Merits & Demerits of Items Rate Contract & EPC/ Design-Build/ Turnkey Contract

General Introduction

Architecture, Engineering & Construction is a vast field and so are their projects. Construction projects are said to be much more complex due to some factors such as time, cost, resources and activities involved in the projects. So, to eliminate some level of complexities and to streamline the process, every construction & engineering project requires some sort of legal binding. That legal binding between the stakeholders or two parties in a construction project is better known as a construction contract.

 

This blog will introduce you to the term “construction contract” and would help you know the merits & demerits of Item Rate Contract and EPC/Design-build/Turnkey contract in detail.

 

What is a “Construction Contract”?

A construction contract is a document that legally binds two parties into a set of rules that are to be followed from the beginning of the engineering & construction project. A contract involves several parties including the owner, the client, contractors, sub-contractors and the firms providing service to the owner. The construction contract, however, outlines the majority of the terms & conditions of the construction project from top to toe.

 

A contract document includes details such as: –

• The scope of work
• A schedule of construction
• Terms & Conditions and the schedule of payment
• Specifications of construction activities involved
• The quality of work required by the owner
• Special requirements, if any, from the owner or the parties involved in the project
• Further, in this blog, we will be learning the merits & demerits of Item Rate Contract and EPC/Design-build/Turnkey contract.

 

Items Rate Contract

 An items rate contract is often used in civil engineering and construction projects. The commonly-implemented form of construction contracts states that the payment will be made based on the quantity of items used or delivered, where the unit rate of each item of work is pre-defined.

 

Advantages of an Item Rate Contract:

1. Cost Control: Since the price of each item is predetermined, an item rate contract helps to control costs and provides greater cost certainty for both parties involved in the contract.
2. Transparency: An item rate contract provides transparency in terms of the pricing of each item, allowing the client to know exactly what they are paying for and ensuring that there are no hidden costs.
3. Flexibility: An item rate contract provides flexibility in terms of the quantity of items required. This allows the client to adjust the quantity of items needed as per their requirements.
4. Fairness: An item rate contract is considered fair as it provides a level playing field for both parties, ensuring that neither the client nor the contractor is at a disadvantage.

 

Disadvantages of an Item Rate Contract:

1. Inaccurate Estimates: If the estimated quantity of items required is inaccurate, it may result in significant cost overruns or underutilization of resources.
2. Disputes: Disputes may arise if there are any discrepancies between the actual quantity of items used and the quantity estimated in the contract.
3. Limited Scope: An item rate contract may not be suitable for projects where the scope of work is not clearly defined or where the quantity of items required is difficult to estimate.
4. Risk of Quality Compromise: There is a risk that the contractor may compromise on the quality of the items used in order to keep costs low, especially if the contract is awarded based on the lowest bidder.

 

EPC/Design-build/Turnkey Contract

 

A turnkey contract, also known as an EPC (Engineering, Procurement & Construction) or a Design-build contract, is a type of construction contract where a contractor agrees to complete a construction project and deliver a fully operational facility to the client, with the agreed quality of work. In an Engineering, Procurement & Construction contract, the contractor takes the top to toe responsibility for the entire project, from design and planning to construction, management and handover of the project. Here are some advantages and disadvantages of the design-build contracts in construction:

 

Advantages of a Turnkey Contract:

1. Single Point of Contact: In turnkey contracts, the contractor acts as a single point of contact for the client. The client can rely on the contractor to manage the entire project, eliminating the need for multiple contractors and subcontractors.
2. Reduced Risk: Since the contractor takes responsibility for the entire project, they are responsible for any issues that arise. This reduces the client’s risk, as they are not responsible for project management or dealing with multiple contractors.
3. Faster Completion: Turnkey contracts can be completed faster than traditional contracts because the contractor is responsible for all aspects of the project. This results in fewer delays and less downtime for the client.
4. Cost Certainty: Turnkey contracts provide cost certainty, as the contractor is responsible for delivering the project within the agreed-upon budget. This reduces the likelihood of cost overruns and unexpected expenses.

 

Disadvantages of a Turnkey Contract:

1. Limited Client Control: In turnkey contracts, the contractor has complete control over the project. This can limit the client’s ability to make changes or adjustments to the project during construction.
2. Limited Flexibility: Turnkey contracts are less flexible than traditional contracts, as the contractor is responsible for delivering the project according to their own specifications.
3. Higher Cost: Turnkey contracts can be more expensive than traditional contracts, as the contractor assumes more risk and responsibility.
4. Quality Control: The client has limited control over the quality of the work performed by the contractor. This can lead to quality issues if the contractor does not perform the work to the client’s satisfaction.

 

Overall, turnkey contracts can be a good option for clients who want a single point of contact and reduced risk, but they may not be suitable for all construction projects. Clients should carefully consider the advantages and disadvantages of turnkey contracts before deciding whether to use this type of contract.