2. Contract Definitions
A. From a Legal Point of View :
A mutual agreement between two or more
parties that something shall be done, an
agreement enforceable at law.
B. According to FIDIC :
Contract means the General Conditions, the
Supplementary Conditions, the Specifications,
the Drawings, the Bill of quantities, the
Tender, the Letter of Acceptance, the Contract
Agreement.
3. C. According to Method of Payment :
The agreement of how the owner will pay the
contractor for work
performed such as a lump-sum or cost-plus
payment.
4. Why Use contract in construction?
Describe scope of work
Establish time frame
Establish cost and payment provision
Set fourth obligations and relationship
Minimize disputes
Improve economic return of investment
6. TYPES OF CONSTRUCTION
CONTRACTS
Two broad categories:
Price Given in Advance Contracts (Priced-based
Contracts)
Cost Reimbursement Contracts (Cost-based
Contracts)
Factors Influencing the Choice of the Type of Contract
The appropriateness for providing an adequate
incentive for efficient
performance by the contractor
The ability to introduce changes
The allocation of risks
The start and completion date of the project
7. Lump sum contracts
Involves a total fixed priced for all construction
related activities.
Can include incentives or benefits for early
termination, or can also have penalties, called
liquidated damages, for a late termination.
Preferred when a clear scope and a defined
schedule has been reviewed and agreed upon.
8. Lump Sum Contract( Advantages)
Low risk on the owner, Higher risk to the
contractor
Cost known at outset
Contractor will assign best personnel
Contractor selection is easy.
9. Lump Sum
Contract(Disadvantages)
Changes is difficult and costly.
Contractor is free to use the lowest cost of material
equipment, methods.
The contractor carries much of the risks. The
tendered price may include high risk contingency.
Competent contractors may decide not to bid to
avoid a high-risk lump sum contract.
10. Unit Price
No total final price
Quote Rates / Prices by units
Re-negotiate for rates if the quantity or work
considerably exceeds the initial target
Payment to contractor is based on the
measure.
Unbalanced bids
Higher risk to owner
Ideal for work where quantities can not be
accurately established before construction
starts.
11. Unit Price contract
• Require sufficient design definition to estimate
quantities of units
• Contractors bid based on units of works
• Time & cost risk (shared)
• Owner : at risk for total quantities
• Contractor : at risk for fixed unit price.
• Large quantities changes (>15-25%) can lead
to increase or decrease of unit price.
12. Unit Price ( Advantages)
Easy for contract selection.
Early start is possible.
Saves the heavy cost of preparing many bills
of quantities by the
contractors.
Fair basis for competition.
In comparing with lump-sum contract,
changes in contract documents can be made
easily by the owner.
Lower risk for contractor.
13. Unit Price (Disadvantages)
Final cost not known from the beginning (BOQ only is
estimated)
Staff needed to measure the finished quantities and
report on the units not completed.
Unit price sometime tend to draw unbalanced bid. (For
Unit-Price Contracts, a balanced bid is one in which each bid is priced to
carry its share of the cost of the work and also its share of the contractor’s
profit.
Contractors raise prices on certain items and make corresponding
reductions of the prices on other items ,without changing the total amount of
the bid)
14. Schedule of rates contract
A Schedule of the work items without quantities
is prepared by the owner and /or A/E to be rated
by the contractor.
The descriptions of items and the units of
measurement are similar to those used in a
normal B.O.Q., but no quantities are given.
It is common for separate rates to be quoted for
labor, plant, and materials.
Used for repair and maintenance works or
under conditions of urgency.
15. Schedule of Rates Contract
Advantages:
1. Work can be commenced earlier than if a full
B.O.Q has been prepared.
Disadvantage :
1. No indication of the final price of the works.
2. Very difficult to determine which contractor
submitted the most
advantageous offer.
3. May cause financial problems to the public
owners
16. Cost Plus
1. Actual cost plus a negotiated reimbursement to
cover overheads and profit.
2. Different methods of reimbursement :
Cost + percentage
Cost + fixed fee
Cost + fixed fee + profit-sharing clause.
3. Higher risk to owner
4. Compromise : guaranteed maximum price (GMP)
reduces risk to owner while maintain advantage of
cost plus contract.
5. By using this type of contract the contractor can start work
without a clearly defined project scope, since all costs will
be reimbursed and a profit guaranteed.
17. Cost + Percent of Cost
1. The contractor is reimbursed for all his costs
with a fixed % age of costs to cover his services.
2. Project/site overheads may be covered by the
%age or computed as one of the costs.
18. Cost + Percent of Cost
Fee = percentage of the
total project cost
(Cost =
$500.000,Fee = 2%)
Advantages Disadvantages
profitable for
the contractor
No incentive
to finish job
quickly
Owner does
not know total
price
Larger the
cost of the
job, the
higher the fee
the owner
pays
19. Cost + Percent (Advantages)
1. Construction can start before design is
completed.
2. If the contractor is efficient in the utilization of
resources then the cost to the client should
represent a fair price for the work undertaken.
20. Cost + Percent (Disadvantages )
1. The project total cost is completely unknown
before the project start.
2. No incentive for the contractor to be efficient in
his use of labors, materials or equipments.
3. Minimum efficiency maximizes the profit.
21. Cost Plus Fixed Fee
Most common form of negotiated contracts
COST = expenses incurred by the contractor for the
construction of the facility
Includes: Labor, equipment, materials, and administrative
costs
FEE = compensation for expertise
Includes: profit
22. Cost + Fixed Fee
Fee = percentage of the
original estimated total
figure
Utilized on large multi-
year jobs
Ex: WW treatment plant
Facility (Cost = $20
million, Fee = 1%)
$20 Million 1% fee =
$200,000 Million
Advantages Disadvantages
Fee amount is
fixed
regardless
of price
fluctuation
Expensive
materials and
construction
techniques may
be used to
expedite
construction
Provides
incentive to
complete
the project
quickly
23. Cost + Fixed Fee +
Profit-Sharing Clause
Rewards contractors who
minimize cost
Percentage of cost under
GMP is considered profit
and shared with the
contractor
Guaranteed Maximum Price
(GMP)
% of profit sharing is
specified in contract
Advantag
es
Disadvantages
Provides
incentive
to the
contracto
r to save
money
Contractor
must absorb
any
amount over
the GMP
Plans & specs.
need to
detailed
24. Cost + Fixed Fee +
Profit-Sharing Clause
In this type of contract the contractor is
reimbursed at cost with an agreed-upon fee
up to the GMP, which is essentially a cap;
beyond this point the contractor is responsible
for covering any additional costs within the
original project scope
An incentive clause, which specifies that the
contractor will receive additional profit for
bringing the project in under the GMP.
25. Guaranteed Maximum Price contract
In a guaranteed maximum price (GMP) contract,
the contractor estimates the cost just like in a
lump sum bid, but profit is limited to a specified
amount.
In the event that actual costs are lower than the
estimates, the owner keeps the savings.
In the event costs are higher, the contractor pays
the difference and profit is reduced.
26. Advantages
Greater price certainty for clients as the contractor normally includes a
sum for future design development and for risks.
GMP promotes pre-agreement of changes as its philosophy links neatly
with a contractual
requirement to pre-agree the cost and time implications of any
potential changes.
GMP provides greater control over spending as the contractor is bound
to a maximum price.
This alerts the team to any potentially expensive items of design
development.
GMP aligns the contractor with client and consultants encouraging
team work with mutual
trust and common goals.
Less administration is required as changes are limited; there is quick
settlement of the final
account.
27. Disadvantages
The client might pay too much as the contractor takes on greater
risk and thus includes in the price an allowance for design
development and risk. Often a competitive price is sacrificed in lieu of
appointing a contractor early.
Contractor’s with design and build experience may have useful
knowledge.
There is no standard form of contract for GMP so there is a greater
possibility of errors and
misunderstandings of liabilities between the parties that may result
in conflict.
Scope changes tend to cost more, it is accepted that scope changes
to design and build are
more likely to be more expensive than with a traditional contract,
the same can also be said
for GMP contracts.
