Advantages and Disadvantages of Contracts

ADVANTAGES AND DISADVANTAGES OF CONTRACTS

A contract is a voluntarily arrangement between two or more parties that is enforceable at law as a binding legal agreement. An agreement is formed when an "offer" is accepted. The parties must have an intention to be legally bound; and to be valid, the agreement must have both proper "form" and a lawful object.

Advantages & Disadvantages of Design/Build Turnkey Contracts Advantages for the Contractor: 1. The project can often be completed within a shorter period of time since the construction can begin before the entire plans and specification are completed. 2. The increased control over the projects which may result in a lower overall costs. 3. Design/build contracts virtually dictate a cost-plus or lump sum approach to pricing. As a consequence, most design/build arrangements will tend to be lump sum in nature, with the lump sum feature meaning that they will usually offer greater certainty as to final cost. 4. Payment by fixed installments at certain stages of the projects, which maybe justifiably required in lump sum contract arrangements. Advantages for the Owner: 1. The owner can recover directly from the contractor for deficiencies in either design or construction of the project. 2. The contractor bears any additional costs that may occur as a result of using inadequate plans prepared by his engineer, which is a disadvantage for the contractor. 3. Owners without adequate technical resources of manpower may find such contracts attractive. 4. The buyer or owner does not have to worry about the pressure of making design decisions and does not pay for the full project until completion. Disadvantages for the Owner

ADVANTAGES AND DISADVANTAGES OF CONTRACTS

1. It is difficult to effectively compare the various preliminary design proposals submitted by the contractors. 2. The owner may not obtain the lowest cost for the project since the contract is usually entered into by negotiation rather than competitive bidding. 3. There is no independent party to protect the owner’s interests. 4. There can be little or no check on the reasonableness of the price. 5. There is little evidence that design/build contracts designed in the light of the contractor’s proposed construction methods have in fact produced cost savings to the owner. 6. If the owner wishes to use the design/build contracts under competitive tendering procesures, the cost of tendering is enormously increased. 7. A substantial loss of control by the owner takes place during design and construction. 8. The contract is not customized to an individual buyer’s needs and it may not work for a buyer who wants more authority, control and flexibility in a design process. Disadvantages for the Contractor 1. The contractor is liable for both design and construction so they usually carry commercial general liability insurance. 2. The contracts require to be very carefully drafted if ultimate certainty of the lump sum price is to be achieved. 3. Satisfactory standard forms of contract for design/build contracts are not readily available.

ADVANTAGES AND DISADVANTAGES OF CONTRACTS

LUMP SUM CONTRACTS ADVANTAGES 1. 2. 3. 4.

Low risk on the owner, higher risk to the contractor Cost known at outset Contractor will assign best personnel Contractor selection is easy.

DISADVANTAGES 1. Changes is difficult and costly. 2. Contractor is free to use the lowest cost of material, equipment and methods. 3. The contractor carries much of the risks. The tendered price may include high risk contingency. 4. Competent contractors may decide not to bid to avoid a highrisk lump sum contract.

UNIT PRICE ADVANTAGES FOR THE CONTRACTOR / DISADVANTAGE FOR THE OWNER 1. No total final price only an estimated BOQ 2. Quote rates / Prices by units 3. Re-negotiate for rates if the quantity or work considerably exceeds the initial target. 4. Payment to contractor is based on the measure 5. Unbalanced bids 6. Higher risk to owner 7. Ideal for work where quantities cannot be accurately established before constructions starts.

ADVANTAGES AND DISADVANTAGES OF CONTRACTS

8. Saves the heavy cost of preparing many bills of quantities by the contractors 9. Lower risk for contractor ADVANTAGES FOR THE OWNER 1. Easy for contract selection. 2. Early start is possible. 3. Changes in contract documents can be made easily by the owner

SCHEDULE OF RATES CONTRACT ADVANTAGES: 1. Work can be commenced earlier than if a full B.O.Q has been prepared. DISADVANTAGE 1. No indication of the final price of the works. 2. Very difficult to determine which contractor submitted the most advantageous offer. 3. May cause financial problems to the public owners

COST PLUS -

A negotiated reimbursements to cover overheads and profit. Different methods of reimbursements: o 1. Cost + Percentage  The contractor is reimbursed for all his consts with a fixed percentage (%) age of costs to cover his services  ADVANTAGES:  Construction can start before design is competed  If the contractor is efficient in the utilization of resources then the cost of the client should represent a fair price for the work undertaken.  Profitable for the contractor  DISADVANTAGES  The project total cost is completely unknown before the project start.

ADVANTAGES AND DISADVANTAGES OF CONTRACTS

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No incentive for the contractor to be efficient in his use of labors, materials or equipments.  Minimum efficiency maximizes the profit  Larger the cost of the job, the higher the fee the owner pays. o 2. Cost + Fixed Fee  Most common form of negotiated contracts  Utilized on large multi-year job  ADVANTAGES  Fee amount is fixed regardless of price fluctuation  Provide incentive to complete the project quickly  DISADVANTAGES  Expensive materials and construction techniques may be used to expedite construction. o 3. Cost + Fixed Fee + Profit Sharing  Rewards contractors who minimize cost  Percentage of cost under Guaranteed Maximum Price (GMP) is considered profit and shared with the contractor  The contractor is reimbursed at cost with an agreedupon fee up to the GMP, beyond this point the contractor is responsible for covering any additional costs within the original project scope  ADVANTAGES o Provides incentive to the contractor to save money  DISADVANTAGES o Contractor must absorb any amount over the Guaranteed Maximum Price o Plans and specifications need to detailed.

GUARANTEED MAXIMUM PRICE CONTRACT -

The contractor estimates the cost just like in a lump sum bid, but profit is limited to a specified amount. In the event that actual costs are lower than the estimates, the owner keeps the savings. In the even costs are higher, the contractor pays the difference and profit is reduced.

ADVANTAGES

ADVANTAGES AND DISADVANTAGES OF CONTRACTS

1. Greater price certainty for clients as the contractor normally includes a sum for future design development and for risks. 2. GMP promotes pre-agreement of changes as its philosophy links neatly with a contractual requirement to pre-agree the cost and time implications of any potential changes. 3. GMP provides greater control over spending as the contractor is bound to a maximum price. This alerts the team to any potentially expensive items of design development. 4. GMP aligns the contractor with client and consultants encouraging team work with mutual trust and common goals. 5. Less administration is required as changes are limited; there is quick settlement of the final account. 6. The client might pay too much as the contractor takes on greater risk and thus includes in the price an allowance for design development and risk. 7. Contactor’s with design and build experience may have useful knowledge.

Advantages & Disadvantages of Contracts in Companies A "liability" in a company refers to a legal liability --- a situation in which the company might be sued or face other legal action that would require it to pay out money. Companies often attempt to draw up contracts with employees, contractors, consumers or other associates with the purpose of limiting the company's liability. This process has a number of advantages, but it also carries certain drawbacks. I will first enumerate some of the advantages of contracts: Advantage: Reduces Risk

ADVANTAGES AND DISADVANTAGES OF CONTRACTS

The main advantage to the drawing up of contracts to minimize liabilities is that it reduces the risk that the company issuing the contracts will be sued. By making sure that all parties agree on the terms of a particular agreement and making everyone sign a contract attesting to this, this strategy reduces the chance that one party will have grounds for legal action later on. Advantage: Clarity In addition to reducing the risk of lawsuits, contracts can also provide clarity to employees and partners in their mission. Contracts often outline exactly what's expected of each party. In addition to reducing the likelihood that one party will be able to sue the other party later on, these contracts can also help each party remain mindful of exactly what they've been contracted to do, thus reducing confusion and increasing focus. Advantage: Assurance One of the biggest advantages that you get when you use contracts, specifically for your employees, is that you have the ability to hang onto your best employees. You can do this by adding terms into the employment contract that limit the reasons than an employee can use to leave your company. Now, that I have tacked some of the advantages, I will therefore mentioned the disadvantages as follows: Disadvantage: Time and Money Perhaps the main disadvantage to the use of contracts to reduce risk is that drawing up contracts takes both time and money. To construct an airtight contract, a company has to employ the services of a lawyer to draft the contracts, and lawyers are seldom inexpensive. In addition, focusing on contracts draws time away from other activities that could help grow the business. Disadvantage: Litigious Atmosphere Making every person who deals with an organization sign contracts that are designed to reduce the company's risk can create an atmosphere in which everyone has their hackles up. This may not only breed suspicion, but it can actually increase the likelihood of a lawsuit, as people forced to sign these contracts may seek the counsel of a lawyer they wouldn't otherwise approach.

ADVANTAGES AND DISADVANTAGES OF CONTRACTS