A construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use.

It also includes agreements of real estate development to provide services together with construction material in order to perform contractual obligation to deliver the real estate to the buyer.

construction contracts include:

(a)    contracts for the rendering of services which are directly related to the construction of the asset, for example, those for the services of project managers and architects; and

(b)    contracts for the destruction or restoration of assets, and the restoration of the environment following the demolition of assets.

Classification

Construction contracts are classified as fixed price contracts and cost plus contracts.

(a) A fixed price contract is a construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per unit of output, which in some cases is subject to cost escalation clauses.

(b)A cost plus contract is a construction contract in which the contractor is reimbursed for allowable or otherwise defined costs, plus a percentage of these costs or a fixed fee.

Combining and segmenting construction contracts

When a contract covers a number of assets, the construction of each asset shall be treated as a separate construction contract when:

(a)    separate proposals have been submitted for each asset;

(b)    each asset has been subject to separate negotiation and the contractor and customer have been able to accept or reject that part of the contract relating to each asset; and

(c)     the costs and revenues of each asset can be identified.

A group of contracts, whether with a single customer or with several customers, shall be treated as a single construction contract when:

(a)    the group of contracts is negotiated as a single package;

(b)    the contracts are so closely interrelated that they are, in effect, part of a single project with an overall profit margin; and

(c)     the contracts are performed concurrently or in a continuous sequence.

A contract may provide for the construction of an additional asset at the option of the customer or may be amended to include the construction of an additional asset.

The construction of the additional asset shall be treated as a separate construction contract when:

(a)    the asset differs significantly in design, technology or function from the asset or assets covered by the original contract; or

(b)    the price of the asset is negotiated without regard to the original contract price.

 

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