Contracts

• What? Is the document that stipulates the

rights, obligations and responsibilities of the
major parties involved in the contract:
Indirect stakeholders’ boundary

Users

Contractor
Regulatory/
Statutory bodies Suppliers

Client Direct stakeholders’

Trade Unions Financing boundary
Architect/Engineer institutions

The general public

By: Ins.Kebede.H (MSc,PE)
 Contracts
• Why? to protect parties against defaulting by
their contracting party, if so provide adequate
compensation:
• Facilitate smooth functioning of the industry
• It is one way of managing risk!
– Most (common contracts) are meant to share risks
among parties

By: Ins.Kebede.H (MSc,PE)

 Contracts
Major risks in construction projects
Project
integration Communication
Scope
Integrated effects
Scope crippling of any of the rest Communication gap

Non quality Project Suitability & Resource

Quality product risk availability

Defaulting
Delays
Cost
overrun
Time
Procurement
Cost

By: Ins.Kebede.H (MSc,PE)

 Contracts
• Risk of defaulting by a contracting parties
– Non performance
– Default performance
– Non [on time] payment

Risk management

Respond to risks
Identify
Identify risks Quantify risks Avoid Transfer
objectives
Mitigate Accept
Mitigate risk

Transfer risk
Avoid risk

Accept risk By: Ins.Kebede.H (MSc,PE)

 Contracts
Risk transfers in contracts
Project
Owner
Risk Banks

Risk
General
Contractor
Risk
Risk
Sub-Contractor
Insurance
Risk

Risk should be allocated to party Sub-Sub

Contractor
that is in the best position to
manage it.
By: Ins.Kebede.H (MSc,PE)
 Major types of contracts common in
Construction
Client

Contractor Consultants
“Works" “Service"
Contract Contract

Suppliers
“Goods” contracts
The procurement procedures, evaluation criteria adopted, etc vary substantially among the
above procurements
By: Ins.Kebede.H (MSc,PE)
 Major types of contracts common in Construction

• Assignment: Thoroughly discuss the major:

• Types of procurement adopted
• Procurement procedures followed;
• Evaluation criteria exercised;
• Contracting documents used
In Goods and Services Procurement & Contracting

By: Ins.Kebede.H (MSc,PE)

 Construction (Work) contracts
• Major Components:
– Agreement, if any
• Usually made to cater for the ‘acceptable corrections and
modifications’ made during negotiation of the two parties
• Most GCC’s provide a model for the form of agreement: Eg.
in section 9 of PPA’s SBD);
– Letter of Acceptance
• Forms part of the contract and is furnished (PPA) at least
five working days after notification of successful bidder

By: Ins.Kebede.H (MSc,PE)

 Construction contracts
– Contractor’s Bid
 Usually supplied in bid submission form
 It stipulates summary of the major requirements of the bid
documents like:
 Bid price and validity period (usually from 60-120 days
depending on complexity of process)
 Declaration of eligibility of contractor and proposed
subcontractors and suppliers (legal, conflict of interest, etc)
 Amount of advanced payment (up to 20% for buildings and
30% for roads)
 Declaration of full consent with the terms of the documents and
acceptance of PE’s right not to accept lowest bidder

By: Ins.Kebede.H (MSc,PE)

 Construction contracts
Construction contracts
– Special Conditions of Contract
– General Conditions of Contract
– Specifications
– Drawings
– Bill of Quantities or Activity Schedule

By: Ins.Kebede.H (MSc,PE)

Contents Function and broad outline of contents
Number Heading
Agreements and contract data
Form of Offer and This form formalizes the legal process of offer and acceptance. The following provisions are
Acceptance common to most agreement forms:
Identification and full address of the signing parties, short description of the project and the
work, date of commencement and signature, completion time of the project, the contract
price, and enumeration of contract documents constituting the entire agreement.

Standard or General States the applicable conditions of contract and associated contract specific data that
Conditions of collectively describe the risks, liabilities and obligations of the contracting parties and the
Contract: procedures for the administration of the contract.

Particular or Special This document provides more specific and relevant information and conditions to a particular
Conditions of project. It is a supplementary and modified section of the general conditions of contract.
Contract Special conditions include additional owner requirements.

Pricing data
Activity Schedule / Bill of Records the contractor's prices for providing supplies / services / engineering and construction
Quantities works which are described elsewhere in a specification within the Scope of Work section
of the contract.

Scope of Work
Technical Specifications Specifies and describes the supplies, services, or engineering and construction works which are
& Methods of to be provided and any other requirements and constraints relating to the manner in which
Measurement the contract work is to be performed.

Drawing These are intended to describe the size and dimensional requirements of the project. Many
professionals are involved in developing drawings. These include the architectural,
structural, sanitary, mechanical, electrical, topographic survey, land profile, and detailing.

Appendix to Construction
Agreement:
Miscellaneous
Comprises tabulated and narrative information of the project such as amount and liquidated
damages, interest rates, completion time, amounts of bond and insurances, defects
liability period, retention, progress payments, advance payment, etc. Some of this
By: Ins.Kebede.H
information (MSc,PE)
might be left blank to be filled by the contractor or might be readily provided
by the client.
 The GCC
• Why GCC:
• Helps in a fair and adequate method of handling construction projects;
• Many of the terms of the standard conditions of the contract may have been
tested by courts and hence can be relied upon to provide similar protection to all
who use them;
• As contracting parties get used to them, can help in stabilizing the industry and
bid prices;
• Reduces time and effort exerted in preparing contracting documents
• What do GCCs do?
• Provide the general framework by which construction projects are governed;
• Are usually drafted to cover common aspects of construction while specific
aspects are left for SCC,s
• Generally accused to favor the party who promulgates them
– FIDIC- Engineers
– AGC- contractors

By: Ins.Kebede.H (MSc,PE)

Major terms covered in GCCs
&PCCs

By: Ins.Kebede.H (MSc,PE)

 Priority
• All efforts should be made for the documents to be supportive of each
other.
– If discrepancy [most GCCs –eg FIDIC, PPA-also usually clearly stipulated in
the PCC] provide provisions for overruling:
– Agreement
– Letter of acceptance
– Contractor’s bid
– Special Conditions of Contract
– General Conditions of Contract
– Specifications
– Drawings
– Bill of Quantities or Activity Schedule
– Some GCCs give the Engineer the responsibilities to make conciliatory
adjustments
– It has to be noted that most engineers prepare tendering documents, when discrepancy
they tend to interpret in such a way they won’t be held accountable or their reputations is
not questioned.

By: Ins.Kebede.H (MSc,PE)

 Precedence

• Overruling lang: As much as possible, in the lang

the two parties understand most.
– If there are more than one lang used, the overruling
language needs to be stated
• Ruling law -usually the law of the country the work
in done at.
– International contractors prefer international laws and
chamber of arbitrations

By: Ins.Kebede.H (MSc,PE)

 Employer
• Is the party (public or private) under whose
tutelage the project is executed
 Comes up with the investment needs

Pr. Idea

Land Capital
By: Ins.Kebede.H (MSc,PE)
 Employer

• Has responsibilities to:

• Pay the due payments for the contractor;
• Provide the site and right of access to it in due time;
• Look into the statutory aspects of the construction such as
permission to construct, custom clearance etc;
• Employer’s personnel and other contractors to cooperate with
contractor;

By: Ins.Kebede.H (MSc,PE)

 The Engineer
• Is the party who supervises the proper execution of the
works and advises as appropriate.
• Responsibilities of Engineer
– Is supposed to act professionally with integrity and impartiality
– His authorities can be limited [by specifying matters he needs to
get approval from the Employer on PCC)
• Care must be taken not to stifle the engineer’s performance by overly
limiting his authorities
• Most issues limited are:
– Consenting with contractor to the sub-letting of part of the works
– Certifying additional cost determined
– Awarding an extension of time

By: Ins.Kebede.H (MSc,PE)

 Engineer responsibility
• Issuing variation, which exceeds XXX amount
• Issuing variation, if the sum of all variations issued has exceeded X% of the
Contract Price;
• Certifying payment if the contract price will be exceeded;
• Issuing any taking-over certificate;
• Authorising the use of provisional sums in excess of the monetary limit for
variations;
• Certifying additional payment
• Issuing Defect Liability Certificate
– Risky (emergency) situations are always exempted
– Usually allowed to delegate his authority (to ERs) to oversee the day to day work
– The ERs communications shall be taken as if they are that of the Engineer
but failure of the ER to disapprove works or materials or plant doesn’t
prejudices the Engineer to order rectification;
– Any personnel employed to assist the ER or the Engineer shall not issue
instructions to the Contractor except for the proper execution of their job and
in compliance to the contract!
– Advised to give instructions in writing but can give oral instructions and substantial
them in writing latter-if not contractor can request for same

By: Ins.Kebede.H (MSc,PE)

 Contractor

• Contractor’s responsibilities
– If called to do so, expected to sign the contract
upon notification of winning
• If not, will lose bid guarantee
– Need to produce performance security and satisfy
other formalities

By: Ins.Kebede.H (MSc,PE)

 Site inspection & Tender sufficiency
• Contractor encourage to inspect site before tender and satisfy himself:
– necessary information, so far as is practicable, having regard to
considerations of cost and time, as to risks, contingencies and all other
circumstances which may influence or affect his Tender
• form and nature thereof, including the sub-surface conditions,
• the hydrological and climatic conditions,
• the extent and nature of work and materials necessary for the
execution of the Works
• the means of access to the Site and the accommodation he may
require,
• Availability of resource and skill
• No enough resource and time to carry out thorough investigation
– Employer is asked to make available information
• Usually collected for design purpose (design (review) report)
• The omens on interpretation lies on the contractor

By: Ins.Kebede.H (MSc,PE)

 Site inspection & Tender sufficiency
• Tender submitted is assumed to made with due
consent and satisfaction of contractor
– If an unusually adverse conditions occur (which
couldn’t have been foreseen by a knowledgeable
contractor), contractor can be compensated for time
or/and cost.
– Interpreting ‘unusually adverse condition’ is a major
matter of dispute

By: Ins.Kebede.H (MSc,PE)

 Program to be submitted
• Often submitted before signing Agreement Form and
needs to be approved by Engineer
– Scope and Methodology
• Scope and methodology
– Time
• Usually resource loaded CPM
– Resource
• Resource (key equipment and HR) deployment schedule shown
• Material purchase schedule
– Cost
• Cash flow demanded

By: Ins.Kebede.H (MSc,PE)

 Schedule and cash flow schedule
• In most documents, contractor asked to supply schedule
– The form and date of submission is usually specified in PCC
– Resource loaded diagram

By: Ins.Kebede.H (MSc,PE)

 Schedule and cash flow schedule
– Benefits of resource loaded CPM
• Enables to see if contractor has appreciated the
importance of the work (especially if asked during
tendering)
• Cross check the trustworthiness/reliability of
assumptions/estimation about execution of activities;
• Avoid disputes b/n contracting parties about resources
that needs to be on site during execution

By: Ins.Kebede.H (MSc,PE)

 Schedule and cash flow schedule
• Cost loaded CPM and cash flow diagram
– Enable the employer budget for the project
– Can be used to combat front-end loading
• Most contracting documents give provision for
advanced payment, contractors shouldn’t have any
excuses for front-end loading

By: Ins.Kebede.H (MSc,PE)

 Contractor’s responsibilities
• Expected to produce Performance security
• Construction (performance) guarantee
– Usually 10% of price if performance guarantee but reduces upon completion
(could be changed if substantial variation order)
– Higher if it is surety bond
• Retention money (criticized to have undue disadvantage on contractors and
specifically sub contractors)
– Usually 10% of each interim payment but less than some (eg 5%) of contract
price-should be reduced at completion
• Contractor’s equipment
– Sometimes not allowed to leave site
• Taking hold of the facility delivered [for contractors]
– Guarantees demanded shouldn't be made unnecessarily high, otherwise,
they are bound to increase the bid prices
– Some GCC’s (eg NEC) advise guarantees against defaulting by
employers

By: Ins.Kebede.H (MSc,PE)

 Contractor’s responsibilities
– Expected to perform the job with due diligence
• Shall design (if needed) and perform the work professionally.
• Shall promptly notify any mistake or error in design or
specifications or any event which could lead to delay or cost
overrun
– Subletting and Subcontracting
• Usually not allowed to sublet the whole work (Why?)
• Is to be held responsible for the performance of his subcontractors;
• Some countries specify trade contracting in the first place (to
encourage SMMEs)
• Subletting doesn’t include provision of labor, supply of material
according to spec, subcontracting to a pre-declared contractor

By: Ins.Kebede.H (MSc,PE)