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
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
Why Use contract in construction?
Describe scope of work
Establish time frame
Establish cost and payment provision
Set fourth obligations and relationship
Improve economic return of investment
TYPES OF CONSTRUCTION
Two broad categories:
Price Given in Advance Contracts (Priced-based
Cost Reimbursement Contracts (Cost-based
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
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
Cost known at outset
Contractor will assign best personnel
Contractor selection is easy.
Changes is difficult and costly.
Contractor is free to use the lowest cost of material
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.
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
Higher risk to owner
Ideal for work where quantities can not be
accurately established before construction
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
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
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
Contractors raise prices on certain items and make corresponding
reductions of the prices on other items ,without changing the total amount of
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
1. Work can be commenced earlier than if a full
B.O.Q has been prepared.
1. No indication of the final price of the works.
2. Very difficult to determine which contractor
submitted the most
3. May cause financial problems to the public
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
Fee = percentage of the
total project cost
$500.000,Fee = 2%)
to finish job
not know total
cost of the
higher the fee
Cost + Percent (Advantages)
1. Construction can start before design is
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
FEE = compensation for expertise
Cost + Fixed Fee
Fee = percentage of the
original estimated total
Utilized on large multi-
Ex: WW treatment plant
Facility (Cost = $20
million, Fee = 1%)
$20 Million 1% fee =
Fee amount is
be used to
Cost + Fixed Fee +
Rewards contractors who
Percentage of cost under
GMP is considered profit
and shared with the
Guaranteed Maximum Price
% of profit sharing is
specified in contract
r to save
Plans & specs.
Cost + Fixed Fee +
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
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.
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
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
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
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
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
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.