Jimma UNIVERSITY

JIMMA INSTITUTE OF TECHNOLOGY

SCHOOL OF CIVIL AND ENVIRONMENTAL ENGINEERING

CONSTRUCTION MANAGEMENT

CHAPTER TWO
CONTRACT & ITS ADMINISTRATION

18 Lecture Notes By: Ahmed N.

 Basics of Contract
 Contract is a written agreement between or among two or more
parties where by 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.
 These promises and terms shall be enforceable by law and
incorporates the Rights, Obligations and Remedial rights of each
contracting parties.
 A construction contract is a product of an agreement between the
employer & the contractor & it is enforceable at law.

19 Lecture Notes By: Ahmed N.

 Elements of a contract
 The following are the fundamental elements of contract.

 Capacity of the contracting parties;

 Consent of the contracting parties;

 Object of the contract; and

 Form of contract, if any

20 Lecture Notes By: Ahmed N.

 A. Capacity
 Capacity means competence to enter into a legally binding
agreement.
 Parties entering into an agreement or contract shall, therefore, be
capable of contracting.

B. Consent
 Consent is a declared will of the individual to enter in to contract.
 It is the willingness of the parties to enter in to a legally binding
relation.
 Consent of the intended contracting parties decomposes in to :-
Offer; and
Acceptance;

21 Lecture Notes By: Ahmed N.

 i. Offer
 Offer is defined as a proposal expressing the declared

willingness of the offeror to enter in to an agreement, if the

offer is accepted.

ii. Acceptance
 Acceptance is a declaration of will to enter in to a legally

binding contract.

 By acceptance, a contract shall be completed, where the

offeree accepts the offer without any reservation.

22 Lecture Notes By: Ahmed N.

 Defects in consent
Defects in consent or vices of consent are the following.
Mistake: Mistake is defined as a misunderstanding of or
erroneous belief about a matter of fact or a matter of law.
Fraud: Fraud means a false representation, by means of a
statement, conduct made knowingly or recklessly in order to gain a
material advantage.
Duress: Duress means a threat of imminent danger, which may be a
future, or immediate danger posted against the contract himself or his
nearest relatives.

23 Lecture Notes By: Ahmed N.

 C. Object of Contract
 The object of contract is the very obligations of the

contracting parties

 The possible objects, i.e. the obligations of the

contracting parties, of contract are:-

 obligation to do (perform);

 obligation not to do; or

 obligation to deliver;

24 Lecture Notes By: Ahmed N.

  The object of contract shall be:- Sufficiently defined;

Possible; Lawful; Not immoral.

 The object of contract, even though sufficiently defined, it

has to be possible or capable of performing.

 The object of contract shall be lawful. Contract agreements

can not serve to achieve illegal objectives.

25 Lecture Notes By: Ahmed N.

 D. Form
 Form may mean types of contract.

 Form may also mean the making of the contract orally or

in writing.

 Should the contract is to be made in certain prescribed form,

it means that contract should be made in writing.

26 Lecture Notes By: Ahmed N.

 The purposes of a contract in construction 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

27 Lecture Notes By: Ahmed N.

 Types of Construction Contract
There are many types of construction contracts, which are
applicable based on the prevailing specific project conditions
and largely the interest of the owner, as listed below:
A. Lump sum fixed price contract

B. Lump sum fixed price and schedule rate contract

C. Unit rate contract

D. Cost plus percentage of cost contract

E. Cost plus fixed fee contract

28 Lecture Notes By: Ahmed N.

 A. Lump sum fixed price contract
 The contractor agrees to execute the project based on a fixed

lump sum price which is not subject to any variations

 Overestimating the volume of works will result in loosing

the job
 A lump sum contract is more suitable for works for

which contractors have prior construction experience.

29 Lecture Notes By: Ahmed N.

 Advantages of Lump sum fixed price contract
 The owner decided whether to start or shelve the project knowing

the total lump sum price quoted by different contractors.

Disadvantages of Lump sum fixed price contract

 All competing contractors are required to carry out enormous take

off works where only one contractor will be successful.

 All bidding documents such as the technical specifications
and drawings have to be clearly prepared and delivered
during tendering stage to the contractor.

 Claims and variation works are very difficult to handle

30 Lecture Notes By: Ahmed N.

 B. Lump sum fixed price and schedule rate contract
 This is another extension of lump sum fixed price contract but

it incorporates unit prices of different activities which will help

to manage variation works and claims during execution of the
project

31 Lecture Notes By: Ahmed N.

 C. Unit Rate Contract
 The unit rate contract is also called item rate contract.

 In this case, the construction contract is based on priced bill

of quantities.
 The unit rate contract is the most commonly used for all

public and governmental projects whereby the estimated

quantities and specifications of works are well known in
advance.

32 Lecture Notes By: Ahmed N.

 Advantages of Unit Rate Contract
 There is no need for detailed drawings as in the case of lump

sum contracts and these detailed drawings can be prepared after

the award of the contract.

 Additional works and claims can be handled in a better way

especially

 It gives a better opportunity to compete on the same ground.

Disadvantages of Unit Rate Contract

 The total cost of the project can only be known upon

completion of the project.

33 Lecture Notes By: Ahmed N.

 D. Cost Plus Percentage of Cost Contract
 The contract is agreed based on the actual direct cost records

plus agreed percentage of these actual direct costs expended

by the contractor to cover overhead costs as well as profit and
income tax.

34 Lecture Notes By: Ahmed N.

 Advantages of Cost Plus Percentage of Cost Contract
 The contractor executes works in good quality.

 Changes in design and method of constructions, if required,

can easily be carried out by the contractor without disputes.

Disadvantages of Cost Plus Percentage of Cost Contract

 The total cost of the project is unknown until completion

 It encourages the contractor to increase the actual direct costs

of the project

35 Lecture Notes By: Ahmed N.

 E. Cost Plus Fixed Fee Contract
 One of the major shortcomings of the cost plus percentage of

cost contract is the tendency of the contractor to increase the

cost of the project and cost plus fixed fee contract discourages
this tendency of the contractor.
 In this case, the contract is based on actual direct costs plus

fixed fee and the amount of fixed fee covers the overhead costs,
profit and income tax of the contractor.
 Claims and disputes may occur when major changes are

required by the owner during execution of the project.

36 Lecture Notes By: Ahmed N.

Contract Delivery System
Contract Delivery system is the way Project Owners together
with Project Regulators and Financiers determine the
assignment of responsibilities to Project Stakeholders along the
Construction Process.

37 Lecture Notes By: Ahmed N.

  Force Account
 when the Project Owners engage themselves to undertake

the project

 when there is a lack of capacity from the private sector to

undertake very large and technologically new projects,

public companies do undertake such projects

 when projects are small and places are remote such that

reaching them is difficult and in general they are not

attractive enough to call the attention of Bidders

38 Lecture Notes By: Ahmed N.

  Design Bid Build (DBB)
 the most practiced type of delivery system

 project owners did prepare the Basic Planning that identifies

construction project programs

 call upon the participation of Design and / or Supervision

Consultants either by tender or by negotiated contracts

 consultant will carry out the design together with the

necessary tender documents which will be the bases for

tendering to select contractors

39 Lecture Notes By: Ahmed N.

  DBB continued

 the design and supervision consultant will be the prime

professional on behalf of the owner and largely the

administrator of the construction contract.

 the employer takes the responsibility of coordinating the

various project packages and their respecting interfaces.

 Contractors are also responsible to construct works with due

care and diligence and complete them in accordance with the

contract, but they are not held responsible for design
deficiencies.

40 Lecture Notes By: Ahmed N.

  Disadvantages of DBB

 Severe adversarial relations between the design and

contract administration consultant and the contractor

 Fragmented contract for the project owner

 Project owner responsibility for risks associated with

the design and contract administration

 The indirect contractual obligation assigned for the

Design and Contract Administration consultants

41 Lecture Notes By: Ahmed N.

  Design Bid (DB)/Turnkey
 Design Build or Turnkey Delivery system is a response to

problems associated to the last two types of delivery

systems.

 Enhance the Force Account System and reducing

fragmentation, adversarial relations and Project Owners’

risk which are recurrent manifestations in the DBB
delivery system.

42 Lecture Notes By: Ahmed N.

  DB continued

 Reduces numbers of procurement processes engaged in

the fragmented process and employ only one

procurement process and a single contractor to provide
the entire Construction Implementation Process (Design
and Construction Implementations).

 The project concept should clearly define the

performance criteria such as output, input, waste and

any other performances the employer may desire.

43 Lecture Notes By: Ahmed N.

  Typical advantages of DB include:
 reducing fragmentation and adversarial relations between
designers and constructors;
 minimizing Project owners’ risk transferable due to
Designers’ faults;
 accountability and entire responsibility for both design and
construction which entitle the employer to receive
completed project is onto a single contractor;
 employers’ responsibility to co-ordinate interfaces
between different project elements is avoided;
 single point responsibility minimizes the opportunity to
claims by the contractor due to design related issues;

44 Lecture Notes By: Ahmed N.

  The disadvantage of this delivery system is:
 loss of control, relatively flexible and makes the employer
distanced from the whole process, the employer has little chance
to understand what is developed and entertain variations in
requirements implying loss of control.
 cost of tender, Contractors in order to provide reasonable offer,
their tender cost is higher than in the case for DBB delivery
system. This is because they need to carryout acceptable design
for project cost offers.
 Cost of risks, The increase in risk transferred onto the contractor
will be counterbalanced by the increase in contract prices which
can be taken to include these costs of risks.

45 Lecture Notes By: Ahmed N.

 A variety of factors makes a construction contract
different from most other types of contracts. These include :
 Nature and Complexity of Works

 Size and Duration of Contract

 Degree of Definition/risk/Uncertainty

 Status of Design

 Technical/Supervisory Resources of Employer

 Budgetary/Financing/Borrowing Constraints

 Previous Experiences of Employer

 Standard Documents of Funding Agency

46 Lecture Notes By: Ahmed N.

 Essential part of Contract document are:
 The Agreement:

 The Conditions of contract:

 General conditions of contract

 Special conditions of contract

 Drawings:

 Specification or Bill of Quantities:

 Addenda

47 Lecture Notes By: Ahmed N.

 1.The Agreement
Is the document that represents and reflects the legal contract
between:
 the owner and the contractor,

 the owner and the designer,

 the General contractor and the sub contractor, or

 the contractors and the supplier

48 Lecture Notes By: Ahmed N.

 The agreement must contain:
 Date of the agreement

 Names and addresses of the contracting parties

 Description of the scope of work

 Time limitations

 Contract considerations

 Payment conditions

 Reference to other documents

 signatures

49 Lecture Notes By: Ahmed N.

 2. The Conditions of Contract
 Are terms in which parties in the contract are governed or

administered with.

 These promises and terms shall be enforceable by law and

incorporates the rights and obligations of each contracting parties.

 Conditions of contract are often conventionally described as being

either “general” or “special”.

50 Lecture Notes By: Ahmed N.

 General Conditions of Contract
 Specify the manner and the procedures for implementing the

provisions of the construction contract according to the

accepted practices with in the construction industry.

 These conditions are intended to govern and regulate the

requirements of the formal contract or agreement.

51 Lecture Notes By: Ahmed N.

 General conditions state about:
 The owner
 The contractor
 Administration of the contract
 Subcontractors
 Construction by owner or by separate contract
 Change in the work
 Time
 Payments and completion
 Protection of persons and property
 Insurance and bonds
 Uncovering and correction of works
 Miscellaneous provisions
 Termination or suspension of the contract

52 Lecture Notes By: Ahmed N.

 Some of the advantages of standard Conditions are:
 The parties will be familiar with their terms as a result of common

(frequent) usage.

 Avoids drafting contract for each project.

 Time for the preparation of contract conditions is saved

 Since all of the standard General conditions have been tested in court,

and their legal interpretations are well known, it is not wise to use non
standard General conditions

53 Lecture Notes By: Ahmed N.

 Some of the disadvantage of standard conditions are :
 The forms are cumbersome, complex and often difficult to

understand.

 Because the resulting contract is often a compromise, they are

resistant to change, many changes take a long time to bring into

effect.

The standard contracts in use in Ethiopia are mostly

 FIDIC (for International contracts), and

 MoWUD, 1994 ( for national contracts)

54 Lecture Notes By: Ahmed N.

 Supplementary /Special Conditions
 The purpose of the Supplementary conditions is to provide an

extension of the general provisions of the contract to fit the

specific project at hand

 They serve as amendments or augmentation to the general

conditions.

55 Lecture Notes By: Ahmed N.

 Items in the supplementary conditions may include topics
such as:
 The number of copies of contract document 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
 Requirements for security and temporary facilities
 Procedures for submittal and processing of shop drawings
 Cost and schedule reporting requirements
 Responsibilities for testing of materials
 Actions to be taken in the event of discovery of artifacts or items
of historical value
56 Lecture Notes By: Ahmed N.
 3. Specifications
 May also be known as technical provisions.

 Are written instruments to be used in conjunction with the

drawings,

 They supplement drawings and provide information that can not

be in graphic form or information that is too lengthy to be placed

with in the drawings

 They guide bidders in the preparation of cost proposals as well as

field executions of the work.

57 Lecture Notes By: Ahmed N.

  They guide the contractor through the process of ordering

materials and construction and installation of the facility

 Provide information regarding:

 The quality of materials

 The quality of workmanship

 Erection and installation methods

 Test and inspection requirements and methods

 Have restricted application, usually to a specific term or work

operation.

58 Lecture Notes By: Ahmed N.

 4.Drawings
 Are meant by which the designer conveys the physical, quantitative, and
visual description of the project to the contractor.
 Are two dimensional representation of the physical structure that meets
the objectives of the owner.
 Architectural drawings
 are the core drawings of the contract in building projects.
 Show the floor plans, exterior elevations, interior elevation
 Structural Drawing
 Show the load carrying systems
 Mechanical drawings
 Show the plumbing heating, venting air conditioning (HVAC) and
fire protection
 Drainage plan
Lecture
shows systems such as sanitary sewer and utilities
Notes By: Ahmed N.
59
 5. Addenda
 Any changes to the bid documents after they are released for bidding
but before bids are actually received requires the issuance of an
addendum.
 This formal document changes the original bid documents and
becomes a part of the bid package
 At the time bid opening, bidders must in their bid documents,
acknowledge all addenda
 Technically addenda may be issued to change the bid opening date,
to modify the original design, to delete or add items, or to correct
errors.
 Addenda may not be issued within about five days of bid opening
unless the bid date is also extended accordingly.

60 Lecture Notes By: Ahmed N.

 Form of Tender
 This is a document where the contractor:

 Confirms that he has examined all the tender documents

 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 not be accepted

 Confirms that he will enter into an agreement if awarded

61 Lecture Notes By: Ahmed N.
 Appendix To Tender
 Amount of bond or guarantee

 Minimum amount of third party insurance

 Period for commencement, from date of signature of contract

 Time for completion

 Amount of liquidated damages

 Period of maintenance

 Percentage of retention

 Minimum amount of interim certificates

62 Lecture Notes By: Ahmed N.

 Supplementary Contracts
• Additional works which were not foreseen in the contract or

which are outside the scope of the contract

• Performed under the terms and conditions of a supplementary

contract and new prices may be negotiated.

 The supplementary contract should not exceed 30% of the main

contract amount

63 Lecture Notes By: Ahmed N.

 SECURITIES
A surety is defined as:
 “A person who assumes legal responsibility for the fulfillment of
another’s debt or obligation and himself becomes liable if the other
defaults”.
Forms/types Contract securities
 A bond, defined as “a written acknowledgement of an obligation to
pay a sum or to perform a contract”.
 A guarantee, defined as “a promise, especially a collateral agreement
to answer for the debt, default or miscarriage of another”.
 Insurance, defined as "securing of compensation in the event of loss
or damage by advance regular payments"

64 Lecture Notes By: Ahmed N.

 1. Bid Bond / Bid Security
 To safeguard the employer from sudden withdrawal of the
bid,
 The bidders shall secure bids in the form of bid bond or bid
security.
 Bid validity period is usually in the range of 30 to 120 cal.
days.
 Its amount usually ranges between 0 - 5% of the bid amount /
price.
 It is in the form of CPO or bank guarantee

65 Lecture Notes By: Ahmed N.

 2. Performance bond or security
 It is an agreement reached by the surety company to protect the
Employer against any damage resulting from the failure of the
bidder to perform
 Its amount is usually greater than or equal to 10% of the contract
price
 Usually be furnished by the successful bidder within 30 calendar
days of receipt of the notification of award from the Employer
 Performance bank guaranty------------the guarantor is the bank
 Performance bond ---------------the guarantor is an insurance
company
 It is after the receipt of the performance bond or bank guaranty
that the signing of the contract agreement is carried out.

66 Lecture Notes By: Ahmed N.

 3. Advance payment bond (guarantee)
 A bank guarantee may be defined as the obligation of the bank

to pay a sum of money in the event of non-performance of a

contract by the third party.

 Advance payment guarantee is therefore an agreement reached

by the guaranteeing bank to protect the Employer against any

damage resulting from the contracting party to use the sum for
the contractual obligation

67 Lecture Notes By: Ahmed N.

 4. Maintenance security
 It is in the form of retention amount of 5% of the executed

work.

 This amount is reduced to 2.5% of the executed work at the

completion of the project until the expiry of the maintenance

period and final acceptance is made.

68 Lecture Notes By: Ahmed N.

Contract management
Why Contract Management?
The purpose of contract Management is to see that the Contract is properly
administered in parallel with the execution of the works.
 It is also to ensure that the Contractor receives fair and proper payment for
the work executed.
Quality : To ascertain that the end result of the project fit for the purpose for
which it was intended. Quality must be maintained!
Budget : To safeguard that the project will be completed without exceeding
the Authorized expenditure. Budget must be controlled!
Time Scale: To control that the project progress matches planned progress, so
that final handover to the Employer takes place no later than the specified
date. Time should be kept!

69 Lecture Notes By: Ahmed N.

 Claims and disputes
Claims under a Construction Contract must have a legal
contractual basis to succeed.

The Contractual Basis for Claims

 Extra or additional work

 Any cause of delay referred to in the conditions of contract

 Exceptionally adverse climatic conditions

 Any delay, impediment or prevention by the employer

 Other special circumstances, which may occur, other through a

default or breach of contract by the contractor.

70 Lecture Notes By: Ahmed N.
 Disputes
 Disputes arise when a claimant who has suffered the loss is

satisfied that his/her claim is justifiable and yet it is not met

 The Engineer must give notice of his/her decision on the matter

in dispute within the time specified in the contract

 If either party is dissatisfied with the Engineer's decision or the

Engineer fails to make a decision within the time limit…

71 Lecture Notes By: Ahmed N.