CONTRACTS

What is a Contract?
An agreement which is enforceable by law is a ‘Contract’

 When two or more persons have a common intention

communicated to each other

 And when there is some obligation between them,

--- There is said to be an agreement between the two persons or

parties

This agreement enforced by law or made legal by documentation is

called a ‘contract’
The essential ingredients of a Contract:

o Offer made by one person called the ‘Promisor’

 Acceptance of offer made by the other person called the ‘Promisee’

 Doing of an act or abstinence from doing a particular act by

promisor for promise is called consideration

 The offer and acceptance relating to something not prohibited by law

 Offer and acceptance constitute an agreement, which,

when enforceable by law, become a contract.

• The party entering into such an agreement should be competent to make

such agreement.
Communication of intention between the parties - the
forms of a Contract

In the forms of a Contract there is:

 A proposal

 Communication of the proposal

 A communication of the acceptance of the proposal

Points to be noted

 The words ‘agreement’ and ‘contract’ are very often used as

synonyms

 In fact, they are not

 All contracts are agreements but all agreements are not

necessarily contracts

 Agreements not enforceable by law are not contracts.

The Indian contract Act 1872 says

An agreement is a contract if ‘it is made by the free consent of

parties competent to contract, for lawful consideration and with a
lawful object, and is not expressly declared to be void.
--- The contract must be definite and its purpose should be to
create a legal relationship

--- A contract creates an obligation i.e. a duty cast upon a person by

law

--- When the parties to a contract exchange promises, it gives rise to

a contractual obligation
Types Of Contracts

Contracts for the execution of civil engineering works are of following

types

• Lumpsum contract
• Item rate contract
• Lumpsum and schedule contract
• Cost plus fixed fee contract
• Cost plus percentage of cost contract
• Special contracts
Types Of Contracts - Lumpsum contract

 the contractor offers to do the whole work as per drawings and

specifications, for a total stipulated sum of money

 no individual rates quoted

 becomes difficult to make adjustments in the contract value if any

changes are to be made in the work later on.

 The schedule of different items of work is not provided

Types Of Contracts - Lumpsum contract

 Deposit of 10 % security money and other conditions of the

contract are included in the contract agreement.

Detailed measurements of different items are required but the whole

work is compared and checked with drawings and specifications
before releasing the payment.

Part payments are made to the contractor at different stages of work

on agreed terms, for specially large projects

In case the contractor stops the work in between he is not entitled
for any further payment.
Types Of Contracts - Lumpsum contract
Suitability

-- more suitable for works for which contractors have prior

construction experience

-- experience enables the contractors to submit a more realistic bid

-- not suitable for difficult foundations, excavations of uncertain

character, and projects susceptible to unpredictable hazards and
variations.
Types Of Contracts - Lumpsum contract
Merits

-- The owner can decide whether to start or shelve the project

knowing the total lumpsum price quoted by different contractors.

-- The contractor can earn more profit by in-depth planning and

effective management at site
Types Of Contracts - Lumpsum contract
Demerits

-- Before the contract is awarded, the project has to be studied

thoroughly and complete contract documents have to be
prepared in advance.

--- In this type of contract, unforeseen details of work are not

specified in the contract document. Many additional items may have to
be undertaken as the work progresses, giving
opportunity to the contractor for claiming higher rates of the
extra items not included in the contract agreement.
Types Of Contracts - Item Rate Contract

 Also called a schedule contract

 The contractor undertakes the execution of work on an item rate

basis

 Amount to be received by the contractor depends upon the

quantities of various items of work actually executed

 Payment to contractor is made on the basis of detailed

measurements of different items of work actually done
Types Of Contracts - Item Rate Contract
Suitability

 Most commonly used for all types of engineering works financed

by public or government bodies

 Suitable for works which can be split into various items and
quantities under each item can be estimated with accuracy.
Types Of Contracts - Item Rate Contract
Merits

o No need for detailed drawings at the time of allotting contract as in

the case of lumpsum contract

o The detailed drawings can be prepared after the contract is

awarded

o Changes in drawings and quantities of individual items can be

made as per requirement within agreed limits

o Payment to contractor is made on the actual work done at the

agreed rates.
Types Of Contracts - Item Rate Contract
Demerits

 Total cost of work can only be known upon completion

 As such, the owner may incur financial difficulty if the final cost
increases substantially

 Additional staff is required to take detailed measurements of

work done

 Scope for additional saving with the use of inferior quality

materials may prompt contractor to use such materials in the work.
Types Of Contracts - Lumpsum and Scheduled Contract

 Similar to lumpsum contract except the schedule of rates is also

included in the contract agreement
 Contractor offers to do a particular work at a fixed sum within a
specified time as per plans and detailed specifications
 Schedule of rates for various items is provided which regulates the
extra amount to be paid or deducted for any additions or deletions
made during the progress of work
 Measurements of different items of original work are not required
but extra items are required to be measured for payment
 Original work shall however be checked and compared with the
drawings and specifications.
Types Of Contracts - Lumpsum and Scheduled Contract
Suitability

More suitable for construction works for which contractors have prior
work experience and can consequently estimate the project cost more
realistically.

Merits

 Additional staff for recording detailed measurements of original

item of work is not required
 Owner can know from tenders as to what the project will
cost him. Knowing the financial implications, the owner can
decide to start or defer the project.
Types Of Contracts - Lumpsum and Scheduled Contract
Demerits

 Before contract is awarded the project has to be studied

thoroughly and all contract documents are required to be
completed in every respect

 Non-scheduled extra items arising out of changes made in

the drawings and specifications are often a source of dispute
because the contractor presses for rates higher than the
prevailing market rates.
Types Of Contracts - Cost Plus Fixed Fee Contract

 Desirable when the scope and nature of the work can

atleast be broadly defined
 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
 Essential that the scope and some general details of the
work are defined
 Contractor is selected on the basis of merit rather than
the fee alone
 Contractor’s fee is fixed and does not fluctuate with
actual cost of work. Once fee is fixed, the contractor cannot
increase the cost of work as in case of cost plus percentage
contract
Types Of Contracts - Cost Plus Fixed Fee Contract
Suitability

 Suitable for works required to be completed expeditiously and

where it is difficult to foretell what difficulties are likely to be
encountered

 Suitable for important structures where the cost of construction is

immaterial.
Types Of Contracts - Cost Plus Fixed Fee Contract
Merits

 Actual cost is to be borne by owner

 Contractor performs the work in the best interest of the owner

resulting in good quality work

 Work can be taken in hand even before the detailed

drawings and specifications are finalized

 Changes in design and method of construction, if needed, can be

easily carried out without disputes

 Work can be executed speedily.

Types Of Contracts - Cost Plus Fixed Fee Contract
Demerits

• Cannot be adopted normally in case of public bodies and

Government departments

• Final cost of work is not known in advance and this may subject the
owner to financial difficulties.
Types Of Contracts - Cost Plus Percentage of Cost Contract

 Work is awarded on the basis of a certain percentage over the

actual cost of construction.
 Actual cost of construction is reported by contractor
 Owner pays the cost of construction together with a certain
percentage as agreed earlier
 Work is done according to drawings, specifications and other
conditions of contract
 Proper control to be exercised by the owner in purchasing
materials and arranging labour.

The suitability, merits and demerits are similar to cost plus fixed fee
contracts. An additional demerit is the tendency of contractor to
increase cost of work to earn profit by way of percentage of enhanced
actual cost.
Special Contracts

Contracts used at different occasions. Some of these are:

 Turn-key Contract
 Package Contract
 Negotiated Contract
 Continuing Contract
 Running Contract
Special Contracts - Turn-key Contract

 An integrated contract in which all works pertaining to various

disciplines such as civil, electrical, mechanical etc. are in the hands of
a single contractor called the main contractor

 The main contractor can sublet the work to subcontractors

who are specialists in their respective fields

 The main advantage to the owner is that he need not coordinate

the work of different contractors

 The main contractor is responsible for all kinds of jobs starting

from planning to commissioning stage
Special Contracts - Package Contract
o Two or more related jobs, each of which could form a separate
contract, are combined in a single contract
o In the field of civil engineering, generally, design and development
are combined with construction and supply or maintenance
o Plan of work and standards are established and the work is carried
out accordingly by the contractor
o The main contractor is responsible for safeguarding the owner’s
interest and for this reason, prior approval of design and
technical aspects have to be taken from the owner
o Responsibility for correctness of the design lines with the main
contractor.
Special Contracts - Negotiated Contract

 Negotiation across the table takes place between representatives

of the owner and the main contractor for project cost and other
conditions of contract

 Detailed projects specifications are arrived at by discussions

between the owner and the main contractor and Consultant

 Involves extended discussions for finalization as a competitive

contract

 Most of the consultancy projects of World Bank are negotiated

contracts.
Special Contracts - Continuing Contract

 New or additional work is awarded to contractor on the basis of

agreed terms and conditions of an existing contract

 Such contracts do not require re-tendering and hence can save

time and money.
Special Contracts - Running Contract

 Such contracts provide goods and services at specified

intervals or as and when required by the owner

 The contract price is not fixed and payment is based on goods

supplied and services rendered as specified in the contract
documents.
Contract Documents

The contract document consists of the contract agreement (on

non-judicial stamp paper of prescribed value) and the following set of
documents, each page of which is signed both by the owner and the contractor.
a. Cover Title Page: contains name of work, name of owner, name of contract,
contract agreement number, contents etc.
b. Contents Page: contains the contents of the agreement with page
references.
c. Notice Inviting Tender (NIT): contains a brief description of work, estimated
cost of work, date and time of receiving the tender, amount of earnest
money, security money, time of completion etc.
d. Tender Form: It comprises bill of quantities, contractor’s rates, total cost of
work, time for completion, security money to be deposited and penalty
clauses etc.
e. Schedule of Issue of Materials: contains the list of materials to be issued by
the department or owner to the contractor with rates and place of issue.
Contract Documents

f. Drawings: a complete set of fully dimensioned drawings including plans,

elevations, and sections, detailed drawings and site plan

g. Specifications: It is not practicable to include detailed information of each

item of work in the limited space of description in the bill of quantities. As
such detailed specifications form a part of the contract agreement.
Specifications should be clear and precise covering all items of the bill of
quantities.
Following specifications are normally included in the contract document.
i. General Specifications: These specify the class and type of work quality of
materials etc, in general for the work as a whole
ii. Detailed Specification: These give detailed description of each item of work
including material and method to be used along with quality of
workmanship required.
Contract Documents

h. Conditions of Contract: The terms and conditions of contract specify the

following
i. Rates of each item of work inclusive of materials, labour, transport,
plant/equipment and other arrangements required for completion work
ii. Manner of payment of contractor including running payment, final payment,
refund of security money etc.
iii. Time of completion of work
iv. Proportionate progress to be achieved
v. Penalty for poor quality and unsatisfactory work, lack of proportionate
progress and for delay in completion
vi. Extension of time for completion of work
vii. Engaging other agency at contractor’s cost and risk
viii. Termination of contract
ix. Subletting of the work
x. Changes in design/drawings etc and valuation of variations