Contract management in construction industry

• Brain storm question

– what was the previous session topic?
– Mention the main points of the
previous session

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 Contract management in construction industry
By the end of the session the students will
be able
– Define contract and contract management
– List out the component /element of contract
management
– List out the type of engineering contract
– Differentiate different type engineering
contract
– Explain the process of contract administration
process
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 Cont..

What does mean

contract to you?

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 CONTRACT
Principles of Contract Law
Contract: Definition
 Generally, a contract is an agreement or willful promise
enforceable at law.
 However, not all agreements or promises are contracts as
some agreements may lack enforceability at law.
 Enforceable at law means that if the agreement reached
between the parties breached (deviations occur from the
promises) by one of the parties, the aggrieved party, may
bring a legal action against the other to demand the
enforcement of its rights with the support of law.
 A valid contract is an agreement made between two or more
parties where by legal rights and obligations are created
which the law will enforce.
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 Cont…
 According to Art. 1675 of the 1960 Civil Code of Ethiopia:
“A contract is an agreement where by two or more persons as
between themselves create, vary or extinguish obligations of a
proprietary nature.”
 The definition encompass the following main points:
– The contract is an agreement;
– The agreement is to be made between two or more
persons;
– The agreement is binding between such two or more
persons;
– The agreement is to create, vary and extinguish
obligations;
– The nature of obligations is proprietary.
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 Elements of Contract

What point should be fulfilled to make

contract valid?
 Mention an example of
– Valid contract
– Invalid contract

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 Cont..
Legal Perspective
 According to Art.1678 of the Civil Code, no
valid contract shall exist unless:
– The parties are capable of contracting and give
their consent sustainable at law.
– The object of the contract is sufficiently defined
and is possible and lawful.
– The contract is made in the form prescribed by
law.
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 Cont..
 The following are the fundamental elements of
contract.
A. Capacity of the contracting parties;
B. Consent of the contracting parties;
C. Object of the contract; and
D. Form of contract, if any.

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 Cont…
A. Capacity
According to Art.1678(a) of the Civil Code,
Capacity refers to competence to enter into a
legally binding agreement.
 Parties entering into an agreement or contract
shall, therefore, be capable of contracting.
 Legal capacity is of two types.
– Personal (Own) capacity,
– Representative (Agent) capacity.

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 Cont…
The following may not have legal capacity to
enter into contract and bind themselves.
• Minors (under the age of 18);
• Companies adjudged or declared bankrupt;
• Judicially interdicted persons;
• Legally interdicted persons;
• Persons, whose civil rights are suspended by the
judgment of the court;
• Non- nationals, unless permitted by law or
special prerogative.
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 Cont…
B. Consent
Consent is thoroughly dealt with in the civil code,
(Art.1678(a) and Art.1679-Art.1710) Consent is a
declared will of the individual to enter into contract.
It is the willingness of the parties to enter into a legally
binding relation.
Consent of the intended contracting parties decomposes
into:
• Offer, and
• Acceptance.

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 Cont…
i. Offer
 Offer is a proposal expressing the declared willingness of
the offeror to enter into an agreement, if the offer is
accepted.
 Offer is a legal process which is a declaration of willingness
or intent to be bound by specific terms set out.
A valid offer shall be:
• Certain,
• Communicated,
• Unconditional,
• Distinguished from invitation to treat (display of goods,
advertisement, tender etc.).

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 Cont…
ii. Acceptance
 Acceptance is a declaration of will to enter into a legally
binding contract.
 By acceptance, a contract shall be completed, where the offeree
accepts the offer with out any reservation.
Characteristics of Acceptance:
 Acceptance could be conditional or unconditional.
• Conditional acceptance rejects the original offer made by the
bidder (offer or) and creates a counter offer or new offer by the
project owner.
• Unconditional or unreserved acceptance of an offer by the
project owner creates a Contract Agreement between the bidder
and the project owner subject to other subsequent actions, such
as negotiation.
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 Cont…
C. Object of Contract
 The object of contract is the very obligations of the
contracting parties i.e. in the construction contract, the
obligations of the employer and of the contractor (Art.1678(b)
and Art.1711–Art.1718 of the Civil Code).
 The possible objects, i.e. the obligations of the contracting
parties, of contract include:
– Obligation to do (to perform),
– Obligation not to do, or
– Obligation to deliver.
 The obligations of the contracting parties could be divided into
two broad terms:
– Promises, and
– Considerations.
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 Cont…
Object of Contract
 The object of contract (both promises and considerations) shall
be:
– Sufficiently defined: Art.1678(b) cumArt.1714,
– Possible: Art.1678(b) cum Art.1715,
– Lawful: Art.1678(b) cum Art.1716(1),
– Not immoral: Art.1716(1).

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 Cont…

D. Form of Contract
 Form refers to the types of contract. Form may also mean the
making of the contract orally or in writing (Art.1678(c) cum
Art.1719–Art.1730 of the Civil Code).
 Should the contract is to be made in certain prescribed form, it
means that contract should be made in writing.
 In this case, for misrelated with the validity and proof of the
contract itself.
 Contracts with public (government) body shall be made, legally,
in writing (Art.1724 of the Civil Code).
If the contract shall be made in writing, there are two possibilities:
• Preparing fully tailor-made contract to the project at hand; or
• Using standard conditions of contract suitable for the project
at hand;
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 Cont…
Effects of Contract
 Effects of contract may have two dimensions:
– The time when the contract is considered bound by the
contracting parties; and
– The fulfillment or performance of these the of promises
prescribed in the contract;
 The first one relates to the effectiveness of the
contract, where as the second is related to the
performance of obligations of the contracting
parties under the contract.

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 Cont…
Effectiveness of Contract (Time)
This may be expressed in the following three ways:
– Contract is effective and thus is binding on the contracting
parties from the moment of the conclusion of the
contract;
– Contract can be considered effective after some days are
passed from the conclusion of the contract; and
– Contract can be considered effective after the performance
of some actions by the contracting parties; such as:
• Making advance payment a condition precedent for the
effectiveness of the contract;
• Securing approval of the contract by higher authorities; and
• Other pre-conditions.

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 Cont…
Performance of Contract (Discharge)
• Performance of Contract is the carrying out or
discharge of the obligation undertaken by the
contracting parties.
• It focuses on the real performance of the contract
as agreed.
 Effects of contract may bring:
– Contractual effects, and/or
– Legal effects.

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Case study

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 Types of Construction Contract
 Construction contracts are classified on the basis of payment
methods (fixed price or cost plus fee) adopted by the
employer/client/owner/promoter.
Construction contracts take the following forms:
Competitive(fixed price)contract:
– Lump Sum, and
– Unit price/Ad-measurement.
Negotiated(Cost plus)contract:
• Cost plus fixed fee,
• Cost plus fixed percentage,
• Cost plus variable fee,
• Target cost/ estimate, and
• Guaranteed maximum price.
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 Cont…
Fixed Price Contract
• Fixed Price types of contract are ones where in a
contractor agrees to furnish services and
material at a specified price, possibly with a
mutually agreed upon escalation clause.
• This type of contract is most often employed
when the scope of services to be provided is
well defined.
 The two forms include:
– Lump sum contract(Buildings),
– Unit price contract(heavy construction).
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 Cont…
A. Lump Sum Contract
• In this type of contract, a single lump sum price is
quoted for the completion of the specified work to the
satisfaction of the employer with in a certain duration.
• The contractor offers to do the whole work as shown
in drawings and described by specifications, for a total
stipulated sum of money.
• For such contracts, the design must be complete and
final, as there is no mechanism with in the contract
for adjustment of the price in consequence of
variation.
• The contractor bears high risk.
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 Cont…
Suitability
 A lump sum contract is more suitable for
works for which contractors have prior
construction experience. B/c The experience
enables the contractors to submit a more
realistic bid.
 This type of contract is not suitable for difficult
foundations, excavations of uncertain
character, and projects susceptible to un
predictable hazard and variations.
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 Cont…
B. Unit Price/Ad-measurement Contract
The contract or execute the work on an item rate basis.
 The amount to be received by the contactor depends upon
the quantities of various items of work actually executed.
 Used for works where it is impossible to calculate in
advance the exact quantity of materials that will be
required; hence, require sufficient design definition to
estimate quantities of units.
Time and cost risk is shared by contracting parties.
– 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.
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 Cont…
Suitability
• The item rate contract is most commonly used
for all types of engineering works.
• This type of contract is suitable for works
which can be divided into various items and
quantities (WBS), where each item, can be
estimated with accuracy.

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 Cont…
Negotiated Contract
• Cost plus (cost reimbursable) 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.
• The contractor agrees to furnish to the client works and
material at actual cost, plus an agreed upon fee for these
services.
• This type of contract is employed most often when the
scope of services to be provided is not well defined.
• By using this type of contract the contractor can start work
with out a clearly defined project scope, since all costs will
be reimbursed and a profit guaranteed.
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 Cont…

 Actual cost plus a negotiated reimbursement

to cover overheads and profit with different
methods of reimbursement:
• Cost plus fixed fee,
• Cost plus fixed percentage,
• Cost plus variable percentage,
• Target cost / estimate,
• Guaranteed maximum price.
• It is applied for complex projects such as:
power plants, tunnels, process plants etc.
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 Cont…
A. 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.
• The 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, man power
and equipment requirements etc.
• In order to negotiate such a type of contract, it is essential that
the scope and some general details of the work are defined.
• The contractor have incentive to complete the job quickly
since its fee is fixed regardless of the duration of the project.
• The owner assumes the risks of cost overrun while the
contractor may risk the erosion of its profits if the project is
dragged on beyond the expected time.
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 Cont…
Suitability
• This type of contract is suitable for works
required to be completed expeditiously and
where it is difficult to predict what difficulties
are likely to been countered.
• This contract is also suitable for important
projects, where the cost of construction is
immaterial.

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 Cont…
B. Cost plus Fixed Percentage Contract
• In this type of contract, the contractor is given a certain
percentage over the actual cost construction.
• The owner is forced to assume all risks of cost overruns.
• Furthermore, if there are pressing needs to complete the project,
overtime payments to workers are common and will further
increase the project cost.
• Unless there are compelling reasons such as the urgency in the
construction of military installations, the owner shouldn’t use this
type of contract.
• The suitability, merits and demerits of this type of contract are
similar to cost plus fixed fee contracts.
• An additional demerit is the tendency of the contractor to
increase the cost of work to earn more profit by way of
percentage of enhanced actual cost. 31
 Cont…
C. Cost plus Variable Percentage Contract
• For this type of contract, the contractor agrees to a
penalty if the actual cost exceeds the estimated project
cost, or a reward if the actual cost is below the
estimated project cost.
• Furthermore, the project duration is usually specified
and the contractor must abide by the deadline for
completion.
• This type of contract allocates considerable risk for
cost overruns to the owner, but also provides
incentives to contractors to reduce costs as much as
possible.
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 Cont…

D. Target Cost/Estimate Contract

• This is another form of contract which specifies a
penalty or reward to a contractor, depending on
whether the actual cost is greater than or less
than the contractor's estimated direct project
cost.
• Usually, the percentages of savings or overrun to
be shared by the owner and the contractor are
predetermined and the project duration is
specified in the contract.
• Bonuses or penalties may be stipulated for
different project completion dates. 33
 Cont….
E. Guaranteed Maximum Price Contract
• When the project scope is well defined, an owner
may choose to ask the contractor to take all the
risks, both in terms of actual project cost and
project time.
• The owner and the contractor agree to a project
cost guaranteed by the contractor as maximum.
There may be or may not be additional provisions
to share any savings if any in the contract.
• This type of contract is particularly suitable for
turnkey operation.
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 Cont…
 The following factors affect the choice of specific
type of contract:
– Nature and complexity of the works;
– Size and duration of contract;
– Degree of definition (scope, risk, uncertainty);
– Status of design;
– Technical/ Supervisory resource of Employer;
– Budgetary/ Financing/ Borrowing constraints;
– Previous experience of Employer; and
– Standard documents of funding agency.

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 Contract Management
Contract Management: is a process of
reaching contractual agreement for
implementation, its administration and finally
concluding the contract. It based on provisions
made on contract planning phase.

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Contract Management
The following issues are necessary for a
successful Contract Management phase:
knowing and ensuring contract related National and
International laws, rules and regulations,
adherence to the provisions made during the contract
planning phase including their change processes,
identifying, recognizing and involving all potential or
key stakeholders to form a contract team,
understanding, mapping and monitoring all contract
conditions agreed upon, and
ability to administer changes, claims and disputes.
 Cont…

Contract Documents
 Contract Documents (graphic and written) describe the
proposed construction (the ‘Work’) that results from
performing services, furnishing labor, and supplying and
incorporating materials and equipment into the construction.
 Include the following construction documents except bidding
forms:
– Contract Agreement,
– Conditions of Contract (General and Specific),
– Specifications and Bill of Quantities (BOQ),
– Drawings,
– Addenda, and
– Supplementary Contracts (Change Orders).
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Thank you

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 Cont…

Contract Agreement
• The agreement is the document that represents and
reflects the legal contract between the owner and the
contractor.
• The purpose of the agreement is to record in written form
those items agreed 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.
• The Contract Agreement shall also declare the priority of
the Contract Documents i.e. which Contract Document
shall have precedence or priority over the other incase of
ambiguity or discrepancy between or among the relevant
parts of the Contract Documents.
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 Cont…
The agreement should contain:
• The date of agreement;
• The names and address of contracting parties;
• A brief description of the scope of work;
• A list of contract documents with their precedence
(reference to other documents);
• The procedures for payment;
• The contract time, or dates for start and completion;
• The signatures of contracting parties and witnesses;
• International construction documents are also often
based on industry-prepared standard forms.
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 Cont…

 Conditions of Contract
General Conditions of Contract, GCC
• A document called the General Conditions is an essential part of the
contract. It defines the responsibilities of the parties involved in the
contract, the owner and the general contractor. It describes the
guide lines that will be used in the administration of the contract.
• The conditions are intended to govern and regulate the obligation of
formal contract.
• Various standard forms of General Conditions have been developed
by different organizations such as FIDIC, ICE, JCT, BaTCoDA, MoWUD
and PPA etc.
• 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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 Cont…

Special Conditions of Contract, SCC

• The purpose of the Special Conditions is to provide
an extension of the General Provisions of the
contract to fit the specific project at hand.
• It is also known as Conditions of Particular
Application, CPA.
• They serve as amendments or augmentation to
the General Conditions.
• Items included in the Supplementary Conditions
are entirely subject to the discretion of the owner.

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 Cont…
 Special conditions of contract may include topics such as:
• 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;
• Requirements for security and temporary facilities;
• Procedures for submittal and processing of shop
drawings;
• Cost and schedule reporting requirements; and
• Traffic control and street cleaning requirements.

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 Cont…
Specifications
• Specification is a written standard to be used in conjunction
with the drawings, so together with drawings and the
specifications fully describe and define the requirements of the
contract, to include the quality that is to be achieved.
• Specification may also be know as Technical Provisions.
• They supplement the drawings and provide information that
cannot be shown in graphic form, or information that is too
lengthy to be placed within the drawings.
• They guide bidders in the preparation of cost proposals as
well as field execution of the work.
• They also guide the contractor through the processes of
ordering material sand construction and installation of the
facility.
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 Cont…
• It helps as a standard assuring the critical performance and other
requirements for the works.
• It is advisable to use Ethiopian standards (ES) and
technical specifications (BaTCoDA1991) for the works;
however, if they are in appropriate for the specific work,
internationally accepted standards and specifications such
as those issued by ISO can be specified.
 Specifications provide information regarding:
• The quality of materials,
• The quality of workmanship,
• Erection and installation methods, and
• Measurement, test and inspection requirements and
methods.
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 Cont…

• Specifications have restricted application, usually to a

specific item or work operation. The designer or
specification writer is therefore able to assign
responsibility for each provision of the specifications to
the desired specific party.
 Specifications must satisfy these basic criteria:
• Technical accuracy and adequacy;
• Definite and clear stipulations;
• Fair and equitable requirements;
• A format that is easy to use during bidding and
construction; and
• Legal enforceability.
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 Cont…
Drawings
• Drawings are the means by which the designer conveys the
physical, quantitative, and visual description of the project
(physical structure) to the contractor.
• They are also known as plans or blue prints.
• The contract drawings are organized into sections
numbered sequentially. Drawings for a building project may
include the following type:
• Architectural drawings,
• Structural drawings,
• Sanitary drawings,
• Electrical drawings, and
• Mechanical drawings.
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 Cont…
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.
• This formal document changes the original bid documents and
becomes apart of the bid package.
• 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, 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.
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 Cont…

Performance Bond
• The Contractor, upon receiving the Letter of Acceptance, shall
obtain and provide to the Employer before signing the Contract,
the Performance Guarantee in the value often percent of the
Contract Sum, as a guarantee of the proper execution of the
Works in accordance with the Contract.
• This guarantee shall be issued by a licensed bank or financial
institution acceptable to the Employer.
• The obtaining of such guarantee shall in all respects be at the
expense of the Contractor.
• The Performance Security shall be valid until a date 28 days from
the date of issue of the Certificate of Completion in the case of a
Bank Guarantee, and until one year from the date of issue of the
Completion Certificate in the case of a Performance Bond.
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 Cont…
Advance Payment Bond
• The Employer shall make advance payment to the Contractor of
the amounts stated in the SCC / CPA by the date stated in the
SCC / CPA, against provision by the Contractor of an
Unconditional Bank Guarantee in a form and by a bank
acceptable to the Employer in amounts and currencies equal to
the advance payment.
• The Guarantee shall remain effective until the advance payment
has been repaid, but the amount of the Guarantee shall be
progressively reduced by the amounts repaid by the Contractor.
• Interest shall not be charged on the advance payment.
• Provide a guarantee that subcontractor, material suppliers, and
others providing labor, material goods, and services to the project
will be paid.
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 Cont…
• The Contractor is to use the advance payment only to pay
for Equipment, Plant, Materials, and mobilization
expenses required specifically for execution of the
Contract. The Contractor shall demonstrate that advance
payment has been used in this way by supplying copies of
invoices or other documents to the Project Manager.
• The advance payment shall be repaid by deducting
proportionate amounts from payments otherwise due to
the Contractor, following the schedule of completed
percentages of the Works on a payment basis. No account
shall be taken of the advance payment or its repayment in
assessing valuations of worked one, Variations, price
adjustments, Compensation Events, Bonuses, or Liquidated
Damages.
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 Cont…
Defects Liability Security
• After primary taking over, 5% guarantee is
submitted to employer for defect liability, valid
for 365 days or as stipulated in SCC/CPA.
Insurance Certificates
• Insurance for Works and Contractor’s
Equipment,
• Insurance against Injury to Persons and
Damage to Property,
• Insurance for Contractor’s Personnel.
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Thank you

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