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Lec 8 (Contract Types)

This document discusses four main types of construction contracts: 1) Lump sum, 2) Cost-plus-fee, 3) Guaranteed maximum price, and 4) Unit cost. It provides details on the key aspects of each contract type, including how the contractor's price is determined and how risk is allocated. Lump sum contracts provide a fixed total price upfront but are limited to projects with well-defined scopes. Cost-plus-fee contracts reimburse costs plus a fee but shift more risk to the owner. Guaranteed maximum price contracts provide cost certainty to the owner with incentives for the contractor to finish under budget. Unit cost contracts involve estimating quantities of work items but the final cost is unknown until completion.

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Usman Ali Khan
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179 views

Lec 8 (Contract Types)

This document discusses four main types of construction contracts: 1) Lump sum, 2) Cost-plus-fee, 3) Guaranteed maximum price, and 4) Unit cost. It provides details on the key aspects of each contract type, including how the contractor's price is determined and how risk is allocated. Lump sum contracts provide a fixed total price upfront but are limited to projects with well-defined scopes. Cost-plus-fee contracts reimburse costs plus a fee but shift more risk to the owner. Guaranteed maximum price contracts provide cost certainty to the owner with incentives for the contractor to finish under budget. Unit cost contracts involve estimating quantities of work items but the final cost is unknown until completion.

Uploaded by

Usman Ali Khan
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Lecture 8:

Contract Types
CED-307
Construction Planning & Management

Engr. Muhammad Asif


Department of Civil Engineering
UCE&T, B Z University, Multan

1
Contract Types

There are four basic types of construction


contracts:
1.lump sum,
2.cost-plus-fee,
3.guaranteed maximum price,
4.unit cost.

2
Contract Types (Cont’d)

These types differ in two fundamental ways:


 How the contractor's price is quoted to the
owner;
 How risk is allocated to each of the parties

3
1. Lump Sum Contracts

 In a lump-sum contract, the contractor agrees to perform a


stipulated (require by contract) job of work in ex­change for a fixed
sum of money.
 The satisfactory completion of the work for the stated amount
remains the obligation (an agreement enforceable by law) of the
contractor;
Table illustrates the various scenarios.

4
Lump Sum Contracts (Cont’d)

 Lump Sum Contract is popular with owners as the total cost of the
project is known in advance.

 However, its use is limited, of necessity, to construction programs


that can be accurately and completely described at the time of
bidding or negotiation.

 For this reason, lump-sum contracts are widely used for residential
and building construction.

 If the work is of such a type that its nature and quantity cannot be ac­
curately determined in advance of field operations, the lump-sum
type of contract is not suitable.

5
2. Cost-Plus-Fee Contracts
 Under a cost-plus-fee contract, Contractor will be reimbursed for actual
project cost plus an additional amount for profit and overhead

 This type of contract is used when total construction cost to the owner
can not be known until completion of project.

 For the contractor, this type contract guarantees a profit ;

 For the owner, a significant risk under this arrangement ;

 Cost-Plus-Fee contract shifts risk from contractor to owner;

 It is essential that the contract clearly define what is considered


reimbursable as a cost and what is included in overhead and profit

6
Cost-Plus-Fee Contracts (Cont’d)

Table illustrates this scenario for a Rs.8,000,000/- budget.

7
3. Guaranteed Maximum Price
Contract (GMP)

 In cost-plus-type of contract , an accurate cost of the project is not


known until after completion of the construction.

 A solution to this problem has been to provide for a guaranteed


maximum price (GMP) to the owner.

 In GMP Contract, the contractor guarantees that the project will be


constructed in full accordance with the drawings and specs and the
cost to the owner will not exceed some total upset price (lowest
price).

 In return for its services, the contractor receives a prescribed fee.

8
Guaranteed Maximum Price Contract (GMP) (Cont’d)

 If the cost of the work exceeds the assured maximum, the


contractor pays for the excess.

 The determination of the upset cost (lowest cost) by the contractor


must be based on careful estimates made from complete drawings
and specifications.

 An incentive for the contractor to keep costs below the guaranteed


maximum is sometimes provided by a bonus clause stating that the
contractor and the owner will share any savings.

 The owner may offer splits in the 60/40 range or even 50/50 range.

9
Guaranteed Maximum Price Contract (GMP) (Cont’d)

 Contracts providing for a fixed fee with a guaranteed maximum


price are sometimes competitively bid in a manner similar to that
used for lump-sum contracts.

Table GMP Contract

10
4. Unit Price Contract
 A unit-price contract is based on estimated quantities of defined
items of work and costs per unit amount of each of these work
items.

 However, the total sum of money paid to the contractor for each
work item remains an indeterminable factor until completion of the
project, because payment is made to the contractor based on units
of work actually done and measured in the field.

 Therefore, the owner does not know the exact ultimate cost of the
construction until completion of the project.

11
Unit Price Contract (Cont’d)

 The contractor is obligated to perform the quantities of


work actually required in the field at the quoted unit
prices, whether they are greater or less than the
architect-engineer's estimates.

 Unit-price contracts offer the advantages of open


competition on projects involving quantities of work that
cannot be accurately forecast at the time of bidding or
negotiation.

12
Unit Price Contract (Cont’d)

Estimated Contract Unit Bid Amount Actual Final Cost


Work Item
Quantities* Prices (Rs.) (Rs.) Quantities (Rs.)

Trench
14000 CY 60 840000 13500 810000
Excavation
9// Pipe 1750 LF 300 525000 1750 LF 525000

Compacted fill 4500 CY 450 2025000 4700 2115000

Backfill 9500 CY 50 475000 9800 CY 490000

Total 3865000 3940000

*Provided by the owner

13
Note:
“The project delivery systems and
commercial contract types can
cross match”

14

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