Project Management

Construction Management (Contract Types)

last edited by: Mohamed Abdelaziz Mohamed on Jul 28, 2017 9:01 AM login/register to edit this page

Contents
1 A Practical Definition of Contract
2 Why Is A Contract Needed?
3 The Major Kinds of Contracts
4 Fixed Price or Lump Sum
5 Guaranteed Maximum Price
6 Target Price or Cost
7 Cost Reimbursable

A Practical Definition of Contract

• An agreement with specific terms between two or more persons or entities in which there is a promise to do something in return for a valuable benefit known as consideration.

• In construction, it is the vehicle for:

A. Allocating risk among the contractor and owner/employer. B. Defining what is to be built. C. Setting the price. D. Defining the time period for construction and completion.

Why Is A Contract Needed?

There is an inherent conflict between the interests of the contractor and the owner/employer.

• Contractor wants the least work for the highest price. • Owner wants the most work for the lowest price.

Construction involves many unknowns - efficiency and good business practices suggest that these unknowns should be managed by the party in the best position to control them as they arise.

The Major Kinds of Contracts

One way contracts are known is by name of their pricing mechanism

• Fixed price / Lump sum

• Unit Price

• Cost Reimbursable

• Guarantied maximum price

• Target price

Fixed Price or Lump Sum

• Allocates the most risk to the contractor which promises to deliver the work scope for a sum certain

• Contractor benefits/losses based on the difference between the price and cost

• Provides owner/employer with the most certainty

• Objective selection process

• Relies on well-defined project objective

Guaranteed Maximum Price

• Contractor promises to deliver the work scope for no more than the agreed sum certain

• Contractor absorbs the cost of overruns but shares cost savings with the owner/employer

• Transparency in relationship

• Fixed or percentage fee options

• Varying control over final cost

Target Price or Cost

• Contractor and Owner/Employer agree on a price for the work scope and share both overruns and savings

• Blend of lump sum and guaranteed maximum price • Better cost protection for both contractor and owner than lump sum or guarantied maximum price

Cost Reimbursable

• Contractor promises to deliver the work scope for its cost (subcontractors, vendors, self performed work, specified overhead and profit)

• Owner/employer takes all cost risk and has the least cost certainty; provides specified profit and fee for the contractor

• Transparency in relationship

• Least control over final cost


last edited by: Mohamed Abdelaziz Mohamed on Jul 28, 2017 9:01 AM login/register to edit this page


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