19-02-2021

AR L2434 CONTRACTS
CONSTRUCTION MANAGEMENT
Lecture – 2
- Ar. Sachin Harry

CONTRACTS CONTRACTS
 A contract is an agreement between two parties to do certain  Stages in the process of Contract –
things for a legal consideration and this is an agreement,
which is enforceable by law.
 A consideration, in the context of a construction contract, is
made in return for a specific promise contained in the offer ENQUIRY OFFER ACCEPTANCE
of the promissory.
 In order to enter into a contract, there must first be an offer
or proposal signifying the willingness of one party to do
something at the desire of other party.
CONTRACT AGREEMENT
 The desire of the other party is expressed in the enquiry
often known as Notice Inviting Tender (NIT) and the offer to
carry out the services at certain terms is known as Tender.

CONTRACTS CONTRACTS
 Types of Contracts –  Item Rate Contract –
 Item Rate Contract  In this type of contract, BOQs are worked out and included in the tender
 Lump Sum Contract document as under:-
 Lump Sum and Schedule Contract
S. No. Item Description Area / Unit Quantity Rate Amount
 Cost Plus Fixed Fee Contract
 Cost Plus Percentage of Cost Contract
 Term Contract  The rate and amount columns are left blank and the same is filled by the
 Special Repairs Contract contractor.
 Special Contracts  Actual amount paid to the contractor will depend on the actual quantity
 Turn Key Contract of each item executed.
 Package Contract  In this type of contract, detailed drawings can be issued after the
 Negotiated Contract acceptance of contract, though the complete specifications should be
 Running Contract included in tender document for each item of work.

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CONTRACTS
 Item Rate Contract –
 Advantages:-
 Changes in quantities is possible because changes in requirements can be
made within agreed limits (each item 50%, each schedule 20%) without
any deviation order.
 The payment is made for the actual work done.
 Owner / Client has more flexibility with regard to accommodate
revised requirements, if any.
 Disadvantages:-
 Actual cost of work is known only on completion of work and if it
exceeds substantially, this may upset the budget provisions of owner.
 Additional staff and time is required to take measurements of the work
done.
CONTRACTS
 Lump Sum Contract –
 Advantages:-
 Contracting agency knows before the start of work as to what the project is going to
cost.
 This type of contract does not require item-wise measurement of work done both for
the running payments and also for final bill thus saving lot of paperwork and man
hours. Running payments are released to contractor based on mutually agreed yard
stick.
 Disadvantages:-
 This type of contract is not suitable where certain information is either not fully
available or is of uncertain nature thereby having a large probability of variation.
 Before floating such a tender great care is required to ensure that the drawings are
prepared in detail and specification cover all items of work.
 Invariably, in all works, some changes do take place and since there are no agreed upon
rates for items of work there is every possibility for contractor quoting high rates.
 The deviation orders in these contracts are generally the source of dispute between the
contracting agency and the contractor.
CONTRACTS
 Cost Plus Fee Contract –
 This type of contract is suitable when high quality important
structure is to be executed speedily irrespective of cost.
 The owner defines the scope and nature of work in broad terms
along with approximate cost, estimated time for completion,
requirements of manpower and equipments, etc. and it is stated
that actual cost of construction will be borne by the owner.
 Contractor is required to quote his fee for execution of work.
 Contractor is selected based on merit rather than fee alone.
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CONTRACTS
 Lump Sum Contract –
 In this type of contract, contractor is provided with complete drawings of
the work to be carried out along with detailed specifications to be
followed and he is asked to quote the lump sum amount to carry out the
complete work as per specifications and drawings.
 In-house, detailed estimate is prepared and to this a percentage + or – is
added based on similar contract in progress at that time to know the
reasonable cost of execution, but these details are not disclosed to the
contractor.
 Contractor is expected to carry out thorough study of the work involved
and make his realistic bid.
 This is possible only if the contractor has carried out similar works
earlier, hence great care is required to select the contractors for this type
of work, because any inexperienced contractor quoting freakishly low
amount can derail the whole process of tendering.
CONTRACTS
 Lump Sum and Schedule Contract –
 This contract is exactly as the Lump Sum contract discussed above
with only difference that Standard Schedule of Rates (SSR)* is
made part of the contract and the contractor in addition to
quoting amount for lump sum work also quotes a percentage on
SSR for preparations of deviation orders if required.
 This reduces the need to work out additions or omissions as all
rates are priced at SSR and the contractor percentage is added to
arrive at final value of Deviation Order.
 This reduces the time required to finalise the Deviation Orders
and also eliminates the source of dispute, though all work carried
out under Deviation Orders is measured and priced item wise.
* Typically, SSR is a book (nearly 500 pages) which consists of rates for (i) Labour, (ii) Material for Building Works,
(iii) Usage Rates of Machineries, (iv) Mortars, (v) Loading and Unloading, (vi) Carriage of Material, etc.
CONTRACTS
 Cost Plus Fee Contract –
 Advantages:-
 As the cost is borne by owner there is no compromise by contractor on
the quality of work.
 Work can start without waiting for completion of all drawings.
 Changes in design and method of execution can be implemented without
any delay and dispute.
 The work can be executed speedily.
 Disadvantages:-
 Government agencies cannot conclude such contracts.
 The final cost is known only on completion of work.
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CONTRACTS
 Cost Plus Percentage Contract –
 This type of contract is exactly same as Cost Plus Fee Contract
with the only difference that the fee of the contractor is not
fixed but is worked out as percentage of the cost of work.
 This type of contract has an inherent drawback that the
contractor may tend to inflate the cost of work but that can be
checked by laying down complete specifications before
commencement of work and later strict adherence to laid down
specifications, proper check on purchase of materials and
employment of labour.
CONTRACTS
 Term Contract –
 This is a maintenance contract.
 Standard Schedule of Rates is made part of contract.
 In this contract, the contractor agrees to carry out repairs of all
types to the buildings located in a certain geographical area at a
certain percentage over and above the standard schedule of rates.
 As and when the need arise a work order giving the details of
repairs required is placed on the contractor with specific date of
commencement and date of completion.
 Final bill is prepared for each work order separately.
 Generally, the duration of this contract is for a year.

CONTRACTS
 Turn Key Contract –
 In this type of contract, a main contractor is responsible for complete
planning and commissioning of project.
 It includes all works pertaining to different disciplines viz., civil,
electrical, mechanical, etc.
 The main contractor is permitted to sublet the contract to specialist
firms in their field of specialisation.
 Advantage to the client is that he has to deal with only main contractor.
 Supervision, monitoring and payments to sub-contractor is dealt with by
main contractor hence the owner / client is saved of hassles of dealing
with so many firms.
 The main contractor is responsible to the owner for completing and
handing over the fully operational building(s) to the owner / client.
CONTRACTS
 Package Contract –
 Two or more related jobs which could have been formed as separate
contracts are clubbed together and allotted to one contractor, e.g.,
designing and construction of a project may be combined and allotted
to a single firm.
 Negotiated Contract –
 The project scope, specifications, cost and other conditions of
contract are evolved by negotiations between the owner and the
contractor without putting the work out to bid.
 Running Contract –
 Such contracts are for providing goods and listed services at laid down
intervals or on as required basis. The rates are not fixed but the
payments are made on the basis of actually supplied goods or services.

CONTRACT AGREEMENT REFERENCES

 The document consists of the following –
 Cover Page
 Notice Inviting Tender (NIT)
 Tender Form
 Schedule of issue of materials
 Drawings
 Specifications
 General specifications
 Particular specifications
 Conditions of Contract
 Time for completion
 Penalty for delay
 Incentive for early completion
 Construction Project Management by Prof. Harbhajan Singh
 Amount and form of Earnest  Construction Planning and Management by P. S. Gahlot and
Money and Security to be B. M. Dhir
deposited
 Sub-letting of work
 Termination of contract
 Changes in design / drawings
and valuation of variations.
 Arbitration for settlement of
disputes
 Price escalation
 Insurance cover to cover
natural disasters
 Conditions for mobilisation
advances