The different ways to Contract in the construction field

The types of contracts for construction projects are diverse and complex. In this Article, we will address the most common contracting patterns in this field, identify the most prominent characteristics, advantages and disadvantages of each of them, and cover certain contracting methods. With regard to the types of contracts related to construction projects, we will explain lump sum/fixed price contracts, and cost/cost plus reimbursable contracts. Finally, we will address the most important contractual methods in this regard.

First: Lump sum/fixed price contracts

Lump sum/fixed price contracts are usually based on a fixed price and are announced by a public sector entity. The employer offers the project in a public tender in official newspapers. Contractors wishing to participate in the tender are required to examine the project and bid. Unit price contracts are divided into two types: 

Lump Sum Contracts:

In this type of contract, the contractor is generally free to employ whatever methods and resources it chooses to complete the work for a lump sum paid by the employer. owner. The contractor carries total responsibility and risk for proper performance of the work although approval of design, drawings, even they are not explicitly mentioned in the contract particulars. The advantages of lump sum contracts are as follows:

1. Provides maximum financial motivation for the contractor;

2. The contractor carries total responsibility for the preparation of designs and drawings and ensures compliance with the specifications.

3. Cost, and project viability for the employer, are known before a commitment is made. 

4. Employer cannot make any amendments to the quantity of the project items but to a limited extent.

5. The contractor bears all risks to the project in increasing quantities or prices of materials and execution.

2. Unit Price Contract:

This type of contract is based on unit price. Schedules of project work items are prepared as per the work progress, as mentioned above. These schedules include specifications of each item, the quantity of each work and the unit of measurement, as well as the price for each unit. By multiplying this price for the item unit in the amount calculated for this item we get the total price of the item.

The total cost is based on the totals of all items.

Advantages of unit price contracts:

1. Final cost is unknown, and cannot be known before the completion of the execution of work, as the total cost is calculated on a unit price basis. 

2. The employer can make some changes in certain items by increasing or decreasing them during the implementation phase.

3. Unlike lump sum contracts, this type of contract can be used even if the designs are incomplete.

4. Both employer and contractor bear the risk of the project during the execution of works.

2. Cost-Plus Contracts 

Unlike lump sum contracts, this contract is awarded after a specific number of competent and trustworthy contractors are invited by the employer. This competency includes expertise and the availability of machinery and equipment required to implement the project. Thereafter, selected contractors are negotiated to finally select one of them. This type of contract is frequently used in private-sector contracts. The employer pays the costs of the actual work to the contractor in addition to fees for services, equipment and profits. This type of contract includes:

1. Cost contract plus profit margin:

a. Cost contract plus lump sum and time-saving incentive.

b. Cost contract plus lump sum and percentage of savings profits.

c. Cost contract plus a percentage of cost. 

d. Cost contract plus a lump sum for damages.

The most important feature of this type of contract is the speedy commencement of work even before the completion of the designs. The cost estimate does not rely on the contract. The employer can take part in the management and follow-up of the project, including expenses, and enjoy high flexibility in making any changes in the terms of the project works or requirements.

Defects in Cost contract plus a percentage of cost:

The disadvantages of this type of contract are the lack of any incentive for the contractor to improve the efficiency of the work. Indeed, it is in the contractor's interest to increase the expenses as this increases the amounts received by the contractor. This defect can be remedied using the target cost contract.

Third: Target Cost Contract:

In this type of contract, the employer and the contractor agree on the total cost of the project prior to execution; i.e. the "target cost”. It is agreed that the actual cost of the project will not exceed that target cost. Execution takes place based on that the project must be implemented by the contractor. The liability of the employer is limited to the expenses, in addition to a percentage of such expenses, to be paid to the contractor for his work and management of execution, which is exactly like the “Cost plus contracts”. However, in the target cost contract, a material condition is added to the contract, that the contractor shall bear part of any expenses exceeding the final cost of the project, being the target cost.

With regard to contracting methods in construction projects, the responsibility of most construction projects is shared between the employer, engineer, contractor and suppliers. In general, the employer shall determine the type of contract. Once the type of contract is determined and the decision is taken to proceed with the project, it is necessary to make the necessary designs and sign the contract agreement defining each party's responsibilities and duties. Hence, the contractor will then proceed to implement the project.

With regard to contracting methods in construction projects, some of them include, but are not limited to:

1. 1. Traditional Contract Method:

This is a contracting method between the employer and the main contractor. The employer often represents a company that prepares engineering drawings and anything related to the contract, so that each party's role is clear and known in accordance with the conditions of the contract. The project is announced by general means of notifying the technical parties, i.e. the contractors, of the application for analysis of the project and the date of submission. Employer will typically award the contract to the lowest responsive, responsible bidder. The employer may proceed with negotiating with the contractor to reduce the cost of the project. In the event that the main contractor is not specialized in some work or lacks experience, the employer may assign a subcontractor to carry out such work. The subcontractor will be responsible for the labor, equipment and management of the assigned work.

2. Separate Contract Method:

Contracting in this method is made between the employer and contractors specialized in the project works, including a contractor for concrete structures and a contractor for finishing works, etc., without a main contractor. This method is similar to the traditional contract method, which means that the employer shall be responsible for the project management supervision of milestones. In applying this method, it is important to have a technical director or project management engineer with sufficient expertise to monitor the items of the project. While this method is suitable for projects requiring specialized contractors, it exposes the employer to risks compared to the traditional contract method. On the other side, however, it enables the employer to maintain a part of the profits that would have gone to the main contractor.

Turnkey Contract Method:

Under this contract, the employer assigns a main contractor to complete all works, including the supply of materials, design, and execution, in a specified amount, so that the project shall be completely delivered, whether residential building, hospital, or factory.