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Forms of contracts in construction industry.

4/06/2014

CONSTRUCTION CONTRACTS

      These are the printed form setting out the articles of agreement and procedures for conducting the construction operations on the site. The most generally used articles of agreement are those which have evolved over many years and through different revisions, under the hands of the body representing all aspects of the consultancy professions, and construction industry. Because the terms in these publications are accepted as fairly balanced by the institutions representing the various facets of the construction industry, they are generally regarded as a legally sound way of placing a contract with a general contractor for any construction work. There are many methods of procurement for a construction project and the route chosen will depend on the
  •  nature of the work
  • budget
  • time available and;
     The views of the client, legal advisers and other members of the consultancy team. The type of contract is selected accordingly.

      The range of forms includes versions for private or local authority use and other variations which also deal with different sizes of job. Most forms also include their own supporting range of documents related to the conditions and procedures required of the selected form. The importance of deciding the type of contract to be used is that a contracting company must be aware of the conditions under which the contract will be carried out on site. They must also know whether they will be required to undertake responsibility for a design element of their work by means of an independent agreement with the client. Here are some forms of contracts which are commonly used in construction industry;

1. Lump sum contracts

     Lump sum is a noun which means a complete payment consisting of a single sum of money. Lump sum contract is a contract under which a client agrees to pay a contractor a specified amount for completing work without requiring a cost breakdown.

      A lump sum contract is normally used in the construction industry to reduce design and contract administration costs. A lump sum contract is the most recognized agreement form on simple and small projects, for example, projects with a well-defined scope or construction projects where the risk of different site conditions is minimal.

      This contract will require that the supplier agree to provide specified services for a stipulated or fixed price. In a lump sum contract, the client has essentially assigned all the risk to the contractor, who in turn can be expected to ask for a higher markup in order to take care of unforeseen contingencies. A supplier being contracted under a lump sum agreement will be responsible for the proper job execution and will provide its own means and methods to complete the work. This type of contract usually is developed by estimating labor costs, material costs, and adding a specific amount that will cover contractor’s overhead and profit margin.

      The amount of overhead calculated under a lump sum contract will vary from builder to builder, but it will be based on their risk assessment study and labor expertise. However, estimating a very large overhead cost can lead the contractor to present higher construction costs to the project owner. The expertise of the contractor will determine how their estimated profit will actually be; furthermore, a poor executed and long-delayed job will raise your construction costs and eventually diminish the contractor's profit.

2. Unit price contracts

      Sometimes it is called a fixed-price contract; it is a contract where the amount of payment does not depend on the amount of resources or time expended, as opposed to a cost-plus contract which is intended to cover the costs plus some amount of profit.

       A fixed-price contract obliges the supplier to deliver a defined work-product to a consumer at a predetermined price. A fixed-price contract shifts most or all risks from the client to the supplier, and simultaneously shifts the management burden from the client to the supplier. Fixed price contracts are a bit self-explanatory. The contractor propose a single price to accomplish the work being sought. Once the project is complete the client pays the contractor agreed to price. The cost to complete the work does not factor into how much you are paid. This kind of contract is based on estimated quantities of items included in the project and their unit prices. The final price of the project is dependent on the quantities needed to carry out the work.

       In general this contract is only suitable for construction and supplier projects where the different types of items, but not their numbers, can be accurately identified in the contract documents. Fixed-price contracts tend to work when costs are well known in advance. 

3. Cost plus contracts

      A cost-plus contract, also termed a cost reimbursement contract, is a contract where a contractor is paid for all of its allowed expenses to a set limit plus additional payment to allow for a profit. Cost-reimbursement contracts contrast with fixed-price contract, in which the contractor is paid a negotiated amount regardless of incurred expenses.

      In cost plus contracts the client agrees to pay the cost of all labor and materials plus an amount for contractor overhead and profit (usually as a percentage of the labor and material cost). The contracts may be specified as;
  • Cost + Fixed Percentage Contract
  • Cost + Fixed Fee Contract
  • Cost + Fixed Fee with Guaranteed Maximum Price Contract
  • Cost + Fixed Fee with Bonus Contract
  • Cost + Fixed Fee with Guaranteed Maximum Price and Bonus Contract
  • Cost + Fixed Fee with Agreement for Sharing Any Cost Savings Contract
      These types of contracts are favored where the scope of the work is indeterminate or highly uncertain and the kinds of labor, material and equipment needed are also uncertain. Under this arrangement complete records of all time and materials spent by the contractor on the work must be maintained.
  • Cost + Fixed Percentage Contract 
Compensation is based on a percentage of the cost. 
  • Cost + Fixed Fee Contract
Compensation is based on a fixed sum independent the final project cost. The customer agrees to reimburse the contractor's actual costs, regardless of amount, and in addition pay a negotiated fee independent of the amount of the actual costs.
  • Cost + Fixed Fee with Guaranteed Maximum Price Contract
Compensation is based on a fixed sum of money. The total project cost will not exceed an agreed upper limit.
  • Cost + Fixed Fee with Bonus Contract
Compensation is based on a fixed sum of money. A bonus is given if the project is finished below budget, ahead of schedule etc.
  •  Cost + Fixed Fee with Guaranteed Maximum Price and Bonus Contract
Compensation is based on a fixed sum of money. The total project cost will not exceed an agreed upper limit and a bonus is given if the project is finished below budget, ahead of schedule etc.
  • Cost + Fixed Fee with Agreement for Sharing Any Cost Savings Contract
Compensation is based on a fixed sum of money. Any cost savings are shared with the buyer and the contractor.

4. Package deal contracts

     Package deal contracts sometimes are called design and build or turnkey cotracts.

    Design and Build procurement works on the basis that the main contractor is responsible for undertaking both the design and construction work on a project, for an agreed lump-sum price.

     Design and build projects can vary depending on the extent of the contractor’s design responsibility and how much initial design is included in the employer’s requirements. Nevertheless, the level of design responsibility and input from the contractor is much greater on design and build projects than a traditional contract with a contractor’s designed portion.

     The client has control over any design elements of the project that are included in their requirements, but once the contract is let responsibility over design passes to the contractor, so the client has no direct control over the contractor’s detailed design.

     The contractor can carry out the design in a number of ways. Often they will appoint their own consultants or use their own in-house team. It is also common practice for the contractor to take on the employer's consultants and continue to use them to complete the detailed design under what is known as a novation agreement.

5. Guaranteed maximum cost contracts

     A Guaranteed Maximum Price contract is a cost-type contract (also known as an open-book contract) where the contractor is compensated for actual costs incurred plus a fixed fee subject to a ceiling price. The contractor is responsible for cost overruns, unless the Guaranteed Maximum Price has been increased via formal change order (only as a result of additional scope from the client, not price overruns, errors, or omissions). Savings resulting from cost under runs are returned to the owner. This is different from a fixed-price contract where cost savings are typically retained by the contractor and essentially become additional profits.

This type of legal agreement sets a ceiling or maximum price for which a person or entity will pay for a certain project. A contractor such as a homebuilder is compensated for actual costs incurred plus a fixed fee, subject to a maximum amount. As a result, the contractor is responsible for all cost overruns and any savings resulting from cost under runs are returned to the client.

6. Measure and value contracts

      "Measure and value", or "remeasurement" contracts, are contracts in which the amount payable to the contractor is determined by measuring the work actually done, and valuing it in accordance with the rates and prices set out in the contract in a bill of quantities, or schedule of rates. This approach allows the contractor to be remunerated fairly in circumstances where the quantity or scope of the work is unknown, whilst holding the contractor to the rates initially tendered.

      Measurement contracts allow a client to shorten the overall programme for design, tendering and construction, but usually with the result of some lack of early price certainty, as the approximate quantities reflect the absence of information on exactly what is to be built at the tender stage. The scope of the work, the approximate price and a programme should be clear at the contract stage. Measurement contracts provide more risk for the client than the lump sum contracts achieved through design-bid-build, but can generally have some programme advantages.

      Measurement contracts can be used in situations where the design (or type of works) can be described in reasonable detail, but the amount cannot. For example, excavation works where the quantity of excavation required is difficult to assess until after the works have begun, or refurbishment projects where there are some uncertainties about the works that will be required. A measurement contract might also be appropriate on projects where the design has not been completed in sufficient detail for bills of quantities to be produced.






2 comments:

john said...

i get little confused!!

April 6, 2014 at 7:25 PM
johnjulius said...

ndezi we

April 6, 2014 at 7:26 PM

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