COST INTERPRETATION

OF CONTRACTUAL TERMS

M. Viswanathan
Principal Estimator 3
The Ralph M. Parsons Company I
Los Angeles, California 90017

Those who are representing Contractors and in- Many courts tend to treat the latter strictly
volved in engineering and construction contracts as a penalty rather than as a fair compensation for
must necessarily depend on their ability to bid damages sustained by the owner. Penalties imposed
competitively and profitably as well as be able to by contracting parties on each other are unenforce-
collect whatever money that is due in the course of able and void.
actual performance of a contract. Also, those who
are on the owner's side must ensure that the owner Therefore, when bidding big contracts, liquida-
gets all he has contracted for. This calls for the ted damages clauses must be thoroughly evaluated to
skills of Contracts Manager, Cost Engineer, and determine if it could be grossly out of line and not
Estimator in analyzing the contract document and in fact a reasonable compensation for anticipated
evaluating it accurately to ascertain its potentials damages to the owner. Such evaluation should be
for creating financial benefits or burdens to each brought to the attention of the legal department
party. and their advice must be taken into account in the
evaluation of risk, while projecting the probable
This paper contains a reasonable check list percentage of 'overrun for determination at the
that involves an element of money impact either overall dollar contingency in preparation of the
directly or indirectly in the construction type bid.
contracts. However, the discussion here of neces-
sity is restricted to typical areas of interest. Exculpatory Clause

Liquidated Damages This simply means the clause is introduced to

clear or tend to clear from alleged fault or guilt.
The general reaction of a contractor upon spot- Most construction contracts have some kind of ex-
ting a liquidated damages clause in a bid invitation culpatory clause. When such clauses are introduced
is to "cushion" the bid defensively to protect him- in good faith and are lawful, they may be upheld.
self against the possibility of suffering that dam- However, if they are introduced primarily to pro-
age. However, under certain circumstances, such a tect the contractor from acts that are his own
clause may become legally unenforceable even though wrong doing they probably will not be upheld.
it is an integral part of the contract.
For example, if a bore hole data is furnished
Liquidated damages are in most instances valid to the contractor for bidding purposes and at the
and are sought by the owner when it is impractical same time the owner or architect disclaims liabil-
for him to ascertain in advance the possible extent ity for correctness, the contractor may still
of damage he would suffer for failure to perform as reasonably rely on the data in preparation of his
contracted. Usually, a fixed sum of money for dam- bid irrespective of the owner's disclaimer for its
ages is agreed upon in advance, to be payable to correctness. The underlying principle is that one
the owner for failure of the contractor to complete cannot take advantage of his own wrong doing.
all agreements of the contract.
Ambiguity
Illustrating simply, suppose that a building
contract had a clause in which the contractor is This arises when there is a doubtfulness in
held liable in liquidated damages in the amount of meaning. Ambiguities are generally resolved in
$200 a day for each day her overruns the date of favor of an innocent party. There are certain
completion of an apartment building, and the sole terms peculiar to quantity schedules. When
purpose of this clause was to force the contractor "approximate" is used in describing quantities,
to expedite the job. Upon failure of the contrac- the bidder may take it as an almost correct figure.
tor to complete the job on time, the law would de- Similarly, "about" or "more or less" mean only very
termine, among other things, whether or not $200 slight variation is expected. "Estimated" would be
per day is fair compensation for owner loss due to a better word to describe a lesser order of accu-
contractor delay; and whether or not the owner had racy.
arbitrarily set the amount simply to impose a pen-
alty for failure of the contractor to meet the Alternatives
agreed deadline.
When alternatives are used like "similar or
In this illustration, if the contract is for a equal", the contractor is not bound to furnish the
$l,OOO,OOO building, the owner may possibly stand material specified, even if it is available and he
to lose a return of $200 a day. On the other hand, can choose the alternate that is more advantageous
if the contract is for $100,000 the loss to the to him. However, he would not have the choice if
owner may more likely be in the order of $20 a day. the alternate is conditioned upon non-availability
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of the specified material. In the latter situation, changes, such changes must be ordered without un-
the contractor must show reasonable diligence to reasonable delay. To wit: changes ordered after
obtain that specified before making a substitution. work has progressed very far, changes to extend
work to winter time (originally scheduled to be for
Contract Changes completion in fall), changes resulting in disorgan-
ization of contractor's setup, changes resulting in
Changes to the contract can be additions or substantial increase in quantity not contemplated
extras and alteration. by either party, changes resulting in considerable
reduction in volume of work not anticipated at the
A contractor who had agreed to build according time of making the contract, qualitative change in
to plans and specifications is not required in ex- work rather than quantitative changes; for example,
cess of the agreements to do anything unless specif- substituting a steel building for a concrete build-
ic provision is made in the contract compelling him ing, and similar changes do not constitute a reason-
to accept the changes. Extras are not part of a able change, and in such cases the contractor may be
contract unless so specified; therefore, extra work entitled to seek reasonable recovery.
need not be bound by the same terms and conditions
as provided in the contract. This has particular The law disfavors contracts that put one party
significance in turnkey type contracts. at the mercy of another. In case of doubt, the
eyes of Justice may very well seek to determine
The contractor must agree on the method of whether or not any act or omission to act is within
reimbursement for extra work ordered. This should reasonable contemplation of the parties at the time
invariably spell out the method of including over- of making the contract. Therefore, it is of utmost
head and profit, in addition to reimbursing the importance that Contract Manager, Cost Engineer,
actual costs, such as the cost of labor and mater- and Estimator have a good understanding of the cost
ial. implications in the contract they handle, so that
they know what each party is entitled to receive or
As a general rule, all extra work should be not to receive from the other.
undertaken only upon a written order, because this
is outside the limits of original contract. Fail- Note: This paper is presented by the author
ure to do so will bring this to the category of exclusively in the individual capacity of a Cost
voluntary work for which the contractor is not Engineer and is not intended to render specific ad-
bound to be paid. vice of any nature requiring legal counsel.

As to alterations, they are only changes to an

existing contract and are not treated as extras. Alphabetic Check List Having Cost Impact Directly
Alterations may be described as that type of work or Indirectly
which is a part of original contract and by ignor-
ing the alterations the original work as contracted Acceptance General Conditions
could not be completed. For example, changing dia- Acceptance - Time of Guarantee
meter of the pipe may be an alteration, but provid- Acceptance by Home Office
ing additional excavation and concreting may very Acts of Owner Indemnity Costs
well be in the category of extras. Alterations Independent Contractor
Ambiguity Information - Cost of
Possession Approval; Permits Collecting
Arbitration Costs Insurance Costs
Contractors should watch for the word "posses- Assignment Inspection - Acceptance
sion" because certain liabilities are affected de- Interest Charges
pendent on the point in time that one gives up pos- Backcharges
session from his care, custody, and control over a Billing Labor Laws
property. A typical situation is when a contract Bonds Required Laws Applicable
provides for commencement of plant operation par- Breach of Contract Liability - Person
tially before total completion of the project by Liability - Property
the contractor. For example, the first boiler or Cancellation Liens
reactor may be planned for commissioning in a power Caption for Convenience Limitation for Delay
plant construction even though part of the project Liquidated Damages
@-JY
construction may still be under progress. In Changes Low Bidder
building construction, the owner may desire to open Claims
part of it for public use while the contractor is Cleanup Material Returned
still on the job. This will affect substantially Compensation Modification Costs
builders risk insurance, and provision must be made Continuity - Work
in the estimate or bid proposal for such conditions. Contingency Notification
Contract Nuclear Liability
Cost Analysis
Acts of the Owner Affecting the Contract cost Plus Order of Precedence
Credit Costs OSHA Compliance Cost
The owner may expressly or impliedly reserve Overtime Cost
the right to act in a particular way. This is a Damages Ownership
vast and grey area full of implication for poten- Default - Payments
tial conflicts. Delays Patents
Delivery Payments
Though the owner may retain the right to seek Document - Contractual Performance
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Drawings Permits Force Majeure Standard Practice
Duty of Parties Possession Forwarding Subcontract
Duration Procedure Foundations Substitution
Property Rights Freight Suspension of Contract
Energy Crisis Cost Proposal Cost Furnished by Contractors
Engineer's Acts Furnished by Purchaser
Environmental Impact Quotation Expiry Taking Over Union Disputes
costs Taxes Utility Costs
Errors - Clerical Rate Adjustment Terms of Contract
Errors - Judgment Remedy Test and Inspect Voting Time
Excess Material Returned Goods Time is the Essence
Escalation Reestimating Costs Title - Right of Waiver of Rights
Exculpatory Clause Possession Warranty Disclaimer
Exclusions - (Specify) Schedules Transportation Costs Weight Calculation
Expediting Costs Services Chargeable Turnkey Contract Working Hours
Expenses Reimbursable Shipping - Costs Workmanlike Manner
Extras Shop Assembly
Source of Material

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