EDP 200 Understanding Contracts 2018 Final 10-27-2018

D.M. Consunji, Inc.
ENGINEERS DEVELOPMENT PROGRAM: SERIES 200

Engineers • Contractors
UNDERSTANDING CONTRACTS
Engineers Development Program

Series 200 & Cadetship
Understanding Contracts
October 27, 2018

DMCI Annex Bldg., Training Room
By: Carol M. Camba
D.M. Consunji, Inc. ENGINEERS DEVELOPMENT PROGRAM: SERIES 200
OBJECTIVES:
To provide the participants with:
Basic understanding and appreciation of
construction contracts
Knowledge of the essential elements of a

contract
Familiarity on the different parts of a

contract and the important clauses
Awareness on what clauses to look out for

in a contract
OUTLINE:
I. The Contract
A. Definition of a Contract
B. Essential Elements of a Contract
C. Why is a Contract Important
D. How typical construction contracts are formed
E. Parts of a Contract
F. Different clauses of a construction contract
II. What clauses to look out for

A. Definition of Contract -
 Article 1305 of the Civil Code of the Philippines:
“A contract is a meeting of minds between two

persons whereby one binds himself, with respect to the
other, to give something or render some services.”
What is a Contract?
CONTRACT – an agreement (meeting of minds)

between two or more parties (people or entities) in
which one agrees to perform or provide a specific
task (service) to the other for something in return
(compensation).
– is the contract for the performance of the

Construction Work between two or more parties,
or to supply related goods and services.
- The “contract is the law” between the owner / client

and the contractor; it governs the relationship of the
parties.
A good contract is: fair, reciprocal / mutual, provides

respective rights and obligations of the parties.
B. Essential Elements of a Contract

 Article 1318 of the Civil Code of the Philippines:
“There is no contract unless the following requisites
concur:
(1) C onsent of the contracting parties (meeting of the
minds of the parties)
(2) O bject which is the subject matter of the contract
(the service to be provided or performed)
(3) Cause - the essential purpose or reason for the
contract; the service or benefit which is being
remunerated; the obligation is established
(consideration)
Five Essential Elements of a Construction Contract
 Full Name, address and signatures of the Parties

 Scope of work
 Contract price and payment terms
 Schedule of work
 Authority
C. Why is a contract important?

 It is binding and legally enforceable, that it provides
protection for both parties.
 The contract defines the rights and obligations each

party (ex: for contractor - to complete the project on time
and for the owner - to pay the contractor on time)
 A contract captures the terms and conditions of the

respective performance of the parties.
C. Why is a contract important? – cont.

 It provides legal documents that state the
expectations of both parties
 A contract provides remedies in the event that one

party fails to perform as expected / required.
D. How typical construction contracts are formed

1. Through bidding
 Owner / client bids out his project
 There is an offer and acceptance
 Considerations, terms and conditions are agreed
 There is a legal relationship
 Genuine consent of parties
 Legal capacity of parties
2. Through negotiation / request for proposals

E. Key Parts of a Construction Contract

1. The contracting parties
2. The recitals – “whereas” clauses, the agreement
3. The body - the terms of the contract
4. The signatures of the parties
5. Acknowledgement (notarial page)
Key Parts of a Construction Contract

The contracting parties -
 Owner / Client / Employer
The party who employs the Contractor to carry out
the Works stated in the Contract.
For private companies: Owner or Client or Employer
For government projects: Procuring Entity
 Contractor
The one responsible for the performance of the
construction in accordance with the established scope of work
as required, described and specified in the contract
documents and agreement.
(Contractor or General Contractor, Main Contractor or Sub-
contractor)
Key Parts of a Contract
The Parties:
Owner /
Client
Contractor
Key Parts of a Contract – cont.
 Recitals (“Whereas” clauses):
It includes a general statement of what service the

contractor is expected to do for the owner and a brief
description of the project and how it came about.
Key Parts of a Contract – 1/3
Agreement
(Recitals)
Agreement
(Recitals)
(ex. from gov’t.

project)
Agreement
(Recitals)
(ex. from private

project)

 The Body (Terms of the Contract):
Includes a more detailed information about the
project. This section spells out exactly what services
are expected from the contractor.
The terms section also includes the price,

details of the payment, the length of the contract and
when the project will be completed. Some contracts
also include special terms.
The Body
(Terms of the
Contract)

The Body (Terms of the Contract)

The Body (Terms of the Contract)

 Signatures of the Parties:
Signifies that both parties agrees with the
terms of the contract.
This indicates that the owner accepts the
payment conditions and the contractor agrees to
complete the specified work.
Signatures of
the Parties

 Acknowledgment (Notarial Page):
A contract typically does not have to be

notarized.
A notary adds a layer of verification that
“the people who signed the document are the
people they say they are” and also the fact that
all parties who signed did so willingly.
Key Parts of a Contract
Acknowledgment
(Notarial Page)
F. Different clauses of a construction contract
1. Definition of Terms
2. Scope of Works
3. Contract Price
4. Payment Terms
5. Contract Time / Project Duration / Completion Date
6. Contract Document List (Annexes)
7. Securities (Bonds and Insurances)
8. Governing Law
9. Dispute Resolution
10. Other Terms & Conditions & Responsibilities of the Parties
Different clauses of a construction contract –

cont.
1. Definition of Terms
Definitions are used to make the interpretation of
a contract easier and to reduce any risks of ambiguity.
When terms are defined, the first letter should always
be capitalized.
2. Scope of Works
Description of all construction activities
including some descriptions of things that will form
part of the project.

cont.
3. Contract Price
Describes the type of contract awarded (Lump Sum,
or re-measurable, etc. ) and the total contract amount.
4. Payment Terms
Describes how the money is going to be paid to the
contractor. It should also specify the percentage for
advance payment, how the advance payment is going to be
repaid, and the percentage of retention.
Also defines when the payment is due, the conditions
for the release of progress or milestone payments, final
payment and the release of retention.

cont.
5. Contract Time / Project Duration / Completion

Defines the contract start date, the project duration,
how the project schedule will be divided (sectional or
milestone completion, if applicable), expressed in calendar
days or calendar months and may include liquidated
damages in case of delay.

cont.
Examples Types of Completion:
 Substantial/Practical Completion – ex. 95%
accomplishment or when the project is fit for its
intended purpose.
 Final Completion – ex: after punchlist and minor

defects have been rectified and owner issues
Certificate of Completion.
 Final Acceptance – ex: upon expiry of Defects Liability

Period (Warranty Period) and owner issues Certificate
of Final Acceptance

cont.
6. Contract Documents List (Annexes)

A list of all contract documents that form part
of the contract.
This section also defines the order of priorities
or hierarchy of documents and indicates which one
should govern in case of conflict.
List / Examples of Contract Documents:
 Letter of Award / Notice to Proceed (LOA/NTP)

 Contractor’s Final Proposal
 Plans and Specifications
 General Conditions of Contract
 Special or Particular Conditions of Contract
 Bid bulletins, minutes of pre-bid meetings, bid
clarifications
 Bill of Quantities (BOQ)
 Construction Schedule
 Guarantees/Securities (Bonds) and Insurances
 Secretary’s Certificate (signing authority)
Priority of Contracts Documents

Example from Marco Polo – the order of priority is stated:

Example from Imperium – the Owner / PM resolves the
conflict or interpret or explain such discrepancy, defective
description, error or omission

Example from FIDIC – the order of priority is stated and
the Owner decides in case of irreconcilable conflict:
Example from NPC Mansalay Contract – the document

with the latest date shall prevail
THE CONDITIONS OF CONTRACT
1. General Conditions of Contract

This contract document will define the detailed
obligations and rights of the parties on how to execute
the project.
2. Special or Particular Conditions of Contract

This is usually an extension of the contract or an
amendment to the General Conditions. Pay special
attention to specific conditions of the General
Conditions being amended, as these could sometimes
be onerous or self-serving to the benefit of the owner.
Standard Forms of General Conditions of Contract:

 Arcadis Form of Contract for Use in the Philippines
(Arete, Shang Wack Wack, STRC Projects)
 FIDIC (Federacion Internationale Des Ingeneurs –
Consiels) International Federation of Consulting
Engineers Conditions of Contract (Maynilad, North
South Commuter Railway (NSCR) Project)
 RA 9184 – The Government Procurement Act
(LRT Line 2 Masinag, NAIA T1 Rehab)
 UAP (United Architects of the Philippines) DOC 301 –
General Conditions (part of Anchor Land contract
docs, Co Ban Kiat)
 CIAP Document 102 - Construction Industry Authority
of the Philippines (CIAP) (Ecoprime, Co Ban Kiat Proj)
Other Forms of Conditions of Contract:

 SIA – Singapore Institute of Architects General Conditions
(168 Residences Project)
 ALI – Ayala Land Inc. General Conditions of Contract

(Ayala Triangle, Roxas Triangle Projects)
 MDC – Makati Dev. Corp. General Conditions of Contract

(City Gate, The Circuit Projects)
 JACMI – Jose Aliling Construction Managers, Inc.

(Princeview Parksuite Projects)
7. Guarantees/Securities (Bonds) & Insurances

Provide the guarantee to the owner that the
contractor has the means and the economic backup to
perform the construction contract.
Guarantees can be in the form of bond issued by
bonding companies, cash bonds or Letter of Credit
issued by banks or combination.
Examples of Guarantees/Securities (or bonds):

 Performance – for the faithful performance of the works
 Surety – repayment of advance payment
 Payment – guarantee of payment of labor, materials
 Guarantee / Warranty – rectification of defects
8. Governing Law
The section of a contract in which the parties

agree on which country's law will be used to
interpret the contract in case of a dispute, normally
the law of the country where the project is located.
9. Dispute Resolution
 Sets out the mechanism for the resolution of disputes

between the parties.
 This will determine where and how disputes will be heard.
 Many construction contracts include an arbitration clause

than resolution by court litigation.
 Under E.O. 1008, Construction Industry Arbitration Law -

For Construction Industry Arbitration Commission (CIAC)
shall have original and exclusive jurisdiction over
disputes arising from, or connected with, contracts
entered into by parties involved in construction in the
Philippines
10. Other Terms and Conditions & Responsibilities of

the Parties
Sets the responsibilities for the parties (the owner,

the contractor and the Owner’s Construction
Manager/Representative).
- contains the specific terms of the contract.
Examples of Other Terms and Conditions:
 Variations / Changes
 Escalation clause
 Contract Time Extension, Force Majeure events
 Penalties for Delays / Liquidated Damages
 Defects Liability Period / Warranty Period
 Rights and Responsibilities of the Owner
 Rights and Responsibilities of the Contractor
 Guarantees/Securities (Bonds) and Insurances
 Suspension and Termination Clauses
II. What clauses to look out for:

 Time Limits – sets the time when an obligation is required to be done.
 Condition Precedent -
- A contract provision specifying that one party must perform its duties before
the other party will perform its duties under the contract.
- A condition precedent can seriously restrict the contractual rights of the
contractor if it fails to comply with it, leaving with no remedy for what might
otherwise be a perfectly good claim.
 Contractor Default Provision - what constitutes breach of contract. It is

reasonable to allow the contractor a set amount of time to fix or “cure” a problem.
II. What clauses to look out for (cont.):

 Termination clauses - look out for clauses which allow the client to terminate
for unusual or trivial reasons. Clauses giving the client the express right to terminate
for convenience and whether they offer compensation for lost profit and other
costs arising from termination.
 Rights of the Contractor - how contractor can assert its rights

 Suspension / termination by Contractor – not all contracts (especially when
prepared by owners) contain this clause
 Penalty clauses – amount or percentage of contract the contractor is liable to

pay the owner/client in case of failure to comply with requirements of the owner
(examples: safety violations, delays in submission of reports, failure to pass tests)
 Limitations on Liability – a limitation of liability clause will give valuable certainty

about the contractor’s total financial exposure
II. What clauses to look out for (cont.):

 Latent Defects - Hidden defect in material and/or workmanship of an item which
may cause failure or malfunction, but is not discoverable through general inspection.
By contract, a latent defect is one which has been concealed in the works and may
not become apparent for many years.
 Approving Authority – identifies who are authorized to approve variation orders,

claims, samples, completed works, etc.
 Set-Off clause allows the paying party to make deductions from monies owed to
the payee in cases where the payee also owes money to the paying party.
 Insurance – who will secure the CARI; what is the insurance coverage (inclusions
and exclusions), period of cover, amount of first deductibles and for whose account;
END OF PRESENTATION
THANK YOU !

EDP 200 Understanding Contracts 2018 Final 10-27-2018

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

EDP 200 Understanding Contracts 2018 Final 10-27-2018

Uploaded by

Copyright:

Available Formats

D.M. Consunji, Inc.

ENGINEERS DEVELOPMENT PROGRAM: SERIES 200

Engineers Development Program

October 27, 2018

Knowledge of the essential elements of a

Familiarity on the different parts of a

Awareness on what clauses to look out for

II. What clauses to look out for

 Article 1305 of the Civil Code of the Philippines:

“A contract is a meeting of minds between two

CONTRACT – an agreement (meeting of minds)

– is the contract for the performance of the

- The “contract is the law” between the owner / client

A good contract is: fair, reciprocal / mutual, provides

B. Essential Elements of a Contract

Five Essential Elements of a Construction Contract

 Full Name, address and signatures of the Parties

C. Why is a contract important?

 The contract defines the rights and obligations each

 A contract captures the terms and conditions of the

C. Why is a contract important? – cont.

 A contract provides remedies in the event that one

D. How typical construction contracts are formed

2. Through negotiation / request for proposals

E. Key Parts of a Construction Contract

Key Parts of a Construction Contract

Key Parts of a Contract

Key Parts of a Contract – cont.

 Recitals (“Whereas” clauses):

It includes a general statement of what service the

Key Parts of a Contract – 1/3

Key Parts of a Contract – 2/3

(ex. from gov’t.

Key Parts of a Contract – 3/3

(ex. from private

Key Parts of a Contract – cont.

The terms section also includes the price,

Key Parts of a Contract – 1/3

Key Parts of a Contract – 2/3

Key Parts of a Contract – 3/3

Key Parts of a Contract – cont.

Key Parts of a Contract – cont.

Key Parts of a Contract – cont.

A contract typically does not have to be

Key Parts of a Contract

F. Different clauses of a construction contract

Different clauses of a construction contract –

Different clauses of a construction contract –

Different clauses of a construction contract –

5. Contract Time / Project Duration / Completion

Different clauses of a construction contract –

 Final Completion – ex: after punchlist and minor

 Final Acceptance – ex: upon expiry of Defects Liability

Different clauses of a construction contract –

6. Contract Documents List (Annexes)

List / Examples of Contract Documents:

 Letter of Award / Notice to Proceed (LOA/NTP)

Priority of Contracts Documents

Priority of Contracts Documents

Priority of Contracts Documents

Priority of Contracts Documents

Example from NPC Mansalay Contract – the document