3.

Construction Contract
3.1. Introduction
Contract is an agreement between or among two or more parties whereby each party promises to do
or not to do something and agrees to terms (conditions and Warranties) set out in the contract.
Conditions of Contract are terms in which parties in the contract are governed / administered with.
That is, it is an administrative law which is the legally binding the contracting parties. These
promises and terms shall be enforceable by law and incorporates the rights, obligations and
Remedial rights of each contracting parties.

In other words, 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:

 There must be an intention (Consent) to create a legal relationship: Intention

 There must be offer and acceptance(Constitute two parts): Offer and Acceptance
 Parties enter into Agreement: Agreement
 Parties are capable of contracting: Legal Capacity
 The legality of the object of the agreement must be ensured. Legality of object
 The terms of the contract must be sufficiently certain. Certainty of object
 Payment for the Promise: Consideration

Intention is willingness or consent by the contracting parties to create a legal contract.

An offer is a proposal by one party to enter into a legally binding contract with another. It is
an indication that one party is willing to be bound by specific terms set out in the contract.
An offer can remain open unless conditioned for termination using the following ways:
 Refusal or Counter Offer
 Closure of the Offering organization
 Non – Acceptance with in the offer time
 Failure of the offer condition
An Acceptance is the key for the formation of a contract which must be absolute, indication
of consent, and communicated to the offering entity by the offeree

Agreement: An agreement comes about when one party accepts an offer made by another.
Legal Capacity: is to mean they are legally allowed to enter into contract and provides
statements of facts (statement of opinion + Knowledge) for their ability to perform their
obligations. Misrepresentations of facts both from Fraudulent or Innocence actions are liable for
damages and / or rescission.

Legality of object: is a description of both the promises and considerations (including rights and
obligations) clearly and distinctly stated and they should be practicable and legally binding. An
agreement though proves the existence of a contract; there are situations where it can be
considered as there isn’t. Some contracts will be regarded at law as illegal. These include
agreements to commit a crime or tort, hinder justice, act immorally or restrain trade in breach of
the Trade Practices Act, and some wagering contracts. And also if contracts violate statutorily
prohibited conditions such as promoting gambling; and / or also violates unlawful conditions by
the common law such as agreements to promote corruption, discrimination, against the benefit of
the state, that devalue the value of one party, etc.

Certainty of object: The object of the Contract must be sufficiently defined. Even though
parties have apparently agreed and have acted as if there is a contract, there may be no contract
because the alleged contract lacks sufficient certainty and completeness. A contract to do an
unlimited quantity of work for a fixed price would be void for uncertainty.

Consideration can simply be interpreted as ‘price for the promise’ which involves a benefit
accrued from the offeree in exchange for the promise the offeror is bound by the contract.

Following these characteristics; While the contract is understood as the sub - framework of the law
which can be understood as the private law, the law provides a framework within which the services
and works of the construction industry is governed with. Therefore, the significance of any contract
is that the promisee is obliged for their performances against a certain return and if failed to
compensate for non - performance and at the same be time legally enforceable.

On the other hand, A contract is a not a mental state but an act which is a matter of inference from
conduct. That is, the parties are judged not by what is in their minds, but by what they have said or
written or done. Essential Terms, Certainty, Agreements to Agree, Subsequent words or conducts,
Agreements after commencement, Agreement by conduct, Formalities are some issues to be clearly
understood when dealing with contractual matters.
The purposes of a contract are therefore:
 To clearly show the Rights and Obligations of performances from the contracting parties
 To enforce law or bind conditions between or among the parties agree to procure services /
works / goods
 To clearly show the Terms and Conditions of contracts the parties agree with
 To clearly show remedial measures in cases for non - performances
 To identify special risks and their treatment
 To clearly show handling provisions for price, completion time, requirements variations
adjustment systems, Changes in cost and legislations and their dispute resolution mechanisms

3.2. Construction Project Delivery system

Contract delivery system is the way project owners together with project regulators and financiers
determine the assignment of responsibilities to project stakeholders along the construction process.
Procurement and Contract Delivery system is often determined during the Basic planning phase of
construction project. Generally, there are six types of Contract Delivery systems. These are:
1. Force Account,
2. Design Bid Build (DBB),
3. Design Build (DB) or Turnkey,
4. Finance / Build Operate System (BOT),
5. Construction/Facility Management Consultancy, &

1. Force Account

When the project owners engage themselves to undertake the project, it is called a force account
delivery system. Often such a system is promoted if the project owners believe that there is a
comparative advantage in Cost, Time and Quality issues. Besides, when there is a lack of capacity
from the private sector to undertake very large and technologically new projects, public companies
do undertake such projects using Force account delivery systems.

These days this type of delivery system is often used when projects are small and places are remote
such that reaching them is difficult and in general they are not attractive enough to call the attention
of Bidders. Besides when projects are spatially scattered and maintenance are to be done for schools,
colleges, health centers etc., such cases can be applied.
 2. 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. This consultant will carry out the design together with the
necessary tender documents which will be the bases for tendering to select contractors. These
process is called Design - Bid- Build and hence the name for such delivery system.

In this type of delivery system, projects are divided into different packages interfacing to each other.
Though the design and supervision consultant will be the prime professional on behalf of the owner
and largely the administrator of the construction contract; the employer takes the responsibility of
coordinating the various project packages and their respecting interfaces.

Besides, designers have not been required to guarantee results but rather methods. That is, they are
held accountable on the basis of their superior knowledge and sufficient competency and ability to
design with a reasonable degree of technical skills. As a result, contracts and courts focused on
professional duty of care, not results or project goals. Contractors are also 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. Since the 1980s, this traditional approach becomes less
popular due to the following factors:
 Severe adversarial relations between the design and contract administration consultant and
the contractor
 Fragmented contract for the project owner
 Project owner responsibility for risks associated with the design and contract administration
 Non - Impartiality of the Design and Contract Administration services
 The inability of design and contract administration consultants to cope up with new
construction technologies and constructability issues of their designs
 The indirect contractual obligation assigned for the Design and Contract Administration
consultants
 The incompatibility of consultancy fee to the desired activities they are required to provide,
etc.
The following standard forms of DBB Conditions of Contract are known for use for such delivery
system:
 FIDIC White Book for Consultancy Services (Design and Supervision) and Red Book for
Construction Works
 Standard Conditions of Contract for Construction of Civil Works, 1994; MWUD

3. Design Build (DB) / Turnkey

Design Build or Turnkey Delivery system is a response to problems associated to the last two types
of delivery systems. These were promoting privatization and its business like approach to enhance
the Force Account System and reducing fragmentation, adversarial relations and Project Owners’
risk which are recurrent manifestations in the DBB delivery system. Design Build or Turnkey by
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 and Construction Implementations). In the 1970s, large firms began
to offer both design and construction services in order to provide project owners with a single source
for project delivery. At the beginning, this delivery system was limited to complex projects such as
industrial, big plants and big infrastructural constructions.

DB delivery system is common worldwide specifically for Private projects. This led lead contracting
firms to form a team or consortium of designers and specialty contractors who work together to meet
the entire demand. Such services are initiated after the Project Owner built the project concept
during the basic planning phase and brought to the DB Contracting Firms. The project concept
should clearly define the performance criteria such as output, input, waste and any other
performances the employer may desire. This makes an additional responsibility to the contractor
which is ¨fitness to purpose¨ according to the Orange Book of FIDIC. Fitness to purpose is beyond
the professional duty of care and places liability on the contractor for any failure of the design to
perform the standards required.

Typical advantages of this system include:

 reducing fragmentation and adversarial relations between designers and constructors;
 minimizing Project owners’ risk transferable due to Designers’ faults;
  accountability and entire responsibility for both design and construction which entitle the
employer to receive completed project is onto a single contractor;
 employers’ responsibility to co-ordinate interfaces between different project elements is
avoided;
 single point responsibility minimizes the opportunity to claims by the contractor due to
design related issues;
 coordination between design and construction processes will also be enhanced (both in
communication for constructability as well as in fast tracking); and
 the client budget or financial requirement is defined early enough in the development
process.

For this type of delivery systems, either joint ventures or firms with large design and construction
capabilities were able to participate.

The disadvantage of this delivery system is loss of control, cost of tender and cost of risks.

 Since limited supervisory role by the employer representative is practiced; which is relatively
flexible and makes the employer distanced from the whole process, the employer has little
chance to understand what is developed and entertain variations in requirements implying
loss of control.
 Contractors in order to provide reasonable offer, their tender cost is higher than in the case
for DBB delivery system. This is because they need to carryout acceptable design for project
cost offers. Though it was not practiced often, employers who shared costs related to
tendering are informed to get seriously considered offers. World Bank suggested a Two
staged procurement method based first on technical merit and followed by financial
competition and not for more than six bidders.
 The increase in risk transferred onto the contractor will be counterbalanced by the increase in
contract prices which can be taken to include these costs of risks.

Projects carried out using DB delivery system are often called Turnkey Projects because a single
contractor is responsible to hand over the completed facility and let the Project owner to turn the key
and gets in. The following standard forms of DB Conditions of contract are known for use for such
delivery systems:
  FIDIC Orange Book
 ENAA Model Form International Contract
 ICE Design & Construct Conditions of Contract & etc.

4. Finance / Build Operate Transfer (BOT)

Build - Operate - Transfer is a form of procurement and contract delivery system that promotes
Public Private Partnership (PPP) in which a private company is contracted to finance, design,
construct, operate for a certain period (usually 10 years) and transfer. BOT contractors look to
project financiers for the realization of projects through equity contributions or credits. Such
provisions are different from budgeted finances such that they involve no or limited re – course
which means the project owner is not responsible for any liability other than force majeure and
agreed upon claim adjustments. This obliges that projects should first be viable for revenue
generation in order to payback its depts.

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. BOT project involves a potentially complex
contractual structure. The Operation period between completion and transfer gives the contractor an
opportunity to verify the quality of the output of the services and works, and train the employer
personnel on how to manage the facility afterwards. In some BOT contracts, defect liability period
will be included in order to ensure the quality of the facility during transfer. This is because,
operators in an attempt to save costs, may decrease operating and maintenance expenditures towards
the end of the concession period.

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.

Such delivery system requires appropriate packaging of projects and their definition clearly. It is
advisable to start with small projects and tries to develop experience and expertise to make such
delivery system successful. Most BOT projects failed because of their built up and engagement in
very large projects which is an extremely risky business for contractors. Consortium of contractors is
used to carry out such projects. The increasing popularity of the BOT project is largely due to a
shortage of public funding and the opinion that the facility will be more efficiently managed by a
private entity.

The standard forms of BOT Conditions of Contract known for use for such delivery systems is
FIDIC Yellow Book

5. Construction / Facility Management Consultancy

Construction Management Consultancy Delivery System is a response to problems associated with

DB and BOT where the Project Owner was not well represented for its benefit and the problem of
fragmentation between Planning and Implementation. As a result, construction management
consultancy firm is used to coordinate all activities from concept inception through acceptance of the
facility. Facility management consultancy adds operation of facility during operation to Construction
Management Consultancy.

Construction Management service in such delivery system include the management activities related
to a construction program carried out during the Basic Planning, Design & Construction
Implementation and its completion process that contributes for the successful completion of projects.

The main difference of this delivery system is that, while all the others involve only during the
implementation phase after major decisions was made during the Basic planning phase of the
construction process, it is involved in the whole construction processes. Construction Management
Consultancy service are particularly attractive to organizations that involve in construction physical
infrastructures such as MoE, MoH, Real Estate Organizations, MoWRs, etc. Construction
Management Consultants then represents Project Owners to carry out the following services:
 Feasibility studies of Construction related services
 Plan and Monitor the Triple Constraints of Project Performances
 Lead and Organize regulatory systems of the Construction Industry
 Valuation, Quantity Surveying and Procurement and Contract Management Services


3.3. Types of Construction Contracts
Contracts for the execution of civil engineering works are of following type:
a) Lump sum contract
b) Unit rate contract
c) Cost plus fixed fee contract
d) Cost plus percentage of cost contract
e) Labor contract

a) Lump Sum Contract

In this type of contract, the contractor offers to do the whole work as shown in drawings and
described by specifications, for a total stipulated sum of money. It fixes the price to be paid for
carrying out the work, before the start of the contract. A lump-sum price should cover all costs,
overheads, risk contingencies and profit. Contractors and subcontractors are commonly required
to bid for work on the basis of lump-sum tender prices. The preparation of a lump-sum price
requires access to full project documentation including drawings, specifications and sometimes a
bill of quantities. Contractors and subcontractors must ascertain the extent and the quantity of the
work.

Lump sum contract are typically used for buildings. The qualities of the materials required can
be calculated with sufficient accuracy during the bidding process to allow contractors to submit a
single lump sum price for the work.

There are no individual rate quoted, thus it becomes difficult to make adjustments in the contract
value of any changes are to be made in the work later on. A Lump Sum Contract is more suitable
for works of smaller in size and where contractors have prior construction experience. The
experience enables the contractors to submit a more realistic bid. This type of contract is not
suitable for difficult foundations, excavations of uncertain charter, and projects susceptible to
unpredictable hazard and variations.

b) Unit Rate or Bill of Quantity Contract

Also called a schedule contract, in this contractor undertakes the execution of work on an item
rate basis. The amount to be received by the contactor depends upon the quantities of various
items of work actually executed. The payment to the contractor is made on the basis of detailed
measurements of different items of work actually done by him.

Unit-price contracts are 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.
The designer may calculate that 1,000 m3 of earth needs to be moved, but the owner and
contractors know that after the work has been completed, the contractor may not move exactly
1,000 m3. The exact quantity will usually vary.

Contractors submit a price for each item on a unit-price contract. Unit prices are multiplied by
the engineer’s estimated quantities and totaled. The low bidder is the bidder with the low total of
the all items. 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.

The item rate contract is most commonly used for all type of engineering works financed by
public or government bodies. This type of contract is suitable for works which can be divided
into various items and quantities, under each item, can be estimated with accuracy.

c) Cost plus Fixed Fee Contract:

When projects are fast – track and required to be completed expeditiously and where it is
difficult to estimate the project cost before, the project expenses called costs will be recorded and
a fixed amount which is agreed upon by the contracting parties will be added as payment to the
contractor. A contract that stipulates to reimburse cost together with an additional fixed fee, it is
called a cost plus fixed fee contract. Such a contract is desirable when the scope and nature of the
work can at least be broadly defined and for important structures such as monumental buildings
which are Time and Quality driven than Cost driven. In such contracts:
 The work is executed in the best interest of the owner with regard to the project
quality and time,
 There is no way that the contractor can loose,
 Changes and Amendments can be accommodated amicably,
  The amount of the fixed fee is determined as a lump sum from a consideration of the
scope of the work, its approximate cost, nature of work, estimated time of
construction, manpower and equipment requirements, and
 The owner could not easily anticipate the final project price and can cause budgetary
problems

d) Cost Plus Percentage of Cost Contract:

This type of contract is similar to the Cost plus fixed fee contract but its fixed fee is made
variable using a percentage of the cost which is meant to cover the overhead and profit costs of
the contractor. Contract Administration becomes intense in such type of contract in order to
protect the interest of the owner. This is because the payment is made by determining the actual
cost of the work plus a certain percentage. The disadvantage of such kind of contract is the
tendency to increase the cost of the work to earn more profit by way of percentage of enhanced
actual cost.

e) Labor Contract:
When the Project owner is responsible for the provision of major resources such as materials and
Equipments other than labor, small tools and equipments and their management, it is called a
labor contract.

3.4. Contract Documents

The main contract documents are:
a) Agreement
b) Letter of acceptance
c) Bid (tender) document
d) Special condition of contract
e) General condition of contract
f) Specification
g) Drawing
h) Bill of Quantity
Agreement: is the document that represents and reflects the legal contract between the owner
and the contractor. Obviously there is also a contract between the owner and the designer, and
between the general contractor (GC) and the subcontractors, or between the contractors and the
suppliers for those contracts. It is simply a letter that constitutes legal evidence that a contract
exists, and forms the basis for its enforcement.
Letter of acceptance: means the letter of formal acceptance signed by employer and issued to
the contractor awarded the bid.
Bid (tender) document: is a document submitted by the bidder for competition. It includes Bid
Submission Form, Bid Security, Priced Bill of Quantities or Activity Schedule, Qualification
Information Form and Documents, and any other document or information required to be
completed.
Conditions of Contract is a document that states the obligations and rights of the parties and
detail the conditions under which the contract is to be carried act. It states to what extent should
be the relation between the engineer, contractor and client. It includes General and Special
(Particular) conditions of contract. General and Special Conditions of Contract is the
administrative law applicable to the contract which is legally enforcing the contracting parties.
MWUD, FIDIC, PPA, and Other General and Particular Conditions of Contract
General conditions of contract: a document called the General Conditions is an essential part
of the contract. It defines the responsibilities of the parties involved in the contract- the owner
and the general contractor. It describes the guide lines that will be used in the administration of
the contract. Various standard forms of General Conditions have been development by different
organizations.
Special conditions of contract: are meant for those particular contexts and requirements that
can not be standardized and generalized into common conditions of contract. The purpose of the
Special Conditions of Contract is to provide an extension of the General Provisions of the
contract to fit the specific project at hand. They serve as amendments or augmentation to the
General Conditions.
Specifications: may also be known as Technical provisions. They are written instruments to be
used in conjunction with the drawings, so together the drawings and the specifications fully
describe and define the requirements of the contract, to include the quality that is to be achieved.
They supplement the drawings and provide information that cannot be shown in graphic form, or
information that is too lengthy to be placed within the drawings. They guide bidders in the
preparation of cost proposals as well as field execution of the work. They also guide the
contractor through the processes of ordering materials and construction and installation of the
facility.
Bill of Quantities: Describe the expected amount of work (measured) in works; it sets out the
units of measurement, the units of work, the unit price and the total cost of the works.
Drawings: are the means by which the designer conveys the physical, quantitative, and visual
description of the project to the contractor. The drawings are a two dimensional representation of
the physical structure that meets the objectives of the owner. They are also known as plans or
blueprints.