【正文】 ruction technology. While innovations are often sought to save money and time, unsuccessful innovations may require additional money and time to correct earlier misjudgment. At worse, a failure could have serious consequences. In spite of admonitions and good intentions for better planning before initiating a construction project, most owners want a facility to be in operation as soon as possible once a decision is made to proceed with its construction. Many construction contracts contain provisions of penalties for late pletion beyond a specified deadline。s estimates of these quantities. Depending on the confidence of the contractor on its own estimates and its propensity on risk, a contractor can slightly raise the unit prices on the underestimated tasks while lowering the unit prices on other tasks. If the contractor is correct in its assessment, it can increase its profit substantially since the payment is made on the actual quantities of tasks。s gross profit at the pletion of a project is affected by the type of contract, the accuracy of its original estimate, and the nature of work change orders. The owner39。s gross profit R = basic percentage markup above the original estimate for fixed fee contract Ri = premium percentage markup for contract type i such that the total percentage markup is (R + Ri), . (R + R1) for a lump sum contract, (R + R2) for a unit price contract, and (R + R3) for a guaranteed maximum cost contract N = a factor in the target estimate for sharing the savings in cost as agreed upon by the owner and the contractor, with 0 N 1. At the time of a contract award, the contract price is given by:()The underestimation of the cost of work in the original contract is defined as:()Then, at the pletion of the project, the contractor39。 Original Estimated Contract PricesType of ContractMarkupContract Price1. Lump sum2. Unit price3. Cost plus fixed %4. Cost plus fixed fee5. Cost plus variable %6. Target estimate7. Guaranteed max costM = (R +R1)EM = (R + R2)EM = RA = REM = REM = R (2E A) = REM = RE + N (EA) = REM = (R + R3)EB = (1 + R + R1)EB = (1 + R + R2)EB = (1 + R)EB = (1 + R)EB = (1 + R)EB = (1 + R)EB = (1 + R + R3)EPayments of change orders are also different in contract provisions for different types of contracts. Suppose that payments for change orders agreed upon for various types of contracts are as shown in column 2 of Table 82. The owner39。s Actual Payment with Different Contract ProvisionsType of ContractChange Order PaymentOwner39。s profits under various contractual arrangements are shown in Table 83. TABLE 82s markup and the price for construction agreed to in the contract are shown in Table 81. Note that at the time of contract award, it is assumed that A = E, even though the effects of underestimation on the contractor39。s original estimate of the direct job cost at the time of contract award M = amount of markup by the contractor in the contract B = estimated construction price at the time of signing contract A = contractor39。s profit beyond the markup in the unit prices. Cost Plus Fixed Percentage ContractFor certain types of construction involving new technology or extremely pressing needs, the owner is sometimes forced to assume all risks of cost overruns. The contractor will receive the actual direct job cost plus a fixed percentage, and have little incentive to reduce job cost. Furthermore, if there are pressing needs to plete the project, overtime payments to workers are mon and will further increase the job cost. Unless there are pelling reasons, such as the urgency in the construction of military installations, the owner should not use this type of contract. Cost Plus Fixed Fee ContractUnder this type of contract, the contractor will receive the actual direct job cost plus a fixed fee, and will have some incentive to plete the job quickly since its fee is fixed regardless of the duration of the project. However, the owner still assumes the risks of direct job cost overrun while the contractor may risk the erosion of its profits if the project is dragged on beyond the expected time. Cost Plus Variable Percentage ContractFor this type of contract, the contractor agrees to a penalty if the actual cost exceeds the estimated job cost, or a reward if the actual cost is below the estimated job cost. In return for taking the risk on its own estimate, the contractor is allowed a variable percentage of the direct jobcost for its fee. Furthermore, the project duration is usually specified and the contractor must abide by the deadline for pletion. This type of contract allocates considerable risk for cost overruns to the owner, but also provides incentives to contractors to reduce costs as much as possible. Target Estimate ContractThis is another form of contract which specifies a penalty or reward to a contractor, depending on whether the actual cost is greater than or less than the contractor39。s per hour of steam at 200 pounds pressure. Unfortunately, the finished plant did not meet this performance standard, and the Arkansas Rice Growers Cooperative Association sued Alchemy Industries and its subcontractors for breach of warranty. Damages of almost $ million were awarded to the Association. Types of Construction ContractsWhile construction contracts serve as a means of pricing construction, they also structure the allocation of risk to the various parties involved. The owner has the sole power to decide what type of contract should be used for a specific facility to be constructed and to set forth the terms in a contractual agreement. It is important to understand the risks of the contractors associated with different types of construction contracts. Lump Sum ContractIn a 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