MODULE -3

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CONTRACT
Contract may be defined as an agreement which is enforceable by law. It is a written
undertaking for execution of work or supply of materials or performance of any service.

An Agreement enforceable by law is a contract‖. Therefore in a contract there must be an

agreement and (2) the agreement must be enforceable by law. A contract is also an
―agreement creating and defining obligations between the parties‖ or an agreement
enforceable at law made between two or more persons, by which rights are acquired by one
or more to acts or forbearances on the part of the other or others.

An agreement comes into existence whenever one or more persons promise to one or others,
to do or not to do something, ―Every promise and every set of promises, forming the
consideration for each other, is an agreement. Some agreements cannot be enforced through
the courts of law, e.g., an agreement to play cards or go to a cinema. An agreement, which
can be enforced through the courts of law, is called contract.

The Contract Act is the law of those agreements which create obligations, and in case of a
breach of a promise by one party to the agreement, the other has a legal remedy.

Parts of a contract

• Offer/Proposal

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 • Acceptance
• Agreed terms

Offer / proposal
When one person signifies to another his willingness to do a work, he is said to make a
proposal. Communication of an Offer: By words or by actions

Acceptance: When the person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted

1. Acceptance must be absolute

2. It must be communicated.

3. It must be according to the mode prescribed.

4. It must be given within the time specified or within reasonable time.

Essentials of a contract

1. Agreement.
2. Intention to create legal relationship.
3. Free and genuine consent.
4. Parties competent to contract.
5. Lawful consideration.
6. Lawful object.
7. Agreements not declared void or illegal.
8. Certainty of meaning.
9. Possibility of performance.
10. Necessary Legal Formalities.

1. Parties Competent to Contract:-

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 A person is competent to contract provided
a) He is of the age of majority according to the law to which he is subject. A
person who is not a major according an agreement No contact shall be made
by a subordinate authority who has not been directed or authorised to do so.
b) He is of sound mind. A person is said to be of sound mind for the purpose of
making contract provided he is capable of understanding it and of forming a
rational judgement as to is effect upon his interest at the time when he
performs the contract.
c) He is not disqualified from contracting by any law to which he is subject.
2. Free Consent of the parties:
Two or more persons are said to consent when they agreed that upon same thing in the
same sense. Consent is said free when:
a) It is not caused under influence. The relations between the two parties
performing a contract are not such that one of the parties is in the position to
dominate the will of the others and uses that position to obtain an unfair
advantage over the other.
b) It is not caused by committing or threatening to commit any act forbidden by
the Indian penal code, or the unlawful detaining or threatening to detain any
person to enter into an agreement
c) It is no caused by fraud.
d) It is not caused by misrepresentation.
e) It is not caused by mistake. Where both the parties do an agreement under a
mistake the agreement is avoidable.
3. Definite proposal and its acceptance:
Terms of contact must be precise and definite and there must be no room for
ambiguity or misconstruction therein. When one person signifies to another
his willingness to anything, he is said to make a proposal the communication
of a proposal is complete when it comes to the Knowledge of the person to
whom it is made. The acceptance must be absolute, unqualified and expressed

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 in some usual and reasonable manner. Acceptance is made by performing
conditions or receiving conditions.
4. The considerations or objects are lawful:
The consideration or object of an agreement is said to be unlawful if forbidden
by law or fraudulent or of such nature that, if permitted it would defeat the
provisions of any law or involves or implies injury to the person or property of
another or opposed to public policy or regarded as immoral by the court.
5. That the meaning shall be certain:
Agreement, the meaning of which shall be certain or capable of being made certain.

ESSENTIAL ELEMENTS OF A CONTRACT

An agreement becomes enforceable by law when it fulfils certain conditions. These
conditions, which may be called the Essential Elements of a Contract, are explained
below.
1. Offer and Acceptance: There must be a lawful offer by one part and a lawful
acceptance of the offer by the other and acceptance must conform to the rules laid
down in the Indian Contract Act regarding offer and acceptance.
2. Intentions to create Legal Relationship: There must be an intention (among parties)
that the agreement shall result in or create legal relations. An agreement to dine at a
friend‘s house is not an agreement intended to create legal relations and is not a
contract. But an agreement to buy and sell goods or an agreement to marry, are
agreements intended to create some legal relationship and are therefore contracts,
provided the other essential elements are present.
3. Lawful Consideration: Subject to certain exceptions, an agreement is legally
enforceable only when each of the parties to it gives something and gets something.
An agreement to do something for nothing is usually not enforceable by law. The
something given or obtained is called consideration. The consideration may be an act
(doing something) or forbearance (not doing something) or a promise to do or not to
do something. Consideration may be past (something already done or not done). It

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 may also be present or future. But only those considerations are valid which are
―lawful‖.
4. Capacity of Parties: The parties to an agreement must be legally capable of entering
into an agreement; otherwise it cannot be enforced by a court of law. Want of capacity
arises from minority, lunacy, idiocy, drunkenness, and similar other factors. If any of
the parties to the agreement suffers from any such disability, the agreement is not
enforceable by law, except in some special cases.
5. Free Consent: In order to be enforceable, an agreement must be based on the free
consent of all the parties. There is absence of genuine consent if the agreement is
induced by coercion, undue influence, mistake, misrepresentation, and fraud. A
person guilty of coercion, undue influence etc. cannot enforce the agreement. The
other party (the aggrieved party) can enforce it, subject to rules laid down in the Act.
6. Legality of the Object: The object for which the agreement has been entered into must
not be illegal or immortal or opposed to public policy.
7. Certainty: The agreement must not be vague. It must be possible to ascertain the
meaning of the agreement, for otherwise it cannot be enforced.
8. Possibility of Performance: The agreement must be capable of being performed. A
promise to do an impossible thing cannot be enforced.
9. Void Agreements: An agreement so made must not have been expressly declared to
be void. Under Indian Contract Act there are five categories of agreements which are
expressly declared to be void. They are:
1. Agreement in restraint to marriage.
2. Agreement in restraint of trade.
3. Agreement in restraint of proceedings.
4. Agreements having uncertain meaning.
5. Wagering agreement.
10. Writing Registration and Legal Formalities: An oral contract is a perfectly good
contract, except in those cases where writing and/or registration is required by some
statute. In India writing and/or registration is required by some statute.

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 In India writing is required in cases of lease, gift, sale and mortgage of immovable
property: negotiable instruments; memorandum and articles of association of a
company etc. Registration is compulsory in cases of documents coming within the
purview of Section 17 of the Registration Act, e.g., mortgage deeds covering
immovable property. The terms of an oral contract are sometimes difficult to prove.
Therefore important agreements are usually entered into writing even in cases where
wiring is not compulsory.

TYPES OF CONTRACT
Contracts for the execution of civil engineering works are of following types:

(a) Lump sum contract

(b) Item ratc contract
(c) Lump sum and schedule contract
(d) Cost plus fixed fee contract
(e) Cost plus percentage of cost contract
(f) Special contracts

a) Lumpsum Contract

In this type of contract, the contractor offers to do the whole work as shown in
drawings and described by specifications, for a total stipulated sum of money. There
are no individual rates quoted, thus it becomes difficult to make adjustments in the
contract value if any changes are to be made in the work later on. The schedule of
different items of work is not provided and the contractor has to complete the work as
per drawings and specifications for the agreed lump sum amount.
Deposit of 10% security money and other conditions of the contract are included in
the contract agreement. Upon the completion of work, a fixed lump sum amount is
paid to the contractor. Detailed measurements of different items are required but the
whole work is compared and checked with drawings and specifications before
releasing the payment. In large projects, part payments are made to the contractor at
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 different stages of work on mutually agreed terms. In case the contractor stops the
work in between he is not entitled for any further payment.
Suitability
A lump sum contract is more suitable for works for which contractors have prior
construction experience. This experience enables the contractors to submit a more
realistic bid. This type of contract is not suitable for difficult foundations, excavations
of uncertain character, and projects susceptible to unpredictable hazards and
variations.
Merits
• The owner can decide 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.
Demerits
• Before the contract is awarded, the project has to be studied thoroughly and
the complete contract document has lo be prepared in advance.
• In this type of contract, unforeseen details of work are not specified in the
contract document. Many additional items may have to be undertaken as the
work progresses, giving opportunity to the contractor for claiming higher
rates for the extra items not included in the contract agreement.

b) Item Rate Contract

Also called a schedule contract, in this contract, the contractor undertakes the
execution of work on an item rate basis. The amount to be received by the contractor,
depends upon the quantities of various items of work actually executed. The payment
to the contractor is made on the basis of detailed measurements of different items of
work actually donc by him.
Suitability
The item rate contract is most commonly used for all types of engineering works
financed by public or government bodies. This type of contract is suitable for works
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 which can be split into various items and quantities under each item can be estimated
with accuracy.
Merits
• In this type of contract, there is no need for detailed drawings at the time of
allotting contract as ¡n the case of lump sum contract. The detailed drawings
can be prepared after the contract is awarded.
• Changes in drawings and quantities of individual items can be made as per
requirement within agreed limits.
• The payment to the contractor is made on the actual work done by him at the
agreed rates.
Demerits
• The total cost of work can only be known upon completion. As such, the
owner may incur financial difficulty if the final cost increases substantially.
• Additional staff is required w take detailed measurements of work done for
releasing payments to the contractor.
• The scope for additional saving with the use of inferior quality materials may
prompt the contractor to use such materials in the work.

c) Lump Sum and Scheduled Contract

This is similar to the lump sum contract except the schedule of rates is also included
in the contract agreement. In this type of contract the contractor offers to do a
particular work at a fixed sum within a specified lime as per plans and detailed
specifications. The schedule of rates for various items is provided which regulates the
extra amount to bc paid or deducted 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. The original work shall
however be checked and compared with the drawings and specifications.
Suitability

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 This type of contract is more suitable for construction works for which contractors
have prior work experience and can consequently estimate the project cost more
realistically.
Merits
• In this type of contract, additional staff for recording detailed measurement of
original item of work is not required for making payment to the contractor.
• The owner can know from tenders as to what the project will cost him.
Knowing the financial implications, the owner can decide to start or defer the
project.
Demerits
• Before the contract is awarded the project has to be studied thoroughly and all
the contract documents are required to be completed in every respect.
• The non-scheduled extra items arising out of changes made in the drawings
and specifications are often a source of dispute because the contractor presses
for rates higher than the prevailing market rates.

d) Cost Plus Fixed Fee Contract

Cost plus fixed fee contract is desirable when the scope and nature of the work can
atleast 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. In order to negotiate
such a type of contract, it is essential that the scope and some general details of the
work are defined. The contractor in this type of contract is selected on the basis of
merit rather than the fee alone. In case of cost plus percentage contract, the contractor
has a tendency to increase his profit by increasing the cost of work. But this drawback
is overcome in cost plus fixed fee contract because here the 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.
Suitability

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  This type of contract is suitable for works required to be completed
expeditiously and where it is difficult to foretell what difficulties are likely to
be encountered.
 This contract is also suitable for important structures where the cost of
construction is immaterial.
Merits
 In this type of contract, actual cost is to be borne by the owner. Therefore, the
contractor performs the work in the best interest of the owner resulting in good
quality work.
 The work can be taken in band even before the detailed drawings and
specifications are finalized.
 Changes in design and method of construction if needed can be easily carried
out without disputes.
 The work can be executed speedily.
Demerits
 This form of contract cannot bc adopted normally in case of public bodies and
Government departments.
 The final cost of the work is no known in advance and this may subject the
owner to financial difficulties.

e) Cost Plus Percentage of Cost Contract

In this type of contract, instead of awarding the work on lumsum or item rate basis, it is given
on certain percentage over the actual cost of construction. The actual cost of construction is
reported by the contractor and 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, other
conditions of contract. In this type of contract proper control has been exercised by the owner
in purchase of materials and in arranging labour.

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The suitability, merits and demerits of these type of contract are similar to cost plus fixed fee
contarct. An addition to demerit, the tendency of the contractor to increase the cost of work to
earn more profit by way of percentage of enhanced actual cost.

Special contract

There are certain special contract used at different occasions. Some of these contracts are:

1. Turnkey contract
2. Package contract
3. Negotiated contract
4. Continuing contract
5. Running contract
6. Joint venture contract
7. BOT contract
8. BOOT contract

1. Turnkey contract
A turnkey contract is an integrated contract in which all works pertaining to various
disciplines such as civil, electrical, mechanical etc. are in a single contract called the main
contract. The main contractor can sublet the contract to sub-contractors who are specialist
in their respective fields.
In this contract, the main advantage of the owner is that he need not to coordinate the
work of different contractors. The main contractor is responsible for all kinds of jobs,
starting from planning to commissioning stage. The owner takes over the entire work
which is fully operational and of proven performance from the main contractor.

2. Package contract
In a package contract, two or more related jobs, each of which could form a separate
contract are combined in a single contract. In the field of civil engineering generally
design and development are combined with construction and supplying or maintenance.

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In this type of contract, plan of work and standards are established and the work is carried
out accordingly by the contractor. The main contractor is responsible for safe guarding
the owner‘s interest , clear approval of design and technical aspect have to be taken from
the owner. The responsibility for the correctness of design lays with the main contractor.

3. Negotiated contract
In this type of contract negotiation across the table takes place between the
representatives of the owner and the main contractor for the project cost and other
conditions of contract. In this type of contract, detailed project specifications, are arrived
at by discussions between the owner and the main contractor.
A negotiated contract involves extended discussions for finalization as a competitive
contract. Most of the consultancy works of World Bank are negotiated contract

4. Continuing contract
In this type of contract new or additional work is awarded to the contractor on the basis of
the agreed terms and conditions of an existing contract. Such contract do not require
retendering and hence can save time and money.

5. Running contract
Such contracts provide goods and services at specified intervals or as on when required
by the owner. The contract price is not fixed and the payment is based on actual goods
supplied and services rendered as specified in the contract document.

6. Joint venture contract

An extra ordinary large construction project to be accomplished under a general contract
may require a greater concentration of financial, and administrative and technical that can
be mobilized by another company. This has led to the development of joint venture(J.V)
type of contract in which several firms combined their assets , plan and personnel to
undertake such a project. The J.V is similar to an ordinary partnership and corporation in
that each party in the combination shares in the work, risk and profit or losses of the
contract in accordance with the terms of the J.V agreement. There should be an
independent written document or agreement between the J.V which gives a clear
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 arrangement for the financing and management of the work under the contract and the
manner in which the risk and profits or losses are to be shared. The J.V agreement should
be subject to the approval of the owner and may be made a part of the construction
contract if desired.

7. BOT contract
Build - Operate – Transfer , a third party contract to to build, then operate an assest( for
e.g dam , bridge, road) for a specific amount of time for a fee and then transfer the asset
back to contracting company or entity ( usually a government entity). This is commonly
used by public sector for large capital projects. The system of contracting is useful when
client does not want to invest directly in the project and wants to encourage development
projects through external funding and investment. It is also a method of attracting and
involving the private sector which typically involve very heavy capital investment

For e.g: a power corporation may ask bidders to setup power plant on BOT basis, where
in the bidder agrees to design and construct the plant for in return for the right to operate.
The plant, say for 10 years, during which the contractor can generate and sell the power.
Design and construction of certain highways or airways can also be similar done on BOT
basis.

8. BOOT contract
BOOT- Build – Own –Operate –Transfer is similar to BOT except that rather than
receiving a fee for operating it. It receives the net income from the asset as if it owned it.
This asset is a revenue generating asset ( e.g: toll bridges, powerstations)

IMPORTANT CONDITIONS OF CONTRACT

The members of the construction team should be fully aware of their rights and obligations
under the contract. Following are the important conditions of contract.

1. Time of completion
2. Delay and extension of time
3. Penalty

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 4. Compensation of delay in completion of work
5. Liquidated damages
6. Debitable agency
7. Valuation of variations
8. Settlement of disputes
9. Force majeure and natural disaster
10. Price excalation
11. Termination of contract

1. Time of completion
The contract is required to complete the work within the agreed time of completion which
is specified in a suitable unit of time ( year, month, week, days ) depending on the nature
and scope of work. The contractor is also required to maintain the proportionate progress
of work.
2. Delay and extension of time
The delay in completion of work not attributed to the contractor, should be brought to the
notice of the owner by the contractor in writing, within the time specified in the contract
for seeking extension of time. The owner will satisfy himself that the delay is not on
account of a lapse on the part of a contractor before granting suitable extension of time.
3. Penalty
It is a fine imposed on the contractor for non-fulfillment of contractual obligations such as
failure to maintain required progress of work, delay in completion, poor quality of work,
bad workmanship etc.
4. Compensation for delay in completion of work
The contractor is liable to pay compensation to the owner for delay attributed to him in
completion of work. The amount of compensation may be stated as a percentage of the
estimated cost of work for each unit of time delay. The maximum limit of compensation
may be 10% of the contract price.
5. Liquidated damages
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 It is a fixed stipulated sum payable by the contractor on account of penalty for delays and
does not bear any relationship to the real damage to the owner. It is generally high and
fixed per day for the excess period over that specified in the contract for completing the
work.
6. Debitable agency
Whenever the contractor fails to fulfill his contractual obligation in respect of progress or
quality of work even after giving due notice by the owner, it becomes necessary to
appoint a debitable agency which works at the cost and risk of the contractor. This agency
is in the form of labour or other contractor to fulfill the contractual obligations of the
main contractor. The expenses incurred are charged from the bill or security of the
original contractor.
7. Valuation of variations
The valuation of variations is based on change in orders issued in writing by the owner.
Generally, the variation in individual items of work should not be more than 25% and
variation in total cost should not exceed 10%.
8. Settlement of disputes
Efforts should be made to resolve disputes amicably between the owner and the
contractor through mutual discussions and negotiations. Arbitration clause may be
incorporated in the contract to settle disputes not resolved through mutual discussions and
negotiations.
9. Force majeure and natural disasters
Natural disasters are acts of nature, such as unprecedented floods or rainfall, earthquake,
hurricanes, typhoons, fire etc. These disasters along with occurrence of riots, revolt etc.
are beyond the control of the contractor and may lead to financial and time loss. The
contractor should obtain an insurance policy for such risks as can be covered by
insurance. In the event of financial or time loss, the contractor can claim financial
compensation from the owner for risks which are not insurable and an extension of time
for all such risks.
10. Price escalation

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 During execution of the work, labour wages and material prices may increase as a result
of inflation. The contract conditions should, therefore, include on appropriate clause for
payment of escalation to the contractor. Generally, escalation payment is made for
increase in the cost of labour, materials and petrol, oil and lubricants (POL) and the
percentages of three components are taken as under:
Labour 30% of contract price
Materials 65% of contract price
POL 5% of contract price

11. Termination of Contract

The owner can terminate the contract in the event of default or bankruptcy of the
contractor and may impose penalty as per the contract agreement. Default on the part of
the contractor includes abandoning the work, failure to maintain required progress, non-
observance of rules/instructions etc. for which the owner may resend the contract and
impose penalty upto 10% of the estimated cost of the work. Due notice must be served on
the contractor before termination of the contract.

CONTRACT DOCUMENT
Construction works intended to be awarded to be awarded to contractors are given by
publicity so that a sufficient number of interested parties may bid for the work. Usually
the lowest bid is accepted unless there are valid reasons for not following these practices.
Every written contract which clearly describes the work should also define the right and
obligations of the parties. If the right and obligations of the owner and the contractor are
defined in a document , then it is called the contract document. This document generally
follows a standard format for construction contracts entered into by govt. and public
bodies. The contract document consist of contract agreement on non-judicial stamp paper
of prescribed value and the following sets of document each page of it is signed both by
the owner and the contractor.
1. Cover or Title Page

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