BUILDING CONTRACT TYPES

Contracts are usually categorized according to the type of payment but can be tailored to incorporate common elements from several different Contract types. Some of the common forms of Contract are described below.

1. UNIT PRICE (ITEM WISE) CONTRACT
2. LUMP SUM ( FIRM FIXED PRICE) CONTRACT
3. LABOUR CONTRACT
4. COST + CONTRACT
5. PROJECT MANAGEMENT CONTRACT

1. UNIT PRICE (ITEM WISE) CONTRACT-

This kind of Contract is based on the estimated quantities of each item of the building project and unit prices (for each item) which have been agreed to. The final price of the project is dependent on the quantities of the items needed to carry out the work, which may eventually vary from what was initially estimated. This type of Contract therefore accommodates flexibility for price adjustment.

ADVANTAGES OF UNIT PRICE (ITEM WISE) CONTRACT:

•  Involvement of the Architect- The Architect is involved in this type of Contract because it is he who provides the quantities of each item (in the Bill of quantities), and negotiates the unit prices with the Contractor. Moreover, in this type of Contract, the Owner makes payments to the Contractor only after the Architect  has verified the measurements at Site and certified the Contractor’s bills for payment. This way the Owner is safe as he is paying only for the volume of work done at site and not paying anything extra. Also, he is assured (because the Architect is involved), that the quality of the work will be upto the mark.
• Initial investment by the Contractor - In this type of Contract, the Contractor has to initially invest his own money for starting the work, and so the Owner need not worry about giving the Contractor a big advance.
• Most Scientific type of Building Contract - In general this Contract is considered the most scientific and most suitable for construction projects where the different types of items, but not their numbers, can be accurately identified in the Contract documents.
• Contractor is also safeguarded- against any contingencies, or variations in labour or material rates.

DISADVANTAGES OF THE UNIT PRICE (ITEM WISE) CONTRACT: 

• From the Contractor's point of view, there is one disadvantage and that is, he has to invest his own money initially. Sometimes, Owners can be tricky and may try to get rid of the Contractor after he has started the work without paying for it.

Though this is one of the most preferred  Contract  in Construction/Buildings, it is not unusual to combine a Unit Price Contract for parts of the project with a Lump Sum Contract or other types of Contracts.

2(a). LUMP SUM (FIRM FIXED PRICE) CONTRACT -

With this kind of  Contract  the Contractor agrees to do the construction and completion of the building at a designated time for a fixed price or Lump Sum. Also named "Fixed Fee Contract", this type of Contract is often used in Building Contracts. Fixed Fee or Lump Sum Contract is suitable if the scope and schedule of the project are sufficiently defined to allow the estimation of the project costs.The scope of the Contract defines the expectations of both parties.

ADVANTAGES OF LUMP SUM CONTRACT:

• Fixed Price - A lump sum Contract provides for a price that is not subject to any adjustment on the basis of the Contractor’s cost experience in performing the Contract. This Contract type places upon the Contractor maximum risk and full responsibility for all costs and resulting profit or loss.
• Certainty - This type of Contract provides a degree of certainty for both parties because the Contract clearly spells out what is involved.
• No Unforeseen price variation for the Owner - Since the price is fixed, any unforeseen contingencies or variations in material or labour prices do not affect the Owner.
• Control Costs - It provides maximum incentive for the Contractor to control costs and perform effectively and imposes a minimum administrative burden upon the Contracting parties.

DISADVANTAGES OF THE LUMP SUM CONTRACT:

• Architect is not involved - An Architect  is not involved as this Contract is an agreement between the Owner and the Contractor for a final fixed price. So the Architect does not have a role to play, and hence the quality of work cannot be checked and controlled by an expert.
• The specifications are not clear - Therefore, the Contractor can use alternative/inferior brands of materials.
• Ambiguity - There is a lot of ambiguity in the specifications, measurements, mode of payment, etc.
• Extras - Though the Contract is made on a fixed price, the Contractor may claim extras by giving different reasons, since the specifications, measurements are not clear.
• Money taken in advance - The Contractor takes money in advance from the Owner, and then he proceeds with the work at his own pace. Also sometimes, the Contractors deliberately hold up work towards the end, so as to extract maximum money from the Owner. So the Owner feels helpless as his money is with the Contractor.

A lump sum Contract can be used in conjunction with an award-fee incentive and performance incentives, when the award fee or incentive is based solely on factors other than cost. The  Contract  remains Lump Sum when used with these incentives.

A lump sum Contract, which best utilizes the basic profit motive of business can be used when the risk involved is minimal or can be predicted with an acceptable degree of certainty. However, when a reasonable basis for firm pricing does not exist, other Contract types (or Combination types) should be considered that will appropriately tie profit to Contractor performance.

2(b). LUMP SUM CONTRACT WITH PRICE ADJUSTMENT-

It provides for upward and downward revision of the stated Contract price upon the occurrence of specified contingencies. A lump sum Contract with economic price adjustment may be used when there is serious doubt concerning the stability of market or labour conditions that will exist during an extended period of Contract performance, and contingencies that would otherwise be included in the Contract price can be identified and covered separately in the Contract. Economic price adjustments are adjustments:

• based on established prices of specific items or the Contract end items,
• based on actual costs of labor or material that the Contractor actually experiences during Contract performance and
• based on cost indexes of labor or material that are specifically identified in the Contract.

In establishing the base level from which adjustment will be made, one shall ensure that contingency allowances are not duplicated by inclusion in both the base price and the adjustment requested by the Contractor.

3. LABOUR CONTRACT -

In this type of  Contract , the Owner buys and supplies all the material required for the construction to the Labour Contractor and only uses his labour. A workman is deemed to be employed as Contract Labour when he is hired in connection with the work by or through a Contractor. Contract workmen are indirect employees; persons who are hired, supervised and remunerated by a Contractor who, in turn, is compensated by the Owner of the site. Contract labour has to be employed for work which is specific and for definite duration.

ADVANTAGES OF A LABOUR CONTRACT: 

• Save on Contractor's Profit - This kind of Contract is sometimes preferred by the Owner, because he buys all the material by himself and thus saves a lot on the Contractor’s profit.
• Control over Materials - Moreover, the Owner can buy the materials of his choice and can be sure of the brand that will be used in the construction.

DISADVANTAGES OF A LABOUR CONTRACT: 

As an Architect, I personally would discourage a Client from entering into this type of Contract for the following reasons:

• No role for Architect -In this Contract also, the Architect  does not have a role to play, and so quality of work cannot be checked and controlled by an expert.
• Tensions for the Owner - There is a lot of headache and tension involved in running around and arranging for the supply of materials at site, on time as the work progresses.
• Quality of Materials may be compromised -It is easy to get fooled on the quality of sand, bricks etc because the Owner is not very experienced in assessing the quality.
• May not get a good bargain- It is difficult to strike a good bargain when negotiating with suppliers and vendors, because the Owner is a one time Client, whereas the Contractor normally has an advantage as he is a regular Client and a relationship is built between him and the suppliers.
• Pilferage - There is every possibility of pilferage of the material stored at site, because it is not the responsibility of the Labour Contractor.
• Delay in Work -Very often labourers, masons etc do not turn up to site as they may be lured for a day to some other site and hence the work gets delayed.
• Go slow on the Project - Since the workers are generally paid for the work on a daily basis, the labour Contractor may purposely go slow so that he he takes longer to complete the job and so get paid more.
• Social injustice - Inferior labour status, casual nature of employment, lack of job security and poor economic conditions are the major characteristics of Contract labour. While economic factors like cost effectiveness may justify system of Contract labour, considerations of social justice call for its abolition or regulation.

In fact, in my experience, I have seen that in most cases, the Owner ends up spending almost as much, at the end of the project as he would have if he had chosen any other type of Contract.

4. COST + CONTRACT- 

This type of  Contract  is not popular in India. This is a Contract agreement wherein the Owner agrees to pay the cost of all labor and materials plus an amount for Contractor overhead and profit (usually as a percentage of the labor and material cost). It is like a Labour Contract, but here the Contractor buys the materials and provides the labour and is reimbursed accordingly. 

This type of  Contract  is favoured where the scope of the work is indeterminate or highly uncertain and the kinds of labor, material and equipment needed are also uncertain. Under this arrangement complete records of all time and materials spent by the Contractor on the work must be maintained. This type of Contract can be altered according to the basis on which the additional amount paid to the Contractor is fixed.

• COST + FIXED % CONTRACT- It is based on a percentage of the cost
• COST + FIXED FEE CONTRACT – It is based on a fixed sum independent of the final project cost.
• COST + FIXED FEE BONUS CONTRACT –It is based on a fixed sum of money and a bonus is given if the project finishes below budget, ahead of schedule etc.
• COST + FIXED FEE WITH SHARING ANY COST SAVINGS CONTRACT- It is based on a fixed sum of money and any cost savings are shared with the Owner and the Contractor.
• INCENTIVE CONTRACTS – It is based on the Contractor’s performance on the agreed target - budget, schedule and/or quality.

ADVANTAGES OF THE COST + CONTRACT:

• It has the advantages of the Labour Contracts.
• Incentive for the Contractor - In addition, since the Contractor gets an additional amount at the end of the project, it provides maximum incentive for the Contractor to control costs and perform effectively and on schedule.

DISADVANTAGES OF COST + CONTRACT:

• No role for Architect - In this Contract also, the Architect  does not have a role to play, and so quality of work cannot be checked and controlled by an expert.
• No Proof- Since the Contractor is reimbursed based on the records of the workers he has employed and the materials he has bought, one can never be sure if these records are genuine, as there is no way of verifying them. So, this type of Contract is rarely adopted in India.

5. PROJECT MANAGEMENT CONTRACT -

Project Management Contracts are a type of Contract where the Architect  agrees to manage the Contract, as defined by the scope of the agreement, for a specified duration of time for monetary consideration. This type of Contract can be short term or long term.

ADVANTAGES OF PROJECT MANAGEMENT:

• No worries for the Owner - The Clients can focus on their core operations while the Architect (Project Manager) looks after the management of Projects, people and issues, ensuring that deadlines are met, quality is maintained and costs are controlled.
• Co-ordination - The Project Manager coordinates with all the agencies, including the Consultants, the Contractor and the Suppliers to ensure that the construction of the project goes on smoothly.

DISADVANTAGES OF PROJECT MANAGEMENT:

• Extra Cost -Some Clients hesitate to go in for Project Management Contract as they have to pay extra for project management, in addition to the fees paid to the Architect However, there are lots of Clients nowadays, who opt for Project management as it saves them from a lot of headache and they can concentrate on their work as the building comes up. Moreover, in the long run, since the project is completed on time, and costs are controlled, the Client actually saves.

Related Topics:

• BUILDING CONTRACT
• BUILDING CONTRACTOR | NATURE OF WORK
• LIST OF BUILDING CONTRACTORS IN INDIA