Week 7_John Agbo_ Choosing the best contract option.

A client based in Canada intends to retire back to Nigeria in the next 15 years. Part of his retirement plan is to build luxury flats and lease to Oil producing Companies to use as Expatriate living Quarters. At the moment, he has 4 parcels of land in various choice locations in Nigeria. Based on an approximate estimate prepared for him, the sum of $20m is required and the project duration is approximately 2 years. Finance is an issue as a result of the economic down turn. He needs my advice on the best way to achieve his dream. I have the following contract options in mind:

1. Lump Sum Contract

2. BOT (Build Operate and Transfer) Contract

Analyzing the options

1. Lump Sum Contracts – This type of contract is binding with a fixed lump sum price of which the contractor has to undertake all the works as shown on the tender drawings , bills of quantities , specifications and the terms and conditions of the contract .

The quantities of works are for information only and the contractor is responsible for the assessment of all costs that it will incur throughout the contract period. The lump sum price will seldom be adjusted unless the specified tendered work is altered by formal instructions.

If this kind of contract is selected, the client bears the financial burdens (Sourcing for bank facilities, interests on those facilities for two years and other variations that may arise in the course of the project). The client will bear a lot of risk. The contractor, if not closely monitored can compromise quality to maximize profit.

2. BOT (Build Operate and Transfer) Contract - This type of contract is sometimes known as “Build, Own, Operate and Transfer (BOOT) contract”. The client will layout a series of required end products with specification , terms and conditions ; and the contractor has to finance , design , construct , maintain , manage and operate the finished work for an agreed period say 10 years , 20 years or as agreed by the parties to the contract .

During this agreed period, the contractor has the temporary ownership of these finished works and can charge the end users for recovery of its investment together with the expected profit. However when the agreed period expires, the finished work will have to be transferred back to the client in specified conditions

If this is selected, the client leaves the entire fund sourcing to the contractor who also bears all the risks involved. Since the client knows that he will also make some returns from this, he is not likely to compromise in terms of quality.

Conclusion and Recommendation

Most contractors are often caught cutting corner to compromise quality and maximize profit knowing that after construction, they have nothing at stake except the cost of retention, which will be released after the defect liability period. This has led to the collapse of many building the world over and shattering of many dreams.

If the contractor is allowed to bear the entire risk, then he would build to his utmost.

I will therefore recommend to my client to opt for the BOT type of contract and allow the contractor own and operate the building for a period of 10years. At the end of 10 years, he will start making returns 5 years before he returns and have enough money to start life after retirement.

References:

1. Construction site handbook(Types of contract) online - http://www.constructiondb.com/handbook/pre-contract-stage/types-of-contracts.html