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
1. Actual cost plus a negotiated reimbursement to
cover overheads and profit.
2. Different methods of reimbursement :
Cost + percentage
Cost + fixed fee
Cost + fixed fee + profit-sharing clause.

3. Higher risk to owner

4. Compromise : guaranteed maximum price (GMP)
reduces risk to owner while maintain advantage of
cost plus contract.
5. 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
Fee = percentage of the Advantages Disadvantages
total project cost profitable for No incentive
(Cost = the contractor to finish job
quickly
$500.000,Fee = 2%)
Owner does
not know total
price
Larger the
cost of the
job, the
higher the fee
the owner
pays
Cost + Percent (Advantages)
1. 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 Advantages Disadvantages

original estimated total
Fee amount is Expensive
figure fixed materials and
 Utilized on large multi- regardless construction
year jobs of price techniques may
fluctuation be used to
 Ex: WW treatment plant expedite
Facility (Cost = $20 construction
million, Fee = 1%)
Provides
 $20 Million 1% fee = incentive to
$200,000 Million complete
the project
quickly
Cost + Fixed Fee +
Profit-Sharing Clause
 Rewards contractors who Advantag Disadvantages
minimize cost es
 Percentage of cost under
GMP is considered profit Provides Contractor
and shared with the incentive must absorb
to the any
contractor
contracto amount over
 Guaranteed Maximum Price
r to save the GMP
(GMP)
money
 % of profit sharing is
specified in contract 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.