CB514
Construction
Contracts and
Law
LECTURE 5
Engineering construction
contracts
The classification of engineering construction
contracts based on the method of payment can
be divided into two main groups:
1. Competitive Contracts (Price-Based): These
contracts are generally based on a fixed price
and typically involve a competitive bidding
process with multiple contractors. The contractor
agrees to complete the work for a set price
agreed upon at the start.
2. Negotiated Contracts (Cost-Based): In these
contracts, the client pays the contractor not only
for direct costs but also for indirect costs, such as
the costs of employees and staff at the
contractor's main office, along with a specific
percentage of profit. Negotiated contracts usually
involve a limited number of contractors and
provide flexibility to accommodate specific
project requirements.
Contract Type
Price
Breakdown
CONTRACT TYPE
Lump-sum Contract
• A single tendered price is given for the completion of specified
work to the satisfaction of the client by a certain date. Payment
may be staged at intervals on the completion. The contract has a
very limited flexibility for design changes. The tendered price may
include high level of financing and high risk contingency. Where
considerable risk has been places with the contractor, this contract
may lead to cost cutting, trivia claims, or bankruptcy.
• Contract final price is known at tender. A lump-sum contract
would seem to prevent risks for the client where in fact it just
changes them. An important risk t the client is that of not
receiving competitive bids from desirable contractors who may
avoid a high-risk lump-sum contract.
• This contract may be used for a turnkey construction. It is
appropriate when work is defined in detail, limited variations
are expected, level of risk is low and quantifiable, and client
does not wish to be involved in the management of his project.
Lump-sum Contract
Unit Price
n this type of contracting, items of work are specified
in Bills of Quantities or Schedule of Rates. The
contractor then specifies rates against each item. The
rates include risk contingency.
Payment is paid monthly for all work completed
during the month. The contract offers a facility for the
client to introduce changes in the work defined in the
tender documents.
The contractor can claim additional payment for any
changes in the work content of the contract. • Claims
resolution is very difficult because the client has no
knowledge of actual cost or hidden contingency.
Tender price is usually increased by variations and
claims. • Two forms of admeasurement contract are
usually used: bill of quantities and schedule of rates.
Unit Price
Bill of Quantities Contract:
Tenderers enter rates against each item of the
estimated quantities of work. The quantities are
re-measured during the course of the contract,
valued at the tendered rates and the contract
price adjusted accordingly.
Unit Price
Schedule of Rates Contract
It contains inaccurate quantities of work,
possibly with upper and lower probable limits.
Therefore, it is common for separate rates to be
quoted for labour, plant, and materials.
The contract price is derived by measuring the
man-hours, plant-hours and the quantities of
materials actually consumed, and then pricing
them at the tendered price. This contract is best
suitable for repetitive works.
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
cost-plus
Cost-reimbursable contract
(cost-plus contract)
The contractor is reimbursed for actual cost plus
a special fee for head office overheads and
profit, no special payment for risk. Payment may
be made monthly in advance. The contract
involves a high level of flexibility for design
changes. Final price depends on changes and
extent to which risks materialize.
The contractor must make all his records and
accounts available for inspection by the client
or by some agreed third party. The fee may be
a fixed amount or a percentage of actual costs.
cost-plus
This contract has no direct financial incentives
for the contractor to perform efficiently. It may
be used when it is desirable for design to
proceed concurrently with construction and
when the client wishes to be involved in
contract management.
Actual cost plus a negotiated reimbursement to
cover overheads and profit.
Higher risk to owner;
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.
Target Cost
Target Cost Contract
Cost targets may be introduced into cost-
reimbursable contracts. In addition to the
reimbursement of actual cost plus percentage
fee, the contractor will be paid a share for any
saving between target and actual cost, while
the fee will be reduced if actual cost exceeds
the target.
The target figure should be realistic and the
incentive must be sufficient to generate the
desired motivation.
Target Cost
Specified risk' can be excluded from the
tendered target cost. When these occur, the
target cost is adjusted accordingly and the
client pays the actual cost incurred by the
contractor.
The target may also be adjusted for major
changes in work and cost inflation.
This contract can be used in the same
circumstances as the cost-plus contract.
