TYPES OF CONTRACT

Types of contract
Types of contract’s are
 Item rate contract
 Percentage rate contract
 Lump-sum contract
 Labour contract
 Materials supply contract
 Cost plus contract
 Cost plus percentage rate contract
 Cost plus fixed free contract
 Cost plus sliding or fluctuating fee scale contract
 Target contract
 Negotiated contract
 ITEM RATE CONTRACT
Item rate contract:
 Item rate contract is also known as unit price contract or
schedule contract. A contractor undertakes the execution of work
on an item rate basis. He is required to quote rate for individual
item of work on the basis of schedule of quantities (i.e., bill of
quantities ) furnished by the department. The amount to be
received by the contractor, depends upon the quantities of work
actually performed. The payment to the contractor is made on
the basis of the detailed measurements of different items of
work actually executed by him.
 Suitability :
 The item rate contract is most commonly used for all types of
engineering works of the government undertakings including
railway department. It is suitable for works which can be
distinctly split into various items and quantities under each item
can be estimated accurately.
 MERITS AND DEMERITS
 Merits:
 This method ensures a very detailed analysis of cost and payment to the contractor and also is based upon
detailed measurements of each item actually done, so this method is more scientific.
 Changes in drawings and quantities of individual item can be made as per requirements within agreed
limits.
 There is no urgency of providing detailed drawings at the time of awarding the contract. It can be prepared
later on.
 A contractor is asked to write down the rate of individual item in figures and words both so it is not easy to
form a cartel during the submission of tender.
 An engineer can compare the rates quoted by the contractor with that of schedule of rates prepared by the
departments to find out whether the tender is unbalanced.
 Demerits:
 As by wise anticipation or perhaps outside information, a contractor may quote high for items that are likely
to be increased and low rate for items likely to be decreased, making an unbalanced tender and
consequently the departments may stand to lose substantially.
 Comparative statement of item rate tenders are more elaborate and comprehensive and intelligent scrutiny
is required.
 A contractor may quote some items in words excluding paise intentionally in order to tamper in rates.
 The total cost of work can only be known after completion. As such the owner may face financial difficulty if
the final cost is substantially high.
 Additional staff is required to take detailed measurements of work.
 The scope of saving with use of interior quality may prompt the contractor to do so.
Percentage rate contract:

 In this form of contractor, the department

draws up ‘item rate tender’ i.e bill of quality and
total amount. The contractors are required to
offer to carry out the work as per with the rates
shown in the specific price schedule or some
percentage above or some percentage below the
rates indicated in the schedule of work attached
with the tender. The percentage above or below or
at par is applicable on the over of the work also.
MERITS AND DEMERITS:
 Merits:
 The ranking amongst the contractor is easily known just on the
opening of the tender.
 As there is no provision to quote contractor’s own rate for an
individual item, benefit due to increased quantity with a
beneficial rate can not be availed by the contractor. The chance of
unbalanced tender gets eliminated.
 Demerits:
 A contractor is required to write down only the percentage above
or at par or below, it is easy to write such a rate in few minutes
before the time of submission of the tender.
 By negotiating among the contractors, two or more may quote
the same rate in order to get a part of the work at a high rate.
There may be difficulty to divide the work at equal amount
among the contractors.
Lump sum contract:
 In this type of contract, a contractor is required to
quote fixed sum for execution of work complete in all
respect in thr stipulated to him with the tender.
 The department schedule of rates for various items
of work are also provided which regulates the
payment of the contractor in respect of any additions
and alterations which are made over the original
work. On the completion but the whole done must be
compared and checked with the drawings and
specifications.
MERITS AND DEMERITS
 Merits:
 As the total cost of the work known before hand, the owner can arrange the fund in time.
 Detailed measurements of the work done are not required except in respect of additions and
alterations.
 The contractor’s profit mainly lies in the completion time. Hence for getting more profit the
contractor tries to complete the work as early as possible. This concept on the part of
contractor coincides with the objective of the owner also.
 As it is difficult to get intermediate payment, the contractor tries to finish earliest to get the
full payment earliest and go to another venture. The owner also benefits from the project
completed early or in time.
 Due to completion among the contractor, the contractor tries to take the work up even at the
less profit, resulting in low cost of work.
 Demerits:
 The owner aims to get maximum work out of money he spends whereas the contractor tries
to get maximum profit out of money he receives, this causes conflict iin interests.
 It is very essential the work must be defined accurately, specifications must be fully specified
and the site conditions must be fully explained otherwise disputes can arise later on.
 For any intermediate payment, the value of work done should not be less than the payment
being made.
 It is suitable form of contract where considerable amount of addition and alterations are
expected.
Labour contract:
 In labour contract, the contractor undertakes
contract for the labour portion only excluding the
materials which are arranged at the work site by
the department/owner. The contractor engages
the requisite labour and gets the work done as per
drawings and specifications. It is an item rate
basis for labour portion only and the contractor is
paid for the quantities of work done on
measurements of different items of work at the
stipulated rate in the contract agreement.
MERITS AND DEMERITS
 Merits:
 The materials stored by the departments are thus utilized.
 The work done through labour contract is of superior quality as better
quality materials are arranged by the owner,
 The overall cost of construction may be less, as no profit is paid on the
cost of materials.
 This system is very convention for private building construction.
 Demerits:
 The material and the department will have to remain vigilant and
watchful over the materials used, the contractor may over look the
material wastage involved.
 A large storage area is required to store the various kinds of materials to
be used in the construction under a constant guarding.
 This system is not suitable for government department. Because due to
lengthy formalities in procurement of materials, it is very difficult to
supply each material readily to the labour contractor.
Material supply contract:
 In this type of contract, a contractor has to offer
his rates for supply of the required quantities of
materials, inclusive of all local taxes, carriages
and delivery charges to the specified stores within
the time limit prescribed in the tender. All such
materials received should be examined and
counted or measured, as the case may be, when
delivery is taken.
MERITS AND DEMERITS
 Merits:
 Payment is very prompt, so the contractors try to
take supply order at less profit, resulting in low
cost of material.
 The owner/department has nothing to worry for
any loss, breakage, demurrage, charges during
transit.
 Demerits:
 Constant control over quality of materials
received in several batches and different times is
required.
Cost plus percentage rate contract:
 In this type of contract, a contractor agrees to take
the work of construction on the actual cost of
work plan an agreed percentage in addition, for
his services. It is generally adopted when the
labour and material cost are liable to fluctuate
heavily in the market. The contractor arranges
materials and labour at his cost and keeps proper
account which is paid by the department or owner
with certain percentage ( say 10% ) of the cost os
construction as his profit. An agreement is made
accordingly in advance.
MERITS AND DEMERITS
 Merits:
 The contract can be quickly drawn up and agreed and work
can be completed in the shortest possible time. Is is well
suited during war period or calamity period when the
shortest possible project time is the main criteria in place
of the cost involved.
 It is particularly suitable when work can not be executed by
other types of contracts due to uncertainity and
fluctuations in the market rates of labour and materials.
 Demerits:
 The contractor’s only aim is to make the cost project as high
as possible in order to seek greater margin.
 A proper control over purchase of materials and labour
shall have to be executed by the department or the owner.
Cost plus fixed fee contract:
 In this type of contract, the contractor is paid by
the owner an agreed fixed lump-sum amount and
above actual cost of the work. This fixed fee will
include overhead and profit to the contractor. The
fees does not vary with the actual cost of the work
as in the case of cost plus percentage rate
contract.
MERITS AND DEMERITS
 Merits:
 Since the fixed fee covers the contractor’s overhead charges
and profit, the contractor will try to finish the work as early
as possible, so the owner gets the advantage of early
completion.
 Demerits:
 The contractor is quite indifferent towards the quality of
work, he is simply interested in its early completion,
 Close supervision and checking of delivery notes and
invoices which it involves, makes it unsuitable for works
where the necessary staff is not available.
 The cost of project is unnecessarily increased because of
purchase of materials at higher prices and engaging costly
labour in an attempt tp reduce the project time.
Cost plus sliding fluctuating fee scale
contract:
 In this type of contracts, the contractor gets the actual
cost of construction plus an amount of fee ( % of
construction cost) inversely variable according to the
increase or decrease of the estimated cost agreed first
by both the parties. Higher the actual cost, lower will
be the percentage rate of fee and vice versa. Hence the
main objectives of both parties lies in the minimum
cost of construction and this is treated as one of the
best system of contract. It is clear from the following
example where the cost of construction is going less
and the contractor’s amount goes up and up.
MERITS AND DEMERITS
 Merits:
 The owner and the contractor both will be
benefitted in the lowest possible cost of
construction and this is treated the best system of
contract.
 Demerits:
 The estimated cost must be accurately
determined. In case the estimated cost is much
higher than the required due to inefficiency of the
estimater, a contractor will get more amount on
the basis of savings.
: Target contract:
 In this system, the contractor is paid on a cost
plus percentage basis of waork and in addition he
receives a percentage plus or minus on savings or
exceses effected against a prior agreed estimate by
measuring the work on completion and vakuing
at prior agreed rates.
MERITS AND DEMERITS
 Merits:
 The contractor is encouraged to use his skill and
expertise in order to keep the cost of construction as
low as possible. This gives an opportunity to a
contractor to earn bonus in addition to the fixed
percentage fee.
 Demerits:
 The contractor may try to increase the cost of
construction high because he gains more amount on
the basis of fixed percentage of cost of construction
without caring about the penalty of excess
expenditure.
Negotiated contract:
:

 When the contract is awarded without calling

tenders on the basis of negotiations only, it is
called negotiated contract. It may be of any form
discussed above.