Lecture 8:

Contract TypesCED-307Construction Planning & Management

Engr. Muhammad Asif Department of Civil EngineeringUCE&T, B Z University, Multan

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Contract Types

There are four basic types of construction contracts:

1.lump sum,

2.cost-plus-fee,

3.guaranteed maximum price,

4.unit cost.

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Contract Types (Cont’d)

These types differ in two fundamental ways:

How the contractor's price is quoted to the owner;

How risk is allocated to each of the parties

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1. Lump Sum Contracts

In a lump-sum contract, the contractor agrees to perform a stipulated (require by contract) job of work in ex change for a fixed sum of money.

The satisfactory completion of the work for the stated amount remains the obligation (an agreement enforceable by law) of the contractor;

Table illustrates the various scenarios.

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Lump Sum Contracts (Cont’d)

Lump Sum Contract is popular with owners as the total cost of the project is known in advance.

However, its use is limited, of necessity, to construction programs that can be accurately and completely described at the time of bidding or negotiation.

For this reason, lump-sum contracts are widely used for residential and building construction.

If the work is of such a type that its nature and quantity cannot be ac curately determined in advance of field operations, the lump-sum type of contract is not suitable.

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2. Cost-Plus-Fee Contracts

Under a cost-plus-fee contract, Contractor will be reimbursed for actual project cost plus an additional amount for profit and overhead

This type of contract is used when total construction cost to the owner can not be known until completion of project.

For the contractor, this type contract guarantees a profit ;

For the owner, a significant risk under this arrangement ;

Cost-Plus-Fee contract shifts risk from contractor to owner;

It is essential that the contract clearly define what is considered reimbursable as a cost and what is included in overhead and profit

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Cost-Plus-Fee Contracts (Cont’d)

Table illustrates this scenario for a Rs.8,000,000/- budget.

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3. Guaranteed Maximum Price Contract (GMP)

In cost-plus-type of contract , an accurate cost of the project is not known until after completion of the construction.

A solution to this problem has been to provide for a guaranteed maximum price (GMP) to the owner.

In GMP Contract, the contractor guarantees that the project will be constructed in full accordance with the drawings and specs and the cost to the owner will not exceed some total upset price (lowest price).

In return for its services, the contractor receives a prescribed fee.

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Guaranteed Maximum Price Contract (GMP) (Cont’d)

If the cost of the work exceeds the assured maximum, the contractor pays for the excess.

The determination of the upset cost (lowest cost) by the contractor must be based on careful estimates made from complete drawings and specifications.

An incentive for the contractor to keep costs below the guaranteed maximum is sometimes provided by a bonus clause stating that the contractor and the owner will share any savings.

The owner may offer splits in the 60/40 range or even 50/50 range.

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Guaranteed Maximum Price Contract (GMP) (Cont’d)

Contracts providing for a fixed fee with a guaranteed maximum price are sometimes competitively bid in a manner similar to that used for lump-sum contracts.

Table GMP Contract

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4. Unit Price Contract

A unit-price contract is based on estimated quantities of defined items of work and costs per unit amount of each of these work items.

However, the total sum of money paid to the contractor for each work item remains an indeterminable factor until completion of the project, because payment is made to the contractor based on units of work actually done and measured in the field.

Therefore, the owner does not know the exact ultimate cost of the construction until completion of the project.

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Unit Price Contract (Cont’d)

The contractor is obligated to perform the quantities of work actually required in the field at the quoted unit prices, whether they are greater or less than the architect-engineer's estimates.

Unit-price contracts offer the advantages of open competition on projects involving quantities of work that cannot be accurately forecast at the time of bidding or negotiation.

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Unit Price Contract (Cont’d)

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Work ItemEstimated Quantities*

Contract Unit Prices (Rs.)

Bid Amount

(Rs.)

Actual Quantities

Final Cost

(Rs.)

Trench Excavation

14000 CY 60 840000 13500 810000

9// Pipe 1750 LF 300 525000 1750 LF 525000

Compacted fill 4500 CY 450 2025000 4700 2115000

Backfill 9500 CY 50 475000 9800 CY 490000

Total 3865000 3940000

*Provided by the owner

Note:

“The project delivery systems and commercial contract types can cross match”

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