Below shows some common contract types used in construction. It is also prudent to remember that the contract type is a base and most contracts have their own unique complications to the type.
Lump Sum Contract
The Lump Sum Contract can sometimes be called ‘Stipulated Sum’ and is the most basic form of agreement where the contractor/supplier agrees to a fixed lump sum price to undertake all the specified contract works and the employer agrees to pay this price upon completion of works.
The Schedule of Rates may be provided by the employer but quantities are usually binding upon the contract drawings and specifications. The SoR can be used for payment purposes and the rates used for assessments of design changes and additional work.
Advantages:
- Lower financial risk to Employer.
- Higher financial risk to Contractor.
- Minimum Owner supervision related to quality and schedule.
- Contractor has a higher incentive to achieve earlier completion and better performance.
- Contractor selection is relatively easy.
Disadvantages:
- Changes are difficult and costly. (but it usually is)
- Need to substantially complete design prior to bidding.
- Contractor is inclined to choose lowest methods / materials to comply with specifications.
- Hard to build relationships. Each project is unique.
- Bidding is expensive and lengthy.
- Contractors may include high contingency within each Schedule of Rate item
Re-measurement Contract
The Re-measurement Contract contains a Bill of Quantities ( BQ )provided by the employer or its consultants, however, the BQ quantity is estimated and not final. The contractor will quote against each BQ item and enter a unit rate or unit price to build up the total contract price based on of those BQ quantities.
During the construction period, the actual quantity of works executed under each BQ item will be jointly measured and valued at the quoted rate for interim payment purpose.
At completion of contract, the exact quantity of works finally executed under each BQ item will be again re-measured ( ie. the final measurement ) and valued at the quoted rate to evaluate the final account.
In case of instructed variation or additional works that are without basis of BQ rate(s), the contractor can build up new rates or star rates for those works for valuation.
Arguably, this type of contract is more fair to both the client and the contractor because the final contract sum is based on a final re-measurement rather than being based on preliminary quantities set at tender.
Build, Operate and Transfer ( BOT ) Contract
This type of contract is sometimes known as “ Build, Own, Operate and Transfer ( BOOT ) contract ”. The client will lay out a series of required end products with specification, terms and conditions; and the contractor has to finance, design, construct, maintain, manage and operate the finished work for an agreed period, say 10 years, 20 years or so.
During this agreed period, the contractor has temporary ownership of these finished works and can charge the end users for recovery of its investment together with the expected profit. However, when the agreed period expires, the finished work will have to be transferred back to the client in specified conditions.
All-in Contract
This type of contract is sometimes known as a “ package contract ” or “ turnkey contract ” or “ design and build contract ” and can be on lump sum basis or re-measurement basis.
The client or its engineer will set out the requirements in the board or particular terms and invite the tenderers ( usually pre-qualified ) to submit a comprehensive proposal for the design and construction of the project.
Maintenance Contract
This type of contract is usually for the maintenance or renovation work of a large-sized project and the construction period usually ranges between 2 to 3 years or as otherwise agreed.
Usually a “ schedule of rates ” contains a comprehensive list of work items already prepared to cover the employer’s proposed works but without specified quantities. The tenderers will be invited to quote their competitive rates against the work items in the schedule, or sometimes to quote an addition / deduction percentages against the pre-determined rates entered by the employer or its engineer.
The employer will issue Works Orders to the contractor during the stated period for execution of any work items as required in anywhere within the project site. Payment for workdone will be based on the agreed schedule of rates. In case the executed work items are not covered under the agreed schedule of rates, a new rate or “ star rate ” will be built up and jointly agreed for payment purpose.
Term Contract
This type of contract is a short-term contract and usually applies to some project which has an urgency to commence construction work. It includes a list of major work items with provisional quantities and invites the contractor to quote.
Following the award of the contract, the contractor will immediately commence preparatory work and detailed scope of works will be instructed from time to time until the whole design is completed. The works payment will be on the basis of the list of major work items and will negotiate a relevant new rate for the missing work items.