TYPES OF CONTRACT
TYPES OF CONTRACT
2
2..11 IINNTTRROODDUUCCTTIIOONN
The client will usually take advice as to
The client will usually take advice as to what type of contract should be adopted for eachwhat type of contract should be adopted for each project, although Bill of Quantities contract is probably the most frequently used in Civil project, although Bill of Quantities contract is probably the most frequently used in Civil Engineerin
Engineering Construction contracts can g Construction contracts can be categorised under two be categorised under two major heading!major heading! ""ii## TTyyppe e oof f ppaayymmeennt t ssyysstteemmss
""iiii## TTyyppe e oof f oorrggaanniissaattiioonnss
2
2..22 TTYYPPE E OOF F PPAAYYMMEENNT T SSYYSSTTEEMMSS
Contracts under types of payment systems are
Contracts under types of payment systems are either priced based or cost either priced based or cost basedbased ""ii## $$rriicceed d bbaasseedd
%n
%n prpriciced ed babasesed d papaymymenent t sysyststemems, s, prpricices es bebeining g susubmbmititteted d by by ththee contractor in his bid %t is also known as &'i(ed $rice Contract), which contractor in his bid %t is also known as &'i(ed $rice Contract), which include!
include!
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"b## eeasasururememenent t - - .e.ememeasasururememenent t - - &&eaeasusure / re / 00aalulue) ce) conontrtracact,t, which comprises of BQ contract, and
which comprises of BQ contract, and +chedule of .ate contract+chedule of .ate contract ""iiii## CCoosst t bbaasseedd
%n cost based systems, the contracts are &Cost .eimbursement Contract)1 %n cost based systems, the contracts are &Cost .eimbursement Contract)1 wh
which ich meamean n the the actactual ual coscost t inincurcurred red by by the the concontratractoctor r is is reireimbmbursurseded together with a fee to
together with a fee to overcome overheadovercome overheads and profit This will include thes and profit This will include the cost of material, labour, supervision, equipment, plant and other items cost of material, labour, supervision, equipment, plant and other items ha
haviving ng reresisidudual al vavalulue e 2e 2e is is alalso so papaid id a a fefee e fofor r hihis s seservrvicices es in in ththee management of the work and as profit 2owever, it is essential that the management of the work and as profit 2owever, it is essential that the services e(pected from the e(ecutor and the method of evaluating the services e(pected from the e(ecutor and the method of evaluating the co
cost st mumust st be be clcleaearlrly y dedefifinened d in in ththe e cocontntraractct CoCost st .e.eimimbubursrsememenentt Contract comprises of!
Contract comprises of! "a
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"c
"c## CCoost st $$llus us 'l'lucuctutuaatitinng 'g 'eee Ce Conontrtracactt ""dd## TTaarrggeet Ct Coosst Ct Coonnttrraacctt
4 - 5 4 - 5
hapter
2.2.1 LS Contract
%n *+ contract, the contract price is a fi(ed sum quoted by the contractor for the entire works as specified in the contract documents The nature and e(tent of the work are normally indicated on drawings and the nature of the materials and workmanship described in specification
6o individual rates are quoted for each item of work 7etailed or appro(imate quantities may not be issued with the form of tender %n most cases there is no provision to vary the contract price even if the actual work e(ecuted differs in quantities from those on which the tender was based 2owever there may be provision if the specified work is varied
erit!
"i# +uitable where later changes are not e(pected, and when a simple and quick form of payment is preferred
"ii# $ayments are made in stages, as identified in agreement form 'or e(ample 589 of the contract sum shall be paid upon the completion of foundation stage
"iii# 6o physical measurements shall be carried out1 general visuali:ation is satisfactory
7emerit!
"i# %f there are any changes in the plans and-or drawings, the value of the change should be negotiated with the contractor This may cause delay and sometimes disputes
"ii# The owner pays a fi(ed sum for the works, regardless of their actual cost This constitutes an undesirable practice from the contractor)s point of view
"iii# There is no provision of payment for materials at site
2.2.2 B Contract
BQ contract is the most usual type of fi(ed price contract ; bill of quantities is prepared, giving as accurate as possible, the quantities of each item of work to be e(ecuted The contractor only need to quotes a unit rate or price for each item of work The &Contract $rice) is the sum total of prices of each item of work mentioned in the BQ $ayments are generally made on the basis of the actual measured quantity of work e(ecuted for each item in the BQ and the rate quoted <sually there is a provision for valuation on a day= work basis or otherwise, in cases where the quoted rates are not applicable BQ contract greatly assist in keeping tenders figures as low as possible They should be prepared, whenever possible, on all engineering projects
erit!
"i# Changes made in drawings at later stages may increase or decrease the quantity of work to be done +ince the price is based on the rates, variations can easily be identified, calculated and adopted
"ii# Changes in the contract sum are possible %f the employer has difficulty to manage his cash flow, he may decide to carry on with the work but with some changes %tems in the BQ may be essentials, non=essentials or lu(urious The employer can identify particular items on which he wishes to reduce the cost, and instruct through the correct procedure to change the item to be done at lower cost
"iii# aterial on site is paid >89 of the actual value 7emerit!
"i# %t may be necessary to supervise to assure the quality of work and materials
"ii# Time consuming for BQ preparation This may vary from 4 to ? months1 thus e(tent the time spends for initial planning
"iii# Time consuming for tender analysis The analysing of BQ contracts, tender documents, quantities, prices difference in particular item, and in some cases pre=tender method appreciation, may take 4 t o @ months "iv# $lanning and implementation cost The Q+ needs to be paid for the
preparation of the BQ and then for the subsequent supervision Aenerally, total amount for the preparation of BQ is 59 to 49 of the contract sum
2.2.! Sche"#$e O% Rate& Contract&
There are two types as mentioned below!
"i# The tenderer is issued with documents having the schedule of items, prepared for a particular contract, where he is required to enter the unit rates or price for each item of work
"ii# The tenderer is issued with documents having the schedule of items with unit rates, prepared for a particular contract, where he may agree or quote a percentage above or below the given unit rates, for which he is prepared to carry out the work
'or either type of schedule, it may state the appro(imate quantities to be e(ecuted for each item of work $rovision for valuation on a day=work basis or other wise is usually made in the form of contract, in cases where the quoted rates are not applicable The contract price is thus determined by summing up the amounts obtained by multiplying the respective quoted rates and actual quantity of each item of work to be e(ecuted This type of contract is suitable for use in maintenance, jobbing, and similar contracts %t is usually chosen for urgent works
erit!
"i# 0ariations in quantities are easily accommodated
"ii# E(perienced architects or engineers may be able to forecast the types of works and methods appreciate, thus accurately prepare the schedule of items, even before the design drawings and specifications are completed 7emerit!
"i# +ince only appro(imate quantity of work is known at tendering stage, it is difficult to estimate the actual contract price, to plan properly the contract programme, and to project the cash flow
"ii# The quotations for the unit rates tend to be high because the advantage of discounts on bulk buying by the e(ecuters of works cannot be considered at the tender stage, since the volume of work is not certain
%n the case of the rehabilitation or reinstatements works the e(ecutor of the work cannot e(actly estimate the type and quantum of the different items of work to be replaced or repaired
"iii# Contractors may quote at lower rates to be more competitive1 which may lead to financial problems
2.2.' D(%%erence& Between Sche"#$e O% Rate& Contract An" B Contract)
+chedule of .ates Contract BQ Contract
There is no implied guarantee given that all or any of the work scheduled will be carried out
;ll of the work scheduled will be carried out
ore items are scheduled for temporary works than usually appear in a BQ, because the amount of temporary works that the contractor has to under take is uncertain
*esser items are scheduled for temporary works
*esser time spend in preparing tender document ust adopt the standard schedule of rates
; lot of time spends to prepare BQ There is no guarantee on the quantities stated
The quantities against individual items may not be stated1 they may be indicated as an estimated amount, or round figure provisional quantities
The quantities stated is abstract from drawings and specification, which have certain level of accuracy regarding the work to be carried out
2.2.* D(%%erence& Between Sche"#$e O% Rate& Contract An" L#+p S#+ Contract)
+chedule of .ates Contract *ump +um Contract
Contractor quotes detail price of each item 7etail price of each item is not quoted *ower risk "variation# to owner and
contractor as rate of each item are specified
2igher risk "variation# to owner and contractor as rate of each item are not specified
Take longer time to prepare tender document
Take lesser time to prepare tender document
2.2., Co&t P$#& Percenta-e O% Co&t Contract
The contractor, in this form of contract, charges an agreed fee in terms of a percentage of the cost of the actual work e(ecuted The percentage varies from D9 to 489
erit!
"i# %t allows contractors involve at the design stage
"ii# The owner gains great fle(ibility to involve in the project effectively
"iii# The contractor can be confident of an equitable payment for changes and unforeseen events
"iv# +ince the entire cost is to be charged to the employer, there is a less likelihood on negligence on the quality of material, construction and supervision, however complicated the work may be
7emerit!
"i# There is no incentive to complete the works as quickly as possible or to try to reduce costs
"ii# <nscrupulous contractor could increase his profit by increasing the contract sum +uch as the cost of construction escalate by delays, e(pensive materials, poor control in supervision and negatives practices 'or e(ample in a particular case the ma(imum repetitive utili:ation of formwork was avoided by destroying-burning 'urther, there may be wastage in terms of hardened cement, ine(perienced labour and supervisors
2.2. Co&t P$#& F(/e" Fee Contract.
The sum paid to the contractor will be the actual cost incurred in the e(ecution of works, plus a fi(ed fee, which has been previously agreed upon and does not fluctuate with the
final cost of the job The fi( fee may have been negotiated on a percentage basis on an anticipated cost of work that had been to be e(ecuted
erit!
"i# The contractor is not inclined to push up the cost of work, as his profit from his undertaken job is already fi(ed
"ii# %t is to the contractor)s advantage if the work is accelerated, so that the contractor could earn his fi(ed fee as early as possible and utili:e the resources on the other job
7emerit!
"i# The contractor may try to reduce the cost of supervision, e(pedite with the work, neglecting the correct construction process to ma(imise profit
2.2.0 Co&t P$#& F$#ct#at(n- Fee Contract
It is also known as cost plus a sliding scale of fee contract, since the fee paid to the
contractor is based upon some form of a sliding scale. It is designed in such a way that the contractor may have a definite financial incentive to affect the economy in the cost of work. Economy is gauged by comparison with some predetermined, mutually agreed estimate of the cost of the work to be undertaken. As the cost of the project increases the percentage becomes lesser. Generally the following sliding scale fee is practised in
Malaysia
$roject Cost 9 of fee
Below .4 million @8
.4 million .54 million 58=48
;bove .54 million 54=5D
2.2. Tar-et Co&t Contract
%n target cost contract, a basic fee is generally quoted as a percentage of an agreed target estimated from BQ The agreed target estimate may be adjusted for variation ;ctual fee paid to the contractor is derived by increasing or reducing the basic fee, by an
agreed percentage, of the saving or access between the actual cost and the agreed target estimate
Target cost contract E(ample 5 E(ample 4
;greed target estimate D,888,88888 D,888,88888
;ctual cost ,D88,88888 D,D8888888
+aving D88,88888
E(cess D88,88888
+haring ratio D8!D8 4D8,88888 4D8,88888
$ayable to the contractor ,FD8,88888 D,4D8,88888 erit!
"i# %t encourages the contractor to e(ecute the work as cheaply as possible "ii# The fluctuation of cost is shared between the owner and the contractor in
a pre=determined ratio
"iii# The owner gains great fle(ibility to involve in the project effectively 7emerit!
"i# There is no incentive to complete the works as quickly as possible
"ii# The contractor may try to reduce the cost of supervision, e(pedite with the work, neglecting the correct construction process so that the profit ma(imi:ation can be effected
2.! TYPE OF ORANISATIONS
The type of contract due to a particular project organisational method may be one of the following!
"i# Turnkey Contract
"ii# anagement Contracting
2.!.1 T#rn3e4 Contract
The owner of a Turnkey Contract will normally issue a brief based on a performance specification together with outline drawings indicating a preferred layout The contractor is fully responsible for the design, specification, construction and sometimes maintenance of the project %t is normally use for a giant project
erit!
"i# 6ormally the employer will get satisfactorily workmanship and efficient service from the contractor since the construction is following their own design
"ii# The employer can make fully use of the professional services from the contractor in any disciplines
"iii# +ingle source responsibilities from contractor relieve the owner from the design responsibilities
"iv# The contractor may apply a fast track approach with design and construction overlapping
7emerit!
"i# The cost of the project will be e(pensive since the contractor will highly charged for their professional services and managements
"ii# 3wner participation and supervision is not significant "iii# 3wner fle(ibility to incorporate changes is very limited
2.!.2 Mana-e+ent
Contract(n-<nder these method the contractor offers the owner a consultant service based on a fee for co=ordinating, planning the construction, managing and e(ecuting the project %t ensures that the contractor "or construction management consultant# is part of the owner team, ensuring that ma(imum construction e(perience is fed into the design %n management contract, the permanent work are constructed under a series of construction contract "also known as trades contracts or works contracts# placed by the management contractor after approval by the client-owner
4 - > onstruction
contractors !wner project management
"esign organisation
Management contractor
erit!
"i# Time can be saved by more e(tensive overlap of design and construct utilising the management contractor)s e(perience in construction planning "ii# %t allows more fle(ibility particularly where the programme and design are
ill=defined and subject to change
"iii# %t reduces delays and the knock=on effect of claims
"iv# %t avoids adversarial attitudes, which leads to a more harmonious relationship
7emerit!
"i# The overall construction cost may be increased1 but is normally offset by an early completion
"ii# There is tendency to produce additional administration and some duplication of supervisory staff
"iii# The potential for interface &grey areas) between works contractors is high
