Construction Contracts

Types of contract:
a) Lumpsum Contract
b) Item rate contract
c) Lumpsum and schedule contract
d) Cost plus fixed fee contract
e) Cost plus percentage of cost contract
f) Special contracts

a) Lumpsum Contract: Contract to do entire work/project as per specification given by

the owner within stipulated money.
Suitability: Contracts having experience of executing similar kind of work. No Lumpsum
contract for any difficulty construction.
Pros: Easy to take decision whom to give the contract as it shows only lumpsum expenses
in the end (owner side). An internal alteration in planning by a contractor leads to more
profits as no work plan details are prescribed by the owner (Contractor side)
Cons: All gross details should be on table prior to the beginning of the project, any
additional construction may claim more money.

b) Item rate contract/ Scheduled contract: Contract to be executed based on

item rates. Suitability: A project divisible into various items. Public/Government
engineering works.
Pros: No detailed drawing/specification prior to awarding the contract, alteration of drawing
and quantities of individual items as per requirements. Payment can be made to the
contractor after completion of a specific item.
Cons: Total cost may increase substantially in the end. Additional staff to look after each
item of the work.
c) Lumpsum and Scheduled Contract: A lumpsum contract with some scheduled
specified for each item.
Suitability: Contractor has prior experience. Parallel estimation of cost more logically.
Pros: There is a cost ceiling of the project. Therefore the owner can decide whether to start,
defer or solve the project. No need to appoint staff accountable for payment release.
Cons: A thorough study of the project has to be done in order to prepare the contract
documents in every project. Nonscheduled extra item is often a source of dispute under this
fixed of circumstances.

d) Cost plus Fixed Fee Contract: Contracts when the scopre and nature of the work
is roughly obtained. It includes:
 A lumpsum approximate cost
 Nature of work
 Estimated time of construction
 Manpower
 Equipment requirements.

Fee for contractor doesn’t change with any fluctuation of actual cost.
Suitability: A project with no idea about the difficulties to be encountered. Contractors to
complete the job skillfully and expeditiously.
Pros: As in the fee for contractor is fixed and there is no upper bound as such as the cost of
construction, the contractor performs for the interest of the owner resulting good quality of
work.
 Contractor would be ready to take up the job before preparation of detailed
specification.
 Any required arrangements in design/drawing can be done during construction
without any disputes.
 As the contractor fee is fixed and no cost limit, work can be done speedily.
Cons: Cannot be adopted for any public/government construction because some strict norms
are difficult to follow in this context. The owner may face financial difficulty as the actual
total cost is unknown.
e) Cost plus percentage of cost contract: A percentage of construction cost
reported by the contractor is assured as the fees for the contractor.
Suitability: When cost is not an important factor, but quality matters.
Pros: Contractor invests more on quality improvement to spend more money.
Cons: Attracts corruption. Same as (d)

f) Special Contract:
i. Turnkey Contract: All kind of works (Civil, electrical, Mechanical etc.,) are controlled by
single contractor, who can hire some sub-contractor for execution of any special work.
Pros: A fully operational product/structure to handed over to the owner in the end of the
project.
Cons: Singly handed project leads to scope of poor quality.
ii. Package Contract: When two or more contracts are combined in a single one.
iii. Negative Contract: When cost or mode of execution are finalized between two parties
(owner and contractor). Most f the consultancies project come under this.
iv. Continuing Contract: Any new or additional contract with the same form and condition of
the existing one.
Pros: It can save time and money as no re-tendering required.
v. Running Contract: Contract to supply material
This is very much necessity based.
Runs for long time.
Payments based on supplied material.