Types of construction contracts

Construction contract is a civil contract negotiated in writing between the employer and contractor for execution of a part or whole of the construction investment activity.

In the construction industry, there are many types of contracts, which one to use often depends on the type of project and the method of disbursement. However, basically, types of construction contracts are classified according to 3 criteria: nature and content of work; contractual price manner; and the relationship between the contracting parties.

1. Nature and content of work

According to this criterion, construction contract are divided into 9 categories as follows:

(i) Construction consultant contract (or contract for consultancy) is a type of contract for performance of part or whole of the consulting task in activities of investment and construction;

(ii) Work construction contract (or construction contract) is a type of contract for the performance of construction of the works, work items or part of construction work by design. (General construction contract is a type of contract for the performance of all of the works of an investment project);

(iii) Technological equipment procurement contract (or procurement contract) is a type of contract for the procurement of technological equipment to be installed to the construction works under technological design (General procurement contract is a type of contract for the procurement of equipment to all of the works of an investment project);

(iv) Engineering and Construction contract (or EC contract) is a type of contract for the engineering and construction of the works, work items (General EC contract is a type of contract for the engineering and construction of all of the works of an investment project);

(v) Engineering and Procurement contract (or EP contract) is a type of contract for the engineering and procurement of equipment for the installation of the construction works as designed (General EP contract is a type of contract for the engineering and procurement of equipment to all of the works of an investment project);

(vi) Procurement and Construction contract (or PC contract) is a type of contract for the procurement and construction of the works, work items (General PC contract is a type of contract for the procurement and construction of all of the works of an investment project);

(vii) Engineering, Procurement and Construction contract (or EPC contract) is a type of contract for the engineering, procurement and construction of the works, work items (General EPC contract is a type of contract for the engineering, procurement and construction of all of the works of an investment project);

(viii) Turnkey contract is a type of contract for the performance of all the tasks from project establishment, engineering, procurement and construction of the works of an investment project;

(ix) Contract for supply of human force, working machinery and equipment is a type of contract for the supply of human force, working machinery, equipment and other necessary vehicles for serving the construction of the works, work items, packages or construction work as designed;

2. Contractual price manner

According to the contractual price, construction contracts can be classified into the following 5 categories:

(i) Lump sum contract is a type of contract in which the contractual price is unchanged throughout the implementation period for the quantity of work within the scope of work under the signed contract except force majeure events or compulsory changes to scope of work.

Lump sum contract price applied to bid packages at the date of contractor selection and contract negotiation has met conditions for determination of quantity and unit price for the implementation of the works under the construction contract or in some cases, quantity and unit price are not yet determined but the parties are qualified to calculate and determine the lump sum contract price.

When the lump sum contract price is applied, elements related to bid package price or contractual price such as risks to quantity and slippage in prices must be taken into account during the contract implementation period and each party must be responsible for its own risks.

(ii) Contract with fixed unit contractual price is a type of contract in which the contractual price is determined by multiplying fixed unit price of each work by respective quantity of work. Fixed unit price is the unit price that is unchanged throughout the implementation period except force majeure events.

Contractual price of fixed unit price applied to bid packages at the date of contractor selection and contract negotiation has met conditions for determination of unit price for the implementation of the works under the construction contract but quantity of work is not yet determined. Then, risky elements of unit price such as slippage in prices must be taken into account during the contract implementation period and each party must be responsible for its own risks as well as anticipating provisional budget for risky elements of bid price and contractual price such as slippage in prices and quantity.

(iii) Contract with adjustable unit contractual price is a type of contract in which the contractual price is determined by multiplying the unit price subject to adjustment due to slippage in prices as agreed in the contract by respective quantity of work (with the price adjustable).

Adjustable unit price contract applied to bid packages at the date of contractor selection and contract negotiation has not yet met conditions for determination of quantity, unit price and elements of contractual price such as slippage in prices during the contract implementation period and the parties must be responsible for anticipating provisional budget for risky elements of bid price and contractual price such as slippage in prices and quantity.

(iv) Time-based contract is a type of contract in which the contractual price is determined on the basis of expenses for experts’ work, other expenses and work time (quantity) by month, week, day and hour.

Expenses for experts’ works are determined by multiplying their pay rate and other related expenses by the actual work time (on a monthly, weekly, daily and hourly basis).

Other expenses apart from the expenses for experts’ work include travel expenses, working offices and other expenses.

(vii) Combined price contract is a type of contract in which the contractual price used in combination with other contractual prices as prescribed in Points a – d of this Clause in accordance with each type of work mentioned in the contract.

3. The relationship between the contracting parties

According to the relationship of the contracting parties, construction contracts can be classified into the following four categories:

(i) Main contract is a type of contract signed between the investor and main contractor or general contractor.

(ii) Sub-contract is a type of contract signed between main contractor or general contractor and sub-contract.

(iii) Fixed rate contract is a type of contract signed between the employer and contractor as an agency or organization.

(iv) Foreign construction contract is a type of contract signed between a foreign contractor and a domestic contractor or investor.

Construction contracts are mainly governed by the following legal documents:

– Construction Law 2014;            

– Decree No. 37/2015/ND-CP detailing construction contracts;            

– Circular No. 07/2016/TT-BXD guiding adjustment of the construction contract price;            

– Circular No. 08/2016/TT-BXD guiding a number of contents on construction consultancy contracts;              

– Circular No. 09/2016/TT-BXD guiding construction contract of a project;            

– Circular No. 30/2016/TT-BXD guiding contract design – supply technology equipment and construction works.