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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.
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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.
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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.
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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.
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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)
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Unit Price Contract (Cont’d)
1;
%PPLC%#67
Proects suc) as roa"s t)at "o not permit accurate
calculation of materials /uantities.
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Unit Price Contract (Cont’d)
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
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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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3. Cost-Plus cont’d
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.
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Cost-Plus-Fee Contracts (Cont’d)
Table illustrates this scenario for a Rs.8,,!-bud"et.
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3. Cost-Plus cont’d
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
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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.
nno!ations an" #ren"s,
$ % & ' ( 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.
nno!ations an" #ren"s,
$ % & ' ( 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.
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#%7H I6U J
2;
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$ (
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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