Lec 5 (Contract Types)-New

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Lecture 5:

ontract Types

AE-307Construction Planning & Management

Engr. Syed Shahid Ali Bukhariead o! the "e#artment $ %" Building & Architectural Engineering'ni(ersity College o! Engineering & )echnologyBahauddin *akariya 'ni(ersity+ Multan.

1



ontract Types

Four basic types of construction contracts:

1.Lump-Sum

2.Unit-Price

3.Cost-Plus,

4.nno!ations an" #ren"s, $ % & ' ( Contracts

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ontract Types ont’d

#)ere are many types of Contraction

Contracts, an" t)e o*ner +enerally mae

t)e selection of Contract #ype. #)e #ype ofcontract selecte" "epen"s on

#)e in" of *or bein+ performe" an"

#)e con"ition un"er *)ic) it is bein+performe".

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Contract Types (Cont’d)

#)ese types "iffer in t*o fun"amental *ays:

o* t)e contractors price is /uote" to t)e

o*ner0

o* ris is allocate" to eac) of t)e parties

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1. Lump Sum ontracts

n a lump-sum contract, t)e contractor a+rees to perform a

stipulate" $require by contract) ob of *or in ec)an+e for a fie"

sum of money.

#)e satisfactory completion of t)e *or for t)e state" amount

remains t)e obli+ation $an agreement enforceable by law ( of t)econtractor0

Table illustrates the various scenarios.



Lump Sum Contracts (Cont’d)

Lump Sum Contract is popular *it) o*ners as t)e total cost of t)e proect is

no*n in a"!ance.

Submittin+ a sin+le lump-sum bi" is fair to t)e contractor.

#)e /uantities of t)e materials can be calculate" *it) a sufficient accuracy

"urin+ t)e bi""in+ process to allo* contractor to submit a sin+le lump-sum

price for *or.

For t)is reason, lump-sum contracts are *i"ely use" for resi"ential an"

buil"in+ construction.

f t)e *or is of suc) a type t)at its nature an" /uantity cannot be accurately

"etermine" in a"!ance of fiel" operations, t)e lump-sum type of contract is not

suitable.



Lump Sum Contracts (Cont’d)

5

%PPLC%#67

Structure suc) as buil"in+s t)at permit t)e bi""ers to

compute t)e /uantities an" cost accurately.



2. Unit Price Contract

Unit-price contracts are use" for *or *)ere it is not possible to

calculate t)e eact /uantity of materials t)at *ill be re/uire".

Unit-price contracts are commonly use" for )ea!y 8 )i+)*ay *or.

o*e!er, t)e total sum of money pai" to t)e contractor for eac)

*or item remains an in"eterminable factor until completion of t)e

proect, because payment is ma"e to t)e contractor base" on units

of *or actually "one an" measure" in t)e fiel".

#)erefore, t)e o*ner "oes not no* t)e eact ultimate cost of t)e

construction until completion of t)e proect.

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Contractors submit a price for eac) item on a unit price contract.

Unit prices are multiplie" by t)e en+ineers estimate" /uantities an"

totale". #)e lo* bi""er is t)e bi""er *it) t)e lo* total of all items.

tems *)ose actual /uantity !aries from t)e estimate" /uantity bymore t)an 1 or 2;<, eit)er abo!e or belo* t)e estimate" /uantity,

are sometimes subect to rene+otiation of t)e unit price. =)en t)e

actual /uantity is lo*, t)e contractor may re/uest a rene+otiate"

)i+)er price because t)e anticipate" amount of earne" o!er)ea"

)as been re"uce". =)en t)e actual /uantity is )i+), t)e o*ner mayre/uest a rene+otiate" unit price for t)e opposite reason.

#)e +oal of unit-price contracts is fairness to bot) parties.

>

Unit Price Contract (Cont’d)




1;

%PPLC%#67

Proects suc) as roa"s t)at "o not permit accurate

calculation of materials /uantities.




11

Work ItemEstimated

Quantities*

Contract Unit

Prices (Rs.)

Bid Amount

(Rs.)

Actual

Quantities

Final Cost

(Rs.)

TrencE!ca"ation

#$%%% C& '% $%%%% #%% #%%%%

+,, Pi-e #% /F %% 0%%% #% /F 0%%%

Com-acted 1ill $%% C& $% 0%0%%% $%% 0##%%%

Back1ill +%% C& % $%%% +%% C& $+%%%%

Total '%%% +$%%%%

*Pro"ided 23 te o4ner



3. Cost-Plus

Cost-plus contracts are use" in a situation t)at mae it "ifficult or

impossible for eit)er t)e o*ner or t)e contractor to pre"ict t)eir

costs "urin+ t)e ne+otiation, bi", an" a*ar" process.

Factors t)at may mae t)e calculation of costs impossible inclu"e

unpre"ictable an" etreme *eat)er con"itions suc) as *oul" be

encountere" in t)e %ntarctic, unno*n transportation re/uirements

to remote locations, combat or *ar, or

contracts *)ere t)e amount of effort t)at *ill be re/uire" "epen"son anot)er contractors

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3. Cost-Plus cont’d

Cost plus contracts tae many forms, t)e most common bein+

C6S# ?PLUS F@@

Aost 6*ners prefer cost plus fie" fee because t)en t)e

amount of profit t)e contactor *ill earn cannot increase,because t)ereby remo!in+ any incenti!e for t)e contractor

to be anyt)in+ less t)an t)rifty, or to pro"uce poor-/uality

*or.

C6S#-PLUS % P@BC@7#%@

Cost-plus-percent contracts may be fair in situations t)at are !ery

"ifficult , or *)en time to complete t)e *or is not no*n *it) any

certainity but some incenti!es to maintain pro"ucti!ity are nee"e".

% profit t)at can be earne" in si mont)s may not be attracti!e if

t)ere is possibility t)at t)e *or may re/uire a year or t*o.

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14

%PPLC%#67

%ny type of facility t)at )as con"itions main+ it

impossible for eit)er t)e o*ner or t)e contractor tocompute costs accurately0 an eample *oul" be *or

in remote areas.



Cost-Plus-Fee Contracts (Cont’d)

Table illustrates this scenario for a Rs.8,,!-bud"et.

1




Contractor *ill be reimburse" for actual proect cost plus an a""itional

amount for profit an" o!er)ea"

#)is type of contract is use" *)en total construction cost to t)e o*ner

can not be no*n until completion of proect.

For t)e contractor, t)is type contract +uarantees a profit 0

For t)e o*ner, a si+nificant ris un"er t)is arran+ement 0

Cost-Plus-Fee contract s)ifts ris from contractor to o*ner0

t is essential t)at t)e contract clearly "efine *)at is consi"ere"

reimbursable as a cost an" *)at is inclu"e" in o!er)ea" an" profit

1



3.

nno!ations an" #ren"s,

$ % & ' ( Contracts

% & ' Contracts are relati!ely ne* inno!ation importe" from @urope.

#)ey *ere "e!elope" by t)e Department of #ransportation to re"uce

t)e time )i+)-*ays are un"er construction, an" t)erefore are

restrictin+ traffic flo*.

Aany )i+)*ay proect in!ol!e reno!ation, repair, impro!ement, or

*i"enin+. Eery fe* are true ne* construction proects.

#)e purpose of t)e % & ' contract is to pro!i"e a *ay to compensatet)e contractor for t)e epertise in se/uencin+ an" sta+in+ to

complete t)e *or /uicly an" efficiently.

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3.


$ % & ' ( Contracts

% & 'G means cost plus-time. #)e Department of #ransportation

*ill asi+n a !alue to eac) "ay t)e )i+)*ay *or is bein+ performe"

an" t)e contractor *ill t)en bi" a price plus a number of "ays.

#)e lo*er bi""er is "etermine" as lo* total of t)e !alue of cost plustime.

t is, of course, !ery possible to select a lo* bi""er *)o bi"s a

)i+)er price, but fe*er "ays t)an t)e ot)er contractors.

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3.


$ % & ' ( Contracts

1>

Contract t)at pro!i"e a financial incenti!e to t)e

contractors *it) t)e epertise to complete t)e proect

/uicly, by re*ar" early completion.



#%7H I6U J

2;



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$ (



3. nno!ations an" #ren"s, $ % & ' ( Contracts

Guaranteed Maximum Price

ontract (GMP)

n cost-plus-type of contract , an accurate cost of t)e proect is not

no*n until after completion of t)e construction.

% solution to t)is problem )as been to pro!i"e for a +uarantee"

maimum price $AP( to t)e o*ner.

n AP Contract, t)e contractor +uarantees t)at t)e proect *ill be

constructe" in full accor"ance *it) t)e "ra*in+s an" specs an" t)e

cost to t)e o*ner *ill not ecee" some total upset price $lowest

price).

n return for its ser!ices, t)e contractor recei!es a prescribe" fee.

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!uaranteed "a#imum Price Contract (!"P) (Cont’d)

f t)e cost of t)e *or ecee"s t)e assure" maimum, t)e

contractor pays for t)e ecess.

#)e "etermination of t)e upset cost $lowest cost ( by t)e contractor

must be base" on careful estimates ma"e from complete "ra*in+san" specifications.

%n incenti!e for t)e contractor to eep costs belo* t)e +uarantee"

maimum is sometimes pro!i"e" by a bonus clause statin+ t)at t)e

contractor an" t)e o*ner *ill s)are any sa!in+s.

#)e o*ner may offer splits in t)e ;84; ran+e or e!en ;8; ran+e.

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!uaranteed "a#imum Price Contract (!"P) (Cont’d)

Contracts pro!i"in+ for a fie" fee *it) a +uarantee" maimum

price are sometimes competiti!ely bi" in a manner similar to t)at

use" for lump-sum contracts.

Table !"P Contract

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$ote%

“The project delivery systems and

commercial contract types can

cross match”

2

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