Types of Construction Contracts | Lump Sum

Most Common Types of Construction Contracts

In this article we will discuss about most common types of construction contract. Also you can get an idea about advantages and disadvantage of that types of construction contract. In construction industry there are several no of contract such as; lump sum contracts, re-measurement contract, unit price contracts, cost plus contracts.

So be sure to bookmark this article to check out future posts to learn valuable information on the other sources as well.

Also you can share our valuable article with other professionals. By the end of the this articles, you will become familiar with types of construction contract and about advantages and disadvantage of that types of construction contract. In the future I have to planned to discuss lot of things related with quantity surveying practice and stay with our quantity surveying blog.

most common types of construction contract

Types of Contracts in Construction Project

Management
1-Lump Sum Contracts.
2-Unit Price Contracts.
3-Cost Plus Contracts.
4-Types and Materials Contracts

Lump Sum Contract

In Lump sum contract, the engineer or/and contractor agrees to do the described & specified project for a fixed price. Also named “Fixed Fee Contract”. Often used in engineering contracts.

A Lump Sum or Fixed Fee Contract is appropriate if the scope & schedule of the project are
sufficiently defined to allow the consulting engineer to estimate project costs.

Advantages of Lump Sum Contract

1. Lower financial risk to Client.
2. Higher financial risk to Contractor.
3. Minimum Owner supervision related to the quality & schedule.
4. The contractor has a higher incentive to achieve earlier completion & better performance.
5. Contractor selection is relatively easy.

Advantages of Lump Sum Contract

1. Changes difficult and costly. (but it usually is)
2. Need to substantially complete design prior to bidding.
3. Contractor is inclined to choose lowest methods/materials to comply with the specification.
4. Hard to build a relationship. Each project is unique.
5. Bidding expensive and lengthy.
6. Contractors sometimes add high contingency within each Schedule of Rate item

Unit Price Contract

Unit Price Contract is a construction contract type based on estimated quantities of items and unit prices (rates: hourly rates, the rate per unit work volume, etc.). In general, the contractor’s overhead and profit are included in the rate. The final price of the works is depending on the total quantities needed to carry out and complete the work. The Unit Price Contract is appropriate only for a project involving well-known resources but at the moment of the agreement unknown quantities which will be defined when the design & engineering or construction work is finished.

The unit price contract is based on the quantity of items included in the project and their unit prices initially estimated. The final cost of the project’s works depends on the quantity required to perform a task.

The unit price agreement is one of the best choices for construction or supplier projects where the contract documents can correctly identify the various kinds of items, but not their numbers.

It is not uncommon to combine a unit price contract with a Lump Sum contract or other types of agreements for parts of the project

Factors affecting unit price contracts,

Labor
Material
Overhead
Profit
Taxes
Permit and Inspection Costs

Advantages of Unit Price Contract

It makes the selection of a contractor is easy (the person with the cheapest unit price is usually chosen)
It increases the speed of the project as the contractor wants to finish as many units of work as soon as possible.
It allows the client to relate the cost of his project to tangible & measurable results (which are the units of work).

Disadvantages of Unit Price Contract

When using hours (or any other unit of measurable time, such as days) for unit pricing, the cost of the construction project may be limitless. That’s why in all these types of contracts, there is a maximum number of units that the vendor can charge the client with, and when this maximum number of units is exceeded, the cost of the unit is reduced. In any case, when an hour is used as a pricing unit, clients take all the risk in unit price contracts.

The quality of the work may suffer. Let’s take the example of the painting above, the faster the contractor finishes the job, the faster he’ll get paid, and that may result in sub-standard quality because he just wants to complete the construction works for another square meter of paint as fast as possible. Strict quality standards must be applied in order to avoid this issue.

Misleading bidding. Let’s say two contractors are bidding for a job, and each is using the
same pricing units, and one of them is cheaper than the other. Instinctively, the client chooses
the cheapest of the two. But the cheapest of these two appear to be slower or has a lower
quality of work, etc.

Cost Plus Contract

A contract agreement wherein the purchaser agrees to pay the cost of all labor & materials plus an amount for contractor overhead & profit (usually as a percentage of the labor and material cost). The contracts in construction may be specified as:

Cost Plus + Fixed Percentage Contract
Cost Plus + Fixed Fee Contract
Cost Plus + Fixed Fee of Guaranteed Maximum Price Contract
Cost Plus + Fixed Fee + Bonus Contract
Cost Plus + Fixed Fee Guaranteed Maximum Price and Bonus Contract
Cost Plus + Fixed Fee Agreement for Sharing Any Cost Savings Contract
Cost plus contracts are preferred when the scope of the work is indeterminate or highly uncertain & the kinds of labor, material & equipment needed are also uncertain. Under this arrangement, complete records of all time & materials spent by the contractor on the work must be maintained.

Advantages of Cost-Plus Contracts

They eliminate the risk for the contractor.
They allowing the focus to shift from the overall cost to the on the quality of work being done.
They cover all the expenses related to the project, so there are no surprises.

Disadvantages of Cost-Plus Contracts

They may leave the final cost up in the air since they can’t be predetermined.
They may lead to a longer timeline for the project.

Time and Materials Contracts

The contracts for time and materials (T&M) are a fixed and cost-reimbursing hybrid that is used in cases where there can be no clear statement of work. For example, if the size (the number of hours that the client needs) is not clear, set professional hourly rate is used (for instance fees and costs). In this kind of contract, a ceiling or a price that can not be exceeded is always a good idea to prevent overruns of heavy costs.


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