1.

Compare the lump sum and cost plus contracts from the point of view of early start to construction, Risk
Sharing, Flexibility of Design Change and variation.
There will be incentives for early finish in lump sum contract.
There is high risk for contractor in lump sum contract since the quantity of works to be done will be unknown.
Flexibility of design change will be limited in lump sum contract whereas cost plus contract is more flexible
to design stages.

2. What are the essentials of a valid contract? Define Engineering Contract. Describe contract formation
process?
3. Define Engineering Contract. Shortly introduce the different types of Engineering Contracts based on the
method of payments to the contractors?
4. Define Engineering Contract and its purpose.
 Scope of Work
The first purpose of the contract is that it clearly lays out what is expected of the contracted engineer. Any
parts of the project that should not be handled by the contracted engineer should be clearly stated in the
contract.
 Period of Performance
Engineering contracts should give the expected time frame for the project and a deadline for total completion.
 Payment
Contracts make sure that products and services are paid for in a timely manner. An engineering contract
should outline when payments will be received, from whom, and how much, as well as instructions for
invoicing.
 Termination
Engineering contracts usually contain termination clauses. These types of clauses specify how, and for what
reasons, the contractor or customer can terminate the agreement.
5. Shortly introduce the different types of Engineering Contracts based on the method of payments to the
contractors?
6. Although BOOT Contract is being popular these days, it seems that private sector is not interested to finance
infrastructure projects other than Hydropower. Please comment on this with strong reasoning.
 7. Contracts are agreements enforceable by law. It is said that all contracts are agreements but all agreements
are not contracts. Differentiate the ‘Contract’ and ‘Agreement’. Briefly describe the essentials of a valid
contract. How do you define ‘Engineering Contract’?
8. Define Engineering Contract. Compare Turnkey and BOOT Contracts.
9. Why sub-contracting is done in construction contract? Briefly introduce different types of Sub contracting
you know.
10. State the major content clause of general and special condition of contract
11. Specify the suitable types of contract for following construction projects with justification;
#Bridges: TURNKEY # Highways: UNIT RATE
# Hospitals: EPC # Military Projects
12. Introduce FIDIC Conditions of Contract with its salient features. Describe the roles and responsibilities of
FIDIC Engineer.
What role does the Engineer play?
As already noted, the Engineer has a very significant project management role under the 2017 forms. Examples of
the Engineer’s role (and tools for project management) include:

 Notifying the Contractor of the Commencement Date not less than 14 days before that
date;
 Reviewing programmes;
 Measuring the Works;
 Issuing payment certificates;
 Issuing instructions (including for variations);
 Ensuring that the personnel of the contractor act professionally and safely and removing
them the site if they do not;
 Inspection and testing of the works;
 Issuing notices to correct failures;
 Issuing Taking-Over Certificate(s);
 Issuing the Performance Certificate;
 Assessing and making a neutral determination.
Engineering Contracts
Contract is a legally binding written agreement between two parties where the responsibilities of
both the parties are spelled out. In a contract, a party commits to provide some works or services
for second party who agree to pay the first party.
An Engineering Contract is a mutual agreement negotiated between two parties for the purpose of
undertaking, on a commercial basis, certain clearly specified engineering work.
Essentials of a Valid Contract
There is a saying that all contracts are agreements, but all agreements are not contracts because,
the fulfillment of certain requirements only give an agreement a status of contract. Therefore, we
call such requirements as essentials of a valid contract. The primary aim of entering into a contract
is to seek legal remedies. Therefore contract must be legally strong so that in case if a party does
not fulfill contractual obligations then necessary legal measures can be taken. Followings are the
essentials of a valid contract:
 Offer and Acceptance: First a party should make an offer and then the other party should
accept the offer made by the first party.
 Free Consent: Offer must have been accepted freely without any coercion.
 Legal relationship: The intention behind entering into a contract should be creating legal
relationship between the parties involved.
 Competent Parties: The parties into a contract shall be legally competent.
  Legal Objective: The objective of an agreement shall not be illegal.
 Lawful Consideration: Both parties involved in a contract must be benefited from the
contract.
 Possibility of Performance: The agreement made shall have possibility of performance.
 Certainty: There must be certainty. Agreement should not be ambiguous, vague and
unlimited.
 Writing and Registration: To have legal status, writing and registration of an agreement
is very often needed.

Void Contracts
A contract that lacks one or more of the elements of contract is void contract and it has no
legal effect.
As per contract act 2023, the following are void contract:
Contrary to the statutory law: if the contract or its intention are against the law of the
country or contrary to the law, the contract becomes void.
Ambiguous, vague and unlimited contract: the contract must be specified, defined and
bounded with certain parameters so that the contract can be executed against certain target.
Non possibility of performance: when the contract seems of not possible for performance
the contract is void.
Contrary to the public policy and welfare: any contract against the public policy and
welfare shall be void contract.
Characteristics:
It’s not legally enforceable.
It imposes no obligation on the parties.
It fails to create legal rights.
It’s against the law.
Neither party shall receive compensation.

1.4 Contract Formation

When two parties mutually agree to transaction, a contract is formed. Negotiation for a contract is
begun by the Principle inviting an offer or a proposal to undertake the work under a contract from
one or more suitably qualified individuals or corporations. The formal offer made by a contractor
in response to such an invitation is referred to as tender. Where one party only is invited to submit
a tender, the agreement may be reached by direct negotiation. Where two or more parties are
invited, the agreement is usually reached by a competitive tendering process in which tenders are
invited and evaluated in accordance with clearly defined provisions.
Reaching the final agreement may be a lengthy procedure during which the negotiating parties
prepare and exchange documents setting out their respective requirements, offer and counter
offers. These documents must be carefully prepared so as to avoid misunderstandings and
misinterpretations that could lead to disputes during the contract stage.
To ensure that the finally negotiated agreement is enforceable at law, the contract should be clearly
evidenced by writing down the agreed terms and conditions under an instrument of Agreement to
be signed by the parties to the contract.
Classification by the method of payment for the work.
1. Lump Sum or Stipulated Sum Contracts
This type of contract is the one in which the contractor based on the available complete set of plans
and specifications quotes one single price which covers all works and services required by the
contract plans and specifications. The lump sum price includes all direct costs of the contractor for
labor, machines, materials and indirect costs such as field and front office supervision, secretarial
support and equipment maintenance and support costs and also includes profit of the contractor.
In lump sum contracts, the contractor is paid the amount nominated in the contract for the work as
agreed with the Principal when negotiating the contract. This amount may, of course, be increased
or decreased owing to additions or deletions from the scope of the work under the contract in
accordance with the terms of agreement. This type of contract is commonly used where the nature
and extent of the work can be accurately defined but the quantity of work cannot.
Advantages:
1. from owner’s Point of View
 The owner since he knows the exact amount of money that must be budgeted.
 The contractor receives monthly progress payments based on the estimated percent of the
total job that has been completed, which reduces the extra burden of accurate measurement
for paying running bills as in other types of contract.
 Minimal involvement of owner.
 The contractor takes all of the construction risks in the absence of changes or impacts
unforeseen by either party.
2. From Contractor’s Point of View
 There is minimum interference from the owner and his Engineer other than for quality and
schedule.
 An innovative contractor may obtain an opportunity to maximize profit through innovation.
 The contractor may pass on much of the risks to the sub-contractors.
Disadvantages:
1. From owner’s Point of View
 Requirement to have detailed plans and specifications complete before bidding
 Overall design-construct time is usually the longest.
 Changes to the work or unforeseen difficulties will often end in disputes
 The owner has minimal control over the performance of the work.
2. From Contractor’s Point of View
 The owner controls the funding on disputed extra work or changed conditions and the
contractor must often resort to expensive arbitration or litigation with no assurance that it
will recover for the additional costs.

2. Unit- Price Contracts

In this type of contract, the project is broken down into the work items that can be characterized
by units such as Cum, Sqm, Rm, and Nos etc. The contractor quotes the price by units rather than
as a single total contract price. A guide quantity is given for each work item. Based on this guide
quantity, the contractor quotes a unit price for each item of the project work. The total price is
computed by multiplying the unit price by guide quantity and summing up the cost of whole the
items. The lowest reasonable bidder is determined and the contract is awarded.
Advantages:
1. From owner’s Point of View
 The owner may benefit from price competition in a competitive situation.
 Minimal involvement of owner.
 The contractor takes all of the construction risks in the absence of changes or impacts
unforeseen by either party.
2. From Contractor’s Point of View
 There is minimum interference from the owner and his Engineer other than for quality and
schedule.
 The contractor may pass on much of the risks to the sub-contractors.
 The contractor can maximize the profit by manipulating the bid.

Disadvantages:
1. From owner’s Point of View
 Requirement to have detailed plans and specifications complete before bidding.
 Overall design-construct time is usually the longest.
 Changes to the work or unforeseen difficulties will often end in disputes.
 The owner has minimal control over the performance of the work.
 The owner does not have a precise final price for the work until the project is complete.

2. From Contractor’s Point of View

 To be competitive, the builder must often use marginal sub-contractors who may have
problems in performing the works.
 The owner controls the funding on disputed extra work or changed conditions and the
contractor must often resort to expensive arbitration or litigation with no assurance that it
will recover for the additional costs.
 The contractor usually bears the economic risks of unusual weather conditions, strikes or
other external factors that influence a contractor’s cost.
3. Cost plus Contracts
In a Cost plus Contract, the contractor is reimbursed the actual costs incurred in carrying out the
work under the Contract plus a fixed or variable fee to cover overhead costs and profit.
i. Cost + Percent of Cost
ii. Cost+ Fixed Fee: In this form of contract, a fixed amount of fee is paid regardless of the
fluctuation of the reimbursable cost component. This is usually established as a percent of an
originally estimated total cost figure.
iii. Cost + Fixed- Fee +Profit Sharing
The fixed- fee plus profit sharing formula provides a reward to the contractor who controls costs,
keeping them at a minimum. In this formula, it is common to specify a target price for the total
contract. If the contractor brings the job in under the target, the savings are divided or shared
between owner and contractor. A common sharing formula provides that the contractor shares by
getting 25% of this under run of the target. If for instance, the target is $10 Million and the
contractor completes the job in $9.5 Million, he receives a bonus of $125,000.
iv. Cost+ Sliding Fee
A variation of the profit sharing approach is the sliding fee, which not only provides a bonus for
underrun but also penalizes the contractor for overrunning the target value.
Advantages:
A reasonable profit is assumed to contractor as a result of which contractor undertake the
contract.
1. Advantages from Owner’s Position
 Opportunity to utilize contractor expertise during the design phase to help minimize overall
costs.
 The owner may participate fully in the management and control of the project.
 The owner may achieve the advantage of eliminating marginal subcontractors as well as
achieving fixed prices for specialty work by letting a substantial portion of the work to
prequalified subcontractors.
2. Advantages from Contractor’s Position.
 Elimination of the risk inherent in fixed price contracting.
 The contractor is paid for the preparation of his initial planning, including development of
cost-estimates, schedule and other work plan items which he most absorb in competitively
bid contract.
 Opportunity to obtain future work from the owner due to harmonious relationship.
 Job site can be staffed and managed efficiently with owner’s cost.
Disadvantages:
1. Disadvantages from Owner’s Position:
 Cost plus fixed fee may not be the most economical in a competitive market.
 Disreputable, unskilled contractor can abuse this arrangement if the owner is not careful in
selection.
 Owner’s involvement is increased.
 Definition of reimbursable items of cost, particularly those for contractor’s tools and
equipment’s, overhead expenses etc. may be the sources of disputes and adverbial
relationship.
2. Disadvantages from Contractor’s Position.
 Fees may be minimal in comparison to profit potential in areas of known performance with
a favorable risk/reward ratio.
 The contractor’s reputation may suffer in the event of significant delays, cost overruns or
personal clashes with owner personnel.
 The contractor may bear risks for items not under his control.

Design–Build or Design- Manage (Turn Key) or EPC Contracts

TURNKEY PROJECTS:AIRPORTS,BRIDGES,GAUTAM BUDDHA CRICKET
The “turnkey” type of contract is widely used for the delivery of projects. The basic concept of
this approach is for the organization requiring the project to contract with a single organization
that would be responsible for design, procurement, and engineering and commissioning. Literally
all the promoter would have to do would be to “turn a key in the door’ and project will be
operational.
EPC stands for Engineering, Procurement, and Construction and is a prominent form of contracting
agreement in the construction industry. The engineering and construction contractor will carry out
the detailed engineering design of the project, procure all the equipment and materials necessary,
and then construct to deliver a functioning facility or asset to their clients. Companies that deliver
EPC Projects are commonly referred to as EPC Contractors.
Normally the EPC Contractor has to execute and deliver the project within an agreed time and
budget.
Advantages:
 The responsibility for the contract lies with a single firm and the promoter is relieved from
responsibilities for the equipment or plant and performance.
 The project is put into operation more rapidly than other contracts.
 Owner is not affected by the market rise
 Minimal owner coordination is required between construction, design, and other project
elements. This can be of great benefit to an unknowledgeable owner.
 Considerable opportunity for construction expertise to be incorporated during the design
phase.
 Implementation of changes is simplified throughout the construction program.
Disadvantages:
 Usually no firm project cost is established until construction is well underway.
 Contractor compromises quality for fixed price
 Involves high risk
 Generally cost higher
 Design option is limited with contractor
 Very few checks and balances and the owner is sometimes not advised or aware of design
or construction problems that may greatly affect cost or schedule.
 Due to minimal involvement of owner, the final result may not fully comply with
expectations.
 Successful integration of design and construction functions and avoidance of changes are
largely left up to the design construct firm.

EPC contract Turnkey contract

In EPC project employer gives basic design
and its contractor responsibility to do the detail
engineering & carried risk in design is
allocated to contractor scope
An EPC plan will include the contractor
getting a complete system design ready to be
more effective and easy to read
In Turnkey project employer gives only
idea while it is contractor responsibility to
convert idea in reality
A turnkey process will involve a contractor
dealing with special considerations for
handling property and designing things
based solely on the type of specifications
that come with the property.

Build-Own-Operate-Transfer (BOOT)
The major components of a BOOT Project include:
Build: design, manage, project implementation, procurement, construct and finance
Own: own the asset for the concession period and the license for the equipment used.
Operate: manage and operate plant, carryout maintenance, deliver product or service and
receive off take Payments.
Transfer: handover plant in operating condition at the end of the concession period.
Comparison of “Turn-key” and BOOT Projects
 BOOT projects are contractor financed turnkey contracts.
 BOOT project strategies grew out of turnkey contracting.
 In conventional turnkey contracts, governments have attempted to shift the risk for the
project construction to the private sector while still bearing the risk of financing and
operating the project. In a concession project i.e. BOOT project, the major risks of finance
and operation, however, borne by the promoter.
 In turnkey contracts, feasibility studies are often carried out by the principal while in BOOT
project, the promoter will be responsible for feasibility studies.
 Commercialization of a turnkey contract is normally the responsibility of the principal,
who will often pay the contractor a mobilization fee and monthly payments for the work
carried out. In BOOT projects, the promoter will carry out commercialization.
 In turnkey contracts, operation of the facility is carried out by the principal after one or two
years of commissioning while in BOOT projects, the promoter will operate the facility over
the concession period before finally transferring the facility to the principal.
Advantages:
 Promotion of private investment.
 Completion of projects on time without cost overruns.
 Good management and efficient operation.
 Transfer of new and advanced technology.
 Utilization of foreign companies’ resources.
 Additional financial sources for priority projects.
 No burden on public budget for infrastructure development.
 Positive effect on the credibility of the host country.

Disadvantages:
A review of BOOT schemes by an EU Commission concluded that there were three key problems
associated with BBOT projects:
 Availability of experienced developers and equity investors
 The ability of governments to provide necessary supports
 The workability of corporate and financial structures.

Subcontracts
In most cases the contractor will not undertake the whole of the work of major project entirely
from within the contractor’s own resources. The contractor usually divides the work up into
number of elements and enters into separate agreements with subcontractors to carryout some of
the work directly for the contractor.
Designated Subcontractors
 Designated sub contractor is one named in the Enquiry Document to carry out certain work

or to supply certain items or services, the nature and extent of which are clearly described in

the documents which the contractor can be reasonably expected to price and allow for it at

the time of tendering. It is up to the contractor to negotiate with the designated sub contractor

before submitting the tender. As the contractor knows right from the beginning who the sub

contractor is, there can be no right of objection to the designation once an agreement has

been reached with the principal.

The Principal must accept the responsibility for default by designated subcontractor. In the
event of a designated subcontractor defaulting, the Principal must nominate another sub
contractor and be liable to the main contractor for any additional cost incurred as a result of
the default.
3.2 Selected Subcontractors

Selected subcontractor is one selected by the contractor from a restricted list of approved
subcontractors nominated by the Principal and included in the enquiry documents.

The Principal accepts no responsibility for default by a selected subcontractor. In the event of
a Designated Subcontractor defaulting, it is the main contractor’s responsibility to negotiate
with one of the other subcontractors on the list to complete the work.

2.1 Nominated Subcontractors

Nominated subcontractor is one selected by the Principal without reference to the main
contractor. As a general rule, the work carried out by a Nominated subcontractor is covered by a
provisional sum in the contract. Frequently, the Principal independently invites tenders for the
work under the subcontract, negotiates a subcontract and directs the main contractor to enter into
a subcontract with Nominated subcontractor selected on terms and conditions negotiated by the
Principal. As with designated subcontractors, the Principal accepts responsibility for nominating
a new subcontractor in the event of the Nominated Subcontractor defaulting and is liable for any
resulting costs.
4. Labour Contract

Sometimes, in traditional approach of Contracting, owner supplies all construction materials and
equipments on his own cost and contractor is paid only for labor. The contractor quotes his rate
item wise in standard units. Payment is made by measuring the works in standard units like Cum,
Sqm, Rm etc. Sometimes, the contractor is paid for his labors in muster roll basis like in force
account method. In this method most of the risk is kept by the employer.