3. Construction Contracts
• Why do we use contracts 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
• Types of Contracts
– Competitive Bid Contracts
– Negotiated Contracts
– Combined Competitive bid and Negotiated contracts
4. Types Of Contracts
• Competitive Bid Contracts
– For public works construction all who are so inclined may
submit a bid and the contract will be awaeded to the
lowest responsible bidder
– Responsible bidder
• One with ample working capital
• That can furnish the required sureties and guarentees
• Whose record is free from defaulted contracts and unjustified
litigation
• Satisfactory experience
• Competitive Bid Contacts
– Lump-sum Contracts
– Unit-rate Contracts
5. Competitive Bid Contracts
• Lump-sum Contracts
– Compensation to contractor on the bases of the total
amount to cover all the work on the plans and
specifications
– Payment based on a scheduled percentage scheme
(monthly progress claims)
– Used when the type of construction are standardized and
a variety of operations are required, making it
impracticable to break down the work into units
– The plans and specifications should be comprehensive and
should show in complete detail the requirements of the
work
– Changes and extra work orders after the contract is signed
are expensive and lead to controversies and disputes
6. Competitive Bid Contracts
Advantages of Lump Sum
Contracts
• The owner knows the cost
of the work from the outset
• Low risk on the owner,
Higher risk to the contractor
• Contractor will assign best
personnel
• Contractor selection is easy.
• Timely completion fof the
works because efficiency
and speed maximizes the
contractors profits
Disadvantages of Lump Sum
Contracts
• Changes is difficult and
costly.
• Contractor is free to use the
lowest cost of material
equipment, methods.
7. Competitive Bid Contracts
• Unit-Price Contracts
– Include the breakdown estimates of quantities of the
number units of each type of construction and the price of
each work
– For the purpose of comparing bids an approximate total
cost is determined from estimated quantities and the unite
prices
– Used when large quantities of a relatively few types of
construction and the volume of work cannot be estimated
in advance
– Plans and specification should be completed in terms of
nature and details of the work but not the magnitude of
the work
– Payment based on measured quantities not general sum
8. Competitive Bid Contracts
Advantages of Unit Price
Contracts
• Suitable for competitive bid
• Easy for contract selection
• Early start is possible
• Flexibility : quantities and
scope can be easily adjusted
Disadvantages of Unit Price
Contracts
• 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.
9. Types Of Contracts
• Negotiated Contracts
– Contracts awarded to a selected contractor after
studying the qualifications, previous experience and
facilities
– It can be in lump sum or unit price contract however
most negotiated contracts are cost plus some form of
compensation to the contractor
– The contractor furnishes the working capital required
to finance the construction and will be compensated
reimber in the full amount of completed to date plus
management coordination fees
10. Negotiated Contracts
• Cost Plus Percentage of cost Contracts
– Works can begin before the completion of design
plans and specifications hence saves a lot of time
– Contractor’s compensation increases with work
volume i.e. no incentive to economize
– Owner does not know the construction cost from
the outset
– Mostly abandoned method for large projects but
extra work can be handled successfully
11. Negotiated Contracts
• Cost Plus Fixed Fee Contracts
– Provides payment to the contractor the cost of the
work plus a fixed amount as a fee the
accomplishment of the work
– The scope of the work should be clearly defined
and both parties mus agree on the estimated
volume of the work
– The best form of contracts
12. Negotiated Contracts
• Cost Plus Fixed Fee with a profit sharing
clause Contracts
– As an added incentive to the contractor, a profit
sharing clause may be introduced in to the
contract
– Preliminary costs are estimated and if the actual
cost is smaller than the preliminary cst the
contractor will share 25 -50% of the savings
13. Negotiated Contracts
• Cost Plus Fixed Fee with a Bonus clause contracts
– When the completion of the work is urgently required, the
owner may write into the contract a bonus clause
– A fixed amount in addition to his fees for each day the
owner has full use of the completed work before the
originally estimated day of completion
• Cost plus a sliding scale of fees contracts
– The contractors fees change with the actual cost of the
work in accordance with a sliding scale of fixed fees
– If the costs rise the contractors fees decrease and if the
costs fall the contractors fees increase in fixed amounts
14. Negotiated Contracts
• Cost plus contract with guaranteed ceiling price
– The contractor is reimbursed for the actual cost of the
work plus his fixed fee, provided that the total amount
should not exceed the maximum limit established in the
contract
– If the total amount exceed the maximum limit the
contractor is held responsible for the excess and receives
no compensation over the guaranteed ceiling price
15. Selection of type of contracts
• Fundamental difference between competitive Bid and
negotiated contracts
– Competitive bidding straight forward business transaction in
which the owner take his chances in the market
– In negotiated contracts the owner and the contractor are
partners with common objective
• Competitive Bid Contracts are advantageous to the
owner when
– There is sufficient time to prepare plans and specifications in
detail
– Activity in the construction industry is at low ebb
– Some control can be exercised on the quality and character of
the bidders
16. Selection of type of contracts
• Negotiated contracts are is preferred when
– It is desirable to begin the work before the completion of
detailed plans and specifications
– When requirements of the project cannot be determined
definitely in advance of the early phase of the
construction
– When the nature of the projects is as such accurate
estimate of the the works can not be made for bidding
purposes
17. Testing Times…..
1. Explain the difference between methods of payment under
lump-sum and unit price contracts
2. When would it be advisable to use a combination of lump-
sum and unit price methods of payments
3. The following projects are to be constructed under
competitive bid contracts. Make a selection between the
lump-sum and unit-price types, and give the reason for each
choice
– A sewer system
– A small residence
– A masonry dam
– A steel bridge
– Foundation for large building
4. Under what condition would a cost plus contract be
indicated in lieu of the competitive bid contracts
5. Why should a sub contract always be awarded on the basis
of competitive bids when the prime contract is of cost-plus
type?
