Types of Engineering Contracts

Types of Engineering Contracts and Their Uses

Types of Engineering Contracts:

Following are the different types of engineering contracts for the execution of civil engineering works.

Types of Contracts

1) Item Rate Contract

2) Percentage Rate Contract

3) Lump – Sum Contract

4) All in Contract / Entire Contract

5) Labour Contract

6) Material Supply Contract

7) Piece Work Agreement

8) Cost-plus Percentage Rate Contract

9) Cost-plus Fix fee Contract

10) Cost-plus Sliding or Fluctuating fee Contract

11) Target Contract

12 BOT Contract


1) Item Rate Contract:

In item rate contract, the contractor quotes his rate per unit of each item of the construction. An estimate of bill of quantities is done accurately. So that quantities of each item of work to be executed and the contractor enters the unit rate against each item of work. The basis of the agreement is thus the unit rate of each item. A little variation in estimated quantities must be agreed by both the parties.

The rate of the contractor for a unit of an item includes materials, labor. Overhead cost and -profit. This contract is more important when the quality of work, but not the exact quantities of the items to be executed, is previously known. Major public work contract are if this form of contract,

This contract is also known as a unit price contract.

2. Percentage Rate Contract:

In this form of the contract, the department draws up the schedule of items according to the description of items sanctioned in the estimate with the quantities, units, rates, and amounts shown therein. When department fix the rate of item it is known as “Item Rate Contract”.

The contractors are required to offer to carry out the work at par with the rates shown in the bill of quantities or percentage above or below the rates indicated the bill of quantities of the tender. The percentage above or below or at tendered by the contractor applies to all the items.

3) Lump-sum Contract:

A lump-sum contract is the oldest form of contract and is still popular in the USA.

 In this form of contract (P.W.D. form 12) contractors are required to quote a fixed sum for the execution of work in all respect. There quotation must be as per drawing, design, and specifications supplied to them with the tender within the specified time.

A schedule of rates is also provided to the contractor, to work out the cost of extra items or omissions. A lump-sum contract is usually an “entire” contract and, as such, no payment can be recovered by the contractor until the whole of the work is completed. In case the contractor abandons the work before completion, he is not entitled to payment for the portion of work already done, however substantial it may be.


Types of Engineering Contracts

4) All in Contract / Entire Contract:

All in contract is considered rate now, but considered first because in it the owner ceases to be the promoter and delegates a large firm or consortium to perform both design and construction. Under this contrsct, the owner specifies his requirements and also the broad and general outline of the proposed work and the contractor has to submit full particulars of detailed investigations. Designs and construction cost including maintaining the work for a limited period.

The two parties agree to the terms and conditions of executing the project through all the above phases. This form of contract is suitable for some exceptional types of works and is seldom adopted for normal works. The works are most suited to this from are industrial facilities where firms are in the market with say patented processing plants.

5. Labour Contract:

Sometimes, the owner is in a position to purchase the required materials himself In such cases, he invites tenders only for the labour work. The contractors put up their rates for the labour per unit execution of each item. It is necessary to state that these rates include:

  • Use of contractor’s plant and equipment
  • All necessary falsework
  • Contractor’s supervision
  • Contractor’s profit

The overall responsibility of the work is of the contractor, and he has to arrange in such a way that the proper rate of progress is maintained for the work. The owner has to see that the necessary materials are brought on-site as and when required.

6. Materials Supply Contract:

In Material supply contract offer their rate of supply for the required quantity of materials, inclusive of all local taxes, carriage and delivery charges to supply the place of construction within the time fixed in the tender.

This type of contract is generally used when the purchase of materials viz. bricks, stone, chips, furniture, pipes, and specials, etc. are involved. There should be supervision on supply of material as the case may be when delivery is taken.


Types of Engineering Contracts

7. Piece Work Agreement:

A piece work agreement is where the only rate is agreed upon without reference to the total quantity of -work or time, and that involves payment of work done at the stipulated rate. In case of any work valued up to Rs. 10,000 each inclusive of the cost of materials may be carried out through contractors by piece work agreement.

The P. W. Agreement contains only the descriptions of different items of works to be done and the rate to be paid for but does not provide the quantities of different items of works to be done and the rate to be paid for but does not provide the quantities of different items to be executed nor the time within which the work is to be completed. Detailed specifications of the different items of work to be done are however included in the P.W. The agreement and the total cost of the whole work to be done is also mentioned.

P.W. Agreements are not contracts in the true sense, there is no penalty clause and no security money, and the department may terminate the work at any time they like but a notice specifying the date of termination should be served to the piece worker. Separate agencies may also be engaged chargeable to the contractor to complete the work if the contractor does not carry out the work satisfactorily to the -specifications or delays the work or leaves the work incomplete or uses bad materials.

8. Cost-plus Percentage Rate Contract:

In this system contractor is paid the actual cost of the work, plus an agreed % also, to allow for profit. Contractor arranges materials and labor at his cost and keeps proper account and he is paid by the department or owner the whole cost together with a certain percentage, say 10% as his profit as agreed upon beforehand, An agreement is prepared with all conditions of contract in advance.

In this case, proper control in the purchase of the materials and labor shall have to be exercised by the department or owner.

This type of contract is selected when conditions are such that labour and materials rates are liable to fluctuate. In adopting this system of tendering no “bill of quantities” or “schedule of rates” has to be framed but the owner or the department should carefully define the actual cost exactly what is permissible in the cost of work.


9. Cost-plus Fixed fee Contract:

In Cost plus fixed fee contract, the owner pay to contractor, an agreed fixed lump sum amount over and above the actual cost of the work. This fix amount shall include overhead charges and profit to the contractor. The fee does not vary with the actual cost of the work as in the case of cost plus percentage rate contract.


  • Since the fixed fee covers the contractor’s profit and overhead charges, the contractor shall naturally try to complete the work speedily to earn his fee as soon as possible.


  • This form of tender is not popular with contractors, even though they cannot losses pan it. The contractor shall try to complete the work as early as possible even by purchasing materials at a higher rate and engaging labour at high charges and thus the owner may lose a reasonable amount.

Types of Engineering Contracts

10. Cost Plus Sliding or fluctuating fee contract:

In this type of contract, the owner pay to contactor the actual cost of construction plus an amount of fee inversely variable according to the increase or decrease of the estimated cost agreed by owner and contractor. Thus, the higher the actual cost, the lower will be the value of fee and vice versa.


In this type of contract, the contractor shall not try to increase the actual cost, as in the case of “cost plus percentage rate” or shall not be indifferent to in the case of “cost plus fixed fee contract” because of interest of a

The contractor is involved with the variation of the actual cost. The actual cost is thus lower and lower so both the owner and the cost will be benefited. This is the best of the cost-plus contract.


The estimated cost must be very accurately determined. In case the estimate is much higher than actual cost due to inefficiency of the estimator a contractor will get more amounts based on saving and vice-versa.

11. Target contract:

In this type of contract the contractor is paid on a cost-plus percent basis of work performed under this contract. In addition contractor receives per increase or decrease of rate amount or it affect either a prior agreed of total cost or a target value is paid by measuring the actual work and billed as per agreed rate of item.


The contractor is encouraged to use his skill and experience in keen’ the cost as low as possible. This type of contract is profitable to both contractors as well as to the owner.

The contractor may show the higher cost of construction and thus he gaits more amount even covering the penalty for excess expenditure.

Types of Engineering Contracts

12. BOT Contract:

In this type of contract, the contractor undertakes to design; finance, cons operate and maintain the works for a concession period in consideration of exercise and/or to enjoy the rights, powers, benefits, privileges, authorities’ ad entitlements including the amount receivable from the collection of charges levied year on the beneficiaries who use the work and in some cases annuity payment eat

For example, in the case of a road or bridges, the contractor constructs the structure and is entitled to collect toll from the road users for the concession period.

The cost of construction of the project is ascertained in the same manner as the lump sum or item rate contract. The tenderer then works out the cost of financing the project and its recovery from the Collection of toll until the cost of construction together with the cost of finance is fully recovered.

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