TYPES OF CONTRACT
Types of contract
Types of contract’s are Item rate contract Percentage rate contract Lump-sum contract Labour Labo ur contract contract Materials supply contract Cost plus contract Cost plus percentage pe rcentage rate contract Cost plus fixed free contract Cost plus sliding or fluctuating f luctuating fee scale contract Target contract Negotiated contract
ITEM RATE CONTRACT Item rate contract: Item rate contract is also known as unit price contract or schedule contract. A contractor undertakes the execution of work on an item rate basis. He is required to quote rate for individual item of work on the basis of schedule of quantities (i.e., bill of quantities ) furnished by the department. The amount to be received received by the contractor, contractor, depends depend s upon the quantities quantit ies of work actually performed. The payment to the contractor is made on the basis of the detailed measurements of different items of work work actually actually executed executed by him. Suitability : The item rate contract is most commonly used for all types of engineering works of the government government undertakings including includ ing railway railway department. It is suitable for works works which can be distinctly split into i nto various items and quantities under each item can be estimated accurately.
MERITS AND DEMERITS
Merits: This method ensures a very detailed analysis of cost and payment to the contractor and also is based upon detailed measurements of each item actually done, so this method is more scientific. Changes in drawings and quantities of individual item can be made as per requirements within agreed limits. There is no urgency of providing detailed drawings at the time of awarding the contract. It can be prepared later on. A contractor contractor is asked to write down the rate of individual item in figures figures and words words both so it is not easy to form a cartel during the submission of tender. tender. An engineer can compare the rates rates quoted by the contractor with that of schedule of rates rates prepared prepared by the departments to find out ou t whether the tender is unbalanced. Demerits: As by wise anticipation or perhaps perhaps outside information, information, a contractor may quote high for items that are likely to be increased and low rate for items likely to be decreased, making an unbalanced tender and consequently the departments may stand to lose substantially. substantially. Comparative statement of item rate tenders are more elaborate and comprehensive and intelligent scrutiny is required. A contractor contractor may quote some items in words words excluding excluding paise intentionally in order to tamper in rates. The total cost of work can only be known after completion. completion. As such the owner may face financial difficulty if the final cost is substantially substa ntially high. Additional staff is required required to take detailed detailed measurements of work. The scope of saving with use us e of interior quality may prompt the contractor to do so.
Percentage rate contract:
In this form of contractor, contractor, the department depa rtment draws up ‘item rate tender’ i.e bill of quality and total amount. amoun t. The contractors are required to offer to carry out the work as per with the rates shown in the specific specif ic price schedule or some percentage above or some percentage below the rates indicated in the schedule of work attached with the the tender. tender. The The percentag percentage e above above or below or at par is applicable applic able on the over over of the work also. also.
MERITS AND DEMERITS:
Merits: The ranking amongst the contractor is easily known just on the opening of the tender. tender. As there is no provision provision to quote contractor’ contractor’ss own rate rate for for an individual item, benefit due to increased quantity with a beneficial benef icial rate can not be availed availed by the contractor. contractor. The chance of unbalanced tender tende r gets gets eliminated. Demerits: A contractor contractor is required required to to write down only the percentag percentage e above above or at par or below, it is easy to write such a rate in few minutes before the time of submission su bmission of the tender. tender. By negotiating among the contractors, two or more may quote the same rate in order to get a part of the work at a high rate. There may be difficulty difficu lty to divide the work work at equal amount among the t he contractors.
Lump sum contr contract: act:
In this type typ e of contract, a contractor is required to quote fixed f ixed sum for execution of work complete in all respect in thr stipulated to him with the tender tende r. The department schedule of rates for various items of work are also provided which regulates the payment of the contractor in respect of any additions and alterations alteration s which are made over the original work. On the completion but the whole done must be compared and checked with the t he drawings drawings and specifications.
MERITS AND DEMERITS
Merits: As the total cost of the work work known before hand, the owner owner can arrange the fund in time. Detailed measurements of the t he work done are are not required except in respect of additions and alterations. The contractor’s profit profit mainly lies in the completion time. Hence for getting more profit the contractor tries to complete the work as early as possible. This concept on the part of contractor coincides coincides with the objective of the owner also. As it is difficult to get intermediate payment, the contractor tries to finish earliest to get the full payment earliest and go to another venture. The owner also benef its from the project completed early or in time. Due to completion among the contractor, the contractor tries to take the work up even at the less profit, resulting in low cost of work. Demerits: The owner aims to get get maximum work out of money mone y he spends whereas the contractor tries to get maximum profit out of money he receives, this causes conflict iin interests. It is very essential the work must be defined defi ned accurately, accurately, specifications must be fully specified and the site conditions must be fully explained otherwise disputes can arise later l ater on. For any intermediate payment, the value of work done should not be less than the payment being made. It is suitable form of contract where considerable amount of addition and alterations are expected.
Labour contract:
In labour labou r contract, the contractor undertakes contract for the labour portion only excluding the materials which are a re arranged at the work site by the department/owner department/owner.. The contractor engages the requisite labour labo ur and gets the work done as per drawings and specification specifi cations. s. It is an item rate basis for labour labou r portion only and the contractor is paid for fo r the quantities of work done on measurements measurement s of different d ifferent items of work at the stipulated stipulated rate in the contract contract agreement.
MERITS AND DEMERITS
Merits: The materials stored by the departments are thus utilized. The work done through labour contract is of superior su perior quality as better quality materials m aterials are arranged by the t he owner, owner, The overall cost of construction may be less, as no profit is paid on the cost of materials. This system is very convention for private building construction. construction . Demerits: The material and the department will have to to remain vigilant and watchful over over the materials materials used, the contractor contractor may over over look the material wastage involv i nvolved. ed. A large large storag storage e area area is required to store the various kinds of materials to be used in the t he construction under a constant guarding. This system is not suitable suitab le for government government department. department . Because due to lengthy formalities in procurement of materials, it is very difficult to supply each material mater ial readily readi ly to the labour contractor. contractor.
Material supply contr contract: act:
In this type of contract, a contractor has to offer his rates for supply of the required quantities quantit ies of materials, inclusive of all local taxes, carriages and delivery charges to to the specified specified stores within the time limit prescribed prescri bed in the tender. tender. All such materials received should be examined and counted or measured, as the case may be, when delivery is taken.
MERITS AND DEMERITS
Merits: Payment is very prompt, so the contractors try to take supply order at less profit, resulting resu lting in i n low cost of material. The owner/department has nothing to worry for any loss, breakage, breaka ge, demurrage, charges charges during transit. Demerits: Constant control over over quality of materials received in several several batches batche s and different times is required.
Cost plus plu s percentage rate rate contract:
In this type t ype of contract, a contractor agrees to take the work of construction constructio n on the actual cost of work work plan plan an agreed percentage percentage in addition, for his services. services. It is generally adopted when the th e labour and material cost are liable to fluctuate heavily in the market. The contractor arranges arranges materials and labour at his cost cost and keeps proper account which is paid by the department or owner with certain percentage percentage ( say say 10% ) of the cost os construction as his profit. An agreement is made accordingly in advance.
MERITS AND DEMERITS
Merits: The contract can be quickly quick ly drawn drawn up and agreed and work can be completed in the shortest possible time. Is is well suited during war period or calamity period when the shortest possible possibl e project time is the main criteria in place of the cost involved. involved. It is particularly suitable when work can not be executed by other types of contracts due to uncertainity and fluctuations in the market rates of labour and materials. Demerits: The contractor’s only aim is to make the cost project as high as possible possibl e in order to to seek greater margin. A proper proper control control over over purchase of materials and labour shall have to be executed executed by the department or the owner. owner.
Cost plus fixed fee fee contract:
In this type of contract, the t he contractor contractor is paid by the owner an agreed fixed f ixed lump-sum lump-sum amount and above actual actual cost of the work. This fixed fee will include overhead and profit profit to the contractor. contractor. The fees does not vary with the actual actua l cost of the work as in the th e case of cost plus percentage rate rate contract.
MERITS AND DEMERITS
Merits: Since the fixed f ixed fee covers the contractor’s overhead overhead charges and profit, prof it, the contractor will try tr y to finish the work as early as possible, possibl e, so the owner gets gets the advantage of early completion. Demerits: The contractor is quite indifferent towards the quality quali ty of work, he is simply interested interested in its early completion, completion, Close supervision and checking of delivery delivery notes and invoices which it involves, involves, makes ma kes it unsuitable unsui table for fo r works works where the necessary necessary staff is not available. available. The cost of project is unnecessarily increased because of purchase of materials at higher prices and engaging costly labour in an attempt tp reduce the project time. time .
Cost plus sliding fluctuating fee scale contract:
In this type of contracts, the contractor gets the actual cost of construction plus an amount of fee ( % of construction constructi on cost) inversely variable according according to the increase or decrease of the estimated cost agreed first by both the parties. Higher the actual cost, lower will be the percentage rate of fee and vice versa. versa. Hence the main objectives of both parties lies in the minimum cost of construction constructio n and this is treated as one of the best system of contract. It is clear from the following example where the cost of construction constructi on is going less les s and the contractor’s amount goes up and up.
MERITS AND DEMERITS
Merits: The owner and the t he contractor both will be benefitted benef itted in the th e lowest possible cost of construction constructio n and this is treated the best bes t system of contract. Demerits: The estimated cost must be accurately determined. In case the estimated cost is much higher than the required due to inefficiency of the estimater estima ter,, a contractor will get more mo re amount on the basis of savings.
Target contract:
:
In this system, the contractor is paid on a cost plus percentage basis of waork waork and in addition additi on he receives a percentage plus or minus on savings or exceses effected against a prior agreed estimate esti mate by measuring measuring the work on completion and vakuing at prior agreed rates.
MERITS AND DEMERITS
Merits: The contractor is encouraged to use his skill and an d expertise expertise in order to keep keep the cost of constructio cons truction n as low as possible. This gives an opportunity opportuni ty to a contractor to earn bonus in addition to the fixed percentage fee. Demerits: The contractor may try to increase the th e cost of construction high because he gains more amount on the basis of fixed percentage percentage of cost of construction without caring about the penalty of excess excess expenditure.
Negotiated contract: :
When the contract contract is awarded awarded without calling tenders on the basis of negotiations only, only, it it is called negotiated contract. It may be of any a ny form discussed above.
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