Nicolás LISO: Types of construction contracts and their peculiarities
Actualizado: 16 de ene de 2020
The construction contract is the document signed by the Contractor and the Builder. Through which the Builder undertakes to execute the works and the Contractor to pay them. The contract must describe what works have to be done and how they should be paid.
The works are often complex and involve many different operations, requiring the Builder to purchase a multitude of materials and different manufactured elements, as well as the use of a wide range of machines and the collaboration of people from different trades.
There are many ways to contract the payment of construction works. These basically differ in the way of paying for the construction that is done. Each of them determines in the Constructor a different strategy when programming the construction process and especially when establishing priorities in the execution of the different work units. The most common types of construction contracts are:
For an easy understanding and reminder of each type of contract, some denominations have been chosen, which although they are not always used as they are expressed here, they do give a clear idea of the type of contract to which we refer.
Advantages and Disadvantages of each type of Contract.
Project and Construction Contract
It is a modality, which in recent times is becoming common in large projects
Of construction. In this type of contract the Builder or Contractor takes charge of both the project and the construction of the works and in its offer it values the execution of the works described in a project, which the same team or someone on behalf of the Builder has written. In this type of contracts, the Contractor makes the bidding on a Bidding Document, which succinctly defines the objective or intention that it wishes to achieve with the construction, and leaves the bidder free to define the way to achieve it, and the bidder must assess Subsequently your own project. The Contractor awards the offer that is most acceptable to meet the objectives pursued with the construction or simply the one he likes best. Some contractors clearly favor this type of contract, especially when it includes the financing of the entire operation. In other words, the builder not only contributes the complete project and its construction, but also finances it and the Contractor undertakes to pay over a series of years, usually many more than the construction lasts, the total amount of its promotion .
At present, in certain cases, the maintenance of the construction or installation built for a considerable number of years is included in the work included in the contract. In some countries, road sections are currently contracted, including in the contract the complete package: Project, Construction and Maintenance for ten or fifteen years. The Contractor (usually the Administration in these latter cases) agrees with the Builder the payment extended over time of the entire operation, including, of course, in the amount of interest generated by the deferred payment. As advantages of this system can be noted:
• Coordination of specialists in design and construction of a certain type of works, which has a favorable impact on the final quality of the construction.
• Project conceived at all times to be built in a rational and economical way. In many occasions the design has been conditioned by the execution of the work itself.
• Possibility of obtaining economically advantageous offers by adapting the project to its builder.
On the contrary this system has as disadvantages:
• Each builder offers different solutions, appropriate to its own convenience, which may not match the convenience of the contractor's project or idea.
• Increase in the design phase, for example ten different projects and offers and only one.
• Lack of control by the contractor, as there is no independent person who can ensure their interests in possible design changes when building.
• Difficult guarantee that, in case of difficulties, the cost offered does not vary substantially and always upwards.
Contract at a closed price
In this type of Contract, often referred to as turnkey, the Builder undertakes to deliver a completely finished construction and in a state of operation against the delivery of a fixed amount, distributed in terms previously agreed, in accordance with the progress of the work. The Builder's offer is based on a study of the project provided by the Contractor, but the risks of errors in said Project are understood to be assumed by the Builder, who must therefore carry out a complete and exhaustive study of the project delivered by the Contractor and add in he everything that he considers to be missing since the number of his offer is considered "closed" once the Contract is signed. The builder undertakes to receive exclusively the amount offered, including in it all those things that in his opinion are necessary for the correct completion and operation of the installation even if they were not included in the Project received for the study of the offer.
The advantages of this type of contract are:
• All offers have the same basis, that is, the same is offered by each of the bidders, therefore they are comparable.
• The contractor ensures a more or less certain cost or at least with a very small percentage of variation, since the risks of possible variations are assumed by the builder and included in the price offered.
• The builder assumes responsibility for the measurement; Therefore, you can assess something that you have measured, which exempts you from possible mistakes when evaluating your own costs.
• It avoids a large part of the work of measurement and valuation of the work carried out, since the final figure of each unit is known and therefore it is possible to CERTIFY, that is to say, to pay each monthly relation of work performed, based on calculating the percentage made of each unit.
• The Contractor obtains a series of offers, which prove the economic reliability of the Project he commissioned and, when compared, give him a very clear idea of what the real price of the construction of his project may be.
As inconveniences could be noted:
• The establishment of a closed price obliges the Contractor to not be able to vary practically anything once the award has been made, since if the builder does so, he can take advantage of the situation to improve his contractual position and no longer has possible competition, which allows checking what is appropriate of your posture
• Requires a well-defined and accurate project with little chance of error, since any variation involves safe difficulties between Contractor and Builder.
These types of contracts are only recommended in any of the following cases:
• Works of low economic value.
• Works that can be precisely defined. Its use should be avoided, for example, in underground works, or with a high degree of uncertainty.
• Works of short duration or little risk of price variation.
Contract for work units and price chart
The price of a series of work units is contracted, so that the volume of each unit is not guaranteed, not even the execution of all the units of the contract. The builder must perform its cost calculations of each unit independently and evaluate approximately the overall value of the works, to distribute expenses not proportional to the volume of work. The Contractor is not committed in any way to ensure a certain volume of work. It is a typical type of contract of works with a great margin of insecurity in its execution, and is usually even used for research or prospecting work contracts in which there is a fixed and fixed amount to spend, which is consumed according to a contracted price chart, which usually adds the percentages necessary to cover the expenses of taxes, industrial benefit of the builder etc. It is a contract to be signed with a trustworthy builder, when it is not possible to foresee even approximately the volumes of work to be performed, and therefore the total amount of the works that are executed cannot be guaranteed either.
Contract of partial budgets and general budget
It is the usual and most frequent contract; Using the price tables of the project and measuring the plans of the project, an assessment is obtained reflected in partial budgets and a general budget, as a sum of the different partial budgets included in the project received and which will be part of the Contract. This general budget, affected by a coefficient greater than the unit, to cover taxes, general expenses, industrial benefit and any other cost proportional to the volume of work performed, is the final budget of the project on which the Builder undertakes to make a low or a hike. In order to obtain the number of its offer, the Builder obtains its own cost prices for the different work units included in the project. Apply these prices to the measurements contained in the project received and get partial budgets and a general budget called budget per administration ... Then you get the factor by which you must multiply all your direct costs to cover overhead, taxes, permits , unforeseen and industrial benefit. This factor can currently vary between 1.35 and 1.70. When applied to the general budget per administration, the figure that should actually be that offered by the Builder is obtained. This figure almost never coincides with the figure of the Project studied and when compared with that it gives us the loss or increase that the Builder needs to make to take over the Contract with a fair benefit for its activity. This decrease or increase is applied to all the prices of the Contract to invoice monthly to the Contractor, the work units carried out by the Builder. In this type of contract it is agreed that only those work units actually executed by the Builder will be paid. Once the work has been built, the actual measurements multiplied by the unit prices affected by the low or rise agreed, give the final total amount to be charged by the Builder. In the Project Specifications, which is one of the Project documents that is incorporated into the Contract, the percentage of variation accepted in the total volume of each work unit is usually specified, to respect the price of the contracted unit.
The advantages of this type of contract, especially if the Project is well carried out, are evident as it participates in the advantages of the other systems already described and is therefore the most common type of contract in engineering works. It ensures to a certain extent the total cost and at the same time leaves open the possibility of introducing variations without prejudice to either of the two contracting parties: Contractor and Builder. On the other hand, it establishes a concrete and determined basis on which to carry out the bidding of the works, allowing fair competition among the contestants to a work.
Although it is usually the dream of some builders, it is not at all recommended for the interests of the Contractor. If we delve a little into the philosophy of every good Builder, neither is it for this one. This contract by Administration is based on the fixing of prices of labor and materials by the Builder and according to them, the Contractor will be billed for the work performed by the property. The Builder's commitment is limited to setting the amount to be billed for each hour of the operator or pawn, and for each unit of material used, but without guaranteeing in any case the number of hours or the amounts to be used in each unit of work. On the total billing of labor and materials consumed, the builder charges a fixed percentage to cover its fixed expenses and industrial benefit. Therefore, the total amount to be charged for these items increases as the total volume of labor and materials increases, regardless of the total volume of work performed.
This type of contract requires, to be reasonably acceptable to the Contractor, close supervision of the Builder by the Contractor and usually involves a higher cost in the work performed than would be achieved with another type of contract. In this Contract, all interest in performance and productivity is eliminated not only in the builder, but also in its own personnel or organization. On the other hand, the builder is fully coerced in his work, unable to make any decision, without the prior permission of the Technical Director or the person representing the Contractor, which severely hinders his own work schedule. In addition, the administrative processing of payments is often complicated due to the multitude of checks and paperwork required by your authorization. Therefore, this type of contract is not advisable, except in cases of emergency and always provisionally and partially until the signing of another more convenient contract. Of course, there are also many types of contracts that include different variants to those mentioned above. Among them the contracts at cost plus a fixed benefit, contracts with benefit depending on the cost achieved, etc. The Contract is basically an agreement between the two contracting parties in which the commitments and obligations of each party are established, as well as the distribution of the risks that may arise. All this on an equal level that also implies the good faith of both parties at the time of signing the contract.
The possibility of remuneration at a lump sum price, with no existence of unit prices, is expected and exceptionally:
• The application of the price revision is regulated in detail
• The award of a contract in case of reckless discharge is regulated precisely
• The constitution and possibilities of the bonds or guarantees required for contracts are regulated
The contract for the construction of a specific work requires the 0Constructor to carry out the work and the Contractor or Owner to pay for it. The contract must therefore describe in detail what needs to be built, and how the construction will be paid. For this the contract must include a Series of documents:
a) .- Project
It is convenient that the entire Project is part of the contract, because if it is a good Project, it includes not only the graphic and detailed description of each and every one of the works to be carried out, but also conditions, qualities of execution, and forms of payment of each of the units. It also allows the Builder to obtain a clear idea of what the final objectives of what he is going to do and therefore, if he is a responsible and technical person, it allows him to know in depth not only what is technically required but also what is convenient in the construction process . From a purely legal point of view, project documents that are contractual are usually specified, that is, they are a legal part of the contract and even the order of priorities in case of divergences between some documents and others.
b) .- General Conditions
The general conditions of the Contract specify responsibilities, obligations and powers of each of the contracting parties and their powers in the respective fields of action.
c) .- Offer
It is the commitment document, signed by the Builder and accepted in writing by the Contractor, which sets the price offered and the term offered for the completion of the works, respecting the conditions set forth in the Contract.
d) .- Explanatory documents
Of any possible difficult or important point of the contract, such as bail, awards or penalties for delays, how to act in case of unforeseeable emergencies, risk sharing, etc., etc.
e) .- Contract itself
It is the document, signed by both parties, complying with the terms set forth in the documents described above, which are summarized in the commitment of the Builder to build and that of the Contractor to pay for the construction.
Nicolás LISO FABBRI