218.

781 Construction Financial Administration

CONTRACTUAL ARRANGEMENTS
BLOCK DAY 01

Chinthaka Atapattu
Senior Tutor in Quantity Surveying & Construction Law
School of Built Environment
Massey University

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Lesson Plan

❑ Introduction

❑ Contract Types

❑ Terminologies

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 Delivery methods

Procurement
strategy Contract payment types

Procurement phases

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 General
introduction
Fixed-price
Contract
Unit price
payment types
Cost-reimbursable

Time and materials

Classification
Incentive

Terminologies Hybrid

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 General introduction

• Contract = An agreement between two parties or more (offer and

acceptance), with consideration (you get something and I get
something), done with the intention of creating a legal relation and
concluded between parties with legal capacity to create a contract.

• ‘Contract types’ is sometimes referred to as ‘procurement types’.

This is inaccurate!

Retrieved from:
https://giphy.com

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 General introduction

• Procurement is an overall strategy to obtain product or seller. Contract

is a subset of a procurement strategy.

• Contract types can be classified and defined in various ways.

Sometimes, they are defined based on the project’s delivery method,
and sometimes, based on payment type. In here, contract types will be
defined based on PAYMENT TYPE.

• There are many types of contracts. Different contract type gives

different risk effects.

Retrieved from:
https://giphy.com

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 General introduction

• Different contract types give

different risk distribution to both
contractor (seller) and client
(buyer).

Source: Figure 12-3. Spectrum of distributed contract risk,

Construction Extension to the PMBOK Guide, Project
Management Institute, 2016, p.123

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 General
introduction
Fixed-price
Contract
Unit price
payment types
Cost-reimbursable

Time and materials

Classification
Incentive

Terminologies Hybrid

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Contract Types: Fixed Price (Lump Sum)

Fixed-price/ Lump sum contracts

• Work is performed and paid for based on a fixed value/lump sum
price according to the contract.
• Different types of fixed-price (FP) contracts include ‘firm FP’, ‘FP
with incentive fee’, ‘FP with economic adjustments’.
• Preferred when project scope is clearly defined.
• Risk is allocated more to the client or contractor?
• Example: Pure lump sum contract, With-quantities contract, With-
approximate-quantities contract, Without-quantities contract,
Design and specification contract, Schedule of rates contract.

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 Contract Types: Fixed Price (Lump Sum)

QUESTIONS…
• ARE LUMP SUM AND FIXED PRICE CONTRACTS THE
SAME?

• CAN A DESIGN AND BUILD DELIVERY METHOD BE A LUMP

SUM CONTRACT? Images retrieved from:
https://giphy.com

• CAN A WITH-QUANTITIES CONTRACT BE A LUMP SUM

Images retrieved from: CONTRACT?
https://giphy.com

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Contract Types: Unit Price

Unit price contracts

• Work is performed and paid based on a fixed amount (unit price) for
each unit work.
• Unit-price for each unit work includes labour, material, equipment, plus
overhead and profit attributable to the unit work.
• Suitable for projects with familiar materials and repetitive work units.
• Risk is allocated more to the client or contractor?
• Example: Remeasurement contracts.

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Contract Types: Cost Reimbursable
Cost-reimbursable contracts
• Work is performed on a reimbursable cost basis.
• COSTS = Direct costs + Indirect costs
• May include PROFIT. If profit or fee added → COST PLUS CONTRACT.
• The final price is left open ended and may subject to cost increase.
• Typically employs an ‘open-book’ accounting system, so that both the
client and contractor can tract the actual cost incurred in the completion
of the project.
• Suitable for contracts where scope is not clearly defined.
• Example: Cost plus fixed-fee contract, cost plus fixed fee with bonus
contract, cost plus fixed percentage contract, cost plus fixed fee with
guaranteed maximum price (GMP), cost plus fixed fee with GMP and
bonus contract, cost plus fixed fee with agreement for cost-savings
contract.

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 Contract Types: Cost Reimbursable

QUESTIONS…
• WHO BEARS MORE RISK IN THIS CONTRACT TYPE?

• DOES A ‘LABOUR-ONLY CONTRACT’ FALL UNDER THE

CATEGORY OF TIME AND MATERIAL CONTRACT?
• Click on the links below to read more about ‘Labour-only’ Images retrieved from:
https://giphy.com
contracts:
• https://www.building.govt.nz/projects-and-consents/why-contracts-are-valuable/
Images retrieved from: • https://www.building.govt.nz/about-building-performance/news-and-
https://giphy.com updates/codewords/codewords-issue-89/your-duty-in-labour-only-contracts/

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Contract Types: Incentive & Hybrid

Incentive contracts
• Payment is based on the services provided in
accordance with an agreed-upon scope, budget,
schedule and quantity.
• Example: Fixed-price incentive contracts, cost-
reimbursable incentive contracts.

Hybrid contracts
• A combination of 2 or more contracts.
• Example: Combination of unit-price, fixed-price and
provisional sums.

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 Terminologies

• Let’s get familiar with some • Allowance allocated for works that you know you
terminologies… need to achieve the project’s objective, but you still
haven’t got the details on the scope of those works
Provisional (level of uncertainty high).
sums • Example: Office work-stations (cubicles) are needed
but there was no detail design at the time the project
was tendered out.

• Allowance allocated for the works that would be

procured by the client i.e. the works done/ supplied
Prime Cost by others and this other party will be nominated to
Retrieved from: sums (PC the main contractor, i.e. nominated subcontractor
https://giphy.com
Sums)* (NSC).
*Note: Please read Chapter 92: Provisional and Prime • Example: PC sums for air-conditioning systems,
Cost Sums by David Chapell security systems, kitchen appliances.
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 Terminologies

• Let’s get familiar with • Contracts with BoQ/ SoQ.

some With quantities • Quantities form part of the contract and is binding.
terminologies… contract • Example: Fixed price contract with BQ.

Approximate • Quantities are approximate or provisional in nature.

quantities /
• Quantities are subject to remeasurement, i.e. based on
Provisional
what actually done or completed on site.
quantities
contract • Example: Earthworks, piling works, electrical works.

• Contract without quantities (BoQ/ SoQ)

Without • Typically used when the precise quantity of work cannot
Retrieved from:
https://giphy.com quantities be quantified because of multiple influencing variables.
contract • Example: Schedule of Rates contract, Drawing and
Specification Contract, Maintenance contract.
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 Terminologies

• Let’s get familiar with

some • Contractor is reimbursed for all the costs incurred for the
Cost plus fixed- completion of the works, PLUS a pre-agreed fixed fee.
terminologies…
fee • Example: Cost + Fixed fee of $100,000

• Contractor is reimbursed for all the costs incurred for the

completion of the works, PLUS a pre-agreed fixed fee,
Cost plus fixed- PLUS a bonus if the contractor managed to achieve a
fee with bonus prearranged success criteria
• Example: Cost + Fixed fee of $100,000 + Bonus of $50,000
if completed by 1st August 2020.

Retrieved from:
• Contractor is reimbursed for all the costs incurred for the
https://giphy.com Cost plus fixed completion of the works, PLUS a pre-agreed fixed
percentage percentage.
• Example: Cost + Fixed 10% of costs

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 Terminologies

• Let’s get familiar with • An agreed ceiling price for the project
some • The final price cannot exceed the ceiling price.
terminologies… Guaranteed
maximum price • Example: GMP is $1.50 million. The final costs of the
(GMP) project is $1.60 million. The contractor is to be paid only
$1.50 million because that is the maximum ceiling agreed
to be paid in the contract.

• Contractor is reimbursed for all the costs incurred for the

completion of the works, PLUS a pre-agreed fixed fee, but
with a ceiling price.
Cost plus fixed-
• If the contractor exceeds the ceiling price, the contractor
fee with GMP
Retrieved from:
will be paid only the ceiling price and not more.
https://giphy.com • Example: Cost + Fixed fee of $100,000, ceiling price =
$1,500,0000.

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 Terminologies
• Contractor is reimbursed for all the costs incurred for
• Let’s get familiar with
some the completion of the works, PLUS a pre-agreed
terminologies… fixed fee, PLUS a bonus if the contractor managed
to achieve a prearranged success criteria, with a
ceiling price.
Cost plus fixed-
fee with GMP • If the contractor exceeds the ceiling price, the
plus bonus contractor will be paid only the ceiling price and not
more.

• Example: Cost + Fixed fee of $100,000 + Bonus of

Retrieved from:
$50,000 if completed by 1st August 2020, ceiling
https://giphy.com price = $1,500,0000.

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 Terminologies
The Contractor is reimbursed for all the costs incurred for the
• Let’s get familiar with
completion of the works, PLUS a pre-agreed fixed fee, with a
some
pre-agreed ratio of cost savings or cost overruns sharing
terminologies…
(pre-agreed formula).

Cost plus fixed So if the actual cost is less than the target cost, both the
fee with an client and contractor will share the cost savings.
agreement for
cost-savings If the actual cost exceeds the target cost, both the client and
contract contractor will share the cost overrun.

Example: Cost + Fixed fee of $100,000; the client and the

Retrieved from: contractor share the cost savings and cost overruns at 80%:
https://giphy.com
client and 20%: contractor.

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 THE END
Thank You

Chinthaka Atapattu
Senior Tutor in Quantity Surveying & Construction Law
School of Built Environment
Massey University

Massey University | massey.ac.nz | 0800 MASSEY