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Construction Project Management: Contract Types

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By: themindandbeauty
May 22, 2017


Types of Contracts

At the early stage of the construction projects, the essential argument that disturbs the owner and contractor is accepting a suitable form of the contract that meets the common objectives. (Elbeltagi, 2009). Specifying the suitable form of the contract is the first step to confirm the policies and procedures required for executing the project. When the owner, consultant and contractor develop the contract, they provide their choices compatible with the specifications and design that they previously agreed to. The contract increases the chances and probabilities of implementing the objectives and fulfilling the project. The structures of the contracts differ generally, as they are related to the size and complexity of the project.There are various forms of the contract that the owner, consultant, and contractor can use in their projects. Those forms are organized and arranged based on the risks involved and can also be arranged based on the method of payment from the owner to the contractor:
  1. The first type is the lump-sum suitable for the turnkey construction when the project is precisely defined and the changes are thoroughly prescribed. This type is appropriate for the project when the owner prefers that the contractor manages the project and handle it until finishing so, the owner offers a formal tender to the contractor providing the schedule of the project. The contract lacks the flexibility of making changes in design so, when the owner makes modifications, the contractor is entitled to ask for additional tender to cover the additional costs
  2. The second type is the cost-reimbursable suitable for the projects when the owner needs to participate in the management and expects to make modifications to the design during the construction. The owner provides the total costs to the contractor offering additional fees for the overheads. The contract includes a high level of flexibility in changing the design when the owner needs so, the total costs are estimated after the changes are made and the extended time is carefully considered
  3. The third is the time and material contract suitable for the projects when the owner needs to gain a higher level of control. The contract is also suitable when the scope of the projects is not completed and the owner and contractor need to work immediately. The contract does not estimate the total costs and extended time at time of placing whatever the owner and contractor trust each other  
 The previous types may cause troubles when the owner and contractor find that the objectives become inconsistent. That may destroy their relationships and make the matters go worse so, the construction Industry needs flexible settlement mechanisms that can provide solutions and implementing them efficiently considering the time and costs. The construction industry needs a contemporary system that can offer the tender and evaluate the eligibility and competencies that distinguish the owner and contractor and accordingly, it can outline the procedures that regulate the tender and organize its documents. That system maintains the required consistency combining the owner and contractor and makes the conditions and terms seem equal and mutually satisfactory as it distributes the inherent risks between the owner and contractor.A featured form of that system is FIDIC (Fédération Internationale Des Ingénieurs-Conseils). It is a standard type of the construction contracts since 1969 when it is approved by Inter-American Federation of the Construction Industry; however, it gained its international reputation in 1971 (Conditions of Contract for Construction, 1999). FIDIC pays a great attention to the scope of the construction projects defining it in its technical conditions stating that those projects should consider the schedule set by the owner and the costs as well. The conditions include the processes of achieving the stages of the projects and separate the expected risks sharing the responsibilities between the owner, consultant, and contractor so; they feel that there is a fair balance contributing to their success. FIDIC in its edition in 1987 changed those conditions to organize the relationship between the owner, consultant, and contractor when troubles occur (FIDIC, 1999). That edition becomes a worldwide mechanism for managing those troubles between the parties during the execution of the project. For example, based on Sub-Clause 47.1 of FIDIC General Conditions, when the contractor does not finish the construction project within the time and costs set, the owner is entitled to ask for being paid for every day or part of a day that witnessed the time extension and the additional costs. After the owner gets the compensation for the damages, the contractor remains responsible for those damages and obligated to finish the project according to the plan and design prescribed. The Sub-Clause 43.1 confirmed the same legal text as it indicated that the essential commitment of the contractor is delivering the project on time while Sub-Clause 44.1 pays a particular attention to the distribution of risks for delay under the conditions of the contract. Delays in construction projects lead to adverse consequences affecting the schedule and budget so, the contractor may blame the owner and consultant for making mistakes and likewise, the owner can indicate that the contractor takes the charge of the concurrent delay because it is his part of the project to deliver the project on time. In that case, the contractor asks for an extension of time while the owner states that the contractor is not entitled to ask for that extension because there is a concurrent delay in the project. To solve the problem, the consultant should involve a single approach performing a thorough review investigating the data handling the updated events occurring. That review is a suitable tool for the consultant to determine the responsible for delays. After analyzing the results of that review, the consultant should allocate the risk for delays according to the last events occurring so, when he finds that a relevant event occurred and caused delays, he should allow an extension of time to the contractor. Clause 8.1 supported the same legal text as it stated that the contractor should complete the project without delays; however, it made the extension of time available for him provided that it takes the relevant circumstances into consideration while clause 8.3 stated that the contractor can directly provide his advice regarding the expected events that may occur in the future and cause delays. It is critical to indicate that when the contract lacks a mechanism determining the methods handling delays, the owner loses his right enforcing the contractor that he completes the project considering the schedule set. In that case, the time becomes “at large” and the contractor is allowed a reasonable extension to complete the project. That causes tension between the owner and contractor as the owner finds that he loses his right to get a reasonable compensation for the damages that he blames the contractor for bringing them out.  Another featured standard-form of the construction contracts is JCT (Joint Contracts Tribunal). It becomes a formal document for the construction projects since 1931 as it allows the owner to identify a starting date for the project and the delivery date as well (The Joint Contracts Tribunal Limited, 2011). JCT considers damages as the essential responsibility of the contractor as they lead in delays so after the contract is executed, the contractor should provide his plan of completing the project. After the owner and consultant accept the plan, it can be used as a mechanism to measure the performance and estimate the changes made by the owner and consultant. JCT separates the schedule and budget handling them independently after changes are made. That allows several practical reviews to analyze the events that cause delays and estimate the fair compensation; however, there is an exceptional case that JCT refers to as ‘exceptional adverse weather conditions’ stating that it is out of control.
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