Construction Contracts

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Construction Contracts
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2- Cost Reimbursement Contracts %] j !

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Example ( 1 )
The following information belongs to a target cost contract:
- Target cost = L.E. 100 M.
- Target fee = L.E. 20 M
- Cost saving share = 50/50, (50% by the client)
- Cost increase share = 70/30, (70% by the contractor)
Required:
Calculate the contractor's fee ( ! ;) for the following cases:
1- If the cost of project equals L.E 105 M.
2- If the cost of project equals L.E 110 M.
3- If the cost of project equals L.E 95 M.

Solution:
1- If the cost of project equals L.E 105 M.
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- Contractor cost penalty = (105 - 100) * 0.7 = 3.5 M.
- Contractor fee = 20 - 3.5 =16.5 M.
2- If the cost of project equals L.E 110 M.
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- Contractor cost penalty = (110 - 100)* 0.7 = 7.0 M.
- Contractor fee = 20 - 7=13.0 M.
3- If the cost of project equals L.E 95 M.
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- Contractor cost bonus = (100-95) * 0.5 = 2.5 M.
- Contractor fee = 20 + 2.5 = 22.5 M.
Example ( 2 )
The following information belongs to a certain construction project:
- Target cost = L.E. 750,000. Target duration = 10 months
- Contractor fee if Target cost achieved = L.E. 100,000
- Contractor Bonus (L‡ 9)) for early completion ( 9 ) ] N$\) = 20,000 L.E./month
- Contractor Penalty (UH?) for late completion ( ?‡ ) ] N$\) = 40,000 L.E./month
- Contractor Bonus (L‡ 9)) for cost below Target cost = 50% of the saving
- Contractor Penalty (UH?) for cost above Target cost = 50% of the excess
It is required to complete the following table.
Actual Actual Time Cost Contractor
Case
cost duration Bonus/Penalty Bonus/Penalty fee
1 800,000 11 ? ? ?
2 700,000 9 ? ? ?

Solution:
For case 1:
Cost increase = 800,000 - 750,000 = 50,000 L.E.
Contractor cost penalty = 50,000 * 0.5 = 25,000 L.E.
Time increase = 11-10 = 1 month
Contractor time penalty = 1 * 40,000 = 40,000 L.E.
Contractor fee = 100,000 - 25,000 - 40,000 = 35,000 L.E.
For case 2:
Cost saving = 750,000 - 700,000 = 50,000 L.E.
Contractor cost bonus = 50,000 * 0.5 = 25,000 L.E.
Time saving = 10 – 9 = 1 month
Contractor time bonus = 1* 20,000 = 20,000 L.E.
Contractor fee = 100,000 + 25,000 + 20,000 = 145,000 L.E.
Example ( 3 )
The following information belongs to a target cost contract:
- Target cost = L.E. 160 M.
- Cost at the start of target band = L.E. 155 M. (L‡ 9! @ , )
- Cost at the end of target band = L.E. 165 M.(UHE @ , )
- Target fee = L.E. 20 M
- Cost saving share = 60/40, (60% by the client)
- Cost increase share = 70/30, (70% by the contractor)
Required:
Calculate the contractor's fee for the following cases:
1- If the cost of project equals L.E 163 M.
2- If the cost of project equals L.E 177 M.
3- If the cost of project equals L.E 184 M.
4- If the cost of project equals L.E 140 M.
Solution:
1- If the cost of project equals L.E 163 M.(L‡ 9) ; UH? I ,P)
- Contractor fee = 20 M.
2- If the cost of project equals L.E 177 M.
- Contractor loss = (177 - 160)* 0.7 = 11.9 M.
- Contractor fee = 20 – 11.9 = 8.1 M.
3- If the cost of project equals L.E 184 M.
- Contractor loss = (184 - 160) * 0.7 = 16.8 M.
- Contractor fee = 20 - 16.8 = 3.2 M.
3- If the cost of project equals L.E 140 M.
- Contractor excess = (160 - 140) * 0.4 = 8 M.
- Contractor fee = 20 + 8 = 28M.
Example ( 4 )
The target direct cost of power plant project is 3.4 million and scheduled to be

completed in 60 weeks. The indirect cost of each week the contractor remains in site

is 5000 L.E. The contractor fee is 20% of the total target cost. The contractor is

responsible of 50% of excess or saving in total project cost. For each scenario shown

in the cells marked by letters (A¿L).

Direct cost Duration Indirect cost Total cost Contractor fee

Case
(L.E) (weeks) (L.E) (L.E) L.E. %
1 3,400,000 60 300,000 3,700,000 740,000 20.0
2 A 58 B 3,690,000 C 20.2
3 3,400,000 D 320,000 3,720,000 730,000 16.9
4 3,750,000 61 305,000 E 562,500 13.9
5 3,750,000 56 F 4,030,000 575,000 14.3
6 3,000,000 65 325,000 G H 27.9
7 3,000,000 60 I 3,300,000 J K
8 3,200,000 L 285,000 3,485,000 847,500 24.3

Solution:
For B:
Duration = 58 weeks & Indirect cost = 5000 L.E/week
Indirect cost (B) = 58 * 5000 = 290,000 L.E
For A:
Total cost = 3,690,000 L.E
Indirect cost (B) = 58 * 5000 = 290,000 L.E
Direct cost (A) = 3,690,000 - 290,000 = 3,400,000 L.E
For C:
Total target cost = 3,400,000 + (60 * 5000) = 3,700,000 L.E
Saving in project cost = 3,700,000 - 3,690,000 = 10,000 L.E
Contractor share of saving = 0.5 * 10,000 = 5,000 L.E
Contractor fee = 0.2 * 3,700,000 + 5,000 = 745,000 L.E
For D:
Indirect cost = 320,000 L.E
Duration = 320,000 /5000 = 64 weeks
For E:
Total cost = 3,750,000 + 305,000 = 4,055,000 L.E
For F:
Duration = 58 weeks & Indirect cost = 5000 L.E/week
Indirect cost (F) = 56 * 5000 = 280,000 L.E
For G:
Total cost = 3,000,000 + 325,000 = 3,325,000 L.E
For H:
Total target cost = 3,400,000 + (60 * 5000) = 3,700,000 L.E
Saving in project cost = 3,700,000 - 3,325,000 = 375,000 L.E
Contractor share of saving = 0.5 * 375,000 = 187,500 L.E
Contractor fee = 0.2 * 3,700,000 + 187,500 = 927,000 L.E
For I:
Duration = 60 weeks & Indirect cost = 5000 L.E/week
Indirect cost (I) = 60 * 5000 = 300,000 L.E
For J:
Total target cost = 3,400,000 + (60 * 5000) = 3,700,000 L.E
Saving in project cost = 3,700,000 - 3,300,000 = 400,000 L.E
Contractor share of saving = 0.5 * 400,000 = 200,000 L.E
Contractor fee = 0.2 * 3,700,000 + 200,000 = 940,000 L.E
For K:
Percentage of contractor fee = 940,000/3,300,000 = 28.5 %
For L:
Indirect cost = 285,000 L.E
Duration = 285,000 /5000 = 57 weeks