There are four basic types of construction contracts: lump-sum, unit-price, cost-plus, and A+B contracts. The type of contract selected depends on the kind of work being performed and the conditions under which it is performed. Lump-sum contracts stipulate a fixed price for the entire job. Unit-price contracts are based on rates for estimated quantities of work that are multiplied by actual quantities. Cost-plus contracts reimburse the contractor's actual costs plus a fee, shifting risk to the owner. A+B contracts incentivize fast completion by rewarding early finishes.
There are four basic types of construction contracts: lump-sum, unit-price, cost-plus, and A+B contracts. The type of contract selected depends on the kind of work being performed and the conditions under which it is performed. Lump-sum contracts stipulate a fixed price for the entire job. Unit-price contracts are based on rates for estimated quantities of work that are multiplied by actual quantities. Cost-plus contracts reimburse the contractor's actual costs plus a fee, shifting risk to the owner. A+B contracts incentivize fast completion by rewarding early finishes.
There are four basic types of construction contracts: lump-sum, unit-price, cost-plus, and A+B contracts. The type of contract selected depends on the kind of work being performed and the conditions under which it is performed. Lump-sum contracts stipulate a fixed price for the entire job. Unit-price contracts are based on rates for estimated quantities of work that are multiplied by actual quantities. Cost-plus contracts reimburse the contractor's actual costs plus a fee, shifting risk to the owner. A+B contracts incentivize fast completion by rewarding early finishes.
There are four basic types of construction contracts: lump-sum, unit-price, cost-plus, and A+B contracts. The type of contract selected depends on the kind of work being performed and the conditions under which it is performed. Lump-sum contracts stipulate a fixed price for the entire job. Unit-price contracts are based on rates for estimated quantities of work that are multiplied by actual quantities. Cost-plus contracts reimburse the contractor's actual costs plus a fee, shifting risk to the owner. A+B contracts incentivize fast completion by rewarding early finishes.
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Lecture 5:
Contract Types AE-307 Construction Planning & Management Engr. Syed Shahid Ali Bukhari Head of the Department ( HOD ) Building & Architectural Engineering University College of Engineering & Technology Bahauddin Zakariya University, Multan. 1
Contract Types Four basic types of construction contracts: 1.Lump-Sum 2.Unit-Price 3.Cost-Plus, 4.Innovations and Trends, ( A + B ) Contracts
Contract Types Contd
There are many types of Contraction
Contracts, and the owner generally make the selection of Contract Type. The Type of contract selected depends on The kind of work being performed and The condition under which it is being performed. 3
Contract Types (Contd)
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
1.
Lump Sum Contracts
In a lump-sum contract, the contractor agrees to perform a
stipulated (require by contract) job of work in exchange 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.
Lump Sum Contracts (Contd)
Lump Sum Contract is popular with owners as the total cost of the project is known in advance. Submitting a single lump-sum bid is fair to the contractor. The quantities of the materials can be calculated with a sufficient accuracy during the bidding process to allow contractor to submit a single lump-sum price for work. 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 accurately determined in advance of field operations, the lump-sum type of contract is not suitable.
Lump Sum Contracts (Contd)
APPLICATION Structure such as buildings that permit the bidders to compute the quantities and cost accurately.
2. Unit Price Contract
Unit-price contracts are used for work where it is not possible to
calculate the exact quantity of materials that will be required.
Unit-price contracts are commonly used for heavy / highway work.
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.
Unit Price Contract (Contd)
Contractors submit a price for each item on a unit price contract.
Unit prices are multiplied by the engineers estimated quantities and totaled. The low bidder is the bidder with the low total of all items. Items whose actual quantity varies from the estimated quantity by more than 15 or 20%, either above or below the estimated quantity, are sometimes subject to renegotiation of the unit price. When the actual quantity is low, the contractor may request a renegotiated higher price because the anticipated amount of earned overhead has been reduced. When the actual quantity is high, the owner may request a renegotiated unit price for the opposite reason.
The goal of unit-price contracts is fairness to both parties.
Unit Price Contract (Contd)
APPLICATION Projects such as roads that do not permit accurate calculation of materials quantities.
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Unit Price Contract (Contd)
Work Item
Estimated Quantities*
Contract Unit Bid Amount Actual
Prices (Rs.) Quantities (Rs.)
Final Cost
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
(Rs.)
3940000
*Provided by the owner
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3.
Cost-Plus
Cost-plus contracts are used in a situation that make it difficult or
impossible for either the owner or the contractor to predict their costs during the negotiation, bid, and award process. Factors that may make the calculation of costs impossible include unpredictable and extreme weather conditions such as would be encountered in the Antarctic, unknown transportation requirements to remote locations, combat or war, or contracts where the amount of effort that will be required depends on another contractors
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3.
Cost-Plus contd Cost plus contracts take many forms, the most common being
COST PLUS FEE
Most Owners prefer cost plus fixed fee because then the amount of profit the contactor will earn cannot increase, because thereby removing any incentive for the contractor to be anything less than thrifty, or to produce poor-quality work. COST-PLUS A PERCENTAGE Cost-plus-percent contracts may be fair in situations that are very difficult , or when time to complete the work is not known with any certainity but some incentives to maintain productivity are needed. A profit that can be earned in six months may not be attractive if there is possibility that the work may require a year or two. 13
3.
Cost-Plus contd
APPLICATION Any type of facility that has conditions making it impossible for either the owner or the contractor to compute costs accurately; an example would be work in remote areas.
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Cost-Plus-Fee Contracts (Contd)
Table illustrates this scenario for a Rs.8,000,000/budget.
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3.
Cost-Plus contd
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 16
3.
Innovations and Trends,
( A + B ) Contracts
A + B Contracts are relatively new innovation imported from Europe.
They were developed by the Department of Transportation to reduce the time high-ways are under construction, and therefore are restricting traffic flow. Many highway project involve renovation, repair, improvement, or widening. Very few are true new construction projects. The purpose of the A + B contract is to provide a way to compensate the contractor for the expertise in sequencing and staging to complete the work quickly and efficiently.
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3.
Innovations and Trends,
( A + B ) Contracts
A + B means cost plus-time. The Department of Transportation
will asign a value to each day the highway work is being performed and the contractor will then bid a price plus a number of days. The lower bidder is determined as low total of the value of cost plus time. It is, of course, very possible to select a low bidder who bids a higher price, but fewer days than the other contractors.
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3.
Innovations and Trends,
( A + B ) Contracts
Contract that provide a financial incentive to the
contractors with the expertise to complete the project quickly, by reward early completion.
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THANK YOU ! 20
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3. Innovations and Trends, ( A + B ) Contracts 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) (Contd)
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) (Contd)
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
