How to select a contractor ?
Contract – Definitions
- A mutual agreement between two or more parties that something shall be done, an agreement enforceable at law – Legal point of view
- Contract means general conditions, the supplementary conditions, the specifications, the drawings, the bills of quantities, the tender, the letter of acceptance and the contract agreement – FIDIC
- The Agreement of how the owner will pay the contractor for work – Method of payment
Although definition given by FIDIC seems comprehensive, since construction industry technical terms used, this article uses first definition for contract. It describes the scope of work in detail. It establishes time frame payment procedure thus it mminimizes disputes and it helps to improve economic return of investment
Selection of contract type depends on the following factors
- The allocation of risks
- The ability of introduce changes
- Performance by the contractor
- Start and completion date of the project
- The appropriateness for providing adequate incentive for efficient
Competitive Bidding – Lump Sum contract
It provides a total fixed priced for all the construction related activities.It can include incentives or benefits for early termination or can also have penalties called liquidated damages for late termination. These types of contract shall be preferred when a clear scope and defined schedule has been reviewed and agreed upon.
Competitive Bidding – Measure & Pay contract
Final price shall not be finalized until completion of project. It is ideal for work where quantities cannot be accurately established before construction starts. Payment to contractor is based on the measurement; there will be a chance for unbalance bid. Re- negotiation for rates available if the quantity or work considerably exceeds the initial target. Total risks shall be shared between employer and contractor.
Competitive Bidding – Schedule of rates
It is a schedule of work items without quantities is prepared by the owner and to be rated by the contractor. It has been usend for repair and maintenance works or under conditions of urgency. It is common for separate rates to be quoted for labor, plant and materials
|Types of contracts||Advantages||Disadvantages|
|Lump Sum contract||Low risk to owner.
Cost is known at outset.
Contractor selection is easy.
Contractor will assign best personnel.
|High risk to the contractor.
Changes are difficult and costly.
High price since it includes high risk contingency.
Competent contractors may give up on bidding.
|Measure & Pay contract||Selection method is easy
Changes can be easily incorporated.
Risk can be shared.
|Mislead employer since final price is unknown.
Unit price sometimes tend to less profitable with ratio of work.
|Schedule of rates||Same as Measure & Pay||Same as Measure & Pay|
Negotiated Bidding – Cost plus contracts
It covers actual cost plus a negotiated reimbursement to cover overheads and profits. There are mainly three types of cost plus contract. They are Cost + Percentage of cost, Cost + Fixed fee and Cost + Fixed fee + Profit Sharing Clause. Generally these contract transfers High risk to owner. By using Guaranteed maximum price (GMP) owner can reduce risk. Early start is possible in this type of contract.
|Types of Negotiated Contracts||Features|
|Cost + Percentage of Cost||The contractor is reimbursed for all his costs with a fixed % of cost to cover his services.|
|Cost + Fixed fee||Most common form of negotiated contracts
Cost – Labor, equipment , material & administrative cost
Fee – Compensation for expertise includes profit
|Cost + Fixed fee + Profit sharing Clause||Rewards to contractors who minimize the cost
% of the profit sharing is specified in contract
Till GMP point contractor shall be reimbursed beyond this point the contractor is responsible for covering any additional costs
In reality with an agreement of both parties, characteristics of both competitive bidding and negotiated bidding contracts have been used in a single project.
aslo check Types of Contracts
Written by Gowrinath © BasicCivilEngineering.com