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Contract Management

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CONTRACT MANAGEMENT
Lecture-3 (Week-3)

Engr. Rafia Nawaz

Lecturer Department of Civil Engineering
GIK Institute
Dr.-Ing Abdur Rehman Nasir
Assistant Professor ofEngineering
of Construction Engineering Sciences & Technology, Topi, Swabi KPK
and Management
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12.09.2019 NIT (SCEE), NUST H-12, Islamabad
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Contract Management

Topics to cover
o Contracts naming convention
o Contract Strategy
o Formulating a contract strategy
o Project Delivery Methods
o Traditional Project Delivery

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Contracts naming
convention

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Contracts naming convention

▪ Construction contracts involve the provision of goods or services or both.

▪ The goods are usually construction materials. The services are usually laboring and use of
plants to work but they can include design services and management services.

▪ Where the contractor does not contract to provide design or management services, the
contract is usually described as a ‘traditional contract’.

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Contracts naming convention

▪ Where the contractor agrees to carry out design, the contract is usually
called ‘design and construct’.

▪ Where the contractor agrees to manage work by others, the contract is

usually called a ‘management contract’.

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Contracts naming convention

▪ On the other hand, the name given to a contract may be some indication of
what the contract is about but care must be taken because often a particular
name is given to a contract to make it appear more attractive.

▪ For example, some contractors call their own form of contract a ‘Guaranteed
Maximum Price Contract’ but usually there is no guarantee that the price will
not increase.

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Contracts naming convention

Sometimes contracts are named after the nature of the work, for example:
▪ residential building
▪ domestic building
▪ civil engineering
▪ architectural
▪ air-conditioning
▪ maintenance
▪ management
▪ design and construct
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Contracts naming convention

Sometimes contracts are named after the nature of the remuneration, for
example:
▪ lump sum
▪ schedule of rates (unit rates)
▪ cost-plus fixed fee
▪ cost-plus percentage.

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Contracts naming convention

Sometimes contracts are named after the nature of the contractual
relationship, for example:
▪ consultant agreement
▪ supply contract
▪ leasing contract
▪ subcontract
▪ head contract
▪ nominated subcontract
▪ concessional contract (e.g. BOOT — build, own, operate and transfer).
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Contracts naming convention

Sometimes contracts are given the name or acronym used by the publisher of
the standard form of general conditions incorporated in the contract, for
example:
▪ AS2124 (published by Standards Australia)
▪ New Engineering Contract (NEC) 1995, UK
▪ CIC-1 (published by the Royal Australian Institute of Architects)
▪ ICE Conditions (published by the Institution of Civil Engineers, UK)
▪ FIDIC (published by the International Federation of Consulting Engineers)
▪ AIA (published by the American Institute of Architects).

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Contract Strategy

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Contract Strategy
In deciding what form of contract the client should enter, the three issues need
to be carefully considered

i. Management of the project lifecycle,

ii. Development of the design, and
iii. Construction of the facility.

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Contract Strategy
Management of the project lifecycle
▪ Clients have a choice of either managing individual stages of the project
lifecycle themselves or engaging suitable qualified and experienced
consultants such as project managers.

▪ The choice is commonly related to the client’s skill and experience in

managing projects, the type and the size of project, and the degree of risk
involved.

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Contract Strategy
Design of the facility
▪ Once a decision is made on ‘management’, the client decides who to contract
for design services.
▪ Since the design work may involve a number of specialist designers, the client
may either enter into one contract only with the ‘main’ or ‘chief’ designer,
who in turn would form separate contracts with the other design specialists,
or form separate contracts with individual specialist designers.

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Contract Strategy
Design of the facility
▪ The client must, however, nominate one of the designers to assume the role
of a design leader to ensure effective co-ordination and integration of the
design.
▪ Alternatively, the client will appoint a project manager to lead the design
team.

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Contract Strategy
Design of the facility
▪ In ‘design and construct’ contracts, the contractor becomes responsible for
the design. The contractor has either in-house design capabilities or sublets
the design work to design firms. This practice is increasingly popular on
medium to large commercial and engineering projects.

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Contract Strategy
Construction
▪ A contract to build a construction project may be awarded to one contractor,
which is the most common practice, or to several contractors.
▪ The latter practice is associated with ‘fast-tracking’ (a process of overlapping
design and construction) and may also be applied on projects where risks are
such that a reasonable price cannot be formulated through a tender process.

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Contract Strategy
Construction
▪ Where the client proposes to ‘package’ the work to several contractors, it is
common to appoint a construction manager to lead the contracts (then
called trade contracts or separate contracts) on behalf of the client.

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Formulating a contract
strategy

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Formulating a contract strategy

▪ Management, design and construction are the key elements of a contract
strategy.

▪ It may well be that the client will let one contract for all three elements or
three separate contracts, one for each element, or the client may choose any
combination of those elements.

▪ The decisions taken during the development of a contract strategy affect the
responsibilities of those involved.

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Formulating a contract strategy

▪ They influence the control of design, construction and commissioning, and
the entire co-ordination of the project lifecycle including its participants.

▪ They also allocate risks and define policies for risk management, as well as
define the extent of control is transferred to contractors. Therefore they affect
all of the crucial project objectives of cost, time, and quality.

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Formulating a contract strategy

Apart from examining the issues of management, design and construction,
reaching an appropriate contract strategy requires careful consideration of:

▪ the choice of a project delivery method

▪ the choice of a contract price
▪ how the contractor should be selected
▪ the choice of conditions of contract
▪ the allocation of risk to the parties through the contract documents

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Formulating a contract strategy

Apart from examining the issues of management, design and construction,
reaching an appropriate contract strategy requires careful consideration of:

▪ the choice of a project delivery method

▪ the choice of a contract price
▪ how the contractor should be selected
▪ the choice of conditions of contract
▪ the allocation of risk to the parties through the contract documents

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Project Delivery Methods

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Project Delivery Methods

▪ Many different terms are used to describe an organization structure chosen
for a particular construction project.

▪ These are commonly known as procurement, contractual or delivery

methods, or options of project delivery.

▪ In this part, the terms ‘delivery methods’ and ‘options of project delivery’
will be used to describe project organization structures.

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Project Delivery Methods

Definition of delivery method

Delivery methods are project organization structures that define a framework of

contractual and communication links among project team members.

▪ Unlike corporate organization structures that define the main functional and
administrative units of a firm, project organization structures define a
hierarchy of the key project team members and give the contractual and
communication links between them.

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Project Delivery Methods

▪ Project delivery methods are specifically designed organization structures for
delivering construction projects within cost and time constraints.

▪ They define contractual links among the key project team members and the
flow of information within the hierarchical management structure.

▪ Methods vary and their nature is determined by the roles played by the
project team members, the relationships between them, the timing of
events, as well as the formal general conditions of contract used.

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Project Delivery Methods

Selection of delivery methods
The client’s problem is to choose the most appropriate delivery method for a
particular project from a rather large array of delivery methods available.
The selection is likely to be influenced by:

i. Standard practices adopted by the client. Some clients may be reluctant

to abandon a delivery method that worked well for them in the past.

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Project Delivery Methods

ii. The uniqueness of the contracting roles and responsibilities, which strongly
influence the choice of an appropriate delivery method. For example,
inclusion of a construction manager on the project team is likely to lead to
the selection of construction management as a delivery method.

iii. The degree of documentation available before contracts are entered into.
With full documentation available, a traditional method of delivery may be
the best alternative.

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Project Delivery Methods

vi. The degree of difficulty of arriving at a contract price. For example, when full
documentation is available and when the level of risk is low, a lump-sum price
may be a suitable option for a contract sum.

v. The lender’s preference. The role of the lender in decision-making on a

project should not be underestimated. When the risk is high, the lender may
impose a particular option of project delivery that would best protect the
lender’s investment.

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Traditional Method of Project Delivery

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Traditional Project Delivery Method

▪ The word ‘traditional’ points to the universal acceptance of this method over
a long period of time.

▪ The method is well known, its structure is clearly defined, and the roles and
responsibilities of individual project team members are understood.

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Nature of the Traditional Method

▪ The client, the design consultant and the contractor are the three main
parties that form the structure of the traditional delivery method.
▪ The client selects the main design consultant to design and document the
project.
▪ Using a competitive tendering process, the client then selects a contractor
and enters into a formal contract (the main contract) with that contractor to
build the facility as designed.
▪ The contract price paid to the contractor may be in the form of a lump sum, a
schedule of prices, or a mixture of both. It may even be, wholly or in part,
cost-plus.
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A typical structure of the traditional method of project delivery is given in Figure 1.

Figure 1: The Traditional Method of Project Delivery

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A typical structure of the traditional method of project delivery is given in Figure 1.

Figure 1: The Traditional Method of Project Delivery

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Organization of Traditional Delivery Method

▪ It shows the hierarchy of the management structure, contractual links formed
between project team members, and the lines of communication.
▪ It is worth noting that the project manager is not involved in the traditional
method.
▪ But it doesn’t mean that the traditional method does not require project
management services.
▪ These are provided by the client up till the start of the construction stage,
after which the design consultant assumes the responsibility for administering
the construction contract.

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Organization of Traditional Delivery Method

▪ Inexperienced clients may seek advice from specialist consultants such
as project managers in conceiving the project and developing the
design, but apart from assisting the client, they are not part of the
traditional organization structure.

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Contract between the principal/client and the design

consultant

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Contract between the principal/client and the design consultant

▪ The first contract formed is between the principal/client and the design
consultant.
▪ The design consultant is commonly required to
– design the project,
– provide estimates of cost,
– facilitate production and co-ordination of design documentation,
– prepare tender documentation and administer the tender process,
– recommend to the client selection of the best contractor and any nominated
subcontractors
– administer the main contract formed between the principal and the contractor.

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Contract between the principal/client and the design consultant

▪ The design consultant acts in an independent role and offers impartial
advice to the client on technical and financial matters as well as on matters
concerning the contractor.

▪ In addition to best design solution, which requires competence as a designer,

the design consultant has to be an efficient manager and coordinator of
activities of other members of the design team, such as the structural
engineer and specialist designers.

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Contract between the principal/client and the design consultant

▪ Ideally, the design consultant should be engaged in the conceptual stage of
the project lifecycle to assist in developing a project brief.

▪ The design consultant will advise the client on the most suitable contract
conditions and the procedure for selecting a contractor. This will involve
drafting tender conditions, recommending how the tender process should be
carried out, evaluating tenders and recommending a winning tenderer. The
design consultant will also make a recommendation on the selection of
nominated subcontractors.

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Contract between the principal/client and the design consultant

▪ Design of a large facility involves a number of specialist designers, including
architect, structural engineer, services engineers, interior and landscape
architects, and any other required specialist designers.

▪ The principal/client commonly forms a contract with one of such design

firms, which becomes the main design consultant. The main design
consultant will then enter into separate contracts with the other required
design consultants.

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Contract between the principal/client and the design consultant

▪ The overall responsibility for the development of the design, and the
production and co-ordination of the necessary documentation, lies with the
main design consultant.

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Contract between the principal/client and the

Contractor

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Contract between the principal/client and the Contractor

▪ A contract between the principal/client and the contractor is referred to as
the ‘main’ or ‘head’ contract.

▪ The contractor undertakes to fulfill all the obligations under the contract to
build the facility within the agreed cost and time, and to the required quality
standards.

▪ Figure 1 shows that the contractor has a communication link with the design
consultant but not with the principal/client. This is characteristic of the
traditional method.

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Contract between the principal/client and the Contractor

▪ After the award of the main contract to the contractor, the design consultant
assumes the responsibility for administering the main contract on behalf of
the client. The design consultant becomes the client’s agent with the
authority to give directions, assess and certify the contractor’s claims, and
resolve issues (The Engineer).

▪ Things done and directions given by the design consultant as the agent of the
principal bind the Contractor just as if done by the Client. In general, a claim
cannot be made against the agent for acts performed as an agent of the client
but must be made against the client.

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Contract between the principal/client and the Contractor

▪ It is worth noting that in performing the role of superintendent in the
construction stage, the design consultant may appear to be exposed to
potential conflict of interest.

▪ In administering the main contract as superintendent, the design consultant

is sometimes required to be unbiased and impartial in decision-making, for
example in certifying extensions of time or the value of work or deciding
disputes.

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Contract between the principal/client and the Contractor

▪ As the client’s agent, the design consultant is also required to act in the best
interest of the client, but where the client has given the superintendent the
role of an independent certifier, the best interests of the client require the
superintendent to act independently without bias or partiality.

▪ Consequently, the superintendent who acts in accordance with the role

allocated will never have the apparent conflict of interests.

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Contract between the principal/client and the Contractor

▪ Rejection of the contractor’s claims by the design consultant when such
claims should have been certified would be seen by the contractor as a sign of
favoritism for the client and may trigger the contractor’s action against the
client or, in some instances, against the design consultant.

▪ In the opposite case, the client may argue that the design consultant is not
acting in the client’s best interest and may have a claim against the design
consultant for breach of the terms of the consultancy engagement.

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Contract between the principal/client and the Contractor

▪ The design consultant as a contract superintendent performs a difficult and

important role in administering the main contract.

▪ The client needs to ensure that only a highly experienced and reputable
design firm is selected for this task.

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Contract between the principal/client and the Contractor

▪ The client must bear in mind that the design consultant is not expected to
provide legal advice.
▪ There will be instances where the design consultant will not know the answer
to a contractual problem, for example, whether a certain instruction will
place the client in breach of contract or create liability, perhaps to pay for a
variation.
▪ In such instances, the design consultant can only point out the risks involved
and it is up to the client to decide, perhaps after taking legal advice, which
course the client requires the superintendent to take.

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Contract between the contractor and subcontractors

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Contract between the contractor and subcontractors

▪ While the contractor is contracted to build the facility, the bulk of the
construction work is usually performed by subcontractors, sometimes
referred to also as ‘specialist contractors’.
▪ The contractor breaks the project down into specific trade packages, which
the contractor lets to different subcontractors, usually in the form of lump-
sum prices.
▪ If there are any suppliers, they will have a contractual arrangement with the
contractor.
▪ The contractor’s role is that of the manager of construction activities.

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Contract between the contractor and subcontractors

▪ All subcontractors, including nominated subcontractors, are contracted to the
contractor.

▪ Apart from being selected by the client on advice from the design consultant,
nominated subcontractors do not enjoy special privileges.

▪ By subcontracting, the contractor does not escape liability to the client. The
contractor is usually liable for the acts or omissions of a subcontractor as if
committed by the contractor.

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Traditional Project Delivery Client

Perspective
Advantages to Client
Disadvantages to Client

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Advantages to Client
The traditional method of project delivery promises a number of distinct
advantages to the client. A brief summary of potential advantages is given
below:

▪ The completion of plans and specifications before the award of the main
contract allows the client and the contractor to make a fairly accurate
estimate of the cost and construction time of the facility.
▪ Because sufficient time has been provided before construction for the
development of design and the production of documentation, the risk
associated with design changes (variation orders) is expected to be low.

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Advantages to Client

▪ The client’s financial risk associated with the construction stage is relatively
low since the contractor assumes most of the risk.

▪ A contractor can be selected competitively from a large pool of experienced

contractors.

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Disadvantages to Client
The major disadvantage of the traditional method is that construction
generally cannot start until the project is fully designed and documented. This
extends the period of the whole project and increases the vulnerability of the
client to financial risk through inflationary and interest rate movements.
Other potential disadvantages of the traditional method are:
▪ the lack of the contractor’s technological and management expertise
and input into those aspects of the design involving construction
▪ the possibility of errors and discrepancies in contract documents that a
dishonest contractor might exploit to the disadvantage of the client

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Disadvantages to Client

▪ a high cost of tendering. The tendering cost may be as high as 3.5 percent of
the tender price (Cordell 1980).

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Traditional Contract Strategy

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Traditional Contract Strategy

The optimum or best contract strategy for projects procured using the
traditional method of project delivery requires the following requirements to be
satisfied or substantially satisfied:
▪ The optimum design for the project is established without involving the
prospective general contractor or subcontractors. This is conditional on the
design team having broad site experience in availability of resources and
knowledge of buildability, industrial relations and safety aspects. If this is not
available, the client should appoint a consultant with construction knowledge
on a fee basis.

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Traditional Contract Strategy

▪ The client manages the interface between the detailed
design/documentation and construction, and selects and engages the
consultants, who are directly responsible to the client.

▪ The client requires the consultants to provide advice and monitoring of the
project through the design, documentation and construction stages.

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Traditional Contract Strategy

▪ The time available for the project is such that the detailed design of the
project is completed or may be substantially completed before construction
commences.

▪ Few variations to the project design are expected to be required during

construction.

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Selection of Contract
Conditions

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Selection of Contract Conditions

▪ While standard forms of general conditions of contract offer the benefit of
greater certainty of the meaning of the conditions, their main drawback is
that they tend to cover all possible contingencies across all project types and
may not be totally applicable to a particular project.

▪ This leads to minor or major modifications of some contract conditions, the

down side of which is that these modifications may unintentionally alter the
meaning of the contract.

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Thank You!

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