LAW OF CONTRACT & ESTIMATION BAA3012

CONTRACT

SEM II0910Z 1
 CONTRACT
SEM II0910Z 2
 LESSON OUTCOMES
At the of the Class students are able
1. Describe what is contract
2. Describe the importance of contract
3. Differentiate the type of contract
4. Identify the right of contract for
construction works

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 CONTRACT
1. Introduction to Contract

Notice to Bid Contract

bidders opening Agreement

Bidding Period Acceptance Period (60 120 days)

-Written to proceed
-Formal Contract

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 CONTRACT
1. Introduction to Contract
to: Government Project (JKR):
1.
- Contract Document should be prepared
for procurement above RM200,000.00
- Based on Akta Kontrak 1949, officer that
represented government that sign the
contract document should be endorse by
the minister
- Contract document should be signed by
both parties within 4 months from LOA
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 CONTRACT
1. Introduction to Contract
to: Definition
1.
- A binding agreement between two or
more persons that is enforceable by law
- A contract is an exchange of promises
between two or more parties to do, or
refrain from doing, an act which is
enforceable in a court of law
- A binding legal agreement

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 CONTRACT
1. Introduction to Contract
to:
2. In general a contract is legal
document, almost always in written
form wherein the parties establish
their relationship. This should be
based on complete mutuality.
Essential to the contract is a clear
meeting of the minds of parties as to
what each will, and will not, do.

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 CONTRACT
1. Introduction to Contract
to: Every contract consists of several parts:
3.
a) A need (in construction, a description
of what is to be built)
b) An offer (offer from the contractor to
built with a sum of money)
c) An acceptance of the offer, by the
owner
d) Compensation (payment of the
proposed cost, from owner to
contractor)
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 CONTRACT
1. Introduction to Contract
to: Why we need contract?
4.
- To clarify the scope of work
- To determine the agreed price and
finish date of the work / project.
- To clarify the roles and responsibility
of all the parties involved.
- To find out the appropriate action to
be taken if any breach of contract
occurred among the parties.
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 CONTRACT
2. Type of Contract
to: Construction contracts can be broadly grouped
1.
into two categories:
a) Competitive Bidding Contracts (Price Based)
b) Negotiated Cost-Plus Contracts (Cost Based)
2. The three basic factors that favor the use of a
particular type of contract are:
a) The need to provide an adequate incentive
for efficient performance
b) The ability to introduce changes during
construction
c) The allocation of risks between owner and
contractor and the cost implication

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 CONTRACT
2. Type of Contract

Key consideration in a contracting strategy

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 CONTRACT
2. Type of Contract
Construction Type of
Contract

1. Competitive Bidding 2. Negotiated Cost-Plus

3. Combination
(Price Based) (Cost Based)
- Contract with price being - The actual cost incurred by
submitted by contractor in the contractor are reimbursed New Innovative Types:
his bid. together with a fee to cover 1. Turnkey
overheads and profit. 2. Use a combination of
contract types in a single
Many Types:
Two Main Types: project
1. Cost + % of Cost
1. Lump Sum
2. Cost + Fixed Fee
2. Unit Price
3. Cost + Fee + Profit Sharing
(admeasurements contract)
4. Cost + Sliding Fee
5. Cost + Guaranteed Max.
Price (GMP)

-High risk to contractor -Risk sharing -PMC administered

-Low risk to owner
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 CONTRACT
2. Type of Contract
0% 100%
Turnkey
Lump Sum
Unit Price
GMP
Cost Plus
Owner Direct Force
100% 0%

Owner Risk Contractor Risk

Level of Risk Associated with Various Contracts

SEM II0910Z 13
 CONTRACT
2. Type of Contract
1. Competitive Bidding Contracts
a) The main process for selecting
contractors, particularly for
government projects
b) There are two types of contracts:
i) Lump Sum
ii) Unit Price (admeasurements
contract)
SEM II0910Z 14
 CONTRACT
2. Type of Contract Lump Sum
i) Lump Sum
Generally used in smaller
straightforward works (referred to
plan & specification contracts).
A single tender price is given to
contractor for completion of a
specified work to satisfy the owner
Each contractor is required to
estimate the quantities and value of
work, based on clients designers
drawings and specification.
SEM II0910Z 15
 CONTRACT
2. Type of Contract Lump Sum
i) Lump Sum
Payments on monthly basis / linked
to achievement of progress. Based
on the estimated percent of the
total job that has been completed
Since the contractor is committed to
a fixed price, this type of contract
has very limited flexibility for design
changes
Demand that the design is
completed during tender stage.
With minimal changes
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 CONTRACT
2. Type of Contract Lump Sum
i) Lump Sum
Some contracts include typical
schedule of rate requiring the
contractor to insert individual
rates for valuing variations.
Generally, this contract
appropriate when the work is
defined in detail limited variation
is needed and level of risk is low
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 CONTRACT
2. Type of Contract Lump Sum

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 CONTRACT
2. Type of Contract Lump Sum
i) Lump Sum
This contract also suitable for
traditional, design & build and
turnkey
Suitable for building projects

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 CONTRACT
2. Type of Contract Unit Price
i) Unit Price (admeasurements)
The most popular form of
contracting in both the building and
civil engineering sector is still the
traditional system.
The project is design by the clients
designer and detailed Bill of
Quantity are prepared in accordance
with the appropriate standard
methods of measurement (SMM).
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 CONTRACT
2. Type of Contract Unit Price
i) Unit Price (admeasurements)
In this contract, bidders enter
rate against the estimated
quantities of works
The rates include risk contingency

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 CONTRACT
2. Type of Contract Unit Price
Measurement for Building works based on STANDARD METHOD OF
MEASUREMENT 2

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 CONTRACT
2. Type of Contract Unit Price
Measurement Method for Civil Works based on CESSM

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 CONTRACT
2. Type of Contract Unit Price
i) What is BQ?
a) Documents that given a very detail
information such as works that must
be carried out and having a quantity
b) Part of Tender and Contract
Document

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 CONTRACT
2. Type of Contract Unit Price
i) Unit Price (admeasurements)

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 CONTRACT
2. Type of Contract Unit Price
i) Unit Price (admeasurements)

SPKPKR 3/1993 bertarikh 6.8.1993

Projek bangunan & kejuruteraan awam > RM1.0 juta hendaklah
dipanggil secara BQ- JKR203A
Bagi projek-projek yang menggunakan lukisan piawai kesemuanya
hendaklah dipanggil secara BQ tanpa mengira nilai (walaupun bernilai <
RM1.0j)
Sebarang pengecualian hendaklah mendapat kelulusan KPKR

SEM II0910Z 26
 CONTRACT
2. Type of Contract Unit Price
i) Unit Price (admeasurements)
a) For civil engineering works-substantial
amount of unpredictable work below
ground and provisions for
re-measurement on completion.

b) Minimize the contractors risk,

reimbursement for the quantities executed
measured in accordance with the standard
method of measurement rules.

c) Offered advantages when compared to

the lump sum approach.
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 CONTRACT
2. Type of Contract Unit Price
i) Unit Price (admeasurements)
ADVANTAGES of BQ

1.Prompt the design team to 6.As a basis for monthly

finalise the design before the interim valuations.
bill can be prepared.
7.Rates contained in bills used
2.Avoids measure works for the valuation of variations
before bidding, 8.Assist in the control &
financial management of the
3.Avoid duplication of effort
works.
resulted increase overheads
(a)Pre-contract estimating
4.Provided opportunity for (b)Post-contract control
realistic tender evaluation. (c)Development of cost
5.The unique coding system management system
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 CONTRACT
2. Type of Contract
1. Negotiated Cost-Plus Contracts
In this type of contract, project risk is
high
Owner shares the project risk with
contractor by reimburse the actual
cost plus a specific fee for overhead
This type of contract offers a high
level of flexibility for design changes
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 CONTRACT
2. Type of Contract
1. Negotiated Cost-Plus Contracts
The contractor is usually appointed
early in the project and is encourage
to proposed design changes in the
context of value engineering
The final price, depends on the
changes and the extent of the risk

SEM II0910Z 30
 CONTRACT
2. Type of Contract
1. Negotiated Cost-Plus Contracts
The problems that lead to the adoption of this
contracts are:
Inadequate definition of the work at time of
tender
Need for design to proceed concurrently
with construction
Works involves technical complexity
Situations involving unquantifiable risks to
the contractor such as work below ground
level and the effect of inflation
Owner wishes to be involved in the
management of his/her project
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 CONTRACT
2. Type of Contract
1. Negotiated Cost-Plus Contracts
Not favored by many industrys
employers, since there is an absence of a
tender sum and a forecasted final
account.
Provide little incentive for the contractor
to control cost, although different
varieties of cost reimbursement build in
incentive for the contractor to keep costs
as low as possible.
SEM II0910Z 32
 CONTRACT
2. Type of Contract
1. Negotiated Cost-Plus Contracts
This type of contract suitable when:
When the character and scope of the
works cannot be readily determined.

Where new technology is being used.

Emergency work projects, where time is not

available to allow the traditional process to
be used.

Where there is special relationship between

client and contractor; trust.
SEM II0910Z 33
 CONTRACT
2. Type of Contract
1. Negotiated Cost-Plus Contracts
Some of the common types of cost-plus
contract are:
Cost + Fixed Percentage
Cost + Fixed Fee
Cost + Fixed Fee + Profit Sharing
Cost + Sliding Fee (Fluctuating Fee)
Cost + Guaranteed Maximum Price
(GMP) (Target Contract)

SEM II0910Z 34
 CONTRACT
2. Type of Contract
Cost + Fixed Percentage
Simple to administer
The contractor receives cost of labour,
materials, plant, sub contractors and
overheads.
A certain amount of percentage (agreed
at the outset of the project) is added to
this sum.
Major disadvantage the contractors
profit are directly geared to the
contractors expenditure.
SEM II0910Z 35
 CONTRACT
2. Type of Contract
Cost + Fixed Fee
The contractors profit is predetermined
by the agreement of a fee for the work
before the commencement of the work.
Require detail estimate.
Difficult to predict the cost with sufficient
accuracy.
The fixed fee may need to be revised on
completion.
No control over contractor.

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 CONTRACT
2. Type of Contract
Cost + Fixed Fee + Profit Sharing
Same as cost + fixed fee but the
contractor is paid a share of any cost
saving that the contractor done
during the construction

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 CONTRACT
2. Type of Contract
Cost + Sliding Fee (Fluctuating Fee)
The sliding fee is a fee that increase
linearly with the amount of cost
saving that the contractor introduce
between the actual cost and a preset
target
The fee can also be reduced when the
actual cost exceeds the target
(specific risks can be excluded from
the tender cost)
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 CONTRACT
2. Type of Contract
Cost + Sliding Fee (Fluctuating Fee)
Fee = R(2T-A)
where : T = target price
R = base percent value
A = actual cost of the construction
5%

Fee
3%

0.5T Actual T : Target Cost

Cost
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 CONTRACT
2. Type of Contract
Cost + Guaranteed Maximum Price (GMP)
(Target Contract)
The contractors cost in this case is
reimbursed with the contractor giving a
cap on the total price not to be exceed a
preset value
Very few contracts to include positives
incentives for performance, most rely on
damages for non-performance (e.g
Liquidated Damages, retentions, bonds
and warranties).
SEM II0910Z 40
 CONTRACT
2. Type of Contract
Cost + Guaranteed Maximum Price (GMP)
(Target Contract)
Target costs contract require a different
approach when compared to traditional
contract.
Target contracts demand that the
promoter contractor and the engineer
are all well involved in the management
and joint planning of the contract.
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 CONTRACT
2. Type of Contract
Cost + Guaranteed Maximum Price
(GMP) (Target Contract)
Target cost means the estimated of
this contract as initially negotiated.

Target Cost

Cost Performance Time

Incentive Incentive Incentive

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CONTRACT
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