ASSIGNMENT 3
GCAD/20/132
SECTION-A
Q- You have to list down and define each type of contract in construction. You have to define
risks and responsibilities of each stake holder for the respective contract type with
advantages and disadvantages.
ANS-
1. Lump Sum (Fixed Price) Contract
A Lump Sum Contract (also called Fixed Price Contract) is an agreement where the
contractor agrees to complete the project for a fixed total price, regardless of the actual costs
incurred.
Stakeholder Risks & Responsibilities
Client (Owner):
o Low financial risk if the scope is well-defined.
o Risk increases if changes or variations occur, leading to expensive change
orders.
o Must ensure detailed project specifications before signing the contract.
Contractor:
o Assumes most financial risks; any cost overrun or inefficiency reduces profit.
o If unforeseen challenges arise, the contractor bears the cost.
o Motivated to minimize costs, but this may impact quality.
Consultants/Architects:
o Must prepare a complete and detailed design before bidding.
o Responsible for reviewing work quality to ensure compliance.
Advantages
Cost certainty—client knows the exact price upfront.
Reduces administrative burden since payments are fixed.
Encourages contractor efficiency in resource management.
Disadvantages
High contractor risk leads to inflated bid prices.
Change orders can significantly increase costs.
Potential for lower quality as contractors seek to maximize profit.
2. Cost-Plus Contract
A Cost-Plus Contract reimburses the contractor for actual costs incurred plus an agreed-upon
profit margin (either a fixed fee or a percentage).
Stakeholder Risks & Responsibilities
Client (Owner):
o Takes on financial risk—final cost is not guaranteed.
o Requires transparent cost tracking and oversight to prevent excessive spending.
Contractor:
o Bears minimal financial risk since all costs are covered.
o Responsible for keeping cost records and ensuring efficiency.
Consultants/Architects:
o Responsible for monitoring expenses and ensuring legitimate costs.
Advantages
High flexibility in design and materials selection.
Reduces disputes over change orders.
Encourages higher quality work as the contractor is not forced to cut costs.
Disadvantages
Cost uncertainty—project could exceed initial budget.
Requires detailed auditing to ensure fair pricing.
Contractor has less incentive to work efficiently.
3. Time and Materials (T&M) Contract
A T&M contract pays the contractor based on actual labor hours and material costs plus a
markup or profit percentage.
Stakeholder Risks & Responsibilities
Client (Owner):
o Faces financial risk as the total cost is unknown.
o Needs to closely monitor progress to prevent inefficiency.
Contractor:
o Minimal financial risk as all costs are reimbursed.
o Responsible for maintaining detailed time and material logs.
Consultants/Architects:
o Ensure proper billing and tracking of costs.
Advantages
Flexibility for unknown or evolving project scopes.
Suitable for emergency repairs or small projects.
Easy contract setup with transparent cost breakdowns.
Disadvantages
No cost cap, leading to potential overspending.
High administrative burden in tracking costs.
Contractor has less incentive to work efficiently.
4. Unit Price Contract
A Unit Price Contract pays the contractor a fixed amount per unit of work completed (e.g.,
per cubic meter of concrete, per square meter of paving).
Stakeholder Risks & Responsibilities
Client (Owner):
o Faces risk if actual quantities exceed estimates.
o Must ensure accurate quantity forecasting.
Contractor:
o Risk depends on unit pricing; if actual costs exceed estimated unit prices, profit
is reduced.
o Must provide precise quantity tracking.
Consultants/Architects:
o Verify quantity estimates and payment requests.
Advantages
Good for linear or repetitive work (e.g., road construction).
Allows flexibility if project scope changes.
Disadvantages
Final cost is unpredictable if quantity estimates are wrong.
Requires strict measurement and verification of units.
5. Design-Bid-Build (DBB) Contract
A DBB contract follows a three-phase process:
1. Design: The client hires a designer.
2. Bid: The contractor is selected through bidding.
3. Build: The contractor executes the project.
Stakeholder Risks & Responsibilities
Client (Owner):
o Responsible for ensuring design accuracy.
o Faces cost and time overruns if design errors occur.
Contractor:
o Only responsible for construction; has no say in design.
o Must bid competitively, leading to cost-cutting risks.
Consultants/Architects:
o Must create complete and buildable designs.
Advantages
Well-established process.
Competitive bidding can reduce construction costs.
Disadvantages
Longer project duration (sequential process).
High change order risk due to design issues.
6. Design-Build (Turnkey) Contract
The contractor is responsible for both design and construction, ensuring a streamlined
process.
Stakeholder Risks & Responsibilities
Client (Owner):
o Less control over design.
o Lower risk of coordination issues.
Contractor:
o Full responsibility for design and execution.
Consultants/Architects:
o Work under the contractor instead of the client.
Advantages
Faster completion due to overlapping design and construction.
Disadvantages
Limited client control over design.
7. Guaranteed Maximum Price (GMP) Contract
A GMP contract sets a cost cap, meaning the contractor covers overruns.
Stakeholder Risks & Responsibilities
Client: Limited financial risk.
Contractor: High cost overrun risk.
Architects: Must ensure accurate cost estimation.
Advantages
Cost certainty.
Disadvantages
Requires detailed cost forecasting.
8. Integrated Project Delivery (IPD) Contract
All stakeholders (client, contractor, designers) collaborate and share risks and rewards.
Advantages
Reduces conflicts and change orders.
Disadvantages
Requires high trust and collaboration.
