Types of Construction Contracts

•  By Azeez Nazar Sabri

Construction Contracts are specific contracts. There are many forms of the construction contract. Terms and conditions of the contract vary from contract to contract. For the analysis of the terms and conditions of the contract, it is must to know the nature of contract first. The obligations of the Contractor and Employer/ owner depend on the nature of the Contract. If the Contract is a lumpsum Contract the Contract takes the risk of quantity variation. If the Contract is an item rate contract the Contract do not take such risk.  There are number of contract form but the most basis forms are as under:

1. Fixed Price Contract/Lump Sum Contract

2. Unit Price Contract/ Item rate Contract

3. Cost Plus Contract

4. Engineering and Procurement ( EPC) Contract

5.   Turnkey Contract

6. Design, Build and operate Contract

7. Design, Build, Operate and transfer Contract

Lump Sum Contract is one where the Contract is to receive a lump sum amount for the cost, including labour material, equipment, over heads and profit, for execution of works and remedying the defects during defect liability period.  The owner/ Engineer shall supply the drawing and supervise the works. The entire planning etc. shall be in the scope of the contractor. In the Lumpsum Contract the BOQ is only indicative and only for the purpose of the valuation of variation and payments. Contractor is not entitled for the quantity variation unless there is change in the design or drawings.

Fixed Price Contract is one where the Contractor is to receive cost of execution of works as per the rates stipulated in the Bill of Quantities (BOQ). In such Contracts Contract do not take the risk of quantity variations as he is paid for the quantities executed by him as per the unit rates mentioned in the BOQ. However, for the purpose of the rate the limit of quantity variation can be fixed. Under the FIDIC contract the limit of quantity variation is 15%. If the quantities executed are more the 15% or less than 15% in that case the unit rates can be revised.

Cost Plus Contract is a Contract where the rates of major items, equipment and manpower are fixed by the Contractor and Employer upfront. Contract is entitled for reimbursement of the actual cost as per agreed rate plus certain fixed percentage thereon by way of overheads and profit. In such types of the Contract owner has to be very vigilant in monitoring the contract as the certification of monthly cost statement is a challenging task.

Engineering and Procurement ( EPC) a Contractor where Employer/Owner specifies the requirement and the Contractor is responsible for all activities from design, engineering, procurement, construction and handover over the Project to Owner or end user. This type of Contract is cover by FIDIC Silver book. The Payment terms of the EPC contract can be Lump Sum or item rates basis.

Turn Key is a Contract where contractor do all activities to complete the project then handover it to the owner in the fully operation form. Owner has nothing to do but to turn the key and start using the Facilities.     

Design Build and operate  is a Contract where financial institution in association with the Construction firm provide project facilities such as Roads, Railways, Power Stations Mall etc. The Contractor plays the role of Owner and a Contractor build in one. In some case Public Sector owns and finances the construction of new project and the private sector designs build and operates the project/ facility to meet certain agreed outputs.

Design Build, operate and transfer (BOT), a most popular form of contract in Toll Roads constructions.  In such forms of the contract the construction company receives a concession from the owner/ employer to finance, design, construct and operate a facility stated in the concession contract. Due to the long term nature of the arrangement the fees are usually raised during the concession period. On expiry of the term fixed between the owner and the contractor, the facility is finally transferred to the final owner.