Chapter-4.1 - Construction Contract PDF

ADDIS ABABA SCIENCE AND TECHNOLOGY UNIVERSITY DEPARTMENT OF ARCHITECTURE Architectural Practice II (ARCH 4135) 4. CONSTRUCTION CONTRACT COURSE CONTENT ‡2.1. Principles of Contract Law ‡2.2. Types of Construction Contract ‡2.3. Contract Documents ‡2.4. Contract Manage...

ADDIS ABABA SCIENCE AND TECHNOLOGY UNIVERSITY DEPARTMENT OF ARCHITECTURE Architectural Practice II (ARCH 4135) 4. CONSTRUCTION CONTRACT COURSE CONTENT ‡2.1. Principles of Contract Law ‡2.2. Types of Construction Contract ‡2.3. Contract Documents ‡2.4. Contract Management : „Contract Administration and Closing „Claims and Dispute Management Preface Delivery System Contract Formulation Procurement Method Contract Administration Contract Types Contract Closing Contract Procurement Contract Planning Management Management Procurement Preparation Tendering Tender Evaluation & Notice of Acceptance Principles p of Contract Law Principles of Contract Law Principles of Contract Law Principles of Contract Law Principles of Contract Law ‡ Legal Definition of Contract „ According to the Civil code of Ethiopia, Art.1675: ‡ A contract is an agreement whereby two or more persons as between themselves create, vary or extinguish obligations of a proprietary nature. ‡ An agreement that affects the legal relationship between two or more parties. Principles of Contract Law ‡ Elements of a Contract ‐ What does it take to have a legally binding contract? t t? ‡ Contracts require 4 basic elements „ Mutual Agreement ‡ Offer ‡ Acceptance „ Legal Objective „ Valid Consideration „ Legal Capacity of the parties  Principles of Contract Law 1. What is Mutual Agreement? „ It should show evidence that there was ‘MEETING OF MIND’’ „ Offer – Clear and Unambiguous „ Acceptance – clearly accepting deal offered & anything else – Counteroffer & Non acceptance 2. What is legal objective? ‡ The h thing h contracted d must be b legal l l in and d off itself. lf 3. What is a valid consideration? ‡ In exchange for the offer to perform, perform the recipient or client must offer something of value „ Money „ Promise of future work or revenue „ Goods or Services Principles of Contract Law ‡ Without valid consideration a contract is invalid & unenforceable 4. What is legal Capacity? ‡ In simplest form, parties must be: „ Of Age „ Mentally y Competent p ‡ In construction environment, parties must have: „ Legal authority to issue & execute contracts „ Must have proper license to have legal capacity Principles of Contract Law Concepts and Basic Terms of Contracts: ‐ ‡ Offer: ‐ proposal to enter into a contract. ‡ Acceptance: ‐ ‡ Performance of Contracts: ‐ „ Performance – fulfilling respective legal obligations ‡ Contractual Liability: ‡ Extra – Contractual Liability: ‐ Types of Construction Contracts Types of Construction Contracts Types of Construction Contracts Contracts for the execution of civil engineering g g works are of following type: ‡ (a) Lump sum contract ‡ (b) Unit rate contract ‡ (c) Lump sum and schedule contract ‡ (d) Cost plus fixed fee contract ‡ (e) Cost plus percentage of cost contract A. Lump Sum Contract( Fixed Price) ‡ Lump sum contract are typically used for buildings. ‡ Difficult to make adjustments. j Types of Construction Contracts ‡ A lumpp sum contract is more suitable for works for which contractors have prior construction experience. ‡ Not N suitable i bl ffor unpredictable di bl conditions. di i B. Unit Price or Bill of Quantity (Fixed Price) ‡ Also Al called ll d S Schedule h d l contract t t ‡ Used for work where it is not possible to calculate the exact quantity of materials that will be required. ‡ Unit‐price p contracts are commonly y used for heavy/highway work. Types of Construction Contracts Types of Construction Contracts ‡ Items whose actual quantity varies from the estimated quantity by more than 15 or 20%, either above or below the estimated quantity, are sometimes subject to renegotiation of the unit price. C. Lump sum and scheduled contract ‡ Combines the features of the Lump sum and schedule h d l contracts ‡ Additional items are amounted as per the attached tt h d item it rate. t Types of Construction Contracts D. Cost plus ‡ Used when it is impossible p to ppredict their costs during g the negotiation, g , bid,, and award process. ‡ Factors ‐ unpredictable and extreme weather conditions, transportation problems, combat or war, or contracts where the amount of effort that will be required depends on another contractor’s work. ‡ Cost plus contracts take many forms: most common cost plus fixed fee and cost plus a percentage. D.1. Cost plus Fixed Fee Contact ‡ Is desirable when the scope p and nature of the work can at least be broadly y 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, manpower p and equipment q p requirements q etc. ‡ The contractor will not be tempted to increase the cost to get more revenue. ‡ The contractor in this type of contract is selected on the basis of merit rather than the fee alone. Types of Construction Contracts D.2. Cost pplus Percentage g off Cost Contract ‡ In this type of materials and labor are arranged between the client and the contractor. ‡ The tendency of the contractor to increase the cost of work to earn more profit by way of percentage of enhanced actual cost is the major j demerit of this contract type. yp Special Types of Contracts: „ Turn – key Contract „ Package Contract „ Negotiated Contract „ Runningg Contract 2.3. Contract Documents ‡ The main contract documents are: „ Invitation I it ti to t tender, t d „ Instruction to tender, „ Form of tender, tender „ The Agreement, „ Condition of contract(( General and Particular), ), „ Specification (General and Particular), „ Bill of Quantities, „ Drawings, „ Addenda and „ Appendix A d to Tender. d 2.3. Contract Documents Standard Bid Documents MLDOs Business Asson’s Asson s Professional Asson Asson’ss WB, ADB, EC/U, etc Contractors, Civil Engineers, Architects, Consultants Construction Management, Donors’ Interest Donors Business Interest Professional Interest Public Authorities Public and / or Public Works Bodies, Government Public Financiers Interest 2.3. Contract Documents ‡ In Ethiopia Construction Industry the following standard conditions of contracts are commonly used: „ FIDIC (1987) – Condition of Contract „ PPA, PPA Standard Bid Document „ MoWUD, Standard Condition of Contract (1994) „ BaTCoDA, BaTCoDA Condition of Contract 2.3. Contract Documents ‡ FIDIC Conditions of Contracts „ FIDIC is the international federation of national associations of independent consulting engineers „ Founded in 1913 by the national associations of three European countries (France , Belgium and Switzerland) „ Now with membership from over 74 countries, countries members are generally national associations with the Ethiopian Consulting Engineering and Architects Association being one. „ FIDIC has evolved into a leading body for development of model standard forms of contract for use in the international construction industry. 2.3. Contract Documents ‡ FIDIC conditions of contracts have two parts: „ General Condition of Contract „ Particular Conditions of Contract ‡ FIDIC Conditions of Contracts „ 1957 – RED BOOK ‡ The very first edition – civil engineering ‡ Contract type – Add Measurement Type „ 1963 – YELLOW BOOK ‡ For mechanical and Electrical works „ 1987 – OLD FIDIC ‡ Comprises the RED and YELLOW Books. 2.3. Contract Documents „ 1995 – ORAGE BOOK ‡ For Design Build and Turnkey Projects „ 1999 – GREEN BOOK ‡ For short h period d projects ( 6 months) h ) ‡ Low contract value ($ 500,000) „ 1999 – SILVER BOOK ‡ For turnkey for power plants, factories and facilities ‡ MBD – Harmonized Edition „ Multi‐later banks (MDBs) tried to harmonize the FIDIC conditions to suite there procurement needs. „ W ld Bank World B k – has h published bli h d one in i 2004 2.3. Contract Documents ETHIOPIAN CONSTRUCTION INDUSTRY ‡ 1959 – Ministry y of Housing g ‡ 1987 – Building and Transport Construction and Design Authority (BaTCoDA) ‡ 1994 – Ministry of Works and Urban Development (MoWUD) „ Based on FIDIC RED Book „ Difficult to use for private contacts ‡ 2006 – Public P bli Procurement P t Authority A th it (PPA), (PPA) Standard St d d Bid Document  2.3. Contract Documents ETHIOPIAN CONSTRUCTION INDUSTRY ‡ 2006 – PPA Condition of Contract ‡ Dispute/Claim Management – „ Claim ‐ Adjudicator – Arbitration ‡ Price Escalation – „ MoWUD – only by decree ( Fuel) „ 2004 – Directive Di ti ( Cement, C t Reinforcement R i f t and d Bitumen Bit were added) „ PPA – price escalation formula is provided ‡ Advance Payment - Special Condition of Contract ‡ Duration - Special Condition of Contract ‡ Liquidated Damage – 1/1000 of Unjustified Delay Amount vs. 1/1000 on basis of contract price 2.3. Contract Documents ETHIOPIAN CONSTRUCTION INDUSTRY 2.4. Contract Management : C t t Administration Contract Ad i i t ti and d Cl Closing i ‡ Contract Management Process Contract Administration ‡ Identifying y g contractual responsibilities p of Stakeholders. „ Reviewing the Terms of Contract Documents „ Extract Monitoring Responsibilities „ Preparing p g Monitoring g Responsibility p y Summary y Sheets ‡ Determining and understanding the construction components of the project. ‡ Reviewing the Contract Drawings and Technical Specifications ‡ Extract the Construction Methods and Sequences ‡ Prepare Construction Methods and Over all Sequences Sheets ‡ Review submitted (Integrated) Schedules and Breakdowns for operations such as Organizational Breakdowns, Resources Breakdowns & Schedules and Time Schedules. ‡ Record, Monitor and Evaluate Progress of Mobilizations, Record Mobilizations Works and Completions. Contract Administration ‡ Report p Project j Status daily y and / or p periodically y and Completions. ‡ Certify qualities of materials, shop drawings, samples, l workmanships k hi and d works. k ‡ Measure Works, Record Site Potentials and Certify Payments and Completions „ Take off sheet and Bending Schedules are used for Measurement of Works „ Method of Measurement is according to standard practices „ Site Potentials such as material, equipment and Manpower on site together with appropriate site organization is recorded „ Advance Interim and Final Payments are certified Advance, ‡ Mediate Disputes. Contract Closing ‡ Closing of Contract looks into issues related to Maintenance Period and Remedial works, Dealing with Left Over Claims and Disputes, if any, Closing of Accounts and Completion Certificates. Claims and Dispute Disp te Management  Claims and Dispute Disp te Management ‡ Dispute in simple terms is a difference in a line of thought. ‡ Claim is mostly y concerned with entitlements and liabilities arising under, or as a result of, a legally valid contract. ‡ A construction claim is therefore can be a demand for payment of additional compensation, adjustment dj off the h partiesʹ i ʹ respective i contractuall obligations, Extension of Time or compensating delay damages, damages or any other change with regard to the contractual conditions or terms. Cl i and Claims d Di Dispute M Management ‡ Claim in practice can also be understood in different ways based on the perceptions held by contractual stakeholders. „ A claim is a disguised form of a blackmail, „ A claim is the last chance to bail out of a losing job, and „ A claim is an assertion to a contractual right. ‡ Claims Cl i can bbe associated i t d with ith th three major j categories that can be understood as the different types of claims claims. These are:  Cl i and Claims d Di Dispute M Management ‡ Time Related Claims: Claims associated with delay or in time completion of projects where either of the following six Entitlements or Penalties are subjected to: „ Time Extension only „ Liquidated Damages only „ Ti Time E t i and Extension d Cost C t Compensation C ti „ Concurrent Compensations „ Bonus „ Reliving g of Obligation g ‡ Cost Related Claims: Claims associated with monetary compensation where either of the following entitlements or penalties are entertained: „ Additions requiring rate adjustments „ Price Changes „ Provisional sum adjustments ‡ Default by Contracting Parties: Claims associated with non performances of contractual obligations p g such as: „ Delay in Payment Certificates „ Suspensions and Terminations Cl i and Claims d Di Dispute M Management ‡ Claim Administration Processes Contract Conditions related to Claims Major Causes for Claims ‡ Levy, 2000 outlined 11 reasons why claims can be initiated. They are related to „ p poor or unclear tender and/or contract documents, „ poor or inadequate administration of responsibilities by stakeholders, and „ U f Unforeseen or uncertain t i situations it ti d i execution during ti ‡ Wideman, 2001 has also identified claim causes into three main categories: „ Changed conditions „ Additional works, works and „ Delay for cost overruns and time extension. Al Alternative i DiDispute R Resolution l i S System ‡ ADR – includes ‡ Preventive Dispute Resolution System ‐ Partnering, Use of dispute resolution advisors and Use of Facilitators ‡ Amicable Dispute Resolution System ‐ Negotiation, Mediation, Conciliation and use of Mini‐Trials to administer the claim in a less formal, simple procedure, more flexible, less adversarial and strictly confidential mode so as to avoid the time and cost implication of claim processing. ‡ Judgmental Dispute Resolution System including Adjucation or use of Dispute review board, Arbitration and Litigation where the formal adjucatory or common law system is applicable to bring the closure of claim processing. Alternative Dispute Resolution System Preventive i Dispute i Resolution l i System ‡ PARTNERING – „ Project Partnering „ Strategic Partnering  Alternative Dispute Resolution System P Preventive i Dispute i Resolution l i System ‡ ALLIANCING ‡ Alliancing is generally a tender arrangement where all the principal tenderers organise into groups with common aims, prior to submitting the tender. ‡ STANDING NEUTRALS ‡ DISPUTE REVIEW BOARDS ‡ DRB ‐ a representative from the owner, one from the contractor and a third, selected by these two representatives. The third member chairs the board. ‡ The members usually have experience in the kind of construction work being undertaken and are also familiar and experienced in dispute resolution. It is important that all the board members are independent off any off the h contracting parties, although lh h they h are paid d by b them. h Alternative Dispute Resolution System Amicable i bl Dispute i Resolution l i System ‡ Amicable Dispute Resolution System includes Negotiation, Mediation, Conciliation and use of Mini‐Trials ‡ NEGOTIATION ‡ IS NEGOTIATION AN ALTERNATIVE DISPUTE RESOLUTION METHOD? ‡ It can be argued that negotiation is not part of an ADR at all, largely because it is not a specific, detailed system such as arbitration or even mediation di ti  Alternative Dispute Resolution System Amicable i bl Dispute i Resolution l i System ‡ MEDIATION ‡ Defn: “a process in which the parties to a dispute, with the assistance of a neutral third party (the mediator), identify the disputed issues, issues develop options, options consider alternatives and endeavour to reach an agreement. The mediator has no advisory or determinative role in regard to the content of the dispute or the outcome of its resolution, resolution but may advise on or determine the process of mediation whereby resolution is attempted”. ‡ WHY USE MEDIATION? „ Save money „ Preserve relationships „ Maintain confidentiality and privacy Alternative Dispute Resolution System Amicable i bl Dispute i Resolution l i System Alternative Dispute Resolution System A i bl Dispute Amicable i Resolution l i System ‡ CONCILIATION ‡ Conciliation is in many respects similar to mediation. The conciliator is still an independent p third party but the difference is that the conciliator may make more specific suggestions to resolve the dispute. The conciliator may also have a more forceful and powerful role in the various meetings. meetings ‡ Unlike mediation, there is an international set of rules for conciliation Alternative Dispute Resolution System Judgmental d l Dispute i Resolution l i System ‡ Includes Adjucation or use of Dispute review board, Arbitration and Litigation ‡ The Adjucation j or dispute p review board has been discussed in the above section. ‡ Litigation g means g goingg to court and being g jjudged g by a public appointed jury. This process is obvious quite expensive as the public judiciary system is i less l efficient ffi i and d time i taking. ki ‡ The most common alternative to litigation is arbitration. bit ti ARBITRATION ‡ ‘Arbitration’ Arbitration has been defined as: “ is the reference of dispute or difference between not less than two parties for determination, after hearing both sides in a judicial manner, by a person or persons other than a court of competent j i di ti ” jurisdiction”. ‡ ARBITRATOR ‡ He H iis private i iin so ffar as „ He is chosen and paid by the disputants „ H does He d nott sit it in i public bli ARBITRATION „ He acts in accordance with p privatelyy chosen procedure so far as that is not repugnant to public policy „ S ffar as the So th law l allows ll h is he i sett up tto th the exclusion l i off the state courts „ His authority y and p powers are only y whatsoever he is given by the disputant’s agreement ‡ ARBITRATION ADVANTAGES „ There is belief by both parties that Arbitrator is qualified to handle the case ARBITRATION „ The Arbitrator is an expert p in the field „ The procedures are open to the parties „ Hearing are private „ The decision is binding ‡ THE LEGISLATION ‡ The UNCITRAL Model Law on International C Commerciali lA Arbitration bi i iis usedd as the h starting i point from which to consider current and proposed legislation in relation to a given clause clause. ARBITRATION ‡ MODEL LAW ‡ O off the One h advances d in using arbitration b as a tooll ffor d dispute resolution around the world was the publication of the Model Law as adopted by the United Nations Commission on International Trade Law on 21 June 1985. ‡ The Model Law applies specifically to international arbitration. ‡ The definition provided by the Model Law to the interpretation of the words ‘commercial’ states that it should be applied to all relationships of a commercial nature, nature whether contractual or not (Model Law Endnote 2). ‡ In Ethiopia the important source of legislation for Arbitration is Addis Ababa Chamber of Commerce & Sectoral Associations (AACCSA) Arbitration Institute Institute. ‡ Regional sources of information include Kenya (Dispute Resolution Center and Nairobi Peace Initiative), Malta (Malta Arbitration Center), Nigeria (Nigerian Arbitration and Conciliation Act) and South Africa (C (Center for f Conflict C fli Resolution R l i and d Commission C i i for f Conciliation, C ili i Mediation and Arbitration). THE ARBITRATION PROCEDURE