1. TYPES OF CONTRACTS

2. 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.

3. 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.

4. 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

5. Major Contract Types (traditional)

6. 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

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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)

14. 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.

15. 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

16. 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.

17. 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.

18. Cost + Percent of Cost (Cost = $500.000,Fee = 2%)
Fee = percentage of the total project cost
(Cost = $ ,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

19. 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.

20. 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.

21. 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

22. 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

23. 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

24. 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.

25. 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.

26. 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.

27. 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.