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Types of Contracts in Construction Management

Contracts provide a legal framework or a set of protocols to be carried out to establish a legal settlement between the two parties involved. It avoids any such unnecessary confusion that may arise leading to disputes. These are the keys to guide business relationships across all sectors. Not only that, these are helpful for contractors to better estimate the time and money to be used up in the project. Also, it helps the contractors to utilise their powers for gaining maximum profit out of it.

When contracts are not met as per the requirements, then action has to be taken at the initial stages, otherwise conflicts may arise leading to unprofessionalism and disputes. Contracts address labour requirements, incentives involved, money matters, time of delivery, economic construction, choice of equipment, and so on. Thus, it is essential if the construction works are to be carried out smoothly.

Stages of Project Management
Fig 1: Stages of Project Management

There are different types of contracts which vary in terms of cost, time of completion, suitability, etc. They are –
1. Unit pricing contract – This type of contract is used mostly by builders and engineers. Here, bidding is facilitated in a written form without informing the scope of work. Moreover, the work is based on rates and the final price is dependent on the total quantity of contracted parts that are necessary for the project. Contractor has the freedom to give the cost per unit item while the quantity of items is given by the owner.

Its disadvantage is that the total cost will only be known after the finishing of the project as it is based on the actual work done and not on theoretical ground. In addition to this, if the quantity is increased, then the cost shall also increase, hence it is difficult to ascertain the scope of work.

2. Lump sum contract – Here the contractor commits to execute the work as per drawings and specifications for a lump sum amount of money. There will be no unit cost system and so the estimation for the whole work is somewhat difficult. An experience is required for the contractors to accurately estimate the amount of money that will be involved and so amateur contractors are not preferred for this type of contract. However, in bigger projects,payments can be made partially on mutually agreed terms.

Its disadvantage involves that the contractor can discard the project if the lump sum price exceeds the expectations of the owner. Additionally, the contractor has to put up additional costs, otherwise the owner may blame the contractor if additional cost adds up after the start of the project.

3. Lump sum and schedule contract – It is the same as Lump sum contract except Schedule of Rates (SOR) is also included in the agreement between the owner and contractor. The lump sum price is displayed by the contractor as well as Schedule of rates to regulate the extra amount for any additional work afterwards.

Its disadvantage involves that similar to the lump sum contract, every detail of the work is needed to be studied thoroughly, otherwise disputes may arise if any additional cost is added afterwards without the consent of the owner.

4. Cost plus percentage contract – Here, the work is awarded on the basis of the percentage of actual cost for construction. The actual cost is handed over to the owner where the owner pays the price along with a certain It is suitable in case of work to be done rapidly or the project cost is difficult to predict as a lump sum. Also, here the owner pays as per the performance of the contractor and so the contractor tends to work more attentively and guides his labours well. Moreover, the work can be submitted to the owner before the completion of the drawings and specifications. Also, speed is the advantage here.

Its disadvantage involves that it is not preferred in works related to government departments. Also, a great sum of money may be the result of extensive additional work and increased contractor’s demand.

5. Cost plus fixed fee contract – Contractor is being paid by the owner as a fixed sum that displays his profit. This is suitable when the nature and scope of the work are known. The amount of fee is paid as a lump sum depending upon the time of completion, quality of work, manpower involved,equipment, involved and so on. Here, one such advantage is that the contractor cannot unnecessarily increase his rate like in the case of cost-plus percentage contract.

Its disadvantage involves that the contractor may demand to increase his rate by improving his quality of work. Also, it cannot be adopted in public bodywork like in the case of cost-plus percentage contract.

6. Guaranteed maximum price contract – Here, the builder specifies the maximum fee involving the actual cost and a fixed fee. If the total fee exceeds the fee that is mentioned in the contract then the builder acts on it till the price is agreed to the contract. If the excess fee is not there.i.e., the cost is less than the budget, the extra amount is returned.

6. Negotiated contract – Here the owner negotiates the method of payment, type of work, bidding amount, etc that builds a competitive or non-competitive A tender is invited where the contractors bid and display their experience and level of work. The owner has the complete freedom to select the bidders as per the suitability of the contract.

7. Turn key contract – It is the one under which the contractor is responsible for both the design and construction of a facility. The contractor shall provide the works ready for use at the agreed price and by a fixed date. It falls under the category of Special contract.

The owner has the freedom to choose whichever contract is felt suitable for a specific project keeping in mind the specifications and regulations involved. Apart from this, any type of work is mainly transferred via the site engineer to the owner as the site engineer has the ability to make the points clear to the owner which the contractors may lack. Any serious issue is handled by the site engineer, thus making the site engineer the connecting link between the owner and contractor.

• Global Negotiator, “What is a Turnkey Contract”-
• Contract works, “The Complete List of Construction Management Contract Types”-
• Upcounsel, “Types of Construction Management Contracts”-
• Slideshare, “Types of Contract in Construction Management”-

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Kanwarjot Singh

Kanwarjot Singh is the founder of Civil Engineering Portal, a leading civil engineering website which has been awarded as the best online publication by CIDC. He did his BE civil from Thapar University, Patiala and has been working on this website with his team of Civil Engineers.

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