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Construction Contract Management and types of Construction Contracts

Last Updated on December 20, 2020 by Admin

All projects require a certain amount of supervision and quality control to ensure an optimal end result. Contract management or Contract Lifecycle Management is the Management of contracts from vendors, partners, customers, or employees. We have discussed here contract management and types of construction contract management.


What is Contract Management?

Contract Management at its best is about managing risk, and managing relationships. In a simple form, a contract is a document describing a relationship between two parties, what each of them agrees to do, and who carries the risk if things don’t turn out as planned. So simply put, contract management is about defining resources, relationships, and risk.

Not necessarily managers of all levels are well-versed in effective contract management techniques. Contract management can actually be a career–there’s even an International Association for Contract & Commercial Management, the IACCM.

What is the use of Contract Management in Construction Projects?

An exhaustive construction contract can include up to ten different documents, all of which define responsibilities and risks regarding different aspects of the project. Here are a few examples:

  • A Construction Contract Agreement or construction contract management is between the general contractor and owner or developer. Most contracts that define the basic project delivery system or contractor agreement fall under the categories of:
    • Lump-sum or fixed-price contracts,
    • Cost-plus contracts,
    • Time and materials contracts
    • Guaranteed maximum price contracts.
  • A Scope or Statement of Work (SOW) spells out exactly who agrees to do what, and which techniques and materials they’ll be using.
  • Project Duration or Construction Schedule, which may be updated as work progresses.
  • General Conditions, which breaks down shareholder rights and responsibilities and addresses how any potential disputes would be settled.

Any construction project unfolds in phases: conception, design, pre-construction, construction procurement (securing materials, equipment, and work teams), building, and delivery/post-construction.

Contracts cover pretty much all of them and can be broken down into pre-award and post-award contract development.

Once a bid has been accepted, work on a construction project begins. In complex projects, contract changes are going to happen, and they’ll need to be managed by the construction management team. Ideally, how this process takes place should already be spelled out in the original documentation.

Essential Elements of Successful Contract Management

It isn’t enough that an organization has professionals in place to handle construction contract management. Employees must be augmented with the presence of processes and software companions to satisfy increasing compliance and analytical needs. When a contract management strategy is successfully implemented, organizations can expect to see:

  • The expected business benefits and financial returns are being realized.
  • The supplier is cooperative and responsive to the organization’s needs.
  • The organization encounters no contract disputes or surprises.
  • The delivery of services is satisfactory to both parties.


Stages of Contract Management

Contracts play a significant role in the end-of-quarter crunch and are broken up into stages to organize efforts and structure the typical contract process. When done manually, creating a contract can prove quite time-consuming. The process in the stages of contract management includes several of the following steps:

1. Initial requests. The contract management process begins by identifying contracts and pertinent documents to support the contract’s purpose.

2. Authoring contracts. Writing a contract by hand is a time-consuming activity, but through the use of automated contract management systems, the process can become quite streamlined.

3. Negotiating the contract. Upon completion of drafting the contract, employees should be able to compare versions of the contract and note any discrepancies to reduce negotiation time.

4. Approving the contract. The instance in which most bottlenecks occur is getting management approval. Users can pre-emptively combat this by creating tailored approval workflows, including parallel and serial approvals to keep decisions moving at a rapid pace.

5. Execution of the contract. Executing the contract allows users to control and shorten the signature process through the use of electronic signature and fax support.

6. Obligation management. This requires a great deal of project management to ensure deliverables are being met by key stakeholders and the value of the contract isn’t deteriorating throughout its early phases of growth.


7. Revisions and amendments. Gathering all documents pertinent to the contract’s initial drafting is a difficult task. When overlooked items are found, systems must be in place to amend the original contract.

8. Auditing and reporting. Contract management does not simply entail drafting a contract and then pushing it into the filing cabinet without another thought. Contract audits are important in determining both organizations’ compliance with the terms of the agreement and any possible problems that might arise.

9. Renewal. Using manual contract management methods can often result in missed renewal opportunities and business revenue loss. Automating the process allows an organization to identify renewal opportunities and create new contracts.

Much of contract management comes down to handling these nine steps. Contract lifecycle management is critical. As different contract types go through their various stages, contract managers need to monitor any potential changes or breaches of contract.

If an employee or business is unhappy with their contract, it might be worth making alterations to the contract. It’s important to follow contractual obligations while also making sure both sides of the contract are happy.

There are many times during the contract management process when lifecycle management becomes important. Vendor performance and risk management are important considerations during the management of contracts. For example, if a vendor fails to meet their contractual obligations, you may need to rework the contract or enforce some disciplinary measure.

Types of Construction Contracts

Based on the various parameters following are the construction contracts followed in the construction industry for proper implementation of construction contract management.

1. Unit Rate/ Unit Price Contract

Also called a Unit cost contract/item rate contract/ value contract /measurement contract or schedule rate contract. In this type of construction contract management, the contractors are required to quote rates for individual items of work on the basis of a schedule of quantities furnished by the owner.

This schedule indicates a full description of the item, estimate quantities, and their units. The contractors are required to express rates and work out the cost against each item and thereby draw up the total amount tendered for the work.

This type of contract is normally utilized where the quantity of work cannot be established such as civil engineering construction projects where excavation of soil and rock are involved. The contractor is paid based on the units that have been put in place and verified by the owner

2. Percentage Rate Contract

In this type of contract, the owner prepares a schedule of items with quantities rate units and the amount shown therein. The contractors are required to offer percentages above, below, or at par with the rates given in the schedule. The percentage quoted by the contractor is applicable to the overall schedule.

Simply put, When the lowest rate and comparative position among the contractors are already specified prior to the opening of the tender, then the percentage rate contract is used. A percentage contract is a type of contract where there is no possibility of an unbalanced tender.


3. Cost plus Percentage Contract.

This type of contract generally adopted when conditions are such that the rates of labor, material, etc. are liable to fluctuate and there is an element of uncertainty in the scope of the work. In this type of contract, there is an arrangement between the owner and the contractor by which the parties agree that the work ordered would be completed and paid for on the basis of actual cost incurred plus a fixed percentage as overhead and profit.

4. Time and materials Contracts.

A time and materials contract means the buyer pays for the time spent by the builder and his subcontractors and must pay for the actual costs of construction materials. There is uncertainty involved for the buyer here as well since the buyer has to pay for extra costs or time overruns. Many time and materials contracts will contain maximum price clauses as well.

5. Lump-Sum Contract

Lump-sum or fixed-price contracts. Lump-sum contracts involve the buyer agreeing to pay a set price and the contractor or builder agreeing to complete the project for that set price. With this type of contract, the buyer has certainty because he knows what his final costs will be unless changes are made.

The builder or developer takes on the risk because if prices go up or problems arise, the buyer will not have to pay any more money.  Some lump-sum contracts include allowances, which can mitigate risk to builders because if the buyer goes over the allowance, the cost is borne by the buyer.

Lump-sum contracts can sometimes include benefits or incentives for completing projects under budget or in a shorter period of time, and can sometimes include liquidated damage clauses so the builder will have to compensate the buyer for being late to finish.

6. EPC and Turnkey Contract

EPC Engineering, construction, and procurement is the prominent form of contracting agreement in the construction industry. The engineering and construction contractor will carry out the detailed engineering design of the project, procure all the equipment and materials necessary, and then construct to deliver a functioning facility or asset to their clients.

A turnkey contract is a business arrangement in which a project is delivered in a completed state. Rather than contracting with an owner to develop a project in stages, the developer is hired to finish the entire project without owner input. The builder or developer is separate from the final owner or operator and the project is turned over only once it is fully operational. In effect, the developer is finishing the project and “tuning the key” to the new owner.

In EPC, the owner provides the basic engineering to the contractor and the constructor needs to perform the detailed design based on the basic design received by them from the owner. Whereas in Turnkey, the owner only provides certain technical specifications of the project and the contractor needs to prepare all basic and detailed design of the project.

7. BOT ( Build, Operate, and Transfer) Contract

A type of contract between a private company and a government body, in which the private company finances, design, construct, operate, and maintains an infrastructure project for a period of time and then transfers the ownership of the project to the government. During this period the private party is entitled to retain all revenues generated by the project and is the owner of the regarded facility.

The basic difference from the other conventional projects/ contract;

  • the returns are spread over a longer period
  • sound financial and engineering skills are warranted
  • no protection against any prices variation during the implementation period,
  • cost and time overrun upsets the returns.
  • Extension of time granted by authority does not provide much remedy.

8. Target Price Contract

In this contract type, the actual cost of completing the project is compared with a target cost previously agreed. If the actual cost exceeds the target cost, some of the cost overrun will be borne by the contractor (pain share) and the remainder by the owner in accordance with the agreed formula.

Similarly, if the actual cost is lower than the target cost, the contractor will be saving with the owner again in accordance with a previously agreed formula (gain share). Such an approach helps t align the interest of the parties since both will have an interest in working together in order to reduce the costs of the projects.

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