Types of Contracts - Part One


Definition of a Contact:


For implementation of the construction works of a project, an agreement, commonly called a contract, between contracting authority and contractor/supplier should be concluded, the definition of contract will be as follows:

The contract is an agreement between the contracting authority and a contractor /supplier providing contracting services/works and/or goods.

 

It is important that whatever contract is developed it must demonstrate:
  • The contracting authority’s intent to contract. 
  • A clear offer from the contracting authority and a clear acceptance of the offer by the contractor/supplier. 
  • The ability of both contracting authority and supplier to legally contract. 
  • A price that the contracting authority agrees to pay the contractor/supplier. 
  • A clear agreement between contracting parties about the terms and conditions of the contract which should be precise and definite and there should be no room for ambiguity or misconstruction.


Types of contract:


The nature and content of contracts vary from country to country, however Contract types are likely to vary according to: 
  • the degree and timing of the responsibility assumed by the contractor for the costs of performance.
  • The amount and nature of the incentive offered to the contractor for achieving or exceeding specified standards or goals. 
Contract types according to pricing arrangement will be divided to two main categories which are:
  • Fixed-price contracts.
  • Cost-reimbursement contracts.

Note: in the end of this chapter I will include the most common names for contracting contracts.




First: Fixed-price contracts

  • A price that is not subject to any adjustments. 
  • Places upon the contractor maximum risk and full responsibility for all costs and resulting profit. 
  • It provides maximum incentive for the contractor to control costs and perform effectively. 
  • Firm Fixed Price contracts are the preferred method of contracting from the government’s perspective. Used when sealed bid is involved. Used for acquiring supplies and services and/or for acquiring commercial items. 

Variations of fixed price contracts


1- Economic price adjustment
  •  Revision of prices for specific contingencies. 
  • Adjustments based upon increases or decreases from an agreed 
  • Upon level in either published or established market prices for specific items. 
  • Adjustments based upon actual increases or decreases in the price 
  • Adjustments based upon increases or decreases in the specific labor or material cost standards or indexes, such as Bureau of Labor Standards indices. 

2- Incentive Contracts
An FPI (Fixed Price Incentive) contract specifies a target cost, a target profit, a price ceiling and a profit adjustment formula. The FPI contract provides a profit motive for the contractor to perform efficiently from a cost perspective. If the contractor completes the contract while incurring less cost than originally anticipated, the contractor will receive more profit.
  • Used when a fixed-firm contract is not appropriate.
  • Supplies/services can be acquired at lowers costs, with improved delivery or improved technical performance. 


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 follows:

  1. Cost + Fixed Percentage Contract.
  2. Cost + Fixed Fee Contract.
  3. Cost + Fixed Fee with Guaranteed Maximum Price Contract.
  4. Cost + Fixed Fee with Bonus Contract.
  5. Cost + Fixed Fee with Guaranteed Maximum Price and Bonus Contract.
  6. Cost + Fixed Fee with Agreement for Sharing Any Cost Savings Contract.

These 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.



In the next Topic, I will continue explaining other types of contracts; Cost-reimbursement contracts.



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