CHAPETR – 2

Chapter
h Outline
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‡2.1. Principles of Contract Law
‡2.2. Types of Construction Contract
‡2.3. Contract Documents
‡2.4. Contract Management :
„Contract Administration and Closing
„Claims and Dispute Management
Preface

Delivery System Contract Formulation

Procurement Method Contract Administration
Contract Types Contract Closing

Contract Procurement Contract

Planning Management Management

Procurement Preparation
Tendering
Tender Evaluation & Notice of Acceptance
Principles
p of Contract Law
Principles of Contract Law
Principles of Contract Law
Principles of Contract Law
Principles of Contract Law

‡ Legal Definition of Contract

Legal Definition of Contract
„ According to the Civil code of Ethiopia, Art.1675:

‡ A contract is an agreement whereby two or more 
persons as between themselves create, vary or 
extinguish obligations of a proprietary nature.

‡ An agreement that affects the legal relationship 
between two or more parties.
Principles of Contract Law

‡ Elements of a Contract ‐
Elements of a Contract ‐ What does it 
What does it
take to have a legally binding 
contract?
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‡ Contracts require 4 basic elements
„ Mutual Agreement
‡ Offer 
‡ Acceptance
„ Legal Objective
„ Valid Consideration
„ Legal Capacity of the parties
 Principles of Contract Law

1. What is Mutual Agreement?
„ It should show evidence that there was ‘MEETING OF MIND’’
„ Offer – Clear and Unambiguous
„ Acceptance – clearly accepting deal offered & anything else 
clearly accepting deal offered & anything else –
Counteroffer & Non acceptance
2. What is legal objective?
‡ The thing contracted must be legal in and of itself.
h h d b l l d f lf
3. What is a valid consideration?
‡ In exchange for the offer to perform, the recipient or client 
In exchange for the offer to perform the recipient or client
must offer something of value
„ Money
„ Promise of future work or  revenue
„ Goods or Services
Principles of Contract Law

‡ Without valid consideration a contract is invalid 
Without valid consideration a contract is invalid
& unenforceable

4. What is legal Capacity?
‡ In simplest form, parties must be:
In simplest form, parties must be:
„ Of Age
„ Mentally Competent
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‡ In construction environment, parties must have:
„ Legal authority to issue & execute contracts
„ Must have proper license to have legal capacity
Principles of Contract Law

Concepts and Basic Terms of Contracts: 
Concepts and Basic Terms of Contracts: ‐
‡ Offer: ‐ proposal to enter into a contract.
‡ Acceptance: 
Acceptance: ‐
‡ Performance of Contracts: ‐
„ Performance – fulfilling respective legal obligations
Performance  fulfilling respective legal obligations
‡ Contractual Liability:
‡ Extra –
Extra – Contractual Liability: ‐
Contractual Liability: ‐
Types of Construction Contracts
Types of Construction Contracts
Types of Construction Contracts

Contracts for the execution of civil engineering works are 
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of following type:
‡ (a)  Lump sum contract
‡ (b)  Unit rate contract
‡ (c)  Lump sum and schedule contract
‡ (d) Cost plus fixed fee contract
(d)  Cost plus fixed fee contract
‡ (e)  Cost plus percentage of cost contract
A. Lump Sum Contract( Fixed Price)
A. Lump Sum Contract( Fixed Price)
‡ Lump sum contract are typically used for buildings. 
‡ Difficult to make adjustments.
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Types of Construction Contracts

‡ A lump sum contract is more suitable for works 
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for which contractors have prior construction 
experience. 
‡ Not suitable for unpredictable conditions.
N i bl f di bl di i
B. Unit Price or Bill of Quantity (Fixed Price) 
‡ Also called Schedule contract
Al ll d S h d l t t
‡ Used for work where it is not possible to 
calculate the exact quantity of materials that will
calculate the exact quantity of materials that will 
be required. 
‡ Unit‐price contracts are commonly used for 
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heavy/highway work. 
Types of Construction Contracts
Types of Construction Contracts

‡ Items whose actual quantity varies from the 
Items whose actual quantity varies from the
estimated quantity by more than 15 or 20%, either 
above or below the estimated quantity, are 
sometimes subject to renegotiation of the unit 
price. 
C. Lump sum and scheduled contract
‡ Combines the features of the Lump sum and 
schedule contracts
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‡ Additional items are amounted as per the 
attached item rate.
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Types of Construction Contracts

D. Cost plus
‡ Used when it is impossible to predict their costs during the negotiation, bid, 
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and award process. 
‡ Factors ‐ unpredictable and extreme weather conditions, transportation 
problems, combat or war, or contracts where the amount of effort that will be 
required depends on another contractor’s work. 
‡ Cost plus contracts take many forms: most common cost plus fixed fee and 
cost plus a percentage. 
D.1. Cost plus Fixed Fee Contact
‡ Is desirable when the scope and nature of the work can at least be broadly 
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defined. 
‡ The amount of fee is determined as a lump sum from a consideration of the 
scope of work, its approximate cost, nature of work, estimated time of 
construction, manpower and equipment requirements etc. 
p q p q
‡ The contractor will not be tempted to increase the cost to get more revenue. 
‡ The contractor in this type of contract is selected on the basis of merit rather 
than the fee alone. 
Types of Construction Contracts

D.2. Cost plus Percentage of Cost Contract
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‡ In this type of materials and labor are arranged between 
the client and the contractor.
‡ The tendency of the contractor to increase the cost of work 
to earn more profit by way of percentage of enhanced 
actual cost is the major demerit of this contract type.
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Special Types of Contracts:
„ Turn – key Contract
„ Package Contract
„ Negotiated Contract
„ Running Contract
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2.3. Contract Documents
‡ The main contract documents are:
„ Invitation to tender,
I it ti t t d
„ Instruction to tender,
„ Form of tender, 
Form of tender
„ The Agreement, 
„ Condition of contract( General and Particular),
( ),
„ Specification (General and Particular),
„ Bill of Quantities,
„ Drawings, 
„ Addenda and
„ Appendix to Tender.
A d d
2.3. Contract Documents

Standard Bid Documents

MLDOs Business Asson’s

Asson s Professional Asson
Asson’ss
WB, ADB, EC/U, etc Contractors, Civil Engineers, Architects,
Consultants Construction Management,

Donors’ Interest
Donors
Business Interest Professional Interest

Public Authorities Public and / or

Public Works Bodies, Government
Public Financiers Interest
2.3. Contract Documents

‡ In Ethiopia Construction Industry the following 
In Ethiopia Construction Industry the following
standard conditions of contracts are commonly 
used:
„ FIDIC (1987) – Condition of Contract
„ PPA, Standard Bid Document
PPA Standard Bid Document
„ MoWUD, Standard Condition of 
Contract (1994)
„ BaTCoDA, Condition of Contract
BaTCoDA Condition of Contract
2.3. Contract Documents

‡ FIDIC Conditions of Contracts

FIDIC Conditions of Contracts
„ FIDIC is the international federation of national 
associations of independent consulting engineers
„ Founded in 1913 by the national associations of three 
European countries (France , Belgium and Switzerland)
„ Now with membership from over 74 countries
Now with membership from over 74 countries, 
members are generally national associations with the 
Ethiopian Consulting Engineering and Architects 
Association being one.
„ FIDIC has evolved into a leading body for development 
of model standard forms of contract for use in the
of model standard forms of contract for use in the 
international construction industry. 
2.3. Contract Documents

‡ FIDIC conditions of contracts have two parts:

FIDIC conditions of contracts have two parts:
„ General Condition of Contract
„ Particular Conditions of Contract
‡ FIDIC Conditions of Contracts
„ 1957 – RED BOOK
‡ The very first edition – civil engineering
‡ Contract type – Add Measurement Type 
„ 1963 YELLOW BOOK
1963 – YELLOW BOOK
‡ For mechanical and Electrical works
„ 1987 – OLD FIDIC
‡ Comprises the RED and YELLOW Books. 
2.3. Contract Documents

„ 1995 – ORAGE BOOK
‡ For Design Build and Turnkey Projects
„ 1999 – GREEN BOOK
‡ For short period projects ( 6 months)
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‡ Low contract value ($ 500,000)
„ 1999 – SILVER BOOK
‡ For turnkey for power plants, factories and facilities
‡ MBD – Harmonized Edition
„ Multi‐later banks (MDBs) tried to harmonize the FIDIC 
conditions to suite there procurement needs.
„ W ld B k has published one in 2004
World Bank – h bli h d i 2004
2.3. Contract Documents
ETHIOPIAN CONSTRUCTION INDUSTRY

‡ 1959 – Ministry of Housing
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‡ 1987 – Building and Transport Construction and Design 
Authority (BaTCoDA)

‡ 1994 – Ministry of Works and Urban Development 
1994 Ministry of Works and Urban Development
(MoWUD) 
„ Based on FIDIC RED Book
„ Difficult to use for private contacts 

‡ 2006 – Public Procurement Authority (PPA), Standard 
2006 P bli P t A th it (PPA) St d d
Bid Document  
 2.3. Contract Documents
ETHIOPIAN CONSTRUCTION INDUSTRY

‡ 2006 – PPA Condition of Contract

‡ Dispute/Claim Management –
„ Claim ‐ Adjudicator – Arbitration
‡ Price Escalation –
„ MoWUD – only by decree ( Fuel)
„ 2004 –
2004 Directive ( Cement, Reinforcement and Bitumen 
Di ti ( C t R i f t d Bit
were added)
„ PPA 
PPA – price escalation formula is provided
price escalation formula is provided
‡ Advance Payment - Special Condition of Contract
‡ Duration - Special Condition of Contract 
‡ Liquidated Damage – 1/1000 of Unjustified Delay Amount 
vs. 1/1000 on basis of contract price
2.3. Contract Documents
ETHIOPIAN CONSTRUCTION INDUSTRY
2.4. Contract Management :
C t t Administration
Contract Ad i i t ti and d Cl
Closing
i
‡ Contract Management Process
Contract Management Process
Contract Administration
‡ Identifying contractual responsibilities of Stakeholders.
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„ Reviewing the Terms of Contract Documents
„ Extract Monitoring Responsibilities
„ Preparing Monitoring Responsibility Summary Sheets
p g g p y y
‡ Determining and understanding the construction 
components of the project.
‡ Reviewing the Contract Drawings and Technical Specifications
Reviewing the Contract Drawings and Technical Specifications
‡ Extract the Construction Methods and Sequences
‡ Prepare Construction Methods and Over all Sequences Sheets
‡ Review submitted (Integrated) Schedules and Breakdowns for
Review submitted (Integrated) Schedules and Breakdowns for 
operations such as Organizational Breakdowns, Resources 
Breakdowns & Schedules and Time Schedules.
‡ Record, Monitor and Evaluate Progress of Mobilizations, 
Record Monitor and Evaluate Progress of Mobilizations
Works and Completions.
Contract Administration
‡ Report Project Status daily and / or periodically 
p j y / p y
and Completions.
‡ Certify qualities of materials, shop drawings, 
samples, workmanships and works.
l k hi d k
‡ Measure Works, Record Site Potentials and 
Certify Payments and Completions
Certify Payments and Completions
„ Take off sheet and Bending Schedules are used for Measurement 
of Works
„ Method of Measurement is according to standard practices
Method of Measurement is according to standard practices
„ Site Potentials such as material, equipment and Manpower on 
site together with appropriate site organization is recorded
„ Advance Interim and Final Payments are certified
Advance, Interim and Final Payments are certified
‡ Mediate Disputes.
Contract Closing
‡ Closing of Contract looks into issues related to 
Closing of Contract looks into issues related to
Maintenance Period and Remedial works, 
Dealing with Left Over Claims and Disputes, if 
any, Closing of Accounts and Completion 
Certificates.
Claims and Dispute
Disp te Management
 Claims and Dispute
Disp te Management
‡ Dispute in simple terms is a difference in a line of 
Dispute in simple terms is a difference in a line of
thought.
‡ Claim is mostly concerned with entitlements and 
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liabilities arising under, or as a result of, a legally 
valid contract. 
‡ A construction claim is therefore can be a demand 
for payment of additional compensation, 
adjustment of the partiesʹ respective contractual 
dj f h i ʹ i l
obligations, Extension of Time or compensating 
delay damages or any other change with regard to
delay damages, or any other change with regard to 
the contractual conditions or terms.
Cl i and
Claims d Di
Dispute M
Management
‡ Claim in practice can also be understood in 
Claim in practice can also be understood in
different ways based on the perceptions held by 
contractual stakeholders. 
„ A claim is a disguised form of a blackmail,
„ A claim is the last chance to bail out of a losing job, and
„ A claim is an assertion to a contractual right.

‡ Claims can be associated with three major 
Cl i b i t d ith th j
categories that can be understood as the different 
types of claims These are:
types of claims. These are:
 Cl i and
Claims d Di
Dispute M
Management
‡ Time Related Claims: Claims associated with delay or in time 
completion of projects where either of the following six Entitlements or
completion of projects where either of the following six Entitlements or 
Penalties are subjected to:
„ Time Extension only
„ Liquidated Damages only
„ Ti
Time Extension and Cost Compensation
E t i dC tC ti
„ Concurrent Compensations
„ Bonus
„ Reliving of Obligation
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‡ Cost Related Claims: Claims associated with monetary compensation 
where either of the following entitlements or penalties are entertained:
„ Additions requiring rate adjustments
„ Price Changes
Price Changes
„ Provisional sum adjustments
‡ Default by Contracting Parties: Claims associated with non 
p
performances of contractual obligations such as:
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„ Delay in Payment Certificates
„ Suspensions and Terminations
Cl i and
Claims d Di
Dispute M
Management
‡ Claim Administration Processes
Claim Administration Processes
Contract Conditions related to Claims
Major Causes for Claims
‡ Levy, 2000 outlined 11 reasons why claims can 
Levy, 2000 outlined 11 reasons why claims can
be initiated. They are related to 
„ poor or unclear tender and/or contract documents,
p
„ poor or inadequate administration of 
responsibilities by stakeholders, and
„ U f
Unforeseen or uncertain situations during execution
t i it ti d i ti
‡ Wideman, 2001 has also identified claim causes 
into three main categories:
into three main categories:
„ Changed conditions
„ Additional works and
Additional works, and
„ Delay for cost overruns and time extension.
Al
Alternative
i DiDispute R
Resolution
l i S System
‡ ADR – includes
‡ Preventive Dispute Resolution System ‐ Partnering, Use of dispute 
resolution advisors and Use of Facilitators

‡ Amicable Dispute Resolution System ‐ Negotiation, Mediation, 
Conciliation and use of Mini‐Trials to administer the claim in a less 
formal, simple procedure, more flexible, less adversarial and strictly 
confidential mode so as to avoid the time and cost implication of
confidential mode so as to avoid the time and cost implication of 
claim processing.

‡ Judgmental Dispute Resolution System
Judgmental Dispute Resolution System including Adjucation or 
including Adjucation or
use of Dispute review board, Arbitration and Litigation where the 
formal adjucatory or common law system is applicable to bring the 
closure of claim processing.
Alternative Dispute Resolution System
Preventive
i Dispute
i Resolution
l i System
‡ PARTNERING –
„ Project Partnering
Project Partnering
„ Strategic Partnering
 Alternative Dispute Resolution System
P
Preventive
i Dispute
i Resolution
l i System
‡ ALLIANCING
‡ Alliancing is generally a tender arrangement where all the principal 
tenderers organise into groups with common aims, prior to submitting 
the tender. 
‡ STANDING NEUTRALS
‡ DISPUTE REVIEW BOARDS
‡ DRB ‐ a representative from the owner, one from the contractor and a 
third, selected by these two representatives. The third member chairs 
the board.
‡ The members usually have experience in the kind of construction work 
being undertaken and are also familiar and experienced in dispute 
resolution. It is important that all the board members are independent 
of any of the contracting parties, although they are paid by them.
f f h lh h h db h
Alternative Dispute Resolution System
Amicable
i bl Dispute
i Resolution
l i System

‡ Amicable Dispute Resolution System
Amicable Dispute Resolution System includes 
includes
Negotiation, Mediation, Conciliation and use of 
Mini‐Trials 
‡ NEGOTIATION
‡ IS NEGOTIATION AN ALTERNATIVE DISPUTE 
RESOLUTION METHOD?
‡ It can be argued that negotiation is not part of an 
ADR at all, largely because it is not a specific, 
detailed system such as arbitration or even 
mediation
di ti
 Alternative Dispute Resolution System
Amicable
i bl Dispute
i Resolution
l i System
‡ MEDIATION 
‡ Defn: “a process in which the parties to a dispute, with the 
assistance of a neutral third party (the mediator), identify 
the disputed issues develop options consider alternatives
the disputed issues, develop options, consider alternatives 
and endeavour to reach an agreement. The mediator has no 
advisory or determinative role in regard to the content of 
the dispute or the outcome of its resolution but may advise
the dispute or the outcome of its resolution, but may advise 
on or determine the process of mediation whereby 
resolution is attempted”.
‡ WHY USE MEDIATION?
WHY USE MEDIATION?
„ Save money
„ Preserve relationships
„ Maintain confidentiality and privacy
Alternative Dispute Resolution System
Amicable
i bl Dispute
i Resolution
l i System
Alternative Dispute Resolution System
A i bl Dispute
Amicable i Resolution
l i System
‡ CONCILIATION
‡ Conciliation is in many respects similar to 
mediation. The conciliator is still an independent 
p
third party but the difference is that the 
conciliator may make more specific suggestions 
to resolve the dispute. The conciliator may also 
have a more forceful and powerful role in the 
various meetings
various meetings. 
‡ Unlike mediation, there is an international set of 
rules for conciliation
rules for conciliation 
Alternative Dispute Resolution System
Judgmental
d l Dispute
i Resolution
l i System

‡ Includes Adjucation or use of Dispute review 
Includes Adjucation or use of Dispute review
board, Arbitration and Litigation 
‡ The Adjucation
j or dispute review board has been 
p
discussed in the above section. 
‡ Litigation
g means going to court and being judged 
g g gj g
by a public appointed jury. This process is 
obvious quite expensive as the public judiciary 
system is less efficient and time taking. 
i l ffi i d i ki
‡ The most common alternative to litigation is 
arbitration. 
bit ti
ARBITRATION
‡ ‘Arbitration’
Arbitration  has been defined as: 
has been defined as: “ is the 
is the
reference of dispute or difference between not less 
than two parties for determination, after hearing 
both sides in a judicial manner, by a person or 
persons other than a court of competent 
j i di ti ”
jurisdiction”.
‡ ARBITRATOR
‡ He is private in so far as
H i i i f
„ He is chosen and paid by the disputants
„ H d
He does not sit in public
t it i bli
ARBITRATION
„ He acts in accordance with privately chosen 
p y
procedure so far as that is not repugnant to public 
policy
„ S f
So far as the law allows he is set up to the exclusion of 
th l ll h i t t th l i f
the state courts
„ His authority and powers are only whatsoever he is 
y p y
given by the disputant’s agreement
‡ ARBITRATION ADVANTAGES
„ There is belief by both parties that Arbitrator is 
qualified to handle the case 
ARBITRATION
„ The Arbitrator is an expert in the field
p
„ The procedures are open to the parties
„ Hearing are private 
„ The decision is binding

‡ THE LEGISLATION
‡ The UNCITRAL Model Law on International 
C
Commercial Arbitration is used as the starting 
i l A bi i i d h i
point from which to consider current and 
proposed legislation in relation to a given clause
proposed legislation in relation to a given clause. 
ARBITRATION
‡ MODEL LAW
‡ O
One of the advances in using arbitration as a tool for dispute 
f h d b lf d
resolution around the world was the publication of the Model Law as 
adopted by the United Nations Commission on International Trade 
Law on 21 June 1985. 
‡ The Model Law applies specifically to international arbitration.
‡ The definition provided by the Model Law to the interpretation of the 
words ‘commercial’ states that it should be applied to all relationships 
of a commercial nature whether contractual or not (Model Law
of a commercial nature, whether contractual or not (Model Law 
Endnote 2). 
‡ In Ethiopia the important source of legislation for Arbitration is Addis 
Ababa Chamber of Commerce & Sectoral Associations (AACCSA) 
Arbitration Institute
Arbitration Institute. 
‡ Regional sources of information include Kenya (Dispute Resolution 
Center and Nairobi Peace Initiative), Malta (Malta Arbitration Center), 
Nigeria (Nigerian Arbitration and Conciliation Act) and South Africa 
(C
(Center for Conflict Resolution and Commission for Conciliation, 
f C fli R l i dC i i f C ili i
Mediation and Arbitration).
THE ARBITRATION PROCEDURE