SCE4281

Contract Administration &

Measurement
Lecture 2
Types of Civil Engineering Contracts

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Lecture 2

The aim of this lecture is to

introduce different types of civil
engineering contracts commonly
used in construction industry.
Their features and ocassions of
use will also be discussed.

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Types of Civil Engineering
Contracts
• Lump Sum Contracts
• Measurement Contracts
• Cost Reimbursement Contracts
• Management Contract
• Design and Build (and Turnkey Contracts)
• Build-Operate-Transfer (BOT)

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Lump Sum Contracts
• What are lump sum contracts?

• In lump sum contracts, the contractor undertakes to carry out

certain specified works for a sum of money agreed in advance (i.e.
the contract sum), subject to possible increases or decreases as a
result of variations ordered by the Engineer (Architect) in
accordance with the contract. The sum agreed upon may be fixed,
or adjustments may be allowed for fluctuation in the cost of labour
and/or materials due to inflation during the contract period.

• The nature and the extent of the works are normally indicated on
drawings (e.g. plans and workshop drawings) and/or Bills of
Quantities (BQ), and the nature of the materials and workmanship
described in a specification.

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Lump Sum Contracts
• Lump Sum Without Quantities (Based on Drawings and
Specification)

• Lump Sum With Quantities (Based on Bill of Quantities)

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Lump Sum Without Quantities
• In lump sum contacts based on plan and specification, the
contractor undertakes to carry out the work described, or specified,
to completion, for an agreed lump sum.
• The documents required for this contractual arrangement are the
complete working drawings, together with a full specification. No
bills of quantities are supplied to the tenderers who must prepare
their own quantities from the drawings.
• There are substantial risks imposed on the tenderers under this
arrangement. A tenderer is responsible for any errors he makes in
the taking off from the drawings.
• The contractor is required to take up all responsibilities for any costs
incurred due to uncertainties or unforeseen difficulties when
preparing the tender.

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Lump Sum Without Quantities
• In order to allow for these risks, the tenderers are likely
to include higher cost in their prices.

• Because there are substantial risks imposed upon the

contractor, this contractual arrangement is suitable for
the following circumstances:

– minor works where the likelihood of variations is small and;

– the amount of information to be supplied during the progress of

the work is minimal.

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Lump Sum Without Quantities
Advantages
• The time for the preparation of tender documents is reduced, as the
time consuming process of preparing bills of quantities is eliminated.

• As it is a lump sum contract, both parties can have a clear picture of

their respective commitments at the time of signing the contract.

Disadvantages
• No breakdown of the tender sum is available.

• The cost to the tenderers of producing their own quantities will be

reflected in a higher tender prices.

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Lump Sum With Quantities
• This type of contract, which incorporates a bill of quantities priced by
the contractor, where the quantities of the bulk of the work can be
ascertained with reasonable accuracy before the work is started.
• An item in bills of quantities is as follow:
Description Quantity Unit Rate Total
R.C. Grade 30/20D in 100 m3 $900 $90,000.00
foundation

• The tender sum is derived from the total of the items in the bill of
quantities.
• In lump sum contracts based on bill of quantities, the contractor
undertakes to carry out the work in accordance with the drawings,
specification and as described in the bill of quantities for a lump sum.

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Lump Sum With Quantities
• This type of contract is suitable for the following
circumstances:-

– The nature of this form of contract requires a full comprehensive

design from the Engineer and requires the variations and
additional information be kept to a minimum.

– In cases where early start of work is desired or where the extent of

work is uncertain or substantial variations are expected, the use of
bills of quantities is restricted.

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Lump Sum With Quantities
Advantages
• The design team has to finalize the design requirement as much as
practicable before committing into a lump sum contract. As a result,
the employer and the contractor enter the contract with their
commitments clear.
• The employer’s quantities surveyor prepares the bills of quantities
from the drawings, which the competing contractors will price on
the same set of information. It provides a fairer basis for
competition.
• It gives the employer a good indication of the final cost of the work.
• The quantities and the unit rates of the measured items will serve as
the basis for the valuation of variation when there are changes to
the works.

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Lump Sum With Quantities
Disadvantages
• It takes longer time in the design of the project and preparation of
the bills of quantities before tendering out the works.

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Measurement Contracts
• This type of contract is sometimes called 're-
measurement' or 'measure and value' contracts.

• What are measurement contracts?

• In measurement contracts, the contract sum is

ascertained by measurement and valuation related to
bills of approximate quantities or to a schedule of rates
included in the contract.

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Measurement Contracts
• Measurement Contract based on Bills of
Approximate Quantities

• Measurement Contract based on a Schedule of

Rates (SOR)

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Measurement Contract
(based on Bills of Approximate Quantities)

• This method is similar to the one of the Bills of

Quantities, except that the quantities given in
this bill are approximate only and are subject to
a re-measurement once the works are
completed.

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Measurement Contract
(based on Bills of Approximate Quantities)

• An item of a bills of approximate quantities is as follow:-

Description Quantity Unit Rate Total

R.C grade 30/20D 100 m3 $900 $90,000.00

in fdn (Approximate qty)

• In measurement contracts based on bills of approximate quantities, the

contractor carries out the work required, which is then priced at the rates in
the bill of approximate quantities. The final quantities shall be re-measured.

• The approximate quantities included in the contract are subject to re-

measurement of completed work during the progress of the contract.

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Measurement Contract
(based on Bills of Approximate Quantities)

• The unit rates will form part of the contract and work on site may
proceed before the design is completed.

• This type of contractual arrangement is used for the following

circumstances:

• where the employer cannot determine his requirements in

advance, or

• where the urgent nature of the project does not allow adequate
time for design and firm quantities to proceed tendering.

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Measurement Contract
(based on Bills of Approximate Quantities)

Advantages:
• Approximate bills permit the overlapping of design and construction
and this will save time before tendering.
• Approximate bills avoid the great expense of preparing firm
quantities, in particular, where there maybe substantial variation
works.
Disadvantages
• The bills of quantities cannot be relied to give realistic total cost at
tender stage as the quantities are approximate (i.e. price certainty)
• Where the bills are too approximate, for example, where the
uncertainty as to the character of the work are too vague, the
usefulness of the bills will be reduced.

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Measurement Contract
(based on Schedule of Rates)

• In measurement contracts based on a schedule of rates, the

contractor carries out the work required, which is then measured and
priced at the rate in a schedule of rates.
• This type of contract arrangement is used where the employer
cannot determine his requirements in advance. Commonly used in
maintenance work such as concrete repair work.
• The Schedule consists of a list of items with units of measurement
stated against the items but with no quantities and the contractor is
required to insert the rates for the items in the schedule.
• The quantities shall be measured in the final measurement period.
• This type of contract may take one of two forms

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Measurement Contract
(based on Schedule of Rates)

• The employer may supply a schedule of unit rates (this is what we

called pre-priced schedule). The schedule consists of a list of
measured items with units of measurement stated against each, but
with no quantities given. The contractors, when tendering, is required
to state a percentage above or below the given rates.

• An item of a standard schedule of rate is as follow:-

Description Unit of Measurement Unit Rate % Adjustment

R.C grade 30/20D m3 $800 (+15%)

in fdn

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Measurement Contract
(based on Schedule of Rates)

• Alternatively, a schedule of rates may be specially prepared and only

the items relevant to the job in question will be written into the
schedules; these schedules are known as ad-hoc schedule. They
should contain as many items as practicable so that the fixing of rates
on varied work will be easier.

• The contractors may be requested to insert prices against each item

of work, and a comparison of the prices entered will enable the most
favorable offer to be ascertained.

• An item of an ad-hoc schedule of rate is as follows:-

Description Unit Rate
R.C grade 30/20D in fdn m3 $950
(inserted by the Contractor)
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Measurement Contract
(based on Schedule of Rates)

Advantages:
• It allows for contract to be signed and work to start on site when
design is in preliminary stage and shorten the pre-contract period.

• The use of standard schedule of rates eliminates the need for lengthy
tendering time.

Disadvantages:

• The schedule of rates comprises components of work without any

quantities. This leads to difficulty in quoting realistic prices, resulting
in greater risk to both the client and the contractor.

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Cost Reimbursement Contract
• In cost reimbursement contracts, the price paid is determined on the
basis of the actual cost incurred by the Contractor in carrying out the
work, plus an agreed amount to cover overheads and profit.

• The costs for the works will be the cost of material, cost of labor and cost of plants.
This is normally used where the nature of work is of a urgent nature

• Of all contracts, this type involves the most uncertainty as to the

financial outcome. Tenders contain no total sum and it maybe very
difficult to form any reliable estimate of the total cost.

• It should be noted that no measurement is necessary other than

checks on the quantities of materials for which the contractor submits
invoices, time sheets, subcontractors’ account etc.

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Cost Reimbursement Contract
This is used in the following circumstances:
• where the requirements are only in general terms because
of the nature of the work, such emergency repair of
damage, and/or of the shortage of time.

• It is used for construction of an unusual nature, where

requirements cannot be ascertained before the contract is
let, and where it is not possible to make any estimate or the
total final cost.

Three Cost Plus Methods: Percentage, Fixed Fee or Fluctuating

Fee

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Cost Plus Percentage
Cost Plus Percentage. The Contractor carries out the work
and is paid all costs, plus a fee which is calculated as a
percentage of whatever the total cost for overheads and
profit.
“Prime Cost + ( % )for Profit & Overhead”
Definition of prime cost: The total of direct material costs,
direct labor costs, and direct expenses.

There is no financial incentive to encourage the contractor to

carry out the work economically. The contractor may even be
inclined to make the cost as great as possible in order to earn
a higher level of overheads and profit.

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Cost Plus Percentage
Advantages:
• Once the basis of the contract is agreed the work can
commence immediately, thus avoiding the delay which is
necessary if estimates have to be prepared.
• If the contractor is efficient, then the cost to the employer
should represent a fair price for the work undertaken.
Disadvantages:
• It is difficult to predict the final cost at the early stage of
the work.
• Some form of control is necessary in order to ensure that
the correct costs are being charged by the contractor, and
such a control system may be difficult and costly.

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Cost Plus Fixed Fee
• Cost Plus Fixed Fee. This is used when an accurate
estimate of the maximum total cost can be made and a
fixed fee is agreed on signing of contract.
• The fee for the overheads and profit will be agreed as a
fixed sum unless the scope of work has altered after the
contractor has tendered.
• “Prime Cost + A Fixed Amount for Profit & Overhead”
• The fee will not be adjusted even though there is
difference in actual cost. Since the fee is fixed and will not
be affected by the costs, the Contractor may try to reduce
the time and thus cost of the construction, which will
result in a saving for the Client.

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Cost Plus Fixed Fee
Advantages:
• The advantage of speed in commencing the work is
undermined, since a fairly detailed scheme of work must
be prepared before a fee can be agreed.

Disadvantages:
• If there are any major variations, which can be difficult to
avoid in this type of work, then the fee must be re-
negotiated to take account of such variation.

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Target Price
• Target Price. An estimate is prepared for the work and to
be agreed as the target cost of the project.

• The employer’s requirements must be known in some

detail, and it must be possible to prepare a reliable
estimate of the probable cost. Under this arrangement, a
target price is agreed for the work.

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Target Price
• The Contractor is reimbursed in the first place on the basis
of cost plus percentage or fixed fee, and Then comparison
of the actual cost shall be made against the target price. If
there is saving, a bonus will be rewarded to the Contractor.
If the amount of the actual cost is more than the target
price, a penalty shall be imposed on the Contractor.

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Target Price
• This method provides an effective incentive for the
contractor. The target price must be fixed accurately, and
the extent of work to be carried out must be well defined.

• Extensive negotiation between the employer and the

contractor should take place in order to arrive at a realistic
target price.

• The target price must be kept constantly under review

throughout the progress of the contract and amended for
the value of any variations required by the employer.

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Guaranteed Maximum Price
Contract
• A mixture of fixed or unit price and cost-plus or fixed-fee
model is the guaranteed maximum price contract.

• The owner looks to this model to reap the rewards of a

cost-plus type of contract, but with the understanding that
there is a maximum price-typically 10 percent or more
above that of a fixed-fee contact – above which the
contractor takes the risk. However these types of contract
forms must also be prepared with care.

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Guaranteed Maximum Price
Contract
• When the project scope is well defined, an owner may
choose to ask the contractor to take all the risks, both in
terms of actual project cost and project time.
• Any work change orders from the owner must be
extremely minor if at all, since performance specifications
are provided to the owner at the outset of construction.
• The owner and the contractor agree to a project price
guaranteed by the contractor as maximum.
• There may be or may not be additional provisions to share
any savings if any in the contract. This type of contract is
particularly suitable for turnkey operation.

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Management Contract
• The management contractor is employed to manage,
coordinate and direct the work of other contractors on
behalf of a employer.

• The management contractor does none of the

construction work himself but it is divided into packages
which are carried out by other contractors employed by
the employer.

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Management Contract
• The management contractor’s role is that of providing a
construction management service on a fee basis as part
of the employer’s management team- organizing,
coordinating, supervising and managing the construction
works in cooperation with the employer’s other
professional consultants.

• This type of contract is most suitable when there is a fast-

tracking in the works.
• Fast-tracking is the arrangement where the works is separated
into work packages to enable the overlapping of design and
construction. There will be separate contractors carrying out the
various work packages on site.

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Design and Build
• This is a departure from the traditional procedure
whereby the Client and his consultant will provide the
design to the Contractor for his construction.

• In design and build, the Contractor will be responsible for

design and building the project.

• The Contractor can offer a better deal when he is in

control of all aspect of the project, and the Client does
not have to employ professional advisers.

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Design and Build
• The procedure is initiated by the employer preparing his
requirements/brief. These are then sent to a selection of
suitable contractors, each of whom prepares his proposals on
design, time and cost.

• However, the idea does not seem to work in its fullest

sense, since clients still find it necessary to employ a
representative in order to ensure that the contractor's
work is of an acceptable standard and that he is not over-
charging.

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Design and Build
• Such representatives may take the form of an engineer to
ensure the quality of construction work and/ or a
quantity surveyor to advise on and monitor costs.

• Variations from the original design are discouraged and if

allowed, are expensive.

• This type of contract is used for the following

circumstances:
– When the a single point responsibility
– i.e the contractor is solely responsible for the design and the
construction is required in the arrangement of the work.

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Build-Operate-Transfer
• Globally, this is one of the most popular methods of
privatizing government infrastructure work.

• Under this scheme, the private sector organization

usually in the form of a consortium undertake to finance,
design, construct and operate the facility such as tunnel
or highway.

• The consortium usually carries out the construction with

independent monitoring by a consultant hired by the
government.

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Build-Operate-Transfer
• Once the facility is completed, the consortium will
operate the facility for a period of years for example 10 to
30 years as defined by a concession granted by
government.

• The government will grant concession to the consortium

to charge the public for use of the facility in order to
repay loans and provide return to the investors.

• At the end of the concession, the facility is handed back

to the Government free of charge.

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Build-Operate-Transfer
• In Hong Kong, there are many examples of government
infrastructure facilities which have been successfully
completed under the Build-Operate- Transfer scheme. One
such example is the Tate's Cairn vehicular tunnel linking
Shatin to North Kowloon.

• In order to undertake this major project, a Japanese

contractor, Nishimatsu Construction Ltd (responsible for
tunnelling design and construction), formed a joint
venture with local contractor Gammon Construction Ltd
(responsible for the design and construction of the roads
and buildings).

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Build-Operate-Transfer
• Although not as numerous, there are examples of BOT
schemes in Hong Kong which have been successfully
adopted for use in the private sector.

• One such example is that of the Standard Chartered Bank

who procured its new headquarters in Hong Kong, at no
cost to itself, by using a modified BOT scheme.

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Build-Operate-Transfer
• Under the scheme, the Bank
awarded a twenty-five year sublease
of the land, where the existing
headquarters stood, to Nishimatsu
Property (Hong Kong).
• In return for the granting of the
sublease, Nishimatsu were required
to pay a premium as well as
undertake to totally finance the cost
of reconstruction; the Bank chose to
retain its own architect and
consultant team, which Nishimatsu
was required to allow for in its price.

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Build-Operate-Transfer
• It was further agreed that, upon completion, Standard
Chartered would have the exclusive right to lease back
70% of the floor area, at a fixed rental, up until the expiry
of the twenty-five year sublease when the entire
development would revert to the Bank.

• During the twenty-five year sublease period, Nishimatsu

would have the right to rent the remaining 30% of the
building on the open market, subject only to the Bank's
option to occupy another 15%.

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Build-Operate-Transfer
• The benefit of this scheme to the Bank was the
opportunity to retain its liquid assets (bankers place
greater value on cash than capital tied up in property),
while Nishimatsu gained by boosting their turnover by
nearly HK$1 billion.

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Build-Operate-Transfer
• The benefit of this scheme to the Bank was the
opportunity to retain its liquid assets (bankers place
greater value on cash than capital tied up in property),
while Nishimatsu gained by boosting their turnover by
nearly HK$1 billion.

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Extend Part

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References
1. Hills, M.J. (1995) Building Contract Procedures in Hong Kong. Hong Kong:
Longman.

48
Bibliography
1. Murdoch, J. and Hughes, W. (2008) Construction Contracts: Law and
Management, 4th edition. London:Taylor & Francis.

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Contact
• For comments and enquiries, please message to
[email protected]

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End

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