TYPES OF CONTRACTS

DR., RABAB SOBHI

DR., RABAB SOBHI

 METHOD OF CONTRACTING

• The appropriate method for a particular project depends on a number of

factors including the following :
1. The method of financing If the project is financed by non-recourse financing,
that is the project itself provides the security for the loans, the banks are almost
certain to insist on a turnkey route so the entire design is the responsibility of
the contractor and the client’s only responsibility is the preparation of their
statement of requirements.
2. The need to ensure the earliest feasible date of completion, the quickest
method is construction management with the contractor responsible at least for
the management of design. This allows design and construction to proceed in
parallel. It does not, however, provide the client at the outset with a firm price.
DR., RABAB SOBHI
 METHOD OF CONTRACTING
1. Parallel Design and Construction:
1. In this method, the design phase doesn't need to be fully completed before construction starts. For example, while the design of the classrooms and
lecture halls is being finalized, construction of the foundation and structural elements can already begin. This saves time compared to traditional
methods, where every design element must be complete before breaking ground.
2. Flexibility in Design Changes:
1. As the project progresses, the construction manager can coordinate with architects and designers to make adjustments. If, for example, new
regulations or university requirements arise, changes can be made to the design while the construction continues in other areas. This flexibility is a
major advantage of the CM method.
3. No Fixed Price at the Start:
1. One key drawback is that the client (in this case, the university) won't have a firm price upfront. This is because the design is still evolving during the
construction process. While the construction manager can provide cost estimates and monitor the budget, the final cost might vary depending on
design changes, material costs, or unforeseen site conditions.
4. Faster Completion:
1. By allowing the design and construction phases to overlap, the project can be completed faster. In the university’s case, this could mean the campus
opens for students a year earlier than it would have using traditional methods. Although the total cost might be uncertain at the start, the time
saved can be a critical factor for the university's decision.

DR., RABAB SOBHI

 METHOD OF CONTRACTING

Advantages Disadvantages
•Time-Saving: Overlapping design and construction •Cost Uncertainty: The final price is not guaranteed at
phases shorten the overall project duration. the beginning, which could lead to cost overruns.
•Flexibility: Easier to make adjustments to design during •Complex Coordination: The contractor has to manage
construction without significant delays. multiple aspects of design and construction
•Expert Management: The construction manager simultaneously, requiring strong leadership and
ensures smooth coordination between designers, communication skills.
contractors, and other stakeholders.

DR., RABAB SOBHI

 METHOD OF CONTRACTING

• The appropriate method for a particular project depends on a number of factors including the following :
3- The need to ensure the lowest initial capital cost This is most likely to be achieved using the traditional
method although there is a risk that the consultant’s design may not be the most economic since it will not
have been tendered in competition. On the other hand, a contractor’s design might not take account of the
lifetime costs. There is also the risk of variations and claims which can cause the out-turn cost substantially
to exceed the initial estimate.

DR., RABAB SOBHI

 4- Certainty of the out-turn costs This is most likely to be achieved through the use of the turnkey method
which is why it is favoured by the banks. Of course, this will only be so if it is feasible for the contractor to
provide a total lump sum for the contract, which means that they must be able to obtain the complete
information necessary for a firm lump sum tender. Also all the information must be available at the required
time. This may increase the time required for tendering. It also means that the client must not change their
mind later.

DR., RABAB SOBHI

 THE CONTRACT PRICE

There are three main ways in which the contract price may be
expressed or calculated:
• Fixed-Price Contracts ‫عقود المنافسة‬
• Cost-Reimbursable Contracts
• Time and Materials Contracts (T&M)

DR., RABAB SOBHI

 FIRSTLY : FIXED PRICE CONTRACTS (FF)
1. Fixed-Price Contracts
• Firm Fixed Price (FFP): A contract where the price is set and does not change regardless of actual costs incurred. The
contractor bears the risk of cost overruns.
• Fixed Price Incentive Fee (FPIF): A fixed price contract with financial incentives tied to certain performance objectives
(e.g., cost savings or faster delivery).
• Fixed Price with Economic Price Adjustment (FP-EPA): A fixed price contract with provisions for adjusting the price in
case of significant changes in economic conditions like inflation.
Fixed Price (FP) contracts features allocate both cost and performance risks to the supplier.
• Under FP contracts, the contractor is obliged to "complete" the Statement of Work (SOW), making these agreements
"completion" contracts.
• FP contracts are suitable when the SOW is explicitly defined such that the cost and timeline can be accurately
predicted and "fixed" for the necessary performance.
• However, FP contracts are generally unsuitable for many research and development (R&D) activities where the scope
of work is not clearly defined

DR., RABAB SOBHI

 SECONDLY COST-REIMBURSABLE CONTRACTS

Cost-Reimbursable Contracts Types :

• Cost Plus Fixed Fee (CPFF): The contractor is reimbursed for all allowable costs and receives a fixed fee as profit, regardless of
project performance.
• Cost Plus Incentive Fee (CPIF): The contractor is reimbursed for allowable costs and receives an additional incentive fee based on
meeting specific targets (e.g., cost efficiency).
• Cost Plus Award Fee (CPAF): The contractor is reimbursed for all allowable costs, and an award fee is provided based on
performance measured by subjective criteria, like customer satisfaction.
Cost-Reimbursable Contracts Features :
• Cost Plus (CP) or cost-reimbursable contracts allocate only a portion of the cost risk to the contractor (supplier), requiring merely
the contractor’s “best effort” to work towards completing the Statement of Work (SOW).
• CP contracts do not necessitate the completion of the SOW.
• These contracts are ideally suited for research and development (R&D) and other projects where the scope cannot be precisely
defined to allow for definitive estimates.
• Although CP contracts include an estimated scope of work, the contractor is obligated to perform only within a reasonable and
competent framework. There is no requirement for the contractor to “complete” the SOW, as the true scope remains
indeterminate. Projects that employ extensive "rolling wave" planning are optimally executed using CP contracts.

DR., RABAB SOBHI

 THIRDLY : TIME AND MATERIALS CONTRACTS (T&M)
3. Time and Materials Contracts (T&M) features :
• The buyer agrees to pay the contractor for the time spent and materials used on the project. The price
is based on an agreed-upon rate for labor and materials, making it flexible but higher risk for the buyer
if work exceeds expectations.

• Time and Materials (T&M) contracts represent a hybrid contractual format that integrates elements of
both cost-reimbursable and fixed-price arrangements. These contracts share similarities with cost-
reimbursable arrangements in being open-ended, allowing for undetermined final values and quantities
of deliverables at the time of contract award. Consequently, T&M contracts can expand in value
similarly to cost-reimbursable agreements. However, T&M contracts also bear resemblance to fixed-
price arrangements, particularly when unit rates are pre-established by mutual agreement between the
buyer and seller for specified resource categories.

DR., RABAB SOBHI

 THE FIXED PRICE CONTRACT PRICE

1- Fixed Price contract / Lump sum :

From the purchaser’s viewpoint, and that of any financier, the ideal is a firm lump sum with
the minimum provisions for variations or claims. However, these benefits will be obtained
only if it has been possible for the contractor to tender realistically. It follows from this that
in addition to the general information required by a tenderer, they must be able to assess
the following from information provided by the purchaser, their own engineering staff or
prior experience of similar work:

DR., RABAB SOBHI

 THE CONTRACT PRICE

1- Fixed Price contract :

1-1 Lump sum :
A. The ground conditions on the site.
B. Material quantities and specifications. Labour hours and trades both for shop production and on site. This will mean that method
statements must have been produced.
C. Descriptions and quantities of bought-out items. This requires decisions to have been taken, for example, on sizes and capacities.
D. Types of constructional plant which will be required and for what periods.
E. The time required by the various categories of design staff involved.
F. The site organization and facilities which will be required and for how long.
G. Factors which will affect site productivity.
H. Geographical and climatic factors as they affect site work.
I. Access to site.
J. Local availability of materials and labour
DR., RABAB SOBHI
1- FIXED PRICE CONTRACT / LUMP SUM :

• In a Fixed Price with Economic Adjustment contract, adjustments to certain

components of the fixed price are permissible under specific conditions. For
instance, adjustments are made if the costs of materials such as iron, cement,
or electronic boards fluctuate (increase or decrease) by more than 15 percent
from the initial bid price. These adjustments are implemented in alignment
with the economic price adjustment provisions detailed within the contract.()

DR., RABAB SOBHI

‫‪1- FIXED PRICE CONTRACT :‬‬
‫‪1-1 LUMP SUM :‬‬

‫• في مشروعات الطرق‪ ،‬يفضل الممولون عقدًا بمبلغ ثابت لتجنب التكاليف المتزايدة‬
‫غير المتوقعة‪ .‬يتم تحديد جميع تفاصيل المشروع ومتطلباته في مرحلة التخطيط‪.‬‬
‫ضا بنا ًء على هذه المعلومات ويوافق على مبلغ ثابت إلنجاز‬ ‫المقاول يقدم عر ً‬
‫المشروع‪ .‬هذا النوع من العقود يحفز المقاول على العمل بكفاءة لضمان إتمام‬
‫المشروع في الوقت المحدد‪ ،‬مما يقلل من الحاجة إلى اإلدارة المكثفة من قبل‬
‫‪DR., RABAB SOBHI‬‬
‫الممولين بعد بدء العمل‪.‬‬
 ‫‪1- FIXED PRICE CONTRACT :‬‬
‫‪1-1 LUMP SUM :‬‬
‫• المبلغ اإلجمالي هو نوع من العقود يقدم فيه المقاول مبلغًا ثابتًا واحدًا لجميع المهام المطلوبة في نطاق‬
‫المشروع‪ .‬يقوم المقاول بتقدير سعر المشروع بمساعدة مواصفات البناء أو مخططات التطوير‪ .‬ثم يتم تضمين‬
‫الربح والنفقات العامة في حساب التكلفة اإلجمالية للمشروع‪ .‬الخصائص الرئيسية لعقود المبلغ المقطوع هي‪:‬‬
‫• جميع المخاطر التي ينطوي عليها األمر هي للمقاولين‪.‬‬
‫• ال يوجد خطر على ال ُمالك‪.‬‬
‫• يتضمن هذا العقد حوافز لالنتهاء المبكر‪.‬‬
‫• يتضمن هذا العقد بعض العقوبات للتأخر في االنتهاء‪.‬‬
‫ضا‪ ،‬أكمل تصميم‬‫• االستخدام‪ :‬عقد البناء هذا مناسب للمشاريع ذات جدول ونطاق محددين ومفصلين جيدًا‪ .‬أي ً‬
‫المشروع قبل استخدام هذا النوع من العقود‪ ،‬حيث توجد مرونة أقل في التعديالت أثناء مرحلة التطوير‪.‬‬

‫‪DR., RABAB SOBHI‬‬

‫‪1- FIXED PRICE CONTRACT :‬‬
‫‪1-1 LUMP SUM :‬‬

‫• موجب هذا النوع يتعهد المقاول بتحمل كافة أعباء تنفيذ المشروع ‪ ،‬بما فى ذلك قيمة المواد وأجور‬
‫العمال وأتعاب موظفيه وبقية التكاليف المباشرة وغير المباشرة ‪ ،‬نظير مبلغ مقطوع يدفعه المالك أي‬
‫سعر ثابت مقطوع‪ .‬اذن تستخدم عقود المبلغ المقطوع فى إنشاء المبانى ‪ ،‬عندما تكون الوحدات المكونة‬
‫للمشروع قياسية فى طبيعتها وكثيرة فى عددها ومختلفة فى أنواعها ‪ ،‬وعند استعمال هذا النوع من‬
‫العقود البد أن تكون شروط ومواصفات ورسو مات وبنود العقد واضحة ودقيقة ال مجال فيها للتفسيرات‬
‫المختلفة‬

‫‪DR., RABAB SOBHI‬‬

 THE FIXED PRICE CONTRACT

1- Fixed Price contract :

1-2 Unit Price contract:
• In a unit price contract, the contractor agrees to a fixed rate per unit of work, and the total payment depends on the
actual quantity of work completed. This type of contract is useful when the scope of work can be broken down into
measurable units.
• A pricing mechanism in construction contracts based on a series of line items identifying discrete tasks or scopes of
work.
• Under a unit price contract, a contractor is paid for the actual quantity of each line item performed as measured in
the field during construction. Each unit price includes all labor, material, equipment, overhead, and profit
attributable to that scope of work.
• Unit price contracts are commonly used on:
• Public works projects.
• Engineering projects.
• Horizontal construction, such as roads.
• They are best suited for construction work consisting of repetitive tasks that are easily measured.
DR., RABAB SOBHI
 THE CONTRACT PRICE

1- Fixed Price contract :

1-2 Unit Price contract:
• Characteristics:
• Fixed Rates: Prices are set per unit of work (e.g., per square meter of paving).
• Adjustable Total Cost: The final payment is based on the actual quantity of work done.
• Risk Distribution: The contractor assumes the risk of unit price variations, while the client bears the risk
of quantity variations.
• Common Use: Often used in construction projects where the exact quantities are unknown at the
outset.

DR., RABAB SOBHI

 THE CONTRACT PRICE

1- Fixed Price contract :

1-2 Unit Price contract:
• A road construction project where the contractor charges $50 per square meter of asphalt
paving. If 12,000 square meters are paved instead of the estimated 10,000, the final cost
would be $600,000.
• The overall value of the contract depends on the number of units produced, delivered,
installed, etc. Similar to a lump sum contract, a unit-price contract can also include
incentives. Additionally, unit-priced contracts typically feature a clause for quantity
variation, stating that if the unit quantities change by more than +/- 15 percent, adjustments
will be made accordingly.
DR., RABAB SOBHI
 THE CONTRACT PRICE

1- Fixed Price contract :

1-2 Unit Price contract:
• Whether contractor or owner, here are four things you should know about Unit Price Contracts.
1. A Unit Price Contract is good for projects where the scope tends to change: As mentioned before, large projects tend
to change over time. For this reason, parties tend to choose Unit Price Contracts. A dam, an interstate highway, a
massive engineering assignment, project like these is where contracts like these should come into play.
2. Unit Price Contracts can be labor intensive: Flexibility is a benefit of these instruments, but a lot of paper pushing,
revising, and number crunching comes with it.
3. Billing is a breeze: While the number of units might change over the course of the project, the costs that were
established at the beginning remain static. This makes billing simple.

DR., RABAB SOBHI

 LUmsp
LUmsp

RIsk
DR., RABAB SOBHI
 THE CONTRACT PRICE

1- Fixed Price contract :

1-3 Fixed Price with Incentives :

Fixed Price with Incentives: In this contractual arrangement, the core price is
predetermined and non-negotiable; however, the agreement may incorporate specific
incentive clauses that are linked to project timing, cost efficiency, and overall performance
outcomes. For instance, the contractor could receive additional compensation for each
day the project is finalized ahead of the agreed schedule. Alternatively, the contractor
might retain fifty percent of the cost savings achieved if the project costs fall below the
initially budgeted amounts. This model aims to provide a financial motivation for the
contractor to achieve or surpass predefined project benchmarks.
DR., RABAB SOBHI
DR., RABAB SOBHI
 2- COST REIMBURSEMENT CONTRACT

• COST REIMBURSEMENT :
• On some projects, where the facility delivered will earn substantial
revenue, finishing by the earliest possible date is regarded as more
important than obtaining the lowest capital cost. Yet the extent of the
lack of definition of the project or the anticipated risks are such that it is
impractical to expect the contractor to assume the risks of even a
measurement and value contract of the type just discussed. In these
circumstances, the only alternative is some form of cost reimbursement.
DR., RABAB SOBHI
 ‫‪COST REIMBURSEMENT CONTRACT‬‬

‫مثل تطوير محطة كهرباء بالطاقة الشمسية إذا كانت المحطة ستبدأ في تحقيق إيرادات كبيرة بمجرد تشغيلها‪،‬‬
‫فقد يكون من الضروري االنتهاء من البناء بسرعة بغض النظر عن زيادة التكاليف‪ .‬وفي حالة وجود عدم‬
‫وضوح كبير في تعريف المشروع أو مخاطر مرتفعة‪ ،‬فإن عقد السداد على أساس التكلفة سيكون مناسبًا‪.‬‬
‫تكون هذه العقود عملية في حالة أن تكون المخاطر غير معروفة بدقة وتحتاج إلى تعديالت مستمرة أثناء التنفيذ‪،‬‬
‫يمكن استخدام عقد السداد على أساس التكلفة لتغطية التكاليف الفعلية باإلضافة إلى أرباح المقاول‪.‬‬

‫‪DR., RABAB SOBHI‬‬

 2- COST REIMBURSEMENT CONTRACT

• The obvious problem is that paying the contractor the actual costs of carrying out the
work provides no incentive for the contractor to minimize the costs. Indeed many
contractors do not like cost reimbursement because of the inefficiencies which it can
breed within their own organizations. Therefore, various types of incentive or target cost
contracts have been devised as a means of combining the flexibility and speed associated
with cost reimbursement with a measure of financial discipline and an incentive to
achieve economy and efficiency. All these forms of contract have certain features in
common:
DR., RABAB SOBHI
 2- COST REIMBURSEMENT CONTRACT

• Cost Reimbursable Contracts VS Fixed Price:

• Unlike fixed-price contracts, cost reimbursable contracts do not have a
set price. The fundamental characteristic of these contracts is that the
contractor receives compensation for all legitimate actual costs incurred
during the execution of the project, in addition to a predetermined profit
margin. This type of contract is commonly known as a cost-plus-fixed-fee
(CPFF) contract or a time and materials (T&M) contract. Expenses under
these agreements are typically categorized as either direct or indirect
costs.
DR., RABAB SOBHI
 COST REIMBURSEMENT CONTRACT
2- Negotiated Contracts
2.1: Cost Plus-a-Percentage-of-Cost Contract
• In these types of contracts, the employer reimburses the contractor for the actual
costs of the work, in addition to an amount for the contractor's fees and profits. This
additional amount is calculated as a percentage of the total actual cost of the work.
• For instance, if a construction project incurs actual costs of $1,000,000 and the
contract stipulates a fee of 10% for the contractor's profit, the contractor would
receive $1,100,000 in total ($1,000,000 in costs + $100,000 in profit).
• Cost Plus-a-Percentage-of-Cost contracts offer flexibility and assurance to contractors
that their costs will be covered and they will receive a predetermined profit margin.
However, they also require careful monitoring and control to prevent excessive cost
overruns, as the contractor's profit increases with higher project costs.

DR., RABAB SOBHI

 COST REIMBURSEMENT CONTRACT
2- Negotiated Contracts
2-2 Cost-Plus-a-Fixed-Fee Contract:
• In this format, the owner pays the actual construction costs plus a fixed amount for the
contractor's services, overhead, and profit. This method requires precise specifications that
clearly define the scope of work, as the contractor may request an increase in the fixed fee if the
scope of work changes significantly.
• For example, if the actual cost of a project amounts to $500,000 and the agreed fixed fee for the
contractor’s services is $50,000, the total amount paid to the contractor would be $550,000.
Should there be a substantial change in the scope of work, such as additional structures or
significant design modifications, the contractor might negotiate a higher fixed fee to
accommodate the new requirements.
• The Cost-Plus-a-Fixed-Fee contract offers a balance between covering actual costs and providing a
stable profit for the contractor, making it suitable for projects where the scope can be well-
defined but costs are somewhat unpredictable. This type of contract helps ensure that both
parties are clear about financial expectations and responsibilities from the outset.
DR., RABAB SOBHI
 COST REIMBURSEMENT CONTRACT
2-3 Cost-Plus-a-Fixed-Fee and Percentage of Savings Contract:
• In construction contracts, various types of agreements are designed to manage costs and incentives
effectively. One such type is the Cost-Plus-a-Fixed-Fee and Percentage of Savings contract. This agreement
not only reimburses the contractor for the actual construction costs and provides a fixed fee but also
includes a percentage of any savings achieved below the estimated project cost, offering a strong incentive
for cost efficiency.
This contract grants the contractor, in addition to the fixed amount for services and fees, a percentage of the
profits if there is a saving in the total estimated cost at the time of contract signing. This approach strongly
motivates the contractor to economize on costs during execution.
• For instance, if a project’s estimated cost is $600,000, and the fixed fee for the contractor is $60,000, with an
agreement that 10% of any cost savings will be shared with the contractor. If the contractor manages to complete
the project for $550,000, the saving is $50,000. The contractor would then receive the fixed fee of $60,000 plus
10% of the savings ($5,000), totaling $65,000.
• The Cost-Plus-a-Fixed-Fee and Percentage of Savings contract effectively aligns the interests of the owner
and the contractor by rewarding cost efficiency. It ensures the contractor is compensated fairly while
providing a financial incentive to minimize costs, benefiting both parties through potential savings and
streamlined project execution.
DR., RABAB SOBHI
 2- COST REIMBURSEMENT CONTRACT
2-4 Cost-Plus-Fixed-Fee with Time-Saving Incentive:
• This contract structure is used in situations where time is of significant importance. In addition to covering
all costs and providing a fixed fee for services, the contract awards the contractor an additional fixed
amount for each day the project is completed ahead of the anticipated completion date. Conversely, the
contract may also stipulate a penalty for delays if the contractor fails to complete the work by the
specified completion date.
• For instance, a project with an estimated duration of 180 days might include a fixed fee of $100,000 for the
contractor. The contract could offer an additional $1,000 for each day the project is finished early. If the
contractor completes the project 10 days ahead of schedule, they would earn an extra $10,000, bringing the total
fee to $110,000. Conversely, if the project is delayed by 5 days, the contractor might face a penalty of $1,000 per
day, reducing their fee by $5,000.
• The Cost-Plus-Fixed-Fee with Time-Saving Incentive contract effectively encourages contractors to
prioritize timely completion without compromising on quality. It aligns the contractor's financial interests
with the project's critical timelines, ensuring that both the owner and the contractor benefit from efficient
project management.

DR., RABAB SOBHI

 2- COST REIMBURSEMENT CONTRACT
2-5 Cost-Plus-Incentive-Fee Contract:
• In construction and project management, various contract types are tailored to align the contractor's incentives
with the project's goals. One such contract is the Cost-Plus-Incentive-Fee contract, which encourages contractors to
minimize costs and expedite completion. This contract type offers variable payments based on the project's cost
and duration, providing a flexible and performance-oriented approach.
• In this type of contract, the owner pays the contractor the total construction cost plus additional amounts
calculated using a mathematical formula based on the project's cost and execution time. This formula is designed
such that the contractor's fees increase when they save on project costs and complete the project ahead of
schedule.
• For example, suppose a project is estimated to cost $1 million and is scheduled to be completed in 12 months. The contract
might include an incentive formula where for every 1% cost saved, the contractor earns an additional 0.5% of the saved
amount as a bonus. Similarly, for every month the project is completed early, the contractor might receive an extra
$20,000. If the contractor completes the project for $950,000 (a 5% savings) and finishes one month early, they would earn
a bonus of $25,000 for cost savings and $20,000 for early completion, totalling $45,000 in incentives.
• The Cost-Plus-Incentive-Fee contract effectively aligns the contractor's financial rewards with project efficiency and
cost savings. By structuring payments to reward performance, this contract type promotes proactive project
management and ensures that both the contractor and the owner benefit from optimized project delivery.
DR., RABAB SOBHI
 3- TIME AND MATERIAL CONTRACT

• Unlike fixed-price contracts that nail down every detail, time and materials contracts are
more flexible. They acknowledge that projects can evolve.
• In practice, a time and material contract thrives on constant communication and
collaboration. It’s an ongoing dialogue between the client and the contractor. Ideas flow
freely, and the project’s direction can pivot with new insights and changing circumstances.
• However, this adaptability doesn’t come without challenges. Clients might wonder if
they’re getting their money’s worth without a fixed price tag. Here’s where transparency
becomes crucial. Contractors need to be like an open book, showing their work, time, and
expenses with impeccable clarity. It’s about building trust through radical honesty.
DR., RABAB SOBHI
 3- TIME AND MATERIAL CONTRACT

• In the time and material (T&M) agreement, the total cost is not determined at the
beginning of the cooperation as it depends on the number of hours spent on the project
and the materials used to deliver it.
• Importantly, both parties agree on what materials will be used and on the hourly rate. So,
even if the project takes much longer or much less time than anticipated, both parties can
rest assured that they will be reimbursed and receive the work carried out or expected.
• You need to keep in mind that the costs comprise not only the number of hours
developers and designers spend on the project, but the contract includes meetings,
communication, project management and other actions required.
DR., RABAB SOBHI
 3- TIME AND MATERIAL CONTRACT

• Time and material contracts are a hybrid form of agreement that combine features of
cost-reimbursable and fixed-price contracts. They are similar to cost-reimbursable
agreements because they are open-ended; the contract’s total value and the specific
quantities of items to be delivered are not determined at the time of contract award.
Therefore, the contract value can increase as it would with a cost-reimbursable
arrangement. On the other hand, time and material contracts can also function like fixed-
price agreements. For example, both parties can agree on fixed unit rates for specific
resource categories in advance.
• Consider a software development project where the client pays an agreed hourly rate for developer
time and the cost of necessary software licenses, with a fixed percentage added for profit. This
structure provides the flexibility needed to address unpredictable project requirements while
maintaining control over labor costs.

DR., RABAB SOBHI

DR., RABAB SOBHI
DR., RABAB SOBHI
 Time and material vs fixed-price models: a detailed comparison

DR., RABAB SOBHI

 TARGET COST CONTRACT

• The target cost contract method is a blend of measures found in lump sum and cost-
plus contracts. A joint effort between both parties on an agreed amount target cost, the
contractors are paid based on actual costs plus a certain fee (usually a fixed percentage)
of the total cost. Higher risk can be carried by the contractor in the case where project
prices can increase in total cost. However, the contractor can also be rewarded with a
percentage of savings between the target cost and the actual cost.
• Pros: shared risk between both parties, rewards for contractors for the difference in
target versus actual cost, and the target cost is defined at an earlier stage as a mutual
decision between contractor and owner
• Cons: limited flexibility in changes to design, often takes more time to negotiate, and
going over budget

DR., RABAB SOBHI

DR., RABAB SOBHI
DR., RABAB SOBHI