CONSTRUCTION CONTRACT MANAGEMENT BY MUMTAZ HUSSAIN PROJECT DIRECTOR (ZPIP) CAPITAL DEVELOPMENT AUTHORITHY

Todays reality
Construction is complex and challenging. Delays, changes, disputes, accidents cost more than ever. Construction contracts are among the most complex forms of contract around because determinations of satisfactory performance of the obligation is difficult to determine.

INTRODUCTION
A contract is a formalized means of communication between two parties. This facility is used very commonly by the project manager and owner to control the delivery of their projects. A contract has the added advantage of forcing owners to define their, requirements, organize and arrange their thinking, and make a commitment to their project.

BASIC REASONS FOR A CONTRACT

BASIC REASONS
1. It defines the work and the owners delegation of responsibilities to the various parties to complete the work 2. It inherently defines the nature and extent of risk to various parties. 3. It defines the transfer of financial incentives to complete the work.

CONTRACT
THE WORD CONTRACT IS DERIVED FROM LATIN WORD CONTRACTUM WHICH MEANS DRAWN TOGETHER;

WHAT IS A CONTRACT?
A contract may be defined as a voluntary agreement enforceable at law, made between two or more parties, whereby rights are acquired by one party to act or forbearances by the other. According to the Construction Specification Institute (CSI) Manual of Practice, a contract is a promise or a set of promises for the breach of which the law gives a remedy of the performance of which the law recognizes a duty (CSI 2008). The agreement is reached by the acceptance of an offer made by one party to do something for other for a stipulated consideration.
6

ELEMENTS OF A CONTRACT These are the five basic elements of a contract OFFER CONSIDERATION ACCEPTANCE LEGAL PURPOSE LEGAL CAPACITY
7

CONTRACT AGREEMENT The agreement is designed to formalize the contract. It brings together all the other contract documents by reference to them and is legal instrument verifying the contract.

CONTRACT MANAGEMENT
That function of a project which is responsible for conformation of performance within the stipulations of contract. CONSTRUCTION CONTRACT
A contract under which one party promises to furnish service & materials to build a structure for another party who promises to pay for the work performed. There are two basic types of construction contracts Fixed price (or lump sum) Cost type
9

CONSTRUCTION CONTRACT (Contd.)

The success of a project is often judged on the construction performance because this activity is highly visible. The success of a project is also influenced by; The accuracy and details of its documentation The understanding between parties and acceptance of their particular responsibilities How professionally and accurately the day to day administration is handled How conflict or contractual problems are resolved.

10

Construction Project Development Phases

Typical construction project development phases includes; 1. Preliminary planning and feasibility studies 2. Preliminary engineering and design 3. Detailed Engineering design 4. Procurement 5. Construction 6. Operation 7. Demolition

Contracts are used during all phases of construction projects. In the first phase , which is the feasibility phase, contracts are formed between an owner and a consultant, an engineering firm, or an architectural firm to perform a feasibility and site selection study. In the construction phase contract are formed between an owner and a Contractor firm.

Construction Contract Documents

Characteristics of a good contract document:
1. 2. 3. 4. 5. 6. 7. Carefully considered Expressed clearly Time-tested Comprehensive Fair Balanced Applicable to the elements of a construction projects

PEC BIDDING DOCUMENTS

Standard Form of Bidding Documents (Civil Works) (to be used for estimated value of more than Rs. 25 Millions) Standard Form of Bidding Documents for Procurement of Works (E&M) (to be used for estimated value of more than Rs. 25 Millions) Standard Form of Bidding Documents for Procurement of Works (For Smaller Contracts) (to be used for all type of procurement for estimated value of not more than Rs. 25 Millions) Standard Form of Contract for Engineering Consultancy Services (For Large Projects) Time Based Assignments (to be used for consultancy fee over Rs. 2 Millions) Standard Form of Contract for Engineering Consultancy Services (For Large Projects) Lump Sum Assignments (to be used for consultancy fee over Rs. 2 Millions) Standard Form of Contract For Engineering Consultancy Services (For Smaller Projects) (to be used for consultancy fee not more than Rs. 2 Millions)

A NORMAL SET OF TENDER DOCUMENTS

1. INSTRUCTIONS TO BIDDERS 2. CONDITIONS OF CONTRACT (GENERAL PART-I & PARTICULAR PART-II) 3. FORMS OF TENDER & CONTRACT SECURITIES 4. SPECIFICATIONS & SPECIAL PROVISIONS 5. BILLS OF QUANTITIES OR SCHEDULES OF PRICES 6. DRAWINGS 7. SUPPLEMENTARY DATA

15

INSTRUCTIONS TO BIDDERS
This Contains Information's And Instructions Which A Prospective Contractor Is Required To Know Or Abide By For Participation In Tendering:Name Of Work To Be Constructed Source Of Funds For The Works Eligibility & Qualification Requirement Firms And Persons Authorized To Submit Tender Cost On Tendering Not Reimbursable What Makes A Tender Non-responsive Holding Of Pre-tender Conference, If Required
16

TENDER DOCUMENTS
General Conditions of Contract
These define the legal rights and obligations of the parties and may be described as the regulations under which the contract will be performed. Nominates an independent third person called the Engineer who is responsible for administering the contract Conditions of Contract internationally Federation Internationale des Ingenieurs- Counseils (FIDIC), Switzerland, 1992.

17

Tender Documents (Contd.)

Special Conditions of Contract
These are additions to, deletions from or amendments to the General Conditions to make them project or party specific.

Specifications
Give full description of work to be carried out Detail the materials and workmanship that the Contractor is to utilize in the project Define the quality and standards of workmanship required Act as a legal evidence in the event of litigation

18

Tender Documents (Contd.)

Drawings Bill of Quantities Quantities are estimates only and should have limits of accuracy Tender Formal offer to undertake the project. Price, conditions and method statements are detailed. It should be noted that all documents submitted with a tender form part of the tender Letter of Acceptance Relevant Correspondence This often include points of clarification of either the Tender Documents or a tender.

19

Design phase Preparation of Pre-qualification Documents

Advertisement Pre-qualification Criteria

Pre-qualification Finalization
List of pre-qualified Contractors

Invitation to Pre-qualified Bidders Instructions to Bidders Bid submission Process

Pre-bid meeting Evaluation of bids Lowest Evaluated Bid Letter of Acceptance Submission of Performance Bond Signing of Contract Agreement Letter of Commencement/ Notice to proceed Financial Assistance in form of Mobilization Advance
20

Bidder Conferences/Pre-Bid Meetings

Bidder conferences (sometimes called contractor conferences, vendor conferences, and pre-bid conferences) are meetings with all prospective sellers and buyers prior to submittal of a bid or proposal) are meetings with all prospective sellers have a clear and common understanding of the procurement (both technical and contractual requirements), and that no bidder receive preferential treatment. Responses to questions can be incorporated in to the procurement documents as amendments. To be fair, buyers must take great care to ensure that all prospective sellers hear every question from any individual prospective seller and every answer from the buyer.

21

TENDER SECURITY/BID BOND

Bid Bonds are used to protect owners when the contractor that is lowest, responsible , responsive bidder on a competitively bid project refuses to enter into the contract for the project. Amount of security shall be in form of Cash Deposit, Certified Cheque, Bank Draft, Letter of Credit, Guarantee from a Scheduled Bank in Pakistan or Foreign Bank Acceptable to Employer. If Tender is not accompanied by an acceptable Tender Security (1-3% of Est. Cost, whereas 3% for smaller Contracts). It will be rejected being nonresponsive and having major deviation.
22

CONTRACT ADMINISTRATION
Performance Bond Financial Assistance/Mobilization Advance Appointment of the Engineer and Authority Priority of Contract Documents Retention Money Insurances and risk management Clause 14 Work Program Liquidated Damages Bonus Variation Orders Claims Dispute Resolution Price adjustment Clause Taking over Certificate Defect Liability Certificate
23

Performance Bonds Performance bonds are guarantees by the surety that a contractor will perform the work as required by all of the conditions and terms of the contract The Performance Security shall be of an amount equal to 10% of the Contract Price stated in the Letter of Acceptance. Such Security shall, at the option of the bidder, be in the form of either (a) bank guarantee from any Scheduled Bank in Pakistan or (b) bank guarantee from a bank located outside Pakistan duly counterguaranteed by a Scheduled Bank in Pakistan or an insurance company having at least AA rating from PACRA/JCR. "Commencement Date" means the date upon which the Contractor receives the notice to commence issued by the Engineer pursuant to Clause 41.

24

The Engineer" means the person appointed by the Employer to act as Engineer for the purposes of the Contract. The Engineer shall obtain the specific approval of the Employer before carrying out his duties in accordance with the Clauses mentioned in document e.g.: Consenting to the sub-letting of any part of the Works under Sub-Clause 4.1 Subcontracting. "Letter of Acceptance" means the formal acceptance by the Employer of the Tender.

5.2

Priority of Contract Documents

The documents listed at (1) to (6) of the Sub-Clause are deleted and substituted with the following: (1) The Contract Agreement (if completed); (2) The Letter of Acceptance; (3) The completed Form of Bid; (4) Special Stipulations (Appendix-A to Bid); (5) The Particular Conditions of Contract Part II; (6) The General Conditions Part I; (7) The priced Bill of Quantities (Appendix-D to Bid); (8) The completed Appendices to Bid (B, C, E to L); (9) The Drawings; (10) The Specifications; and (11)______ (any other).

26

Liquidated Damages Rather Than have a contractor be in breach of contract if he or she is not able to complete a project as scheduled, liquidated damages provides compensation to owners when this situation occurs at the end of a construction project. Fixed per day maximum amount 10% of contract price

27

BONUS
The Contractor shall in case of earlier completion be paid bonus up-to a limit and at a rate equivalent to 50% of the relevant limit and rate o f liquidated damages prescribed in the Contract.

28

 Insurance of Works and Contractor's Equipment Damage to Persons and Property Insurance Against Accident to Workmen The Contractor shall, except if and so far as the Contract provides otherwise, indemnify the Employer against all losses and claims in respect of: (a) death of or injury to any person, or (b) loss of or damage to any property (other than the Works), Third Party Insurance (including Employer's Property)

Changes in plans and specs

clarification, correction, modifications prior to bid are referred to as addenda
owner must maintain a system of distributing and acknowledging receipt of addendum

plan and spec changes after award are referred to as revisions, and generally require issuance of a Variation order(s)

51.1

Variations

The Engineer shall make any variation of the form, qualify or quantity of the Works or any part thereof that may, in his opinion, be necessary and for that purpose, or if for any other reason it shall, in his opinion, be appropriate, he shall have the authority to instruct the Contractor to do and the Contractor shall do any of the following: (a) increase or decrease the quantity of any work included in the Contract, (b) omit any such work (but not if the omitted work is to be carried out by the Employer or by another contractor), (c) change the character or quality or kind of any such work, (d) change the levels, lines, position and dimensions of any part of the Works, (e) execute additional work of any kind necessary for the completion of the Works, or (f) change any specified sequence or timing of construction of any part of the Works.

Variations Orders
a written order issued by the owner to the contractor for a change to the contract within the scope of work change orders are written for:
extra work increasing or decreasing the contract quantities alterations

change orders state the basis and amount of payment and time extensions

Ability to influence cost over time Greatest potential to influence cost is during the pre-construction design phase Claims avoidance begins during pre-construction Design phase Intensive preparation and review of contract documents Careful consideration of methods and equipment = consider overall constructability

Extension of Time for Completion

In the event of: (a)the amount or nature of extra or additional work, (b)any cause of delay referred to in these Conditions, (c) exceptionally adverse climatic conditions, (d)any delay, impediment or prevention by the Employer, or (e)other special circumstances which may occur, other than through a default of or breach of contract by the Contractor or for which he is responsible,

Taking-Over Certificate
When the whole of the Works have been substantially completed and have satisfactorily passed any Tests on Completion prescribed by the Contract, the Contractor may give a notice to that effect to the Engineer with a copy to the Employer, accompanied by a written undertaking to finish with due expedition any outstanding work during the Defects Liability Period.

Defects Liability Certificate

The Contract shall not be considered as completed until a Defects Liability Certificate shall have been signed by the Engineer and delivered to the Employer, with a copy to the Contractor, stating the date on which the Contractor shall have completed his obligations to execute and complete the Works and remedy any defects therein to the Engineer's satisfaction. The Defects Liability Certificate shall be given by the Engineer within 28 days after the expiration of the Defects Liability Period, or, if different defects liability periods shall become applicable to different Sections or parts of the Permanent Works, the expiration of the latest such period, or as soon thereafter as any works instructed, pursuant to Clause 49 and 50, have been completed to the satisfaction of the Engineer. Provided that the issue of the Defects Liability Certificate shall not be a condition precedent to payment to the Contractor of the second portion of the Retention Money in accordance with the conditions set out in Sub-Clause 60.3.

ADMINISTER PROCUREMENT:
Claims Administration
Contested changes and potential constructive changes are those requested changes where the buyer and seller cannot reach an agreement on compensation for the change, or cannot agree that a change has occurred. These contested changes are variously called claims, disputes, or appeals. Claims are documented, processed, monitored, and managed throughout the contract life cycle, usually in accordance with the terms of the contract. If the parties themselves do not resolve a claim, it may have to be handled in accordance with alternative dispute resolution (ADR) typically following procedures established in the Contract. Settlement of all claims and dispute through negotiation is the preferred method.

37

CONTRACT CLAIMS
Contract Claims could occur at any stage in the execution of a project. Typical causes of claims include: Differing site conditions Delays Design error or changes Interpretation differences Acceleration or suspension of work Additional work Deleted work Construction failures

Claims Avoidance producing comprehensive, accurate, contract documents constructability review clear understanding of contract requirements prior to bidding having good administrative procedures in place open and honest communication timely troubleshooting

Claims avoidance begins in the pre-construction phase

Procedure for Claims

53.1 Notice of Claims
Notwithstanding any other provision of the Contract, if the Contractor intends to claim any additional payment pursuant to any Clause of these Conditions or otherwise, he shall give notice of his intention to the Engineer with a copy to the Employer, within 28 days after the event giving rise to the claim has first arisen.

53.2

Contemporary Records

Upon the happening of the event referred to in Sub-Clause 53.1, the Contractor shall keep such contemporary records as may reasonably be necessary to support any claim he may subsequently wish to make. Without necessarily admitting the Employer's liability, the Engineer shall, on receipt of a notice under Sub-Clause 53.1, inspect such contemporary records and may instruct the Contractor to keep any further contemporary records as are reasonable and may be material to the claim of which notice has been given. The Contractor shall permit the Engineer to inspect all records kept pursuant to this Sub-Clause and shall supply him with copies thereof as and when the Engineer so instructs.

53.3

Substantiation of Claims

Within 28 days, or such other reasonable time as may be agreed by the Engineer, of giving notice under Sub-Clause 53.1, the Contractor shall send to the Engineer an account giving detailed particulars of the amount claimed and the grounds upon which the claim is based. Where the event giving rise to the claim has a continuing effect, such account shall be considered to be an interim account and the Contractor shall, at such intervals as the Engineer may reasonably require, send further interim accounts giving the accumulated amount of the claim and any further grounds upon which it is based. In cases where interim accounts are sent to the Engineer, the Contractor shall send a final account within 28 days of the end of the effects resulting from the event. The Contractor shall, if required by the Engineer so to do, copy to the Employer all accounts sent to the Engineer pursuant to this Sub-Clause.

Disputes

Under ConstructionProblems & Disputes

Settlement of Disputes
67.1Engineer's Decision If a dispute of any kind whatsoever arises between the Employer and the Contractor in connection with, or arising out of, the Contract or the execution of the Works, whether during the execution of the Works or after their completion and whether before or after repudiation or other termination of the Contract, including any dispute as to any opinion, instruction, determination, certificate or valuation of the Engineer, the matter in dispute shall, in the first place, be referred in writing to the Engineer, with a copy to the other party. Such reference shall state that it is made pursuant to this Clause. No later than the eighty-fourth day after the day on which he received such reference the Engineer shall give notice of his decision to the Employer and the Contractor. Such decision shall state that it is made pursuant to this Clause. Unless the Contract has already been repudiated or terminated, the Contractor shall, in every case, continue to proceed with the Works with all due diligence and the Contractor and the Employer shall give effect forthwith to every such decision of the Engineer unless and until the same shall be revised, as hereinafter provided, in an amicable settlement or an arbitral award. Amicable Settlement Where notice of intention to commence arbitration as to a dispute has been given in accordance with Sub-Clause 67.1, the parties shall attempt to settle such dispute amicably before the commencement of arbitration. Provided that, unless the parties otherwise agree, arbitration may be commenced on or after the fifty-sixth day after the day on which notice of intention to commence arbitration of such dispute was given, even if no attempt at amicable settlement thereof has been made

INCREASE OR DECREASE OF COST

It is not in the best interest of the Employer to ask tenderers to quote firm prices with no provision of adjustments, especially for long-term contracts. In bidding documents having provisions for price adjustment, the Employer is expected to receive more competitive offers from reputable parties and will have to meet the net variations in cost as may actually occur.

43

S. No.

MATERIAL

MARKET PRICE Dec-07/ Jan 08

MARKET PRICE

Difference

31st May-08

1 2 3 4 5

Cement Reinforcement Diesel Bitumen Labour (unskilled)

240 47000 37.8 36395 250

300 84000 50.21 48195 300

25.00 78.72 32.83 32.42 20.00

44

PRICE INCREASE DEC 07/Jan 08 to 31st May 2008 39.40% March 2008 to 31st May 2008 21.29%

45

Why a formula?
Make price adjustment (as a reasonable compensation against variation in prices of the selected materials and inputs) as close as possible to the actual; Set out a simple procedure; Minimize ambiguities; and Make the contract more equitable.

46

1. COMPLETION PERIOD OF THE CONTRACT Only contracts having duration of six months or more should be liable to price adjustment. 2. COST OF THE CONTRACT The Price Adjustment shall be applicable only for the contracts having contract price exceeding financial limit of PEC Contractors Registration Category C-5 (Rs. 30 Million).

47

Particular Conditions of Contract Part-II Clause 70- Increase or Decrease of Cost Adjustment Formula Pn= A+ b*Ln/Lo+ c*Fn/Fo + d*Cn/Co+ e*Sn/So+ f*En/Eo + g*Mn/Mo ..

48

APPENDIX-C
Cost Element (i) (ii) Description Base Cost Weightag es 0.35 Government of Pakistan (GP) Federal Bureau of Statistics (FBS) Monthly Statistical Bulletin. FBS Pakistan Steel Mills/ FBS PSO FBS Attock/National Refinery Total 1.0
49

Applicable index

Fixed Portion Labour

(iii) (iv) (v) (vi) (vii)

Cement- in bag Reinforcement Steel HSD Bricks Bitumen

3. DECISION ABOUT ELEMENTS TO BE COVERED

4. WEIGHTAGE OF EACH COST ELEMENT

5. SELECTION OF SOURCE In case the price adjustable elements are not covered in the Federal Bureau of Statistics, the Base price and the source thereof shall be mentioned by the Employer.

50

6. BASE COST PRICES The base cost prices shall be those applying 28 days prior to the latest day for submission of bids.

51

TERMINATION OF CONTRACTS
BY AGREEMENT BY PERFORMANCE BY BREACH BY IMPOSSIBALITY BY LAPSE OF TIME

52

53

Executing Project Procurement Management Plan Contracting

Procurement documents: Request for Proposal (RFP) - requests a detailed proposal on how the work
will be done, who will do it, . . . , basically a Project Execution Plan from the contractor

Invitation for Bid (IFB, or RFB) - requests one price to do all the work. Request for Quotation (RFQ) - Requests a price quote per item, per hour
charges, etc.

Test yourself:
Procurement Document RFP IFB RFQ Contract Type Cost Reimb. (CR) Fixed Price (FP) Time/Matl (TM) Scope of Work Performance Design Any

Contract Types Versus Risk

Employer Contractor Consultant The Engineer Engineers Representative

Disputes
The best practices for resolving disputes include a combination of: dispute prevention, flexibility, early dispute intervention, use of alternative dispute resolution methods, and a predetermined plan as to how disputes will be handled. A constructive approach to problem-solving is more effective than adopting an adversarial approach.

Methods of Procurement Consultancy Services

Quality and Cost Based Selection (QCBS) Least Cost Selection (LCS) Selection Based on Consultants Qualifications (SBCQ) Single Source Selection (SSS) Fixed Budget Selection (FBS) Quality Based Selection (QBS) Individual Consultants

58

Disputes
In spite of all the efforts of owners, contractors, and subcontractors, contract disputes still occur on projects. It is difficult, if not impossible to draft construction contracts that addresses every potential problem that could arise during a project implementation. File claims In order to able to settle contractual disputes, engineers and contractors should be familiar with contract dispute resolution techniques.

Disputes
The various types of dispute resolution methods used are:
Litigation Arbitration Mediation Mediation/Arbitration Early Neutral evaluation Rent a Judge Court annexed arbitration Summary Jury trials Dispute Review Board

Disputes
Litigation and Arbitration are both methods that use adversarial processes, which means that one party will win and one party will lose. Using adversarial processes could lead to deteriorating relationships between the parties involved.

Construction of Grade Separation Facility at Zero Point Islamabad

AL-04

AL-05

Kashmir Highway