INTRODUCTION

A contract is a legally binding or valid agreement between two parties. The two
parties involved are one or more owners, and one or more contractors. The owner has full
authority to decide what type of contract should be used for a specific development to be
constructed and to set forth the legally-binding terms and conditions in a contractual
agreement. If one of the parties fails to keep the promise, the other is entitled to legal
redress.  So, it is important that the contract is well constructed to avoid building and
contract disputes.

A construction contract is an important piece of document that outlines the scope of

work, risks, duties, and legal rights of both the contractor and the owner. A construction
contract contains general and special conditions of agreement, details of construction project
work, their specifications, time limits, payments and penalties for delivery delays, etc. and
ensures every party’s rights and obligations. The law will consider a contract to be valid if the
agreement contains elements of offer and acceptance, an intention between the parties to
create binding relations, consideration to be paid for the promise made, legal capacity of the
parties to act, genuine consent of the parties and legality of the agreement. An agreement
that lacks one or more of the elements is not a valid contract.

The traditional structure is a sequential method because the employer takes his
scheme to an advanced stage with his professional team before appointing a contractor. The
consultant’s role is seen as an independent one. The designer is employed to advice the
client, design, and ensure the work is kept within the cost limit and complies with the
standard required.

There are different types of contracts, and each determines the rights and duties of
both sides. A specific type of contract regulates the risks and expenses for the contractor.
Construction contract types are usually defined by the way, the disbursement is going to be
made and details other specific terms, like duration, quality, specifications , and several
other items. Many types of contracts are used in construction. Each type has its advantages
and disadvantages concerning the owner and the contractor. They are categorized into two
major groups as per the method of payment to the contractor. The types of construction
contracts generally used in construction projects are lump sum contract, unit price contract,
cost plus contract and design-build contract.
a) the following types of contract being practiced in Malaysian Construction Industry:

i. Lump Sum Contract

A lump sum contract, sometimes called stipulated sum, is the most basic form of
agreement between a contractor and a customer.  It is called a lump-sum because the
contractor is required to submit a total and global price instead of bidding on individual
items.  A lump sum contract or a stipulated sum contract will require that the contractor
agree to provide specified service for a stipulated or fixed price. In a lump sum contract, the
owner has essentially assigned all the risk to the contractor, who in turn can be expected to
ask for a higher markup in order to take care of unforeseen contingencies. Where there are
fewer mechanisms to allow them to vary their price, and they give
the client some certainty about the likely cost of the works.

A contractor under a lump sum agreement will be responsible for the proper job
execution and will provide its own means and methods to complete the work. This type of
contract usually is developed by estimating labor costs, material costs, and adding a specific
amount that will cover contractor’s overhead and profit margin. This type of contract requires
a full and complete set of plans and specifications and includes all the indirect costs plus the
profit and the contractor will receive progress payments each month minus retention. The
detailed specifications of all items of work, plans and detail drawings, security deposit,
penalty, progress and other condition of contract are included in agreement.  The flexibility of
this contract is very minimal and changes in design or deviation from the original plans would
require a change order paid by the owner. In this contract the payment is made according to
the percentage of work completed. If the actual costs of labor and materials are higher that
the estimate, the profit will be reduced. If the actual costs are lower, the contractor gets more
profit. Either way, the cost to the owner is the same.

A lump sum contract is a suitable if the scope and schedule of the project are
sufficiently defined to allow contractor to fully estimate project costs. Lump sum contracts are
favored in situations when a clear scope and a defined schedule is negotiated and accepted.
For example, if it is necessary to shift the liability to the builder and to prevent changes in
orders for undetermined work, this type of contract is best suitable for the situation. Due to
present risk, a contractor holds some percentage cost.
Reference

 2020, Construction contract, Retrieved from

https://en.wikipedia.org/wiki/Construction_contract
 2020, Types of Construction Contracts and their Comparison, Retrieved from
https://theconstructor.org/construction/types-of-construction-contracts-
comparison/14268/
 2020, Different Types of Contracts: Everything You Need to Know, Retrieved
from https://www.upcounsel.com/different-types-of-contracts
 2020, contract , Retrieved from https://www.britannica.com/topic/contract-law
 2020, A Guide to Lump Sum Construction Contracts, Retrieved from
https://www.thebalancesmb.com/lump-sum-construction-contract-844915