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1. Lump-sum contract: all the risks have been assigned to the contractor.
Underestimate cost will be contractor’s responsibility
2. Unit price contract: the risk of inaccurate estimation and uncertain quantities have
been removed from the contractor
3. Cost plus fixed percentage contract: Owner will take responsibility for cost overrun
4. Cost plus fixed fee contract: Owner still take responsibility for cost overrun
5. Cost plus variable percentage contract: penalty for actual cost exceed the estimated
cost and rewards if below it. Considerable risk for cost overrun to the owner
6. Target estimate contract: penalty for actual cost exceed the estimated cost and
rewards if below it but share with owner
7. Guaranteed maximum cost contract: contractor takes all the risks (underestimates
and change orders)
Assumption: E is A
E= Contractor’s original estimate of the direct job cost at the time of contract award
A= Contractor’s actual cost for the original scope of work in the contract
U= Underestimate of the cost of work in the original estimate (with negative value U denoting
an overestimate)
C= Additional cost of work due to change orders
Premium percentage markup for contract type i such that the total percentage markup is
Ri = (R+Ri), for example, (R+R1) for a lump-sum contract, (R+R2) for unit price contract, and
(R+R3) for a guaranteed maximum cost contract
N= A factor in the target estimate for sharing the savings in cost as agreed upon by the
owner and the contractor, with 0 ≤ N ≤ 1
Problem:
A Construction project for which the contractor’s original estimate is $ 6,000,000. For
various types of contracts, R = 10%, R1 = 2%, R2 = 1%, R3 = 5%, and N = 0,5.
The contractor is not compensated for change orders under the guaranteed maximum cost
contract if the total cost for the change orders is within 6 % ($ 360,000) of the original
estimate. Determine the contractor’s gross profit for each of the seven types of construction
contracts for each of the following conditions:
a. U = 0, C=0
b. U = 0, C = 6% E = $ 360,000
c. U = 4% E = $ 240,000 C=0
d. U = 4% E = $ 240,000 C = 6% E = $ 360,000
e. U = -4%E = - $240,000 C=0
f. U = -4%E = - $240,000 C = 6% E = $ 360,000