Contract Management

Principles of Contract Management

Prepared by Eng. Fatmah Elwardagy

Construction Contracts – Agreement Between
Parties
The construction contract is a legal binding written or
unwritten agreement between the parties for the
performance of work.
First, a valid contract must be sufficiently certain to
have a practical meaning and before execution the
parties must have agreed on all terms and conditions.
Second, there must also be an agreement on the
consideration and on the payment terms. Third, the
contract must be in writing.
It is worth bearing in mind that the contract of
A contract is not easily enforceable if it remains entirely magnitude in size and value need to be crystal
as an oral agreement and without written evidence. clear with guaranteed protection against future
construction disputes, and capable of being
understood by all parties to the agreement
Construction Contracts – Valid Contract

Once a valid contract is made, both sides will be

bound to honour its terms, or face the legal
consequences if the contract is breached.

If one of the parties breach a contract, legal

remedies will be available to the other party.
Parties to Contract
The key parties to a main construction contract
are:
–client (or Employer)
–contractor

Other parties may be named, or exist in other

contracts:
–Consultants (or Engineer)
–sub-contractors
–suppliers
Why do we need contract law?
Because promises (involving an exchange) should be binding!
Why have laws enforcing promises that involve exchange?
• Market capitalist society – people buy & sell freely – make own bargains
• We are free to choose what to buy; from whom; what price (to a certain extent)
• Planning of business activities; Certainty
Helps parties to know what they can expect if the contract is not performed
Encourages performance (i.e. going through with what was agreed in the contract /not breaching the
contract) by ensuring that those who fail to perform cannot get away with their breach!
• Contract law rarely forces a party to fulfil contractual promises
• Usually, contract law tries to give financial compensation to innocent parties (to put them in the
position they would have been in had the contract been performed as agreed)
Contract Formation

For a contract to exist.. Contract Formation Basic Requirements;

–Usually 1 party would have made an • Offer

OFFER • Acceptance
–and the other party must have • Consideration
ACCEPTED that offer • Privity
• Intention
• Capacity
Once acceptance has taken effect, a
contract will usually be BINDING on
both parties
Contract Formation Timeline

The rules on offer & acceptance that we are about to learn are
typically used to pinpoint when a series of negotiations has
passed that point

➢ To decide whether the parties are obliged to fulfil their

promises!
Invitation to Treat/Tender
Offer distinguished from ‘Invitation to treat’ (an invitation to
make an offer)
–Some transactions involve a preliminary stage in which one
party invites another to make an offer.
•How to distinguish an offer from an invitation to treat
–Does statement maker clearly intend to be bound by
acceptance of the stated terms?
•Much depends on language used → Discuss based on the
facts (context) of the situation
Contract Formation – Offer
A communication will be treated as an offer if;

• It indicates the terms on which the offeror is prepared to

make a contract (e.g. price, delivery date)

• It gives a clear indication that the offeror intends to be

bound by those terms, if accepted by offeree
Pre – Contract
Tender stage
Responses to an announcement of
procurement by tender or
competitive negotiation must be
submitted in two sealed envelopes.
One envelope must contain the
technical offer and the
other the financial offer. The
technical offer envelope must
include the bid bond, either in the
form of a receipt for cash payment
to the financial office of the
administrative unit, a certified
check, or a letter of guarantee issued
by an approved local bank.
Bid Bond & Performance Security – Law 89
Performance Security – FIDIC – Sub-clause:4.2
The Contractor shall obtain (at his cost) a Performance Security for proper performance, in the form,
amount and currencies stated in the Contract Data.
If an amount is not stated in the Contract Data, this Sub-Clause shall not apply.

The Contractor shall deliver the Performance Security to the Employer within 28 days after receiving
the Letter of Acceptance, and shall send a copy to the Engineer.
The Performance Security shall be issued by an entity and from within a country (or other jurisdiction)
approved by the Employer, and shall be in the form annexed to the Particular Conditions or in another
form approved by the Employer.

The Contractor shall ensure that the Performance Security is valid and enforceable until the Contractor
has executed and completed the Works and remedied any defects. If the terms of the Performance
Security specify its expiry date, and the Contractor has not become entitled to receive the
Performance Certificate by the date 28 days prior to the expiry date, the Contractor shall extend the
validity of the Performance Security until the Works have been completed and any defects have
been remedied.
Pre – Contract
Tender stage
A bid bond is not required for a
Direct Agreement, as there is no
bidding. However, a 5
percent performance bond may be
required by the competent
authority, if the authority
believes that delivery of the goods
or services requires, by its nature,
the contractor’s
warranty of soundness.67 The
administrative unit retains the
performance bond until the end
of the warranty period, as agreed
to with the contractor.
Tender Department - Process Tracking

The Purchasing Department in the administrative unit is required to establish necessary

registers and forms to track the procurement process from announcement through
evaluation, and contract signing.
Among other things, the registers record:
➢ The respondents to a procurement announcement.
➢ The minutes of the envelope opening sessions.
➢ The decisions of the committee that performs the technical review.
➢ Notification of offer acceptance.
Types of Contracts
Types of Contracts

Lump sum or fixed price contracts

Lump sum contracts involve the buyer agreeing to pay a set price and the contractor or
builder agreeing to complete the project for that set price.With this type of contract, the
buyer has certainty because he knows what his final costs will be unless changes are
made. The builder or developer takes on the risk, because if prices go up or problems
arise, the buyer will not have to pay any more money. Some lump sum contracts include
allowances, which can mitigate risk to builders because if the buyer goes over the
allowance, the cost is borne by the buyer. Lump sum contracts can sometimes include
benefits or incentives for completing projects under budget or in a shorter period of
time, and can sometimes include liquidated damage clauses so the builder will have to
compensate the buyer for being late to finish.
Types of Contracts
Lump sum In the ECE Law

Art. 658 - (1) If a contract is entered into on a lump sum basis

according to a design
agreed upon with the employer, the contractor cannot
demand any increase in the fee, even if modifications or
additions are made to the design unless they are due to the
fault of the employer or have been authorized by him and the
fee therefor has been agreed with the contractor.
(2) Such agreement must be made in writing unless the
original contract was
agreed upon orally.
(3) The contractor may not request an increase in his fee
based on an increase in
the price of raw materials, labour or other expenses even if
the increase is to the extent that it renders the performance
of the contract onerous.
Types of Contracts

Cost Plus Contracts

Cost plus contracts involve the buyer paying the actual costs of construction and
purchases plus an additional set percentage or amount for the contractor or builder. The
owner takes on the risk here, because if it turns out the project is much more expensive,
the buyer will be the one to pay for the cost of construction plus the profit margin. Cost
plus contracts can be structured in different ways, including cost plus with the builder
making a fixed percentage of costs; or cost plus with a fixed fee or set amount for
the builder. It is also possible for a cost plus contract to specify a guaranteed maximum
price, so the buyer can mitigate risk.
Types of Contracts

Time and materials contracts

A time and materials contract means the buyer pays for the time spent by the builder
and his subcontractors and must pay for the actual costs of construction materials. There
is uncertainty involved for the buyer here as well, since the buyer has to pay for extra
costs or time overruns. Many time and materials contracts will contain maximum price
clauses as well.
Key Topics in Clauses
➢ Roles and responsibilities (relationships)
➢ Procedures for execution of project
➢ Dealing with money and time
➢ Dealing with changes
➢ Dealing with disputes and their avoidance
➢ RISK ALLOCATION
ICE7 Clauses - The ICE Conditions of Contract 7th
edition
71 specific clauses
•5-7 Contract documents
•8-35 General obligations
–12 Adverse physical conditions and artificial obstructions
–14 Programme to be furnished
–17 Setting out
–32 Fossils etc
•41-46 Commencement time and delays
•51-53 Alterations additions and omissions
•55-57 Measurement system
•60-61 Certification and payment
•66 Avoidance and settlement of disputes
FIDIC & ECE - Key Clauses
Roles and responsibilities (relationships) & General Obligations – FIDIC

Clause 2 addresses the role of the Employer. There are two particularly interesting sub-clauses.
First sub-clause 2.4 requires the Employer following request from the Contractor to submit:
“reasonable evidence that financial arrangements have been made and are being maintained which
will enable the Employer to pay the contract price punctually”; and
“Before the Employer makes any material change to his financial arrangements, the Employer shall
give notice to the Contractor with detailed particulars.”

Clause 4 is by far the longest sub-clause and covers the Contractor’s general obligations
including the requirement that in respect of Contractor-designed works3:
“it shall, when the works are completed, be fit for such purposes for which the part is intended as are
specified in the Contract.”
FIDIC & ECE - Key Clauses
Roles and responsibilities (relationships) & General Obligations – ECE

Obligations of the Contractor

Art. 647 - (1) The contractor may limit his undertaking to performing work, the employer being
responsible for supplying the materials which the contractor will use or be
aided by in his work. (2) The contractor may also undertake to
supply the materials as well as his work.

Art. 648 - If the contractor undertakes to supply all or part of the materials to be used in the
work, he is responsible for and warrants their good quality to the employer.
FIDIC & ECE - Key Clauses
Roles and responsibilities (relationships) & General Obligations – ECE

Obligations of the Contractor

Art. 649 - (1) If the employer supplied the materials, the contractor must guard them
and use them with the requisite technical skill, and provide the employer with an account
showing what he used of them, and return the rest to him. If any of the materials become
unfit for use due to the contractor’s negligence or inadequate technical skill, he must reimburse
the employer for the value of such materials. (2) In the absence of an agreement or trade usage
to the contrary, the contractor shall provide, at his own expense, the tools and additional
equipment he needs for the performance of the work.
Art. 650 - (1) If during the performance of the work it is established that the contractor is
performing the work in a faulty manner or contrary to the contract, the employer may call on
him to rectify the manner of performance within a reasonable period he fixes for him. If the
period expires and the contractor fails to adopt the proper manner of work, the employer may
either request rescission of the contract or handing over the work to another contractor for its
completion at the first contractor's expense in
 Key Clauses
Dealing with money and time – FIDIC & Law 89

Clause 4.21 provides details of the information

required to be inserted by the Contractor in the
Progress Reports. The provision of this report is
a condition of payment.

Under clause 14.3, payment will only be made

within 28 days of receipt of the application for
payment and the supporting documents, one of
which is the Progress Report.
Key Clauses
Dealing with money and time – Law 89
Key Topics in Clauses
Contract Termination – FIDIC & Law 89

Clauses 15 and 16 deal with termination by the Employer and suspension and termination by the
Contractor, whilst clause 17 deals with risk and responsibility. This includes at sub-clause 17.6 the
exclusion of the liability of both Contractor and Employer:
“for loss of use of any works, loss of profit, loss of any contract or for any indirect or consequential loss or
damage which may be suffered by the other party in connection with the contract”.
Clause 17 includes a cap on the liability of the Contractor to the Employer, something which was again
new to the 1999 FIDIC form.
Clause 19 deals with Force Majeure. As is discussed below, whilst most civil codes make provision for
force majeure, at common law, force majeure is not a term of art and no provision will be implied in the
absence of specific contractual provisions.
Finally clause 20 deals with claims, and again this is something I deal with below.
Key Topics in Clauses
Contract Termination – FIDIC & Law 89
Key Topics in Clauses
Performance Bond & Contract Termination – Law 89
Key Topics in Clauses
Penalty of Delay – FIDIC & Law 89
Why do we need contract administration?
Case Study
AN EARLY CONTRACT CLAUSE
Consider the following clause:
"In the event of anything reasonably necessary or proper to the due
and complete performance of the work (of which the Engineer shall
be the sole judge) being omitted to be shown or described in the said
drawings or schedules the contractor shall notwithstanding execute
and provide all such omitted works and things as if they had been
severally shown and described without any extra charge and
according to the directions of the Engineer and to his satisfaction."
What do you think about it?
Who carries the risks?
What might the effect on the contract price be?