WEEK 7: CONVENTIONAL CONTRACTUAL ARRANGEMENT I (7.

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7.1 Traditional Types of Contract

There are three main traditional types of contracts:
1. Fixed price contract
2. Cost reimbursable contract
3. Package deal

7.1.1 Fixed Price Contract

May be of three types:
(a) Bill of Quantities Contract
This type of contract is preferred by both consultant and clients. In this type of
contract, the tender drawings which makes it easier for him to estimate his tender
figure. The BOQ contains every item of cost required to complete a project and the
contractor is expected to fix his price against each of the item listed. Contractors have
precise information for tendency or less work to do to make up their tender than with
unbilled contracts. Consultants also find it easier to compare tenders from different
contractors. The priced billed item from the basis for valuation of variations which
may occur during the contract and also for stage or interim payment. To date, the
majority of building contracts are let on this basis.

(b) Lump sum Contract:

There, the contractor agrees to carryout work out for a fixed sum of money. He is
provided with drawings and specifications and with these, he calculates his tender
figure. BOQ is not usually provided. This type of contract is only used for small
projects especially when the bulk of the work is above ground and well detailed.
Although, in theory, the contractor will carryout the whole of the work for a fixed
sum, provision id usually made in the contract conditions for the valuation of any
variations made in the design by the architect or engineer.
(c) Schedule Contract:
These may be in one or two forms:
(i) The contractors tendering for the project are supplied with a list of description of
work to be undertaken with no quantities. Against each item is appended a unit
(i.e a figure in N and K) Each contractor will indicate whether he is prepared to
do the work at the stated rate or not, the amount (usually stated as percentage) he
requires to be added or deducted from the figure shown. The contractors return
their list to the employer, and the Q.S on his behalf, examines the rates and
recommend which rate should be accepted. The contractor recommended is
awarded the contract. All work done by the contractor will be measured on the
site and valued at the agreed unit rates.
(ii) Alternatively
(iii) And more often, the contractors append the unit rates they require against the
items of work listed, thereafter, the procedure is just as described in (a) above.
This type of contract is listed mainly for maintenance contracts where accurate
quantities of work cannot be measures. It is very difficult to assess which
contractors rates are most favourable. Approximate quantities of the various
items of work can facilitate the choosing of the contractor.

7.1.2 Cost Reimbursable Contract:

These are sometimes known as cost plus contract or prime cost contract. Prime cost
of a project is the net cost of materials, labour, plant and other preliminary items
expended on the project and in addition a fee to the contractor to cover his profit and
overheads. The price cost is ascertained by the contractor submitting material
invoices, labour hiring invoices and plant hiring charges for claims, the fees paid to
the contractor is usually calculated on a previously agreed method which gives rise to
a number of forms of cost reimbursement contracts.
(a) Cost Plus Percentage Fee:
Under this type of contract, the net cost of labour, material, plant etc. expended on a
project are ascertained and percentage added to cover the contractors profit and
overheads. The percentage is agreed on before the contract is signed and may be
subjected to completion i.e several contractors submit the percentage addition they
require on the net cost of the various element. The main advantage of this type of
contract is that a contractor can be selected and work started with the minimum
delays. It is ideal therefore for emergency situations possible before bill of
quantities can be prepared or when there is insufficient information for a bill of
quantities to not prepared.

The disadvantage is that almost invariably the final cost of the project will be
much higher than say a BOQ contract. There is no mean time for the contractor to
economize, the longer it takes him to complete the work and the higher the level
of wastage, than the higher the net cost of the project and as a result his profit will
be higher. It sometimes help to have an agreed contract period for such contract.

(b) Cost Plus Fixed Fee

The net cost of labour material and plant is ascertained on completion of the project.
This total is paid to the contractor in addition to a fixed fee to cover his prift and
overheads. The fee is fixed and agreed bwteen the parties before the contract is
agreed.

Much more information is required at this stage because reasonable accurate

estimate of the work is required before a fixed fee can be agreed on. It is a better
type of contract than the previous one because there is a slight incentive for the
contractor to economize time-wise and earn his fee as soon as possible. However,
there is no incentive to reduce waste since his fee is not affected either way.
(c) Cost plus fluctuation fee:
This is an improvement on the last type of contract described in that the contractors
fee is increased by an agreed, usually on a sliding scale basis, should the final cost
be below the estimated cost.

(d) Target Cost with Variable Fee:

Further development on the described form of contract. A target estimate is agreed
between the parties to the contract. Should the final cost of the project be less than
the target estimate, the contractors fee will be increased by an agreed percentage of
the saving on the other hand, if the cost exceeds the target estimate, the contractors
fee will be reduced by an agreed percentage of the over-expenditure. Thus the
contractors has a considerable incentive to economize, since the greater the saving
on the target estimate, the higher will be his fees and vise-versa

Package deal or all-in service contract

This is a system of contracting which originated from the states of America. With
this arrangement, a contractor agrees with his client to take full responsibility for
design and construction. This eliminates some of the delays involved in co-
operation with consultants but it increases the risk to the client of unsuitable
construction.

The client gives the brief directly to the contractor of his choice, who then submit a
proposal in terms drawings, specifications, cost and completion time. If his terms
are acceptable, a formal agreement is signed and the contractor undertakes all the
works of the consultant using his in-house staff or by commissioning outside
consultant and also carries out the construction of the project.

It is also possible to go into package deal contract by notifying a number of

qualified contactors to submit independent proposals after which one is chosen.
This provides a measure of competition and ensures that the client gets value for
money. To further protect the interest of the client, a team of independent
consultants may be appointed to supervise the post-contract work to ensure that the
contractor keeps to specification and maintaining standards.

Package deal contact tends to have higher final accounts particularly when there is
limited or no competition. Secondly, because this system is based on a lumpsum
price without quantities, it is quite difficult to secure a basis for valuation of
variations. Again, the conditions for public accountability are not met since these is
not enough evidence to convince people that the cost are justified.

In addition to these, there are other developments that have worked for complex
projects. These include
- Turnkey
- Management contracting
- Project management etc.