Types of Contracts in Construction Industry

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Contracts are the form of the agreements enforceable by law.

The term Contract, so far as the Public Works Department is concerned, indicates a written undertaking of the execution of a work, a supply of some material or any service-connected therewith duly accepted and registered by the competent authority on behalf of the Union or State govt.

In any major constructional activity, there are two parties involved, one is the executing authority, under whose command the entire construction work is carried out (which are mostly the Government or Govt. undertaking organisations), and the other one is contractor, who actually performs the whole construction work.

 

Types of Contracts

 

The executing authority puts up a tender whenever there is any construction work needed to be carried out(which includes the details and components of the work), and the contractors bid on the tender. Depending on the bidding value, and the qualification of contractors, that particular construction work is awarded to him by the competent authority, which then follows by a written agreement, including the detailed information of the construction work (e.g. Detailed drawing & design, specifications, estimates).

This written agreement, i.e. contract, binds the action of both the parties by law and which invariably follows a proposal from one party and it’s acceptance by the other. In case of absence of any of the above-mentioned factors, the contract becomes void, without a legal effect, and can be avoided by any parties to it.

 

Types of Contracts

There are various types of contracts which are in use of the modern construction industry. Some of them, have been mentioned followed:

 

Item Rate Contract

In this type of contract, the contractors are required to quote rates for their individual item of supply, on the basis of the schedule of quantities furnished by the executing authority. While filling up, the contractors are required to quote the rate in words and figures, and work out the total cost of each item, as per the quantities. This type of Contract is generally followed by the railway department.

Advantages of Item Rate Contract:

In this type of contract, the detailed cost analysis can be obtained,

As the Contractors are required to Express the rates against each item, the unworkable tender may be avoided and smooth progress of work can be attained.

Disadvantages of Item Rate Contract:

As the contractors need to fill up the rates against each item in figures as well as in words, there can be space for mistakes. Erased rates, overwritten rates and rates not shown in words are liable to rejection.

 

Percentage Rate Contract

In this type of contract, the executing authority prepares the schedule of items along with the description of the item, quantity, rate and total cost incurred in the particular item of work. The contractors are required to quote a particular percentage above, below or at par of the schedule of rates, at which the contractor will carry out the construction work.

Advantages of Percentage Rate Contract

In this type of contract, the contractors only need to quote the percentages above, at par or below the schedule of rates furnished by the department. So there is very little scope of Mistakes in this type of contract.

In this type of contract, the comparative statement can be prepared quickly.

Disadvantages of Percentage Rate Contract:

Since the contractors only need to quote a certain percentage as profit, which can be done in very little time, there is a chance of forming a ring, in order to allow the work to a particular contractor at a high rate without actual competition. This leads to the drainage of Government money.

 

Lump-Sum Contract

In this type of contract, the contractor needs to quote a fixed sum for the execution of the work, complete in all aspect. This is the most common form of contract, used in any public construction work.

Advantages of Lump-Sum Contract:

The executing authority knows beforehand how much the work will cost.

As problem arises in making Intermediate payments, the contractor will try to complete the work as soon as possible to get early payment, which in return, results in faster execution of projects.

Disadvantages of Lump-Sum Contract:

As difficulty arises in making Intermediate payments, the contractor tries to complete the work as soon as possible, even with the high cost of materials and equipment, which results in drainage of government money.

 

Labour Contract

In this type of contract, the contractor quotes rates for item work exclusively of the materials which are supplied by the executing authority. 

Advantages of Labour Contract:

The materials stored by the government are thus utilised.

Difficulty in obtaining certain materials in the open market can be minimised as the materials are supplied by the government, so speedy execution of the work can be achieved.

Disadvantages of Labour Contract:

Theft from the store, difficulty during handling of materials, shortage of supply of material, is the matter of constant worry of a department, which also includes additional charges for storage and security.

 

Material Supply Contract

In this type of contracts, the contractors are required to offer their rates for the supply of the materials, inclusive of all charges, e.g. carriage and delivery charges, local and central taxes.

Advantages of Material Supply Contract

Payment in this type of contract can be made promptly, which also results in faster delivery of materials.

Disadvantages of Material Supply Contract:

Constant control for quality of materials is to be received, which incurs additional charges.

 

Cost-plus Percentage Rate Contract

In this type of contract, the contractor is paid the total cost of the work, plus an additional percentage as agreed by both parties.

Advantages of Cost-plus percentage rate contract:

This type of contract is suitable when the work is required to be carried out in extraordinary situations due to the fluctuations and uncertainty in the market rates of labour and materials. 

Disadvantages of Cost-plus percentage rate contract:

It is of the contractor’s interest to unnecessarily increase the cost of work, by wasting materials and employing inefficient workmen, as his profit depends on the cost of work. So as a result the wastage of government money occurs.

 

Cost-plus Fixed Fee Contract

In this type of contract, the contractor is paid the total cost of the project, plus a lump sum amount, over and above the actual cost of the work.

Advantages of Cost-plus fixed fee contract:

Contractors profit and overhead charges are already included, so the contractor tries to complete his work as soon as possible to receive easy payments.

 

Cost-plus Sliding or Fluctuating fee scale Contract

In this type of contract, the contractor is paid the total cost of the work, plus, an amount inversely proportional to the increase or decrease in the cost of the project.

Advantages of Cost-plus fluctuating fee Contract:

The contractor tries to finish his work in as low cost as possible, in order to receive high profit, as his profit completely depends on the project cost.

 

Target Contract

In this type of contract, the contractor is paid on a cost-plus percentage basis, in addition, he receives an additional percentage on the savings effected by the total cost of work.

Measured Contract

In this type of contract, the total cost of a work is worked out by the detailed measurement of different items of work. Except for a lump sum contract, all other contracts are measured contract.

Negotiated Contract

When the work is awarded by negotiation between two parties without the call of tenders, the contract awarded to the contractor is known as a Negotiated contract. 

Rate contract

This type of contract is generally awarded for the supply of some manufactured article or materials.

Piece work agreement

For petty work costing up to ₹ 10000, this type of agreement is a popular choice between both the parties.

Turn key job, or Combined engineering and Construction Contract

Often the competent authority of any construction project decides to deal with only one party for both engineering and construction work. This type of contract is specifically used for this purpose.

 

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