CONTRACTS AND SPECIFICATIONS

I. 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”. 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. 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. To make a valid and binding agreement, the party entering into such an agreement
should be competent to make such agreement.

Types of Contracts

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 adjust 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
must 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
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 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

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

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. 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 based on merit rather than the fee alone. In case of cost-plus percentage
contract, the contractor tends to 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 finalized.
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

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 must 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:

a. Turn-key Contract
A turn-key contract is an integrated contract in which all works pertaining to various
disciplines such as civil, electrical, mechanical etc. are in the hands of a single contractor called
the main contractor. The main contractor can sublet the contact to subcontractors who are
specialists in their respective fields. In this contract, the main advantage to the owner is that he
need not coordinate the work of different contractors. The main contractor is responsible for all
kinds of jobs starting from planning to commissioning stage. The owner takes over the entire
work (which is fully operational and of proven performance) from the main contractor.

b. Package Contract
In a package contract, two or more related jobs, each of which could form a separate
contract are combined in a single contract. In the field of civil engineering, generally, design and
development are combined with construction and supply or maintenance. In this type of contract,
plan of work and standards are established, and the work is carried out accordingly by the
contractor. The main contractor is responsible for safeguarding the owner’s interest and for this
reason, prior approval of design and technical aspects must be taken from the owner.
Responsibility for correctness of the design lines with the main contractor

c. Negotiated Contract
In this type of contract, negotiation across the table takes place between representatives
of the owner and the main contractor for project cost and other conditions of contract. In this
type of contract, detailed projects specifications are arrived at by discussions between the owner
and the main contractor and consultant. A negotiated contract involves extended discussions for
finalization as a competitive contract. Most of the consultancy projects of World Bank are
negotiated contracts.
 d. Continuing Contract
In this type of contract, new or additional work is awarded to the contractor based on
agreed terms and conditions of an existing contract. Such contracts do not require retendering
and hence can save time and money.

e. Running Contract
Such contracts provide goods and services at specified intervals or as and when required
by the owner. The contract price is not fixed, and payment is based on goods supplied and
services rendered as specified in the contract documents.

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.
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 workmanship required.

h.) Conditions of Contract: The terms and conditions of contract specify the following.
i. Rates of each item of work inclusive of materials, labor, 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.
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.
xi. Arbitration for settlement of disputes. In addition to the above, performance

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 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.
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.

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 compensations 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. 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 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.

j. Price Escalation
During execution of the work, labor wages and material prices may increase because of
inflation. The contract conditions should, therefore, include on appropriate clause for payment of
escalation to the contractor.

k. Termination of Contract
The owner can terminate the contract in the event of default or bankruptcy of the
contractor and may impose penalty as per the contract agreement. Default on the part of the
contractor includes abandoning the work, failure to maintain required progress, nonobservance
of rues / instructions etc. for which the owner may rescind the contract and impose penalty up to
10% of the estimated cost of work. Due notice must be served on the contractor before
termination of the contract.

II. SPECIFICATIONS
Specifications are statements which describe the nature and class of work, materials to be
used, labour to be employed, method of work, precautions to be taken, quality of workmanship
etc. The cost of the work depends much upon the specifications. The nature of work can be easily
understood from the study of specifications. The drawings of a building or structure show the
arrangement of rooms and dimensions (length, breadth, and height) and include a brief
description of the different parts. Drawings do not furnish the details of different items of work,
the quantity of materials, workmanship etc., which are all description in the specifications.
Specifications serve the following purposes:
 i. Guide the bidder at the time of tendering for arriving at a fair price for the work
involved.
ii. Provide guidance for execution and supervision of work and purchase of materials.
iii. State the acceptance criteria for different items of work.

Types of Specifications

A. Contract Specification
The specifications prepared for a particular job to accompany the working
drawings are
contract specifications. These are further clauses at:
 General Specifications - are also called brief specifications. These give a general idea
of the class and type of work giving brief descriptions of materials, quality and
workmanship.
 Detailed specifications - provide a detailed description of each item as per schedule
of quantities, specifying the materials to be used including their proportions, method
of work quality of workmanship required etc. The specifications are written, as far as
possible, in the same sequence or order in which the work is carried out.

B. Guide Specifications
These specifications provide a guideline for preparing contract specifications and give a
broad idea about class and type of construction for a particular purpose.

C. Standard Specifications
These specifications are prepared for various materials or group of materials for the
guidance of all concerned with construction or construction industry. These specifications
include methods of manufacture methods of tests, code of practice etc.,

D. Manufacturer’s Specifications
Manufacturers prepare specifications of their products for the guidance of users. These
specifications also include installation instructions and other guidelines for use and maintenance
of products. These specifications are generally provided in the form of manuals. Clear
understanding of specifications plays a vital role in the successful completion of a construction
project.

GROUP 5
GANDIA, MARANATHA I.
LUMPAS, JUSTIN DRAKE T.
DOCOS, ERWIN JR.