WEEK 3- COMMON TYPE OF CONTRACT USED IN CONSTRUCTION INDUSTRY

LEARNING OUTCOMES (CO1-PO4)

•Understand the type of contract used in Malaysia

•Understand the advantages of each contract

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Types of contract
Lump sum contract

All-in Measurement Contract

contract

Type of Contract

Management
contract Cost-Reimbursement
contract

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 the price to
be paid is fixed
scope of work
indicated on drawings
No additional
variation or omission

Lump sum Contract

quality of material and
workmanship described
in a specification
total cost of
the project is fixed

no bill of quantities
is provided

This type useful when project work is not too large, can be precisely
described and few alteration occur during construction

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LUMP SUM CONTRACT
• The price to be paid is fixed
• No bill of quantities is provided
• The contractor has more incentive to reduce his cost to increase the profit.
• Quality of material and workmanship described in a specification
• For example, STA Bhd offer the contractor to do bridge painting work and pavement
marking. This project can use lump sump contract because the project is not to large and can
be described.
a. Bill of quantities contract b. Schedules of rates
Divided by
two types • client cannot determine his
• Bill of quantities is based on a
detailed bill of approximate quantities. requirements in advance.
•Contractor enter a unit rate against each • client may supply a schedule
item of work. of unit rates covering each
•Used for comparison of tenders and also item of work.
for evaluation of the amount due to the • contractor may ask to state a
contractor as construction proceeds. percentage of the given rate
•Total cost of the project is uncertainty. and to insert prices against
•Consider additional variation or omission
Measurement
•Most commonly used in civil engineering
for each item of work.
• sometime approximate
Contract
work
•Bill of quantities is to be read in quantities are included to
conjunction with drawing assist contractor in pricing.
•Quality of material and workmanship • suitable for maintenance
described in a specification because impossible to give a
realistic and accurate
quantities,

This type useful when detailed drawings and estimation

are prepared for reminder of the project work
MEASUREMENT CONTRACT
• Used when the design or type of works can be described in reasonable
detail but not the amount.
• Allow an early start on site, before design is completed and allow
changes to be made.
• Two types: Bill of Quantity(BQ) Contract & Schedule of Rate.
• In BQ contract, contractor only enter a unit rate against each item of
work, then payment will based on the real work on site. For example :
excavation work, where the quantity of excavation is difficult to access
until after the work have begun.
• In Schedule of rate, the list of work is already prepared based on client’s
demand but without specified quantities. Usually apply for maintenance
or renovation work of large size project. The construction period usually
ranges between 2 to 3 years or as otherwise agreed.
• Risk : risk for client because total cost of work is not known.
 Cost-Reimbursement
Contract

Target + cost contract Cost + percentage fee

Divided by contract
three types

Cost + fixed fee contract

This type useful for maintenance and emergency work

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Target plus cost contract

• to encourage the contractor to execute the work as cheaply as possible.

• 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 labor and material, etc.
• the actual fee paid to the contractor is arrive by increasing or reducing the basic fee by
an agreed percentage 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.

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Cost plus percentage contract

• the contractor is paid the actual cost of the work plus an agreed percentage to
cover overhead, profit etc.
• useful in an emergency work because insufficient time to prepare a detailed
document tender or drawing before work is commenced.
• No incentive for the contractor if the can be completed early.

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Cost plus fixed fee contract

• 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 incentive to the contractor if the work can be completed early.

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COST REIMBURSEMENT CONTRACT
• Divided into three types: Cost + percentage fee contract, Cost + fixed fee contract, Target +
cost contract.
• Allowable and reasonable cost incurred by a contractor in the performance of a contract.
• The final cost will be determined when the contract is completed.
• A total cost estimate will determined before contract work commences to allow them to set
budget for the project.
• Only the actual cost of completing the contract are covered.
• Contractor did not receives any additional fee.
• Time, labor and materials are highly uncertain to perform the contract.
• Useful in emergency work because insufficient time to prepare a detailed document tender
or drawing before work is commenced.
• No incentive for the contractor if the project can be completed early.
• Tendering proceed based on outline specification, any previous drawing, and an estimates
cost.
• Example : Interstate 5 Skagit River Bridge collapsed into the river. Several innovations led to
the successful handling of the emergency and the restoration of the Skagit River Bridge
 Advantages of Disadvantages of
Management Contract management
management
contract contract

• Contractor expertise
available to design • Final cost of
team. The management contractor is usually a project not
• Construction can construction company and paid known at outset
commerce before predetermining fees and expenses to: as design
design is complete as • Participate in the project from the overlaps with
work let in package. outset construction.
• Useful where complex • Contribute construction expertise to • If management
contract require many design contractor does
design groups and • Manage the construction not have the
contractor- required
management of the The management contractor does not expertise he may
whole process is normally undertake any of the not be able to
controlled by the construction work, but lets specific contribute to the
management packages of work to other contractors design.
contractor/consultant. usually by competitive tender, and
• Time target more supervises their work.
easily met as later
packages of the work
can be adjusted. This type useful for big project which have a lot of works.
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MANAGEMENT CONTRACT
• Project management contractor (PMC) is generally appointed by client at early design process as an
principal.
• PMC is paid predetermining fees and expense to participate in the project from the outset, contribute
construction expertise to design & manage the construction.(they control the whole process)
• Does not normally undertake any of the construction work but specific packages of work to other
contractors usually by competitive tender and supervises their work.
• Time target more easily met as later packages of the work can be adjusted but the final cost uncertainly until
the design complete.
• Useful for big project which have a lot of works.
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• submit full details of
design , construction and
cost including maintenance
of the works for a limited
period.
• Minor work change
orders
• since performance
specifications are
provided to the owner
at the outset of
construction..
• suitable for turnkey
operation.
This type useful for a limited period project request
by the client through their engineer
• called as design and built
contract
• project scope is well
defined
• an owner may choose to
ask the contractor to
All in Contract
take all the risks, both in
terms of actual project
cost and project time
• additional provision
• There may be or may not
•The owner and the be additional provisions to
contractor agree to a share any savings if any in
project cost guaranteed by the contract.
the contractor as
maximum
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ALL IN CONTRACT
 Main contractor is appointed by client to do the design and construct
 The contractor can use their own in-house designers, consultant to complete the design
 Client can also choose their own contractor for specific work (Nominated-sub contractor)
 This contract is one of favoured by the Government for publicy-funded project
 This contract allow a fully integrated team to work together from the beginning.
 Example project: Mass Rapid Transit (MRT) &
 PLUS Expressway- (built operate and transfer)