Construction Contracts

Construction contracts play a crucial role in the successful completion of construction projects.
They establish the legal framework and define the rights and obligations of all parties involved.
Different types of construction contracts exist to accommodate various project requirements,
risk allocations, and payment structures.

A construction contract is an agreement between two or more parties to execute the

construction works as per certain terms and conditions. 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. A construction contract document is a valid document that can be
enforced under a certain authority or law.
At the early stages of any construction project, the owner with his engineer or consultant
prepares necessary documents for the tender process, which will be included in the contract.
These documents are called contract documents.
Contracts used specifically in the construction industry typically outline things like the project's:
1. Timeline
2. Cost
3. Specifications
4. Quality
The different types of documents in a construction contract are as follows-
1. General conditions
2. Special conditions
3. Drawings and specifications
4. B.O.Q (bill of quantity)
5. Letter of acceptance
6. Contractor bid.
General Conditions of Contract, they are standard terms that suit the majority of projects; they
include:
 Definition of the project
 Contract components
 Rights and responsibilities for the owner and the contractor
 Project schedule
 Payment method
 Warranty and delay penalty
The role of Special Conditions of Contract.
They are the modifications required to suit the uniqueness of the project, make the contract
flexible for the nature of the project, and achieve project objectives.

Factors affecting the selection of construction contract

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1. Project objectives; The type of contract should meet with the project objectives.

2. Project Constraints; There isn't any construction project without constraints. Thus,
project constraints should be considered while selecting the type of construction
contracts.

3. Project Delivery Method; The project delivery method determines the relationships
between parties getting involved in the project and how they interact with each other,
from project initiation to project closure.

Tender and Contract

Tender: The term tender formally means an invitation to trade under the terms of offer. A tender
is a formal notification of procurement needs and invitation of bids from potential suppliers,
contractors or sellers. In other words, it is a request for quotation made by the buyer
organization. Tenders are released to give an outline of the scope of work and invite quotes
from suppliers or contractors so that they can share a competitive quote.

Contract: A contract is the term used when 2 parties have reached agreement. It is a legal
document that binds the two organizations under specified terms and conditions. In the context
of a tendering process, the contract is drawn after the tendering process is complete and the
supplier is selected. It outlines terms, timelines, payment terms, etc., for a specified work,
project or goods delivery.

Purpose of a Tender: The main purpose of a tender is to get competitive quotations for the
specified work or project from different suppliers and contractors. It helps the buyer to find a
suitable vendor to enter into a contract with.

Purpose of a Contract: As mentioned earlier, a contract is a legal document binding the buyer
and seller in the context of the tendering process. The purpose of the contract is to establish
terms and conditions under which the work will be performed.

Classification of Contracts
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1. Separated contracts.
2. Management Contracts.
3. Integrated Contracts.
4. Discretionary Contracts.

Separated contracts.

1. Lump Sum Contract.

2. Measurement Contract.
3. Item Rate Contract.
4. Percentage Rate Contract.
5. Cost Plus Percentage Contract.

Management Contracts.
1. Management Contract.
2. Construction Management Contract.
3. Design, Management & Construction Contract.

Integrated Contracts.
1. Design Build Contract.
2. Turn Key Contract.
3. Build, Operate & Transfer Contract.

Discretionary Contracts.

1. Partnering Contract.
2. Joint Venture Contract.

There are many types of contracts used in construction. Each type has its advantages and
disadvantages concerning the owner and the contractor. They are categorized into major
groups as per the method of payment to the contractor. The following are the types of
construction contracts generally used in construction projects:
1. A Stipulated Sum Contract, also known as a Lump Sum Contract, is a Fixed-Price.
2. Time and Materials.
3. Cost plus.
4. Unit Price.
5. Guaranteed Maximum Price.
6. Design-build contracts.

In order for a construction contract to be enforceable and legally binding, it must cover these five
key areas:
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1. Intention - what will happen, when and how
2. Capacity - if all parties have capacity to agree
3. Agreement - details of the offer and acceptance by both parties
4. Certainty of terms - which terms are being set out
5. Consideration - who will provide the services and payment schedules

Subcontractor contracts
A subcontractor contract is where a separate party agrees to undertake some of the work on
behalf of the original contractor. This could be an individual or another company. In this
instance, a separate contract will be needed between the contractor and the subcontractor.
The advantages are it allows the contractor to use specialist services to assist with the project,
such as a certified gas-safe engineer installing underfloor heating as part of the build. The
disadvantages might be that the client will hold the main contractor accountable for all the
work.

Every subcontractor contract agreement should include:

1. Business information
2. Scope of the work
3. Payment terms
4. Change orders
5. Licensing and business insurance
6. Dispute resolution
7. Termination
8. Flow-down provisions

Design-build contracts
A design and build contract is where the tasks of designing and building are simultaneously
done, which can often save time and money for both parties. The architect and builder work
closely together in a collaborative way, which can streamline the process. For the client, there is
one single point of contact and responsibility which can make things more straightforward, and
there is a certain amount of flexibility required which can be beneficial for all sides. With this
collaboration though can come downsides, such as increased costs when ideas change, and
having to rely on other specialties.

Guaranteed maximum price

A guaranteed maximum price contract (also known as a ‘not to exceed price’ or ‘guaranteed
fixed fee contract’) is as you’d expect - a contractor will work out a maximum price for the
client for the project. This sort of contract requires a highly detailed breakdown of all the works
in order to accurately estimate costs and overheads, yet it can often be clearer to work out
profits. The pros for the client are the obvious cost certainty - being able to budget successfully
and manage the costs coming in, as well as control over-spends. It can encourage savings
overall by incentivizing contractors to work efficiently. For the contractor it may help to win
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new client contracts, as a popular option for homeowners with tighter budgets. There are risks
involved, however - such as unexpected costs and unavoidable delays, including inflation and
price rises for materials, or availability of sub-contractors and staff. It’s vital that the contract
includes a maximum threshold, as well as clear terms to discuss unforeseen price rises in
exceptional circumstances.

Unit price contracts

A unit price contract sets out separate prices for each area of the work (such as building
materials, labor, overtime etc.) and the client pays the contractor based on the pre-agreed
‘unit’ rates. The benefit for the client is the transparent pricing, flexibility if unforeseen costs
come up and the ability to keep on top of construction budgets. For the contractor, it takes
away some of the risk which comes with guaranteed maximum price as it’s a more accurate
dynamic estimate that offers flexibility in unforeseen circumstances, meaning a more accurate
payment for the actual work. This sort of contract is usually better for projects which have
repetitive work, such as a series of new bathroom suites in a hotel or straightforward roofing
jobs, which can also make invoicing much easier. For complex jobs with varying materials and
tasks it can be less easy to estimate in advance, and may mean a complicated invoicing system
and less incentive for sub-contractors to work efficiently.

Cost-plus contracts
Cost-plus contracts mean that contractors are paid for all their expenses (the ‘cost’, which
includes staff, mileage, supplies etc.) with the ‘plus’ being a pre-agreed profit. This type of
contract is popular with many contractors as the transparent pricing means very little risk for
loss of profit, plus it gets around problems associated with price rises for materials and labor. It
does however mean keeping a detailed track of all costs, labor and supplies. For the client it
means contractors often priorities quality as they don’t need to cut corners to ensure they still
make a profit, but with this comes the risk of the work going over-budget. For this reason, many
of these contracts include a maximum amount which can be spent. A cost-plus contract might
be ideal in a situation where the full extent of the work is uncertain, such as a large renovation
on a character property with potentially hidden problems.

Time and materials contracts

A time and materials contract (also known as T&M) combines some of the aspects of both the
cost-plus and lump-sum contracts, where the client pays an agreed price to cover the
contractor’s costs and profit. This sort of contract can offer flexibility by clearly setting out
hourly rates for labor, as well as estimated prices for materials. For the client it’s
straightforward and allows them to keep more on top of costs for budgeting, but the costs are
less transparent in the case of changing material prices and the amount to pay may well go up.
The benefit for the contractor is reducing the risk of loss from fluctuating staff and materials
prices, but the downside may be that the contract management side can be time consuming.
An example of when this type of contract might be used is when the final scope of work is
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unclear, if there have been recent updates to the building regulations which mean additional
supplies and inspections, or if labor and material prices or availability are unstable.

Lump sum contracts

Lump sum contracts are when a contractor completes a project at a pre-agreed price. However,
it’s important to note that - unlike guaranteed maximum price contracts - the costs can
fluctuate in exceptional circumstances. As details of labor, materials and other costs aren’t set
out in detail it is often a straightforward contract to prepare and agree on with the client, which
cuts down on admin time. For clients, the benefits include an agreed price - knowing costs in
advance to keep on top of budgets - as well as encouraging a timely completion. For
contractors, the benefits include a simpler invoicing system, but can present a risk for loss of
profit if staff or supply costs increase or if additional work is needed. Of course, it also means if
there are savings to be made the contractor can benefit from this. These contracts are usually
better for simpler or low-risk projects with a defined scope of work, such as new glazing or
decorating, or smaller jobs such as installing decking.

Fixed-price contracts
Like lump sum contracts, fixed price contracts also have a pre-agreed price between the
contractor and client. However, these are not usually able to fluctuate in case of changing
materials or labor costs. This contract includes all the set price benefits of the lump sum
contract for clients, to assist with budgeting, but some clients find that they may overpay for
services as the contractor builds in a buffer in case of risk. Again, due to the potential financial
risks for the contractor these contacts are better for projects with fixed scope or
straightforward jobs, with less risk of profit loss. It’s important to remember that different
projects often call for different types of contract. Many overlap with their pros and cons, but it’s
often down to the complexity of the job and the client’s preference to determine which
contract is the best fit. To find out more about planning any construction project,

Here are three of the more common types of construction contracts between project owners and
contractors:

FIXED PRICE Contracts

Fixed price construction contracts, also commonly referred to as “lump sum” or “stipulated sum”
contracts, are the most common types of construction contracts. As its name suggests, under a
fixed price contract a contractor agrees to construct a project for a “fixed” or agreed upon price.

Benefits: These provide price predictability for project owners because absent changes in the
scope of work, unforeseen conditions, or other circumstances that cause the project to change,
the contractor must complete the work for the agreed upon price.

Drawbacks: These can be more expensive for project owners than other types of construction
contracts because contractors, knowing that they are going to be subject to a “fixed” price, will
 Construction Contracts
often build in a buffer to protect itself from cost overruns, for which the contractor would not be
compensated. They can add to the time and cost of the design phase of a project, which can
affect the overall project timeframe They also can result in lower quality work because
contractors may adopt a “cheaper is better” approach knowing that any cost savings they can
achieve will improve their profit margin.

Best Use: Projects with well-defined scopes of works, where the project owner wants price
certainty.

COST PLUS Contracts

Under a cost plus construction contract, also known as a time and materials contract, a project
owner agrees to pay a contractor for its costs plus a fee, which may either be a fixed fee or
calculated as a percentage of costs.

Benefits: These offer the most design flexibility for project owners and best price predictability
for contractors since owners can make design decisions along the way, and contractors know
they will be paid for their time and cost of materials, no matter how long the project takes or the
quality of materials used.

Drawbacks: Because time and materials are variable, these contracts provide owners with the
least control over costs. Because of the cost uncertainty, it can be difficult for owners to obtain
construction financing. Finally, it can be difficult for contractors to schedule their work on the
project and juggle workforce and other resources.

Best Use: Smaller projects or specific scopes of work within larger construction projects where
more flexibility is needed.

GUARANTEED MAXIMUM PRICE Contracts

Under a guaranteed maximum price contract, project owners agree to pay contractors for their
time and cost of materials plus a fee—but only up to a “guaranteed maximum price.”

Benefits: Under this approach, contractors get a degree of price predictability because they will
be paid for their time and materials and project owners retain more design flexibility. Similar to a
fixed price contract, project costs are capped at a “guaranteed maximum price.” These contracts
can include a shared savings provision whereby the parties agree to split any savings if the actual
costs of construction are less than the guaranteed maximum price.

Drawbacks: Contractors under a guaranteed maximum price contract often build in a buffer to
protect from cost overruns that cause the contractor to exceed the guaranteed maximum price. If
there is a shared savings provision, a contractor may try to increase the guaranteed maximum
price in order to benefit from “more” shared savings. These contracts can take more time to
negotiate and administer.
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Best Use: Best for sophisticated project owners and contractors.

Types of Risk-Based Construction Contracts

When scrutinizing parties’ rights and obligations using a standard or bespoke contract form, the
participants must pre-allocate responsibilities between themselves concerning certain risks that
may occur before, during, and after the execution of the contract (from conception, construction
to operation and maintenance aspects). Knowing exactly which type of risk-based contract, that
suits a project, will best assist owners, contractors, and suppliers manage risk allocations and
ensure the work and payment go as smoothly as possible. The following are some types of
related construction contract commonly found in the industry:

Lump-Sum: are usually considered the most popular type of contract when it comes to building
and engineering agreements, construction service contract for the completion of all work within a
certain time limit, with a fixed contract price, and all risks that may occur in the execution of
work are fully borne by the goods/services provider or contractor.
It’s important to note that although ‘lump sum contracts’ are the most popular type of
construction contract; it doesn’t mean they are automatically the best option for every project.
Each contract type has its own benefits and potential drawbacks - depending on the size, scale
and scope of the build or renovation - and each can usually be tailored to the individual project.
Turnkey (Contractor’s Full Pre-financing): a contract where a contractor is responsible for
financing all costs required to complete the project. Payment to the contractor is made after the
building is delivered and ready for operation by the owner. As a guarantee for payment to the
contractor, a bank guarantee letter is given for the total development costs (pre-design, design,
construction, interest expenses). The contractor can disburse the bank guarantee letter if the
owner fails to pay at the agreed time after the contractor’s obligations have been fulfilled.
EPC (Engineering, Procurement, and Construction): a contract system that covers the scope of
responsibilities of the project owner and contractor for Engineering, Procurement, Construction
and Commissioning to produce a production-capable system. EPC projects are generally paid
according to work progress (earned value system). This system converts work progress into a
monetary value or into a man-hour rate/value. The contractor has the right to submit ‘a monthly
earn value progress’ (a progress calculation) for claim payment installment under the project
owner’s approval.
An engineering, procurement and construction (EPC) contract is sometimes referred to as a
turnkey contract, although there are some differences between the two.
o In an EPC contract, the project company will do some basic engineering before handing
over the project to the contractor. In a turnkey contract, the owner would specify certain
technical aspects of the project, and then the turnkey contractor will have all the project
controls until the contract is complete.
o A turnkey contractor is responsible for the design, procurement and construction of the
project. The contractor is also responsible for commissioning and handing over the ready-
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to-use project to the owner or the client. In EPC, the commissioning is not a part of the
contract as in a turnkey contract.

Difference between EPC and EPCM contracts

The definition of EPCM is engineering, procurement, construction and management. Although it
sounds similar to an EPC project, an EPCM contract is very different from the former. An EPC
contractor handles design, procurement, construction and hands over the project to the end-user.
By comparison, the EPCM contractor is mainly concerned with the supervision of the project,
although an EPCM contractor is also responsible for the detailed design and the overall project
management.

Construction Only: a contract where a contractor builds a project in compliance with the design
made by other parties. This is considered the lowest risk for contractors and is a popular delivery
method for small-scale projects on domestic and commercial buildings, including infrastructure
works.
Design and Build: a contract where a contractor carries out both the design and construction
works. This is used to avoid risks of delivery schedule conflicts between the design phase and
the construction phase of a project. The design-build contractor is responsible for all work on the
project; therefore, the owner may seek legal remedies for any fault directly from one party
(contractor).
Cost Plus Fee (Cost Reimbursement): a contract for the procurement of construction where the
contractor receives service fees from the owner as agreed. This contract authorizes the contractor
to use the fee up to a certain cost limit. After the cost limit is exceeded but the construction
procurement has not fulfilled the existing agreement, all additional costs and risks to accomplish
the project will become the responsibility of the contractor.
 ‫‪Construction Contracts‬‬

‫هناك مجموعة متنوعة من أنواع عقود البناء التي تناسب متطلبات المشروع المختلفة‪ ،‬مثل‪:‬‬

‫عقود المبلغ المقطوع‪ :‬يوافق المقاول على إكمال المشروع بسعر محدد‪.‬‬ ‫‪‬‬
 ‫‪Construction Contracts‬‬
‫عقود الوقت والمواد ‪ :‬يدفع المالك للمقاول التكلفة الفعلية للعمالة والمواد‪ ،‬باإلضافة إلى هامش ربح متفق عليه‪.‬‬ ‫‪‬‬

‫عقود سعر الوحدة‪ :‬يتم الدفع للمقاول على أساس أسعار وحدة محددة لكل بند من بنود العمل‪.‬‬ ‫‪‬‬

‫عقود السعر األقصى المضمون (‪ :)GMP‬يتم الدفع للمقاول مقابل التكاليف الفعلية المتكبدة باإلضافة إلى الرسوم‪،‬‬ ‫‪‬‬
‫ولكن المبلغ اإلجمالي محدد بحد أقصى متفق عليه‪.‬‬

‫عقود التكلفة الزائدة‪ :‬يدفع المالك للمقاول التكاليف الفعلية باإلضافة إلى الرسوم‪ ،‬دون حد أقصى‪.‬‬ ‫‪‬‬