Contract Types

Common engineering and construction contracts

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Some common types of contracts are used in the engineering and construction industry

·         Lump Sum Contract

·         Unit Price Contract

·         Cost Plus Contract

·         Incentive Contracts

·         Percentage of Construction Fee Contracts

Lump Sum Contract

With this kind of contract the engineer and/or contractor agrees to do the a described and specified project for a fixed price. Also named "Fixed Fee Contract". Often used in engineering contracts.

A Fixed Fee or Lump Sum Contract is suitable if the scope and schedule of the project are sufficiently defined to allow the consulting engineer to estimate project costs.

Unit Price Contract

This kind of contract is based on estimated quantities of items included in the project and their unit prices. The final price of the project is dependent on the quantities needed to carry out the work.

In general this contract is only suitable for construction and supplier projects where the different types of items, but not their numbers, can be accurately identified in the contract documents.

It is not unusual to combine a Unit Price Contract for parts of the project with a Lump Sum Contract or other types of contracts.

Cost Plus Contract

A contract agreement wherein the purchaser agrees to pay the cost of all labor and materials plus an amount for contractor overhead and profit (usually as a percentage of the labor and material cost). The contracts may be specified as

·         Cost + Fixed Percentage Contract

·         Cost + Fixed Fee Contract

·         Cost + Fixed Fee with Guaranteed Maximum Price Contract

·         Cost + Fixed Fee with Bonus Contract

·         Cost + Fixed Fee with Guaranteed Maximum Price and Bonus Contract

·         Cost + Fixed Fee with Agreement for Sharing Any Cost Savings Contract

This types of contracts are favored where the scope of the work is indeterminate or highly uncertain and the kinds of labor, material and equipment needed are also uncertain. Under this arrangement complete records of all time and materials spent by the contractor on the work must be maintained.

Cost + Fixed Percentage Contract

Compensation is based on a percentage of the cost.

Cost + Fixed Fee Contract

Compensation is based on a fixed sum independent the final project cost. The customer agrees to reimburse the contractor's actual costs, regardless of amount, and in addition pay a negotiated fee independent of the amount of the actual costs.

Cost + Fixed Fee with Guaranteed Maximum Price Contract

Compensation is based on a fixed sum of money. The total project cost will not exceed an agreed upper limit.

Cost + Fixed Fee with Bonus Contract

Compensation is based on a fixed sum of money. A bonus is given if the project finish below budget, ahead of schedule etc.

Cost + Fixed Fee with Guaranteed Maximum Price and Bonus Contract

Compensation is based on a fixed sum of money. The total project cost will not exceed an agreed upper limit and a bonus is given if the project is finished below budget, ahead of schedule etc.

Cost + Fixed Fee with Agreement for Sharing Any Cost Savings Contract

Compensation is based on a fixed sum of money. Any cost savings are shared with the buyer and the contractor.

Incentive Contracts

Compensation is based on the engineering and/or contracting performance according an agreed target - budget, schedule and/or quality.

The two basic categories of incentive contracts are

·         Fixed Price Incentive Contracts

·         Cost Reimbursement Incentive Contracts

Fixed Price Incentive Contracts are preferred when contract costs and performance requirements are reasonably certain.

Cost Reimbursement Contract provides the initially negotiated fee to be adjusted later by a formula based on the relationship of total allowable costs to total target costs. This type of contract specifies a target cost, a target fee, minimum and maximum fees, and a fee adjustment formula. After project performance, the fee payable to the contractor is determined in accordance with the formula.

Percentage of Construction Fee Contracts

Common for engineering contracts. Compensation is based on a percentage of the construction costs.