What are the type of contracts?

Procurement methods in Construction Industry

Contract

The word as ‘Contract’ in human activities is so general under legal contest.  In construction, the main

important thing is that work information is enough to carry out the works though Contract also can

be seen every projects.

The reason behind to include the contract is for helping to parties to overcome the situation where

something goes wrong then no parties are willing to accept the fault or consequence of the problem.

A formal contract incorporating the terms described in the  tender  may be sent to the successful

bidder for execution.

Contract types

The following are the various types of contracts,for execution of civil engineering works:

1. Lump Sum or Fixed Price Contract

2. Measurement contract

3. Turnkey Contract

4. Design and Build

5. Cost Plus Contracts

6. Unit Price Contracts

7. Time and Material Contracts

8. Item rate contract

9. Percentage rate contract

10. Labour contract

11. Piece-Work agreement

12. Target Contract

 1. Lump Sum or Fixed Price Contract

Under a Lump Sum or Fixed Price Contract, the contractor agrees to perform the work specified and

described in the contract for a fixed price. The price of a fixed contract can only be changed upon the

execution of a change order, under which the owner and the contractor either

(1) Agree for the contractor to perform additional work that falls outside the scope of the original

work for an agreed         upon extra compensation or

(2) Agree to remove certain work from the original scope of work and reduce the price of the

contract in proportion           to the work that the contractor no longer has to perform.

These types of contracts are appropriate when a clear scope and a defined schedule have been

reviewed and agreed upon.

Advantages:

1. Lower financial risk to Employer.

2. Higher financial risk to Contractor.

3. Minimum Owner supervision related to quality and schedule.

4. Contractor has higher incentive to achieve earlier completion and better performance.

5. Contractor selection is relatively easy.

Disadvantages:

1. Changes difficult and costly. (but it usually is)

2. Need to substantially complete design prior to bidding.

3. Contractor inclined to choose lowest methods / materials to comply with specification.

4. Hard to build relationship.  Each project is unique.

5. Bidding expensive and lengthy.

6. Contractors may include high contingency within each Schedule of Rate item

2. Measurement contract

Measurement contracts  (sometimes called “re-measurement” or ‘measure and  value’ contracts)

contains a  Bill of Quantities  ( BOQ )  provided by the employer or its consultants,  can be used in

situations where the  design  (or type of works) can be described in reasonable detail, but the amount

cannot. The contractor will quote against each  BOQ  item and enter a unit rate or unit price to build

up the total contract price on basis of those  BOQ  quantities. During the construction period, the

actual quantity of works executed under each  BOQ  item will be jointly measured and valued at the

quoted rate for interim payment purpose.

A measurement contract  might also be appropriate on projects where the  design  has not been

completed in sufficient detail for  bills of quantities  to be produced.

It should be possible to describe the works in sufficient detail to determine a  programme  and to

obtain rates from  tenderers. Generaly  tenderers  rates will be based on  drawings  and approximate

quantities.

The actual  contract sum  (sometimes called the ‘ascertained final sum’) cannot be determined when

the  contract  is entered into, but is calculated on completion, based on “re-measurement” of the

actual work carried out and the rates  tendered.

Measurement contracts  can allow an early start on site, before  design  is complete, and they can

allow changes to be made to the works relatively easily. However, there is inevitably some  risk  for

the  client  as the  cost  of the works is not known. In effect, the  client  is taking the  risk  for any

‘unknowns’, and whilst this can result in competitive prices from  contractors, the level of uncertainty

for the  client  means that  measurement contracts  are rare other than on  civil engineering  projects.
 3.  Turnkey Contract

A  turnkey  contract is a business arrangement in which a project is delivered in a completed state.

Rather than contracting with an owner to develop a project in stages. The developer is hired to finish

the entire project without owner input. The builder or developer is separate from the final owner or

operator, and the project is turned over only once it is fully operational. In effect, the developer is

finishing the project and “turning the key” over to the new owner.

This type of arrangement is commonly used for construction projects ranging from single buildings to

large-scale developments.

 Difference between lump-sum contract & turnkey contract

Under a traditional lump-sum contract, the owner agrees to pay the developer to complete a project

that is built to the owner’s specifications. The owner is given many opportunities to make decisions

throughout the project, and to make changes as needed. In a turnkey contract, the owner is

generally left out of the building process entirely as the developer handles all decisions and problems

related to construction.

A contract of this kind may also be used in the residential home building industry. With a turnkey

agreement, a builder or developer completes both the construction and the finishes in the home

before turning it over to the homeowner. The homeowner is often offered a chance to select finishes,

including curtains, paint colours and carpeting.

  4.  Design and Build

Design and Build procurement works on the basis that the main contractor is responsible for

undertaking both the design and construction work on a project, for an agreed lump-sum price.
 Design and build projects can vary depending on the extent of the contractor’s design responsibility

and how much initial design is included in the employer’s requirements. Nevertheless, the level of

design responsibility and input from the contractor is much greater on design and build projects than

a traditional contract with a contractor’s designed portion.

Adequate time must be allowed to prepare the employer’s requirements (the employer usually

appoints consultants to facilitate this), as well as time for the contractor to prepare their proposal

and tender price. It is vital that the proposal matches all of the employer’s requirements before any

contract is entered into.

The employer has control over any design elements of the project that are included in their

requirements,  but once the contract is let responsibility over design passes to the contractor, so the

employer has no direct control over the contractor’s detailed design.

The contractor can carry out the design in a number of ways. Often they will appoint their own

consultants or use their own in-house team. It is also common practice for the contractor to take on

the employer’s consultants and continue to use them to complete the detailed design under what is

known as a novation agreement.

Other Features of Design and Build Procurement

 As design and construction can be carried out in parallel, the overall programme time of

design and build projects can be shorter. However this depends on how much design the contractor is

responsible for.

 There is reasonable certainty over costs because the contract price is known at the outset.

Provided the employer does not order changes during the construction of the work, the contractor

will be obliged (subject to the conditions) to complete the project for the contract sum. If the

employer does require design or specification changes during the construction period, the contractor

advises as to the effect this may have on costs or additional time needed.
 Design and Build is a relatively low risk procurement option for the employer, in terms of cost

and time. There can be a risk related to design and quality, particularly if the employer’s

requirements were not properly gathered and if insufficient time went into examining the

contractor’s proposal.

5.  Cost Plus Contracts

The Cost Plus Contract is a type of a construction contract under which the owner agrees to pay the

complete cost of the materials and labor needed to needed to build the project along with a fee for

the contractor’s overhead and profit. This contract type is favored where the scope of work is highly

uncertain or indeterminate and the type of labor, material, and equipment needed to build the

project is also uncertain in nature.

This type of contract involves payment of the actual costs, purchases or other expenses generated

directly from the construction activity. Under this arrangement, complete records of all time and

materials spent by the contractor on the work must be maintained. Cost Plus Contracts must contain

specific information about certain pre-negotiated amount (some percentage of the material and

labor cost) covering contractor’s overhead and profit. Costs must be detailed and should be classified

as direct or indirect costs.

There are multiple variations for Cost plus contracts, and the most common are:

 Cost Plus Fixed Percentage Contract– Compensation is based on a percentage of the cost;

 Cost Plus Fixed Fee Contract– Compensation is based on a fixed sum independent the final

project cost. The owner agrees to reimburse the contractor’s actual costs, regardless of amount, and

in addition pay a negotiated fee independent of the amount of the actual costs;

 Cost Plus Fixed Fee with Guaranteed Maximum Price Contract– Compensation is based on a

fixed sum of money. The total project cost will not exceed an agreed upper limit;
 Cost Plus Fixed Fee with Bonus Contract– Compensation is based on a fixed sum of money. A

bonus is given if the project is finished below budget, ahead of schedule, etc.;

 Cost Plus Fixed Fee with Guaranteed Maximum Price with Bonus Contract–Compensation is

based on a fixed sum of money. The total project cost will not exceed an agreed upper limit and a

bonus is given if the project is finished below budget, ahead of schedule, etc.; and

 Cost Plus Fixed Fee with Arrangement for Sharing Any Cost Savings Contract– Compensation

is based on a fixed sum of money. Any cost savings are shared with the buyer and the contractor.

The Cost Plus Fixed Fee construction contract is more predictable than Cost Plus Fixed Fee Percentage

Construction Contract because the contractor’s fee for overhead and profit is, as its name suggests,

predetermined. Regardless of what the cost of construction ultimately amounts to, the contractor’s

fee remains the same. Conversely, the Cost Plus Fixed Percentage Construction Contract provides

more variability with respect to the amount of the contractor’s fee because it is directly linked to the

cost of construction, which in these types of arrangements is inherently unpredictable. In fact, the

Cost Plus Fixed Percentage Construction Contract arguably incentivizes the contractor to not keep

the costs low because its fee increases with the cost of construction.

The Cost Plus with Guaranteed Maximum Price Contract seeks to eliminate some of the risks

associated with Cost Plus Contracts in that it caps the owner’s overall financial exposure. Thus, while

the contract price is to be determined based on the cost of construction and the contractor’s fee,

owner’s costs are capped at a certain amount.

These types of Cost Plus Construction Contracts are oftentimes grouped with bonus contracts, built-in

contingencies, or cost savings contracts which incentivize the contractor to complete the project with

agreed targets regarding schedule, quality, and budget in exchange for additional compensation on

the project.

6. Unit Price Contracts

Unit Price Contracts are based on anticipated quantities of items which are counted in the project in

addition to their unit prices. The final price of the project depends upon the quantities required to

carry out the work. Generally, these types of contracts are suitable only for construction and supplier

projects which involve accurate identification of different types of items, but not their numbers, in

the contract documents. These types of contracts are oftentimes used on excavation projects.

7. Time and Material Contracts

Time and Material Contracts are usually preferred if the project scope is not clear, or has not been

defined. The owner and the contractor must establish an agreed hourly or daily rate, including

additional expenses that could arise in the construction process. The costs must be classified as

direct, indirect, mark-up, and overhead. Sometimes the owner might want to establish a cap or

specific project duration to the contractor that must be met, in order to have the owner’s risk

minimized.

8. Item rate contract

For this contract, contractors are required to quote rates for individual items of work on the basis of

schedule of quantities furnished by the client’s department.

9. Percentage rate contract

In this form of contract, the client’s department draws up the schedule of items according to the

description of items sanctioned in the estimate with quantities, rates, units and amounts shown

therein.

10. Labour contract

This is a contract where the contractor quotes rates for the item work exclusive of the elements of

materials which are supplied by the client’s Department.

11. Piece-Work agreement

This is that for which only a rate is agreed upon without reference to the total quantity of work to be

done or the quantity of work to be done within a given period.

12.Target Contract

This is the type of contract where the contractor is paid on a cost-plus percentage work performed

under this contract. In addition, he receives a percentage plus or minus on savings or excess effected

against either a prior agreed estimate of total cost or a target value arrived at by measuring the

work on completion and valuing at prior agreed rates.