Lecture Five

Specification and Quantity Surveying

Construction Contract
1
Contents;
Principles of contract law
 Types of Construction Contract
 Contract Documents
 Contract management
Contract management
Dispute and Claim management

2
 1 Principles of Contract Law
Contract;
• Is a written or oral agreement between two or more parties
whereby each party promises to do or not to do something.
• An agreement whereby two or more persons as between
themselves create, vary or extinguish obligations of a proprietary
nature.
• It is intended to be enforceable by law and incorporates the rights,
obligations and Remedial rights of each contracting parties.
Construction contract is a contract whereby one party, the contractor,
under takes to produce a given result, under his own responsibility, in
consideration of a remuneration that the other party, the client, under
takes to pay him”
 Principles of Contract Law...
Contract requirements;
 Parties are capable of contracting: Lawful and Capable
 Consent/willingness of contracting parties is necessary: Intent
 Object of the contract is sufficiently defined, possible and
lawful: Legal and Distinct
 Use of Contract form prescribed by law, if any: Standard
 Payment/price for the Promise: Consideration
 Constitute two parts: Offer and Acceptance
 Parties enter into Agreement: Agreement
 Principles of Contract Law...
 The significance of any contract is that the promise is obliged for their
performances against a certain return and if failed to compensate for non -
performance and at the same time legally enforceable.
 A contract is a not a mental state but an act which is a matter of inference
from conduct.
 Some issues to be clearly understood when dealing with contractual matters.
• Essential Terms and Conditions
• Certainty
• Agreements to Agree
• Subsequent words or conducts
• Agreements after commencement and
• Agreement by conduct.
 Principles of Contract Law...
The purposes of a contract;
 To describe scope of work
 To establish time frame
 To establish cost & payment provisions
 To Set forth obligations & relationships
 To Manage multiple risks
 To Establish control mechanisms
 To Minimize disputes
 To Improve economic return on investment
 2 Types of Construction Contract

Construction Contracts types;

 Lump sum contract
 Unit rate contract
 Lump sum and schedule contract
 Cost plus fixed fee contract
 Cost plus percentage of cost contract
 Types of Construction Contract...
1. Lump Sum Contract;
 Contractor offered to do the whole work as shown in drawings
and described by specifications, for a total stipulated sum of
money.
 The qualities of the materials required can be calculated with
sufficient accuracy during the bidding process to allow contractors
to submit a single lump sum price for the work.
 More suitable for works for which contractors have prior
construction experience. Typically used for buildings.
 Not suitable for difficult foundations, excavations of uncertain
charter, and projects susceptible to unpredictable hazard and
variations.
 Types of Construction Contract...
2. Unit Price or Bill of Quantity/schedule contract;
 In this contractor undertakes the execution of work on an item
rate basis.
 The amount to be received by the contactor depends upon the
quantities of various items of work actually executed.
 Used for work where it is not possible to calculate the exact
quantity of materials that will be required.
 Used for Contracting heavy/highway work.
 Contractors submit a price for each item on a unit-price contract;
usually presented in the Bill of Quantity (BOQ).
 Types of Construction Contract...
3. Lump sum and scheduled contract
 Contractor offered to do a particular work at a fixed sum within a
specified time as per plans and detailed specifications.
 The schedule of rates for various items is provided which regulates
the extra amount to be paid or deduced for any additions or
deletions made during the progress of work.
 Measurements of different items of original work are not required
but extra items are required to be measured for payment.
 More suitable for construction works for which contractors have
prior work experience and can consequently estimate the project
cost more realistically.
 Types of Construction Contract...
4. Cost plus/cost reimbursable;
• Used when it is difficult or impossible for either the owner or the
contractor to predict their costs during the negotiation, bid and award
process; Due to unpredictable and extreme weather conditions.
• Cost plus contracts take many forms, the most common being cost plus
fixed fee and cost plus a percentage.
 Types of Construction Contract...
4.1 Cost plus Fixed Fee Contract
 It is desirable when the scope and nature of the work can at least be
broadly 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.
 Contractor is selected on the basis of merit rather than the fee alone.
Advantages;
 Contractor’s fee is fixed and does not fluctuate with actual cost of work.
Once this fee is fixed, the contractor cannot increase the cost of work.
 More preferable for the owner of the Project.
 Types of Construction Contract...
4.2 Cost plus Percentage of Cost Contract
 In this type of contract, it given on certain percentage over the actual cost
construction.
 The actual cost construction is reported by the contractor and is paid to
him by the owner together with a certain percentage as agreed earlier.
 The contractor agrees to do the work in accordance with the drawings,
specifications and other conditions of contract.
 Cost plus percent contracts may be fair in situations that are very
difficult, or when the time to complete the work is not known with any
certainty,
Disadvantage;
The contractor has a tendency to increase his profit by increasing the cost of
 3 Contract Documents

Contract Documents;
 A documents which describe about the Contract.
Typical Contract documents in the Construction Contract includes;
1. The Legal Part;
 The Contract Agreement
 The (latest) Minutes of Meeting
 The Letter of Acceptance(Award)
 The Tender document (Including the Appendix to Tender) and
 Conditions of Contract.
 Contract Documents...
2. The Commercial Part
 The Performance Security Form
 The Payment Security Form
 The Advance Payment Guarantee Form
 The Bid Security Form
 The Insurance Form and
 The Retention Money Security Form.
 Contract Documents...
3. The Technical Part;
 The Technical Specifications;
 The Drawing
 The Bill of Quantities
 Take off and Others
 Contract Documents...
The main tender (Contract) documents includes;
 Invitation to tender
 Instruction to tender
 Form of tender
 The Agreement
 Condition of contract (General and Particular)
 Specification (General and Particular)
 Bill of Quantities
 Drawings, Addenda
 Appendix to Tender and others
 Contract Documents...
1. Invitation to Tender: -
 An initiation letter to the contractor to participate in the tender with an
acknowledgment attached.
2. Instruction to Tenders: -
The contractor is given directive of what is required of tenders. It includes:
Tendering procedures, bid bond, data, space, time
Commercial requirements
Information in what shall be submitted with the tender (alternative proposals etc)
Scope of work
Tender basis
Tender bond (possible)
 Contract Documents...
3. Form of Tender
This is a document where the contractor:
 Confirms, that he has examined all the tender documents
 Confirms that he will perform the work
 Promises that the validity of the tender is open for a certain
period
 Shows his understanding that the lowest bid or any after may be
rejected
 States that part of the work may only be accepted
 Confirms that he will enter into an agreement if awarded
 Contract Documents...
4. Agreement
 The document that represents and reflects the legal contract between the
owner and the contractor, and between other bodies.
It is simply a letter that constitutes legal evidence that a contract exists and
forms the basis for its enforcement.
5. Conditions of Contract
 A document that states the obligations and rights of the parties and detail
the conditions under which the contract is to be carried out.
It states to what extent should be the relation between the engineer,
contractor and client.
It includes General and Supplementary conditions of contract.
 Contract Documents...

5.1 General Conditions;

 An essential part of the contract document.
 It defines the responsibilities of the parties involved in the
contract; the owner and the general contractor.
 It describes the guidelines that will be used in the administration
of the contract
 It is often referred to as boilerplate, implying that the same
documents are standard to all contracts.
 Various standard forms of General Conditions have been
development by different organizations.
 Contract Documents...
5.2 Supplementary Conditions
 Known as Special/Particular Conditions.
 Provide an extension of the General Provisions of the contract to fit the
specific project at hand.
 They serve as amendments or augmentation to the General Conditions.
 Some items included in the Supplementary Conditions are;
• The number of copies of contract documents to be received by the
contractor
• Materials provided by the owner
• Site visit
• Start date of the construction and others
 Contract Documents...
6. Specifications
 Known as Technical provisions.
 Written instruments to be used in conjunction with the
drawings
 Supplement the drawings and provide information that cannot
be shown in graphic form, or information that is too lengthy to be
placed within the drawings.
 Guide bidders in the preparation of cost proposals as well as field
execution of the work.
 Guide the contractor through the processes of ordering materials
and construction and installation of the facility.
 Contract Documents...
7. Bill of Quantities;
 Describe kind of work, with its expected amount of estimated
work
 It sets out the units of measurement, the units of work, the unit
price and the total cost of the works.
8. Drawings;
 It is a model of the designer's idea
 The means by which the designer conveys the physical,
quantitative, and visual description of the project to the contractor.
 They are also known as plans or blueprints.
 Contract Documents...
9. Addenda
 Any change to the bid documents after they are released for
bidding but before bids are actually received
 This formal document changes the original bid documents and
becomes a part of the bid package.
 Technically addenda may be issued to change the bid opening
date, to modify the original design, to delete or add items, or to
correct errors.

Addenda may not be issued within about five days of bid opening
unless the bid date is also extended accordingly.
 Contract Documents...
10. Appendix to Tender mainly defines the following;
 Amount of performance bond which is normally 10% of
the tender sum
 Minimum Amount of insurance
 Time for issuing notice to commence
 Time for completion
 Limit of liquidated damage (20% of the tender sum)
 Period of maintenance (defects liability period) normally
12 months.
 Contract Documents...
 Percentage for adjustment of provisional sum
 Percentage of the value of goods and materials to be
included in payment certificates usually 70 – 80%
 Percentage of retention money
 Limit of retention
 Minimum amount of interim certificates usually one
half of the engineer's estimated average monthly value.
Rate of interest upon unpaid sums
 Contract Documents...

In Ethiopia Construction Industry the following standard

conditions of contracts are commonly used:
 FIDIC (1987) – Condition of Contract
The international federation of national associations of
independent consulting engineers
 PPA, Standard Bid Document
 MoWUD, Standard Condition of Contract (1994)
 BaTCoDA, Condition of Contract
 4 Contract Management
1
Contract Management;
 It is the management of Contract Processes, Stakeholders
and their Performances along the Planning, Implementation,
Monitoring and Evaluation.
 Contract Management process can be idealized into three
major processes. These include
1. Contract Formulation
2. Contract Administration and
3. Closing of Contract Processes.
 Contract Management..
1. Contract Formulation;
Involves two sub processes;
1. Negotiation and
2. Signing of Contract Agreement.
Negotiation is a process by which Project Owners together with
their professional representatives’ deal with the recommended
winner of the tender on the requirements of the tender.
Contract document (signed Contract agreement) are base for
Contract Administration.
 Contract Management...
2. Contract Administration
A process that ensures the terms of the Contract.
Includes;
 Identifying contractual responsibilities of Stakeholders.
 Record, Monitor and Evaluate Progress of Mobilizations, Works
and Completions.
 Report Project Status daily and /or periodically and
Completions.
 Mediate Disputes.
 Following up and Evaluate Project Cost, Time and Quality.
 Ensuring Health, Safety and Environmental Requirements.
 Contract Management..
3. Closing of Contract
Maintenance Period and Remedial Works:
• One year
• The focus is not on normal wear and tear but rather damages seen on the
construction components.
• If claims and disputes are not settled before provisional certificate of
completion, they can be dealt during this phase.
• Closing of Accounts: release of retention moneys and performance securities
at the time of closing and Final Payment Certificate is issued.
• Completion Certificates; a certificate that concludes the contractual agreement
and will not be considered binding there after unless otherwise it is proved
illegal.
 Contract Management..
2 Dispute and Claim Management
 Dispute is a difference in a line of thought.
 Claim is mostly concerned with entitlements and liabilities
arising under, or as a result of, a legally valid contract.
A construction claim is a demand for
 Payment of additional compensation
 Adjustment of the parties respective contractual obligation.
 Extension of time
 Compensating delay damages
 Any other change with regard to the contractual conditions
 Contract Management..
Major Causes for Claims;
Deviations; interms of time, cost, quality, health and environmental
consequences from performance requirements among contractual stakeholders
can causes claims in construction contracts.
Causes for Claim;
 Poor or unclear tender and contract documents,
 Poor or inadequate administration of responsibilities by stakeholders and
 Unforeseen or uncertain situations during execution
Main categories Claim causes :
 Changed conditions
 Additional works, and
 Delay for cost overruns and time extension.
 Contract Management..
Claims can be associated with three major categories.
a. Time Related Claims;
When this type of claims are raised the following entitlements or
penalties will be taken
• Time Extension only
• Liquidated Damages only
• Time Extension and Cost Compensation
• Concurrent Compensations
• Bonus
• Reliving of Obligation
 Contract Management..
b. Cost Related Claims;
In this type the following entitlements or penalties will be taken
Additions requiring rate adjustments
Price Changes
Provisional sum adjustments
c. Default by Contracting Parties;
Claims associated with non performances of contractual obligations
such as:
Delay in Payment Certificates
Suspensions and Terminations
 Contract Management..
Claim Administration Processes;
 Contract Management..
1 Claim Submittal:
• A process by which the claimant is obliged to claim within a
reasonable period of time (28 – 30 days)
• It should constitutes Claim Notification, Claim Preparation
and Claim Submittal
2
Claim Processing:
• Claim approval
• Verifying Validity and reliability consideration and
• Finding Procedural requirements (Claim Handling).
 Contract Management..
Basically, three types of dispute resolution systems are well recognized.
a. Preventive Dispute Resolution System
• Early neutral evaluation and advise to prevent the happening of
claims or their consequential disputes.
• It is partnering, use of dispute resolution advisors and use of
facilitators.
b. Amicable Dispute Resolution System; Includes,
• Negotiations; agreement
• Mediations; using additional third party for negotiation.
• Conciliation; it is almost similar to mediation but; the conciliator
may make more specific suggestions to resolve the dispute.
 Contract Management..

c. Judgmental Dispute Resolution System

Includes
• Adjunction; it is use of dispute review board.
• Arbitration; is a method of adding the third party for negotiation.
• The arbitrator will be chosen and paid by disputants.
• Litigation; is going to court and being judged by a public
appointed jury.
• This process is quite expensive.
 Contract Management..
3 Claim Enforcement:
Two sub processes are included;
• Approved claim is enforced
• Finally becomes a closure therefore .
The claim enforcement process will entertain the inclusion of the
approved claim into payment certificates where their enforcement is
due.
Claims and disputes in construction contracts cannot be totally
avoided;
END OF LECTURE- FIVE
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