Selection of suitable contracts for construction

How to select a contractor ?

Contract – Definitions

  • A mutual agreement between two or more parties that something shall be done, an agreement enforceable at law – Legal point of view
  • Contract means general conditions, the supplementary conditions, the specifications, the drawings, the bills of quantities, the tender, the letter of acceptance and the contract agreement – FIDIC
  • The Agreement of how the owner will pay the contractor for work – Method of payment

Although definition given by FIDIC seems comprehensive, since construction industry technical terms used, this article uses first definition for contract. It describes the scope of work in detail. It establishes time frame payment procedure thus it mminimizes disputes and it helps to improve economic return of investment construction contracts

construction contracts

Selection of contract type depends on the following factors

  • The allocation of risks
  • The ability of introduce changes
  • Performance by the contractor
  • Start and completion date of the project
  • The appropriateness for providing adequate incentive for efficient

Competitive Bidding – Lump Sum contract

It provides a total fixed priced for all the construction related activities.It can include incentives or benefits for early termination or can also have penalties called liquidated damages for late termination. These types of contract shall be preferred when a clear scope and defined schedule has been reviewed and agreed upon.

Competitive Bidding – Measure & Pay contract

Final price shall not be finalized until completion of project. It is ideal for work where quantities cannot be accurately established before construction starts. Payment to contractor is based on the measurement; there will be a chance for unbalance bid. Re- negotiation for rates available if the quantity or work considerably exceeds the initial target. Total risks shall be shared between employer and contractor.

Competitive Bidding – Schedule of rates

It is a schedule of work items without quantities is prepared by the owner and to be rated by the contractor. It has been usend for repair and maintenance works or under conditions of urgency. It is common for separate rates to be quoted for labor, plant and materials

Types of contracts Advantages Disadvantages
Lump Sum contract Low risk to owner.

Cost is known at outset.

Contractor selection is easy.

Contractor will assign best personnel.

High risk to the contractor.

Changes are difficult and costly.

High price since it includes high risk contingency.

Competent contractors may give up on bidding.

Measure & Pay contract Selection method is easy

Changes can be easily incorporated.

Risk can be shared.

 

Mislead employer since final price is unknown.

Unit price sometimes tend to less profitable with ratio of work.

 

Schedule of rates Same  as  Measure & Pay Same  as  Measure & Pay

 

Negotiated Bidding – Cost plus contracts

It covers actual cost plus a negotiated reimbursement to cover overheads and profits. There are mainly three types of cost plus contract. They are Cost + Percentage of cost, Cost + Fixed fee and Cost + Fixed fee + Profit Sharing Clause. Generally these contract transfers High risk to owner. By using Guaranteed maximum price (GMP) owner can reduce risk.  Early start is possible in this type of contract.

 

Types of Negotiated Contracts Features
Cost + Percentage of Cost The contractor is reimbursed for all his costs with a fixed % of cost to cover his services.
Cost + Fixed fee Most common form of negotiated contracts

Cost – Labor, equipment , material & administrative cost

Fee – Compensation for expertise includes profit

Cost + Fixed fee + Profit sharing Clause Rewards to contractors who minimize the cost

% of the profit sharing is specified in contract

Till GMP point contractor shall be reimbursed beyond this point the contractor is responsible for covering any additional costs

 

In reality with an agreement of both parties, characteristics of both competitive bidding and negotiated bidding contracts have been used in a single project.

 

aslo check Types of Contracts

Written by Gowrinath  © BasicCivilEngineering.com

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