CM-4

By- Jitesh Kumar

 Construction Contract :-
A construction contract is an agreement between
two or more parties for carrying out the
construction works as per certain terms and
conditions.
As per The Indian contract act 1872, a contract is
an agreement which is enforced by law.
A contract comes into existence only when both
party/person agree.
 Objectives of contract:-
To complete the work on time &
according to specifications
Contract eliminates dispute b/w two
parties (contractor & owner).
Contractor is paid on the basis of his work
& time & owner gets quality work as per
specifications.
 Types of Construction Contracts
• There are many types of contracts used in
construction. Each type has its advantages and
disadvantages regarding the owner and the contractor.
• They are categorized into two major groups as per the
method of payment to the contractor. The following
are the types of construction contracts generally used
in construction projects:
Lump-sum contract
Unit price contract
Cost-plus contract
Target cost contract
Labour Contract
 Price-based Construction Contracts
1. Lump-Sum Construction Contract
• In this type, the contractor bids a single fixed price for overall activities in
the project. The contractor estimates the project cost from drawings &
information supplied by owner. Then he adds overhead and his profit to
determine the value of the project.
• All risks are taken by the contractor, and there isn't any risk carried by the
owner. The contractor has an incentive in this contract as he is rewarded
for an early finish, and there is a penalty for a late finish.
• This contract is ideal when the project scope is well defined at the design
stage, because there is limited flexibility for modifying the design during
the construction period.
• In lump-sum contract, construction is carried out as per plan &
specification by the contractor for definite money of money.
Advantages:-
Total cost of construction is known before starting of the
work
Early completion of work
Low cost of construction for owner due to high
competition among contractor
Owner’s risk is low
Disadvantages
It is difficult to adjust extra work during construction
Dispute may occurs b/w contractor & owner because both
of them works towards their own interest
Higher risk for the contractor
Quality of work can not be guranted
2. Unit Price/ Item rate Construction Contract
• In this contract, the contractor gives his rate per
unit of work/item. Total cost of the project is
based on the price of each item's unit.
• The risk is shared with the contractor and the
owner. This type of contract has more flexibility for
design changes than the lump sum contract.
• The construction of the project can be started
before finishing the designs.
• This form of contract is very use full for quality
work & when total quantity of work is not known.
• The rate quoted by contractor include materials,
labour, tools, plants & contractor’s profit etc.
Advantages
Payment is made on the basis of actual work hence this
method is economical.
It allows extra item of construction
Contractor tries to complete work as early as possible
Modification is possible during construction

Disadvantages
Both contractor & owner has to hire a staff for taking
measurements
Exact cost of construction is not known at the start of
the project
 Cost-based Construction Contracts
3. Percentage rate Construction Contract
• The contractor is paid based on the actual cost of the
project, including direct and indirect costs, plus a specific
fee. This fee could be a fixed fee or percentage of costs.
• All risks are associated with the owner, and he gets involved
with the contractor in the management of the project. The
contractor has no risk in case of increasing the cost of the
project; also, there isn't any incentive for an early finish.
• This type of contract is ideal when the project scope is
uncertain in the early stages of the project. The contractor
can start the execution of the project before finishing the
design. It is impossible to estimate the cost of the project
before the construction has been completed.
• This type of contract is classified as follows
:-
Cost plus percentage rate contract
Cost plus fixed fee contract
Cost plus variable percentage contract
Cost plus variable fee contract
1. Cost plus percentage rate contract
In this contract, owner agrees to pay to the
contractor the actual cost of the work plus an
agreed percentage of cost as his profit.
2. Cost plus fixed fee contract
In this contract, owner agrees to the contractor the
actual cost of work plus certain fixed amount as his
fees.
3. Cost plus variable percentage contract
In this contract, payment to the contractor is made on
varying percentage basis. i.e. contractor’s percentage is
linked with the cost of construction, % profit increases with
decreasing cost of construction & % profit decreases with
increasing cost & time of construction.
Contractor gets more profit if he bring down the estimated
cost of construction.
A variable scale of % profit, related to the cost of
construction is already prepared.
4 Cost Plus variable contract:-
This type of contract is similar to cost plus fixed fee
contract, but fee of contract varies with respect to the
cost of construction.
Fee to be paid to contractor is not fixed but it
increases or decreases with respect to actual cost of
construction.
Higher the actual cost of work, lower is the fee & vice
versa.
4. Target Cost Construction Contract
• Target cost contract has common features of the lump
sum and cost-plus contracts. The contractor is paid
based on the actual costs plus a certain fee either
fixed or percentage of total cost in case of the cost of
the project doesn't exceed certain target cost
mentioned by the owner.
• There is a risk carried by the contractor in case of an
increase in the cost of construction projects. The
contractor is also rewarded a percentage of any
savings between target and actual cost.
 Labour Contract
• In this contract, owner & contractor enters into
agreement only for supply of labour.
• Material used in the project is supplied by owner &
labour ( & required machinery) is supplied by contractor.
• Quality of work in this contract is good because material
is supplied by the owner.
Advantages
Quality of work is superior
Extra work can be added
Disadvantages
Wastage of materials is common
Shortage of material may delay in construction
work
Fee Contract
In this contract, owner agrees to pay the
contractor an amount as fee for his technical
skills & knowledge.
Cost of materials, labour, & other expenses are
covered by owner separately.
Negotiated Contract
When the contract is given simply by the negotiation
between the parties without invitation of tender is called
as negotiated contract.
In this contract, there is no open competition & owner
negotiates with selected contractors.
Generally it is not used for public works or by
government dept./companies. Private companies often
uses this system of contract.
 Contract Document
• A construction contract document is a valid document
that can be enforced by law.
• At the early stages of any construction project, the
owner with his engineer or consultant prepares
necessary documents for the tender process, which
will be included in the contract. These documents are
called contract documents.
• These are the reference documents that describe the
details of work to be performed.
• These are a legal part of the contract which describes
the work such as supplying labor, equipments,
technical expertise and materials for the construction.
 Types of Documents in a Construction
Contract
The different types of documents in a
construction contract are as follows :-
• Contract Agreement
• Scope of work definition
• General conditions
• Special conditions
• Drawings and specifications
• B.O.Q (bill of quantity)
• Letter of acceptance
• Work Schedule
1. Contract Agreement
• A contract agreement defines the agreement
between the client. In this document parties are
specified and their responsibilities are defined in
the construction process.
• It is the important document to which other
contract documents attach or reference.
2. Scope of work definition
• Scope of work should describe the project, the
project deliverables, and details of work. It must
specify all tasks, duties, and limitations to get
desired results.
3. General Conditions of Contract
• General conditions define all general terms and items such as
utilities, vehicles, organizational structure, mobilization etc. But
these items are not directly related to the construction
activities. Obligations of both parties, general conditions,
overhead costs, bonuses, and some other conditions are
included in this portion.
• General conditions set the framework of the contract that
establishes all the rights and obligations of the parties involved.
• It generally includes:
• Definition of the project
• Contract components
• Rights and responsibilities for the owner and the contractor
• Project schedule
• Payment method
• Warranty and delay penalty
4. Special Conditions of Contract
• Special conditions describe specific requirements
and instructions for the work. Mostly these are
additional to the general conditions. Special
conditions include details and conditions
regarding the individual tasks or the whole
project.
5. Drawings & Specifications :-
• All contracts should involve drawings that contains
detail of the work to be done. Drawings have the
details like quantities, locations, dimensions, sizes,
shapes, and forms of the elements. These drawings
can be architectural, electrical, mechanical,
landscape & structural.
• Construction drawings include elevations, sections,
and profiles for the building to be constructed.
• Technical Specifications explain the materials,
workmanship, and equipments required for a work.
Client should describe the specifications clearly
before the tendering stage. Every little work should
be specified and deviation limits should be
determined in technical specifications.
6. Bill of quantity
• A bill of quantities is a document used
in tendering, which contain details of materials,
works, and labor (and their costs) etc. It also
details the terms and conditions of the
construction work. BOQ helps a contractor to
price the work for which he or she is bidding.
7. Letter of acceptance
• A letter of acceptance is a document sent and
signed by the employer, which says that the offer
submitted by the contractor has been fully
accepted and that the contractor may begin to
work.
8. Work Schedule
• Work schedule is very important for both parties.
Because a project cannot be performed without a
proper plan. A work schedule shows site delivery date,
start and finish milestones, project duration, and other
useful information.
• Different types of works are mentioned in the work
schedule, works of similar nature are grouped &
termed as civil, electrical, and mechanical works etc.
 Contract Management
• Contract management or contract lifecycle
management (CLM) is the process of managing
contracts, from the initial stage to execution.
• It also manages termination or renewal of the contract.
• Key activities involved in contract management are
contract drafting and clause negotiation, performance
analysis to maximize operational and financial
performance and risk mitigation.
• Business relationships get damaged by defaulting on
contract terms.
• Contracts are the foundation of business relationships.
They describe every details of a business deal or
supplier relationship from start to finish.
• All contracts need to be managed for their entire
lifecycle, managing negotiated clauses, monitored for
compliance, and then reviewed again for renewal or
amendments.
• A single contract needs people from finance, legal and
procurement. These peoples should have great skill &
knowledge.
• This is a manual, time-consuming and costly process.
But it needs to be done for proper functioning of
business & have healthy relationship b/w parties
involved in the business.
• Without proper contract management, companies open
themselves to several risks, financial penalties etc.
• A small technical mistake or wording issue can cost
lakhs of rupees in the long run.
 MODES OF SETTLEMENT OF DISPUTES
1. Capitulation- weaker party give in to retain
goodwill/ long term business relationship with
stronger party
2. Negotiation--Both parties sink differences and try to
reach amicable settlement
3. Arbitration- Disinterested/impartial third party
appointed to pass judgment
4. Litigation- Disputes taken to court resulting in
abnormal delay and heavy expenditure
5. Dispute Resolution Board- Board constituted on
award of contract to resolve disputes as and
when they arise
 ARBITRATION
• It is the settlement of a dispute between parties to a contract by a
neutral third party without turn to court action.
• The neutral third party is called as the Arbitrator.
• Arbitration is usually voluntary but sometimes it is required by
law . If both sides agree to follow the arbitrator's decision,
'award' becomes a binding arbitration.
• Exact procedure to be followed is according to country's
arbitration laws or by arbitration rules prescribed by International
Chamber Of Commerce (ICC).
• Arbitration is the most popular method of disputes settlement in
building and construction disputes.
 ARBITRATION-OBJECTIVES
• Make provision for arbitral procedure which is fair,
efficient, capable of meeting needs of specific
arbitration
• To minimize supervisory role of Courts
• Arbitral tribunal to give reasons for the award
• To ensure Arbitral tribunal remains within its
jurisdiction
• Permit Arbitral tribunal to use:- mediation,
conciliation or other procedures to settle disputes
• To make decisions of Tribunal enforceable as a decree
of court
 DEFINITIONS
• Arbitrator- A person appointed to settle disputes
• Arbitration Agreement- A written agreement between client
and contractor to settle future disputes
• Order of reference- Order containing names of the arbitrator,
specific dispute, nature, time limit for award
• Presiding arbitrator-An umpire when each party's arbitrator or
both parties arbitrator choose one presiding arbitrator
• Award-Written decision of the arbitrator on completion of the
proceedings
• Arbitral tribunals :- It refer to panels of one or more arbitrators
responsible for passing judgment regarding disputes between
parties
 PROCEDURE FOR ARBITRATION
• Specific clause to be introduced in contract for dispute
settlement by arbitration
• Unhappy party to approach the designated authority to
appoint arbitrator with list of disputes and amount
involved for dispute
• Arbitrator is then appointed & referred with the papers
submitted
• Few contracts provide for direct resolution of disputes
by parties- failure to do so can lead to appointment of
an Arbitrator
• Arbitration is conducted under the provisions of
Arbitration and Conciliation Act, 1996.
• Parties are to be treated equal and is given full
opportunity to present their case
• Parties are free to agree on the procedure for Arbitral Tribunal, place &
language for arbitration.
• Arbitration proceedings start from the date of receipt of request for
arbitration
• Claimant to state facts supporting the claim, issues involved and
remedy sought
• Respondent to give defence against these claims
• Tribunal to decide on oral/documentary evidence
• Experts appointed by Tribunal in case of specific technical issues
• Assistance of court may be sought for taking evidence
• Decision of the Tribunal is taken by majority. Award is given in writing
and signed by all members.
• Award amount, if not paid, to carry interest @18% per annum from
date of award to date of payment
• Award to be final and binding & Enforced as - decree of the Civil Court.