11-09-2024

Types of Prime Contract

• Measurement Contract
– Item Rate
Types of Contracts – Percentage Rate

Prof. Prahlad R • Fixed Price

NICMAR UNIVERSITY PUNE – Entire contract
– Lump Sum

• Cost Reimbursable
– Cost plus percentage fee (CPPF)
– Cost plus fixed-fee (CPFF)
– Cost plus fluctuating fee (CPIF) (Also called as “Target Estimate”)
– Target Contract
– Guaranteed Maximum Terms (GMP)

Entire Contract Lump sum Contract

• A lump sum contract is, generally speaking an “entire” • It is a Fixed Price Contract, i.e. the contractor will
contract . An entire contract is one where one party has to be paid an agreed fixed price for the contractually
stipulated services
fulfill his part of the agreement fully before the obligation of
• The lump sum amount can be decided by
the other party to the contract arises. negotiation or competitive bidding
• In a strict lump sum contract , the contractor may not receive • The bidder’s quotations are compared on the
basis of only one figure, the bottom-line or total
under the contractor, the cost of the work done however estimated contract value
substantial it may be, if he has failed to complete the contract • The value of the works is estimated by the
fully in accordance with agreed terms.
contractor based on the drawings and
specifications provided.

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Lump sum Contract Lump sum Contract

• Fixed price contract needs complete and accurate • Deviation schedule
set of drawings and specifications – The work is broken into a no. of items, as in a BOQ
• Even with complete drawings, estimation of the
– Gives a complete break-up of the fixed price,
fixed price in short time available for bid
including item description, quantity and rate
preparation becomes difficult
– In case of variation, the amount payable for that
• Contractor may quote very conservatively
particular item is decided based on the deviation
• Sometimes, the agreement makes provision to schedule
adjust the ‘fixed sum’ allowing for the cost of
extra work, variation , omission, etc., through
deviation schedule.

Lump sum Contract Lump sum Contract

• Even though the fixed price is for the total Bid Documents
completion of job, working capital management Notice Inviting Tender
becomes difficult if there is no interim payment Instruction to the Bidders
• Milestones are decided Qualification Criteria
• Payment is linked with completion of milestones Details of Bid Bonds
• Payment schedule is mostly back loaded General Conditions of Contract
• In case the contractor abandons midway, he can Special conditions of contract
only receive payment for completed milestones Project Details
and not the actual portion of work done Complete set of Detailed Drawings & site investigation data
• The engineer’s interim certificates form the basis Specifications
of part payments to the contractor by the owner Deviation Schedule
Payment Schedule

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Lump sum Contract Lump sum Contract

• Pros • Cons
– If no extras are contemplated the tenders tell the owner exactly – Before a contract is let out the project has got to be
what the project will cost him. This is a sound footing on which thoroughly investigated and all the contract documents
he can take the decision whether to start the project or kept ready in every respect. This entails costly and time
abandon the same consuming work and which is often difficult to accomplish.
– Owner need not employ too many staff to keep periodical
– If the nature , extent, and details of the work are not
accounts of the contractor’s materials, labour and output. All
that the engineer has to do on his behalf is to see that the work
properly defined by the contract documents, many
is being executed exactly according to the terms of the contract additional features may have to be determined and
and issue interim certificates to the contractor provided for as the work progresses. These features not
– There is incentive on the contractor to save on quantity / cost. being part of the original agreement give opportunity to
Considerable scope for value engineering and innovation the contractor for claiming payment at abnormal rates

Lump sum Contract Lump sum Contract

Suitability • It is then unfair to make the contractor assume all risks and
• A lump sum contract can be used successfully for the uncertainties. Example of works unsuited to a lump sum
construction of works with which the contractors have had contract are :
considerable experience and whose cost they can predict with – Works involving difficult foundations : Where it is no
reasonable accuracy. Examples of such works are public and possible to know in advance the characteristics and
private building, warehouses, workshops , etc. quantity of excavation, dewatering of foundations, shoring
• This type of contract is not suitable for works of which extent etc.
and nature cannot be predicted in advance – Emergency projects that have to be rushed through
without time to prepare complete set of contract
documents.

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Lump sum Contract Measurement Contract

– Works, such as additions and alterations to existing structure
which involves the maintenance of operations while the work is • Contract is Broken Down into a series of bid items,
being performed. each for a discrete element of work of the project
– The works subjected to unusual and unpredictable hazards such • The two parties are not bound by the total value of
as floods beyond the control of contractors.
work. They are bound by each individual rates
• Payment is based on actual measured quantity of work
• Most common type is Item Rate

Item Rate Contract Item Rate Contract

• Also called unit-price contract Sl. No. Item
Description
UOM Quantity Rate Amount Remarks

• Bid document includes a schedule-of-bid-items or

Bill of Quantities 1 EXCAVTION CUM 560 24 13440

• The schedule contains the following columns:

2
– Sl. No.
– Description of each item of work
3
– Unit of Measurement
– Estimated quantity
– Rate or Price per unit of work
– Value of the particular item of work
– Remarks if any

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Item rate Contract Item Rate Contract

• As the actual work progresses, the payment is made on
• The schedule with item description and quantities is quantity of work physically measured
given with bid form • If no changes are made in nature of work, the quantity
• The bidders fill in the rate column for each of the item of work actually performed can vary from the
• The rate or unit price includes the contractor’s quantities in BOQ (subject to limits), without change in
rate
overheads and profits
• If the quantity of work changes beyond limits, the rates
• By totaling all the arithmetic products (Quantity x may be revised
Rate), the estimated total cost of the project is • The final contract price will depend on the actual
obtained quantity of work. The estimated value of contract is not
• The project is awarded to the lowest responsible and binding
responsive bidder; i.e. the bidder with lowest • For new items of work, not in original schedule, the
estimated cost who satisfies all pre-conditions rates need to be separately negotiated

Item Rate Contract Item Rate Contract

• Mode of Payment
• Bid Documents – The contractor has to take measurements of the work carried
out, prepare and submit the bill periodically ( generally every
– Notice Inviting Tender month )
– Instruction to the Bidders – The engineer either accompanies the contractor or his
• Qualification Criteria representative while the measurements a quantities afterwards.
• Details of Bid Bonds – If no discrepancy is found recommends the bill for payment.
– General Conditions of Contract – The amount recommended by the engineer is the cost of the
work less retention money and the cost of material supplied to
– Special conditions of contract the contractor by the owner and actually used on the work
– Project Details during the period under consideration.
• Bill of Quantities – If any item occurs during execution which is not included in the
• Basic Drawings bill of quantities, It is usually possible construct that item by a
combination of other items already in the bill, otherwise It is
• Specifications paid for as an ‘extra’ item as a specially analyzed rate.

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Computation of RA Bill Item Rate Contract

• Pros
– The tender can be floated right after preparation of
preliminary drawings
– Beneficial when there is lack of design information
– Tendering process, Mobilization, etc. can be carried out in
parallel with design & drawing
– Easier to accommodate changes due to differing site
conditions, change in requirements, etc.
– Less risk of contractor making error in quantity estimation
during short time period available during bidding
– Less tendency of contractor to bid conservatively
– What the owner pays to the contractor is the actual cost of
the work at the agreed rates. This arrangements is fair to
both the parties

Item Rate Contract Item Rate Contract

• Cons
– Owner can not be sure of total cost till completion of • Dispute regarding extra items
project. Can lead to huge cost escalations
– The contractor invariably presses for higher rates
– Needs lot of book keeping. Increases overheads
than he would have tendered in the beginning
– No incentive on contractor to reduce quantity / cost.
No scope for value engineering – May threaten to not perform the extra items if his
– Dispute regarding extra items demand not made. Difficult to get the extra items
– Malpractices (Insider trading) done by another contractor
– Front loading – In most cases owner has to meet the demands
– Back loading

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Item Rate Contract Item Rate Contract

• Malpractices • Front Loading
– The bidder, by bribing an insider, can get information on an – The contractor may put a higher rate for works to
item, which has more probability of increase in quantity
be completed earlier, and a lower rate for ending
– He may bid high rate for that particular quantity, and bid
low for another which he knows may decrease in quantity
items
– He may be awarded the contract on becoming L1, and on – This ensures that contractor becomes cash rich
actual completion, the payment made may be much more upfront, and can manage his working capital
than what would have been made if project was awarded better
to the L2 bidder – However if the bid is heavily front loaded,
– Through corruption the quantities can even be contractor may run away, after completing the
intentionally changed to facilitate such malpractice
profitable items

Percentage Rate Contract

• Another type of measurement contract
• Devised to get rid of unbalanced / front loaded bids
• The rates are estimated by the owner himself, and
included in the BOQ, in addition to item description
and quantity
• The bidder has to quote a percentage above / below /
at par with the rates given in the BOQ
• Rates of all items will be increased/decreased by the
percentage quoted by the bidder
• The bids will be compared based on value of work
derived based on the revised rates

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Percentage Rate Contract Percentage Rate Contract

• No scope for • Documents
– Unbalanced bids – Same as item rate, only rate column of BOQ filled
– Front loading by owner and not bidder
– Malpractices through insider tips • Mode of payment
• used in preference to the item rate contract – Same as item rate
for the works where the estimated quantities
are uncertain and likely to change
considerably.

Cost Plus Contracts Cost Plus Contracts

• In these contracts the owner agrees to pay the • The items, expenses under which will constitute actual
cost, are to be carefully defined in the agreement
contractor the actual cost of carrying out the • Generally the following are not included as cost, and is
work, plus an additional amount which would considered to be part of the percentage fee paid
cover his profits and indirect overheads – Salaries of the contractor’s supervisory staff.
– Contractor’s general office expenses such stationery,
• Not as common as lump sum / item rate but postage , telephone accounts etc.
sometimes may become necessary due to – Salaries or portion of salaries or traveling expenses of
various circumstances the officials of the firm who may visit the work.
– Unusual nature of work – Charges for the use of any equipment that the
contractor would not normally use for the
– Lack of interest among contractors performance of the work.

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Cost plus percentage fee (CPPF) Cost plus percentage fee (CPPF)
• The owner agrees to pay to the contractor the • Bid Documents
actual cost of the work plus an agreed – Notice Inviting Tender
percentage of the actual or allowable cost – Instruction to the Bidders
– Qualification Criteria
– General Conditions of Contract
– Special conditions of contract
– Project Details
– Details of Bid Bonds

Cost plus percentage fee (CPPF) Cost plus percentage fee (CPPF)
• Pros • Pros
– Early completion of the work : The work can be started
even before the drawings, designs, estimates and – Quality of Work : The contractor is assured of a
specifications are prepared; these being prepared as the reasonable amount of profit even though the
work progresses. The decisions can be taken speedily. prices of materials and the labour charges are
These factors lead to the rapid execution of the work.
subjected to fluctuations . Similarly , the use of
inferior type of materials than specified and
– Extra Works : No work or a portion thereof that the
contractor is directed to perform can be called an “extra hurried completion resulting in poor workmanship
work”. This flexibility allows the adoption of alternative do not increase the contractor’s profit. This
ways and methods of construction from which to choose induces him to perform the work in the best
the most economic one for the work as a whole. This may
reduce the cost of the work. Disputes arising due to extra interest of the owner. The final result is therefore
work are eliminated. a better quality work.

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Cost plus percentage fee (CPPF) Cost plus percentage fee (CPPF)
• Cons • Cons
– Lack of Incentive : Other than professional ethics – Unpredictability : The final cost is not known to
and goodwill, There is no incentive for the the owner. This may lead the owner to financial
contractor to complete the work speedily, and difficulties. Since profits of the contractor are
economically by proper planning and efficient linked with cost of materials, labour and
management . On the contrary any increase in equipment, a high cost gives the contractor a
the construction cost due to delay, wastage of higher amount of profits. This results in waste,
materials, changes in the drawings and designs inefficiency and extravagance by contractors
result in increase of his profit.

Cost plus percentage fee (CPPF) Cost plus percentage fee (CPPF)
• Suitability
• Cons – When there is an emergency or any other condition that
– Accounts Keeping : Both the parties have to do a requires constructing a facility in a hurry without time to
lot of accounts keeping regarding the materials develop plans for it, neither the employer nor the contractor is
sure about the cost of construction, a ‘cost plus percentage’
purchased and used, the labour and plant contract is generally used
employed and other miscellaneous expenses
incurred on the work. – Works ( in situations which are no emergencies )Where no one
can foretell with certainty just what troubles would be
encountered in the work, and correct decisions cannot be taken
– Illegal for Public Works : Where the owner except during the progress of the work
happens to be a public body or government
department this form of contract cannot be – Construction of expensive structures e.g. palaces, where the
adopted except during emergencies. cost of the work is of no consequences but the materials to be
used and the methods to be adopted are to suit the choice and
taste of the owner

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Cost plus percentage fee (CPPF) Cost plus fixed fee (CPFF)
• The owner should exercise great care in • The contractor is reimbursed the actual cost
incurred by him on materials and labour and is
selecting a contractor to carry out the work given a fixed amount of money as his fee.
for him. A person or firm of known integrity , • It has evolved because of the potential for abuse
who will not exploit the weakness of this type in CPPF format
of contract to his advantages, will be the best • The profit of the contractor is not linked with the
choice cost. The contractor receives only the stipulated
sum for his part in overseeing and doing the job,
no matter what the cost of the project may be
• The contractor will, therefore, try to complete the
job as fast as possible, to reduce his overheads

Cost plus fixed fee (CPFF) Cost plus fixed fee (CPFF)
• The agreement specifies the fixed lump sum to be • Mode of Payment, Documents, Suitability
paid to the contractor by the owner over and – Same as CPPF
above the actual cost of the work.
• The employer can select a reliable contractor to
execute the work. The parties can work in
harmony and accomplish amazingly fine results.
• However, there is no incentive for the contractor
to do the work economically

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Cost plus Fluctuating fee Cost plus Fluctuating fee

• A more sophisticated form of cost • The target estimate is an estimate agreed upon by the
parties prior to entering into the contract, as the most
reimbursable contract probable cost of providing the contemplated services.
• The contractor is paid the actual costs for • A fee as payment for the services is also agreed to
based on the magnitude of the target estimate, with
carrying out the work, and an incentive the provision that the parties will share the benefits or
amount, worked out by a pre agreed formula, penalties of any underruns or overruns in the actual
costs incurred in providing the services, compared to
which is directly proportional to the savings the target estimate.
over a target estimate • The exact formula for sharing is also agreed to at the
onset and may vary from contract to contract
• Usually there is a cap on the contractor’s share of
overruns ( the agreed-upon fee)

Guaranteed maximum price (GMP) or

Cost plus Fluctuating fee
not-to-exceed price"
• By introducing an element of incentive for the contractor to • The parties agree on an initial estimate for the cost of the
carry out the work in the most economic way an attempt is contemplated services and on a fee for the provider

made in this form of contract to overcome the main • The estimated cost ; fee ; contingencies are added to yield the
Guaranteed maximum price
drawback of the previous two types of cost-plus contracts.
• The GMP is the owner’s maximum financial exposure
• This is achieved by suitably changing the nature of the
• The owner agrees to reimburse the contractor for materials, labor
agreement in respect of the fee is determined by reference and the contractor's fee that covers profit.
to some form of sliding scale. Thus higher the actual cost, • The guaranteed maximum price is the highest amount owner would
lower will be the value of the fee that the contractor pay for the project, though if the final price is less than the
receives and vice versa. maximum, the client is not obliged to share those savings with the
contractor unless stipulated in the agreement

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