Construction

Project
Management
Construction Contract
Table of Contents

1. 2. 3.
Construction Construction Classification
Contract Document of Engineering
Contracts

4. 5. 6.
Bidding Subcontracting What to do after
Process the session?
 1.
Construction Contract
Construction Contract
Various types of contracts have been evolved to suit the various subject
matters of contracts complying with the legal requirements. Construction
contracts also have many variants and these vary from country to country.

These are the general criteria:

❖There must be mutual agreement between the two parties.
❖There must be an offer made by one party called the promisor.
❖The other party, called the promisee, must accept the offer.
❖There must be considerations, which is usually payment in the form of
money for doing of an act or abstinence from doing a particular act
by promisor for promisee.
❖The offer and acceptance should relate to something that is not
prohibited by law.
❖The offer and acceptance constitute an agreement that when enforceable
by law becomes a contract.
❖The contracting parties entering into agreement should be competent,
i.e., not disqualified by either infancy or insanity to make such agreement.
 2.
A Contract Document
Construction Contract
A construction contract comprises essentially the following documents:

The Contract Drawings - The contract drawings are the means through
which the physical, quantitative and visual descriptions of the project are
conveyed to the contractor. These are normally provided in the form of a
two-dimensional diagram, referred to as the plan or the blueprint;
however, in some cases, the drawings could be provided in the form of a
softcopy consisting of ‘read only’ Autocad drawing files.

The Specifications - Specifications, or technical provisions, are written

instructions to carry out a work. It also contains information not possible to
show on a piece of drawing. Drawings mentioned earlier together with
specifications furnish the complete instructions to convert an architect’s
and a designer’s imagination into reality
 Construction Contract
Specifications commonly deal with the following aspects:
❖ The quality of materials
❖ The quality of workmanship
❖ The frequency of testing
❖ The approved manufacturers
❖ The relevant Indian standards describing the material
❖ The inspection and installation method
Construction Contract
The General Conditions of Contract (GCC) - The general conditions of contract
are an essential part of the contract. The term ‘general’ implies that the
document is a standard one used in all the contracts entered by a party (the
owner). The general conditions of contract set out the responsibility and
obligation of parties to the contract. It spells out the scope and performance of
the contract, valuation and payment terms, arbitration and laws, labour
regulations, safety code, various forms used for the tender and required deeds
under the general conditions of contract.

The Special Conditions of Contract (SCC) - Certain

amendments/additions/deletions are made in general conditions of contract in
order to make it suitable for a particular project. These amendments are
contained in a separate document called special conditions of contract (SCC).

The Bill of Quantities (BOQ) - The bill of quantities shows the net quantity to be
executed in each item of work. Items are classified into earthwork, anti termite
treatment, waterproofing, brickwork, concreting, whitewashing and painting,
flooring and finishing, doors and windows, structural steel, aluminium works,
stonework, etc.
 3.
Classification of
Engineering
Contracts
Classification of Engineering Contracts
The activities in a construction project can be taken to comprise largely the
following classes:

Engineering - These activities include issues related to process finalization,

structural analysis and design, technical issues related to equipment design and
selection, etc.

Procurement - The procurement of materials equipment, etc., comes under this

category, which may also be taken to include identification of suitable vendors.

Construction - This covers the construction, installation and test run of a

constructed facility before it is handed over to the owner for actual operations.
Classification of Engineering Contracts
In addition to the above, sometimes other methods such as rate contracts or
term contracts are also used.
 Separated Contract
The separated contract, which is a sequential process, has been the traditional
system adopted for construction contracts. In separated contracts, there is a
clear division between the design and construction responsibilities.

❖ Lump-sum Contract
In this form of contracting, from the drawings and other details of the project
provided by the client, the contractors quote a single lump-sum figure, which is
the total contract value of the work. Obviously, the contractor arrives at this
figure on the basis of his own analysis of rates and estimated quantities.
❖ Measurement Contracts
Item rate contract This contract is so called because more than the total
amount or the quantity of work in any item, it is the rate of the item quoted by
the contractor that is held sacrosanct.

Percentage rate contract In this form of contract, tender documents also

contain the analysed schedule of rates for each item, in addition to the detailed
estimated quantities expected in the execution of the works

❖ Cost Plus Percentage

In this kind of contract, the client agrees to pay the contractor a certain
percentage of the (actual) cost incurred by the contractor while completing a
job, in addition to the cost itself. Thus, the tenderer only quotes this
percentage..
 Management Contract
❖ Management Contract
In this type of contract, the managing contractor is appointed at the earliest
possible time. This helps the client to avoid dealing with a large number of
small contractors. In management contract, the client has to deal with a single
(principal) contractor besides a designer.

❖ Construction Management Contract

In the construction management contract, construction manager is appointed
by the client at an early stage to provide planning, management and
coordination. The owner also appoints the designer and contractors for
different works. The role of construction manager, therefore, is mainly
coordination among different contractors, besides ensuring timely completion
of project within the budgeted cost according to the specifications.
❖ Design, Management and Construction Contract
In this arrangement, the client appoints a single (principal) contractor to take
care of design and construction. Thus, the client has to deal with a single
agency for both design and construction. The basic design concepts may be
provided by the client himself or through an independent agency.
 Integrated Contract
❖ Design—Build
This is a form of contract in which the contractor takes up the responsibility for
both design and construction, based on basic plans drawn up by the client. In
other words, design and construction are handled within a single organizational
structure, and a perennial conflict between the designer and the contractor is
avoided.

❖ The Turnkey Contract

As the name suggests, this comprehensive contract entrusts the responsibility
of all activities involved to the contracting agency, and the owner simply wants
to ‘turn the key’ at completion to take over the facility. Thus, in such contracts
all activities related to surveying, drawing up specifications, design, project
planning, construction and test operation are entrusted to one large
contracting organization, which may break the activities down and engage
other agencies to carry out specific jobs.
❖ Build, Operate and Transfer (BOT) Contract
Apart from the responsibilities of the turnkey contract, this throws in the
responsibility of fundraising for the project in the contractor’s court. In return,
the contractor is allowed to ‘operate’ the facility for an agreed period of time to
recover the cost incurred in the design and construction of the facility. This
system of contracting is useful when the client does not want to invest directly
in the project, and wants to encourage development projects through external
funding and investment.
 Discretionary Contract
❖ Partnering
This is a new form of agreement or system, adopted within normal construction
contracts or design–build contracts, in which the client and the contractor
together form a project team based on mutual confidence and then work
together to manage the project to a successful conclusion, yielding a profit for
both parties. The fundamental philosophy behind partnering is the mutual trust
among parties involved in the partnering.

❖ Joint Venture
In large projects, very often no single contracting company has adequate
expertise and/or resources to be able to bid alone and become the main
contractor. In such cases, several contractors pool in their resources and form a
joint venture, and bid for the project together. Very often, a company is formed
especially for that particular project.
 4.
Bidding Process
 Bidding Process
Open Bidding
Open bidding is adopted for small-value projects that involve typical nature of
work. The risk involved in the project is less here. The owner specifies some
minimum eligible criteria for issue of the tender document. If these criteria are
satisfied by a contractor, the tender document is issued to him.

Selective Bidding (Limited Tender)

Selective bidding is adopted for very specialized projects. In this approach, a
two-tier procedure is adopted. The first step is the pre-qualification process for
selection of a set of contractors. In selective bidding, the tender document is
issued only to selected bidders who had qualified from the pre-qualification
process.
 Pre-Qualification Process
A typical pre-qualification process would take anything between 8 weeks and 10
weeks, and may involve considerable efforts on the part of the owner
organization. Selection of the ‘wrong contractor’ has been identified as one of
the causes of project failures. Hence, the gains in long terms that result from
pre-qualification process are worth the time and effort spent on it.

Notice for Pre-qualification

Upon receipt of pre-qualification document from the owner, the contractor fills
up the different information required for the purpose. Although the
information required for pre-qualification varies from project to project and
from owner to owner, there are certain aspects that are typically desired by an
owner or employer for selecting the prospective bidders for a proposed project.
 Pre-Qualification Process
Typical Documents Required for Pre-qualification

Letter of transmittal -Letter stating applicant read and understands contract

Power of attorney -Letter stating signing authority
Financial information
Details of similar works
Concurrent commitment -Projects currently under execution
Certificates for completed jobs
Structure and organization
Details of technical and administrative personnel
Details of plant and equipment
Some other questions
Construction Methodology
 Notice Inviting Tender
A common practice is to publish a formal ‘notice inviting tender’ (NIT), with the
following details:
❖ Name of the authority inviting the bids
❖ Name of the project
❖ Conditions for eligibility of contracting agencies to submit a bid
❖ Brief details of the project
❖ Estimated cost and time of completion of the project
❖ The cost of the tender documents
❖ Earnest money to be deposited with the completed tender
❖ Date and time by which the bids are to be submitted and the place of
submission
❖ The date and time of opening of the bids
 Submission of Bids
Once a contracting agency, through an NIT or otherwise, learns of the
availability of an opportunity, and decides to make an offer, it obtains the
required tender documents and other details, carries out its own analysis of the
job, and determines the cost at which it is willing to carry out the project.
Normally, contracting agencies carry out a survey by visiting the site to check
the availability of water, labour, power, transport, etc., and study issues like the
kind of construction methodology and temporary infrastructure that would be
required to be set up.
 Analysis of Submitted Tenders
❖ Evaluation of offers is generally carried out by an evaluation committee
usually consisting of three persons, with one person being from the finance
department.
❖ The seniority of members of the committee depends upon the value of the
contract. The committee scrutinizes the submitted tenders, prepares a
comparative statement containing the rates of all the offers and conditions, if
any, and submits a recommendation for the award of the job.
Basis for Evaluation and Acceptance
❖ Indeed, while the quoted cost is perhaps the most widely used basis for
drawing up a comparative statement, other aspects of past performance of a
contracting agency such as safety, compliance with quality standards, and
dispute resolution are also being increasingly considered.
❖ Acceptance of an offer needs to be done very carefully, keeping a
comprehensive view of the situation in mind. It should, however, be pointed
out that increasing efforts are being made to develop other criteria than
cost.
 Letter of Intent
❖ If the competent authority approves the recommendations of the tender
committee, a letter of intent is issued to the contractor requesting him to
submit necessary documents like partnership deed in case of partnership
firm, and income tax clearance (if not submitted earlier).

Work Order
❖ After the contracting agency accepts the offer and submits necessary
documents, a work order is issued detailing the special terms and conditions,
the mode of payment, the payment of security deposit, the total value of the
contract, etc. In the work order, the contractor is asked to enter into an
agreement with the owner and initiate the work.
 Agreement
❖ At this stage, the contractor contacts the engineer-in-charge of the project,
and while preparing to start work at the site, enters into an agreement with
the owner. The agreement includes previous relevant documents like the
letter of intent, the work order, the general conditions of contract, the special
conditions of contract, and the specifications and drawings. After the
documents are signed by both parties, it becomes a contract, which is legally
binding.
 5.
Subcontracting
 Subcontracting
❖ The major construction agencies are essentially civil engineering
organizations. More often than not, they are required to engage a variety of
vendors and subcontractors for execution of specialized works in a modern-
day project. Any project involves a number of items.
❖ It is very difficult to be a specialist for all the activities/works involved in a
project. In such cases, a part of activities is sublet or subcontracted by the
main contractor to other contractors, known as subcontractors to the main
contractor for this project.
 Classifications of subcontractors
❖ Labour Only – The subcontractors undertaking such as works are known as
general subcontractors and sometimes also referred to as petty
contractors.
❖ Material Only – When the requirement is that for supplying material alone.
The supplying agencies are also known as vendors or suppliers.
❖ Equipment Hiring - General contractors hire equipments for a variety of
reasons. The hiring rate depends on market conditions, duration of hire,
payment terms and other terms and conditions, besides a host of other
factors. The terms and conditions of hiring should be clearly spelt out.
❖ Back-to-Back - Sometimes, general contractors also resort to
subcontracting a work package in totality. Needless to say, these
subcontractors are cash-rich contractors and command respect in the
industry. Such arrangements should be thoughtfully considered, though.
❖ Labour, Material and Equipment - They are referred to as specialized
subcontractors or speciality contractors. Sometimes, these contractors are
specified by the owners themselves. In such cases, they are called
nominated subcontractors.
 Work Order
❖ Once the subcontractor has been finalized for a work, work order is
prepared. This is a legally binding agreement between the main contractor
and his subcontractor, and should be treated as a sacrosanct document
in order to avoid disputes at a later date.
❖ The work order should contain scope of work (what it includes and what it
does not), clear and unambiguous specification, relevant drawings,
provision of samples, mock-ups and inspection, and clear mobilization and
delivery programme/schedule. The work order should mention the mode
of measurement as many a time, disputes arise due to ambiguity in mode
of measurement.
 Terms and Conditions
❖ Performance guarantee to be deposited by the subcontractor
❖ Commencement and completion dates
❖ Applicable taxes and duties on works contracts, insurance, value-added tax
and income tax deduction
❖ Variation in rate
❖ Site working and access
❖ Method of measurement
❖ Variation in scope of work
❖ Liquidity damages
❖ Maintenance and defect liability period
❖ Payment terms
❖ Obligation towards labour
❖ Subcontractor’s obligations and responsibility
❖ Facilities to be provided by general contractor
❖ Arbitration clause in case any dispute arises
 6.
What to do after this
session?
What to do after this session?

GA 9 Revision 9 FA 2 Submission