COTM 3231:-Construction

Site Supervision

CHAPTER TWO
BIDDING PROCEDURES AND
CONTRACT TYPES

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 Construction Contract Type
Session objectives

At the end of this session , students should be able to:

• Define and explain contracts

• Mention the different types construction contract

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1. Contract: Definition

 Generally, a contract is an agreement or willful promise

enforceable at law.
 However, not all agreements or promises are contracts as
some agreements may lack enforceability at law.
 Enforceable at law means that if the agreement reached
between the parties breached (deviations occur from the
promises) by one of the parties, the aggrieved party, may
bring a legal action against the other to demand the
enforcement of its rights with the support of law.
 A valid contract is an agreement made between
two or more parties whereby legal rights and
obligations are created which the law will
enforce.
1. Contract: Definition
 According to Art. 1675 of the 1960 Civil Code of
Ethiopia:
“A contract is an agreement whereby two or more
persons as between themselves create, vary or extinguish
obligations of a proprietary nature.”
 The definition encompass the following main points:
 The contract is an agreement;
 The agreement is to be made between two or
more
 persons;
The agreement is binding between such two or more
 persons;
The agreement is to create, vary and extinguish
obligations;
 The nature of obligations is
proprietary.
2. Construction Contracts
2.1 Purpose of Construction Contracts
 The fundamental purpose of construction contract is to:
 Describe scope of work;
 Establish time frame;
 Establish cost and payment provisions;
 Establish commercial terms and conditions;
 Set obligations, remedial rights and relationships;
 Balance risk;
 Set project execution plan;
 Minimize disputes; and
 Improves economic return of investment.
3. Types of Construction Contracts
 Construction contracts are classified on the basis of
payment methods (fixed price or cost plus fee) adopted
by the employer/client/owner/promoter.
 Construction contracts take the following forms:
 Competitive (fixed price) contract:
o Lump Sum, and
o Unit price/Ad-measurement.
 Negotiated (Cost plus) contract:
o Cost plus fixed fee,
o Cost plus fixed percentage,
o Cost plus variable fee,
o Target cost/estimate, and
o Guaranteed maximum
price.
3. Types of Construction Contracts
 The following factors affect the choice of type of
specific contract:
 Nature and complexity of the works;
 Size and duration of contract;
 Degree of definition (scope,
 risk, uncertainty);
 Status of design;
 Technical/Supervisory resource of Employer;
 Budgetary/Financing/Borrowing constraints;
 Previous experience of Employer; and
Standard documents of funding agency.
3. Types of Construction Contracts
3.1 Fixed Price Contract
 Fixed Price types of contract are ones wherein a
contractor agrees to furnish services and material at a
specified price, possibly with a mutually agreed upon
escalation clause.
 This type of contract is most often employed when the
scope of services to be provided is well
 defined.
The two forms include:
 Lump sum contract (Buildings),
 Unit price contract (heavy
construction).
3. Types of Construction Contracts
3.1 Fixed Price Contract
3.1.1 Lump Sum Contract
 In this type of contract, a single lump sum price is quoted
for the completion of the specified work to the
satisfaction of the employer within a certain duration.
 The contractor offers to do the whole work as shown
in
drawings and described by specifications, for a total
stipulated sum of money.
 For such contracts, the design must be complete and
final, as there is no mechanism within the contract for
adjustment of the price in consequence of variation.
 The contractor bears high risk.
3. Types of Construction Contracts
3.1 Fixed Price Contract
3.1.1 Lump Sum Contract
Suitability
 A lump sum contract is more suitable for works for
which contractors have prior construction experience.
 The experience enables the contractors to submit a
realistic bid. more
 This type of contract is not suitable for difficult
foundations, excavations of uncertain character, and
projects susceptible to unpredictable hazard and
variations.
3. Types of Construction Contracts
3.1 Fixed Price Contract
3.1.1 Lump Sum Contract
Merits
 The owner decides whether to start or leave the project
knowing the total lump sum price quoted by different
contractors.
 The contractor can earn more profit by in-depth
planning and effective management at site.
 Contractor will assign best personnel.
 Contractor selection is easy.
3. Types of Construction Contracts
3.1 Fixed Price Contract
3.1.1 Lump Sum Contract
Demerits
 Before the contract is awarded, the project has to be
studied thoroughly and the complete contract document
has to be prepared in advance.
 Unforeseen details of work are not specified in the
contract document.
 Many additional items may have to be undertaken as the
work progresses, giving opportunity to the for
claiming
contractorhigher rates for the extra items not included in
the contract agreement; hence, changes are difficult and
costly.
 Contractor is free to use the lowest cost of material
equipment, methods etc.
.
3. Types of Construction Contracts
3.1 Fixed Price Contract
3.1.2 Unit Price/Ad-measurement Contract
 The contractor execute the work on an item rate basis.
 The amount to be received by the contactor depends
upon the quantities of various items of work actually
 executed.
Used for works where it is impossible to calculate in
advance the exact quantity of materials that will be
required; hence, require sufficient design definition to
estimate quantities of units.
 Time and cost risk is shared by contracting
parties.
 Owner: at risk for total quantities
 Contractor: at risk for fixed unit
 Largeprice.
quantities changes (>15-25%) can lead to increase
or decrease of unit price.
3. Types of Construction Contracts
3.1 Fixed Price Contract
3.1.2 Unit Price/Ad-measurement Contract
Suitability
 The item rate contract is most commonly used for all types of
engineering works.
 This type of contract is suitable for works which can be
divided into various items and quantities (WBS), where each
item, can be estimated with accuracy.
Merits
 There is no need for detailed drawings at the time of allotting
contract as in the case of lump sum contract. The detailed drawings
can be prepared after the contract is awarded.
 Changes in drawings and quantities of individual items can be
made as per requirement within agreed limits.
 The Payment to the contractor is made on the actual work done
by him at the agreed rates.
3. Types of Construction Contracts
3.1 Fixed Price Contract
3.1.2 Unit Price/Ad-measurement Contract
Demerits
 The total cost of work can only be known upon
completion.
 As such the owner may incur financial difficulty if the
final cost increases substantially.
 Additional staff is required to take detailed measurements
of work done for releasing payments to the contractor.
 The scope for additional saving with the use of inferior
quality materials may prompt the contractor to use such
materials in the work.
3. Types of Construction Contracts
3.2 Negotiated Contract
 Cost plus (cost reimbursable) contracts are used in
situations that make it difficult or impossible for either
the owner or the contractor to predict their costs during
the negotiation, bid, and award process.
 The contractor agrees to furnish to the client services and
material at actual cost, plus an agreed upon fee for these
services.
 This type of contract is employed most often when the
scope of services to be provided is not well defined.
 By using this type of contract the contractor can start
work without a clearly defined project scope, since all
costs will be reimbursed and a profit guaranteed.
3. Types of Construction Contracts
3.2 Negotiated Contract
 Actual cost plus a negotiated reimbursement to cover
overheads and profit with different methods of
reimbursement:
 Cost plus fixed fee,
 Cost plus fixed percentage,
 Cost plus variable percentage,
 Target cost/estimate,
 Guaranteed maximum price.
 It is applied for complex projects such as: power plants,
tunnels, process plants etc.
3. Types of Construction Contracts
3.2 Negotiated Contract
3.2.1 Cost plus Fixed Fee Contract
 Cost plus fixed fee contract is desirable when the scope and
nature of the work can at least be broadly defined.
 The amount of fee is determined as a lump sum from a
consideration of the scope of work, its approximate cost,
nature of work, estimated time of construction, manpower
and equipment requirements etc.
 In order to negotiate such a type of contract, it is essential
that the scope and some general details of the work are
defined.
 The contractor have incentive to complete the job quickly
since its fee is fixed regardless of the duration of the project.
 The owner assumes the risks of cost overrun while the
contractor may risk the erosion of its profits if the project
is dragged on beyond the expected time.
3. Types of Construction Contracts
3.2 Negotiated Contract
3.2.1 Cost plus Fixed Fee Contract
Suitability
 This type of contract is suitable for works required to be
completed expeditiously and where it is difficult to
foretell what difficulties are likely to be encountered.
 This contract is also suitable for important projects,
where the cost of construction is immaterial.
3. Types of Construction Contracts
3.2 Negotiated Contract
3.2.1 Cost plus Fixed Fee Contract
Merit
 In this type of contract, actual cost is to be borne by the
owner. Therefore, the contractor performs the work in the
best interest of the owner resulting in good quality work.
 The work can be taken ahead even before the detailed
drawings and specifications are finalized.
 Changes in design and method of construction if needed
can be easily carried out without disputes.
 Provides incentive i.e. the work can be executed speedily.
 Fee amount is fixed regardless of price fluctuation.
3. Types of Construction Contracts
3.2 Negotiated Contract
3.2.1 Cost plus Fixed Fee Contract
Demerit
 This form of contract cannot be adopted normally in case
of public bodies and Government departments.
 The final cost of the work is not known in advance and
this may subject the owner to financial difficulties.
 Expensive materials and construction techniques may
be used to expedite construction.
3. Types of Construction Contracts
3.2 Negotiated Contract
3.2.2 Cost plus Fixed Percentage Contract
 In this type of contract, the contractor is given a certain
percentage over the actual cost construction.
 The owner is forced to assume all risks of cost overruns.
 Furthermore, if there are pressing needs to complete the
project, overtime payments to workers are common and
will further increase the project cost.
 Unless there are compelling reasons such as the urgency
in the construction of military installations, the owner
shouldn’t use this type of contract.
 The suitability, merits and demerits of this type of
contract are similar to cost plus fixed fee contracts.
 An additional demerit is the tendency of the to
contractor increase the cost of work to earn more of
profit by way percentage of enhanced actual cost.
3. Types of Construction Contracts
3.2 Negotiated Contract
3.2.3 Cost plus Variable Percentage Contract
 For this type of contract, the contractor agrees to a
penalty if the actual cost exceeds the estimated project
cost, or a reward if the actual cost is below the estimated
project cost.
 In return for taking the risk on its own estimate, the
contractor is allowed a variable percentage of the direct
project cost for its fee.
 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.
3. Types of Construction Contracts
3.2 Negotiated Contract
3.2.4 Target Cost/Estimate Contract
 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 project cost.
 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.
3. Types of Construction Contracts
3.2 Negotiated Contract
3.2.5 Guaranteed Maximum Price Contract
 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.
 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.
 This type of contract is particularly suitable for turnkey
operation.
 Thank You

22/02/2025 praperd by Zenaw A.& Tegenu L. and 26