How many Types of contract in civil engineering?
Contract In law, a contract is a binding legal agreement that is
enforceable in a court of law. That is to say, a contract is an
exchange of promises for the breach of which the law will provide a
remedy According to legal scholar Sir John William Salmond, a
contract is "an agreement creating and defining the obligations
between two or more parties". Construction contract Formal
agreement for construction, alteration, or repair of buildings or
structures (bridges, dams, facilities, roads, tanks, etc.). A
construction contract is distinct from a contract to assemble,
fabricate, or manufacture. While construction contracts serve as a
means of pricing construction, they also structure the allocation
of risk to the various parties involved. The owner has the sole
power to decide what type of contract should be used for a specific
facility to be constructed and to set forth the terms in a
contractual agreement. It is important to understand the risks of
the contractors associated with different types of construction
contracts. 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 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.
