CMPROMGT - LECTURE – 2 TYPES OF CONSTRUCTION CONTRACTS

Construction Contracts and Specifications 1. Price Given in Advance Contracts (Price-based

Contracts)
Considerations in selecting contract types: a. Lump Sum Contract
• What is being purchase (a product or service) b. Measurement or Unit Price Contract
• The completeness of the statement of work c. Schedule of rates term contract
• The level of effort and expertise of the Owner can 2. Cost Reimbursement Contracts (Cost-based
devote to managing the Contractor Contracts)
• Whether the Owner wants to offer the a. Cost + percentage
Contractor an incentives b. Cost + fixed fee
c. Cost + fixed fee + profit-sharing clause
• The Marketplace or economy
• Industry standards for the types of contract used
Factors Influencing the Choice of the Type of Contract
Contract Definitions
• The appropriateness for providing an adequate
incentive for efficient
A. From a Legal Point of View
➢ A mutual agreement between two or more • performance by the contractor
parties that something shall be done, an • The ability to introduce changes
agreement enforceable at law. • The allocation of risks
B. According to FIDIC (International federation of • The start and completion date of the project
Consulting Engineers)
➢ Contract means the General Conditions, the Contract Types
Supplementary Conditions, the • Traditional vs. alternative
Specifications, the Drawings, the Bill of • Classification by method of award and method of
quantities, the Tender, the Letter of pricing
Acceptance, the Contract Agreement. • Model contracts have been developed by PCA,
C. According to Method of Payment : PICE, SPAC, COFILCO, PCCI CPMAP, UAP, CREBA,
➢ The agreement of how the owner will pay the PICA and CONSTRUCTION INDUSTRY AUTHORITY
contractor for work OF THE PHILIPPINES (CIAP)
➢ performed such as a lump-sum or cost-plus
payment. • METHOD AWARD
1. COMPETITIVE BIDDING
Why Use contract in construction? - formally advertised public work
• Describe scope of work - selective invitation for private work
• Establish time frame - awarding of contracts by:
• Establish cost and payment provision o Lowest responsible bid or
• Set fourth obligations and relationship o Best value i.e.: technical score 
• Minimize disputes price or price + time(ft ), and other
• Improve economic return of investment variations

Major Contract Types (traditional) 2. NEGOTIATED CONTRACTS

- Generally private work
- Benefits include flexibility of pricing
arrangement
- Often used on projects of large size and
great complexity
- Owner may value expertise and integrity
of a particular contractor and can award
contract without competition that may
otherwise exclude that contractor from
the work
• METHOD OF PRICING - Actual cost to the owner will vary with
1. FIXED-PRICE actual quantities placed
1) LUMP SUM - Best used when details and general
- Traditional, single fixed price character of the work are known, but
- Predetermined price that includes profit, quantities are subject to variation
overhead, and all other costs - Risk of unbalanced bids
- Greatest risk to contractor resulting in a
higher markup (the greater the risk, the • Require sufficient design definition to
higher required rate of return ) estimate quantities of units
- Most common contract form • Contractors bid based on units of works
• Time & cost risk (shared)
Lump Sum Contract( Advantages) • Owner : at risk for total quantities
• The final price is known, by the owner, • Contractor : at risk for fixed unit price.
before the work commences i.e. Cost • Large quantities changes (>15-25%) can
known at outset. lead to increase or decrease of unit price.
• The contractor has more incentive to
reduce his cost to increase the profit. Unit Price ( Advantages)
• The contractor hopes to complete the job • Easy for contract selection.
as quickly as possible, to minimize • Early start is possible.
overhead, to maximize profit and to • Saves the heavy cost of preparing many
move to the next Job. bills of quantities by the contractors.
• Contractor selection is easy. • Fair basis for competition.
• Level of risks is low and quantifiable, and • In comparing with lump-sum contract,
can be accurately and completely changes in contract documents can be
described at the time of bidding such as made easily by the owner.
residential and building construction. • Lower risk for contractor.
• More suitable when the client does not
wish to be involved in the management Unit Price (Disadvantages)
of the project. • Final cost not known from the beginning
• Suitable when limited variation is need (BOQ only is estimated)
• Staff needed to measure the finished
Lump Sum Contract (Disadvantages) quantities and report on the units not
• Changes in drawings and specifications completed.
can be very expensive and source of • Unit price sometime tend to draw
trouble. In other words the contract has unbalanced bid. (ForUnit-Price Contracts,
limited flexibility for design changes. a balanced bid is one in which each bid is
• Contractor is free to use the lowest cost priced to carry its share of the cost of the
of material equipment, methods. work and also its share of the
• The contractor carries much of the risks. contractor’s profit. Contractors raise
The tendered price may include high risk prices on certain items and make
contingency. corresponding reductions of the prices
• Competent contractors may decide not on other items ,without changing the
to bid to avoid a high-risk lump sum total amount of the bid)
contract.
• Lump sum contracts might be less 3) SCHEDULE OF RATES CONTRACT
appropriate where speed is important, or • A Schedule of the work items without
where the nature of the works is not well quantities is prepared by the owner and /or
defined. A/E to be rated by the contractor.
The descriptions of items and the units of
2) UNIT-PRICE CONTRACT measurement are similar to those used in a
- Prices of specified units of work are fixed normal B.O.Q., but no quantities are given.
or predetermined
• It is common for separate rates to be quoted 5. By using this type of contract the
for labor, plant, and materials. contractor can start work without a
• Used for repair and maintenance works or clearly defined project scope, since all
under conditions of urgency. costs will be reimbursed and a profit
guaranteed.
Advantages:
1. Work can be commenced earlier than if a full • Cost + Percent of Cost
B.O.Q has been prepared. 1. The contractor is reimbursed for all his
costs with a fixed %age of costs to cover
Disadvantage : his services.
1. No indication of the final price of the works. 2. Project/site overheads may be covered
2. Very difficult to determine which contractor by the %age or computed as one of the
submitted the most advantageous offer. costs.
3. May cause financial problems to the public
owner Fee = percentage of the total project cost
(Cost = $500.000, Fee = 2%)
2. COST-PLUS
- Contractor agrees to perform the work
for a fixed or variable fee covering profit
and home office costs (general overhead)
- Field costs are reimbursable at actual
cost
- Used when:
i. nature of the work or physical
conditions are unpredictable
ii. scope is unknown or difficult to
define

- All cost-plus contracts depend on

cooperation among A/E, owner, and
contractor
- Record keeping and timely evaluation are
extremely critical
- Detail record of labor hours and salaries,
material and equipment must be Cost + Percent (Advantages )
maintained 1. Construction can start before design is
- Good application for professional CM completed.
services 2. If the contractor is efficient in the
utilization of resources then the cost to
Cost Plus the client should represent a fair price
1. Actual cost plus a negotiated for the work undertaken
reimbursement to cover overheads and
profit Cost + Percent (Disadvantages )
2. Different methods of reimbursement : 1. The project total cost is completely
- Cost + percentage unknown before the project start.
- Cost + fixed fee 2. No incentive for the contractor to be
- Cost + fixed fee + profit-sharing clause. efficient in his use of labors, materials
3. Higher risk to owner or equipments.
4. Compromise : guaranteed maximum 3. Minimum efficiency maximizes the
price (GMP) reduces risk to owner while profit.
maintain advantage of cost plus
contract.
• Cost plus Fixed Fee
1. Most common form of negotiated
contracts
2. COST = expenses incurred by the
contractor for the construction facility
- Includes: Labor, equipment,
materials, and administrative costs

3. FEE = compensation for expertise

- Includes: profit

Cost + Fixed Fee

Fee = percentage of the original estimated
total figure
- Utilized on large multiyear jobs
- Ex: WW treatment plant Facility - In this type of contract the contractor is
(Cost = $20 million, Fee = 1%) reimbursed at cost with an agreed-upon
- $=20 Million 1% fee = $200,000 fee up to the GMP, which is essentially a
cap; beyond this point the contractor is
responsible for covering any additional
costs within the original project scope
- An incentive clause, which specifies

GUARANTEED MAXIMUM PRICE CONTRACT

- In a guaranteed maximum price (GMP)
contract, the contractor estimates the
cost just like in a lump sum bid, but profit
is limited to a specified amount.
- In the event that actual costs are lower
than the estimates, the owner keeps the
savings.
- In the event costs are higher, the
contractor pays the difference and profit
is reduced.

• Cost + Fixed Fee + Profit-Sharing Clause Advantages

- Rewards contractors who minimize cost - Greater price certainty for clients as the
- Percentage of cost under GMP is contractor normally includes a sum for
considered profit and shared with the future design development and for risks.
contractor - GMP promotes pre-agreement of
• Guaranteed Maximum Price changes as its philosophy links neatly
(GMP) with a contractual requirement to pre-
• % of profit sharing is specified in agree the cost and time implications of
contract any potential changes.
- GMP provides greater control over
spending as the contractor is bound to a
maximum price. This alerts the team to
any potentially expensive items of design
development.
 - GMP aligns the contractor with client and ➢ intellectual property issues (eg transfer
consultants encouraging team work with of technology)
mutual trust and common goals. - In a turnkey contract, employers lose control
- Less administration is required as over the process in exchange of allocating a
changes are limited; there is quick single point of responsibility on the
settlement of the final account. contractor

Disadvantages • Management contracts

- The client might pay too much as the - It is also becoming increasingly common for
contractor takes on greater risk and thus parties to enter into management contracts
includes in the price an allowance for instead of building contracts
design development and risk. Often a - In a management contract, the
competitive price is sacrificed in lieu of contracted manager’s role is to ensure the
appointing a contractor early. implementation of the contract is carried
- Contractor’s with design and build out effectively
experience may have useful knowledge. - The contracted manager gets involved
- There is no standard form of contract for early in the process, as opposed to the
GMP so there is a greater possibility of building contractor who is engaged later
errors and misunderstandings of when the project is ready to be constructed
liabilities between the parties that may - It may well be that the “manager” is a
result in conflict. related company of the “contractor”
- Scope changes tend to cost more, it is eventually
accepted that scope changes to design
and build are more likely to be more • Build-Operate-Transfer (BOT) contracts
expensive than with a traditional - a BOT contract usually happens for public
contract, the same can also be said for infrastructure works
GMP contracts. - In a BOT contract, the private company
builds, and operates a concession on the
__________ infrastructure built for an agreed period of
time before transferring the infrastructure
Other types of Construction Contracts to the Government
• Design and Build contracts - Ideally, a BOT contract would be a good
- Unlike a traditional contract, a design and mechanism for the private sector to fund
build contract is one where the contractor infrastructure projects
undertakes both design work as well as the - However, the reality may result in an overly
work of construction for the contract generous concession for the private
- This is advantageous for employers who get companies involved
a complete design, full scope of works and
stipulated price from the outset • Supply contracts
- There are parties in the construction
• Turnkey contract industry who are involved in supplying
- A variant of the design and build contract is materials only, and do not participate in any
the turnkey contract actual construction
- In a turnkey contract, the contractor does - For such contracts, the liability of the
not only carry out design and construct contractor is limited to supplying materials
obligations that meet the specifications
- The contractor is also responsible for - It is important when dealing with supply
➢ Financing contracts that proper tests are carried out
➢ approvals before accepting the materials supplied
➢ procurement - Once the materials supplied are used, it
➢ fitting out would be rare for these contractors to be
held liable any longer as there would be
 legal hurdles to point to the inadequacy of Construction Contracts ……bidders are required to:
their materials • examine all portions of the contract documents
• examine the physical conditions of the site
• Term contract • determine legal requirements affecting the work
- For maintenance, term contracts would be a • complete these investigations prior to bidding
common practice, whereby a contractor is
required to maintain a certain facility for a Construction Contracts ……contract documents should:
pre- agreed term at a pre-agreed price • Include a hierarchy to determine which
documents govern in case of conflict
• Construction contracts • Not contain ambiguous language
- Prequalification of bidders • Not contain exculpatory clauses
✓ Evidence of satisfactory previous
experience Construction Contracts -- General Conditions
✓ Financial stability • Contractor’s warranties
✓ Advanced or specialized prequalification • Defective drawings
may be required as dictated by the • Approval of contractor’s plans and equipment
magnitude and nature of the work • Approval of shop drawings other submittals
✓ Bid bonds are often required
• Guarantee by the Contractor
• Conduct of the work
__________
• Defective work
Elements of a legal contract • Relations with other contractors and
subcontractors
• offer
• acceptance • Inspection of materials
• consideration • Inspection of field work
• legal in every respect • Authority of the Eng’r.
• requires a meeting of the minds • Duties of the inspector
• offer + acceptance = binding obligation • Permits and licenses
• Advertisement for bids • Labor considerations
• Information for bidders • Work done by the owner
• Bid form • General notices • Lines and grades
• Notice of award • Order and discipline
• Notice to proceed • Performance
• Bid bond • Final inspection & acceptance
• Performance bond • Private and local government regulation
• Payment bond • Employment rules
• Contract form or agreement • Emergencies
• General conditions or provisions • Minimum wage rate
• Supplemental and/or special conditions • Domestic vs. foreign materials and labor
• Plans • Construction reports
• Specifications • Payrolls and bills of material
• Cooperation among contractors • Patents
Characteristics of a “good” contract document: • Retainage
1. Carefully considered • Bonding and insurance
2. Expressed clearly • Guarantee of equipment
3. Time-tested • Borings
4. Comprehensive • Spare parts
5. Fair
6. Balanced Risk Allocations -- General Conditions
7. Applicable to the elements of a construction • Force majeure
projects • Indemnification
• Liens
 • Labor laws • Safety Regulations (D.O.#13)
• Differing site conditions
• Delays and extension of time Codes, Standards, and Regulations
• Liquidated damages • Model Codes
• Consequential damage - Model codes are adopted in whole or in part
• Occupational safety, and health of workers by the local municipality, and become
• Permits, licenses, and regulations enforceable under the law
• Termination for default by contractor • Zoning Regulations
• Suspension of work - imposed by local zoning commissions
• Warranties and guarantees • Environmental Regulations
- imposed by National, or local agency
Specifications
• Standard, supplemental, and special provisions Codes, Standards, and Regulations
• two types of specifications: Standards
- method specification dictates equipment • ASTM
and procedures • Underwriters Laboratories, Inc. (UL)
- performance spec specifies only the desired • AASHTO
end result or product • ACI
- should include hierarchy • AISC
• many, many others
Hierarchy • no enforcement by these agencies
Governing ranking of contract components in case of a • specifications generally refer back to these
discrepancy standards
• General Notices
• Special Provisions Submittals required in the contract
• Plans • copies of subcontracts
• Supplemental Specifications • shop drawings and support calculations
• Standard Construction Details • catalog cuts
• Standard Specifications • material or equipment samples
• schedule(s)
Classification Coding System • certified payrolls
• Architectural building and site development • certificates of insurance
industry employees the CSI Format that includes • environmental test reports
16 divisions of work. • material test reports & certifications
• Public owners generally use a system of sections
or divisions developed and employed for several Shop Drawings
decades • structural steel details & erection plan
• erection procedures (safety)
Codes, Standards, and Regulations • PS/PC concrete items
Model Codes • shoring & underpinning details
• National Building Code (PD 1096) • jacking plans and calculations
• National Structural Code • scaffolding and falsework
• Standard Building Code • concrete formwork design and details
• Uniform Building Code • construction sequencing diagrams
• National Electric Code • cofferdam design & details
• Plumbing Code • dewatering procedure
• Sanitation Code • stream diversions
• Fire Code • pipe and ductwork fabrication details
• Waste Management Act • reinforcing steel bending diagrams and bar lists
• Mechanical Code • structural timber elements
• Code of Ethics • ornamental iron or steel
 • maintenance of traffic plans (alternates)
Dispute Resolution
Payments and related issues • Early settlement between parties
• mobilization and initial costs • Alternative depute resolution (ADR)
• retainage - Negotiation
• progress payments and partial payments - arbitration (1 or 3 members)
• material payments - mediation
• change orders - neutral advisors
• substantial completion - Dispute Review Board (DRB)
• punchlist • 3 or more odd number of board
• final acceptance and payment members selected evenly by both
sides
Changes in plans and specs • Litigation
• clarification, correction, modifications prior to ▪ sometimes unavoidable; usually
bid are referred to as “addenda” undesirable; but sometimes best
- owner must maintain a system of method
distributing and acknowledging receipt of
addendum Credits
• plan and spec changes after award are referred to • Credits – reimbursement from contractor to
as “revisions”, and generally require issuance of a owner for work eliminated (lump sum contract or
change order(s) item)
• Credit may also be given when specified
Change Orders performance criteria is not met
• a written order issued by the owner to the
contractor for a change to the contract within the Claims Avoidance
scope of work • producing comprehensive, accurate, contract
• change orders are written for: documents
- extra work • constructibility review
- increasing or decreasing the contract • clear understanding of contract requirements
quantities prior to bidding
- alterations • having good administrative procedures in place
• change orders state the basis and amount of • open and honest communication • timely
payment and time extensions troubleshooting

Contracts Claims Avoidance

• Liquidated damages • Claims avoidance begins in the preconstruction
• Incentive/Disincentive (bonus/penalty) phase
• Acceleration • Contract documents need to be clear, accurate,
- Increase crew levels, crew size comprehensive, and fairly distribute risk
- Add shifts and/or extend work hours
• CPM schedule is an extremely valuable tool in Ability to influence cost over time
analyzing delay claims • Greatest potential to influence cost is during the
Claims and Disputes pr-construction design phase
• a claim is a request by a contractor for additional • Claims avoidance begins during pre-construction
compensation or time extension for occurrences • Design phase
beyond the contractor’s control including: - Intensive preparation and review of contract
- differing or unexpected site conditions documents
- change in scope
- delays caused by the owner
• owner has duty to provide adequate, accurate
data to the bidders
 - Careful consideration of methods and
equipment = consider overall Construction by General Contractor
constructability • Also referred to as “Prime Contractor”
• Most common method of delivery
• Contractor bears substantial risks and financial
responsibility
• Facility designed by in-house architect/engineer
or by design consultants
• Often requires specialty subcontractors

Specialty contractors might include those

specializing in one of the following:
1. Excavation
2. Steel erection
3. Concrete
- Cast-in-place
- Prestressed/Precast
4. Masonry
Design Professionals should: 5. Timber/wood framing
• Specify locally available material 6. Piping/plumbing
• Allow substitution of equal quality material 7. Clearing and grubbing
• Avoid one-of–a-kind or non-standard items 8. Blasting/demolition
where possibly 9. Electrical
• Design structures with as many redundant 10. Painting
elements as possible 11. HVAC
• Design should allow construction using the 12. Environmental remediation
prevailing methods and equipment 13. Many, many others
• Design to minimize required labor
• Specify a quality of workmanship consistent with Design-Build (Turnkey)
the quality of the project • Single firm or team responsible for design and
• Do not require the contractor to assume construction minimizes coordination problems
responsibility for information that should be • More efficient designs with the interjection of
furnished by the design engineer/architect constructibility and innovation
• Produce simple, straight-forward specs = clearly • Often employs fast-track construction
state what is expected • Benefits include reduced overall delivery time
and “one-stop shopping” for the owner
Project Delivery Organization • Disadvantages include complexity of evaluating
• Construction by owners forces proposals
• Owner-managed construction
• Construction by general contractor CM Contract -- Fee (management services only) also
• Design-build team referred to as “Agency”
• CM Contract • Specialized construction skills through all project
stages including preconstruction
Construction employing owner forces • Provides close coordination between design and
• Usually small in-house construction or construction
renovations • Eliminates impact of conflicts of interest
• Industrial projects or institutional (such as • Independent and objective evaluation of costs,
hospitals or schools schedules, and performance
• Potential saving in time and cost
Owner-managed construction • Disadvantages include no risks associated with
• Residential/commercial building developers costs increase’’
• Industrial or institutional
 • CM Contract – “At-Risk”
- CM assumes financial risks similar to a GC
- CM manages all phases of the work without
performing any actual work tasks
- CM’s only resources are management
personnel
- Contractors/subcontractors have a direct
contract with CM
- Contract form is often a negotiated
guaranteed maximum price arrangement
- Disadvantages includes lack of impartiality

Method or System of Project Delivery

• Traditional design-bid-build
• Phased or Fast-track
• Design-build