Introduction To Construction Contract Practice PDF

UNIVERSITY OF TECHNOLOGY AND APPLIED SCIENCES MUSCAT BRANCH ENGINEERING DEPARTMENT CIVIL AND ARCHITECTURAL ENGINEERING SECTION INTRODUCTION TO CONSTRUCTION CONTRACT PRACTICE Course Lecturer: Suha AL- Kiyumi ...

UNIVERSITY OF TECHNOLOGY AND APPLIED SCIENCES MUSCAT BRANCH ENGINEERING DEPARTMENT CIVIL AND ARCHITECTURAL ENGINEERING SECTION INTRODUCTION TO CONSTRUCTION CONTRACT PRACTICE Course Lecturer: Suha AL- Kiyumi  Objectives 1. Explain the basics, steps involved and process of formulating a construction contract and discuss its important elements. 2. Examine the various forms of construction contracts used in the industry. 3. Demonstrate the roles and responsibilities of Goal various project parties (Understand) To impart knowledge of contractual 4. Illustrate the essential terms used in contracts and legislative requirements of a construction project including the 5. Discuss on how a contract is breached, the parties and processes involved. reasons, solutions and contract termination. 2  Outcomes 1. Explain the legal relationship of the contract parties and the essential elements to form a legal contract. 2. Demonstrate knowledge and understanding of the various forms of contract used in the construction industry in general and in Oman in specific 3. Define the responsibilities and obligations of all the major parties involved in the construction project. 4. Understand the general contractual provisions such as letters of intent, insurances, retention, bonds, liquidated damages, early possession, practical completion, and other common contractual mechanisms. 5. Evaluate the reasons for terminating the contract from the perspective of all parties and deduce the effect of this termination. 3  Communication skills Critical thinking, analysis, Entrepreneurial and problem skills solving Graduate Insert Image Technical and Attributes Digital Teamwork competency and leadership Discipline knowledge Lifelong learning and skills TABLE OF CONTENTS Chapter-1 Chapter-2 Chapter-3 Chapter-4 Chapter-5 Introduction Standard The Building Contractual Contract to Forms of Team Terminology Termination Construction Construction contract Contract 5  Introduction to “Chapter-1” Construction contract TABLE OF CONTENTS  Introduction  Elements of a valid contract  Form of contract  Contract documents  Types of Contract based on Payment Method. 7 Introduction An agreement is a meeting of minds with the mutual understanding and acceptance of rights and duties between two or more parties, or “An acceptance of an offer given by one party to another”.  An agreement is not always synonymous with a contract because it might lack an essential element of a contract, such as consideration.  All Contracts are agreements but all agreements are not contracts.  Only those particular agreements which are enforceable at law are deemed to be valid contracts. 8  Introduction (Cont’d) A construction contracts is a legal agreement between two or more parties that Definition of promise to fulfill the obligations and duties Construction of the agreement, or “An agreement Contract enforceable through the law”.  Enable the exchange of goods and Purpose of services in a fair and orderly Construction manner Contract  Enforced by a neutral third party if a party fails to meet its obligations 9 or duties.  Basis Agreement Contract A meeting of minds with the mutual A legal agreement between two or understanding and acceptance of more parties that promise to fulfill rights and duties between two or the obligations and duties of the Definition more parties. agreement. Contract = Agreement + Elements Agreement = Offer + Acceptance Enforceable by Law The agreement can not necessarily be A contract is normally written and Written Form in written form. registered. An agreement has a wider scope than A contract has a narrower scope as Scope a contract. compared to an agreement. It involves a higher risk factor A contract is abided by the law, so Risk because it is not enforceable by law. it ensures a low-risk factor. All agreements cannot be considered All contracts can be considered an One in Another a contract. agreement. An agreement does not create a legal Contracts are meant to create a Legal Obligation obligation. legal obligation. 10 Agreements can be formed without There should be some Consideration consideration. consideration to form a contract. Introduction (Cont’d) A quantity surveying and a The construction contract is considered as a designer firm who are determined formal arrangement between the two main by the client and perform a service parties is not bound by the agreement between the client and the The client or owner (who may contractor, even they are part of the be called the employer in the same project. form) who owns the project Designers and subcontractors who and pays the cost of the work perform services for the contractor and they don’t have contractual link with the client, they enter into The contractor or builder for separate agreements with the the execution of the works. contractor with responsibility for their performance and liabilities 11 with the contractor. Introduction (Cont’d) An intention to form a contract usually begins with: An invitation to tender where client asks for a price. This invitation that allows participants to submit an offer for the supply services and goods as mentioned in the information provided. 12 Elements of a valid contract: Offer Acceptance Capacity Consideration Legality 13 Elements of a valid contract: Offer and acceptance When a contractor provides Acceptance a quote. He is requested to submit a proposal by an employer. Offer When a potential employer chooses him 14 Elements of a valid contract (Cont’d): Offer and acceptance (Cont’d) A party making an offer and another party accepting the terms of the offer are necessary for a contract to be legally binding. Two parties have engaged into a contract, for instance, if a contractor offers to renovate a customer's home for a specific sum and the client accepts the offer. By making an offer, you indicate your willingness to enter into a contract and your understanding that if the other party accepts its conditions, it will be legally enforceable. 15 Consideration Consideration is something of value exchanged. When two parties enter When hiring a contractor into a contract, Consideration can be to build a home, the consideration is the Sum of money, Service employer is required to value that is offered or Promise to do / not pay a portion of the and accepted. do something. agreed-upon sum as Consideration can be consideration. anything of value, although most people 16 think of it as money. Legality Legality is simply the requirement that the agreement's terms be permissible in the state or country where it is made. Individuals can't essentially enter into a contract that is based on an unlawful act, promise, or other circumstance. No illegal promises or considerations may be included in a contract for it to be deemed valid. A commitment to do anything against the law, such committing a crime, is a typical example of unlawful consideration. 17 Capacity  A person is said to be in a capacity if they are legally able to sign the contract.  The ability of a person to sign a contract may be impacted by circumstances such as mental competence, age, or financial situation.  A court might determine that the following people lack the capacity to enter into a contract: 1. Individuals 2. Individuals not 3. Minors under the of sound mind 18 influence of drugs  Capacity  Simply said, not everyone has the legal capacity to sign contracts.  By ensuring that everyone is capable of completely understanding and upholding their duties, requiring people to be fully capable protects both parties. 1 9 Forms of Contract (Contract Characterises)  Forms of contract include technical terms relevant to the construction industry, and most also contain legal terms, though to a lesser extent, presumably in an effort to avoid overwhelming legal details so contract administrators are not distracted by the legal terms. Forms of Contract (Contract Characterises) (Cont’d) The following features of a construction contract form must be applicable to the project and must be included: A confirmation that the project will take place on land, inside a building, or besides that building and that the contractor has been granted permission to work there. The form contains the names of the contract's parties. A set of requirements that specify how the technical language employed and, to some extent, the legal language should be interpreted. The contract's governing legislation ( e.g. governed by the law of 21 Sultanate of Oman ) Forms of Contract (Contract Characterises) (Cont’d) Obligations of the contractor to its client for performing the service, including a mention of the use of contract documents. The client's responsibility for overseeing and inspecting the ongoing work, including granting representative’s access. A client's right to modify the works through a variation and, if appropriate, an adjustment to the contract price. Payment method for the work to the contractor. 22 Forms of Contract (Contract Characterises) (Cont’d) A measure of security that the contractor must offer in the form of a bank guarantee or cash retention. The offering of appropriate insurances. Application of collateral warranties. Guidelines for contract termination. 23  Contract Documents  A construction contract typically consists of multiple documents.  Each items of this contract documentation is significant since it describes and document every element of the project.  The most common ones are described below. Contract Documents Articles of agreement Specification Common Conditions of Contract Drawings Contract Documents Project-specific data Bill of Quantities 25  Articles of agreement  The articles of agreement set forth the broad terms of the parties' agreement.  They specify the contract's participants, the work that is to be completed (the contractor's obligation), and the compensation due (the employee's obligation). 27  Conditions of Contract  The extremely specific clauses that follow the articles of agreement are known as the conditions of contract.  The intent of the conditions is to clarify and amplify the fundamental commitments made by the parties in signing the articles of agreement.  The terms also include administrative safeguards to guarantee that the right procedures are followed.  Effective contract terms of this kind effectively address situations that would otherwise constitute violations of the agreement and guarantee that the contract is maintained. 29  Project-specific data  There are several execution-related details that will vary from project to project.  The relevant facts can be condensed in a section of the contract known variously as the appendix, contract particulars, contract data, abstract of particulars, and so on, which should be filled out when executing the contract, allowing standard-form contracts to be used despite these discrepancies. 31 32  Drawings  The design team is often in charge of producing the drawings.  Drawings serve a variety of purposes, and a particular drawing often satisfies each need. DRAWINGS (CONT’D) 1. Create a model of the 2. They highlight and clarify designers' concepts and aid in the fundamental essence of articulating and foreseeing what will be needed in the issues with manufacture and finished construction. presentation. 4. The information that 3. Drawings are the means by demonstrates how the many which the contractor is components of the building informed of the designers' interact with one another is intentions. included in the detail design 34 drawings.  DRAWINGS (CONT’D) These designs coordinate and ow the specific information 6. Drawings serve as a record of m other designers and what has been accomplished. ecialized subcontractors. These "as-built" drawings, hich may not be the same as 8. They serve as an ose used 35 for fabrication, are effective control document ucial to the building owner as a  Specifications  The specification is the written confirmation of the precise scope and quality of the services that each party undertakes to supply to the other.  This will include details regarding the components and materials to be utilized, the expected level of craftsmanship, any unique performance requirements, and the environment in which the job is to be done.  Bill of Quantities  Bills of quantities are documents that list the quantity and quality of each component portion of a planned building project. They serve two main purposes.  They are initially employed as tender procurement contracts to offer a consistent framework for fiercely competitive lump sum tenders.  Bill of Quantities (Cont’d)  They then turn into contract documents that serve as rate plans for the price of variants.  Therefore, it is crucial that they include at least the minimal information mandated by the applicable contract terms and that they be presented in an approachable manner to make use of them easier. Types of Contract based on Payment Method Lump sum Contract (Fixed Price) Comm Unit Price Contract on types of contra Cost-Plus Contract ct Target Cost Contract (Cost-plus-incentive fee) 39   lump sum contracts, the contractor agrees to supply all labor and materials for affixed price.  This type of contract (also called stipulated sum) Lump Sum work best when the scope and schedule of the Contract Insert Image (Fixed project are clearly defined so that costs can be Price) estimated.  This is the most common type of contract because the owner knows how much the job will cost from the start. Lump Sum Contract (Fixed Price) Advantages of lump Disadvantages of sum contract lump sum contract It is difficult and costly to make change Low financial risk to client The contractor can use alternative brands of materials because the specification may not be clear The Architect is not involved in this contract as it is between contractor and client, so the quality of work cannot be checked by expert. The client will not get effect by any unforeseen contingencies or variation in material or labor. Cost are known at the 41 beginning. Lump Sum Contract (Fixed Price) Example 1.1 Client and contractor enter into a Lump sum contract with OMR 25,000. The actual costs incurred by the contractor are OMR 17,500. Determine the following  The price charged to client  Contractor profit Solution: 42   This kind of agreement is often used when both parties lack the ability to estimate costs in advance. Here, the owner specifies a set unit price to control expenditure.  For this kind of contract, a fixed price is agreed for each unit of work after the work is divided into multiple pieces, typically by construction trade. Unit InsertPrice Image Contract  The contractor is paid once the contract is fulfilled by measuring the actual amounts of work accomplished and multiplying those amounts by the per-unit pricing that was previously agreed upon.  The project's final cost will rely on the actual amounts of the materials used to complete the task, which may differ from the initial estimate. Unit Price Contract Advantages of Unit Disadvantages of Unit Price Contract Price Contract Allow for increased The clients may pay more transparency and help to avoid than they expected as the arguments and disputes as the number of units needed to client can easily understand complete a project is not each cost that goes into the known immediately. final price of the contract. The owner’s ability to Easy to manage alternations to compare the price of each unit the scope of work and change with the total cost of the 44   This is a contract wherein the client agrees to pay the cost of all labor and supplies on a cost-plus basis, in addition to a charge covering the contractor's profit and overhead costs.  The contractor purchases the goods, Cost-Plus Insert Image Contract provides the labor, and is paid for those services.  Cost-plus contracts can either be defined as cost-plus a percentage of costs, in which case the fee is an agreed- upon percentage of the costs or as cost-plus a fixed fee, in which case the charge is separate from the contractor's costs.  Cost-plus Contract dvantages of Cost-plus Disadvantages of Cost- Contract plus Contract low clients to make design A very less incentive for the anges along the way because contractor to improve work ntractors know that they will be efficiency. id for the extra time or materials ose changes incur. Cost-plus contracts require contractors to justify the costs on a accuracies in the initial bid are given project which will be difficult t as detrimental 46 as they are with to get their payment. Cost-plus Contract Example 1.2 A cost-plus contract was signed between the owner and contractor for the construction of a villa. The actual cost of the project is OMR 60,000. If the contract specifies that the contractor shall be paid OMR 400 upon completion, determine the owner’s payment and the contractor’s profit. Solution: 47 Cost-plus Contract Example 1.3 A cost-plus contract was signed between the client and contractor for the construction of a commercial building. The actual cost of the project is OMR 350,000. If the contract specifies that the contractor shall be paid 12% of the actual project cost for overheads and profit, determine the owner’s payment and the contractor’s profit. Solution: 48   A cost-plus-incentive fee (CPIF) contract is a cost-reimbursement contract that provides for an initially negotiated fee to Target Cost Contract be adjusted later by a formula based on the relationship of total allowable costs (Cost-plus-incentive Insert Image to total target costs. fee)  Incentive contracts allow sharing of the risks between the contractor and the client. The contractor is reimbursed all its justifiable costs in addition to a calculated fee.   The basic elements of a CPIF contract are:  Target/budget Cost (BC): the estimated total contract costs. Target Cost Contract (Cost-plus-incentive  Actual Cost (AC): constitutes the reasonable costs Insert Image that the contractor can prove he has made. fee)  Target Fee (TF): the basic fee to be paid if the Target Cost matches the Actual Cost.  Sharing Ratio: the agreed upon cost sharing proportion, normally expressed in percentage.  𝑂𝑃 = 𝐴𝐶 + 𝐶𝑃 Equation 1-1: Owner’s payment to contractor Target Cost Contract 𝐶𝑃 = 𝑇𝐹 + 𝐶𝑆 × (𝐵𝐶 − 𝐴𝐶) Equation 1-2: Contractor’s profit (Cost-plus-incentive Insert Image fee) 𝑂𝑆 = 𝐵𝐶 + 𝑇𝐹 − 𝑂𝑃 Equation 1-3: Owner’s savings 𝑇𝐹 = 𝑀𝑎𝑟𝑘𝑢𝑝 × 𝐵𝐶 Equation 1-4: Contractor’s target fee Target Cost Contract (Cost-plus-incentive Fee) Example 1.4 Target Estimate contract / cost-plus incentive fee contract  2% basic markup  70/30 O/C sharing arrangement  Original estimate/Budget cost: 10,000,000 OMR Calculate the owner’s payment to the contractor, owner’s savings/losses, contractor’s profit/losses, and the final cost of the project if the actual cost of the project is (a) OMR 8,000,000 and (b) OMR 12,000,000 52  References - Murdoch,J. & Hughes.W. (2008).Construction Contract, law and management. Taylor & Francis Group. - Towey, D. (2013). Cost Management of Construction Projects. SPi Publisher Services, Pondicherry, India - Hackett, M & Robinson, I. (2003). Pre-Contract Practice and Contract administration the AQUA Group. Blackwell Science Ltd - Kubba,S, (2007). Hand Book of Green Building Design and Construction, Elsevier - Agreement. (2018). Retrieved from https://legal-dictionary.thefreedictionary.com/agreement 53