HKIA/ARB Professional Assessment

Lecture & Seminar Series 2020

Building Contract II – Application

Kay Choy & Phoebe To

July 28, 2020
Contents

Part A – Contract Procurement

I. Types of Building Contracts
II. Tendering

Building Contract II – Applications

Contents

Part A – Contract Procurement

I. Types of Building Contracts
II. Tendering

Building Contract II – Applications

I. Types of Building Contracts
(a) based on role of Contractor

1. Build Only Contract

2. Design and Build Contract
3. Management Contract
4. Public Private Partnership / Build-Operate-Transfer

Building Contract II – Applications

(a)1. Build Only Contract

Employer

Quantity Main
Surveyor
Architect
Contractor

Sub-contractors
Structural M&E
Engineer Engineer Sub-contractors

Consultant Team Contractor Team

Building Contract II – Applications

(a)2. Design and Build Contract

Employer

Employer’s
Agent
Design &
Build Team

Sub- Sub- Independent

Designer
contractor contractors Checker

Building Contract II – Applications

Design & Build Contract
▪ Contractor offers a package deal service: both designs and builds the building
▪ Contractor can of better deal when he is in control of all aspects
▪ Necessary to have employer’s representative to ensure that the contractor’s
works is of an acceptable standard

Turnkey Contract
▪ Not only design and build but also to furnish and fits out as well

Primary documents in D&B

1. Employer’s requirements
2. Contractor’s proposals
3. Contract sum analysis

Building Contract II – Applications

(a)2. Design and Build Contract
Q: What projects Design & Build Contract best fits?
A: (1) Projects need specialist skills and knowledge to carry out detail design, e.g.
building facades; (2) Projects which requirements can be defined by output, e.g.
dormitory with two hundred beds
Q: What are the main advantages of Design and Build Contract?
A: (1) Single point deliver; (2) Little opportunity for contractor to claim provided
that scope is properly defined; (3) Cost certainty at the outset; (4) Potential for
reduction in programme duration
Q: Will the Employer loss the control on design?
A: Employer must ensure that things that matter are properly defined in the outset,
otherwise there is potential for Contractor to lower the quality where there is
inadequate definition in Employer's requirements.
Q: Who approves the Design under Design and Build Contract?
A: There should be a design approval process with written procedure in Contract,
including time for inspection and responses to design proposals.

Building Contract II – Applications

(a)3. Management Contract
Employer

Quantity Structural M&E Management

Surveyor Engineer Architect Engineer Contractor

Work
Contractors
3.1 Management Contracting
Employer

Quantity Structural M&E Construction Trade

Surveyor Engineer Architect Engineer Manager Contractors

3.2 Construction Management Contract

Building Contract II – Applications
 Management Contracting
▪ Employer engages a Management
Contractor to contribute from
early stage to provide advice and
expertise with construction angle
to positively influence the design
and manage the construction.
▪ Management Contractor contracts
Works Contractors directly.
▪ The management contractor
undertakes to manage the carrying
out of the work through works
contractors, who are contractually
accountable to him
▪ Can be reimbursed on the basis of
fixed or variable costs, plus either
percentage fee, fixed fee or on a
target-cost basis.
Building Contract II – Applications
Construction Management
▪ Employer appoints construction
manager early in design process to
improve the cost and buildability of
proposals.
▪ Construction manager manages the
carrying out of the work through
trade contractors, which are
contracted to the employer directly.
▪ Construction management
appointment will be for the services
as defined in that document.
Although the trades contracts are
arranged and administered by the
construction manager, contractually
they are the client’s risk.
▪ Some developers have in-house
Construction Management Team.
(a)4. Build-Operate-Transfer
Public Sector Private Sector
▪ One of the most popular ▪ Less common
methods of privatising
government infrastructure ▪ Example: Headquarter of
work Standard Chartered Bank
▪ A private sector organization
undertakes to finance, design,
construct and operate an
infrastructure facilities
▪ Contractor usually carries out
works under a Turnkey contract
▪ Concession will allow the
company, to charge the public
for use of the facility in order to
repay loads and provide returns
for investors
▪ Example: Tate’s Cairn Tunnel

Building Contract II – Applications

I. Types of Building Contracts
(b) based on how contract sum is derived

1. Lump Sum Contracts

2. Remeasurement Contracts
3. Cost Plus Contracts
4. Target Cost Contracts

Building Contract II – Applications

(b)1. Lump Sum Contract
Contract sum is determined before construction work is started

▪ Employer selects designer(s) who produce the agreed design. Contractor is then
selected on a competitive bid.
▪ Scope of work, construction drawings & detailed specifications are given to
tenderer along with terms and conditions of contract.

▪ Provides the Client a better anticipation of construction cost

▪ Maximum risk with contractor.
▪ Higher negotiated profit margin.
▪ Longer period required for preparation of design and pricing documents than
other procurement routes, but tender period could be shorter since tenderers
will be responding to a defined scope and quality.

Building Contract II – Applications

 Lump Sum Contract
with Bills of Quantities
▪ Based on bills of quantities
▪ Contractor to carry out the
work in accordance with the
drawings and as described in
the bills
▪ The sum is derived from the
total of the items in the bills of
quantities
▪ Specifications may or may not
be included
Building Contract II – Applications
Lump Sum Contract
without Bills of Quantities
▪ Based on drawings and
specifications
▪ Means of valuing variations,
such as daywork schedules,
schedule of rates, or tender
price breakdown
 Bills of Quantities Schedule of Rates
Prepared by Employer or his consultants Tenderers

Production Time During preparation of tender During tendering

documents
Cost of Employer bears cost of preparing All tenderers bear their own costs
Tendering BQ to prepare their set
Risks of errors in Employer’s risks Contractor’s risks
quantities Contract sum to be adjusted for Contract sum not to be adjusted
errors for errors
UNLESS the BQ are declared to be → Enjoy over-measurement
for reference only at the risks of → Suffer from under-
the Contractor measurement
Risks of errors in Contractor’s risks Contractor’s risks
rates Contract sum not to be adjusted Contract sum not to be adjusted
for errors for errors
Comparison of Easier More difficult
tender price Items with different quantities or
grouped differently

Building Contract II – Applications

(b)2 Re-measurement Contract

Contract sum is not finalised until works are completed and assessed on
remeasurement to previously agreed basis.

▪ Usually used in situations where design (or type of works) can be described in
reasonable detail, but the quantity cannot be measured accurately before
tenders are invited.
▪ Allow early start on site, before design is completed and can allow changes to
be made to the works relatively easily.
▪ Employer bears risk for “unknow”.
▪ Common in civil engineering projects.

Building Contract II – Applications

 Re-measurement Contract Re-measurement Contract
based on Bills of Quantities based on Schedule of Rates
▪ To be used where the employer ▪ The schedule consists of a list
cannot determine his of measured items with the
requirements in advance, or units of measurement (with no
where the urgent nature of quantities given)
project does not allow ▪ Preliminaries and Preambles
adequate time for design and and form of tender is required.
firm quantities to precede ▪ no defined requirements of the
tendering employer at the time the
▪ Employer’s allowance for contract is formed
contingencies and provisional ▪ To be used where the employer
sums should be generous cannot determine his
requirements in advance, not
even sufficiently for bills of
quantities to be prepared

Building Contract II – Applications

(b)3. Cost Plus Contract

Contractor is paid his actual cost of materials, labour, hire charges of machinery & a
fee towards his profit and overheads.

▪ This method of contract is adopted for: (a) Emergency works; (b) For
miscellaneous works; (c) For works in which scope cannot be defined properly
at tender stage.
▪ Relatively high risk for client while contractor’s risk is minimum.
▪ Partnering ethos may need to be established.

Building Contract II – Applications

 Cost Pus Percentage
▪ percentage of whatever the total cost
may be, for overheads and profits
▪ For building works of an unusual
nature, e.g. experimental works
▪ No financial incentive to carry out the
work economically
Cost Pus Fixed Fee
▪ Where an accurate estimate of the
maximum total final cost can be made
▪ Contractor may try to reduce time, and
cost of construction → saving to
employer
▪ For building works of an unusual
nature, e.g. experimental works

Cost Pus Fluctuating fee

▪ Fee fluctuates in inverse ratio to the
total final cost is more or less than
the agreed estimate of cost
▪ Fee will remain unchanged when
reached a pre-determined min. fee
▪ Additional incentives by profit-
sharing clause or bonus clause

Building Contract II – Applications

(b)4. Target Price

Reimbursed in the first place on the basis of cost plus percentage or fixed fee, and
further payment to be made according to the comparison of the actual cost and
target price

▪ Any savings will accrue to the contractor by way of a share of the saving or an
increased fee
▪ If the cost exceed the target, either the contractor would be paid no fee on the
excess or possibly a reduced fee

Building Contract II – Applications

I. Types of Building Contracts
(c) Sub-contractors and Suppliers
Domestic Sub-contractors /
suppliers
▪ Chosen by the Main Contractor
▪ Main contractor is entirely responsible
for the work carried out by a domestic
sub-contractor, or goods supplied by a
domestic supplier, as well as payment.
Named Sub-contractors / suppliers
▪ Include lists of names of potential
named sub-contract tenderers in
tender document
▪ Treated like other domestic sub-
contractor after award of sub-contract
Building Contract II – Applications
Nominated Sub-contractors /
suppliers
▪ Chosen or nominated by the architect,
on behalf of the employer
▪ Main Contractor is required to enter
into a separate sub-contract with a
sub-contractor / supplier nominated
by the architect.
▪ Main Contractor has the right to object
provided that he has good reasons.
▪ Prime cost sums will be included in BQ.
▪ Payment will be made to Main
Contractor and the main contractor
must pay the NSC within required
period.
Contents

Part A – Contract Procurement

I. Types of Building Contracts
II. Tendering

Building Contract II – Applications

II. Tendering
(a) Tendering Process
Pre-Tender
• Determining Tender
Type of Evaluation
• Call Tender
Contract
• Tender • Tender Opening Award
• Expression of
Interest • Tender • Tender • Letter of
Addendums Assessment
• Preparation Intent /
of Tender • Tender Return • Tender Acceptance /
Documents Interviews / Award
Tender Queries • Documents /
• Recommendati Letters
on attached to
the Conditions
of Contract

Building Contract II – Applications

II. Tendering
(b) Methods of Tendering
After the type of building contract to be used is confirmed, it is time to decide how
to select the Main Contractor. Most works obtained in building industry is by way of
tendering. Methods of tendering commonly used in Hong Kong are:

▪ Open Competitive Tendering

▪ Selective Competitive Tendering
▪ Negotiated Tender

Building Contract II – Applications

 Open Competitive Tendering
▪ Enables new but ambitious contractors
to compete with well established
companies on an equal basis
▪ Difficult to determine which tenderer
is giving the best over
▪ To win in the competition,
unscrupulous contractors will probably
keep down costs in both labour and
materials, at the expense of quality
▪ Heavy competition results in lower
tender prices
Selective Competitive
Tendering
▪ Stage 1 – limit the number of
competing contractors (by either
advertising or by selection)
▪ Stage 2 – final selection of one
contractor
▪ Price tend to be higher when
compared with open tendering
▪ Chance of tender rings → change firms
regularly to prevent collusion
Building Contract II – Applications
Negotiated Tendering
without Competition beforehand
▪ Lack of competition → expensive
tender
▪ Should be restricted to cases where
specialist technical ability prevents or
restricts competition
Negotiated Tendering
with Competition beforehand
▪ Correction of mistakes in tendering, or
the agreement of an addendum or
reduction bills
▪ Stage 1 – similar to selective tendering
▪ Stage 2 – developing the project
design, preparing bills of quantities to
be priced and agreeing on final prices
of the works
▪ Common practice to exchange letters
of intent which clearly define the
extent of any financial obligations
II. Tendering
(c) Expression of Interest / Prequalification
Q: What to be included in invitation for Expression of Interest?
▪ Client
▪ Project team
▪ Project description
▪ Programme

Q: What to be submitted for Expression of Interest?

▪ Experience
▪ Financial strength
▪ Work load
▪ Management structure, etc.

Building Contract II – Applications

II. Tendering
(d) Tender Assessment
- Financial & technical assessments
- Assessment criteria
▪ Price
▪ Relevant experience
▪ Understanding of requirements
▪ Past performance
▪ Technical skills
▪ Proposed methodology
▪ Compliance with requirements set out in the invitation to tender
* Some of these criteria may be assessed at pre-qualification stage
- Certain criteria can be a straight-forward pass / fail issue. For example, failure to
comply with a particular aspect of the invitation to tender
- Tender report with recommendation
Building Contract II – Applications
II. Tendering
(e) Letter of Intent vs. Letter of Award
Letter of Intent Letter of Award
▪ Expresses an intention to enter ▪ Written confirmation that a
into a contract at a future date tenderer has been successful
▪ Creates NO contractual and will be awarded a contract
relationship until future ▪ The letter forms part of the
contract has been entered into contract award.

Building Contract II – Applications