5 Types of Contracts

Home Articles 5 Types of Contracts

In this article, you will come to know about four types of contracts. Let us discuss them one by one.

The first in the list is:

A stipulated or lump sum contract

In the lump sum work contracts a total and definitive amount is fixed for the execution of the work, and this amount will be invariable. Attention! As a builder, you assume the risk of increasing material costs or wages, but you will also get a greater benefit if it is effective in your work or the final costs are lower than initially expected.

In a lump sum contract, the contractor assumes all the risk for the design, commonly drawn up by the client. Design errors lead to over costs in the execution of the work, due to incompatibilities, lack of information or erroneous specifications. Some of these impacts are transmitted as additional to the client, but others are finally assumed by the contractor. Likewise, the contractor assumes the risk of his own meter, since once the project is awarded, he cannot modify the estimated quantities.

Cost-Plus

(Cost + Fee): based on COST, the expenses incurred against an advance in the field are recognized. In addition, GG and a utility are recognized as a fee. It is common to place a GMP (Guaranteed Maximum Price) to this type of contract to avoid that the cost can be infinite. It is important to agree on the GMP baseline, which should be based on the plans and specifications existing at the time agreed upon. Recommended for projects without the complete design. It requires a considerable effort by the supervision and the contractor for the control and report of cost.

Cost of work plus a fee with guaranteed maximum price (GMP) contract

In a cost + tariff contract (also known as work administration) there are two options, place a cap amount (GMP) or leave it free. In the first case, the client can be sure not to exceed an investment amount, and it could also cost cheaper depending on the quality of the GMP (proposed by the contractor). In the second case, the client has no protection against over-costs and the contractor has little motivation to reach the estimated amount. On the other hand, several scenarios have to be considered that may generate costs that may or may not be recognized by the client, such as the cost of quality rework. It is a complex contract to manage.

Construction Management Contract (CM

A variant of the EPC contract, although this contracting method is more common in the mining sector, is the use of CM contracts, which has become increasingly frequent in large infrastructure and construction projects. Apparently, the meaning of EPCM (compared to EPC) is still relatively unknown in the field of construction. The fundamental confusion is that although the "C" in "EPCM" means "construction", it refers to the context of "CM", that is, to Construction Management. Ice-Institution of Civil Engineers (2011) p. 100: "EPC (Engineering, Procurement and Construction): means the company is contracted to provide engineering, procurement and construction services by the owner. Design & Construct style contracts, where the project is largely Contractor managed and the cost risk and control are weighted towards the Contractor and away from the Owner. The EPC contractor has direct contracts with the construction contractors. EPCM (Engineering, Procurement and Construction Management): means the company is contracted to provide engineering, procurement and construction management services. Other companies are contracted by the Owner directly to provide construction services and they are usually managed by the EPCM contractor on the Owner's behalf. Professional Services contracts,"

Design-build or design-and-construct (D&B) contract

The Design and Build contract takes the name of the EPC modality, when the contractor assumes the obligations of the constructor (construction), acquires the supplies (procurement) and develops the engineering of the project.

In summary, the selection of the type of contract depends mainly on the level of detail of the scope of the project. The more detailed it is, the better the client's risk transfer will be to the contractor, who in turn will be more open to accepting such a risk for the quality of the design. This means that a high investment in the design and planning stage can lead to optimizing prices considerably during construction.

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