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MBA CPM 3RD SEMESTER JUL 2015-NOV

2015
CONSTRUCTION CONTRACT PRACTICE & MANAGEMENT
COURSE OBJECTIVE
1. TO ENABLE STUDENTS TO UNDERSTAND THE
PROCESS OF CONTRACT MANAGEMENT AND
ADMINISTRATION IN CONSTRUCTION PROJECTS.
2. TO ACQUIRE THE ABILITY TO TAKE APPROPRIATE
STEPS IN MANAGING THE PROJECT AS PER THE
CONTRACT AND MEET THE REQUIREMENTS OF
ALL STAKEHOLDERS
LEARNING OUTCOMES
DEMONSTRATE KNOWLEDGE AND
UNDERSTANDING OF MAIN MODES OF
PROCUREMENT/TENDERING AND PROCESSES
INVOLVED IN NEGOTIATING CONTRACTS.
APPLY KNOWLEDGE GAINED IN ABOVE TO
SELECTED PROCUREMENT ROUTES TO PROCESS
OF TENDERING AND FINALIZATION.
LEARNING OUTCOMES
DEMONSTRATE AND APPLY KNOWLEDGE AND
UNDERSTANDING OF VARIOUS FORMS OF
CONTRACT FOR CONSTRUCTION INDUSTRY
AND APPLY THE KNOWLEDGE OF OBLIGATIONS
OF VARIOUS PARTIES INVOLVED.
UNDERSTAND IMPORTANCE OF BEST PRACTICES
IN DRAFTING OF CONTRACTS FOR CLAIM
REDUCTION, NEED FOR DISPUTE
AVOIDANCE/PREVENTION AND METHODS OF
DISPUTE RESOLUTION.
MODULE I
CONTRACTS AND ELEMENTS
& TENDERING PROCESS

CPM 3RD SEMETER


CONTRACTS & ELEMENTS
ELEMENTS OF CONTRACTS & PROCESS OF
CONTRACTING
TENDER STRUCTURE (RATE CONTRACT, LUMP
SUM CONTRACT, TURNKEY, EPC AND BOT
CONTRACTS)
PREPARATION OF SOUND TENDER
DOCUMENTS, PROCESS OF DEVELOPING
TENDER DOCUMENT FOR DIFFERENT TYPES OF
CONTRACTS
CONTRACTS & ELEMENTS
TENDER CONTENT AND LEGAL SANCTITY
TENDERING PROCESS (RIGHTS AND
OBLIGATIONS) IN TENDERING PROCESS OF
VARIOUS TYPES
PROCUREMENT OF TENDER DOCUMENTS
CONTRACT?
1. A promise enforceable by law- to do
something or to refrain from doing something
2. Making of a contract requires the mutual assent of
two or more persons, one making an offer and
another accepting it..

3. If one of the parties fails to keep the


promise, the other is entitled to legal recourse.
LAW OF CONTRACT-SEEKS ANSWERS TO

WEATHER a contract exists?

WHAT the meaning of it is ?


WHETHER a contract has been broken?, and if so:

WHAT compensation is due the injured party?


INDIAN CONTRACT ACT 1872

Part 1: General Principles of Law of Contract

Part 2: Special kinds of Contracts such as:


(1) Indemnity and Guarantee
(2) Bailment and Pledge
(3) Agency
DEFINITIONS (Section 2) Common Law Countries
1.Offer-or Proposal
2.Acceptance (Time for acceptance-Any Time)

3. Promise
4. Promisor and promisee

5. Consideration
DEFINITIONS (Contd..)
6.Agreement
7. Voidable Agreement
8. Contract
9. Voidable contract
10. Void contract
OFFER OR PROPOSAL

When one person signifies to another his willingness


to do or to abstain from doing anything,
with a view to obtaining the assent of that other
person either to such act or abstinence,
he is said to make a proposal.
ACCEPTANCE

When the person to whom the proposal


is made, signifies his assent there to, the
proposal is said to be accepted.
PROMISE

A Proposal when accepted becomes a promise.


In simple words, when an offer is accepted it
becomes promise.
PROMISOR & PROMISEE

The person making the proposal is called the


"promisor", and the person
accepting the proposal is called "promisee",
WHAT IS CONSIDERATION?
When at the desire of the promisor, the promisee or any
other person has done or abstained from doing something
or does or abstains from doing something or
promises to do or abstain from doing something,
such act or abstinence or promise is called a
consideration for the promise.
Price paid by one party for the promise of the other Technical
word meaning QUID-PRO-QUO i.e. something in
return.
AGREEMENT

Every promise and set of promises forming the


consideration for each other. In short,
agreement = offer + acceptance
VOID AGREEMENT & CONTRACT

An agreement NOT enforceable by law is void.

An agreement enforceable by Law is a


contract.
VOIDABLE CONTRACT
An agreement is a voidable contract if it is
enforceable by Law at the option of one or more
of the parties there to (i.e. the aggrieved party), and
not enforceable by Law at the
it is

option of the other or others


FIVE ESSENTIAL ELEMENTS -VALID
CONTRACTS(SECTION 10 INDIAN CONTRACTS ACT
All agreements are contracts, if they are made
by the free consent of the parties, capacity of
parties to contract, for a lawful consideration
with a lawful object, and not hereby expressly to be
void.[SECTION 10]
WHAT ARE TERMS & CONDITIONS FOR AN
AGREEMENT TO BECOME A CONTRACT?
1. PROPOSAL AND OBJECT OF AGREEMENT
MUST HAVE LAWFUL OBJECT. ILLUSTRATION?

2. MUTUALLY AGREED OFFER AND


ACCEPTANCE-LAWFUL (OFFER
MADE/ACCEPTED WITH INTENTION OF
CREATING A LEGAL RELATIONSHIP) (Contd..)
3. LAWFUL CONSIDERATION (TOTAL
ABSENCE OF REAL AND LAWFUL
CONSIDERATION MAKES IT
UNENFORCEABLE)
4. COMPETENT CONTRACTING PARTIES-NOT
DISQUALIFIED (INSANITY, INFANCY, UNDER
COERCION)
5. CONTRACT COMPLETION TIME (TIME OF
ESSENCE, IF SO EXPRESSED IN THE
AGREEMENT)
TEN ELEMENTS OF A CONTRACT
1. Minimum TWO Parties
2. Proper Offer& Acceptance
3. Capacity/Competency of parties to Contract
4. Free Consent
5. Certainty, Possibility Of Performance
6. Agreement not declared void or illegal
7. Lawful Consideration
8. Lawful Object and Agreement
9. Intention To Create Legal Relationships
10.Legal Formalities
1. MINIMUM TWO PARTIES

MINIMUM TWO PARTIES NEEDED.

ONE PARTY MAKES AN OFFER & SECOND PARTY


ACCEPTS IT
2. PROPER OFFER AND ACCEPTANCE

There must be an agreement based on a lawful offer


made by person to another and lawful acceptance of
that offer by the latter.
[Sections 3 to 9 of the Contract Act, 1872 Rules for making valid
acceptance].
3. Competency of parties to Contract
In order to make a valid
contract the parties to it must be
competent to be contracted. According to section 11
of the Contract Act, a person is considered to be
competent to contract if he satisfies the following criterion:
The person has reached the age
of majority.
The person is of sound mind.

The person is not disqualified from contracting by any


law.
4. Free Consent
To constitute a valid contract there must be free and
genuine consent of the parties to the contract.
It should not be obtained by misrepresentation, fraud,
coercion, undue influence or mistake.
5. Lawful Object and Agreement
To constitute a valid contract the object of the
agreement must not be illegal or unlawful.
5. Certainty, Possibility Of Performance

Terms must NOT be Vague or Uncertain-if Agreement Vague,


meaning uncertain, cannot be enforced. Terms of Agreement
such that it is capable of Performance. Agreement to do an
Impossible act is VOID and NOT enforceable by Law
7. Lawful consideration
An agreement to form a valid contract should be
supported by consideration.

Consideration means something in return (quid pro


quo). It can be cash, kind, an act or abstinence. It can
be past, present or future. However, consideration

should be real and lawful and not fictional.


6. Legal Obligations
When the two parties enter into an agreement, there must
be intention to create a legal relationship
between them. If there is no such intention on the part of
the parties. There is no contract between them.
Agreements of a social or domestic nature do not
contemplate legal relationship; as such they are not
contracts.
8. Lawful Object
Object of Agreement must be Lawful. ???
Agreement is Unlawful if it is:
a. Illegal
b. Immoral
c. Fraudulent
d. Of nature, if permitted, it would defeat provisions of any Law

e. Causes injury to the person or property to another


f. Opposed to public policy
9. Agreement not declared void or illegal

Agreements which have been expressly declared


void or illegal by law are not enforceable at law;
hence they do not constitute a valid contract.
10. Legal Formalities
Contract may be Oral or in Writing. Certain Contracts are
required to be in WRITING and even REGISTERED-where
the law requires that an agreement to be put in writing
and registered. Example?

Indian Trust Act or Indian Partnership Act


requires creation of Trust or Partnership
should be reduced to writing.
PROCESS OF CONTRACTING
WHAT IS THE BASIS OF PROPER CONTRACT?

1. ON THE BASIS OF VALIDITY

2. THE BASIS OF FORMATION

3. ON THE BASIS OF PERFORMANCE


1. ON THE BASIS OF VALIDITY?

Valid contract-which can be enforced by Law.


Void contract-ceases to be enforceable: against
public policy.
Voidable contract-Not enforceable at the option
of party/parties to the contract. (without consent)
Illegal contract- Forbidden by Law. Void ab initio
Unenforceable contract-Technically illegal
2. ON THE BASIS OF FORMATION ?
EXPRESS CONTRACT- TERMS OF CONTRACT EXPRESSLY
AGREED UPON IN WORDS (WRITTEN OR SPOKEN)

IMPLIED CONTRACT-INFERRED FROM THE ACTS OR


CONDUCT OF THE PARTIES OR FROM THE
CIRCUMSTANCES OF THE CASES.

QUASI CONTRACT-QUASI CONTRACTS ARE STRICTLY


NOT CONTRACTS AS THERE IS NO INTENTION OF
PARTIES TO ENTER INTO A CONTRACT. [EG.
REIMBURSEMENT OF PERSON PAYING MONEY DUE TO
ANOTHER, IN PAYMENT OF WHICH HE IS INTERESTED]
3. ON THE BASIS OF PERFORMANCE?
EXECUTED CONTRACT- BOTH THE PARTIES HAVE PERFORMED THEIR
RESPECTIVE OBLIGATION.

EXECUTORY CONTRACT-WHERE ONE OR BOTH THE PARTIES TO THE


CONTRACT HAVE STILL TO PERFORM THEIR OBLIGATIONS IN FUTURE.
(PARTIALLY PERFORMED)

UNILATERAL CONTRACT- ONE PARTY HAS TO PERFORM HIS


OBLIGATION AT THE TIME OF THE FORMATION OF THE CONTRACT.
OTHER PARTY HAD ALREADY PERFORMED.

BILATERAL CONTRACT- BOTH PARTIES HAVE OUTSTANDING


OBLIGATIONS TO PERFORM.
STRUCTURE OF CONTRACTS?
A CONTRACT SHALL BE STRUCT IN SUCH A WAY THAT IT IS
LAWFULLY POSITIONED, PERFORMED AND PROTECTED
STRUCTURE OF CONSTRUCTION CONTRACTS
ON WHAT DOES STRCUTURE OF CONTRACTS
DEPEND?
PARTIES INVOLVED
PURPOSE
LOCATION
COMMERCIAL, PRACTICAL AND FINANCING
CONSIDERATIONS
LEGAL-CONSTRAINTS IMPOSED
WHAT ARE MAJOR CONTRACT STRUCTURE?

TRADITIONAL CONTRACT STRUCTURE


WORK PACKAGES STRUCTURE
DESIGN & BUILD-EPC CONTRACT STRUCTURE
MANAGEMENT CONTRACTING STRUCTURE
CLIENTN
T

DESIGN MAIN
CONTRACTOR
SUB-
CONTRACTUAL-DOTTED LINE
CONTRACTOR
CONTROL-FULL LINE

TRADITIONAL STRUCTURE
OF PROCUREMENT
EXPLAIN THE PHASES OF TRADITIONAL METHOD DESIGN-
BID-BUILD?
THREE PHASES:
PHASE 1-DESIGN AND BID DOCUMENT PREPARATION
PHASE 2-BIDDING AND COST COMMITMENTS
PHASE 3-HIRING & AWARD
PHASE 4-CONSTRUCTION
WHAT ARE THE PROS AND CONS OF A TRADITIONAL
METHOD?
PROS

CLEAR ROLES-EACH PARTY


DEFINITIVE COMPLETION-DESIGN PRIOR TO
CONSTRUCTION
LINEAR
TIGHT BUDGET CONTROL-LUMP SUM
CONS
LENGTHY-DESIGN AND CONSTRUCTION SEPARATED.
RESTRICTS COMMUNICATION
CHANGES AND DELAYS MORE LIKELY
MORE CLAIMS AND LITIGATION THAN ALL OTHERS
PUT TOGETHER
NOT SUITED TO PROJ FINANCED PROJECTS-GREATER
RISK EXPOSURE TO LENDERS-DUE UNCERTAINTY OF
PRICE, COMPLETION DATE/PERFORMANCE
EXPLAIN WHAT IS A WORK PACKAGES
STRUCTURE?
A PROJECT COMPANY HAS SEPARATE CONTRACTS WITH
VARIOUS CONTRACTORS FOR DIFFERENT TYPES OF
WORK
ONE CONTRACT WITH A DESIGNER AND SEPARATE
CONTRACTS WITH OTHER CONTRACTORS DOING
MAJOR PORTIONS OF THE WORKS
WHAT ARE THE ADVANTAGES/DISADVANTAGES?
PROS
GREATER CONTROL OVER CRITICAL PACKAGES OF WORKS
ALL EGGS NOT IN ONE BASKET
RISKS ARE DISTRIBUTED
IDEAL FOR WORKS INVOLVING SPECIALIST PACKAGES
APPARENTLY(?) LESS COSTLY!!
CONS

LENGTHY-DESIGN AND CONSTRUCTION SEPARATED.


RESTRICTS COMMUNICATION
CHANGES AND DELAYS MORE LIKELY
MORE CLAIMS AND LITIGATION THAN ALL OTHERS
PUT TOGETHER
LAWS IN SOME COUNTRIES DO NOT PERMIT SUCH
SPLITTING OF WORK
WORK PACKAGE STRUCTURE

DESIGNERS/CON CLIENT/OWNER
SULTANTS

JOINERY/ EXTERNAL/
MEP
RCC MASONARY WOODWO FINISHING LANDSCAPI
SERVICES
RK NG
WHAT IS THE SEQUENCE OF EPC?
OWNER HIRES ARCHITECT & CONSTRUCTION
MANAGER-ADVISOR AT NEARLY SAME
TIME. ARCHITECT COMPLETES SCHEMATIC
DRAWINGS.
CONSTRUCTION MANAGER-ADVISOR REVIEWS
SCHEMATIC DRAWINGS/UNNECESSARY COSTS
& ERRORS, PERFORMS SCHEMATIC BUDGETS
TO VERIFY PROJECT ON-TRACK WITH OWNERS
GOALS.
CONTRACTUAL-DOTTED LINE
CONTROL-FULL LINE
CLIENT

MAIN
CONTRACTOR
(OWN DESIGN
TEAM)
SUB-
CONTRACTOR
CONTRACTUAL LINK-DOTTED LINE
CONTROL-FULL LINE

DESIGN & BUILD


EXPLAIN WITH A DIAGRAM AN EPC -TURN KEY
ENGINEERING, PROCUREMENT &
CONSTRUCTION
WHAT DO YOU UNDERSTAND BY EPC
STRUCTURE?
FINANCING
BANKABLE-FIRST CHOICE OF BANKERS LUMP
SUM TURN KEY. FIXED TIME
TURNKEY
DESIGN & CONSTRUCTION
MOSTLY USED IN LARGE INFRASTRUCTURE
PROJECTS
UNDER WHAT CIRCUMSTANCES SHOULD YOU GO
FOR EPC & WHAT ARE THE PROS/CONS?
IMPERATIVES-EPC
INITIAL TASK FOR A PROJECT COMPANY

PRECISE REQUIREMENTS ON PERFORMANCE

CLIENTS CHECKER-REVIEW DESIGNS

LENDERS CHECKER-REVIEW DESIGNS


PROS-EPC
ACCOUNTABILITY
FIXED CONTRACT PRICE
GUARANTEED COMPLETION DATE
BANKABILITY
INCREASED EFFICIENCY
CONTRACTOR CLAIMS
HIGHER DESIGN STANDARDS
CONS-EPC
MORE COSTLY
TENDERING COSTS
CONTRACT PRICE
CONTROL OVER DESIGN
IMPROPER RISK ALLOCATION
WHAT DO YOU UNDERSTAND BY MANAGEMENT
CONTRACTING STRUCTURE?
IF PROJ COY CANNOT HAVE RESOURCES TO MANAGE EPC
CONTRACTOR OR WORK PACKAGES CONTRACTORS..
THE OWNER HOLDS MULTIPLE CONTRACTS:
WITH THE DESIGNER (BASED ON QUALIFICATIONS),
THE CONSTRUCTION MANAGER (BASED ON QUALIFICATIONS),
AND THE CONSTRUCTION LABOUR (BASED ON LOWEST BID).

CONSTRUCTION MANAGER OFTEN MANAGES ALL THE


CONTRACTS ON BEHALF OF THE OWNER, MAKING THIS DELIVERY
VERY SIMILAR TO THE DESIGN-BUILD DELIVERY METHOD.
WHAT IS MANAGEMENT CONTRACTING?

INADEEQUACY OF RESOURCES TO MANAGE

CLIENT ENGAGES A SPECIALIST PROJECT


MANAGER

PROJECT MANAGER ACTS AS MANAGEMENT


CONTRACTOR
WHAT ARE PROS AND CONS?
PROS-MANAGEMENT CONTRACTING
RISK MINIMISATION

TIME AND BUDGET COMPLETION

SINGLE POINT ACCOUNTABILITY A LA EPC PLUS

ADVANTAGE OF EXPERT CONTRACTORS FOR PACKAGES


CONS-MANAGEMENT CONTRACTING
LEGAL RESTRICTION-SUBCONTRACTING
MANAGEMENT CONTRACTOR-MAIN PART OF
CONSTRUCTION WORK
LEGAL ISSUES- SPLITTING WORK IN CERTAIN
COUNTRIES/ORGANISATIONS
TIME CONSUMING
EXACT OPPOSITE OF TURN KEY
OWNERS RISK LIABILITY MORE
CLIENT

PROFESSIONAL MANAGEMENT
TEAM CONTRACTOR

CONTRACTUAL LINK-DOTTED LINE


CONTROL-FULL LINE
SUB-
CONTRACTORS

MANAGEMENT
CONTRACTING
Construction Manager-Advisor
TIME LINE & FEATURES (CONTD..)
ARCHITECT COMPLETES DRAWINGS,
CONSTRUCTION MANAGER CREATES A FINAL
BUDGET AND THEN BUNDLES THE PROJECT
INTO BID PACKAGES TO MAXIMIZE
COMPETITION.
PARTICIPATION OF LOCAL CONTRACTORS, AS
APPROPRIATE IS PROMOTED.
INEXPERIENCED CLIENT: ?

APPOINTS AN ARCHITECT/ENGINEER WHO


SELECTS REST OF DESIGN TEAM-QUANTITY
SURVEYOR, STRUCTURAL ENGINEER ETC.
EXPERIENCED CLIENT:?
APPOINTS ALL DIRECTLY
BILLS OF QUANTITIES PRODUCED & TENDERERS ASKED TO
BID
BIDS RECEIVED & AWARDED (LOWEST IN PUBLIC WORKS)
LOWEST WORKED WENT BY LETTER OF CONTRACT-
DEMANDING EXTRA.
RESULT ?
CONFRONTATION DESIGN TEAM & CONTRACTOR
CLIENT PICKING UP EXTRA BILL.
WHAT IS NOVATED DESIGN CONTRACT
STRUCTURE?
GENERALLY INTERNATIONAL PROJECTS.
PROJ COY INITIALLY HIRES A DESIGNER TO DESIGN THE FACILITY.
LATER ON ENGAGEMENT OF A CONSTRUCTION CONTRACTOR-
NOVATES THE DESIGN CONTRACT TO CONTRACTOR (MAKING DESIG
CONTRACTOR A NOMINATED CONTRACTOR).
THUS CONVERTS THE CONTRACT WITH CONSTRUCTION
CONTRACTOR AS AN EPC.
USED WHEN PROJ COY WANTS THE DESIGN DONE QUICKLY DUE
TIME CONSTRAINTS AND TIGHT CONTROL OVER INITIAL DESIGN.
DISCUSS ADVT AND DISADVANTAGES OF
NOVATED STRUCTURE
ADVANTAGES:
SIMILAR TO EPC. BUT BETTER INITIAL DESIGN CONTROL WITH PROJ
COY/CLIENT.
ALSO CHOICE OF DESIGNER WITH CLIENT.
BETTER FOR FAST TRACK PROJECTS.
DISADVANTAGE-IN ADDITION TO EPC:
SOME COUNTRIES (CHINESE) HAVE RESTRICTIONS ON NOMINATED
SUBCONTRACTING.
IF DESIGNER SUB CONTRACTED PART OF DESIGN WORK-FEASIBILITY ETC.-
SUB CONTRACTORS BECOME PART OF CONSTRUCTION CONTRACTOR.
SPLIT OFF SHORE/ON SHORE CONTRACT
STRUCTURE
DRIVEN BY TAXATION-MINIMISES LOCAL TAXES TO A CONTRACTOR
FOR SERVICES AND EQPT PROCURED OFFSHORE.
TAX SAVINGS PASSED ON TO PROJ COMPANY.
WORKS SPLIT INTO SEPARATE CONTRACTS WITH AN SHORE
CONTRACTOR-CONSTRUCTION, T&C OF ONSHORE ACTIVITIES.
OFFSHORE CONTRACTOR-REPONSIBLE FOR DESIGN SERVICES & SUP
OF IMPORTED EQPT.
KEY TAKEAWAY LESSONS

EARLY CONSIDERATION-HOW TO STRUCTURE THE


CONSTRUCTION CONTRACT: 1. BETTER RISK
CONTRACTUAL MANAGEMENT 2. TYPE OF
CONSULTANTS AND CONTRACTORS TO BE HIRED?
IN PRACTICE-MAJOR PROJECTS ENGAGE
CONSORTIA WHICH COMPRISE KEY CONTRACTORS
AND DESIGNERS.
RESTRICTION ON SPLITTING
INTO PACKAGES-KEY EFFECT EMPLOYER
(PROJECT COMPANY) OF LARGE PROJECT TO
SOURCE A GENERAL CONTRACTOR WITH ALL THE
NECESSARY EXPERTISE, FUNDING AND
RESOURCES TO CARRY OUT THE WORKS.
RESTRICTION ON SUB CONTRACTING

IMPOSES LIMITS ON THE USE OF


NOVATED DESIGN CONTRACT
STRUCTURE, MANAGEMENT
CONTRACTING STRUCTURE, AND
NOMINATED SUBCONTRACTORS.
RISK MANAGEMENT PERSPECTIVE

IN-DEPTH KNOWLEDGE ON TECHNIQUES OF


CONTRACTUAL RISK MANAGEMENT IN
INDIA: EPC CONTRACT STRUCTURE
PROVIDES A GOOD FRAMEWORK FOR RISK
MANAGEMENT.
MAJOR TYPES OF CONTRACTS

1. FIXED PRICE OR LUMP SUM CONTRACT


FIXED PRICE WITH OR WITHOUT ESCALATION PRICE ADJUSTMENT
FIXED PRICE WITH INCENTIVE TARGETS

2. ITEM RATE OR UNIT PRICE CONTRACT


3. PERCENTAGE RATE CONTRACT
4. LABOUR CONTRACTS
SPECIAL CONTRACTS
5. COST PLUS
COST PLUS FIXED FEE
COST PLUS GUARANTEED MAXIMUM

6. TARGET PRICE CONTRACTS


6. BUILD OPERATE AND TRANSFER
BUILD, OPERATE AND TRANSFER (BOT)
BUILD, OPERATE, OWN (OWN)
DESIGN, BUILD, OPERATE AND TRANSFER
DESIGN, FUND, BUILD, OPERATE AND TRANSFER
METHOD OF TENDERING
OMPETITIVE/OPEN TENDER
LIMITED OR CLOSED TENDER /SELECTIVE
TENDER
SINGLE TENDER
NEGOTIATED TENDER
CONTRACT TYPES
I-METHOD OF AWARD
1. Competitive bidding-OPEN OR
SELECTIVE
formally advertised public work
selective invitation for private work
awarding of contracts by:
Lowest responsible bid or
Best value i.e.: technical score
price or
price + time(ft), and other
variations
CONTRACT TYPES
I-Method of Award
2. Negotiated contracts
Generally private work
Benefits include flexibility of pricing arrangement
Often used on projects of large size and great
complexity
Owner may value expertise and integrity of a
particular contractor and can award contract
without competition that may otherwise exclude
that contractor from the work
TYPES OF CONTRACTS
II-Method of Pricing
Fixed-price
1. Lump sum
Traditional, single fixed price
Predetermined price that includes
profit, overhead, and all other costs
Greatest risk to contractor resulting
in a higher markup (the greater the
risk, the higher required rate of
return )
Most common contract form
TYPES OF CONTRACTS
II-Method of Pricing
Fixed-price
2. Unit-price contract
Prices of specified units of work are
fixed or predetermined
Actual cost to the owner will vary
with actual quantities placed
Best used when details and general
character of the work are known,
but quantities are subject to
variation
Risk of unbalanced bids
TYPES OF CONTRACTS
II-Method of Pricing
Cost-plus
Contractor agrees to perform the work
for a fixed or variable fee covering profit
and home office costs (general overhead)
Field costs are reimbursable at actual cost
Used when:
nature of the work or physical
conditions are unpredictable
scope is unknown or difficult to define
TYPES OF CONTRACTS
II-Method of Pricing
Cost-plus (Contd)
All cost-plus contracts depend on
cooperation among A/E, owner, and
contractor
Record keeping and timely evaluation are
extremely critical
Detail record of labor hours and salaries,
material and equipment must be
maintained
Good application for professional CM
services
TYPES OF CONTRACTS
Types of Cost-plus Contracts
3. Cost plus fixed %
Fixed % based on portion or all of
reimbursable costs
Used in construction involving new
technology or extremely pressing needs
Owner assumes risk
Contractor cooperation very high
Little or no incentive for cost savings
TYPES OF CONTRACTS
Types of Cost-plus Contracts
4. Cost plus fixed fee
More incentive for cost savings
Incentive for timely completion
Risk shared by owner and contractor
5. Cost plus variable %
Also called sliding scale %
Keeps fee in line with type & volume of work
Fee becomes progressively smaller on work that is
repetitive, requires little or no re-engineering, re-
planning, or additional layout
TYPES OF CONTRACTS
Types of Cost-plus Contracts
6. Target estimate
May be based on dollar amounts, man-hours, schedule,
or combination
Cost savings or overrun shared by owner and contractor
at predetermined split
Cost underrun increases contractor profit, overrun
decreases profit
7. Guaranteed maximum price
Used with well defined scope of work
Particularly suitable for turnkey operation
Contractor or design-builder assumes all risk
Provisions to share savings can be applied