Types of Engineering Contracts

12 Types of Engineering Contracts

What Is an Engineering Contract?

A contract is an undertaking or agreement by a person or firm to do any work under certain terms and conditions. The work may be for the construction and maintenance and repairs for the supply of materials, for the supply of labor, for transport of materials, etc.

There are Different Types of Engineering Contracts in civil engineering used for the commencement of work. “Contract is an agreement which can be enforced by law”

In order to make this agreement valid, there must be a definite offer and there must also be equally definite and uncordial acceptance of this offer.

Read More: Tendering Process | Tendering Process Steps In Construction

Types of Engineering Contracts

Types of Contracts
12 Types of Engineering Contracts 4

The contract is important to document when dealing with any work during the tendering process. The types of engineering contracts to choose is depend on the types of work and conditions of the contract.

The following are various types of contracts in civil engineering,

  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 in Construction
  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 a team rate contract, the contractor quotes his rate per unit of each item of the construction. An estimate of the bill of quantities is done accurately. So that quantities of each item of work are 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 upon by both parties. The rate of the contractor for a unit of an item includes materials and 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 contracts are this form of contract. The type of contract in which rates are quoted item-wise is an Item rate contract. An item rate contract is also called a Unit Price Contract.

2. Percentage Rate Contract

In percentage rate contracts, 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 the department fixes the rate of an item it is known as an “Item Rate Contract”.

In the Percentage 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 in 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. Their quotation must be as per the drawing, design, and specifications supplied to them with the tender within the specified time. These types of Engineering Contracts are still popular in many countries.

A schedule of rates is also provided to the contractor, to work out the cost of extra items or omissions. in These types of Engineering Contracts 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.

4. All in Contract / Entire Contract

All in the 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 contract, 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 costs include 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 work and is seldom adopted for normal work.

The works that are most suited to this 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 labor work.

In These Types of Engineering Contracts, the contractors put up their rates for the labor 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 it 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

The Material supply contract offers 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, specials, etc. are involved. There should be supervision on the supply of material as the case may be when delivery is taken.

Read More: Types of Stairs in Civil Engineering

7. Piece Work Agreement In Construction

A piece work agreement in construction 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. Piece work agreement in civil engineering essentially has an agreement and the total cost of the whole work to be done are 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 delay the work leaves the work incomplete or use bad materials.

8. Cost Plus Percentage Rate Contract (Cost Plus Fluctuating Fee Contract)

In this system contractor is paid the actual cost of the work, plus an agreed % also, to allow for profit. The 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.

Cost Plus Fluctuating Fee Contract is selected when conditions are such that labor 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.

Read More: Types Of Cost Estimates In Project Management

9. Cost-plus Fixed fee Contract

In Cost plus fixed fee types of Engineering Contracts, the owner pays the contractor, an agreed fixed lump sum amount over and above the actual cost of the work.

This fixed 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 a cost-plus percentage rate contract.

Advantages Cost-plus Fixed fee 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.

Disadvantages of Cost-plus Fixed fee Contract

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

10. Cost Plus Sliding or Fluctuating Fee Contract

In this type of contract, the owner pays the contractor the actual cost of construction plus an amount of fee inversely variable according to the increase or decrease of the estimated cost agreed by the owner and contractor.

Thus, the higher the actual cost, the lower will be the value of the fee and vice versa.

Advantages of Cost Plus Sliding or Fluctuating Fee Contract

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 in the case of “cost plus fixed fee contract”.

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.

Disadvantages of Cost Plus Sliding or Fluctuating Fee Contract:

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

11. Target Contract

It Types of Engineering Contract in which the contractor is paid on a cost-plus percent basis for work performed under this contract.

In addition, the contractor receives per increase or decrease of rate amount or it affects either a prior agreed total cost or target value is paid by measuring the actual work and billed as per the agreed rate of the item.

Advantages of Target Contract:

The contractor is encouraged to use his skill and experience to keep’ 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.

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 bridge, the contractor constructs the structure and is entitled to collect tolls 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.


In Conclusion, understanding the various types of engineering contracts is crucial for successful project management, the 12 types of engineering contracts discussed- ranging from lump sum and unit price contracts to design-build, PPP Contracts, BOT provide different approaches to project execution, risk allocation, and cost management.

The selection of the appropriate contract depends on factors such as project complexity, client requirements, and the desired level of control, by carefully considering the merits and consideration of each contracts type engineers and project stakeholders can make informed decisions, establish clear expectations, and foster effective collaboration, leading to the successful completion of engineering projects.

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