Question

Select four (4) large projects (local or international) and carry out the following:

i. Suggest the most suitable (unique for each one) forms of contract for them.

ii. Provide a brief description for why each of the form of contracts is suitable for

the projects.

iii. Describe one (1) advantage for using each of the form of contracts for the projects.

iv. Describe one (1) disadvantage for using each of the form of contracts for the

projects.

Answer 1

i) Let us consider the 4 different projects as Constructing a highway, constructing a dam, building a railway line and maintaining or repairing a pavement

1) Constructing a highway - Target Cost Construction Contract

2) Constructing a dam - Cost Plus profitContract

3) Building a railway line -  Unit Price Construction Contract

4) Maintaining or repairing a pavement - Lump sum contract

ii) Constructing a highway has its target price as an important criterion: A contractor herein is asked to construct the road within a targeted cost. Constructing a dam requires a lot of material and labor, which is calculated and over it a certain percentage of profit usually 10% is given to the contractor. Building a railway line is done by unit price contract because payment to the contractor is made based on a unit item completed i.e. per miles of the railway line. This can also be applied to road construction. Maintaining or repairing a pavement is a pitty work for which the contractor is paid a fixed lump sum amount.

iii) advantages :

1) Target cost contract has common features of the lump sum and cost-plus contracts. The contractor is paid based on the actual costs plus a certain fee either fixed or percentage of total cost in case the cost of the project doesn’t exceed certain target cost specified by the owner. The contractor has also rewarded a percentage of any savings between target and actual cost.

2) There is no risk of loss arising from changing prices, wrong estimates, and underestimated quotation and all agreed costs are recovered in cost plus profit contract.

3) In unit price contract the contractor is paid based on the actual cost of the project, including direct and indirect costs, plus a specific fee. This fee could be a fixed fee or percentage of costs.

4) Lump-sum Contract - In this type, the contractor bids a single fixed price for overall activities in the project scope.

iv) Disadvantages :

1)In target cost contract there is a risk carried by the contractor in case of an increase in the cost of construction projects.

2) advantage on account of the favorable market price is denied and The profit earned is usually low

3) There are no incentives for the early finish in the unit price contract.

4)In the lump sum contract, all risks are assigned to the contractor, and there isn’t any risk carried by the owner. The contractor has an incentive in this contract as he is rewarded for an early finish, and there is a penalty for a late finish.