TYPES OF

CONSTRUCTION
CONTRACTS
 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.
 Contract Definitions

B. According to FIDIC (International
federation of Consulting Engineers) :

• 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.
Contract Definitions

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.
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
Major Contract Types (traditional)
 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
 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.
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.
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.
 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.
 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.
 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.
 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)
 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.
 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
 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.
 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.
Cost + Percent of Cost
 Advantages

profitable for
–Fee = the contractor

percentag
e of the
total
project
cost (Cost
=
$500.000,
Fee = 2%)
 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.
 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.
 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
Cost + Fixed Fee
 -year fee =
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 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.
 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.
 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.
 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.
Other types of Construction
Contracts
 Design and Build contracts
❖Unlike a traditional contract, a design and
build contract is one where the contractor
undertakes both design work as well as
the work of construction for the contract
❖This is advantageous for employers
who get a complete design, full scope
of works and stipulated price from the
outset
 Turnkey contracts
❖A variant of the design and build contract is the turnkey
contract
❖In a turnkey contract, the contractor does not only
carry out design and construct obligations
❖The contractor is also responsible
for: ➢financing
➢approvals
➢procurement
➢fitting out
➢intellectual property issues (eg transfer of technology)
❖In a turnkey contract, employers lose control over the
process in exchange of allocating a single point of
responsibility on the contractor
 Management contracts
❖It is also becoming increasingly common
for parties to enter into management
contracts instead of building contracts
❖In a management contract, the contracted
manager’s role is to ensure the implementation of
the contract is carried out effectively
❖The contracted manager gets involved early in
the process, as opposed to the building
contractor who is engaged later when the project
is ready to be constructed
❖It may well be that the “manager” is a
related company of the “contractor” eventually
Build-Operate-Transfer (BOT) contracts
❖A BOT contract usually happens for public
infrastructure works
❖In a BOT contract, the private company builds,
and operates a concession on the infrastructure
built for an agreed period of time before
transferring the infrastructure to the Government
❖Ideally, a BOT contract would be a good
mechanism for the private sector to fund
infrastructure projects
❖However, the reality may result in an overly
generous concession for the private companies
involved
 Supply contracts
❖There are parties in the construction industry
who are involved in supplying materials only, and
do not participate in any actual construction
❖For such contracts, the liability of the contractor
is limited to supplying materials that meet the
specifications
❖It is important when dealing with supply contracts
that proper tests are carried out before accepting
the materials supplied
❖Once the materials supplied are used, it would
be rare for these contractors to be held liable any
longer as there would be legal hurdles to point to
the inadequacy of their materials
 Term contract
❖For maintenance, term contracts would be a
common practice, whereby a contractor is
required to maintain a certain facility for a pre-
agreed term at a pre-agreed price