Lecture 3: types of contracts Flashcards
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The classification of contract types is based on what?
method of payment, presence of competition, parties to the contract, and delivery method.
methods of payment
Lump sum, Unit Price, Cost +
presence of competition:
Competitively bid, Negotiated
Parties to the contract:
- General Contractor (Prime or GC) and subs
- Construction management agency
- Construction management at risk
- Force account
Types of delivery methods
Design-bid-buildDesign-buildFast trackDBOT, DBOOT, BOT, Turnkey
Contractor has the greatest risk.
Firm lump sum
Contractor’s risk is 5/6.
fixed lump sum with escalation formula.
Contractors risk is 3/4.
fixed lump sum.
The risk between the owner and contractor is 50/50.
Unit price
Owner’s risk is 3/4.
Cost plus sliding fee (GMP)
Owners risk is 5/6.
Cost plus fixed fee
Owners risk is 100%
Cost plus %.
- Contractor agrees to perform the contract work for a determined sum of money
- Could be firm (no change whatsoever) or subject to modification
- Requires a well defined scope of work
- Requires enough time for the bidders to evaluate and price their bids
- Offers minimum risk for the owner and maximum risk for the contractor
- The _____ figure should cover for all project costs (Labor, material, equipment, overheads, profit, etc.)
Lump sum
- Payments are made on the basis of a pre-submitted schedule of payments (Including interim or progress payments and final payment)
- Adding an escalation clause is a good practice3. Most contractual disputes result from this type
- Contractor should include a margin for contingencies to cater for unexpected events
Lump sum payment
- Contractor is required to calculate quantities from contract documents (Drawings., Specs., etc.).2. Contractor should price one unit of each contract item.
- Total price is calculated by multiplying the number of measured units x unit cost.
- Allows for changes within pre-set limits.
- Total sum of the contract also called equivalent lump sum.
Unit price
- Payment requisitions submitted regularly based on actual performance.
- Payment requisitions should follow a schedule of activities and payments.3. Used when the scope of the project is fairly clear, however, some changes might occur.
- Beware of +/-%, especially in case of unbalancing.
- Risk is almost equally distributed between Owner and Contractor.
Unit price contracts payment
- Mostly a negotiated contract
- Mainly used in cases of:Emergency, Unclear scope, Severe time constraints, and Specialized projects where the contractor is involved in design
Cost plus contracts
The contractor is reimbursed for all the incurred costs +
- A percentage of the cost 2. A fixed fee
- A sliding fee
Cost plus contract payment
Reimbursable costs include:Labor costs (Payroll + taxes + benefits)Equipment costs (Ownership + Operation + transportation + setup)Material Costs (including sales tax + storage+ transportation+ inspection + testing) but excludes work redone due to poor workmanship
“Cost” Component
Also includes:
- SubcontractsBonds and insuranceConsumables (Small tools, etc)
- Overheads (Other than included in “Plus”)
- Losses due to unexpected risks (Other than contractor’s fault)
“Cost” component
1. Worst solution for the owner
- The larger the cost, the larger the dollar amount of the percentage
- Cost control totally shifted to the owner
- No incentive for the contractor to reduce costs
“Plus Component” percentage
- Agreed upon during contract negotiations
- No incentive for the contractor to control costBetter than “+ %”
- Owner still has to perform cost controlDr. Ihab M. H. Saad 2016
Plus component fixed fee
- Starts with a fixed fee for a target contract costCan follow one of two settings:
- Fee increases with increased scope and therefore cost (No contractor incentive to reduce costs)
- Fee increases with decreased cost, and decreases with increased cost till it reaches a ceiling, thus becoming closer to a GMP (Contractor shares in cost control)
“Plus” Component Sliding Fee:
- Also known as “target” or “ceiling”Main cost + “Plus” = Fixed amount “Target”
- If cost increases, “Plus” decreases until it vanishes, or even becomes a negative value if total cost exceeds target
- Offers incentive for contractor to control costs
Guaranteed Maximum Price (GMP)
- Best arrangement for both owner and contractor under such type of contract
- Offers common goal of reducing price and controlling costs
- Savings shared between parties according to a pre-set percentage
Fixed fee with upset price and profit sharing:
