Assosa University

Engineering College
Construction Technology and Management Department

COTM 508 – Procurement & Contract Management

March, 2020

COURSE DESCRIPTION
Procurement and Contract Management: Processes, Applicable Laws and Regulations;
Procurement & Contract Delivery System: Types, Merits & Demerits; Procurement
Management: Purposes & Characteristics, Processes, Methods, Tender Forecasting; Contract
Management: Definition & Purposes, Processes, Types; Contract Changes Management:
Principles of Change Management; Requirement Changes, Time Changes, Cost Changes; Claim
and Dispute Management: Claim Management, Alternative Dispute Resolution; Procurement
and Contract Management in Ethiopia: Past Developments, Present Situations, Future Trends
 Procurement and Contract Management
Course Outline - Table of Content
Chapter 1. Introduction
1.1. General Description
1.2. Procurement & Contract Management Process
1.3. Applicable Laws, Rules, Regulations and Guidelines
Chapter 2. Procurement & Contract Delivery Systems
2.1. Definition, Types and Development
2.2. Logistics, Supply Chain / Network / Management
Chapter 3. Procurement Management
3.1. Introduction and Purposes
3.2. Procurement Methods
3.3. Procurement Management Processes
3.4. Statistical Approach to Procurement
Chapter 4. Contract Management
4.1. Introduction and Purposes
4.2. Contract Management and its Processes
4.3. Contractual Stakeholders and their Roles and Relationships
4.4. Contract Types
Chapter 5. Contract Changes Management System
5.1. Introduction
5.2. Requirement Changes Management System
5.3. Time Changes Management System
5.4. Price Variations Management System
Chapter 6. Claim and Dispute Management System
6.1. Introduction
6.2. Claim Management System
6.3. Alternative Dispute Resolution System
Chapter 7. Procurement and Contract Management in Ethiopia
7.1. Past Developments
7.2. Current Situations
7.3. The Way Forward
 Procurement & Contract Management

Chapter 1. Introduction

1.1. General Descriptions

Construction Industry involves procurement and contract management systems in order to ensure fair
competition and distributions of obligations and rights among stakeholders. Competition helps:

 the Project Owners’ to acquire the five rights (Counterpart, Cost, Time, Quality and Quantity) s/he is entitled to
 the Project Financiers’ and Regulators’ to value market principles and effective utilization of finance such that
lowest qualified bids takes the project , and
 the Project Providers’ to get impartial and neutral Opportunity for business.

Obligations and Rights help to allocate appropriate risks among contractual parties and their remedial rights.
That is, their entitlements and provisions are clearly stated and agreed upon.

Project Owners shall consider its own particular institutional and technical SWOT (including access to
financing) before selecting which procurement and contract forms to adopt for its projects. These include the
design source, allocation of coordination responsibilities and the pricing methods.

Each type of contracting affects, in its own way, the allocation of responsibility & the demands on the
Employer for coordination of the project. Through properly allocating these responsibilities for the project to
reflect the results and recommendations SWOT's, Project Owners’ can rationalize the contract price against
its exposure to project risks. Project Owners’ are at liberty to use either its own in-house capacity or to
allocate them to one or more other parties (Private and / or Public).

Procurement and Contract management has a strong linkage and relationship with Construction Process
and Stakeholders Management. The delivery system chosen, the procurement method adopted and the
contract types decided upon determine the construction process involved and the relationships and roles of
stakeholders along the process.

1.2. Procurement & Contract Management Process

Procurement and Contract Management involves three major processes: Contract Planning, Procurement
Management and Contract Management (Figure 1).

Contract Planning: Construction projects are components of a certain business or development demands.
That is, they are formulated if and only if such businesses or development demands acknowledge their
contribution and it is a must to involve them. This requirement is dealt during the basic / strategic planning
phase of the over all business. This phase often pass through the identification, feasibility and financing
stages of Programs or Projects. Contract is a customary tool used to implement formulated programs or
projects. As a result, contract planning becomes part of this basic / strategic phase.

Delivery System Contract Formulation

Procurement Method Contract Administration
Contract Types Contract Closing

Contract Procurement Contract

Planning Management Management

Procurement Preparation
Tendering
Tender Evaluation & Notice of Acceptance

Figure 1: Procurement and Contract Management Processes

Contract planning includes decisions on proposed Delivery Systems, Procurement Methods and Contract
Types to be followed and used together with its provisions for alterations. This is because such decisions
are related to regulatory requirements such as:

 Ethical (Neutrality, Formality, and Impartiality);

 Economical: (Proof of Competition, Least Qualified and Evaluated Bidder);
 Accountable: (Obligations and Rights);
 HSE (Health, Safety and Environment); and
 Transparent: (Accessibility and Notice of Advertisement).

Procurement and Contract Management processes shall be based upon the approved contract planning
provisions; that is, the contract delivery system, the procurement method and contract types decided upon.
The approved contract provisions can only be changed following the change process stated in the contract
planning document and if and only if:

 the Environment and Context considered are not correctly analyzed or changed,
 their application can remarkably affect the objective of the project, and
 procurement management process justifies change of the Contract Types.

Once the validity of the contract provisions are checked once again and taken for granted or other
provisions are devised; Procurement Management followed by Contract Management can be initiated,
planned, implemented, monitored and Closed.
Among the three important contract Planning Provisions, Procurement and Contract Delivery system is dealt
in Chapter 2. Procurement Methods and Contract Types are covered in their respective management
chapters (Chapter 3 and 4).

Procurement Management: is a process of selecting individuals or organizations to carry out the intended
services and / or works. Procurement Management is carried out based on the provisions made during the
contract planning phase of the Procurement and Contract Process. It involves the preparation of
procurement documents, their invitation and submission of tender proposals, and Opening and Evaluation of
tenders. On the bases of results from tender evaluations, the procurement team will recommend the lowest
responsive bidder for Contract Management Phase.

The following issues are necessary for a successful Procurement Management phase:

 knowing and ensuring the implementation of procurement related National and International laws, rules and
regulations,
 adherence to the provisions made during the contract planning phase including their change processes, that
is; wrt. Delivery Systems, Procurement Methods and Contract Types,
 establishment of a flexible procurement team, and
 adhering to the principles of Proof of competition, Impartiality, Neutrality, Accessibility and Formality.

Contract Management: is a process of reaching contractual agreement for implementation, its administration
and finally concluding the contract. Similar to the procurement management process, it shall be based on
the provisions decided during the contract planning phase. It involves negotiation based on tender
evaluation recommendations and signing of contractual agreement followed by its administration for
contractual implementation, progress tracking, and changes, claim and disputes administrations.

The following issues are necessary for a successful Contract Management phase:

 knowing and ensuring the implementation of contract related National and International laws, rules and
regulations,
 adherence to the provisions made during the contract planning phase including their change processes, that
is; wrt Delivery Systems, Procurement Methods and Contract Types,
 identifying, recognizing and involving all potential or key stakeholders to form a contract team,
 understanding, mapping and monitoring all contract conditions agreed upon, and
 ability to administer changes, claims and disputes.

1.3. Applicable Laws, Rules, Regulations and Guidelines

The following Rules, Regulations and Guidelines are useful for Procurement and Contract Management:

 Ethiopian Financial Laws and Ethiopian Procurement Regulations by MoFED

  Ethiopian Civil and Procedural Codes by MoJ
 Public Works Related Organizations Establishment Proclamations, their Policies, Strategies, Duties and
Responsibilities, such as MWUD, ERA, MWR, etc by FGovt
 Project Formulation Guideline, Volume II, MoFED, 2000
 ADB, WB, EC and Other Bilateral Donors Policies and IMF Regulations
 INCOTERMS, UNICETRAL and Other Internationally acknowledged Construction Related Laws and
Regulations
 Ethiopian Urban Planning & Building Laws - Draft
 Labor, Business, Intellectual Rights, Environment Protection, etc Laws
 Standard Instruction to bidders, MWUD – 1995
 Standard RFP for Construction Consultancy Services
 General and Particular Conditions of Contract: MWUD, ERA, FIDIC, WB, ADB, EC
 Construction related Codes of Practices such as EBCS 1 – 12 by MWUD
 Construction related CPN, draft – MWUD
 Construction Related Standard specifications by QSAE, MWUD, ERA
 Construction Related Regulations by Municipalities and RBWUD

These are covered in the Course of Construction Laws – COTM ….

Chapter 2. Procurement and Contract Delivery Systems

Processes – Stakeholders – Resources Integrations!

Planning – Implementation Integrations (Front – End Assessment)!
Public – Private Partnership (PPP)!
by
Procurement and Contract Delivery System!!!

2.1. Definition, Types and Developments

Procurement and Contract Delivery system is the way Project Owners together with Project Regulators and
Financiers determine the assignment of responsibilities to Project Stakeholders along the Construction
Process. Procurement and Contract Delivery system is often determined during the Basic Planning phase of
Construction Project

Generally, there are six types of Procurement and Contract Delivery systems. These are:

 Force Account,  Construction/Facility Management

 Design Bid Build (DBB), Consultancy, &
 Design Build (DB) or Turnkey,  Alliances and Outsourcing.
 Finance / Build Operate System
(BOT),

Such Procurement and Contract delivery systems are developed overtime

and are shown in Fig. 2 below. The development was based on problem
solving for the previous type and the Development of the Construction
Industry technologically and management wise.
 Force Account - Since development started

Design Bid Build (DBB) – 1950s / 1987

Design Build (DB) / Turnkey - 1970s Onwards / Mid 1990s

Finance / Design Build Operate - 1980s / ……

CM / Facility Management - Mid 1990s / 2000s

Alliances & Outsourcing – 2000s / 2000s

Figure 2: The different Procurement and Contract Delivery Systems

and their development overtime

2.1.1. Force Account

When the Project Owners engage themselves to undertake the project, it is

called a force account delivery system. Often such a system is promoted if the
Project Owners believe that there is a comparative advantage in Cost, Time and
Quality issues. Besides, when there is a lack of capacity from the private sector
to undertake very large and technologically new projects, public companies do
undertake such projects using Force account delivery systems.

These days this type of delivery system is often used when projects are small
and places are remote such that reaching them is difficult and in general they
are not attractive enough to call the attention of Bidders. Besides when projects
are spatially scattered and maintenance are to be done for schools, colleges,
health centres etc., such cases can be applied.

2.1.2. Design Bid Build (DBB)

This is the most practiced type of delivery system in the Construction Industry
of Ethiopia since the 1987. After project owners did prepare the Basic
Planning that identifies construction project programs, they call upon the
participation of Design and / or Supervision Consultants either by tender or
by negotiated contracts. This consultant will carry out the design together
with the necessary tender documents which will be the bases for tendering to
select contractors. These process is called Design - Bid - Build and hence
the name for such delivery system.

In this type of delivery system , projects are divided into different packages
interfacing to each other. Though the design and supervision consultant will
be the prime professional on behalf of the owner and largely the
administrator of the construction contract; the employer takes the
responsibility of coordinating the various project packages and their
respecting interfaces.

Besides, designers have not been required to guarantee results but

rather methods. That is, they are held accountable on the basis of their
superior knowledge and sufficient competency and ability to design
with a reasonable degree of technical skills. As a result, contracts and
courts focused on professional duty of care, not results or project
goals. Contractors are also responsible to construct works with due
care and diligence and complete them in accordance with the contract,
but they are not held responsible for design deficiencies.

Since the 1980s, this traditional approach becomes less popular due
to the following factors:

 Severe Adversarial relations between the design and contract

administration consultant and the contractor
 Fragmented contract for the project owner
 Project owner responsibility for risks associated with the design and
contract administration
 Non - Impartiality of the Design and Contract Administration services
 The inability of design and contract administration consultants to cope up
with new construction technologies and constructability issues of their
designs
 Severe adversarial relationships between Urban Planners and Architects
on the one hand; and Architects and Engineers on the other hand on
building projects
 The indirect contractual obligation assigned for the Design and Contract
Administration consultants
  The incompatibility of consultancy fee to the desired activities they are
required to provide, etc.

The following standard forms of DBB Conditions of Contract are known for
use for such delivery system:

 FIDIC White Book for Consultancy Services (Design and Supervision) and
Red Book for Construction Works
 Standard Conditions of Contract for Construction of Civil Works, 1994;
MWUD

2.1.3. Design Build (DB) / Turnkey

Design Build or Turnkey Delivery system is a response to problems

associated to the last two types of delivery systems. These were promoting
privatization and its business like approach to enhance the Force Account
System and reducing fragmentation, adversarial relations and Project
Owners’ risk which are recurrent manifestations in the DBB delivery system.

Design Build or Turnkey by principle reduces numbers of procurement

processes engaged in the fragmented process and employ only one
procurement process and a single contractor to provide the entire
Construction Implementation Process (Design and Construction
Implementations). In the 1970s, large firms began to offer both design and
construction services in order to provide project owners with a single source
for project delivery. At the beginning, this delivery system was limited to
complex projects such as industrial, big plants and big infrastructural
constructions.

DB delivery system is common worldwide specifically for Private projects.

This led lead contracting firms to form a team or consortium of designers and
specialty contractors who work together to meet the entire demand. Such
services are initiated after the Project Owner built the project concept during
the basic planning phase and brought to the DB Contracting Firms. The
project concept should clearly define the performance criteria such as output,
input, waste and any other performances the employer may desire. This
makes an additional responsibility to the contractor which is ¨fitness to
purpose¨ according to the Orange Book of Fidic. Fitness to purpose is
beyond the professional duty of care and places liability on the contractor for
any failure of the design to perform the standards required.

Typical advantages of this system include:

 reducing fragmentation and adversarial relations between designers and

constructors;
 minimizing Project owners’ risk transferable due to Designers’ faults;
 accountability and entire responsibility for both design and construction
which entitle the employer to receive completed project is onto a single
contractor;
 employers’ responsibility to co-ordinate interfaces between different project
elements is avoided;
 single point responsibility minimizes the opportunity to claims by the
contractor due to design related issues;
 coordination between design and construction processes will also be
enhanced (both in communication for constructability as well as in fast
tracking); and
 the client budget or financial requirement is defined early enough in the
development process.

For this type of delivery systems, either joint ventures or firms with large
design and construction capabilities were able to participate.

The disadvantage of this delivery system is loss of control, cost of tender and
cost of risks.

 Since limited supervisory role by the employer representative is practiced;

which is relatively flexible and makes the employer distanced from the
whole process, the employer has little chance to understand what is
developed and entertain variations in requirements implying loss of control.
 Contractors in order to provide reasonable offer, their tender cost is higher
than in the case for DBB delivery system. This is because they need to
carryout acceptable design for project cost offers. Though it was not
practiced often, employers who shared costs related to tendering are
informed to get seriously considered offers. World Bank suggested a Two
staged procurement method based first on technical merit and followed by
financial competition and not for more than six bidders.
  The increase in risk transferred onto the contractor will be counterbalanced
by the increase in contract prices which can be taken to include these
costs of risks.

Projects carried out using DB delivery system are often called Turnkey
Projects because a single contractor is responsible to hand over the
completed facility and let the Project owner to turn the key and gets in. Often
Turnkey projects use Lump-Sum contract type which will be discussed in
section 4.4. The following standard forms of DB Conditions of contract are
known for use for such delivery systems:

 FIDIC Orange Book  ICE Design & Construct

 ENAA Model Form Conditions of Contract
International Contract  EIC Contract
 AIA Contract Form A191
2.1.4. Finance / Build Operate Transfer (BOT)

Build - Operate - Transfer is a form of procurement and contract delivery system that promotes Public Private
Partnership (PPP) in which a private company is contracted to finance, design, construct, operate for a certain period
(usually 10 years) and transfer. BOT contractors look to project financiers for the realization of projects through equity
contributions or credits. Such provisions are different from budgetized finances such that they involve no or limited re –
course which means the project owner is not responsible for any liability other than force majeure and agreed upon
claim adjustments. This obliges that projects should first be viable for revenue generation in order to payback its depts.

The Typical BOT contract is the process whereby a government grants a concession to a project development
company to develop and operate what would normally be a public sector project, for a given period of time known as
the concession period. BOT project involves a potentially complex contractual structure. The Operation period between
completion and transfer gives the contractor an opportunity to verify the quality of the output of the services and works,
and train the employer personnel on how to manage the facility afterwards. In some BOT contracts, defect liability
period will be included in order to ensure the quality of the facility during transfer. This is because, operators in an
attempt to save costs, may decrease operating and maintenance expenditures towards the end of the concession
period.

This delivery system is advantageous because of three major factors:

 it minimizes owners’ scarcity of financial resources;

 It devoid of considerable risks from the project owners and lesson regulatory activities; and
 the facility is well operated and transferred with free of charge or minimum compensations to project owners.

Such delivery system requires appropriate packaging of projects and their definition clearly. It is advisable to start with
small projects and tries to develop experience and expertise to make such delivery system successful. Most BOT
projects failed because of their built up and engagement in very large projects which is an extremely risky business for
contractors. Consortium of contractors is used to carry out such projects. The increasing popularity of the BOT project
is largely due to a shortage of public funding and the opinion that the facility will be more efficiently managed by a
private entity.

The following standard forms of BOT Conditions of Contract are known for use for such delivery systems:

 FIDIC Yellow Book

2.1.5. Construction / Facility Management Consultancy

Construction Management Consultancy Delivery System is a response to problems associated with DB and BOT
where the Project Owner was not well represented for its benefit and the problem of fragmentation between Planning
and Implementation. As a result, construction management consultancy firm is used to coordinate all activities from
concept inception through acceptance of the facility. Facility management consultancy adds operation of facility during
operation to Construction Management Consultancy.

Construction Management service in such delivery system include the management activities related to a construction
program carried out during the Basic Planning, Design & Construction Implementation and its completion process that
contributes for the successful completion of projects. The main difference of this delivery system is that, while all the
others involve only during the implementation phase after major decisions was made during the Basic planning phase
of the construction process, it is involved in the whole construction processes.

Construction Management Consultancy service are particularly attractive to organizations that involve in construction
physical infrastructures such as MoE, MoH, Real Estate Organizations, MoWRs, MoT&C, etc. Construction
Management Consultants then represents Project Owners to carry out the following services:

 Feasibility studies of Construction related services

 Plan and Monitor the Triple Constraints of Project Performances
 Lead and Organize regulatory systems of the Construction Industry
 Valuation, Quantity Surveying and Procurement and Contract Management Services

2.1.6. Partnering, Alliances, Outsourcing and CE & JIT (Running and Specialized Delivery System)

The need for constructing quicker, cheaper and to a higher quality of physical infrastructure by clients and at the same
time with very minimized or no dispute questioned fragmentation of packaging, costs related to wastes and overheads,
single staged procurement systems, involving in less competitive and comparative advantage for services and works
and existing stakeholders relationships. As a result,

 running delivery system using Partnering and Alliances,

 specialized delivery system using Outsourcing,
 fast tracking, parallel and coordinated implementations using Concurrent Engineering and Just in Time principles

which focuses most on management of relationships and value adding to ensure quicker, cheaper and quality services
and products with less disputes are recent developments. These systems require to overcome cultural and behavioral
barriers among interest groups and control motivated performance based management. These types of delivery
systems are often the bases behind DB, BOT, FM\CM consultancy delivery systems but their at most and recent
developments.

2.2. Logistics, Supply Chain / Network / Management

Shall be covered in Principles of Construction Management, CoTM - …..

Chapter 3. Procurement Management

Impartiality, Accessibility and Neutrality!

Proof of Competition, and Avoidance of Subjectivity!
Formality and Notice of Advertisement!
The Five Rights (Quality, Quantity, Cost, Counterpart and Time)!
Can they be achieved using Procurement???

3.1. Introduction and Purposes

Procurement is a process used to select the lowest competitive and qualified bidder for procuring services or works or
goods from potential competitors based on reasonable relevant criteria. It can also be expressed as a method used to
employ or buy services or works or goods for the value (in the form of money) which includes reasonable profit.
Essentially, a bid or tender is a binding offer or proposal to furnish certain specified promises for the amount stated in the
tender.

Physical infrastructures are cost extensive and appropriate savings obtained through competition are the main factor
behind the procurement process. An effective and efficient procurement method ensures the following rights called the
"Five Rights". These are The Right Quality, The Right Quantity, The Right Cost / Price /, The Right Counterpart and The Right
Time.

The Right Quality: It is indeed wasteful and not necessary to spend time, money and all the efforts for procuring
unqualified services or goods or works. Therefore, it is essential to ensure whether such procurements are of the right
quality. Right Quality is always based on two major factors. These are the technical expectation and the economic
consideration, i.e.; Price & Availability.

While the technical quality can be insured by the provisions of specifications and checking their conformance reliability of
the intended job; the economic consideration can be taken into account by the competition initiated using procurement
processes. This implies that a tender document should, as much as possible, clearly specify the quality requirements and
allow participation of qualified and experienced firms for tendering.

The Right Quantity: The quantity should be computed carefully and included in the BOQ correctly. This is because it has
an effect on the project cost and site organisation which is the bases for offering the right price. If the quantity is found
mistakenly small, it will have consequential effects such as:

 Project Budgeting will be affected due to excess quantities

 Construction planning will be affected and cause under stocking
 Tenderers can manipulate their offer due to it
 Overzealous contract administration is caused, and
  Contractor cash flow will be affected.

On the other hand if the quantity is mistakenly more, it will cause high stocking, more storing places and risk of spoilage;
unhealthy practices due to over budget provisions; and manipulation in tendering. Therefore, provisions of the right
quantity resolve the occurrences of the above stated effects. Two major factors that can play important role in providing
the right quality are Take-off-Sheet Measurements and Resources Allocations.

The Right Cost / Price /: In strict terms the right cost usually relates itself very much to the quality expected to accomplish
the task. It is clear to say that it is difficult to get the right cost, however to approach it, is a possibility. That is one of the
causes for procurement to be processed. Tendering together with negotiation and market intelligence techniques is the
only way that ensures the right cost and accomplishing the task successfully. Competition is the bases for determing the
Right Cost or Price. Here, the most important proverb professionals shall attend to is:

“Don’t let the Best be the Enemy of the Good!”

The Right Counter Parts: This is to guarantee that the parties agreeing to accomplish the task shall be fit to the job. That
is, the Project Owner should know what his needs are as accurately as possible, be competent to act as an Employer
and should possess the finance. The Consultant shall exercise reasonable skill, care and diligence in the performance of
his obligations. If authorised to certify, decide or exercise discretion, the Engineer do so fairly between the client and the
third party not as an arbitrator but as an independent professional acts by his skill and judgement. The contractor shall be
able to execute and maintain the task successfully with due care, diligence and provide all labours including supervision
thereof, materials, equipment, etc. Therefore, with the help of tendering, it is possible to select the right counterparts.

The Right Time: The right time for the provision of resources and accomplishment of obligations of each party shall be
set and agreed. This usually relieves the extra cost incurred on the parties which will make them to suffer. Besides if the
project is not completed at the right time, its effects are devastating. To insure prevention of such happenings scheduling
with regard to right timing is essential.

Purposes: The purposes of a Procurement Management System can be summarized into two major points:

1. To satisfy the need for economy and efficiency, and

2. To provide equal opportunity to competitive bidders.

The successful achievement of these purposes requires the following seven characteristics (Figure 3):

Notice of advertisement: The advertisement shall be made on an official newspaper, mass media, and notice boards etc.
which can enable the advertisement to reach wide range of competitors.
Figure 3: Seven Characteristics of Tendering

Proof of Competition: Tendering shall be as much as possible proof of competition. Unless otherwise conditions such as
complexity, specialisation of projects require restriction to open competition, tenders should be unlimited competition.

Neutrality: When the specifications are prepared care shall be taken to avoid preference to limited alternatives, provided
quality is not compromised. Therefore when specifications, whether standard or particular, are prepared; neutrality shall
be adhered as much as possible. Besides, the bidding documents (contract conditions) which the parties agree with shall
be balanced so as not to cause disruption of the task to be accomplished.

Accessibility: The place where bid documents are purchased shall be clearly indicated. The bid documents shall be
complete and clear. The purchasing cost of bidding documents shall be nominal to cover reproduction and mailing costs.
The place, dates and time for submission shall be notified. Sufficient bidding period shall be given. Besides the amount of
bid security should be reasonable enough not to discourage bidders to participate, usually 1 - 5% of the bid amount is
practiced.

Impartiality: During tendering if clarification is requested, do so accordingly but to all participating bidders so as not to
lead to partiality or preference. Often Pre-Bid Submission Meeting is used for this purpose. Negotiation is not allowed
during tender period.

Formality: Strict adherence to the submission & opening of bids, i.e., place, date and time, and rejection of late and non-
responsive bids shall be a formality to all tenders. Besides, forfeiture of bid bonds to those bidders violating the bid
security condition shall also be a formality to all tenders. As part of the formality; the Employer, the Funding organisation,
if different from the Employer, the Works to be executed shall shortly be described.

Avoidance of subjectivity: Criteria for evaluation shall be strictly set out in the instruction to bidders’ part of the bidding
document and all evaluations shall be carried out accordingly. Hence, award will also be done accordingly for the lowest
evaluated and qualified bidder.
3.2. Procurement Methods

Procurement types can be classified based on the things to be procured and the way how they are procured. There
are six bases for classifying procurement methods. These are:

Things Bidders’ Geographical Procurement Procurement

Bases Procured Coverage Coverage Awareness Steps
Types Goods Competitive International General PN Single
Services Negotiated Regional SpecificPN Two Staged
Works National Pre – Qualification
Local Post - Qualification

 Things to be Procured: Goods Vs Services Vs Works

Based on things to be procured, procurement types can be classified into three major categories; namely,
Procurement of Goods, Services and Works. Depending on the delivery system chosen during the contract planning
phase, mixed types of procurement types can be adopted.

Procurement of Goods: Physical resources used as components for undertaking consultancy services and/or
construction works such as Materials and Equipments are made available using Procurement of Goods.
Procurement of Services: In the construction Industry procurement of services are often termed as consultancy services
procurement. These include services like pre-feasibility and feasibility studies, design and contract administration of
projects, Construction management consultancy services, research or study based consultancy services, etc.
Procurement of Works: In the Construction Industry procurement of works mean the procurement of contractors to
carryout the actual physical infrastructures.

 Bidders’ Coverage: Competitive Vs Negotiated Tendering

Generally, procurement types can be classified into Competitive and Negotiated Tendering when bidders’ coverage is
taken as a basis for classification.

Competitive Tendering: The objective of competitive bidding is to acquire the goods, or works, or services at the most
economic cost to the project owner. This type of tendering is commonly used for the selection of better and capable
winning bidder among the various eligible firms. Competitive bidding can either be Open or Limited Competitive Bidding
in the form their invitations.

As their name implies, while Open competitive bidding allows all eligible bidders to participate; Limited competitive
bidding allows a number of selected firms decided by the Project Owners in consultation with concerned parties for
qualification. The major difference between open and limited competitive bidding is the addition of qualifying criteria
beyond eligibility imposed on the procurement type for limited competitive bidding.
Limited Competitive Bidding is often used when the nature and urgency of the work justifies to do so. In this case limited
numbers of eligible firms are invited to participate for the bid. Commonly short listing is done based on the firms past
performance, work load at present, presence of a firm in the vicinity of the projects, knowledge of similar type of works
before and financial and technical capabilities of the firms. Besides, the listing shall take into account the renewal of
licenses of the firm and the specific requirements of the employer. These are some of the qualifying criteria used for
Limited Competitive Bidding. In such tendering, bidders can not be rejected as non-responsive for being unqualified
technically. Usually in such type of procurement, cost of projects might be higher than expected. To minimise such
effects, capable and competent professionals shall negotiate with the winning firm.

Negotiated Tendering: Under certain circumstances, which shall be rare in practice, direct appointment of an eligible firm
can be exercised by Project Owners. The nomination of this direct invitation is usually based on good performance,
acquaintance with the Project Owner, for supplementary agreements, etc. This kind of tendering is exceptionally
exercised when the project under consideration is very urgent or needs special skill whereby the required skill is rarely
available. The main disadvantage of this type of tendering is that the price offered can usually be higher than the
competitive bidding.

 Geographical Coverage: International Vs Regional Vs National Vs Local Tendering

Procurement can be made using either of the four methods based on geographical coverage: these are
International, Regional, National and Local Tendering. Such types of procurements are generally caused by three
major factors. These are Local Capacity, Financial Sources and Globalization.

When projects could not be carried out by local capacity, project owners are forced to make tendering out of their
localities. Policies of the financial sources dictate the type of tendering geographically. For instance, donor financed
projects are often practicing International or Regional Tendering. The World trend for Globalization and the principles
of Free Trade and Trade Liberalization also encourages international tendering. In practice, Preference Margins in
the range of 7% are applied to local, national or regional tenderers, which imply tender offers higher than 7 % will be
given preference to encourage local participation.

 Procurement Awareness: General and Specific Procurement Tendering

To enhance proof of competition and increase accessibility, projects are recommended to create awareness starting
from its initiation. Following this requirement, General Procurement Notice is made during projects planning phase
and it is only interests of the bidders are aroused because sufficient tender documents are not available. This
approach is used:

 The Project Owners to

o identify interested bidders to issue Invitations by letters and save time;
o identify bidders relevant for the procurement required; and
o protect loss of cost in preparing lots of tender documents.
  The Bidders to:
o give sufficient time to assess the cost of the project;
o protect loss of cost only to participate; and
o encourage competent bidders who wary about law-balling to participate.

General Procurement Notice (GPN) is of two types. These two types are based on their purpose why and when they
are notified. The first type is when the purpose is to create awareness and let bidders’ prior information about
upcoming projects such that they can follow up its development and include them in their plan. This type of GPN is
used for procurement of works and goods and is often announced as soon as the design implementation service is
started. The Second type is when the purpose is to determine interested bidders who could be invited in the form of
Limited Competitive Tendering. This type of GPN is used for procurement of services and is often announced after
financial sources are determined. GPN covers the Employer and its financiers for its project; Description of the
project with its probable or planed implementation time; type of procurement method and address where further
information can be obtained.

General Procurement Notice Further information can be obtained from:

The Gov. of Ethiopia has applied for / received a

from the for Euro which is (1)……………………………...
used towards the , ………………………………….
………………………………….
The project consists of the following components
planned to be completed over the 5 – Year period of (2)……………………………….
…………………………………..
…………………………………..
…
… (3)……………………………….
.,.. …………………………………..
… …………………………………..
…

Procurement for will be under ICB Reference Number

and IFB will be advertised in local and selected
foreign newspapers. Procurement for
will be under LCB advertised locally.

Specific Procurement Notice (SPN) is an Invitation for Tender or a Request for Proposal when the project is ready
for implementation. SPN can be sent to those interested bidders identified following GPN directly. Otherwise, it
should be advertise on the bases of enlarging opportunities. The contents of SPN are similar to The Form of
Invitation to Tender covered in section 3.2.

 Procurement Steps: This includes Single Vs Two Staged; and Pre - Vs Post - Qualification Tendering.

Single or Two Staged Tendering: Procurement can be made using a single or two staged tendering process. They
are related with whether tender packaging for submission separately and their evaluations are staged for a single or
two steps when invitations are made. Often two staged biddings are made for the submission of technical and
financial proposals separately and their evaluations one after the other. According to Ethiopian Procurement
Regulations, the following shall be enforced to use Single or Two Staged Tendering:

Pre or Post Qualification Tendering: Procurement can also be based on Pre - or Post - Qualification processes.

Prequalification is an internationally accepted practice in procurement management. It would normally be required for civil
works contract of which its nature and cost is large and complex. So far in our country, there is no regulation on such
applications but practiced based on Project Owners, Regulators and Financiers initiatives. It is a procedure in which
eligible bidders are invited to provide evidence of their ability to perform the services required by the employer.
Prequalification is desirable because it enables the Employer to establish the competence of companies subsequently
evaluated. It is also in the interest of contractors since, if pre-qualified, they will know that they are competing against a
limited number of other firms, all of whom possess the required competence and capability.

Pre - qualification can be of two types. The First is when companies are already considered qualified during their
licensing requirements which entitled them for a single stage tendering process. For such types of tendering, the
most important tender evaluation criteria become the low priced bid. The Second is when two staged tendering is
used to pre-qualify tenderers’ for their technical competency. Once bidders qualify for the tender, either the lowest
priced bidder or the lowest evaluated bidder based on the weighted average of the technical and financial scores will
be recommended for award.

The advantages of pre - qualification in procurement are:

To the Employer
 Protect the employer against unqualified bidders
 Quicker Evaluation for only pre-qualified bidders
 Ensure award to least evaluated not lowest bidder
 Assess level of interest shown by bidders
 Show competency & methods of implementation
To the Bidder
 Saves bidders from the cost of preparing bids
 Assure pre-qualified bidders for their bid considerations
 Reduce low balling bidders from participation
 Make bidders to be better planned

Pre - qualification should be based entirely on the ability of the bidder to carry out the required works satisfactory. The
following criteria are often used in determining this ability of the bidder;
 Experience and past performance,  Organizational arrangement and facilities,
 Health, Safety and Environment Records, if  Financial Status, and
any,  Schedule of Commitments.
 Capability in respect of personnel and
equipment,

FIDIC, 1994 recommended a procedural Flowchart for Procurement for Prequalification;

however, it is presented here with little modification to suit the current practices (Figure
4).
Post - qualification is a tendering type where Financial Evaluation is carried out first and rank
bidders on the basis of their offer for tender price. That is, Technical Evaluation will be done
after the Financial Evaluation. However, Technical Evaluation is performed step by step
starting from the lowest financially evaluated bidder until technically or cumulatively
qualified bidder is determined. The advantage of this approach is not to loose the lowest
financially evaluated bidder and to save time during technical evaluations. However,
Post qualification approaches often cause to fix evaluators on financial results and be
locked and biased for successive technical evaluations.
Discussion Points:
Merit and Demerits of the different Procurement Methods

ProcedureEmployer / ConsultantContractorsProcurement and Contract Strategy

Contract
Delivery System Planning Phase
Procurement Method Awareness on Future
Contract Type Business and Follow Up
Action Plan

Pre-qualification Documents
Letter of Invitation
Information about prequalification Collect information about
procedureTender Document Preparation the project and its location
Project Information
Prequalification Application

Advertisement
Project Scope, Location, Source of Check Eligibility
finance Invitation To Check Competitive Advantage
Issue, Submission and Pre-qualify
Opening dates of Collect Information
Tenders Decide to participate
Instructions to pre-qualify and evaluation
criteria Tendering
Phase
Organization, Structure & Experience Request and Obtain Pre –
Resources (Financial, Managerial, Qualification docs.
Technical, Labor, Plant, Stock, etc) Request & Obtain
Current Commitments Clarifications
Acknowledge Receipt Complete and Submit Docs
and Relevant Info.
Issuance & Submission of Pre-qualification docs.
Open Tender in the presence of relevant
attendee Tendering Attend Tender Opening
Phase
Evaluate for Eligibility, Technical, Ceremony
Organizational , Financial Capability

Pre-qualified tenderers are selected Acknowledge & Confirm

Opening
Winners & Analysis of Pre –
are Notified Qualification Intention to participate in
succeeding tender
Tender Evaluation PhaseSelection and Notification of Tenders

Tender Evaluation Phase

List of Tenderers
Figure 4.: Procedural Flowchart for Pre-qualifying Bidders

3.3. Procurement Management Processes

Procurement Management process can be idealized into three major processes. These include
Preparation, Tendering, and Evaluation (including Award Recommendation) Processes (Figure
5).

Procurement Team Preliminary Evaluation

Tender Document Detail Evaluation
Approval of Tender Docs Award Recommendations

Procurement Tendering Tender

Preparation (Invitation - Opening) Evaluation

Invitation
Clarification
Submission and Opening

Figure 5: Procurement Management Process

Procurement Preparation phase is meant for the formation of a Procurement Team; the
preparation of Tender Documents and their approval for procurement implementations.

Procurement Team: Ethiopian Procurement Regulation states that a Procurement team consisting
of a minimum of five members shall be established. As Tender Evaluation is a joint technical and
commercial exercise, the project owner shall consider that the necessary experts shall be
composed in the procurement team.

Tender Documents are prepared to:

 Instruct bidders on the procedures for the preparation and submissions of bids,
 Inform prospective bidders about the nature of things to be procured,
 Inform bidders about the criteria for evaluation and selection of the successful bidder, and
 lay down the contract conditions, delivery system, procurement methods and contract types of
the project.

Tender documents include:

 Form of Invitation to Tender or Request for Proposals;

 Instruction to Tenderers (Standard and / or Particular information) or Terms of References;
 Prequalification Documents if necessary – Refer procurement methods based on stages
(Section 3.2);
  Forms of Tender - Refer Contract Documents (Section 4.2);
 Forms of Contract Agreement - Refer Contract Documents (Section 4.2);
 General and Particular Conditions of Contract – Refer Contract Documents (Section 4.2);
 Bill of Quantities and Drawings - Refer Contract Documents (Section 4.2);
 Technical Specifications & Methods of Measurement – Refer Contract Document (Section 4.2);
and
 Other Forms, Formats and Schedules – Refer Contract Document Parts (Section 4.2).

Tender Documents shall also be covered in Construction Laws – COTM …..

Form of Invitation for Tender (IFT) is a requisition for interested bidders to participate for the procurement of services /
works / goods. They shall be:
in accordance with the approved provisions of the contract planning phase and applicable laws
made public through the wide covering media, newsletter, notice boards, etc
Usually Invitations for Tender include:

Name and address of Institutions issuing the invitation and Clarification if requested,
Objective and Requirements of the Invitations,
Stages and accordingly qualification terms
Brief descriptions of the project
Sources of Fund and Eligibility requirements
Completion time, if necessary
Date, Place, Time and Conditions to get, submit and open tender documents
Sample Form for Invitation to Tender

Instruction to Bidder (ITB) is intended to acquaint potential competitors with the nature of the tender and shall provide all
the necessary information to enable bidders to prepare their offer in accordance with the requirements of the Project
Owners. Whenever necessary, it will be supplemented by particular information which cannot be standardized or
generalized in the General ITB document. The ITB document includes:

Introductory Parts covering sources of fund, description of the project, eligibility and qualification requirements, and
necessary obligations concerning the cost of tendering, site visits, etc.
Tender Document Parts eliciting the contents, clarification and amendment processes.
Tender Preparation Parts which states the language, documents comprising and their precedence, form of tender and
appendix thereto requirements, and alternative offer and formats and signing of bids requirements.
Tender Submission part stressing sealing and marking of bids, deadline for submission of tenders, and modification
and withdrawals.
Tender Opening and Evaluation Parts covering procedures and criteria for opening and evaluation of tenders, and
preference for domestic or regional preferences.
Tender Award Parts stating Award criteria and procedures, and Rejection Rights and Obligations
Samples can be:
Particular Instruction to Bidders, MWUD 1995
FIDIC White Book
Approval of Tender Documents: Regulatory requirements enforced for:

 Budgeting, Credit, Assistance and Grant Policies;

 Health, Safety and Environmental Requirements; and
 Professional, Ethical and Legal Requirements

demand checking, renewal and approvals of Tender Documents. Check list for review is the
best practice used for Tender Documents approval.

Prepare Checklist for

Request For Proposal including Proposed Program and Terms of References
Architectural, Structural, Electrical and Sanitary Preliminary and Final Designs
Feasibility Studies for Big Projects
Road and Bridge Designs
Water Works Designs
Contract Documents
General Points

Tendering Phase includes Invitation, Clarification, Submission and Opening of tenders. Normally
open tenders are floated for a period between 30 to 45 days. Limited and Negotiated tenders
can be invited between 7 to 15 days. Invitations shall widened opportunities to the project owner
by reaching all potential and eligible competitors. The invitation to tender shall clearly state:
 the owner and his desirous service or  how long the tender will be floated,
works  how should the tender offer be packed,
 eligibility requirements, and
 place to get further information,  when and where submission and opening
 where to purchase & submit tender of tender will take place.
documents,

Clarifications can either be requested by interested bidder or carried out using a pre - tender
clarification meeting. In both cases, issues clarified shall be sent (written) to all bidders
participating for the intended services or works. The bidders shall submit their offer on or before
the submission date and time. Late bids are automatically rejected.

Tender Opening: Bids shall be opened in public on the date, at the time and place mentioned in the
invitation to tender and stipulated in the tender documents. Ethiopian practice in tender opening for
public construction projects is that, two representatives from MWUD in addition to the Project
Owner, Consultant (if available), and Contractors (Who wish to attend) representatives shall attend
during the tender opening ceremony.
The following will be carried out during tender opening:-
 Tender Attendee members shall take their place and be registered,
 Tender box opened and checked for faulty things,
 Check the tender is the right one,
 Bids will be opened one after the other,
 All necessary data which deem useful such as Project Name, Name of bidder, Bid Bond Amount,
Tender Price, etc. will be read aloud and recorded at the opening of bids.
 Bidders representative shall sign a register to attest their presence during opening, and
 Tender committee members shall sign on the Tender documents.

Sample for Bid Recording Format for Basic Data during tender opening

Project: Bid Submission Date:

______________________________ ______________________________
Employer: Bid Opening Date:
______________________________ ______________________________
Tender Completion Currency Performance Alt. Offer Tender Advance Other
Bidders’ Name Offer Time Requirement Security w/Amount Security Payment Rebate Remark
s s

Procurement Team Bidders Who Choose to Attend

Others
Name Signature

Tender Evaluation Phase: is made to determine and make award recommendation for the least
evaluated bidder using preliminary and detail evaluations. The recommended winner may or
may not necessarily be the lowest bidder. Factors such as technical qualification, completion
time, commercial terms of the offer, etc are used in determining the least evaluated bidder.

Preliminary Evaluations are made for Eligibility and Arithmetic Review requirements. Before
commencing the actual evaluation, it is useful and recommended to complete a Basic Data
Sheet for each tender to record key information and enable coding.

Eligibility Requirements: Tenders are subjected to eligibility qualifications before they enter to bid and
their respective evaluations. Most often sited issues considered in eligibility requirements are:

 Valid & Up to date Trade and Professional  Valid provision of Bid Security or Bond,
License,  Completeness and submittals of all required
 Valid & Up to date Membership to Financier documents,
Organizations,  Turnover requirements fulfilled
 Power of Attorney, Signature and Sealing  Appropriate Invitation, Packaging and Submission
Requirements, and Requirements.

These eligibility requirements together with basic alterations of the conditions of the tender will be
considered for responsiveness or not. If the bidder offer provided weighs a major deviation from the
tender condition, the tender will be considered non - responsive and could not be further considered. But
if it is minor deviation, either the procurement team use their discretionary power to request clarification or
the case will be recorded and taken up during negotiation if the respective winner become the least
evaluated tender. When the first approach is chosen, the bidder is not allowed to change any information
that can substantially affect the tender evaluation. For guideline during tender evaluation; table - outlined
when a tender is considered major deviation or not.

Major Deviations Minor Deviations

 Affecting the validity of the bid  Do not affect the triple constraints of the project
 Rejection or Disqualifying conditions stated  Do not result in change of Bid Price
 Substantial effect on the Bid Price  Non conditional tenders

Arithmetic Review: Most tenders are often submitted hastily. As a result, tenders are not arithmetic error
free. If tenders are processed without arithmetic checks, on the first place tenders are not evaluated on
the bases of equal merits and if they become binding contracts being over-sighted, they will be the cause
for potential disputes. Therefore, it is a formal evaluation process to review arithmetics before carrying out
detail evaluations. Arithmetic review can be done if and only when financial proposals are opened.

Detail Evaluations include Technical, Commercial and Financial Qualification requirements.

Evaluations at this stage should first and foremost critically see the technical and commercial
offers and establish system that can ensure common bases for comparison. Finally, the
Financial offer will be updated using Absolute Results from Commercial comparisons

Technical Requirements: See Pre Qualification, Section

Commercial Evaluation: This includes Benefit Forgone due to Completion Time ; Additional Costs due to
differences in Foreign Currency Exchange and Advance Payment requirements ; and Provisions of
Domestic or Regional Preference Margins.

 Benefit Forgone due to Completion Time

When tenders are offered with different completion times, comparisons are made to determine the
benefit forgone taking into account the least acceptable completion time as a basis for competitions.
The Benefit Forgone (BF) due to additional completion time can be computed using the following
expressions:
BF = (FV – TO) / (1 + i)n; FV = TO (1 + i)n
TO = Tender Offer after Arithmetic Check; n = Completion time in days
i = Discount Rate = 0.05 % per day = 1.5 % per month; FV = Future Value

 Additional cost due to

 o Foreign Currency Exchange requirements
When tenders have provisions to quote different currencies, their comparison will be made
based on determining their effects due to the additional cost incurred fro variations in
currency exchange requirements. It is then recommended to convert all tender prices into
one currency; often the Financiers’ or other widely used and accepted Currency called
Common Currency. For currency conversion, selling rates of Bank published by an official
source and applicable for transactions shall be used.

Additional cost due to Foreign Currency Exchange requirements can then be determined
using selling rates at
 15 days prior to tender submission date
 Tender Opening Date
 Decision for Award or Expiry of Tender Validity date
o Advance Payment
When different amounts of advance payment are requested as part of the tender offer, one
could not directly evaluate the tender price and determine the lowest evaluated bidder.
This violates the principle of competition on the same bases. Therefore, the evaluation
should take minimum advance payment request as a basis and consider others for
additional cost incurred due to different mobilization advance requirements.

The Additional Cost due to differences in mobilization advance requirements can be

computed from the following expressions:

APAC = {(AP x TO) / 100} – PV; PV = A x PWF; A = {(20 / 100) x TO} / n; PWF = {(1 + i) n –
1} / {i(1 + n)n}
AP = Advance Payment Requirement in %; TO = Tender Offer after Arithmetic Check;
i = Discount Rate = 0.04 % per day; n = Completion time in days
PWF = Present Worth Factor; PV = Present Value

 Domestic and / or Regional Preference

Domestic or regional preference margin is a provision to give preference to local companies even if
their bid offer is not over by a percentage often equals 7.5 - 10 % for construction works. This implies
that domestic or regional companies can be awarded the tender even if they are not lowest in tender
price of the evaluated bidders using all the other criteria.

A contractor can be eligible for such preference margin if and only if;
 Its legal constitution is in accordance with the Employers’ Country / Region
 It is registered according to rules and regulations of the Employers’ Country / Region
 It has proof that its majority of works are undertaken in the Employers’ Country / Region
 Its majority of capital shares are held by the Employers’ Country / Region nationals
  Its majority of the board of directors members are the Employers’ Country / Region
nationals
 Its 50 % key personnel are nationals of the Employers’ Country / Region
 Its arrangement to execute the work should not involve major part of its work or net profit
other than the Employers’ Country / Region Nationals or Co - Companies

Financial Offer Comparison: After all commercial comparisons are considered on the same bases; the
Tender offer will be adjusted based on the Cost – Benefit principle which involves adding costs and
deducting benefits foregone. Besides, the preference margin will also be deducted and Least evaluated
Bidder is Determined. That is:

TO evaluated = (TO + BFCT – ACAP) at different dates for Currency Exchanges – Preference Margin for Eligible
Bidders

Rejection of All Tenders though is solely the power of the employer to decide, for the sake of
fairness it is recommended that such rights shall be exercised in the following cases:
 All Tenders are found non – responsive during the Preliminary evaluations
 Evidences of lack of competitions such as collusion among bidders, monopoly, etc
 Lowest responsive offer is found unreasonably high.

The following procedural Flow Chart (Figure …) is recommended for Tendering following the
Pre-Qualification procedural flow chart shown in section …
 ProcedureEmployer / ConsultantContractorsProcurement Document

Tender Document Preparation

Letter of Invitation Check Eligibility
Instruction to Bidders Check Competitive Adv.
Conditions of Contract Collect Information
Decide to participate
Drawings, Bill of Quantities, Forms,
Formats and Schedules, etc

Issuance
Advertisement of Tender Documents
or Invitation Request and Obtain Tender
Project Scope, Location, Source of docs.
finance Tendering Phase
Issue, Submission and Opening dates of
Tenders

Arrange date and Time for Pre Bid Request & Obtain
Submission Meeting Clarifications
Clarification
Send all clarifications and Site
to all bidders Visit Request and Visit Site
Arrange date and time for site visit Acknowledge receipt of all
Prepare and Issue Addenda for all
Tendering clarifications
Clarifications
Phase

Receive Offers Complete and Submit Offers

Record date and Time of Receipt together with Relevant Info.
Reject Late Offers

Submission of Offer

Tendering
Open Tender in the presence of relevant
attendee Phase Attend Tender Opening
Announce and Record Tenderers and all Ceremony
offer information

Review conformity and completeness of

Tender Opening of Provide Clarification if
Tender
Evaluate Alternative tenders and Requested
deviations
Reject Substantially non Responsive and
non conforming
TenderTender
Evaluation Phase
Approval by Regulator & Financier

Select Least Qualified and Evaluated

Bidder
Evaluation of Tenders
Propose Award Recommendations
Decide if further Negotiation is required
or not

Tender Evaluation PhaseSelection and Award Recommendation

Figure …: Procurement Procedure Flowchart. Tender Evaluation Phase
 Tender Evaluation Example

Given the following Bid Opening Data, Evaluate their offer; that is, determine the Least
Evaluated Tender for Award Recommendations and Write the Tender Evaluation Report.

Project: Fechfachit Campus Tender No.: 001 / 88 Engineer’s Estimate:

Birr 20,877,188.00
Date of Invitation: Sept. 30, 1995 Procurement Method: ICB No. of Bid Sold: 8
No. of Bids Submitted: 6 Bid Submission Date: Nov. 15, 1996 Bid Validity Period: 45 Cal
Days
Selling Ex. Rate 15 days before: 1 USD = Birr 6.30 Selling Ex. Rate for Evaluation: 1
USD = Birr 6.31
i = 0.05 % per day = 1.5 % per month for Completion Time; i = 0.04 % per day for Advance Payment
computations
Tender Offer Tender Security (TS) Perf. Adv Comp Foreign Ex.
No Bidders Cat. TO Amount Type Security Req’d Time Req’d Rebate
1 DCM 1 17,630,915.11 31,746 USD
CPO 20 % 20 % 645 55 % USD
2 CGTS 1 22,145,153.10 260,000 USD
UIC 10 % 705
3 CGCS 1 18,146,822.49 250,000 USD
AIC 10 % 705 3%
4 CECCS 1 21,236,399.00 40,000 USD
CPO 20 % 705 50 % USD
5 CGCA 1 24,110,160.00 300,000 USD
Cert. 10 % 20 % 705 15 % USD
Cheq
6 CBAS 1 22,766,237.75 250,000 USD EIC 10 % 20 % 705
Required Minimum Tender Security = 1 % of TO
Tender offer after Arithmetic Check was found as

Tenderers DCM CGTS CGCS CECCS CGCA CBAS

Tender Offer 17,695,206.70 21,200,883.60 18,163,888.91 21,229,904.11 23,885.300.33 20,953,625.22

Turnover of Companies for the last Five Years

Tenderers DCM CGTS CGCS CECCS CGCA CBAS
1991 361,275,260.40 --- --- 2,259,278,000.00 --- 4,571,118.00
1992 338,197,052.30 --- --- 1,663,141,000.00 --- 9,377,632.00
1993 432,790,201.30 343,796.00 --- 2,187,401,000.00 --- 12,680,696.00
1994 550,511,109.90 6,659,457.00 --- 2,416,035,000.00 --- 18,377,772.00
1995 --- 22,068,798.00 63,160,062.88 --- 54,145,000.00 18,099,520.00
Currency Egyptian Pound Birr Birr USD Birr Birr
Ex. Rate** 1 USD = 2.21 6.25 6.25 1.00 6.25 6.25
Required Turnover = 5 Mill. USD taking their maximum turnover over the five years.
** Exchange rate used is selling price at their maximum turnover within the last five years.
Tender Evaluation

Introduction
Tender No. 001 / 88 for the project Fechfachit Campus was floated by the …… of FDRE on the 5 th of Oct,
1995. Its invitation was made on widely covering News paper in Ethiopia and through Ethiopian
Embassies worldwide; namely, the Ethiopian Herald. As a result, eight bidders bought the tender
document and six of them submitted their offer. The Bid was opened on 1 st of December, 1955 and basic
data (Table 1, Annex 1 – Basic Data Sheet) were recorded in the presence of the Employer tender
committee, Regulatory bodies representatives and bidders who choose to attend. Besides, Consecutive
Coding from R to W were assigned for each tenderers for evaluation purposes.

Preliminary Evaluation
Preliminary evaluation covered two major parts; Eligibility Responsiveness and Arithmetic Review. For
Eligibility Responsiveness, the six tender offers were critically examined and Table 1 below has
summarized the findings. Valid provision of Bid Security / Bond and Turnover Requirements are
separately computed and presented in Tables 2 & 3 – Annex 2. Accordingly, all bidders except S and W
were found responsive for eligibility requirements and considered for remaining evaluation processes.

Eligibility Requirements R S T U V W
Valid and Up to date Trade and Professional License R R R R R R
Valid and Up to date Membership to Financier Organizations R R R R R R
Completeness and submittals of all required documents R R R R R R
Power of Attorney, Signature and Sealing Requirements R R R R R R
Appropriate Invitation, Packaging and Submission Requirements R R R R R R
Valid provision of Bid Security or Bond ** R R R R R R
Turnover requirements fulfilled ** R NR R R R NR
** Table 2 & 3; Annex 2 showed their eligibility Responsiveness.
For Arithmetic Review, the tender offer of four responsive bidders is checked and their tender offer after
arithmetic check and any additions or reductions due to rebate and alternative offers are tabulated in
Table 2 Below.

Table 2: Valid Tender Offer

Tenderers R T U V
Tender Offer 17,630,915.11 18,146,822.49 21,236,399.00 24,110,160.00
TO after
Arithm. Check 17,695,206.70 18,163,888.91 21,229,904.11 23,885.300.33
% change 0.36 % 0.1 % 0.03 % 0.93 %
Rebate --- 3% --- ---
TO after
Rebate 17,695,206.70 17,618,972.24 21,229,904.11 23,885.300.33
Detail Evaluation
Detail evaluation covered two major parts; Commercial and Equivalent Financial Offer Comparisons. For
Commercial offer comparison, Benefit Forgone due to Completion Time; Additional Costs due to
differences in Foreign Currency Exchange and Advance Payment requirements; and Provisions of
Domestic Preference Margins. The additions and reductions due to commercial offer Comparison
 and their effects to the Tender Offer for evaluation on equal bases is computed and summarized
in Table 3 below. Computations for each of the commercial offer comparisons are shown in
Table 4, 4 & 6 of Annex 3.

Annex - 2: Preliminary Evaluation

Table 2: Tender Security Responsiveness
Tender Offer Tender Security (TS) Selling % TS Type of Responsive
No Bidders Cat. (TO) Amount Type Exchange Rate to TO TS - ness
1 R 1 17,630,915.11 31,746 USD CPO 1USD = Birr 6.25 1.13 Valid R
2 S 1 22,145,153.10 260,000 USD UIC “ 1.17 “ R
3 T 1 18,146,822.49 250,000 USD AIC “ 1.40 “ R
4 U 1 21,236,399.00 40,000 USD CPO “ 1.17 “ R
5 V 1 24,110,160.00 300,000 USD Cert. heq “ 1.24 “ R
6 W 1 22,766,237.75 250,000 USD EIC “ 1.10 “ R
All Tenderers are responsive for Tender Security Responsiveness

Table 3: Turnover Requirement Responsiveness

Tenderers R S T U V W
1991 361,275,260.40 --- --- 2,259,278,000.00 --- 4,571,118.00
1992 338,197,052.30 --- --- 1,663,141,000.00 --- 9,377,632.00
1993 432,790,201.30 343,796.00 --- 2,187,401,000.00 --- 12,680,696.00
1994 550,511,109.90 6,659,457.00 --- 2,416,035,000.00 --- 18,377,772.00
1995 --- 22,068,798.00 63,160,062.88 --- 54,145,000.00 18,099,520.00
Currency Egyptian Pound Birr Birr USD Birr Birr
Ex. Rate 1 USD = 2.21 6.25 6.25 1.00 6.25 6.25
USD Equiv. 249,127,199.00 4,413,759.60 10,105,610.06 2,416,035,000.00 8,663,200.00 2,895,923.20
Responsiveness R NR R R R NR
Required Turnover = 5 Mill. USD taking their maximum turnover over the five years.
Annex - 3: Commercial Offer Comparisons
Table 4: Benefit forgone due to Completion Time
Tender Offer Completion Time (n) Differences in FV Type of Responsive
No Bidders Cat. (TO) Cal. days Months Completion Time = TO (1 + i)n TS - ness
1 R 1 17,630,915.11 645 21.5 --- --- Valid R
2 S 1 22,145,153.10 705 23.5 2 21, “ R
3 T 1 18,146,822.49 705 23.5 2 1.40 “ R
4 U 1 21,236,399.00 705 23.5 2 1.17 “ R
5 V 1 24,110,160.00 705 23.5 2 1.24 “ R
6 W 1 22,766,237.75 705 23.5 2 1.10 “ R
All Tenderers are responsive for Tender Security Responsiveness
3.4. Statistical Approach to Tendering / Procurement

Most of the construction works are awarded using competitive bidding. It means, Contractors
shall submit their estimates with respect to their offer including the Project Cost. The project
cost, in the estimate, includes the actual cost of the work (the Direct Cost), Overheads cost and
Profit (the Indirect Cost). Besides, the contractor shall consider to minimize risks and complete
the project with in the cost and its completion time. If all goes well, the winner will enjoy with a
fair profit and remain competitive and build his reputations in the Construction Industry.

However, to win a competitive tender, a bidder should keep a step ahead of its competitors
through new and improved techniques of estimating to replace conventional methods and
practices. One of these new and improved methods of obtaining an advantage over competitors
is to use statistical approach for Bidding.

A bidder as a business organization, one of its main objectives is profit making, specifically
maximizing immediate profit. Immediate profit is simply the difference between the amount of
the bid and the actual cost of the work. In competitive bidding, each bidder must submit a sealed
bid and the lowest responsive bidder is awarded the contract. Besides, It is clear that a bidder
may either win or loose the contract. This basic uncertainty is the major problem to contractors.
To narrow the gap of this uncertainty, it is evident that several approaches attained through
experience, statistical, and mathematical knowledge can be used bidders in order to obtain an
advantage over their competitors. These approaches to competitive bidding can provide a useful
guide in:
 evaluating chances of being the winner of a contract,
 determining maximum expected profit,
 providing high competition among bidders by narrowing their price variation gaps,
 saving unnecessary bid preparation expenses, and
 saving from losses.
This part covers the concept of expected profit in line with the statistical approach in tendering.
To open the eyes of our contractors in line with these methods will greatly enhance the
competitiveness of the construction industry. However, one of the major limitations of a
statistically developed strategy in competitive bidding is the basic assumption used in
determining the probability of competitiveness and the maximum expected profit there from.
That is, the assumption clearly states that the competition will follow the same general bidding
pattern in the future to that they behave in the past. Therefore, it is essential to update the data
which is used to establish the bidding behavior of competitors. Nevertheless in the absence of
other updated information’s, the best guide will be that already acquired.
Expected Profit: Expected profit is defined as the average profit per project that will be realized
in the future considering probability of winning a contract. Computation of the expected profit will
help contractors in finalizing the estimate of their bids. To explain with a simple example, let the
cost of fulfilling a particular contract is 20,000 birr, let the probability of contractors with bid
amount of 30,000 birr (Bid A) and 25,000 birr (Bid B) winning the contract is 30% and 70%
respectively, the expected profit for each contractor can be computed as follows:

then the expected profits for bids A and B are computed and tabulated below.

Bidder Bid Amount Actual Cost Imd. profit Pa (%) Exp. profit
(1) (2) (3) (4 = 3 - 2) (5) (6 = 4* 5)
Bid A 30,000 20,000 10,000 30 3,000
Bid B 25,000 20,000 5,000 70 3,500

A bid amount of larger expected profit is the value that the contractor should opt for. In the
above example, the contractor should submit a bid amount of 25,000 birr so that both their
probability of winning and the expected profit to be bigger. Expected profit can only be
computed if the probability of a contractor being awarded the contract for a bid is known or can
be determined.

Statistical data of competitors shall be collected to determine the probability of winning a bid. It
is obvious that the probability of a contractor being awarded any particular contract is lying in the
range of zero to unity. It is taken as zero when a contractor is certainly make a bid so high that it
is almost impossible to win the bid and unity when a contractor make the bid so low, that it
would certainly be awarded the contract.

That is, there is a relationship between the probability of award and size of bid relative to cost.
This relationship can be expressed by a. Probability of competitiveness as a basis for a
cumulative probability distribution is defined as the probability of a bid that there will be a
competitive bid which will beat another bid and is determined by the difference of the
probabilities of being awarded for the same bids. To simplify this concept let us take an
illustrative example;
 Let the cost of fulfilling a particular contract be 100,000 birr, and
 Let the bid amounts and their probability of award be as given in table below

Then the probability of competitiveness is computed and tabulated as shown below:

Bidder Bid Amounts Prob. of Award Prob. of Comp. Exp. profit

A 90,000 1.00 0.07 = 7 % (90,000-100,000)*1.0 = -10,000
B 100,000 0.93 0.15 (100,000-100,000)*0.93= 0
C 110,000 0.78 0.32 (110,000-100,000)*0.78=7,800
D 120,000 0.46 0.17 (120,000-100,000)*0.46=9,200
E 130,000 0.29 0.16 (130,000-100,000)*0.29=8,700
F 140,000 0.13 0.13 (140,000-100,000)*0.13= 5,200
 G 150,000 0.00 0.00 (150,000-100,000)*0.0= 0

From the above table it is easily understood that there is a probability of 0.07 that there will be a
competitive bid of 90,000 birr which would win the bid of 100,000 birr, i.e; Bidder A is
competitive over bidder B by a probability of 7%. The cumulative distribution of the bids should
always sum up to unity or 100%. This is to indicate that all possible competitors are considered.
Now, assuming that a contractor has the appropriate cumulative distribution, the maximum
expected profit is computed and found as 9,200 birr (See Table Above).

Application of Expected Profit to Tendering

The following preparations shall be exercised by every bidder to use the method of expected
profit in order to determine their position to bid, these are:
collect earlier bid amounts of those contractors tendering for similar projects,
assembling, classifying and condensing earlier bid amounts for similar projects,
presentation of the data in the form of text, tables and / or graphs
make analysis of the data with regard to their frequency of bidding, their frequency of
winning the bid, and their ratio with respect to bidders amount and their frequency of
occurrence,

Using the above preparation a bidder can obtain the necessary information about the
distribution of the probabilities of award as a function of the bid amount. Since it is a usual
practice to announce openly the bids on large or public contracts, it is possible to learn the
bidding behavior of competitors. In determining their probability distribution, it is assumed that
competitors will follow the same general bidding patterns in the future that they have in the past
and three different cases are considered. These are;
 Case 1: Numbers and Identities of competitors are known,
 Case 2: Number of competitors are known but their Identities unknown,
 Case 3: Numbers and Identities of competitors are unknown.

Case 1: Numbers and identities of Competitors Known

Given the number of competitors’ equals 5, their identities based on collected and analyzed data
are as tabulated below, and let the ratio of Competitors Offer and the Contractor Offer be R.
Then the probability of competitors’ is computed as described below:

In the case of bidder A, the total frequency of occurrence is 53, and the various ratios’ frequencies of
occurrences are known, which gives sufficient information for the determination of the probability of the
occurrences. Considering the ratio of 1.2, out of the total occurrence which is 53, it is found that this
ratio occurred 16 times; therefore the probability of occurrence of the ratio 1.2 is 16 / 53 = 0.30. (It is
simply determined by dividing each frequency of occurrences of the bidder to its total number of
 occurrences.) Similarly, the probabilities of occurrences for other ratios and other bidders are
determined and shown as the table of probabilities of occurrences below.

Bidder A Bidder B Bidder C Bidder D Bidder E

R FO Pc FO Pc FO Pc FO Pc FO Pc
0.9 1 0.02 0 0.00 3 0.10 1 0.02 0 0.00
1.0 3 0.06 0 0.00 1 0.03 0 0.00 0 0.00
1.1 7 0.13 5 0.19 12 0.40 8 0.20 0 0.00
1.2 16 0.30 6 0.22 3 0.10 11 0.27 11 0.31
1.3 17 0.32 12 0.44 5 0.17 18 0.44 17 0.47
1.4 6 0.11 1 0.04 4 0.13 3 0.07 3 0.08
1.5 2 0.04 2 0.07 2 0.07 0 0.00 4 0.11
1.6 1 0.02 1 0.04 0 0.00 0 0.00 1 0.03
Sum 53 1.00 27 1.00 30 1.00 41 1.00 36 1.00

The results in table below can be interpreted as follows:

Taking bidder A and R value of 1.3, with a probability of 32%, bidder A has submitted bids on
contracts which were 1.2 times the contractor’s cost estimate. For practical works a more refined
breakdown of the ratios would probably be used.
Now, in order to determine the expected profit, the probability that the contractors bid is lower
than the other bidders individually shall be computed. As described above this varies between
zero and unity. The probability that the contractors bid is lower than the others bidders estimate
is determined as follows:

Taking bidder A, Since the lowest bid is 0.9 times bid amount of A, it definitely win the bid which
justifies that the probability that the contractors bid is lower than bid amount A is 100%. Besides, 1.6
times bid amount of A is the highest bid that any bid greater than this bid’s probability of being lowest
is 0%. For other ratios, their probability will be determined and tabulated below;

Bidder A
R Pc Cum.Pc P (lower)
0.9 0.02 0.02 1.00
1.0 0.06 0.08 0.98
1.1 0.13 0.21 0.92
1.2 0.30 0.51 0.79
1.3 0.32 0.83 0.49
1.4 0.11 0.94 0.17
1.5 0.04 0.98 0.06
1.6 0.02 1.00 0.02
>1.6 0.00 1.00 0.00

Similarly, P (lower) can be computed and tabulated below.

Bidder B Bidder C Bidder D Bidder E

R FO Pc Pa FO Pc Pa FO Pc Pa FO Pc Pa
0.9 0 0.00 - 3 0.10 1.00 1 0.02 1.00 0 0.00 -
1.0 0 0.00 - 1 0.03 0.90 0 0.00 - 0 0.00 -
1.1 5 0.19 1.00 12 0.40 0.87 8 0.20 0.98 0 0.00 -
1.2 6 0.22 0.81 3 0.10 0.47 11 0.27 0.78 11 0.31 1.00
1.3 12 0.44 0.59 5 0.17 0.37 18 0.44 0.51 17 0.47 0.69
1.4 1 0.04 0.15 4 0.13 0.20 3 0.07 0.07 3 0.08 0.22
 1.5 2 0.07 0.11 2 0.07 0.07 0 0.00 0.00 4 0.11 0.14
1.6 1 0.04 0.04 0 0.00 0.00 0 0.00 - 1 0.03 0.03
>1.6 0 0.00 0.00 0 0.00 - 0 0.00 - 0 0.00 0.00

Now we have already obtained the probability that the contractor’s estimate is lower than the
bidders estimate. That is, the cumulative probability distribution which gives the probability for
any given bid, expressed as a ratio of the contractor’s cost estimate in which the contractor’s
estimate be lower than that of competitors bid. In other words, the contractor has sufficient
information to determine his estimate that assures him the maximum expected profit. In order to
determine the expected profit, the probability theory should again be called upon when the
number of competitor is one or more. To revise the probability concept behind this the following
illustrations are provided:

Addition law: The addition law of the probability theory applies when an event occurs in one of several
possible ways, provided these possible ways are mutually exclusive. And it is calculated as the sum of
the probabilities of the occurrences of the several different possible ways.
Multiplication law: The multiplication law of the probability theory applies when an event occurs in
simultaneous occurrence. It is calculated as the product of the probabilities of the occurrences of the
several different possible ways.

In all cases and in any consideration of probabilities, the sum of all possible events must equal
unity. Therefore, the expected profit can also be determined using the above probability
theories. Now let us first take only one competitor (Bidder A), and then the expected profit is
computed and tabulated below.

Bidder A
R Pc Cum. Pc P (lower) Pexp
0.9 0.02 0.02 1.00 (0.9c - c)*1.00 = -0.100c
1.0 0.06 0.08 0.98 0.00
1.1 0.13 0.21 0.92 (1.1c - c)*0.92 = 0.092c
1.2 0.30 0.51 0.79 (1.2c - c)*0.79 = 0.158c
1.3 0.32 0.83 0.49 (1.3c - c)* 0.49 = 0.147c
1.4 0.11 0.94 0.17 (1.4c - c)*0.17 = 0.068c
1.5 0.04 0.98 0.06 (1.5c - c)* 0.06 = 0.030c
1.6 0.02 1.00 0.02 (1.6c - c)*0.02 = 0.012c
>1.6 0.00 1.00 0.00 0.00

It is easily observed that a contractor estimate of 1.2 c gives the maximum expected profit of
0.158c, which is the cost that the contractor should bid for.

Now let us take two competitors which are bidder A and B. The contractor will win this contract if
and only if this bid is found lowest of both bidders A and B. In probability theory this can be
explained by an event of simultaneous occurrence. Therefore, in order to determine the
expected profit of the contractor, the probability that the contractor’s bid be lower than the
competitors shall be determined. This probability is determined as the product of the
probabilities of the individual competitors’ probability Pa (AB).

R Pa(A) Pa(B) Pa(AB)

0.9 1.00 - -
The above table now 1.0 0.98 - 1.00 contains
1.1 0.92 1.00 0.92
the probability for 1.2 0.79 0.81 0.64 obtaining
the bid, if the 1.3 0.49 0.59 0.29
1.4 0.17 0.15 0.03
contractor is to bid 1.5 0.06 0.11 0.01 lower
1.6 0.02 0.04 0.00
than both bidder A and >1.6 0.00 0.00 - B. From
this, the expected profit is determined and tabulated below.

R Pa (AB) P exp
1.0 1.00 0.00
1.1 0.92 (1.1c - c)*0.92 = 0.092c
1.2 0.64 (1.2c - c)*0.64 = 0.128c
1.3 0.29 (1.3c - c)*0.29 = 0.087c
1.4 0.03 (1.4c - c)*0.03 = 0.012c
1.5 0.01 (1.5c - c)*0.01 = 0.005c
1.6 0.00 0.00

From the above table the maximum expected profit is 0.128c which is at 1.2 times the
contractors bid. Similarly the expected profit for more than two competitors can be determined.

Case 2: Numbers of Competitors Known, but Identities Unknown.

Here the numbers of competitors are known, but their identities are unknown. Such a case is
exercised when a contractor enhance his grade to a higher position so that he joined a new
team or a new career. Since specific information about bidders’ is unknown, the concept of
“average bidder” shall be used.

Average bidder identities are a hypothetical but typical competitor representing the collective
bidding pattern of the contractor against all competition. If the contractor is faced with only one
competitor whose identities are unknown, then the average bidders’ identity is used for the only
unknown competitors. Generally speaking the average bidder concept is applicable to each of
those their identities are unknown, for others since their identities are known they will be
considered as they are. The probabilities and the expected profit will be determined as
described similar to case one above.

Case 3: Both Numbers and Identities of competitors unknown.

In the case where the contractor does not know both the identities and the numbers of
competitors, statistics plays little role in finding too good too be true estimates as to what the
contractor shall make his bid. Such a possibility usually exists in the case where the contractor
is a beginner or of whose recording is not scientific. One of the best ways to approach such a
condition is by the way of obtaining an estimate of the number of competitors and the use of the
average bidder concept for determining the identities of the competitors. Similar to Case 1 & 2,
other computation will be computed.

Estimating the number of competitors: The important parameters considered here are the
estimated cost of bidders and the expected number of competitors. Usually, a contractor shall
collect past data in order to enable him to estimate the number of competitors likely to bid on a
particular size and type of job. In so doing some correlation shall be developed between the
estimated cost of the bid and the number of bidders using statistical concept called “regression-
correlation.” A graph of the numbers of bidders versus the contractor’s cost estimates can be
prepared for use in cases where both identities and numbers of competitors are unknown.

If one considers the effect on a bid as the number of competitors is known, the cumulative
probability distribution from the average bidders’ identities can be used. For easy demonstration
let us use the following illustrative example:

 Let the probability that the contractor’s estimate is lower than bid of average bidder and the
ratio “R” of the contractor estimate to the average bidders cost estimate be given in the
table below:

R 1.0 1.1 1.2 1.3 1.4 1.5 1.6

Pavg 1.00 0.92 0.64 0.29 0.03 0.01 0.00

Assuming the number of competitors increasing from one to three and the expected profit is
calculated the following values are obtained and tabulated below:

R Pavg Pexp1 Pavg2 Pexp1 Pavg3 Pexp1

1.0 1.00 0.000c (1.00)2=1.00 0.000c (1.00)3=1.00 0.000c
1.1 0.92 0.092c (0.92)2=0.85 0.085c (0.92)3=0.78 0.078c
1.2 0.64 0.128c (0.64)2=0.41 0.082c (0.64)3=0.26 0.052c
1.3 0.29 0.087c (0.29)2=0.08 0.024c (0.29)3=0.02 0.001c
1.4 0.03 0.012c (0.03)2=0.00 0.000c (0.03)3=0.00 0.000c
1.5 0.01 0.005c 0.00 0.000c 0.00 0.000c
1.6 0.00 0.000c 0.00 0.000c 0.00 0.000c

From the above table it is easily understood that as the number of competitors increases, the
amount of expected profit decreases. This indicates that the number of competitors is the most
important variable in determining the bid with regard to the maximum expected profit
determination.
Chapter 4. Contract Management

Rights, Obligations and Remedial Rights!

Scope, Relationships, Processes and Resources!
Negotiation, Agreement and Administration!
Measurement, Payment and Certification!
Can they be Binding Contractually!!!

4.1. Introduction

Contract is a written agreement between or among two or more parties whereby each party
promises to do or not to do something and agrees to terms (conditions and Warranties) set out
in the contract. Conditions of Contract are terms in which parties in the contract are governed /
administered with. That is, it is an administrative law which is the legally binding part of the
contract. These promises and terms shall be enforceable by law and incorporates the rights,
obligations and Remedial rights of each contracting parties.

In other words, A Contract is an Agreement between two or more parties to do or not to do

something for a certain consideration that fulfill the following seven requirements:

 Parties are capable of contracting: Lawful and Capable

 Consent of contracting parties is necessary: Intent
 Object of the contract is sufficiently defined, possible and lawful: Legal and Distinct
 Use of Contract form prescribed by law, if any: Standard
 Payment for the Promise: Consideration
 Constitute two parts: Offer and Acceptance
 Parties enter into Agreement: Agreement

Lawful and Capable is to mean they are legally allowed to enter into contract and provides
statements of facts (statement of opinion + Knowledge) for their ability to perform their
obligations. Misrepresentations of facts both from Fraudulent or Innocence actions are liable for
damages and / or rescission.

Intent is willingness or consent by the contracting parties to create a legal contract.

Legal and Distinct is a description of both the promises and considerations (including rights and
obligations) clearly and distinctly stated and they should be practicable and legally binding.

Standards can be conditions, forms, formats, schedules, instructions, etc which are created for
use as part of contracts.
 Consideration can simply be interpreted as ‘price for the promise’ which involves a benefit
accrued from the offeree in exchange for the promise the offeror is bound by the contract.
An Offer is an indication that one party is willing to be bound by specific terms set out in the
contract. An offer can remain open unless conditioned for termination using the following ways:
 Refusal or Counter Offer
 Closure of the Offering organization
 Non – Acceptance with in the offer time
 Failure of the offer condition

An Acceptance is the key for the formation of a contract which must be absolute, indication of
consent,, and communicated to the offering entity by the offeree.

An Agreement though proves the existence of a contract; there are situations where it can be
considered as there isn’t. For instance, if contracts violate statutorily prohibited conditions such
as promoting gambling; and / or also violates unlawful conditions by the common law such as
agreements to commit civil wrongs, discrimination, against the benefit of the state, to promote
corruption, that devalue the value of one party, etc.

Following these characteristics; While the contract is understood as the sub - framework of the
law which can be understood as the private law, the law provides a framework within which the
services and works of the construction industry is governed with. Therefore, the significance of
any contract is that the promisee is obliged for their performances against a certain return and if
failed to compensate for non - performance and at the same be time legally enforceable.

On the other hand, A contract is a not a mental state but an act which is a matter of inference
from conduct. That is, the parties are judged not by what is in their minds, but by what they have
said or written or done. Essential Terms, Certainty, Agreements to Agree, Subsequent words or
conducts, Agreements after commencement, Agreement by conduct, Formalities are some
issues to be clearly understood when dealing with contractual matters.

The purposes of a contract are therefore:

 To enforce law or bind conditions between or among the parties agree to procure services /
works / goods
 To clearly show the Terms and Conditions of contracts the parties agree with
 To clearly show the Rights and Obligations of performances from the contracting parties
 To clearly show remedial measures in cases for non - performances
 To identify special risks and their treatment
 To clearly show handling provisions for price, completion time, requirements variations
adjustment systems, Changes in cost and legislations and their dispute resolution mechanisms

Contract can be of three types; namely,

  Unilateral or Optional or If Contract
 Synallagmatic or Bilateral, and
 Multilateral
Unilateral or Optional or If Contracts are contracts which are recognized by law where the
promise by one party is binding and if the performance is carried out by the other party who is
not bound merely by embarking on the performance required.
Synallagmatic or Bilateral Contracts are contracts entered to promise for an obligation
performed in the future where both (two) parties are mutually bound. Such obligations are often
termed as Executory.
Multilateral Contracts are contracts entered to promise for an obligation performed in the future
where all (three or more) parties are mutually bound.

4.2. Contract Management and its Processes

Contract Management is the management of its Processes, Stakeholders and their

Performances along the Planning, Implementation and Monitoring + Evaluation Cycle of the
functions of Management.

Contract Management process can be idealized into three major processes. These include
Contract Formulation, Contract Administration, and Closing of Contract Processes (Figure 2).

Negotiations Closing of Accounts

Contract Agreement Contract Evaluations

Contract Contract Contract

Formulation Administration Closing

Contract Implementation
Changes Management
Claims and Disputes Management

Figure 2: Contract Management Process

Contract Formulation: involves two sub processes, namely; Negotiation and Signing of Contract
Agreement. Negotiation is a process by which Project Owners together with their professional
representatives’ deal with the recommended winner of the tender on the requirements of the
tender exclusively which will become the bases for contractual agreements.

Contract Agreement when signed forms the contract document which will be the bases for
Contract Administration. A Construction Contract Document includes:

 Signed and Sealed Form of Contract Agreement and Tender with Appendix if necessary,
 General and Particular Conditions of Contract,
 Technical Specification and Methods of Measurement,
 Priced Bill of Quantities and Drawings, and
 Forms, Formats and Schedules.

Form of Contract Agreement varies from contract to contract but is generally composed of:
the date on which the agreement shall come into force
the contracting parties and the delegated services administrator, their addresses and being called upon
the services to be procured in brief
the general provisions such as words, meanings and expressions; order of precedence and Payment Terms
the construed parts of the contract document, and
the Agreement Considerations, the Signing and Sealing places.
Sample Form for Contract Agreement
Form of Agreement In Consideration of the payments to be made by the
Employer to the Contractor as hereinafter mentioned,
This Agreement hereinafter called “the Contract” is the Contractor hereby covenants with the Employer to
made on the ___ day of __ 20 __ between on the one execute and complete the Works and Remedy any
part __________ of ________ hereinafter called “the defects therein in conformity in all respects with the
Employer” and on the other part _______ hereinafter provisions of the Contract.
called ‘the Contractor” / “the Consultant”. The Employer hereby covenants to pay the Contractor
in consideration of the Contract Price of such other
Whereas the Employer is desirous that certain works sum as may become payable under the provisions of
/ services should be executed by the Contractor / the Contract at the times and in the manner prescribed
Consultant, viz. _________________ and has by the Contract.
accepted the tender for the execution /
implementation and completion of such works / In Witness Whereof the parties hereto have caused this
services and the remedying of any defects therein. Contract / Agreement to be signed in their respective
places as of the day, the month and the year first above
Now this Agreement witnesses as follows: written.
In this Agreement words and expressions shall have
the same meanings as are respectively assigned to For and on behalf of the Employer
them in the conditions of contract herein after
refered to. __________________ _______________
The following documents shall be deemed to form Signature Date
and be read and construed as part of this Agreement,
viz:
The Letter of Acceptance For and on behalf of the Contractor
The said Tender
The Conditions of Contract (I & II) __________________ _______________
The Specifications Signature Date
The Drawings, and
The Priced Bill of Quantities.

Form of Tender include

the date on which the agreement shall come into force
the contracting parties and the delegated services administrator, their addresses and being called upon
the services to be procured in brief
the general provisions such as words, meanings and expressions; order of precedence and Payment Terms
the construed parts of the contract document, and
the Agreement Considerations, the Signing and Sealing places.
Sample Form of Tender
General and Special Conditions of Contract is the administrative law applicable to the contract which is legally enforcing
the contracting parties. The special conditions are meant for those particular contexts and requirements that can not be
standardized and generalized into common conditions of contract. Clauses in both conditions of contract shall be the
same. Generally, conditions of contract cover:
Definitions and interpretations of terms used in the contract
Contract documents priorities, supply of drawings, supplementary documents
Obligations, Rights and Remedial Rights
Services / Goods / Works, their Measurement and Certifications
Alterations, Claims and Dispute Settlement.
Samples:
MWUD, FIDIC, and Other General and Particular Conditions of Contract

Standard and particular Technical Specification defines the quality expected to each trade of items or services whereby
confirmation and approval required are clearly stated. Specifications are statements describing the nature and class of
work, materials to be used, labor to be employed, methods of work, equipment and tools to be used, quality of works
and workmanships and submittals and sampling for tests and approvals.

Specifications govern when it does not fit with drawings and it serves the following purposes:
Guide bidders to arrive fair tender prices during procurement
Be bases for execution and supervision of services and works and delivery of goods during implementation
Help in purchasing of materials, hiring of workmen and provisions of equipment, and
Help in accepting the different items of services and works and delivery of goods.

Specifications are of three types: Contract, Standard and Manufacturers’ specifications

Contract Specification is a Technical Specification used to supplement drawings for a particular project which can be of
two types (General and Detailed). General specifications are written in the bill of quantities to show the class and type
of works and materials together with workmanship and cost inclusions briefly. Detailed specification can either be the
standard specification written to describe the how of the works and services or particular to the project under
consideration.
Standard Specification is a Technical Specification or Guidelines written to clearly establish the ‘What’ of the materials
or (Sub) Products used or the “How’ of the services, works or goods which can generally be described for a construction
sector such as Buildings, Roads, Water Works, etc.
Manufacturers’ Specification is a technical specification prepared for the products companies produced to guide
specifiers, designers and users. Such specifications include installation, use and maintenance instructions and are
usually prepared in the form of manual.

Priced Bill of Quantities and Drawings

 The following Forms, Formats, Schedules and Breakdown Structures are used in Construction Contracts and are
tabulated bellow:

FormsFormatsSchedulesBreakdown StructuresForm of Contract Agreement

Form of Tender
Form of Bid Security
Form of Performance Security
Form of Adv. Payment Guarantee
Form of Maintenance SecurityHanding Over Site Formats
Change Order Format
Progress Reporting Formats
Payment Certificate Format
Contract Administration: Contract Administration is a process that ensures the successful
Price Indices Format
completion of the project under consideration with substantial compliance of the Terms of the
Comp. Certificate FormatsWork Schedule
Contract.
MaterialAs a result, the following activities or tasks are included in Contract Administration
Schedule
services:
Equipment Schedule
Labor Schedule
 Identifying contractual responsibilities of Stakeholders.
Cash flow Schedule
o Reviewing the Terms
Payment ScheduleOrganization BS of Contract Documents
Work BS o Extract Monitoring Responsibilities

Material BSo Preparing Monitoring Responsibility Summary Sheets

Equipment BS
Labor BS Monitoring Responsibility Summary Sheet
Project: _____________________________
Cost BS _____________________________
Owner:
Contractor: _____________________________
Consultant: _____________________________

Contract ArticleContract Condition:

DescriptionOwner
RespContractor
Resp.Consultant
Resp.Regulator
Resp.Financier
Resp.Overlap
Resp

 Determining and understanding the construction components of the project.

o Reviewing the Contract Drawings and Technical Specifications
o Extract the Construction Methods and Sequences
o Prepare Construction Methods and Over all Sequences Sheets
 Review submitted (Integrated) Schedules and Breakdowns for operations such as
Organizational Breakdowns, Resources Breakdowns & Schedules and Time Schedules.
 Record, Monitor and Evaluate Progress of Mobilizations, Works and Completions.
 Report Project Status daily and / or periodically and Completions.
 Certify qualities of materials, shop drawings, samples, workmanships and works.
 Measure Works, Record Site Potentials and Certify Payments and Completions
o Take off sheet and Bending Schedules are used for Measurement of Works
o Method of Measurement is according to standard practices
o Site Potentials such as material, equipment and Manpower on site together with appropriate
site organization is recorded
o Advance, Interim and Final Payments are certified

Page _______
Payment Certificate Sheet

Certificate of Payment No. : __________

Date: ____________

Project: _____________________________ Amount (Curr )Main ContractSupp.

Contract No: _____________________________
ContractContract Change No. 1Contract Change
Contract Date: _____________________________
Owner: _____________________________ No.2Contract Change No.3Total Sum
Contractor: _____________________________
Location: _____________________________

As per attached measurements and priced bill of quantities, the value of works executed and / or material
supplied and net sum due to the contractor to date is:

Previous PaymentsPC. AmountTotal Sum due to the ContractorDeductions

No.DateAmountAdvance1234567
8910Total Exc. VAT

Previous PaymentsRebate ( … % )Retention (5 % of

exc.)PenaltyAdvance RepaymentOthersTotal
DeductionsNet Sum Due to the Contractor15 %
VATNet Sum including VAT

We Certify that the Contractor is now entitled to the sum of ______________________________________

_______________________________________________________________________________________

__________________ _____________________ ______________________

Certified Approved Seal

 Administer contract changes.

o Issue Change Orders including Clarifications
o Evaluate and Certify Additions and Omissions
o Evaluate and Certify Provisional Quantity and Provisional Sums
o Evaluate and Certify Remedial Rights
o Evaluate and Certify Claims
 o Prepare Contract Changes Status Sheet

Contract Changes Status Sheet

Project: __________________________________________
Contract No: __________________________________________
Owner: __________________________________________
Contractor: __________________________________________
Consultant: __________________________________________
Contract Changes No: __________________________________________

Contract Changes Description:

_______________________________________________________________________________________
_______________________________________________________________________________________
_______________________________________________________________________________________

Contract Changes Initiated by: ______________ Owners Consent on Advice Date: ___________
Contract Change Initiated Date: ______________ Contractor Consent on Advice Date: ___________
Consultant Advisory Date: ______________ Change Orders Date: ___________

 Mediate Disputes.

Such services are carried out to ensure projects are completed successfully and

 To Follow up and Evaluate Project Cost, Time and Quality.

 To Ensure Health, Safety and Environmental Requirements.
 To Ensure Project fitness for its purpose or intended objective.

The following Seven Points are worth noting as vital issues to consider during Contract
Administration Services.

The Contractor shares, in most cases, the Owner’s desire for a final product of high quality; however, a
contractor who becomes caught in an irreconcilable conflict between providing that level of quality and
realizing what he believes to be a reasonable profit will …….
Construction is recognized as much an art as a science and that the attainment of something less than
perfection is …….. by the Owner.
Contract Administrator is not a party to the contract between the Owner and the Contractor, but is a
participant in the construction process to promote the successful performance of projects in compliance with
the contract.
Successful contract administrators will know and admit the limits of their knowledge and will seek the
assistance of experts in the interpretation and, if necessary, the legal enforcement of the contract.
An overzealous contract administrator is a disservice to both the Owner and the Contractor and himself.
It is clearly in the financial interest of the contractor that interim payments be maximized, and It is clearly in
the interest of the owner that such payments not exceed the value of work completed; In this situation, the
contract administrator shall determine what is critical for the success of the project in the interests of fairness
to both the owner and contractor.

Closing of Contract: Closing of Contract looks into issues related to Maintenance Period and
Remedial works, Dealing with Left Over Claims and Disputes, if any, Closing of Accounts and
Completion Certificates.
Maintenance Period and Remedial Works: Construction works are subjected to Maintenance Periods
(Usually One Year) in order to reveal quality problems overseen by supervisors. The focus is not on
normal wear and tear but rather damages seen on the construction components which are solely under
the responsibility of the contractor. These often include Sanitary and roof leakages, Poor quality Door and
Window Handles and Locks, Electrical Fittings, Structural damages, Cracks, Pavement subsidence,
Settlement, etc.
Left Over Claims and Disputes: If claims and disputes are not settled before provisional certificate of
completion, they can be dealt during this phase.
Closing of Accounts: Final Accounts together with the release of remaining retention moneys and
performance securities are carried out in accordance with the current situation at the time of closing and
Final Payment Certificate is issued.
Completion Certificates: This is to entitle that the contractor is no longer responsible afterwards if
satisfactory performance is proved by Maintenance Period and its certification, Outstanding claims and
disputes are settled, and closing of accounts are made. Completion certificate is a certificate that
concludes the contractual agreement and will not be considered binding there after unless otherwise it is
proved illegal

4.3. Contract Types

In Construction Industry, the following eight contract types are so far practiced:

1. Lump Sum Contract, 5. Item Rate or Schedule of Rates

2. Bill of Quantities or Unit Rate Contract,
Contract, 6. Labor Contract,
3. Cost Plus Fixed Fee Contract, 7. Hybrid Contract, and
4. Cost Plus Percentage of Cost 8. Special Contract
Contract,

Lump Sum Contract: When the Project or Tender price is determined and quoted as a total sum of
money without individual ratings to execute the whole of the works and / or services according
to the drawings and specifications, it is called a Lump Sum Contract. In such contracts:

 It is difficult to administer changes and amendments but experiences of similar projects are
used as a basis to this effect,
 Works or services are checked based on the specifications, the conditions of contract or terms
of reference and drawings if any for acceptance and closing of accounts, and
 Payments are agreed at different stages of works or services.

A Lump Sum Contract is more suitable for works of smaller in size and where the contracting
parties have prior experience of similar projects. But it is not advisable for projects with
considerable uncertainties such as; difficult sub surface situation, unusual projects, maintenance
projects, etc. A Lump Sum Contract mainly includes Contract Agreement, Conditions of
Contract, Drawings and Technical Specifications.

Bill of Quantities Contract: When the Project or Tender price is determined and quoted from unit
rates assigned to detailed bill of quantities, it is called a Bill of Quantity Contract. The Bill of
Quantity includes short description of specifications, unit of measurement, quantities and
columns for pricing the unit rate and its total amounts. In such contracts:

 It is relatively easy to administer changes and amendments because actual and assigned
quantities can be compared,
 Works or services are checked based on the specifications, the conditions of contract or terms of
reference, drawings if any and the priced bill of quantities for acceptance and closing of accounts,
and
 Payments are made based on measurements of executed works and material on site provided on
site.

Cost Plus Fixed Fee Contract: When projects are fast – track and required to be completed
expeditiously and where it is difficult to estimate the project cost before, the project expenses
called costs will be recorded and a fixed amount which is agreed upon by the contracting parties
will be added as payment to the contractor. A contract that stipulates to reimburse cost together
with an additional fixed fee, it is called a cost plus fixed fee contract. Such a contract is desirable
when the scope and nature of the work can at least be broadly defined and for important
structures such as monumental buildings which are Time and Quality driven than Cost driven. In
such contracts:

 The work is executed in the best interest of the owner with regard to the project quality and time,
 There is no way that the contractor can loose,
 Changes and Amendments can be accommodated amicably,
 The amount of the fixed fee is determined as a lump sum from a consideration of the scope of the
work, its approximate cost, nature of work, estimated time of construction, manpower and
equipment requirements, and
 The owner could not easily anticipate the final project price and can cause budgetary problems.

Cost Plus Percentage of Cost Contract : This type of contract is similar to the Cost plus fixed fee
contract but its fixed fee is made variable using a percentage of the cost which is meant to cover
the overhead and profit costs of the contractor. Contract Administration becomes intense in
such type of contract in order to protect the interest of the owner. This is because the payment
is made by determining the actual cost of the work plus a certain percentage. The disadvantage
of such kind of contract is the tendency to increase the cost of the work to earn more profit by
way of percentage of enhanced actual cost.
Item Rate or Schedules of Rates Contract : A different form of fixed contract but priced based on the
unit rate approach for individual or groups of activities, not the whole project. When accurate
specifications and quantities of work or services could not be determined before executions,
provisional quantities together with acceptable specifications can be included to determine
Provisional sums using unit rates. This type of contract is Item Rate or Schedules of Rates
Contract.

Labor Contract: When the Project owner is responsible for the provision of major resources such
as materials and Equipments other than labor, small tools and equipments and their
management, it is called a labor contract.

Hybrid Contract: A contract that combines two or more contract types is called Hybrid Contract.
This type of contract is designed to meet the special requirement of certain classes of works to
suit their particular needs.

Special Contract: As the name implies, in certain circumstances such as use of specializations,
urgency, supplementary nature and continuity of services or works; remoteness and smallness
of projects, etc requires special arrangements. These include:

 Packaged Contract  Running Contract, and

 Continuing / Supplementary Contract  Sub Contract

Packaged Contract: In remote areas where there is a need to develop physical infrastructures and their
smallness and cost are too low that contractors are discouraged to participate, projects are grouped to
combine two or more individual contracts so as to arose interests by increasing their costs. A single
contract formed from a combination of two or more separate contract to suit special need of a project
owner or financier or regulator is called a packaged contract. This type of contract becomes feasible in
order to promote privatization and discourage Force Account forms of delivery system.

Continuing / Supplementary Contract: When a project incurs additional works or services which is within
10 – 15 % of the total contract price but should not be > 25 % can be allowed to supplement to the
existing contractor in the form of Continuing or Supplementary Contract. Such contract is advisable when
the project owner is able to save cost and time due to tendering and mobilization.

Running Contract: This type of contract is becoming popular after projects started to use Alliance and
Outsourcing Delivery System. Such contracts provide goods, services and works at specified intervals or
as and when required by the Project Owner for a certain period of time. The Contract price is often per
unit rate of goods, services or works where the payment is based on actual goods delivered and / or
services rendered and / or works executed. Contract Prices can in some instances be fixed specifically for
services.
Sub Contract: This type of contract is made when specialized works are involved in the project package
or if the Project Owner envisaged other tangible as well as intangible benefits by using such a contract
type. Competitive and Comparative advantages can be sought using such a contract type and they are
forms of outsourcing and alliances delivery systems.

Discussion Points:
Merits and Demerits of the different Contract Types
Chapter 5. Contract Changes Management

“In a Perfect construction process, There is no Uncertainty during planning

And hence; There are no Changes during Implementations!”
Alas!
There is no Perfect Construction Process!!

5.1. Introduction

The two most important issues considered in contract change management are
Uncertainties and Changes. Uncertainties are issues that can either be difficult to
reasonably predict or unknown during the planning phase of Procurement and Contract
Management. Changes are issues requiring alterations during the implementation of
Procurement and Contract Management.

Uncertainties are multi-dimensional. They can be Information related, and / or Time

based, and / or Ambition related; etc. Besides, they deal with complexity, risk,
opportunity, ambiguity and chaos associated with the project under consideration. For
instance, when uncertainty is understood as the difference between the amount of
information required to perform the task and the amount of information already
available by the planning team (Figure …); one can clearly understand that uncertainty
is the major factor that conflicts with prediction or planning.

Information Lacking Information Possessed or

or Uncertainty Available

Amount of Information Required

Uncertainty is higher in the early phase and reduces through time by getting more and
better information. At the same time, the early phase posses the most probable
influencing power on the project during this phase. That is, the early phase is well
known for its highest influencing possibility of the project and where the available
information and knowledge of the overall situation that helps planning is very minimal
(Figure ….).

Information
Influence and
Uncertainty

Cost

Ti
me
Uncertainty is not only related to the future but also the knowledge of the past as well,
that is; information records and those based on experiences. This indicated that
Uncertainty is always with us and can never be eliminated. Subsequent to this, all
decisions about the future is made in the absence of certainty. What is important from
this discussion is not to searchProject Project until certainty is build but to
for more information
Project
recognize that all decisions are and should be made under such uncertainties. In other
Formulation Implementation
words, waiting until Completion
uncertainty is eliminated before making decision is an implicit
endorsement of the stats quo, andPhase
often an excusePhase
for maintaining it.
Phase
Therefore, projects are planned under a certain level of uncertainty. This implies that
all projects take over risks during implementations. This can be therefore one of the
major reasons why changes occur during implementations.

Uncertainties can be mitigated using the following four interventions used in project
contracts:

 Absorbing: Understanding projects are planned under uncertainty and changes are
expected during implementations, Provisions in the form of Contingencies,
Alterations, etc are made and used to absorb changes caused by uncertainties.
 Dividing or Splitting: When a project uncertainty is high or there is less past
experience, dividing projects into packages or different phases or to make them
smaller sizes, etc is to divide or split to minimize the uncertainties.
 Postponing: When Contracts could not clearly state specifications, quantities and
estimates, they often place Provisional Quantity or Provisional Sum to postpone
uncertainties.
  Transferring: Lump Sum Contracts, DB and BOT delivery systems are some form of
contractual approaches to transfer uncertainties from Owners to Providers.

Changes
Points of Stakeholders’ Views on Changes: Stakeholders’ views and perceptions have
considerable effects on contract changes management. The following classical views are
collected and listed for the different stakeholders’ based on their merits and demerits (Table …):

Project Stakeholders Self initiated changes Others

Project Owners  I know what I want, and I want it badly  Cost and Time overruns are project doers profits
Implementing Agencies  The designer should have thought of this  The designer is the one at fault
Beneficiaries  The cost is immaterial and minimal  Variations and Claims are unethical practices
I am Paying for It!  This should not take any more time 
Too Cost and Time Oriented!!!
Project Doers  Can we gain advantage?  Negotiate to gain profit and extra time
Consultants  This is better for you  The designer should have thought of this
Contractors  The designer has short of experience on  Can we recover soft costs?
Let’s Negotiate! constructability  This should not take any more time
Too Profit and Claim Oriented!!!
Project Regulators
Financiers
Public Works
Abide Laws, Rules &
Regulations
Too ……

Discussion Points:
 Changes Versus Delivery Systems
 Changes Versus Procurement Methods
 Changes Versus Contract Types

5.2. Requirement Changes Management Systems

All projects are planned under the context of uncertainties, what makes them different among
each other is that the type and degree of uncertainties does differ. Accordingly, there are almost
no times that projects are realized without requirement changes. In virtually all contracts, that is
why provisions for requirement changes are retained so that Project Owners can prerogatively
make changes during implementations. For instance, Clauses 51 and 52 of the General
Conditions of FIDIC Red Book provided provisions for Alterations (Additions and Omissions) to
enable Project Owners use the Engineer (the Consultant) to make requirement Changes.
Requirement changes can either be additional or extra or excess and / or omission works. They
can cause review of designs and / or create additional or changes in designs and / or just work
orders to instruct contractors to carryout the requirement changes. While project owners retain
the right to requirement changes, the contractor is obliged to accept as per the conditions of the
contract. However, the contractor is entitled to request and agree upon new or existing rates for
such changes.

Change Orders are written instructions, agreed by the Project Owner or His Representative,
directing the Project Doer to make changes with or without the Consent of Regulatory Bodies.
Often they are entertained using standard formats of which Box … provides one of these types.

Change Order Format

Box …: Change Order Format

There are three kinds of Change Orders:

 Unilateral Change Order: is a type of change order that provides the right to any of the
parties to make changes without causing any effect on the other parties or disrespecting any
laws, regulations and rules binding the contract and itself but requires notification to the other
parties for knowledge
 Bilateral Change Order: is a type of change order that require the agreement and / or
consent of the two contracting parties (the Project Owners and The Project Provider) to
make changes but requires the respects for laws, rules and regulations binding the contract
and itself and requires notification to the other parties for knowledge
 Multilateral Change Order: is a type of change order that require the agreement and / or
consent of the three or more contracting parties (the Project Owners, The Project Providers,
The Project Financiers and / or the Regulators) to make changes but requires the respects
for laws, rules and regulations binding the contract and itself and requires notification to the
other parties for knowledge
 Requirement changes based on the different types of change orders modifies contracts in either
of or the combinations of the following three ways:

Time changes only,

Time changes accompanied by Cost Compensations, and
Cost Changes only.

These three ways are subsequently dealt with in their respective sections.

The following flow chart represents the process in which the Management of Requirement
Changes can be handled (Figure …).

Figure … Management Processes for Requirement Changes

5.3. Time Changes Management System

5.3.1. Introduction

Contract Time can either be Competitively or Directly assigned. In both cases, Time planning can
be made using different approaches such as using CPM, PERT, MCS, SP or TOC. Bar Charts,
Gantt Charts, Network Diagrams and Tables can be used to show Time Plans and
Accomplishments. Contractual Agreement finally defines the Contract Time of a project. The
Completion Time of projects include:

 Dates between Contract Agreement and Handing Over of Site,

  Mobilization Period(s),
 Contract Time, and
 Justified and Agreed Supplementary or Extension of Time.

As a result, the following Expressions hold True for Construction Time Competitions (Box …).

Dhos = Dcont + Thos;

Dstart = Dhos + Tmob;
Dcomp = Dstart + Tcont + Tjust + Tsupp
If Dact < Dcomp; Bonus, if any
If Dact > Dcomp; Time Overrun and Liquidated Damage

Where, Dhos = Date for Handing Over of Site; D Cont = Date for Contract Agreement; Thos = Time
between Contract agreement and handing over of site; D start = Date for Start of Construction
Works; Tmob = Time for Mobilization; DComp = Date for Completion Time; Tjust = Time for Justified
Delay; and Tsupp = Time for Supplementary Works or Agreements.

Section … discussed progress tracking which is applicable to Completion Time Administrations.

Hence, Planned and Actual Schedules are compared for deviations or compliances which show
whether there is a need for Time Change Management System or Not. Unfortunately, in most
instances projects exhibit a principal dimension measured by such comparison called Time
Delays and Overruns.

5.3.2. Time Delays and Overruns

Time delays can occur in components of a project or trades of works, but when their cumulative
effect makes the actual completion time beyond the contract completion time, it is called time
overrun. Contractors in some instances accelerate projects in order to avoid liquidated damages.
In this case, though part of the project did delay; it is compensated which makes the delay
irrelevant. However, contractors will lose some profit if they depend on accelerating options most
often.

Generally , Time delays can be classified into the following three categories:

Classic, Concurrent and Serial Delays

Classic Delays
Concurrent delays are delays that occur simultaneously when they were carried out parallelly. Their effect
for the project can be assessed using that part of the work which causes longest delay and its
consideration are made as such. For instance, if a project owner agreed to supply material and
irrespective of its delay, if the project faced adverse weather condition; the project can not be executed.
Therefore, both delays could not be counted as serial delay but concurrent and the one that causes
longer delay is considered for time delay computations.
Serial Delays

Justifiable and Non - Justifiable Delays

Justifiable delays are delays that occurred due to causes which are beyond the control of project doer. If
delays are caused by project owners, the contractor or the consultant or the supplier is directly justified for
the effects on delay of the project. Force Majeur will also be one of the causes for justifiable delay.

Non - Justifiable or Non - Execusable Delays are delays that occurred due to negligence to fulfill
contractual obligation and are within the control of the contracting parties. Contractors or Consultants or
Suppliers will be liable for Non - Justified delays.

While Justifiable delays can be either compensable or non compensable; Non - justifiable delays will
cause remedial rights (Section 5.3.3) for the project owners.

Compensable and Non – Compensable Delays

Delay damages can involve additional costs incurred by the contractor as a

result of the extended duration of its performance. These typically include
costs of idle laborers and equipment, higher costs of performance during the
later period of time and extended general conditions. Examples of the type of
additional costs associated with delays include:

 Extended or Increased management / supervisory costs

 Additional payment / performance bond premiums
 Additional liability insurance premiums
 Extended equipment / trailer rental costs
 Materials escalation costs
 Unanticipated weather protection
 Idle labor / equipment charges

The other component of delay damages is the unabsorbed overhead

associated with the delay period. Overhead expenses are not usually charged
to a particular project, but rather, are combined and deducted from income
produced from all of the company's projects throughout the year. These costs
are often referred to as "Eichlaey" damages, which is the name of the formula
most commonly used to calculate the Overhead expenses portion of a delay
claim.
One of the first factors for determining whether you can assert a valid claim for
delay damages is your contract. Unfortunately, many contractors often waive
or severely limit their rights to recover delay damages before even getting out
to the project, through their contracts. For example, contract clauses can be in
line with:

 No Damage for Delay, or

 Conditional Recovery,

 Additional Time and Compensation for Delays

The first view expressly prohibits recovering of additional costs incurred as a

result of delay, regardless of the cause in creating the delay. The second view
limits ability to recover or make a claim for delay or impact damages, so that
the recovery is very much dependent on causes of delay and their CPM
Network. This obviously excludes recovery for any unjustified delay damages.
The third view does not inhibit or limit rights to recover due to delay damages.
By waiving your rights to delay damages before your work begins, you could
be putting your company at significant financial risk if a long unforeseeable
delay or other schedule impact causes you to incur unanticipated costs. Be
aware of these provisions, and protect your right to make a delay claim, if
needed. Contractual provisions are not the only factor to consider when
determining whether to make a delay claim. Certainly, the amount of
compensable damages and your ability to prove them are also a part of the
decision.

In Evaluating delay claims, five aspects must be taken into account:

 The effective duration of delay

 The effect of delay on work intended to be done

 The costs attributable to the delay

 The nature of costs / expenses

 The resources and acceleration / expediting measures

Generally, the method for calculating the claim or damages is based on the type of
claim or theory of liability. There are two basic theories of liability: Contract or Tort.
A breach of contract can be material, total or partial. The extent of the breach
determines the measure of damages. A tort is generally a civil wrong which entitles
compensation for damages. A claim that a contractor was negligent in performing a
certain act can be the basis for a tort liability.

Typical Project Owner Delay Claim Components Include:

When the contractor delays the project, the owner can recover one of two types of
damages: liquidated damages or actual damages.

Liquidated damages are typically used when a determination of actual damages would
be difficult if not impossible to ascertain. The amount of and application of liquidated
damages are normally set forth in the contract. Some subcontracts incorporate the
liquidated damage clauses in the prime contract. The liquidated damage amount for a
specific time period are determined before the breach occurred. In California
liquidated damages are generally enforceable. Some contracts attempt to include both
liquidated damages and actual damage clauses. When both clauses are included in the
contract the liquidation damage clause maybe invalid. If the owner caused the delay
the liquidated damages provision will not be enforced. If there are concurrent causes to
delay which are attributable to the owner and the contractor the courts will generally
not enforce the clause. However, there are cases where the court has attempted to
apportion the damages.

When there is no liquidated damage provision in the contract the owner will be able to
collect its actual damages. If the owner has any direct involvement in the project its
actual damages can include: (1) additional supervisorial expenses, (2) other additional
expenses actually caused by the delay, (3) overhead expenses incurred during the delay
period, (4) if project is intended to be leased reasonable value of loss of use and the
lost rents which could not have been reasonably avoided, (5) if the project is not
intended to be leased reasonable value of loss of use, interest expense, interest expense
during the delay period and (6) any other reasonably foreseeable damages the owner
may have incurred including lost profits from a business.

Typical Contractors Delay Damage Components Include:

The components of a contractors delay claim include: (1) indirect costs that occurred
during the extended performance period, (2) home office overhead that was incurred
during the extended performance period, (3) increased (material escalation) material
direct costs that occur during the delay (4) lost productivity caused by the delay and
(5) other damages directly related to and attributable to the delay.

Indirect costs include job site overhead (e.g. project supervision costs), extended
general conditions or extended or unabsorbed overhead, job shack, portable toilet,
telephone, insurance, and job site power and water.

Home office overhead for the extended performance period can be calculated using
several formulas. The Eichleay formula is one method for calculating overhead. The
Eichleay formula resulted from a federal Board of Contract Appeal case against the
Eichleay Corporation. The formula is calculated as follows:
Overhead allocable to the contract equals contract billings divided by total billings for
the contract period times total company overhead for the contract period. Daily
contract overhead equals allocable overhead divided by days of performance. Amount
of company overhead equals daily contract overhead times number of delay days.

The formula cannot be applied to every claim. There are cases which limit its
application when there is not a total suspension of work. The formula is best used
where home office overhead incurred and other jobs did not absorb the overhead.
Other methods include modified versions of the Eichleay formula which are modified
to fit the contractors particular delay circumstance such as: (1) segmenting costs to the
delayed project, (2) using the same overhead percentage as that included in the bid and
(3) applying industry published overhead averages.

Direct costs include: (1) Equipment rental costs and equipment ownership expenses
(measured through rate manuals, depreciation, taxes and insurance) during the delay
period (2) Field labor if the scope of work is increased as a direct result of the delay or
if the hourly labor rate increases during the delay period (e.g demobilization and re-
mobilization expenses), and (2) Increased material costs if the scope of work is
increased or if the material cost increases during the delay period the contractor will be
entitled to that increased cost.

Delay damages can also include a contractors’ increased labor hours resulting from a
loss of the on-site labors efficiency. Disruption occurs when a contractor cannot
achieve the productivity that was originally anticipated. Productivity can also be
impacted by a delays ripple effect. Loss of productivity can be calculated using several
methods. Generally, a productivity claim seeks the increased labor cost. Typically,
each area of lost productivity is determined by comparing the bid to the actual cost.
Once, the area of lost productivity is determined the damages are calculated for each
individual item of work or task where productivity is lost. Some contractors attempt to
calculate the claim on a total overrun cost basis, but such an approach is disfavored. It
is thus very important to keep detailed time record when the project is disrupted. The
increased labor factors can be obtained through the following: Use of learning curves
and other similar models, time motion studies, expert witnesses, scientific models, and
comparisons to industry unit pricing standards.

Other damages that may be recovered include: (1) interest on the claim, (2) lost profits
on other jobs if it can be established that due to the delay the contractor couldn't get
other jobs during the delay period, typically, this occurs when a contractor bonding
capacity restricts further contracts until the existing work is completed.

Attorney fees are not recoverable unless there is an applicable attorneys fees
provisions. If there is an attorney's fees provision the prevailing party recovers the
fees, but in discretion of the judge. AIA documents attorneys fees provisions may not
always allow the prevailing party to recover attorneys fees.

If the party who has been damaged fails to mitigate damages it may not be able to
recover those damages which could have been mitigated. Thus it is important for the
contractor to make reasonable efforts to minimize the damages it sustains as a result of
a delay.

Delay claims require significant documentation.

 Pacing Delay
Causes:
Change Orders, Stop Orders or Suspensions and Force Majeure

Project Owner or Representative; Project Provider; Neither and Both

Project Owner or Representative: When causes are due to Project Owner(s) or their
representatives; project doers are entitled to time extension and compensations if warranted.
Such causes can be related to …..
Project Provider: When causes are due to Project Providers or their sub contractors; project
doers are not entitled to both time extensions and compensations, but are liable for delay
damages which will be payable to the project owner. Such causes can be related to …
Neither: When causes are due to neither the project owners or their representatives, nor the
project providers; project doers are served with only time extensions without any entitlement for
compensations and delay damages. Such causes can be related to ….
Both: When causes are due to both the project owners or their representatives and the project
providers; project doers are are only entitled for time extensions without any provisions for
compensations and delay damages. Such causes can be related to ….

5.3.3. Remedial Rights

Remedial rights are provisions entitled for non performances of the contractual obligation by the
contracting parties. Such rights can be entertained considering the efforts sustained by the
contracting parties in lieu of their duty to mitigate the non – performances. Unless otherwise
contracting parties can prove their effort for their duty to mitigate the occurrences of non
performances, remedial rights are not directly entiltled.

The following remedial rights are well known in construction contracts:

Time Extension: Time extension is a provision for justified time delays. Time extensions may or
may not be entitled for compensations. Using CPM, it is only justified delays that occur on the
critical path that is compensable. In none of the Conditions of Contract, the extension of time
clauses do not make any provisions of payment; and nor do delay and disruption clauses make
entitlement of extension of time a condition precedent to entitlement to compensation.
Therefore, entitlement of compensation due to time extension is strongly associated with causes
of delay and whether it is on critical activities or beyond floats in the case for non critical
activities.
 The primary effect of time extension is to relieve liabilities of delay damages such as liquidated
damages. However, if found justified for compensation, it will also bring in entitlements for
monetary claims.

Liquidated Damage and / or Compensations:

Acceleration: When projects delay or when projects are required to be completed before its
time, project doers are obliged to accelerate their services or works to satisfy the requirements.
The project doer is entitled to compensation and time extension, if and only if delays are justified
and at the same time compensable. Otherwise, the acceleration of projects will only serve to
relieve project doers from liabilities they should cover to the project owners.

Process: Notification; Justifications; Time Impact Analysis; Submission; Review and Approval

5.4. Price Variation Management System

5.4.1. Introduction
5.4.2. Variations: Additions, Excess in Quantities and Omissions
5.4.3. Provisional Quantity and Provisional Sum Administration
5.4.4. Cost Increase or Decrease
 Chapter 6. Claim and Dispute Management System
6.1. Claims Management System

6.1.1. Definition and Types

Claim is mostly concerned with entitlements and liabilities arising under, or as a result
of, a legally valid contract (Hughes & Barber, 1992). A construction claim is therefore
can be a demand for payment of additional compensation, adjustment of the parties'
respective contractual obligations, Extension of Time or compensating delay damages,
or any other change with regard to the contractual conditions or terms. Claim in
practice can also be understood in different ways based on the perceptions held by
contractual stakeholders. Wideman, 2001 reflected these views in three expressive
definitions; namely

A claim is a disguised form of a blackmail,

A claim is the last chance to bail out of a losing job, and
A claim is an assertion to a contractual right.

Such a perception is one of the major motto behind all the process of Claim
Administration and also a motive for either making claims or not making claims. That
is, claim is an emotive word that makes contractual stakeholders to take sides and
think the worst of each other. He further defined construction claim formally as a
legitimate request for additional compensation (cost and/or time) on account of a
change in the terms of the contract.

Further to this, Thesaurus and Synonyms of the word Claim from Microsoft Word,
2003 provided the following categorical meanings (Table 1).

Table 1: Different interpretations for the word claim

Ask for Right Assert Argue Accusation Receive
Call for Entitlement State Allegation Get
Meanings Demand Privilege Declare Contention Obtain
Apply for Retrieve
Request Collect
Willful Act Legally Properly
Interpretations Supported presented Negotiate Litigate Compensated

The very bases of such interpretations of the word claim indicate that any claim is:

A willful act by the claimant when s/he believes that there is no other way than
claiming to compensate for the loss s/he suffered during relationships,
 All of such willful act of the claimant should base on her/his right, entitlement and
privilege that can legally be supported,
All of such willful act by the claimant need to be articulated in such a way that it
proved the claim is properly presented and can be justified,
Whenever necessary, claim goes through different types of processes when they
become disputes among parties in a relationship, and negotiation can be considered
one form of such a process,
When claims reach its utmost and severe stage, its fate is totally geared to the formal
litigation process, and
When they are concluded, they are made for compensation for which the claimant
intends to retrieve an entitlement.
Claims can be associated with three major categories that can be understood as the
different types of claims. These are:

 Time Related Claims: Claims associated with delay or in time completion of projects where
either of the following six Entitlements or Penalties are subjected to:
o Time Extension only o Concurrent Compensations
o Liquidated Damages only o Bonus
o Time Extension and Cost o Reliving of Obligation
Compensation
 Cost Related Claims: Claims associated with monetary compensation where either of the
following entitlements or penalties are entertained:
o Additions requiring rate adjustments
o Price Changes
o Provisional sum adjustments
 Default by Contracting Parties: Claims associated with non performances of contractual
obligations such as:
o Delay in Payment Certificates
o Suspensions and Terminations
o ..

6.1.2. Claim Administration Processes

Claim administration process is understood as the process for the compensation of any
damage, and/or changes resulted during the implementation of Construction projects
which are called entitlements with quantum. This is because claims require to establish
both the liabilities as well as the damages incurred in any construction contract.
Construction contracts allow that all contracting parties will be entitled to make
claims.
The claim administration process is then understood as the process starting from a
willful act of the claimant through claim notification by either of the contracting
parties up to and including claims approval and acceptance by both the Contracting
parties for agreed or enforced compensations or otherwise called claim enforcement.

Either the Contractor or the Employer can initiate the claim administration process.
And, in some instances, the Engineer can also advice on a reasonable incorporation of
claims, on behalf of both the contracting parties, if the engineer believed that without
the treatment of such claims, the successful performance of the project will
considerably be affected. This is an obligation in the case of the Employer, but in no
case, used to accrue advantages only to the contractor.

Following the above interpretations for the word claim, accepted national and
international procedures, and findings from a research conducted recently, claim
administration process can generally fall into three major functions (Figure …). These
included Claim Submittal, Claim Processing and Claim Enforcement.

Claim Notification
Claim Preparation Claim Enforcement
Claim Submittal Claim Closure

Claim Submittal Claim Processing Claim Enforcement

Claim Handling
Dispute Resolution
Claim Approval

Figure ….: Claim Administration Process

Claim Submittal: This is a process by which the claimant is obliged to claim within a
reasonable period of time (28 – 30 days in most contracts) followed by her/his
preparation for all substantial documents and legal aspects supporting hers/his
entitlements for an official submittal. This constituted that a claim has been filed for its
consideration if all these three sub processes called Claim Notification, Claim
Preparation and Claim Submittal are fully undertaken by the claimant.

Claim Processing: This process initiates checking of the claim whether, it is legally or
contractually supported or not; documents provided are valid and reliable to
substantiate the claim for consideration or not; and overall procedural requirements
have been followed or not. After verifying the validity of the claim proper
computations and evaluations will be carried out to present the proposed compensation
for the contractual parties the claim is applicable to. Generally the sub process that
undertakes these requirements is termed as Claim Handling.

The contractual parties will pass through different dispute resolution system depending
on their acceptance over the proposed compensation varying from the simplest
mediation by the consulting engineer to the final court ruling in the form of litigation.
Basically, three types of dispute resolution systems are well recognized. These
included:

1. Preventive Dispute Resolution System including Partnering, Use of dispute

resolution advisors and Use of Facilitators for early neutral evaluation and advise to
prevent the happening of claims or their consequential disputes
2. Amicable Dispute Resolution System including Negotiation, Mediation, Conciliation
and use of Mini-Trials to administer the claim in a less formal, simple procedure, more
flexible, less adversarial and strictly confidential mode so as to avoid the time and cost
implication of claim processing.
3. Judgmental Dispute Resolution System including Adjucation or use of Dispute
review board, Arbitration and Litigation where the formal adjucatory or common law
system is applicable to bring the closure of claim processing.

This sub process where dispute was handled in any form of its resolution systems is
termed as Dispute Resolutions. Such dispute resolution systems require conducive
Macro and Messo environments such us legislations, policies, regulations, etc. above
all other things. Once the contractual parties agree on the final outcome of the claim
process then they have reached into a stage where the claim is approved.

Claim Enforcement: This is a stage where the approved claim is enforced and finally
becomes a closure therefore two sub processes are included. The claim enforcement
process will entertain the inclusion of the approved claim into payment certificates
where their enforcement is due.

Once this compensation or entitlement is due in accordance to the approved claim and
its enforcement requirements, then it is concluded for its closure. In order to account
for such an administration process contracts provide claim clauses with in their
provisions in their conditions of contract.

6.1.3. Contract Conditions

Here claim clauses which are set out in the MoWUD's SCC for construction of civil
work projects in Ethiopia, 1994 are considered and given in Table ….. These claim
clauses are largely similar to FIDIC's SCC, 1996 except in the case of delegating
Duties and Power of the Engineer by MoWUD. The duties and power of the Engineer
is limited such that it required special approvals of the MoWUD (ERA in the case of
Road projects) in connection with claim clauses causing:

 Repayment to contractors under clause 26.3,

 Cumulative Time Extension Exceeding 15% of the contract time under clause 44,
 Fixing rates under clause 52.2,
 variation exceeding 10% under clause 52.3,
 Increase or decrease of costs under clause 70, and
 Termination of contract under clauses 63 & 69.

From this summary of claim clauses one can generally classify claim entitlements and
quanta into two major types: Claim related to Variations in Time and Cost issues.

Table …: Claim clauses in SCC for construction of civil work projects,

MoWUD, 1994
Clause No. Description of claims Entitlement Due to
5.2 Ambiguities or discrepancies among several documents forming the Additional Cost + Time The Contractor
contract Extensions
6.4 Failure or inability to issue Engineering drawings with in reasonable Additional Cost + Time The Contractor
time causing disruption of progress. Extensions
12 Physical conditions or artificial obstructions which can not be Additional Cost + Time The Contractor
predictable Extensions
18 Additional boreholes or exploratory excavation Additional Cost + Profit The Contractor
20.1 Repairs due to damages, loss or injury from any of the excepted risks Additional Cost + Profit The Contractor
25 Contractor's failure to insure. Repayment successively The Employer
26.3 Compliance with statutes, Regulations, etc. Additional Cost The Contractor
27 Obstructions such as archeological and geological interests or Additional Cost The Contractor
structures
30.2 & 30.4 Protection or strengthening due to special loads to highways or Additional Cost + Profit The Contractor
bridges
30.3 & 30.4 Damages due to extraordinary traffic claims Repayment successively The Employer
31 Use of constructors belongings for other purposes by the Employer Additional Cost + Profit The Contractor
36.4 Tests additional to provided in the contract Additional cost The Contractor
38.2 Uncovering and making openings to inspected works Additional cost The Contractor
39.2 Removal of improper work & Material Repayment successively The Employer
40.1 Extra cost due to suspension Additional Cost + Time The Contractor
extension
42.1 Failure on the part of the Employer for possession on time Additional Cost + Time The Contractor
 Extension
47.1 Delay in completion time Liquidated damage The Employer
49.3 Cost due to remedy works other than contractors responsibility Additional cost + Profit The contractor
49.4 Remedy on contractor's failure Repayment The Employer
50 Searching for defects, imperfections, or faults Additional cost +Profit
52.1 Valuation of variations +/- cost The contractor/ The
Employer
63.1 & 63.3 Costs incurred by the Employer due to default by the contractor Repayment The Employer
64 Urgent remedial work made by the Employer Repayment The Employer
65.3 Damage due to special risks Additional cost + profit The Contractor
65.5 Increased costs due to special risks Additional cost
65.8 Payment after termination Additional cost The Contractor/
Repayment The Employer
69 Default by the Employer Additional cost + Time The Contractor
Extension
70.1 - 70.2 Changes in Cost & Legislation Additions / Omissions The contractor/ The
Employer

6.1.4. Major Causes for Claims

Generally, deviations from performance requirements among contractual stakeholders

whether it is related to completion time, or construction cost, or the fulfillment of its
quality and its intended purpose, or safety, health and environmental consequences can
trigger claims in construction contracts. Levy, 2000 outlined 11 reasons why claims
can be initiated. They are related to

poor or unclear tender and/or contract documents,

poor or inadequate administration of responsibilities by stakeholders, and
Unforeseen or uncertain situations during execution

causing changes due to variations in requirements. Wideman, 2001 has also identified
claim causes into three main categories:

Changed conditions
Additional works, and
Delay for cost overruns and time extension.

In both cases, they understood that, though complete and 100% clear tender and / or
contract documents can not be drafted due to uncertainties, it is possible to minimize
their potentials for breeds of contractual claims if proper and clear tender document is
prepared. And they also recognize in most contracts; errors, omissions and ambiguities
are common places. These, whether caused by poor or unclear tender and/or contract
documents; they can be good causes for changed conditions that incur both more time
and additional expenses.

Long and slow decision making process, Weak stakeholders’ relationships resulting
from unhealthy perceptions towards each other (see Wideman’s definitions), Lack of
conducive Macro and Messo environmental situations, and Subordinating common
interests to self-interest serving practices creates poor and inadequate administration of
responsibilities by stakeholders (Wubishet, 2004). Such situations are good grounds
for adversarial relationships that trigger claims and disputes.

Sub surface conditions that can not be reasonably revealed; and Unforeseen Political,
Economical, Societal and Technological uncertainties can also be one of the major
factors causing claims. From several experiences, it becomes a well known fact that
construction contracts are susceptible to a variety of factors that may result in time
and/or cost variations where legitimate claims can be considered and compensated. As
a result, claims and disputes in construction contracts can not be totally avoided which
can call upon identifying requirements for making a valid claim.

6.1.5. Requirements for a Valid Claim

Following the above theoretical reviews, what is important to know for stakeholders in
construction business is that they are aware of the following two main requirements:

Know the different ways of how to deal with claims and disputes together with
their merit and demerits, and
Know required procedures and avail necessary documents to make a valid claim.
Following this two requirements, fair and valid claim administration process requires:

Conducive environment such as Policies, Codes, Standards, Rules and Regulations

called “Macro Environments”. These can be considered as Policy and Regulation
related issues. These include:
 Lack of Clear Claim Administration and Dispute Resolution System
Institutional capacity and capability to act as a good link between Macro and Micro
Environments such that their requirements are aligned, developed and work for better
relationships called “Messo Environments”. These can be considered as stakeholders
relationships and capacity related issues. These include:
 Weak Stakeholders Relationships
 Weak Organizational Capacity
Company specific issues that considered internalizing factors with regard to claim
making called “Micro Environments”. These can be considered as weaknesses of
construction companies. These include:
  Unhealthy Competition
 Poor Information Management System

Before discussing the major factors outlined above why local contractors could not
make claim in the context of Ethiopia, an observation that has been made along the
claim administration processes are summarized in Table … to …. bellow. This is
because these observations can be good grounds for their explanations.

Discussions based on Observations and Informed Opinions

Table 3a: Claim Submittal process

Processes Regulations
Claims Submittals
 Notification When claims first become apparent, claims
notification will1 prevent rejected valid claims.
That is, late claims may deny the opportunity to
observe, investigate, and provide alternative
solutions for the circumstances encountered, and
are often seen with a degree of suspicion.
 Preparation The claimant shall follow contractual procedures
and conditions when preparing claims. Records
such as timely claims notification, instructions,
job diary, reports, time sheets, invoices,
photographs, difficulties encountered, and
schedules showing planned and executed, shall be
kept to serve as evidences and become supporting
documents during claim submittals.
 Submittals The claimant essentially shall provide a properly
documented and verifiable claim to the consultant
in charge. This include an executive summary of
the claim; explanation of how events given rise to
the claim; references to the specific contract
clauses related, proves and evidences for the
claim; a summary of mitigating action to avoid the
claim; and calculations and justifications for the
amounts claimed in time and/or cost.
Observed Issues
 Most claims are often made only after the
claimant has realized the consequences such as
delay for liquidated damage, or when no or less
profit is observed.
 Local Contractors capacity to claim
administration in general is very weak.
 Local contractors are less experienced and are
believed to be too less claim oriented.
 Supporting documents are weak and rarely found
in the case of local contractors.
 Practitioners are weak in handling claim
preparations
 Often contractors are deficient in presenting
verifiable claims and often tend to rely on
interpretive advantages of the claim conditions.
 Contractors claim submittals are more or less not
timely but after facts behind their failure to
complete the project as per the contractual
agreements.
 Employer's claim has never been caused unless in
the case of defenses.

These observations are supported by informed opinions and further clarifications made
with stakeholders in the study. Though mostly claim related issues are less open to the
public and researchers and these observations largely focus on contractors’ side, they
can be good inputs for this paper.
Table ….. tried to show the inability of contractors to make claims due to their lack of
capacity and capability with regard to their documentation system and lack of
experienced human resources to timely and contractually submit their valid claims.

Table …..: Claim Processing Process

Processes Regulations
Claims Processing
 Handling The consultant after investigating the claims
draws out his recommendation and sends to
the executing agency for consideration on his
part.
This review is then passed to MoI for
approval.
 Approval The MoI shall examine the claim and give a
final approval.
The approved claim will then sent to the
claimant for consideration on his part.
 Dispute If there is disagreement, the consultant
Resolution initiates its power for impartial mediation.
If mediation fails, the claim will enter its
final stage of arbitration.
Observed Issues
 The review process by the executing agencies pass
through many public bodies scrutiny depending on their
power and duties to approve certain amount of financial
limit, and hence a long decision making process.
 Executing Agencies capacity to handle claim is very
limited.
 Claim processing is generally less transparent.
 Local contractors are not often entertained.
 Consultants are not providing their impartial services.
 Arbitration took often too long.
 Arbitration is undertaken by MoI.

Table …. emphasizes on the nature of claim processing where non transparency

dominates due to weak relationships among stakeholders and also lack of conducive
environment for valid claims. There seems to be unhealthy perceptions which have
been reined to cause such weak stakeholders relationships that make worst the position
of making valid claims and often let to pass through a non transparent process.

Table ….: Claim Enforcement Process

Processes Regulations
Claims Enforcement
 Acceptance This process is dependent upon the acceptance
of claims by both the contracting parties with
or without dispute resolution.
 Closure Incorporation of the approved and accepted
claims into a contract and perform the
necessary consideration to the claimant will
conclude the claim administration process.
Observed Issues
 The researcher did not come across a case where claims
accepted by the contracting parties are reversed or
modified by the MoI.
 The researcher has come across three cases after court
ordering, negotiation results in less claim amounts.
 Claim amounts became part of the contract.
Table …. showed that it is better to use the first two dispute resolution systems
(Preventive and Amicable) and hereby advises for creation of conducive environments
for them than the adjucatory dispute resolution system. Now the three major
requirements are discussed below.

Discussions based on Requirements developed from largely literature reviews

Macro Environments: Generally, the Ethiopian Government has allocated an average

annual capital budget of 58.2% for public construction projects between 1997/98 and
2001/02 (Wubishet, 2004). This trend has continued till today with a variation of
between 40 to 60%.

The construction industry is constituted of building, communication, water works and

other physical infrastructures, of which the building sectors consumed considerably
low proportion of such capital budgets (relatively 8%).

Though the importance of the construction industry to the development demands of

Ethiopia was well recognized, its contribution to the GDP, HDI and other economic
factors for the country are not well presented so far. Besides, the Construction Industry
was highly fragmented before 2001, and highly diffused after Ministry of
Infrastructure came into place.

As a result of these two major factors, the construction industry till today does not
have clear guiding policies and principles which will help its development visions.
Consequently, the construction on site practices of the primary age has still dominated
the Ethiopian construction industry where uses of construction plants and equipments
are very minimal.

Besides, there are no clear claim administration and dispute resolution regulations
which creates conducive and fair environment for appropriate construction contract
administrations. In the absence of such conducive and fair macro environments, the
ability of local contractors to make valid claims and also the ability of regulatory
bodies such as MWUD to entertain such claims is very much limited.

Messo Environments: The perception behind contractual stakeholders to one another

based on a classical contractual relationship is a very critical problem that considered
claim as a potential ground for unethical practices. Such a preemptive thought caused
protracted and too suspected practices which prolong adversarial and fragmented
approach to contractual relationships.
Besides, Link organizations such as Owners, Beneficiaries and Regulatory authorities
together with contract administration consultants lack capacity in the contract
administration process in general. Predetermined completion time is not well thought
of, and scarcity of professionals in the field of contract management and
administration is considerable. As a result of these two Messo factors, it is mostly
unlikely that construction companies can make claims but rather await for possible
opportunities that the regulatory framework provides sometimes.

Micro Environments: Companies in the construction tenders are well recognized for
their low balling characteristics where extremely low costs are offered. This created
unhealthy competition which could not be reasonably controlled by their business and
professional associations. Rather it is only from regulatory body sides where such
control are tried to be exercised.

This practice put construction companies at high risk to carry out their obligations
which instigated protracted and overzealous contract administration processes in the
form of various claims. But in most cases these claims are incomplete due to poor
documentations and information management systems and at the same time their
presentations are not timely or according to contractual conditions.

As a result, these companies are let with neither be able to present a valid claim nor be
able to complete their contractual obligations. This in turn will cause projects to suffer
considerable delay such that claims are multiplied. The only way out for these
companies in such situations is often presenting themselves as victims of the system or
the environment they are operating in.

These unhealthy competitions together with their poor information and documentation
management system are considered vital reasons for the inability of construction
companies to make valid claims.
Case Study 7: Example
A project was signed on April 12, 1993 for a cost of Birr 6,047,883.90 and executed with the
following conditions;

 Handing over of site is made on............................. Sept. 21, 1993.

 Mobilization time.................................................. 30 Cal. days.
 Completion time ................................................... 660 Cal. days.
 Liquidated damages equals 1/1000 per unjustified delay of Cal. days of that part of
contract price limited to 15% of the contract price.
 The Contractor executed Site clearance and some parts of bulk excavation
amounting Birr 201,465.56 during the time of removing the minimum interference
of obstructions by the Employer.
 The following components of the project costs are as follows;

Project components Cost Scheduled days Remark

Dining hall 563,290.81 150 Cal. days
External roads 205,368.00 90 Cal. days Scheduled
Hay barn 127,132.42 90 Cal. days parallely
Lecture hall seats 229,500.00 30 Cal. days Scheduled
EELCO transformer 90,015.83 10 Cal. days parallely
Workshop roof truss 58,916.00 10 Cal. days
Others 4,772,660.84 -

 The following variations and Excess in quantities are executed;

Variation Variation
Description of works/ Excess in works/
works additions Quantities omissions
Cost 140,496.08 87,631.80 69,760.28

 The following change orders are given during execution;

Description of
work Requested by Approved by Remarks
Workshop roof Employer Consultant Design is
truss changed
Workshop wall Contractor Employer Masonry to
bricks
All down pipes Contractor Employer PVC to GS
sheets

 The following payment certificates are paid to the contractor as given in the
table below;

Payment Amount Consultant Employer pay Work executed amount

Certificate Nos. approved Approval date date during payment delay
P.C.N. 05 500,000 Oct. 2, 1994 Jan. 09, 1995 285,000
P.C.N. 07 325,000 Feb. 5, 1995 Mar. 2, 1995 500,000
P.C.N. 08 268,345 Apr. 11, 1995 Jun. 13, 1995 368,945

 The Employer has to pay within 30 Cal. days all payment certificates after
approval by the consultant and is liable for every days of delay to pay within such
periods to compensate the contractor the unpaid sum as per the Bank’s Saving
account interest which is 6% per annum compounded semi - annually.

 The project is completed and provisional acceptance was made on January 2, 1996.
 The contractor claims for Time Extensions are as tabulated below;

Time Extension Claims:

Claimed
No. Description of Claims Computations dates
1. Due to Variation order amount of 16 Cal.
Birr 140,496.08 (140,496.08 / 6,047,883.90) * 660 = 15,33 days days
2. Due to Excess in quantities amount 7 Cal. days
of Birr 59,633.45 (59,633.45 / 6,047,883.90) * 660 = 6.51 days
3. Design change to relocate Requested by the Contractor dated Oct. 20, 1993 and approval
buildings and roads to insure by the consultant and Employer was made on Oct. 30, 1993.
minimum interference with And the minimum interference were removed by the Employer,
existing trees, electric high tension with the consultation and approval of all public works authority
lines, water supply and sewerage for the regulations proper, on Nov. 20, 1993.
lines, etc. 30 Cal days
4. Design change for two components Requested by the Contractor dated Nov. 20, 1993 and Design
of the buildings, namely Dining changed and approved by the consultant and Employer was
hall and Hay burn made on Dec. 22, 1993 for Dinning hall and Dec. 18, 1993 for 32 Cal.
Hay burn. days
5. Design change for the roof truss of Requested by the Contractor dated May. 4, 1994 and Design
workshop building. changed and approved by the consultant and Employer was 15 Cal.
made on May. 19, 1994. days
6. Change in walling material for Requested by the Contractor dated Apr. 4, 1993 and acceptance
Workshop building by the Employer was made on May. 13, 1994. 23 cal. days
7. Change in down pipes material for Requested by the Contractor dated Aug. 9, 1994 and acceptance
all buildings. by the Employer was made on Aug. 25, 1994. 16 Cal days
8. Fire break out in lecture hall Agreement made on Nov. 2, 1994 to complete within 120 Cal.
producing factory days. Fire breakout on Jan. 20, 1994. Another order was made
to another factory and lecture hall seats completed on May 2, 92 Cal.
1995. days
9. EELCO Transformer installation Request made to EELCO dated Jun. 5, 1994 and Estimate from 60 Cal days
EELCO obtained on Aug. 4, 1994.
10. Change in working days from 6 660 / 30 = 22, then 22 * 4 * 0.5 = 44 Working days 44 Cal.
days a week to 5 days a week days
11. Due to bad weather condition Assume the effect extends itself on the project by 20%, then
during the two rainy seasons in the 120 * 2 * 0.20 = 48 Cal. days. 48 Cal.
construction period. days
12 Permission delay from Request made to Municipality dated Feb. 8, 1994 and
Municipality for the construction permission granted on Mar. 22, 1994.
of External roads and connection to 31 Cal.
the existing Municipal sewer point. days
13. Delay in Payment certificate No. 5 See table above 104 Cal.
and 8. days

 The following table gives information on Changes in cost due to the inflation of
Economy to compute price variations compensations;

Quantity Unit rate of material

Contract Total Executed Executed Based Rate Highest of Based for bid Rate after
Material Document Executed before after for bid before and Rate before increase increase
Increase Increase increase
Cement (Qts.) 250,000 908.57 125.33 783.24 24.14 37.35 37.35 42.22
Coarse aggregate
(M3) 34,788.18 126.43 17.44 108.99 38.00 40.00 40.00 65.00
Timber (M3) 932.79 3.39 0.47 2.92 500.00 1500.00 2000.00 500.00
Steel Reinforcement
(Kg) 237,541 863.20 119.07 744.13 3.00 3.15 3.15 4.20
8mm thick
Chipwood (M2) 520 518.44 None 518.44 8.65 14.65 14.65 17.95
 Seco profile
Windows and doors
(Kg) 2610 2608.06 None 2608.06 5.00 5.10 5.10 8.50
Asphalt (Drum) 270 269.95 None 269.95 110.00 285.75 285.75 475.00
Date coverage = Date price
Jan. 26, 1995 - Aug. changed = Apr.
08, 1995 01, 1995
N.B. Based for bid is either taken from the basic price list of materials or computed as
60 - 70 % of the unit prices quoted in the contract document.

Answer the following questions:

Part A

1. Work out the total delay of the Project.

2. Work out the justified delay of the Project.
3. Work out the unjustified delay of the Project.
4. Compute the Liquidated Damage amount to be compensated for the
Employer.
5. Compute the unpaid sum compensation to the contractor by the Employer in
connection to dalliance of payment certificates.
6. Compute the compensations due to the contractor and the Employer resulting from
changes in cost.
Part B

After computing those in Part A, Describe the project profile and give your
recommendations to:

1. the Employer,
2. the contractor, and
3. the consultant.

Taking yourself as their representatives, and Employer’s representative in the case of

the Contractor and vice versa.

Part C

1. How do you make sure the material rates before and after increases are correct?
2. Why is necessary to compute Highest of basic prices for bid and rate before
increase?
3. If the contractor exercised default by the Employer during the delay of P.C. No. 8,
what would have been the profile of the project?
4. When do you think the completion time of the project be in order the contractor be
released of the obligation of liquidated damages?

Good Luck
Solutions
Part A
1. Total delay of the project:

Contract Date = April 12, 1993.

Handing over site Date = September 21, 1993 = Commencement Date
Mobilization Time = 30 Cal. days.
Starting Date = Commencement Date + Mobilization Time.
= Sept. 21, 1993 + 30 Cal. days.
= Oct. 21, 1993.
Contract Time = 660 Cal. days.
Completion Date as per the contract = Starting Date + Contract Time.
= Oct 21, 1993 + 660 Cal. days.
= Aug. 12, 1995.
Actual Completion Date = Jan. 2, 1995.
Total delay of the project = Actual Completion Date - Completion Date as
per the contract.
= Jan. 2, 1995 - Aug. 13, 1995.
= 143 Cal. days.
Therefore; the total delay of the project was 143 Cal. days.
 2. Justified delay of the project:
Time delay justifications are worked out as tabulated below;
No. Description of Claims
1. Due to Variation order amount
of Birr 140,496.08
2. Due to Excess in quantities
amount of Birr 59,633.45
3. Design change to relocate
buildings and roads to insure
minimum interference with
existing trees, electric high
tension lines, water supply and
sewerage lines, etc.
4. Design change for two
components of the buildings,
namely Dining hall and Hay
burn
4. Design change for the roof
truss of workshop building.
6. Change in walling material for
Workshop building
7. Change in down pipes material
for all buildings.
8. Fire break out in lecture hall
producing factory
(140,496.08 / 6,047,883.90) * 660 = 15,33
days
(59,633.45 / 6,047,883.90) * 660 = 6.51
days
Requested by the Contractor dated Oct. 20,
1993 and approval by the consultant and
Employer was made on Oct. 30, 1993. And
the minimum interference were removed by
the Employer, with the consultation and
approval of all public works authority for
the regulations proper, on Nov. 19, 1993.
Requested by the Contractor dated Nov. 20,
1993 and Design changed and approved by
the consultant and Employer was made on
Dec. 22, 1993 for Dinning hall and Nov. 18,
1993 for Hay burn.
Requested by the Contractor dated May. 4,
1994 and Design changed and approved by
the consultant and Employer was made on
May. 19, 1994.
Requested by the Contractor dated Apr. 4,
1993 and acceptance by the Employer was
made on May. 13, 1994.
Requested by the Contractor dated Aug. 9,
1994 and acceptance by the Employer was
made on Aug. 25, 1994.
Agreement made on Nov. 2, 1994 to
complete within 120 Cal. days. Fire
breakout on Jan. 20, 1994. Another order
was made to another factory and lecture hall
seats completed on May 2, 1995.
Justified
Computations delay
Variation + Excess in quantities - Omissions = 140,496.08 + 87,631.80 -
69, 760.28 = 158,367.60.
17 Cal.
Delay justified = (158,367.60 / 6,047,883. 90) * 660 = 17 Cal. days. days
Delay to be claimed is From Oct. 20, 1993 to Nov. 19, 1993 = 30 Cal.
days. But during this period the contractor executed works amounting
201,465.56 which saves (201,465.56 / 6,047,883.90) * 660 = 22 Cal.
days. Therefore, delay to be justified sshould be = 30 - 22 = 8 Cal. days
30 Cal
days
Dinning hall: Completion time as per contract = (Component Cost /
Contract price) * contract time = (563.291.81/ 6,047,883.90) * 660 = 62
Cal. days. Completion time as per schedule is 150 Cal. days. Therefore;
Completion time for the dining hall will be 150 Cal. days. Delay to be
claimed is From Nov. 20, 1993 to Dec. 22, 1993 = 33 Cal. days which is
a proportion of the total work; ie, 33 / 660 = 0.05. Therefore delay to be
justified should be = 0.05 * 150 = 7.5 Cal. days. Similarly for Hay burn,
justified delay should be 4 Cal. days. Since both components are 7. 5 Cal.
scheduled parallely, the total justified delay is taken to be 7.5 Cal. days days
Completion time as per contract = (Component Cost / Contract price) *
contract time = (58,916/ 6,047,883.90) * 660 = 7 Cal. days. Completion
time as per schedule is 10 Cal. days. Therefore; Completion time for the
roof truss of the workshop will be 10 Cal. days. Delay to be claimed is
From May. 4, 1994 to May. 19, 1993 = 15 Cal. days which is a
proportion of the total work; ie, 15 / 660 = 0.023. Therefore delay to be 0.23 Cal.
justified should be = 0.023 * 10 = 0.23 Cal. days. days
Since Changes are initiated and requested by the contractor for cost
advantage and easy availability with construction, and could he execute
as per contract if reply delayed, therefore; such delays are not
justifyable.
-
Completion time as per contract = (Component Cost / Contract price) *
contract time = (229,500 / 6,047,883.90) * 660 = 25.05 Cal. days.
Completion time as per schedule is 30 Cal. days. Therefore; Completion
time for the lecture hall seats will be 30 Cal. days. Delay to be claimed is
From Nov. 2, 1994 to May. 2, 1995 = 92 Cal. days which is a proportion

9. EELCO Transformer
installation
10. Change in working days from 6
days a week to 5 days a week
11. Due to bad weather condition
during the two rainy season in
the construction period.
12 Permission delay from
Municipality for the
construction of External roads
and connection to the existing
Municipal sewer point.
13. Delay in Payment certificate
No. 5 and 8.
The total justified delay is then, 17 + 30 + 7. 5 + 0.23 + 5 + 1 + 5 + 33 = 98.73 Say 99 Cal. days.
Request made to EELCO dated Jan. 5, 1994
and Estimate from EELCO obtained on
Aug. 4, 1994.
660 / 30 = 22, then 22 * 4 * 0.5 = 44
Working days
Assuming the effect extends itself on the
project by 20%, then 120 * 2 * 0.20 = 48
Cal. days.
Request made to Municipality dated Feb. 8,
1994 and permission granted on Mar. 22,
1994.
See table above
of the total work; ie, 92 / 660 = 0.1394. Therefore delay to be justified 5 Cal.
should be = 0.1394 * 30 = 4.2 Cal. days. days
Completion time as per contract = (Component Cost / Contract price) *
contract time = (90,015.83 / 6,047,883.90) * 660 = 9.82 Cal. days.
Completion time as per schedule is 10 Cal. days. Therefore; Completion
time for the transformer installation will be 10 Cal. days. Delay to be
claimed is From Jan. 5, 1994 to Aug. 4, 1994 = 60 Cal. days which is a
proportion of the total work; ie, 60 / 660 = 0.091. Therefore delay to be
justified should be = 0.091 * 10 = 1 Cal. days. 1 Cal days
The contract time is based on Cal. days, therefore changes in working
days has no effect on the project. -
Weather conditions shall be considered in the contract time. Unless
adverse and unexpected weather conditions pertain to delay the project,
no delays shall be justified with this regard.
-
Completion time as per contract = (Component Cost / Contract price) *
contract time = (205,368.00 / 6,047,883.90) * 660 = 22.41 Cal. days.
Completion time as per schedule is 90 Cal. days. Therefore; Completion
time for the transformer installation will be 90 Cal. days. Delay to be
claimed is From Feb. 8, 1994 to Mar. 22, 1994 = 31 Cal. days which is a
proportion of the total work; ie, 31 / 660 = 0.047. Therefore delay to be 5 Cal.
justified should be = 0.047 * 90 = 4.23 Cal. days. days
Delay to be claimed From table above = 104 Cal.days. However, the
contractor executes work amounting 285,000 + 368,945 = 653,945
which is a proportion of the total work; ie, 653,945 / 6,047,883.90 =
0.108. Therefore, justified delay would be 104 - (0.108 * 660) = 33 Cal. 33 Cal.
days days
3. Unjustified delay of the project
Unjustified delay = Total delay - Justified delay
= 143 - 99
= 44 Cal. days.
Therefore, Unjustified delay of the project is 44 Cal. days.
4. Liquidated damages
The liquidated damage will be applicable for unjustified delays, therefore; the delay to be considered for
this part is 44 Cal. days.
Liquidated damage = 1/ 1000 per unjustified delay of that part of the contract price.
Unjustified delay = 44 Cal. days.
The part of the contract price included in the unjustified delay is:
= (44 / 660) * 6,047,883.90
= 403,192.26
Liquidated damage = (1/ 1000) * 44 * 403,192. 26
= 17,740.46
Limit of liquidated damage = 10% (6,047,883.90)
= 604,788.39. > 17,740.46
Therefore, the liquidated damage of the project is Birr 17,740.46.
5. Unpaid sum compensation
Amount of delayed payment certificate and delayed days:
P.C.N. 05 = Birr 500,000 and delayed for 103 - 30 = 73 Cal. days.
P.C.N. 08 = Birr 268,345 and delayed for 64 - 30 = 34 Cal. days.
Unpaid sum compensation for P.C.N. 05 is computed as:
= 500,000 * (73 / 365) * (6 / 100)
= 6000.
Unpaid sum compensation for P.C.N. 08 is computed as:
= 268,345 * (34 / 365) * (6 / 100)
= 149.50.
The total unpaid sum = 6000 + 149. 50
= 6149. 50.

Therefore, the total unpaid sum compensation = Birr 6149.50.

6. Change in cost compensation

Quantity Unit Rate of Material

Material Executed Highest of Based for bid Rate after Unit rate used for changes
after Increase and Rate before increase increase in cost compensations
Cement (Qts.) 783.24 37.35 42.22 4.87 3,814.38
Coarse aggregate (M3) 108.99 40.00 65.00 25.00 2,724.75
Timber (M3) 2.92 2000.00 5000.00 3000.00 8,940.00
Steel Reinforcement (Kg) 744.13 3.15 4.20 1.05 781.34
8mm thick Chipwood (M2) 518.44 14.65 17.95 3.31 1,716.04
Seco profile Windows and
doors (Kg) 2608.06 5.10 8. 50 3.40 8,867.40
Asphalt (Drum) 269.95 285.75 475.00 189.25 51,088.04
6.2. Alternative Dispute Resolution System

6.2.1. Preventive DRS

6.2.2. Amicable DRS
6.2.3. Judiciary DRS
Chapter 7. Procurement and Contract Management in Ethiopia
7.1. Past Developments
7.2. Current Situations
7.3. The Way Forward
Project Works

1. Compare and Identify Merits and Demerits of the different Procurement and Contract Delivery Systems
2. Compare and Identify Merits and Demerits of the different Procurement Methods
3. Compare and Identify Merits and Demerits of the different Contract Types
4. Compare and Identify Merits and Demerits of General Conditions of Contract for Construction Works: MWUD - 1994, FIDIC
– Latest, WB – Latest, ADB – Latest,
5. SWOT analysis on Applicable Laws, Rules, Regulations and Guidelines for Procurement and Contract Management

Assignments

1. Procurement Evaluation
2. Contract Administration

Group Discussions

1. Delivery System
2. Procurement Method
3. Contract Types
4. Terms of References
5. Instruction to Bidders
6. Conditions of Contract
7. Advance Payment Provisions
8. Warranties and Guarantees
Case Study 1:

 A Contract for surface water drainage to install 1500 m of 30 cm diameter clay pipes requires trench excavation
to a depth between 3 to 3.5 m.
 The Contractor after excavating 200 m of trench called upon the Engineer for go ahead to lay the pipes.
 In the mean time a nearby 600 m water main bursts and the trench collapses. The water could not be stopped
until two days. Work can not be started until the water main is repaired and it takes three weeks.
 Investigation revealed that there was a bend on the water main with a thrust block close to the edge of the
trench and its effect was not considered when the trench support system was designed.
 The Contractor took 30 days to re-excavate and could not satisfy the original design requirement for a narrow
trench condition (130 cm wide).
 Possible solutions suggested by the Engineer for such a problem is either using cast iron pipe instead of the
clay pipes originally specified or to provide a concrete surrounding the original pipe specified.
 The insurance company accepts the event and agrees to cover the cost for the removal of the materials washed
away, its replacement with borrowed fill for the damaged trench support system, and valid claim due to the
water main thrust.
 The insurer clearly indicate that the costs due to the two possible solutions recommended by the Engineer, any
cost associated with the delay of the work and associated liquidated damages are outside its policy and can not
be covered.

Questions:

 Identify clauses of the conditions of contract related to the case

 Identify possible effects of the case
 As a Contract Administration expert propose a viable advice to the Contractor
Case Study 2:

 A Construction Management Consultant entered into a turnkey contract with a Contractor to design and
construct a large storage warehouse by the River Side.
 The site information investigated by the Contractor showed 0.5 m of made up ground over 6 m of soft clay
overlaying a thick layer of sandy gravel.
 A Foundation Report by the Geo-technical investigation team is driven precast concrete piles 8 m deep to the
sandy gravel level.
 After the contract was made and before the piles are driven, the municipality river conservancy board approved
flood protection works which would raise the bank level by 1.5 m. Accordingly; the Construction Management
Consultant in consultation with the Employer provided a work order to raise the floor level of the warehouse by
1.65 m.
 The Contractor following the work order notified that the precast piles already ordered can not be lengthened
and additional piles are required for additional negative skin friction induced by the rise of the bank level.
 The Construction Management Consultant responds that the foundation type was made by the contractor and
that the valuation should be made by increasing the piling item prices pro rata and the design should have
allowed the negative skin friction even for the 0.5 m fill originally recommended.

Questions:

 Identify clauses of the conditions of contract related to the case

 Identify possible effects of the case
 As a Contract Administration expert propose a viable advice if you are working in
o The Construction Management Consultancy Office
o The Contractor Company
Case Study 3:

 The Main Contractor who contracted to construct a bridge for widening an urban motorway subcontracted the
construction of piling and abutment works.
 The Main Contractor was responsible for the piling design by the contract and this requirement was passed to
the sub contractor.
 After the sub contract has been let, the Municipality which is the Employer and The Engineer at the same time
informed the Main Contractor that noise levels should be limited and that pile driving will not be permitted.
 The Sub – Contractor submits a claim that it had intended to use driven precast piles that it will now have to
use Augured cast in place piles which will take longer and cost more.

Questions:

 Identify clauses of the conditions of contract related to the case

 Identify possible effects of the case
 As a Contract Administration expert propose a viable advice if you are working in
o The Main Contractor Office
o The Sub Contractor Office
o The Municipality Office
Case Study 4:

 The City of Addis Ababa planned to construct four parks for its Millennium celebrations.
 The Works are divided in four lots (A, B, C and D) which are expected for completion within 15, 18, 21 and 24
weeks.
 The substructure work of each section was planned to take five weeks. The remaining works including Road
and Drainage works will be completed by end of 32 weeks.
 Liquidated damages are fixed in the appendix to the form of tender at 1/1000 per day to a limit of 15 % of the
contract price.
 Progress is slower because of three reasons: unavailability of resources, Heavy rainfall during March for four
weeks, and changes in design.
 The changes in design caused revision for Section A and B are ready at the End of week 12 and 22
respectively. Section C and D are unchanged.
 The Electric source which should be available by EEPCO has been delayed by three weeks due to a decision to
increase the power requirement by 200 %.
 The Engineer and the Contractor are pressed by the City Council Millennium Committee to ensure the works
are completed within the time table, even if it involves additional expenses.

Questions:

 Identify clauses of the conditions of contract related to the case

 Identify different alternatives to complete the proposed works
 As a Contract Administration expert propose a viable advice if you are working in
o The AA City Council
o The Engineer Office
o The Contractor Office
Case Study 5
 A Contractor was recommended to make contract with the Employer based on the following Evaluation Result:
 The lowest bidder is disqualified because his price is too low (40 % less than the Adjusted Bid
Estimate computed using a quarter of the Engineers’ Estimate and three quarters of the Average
Bidders Estimate).
 The Employer insisted that the bid shall be awarded to the lowest bidder, and The Employer
Representative disagree and recommended the least evaluated bidder using the +/- 20 % disqualifying criteria.
 The Employer after taking up the case with the financier, they agree to award the contract to the
lowest bidder and Contract was signed between the Employer and the Contractor.
 After the work is progressed the following happened
 The contractor can only execute 25 % of the works within 65 % of the completion time
 Currency is devaluated from Birr 8 to Birr 11 at the 65 % of the completion time
 Before the devaluation 10 % of additional works were carried out by the contractor
 The Regulatory Body allow 33 % compensation for the devaluation but only for justified delays of
executed works and planned remaining works
 The Contractor could only justify 30 % of the total delay
 The Contractor was not yet paid the variation works executed so far
 The Contractor Claimed in addition to the justified time delay, the unpaid amount allowed for the
price escalation compensation and the variation works to be executed

Taking the above case into consideration,

1. Identify clauses of the conditions of contract related to the case and

If you are
2. The Consultant, what will be your action / decision?
3. The Employer, what will be your action / decision?
4. The Regulatory Body, what will be your action / decision?
5. The Financier, what will be your action / decision?
Case Study 6
The Employer was short of budget for five months, and two payment certificates were delayed for more than they
should be due. Consequently, the contractor claimed Time Extension and Employer’s Default and suspended
work after giving notice prior to the Employer. The Employer then paid both the payments after five months and
requested the continuation of the project. The contractor also requested for compromise to his earlier defaults with
regard to his unjustified delay for four months and refused to continue the project before his request settles down.

Taking the above case into consideration,

1. Identify clauses of the conditions of contract related to the case and

If you are
2. The Consultant, what will be your action / decision?
3. The Employer, what will be your action / decision?
4. The Regulatory Body, what will be your action / decision?
Case Study 7
A Contract was signed b/n the employer and the contractor on January 19, 2004 with the following facts:

 Project Cost = 10 Million Birr

 Completion Time = 36 Months
 Liquidated damage = 1 / 100 per delay of Calendar day
 Limit of Liquidated Damage = 10 % of the Project Cost
 Banks interest on saving account = 3 % per annum compounded monthly
 Retention = 10 % of the executed work
 Rebate = 2.5 % of the Project Cost

The Contractor’s progress on January 19, 2006 was found to be 45 %.

Variation works done until January 19, 2006 was amounted to 500,000 Birr.
The 2nd and the 5th payments were delayed for two months amounting Birr 600,000 and Birr 350,000.

As a Consultant workout
1. the total and justified delay of the project
2. the liquidated damage
3. Payments delay compensations
Determine the position of the project and recommend action required?
Assume no other claim is filed by the contractor and / or the Employer.
Case Study 8
A project was signed on May 12th, 2004 for a contract price of Birr 8,050,354.90 and Executed with the following
conditions:

 Handing over of site was made on May 15th, 2004

 Mobilization Time 21 Cal. Days
 Completion Time 800 Cal. Days
 Liquidated Damages equals 1 / 1000 per unjustified delay of cal. Days but limited to 15 % of the total
Contract Price
 The following alterations were made and executed
o Additions Birr 137, 256.00
o Omissions Birr 128,436.00
o Executed amount below quantities Birr 8,820.00
 Payment Certificate No. 06 amounting Birr 670,325.85 was delayed for a total of 90 cal. Days due to
budgetary problems. The Contractor executed during this period Birr 128,000.00
The Contractor’s claims for Time extension were:
 Due to Alterations
 Due to delay in Payment Certificate No. 6
 Design change for roof structure Requested by the Employer on May 12, 2005; and Replied by the
consultant on Sept 20, 2005. The Roofing was scheduled as per the contract from July 2005 to Nov. 2005
whose cost is 1,350,405.35. Work executed during this period, which was parallely scheduled as per the
contract equals Birr 250,000.00
The Project was completed and Provisional Acceptance was made on January 16, 2006.

Part A
1. Determine the total delay of the project
2. Determine the Liquidated damage due to the Employer
3. Determine the unpaid sum compensation due to delay of Payment Certificate No. 06 due to the contractor
Part B
4. After computing those in part A, Write a report on the project profile as a Contract Administrator
Case Study 9: Example
A project was signed on April 12, 1993 for a cost of Birr 6,047,883.90 and executed with the following conditions;

 Handing over of site is made on ............................. Sept. 21, 1993.

 Mobilization time .................................................. 30 Cal. days.
 Completion time ................................................... 660 Cal. days.
 Liquidated damages equals 1/1000 per unjustified delay of Cal. days of that part of contract price
limited to 15% of the contract price.
 The Contractor executed Site clearance and some parts of bulk excavation amounting Birr 201,465.56
during the time of removing the minimum interference of obstructions by the Employer.
 The following components of the project costs are as follows;

Project components Cost Scheduled days Remark

Dining hall 563,290.81 150 Cal. days
External roads 205,368.00 90 Cal. days Scheduled
Hay barn 127,132.42 90 Cal. days parallely
Lecture hall seats 229,500.00 30 Cal. days Scheduled
EELCO transformer 90,015.83 10 Cal. days parallely
Workshop roof truss 58,916.00 10 Cal. days
Others 4,772,660.84 -

 The following variations and Excess in quantities are executed;

Variation Variation
Description of works/ Excess in works/
works additions Quantities ommisions
Cost 140,496.08 87,631.80 69,760.28

 The following change orders are given during execution;

Description of
work Requested by Approved by Remarks
Workshop roof Employer Consultant Design is
truss changed
Workshop wall Contractor Employer Masonry to
bricks
All down pipes Contractor Employer PVC to GS
sheets

 The following payment certificates are paid to the contractor as given in the table below;

Payment Amount Consultant Employer pay Work executed amount

Certificate Nos. approved Approval date date during payment delay
P.C.N. 05 500,000 Oct. 2, 1994 Jan. 09, 1995 285,000
P.C.N. 07 325,000 Feb. 5, 1995 Mar. 2, 1995 500,000
P.C.N. 08 268,345 Apr. 11, 1995 Jun. 13, 1995 368,945

 The Employer has to pay within 30 Cal. days all payment certificates after approval by the consultant
and is liable for every days of delay to pay within such periods to compensate the contractor the unpaid
sum as per the Bank’s Saving account interest which is 6% per annum compounded semi - annually.

 The project is completed and provisional acceptance was made on January 2, 1996.

The contractor claims for Time Extensions are as tabulated below;

 Time Extension Claims:

Claimed
No. Description of Claims Computations dates
1. Due to Variation order amount of 16 Cal.
Birr 140,496.08 (140,496.08 / 6,047,883.90) * 660 = 15,33 days days
2. Due to Excess in quantities amount 7 Cal. days
of Birr 59,633.45 (59,633.45 / 6,047,883.90) * 660 = 6.51 days
3. Design change to relocate Requested by the Contractor dated Oct. 20, 1993 and approval
buildings and roads to insure by the consultant and Employer was made on Oct. 30, 1993.
minimum interference with And the minimum interference were removed by the Employer,
existing trees, electric high tension with the consultation and approval of all public works authority
lines, water supply and sewerage for the regulations proper, on Nov. 20, 1993. 30 Cal days
lines, etc.
4. Design change for two components Requested by the Contractor dated Nov. 20, 1993 and Design
of the buildings, namely Dining changed and approved by the consultant and Employer was
hall and Hay burn made on Dec. 22, 1993 for Dinning hall and Dec. 18, 1993 for 32 Cal.
Hay burn. days
5. Design change for the roof truss of Requested by the Contractor dated May. 4, 1994 and Design
workshop building. changed and approved by the consultant and Employer was 15 Cal.
made on May. 19, 1994. days
6. Change in walling material for Requested by the Contractor dated Apr. 4, 1993 and acceptance
Workshop building by the Employer was made on May. 13, 1994. 23 cal. days
7. Change in down pipes material for Requested by the Contractor dated Aug. 9, 1994 and acceptance
all buildings. by the Employer was made on Aug. 25, 1994. 16 Cal days
8. Fire break out in lecture hall Agreement made on Nov. 2, 1994 to complete within 120 Cal.
producing factory days. Fire breakout on Jan. 20, 1994. Another order was made
to another factory and lecture hall seats completed on May 2, 92 Cal.
1995. days
9. EELCO Transformer installation Request made to EELCO dated Jun. 5, 1994 and Estimate from 60 Cal days
EELCO obtained on Aug. 4, 1994.
10. Change in working days from 6 660 / 30 = 22, then 22 * 4 * 0.5 = 44 Working days 44 Cal.
days a week to 5 days a week days
11. Due to bad weather condition Assume the effect extends itself on the project by 20%, then
during the two rainy seasons in the 120 * 2 * 0.20 = 48 Cal. days. 48 Cal.
construction period. days
12 Permission delay from Request made to Municipality dated Feb. 8, 1994 and
Municipality for the construction permission granted on Mar. 22, 1994.
of External roads and connection to 31 Cal.
the existing Municipal sewer point. days
13. Delay in Payment certificate No. 5 See table above 104 Cal.
and 8. days

 The following table gives information on Changes in cost due to the inflation of Economy to
compute price variations compensations;

Quantity Unit rate of material

Contract Total Executed Executed Based Rate Highest of Based for bid Rate after
Material Document Executed before after for bid before and Rate before increase increase
Increase Increase increase
Cement (Qts.) 250,000 908.57 125.33 783.24 24.14 37.35 37.35 42.22
Coarse aggregate
(M3) 34,788.18 126.43 17.44 108.99 38.00 40.00 40.00 65.00
Timber (M3) 932.79 3.39 0.47 2.92 500.00 1500.00 2000.00 500.00
Steel Reinforcement
(Kg) 237,541 863.20 119.07 744.13 3.00 3.15 3.15 4.20
8mm thick
Chipwood (M2) 520 518.44 None 518.44 8.65 14.65 14.65 17.95
Seco profile
Windows and doors
(Kg) 2610 2608.06 None 2608.06 5.00 5.10 5.10 8.50
Asphalt (Drum) 270 269.95 None 269.95 110.00 285.75 285.75 475.00
Date coverage = Date price
Jan. 26, 1995 - Aug. changed = Apr.
08, 1995 01, 1995
 N.B. Based for bid is either taken from the basic price list of materials or computed as 60 - 70 % of the unit
prices quoted in the contract document.

Answer the following questions:

Part A

7. Work out the total delay of the Project.

8. Work out the justified delay of the Project.
9. Work out the unjustified delay of the Project.
10. Compute the Liquidated Damage amount to be compensated for the Employer.
11. Compute the unpaid sum compensation to the contractor by the Employer in connection to delayance
of payment certificates.
12. Compute the compensations due to the contractor and the Employer resulting from changes in cost.
Part B

After computing those in Part A, Describe the project profile and give your recommendations to:

4. the Employer,
5. the contractor, and
6. the consultant.

Taking yourself as their representatives, and Employer’s representative in the case of the Contractor and
vice versa.

Part C

5. How do you make sure the material rates before and after increases are correct?
6. Why is necessary to compute Highest of basic prices for bid and rate before increase?
7. If the contractor exercised default by the Employer during the delay of P.C. No. 8, what would have
been the profile of the project?
8. When do you think the completion time of the project be in order the contractor be released of the
obligation of liquidated damages?

Good Luck
Solutions
Part A
2. Total delay of the project:

Contract Date = April 12, 1993.

Handing over site Date = September 21, 1993 = Commencement Date
Mobilization Time = 30 Cal. days.
Starting Date = Commencement Date + Mobilization Time.
= Sept. 21, 1993 + 30 Cal. days.
= Oct. 21, 1993.
Contract Time = 660 Cal. days.
Completion Date as per the contract = Starting Date + Contract Time.
= Oct 21, 1993 + 660 Cal. days.
= Aug. 12, 1995.
Actual Completion Date = Jan. 2, 1995.
Total delay of the project = Actual Completion Date - Completion Date as per the contract.
= Jan. 2, 1995 - Aug. 13, 1995.
= 143 Cal. days.
Therefore; the total delay of the project was 143 Cal. days.
 2. Justified delay of the project:
Time delay justifications are worked out as tabulated below;
No. Description of Claims
1. Due to Variation order amount
of Birr 140,496.08
2. Due to Excess in quantities
amount of Birr 59,633.45
3. Design change to relocate
buildings and roads to insure
minimum interference with
existing trees, electric high
tension lines, water supply and
sewerage lines, etc.
4. Design change for two
components of the buildings,
namely Dining hall and Hay
burn
4. Design change for the roof
truss of workshop building.
6. Change in walling material for
Workshop building
7. Change in down pipes material
for all buildings.
8. Fire break out in lecture hall
producing factory
(140,496.08 / 6,047,883.90) * 660 = 15,33
days
(59,633.45 / 6,047,883.90) * 660 = 6.51
days
Requested by the Contractor dated Oct. 20,
1993 and approval by the consultant and
Employer was made on Oct. 30, 1993. And
the minimum interference were removed by
the Employer, with the consultation and
approval of all public works authority for
the regulations proper, on Nov. 19, 1993.
Requested by the Contractor dated Nov. 20,
1993 and Design changed and approved by
the consultant and Employer was made on
Dec. 22, 1993 for Dinning hall and Nov. 18,
1993 for Hay burn.
Requested by the Contractor dated May. 4,
1994 and Design changed and approved by
the consultant and Employer was made on
May. 19, 1994.
Requested by the Contractor dated Apr. 4,
1993 and acceptance by the Employer was
made on May. 13, 1994.
Requested by the Contractor dated Aug. 9,
1994 and acceptance by the Employer was
made on Aug. 25, 1994.
Agreement made on Nov. 2, 1994 to
complete within 120 Cal. days. Fire
breakout on Jan. 20, 1994. Another order
was made to another factory and lecture hall
seats completed on May 2, 1995.
Justified
Computations delay
Variation + Excess in quantities - Omissions = 140,496.08 + 87,631.80 -
69, 760.28 = 158,367.60.
17 Cal.
Delay justified = (158,367.60 / 6,047,883. 90) * 660 = 17 Cal. days. days
Delay to be claimed is From Oct. 20, 1993 to Nov. 19, 1993 = 30 Cal.
days. But during this period the contractor executed works amounting
201,465.56 which saves (201,465.56 / 6,047,883.90) * 660 = 22 Cal.
days. Therefore, delay to be justified sshould be = 30 - 22 = 8 Cal. days
30 Cal
days
Dinning hall: Completion time as per contract = (Component Cost /
Contract price) * contract time = (563.291.81/ 6,047,883.90) * 660 = 62
Cal. days. Completion time as per schedule is 150 Cal. days. Therefore;
Completion time for the dining hall will be 150 Cal. days. Delay to be
claimed is From Nov. 20, 1993 to Dec. 22, 1993 = 33 Cal. days which is
a proportion of the total work; ie, 33 / 660 = 0.05. Therefore delay to be
justified should be = 0.05 * 150 = 7.5 Cal. days. Similarly for Hay burn,
justified delay should be 4 Cal. days. Since both components are 7. 5 Cal.
scheduled parallely, the total justified delay is taken to be 7.5 Cal. days days
Completion time as per contract = (Component Cost / Contract price) *
contract time = (58,916/ 6,047,883.90) * 660 = 7 Cal. days. Completion
time as per schedule is 10 Cal. days. Therefore; Completion time for the
roof truss of the workshop will be 10 Cal. days. Delay to be claimed is
From May. 4, 1994 to May. 19, 1993 = 15 Cal. days which is a
proportion of the total work; ie, 15 / 660 = 0.023. Therefore delay to be 0.23 Cal.
justified should be = 0.023 * 10 = 0.23 Cal. days. days
Since Changes are initiated and requested by the contractor for cost
advantage and easy availability with construction, and could he execute
as per contract if reply delayed, therefore; such delays are not
justifyable.
-
Completion time as per contract = (Component Cost / Contract price) *
contract time = (229,500 / 6,047,883.90) * 660 = 25.05 Cal. days.
Completion time as per schedule is 30 Cal. days. Therefore; Completion
time for the lecture hall seats will be 30 Cal. days. Delay to be claimed is
From Nov. 2, 1994 to May. 2, 1995 = 92 Cal. days which is a proportion

9. EELCO Transformer
installation
10. Change in working days from 6
days a week to 5 days a week
11. Due to bad weather condition
during the two rainy season in
the construction period.
12 Permission delay from
Municipality for the
construction of External roads
and connection to the existing
Municipal sewer point.
13. Delay in Payment certificate
No. 5 and 8.
The total justified delay is then, 17 + 30 + 7. 5 + 0.23 + 5 + 1 + 5 + 33 = 98.73 Say 99 Cal. days.
Request made to EELCO dated Jan. 5, 1994
and Estimate from EELCO obtained on
Aug. 4, 1994.
660 / 30 = 22, then 22 * 4 * 0.5 = 44
Working days
Assuming the effect extends itself on the
project by 20%, then 120 * 2 * 0.20 = 48
Cal. days.
Request made to Municipality dated Feb. 8,
1994 and permission granted on Mar. 22,
1994.
See table above
of the total work; ie, 92 / 660 = 0.1394. Therefore delay to be justified 5 Cal.
should be = 0.1394 * 30 = 4.2 Cal. days. days
Completion time as per contract = (Component Cost / Contract price) *
contract time = (90,015.83 / 6,047,883.90) * 660 = 9.82 Cal. days.
Completion time as per schedule is 10 Cal. days. Therefore; Completion
time for the transformer installation will be 10 Cal. days. Delay to be
claimed is From Jan. 5, 1994 to Aug. 4, 1994 = 60 Cal. days which is a
proportion of the total work; ie, 60 / 660 = 0.091. Therefore delay to be
justified should be = 0.091 * 10 = 1 Cal. days. 1 Cal days
The contract time is based on Cal. days, therefore changes in working
days has no effect on the project. -
Weather conditions shall be considered in the contract time. Unless
adverse and unexpected weather conditions pertain to delay the project,
no delays shall be justified with this regard.
-
Completion time as per contract = (Component Cost / Contract price) *
contract time = (205,368.00 / 6,047,883.90) * 660 = 22.41 Cal. days.
Completion time as per schedule is 90 Cal. days. Therefore; Completion
time for the transformer installation will be 90 Cal. days. Delay to be
claimed is From Feb. 8, 1994 to Mar. 22, 1994 = 31 Cal. days which is a
proportion of the total work; ie, 31 / 660 = 0.047. Therefore delay to be 5 Cal.
justified should be = 0.047 * 90 = 4.23 Cal. days. days
Delay to be claimed From table above = 104 Cal.days. However, the
contractor executes work amounting 285,000 + 368,945 = 653,945
which is a proportion of the total work; ie, 653,945 / 6,047,883.90 =
0.108. Therefore, justified delay would be 104 - (0.108 * 660) = 33 Cal. 33 Cal.
days days
3. Unjustified delay of the project
Unjustified delay = Total delay - Justified delay
= 143 - 99
= 44 Cal. days.
Therefore, Unjustified delay of the project is 44 Cal. days.
4. Liquidated damages
The liquidated damage will be applicable for unjustified delays, therefore; the delay to be
considered for this part is 44 Cal. days.
Liquidated damage = 1/ 1000 per unjustified delay of that part of the contract price.
Unjustified delay = 44 Cal. days.
The part of the contract price included in the unjustified delay is:
= (44 / 660) * 6,047,883.90
= 403,192.26
Liquidated damage = (1/ 1000) * 44 * 403,192. 26
= 17,740.46
Limit of liquidated damage = 10% (6,047,883.90)
= 604,788.39. > 17,740.46
Therefore, the liquidated damage of the project is Birr 17,740.46.
5. Unpaid sum compensation
Amount of delayed payment certificate and delayed days:
P.C.N. 05 = Birr 500,000 and delayed for 103 - 30 = 73 Cal. days.
P.C.N. 08 = Birr 268,345 and delayed for 64 - 30 = 34 Cal. days.
Unpaid sum compensation for P.C.N. 05 is computed as:
= 500,000 * (73 / 365) * (6 / 100)
= 6000.
Unpaid sum compensation for P.C.N. 08 is computed as:
= 268,345 * (34 / 365) * (6 / 100)
= 149.50.
The total unpaid sum = 6000 + 149. 50
= 6149. 50.

Therefore, the total unpaid sum compensation = Birr 6149.50.

6. Change in cost compensation

Quantity Unit Rate of Material

Material Executed Highest of Based for bid Rate after Unit rate used for changes
after Increase and Rate before increase increase in cost compensations
Cement (Qts.) 783.24 37.35 42.22 4.87 3,814.38
Coarse aggregate (M3) 108.99 40.00 65.00 25.00 2,724.75
Timber (M3) 2.92 2000.00 5000.00 3000.00 8,940.00
Steel Reinforcement (Kg) 744.13 3.15 4.20 1.05 781.34
8mm thick Chipwood (M2) 518.44 14.65 17.95 3.31 1,716.04
Seco profile Windows and
doors (Kg) 2608.06 5.10 8. 50 3.40 8,867.40
Asphalt (Drum) 269.95 285.75 475.00 189.25 51,088.04