Tendering and Contracts Topics - Essay Example

Lump sum contracts are the simplest type of contracts used in engineering and construction. They are also called stipulated sum, as this is the simplest type of an agreement among the supplier of services and a customer (Oklahoma State University, n.d., p.1). The customer pays the price upon completion of the agreed work, or as agreed. The price offered by the supplier of services is based on estimation of the costs of labour and materials, and a standard amount for overhead and the desired amount of profit (Oklahoma State University, n.d., p.1). Profit and overhead are usually estimated to the total of about 12-16 percent of the project cost (Oklahoma State University, n.d., p.1). This share increases with risk (Oklahoma State University, n.d., p.1). In case the final costs of labour and materials are higher than the builder's estimate, the profit is reduced (Oklahoma State University, n.d., p.1). When final costs are lower, profit increases.

However, the price of the project remains the same. Though there are advantages of this contract, problems might arise as well. In cases where costs turn out to be higher than first estimated, the provider of services might attempt to substitute cheaper materials for those first specified (Oklahoma State University, n.d., p.1). . ed plan of activities must be defined ahead of time; owner’s financial risk must be low and fixed at the beginning; there must be sufficient time to design the project properly and bid (Oklahoma State University, n.d., p.1). Unless these requirements are met, this type of a contract should not be used.

This contract is thus usually used with “Design-Bid-Build method of project procurement” (Oklahoma State University, n.d., p.1). In this method, project planning is outsourced and separated from project execution (AECOM CONSULT, 2006, p.i ). Transportation companies have traditionally used it. Another type of contracts is the measures and value contract. Unlike in the lump sum contract, here the final cost of the project is established upon completion. Before the outset, costs are estimated.

Upon completion, costs are re – measured in order to establish the actual cost (Royal Institution of Chartered Surveyors, 2012). Instead of receiving one final bill, the owner receives “the bill of quantities,” which is composed of a schedule of rates for each unit or item (Royal Institution of Chartered Surveyors, 2012). This type of contracts is best suited for projects where the initial design cannot be completed ahead of time. Drawings and a bill of approximate quantities is usually produced (Royal Institution of Chartered Surveyors, 2012).

They are recommended for the residential projects (Georgie P Landscape Architecture Ltd, n.d., p.1). The advantage of this contract over the lump sum is that the program for design, tendering and construction is shortened (Royal Institution of Chartered Surveyors, 2012). However, here the owner of the project suffers the unexpected costs of the project. This type of a contract is also used in the design – bid – build method of