CONSTRUCTION PROJECT MANAGEMENT lecture, MSc course

Andrzej Czemplik, PhD

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CONTRACTS FOR
CONSTRUCTION PROJECTS

Literature:

electronic book available on our main library net:

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Pacta clara, boni amici.

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WHO NEEDS

A CONTRACT

?

Essentials of Contract validity

SOURCE:

GROOK.net Empowerment Through Knowledge

The parties to the contract

must be competent, and legally capable of playing their intended

part. The law can not enforce the agreement on someone who has not the legal capacity to enter
into an agreement. This could be due to infancy, lunacy, drunkenness, or being restricted from
entering into such agreement by a prior in date agreement or scope of authority.

The subject matter of the contract

must be lawful and definite in respect of requirements and

duties of each party. For example a contract violating municipal regulation is not binding and is
void in courts. Also uncertainty in respect of the what is wanted may result in the contract being
not enforceable by law.

Proposal and acceptance:

There must be a proper proposal by one party and its absolute and

unqualified acceptance by the other party. The proposal is not binding without a clear acceptance
and is not binding beyond its date of validity.

Free consent of parties to the contract:

Consent is said to be free when it is not caused by

force, or undue influence or fraud or misrepresentation.

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CONSTRUCTION PROJECT MANAGEMENT lecture, MSc course

Andrzej Czemplik, PhD

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Breach of Contract

Breach of Contract

is the failure to perform it.

However, not every failure to perform an obligation
amounts to a true breach, as there are a number of
excuses for non performance. When a contract has
been broken without sufficient excuse or justification,
the party who suffers by such breach is entitled to
receive from the party in default, a compensation for
any loss or damage caused by such breach.

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Data Required for Preparing
an Estimate:

A Contract may be terminated or brought to an end in either of the following ways:

Full and satisfactory performance by both parties to their obligations under
the contract.

Breach of contract, when the default of one party releases the other party
from the contractual obligations.

Mutual agreement of the parties to terminate the contract.

Unforeseen circumstances beyond the control of either party render it
impossible to perform his duties or obligations stated in the contract.

Operation of law to terminate a void contract.

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Types of contracts commonly
used in construction

Lump sum contract

Item rate or unit price contract

Percentage rate contract

Cost plus percentage rate contract

Cost plus fixed fee contract

Cost plus fluctuating fee contract

Target cost contract

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UNIT PRICE CONTRACT

This kind of Contract is based on estimated quantities of
items included in the project and unit prices which have
been agreed to. The final price of the project is dependent
on the quantities of the items needed to carry out the work.
The terms of this type of Contract often accommodates
flexibility for price adjustment. The agreed to value may be
subject to amendment if the volume is reduced or exceeds
the original negotiated terms and price.

THE ADVANTAGES OF
UNIT PRICE CONTRACT

The Architect is involved in this type of Contract because it is he who provides the quantities
of each item (in the Bill of quantities), and negotiates the unit prices with the Contractor.
Moreover, in this type of Contract, the Owner makes payments to the Contractor only after the
Architect has verified the measurements at Site and certified the Contractor’s bills for
payment. This way the Owner is safe as he is paying only for the volume of work done at site
and not paying anything extra. Also, he is assured (because the Architect is involved), that the
quality of the work will be upto the mark.

In this type of Contract, the Contractor has to initially invest his own money for starting the
work, and so the Owner need not worry about giving the Contractor a big advance.

In general this Contract is considered the most scientific and most suitable for construction
projects where the different types of items, but not their numbers, can be accurately identified
in the Contract documents.

The Contractor is also safeguarded against any contingencies, or variations in labour or
material rates.

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DISADVANTAGES OF THE
UNIT PRICE CONTRACT

The Contractor has to invest his own money
initially.Though this is one of the most preferred
Contracts in Constuction/Buildings, it is not
unusual to combine a Unit Price Contract for
parts of the project with a Lump Sum Contract or
other types of Contracts.

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CONSTRUCTION PROJECT MANAGEMENT lecture, MSc course

Andrzej Czemplik, PhD

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A LUMP SUM (FIRM FIXED
PRICE) CONTRACT?

With this kind of Contract the Contractor agrees to do the
construction and completion of the building at a designated
time for a fixed price or Lump Sum. Also named “Fixed Fee
Contract”, this type of Contract is often used in Building
Contracts. Fixed Fee or Lump Sum Contract is suitable if the
scope and schedule of the project are sufficiently defined to
allow the estimation of the project costs.The scope of the
Contract defines the expectations of both parties. This type of
Contract provides a degree of certainty for both parties
because the Contract clearly spells out what is involved.

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THE ADVANTAGES OF
LUMP SUM CONTRACT

A lump sum Contract provides for a price that is not subject to any
adjustment on the basis of the Contractor’s cost experience in
performing the Contract. This Contract type places upon the Contractor
maximum risk and full responsibility for all costs and resulting profit or
loss.

Since the price is fixed, any unforeseen contingencies or variations in
material or labour prices do not affect the Owner.

It provides maximum incentive for the Contractor to control costs and
perform effectively and imposes a minimum administrative burden upon
the Contracting parties.

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THE DISADVANTAGES OF
THE LUMP SUM CONTRACT

An Architect is not involved as this Contract is an agreement between the Owner and the Contractor
for a final fixed price. So the Architect does not have a role to play , and so quality of work cannot be
checked and controlled by an expert.

Since specifications are not clear, the Contractor can use alternative/inferior brands of materials.

Also there is a lot of ambiguity in the specifications, measurements, mode of payment, etc.

Though the Contract is made on a fixed price, the Contractor may claim extras by giving different
reasons, since the specifications, measurements are not clear.

The Contractor takes money in advance from the Owner, and then he proceeds with the work at his
own pace. Also sometimes, the Contractors deliberately hold up work towards the end, so as to
extract maximum money from the Owner. So the Owner feels helpless as his money is with the
Contractor.

A lump sum Contract can be used in conjunction with an award-fee incentive and performance
incentives, when the award fee or incentive is based solely on factors other than cost. The Contract
type remains Lump Sum when used with these incentives. A lump sum Contract, shall be used when
the risk involved is minimal or can be predicted with an acceptable degree of certainty. However,
when a reasonable basis for firm pricing does not exist, other Contract types should be considered,
and negotiations should be directed toward selecting a Contract type (or combination of types) that
will appropriately tie profit to Contractor performance.

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LUMP SUM CONTRACT
WITH PRICE ADJUSTMENT

It provides for upward and downward revision of the stated Contract price upon the
occurrence of specified contingencies. A lump sum Contract with economic price adjustment
may be used when there is serious doubt concerning the stability of market or labor
conditions that will exist during an extended period of Contract performance, and
contingencies that would otherwise be included in the Contract price can be identified and
covered separately in the Contract. Economic price adjustments are adjustments: based on
established prices of specific items or the Contract end items,

based on actual costs of labor or material that the Contractor actually experiences during
Contract performance and

based on cost indexes of labor or material that are specifically identified in the Contract.

In establishing the base level from which adjustment will be made, one shall ensure that
contingency allowances are not duplicated by inclusion in both the base price and the
adjustment requested by the Contractor under economic price adjustment clause.

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LABOUR CONTRACT

In this type of Contract, the Owner buys and supplies all the
material required for the construction to the Labour Contractor and
only uses his labour. The system of employing Contract labour is
prevalent in most industries including Construction, involving skilled
and semi skilled jobs. A workman is deemed to be employed as
Contract Labour when he is hired in connection with the work by or
through a Contractor. Contract workmen are indirect employees;
persons who are hired, supervised and remunerated by a
Contractor who, in turn, iscompensated by the Owner of the site.
Contract labour has to be employed for work which is specific and
for definite duration.

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ADVANTAGES OF A
LABOUR CONTRACT

This kind of Contract is sometimes preferred
by the Owner, because he buys all the
material by himself and thus saves a lot on the
Contractor’s profit.

Moreover, the Owner can buy the materials of
his choice and can be sure of the brand that
will be used in the construction.

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CONSTRUCTION PROJECT MANAGEMENT lecture, MSc course

Andrzej Czemplik, PhD

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DISADVANTAGES OF A
LABOUR CONTRACT

There is a lot of headache and tension involved in running around and arranging for the supply of
materials at site, on time as the work progresses.

It is easy to get fooled on the quality of sand, bricks etc because the Owner is not very experienced
in assessing the quality.

It is difficult to strike a good bargain when negotiating with suppliers and vendors, because the
Owner is a one time Client, wheras the Contrctor normally has an advantage as he is a regular Client
and a relationship is built between him and the suppliers.

There is every possibility of pilferage of the material stored at site.

Very often labourers, masons etc do not turn up to site as they may be lured for a day to some other
site and hence the work gets delayed.

Since the workers are generally paid for the work on a daily basis, the labour Contractor may
purposely go slow so that he he takes longer to complete the job and so get paid more.

Inferior labour status, casual nature of employment, lack of job security and poor economic
conditions are the major characteristics of Contract labour. While economic factors like cost
effectiveness may justify system of Contract labour, considerations of social justice call for its
abolition or regulation.

In fact, in my experience, I have seen that in most cases, the Owner ends up spending almost as
much, at the end of the project as he would have if he had chosen any other type of Contract.

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COST + CONTRACT

This is a Contract agreement wherein the Owner agrees to pay the cost of all
labor and materials plus an amount for Contractor overhead and profit
(usually as a percentage of the labor and material cost). It is like a Labour
Contract, but here the Contractor buys the materials and provides the labour
and is reimbursed accordingly. This type of Contract is favored where the
scope of the work is indeterminate or highly uncertain and the kinds of labor,
material and equipment needed are also uncertain. Under this arrangement
complete records of all time and materials spent by the Contractor on the
work must be maintained.

This type of Contract can be altered according to the basis on which the
additional amount paid to the Contractor is fixed.

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COST + FIXED % CONTRACT

- It is based on a percentage of the

cost

COST + FIXED FEE CONTRACT

– It is based on a fixed sum

independent of the final project cost.

COST + FIXED FEE BONUS CONTRACT

–It is based on a fixed sum

of money and a bonus is given if the project finishes below budget,
ahead of schedule etc.

COST + FIXED FEE WITH SHARING ANY COST SAVINGS
CONTRACT

- It is based on a fixed sum of money and any cost

savings are shared with the Owner and the Contractor.

INCENTIVE CONTRACTS

– It is based on the Contractor’s

performance on the agreed target – budget, schedule and/or quality.

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WHAT ARE THE ADVANTAGES OF THE COST + CONTRACT?

Since the Contractor gets an additional amount at the end of the
project, it provides maximum incentive for the Contractor to
control costs and perform effectively and on schedule.

WHAT ARE THE DISADVANTAGES OF COST + CONTRACT?

Since the Contractor is reimbursed based on the records of the
workers he has employed and the materials he has bought, one
can never be sure if these records are genuine, as there is no
way of verifying them.

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