Structuring payment to contractors

The basic forms of contract to consider are lump-sum, remeasurable, and reimbursable. In reimbursable contracts, pa5onent is based on the contractor s inputs, essentially independent from any measure of the work output. The inputs may be based on a measure of actual costs (always rather hard to determine in the case of overheads) or on contract rates per category of input, such as per manhour for various skills and per week for construction equipment, with perhaps a separate overhead percentage. Clearly there is not much incentive for efficiency here, although bonus pa5onents based on performance can be offered (with substantial complications). It is difficult to choose the most cost-effective contractor, and to understand what unit of output will correspond to a unit of input and how much effort will be made to complete the work on schedule. This contract basis is therefore normally reserved for small works, where the contractor can be replaced if ineffective, or for when the nature of the project makes it difficult to define sufficiently accurately the work description at the time that the work must be contracted. 

The opposite extreme is the lump-sum contract, when a single price is quoted for the complete job, inevitably with provision for penalties or damages on late completion. Clearly, such a contract basis requires a precise statement of the work description, including all the factors listed above. Such contracts are rare in process plant work, but have their particular application and effectiveness in the case of repeat or modular plants, where the complete design is available before construction is commenced. It becomes possible to do away with all management and engineering costs related to item breakdown, quantity take-off, and detailed work measurement 

The most frequently employed form of contract is based on item prices for erection of equipment, and the structure of unit rates for fabrication and construction of bulk items. This provides flexibility for calculating contract price adjustments to cater for quantity changes, and for a cost breakdown which facilitates price negotiation in the event of other changes. 

We will not enlarge further on the structuring of rates, but will restrict 

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