Professional Practices
Chapter 2
Contracts, Bonds, and Insurance
Asst. Prof. Khurram IqbalDepartment of Construction Engineering and Management, NIT SCEE, NUST 2
Contract System Single contract
Owner contracts with prime contractor Prime contractor hires subcontractors
and material suppliers Subcontractors and suppliers are
responsible towards the prime contractor
Prime contractor is responsible directly to the owner.
Asst. Prof. Khurram IqbalDepartment of Construction Engineering and Management, NIT SCEE, NUST 3
Contract System Separate contracts
Owner contracts separately for: General construction Plumbing Heating Electrical Sewage disposal Specialties (Elevators, Lifts, Air conditioning) Etc.
Asst. Prof. Khurram IqbalDepartment of Construction Engineering and Management, NIT SCEE, NUST 4
Types of Agreements Lump sum (stipulated sum, fixed
price) Fixed price or set price through competitive
bidding or negotiations. May include change orders which entitles the
contractor to additional monies for actual work and for overhead, as well as additional time.
Majority of the risk is placed upon the general contractor as they have to guarantee a price even though all the costs are estimated
Asst. Prof. Khurram IqbalDepartment of Construction Engineering and Management, NIT SCEE, NUST 5
Types of Agreements Unit-price agreement
A price is given for each unit of work Lower bidder is determined based on
the owner-provided quantities. Paid based on actual quantity of work Neither the owner nor the contractor
will know the exact cost of the project until its completion.
Asst. Prof. Khurram IqbalDepartment of Construction Engineering and Management, NIT SCEE, NUST 6
Types of Agreements Cost-plus-fee
Paid for actual construction cost Plus a fee:
Percentage fee It allows the owner to save fees paid to the contractor when
construction costs go down Fixed fee
It removes the temptation for the contractor to increase construction costs to increase his fee
Fixed fee with a guaranteed maximum cost (g-max). They share any savings.
Sliding scale fee If the cost of the project increases, the percent fee of the
contractor decreases.
Asst. Prof. Khurram IqbalDepartment of Construction Engineering and Management, NIT SCEE, NUST 7
Types of Agreements Cost-plus-fee
Paid for actual construction cost Plus a fee:
Fixed fee with a bonus and penalty A target cost estimate is set up; and if the cost is
less than the target amount, the contractor receives a bonus in the form of a percentage of the savings. If the cost goes over the target figure, there is a penalty (reduction of percentage).
Asst. Prof. Khurram IqbalDepartment of Construction Engineering and Management, NIT SCEE, NUST 8
Agreement Provisions The exact type and form of agreement may vary certain
provisions are included in all of them. Contractor must check items before signing the agreement
Scope of work Time of completion
Start time Completion time
Calendar days Date
Liquidated damages
Asst. Prof. Khurram IqbalDepartment of Construction Engineering and Management, NIT SCEE, NUST 9
Agreement Provisions Contract sum Progress payments
Contractors must receive payments as work is completed. These payments are based on completed work and stored material
Retained percentage It is customary for the owner to withhold a certain
percentage of the payments, which is referred to as retainage. It is protection for the owner to ensure the completion of the contract and payment of the contractors financial obligations
Asst. Prof. Khurram IqbalDepartment of Construction Engineering and Management, NIT SCEE, NUST 10
Agreement Provisions Schedule of values
Contractor provides the architect/engineer with a statement called a schedule of values showing sales prices for specific items within the project
Contractor sometimes overvalue the initial items referred to as front-end loading
Work in place and stored materials Work in place is usually calculated as the percentage
of work that has been completed Contractor may also receive payment for materials
stored on site or some other mutually agreed upon location
Asst. Prof. Khurram IqbalDepartment of Construction Engineering and Management, NIT SCEE, NUST 11
Agreement Provisions Acceptance and final payment
It sets the time for final payment to the contractor
The contractor receives final payment when the final inspection, certification of completion, acceptance of work are completed, which is the amount of retainage withheld through out the construction
Asst. Prof. Khurram IqbalDepartment of Construction Engineering and Management, NIT SCEE, NUST 12
Bonds Surety
Guarantees payment on another party’s obligations
Bonding limits based upon Financial reports Experience Work in progress
Asst. Prof. Khurram IqbalDepartment of Construction Engineering and Management, NIT SCEE, NUST 13
Bonds Bid
Submitted with bid Guarantees the employer that the
contractor will enter into the contract and provide all other specified bonds.
Asst. Prof. Khurram IqbalDepartment of Construction Engineering and Management, NIT SCEE, NUST 14
Bonds Performance bonds
Guarantees that the contractor will perform all the work in accordance with the contract documents
Includes warranty period
Asst. Prof. Khurram IqbalDepartment of Construction Engineering and Management, NIT SCEE, NUST 15
Bonds Labor and material bond (payment
bond) Guarantees contractor will pay for:
Labor Materials
It acts as protection for the third parties and the owner
Asst. Prof. Khurram IqbalDepartment of Construction Engineering and Management, NIT SCEE, NUST 16
Bonds Subcontractor bonds
Performance, labor and materials bond (payment bond) provided by subcontractor to general contractor
Protect prime contractor against financial loss and litigation due to default by a subcontractor
Reduces general contractor’s risk Preserves general contractor’s bonding
capacity
Asst. Prof. Khurram IqbalDepartment of Construction Engineering and Management, NIT SCEE, NUST 17
Bonds License or permit bond
State law or municipal ordinance requires a contractor’s license or permit.
Guarantees compliance with statutes and ordinances
Asst. Prof. Khurram IqbalDepartment of Construction Engineering and Management, NIT SCEE, NUST 18
Insurance Contractor must have insurance for protection of the
assets of their business.
There must not be gaps in the insurance coverage that might cause the contractor serious financial loss.
Insurance is not same as bond. With an insurance policy, responsibility of loss is with the insurance company. In contrast, with a bond, the bonding companies will fulfill the obligations of the bond and then turn to the contractors to reimburse the money that they expended on their behalf.
Asst. Prof. Khurram IqbalDepartment of Construction Engineering and Management, NIT SCEE, NUST 19
Insurance Workers’ compensation insurance
Provides benefits to workers or their families if they are injured or killed on the job
Rate charged for this insurance are based upon:
Location of work (state) Type of work Company's claim history
Asst. Prof. Khurram IqbalDepartment of Construction Engineering and Management, NIT SCEE, NUST 20
Insurance Workers’ compensation insurance
Worker’s compensation benefits include:
Lost wages Economic loss Medical expenses Benefits to dependents if someone is
killed
Asst. Prof. Khurram IqbalDepartment of Construction Engineering and Management, NIT SCEE, NUST 21
Insurance Builder’s risk fire insurance
Covers loss due to fire May be extended to:
Other weather related damage Explosions Riots and civil disorder Vandalism and malicious mischief Theft
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