【正文】 tractor 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 estimated direct job cost. Usually, the percentages of savings or overrun to be shared by the owner and the contractor are predetermined and the project duration is specified in the contract. Bonuses or penalties may be stipulated for different project pletion dates. Guaranteed Maximum Cost ContractWhen the project scope is well defined, an owner may choose to ask the contractor to take all the risks, both in terms of actual project cost and project time. Any work change orders from the owner must be extremely minor if at all, since performance specifications are provided to the owner at the outset of construction. The owner and the contractor agree to a project cost guaranteed by the contractor as maximum. There may be or may not be additional provisions to share any savings if any in the contract. This type of contract is particularly suitable for turnkey operation. Relative Costs of Construction ContractsRegardless of the type of construction contract selected by the owner, the contractor recognizes that the actual construction cost will never be identical to its own estimate because of imperfect information. Furthermore, it is mon for the owner to place work change orders to modify the original scope of work for which the contractor will receive additional payments as stipulated in the contract. The contractor will use different markups mensurate with its market circumstances and with the risks involved in different types of contracts, leading to different contract prices at the time of bidding or negotiation. The type of contract agreed upon may also provide the contractor with greater incentives to try to reduce costs as much as possible. The contractor39。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 actual payment for the project is also affected by the contract and the nature of work change orders. In order to illustrate the relative costs of several types of construction contracts, the pricing mechanisms for such construction contracts are formulated on the same direct job cost plus corresponding markups reflecting the risks. Let us adopt the following notation: E= 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 actual cost for the original scope of work in the contract U = underestimate of the cost of work in the original estimate (with negative value of U denoting an overestimate) C = additional cost of work due to change orders P = actual payment to contractor by the owner F = contractor39。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。s actual cost for the original scope of work is:()For various types of construction contracts, the contractor39。s 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 gross profits are different for various types of construction contracts when the actual cost of the project is assessed upon its pletion. TABLE 81 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 payments based on these provisions as well as the incentive provisions for various types of contracts are given in column 3 of Table 82. The corresponding contractor39。s profits under various contractual arrangements are shown in Table 83. TABLE 82 Owner39。s Actual Payment with Different Contract ProvisionsType of ContractChange Order PaymentOwner39。s Payment1. Lump sum2. Unit price3. Cost plus fixed %4. Cost plus fixed fee5. Cost plus variable %6. Target estimate7. Guaranteed max costC(1 + R + R1)C(1 + R + R2)C(1 + R)CC(1 + R)C0P = B + C(1 + R + R1)P = (1 + R + R2)A +