Different types of Construction Contract Systems - Civil Engineering

Different Types of Construction Contract Systems :

Before going into topic of Different types of Construction Contract Systems.Let us clearly know the Definition of Contract and Contract system.

Contract is an undertaking by a person or firm to do any work under certain terms and conditions.This work may be of newly constructed work,maintenance and repairs.Also Some contracts relate to supply of materials,for the supply of labor and for the transport of materials etc.,

When we turn our wheel next we get to meet contract system.Let me explain you that in detail now.

In Contract system the work is got done through contractors by owner under certain terms and conditions. Contractor will be responsible for the completion of work as per agreed specification,time and money.If he fails to,he must compensate owner as per signed agreement. 

Fig: Different types of Construction Contract Systems

Depend on various conditions of contract,the contract system is divided into four types.They are named as follows :

• Lump Sum Contract System
• Unit Price Contract System
• Cost Plus Contract System
• Target Cost Contract System

The names may be little confusing and hard to remember but believe me it's fun to learn about them.Following the list let's start with Lump Sum Contract.

Lump Sum Contract System:

In Lump Sum Contract system Owner will be in Safe side of the river.The reason is that Contractor will be the responsible for the completion of the work.Owner just sits in a chair drinking coconut water.He has no thing to worry about.

what's this ? What's Happening ? It's Injustice bro ?

Wait wait,I am going to give you guys clarity what Lump Sum Contract actually Means .

Contractor will be responsible for his loss or profit in Lump Sum Contract.Because Once he gives an estimated amount for the completion of work and signs an agreement with owner agreeing to the terms and conditions,he has no choice other than completing the construction at specified cost and Time. If he fails to complete the work within time and cost,he must pay Penalty to the owner.

How Ever if Contractor was intelligent and has good knowledge with Specifications to be used,he can get fruitful results from Lump Sum Contract.Flexibility of construction i.e; change in design and work of construction is limited.

• Contractor has High risk in Lump Sum Contract system
• Risk for Owner is less as Construction cost is defined at early stages
• Owner need not worry about Construction as all tension of construction will be held on Contractor head
• For profit,Contractor may decrease quality of materials,which will decrease the life time of Construction
• Less Flexibility when compared to other systems of Contract systems 

Unit Price Contract System: 

 Unit Price Contract system imparts risk to both owner and Contractor.Both of them have to be careful to finish the project under certain rate and cost.This contract system will increase the quality of construction

Let me dig it in detail

Here,in Unit Price Contract system Owner will pay the contractor according to the items he has used to complete a part of construction.Construction will be completed in parts here in this system of contract system.Contractor will use items according to the specification and owner must pay based on the quantity of items used.

Contractor and Owner must be careful,so that cost of construction exceeds a lot.Flexibility with the design of construction will be more in Unit Price Contract system.

• Risk For Contractor is less when compared to that of Lump Sum Contract System
• Owner has risk equal to that of Contractor
• Quality of Construction will be good
• Flexibility of construction is excellent 
• Owner will have no idea about how much money has to spent for the completion of construction

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Fig: Different types of construction contract systems

Cost Plus Contract System :

Cost Plus Contract System starts with letter "C" and so as the word "Contractor".

What I am intended to say is that Cost plus contract system is favorable to Contractor most.Owner must bear all the burden and lose his hair for every tensed moments.

This type of contract system is adopted when Owner wished to start the work before completion of design of the construction.

The Contractor will be paid actual cost of construction.All risks are involved to the owner He has nothing to do other that nodding his head for what Contractor Says.There will be increasing in cost of construction and total cost of construction will be uncertain too.When we talk raw,it is impossible to estimate the cost of construction until the completion of work in Cost Plus Contract System.Flexibility in this system is too high.

• No Risk for contractors
• Profit for the contractor will be more
• Owner has to face lot of risk and tension
• He will have no idea about total construction cost before completion of work
• Flexibility of construction will be more in Const Plus Contract system.

Target Cost Contract System :

To Know in detail about Target Cost Contract system,first you have to have clear idea about Lump Sum Contract system and Cost plus contract system.If you have skipped them,scroll up to complete them and them scroll down to read this.

What I mean is that Target Cost Contract system has the features of both Lump Sum Contract System and Cost Plus Contract System.

Here the Owner will pay the contractor based on actual cost of construction and a fixed percentage of total cost to complete a work.Contractor will face no risk until Cost of Construction doesn't cross limits,but it once crossing hole will be dig into contractor's wallet.

Contractor can save good money,if he manages to completes work within total cost of construction.Here the total cost of construction will be defined in early stage of construction.Limited Flexibility for design in Target Cost contract System.

• Savings will be good if Contractor can well organize 
• Risk will be great for Contractor if Targeted cost exceeds limits
• Owner can know total cost construction in early stages
• He Sometimes shares Risk with Contractor
• Flexibility will be limited i;e; same as that of Lump Sum Contract system

 So by Now you guys are clear with Different types of construction contract systems.I am thinking to write in detail about Lump Sum Contract in future. If you have any queries share them with me in Comments and I will be happy to answering you.