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 changes |
2 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 carefully |
3 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 only |
4 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 management |
5 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 changes |
What 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. |
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