Ecm 422 Type of Contract Zulkarnain

ECM 422
TYPE OF CONTRACT
NAME: MUHAMMAD ZULKARNAIN BIN TUKIMIN
CLASS: 3A3
STUDENT ID: 2016209182
LECTURER: SIR NORAZLAN BIN KHALID

CONTRACT DEFINITION
1. From a legal point of view

- A mutual agreement between two or more parties that something shall
be done, an agreement enforceable at law.
2. According to FIDIC
- Contract means the General Conditions, the Supplementary
Conditions, the Specifications, drawing, bill of quantities, tender,
letter of acceptance and the contract agreement.
3. 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
WHY USED CONTRACT IN CONSTRUCTION
Describe scope of work

Establish time frame
Establish cost and payment provision
Set fourth obligations and relationship
Minimise disputes
Improve economic return of investment
TYPES OF CONTRACT
1. Lump Sum Contract
- Involves a total fixed priced for all construction related activites

- Can include incentives or benefits for early termination or also can
also have penalties called liquidated damages for a late termination
ADVANTAGES DISADVANTAGES
Low risk on the owner, higher Changes is difficult and costly

risk to the contractor
Cost known at outset Contractor is free to use the

lowest cost of equipment,
methods
Contractor will assign best The contractor carries too much
personnel risks. The tendered price may
include high risk contingency
Contractor selection is easy Competent contractor may

decide not to bid to avoid high
risk lump sum contract
Useful when the project is not
too large
- Preferred when a clear scope and a defined scheduled has been

reviewed and agreed upon
- No addition in variation or omission

- Scope of work in drawing
- Quality of material and workmanship are describe in specifications
2. Measurement Contract
- Divided into 2
i. Unit Price Contract
- No total final price

- Quote rates / price by units
- Re-negotiate for rates if the quantity or work considerably exceeds the
initial target
- Payment to contractor is based on the measure
- Unbalanced bids
- Required sufficient design definitions to estimate quantities of units
- Contractors bid based on units of works
- Time and cost risk (shared)
Owner : at risk for total quantities
Contractor : at risk for fixed unit price
- Large quantities changes (>15-25%) can lead to increase or decrease
of unit price
Easy for contract selection Final cost not known from the
beginning (BQ only is estimated)
Early start is possible Staff needed to measure the finished

quantities and report on the units not
completed
Saves the heavy cost of preparing Unit of price sometimes tend to draw
many bills of quantities by the unbalanced bid
contractor
Fair basis for competition
In comparing with lump sum

contract, changes in contract
documents can be made easily
Lower risk for contractor
ii. Schedule of Rates Contract
- A schedule of work items without quantities is prepared by the owner

and to be rated by the contractor
- The descriptions of items and the units of measurement are similar to
those used in a normal BQ but no quantities are given
- It is common for separate rates to be quoted for labour, plant and
materials
- Mainly used for repair and maintenance works or under conditions of
urgency
Pro Cons
Work can be commenced earlier than No indication of the final price of the
if a full BQ has been prepared works
Very difficult to determine which
contractor submitted the most
May cause financial problems to the
public owners
3. Cost Reimbursement Contract
- Actual cost plus a negotiated reimbursement to cover overheads and

profit
- Different methods of reimbursement :
o Cost + Percentage
o Cost + Fixed Fee
o Cost + Fixed Fee + Profit Sharing Clause
- Higher risk to owner
- Compromise : Guaranteed maximum price (GMP) reduce risk to
owner while maintain advantages of cost plus contract
- By using this type of contract, the contractor can start work without a
clearly defined project scope, since all costs will be reimbursed and a
profit guaranteed.
- Allowable and reasonable cost incurred by a contractor in the
performance of a contract
- Final cost is determined when the contract is completed
- Time, labour and materials are highly uncertain to perform a contract
- Tendering proceed based on outline specification, any previous
drawing and an estimated cost
i. Cost + Percentage (%)
- The contractor is reimbursed for all his costs with a fixed % age of
costs to cover his services
- Project / size overheads may be covered by the % age or computed as
one of the costs
- No incentive for the contractor if I can be completed early
- Useful in emergency work because insufficient time to prepare a
detailed document tender or drawing before work is commenced.
Profitable for the contractor No incentives to finish the job
quickly
Construction can start before design Does not know the total price of the
is completed contract
If the contractor is efficient in the Larger the cost of the job, the higher
utilization of resources then the cost the fee the owner pays
to the client should represent a fair
price for the work undertaken
ii. Cost + Fixed Fee
- Most common form of negotiated contracts

- The sum paid to the contractor will be the actual cost incurred in the
execution of the work plus a fixed lump sum which has been
previously agreed
- No incentives to the contractor if the work can be completed early
Pros Cons
Fee amount is fixed regardless of Expensive materials and construction

price fluctuation techniques may be used to expedite
construction
iii. Cost + Fixed Fee + Profit Sharing Clause
- Rewards contractors to minimise the cost

- A basic fee is quoted as a percentage of an agreed target estimate
obtained from a priced BQ
- The target estimate may be adjusted for variation in quantity and
design and fluctuations in the cost of labour, materials and etc.
- The actual fee is paid to the contractor is arrive by increasing or
reducing the basic fee by an agreed % of the saving or excess between
the actual cost and the adjustment target estimate
- In some cases, a bonus or penalty based on the time of completion
may be applied
Provides incentive clause to the Contractor must absorbed any amount

contractor over the guaranteed maximum price
Plans & specifications need to be

detailed
4. Management Contract
- Practice by which one company supplies another with managerial

expertise for a specific period of time
- Involved parties are :
o Owner of a business
o Third party management company
- 2 types of knowledge can be transferred through management
contracts
o The specialized knowledge of technical managers
o The business management skill of general managers
- This type useful for big project which have a lot of works.
Contractor expertise available to Final cost of project not known at

design team outset of the design overlaps with
construction
Construction can commerce before If management contractor does not

design is complete as work let in have the required expertise he may
package not be able to contribute the design.
Useful where complex contract

require many design groups and
contractor-management of the whole
process is controlled by the
management contractor/consultant
Time target more easily met as later

packages of the work can be adjusted
5. All In Contract
- Main contractor is appointed by client to do the design and construct

- Called as design and built contract
- Project scope is well defined
- A client may choose to ask the contractor to take all the risks, both in
terms of actual project cost and project time
- The may be or may not be additional provision to share any savings if
any in the contract
- Submit a full detailed of design, construction and cost including
maintenance of the works for a limited period
- The owner and the contractor agree to a project cost guaranteed by the
contractor as maximum
- This type of contract is useful for a limited period contract request by
the client through their engineer

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ECM 422

NAME: MUHAMMAD ZULKARNAIN BIN TUKIMIN

STUDENT ID: 2016209182

LECTURER: SIR NORAZLAN BIN KHALID

1. From a legal point of view

3. According to method of payment

WHY USED CONTRACT IN CONSTRUCTION

Describe scope of work

1. Lump Sum Contract

- Involves a total fixed priced for all construction related activites

Low risk on the owner, higher Changes is difficult and costly

Cost known at outset Contractor is free to use the

Contractor selection is easy Competent contractor may

- Preferred when a clear scope and a defined scheduled has been

- No addition in variation or omission

- Quality of material and workmanship are describe in specifications

- No total final price

Early start is possible Staff needed to measure the finished

Fair basis for competition

In comparing with lump sum

Lower risk for contractor

ii. Schedule of Rates Contract

- A schedule of work items without quantities is prepared by the owner

3. Cost Reimbursement Contract

- Actual cost plus a negotiated reimbursement to cover overheads and

- Most common form of negotiated contracts

Fee amount is fixed regardless of Expensive materials and construction

iii. Cost + Fixed Fee + Profit Sharing Clause

- Rewards contractors to minimise the cost

Provides incentive clause to the Contractor must absorbed any amount

Plans & specifications need to be

- Practice by which one company supplies another with managerial

Contractor expertise available to Final cost of project not known at

Construction can commerce before If management contractor does not

Useful where complex contract

Time target more easily met as later

- Main contractor is appointed by client to do the design and construct

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