CONSTRUCTION CONTRACTS

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There are three essential requirements of any contract.

  1. Incentive: The prime aim is to provide an adequate incentive for efficient performance from the contractor. This must be reflected by an incentive for the client to provide appropriate information and support in a timely manner
  2. Flexibility: the prime aim is to provide the client with sufficient flexibility to introduce change which can be anticipated but not defined at the tender stage. An important requirement is that the contract should provide for systematic and equitable evaluation of such changes.
  3. Risk sharing: the prime aim is to allocate all risk between Client and Contractor. This must take into account the management and control of risk which materialize.

Types of Construction Contracts

There are various types of contract strategies in construction industry. Some of the main choices available are:

  • Traditional Contracts

A consultant (or team of consultants) undertakes the process of feasibility, detailed
design, and contract preparation. A tender process follows and thereafter construction
installation and commissioning by the appointed contractor. The consultants who
developed and designed the project supervise these.

  • Design and Build

A consultant undertakes the process of feasibility, establishing the client’s basic needs
and contract preparation. A tender process follows and thereafter the appointed
contractor undertakes detailed design, construction, installation and commissioning.
This type of contract is also known as turn key or prime contracts

  • Management contracts

The client initially appoints consultants to undertake feasibility and costing and
perhaps outline design.A management contractor is appointed early in the project life and has considerable design input.

The management contractor’s responsibility is to prepare and appoints trade contracts or supply packages. Separate contracts are drawn up for independent parts of the construction project. A large amount of work is divided amongst several contractors.

  • Build Own Operate Transfer (BOOT)

In its many forms a BOOT contract not only includes the initial design and
construction of the facility but a continuing maintenance and perhaps refurbishment
of over a number of years until final transfer to the client. Finance is often provided
by the contractor who recovers his cost through the life of the project. Other terms are
PFI, PPP etc

The concession agreement is the structured contract between the client and contractor.
It identifies and allocates risk. 

Modes of Payments

The two main payment systems used in construction contracts are:

  • Price Based: this system consists of lump sum and admeasurements. Prices or rates are submitted by the Contractor in his tender
  • Cost Based: This payment system consists of cost-reimbursable and target cost. The actual costs are incurred by the contractor and reimbursed, together with a fee for overheads and profits.
  • Price Based Payment System

Risk Allocation
A prime function of the contract is to allocate risk. The identification and
consideration of risk is a logical way to develop the organisational and contractual
policies for any project. Some of these uncertainties will remain whatever type of
contract is adopted and the contractor must then include a contingency sum for them
in his tender.
Different levels of risk contingencies can explain the wide range of bid prices
frequently received for admeasurements contracts. Another consequence of risk is that
fewer contractors are prepared to respond to or submit unqualified bids.
All parties to a project are at risk to some extent whatever the contract between them,
for instance that work may be frustrated by the forces beyond their control. If so, the
time lost and all or some of their consequent const may not be recoverable. The
choice of type of contract can motivate (or fail to motivate)

 

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