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Advantages and Disadvantages
Advantages and Disadvantages
CONSTRUCTION CONTRACTS
Contract Definitions
A. From a Legal Point of View A mutual agreement between two or more parties that something shall be done, an agreement enforceable at law. B. According to FIDIC Contract means the General Conditions, the Supplementary Conditions, the Specifications, the Drawings, the Bill of Quantities, the Tender, the Letter of Acceptance, the Contract Agreement, and such further documents as may be expressly incorporated in the Letter of Acceptance or Contract Agreement.
C. According to Method of Payment The agreement of how the owner will pay the contractor for work performed such as a lump-sum or cost-plus payment.
when limited variation is needed, when level of risks is low and quantifiable, and when the client does not wish to be involved in the management of his project. 4. The contractor is responsible for preparing his B.O.Q. i.e. determination of work items, description of work items, obtaining his own quantity form drawings and specifications and taking the responsibility for the accuracy of the estimated quantities. 5. The responsibility is on the contractor to include in his price everything necessary for carrying out the work. b) Advantages of Lump Sum Contract 1. The final price is known, by the owner, before the work commences. 2. The contractor has more incentive to reduce his cost to increase the profit. 3. The contractor hopes to complete the job as quickly as possible, to minimize overhead, to maximize profit and to move to the next Job. c) Disadvantages of Lump Sum Contract 1. A great deal of work should be done by the contractors prior to preparing the estimate. It is wasteful of a skilled estimators time. 2. Changes in drawings and specifications can be very expensive and source of trouble. In other words the contract has very limited flexibility for design changes.
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3. The contractor carries much of the risks. The tendered price may include high risk contingency. 4. Competent contractors may decide not to bid to avoid a high-risk lump sum contract.
Admeasurement Contract
1. Includes Bill of Quantities Contract and Schedule of Rates Contract. 2. Payment is made (monthly) for quantities of work completed and measured during the month. 3. The client can introduce variations in the work. 4. The contractor can claim additional payment for any changes in the work content. 5. Tender price is usually increased by variations and claims.
3. Contractors enter unit prices against the estimated quantities of work. 4. The contract is based on estimated quantities of work items and unit price for each of these work items. 5. Payment is made on the basis of units of work actually done and measured in the field multiplied by the unit prices. 6. Re-determination of unit prices when substantial quantity deviations occur is stipulated in contract conditions. 7. Useful on projects where the nature of the work is well defined, but the quantities of work cannot be accurately determined in advance of construction. Suitable for highways, dams, airports b) Advantages of Unit Price Contract 1. Saving the heavy cost of preparing many bills of quantities by the contractors. 2. Fair basis for competition. 3. In comparing with lump-sum contract, Changes in contract documents can be made easily by the owner. Lower risk for contractor. c) Disadvantages of Unit Price Contract 1. The exact final price of the project is not known to the owner until the completion of the project.
5. Topics that should be negotiated between owner and contractor before signing a cost reimbursement contract include: Subcontract-letting. Determination and payment of fee. Accounting methods. Overheads (site and office). b) Advantages of Cost Reimbursement Contract 1. Start construction without waiting for the whole set of drawings and specifications. 2. More flexibility for the owner to make changes as work progresses. 3. Draw the contractor expertise during design. c) Disadvantages of Cost Reimbursement Contract 1. It is difficult to predict the final cost and the distribution of it, which may cause financial problems to the owner. 2. Contractor pays less attention to cost control.
b) Advantages of Cost plus Percentage of Cost 1. Construction can start before design is completed. 2. If the contractor is efficient in the utilization of resources then the cost to the client should represent a fair price for the work undertaken. c) Disadvantages of Cost plus Percentage of Cost 1. The project total cost is completely unknown before the project start. 2. No incentive for the contractor to be efficient in his use of labors, materials or equipments. 3. Minimum efficiency maximizes the profit. 4. Owner must exercise tight cost control, which may be difficult and/or costly.
2. There is incentive for the contractor to complete the work as quickly as possible since his fee remains constant. c) Disadvantages of Cost plus Fixed Fee 1. Major variations create problems. The fee must be re-negotiated to take account of such variations. 2. The speed of commencing the work is undermined since before a fee can be agreed a fairly detailed description of work must be made.
c) Disadvantages of Target Cost Contract 1. Difficulties may arise in agreeing on a revised target cost if there are major variations or cost inflation. 2. A tight cost control must be exercised, which may be difficult and/or costly.
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