TOPIC 4: CONTRACTS

This is an agreement between parties where one offers and the other party accepts in
provided it doesn’t involve illegal acts and it is enforceable within law.

It is desirable that the acceptance should be in writing.

CONTRACT DOCUMENTS

1. Form of an agreement.
Constitutes the formal agreement between the client and the contractor for the
execution of the work in accordance with the contract document.
It consists of three parts;
i) The article of agreement which is the actual contract which the parties sign.
ii) The conditions which sets out the obligations and rights of the parties and details
under which the contract is to be carried out.
iii) Supplemental provisions (the VAT agreement) which sets out the rights and
abilities of the parties in regarding to value added tax.
2. General conditions of contract.
Defines the term under which the work is to be undertaken, the relationship
between the employees, engineer and the contractor.
3. Specification
Describes clearly the information given in contract drawings and the bill of
quantities. It may also contain clauses specifying the order in which the various
sections of the work are to be carried out and the methods to be adopted in the
execution of the work.
4. Bill of quantities
Consists of the schedule of the items of the work to be carried out under the
contract with quantities entered against each item.
5. Contract drawings
They illustrate the details and scope of works to be executed under the contract.
TYPES/ CLASSIFICATIONS OF CONTRACTS

1. Bill of quantities contracts

A detailed BQ is prepared according to the latest SMM and contractors are given
to price and come up with contract sum. It is used when all drawings have fully
been finalized for accuracy purposes.
Advantages
i) Saves the heavy cost of preparing many BQ by the contractor.
ii) Fair basis for competition.
iii) Changes in contract documents can be made easily by the client compared to
lumpsum.
Disadvantages

i) The exact final price of the project is not known to the owner until the completion
of the project.
2. Lumpsum (Drawings and specifications) contract.
The contractor undertakes to carry out the work for a fixed sum of money. The
nature and extent of work are normally indicated in the drawings and
specifications of materials and workmanship but no BQs are provided.
It is used for works which are small in extent and where the works are above
ground level and clearly visible.
Advantages
i) The final cost/ price is known to the client before the work commences.
ii) The contractor has more incentive to reduce his cost to increase the profit.
iii) The contractor hopes to complete the job as quickly as possible to minimize
overheads, maximize profits and move to the next job.
Disadvantages
i) Competent contactors may decide not to bid to avoid a high risk of lump sum
contract.
ii) The contractor carries much of the risks. The tendered price may include high risk
contingency.
iii) Changes in drawings and specifications can be very expensive and course of
trouble (it has very limited flexibility for design changes).
 iv) A great deal of the work should be done by the contractor prior to preparation of
estimates which is wasteful of a skilled estimator’s time.
3. Schedule of rates contact
It takes two forms;
A: the client may supply a schedule of unit rates covering items of work and ask
the contractor when tendering to state % above or below the given rates for which
he will be prepared to carry out the work.
B: the contractor may be asked to insert prices against an item of work and a
comparison with the employee’s rates enables most favourable offer to be
observed.

NB;- This type of contract is only suitable for use with maintenance and similar
contracts where its possible to give accurate and realistic quantities of work to be
undertaken.
Advantages

i. Work can be commenced earlier than if a full BQ has been prepared

Disadvantages
I. No indication of the final cost of the works.
II. Very difficult to determine which contractor submitted the most advantageous
offer.
III. May cause financial problems to the public owners
4. Cost plus percentage fee contract
The contractor is paid for the actual cost of work plus agreed percentage of the
actual or the allowable cost to cover for the overheads and profits. This type of
contract is suitable for emergency work where no sufficient time is available to
prepare a detailed scheme of work before the work is started.
Advantages
i) Construction can start before design is completed.
ii) If the contractor is efficient in the utilization of resources then the cost of the
client should present a fair price for the work undertaken.
Disadvantages
i) Minimum efficiency maximizes the profit.
ii) The project total cost is completely unknown before the project starts.
iii) No incentive for the contractor to be efficient in his use of labour, material or
equipment.
iv) Owner must exercise tight cost control which may be difficult and/ or costly.
5. Cost plus fixed fee.
The contractor is paid for the actual cost incurred in the execution of the work plus
a fixed lumpsum fee which does not fluctuate and is agreed upon before
commencement of work.
Advantages
i) There is no incentive for the contractor to inflate costs.
ii) There is incentive for the contractor to complete the work as quickly as possible
since his fee remains constant.
Disadvantages.

i) Major variations create problems. The fee must be renegotiated to take account of
such variations.
ii) The speed of commencing the work is undermined since before a few can be
agreed a fairly detailed description of work must be made.
6. Target Cost Contracts (with variable fees)
A basic fee is generally quoted as a percentage of an agreed target estimate
obtained from a priced bill of quantity.
The target fee may be adjusted for variations and cost of labour and materials
e.t.c. The actual fee paid to the contractor is arrived at by increasing or reducing
the basic fee by an agreed percentage of saving or excess between the actual cost
and the adjusted target estimate.
Advantages.
i) The client stands to benefit through the contractor’s efficiency.
ii) There is an incentive to carry out the work as quickly and as economically as
possible.
Disadvantages

i) A tight cost control must be exercised which may be difficult and / or costly.
 ii) Difficulties may arise in agreeing on a revised target cost if there are major
variations or cost inflation.
7. All in contracts.
The client using the services of an engineer gives his requirements in bold outlines
to the contractor who is then asked to submit full detailed design, construction
and cost of the works.
8. Package deal contract.
The contractor provides all the services i.e acts as the architect, Qs and contractor.
This generally refers to huge industrial buildings, bridges, road works etc and may
leave the client with little choice of design. The client has no independent
consultant to advice on design cost.
9. Cost plus fluctuating fee.
The contractor is paid for the actual fee cost of the work plus a fee where the
amount of fee is determined by reference to allowable cost by some for of sliding
scale. Thus the lower the actual cost of the works, the greater will be the value of
feel that the contractor received.
TENDERING.

Tender: it is an offer for willing contractors to apply for a job under conditions of the
employer.

Methods of Tendering

1. Open tendering
The client invites tenders/ applications from interested contractors by publishing
in the media. Contractors may collect document from the client at a small fee.
Advantages
i) There are many contractors to select from.
ii) One is likely to get the cheapest tender.
iii) Equal chances for willing to get the job.
Disadvantages

i) Tender list can be long yet only one contractor is needs (Time consuming)
ii) Public accountability may be questioned if the lowest offer is not accepted
through it is not each to accept the lowest tender always if the reputation is
not known.
iii) Most of the good / best contractors do not apply for opening tendering.
iv) If the lowest contractor has poor management then the whole work may be
delayed.
v) If the price is too low and the contractor realizes he is making less then he may
decide to reduce the quality of work or make other numerous chains in the
process of working.
vi) High chances of getting unqualified workers/ contractor.
vii) Expensive due to production of documents and payment fee.
2. Selective tendering
Only specific contractors are allowed to apply for the job. (A list of contractors is
always made) by the client with the help/ advice of the Architect.
Advantages
i) Saves time.
ii) One gets qualified contractors.
iii) Less expensive.
iv) Reduces administrative cost.
v) Competent contractors of known output are selected.
Disadvantages

i) Tenders are likely to be expensive.

ii) Unequal chances of contractors to tender for the job.
iii) Upcoming contractors are left out of the list.
iv) Selected contractors may be having some other jobs and may not be willing to
take up the job.
3. Negotiated tendering
The client, Architect and Qs negotiate the contract sum and matters pertaining the
project with prospective contractor and agree on terms and conditions of the
project.
Reasons for negotiated tendering
i) Emergency
ii) Need to retain business relationship
iii) State of the market
iv) Need for continuation contract.
Advantages

i) Cheap
ii) Quicker
iii) Good services of the contractor are maintained.
Disadvantages

i) No chance for other contractors to apply for the job.

ii) Contractor may charge high fees in case of continuation.
4. Serial tendering
Contractors are advised to apply for the job bearing in mind that if he is successful,
he will be asked to negotiated for a number of projects of the same nature i.e
Government buildings, schools within an area.
Advantages
i) Enables the client and contractor to programme their work load in advance with
more certainty.
ii) It leads to better relationship between contractor, client and architect where a
contractor may offer advice in the planning of the future week.
iii) Allows the contractor more time to plan the work on the site so that it can be
carried out more efficiently.
Disadvantage

i) It reduces the work available under competition to other contractors who may
have wished to tender.
ii) It relies on the integrity of the client in that since he knows the contractors prices,
the contract may be based on the cost items in the bill of quantities.