SI-5251 ASPEK HUKUM DAN MANAJEMEN KONTRAK

Fundamental Principles of
Construction Contract

May 2024
CONTRACT

• What is a contract?
• Agreement • Persetujuan
• Treaty • Perjanjian
• Understanding • Pemahaman
• Deal • Kesepakat

• What is the essence of a contract?

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 Rights and responsibilities / consequences

About something
Two more parties

In the future
Transfer of ownership/rights

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CONTRACT

• KITAB UNDANG-UNDANG HUKUM PERDATA

(Burgerlijk Wetboek voor Indonesie),
• 30 April 1847
• Buku ketiga: PERIKATAN

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CONTRACT
BAB-I – PERIKATAN
Pasal 1233
Perikatan, lahir karena suatu persetujuan atau karena undang-undang.

BAB-II - PERIKATAN YANG LAHIR DARI KONTRAK ATAU PERSETUJUAN

Pasal 1313
Suatu persetujuan adalah suatu perbuatan dimana satu orang atau lebih mengikatkan diri terhadap
satu orang lain atau lebih.

BAGIAN 3 - Akibat Persetujuan

Pasal 1338
Semua persetujuan yang dibuat sesuai dengan undang-undang berlaku sebagai undang-undang
bagi mereka yang membuatnya. Persetujuan itu tidak dapat ditarik kembali selain dengan
kesepakatan kedua belah pihak, atau karena alasan-alasan yang ditentukan oleh undang-undang.
Persetujuan harus dilaksanakan dengan itikad baik.
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Negotiating the terms and conditions of contract and making sure the compliances to the
terms and conditions, as well as agreeing and documenting any changes and/or
amendments that may rise during the execution of the contract

THEN CONTRACT MANAGEMENT FUTURE

TRANSFORMATION

CONTRACT
ADMINISTRATION

Contract
Planning
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CONTRACT
Legally-binding agreement which recognizes and governs the
rights and duties of the parties to the agreement.

The Meeting of the minds

( also referred to as mutual agreement, mutual
assent or consensus ad idem ) is a phrase in
contract law used to describe the intentions of
the parties forming the contract. In particular it
refers to the situation where there is a common
understanding in the formation of the contract .
This condition or element is often considered a
necessary requirement to the formation of a
contract
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CONTRACT Earliest form of Construction Contract

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CONTRACT Earliest form of Construction Contract

• Earliest regulation concerning the adjudication of structural failures

• Dated back to 2500 B.C. on the era of Babylonia (circa 1780 BC)
• Code of Hammurabi (282 paragraphs)
– If a builder built a house for a man and do not make its construction firm and the house
which he has built collapse and cause the death of the owner of the house, that builder shall
be put to death
– If it caused the death of the son of the owner of the house, they shall put to death a son of
that builder
– If it caused the death of a slave of the owner of the house, he shall give to the owner of the
house a slave of equal value
– If it destroyed property, he shall restore whatever it destroyed, and because he did not make
the house which he built firm and it collapsed, he shall rebuild the house which he collapsed
at his own expense.
– If a builder built a house for a man and do not make its construction meet the requirements
and a wall fall in, that builder shall strengthen the wall at his own expense.
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PRINCIPLES OF CONTRACT FORMATION

• Mutual Consent
• Meeting of the Minds
• All parties must agree on all principal aspects
• Contract must be free of ambiguous meanings

• Offer and Acceptance

• Contract is a reflection of a free will
• Each party is free to offer, counteroffer and /or accept
• Does bidding constitute offer and acceptance?
• Is there any limit of offer and acceptance? (expiration of offer)

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PRINCIPLES OF CONTRACT FORMATION

• Consideration
• Something of valuable that each party furnishes
• Is Mutual consent sufficient?

• Lawful matter
• The object must be definite and clearly defined or can be defined
later
• The object must be lawful
• The subject must exercise free will and be legally acknowledged

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PRINCIPLES OF CONTRACT FORMATION

• What happened if one of more principles are not

met /fulfilled?

• What happened if one or more parties violate the agreement?

• Terms and conditions
• Object of agreement

• Return to the (original) condition, before to execution of

contract

• Compensation
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CONTRACT PLANNING
• Strategy for selection of types of Contract

• Strategy for arrangement of Contract (single – multiple, subs)

• Basis of selection:

• Technical Characteristic of the Project

• Contract Pricing
• Risks and Risk Strategy
• Mandatory Regulation

• The consequences of selection must be carefully examined

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 CONTRACT PLANNING
Getting to know in advance (the works and your potential partners)
A request for information (RFI) is a document used during the construction process to get clarification about the
necessary details of a project. Over the course of a complex construction project, numerous RFIs will be written and
responded to in order to keep everything moving along with the proper design, specifications, materials and more.
https://www.bigrentz.com/blog/what-is-an-rfi

RFQ RFP RFT RFI

Request for Request for

Name Request for Quote
Proposal
Request for Tender
Information

Gather information Clarify questions

Request for in- Formal request for
about specific about project
Purpose aspects of a
depth project terms of a project
specifics during
information agreement
project construction

Detailed list of Contract with Detailed answer

Description of work
Deliverable and cost estimate
methods, costs, specific project that enables work
and timelines information to proceed
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CONTRACT PLANNING
Getting to know in advance (the works and your potential partners)
• Request for Quote (RFQ): is used to solicit information about how a vendor or contractor
would handle a specific aspect of a project, including cost estimates. Generally, RFQs are used in
cases where the client needs information about a specific product or service.

• Request for Proposal (RFP): is a more formal request used to gather information about in-
depth project information, like methods, timelines and specific pricing details. Most often, RFPs are
used by clients who want a detailed understanding of the requirements to complete a project.

• Request for Tender (RFT): is the most specific request, and the respondent to an RFI sets
out clear terms that they will be bound to if the tender is accepted. In essence, an RFT is a request
for a contract, and often responses to RFTs are considered legally binding.
Once a contract is created and a project is underway, RFIs are used to clarify details that may have
been incorrectly or insufficiently explained in the original plans.

https://www.bigrentz.com/blog/what-is-an-rfi
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CONTRACT PLANNING
Getting to know in advance (the works and your potential partners)

https://www.bigrentz.com/blog/what-is-an-rfi
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EXECUTION OF CONTRACT
• Contract is to be executed as agreed terms &
conditions
• Changes can be made as agreed, incl. compensation
• Contract cannot be changed, but can be amended
• Record / documentation is paramount

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TERMINATION OF CONTRACT
Contract is terminated if
• Its all over (termination by default), all obligations have
been delivered
• Termination for Default of contractors’ breach of contract:
contractor bears the burden of default
• Termination of Convenient: owner is obligated to
compensate contractor

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BREACH OF CONTRACT

• Material vs. Immaterial Breach

• Material breach:
• vital aspects of agreement
• may result in termination of contract
• Immaterial breach
• less or not important aspects of contract
• may result financial compensation of event nothing at all

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DAMAGES and REMEDIES for BREACH OF CONTRACT

• Any damages arising for breach of contract will

be borne by the breaching party

• Remedies for no-breaching party

• Excuse or justify the breach
• Rescind/cancel the contract
• Terminate the contract and sue for damages

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DAMAGES and REMEDIES for BREACH OF CONTRACT
Remedy of Compensation of Damages
Cost to finish the project;
If the cost exceeded the original contract amount, the contractor is obligated to fulfill the
remaining cost
Different in value
The contractor is responsible of any additional cost of compensatory damages for remedies
of defective works
Calculation based on:
Difference between the remedial cost and remaining original contract value
Market value, but not to exceed contract value

Liquidated Damages
It is not a penalty
Determined based on estimated future income (revenue)

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DAMAGES and REMEDIES for BREACH OF CONTRACT

Doctrine of “Foreseeability”
Damages for breach of contract will be limited to the cost of
the consequences that were reasonably foreseeable at the
time the contract was signed

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CONTRACTUAL ARRANGEMENT
• Contractual relationship can be implemented in different forms
and arrangement
• Various parties with various interest

• Project objectives

• Complexity organization

• Funding and construction execution

• Hierarchy Contractual Arrangement

• Direct and Indirect Relationship amongst involved parties

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EXAMPLE OF CONTRACTUAL RELATIONSHIP

PROJECT
OWNER
FINANCIAL DESIGN
INSTITUTIONS CONSULTANT

GENERAL INSURANCE
CONTRACTOR AGENCIES

SPECIAL SUB SUPPLIER

CONTRACTORS CONTRACTORS TRADER

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 Contract
Arrangements

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PRINCIPLES OF CONTRACT ADMINISTRATION

▪ The Document Must Be Read as a Whole

▪ The Document Will Be Construed Against the Drafter
▪ The Document Supersedes All Previous Discussions
▪ Specific Terms Govern Over General Terms
▪ Document Must Be Read in the Context of the Trade

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CONTRACT CHANGES, CLAIMS & DISPUTES

▪ Contract shall be prepared to anticipate both expected

and unexpected conditions
▪ Nature of construction works shall accommodate such
matter to allow for changes and modification as required
by present condition.
▪ Contract can be amended but not changed!

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CHANGES / CHANGE ORDER / VARIATION ORDERS

• Nature of Construction (uncertainty)▪ Requirements for Changes

• many sources of changes ▪ written notice
▪ equitable price adjustment
• various stages of construction process
▪ forward pricing vs. cost
• impacts of changes reimbursable
• Type of Construction Changes ▪ Conflicting Plans and Specs
• field changes ▪ order of precedence
• cardinal changes
• directive and constructive changes
• deductive changes
• differing site conditions
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CLAIM AND DISPUTE

• Claim may or may not lead to dispute (dispute is unsettled

claim)

• Disputes are common in construction

• They arise as result of incompliance (differences) of actual

(done) to plan (promises)  CLAIM

• Sources of dispute can be of anything and /or anyone

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Claims and Disputes
what is said / agreed
in contract

no
same?

claim
yes
yes approved
what is actually
settled?
exist / done

pay no

dispute
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Construction Claim (1)

 Claim vs. Lawsuit

 Eligibility of Claims
– entitlement
– damages Two sides of a coin

 Filing Claims
– Request for Equitable Adjustment
– Counterclaim

 Sources of Claims
– breach of agreement (intentionally & unintentionally)
– changes

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Construction Claim (2)

Vague Specifications
– “… shall have or shall arrange to have adequate standby
equipment available at all times to protect the work …”
– “… as large units as practicable …”
– “… shall be made sufficiently in advance …”
– “… concrete should be compacted …”
– “… concrete must be troweled to smooth finish …”
– “… in a workmanlike manner …”
– “… sufficient size …”

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Construction Claim (3)

Types of Claims
◦ Owner-Purchased Material and Delay Claims
◦ Uncontrollable Events and Delay Claims
 Extreme weather
 Zoning, regulation changes

◦ Design-Related Delay Claims

 Design errors and omissions
 Design inspection
 Design review and approvals
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Construction Claim (4)

Types of Claims
◦ Interdependent Contractor Performance Delay Claims
 “Timing is of the essence”

 Contractors/sub-contractors work based on their assumed timing

◦ Scope-of-Work Claims
◦ Owner Change-Order Claims
◦ Acceleration Claims
◦ Changing-Site-Condition Claims
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Schedule and Delays
• Establishment of construction schedule
– start date, duration and completion date
– substantial vs. final completion of works

• Floats: the use and ownership

• Construction Delays ▪ Impact of Delays

– excusable delays
– non-excusable delays
– compensable delays
– concurrent delays
– ripple effects
– liquidate damages
– calculating compensation
Total cost method
Segregation cost method
Eichleay formula (overhead)

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Concurrent Delays
• Concurrent delays can easily be defined as simultaneous delays
caused by the general contractor and the project owner, affecting
the project schedule and project completion date.
• Some others have defined it as "Two or more delay events
occurring within the same time period, each independently
affecting the Completion Date" and in many instances, your
business can be entitled to be compensated to cover extra costs or
damages following these type of delays.)

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Effects of Delays on Scheduling

 Type of scheduling logic

◦ soft logic vs. hard logic
◦ resource logic vs. preference logic
◦ technical vs. planned schedule

 The use of float

◦ reserve for unexpected conditions
◦ resource planning  Q: Who on Floats?

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End of Lecture

CONSTRUCTION CONTRACT

• What is it?
• What are the considerations of such contract?

Write your answer and submit via email to b.soemardi@itb.ac.id by

15:00 today

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End of Lecture Note on
INTRODUCTION TO CONSTRUCTION CONTRACT

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