Contracts and Specifications

Contract - is an agreement that affects or creates legal relationships between two or

more persons enforceable under law.
- An agreement must be enforceable by law and must possess the essential
elements of a valid contract as contained in law.
- An agreement that can be enforced in a court of law between two or more
competent parties, for a lawful consideration and with a lawful object and are
not expressly declared to be void or to do or refrain from doing some
particular thing that is neither illegal nor impossible.

A construction contract provides a legal binding agreement, for both the owner and
the builder, that the executed job will receive the specific amount of compensation or
how the compensation will be distributed.

Use of 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

Types of Contracts:
Lump Sum Contract
Cost Plus Contract
Time and Material Contract
Unit Price Contract
Turnkey Contract
Design and Build Contract

Lump Sum Contract

This type of contract involves a total fixed priced for all construction-related activities.
Lump sum contracts may include incentives or benefits for early termination, or can also
have penalties, called liquidated damages, for a late termination.
Lump Sum contracts are preferred when a clear scope and a defined schedule has
been reviewed and agreed upon. This type of contract is used when the risk needs to
be transferred to the Builder and the owner wants to avoid change orders for
unspecified work.

Advantages
1. The final price is known
2. The contractor has more incentive to reduce his cost to
increase the profit.
3. The contractor hopes to complete the job as quickly as
possible.

Disadvantages
1. Changes can be very expensive and source of trouble.
2. The contractor carries much of the risks.
3. Competent contractors may decide not to bid to avoid a high-risk lump sum contract.

Cost Plus Contract

Cost Plus Contract must contain specific information about a 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. This type of
contract involves payment of the actual costs, purchases or other expenses generated
directly from the construction activity.

Advantages
1. Cost-plus contracts can be budget-friendly for a contractor.
2. Decisions like whether to use the best materials become easier when the cost won’t
come out of the contractor’s paycheck.

Disadvantages
1. A cost-plus contract will typically operate via reimbursement. The contractor on
a cost-plus contract will need to front their own costs.
2. Cost-plus contracts can create a sort of conflict of interest for contractors, which can
lead to higher prices for owners.
Time and Materials Contract
The costs must be classified as direct, indirect, markup, overhead and should be
included in the contract. These contracts are useful for small scopes or when you can
make a realistic guess on how long it will take to complete the scope. 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.

Advantages
1. With assurances that all costs will be covered, time and materials contracts
are simple to implement and a low risk for the contractor.
2. Profit is predictable.
3. Adjustments are easy when specifications or resource needs change.

Disadvantages
1. Clients often prefer a fixed price contract because their risk is lower, and budgeting is
easier.
2. When bidding against a fixed price contract, the contractor with a time and materials
contract may lose the bid.

Unit Price Contract

Unit price contract is another type of contract commonly used by builders and
Government agencies. It is 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.

Advantages
Suitable for competitive bid
Easy for contract selection
Early start is possible
 Flexibility: quantities and scope can be easily adjusted
Disadvantages
Final cost not known from the beginning (BOQ only is estimated)
Unit price sometime tend to draw unbalanced bid.
Staff needed to measure the finished quantities and report on the units not
completed.

Turnkey Contract

A turnkey contract is a business arrangement in which a project is delivered in a

completed state. 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.
This type of arrangement is commonly used for construction projects ranging from
single buildings to large-scale developments.
Turnkey Contract is suitable for short duration project. The first and most significant
requirement from the client is quick completion. It is different from traditional lump sum
contract which the client agrees to pay the contractor to complete a project that is built
in contractor’s specification.

Design and Build Contract

Design and build procurement work 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. They can assess other materials and methods for the project. Innovation and
productivity should always lead to cost savings.
Design and build contract is a relatively low risk procurement option for the employer, in
terms of cost and time.
References:

https://slideplayer.com/slide/6329768/?fbclid=IwAR20j8VPQWhzDTWkco0I9pPshMdU
r UK2OBMeE0I7o9XvChNGmPewCS4m4U0

https://basiccivilengineering.com/2016/05/type-of
contracts.html?fbclid=IwAR3njquDT9A6vJpFh4I9F7Oxu5go8leBjsspqXpYgACAZ8QUx
g 9jfH_q7rs
https://en.ppt-online.org/509066?fbclid=IwAR3to-w
9BEX1H5C_GMtRiaKHoRgC8i3MkjErvzEzGi__XX39CVCcrI1Ypk
Learn the 7 Basics of Construction Contracts (thebalancesmb.com)

Prepared by:
Group 1
Agang, Geia
Amancio, Rael
Balbero, Nenette