Contracts

• What? Is the document that stipulates the

rights, obligations and responsibilities of
the major parties involved in the contract:
Indirect stakeholders’ boundary

Users

Contractor
Regulatory/Statutory
bodies Suppliers
Client

Direct stakeholders’ boundary

Trade Unions Financing
institutions
Architect/Engineer

The general public

 Contracts
• Why? to protect parties against defaulting
by their contracting party, if so provide
adequate compensation:
• Facilitate smooth functioning of the industry
• It is one way of managing risk!
– Most (common contracts) are meant to share
risks among parties
 Contracts
Major risks in construction projects
Project integration

Communication
Scope

Integrated effects of any of

the rest
Communication gap
Scope crippling

Non quality product

Suitability & availability Resource
Quality
Project risk

Defaulting
Delays Cost overrun

Time
Procurement

Cost
 Contracts
• Risk of defaulting by a contracting parties
– Non performance
– Default performance
– Non [on time] payment
Risk management

Respond to risks
Identify objectives Identify risks Quantify risks Avoid Transfer
Mitigate Accept
Mitigate risk

Transfer risk
Avoid risk

Accept risk
 Contracts
Risk transfers in contracts

Project
Owner
Risk Banks

Risk
General
Contractor
Risk
Risk
Sub-Contractor
Insurance
Risk

Risk should be allocated to party Sub-Sub

Contractor
that is in the best position to
manage it.
 Major types of contracts
common in Construction
Client

Contractor Consultants
“Works" Contract “Service" Contract

Suppliers
“Goods” contracts
The procurement procedures, evaluation criteria adopted, etc vary substantially
among the above procurements
 Major types of contracts
common in Construction
• Assignment: Thoroughly discuss the
major:
• Types of procurement adopted
• Procurement procedures followed;
• Evaluation criteria exercised;
• Contracting documents used
In Goods and Services Procurement &
Contracting
 Construction (Work) contracts
• Major Components:
– Agreement, if any
• Usually made to cater for the ‘acceptable
corrections and modifications’ made during
negotiation of the two parties
• Most GCC’s provide a model for the form of
agreement: Eg. in section 9 of PPA’s SBD);
– Letter of Acceptance
• Forms part of the contract and is furnished (PPA)
at least five working days after notification of
successful bidder
 Construction contracts
– Contractor’s Bid
 Usually supplied in bid submission form
 It stipulates summary of the major requirements of the
bid documents like:
 Bid price and validity period (usually from 60-120
days depending on complexity of process)
 Declaration of eligibility of contractor and proposed
subcontractors and suppliers (legal, conflict of
interest, etc)
 Amount of advanced payment (up to 20% for
buildings and 30% for roads)
 Declaration of full consent with the terms of the
documents and acceptance of PE’s right not to
accept lowest bidder
 Construction contracts
Construction contracts
– Special Conditions of Contract
– General Conditions of Contract
– Specifications
– Drawings
– Bill of Quantities or Activity Schedule
Contents Function and broad outline of contents
Number Heading
Agreements and contract data
Form of Offer and This form formalizes the legal process of offer and acceptance. The following provisions are
Acceptance common to most agreement forms:
Identification and full address of the signing parties, short description of the project and the
work, date of commencement and signature, completion time of the project, the contract
price, and enumeration of contract documents constituting the entire agreement.

Standard or General States the applicable conditions of contract and associated contract specific data that
Conditions of collectively describe the risks, liabilities and obligations of the contracting parties and the
Contract: procedures for the administration of the contract.
Particular or Special This document provides more specific and relevant information and conditions to a particular
Conditions of project. It is a supplementary and modified section of the general conditions of contract.
Contract Special conditions include additional owner requirements.
Pricing data
Activity Schedule / Bill of Records the contractor's prices for providing supplies / services / engineering and construction
Quantities works which are described elsewhere in a specification within the Scope of Work section
of the contract.
Scope of Work
Technical Specifications Specifies and describes the supplies, services, or engineering and construction works which are
& Methods of to be provided and any other requirements and constraints relating to the manner in which
Measurement the contract work is to be performed.
Drawing These are intended to describe the size and dimensional requirements of the project. Many
professionals are involved in developing drawings. These include the architectural,
structural, sanitary, mechanical, electrical, topographic survey, land profile, and detailing.

Miscellaneous
Appendix to Construction Comprises tabulated and narrative information of the project such as amount and
Agreement: liquidated damages, interest rates, completion time, amounts of bond and insurances,
defects liability period, retention, progress payments, advance payment, etc. Some of this
information might be left blank to be filled by the contractor or might be readily provided
by the client.
 The GCC
• Why GCC:
• Helps in a fair and adequate method of handling construction projects;
• Many of the terms of the standard conditions of the contract may have
been tested by courts and hence can be relied upon to provide similar
protection to all who use them;
• As contracting parties get used to them, can help in stabilizing the
industry and bid prices;
• Reduces time and effort exerted in preparing contracting documents
• What do GCCs do?
• Provide the general framework by which construction projects are
governed;
• Are usually drafted to cover common aspects of construction while
specific aspects are left for SCC,s
• Generally accused to favor the party who promulgates them
– FIDIC- Engineers
– AGC- contractors
Major terms covered in GCCs
&PCCs
 Priority
• All efforts should be made for the documents to be
supportive of each other.
– If discrepancy [most GCCs –eg FIDIC, PPA-also usually clearly
stipulated in the PCC] provide provisions for overruling:
– Agreement
– Letter of acceptance
– Contractor’s bid
– Special Conditions of Contract
– General Conditions of Contract
– Specifications
– Drawings
– Bill of Quantities or Activity Schedule
– Some GCCs give the Engineer the responsibilities to make
conciliatory adjustments
– It has to be noted that most engineers prepare tendering documents,
when discrepancy they tend to interpret in such a way they won’t be
held accountable or their reputations is not questioned.
 Precedence

• Overruling lang: As much as possible, in

the lang the two parties understand most.
– If there are more than one lang used, the
overruling language needs to be stated
• Ruling law -usually the law of the country
the work in done at.
– International contractors prefer international
laws and chamber of arbitrations
 Employer
• Is the party (public or private) under whose
tutelage the project is executed
 Comes up with the investment needs

Pr. Idea

Land Capital
 Employer

• Has responsibilities to:

• Pay the due payments for the contractor;
• Provide the site and right of access to it in due
time;
• Look into the statutory aspects of the construction
such as permission to construct, custom clearance
etc;
• Employer’s personnel and other contractors to
cooperate with contractor;
 The Engineer
• Is the party who supervises the proper execution
of the works and advises as appropriate.
• Responsibilities of Engineer
– Is supposed to act professionally with integrity and
impartiality
– His authorities can be limited [by specifying matters
he needs to get approval from the Employer on PCC)
• Care must be taken not to stifle the engineer’s performance
by overly limiting his authorities
• Most issues limited are:
– Consenting with contractor to the sub-letting of part of the
works
– Certifying additional cost determined
– Awarding an extension of time
 Engineer responsibility
• Issuing variation, which exceeds XXX amount
• Issuing variation, if the sum of all variations issued has exceeded X% of
the Contract Price;
• Certifying payment if the contract price will be exceeded;
• Issuing any taking-over certificate;
• Authorising the use of provisional sums in excess of the monetary limit for
variations;
• Certifying additional payment
• Issuing Defect Liability Certificate
– Risky (emergency) situations are always exempted
– Usually allowed to delegate his authority (to ERs) to oversee the day
to day work
– The ERs communications shall be taken as if they are that of the Engineer but
failure of the ER to disapprove works or materials or plant doesn’t prejudices
the Engineer to order rectification;
– Any personnel employed to assist the ER or the Engineer shall not issue
instructions to the Contractor except for the proper execution of their job and in
compliance to the contract!
– Advised to give instructions in writing but can give oral instructions
and substantial them in writing latter-if not contractor can request for
same
 Contractor
• Contractor’s responsibilities
– If called to do so, expected to sign the
contract upon notification of winning
• If not, will lose bid guarantee
– Need to produce performance security and
satisfy other formalities
Site inspection & Tender sufficiency
• Contractor encourage to inspect site before tender and
satisfy himself:
– necessary information, so far as is practicable, having regard to
considerations of cost and time, as to risks, contingencies and
all other circumstances which may influence or affect his Tender
• form and nature thereof, including the sub-surface conditions,
• the hydrological and climatic conditions,
• the extent and nature of work and materials necessary for the
execution of the Works
• the means of access to the Site and the accommodation he may
require,
• Availability of resource and skill
• No enough resource and time to carry out thorough investigation
– Employer is asked to make available information
• Usually collected for design purpose (design (review) report)
• The omens on interpretation lies on the contractor
Site inspection & Tender sufficiency
• Tender submitted is assumed to made
with due consent and satisfaction of
contractor
– If an unusually adverse conditions occur
(which couldn’t have been foreseen by a
knowledgeable contractor), contractor can be
compensated for time or/and cost.
– Interpreting ‘unusually adverse condition’ is a
major matter of dispute
 Programme to be submitted
• Often submitted before signing Agreement Form
and needs to be approved by Engineer
– Scope and Methodology
• Scope and methodology
– Time
• Usually resource loaded CPM
– Resource
• Resource (key equipment and HR) deployment schedule
shown
• Material purchase schedule
– Cost
• Cash flow demanded
 Schedule and cash flow schedule
• In most documents, contractor asked to supply
schedule
– The form and date of submission is usually specified in
PCC
– Resource loaded diagram
Schedule and cash flow schedule
– Benefits of resource loaded CPM
• Enables to see if contractor has appreciated the importance
of the work (especially if asked during tendering)
• Cross check the trustworthiness/reliability of
assumptions/estimation about execution of activities;
• Avoid disputes b/n contracting parties about resources that
needs to be on site during execution
 Schedule and cash flow schedule
• Cost loaded CPM and cash flow diagram
– Enable the employer budget for the project
– Can be used to combat front-end loading
• Most contracting documents give provision
for advanced payment, contractors
shouldn’t have any excuses for front-end
loading
 Contractor’s responsibilities
• Expected to produce Performance security
• Construction (performance) guarantee
– Usually 10% of price if performance guarantee but reduces upon
completion (could be changed if substantial variation order)
– Higher if it is surety bond
• Retention money (criticized to have undue disadvantage on
contractors and specifically sub contractors)
– Usually 10% of each interim payment but less than some (eg 5%) of
contract price-should be reduced at completion
• Contractor’s equipment
– Sometimes not allowed to leave site
• Taking hold of the facility delivered [for contractors]
– Guarantees demanded shouldn't be made unnecessarily
high, otherwise, they are bound to increase the bid prices
– Some GCC’s (eg NEC) advise guarantees against
defaulting by employers
 Securities

For the Client For the Contractor

Payment guarantee
Performance Security Retention Fund
Contractor’s Machineries (For suppliers and Payment Guarantee Facility Delivered
(P. Bond or P. Guarantee(Retention Fund Security)
Subcontractors)
 Contractor’s responsibilities
– Expected to perform the job with due diligence
• Shall design (if needed) and perform the work professionally.
• Shall promptly notify any mistake or error in design or
specifications or any event which could lead to delay or cost
overrun
– Subletting and Subcontracting
• Usually not allowed to sublet the whole work (Why?)
• Is to be held responsible for the performance of his
subcontractors;
• Some countries specify trade contracting in the first place (to
encourage SMMEs)

Subletting doesn’t include provision of labor, supply of material according to spec,

subcontracting to a pre-declared contractor.
 Execution of the work
• Contractor is obliged to perform the work, with due
diligence, with strict conformity of the contract (provided
that it is legally and physically possible) and to the
satisfaction of the engineer
• Work to be in accordance to the drawings and specifications
• If specs and drawing are generic, work and material to be of the
highest quality-that approved by the Engineer
• Contractor should care for the work executed and keep it
safe
• The contractor controls the resources and runs the
execution of the work;
• The site operations, construction methods and programms of
execution should be left for him;
– However, Engineer can disapprove programs and construction
methods if feels doesn’t conform with contract or safety;
 Key resource deployment
• Contractor is expected to comply with:
– Key personnel requirements
– Key equipment requirements
– Make workmanship to the quality specified
– Use the appropriately specified materials
– keep the operations safe, etc
• The engineer is at liberty to disapprove:
• But is advised not to unduly interfere with the day
to day running of the project
 Workmanship and material
• Contractor is expected to execute the work
– Using quality material and workmanship
specified for
– If, upon inspection, work is not to quality
specified contractor will be asked to rectify
• Cost of inspection could be covered by contractor
if work was faulty
 Engineer’s approval
• In most cases the engineer’s approval
doesn’t relieve the contractor of his duties
if [later] on works executed are found
faulty [not in accordance to specs and
drawings]
– Even the engineer’s approval of as built
drawings may not relieve the contractor of his
duties if work wasn’t executed accordingly
 Insurance of work and risks
• Employer's (Expected) force majuere risks
• War, hostilities, rebellion, revolution etc
• entitle the contractor for Excusable delays or Excusable
compensable delays
• Contractor is not normally required to insure for such risks
• However, some of these risks are insurable (eg defaults from
designer),
– Employer can insure for such risks but can also provide the
premium to contractor to insure together with contractor’s risks
• Contractor need to insure work and equipment
to the full for non-expected risks
– Insurance should be in both parties names
R

– Contractor should notify sureties if scope of work

CA

changes
 Third Party Damages
• Contractor should make good damages to third
party (both person or property other than the
work) incurred due to his actions:
• Not those caused by the Employer's actions or which are not
avoidable due to the nature of the work. In such cases,
Employer should make good damages on contractor
• Contractor need to insure for third party
damages [in both names but should be claimed
separately]
• As a general practice, if contractor fails to
secure insurance, client can do so and reclaim
the premium from interim payment to contractor.
 Contractor’s workers
• Contractor should provide subsistence for its workers
and monitor their behavior
• Employees of contractor shouldn't be in service of client or engineer
(conflict of interest)
• Should provide with adequate remuneration, housing, food, water,
medical aid, transportation etc (what standard?-trade unions),
• Should provide adequate monitoring to combat disorderly conduct
• Should return employees to their original place upon completion of
contract with employee.
• Contractor should insure all its workmen for injuries and
fatalities
• Some countries provide regulations about insurance of workers
 Other duties of contractors
• Compliance with regulations of locality
– If contractor is new to locality, it could be
advisable that employer assumes some of
these responsibilities
• Provide adequate provisions for normal
functioning of community during work
• Traffic flow, protecting adjacent property, noise
poisoning,
• Provide protection for damages it may incur in
deployment of its equipments
 Other duties of contractors
• Do all its best to work along with other
contractors, if any
– If required deliver facilities (usually preferred
to make savings) to them
• Contractor is required to keep the site
clear all the time and remove debris and
leftovers from site upon completion
– Necessary for safety and expedient operation
of work
 Time clauses
• Employer should make site, including
access if not covered in contract, available
to contractor;
• Contractor should commence the work in a
reasonable time after receipt of
commencement letter;
• Contractor to provide work programme
within a reasonable period of time
• Work schedule within ‘agreed’ time after
commencement date
» Price only tendering
» Price and time tendering
 Time clauses
• Usually incorporate possibilities of extension of
the intended completion time
• Otherwise, given the possibility of change clauses, time may
be put at large
• Under time at large condition, Contractor expected to
complete work in a reasonable time
• Work should finish within agreed time
– If not, and can’t justify delay-will pay liquidated
damage as compensation for the client's losses
– X amount per each unjustified delay up to a Y% of the contract
price
– Usually in proportion of currencies of contract.
 Delays
• Non excusable non compensable delays: contractor
covers costs of escalations; idle, extended labor or
equipment, home office overhead etc, pays liquidated
damage to employer, etc
• Excusable but non compensable delays (Act of gods):
– Often caused neither by the action of contractor nor by his
employer’s
– Contractor absorbs its cost while employer absorbers loss in
revenue
• Excusable compensable delays
– Often caused by employer’s action
– Contractor will be compensated for its damage
 Payment clauses
• Advanced payments:
• Interest free payments to the Contractor for mobilization and front
end expenses for that specific project
• Made as expedient as the Contractor produced advanced payment
securities;
• Currencies usually in proportion of bid currency
• Repayment requirements set (say X amount of each interim
payment after y% of contract price is paid)
• Interim payment:
• Payments for temporary and/or permanent works
• Usually include material (for permanent works) on site
• Should be dispensed within a reasonable time of the Engineer’s
approval or within some pre-specified time if engineer delays
decisions
» If not, causes claim on basis of cash starvation;
» Entitles Contractor interest at a prior agreed rate (usually the
bank)
» Or event terminate contract and claim for damages
• Payments in currencies specified
• Minimum limits of payments could be specified
• Deductions for retention and advanced payment recuperation can
be made
Unauthorized works may not be paid for or even may be ordered to be
removed at Contractor’s expense
 Payment clauses
• Final payment
• Payments after certification of acceptance-after defect liability
period
• Net balance including retention money
• Due within reasonable (say 28 ) days of submission of final
statement
• Termination payments
• If a project is terminated due the Employer’s defaults
• Payments are to be made as if contract is discharged
• Compensations for the losses (including losses in benefits) are
also paid
• Payments can be adjusted if provided in the SCC
(recommended for projects lasting over one and half
year) Ln Mn En
pn  A  b c d  etc.
Lo Mo Eo
 Change clauses in most GGCs
• Provide provisions for alteration, additions or deletions of
part of work
– Variation should be within the scope of the work
• Provide provision for procedures and conditions to fix
rates of altered items
• if price of an items various beyond a limit (say 5%-PPA)
• Total variation cost exceeds some limit of total contract price (say
25 %-PPA)
– Currencies in proportion
– In most cases, Engineer given the authority to give change
orders and fix rates
• Engineer may not certify variations beyond some limits
• Provisions for contractor to disagree but still execute the job unless
change is cardinal
 Change clauses
• Days work
– If the Engineer wants to execute a variation
work or a new item he may order days work
– Resources and rates of resources to be
agreed
 Major causes of changes in
construction
• Can be initiated by Client, Engineer, Contractor Regulatory
bodies, etc
• Causes:
– Errors or omissions
• Design
• Construction
– Differing conditions (couldn’t rationally be anticipated)
• Physical
• Social
• Economical, etc
– Post bid decision by client to change
• For different reasons
– Defaulting by one of the parties
• Client
• Contractor (can’t be compensated or excused)
• Designer
– Public security &Safety reasons
 Changes Vs Claim Vs disputes

Not settled
Changed/ Not settled Claims: Disputes
unanticipated
Money Spiral Effect:
situation
Is it a change? Time Monetary
What is the impact?
Relationship
What does it cost?
Reputation

• In most cases, Disputes arise due to

unsettled claims
Compensable items in PPA
• The Employer does not give access to a part of the Site by
the Site Possession Date stated in the Contractor’s
approved work program.
• The Employer modifies the Schedule of Other Contractors
in a way that affects the work of the Contractor under the
Contract.
• The Engineer orders a delay or does not issue Drawings,
Specifications, or instructions required for execution of the
Works on time (can the Engineer be held responsible?).
• The Engineer instructs the Contractor to uncover or to
carry out additional tests upon work, which is then found to
have no Defects.
Compensable items in PPA
• The Engineer gives an instruction for dealing with
an unforeseen condition, caused by the Employer,
or additional work required for safety or other
reasons.
• Other contractors, public authorities, utilities, or the
Employer does not work within the dates and other
constraints stated in the Contract, and they cause
delay or extra cost to the Contractor.
• The advance payment is delayed.
• The effects on the Contractor of any of the
Employer’s Risks (???).
Compensable items in PPA
• The Engineer unreasonably does not approve a subcontract
to be let.
• Ground conditions are substantially more adverse than could
reasonably have been assumed before issuance of the
Letter of Acceptance from the information issued to bidders
including the Site Investigation Reports, from information
available publicly and from a visual inspection of the Site.
• The Engineer unreasonably delays issuing a Certificate of
Completion.
• Other Compensation Events described in the Special
Conditions of Contract or determined by the Engineer shall
apply.
 Compensation
• For contractor to be reimbursable for delays
– Needs to provide notice to client ahead of time
– If possible at all contractor should do its best to inform
about incidences that could change situations
– Engineer, at his own discretion, decides if claims by
contractor could guarantee so
• To expedite work, a bonus clause can be added
to contracts
– It has to be noted that expedient completion, unless
agreed up on, may not be always advantageous to
client
 Hand over
• Upon substantial completion, contractor can ask
for taking over certificate
– Work need to pass inspection and contractor
promises to rectify defects during defect liability
period
• Taking over can be partial
• Final certificate is issued after defect liability
period
– Contractor is supposed to hand in as built drawings
and maintenance manual the work
 Termination
• Contracts can be terminated if one side
defaults to annul the contract.
– PPA
• Not planned or unauthorised stopage by contractor (for 28
days)
• Instruction by engineer to delay the work that stood long
(more than 28 days)
• Liquidation (other than reconstruction or amalgamation) or
bankruptcy by Employer or Contractor;
• Certified payments not made for a long time (more than 90
days after certification)
 Termination
• PPA’s provisions
– The Engineer gives Notice that failure to correct a
particular Defect is a fundamental breach of Contract
and the Contractor fails to correct it within a reasonable
period of time determined by the Engineer;
– Failure to maintain a required Security
– Delay more than by the number of days for which the
maximum amount of liquidated damages can be paid.
– If the Contractor, in the judgment of the Employer has
engaged in corrupt, fraudulent, collusive or coercive
practices in competing for or in executing the Contract.