PC 2- Advanced Construction Methods and Equipment

Group 2 Members:
Jude P. Namuco
Jorge Vincent C. Nollan
Jones Kevin M. Paala

Topic 2: Construction Contracts and Contracts & Specifications

What is a Contract?

• It is an agreement between two parties creating a legal obligation for both of them to
perform specific acts.
Requirements for a Valid Contract

• Mutual Assent- Each party must have a shared understanding regarding what the subject
matter of the contract is.
• Offer and Acceptance- One party must make an offer by clearly communicating their
intent to be bound in a contract. Likewise, the other party must render their acceptance in
clear terms.
• Consideration- This where both parties mutually exchange something of value in order to
make the agreement binding. Sometimes contracts can be enforced in a one-sided promise
where only one party renders consideration.

How Can a Contract Become Breached?

• The entire formation of the contract begins with negotiations and may undergo several
modifications before a final agreement is reached. This means that there are several points
in time when the contract may be breached. A breach of contract means that one or both
parties has failed to perform their duty. A breach may either be total or partial, and
each will yield different legal consequences.
What is a Construction Contract?

• A construction contract provides a legal binding agreement, for both the owner and the
builder, that the executed job will receive the specific amount of compensation or how the
compensation will be distributed.
• Construction contract types are usually defined by the way, the disbursement is going to
be made and details other specific terms, like duration, quality, specifications, and several
other items.
4 Common Types of Contracts

• Lump Sum Contract- uses a fixed price for all work done on the project.
o Pros:
 Owners avoid paying unexpected project costs.
 Builders have a clear expectation of the scope.
o Cons:
 Can result in loss of profit if project goes over scope.
 Budget constraints may limit project outcomes.
• Unit Price Contract- prices out different categories based on things like the type of
task and materials used.
o Pros:
 Easy to evaluate costs of different categories.
 Easy to adjust prices when scope changes.
o Cons:
 Difficult to estimate costs for large projects.
 Final cost isn’t defined in the beginning.
• Cost Plus Contract- requires the owner to fully pay all project costs on top of a
separate payment to cover the builder’s overhead and profit.
o Pros:
 Project is more likely to be completed as planned.
 Reduces risk for builders.
o Cons:
 Project can go over scope if caps aren’t applied.
 Difficult to manage and track.
• Time and Materials Contract- requires owners to pay for all project costs in addition
to an agreed upon hourly or daily rate.
o Pros:
 Builders are not completely limited by budget.
 Easy to use for small projects.
o Cons:
 Project can go over scope if caps aren’t applied.
 Difficult to estimate final cost.
What are Contract Documents?
- They are attached to the Agreement identified therein as Contract Documents, including all
additions, deletions, and modifications which generally include the following: Special
Provisions or Conditions; General Conditions; Specifications; Drawings; and other Bid
Documents.
Parts of a Contract Document
• Agreement • Drawings
• General Conditions • Addendum
• Special Provisions/Conditions • Modifications
• Specifications

1. Agreement- is used to describe the agreement signed by the Owner and the Contractor,
excluding the Contract Documents.
2. General Conditions- pertain to the roles, rights and obligations of the contracting
parties, and the rules and procedures by which the parties and everyone concerned will be
able to meet their obligations and perform the Works covered under the Contract.
Parts of General Conditions
 Scope of Contract  Inspection and Tests
 Terms of Payment  Warranty
 Performance Security  Liability of the Supplier
3. Special Provisions/Conditions- are instructions which are issued prior to bidding to
supplement and/or modify the Drawings, Specifications and/or General Conditions of the
Contract. They are the clauses added to a standard contract that are specific to the individual
transaction and are used to address unique circumstances that may arise during the buying
process.

Example of Special Conditions

• Having the agreement subject to a professional clean of the property prior
to settlement and at the Seller’s expense.

What many buyers may not realize is that the Seller is not required to
have the property professionally cleaned or even left in a moderately
clean state at settlement.
This can catch out many unexpecting buyers moving into the property
immediately after settlement.
Therefore, having your conveyancer or solicitor include a special
condition like this one, can help alleviate a lot of unnecessary stress and
concern prior to settlement.

Note: Special conditions often are for the Buyers benefit, providing extra certainties
specific to the Buyer’s circumstance or individual characteristic of the property. A contract
full of special conditions may appear less attractive to the Seller and as such, has to be
weighed against up against the overall deal.

4. Specifications- are the written or printed description of the work to be done describing
qualities of the material to be used, the equipment to be installed and the mode of
construction.
Parts of Specifications
 Title Page
 Table of Contents
 Addendum/Addenda
 Bidding Requirements
• Invitation to Bid
• Instructions to Bidders
• Information Available to Bidders
 Sample Forms
• Agreement
• Bid Form
• Bid Bond
• Performance and Payment Bonds
• Other Sample Forms
Who Needs Specifications?
• Contractor/Estimator
• Purchasing Agent
• Inspector
• Owner
• Subcontractors
• Materials and Equipment Manufacturers
Technical Specifications (Specs)- is a written document that covers the qualitative
items of a project as opposed to the quantitative information provided in the
drawings. Technical specifications modify or clarify what is shown in the drawings.
Format of Technical Specs- General contractors sometimes provide the
subcontractors only with a copy of the technical section that relates to the work that
they are contracting to perform. They neglect to give them copies of the General
Conditions, Division 1, Special Conditions, etc. that may also contain information
 relevant to the subcontractor’s portion of the work. To alert the subcontractors to
the possibility of conditions and obligations not explained in the technical section
provided to them, a statement such as the following is included at the beginning of
each technical section: “Provide work under this section as shown or specified
and in accordance with the requirements of the Contract Documents.”
5. Drawings- are graphical are graphical presentations of the Work, including supplementary
details and shop drawings. They are physical, quantitative, and visual descriptions of an
illustration. They are also organized by sequence of construction, such as:
• General Information and • Plumbing
Site Work • Heating, Air-conditioning,
• Structural and Ventilation (HVAC)
• Architectural • Electrical

6. Addendum-
• An addendum to the contract defines the definitions, sections, clauses, and terms
that need modifying, and all parties must agree to and sign off on them. The
language of an addendum is sometimes tricky since the law requires all parties to
a contract to abide by its original language.
• For this reason, you must make sure not to create unintended consequences or
loopholes with the addendum.
• The function of an addendum is to mention the corrections, modifications, and
specifications related to the original document.
Addenda are typically used when:
• A date adjustment is necessary
• A specific term or condition isn't working out for either party
• A clause requires adding or removing
• A job description in an employment contract requires a change
• A deadline extension is necessary in a job order
• The terms of an equipment rental have changed
Consents and Waivers
- When adding specific terms or conditions while maintaining the original contract
validity, an addendum is made. These include cases in which a party has agreed to
waive a contract breach by the other party.
- This is known as a consent or waiver, which means that the parties agree to continue
with a contract despite a minor term being neglected.
Laws Governing Contract Addendums
- Addendums are not enforceable unless they comply with the existing contract terms.
Many contracts provide specific circumstances under which terms are modifiable.
Making Sure an Addendum Is Enforceable
- A contract addendum cannot be legally enforced unless both parties fully understand
the new terms and agree to them in writing. All parties who signed the original contract
must also sign the addendum; if one or more parties are unavailable, they can appoint
agents who have the authority to sign on their behalf.

7. Modifications- Contract modifications (frequently referred to as "mods") are common

actions for many contracting professionals. These changes may be related to contract cost,
delivery schedule, schedule, fee, terms and conditions, and personnel.

Modifications if…
a. Treated as Separate Contracts
i. A contract modification is considered a separate contract for accounting
purposes when both of the following conditions are met (IFRS 15.20):
 1. The scope of the contract expands due to the inclusion of distinct
promised goods or services.
2. The contract’s price increases by an amount that reflects the
entity’s stand-alone selling prices of the newly promised goods or
services.
When these conditions are met, the modification is akin to entering a new
contract. Hence, the performance obligations of the existing contract
remain unchanged by the modification.

b. Not Treated as Separate Contracts

i. If a contract modification doesn’t qualify as a separate contract based on
the above criteria, the entity must determine whether the promised goods
or services yet to be provided under the original contract are distinct from
those already delivered (IFRS 15.21).
ii. If the remaining goods or services are distinct, the modification is
accounted for prospectively. This means revenue from previously satisfied
performance obligations remains unchanged (IFRS 15.21(a)).
c. Changes in transaction price and unpriced change orders
i. If both parties have agreed to a scope change but haven’t settled on a new
price (known as unpriced change orders), the contract is deemed modified.
The yet-to-be-determined price change should be estimated based on the
criteria associated with variable consideration (IFRS 15.19).
d. Approval of contract modifications
i. For a modification to be valid, all parties involved in the contract must
approve it. If any party hasn’t consented to the modification, the original
contract remains in effect for accounting purposes (IFRS 15.18).

END OF TOPIC. THANK YOU FOR READING.

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REFERENCES
1. http://www.bsu.edu.ph/sites/default/files/IB15_Section%204%20and%205%20-
GCC%20and%20SCC.pdf
2. https://www.upcounsel.com/addendum-to-the-contract
3. https://ifrscommunity.com/knowledge-base/contract-modifications/
4. http://construction.gov.ph/wp-content/uploads/2021/02/CIAP-Document-102-
Primer.pdf
5. https://wgc.com.au/what-are-special-
conditions/?fbclid=IwAR1cRY4IEEsf1u4NImNnFErmO6OwvEX5CpvnRof1teFa8
N-
C7oCuJ3WIeJg#:~:text=Special%20conditions%20are%20clauses%20added,arise
%20during%20the%20buying%20process