Lump Sum Contract

In a lump sum contract, the owner 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. Beside the fixed
lump sum price, other commitments are often made by the contractor in the form of submittals such as a
specific schedule, the management reporting system or a quality control program. If the actual cost of the
project is underestimated, the underestimated cost will reduce the contractor’s profit by that amount. An
overestimate has an opposite effect, but may reduce the chance of being a low bidder for the project.

Unit Price Contract

In a unit price contract, the risk of inaccurate estimation of uncertain quantities for some key tasks has
been removed from the contractor. However, some contractors may submit an “unbalanced bid” when it
discovers large discrepancies between its estimates and the owner’s estimates of these quantities.
Depending on the confidence of the contractor on its own estimates and its propensity on risk, a
contractor can slightly raise the unit prices on the underestimated tasks while lowering the unit prices on
other tasks. If the contractor is correct in its assessment, it can increase its profit substantially since the
payment is made on the actual quantities of tasks; and if the reverse is true, it can lose on this basis.
Furthermore, the owner may disqualify a contractor if the bid appears to be heavily unbalanced. To the
extent that an underestimate or overestimate is caused by changes in the quantities of work, neither error
will effect the contractor’s profit beyond the markup in the unit prices.

Cost Plus Fixed Percentage Contract

For certain types of construction involving new technology or extremely pressing needs, the owner is
sometimes forced to assume all risks of cost overruns. The contractor will receive the actual direct job
cost plus a fixed percentage, and have little incentive to reduce job cost. Furthermore, if there are
pressing needs to complete the project, overtime payments to workers are common and will further
increase the job cost. Unless there are compelling reasons, such as the urgency in the construction of
military installations, the owner should not use this type of contract.

Cost Plus Fixed Fee Contract

Under this type of contract, the contractor will receive the actual direct job cost plus a fixed fee, and will
have some incentive to complete the job quickly since its fee is fixed regardless of the duration of the
project. However, the owner still assumes the risks of direct job cost overrun while the contractor may
risk the erosion of its profits if the project is dragged on beyond the expected time.

Cost Plus Variable Percentage Contract

For this type of contract, the contractor agrees to a penalty if the actual cost exceeds the estimated job
cost, or a reward if the actual cost is below the estimated job cost. In return for taking the risk on its own
estimate, the contractor is allowed a variable percentage of the direct job-cost for its fee. Furthermore, the
project duration is usually specified and the contractor must abide by the deadline for completion. This
type of contract allocates considerable risk for cost overruns to the owner, but also provides incentives to
contractors to reduce costs as much as possible.

Target Estimate Contract

This is another form of contract which specifies a penalty or reward to a contractor, depending on
whether the actual cost is greater than or less than the contractor’s estimated direct job cost. Usually, the
percentages of savings or overrun to be shared by the owner and the contractor are predetermined and the
1
project duration is specified in the contract. Bonuses or penalties may be stipulated for different project
completion dates.

Guaranteed Maximum Cost Contract

When the project scope is well defined, an owner may choose to ask the contractor to take all the risks,
both in terms of actual project cost and project time. Any work change orders from the owner must be
extremely minor if at all, since performance specifications are provided to the owner at the outset of
construction. The owner and the contractor agree to a project cost guaranteed by the contractor as
maximum. There may be or may not be additional provisions to share any savings if any in the contract.
This type of contract is particularly suitable for turnkey operation.

Bid bond

A bid bond is issued as part of a bidding process by the surety to the project owner, to guarantee that the
winning bidder will undertake the contract under the terms at which they bid.

A bid bond is important to show proof of guarantee to the project owner that you can comply with the bid
contract and also that you can accomplish the job as laid out in the contract. A bid bond is a guarantee
that you provide to the project owner stating that you have the capability to take on and implement the
project once you are selected during the bidding process. Normally, project owners do not know if a
contractor is financially stable or has the necessary resources to take on a project. However, because of a
bid bond, they will be more comfortable to award a project to a contractor knowing that if the project
fails, they can collect compensation from the surety bond. The bidder is reimbursed for the bid bond if it
does not receive the contract.

To secure any claims by the party inviting the tender on the tenderer in the event of withdrawal of the bid
before its expiry date or if the bid is modified unilaterally – or if the tenderer, upon being awarded the
contract, refuses to sign the contract or provide further guarantees on request.

Guarantee Amount
In general 2% to 5% of the value of the contract.

Performance Bond

• Performance Bond guarantees for the satisfactory completion of a project.

• A bond of the contractor in which a surety guarantees to the owner that the work will be performed in
accordance with the contract documents; frequently combined with the labor and material payment
bond.
• A performance bond is a form of security provided by a contractor to a developer and consists of an
undertaking by a bank or insurance company to make a payment to the developer if the contractor
becomes insolvent or defaults under the contract.

Guarantee amount
Frequently 5% to 20% of the value of the contract.

Quantum meruit

The expression quantum meruit means "the amount he deserves" or "what the job is worth". Essentially,
quantum meruit is an action for payment of the reasonable value of services performed. It is used in
various circumstances where the court awards a money payment that is not determined, subject to what is
said below, by reference to a contract.

2
When a person employs another to do work for him, without any agreement as to his compensation, the
law implies a promise from, the employer to the workman that he will pay him for his services, as much
as be may deserve or merit. In such case the plaintiff may suggest in his declaration that the defendant
promised to pay him as much as he reasonably deserved, and then aver that his trouble was worth sucli a
sum of money, which the defendant has omitted to pay. This is called an assumpsit on a quantum meruit.

When there is an express contract for a stipulated amount and mode of compensation for services, the
plaintiff cannot abandon the contract and resort to an action for a quantum meruit on an implied
assumpsit.

What is an ex-gratia payment?

Ex-Gratia payments are payments made without an obligation to pay. The words mean 'out of favor or
out of gratitude' Insurance Companies often make ex-gratia payments with an accompanying letter
marked 'Without Prejudice' These payments are made without the payer recognizing any liability to the
recipient of the funds.

Ex-gratia payments are made without legal acknowledgement of fault or liability. These types of
payments are used in lieu of financial settlements that imply wrongdoing or contractual responsibility.
The reasoning behind ex-gratia payments is by not admitting fault or wrongdoing, a defending litigant,
accused or contractually obliged entity can avoid higher costs arising out of acknowledgement of
responsibility, or fault.

Breach of Duty

Apart from these fundamental duties, people are also supposed to fulfill obligatory duties such as
honoring a contract or paying taxes. Any breach of duty is a tort, which means that it is a wrong doing
against which action can be bought against in the court of law. In a common parlance, a breach of duty
can be any dishonor, or a situation where a person abstains from fulfillment or performance of an
obligation or a known moral responsibility. It must be noted that breach of duty can be a legally
enforceable offense only if duty arises from agreement or contract, that has has been sealed with a lawful
consideration.

Breach of Duty: Contract

A contract in simple words is defined as an agreement that is legally enforceable. Such an agreement is
backed by effective and lawful consideration (money or money's worth). A simple transaction such as
buying a candy bar can also be treated as a contract and non payment of consideration can become a
breach of duty. The same principle also applies for the seller of candy as well. In fact, breach of duty
from a contract point of view is an important aspect of corporate law.

Workers Compensation
Workers' compensation insurance is statutorily required by all states of employers to cover injuries to
employees during the course and scope of employment.