1. Professional Practices
Chapter 2
Contracts, Bonds, and Insurance

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

3. Contract System
 Separate contracts
 Owner contracts separately for:
 General construction
 Plumbing
 Heating
 Electrical
 Sewage disposal
 Specialties (Elevators, Lifts, Air conditioning)
 Etc.
Asst. Prof. Khurram Iqbal
Department of Construction Engineering and Management, NIT SCEE, NUST 3

4. 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
Asst. Prof. Khurram Iqbal
Department of Construction Engineering and Management, NIT SCEE, NUST 4

5. 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.
Asst. Prof. Khurram Iqbal
Department of Construction Engineering and Management, NIT SCEE, NUST 5

6. 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.
Asst. Prof. Khurram Iqbal
Department of Construction Engineering and Management, NIT SCEE, NUST 6

7. 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).
Asst. Prof. Khurram Iqbal
Department of Construction Engineering and Management, NIT SCEE, NUST 7

8. 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
Asst. Prof. Khurram Iqbal
Department of Construction Engineering and Management, NIT SCEE, NUST 8

9. 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
Asst. Prof. Khurram Iqbal
Department of Construction Engineering and Management, NIT SCEE, NUST 9

10. 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
Asst. Prof. Khurram Iqbal
Department of Construction Engineering and Management, NIT SCEE, NUST 10

11. 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
Asst. Prof. Khurram Iqbal
Department of Construction Engineering and Management, NIT SCEE, NUST 11

12. Bonds
 Surety
 Guarantees payment on another party’s
obligations
 Bonding limits based upon
 Financial reports
 Experience
 Work in progress
Asst. Prof. Khurram Iqbal
Department of Construction Engineering and Management, NIT SCEE, NUST 12

13. Bonds
 Bid
 Submitted with bid
 Guarantees the employer that the
contractor will enter into the contract and
provide all other specified bonds.
Asst. Prof. Khurram Iqbal
Department of Construction Engineering and Management, NIT SCEE, NUST 13

14. Bonds
 Performance bonds
 Guarantees that the contractor will perform
all the work in accordance with the
contract documents
 Includes warranty period
Asst. Prof. Khurram Iqbal
Department of Construction Engineering and Management, NIT SCEE, NUST 14

15. 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
Asst. Prof. Khurram Iqbal
Department of Construction Engineering and Management, NIT SCEE, NUST 15

16. 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
Asst. Prof. Khurram Iqbal
Department of Construction Engineering and Management, NIT SCEE, NUST 16

17. Bonds
 License or permit bond
 State law or municipal ordinance requires a
contractor’s license or permit.
 Guarantees compliance with statutes and
ordinances
Asst. Prof. Khurram Iqbal
Department of Construction Engineering and Management, NIT SCEE, NUST 17

18. 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.
Asst. Prof. Khurram Iqbal
Department of Construction Engineering and Management, NIT SCEE, NUST 18

19. 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
Asst. Prof. Khurram Iqbal
Department of Construction Engineering and Management, NIT SCEE, NUST 19

20. Insurance
 Workers’ compensation insurance
 Worker’s compensation benefits include:
 Lost wages
 Economic loss
 Medical expenses
 Benefits to dependents if someone is killed
Asst. Prof. Khurram Iqbal
Department of Construction Engineering and Management, NIT SCEE, NUST 20

21. 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
Asst. Prof. Khurram Iqbal
Department of Construction Engineering and Management, NIT SCEE, NUST 21