LECTURE 4

CONTRACTS AND SUBCONTRACTS FOR CIVIL ENGINEERING

WORKS

WHAT IS CONTRACT?

A contract is a legally binding agreement which recognizes and governs the rights
and duties of the parties to the agreement. A contract is legally enforceable because
it meets the requirements and approval of the law. An agreement typically involves
the exchange of goods, services, money, or promises of any of those. In the event of
breach of contract, the law awards the injured party access to legal remedies such as
damages and cancellation.

Formation of a contract generally requires an offer, acceptance, consideration, and a

mutual intent to be bound. Each party must have capacity to enter the contract.
Although most oral contracts are binding, some types of contracts may require
formalities such as being in writing or by deed. Not all agreements are necessarily
contractual, as the parties generally must be deemed to have an intention to be legally
bound.

A construction contract provides a legal binding agreement, for both the owner and
the builder, that the executed job will receive the specific amount of compensation
or how the compensation will be distributed. There are several types of construction
contracts used in the industry, but there are certain types of construction contracts
preferred by construction professionals.

Construction contract types are usually defined by the way the disbursement is going
to be made and details other specific terms, like duration, quality, specifications, and
several other items. These major contract types can have many variations and can be
customized to meet the specific needs of the product or the project.

FACTORS THAT DETERMINE THE TYPE OF CONTRACT SELECTED

There are several factors which have to be taken into consideration in making the
choice of contractual arrangement. This may include the following:

• Time available for documenting

• The size and nature of the project

• Urgency of the work

• Equity and fairness.

Since there are many arrangements to choose from, the choice of any one
arrangement will therefore mean the elimination of the others when you come to the
place of deciding the contractor.

Contractual arrangement is not a matter of sentiments but of logical reasoning.

TYPES OF CONTRACT

Generally speaking, contract can be broadly classified into three, namely:

• Fixed price contract type

• Variable price contract type

• Contract for personal/professional services

Fixed Price Contract Type

This type of contract involves a total fixed price for all construction related activities.
This can include incentives or benefits for early termination, or can also have
penalties, called liquidated damages, for a late termination. These contracts are
preferred when a clear scope and a defined schedule has been reviewed and agreed
upon.

This contract is used when the risk needs to be transferred to the builder and the
owner wants to avoid change orders for unspecified work. However, a contractor
must also include some percentage cost associated with carrying that risk. These
costs will be hidden in the fixed price.

• Lump sum contract

In lump sum contract the complete work as per plan and specifications is carried out
by contractor for certain fixed amount as per agreement. The owner provides
required information and contractor charges certain amount. This contract is suitable
when the number of items is limited or when it is possible to work out exact
quantities of work to be executed. The detailed specifications of all items of work,
plans and detail drawings, security deposit, penalty, progress and other condition of
contract are included in agreement. Though it is lump sum contract, contractor will
be paid at regular interval of 2-3 months as per progress of work on the basis of
certificate of payment issued by engineer in charge.

Under a lump sum contract, a “fixed price” for the work to be done is agreed upon
by the client and contractor before the work begins. This contract can also be applied
to both home building and commercial contracts. It can be more of a risk to the
contractor as there are fewer mechanisms to allow them to vary their price.
Advantages of Lump-sum Contract

• Low financial risk to Owner.

• Know cost at outset.

• Minimum Owner supervision related to quality and schedule.

• Contractor would assign best personnel due to maximum financial motivation to

achieve early completion and superior performance.

• Contractor selection is relatively easy.

Disadvantages of Lump-sum contract

• High financial risk to Contractor.

• Changes difficult and costly

• Early project starts not possible due to need to complete design prior to bidding.

• Contractor free to choose lowest cost means, methods, and materials consistent
with the specifications. Only minimum specifications will be provided.

• Hard to build relationship. Each project is unique.

• Bidding expensive and lengthy.

• Contractor may include high contingency within each Schedule of Value item.
 • Unit Pricing Contracts

Unit pricing contracts is probably another type of fixed price contract commonly
used by builders and in federal agencies. Unit prices can also be set during the
bidding process as the owner requests specific quantities and pricing for a pre-
determined number of unitized items.

By providing unit prices, the owner can easily verify that he's being charged with
un-inflated prices for goods or services being acquired.

Advantages of Unit Cost Contract

• Complete design definition not required

• “Typical” drawings can be used for bidding

• Suitable for competitive bidding

• Easy for contractor selection

• Early project starts possible

• Flexibility: Scope and quantities easily adjustable.

Disadvantages of Unit Cost Contract

• Final cost not known at outset since bills of quantities at bid time are only estimates

• Additional site staff needed to measure, control, and report on units completed.
• Unit price contracts tend to draw unbalanced bidding

• Design and Build (Turnkey Contract)

In this process the owner selects one contractor to both design and build the project.
It is primarily intended to save time. It is not necessary to prepare drawings in great
detail if the builder already understands what needs to be done. It works very well
when using standard designs that have been built repeatedly. It is absolutely critical
that the owner and builder have the same clear picture of the final project before
construction begins.

Design-Build is not a good method for most projects for the following reasons:

• When the designers work for the builder, rather than the owner, the checks and
balances that exist in other methods are lost.

• People in a hurry make mistakes

Saving time is the main advantage of design-build, but that should not be as critical
an issue for a project as cost and construction quality.

Variable Price Contract Type

To some extent, all variable price contracts must contain fixed prices (or elements
or agreements on prices or other considerations).

• Bill of Quantities (BOQ) Contract:

This is used particularly in buildings and civil engineering constructions industry.

These can be measured in accordance with the standard procedures including
variations when it occurs and the total price computed to each party’s satisfaction.
 • Time and Material Contracts

Time and material contracts are usually preferred if the project scope is not clear, or
has not been defined. The owner and the contractor must establish an agreed hourly
or daily rate, including additional expenses that could arise in the construction
process. The costs must be classified as direct, indirect, markup, and overhead and
should be included in the contract. Sometimes the owner might want to establish a
cap or specific project duration to the contractor that must be met, in order to have
the owner’s risk minimized. These contracts are useful for small scopes like
maintenance work or when you can make a realistic guess on how long it will take
to complete the scope.

• The Pros of Time and Materials Contract: You only pay when your contractor
works.

• The Cons of Time and Materials Contract: Your contractor will tend to work very
slowly.

• Cost-plus-percentage

Cost-plus-percentage is used particularly for emergency work where time does not
permit the use of other forms of contract. The contractor is paid for actual
expenditures plus an agreed percentage to cover overhead and profits.

• Cost-plus-fixed fees

This is usually employed where work is of a difficult or unforeseeable nature. The

contractor is reimbursed for actual costs incurred, which is variable but is also paid
on an agreed sum by way of a fixed fee which might be determined by competition
with other contractors.
Contract for personal/professional services

Costs are generally reimbursed on a man–hour basis or as an agreed percentage of

the value of the works.

• Man-hour basis

The price for labor is agreed and the cost is measured as the product of the agreed
rate and the man-hour used in performing the contract.

• Professional briefs

This type of contract is usually regulated by the professional body involved.

Although a minimum fee, which is a percentage of the value of the works, is
usually prescribed by the professional body, the actual fee may be negotiated
between the client and the architect or engineer at a higher rate. Alternatively,
fees might be fixed on a reimbursable man-hour basis. Such arrangements require
differentiation regarding payments for skills, status and /or experience/expertise
level.

SUB CONTRACTS

A sub contract is a contract in which a party agrees to perform part of the work that
was originally arranged with the signer of a previous contract.

It is a contract primarily between a builder or a principal contractor and

subcontractor. It outlines the perimeters of specialist work to be done for the
construction project.
As the main contractor cannot undertake the complete work with his own laborers,
he will need subcontractors to execute aspects of the whole work e.g. plumbing and
electrical services are subcontracted.

A subcontractor is an individual or in many cases a business that signs a contract

to perform part or all of the obligations of another's contract.

A subcontractor is a company or person who is hired by a general contractor (or

prime contractor, or main contractor) to perform a specific task as part of the overall
project and is normally paid for services provided to the project by the originating
general contractor. The most common concept of a subcontractor is in building
works and civil engineering,

The incentive to hire subcontractors is either to reduce costs or to mitigate project

risks. In this way, the general contractor receives the same or better service than the
general contractor could have provided by itself, at lower overall risk. Many
subcontractors do work for the same companies rather than different ones. This
allows subcontractors to further specialize their skills.

TYPES OF SUB-CONTRACTORS

DOMESTIC OR NAMED SUBCONTRACTOR A subcontractor who contracts

with the main contractor to supply or fix any materials or goods or execute work
forming part of the main contract. Essentially this contractor is employed by the
main contractor.

NOMINATED SUBCONTRACTOR

Certain contracts permit the architect or supervising officer to reserve the right of
the final selection and approval of subcontractors. The main contractor is permitted
to make a profit from the use of nominated subcontractors on site, but must provide
"attendance" (usually the provision of water, power, restrooms, and other services
to enable the nominated subcontractor to do his job). In effect the appointment of
nominated subcontractors establishes a direct contractual relationship between the
client and the subcontractor.

CONTRACT DOCUMENTS

Civil Engineering contract documents generally follows a standard format of

contracts entered into by government and public bodies. The contract document
consists of the contract agreement and the following sets of documents, each page
of which is signed by both the owner and the contractor:

• Cover/Title page

• Content page: content of agreement with page references

• Notice inviting tender

• Tender form: may be a simple letter setting out the offer

• Schedule of issue of materials: this may include

• Schedule of basic materials

• Cost of lubricants

• Cost of freight

• Drawings
 • Specifications: the following specifications are normally included in
the contract documents:

• General specifications

• Detailed specifications

• Conditions of contract: these are the terms and conditions of the

contract.

Other important contract documents are:

• The letter of acceptance: notification that this offer is accepted

• The agreement: which is the actual deed of the contract. It is a registered legal
document and has all the other contract documents annexed.

Requirements for A Valid Contract

• Consensus

• Contractual capacity

• Certain performance

• Possibility of performance

• Object of contract must be legal

• Legal formalities must be completed

• Agreement must be voluntary

OFFER

Definite and complete

Firm - The offered must be aware of the offer

OFFER EXPIRATION

• Revocation/Withdrawal before acceptance

• Rejection of offer

• Time lapse

• Death of either party (except where there is an executor or power of attorney)

• Counter offer

ACCEPTANCE

•Unconditional

•Intention to make it legal

•Acceptance may be written or oral

•Acceptance must be in reaction to an offer

Contractual capacity

•Full contractual capacity (18+)

• Limited contractual capacity (7-17)

 •No contractual capacity (under 7, mental incapacity etc.)

TERMINATION OF CONTRACTS

A contract is said to be discharged when the agreement between the parties is

terminated and the rights and liabilities arising from it are extinguished. This may
be accomplished in any of the following ways:

• By agreement: the parties agree to terminate the contract either by one waiving
his right or by releasing the other from his obligation or a new contract substituted
for the old one.

• By performance: in this case there is complete fulfillment of the terms of the

contract in every respect.

• By breach: one party fails in its obligation and the other then has the right to cancel
the contract and sue for damages.

• By lapse of time: an action on a simple contract must be commenced within a

certain date when the cause of the action arose.

• By impossibility: this may be due to a cause which has arisen since the making of
the contract.

REMEDIES FOR BREACH OF CONTRACT

Whenever a breach of contract occurs, a right of action exists in the court to remedy
the matter. The remedies generally available are as follows:
i. Claim of damages: Damages consist of a sum of money which will as far as it
is practicable place the aggrieved party in the same position as it would have been
if the contract had not been performed. The parties, when entering into agreement
may agree that a certain sum, known as ‘liquidated damages’ shall be payable if
a breach occurs.

ii. Order for payment of a debt: A debt is a liquidated or ascertained sum of

money due from the debtor to the creditor and is recovered by an action of court.

iii. Specific performance: The term refers to an order of the court directing a
party to a contract to perform its part of the agreement. It is now only applied by
the courts on mere occasions when damages may be an inadequate remedy but
specific performance constitute a fair and reasonable remedy and is capable of
effective supervision by the court. This remedy may not be given if it requires
the constant supervision of the court.

iv. Injunction: This is an order of court directing a person not to perform a

specific act. for instance, if Mr. A had agreed not to carry out any further building
operations on his land for the benefit of Mr. B who owns the adjoining land and
Mr. B then observes Mr. A starting the building operations, Mr. B can apply to
the court for an injunction restraining Mr. A from further building. Damages in
these circumstances would not be an adequate remedy.

v. Rescission: Specifically includes an order of court counseling or setting aside

the contract and results in setting the parties back in the position that they were
in before the contract was made.
ARBITRATION

Disputes may arise between contractor and the Owner/Client because of several
factors. The dispute can be settled through litigation in a court of law or where
the contract permits through arbitration.

Arbitration is a process of hearing and determination of a dispute by an impartial

referee selected or agreed upon by the parties concerned. The idea of arbitration
is enshrined in the general conditions of contract that govern the relationship of
the parties in the construction industry.

The advantages of settling disputes through arbitration instead of litigation in

courts are:

a. Cost: it is less expensive

b. Speed: disputes are settled much faster

c. Convenience: arbitrary hearings are fixed considering the convenience of

the concerned parties.

d. Technical knowledge: it is advantageous to appoint arbitrators having

technical knowledge and expertise in construction.

e. Informality: arbitration is conducted in a relatively informal atmosphere by

observing certain minimum prescribed legal formalities.

f. Proceeding in private premises: as compared to courts which are exposed to

the general public, arbitrations are held in private environments and this helps
to protect the reputation of the businesses.
 g. Finality of award: the award given by the arbitrators is final. It can only be
challenged on questions of law and misconduct of arbitrators.

TRANSFER OF OBLIGATIONS

•Cession: the person in the right gives up the right to another. The consent of
the other party is required

•Delegation: transfer of original duties from debtor to a third party. Consent

of all parties is required.