The document discusses the pre-design stage of construction projects. It describes different project delivery methods and construction contract types that an owner must consider in the early stages, including design-bid-build (DBB), design-build (DB), and construction management. DBB is the traditional method where design and construction are separate contracts, while DB combines design and construction under one entity. The owner's goals and the project characteristics help determine the best delivery method.
The document discusses the pre-design stage of construction projects. It describes different project delivery methods and construction contract types that an owner must consider in the early stages, including design-bid-build (DBB), design-build (DB), and construction management. DBB is the traditional method where design and construction are separate contracts, while DB combines design and construction under one entity. The owner's goals and the project characteristics help determine the best delivery method.
The document discusses the pre-design stage of construction projects. It describes different project delivery methods and construction contract types that an owner must consider in the early stages, including design-bid-build (DBB), design-build (DB), and construction management. DBB is the traditional method where design and construction are separate contracts, while DB combines design and construction under one entity. The owner's goals and the project characteristics help determine the best delivery method.
The document discusses the pre-design stage of construction projects. It describes different project delivery methods and construction contract types that an owner must consider in the early stages, including design-bid-build (DBB), design-build (DB), and construction management. DBB is the traditional method where design and construction are separate contracts, while DB combines design and construction under one entity. The owner's goals and the project characteristics help determine the best delivery method.
CONSTRUCTION MANAGEMENT Chapter 2 Pre-design Stage
Delivered by: Teklebrhan K.
March 2023 CONTENTS Pre-design Stage 1. Introduction
2. Delivery Systems
3. Construction Contracts
4. Types of Construction contracts
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 2
1. Introduction The first stage in Civil Engineering projects is assessing the market demand and perceived needs as part of project initiation. The initiation is followed by project objective and scope definition. At this stage the owner will decide: What sort of project delivery system will be used? How will the various parties be related? Will the owner engage a design professional to prepare plans and specifications and then contract separately with a construction contractor? Or, will a single entity be responsible for the entire project? the owner to decides the type of contract to be used with the contractor.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 3
1. Introduction The owner will also need to decide the basis upon which the design professional will be paid. Often these decisions are not made without consultation and advice. Depending upon the owner’s expertise and experience in administering construction contracts, the owner may engage a professional engineer, an architect or a project manager during this pre-project phase to advise on these important decisions.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 4
2. Project Delivery Methods 2.1 General The term delivery method means the approach used to organize the project team so as to manage the entire designing and building (design-build) process. The owner needs to decide which designers to hire, when to hire them, and under what type of contract ? The owner also needs to decide when to hire the construction professional and under what type of contract ? Which organization gets hired first? Do both organizations report to the owner, or does one report to the other? Project delivery method is an organizational concept which assigns specific responsibilities and authorities to people and organizations and which defines relationship of the various elements in construction of a project.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 5
2. Project Delivery Methods 2.1 General The system establishes among other things: Who will be involved in the process? The roles of parties. The relationship between and among the parties such as: o Legal and contractual responsibilities; o Chain of command; and o Reporting requirements.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 6
2. Project Delivery Methods 2.2 Types of Delivery Methods Contract/project delivery system is the way Project Owners together with Project Regulators and Financiers determine the assignment of responsibilities to Project Stakeholders along the Construction Process.
Delivery systems are basically classified in to 2 broad areas:
Force Account, and Outsourced.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 7
2. Project Delivery Methods 2.2 Types of Delivery Methods 2.2.1 Force Account
When the project owners engage themselves to
undertake the project, it is called a force account delivery system. Such a system is often promoted if the Project Owners believe that there is a comparative advantage in quality, cost and time.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 8
2. Project Delivery Methods 2.2 Types of Delivery Methods 2.2.2 Outsourced delivery systems Most of the project delivery methods/systems are found under the category of outsourcing. The criteria for such category are based on: segmentation, integration and financing. Integrated Process Delivery Methods; Segmented Delivery Methods; and External Financing Methods.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 9
2. Project Delivery Methods 2.2 Types of Delivery Methods 2.2.2 Outsourced delivery systems The detailed types in each category include: Integrated Process Delivery Methods: o Design-Build-Operate; o Design-Build-Operate-Maintain; and o Design-Build-Finance-Operate. Segmented Delivery Methods: o Design-Bid-Build; o Design-Build; o Construction Management; and o Pure Operations and Maintenance (O&M). External Financing Methods: o Design-Build-Finance-Operate; o Build-Own-Operate; and o Build-Own-Operate-Transfer. AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 10 2. Project Delivery Methods 2.2 Types of Delivery Methods 2.2.2 Outsourced delivery systems A. Design-Bid-Build, DBB (Traditional Method) After Project Owners did prepare the basic planning that identifies construction project programs, they call upon the participation of Design and/or Supervision Consultants. This Consultant will carry out the design together with the necessary tender documents which will be the basis for tendering to select Contractors.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 11
2. Project Delivery Methods 2.2 Types of Delivery Methods 2.2.2 Outsourced delivery systems A. Design-Bid-Build, DBB (Traditional Method) For many years, DBB has been the most common method of project delivery for public projects, and for many private projects as well. DBB is effective on projects: where the owner needs both professional design services and construction services; and where the designer does not require detailed knowledge of the means and methods of construction. DBB provides the owner with a high degree of control.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 12
2. Project Delivery Methods 2.2 Types of Delivery Methods 2.2.2 Outsourced delivery systems A. Design-Bid-Build, DBB (Traditional Method) Advantages of DBB include: Applicable to a wide range of projects; Well established and easily understood; Clearly defined roles for all parties; Provides the lowest initial price that competitive bidders can offer; Extensive litigation has resulted in well established legal precedent; and Insurance and bonding are well defined.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 13
2. Project Delivery Methods 2.2 Types of Delivery Methods 2.2.2 Outsourced delivery systems A. Design-Bid-Build, DBB (Traditional Method) Points considered as disadvantages of DBB: Innovation not optimized; Usually cost overruns; Disputes between parties; Client retains risks; Usually low bid-incentive for change orders; and Owner responsible for errors and omissions.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 14
2. Project Delivery Methods 2.2 Types of Delivery Methods 2.2.2 Outsourced delivery systems B. Design-Build, DB (Turnkey) Design Build or Turnkey, in principle, reduces numbers of procurement processes engaged in the fragmented process and employ only one procurement process and a single design-build contractor to provide the entire construction implementation Process (design and construction). The design-builder performs design and construction according to design parameters, performance criteria and other requirements established by the employer or his representative. In this arrangement both the design and construction liability rests with the Contractor.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 15
2. Project Delivery Methods 2.2 Types of Delivery Methods 2.2.2 Outsourced delivery systems B. Design-Build, DB (Turnkey) Advantages of DB. Single source responsibility both for design and construction; Integrating design and construction; Reduction in administration; Innovation; Cost savings; Constructability optimized; Most risks transferred to the design-builder; Usually GMP; and Design reflects. AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 16 2. Project Delivery Methods 2.2 Types of Delivery Methods 2.2.2 Outsourced delivery systems B. Design-Bid, DB (Turnkey) Disadvantages of DB. Limiting competition; High tendering costs; New method and unfamiliarity; Client needs quicker decision making; Clients bringing design requirements (30%) (reduces design innovation); Less Engineer control over final design; and Elimination of traditional checks and balances so that Quality may be subordinated by cost or schedule considerations.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 17
2. Project Delivery Methods 2.2 Types of Delivery Methods 2.2.2 Outsourced delivery systems C. Construction Management, CM Under CM the Owner contracts separately, but somewhat simultaneously, with a design consultant and with a firm whose primary expertise is construction (the Construction Manager). The owner procures the management services of the Construction Manager (in most cases a general contracting construction firm) early in the design phase. Types of CM delivery system: CM at Free: as agent, CM at Risk: as a constructor.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 18
2. Project Delivery Methods 2.2 Types of Delivery Methods 2.2.2 Outsourced delivery systems D. Design-Build-Operate, DBO According to FIDIC(Federation international Des ingenieurs Conseils or int. federation of consulting engineers), the DBO approach to contracting combines design, construction, and long term (ex. 20 years) operation (and maintenance) of a facility in to one single contract awarded to a single contractor (who will usually be a joint venture or consortium representing all the skills for in a DBO arrangement). The advantages are categorized in terms of: time, finance and quality.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 19
2. Project Delivery Methods 2.2 Types of Delivery Methods 2.2.2 Outsourced delivery systems E. Build-Operate-Transfer, BOT BOT is a form of procurement and contract delivery system that promotes Public Private Partnership (PPP) in which a private company is contracted to finance, design, construct, operate for a certain period (usually 10 years) and transfer the facility to the Project Owner. The typical BOT project contract is the process whereby a government grants a concession to a project development company to develop and operate what would normally be a public sector project, for a given period of time known as the concession period. BOT project involves a potentially complex contractual structure. AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 20 2. Project Delivery Methods 2.2 Types of Delivery Methods 2.2.2 Outsourced delivery systems F. Delivery systems based on Financing method Design-build-operate-transfer; DBOT Design-build-operate-maintain; DBOM Design-build-own-operate-transfer; DBOOT
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 21
3. Construction Contracts 3.1 Contract: Definition Generally, a contract is an agreement or willful promise enforceable at law. However, not all agreements or promises are contracts as some agreements may lack enforceability at law. Enforceable at law means that if the agreement reached between the parties breached (deviations occur from the promises) by one of the parties, the aggrieved party, may bring a legal action against the other to demand the enforcement of its rights with the support of law. A valid contract is an agreement made between two or more parties whereby legal rights and obligations are created which the law will enforce.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 22
3. Construction Contracts 3.1 Contract: Definition The earliest recorded reference to a building contract comes from one of the laws of Hammurabi, the Babylonian conqueror: “If a contractor builds a house for a man this man shall give the contractor two shekels of silver as recompense. If a contractor builds a house and does not build it strong enough and it collapses and kills the owner the contractor shall be put to death.”
This ancient law explicitly express the rights, obligations
and penalties for non compliance of contracting parties
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 23
3. Construction Contracts 3.1 Contract: Definition According to Art. 1675 of the 1960 Civil Code of Ethiopia: “A contract is an agreement whereby two or more persons as between themselves create, vary or extinguish obligations of a proprietary nature.” The definition encompass the following main points: The contract is an agreement; The agreement is to be made between two or more persons; The agreement is binding between such two or more persons; The agreement is to create, vary and extinguish obligations; The nature of obligations is proprietary.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 24
3. Construction Contracts 3.2 Construction Contract: International Context Construction Contract, according to the 1996 Housing Grants, Construction and Regeneration Act (of England), includes any agreement in writing, or evidenced in writing, under which a party does any of the following: Carries out construction operations; Arranges for others to carry out construction operations (such as, through sub-contracts); Provides labor for the carrying out of construction operations. According to the Act, construction operations extends beyond construction itself to works of alterations, repair, maintenance, decoration and demolition, and even to cleaning carried out in the course of such works.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 25
3. Construction Contracts 3.2 Construction Contract: International Context Construction operations cover not only structures but also the installation of services and ancillary works such as site clearance, excavation, scaffolding, site restoration and landscaping. The said Act, however, specifically excludes mining works and the installation or demolition of plant or machinery for the process industry. A construction contract is a product of an agreement between the Employer and the Contractor. Construction contract could be: Private or public in terms of ownership; Local or international in terms of the nationality of parties; Purely construction or mixed with industrial works in terms of scope of the construction works involved.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 26
3. Construction Contracts 3.2 Construction Contract: Ethiopian Context Construction contract is legally designated as contract of work and labor in Ethiopia. A contract of work could, be private or public works. According to Art. 2610 of the Civil Code, a contract of (private) work and labor is defined as follows: “A contract of work and labor is a contract whereby one party, the contractor, undertakes to produce a given result, under his own responsibility, in consideration of a remuneration that the other party, the client, undertakes to pay him.”
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 27
3. Construction Contracts 3.2 Construction Contract: Ethiopian Context According to Art. 3244 of the Civil Code contract of public works is defined as follows: “A contract of public works is a contract whereby a person, the contractor, binds himself in favor of an administrative authority to construct, maintain or repair a public work in consideration of a price.” Contract of public works is governed by a special regime of law known as the law of administrative contract (Art. 3131 ff of the Civil Code).
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 28
3. Construction Contracts 3.3 Purpose of Construction Contracts The fundamental purpose of construction contract is to: Describe scope of work, Establish time frame, Establish cost and payment provisions, Establish commercial terms and conditions, Set obligations, remedial rights and relationships, Balance risk, Set project execution plan, Minimize disputes, and Improves economic return of investment.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 29
3. Construction Contracts 3.4 Components of Construction Contracts The typical contract documents in a given large and complex construction contract include the following components; legal, commercial, technical and technological parts. A. Legal Part The Contract Agreement; Minutes of Meeting, if any; Letter of Acceptance(Award), if any; The Tender ( NB: Including the Appendix to Tender, if any); Special Conditions of Contract; General Conditions of Contract; Others, if any.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 30
3. Construction Contracts 3.4 Components of Construction Contracts B. Commercial Part Performance Security Form; Payment Security Form; Advance Payment Guarantee Form; Bid Security Form; Insurance Forms; Retention Money Security Form; Others, if any.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 31
3. Construction Contracts 3.4 Components of Construction Contracts C. Technical Part Technical Specifications, Drawings, Bill of Quantities, BOQ Schedule of Requirements, if any, Others, if any. D. Technological Part It is vital in relation to some process aspect of the construction project, if any;
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 32
3. Construction Contracts 3.5 Parties to Construction Contracts The formal parties to the construction contract are basically the Contractor and the Employer. The Contractor could be: General contractor or joint venture i.e. in terms of its organizational form; Domestic/local or foreign/international i.e. in terms of its nationality; Private or public i.e. in terms of its type of ownership; Only constructor or both designer and contractor, or designer, contractor and financier, or management contractor, build operate transfer (BOT), or build, own, operate and transfer (BOOT): i.e. in terms of assumed contractual obligation; Specialty contractor; in terms of its organizational competence; This is specially valid for sub-contractors.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 33
4. Types of Construction Contracts The following factors affect the choice of specific type of contract: Nature and complexity of the works, Size and duration of contract, Degree of definition (scope, risk, uncertainty), Status of design, Technical/Supervisory resource of Employer, Budgetary/Financing/Borrowing constraints, Previous experience of Employer, and Standard documents of funding agency.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 34
4. Types of Construction Contracts Construction contracts are classified on the basis of payment methods (fixed price or cost plus fee) adopted by the employer/client/owner/promoter. Construction contracts take the following forms: Competitive (fixed price) contract: o Lump Sum, o Unit price/Ad-measurement. Negotiated (Cost plus) contract: o Cost plus fixed fee, o Cost plus fixed percentage, o Cost plus variable fee, o Target cost/estimate, o Guaranteed maximum price.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 35
4. Types of Construction Contracts 4.1 Fixed Price Contract Fixed Price types of contract are ones wherein a contractor agrees to furnish services and material at a specified price, possibly with a mutually agreed upon escalation clause. This type of contract is most often employed when the scope of services to be provided is well defined. The two forms include: Lump sum contract (Buildings), Unit price contract (heavy construction).
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 36
4. Types of Construction Contracts 4.1 Fixed Price Contract 4.1.1 Lump Sum Contract In this type of contract, a single lump sum price is quoted for the completion of the specified work to the satisfaction of the employer within a certain duration. The contractor offers to do the whole work as shown in drawings and described by specifications, for a total stipulated sum of money. For such contracts, the design must be complete and final, as there is no mechanism within the contract for adjustment of the price in consequence of variation. The contractor bears high risk.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 37
4. Types of Construction Contracts 4.1 Fixed Price Contract 4.1.1 Lump Sum Contract Suitability is more suitable for works for which contractors have prior construction experience. The experience enables the contractors to submit a more realistic bid. is not suitable for difficult foundations, excavations of uncertain character, and projects susceptible to unpredictable hazard and variations.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 38
4. Types of Construction Contracts 4.1 Fixed Price Contract 4.1.1 Lump Sum Contract Merits The owner decides whether to start or leave the project knowing the total lump sum price quoted by different contractors. The contractor can earn more profit by in-depth planning and effective management at site. Contractor will assign best personnel. Contractor selection is easy.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 39
4. Types of Construction Contracts 4.1 Fixed Price Contract 4.1.1 Lump Sum Contract Demerits Before the contract is awarded, the project has to be studied thoroughly and the complete contract document has to be prepared in advance. Unforeseen details of work are not specified in the contract document. Many additional items may have to be undertaken as the work progresses, giving opportunity to the contractor for claiming higher rates for the extra items not included in the contract agreement; hence, changes are difficult and costly. Contractor is free to use the lowest cost of material equipment, methods etc.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 40
4. Types of Construction Contracts 4.1 Fixed Price Contract 4.1.2 Unit Price/Ad-measurement Contract The contractor execute the work on an item rate basis. The amount to be received by the contactor depends upon the quantities of various items of work actually executed. Used for works where it is not possible to calculate in advance the exact quantity of materials that will be required; hence, require sufficient design definition to estimate quantities of units. Time and cost risk is shared by contracting parties. Owner: at risk for total quantities Contractor: at risk for fixed unit price. Large quantities changes (>15-25%) can lead to increase or decrease of unit price.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 41
4. Types of Construction Contracts 4.1 Fixed Price Contract 4.1.2 Unit Price/Ad-measurement Contract Suitability The item rate contract is most commonly used for all types of engineering works. This type of contract is suitable for works which can be divided into various items and quantities (WBS), where each item, can be estimated with accuracy. Merits There is no need for detailed drawings at the time of allotting contract as in the case of lump sum contract. The detailed drawings can be prepared after the contract is awarded. Changes in drawings and quantities of individual items can be made as per requirement within agreed limits. The Payment to the contractor is made on the actual work done by him at the agreed rates.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 42
4. Types of Construction Contracts 4.1 Fixed Price Contract 4.1.2 Unit Price/Ad-measurement Contract Demerits The total cost of work can only be known upon completion. As such the owner may incur financial difficulty if the final cost increases substantially. Additional staff is required to take detailed measurements of work done for releasing payments to the contractor. The scope for additional saving with the use of inferior quality materials may prompt the contractor to use such materials in the work.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 43
4. Types of Construction Contracts 4.2 Negotiated Contracts Cost plus (cost reimbursable) contracts are used in situations that make it difficult or impossible for either the owner or the contractor to predict their costs during the negotiation, bid, and award process. The contractor agrees to furnish to the client services and material at actual cost, plus an agreed upon fee for these services. This type of contract is employed most often when the scope of services to be provided is not well defined. By using this type of contract the contractor can start work without a clearly defined project scope, since all costs will be reimbursed and a profit guaranteed.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 44
4. Types of Construction Contracts 4.2 Negotiated Contracts Actual cost plus a negotiated reimbursement to cover overheads and profit with different methods of reimbursement: Cost plus fixed fee, Cost plus fixed percentage, Cost plus variable percentage, Target cost/estimate, Guaranteed maximum price. It is applied for complex projects such as: power plants, tunnels, process plants etc.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 45
4. Types of Construction Contracts 4.2 Negotiated Contracts 4.2.1 Cost plus Fixed Fee Cost plus fixed fee contract is desirable when the scope and nature of the work can at least be broadly defined. The amount of fee is determined as a lump sum from a consideration of the scope of work, its approximate cost, nature of work, estimated time of construction, manpower and equipment requirements etc. In order to negotiate such a type of contract, it is essential that the scope and some general details of the work are defined. The contractor have incentive to complete the job quickly since its fee is fixed regardless of the duration of the project. The owner assumes the risks of cost overrun while the contractor may risk the erosion of its profits if the project is dragged on beyond the expected time.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 46
4. Types of Construction Contracts 4.2 Negotiated Contracts 4.2.1 Cost plus Fixed Fee Suitability This type of contract is suitable for works required to be completed expeditiously and where it is difficult to foretell what difficulties are likely to be encountered. This contract is also suitable for important projects, where the cost of construction is immaterial.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 47
4. Types of Construction Contracts 4.2 Negotiated Contracts 4.2.1 Cost plus Fixed Fee Merit In this type of contract, actual cost is to be born by the owner. Therefore, the contractor performs the work in the best interest of the owner resulting in good quality work. The work can be taken ahead even before the detailed drawings and specifications are finalized. Changes in design and method of construction if needed can be easily carried out without disputes. Provides incentive i.e. the work can be executed speedily. Fee amount is fixed regardless of price fluctuation.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 48
4. Types of Construction Contracts 4.2 Negotiated Contracts 4.2.1 Cost plus Fixed Fee Demerit This form of contract cannot be adopted normally in case of public bodies and Government departments. The final cost of the work is not known in advance and this may subject the owner to financial difficulties. Expensive materials and construction techniques may be used to expedite construction.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 49
4. Types of Construction Contracts 4.2 Negotiated Contracts 4.2.2 Cost plus Fixed Percentage In this type of contract, the contractor is given a certain percentage over the actual cost construction. The owner is forced to assume all risks of cost overruns. Furthermore, if there are pressing needs to complete the project, overtime payments to workers are common and will further increase the project cost. Unless there are compelling reasons such as the urgency in the construction of military installations, the owner shouldn’t use this type of contract. The suitability, merits and demerits of this type of contract are similar to cost plus fixed fee contracts. An additional demerit is the tendency of the contractor to increase the cost of work to earn more profit by way of percentage of enhanced actual cost.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 50
4. Types of Construction Contracts 4.2 Negotiated Contracts 4.2.3 Cost plus Variable Percentage For this type of contract, the contractor agrees to a penalty if the actual cost exceeds the estimated project cost, or a reward if the actual cost is below the estimated project cost. In return for taking the risk on its own estimate, the contractor is allowed a variable percentage of the direct project cost for its fee. Furthermore, the project duration is usually specified and the contractor must abide by the deadline for completion. This type of contract allocates considerable risk for cost overruns to the owner, but also provides incentives to contractors to reduce costs as much as possible.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 51
4. Types of Construction Contracts 4.2 Negotiated Contracts 4.2.4 Target Cost/Estimate This is another form of contract which specifies a penalty or reward to a contractor, depending on whether the actual cost is greater than or less than the contractor's estimated direct project cost. Usually, the percentages of savings or overrun to be shared by the owner and the contractor are predetermined and the project duration is specified in the contract. Bonuses or penalties may be stipulated for different project completion dates.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 52
4. Types of Construction Contracts 4.2 Negotiated Contracts 4.2.5 Guaranteed Maximum Price When the project scope is well defined, an owner may choose to ask the contractor to take all the risks, both in terms of actual project cost and project time. Any work change orders from the owner must be extremely minor if at all, since performance specifications are provided to the owner at the outset of construction. The owner and the contractor agree to a project cost guaranteed by the contractor as maximum. There may be or may not be additional provisions to share any savings if any in the contract. This type of contract is particularly suitable for turnkey operation.
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 53
THANK YOU!
AAU, EiABC,Construction Management, Lecture notes, March 2023, Delivered by Teklebrhan K. 54