Contracts Management

Contracts
• Contracts are the most ubiquitous way of doing business
between parties.

• Very common in construction projects.

• The parties to contract are the service seeker and the

service provider.

• Services may vary from only design, only construction, to

design + construction or even design + construction +
operation.

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 What are Contracts and why?
• Two parties

• Agreement

• Legally binding

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 Tender as Basis of Contract
A Contract:
A legally enforceable ‘Agreement’.

An Agreement:
An ‘offer’ made by one party and an ‘acceptance’ of that offer
by the other party.

A Tender:
‘Offer’ by one party to another.
In construction terms it means an offer by contractor to do a
specified work in return of a sum of money.

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 CLIENT’S REQUIREMENT

AN OFFER (TENDER)
+ ACCEPTANCE

AN AGREEMENT
+ LAWFUL CONSIDERATION AND OBJECT

A CONTRACT
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 The WEB of contracts:
Tiers or levels of Contracts
Main Contract
• (Prime Contract)- client & Contractor.

Tier-1 contract:
• Sub-contracts
• Insurance contracts
• Surety bonds
• Purchase order agreements etc.
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 Contract Structure
• Client-supplied documents.

• Contractor-supplied documents.

• Mutually signed documents.

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 What is Contract management/
Administration ?

Compliance
with the Effective Management
contractual Communication of contract Invoicing & Dispute
terms & & control- changes / Payment Resolution
conditions Documentation variations

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 Forms of contract
• Standard form contracts.

• Purpose-written or bespoke contracts.

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 STANDARD FORMS-OF-CONTRACT
• Used Repeatedly by Client for Multiple Projects with similar
Overall structure and Commercial Conditions (GCC).

• Technical aspects vary from project to project. Client may

even used General Technical Specification for items
commonly used in projects.

• Terms and Conditions are typically set by one party only with
little scope of negotiation on them.

• Take it or Leave It position.

 STANDARD FORMS Vs PURPOSE-
WRITTEN, OR BESPOKE CONTRACTS
• Purpose-written, or bespoke contracts
– Have more flexibility to incorporate views of both parties.
Better for Contractor.
– Need additional time and money in preparing new
documents for every new project.
– Have risk they may not adequately or fairly make provision
for all circumstances,
– May not have history of case law.

– May unintentionally contain ambiguous clauses leading to

disputes.
 Contract clauses
• Point out the obligations of parties to the
contract and the course of action in case of
disagreements and disputes.

• Are mandatory to be followed. Else there is a

breach of contract.

• Can be changed mutually or sometimes

unilaterally.

• Are enforceable under the contract law.

 Contract clauses
• Some clauses are always put to use, others
may or may not be even though they are
present in contract.

• Contract clauses are generally drafted by

the client but agreed by the contractors.
 Contract clauses
• Some of the important/RED FLAG clauses:
– Commencement and time of completion
– Extension of time, liquidates damages
– Suspension and termination
– Taking over and Defect liability
– Payment
– Variations or changes
– Differing site conditions
– Dispute resolution
 Commencement of Project:
• Project Commencement
– Contractual
– Actual

• After contract award, can we say that the

project has commenced without actual
commencement of work ??
 Commencement of Project
Time is the Essence of the Contract:
• Generally we come across the line “time is the
essence of this contract” in most of contracts.

• As per Indian Contract Act, all such contracts where

time is of essence become voidable due to delay.

• How to determine for which contracts time is of

essence???
 Points for Discussion
Time as essence of contract-
• Which contract has time as its essence ?
– All contracts which are time bound.
– All contracts which contain this clause.
– All contracts which are of urgent nature.
– All contracts which are of very short duration.
– All of the above ?
 Indian Contract Act :
55. Effect of failure to perform at fixed time, in
contract in which time is essential.-

• if the intention of the parties was that time should be of

the essence of the contract.

• the contract, or so much of it as has not been performed,

becomes voidable at the option of the promisee
 Indian Contract Act :
55 (contd....). Effect of failure to perform at fixed
time, in contract in which time is essential.-

• Effect of such failure when time is not essential.-

– the contract does not become voidable by the failure

to do such thing at or before the specified time ; but

– the promisee is entitled to compensation from the

promisor for any loss occasioned to him by such failure
Delays in Construction Projects
Common Clauses
• Delay due to other
• Variations contractors.
• Weather, Fire etc • late-issuance of drgs by
• War, Strike etc client.

• Delay by sub-contractors • late issuance of Plant &

Machinery by client.
• Delay by Suppliers
• Suspension of work.
• Other Causes.
 Delays in Construction Projects
• In case of disputed related to delay, the
important issues are:

– Allocating delays to each party

– Determining the consequences of delay.

• Liquidated damages for delay by contractor

• Extension of time with possibility of cost and

profit from client for delays by client.
 Delays in Construction Projects
• Importance of Project Schedule (As-planned,
Intermediate and As-built) for purpose of
delay analysis

• Analysis of planned & intermediate/as built

networks will give the total delay.

• Once activities responsible for delay are

identified, reasons for delay can also be
identified based on correspondence &
records.
 Delays in Construction Projects
• Different ways to categorize Delays
– Critical or Non-Critical.
– Excusable or Non-Excusable.
– Concurrent or Non-Concurrent.
– Compensable or Non-Compensable.

• Only after proper categorization, the effect of

delay can be assessed.
 Client responsible delays
• The claim of contractor generally depends on the
provisions of the contract.

• The delay may be treated as compensable or non-

compensable as per contract.

• Many contract include a “no damages for delay”

clause.

• Even if the delays are compensable, contractor

to provide evidence for the cost with his claim.
 Delays in Construction Projects
• Do all client responsible delays
entitle the contractor for
corresponding EOT ???
N° Task Name
M J J A
10 17 24 31 07 14 21 28 05 12 19 26 02 09 16 23 30
1 Task 1
2 Task 2
3 Task 3
4 Task 4
5 Task 5
6 Task 6
7 Delay due to the Employer
8 Task 7
 „Force Majeure‟ (FM)

• Expression taken from the code of Napoleon.

• Much wider definition compared to „Vis Major‟.

• FM covers acts of God+ Man Made events.

• Contractor to be careful while drafting wording of
FM clause. There are cases when a vague FM clause
led to the contract being declared void.
 Delays in Construction Projects
Concept of „Force Majeure‟ (FM):
• Notice to client/Engineer a condition precedent for
EOT in FM:
• “then upon the happening of any such event causing
delay, the Contractor shall immediately give notice
thereof in writing to the authority as indicated in ….
but shall nevertheless use constantly his best
endeavors to prevent or make good the delay and
shall do all that may be reasonably required to the
satisfaction of the Engineer-in-Charge to proceed
with the Works”

Ref: http://cpwd.gov.in/Publication/GCC14.pdf
 Damages in Projects
Understanding the terms:

• Damage : To property, comfort, Health etc…

• Damages : Damage converted to monitory

compensation.
• Types of damages:
– Liquidated

– Un-liquidated
 Damages in Projects
• Liquidated Damages (LD):
– Sum which is mentioned in the contract as fair
pre-estimated compensation for the breach of the
contract due to delay.

– If LD clause exists do clients have right to claim

actual damages ??

• Un-Liquidated Damages :
– not pre-fixed or determined.
– Requires the victim to present evidence for
establishing the amount
 Damages in Projects
LD Vs Penalty
• English Common law
– Lays much emphasis of differentiation between LD &
Penalty.
– Penalty is Mostly unenforceable.
– Writing Words like “compensation as LD & not Penalty” ??
– Most disputes are settled on case to case basis.

• Indian Contract Act takes an altogether different

approach.
– No distinction between LD & Penalty.
 Indian Contract Act :
74. Compensation of breach of contract where penalty
stipulated for
• When a contract has been broken, if a sum is named in
the contract as the amount be paid in case of such
breach, or if the contract contains any other stipulation
by way of penalty, the party complaining of the breach is
entitled, whether or not actual damage or loss or proved
to have been caused thereby, to receive from the party
who has broken the contract reasonable compensation
not exceeding the amount so named or, as the case may
be, the penalty stipulated for.

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 Suspension of Project
• Suspension:
– Temporary stoppage of the work.
– May be due to reasons attributable to client or
contractor.
– May affect part/whole work.
– May lead to Omission/termination.
– Care during suspension by contractor.
 Suspension by Contractor
FIDIC Cl. 16.1:
• Unique Clause speaking about the rights of contractor
in case engineer/client fails in their obligations.

• Stoppage of work/Reduce rate of work.

• In case job is delayed due to Suspension by contractor,

it makes him eligible for:
– EOT
– Cost + Profit

• If no corrective action, then Contractor can even

terminate the contract without losing rights.
 Termination
• May be resorted to in case of breach of contract.

• Most of contracts have provision of termination for:

• Delay
• Other breach like abandonment etc.

• In case of Termination for default of contractor, can

client have any other compensation apart from LD ??

• Will depend upon contract provisions which give

power like forfeiture of security etc to client.
 Termination
• FIDIC Cl. 16.2: Termination by Contractor:
• Another clause which gives equal right to
contractor to terminate if employer/engineer
fail in their obligations.

• Contractor is even entitled for loss of profit

apart from payment settlement (as per Cl. 19.6)
& PBG !!
Typical Timeline for a project:
contractual milestones

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Taking Over & Defect
Liability Period (DLP)

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 Significance of Taking Over
• For contractor:
– One of most important milestone of a project.
– Relieved of responsibility from taking care of work.
– Tied up payment to be released.
– However, notwithstanding any stated above, the
contractor shall be liable for defects till the DLP.
• For Client:
– Client is supposed to take care of the work with
regular maintenance.
– Release milestone payment.
– Observe defects in the work if any & notify the
contractor at earliest.
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 Defect Liability Period
• Also called defect notification period.

• Starts after issuance of Completion

Certificate or Taking Over Certificate.

• It is the period after taking over during

which the contractor is responsible for
correcting contractor attributable defects in
the said works.

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Measurement,
Valuation &
Payment

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Measurement, Valuation & Payment

• Understanding the Terms,

– Measurement

– Valuation

• Importance of this function wrt type of contract.

• Role of Engineer/Certifier.
Measurement, Valuation & Payment
• General requirements for a measurement to be valid:

– Should be mentioned in the measurement book as

specified.
– Must be signed jointly by contractor & client’s Authorized
representative.
– Contractor’s objections if any.

• Measurements in absence of contractor’s

representatives ??
Interim Payment Certificates (IPC)
• Certificates to effect payments during
execution of works.

• Named formats or express opinion of engineer.

• What if contract doesn’t contain provision of

IPC ??

• Obligation of engineer to issue IPC in time

bound manner.
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Interim Payment Certificates (IPC)

• The title of clause mentions “Payment on

Intermediate certificate to be treated as
advance” .

• Significance of same.

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Interim Payment Certificates (IPC)

• Review of the clause, important issues for

review:
– Time Limit Specified for Certification & payment.

– Compensation for delay.

– Effect of payment on employer’s rights.

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Contract Changes /
Variations
Types of Changes/ Variations

 Administrative Changes

 Substantive Changes

 Constructive Changes
 Changes/Variations Clauses
Some Important Issues
Is the Engineer’s authority to issue variations
unlimited ?
 Changes/Variations Clauses
Engineer’s authority to issue variations :
• Basic Philosophy of variations.

• If it results in radical/material changes in the

nature of the contract !! (cardinal Changes).

• Variations may be directed for improvement

of works or eliminating of work without
changing nature of job.
 Changes/Variations Clauses
ISSUE 2 & 3
1. After receipt of variation, contractor submits its
quotation & carries out the job but engineer
doesn’t confirm the rates nor cancels this
variation. Can Engineer’s silence be treated as
acceptance of quoted rates?

2. Is the contractor always bound to carry out the

variations issued by engineer? Non-execution of
a variation before settlement of rates will
amount to breach of contract ?