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Some Aspects of Efficient Contract Administration
Some Aspects of Efficient Contract Administration
SOME ASPECTS OF
CONTRACT
ADMINISTRATION
By
M.Sridhar
2
1.0 Introduction:
As some one rightly said the first two decades of the new millennium in India,
belong to Civil Engineers because of the growth in spurring industrial activity and all
around infrastructure development. All such construction activities are undertaken
through contracts whether it is a Government Organization or a Private Commercial
Enterprise. There are various types of contracts like Item rate contracts, percentage rate,
Lump sum or Turn key, EPC contracts and cost plus contracts.
which cant be managed. One can simply refer the meaning and difference in functions
of Manager and Administrator for this aspect.
Now let us look at some legal and technical aspects of this subject in subsequent topics.
All the contracts are governed by law of contracts and will be within the preview of
Indian Contract 1872. There is no provision in the law to state that the contract must be in
writing except that the Arbitration agreement, if exists in the contract. Law specifically
states that the Arbitration Agreement must be in writing as per the Arbitration Act.
The term Contract is derived from latin word Contractum which means drawn
together. Thus a contract is defined as an agreement creating and defining obligations
between the parties.
Section 2 (h) of the Indian Contract Act 1872 defines contract as an agreement
enforceable by law is contract.
Normally while referring the construction contract we use the terms contract and
agreement interchangeably. But the above definition suggests that there is a subtle
difference between two.
1. Minimum two parties: There must be minimum two parties for a valid contract.
2. Consensus Ad idem: This term means there must be Identify of minds between
parties for entering in to agreement.
Both the parties should have clear in mind the same subject and object of the
contract. Suppose A has two houses one at Hyderabad another at Vizag and offers
to sell his house to B. Say B assumes that the house of A at Vizag is for sale
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(but A intends to sell the house at Hyderabad) and makes an agreement for
purchase of house (of course place not mentioned) then such contract is void since
there is no identify of minds between parties.
A made an agreement with B for subletting part of his contract work in consideration to
form future business partnerships and joint ventures with B. This consideration is valid to
make a lawful contract since by offering some thing A is also expecting some thing in
return, in future.
4. Free consent: The consent of the parties to the agreement must be free, given by
the free exercise of ones will after his own judgment regarding terms and conditions.
If the consent is induced by coercion, threat, undue influence then the contract is null and
void.
The above list of criterion for valid contracts is not exhaustive and touches those aspects
relevant to construction contracts only .
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Once the acceptance of offer is communicated, legally there is a binding contract arising
between the parties. Signing of agreement by parties is only a formality and part of
documentation process.
The parties may negotiate on the original offer in which case the negotiated offer is
accepted .
But, the acceptance shall be absolute, unconditional. Suppose if the owner invites the
bidder for negotiations for price reduction which is termed as counter offer by other
party and for example the bidder keeps silent . The owner has now made a counter offer
which requires a confirmation by bidder yes or no. In this case the original offer is no
longer valid for acceptance after such a counter offer.
Offer
Invited Bid
Owner Bidder
Owner Bidder Counter /Negotiations
Offer Offer
Confirmation
Acceptance
Acceptance
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Here the types of contracts are categorized based on mode of operation and parties
involved.
- FIDIC contract conditions are not truly followed. Most of the clauses are over
ridden with conditions of particular application or special conditions. Again such
FIDIC models or adopted FIDIC models violate basic philosophy converting them one
sided.
- Not only the true spirit of FIDIC model is lost, but with the cut & paste methods
there is poor drafting resulting in ambiguities, discrepancies creating disputes
during execution stage.
The owner exercises over all control himself and administers the contract.
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Normally at field level the staff have a tendency to refer only the BOQ part for rates for
preparation of bills. At operation level for day to day of activities and progress this may
be alright and the contractual issues are dealt at higher levels.
But at senior levels and for a Project Manager , to be successful in execution , apart from
project management the skills of contract administration is imperative at all levels.
A thorough study of the entire contract documents is highly recommenced .
1. Definition of terms : Generally the first few pages will define the terms and
terminology, parties & their roles. This is important and gives a legal meaning of
terms used like variation, deviation, approval etc.
These are the general conditions of contract stipulating various terms for execution
of work through operation of contract.
2. Time extension: Normally time is regarded as the essence of any contract. The
terms and events for granting extension of time are specified.
Again there can be over all deviation limit specified on the contract value as a
whole.
6. Variations/ extra, substituted items: Terms and the rate deviation procedures,
notification of occurance of such events by contractor, submission of rate
analysis mentioned.
8. Dispute resolution procedures: The discrete methods steps and procedures for
dispute resolution are stated in this clause.
As already stated the contract need not be in writing but as per law, the
arbitration agreement, if exists, it shall be in writing. This also may specify the
terms, procedure and appointment of arbitrators.
The wording of dispute resolution, the series of discrete steps are important
and one is expected to be cautious on this.
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Again in some cases there can be a finality clause (barring arbitration for
certain clauses treating them excepted matters).
Incorporation of statutory laws and some conditions on wages, labour & regulation,
working conditions stipulated.
There are a number of instances that such cut, paste method in conditions and lack
of standardization has resulted in poor drafting of contract conditions leaving scope
for errors, ambiguities.
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During the execution phase, the contract administration is crucial for success of
implementation of project. The parties are expected to fulfill their respective contractual
obligations fully and fairly.
Thus a contract as a set of reciprocal promises, creates and defines the duties obligations
between the parties. Also it generates contractual rights. On performing the duty as on
obligation, the party will acquire a consequential right. For example the contractor has
executed the portion of work as per the terms after which be acquired a right to claim the
payment.
For performance of the work normally the owner or Employer has following obligations:
a) handing over of site
b) Supply the agreed materials in time
c) Issue of drawings
d) Decisions and approvals
e) Delver the agreed facilities
f) Timely payments as per agreed terms
The performance of the other party is obviously crippled for want of fulfillment of these
obligations.
In general in construction contracts terms and time frame for releasing the payment are
specified which is the right of the contractor .
Further in contracts there will be certain terms and conditions specified for certain action
from contractors side in the event of occurrence of some events like delay, deviation,
variations etc.
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1. In case of hindrance - to intimate the project-in-charge with details within seven days.
2. On occurrence of variation (extra) items beyond the scope, to intimate with in 15 days
along with rate analysis
All these are nothing but contractual obligations to be performed, as duties, in legal
terms.
Neverthless if the intimation is not given in specified time, it is not that the claim or right
on deviation or extra item is lost. This is because the general limitation applicable by law
cant be shortened or extended by mutual agreements.
The above time limitation may be construed as a check ensured by the client. But what is
the answer for the question - what prevented the contractor in giving such intimation, in
time, which was his duty.
So it would be appropriate to follow such conditions which are obligations. Just a two line
communication may be adequate to prove that, we have discharged our duty.
Such good practices if followed as matter of routine will definitely yield good results.
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7.0 Correspondence:
Going by the literal meaning of the word (dictionary) correspond means communicate by
exchange of letters.
For efficient site management the requirement of good correspondence is inevitable and
doesnt need a special emphasis. From the perspective of execution of work at site
through a contract, the correspondence can be categorized in to three types based on the
purpose. The three types of correspondence are General, Obligatory and Necessary.
General Correspondence:
Obligatory Correspondence:
Necessary Correspondence:
This is categorized as one which one party would like to keep on record with an intention
for any future reference. The party at a later date can use such communications and
correspondence as a matter of record that the other party was already intimated and has
full knowledge of the events.
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1) The subject mentioned for the correspondence should be brief and specific,
pointing to the gist. Mentioning too many references is not a good practice. Some
persons while replying have a habit of referring what all they had written
previously.
2) The body of the letter is important which reflects a particular style. This should
carry the decency and decorum of official correspondence.
4) Correspondence should be brief, specific and highlighting only what one intends
to convey.
6) Naturally the language and style one intends to employ in writing is influenced
by the mother tongue and the expression in writing is influenced by spoken
language. Some care is needed in this aspect.
7) It is better to go through the draft made twice or thrice for a review in initial
stages.
8 .0 Maintenance of records:
Keeping something on the record through communication, recording & preserving the
documents etc. all are vital as a part of Contract administration.
Rainy season has a special significance to the site personnel. On rainy days, due to
continuous downpour the work schedules are totally disturbed, labour displaced from work
places and work output is drastically reduced with progress and targets severely affected.
Yet a client may not like to understand this and may say:-
It is a well known fact that the progress will be affected and hampered in rainy season.
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Continuous rains do inundate the site making it difficult to work. Pits, low lying areas will
be filled up and water needs to be drained off each time. There will be slush, mud all
around. Movement of trucks, mixers will be affected due to wet roads and slippery tyre
conditions.
Even though the rain is intermittent, labour once disturbed from work and got displaced
on a particular day cant be easily redeployed effectively. Working conditions for labour
are difficult to show much output during rains due to various factors. Construction being a
labour intensive activity cant follow the logic of factory type of working with switching
off/on of machines to get the desired output.
8.2 Dewatering:
Again the construction activity may require dewatering operations. Ordinarily the
water seepage through underground (sub soil strata) during excavation is to be carried out
by contractor at his own cost as part of a technical condition. But what if the dewatering
operations necessitated due to rains or flooding of site and not by sub soil percolation.
This is obviously not envisaged initially while bidding. One is expected to keep a record of
such operations carried out like no. of pumps, days of dewatering through log books.
Proper timely communications with Employer are necessary.
Further there can be a situation of resources deployed for the work being idle or
under utilized for significant periods. Idle or under utilization (Partly idle) of resources
(man power, machinery) deployed for the work are the results of non fulfillment of
contractual obligations of other party like availability of work fronts, drawings, decisions,
required material supply in time.
Based on the work program and mutually accepted schedule, the contractor deploys his
men, machinery for the work. He incurs the costs towards man power like salaries,
establishment of site, office & overhead costs for maintenance of site establishment
besides mobiles, phone, fax, computer, printing, stationery, transportation etc. Normally
these will be expressed as a percentage of turnovers likely to be achieved as a
recoverable cost from turn over.
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Further the machinery, equipment deployed for the work is intended to give a planned out
put of work so as to recover the costs. So if the performance in the work is affected there
will be loss in anticipated turnover. This loss in turnover results in under utilization of
recovery of costs incurred.
1. These are viewed as damages suffered by one party due to the default of other
party. Damages are quantified as Losses suffered which attract compensation.
Obviously losses to be compensated signify that one need to prove the actual
losses incurred.
a) Pursue the contract conditions for remedy in case of delay events, owners risk
events and contractors risk events.
b) List of men & machinery that are actually deployed at site to be communicated
to employer by progress reports or periodic correspondence. Relevant details of
machinery like type, make, description, and numbers etc., to be invariably
listed and mentioned. Regarding the idle manpower the particulars of staff
deployed at site i.e. Names, designation, numbers etc. to be indicated.
c) Record keeping & evidence
d) Periodic correspondence with employer.
9 .0 Construction Claims:
9.1 Introduction:
Claims in construction contracts are inevitable. To tackle the problem of the claims
effectively it is necessary for both sides to have a better understanding of the basis and
principles of contract and therefore of the rights and obligations of the two parties. It is
necessary for professional representatives of both sides to have an understanding of
business side of industry so as to appreciate the circumstances in which the contractor
conducts the risks in which he can properly and contractually be expected to undertake
and the financial consequences if things go wrong. If things go wrong by reason of any
default on the part of contractor, it must remain his concern; however, if the default lies
with the employer or his management team, then the employer must face the financial
consequences and settle the claims without any loss of time to avoid any adverse effect on
progress of work.
It must also be born in mind that the whole question of claim is very complicated, since
the preparation of claim is not only difficult but lot of efforts are needed to extrapolate
the relevant data, fundamental details, figure, data and, other evidence together with the
establishment of sound basis so as to demonstrate fully the validity of claim argument.
Preparation and presentation of claims is a systematic process. Since the burden of proof
lies with the party raising claims, the supporting evidence together with the facts in issue
and basis of claims is to be presented. The substantiation of claim is done through site
records, correspondence, site diaries, progress schedules, minutes of meetings etc. The
contractor therefore needs an expert who can assist him in this area.
i. Contractual Claims
ii. Extra Contractual Claims
iii. Quantum Meruit Claims
iv. Ex-gratia Claims
v. Counter Claims
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Contractual Claims
These are the claims, which arise out of the express provision of the particular
contract, i.e., for extra cost, expense and direct loss specifically provided as a remedy in
the contract for breach of contract on the part of the party concerned.
These claims are also known as common law claims. These claims are for damages
for breach of contract at common law.
Provide remedy for a person who has carried out work under the instruction of the
owner but no price has been agreed or where a new one has replaced original contract and
payment is claimed for work done under the substituted contract.
Ex-Gratia Claims
Ex-gratia claim is one where no legal remedy is available to the contractor but
arise out of hardship. On the ground of equity or favour the authority concerned may in
certain circumstances consider that hardship calls for mercy or moral liability. These
claims are also called sympathy claims. Wherever such claims are to be given it will be
better if these are given during the currency of the contract so that the money paid helps
in improving the progress of the work.
Counter Claims
These are the claims raised by the opposite party to counter the claims of the claimant.
10.1 General:
The dispute resolution steps and the systematic procedure to be initiated will be
normally stipulated in a particular related clause in the agreement. For example clause 67
of contract conditions of FIDIC specifies the dispute resolution procedure.
The readers are suggested to give a thought on the legal meanings and differentiation
between a claim and dispute. For example you go on claiming something and the other
party keeps silent does any dispute existing at this stage?
Say you claim something, other party denies then one can call it a dispute. Again one
party serves a notice to other party to settle something with in a time frame, other wise it
will be deemed as dispute. In certain cases the Dispute resolution clause itself specifies
the steps or procedure how to establish a dispute. Thus establishment
Of Dispute is important before invoking Dispute resolution Clause.
Normally in Contracts invoking Arbitration cant be direct and one or few of following
mentioned ADR (Alternate Dispute Resolution) methods should have been generally
stipulated as a precursor procedure before Arbitration.
4) Conciliation (The conciliator assists the parties and facilitates in arriving an agreed
settlement)
The Board normally consists of 3 members (one will act as chairman) constituted by
parties consisting of technical professionals well acquainted and experienced with the
subject works. The Board is expected to make site visits and offer technical guidance. Also
the Disputes are referred to the Board which will review the Disputes and give the
recommendations on Disputes. The judgments of the board are in the form of opinions,
technical judgments and recommendatory in nature. Such recommendations have no legal
enforcements as in case of Arbitration awards.
The parties are expected to follow the recommendations made by the Board on
Disputes and attempt to settle the same. The recommendations of DRB are open for
review in the Arbitration.
10.4 Arbitration:
It is recommended to study the bear act provisions of Indian Arbitration and Conciliation
Act 1996 applicable for Domestic Arbitration.
Normally the procedure of appointment of Arbitrators are stated in the concerned clause
of Dispute resolution or otherwise the rules and procedures can be as mutually agreed by
parties.
Different departments, organizations follow and adopt their own standard procedure of
rules and regulations for conducting Arbitration for construction contracts. To reduce the
time, to speed up the process and to standardize the procedure across the industry,
Institutional Arbitration is gaining more popularity in India for commercial contracts. The
entire Arbitration process, procedure of conducting Arbitration, time frames, rules &
regulations are governed by the Institute which has governing rules & procedures. Indian
Council of Arbitration (ICA), Construction Industry Development Council (CIDC) in
association with SIAC (Singapore International Arbitration Centre) are the prominent
bodies providing institutional Arbitration mechanism in India .
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Owner caused delays or delays brought about by owner-assumed issues are common
in construction projects. In the previous sections how to keep the records for such delays
was dealt in detail. Due to such delays the performance will be affected resulting in
prolongation work. The budgeted cash flows / monthly turnover will be reduced wherein
the machinery, equipments deployed for the work are under utilized in a way (loss of
production). Normally the contractor mobilizes and deploys the required resources based
on the quantum of work out put to be given and recovers such costs on manpower,
communication, travel etc., other such costs cannot be fully recovered with reduced
turnover .This results in losses since the incurred costs are not fully recovered. Again the
reduced turnover results in a loss of anticipated profit which the contractor expects to
derive from turnover. Nevertheless in the prolonged or extended period, the contractor is
constrained to block his resources in execution of same work otherwise he would have
Once the delay is established, the next question is the justified element of cost
compensation in consequence of such delay. Say how much will be the overhead costs as
losses and what would be the element of profit to work out the loss. Some standard data
books and Govt. departments adopt a fixed percentage say 10% as contractors profit and
take 10 to 25% as overhead costs, for the purpose of analyzing the standard costs or for
There are numerous theories, principles and formulae for estimating and working out
overhead costs. Among these, Hudsons formulae, Emdens formula are most popular and
used universally. Courts have also recognized the principles upon which such formulae are
based.
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For ready reference the brief description, methodology of such formula given below.
However the readers are advised to refer the text books like Law relating to Building
and Engineering Contracts by Sri Gajaria and search Internet for the philosophy of such
formulae.
Hudson Formula:
This formula was deliberated widely in courts in U.K. and later exported to Canada. Off
site overheads are usually known in the industry as Head office overheads (HOOH). It is
convenient to deal with these together with profits, because it is the practice most
contractors do follow by making their best estimate of the project by loading a single
percentage (profit & O.H) as factor on the prime cost worked out.
The percentage used in pricing for such overheads and profit obviously varies from
presented in courts by way of balance sheets, profit & loss accounts of companies, the
courts have also recognized the principle of such factoring or fixed percentages.
The Hudsons formula derives its daily HOOH rate on the basis of the as-bid calculations
and assumes that the bid rate shall hold constant through out life of project.
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________________ x _____________________
That is allocable overhead per day/per week x period of owner caused delay
Example:
Contract amount : Rs.120 crores
Stipulated period : One year (52 weeks)
Owner caused delay : 12 weeks
HOOH (i/c Profit) : 25% (15+10)
As per formulae
Normally in large construction projects where more machinery and equipments are
deployed and their costs, component wise in overheads is significant then loss in
productivity is worked out based on the loss in turnover on proportionate basis. This not
For an example in above case, for the project there may be certain requirement of
machinery and manpower either stated in bid or submitted along with the bid proposal.
Further there may be a works program or estimated cash flows month wise for the project
Nevertheless in absence of such anticipated or budgeted monthly turnover one can easily
work out the average monthly turnover for above example as 120/12 =Rs. 10 Crores.
By achieving this average monthly turnover, the contractor anticipates to recover his costs
incurred on various overheads. But the actual turnover achieved due to owner caused
This shows that only 60% of utilization of resources with 40% loss in productivity. Hence
unabsorbed costs are 40% of costs incurred on actual basis for manpower and machinery.
12.1. Manpower Costs: Can be worked out as per actual deployment and payments on
12.2 Machinery Costs: Machinery costs can be worked out for the equipments deployed.
Theoretically for the owned equipments the costs are depreciation + interest costs and for
e .
1. Straight line depreciation method (linear) normally assumed with 10% residual
value.
2. Commercial rate of interest taken
3. For own equipments if data is not available, market hiring charges can be adopted.
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