professional practices (lec 02) by k.iqbal

Professional Practices

Chapter 2

Contracts, Bonds, and Insurance

Asst. Prof. Khurram IqbalDepartment of Construction Engineering and Management, NIT SCEE, NUST 2

Contract System Single contract

Owner contracts with prime contractor Prime contractor hires subcontractors

and material suppliers Subcontractors and suppliers are

responsible towards the prime contractor

Prime contractor is responsible directly to the owner.


Contract System Separate contracts

Owner contracts separately for: General construction Plumbing Heating Electrical Sewage disposal Specialties (Elevators, Lifts, Air conditioning) Etc.


Types of Agreements Lump sum (stipulated sum, fixed

price) Fixed price or set price through competitive

bidding or negotiations. May include change orders which entitles the

contractor to additional monies for actual work and for overhead, as well as additional time.

Majority of the risk is placed upon the general contractor as they have to guarantee a price even though all the costs are estimated


Types of Agreements Unit-price agreement

A price is given for each unit of work Lower bidder is determined based on

the owner-provided quantities. Paid based on actual quantity of work Neither the owner nor the contractor

will know the exact cost of the project until its completion.


Types of Agreements Cost-plus-fee

Paid for actual construction cost Plus a fee:

Percentage fee It allows the owner to save fees paid to the contractor when

construction costs go down Fixed fee

It removes the temptation for the contractor to increase construction costs to increase his fee

Fixed fee with a guaranteed maximum cost (g-max). They share any savings.

Sliding scale fee If the cost of the project increases, the percent fee of the

contractor decreases.


Types of Agreements Cost-plus-fee

Paid for actual construction cost Plus a fee:

Fixed fee with a bonus and penalty A target cost estimate is set up; and if the cost is

less than the target amount, the contractor receives a bonus in the form of a percentage of the savings. If the cost goes over the target figure, there is a penalty (reduction of percentage).


Agreement Provisions The exact type and form of agreement may vary certain

provisions are included in all of them. Contractor must check items before signing the agreement

Scope of work Time of completion

Start time Completion time

Calendar days Date

Liquidated damages


Agreement Provisions Contract sum Progress payments

Contractors must receive payments as work is completed. These payments are based on completed work and stored material

Retained percentage It is customary for the owner to withhold a certain

percentage of the payments, which is referred to as retainage. It is protection for the owner to ensure the completion of the contract and payment of the contractors financial obligations


Agreement Provisions Schedule of values

Contractor provides the architect/engineer with a statement called a schedule of values showing sales prices for specific items within the project

Contractor sometimes overvalue the initial items referred to as front-end loading

Work in place and stored materials Work in place is usually calculated as the percentage

of work that has been completed Contractor may also receive payment for materials

stored on site or some other mutually agreed upon location


Agreement Provisions Acceptance and final payment

It sets the time for final payment to the contractor

The contractor receives final payment when the final inspection, certification of completion, acceptance of work are completed, which is the amount of retainage withheld through out the construction


Bonds Surety

Guarantees payment on another party’s obligations

Bonding limits based upon Financial reports Experience Work in progress


Bonds Bid

Submitted with bid Guarantees the employer that the

contractor will enter into the contract and provide all other specified bonds.


Bonds Performance bonds

Guarantees that the contractor will perform all the work in accordance with the contract documents

Includes warranty period


Bonds Labor and material bond (payment

bond) Guarantees contractor will pay for:

Labor Materials

It acts as protection for the third parties and the owner


Bonds Subcontractor bonds

Performance, labor and materials bond (payment bond) provided by subcontractor to general contractor

Protect prime contractor against financial loss and litigation due to default by a subcontractor

Reduces general contractor’s risk Preserves general contractor’s bonding

capacity


Bonds License or permit bond

State law or municipal ordinance requires a contractor’s license or permit.

Guarantees compliance with statutes and ordinances


Insurance Contractor must have insurance for protection of the

assets of their business.

There must not be gaps in the insurance coverage that might cause the contractor serious financial loss.

Insurance is not same as bond. With an insurance policy, responsibility of loss is with the insurance company. In contrast, with a bond, the bonding companies will fulfill the obligations of the bond and then turn to the contractors to reimburse the money that they expended on their behalf.


Insurance Workers’ compensation insurance

Provides benefits to workers or their families if they are injured or killed on the job

Rate charged for this insurance are based upon:

Location of work (state) Type of work Company's claim history


Insurance Workers’ compensation insurance

Worker’s compensation benefits include:

Lost wages Economic loss Medical expenses Benefits to dependents if someone is

killed


Insurance Builder’s risk fire insurance

Covers loss due to fire May be extended to:

Other weather related damage Explosions Riots and civil disorder Vandalism and malicious mischief Theft

professional practices (lec 02) by k.iqbal

Business

actual construction

agreements

fee paid

fixed fee

construction

financial

khurram iqbaldepartment

nit scee