CHAPTER II

CONTRACT

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Principles of Contract Law
Contract is a written agreement between
or among 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

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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.

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Contract fulfill the following seven
requirements:
Parties are capable of contracting: Lawful
and Capable
Consent of contracting parties is
necessary: Intent
Object of the contract is sufficiently
defined, possible and lawful: Legal and
Distinct
Use of Contract form prescribed by law,
if any: Standard
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Cont...
Payment for the Promise: Consideration
Constitute two parts: Offer and
Acceptance
Parties enter into Agreement: Agreement

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Lawful and Capable is to mean they are
legally allowed to enter into contract and
provides statements of facts and obligation.
Intent is willingness or consent by the
contracting parties to create a legal contract.
Legal and Distinct is a description of both
the promises and considerations
Standards can be conditions, forms,
formats, schedules, instructions, etc

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Consideration can simply be interpreted
as ‘price for the promise’ which involves
a benefit.
Offer is an indication that one party is
willing to be bound by specific terms set
out in the contract.

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An offer can remain open unless
conditioned for termination using the
following ways:
Refusal or Counter Offer
Closure of the Offering organization
Non – Acceptance with in the offer time
Failure of the offer condition

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Acceptance is the key for the formation
of a contract which must be absolute
indication of consent.
Agreement though proves the existence
of a contract; there are situations where it
can be considered as there isn’t.

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The purposes of a contract are:
To describe scope of work
To establish time frame
To establish cost & payment provisions
To Set forth obligations & relationships
To Manage multiple risks
To Establish control mechanisms
To Minimize disputes
To Improve economic return on investment

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Types of Construction Contract
Lump sum contract
Unit rate contract
Lump sum and schedule contract
Cost plus fixed fee contract
Cost plus percentage of cost contract

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Lump Sum Contract
used for buildings.
The qualities of the materials required can
be calculated with sufficient accuracy.
is more suitable for works for which
contractors have prior construction
experience.
This type of contract is not suitable for
difficult foundations, excavations of
uncertain charter, and projects
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Cont...
One price for the whole contract
Lump sum includes costs plus overheads
and profits
Higher risk to contractor
Price quoted is a guaranteed price as per
contract documents.
Payment based on a scheduled percentage
scheme (monthly progress claims)

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Cont...
The contractor is free to use means and
methods to complete the work and
responsible for proper performance
Work must be well defined at bid time.
Fully developed plans and specifications

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Unit Price or Bill of Quantity
 Quote Rates / Prices by units
 No total final price
 Re-negotiate for rates if the quantity or
work considerably exceeds the initial
target
 Payment to contractor is based on the
measure.

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Cont...
 Unbalanced bids
 Higher risk to owner
 Ideal for work where quantities can not
be accurately established before
construction starts.
 Require sufficient design definition to
estimate quantities of units
 Contractors bid based on units of works
 Time & cost risk (shared)
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Bill of Quantity
The unit price contracts are usually
presented in the Bill of Quantity.
The item rate contract is most commonly
used for all type of engineering works
financed by public or government bodies.
This type of contract is suitable for works
which can be divided into various items
and quantities.

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Example of BOQ

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Lump sum and scheduled contract
This is similar to the lump sum contract but
schedule of rates is also included in the
contract agreement.
the contractor offers to do a particular work
at a fixed sum within a specified time as per
plans and detailed specifications.
The type of contract is more suitable for
construction works for which contractors
have prior work experience & realistic esti.

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Cost plus
Cost plus contracts are used in situations
that make it difficult or impossible for
either the owner or the contractor to
predict their costs during the negotiation,
bid, and award process.
Factors that may make the calculation of
costs impossible include unpredictable
and extreme are:

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Cont....
weather conditions such as would be
encountered in the Antarctic,
known transportation requirements to
remote locations,
combat or war,
Two types
1. Cost plus Fixed Fee Contract
2. Cost plus Percentage of Cost Contract

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Cost plus Fixed Fee Contract
Cost plus fixed fee contract is desirable
when the scope and nature of the work
can at least be broadly defined.
it is essential that the scope and some
general details of the work are defined.
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.
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Cost plus Percentage of Cost
Contract
instead of awarding the work on lump sum
or item rate basis, it given on certain
percentage over the actual cost construction.
The contractor agrees to do the work in
accordance with the drawings,
specifications and other conditions of
contract.
materials and labor are arranged between
the client and the contractor.

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The tendency of the contractor to increase
the cost of work to earn more profit by
way of percentage of 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),
.

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Specification (General and Particular),
Bill of Quantities,
Drawings,
Addenda and
Appendix to Tender

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Invitation to Tender: -
An initiation letter to the contractor to
participate in the tender with an
acknowledgment attached.
Instruction to Tenders: -
The contractor is given directive of what
is required of tenders. It includes:
Tendering procedures, bid bond, data,
space, time

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Commercial requirements
Information in what shall be submitted
with the tender (alternative proposals etc)
Scope of work
Tender basis
Tender bond (possible)

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 Form of Tender
This is a document where the contractor:
Confirms, that he has examined all the tender doc.
Confirms that he will perform the work
Promises that the validity of the tender is open for
a certain period
Shows his understanding that the lowest bid or any
after may be rejected
States that part of the work may only be accepted
Confirms that he will enter into an agreement if
awarded 29
Agreement
The agreement is the document that
represents and reflects the legal contract
between the owner and the contractor.
It is simply a letter that constitutes legal
evidence that a contract exists, and forms
the basis for its enforcement.

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Conditions of Contract
Itincludes General and
Supplementary or Special/Particular
conditions of contract.

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General Conditions
is an essential part of the contract.
defines the responsibilities of the parties
involved in the contract- the owner and
the general contractor.
It describes the guidelines that will be
used in the administration of the contract.

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cont...
implying that the same documents are
standard to all contracts.
These forms are familiar to all parties
concerned, and the wording is not only
clearly understood, but has also been
tested in the courts.

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Supplementary Conditions
are sometimes known as Special
Provisions or Special/Particular
Conditions.
Its purpose is to provide an extension of
the General Provisions of the contract to
fit the specific project at hand.
Items included in the Supplementary
Conditions are entirely subject to the
discretion of the owner.
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 It includes:
The number of copies of contract documents to
be received by the contractor
Survey information to be provided by the owner
Materials provided by the owner
Changes in insurance requirements
Phasing requirements
Site visit
Start date of the construction

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Requirements for security and temporary
facilities
Procedures for submittal and processing of shop
drawings.
Cost and schedule reporting requirements
Traffic control and street cleaning requirements
Responsibilities fir testing of materials
Actions to be taken in the event of discovery of
artifacts or items of historical value

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 Specifications
may also be known as Technical provisions.
They are written instruments to be used in
conjunction with the drawings.
the drawings and the specifications fully describe
and define the requirements of the contract, to
include the quality that is to be achieved.
They also guide the contractor through the
processes of ordering materials and construction
and installation of the facility.

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 Bill of Quantities
Describe the expected amount of work
(measured)
it sets out the units of measurement,
The units of work,
the unit price and
the total cost of the works.

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Drawings
Drawings are the means by which the
designer conveys the physical, quantitative,
and visual description of the project to the
contractor.
They are also known as plans or blueprints.
Addenda:Any change to the bid documents
after they are released for bidding but before
bids are actually received requires the
issuance of an addendum.

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 Cont...
This formal document changes the original bid
documents.
At the time of bid opening, bidders must in
their bid documents, acknowledge all addenda.
Technically addenda may be issued to change
the bid opening date.
Addenda may not be issued within about five
days of bid opening

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Appendix To Tender

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Forms and Formats
Different forms, formats and schedules
are also part of the contract document.

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Thank You

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L ecture 4

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History of Conditions of Contracts
Conditions of contact for civil engineering
works are commonly prepared by four
bodies:
Multilateral donors,
Business Associations,
Professional Associations and
Public Authorities,

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 FIDIC Condition of Contract
FIDIC is the international federation of national
associations of independent consulting engineers and was
founded in 1913 by the national associations of three
European countries. (France, Belgium and Switzerland).
FIDIC has now membership from over 74 countries.
members are generally national associations with the
Ethiopian Consulting Engineering and Architects
Association being one.

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Sources of Condition of Contracts

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FIDIC conditions of contracts have two parts:

General Condition of Contract – where

the overall clauses are stated
Particular Conditions of Contract – where
modifications, changes and omissions to
the
general condition of contract are stated.
FIDIC has published different conditions of
contract over the years.

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The main conditions of
contracts published by FIDIC include:
1957 – RED BOOK
The very first edition – civil engineering
Contract type – Add Measurement Type
1963 – YELLOW BOOK
For mechanical and Electrical works
1987 – OLD FIDIC
Comprises the RED and YELLOW Books.

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1995 – ORANGE 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 of power plants, factories and
facilities

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 Ethiopia Conditions of Contract
In the Ethiopia the first condition of contract
was published in 1959 by the Ministry of
Housing.
Ministry of Works and Urban Development
(MoWUD) developed a condition of contract
based on FIDIC RED Book.
The most comprehensive standard bid
document was published by the Public
Procurement Authority of the Ministry of
Finance and Development.
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This include:
standard bid document for both national
and international competitive biddings for
procurement of Goods, Service and for
the first time Works.
there are many changes from the
MoWUD 1994 condition of contracts
Dispute/Claim Management –
For the first time provision for an
Adjudicator is provided
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Price Escalation –
The MoWUD states that price escalation
shall be made only when the price of the
item is changed by decree.
This means that only Fuel, Cement,
Reinforcement and Bitumen were open
for price escalation.

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Advance Payment
The provision for advance payment has
been placed in the Special Condition of
Contract making it possible to have
different advance payments.
Duration - Special Condition of Contract
making it possible to propose a
completion date by the bidders.

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Liquidated Damage
The previous clause states that the
liquidated damage is to be 1/1000 of
Unjustified Delay Amount.
But the 1954 contract suggests liquidated
damage is to be 1/1000 on basis of
contract price, crippling the contractor
from performing his tasks during a delay.

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Contract Management
Contract Management is the
management of its Processes,
Stakeholders and their Performances
along the Planning, Implementation and
Monitoring Evaluation Cycle of the
functions of Management.
Contract Management process can be
idealized into three major processes.

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These include:
Contract Formulation,
Contract Administration, and
Closing of Contract Processes

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 Contract Formulation

Contract Formulation involves two sub processes,

namely;
Negotiation and Signing of Contract Agreement.
Negotiation is a process by which Project Owners
together with their professional representatives’
deal with the recommended winner of the tender on
the requirements of the tender

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 A Construction Contract Document
includes:
Signed and Sealed Form of Contract
Agreement,
General and Particular Conditions of Contract,
Technical Specification and Methods of
Measurement,
Priced Bill of Quantities, Drawings and
General Notes to drawings if necessary, and
Forms, Formats and Schedules.

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Contract Administration
Contract Administration is a process that
ensures the successful completion of the
project under consideration with substantial
compliance of the Terms of the Contract.
the following activities or tasks are included
in Contract Administration services:
Identifying contractual responsibilities of
Stakeholders.

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Cont...
Reviewing the Terms of Contract
Documents
Extract Monitoring Responsibilities
Preparing Monitoring Responsibility
Summary Sheets.

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Determining and understanding the
construction components of the project.
Reviewing the Contract Drawings and
Technical Specifications
Extract the Construction Methods and
Sequences
Prepare Construction Methods and Over
all Sequences Sheets

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Review submitted Schedules and Breakdowns
for operations such as Organizational
Breakdowns, Resources Breakdowns &
Schedules and Time Schedules.
Record, Monitor and Evaluate Progress of
Mobilizations, Works and Completions.
Report Project Status daily and / or periodically
and Completions.

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Certify qualities of materials, shop
drawings, samples, workmanships and
works.
Measure Works, Record Site Potentials
and Certify Payments and Completions.
Mediate Disputes.
Such services are carried out to ensure
projects are completed successfully

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Cont...
To Follow up and Evaluate Project Cost,
Time and Quality.
To Ensure Health, Safety and
Environmental Requirements.
To Ensure Project fitness for its purpose
or intended objective.

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Closing of Contract
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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Maintenance Period and Remedial
Works
are subjected to Maintenance Periods
(Usually One Year) in order to reveal
quality problems overseen by supervisors.
These often include Sanitary and roof
leakages, Poor quality Door and Window
Handles and Locks, Electrical Fittings,
Structural damages, Cracks, Pavement
subsidence, Settlement, etc.

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Left Over Claims and Disputes
If claims and disputes are not settled
before provisional certificate of
completion, they can be dealt during this
phase.
Closing of Accounts:
Final Accounts together with the release
of remaining retention moneys and
performance securities are carried out

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Completion Certificates:
This is to entitle that the contractor is no
longer responsible afterwards if
satisfactory performance is proved by
Maintenance Period and its certification,
Outstanding claims and disputes are
settled, and closing of accounts are made.

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 Dispute and Claim Management
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.
Claims can be associated with three major
categories.

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Time Related Claims
Time Extension only
Liquidated Damages only
Time Extension and Cost Compensation
Concurrent Compensations
Bonus
Reliving of Obligation

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Cost Related Claims:
Claims associated with monetary
compensation where either of the following
entitlements or penalties are entertained
Additions requiring rate adjustments
Price Changes
Provisional sum adjustments

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Default by Contracting Parties:
Claims associated with non performances
of contractual obligations such as:
Delay in Payment Certificates
Suspensions and Terminations.

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Requirements for a Valid Claim
Know the different ways of how to deal
with claims and disputes together with
their meritand demerits, and
Know required procedures and avail
necessary documents to make a valid
claim.

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