Contract, Specification and Quantity survey(CENG 5101)

CHAPTER 2: CONTRACT
Chapter Outline
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
2.1 Principles of Contract Law
Contracts are governed /administered with conditions, which are legally binding parts of the 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.
Or Contract means:-
 The agreement between two parties creating rights and duties, which is enforceable by law to undertake certain work for the
payment of a sum of money is known as contract.
 The contract inevitably follows a proposal from one party and its acceptance by the other.
Such contract legally binds the two parties to undertake the works on the one hand and to pay for the work on the other hand.
What is an Agreement?
 Agreement is defined as “every promise and every set of promises forming the consideration for each other is an agreement.”
 Two main characteristics of an Agreement
 Plurality of persons: - Two or more persons
 Consensus in idea: - Identity of minds

1
What is a Promise?
“When the person to whom the proposal is made signifies his assent there to, the proposal is said to be accepted thus a proposal when
accepted becomes a promise.”
Difference between Agreement and Contract
 Agreement = offer + acceptance
 Contract = agreement + enforceability

OBJECTIVES OF A CONTRACT
The purposes (reason for existence) of a contract are to:
 Enforce law or bind conditions between or among the parties.
 To show clearly
 the Terms and Conditions of contracts
 the Rights, Obligations and remedial rights of performances from the contracting parties
 The handling provisions for price, completion time, requirement variations adjustment systems, Changes in cost and legislations and
dispute resolution mechanisms.
 To describe scope of work
 To establish time frame
 To establish cost and payment provisions
 To set forth obligations and relationships
 To manage multiple risks
 To establish control mechanisms
 To minimize disputes
 To improve economic return on investment

CONTENTS OF A CONTRACT
There are basic contents of contract which contracting parties are expected to understand. They are:
 Formation of Contract;
 Terms of Contract;
 Variation of Contract;
 Privity of Contract;
 Discharge of Contract; and

2
  Invalidation of Contract.
Formation of A Contract (continued)
To have valid contract agreement the following requirement of formalities must be satisfied
1. Offer and Acceptance(agreement)
2. Consideration
3. Competent parties(Legal capacity)
4. Legality of the object
5. Formalities
As per Art. 1678 Civil Code of Ethiopia, 1960 A Contract is valid if
A. The parties are capable of contracting
B. Contracting and give their consent suitable at law
C. The object of the contract is sufficiently defined and is possible and lawful
1. Offer and acceptance (agreement)
OFFER
 An offer is an expression that one party is willing to be bound by specific terms which are set out in the contract.
 An offer remains open unless it is terminated. Termination can occur in the following ways:
 A refusal (Rejection) or counter offer but not just a request for further information;
 Death of offeror or offeree;
 None acceptance within the offer time or after reasonable length of time;
 Failure of a condition subject to which the offer was made; and
 Revocation of the offer (withdrawal of offer).
Acceptance
 A contract does not exist until the offer is accepted by the other party.
 This acceptance must be:
 absolute - i.e. accepting all the terms of the offer;
 There must be an indication of consent - i.e. silence does not indicate acceptance;
 The acceptance must be communicated to the offeror; and
 It must be the offeree or his agent which communicates the acceptance.
When the processes of offer and acceptance are accomplished, there is an agreement.

3
2. Considerations
 Consideration is the price for the promise i.e. what one party to a contract can get from the other party in return for performing
contract obligations.
 Consideration must be:
 of some value, but not necessarily adequate;
 additional to the duty in the law;
 additional to previous contract agreements; and
 for a future act.
If one party makes a promise and the other party offers nothing in return for that promise, the promise is unenforceable due to lack of
consideration.
3. Legal Capacity
 The legal competence of the parties to enter into legally binding contract.
 The person are incompetent to enter into a contract
A. Minors (under the age of 18)
B. Those considered legally incompetent
C. Mentally ill
D. Under the influence of alcohol and other drugs
4. Legality of the object
 A valid contract must be legally enforceable. Illegal contract are agreement
 to commit crimes or civil wrongs
 Which may injure the state
 Promotion of corruption
Which limit a person’s ability to carry out his/her trade
5. Formalities
 Any contract required to be in writing shall be supported by a special document signed by all parties bound by the contract.
 Failure to execute a contract in a required form makes the contract invalid.
 Examples of contract requiring written evidence are contract
 related to immovable
 Made with a public administration
 Of guarantee , insurance
It shall be of no effect unless it is attested by two witnesses.

4
Terms of A Contract
 are provisions or stipulations in a valid contract describing some aspects of the agreements between the parties to contract.
 define the rights and obligations of the parties in accordance with their agreement.
 can either be
– Express terms:
• are words expressly agreed by parties to contract and by which they intend to be bound.
– Implied terms:
are contract terms which are not written down in a contract or openly expressed at the time the contract is made, but which the law implies.
– Statutory terms:
• are terms which are imparted into contracts by legislation.
• The Civil Code of Ethiopia, procurement law and other pertinent legislation are example of these.
 Contract terms can be also be either:
 Conditions:
 are fundamental to the contract. Failure to adhere to a condition may result in a breach and/or damages.
 Warranties-
 are subsidiary to the main contract. A breach of warranty will only result in the injured party suing for damages.
Privitiy of A Contract
Only parties who enter into a contractual agreement will have the right to sue or a liability to be sued due to a contract.
Discharge of A Contract
There are four ways in which a contract may be discharged.
 By performance:
A construction contract will be discharged by performance
 on the part of the contractor when all the works has been completed including maintenance during defects liability period,
and
 when the Engineer has issued all the required certificates and
 on the part of the employer when he has paid all the payments due.

N.B. The contractor is liable to employer if latent defects are discovered during the period limited by law. (i.e. 10 years limitation period by
Ethiopian Civil code and MOWUD 1994)
 By agreement:
 A contractual obligation may be discharged by a subsequent binding contract.

5
 A. By mutual agreement
B. By Notation (i.e. substituting the existing contract with the new one)
C. By accord and satisfaction
 By Frustration :
 Occurs when the contract was executable at time of agreement but subsequent events, over which the contracting parties
have no control, make it impossible to fulfill the contract obligations. The Ethiopian civil code deals with frustration under
force majuere.
Example
 Destruction of the specific items essential to the performance of the contract
 Action by government which prohibit performance of a contract for a long period.
 War
 Natural catastrophe such as earthquake, lightning or floods
 By Acceptance of breach:
Breach of a contract occurs where, with out justification, a party either fails to perform its contractual obligation expressly or by implication.
Invalidation of A Contract
 Invalidated contract is a contract which is not binding.
 The two main factors that can invalidate a contract are
 Mistake:
 the situation in which an ‘offer’ made by one party and its ‘acceptance’ by the other do not actually corresponds.
 Misrepresentation (False statement):
 the making of an untrue statement relating to fact which includes another party to enter into contract.
When misrepresentation occurs, the injured party can either state or reject the contract. He or she can also bring as action for either
recession and restitution or damages.

2.2 Types of Construction Contracts

Contracts for the execution of civil engineering works are of following type:
(a) Lump sum contract
(b) Unit rate contract
(c) Lump sum and schedule contract
(d) Cost plus fixed fee contract
(e) Cost plus percentage of cost contract

6
A. Lump sum fixed price contract
 The contractor agrees to execute the project based on a fixed lump sum price which is not subject to any variations unless the
drawings and specifications are altered beyond the maximum limit stated in the contract conditions by the owner.
 The contractor is fully responsible to quantify the volume of works based on the given specifications and drawings.
 Overestimating the volume of works will result in loosing the job, if it is on competitive basis and underestimating the volume of
works will result irreversible loss, which can not be corrected during the execution of the contract at any level.
 Moreover, the contractor must be in a position to estimate the influence of cost escalation in the future during the execution of the
project and these anticipated additional costs should be incorporated in the tender prices.
A lump sum contract is more suitable for works for which contractors have prior construction experience. The experience enables the
contractors to submit a more realistic bid.
Advantages of Lump sum fixed price contract
 The owner decided whether to start or shelve the project knowing the total lump sum price quoted by different contractors.
 The contractor can earn more profit by in-depth planning and effective management at site.

Disadvantages of Lump sum fixed price contract

 All competing contractors are required to carry out enormous take off works where only one contractor will be successful. It
consumes excessive time of the contractors.
 All bidding documents such as the technical specifications and drawings have to be clearly prepared and delivered during tendering
stage to the contractor.
 Claims and variation works are very difficult to handle in this kind of construction contracts due to the absence of agreed unit rates.
 Contractors tend to include higher percentages of contingencies in their tender prices to cover price escalation, take off errors,
clarity of drawings and specifications which inevitably raises the tender prices.
 Unless the bidding documents are sound and sufficient enough to define the intended projects, contractors may not compete on the
same ground.
B. Unit Rate Contract
The unit rate contract is also called item rate contract.

7
 In this case, the construction contract is based on priced bill of quantities whereby estimated quantities of certain well defined work
items and fixed unit prices of each of these defined work items are agreed upon.
The estimated quantities may increase or decrease during the execution of the project and the contractor is obliged to accept these
variations without additional costs as far as these variations in quantity are within the agreed limits with the owner.
The unit rate contract is the most commonly used for all public and governmental projects whereby the estimated quantities and
specifications of works are well known in advance.
Advantages of Unit Rate Contract
• There is no need for detailed drawings as in the case of lump sum contracts and these detailed drawings can be prepared after the
award of the contract.
• Changes in drawings and quantities can be made as required by the owner within the agreed limits.
• Additional works and claims can be handled in a better way especially when the priced bill of quantities includes these additional
work items and claims.
• It gives a better opportunity to compete on the same ground.
Disadvantages of Unit Rate Contract
 The total cost of the project can only be known upon completion of the project.
 The contract doesn’t contain provision for price escalation and the contractor may increase his construction cost estimates.
 Clearly defined work specifications shall be prepared in advance and issued with the bidding documents to contractors participating
in the tender.
 The preparation of technical specifications and estimated bill of quantities may take longer time, which will affect the overall
completion of the intended project.

C. Lump sum fixed price and schedule rate contract

o This is another extension of lump sum fixed price contract but it incorporates unit prices of different activities which will help to
manage variation works and claims during execution of the project.

8
 o Moreover, the contractor shall not account contingencies for additional works and claims but contingencies for price escalation of
materials, labor and equipments shall be considered in the tender prices.
D. Cost Plus Percentage of Cost Contract
 In this kind of contract, it is very important to have a common understanding regarding the accounting methods to be followed
during execution of the project.

Advantages of Cost Plus Percentage of Cost Contract

 The contractor executes works to the best interest of the owner resulting in good quality of works.
 The project can commence as early as possible even before detailed drawings and specifications are finalized.
 Changes in design and method of constructions, if required, can easily be carried out by the contractor without disputes.
 The progress of works can be speed up to the maximum possible shortening the overall completion time of the project.
Disadvantages of Cost Plus Percentage of Cost Contract
 The total cost of the project is unknown until completion of the project putting the owner in financial difficulties.
 It encourages the contractor to increase the actual direct costs of the project unnecessarily as the contractor‟s profit increases with
the increment of these costs.
 In the cost plus percentage of cost contract, the contractor shall focus mainly on identification of company head office overhead
costs, site overhead costs and relevant income tax laws as well as anticipated profit.
 Moreover, it is also very important to estimate the total scope of work, which is very important in fixing the percentage of cost.
E. Cost Plus Fixed Fee Contract
– One of the major shortcomings of the cost plus percentage of cost contract is the tendency of the contractor to increase the cost of
the project and cost plus fixed fee contract discourages this tendency of the contractor.
– In this case, the contract is based on actual direct costs plus fixed fee and the amount of fixed fee covers the overhead costs, profit
and income tax of the contractor.
– However, cost plus fixed fee contract has also the following disadvantages as compared to the cost plus percentage of cost contract:
– The scope of works shall be properly defined in advance to reach an agreement on the fixed fee with the contractor.
– Claims and disputes may occur when major changes are required by the owner during execution of the project.
– The contractor will insist higher fixed fee depending on the clarity of the defined scope of works.

9
 – In this type of contract, the contractor has to be very careful in identifying all other anticipated costs other than the direct costs to
fix the amount of fixed fee.
– Moreover, the time for completion of the project has to be predicted based on the defined scope of works as most of overhead
costs are time related costs to the contractor.
2.3. Contract Documents
 Contract documents are the documents in which the scope and the requirements of a project are comprehensively laid down.
 In these documents the obligations and responsibilities of the parties to the Contract as well as the Engineer’s powers, duties and
functions which flow from such a Contract are defined.
The Contract Documents adopted for Civil Engineering construction comprises the following elements:
The main contract documents are:
–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 and
–Appendix to Tender.
1. Instruction to Tenderers
– The instructions to Tenderers are usually the first section included in the bound volume of the tender Documents. And it
consists:
(a) Instructions on filling in tender form
(b) Data to accompany tenders:
(c) Delivery of Tenders:

10
 (d) Letter of Capacity
(e) Validity and Price Variations:
(f) Special Conditions
(g) Instructions on completion of the Bill of
Quantities, Schedule of Rates, Day work Schedule
2. Form of Tender
 The Form of Tender is the part of the document that Tenderers is required to fill in to make an offer to execute the works.
 The Form of Tender is accompanied by an Appendix which forms part of the Tender. In the Appendix, figures which need to be
inserted under the various clauses in the Conditions of Contract are filled in.
3. Form of Agreement
 The Form of Agreement is the formal document conforming the existence of a Contract between the Employer and the Contractor.
Parties in government construction contracts are required to execute the agreement with signatures and their seal.
Agreement
•is the document that reflects the legal contract between owner & contractor, owner & designer, and general contractor (GC) & sub-
contractors and supplies for those contracts.
•Simply a letter that constitutes legal evidence that a contract exists, and forms the basis for its enforcement.
4. Conditions of Contract
•States the obligations 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 among the engineer, contractor and client.
•It includes general and supplementary special/particular conditions of contract.
4.1 General Condition
•This document is an essential part of the contract. Called boilerplate, implying that the same documents are standard to all contracts.
•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.
4.2 Supplementary Conditions
•Also known as special provisions or special/particular conditions.
•Is extension of the general provisions of the contract to fit the specific project at hand.
•They serve as amendments or augmentations to the general one.

11
Items included in the supplementary conditions are entirely subject to the judgment of the owner, and may include topics such as:
–The number of copies of contract documents to be received by the contractor
–Survey information to be provided by the owner
–Materials provided by the owner
–Site visit
–Start date of the construction
–Requirements for security and temporary facility
–Procedures for submittal and processing of shop drawings
–Cost and schedule reporting requirements
–Traffic control and street cleaning requirements
–Responsibilities for testing of materials
–Actions to be taken in the event of discovery of artifacts or items of historical value
5. Specifications

•Also known as technical provisions.

•They are written instruments to be used in conjunction with the drawings.
•Fully describe and define the requirements of the contract, to include the quality that is to be achieved.
•They supplement the drawings and provide information that cannot be shown in graphic form, or too lengthy to be placed within the
drawings.
•They guide bidders in the preparation of cost proposals as well as field execution of the work.
•They also guide the contractor through the processing of ordering materials and construction and installation of the facility.
6. Bill of Quantities
•Describe the expected amount of work (measured); units of measurement, the unit priceand the total cost of the works.

7. Drawings
•Are the means by which the designer conveys the physical, quantitative, and visual description of the project to the contractor.

12
•Two dimensional representation . Also known as plans or blueprints.

8. Addenda
•Any change to the bid documents after they are released for bidding but before bids are actually received requires issuance of an
addendum.
–It changes the original bid documents and becomes a part of the bid package.
–At the time of bid opening, bidders must in their bid documents, acknowledge all addenda.
–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.
–May not be issued within about five days of bid opening unless the bid date…
2.4 Contract Management :
2.4.1 Contract Administration and Closing
•is mng’t of its processes, stakeholders & their performances along planning, implementation and monitoring.
•Contract Management Process is idealized into:

13
Contract Administration
Process of insuring successful completion of project with substantial compliance of the terms of the contract.
•Tasks for contract administrationare:
– Identifying contractual responsibilities of Stakeholders.
– Reviewing the Terms of Contract Documents
– Extract Monitoring Responsibilities

14
 – Preparing Monitoring Responsibility Summary Sheets
Determining and understanding the construction components of the project.
–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 operations such as Organizational Breakdowns, Resources
Breakdowns & Schedules and Time Schedules.
Record, Monitor and Evaluate Progress of Mobilizations, Works and Completions.
•Report Project Status daily and / or periodically and Completions.
•Certify qualities of materials, shop drawings, samples, workmanships and works.
•Measure Works, Record Site Potentials and Certify Payments and Completions
–Take off sheet and Bending Schedules are used for Measurement of Works
–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

Contract Closing
Closing of Contract looks into issues:
•Maintenance Period and Remedial works (Usually 1 yr.): to reveal quality problems like sanitary and roof leakages, poor quality door and
window handles and locks, electrical fittings, structural damages, cracks, pavement subsidence, settlement, etc.
 Left Over Claims and Disputes, if any: not settled before provisional certificate of completion, they are dealt during this
phase.
 Closing of Accounts: release of remaining retention money and performance securities and final payment certificate is
issued.
 Completion Certificates: entitle that the contractor is no longer responsible afterwards if satisfactory performance is proved
by maintenance period, outstanding claims and disputes are settled, and closing of accounts are made.

15
2.4.2 Claims and Dispute Management
Dispute in simple terms 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 therefore can be a demand for payment of additional compensation, adjustment of the partiesʹ respective contractual
obligations, extension of Time or compensating delay damages, or any other change with regard to the contractual conditions or terms.
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 blackmail,

–A claim is the last chance to bail out of a losing job, and

–A claim is an assertion to a contractual right.

Three different types of claims:
•Time Related Claims: Claims associated with delay or in time completion of projects where either of the following six Entitlements or
Penalties are subjected to:
–Time Extension only
–Liquidated Damages only
–Time Extension and Cost Compensation
–Bonus
–Reliving of Obligation
•Cost Related Claims: Claims associated with monetary compensation where either of the following entitlements or penalties are
entertained:
–Additions requiring rate adjustments
–Provisional sum adjustments

•Default by Contracting Parties: Claims associated with non performances of contractual obligationssuch as:
–Delay in Payment Certificates
–Suspensions and Terminations

16
Major Causes for Claims
Levy, 2000 outlined 11 reasons why claims can be initiated. They are related to
–poor or unclear tender and/or contract documents,
–poor or inadequate administration of responsibilities by stakeholders, and
–Unforeseen or uncertain situations during execution
•Wideman, 2001 has also identified claim causes into three main categories:
–Changed conditions
–Additional works, and
–Delay for cost overruns and time extension.
Alternative Dispute Resolution System
ADR –includes
 Preventive Dispute Resolution System ‐Partnering, Use of dispute resolution advisors and Use of Facilitators.
 Friendly 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 claim processing.
 Judgmental Dispute Resolution System -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 SystemPreventive Dispute Resolution System
ALLIANCING
–Alliancingis generally a tender arrangement where all the principal tenderersorganize 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.

17
–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.
– Alternative Dispute Resolution SystemAmicable (friendly) Dispute Resolution 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 and endeavourto 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 on or determine the process of mediation whereby resolution
is attempted”.
WHY USE MEDIATION?
–Save money
–Preserve relationships
–Maintain confidentiality and privacy
Dispute Resolution
Judgmental Dispute Resolution System
iii.Litigation
Litigation takes place at the court of law having jurisdiction over the case.
The courts play here their dispute resolution role.
Litigation is the most serious & adversarial method of dispute resolution.
The procedure before the court is so rigid & not tailor made to the construction dispute resolution.
The courts are following the standard procedure established under the civil procedure code, which applies for all types of disputes
brought to them.

18