CONTRACT MANAGEMENT

CONTRACT

As per the Indian contract Act 1872, defines contract as

“ an agreement enforceable by law”.

Also defined as “ an agreement between two or more parties which is

intended to be enforceable at law and is constituted by acceptance by one
party of an offer made by the other party to do or abstain from doing an
act”.

Definition as per construction industry “ an agreement entered into by two

competent parties under the terms of which one party agrees to perform a
given job for which the other party agrees to pay.

The proper contract requires the responsibilities , obligations and

duties of the parties to be defined clearly and to be set out in such a manner
that the work is completed as intended and with true economy to the satisfaction
of the party who agrees to pay for the execution of work.
MANAGEMENT

The fundamental objective of management is “getting results

through people.”
It is a disciplined approach for the optimal use of available scarce
resources.
It ensures coordination of individual efforts to achieve group
goals.
It is a composite process made up of interdependent functions
viz planning, organizing, staffing, leading and controlling, all
optimized, in such a way so as to obtain the best results in the shortest
time with least resources.
OBJECTIVE OF CONTRACT MANAGEMENT
The primary objective of contract management is completion of work
entrusted to a contractor with least complications.

Management of contract should be

done in such a way that
 The contractor at least gets whatever
is due to him within the perimeter of
conditions of contract without
affecting harmony and the owner
realizes full value for the money
invested in construction activity,
There by protecting the interests of
both and ensuring full discharge of
contractual obligations of both the
parties.
TERMINOLOGIES USED IN THE CONTRACT

ARBITRATION: A simple method by which two or more parties agree to refer a

dispute existing between them to a third person of their choice for a binding
decision.

BANK GAURANTEE: A contract to perform the promise or to discharge the

liability of a third person in case of his default.

CLERK OF WORKS:
A person approved by the architect and appointed and paid by the owner to act
under the orders of the architect to inspect the works in the absence of architect.
He has no authority to order variations.
He has power to issue notice to contractor for non approval of any work or
materials.

CARTEL: It is a combination of contractors to keep up prices and to kill

competition in tendering process.
CONTINGENCIES: Allowance made to cover unforeseen errors and omissions.

DAMAGES: Monetary compensation for the injury [ loss] suffered.

DAY WORK: Work which under the terms of contract is to be paid for time and
materials and not by measurements.

DEVIATION: Excess or short fall w.r.t plan or estimate.

DEFENDANT: The person defending or denying / respondent / accused. The

person against whom recovery is sought.

ESCALATION: Compensation for price rise. Allocation for risk of price rise.

EXTRA ITEM: Any item of work which is outside the offer made by the contractor
and therefore outside the contract as well.

FRUSTRATION OF CONTRACT: Duty to perform a promise in a contract is

discharged.

FORCE MAJEURE: An unexpected event. An irresistible and superior force.

LIEN:
It is the legal right to control the real or personal property of another person until
such time as that person satisfies a debt or duty owed to the lien holder.
The property becomes in effect a form of security for the debt or duty owed.

NEGOTIATION: A process for amicable settlement of an issue in the spirit of

“given and take”

PLANTIFF: A person who complains and brings an action.

QUANTUM MERUIT: A s much as one deserves. It is awarded for work done or

services rendered when price thereof is not fixed by the contract.

SURETY: One who promises to answer for the debt, default or miscarriage of
another.

VARIATIONS: Alteration or modifications of the designs, quality or quantity of the

work as shown upon the contract drawing and desired by architect or referred to
in the contract bills and includes the addition, omissions or substitution of any
work.
WORK ORDER: It is a written order issued by the owner or his authorized
architect or engineer to the contractor, intimating him that his offer has been
accepted by the competent authority and that he is ordered to commence the
work.

PRIME COST:
A prime cost sum is an approximate sum included in the contract to cover the
cost of some particular item of work or of some particular goods or materials to be
supplied by the contractor or by some nominated person, the cost of which is not
known at the time of signing the contract.
These sums are inherently, subject to adjustment when the true cost emerges
in due course.
If the specifications for any item or material, fixture or fitting are not finalized by
the architect, contractors are asked to quote prime cost to be adjusted later when
the material or fixer or fitting is selected and approved.
Prime cost related to materials to be supplied by vendors.

PROVISIONAL SUM:
The main contractor quotes a provisional sum for specialized works such as
pile foundations, water proofing treatment, lifts and air conditioning work obtaining
a quotation from specialist firms.
These sums are called provisional sums and are subject to adjustment later
after execution of work and it relates to execution work by specialist firm.
THE INDIAN CONTRACT ACT 1872
There are several types of contracts. They involve issues relating to
Technology
Finance
Administration and management
Contracts involve high monetary stakes. Contracts should be properly
administered, governed and controlled as per provisions of Indian Contract Act
1872.

All contracts if they are to be valid and enforceable at law must have certain
ingredients viz.:
Mutual agreement between the contracting parties as to the terms and
conditions of the contract.
Genuine intention of the parties to accept and fulfill their respective rights and
duties under the contract.
Legal capacity of the parties to make a valid contract.
Consideration of some value [ such as payment for construction work done]
exchanged by the parties.
Lawful nature of the object of the contract [ eg: to build a structure that
conforms to all laws and regulations]
INTERPRETATION CLAUSES:

PROPOSAL:

When one person signifies to another his willingness to do or to abstain from

doing anything with a view to obtain the assent of the other to such act or
abstinence, it is called “proposal”.
The person making the proposal is called “promisor”. [ contractor]

When the person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted, and it becomes a “promise”.
The person accepting the proposal is called the “promisee” [owner].

An agreement enforceable by law is a contract: an agreement not enforceable

by law is said to be void.

An agreement which is enforceable by law at the option of one or more parties

thereto, but not at the option of other or others is a voidable contract.
GENERAL PRINCIPLES / ELEMENTS OF CONTRACT

Offer

Acceptance

Contract Intention

Consideration

Capacity to
contract
1.OFFER:
 What does an ‘offer’ means?
“An expression of willingness by the offeror to enter into an agreement with
the offeree.”
 Prof. Treitel:
Offer is an expression of willingness to contract, on certain terms, made with
the intention that it shall become binding as soon as it is accepted by the
person to whom it is addressed, the offeree.

OFFEROR OFFER OFFEREE

TERMINATION OF AN OFFER
Offer can be terminated by several ways:
 When the terms of the offer allows it to be open for certain time, and upon
expiry of that time, the offer will lapse
 Offer will lapse after a reasonable length of time has passed.
 If the offeror, makes an offer, with certain preconditions to be fulfilled, by
the offeror before acceptance, upon failure to fulfill such preconditions,
shall make the offer lapses.
 An offer will lapse upon its rejection.
 An offer will lapse once it is being countered (counter-offer)
 Death of the offeror & offeree
 Withdrawal of an offer
 Once an offeror withdraws an offer, the offer will be terminated
 However, withdrawal of an offer will take effect upon its
communication to the offeree
 Withdrawal must be communicated to the offeree.
2.ACCEPTANCE:
 Acceptance is an unconditional agreement to
all the terms of that offer.
 It also signifies a final and unqualified expression
of assent to the terms of an offer.

METHODS OF ACCEPTANCE
1. Verbal / Express Acceptance: It is
where the offeree accepts the offer
straightforwardly / directly.

2. Conduct / Implied Acceptance :The

offeree signifies his acceptance by doing
something that conform to the offeror’s
offer.

3. Silence: Silence does not amount to

acceptance unless it is otherwise agreed by
both parties.
3.CONSIDERATION

Consideration is the price in terms of money, goods or services paid for the thing
that the promisor [contractor] wishes to have.

OR
ACCORDING TO SEC 2(D) CONSIDERATION IS DEFINED AS “WHEN AT THE
DESIRE OF THE PROMISOR , OR PROMISEE OR ANY OTHER PERSON HAS
DONE OR ABSTAINED FROM DOING OR DOES OR ABSTAINS FROM DOING
,OR PROMISES TO DO OR TO ABSTAIN FROM DOING , SOMETHING , SUCH
AN ACT OR ABSINENCE OR PROMISE IS CALLED A CONSIDERATION FOR
THE PROMISE .

WHEN A PARTY TO AN AGREEMENT PROMISES TO DO SOMETHING HE

MUST GET “SOMETHING” IN RETURN .THIS “SOMETHING” IS DEFINED
AS CONSIDERATION.
4.CAPACITY TO CONTRACT
Following are the condition for a person to enter into contract
 He must be major
 He must be sound mind
 He must not be disqualified by any other law.

5.INTENTION

Intention to be legally bound, otherwise "intention to create legal relations" is a

technical term used in contract law, particularly English contract law, to denote
whether a court should presume that parties to an agreement wish it to be
enforceable at law.
TYPES OF CONTRACTS
TYPES OF CONSTRUCTION CONTRACTS
 Factors Influencing the Choice of the Type of Contract
 The appropriateness for providing an adequate incentive for efficient
 performance by the contractor
 The ability to introduce changes
 The allocation of risks
 The start and completion date of the project

Measurement contracts [ item rate and % rate ]

Lumpsum contracts
Cost plus fee contracts
Turnkey contracts
Build-Own-Operate and Transfer [BOOT] contracts.
LUMP SUM CONTRACTS
 Involves a total fixed price for all construction related activities.
 Can include incentives or benefits for early termination, or can also have
penalties, called liquidated damages, for a late termination.
 Preferred when a clear scope and a defined schedule has been reviewed
and agreed upon.

ADVANTAGES DIS-ADVANTAGES

 Low risk on the owner, Higher  Changes is difficult and costly.

risk to the contractor  Contractor is free to use the lowest
 Cost known at outset cost of material equipment, methods.
 Contractor will assign best  The contractor carries much of the
personnel risks. The tendered price may include
 Contractor selection is easy. high risk contingency.
 Competent contractors may decide
not to bid to avoid a high-risk lump
sum contract.
UNIT PRICE CONTRACTS
 No total final price
 Quote Rates / Prices by units
 Re-negotiate for rates if the quantity or work considerably exceeds the
initial target
 Payment to contractor is based on the measure.
 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)
 Owner : at risk for total quantities
 Contractor : at risk for fixed unit price.
 Large quantities changes (>15-25%) can lead to increase or decrease of
unit price.
ADVANTAGES [ UNIT PRICE ]
 Easy for contract selection.
 Early start is possible.
 Saves the heavy cost of preparing many bills of quantities by the contractors.
 Fair basis for competition.
 In comparing with lump-sum contract, changes in contract documents can be
made easily by the owner.
 Lower risk for contractor.

DIS-ADVANTAGES [ UNIT PRICE ]

 Final cost not known from the beginning (BOQ only is estimated)
 Staff needed to measure the finished quantities and report on the units not
completed.
 Unit price sometime tend to draw unbalanced bid. (For Unit-Price Contracts, a
balanced bid is one in which each bid is priced to carry its share of the cost of
the work and also its share of the contractor’s profit.
 Contractors raise prices on certain items and make corresponding reductions
of the prices on other items ,without changing the total amount of the bid)
SCHEDULE OF RATES CONTRACT

 A Schedule of the work items without quantities is prepared by the owner

and /or A/E to be rated by the contractor.
 The descriptions of items and the units of measurement are similar to those
used in a normal B.O.Q., but no quantities are given.
 It is common for separate rates to be quoted for labor, plant, and materials.
 Used for repair and maintenance works or under conditions of urgency.

Advantages:

1. Work can be commenced earlier than if a full B.O.Q has been prepared.

Disadvantages:

1. No indication of the final price of the works.

2. Very difficult to determine which contractor submitted the most advantageous offer.
3. May cause financial problems to the public owners
COST PLUS
1. Actual cost plus a negotiated reimbursement to cover overheads and
profit.
2. Different methods of reimbursement :
Cost + percentage

Cost + fixed fee

Cost + fixed fee + profit-sharing clause.

3. Higher risk to owner

4. Compromise :
guaranteed maximum price (GMP) reduces risk to owner while maintain
advantage of cost plus contract.

By using this type of contract –

The contractor can start work without a clearly defined project scope,
since all costs will be reimbursed and a profit guaranteed.
COST + PERCENT OF COST
 The contractor is reimbursed for all his costs with a fixed % age of costs to
cover his services.
 Project/site overheads may be covered by the %age or computed as one of
the costs.
Fee = percentage of the total project cost
(Cost = $500.0,Fee = 2%)
Advantages Disadvantages

profitable for the contractor No incentive to finish job

quickly
Owner does not know total
price
Larger the cost of the job, the
higher the fee the owner pays
ADVANTAGES [ COST + PERCENT ]

 Construction can start before design is completed.

 If the contractor is efficient in the utilization of resources then the cost to the
client should represent a fair price for the work undertaken.

DIS-ADVANTAGES [ COST + PERCENT ]

 The project total cost is completely unknown before the project start.
 No incentive for the contractor to be efficient in his use of labors, materials or
equipments.
 Minimum efficiency maximizes the profit.
COST + FIXED FEE
Most common form of negotiated contracts
COST = expenses incurred by the contractor for the construction of the
activity.

Includes: Labor, equipment, materials, and administrative costs

FEE = Compensation for expertise
Includes: profit
Fee = percentage of the original estimated total figure
 Utilized on large multi-year jobs
 Ex: WW treatment plant Facility (Cost = $20 million, Fee = 1%)

Advantages Disadvantages
Fee amount is fixed regardless Expensive materials and construction
of price fluctuation techniques may be used to expedite
construction

Provides incentive to complete

the project quickly
COST + FIXED FEE + PROFIT – SHARING CLAUSE
 Rewards contractors who minimize cost.
 Percentage of cost under GMP is considered profit
 And shared with the contractor
 Guaranteed Maximum Price (GMP)
 % of profit sharing is specified in contract

Advantages Disadvantages
Provides incentive to the Contractor must absorb any
contractor to save money amount over the GMP

Plans & specs. need to detailed

 In this type of contract the contractor is reimbursed at cost with an agreed-
upon fee up to the GMP, which is essentially a cap; beyond this point the
contractor is responsible for covering any additional costs within the original
project scope.
 An incentive clause, which specifies that the contractor will receive
additional profit for bringing the project in under the GMP.
GUARANTEED MAXIMUM PRICE CONTRACT
In a guaranteed maximum price (GMP) contract

 the contractor estimates the cost just like in a lump sum bid, but profit is limited to
a specified amount.
 In the event that actual costs are lower than the estimates, the owner keeps the
savings.
 In the event costs are higher, the contractor pays the difference and profit is
reduced.

Advantages:
 Greater price certainty for clients as the contractor normally includes a sum
for future design development and for risks.
 GMP promotes pre-agreement of changes as its philosophy links neatly with
a contractual requirement to pre-agree the cost and time implications of any
potential changes.
 GMP provides greater control over spending as the contractor is bound to a
maximum price.
 This alerts the team to any potentially expensive items of design
development.
 GMP aligns the contractor with client and consultants encouraging team
work with mutual trust and common goals.
 Less administration is required as changes are limited; there is quick
settlement of the final account.

Disadvantages:

 The client might pay too much as the contractor takes on greater risk and
thus includes in the price an allowance for design development and risk.
 Often a competitive price is sacrificed in lieu of appointing a contractor early.
 There is no standard form of contract for GMP so there is a greater
possibility of errors and misunderstandings of liabilities between the parties
that may result in conflict.
 Scope changes tend to cost more, it is accepted that scope changes to
design and build are more likely to be more expensive than with a traditional
contract, the same can also be said for GMP contracts.
BOOT CONTRACT [BUILD OWN OPERATE AND TRANSFER]

“BOOT (build, own, operate, transfer) is a public-private partnership (PPP)

project model in which a private organization conducts a large development
project under contract to a public-sector partner, such as a government
agency.”

A BOOT project is often seen as a way to develop a large public infrastructure

project with private funding.
BOOT is sometimes known as BOT (build, own, transfer). Variations on the
BOOT model include BOO (build, own, operate), BLT (build, lease, transfer)
and BLOT (build, lease, operate, transfer).

Examples:
Highway projects
Airports
Convention centers
IT parks
Power plants
Bridges
Here's how the BOOT model works:

The public-sector partner contracts with a private developer - typically a

large corporation or consortium of businesses with specific expertise - to
design and implement a large project.
The public-sector partner may provide limited funding or some other
benefit (such as tax exempt status) but the private-sector partner assumes
the risks associated with planning, constructing, operating and maintaining
the project for a specified time period.
During that time, the developer charges customers who use the
infrastructure that's been built to realize a profit.
At the end of the specified period, the private-sector partner transfers
ownership to the funding organization, either freely or for an amount
stipulated in the original contract.
Such contracts are typically long-term and may extend to 40 or more
years.