UNITY

Contract, Specification and Quantity Survey

CHAPTER SEVEN
CONTRACT
EYOB E. (MSc.)
 Principles of Contract
 Contract is a written agreement between two

or more parties whereby each party promises

to do or not to do something and agrees to
terms (conditions and warranties) set out in
the contract.
 Conditions of contract are terms in which

parties in the contract are governed/

administered with. That is, it is an
administrative law which is the legally binding
part of the contract.
 These terms shall be enforceable by law and

incorporates the rights, obligations and

remedial rights of each contracting parties.
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Parties in construction contract

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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.
In other words, a contract is
an agreement that affects the legal 
relationship between two or more parties.

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Elements of a contract
 Contract requires four basic elements

◦ – Mutual agreement
• Offer & acceptance
◦ – Legal objectives
◦ – Valid consideration
◦ – Legal capacity of the parties

Mutual agreement
◦ Must have evidence that there was a “meeting of th
e minds”
• Offer ‐clear & unambiguous
• Acceptance ‐clearly accepting deal offered,
indication of consent,

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legal objective
 The thing being contracted for must be legal
 Most construction contracts are legal,

assuming correct party issues the contract

 But some contract modifications may be

illegal & thus unenforceable

◦ Verbal modifications
◦ Modifications beyond scope of the party’s authority

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legal capacity
– In simplest form, parties must be 
◦ Of age
◦ Mentally competent
– In construction environment, parties must
have
◦ Legal authority to issue and execute contracts 
◦ May have to be properly licensed to have
legal capacity

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Valid consideration
 In exchange for the offer of performance, the

recipient must offer something of value

◦ ‐Money(most typical)
◦ ‐promise of future work or revenue
◦ „ Goods or Services
 – Without consideration a contract is not valid

Note: In most cases a construction contract must be

in written form to be enforceable. But verbal contract
can be enforceable under proper circumstance.

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Content of construction contract
◦ Identity of parties 
◦ Promises and responsibilities
◦ Scope of the work
◦ Price and payment terms
◦ Project execution plans 

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Purpose of construction contract
 Describe the scope of work
 Establish timeframe
 Establish cost and payment provisions
 Set forth obligations and relationships
 Manage multiple risks
 Establish control mechanisms
 Minimize disputes
 Improve economic return on investment

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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

A. Lump Sum Contract( Fixed Price)

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.

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◦ The contractor is fully responsible to quantify the
volume of works based on the given specifications
and drawings. (must be careful not to overestimate
or underestimate)
◦ Lump sum contract are typically used for
  buildings. 
◦ Difficult to make adjustments.
◦ is more suitable for works for which contractors 
have prior construction experience
◦ Not suitable for unpredictable work conditions

NB: Escalation Contract: When the contract contains

provisions for price escalation. These provisions
reduce the risk of the contractor during Periods of
inflation.

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B. Unit Rate Contract
◦ Also called Item rate contract
◦ Fixed Unit prices are submitted for each item of
work.
◦ Used for works whose quantities can be estimated
in advance.
◦ Changes in drawings and quantities can be made as
required by the owner within the agreed limits.
◦ ‡ Items whose actual quantity varies from the ‡
estimated quantity by more than 15 or 20%, either a
bove or below, are sometimes subject to 
renegotiation of the unit price. 

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C. Lump sum and schedule rate contract

◦ ‡Combines the features of the Lump sum and 
schedule contracts
◦ schedule rate contract is based on only agreed unit
prices of the intended work items with out
estimated quantities of the works.
◦ ‡Additional items are amounted as per the attache
d  item rate.

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D. Cost plus
◦ ‡Used when it is impossible to predict their costs 
during the negotiation, bid,
and award process. 
Factors:
◦ unpredictable and extreme weather conditions, 

transportation problems, combat or war, or contr
acts where the amount of effort that will be requir
ed depends on different factors. 
◦ ‡Cost plus contracts take many forms: the most
common cost plus fixed fee and cost plus a
percentage. 
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D.1. Cost plus Fixed Fee Contact
◦ ‡Is desirable when the scope and nature of the wor
k can at least 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. 
◦ ‡The contractor will not be tempted to increase the
 cost to get more revenue. 
D.2. Cost plus Percentage of Cost Contract
◦ ‡The tendency of the contractor to  increase the cost
 of work to earn more profit by way of percentage o
f enhanced actual cost is the major demerit of this 
contract type.

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Contract Documents
 ‡ 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.

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In the Ethiopian Construction Industry the
following
‡standard conditions of contracts are commo
nly used:
 „FIDIC (1987) –Condition of Contract
 2006 -Public Procurement Agency(PPA),

Standard Bid Document   „

 1994- Ministry of Works and Urban

Development (MoWUD) 
 „ 1987 –Building and Transport Construction

and Design Authority (BaTCoDA)

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FIDIC Conditions of Contracts
 FIDIC has evolved into a leading body for 
development of model standard forms of
contract for use in the international
construction industry. 
 ‡ FIDIC conditions of contracts have two

parts: ‡
◦ „ General Condition of Contract
◦ „ Particular Conditions of Contract

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 FIDIC Conditions of Contracts
◦ „ 1957 –RED BOOK
 ‡ for civil engineering works 
◦ „ 1963 – YELLOW BOOK
 ‡ For mechanical and Electrical works
◦ „ 1987 –OLD FIDIC
 ‡ Comprises the RED and YELLOW Books. 
◦ „ 1995 –ORAGE BOOK
 ‡ For Design Build and Turnkey Projects
◦ „ 1999 –GREEN BOOK
 ‡ For short period projects ( 6 months)
 ‡ Low contract value ($ 500,000)
◦ „ 1999 –SILVER BOOK
 ‡ For turnkey for power plants, factories and facilities ‡
◦ MBD –Harmonized Edition
 „2004, „World Bank tried to harmonize the FIDIC 
conditions to suite its procurement needs. 23
Quiz II
 What is the difference between lump sum
contract and Unit rate contract? If the
estimated quantity in the contract BOQ is
found to be less than the actual quantity
which needs to be excavated on site, which
contract type (Lump sum or Unit rate) would
be advantageous for the contractor? Briefly
explain.

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Contract Management :

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Contract administration
 Identifying contractual responsibilities of 

Stakeholders.
◦ „ Reviewing the Terms of Contract Documents
◦ „Preparing and Monitoring Responsibility Summary
Sheets.
 Determining and understanding the 
construction components of the project.
◦ ‡ Reviewing the Contract Drawings and Technical
Specifications ‡‡
◦ 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.
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 Report Project Status daily and / or and 
Completions.
 Certify qualities of materials, shop drawings, 

samples, and works.
 Measure Works, Record Site Potentials and 

Certify Payments and Completions

◦ „Take off sheet and Schedules are used for 
Measurement of Works
◦ „ Method of Measurement is according to standard
practices „
◦ „ „ Advance, Interim and Final Payments are
certified „
 Mediate Disputes.

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Contract Closing
 ‡ Closing of Contract looks into issues related

to ‡Maintenance Period and Remedial works, 
Dealing with Left Over Claims and Disputes, if
 any, Closing of Accounts and Completion 
Certificates.

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Claim and dispute management

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 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 can therefore be a

demand for payment for adjustment of the

partiesʹ respective contractual obligations,
Such as, Extension of Time for compensating
delay damages and extra payment for
variation works etc.
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 There are three major types of claims
◦ Time Related Claims: Claims associated with delay
  or in time completion of projects
◦ Cost Related Claims: Claims associated with 
monetary compensation
◦ Default by Contracting Parties: Claims associated
with non performances of contractual obligations 

Claim
administration
process
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Major causes of claims
 „poor or unclear tender and/or contract 
documents,
 „poor or inadequate administration of 

responsibilities by stakeholders, 
 „Unforeseen or uncertain situations during 

execution
 Changed conditions, or variations
 Additional works, and
 Delay in approving payment and time

extension.

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Alternative dispute resolution mechanisms
 Preventive dispute resolution system

◦ ALLIANCING: is generally a tender arrangement 
where all the principal tenderers organize into 
groups with common aims, prior to submitting the
tender. 
◦ 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.
 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 selected and paid by them.
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Amicable Dispute Resolution System: used
to administer the claim in a less formal, simple 
procedure, more flexible, and less adversarial
mode so as to avoid the time and cost
implication of claim processing.
Amicable Dispute Resolution System includes
Negotiation, Mediation, Conciliation and use of Mini
‐Trials 

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MEDIATION 
  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 try to 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. 35
CONCILIATION
 ‡ Conciliation is in many respects similar to

mediation. The conciliator is still an 
independent third party but the difference is
 that the conciliator may make more specific
suggestions to resolve the dispute. The 
conciliator may also have a more powerful 
role in the various meetings. 

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Judgmental Dispute Resolution System
◦ the formal common law system is applicable to 
bring the closure of claim processing.
◦ Includes Arbitration and Litigation 
Litigation:
◦ means going to court and being judged by a public
appointed jury. This process is quite expensive as
the public judiciary system is less efficient and time
 taking. 

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Arbitration
after hearing both sides in a judicial manner, the
decision is made by a person or persons other than
a court .
ARBITRATOR
 „ He is chosen and paid by the disputants
 „ He does not sit in public
 „He acts in accordance with privately chosen procedure
 as long as he doesn’t violate public Policy
 When the law allows he is set up to the exclusion of 
the state courts
 „His authority and powers are only whatever he is give
n by the disputant’s agreement

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 Advantages of arbitration
◦ „ The Arbitrator is an expert in the field
◦ „ The procedures are open to the parties
◦ „ Hearing are private 
◦ „ The decision is binding

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THANK YOU!

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