Types of Contracts.

The two parties involved in an engineering contract are:1. Owner/Employer:-

The owner of employer in a building or engineering contract is the individual firm or public body which finances a work. The owner is the most important party in the whole of a contract system because it is he who finances the work. He also designated as employer because it is he who employs all concerned for converting the blueprints of a project into reality. 2. Contractor Builder:-

The contactor or builder is the person or firm who, in pursuit of an independent business, undertakes to supply certain materials, or to perform any work or service at an agreed price or rate, for others. He does not submit himself to the control of others but does the work in manner he thinks best.

Types of Contract: Contracts for the execution of civil engineering works may be broadly classified as under:1. All in contract/entire contract. 2. Lump sum contract. 3. Item rate or unit price contract. 4. Percentage rate contract. 5. Cost plus percentage rate contract. 6. Cost plus fixed fee contract. 7. Cost plus fluctuating fee contract. 8. Target contract. 9. Labour contract. 10. BOT contract

1.

All in Contract/Entire Contract:

This is a rare form of a contract but considered first because in it the owner ceases to be the promoter and delegates a large firm or consortium to perform both design and construction. In this form of contract, the owner, specifies his requirements and also the broad and general outline of the proposed work and the contractor has to submit full particulars of detailed investigations, design and construction cost including maintaining the work for a limited period. The two parties agree to the terms and conditions of executing the

project through all the above phases. This form of contract is suitable to some exceptional types of works and is seldom adopted for normal works. The works most suited to this form are industrial facilities where firms are in market with say patented processing plants. 2. Lump Sum Contract:

A lump sum contract, the contractor, agrees to carry out the entire work as shown in the drawings and described by specifications, supplying labour and materials, all for a specified lump sum. Sometimes, the agreement makes a provision for adjusting-the fixed sum allowing for the cost of extras, variations, omissions, etc. The main feature of the agreement is that the contractor agrees to fulfill all his contractual obligations for the stipulated payment, no matte what trouble or expenses he encounters or incurs in doing so. Advantages: (1) If no extras are contemplated, the tenders inform the owner exactly what the project will cost him. This provides a sound footing on which he can take a decision either to start the project or abandon the same. (2) He need not employ a staff to maintain periodical accounts of the contractors materials, labour and output. All that the engineer has to do on the owners behalf is to see that the work is being executed exactly according to the terms of the contract and issue interim certificates to the contractor. (3) From the contractors stand point the greatest advantage of this form of contract is that whatever benefits the contractor can gain by excellent planning and efficient management on the site of work are his own.

Drawbacks: This form has however, the following drawbacks: (i) Before a contract is to be let out, the project has got to be thoroughly investigated and all the contract documents kept ready in every respect. This entails costly and time consuming work, which is often difficult to accomplish. (ii) If the nature, extent and details of the work are not properly, defined by the contract document, many additional features may have to be determined and provided for as the work progresses. These features, not being part of the original agreement, give an opportunity to the contractor to claim payment at abnormal rates.

Suitability of the Lump Sum Form of Contract: A lump sum contract can be used successfully for the construction of such works wherein what is to be

constructed is known exactly at the time of tendering and no change is likely to occur. It is also suitable to works with respect to which the contractors have had considerable experience and whose cost they can predict with reasonable accuracy. Examples of such works are public and private buildings, warehouses, and workshops.

2. Item Rate or Unit Price Contract : This contract falls within the group of measurement contracts and is the most common form in use. An item rate contract is one in which the contractor agrees to carry out the work as per the drawings, bills of quantities and specifications out the work as per the drawings, bills of quantities and specifications in consideration of a payment to be made: entirely on measurements taken as the work proceeds and at the unit prices tendered by the contractor in the bill of quantities. A bill of quantities is prepared, giving, as accurately as possible, the quantities of each item of work to be executed and the contractor enters the unit rate against each item of work. The basis of agreement is thus the unit rate of each item, certain reasonable variations in the quantities being accepted by both parties. Advantages: An item rate contract has the following advantages: (i) The owner can avoid the delay that becomes necessary in making a large number of contract drawings to show in detail everything that would be needed as in the case of a lump sum contract. The detailed drawings can be prepared after the contract is awarded, but sufficiently in advance to enable the contractor to secure all information in time. (ii) The bill of quantities, which forms a part of the contract documents, greatly assists in keeping the tendered sum as low as possible. This is obvious because in the absence of the bill of quantities,(e.g. lump sum contract), every contractor submitting the tender has to assess the amount of work involved, usually in a very short period, in addition to the normal work. Under these circumstances the contractor, unless he is in great need of work, is almost bound to price high in order to allow himself a sufficient margin of cover for any items which he may have missed. Disadvantages: (i) The owner cannot be absolutely sure of the total cast that he would have to incur until the work is completed. In case the quantities mentioned in the

bill are found to being accurate, the cost of the work will vary considerably from the estimated cost. If the actual cost increases, the owner may be put into financial difficulty even leading to suspension of the work. (ii)Both the owner and the contractor have to do considerable computation and book-keeping during the progress of the work. Both the parties are required to appoint staff to record the measurement of the work done. (iii) As the quantities are likely to vary, there is a possibility of the contractor submitting an unbalanced tender on the basis of shrewd anticipation or perhaps outside information. If the contractors anticipation proves to be correct, the owner would stand to lose heavily. A contract of this nature therefore requires very careful scrutiny and consideration by a skillful and experienced engineer or architect before it is entered into. 4. Percentage Rate Contract:This form of contract is similar to the item rate contract in almost all respects except the method of tendering the unit rates. The bills of quantities supplied to all the intending bidders include in addition to the approximate quantities and detailed description, the unit rates as estimated by the engineer. While tendering, the contractors do not have to write the rate or estimated cost of each item, but a percentage figure by which the estimate unit rates are to be increased or decreased, the same percentage figure being applicable to all the items. Advantages: The only additional benefit claimed by this form over the unit price contract is that there is no scope for a contractor to submit an unbalanced tender. The work of scrutinizing the tenders before acceptance is much simplied. For the above-mentioned reason, this form is used in preference to the item rate contract for works where the estimated quantities are uncertain and likely to change considerably.

5. Cost Plus Type Contracts : The cost plus type contracts, as the name suggests, are based on the payment of actual cost plus something additional to cover the contractors overheads and profit. In other words, the owner agrees to pay to the contractor, the actual cost of the work plus an agreed percentage of the actual or allowable cost to cover overheads, profit, etc. Those items, expenses under which will constitute the actual cost, are to be carefully defined in the agreement. The total cost of a construction project when broken down can be grouped under the five heads as follows:

(I) (II) (III) (IV) (V)

Cost of materials. Cost of labour. Cost of deployment of machinery and equipment. Administrative expenses commonly called overheads. Profit to the contractor.

This plus can be agreed as a fixed fee, or percentage of the direct cost or fluctuating fee giving rise to different forms of contract under the cost plus type. Advantages: The cost plus contracts, in general, have the following advantages: (i) Early completion of the work: The work can be started even before the drawings, designs, estimates and specifications are ready, these items being prepared as the work progresses. Also, decision can be taken quickly. These factors lead to the rapid execution of the work. (ii) Quality of work: The contractor is assured of a reasonable amount of profit even though the prices of materials and the labour charges are subjected to fluctuations. Similarly, the use of another type of material, which is inferior to that specified and the hurried completion, resulting in poor workmanship, does not increase the contractors profit. The contractor will be induced to perform the work in the best interests of the owner. The final result would, therefore, produce a better quality work. (iii) Disputes arising due to extra work are eliminated: No work, or a portion thereof, that the contractor is directed to perform can be called an extra work. This flexibility allows the adoption of alternative ways and methods of construction in order to choose the most economic one for the work as a whole, This may reduce the cost of the work. Drawbacks: Although the cost plus percentage rate contract appears to be an attractive contract from the foregoing discussion, it suffers from many severe drawbacks, some of which are mentioned below:1. Lack of incentive: There is no incentive for the contractor either to complete the work speedily to or effect economy in the construction cost by proper planning and efficient management. On the contrary, any increase in the construction cost due to delay, wastage of materials; changes in the drawings and designs results in increase of his profit, if he has quoted plus in the form of percentage of the cost. 2. The final cost of the work: Like other contracts ( except the lump sum type contract where no extra or changes are ordered); here also, the final cost of the project to the owner can not be foretold.

3. Account keeping: Both the parties have to do a lot of account keeping regarding the materials purchased and used, the labour and plant employed and other miscellaneous expenses incurred during the course of the work. 4. Illegal with respect to public works: Where the owner happens to be a public body or a government department, this form of contract is not be adopted except during emergencies.

Cost plus percentage contract In a cost plus percentage contract, the employer agrees to pay to the contractor the actual cost incurred by him for materials, labour and machinery equipment etc. plus an agreed percentage, of the said cost. The percentage may vary from 10% to 30% depending upon the magnitude of the work. The larger the project, lesser will be the agreed percentage. The main drawback of this form as already stated is the lack of incentive to the contractor to keep the cost down and execute the work economically.

6. Cost plus fixed fee contract: The cost plus fixed fee contract differs from the cost plus percentage type contract in respect to the determination of the fee to be paid to the contractor to cover overheads and profit. The agreement specifies the fixed lump sum to be paid to the contractor by the owner over and above the actual cost of the work. In other words, the fee does not fluctuate with the actual cost of the work. This factor overcomes the possible weakness of the cost plus percentage type contract. 7. Cost plus fluctuating fee contact: By introducing an element of incentive for the contractor to carry out the work in the most economic way, an attempt is made in this form of contract to overcome the main drawbacks of the previous two types of cost plus contracts. This is achieved by suitably changing the nature of the agreement in respect of the fee payable to the contractor. The amount of fee is determined by reference to some form of a sliding scale. Thus, the higher the actual cost, the lower is the value of the fee that the contractor receives and vice versa. From the owners

point of view this is one of the best of the cost plus type contracts. It developed form is a target contract. 8. Target Contract:This form of contract is comparatively of recent origin. It combines the best features of the cost plus percentage and the cost plus fluctuating fee type contracts. The contractor is paid on a cost plus percentage basis for work performed under the contract plus or minus a certain amount, which is an agreed percentage of saving or excess affected against the target value. The target value is arrived at by measuring the work on completion and valuing it at the rates agreed to earlier. 9. Labour Contract:-

The special feature of this type of contract is that the owner agrees to supply all the requisite materials to the contractor and the latter agrees to supply all the labour and workmanship necessary to complete the work according to the drawings and specifications. This form of contract is suitable for those cases where the owner is in a position to buy large quantities of materials at favourable rates and also deliver them to the site of work most economically; for example, spreading and compacting metal and laying and fixing sleepers on a railway track.

10.

BOT Contract:-

In such contracts contractor undertakes to : design, finance, construct, operate and maintain the works for a concession period in consideration of the exercise and/or to enjoy the rights, powers, benefits, privileges, authorities and entitlements including the amount receivable from the collection of charges levied on the beneficiaries who use the work and in some cases annuity payment each year. For example, in the case of a road or bridge, the contractor constructs the structure and is entitled to collect toll from the road or bridge users for the concession period. Advantages: The main advantage is that the state or public authority is not required to finance the project immediately, and the project is made to generate the funds and be self-financing to the extent required. The developmental works which otherwise would get delayed can be undertaken forthwith. Disadvantages:-

The main drawback of this form of contract is that it is not suitable for each and every type of work. In particular, works which are not likely to generate capital or be self-financing, are not suitable for this contract. For example, rural water supply project, village roads, city roads, etc. Suitablility:Ideal for highly capital intensive works like construction of highways and express ways, bridges, tunnels that saves direct capital expenditure of Government.