Negotiated contracts
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The document outlines the concept of negotiated contracts in construction, emphasizing that they are awarded based on negotiations rather than tenders. It details different types of negotiated contracts, including cost plus percentage rate, cost plus fixed fee, cost plus fee profit sharing, and cost plus sliding fee contracts, along with their respective merits and demerits. The summary highlights the implications of each contract type on cost management and contractor efficiency.
Negotiated contracts
- 1. NEGOTIATED CONTRACT Subject Guide : Prof. Rachita Panda Submited by : Shubham Singh CONSTRUCTION PLANNING AND MANAGMENT KALINGA INSTITUTE OF INDUSTRIAL TECHNOLOGY BHUBHANESWAR Date of Presentation : 05/11/2019
- 2. When the contract is awarded without calling tenders on the basis of negotiations only, it is called negotiated contract. The preselected contractors are invited upon on the basis of :- • Capability of the past experience in the specific area • Availability of the personnel to accomplish the work in the specified time frame • Bid (Estimate) Price • Proposed method for compensation including amount of fee On the bais of circumstances it can be competitive or non competitive. Negotiated contract 1
- 3. Types of Negotiated Contract Cost Plus Percentage Rate Contract Cost Plus Fixed Fee Contract Cost Plus Fee Profit Sharing Contract Cost plus Sliding Fee Contract 2
- 4. Cost Plus Percentage Rate Contract In this type of contract, a contractor agrees to take the work of construction on the actual cost of work plus on agreed percentage in addition, for his services. It is generally adopted when the labour and material cost are liable to fluctuate heavily in the market. The contractor arranges materials and labour at his cost and keeps proper account which is paid by the department or owner with certain percentage. Merits: • Construction can start before design is completed. • If the contractor is efficient in the utilization of resources then the cost to the client should represent a fair price for the work undertaken. 3
- 5. Demerits: • The project total cost is completely unknown before the project start. • No incentive for the contractor to be efficient in his use of labors, materials or equipments. • The contractor's only aim is to make the cost of the project as high as possible in order to seek greater margin of profit. • Minimum efficiency maximizes the profit. Cost Plus Percentage Rate Contract 4
- 6. Cost Plus Fixed Fee Contract In this type of contract, the contractor is paid by the owner an agreed fixed lump-sum amount over and above the actual cost of the work. This fixed fee shall cover overheads and profit to the contractor. The fee does not vary with the actual cost of the work as in the case of cost plus percentage rate contract. Merits : • Fee amount is fixed regardless of price fluctuation • Provides incentive to complete the project quickly 5
- 7. Cost Plus Fixed Fee Contract Demerit : Contractor Purchasing material at high rates and engaging labour at high price. i.e., Owner money loss 6
- 8. Cost Plus Fee Profit Sharing Contract Rewards contractors who minimize cost Percentage of cost under Guaranteed Maximum Price (GMP) is considered profit and shared with the contractor Merits : Provides incentive to the contractor to save money Demerits : • Plans and specifications need to be detailed • Contractor may absorb any amount over the GMP 7
- 9. Cost Plus Sliding Fee Contract In this type of contract the contractor is paid by the owner the actual cost of construction plus an amount of fee inversely variable according to the increase or decrease of the estimated cost agreed first by both the parties. Thus higher the actual cost, lower will be the value of fee and vice versa. Merits : • In this case a contractor shall not try to increase the actual cost. • The actual cost is lower so both the owner and the contractor will be benefited. • This is the best of the cost plus type contract. Demrits : • The estimated cost must be very accurately determined. • In case the estimate is much higher than the actual cost due to inefficiency of the estimator, a contractor will get more amount on the basis of savings and vice versa. 8
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