This document defines different types of construction contracts and summarizes their key aspects. It discusses lump sum, unit price, cost plus, and other contract types. For each type it provides an overview of how payment is determined, as well as advantages and disadvantages from the perspective of owners and contractors. The goal of different contract types is to appropriately allocate risk between owners and contractors for a given project scope, schedule and budget.

1. CONTRACTS

2. 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
• 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 at 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 rump 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 used 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 of Unit-Price Contracts, a balanced bid is one
which each bid is priced to carry its share of the cost of
the work and also its sham 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. Percentage Rate Contract
• Client draws up the schedule of items with
quantities, rates, units and amount.
• The contractors are required to offer to carry
out the work at par with the rates shown in
the specific price schedule or percentage
above or below the rates indicated

15. Advantages
• Comparative position of contractors is readily
known
• No possibility for contractors to tamper with
the rates in order to quote the lowest tender
• No possibility of an unbalanced tender

16. Disadvantages
• Contractors quote lowest tender without
analyzing the actual rates, so thorough
verification to be done by the client
• By negotiation, 2 or more contractors may
quote same percentage at higher price

17. Labour contract
• Contractor need to quote rates for item work
exclusive of materials which will be supplied
by the Department free of cost

18. Advantages:
1. Materials stored by Govt. are utilized.
2. Difficulty in obtaining certain materials in
open market are easily obtained
Disadvantages:
1. May be delay in obtaining materials, hence
contractor need be in touch with client
2. Large storage area is required
3. Refund of surplus materials to the client
without any damage

19. Material supply contract
• Contractors have to offer their rates for
supply of required quantity of materials
inclusive of local taxes, carriage and delivery
charges to the specified stores within the
time specified

20. Advantages:
• Payment will be paid promptly
• No need to worry due to loss of materials,
breakage etc during transit
Disadvantages:
• Quality check has to be done constantly
• Contractors may negotiate and quote tender
at higher prices

21. Piece work agreement
• Small part of work need to be done
• Rates can be quoted without any reference
with the total quantity of work
• Can be terminated by both parties at any
instance without any penalty

22. Advantages:
• Urgent small work can be carried without any
tenders
• If a contractor leaves, another can take the
work
Disadvantages:
• Only petty contractors are interested in this
contract. Hence careful supervision is required

23. Cost Plus contracts
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.

24. Cost + Percent of Cost
• The contractor is reimbursed for all his costs
with a fixed % age of costs over his services.
• Project/site overheads may be covered by the
%age or computed as one of the costs.

25. 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.

26. 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.

27. 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

28. Advantages
• Fee amount is fixed regardless of price
fluctuation
• Provides incentive to complete the project
quickly
Disadvantages
• Expensive materials and construction
techniques may be used to expedite
construction

29. Target contract
• Contractor will be paid on a cost plus
percentage basis
• In addition, he receives a percentage plus or
minus on his savings or excess over a prior
estimate

30. Advantages
• He can use his skill and expertise to reduce
the cost of work
Disadvantages
• Contractor may show higher cost of
construction and gain more amount even
cover his penalty

31. 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.

32. Advantages
• GMP promotes pre-agreement of changes as it’s
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 or with mutual trust and common
goals.
• Less administration is required as changes are limited;
there is quick settlement of the final account.

33. 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.

34. TENDER
• Tender is a written offer submitted by the
contractors to execute certain work at certain
rates with terms and conditions
Tenders can be grouped into
1. Open or public tenders
2. Selected or limited tenders
3. Negotiated tender

35. Open tender
• Any contractor fulfilling all formalities to
compete can enter
• Due to competition, it may have low cost
• Work may be given to unknown
• Result in delays, extra items etc

36. limited tender
• Only limited no: of contractors are called
• Competition in low scale
• Skilled work
• Successful completion of work

37. Negotiated tender
• Advance form of selective tender
• Contract is negotiated with 1 or mostly 2
contractors

38. Earnest money
• It is an assurance in the form cash or bank
deposit to confirm his intention to take up
work
• In case, he fails to complete the work, the
money will be forfeited to the government
• Works upto 5 lakhs – 2.5%
• Above 5 lakhs – 2%

39. Security Deposit
• It is an amount deposited by contractor whose
tender is accepted
• Has to pay the amount to the client, if work is
not completed