Types Of Contracts in Building Construction
Contracts is a mutual or legal binding agreement between two parties based on terms and condition recorded in a document.
It is the important document as it define the Scope of work, risk, duties and legal rights of both the owner and contractor.
And we know executing the project is most complex activity and each activity have their own set of rules, that's why contracts is must between stakeholder involve in construction. It reduces the risk of dispute in future between client and contractor.
Signed contract is legally valid and can be used in court when there is any dispute.
Hence before signing any contract, please be clear on scope of work , clauses used in contracts and condition defined for executing the project.
It is very rare in construction where project gets completed without any dispute , And when ever there is any dispute , contracts documents play important role to figure out disputes.
Types of Contracts
Based on industry, the following types of contracts are mostly used
1. LUMPSUM Contracts
In this type of contracts, the client pays a lump sum amount to the contractor without any breakup and contractor have to execute complete work for decided lumpsum amount.
No measurement is required after work completion.
It is also called as fixed-fee type contracts.
In this type of contracts, sufficient documents (such as Scope of work, payment breakup, project schedule, design basis report, specification and make lists for material, detailed drawing, Detailed or lumpsum BOQ) are provided to sub-contractor to avoid the extra item.
-It mostly suits the client as minimum supervision required related to quality and schedule.
-Contractor selection is easy for the client.
-It is risky for the contractor. As the client pay a lumpsum amount.
If contracts documents are well defined and construction drawing available then lumpsum type contract is best as it reduces risk of clients and contractor have proper idea about his work so that contractor can control profit margin.
2. Item Rate Contracts
In this type of contracts, the client provides detailed Scope, BOQ, drawing and specification.
Contractor quote based on the quantity provided by the client, and if any changes occur it will be payable by the client.
-it is safe contracts for the contractor as most of the risk lies in client scope.
-This type of contracts takes more time for contractor selection.
-Total cost of the project may change, it depends on the accuracy of quantity calculation done at the tender stage by the client.
-Contractor paid after client measurement due to this mostly contractor payment delayed.
-Any item not covered in BOQ and needed on site then it will be considered as an extra item.
-It is the most transparent type of contracts, as everything inspected and guided by client and its supervisory team.
-Less chance of dispute between client and contractor.
3.Percentage Rate type Contracts
This type of tender is the same as Item rate contracts.
In these contracts, the client provides a rate of each item and contractor pay percentage on the same.
Example
for one project contractor have quoted Rs130 and client price is 100
then 30% is added on client price to match contractor price.
Billing is done on client rate with an addition 30% on the same.
4. Cost-plus contract
This is one of the safe contracts for contractors.
In this owner pays for all material, labour, staff with co-ordination charges to the contractor.
Mostly client fixes some percentage on all bill as overhead margin for contractor.
It is the most transparent type contracts between client and contractor.
This type of contracts is helpful when the quantum of work is uncertain and type of labour, the material is also unpredictable.
Client pay fix percentage as profit For all payment done to any sub-contractor or manufacturer.
All the negotiation is done by the client and contractor.
This percentage is mostly called as co-ordination charges.
It avoids the dispute and risk for contractor.
Final project cost is un-predictable.
5. GMP
Guaranteed maximum price
It is also similar to cost plus type of contracts.
It gives a cap on the contract price and the client won't cross contract price.
Client financial risk is reduced and contractor risk is increased.
6.EPC and Trunkey Contracts
Nowadays EPC(Engineering, Procurement and construction ) type of contract used which is one of the types of lumpsum contracts only, where the client provides outline such as scope and specification and everything will be in contractor scope including design, procurement, construction and its related approval. It is very risky type contracts for both owners as well as the contractor because anything missed by anyone will cost them. In this type of tender mostly payment is done on a milestone basis And contractor bid with a single figure amount.
for a contractor, Trunkey contracts are also similar to EPC contracts with some additional responsibility.
In EPC contracts, the owner provides fundamental design additional to scope and specification. Accordingly, the contractor designs and take approval from the client.
And in turnkey contract owner provide only specification and requirement, And accordingly the turnkey contractor provides basic and detailed design.
As a contractor, you should not forget the following thing about contracts
1.Read the contracts very carefully because any item missed in contracts will be a loss for the contractor.
2.find out the loopholes in contracts as no contract is full proof. And try to take benefit of that loopholes.
3. Try to find an item which is going to be installed at the site but not mentioned in the contract document.
try to convince the client about that and claim it is an extra item. Extra item can increase your company profit.
4. At tender stage try to raise questions about all the clause (like scope of work, payment terms, time, LD, DLP, qualification, make list, specification, vendor selection) which can affect the project in future.
5. Practically, contracts terms are very confusing and difficult to understand
So the contracts team should provide a simplified form of contracts document to the site team because the site team will be the front face for the client.
And if possible for the contractor to place a dedicated contract person over the site, then it will benefit a lot.
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