Tag: construction contract
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Building Trust: Drafting a Simple Construction Agreement
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Choosing the Right Construction Contract: Types, Standards, and Best Practices
Construction contracts are vital for managing projects and foresee their successful completion. In order to prepare a professional contract document, it is necessary to understand the various types of contracts. In addition, industry standards and best practices also contribute to effectiveness of these contracts.
In this article, we will look into the different types of constructions; local and international standards; as well as advantages/disadvantages of contract to specific project type.
What are the types of construction contract?
Construction contracts can be generally classified into four basic categories though different references broaden this category into multiple numbers. We shall add one more category to these well recognized classifications.
1 Lumpsum Contract
Lumpsum contracts are also known as fixed price contracts. In simple words, an owner and a contractor will agree on total cost of the project at the beginning of their negotiation. And, this agreed cost will be fixed or will not be changed until completion of the project. Very general example could be: “an owner and a contractor agree to build a G+2 residential building for cost of 5 million”. So, what’s the advantage and disadvantage of this type of contract.
Advantages of Lumpsum Contract Disadvantages of Lumpsum Contract + Owner is sure of the financial requirement of the project
+ Contractor can maximize profit by using effective construction methods– Works for projects with clearly defined scope
– Contractor takes on more risk
– It is difficult to accommodate changes2 Unit Price Contract
Unit price contracts divide project scope into units like, man-hour, meter, liter, kilo grams, and so on. And, a contractor will assign price to each unit and comes up with final estimate of final project cost. A well-prepared design and quantity estimate can benefit both owner and contractor by giving clear picture of the overall cost of the project.
Advantages of Unit Price Contract Disadvantages of Unit Price Contract + The project is simplified and divided into units
+ Contractor can feel comfortable in estimating cost for each unit
+ Change can be managed in these projects– It is difficult to determine total cost
– Contractor may risk loss if he poorly estimated unit costs
– Measurement of works and completion checks must be done carefully3 Time and Materials Contract
In this type of contract, the owner promises to pay cost related material and labor while certain amount of profit is allocated for the contractor. This contract can be a quick method to start/launch a project when project scope could be not be quantified at start.
Advantages of Time and Materials Contract Disadvantages of Time and Materials Contract + Favors flexibility in both design and construction methods
+ Contractor’s risk for profit loss is minimized
+ Easy to start project construction– Cost overrun may happen
– Requires intensive and well-organized project management
– Advisable for small projects only4 Cost-Plus Contract
An owner of a construction project can agree to pay all cost related to the projects work [COST] and agree to pay certain additional amount [PLUS] for a contractor. This contract can be used when a project scope is not clearly defined or changes over time.
Advantages of Cost-Plus Contract Disadvantages of Cost-Plus Contract + Contractors are safe from loss of profit risk
+ Projects will have innovative nature– Project cost cannot be estimated
– Requires intensive and well-organized project management5 Design-Build Contract
This contract type bundles design and construction phases together. This contract overlaps to some extent both the effort and time of project execution. Since a contractor is responsible for design and construction, it can create speed and optimization.
Advantages of Design-Build Contract Disadvantages of Design-Build Contract + Good in handling complex projects
+ Construction Speed
+ Good for design and construction teams’ cooperation– Project cost can be high
– Low flexibility in design changesWhat are the relevant standards for these construction contract types?
The contract types mentioned above have their own unique features to consider when drafting their contracts. To address these unique features, international and local standards are developed. The following are some of commonly used standards.
- FIDIC Conditions of Contract: is the most commonly used form of contracts world-wide and in our country. This contract is suitable for preparing document for the different construction contract types.
- MoWUD Standard Conditions of Contract: Ethiopian Ministry of Works and Urban Development drafted this agreement in 1994. It is dedicated to construction contracts which requires professional modification to specific contract type.
- PPA Contract: Ethiopian Federal Public Procurement Agency also prepared conditions of contract for construction project. It is updated on 2011.
- Government Authorities: Ethiopian Roads Administration (ERA), Addis Ababa City Roads Authority (AACRA), Addis Ababa Water and Sewage Authority (AAWSA), and so on seems to have some kind of a variation to the above standards.
Depending up on project’s scope of work and other requirements, one can develop a construction contract document based on the above standards. Good technical and legal knowledges are required in drafting the documents.
What are the best practices to prepare contract documents?
The following are some the best practices in preparing and developing construction documents in general.
Use clear or non-confusing language: Vague terms like “reasonable,” “substantial,” or “satisfactory” are contract killers. They mean different things to different people. Fix this by being painfully specific. Instead of “timely completion,” write “completion within 45 calendar days from permit approval”. Use complete scope definitions: A weak scope statement sounds like: “Contractor will renovate kitchen.” A strong scope lists every: demolition activity; material with brand, model, and color; installation method; and testing procedure. Include insurance and bonding requirements: The requirements for insurance coverage aren’t suggestions – they’re non-negotiable protection. Adequate change management provisions: Changes happen on every project. Your contract needs an invincible process for handling them. Weak change management leads to: unpaid work, schedule delays, relationship breakdown, disputes over what was “included”. Set realistic schedules: Smart scheduling means: accounting for permit delays; considering material delivery times; planning for weather impacts; and including realistic client decision timelines. WHAT DO YOU THINK OF THE ABOVE ARTICLE?
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Understanding Construction Contract Agreements: A Beginner’s Guide
We all see some type of construction in our daily life. And, most of us have been involved in construction work. Whether doing fence masonry; painting of family house; construction of building/bridge; or a big dam; these all fall in into construction category with of course wide range of complexity.
It should be interesting to note that the words we use in complex construction works are very similar to simple constructions. For example, masonry -> masonry; concrete -> concrete; roof -> roof; and contract agreement –> contract agreement.
In this article, we shall discuss construction contract agreement briefly and why it is very important to your construction work. Finally, you shall be able to draft an agreement for your construction project.
What is construction contract agreement?
A construction contract agreement is a written understanding between two parties to build or construct a civil engineering or related work. Now, who are these two parties? Look at the following pictures.
Relation Ship Party 1
(Owner)Party 2
(Consultant or Contractor)1 Individual (like Abebe, Chaltu) Individual (like Teshome, Almaz) 2 Individual (like Abebe, Chaltu) Company (AGY Consultant or Extreme General Contractors) 3 Private Business (ZTY Supermarket) Individual (like Teshome, Almaz) 4 Private Business (ZTY Supermarket) Private Business (ZTY Supermarket) 5 Government Organization (AA Housing) Individual (like Teshome, Almaz) 6 Government Organization (AA Housing) Private Business (ZTY Supermarket) As can be seen above, the first party (Owner/Client) want to build something while the second party will be the builder (Contractor). When these two parties agree and sign a piece of paper for a construction work, they have formed or committed a construction contract agreement.
What are the benefits of a construction agreement?
Construction in general is a complex undertaking. It involves two or more people to complete a project. Having written and signed contract documents shall have the following benefits
- It clearly explains what work will be done, who is responsible for what, how long the project will take, and how much it will cost
- It serves as a legal document for both the owner and the contractor
- If something goes wrong or there’s a disagreement, the contract can be used to solve the problem fairly
- It makes sure payments are made properly and on time, and it can include penalties for late work or rewards for finishing early
- It also helps the project run smoothly by setting clear deadlines and steps to follow
Can I prepare a construction contract agreement for my project?
In order to give you an answer, we first need to classify your project into one of the following complexity categories.
EASY: This is a type of construction where one or two skilled-manpower (mason, electrician, plumber, etc.) are involved. House paintings, ditch construction, fence construction, house maintenance, and so on are examples of easy construction. In this case, you may assign yourself as owner and project manager even if you don’t have experience in construction.
SMALL: House renovation/maintenance; residence villa/building; small internal road; and small bridge constructions can be included into this group. These construction works involve more than two skilled-men power with professionals. In this case, you may assign yourself as owner and project manager but you definitely need an experienced professional adviser. It may also be wise to assign a professional as project manager.
MEDIUM: These are projects with wide scope compared to small projects. Medium rise buildings (five to twelve stories), small factories, medium span bridges, small dams, and so on fall into this category. These projects require dedicated individual professionals and companies to manage, supervise, and construct. It is highly recommended for the owner not to be a project manager. A qualified professional or company shall manage these projects.
BIG: From medium to high-rise buildings (more than twelve stories) to highways to bridges to dams; all shall fall under this category. These projects are highly complex and difficult to manage/construct in which competent companies with specialized experience are required.
How shall I draft my construction contract agreement?
Based on the above complexity categories, you shall prepare a contract document for easy projects only. We have prepared a step by step guide for you on our article “how to draft a simple construction contract agreement”. You can also draft an agreement together with a professional for a small project too. Please read our guide on our article “how to prepare a formal construction contract agreement”. For medium and big projects, it is highly recommended to hire professional companies on this matter.
In conclusion,
A good construction contract isn’t just legal protection—it’s peace of mind. For owners, contracts provide quality guarantees and remedies if things go wrong. For contractors, they ensure fair payment terms and clear work expectations.
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