Contracts in Procurement

MSc in Construction Law and Dispute Resolution

Day Two

CONSTRUCTION PROCUREMENT

CONTRACTS

BE 5402

Suranga Jayasena
1

Some Preliminaries

Value = Price

What is Price?

if
Price = Cost + Profit : for the seller/contractor

Amount of payment (compensation) given by

one party to another in return for goods or
services.

Value = value-in-use : for the buyer/client

Value = exchange value : for the buyer/client

What is Value?
Various explanations
Value-in-use: what benefit provided to the buyer
Exchange value: how much of other goods given up
Value = price: market mechanism

?
4

In a Contract

A Contract

We should be able to see the link between

...is a legally binding agreement (usually)

between two parties.
Usually a written (& sometimes not)
All agreements are not contracts
Test

Value
&
Price

Offer and acceptance

Intention to create legal relationship

Thus, all contracts are agreements

5

MSc in Construction Law and Dispute

Resolution

Contracts in Procurement

Contract Development

Contracts in Procurement

Decision on type of contract, conditions of

contract and contract documentation
Selection of the contractor
Establishment of contract price (or how the
price will be arrived at)

The focus is on
Validity of Contracts
Legal grounds for challenge
Judicial precedents
...

No
It is on what is agreed by the parties.
7

What is agreed

Rights and Obligations

Rather than what they are, we may also
look how they are defined.
Contract defines

...defines
Rights and
Obligations

What is to be designed
What is to be built and
How much to be paid

of parties under the agreement.

Clients right: to get the project done.

Contractors right: to get paid

How these are defined maybe used to

classify the contracts
9

Contract Classification

Classification by Reward

Simplest maybe to look at design and

build responsibilities, i.e. classification by
responsibility.

Looks at how reward (payment) is paid to

the contractor by the client.
>> What is agreed at the time of contract.

A design contract
A building/construction contract
A design and build contract

Broadly, either
Price Based, or
Cost Based

This classification may not be deep

enough for our purposes
11

MSc in Construction Law and Dispute

Resolution

10

12

Contracts in Procurement

Price Based Contracts

Lump Sum Contracts

Broadly Two

Contract Sum (for the total contract) is

agreed before construction starts.
Appropriate for most of contracts.
Client has the maximum price certainty
before contractor starts performing.

Lump Sum Contracts

Measurement Contracts

13

Measurement Contracts

14

Measurement Contracts Cont.

Agree for a mechanism to arrive at final

sum based on actual quantities of work
done.
Price certainty only at the end of
performance.
Higher price risk compared to lump sum.
Some, are re-measurement contracts.

Most effective when works are

substantially designed but final details not
yet completed.
Client can shorten overall programme at
the expense of price certainty.
Fair Price ...?

15

Cost Based Contracts

16

Cost Based Contracts Cont.

Agreed for mechanism for final price

Price = Costs + Agreed Allowance
Costs

Known as Cost Reimbursement Contracts

Used When not appropriate to measure
even approximate quantities: scope not
clear, risk unreasonable to price, etc.

Actual costs (prime cost) incurred by the

contractor in performing the contract >>
labour, plant, material, fuel, etc.

Risk >>> Profit Margin

Examples: emergency building repair after

fire, Civil Engineering work under water.

Allowance
A fee: which needs to be agreed.
17

MSc in Construction Law and Dispute

Resolution

18

Contracts in Procurement

Cost Based Contracts Cont.

Cost Reimbursement Contracts

Provide for great flexibility for change

Cost + Percentage Fee

Programme, scope, quantity of works, etc.

Price risk to contractor is low; to client high

Weakness in lack of incentive for
contractor minimize his prime cost
Few variants depending on the way the
fee is applied.

Cost + Fixed Fee

Cost + Fluctuating Fee
Target Cost Reimbursement Contract

19

Alternative Classification

20

Drawings and Specifications

Simplest type
Complete drawings and full specifications
Comprises of large amount of tender
information
Most pricing risk to the contractor
Tendency to overprice due above
Known to be used with lump sum price

Drawings and Specification

Performance Specification
Schedule of Rates
Schedule of Prices
Bills of Firm Quantities
Bills of Approximate Quantities

(and no BoQ)
21

Drawings and Specification

with Lump Sum Price

Performance Specification

Each bidder quantifies for pricing >>

wasteful
Difficult to evaluate bid prices
Design needs to be fully completed for
signing of the contract
Variations might become problematic to
value

Price based on employers brief and user

requirements (documented as a
performance spec)
Within the parameters laid down,
contractor chooses methods, materials
and the design (often)
Flexibility to the contractor
Defined performance to be achieved
23

MSc in Construction Law and Dispute

Resolution

22

24

Contracts in Procurement

Performance Specifications Cont

Schedule of Rates

Similar to BoQ but no quantities

Principles of SMM used
Bidders insert their rates
Neither contract sum nor final price
predictable
Difficult to price in absence of quantities
Used when not possible to predetermine
the extent of proposed work

Lump sum price

Natural to offer least expensive materials
and construction methods
Difficulty is to draft the Performance Spec
perfectly
Suits projects of any size.

25

Schedule of Prices

26

Bills of Firm Quantities

Both Quantities and Unit Rates form part
of contract
Design to be virtually completed
Clear picture of commitment of both
parties
Detail breakdown of bid/tender sum >>
better bid evaluation
Unit rates >> basis for pricing variations

Similar to Schedule of Rates, but tender

includes rates (from current market)
Bidders offer discounts (+/-) for work
sections
Facilitate bid evaluation
Usage of standard allows familiarity >>
better pricing
27

Bills of Firm Quantities Cont.

Bills of Approximate Quantities

Bid can be compared on bid sum alone

Widely used, suits projects of any size
Lot of time on design and bill preparation
Risk of quantity errors in BQ is with bidder
Bidder to rate strategically
May cause problems in variations pricing
29

MSc in Construction Law and Dispute

Resolution

28

Used when not possible to measure work

accurately
Price certainty comparatively less than
previous
Entire work re-measured on completion
Only Unit Rates form part of contract
Quantities ...?
30

Contracts in Procurement

Bills of Approximate Quantities Cont

Less pressure to fully complete the design
Signing of contract before finalizing the
design
Lesser overall time
No risk to bidder on quantity errors in the
bill (what if for large deviations)
Extra expense (time/money) on bill of firm
quantities avoided >> but, what about
remeasuring
31

Contracts

Further Comments?
Reflections?
Summarizing?
32

Thank You

33

MSc in Construction Law and Dispute

Resolution