TYPES OF CONTRACT

 By the end of this session, students should be

able to : -
◦ List, defined and explain the types of contract
 WHAT IS CONTRACT????

 “A legal binding agreement between two or

more parties by which rights are required by
one or more to act or forbearances on the part
of the other or others”
Sir William Anson, the learned authority on the Law of
Contract

 “An agreement enforceable by Law”

Malaysian Contract Act 1950 under section 2(h)
2.2.1 Type of Payment System
2.2.2 Type of Organisation
 TYPES OF
CONTRACT

PAYMENT
ORGANISATION
SYSTEMS

PRICED COST TURNKEY MANAGEMENT

BASED BASED

- Cost + % cost contract

- Lump Sum (LS) - Cost + Fixed Fee
- Scheduled of Rate
- Bill of Quantity - Cost + Fluctuating Fee
- Target Cost
 Priced being submitted  Also known as “Cost
Reimbursement Contract”
by contractors on his  Based on the actual cost
bids incurred carrying out
construction works, plus fee to
 Also known as “Fixed
cover overheads, profit and
Priced Contract” any services provided by
 Including: contractor.
 Useful for maintenance and
A. Lump Sum Contract emergency works
B. Scheduled of Rates  Comprises of:
A. Cost Plus Percentage Of Cost
Contract Contract
C. Bill of Quantity B. Cost Plus Fixed Fee Contract
Cost Plus Fluctuating Fee
Contract C.
Contract
D. Target Cost Contract

2.2.1.1 - Priced Based 2.2.1.2 - Cost Based

 the contract price is a fixed sum quoted by the
contractor for the project as specified in the
contract documents
 No individual rates are quoted for each item of
work
 No provision to vary the contract priced even if the
actual work executed differs in quantity
 Advantages:
o Suitable where later changes are not expected, and
when a simple and quick form of payment is
preferred
o Suitable for small project
o Payments are made in stages
o No physical measurements shall be carried out

 Disadvantages:
o If there are any changes in the plans or drawings,
the value of the change should be negotiated with
the contractor. This may cause delay and
sometimes disputes
o The owner pays a fixed sum for the works,
regardless of their actual cost
o There is no provision of payment for materials at
site
 Documents having the schedule of items with
unit rates
 This type of contract is suitable for use in
maintenance, jobbing, and similar contracts.
It is usually chosen for urgent works
 Advantages:
o Variations in quantities are easily accommodated
o Experienced architects or engineers may be able to
forecast the types of works and methods
 Disadvantages:
o difficult to estimate the actual contract price, to
plan properly the contract programme, and to
project the cash flow
o The quotations for the unit rates tend to be high
 BQ contract is the most usual type of fixed
price contract
 BQ is prepared, giving as accurate as
possible, the quantities of each item of work
to be executed
 The contractor only need to quotes a unit rate
or price for each item of work
 BQ contract greatly assist in keeping tenders
figures as low as possible
 Changes in drawings may
increase or decrease the
quantity of work to be done
 variations can easily be
identified, calculated and
adopted
 The employer can identify
particular items on which
he wishes to reduce the
cost
Material on site is paid 90%

of the actual value
Advantages
 It may be necessary to
supervise to assure the
quality of work and
materials
 Time consuming for BQ
preparation and
analyzing of tender
 Planning and
implementation cost
since it is needed to
paid the QS
Disadvantages
 The contractor, in this form of contract,
charges an agreed fee in terms of a
percentage of the cost of the actual work
executed (percentage varies from 5% - 20%)
 Advantage:
i. It allows contractors involve at the design stage
ii. The contractor can be confident of an equitable
payment for changes and unforeseen events
 Disadvantage:
i. Dishonest contractor could increase his profit by
increasing the contract sum
ii. There is no incentive to complete the works as
quickly as possible or to try to reduce costs
 The sum paid to the contractor will be the actual
cost incurred in the execution of works, plus a
fixed fee, which has been previously agreed and
does not fluctuate with the final cost of the job
 Advantage:
i. The contractor is not inclined to push up the cost
of work since the profit is already fixed
ii. if the work is accelerated, the contractor could
earn his fixed fee as early as possible
 Disadvantage:
i. The contractor may try to reduce the cost of
supervision, expedite with the work, neglecting the
correct construction process to maximise profit
 It is also known as cost plus a sliding scale of
fee contract since the fee paid to the contractor
is based upon some form of a sliding scale.
 It is designed in such a way that the contractor
may have a definite financial incentive to affect
the economy in the cost of work. Example:
Project Cost % of Fee

Below RM 2 MIllion 30

RM 2 Million – RM 12 Million 10 – 20

Above RM 12 Million 12 - 15
 A basic fee is generally quoted as a percentage of an
agreed target estimated from BQ
 Actual fee paid to the contractor is derived by
increasing or reducing the basic fee, by an agreed
percentage, of the saving or access between the
actual cost and the agreed target estimate. Example:
Target cost contract Example 1 Example 2
Agreed target 5,000,000.00 5,000,000.00
estimate
Actual cost 4,500,000.00 5,500,000.00
Saving 500,000.00
Excess 500,000.00
Sharing ratio 50:50 250,000.00 250,000.00
Payable to the 4,750,000.00 5,250,000.00
contractor
 encourages the  There is no incentive to
contractor to execute complete the works as
the work as cheaply as quickly as possible
possible  contractor may try to
 fluctuation of cost is reduce the cost of
shared between the supervision, expedite
owner and the with the work,
contractor neglecting the correct
 owner gains great construction process
flexibility to involve in so that the profit
the project effectively maximization can be
effected

Advantages Disadvantage
 The contractor is fully responsible for the design,
specification, construction and sometimes
maintenance of the project
 Advantages:
i. Single source responsibilities from contractor
relieve the owner from the design responsibilities
ii. The contractor may apply a fast track approach
with design and construction overlapping
 Disadvantages:
i. Cost of the project will be expensive since the
contractor will highly charged for their
professional services and managements
ii. Owner participation and supervision is not
significant
 Contractor offers the owner a consultant service based on a
fee for co-ordinating, planning the construction, managing
and executing the project
 The permanent work are constructed under a series of
construction contract after approval by the client/owner

Owner project management

Design Management
organisation contractor

Construction
contractors
i. Time can be saved by  The overall
more extensive construction cost may
overlap of design and be increased
construct utilising the
management  The overall
contractor’s construction cost may
experience be increased
ii. It allows more
flexibility particularly
where the programme
and design are ill-
defined and subject to
change
iii. It reduces chances of
delay project

Advantages Disadvantages