Construction Contract Terminology

This is the fifth blog post in a six-part series that defines terms commonly used in Engineering, Procurement, and Construction (EPC) project management, construction management, and claims. The first post defined language related to costs, damages, and cost estimating, and the second post addressed construction labor and loss of productivity. The third post covered scheduling and delay, and the fourth post focused on claim types. This fifth post addresses contracts, and the sixth post will cover project and construction management.

Authorized Work – Work that has been defined and is included in the contract value. Also may include work that has been authorized in writing, but for which the contract value has not been determined and agreed on.

Cost Reimbursement Contract – A contract type that provides for payment to the contractor of allowable costs incurred in the performance of the contract, to the extent prescribed in the contract. A variation is a Cost Plus Fee or Fixed Fee Contract, where a fee based on a percent of the costs incurred or a fixed fee is added to the actual costs incurrent to derive the contract price.

Engineering, Procurement, and Construction Contract (EPC Contract) – Under an EPC contract, the contractor is responsible for the design, procurement, and construction of the project.

Engineering, Procurement, and Construction Management Contract (EPCM Contract) – The primary difference between an EPC and an EPCM contract is that under an EPCM contract, the contractor is responsible for supervision/management of construction but does not assume responsibility for the construction itself.

FIDIC – The International Federation of Consulting Engineers (FIDIC) is a Geneva-based international engineering organization responsible for producing a set of standard form contracts designed for international construction projects under this name.

Firm-Fixed-Price Contract (FFPC) – A contract that provides for a price that is normally not subject to any adjustment. FFP contracts are generally used for contracts awarded after formal advertising, or for negotiated contracts when reasonably definite specifications are available, and costs can be estimated with reasonable accuracy to enable the negotiation of a fair price. An FFP contract price may be altered under the provisions of a contract Change clause.

Fixed-Price Contract – A type of contract that generally provides for a firm price but that, under certain appropriate contract clauses (Change clauses, etc.) may provide for an adjustable price, for the supplies or services that are being procured.

Incentive-Type Contract – The incentive-type contract may be of either a fixed-price or cost-reimbursement nature, with a special provision for adjustment of the fixed price or fee. It provides for a target price, target profit or fee, and target cost as a point of departure for various incentives. It also has a maximum price or maximum fee, with price or fee adjustment after contract completion to establish a final price or fee. The final adjustment is based on the contractor’s actual costs, plus a sliding scale of profit or fee that varies inversely with the cost but that in no event shall permit the final price or fee to exceed the maximum price or fee stated in the contract. Incentive-type contracts may include specific incentive goals for schedule, technical performance, etc.

Lump Sum Turnkey (LSTK) Contract – A Lump Sum Turnkey Contract is a fixed price agreement in which a contractor designs, constructs, and manages a project until it is ready to be handed over to the owner and operation can begin immediately. LSTK contracts are suited in cases where the scope of the work is well defined, the work can be quantified, and no Change Orders are anticipated. However, the contract would typically contain a Changes clause for certain events or modifications, and for time extensions under certain circumstances. A comprehensive allocation of risks is appropriate for an LSTK contract.

Statement/Scope of Work – A description of a facility or product to be provided or service to be performed; a statement of requirements.

Time and Materials Contract – A hybrid of a Fixed Price and a Cost Plus contract in which the owner pays the contractor for the cost of labor hours and materials, plus a fee. This type of contract is typically used when the work cannot be clearly defined and the total costs cannot be accurately estimated.

Unit Cost Contract – A type of contract whereby the contractor provides unit costs for performing certain work, such as a cost per cubic yard of concrete installed, cost per foot of two-inch pipe installed, etc. The unit price includes all of the contractor’s direct and indirect costs for performing the work, including profit.

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