TYPES OF CONSTRUCTION CONTRACT

1. lump sum contract – provides that the owner will pay to the constructor a
agreed-upon sum of money for the completion of a project conforming to a well-
defined scope of work. It is a common practice for the owner to pay the
constructor a portion of this money at specified intervals such as monthly
with the amount of each payment depending on the value of work completed
during the prior period of time or according to some agreed-upon schedule of
payments. EFFECT LUMP-SUM CONTRACTS CAN ONLY BE OBTAINED IF WELL-DEFINED SCOPE
OF WORKS ARE PREPARED IN ADVANCE WHICH REQUIRES VERY CAREFUL AND COMPLETE
PLANNING AND SCHEDULING. HE MAY EARN A PROFIT IF HE PREPARED A GOOD ESTIMATE
AND STAYED WITHIN BUDGET. HE MAY SUSTAIN A LOSS IF HIS ACTUAL COSTS EXCEEDS
HIS ESTIMATES.

2. UNIT PRICE CONTRACT – PROVIDES THAT THE OWNER WILL PAY TO THE CONSTRUCTOR
AN AGREED-UPON AMOUNT OF MONEY FOR EACH UNIT OF WORK COMPLETED IN A PROJECT
LIKE CUBIC YARDS OR CUBIC METERS OF EARTH, LINEAL FT. OR METER OF PIPE, CUBIC
YARDS OR METERS OF CONCRETE PAVEMENT, IN-PLACE; ETC. PAYMENTS ARE MADE OF
SPECIFIED INTERVALS OF TIME WITH THE AMOUNT OF EACH PAYMENT DEPENDING ON WORK
ACTUALLY COMPLETED DURING THE PRIOR PERIOD OF TIME. THIS TYPE OF CONTRACT ALSO
REQUIRES A COMPLETE SCOPE OF WORK. IT IS THE PREFERRED TYPE OF CONTRACT WHEN
THE ACTUAL FINAL QUANTITIES ARE NOT KNOWN WITH CERTAINTY BEFOREHAND. THE
CONSTRUCTOR MAY EARN A PROFIT OR INCUR A LOSS DEPENDING ON THE ACCURACY OF
HIS ESTIMATE. THE RISK ASSOCIATED WITH QUANTITIES HAS BEEN ASSUMED BY THE
OWNER. EXAMPLE: EARTH AND ROCK DAM CONSTRUCTION PROJECTS AND CANAL WORK
PROJECTS MAYBE SUBJECTED TO LARGE VARIATIONS BETWEEN ESTIMATED AND ACTUAL
QUANTITIES.

3. COST-PLUS-FEE CONTRACT – PROVIDES THAT THE OWNER WILL REIMBURSE THE

CONSTRUCTOR FOR ALL COSTS SPECIFIED TO CONSTRUCT THE PROJECT INCLUDING ALL
LABOR COSTS, MATERIAL COSTS, EQUIPMENT USAGE COSTS, SUBCONTRACTORS COSTS,
AND JOB SUPERVISION COSTS. IN ADDITION, THE OWNER AGREES TO PAY THE
CONSTRUCTOR AN ADDITIONAL FEE WHICH IS ESSENTIALLY A MANAGEMENT FEE; COSTS
INCURRED AT BOTH HIS HEAD ON FIELD OFFICES RESULTING FROM THE EXECUTION OF THE
PROJECT. INCLUDED IN THE FEE, AS SUCH AS COSTS AS RENT, TAXES, INSURANCE,
INTEREST ON BORROWED MONEY FOR THE PROJECT AND MAIN OFFICE/HEAD OFFICE
SUPERVISION AND COST CONTROL COSTS. FINALLY THE FEE WILL INCLUDE SOME EXPECTED
PROFIT FOR THE CONSTRUCTOR. THIS TYPE OF CONTRACT IS USED PRIMARILY IN
SITUATIONS WHERE THE SCOPE OF WORK CANNOT BE WELL-DEFINED AHEAD OF
CONSTRUCTION, OR WHEN THE STATE OF THE ART FOR THE PARTICULAR PROJECT IS NOT
WELL-KNOWN.

4. PERFORMANCE GUARANTEES- IS A THREE-PARTY INSTRUMENT IUN WHICH A BONDING

COMPANY (TERMED SURETY) GUARANTEES (OR BONDS) TO THE OWNER THAT THE PROJECT
WILL BE BUILT BY THE CONSTRUCTPR IN ACCORDANCE WITH THE CONTRACT, USUALLY
EQUAL TO 1% OF THE PROJECT COST OR LESS THAN 1% FOR CONSTRUCTORS WITH GOOD
REPUTATION.

PREFERRED: LUMP SUM CONTRACT AND UNIT PRICE CONTRACT

COMMONLY USED: UNIT PRICE CONTRACT

SIMILARITIES: NEEDS A WELL-DEFINED SCOPE OF WORK.

dIFFERENCES: LUMP SUM CONTRACT – AS A WHOLE

UNIT PRICE CONTRACT – BASED ON UNIT