Estimating in Building Construction

12 CHAPTER TWO

FIGURE 2.1.Lump-Sum Agreement.

FIGURE 2.2.Typical Quantity Survey.

that pertain to his or her client’s welfare. All contractors
should employ the services of an attorney who understands
the nuances of the construction industry and property law.
Types of agreements generally used are as follows:

1. Lump-sum agreement (stipulated sum, fixed price)


2. Unit-price agreement


3. Cost-plus-fee agreements

Lump-Sum Agreement (Stipulated Sum,

Fixed Price)

In a lump-sum agreement, the contractor agrees to construct
the project in accordance with the contract documents, for a
set price arrived at through competitive bidding or negotia-
tion. The contractor agrees that the work will be satisfacto-
rily completed regardless of the difficulties encountered.
This type of agreement (Figure 2.1) provides the owner
advance knowledge of construction costs and requires the
contractor to accept the bulk of the risk associated with the
project. The accounting process is simple, and it creates cen-
tralization of responsibility in single contract projects. It is
also flexible with regard to alternates and changes required
on the project. However, the cost of these changes may be
high. When the owner issues a change order, the contractor
is entitled to additional monies for the actual work and for
additional overhead, as well as additional time. If the origi-
nal work is already in place, then the cost of the change order
includes not only the cost of the new work but also the cost
of removing the work that has already been completed. The
later in the project that change orders are issued the greater
their cost. Therefore, changes need to be identified as early as
possible to minimize their impact on the construction cost
and completion date. Seeking input from the contractor on
the constructability of the project, adequacy of the drawings,
and any recommended changes during the design process
helps reduce the number of change orders. Contractors
should help their clients understand that changes in the
design during the construction phase are more expensive
and increase the construction time more than if they were
made during the design process. In addition, the contractor
should not begin work on any change orders prior to receiv-
ing written authorization from the owner.

The major disadvantages to the contractor of lump-sum

agreements are that the majority of the risk is placed upon

the general contractor and they have to guarantee a price

even though all of the costs are estimated.

Because of the very nature and risks associated with the

lump-sum price, it is important that the contractor be able

to accurately understand the scope of the project work

required at the time of bidding.

Unit-Price Agreement

In a unit-price agreement,the contractor bases the bid on

estimated quantities of work and on the completion of

the work in accordance with the contract documents. The

owner of the contracting agency typically provides the

quantity takeoff. This type of contracting is most preva-

lent in road construction. Because of the many variables

associated with earthwork, the main component of road

projects, it is virtually impossible to develop exact quanti-

ties. The owner, therefore, provides the estimated quanti-

ties, and the contractors are in competition over their

ability to complete the work rather than their quantity

estimating ability. Figure 2.2 is an example of unit price

quantities.

Bidders will base their bids on the quantities provided or

will use their estimate of the quantities to determine their

unit price bids. If contractors have insight into the quantities,

they can use that information to their competitive advantage.

The contractor’s overhead is either directly or indirectly

applied to each of the unit price items. If the contractor

believes that the stated quantities are low, the overhead can be

spread over a greater quantity rather than the quantity pro-

vided by the owner. This allows the contractor to submit a

lower bid while making the same or more profit. In govern-

ment agency projects, the low bidder will be determined

based on the owner-provided quantities. In Figure 2.3, the

illustration shows the unit price bid tabulation for a portion

of the project.

Payments are made based on the price that the contrac-

tor bids for each unit of work and field measurements of the

work actually completed. A field crew that represents the

owner must make the verification of the in-place units,

meaning that neither the owner nor the contractor will