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I. Marovi}, D. Boškovi}, I. Gudac: Process approach in modelling Croatian construction contract management practice

UDC 336.6:338.532:624.05:69.05
Original scientific paper
Received: 28.12.2012.

Process approach in modelling Croatian

construction contract management practice
Ivan Marovi}, Dra`en Boškovi} and Ivona Gudac
Faculty of Civil Engineering, University of Rijeka, Radmile Matej~i} 3, HR-51000 Rijeka, CROATIA
e-mail: [email protected]

SUMMARY
Contract management is an essential part of project management as well as construction management.
International contract management practice has a great influence on Croatian construction contract management
practice (CCCMP). The influence is manifested in the terms of globalization and integration processes, in the
implementation of new financing models, in the ascending market demands, as well as in the increase of projects’
complexity. The shortage of national assets and a constant need for the Government’s borrowing from international
financial institutions, resulted with the presence of international contract management and legal systems (Common
Law) in the Republic of Croatia, which are inconsistent with the domestic ones (Civil Law). Such an influence urges
for a remodelling and reshaping of the national contract practice. For instance, public projects financed by the
international finance funds, due to the lack of quality and eligible domestic contract practice, often result in the
direct application of FIDIC Form of Contract. The aim of this paper is to present the construction contract
management as a form of a complex organizational process composed of several generic sub-processes, possibility
of implementing data tracking and control system (DTCS) and its specificities in the CCCMP, with the emphasis on
Progress Billings and Payments sub-process.

Key words: contract management, project management, construction management, FIDIC, contract practice.

1. INTRODUCTION With public projects financed by the international

funds, the existence of quality and eligible contracting
For the last couple of years, under the influence of practice is one of the key conditions for credit
globalization and integration processes, Croatian arrangements approval. In the lack of adequate
construction industry undergoes intense changes. The contracting practice investors often turn to direct
implementation of new financing models, ascending application of forms of contract prescribed by the
market demands and the increase of projects’ International Association of Construction Engineers
complexity are only a part of many influential (Fédération Internationale Des Ingénieurs-Conseils –
elements. The shortage of national assets and a FIDIC). FIDIC Form of Contract [1] was first issued
constant need for the Government’s borrowing from in 1957, and is based on Common law. The
international financial institutions in executing large introduction of other legal system’s forms of contract,
public projects resulted with the presence of such as the ones from Common law, causes great deal
international contract management and legal systems of conflict between the provisions of two different legal
in the Republic of Croatia. Emergence of such “new” systems. Causes of conflict between the national
contract management practice and legal systems based construction contracting practice and FIDIC Form of
on Common law, strongly affected the domestic Civil Contract can be either linguistic or they can arise due
law based contract management practice. to different conceptual interpretations originating from

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 I. Marovi}, D. Boškovi}, I. Gudac: Process approach in modelling Croatian construction contract management practice

the diversity of these legal systems. Conflicts can also Management Institute (PMI) and the National Contract
arise as a consequence of underdevelopment or, more Management Association (NCMA). PMI in their “Guide
often, as a result of the lack of national contractual to the Project Management Body of Knowledge” offers
provisions conforming to those of the FIDIC. In any a division of the overall project management into
case, one of the major problems is the existence of the knowledge areas and the related processes [5]. Project
same legal provisions within legal systems with a management knowledge areas and the related processes,
different legal effect. In the case of public projects, it given by PMI, are presented in Figure 1.
is necessary to fully understand and be familiar with In accordance with the presented idea, NCMA
the legacy of contractual provisions and to work issued the “Guide to the Contract Management Body
proactively on the construction contract of Knowledge” [6] which takes the structure of PMI
documentation and actively manage it. processes and further develops the concept of
The presence of FIDIC Form of Contract affects Contract documentation management. Project
the national contracting practice forcing its remodelling. Management presents a broader framework for a
Conflicts that occur from the differences in the legal generally accepted knowledge and professional
systems result in a number of circumstances in the practice, where Contract Management is one of the
construction contract management, which are in practice many Project Management areas [7].
usually determined by the consultants and contractors Figure 1 shows the PMI knowledge areas according
[2]. Upon the termination of each project, the experience to which the Contract Administration belongs to the
and knowledge that could be transferred on and that domain of Project Procurement Management. On the
could help formulate the “Best Practice” disappears other hand, Garrett and Rendon [8, 9] describe Contract
causing the contract documentation management Management area as “a comprehensive contract
system to stagnate [2, 3]. management process”, while the Contract
In public projects, taxpayers of public procurement Administration is defined as “the process of securing
are the main factor in the formation of market prices the execution of contractual obligations of each party
and relations. Achievements of public works are not in accordance with the requirements of the contract”.
evaluated, which results in a lack of interest of the Gilbreath [10] recognizes the area of Contract
taxpayers for modelling a desirable contracting practice Administration as a key element of the process of
and the development of autonomous regulations. Under Contract Management, and defines it as “direct contract
the development of autonomous regulations, the documentation management from the time the contract
authors are reviewing the making of general contract was awarded to the moment when it is formally
conditions for conducting construction works which concluded”. He states that the Construction Contract
will be supported by general and specific technical Management is a systematic collection of plans,
requirements. The underdeveloped technical legislation activities and approaches necessary for the fulfillment
and the late emergence of professional organizations of the commercial side of the contracts.
that have significantly contributed to the development
Subsequently, Project Procurement Management is
of national legislation can be linked with the socialist
described [5] by the following six processes from the
practice from the pre-1990’s period [2, 3]. The
aspect of the Client as a signatory: Procurement
Croatian Chamber of Architects and Engineers (CCAE)
Planning, Solicitation Planning, Solicitation, Source
was a young organization whose task was to actively
Selection, Contract Administration and Contract
provide answers to numerous market demands. It was
Closeout; and six processes from the aspect of the
established in 1998 [4], and in 2009 separated into the
Contractor: Presales Activity, Bid/No bid Decision
Croatian Chamber of Architects (CCA) and the Croatian
Making, Bid or Proposal Preparation, Contract
Chamber of Civil Engineers (CCCE).
Negotiation and Formation, Contract Administration
In this paper, the reasons for stagnation and non-
and Contract Closeout [3, 8]. Key process areas of
development of national autonomous regulations will be
Contract Management are presented in Table 1.
shown through a presentation of the complex
Generally, it can be concluded that the stages of
organizational process of construction contract
Contract Management life cycle, regardless of the legal
management composed of its generic and extensive sub-
system in question, output two types of documentation
processes. The possibility of implementing data tracking
- bidding and contracting. Bidding documents consists
and control system (DTCS) and its specificities in the of calls for tenders and bids, whilst the contract
Croatian construction contract management practice documents are constituted of the Contract and
(CCCMP), with the emphasis on Progress Billings and documents resulting from the implementation of the
Payments sub-process will be shown as well. Contract. The typical contract structure used in public
works consists of a contractual agreement, the special
and general conditions of the contract, bid,
2. CONTRACT MANAGEMENT attachments, contract bill and plans.
The term Contract Management can be explained in By definition [1, 2, 5, 6] which states that the
detail from the literature provided by the Project process is “a set of related activities, with the

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 I. Marovi}, D. Boškovi}, I. Gudac: Process approach in modelling Croatian construction contract management practice

Fig. 1 Project Management knowledge areas [5]

Table 1. Contract Management key process areas [8]

Contract Management Key Process Areas
Maturity Levels

Buyer

Procurement Solicitation
Solicitation Source Selection
Planning Plannin g
Contract Contract
Administration Closeout
Seller

Presales Bid/no-bid Bid/Proposal Negotiation/

Activity Decisio n Preparation Formation

consumption of certain resources, converting the input management will be presented as a series of closely
parameters to output”, we can define construction linked and overlapped processes. For the purpose of
contract management as a process. Processes are in presenting the formal construction contract
practice rarely found in its purified form, more often management process, “IDEF0” method, which proved
they are within the complex hierarchical systems. to be appropriate [11] for presenting complex
Subsequently, the construction contract processes, will be used.

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 I. Marovi}, D. Boškovi}, I. Gudac: Process approach in modelling Croatian construction contract management practice

3. CONSTRUCTION CONTRACT Sources of law in Croatian construction contracting

MANAGEMENT – PROCESS APPROACH practices are based on Romano-Germanic legal system
which is represented by contracts (if in compliance with
Construction contract is a strictly formal, negotiated, mandatory regulations), customs, regulations and COA
bilaterally obligated, financially binding contract judicial and arbitral practice, or indirectly legal science.
acceptable in written form only. The most important The legal source of the construction contract is the Civil
parts of the Contract are considered to be the subject of Obligations Act (COA). General provisions (relating to
the contract, construction period and total price. The compensation, unilateral termination of the will of the
subject is strictly defined, while the cost and completion Employer, the Contractor’s liability, breach of contract
date may be determined on the basis of legal provisions due to the deviation from the provisions of the contract)
or the contract itself. Due to a number of complex legal and the provisions of the service are applicable. The
issues that arise during construction, the construction sources of law in the Anglo-Saxon system of
contract is a complex agreement that gains important jurisprudence are precedents, equity, legislation,
economic significance with high amounts of investment. international conventions, treaties and customs.
The purpose is to make construction contract In the general concept of the construction contract
management a factor in protecting the public interest management process (Figure 2), processes arising
and a benefit to the national economy. from the formation stage of the Contract are
The overall construction character includes a very considered as input, while the output represents the
broad legal representation. The provisions of the realization of the provisions of the Contract. The
Spatial Planning and Construction Regulation [12] process is actively affected by contracting parties
relate to the protection of public interest, while the Civil (Client and Contractor), as well as by control processes
Obligations Act (COA) [13] regulates the relations that are encouraged partly by environment, partly by
between the parties of the contract. COA also applies Client and Contractor. All the sub-processes of Contract
to foreign persons (physical and legal) when it comes documentation management represent a complex
to the rules of private international law that obligation organizational process.
relations suggest to.

Fig. 2 Construction contract management process structure

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 I. Marovi}, D. Boškovi}, I. Gudac: Process approach in modelling Croatian construction contract management practice

Construction contract management consists of a * Payment based on time spent, and

series of sub-processes that are not organized in a linear * Payment based on performed work.
sequence. We distinguish two types of sub-processes, In general, the concepts are functionally associated
generic and extensive ones. Sub-processes which are with the intention of monitoring the dynamics and
permanent and appear in any construction contract trends of the works done by the Employer. This further
management process (shown in Figure 2) are called indicates on the calculation method of construction
generic sub-processes. These sub-processes can be works and the technique of calculation [2].
divided into: Mobilization and Commencement, The manner in which the price is contracted often
Communications and Correspondence, Progress depends on the decision of who bears the risk of the
Billings and Payments, and Contract Closeout. changes in quantity and variety of unforeseen
In addition to constant generic sub-processes, circumstances that may arise during the performance
within construction contract management process of works, and on which the final cost of works
extensive sub-processes are also present. They are depends [14]. The fact that it is usually difficult to
likely to appear, but are unpredictable in terms of accurately pre-determine the amount of work to be
volume and frequency of appearance and, therefore, done is the main problem in determining the price of
have extensive character. These sub-processes are construction. Therefore, depending on who bears the
induced by conscious action of the contracting parties risk for these unknown quantities, pricing methods are
which affect them and/or represent the reaction to being formed. This means that the way the price has
changes that occur during the process by producing been contracted determines the division of
direct and indirect feedback. Extensive sub-processes responsibilities between the contract parties.
are: Change Management, Claims Management, There are three basic ways of pricing:
Contract Reporting and Contract Auditing. * Unit prices - quantities are measured and they
Contract documentation management is inextricably have an effect on the final price. The contractor
linked to information technology, therefore controlling takes responsibility for the continuity of unit
and monitoring the flow of information based on prices, but not for the total amount of quantities.
information technologies becomes its important * Lump-sum - one price for all the construction
element. For more than fifteen years, “E-Tools” have work. The contractor assumes the risk that
been developed to support the contract management entails’ exclusive price for all works.
and administration on which data tracking and control * Cost reimbursable - The contractor is
system (DTCS) is based. DTCS provides a platform compensated for all costs and is given a
through which all the project documentation can be percentage of his makings.
generated, monitored, reviewed and reported from a Variations on the above pricing methods, as well as
single central database. The system offers the ability on the level of the obligation are as follows:
to communicate with subcontractors and suppliers at * Non-binding calculations,
any place and at any time, as well as rapid organization * Calculations without the express warranty,
of multiple bids, contracts and change orders. One part * Calculations with the express warranty,
of the system related to the paper topic is certainly a * Unit prices,
possibility of making project calculations and cost * Lump-sum prices,
control in one place. Data tracking and control system * Prices according to the actual cost together with fee,
is a concept of high level efficiency and low cost * Prices according to price lists,
requirements. Its implementation requires education * Joint contract prices,
and training period, standardized equipment and a * Prices for the “turnkey” contract,
certain level of experience of all participants in the * Prices for “project management”,
project, which is the main reason why it still has not * Target price.
been widely used in the Croatian construction contract
management practice.
4.1. Unit price

4. CROATIAN CONSTRUCTION The system of unit price contracting incorporates

CONTRACT MANAGEMENT the distribution of risk between the client and the
SPECIFICITIES IN SUB-PROCESS contractor presenting thus a very balanced way of price
PROGRESS BILLINGS AND PAYMENTS contracting. The risk division lies in the fact that the
contractor takes the risk for the price of individual
Progress Billings and Payments sub-process is the units, while the client takes the risk for the total number
part of the Contract Management to which the most of derived units, i.e. the quantities. Precisely because
attention is given. There are three basic concepts of of this balance, contracting of unit prices is the most
pricing methods: common way of price fixing in the construction
industry. Such a method of contracting is especially
* Payment based on actual costs,

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 I. Marovi}, D. Boškovi}, I. Gudac: Process approach in modelling Croatian construction contract management practice

suitable for larger investment projects - larger amount scale, index clauses, and currency clause which is very
and longer duration of the works in which the extent popular in Croatian contracting practices.
of work is measured.
Unit prices are usually contracted in case in which
the final amount of work required for the construction 4.2. Lump-sum
of a building cannot be predicted with certainty, which
is the most common case of construction works. For The term lump-sum is widely used in commercial
each such type it is required for the bidder (contractor) terminology as the label for pre-agreed fixed fee.
to determine his unit price. Unit price is given individually Croatian regulation of COA avoids the use of this term.
for all those works that can be specified individually, Instead, the terms “total contract price” or “price
which should be performed in a facility. These works determined in the total amount” are used. Lump-sum
and supplies are presented and sorted by each unit which is the price at which the contractor has determined in
can be calculated separately (e.g. excavation per cubic advance the total cost for all the work to be done and
meter, foundations on the width and depth, individual in which quantities are not measured. If the price is
price for each type of door, window, installation of all fixed in such a way, the contractor can not ask for an
types of doors, windows etc). increase in price due to higher amount of quantities,
A document that contains the display of certain since the increase or decrease of the amount has no
types of works and deliveries, and is broadcasted in effect on the agreed cost.
the format, in which prices are included, is called Bill When contracting lump-sum prices, it is essential
of Quantities (BOQ). In a BOQ, all kinds of work to be for the parties to agree on the works that are immutable.
done are described in detailed, and the bidder is Generally speaking, the lump-sum refers to the price
expected to set a price for each work listed. Bills also in cases where the contracted quantities are not
contain the final sum of the estimated total amount of measured for payment. This means that the work not
work to be done. However, these amounts, yet covered by lump-sum must be paid separately. All the
unknown at the time of bidding, are only estimates. additional work must also be paid separately. It is
Unit prices are, therefore, agreed to when the final possible, however, that the lump-sum refers not only
amount of work required for the construction of an to price, but to the scope of work which depends on
object can not be predicted with certainty, or when the the formulation of the contract.
contractor is not required to take the risk for the Premature termination of the contract may led to
accuracy of that amount. These contracts are known special difficulties in lump-sum prices. The Contractor
as “measured contracts” since the real amounts derived is entitled to compensation for all the work performed,
are measured as work progresses and are calculated and if no specification of individual sections and their
periodically. Periodical calculations of the performed prices is given, the value of the work can be disputed.
work are calculated by multiplying the quantity of The situation is simpler if the lump-sum price is
performed works and deliveries to the agreed unit contracted after determining unit prices for certain type
prices, and the final cost of the entire structure is of work, and if these prices served as the basis for
known only after the works are carried out in entirety. determining the lump-sum price.
The difference between the estimated quantities and If there is any doubt whether some of the work is
actual quantities of delivery and works executed may included in the lump-sum price or not, the provisions
occur as a result of various circumstances that are not of the agreement and intention of the parties will be
yet known at the time of contracting. Unit pricing taken into account. In some cases the principles of
allows the client to have a rough estimate of works honesty and integrity can be applied by which it is
and prices of these works per unit of measurement at evaluated whether a work is so beyond the agreed
the time of contracting. It also allows him to compare scope and nature that the contractor could not deal
those prices with the prices of other tenderers. The with. If none of the above stated indicators would
prices offered by the contractor can not be changed provide the basis for the decision. Given the potential
and the contractor bears the risk for the ambiguity in the contract regarding the lump-sum price
appropriateness of the specified unit prices. There are and job description, the parties should define and
no obstacles, however, that such contracts, depending specify those works and the scope of work implied
on various factors that influence their possible revision, with the utmost care.
provides the audit of the prices. The danger for clients
with this pricing method is that bidders can provide 4.3. Cost reimbursable
lower prices for those works which are expected to be
fewer, and higher prices for those are expected to be Cost reimbursable is a way of contracting the price
more. Similarly, the initial work can be charged more where the contractor will reimburse all his costs, and a
expensive to ensure a greater amount of money in the certain percentage of his makings will be added to the
beginning of construction works. COA prescribes the amount. This pricing method is usually applied when
application of contractual instruments such as a sliding contractors do not know the exact price at the time of

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 I. Marovi}, D. Boškovi}, I. Gudac: Process approach in modelling Croatian construction contract management practice

contracting, or in the case of emergency or each work section is made in accordance with the bill
experimental works. It is also appropriate when the or with the provisions from technical specifications,
scope of the work and the circumstances under which standards etc. It is interesting that in the FIDIC Form
the work will be done are not known at the time of of Contract, on which the measurement is based, the
bidding. The final price is known at the end of the documentation is made by the Supervising Engineer.
project and is computed by multiplying the total amount The Contractor’s obligation then is to review and
of quantities by the agreed unit prices. conciliate with the documentation. In Croatian
In such a calculation method the contractor shall construction contract management practice the
be entitled to reimbursement of all actual costs resulting Contractor documents the work in document called
from the job performance, and even to a certain fee Bills of Measurements and the Supervising Engineer
which will cover his profit and overhead costs. With reviews it either approving or disapproving the
this pricing method it is not necessary to agree on price performed work.
revision clauses, since the client will pay the actual The Supervising Engineer generally solves the
costs that will reflect the possible price increases. Such calculation issue through monthly situations, with its
method of cost contracting shifts the entrepreneurial minimal amounts limited by contract (usually not less
risk from the contractor to the client. than 1% of contractual amount). He controls the
These contracts are frequently exposed to documentation and approves the work performed, the
disagreements between the contractor and the client, amounts to be added or deducted based on variations
both in terms of the construction works scope, and in of price due to changes in the cost or quantity, or other
terms of labor and machinery use. It is, therefore, circumstances (correction due to changes in
necessary to agree in advance on the documentation legislation). The Supervising Engineer calculates the
that will prove the basis for the calculation and advanced and retention amounts, approves additional
payment. At the time of contracting, clients do not have and unexpected works, additions and deductions that
any advance review of the amount or the price of the are due under the resolutions' claims. The amount
project. All this leads to much more complex process calculated in all previous situations will eventually be
of cost control and administration of the entire deducted. The Progress Billings and Payments sub-
construction process, which greatly increases the price process is sensitive and suffers from inadequate
of the entire project. From the client’s standpoint this project preparation and imprecise contractual strategy
pricing method is under great risk and control measures definitions in the Contract planning, part of Contract
should be provided to prevent and reduce the possibility formation phases [2, 3].
of contract abuse.

5. CONCLUSIONS
4.4. Payment methods
The introduction of new funding models, the
COA provides two pricing models for construction growing market demands and market documentation,
based on payment for the performed work: unit price as well as the increasing complexity and scope of the
from which follows payment based on the Unit price projects, are just some of the elements that have
method, and Lump-sum method. A third model also affected the construction contracting practice in the
appears in practice - payment based on actual costs Republic of Croatia. The construction of large public
and can be identified with the Cost reimbursable pricing projects financed by international financial institutions
method. These three models do not exclude other has lead to the presence of the international contracting
pricing models, so it is arguable that in Croatian practices and legal systems. The execution of such
contracting practice they are determined by agreement projects calls for the presence of a quality contracting
between the Client and the Contractor. If the unit prices practice as one of the main conditions for the granting
are contracted, for each calculation, the work will be of credit arrangements. The organizational complexity
evaluated depending on the measured quantity amount of the process is presented in this paper, with a special
for each unit. If the agreed price is lump-sum, the attention being given to the Progress Billings and
amount of payment will be lump-sum price that Payments sub-process.
remains constant, unless being subject to changes in In the absence of adequate national contracting
accordance with the contract. practice, FIDIC Form of Contract is widely used. The
Method of payment compliance and method of the presence of contract forms based on the legal system
advance payment is defined by the contract. (Common Law) that do not correspond to the national
Procedures of monthly progress billings and payment ones (Civil Law) cause many problems and conflicts.
sub-process are carried out through the end of the Perhaps one of the most significant problem is that
project. Supervising Engineer has a central role in the upon the cessation of every public project, the project
Progress Billings and Payments sub-process in Croatian team is dissolved and the acquired experience and
construction contract management practice. In knowledge, which could be passed on and be an active
practice, the measurement of the actual net quantity of element in formulating the “Best Practice”, disappears.

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 I. Marovi}, D. Boškovi}, I. Gudac: Process approach in modelling Croatian construction contract management practice

Such an attitude towards the projects and acquired [7] G. Jones, M. Mickaliger and J. Witzgtall,
knowledge directly affects the stagnation of contract Performance sunrise: Blending contract
management practice. management with project management, Contract
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discussed in the paper, it is evident that the very action [8] G.A. Garrett and R.G. Rendon, Contract
against the dissipation of the knowledge may lead to Management: Organizational Assessment Tools,
the development of an autonomous regulation. Due to National Contract Management Association,
the increased international investment activities, a McLean, 2005.
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from the national legislation will be even more contracts in turbulent times, Contract
pronounced in future. Management, Vol. 45, No. 9, pp. 48-57, 2005.
[10] R.D. Gilbreath, Managing Construction
Contracts: Operational Controls for Commercial
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PROCESNI PRISTUP PRI MODELIRANJU UPRAVLJANJA HRVATSKE GRAÐEVINSKE

UGOVORNE PRAKSE

SA@ETAK
Upravljanje ugovornom dokumentacijom predstavlja osnovu upravljanja projektima kao i organizaciju gra|enja.
Me|unarodna praksa upravljanja ugovornom dokumentacijom ima veliki utjecaj na upravljanje hrvatskom
gra|evinskom ugovornom praksom. Utjecaj se o~ituje u globalizacijskim i integracijskim procesima, uvo|enju novih
modela financiranja, rastu}im zahtjevima tr`išta, kao i u pove}anju slo`enosti projekata. Nedostatak nacionalnih
sredstava i kontinuirana potreba dr`avne uprave za zadu`ivanjem kod me|unarodnih financijskih institucija rezultirali
su prisutnoš}u me|unarodne ugovorne prakse i pravnih sustava u Republici Hrvatskoj koji su nedosljedni doma}im.
Navedeni utjecaj poti~e na preoblikovanje nacionalne ugovorne prakse. Na primjer, kod javnih projekata
financiranih od strane me|unarodnih financijskih fondova, zbog nepostojanja kvalitetne po`eljne ugovorne prakse,
~est je rezultat direktna primjena FIDIC ugovornih formi. Cilj ovog rada je prikazati upravljanje gra|evinskom
ugovornom dokumentacijom u obliku slo`enog organizacijskog procesa koji se sastoji od nekoliko generi~kih
potprocesa, mogu}nost implementacije elektronskih sustava pra}enja i kontrole kao i specifi~nosti upravljanja
hrvatskom gra|evinskom ugovornom praksom s naglaskom na potproces obra~una i pla}anja.

Klju~ne rije~i: upravljanje ugovorima, upravljanje projektima, organizacija gra|enja, FIDIC, ugovorna praksa.

26 ENGINEERING MODELLING 25 (2012) 1-4, 19-26