Project Contract

Contract is an agreement between two or more parties, to exchange providing a specific work (Scope of Work) with agreed compensations (mainly cost and/or any others specified in the contract) with terms and conditions. The Contract terms and conditions including both parties' obligation, liability, payment, and other terms and conditions are legally binded. The Contract dispute settlement process and change management work process is a part of contract. In addition to a signed document, resulting from acceptance of offers by award notices, letters of intent (LOI), and other orders such as POs are one of the contracts.

Contract Management is the process of managing legally binding agreements from the initial stages of deciding on the services needed, choosing of a provider of services, negotiation, and monitoring of the service until the contract ends that is the systematically and efficiently managing contract creation, execution, and analysis for the purpose of maximising financial and operational performance and minimising risk. The Contract Management is the management of contracts made with goods and services suppliers, partners, or employees, etc., that includes negotiating the terms and conditions in contracts and ensuring compliance, as well as documenting and agreeing on any changes or amendments that may arise during its implementation or execution.

Agreement is 1) a position or result of the same opinion or accept something; 2) an explicit or implicit arrangement between organisations to their mutual benefit that is a negotiated terms and conditions of contract, usually covers deeds. The Agreement is usually legally binded, and often formal and written documents.

Contractor is a person or company that arranges to supply materials or works including services in accordance with a contract, such as vendor, supplier, manufacturer, fabricator, construction contractor or subcontractor, professional consulting services, etc.

Main Contractor is a total responsible contractor for the completion of the project under the contract terms and conditions. The Main Contractor can utilise and manage subcontractors or hire people for specific parts of the work to complete the work. (Refer to the Prime Contractor)

Managing Contractor is the owner's representative in overseeing the project work efforts who acts as an owner to administrate and oversee a complete project. The Managing Contractor is responsible for the overall project management by managing several contractors or subcontractors who carry out different parts of the work. (e.g., recommend and select contractors; coordinate and supervise all aspects of the design and construction work; staffing requirements necessary to operate the facility, etc.) (Refer to the Main Contractor; Prime Contractor)

Prime Contractor is an ultimate and total responsible contractor for the completion of the works or a project under the contract terms and conditions. The Prime Contractor can utilise the contractor, subcontractor, or hire people for specific parts of the work and manage them.

Subcontractor is a company or individual being contracted by a main contractor to perform work or carry out or deliver services, labour, or materials as a part under the main contractor management. The Subcontract is an agreement or arrangement with the main contractor in which any person of the subcontractor do not stand in the relationship of a company employer and employee.

Contractor Management is a systematic management work process of controls the project contractors to ensure of the contracted services which is the outsourced work performed by the individual company (Contractor). The Contract Management includes the contractor selection, controls and monitoring of contracted services, and close-out and appraisal of their products and services.

Contract Scope of Work (SOW) is a foundation of the contract and project baseline. The Contract SOW document is initiated by owner included in the ITB (Invitation to Bid), and developed and proposed by contractor, and finalised after clarification and negotiation meeting between owner and contractor, and included in the contract document. The project execution members including a project manager should review the project Contract Scope of Work (SOW) document and agree them with internal and external organisation before the contract is signed.

Contract Types are several methods between contract parties, owner and contractor, depending on the project environments and project approaches. There are two main types of contract: a fixed price and a reimbursement, and can be divided into:

Fixed Price (Lump Sum) Contract,
Cost plus (Reimbursable) Fee Contract,
Incentive Contract,
Unit Price Contract.

Fixed Price Contract is a type of contracts in which the contracted amount (Contract Price) is not changed for the entire project life cycle where the contract amount (fixed cost) does not depend on resources used or time expended. (Also, called as the Lump Sum Contract)

Lump Sum Contract (known as a Fixed Price Contract) is a contract with a single lump sum price for all of the works, and the contractor is responsible for completing the project within the agreed fixed cost set forth in the contract. If the contractor completes the project under the fixed total cost, then the contractor makes additional profits from the project. The Lump Sum Contract is normally used in the construction industry to reduce the contract administration costs. The Lump Sum Contract is the most recognised agreement form on simple and small projects, and generally appropriate where the project is already well defined in scopes and responsibilities of both parties, and changes are unlikely therefore the owner must have sufficiently detailed and complete drawings and specifications, and construction documents at the time of the bid to allow the bidders to properly estimate the cost of labour and materials. The Lump Sum Contract can include incentives or benefits for early completion, or can also have penalties, called liquidated damages, for a late completion.

Lump Sum Contract is also often ideal when an owner has very tight budget constraints or lack of experiences in the construction industry. A Lump Sum Contract requires that a contractor agrees to provide specified services or works for an agreed fixed amount or price. In the Lump Sum Contract, the owner has essentially assigned all the risk to the contractor, who in turn can be expected to ask for a higher markup in order to take care of unforeseen contingencies. A Contractor being contracted under a Lump Sum agreement will be responsible for the proper job execution and will provide its own means and methods to complete the work. The Lump Sum contract usually is developed by estimating labour costs, material costs, and adding a specific amount that will cover contractor’s overhead and profit margin. The amount of overhead calculated under a lump sum contract will vary from contractors, but it will be based on their risk assessment study and labour expertise.

Lump Sum Turnkey (LSTK) is a combination of Lump Sum (LS) contract and Turnkey (TK) contract. A Lump Sum Contract is a type of the contracts under which an owner agrees to pay a specified contracted amount for completing work to a contractor, and the contractor is responsible for completing the project under the contractor’s financial risk. A Turnkey (TK) specifies contractor's scope of work including start-up activities of a project and achievements of the normal operation status under the contractor’s responsibility.

Progressive LSTK (Lump Sum Turn Key) Contract is a type of the contracts that splits into phases where an agreed fixed price (lump sum) for a limited scope of work or reimbursable basis at the start of the project or each phase, and convert to lump sum fixed price after the project is fully developed. The Progressive LSTK (Lump Sum Turn Key) Contract can be applied in a very large project or urgent project to reduce the overall project especially, contract parties' financial risks at the start of the project, and this increases flexibility to owner to incorporate requirements into the project until the project is fully developed.

Turnkey Contract is an agreement in which a contractor is given full responsibility to plan, design and build for all project services and work that is ready for use when delivered to the other contracting party. The Turnkey Contract is typically a construction industry under which a contractor builds a fully equipped and operational facilities and hand over the project in the operational state. 

Reimbursable Contract is a type of the contracts in which a contractor is reimbursed reasonable and allowable actual costs incurred by a contractor plus additional profits in accordance with the contract terms and conditions. (Called as the Cost plus Fee Contract)

Cost plus Fee Contract is a contract where a contractor is reimbursed by the owner for the actual cost of performing works plus additional payment to allow for contractor's overhead and profit in accordance with the contract. The owner and contractor agree and specify what is considered the cost item, and reimbursable expenses to the contractor, and contractor's fee that the contractor will retain for profit and overhead. The Cost plus Fee Contract is an adequate for the experienced owner in the construction industry, or for an owner who cannot initially define or sufficiently detail the scope of the work, and labour, material and equipment needed are also uncertain. Under this contract terms and conditions, complete records of all time and materials spent by the contractor on the work must be maintained. (Called as a Reimbursable Contract)

Type of Cost plus Fee Contract can be defined as: Cost plus Fixed Fee (CPFF); Cost plus Incentive Fee (CPIF); Cost plus Award Fee (CPAF); Cost plus Percentage of Cost; Cost Plus with Guaranteed Maximum Price (GMP); Cost Plus with Guaranteed Maximum Price and Incentive; and Cost plus Fixed Fee with agreement for sharing any cost savings contract.

Cost plus Award Fee (CPAF) Contract is one of the Reimbursable Contract types by which an owner is to pay a fee based on the contractor's work performance. In some contracts, the fee is determined subjectively by an awards fee based upon objective performance metrics. (e.g., An aircraft development contract, a contractor may be paid award fees if the contractor achieves certain speed, range, or payload capacity goals.)

Cost plus Fixed Fee (CPFF) Contract is one of the Reimbursable Contract types by which an owner is to compensate to contractor a fixed amount of fee for contractor’s overhead and profit that is agreed upon at the time of contract formation. The owner agrees to reimburse the contractor's actual costs, regardless of amount, and in addition to pay a negotiated fee for contractor’s overhead and profit.

Cost plus Fixed Fee (CPFF) with sharing Savings Contract is one of the Reimbursable Contract types by which an owner is to compensate a project cost and an agreed fixed fee plus any cost savings sharing with the owner and the contractor.

Cost plus Incentive Fee (CPIF) Contract is one of the Reimbursable Contract types by which an owner is to pay an incentive to contractor if the project is successfully completed, meet or exceed performance targets: under budget; ahead of schedule; excellent in safety record, etc., and can be included any cost savings rather than compensate fixed fee for contractor’s overhead and profit.

Cost plus Percentage of Cost Contract is one of the Reimbursable Contract types by which owner is to compensate a fee based on a percentage of the cost. Also, there is a Cost plus Percentage of the Construction Cost Contract.

Cost Plus with Guaranteed Maximum Price (GMP) Contract is one of the Reimbursable Contract types, while the traditional cost-plus agreement does not have a fixed budget, an owner and contractor often agree to cap the price once the project design and engineering is substantially complete. Under a GMP Agreement, a contractor is responsible for the difference of the exceeding capped amount, and if the total cost of the project is below the capped cost, the owner and contractor often agree to a shared saving benefit.

Cost Plus with Guaranteed Maximum Price (GMP) and Incentive Contract is one of the Reimbursable Contract types by which a contractor is compensated based on a fixed cost of money. The total project cost will not exceed an agreed upper limit and a bonus or incentive is given if the project is finished below budget, ahead of schedule, etc.

Guaranteed Maximum (G-Max) Price Contract is a type of the Reimbursable Contracts by which a contractor is compensated an agreed maximum or not to exceed price basis for the specified work is successfully performed.

Bonus-Penalty Contract is a provision in the contract for payment of a bonus to the contractor for completing the work (e.g., early completion in a fixed lump sum contract; incentive or sharing savings cost in a reimbursable contract), or a penalty charge (e.g., liquidated damages). Effort Differences between Bonus and Penalty Contract: Contractor/ Employee/ Worker prefers a Bonus Contract, but a Penalty Contract lead to higher productivity than performance-based bonus contract.

Incentive Contract is one of the contract types that is an owner to make an additional compensation to a contractor based on the contractor's execution performance of cost, schedule, quality, and safety according to the contract terms and conditions. There are two possible incentive contracts, fixed price incentive contracts, and cost reimbursement incentive contracts. Fixed price incentive contracts are preferred when contract costs and performance requirements are reasonably certain.

Multiplier Contract is a type of the Reimbursable Contracts that applies an agreed percentage to base labour rates to cover Contractor's overhead and profit, payroll burdens, benefits, and other non-reimbursable cost.

Not to Exceed (NTE) Contract is a type of contract that is allowed a contractor issue bills to an owner, or spend up to the portion of estimated price for specific work scope. The contractor’s commitments and expenditures for this work scope are limited to this value. This type of contract or agreement can be used before reaching a final agreement on contract terms and conditions.

Unit Price Contract is a type of contract based on estimated quantities of items and unit prices (rates: hourly rates, rate per unit work volume, etc.). In general, the contractor’s overhead and profit are included in the rate. The final price of the project is depending on the total quantities needed to carry out and complete the work. The Unit Price Contract is only suitable for well-known resources involved project but unknown quantities at the time of the contract which will be defined when the design and engineering or construction work is completed.

Balancing Agreement is a contract among parties of the production of a gas well used to define procedures for the capacities in pipelines or productions from gas fields. The Balancing Agreement agrees to specify the gas custody transfer procedures for confirmation of scheduled quantities for balancing discrepancies between the nominated levels of produced gas quantities and the actual serviced quantities at delivery or receipt points.

Browsewrap Agreement is a term used in Internet law to refer to a contract or license agreement that describes the situation where the terms of use (TOU) or terms of service (TOS) of the use of a website can be viewed on a linked page but the user of the website is not required to click a button to acknowledge.

Collective Agreement is used for an agreement made between employee and employer, and they are governed by employment law, not contract law.

Dedication Contract is 1) an exclusive supply contract; 2) the commitment in performing entire duties to give enough time and resources to a task. In gas industry, the Dedication Contract is an agreement about the entire production from a gas field.

Depletion Contract is usually for smaller amounts of gas or oil sales contract in which the sale volumes are essentially governed by the performance of a gas field. (Opposite of the Supply Contract)

Double Taxation Treaty (or Agreement) is the reciprocal arrangement between two countries that specifies which country has taxing rights over an individual, if they both have such rights, which one takes priority. The Agreement may set down different rules for different types of income, also agree to exempt some income or gains from tax or allow a set-off of tax paid in one country against tax due in the other.

End-User License Agreement (EULA) is a legal contract between the licensor (manufacturer and/or the author) and the purchaser (end user) of an application. The EULA specifies in detail the rights and restrictions which apply to the use of the software including sharing the software with anyone else.

Employment Contract

EP (Engineering and Procurement) Project is a service agreement to perform the services necessary for both the engineering including preparation and development of plans, drawings, and specifications, and limited procurement services.

EPC (Engineering, Procurement and Construction) Project is one of the typical contract types of the oil and gas business sector that defines contractor's scope of work (EPC). A Contractor provides the works for Engineering, Procurement and Construction up to a Mechanical Completion (MC) of the plant, and hand-over to the Owner for a start-up and operation.

EPCI (Engineering, Procurement, Construction, and Installation) Project is one of the typical contract types of the oil and gas business sector that covers Engineering, Procurement, Construction, and Installation scope of works to be provided by a contractor.

EPCM (Engineering, Procurement and Construction Management) Project is one of the typical contract types of the oil and gas business sector defining the contractor's scope of work. The Contractor provides the overall project management, engineering services of the preparation of plans, drawings and specifications, and provides procurement with equipment and bulk material supply (necessary of all or part of the material requirements), and provides the construction management only. The Construction activity will be performed by construction subcontractors under the contractor's management.

Project Management Consultant (PMC) is a professional organisation of the project management who provides services on behalf of the owner in the large complex multi-unit projects or series of projects, and assists the owner in minimising costs, maximising return on investment and timely completion of the project or program. A PMC brings a set of systems, procedures, and methodologies for the owner consideration, and is responsible for overall planning and execution of the total project or program from definition through to start-up. A PMC coordinates the interfaces between the different EPC Contractors during all phases of the project or program.

Acceptance is a formal permitting action by a person or organisation to declare that the project or activity meets defined requirements to proceed subsequent activities. The Acceptance is an unconditional agreement to the offer or proposal.

Act of God is a very bad situation and cannot be prevented or ​controlled that is a contractual term used to denote an ​event such as an earthquake, flood, hurricane, lightning, snowstorm, etc. The Acts of God is insurable accidents and valid excuses for non-performance of a contract. (Refer to the Force Majeure)

Addendum is a written document attached or added to clarify, modify, or support the information in the original document or written contract document.

Advance Payment Bond (AP Bond) is issued to cover either the simple making of an advanced payment or to guarantee the proper use of the funds advanced that manages the risk of a contractor’s failure to earn the whole of any advance payment from the owner by failing to provide goods and services to an equivalent value. An AP Bond is supplied by the contractor receiving an advance payment to the owner to guarantee the proper use of the advance payment. (Also, called as the Advance Payment Guarantee)

Agency is a business relation that represents one ​group of ​people who has significant relations and is authorised to perform or transact certain business for the other.

All Rights Reserved is a copyright formality notifying the world that copyright exists in provided contents and the contents can not be reproduced, downloaded, disseminated, published, or transferred in any form or by any means, except with the prior written permission. In copyright law, by default all rights are reserved; nothing may be done with a copyrighted work without explicit permission which is originated in the Buenos Aires Convention of 1910, however, it is still used by many copyright holders.

Allegation is a claim statement or assertion without giving evidence that is the act of alleging something illegal or wrong.

Alternative Dispute Resolution (ADR)

International Centre for Settlement of Investment Disputes (ICSID) is the world’s leading institution devoted to international investment dispute settlement. It has extensive experience in this field, having administered the majority of all international investment cases. States have agreed on ICSID as a forum for investor-State dispute settlement in most international investment treaties and in numerous investment laws and contracts. (https://icsid.worldbank.org)