Engineering Contracts: Everything You Need to Know
Engineering contracts are legal agreements between a business and an engineering company detailing services promised, and payment for those services. 3 min read
Updated November 6, 2020:
Engineering contracts are legal agreements between a business and an engineering company detailing services promised, and payment for those services.
What Is a Contract?
Contracts are agreements in which a person or business agrees to specific terms and conditions that can be legally enforced. In a contract, responsibilities and obligations are outlined and agreed upon by the two parties involved.
Four Functions of Engineering Contracts
Engineering contracts cover four particular issues of an agreement between an engineer and the company they are going to work on a project for.
These functions are:
- 1. Scope of work
- 2. Period of performance
- 3. Payment
- 4. Termination
Engineering contract templates can be found online.
Scope of Work
The first purpose of the contract is that it clearly lays out what is expected of the contracted engineer. To be completely clear, the company proposing the work should outline each task that is part of the project and provide deadlines. They should also be clear about their vision for the project and the end goal. Any parts of the project that should not be handled by the contracted engineer should be clearly stated in the contract.
Period of Performance
Engineering contracts should give the expected time frame for the project and a deadline for total completion. Companies usually provide payment for the project at its beginning, so it is especially important to set deadlines in a contract.
Contracts make sure that products and services are paid for in a timely manner. An engineering contract should outline when payments will be received, from whom, and how much, as well as instructions for invoicing. Some projects with a longer time span will be paid in installments at preset milestones in the progress of the project. If this is the case, the contract should lay out these milestones and payment amounts.
Engineering contracts usually contain termination clauses. These types of clauses specify how, and for what reasons, the contractor or customer can terminate the agreement.
Valid reasons for termination include:
- Convenience issues that prevent project progress or completion
- Natural disasters
If one of the parties involved in the agreement breaches the contract or defaults on a part of it, the engineering contract should outline how such an event should be handled.
A common type of engineering contract is a lump sum contract, also called a fixed price contract. This type of contract requires the contractor to agree to perform the specified work outlined in the contract for one fixed price.
Lump-sum contracts have a fixed price for the work promised and that price is only allowed to change under a change order. For a change order to take place, the client and the contractor need to determine additional work to be performed and require additional payment or remove some of the work originally agreed upon and settle on a lower payment. If the client and contractor have agreed on a clear vision and schedule for the project, a lump sum contract will likely work well for their agreement.
Some advantages of a lump sum contract are:
- They offer fewer risks financially for the customer because they can budget for the fixed cost and not worry about it changing
- There is less supervision needed for the contracted work because a clear schedule has been set
- They encourage efficient work by the contractor to get done earlier and to achieve a better pay rate
Some disadvantages of a lump sum contract are:
- If changes to the contract are needed it can be expensive and complicated
- The design plans need to be definitively set before writing the contract
- Fixed payment amounts can encourage contractors to choose cheaper materials and methods to increase their profit
Another common type of engineering contract is a measurement contract, also called a re-measurement contract or a measure and value contract. This type of contract includes a Bill of Quantities (BOQ) that the employer provides when the engineering design can be explained in detail, but the quantity of work cannot.
As a project is worked on, the contractor can create a BOQ quoting each item used in the project. These will have unit rates and prices that will be added together to determine the total price for the project. The contract will quote the price of the project based on the BOQ.
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