Effective Contracting Out

A Road Agency has a choice of several forms of contract:

  • Lump sum contracts, with payment based on a single price for the total work
  • Admeasure contracts, where payment is based on the quantity of work completed, valued at tender rates in a Bill of Quantities;
  • Cost-reimbursable contracts, with payment based on actual costs(requiring "open book" accounting plus an agreed fee to cover overheads and profits; and
  • Target-cost contracts, where payment is based on actual costs, plus a fee, together with an incentive payment related to any savings beyond the initial target costs

The main difference among these forms relates to the way risk is allocated between the contractor and the client. In lump sum and admeasure, essentially price based, the contractor bears much of the risk and prices the tender accordingly. The higher is the risk, the higher the price. Cost reimbursement and target-cost contracts are cost based for which the client bears the main risk. These contracts are staff intensive, require good cost accounts, and work only where there is good governance. Most road agencies in developing and transitional countries thus favor price based contracts, particularly admeasure contracts.

Read more in the gTKP Finance & Economics Topic Information Sheet on Effective Contracting Out.

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