KJC326

Chapter Two
TYPES OF CONTRACT
2.1

INTRODUCTION

The client will usually take advice as to what type of contract should be adopted for each
project, although Bill of Quantities contract is probably the most frequently used in Civil
Engineering. Construction contracts can be categorised under two major heading:

2.2

(i)

Type of payment systems

(ii)

Type of organisations.

TYPE OF PAYMENT SYSTEMS

Contracts under types of payment systems are either priced based or cost based.
(i)

Priced based
In priced based payment systems, prices being submitted by the
contractor in his bid. It is also known as Fixed Price Contract, which
include:
(a)

Lump sum (LS) contract

(b)

Measurement / Remeasurement / Measure & Value contract,

which comprises of BQ contract, and Schedule of Rate contract.

(ii)

Cost based
In cost based systems, the contracts are Cost Reimbursement Contract;
which mean the actual cost incurred by the contractor is reimbursed
together with a fee to overcome overheads and profit. This will include the
cost of material, labour, supervision, equipment, plant and other items
having residual value. He is also paid a fee for his services in the
management of the work and as profit. However, it is essential that the
services expected from the executor and the method of evaluating the
cost must be clearly defined in the contract. Cost Reimbursement
Contract comprises of:
(a)

Cost Plus Percentage Of Cost Contract

(b)

Cost Plus Fixed Fee Contract

(c)

Cost Plus Fluctuating Fee Contract

(d)

Target Cost Contract

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2.2.1

LS Contract

In LS contract, the contract price is a fixed sum quoted by the contractor for the entire
works as specified in the contract documents. The nature and extent of the work are
normally indicated on drawings and the nature of the materials and workmanship
described in specification.
No individual rates are quoted for each item of work. Detailed or approximate quantities
may not be issued with the form of tender. In most cases there is no provision to vary the
contract price even if the actual work executed differs in quantities from those on which
the tender was based. However there may be provision if the specified work is varied.
Merit:
(i)

Suitable where later changes are not expected, and when a simple and
quick form of payment is preferred.

(ii)

Payments are made in stages, as identified in agreement form. For

example 10% of the contract sum shall be paid upon the completion of
foundation stage.

(iii)

No physical measurements shall be carried out; general visualization is

satisfactory.

Demerit:
(i)

If there are any changes in the plans and/or drawings, the value of the
change should be negotiated with the contractor. This may cause delay
and sometimes disputes.

(ii)

The owner pays a fixed sum for the works, regardless of their actual cost.
This constitutes an undesirable practice from the contractors point of
view.

(iii)

There is no provision of payment for materials at site.

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2.2.2

BQ Contract

BQ contract is the most usual type of fixed price contract. A bill of quantities is prepared,
giving as accurate as possible, the quantities of each item of work to be executed. The
contractor only need to quotes a unit rate or price for each item of work The Contract
Price is the sum total of prices of each item of work mentioned in the BQ. Payments are
generally made on the basis of the actual measured quantity of work executed for each
item in the BQ and the rate quoted. Usually there is a provision for valuation on a daywork basis or otherwise, in cases where the quoted rates are not applicable. BQ contract
greatly assist in keeping tenders figures as low as possible. They should be prepared,
whenever possible, on all engineering projects.
Merit:
(i)

Changes made in drawings at later stages may increase or decrease the

quantity of work to be done. Since the price is based on the rates,
variations can easily be identified, calculated and adopted.

(ii)

Changes in the contract sum are possible. If the employer has difficulty to
manage his cash flow, he may decide to carry on with the work but with
some changes. Items in the BQ may be essentials, non-essentials or
luxurious. The employer can identify particular items on which he wishes
to reduce the cost, and instruct through the correct procedure to change
the item to be done at lower cost.

(iii)

Material on site is paid 90% of the actual value.

Demerit:
(i)

It may be necessary to supervise to assure the quality of work and

materials.

(ii)

Time consuming for BQ preparation. This may vary from 2 to 6 months;

thus extent the time spends for initial planning.

(iii)

Time consuming for tender analysis. The analysing of BQ contracts,

tender documents, quantities, prices difference in particular item, and in
some cases pre-tender method appreciation, may take 2 to 3 months.

(iv)

Planning and implementation cost. The QS needs to be paid for the

preparation of the BQ and then for the subsequent supervision. Generally,
total amount for the preparation of BQ is 1% to 2% of the contract sum.

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2.2.3

Schedule Of Rates Contracts

There are two types as mentioned below:

(i)

The tenderer is issued with documents having the schedule of items,

prepared for a particular contract, where he is required to enter the unit
rates or price for each item of work.

(ii)

The tenderer is issued with documents having the schedule of items with
unit rates, prepared for a particular contract, where he may agree or quote
a percentage above or below the given unit rates, for which he is
prepared to carry out the work.

For either type of schedule, it may state the approximate quantities to be executed for
each item of work. Provision for valuation on a day-work basis or other wise is usually
made in the form of contract, in cases where the quoted rates are not applicable. The
contract price is thus determined by summing up the amounts obtained by multiplying
the respective quoted rates and actual quantity of each item of work to be executed. This
type of contract is suitable for use in maintenance, jobbing, and similar contracts. It is
usually chosen for urgent works.
Merit:
(i)

Variations in quantities are easily accommodated.

(ii)

Experienced architects or engineers may be able to forecast the types of

works and methods appreciate, thus accurately prepare the schedule of
items, even before the design drawings and specifications are completed.

Demerit:
(i)

Since only approximate quantity of work is known at tendering stage, it is

difficult to estimate the actual contract price, to plan properly the contract
programme, and to project the cash flow.

(ii)

The quotations for the unit rates tend to be high because the advantage of
discounts on bulk buying by the executers of works cannot be considered
at the tender stage, since the volume of work is not certain.
In the case of the rehabilitation or reinstatements works the executor of
the work cannot exactly estimate the type and quantum of the different
items of work to be replaced or repaired.

(iii)

Contractors may quote at lower rates to be more competitive; which may

lead to financial problems.

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2.2.4

Differences Between Schedule Of Rates Contract And BQ Contract:

Schedule of Rates Contract

There is no implied guarantee given that all or any

BQ Contract
All of the work scheduled will be

of the work scheduled will be carried out.

More items are scheduled for temporary works

carried out.
Lesser items are scheduled for

than usually appear in a BQ, because the amount

temporary works.

of temporary works that the contractor has to

under take is uncertain.
Lesser time spend in preparing tender document.

A lot of time spends to prepare BQ.

Just adopt the standard schedule of rates.

There is no guarantee on the quantities stated.

The quantities stated is abstract

The quantities against individual items may not be

from drawings and specification,

stated; they may be indicated as an estimated

which

amount, or round figure provisional quantities.

accuracy regarding the work to be

have

certain

level

of

carried out.
2.2.5

Differences Between Schedule Of Rates Contract And Lump Sum Contract:

Schedule of Rates Contract

Contractor quotes detail price of each item.
Lower risk (variation) to owner and

Lump Sum Contract

Detail price of each item is not quoted.
Higher risk (variation) to owner and

contractor as rate of each item are

contractor as rate of each item are not

specified.
Take longer

specified.
Take lesser

document.

2.2.6

time

to

prepare

tender

time

to

prepare

tender

document.

Cost Plus Percentage Of Cost Contract

The contractor, in this form of contract, charges an agreed fee in terms of a percentage
of the cost of the actual work executed. The percentage varies from 5% to 20%.
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Merit:
(i)

It allows contractors involve at the design stage.

(ii)

The owner gains great flexibility to involve in the project effectively.

(iii)

The contractor can be confident of an equitable payment for changes and

unforeseen events.

(iv)

Since the entire cost is to be charged to the employer, there is a less

likelihood on negligence on the quality of material, construction and
supervision, however complicated the work may be.

Demerit:
(i)

There is no incentive to complete the works as quickly as possible or to

try to reduce costs.

(ii)

Unscrupulous contractor could increase his profit by increasing the

contract sum. Such as the cost of construction escalate by delays,
expensive materials, poor control in supervision and negatives practices.
For example in a particular case the maximum repetitive utilization of
formwork was avoided by destroying/burning. Further, there may be
wastage in terms of hardened cement, inexperienced labour and
supervisors.

2.2.7

Cost Plus Fixed Fee Contract.

The sum paid to the contractor will be the actual cost incurred in the execution of works,
plus a fixed fee, which has been previously agreed upon and does not fluctuate with the
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final cost of the job. The fix fee may have been negotiated on a percentage basis on an
anticipated cost of work that had been to be executed.
Merit:
(i)

The contractor is not inclined to push up the cost of work, as his profit
from his undertaken job is already fixed.

(ii)

It is to the contractors advantage if the work is accelerated, so that the

contractor could earn his fixed fee as early as possible and utilize the
resources on the other job.

Demerit:
(i)

The contractor may try to reduce the cost of supervision, expedite with the
work, neglecting the correct construction process to maximise profit.

2.2.8

Cost Plus Fluctuating Fee Contract

It is also known as cost plus a sliding scale of fee contract, since the fee paid to the
contractor is based upon some form of a sliding scale. It is designed in such a way that the
contractor may have a definite financial incentive to affect the economy in the cost of
work. Economy is gauged by comparison with some predetermined, mutually agreed
estimate of the cost of the work to be undertaken. As the cost of the project increases the
percentage becomes lesser. Generally the following sliding scale fee is practised in
Malaysia
Project Cost
Below RM2 million
RM2 million RM12 million
Above RM12 million

2.2.9

% of fee
30
10-20
12-15

Target Cost Contract

In target cost contract, a basic fee is generally quoted as a percentage of an agreed

target estimated from BQ. The agreed target estimate may be adjusted for variation.
Actual fee paid to the contractor is derived by increasing or reducing the basic fee, by an
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agreed percentage, of the saving or access between the actual cost and the agreed
target estimate.
Target cost contract
Agreed target estimate
Actual cost
Saving
Excess
Sharing ratio 50:50
Payable to the contractor

Example 1
5,000,000.00
4,500,000.00
500,000.00
250,000.00
4,750,000.00

Example 2
5,000,000.00
5,500.000.00
500,000.00
250,000.00
5,250,000.00

Merit:
(i)

It encourages the contractor to execute the work as cheaply as possible.

(ii)

The fluctuation of cost is shared between the owner and the contractor in
a pre-determined ratio.

(iii)

The owner gains great flexibility to involve in the project effectively.

Demerit:
(i)

There is no incentive to complete the works as quickly as possible.

(ii)

The contractor may try to reduce the cost of supervision, expedite with the
work, neglecting the correct construction process so that the profit
maximization can be effected.

2.3

TYPE OF ORGANISATIONS

The type of contract due to a particular project organisational method may be one of the
following:
(i)

Turnkey Contract

(ii)

Management Contracting

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2.3.1

Turnkey Contract

The owner of a Turnkey Contract will normally issue a brief based on a performance
specification together with outline drawings indicating a preferred layout. The contractor
is fully responsible for the design, specification, construction and sometimes
maintenance of the project. It is normally use for a giant project.
Merit:
(i)

Normally the employer will get satisfactorily workmanship and efficient

service from the contractor since the construction is following their own
design.

(ii)

The employer can make fully use of the professional services from the
contractor in any disciplines.

(iii)

Single source responsibilities from contractor relieve the owner from the
design responsibilities.

(iv)

The contractor may apply a fast track approach with design and
construction overlapping.

Demerit:
(i)

The cost of the project will be expensive since the contractor will highly
charged for their professional services and managements.

2.3.2

(ii)

Owner participation and supervision is not significant.

(iii)

Owner flexibility to incorporate changes is very limited.

Management Contracting

Under these method the contractor offers the owner a consultant service based on a fee
for co-ordinating, planning the construction, managing and executing the project. It
ensures that the contractor (or construction management consultant) is part of the owner
team, ensuring that maximum construction experience is fed into the design. In
management contract, the permanent work are constructed under a series of

management
construction contract (also Owner
known project
as trades
contracts or works contracts) placed by the
management contractor after approval by the client/owner.

Design
organisation

Management
contractor

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Construction
contractors

Figure 2.3.2 : Management Contracting

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Merit:
(i)

Time can be saved by more extensive overlap of design and construct

utilising the management contractors experience in construction planning.

(ii)

It allows more flexibility particularly where the programme and design are
ill-defined and subject to change.

(iii)

It reduces delays and the knock-on effect of claims.

(iv)

It avoids adversarial attitudes, which leads to a more harmonious

relationship.

Demerit:
(i)

The overall construction cost may be increased; but is normally offset by

an early completion.

(ii)

There is tendency to produce additional administration and some

duplication of supervisory staff.

(iii)

The potential for interface grey areas between works contractors is high.

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