Details of Contract

Chapter No : 01

INTRODUCTION
A contract is a legally binding agreement that recognizes and governs the rights
and duties of the parties to the agreement. A contract is legally enforceable because it
meets the requirements and approval of the law. An agreement typically involves the
exchange of goods, services, money, or promises of any of those.

If two parties have regularly conducted business on certain terms, it may be

reasonable to presume that in future dealings where there is no contract, the parties wish
to incorporate the terms of the previous contracts. However, if a party wishes to
incorporate terms by course of dealing, the original document must have been contractual
in nature, and delivery receipts may not fit this description. In Australia, the contract is a
legally binding exchange of promises or agreement between parties that the law will
enforce . Breach of a contract is recognized by the law and remedies can be provided.
Almost everyone makes contracts every day. Sometimes written contracts are required,
e.g., when buying a house . However the vast majority of contracts can be and are made
orally, like buying a law text book, or a coffee at a shop. Contract law can be classified,
as is habitual in civil law systems, as part of a general law of obligations (along with tort,
unjust enrichment or restitution)ere is a further requirement that the document was
procured after formation.

In common law jurisdictions there are three key elements to the creation of a
contract. These are offer and acceptance, consideration and an intention to create legal
relations. In civil law systems the concept of consideration is not central. In addition, for
some contracts formalities must be complied with under what is sometimes called a
statute of frauds.

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Chapter No : 02

LITERATURE REVIEW
1. HMSO, Licensing Division, St Clements House, 2-16 Colegate, Norwich, NR3
1BQ Tel No (01603) 621000© Crown Copyright 2002 - has studied about the directors
and managers who have the power and responsibility to make decisions and oversee an
enterprise are called management. The size of management can range from one person in
a small organization to hundreds or thousands of managers in multinational companies.
In large organizations, the board of directors defines the policy which is then carried out
by the chief executive officer, or CEO. Some people agree that in order to evaluate a
company's current and future worth, the most important factors are the quality and
experience of the managers. Contracts can range from a single, ad hoc agreement for the
provision of a product or service of relatively low monetary value, requiring little more
than a short term, formal relationship, or an overarching framework agreement, through
contracts for long term product or service contracts, to a series of contracts for large,
complex construction or leading edge research and development contracts with
multimillion pound values requiring the establishment of strategic partnerships and
alliances. Contractual Management is a complex but strategic issue.
2. Contract Life-Cycle Management open Source CM, 2012 - has studied about the
Management in businesses and organizations is the function that coordinates the
efforts of people to accomplish goals and objectives using available resources
efficiently and effectively. Management includes planning, organizing, staffing,
leading ordirecting, and to achieve its goal .

3. Contract management Guide, Republic of South Africa 2010 - has studied

about the Management is often included as a factor of production along with‚ machines,
materials, and money. According to the management guru Peter Drucker [1909-2005],
the basic task of management includes both marketing and innovation. Practice of
modern management originates from the 16th century study of low-efficiency and
failures of certain enterprises, conducted by the English statesman Sir Thomas More
[1478-1535]. Management consists of the interlocking functions of creating corporate

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policy and organizing, planning, controlling, and directing an organization's resources in

order to achieve the objectives of that policy.

4. Best Practices in Contract Management Strategies for Optimizing Bussines

Relationships (2004), Aberdeen - studied about the Integrated contracts are used in the
built environment to arrange the formal relation between the client and contractor during
building projects. In these types of contracts, several phases of a project lifecycle are
combined. Such that this facilitates a combination of the design, build, finance,
maintenance, and operation phase can be incorporated in the same contract under the
uniform UAVGC conditions. The use of integrated contracts (compared to the traditional
contract types), led to a change as to how projects are governed by the client, as the
traditional contract consists of only one contract phase under the UAV uniform
conditions.
5. A professional guide to contracting including model conditions, A D All wright
& R W Oliver. Revised by E S Singleton & K R Burnett (1997) - has studied about the
Integrated contracts are used in the built environment to arrange the formal relation
between the client and contractor during building projects. In these types of contracts,
several phases of a project lifecycle are combined. Such that this facilitates a combination
of the design, build, finance, maintenance, and operation phase can be incorporated in the
same contract under the uniform UAVGC conditions. The use of integrated contracts
(compared to the traditional contract types), led to a change as to how projects are
governed by the client, as the traditional contract consists of only one contract phase
under the UAV uniform conditions.

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Chapter No : 03

METHODOLOGY
A contract is an agreement between two or more persons creating rights & duties and
which is enforceable by law.

3.1 Definition of Contract according to different persons

According to Pollack

“Every agreement and promise enforceable at law is a contract”

According to Salmond

“A contract is an agreement creating and defining obligation between two or more

persons by which rights are acquired by one or more to acts or forbearance on the part of
others”

According to Sir William Anson

“A legally binding agreement between two or more persons by which rights are acquired
by one or more to acts or forbearance on the parts of others”.

3.2. Contracts and Forms of Contracts

When two or more persons have a common intention communicated to each other
to create some obligation between them, there is said to be an agreement. An agreement
which is enforceable by law is a “Contract”. According to section 10 of the Indian
Contract Act, 1872 only those agreements are enforceable by law which are made by the
free consent of parties competent to contract, for a lawful consideration and with a lawful
object and are not expressly declared to be void. This is subject to any special law
according to which contract should be in writing and attested by witnesses.

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The following are the essential ingredients of a contract:

a. Offer made by one person called the “Promisor”.

b. Acceptance of offer made by the other person called the “Promisee”.

c. Doing of an act or abstinence from doing a particular act by promisor for promise a
called consideration.

d. The offer and acceptance would relate to the something which is not prohibited by law.

e. Offer and the acceptance constitute an agreement, which, when enforceable by law,
become a contract.

f. In order to make a valid and binding agreement, the party entering into such an
agreement should be competent to make such agreement.

For the purpose of an agreement, there must be a communication of intention

between the parties the to. Hence in the forms of a Contract there is:

a. A proposal

b. Communication of the proposal

c. A communication of the acceptance of the proposal

A contract is an agreement enforceable by law. It may be noted that the works

‘agreement’ and ‘contract’ are very often used as synonyms, but in fact they are not. All
contracts are agreements but all agreements are not necessarily contracts; agreements not
enforceable by law are not contracts. To be legally enforceable, the agreements must
satisfy two things, viz, intention to be bound and consideration. However, according to
the Indian contract Act 1872, an agreement is a contract if ‘it is made by the free consent
of parties competent to contract, for lawful consideration and with a lawful object, and is
not expressly declared to be void. The contract must be definite and its purpose should be
to create a legal relationship. A contract creates an obligation i.e. a duly cast upon a

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person by law. When the parties to a contract exchange promises, it gives rise to a
contractual obligation.

3.3. Types of contract

Contracts for the execution of civil engineering works are of following types:

a. Lumpsum contract

b. Item rate contract

c. Lumpsum and schedule contract

d. Cost plus fixed fee contract

e. Cost plus percentage of cost contract

f. Special contracts

g. Labour contract

h. Demolition contract

i. Fee contract

j. Target contract

a. Lumpsum 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. There are
no individual rates quoted, thus it becomes difficult to make adjustments in the contract
value if any changes are to be made in the work later on. The schedule of 3 different
items of work is not provided and the contractor has to complete the work as per
drawings and specifications for the agreed lump sum amount. Deposit of 10 % security
money and other conditions of the contract are included in the contract agreement. Upon
the completion of work, a fixed lumpsum amount is paid to the contractor. Detailed
measurements of different items are required but the whole work is compared and

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checked with drawings and specifications before releasing the payment. In large projects,
part payments are made to the contractor at different stages of work on money agreed
terms. In case the contractor stops the work in between he is not entitled for any further
payment.

Suitability :

A lumpsum contract is more suitable for works for which contractors have prior
construction experience. This experience enables the contractors to submit a more
realistic bid. This type of contract is not suitable for difficult foundations, excavations of
uncertain character, and projects susceptible to unpredictable hazards and variations.

Merits :

i. The owner can decide whether to start or shelve the project knowing the total
lumpsum price quoted by different contractors.

ii. The contractor can earn more profit by in-depth planning and effective management
site.

Demerits :

i. Before the contract is awarded, the project has to be studied thoroughly and the
complete contract documents has to be prepared in advance.

ii. In this type of contract, unforeseen details of work are not specified in the contract
document. Many additional items 4 may have to be undertaken as the work progresses,
giving opportunity to the contractor for claiming higher rates of the extra items not
included in the contract agreement.

b. Item Rate Contract

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

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the contractor is made on the basis of detailed measurements of different items of work
actually done by him.

Suitability :

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

Merits :

i. In this type of contract, there is no need for detailed drawings at the time of allotting
contract as in the case of lumpsum contract. The detailed drawings can be prepared after
the contract is awarded.

ii. Changes in drawings and quantities of individual items can be made as per
requirement within agreed limits.

iii. The payment to the contractor is made on the actual work done by his at the agreed
rates.

Demerits :

i. The total cost of work can only be known upon completion. As such, the owner may
incur financial difficulty if the final cost increases substantially.

ii. Additional staff is required to take detailed measurements of work done for releasing
payments to the contractor.

iii. The Scope for additional saving with the use of interior quality materials may prompt
the contractor to use such materials in the work.

c. Lumpsum and Scheduled Contract

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This is similar to the lumpsum contract except the schedule of rates is also included in
the contract agreement. In this type of contract, the contractor offers to do a particular
work at a fixed sum within a specified time as per plans and detailed specifications. The
schedule of rates for various items is provided which regulates the extra amount to be
paid or deducted for any additions or deletions made during the progress of work.

Measurements of different items of original work are not required but extra items are
required to be measured for payment. The original work shall however be checked and
compared with the drawings and specifications.

Suitability :

This type of contract is more suitable for construction works for which contractors
have prior work experience and can consequently estimate the project cost more
realistically.

Merits :

i. In this type of contract, additional staff for recording detailed measurements of

original item of work is not required for making payment to the contractor.

ii. The owner can know from tenders as to what the project will cost him. Knowing the
financial implications, the owner can decide to start or defer the project.

Demerits :

i. Before the contract is awarded the project has to be studied thoroughly and all the
contract documents are required to be completed in every respect.

ii. The non-scheduled extra items arising out of changes made in the drawings and
specifications are often a source of dispute because the contractor presses for rates higher
than the prevailing market rates.

d. Cost Plus Fixed Fee Contract

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Cost Plus fixed fee contract is desirable when the scope and nature of the work
can at least be broadly defined. The amount of fee is determined as a plump sum from a
consideration of the scope of work, its approximate cost, nature of work, estimated time
of construction, manpower and equipment requirements etc. In order to negotiate such a
type of contract, it is essential that the scope and some general details of the work are
defined. The contractor in this type of contract is selected on the basis of merit rather than
the fee alone. In case of cost plus percentage contract, the contractor has a tendency to

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increase his profit by increasing the cost of work. But this drawback is overcome in cost
plus fixed fee contract because here the contractor’s fee is fixed and does not fluctuate
with actual cost of work. Once this fee is fixed, the contractor cannot increase the cost of
work. Suitability :

i) This type of contract is suitable for works required to be completed expeditiously

and where it is difficult to foretell what difficulties are likely to be encountered.

ii) This contract is also suitable for important structures where the cost of
construction is immaterial.

Merits :

i) In this type of contract, actual cost is to be borne by the owner. Therefore, the
contractor performs the work in the best interest of the owner resulting in good quality
work.

ii) The work can be taken in hand even before the detailed drawings and specifications
are finalised.

iii) Changes in design and method of construction if needed can be easily carried out
without disputes.

iv) The work can be executed speedily.

Demerits :

i) This form of contract cannot be adopted normally in case of public bodies and
Government departments.

ii) The final cost of the work is not known in advance and this may subject the owner
to financial difficulties.

e. Cost Plus Percentage of Cost Contract

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In this type of contract, instead of awarding the work on lumpsum or item rate
basis, it is given on certain percentage over the actual cost of construction. The actual cost
of construction is reported by the contractor and is paid to him by the owner together with
a certain percentage as agreed earlier. The contractor agrees to do the work in accordance
with the drawings, specifications and other conditions of contract. In this type of contract,
proper control has to be exercised by the owner in the purchase of materials and in
arranging labour. The suitability merits and demerits of this type of contract are similar to
cost plus fixed fee contracts. An additional demerit is the tendency of the contractor to
increase the cost of work to earn profit by way of percentage of enhanced actual cost.

f. Special Contracts

There are certain contracts which are used at different occasions. Some of these contracts
are listed below:

i. Turn-key Contract
ii. Package Contract
iii. Negotiated Contract

g. Labour contract
Contractor quotes the rates only for labours and not for material . Materials are
supplied by owner and department .

Merits :
i. Quality of work is assured .
ii. Contractor is not affected by fluctuations in rate of material .

Demerits :
i) Wastage of materials .
ii) Delay in supply of materials .

iii) Delays in execution of work .

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h. Demolition contract
Demolition of existing structure and disposal of demolished material is called the
demolition contract .
Contractor quotes the higher amount and contractor has to payed full amount
before demolishing the existing structure

i. Fee contract
In these type of contract owner gives a fixed amount as a fee for contractor
services is a fee contract .
The cost of labours , materials and other expenses are beared by owner and if
contractor completes work earlier and economical , he will payed certain incentives .

g. Target contract
It is a combination of cost plus % and cost plus variable fee contract. Contractor is
payed rates on the basis of actual cost of work executed by him .
Contract document is not necessary at the time of signing of contract or aggrement .

3.4. Contract Documents

The contract document consists of the contract agreement (on non-judicial stamp
paper of prescribed value) and the following set of documents, each page of which is
signed both by the owner and the contractor.

a) Cover Title Page: It contains the name of work, name of owner, name of contract,
contract agreement number, contents etc.

b) Contents Page: It contains the contents of the agreement with page references.

c) Notice Inviting Tender (NIT): It contains a brief description of work, estimated cost
of work, date and time of receiving the tender, amount of earnest money, security
money, time of completion etc.,

d) Tender Form: It comprises bill of quantities, contractor’s rates, total cost of work,
time for completion, security money to be deposited and penalty clauses etc.

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e) Schedule of Issue of Materials: It contains the list of materials to be issued by the

department or owner to the contractor with rates and place of issue.

f) Drawings: These comprise a complete set of fully dimensioned drawings including

plans, elevations, and sections detailed drawings and site plan.

g) Specifications: It is not practicable to include detailed information of each item of

work in the limited space of description in the bill of quantities. As such detailed
specifications form a part of the contract agreement. Specifications should be clear and
precise covering all items of the bill of quantities.

Following specifications are normally included in the contract document.

i. General Specifications: These specify the class and type of work quality of
materials etc, in general for the work as a whole.

ii. Detailed Specification: These give detailed description of each item of work

including material and method to be used along with quality of work manship required.

h) Conditions of Contract:

The terms and conditions of contract specify the following :

i. Rates of each item of work inclusive of materials, labour, transport, plant/equipment

and other arrangements required for completion work.

ii. Manner of payment of contractor including running payment final payment, refund of
security money etc.

iii. Time of completion of work.

iv. Proportionate progress to be achieved.

v. Penalty for poor quality and unsatisfactory work, lack of proportionate progress and
for delay in completion.

vi. Extension of time for completion of work.

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vii.Engaging other agency at contractor’s cost and risk. viii. Termination of contract. ix.

Subletting of the work.

x. Changes in design/drawings etc and valuation of variations.

3.5. Important conditions of contracts connected with contractual

problems

The members of the construction team should be fully aware of their rights and
obligations under the contract, they should be 27 thoroughly conversant with the precise
provisions and true importance of each clause in the contract agreement.

Following are in important conditions of contract:

a. Time of completion.

b. Delay and extension of time.

c. Penalty d. Compensation for delay in completion of work.

e. Liquidated damages.

f. Debitable agency

g. Valuation of variations

h. Settlement of disputes

i. Force of nature and natural disasters

j. Price escalation

k. Termination of contract

a. Time of Completion: The Contractor is required to complete the work within the
agreed time of completion which is specified in a suitable unit of time (year, month, week
etc) depending upon the nature and scope of work. The contractor is also required to
maintain a proportionate progress of work.

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b. Delay and Extension Time: Delay in completion of work not attributed to the
contractor should be brought to the notice of the owner by the contractor in writing,
within the time specified in the contract, for seeking extension of time. The owner will
satisfy himself that the delay is not on account of a lapse on the part of the contractor
before granting suitable extension of time.

c. Penalty: It is a fine imposed on the contractor for nonfulfillment of his

contractual obligations such as failure to maintain required progress of work, delay in
completion, poor quality or work, bad workmanship etc.

d. Compensation for delay in completion of work: The contractor is liable to pay

compensation to the owner for delay attributed to him in completion of work. The
amount of 28 compensation may be stated as a percentage of the estimated cost of work
for each unit of time delay. The maximum limit of compensation may be 10% of the
contract price.

e. Liquidated Damages: It is a fixed stipulated sum payable by the contractor on

account of penalty for delays and does not bear any relationship to the real damage to the
owner. It is generally high and fixed per day for excess period over the specified in the
contract for completing the work.

f. Debitable Agency: Whenever the contractor fails to fulfil his contractual

obligation in respect of progress or quality of work even after giving due notice by the
owner, it becomes necessary to appoint a debitable agency which works at the cost and
risk of the contractor. This agency is in the form of labour or other contractor to fulfill the
contractual obligations of the main contractor. The expenses incurred are charged from
the bill or security of the original contractor.

g. Valuation of Variations: The valuation of variations is based on change orders

issued in writing by the owner. Generally, the variation in individual items of work
should not be more than 25% and variation in total cost should not exceed 10%.

h. Settlement of Disputes: Efforts should be made to resolve disputes amicably

between the owner and the contractor through mutual discussions and negotiations.

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Arbitration clause may be incorporated in the contract to settle disputes not resolved
through mutual discussions and negotiations.

i. Forces of Nature and Natural Disasters: Natural disasters are acts of nature,
such as unprecedented floods / rainfall, earthquake, hurricanes, typhoons, fire etc. These
disasters along with occurrence of riots, civil commotion, revolt etc. are beyond the
control of the contractor and may lead to financial and time loss. The contractor should
obtain an insurance policy for such risks as can be covered by insurance. In the event of
29 financial or time loss, the contractor can claim financial compensation from the owner
for risks which are not insurable and an extension of time for all such risks.

3.6. The importance of Contract Documents for successful construction

claims

It is extremely important for the contract administration system on a project to

manage the documents forming the contract efficiently. In a claim situation, these
documents will assist in producing an effective claim submission and may be vital to its
success.

1. The contract documents should be compiled and signed as soon as possible after the
agreement has been reached.

2. The contract documents should reflect any changes that have been introduced to the
tender documents as a result of tender clarifications and negotiations between the
parties.

3. The propensity to include volumes of ‘other documents’ as appendices should be

discouraged.

4. A controlled set of contrast documents should be maintained on site.

5. The controlled set of documents should be annotated with cross-references to other

parts if the documents where necessary.

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6. A copy of the contract conditions which consolidates the general conditions and the
particular conditions should be produced for day-to-day use.

7. It is good practice to build up a ‘library’ of frequently used clauses, including any

amendment made by the particular conditions in a Word document for future
reproduction in correspondence and claims.

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Chapter No : 04

CONCLUSION
All over the world projects are losing billions of monies due to poor contract.
However, the problem is not the contract failing rather than the poor contract
management practices.

The issues of non-compliance with the rules of legislation can be attributed to a

general lack of knowledge with regards to managing projects or proper contract
administration. Guidance is required to ensure adherence to the laws, to support the
application of good practice within a project to avoid project/contract cost overruns and
delays, and to support the development and application of an effective overall
organizational approach to contract management.

Apart from the lack of knowledge with regards to proper contract administration,
the other factors affecting poor contract management like the impact of globalization
creating a thicker volume of the document, strict government rules and legislation,
technological innovation like BIM, and speed of change in contracting norm. Proper
contract management guidelines would enable the contract/project manager to manage
the contracts more effectively and efficiently.

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Chapter No : 05

REFERENCE
1. www.Wikipedia.coms
2. HMSO, Licensing Division, St Clements House, 2-16 Colegate, Norwich, NR3 1BQ
No (01603) 621000© Crown Copyright 2002
3. Contract Life-Cycle Management – open Source CM, 2012
4. Contract management Guide, Republic of South Africa 2010
(http://www.businessdictionary.com/definition/management)
5. Best Practices in Contract Management Strategies for Optimizing Business
Relationships (2004), Aberdeen Group
6. A professional guide to contracting including model conditions, A D All wright & R
W Oliver. Revised by E S Singleton & K R Burnett (1997),

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