Construction

CM
COST MANAGEMENT
Contracts
Lecturer: A.Prof Tiep Nguyen
International University
School of Engineering and
Construction Management
 Definition
• A contract is simply an agreement
between two or more people in
which one person agrees to perform
a specific task or provide goods or a
service to another in exchange for
something in return.
• The contract type chosen, like the
delivery method chosen, is
important to the owner for its ability
to address project risk.

Add a footer 2
 Contract Types
• Lump-sum Contract
• Unit-price Contract
• Cost Plus Fixed Fee Contract &
Guaranteed Maximum Contract (Sub-Type)
• Negotiated Contract
• Design Build
• Turn Key Contracts

Add a footer 3
 TN
Lump Sum Contract
• Traditional method of Contract. In a lump sum contract, also
called a single fixed price, the contractor agrees to provide a
specified amount of work for a specific sum.
• The contractor offers to do the whole work for a total stipulated
sum of money as shown in drawings and described by
specification.
• In this contracting method both parties try to fix the conditions of
the project as precisely as possible. Once the contract is signed,
both parties must live with its terms.
• It is more suitable for works which contractor have prior
construction experience.
• This is considered when tender process will tend to be slower and
preparing a tender may be more expensive for the contractor.

Add a footer 4
 TN
Lump Sum Contract
Advantages Disadvantages
• Owner is aware of the cost of the The lack of time flexibility in this method
project before the project construction may result in delayed project
starts. implementation.
• Project scope and limits are defined Highly skilled Architect or Engineer is
prior to the start of construction.
needed.
• Contractual relation between all parties,
owner and Engineer are clearly defined. Difficult to implement revisions or change
in the work on the later stage of the work.
• Best price for work obtained through
competitive process with cost of work
established and agreed upon.

Add a footer 5
 TN
Lump Sum Contract
In summary,
• This contracting method combined with a traditional delivery
method allows the owner to define and commit to an agreed-
upon project description and dollar amount before the work
begins.
• For owners who want to minimize risk on a project that can be
clearly defined (i.e., that has minimal unforeseen conditions),
this type of contracting method works well.
• The owner must understand that the process will take
longerand that changes caused by mistakes, unknowns, or
changes in owner requirements will jeopardize the agreement.

Add a footer 6
 TN
Unit-Price Contract
•In a unit price contract the owner and
the contractor agree as to the price that
will be charged per unit for the major
elements of the project.
•The owner/designer will typically
provide estimated quantities for the
project, then ask contractors to “bid”
the job by calculating unit prices for
these items and calculating a final price.

Add a footer 7
 TN
Unit-Price Contract
Contractor overhead, profit, and other project expenses must be
included within the unit prices that are provided.

 Bidder 2 wins the job with the$308,200 total price

Add a footer 8
Unit-Price Contract TN
Advantages Disadvantages
• In many projects (heavy engineering projects • If estimated quantities are significantly
being a perfect example), it is difficult to different from the reality of the situation,
accurately quantify the work necessary. In the financial commitment of the ownermay
excavation work it is often difficult to be greater than planned.
accurately quantify the actual amount of rock • Mistaken estimates also expose the owner
versus soil that must be excavated. to what is called an unbalanced bid,
• Provides the owner with a competitive bid increasing the project's costs to the owner.
situation, allowing for a fair price for the • Actual quantities must be measured in the
work. field, requiring an owner presence on site to
• It eliminates the risk of getting a fixed price work with the contractors.
and then having to renegotiate because of • Delivery tickets and other invoices must be
differing site conditions, as explained before. checked and validated.
• Work can also begin before the design is • Final contract price is not known until the
completed, speeding up the completion of last item of work is measured and invoiced
the project. by the contractor.
9
 Unbalanced Bid (Example) TN

Assume Bidder2, in the last figure, knew that thesoil excavation quantity
provided was high and the fill material provided was low.

By providing a low unit price for soil excavation and a high unit price for the
fill material, Bidder 2 earns an additional $16,000.

Add a footer 10
Unit-Price Contract TN
In summary,
• Heavy engineering projects such as infrastructures are often
accomplished by a unit price contract since the quality of the
work can be defined, but the actual quantities are difficult to
determine in advance.
• The risk that the owner runs on this type of contract is that the
actual price is not known until the work nears completion, but
can be minimized by good design support.
• An owner presence in the field must also exist to verify
quantities and authorize payments.
• Once a good estimate is made of the actual quantities and
funding is deemed adequate, work can begin before final
design is complete, saving project time.

Add a footer 11
Cost plus a fee Contracts TN
• In a cost-plus contract arrangement, also called a reimbursable
contract or a time and materials contract, the contractor (or,
sometimes, the designer) works on the project and is reimbursed by
the owner for its costs, plus is paid either an additional agreed upon
fee or is paid a fee which is a percentage of those costs.
• In a cost-plus contract arrangement, also called a reimbursable
contract or a time and materials contract, the contractor (or,
sometimes, the designer) works on the project and is reimbursed by
the owner for its costs, plus is paid either an additional agreed upon
fee or is paid a fee which is a percentage of those costs.
• It is important for the owner to spell out clearly in advance what costs
will be reimbursed and which costs are to be covered by the fee.
• This contract makes sense when the scope of the project may be
difficult to define or when it is important to fast-track the project.
Cost plus a fee Contracts TN
Advantages Disadvantages
• By using this type of contract the contractor can • The risk to the owner in using this type of
contract is that, even with a GMP, the project is
start work without a clearly defined project scope started with considerable unknowns.
since all costs will be reimbursed and a profit
• By using a GMP the project costs may be
guaranteed. capped, but the quality and scope may become
• This type of contract also allows the contractor, sacrificed at the expense of the GMP.
If a GMP is not used, the scope and quality of the
designer, and owner to work together early in the project may be solid, but the cost and schedule may
designing/building process in a non-adversarial increase.
fashion, encouraging value engineering and good • This type of contract requires a reputable
estimating and scheduling support. contractor or construction manager, since
tremendous trust needs to be placed with this
• A variation of this type of contract is called a participant.
guaranteed maximum price (GMP). 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.

13
Guaranteed Maximum Contract TN
(Sub-Type of Cost plus a fee Contracts)
• The contractor agrees to perform work within a price ceiling. This is the
maximum guaranteed price.
• If the ceiling is exceeded, without change in scope then the excess cost
is borne by the contractor.
• If the work is accomplished under the ceiling then the owner pays no
more than the actual cost and the profit is shared between the
contractor and the owner.
• This method gives greater flexibility for the owner
 Example TN

• Assume that the contractor believes that your project will wind
up costing just about $10 million to build.
• The next three graphs show the price to you and the profit or
loss to the contractor for the three kinds of contracts at three
different actual final cost levels.
• At point a at each diagram, the contractor has shaved
$500,000 from the anticipated cost.
• At b, costs have run as expected.
• At c, there has been a cost overrun of $500,000.

Add a footer 15
TN
 TN

Add a footer 17
TN
 TN
As Figures shown,
• Basically, with a lump sum, the contractor gets all the savings
and takes all the risks.
• With time-and-materials,the owner gets the savings and takes
the risk.
• And with guaranteed-maximum-price, the owner gets the
savings and the contractor takes the risk.
• It is not unusual to include in this contract an incentive clause
which specifies that the contractor will receive additional profit
for bringing the project in under the GMP.

Add a footer 19
Cost plus a fee Contracts TN
In summary,
• The cost-plus type of contract makes sense when the owner
needs to complete a project quickly or when the project is
difficult to define accurately upfront.
• The project needs a qualified and reputable designer and
builder, as well as an active owner organization.
• The risks to the owner are clear: because the work often begins
before the project is completely defined, the costs may very
well exceed the figures that were defined upfront.
• A GMP can provide a cap, but this cap may be protected by the
contractor at the expense of qualityand scope.
• This type of contract is used in both the construction project
management and design-build delivery methods.

Add a footer 20
Negotiated Contract (cont) TN
The preselected contractors are invited upon on the basis of
• Capability of the past experience in the specific area
• Availability of the personnel to accomplish the work in the
specified time frame
• Bid (Estimate) Price
• Proposed method for compensation including amount of fee.
• The owner is then negotiating with the contract including
method of payment for the work, Bid, etc.
• On the basis of circumstances it can be competitive or non-
competitive.

Add a footer 21
 TN
Design Build
• It is a method to deliver a project in which the design and
construction services are contracted by a single entity known as
the design–builder or design–build contractor
• design–build relies on a single point of responsibility contract
and is used to minimize risks for the project owner and to
reduce the delivery schedule by overlapping the design phase
and construction phase of a project.
• Contractor will be responsible for all of the work on the project,
regardless of the nature of the fault

Add a footer 22
 TN
Turn-key contracts
• A type of project that is constructed so that it could be sold
to any buyer as a completed product.
• This is contrasted with build to order, where the constructor
builds an item to the buyer's exact specifications, or when an
incomplete product is sold with the assumption that the
buyer would complete it.

Add a footer 23
 TN
Contract Changes
Contract changes occur for three main reasons:
1. Because of a change in owner requirements, the scope of the
project changes.
2. Because of conditions unforeseen at the time the contract is signed,
the work must be performed differently.
3. Due to omissionsor design features that cannot be built as
specified, the design must be adjusted.

24
Contract Changes TN
• The impact that the change has on the contract depends on which
type of contract is in place and what the reasonis for the change.
• A cost-plus contract can accommodate all of the above contingencies
without a change in the contract except for possibly the case of a
GMP.
• If a GMP is in place, it may have to be increased, depending on the
terms of the GMP clause between owner and contractor.
• The impact that the change has on the contract depends on which
type of contract is in place and what the reasonis for the change.
• A cost-plus contract can accommodate all of the above contingencies
without a change in the contract except for possibly the case of a
GMP.
• If a GMP is in place, it may have to be increased, depending on the
terms of the GMP clause between owner and contractor.
25
Contract Changes TN
• In the case of an excavation project an increase in rock would be
covered by the unit price submitted, whereas an unexpected
decision to prohibit blasting would require a change in the contract.
• Contract changes are a reality on construction projects, although
from the perspective of most parties they can be disruptive and
should be avoided.
• As illustrated before the type of contract chosen can either increase
or decrease the number of changes that need to be negotiated.
• In general, fixed price contracts require the most, and cost plus a fee
the least.
• Owners need to recognize that changes cost the project money
since in negotiating a change with a contractor they will generally
not get as good a price as if they had included the change item in
the original project, where the work may have been competitively
bid.
26
Are you ready?
 CMS Thank You.
Always deliver more than expected Construction Management
208 555 0164
nvtiep@hcmiu.edu.vn
www.e-cms.vn