CONTRACTUAL

ARRANGEMENT
FOR BQS559
 What is Contract?
a contract (or informally known as an
agreement in some jurisdictions) is an
agreement having a lawful object entered into
voluntarily by two or more parties, each of
whom intends to create one or more legal
obligations between them.
Basic Elements of Contract?

Offer Acceptance
(contractor) (client)

Consideration
(contractor & client)
 Contractual Arrangement?
Contractual arrangement provide legal
framework set up to formalise relationship
between the client, consultants and the
contractors.

Contractual arrangement are intertwined with

procurement system in determining price with
the method of payment to the contractor.
•TYPES OF CONSTRUCTION CONTRACTS
Based on Contract Price
I. Fixed Price Contracts
II. Cost Reimbursement Contracts
Based on Extent of Contractor’s
Obligation/Method of Procurement
I. Traditional/Conventional
II. Design & Build
III. Management-based
Continuation Contract
Miscellaneous Types of Contracts
•BASED ON CONTRACT PRICE (Price Based)

BQ
Lump Sum
(Predetermined
contract sum) Drawings and
Specifications
Fixed Price
(Firm Price)
Re-measurement Schedule of Rates
(Contract sum
ascertained on
completion) Approximate BQ
1. FIXED PRICE CONTRACTS
The contractor contracts is to do the work at a price
estimated in advance.
Contractor takes the risk of calculating approximately
how much work is involved and its cost.
Contract sum is predetermined and stated in the
contract.
Traditional contracts are usually fixed price contracts
Once the contract is in force, the lump sum price is
fixed – unless there is breach by client (eg. v.o)
1.1 Lump Sum
• Contractor is responsible for carrying out all
the works shown in the BQ or Drawings and
specifications, for a fixed price.
• Contract price is fixed in advance.

• However, contract condition may allow the

lump sum to be adjusted for fluctuations,
variations works and other matters.

Lump Sum
(Predetermined
contract sum)
1.1 Lump Sum
• Advantage
• Client is able to define the work and prepare design – known budget
• Contractor has incentive to adhere the schedule and budget.
• Drawbacks
• Design should be completed before construction-extend design &
construction time
• Lack of flexibility – changes are expensive & open to claims attempts.
• Risky to contractor is they prepare imperfect documents
When to use lump sum contract?
1. Project is well-defined, not complex.
2. Client wants certainty of price and has fixed budget.
3. Suitable for routine construction-familiar by contractors and
manage to get accurate estimates.
4. Not favourable for emergency project; insufficient time to
prepare complete plans to obtain bids.
 BQ
1.1.1 Bills of Quantities (BQ)
Prepared by QS in accordance with
the rules of SMM.
All contractors tender on the same
measurement data.
Bills sets out in a format the quantity
for each of the work components.
The sum of the price inserted for each
items in BQ collectively makes up the
total tender price.
BQ is considered as the best basis for
estimating, tender comparison and
financial administration.
 BQ
1.1.1 Bills of Quantities (BQ)
Characteristics:
1. Both the quantity and unit rates in the BQ form part of the
contract.
2. Virtual completion of the design precedes the signing of the
contract.
Advantages
1. Both parties have a clear picture of the extent of their
respective commitments.
2. The unit rates in the BQ provide a sound basis for the
valuation of variation works.
3. A detailed breakdown of the tender sum is readily available.
Disadvantages
1. The length of time taken in the design & BQ preparation –
time consuming
 Drawings and
1.1.2 Drawings and Specifications Specifications

Contractor is responsible for carrying out all the works shown on drawings
and specification.
Contractor must calculate his tender sum based upon the contract
drawings and specification.
Contractor will calculate his own quantities.
Contractor may be required to submit a schedule of his rates used to
arrive at the tender figure in order to value variations.
This approach does not provide easy comparison of tender sums.
 Drawings
BQ and
1.1.2 Drawings and Specifications Specifications
Characteristics:
1. Tenderers are supplied only with complete working drawings
& a full specification.
2. Virtual completion of the design precedes the signing of the
contract.
Advantages
1. Time required for preparation of tender document is reduced
as the process of preparing BQ is eliminated.
2. Both parties can have a clear picture of their respective
commitments when signing the contract.
Disadvantages
1. No breakdown of the tender sum is immediately available.
2. The valuation of V.O. presents problems.
1.2 RE-MEASUREMENT
• Contract sum is ascertained on completion by
measuring the work done and valuing on the basis
of an agreed schedule of prices.
• Rates can be adjusted for fluctuations, variation to
the works and other matters.
• The contract is used when the extent of work
(particularly quantities) is unknown.
Re-measurement
(Contract sum
ascertained on
completion)
1.2 RE-MEASUREMENT
• Advantage
• Work may commence earlier – tendering cycle shorter.
• Can avoid delay and expense for detail drawings, specs etc
• Drawbacks
• Client & contractor involves in updating price & time (re-measurements) in
agreeing the work qty.
• Total cost only can be certain upon completion
When to use re-measurement contract?
• Extent of work (particularly qty) is unknown
• Insufficient time to prepare the detailed
drawings necessary for accurate bills.
1.2.1 Schedule of Rates Schedule of Rates

Being used when it is not possible to predetermine the

nature and extent of the works.
The schedule is similar to a BQ but without quantities.
Contractor is required to insert his prices against the
items in the schedule.
Alternatively, a priced schedule is prepared and the
contractor is asked to quote a percentage adjustment to
the rates.
The total cost of the project is unknown until the work is
completed.
1.2.2 Bills of Approximate Quantities Approximate BQ
All works would be REMEASURED upon completion.
Quantities in BQ are approximate only.
Used when detailed drawings and accurate BQ are
unavailable at tender stage.
However, the scope of the work must be well established
and outline design and specification and materials must be
produced so that the contractors can submit their tender
based on approx. quantities.
The rates inserted against items in the bill provide a
realistic basis of valuing the works that have been carried
out.
1.2.2 Bills of Approximate Quantities Approximate BQ
Characteristics
1. Only the unit rates form part of the contract.
2. The signing of contract & the beginning of work on site may
proceed before the design is complete.
Advantages
1. Construction on site may begin earlier
2. Extra expenses of preparing firm quantities is avoided but this
will offset by the cost of doing remeasurement.
Disadvantages
1. BQ cannot be relied upon as giving a realistic total cost at
tender stage
2. Remeasurement works may prove to be more costly than
preparing BQ initially.
3. Architect may feel less pressure to make design decision at
early stage.
TUTORIAL
•BASED ON CONTRACT PRICE (Cost Based)
Prime Cost + % Fee

Prime Cost + Fixed Fee

Cost Reimbursement Prime Cost + Fluctuating Fee

Target Cost Contract

Cost plus contract with Guarantee

Maximum Price (GMP)
2. COST REIMBURSEMENT CONTRACTS
Also known as Prime Cost/Cost Plus contracts because
method of payment is by reimbursement to the
contractor of his prime cost plus a management fee.
Prime cost means the total cost to the contractor of
buying materials, goods, components, hiring plant and
employing labour to carry out construction works.
No site measuring is necessary. The process of calculating
and verifying the total prime cost involves investigation &
checking of invoices, time sheets, subcontractor’s account
etc.
2. COST REIMBURSEMENT CONTRACTS
Final contract price is known only after the project has
been completed.
Contract price is determined at completion on:

The basis of the

actual cost incurred Agreed amount or
by the contractor in
carrying out the
+ percentage to cover
overhead and profit.
work
2. COST REIMBURSEMENT CONTRACTS
The ‘cost’ comprises of :
Prime (direct) cost of materials
labour and plants.

PLUS

The percentage or fixed fee are for :

Overhead charges and profit,
may also include preliminary items.
2. COST REIMBURSEMENT CONTRACTS
Advantages:
Construction can commence on site before design work is fully
completed.
Time required for preparation of tender document and for
obtaining tenders is minimised.
Early start on site for construction.
Disadvantages:
Employer/client is lacking of certainty on his financial commitment
Contractor is lacking of incentive to control the cost.
No risk to the contractor since the cost items are fully
reimbursable by the client.
Computation and verification of the total prime cost is a long and
tedious process.
2. COST REIMBURSEMENT CONTRACTS
When the cost plus contract are used?
Where the nature and scope of work cannot be readily
determined.
Great urgency.
Project is extremely complex.
New technology is being applied.
Where some special relationship exists between the contractor
and client.
Suitable for experimental project.
2. COST REIMBURSEMENT CONTRACTS
To improve on certainty of final construction cost, the
employer may require a guaranteed maximum price
(GMP).
Under GMP, general contractor or construction manager
would assume the risk for the cost overruns in excess of
GMP.
Contractor is usually reimbursed his expenditure monthly
on submission of his accounts- include evidence of:
payments made to suppliers of materials.
gross wages paid to employees.
hours operated by plant.
2.1 Cost plus a percentage Prime Cost + % Fee

Contractor is paid actual cost of the work incurred plus a

percentage of actual cost to cover his overhead and
profit.
May provide schedules to determine prime costs.
No incentive for the contractor to make good progress or
to save money because his fee rises with the total cost of
the job.
 2.1 Cost plus a percentage Prime Cost + % Fee

Cost Escalation
Inefficient in
(eg. Petrol and
Item Ideally material
material price
management
increase)
P.C. Labour 10,000 10,000 10,000
P.C. Materials 15,000 17,000 18,000
P.C.
8,000 8,000 9,000
Plant/Equipment
TOTAL 33,000 35,000 37,000
Add overhead 10%
4,950 5,250 5,550
+ profit 5% = 15%
Cost to the Client 37,950 40,250 42,550
2.2 Cost plus a fixed fee Prime Cost + Fixed Fee

The fee is a fixed lump sum.

The fee remains constant even when costs vary. The
contractor does not gained any profit by increase
expenditure unless the nature of thee work is
substantially altered.
The contractor has more incentive to finish quickly and
maximise his profit as a percentage turnover.
 2.2 Cost plus a fixed fee Prime Cost + Fixed Fee

Cost Escalation
Inefficient in
(eg. Petrol and
Item Ideally material
material price
management
increase)
P.C. Labour 10,000 10,000 10,000
P.C. Materials 15,000 17,000 18,000
P.C.
8,000 8,000 9,000
Plant/Equipment
TOTAL 33,000 35,000 37,000
Add overhead
5,000 5,000 5,000
&profit
Cost to the Client 38,000 40,000 42,000
 Prime Cost +
2.3 Cost plus a fluctuating fee Fluctuating Fee

Similar to fixed fee. An estimate is made of the total cost.

The amount of the fee received by the contractor varies
inversely to the costs actually achieved. – sliding scale.
 Prime Cost +
2.3 Cost plus a fluctuating fee Fluctuating Fee

Example: 1% deduction at every 1,000 increase in prime cost.

Cost Escalation
Inefficient in
(eg. Petrol and
Item Ideally material
material price
management
increase)
P.C. Labour 10,000 10,000 10,000
P.C. Materials 15,000 17,000 18,000
P.C.
8,000 8,000 9,000
Plant/Equipment
TOTAL 33,000 35,000 37,000
Add overhead 10%
4,950 4,550 4,070
+ profit 5% = 15%
Cost to the Client 37,950 39,550 41,070
2.4 Target Cost Contract Target Cost Contract

Preliminary target cost is estimated and on completion

the difference between the target and actual prime cost
is shared between the employer and the contractor on
the basis of a pre-agreed formula.
As an incentive to be paid to reduce the prime cost , the
agreement provides:
❑ bonus to be paid to the contractor if the total prime cost is less
than agreed sum (target cost).
❑ penalty to be paid by the contractor if the total prime cost
more than target cost.
2.4 Target Cost Contract Target Cost Contract

The bonus and penalty are commonly 50% of the

difference between the total amounts.
Under this contractual arrangement, an extra cost or
saving is shared between client and contractor.
 2.4 Target Cost Contract Target Cost Contract
Example 1:
Original prime cost = RM 50,000
Excess = RM 5,000
Target Cost = RM 60,000 0

Item Price
Actual Prime Cost 55,000
Fixed Fee 10,000
TOTAL 65,000

Ddt, penalty , being 50% of excess over

2,500
RM60,000 (target cost)

AMOUNT OF FINAL PAYMENT 62,500

 2.4 Target Cost Contract Target Cost Contract
Example 2:
Original prime cost = RM 50,000
Saving = RM 2,000
Target Cost = RM 60,000 0

Item Price
Actual Prime Cost 48,000
Fixed Fee 10,000
TOTAL 58,000

Add, bonus, being 50% of excess over

1,000
RM60,000 (target cost)

AMOUNT OF FINAL PAYMENT 59,000

 Cost plus contract
2.5 Cost plus contract with with Guarantee
Guarantee Maximum Price Maximum Price
(GMP)
(GMP)
It allows the client to gain the protection of the maximum cost of the
construction while retaining the potential for cost savings.
Contractor paying for everything beyond stated maximum cost.
it is basically a cost-plus-fee contract with a cap on it.
Protects clients against any exceeding of budget, while encouraging
contractor for saving, fast completion and acceptable quality, to gain better
profit margin
No extra claims (VO, Loss and expense for Extension of Time, etc. additional
contingencies expenses)
Contractor will borne all extra expenses if cost goes beyond budgeted
amount
Common in Design and build arrangement and fast track contracts
•BASED ON EXTENT OF CONTRACTOR’S
OBLIGATION/ METHOD OF PROCUREMENT

Traditional
/Conventional

Method of
Design & Build
procurement

Management-
based
 Traditional
3.1 Traditional /Conventional
The client selects the design consultants to design and
contractor to build the building as designed.
The main contract is between the employer and the
contractor. The design consultant has no contractual
agreement with the contractor; however the consultant
will administer the contract on behalf of the clients.
The award may be by competitive tender or by
negotiations and the contract price may be in the form of
lump sum, unit prices or cost plus arrangement.
3.2 Design & Build Design & Build

The contractor is responsible for the whole of design and

construction process from initial briefing to completion –
single point responsibility.
The contractor may be a company with in-house
resources to design and construct, or a joint venture
comprising a construction contractor and a design firm or
the contractor can subcontract the design to consultants.
Normally, the design and construction stages overlapped
to reduce the overall contract time/contract period.
3.3 Management- based Management- based

Generally, it is an arrangement where the contractor does

non of the actual building work, but is employed only to
provide management expertise for the employer. The
contractor receives a fee for his services.
Depending on the terms of the contract, the contractor is
responsible to the employer for the construction process.
The management contractor is appointed early to
provide input during pre-contract and to manage the
construction process.
The system is most useful for large and complex contracts
when a considerable degree of coordination of specialist
is required and where early completion is vital.
4.0 Continuation Contract
• Letting ordinary construction contract or
carrying out a series of works of an identical
nature- eg. resurfacing roads.
• The similar project (follow on from the
completion of the first project) will be awarded
to successful tenderer, (subject to satisfactory
performance)
• Price for subsequent project is normally
negotiated
 4.1 Serial Contract

Contract 1 Contract 2
• Useful for client who have a number of building program in succession
• Negotiation may apply for the 2nd contract on the basis of successful tender (1st
contract)
• Projects are normally similar in nature, time scale and contract conditions.
• Can consist of a number of projects eg. individual starts to finish dates, flexible
timing to give continuity of work – promotes cost and time saving
• Accumulated knowledge and expertise from project teams available
• Tender price are able to be reduced due to economies of scale.
 4.2 Term Contract
- For maintenace, repair, renovation works
Term contract -can vary from 1-3 years or more (period of
contract)

• Contractor undertakes work of a specified description at agreed rates for a stated

period
• Will be valued by measurement of cost reimbursable basis
• Normally utilized in the following areas:
• Repair work, ie building, structure, services
• Maintenance work, ie both preventive and corrective maintenance
• Renovation or alteration work
• Useful application for maintenances or repair works (service are required over a
period of time at irregular intervals)
• Works initiated by instruction from time to time
• Advantage – contractor gains familiarity with the property and lower cost rather
than by attempting to secure tenders for each jobs as problem arises
5.0 Miscellaneous Types of Contracts
• Labour and Material contracts
• The procurement and supply of all material required for the contract
• The supply of all labour (inclusive of skill and services) necessary for the
contract
• The client pay fee or price called contract sum

• Labour only contract

• Supply of labour or a contract of employment or contract of service
• Common in local construction field whereby such labour supply is sourced
mainly from the ‘immigrant’ community with certain contractors specializing in
this field of activity

• Material Supply Contract

• ‘Material’ i.e the raw elements used for the fabrication, or construction
process, eg cement, sand, reinforcement bars etc
• ‘Goods’ covering equipment, furniture, fittings, etc
THANK YOU