TYPES OF

CONTRACTS

Contract Definitions
Ø A. From a Legal Point of View :
— A mutual agreement between two or more parties that
something shall be done, an agreement enforceable at
law.

Ø B. According to FIDIC :
— Contract means the General Conditions, the
Supplementary Conditions, the Specifications, the
Drawings, the Bill of quantities, the Tender, the Letter of
Acceptance, the Contract Agreement.
 Ø C. According to Method of Payment :
— The agreement of how the owner will pay the contractor for
work
— performed such as a lump-sum or cost-plus payment.

Why Use contract in construction?

— Describe scope of work

— Establish time frame
— Establish cost and payment provision
— Set fourth obligations and relationship
— Minimize disputes
— Improve economic return of investment
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TYPE OF CONSTRUCTION CONTRACT

— Competitive Bid
Unit price
Lump Sum

— Negotiated
— Cost Plus
— B.O.T

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 Method of acquiring the construction service
— Competitive bid
-Public sector project
— Negotiated project
— Non public self finance project

Method of quoting the price – Unit price/ lump sum/

TYPES OF CONSTRUCTION CONTRACTS

Ø Two broad categories:
— Price Given in Advance Contracts (Priced-based Contracts)
— Cost Reimbursement Contracts (Cost-based Contracts)

Ø 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
 Lump sum contracts
— Involves a total fixed priced for all construction related
activities.
— Can include incentives or benefits for early termination,
or can also have penalties, called liquidated damages, for a
late termination.
— Preferred when a clear scope and a defined
schedule has been reviewed and agreed upon.

LUMP SUM

— Method of assigning the cost to

whole package of work

Type of work Quantity Unit Rate Total

To supply labour, material and L.Sum - RM50,000.00 RM50,000.00

equipment to construct toilet
building in accordance to drawing
no. XX/YYY/123

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Lump Sum Contract( Advantages)

— Low risk on the owner, Higher risk to the contractor

— Cost known at outset
— Contractor will assign best personnel
— Contractor selection is easy.

Lump Sum Contract(Disadvantages)

— Changes is difficult and costly.

— 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.
Unit Price

— No total final price

— Quote Rates / Prices by units
— Re-negotiate for rates if the quantity or work
considerably exceeds the initial target
— Payment to contractor is based on the measure.
— Unbalanced bids
— Higher risk to owner
— Ideal for work where quantities can not be accurately
established before construction starts.

Unit Price contract

• Require sufficient design definition to estimate quantities

of units
• Contractors bid based on units of works
• Time & cost risk (shared)
• Owner : at risk for total quantities
• Contractor : at risk for fixed unit price.

• Large quantities changes (>15-25%) can lead to increase

or decrease of unit price.
 Unit price

— Breaking down the price to unit rate

of work or material e.g. 1 m3, m2,
kg, ton
— Eg.

Type of work Quantity Unit Rate Total

To supply labour, material and 1000 m.sq RM100.00 RM100,000.00

equipment for concreting of
100mm thick of reinforced
concrete slab

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Unit Price ( Advantages)

— Easy for contract selection.
— Early start is possible.
— Saves the heavy cost of preparing many bills of quantities
by the
contractors.
— Fair basis for competition.
— In comparing with lump-sum contract, changes in
contract documents can be made easily by the owner.
— Lower risk for contractor.
 Unit Price (Disadvantages)

— Final cost not known from the beginning (BOQ only is estimated)
— Staff needed to measure the finished quantities and report on the units not
completed.
— Unit price sometime tend to draw unbalanced bid. (For Unit-Price Contracts, 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.
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 contract

— A Schedule of the work items without quantities is
prepared by the owner and /or A/E to be rated by the
contractor.
— The descriptions of items and the units of measurement are
similar to those used in a normal B.O.Q., but no quantities
are given.
— It is common for separate rates to be quoted for labor,
plant, and materials.
— Used for repair and maintenance works or under
conditions of urgency.
 Schedule of Rates Contract
Advantages:

— 1. Work can be commenced earlier than if a full B.O.Q

has been prepared.

Disadvantage :

— 1. No indication of the final price of the works.

— 2. Very difficult to determine which contractor
submitted the most advantageous offer.
— 3. May cause financial problems to the public owners

Cost Plus
1. Actual cost plus a negotiated reimbursement to cover overheads
and profit.
2. Different methods of reimbursement :
—Cost + percentage
—Cost + fixed fee
—Cost + fixed fee + profit-sharing clause.

3. Higher risk to owner

4. Compromise : guaranteed maximum price (GMP) reduces risk
to owner while maintain advantage of cost plus contract.
5. 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.
 Cost Plus
Cost of work done + Profit

Direct Cost + Indirect Cost

• Cost of material overhead

•Cost of equipment
•Cost Labour

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Cost + Percent of Cost

— 1. The contractor is reimbursed for all his costs with a fixed
% age of costs to cover his services.

— 2. Project/site overheads may be covered by the %age or

computed as one of the costs.
Cost + Percent of Cost
—Fee = percentage of the total Advantages Disadvantages
project cost
profitable for No incentive
—(Cost = $500.000,Fee = the contractor to finish job
quickly
2%)
Owner does
not know total
price
Larger the
cost of the
job, the
higher the fee
the owner
pays

Cost + Percent (Advantages)

1. Construction can start before design is completed.

2. 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.
Cost + Percent (Disadvantages )
1. The project total cost is completely unknown before the
project start.
2. No incentive for the contractor to be efficient in his use of
labors, materials or equipments.
3. Minimum efficiency maximizes the profit.

Cost Plus Fixed Fee

— 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 = compensation for expertise
— Includes: profit
Cost + Fixed Fee

— Fee = percentage of the original Advantages Disadvantages

estimated total figure
Fee amount is Expensive
— Utilized on large multi-year fixed materials and
jobs regardless construction
— Ex: WW treatment plant of price techniques may
fluctuation be used to
Facility (Cost = $20 million, expedite
Fee = 1%) construction
— $20 Million 1% fee =
Provides
$200,000 Million incentive to
complete
the project
quickly

Cost + Fixed Fee +

Profit-Sharing Clause
— Rewards contractors who minimize Advantag Disadvantages
cost es
— Percentage of cost under GMP is
considered profit Provides Contractor
and shared with the contractor incentive must absorb
to the any
— Guaranteed Maximum Price (GMP)
— % of profit sharing is specified in
contracto amount over
r to save the GMP
contract
money
Plans & specs.
need to
detailed
Cost + Fixed Fee +
Profit-Sharing Clause

— In this type of contract the contractor is reimbursed at

cost with an agreed-upon fee up to the GMP, which is
essentially a cap; beyond this point the contractor is
responsible for covering any additional costs within the
original project scope
— An incentive clause, which specifies that the
contractor will receive additional profit for bringing the
project in under the GMP.

Guaranteed Maximum Price contract

— In a guaranteed maximum price (GMP) contract, the
contractor estimates the cost just like in a lump sum bid, but
profit is limited to a specified amount.
— In the event that actual costs are lower than the estimates,
the owner keeps the savings.
— In the event costs are higher, the contractor pays the
difference and profit is reduced.
 Advantages
— Greater price certainty for clients as the contractor normally includes a sum for future
design development and for 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.
— GMP aligns the contractor with client and consultants encouraging team work with
mutual
trust and common goals.
— Less administration is required as changes are limited; there is quick settlement of the
final
account.

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.
— Contractor’s 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.
— Scope changes tend to cost more, it is accepted that scope changes to design and
build are
more likely to be more expensive than with a traditional contract, the same can also
be said
for GMP contracts.