TYPES OF CONTRACT

Types of contract
Types of contracts are
Item rate contract
Percentage rate contract
Lump-sum contract
Labour contract
Materials supply contract
Cost plus contract
Cost plus percentage rate contract
Cost plus fixed free contract
Cost plus sliding or fluctuating fee scale contract
Target contract
Negotiated contract

ITEM RATE CONTRACT

Item rate contract:

Item rate contract is also known as unit price contract or

schedule contract. A contractor undertakes the execution of
work on an item rate basis. He is required to quote rate for
individual item of work on the basis of schedule of quantities
(i.e., bill of quantities ) furnished by the department. The
amount to be received by the contractor, depends upon the
quantities of work actually performed. The payment to the
contractor is made on the basis of the detailed measurements
of different items of work actually executed by him.
Suitability :

The item rate contract is most commonly used for all types
of engineering works of the government undertakings including
railway department. It is suitable for works which can be
distinctly split into various items and quantities under each
item can be estimated accurately.

MERITS AND DEMERITS

Merits:
This method ensures a very detailed analysis of cost and payment to the contractor and also is

based upon detailed measurements of each item actually done, so this method is more scientific.
Changes in drawings and quantities of individual item can be made as per requirements within

agreed limits.
There is no urgency of providing detailed drawings at the time of awarding the contract. It can

be prepared later on.

A contractor is asked to write down the rate of individual item in figures and words both so it is
not easy to form a cartel during the submission of tender.
An engineer can compare the rates quoted by the contractor with that of schedule of rates
prepared by the departments to find out whether the tender is unbalanced.
Demerits:
As by wise anticipation or perhaps outside information, a contractor may quote high for items
that are likely to be increased and low rate for items likely to be decreased, making an
unbalanced tender and consequently the departments may stand to lose substantially.
Comparative statement of item rate tenders are more elaborate and comprehensive and
intelligent scrutiny is required.
A contractor may quote some items in words excluding paise
intentionally in order to tamper in
rates.
The total cost of work can only be known after completion. As such the owner may face financial
difficulty if the final cost is substantially high.
Additional staff is required to take detailed measurements of work.
The scope of saving with use of interior quality may prompt the contractor to do so.

Percentage rate contract:

In this form of contractor, the

department draws up item rate tender
i.e bill of quality and total amount. The
contractors are required to offer to carry
out the work as per with the rates shown
in the specific price schedule or some
percentage above or some percentage
below the rates indicated in the schedule
of work attached with the tender. The
percentage above or below or at par is
applicable on the over of the work also.

MERITS AND DEMERITS:

Merits:
The ranking amongst the contractor is easily known just on

the opening of the tender.

As there is no provision to quote contractors own rate for an
individual item, benefit due to increased quantity with a
beneficial rate can not be availed by the contractor. The
chance of unbalanced tender gets eliminated.
Demerits:
A contractor is required to write down only the percentage
above or at par or below, it is easy to write such a rate in
few minutes before the time of submission of the tender.
By negotiating among the contractors, two or more may
quote the same rate in order to get a part of the work at a
high rate. There may be difficulty to divide the work at equal
amount among the contractors.

Lump sum contract:

In this type of contract, a contractor is
required to quote fixed sum for execution of
work complete in all respect in thr stipulated to
him with the tender.

The department schedule of rates for various

items of work are also provided which regulates
the payment of the contractor in respect of any
additions and alterations which are made over
the original work. On the completion but the
whole done must be compared and checked
with the drawings and specifications.

MERITS AND DEMERITS

Merits:
As the total cost of the work known before hand, the owner can arrange the fund in time.
Detailed measurements of the work done are not required except in respect of additions and

alterations.
The contractors profit mainly lies in the completion time. Hence for getting more profit the
contractor tries to complete the work as early as possible. This concept on the part of
contractor coincides with the objective of the owner also.
As it is difficult to get intermediate payment, the contractor tries to finish earliest to get the
full payment earliest and go to another venture. The owner also benefits from the project
completed early or in time.
Due to completion among the contractor, the contractor tries to take the work up even at the
less profit, resulting in low cost of work.
Demerits:
The owner aims to get maximum work out of money he spends whereas the contractor tries
to get maximum profit out of money he receives, this causes conflict iin interests.
It is very essential the work must be defined accurately, specifications must be fully specified
and the site conditions must be fully explained otherwise disputes can arise later on.
For any intermediate payment, the value of work done should not be less than the payment
being made.
It is suitable form of contract where considerable amount of addition and alterations are
expected.

Labour contract:
In labour contract, the contractor

undertakes contract for the labour

portion only excluding the materials
which are arranged at the work site by
the department/owner. The contractor
engages the requisite labour and gets
the work done as per drawings and
specifications. It is an item rate basis for
labour portion only and the contractor is
paid for the quantities of work done on
measurements of different items of work
at the stipulated rate in the contract

MERITS AND DEMERITS

Merits:
The materials stored by the departments are thus utilized.
The work done through labour contract is of superior quality as

better quality materials are arranged by the owner,

The overall cost of construction may be less, as no profit is paid on
the cost of materials.
This system is very convention for private building construction.
Demerits:
The material and the department will have to remain vigilant and
watchful over the materials used, the contractor may over look the
material wastage involved.
A large storage area is required to store the various kinds of
materials to be used in the construction under a constant guarding.
This system is not suitable for government department. Because
due to lengthy formalities in procurement of materials, it is very
difficult to supply each material readily to the labour contractor.

Material supply
contract:
In this type of contract, a contractor has

to offer his rates for supply of the

required quantities of materials,
inclusive of all local taxes, carriages and
delivery charges to the specified stores
within the time limit prescribed in the
tender. All such materials received
should be examined and counted or
measured, as the case may be, when
delivery is taken.

MERITS AND DEMERITS

Merits:
Payment is very prompt, so the contractors

try to take supply order at less profit,

resulting in low cost of material.
The owner/department has nothing to worry
for any loss, breakage, demurrage, charges
during transit.
Demerits:
Constant control over quality of materials
received in several batches and different
times is required.

Cost plus percentage rate contract:

In this type of contract, a contractor agrees to

take the work of construction on the actual

cost of work plan an agreed percentage in
addition, for his services. It is generally
adopted when the labour and material cost are
liable to fluctuate heavily in the market. The
contractor arranges materials and labour at
his cost and keeps proper account which is
paid by the department or owner with certain
percentage ( say 10% ) of the cost os
construction as his profit. An agreement is
made accordingly in advance.

MERITS AND DEMERITS

Merits:
The contract can be quickly drawn up and agreed and work

can be completed in the shortest possible time. Is is well

suited during war period or calamity period when the
shortest possible project time is the main criteria in place
of the cost involved.
It is particularly suitable when work can not be executed
by other types of contracts due to uncertainity and
fluctuations in the market rates of labour and materials.
Demerits:
The contractors only aim is to make the cost project as
high as possible in order to seek greater margin.
A proper control over purchase of materials and labour
shall have to be executed by the department or the owner.

Cost plus fixed fee contract:

In this type of contract, the contractor is

paid by the owner an agreed fixed lumpsum amount and above actual cost of the
work. This fixed fee will include overhead
and profit to the contractor. The fees
does not vary with the actual cost of the
work as in the case of cost plus
percentage rate contract.

MERITS AND DEMERITS

Merits:
Since the fixed fee covers the contractors overhead

charges and profit, the contractor will try to finish the

work as early as possible, so the owner gets the
advantage of early completion.
Demerits:
The contractor is quite indifferent towards the quality of
work, he is simply interested in its early completion,
Close supervision and checking of delivery notes and
invoices which it involves, makes it unsuitable for works
where the necessary staff is not available.
The cost of project is unnecessarily increased because of
purchase of materials at higher prices and engaging
costly labour in an attempt tp reduce the project time.

Cost plus sliding fluctuating fee

scale contract:
In this type of contracts, the contractor gets

the actual cost of construction plus an amount

of fee ( % of construction cost) inversely
variable according to the increase or decrease
of the estimated cost agreed first by both the
parties. Higher the actual cost, lower will be
the percentage rate of fee and vice versa.
Hence the main objectives of both parties lies
in the minimum cost of construction and this is
treated as one of the best system of contract.
It is clear from the following example where
the cost of construction is going less and the
contractors amount goes up and up.

MERITS AND DEMERITS

Merits:
The owner and the contractor both will be

benefitted in the lowest possible cost of

construction and this is treated the best
system of contract.
Demerits:
The estimated cost must be accurately
determined. In case the estimated cost is
much higher than the required due to
inefficiency of the estimater, a contractor will
get more amount on the basis of savings.

Target contract:
In this system, the contractor is paid on

a cost plus percentage basis of waork

and in addition he receives a percentage
plus or minus on savings or exceses
effected against a prior agreed estimate
by measuring the work on completion
and vakuing at prior agreed rates.

MERITS AND DEMERITS

Merits:
The contractor is encouraged to use his skill

and expertise in order to keep the cost of

construction as low as possible. This gives an
opportunity to a contractor to earn bonus in
addition to the fixed percentage fee.
Demerits:
The contractor may try to increase the cost of
construction high because he gains more
amount on the basis of fixed percentage of cost
of construction without caring about the
penalty of excess expenditure.

Negotiated contract:

When the contract is awarded without

calling tenders on the basis of

negotiations only, it is called negotiated
contract. It may be of any form discussed
above.

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