Lecture 3: types of contracts

Question 1

The classification of contract types is based on what?

Answer 1

method of payment, presence of competition, parties to the contract, and delivery method.

Question 2

methods of payment

Answer 2

Lump sum, Unit Price, Cost +

Question 3

presence of competition:

Answer 3

Competitively bid, Negotiated

Question 4

Parties to the contract:

Answer 4

1. General Contractor (Prime or GC) and subs
2. Construction management agency
3. Construction management at risk
4. Force account

Question 5

Types of delivery methods

Answer 5

Design-bid-buildDesign-buildFast trackDBOT, DBOOT, BOT, Turnkey

Question 6

Contractor has the greatest risk.

Answer 6

Firm lump sum

Question 7

Contractor’s risk is 5/6.

Answer 7

fixed lump sum with escalation formula.

Question 8

Contractors risk is 3/4.

Answer 8

fixed lump sum.

Question 9

The risk between the owner and contractor is 50/50.

Answer 9

Unit price

Question 10

Owner’s risk is 3/4.

Answer 10

Cost plus sliding fee (GMP)

Question 11

Owners risk is 5/6.

Answer 11

Cost plus fixed fee

Question 12

Owners risk is 100%

Answer 12

Cost plus %.

Question 13

1. Contractor agrees to perform the contract work for a determined sum of money
2. Could be firm (no change whatsoever) or subject to modification
3. Requires a well defined scope of work
4. Requires enough time for the bidders to evaluate and price their bids
5. Offers minimum risk for the owner and maximum risk for the contractor
6. The _____ figure should cover for all project costs (Labor, material, equipment, overheads, profit, etc.)

Answer 13

Lump sum

Question 14

1. Payments are made on the basis of a pre-submitted schedule of payments (Including interim or progress payments and final payment)
2. Adding an escalation clause is a good practice3. Most contractual disputes result from this type 
3. Contractor should include a margin for contingencies to cater for unexpected events

Answer 14

Lump sum payment

Question 15

1. Contractor is required to calculate quantities from contract documents (Drawings., Specs., etc.).2. Contractor should price one unit of each contract item.
2. Total price is calculated by multiplying the number of measured units x unit cost.
3. Allows for changes within pre-set limits.
4. Total sum of the contract also called equivalent lump sum.

Answer 15

Unit price

Question 16

1. Payment requisitions submitted regularly based on actual performance.
2. 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.
3. Beware of +/-%, especially in case of unbalancing.
4. Risk is almost equally distributed between Owner and Contractor.

Answer 16

Unit price contracts payment

Question 17

1. Mostly a negotiated contract
2. Mainly used in cases of:Emergency, Unclear scope, Severe time constraints, and Specialized projects where the contractor is involved in design

Answer 17

Cost plus contracts

Question 18

The contractor is reimbursed for all the incurred costs +

1. A percentage of the cost 2. A fixed fee
2. A sliding fee

Answer 18

Cost plus contract payment

Question 19

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

Answer 19

“Cost” Component

Question 20

Also includes:

1. SubcontractsBonds and insuranceConsumables (Small tools, etc)
2. Overheads (Other than included in “Plus”)
3. Losses due to unexpected risks (Other than contractor’s fault)

Answer 20

“Cost” component

Question 21

1. Worst solution for the owner

2. The larger the cost, the larger the dollar amount of the percentage
3. Cost control totally shifted to the owner
4. No incentive for the contractor to reduce costs

Answer 21

“Plus Component” percentage

Question 22

1. Agreed upon during contract negotiations
2. No incentive for the contractor to control costBetter than “+ %”
3. Owner still has to perform cost controlDr. Ihab M. H. Saad 2016

Answer 22

Plus component fixed fee

Question 23

1. Starts with a fixed fee for a target contract costCan follow one of two settings:
2. Fee increases with increased scope and therefore cost (No contractor incentive to reduce costs)
3. 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)

Answer 23

“Plus” Component Sliding Fee:

Question 24

1. Also known as “target” or “ceiling”Main cost + “Plus” = Fixed amount “Target”
2. If cost increases, “Plus” decreases until it vanishes, or even becomes a negative value if total cost exceeds target
3. Offers incentive for contractor to control costs

Answer 24

Guaranteed Maximum Price (GMP)

Question 25

1. Best arrangement for both owner and contractor under such type of contract
2. Offers common goal of reducing price and controlling costs
3. Savings shared between parties according to a pre-set percentage

Answer 25

Fixed fee with upset price and profit sharing: