CONSTRUCTION MANAGEMENT AND ADMINISTRATION

UNIT –IVContracts

List of topics

1. Introduction of contractsTypes of contracts: Conditions of contract

2. Tender : Tender form, Tender Documents, Tender Notice, Work Order.

3. Project Delivery Methods : Public Private Partnership (PPP)4. Stages of awarding contract

– Procedure for execution of PWD works

5. Safety in construction6. Workmen compensation act7. Contract labor act8. Demolition of buildings

Introduction of contracts

• Construction contracts are formalized in the form of a written document which defines clearly the Rights and Obligations of each party

• Contract describes precisely the Legal, Financial and Technical provisions of the work

• It usually contains clauses that specify – Completion time– Liquidated damages– Payments to the contractor– Scope and nature of work

• It is agreed and signed by both parties• The elements of a contract consists of

– Job Offer– Monetary consideration and – Acceptance

Types of construction contracts

1. Lump sum contract 2. Item rate contract / scheduled contract3. Lump sum and scheduled contract4. Cost plus percentage/fixed fee contract5. Special contracts

1. Lump sum contract

The Contractor constructs the works in accordance with a design & specification provided by the Employer, but for a fixed lump sum of money

There are no individual rates quoted and no schedule for different items

Upon the completion of work, detailed measurements of whole work checked and a fixed lump sum amount is released to the contractor

In large projects, part payments are made at different stages of work on mutually agreed terms

In case the contractor stops the work in between, he is not entitled for any payment

1. Lump sum contract

• Suitability– Suitable for works in which contractors have prior construction experience– Not suitable for difficult foundations, excavations of uncertain character, and

projects susceptible to unpredictable hazards and variations

• Merits– The owner can decide whether to start or shelve the project knowing the total

lump sum price quoted by different contractors– The contractor can earn more profit by in depth planning and effective

management at site

• Demerits – The project has to be studied thoroughly– Unforeseen details of work are not specified– Many additional items may have to be undertaken as the work progresses, giving

opportunity to the contractor for claiming higher rates for the extra items

2. Item rate contract / Scheduled contract

In this type of Contract, the Contractor undertakes the works in accordance with design & documents provided by the Employer on item rate basis

The Contractor is only responsible for the execution of the Works as per the schedule within the frame work of the Contract

Amount to be received by contractor depends on Bill of Quantities (BOQ)

Payment is made to the Contractor as per the measured quantities of actual work execution

2. Item rate contract / Scheduled contract

• Suitability– Suitable for all types of engineering works financed by public/govt. bodies– Suitable for works which can be split into various items and quantities

under each item can be estimated with accuracy

• Merits– There is no need of detailed drawings at the time of awarding contract as in

case of lump sum contract. The detailed drawings can be prepared after the contract is awarded

– Changes in drawings and quantities of individual items can be made as per requirement within agreed limits

– Payment is made as per actual work done

• Demerits – The total cost of work can only be known upon completion– Additional staff is required to take detailed measurements

3. Lump sum and scheduled contract

• Similar to the lump sum contract except that the schedule of rates is also included in the contract agreement

• The contractor offers to do a particular work at a fixed sum within specified time as per plans and detailed specifications

• Extra amount to be paid or deducted for any additions or deletions made during the progress of work is regulated by schedule of rates

• Measurement 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

3. Lump sum and scheduled contract

• Suitability– Suitable for construction works for which contractors have prior

work experience and can consequently estimate the project cost more realistically

• Merits– The owner can know from tenders as to what the project will cost

and can decide whether to start or defer the project– Changes in drawings and quantities of individual items can be

made as per requirement within agreed limits

• Demerits – The project has to be studied thoroughly and all the contract

documents are required to be completed before awarding contract– Non scheduled extra items arising out of changes made in the

drawings and specifications are often a source of dispute

4. Cost plus percentage/fixed fee contract

When the scope and nature of the work can at least be broadly defined this type of contract is desirable

The design is in the scope of the Employer In this type of contract the Contractor is paid at actuals for his expenditure

at site and a certain percentage or fixed fee over & above Amount of fee determined by considering

Scope of work Approximate cost Nature of work Estimated construction time Man power and equipment

There could be a variant by giving a proportional bonus for early completion or proportional Liquidated Damages for any delay

The Contractor is selected based on merit rather than the fee alone

4. Cost plus percentage/fixed fee contract

• Suitability– Suitable for construction works required to be completed expeditiously and

where it is difficult to foretell difficulties likely to be encountered– Important structures where the cost of construction is immaterial

• Merits– The owner bears the actual cost therefore contractor performs the work in the

best interest of owner resulting good quality work– The work can be taken in hand even before the detailed drawings and

specifications are finalized– Changes in in design and method of construction if needed can be easily

carried out without disputes– Work can be executed speedily

• Demerits – This form of contract cannot be adopted in case of normal works of public

bodies and govt. departments– The final cost of the work is not known in advance and this may subject the

owner to financial difficulties

5. Special contracts

a) Turn-key contractb) Package contractc) Negotiated contractd) Continuing contracte) Running contractf) FIDIC Contract

a) Turnkey contract

Under this contract, the Contractor carries out all the Engineering, Procurement and Construction (EPC) providing a fully-equipped facility, ready for operation (at the “turn of the key”)

It is an integrated contract in which all works related to civil, electrical, mechanical e.t.c., are in the hands of a main contractor

Also the main contractor takes total responsibility from planning to commissioning stage

The owner need not to coordinate the work of different sub-contractors

This type of contract is suitable, where a higher degree of certainty of final price and time is required

b) Package contract

• Two or more related jobs, each of which form a separate contract are combined in a single contract– Design and development + construction + maintenance– Supply + maintenance

• Plan of work and standards are established and the work is carried out accordingly by the contractor

• The main contractor is responsible for safeguarding the owner’s interest and for this reason, prior approval of design and technical aspects have to be taken from the owner

• Responsibility for correctness of the design lies with the main contractor

c) Negotiated contract

• In this type of contract Negotiation across the table takes place between representatives of the owner and the main contractor for project cost and other conditions of contract

• Detailed project specifications are arrived at by discussions• It involves extended discussions for finalisation as a

competitive contract• Most of the consultancy projects of world bank are negotiated

contracts

d) Continuing contract– New or additional work is awarded on the basis of agreed

terms and conditions of existing contract– It requires no retendering hence can save time and money

e) Running contract– These provide goods and services at specified intervals or

as and when required by the owner– The contract price is not fixed and payment is based on

actual goods supplied and services rendered as specified in the contract document

f) FIDIC contract

Evolved by an International body of consultants - Federation Internationale des Ingenieurs Conseils (FIDIC)

FIDIC was originally founded in 1913 by the National Associations of Belgium, France and Switzerland and is now best known as the organisation which publishes standard forms of contract documents

Every Project has contract document consisting of Part I – General Conditions & Part II – Conditions of Particular Application (COPA)

Is a very equitable form of contract, fair to both Owner & Contractor and employs the principle of a neutral “Engineer”

Tender drafting and tender analysis

• Types of tenders• Contract document• Specifications• Important conditions of contract

Types of Tender

• Open Tender : If Job Value > Prescribed limit (Say 25 Lacs)– Global tender

• Limited Tender : If job value <= Prescribed limit

• Single or Restricted Tender : If only a particular firm is the manufacturer.

Contract document

• The contract document generally follows a standard format • It consists of the contract agreement (on non-judicial stamp

paper of prescribed value) and the following set of documents, each page of which is signed both by the owner and the contractor– Cover page/Title page:– Contents page:– Notice inviting tender (NIT):– Tender form:– Schedule of issue of materials:– Drawings:– Specifications

• General specifications• Detailed specifications

– Conditions of contract

Notice Inviting Tender (NIT)

NIT contains • Brief description of work• Estimated cost of work• Date and time of receiving the tender• Amount of earnest money (EMD)• Security money • Time of completion

Tender form

Tender form consists of • Bill of quantities• Contractor’s rates• Total cost of work• Time for completion• Security money to be deposited• Penalty clauses etc.

Schedule of issue of materials

• These comprise a complete set of fully dimensioned drawings including plans, elevations, sections detailed drawings and site plan

Drawings

• It contains the list of materials to be issued by the department or owner to the contractor with rates and place of issue

Specifications

Specifications are of the following types1. Contract specifications2. Guide specifications3. Standard specifications4. Manufacturer’s specifications

1. Contract specifications

• The specifications prepared for a particular job to accompany the working drawings are called contract specifications

• These are further classified as– General specifications/Brief specifications

• To give the general idea of work

– Detailed specifications• To give detailed description of each item of work

2. Guide specificationsThese specifications provide a guideline for preparing contract specifications

and give a broad idea about the class and type of construction for a particular purpose (e.g. Model Concession Agreement)

3. Standard specificationsThese specifications re prepared for various materials or group of materials

for the guidance of all concerned with construction (e.g. IS 456)

4. Manufacturer’s specificationsManufacturers prepare specifications of their products for the guidance of

users. These specifications also include installation instructions and other guidelines for use and maintenance of products. Generally provided in the form of Manuals

Important Conditions of Contract

1. Time of completion (TOC)2. Delay and extension of time (EOT)3. Penalty4. Compensation for delay in completion of work5. Liquidated damages6. Debitable agency7. Valuation of variations8. Settlement of disputes9. Force majeure and natural disasters10. Price escalation11. Termination of contract

Important Conditions of Contract

1. Time of completion (TOC)The contractor is required to complete the work with in agreed time of

completion which is specified in suitable unit of time(year, month, week). The contractor is also required to maintain a proportionate progress of work

2. Delay and extension of time (EOT)Delay in completion of work not attributed to the contractor should be brought to

the notice of owner by the contractor in writing, with in the time specified in the contract, for seeking extension of time. The owner will satisfy himself that the delay is not on account of a lapse on the part of the contractor before granting suitable extension of time

3. PenaltyIt is fine imposed on the contractor for non-fulfillment of his contractual

obligations such as failure to maintain required progress of work, delay in completion, poor quality, bad workmanship

4. Compensation for delay in completion of workThe contractor is liable to pay compensation to the owner for delay attributed

to him in completion of work. The amount of compensation may be stated as a percentage of the estimated cost of work fro each unit of time delay. The maximum limit of compensation may be 10% of the contract price

5. Liquidated damages (LDs)It is a fixed stipulated sum payable by the contractor on account of penalty for

delays and does not bear any relationship to the real damage to the owner. It is generally high and fixed per day for the excess period over that specified in the contract for completing the work

6. Debitable agencywhenever the contractor fails to fulfill his contractual obligations in respect of progress or quality of work even after giving due notice by the owner, it becomes necessary to appoint a debitable agency which works at the cost and risk of the contractor. This agency is in the form of labor or other contractor to fulfill the contractual obligations of the main contractor. The expenses incurred are charged from the bill or security of the original contractor

Important Conditions of Contract

7. Valuation of variationsThe valuation of variations is based on change orders issued in writing by the owner.

Generally, the variation in individual items of work should not be more than 25% and variation in total cost should not exceed 10%

8. Settlement of disputesEfforts should be made to resolve disputes amicably between the owner and the

contractor through mutual discussions and negotiations. Arbitration clause may be incorporated in the contract to settle disputes not resolved through mutual discussions and negotiations

9. Force majeure and natural disastersNatural disasters are acts of nature, such as unprecedented floods/rainfall, earthquake,

hurricanes, typhoons, fire etc. these disasters along with occurrence of riots, civil commotion, revolt etc. are beyond the control of the contractor and may lead to financial and time loss. The contractor should obtain an insurance policy for such risks as can be covered by insurance. In event of financial or time loss contractor can claim compensation and an extension of time

Important Conditions of Contract

10. Price escalation– During work execution labor wages (L), material prices (M) and

Petrol Oil Lubricants (F) may increase as a result of inflation– Variation in Labor cost = W *Y/100*(LI-LI0)/LI0

– Variation in Material cost = W *X/100*(MI-MI0)/MI0

– Variation in POL cost = W *Z/100*(FI-FI0)/FI0 – Generally y=30%, x=65%, z=5%– Compensation for escalation is normally worked out at quarterly

interval

11. Termination of contract– In the event of default or bankruptcy of the contractor– Default includes abandoning the work, failure in progress, non

observation of rules/instructions etc.– Due notice served before termination of the contract

Important Conditions of Contract

Project Delivery Methods

• A project delivery method is a system designed to achieve the satisfactory completion of a construction project from conception to occupancy.

• A project delivery method may employ any one or more contracting formats to achieve the delivery

1. Design-Bid-Build (DBB) 1. Multiple Primes

2. Construction Management At Risk (CMAR) 3. Design-Build (DB)

1. Bridging 2. PPP

4. Integrated Project Delivery (IPD)

Risk and Control-Project delivery methods

Public Private Partnership (PPP) or P3

• A project delivery method which combines architectural and engineering design services with construction performance under one contract

• A private entity or consortium of investors provides some or all of the required capital with a commitment to deliver a completed project for a public sector owner in exchange for revenue that the completed facility is anticipated to generate.

PPP-Private Finance Initiative (PFI) model

• Public private partnership is a partnership which leverages private funding and the strengths of private entrepreneurship and management, for the maximum provision of public services in a climate of scarce public resources.

• The PFI is a PPP special case where all the finance needed for the capital funding and its basic operation is supplied by the private sector in return for a service charge.

P3 Benefits

P3 can benefit public projects in the following ways:• Targets alternative revenue and funding sources to close a

funding gap • Allows use of low cost tax-exempt or taxable financing • Transfers risk to the private sector • Not subject to capital budget allocations or voter referendums– Accelerates construction starts– Reduces construction cost and interest rate risks

• Takes advantage of private-sector efficiencies and innovations in construction, scheduling, and financing

• Provides efficiencies in long-term operations and maintenance • Presents an opportunity to combine public and private uses in

mixed-use developments to leverage economic development

Disadvantages of P3

• The owner may experience higher total life cycle costs

• The proposal process can be very expensive for all involved

• A high level of expertise is required to execute a P3 project

Is a recent development Incorporates financing issues, returns on investment, etc

Invariably involves an EPC Contract for the implementation of the Project

Risk Management is a major issue for such contracts

For the Employer, such single-point responsibility may be advantageous, but the benefits may be offset by having less control over the design process and more difficulty in imposing varied requirements.

Time is the essence of such contracts

BOT & its variants

Design Build Operate Transfer (DBOT), Design finance Build Own Operate and Transfer (DFBOOT) etc. are variants of BOT

Stages of awarding a contract

The complete process of awarding contract can be summarized as follows

• Preparation of contract document• Advertising the tender, tender notice• Pre-bid meeting• Submitting Tender by contractor• Study of the tender by owner• Clarification regarding conditions or specifications• Preparing comparative list• Awarding contact

Procedure for Execution of Works( CPWD works manual)The broad procedure to be followed by a Ministry or Department for execution of

works under its own arrangements shall be as under

1. The detailed procedure relating to expenditure on such works shall be prescribed by departmental regulations framed in consultation with the Accounts Officer

2. Preparation of detailed design and estimates shall precede any sanction for works3. No work shall be undertaken before issue of Administrative Approval and Expenditure

Sanction by the competent Authority on the basis of estimates framed4. Open tenders will be called for works costing Rupees five lakhs to Rupees ten lakhs5. Limited tenders will be called for works costing less than Rupees five lakhs6. Award of work should be done before commencement of the work7. Final payment for work shall be made only on the personal certificate of the officer-in-

charge of execution of the work in the format given below:

“ I…………………………………………., Executing Officer of (Name of the Work), am personally satisfied that the work has been executed as per the specifications laid down in the Contract agreement and the workmanship is up to the standards followed in the Industry.”

References

• Construction-Project-Management by Peter Feweings

• CPWD Construction manual• CMAA Owner’s Guide to Project Delivery

Methods - August 2012