Chapter 3 :Contract

3.1 The law of contract as applied to Civil Engineering constructions

 Contract is a written agreement between or among two or more
parties whereby each party promises to do or not to do something
and agrees to terms (conditions and Warranties) set out in the
contract.
 Generally, a contract is an agreement or willful promise
enforceable at law.
 However, not all agreements or promises are contracts.
 Some may lack enforceability at law.

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 Legal Definition of Contract:
The definition contains the following elements. These are:
 That the contract is an agreement;
 The agreement is to be made between two or more persons; The Form
of Agreement, in the construction contract, clearly presents the
Agreement reached between the employer and the contractor.
 That the agreement is binding between such two or more persons;
 The agreement is to create, vary and extinguish obligations;
 The construction contract clearly fulfills all the elements given to the
definition of contract.

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 The purposes of a contract:
 To describe scope of work
 To establish time frame
 To establish cost and payment provisions
 To Establish control mechanisms
 To Minimize disputes
 To Improve economic return on investment

According to Article 1675 civil code briefly discussed about

contract in detail.

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 3.2 Types of Civil Engineering construction contracts
Contracts for the execution of civil engineering works are of
following type:
A. Lump sum contract
B. Unit rate contract/schedule contract/BOQ contract
C. Lump sum and schedule contract
D. Cost plus fixed fee contract
E. Cost plus percentage of cost contract

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 A. Lump Sum Contract
 In this type of contract, the contractor offers to do the whole work as
shown in drawings and described by specifications, for a total stipulated
sum of money.
 Lump sum contract are typically used for buildings.
 The qualities of the materials required can be calculated with sufficient
accuracy during the bidding process to allow contractors to submit a
single lump sum price for the work.
 There are no individual rate quoted, thus it becomes difficult to make
adjustments in the contract value of any changes are to be made in the
work later on.
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 Cont.…
A lump sum contract is more suitable for works for
which contractors have prior construction experience.
The experience enables the contractors to submit a
more realistic bid.
 This type of contract is not suitable for difficult
foundations, excavations of uncertain charter, and
variations.

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 Advantages of Lump Sum Contract:
1. From the employer's stand point, and if no extras are contemplated,
the tender sum tells him the exact cost of the project.
2. Sometimes the employer will be working within a tight margin of
budget.
3. From the contractor's stand point, because the design will often be
prepared by him, the contractor can gain through proper planning
and efficient management to increase his margin of profit and/or
to control timing.
4. Both parties need less number of staff for book-keeping accounting
and measurement.
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Cont..
 Low risk to the owner.
 Fixed construction cost.
 Minimize change orders.
 Owner supervision is reduced when compared to Time
and Material Contract.
 The contractor will try to complete the project faster.
 Accepted widely as a contracting method.

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 Disadvantages of Lump Sum Contract:
1) In lump sum contracts, there should be a complete set of plans and
specifications, or what is called "Employer's Requirements" which
should be sufficiently detailed.
2) Variations in lump sum contract may lead to conflicts about whether
or not a particular item of work falls within the agreed scope of
work, and whether there has been a variation to such scope.
3) This type of contract will not be suitable for works with scope and
nature that cannot be predicted accurately in advance.
4) The outcome will be unfair for the contractor to assume all risks and
uncertainties, or for the employer to pay a higher cost.
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Cont.…
 A lump sum agreement presents a higher risk to a contractor.
 Measuring the number of changes is difficult.
 Such contracts require paperwork and records of change orders from
each phase, and this means further documentation is needed.
 A rejection of change order can be asked for by the employer.
 As the contract is founded on a fixed cost, the contractor could
potentially use inferior tools, techniques, and methods to work.&
 To avoid this, the owner should state that he or she wants specific
building materials used before the work starts

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 B. Unit Price or Bill of Quantity
 Also called a schedule contract, in this contractor undertakes the
execution of 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.
 The payment to the contractor is made on the basis of detailed
measurements of different items of work actually done by him.
 The designer may calculate that 1,000 m3 of earth needs to be
moved, but the owner and contractors know that after the work has
been completed, the contractor may not move exactly 1,000 m3.
 The exact quantity will usually vary.

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 Bill of Quantity

 The unit price contracts are usually presented in the Bill

of Quantity.
 The item rate contract is most commonly used for all
type of engineering works financed by public or
government bodies.
 This type of contract is suitable for works which can be
divided into various items and quantities, under each
item, can be estimated with accuracy.

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 Cont..

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 Advantages of Unit Price or Bill of Quantity Contract

 Suitability: This type of contract is widely used in the execution of

large projects financed by public bodies or governments. It also suits
the works which can be split into separate items and the quantity of
each item could be estimated with reasonable accuracy.
 The employer pays for the actual work executed.
 The contractor usually allows for a certain margin of variation, with
a clear mechanism for valuation of such variations.
 The engineer / employer has liberty to provide some drawings
during the execution of the project, after award.

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 Disadvantages of Unit Price or Bill of Quantity Contract
 The employer cannot be absolutely sure of the total cost of the project until
the whole work is completed. In case the quantities in the BOQ are in
accurate or roughly approximated, the value of the work may vary
considerably.
 Both the engineer and the contractor have to do considerable computations
and book- keeping during the progress of work.
 Extra works or varied items of work are often a source of conflict.
 The contractor may press for higher rates than he would have tendered for
in the beginning.

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 C. Lump sum and scheduled contract
 This is similar to the lump sum contract but schedule of rates is also included
in the contract agreement.
 In this type of contact, the contractor offers to do a particular work at a fixed
sum within a specified time as per plans and detailed specifications.
 Measurements of different items of original work are not required but extra
items are required to be measured for payment.
 The original work shall however be checked and compared with the drawings
and specifications
 The type of contract is more suitable for construction works for which
contractors have prior work experience and can consequently estimate the
project cost more realistically.

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 D. Cost plus
 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. (e.g. in the presence of
unpredictable and extreme weather conditions such as would be encountered
in the Antarctic, un known transportation requirements to remote
locations, war, or contracts where the amount of effort that will be required
depends on another contractor’s work.)
 Most owners prefer cost plus fixed fee because the amount of profit the
contractor will earn cannot increase.
 Cost plus contracts take many forms, the most common being cost plus
fixed fee and cost plus a percentage.
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 D.1 Cost plus a percentage
 In this type of contract the employer agrees to pay the contractor for
the actual cost of the work plus an agreed percentage of this actual
cost to cover overhead and profit.
 The contractor agrees to execute the works based on the drawings
and specifications and any other information that will be provided to
him from time to time during progress of the works.
 The percentage to be paid should not be applied on the costs of
salaries of the contractors staff, whether on-site or off- site.
 In order to negotiate such a type of contract, it is essential that the
scope and some general details of the work are defined.

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 Advantages of Cost plus a percentage:

Early completion of the work - The work can be started even

before the design and estimates are prepared.
Decisions can be taken speedily, and flexibility allows adoption
of alternates for construction to suit the Employer's
Requirements.
The quality of the work can be assured. The contractor is
induced to perform the work in the best interest of the employer.
No conflicts will be anticipated as to extras or omissions.

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 Disadvantages of Cost plus a percentage:

 The final cost to the employer cannot be known.

 Both parties have to do a lot of accounting and book-keeping
regarding labour; purchase of materials and plant and use of
equipment.
 The contractor has no incentive to economize or finish the work
speedily.

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 D.2 Cost plus fixed fee Contract
 An alternate to the cost-plus percentage of cost contract is the cost-plus
fixed fee contract, where the contractor will be paid for the actual cost of
construction plus a fixed amount of fees for his overhead and profit.
 In order to negotiate such a type of contract, it is essential that the scope and
some general details of the work are defined.
 In case of cost plus percentage contract, the contractor has a tendency to
increase his profit by increasing the cost of work.
 In the case of Cost plus fixed fee, the fee does not fluctuate with the actual
cost of the project.

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 3.3 Contract document
 The following are typical tender (contract) documents in the
Construction Contract & divided in to legal, commercial &
technical parts.
 The Legal Part
The Contract Agreement;
The Letter of Acceptance(Award);
The Tender (Invitation to tender, Instruction to tender, Form of tender)
The Special Conditions of Contract;
The General Conditions of Contract;
 The Commercial Part
The Performance Security Form;
The Payment Security Form;
The Advance Payment Guarantee Form;
The Bid Security Form;
The Insurance Forms;
The Retention Money Security Form; Others, if any
 The Technical Part
The Technical Specifications;
The Drawing;
The Bill of Quantities;
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Cont.…
 The following are typical tender (contract) documents in the
Construction Contract & divided in to legal, commercial & technical
parts.
3.3.1 The legal part
a. Invitation to Tender: -
 An initiation letter to the contractor to participate in the tender with an
acknowledgment attached.

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 b. Instruction to Tenders: -
The contractor is given directive of what is required of tenders. It includes:
 Tendering procedures, bid bond, data, space, time
 Commercial requirements
 Information in what shall be submitted with the tender
(alternative proposals etc.)
 Scope of work
 Tender basis
 Tender bond (possible)

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 C. Form of Tender
This is a document where the contractor:
Confirms, that he has examined all the tender documents
Confirms that he will perform the work
Promises that the validity of the tender is open for a certain
period.
Shows his understanding that the lowest bid or any after may
be rejected
States that part of the work may only be accepted
Confirms that he will enter into an agreement if awarded
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 D. Contract Agreement
 The agreement is the document that represents and reflects the legal
contract between the owner and the contractor.
 Obviously there is also a contract between the owner and the designer,
and between the general contractor (GC) and the sub-contractors, or
between the contractors and the suppliers for those contracts.
 It is simply a letter that constitutes legal evidence that a contract exists,
and forms the basis for its enforcement.

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 E. Condition of contract
 The condition of contract is a document that states the obligations and
rights of the parties and detail the conditions under which the contract is
to be carried.
 It states to what extent should be the relation between the engineer,
contractor and client.
 It includes General and Supplementary or Special/Particular conditions
of contract.
 Conditions of contact for civil engineering works are commonly prepared
by four bodies: Multi- lateral donors, Business Associations, Professional
Associations and Public Authorities.

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 Cont.…
General Conditions
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 guidelines that will be used in the
administration of the contract.
It is often referred to as boilerplate, implying that the same documents are
standard to all contracts. Contractors must know exactly what is contained
in the boilerplate.
Various standard forms of General Conditions have been development by
different organizations. 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.…
Supplementary Conditions
 The Supplementary Conditions are sometimes known as Special
Provisions or Special/Particular Conditions.
 The purpose of the Supplementary Conditions is to provide an
extension of the General Provisions of the contract to fit the specific
project at hand.
 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, and may include topics such as:
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 Cont.…
Items included in the Supplementary Conditions are entirely subject to the
discretion of the owner, and 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
 Site visit
 Start date of the construction
 Requirements for security and temporary facilities
 Procedures for submittal and processing of shop drawings.
 Responsibilities of testing of materials

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 E.1 FIDIC condition of contract
 FIDIC is the international federation of national associations of independent
consulting engineers and was founded in 1913 by the national associations of three
European countries (France, Belgium and Switzerland).
 FIDIC has now membership from over 74 countries, and members are generally
national associations with the Ethiopian Consulting Engineering and Architects
Association being one.
 Over the past years FIDIC has evolved into a leading body for development of
model standard forms of contract for use in the international construction industry.
General Condition of Contract – where the overall clauses are stated
Particular Conditions of Contract – where modifications, changes and omissions to
the general condition of contract are stated.

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 3.4 Contract Management
 Contract Management is the management of its Processes, Stakeholders
and their Performances along the Planning, Implementation and
Monitoring + Evaluation Cycle of the functions of Management.
 Contract Management process can be idealized into three major processes.
 These include Contract Formulation, Contract Administration, and
Closing of Contract Processes.
.

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 A. Contract Formulation
 Contract Formulation involves two sub processes, namely; Negotiation and
Signing of Contract Agreement.
 Negotiation is a process by which Project Owners together with their
professional representatives deal with the recommended winner of the
tender on the requirements of the tender exclusively which will become the
bases for contractual agreements.
Contract Agreement when signed forms the contract document which will be the bases for Contract
Administration. A Construction Contract Document includes:
 Signed and Sealed Form of Contract Agreement,
 General and Particular Conditions of Contract,
 Technical Specification and Methods of Measurement,
 Priced Bill of Quantities, Drawings and General Notes to drawings if necessary,
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 B. Contract Administration
 Contract Administration is a process that ensures the successful completion of the
project under consideration with substantial compliance of the Terms of the Contract.
 As a result, the following activities or tasks are included in Contract Administration
services:
 Identifying contractual responsibilities of Stakeholders.
 Determining and understanding the construction components of the project.
 Review submitted (Integrated) Schedules and Breakdowns for operations such
as Organizational Breakdowns, Resources Breakdowns & Schedules and Time
Schedules.
 Measure Works, Record Site Potentials and Certify Payments and
Completions

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Cont.…

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 Cont.…

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 Cont.…

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 C. Closing of Contract
 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.
 Maintenance Period and Remedial Works: Construction works are subjected to
Maintenance Periods (Usually One Year) in order to reveal quality problems overseen by
supervisors.
 Left over Claims and Disputes: If claims and disputes are not settled before provisional
certificate of completion, they can be dealt during this phase.
 Closing of Accounts: Final Accounts together with the release of remaining retention
moneys and performance securities are carried out in accordance with the current situation
at the time of closing and Final Payment Certificate is issued.
 Completion Certificates: This is to entitle that the contractor is no longer responsible
afterwards if satisfactory performance is proved by Maintenance Period and its
certification, outstanding claims and disputes are settled, and closing of accounts are made.
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 3.5 Dispute and Claim Management
 Dispute in simple terms is a difference in a line of thought.
 A construction claim is therefore can be a demand for payment of additional
compensation, adjustment of the parties' respective contractual obligations,
Extension of Time or compensating delay damages, or any other change with
regard to the contractual conditions or terms.
 Claim in practice can also be understood in different ways based on the
perceptions held by contractual stakeholders.
 Claims can be associated with three major categories that can be understood as
the different types of claims. These are
 Time Related Claims
 Cost Related Claims
 Default by Contracting Parties:
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 3.5.1 Claim administration process

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 3.5.2 Dispute resolution system
 The contractual parties will pass through different dispute resolution
system depending on their acceptance over the proposed compensation
varying from the simplest mediation by the consulting engineer to the
final court ruling in the form of litigation.
 Basically, three types of dispute resolution systems are well recognized.
These included:
 Preventive Dispute Resolution System including Partnering
 Amicable Dispute Resolution System including Negotiation, Mediation,
Conciliation etc..
 Judgmental Dispute Resolution System including Adjudication or use of
Dispute review board, Arbitration etc.
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