Although a contract maybe written or oral, the former is overwhelmingly more popular due to its comparative permanence strength and verifiability.
Relationships in any project are defined by a series of contacts between the owner, the consultants, contractors, sub-contractors and vendors. There are other legally binding documents that may take the form of MoUs (Memorandum of Understanding), agreements or LoIs (Letter of Intent), used between the owners and others contributing through goods or services during and after the project.
In a civil engineering and construction scenario, a contract between the client and any contractor implies stage-wise payment against a defined series of chronologically spaced deliverables from the client where the process as well as the product meets contractually defined standards.
Each of these contract sub-types have different advantages and have a different degree of risk exposure to the client and the contractor. It is in the interest of the project for the correct type of contract to be formulized in order to avoid the 3 reasons for failure of contract discharge.
We shall discuss below each type of contract, the problems faced during the execution of such a contract and methods by which these problems can be dealt with so as to minimize friction during project execution.
Lumpsum / Fixed price Contract
It is an agreement creating an obligation on the contractor to complete works as shown and specified by drawings and documents, subject to incidental and pre-mapped variations, supplying of all labour, materials and equipment so as to complete the contracted for work for a fixed amount subject to adjustments and payable by the owner as a reciprocal obligation either as a single payment or as a series of payments triggered by intermediate goals during the project.
Indivisibility: A fixed price contract is inherently designed to be an indivisible entity. It is this characteristic that is its strength and its weakness. The client reduces his overall liability and achieves a lower risk at the macro level by defining the scope of work and the amount to be paid for it (with an acceptable contingency percentage) at the onset. The contractor is able to give better prices to the client as he has a clear and defined mandate and has also the most freedom of any contract type to micro-manage the project to achieve his goals and meet targets. Having said that, the client invariably looses at the micro-level as contractors tend to cut corners to reduce cost and adherence to specifications to compromised unless a strong oversight entity is in place