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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 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: 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: 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: 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 agreement.


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: 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: 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 lump-sum 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: 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: 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: 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.