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‡ Why use contracts in construction?

² Describe scope of work
² Establish timeframe
² Establish cost & payment provisions
² Set forth obligations and relationship
² Manage multiple risks
² Establish control mechanism
² Minimize disputes
² Improve economic return on investment
 
 
Exposure various dimensions of construction
contracts, different types of construction
contracts, the types of contractors and risk
allocation and its analysis with a view to offer
viable recommendations.
 
  
‡ Legal Definition
² Mutually binding agreement that obligates the seller
to provide the specified product or services &
obligates the buyer to pay for the same.
² An agreement that affects the legal relationship
between two or more parties.
‡ A construction contract is a contract specifically
negotiated for the construction of an asset or a
combination of assets that are closely interrelated or
interdependent in terms of their design, technology and
function or their ultimate purpose or use.
 
‡ A construction contract may be negotiated for
the construction of a single asset such as a
bridge, building, dam, pipeline, road, ship or
tunnel.
 E E
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‡ Contracts require four basic elements:-
² Mutual Agreement
‡ Offer
‡ Acceptance
² Legal Objective
² Valid Consideration
² Legal capacity of the parties
 Muu
‡ Must have evidence that there was a ´meeting
of mindsµ
² Offer
‡ Clear & unambiguous
² Acceptance
‡ Clearly accepting the deal offered
‡ Anything else = counter offer and not
acceptance
 
 
‡ The object of a contract must be lawful, for the
law will not enforce a contract for an illicit
purpose.
‡ But, some contracts modifications may be
illegal & thus, unenforceable
² Verbal modifications
² Modifications beyond party·s authority
² Cardinal changes
 _
‡ Consideration is something of value given by
one party in a contract to the second party in
exchange for something else.
‡ In contract law, consideration can be anything
of value and the law usually is not concerned
with the amount of value. Its sufficiency is a
matter for the parties to bargain over and
agree to.
   !
‡ Capacity refers to the competency to make
valid and enforceable contracts.
‡ In simplest form parties must be
² Of age
² Mentally competent
‡ In construction environment, parties must
have
² Legal authority to issue & execute contracts
² May have to be properly licensed to have legal
capacity
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‡ Generally, no
² but they may need to be in writing to be
enforceable.
‡ Usually a contract must be in writing, if it cannot be
performed within a year. Therefore, most major
construction projects require a written contract.
‡ An oral contract is unsubstantial and difficult to prove,
and because it cannot be demonstrated by tangible
evidence (except to the extent it has been performed),
it is always a potential source of misunderstanding.
   u
‡ Drawings graphically provide:
² Arrangements
² Materials
² Dimensions
² Configurations
² Other...
   u
‡ Specifications provide:
² Written instructions that detail project
requirements
² Information that is not easily shown on
drawings
   u
‡ Other key documents:
² Contract
² Subcontract
² General conditions
² Supplemental conditions
² Addenda and change orders
² Performance and payment bonds
² Request for information (RFI)
   u
‡ Other key documents:
² AIA Doc.521 and EJCDC Doc. 1910-16 address the question of
where to place or find a specific subject in contract documents and
offer a uniform approach to the organization of contract
documents.
² Several components of the construction contract documents are
available as standard forms to define the agreement for a particular
project.
² AIA, AGC, DBIA, and EJCDC have developed high quality standard
forms, agreements, general conditions, and other documents.
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‡ Owner wants to achieve best value for their
investment.
‡ Contractors desire to bid low enough to win but high
enough to realize profit on investment.
‡ Workers hope to achieve better living standards and
working conditions.
‡ Architect and Engineers are not directly associated
with the above groups.
‡ Professional achievement more attractive.
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‡ Fixed Price





‡ Reimbursable


 

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‡ Contractor free to use any means and methods to
complete work
‡ Contractor responsible for proper work performance
‡ Work must be very well defined at bid time
‡ Fully developed plans and specs required
‡ Owner·s financial risk low and fixed at the outset
‡ Contractor has greater ability to profit

!   & u u
‡ Requirements
² Good project definition
² Stable project conditions
² Effective competition essential when bidding
² Much longer time to bid and award this type of project
² Minimal scope changes

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‡ Require sufficient design definition to estimate quantities

of units
‡ Contractors bid on units of work
‡ Time and cost risk ´sharedµ
² Owner - - At risk for total quantities
² Contractor - - At risk for fixed unit price
‡ Large quantity changes (>15 ² 25%) can lead to
increases or decreases in unit prices

!   & $ 

‡ Requirements
² Adequate breakdown and definition of work units
² Good quantity surveying and reporting system
² Adequate drawings
² Experience in developing bills of quantities
² Payment terms properly tied to measured work completion
² Owner-furnished drawings and materials must arrive on time
² Quantity sensitive analysis of unit prices to evaluate total bid price for
potential quantity variations

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‡ Less design definition required

‡ Final costs are owner·s responsibility
‡ Can contract in early stages of project
‡ Can mix fixed costs with reimbursable costs
² Overhead and profit at fixed rate
² Reimbursed labour, material and equipment at cost
‡ Owner has more control over contractor
‡ Contractor has little risk and no incentive to control costs

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‡ Requirements
² Competent and trustworthy contractor
² Close quality supervision by owner
² Careful cost control by owner
² Detailed definition of work items to be performed
² Detailed payment terms covered by both lump sum
and ´all inclusiveµ rates
 " 
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Factors Conditions
Scope Definition Extensive Low
Uniqueness of work Routine Unusual
Cost Importance High Low
Market Conditions Buyers· sellers·
Economic Conditions Stable Unstable
Project Duration Normal Long
Schedule Importance High Low
Buyer·s Resources Low High
Pricing style Indicated Fixed Price Reimbursable
 u "

‡ Construction Law deals with all legal issues relating to

the construction process, including:-
² Advising on the most appropriate form of project delivery
² Drafting, tender documents and a variety of contracts
including building contracts, subcontracts, architect/client
agreements and engineering and supply contracts.
² Advising on, and seeking to resolve construction claims
through ADR, arbitration and litigation and
² Advising on and assisting with resolving insurance issues.
 
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‡ Torts
‡ Contract Law
‡ Trade Practices
‡ Equity
‡ Dispute Resolution (including civil
procedure, arbitration and ADR)
 u " 


‡ Property Law
‡ Planning Law
‡ Environmental Law and
‡ Project Finance.
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‡ An ns 
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‡ A compl
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‡ A hghl sp
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‡ A highly varied field with projects ranging from small

domestic renovations to the construction of City link
and Eureka, the tallest residential building in the world
&

‡ A challenging area to work in because it is constantly

changing and evolving ² frequently new ideas and
improved ways of doing things initiate from
construction law issues and cases.
 ) u  
‡ Like all contracts, construction contracts are about the
prior allocation of risk.
‡ Winar (1991) ras attention to the construction
inustry·s nee to make a profit on the employment of
capital
‡ ¶If risk is an essential ingreient of the system hich
generates your profit, it is inevitable that there must be
a structure for resolving isputes. It brings the
relationship of the isputants back into balance so that
life can resume its normal course.·
 ) u  
TERMINOLOGY
‡ Hazard - a particular event which has the potential if
it occurs of an adverse effect.
‡ Risk - the probability of occurrence of a defined
hazard and the magnitude of the consequences.
‡ Risk Assessment - the estimation and evaluation of the
risk, the magnitude of the consequences together with
the probability of the consequences.
 ) u  
TERMINOLOGY
‡ Risk Identification - an awareness of those risks which
could adversely affect the outcome of the project.
‡ Risk Management - the identification, measurement
and economic control of risks.
 Ex )
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‡ Inclement weather
‡ Unforseen ground conditions
‡ Industrial action
‡ Deficiencies in design
‡ Insolvency or non-performance by a sub-
contractor
‡ Unavailability of materials
‡ Cost overruns in labour and materials and
‡ Occupational health and safety
Mþ
M  ! M 
 
‡ It can be assumed ² i.e. risk taking;
‡ It can be priced ² i.e. built into the tender price;
‡ It can be laid off ² i.e. insured or passed on to another
entity e.g. subcontractor;
‡ It can be refused ² i.e. decline the job; or
‡ It can be shared ² i.e. in alternative contractual
arrangements such as alliancing and partnering.
‡ But it should never be ignored!!!
 
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A party to a contract should bear a risk where:-
‡ The risk is within the party·s control
‡ The party can transfer the risk, e.g. through insurance, and
it is most economically beneficial to deal with the risk in
this fashion.
‡ The preponderant economic benefit of controlling the risk
lies with the party in question.
‡ To place the risk upon the party in question is in the
interests of efficiency, including planning, incentive and
innovation.
‡ If the risk eventuates, the loss falls on that party in the first
instance.
  !
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‡ The Principal should not ask a Contractor to price an

unquantifiable risk that is within the control of the
Principal e.g. ground conditions.

‡ The Principal, may ask the Contractor to manage and

control a neutral risk e.g. weather.

‡ The Contractor should carry the risk for the safety of

its own workers.
  u 

Contract Documents
‡ The Contract Documents do not include unless
specifically enumerated in the Agreement,
² Bidding requirements (advertisement or invitation to bid
² Instructions to Bidders
² Sample forms
² The Contractor·s bid
² Portions of Addenda relating to bidding requirements
  u 

Scope of Work
‡ An os escrpon of he Work occrs when he owner
nerpres he Scope of Work ore ro ly h n oes he
conr cor.
‡ The Sppleen ry Conons, Dr wns n Specfc ons
shol ll e horohly revewe o
² e sre h  ll Work h s een properly enfe n
² o ep o eln e conflcs whn he Conr c Docens.
  u 

Some hierarchical contract issues include:-

‡ Contract Efficiency Factors. These are regulatory and financial conditions
ensuring project finance when the work is commenced by the contractor
‡ Taking over a Building on Completion of Construction. The conditions of
taking over the responsibility for the completed project by the employer
and dismissal of the contractor
‡ Insurance. This concerns the external risks and liability of the 3rd party
‡ The Right of the 3rd party for Intellectual Property. It is a definition of
risks associated with 3rd party patents and their violation
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Criteria Effect of Contract Form on Mgmt

Positive Negative
Specifications Concentrated on key areas Too detailed

Price Reasonable Not beneficial for

contractor
Terms of payment Favorable for contractor Unfavorable for contractor
Schedule Rational delay time High coverage of losses
Performance guarantees Concentrated on key areas Too detailed

Warranties Rather limited All including

Liability Not High wrt contract price High wrt contract price
Securities Not broad wrt contract price Broad wrt contract price
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Alternatives Criteria

Tech Price of est Terms of Sch Per Warranties Limit of

Specs payment guarantee liability

Fixed Price Highest Suitable for Fixed in Rational Very imp High High
consistency contractor advance delay time

Incentive Well defined Suitable for Not fixed Rational Imp Intermediat intermediat
contractor delay time e e

EPCP Not well Not suitable Not fixed Inadmissible Imp Low Low
defined for time
contractor