Types of Contracts

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Types of Contracts

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Types of Contracts

1.   Measured or Unit rate Contract

In this type of contract, the price is computed by multiplying quantities of work executed by the unit rate offered by the contractor in his tender. The rates are usually set out in the Bill of Quantities (BOQ).

Such contracts often used where there are significant changes in the quantities or working conditions.

So, when there are certain reasonable differences of the quantities accepted by all the parties, then the contract can be paid for by multiplying the actual measured quantities by the unit rates.

Advantages:

  1. Suitability: This type of contract is widely used in the execution of large projects financed by public bodies or governments. It also suits the works which can be split into separate items and the quantity of each item could be estimated with reasonable accuracy.
  2. The employer pays for the actual work executed.
  3. The contractor usually allows for a certain margin of variation, with a clear mechanism for the valuation of such variations.
  4. The engineer/employer has the liberty to provide some drawings during the execution of the project, after award.

Disadvantages:

  1. The employer cannot be absolutely sure of the total cost of the project until the whole work is completed. In case the quantities in the BOQ are inaccurate or roughly approximated, the value of the work may vary considerably. The contractor may try to offer an unbalanced tender on the basis of his anticipation of the uncertainty of quantities of certain items.
  2. Both the engineer and the contractor have to do considerable computations and book-keeping during the progress of work.
  3. Extra works or varied items of work are often a source of conflict. The contractor may press for higher rates than he would have tendered for in the beginning.

2.   Lump-sum contract

In a lumpsum contract, the contractor agrees to carry out the entire work as indicated in the drawings and described in the specifications, for a specified fixed lumpsum amount.

Sometimes, the contract makes provisions to adjust the “lump sum” allowing for extra work and limited variations.

 Normally, a bill of quantities is not usually included, and if included it does not form part of the “Contract Documents”, but may be used just for guidance.

Instead, a schedule of rates may be of value to evaluate the cost of extras or omissions.

Advantages:

 l. From the employer’s stand point, and if no extras are contemplated, the tender sum tells him the exact cost of the project. Sometimes the employer will be working within a tight margin of budget.

2. From the contractor’s stand point, because the design will often be prepared by him, the contractor can gain through proper planning and efficient management to increase his margin of profit and/or to control timing.

3. Both parties need a smaller number of staff for book-keeping, accounting and measurement.

Disadvantages:

  1. In lumpsum contracts, there should be a complete set of plans and specifications, or what is called “Employer’s Requirements” which should be sufficiently detailed.
  2. Variations in lumpsum contract may trigger conflicts about whether or not a particular item of work falls within the agreed scope of work, and whether there has been a variation to such scope.
  3. This type of contract will not be suitable for works with scope and nature that cannot be predicted accurately in advance. The outcome will be unfair for the contractor to assume all risks and uncertainties, or for the employer to pay a higher cost.

3.   Cost-plus contract

This type of contract differs from both the measured and the lumpsum contract in that the employer agrees to pay the contractor for the actual cost of the work plus an agreed percentage of this actual cost to cover overhead and profit.

The contractor agrees to execute the works based on the drawings and specifications and any other information that will be provided to him from time to time during progress of the works.

The percentage to be paid should not be applied on the costs of salaries of the contractor’s staff, whether on-site or off-site.

Advantages:

  1. Early completion of the work – The work can be started even before the design and estimates are prepared. Decisions can be taken speedily, and flexibility allows adoption of alternates for construction to suit the Employer’s Requirements.
  2. The quality of the work can be assured. The contractor is induced to perform the work in the best interest of the employer.
  3. No conflicts will be anticipated as to extras or omissions.

Disadvantages:

  1. The final cost to the employer cannot be foretold.
  2. Both parties have to do a lot of accounting and book-keeping regarding labour; purchase of materials and plant and use of equipment.
  3. The contractor has no incentive to economize or finish the work speedily.

Suitability:

 In spite of some drawbacks in certain cases, this form of contract can be used suitably for:

  1. Emergency works that require speedy construction and where no time is available to prepare drawings for it.
  2. Construction of special or expensive projects, such as palaces, where the cost of the work is of no consequence but the materials and workmanship to be purchased are just to suit the choice and taste of the employer.

Remark:

An alternate to the cost-plus contract is the cost-plus fixed fee contract, where the contractor will be paid for the actual cost of construction plus a fixed amount of fees for his overhead and profit. The fee does not fluctuate with the actual cost of the project. This factor may overcome the possible drawback of the cost-plus contract.

4.   Construction Management Contract (C.M.)

In this type of contract, the employer engages a specialized construction manager (C.M.) to provide administrative service for him and manage the work on his behalf. The (C.M.) has full control on (Cost and Time), on the budget and programming, and is usually paid on a staff-reimbursement basis.

The (C.M.) assists in choosing the design consultant and the various contractors for a project divided into packages (structural, finishes, electro-mechanical, etc.).

The technical role is kept with the design-professional, but as to control, coordination, certification and dispute resolution, the (C.M.) normally possess the major role.

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