Types of contract

All construction contracts address critical aspects of a project, including

its scope of work, price and payment terms, schedule and an explanation
of each party’s rights and responsibilities.

Main Factors Influencing the Choice of the Type of Contract

The ability to introduce changes

The allocation of risks

The start and completion date of the project

 LUMP SUM CONTRACT
• A lump sum contract, also known as a stipulated sum contract.
• The project owner provides explicit specifications for the work, and the contractor
provides a fixed price for the project.
• The contractor then estimates the costs of materials, tools, labor and indirect costs
such as overhead and profit margin and provides a quote.
• To modify a lump-sum contract, project owners must submit a change order
document that the contractor must approve along with any price changes. That makes
lump-sum contracts somewhat inflexible.
Advantages of Lump Sum Contracts
• Simplicity
• Profitability
• Financing is easier
• Paperwork is straightforward
• Cash flow is easier to manage
Advantages for project owners
• The predictability of lump sum contracts is the
primary benefit to project owners.
• The owner can expect the project to be
completed within budget and often more quickly
so that the contractor can maximize resources
and save on labor costs.
Advantages for contractors
• Lump sum contracts also require less
paperwork, management and accounting,
decreasing administrative costs.
Disadvantage of Lump Sum Contracts
• High contractor risk
• Potentially more expensive
• Projects can’t be fluid
• Contractors can hide their profits
Disadvantage for project owners
• Owners must submit and adhere to completed
designs and finalized plans, making the project
inflexible.
• If a change is needed, lump sum contracts
stipulate the use of a formal change order
process and a considerable amount of
paperwork.
Disadvantage for contractors
• Contractors incur the cost of going over budget,
which can eat into profits. Contractors also
share the disadvantage of time-consuming
change order paperwork if modifications need to
occur.
 RELATION TO OTHERS

Lump sum vs BOQ Lump sum vs cost plus

Lump sum and measurement are both types of • Compared to lump sum contracts, cost-
construction contracts. plus is far more paperwork and
• Under a lump sum contract, a single ‘lump administration heavy. Contractors have to
sum’ price for all the works is agreed before document every cost and provide detailed
the works begin. But for the BOQ generally invoices. This level of detail makes the
used in situations where the design (or project very transparent but complicates
type of works) can be described in the payment application process.
reasonable detail, but the amount can not.
Lump sum vs unit price-lump sum combined
• In lump sum one total cost can be raised without watching
any detail. It is mostly used for building which does not
have deep foundation. As well the combination of lump
sum and unit price are going to put unit rate for the
activities in case if there is a variation it is going to be
done by a scheduled rate but if not the owner is going to
pay according to the total cost.
 BILL OF QUANTITIES (SCHEDULED) OR UNIT RATE CONTRACT

A Bill of Quantity is a Contract that provides project specific measured quantities of the items of
work identified by the drawings and specifications in the tender documentation.
Main Aspects of Unit Price Contract
• Items of work of the contract are specified with estimated quantities in the Bills of Quantities.
• Estimated quantities are surveyed by Engineer
• Contractors enter unit prices against the estimated quantities of work.
• The contract is based on estimated quantities of work items and unit price for each of these
work items.
• Payment is made on the basis of units of work actually done and measured in the field
multiplied by the unit prices.
• Useful on projects where the nature of the work is well defined, but the quantities of work
cannot be accurately determined in advance of construction. Suitable for highways, dams,
airports…
Advantages of Bill of Quantities Contract
• This method ensures a very detailed analysis of
cost and payment to the contractor.
• Changes in drawings and quantities of individual
item can be made as per requirements.
• There is no urgency of providing detailed drawings
at the time of awarding the contract.
• A contractor is asked to write down the Total rate
of item in figures and words both so it is not easy
to form a cartel during the submission of tender.
• An engineer can compare the rates quoted by the
contractor with that of schedule of rates prepared
by the departments to find out whether the tender is
unbalanced.
Disadvantages of Bill of Quantities Contract
• As by wise anticipation or perhaps outside
information, a contractor may quote high for items
that are likely to be increased and low rate for
items likely to be decreased, making an unbalanced
tender and consequently the departments may stand
to lose substantially.
• Comparative statement of item rate tenders are
more elaborate and comprehensive and intelligent
scrutiny is required.
• The total cost of work can only be known after
completion. As such the owner may face financial
difficulty if the final cost is substantially high.
• Additional staff is required to take detailed
measurements of work.
 RELATION TO OTHERS
BOQ vs UNIT PRICE-LUMP SUM COMBINED
• When the Project or Tender price is determined
and quoted from unit rates assigned to detailed bill
of quantities, it is called a Bill of Quantity
Contract.
• But the mixture of lump sum and Bill of quantity
we are going to put unit rate for the activities in
case if there is a variation it's going to be done by
scheduled rate but if not the owner is going rate
but pay according to the total cost that is already
out.
BOQ vs COST PLUS
• Items of work of the contract are specified with
estimated quantities in the Bills of Quantities.
Estimated quantities are surveyed by Engineer
Contractors enter unit prices against the estimated
quantities of work.
• But Cost plus Fixed Fee Contract is 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.