Types of Construction Contracts

Contracts for the execution of civil engineering works are of following type:
a) Lump sum contract
b) Unit rate contract
c) Cost plus fixed fee contract
d) Cost plus percentage of cost contract
e) Labor contract

a) Lump Sum Contract

In this type of contract, the contractor offers to do the whole work as shown in
drawings and described by specifications, for a total stipulated sum of money. It fixes
the price to be paid for carrying out the work, before the start of the contract. A lump-
sum price should cover all costs, overheads, risk contingencies and profit.The
preparation of a lump-sum price requires access to full project documentation
including drawings, specifications and sometimes a bill of quantities. Lump sum
contract are typically used for buildings. The qualities of the materials required can be
calculated with sufficient accuracy during the bidding process to allow contractors to
submit a single lump sum price for the work.
There are no individual rate quoted, thus it becomes difficult to make adjustments in
the contract value of any changes are to be made in the work later on.
A Lump Sum Contract is more suitable for works of smaller in size and where
contractors have prior construction experience. The experience enables the contractors
to submit a more realistic bid. This type of contract is not suitable for difficult
foundations, excavations, and projects susceptible to unpredictable hazard and
variations.

b) Unit Rate or Bill of Quantity Contract

Also called a schedule contract, in this contractor undertakes the execution of work on
an item rate basis. The payment to the contractor is made on the basis of detailed
measurements of different items of work actually done by him. Unit-price contracts
are used for work where it is not possible to calculate the exact quantity of materials
that will be required. Unit-price contracts are commonly used for heavy/highway
work.
This type of contract is suitable for works which can be divided into various items
and quantities, under each item, can be estimated with accuracy.

c) Cost plus Fixed Fee Contract:

When projects are fast – track and required to be completed expeditiously and where
it is difficult to estimate the project cost before, the project costs will be recorded and
a fixed amount which is agreed upon by the contracting parties will be added as
payment to the contractor. A contract that stipulates to reimburse cost together with an
additional fixed fee, it is called a cost plus fixed fee contract. Such a contract is
desirable when the scope and nature of the work can at least be broadly defined and
for important structures such as monumental buildings which are Time and Quality
driven than Cost driven.

d) Cost Plus Percentage of Cost Contract:

This type of contract is similar to the Cost plus fixed fee contract but its fixed fee is
made variable using a percentage of the cost which is meant to cover the overhead
and profit costs of the contractor. The payment is made by determining the actual cost
of the work plus a certain percentage. The disadvantage of such kind of contract is the
tendency to increase the cost of the work to earn more profit by way of percentage of
enhanced actual cost.

e) Labor Contract:
When the Project owner is responsible for the provision of major resources such as
materials and Equipments other than labor, small tools and equipments and their
management, it is called a labor contract.