Construction

contract

A construction contract is a mutual or

legally binding agreement between two
parties based on policies and conditions
recorded in document form. The two
parties involved are one or more property
owners and one or more contractors. The
owner, often referred to as the 'employer'
or the 'client',[1] has full authority to decide
what type of contract should be used for a
specific development to be constructed
and to set out the legally-binding terms
and conditions in a contractual
agreement.[2] A construction contract is an
important document as it outlines the
scope of work, risks, duties and legal
rights of both the contractor and the
owner.

Types
There are three main types of construction
contract, identified according to the
mechanism for calculating the sum due to
be paid by the employer: lump sum
contracts, re-measurement contracts and
cost-reimbursable contracts. The different
types vary primarily with regard to who
takes the risks involved, which party has to
pay for the cost over runs, and which party
can keep the savings if the project costs
are less than the estimated costs.[3]

Other types of contract and descriptions

of contractual purpose include:

Commercial contract
Domestic building contract[4]
Percentage rate contract
Item rate contract or Unit price contract
Lump sum and scheduled contract[5]
Cost plus fixed fee contract
 Cost plus percentage of cost contract
Subcontract agreement [6]
Special contracts[7]

Lump sum contract …

Under a lump sum contract, an owner

agrees to pay a contractor a specified
lump sum after the completion of work
without a cost breakdown.[8][9] After work
is complete, no detailed measurement is
required.

Lump sum and scheduled contract …

In lump sum contract the complete work

as per plan and specifications is carried
out by contractor for certain fixed amount
as per agreement. The owner provides
required information and contractor
charges certain amount. This contract is
suitable when the number of items are
limited or when it is possible to work out
exact quantities of work to be executed.
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. Though it is lump sum and
scheduled contract, contractor will be paid
at regular interval of 2-3 months as per
progress of work on the basis of
certificate issued by engineer in charge. A
scheduled of rate is included in agreement
for making payment of extra items.

Under a lump sum contract, a “fixed price”

for the work to be done is agreed upon by
the client and contractor before the work
begins. This contract can also be applied
to both home building and commercial
contracts. It can be more of a risk to the
contractor as there are fewer mechanisms
to allow them to vary their price.

Commercial contracts …

A commercial contract is an agreement

containing all the work that should be
performed for the construction of a
commercial building or non-residential
building. A skillfully constructed
commercial contract can protect both
parties' interests, minimize risks, and
increase profitability for the contractor.

Domestic construction contracts …

A domestic building contract is an

agreement containing all the work that
should be performed for the construction
of a commercial or residential building
existing or occurring inside a particular
country; not foreign or international.
Percentage rate contract …

When the lowest rate and comparative

position among the contractors are
already specified prior to the opening of
the tender, then the percentage rate
contract is used. Percentage contract is a
type of contract where there is no
possibility of unbalanced tender.

Cost plus fixed fee contract …

In cost plus fixed fee, the owner pays the

contractor an agreed amount over and
above the documented cost of work.[10]
This is a negotiated type of contract where
actual and direct costs are paid for and
additional fee is given for overhead and
profit is normally negotiated among
parties. The owner is in more control of
the project; however, the risks are
transferred to the owner.[11]

A cost plus contract states that a client

agrees to reimburse a construction
company for building expenses such as
labor, materials, and other costs, plus
additional payment usually stated as a
percentage of the contract’s full price.
This type of construction contract is an
alternative to lump sum agreements. It
allows flexibility and transparency for the
homeowner, and reduces the risk for a
contractor since a Cost Plus construction
contract guarantees them a profit.

The difference between this type of

contract which is a cost-based contract
with lump-sum contract is that in
guaranteed maximum price (GMP), if there
is any savings resulted from cost under
runs, then that would be stipulated price
contract, and the contractors will keep the
savings obtained from the cost under runs
for themselves and there is no obligation
for them to give them back to the owners.
Nevertheless, this saving can be shared by
both the contractor and the owner.[12]
Another difference is about status of the
plans. The lump-sum contract may be
used when the owner does have a
complete set of construction plans,
specifications etc. available, otherwise, the
guaranteed maximum price (GMP) is
preferred to be included to compensate for
this lacking. When the Cost-Plus is utilized,
it is better for the owner to determine the
guaranteed maximum price, to prevent any
further cost and contractor needed to
provide the primary input for owner about
the project cost.[13]
Duke and Carmen stated "Cost-plus with
GMP provides an upper limit on total
construction costs and fees for which an
owner is responsible. If the party providing
the work under this pricing method runs
over GMP, it is responsible for such
overruns…Cost-plus with GMP and an
agreement for sharing cost savings can
incentivize both parties to a construction
contract to work together as efficiently as
possible.”[14]

In this type of contract, the owner has

more authorities in monitoring, inspecting
and auditing the project periodically before
ultimate payment. Therefore, the risk will
be transferred from owner to contractor
and this would be an attraction for the
customer.[12]

Cost plus a percentage of cost

contract
…

In cost plus percentage, the owner pays

greater than 100 percent of the
documented cost, usually requiring
detailed expense accounting.[15] In this
type of contract, contractor is paid the
actual cost of work plus certain
percentage as profit. Various contract
documents, drawing, specifications are not
necessary at the time of signing the
agreement. The contractor has to keep all
records for cost of material and labour and
contractor will be paid accordingly to
engineer in charge. This type of contract is
suitable for emergency work like
difficulties in foundation conditions,
construction of expensive structure etc.
The U.S. Federal Acquisition Regulations
specifically prohibit the use of this type for
U.S. Federal Government contracting.[16]

Re-measurement contract …

Under a re-measurement (or

remeasurement) contract, the price to be
paid for the whole work is to be
ascertained by measurement in detail of
the various parts of the work and the
valuation of the work done by reference to
a schedule of prices included in the
contract.[3] The FIDIC Red Book 4th edition
[17] (the predecessor of the 1999 Red
Book) is used in some parts of the world
as a re-measurement contract for civil
engineering works.[18]

Subcontract agreement …

A subcontractor agreement is a contract

primarily between a builder or a principal
contractor and subcontractor. It outlines
the perimeters of specialist work to be
done for the construction project.[6]

Unit Cost Contract …

This contract is based on units put in

place rather than a single price. The
payment is calculated at a specific rate for
each item such as cubic yard for concrete
times quantity put in place. “The
contractor quotes an owner a price for a
particular task or scope of work, though at
the time of contracting the parties may not
know the actual number of the units of
work to be completed.”[14] Consequently,
the owner does not have an exact final
price till the project is finished.[19] This
type of contract is normally utilized where
the quantity of work cannot be established
such as civil engineering construction
projects where excavation of soil and rock
are involved. The contractor is paid based
on the units that have been put in place
and verified by the owner.[20]

Unit Cost contracts provide more flexibility

in discrepancies in field quantities and
because of this, it is always used on heavy
and highway construction contracts.[19]
Associated General Contractors of
America (AGC) states that this type of
contract is hardly used for the entire
project and is mostly applied to when
contracting with subcontractors which
identification of different quantities are of
matter of importance and they are
commonly used for repair and
maintenance work. For this reason, it is
“not particularly useful for most private
building projects, except as part of a lump
sum or cost-plus contract, applied to
select components of work items such as
dirt removal or fill, finish hardware, etc.”[14]

Special contracts …

This section needs expansion.

Learn more
Special contracts are further classified
into five types:

Turn key contract

Owner exerts governance over the

contractor. Contractor exerts governance
over internal units and sub suppliers.

Negotiated contract
Package contract
Continuing contract
Running contract[21]

Features of construction
contracts
 This section needs expansion.
Learn more

Base date …

A "base date" is a reference date from

which changes in conditions can be
assessed. In a construction contract, the
inclusion of a base date is generally used
as a mechanism for the allocation of risk
between the owner and contractor for
changes which might occur in the period
between the contractor pricing the tender
and the signing of the contract. This
period can potentially be very long and
changes that occur may have a significant
impact on the costs of the works.[22]
The base date sets the reference date
from which the conditions under which the
tender was prepared are considered to
have been known by the contractor and so
are properly reflected in their price. If
specified conditions change before the
contract is implemented, then the contract
may be adjusted to reflect this.

In very small projects, where the time

frame is short, this may not be considered
necessary. On larger projects, the base
date can be used to allow changes to the
contract sum, or sometimes extensions of
time, or even to determine which rules will
apply to the contract (for example, which
edition of the arbitration rules).

The exact provisions will depend on the

specific form of contract being is adopted.
For example, in the Joint Contracts
Tribunal (JCT) Design and Build Contract,
the base date determines the allocation of
risk in relation to changes in statutory
regulations, changes to VAT exemptions
and changes to definitions of dayworks.
Under the JCT's Standard Building
Contract, 2011 Edition, if there are
changes to “Statutory Requirements” after
the contract's base date, then the
contractor must alter the scope of work to
comply. The change will be deemed to be
a variation for which the contractor is
entitled to be paid, even if no formal
instructions have been issued.[23]

Practical completion …

Practical completion occurs when the

contractor returns possession of the site
to the owner, usually at the time when the
work has been completed and accepted by
the client. A certificate of practical
completion usually confirms this
acceptance. Typically half of the retention
monies are released, the contractor’s
potential liability for liquidated damages
ends and the defects rectification period
begins.[24]

Retention …

A retention is a sum of money withheld by

the owner under the contract to act as
security against incomplete or defective
works.

Sectional completion …

Sectional completion refers to a provision

within a construction contract which
allows different completion dates for
different sections of the works. This is
common in larger projects which are
completed in stages, allowing the client to
take possession of the completed parts
whilst construction continues on
others.[25]

Snagging …

Snagging refers to a process where the

owner or the owner's agent checks for any
defects, which the contractor needs to put
right before the final payment is made.
The UK consumer organisation Which?
states that the most common issues
picked up by snagging surveys for
residential properties tend to be
concerned with the completion of
plastering, tiling, skirting boards and
external brickwork.[26]

See also
Australian Construction Contracts
Economics
Engineering, procurement and
construction

References
1. Bowman's, A Guide to Construction
Contracts , p. 5, accessed 2
September 2020
2. "Main types of contracts" . Retrieved
23 October 2014.
3. Hogos, T. and Shewangzaw, M. (2009),
Construction Law: Teaching Material ,
sponsored by the Justice and Legal
System Research Institute, accessed
29 August 2020
4. "Building Contracts" . Retrieved
23 October 2014.
5. "Common types of construction
contracts" . Retrieved 23 October
2014.
. "Construction contracts" . Retrieved
20 October 2014.
 7. Dr. B.C Punmia (2014). A text book of
Production Planning and
Management.
. "Business dictionary" . Retrieved
17 October 2014.
9. "Lump sum contract" . Retrieved
17 October 2014.
10. "India study channel" . by Owais
Khursheed. Retrieved 17 October
2014.
11. Barrie, Donald S. (1992). Professional
construction management : including
CM, design-construct, and general
contracting. Paulson, Boyd C., Jr.
 (3rd ed.). New York: McGraw-Hill.
ISBN 0070038899. OCLC 24219336 .
12. Burger, Rachel. "What You Need to
Know About Guaranteed Maximum
Price (GMP) Contracts" . The Balance
Small Business. Retrieved 2019-07-04.
13. www.aia.org
https://www.aia.org/articles/7196-
how-gmp-contracts-keep-projects-
from-endless-:46 . Retrieved
2019-07-04. Missing or empty
|title= (help)
14. "The Pros and Cons of Pricing Options
in Construction Contracts" . Bell Davis
 Pitt. 2017-06-20. Retrieved
2019-07-04.
15. "Cost plus percentage of cost
contract" . by Owais Khursheed.
Retrieved 20 October 2014.
1 . FAR Part 16.102
17. FIDIC, Conditions of Contract for
Works of Civil Engineering
Construction, Fourth Edition, 1987
1 . Richards, G., UK: Procurement
Methods in the Construction Industry ,
Pinsent Masons LLP, published 14
March 2006, accesses 1 September
2020
19. Halpin, Daniel W. (2006). Construction
management (3rd ed.). Hoboken, NJ:
Wiley. ISBN 0471661732.
OCLC 61425134 .
20. The project resource manual : CSI
manual of practice. Construction
Specifications Institute. New York:
McGraw-Hill. 2005. ISBN 0071370048.
OCLC 56191871 .
21. Dr. B.C. Punmia (17 October 2014).
Production Planning and
Management.
22. Designing Buildings Wiki, Base date in
construction contracts , updated 5
July 2019, accessed 24 August 2020
23. JCT, Standard Building Contract, 2011
Edition (SBC/2011), referenced in
Sergeant, M., Deemed variations under
a construction contract , published 11
November 2015, accessed 24 August
2020
24. Kempthorne, V., The meaning of
‘Practical Completion’ , Clarks Legal,
published 11 January 2019, accesssed
3 September 2020
25. Designing Buildings Wiki, Sectional
completion in construction contracts ,
updated 14 January 2019, accessed
29 August 2020
 2 . Which?, Snagging surveys , accessed
3 September 2020

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