SESSION 10 Works Contracts

SELECTION OF CONTRACT TYPE

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Types of works contract

 Basic
 Unit rate (paid against measured work)
 Lump sum (all-inclusive price)
 Cost plus (paid against inputs)
 Fixed fee
 Percentage fee
 Variable (incentive) fee

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 Unit Rate/Remeasurement Contract
 The initial Contract Price is based on a list of unit rates or
prices, for materials and different types of construction,
installation, testing, commissioning works or services, together
with estimated quantities of these inputs or outputs required
 The unit prices should be defined to include all overhead costs
(all inclusive)
 Used to produce a Provisional Estimate to serve as a basis for
the evaluation of a Tender.
 The Contractor is paid for the quantity of the work done at the
rate in the BoQ for each item

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 Remeasurement Contract
Advantages
 Use of quantities and
unit rates provides a
basis for competitive
evaluation and
comparison of Tenders
 Provisional cost known
at outset
 PE’s risk reduced
 Combination with
another method such
as Lump Sums pricing
for certain parts of the
Contract improves its
efficiency
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Disadvantages
 Overhead and profit
included in unit rates
 No incentive for
Contractor to minimize
quantities
 Problem of efficient
control and
measurement of
quantities consumed or
delivered by Contractor
which requires quality
supervision
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Types of works contract – cont.

• Contract price specified as a fixed sum , not subject to

adjustment unless under special circumstances
• Both parties must be fully aware of the services required, which
should be fully described in the contract documents

• Lump sum contract

– Uses
• Small, well-defined works / buildings of short
duration
• Large industrial process plants (turnkey)
• Any construction above ground
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• Advantages: • Disadvantages:
 Fixed sum for budgeting/Cost  Inflexible to changes / high risk
known at outset
 Higher cost since all risks
 Reduces PE’s risk transferred to bidders
 Contractor motivated  Full information necessary
 Good quality staff normal with  Increases Contractor’s risk
Contractor  Claims can be complex
 Easy to administer/ Minimal PE  Quality problems
involvement
 Stable market conditions must
 Little / no measurement
be maintained
 Less documentation  Change and budget control
 Risks understood important.

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Lump Sum contract

• Advantages
 Fixed sum for budgeting
 Easy to administer
 Little / no measurement
 Less documentation
• Disadvantages

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Types of works contract

unit rate (ad/re-measurement)
• Uses
– Most common for infrastructure construction of
short or long duration
– Most appropriate for Construction below ground
level
• Advantages
– Provides equitable basis for bidding
– Facilitates bid comparison and evaluation
– Adaptable to changes
– Periodic payments follow contractor’s needs

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Types of works contract

unit rate (ad/re-measurement) – cont.

• Disadvantages
– Problems with unbalanced bids / unit
rates
– Risk of quantity variations
– Need for precise measurement of work
performed which requires more
supervision efforts

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Types of works contract - Cost reimbursable

plus fee (cost plus)

 Uses
 Open-ended emergency situations
(earthquakes, floods)
 High risk and uncertainty
(war, tunnelling)
 Ill-defined, high return projects
(private sector)
 Most construction projects

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Types of works contract - Cost reimbursable

plus fee (cost plus) – cont.
• Advantages
– Early mobilization and rapid start
– Contractor assumes little or no risk

• Disadvantages
– Inappropriate (in basic form) for competitive
bidding (see target cost)
– With fixed fee, no incentive for quality or timely
work
– With % fee, no incentive to limit costs
– Additional employer staff needed to monitor costs

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 Procuring Entity’s Needs

Value Certainty
for Money of Time
Functional
Reliability

Clear
Accountability

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Selecting the Contract Type

Factors affecting choice of contract type

 Nature and complexity of works

 Size and duration of contract

 Degree of definition / risk / uncertainty

 Status of design

 Technical / supervisory resources of employer

 Budgetary / financing / borrowing constraints

 Previous experiences of employer

 Standard documents

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 Works Contract characteristics:
A typical Works contract has the following:
 Operations are mostly manual
 Production happens on a Site
 One-off operation
 Traditional skills involved
 Requires investment
 Economic Uncertainty surrounds it
 The WEATHER can easily affect it
 Comprises a complex Assembly of activities
 Small Firms are involved
 Quality is essential and yet it is problematic
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 PROPOSED GUIDE TO WB-SBD SELECTION

PARAMETER CONSIDERATION APPROPRIATENESS OF SBD

LARGER SMALLER
WORKS WORKS
1. RISKS Potential risks involved in the works for
both parties are small.
 
2. COMPLEXITY Technically advanced or highly
complex works.
 
3. SIMPLICITY Works of a simple and straight forward
nature.
 
4. TIMING Early completion (less than a year)  
5. COST Contract value exceeds US$10 million
or equivalent
 
6. MANAGEMENT Proactive Employer  
7. ENGINEER The Engineer to have a central role in
administering the contract.
 
8. DESIGN The design of the works is completed in  
all essentials before bids are invited
9. QUALIFICATION Prequalification of potential bidders
required.
 
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 PROPOSED GUIDE TO WB SBD’s SELECTION

PARAMETER CONSIDERATION APPROPRIATENESS OF

SBD
LARGER SMALLER
WORKS WORKS
10. MULTIPLE
CONTRACTS
Project involves slice and package
contracts.
 
11. SUBCONTRACTING Nominated sub-contractors are  
employed
12. PAYMENTS Normal method of payment by  
measuring and value.

 Most suitable
 Inappropriate or less suitable

NB This table is for guidance only.

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 Traditional Model –
National Procurement
Procuring Entity

By Specification
Project Manager

Design Services Suppliers

Monitoring Functions
Financial Services
MIS Contractor Nominated
Legal Advice Subcontractors

Site Manager Subcontractors

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 Traditional Model – FIDIC
For Very Large Contracts
Procuring Entity

By Specification
Engineer

Suppliers
Consultant’s
Team Contractor Nominated
Subcontractors
Site Engineer

Domestic Subcontractors

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ROLE OF THE ENGINEER
TRADITIONAL ROLE

NEW ROLE

PROJECT DESIGNER
MANAGER

SUPERVISION
OF ADJUDICATOR PROJECT
CONSTRUCTION MANAGER DESIGNER

SUPERVISION
OF
CONSTRUCTION ADJUDICATOR

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 Simple Contract Procedure
End of defects
liability period
Submission of
Certification Final Account
Completion
Period
Start date taking over date Final
+
GCC 1.1(ae) Payment
Interim
Payments Including
Submission of Payment of 50%
Contract Work Program 50% Retention
Effective Retention

GCC 43.1 month 28 days

Contract Period 12 months 56 days

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 TYPICAL PAYMENT PROVISIONS
CIVIL WORKS
1. ADVANCES
MOBILIZATION 10-20%
MATERIAL & PLANT AT 75% of invoice
SITE* (before incorporation
in works)
2. MONTHLY/PERIODIC 100% (price adjusted)
INVOICES less advance repayment
and retention
3. RETENTION 5-10%
4. RECOVERY OF ADVANCE proportionate to
contract (1) payments (2)
* “PLANT” IS PART OF PERMANENT WORKS, NOT “CONTRACTOR’S EQUIPMENT”
(1) COMMENCES WHEN A STATED % (20-30%) OF CONTRACT AMOUNT HAS BEEN PAID
(2) COMPLETED WHEN 80% CONTRACT AMOUNT HAS BEEN PAID

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 Other Types of Works Contracts
Supply + Erect / Install Contract
 Primarily for equipment procurement with commissioning

Design + Build (Design + Construct) Contract

 Encouraging Contractor innovation, needs two-stage tendering
process and complex evaluation

Turnkey Contract
 Similar to Design + Build but can include total fitting-out ready for
occupation

BOO/BOT/BOOT/Concession Contract
 Using investor funds or partnership agreements to construct
operating project handed to PE after stipulated period

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 Cost (Reimbursable) Plus Fee Contract
 Emergency situations (earthquakes, floods)
 Conditions of high risk and uncertainty (tunneling)
 Where there is doubt about scope or final cost
 Fee type
 Fixed
 A percentage (%) of cost
 A variable (incentive)

Advantages:
Early mobilisation Disadvantages:
Rapid start Difficult to have competitive tendering
Easy Variation Fee system can reduce incentive
Basis and system for payment Contractor avoids risks
agreed High quality PE’s Staff essential to
Direct Control
ensure quality and expenditure control

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 High
FORCE ACCOUNT (DIRECT LABOR)
Self design/construct/supervise
LUMP SUM
PE’s Risk?
COST (REIMBURSABLE) PLUS FEE

SUPPLY & INSTALL /

DESIGN & CONSTRUCT/BUILD
2-stage tendering or pre- qualification
Contractor's responsibility
BILL OF QUANTITIES/RE-MEASUREMENT
Competitive Tendering
Variations require PE’s approval

TURNKEY
2-stage tendering normal
Contractor’s responsible up to taking over

BOT/CONCESSIONARY
Contractor is responsible for successful outcome
low
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 FLOWCHART OF ADJUCATION/
ARBITRATION
Dispute
Dispute or
or Difference
Difference Under
Under the
the
Contract
Contract
Referral
Referral to
to Adjudicator
Adjudicator (within
(within 14
14
days
days of
of PM’s
PM’s decision)
decision)
Notice
Notice ofof Adjudication
Adjudication //
Recommendation
Recommendation (within
(within 28
28 days
days of
of
receipt
receipt of
of aa notification
notification of
of above
above
difference)
difference)

N Dispute
Dispute to
to be
be referred
referred
Adjudicator’s
Adjudicator’s o to
to Arbitration
Arbitration
Decision
Decision
agreed Yes 28
agreed within
within 28 Arbitral
Arbitral award
award executed
executed
Adjudicator’s
Adjudicator’s
days Decision
days Decision by
by National
National Court
Court
Final
Final &
& Binding
Binding
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 COMPLETION OF CONTRACT
Intended
Issue of Defects Correction
Start Date Completion DateCompletion Date
Submission of final Certificate and Certificate of
(1.1) (1.1) (1.1)
account (57.1) Final Payment (57.1)

56 days

Defects Liability Period (1.1) [usually 12

Liquidated
months (35.1)] Limit for Notification of
Damages
Claims under a
(49)
28d Performance Bank
Guarantee (conditional)
or a Performance Bond
Limit for Validity of a
(52.1)
Performance Bank
Guarantee
(unconditional) (52.1)
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