Project

Management

Dr. Abbas Badr

CONTRACTS
CONTRACT DEFINITION

A contract definition refers to a two-party

agreement, either given verbally or in writing, that
provides a product or service to an individual or
business.
Consideration between the parties must be
exchanged for the contract to be lawful and
enforceable.

3
CONTRACT DEFINITION

What is a contracts purpose? The purpose of a

contract is to protect the parties if either party
does not fulfill its promises.
If the contract is broken, it can be turned over to
a court for enforcement.
Contract law creates and implements the
agreements of a contract and will seek out a
remedy if a violation does occur.

4
CONTRACT DEFINITION

Contracts must contain these six essential

elements.
▸ Offer
▸ Acceptance
▸ Awareness
▸ Consideration
▸ Capacity
▸ Legality

5
CONTRACT DEFINITION

Contractual Offer
All contracts start with desire and responsibility.
Someone wants (desires) something, and
someone can fulfill (take responsibility for) that
want.
Known as “the offer,” this first essential element
encompasses the duties and responsibilities of
each party, but must also demonstrate an
exchange of value. That value can be money, or
it can relate to a desired action or outcome.
6
CONTRACT DEFINITION

Contract Acceptance
Once the offer is presented, the offeree can
decide whether to accept or reject the proposal.
The offeree can communicate acceptance either
verbally or in writing (including mail or email)*.

7
CONTRACT DEFINITION

Awareness
Awareness is one of the elements of a contract
because in order for a contract to be binding,
both parties must first be aware that they are
entering into an agreement.

8
CONTRACT DEFINITION

Contractual Consideration
In contract law, consideration is something of
value that is exchanged between the parties to a
contract.
Consideration is essential for a contract to be
valid and enforceable, which is why it’s one of the
key elements of a contract.

9
CONTRACT DEFINITION

Contractual Capacity
In simplest terms, an individual cannot sign away
their rights.
Of course, the reality is a bit more complicated,
which is why contract law requires that all
signatories demonstrate that they clearly
understand the obligations, terms, and
consequences of the contract before they sign.

10
CONTRACT DEFINITION

Contract Legality
Finally, legality is one of the elements of a
contract.
All contracts are subject to the laws of the
jurisdiction in which they operate, including any
applicable local laws and ordinances.

11
Main Types of Contracts
LUMP-SUM CONTRACT

13
Lump-Sum Contract

With a lump-sum contract, the contractor delivers the

project at a preset price. The contractor will deliver a
total price for the project rather than bidding on the
deliverables.
The construction agreement is relatively simple and
works well for projects with a well-defined scope.
They’re popular with straightforward work.
This type of contracts also makes administration and
cash flow estimates easy.

14
Lump-Sum Contract

Lump-Sum Contract Benefits

The lump-sum contract presents easy-to-plan-for
figure to the owner.
These agreements streamline business analysis and
the selection process as well.
They give the contractor the flexibility to focus on
quality, materials, and output.
Unlike time and materials contracts, lump-sum
contracts don’t dictate as much owner supervision and
approval.

15
Lump-Sum Contract

Lump-Sum Contract Drawbacks

Lump-sum contracts aren’t usually a good fit for
undefined projects.

They don’t factor in changes in material costs, site

conditions, or requests from the owner.

For the lump-sum contract to pay off, you’ll need to be

able to estimate the project’s schedule, materials, labor
costs, overhead costs, and profit.

16
Time and Materials Contract

17
Time and Materials Contract

Under a time and materials (T&M) contract, the owner

pays an agreed-upon price based on the time spent on the
project, required materials, and the included profit rate.

Like the lump-sum contract, this construction agreement is

simple and straightforward.
However, T&M contracts allow for more flexibility in the
costs of the materials and account for labor rates.

They may also include a mark-up for the materials if they

are purchased at wholesale rates.
.

18
Time and Materials Contract

Time and Materials Contract Benefits

T&M contracts help the owner to budget for the overall

costs while reducing the risk on the contractor’s part in the
case of fluctuating material and labor costs.

They also help to prevent cost-cutting methods as the

contractor knows they’ll receive a profit.

19
Time and Materials Contract

Time and Materials Contract Drawbacks

There are some potential downsides to this type of

construction agreement.

There’s less transparency about the final cost for owners,

which can lead to disputes along the way if prices rise.

Inaccurate estimates can also potentially eat into the

contractor’s profit margins.

20
Unit Price Contract
Unit Price Contract

The unit price contract details prices per unit, which may
include materials, labor and supplies.
The owner pays the contractor based on the units at
agreed-upon rates.
This type of contract for construction may or may not
include the number of units needed to complete the
project but will likely include at least an estimate.

22
Unit Price Contract

Unit Price Contract Benefits

These contracts work well with projects that can be
easily divided into units.
If the project is largely dependent on the price of the
units and involves repetitive tasks, a unit price contract
may be a good choice.
Contractors who use unit price contracts find the simple
invoicing and shared risk beneficial.

23
Unit Price Contract

Unit Price Contract Drawbacks

They’re not always a good fit for projects that require
different tasks and many different types of materials.
They don’t incentivize contractors and can lead to profit
loss if the initial estimates are off-target.

24
COST-PLUS CONTRACT

25
Cost-Plus Contract

Under a cost-plus contract, contractors are paid for

all of their construction-related expenses.
That’s the cost part of the name. The construction
costs can include direct costs such as labor,
materials, supplies, etc.
They also include overhead costs such as insurance,
mileage, a portion of your office rent.
Additionally, they also receive an agreed-upon
amount for the profit. That’s the “plus.”
.

26
Cost-Plus Contract

Cost-Plus Contract Benefits

This type of construction contract is usually looked
upon pretty favorably by contractors.
There’s seemingly no risk of losing money on
materials. Plus, you know you’ll incur a profit.
These types of construction contracts are especially
useful when you don’t have enough information to
provide a thorough estimate of work or the scope is
not well-defined.

27
Cost-Plus Contract

Cost-Plus Contract Drawbacks

However, there are a few details about these types
of contracts to be aware of.
First, you’ll need to keep track of all of your
expenses and be prepared to present them.
That can require additional resources and labor costs
on your side.
You may also be limited on how much you can spend.
Some cost-plus contracts include clauses with “not
to exceed” amounts for costs.

28
Guaranteed Maximum
Price Contract

29
Guaranteed Maximum Price Contract

Under the guaranteed maximum price (GMP) contract,

the maximum amount the owner will have to pay the
contractor is capped.
The GMP construction contract limits the amount the
owner will have to pay, and any additional expenses
incurred are covered by the contractor.
These agreements limit the cost-risk for the customer.
They clearly define the most the owner will have to pay,
which makes budgeting much easier.

30
Guaranteed Maximum Price Contract

Guaranteed Maximum Price Contract Benefits

The GMP includes costs for labor, materials,
overhead, and a percentage of those costs to
generate a profit.
If the final costs come in under the GMP, the
customer may receive all of the cost savings or
share them with the contractor.
For contractors, it can also help to expedite the
lending process.

31
Guaranteed Maximum Price Contract

Guaranteed Maximum Price Contract Drawbacks

Similar to the cost-plus contract, this
construction agreement does require careful
review and analysis of expenses.
This can be particularly time-consuming on
large, multi-phase projects.
It also places the majority of the risks on the
contractor. If the original estimate ends up
being below the final costs, the contractor can
lose money on the project.

32
Incentive Contracts
Incentive Contracts

Incentive contracts provide the contractor with

an agreed-upon payment if the project is
delivered by a certain date and at a specific point.
If the project is delivered at a lower cost and/or
by the target deadline, the contractor receives
extra payment.
The amount they receive is specified in the
construction contract and may be based on a
sliding scale.
In other words, the contractor is incentivized for
controlling costs and staying on schedule.
34
Incentive Contracts

Incentive Construction Contract Benefits

These contracts aren’t just beneficial for
controlling costs and timelines.
They also help to create a more collaborative
process where the contractor has more
ownership. Because of the incentive phased
approach, the contractor and owner often
communicate more and look for innovative ways
to get the job done.

35
Incentive Contracts
Incentive Construction Contract Drawbacks
Incentive contracts do require more negotiation
to determine the incentives.
It’s important for contractors to ensure that the
costs and deadlines are achievable.
If the terms and conditions are not clear, it can
leave room for disputes.
Contractors need to clearly define what meeting
the incentive looks like so there are no
miscommunications when the project is
delivered.
36
▸
“
Integrated Project
Delivery Contract

37
Integrated Project Delivery Contract

Integrated Project Delivery (IPD) is a delivery

model for delivering construction projects
using a single contract for design and
construction with a shared risk/reward model,
guaranteed costs, waivers of liability between
team members, an operating system based on
lean principles, and a collaborative culture.”
The IPD contract is a multi-party agreement
between the design firm, the builder, and the
owner.
It may also include trade partners.

38
Integrated Project Delivery Contract

Subcontractors typically fall under the

contractor’s portion of the agreement.
This construction contract agreement will tie
the subcontractors to the contractor, but they
will not serve as a signatory like the contractor.
Like the design-build contract, it brings all of
the deliverables into one single contract.
This type of construction contract spreads the
risk and rewards of the project across the
designer, builder, and owner, dependent on the
project’s financial results.

39
Integrated Project Delivery Contract

The IPD contract generally includes costs for

design, construction, and the shared
contingency. The risk and reward parties (i.e.,
the signatories on the contract) agree to
receive payment for their costs and shared
savings if the project meets the performance
requirements outlined in the contract. These
parties agree upon a lump sum profit if the
project meets the defined financial outcomes.

40
Integrated Project Delivery Contract

Integrated Project Delivery Contract Benefits

IPD contracts are popular with teams that want
to prioritize collaboration.
They promote a sense of ownership and
teamwork as all parties must work together to
achieve the desired rewards.
They also spread the risk and reward fairly
across parties and foster greater accountability
for the results of the project.
.

41
Integrated Project Delivery Contract

Integrated Project Delivery Contract Drawbacks

Each party needs to remain committed to the

IPD model or risk reverting to traditional
project delivery methods.
Some design firms and subcontractors may not
want to participate.
Some contractors find it difficult to secure
financing for these projects as well.

42
FIDIC

43
FIDIC

FIDIC (Fédération Internationale des Ingénieurs-Conseils),

which translates to the International Federation of Consulting
Engineers, is a global organization that represents the
consulting engineering industry. Founded in 1913, FIDIC
plays a key role in the development and promotion of
standards in the construction and engineering sectors,
particularly related to contracts.

44
FIDIC

What is FIDIC?

FIDIC is best known for its suite of standard form contracts,

widely used in the international construction industry. These
contracts provide a framework for the legal and financial
relationships between parties involved in construction
projects, including employers, contractors, consultants, and
engineers.
The main purpose of FIDIC contracts is to ensure clarity,
fairness, and efficiency in project delivery.

45
FIDIC

Key Features of FIDIC Contracts:

Standardized Contract Templates: FIDIC provides standard
forms of contracts that outline the terms and conditions
governing the construction projects.
These contracts are designed to be used internationally and
can be adapted to local legal systems.
Risk Allocation: The FIDIC contracts are designed to allocate
risks fairly among the parties involved in a project. This is
done by defining responsibilities clearly for both the employer
(client) and the contractor.

46
FIDIC

Dispute Resolution: FIDIC contracts include provisions for

dispute resolution mechanisms such as adjudication,
arbitration, or mediation, which are essential in case
disagreements arise during the project.
International Application: FIDIC contracts are widely used in
international projects, and their flexibility makes them
applicable to a variety of industries, including infrastructure,
civil engineering, and building projects.

47
FIDIC

Advantages of Standard Forms of Contract :

▸ Savings in time and costs on repetitive transactions,
▸ Clear and easy-to-understand drafts,
▸ Frequent use increases understanding, and thus fewer
disputes,
▸ Fairness to all parties increases Contractor confidence
and lowers risk contingencies and, subsequently, lowers
costs,
▸ Ease of use for international contracts,
▸ Not drafted in favor of one party over another,
▸ Includes the best practice in the industry and common
issues and concerns that may be found in similar projects
48
FIDIC

Types of FIDIC Contracts: FIDIC

publishes a range of contract forms
tailored for different types of projects
and contracting relationships.
Some of the key types include:

Red Book (Construction): The most

widely used FIDIC contract, suitable
for traditional design-bid-build
projects, where the employer
provides the design and the
contractor is responsible for
construction.
49
FIDIC

Yellow Book (Design & Build): Provides

the conditions of contract for the
construction of buildings and engineering
works where the detailed design is done by
the Employer.
However, It also allows some part of the
works to be Contractor-designed but it is
not suitable if most of the works are
designed by the Contractor.
Yellow Book is suitable for projects where
design and construction, including electro-
mechanical works, are the common areas;
for example pumping stations, water and
waste treatment plants, industrial plant
transfer, recycling units, etc.

50
FIDIC

Silver Book (EPC/Turnkey

Projects): This contract is
used for Engineering,
Procurement, and
Construction (EPC) or
turnkey projects, where the
contractor assumes a high
degree of responsibility,
including design,
construction, and delivery of
a complete project.

51
FIDIC

Green Book (Short Form of

Contract): A simplified
version for smaller projects
or those where the
complexity and value of the
work do not justify the use
of the full FIDIC contracts.

52
FIDIC

Gold Book (Design, Build &

Operate): It is for contracts
combining design-build
obligations with a long-term
operation commitment. The
Gold Book adopts a 'green
field' design-build operation
scenario with a 20-year
operation period, or
beyond.

53
Thanks!

54
 Any
Questions

55