CHAPTER THREE

CONTRACT AGREEMENT

Introduction

What is a contract law?

Contract is a legally binding agreement between two or more parties where parties abide by

the court of law. ‘All contracts are an agreement but not all agreements are contract.’

The terms of a contract are legally binding and are enforced by codes of law.

In other word, A contract as an agreement between two or more parties for a certain

consideration that fulfill contract requirements.

Contract requirements (7 elements of contract)

A contract is a legal document between two parties. In order to be enforceable, the contract

must contain seven elements. While more specific requirements may differ by state, the

basics of contract law require that these seven elements exist regardless of where the contract

is formed. If even one is missing, a contract may be voided and the parties will be excused

from any obligations.

1. Offer:

2. Acceptance:

3. Consideration:

4. Mutuality of obligation

5. Competency and capacity

6. Legality

7. Writing instrument.
Purpose of a Contract

The purposes of contract are:

 To bind conditions between the parties

 To clearly show the terms and conditions of the contracts the parties agree with

 To clearly show the rights and obligations of the contracting parties

 To clearly show remedial measures in cases for non performances

In other ways the purpose of the contract is to produce:

 A quality construction project

 On time construction project

 Construction project within budget

 Safety execute project

The contract documentation under the Construction Contract:

1. The form of agreement.

2. Conditions of contract.

3. Contract data (setting out information needed to operate the contract and identifying the

documents which contain works information).

4. Prices, activities schedules and bill of quantities.

5. Works information (describing what is to be done on the site).

6. Site information (describing the condition of the site before the work starts)

Fundamentals of contract administration for contractors

 To appoint suitable consultants

 To define project scope To set the key project objectives of cost, time and quality
 To assist in formulating a project brief

 To select the most appropriate method of project delivery

 To ensure accuracy and completeness of tender documentation

 To award a contract to the contractors on fair and equitable conditions of contract

 To appoint an experienced superintendent for administering the contract during the

construction stage

 To avoid making changes to the design unless knowing the cost and time impact of

such changes

 To pay the contractor strictly in accordance with the contract

 To monitor progress and the use of a contingency

 To resolve issues as early as possible before they develop into major problems

 To document actual progress in terms of cost, time and the use of resources to be able

to defend against a potential claim from the contractor

 To advise the contractor in writing of any deviation from contract conditions and to

request compliance with same within a specified period

 To execute the project strictly in accordance with the contract conditions

 To award subcontracts on fair and equitable subcontract conditions

 To monitor and control progress of subcontractors

 To pay subcontractors on time

 To minimise overall project time, thus reducing site overheads

 To balance increased direct costs of additional resources on critical activities, against

possible saving in site overheads

 To advise the principal early in the project that the program is arranged to maximise

use of resources and any additional work required

  To allow sufficient time to rearrange activities, acquire additional resources, perform

additional planning, fabrication, etc

 To manage extensions of time and a prolongation of overhead costs

 To recommend to the principal not to make any changes to the design

 To document the actual progress compared with a program to identify areas of

progress loss To take immediate action on contractor-caused problems and

immediately advise the principal of other problems

 To instruct all internal staff to carry out work as specified in the contract documents,

unless written instructions have been given by the principal’s representative

Types of Contract

There are a range of contract types which may be attractive on a particular project.

The choice of a particular style of project delivery system will depend on many factors, for

example:

 Ease of design (buildings vs complex engineering projects);

 desire for design flexibility during construction;

 availability of suitable contractors/project managers, and balance sheets of such

contractors;

 political considerations;

 budget constraints vs performance of completed project.

On major public sector projects, the use of standard form fixed-price contracts would

be more prevalent than on similar scale private sector projects (though, in contrasts are

essentially public sector projects delivered by the private sector).

There are multiple different types of project delivery systems as follows:

1. Lump Sum or Fixed Price Contract Type:

A lump sum or fixed price contract is the type of contract where all construction-

related activities are regulated with a total fixed price agreement.

Lump sum contracts are favored in situations when a clear scope and a defined

schedule is negotiated and accepted. For example, if it is necessary to shift the

liability to the builder and to prevent changes in orders for undetermined work, this

type of contract is best suitable for the situation. Due to present risk, a contractor

holds some percentage cost.

It is essential to consider that if the lump sum contract was signed, it would be

challenging to obtain any credit back for an uncompleted job.

2. Cost Plus Contracts:

Cost plus contracts cover:

 Actual cost

 Purchase 

 Other expenses incurred from the construction work.

Before the negotiations begin, a specific expense amount must be included in cost plus types

of contracts. These amounts represent a percentage of the material and labor costs, which

cover the continuing costs of operation and the contractor's profit.

Cost can be direct or indirect, and it must include all critical cost aspects of a contract.
 3. Time and Material Contract When scope is not clear

Time and materials contracts are types of contracts used in a case where:

 The capacity and quantity of time and materials is undetermined, which makes the

project risky.

 The owner and the contractor are compatible with the tariff per hour or per day,

including possible additional costs during construction.

Periodically, the owner can determine a duration of the project with a contractor, which must

be performed to reduce the risk to a minimum. 

The downfall of this type of contracts is that the seller can increase an indefinite or unknown

expense amount, which is the cost the buyer has to pay.

4. Unit pricing contract

Unit price contracts are commonly called hourly rate contracts. This type of contract

combines:

 Reimbursable expenses

 Fixed price type of contracts.

Unit pricing contracts can be adjusted during the process in which the owner offers certain

quantities and prices for the predetermined number of items.

5. Bilateral contract

Both parties involved in a bilateral contract promise to implement certain things.

6. Unilateral contract

In a unilateral contract, one party, which is the bidder, requires performance from the other

party rather than a promise. An offer cannot be used for:

 Abandoning the project

 Not being able to finish his or her work.

This is because he or she did not make a promise. Therefore, only the bidder is required by

law to comply.