Chp3: Types of Contracts

Question 1

What are the 4 pure types of contracts, from a financial POV?

Answer 1

1) Unit Price Contract
2) Cost-Plus Contract
3) Lump Sum Contract
4) Job Ordering Contract

Question 2

1) What are Unit Price Contracts?

Answer 2

• Fixed pricing is determined before start of construction

- Owner will estimate the number of units, and potential bidders will estimate the unit price

Question 3

What are the components of a unit price?

Answer 3

Low Bidder will be evaluated based on:

1) Direct expenditure
2) Overhead
3) Profit
4) Missing items

Question 4

Under Unit Price contract what is a balanced bid?

Answer 4

Anticipated costs for the bid are accurately reflected in the unit prices.

Question 5

Under Unit Price contract what is an Unbalanced bid?

Answer 5

Method used by some contractors where unit prices are altered so they do not reflect the true cost of items

Question 6

What are the conditions for an unbalanced bid to maximize profits?

Answer 6

• Does not alter the total amount
  1) Positive cash flow: Increase price of work units that are performed early, to reduce initial investment costs.
  2) Owner’s Estimation Error: Contractor is more confident with his work unit estimations than the owner’s

Question 7

What should be the owner’s response to an unbalancing bid?

Answer 7

• Owner’s error in estimation will be very costly
  1) If the unbalanced bid is irregular, reject bid

2) Renegotiate if the actual quantity varies from the
estimated quantity by more than a stated percentage.

3) Resort to a change order that will delete a grossly unbalanced bid item. This may constitute a breach of contract if the deleted work is a large portion.

Question 8

Adv of Unit Pricing?

Answer 8

1) Easy for contractor selection
2) Fair basis for competition
3) Changes can be made easily by the owner
4) Lower risk for contractors

Question 9

Disadv of Unit Pricing?

Answer 9

1) Total project cost is not known at the beginning
2) Owner staffing must be extensive (STAFF must be alert and account for every item)
3) Quantity errors can be very costly

Question 10

Applications of Unit Pricing?

Answer 10

1) Project has to be fairly defined although quantities are difficult to estimate prior to construction.
2) Total construction cost should be slightly deviated from established total price.

Question 11

2)What are Cost-Plus Contracts?

Answer 11

The contractor is reimbursed for most of the direct
expenditures plus an allowance for overhead and
profit. (2 kinds of Eqns)

Question 12

Adv of Cost-Plus Contracts?

Answer 12

o Project definition: scope of work need not
be clearly defined

Advantages:
▪ Work commences without detailed plans.
▪ No negotiations required for changes.
▪ Owner has the complete flexibility to oversee
design and construction.

Question 13

Disadv of Cost-Plus Contracts?

Answer 13

Difficulty for project cost control. (Most of the time is overbudget)

Question 14

Are there any modifications to Cost-Plus Contracts?

Answer 14

1) With guaranteed maximum:
▪ Advantage: Maximum price is
known without detailed design
drawings.
▪ Disadvantage: Contractor’s fee will
be higher due to the added risk.

2) With guaranteed maximum
and incentive:
▪ Advantage: Contractor is motivated
to cut costs (shared savings).
▪ Disadvantage: Contractor fee will
still be high due to added risk.

Question 15

Applications for Cost-Plus Contracts?

Answer 15

These contracts are used when the actual costs of a
project are difficult to estimate with accuracy.

1) Fast delivery
2) When the true nature cannot be
accurately described before construction
begins (e.g., decoration, renovation).

Question 16

What are Lump Sum Contracts?

Answer 16

The contract essentially states that the contractor will produce the project as designed
for a stated specific sum.

Question 17

Can an unbalanced bid occur in Lump Sum Contracts?

Answer 17

Yes, only for Positive Cash flow, however less risk to the owner compared to unit price.

However, the owner will be at considerable risk if the contractor defaults.

Question 18

Adv of Lump Sum Contracts?

Answer 18

1) Less risk for owner
2) Minimal Owner staffing for project
3) Max construction efficiency

Question 19

Disadv of Lump Sum Contracts?

Answer 19

1) Changes from owner must be separately negotiated

2) High risk fro contractor, but high return

Question 20

Applications for Lump Sum Contracts?

Answer 20

1) When entire design is completed prior to construction
2) Quantities has to be accurately established
3) For owners with limited budget

Question 21

What is Job Order Contracting? (JOC)

Answer 21

A contractor will be “on call” for any task, JOC done through multi-year contracts

Question 22

Adv of JOC?

Answer 22

1) Established Cost & Fee prior to work
2) Work on short notice
3) Owner can utilise various JOC for diff works

Question 23

Disadv of JOC?

Answer 23

Difficult selection of JOC contractors (Reliable, efficient, safe, competent, deliver timely)

Question 24

Applications of JOC?

Answer 24

1) Public agencies: Renovation, repair, and
maintenance.

2) Private: Owners with substantial facilities