CONSTRUCTION MANAGEMENT AND ADMINISTRATION UNIT IV Contracts

List of topics
1. Introduction of contracts 2. Types of contracts 3. Tender drafting and Tender analysis
Conditions of contract

4. Stages of awarding contract

Procedure for execution of PWD works

5. 6. 7. 8.

Safety in construction Workmen compensation act Contract labor act 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. 2. 3. 4. 5. Lump sum contract Item rate contract Lump sum and scheduled contract Cost plus percentage/fixed fee contract 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) b) c) d) e) f) g) Turn-key contract Package contract Negotiated contract Continuing contract Running contract BOT & its Variants 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 subcontractors 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 owners 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) BOT & its variants

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

g) 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 Security money Time of completion

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

Schedule of issue of materials

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

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

Specifications Specifications are of the following types

1. 2. 3. 4. Contract specifications Guide specifications Standard specifications Manufacturers 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 specifications
These 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 specifications
These specifications re prepared for various materials or group of materials for the guidance of all concerned with construction (e.g. IS 456)

4. Manufacturers specifications
Manufacturers 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. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Time of completion (TOC) Delay and extension of time (EOT) Penalty Compensation for delay in completion of work Liquidated damages Debitable agency Valuation of variations Settlement of disputes Force majeure and natural disasters Price escalation 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. Penalty
It 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

Important Conditions of Contract 4. Compensation for delay in completion of work

The 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 agency
whenever 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 variations
The 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 disputes
Efforts 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 disasters

Natural 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

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. 2. 3. 4. 5. 6. 7. The detailed procedure relating to expenditure on such works shall be prescribed by departmental regulations framed in consultation with the Accounts Officer Preparation of detailed design and estimates shall precede any sanction for works No work shall be undertaken before issue of Administrative Approval and Expenditure Sanction by the competent Authority on the basis of estimates framed Open tenders will be called for works costing Rupees five lakhs to Rupees ten lakhs Limited tenders will be called for works costing less than Rupees five lakhs Award of work should be done before commencement of the work Final payment for work shall be made only on the personal certificate of the officerin-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.