A brief introduction to construction contract and the categorisation of construction contract. 

Q1. How does categorisations of construction contracts derive?

In preparing and executing a construction contract, it is pertinent to be aware of its categorisation. Owing to the highly fragmented nature of the industry, there appears to be no standard method of classifying the various construction contracts that are used whether in this country or across the globe. Different segments of the industry and different jurisdiction have developed their own methodology as to such classification. 

Q2. What are the categorisations of construction contracts?

There are few categories of construction contract namely:

1. Price-based contracts;

2. Lump sum contracts;

3. Measure and value contracts;

4. Cost plus contracts; 

5. Procurement-based contracts; and

6. Supply contract.

Q3. What is a price-based contract?

Price-based contracts is relatively popular method of classifying construction contracts is to base that on the method used in pricing the said contracts and ultimately effecting payment. It is often preferred by quantity surveyors and cost consultants, they are prevalent in local practice especially in relation to building works and engineering-based infrastructure contracts.

Q4. What is a lump sum contract?

Lump sum contracts often equated with the term “stipulated-sum” contract, a lump sum contract is “a construction contract where the price or contract sum to which the contractor is entitled for undertaking the work is fixed unless extra work or other variation is ordered” (see Chow Kok Fong, Construction Contracts Dictionary, p239).

In short, it is a contract where the contractor undertakes to carry out all works under the contract for a stated sum which he has estimated in advance of entering into the contract in question. Accordingly, the employer must agree to pay the said lump sum price for the defined scope and quantity of work to be undertake by the contractor.

Q5.What is measure and value contract (provisional sum)?

A measure and value contract is described as “a construction contract where the final amount payable by the owner to the contractor is determined by the actual work done as measured and valued on the basis of the rates contained in the contract” (see Chow Kok Fong, Construction Contracts Dictionary, p 245).

It is employed principally in situations where at the time of tendering, the parties are not able to accurately determine the exact scope and quality of the work to be undertaken and to be therefore priced for by the contractor. All that can be done at the time of contracting is to establish a pricing mechanism within the framework furnished by the employer to the contractor as part of the tender documentation for future reimbursement to the latter.

Using the said agreed pricing mechanism, the works are measured and valued either during the currency of the contract or upon the completion of the works and the commensurate payment disbursed to the contractor. 

Q6.What is a cost-plus contract?

A cost-plus contract is also known as a “cost reimbursement” contract. It is a contract where the contractor receives his actual cost plus a fee to cover his overheads and profits (see The Aqua Group, Tenders and Contracts For Building (2nd edn), p 73). In contrast to a lump sum contract there is no definite sum that is stipulated to be the Contract sum; the latter being determined in a similar vein to a measure and value contract only following the completion of all works under the contract.

The basis of payment is established at the time of contracting and the contractor is accordingly reimbursed the prime cost of the work that he carries out plus a fee to cover his overheads and profits, etc; the fee is to be a fixed sum, a fixed percentage or a fluctuating fee. 

Q7.What is a procurement-based contract?

A procurement-based contract is another common and often encountered method of classifying contracts adopts the method of procurement that is used instead of merely the pricing, per se. In practice, since elements of the latter are nevertheless subsumed into whatever method of procurement that is ultimately carried out, it cannot be said that procurement on its own should be a distinct categorisation basis. 

Q8.What is a supply contract?

Supply contract are essentially contracts for the supply for materials and goods and are subject to the provision of the Sale of Goods Act 1957. The ambit of such contracts encompasses not only raw materials used in the construction process but also plant, equipment, loose fittings and etc, all coming within the ambit of the term “goods” as defined in the said Act. Such contracts can be either of the “direct” type between the employer and the supplier or of the “subcontract” type. 

THIS FAQS ARE PREPARED AND PUBLISHED BY MESSRS GAN & ZUL, ADVOCATES & SOLICITORS, KUALA LUMPUR.-CONSTRUCTION & ALTERNATIVE DISPUTE RESOLUTION DIVISION-