Construction contracts

Name Roll Topic

number
Srinivas K 49 Introduction & definition.

Shruti N 44 Procurement of contract.

Virupaksha 56 Contract analysis.

Zakir 58 Cost estimation.

Sharada 40 Types of payments.

Sangameshwar 36 Types of costs.

Saroj 38 Collection of costs.

Shilpa S 42 Indian example.

Soumya B 47 International example.

 Construction contract

A construction contract is a contract

specifically negotiated for the
construction of an asset or a combination
of assets that are closely interrelated or
interdependent in terms of their design,
technology and function or their ultimate
purpose or use.
 Construction contract is a
formal agreement for construction,
alteration, or repair of
buildings or structures (bridges,
dams, facilities, roads, tanks, etc.). A
construction contract is distinct from a
contract to assemble, fabricate,
or manufacture.
 Contract costing

Contract costing is defined as “the form of

specific order costing which is
undertaken for customer’s special
requirements and each order is of long
duration, the work is usually
constructional and in general the method
is similar to job costing”
 Procurement methods of contract

•Traditional

•Design and Build

• Two Stage Tendering

• Management Contracting
• Construction Management

• Framework Agreements
Analysis of construction company
project

•Plan
•Secure
•Achieve
 Factors
• Plan:Plan is developed to describe activities
associated with the project .The resource
required to achieve the best possible
outcomes for it &must be agreed on by all
key characters.
• Scope < Time < Cost < Quality < Human
resource < Communication < Risk <
Procurement.
• Secure: Once the project team is established they
should secure the project. It means maintaining control
over where the project is and where it is headed.
• Achieve: Completing the project goals and objectives.
Achieving the goals set out at the beginning of it ,with
a successful project outcome.
• Example : NICE construction company
 Cost Estimation :
The costs in a construction contract
includes both the initial capital cost
and the subsequent operation and
maintenance costs. Each of these
major cost categories consists of a
number of cost components.
Initial Capital cost
•
–Land acquisition
–Planning and feasibility studies
–Construction, including materials, equipment and labor
–Insurance and taxes during construction
Operation and maintenance cost
•
–Operating staff
–Labor and material for maintenance and repairs
–Utilities
–Periodic renovations
–Insurance and taxes
Unexpected cost during construction
•
–Design development changes
–Schedule adjustments
–General administration changes
 Types of construction cost estimates
•Design Estimates
–Screening estimates (or order of magnitude estimates)
–Preliminary estimates (or conceptual estimates)
–Detailed estimates (or definitive estimates)
–Engineer's estimates based on plans and specifications

•Bid Estimates
–As a contractor, a bid estimate is submitted to the owner either for
competitive bidding or negotiation.

•Control Estimates
–Budget estimate for financing
–Budgeted cost after contracting but prior to construction
–Estimated cost to completion during the progress of construction.
 TYPES OF PAYMENTS
Upfront payment/deposit:
• Upfront payments or deposits will generally be
used for jobs where high level of material cost is
found
Periodic payment:
• It is based on the interim valuation of the work
• The main contractor then makes a down stream
payment
Stage payments:
• Depends on events rather than time
• The parties agree at the out set that payment will be
released on completion of the agreed stages of work.

Milestone payment:
• It is a derivative of stage payment
• It will be setout in a schedule to the contract & the
contractor will notify the employer when it considers
that all work to be performed for a milestone.
Retention payment:
Retention payments act as an incentive for
the contractor to finish the job.
 Types of costs
• Direct Materials
• Direct Labor
• Indirect Costs
• Direct expenses
Direct Materials.
Provide a consolidated priced summary of individual material
quantities included in the various tasks, orders, or contract line
items being proposed and the basis for pricing (vendor quotes,
invoice prices, etc.).
Include raw materials like sand, stone, cement, and steel to be
produced or performed by others

Direct Labor.
workers who are engaged directly in the construction process.
Provide a time-phased (e.g., monthly, quarterly, etc.)

.
• Indirect Costs. Indirect costs are those for
activities or services that benefit more than one project.
Their precise benefits to a specific project are often difficult
or impossible to trace. For example, it may be difficult to
determine precisely how the activities of the director of an
organization benefit a specific project

• Direct expenses. all other costs other than the

above mentioned costs (e.g., architects, designs,
carriage inward, ) and provide bases for pricing.
 Collection of cost
Material cost:
• Materials required for contract are purchased and
delivered at the site
• Materials in stock are valued and credited to the
contract account ,the contract account gets debited
by the value of material consumed during the year
Labour cost:
• Depending upon the contract, wages are paid
directly at the site
• Allocation of wages to various sub units is easy
Plants & Equipment cost:
• They are purchased or hired
• Depreciation on owned plant & equipment are
debited to the contract account
• The written down value is carried over as a balance
to the next accounting period in which it is credited
Sub contracts cost :
• Specialised nature tasks are assigned to the sub contractors
• They are paid at agreed rate.
• Direct expense
• Contract account is debited on the basis of invoice received
from the sub contractor
Godavari rail bridge
 Godavari Rail Bridge is a bridge over the
river Godavari connecting Rajamandri and
Kovur in Andhrapradesh.
• Inaugurated in 2003.
• Length : 2730m.
• Constructed by : Hindustan Construction
Company (HCC).
• Total cost: Rs. 1.5 cr.
DIRECT EXPENSES:
DIRECT MATERIAL: 44,10,000
DIRECT LABOUR: 15,75,000
DIRECT EXPENSES: 7,77,000
PRIME COST 67,62,000

INDIRECT EXPESES:
OVERHEADS:
POWER 2,10,000

INSURANCE 4,20,000
TRANSPORTATION 3,25,500
FIELD ENGINEERS 5,28,000
DESIGN ENGINEERS 4,72,500
MANAGERS SALARY 7,68,000

SECURITIES SALARY 3,84,000

CONTRACTOR’S FEE 6,30,000

Hamilton construction company undertook
the construction of Winchester Bridge in
Roseburg, Oregon, USA.
 Winchester Bridge
• Built:1923
• Crosses: North Umpqua River.
• Total length :269.4 m
• Construction costs: $29,40,000
Particulars Amount
Direct materials: $ 16,80,000

Direct labour: $ 8,40,000

Direct expenses: $ 2,80,000

Prime cost: $28,00,000

Overheads:
Power: $35,000

Transportation: $20,000

Supervisor’s salary: $25,000

Engineering: $30,000

Fuel: $15,000

Other expenses: $15,000

 Assumption

• Power: @ $2/unit for 10000 units.

• Supervisors salary @ $2000/ month.

Absorption of overhead
• % of Direct Material=8.33%
• % of Direct Labour= 16.6%
• % of Prime Cost= 5%
 Sources
• Principles and practice of cost accounting: Asish
K. Bhattacharyya.
• Cost Accounting: Jawahar lal.
• Cost accounting: Tukaram.
• Websites:
• www.wikipedia.com
• www.futureaccountant.com
• www.slideshare.com
Thank you