TYPES OF CONTRACT

GRP -9
ANKLIT SUTHAR 15SA205
ANNIE THACKER 15SA206
HARSHIL PATEL 15SA
CONTRACT DEFINITIONS
A. F rom a L egal P oint of View :
• A mutual agreement between two or more parties
that something shall be done, an agreement
enforceable at law.
B . Ac c ording to F IDIC :
• 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.
C . Ac c ording to Method of P ayment :
• 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)
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 CONTRACT
• 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.
• 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
• Actual cost plus a negotiated reimbursement to cover
overheads and profit.
• Different methods of reimbursement :
• Cost + percentage
• Cost + fixed fee
• Cost + fixed fee + profit-sharing clause.
• Higher risk to owner
• Compromise : guaranteed maximum price (GMP) reduces
risk to owner while maintain advantage of cost plus
contract.
• 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.
Advantages Disadvantages
• 2. Project/site overheads may
be covered by the %age or profitable for No incentive
computed as one of the costs. the contractor to finish job
quickly
• Fee = percentage of the total Owner does
project cost not know total
price
• (Cost = $500.000,Fee = 2%)
Larger the
cost of the
job, the
higher the fee
the owner
pays
COST + PERCENT (ADVANTAGES)
• Construction can start before design is completed.

• 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 )

• The project total cost is completely unknown before the
project start.
• No incentive for the contractor to be efficient in his use
of labors, materials or equipments.
• 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 Advantages Disadvantages
Includes: profit
Fee amount is Expensive
• Fee = percentage of the fixed materials and
regardless
original estimated total construction
of price
figure techniques may
fluctuatio
Utilized on large multi- year jobs n be used to
Ex: WW treatment plant Facility expedite
(Cost = $20 million, Fee = 1%) construction
$20 Million 1% fee = Provides
incentive to
• $200,000 Million
complete
the
project
quickly
COST + FIXED FEE + PROFIT-SHARING CLAUSE
• Rewards contractors who Advantag Disadvantages
es
minimize cost
• Percentage of cost
Provides Contractor
under GMP is incentive must absorb
considered profit and to the any
shared with the contracto amount over
r to save the GMP
• contractor
money
Guaranteed Maximum Price
(GMP) Plans & specs.
% of profit sharing is specified need to
in contract detailed
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.