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Nature of Contracts in Construction


Ranadheer Addagatla PGP/20/232

Gaurav Madanpuri PGP/20/265
Jigar M Doshi PGP/20/271
Rupali PGP/20/290
Umang Agrawal PGP/20/303

Type of
Introduction Construction

Pay a pre-determined fee that was agreed upon
at the time of contract formation

Types of Items of work are specified in Bills of

Quantities or Schedule of Rates. The contractor
Contracts then specifies rates against each item

The contractor will be reimbursed for all

actual costs plus an agreed fee to cover his
services (overhead and profit)
Main Aspects: Requirements:
• The contractor agrees to perform a stipulated job of ■ Good project definition is
work in exchange for a fixed sum of money required for lump sum
• Milestone based payments contract
• Useful for construction works: ■ Lump sum contract requires
• That can be accurately and completely complete plans and
described at the time of bidding such as specifications setting and
residential and building construction directions in enough detail
Lump Sum • When limited variation is needed to enable a contractor to
carry them out
• When level of risks is low and quantifiable, and
Contracts • When the client does not wish to be involved in ■ Stable project conditions
the management of his project. are necessary
• Contractor is responsible for preparing his BOQ ■ Effective competition is
necessary when bidding
• Contractor is responsible to include everything in
calculating the price ■ There should be much
• Can include incentives or benefits for early longer time to bid and to
termination, or can also have penalties, called award lump sum type of
liquidated damages, for a late termination project
Advantages Disadvantages

• The final price is known, by the • A great deal of work should be done by the
owner, before the work contractors prior to preparing the estimate. It is
commences wasteful of a skilled estimator’s time
• The contractor has more • Changes in drawings and specifications can be
Lump Sum incentive to reduce his cost to very expensive and source of trouble. In other
increase the profit words the contract has very limited flexibility for
Contracts • The contractor hopes to complete
design changes
the job as quickly as possible, to • The contractor carries much of the risks. The
(Contd..) minimize overhead, to maximize
profit and to move to the next
tendered price may include high risk
• Competent contractors may decide not to bid to
• Minimum Owner supervision avoid a high-risk lump sum contract
related to quality and schedule.
• Hard to build relationship. Each lump sum
• Contractor selection is relatively project is unique.
Number One Number Four
In Admeasurement Contracts, items of The contract offers a flexibility for the
work are specified in Bills of Quantities or client to introduce changes in the work
Schedule of Rates defined in the tender documents.

Number Two Number Five

Admeasurem The contractor specifies rates against

each item which also includes risk
The contractor can claim additional
payment for any changes in the work
contingency. content of the contract.
ent Contracts
- Introduction Number Three
Payment is paid monthly for quantities of
Number Six
Claims resolution is very difficult because
work completed, measured during the the client has no knowledge of actual cost
month. or hidden contingency.

Tender price is usually increased by variations and claims.

The admeasurement contract is well understood and widely used. It can be used when little or no
changes are expected, level of risk is low and quantifiable, and when design and construction need to be
Items of work of the contract are Estimated quantities are The contract is based on estimated
surveyed by Architect/Engineer.
Contract specified with estimated
quantities in the Bills of Contractors enter unit prices
against the estimated
quantities of work items and unit
price for each of these work items.
based on a quantities of work

Bill of
Quantities Payment is made on the basis of
units of work actually done and
Re-determination of unit prices
when substantial quantity
Useful on projects where the
nature of the work is well defined,
(or) measured in the field multiplied
by the unit prices.
deviations occur is stipulated in
contract conditions.
but the quantities of work cannot
be accurately determined in
advance of construction.
Unit Price
Contract Suitable for highways, dams, airports…
For example, painting is typically done on a square foot basis. Unit price contracts are seldom used
for an entire major construction project, but they are frequently used for agreements with
subcontractors which involve accurate identification of different types of items, but not their
numbers, in the contract documents. They are also often used for maintenance and repair work.
Advantages Disadvantages

Contract Saving Administrative Cost

Saving the heavy cost of preparing many
Estimation of Total Cost
The exact final price of the project is not
bills of quantities by the contractors. 01 known to the owner until the completion
based on a of the project.

Bill of Shared Risk

Time & cost risk (shared)
Regulatory Support
Require sufficient design definition to
Quantities Owner : at risk for total quantities
Contractor : at risk for fixed unit price.
estimate quantities of units

- Advantages Comparative Advantage Draw Unbalanced Bid

In comparing with lump-sum contract, Unit price sometime tend to draw
and Changes in contract documents can be
03 unbalanced bid. (Contractors raise prices
on certain items and make corresponding
Disadvantages made easily by the owner.
Lower risk for contractor.
reductions of the prices on other items
,without changing the total amount of the
Used when the nature of work
The descriptions of items and the It is common for separate
required is known but it cannot be
units of measurement are similar rates to be quoted for labor,
quantified, or if continuity
to those used in a normal B.O.Q., plant, and materials.
Schedule of of programme
cannot be
but no quantities are given.

- Term Contract Used for repair and maintenance works or under
conditions of urgency. This contract is best suitable
The contract price is derived by measuring the
man-hours, plant-hours and the quantities of
for repetitive works. materials actually consumed, and then pricing
or Measured them at the tendered price.

Term Contract
Demolition, Geotechnical investigation, Excavation, Concrete work, Roofing and tanking, Fire shutters,
Plasterwork, floor, wall, ceiling finishes, Plumbing and drainage including cable ducts,
Fixtures, fittings and soft furnishings.
Advantages Disadvantages
Variations are easier to estimate and normally Additional resources are required to measure
cheaper than on fixed price traditional 01 work and certify payments.
Schedule of contracts.

The client can stop and start work at a pace that
might be determined by cash flow or funding.
02 The client does not have a final price when
committing to starting work.

contract A larger pool of contractors can be asked

to tender as the process is inexpensive and 03
It is difficult for contractors to plan long-term
resources and so might mean changes to
quick. personnel with loss of continuity.
- Advantages It is flexible in relation to scope and contractual Contractors may be tempted to load front
and commitment. 04 end costs in case later work does not
As a fully-detailed design is not required There is no real incentive for contractors to
the client can obtain tenders at the early stages
of a project and begin construction
05 treat such work with any sense of urgency and
its best staff will be placed on the projects
before completion of the design. So to this where the contractor is carrying more risk.
extent it is 'fast track'.
Main Aspects: Requirements:
• The contractor will be reimbursed for all actual costs ■ The contractor must make
plus an agreed fee to cover his services (overhead all his records and accounts
and profit). available for inspection by
The fee can be designated as: the client or by some agreed
neutral third party
 A fixed percentage of the cost of the work.
This contract can be used when
 Cost plus fixed fee
Cost  A fixed fee with bonus. ■ When the requirements of
the client are vague and
Reimbursement  A fixed fee with an arrangement for sharing any
cost saving.
when it is desirable for
design to proceed
Contracts  Guaranteed Maximum Price Contract concurrently with
Advantages-Start construction without waiting for the
whole set of drawings and specifications. More ■ Project have unknown
flexibility for the owner to make changes as work technologies or major changes.
progresses. ■ for emergency projects, repairs,
Disadvantages- It is difficult to predict the final cost maintenance work, and
and the distribution of it, which may cause financial alterations.
problems to the owner. Contractor pays less attention
to cost control.
Cost Reimbursement Contracts- Major Types
Main Aspects
1. The contractor is reimbursed for all his costs with a fixed % age of costs to cover his services.
2. Project/site overheads may be covered by the %age or computed as one of the costs.
Cost plus Advantages
1. Construction can start before design is completed.
Percentage of 2. If the contractor is efficient in the utilization of resources then the cost to the client should
Cost represent a fair price for the work undertaken
1. The project total cost is completely unknown before the project start.
2. No incentive for the contractor to be efficient in his use of labours, materials or Equipments.

Main Aspects
1. The owner pays all costs of construction with a fixed sum of money. The fee is fixed and does
not fluctuate with the actual cost of the project.
1. There is no incentive for the contractor to inflate costs.
Cost plus Fixed 2. There is incentive for the contractor to complete the work as quickly as possible since his fee
fee remains constant.
1. Major variations create problems. The fee must be re-negotiated to take account of such
variation. Also. The speed of commencing the work is undermined since before a fee can be
agreed a fairly detailed description of work must be made.
Cost Reimbursement Contracts- Major Types
Main Aspects
1. The contractor and owner agree to a target estimate of construction.
2. Bonus or penalty arrangements are tied to this target figure.
3. The work must have a fairly definite nature. Drawings and specifications must be sufficiently
Target Cost with developed to enable a reasonably accurate cost to be determined.
Variable Fees Advantages
1. There is an incentive to carry out the work as quickly and as economically as possible.
Contract 2. The client also stands to benefit through the contactor's efficiency.
1. Difficulties may arise in agreeing on a revised target cost if there are major variations
2. A tight cost control must be exercised, which may be difficult and/or costly

Main Aspects
1. The contractor guarantees to construct the project in full accordance with the drawings and
Guaranteed specifications and that the price to the owner will not exceed some total upset price.
2. If the price of the work exceeds the assured maximum, the contractor pays for the excess.
Maximum Price 3. Contracts are often competitively bid in a manner similar to that for lump sum contracts, but
Contract managed as cost plus.
4. The successful bidder is determined on the combined basis of his quoted maximum price and
fixed fee.
Selection Methods
1. Qualification/Quality Based Selection: 2. Direct Selection
 Institutions, corporations or public  Used by an individual who has a
agencies (sometimes represented by a relatively small project
committee) use this method
 The client selects an architect on the
 Chooses an architect on the basis of basis of
professional qualifications and  Reputation
competence  Personal acquaintance or the
 To achieve an objective comparison, QBS recommendation of a friend, former client
How to uses predetermined, value-based criteria
that may include such factors as:
or another architect
 Roster of architects – employ using a
rotation system
select an  The architect’s history and capability to
perform required services
 Related experience such as past
3. Architectural Design Competitions:
performance on similar types of projects  Used to select both an architect and a
Architect?  Familiarity with local geography and
design for both public and private
 Experience and skills in project
management  Architects submit solutions to a
 Design approach/methodology particular problem and are judged on
the comparative excellence of their
 Other selection criteria may include submissions
 Reputation
 Rapport
 Successful architect is usually awarded
the commission for the actual project
 Technical competence
 Commitment to the client’s interests  Competitions may be “open” (to all
 Client’s desire for imagination and architects) or “limited” (by invitation to
ingenuity a restricted number of architects).
Prepare a well-researched
Commit to a quality-based
project brief or project
selection (QBS) process or ‘two
development plan, including an
envelope’ methodology
adequate budget and program
8 Elements
Use an appropriate tendering
of Successful Select the architect before
selecting the secondary
system that matches submission
demands with project
Procurement complexity

of an
Use QBS criteria to evaluate Appoint an experienced
Architectural proposals selection panel

Determine pre-set fees (using
Use a consultancy agreement
data derived from the ACA
that fairly allocates risk and is
Architects’ Time/Cost
Calculation Guide)
Allocating Risk to
the Party That Is in
the Best Position
to Control That

Ensuring That Allocating Risk

Waivers of Through
Subrogation Are in Indemnity
Risk Mitigation

Mitigation Measures
Adding Protection Backing Up
Measures by Including
Additional Insured
Provisions With
Requirements Insurance

Insurance Is a
Fundamental Way
Risk Coverage
to Manage Risk
Thank you…!!