contract procedure

CC202 – CONTRACT PROCEDURE

CHAPTER 3

CONTRACT PROCEDURE

CONTRACT PROCEDURE

Definition of Contract

o Contract is an agreement occurred when one parties agrees to accept an offer from another parties.

o While in terms of construction, contract is a binding agreement between two parties which is contractor and owners to carry out works. The contractor will perform the work perfectly, and the owner will be responsible for making payment for the completed works. This agreement made in handwritten documents that using legal forms.

Principles of contractBased on Contracts Act 1950 (Revised 1974) there are several principlesof contract should be known as below :-

• Offer According to the Contracts Act 1950 (Revised 1974) - Section 2 (A), an offer is made when one person(parties) made the proposal and expressed willingness to another persons about its intention to made or refraining from making something with the purpose of obtaining approval from the parties.

• Acceptance Based on Contracts Act 1950 (Revised 1974) - Section 2 (B), acceptance occurred when proposal opinions submitted by the proposes being accepted and assented by the party that receiving the proposal without any conditions . Conditional acceptance is invalid and not enforceable by contract law. A accepted proposal becomes an agreement.

CONTRACT PROCEDURE

Consideration

• Consideration is an action taken by the recipient to accept the offer. Acceptance of an offer usually made by orally, in writing or by actions.

Intent

• The intent is to create relations between the two parties such as sincere, honest and trustworthy and does not against conditions of contract agreement.

Approval is valid under the law

• Any agreement between the proposes and the receiver must not against law of the country. Agreement that violates state law is invalid and can not be enforced in accordance with the Contract Act 1950 (Revised 1974).

CONTRACT PROCEDURE

Contract can be implemented

• Before a contract being enforce, both parties involved should ensure that the agreements will not burdened any parties that can lead to some problems for one or both sides.

There is no disablement to both sides

• Disablement is a record or performance in the past. Actions such as careless work, against the contractual agreement, exceeding the completed time accoding with contractual agreement and others are part of the disablement.

CONTRACT PROCEDURE

The connections between contract and tender

Tender is a method to invite contractors to submit their prices/rates based on an offer made by owner’s/client’s. The document is known as Tender Documents.

When the tender prices has been agreed between the owner and the contractor, an agreement is made by Contract Document. This document is important because its explain the responsibilities of each parties that involved according with the contract.

CONTRACT PROCEDURE

Types, characteristics, requirements, advantages and disadvantages of acquisition (procurement)

• Contract is important due to size and difficulty in construction industry nowadays. Usually construction works nowadays involving a lot of skilled workers , modern machinery and plants, and also the use of small contractors or well known as sub-contractors. There is various types of contract being implemented in construction industry as stated below : -

Contract Documents based on Bills of Quantities-BQ

• This is a common type of contract. Basically construction drawings/plans are prepared and all work items and quantities specified in the tender documents before tenders being sold open to the contractors. Tenderers who participated in the tender will determine the price for the details of the work in the Tender Documents. Bills of Quantities can divided into some fraction from the total tender prices for example divided by each building elements such as external walls, internal walls, frames, windows, doors, staircases, roofing and other.

CONTRACT PROCEDURE

Advantages :– Both parties can easily understand each field of work when using the

contract documents based on Bills of Quantities– The price rates contained in the contract documents act as a basic for

assessing interim payment for the works done by contractor and also for variation order/work changes.

– Contractors can use the list of Bills of Quantities for calculating the quantity to purchased materials.

– Contractors also would be able to determine the quotations from sub contractors.

– Contractor can determine its scope of works according with contract document.

Disadvantages :– Quantity Surveyors and architects take a long time to prepare

construction drawings and contract documents based on bills of quantities.

– This contract may only be used if owner and consultant’s had enough time to prepare construction drawings and Bills of Quantities-BQ projects.

CONTRACT PROCEDURE

Contract Documents based on Drawings and Specifications.

• In this contract, the contractor is required to carried-out works for each element according with prices of the tender being submitted previously. For this types of contract, tenderers are not provided with Bills of Quantities but given the standard schedule of rates attached in the tender documents. Details of the work can be found in construction drawings while the method /scope of works described in the specification.Schedule of rates to be used as a basis for assessing the progress of interim payment for the completed and variation orders. If the changes of works (Variation Order) that exists not listed in the standard schedule of rates, quantity surveyor will consult with the contractor to agree a suitable prices.

CONTRACT PROCEDURE

Turnkey Contract

• Turnkey contract is a contractual agreement where the chosen contractor had a responbilities from the beginning to the end of the construction works. Usually this types of contract, the chosen contractor had to plan, design and observe until the project completed successfully according with contact documents.. There are few factors why the turnkey contract was introduced:

•i. urgent need of a specific project

ii. owners lack of the specialist group.

CONTRACT PROCEDURE

Advantages :

• Reduce the project time. Time savings can be made because the contractor is fully involved in the construction process from beginning to end.

• Contractor involvement at an early stage can ensure the success of the project. Contractors can give their views and opinions entirely related to construction projects.

• To reduce the direct involvement of the owners on matters related to technical problems, cost, time and other.

Disadvantages :

• The price for a project is high compared with the traditional system. • Could affect the participation of local consultants as the turnkey

contractor normally will appoint its own consultants. • Local and Bumiputera contractors hardly to take part because have to

compete with more established contractors.

CONTRACT PROCEDURE

Cost Reimbursement Contract

• Cost reimbursement contracts, also known as Cost Plus Contract. This contract means that the repayment of the cost made by the contractor. This includes the cost of materials, plant and labor which is called prime cost sum with added administrative expenses to gain profits and overhead Suitable for complex projects and to be completed soon.

Overhead expenses include: • manager salary• rental offices • Tools / office equipment • bills such as electricity, telephone, water, etc. • insurance • Taxes • Bank Interest • car allowances, transportation, travel, etc.

CONTRACT PROCEDURE

This type of contract can be divided into three types: -

a) Prime Cost Sum + Fixed Fee.

• Contractors has been paid by the actual construction cost plus the costs of profits and overhead. Both parties should agree with the costs of profits and overhead either by tender or negotiation.

CONTRACT PROCEDURE

Prime Cost Sum + Fixed Fee RM RM

1. Labour Cost 39000

2. Material Cost 59000

3. Sub-contractor cost 10000

4. Machinery and plant 2000 110000

added fixed fee 15000

Project costs 125000

This type of contract can be divided into three types: -

b) Prime Cost Sum + percentage fee.

• Contractors has been paid based on actual construction works plus the costs of profits and overhead based on percentage that being agreed by both parties earlier. The fee percentage is calculate from the actual construction costs. If the owner spent big on prime cost sum, contractor will get a big amount of money.

CONTRACT PROCEDURE

Prime Cost Sum + Percentage Fee RM RM


(+) 25% 10000 50000


(+) 10% 6000 66000


(+) 5% 500 10500

4. Machinery and plant 2000 2200

(+) 10% 200


c) Prime Cost Sum + target fee

• For this type of contract the target cost of a construction works must be agreed by the owner and contractor. This type of contract has a incentives factor to encourage contractors save profits and overhead costs by present construction cost less than estimates cost.. But the contractor will be fined /deduction of a sum which should be accepted if the construction cost exceeds the target cost. By this way the contractor has the initiative to reduce construction costs and accelerate completion of the project to get bonus.

• important things that must be agreed in this contract: total cost targets

payable bonus or penalty

quality of work to be accomplished

CONTRACT PROCEDURE

CONTRACT PROCEDURE

Prime Cost Sum + cost target

RM RM(cost target RM 110,000)




4. Machinery and plant Cost 2000 108000

Negotiate fee 15000

(+) 20% of RM 2000 400 15400

(RM 110000 - RM 108000)


Prime Cost Sum + cost target

RM RM(cost target RM 110,000)




4. Machinery and plant Cost 2000 111000

Negotiate fee 15000

(+) 20% of RM 1000 (-)200 14800

(RM 110000 - RM 111000)


Differences between domestic sub-

contractor and nominated sub-contractor

CONTRACT PROCEDURE

domestic sub-

contractor

nominated sub-

contractor

main contractor

responbility

there Is no

contract

bond

contract bond is

occurred

work progress

payment

payments receiced

payment made by

owner

depend on main

contractor

based on

completed

works

appointment main contractor

owner/project

developer

contractor right on

payment

through main

contractor

through sub-

contractor

• The types of Form of Contract

Usually for Public Work Department (JKR) –

JKR 203Sem. 10/83( PWD 203-Rev. 10/83)

PWD 203 Rev. 2007 (LATEST)

JKR 203a-Sem. 10/83( PWD 203a-Rev. 10/83)

PWD 203a Rev. 2007 (LATEST)

CONTRACT PROCEDURE

THE END

contract procedure

Documents

contract law

contract act

contract document

contract proceduretypes

principlesof contract

contractual agreement

binding agreement

accepted proposal