Types and Forms of

Prepared by: Fritz A. Lejarso BSCE - V

Every construction project has its own set of circumstances that can involve timing, legal obligations, ownership configuration, cost limitations, financing objectives, owner in-house resources, and more.

A contract is a voluntary arrangement between two or more parties that is enforceable at law as a binding legal agreement.

• The construction of engineering works by direct employment of an organization independent of any contractor eliminates certain difficulties often no less serious.

Direct Employment

• The responsibility for the construction and for the cost of the work is placed on an organization which the owner or governmental body must create for this purpose, and the results will depend largely on the efficiency of the organization.

• The oldest and most common method of letting work under contract is by receiving bids with fixed prices. These may be either Lump Sums or Unit Prices.

Fixed Price

• Contracting on a basis of either a Lump Sum or of Unit Prices is subject to the objection that the interests of the contractor and of the owner become at once antagonistic.

• The contractor agrees to build a project with a specific scope for a fixed price. A lump-sum contract is suitable if the scope and schedule of the project are sufficiently defined to allow the contractor to fully estimate project costs.

 Lump Sum

• This kind of contract is based on estimated quantities of items included in the project and their unit prices. The final price of the project is dependent on the quantities needed to carry out the work.

Unit Price

• In general, this contract is only suitable for projects in which the scope is reasonably well established, and the different types of items (but not their numbers) can be accurately identified in the contract documents. 

• For certain types of construction involving new technology or extremely pressing needs, the owner is sometimes forced to assume all risks of cost overruns. The contractor will receive the actual direct job cost plus a fixed percentage, and have little incentive to reduce job cost..

Cost Plus Fixed Percentage Contract

• Furthermore, if there are pressing needs to complete the project, overtime payments to workers are common and will further increase the job cost. Unless there are compelling reasons, such as the urgency in the construction of military installations, the owner should not use this type of contract

• For this type of contract, the contractor agrees to a penalty if the actual cost exceeds the estimated job cost, or a reward if the actual cost is below the estimated job cost. In return for taking the risk on its own estimate, the contractor is allowed a variable percentage of the direct job-cost for its fee.

Cost Plus Variable Percentage Contract

• Furthermore, the project duration is usually specified and the contractor must abide by the deadline for completion. This type of contract allocates considerable risk for cost overruns to the owner, but also provides incentives to contractors to reduce costs as much as possible.

• This is another form of contract which specifies a penalty or reward to a contractor, depending on whether the actual cost is greater than or less than the contractor’s estimated direct job cost.

Target Estimate Contract

• Usually, the percentages of savings or overrun to be shared by the owner and the contractor are predetermined and the project duration is specified in the contract. Bonuses or penalties may be stipulated for different project completion dates.

• When the project scope is well defined, an owner may choose to ask the contractor to take all the risks, both in terms of actual project cost and project time. Any work change orders from the owner must be extremely minor if at all, since performance specifications are provided to the owner at the outset of construction.

Guaranteed Maximum Cost Contract

• The owner and the contractor agree to a project cost guaranteed by the contractor as maximum. There may be or may not be additional provisions to share any savings if any in the contract.

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