Name: xxxxxx

Student ID: xxxxxxx

M.Sc. Project Management

Advanced Project Planning & Visualisation

(CENxxx-xxx-CF1-xxxx)
Assignment 1
No Industrial Experience
Contracts in Construction Projects
Contents
1. Introduction .................................................................................................................................... 3
2. Contracts in Construction Projects: Design-Build and Cost-Plus Contract ..................................... 4
2.1 Design-Build Contract ............................................................................................................. 4
2.2 Cost-Plus Contract................................................................................................................... 4
3. Assessment Criteria of the contracts .............................................................................................. 5
3.1 Design-Build Criteria ............................................................................................................... 6
3.2 Cost-Plus Criteria........................................................................................................................... 7
4. Advantages and disadvantages of Design-build contract and Cost-Plus contract.......................... 7
4.1 Design-Build ............................................................................................................................ 8
4.1.1 Advantages of Design-Build Contract ............................................................................. 8
4.1.2 Disadvantages of Design build Contact........................................................................... 8
4.2 Advantages and Disadvantages of Cost-plus Contract ........................................................... 8
4.2.1 Advantages............................................................................................................................. 8
4.2.2 Disadvantages ........................................................................................................................ 9
5. Conclusion ....................................................................................................................................... 9
References ............................................................................................................................................ 10
 1. Introduction

A construction project, particularly a large one, involves a number of parties and, thus, a
network of contractual relations (James, 1994). Such as construction firms (those who "buy"
construction work), contractors (those accountable for the work), sub-contractors (those who
will be delegated from certain parts of the works), professional consultants, the suppliers
(providing materials and equipment). Depending on the type of building to be delivered, a
wide range of areas are covered: management, design, building, engineering, warranties and
guarantees – to name a few. (Caroli, 2018)
Contract is fundamentally an agreement between two or more parties to do or to refrain
from doing something. According to English law, contracts can be enforced legally and should
be intentionally established. Information exchange is critical to establishing an actual
contractual setting grounded on goodwill. Data must be traded genuinely from the beginning
to fabricate trust in all members in the construction project. When completed, collaboration
becomes easier to implement, which in turn allows for more efficient construction projects.
This reduces the possibility of conflict between the two parties. Alternative dispute resolution
mechanisms tend to allow parties to cope with inevitable emergencies in construction
contractual relationships. These instruments incorporate compromise, settlement and
conciliation through a dispute committee or mediator. (Dagenais, 2007)
Procurement is a term used to depict all exercises embraced by the customer in the quest
for building or redesigning a building. It is likewise mentioned to as the technique or
framework that tries to adjust the pros, cons and budgetary requirements that are probably
going to influence the project in order to choose an effective contractual arrangement.
At the point when a client wishes to choose any sort of procurement methods for a
project, the customer’s real concerns are:
 Overall cost of the project
 Execution and quality in connection to both design and development of the project
 To complete project within time.
Primary four procurement methods, they are as per the follows: (Nwachukwu, 2012)

 Design-Build method
 Traditional method
 Management contraction method
 Public-Private Partnership (PPP) method.
 2. Contracts in Construction Projects: Design-Build and Cost-Plus
Contract

Employers and contractors in the construction industry are liable to various bonds that
the contractor and employers must settle before beginning of a project. Among them, the
most regularly utilised contracts in structural designing work are design-build contract and
measurement contract. (Haswell & De Silva, 1989)

2.1 Design-Build Contract

A Design-Build contract is a delivery system for a construction project where the design
and development perspectives are contracted with a solitary element known as the design-
builder or design-build contractor. This is a sort of industry standard model given by JCT (Joint
Contracts Tribunal Ltd). Configuration assemble centre around joining configuration, permits
and development plans for request to streamline the traditional design-bid-build
environment. (Reuters, 2016 )
Major documents of Design-Build contract:
There are three key documents utilised related to a standard design and build contract:
(Anon., 2018)
 Employer’s requirements
 Contractor’s proposals
 Contact sum analysis.
This type of contract incorporates adequate time for the contractor to prepare an
appropriate project design as per the business necessities. The contractor will be given the
full right to design the diverse element of the project mentioned by the business or the
proprietor of the venture. In general, the contractor appoints an internal team to develop the
design of the project to be followed during the implementation of the project (Lesniak, et al.,
2012)
Design–build have been a common contractual system in recent years. It offers an
assortment of advantages through the use of the contractor, who completes and accepts
accountability for the development as well as design the work. Notwithstanding, design and
construction turn out to be a risky system for both owners and contractors unless risk is
identified, analysed and managed during the tender preparation and project implementation
stages. (Öztaş & Ökmen, 2004)

2.2 Cost-Plus Contract

Cost-plus contract is a kind of agreement where the proprietor pays the contractor for all
construction related costs as agreed upon. Here the proprietor gets point by point data on
material and development costs. Here the expression "plus" alludes to the overall revenue
that a contractual worker is permitted to earn. Contractor is required to create and legitimate
proof of costs identified with the work. In addition, the contractual worker will not be
adjusted for any real mistake or blunder because of carelessness.
 The three major criteria of a Cost-Plus contract, it’s composed of:
 Direct costs
 Overhead costs
 Profit/Margin
Direct costs is expenses suffered due to actual construction activities. Expenses such as
labour, supplies, material selection, tools, equipment’s, and professional services will be
include under Direct costs. Overhead cost are expenses relating to the business, office rent,
insurance, employees, office supplies. Before undertaking the contraction work the employer
and the contractor will negotiate and agree upon the percentage of profits allocated to the
contractor once the construction is completed. Usually the profit/margin is a fixed ratio.
(Sturgeon, 2014)

3. Assessment Criteria of the contracts

It’s extremely important to manage the construction project in a viable way so as to

effectively throughout the entire construction works. Certain procurement criteria decide the
prequalification and choice of specific contracts to be distributed in civil engineering for
construction works. Traditionally, the project is considered to have accomplished an
abnormal state of execution if delivered in a timely manner and at the appropriate price and
good quality level. High level of satisfaction and quality should be provided to the clients.
(Bryde & Brown, 2004) concludes that the traditional distinction between good performance
and poor performance in a project are focused on meeting the time, product quality and cost.
The Iron Triangle shows these guidelines for project performance. Fig.1 shows the Iron
Triangle by (Atkinson, 1999)

Figure 1: Project Performance Criteria. Source: (Atkinson, 1999)

 3.1 Design-Build Criteria
Key Design-Build procurement criteria to boost the performance of the project:

 Planning and design project time

 Reducing project cost
 Minimising project time
 Flexibility of design changes
 Working relationship between project team
 Transfer risk to contractor
 Component and experienced contractor
Flexibility in Design and Construction Changes - It is particularly vital to have flexibility in
design and construction changes while working for large and complex construction projects
as changes in design occur regularly. Often it is difficult to define the requirements accurately
before bidding. This criteria provides the ability to absorb all of the changes during design and
construction phases. Among the factors that can have negative impact on project
performance, changes or alterations in design and construction are among the main factors.
Depending on the complexity, size and stage of the construction project, will have an impact
on how flexible the changes can be made or absorbed. For example, changes that are made
during construction are often more expensive to those that were executed during design
stages (Perkins, 2009). Since design and construction stages integrates with Design-build
method with no clear parting between them, it provides with much greater flexibility for
changes from other procurement methods, such us the traditional Design-bid-build method
(Thomas, et al., 2002).
Reducing Project Duration- Project performance has a significant positive effect by
reducing the project duration, providing that the project time is the major client priority,
therefore a factor in PM selection. This method is applied on the basis that the clients desire
to finish the project earlier than the set completion date or in a shorter period. Reduction in
project duration can be accomplished by the delivery strategy known as Design-build method.
This ideal feature of the Design-build approach is largely due to the reliability of the design
and construction process, helping contractors to manage, organise and accelerating the
construction work and completing the project as early as possible. (Thomas, et al., 2002),
(Songer & Molenaar, 1997)
Effective Communication between Project Parties - Effective collaboration and
communication between project partners contributes positively to the success of the project,
therefore this method is considered as one of the key criteria for choosing Design-build
method according to (Mohsini & Davidson, 1991). This method can only be implemented on
the basis that, effective communication between project partners (client, consultant and
contractors) during the design and construction phase of a project. The use of design-build
method enables the projects design and construction process to overlap, which generally
simplify the communication between the project partners. According to (Seng & Yusof, 2006),
performance of a construction project will have a positive impact due to effective
communication between the client and the contractor.
 3.2 Cost-Plus Criteria
Before entering into a Cost-plus contract, client should consider the factors listed
below:
 Price competition
 Price analysis
 Cost analysis
When employers is particularly concerned about the budget constraint of a construction
project, Cost-plus contracts are usually utilised. When the employer wants to minimise the
overall expenses of the construction, they typically choose Cost-plus contract. When choosing
this type of procurement method, the employers are presented with the cost associated
within each aspect of the construction project. When dealing with Cost-plus contract, its
contractors responsibility to gather accurate information regarding the total cost and
expenses of the construction project and present the information to the employer before
initial construction. Generally government agencies typically choose these kind of contacts.
The client may choose the contractor based on experience within the field, due to the risks
associated with cost prediction. Usually an experienced contractor tend to calculate the risks
involved with this kind of contract better. (Berends, 2000)
The performance in the quality of work tend to have high standard when choosing Cost-
plus contract due to, the contractor will not be able to deduct the workmanship. After
detailing the cost to the client and before undertaking the construction the contractor must
focus on the quality of the works. Contracts cover all details of expenses, so it provides a good
overview for the client. Here, because contractors are required to be more open and clear,
they pose the least risk to them. This type of contract also has some drawbacks, due to too
much information and details provided to the client, resulting in lower profits for the
contractor. (Berends, 2000) (Frick, 2013)
The risks involving in this kind of contract for the client is that, the contractor may need
more consultation and resources to fully justify the cost report therefore, an external
management team may be required. Also the duration the project take longer than expected
by the client when Cost-plus contract is used. The contractors must accept fact that the client
may also intervene or interfere with contractors work. As well as, all the recorded book of
earning and expenses must be reported to the client, even though the contactor may wish
not to. However when the contractor performs well under its provisions, it’s likely that they
receive handsome profit but the amount of bonus will depend on the client. In some cases
it’s also possible for the contractor have predetermined rates, based on qualification and
experience. Specialised contractors uses there standard prices, who provide accurate
estimates and provide less room for changes. (Frick, 2013)

4. Advantages and disadvantages of Design-build contract and

Cost-Plus contract
 4.1 Design-Build
Design-build procurement methods is suitable for complex construction projects, which
require implementation during construction stage. According to (Dada, 2013), “both design
and construction are provided by a single entity therefore, number of advantages and
disadvantages can be associated with this contract.
4.1.1 Advantages of Design-Build Contract

 Design-build is useful for contractors as it allows for certain amount of cost control.
The contractor beats full responsibility of the project once it’s initially approved by
the client. Also the contractor can use sub-contractors to work on the certain parts
of the project. This kind of agreement leaves the client stress free.
 Another advantage is that construction time is reduced when Design-build
contract is used. If the full responsibility of the design is taken by the contractor,
it’s most likely to save significant amount of time, as the design and construction
elements can work simultaneously.
 Another advantage that, once the contract is agreed upon by both the parties, the
financial risk of the project is inherited by the contractor. This benefits the client,
as it’s possible for labour cost and material price to rise.
 Client benefits from the financial risks
 If the projects design remains unchanged as agreed, the total cost of the
construction will remain unchanged. However, if the client require some request
changes to the design during the construction period, the contractor can add the
costs affected by the changes.
4.1.2 Disadvantages of Design build Contact

 The design of the project is developed by the contractor, therefore the project
design may not be as good as if an individual architect. Also once the cost of the
design is agreed, regardless whether labour and material cost ascend throughout
the duration of the project, the contractor will operate at the lowest possible
specifications.
 In the real world of construction, majority of the buildings are successful, however
some are disastrous. It very important make sure that all parties involved in the
project, agree on the contract. All parties must be fully understood of the contract
in place and cover all legal requirements
 Another major disadvantage if Design-build contract is that, once the client has
chosen the contractor for the project, the client must completely trust the
contractor. According to (Larkin, et al., 2012) for a successful construction project
using design-build contract trust is necessary.

4.2 Advantages and Disadvantages of Cost-plus Contract

4.2.1 Advantages
The benefits of cost-plus contract of both buyer and contractor includes:
  Less possibility of having the task overbid
 Are often less expensive than holding a fixed price because contractors do not
need to impose a higher price to cover the risk of higher material costs than
expected
 Top quality because the contractor has an incentive to use the best labour and
materials
 The contractor have a chance of earning additional profit with performance
inducements.
 The Contractor has the capacity to execute a project where the design or scope
of work is not fully defined.
4.2.2 Disadvantages
 For the buyer, the primary disadvantage of this sort of contract is the danger
of paying considerably more than anticipated on the material. The contractor
also has less incentive to be effective because it will effect both cases. Further
management and oversight are needed to guarantee contractual worker
consistence with cost control and other severity measures.

5. Conclusion
Although there are many types of contracts that are commonly used in construction
industry, it’s the responsibility of both parties, the client and the contractor to choose the
appropriate contract that best suitable depending on the project. Every contract has its own
advantages and disadvantages, therefore each parties must meet there required criteria’s.
Both parties must be aware of the financial risks involved within each kind of the contract.
Both parties must be aware that it is crucial to analyse the size of the project, the overall
cost/expenses, and completion time of the project before selecting contracts.
If the client require the fast completion of the project, it’s advisable to choose Design-
build contract, as this contract let the contractor start construction stage soon as the basic
design is completed. Implementations and changes can be made on the design as it overlaps
with construction, however this may mean additional charges added on to the total cost of
the overall project.
If the client is under a budget then it’s advisable to choose Cost-plus contract, as both
parties must agree upon the overall cost of the project before starting construction. However
this could result is low quality of work conducted by the contractor to reduce the cost.
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