Types of Contracts in Civil Engineering

How do you guarantee the contractor or architect will work according to the specified time? Of course, by using the contract system. There are several types of project contracts that the owner and construction service providers can carry out.

Types of Contracts Based on Payment Methods

In each type of contract, it is necessary to clearly state the time period for completion of the project along with the obligations that the contractor must fulfill in the event of a delay in progress. The following are the types of contracts in construction projects.

Based on the payment method made by the owner, the types of project contracts can be divided into the following:

Unit Price Contract

In a unit price contract, an assessment of the price of each work unit is carried out before the construction process begins. Determination of the amount of the unit price must be able to cover all costs that may occur (such as overhead costs, profits, unexpected costs, and costs to anticipate risks).

Cost Plus Service Contract (Cost Plus Fee Contract)

In the cost plus service contract system, the contractor will receive a number of payments for its expenses plus a number of overhead costs and profits which are generally calculated from the percentage of costs incurred in the work.

Determination of fees or payments for contractors in this type of cost plus service contract can be done in the following ways:

Fixed amount (cost plus fixed fee)

Payment to contractors in the form of actual costs incurred by the contractor plus general costs (overhead cost)) and a number of fixed benefits (fixed fee). Such a contract is used for work so impromptu that it is not possible to prepare a plan drawing.

Percentage of costs (cost plus percentage)

The contractor will receive a reimbursement or replacement cost for all actual costs incurred in addition to a compensation based on the percentage of real costs as agreed with the project owner. This type of contract is also used for urgent work where it is not possible to prepare a drawing plan, but there is a possibility that the contractor will slow down the speed of his work so that the compensation received will be more.

Maximum cost guarantee (cost plus fee with maximum guaranteed price)

The contractor will be given back all costs that have been incurred, plus compensation, the amount of which is calculated from a mutually agreed percentage and is limited to a certain maximum amount.

Lump Sum Contract

This type of contract is used when the contractor will build a project according to a design that is set at a certain cost benchmark (budget). If there is a change that causes a change in costs, negotiations must be held between the owner and the contractor to determine the payment to be given to the contractor.
This type of contract must wait for the planning and calculation of the RAB to be completed so it can take more time. But everything has been planned so that the cost of the work is more measurable.

Guaranteed Maximum Price Contract (GMP)

In this contract system, the relationship between the project owner and the contractor is bound by a certain maximum price to complete the entire scope of work required by the project owner.

Types of Contracts Based on the Aspect of Task Distribution

Judging by the aspect of division of labor, the types of project contracts are divided into the following:

Design and Build Contracts

The owner only determines the requirements referred to in the TOR / TOR to the main contractor for later development and detailing. The contractor can appoint a more skilled planning consultant, but the full responsibility remains with the contractor. This contract system can reduce the risk of price calculation errors because the contractor’s involvement in the planning process is strong enough.

Turnkey Contract (Contractor’s Full Pre Financing Contract)

The contractor in this case is responsible for financing all costs needed to complete the project. Payment to contractors will be made after the building is delivered and ready for owner operation. As a guarantee of payment, the contractor receives a bank guarantee letter equal to the cost of construction. The bank guarantee letter can be disbursed directly by the contractor if the owner fails to pay at the agreed time while all of the contractor’s obligations have been fulfilled.

Engineering Procurement and Construction Contract (EPC)

A contract system that covers the scope of responsibility for engineering, procurement, construction and commissioning to produce a production-capable system, for example in a factory construction project.

Contract Definition

The definition of a contract is:

  • PMBOK: Documents that bind buyers and sellers legally. A contract is an agreement that binds the seller and provider of services, goods, and a result, and binds the buyer to provide money or other valuable considerations.
  • FIDIC 2006 Edition: Contract means the Contract Agreement ( Contract Agreement ), Letter of Appointment ( Letter of Acceptance ), Letter of Offer ( Letter of Tender ), conditions ( Conditions ), Specifications ( Spesifications ), pictures ( Drawings ), Table / List ( Schedules ), and other documents (if any) listed in the contract agreement or in the Letter of Appointment.
  • The Law of the Republic of Indonesia Number 18 of 1999 concerning construction services explains that a construction work contract is an entire document that regulates the legal relationship between service users and service providers in the implementation of construction work.
  • A construction work contract is also a business contract, which is an agreement in written form in which the substance agreed by the parties involved in it contains business-related actions. Meanwhile, what is meant by business is an action that has a commercial aspect. Thus a construction work contract which is also a business contract is a written agreement between two or more parties that has commercial value (Hikmahanto Juwana, 2001).

Contract documents that need attention include the Condition of Contract document, because in this document all the provisions which constitute the rules of the game agreed upon by the two parties making the agreement.

Terms, Aspects, and Contract Principles

In general, a construction work contract is a conditional contract which includes:

  1. The validity requirement is a condition for the validity of one engagement
  2. The time requirement is a condition that limits the validity of the contract. This is related to the nature of the project which has a time limit in its work.
  3. Requirements for completeness , are conditions that must be completed by one or both parties as a prerequisite for the entry into force of the conditional engagement. The completeness referred to in the construction work contract, including the completeness of the design, the completeness of the description and the completeness of the guarantee.

Contract aspects are technical, financial and taxation, as well as legal aspects. Technical aspects include:

  1. General terms of contract ( General Conditions of Contract )
  2. Appendices ( Appendix )
  3. Special Conditions of Contract ( Special Conditions of contract / Conditions of Contract – Particular )
  4. Technical Specifications ( Technical Specification )
  5. The pictures of Contract ( Contract Drawing )

Financial / Banking Aspects consist of:

  1. Contract value ( Contract Amount ) / wholesale price
  2. Payment Method ( Method of Payment )
  3. Guarantee ( Bonds )

Aspects related to Taxation are:

  1. Value Added Tax (VAT)
  2. Income Tax (PPh)

Aspects of Insurance, Socio-Economy and Administration include:

  1. CAR and TPL
  2. ASKES
  3. Requirement of using local labor, location of material acquisition and environmental impact.
  4. The administrative side includes information about the parties, financial reports, correspondence and working relations between the parties.

According to the Civil Code, the three principles of contract law in effect in Indonesia are the principle of freedom of contract, the principle of binding as law and the principle of consensuality . The principle of freedom of contract is the freedom to make a contract as long as it does not violate law, order and morality. Includes five kinds of freedom, namely:

  1. Freedom of the parties to close or not to close the contract
  2. Freedom to determine with whom the parties will close the contract
  3. Freedom of the parties to determine the form of the contract
  4. Freedom of the parties to determine the contents of the contract
  5. Freedom of the parties to determine how the contract is closed

The principle of binding as law is expressly stated in article 1338 of the Civil Code. The article states that all contracts made legally will be binding as law for the parties to the contract. The principle of consensuality implied in Article 1320 of the Civil Code means that a contract has occurred and therefore binds the parties to the contract since an agreement has been made on the main elements of the contract.

Law of the Republic of Indonesia Number 18 of 1999 Article 2 which explains the principles of contracts used as the basis for the operation of construction services, namely:

  1. Fair, namely protecting the interests of each party fairly and not protecting one party excessively so as to harm the other party.
  2. Balanced , namely the sharing of risk between service users and service providers must be balanced.
  3. Equal , namely the rights and obligations of service users and service providers must be equal

Construction contracts, regardless of form and type, must comply with existing regulations. This means that the contract must not violate the contract principles contained in the laws or regulations of the country where the construction project is carried out. An illustration of the existence of a contract legally is shown in the following figure:

Generally, construction contracts in this country are not in accordance with existing regulations. Especially for private projects. The private sector wants to transfer all risks to the contractor. In fact, this will backfire for the private sector.