Pre-Design Stage

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Construction Management Chair

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

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