TYPES OF CONTRACTS

Contract Definitions A. From a Legal Point of View : A mutual agreement between two or more parties that something shall be done, an agreement enforceable at law. B. According to FIDIC : Contract means the General Conditions, the Supplementary Conditions, the Specifications, the Drawings, the Bill of quantities, the Tender, the Letter of Acceptance, the Contract Agreement.

C. According to Method of Payment : The agreement of how the owner will pay the contractor for work performed such as a lump-sum or cost-plus payment.

Why Use contract in construction? Describe scope of work Establish time frame Establish cost and payment provision Set fourth obligations and relationship Minimize disputes Improve economic return of investment

Major Contract Types (traditional)

TYPES OF CONSTRUCTION CONTRACTS Two broad categories: Price Given in Advance Contracts (Priced-based Contracts) Cost Reimbursement Contracts (Cost-based Contracts) Factors Influencing the Choice of the Type of Contract The appropriateness for providing an adequate incentive for efficient performance by the contractor The ability to introduce changes The allocation of risks The start and completion date of the project

Lump sum contracts Involves a total fixed priced for all construction related activities. Can include incentives or benefits for early termination, or can also have penalties, called liquidated damages, for a late termination.  Preferred when a clear scope and a defined schedule has been reviewed and agreed upon.

Lump Sum Contract( Advantages) Low risk on the owner, Higher risk to the contractor Cost known at outset Contractor will assign best personnel Contractor selection is easy.

Lump Sum Contract(Disadvantages) Changes is difficult and costly. Contractor is free to use the lowest cost of material equipment, methods. The contractor carries much of the risks. The tendered price may include high risk contingency. Competent contractors may decide not to bid to avoid a high- risk lump sum contract.

Unit Price No total final price Quote Rates / Prices by units Re-negotiate for rates if the quantity or work considerably exceeds the initial target Payment to contractor is based on the measure. Unbalanced bids Higher risk to owner Ideal for work where quantities can not be accurately established before construction starts.

Unit Price contract Require sufficient design definition to estimate quantities of units Contractors bid based on units of works Time & cost risk (shared) Owner : at risk for total quantities Contractor : at risk for fixed unit price. Large quantities changes (>15-25%) can lead to increase or decrease of unit price.

Unit Price ( Advantages) Easy for contract selection. Early start is possible. Saves the heavy cost of preparing many bills of quantities by the contractors. Fair basis for competition. In comparing with lump-sum contract, changes in contract documents can be made easily by the owner. Lower risk for contractor.

Unit Price (Disadvantages) Final cost not known from the beginning (BOQ only is estimated) Staff needed to measure the finished quantities and report on the units not completed. Unit price sometime tend to draw unbalanced bid. (For Unit-Price Contracts, a balanced bid is one in which each bid is priced to carry its share of the cost of the work and also its share of the contractor’s profit. Contractors raise prices on certain items and make corresponding reductions of the prices on other items ,without changing the total amount of the bid)

Schedule of rates contract A Schedule of the work items without quantities is prepared by the owner and /or A/E to be rated by the contractor. The descriptions of items and the units of measurement are similar to those used in a normal B.O.Q., but no quantities are given. It is common for separate rates to be quoted for labor, plant, and materials. Used for repair and maintenance works or under conditions of urgency.

Schedule of Rates Contract Advantages: 1. Work can be commenced earlier than if a full B.O.Q has been prepared. Disadvantage : 1. No indication of the final price of the works. 2. Very difficult to determine which contractor submitted the most advantageous offer. 3. May cause financial problems to the public owners

Cost Plus Actual cost plus a negotiated reimbursement to cover overheads and profit. Different methods of reimbursement : Cost + percentage Cost + fixed fee Cost + fixed fee + profit-sharing clause. Higher risk to owner Compromise : guaranteed maximum price (GMP) reduces risk to owner while maintain advantage of cost plus contract. By using this type of contract the contractor can start work without a clearly defined project scope, since all costs will be reimbursed and a profit guaranteed.

Cost + Percent of Cost 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 + Percent of Cost (Cost = $500.000,Fee = 2%) Fee = percentage of the total project cost (Cost = $500.000,Fee = 2%) Advantages Disadvantages profitable for the contractor No incentive to finish job quickly Owner does not know total price Larger the cost of the job, the higher the fee the owner pays

Cost + Percent (Advantages) Construction can start before design is completed. 2. If the contractor is efficient in the utilization of resources then the cost to the client should represent a fair price for the work undertaken.

Cost + Percent (Disadvantages ) 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 labors, materials or equipments. 3. Minimum efficiency maximizes the profit.

Cost Plus Fixed Fee Most common form of negotiated contracts COST = expenses incurred by the contractor for the construction of the facility Includes: Labor, equipment, materials, and administrative costs FEE = compensation for expertise Includes: profit

Cost + Fixed Fee Fee = percentage of the original estimated total figure Utilized on large multi-year jobs Ex: WW treatment plant Facility (Cost = $20 million, Fee = 1%) $20 Million 1% fee = $200,000 Million Advantages Disadvantages Fee amount is fixed regardless of price fluctuation Expensive materials and construction techniques may be used to expedite construction Provides incentive to complete the project quickly

Cost + Fixed Fee + Profit-Sharing Clause Rewards contractors who minimize cost Percentage of cost under GMP is considered profit and shared with the contractor Guaranteed Maximum Price (GMP) % of profit sharing is specified in contract Advantages Disadvantages Provides incentive to the contractor to save money Contractor must absorb any amount over the GMP Plans & specs. need to detailed

Cost + Fixed Fee + Profit-Sharing Clause In this type of contract the contractor is reimbursed at cost with an agreed-upon fee up to the GMP, which is essentially a cap; beyond this point the contractor is responsible for covering any additional costs within the original project scope An incentive clause, which specifies that the contractor will receive additional profit for bringing the project in under the GMP.

Guaranteed Maximum Price contract In a guaranteed maximum price (GMP) contract, the contractor estimates the cost just like in a lump sum bid, but profit is limited to a specified amount. In the event that actual costs are lower than the estimates, the owner keeps the savings. In the event costs are higher, the contractor pays the difference and profit is reduced.

Advantages Greater price certainty for clients as the contractor normally includes a sum for future design development and for risks. GMP promotes pre-agreement of changes as its philosophy links neatly with a contractual requirement to pre-agree the cost and time implications of any potential changes. GMP provides greater control over spending as the contractor is bound to a maximum price. This alerts the team to any potentially expensive items of design development. GMP aligns the contractor with client and consultants encouraging team work with mutual trust and common goals. Less administration is required as changes are limited; there is quick settlement of the final account.

Disadvantages The client might pay too much as the contractor takes on greater risk and thus includes in the price an allowance for design development and risk. Often a competitive price is sacrificed in lieu of appointing a contractor early. Contractor’s with design and build experience may have useful knowledge. There is no standard form of contract for GMP so there is a greater possibility of errors and misunderstandings of liabilities between the parties that may result in conflict. Scope changes tend to cost more, it is accepted that scope changes to design and build are more likely to be more expensive than with a traditional contract, the same can also be said for GMP contracts.