Procurement

and
Contract Management
Contents

Introduction to Procurement
Procurement and Contract Management Process
Procurement and Contract Delivery Methods
Procurement Management
Contract
 Introduction to Procurement
Definition: -Procurement is a process used to select the
lowest competitive and qualified bidder for procuring
services, works or goods from potential competitors
based on reasonable & relevant criteria.

Construction Industry involves procurement and contract

management systems in order to ensure:
 fair competition and
 Distributions of obligations and rights among
stakeholders.
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Competition helps:
 The Project Owners’-acquire the five rights
(Counterpart, Cost, Time, Quality and Quantity) .

 The Project Financiers’& Regulators’-value market

principles and effective utilization of finance, and

 The Project Providers’-get impartial & neutral

Opportunity for business.
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P &CM 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.
P&CM process
P&CM involves three major processes:
1. Contract Planning
2. Procurement Management and
3. Contract Management

Delivery System Contract Formulation

Procurement Method Contract Administration
Contract Types Contract Closing
Procurement
Contract Management
Contract
Planning
Management

Procurement Preparation
Tendering
Tender Evaluation & Notice of Acceptance
Contract Planning
Construction projects are components of a certain
business or development demands.
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.
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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 Management (PM)
PM is a process of selecting individuals or
organizations to carry out the intended services and/or
works.
PM is carried out based on the provisions made during
the contract planning phase of the Procurement and
Contract Process.
PM involves the preparation of procurement documents,
their invitation and submission of tender proposals,
and Opening and Evaluation of tenders.
On the bases of tender evaluations, the procurement
team will recommend the lowest responsive bidder for
CM Phase.
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The following issues are necessary for a successful
PM 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, i.e.; wrt
Delivery Systems, Procurement Methods and Contract
Types and
 Adhering to the principles of Proof of competition,
Impartiality, Neutrality, Accessibility and Formality.
Contract Management (CM)
CM is a process of reaching contractual agreement for
implementation, its administration and finally
concluding the contract.
Similar to the PM 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.
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The following issues are necessary for a successful CM 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, i.e; 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.
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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.

Types of Procurement
Procurement types can be classified based on the things to
be procured and the way how they are procured.
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A. Things to be Procured: Goods, Services, or Works

A-1.Procurement of Goods: Physical resources like Materials

and Equipments are made available using Procurement of
Goods.
A-2.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.
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A –3. Procurement of Works: In the CI procurement of
works mean the procurement of contractors to carryout
the actual physical infrastructures.
B. Bidders' Coverage: Competitive Vs Negotiated Tendering

B –1.Competitive Tendering:

 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 for their invitations.
B –1.1 -Open Tendering–all eligible bidders are allowed
 Consumes time for tending and bid –evaluation
 Might result in incompetent bidder
 Results in better cost

B –1.2 -Limited Tendering-only those passing a certain

qualification criteria are allowed
 Applicable when the project is urgent or unique
 Avoids the rejection of Bids which are non –responsive for
technical evaluations
 Results in higher costs –professional negotiation
B–2. Negotiated Tendering:-Direct appointment of an
eligible firm

 Exceptionally exercised
 Applicable when the project requires special skill and is
very urgent
 The offer might be higher than the norm
C. Geographical Coverage: International Vs Regional Vs
National Vs Local Tendering

 –Based on geographical coverage: i.e. International,

Regional, National and Local Tendering.

 Such types of procurements are generally caused by three

major factors.
 Local Capacity –lack of local capacity,
 Financial Sources –depending on financial source and,
 Globalization –free tread policy
In Practice -Preference Margins –Up to 10% margins might
be used to encourage local firms.
D. Procurement Awareness: General and Specific
/Limited Tendering

 It is advisable to include bidders at initiation of projects

 Then General Procurement Notice (GPN) is made
during projects planning phase
 It only arouse the interests of the bidders.
General Procurement Notice (GPN) is used when
 The Project Owners: to save time; identify bidders
relevant for the procurement required; and protect loss of
cost in preparing lots of tender documents
 The Bidders: to give sufficient time to assess the cost of
the project; protect loss of cost only to participate; and
encourage competent bidders who wary about law-balling
to participate.
 GPN)–is of two types
 Type I –posted to create awareness of up coming projects
(Announced -Design implementation stage is started)
 Type II – determine interested bidder’s.
 Limited Procurement Notice (SPN)–is an Invitation
to tender or request for proposal (Project ready for
Implementation).
 Might be used to invite pre-selected bidders through
GPN .
E. Procurement Steps:
 Single Vs Two Staged; and
 Pré -Vs Post -Qualification Tendering

Single or Two Staged Tendering:

Single: Bidders submit single proposal and the

evaluation is carried out on the same.

Two Staged: When the bidders submit separate

proposals and the evaluation will be carried out
separately, usually finical then technical.
Pre or Post Qualification Tendering:

 Pre-qualification: an internationally accepted practice

& Common in civil works -nature &cost is large &
complex.

 Post –qualification: Technical evaluation carried out

first then financial.
Pre -qualification criteria:

 Experience and past performance,

 Health, Safety and Environment Records, if any,
 Capability in respect of personnel and equipment,
 Organizational arrangement and facilities,
 Financial Status, and
 Schedule of Commitments.
The advantages of pre -qualification in procurement are:
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. Then
Technical Evaluation follows.
Advantage -the lowest bidder will not loose and allows
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.
 Procurement and Contract Delivery Systems
 Procurement and Contract Delivery system is the way
Project Owners, Project Regulators and Financiers
determine the assignment of responsibilities to Project
Stakeholders along the Construction Process.

 Project Delivery method is an organizational concept

which assigns specific responsibilities and
authorities to people and organizations and which
defines relationship of the various elements in
construction of a project.

 It is often determined during the basic planning phase of

the construction project.
 Types of Project Delivery Systems

 Project delivery systems are basically classified in to two

broad areas:

a) Force Account; and

b) Outsourced
 Outsourcing
 Most of the project delivery methods/systems are found under the
category of outsourcing.

 The following are some of them.

 Design-Bid-Build (D-B-B);
 Design-Build (D-B);
 Construction Management (CM At Free & At Risk);
 Design –Build- Operate (D-B-O);
 Design-Build-Operate-Maintain (D-B-O-M);
 Design-Build-Finance-Operate (D-B-F-O);
 Full Delivery or Program Management;
 Build-Operate -Transfer(B-O-T);
 Build Own Operate Transfer(B-O-O-T);
Force Account
 When the Project Owners engage themselves to undertake
the project, it is called a force account delivery system.
 Used when:

 projects are small and places are remote such that

reaching them is difficult
 It provides a comparative advantage in Cost, Time and
Quality issues.
 When there is a lack of capacity from the private sector to
undertake very large and technologically new projects.
 When projects are unattractive to bidders.
 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.
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 This consultant will carry out the design together

with the necessary tender documents which will be
the bases for tendering to select contractors.

 Contractors are 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.
Advantages may include:

 Long history of acceptance;

 Open competition;
 Distinct roles are clear;
 Owner flexibility;
 Easy to tender;

Disadvantages may include:

 Innovation not optimized;

 Usually cost overruns;
 Disputes between parties;
 Client retains risks;
 Usually low bid-incentive for change orders;
 Owner responsible for errors & omissions;
 Design Build (DB) / Turnkey
 Design Build or Turnkey, in 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 & Construction
Implementations)
 In this arrangement both the design & construction
liability rests with the Contractor.
 Is a response to problems associated to the last two types
of delivery systems.
 Reduces fragmentation, adversarial relations and
Project Owners’ risk.
 The following are some of the basic features of Design-Build.
 Employer’s Requirements & Contractor’s Proposals;

 The employer approaches a contractor with a set of

requirements defining what the employer wants.
 The contractor responds with proposals, which will
include production as well as design work.
 The scale of design work included depends on the extent
to which the employer has already commissioned such
(design) work from others.
 The contractor’s design input varies from one contract to
another, ranging from the mere detailing of a fairly
comprehensive design to a full design process including
proposals, sketch schemes & production information.
 The Pricing Mechanism

 The other feature is that Design-Build delivery method

deals is a guaranteed maximum price (GMP).

 This helps clients to feel reassured that they are not

signing a blank cheque.

 As an incentive to the contractor, any savings made by

completing the project for a price below the GMP may
sometimes be shared between the client & the contractor.
 Roles & Responsibilities of the contracting
parties in the design-build process;

 There is lack of an independent certification role in the

contract.

 There is no architect or contract administrator to settle

differences.

 There is no independent quantity surveyor responsible

for preparing the basis up on which contractors tender.
Advantages of DB

 Single source responsibility both for design &

construction;
 Integrating design & construction;
 Reduction in administration;
 Innovation;
 Cost savings;
 Constructability optimized;
 Most risks transferred to the design-builder;
 Usually GMP;
 Design reflects;
Disadvantages of DB

 Limiting competition;
 High tendering costs;
 New method & unfamiliarity;
 Client needs quicker decision making;
 Clients bringing design requirements(30%)(reduces
design innovation);
 Construction Management

 CM is of two types: CM At Free/as Agent & CM At

Risk/as Constructor. This distinction determines the
contractual approach to CM.
Construction Manager (CM) as Agent

 This is a form of CM under which the Construction

Manager acts as an agent of and advisor to, the Owner.
 The Owner enters in to multiple trade contracts with
the trade contractors & suppliers.
 The Construction Manager is retained on a fee for
services basis & acts on the Owner’s behalf in managing
& coordinating the trade contracts in the best interests of
the Owner.
 The Owner retains all of the contracting risks inherent
in each of the trade contracts.
 It essentially involves the Owner acting as its own
general contractor, with the assistance of a Construction
Manager.
 This form of CM is sometimes also referred to as the “CM
as Advisor” or “owner contacted form of CM”.
Advantages may include:
CM At Free
 Provides a managing & administering for all phases of a project;
 Treats planning, design, construction as an integrated tasks;
 Some costs & schedule control;

CM At Risk
 Good for clients with insufficient staff;
 Owner flexibility;
 Responsible for time & cost overrun;
 Holds & manages the trade contractors;
 Constructability design review;
 Same legal position as a General Contractor;
 Provides a GMP;
 Works closely as a teaming effort & encouraging partnering & trust;
Disadvantages may include;

CM At Free
 No contractual relationship with trade contractors;
 No contractual responsibility for outcomes of a project;
 Client retains the risks;

CM At Risk
 Duplication of administration & additional paperwork;
 More paper work for the client;
 Some duplication of administration;
 Fast tracking difficult to control with designer & CM;
 Sometimes difficult to manage all phased packages with
costs, changes & schedules;
Design-Build-Operate (D-B-O)

 According to FIDIC, the D-B-O approach to

contracting combines design, construction, and long
term (ex. 20 years) operation (and maintenance) of a
facility in to one single contract awarded to a single
contractor (who will usually be a joint venture or
consortium representing all the skills for in a D-B-O
arrangement).
Advantages of D-B-O
 The advantages are categorized in terms of: time, finance & quality.
Time :
 With possibilities to overlap some design & build activities it will be
possible to minimize delays & optimize the smooth flow of
construction activities.
Finance
 With cost restraints & commitments & other risks being carried by
the contractor, there is less risk of price over-run.
Quality
 With the contractor responsible for 20 years operation, he has an
interest to design & build quality plant with low operation &
maintenance costs.
 Not only will then plant be “fit for purpose” but it will be built to
last.
 The FIDIC has now prepared conditions of contract which facilitate
the D-B-O process.
Full Delivery or Program Management

 Under full delivery method the selected contractor shall

under take the whole range of activities from thought
to finish & operation inclusive of maintenance.
The possible activities include:
 Planning & acquisition;
 Finance;
 Design;
 Construction;
 Operation;
 Maintenance;
 Upkeep & Improvements;
Advantages may include;

 Shorter time to project competition;

 Fully integrated process from project inception;
 Maximization of planning & reduction of problems during
execution;
 Knowledgeable alternative funding sources;
 Good for large & complex projects;
 Single source expertise;

Disadvantage may include:

 Difficult to tender & not knowing the costs;

 Compatibility issues wit client;
 Quality based selection process(Negotiated);
 Client needs to make decisions quicker;
Finance / Build Operate Transfer (BOT)
 Promotes Public Private Partnership (PPP) –A
private company is contracted to finance, design,
construct, operate for a certain period (usually 10 years)
and transfer.
 The project owner is not responsible for any liability
other than force majeure and agreed upon claim
adjustments.
 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.
Advantages of BOT
 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.
Procurement Management Process
Procurement Management process can be idealized into three
major processes
A. Procurement Preparation phase: includes

A.1.Formation of a Procurement Team

 Minimum of five members shall be established
 Necessary Experts shall be included

A.2.Preparation of 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:
1.Form of Invitation to Tender or Request for Proposals
2.Instruction to Tenderers (Standard and / or Particular
information –Box 1.2) or Terms of References;
3.Prequalification Documents if necessary –Refer
procurement methods based on stages (Section 1.3);
4.Forms of Tender -Refer Contract Documents (Chapter 2);
5.Forms of Contract Agreement -Refer Contract
Documents
6.General and Particular Conditions of Contract –Refer
Contract Documents;
7.Bill of Quantities and Drawings -Refer Contract
Documents;
8.Technical Specifications & Methods of Measurement –
Refer Contract Document; and
9.Other Forms, Formats and Schedules –Refer Contract
Document Parts.
A.3.Approval of Tender Documents: includes the checking,
renewal and approval of tender documents.
Check list s usually used for Tender Documents approval.
Prepare Checklist for:
1.Request For Proposal including Proposed Program and
Terms of References
2.Architectural, Structural, Electrical and Sanitary
Preliminary and Final Designs
3.Feasibility Studies for Big Projects
4.Road and Bridge Designs
5.Water Works Designs
6.Contract Documents
7.General Points
B. 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 to15 days.
B.1. Invitation: the invitation to tender shall clearly state:
 The owner and his desirous service or works
 Eligibility requirements,
 Place to get further information,
 Where to purchase & submit tender documents,
 How long the tender will be floated,
 How should the tender offer be packed, and
 When and where submission and opening of tender will
take place
B.2.Clarifications: -can either be requested by
interested bidder or carried out using a pre -tender
clarification meeting.

 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 including the issues
clarified.
 Late bids are automatically rejected.
B.3. 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 (public):Two representatives from
MWUD, Project Owner, Consultant (if available), and
Contractors (Who wish to attend) by themselves or by
their representatives shall attend during the tender
opening ceremony.
 The following will be carried out during tender opening:-

1.Tender Attendee members shall take their place and be

registered,
2.Tender box opened and checked for faulty things,
3.Check the tender is the right one,
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4.Bids will be opened one after the other,

5.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.
6.Bidders representative shall sign a register to attest
their presence during opening, and
7.Tender committee members shall sign on the
Tender
C. Tender Evaluation Phase: meant to determine the
winner based on:
 Technical qualification,
 Completion time,
 Commercial terms of the offer, etc
Note: -Least bidder may not necessarily be the
winner.

C.1. Preliminary Evaluations: includes Eligibility and

Arithmetic Review requirements.

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 License,
 Valid & Up to date Membership to Financier
Organizations,
 Valid provision of Bid Security or Bond,
 Completeness and submittals of all required
documents,
 Turnover requirements fulfilled
 Power of Attorney, Signature & Sealing
Requirements, and
 Appropriate Invitation, Packaging and Submission
Requirements.
 Responsive to Tender is based on the deviation from
the bid conditions. The more major deviations are
witnessed the bid will be rejected based on non –
responsiveness to bid conditions.
Arithmetic Review

 Most tenders are often submitted hastily and it is

common to have arithmetic error.
 Evaluation without arithmetic check will ultimately
result in despites.
 Therefore, it is a formal evaluation process to
review arithmetic before carrying out detail
evaluations.

Note: -Arithmetic review can be done if and only

when financial proposals are opened.
C. 2. Detail Evaluations: Include Technical,
Commercial and Financial Qualification
requirements.
 Critical evaluation of Technical and Commercial
offers will be carried out.
 Finally, the Financial offer will be updated using
Absolute Results from Commercial comparisons.
 Technical Requirements: Will be carried out
according to the criteria set.

E.g. Pre –Qualification Criteria.

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.
1. Benefit Forgone due to Completion Time

 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, I = 1.5 % per
month;
FV = Future Value
2. Additional cost due to:

2.1. Foreign Currency Exchange requirements

 Used when the tenders have provisions to quote
different currencies
 Comparison will be made based on the effects due to
the additional cost incurred from variations in
currency exchange requirements.
 Then every currency is converted to a 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
2.2. Additional Cost due to Advance Payment
 Occurs when different amounts of advance payment are
requested as part of the tender offer.
 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 = {(AL%) 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
3. 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.

 Eligibility criteria's are usually set.

 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
benefits foregone. That is:
TO evaluated = (TO + BFCT + ACAP + ACFE + ACPM)

 Besides, Financial offers per groups of trades of

works are compared in order to evaluate whether
tenders are front loaded or not.
 Front loading often cause disruption of projects or
overzealous contractual negotiations.
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.
Eligibility Requirement
Commercial Evaluation
 Contract
and
Contact Management
According to the Civil code of Ethiopia, Art.1675:

 A contract is an agreement whereby two or more

persons as between themselves create, vary or
extinguish obligations of a proprietary nature.

 It is the agreement between two or more parties which

is empowered at law.

 An agreement that affects the legal relationship

between two or more parties.
 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
 Elements of a Contract ‐ What does it take to have a
legally binding contract?

Contracts require 4 basic elements

 Mutual Agreement
 Offer
 Acceptance
 Legal Objective
 Valid Consideration
 Legal Capacity of the parties
1. What is Mutual Agreement?
It should show evidence that there was ‘MEETING OF MIND’’
 Offer – Clear and Unambiguous
 Acceptance – clearly accepting deal offered & anything else –
Counter offer & Non acceptance
2. What is legal objective?
The thing contracted must be legal in and of itself.
3. What is a valid consideration?
In exchange for the offer to perform, the recipient or client
 must offer something of value
 Money
 Promise of future work or revenue
 Goods or Services
Without valid consideration a contract is invalid & unenforceable
4. What is legal Capacity?
 In simplest form, parties must be:
 Of Age
 Mentally Competent
 In construction environment, parties must have:
 Legal authority to issue & execute contracts
 Must have proper license to have legal capacity
Purposes of contract
 To enforce law or bind conditions between or among
the parties agree to procure services /works/ goods
 Terms and Conditions of contracts the parties agree
with
 Rights and Obligations of performances from the
contracting parties
 Remedial measures in cases for non - performances
 To identify special risks and their treatment
 Handling provisions for price, completion time,
requirements variations adjustment systems, Changes
in cost and legislations and their dispute resolution
mechanisms
Parties to the Construction Contract

The formal parties to the construction contract are

basically the contractor & the employer.
The contractor could be:
 General contractor or “joint venture”: i.e. in terms of its
organizational form;
 Domestic or local/foreign or international: i.e. in terms of
its nationality;
 Private or public: i.e. in terms of its type of ownership;
 Only constructor or both designer & contractor, or
designer, contractor & financier, or management
contractor, build operate transfer (BOT), or build, own,
operate & transfer (BOOT): i.e. in terms of assumed
contractual obligation;
 Specialty contractor; in terms of its organizational
competence; This is specially valid for sub-contractors;
The employer could be:-
 Natural person or a legal person.
 Legal persons could be:
 Government;
 Non-governmental organizations (NGOs);

 Private entities;

 Community Based Organizations (CBOs);

 Cooperatives;

 Professional & other associations; and

 Other forms of legal incorporation;

  government employer could be federal or regional
or local(for example in case of the City of Addis
Ababa & Dire Dawa), and & public enterprises
and/or public share companies;
 NGO employer could be local or international;
 private employer could be in the legal form of Plc
or Share Company or otherwise;

 Others outside the contractor & the employer are

called third parties. They are not formal parties to the
construction contract.
Legal Status of the Contractor
 The contractor is neither an agent nor the employee of the
employer.

 The contractor & the employer’s legal relationship is

recognized under the law as a contract of work & labour.

 As per the definition given to the contract of public works,

and contract of works & labor, there is an important
principle behind the concept of “contractor”.

 It means that the contractor undertakes its contractual

obligation under its own responsibility.

 This leads us to the doctrine of independent contractor.

 It means, legally, as per Article 2616 of the Civil Code:

(1) The contractor shall carry out his task as he wishes & shall
comply with the rules of his profession.
(2) He shall not be bound to comply with the orders of the
client except in so far as he has agreed, at the time of the
contract, to comply therewith.

 The employer specifies the result to be achieved & the

contractor is expected to deliver that specified result (ex.
building, bridge, road, dam…) to the employer.

 The contractor, however, is free to determine how (ex. in

terms of scheduling, construction method, and project
management style …) to realize & achieve the expected
result.
 The contractor is not, in principle, under the control &
direction of the employer, or the engineer, who is an agent
of the employer.

 There are, by way of exception, certain orders to be given to

the contractor through the engineer, which help achieve the
employer’s expectation & specification.

 The contractor is not thus an agent of the employer. It is

said to be that the contractor is an independent contractor.

 The legal effect of which is that the contractor is itself liable

for its own acts & defaults. Both the agent & the employee,
in contrast, shift such liability to the principal.

 The legal status of the contractor towards the employer is

thus that of an independent contractor.
Conditions of Contract

 Conditions of contract could be international or

national/local.

 Conditions of contract could be prepared by:

 Government; like the PPPAA Conditions of Contract by the

Federal Government of Ethiopia;
 Financial/Development institutions; like the World Bank,
European Investment Bank, African Development
Bank/Fund…;
 Professional associations/institutions; like FIDIC, Institute
of Civil Engineers of England (known as the ICE Conditions
of Contract)…;
Count…
 Each conditions of contract may base its content in
consideration of some underlined interest and/or
legal system.

 In terms of local conditions of contract we focus on

the PPA Conditions of contract.

 In terms of international Conditions of Contract, the

Course focus on FIDIC Conditions of Contract
specially that of the Multilateral Development
Banks (MDB) Harmonized Edition.
FIDIC

 FIDIC is an international federation of national

association of independent consulting engineers.
 Its full name is Federation International Des Ingenieurs-
Conseils ;
 It was founded in 1913 by five national associations of
independent consulting engineers within Europe;
 The objectives of forming the federation were to
promote in common the professional interests of the
member associations and to disseminate information of
interest to members of its component national
associations;
 It has begun to prepare & disseminate standard
conditions of contract since 1957 for international use.
Count…
The following editions are relevant with respect to
international construction contract ( Red Book):
 First Edition: August, 1957;
 Second Edition: July, 1969;
 Third Edition: March, 1977;
 Fourth Edition: September, 1987;
 Fourth Edition (a supplement) Summer 1992 ;
(NB: Amendments with regard to some of the Provisions
of
The Conditions of Contract)
 Fourth Edition ( further amendment) November, 1996
(NB: in relation to Dispute Adjudication Board, Payment
on Lump Sum Basis & Late Certification.)
The FIDIC Conditions of Contract is based on the concepts of the
Common Law Legal System.
Recently (1999 & 2006) FIDIC has published the following
international conditions of contract.
These are:-
 Conditions of Contract for Construction for Building and
Engineering Works Designed by the Employer: The
Construction Contract (New Red Book);
 Conditions of Contract for Plant and Design-Build for
Electrical and Mechanical Plant, and for Building and
Engineering Works, Designed by the Contractor: The Plant
and Design/Build Contract (New Yellow Book);
 Conditions of Contract for EPC/Turnkey Projects: The
EPC/Turnkey Contract: (Silver Book);
 Short form of Contract: The Short Form (Green Book);
 Conditions of Contract for Construction: For Building and
Engineering Works Designed by the Employer: Multilateral
Development Bank(MDB) Harmonized Edition, March, 2006,
FIDIC;
Stakeholders in the Construction Project

 The stakeholders in a given construction project are

many & diverse.
 The following are some:
 The general public;
 The dwellers in the specific project area;
 The Owner of the Construction Project, known as the
Employer;
 Financing & development institutions: international and/or
local;
 Regulatory institutions: of the relevant national, regional &
local government;
 The Contractor: international and/or local;
 Sub-contractors: international and/or local Sub-contractors; (
nominated or preferred (domestic) sub-contractors)
Count…
 All consultants: including the Engineer, who studies,
designs and/or supervises the Construction Project;
 Sub-Consultants: international and/or local;
 Suppliers: which supply construction materials & other
inputs to the Construction Project;
 The construction project workers;
 Service providers; like transport services by carriers by
sea, air & land, and others;
 Professional Associations: Contractors, Consultants,
Engineers, Architects & others; and
 Others, if any;
Construction Contract Documents

 Advertisement for bids  Payment bond

 Information for bidders  Contract form or
 Bid form agreement
 General conditions or
 General notices
provisions
 Notice of award  Supplemental and/or
 Notice to proceed special conditions
 Bid bond  Plans
 Performance bond  Specifications
Characteristics of a “good” contract document:
1. Carefully considered
2. Expressed clearly
3. Time-tested
4. Comprehensive
5. Fair
6. Balanced
7. Applicable to the elements of a construction projects
Construction Contracts ……bidders are required to:

 examine all portions of the contract documents

 examine the physical conditions of the site
 determine legal requirements affecting the work
 complete these investigations prior to bidding
Construction Contracts -- General Conditions
 Contractor’s warranties
 Defective drawings
 Approval of contractor’s plans
and equipment
 Approval of shop drawings
other submittals
 Guarantee by the Contractor
 Conduct of the work
 Defective work
 Relations with other
contractors and
subcontractors
 Inspection of materials
 Inspection of field work
 Authority of the Eng’r.
 Duties of the inspector
 Permits and licenses
 Labor considerations
 Work done by the owner
 Lines and grades
 Order and discipline
 Performance
 Final inspection &
acceptance
 Others
Contracts for the execution of civil engineering works
are of following type:
Lump sum contract
Unit rate contract
Lump sum and schedule contract
Cost plus fixed fee contract
Cost plus percentage of cost contract
Lump Sum Contract( Fixed Price)
Lump sum contract are typically used for buildings.
Difficult to make adjustments.
A lump sum contract is more suitable for works for
which contractors have prior construction experience.
Not suitable for unpredictable conditions.
Unit Price or Bill of Quantity (Fixed Price)
Also called Schedule contract
Used for work where it is not possible to calculate the
exact quantity of materials that will be required.
Unit‐price contracts are commonly used for
heavy/highway work.
Items whose actual quantity varies from the estimated
quantity by more than 15 or 20%, either above or
below the estimated quantity, are sometimes subject to
renegotiation of the unit price.
C. Lump sum and scheduled contract
Combines the features of the Lump sum and schedule
contracts
Additional items are amounted as per the attached
item rate.
D. Cost plus
 Used when it is impossible to predict their costs during
the negotiation, bid, and award process.
 Factors ‐ unpredictable and extreme weather
conditions, transportation problems, combat or war,
or contracts where the amount of effort that will be
required depends on another contractor’s work.
 Cost plus contracts take many forms: most common
cost plus fixed fee and cost plus a percentage.
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.

 It’s idealized into three major processes. These

include Contract Formulation, Contract
Administration, and Closing of Contract Processes
Contract Management Process
 Contract Formulation: involves two sub processes:
 Negotiation and
 Signing of Contract Agreement.
 Contract Administration
Contract Administration: is a process that ensures the
successful completion of the project under consideration
with substantial compliance of the Terms of the
Contract.

Identifying contractual responsibilities of

Stakeholders.
 Reviewing the Terms of Contract Documents
 Extract Monitoring Responsibilities
 Preparing Monitoring Responsibility Summary Sheets
 Determining and understanding the construction
components of the project.

 Reviewing the Contract Drawings and Technical

Specifications
 Extract the Construction Methods and Sequences
 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.
Count…
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
 Take off sheet and Bending Schedules are used for
Measurement of Works
 Method of Measurement is according to standard practices
 Site Potentials such as material, equipment and Manpower
on site together with appropriate site organization is
recorded
 Advance, Interim and Final Payments are certified
Mediate Disputes.
Contract Closing
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.
Claim and Dispute Management System
 Claim is mostly concerned with entitlements and
liabilities arising under, or as a result of, a legally
valid contract.

 Claim is a request by a contractor for additional

compensation or time extension for occurrences
beyond the contractor’s control including:
 differing or unexpected site conditions
 change in scope
 delays caused by the owner
 Owner has duty to provide adequate, accurate data
to the bidders.
 Owner is liable to contractor when:
 inaccurate data are given
 extras develop because of improper design
 design is significantly changed after the contract is
signed (constructive change)
 Contractor must prove entitlement and the
associated damages
 Contractor must provide timely notice of claim upon
discovering impact
 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.
Types of Claims
1. 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:
 Time Extension only
 Liquidated Damages only
 Time Extension and Cost Compensation
 Concurrent Compensations
 Bonus
 Reliving of Obligation
2. Cost Related Claims: Claims associated with monetary
compensation where either of the following entitlements
or penalties are entertained:
 Additions requiring rate adjustments
 Price Changes
 Provisional sum adjustments
3. Default by Contracting Parties: Claims
associated with non performances of contractual
obligations such as:
 Delay in Payment Certificates
 Suspensions and Terminations
Claim Administration Processes (CAP)
 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.
CAP …

•Claim Notification
•Claim Preparation •Claim Enforcement
•Claim Submittal •Claim Closure

Claim Claim Claim

Submittal Processing Enforcement

•Claim Handling
•Dispute Resolution
•Claim Approval
 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.

 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:
 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, proper computations and evaluations
will be carried out to present the proposed compensation
(-> 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
Dispute resolution (DR) systems

1. Preventive: Partnering, Use of DR advisors and Use

of Facilitators for early neutral evaluation and
advise to prevent the happening of claims.

2. Amicable: Negotiation, Mediation, Conciliation and

use of Mini-Trials to administer the claim in:
 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: 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.
Stages in DR
•No attorneys involved
•mediator facilitates
the negotiation
•Binding arbitration in lieu of litigation
•Less expensive than litigation
•Each party is represented by an attorney
•witnesses are called
•The decision is final.

Mediation Mini-trial Arbitration

•one step up in terms of the amount of time and cost

invested
•Combines aspects of both mediation and litigation
•attorney is employed
•executive from each of the firms involved
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
Claims Avoidance
 producing comprehensive, accurate, contract
documents
 constructability review
 clear understanding of contract requirements prior to
bidding
 having good administrative procedures in place
 open and honest communication
 timely troubleshooting
 Claims avoidance begins in the pre-construction
phase
 Contract documents need to be clear, accurate,
comprehensive, and fairly distribute risk