Professional Documents
Culture Documents
Question No.: 1
The most common types of contract that are used in a construction project are Lump sum
Contract, Unit Price Contract and Cost-Plus Contract.
In Lump Sum Contract, the contractor agrees for a fixed price to complete the project and
that shall be paid for each scope of work. The payment will be based on the percentage of
completion and the contractor is at more risk in this type of contract. In this contract type,
the contractor takes on more risks such as late delivery of work, increased material costs, cost
of unclear scope and other potential problems.
In a Unit Price Contract, the contractor is paid for the number of units delivered at a fixed
price per unit. In such a contract, a contractor is paid for the actual work performed as per
the measurement. The unit price for an item may include labour charges, material cost,
equipment cost, overhead and contractor’s profit. In a Unit Price Contract, the employer will
not be in a position to estimate the total cost until the completion of the project.
In a Cost-Plus Contract, the employer agrees to pay the contractor the cost incurred to
perform the work plus an agreed fee. This type of contract is used when the employer is
uncertain about the scope of works, labour, materials and equipment required.
In the contractor point of view, the Lump Sum contract is the worst type of contract on the
basis of payment. The contractor is at more risk in Lump Sum Contract. However, in the
employer point of view, the Lump Sum Contract is the best type of contract. In the contractor
point of view, the Cost-Plus Contract is the best type of contract in terms of payment. The
contract is subject to a minimum risk, provided the contractor is able to provide proper
documentation for the expenses incurred. Thus, Cost-Plus contract is the worst type of
contract in employer point of view as the employer is obliged to pay the actual expenses plus
the agreed fee.
Question No.: 2
1
a. Uniform and Easy to Understand: It provides a uniformity with regard to the terms
used in the entire industry and as the terms of the contract are widely used, parties to
the agreement are well versed with the terms.
b. Effective and Refined: A normal contract, which is drafted to set out the
understanding/agreement between the parties, may fail to address important issues
that may arise during construction work. As a Standard Form of Contract is in use over
a period of time and is prepared to effectively address the issue that may likely arise
in a work, the Standard Form is very effective and well-defined with regard to the
possible issues that may arise and interpretation of the terms.
c. Reduced Cost and Time: The cost incurred for the preparation of a customized
contract for each work/each party can be eliminated by the use of Standard Form. As
the Standard Form is readily available, the time required to finalize a contract can be
reduced.
d. Reduced Scope of Negotiation: The use of Standard Forms can eliminate the issues of
negotiation between the parties. As the terms are familiar and clearly defined, there
is less space for negotiation, which can save cost and time.
e. Consistent and Firm: As the terms are consistent and firm, it provides less chance for
deviation and thereby disputes. In addition, as Standard Form is widely used, a
substantial number of case law addressing various issues has been already decided,
which is a precedent to the issues that may arise in construction work.
Question No.: 3
The various standardized form of agreement that provides a legal framework with regard to
the rights, obligation and duties of the contracting parties in a construction project is
prepared by various authorities consisting of professionals, advisors, government
representatives etc. Below given is the list of prominent bodies or association which provides
different Standard Forms of Contract.
2
b. Institution of Civil Engineers (ICE)
ICE is an independent engineering institution and represents approximately 80,000
civil engineers worldwide. The ICE Contracts are traditionally for Engineering
Contractors. The different ICE Contracts available are listed below:
ICE Conditions of Contract Measurement Version 7th Edition
ICE Conditions of Contract Design and Construct 2nd Edition
ICE Conditions of Contract Minor Works 3rd Edition
ICE Conditions of Contract Term Version
ICE Conditions of Contract Ground Investigation 2nd Edition
Agreement for Consultancy Work in respect of Domestic or Small Works:
amendments Dec 1999
1
Dr. Khalid Kadfoor Al Mehairi, Understanding Construction Law (Institute for International Law 2011) 226.
2
‘About NEC’ (NEC Contracts) <https://www.neccontract.com/About-NEC> accessed 28 November 2020.
3
Al Mehairi (n 1) 229
3
PCC 2005 Standard Form of Prime Cost Contract
WCD 2005 Standard Form of Building Contract With Contractor's Design
2005 Standard Form of Building Contract
MC 2005 Standard Form of Management Contract
IC2005 Intermediate Forms of Building Contract
MW 2005 Agreement for Minor Building Works
MTC 2005 Standard Form of Measured Term Contract
Question No.: 4
A contract is a legally binding agreement between the parties that details their duties and
obligations. A building or engineering contract may be defined as an agreement under which
a builder or contractor undertakes for a consideration to carry out for a building owner or
employer, works of a building or civil engineering nature. 4 For a contract to be legally binding,
there must be an offer from one party and an acceptance by the other.
The indication to accept the offer by the offeree must match exactly with the terms of the
offer. If the offeree while accepting the offer proposes some new terms to the offer made by
the offeror, then it does not constitute a valid acceptance but it constitutes a counter-offer.
A counter-offer will quash the original offer and make it no longer capable of acceptance.
4
P C Markanda, Naresh Markanda and Rajesh Markanda, Building and Engineering Contracts (4th Edn, Lexis
Nexis 2013) 3.
5
Robert Duxbury, Contract Law (2nd Edn, Sweet & Maxwell 2013) 13.
6
Ibid 23.
7
Duxbury (n 5) 23.
4
Question No.: 5
The essential conditions required before the formation of a legally valid and binding contract
are as follows:
a. Competent Parties: The contract must be between at least two parties – one under
an obligation and another entitled to enforce the obligation. The parties must be
competent and authorized to enter into the contract.
b. Offer and Acceptance: There must be an offer from one party and acceptance of the
offer by the other party.
c. Consensus ad idem: There must be a meeting of minds and parties shall have a mutual
understanding and assent to the expression of their agreement. The parties must
agree to the same thing, in the same sense, at the same time.
d. Certainty: In general, a contract is legally binding only if its terms are sufficiently
defined to enable a court to understand the parties’ obligations.8 Though the parties
have complied with the rules of offer and acceptance, there may still be no contract
because the terms upon which the parties have contracted are too vague or uncertain
or they have left important issues for further agreement.9
e. Intention to Create Legal Relation: The parties shall have an intention to create a legal
relation. A contract shall be deemed to be perfect and binding on the parties only if
there is evidence that the intention to both parties has come together to create the
subject matter of the contract and to render it effectively.
f. Consideration: Consideration is an essential element in the formation of a contract.
The party to the contract who promises to perform/not to perform an act for the other
party shall be given something in return for the promise. There should be an exchange
of something of a value to constitute a valid contract.
TASK 2
Question No.: 1
8
T.O. Stanley Boot Co. v Bank of El Paso, 847 S.W.2d 218.
9
Duxbury (n 5) 47.
5
Consultant in a construction project. Typical examples for the service provided by a
Consultant to the Employer in a construction project are listed below:
a. Investigation and Report
b. Detailed Design
c. Contract Documentation
d. Construction Supervision
e. Inspection of Works
f. Certification of Works
The below diagram explains the roles and responsibilities of a Consultant in a construction
project.
6
Question No.: 2
Variation is the change or alteration made to the scope of works in a construction contract in
the form of an addition, substitution or omission from the original scope of work. The term
“variation” means the alteration or modification of the design, quality or quantity of the
works as shown upon the contract drawings and described by or referred to in the contract
bills, and includes the addition, omission or substitution of any work, the alteration of the
kind or standard of any of the materials or goods to be used in the works, and the removal
from the site of any work materials or goods executed or brought thereon by the contractor
for the purpose of the works other than work materials or goods which are not in accordance
with the contract.10
a. Change of Scope: This is one of the main and most significant causes of variation in
construction work. This change is an employer-related change and happens due to
change in the requirements of the employer, design errors, constructability issues etc.
b. Financial Problems: The financial condition of the employer may result in a variation
by way of omitting some works or change in agreed quality, specification etc.
c. Lack of Adequate Planning: Lack of planning during the initial phase of design, failure
to determine the requirements prior to the start of design, improper or wrong input
from the employer during the design phase etc. results in variation. This variation may
be attributed to the employer and the design consultant/engineer.
d. Change is Design: A design change proposed by the design consultant/engineer after
the start of construction may result in variation.
e. Change in Specification: A change made to the agreed specification by the employer,
design consultant/engineer may result in variation.
f. Differing Site Conditions: Due to the prevailing site conditions, including weather
conditions, a variation to the agreed work may become necessary.
Question No.: 3
In the construction industry, it is very normal for the employer or the consultant/engineer to
issue oral or verbal instruction to the contractor and the contractor is obliged to comply with
such instructions. It is common to allow such oral instructions for instance during a site visit
10
JCT Form 1963, Clause 11 (2).
7
or in other emergencies. In that case, the contractor shall deduce it in writing and send it to
the employer or the consultant/engineer for confirmation.
In order to deduce the oral instruction given by the engineer, the contractor shall follow the
Confirmation of Verbal Instruction (CVI) procedure. Following the oral instruction, the
contractor shall write to the engineer so that the oral instruction is made in writing and this
written instruction sent by the engineer will be treated as a formal instruction unless
otherwise the engineer dissents to such writing within a specified period. In the event of any
dispute, the CVI can be used to prove that though the instruction was a formal instruction
issued by the engineer.
The above-mentioned procedure is provided in FIDIC Red Book 1999, which reads as follows:
“The Engineer may issue to the Contractor (at any time) instructions and additional
or modified Drawings which may be necessary for the execution of the Works and
the remedying of any defects, all in accordance with the Contract. The Contractor
shall only take instructions from the Engineer, or from an assistant to whom the
appropriate authority has been delegated under this Clause. Is an instruction
constitutes a Variation Clause 13 (Variations and Adjustments) shall apply.
The Contractor shall comply with the instructions given by the Engineer or
delegated assistant, on any matter related to the Contract. Whenever
practicable, their instructions shall be given in writing. It the Engineer or a
delegated assistant:
a) gives an oral instruction,
b) receives a written confirmation of the instruction from (or on behalf of)
the Contractor, within two working days after giving the instruction,
and
c) does not reply by issuing a written rejection and or instruction within
two working days after receiving the confirmation.
then the confirmation shall constitute the written instruction of the Engineer or
delegated assistant as the case may be.”11
The contractor shall follow the CVI procedure and convert the oral instruction into a written
formal instruction. It is always good to maintain records of oral instructions with a backup of
formal written instruction.
11
FIDIC Red Book 1999, Clause 3.3.
8
Question No.: 3
In the event, if a Standard Method of Measurement is agreed between the parties, the
applicable method of measurement shall be Project Progress Measurement. If there is no
prescribed method, then the contract shall be considered as Lump Sum Contract. The
payment shall be according to the progress of the work. Both parties shall agree on the Project
Progress Weightage and the payment shall be based on the percentage of work completed.
Each task or work shall be assigned a weightage which the parties shall agree mutually.
According to the agreed weightage, considering the project completion, the contractor shall
be paid accordingly.
TASK 3
Question No.: 1
Contract Price
9
Cost-Plus Variable Percentage: The contractor receives the actual cost of work
plus a percentage of fee which varies. The percentage reduce if the total cost
exceeds the estimated cost and percentage increase if the total cost is less than
the estimated cost.
Question No.: 2
Imposing minimum risk on the employer’s financial resource with regard to the project
finance has the following issue:
Putting more financial stress on the contractor will result in a reduced number of
tenders. The small companies, who can carry out the work will be not in a position to
take the work due to the increased financial stress. The tenders will then automatically
limited to the contractors who have a sound financial position. This will reduce the
chance of the employer to obtain the best available market price.
If the financial stress is more on the contractors, in order to cover this, the contractors
will be forced to increase the tender price.
Due to lack of financial resources, contractors who are well qualified and technically
able to perform the work in the best possible way will be stopped from taking the
work.
Given the above, the employer's position under the contract shall be safeguarded to avoid
any incident putting the employer in loss due to the inefficiency of the contractor. Putting
minimum stress will enable the contractor’s to take the work who are not in a financial
condition to take up the work. There may be chances where the contractor may fail to
complete the work due to their financial stability. In such circumstances, the contract shall be
drafted to secure the employer.
Imposing minimum risk on the contractor’s will result in more stress on the financial resources
of the employer. In such a situation, the employer shall finance the project. Considering a
project where the employer expects to get the return of the investment after a few years of
the completion of the project, the employer will not be able to take financial stress from the
beginning stage. In such a situation, the employer will be beneficial only if the employer can
delay the payment until the completion of the project. Delaying the payment and carrying out
the work on credit basis is the only possible way to carry out the project, where the employer
is not in a position to finance the project. However, reducing the financial stress on the
contractor help more contractors to participate in the tender with the best market price. The
10
tender process will not be limited to those contractors who have better financial stability and
increased overhead charges.
TASK 4
Question No.: 1
The NEC was developed by ICE in the early 1990s with the aim of introducing a new form of
non-adversarial form of contract strategy that would contribute towards more effective and
smoother management of projects.12 NEC is a family of contracts that facilitates the
implementation of sound project management principles and practices as well as defining
legal relationships.13 One of the important merits of NEC Contracts is the use of plain English
with a straightforward structure.
NEC3
The NEC3 Engineering and Construction Contract (ECC) is the main construction contract
within the NEC3 family, from which the options A-F are extracted. The Engineering and
Construction Contract has been used on some of the highest-profile projects in the world,
12
Al Mehairi (n 1) 226
13
About NEC (n 2)
14
‘NEC3-Contracts’ (NEC Contracts) <https://www.neccontract.com/NEC3-Products/NEC3-Contracts> accessed
28 November 2020.
11
including the London 2012 Olympics, as well as every day projects like the construction of
buildings, highways and process plants.15
Question No.: 2
Compensation events are events that are not the fault of the contractor which changes the
cost of work or time of completion. NEC3 defines compensation events are events which, if
they occur, and do not arise from the Contractor’s fault, entitle the Contractor to be
compensated for any effect the event has on the Prices and the Completion Date or a Key
Date. The assessment of a compensation event is always of its effect on the Prices, the
Completion Date, and any Key Date affected by the event.16
Clause 60.1 of NEC3 Engineering and Construction Contracts explains about compensation
events. The NEC3 does not provide a clear definition of a compensation event, instead, a list
of various events which constitute a compensation event is provided under clause 60.1. The
Compensation Event for weather is defined at clause 60.1(13) as occurring when:
“(13) A weather measurement is recorded
within a calendar month,
before the Completion Date for the whole of the works and
at the place stated in the Contract Data
the value of which, by comparison with the weather data, is shown to occur on
average less frequently than once in ten years. Only the difference between the
physical conditions encountered and those for which it would have been reasonable
to have allowed is taken into account in assessing a compensation event.”17
The NEC3 deals with the weather in a very different way. The weather condition can be
considered only as a compensation event if and only if a weather condition occurred during
the contract term is shown, by comparison with weather data, to occur on average less
frequently than once in ten years. By this provision, the risk of any weather condition, which
measures less than the 1-in-10 year event, is on the contractor.
15
‘NEC3 Engineering Construction Contract’ (NEC Contracts) <https://www.neccontract.com/NEC3-
Products/NEC3-Contracts/NEC3-Engineering-Construction-Contract> accessed 28 November 2020.
16
Guidance Notes for the NEC Engineering and Construction Contract (NEC Contracts)
<https://www.neccontract.com/getmedia/6a050f6a-9969-497c-8f89-7f7f9d670396/engineering-and-
construction-contract-guidance-notes.pdf.aspx> accessed on 29 November 2020.
17
NEC3 Engineering and Construction Contract, April 2013.
12
Question No.: 3
In order to ensure proper and effective communication, the NEC has requirements with
regard to the response time from the parties. The period for reply is stated in Part One of
Contract Data and this shall be complied by the parties. Unless otherwise stated in the
contract, the replies required to be provided by the parties shall be made within the period
for reply. If the contract specifically provides a time limit for a reply, then this will take
precedence over the period for reply.
According to clause 13.5, the project manager can extend the period for reply if the project
manager and contractor agree to such an extension before the reply is due. The failure of the
project manager to reply within the agreed period for reply will constitute a compensation
event.
Question No.: 4
In the given situation, the Project Manager in the project was replaced by an external
consultancy. Prior to Mr James taking charge of the project, the Employer shall inform the
Contractor regarding the replacement of the Project Manager. According to clause 14.4, prior
to the replacement of the Project Manager or the Supervisor, the Employer is obliged to
inform the same to the Contractor. Clause 14.4 of the NEC3 Engineering and Construction
Contracts reads a below:
Under an NEC3 Engineering and Construction Contract, the Project Manager has the duty to
act on behalf of the Employer and make decisions. The Project Manager is required to be
independent, fair, honest and impartial while performing the duty assigned to him. The
Employer has the duty to appoint an impartial, honest, independent, qualified, and efficient
18
Ibid 17
13
Project Manager as the replacement. The Contractor shall be notified of the name of the new
Project Manager so that the Contractor is able to raise an objection if any concerning the new
appointment.
The NEC3 Engineering and Construction Contract, Supervisor ensure that the works are
carried out in line with the quality defined by the Works Information. The Supervisor will have
a regular presence on-site, providing independent scrutiny of the works, ensuring the correct
materials are used and to the correct standards. Upon appointment, the Supervisor shall
obtain the latest updated work information related to the project from the Employer or the
Project Manager. The Supervisor is responsible to act independently and is responsible for
monitoring, witness testing, and checking compliance of the work with the work information.
In addition, the Supervisor shall obtain the latest project programme scheduled accepted by
the Project Manager from the Contractor to perform the roles of the Supervisor.
14
BIBLIOGRAPHY
Primary Sources
Legislations
FIDIC Red Book 1999
JCT Form 1963
NEC3 Engineering and Construction Contract, April 2013
Case Law
T.O. Stanley Boot Co. v Bank of El Paso, 847 S.W.2d 218
Secondary Sources
Books
Dr. Al Mehairi K K, Understanding Construction Law (Institute for International Law 2011).
Markanda P C, Markanda N & Markanda R, Building and Engineering Contracts (4th Edn,
Lexis Nexis 2013).
Websites
‘About NEC’ (NEC Contracts) <https://www.neccontract.com/About-NEC> accessed 28
November 2020.
‘Guidance Notes for the NEC Engineering and Construction Contract’ (NEC Contracts)
<https://www.neccontract.com/getmedia/6a050f6a-9969-497c-8f89-
7f7f9d670396/engineering-and-construction-contract-guidance-notes.pdf.aspx> accessed
on 29 November 2020.
15