B.

Sc Civil
Engineering

Project & Contract

Management CE 206
Aqsa Shabbir

Department of Civil Engineering

UET LAHORE
Types of Construction Contracts
What is a Contract?

• The word “Contract” is derived from the latin

word “Contractum” meaning drawn together.
• A legally binding agreement. In other words…
“A promise or set of promises which the law will
enforce”.
• A simple contract consists of an agreement between
two or more parties under certain terms and conditions
whereby one party undertakes to execute works or to
supply materials at specified rates and the other party
undertakes to make necessary payments for the work
completed by the first party.
What is a Contract?

• In the project context, contracts typically involve the

exchange of money in return of goods or services.
• The parties must have entered into the agreement
freely.
• The agreement will create rights and obligations that
may be enforced in the courts.
• If the contract terms are set out in writing in proper
documents, which the parties subsequently sign, then,
both parties are bound by these terms.
• The normal method of enforcement is an action for
damages for breach of contract, though in some cases
the court may order performance by the party in
default.
Why should we know types of contract?

• Whether you’re managing a small project or a large

complex program you need a basic understanding of
the different types of contract you’re likely to
encounter when buying from external organizations
and 3rd parties.
• The type of contract being used in an agreement
can refer to the structure of the document,
details of compensation, requirements to be
legally enforceable, or the associated risks.
Defining Contract:

• It is an agreement or an understanding between

two parties such that it is enforceable by law and
must be agreed upon.
Criteria Of Contract:

1. There must be mutual agreement or meeting or

understanding of minds.
2. There must be an offer.
3. The offer must be acceptable.
4. There must be consideration for the service
performed.
5. The subject matter of the contract must be lawful.
6. The contracting parties must have the legal capacity
to enter a contract.
Purpose Of A Contract:

• A quality construction.
• Construction on time.
• Construction within budget.
• Safe construction.
Why Use contract in construction?

• To set fourth obligations and relationship

• To describe scope of work
• To establish time frame
• To establish cost and payment provision
• To minimize disputes
• To improve economic return of investment
Essential elements of a Contract:
1) Agreement
One party make the offer, another party accepts the offer
and both achieve consensus ad idem (meeting of the minds)
2) Consideration
Both parties must have provided consideration, ie, each side
must promise to give or do something for the other.
3) Intention to create legal relations
The parties must have intended their agreement to have
legal consequences.
4) Capacity
The parties must be legally capable of entering into a
contract.
5) Absence of Vitiating factors
Absence of factors that are going to invalidate a contract,
i.e. duress or undue influence, mistake, misrepresentation,
illegality
Factors Influencing the Choice of the Type of Contract

• The appropriateness for providing an adequate

incentive for efficient performance by the
contractor
• The ability to introduce changes
• The allocation of risks
• The start and completion date of the project
TWO BROAD CATEGORIES :

1. Price Given in Advance Contracts

(Price-based Contracts)
a) Lump Sum Contract
b) Measurement or Unit Price Contract
c) Schedule of rates term contract
2. Cost Reimbursement Contracts
(Cost-based Contracts)
a) Cost + percentage
b) Cost + fixed fee / Incentive payment
c) Cost + profit-sharing clause / GMP
Lump Sum Contract:
• A lump sum contract is the most common form
of construction contract.
• Involves a single total fixed or ‘lump sum’ price for all
construction related activities.
• It is generally appropriate where the project is already well
defined when tenders are sought and changes are unlikely.
This means that the contractor is able to accurately price
the risk they are being asked to accept.
• It is typically used in building construction projects in which
quantities are accurately measured.
• Can include incentives or benefits for early completion, or
can also have penalties, called liquidated damages, for a
late completion.
• Lump sum includes costs plus overheads and profits
• Payment may be staged at intervals of time on the
completion of milestones (monthly progress claims).
Advantages
• The final price is known, by the owner, before the work commences
i.e. Cost known at outset hence lower financial risk to
Employer/client.
• Price quoted is a guaranteed price as per contract documents.
• The contractor has more incentive to reduce his cost to increase the
profit.
• The contractor hopes to complete the job as quickly as possible, to
minimize overhead, to maximize profit and to move to the next Job.
• Contractor selection is easy.
• Level of risks is low and quantifiable, and can be accurately and
completely described at the time of bidding such as residential and
building construction.
• More suitable when the client does not wish to be involved in the
management of the project.
• Suitable when limited variation is needed.
• These types of construction contracts also make administration and
cash flow estimates easy.
 Disadvantages
• Lump-sum contracts aren’t usually a good fit for more
complicated projects.
• Changes in material costs, site conditions, drawings and
specifications or requests from the owner can be very expensive
and source of trouble. In other words, this type of contract has
limited flexibility for design changes.
• Contractor is free to use the lowest cost of material equipment,
methods.
• The contractor carries much of the risks. The tendered price may
include high risk contingency.
• Competent contractors may decide not to bid to avoid a high-
risk lump sum contract as it is a higher financial risk contract for
Contractors.
• Lump sum contracts might be less appropriate where speed is
important, or where the nature of the works is not well defined.
Measurement (re-measurement or measure and
value) or Unit Price Contract:
• Contractors bid is based on units of works. The “unit” is a predefined block of work
which may include labor, material, equipment, overhead and profit to complete a
project. While the parties can estimate or make guesses, the actual number of units
typically can’t be specified at the beginning of the project.
• The total price is based on all of the individual units that make up the entire project.
• Requires sufficient design definition to estimate quantities of units.
• Large quantities changes to initial target e.g. 15-25%, can lead to renegotiation for
rates increasing or decreasing unit price.
• Units typically include raw materials, like lumber for a building or asphalt for a road,
and labor, such as an electrician’s hourly rate. Units must be specific and consistent for
accurate pricing; any variation calls for a separate designated unit.
Measurement or Unit Price Contract:
• Ideal for work where quantities can not be accurately established before
construction starts i.e. situations where the design (or type of works) can be
described in reasonable detail i.e. the units of the work/chunks, but the amount
cannot.
• For example, excavation works where the quantity of excavation required is
difficult to assess until after the works have begun. The payment is given at the
given excavated amount of earth.
• For example, a pool installer might be unable to predetermine the amount of dirt
they might remove from a location. In this scenario, they can use a unit price
contract where the consumer agrees to pay a certain amount for each load of dirt
the installer removes.
• For example you are making a deal with someone to repave your driveway. It’s
hard to tell how much cement you’ll need exactly, but the contractor says it costs
$1,000 for each truckload of supplies and associated labor. So to redo your entire
driveway, you would need to agree to pay $1,000 per unit. And if it took three
units to complete the entire project, you would have to pay the contractor
$3,000.
Advantages:

• Measurement contracts can allow an early start on site,

before design is complete.
• It is useful for projects that can be easily and logically split
into bundles of work and for which the final scope of work is
unclear.
• Good choice where the project is largely dependent on the
price of the units and involves repetitive tasks.
• Saves the heavy cost of preparing many bills of quantities by
the contractor
• Fair basis for competition as buyers can easily compare prices
of the contractor with their competitors.
• Changes can be made easily by the owner
• Lower financial risk for the contractor
• Contractors who use unit price contracts find the simple
invoicing and shared risk beneficial.
Disadvantages:
• The actual contract sum cannot be determined when the contract is entered into,
but is calculated on completion, based on ‘re-measurement’ of the actual work
carried out and the rates tendered. So, No total final price is given in advance/
beginning to the client hence making this type of contract a rare choice.
• They don’t incentivize contractors and can lead to profit loss if the initial estimates
are off-target.
• They’re not always a good fit for complex projects that require complicated tasks
and many different types of materials.
• Payment to the contractor is based on remeasurement. Staff is needed to measure
the finished quantities and report on the units which are not completed.
• Unit price sometime tend to draw unbalanced bid. (A balanced bid is one in which
each bid is priced to carry its share of the cost of the work and also its share of the
contractor’s profit. A Mathematically Unbalanced Bid is a Bid containing unit price
items that do not include reasonable labor, equipment, and material costs plus a
reasonable proportionate share of the Bidder's overhead costs, other indirect costs,
and anticipated profit i.e. contractors raise prices on certain items and make
corresponding reductions of the prices on other items, without changing the total
amount of the bid).
Schedule of rates term contract:

• A 'schedule of rates term contract', 'term contract' or 'measured term contract'

may be used when the nature of work required is known but it cannot be
quantified, or if continuity of programme cannot be determined (e.g. In case of
repair and maintenance works or under conditions of urgency).
• A schedule of the work items without quantities is prepared by the owner to be
rated by the contractor. The description of the items and the units of
measurement are similar to those used in BOQ but no quantities are given.
• It is common for separate rates to be quoted for labour, plant and material.
• It is the same as Lump sum contract except Schedule of Rates (SOR) is also
included in the agreement between the owner and contractor. The lump sum price
is displayed by the contractor as well as Schedule of rates to regulate the extra
amount for any additional work afterwards.
• A schedule of rates is a list in a contract setting out the
staff, labour and plant hire rates etc. but not the quantities of work like in BOQ
that a contractor will use for pricing cost reimbursable work. In the absence of
an estimate, tenderers quote unit rates against this document that is intended to
cover all likely activities that might form part of the works.
Schedule of rates term contract:

• As the extent of the work is unknown, the unit rates include overheads
and profit. General preliminaries such as scaffolding, temporary power,
supervision and temporary accommodation will also have rates.
• As the rates of items mentioned in schedule of rates are likely to vary
because of continuous changes in the market rates of materials, wages of
labour, cost of carriage etc. the schedule of rates is periodically revised.
• The rates would however, vary from place to place depending upon the
rates of construction materials, labour, working environment etc.
Advantages:

• Work can be commenced earlier than if a full BOQ has

been prepared.
• Variations are easier to estimate and normally cheaper
than on fixed price traditional contracts.
• The client can stop and start work at a pace that might be
determined by cash flow or funding.
• A larger pool of contractors can be asked to tender as the
process is inexpensive and quick.
• It is flexible in relation
to scope and contractual commitment.
• As a fully-detailed design is not required the client can
obtain tenders at the early stages of a project and
begin construction before completion of the design. So
to this extent it is 'fast track'.
Disadvantages:

• No indication of the final price of the works.

• Very difficult to determine which contractor submitted the most
advantageous offer
• May cause financial problems to the public owners
• Additional resources are required to measure work and certify payments.
• The client does not have a final price when committing to starting work.
• There is no real incentive for contractors to treat such work with any sense
of urgency and its best staff will be placed on the projects where
the contractor is carrying more risk.
• Additional resources are required to measure work on completion
and certifying payments.
• It is difficult for contractors to plan long-term resources and so might
mean changes to personnel with loss of continuity.
• Contractors may be tempted to front-load costs in case later work does
not materialise.
Cost reimbursable or Cost Plus Contracts:
• A cost reimbursable contract / cost plus contract is one in
which the contractor is reimbursed the actual costs they
incur in carrying out the works (i.e. construction related
expenses), plus an additional agreed upon amount as profit.
• This contract is used in the situation where it is not possible
either for the owner or the contractor to predict the cost of
project in advance/ in the beginning of the project because
of not having enough information to provide a thorough
estimate of work or the scope is not well-defined, e.g.
emergency work (for example urgent alteration or repair
work, or if there has been a building failure or
a fire requiring immediate reconstruction or replacement of
a building so that the client can continue to operate their
business).
• Tendering may proceed based on an outline specification,
any drawings and an estimate of costs.
Cost reimbursable or Cost Plus Contracts:
• This is a high risk form of contracting for the client as the final cost is
unknown when the contract is entered into or started.
• The costs for which the contractor is entitled to be reimbursed must be set
out very clearly in the contract.
• Client will need to keep track of all expenses and be prepared to present
them. That can require additional resources and labor costs by the client.
• This is a complex procedure that needs to be carefully considered, as
whilst some direct costs may be relatively straight forward to determine,
whilst other ‘shared’ costs, might not.
• This can become complex where the contractor is thought to be operating
inefficiently or incompetently.
• The contractor can be incentivised to operate efficiently by the
introduction of a target cost (GMP) or an incentive fee. GMP also reduce
risk to the owner while maintaining advantage of cost plus contract.
• Costs are calculated based on the contractor’s accounts and other records,
which are made available to the client on an ‘open book’ basis.
• The client may also monitor activities on site to verify that costs are
legitimate (for example checking whether plant that is being charged is
actually being used) and that costs are not excessive.
Cost reimbursable or Cost Plus Contracts:

• Direct costs that are clearly attributable to a single project

could include:
– Labour.
– Materials.
– Hired plant.
– Sub-contractors.
• Other costs that might be spread across more than one
project could include:
– Overhead cost such as Head office rent, insurance, mileage etc.
– Staff costs.
– Manufacturing facilities.
– Owned plant.
Cost reimbursable or Cost Plus Contracts:
• Actual cost plus a negotiated reimbursement to cover
overheads and profit.
• Different methods of reimbursement :
–Cost + percentage
–Cost + fixed fee / Incentive
–Cost + fixed fee + Profit Sharing Clause / GMP (used
for heavy work e.g. highways/road construction,
railway lines etc.)
Cost + %age of Cost Contracts:

• The contractor is reimbursed for all his costs with a fixed % age of
costs to cover his services.
• Project/site overheads may be covered by the %age or computed
as one of the costs.

• Advantages: Construction can start before design is completed.

Profitable for the contractor. If the contractor is efficient in the
utilization of resources then the cost to the client should
represent a fair price for the work undertaken.

• Disadvantages: The project total cost is completely unknown for

the owner before the project starts. No incentive for the
contractor to be efficient in his use of labors, materials or
equipment that means no incentive for completing the job
quickly. Minimum efficiency maximizes the profit. Larger the cost
of the job, the higher the project cost the owner pays.
Cost + Fixed Fee / Incentive Construction Contracts :

– Most common form of negotiated contracts

– COST = expenses incurred by the contractor for the construction of the
facility
• Includes: Labor, equipment, materials, and administrative costs
– FEE = percentage of the original estimated total figure as
compensation for expertise. Fee also Includes profit.
– Utilized on large multi year projects or jobs.
– Fee amount is fixed regardless of price fluctuations.
– Incentive contracts provide the contractor with an agreed-upon
payment if the project is delivered by a certain date and at a specific
point.
– If the project is delivered at a lower cost and/or by the target deadline,
the contractor receives extra payment / fixed fee. The amount they
receive is specified in the contract. In other words, the contractor is
incentivized for controlling costs and staying on schedule.
Cost + Fixed Fee / Incentive Construction Contracts:

– Advantages: These contracts are beneficial for controlling costs

and timelines. They also help to create a more collaborative
process where the contractor has more ownership. Because of
the incentive-based approach, the contractor and owner often
communicate more and look for innovative ways to get the job
done. Provides incentive to complete the project quickly.
– Disadvantages: Incentive contracts do require more negotiation
to determine the incentives. It’s important for contractors to
ensure that the costs and deadlines are achievable. If the terms
and conditions are not clear, it can leave room for disputes.
Contractors need to clearly define what meeting the incentive
looks like so there are no miscommunications when the project
is delivered. Expansive materials and construction techniques
may be used to expedite the construction work as incentive is
there for quicker completion.
Cost + Fixed Fee + Profit Sharing Clause / GMP Contracts:

• A guaranteed maximum price (GMP) is a form of agreement

with a contractor in which it is agreed that the contract
sum will not exceed a specified maximum amount i.e. the
amount the owner will have to pay the contractor is capped.
• If the actual cost of the works is higher than the guaranteed
maximum price/beyond GMP, the contractor is responsible for
covering any additional costs within the original project scope
and his profit is reduced.
• These agreements limit the cost-risk for the customer.
• Typically this is a mechanism used on design and build
contracts where the contractor has responsibility for
completing the client’s design and for carrying out the
construction works, so they are in a good position to control
costs.
Cost + Fixed Fee + Profit Sharing Clause / GMP Contracts:

• Percentage of profit sharing is specified in the contrac.

• Percentage of cost under GMP is considered profit and
shared with the contractor.
• An incentive clause is included which specifies that the
contractor will receive additional profit for bringing the
project in under GMP.
• If the cost is lower than the guaranteed maximum price,
then the contract should set out whether the savings
made go to the client, to the contractor or are shared.
• This can create a ‘pain / gain’, or a target cost agreement,
where the contractor is incentivised to make savings, but
the client has the security of a cost cap.
Cost + Fixed Fee + Profit Sharing Clause / GMP Contracts:

• Advantages: Rewards contractor who minimize the cost. Greater price certainty for
clients as the contractor normally includes a sum for future design development
and risks.
• GMP promotes pre-agreement of changes as its philosophy links neatly with a
contractual requirement to pre-agree the cost and time implications of any
potential changes.
• GMP provides greater control over spending as the contractor is bound to a
maximum price. This alerts the team to any potentially expensive items of design
development.
• Less administration is required as changes are limited.
• Disadvantages: The client might pay too much as the contractor takes on greater
risk and thus includes in the price an allowance for design development and risk.
Often a competitive price is sacrificed in lieu of appointing a contractor early.
• Contractors with design and build experience may have useful knowledge.
• There is no standard form of contract for GMP so there is a greater possibility of
errors and misunderstandings of liabilities between the parties that may result in
conflict.
• This agreement does require careful review and analysis of expenses. This can be
particularly time-consuming on large, multi-phase projects.
• Scope changes tend to cost more.
Time and materials contract

• A time and materials contract is like a cost-plus contract, but a little more
straightforward.
• In these deals, the buyer pays the contractor for the time spent to complete the
project and the materials used in the process.
• Time and materials contracts are also used in situations where it’s not possible to
estimate the size of the project or if the requirements for completion are expected
to change.
• As a buyer, your money will be out toward the material costs and the rate you are
paying the workers for their time. At the start of the process, you will likely have to
come to a mutual agreement on the price of materials, including a markup rate and
hourly rates for labor.
• Time and material contracts require logging of everything happening on the work
site, most importantly the hours being worked and materials being used.
• Paying close attention to those details will help the contractor and buyer come up
with the most accurate estimate of the final total cost.
• Contractors will use time and materials contracts because it simplifies the
negotiation process and it’s easy to adjust if the requirements of the project change.
• A downside to this is that tracking time and managing materials is tedious work.