Construction Contracts: Types and Applications

Contract Types and Management

• Cost-plus contracts are used in situations where it's difficult or impossible to predict costs during the negotiation, bid, and award process.
• Factors that make cost calculation impossible include unpredictable weather, remote locations, combat, or war, and contracts dependent on another contractor's work.

Cost-Plus Fixed Fee Contract

• A cost-plus fixed fee contract is desirable when the scope and nature of the work can be broadly defined.
• The fee amount is determined as a lump sum based on the scope of work, approximate cost, nature of work, estimated time of construction, manpower, and equipment requirements.

Contract Formulation

• Involves two sub-processes: Negotiation and Signing of Contract Agreement.
• Negotiation is a process where project owners and their representatives deal with the recommended winner of the tender to agree on the requirements.
• Contract agreement is signed, forming the contract document that serves as the basis for contract administration.

Contract Administration

• Ensures the successful completion of the project under consideration with substantial compliance of the Terms of the Contract.
• Activities included in Contract Administration services:
• Identifying contractual responsibilities of stakeholders
• Monitoring and influencing the contractor's activities without jeopardizing the owner's interests
• Ensuring compliance with the terms of the contract

Closing of Contract

• Involves issues related to Maintenance Period and Remedial works, dealing with Left Over Claims and Disputes, and Closing of Accounts.
• Maintenance Period usually lasts one year, focusing on quality problems overseen by supervisors.
• Left Over Claims and Disputes are settled during this phase.

Contract Changes Management

• Uncertainties and Changes are the two most important issues considered in contract change management.
• Clauses 51 and 52 of the General Conditions of FIDIC Red Book provide provisions for Alterations (Additions and Omissions).
• Requirement changes can be additional or excess, and the contractor is entitled to request and agree upon new or existing rates for such changes.

Change Orders

• Written instructions directing the Project Doer to make changes with or without the Consent of Regulatory Bodies.
• There are three kinds of Change Orders:
• Unilateral Change Order: provides the right to any party to make changes without affecting the other parties.
• Bilateral Change Order: requires the agreement and consent of the two contracting parties.
• Multilateral Change Order: requires the agreement and consent of three or more contracting parties.

Time and Cost Changes

• Requirement changes based on the different types of change orders modify contracts in one of or a combination of the following ways:
• Time changes only
• Time changes accompanied by Cost Compensations
• Cost Changes only