WEEK 3

SECTION 1: CONTRACTS AND SUBCONTRACTS FOR CIVIL

ENGINEERING WORKS
WHAT IS CONTRACT?
A contract is a legally binding agreement which recognizes and governs
the rights and duties of the parties to the agreement. A contract is legally
enforceable because it meets the requirements and approval of the law.
An agreement typically involves the exchange of goods, services,
money, or promises of any of those. In the event of breach of contract,
the law awards the injured party access to legal remedies such as
damages and cancellation.
Formation of a contract generally requires an offer, acceptance,
consideration, and a mutual intent to be bound. Each party must have
capacity to enter the contract. Although most oral contracts are binding,
some types of contracts may require formalities such as being in writing
or by deed. Not all agreements are necessarily contractual, as the parties
generally must be deemed to have an intention to be legally bound.

A construction contract provides a legal binding agreement, for both the

owner and the builder, that the executed job will receive the specific
amount of compensation or how the compensation will be distributed.
There are several types of construction contracts used in the industry,
but there are certain types of construction contracts preferred by
construction professionals.

Construction contract types are usually defined by the way the

disbursement is going to be made and details other specific terms, like
duration, quality, specifications, and several other items. These major
contract types can have many variations and can be customized to meet
the specific needs of the product or the project.
TYPES OF CONTRACT
Generally speaking, contract can be broadly classified into three,
namely:

 Fixed price contract type and

 Variable price contract type
 Contract for personal/professional services
Fixed Price Contract Type

This type of contract involves a total fixed price for all construction-
related activities. This can include incentives or benefits for early
termination, or can also have penalties, called liquidated damages, for a
late termination. These contracts are preferred when a clear scope and a
defined schedule has been reviewed and agreed upon.

This contract is used when the risk needs to be transferred to the builder
and the owner wants to avoid change orders for unspecified work.
However, a contractor must also include some percentage cost
associated with carrying that risk. These costs will be hidden in the fixed
price.

 Lump sum and scheduled contract

In lump sum contract the complete work as per plan and specifications is
carried out by contractor for certain fixed amount as per agreement. The
owner provides required information and contractor charges certain
amount. This contract is suitable when the number of items are limited
or when it is possible to work out exact quantities of work to be
executed. The detailed specifications of all items of work, plans and
detail drawings, security deposit, penalty, progress and other condition
of contract are included in agreement. Though it is lump sum and
scheduled contract, contractor will be paid at regular interval of 2-3
months as per progress of work on the basis of certificate of payment
issued by engineer in charge. A scheduled of rate is included in
agreement for making payment of extra items.

Under a lump sum contract, a “fixed price” for the work to be done is
agreed upon by the client and contractor before the work begins. This
contract can also be applied to both home building and commercial
contracts. It can be more of a risk to the contractor as there are fewer
mechanisms to allow them to vary their price.

 Unit Pricing Contracts

Unit pricing contracts is probably another type of fixed price contract

commonly used by builders and in federal agencies. Unit prices can also
be set during the bidding process as the owner requests specific
quantities and pricing for a pre-determined amount of unitized items.

By providing unit prices, the owner can easily verify that he's being
charged with un-inflated prices for goods or services being acquired.
Unit price can easily be adjusted up and/or down during scope changes,
making it easier for the owner and the builder to reach into agreements
during change orders.

Other fixed contracts include:

 Turn key contract

 Package-deal contract
 Construction management contract

Variable Price Contract Type

 Time and Material Contracts When Scope is Not Clear

Time and material contracts are usually preferred if the project scope is
not clear, or has not been defined. The owner and the contractor must
establish an agreed hourly or daily rate, including additional expenses
that could arise in the construction process.
The costs must be classified as direct, indirect, markup, and overhead
and should be included in the contract. Sometimes the owner might want
to establish a cap or specific project duration to the contractor that must
be met, in order to have the owner’s risk minimized. These contracts are
useful for small scopes or when you can make a realistic guess on how
long it will take to complete the scope.

 Cost Plus Contracts

This type of contract involves payment of the actual costs, purchases or

other expenses generated directly from the construction activity. Cost
Plus contracts must contain specific information about a certain pre-
negotiated amount (some percentage of the material and labor cost)
covering contractor’s overhead and profit. Costs must be detailed and
should be classified as direct or indirect costs. There are multiple
variations of Cost Plus contracts and the most common are:

 Cost Plus Fixed Percentage of Cost

 Cost Plus Fixed Fee
 Cost Plus with Guaranteed Maximum Price Contract
 Cost Plus with Guaranteed Maximum Price and Bonus Contract

Cost plus contracts are used when the scope has not been clearly defined
and it is the owner responsibility to establish some limits on how much
the contractor will be billing. When some of the aforementioned options
are used, those incentives will serve to protect the owner's interest and
avoid being charged for unnecessary changes. Be aware that cost-plus
contracts are difficult or harder to track and more supervision will be
needed, normally do not put a lot of risk in the contractor.

 Cost plus fixed percentage of cost contract

In cost plus percentage, the owner pays greater than 100 percent of the
documented cost, usually requiring detailed expense accounting. In this
type of contract, contractor is paid the actual cost of work plus certain
percentage as profit. Various contract documents, drawing,
specifications are not necessary at the time of signing the agreement.
Contractor has to keep all records for cost of material and labour and
contractor will be paid accordingly to engineer in charge. This type of
contract is suitable for emergency work like difficulties in foundation
conditions, construction of expensive structure etc.

 Cost plus fixed fee contract

In cost plus fixed fee, the owner pays the contractor an agreed amount
over and above the documented cost of work.

This is a negotiated type of contract where actual and direct costs are
paid for and additional fee is given for overhead and profit is normally
negotiated among parties. The owner is in more control of the project;
however, the risks are transferred to the owner.

A cost plus contract states that a client agrees to reimburse a

construction company for building expenses such as labor, materials,
and other costs, plus additional payment.

This type of construction contract is an alternative to lump sum

agreements. It allows flexibility and transparency for the homeowner,
and reduces the risk for a contractor since a Cost Plus construction
contract guarantees them a profit.

 Commercial contracts

A commercial contract is an agreement containing all the work that

should be performed for the construction of a commercial building or
non-residential building. A skillfully constructed commercial contract
can protect your interests, minimize risks, and increase profitability.

 Domestic construction contracts

A domestic building contract is an agreement containing all the work

that should be performed for the construction of a commercial or
residential building existing or occurring inside a particular country; not
foreign or international.

SPECIAL CONTRACT TYPE

 Sub contractual agreement

A sub contractual agreement is a contract primarily between a builder or

a principal contractor and subcontractor. It outlines the perimeters of
specialist work to be done for the construction project.

SUB-CONTRACT

It is a contract in which a party agrees to perform part of the work that

was originally arranged with the signer of a previous contract.
A subcontractor is an individual or in many cases a business that signs
a contract to perform part or all of the obligations of another's contract.
A subcontractor is a company or person who is hired by a general
contractor (or prime contractor, or main contractor) to perform a specific
task as part of the overall project and is normally paid for services
provided to the project by the originating general contractor. While the
most common concept of a subcontractor is in building works and civil
engineering, the range of opportunities for subcontractor is much wider
and it is possible that the greatest number now operate in the information
technology and information sectors of business.
The incentive to hire subcontractors is either to reduce costs or to
mitigate project risks. In this way, the general contractor receives the
same or better service than the general contractor could have provided
by itself, at lower overall risk. Many subcontractors do work for the
same companies rather than different ones. This allows subcontractors to
further specialize their skills.
TYPES OF SUB-CONTRACTORS
DOMESTIC OR NAMED SUBCONTRACTOR
A subcontractor who contracts with the main contractor to supply
or fix any materials or goods or execute work forming part of the
main contract. Essentially this contractor is employed by the main
contractor.
NOMINATED SUBCONTRACTOR
Certain contracts permit the architect or supervising officer to
reserve the right of the final selection and approval of
subcontractors. The main contractor is permitted to make a profit
from the use of nominated subcontractors on site, but must provide
"attendance" (usually the provision of water, power, restrooms,
and other services to enable the nominated subcontractor to do his
job). In effect the appointment of nominated subcontractors
establishes a direct contractual relationship between the client and
the subcontractor.

SECTION 2: SIMPLIFIED INDUSTRY MODEL OF PARTIES

AND BASIC BUSINESS LAWS OF RELATIONS

PARTIES TO A CONTRACT

Generally, the nature and size of a construction project will to a large

extent determine the parties to the contract for the project and the
responsibilities. The main parties involved in a construction contract are:

Employer/Client

The employer/client is the party procuring the work, conceives the idea
and employs the contractors and consultants to undertake the works for
the project. He is responsible for procuring funding and obtains relevant
permits for the project. The employer is obliged to ensure that the
Contractor is qualified.

Contractor

The Contractor in a construction project undertakes and completes the

works in accordance with statutory requirements, the contract drawings
and contract bills and may engage with sub-contractors for separate parts
of the works. The contractor is independent and not under the control of
the employer.

The Architect

The Architect is the party responsible for the preparation of the designs
or drawings for the construction project and supervising the
implementation on the employer’s behalf.

The Quantity Surveyor

The Quantity Surveyor is responsible for costing (Bill of Quantities) and

adjustments to the pricing in the course of the construction work.

Civil/Structural Engineers

They are engaged in the designing of the projects working closely with
the Architect to ensure structural integrity of the construction project.

Other Subcontractors

Other subcontractors and Suppliers of specific services under the

supervision and control of the Contractor.
BASICS OF CONSTRUCTION CONTRACTS

01 Contract Documents

A so-called "construction contract" is often a combination of individual

documents detailing different aspect of the project, or it can be a
complex, multi-page document with many sections that offer details on
different aspects of the agreement.

02 Contract Types

Different types of construction contracts are used within the building

industry, but professionals generally prefer certain ones. Construction
contract types are usually defined by the manner in which the
disbursement is going to be made, but they may also specify other terms,
such as duration, quality, specifications, and other issues of similar
importance.

03 Successful Contract Negotiations

When the time comes for a builder to sit down with union
representatives or project stakeholders, he or she needs to be prepared. A
good negotiator should have the characteristics and skills that allow for
the right deal to be struck—one that achieves set goals while leaving
both parties satisfied. Face-to-face negotiations, although rare, can
sometimes make things even worse. Certain tricks and methods can
ensure that everyone leaves the table feeling that they have a good deal.

04 Direct Hire or Subcontract

Builders have two options for completing work on a project: direct hire
their own employees or subcontract the work to independent contractors.
It is not an easy decision.

Subcontracting can offer warranties that can make your work easier
while hiring someone directly requires additional efforts as far as
oversight and management. But direct hiring often gives the builder
more control over costs and quality. How does a contractor decide
between the two? Based on the scope of the project and existing
relationships with subcontractors, the project manager will make the
decision based on what is most cost-effective and timely.

05 Construction Contract Agreements

A construction contract agreement is a principal document that sets a

date and specifies which parties are going to participate in the
construction process. Usually, the contract agreement is executed
between the owner of the project and the contractor (or supplier) that is
providing the requested service. The contract generally contains several
sections or clauses (or sometimes appended documents) that define the
scope, terms, and conditions of the agreement. The legal writing can be
heavy, and both parties often involve a lawyer when dealing with these
specific documents.

06 Differing Site Conditions

Differing site conditions can increase construction costs and can delay
breaking ground on the project. A contractor developing contracts needs
to know how to handle this possibility and include language that protects
against unforeseen circumstances. Normally, differing site conditions
surface during the first weeks of the project, potentially affecting the
schedule and causing unforeseen delays. Considering the
repercussions of delays, it's crucial to document how such impediments
affect the general contract.

07 Construction Contracting Escalation Clause

Escalation clauses are often written into construction contracts. They are
more typically included on large construction projects, where the job
might require more than one year to complete and where it carries
substantial financial backing and risk. For example, the potential for
economic changes such as a gas shortage or oil glut may require contract
escalation clauses, even on small and medium-size projects. If executed
properly, escalation clauses protect the contractor
from unpredicted charges.

ELEMENTS OF A CONTRACT

The contract itself must include the following:

1. Offer
2. Acceptance
3. Consideration
4. Parties who have legal capacity
5. Lawful subject matter
6. Mutual agreement among both parties
7. Mutual understanding of the obligation

When it comes to the key three elements that make up the beginning
stages of the contract, you’ll need to ensure that there is an offer,
acceptance, and consideration. First, an offer must be made by one
party to another party. Next, the party receiving the offer must accept
it. Then, there must be consideration exchanged between the parties.
This could be a monetary amount or a simple promise to act under the
contract.

When it comes to the legal capacity of a party, keep in mind that

those under the age of 18 or those who are mentally incompetent
don’t have the legal capacity required to enter into a contract.

While all contracts are unique, there are certain terms that are
commonly used in all contracts, particularly business contracts. These
are generally referred to as the terms and conditions of a contract.