Construction law
CHAPTER 3
THE ROLE-PLAYERS IN
CONSTRUCTION CONTRACTS
AND TYPES OF
CONSTRUCTION CONTRACTS
Construction law by Tariku A 1
Introduction
A construction contract, unlike ordinary contracts, involves a
multiple parties
The process of concluding it has many complicated tiers as it
takes a long period of time to conclude and to perform
Accordingly, there are different parties to be involved in a
construction contract
A typical construction project involves at least five parties:
the employer, the architect, the civil engineer, the quantity
surveyor, and sub-contractors.
These parties usually sign d/t contracts with one another. But
the major contract is mostly signed between the employer and the
engineer, being a prime contractor concerning the project.
The architect & others may sign independent contracts with the
employer; and
the sub-contractors mostly enter into agreement with the prime
contractor
Construction law by Tariku A 2
Introduction cont.
a contract is the basis for the relationship between the
different parties involved in a construction contract so
it is essential to know the types and choices of contracts so as
to protect oneself
In any construction contract, the cost of the project consists of
the cost for labor, materials and the builder's profit
The different types of construction contracts vary primarily in
regard to who has to pay for cost over runs and who keeps the
savings if the project costs less than that of the estimated one
Therefore, we will see the different parties that are involved in
the conclusion of construction contracts along with their
respective obligations and
the major types of construction contracts that are widely
applicable in different parts of the world
Construction law by Tariku A 3
Parties and Their Respective Obligations
In the strict sense of the term the parties to a construction contract are
the employer and the contractor. so
The others are not normally included in the contract.
However, they have to be addressed as they are part of the project and
may even be included in separate contracts
Finsen writes
The parties to a building contract are, on the one hand, the person
who wishes to have a building built for himself, who is generally
referred to in building contracts as the employer, and,
on the other hand, the builder who carries out the work, generally
referred to as the contractor.
Architects, quantity surveyors, engineering consultants, etc. are
not parties to a contract in that they do not acquire legal rights or
obligations, but
they are nevertheless charged with many duties as agents of the
employer and have their own contracts with the client
Construction law by Tariku A 4
Parties and Their Respective Obligations cont.
1 The Employer (Client)
The employer (or, client, project owner, or developer) is the person
for whom the project (construction) is being undertaken
Employers may be divided into two categories
1. Those who erect buildings for their own ownership and use,
whether they intend to inhabit and use the buildings themselves
or let them to others, and
2. Those whose intention is to sell the buildings as soon as they can
possibly even during the construction phase, so that they can
recoup their capital with a profit, and embark on further
building projects.
The primary obligation of the employer is making a payment to the
contractor for the work done. So
construction contracts are required to make provisions for the
payment of contractors in addition to specification and other
details Construction law by Tariku A 5
Parties and Their Respective Obligations cont.
The employer has other obligations which arise from the very
nature of construction contracts.
So the employers are expected to
Refrain from hindering or wrongfully interfering with the
performance of the contract and
Provide his full cooperation whenever the contractor requires
On projects involving multiple contractors, the owner has an
implied duty
to coordinate the contractors’ work so as to avoid substantial
interference b/n the contractors causing unreasonable delays
The employer is also obliged to give possession of the site in a
reasonable time and
The contractor is entitled to sufficient degree of possession so at
to permit execution of the work unimpeded by others
Construction law by Tariku A 6
Parties and Their Respective Obligations cont.
The Standard Building Contract with Quantities state that
"… on the Date of Possession, possession of the site shall be
given to the contractor … who shall … proceed regularly and
diligently … to complete the same on or before the
completion date."
If the employer delays the giving of possession, then
it will be considered as an entitlement for the contractor to
have the extension of time to complete the work, and
The ground of compensation for any loss and/or expense
suffered as a result of the delay
The owner also has an implicit duty
Not to actively interfere with the contractor’s progress and
To share all known material information that would be
useful for the contractor to properly execute its work.
Construction law by Tariku A 7
Parties and Their Respective Obligations cont.
2. The Architect
The architect is the person who is employed by the employer
to design the project and oversee that the construction is
being undertaken as per the contract. so
s/he will designs the plans & specifications for the
construction
Architect is a person who designs buildings and superintends of
their erection so
He is both an advisor, and an agent of his client
Architect are required to get registered as per the law and
need to be familiar with
All the statutory, or other legal requirements, and
Limitations on the design of his client's building and to
ensure that his design complies with them
Construction law by Tariku A 8
Parties and Their Respective Obligations cont.
Usually, the architect enters into a contract with the employer
as his agent
Architect has the duty to act fairly and professionally as the
agent of the employer
3. The Civil Engineer
The main contractor/civil engineer is obliged to carry out the
the works to whatever extent the contract provides
Sometimes he may undertake, the sophisticated and complex
structural design of buildings, and the design of their
mechanical and electrical installations,
Here we need Civil Engineer, because it may beyond the
technical knowledge and experience of architects
The engineer will sign an agreement with the employer of the
building, and
He is liable to his client for any negligence in the execution of
his professional duties
Construction law by Tariku A 9
Parties and Their Respective Obligations cont.
Construction engineers have a lot of responsibilities such as
Analyze maps, drawings, blueprints, aerial photography and
other topographical information
Estimating costs and keep the project under budget planned
Making sure that the safety of all the workers undertaking
the construction works
Making sure that the site stays clean and sanitary
Making sure that there are no impediments in the way of
the structure's planned location
Surveying the land while the construction is in progress
testing soils and materials used for adequate strength and
provide construction information including repairs and cost
changes to the managers of the construction work
Construction law by Tariku A 10
Parties and Their Respective Obligations cont.
Therefor to meet the above responsibilities, the construction
engineers main activities include:-
Drafting:- Construction engineers use drafting to design
structures and show it to on others how to build them
Decision making,:-They have to analyze information and make
the best decision and solve problems
Computer interaction, Computers are used to write programs
and solve equations
Communication documentation, is used to record important
information that needs to be passed on to the management
Creative thinking: it is used to come up with new ideas and to
solve problems
Estimating and analyzing: to keep a project under budget,
construction engineers have to estimate costs of materials and
workers
Construction law by Tariku A 11
Parties and Their Respective Obligations cont.
4. The Quantity Surveyor
The quantity surveyor is a person who calculates the quantity of
labor and materials that are required to erect the building and
compiles this information in a document known as a bill of
quantities,
which is used by tenderers as a basis for estimating the cost of
the project and formulating their tenders
As an agent of the client, the quantity surveyor
prepares preliminary estimates of cost,
advises on the value of interim payment certificates,
evaluates claims for extras and determines the proper value of
the final account.
And sometimes the quantity surveyor may
advise a client on a project’s future running & maintenance costs
and the income it may be expected to generate by way of rentals
informs the employer on variations to the contract price caused
either by cost fluctuations or changes to the design, or
specification
Construction law by Tariku A 12
Parties and Their Respective Obligations cont.
The quantity surveyors play a key role in the organization and
financial management of the construction projects.
They manage projects to ensure that they are built on time and
budget. So
Their job is to manage costs effectively and to ensure that they
get the best value from contractors and suppliers & it involves
obtaining tenders,
arranging contracts, and
managing costs for the client while the works are being
undertaken.
It is also their job to negotiate with the client’s representatives
on payments and the final settlement.
Construction law by Tariku A 13
Parties and Their Respective Obligations cont.
5. Sub-Contractors
Subcontractors are persons employed by the contractor so as to
undertake part of the construction work
The contractor has to first secure the consent of the employer
before he/she can hire any sub-contractors
Sub-contractors will be employed by the main contractor to
carry out specific part of the work.
There are considerable benefit to sub-contractor in securing
specialist expertise but again
There are inevitable risks associated with it and a need to
appreciate that the employer will not have a relationship of
privity of contract with the sun- contractor involved.
Although the construction contract is made between the
employer and the contractor, subcontractors are the ones that
do most of the work
As a general rule, the contractor is the one liable for the work
carried out by the sub contractor
Construction law by Tariku A 14
Types of Construction Contracts
and Risk Allocation
A construction contract is an agreement that outlines the way a
construction job is executed and the specific amount of
compensation for the job.
In any construction contract, the cost of the project consists of
the costs labor, materials, the builder’s profit and overhead.
There are a several types of construction contracts used in the
industry, however, there are certain types of construction
contracts preferred by construction professionals
Construction contract types are usually defined by the way the
disbursement is going to be made and other specific terms, like
duration, quality, specifications and several other items.
Types of construction contracts vary primarily with regard to
who takes the risks involved,
which party has to pay for the cost over runs and
who keeps the savings if the project costs are less than the
estimate one
Construction law by Tariku A 15
Types of Construction Contracts… cont
The most common types of construction contracts used in the
construction industry include:
1 Lump Sum Contracts (Fixed Price Contract)
Under this contract type, the engineer or contractor agrees to
perform the specified and described project for a fixed price
In lump sum contract, the contractor agrees to provide
specified services for a specific price and
The employer agrees to pay the price upon the completion of
the work, or according to a negotiated payment schedule
This type of contract is very often used in engineering contracts
and it is appropriate where scope and schedule of the project
are defined sufficiently
thus allowing the contractor or engineer to estimate the
costs of the project.
Construction law by Tariku A 16
Types of Construction Contracts… cont
Lump sum contracts require complete plans and specifications
setting forth detailed directions to enable the contractor carry
them out
In developing a lump sum bid, the builder estimates the costs
of labor and materials and adds to it a standard amount for
overhead and the desired amount of profit.
Most builders estimate profit and overhead to total about 12-
16 percent of the project cost.
This amount may be increased based on the builder's
assessment of risks so
If the actual costs of labor and materials are higher than the
builder's estimate, the profit is be reduced. and
If the actual costs are lower, the builder gets more profit
Either way, the cost to the owner is the same,
Construction law by Tariku A 17
Types of Construction Contracts… cont
But, in practice , costs that exceed the estimates may lead
to disputes over the scope of work or
attempts to substitute less expensive materials for those
specified.
Lump sum contract expect an entire contract for a fixed price.
So the contractor’s obligation to carry out the work is based on a
condition precedent to the liability of the employer to pay and
the contractor takes the risk of the work becoming more
extensive than that of the estimated previously (since its fixed
price)
Thus, a lump sum contract is an entire contract that implies that
the contractor must finalize the work in accordance with the
contract before he/she entitled to the payment agreed upon.
Similarly, there is an implied obligation upon the employer to
satisfy the specifications in all its aspects so that the contractor
can properly and timely undertake his/her work.
Construction law by Tariku A 18
Types of Construction Contracts… cont
2 Re-Measurement Contracts (Unit price contract )
This contract type is based on anticipated quantities of items,
which are counted in the project in addition to their unit prices
The final price of the project depends upon the quantities
required to carry out the work
In unit price Contracts, the price to be paid for the whole work
is to be ascertained by measurement in detail of the various
parts of the work and the valuation thereof by reference to a
schedule of prices or formula included in the contract
This type of contract is usually entered into when the extent
and scope of the work to be done is not known at the time of
entering into the contract
Therefore, in this type of contract, it is usually immaterial
whether any particular piece of work that the contractor is
required to do is included in the contract or not.
Construction law by Tariku A 19
Types of Construction Contracts… cont
This is because the contractor is entitled to payment for the
piece of work at a stipulated rate, whenever applicable, or
at a reasonable market price whenever the stipulated rate
is not applicable
Generally, this contract is suitable only for construction and
supplier projects which
involve accurate identification of different types of items,
but not their numbers, in the contract documents.
Re-measurement contracts imply that price is agreed for each
piece of work and the quantities are counted or measured
either as the work proceeds, or
at the end of the completion of a particular item.
Profit rate is included in the rate settled, or separately as a
percentage agreed upon
Construction law by Tariku A 20
Types of Construction Contracts… cont
3 Cost-Reimbursable Contracts (Cost plus contract )
The cost plus contract is an agreement which involves
the buyer’s consent to pay the complete cost for material
and labor in addition to the amount for contractor
overhead and profit
In a cost reimbursable contract the contractor's profit is set at
a fixed amount. So
If actual costs are lower than that of the estimated, the
owner keeps the savings.
If actual costs are higher than that of the estimated, the
owner must pay the additional amount.
The advantage of a cost reimbursable contract is it will result in
the building of the intended project, even if costs run high. But
The disadvantage is that the contractor has little incentive to
keep the owner's costs down, since his profit is not in jeopardy
Construction law by Tariku A 21
Types of Construction Contracts… cont
Under cost reimbursement contract, the contractor is
reimbursed for the actual cost of labor and materials,
plus charges fee (typically an agreed-upon lump or
percentage of the total costs) for overhead and profit
Under cost plus contract, the the employer & contractor create
a list of specifications and an estimated budget that matches
to the specifications. And
The contractor have an obligation to keep copy records of
its costs, even though they suffer from overspending
One way to prevent breaking the budget is to set a guaranteed
maximum price. However, even the maximum price will not
alleviate problems.
Cost plus contract is favored where the scope of work is highly
uncertain or indeterminate
in addition to the types of labor, material, and equipment
being similarly uncertain in nature.
Construction law by Tariku A 22
Types of Construction Contracts… cont
Cost plus contract is advantageous where the employer wants
to have open reign to select materials and workmanship as the
project proceeds.
this arrangement can be extremely flexible and accommodating.
Cost plus contract is disadvantageous since the contracts are
usually used where the scope of work is uncertain, and
the costs can quickly get way out of control.
Even under the maximum price, poor control in materials
selection and on-the-fly design modification can quickly
consume budget,
leaving line items on the project starved for capital.
This, in turn, requires either a diminution in quality in certain
aspects of the project, and /or
the total elimination of aspects of the project, and /or the need
for an additive change order to increase project funding.
Construction law by Tariku A 23
Types of Construction Contracts… cont
4. Incentive contracts:
Incentive contract is a fixed price or cost reimbursement type
contract that makes the Contractor responsible for their
performance
(i.e. delivery, cost, and technical performance).
The profit or fee amount is tied to the Contractor’s
performance and the Incentives can be positive or negative
The Purpose of Incentive Contracts are to
Establishes Targets for the Contractor (Technical, Cost,
Schedule)
Motivates the Contractor, Discourages Inefficiency and
Improves Performance
Incentive contracts commonly fall into one of two common
categories:
1. Fixed Price Incentive Contracts and
2. Cost Reimbursement Incentive Contracts
Construction law by Tariku A 24
Types of Construction Contracts… cont
fixed-price incentive contracts are preferred when contract
costs and performance requirements are reasonably certain
since it is usually to the Government’s advantage for the
contractor to assume substantial cost responsibility and an
appropriate share of the cost risk,
Cost reimbursement Incentive contracts are appropriate when
a firm-fixed-price contract is not appropriate and the required
supplies or services can be acquired at lower costs &,
Incentive contracts are designed to obtain specific acquisition
objectives by
1. Establishing reasonable and attainable targets that are clearly
communicated to the contractor; and
2. Including appropriate incentive arrangements designed to
motivate contractor efforts that might not otherwise be
emphasized and
To discourage contractor inefficiency and waste
Construction law by Tariku A 25
Types of Construction Contracts… cont
The advantages of incentive contracts are that
it
Used to Encourage More Effective Work from
Contractors
When Appropriately Applied, Contractors are Paid
Based on Their Handling of Cost, Schedule, and Their
Performance &
For Good Business Practice
The disadvantage of incentive contracts are that it is
Time Consuming to Administer
Incentive Criteria may not be Related to Cost,
Schedule, or Performance Goals
Opportunities are Given to Contractors to Receive
Unearned Fees
Construction law by Tariku A 26
Types of Construction Contracts… cont
5. Cost plus Percentage construction contracts
This contract type is common for engineering contracts.
The compensation (payment) involved in these contracts is
based on a percentage of the cost of construction.
A compensation method for a construction project in which the
contractor is paid a specified percentage over and above
construction costs.
This percentage may be pure profit to contractor or
the contractors gross compensation from which must be paid
general overhead expenses such as phone line and general
business insurance.
Its important to determine the difference because
if the contractor expects the percentage to be pure profit,
then normal business operating expenses will be accounted
for some where in the construction contract as expenses.
End of chapter three.
Construction law by Tariku A 27
