LEC 3: Construction Contracts Lecture Notes PDF

‫كلية الحكمة للعلوم والتكنولوجيا‬ ‫المستوى الخامس ‪ -‬الفصل الدراسى األول‬ ‫مادة‪ :‬إدارة التشييد ‪Construction Management -‬‬ ‫‪Lecture (3): Construction Contracts‬‬ ‫‪Elements and Types‬‬ ‫عناصر وأنواع عقود التشييد‬  ‫‪Part (1): What Makes a Legal Contract‬‬ ‫‪E...

‫كلية الحكمة للعلوم والتكنولوجيا‬ ‫المستوى الخامس ‪ -‬الفصل الدراسى األول‬ ‫مادة‪ :‬إدارة التشييد ‪Construction Management -‬‬ ‫‪Lecture (3): Construction Contracts‬‬ ‫‪Elements and Types‬‬ ‫عناصر وأنواع عقود التشييد‬  ‫‪Part (1): What Makes a Legal Contract‬‬ ‫‪Enforceable at Law?:‬‬ ‫والمعنى المقصود هو‪:‬‬ ‫ماهى العناصر التى تجعل من العقد وثيقةً قانونية؟‬  When an Offer (a Tender) by one party is unconditionally accepted by the person to whom it is made - the second party, a contract is formed. Unconditionally is a keyword which means no ifs, no buts, no provided that's etc. Any of these means a counter - offer to be resubmitted for acceptance or rejection. The Essential Elements of a Contract are: (1) An Agreement of Views Between the Parties: Parties must know the views of each other and fully agree on them. Refer to the previous definition of agreement. (2) Intention to Create a Legal Relationship: This requires that the parties intend that their agreement shall be one enforceable at law. (3) A Genuine Consent of the Parties: This implies that the agreement must be clear, voluntary and without malice. It covers the following matters:  (a) Fraudulent misrepresentation, (b) Innocent misrepresentation, (c) Duress (entering a contract by threatened violence to the weaker party), (d) Undue influence (acceptance of the weaker party to a contract non - voluntarily), (e) Genuine mistakes (including important mistakes as to the identity of the other party, mutual mistakes as to the existence of the subject matter of the contract, mutual mistakes as to the identity of the subject matter of the contract, mistakes as to the nature of the contract). (4) Legal Capacity of the Parties to enter a Contract: The persons signing the contract must be' authorized to do so by their respective organizations either by delegation of power or by the regulations or articles of association to commit the organizations. It is common practice to state in the document itself (in the introductory recital or with the signature at the end) the names and positions of the persons signing for the two parties and a statement that they are respectively authorized to do. (5) Legality of the Object (Subject Matter) of the Contract: This is the nature of the subject matter of the contract. It should be a legal object, or the contract may be null and void. Examples of illegal objects are restrictive trade agreements, smuggling of narcotics etc. Examples of semi-illegal objects are: to overload a ship, avoid tax payments, circumvent a regulation having the effect of law etc. (6) Valuable Consideration Passing Between the Parties: It is an essential element of every simple contract (that is, a contract not under seal) that a consideration of value must pass both ways between the parties. In effect this constitutes a bargain (as opposed to a gift) in which party A gives something acceptable to party B as a quid-pro-quo for the fulfillment of a promise by B. The considerations must be specific - vague or general considerations are not sufficient. Part (2): Types of Engineering Contracts Contracts can be classified in different ways; two ways are adopted here: Method of Classification (1): Classification by Method of Evaluating Contract Price: (a) Fixed Price Contract: Also called lump sum contract the contract price is fixed and agreed at the time the contract is signed and doesn't subsequently change except because of variation of the contract specification under limited circumstances specified in the contract conditions any risk of increased cost due to inflation, introduction of higher taxation, increase in material prices etc. is taken by contractor. Disadvantages: a) Problems if variation is needed later. b) Problems if part of the job was not sufficiently specified. c) Cost of tendering may be high. d) As risk is to be carried to by contractor then cost may be high. Advantages: a) Cost is fixed-good for client. b) Lost of detailed accounting not required. c) Speed – provided well defined job. d) Suitable for supply and installation of equipment (short execution times hence less risk of inflation). (b) Price-Adjustment Contract: This includes a price adjustment clause (CPA-Contract Price Adjustment) whereby the contract price is increased or decreased because of change up or down of certain specified costs which the contractor incurs, based some recognized statistics or indices. Under conditions of inflationary uncertainty, a CPA clause is almost essential in any contract which is likely to take more than 12 months to complete. The contractor, protected against unpredictable cost increases, will not resort to skimming work, multiplying claim and, in a formula is usually for the extent of adjustment made such as: PR = PB [A+B*LR/LB+C*MR/MB+D*NR/NB] Where: PR = Adjusted Contract Price BR = Original Contract Price A, B, C, D, etc. = The fraction of the contract price represented by different service or commodities such as labour, transport, steel, oil etc. (the total A+B+C+D …. must of course be 1.0). A clearly represent a fixed part of the contract price. LR, MR, NR, etc. = the respective indices at the date of revision LB, MB, NB, etc. = the respective indices applicable at the date of revision LB, MB, NB, etc. = the respective indices at the base date (used by the contractor in calculating). c): Cost-Plus Contract: This is a contract in which the contractor is reimbursed his actual costs incurred, plus a specified amount of money, without any total contract price being coated. Advantages: 1) No risk to contractor. 2) Useful when technical aspects govern a project. Disadvantages: 1) Conflict of interest between employer and contract 2) Increased burden of close control is placed on the engineer. 3) Careful negotiations are needed. 4) Safeguard needed to watch Employer's interest. 5) Rates of pay my become very thorny point. Cost-plus contracts may be of the form: 1) Cost plus percentage of cost. 2) Cost plus fixed fee. 3) Cost plus fixed fee with guaranteed maximum cost. 4) Cost plus incentive fee (fee adjusted according to contract … incentive). d): Target-Cost Contract: An elaboration of the "cost-plus" concept aiming to overcome lack of incentive so that contractor should be efficient. Contractor is paid cost-plus against his actual expenditure or on the basis of re-measurement. If his total cost proves to be less than a target-cost he gets as bonus profit an agreed proportion of the excess the employer retaining. Such proportion can be on sliding scale. The importance of fixing a target-cost is clear but it's difficult to fix, if fixed too low there is no incentive for the tender. If fixed too high it's too easy for contractor to make a large profit at the expense of the employer. Advantages: 1) Incentive for the Contractor. 2) Fair as contractor gets a profit anyway. Disadvantages: 1) Difficult to fix target-cost 2) Need close monitoring by engineer. e): Bills of Quantity (BoQ) Contract: This is a common form of contract in engineering (especially civil engineering and building projects) in which the design has been completed by the employer and can be specified in the tender. The works are broken are down into as many parts or activities as possible and these are billed (from drawings) in the tender together with the quality of each item. The tenderer enters his rate for each item which, when multiplied by its quantity, gives his total price for that item. The total contract price can therefore be established by summation. The contract condition must specify clearly weather. These quantities are fixed or subject to re-measurement. f): Schedule of Rates Contract: An alternative to the bills of quantity contracts and used in case, for any reason, the quantities of items of the bills of quantities cannot be established with any reasonable accuracy at the tender enquiry date. Broad estimates of the quantity of each item are given and the tenderer inter his rates accordingly. Measurement of completed work is done by the engineer on behalf of the employer. Method of Classification (2): Classification other than by Method of Evaluating Contract Price: or simply: OTHERS a): Competitive Contract: A contract arrived at by the process of formal competitive tendering by a number of tenderers against a common specification. b): Negotiated Contract: A contract negotiated between the employer and a potential contractor of his choice. Sometimes adopted when: 1) Specifications are not clear cut, or 2) There is only one supplier (for example: plant supply). If the employer fails with his selected contractor, he may try again elsewhere but time may be lost, also some information from earlier negotiations must be confidential. Timetable for negotiation is therefore important. Advantages: 1) May assure quality. Disadvantages: 1) Tactical delays by the contractor. 2) Time lost if first negotiation failed. 3) May not assure least cost of contract. c): Package Contract (Package Deal): A contract where two or more related jobs, each of which could form a separate contract, are combined and placed as a separate contract. Examples are design/development with construction/supply. The contract must clearly lay down who is responsible for the re-design in case the first attempt fails to meet employer's requirement (a disadvantages). Advantages: 1) Continuity of technical and administrative responsibility. 2) Reduction of number of contractors on site. 3) Inducement to a contractor to undertake an unattractive contract by joining it with an attractive one. d): Turnkey contract: Package contract in which all the separate disciplines, civil mechanical, electrical etc. of a major entity are placed in the hands of a main contractor, who may sub-contract specialized works to sub-contractor. The engineer watches employer's interests. The employer is relieved of detailed coordination of the works (advantages). There would be problems as to the conditions of contract which are complex and need carefully worded additional clauses to the standard conditions. e): Continuation Contract: A contract negotiated with a contractor already at work on an existing contract with the employer and based on the existing terms and conditions. Advantages: 1) Continuity of technical and administrative action. 2) Permits rapid switch of plant and machinery between tow similar projects thus saving time and money. Disadvantages: 1) Price negotiation may not be easy because the contractor is well able to appreciate the strength of his position and advantages the employer stand to gain. f): Running Contract: A contract to provide goods or services at specified intervals or as required from time to time over a stated period of time price rates may be fixed for the period or a contract price adjustment (CPA) arrangement may be included. g): Service Contract: A contract concerned solely with the provision services. Examples are consultant's contract with his client for design drawings, supervision, research and advice or a contract for maintenance of plant after installation, public utility companies providing services such as electricity, water, gas etc. Thank you for listening, Dr. Mudathir Sulieman Mohamed Ali +96897602612 +249123013955 [email protected]