23-Jun-20

CE 4023 Construction Practices and

Management
Md. Ashraful Alam
Assistant Professor, Department of CE, UU

Construction Contracts

Elements of a legal contract

• offer
• acceptance
• consideration
• legal in every respect
• requires a meeting of the minds
• offer + acceptance = binding obligation

Md. Ashraful Alam, Assistant Professor,

 23-Jun-20

Why do we need written contracts?

1. Basic lack of trust
2. Clearly establishes the risks and obligations of each party
3. Provides means by which performance can be assessed
and measured
4. Provides means by which breaches can be identified
5. Provides means by which default can be established
6. Establishes the owner’s means of control
7. Establishes the contractor’s scope of work
What does a written contract do for us?
• A written contract provides the document by which risks,
obligations, and relationships of both parties are clearly
established, thus ensuring the performance of these
elements in a disciplined manner.

Types of Construction Contract

Lump Sum Contract: features include -
 all the risks are taken care off by the contractor
 Higher markup can be asked in order to take care of unforeseen
contingencies
 if the actual cost of the project is underestimated, the underestimated cost
will reduce contractor’s profit by that amount
 But overestimate may reduce the chance of being a low bidder

Unit Price Contract: features include -

 Risk of inaccurate estimation of uncertain quantities for some key tasks has
been removed in this contract
 Some contractors may submit an unbalanced bid when it discovers large
discrepancies between its estimates and the owner’s estimates of quantities.
 Owner may disqualify the contractor if it appears to be heavily unbalanced.

Md. Ashraful Alam, Assistant Professor,

 23-Jun-20

Types of Construction Contract

Unit Price Contract: features include -

 To the extent of an underestimate or overestimate, neither error will
effect the contractor’s profit beyond the markup in the unit prices.

Cost Plus Percentage Fee: features include -

 Only in compelling reasons, such as urgency or emergency time
 Contractor will receive the actual direct job cost plus a fixed percentage
 Owner may disqualify the contractor if the bid appears to be heavily
unbalanced.

1. Lump Sum or Fixed Price Contract

• The Owner knows the actual cost of the project before

it begins
• Contractor required to achieve the project at the
Bid/Negotiated Contract Value
• Minimize the risk for the Owner if the project is well
estimated, contractual documents accurate, and project
clearly defined
• High risk for the Contractor in case of many unforeseen.
Usually a high incentive to finish early at low cost

Md. Ashraful Alam, Assistant Professor,

 23-Jun-20

2. Unit Price Contract

• Agreement on the price charged per unit by the Contractor to

the Owner
• Contractor overhead must be integrated in the Unit’s Prices
• The lowest bidder is normally selected
• Necessity of an Owner presence on site to measure the actual
quantities
• Highly dependant on the accuracy of the estimation of the
quantities given by the Owner/Designer
– Difficult to accurately quantify the work necessary
– Contractor can make a more profit because payment is based
on actual quantities but he can also lose money in the same
way
– The total cost for the Owner can be greater than planned

Unit Price: Example

• Activities:
– Footings 80 $/sq ft
– Columns 1,550 $/unit
• Scheduled quantities:
– Footings 100 sq ft
– Columns 9 units

• Contract initial value:

– 80 * 100 + 1,550 * 9 = 14,750 $

Md. Ashraful Alam, Assistant Professor,

 23-Jun-20

3. Cost Plus Percentage Fee

• The Owner is paying the actual cost plus a fixed

percentage fee
• High risk for the Owner
• Maximum flexibility for the Owner
• Used only if the pricing could not be calculated in any
other way and if it is urgent
• No financial insurance of ultimate cost
• Little incentive to reduce cost
• The contractor agrees to do his best effort to achieve the
goal
• Whatever the quality of the work, the reward is the same
but the owner gets the quality he pays for

Cost Versus Price for Cost Plus %

Md. Ashraful Alam, Assistant Professor,

 23-Jun-20

4. Cost Plus Fixed Fee

• Cost may vary but the fee remains firm
• The fee is independent of the duration of the project
• Used only if the pricing could not be determined in an
alternative manner
• No financial insurance of ultimate cost
• Little incentive to reduce costs but high incentive to finish
early
• The contractor agrees to make best efforts to complete the
work
• Promotes collaboration at the early stages of the project

Contractual Risk Allocation

RISK SHARING METER

Modified from Kerzner, 2000

100 % Lump-Sum (Fixed Price) 0%

Fixed-Price w/ Economic Price Adjustments

CONTRACTOR’S RISK

Fixed-Price Incentive
OWNER’S RISK

Cost-Plus Incentive

Cost-Plus Fixed Fee

Cost-Sharing

0%
RISK Allocation Cost-Plus Percentage 100 %

Md. Ashraful Alam, Assistant Professor,

 23-Jun-20

Construction Contract Documents

• Advertisement for bids

• Information for bidders
• Bid form
• General notices
• Notice of award • Contract form or agreement
• Notice to proceed • General conditions or provisions
• Bid bond • Supplemental and/or special
conditions
• Performance bond • Plans
• Specifications

Documents forming Contract

The following documents forming the contract shall be

interpreted in the following order of priority:
• The Signed Contract Agreement
• The notification of Award (NOA)
• Completed Tender and acceptance of tender
• Particular Conditions of Contract (PCC)
• General Conditions of Contract (GCC)
• Tender Specifications
• General Specifications
• Drawing
• Bill of Quantities (BOQ)
• Any other documents listed in PCC

Md. Ashraful Alam, Assistant Professor,

 23-Jun-20

Examples of GCC and PCC

GCC 25.1 Instructions: The contractor shall carry out all the
instructions of the PM that comply with the applicable law
GCC 28.1 Working hours: The contractor shall not perform any work
on the site on the weekly holidays or during the night or outside the
normal hours or on any religious holiday, without the prior written
approval from the PM
GCC 41.1 Completion of works: The contractor shall carry out the
works in accordance with the programme of works submitted by the
contractor and as updated with the approval of the PM
GCC 43.3 Programme of works: If the contractor dose not submit
an updated programme at an intervals stated in the PCC, the PM may
withhold an amount as stated in the PCC
PCC: The Contractor shall submit a programme for the works within
7 (seven) days of singing the contract.

Construction Contract

……bidders are required to:

• examine all portions of the contract documents
• examine the physical conditions of the site
• determine legal requirements affecting the work
• complete these investigations prior to bidding

Md. Ashraful Alam, Assistant Professor,

 23-Jun-20

Specification

Standard, supplemental, and special provisions

• 02 types of specifications:
• method specification dictates equipment and
procedures
• performance specification specifies only the desired
end result or product

Submittals required in Contracts

• copies of subcontracts
• shop drawings and support calculations
• catalog cuts
• material or equipment samples
• schedule(s)
• certified payrolls
• certificates of insurance
• environmental test reports
• material test reports & certifications

Md. Ashraful Alam, Assistant Professor,

 23-Jun-20

Md. Ashraful Alam, Assistant Professor,