Chapter 4 : Contracts and contract types

Question 1

What are the 4 learning objectives for the contracts and contracts types chapter?

Answer 1

1. understand project development cycle
2. understand what is a contract and its components
3. understand difference between direct and indirect cost
4. appreciation of different contract types

Question 2

Why do we use contracts? (6)

Answer 2

• describe the scope of the work
• define the project’s duration
• specify amount/method of payment
• set control mechanisms
• manage and allocate risks
• assign responsibilities and obligations

Question 3

A contract is an ______ between the _____ and the ________________ to execute a _______ _______ of work

Answer 3

A contract is an agreement between the owner and the performing organization to execute a defined scope of work.

Question 4

A contract is a ______ _______ agreement that ______ the _____ to provide the specified products and obligates the ______ to pay for it.

Answer 4

A contract is a mutually binding agreement that obligates the seller to provide the specified products and obligates the owner to pay for it.

Question 5

The type of contract is chosen by the _____ according to

Answer 5

owner, the nature of the product

Question 6

A contract might by in writing or oral. Only time when the contract has to be writing is

Answer 6

land sale

Question 7

6 proofs for the existence of a contract

Answer 7

• an offer was made
• an offer was accepted
• there was a mutual agreement
• there was consideration
• subject matter of the contract is legal
• owner and seller have the capacity to enter into agreement

Question 8

6 things usually specified in a contract

Answer 8

• names and addresses of parties involved
• scope of work covered
• period of the contract
• contract price and method and terms of payment
• language and source of law governing contract
• listing of other documents considered as being part of the contract (engineering drawings and specs)

Question 9

6 types of contracts

Answer 9

1. Lump sum
2. Unit price
3. Cost + Fixed Percentage
4. Cost + Fixed Fee
5. Cost + Fixed Fee + Profit Sharing
6. Cost + Fixed Fee + Sliding Fees

Question 10

Lump sum contracts are used for projects such as building projects where it is possible to _______ accurate quantities of work prior to construction.

Answer 10

Lump sum contracts are used for projects such as building projects where it is possible to compute accurate quantities of work prior to construction.

Question 11

What is the lump sum contract?

Answer 11

when the contractor provides a single quoted price for the entire job based on a complete set of plans and specifications

Question 12

What is included in a lump sum contract price?

Answer 12

• direct costs for labour
• direct costs materials, equipment
• indirect costs, project and home office overheads
• contractor’s profits

Question 13

What are the specifications for a lump sum contract?

Answer 13

• scope of project must be well defined
• higher mark-up to account for risk
• payment according to % of work done

Question 14

Advantage, lump sum contract

Answer 14

• price assumed to be guaranteed

Question 15

Disadvantages, lump sum contract

Answer 15

• owner required to have detailed plans and specifications before bidding and construction can commence
• little to no flexibility to make changes
• litigation and considerable wrangling over the cost of contract changes if any modifications

Question 16

When are unit price contracts are used?

Answer 16

When it is not possible to calculate the exact quantity of material required. (broken down into work items such as : 16 windows)

Question 17

Disadvantages, unit price contracts

Answer 17

• true project price is not known until project completion
• unit contract prices susceptible to being manipulated via unbalanced bidding for profit and unbalanced bidding for front end loading

Question 18

Advantages, unit price contracts (2)

Answer 18

• unit price contracts best used when design responsibility remains with the owner or when design is completed during construction
• this has a lower risk than lump sum for the contractor

Question 19

3 characteristics of cost + fixed percentage contract

Answer 19

• best for contracts with new technology
• not recommended for time limited projects
• risk shifted more towards the owner.

Question 20

4 characteristics of cost + fixed fee contract

Answer 20

• incentive for the contractor to get job done asap
• contractors may tend to use expensive materials to get job done quicker
• owner risk only in direct cost
• contractor can lose profit if project is delayed

Question 21

In what type of contract is it encouraged for the contractor to keep costs at a minimum?

Answer 21

cost + fixed fee + profit sharing

Question 22

In what type of contract the risk is shared between both the owner and the contractor?

Answer 22

• cost + fixed fee + sliding fee

Question 23

5 responsibilities with concomitant risks that can be assigned to contracting parties through contract provisions

Answer 23

• force majeure
• indemnification
• occupational safety and health of workers
• suspension of work
• liquidated damages