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ADVANTAGES AND DISADVANTAGES OF CONTRACTS

A contract is a voluntarily arrangement between two or more parties


that is enforceable at law as a binding legal agreement. An agreement
is formed when an "offer" is accepted. The parties must have
an intention to be legally bound; and to be valid, the agreement must
have both proper "form" and a lawful object.

Advantages & Disadvantages of Design/Build Turnkey


Contracts
Advantages for the Contractor:
1. The project can often be completed within a shorter period of
time since the construction can begin before the entire plans and
specification are completed.
2. The increased control over the projects which may result in a
lower overall costs.
3. Design/build contracts virtually dictate a cost-plus or lump sum
approach to pricing. As a consequence, most design/build
arrangements will tend to be lump sum in nature, with the lump
sum feature meaning that they will usually offer greater certainty
as to final cost.
4. Payment by fixed installments at certain stages of the projects,
which maybe justifiably required in lump sum contract
arrangements.
Advantages for the Owner:
1. The owner can recover directly from the contractor for
deficiencies in either design or construction of the project.
2. The contractor bears any additional costs that may occur as a
result of using inadequate plans prepared by his engineer,
which is a disadvantage for the contractor.
3. Owners without adequate technical resources of manpower
may find such contracts attractive.
4. The buyer or owner does not have to worry about the
pressure of making design decisions and does not pay for the
full project until completion.
Disadvantages for the Owner

ADVANTAGES AND DISADVANTAGES OF CONTRACTS

1. It is difficult to effectively compare the various preliminary


design proposals submitted by the contractors.
2. The owner may not obtain the lowest cost for the project since
the contract is usually entered into by negotiation rather than
competitive bidding.
3. There is no independent party to protect the owners
interests.
4. There can be little or no check on the reasonableness of the
price.
5. There is little evidence that design/build contracts designed in
the light of the contractors proposed construction methods
have in fact produced cost savings to the owner.
6. If the owner wishes to use the design/build contracts under
competitive tendering procesures, the cost of tendering is
enormously increased.
7. A substantial loss of control by the owner takes place during
design and construction.
8. The contract is not customized to an individual buyers needs
and it may not work for a buyer who wants more authority,
control and flexibility in a design process.
Disadvantages for the Contractor
1. The contractor is liable for both design and construction so
they usually carry commercial general liability insurance.
2. The contracts require to be very carefully drafted if ultimate
certainty of the lump sum price is to be achieved.
3. Satisfactory standard forms of contract for design/build
contracts are not readily available.

ADVANTAGES AND DISADVANTAGES OF CONTRACTS

LUMP SUM CONTRACTS


ADVANTAGES
1.
2.
3.
4.

Low risk on the owner, higher risk to the contractor


Cost known at outset
Contractor will assign best personnel
Contractor selection is easy.

DISADVANTAGES
1. Changes is difficult and costly.
2. Contractor is free to use the lowest cost of material,
equipment and methods.
3. The contractor carries much of the risks. The tendered price
may include high risk contingency.
4. Competent contractors may decide not to bid to avoid a highrisk lump sum contract.

UNIT PRICE
ADVANTAGES FOR THE CONTRACTOR / DISADVANTAGE FOR THE
OWNER
1. No total final price only an estimated BOQ
2. Quote rates / Prices by units
3. Re-negotiate for rates if the quantity or work considerably
exceeds the initial target.
4. Payment to contractor is based on the measure
5. Unbalanced bids
6. Higher risk to owner
7. Ideal for work where quantities cannot be accurately
established before constructions starts.

ADVANTAGES AND DISADVANTAGES OF CONTRACTS

8. Saves the heavy cost of preparing many bills of quantities by


the contractors
9. Lower risk for contractor
ADVANTAGES FOR THE OWNER
1. Easy for contract selection.
2. Early start is possible.
3. Changes in contract documents can be made easily by the
owner

SCHEDULE OF RATES CONTRACT


ADVANTAGES:
1. Work can be commenced earlier than if a full B.O.Q has been
prepared.
DISADVANTAGE
1. No indication of the final price of the works.
2. Very difficult to determine which contractor submitted the most
advantageous offer.
3. May cause financial problems to the public owners

COST PLUS
-

A negotiated reimbursements to cover overheads and profit.


Different methods of reimbursements:
o 1. Cost + Percentage
The contractor is reimbursed for all his consts with a
fixed percentage (%) age of costs to cover his
services
ADVANTAGES:
Construction can start before design is
competed
If the contractor is efficient in the utilization of
resources then the cost of the client should
represent a fair price for the work undertaken.
Profitable for the contractor
DISADVANTAGES
The project total cost is completely unknown
before the project start.

ADVANTAGES AND DISADVANTAGES OF CONTRACTS

No incentive for the contractor to be efficient in


his use of labors, materials or equipments.
Minimum efficiency maximizes the profit
Larger the cost of the job, the higher the fee
the owner pays.
o 2. Cost + Fixed Fee
Most common form of negotiated contracts
Utilized on large multi-year job
ADVANTAGES
Fee amount is fixed regardless of price
fluctuation
Provide incentive to complete the project
quickly
DISADVANTAGES
Expensive materials and construction
techniques may be used to expedite
construction.
o 3. Cost + Fixed Fee + Profit Sharing
Rewards contractors who minimize cost
Percentage of cost under Guaranteed Maximum Price
(GMP) is considered profit and shared with the
contractor
The contractor is reimbursed at cost with an agreedupon fee up to the GMP, beyond this point the
contractor is responsible for covering any additional
costs within the original project scope
ADVANTAGES
o Provides incentive to the contractor to
save money
DISADVANTAGES
o Contractor must absorb any amount over
the Guaranteed Maximum Price
o Plans and specifications need to detailed.

GUARANTEED MAXIMUM PRICE CONTRACT


-

The contractor estimates the cost just like in a lump sum bid, but
profit is limited to a specified amount.
In the event that actual costs are lower than the estimates, the
owner keeps the savings.
In the even costs are higher, the contractor pays the difference
and profit is reduced.

ADVANTAGES

ADVANTAGES AND DISADVANTAGES OF CONTRACTS

1. Greater price certainty for clients as the contractor normally


includes a sum for future design development and for risks.
2. GMP promotes pre-agreement of changes as its philosophy
links neatly with a contractual requirement to pre-agree the
cost and time implications of any potential changes.
3. GMP provides greater control over spending as the contractor
is bound to a maximum price. This alerts the team to any
potentially expensive items of design development.
4. GMP aligns the contractor with client and consultants
encouraging team work with mutual trust and common goals.
5. Less administration is required as changes are limited; there is
quick settlement of the final account.
6. The client might pay too much as the contractor takes on
greater risk and thus includes in the price an allowance for
design development and risk.
7. Contactors with design and build experience may have useful
knowledge.

Advantages & Disadvantages of Contracts in


Companies
A "liability" in a company refers to a legal liability --- a situation in
which the company might be sued or face other legal action that would
require it to pay out money. Companies often attempt to draw up
contracts with employees, contractors, consumers or other associates
with the purpose of limiting the company's liability. This process has a
number of advantages, but it also carries certain drawbacks.
I will first enumerate some of the advantages of contracts:
Advantage: Reduces Risk

ADVANTAGES AND DISADVANTAGES OF CONTRACTS

The main advantage to the drawing up of contracts to minimize


liabilities is that it reduces the risk that the company issuing the
contracts will be sued. By making sure that all parties agree on the
terms of a particular agreement and making everyone sign a contract
attesting to this, this strategy reduces the chance that one party will
have grounds for legal action later on.
Advantage: Clarity
In addition to reducing the risk of lawsuits, contracts can also provide
clarity to employees and partners in their mission. Contracts often
outline exactly what's expected of each party. In addition to reducing
the likelihood that one party will be able to sue the other party later
on, these contracts can also help each party remain mindful of exactly
what they've been contracted to do, thus reducing confusion and
increasing focus.
Advantage: Assurance
One of the biggest advantages that you get when you use contracts,
specifically for your employees, is that you have the ability to hang
onto your best employees. You can do this by adding terms into the
employment contract that limit the reasons than an employee can use
to leave your company.
Now, that I have tacked some of the advantages, I will therefore
mentioned the disadvantages as follows:
Disadvantage: Time and Money
Perhaps the main disadvantage to the use of contracts to reduce risk is
that drawing up contracts takes both time and money. To construct an
airtight contract, a company has to employ the services of a lawyer to
draft the contracts, and lawyers are seldom inexpensive. In addition,
focusing on contracts draws time away from other activities that could
help grow the business.
Disadvantage: Litigious Atmosphere
Making every person who deals with an organization sign contracts
that are designed to reduce the company's risk can create an
atmosphere in which everyone has their hackles up. This may not only
breed suspicion, but it can actually increase the likelihood of a lawsuit,
as people forced to sign these contracts may seek the counsel of a
lawyer they wouldn't otherwise approach.

ADVANTAGES AND DISADVANTAGES OF CONTRACTS