Construction contract

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A construction contract is a mutual or legally binding agreement between two parties based on policies and conditions recorded in document form. The two parties involved are one or more owners, and one or more contractors. The owner has full authority to decide what type of contract should be used for a specific development to be constructed and to set forth the legally-binding terms and conditions in a contractual agreement.[1] `


The six types of contracts are:

  • Lump sum contract
  • Percentage Rate Contract
  • Item rate contract/unit price contract
  • Lump sum and scheduled contract[2]

PERCENTAGE RATE CONTRACT: 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. In this type of contract there is no possibility of unbalanced tender.

  • Cost plus fixed fee contract
  • Cost plus percentage of cost contract
  • Special contracts[3]

Lump sum contract[edit]

In a lump sum contract an owner agrees to pay a contractor a specified lump sum after the completion of work without a cost breakdown.[4] [5] After work no detailed measurements is required.

Lump sum and scheduled contract[edit]

In lump sum contract the complete work as per plan and specifications is carried out by contractor for certain fixed amount as per agreement. The owner provides required information and contractor charges certain amount. This contract is suitable when the number of items are limited or when it is possible to work out exact quantities of work to be executed. The detailed specifications of all items of work, plans and detail drawings, security deposit, penalty, progress and other condition of contract are included in agreement.Though it is lump sum and scheduled contract, contractor will be paid at regular interval of 2-3 months as per progress of work on the basis of certificate issued by engineer in charge. A scheduled of rate is included in agreement for making payment of extra items.

Cost plus fixed fee contract[edit]

In cost plus fixed fee, the owner pays the contractor an agreed amount over and above the documented cost of work.[6]

Cost plus percentage of cost contract[edit]

In cost plus percentage, the owner pays greater than 100 percent of the documented cost, usually requiring detailed expense accounting.[7] In this type of contract, contractor is paid the actual cost of work plus certain percentage as profit. Various contract documents, drawing, specifications are not necessary at the time of signing the agreement.Contractor has to keep all records for cost of material and labour and contractor will be paid accordingly to engineer incharge.This type of contract is suitable for emergency work like difficulties in foundation conditions, construction of expensive structure etc.

Special contracts[edit]

Special contracts are further classified into five types:

  • Turn key contract
  • Negotiated contract
  • Package contract
  • Continuing contract
  • Running contract[8]

See also[edit]


  1. ^ "Main types of contracts". Retrieved 23 October 2014.
  2. ^ "Common types of construction contracts". Retrieved 23 October 2014.
  3. ^ Dr. B.C Punmia (2014). A text book of Production Planning and Management.
  4. ^ "Business dictionary". Retrieved 17 October 2014.
  5. ^ "Lump sum contract". Retrieved 17 October 2014.
  6. ^ "India study channel". by Owais Khursheed. Retrieved 17 October 2014.
  7. ^ "Cost plus percentage of cost contract". by Owais Khursheed. Retrieved 20 October 2014.
  8. ^ Dr. B.C. Punmia (17 October 2014). Production Planning and Management.