QUIZ #1
10 Minutes
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Construction Engineering 221
Construction Contracts
Construction Contract Types
What are the two main divisions
of construction contracts?
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First Main Division
 Competitive bid contracts

Lump-sum

Unit-price
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Second Main Division
 Negotiated contracts

Lump-sum

Unit-price

Cost-plus-fee (most common w/ negotiated)
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Award of Competitive-Bid Contract
Award contract to the “lowest
responsible bidder”
What is meant by the term
“lowest responsible bidder”?
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“lowest responsible bidder”
 Lowest bidder whose offer best responds in
quality, fitness and capacity to fulfill the
particular requirements of the proposed
work and with the necessary qualifications
to complete the job in accordance with the
terms of the contract. In open competitive
bidding by public and private owners the bid
will go to the lowest responsible bidder.
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COST-PLUS-FEE CONTRACTS
 Contract value is NOT guaranteed
 Used when design and drawings are NOT
complete
 Owner pays “reimbursable costs” plus a
“fee”
 “Fee” is usually a percentage of total
reimbursable cost (2% to 6%)
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Reimbursable Costs
 Defined by very detailed contract language
 Subcontract bidding and letting procedures
 Definitions of what types of costs can be reimbursed
 Payments to Subcontractor per subcontract
 Contractor’s field labor, material and equipment costs
 Definitions of what types of cost that will NOT be
reimbursed


Contractor’s main office overhead and staff
Salaries of contractor’s officers
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Contractor’s Fee in Cost-Plus Contract
 Determined by taking into account:

Degree of risk

Nature and complexity

Geographical location

Equipment and manpower requirements

Estimated construction time
 Final fee usually negotiated to be competitive (what
will the market bear)
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Cost Reimbursable Contracts
1. Cost–Plus-Fee as a Percentage-of-Cost

Fee may be on a sliding scale (smaller percentage as
the cost of the project increases)
 Fee of 10% for contract values <$50,000
 Fee of 5% for contract values $50,000 to $500,000
 Fee of 3% for contract values >$500,000
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Cost Reimbursable Contracts (cont.)
2. Cost-Plus-Fixed-Fee Contracts
3. Incentive contracts (bonus-penalty)

Share of the cost savings up to a maximum

Bonus for each day finished early, or penalty for
each day finished late
4. Guaranteed Maximum Cost (upset price)
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Contact Documents
 The construction contract is comprised of a number of
different documents. Most construction documents include:
 Invitation to bid
 Instructions to bidders
 General Conditions
 Supplementary Conditions
 Technical Specifications
 Drawings
 Addenda
 Proposals
 Bid Bond
 Agreement
 Performance bond
 Labor and material payment bond
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Construction Contract Conflicts
 What if there is a conflict between the
drawing and the specifications? Which is
considered the governing document?
 And what if a construction requirement is
found in only the drawings and not in the
specification? Is it still a requirement?
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Retainage
What is retainage and why is
it necessary?
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Retainage or Retention
 A percentage of the payment to the
contractor that is withheld each month
 Usually is 10%
 Owner may reduce below 10% after
SUBSTANTIAL COMPLETION
 Paid by owner to contractor after FINAL
COMPLETION of the project
 Serves as an incentive for contractor to
complete ALL work per contract
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Other Contractual Terms
 Substantial Completion

“Beneficial Occupancy” of the project
 Warranty Period
 Contact time

Calendar days vs. working days

“time is of the essence”
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Other Contractual Terms
 Liquidated Damages
 Used as a PENALTY for late completion
 Used in lieu of a determination of actual
damages suffered by the owner
 Must be a REASONABLE penalty based on a
forecast of actual damages the owner would
suffer if the contractor is in breach of contract
by finishing late
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