LAW OF CONTRACT & ESTIMATION BAA3012

CONTRACT

SEM II0910Z 1
 CONTRACT
SEM II0910Z 2
At the of the Class students are able
1. Describe what is contract

LESSON OUTCOMES
2. Describe the importance of contract
3. Differentiate the type of contract
4. Identify the right of contract for
construction works

SEM II0910Z 3
1. Introduction to Contract

CONTRACT
Contract
Notice to Bid
Agreemen
bidders opening
t

Bidding Period Acceptance Period (60 – 120 days)

-Written to proceed
-Formal Contract

SEM II0910Z 4
1. Introduction to Contract
to:
1. Government Project (JKR):
- Contract Document should be prepared

CONTRACT
for procurement above RM200,000.00
- Based on Akta Kontrak 1949, officer that
represented government that sign the
contract document should be endorse by
the minister
- Contract document should be signed by
both parties within 4 months from LOA
SEM II0910Z 5
1. Introduction to Contract
to:
1. Definition
- A binding agreement between two or

CONTRACT
more persons that is enforceable by law
- A contract is an exchange of promises
between two or more parties to do, or
refrain from doing, an act which is
enforceable in a court of law
- A binding legal agreement
SEM II0910Z 6
1. Introduction to Contract
to:
2. In general a contract is legal
document, almost always in written

CONTRACT
form wherein the parties establish
their relationship. This should be
based on complete mutuality.
Essential to the contract is a clear
meeting of the minds of parties as to
what each will, and will not, do.

SEM II0910Z 7
1. Introduction to Contract
to: Every contract consists of several parts:
3.
a) A need (in construction, a description of

CONTRACT
what is to be built)
b) An offer (offer from the contractor to
built with a sum of money)
c) An acceptance of the offer, by the owner
d) Compensation (payment of the
proposed cost, from owner to
contractor)

SEM II0910Z 8
1. Introduction to Contract
to:
4. Why we need contract?
- To clarify the scope of work

CONTRACT
- To determine the agreed price and finish
date of the work / project.
- To clarify the roles and responsibility of
all the parties involved.
- To find out the appropriate action to
be taken if any breach of contract occurred
among the parties.
SEM II0910Z 9
2. Type of Contract
to:
1. Construction contracts can be broadly grouped
into two categories:

CONTRACT
a) Competitive Bidding Contracts (Price Based)
b) Negotiated Cost-Plus Contracts (Cost Based)
2. The three basic factors that favor the use of a
particular type of contract are:
a) The need to provide an adequate incentive
for efficient performance
b) The ability to introduce changes during
construction
c) The allocation of risks between owner and
SEM II0910Z 10
2. Type of Contract

CONTRACT
Key consideration in a contracting strategy
SEM II0910Z 11
2. Type of Contract
Construction Type of
Contract

CONTRACT
1. Competitive Bidding 2. Negotiated Cost-Plus
3. Combination
(Price Based) (Cost Based)
- Contract with price being - The actual cost incurred by
submitted by contractor in the contractor are reimbursed New
New Innovative
Innovative Types:
Types:
his bid. together with a fee to cover 1.
1. Turnkey
Turnkey
overheads and profit. 2.
2. Use
Use aa combination
combination ofof
contract
contract types
types in
in aa single
single
Many
Many Types:
Types:
Two
Two Main
Main Types:
Types: project
project
1.
1. Cost ++ %
Cost % of
of Cost
Cost
1.
1. Lump
Lump Sum
Sum 2.
2. Cost + Fixed Fee
Cost + Fixed Fee
2. Unit Price
2. Unit Price 3.
3. Cost + Fee + Profit Sharing
Cost + Fee + Profit Sharing
(admeasurements
(admeasurements contract)
contract) 4.
4. Cost
Cost ++ Sliding
Sliding Fee
Fee
5.
5. Cost
Cost ++ Guaranteed
Guaranteed Max.
Max.
Price (GMP)
Price (GMP)

-High risk to contractor - Risk sharing -PMC administered

-Low risk to owner
SEM II0910Z 12
2. Type of Contract
0% 100%
Turnkey

CONTRACT
Lump Sum
Unit Price
GMP
Cost Plus
Owner Direct Force
100% 0%

Owner Risk Contractor Risk

Level of Risk Associated with Various Contracts

SEM II0910Z 13
2. Type of Contract
1. Competitive Bidding Contracts
a) The main process for selecting

CONTRACT
contractors, particularly for
government projects
b) There are two types of contracts:
i) Lump Sum
ii) Unit Price (admeasurements
contract)
SEM II0910Z 14
2. Type of Contract – Lump Sum
i) Lump Sum
• Generally used in smaller straightforward

CONTRACT
works (referred to plan & specification
contracts).
• A single tender price is given to
contractor for completion of a specified
work to satisfy the owner
• Each contractor is required to estimate
the quantities and value of work, based
on client’s designer’s drawings and
specification.
SEM II0910Z 15
2. Type of Contract – Lump Sum
i) Lump Sum
• Payments on monthly basis / linked to

CONTRACT
achievement of progress. Based on the
estimated percent of the total job that
has been completed
• Since the contractor is committed to a
fixed price, this type of contract has very
limited flexibility for design changes
• Demand that the design is completed
during tender stage. With minimal
changes SEM II0910Z 16
2. Type of Contract – Lump Sum
i) Lump Sum
• Some contracts include typical ‘

CONTRACT
schedule of rate’ requiring the
contractor to insert individual rates
for valuing variations.
• Generally, this contract appropriate
when the work is defined in detail
limited variation is needed and
level of risk is low
SEM II0910Z 17
2. Type of Contract – Lump Sum

CONTRACT
SEM II0910Z 18
2. Type of Contract – Lump Sum
i) Lump Sum
• This contract also suitable for

CONTRACT
traditional, design & build and
turnkey
• Suitable for building projects

SEM II0910Z 19
2. Type of Contract – Unit Price
i) Unit Price (admeasurements)
• The most popular form of contracting in

CONTRACT
both the building and civil engineering
sector is still the traditional system.
• The project is design by the client’s
designer and detailed Bill of Quantity
are prepared in accordance with the
appropriate standard methods of
measurement (SMM).

SEM II0910Z 20
2. Type of Contract – Unit Price
i) Unit Price (admeasurements)
• In this contract, bidders enter

CONTRACT
rate against the estimated
quantities of works
• The rates include risk contingency

SEM II0910Z 21
2. Type of Contract – Unit Price
Measurement for Building works based on STANDARD METHOD OF
MEASUREMENT 2

CONTRACT
SEM II0910Z 22
2. Type of Contract – Unit Price
Measurement Method for Civil Works based on CESSM

CONTRACT
SEM II0910Z 23
2. Type of Contract – Unit Price
i) What is BQ?
a) Documents that given a very detail

CONTRACT
information such as works that must
be carried out and having a quantity
b) Part of Tender and Contract
Document

SEM II0910Z 24
2. Type of Contract – Unit Price
i) Unit Price (admeasurements)

CONTRACT
SEM II0910Z 25
2. Type of Contract – Unit Price
i) Unit Price (admeasurements)

CONTRACT
 SPKPKR 3/1993 bertarikh 6.8.1993
 Projek bangunan & kejuruteraan awam > RM1.0 juta hendaklah
dipanggil secara BQ- JKR203A
 Bagi projek-projek yang menggunakan lukisan piawai kesemuanya
hendaklah dipanggil secara BQ tanpa mengira nilai (walaupun bernilai <
RM1.0j)
 Sebarang pengecualian hendaklah mendapat kelulusan KPKR

SEM II0910Z 26
2. Type of Contract – Unit Price
i) Unit Price (admeasurements)
a) For civil engineering works-substantial amount of
unpredictable work below ground and provisions for

CONTRACT
re-measurement on completion.

b) Minimize the contractor’s risk, reimbursement

for the quantities executed measured in accordance
with the standard method of measurement rules.

c) Offered advantages when compared to the lump

sum approach.

SEM II0910Z 27
2. Type of Contract – Unit Price
i) Unit Price (admeasurements)
ADVANTAGES of BQ

CONTRACT
1.Prompt the design team to 6.As a basis for monthly
finalise the design before the interim valuations.
bill can be prepared.
7.Rates contained in bills used
2.Avoids measure works for the valuation of variations
before bidding, 8.Assist in the control &
financial management of the
3.Avoid duplication of effort
works.
resulted increase overheads
(a)Pre-contract estimating
4.Provided opportunity for (b)Post-contract control
realistic tender evaluation. (c)Development of cost
5.The unique coding system management system

SEM II0910Z 28
2. Type of Contract
1. Negotiated Cost-Plus Contracts
• In this type of contract, project risk is

CONTRACT
high
• Owner shares the project risk with
contractor by reimburse the actual
cost plus a specific fee for overhead
• This type of contract offers a high level
of flexibility for design changes
SEM II0910Z 29
2. Type of Contract
1. Negotiated Cost-Plus Contracts
• The contractor is usually appointed

CONTRACT
early in the project and is encourage
to proposed design changes in the
context of value engineering
• The final price, depends on the
changes and the extent of the risk

SEM II0910Z 30
2. Type of Contract
1. Negotiated Cost-Plus Contracts
• The problems that lead to the adoption of this

CONTRACT
contracts are:
• Inadequate definition of the work at time of tender
• Need for design to proceed concurrently with
construction
• Works involves technical complexity
• Situations involving unquantifiable risks to the
contractor such as work below ground level and
the effect of inflation
• Owner wishes to be involved in the management
of his/her project
SEM II0910Z 31
2. Type of Contract
1. Negotiated Cost-Plus Contracts
• Not favored by many industry’s employers,

CONTRACT
since there is an absence of a tender sum
and a forecasted final account.
• Provide little incentive for the contractor to
control cost, although different varieties of
cost reimbursement build in incentive for
the contractor to keep costs as low as
possible.

SEM II0910Z 32
2. Type of Contract
1. Negotiated Cost-Plus Contracts
• This type of contract suitable when:

CONTRACT
• When the character and scope of the works
cannot be readily determined.

• Where new technology is being used.

• Emergency work projects, where time is not

available to allow the traditional process to be used.

• Where there is special relationship between client

and contractor; trust.
SEM II0910Z 33
2. Type of Contract
1. Negotiated Cost-Plus Contracts
• Some of the common types of cost-plus

CONTRACT
contract are:
• Cost + Fixed Percentage
• Cost + Fixed Fee
• Cost + Fixed Fee + Profit Sharing
• Cost + Sliding Fee (Fluctuating Fee)
• Cost + Guaranteed Maximum Price
(GMP) (Target Contract)
SEM II0910Z 34
2. Type of Contract
 Cost + Fixed Percentage
• Simple to administer

CONTRACT
• The contractor receives cost of labour,
materials, plant, sub contractors and
overheads.
• A certain amount of percentage (agreed at the
outset of the project) is added to this sum.
• Major disadvantage – the contractor’s profit are
directly geared to the contractor’s expenditure.

SEM II0910Z 35
2. Type of Contract
 Cost + Fixed Fee
• The contractor’s profit is predetermined by the

CONTRACT
agreement of a fee for the work before the
commencement of the work.
• Require detail estimate.
• Difficult to predict the cost with sufficient
accuracy.
• The fixed fee may need to be revised on
completion.
• No control over contractor.
SEM II0910Z 36
2. Type of Contract
 Cost + Fixed Fee + Profit Sharing
• Same as cost + fixed fee but the

CONTRACT
contractor is paid a share of any cost
saving that the contractor done during
the construction

SEM II0910Z 37
2. Type of Contract
 Cost + Sliding Fee (Fluctuating Fee)
• The sliding fee is a fee that increase

CONTRACT
linearly with the amount of cost saving
that the contractor introduce between
the actual cost and a preset target
• The fee can also be reduced when the
actual cost exceeds the target (specific
risks can be excluded from the tender
cost)
SEM II0910Z 38
2. Type of Contract
 Cost + Sliding Fee (Fluctuating Fee)
• Fee = R(2T-A)

CONTRACT
where : T = target price
R = base percent value
A = actual cost of the construction
5%

Fee
3%

0.5T Actual T : Target Cost

Cost
SEM II0910Z 39
2. Type of Contract
 Cost + Guaranteed Maximum Price (GMP)
(Target Contract)

CONTRACT
• The contractor’s cost in this case is
reimbursed with the contractor giving a cap
on the total price not to be exceed a preset
value
• Very few contracts to include positives
incentives for performance, most rely on
damages for non-performance (e.g Liquidated
Damages, retentions, bonds and warranties).
SEM II0910Z 40
2. Type of Contract
 Cost + Guaranteed Maximum Price
(GMP) (Target Contract)

CONTRACT
• Target costs contract require a different
approach when compared to traditional
contract.
• Target contracts demand that the
promoter contractor and the engineer
are all well involved in the management
and joint planning of the contract.
41
2. Type of Contract
 Cost + Guaranteed Maximum Price
(GMP) (Target Contract)

CONTRACT
• ‘Target cost’ means the estimated of
this contract as initially negotiated.

Target Cost

Cost Performanc Time

Incentive e Incentive Incentive

42
CONTRACT
43