omg paper august 2013

BUILDING CONTRACTS MANAGEMENT AND GENERAL CONTRACTUAL PROCESS

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01. INTRODUCTION

Construction projects can be broadly classified into the following categories;

.01 Simple buildings including housing

.02 Complex developments e.g.

Houses – low and high rise can be defined by the functions they are

intended to be utilised for.

Industrial

Office blocks

Hotel buildings

Hospital buildings

Teaching buildings

Churches, mosques, temples etc.

Prisons

3. Civil engineering nature – roads, dams, harbours etc.

Additionally, the types of Developers are motivated to undertake construction

by various desirers;

Profit making - Offices, houses etc

Service provision - Prisons, schools, hospitals etc.

Social and religious - Churches, mosques, temples, synagogues,

clubs etc.

Every Developer is motivated by the desire to maximise on;

(i) Delivery of quality building

(ii) Maximise on profit realised at the end of the project.

BUILDING CONTRACTS MANAGEMENT AND GENERAL CONTRACTUAL PROCESS C’TD

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02. PARTIES TO A BUILDING CONTRACT

There are two parties in every contract and at times third parties are given

rights and obligations within the same contract. The two major parties are;

Developer and Financiers

Contractor – Main and Specialists

The third parties incorporated in the contract either directly or by operation of

the law of the land between the two major parties are;

Design Team

Local Authorities and Government Agents e.g. NEMA

Local Communities

03. CONTRACT FORMULATION

A building Contract is formulated after the Developer invites contractors to

make offers to undertake some works.

The Contract/Tender Documents are;

(a) Instructions to Tenderers

(b) Form of Tender and Qualification Information

(c) Conditions of Contract

(d) Specifications

(e) Drawings

(f) Bills of Quantities

(g) Form of Securities


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CONTRACT FORMULATION C’TD

There are various parties involved in the formulation of a building contract i.e.

Client, Architects, Engineers, Quantity Surveyors and/or Project Managers

etc.

These parties decide on the salient points to be the framework of the

tendering and subsequently contract agreements and it is at this stage of

decision taking that it is decided whether to:

03.01 Tender or negotiate

03.02 Contract on fixed contract or fluctuating basis

03.03 Fix construction time or make it a competitive item.

Some Clients e.g. Government Departments, Parastatals, Banks etc. have

their professional teams to advise on the contracting process whereas other

Clients rely on advise given by design team.


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04. CONTRACTORS UNIT RATE COMPILATION

During tender pricing every contractor considers inputs such as materials,

plant, human resources, financing and politics to enable him compute the unit

rate.

Though every project is different from the other, inputs in both materials, labour

and financing charges are similar and contractors are advised to build a bank of

data for their use in future projects with whatever adjustment one needs to sort

particular situation i.e. DO NOT INVENT THE WHEEL ALL THE TIME

NEEDED!

Contractors are also advised to utilise fully materials procured for a particular

project but any surplus should be well stored for next project – however, take

care not to over-order perishable materials e.g. cement which will go to waste

after a certain time!

e.g. Materials: concrete mix 1:2:4 in column bases M3 rate

Cement 266Kg @14,400/= per ton

Sand: 563Kg @ 2,200/= per ton

Ballast: 1050Kg @ 2,100/= per ton

Therefore; Cost of Materials: 3,830/= + 1,240/= + 2,200/= = 7,274/= M3

Above figures include 5% waste and 25% shrinkage.


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CONTRACTORS UNIT RATE COMPILATION C’TD

Labour: Use of 14/10 concrete mixer which will cost 650/= per M3

including fuel and operator.

Use of human resources

Loaders of cement

Loaders of sand

Loaders of ballast

Transporters of ready concrete

Placers of concrete

A gang of TEN labourers will handle the machine to produce

and lay 10M3 in a day.

Cost in 500/= x 10 = 5,000/= per day = 500/= per M3

Hence Plant and Labour = 650/= x 500/= = 1,150/= per M3

Site management cost 7% x 8424/= = 590/=

Head Office Management cost 8% x 8424/= = 675/=

SUMMARY

Materials Shs. 7,274.00Labour and Plant Shs. 1,150.00Site Management Shs. 590.00Head Office Management Shs. 675.00

SUB-TOTAL Shs. 9,689.00Add Profit 10% Shs. 970.00

Shs. 10,659.00Add V.A.T. @ 16% Shs. 1,706.00

TOTAL SHS. 12,365.00


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CONTRACTORS UNIT RATE COMPILATION C’TD

If the contractor is desperate for work, he will cut on profit and reduce management

charges. This will bring the rate to as low as shs.11,000/= and as high as

shs.15,000/= where the tenderer does not need the job and all he can do is to

overload his rates – get the job at any price!

Politics of the day will affect the pricing of construction tenders e.g.

Where is the project located?

When are the next general elections and

Who is likely to win the general elections?

LIFE IS ALL POLITICS AND CONSTRUCTION IS PART OF LIFE!

The Tenderer will also price guided by;

The tender list (knowing his competitors)

The Design Team (If uncooperative team, the Tenderer will price high)

The Developer (If a good paymaster, rates will be competitive)


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05. CONSTRUCTION INPUTS

There are various inputs (materials, plant, labour and financial) that the

contractor is required to put into building projects. The quantum of each input

depends largely on the projects;

Size

Complexity

When needed (Time)

Location

Financing

Politics of the day

Large high rise buildings will need materials hoists and cranes and less

labour.

Low rise housing estate will need more labour input and less plant.

Factories and Godowns sheds will need less materials than shopping

complex.

The larger the project and the complicated nature of the project dictate

the construction time. The construction time dictate the capital outlay –

hence finance.

.01 Actual Inputs

Professional skills in design and construction

Labour – both skilled and unskilled

Plant and machinery

Materials – Local and imported

Finance – during construction and end financing

Politics


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CONSTRUCTION INPUTS C’TD

.02 Constraints/Challenges

Sourcing of materials – local and imported

Sourcing of human resources

Sourcing of plant and time

Sourcing of financing

Restrictions imposed by potential developers e.g. tender conditions,

contract conditions, performance and bid bonds etc.

Politics of the day – may not be conducive to labour availability and

financing etc.

Whereas a prudent businessman/contractor should be able to forecast

likely materials and price changes, he can only do so over a short time

– say six months – and even that depends on the nature and source of

such materials.

This uncertainty affects materials locally sourced and imported due to

external influencing factors e.g. exchange rates, fuel prices etc.

THE GOVERNMENT IS NOT ABLE TO FORECAST THE PRICES OF

BOTH LOCAL AND IMPORTED MATERIALS.

THE DEVELOPERS – INCLUDING THE GOVERNMENT – ARE IN

THE SAME SITUATION OF UNCERTAINTY.

SIMILARLY THE CONTRACTORS ARE IN THE SAME STATUS.


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CONSTRUCTION INPUTS C’TD

Having stated that NO-ONE CAN REALISTICALLY FORECAST

PRICES, THEN WHY PUT THE TENDERERS/CONTRACTORS IN A

GAMBLING STATUS.

This situation of using FIXED PRICES affects the projects and the

construction industry as follows;

Contractors lose money as they had not built-in enough

contingency in their costing thus resulting to;

Bankruptcy

abandonment

In both cases, the Client will retender and pay CURRENT PRICES IN THE

MARKET.

Disputes are declared as a result of delayed performance and

at times resulting to poor quality of work substitution.

Delayed handing over complete project resulting to Client loss

of anticipated income/utilisation.

This is the effect of INFLATION and the Developer is under falsehood

feeling that he is getting something cheaper than real current price.

WHAT HAPPENS WHEN THERE IS DEFLATION.

The tenderer gets benefits of reduced materials prices and the

eventual loser is the DEVELOPER.


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06. FLUCTUATIONS IN BUILDING CONTRACTS

06.01 DEFINITION OF PRICE FLUCTUATIONS

The word FLUCTUATE is a verb defined as:-

(A) To change or cause to change position constantly

(B) be or make unstable

(C) to rise and fall like a wave

In the building Industry the most applicable definition is BE OR MAKE

UNSTABLE.

If materials and labour prices were consistently changing by a known

factor/percentage, then there would be no need of incorporating a price

fluctuation clause in the Contract as the Tenderer/Contractor can

realistically project the likely price changes.

However due to the nature of our economy it is impossible to forecast

the future prices. It is this uncertainty in forecasting that induces the

necessity to introduce a fluctuations clause to operate from a base date

– Tender date or any other date so stated.


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07. WHAT CAUSES PRICE FLUCTUATIONS

In the Agreement and Schedule of Conditions of Contract for Building Works

1999 Edition Clause 35 the following items that are considered to change or

likely to change affecting the rates quoted by the Tenderer are:-

(i) Duties which shall include all customs and excise charges, tariffs, taxes

and other duties imposed by statutory or other authority.

(ii) Local taxes – V.A.T., Kenya Bureau of Standards, Local Authorities

cess, National Construction Authority Levy etc.

(iii) Currency exchange rate fluctuations.

(iv) Changes in prices of locally available materials and labour i.e. local

inflation in materials and labour prices.

In most third world or developing countries, the major contributor to price

fluctuations is the instability of local currency vis-a-vis the hard currency which

is very erratic at times and can induce an inflationary rate of over 100% in a

very short period.

e.g. In early 1993, and due to varied factors, our Kenya Shilling fell from

Kshs.35.00 = U.S.$1.00 to Kshs.85.00 = U.S.$1.00 i.e. by 143% fall.

Due to the import component of our building materials and other products

indirectly used in construction industry e.g. plant and fuel the cost of such

inputs had to rise as well by a factor related to import component of each

product.

Materials inputs are classified into two categories – Locally available and

imported.

Most of materials used in this country have some element of import

component (even it means petroleum and machines involved in

transportation) and as such external economic and political forces affect

supply of materials to building industry.


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WHAT CAUSES PRICE FLUCTUATIONS C’TD

Labour (skilled and semi-skilled) is another major factor to be considered

when projecting the likely construction time of a project. To obtain regular

supply of quality labour and in quantity there must be good level of pay and

emoluments and above all assured supply. This is achieved through relevant

training, Trade Unions and Industrial Court.

Historically, the Fluctuations in the Building Contracts (as it is today in Kenya)

was introduced in early 1974 to try and help Clients obtain realistic Tenders.

Prior to 1974, materials availability was steady and prices predictable but

during 1973 oil crisis, everything went out of control in the World market and

infact some Contractors went bankrupt and Kenya Government introduced

Ex- Gratia form of increase in cost reimbursement to Contractors in Contracts

that were not tendered on Fluctuation basis to try and save the industry.

In Kenya the guide rules as to whether to include Fluctuation in a building

Contract are:-

Time: - Is the projected construction time likely to be over six

months? If yes, then include Fluctuations clause (it is

assumed that there are not so much radical changes in

a period of six months and in any case advance buying

for such project can be made).

Value: - If a project construction time is likely to be over Shs. 50

Million, then it is likely to be constructed in a period of

over six months – hence Fluctuations clause to be

included.


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WHAT CAUSES PRICE FLUCTUATIONS C’TD

This guidance rules were formulated in 1974 and are still operational with

project value adjusted.

It is worthwhile noting that not all material fluctuate that erratically and also

some material are less in quantum input in the buildings- hence the materials

included in Fluctuations clause e.g. cement, sand, aggregate, steel, concrete

blocks, roofing sheets etc. do not constitute 100% of materials as fixed in the

building.


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SECTION TWO – THE JOINT BUILDING COUNCIL

01. WHAT IS THE JOINT BUILDING COUNCIL

The Joint Building Council is a limited private company registered under CAP

486 Kenya Laws. It came to be in operation in 1974 (though it was registered

in 1980) as a result of problems arising from world wide oil crisis in 1973

(which caused inflation over a period of six months to reach over 100%) to try

and prevent possible collapse of the industry. It was initiated jointly by the

Government, KABCEC and the Architectural Association of Kenya.

Its main objectives (as in memorandum of Association) articles 3 are:-

(A) To promote the consideration and discussion of all questions affecting the

building industry (which expression in this Memorandum includes the trade

of builders and Contractors for the execution of public and private works,

the practice of the professions of architect, surveyor and engineer, and all

ancillary and allied trades and professions, and every branch of such trade

and professions).

(B) To arrange and promote the adoption of equitable forms of Contracts and

other documents used in the building industry, and generally to promote

co-operation within and the stability of the building industry through the

Contract and sub-contract procedure and the adoption of model forms of

contracts, and in particular to take all measures necessary and incidental to

the production of such particulars as may be required from time to time for

the “Fluctuations Clauses” contained in any agreement.

(C) To promote and encourage the settlement of disputes by conciliation or

arbitration and to act as or nominate arbitrators, experts and umpires and

to assist and participate in the formation, development and maintenance of

Boards of conciliation and Arbitrators upon such terms and in such cases

as may seem expedient.


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WHAT IS THE JOINT BUILDING COUNCIL C’TD

(D) To advance the science and art of planning and building, and to

promote excellence in the construction of building, and just and

honourable practice in the conduct of business, and to suppress

malpractice.

(E) To give members of the Legislature and other public bodies facilities

for conferring with and ascertaining the views of persons engaged in

the building industry as regards matters directly or indirectly affecting

the industry.

(F) To furnish to persons engaged in the building industry information on

all matters affecting the building industry and to print, publish, issue

and to circulate such papers, periodicals, books, circulars and other

literary undertakings as may seem conducive to any other objects.

(G) To subscribe to, render support to and to promote any society,

organisation, movement or other body the objects of which are, in

the opinion of the company such as to be of benefit to the building

industry directly or indirectly.

There is pricing sub-committee which monitors monthly price changes

and prepares all necessary practice notes to ensure that all parties

work on the same basis.


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02. EXTENT OF FLUCTUATIONS COVERAGE

Not all materials incorporated in the buildings are covered in the J.B.C.

Fluctuations monthly list.

02. THE MONTHLY PRICE LIST

Constitution

The monthly list contains the bulk of MAIN CONTRACTORS building

materials (at least 85%) which are likely to be incorporated in most

building projects and which change regularly.

Cement

Sand

Aggregate

Steel

H.T. Square twisted

Round mild bars

Fabric mesh reinforcement

Structural steel

Concrete blocks

Solid

Hollow

Building stone

Clay products

Asbestos cement sheeting

G.C.I. sheeting

Resincot I.T.4 and L.T.S. sheets

Vinylex floor tiles

PVC drain pipes and fittings

Galvanised mild steel pipes and fittings


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EXTENT OF FLUCTUATIONS COVERAGE C’TD

THE MONTHLY PRICE LIST C’TD

Timber

Softwood

Hardwood

Blockboard

Paint

Emulsion

Enamel

Precast concrete roof tiles

Bitumen and mastic asphalt

Labour

A typical building tender is currently broken down as follows;

( J.B.C. Fluctuating items 80% )

Materials ( ) 60%

( Non-J.B.C. items 20% )

Labour 19% of builder's work (Approx. 19% of 60%) 11.5%

Plant (not forming part of Preliminaries) 9%

Preliminaries 6%

Overheads 8%

Profit 5.5%

TOTAL 100%This is after excluding specialist services which are executed by others and not

subject to Fluctuations.


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.01 Exclusions are specialists items

Lifts

Sanitary fittings

Electrical works including wiring and fittings

Specialist finishes to floors, walls and ceilings

Metal doors and windows

Communications wiring and fittings

However, labour component can be assessed and be made to fluctuate

like the rest of fluctuating items!

Above items have very high IMPORT COMPONENT and the items are

excluded because either there is not enough data available to enable

smooth management of price changes or such items are tendered for just

about when needed for installation or fluctuations is INCORPORATED in

the tender.

The criteria used when deciding what to include or exclude is;-

(i) The weighting factor of the material as part of finished building. If

the material is of insignificant overall value, then it is excluded e.g.

ceramic tiles

(ii) Frequency of price change – if the material price does not change

frequently then it is excluded e.g. glass

(iii) Specialist items which can be included as P.C. Sum and tendered

close to incorporation date – excluded e.g. ironmongery.

(iv) Shelf life of material – materials that can be bought early and

stored without damage – excluded e.g. sanitary fittings.


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.02 Foreign Exchange Rate

All items in the construction industry have a certain element of foreign

exchange incorporation in

Transport

Fabrication

Plant and equipment

Prices of oil affects the price of electricity – raises the cost of fabrication

and site assembly.

Some materials e.g. copper has increased in prices – hence the price of

electrical wires. Kenya cannot control this situation as it is external.

Kenya is just a consumer of situations created by the G/8 etc and soon

the collapse of world economy will soon be with us!


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02. SOURCES OF PRICES

The Joint Building Council collects prices from various manufacturers and

suppliers and meets monthly (PRICING SUB-COMMITTEE) to update the

monthly price list and it is important to indicate the basis of the prices so

included.

KABCEC collects the price lists, the JBC also collects price lists and any

other interested person within the industry may provide the JBC with

pricing data e.g. Developers, Consultants and even price control/price

regulatory bodies.

e.g.

Cement - Bamburi Portland Cement Co.

- Athi River Portland Cement Co.

Paint - Crown-Berger Kenya Ltd.

- Saddolin

Ballast - Orbit Enterprises

- National Concrete

Timber - Timsales

- Wood Makers

The source so chosen must be reliable and has a fairly large share of

the market.


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SOURCES OF PRICES

The practice notes issued from time to time dictate the price included in

the list.

Factory price

Delivery charges within Nairobi City Centre

Waste/breakage factor during delivery

Taxes e.g. V.A.T.

e.g.

190mm Solid Concrete Block

Price ex-quarry Kshs. 48.00

Transport Kshs. 15.00

Breakage during transport (5%) Kshs. 3.00

TOTAL Kshs. 66.00

Add 16% V.A.T Kshs. 10.56

Price of each block Kshs. 76.56

The current Agreement and Conditions of Contract for Building Works

1999 Edition Clause 35.4 nominates the Joint Building Council to be

acceptable body to DETERMINE THE SCHEDULE OF BASIC RATES

to be used by all Tenderers and also to PUBLISH ALL CHANGES TO

THE SCHEDULE OF BASIC RATES AT ALL TIMES.


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SOURCES OF PRICES C’TD

This situation puts the Joint Building Council in a contractual obligation to

contracting parties i.e. the Developer and the Contractor to ensure that AN

ACCURATE monthly list is ALWAYS AVAILABLE AND UPDATED

REGULARLY!

e.g.

Steel being a major input in construction industry and also having a very high

import component value is both affected by world steel market and exchange

rate of Kenya shilling.

e.g.

July 2007 - shs.60/32 per Kg

January 2008 - shs.67/28 per Kg

February 2008 - shs.78/88 per Kg

April 2008 - shs.84/10 per Kg

September 2008 - shs.83/23 per Kg

November 2008 - shs.76/40 per Kg

December 2008 - shs.69/41 per Kg

July 2009 - shs.69/30 per Kg

August 2009 - shs.75/40 per Kg

August 2010 - shs.75/40 per Kg

February 2011 - shs.92/80 per Kg

December 2012 - shs.80/93 per Kg


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SOURCES OF PRICES C’TD

The base data at Tender stage commonly referred to as TENDER LIST must

be named and preferably included with tender documents.

Any changes after Tender opening date constitutes Fluctuations whether

contract signed or Tender validity extended i.e. if a Tender is opened and the

Client does not accept the Tender for even as long as one year, then all

changes in J.B.C. Fluctuations list will ne contractual.

The effectiveness of Fluctuations list cease at practical completion date and in

detail as soon as materials have been paid for by the Client. The logic in this

approach is that after practical completion, no further materials are necessary

for the works (and any new instructions are executed at new/current rates)

and also as soon as the Client pays for materials, why should he suffer

subsequent Fluctuations (he is already suffering from interest on such money

borrowed to effect early settlement of materials included in interim

certificates).

Fluctuations Clause considers materials prices available ex-suppliers or

manufacturers. The effect of currency Fluctuations on the import component

of locally available fluctuating materials is assessed at supply point as usual

when changes occur. However currency Fluctuations can be made

contractual so long as the base data is established at Tender stage and all

other changes so agreed just like the materials Fluctuations.

The detailed calculations of all contractual (Tender based) Fluctuations

(materials, labour and currency) are worked out interparties between the

Architect and the Contractor or at the direction of the Architect between the

Quantity Surveyor and the Contractor.

Reimbursement is as per certificate (on certificate basis) as events take place.

Materials not included in the Tender Fluctuations list do not attract

Fluctuations even when incorporated in the subsequent lists.


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CONCLUSION

From the foregoing, there are more advantages in contracting based on Fluctuations

Clause because the Client obtains a competitive Tender and minimises the

frequency of claims by contractors to try and catch on weak points from Clients-

caused delays.

“if neither the Client nor the Contractor can accurately foretell the future why demand

the Contractor to foresee future price changes and include the same in the Tender?”

they are both reasonable human beings.

.01 Current projects that were contracted prior to December 2007 todate have

been affected by;

High inflation worldwide especially caused by crude oil – multiplier

effect are enormous.

High increase in imported materials caused by fall in Kenya shillings

value.

High cost of locally assembled materials resulting from effects of oil

and low exchange rate e.g. sand, steel and aluminium.

THESE PROJECTS NEEDED SPECIAL ATTENTION TO MITIGATE

CONTRACTORS LOSS – ELSE ABANDONMENT OR SHODDY WORKS WOULD

RESULT.

THE DEVELOPER NEGOTIATED AND GAVE EX-GRATIA PAYMENT TO

CONTRACTOR TO SAVE THE PROJECT.


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CONCLUSION C’TD

I pray and hope that one day all building components shall be included in the

Fluctuations Clause but who knows when? Let us all work towards that goal and as

we do so we also encourage contractors to be less claims-conscious and work with

the Design Team and the Client as partners and evolve the construction process into

a more honourable profession

ALL future projects to have basis of tender extended to bulk of items that are not

currently in JBC list e.g.

Electrical wiring 100% August 2010

Fuel cost 100% ($70.00) August 2010

Aluminium items 100% August 2010

Foreign exchange rate US$1 = 71.00 August 2010

It is also recommendable to seek the services/inputs of CENTRAL BUREAU OF

STATISTICS so that the cost of living index can also be incorporated and make it

part of fluctuations operations for small and large projects!

MINIMISE SPECULATION

MINIMISE DISPUTES

ACHIEVE PROJECTS COMPLETION IN TIME AND IN A RELAXED MANNER

PRICE CHANGES AFFECTS BOTH THE CONTRACTOR AND DEVELOPER

ALIKE AND NO-ONE SHOULD HAVE AN ADVANTAGE OVER THE OTHER

BECAUSE ALL PARTIES TO A CONTRACT ARE EQUAL.

This is the paramount objective of JBC to minimise disputes both ways and

eventually establish a stress-free industry.

GIVE IT A TRY!


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CONTRACTORS CAPACITY BUILDING

As stated earlier, all good businessmen learn from others as well as own experience.

For a Building Contractor, he must treasure experience from past jobs and tread of

economy and political climate.

For one to grow and rise in categorisation (NCA Categorisation) one has to invest in

the business both in plant, owned workshops and offices and a reliable backup of

professional/technical staff.

For one to survive lean days of workload, one has to set aside some profit for that

rainy day!

Access to finance from banks and access to credit of materials from suppliers are all

assessed on the financial stability of the Contractor and above all attitude towards

payment of debts as and when they fall due!

As one starts on a new project, one has to plan how to complete the old ones and

also how to get jobs for the near future.

This assures continuity of business and that is the aim of each and every

businessman!

LET US ALL AIM AT CONTINUITY AND GROWTH AT ALL TIMES!

Prepared by: QS. ONESIMUS MWANGI GICHUIRI, HSC(B.A. (Build Econ) Hons, FAAK(Hons), FIQSK, MCIArb,MKIM, AKISM),FICPMK

CHAIRMAN (1990 – 2007) THE JOINT BUILDING COUNCIL, KENYA

omg paper august 2013

Documents

fixed contract

contract formulationa

various parties

major parties

contract formulation

building contractthere

simple buildings

contracting process