QUANTITY SURVEYING AND ESTIMATION

LECTURE 3

Contract Strategy

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CONTRACT STRATEGY
 Contract strategy means selecting organizational
and contractual policies required for the execution
of a specific project.
 Development of the contract strategy comprises a
complete assessment of the choices available for
the management of design and construction to
maximize the likelihood of achieving project
objectives.
 The size and complexity of the contract matter vary
accordingly.

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CONTRACT STRATEGY
 A proper contract strategy for a project involves five
key decisions:
1. Setting the project objectives
2. Setting the project constraints
3. Selecting a proper project delivery method
4. Selecting a proper contract form / type
5. Contract administration practices

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WHAT IS A CONTRACT?
 A contract is defined as: "an agreement made
between two or more parties which is enforceable
by law to provide something in return for
something else from a second party".
 Simple versus complicated contract (nature of project)
 Legal bindings on contractual parties
 It is necessary to protect both client and contractor

 According to its simple definition, a contract is an

agreement but not all agreements are contracts.

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 Contract = offer + acceptance + consideration
AGREEMENT TO CONTRACT
 Some elements must be present before an
agreement becomes a contract.

 Competent Parties: There must be two or more competent

parties. In order to be considered competent, a party must have
a certain legal standing.

 Proper Subject Matter: Subject matter of a contract should be

clearly defined as to the rights and obligations of each party. The
purpose of the contract must not violate the law.

 Consideration: There must be a lawful and valuable

consideration given to both parties. A consideration often called
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"Something for Something.”
AGREEMENT TO CONTRACT
 Agreement: For valid contract, there must be a mutual
agreement. An agreement is said to be reached when an offer
made by one party is accepted by the second party. Both parties
must wish and intend their bargain to be enforceable by law.

 Proper Form: The terms of a contract must be written so that

both parties are very sure about their rights and responsibilities.

 Consent of the Parties: The agreement must be free from:

Misrepresentation, Duress Undue influence, etc.

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WHY USE CONTRACT IN CONSTRUCTION:
 Describe scope of work
 Establish time frame

 Establish cost and payment provision

 Set fourth obligations and relationship

 Minimize disputes

 Improve economic return of investment

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STEPS OF
CONTRACTING
PROCESS

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SELECTION OF CONTRACT TYPE
 The selection of contract type is made by the owner, acting
upon the advice of his engineer and his legal advisor.

 Must meet the owner objectives and takes into account the
project related constraints.

 Consultants and contractors should be fully informed by the

project objectives and constraints.

 The scope and the nature of the project will primarily affect the
selection of type of contract.

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SELECTION OF CONTRACT TYPE
Project Objectives
 Primary objectives
 Functional performance (scope),
 Time objectives, and
 Cost objectives
 Secondary objectives
 Allocation and payment for risk
 Training of the client's staff
 Transfer of technology
 Involvement of contractor in design
 Involvement of client in contract management
 Choice of labor-incentive construction
 Use of local material and resources 10
 Protection of the environment
SELECTION OF CONTRACT TYPE
Project constraints
 Availability of funds
 Availability of contractual incentives
 Method of tendering (two methods)
 Project location
 Target dates of the project
 Possibility of design changes
 Availability of resources
 Seasonal working
 Number of contractors willing or able to tender
 Inflation
 Factors influencing contract choice: the incentive, risk
sharing and the flexibility. 11
PROJECT DELIVERY METHODS
 What project parties are involved in the project and how
they interact with each other (organizational structure).
 Choice of an organizational structure should be related
to project objectives and constraints.
 When plans are completed and the owner is interested
in securing the low price, the use of competitive bids is
suggested. The competitive bidding results in the type of
contract that many are familiar with.
 A negotiated contract should be used when
construction should start before plans are completed or
when the many unknown factors of the project make an
accurate estimate impossible. When many changes are
expected and when inspection and supervision cannot
be done efficiently, the negotiated type of contract 12
should be used.
PROJECT DELIVERY METHODS
(PROCUREMENT)

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PROJECT DELIVERY METHODS
Traditional or Standard Approach (D-B-B)
 Simplest method
 Design has to be completed before construction can start.
 Design and construction done separately by two parties
 Design Bid-Build is effective on projects
 where the owner needs both professional design services and
construction services
 where the designer does not require detailed knowledge of the
means and methods of construction.

Appointing Appointing Main

Consultant Contractor

Constructing 14
Designing
PROJECT DELIVERY METHODS
Traditional or Standard Approach
Advantages:
 Price competition - offer lowest cost of a project
 Total cost is known before construction starts
 Well established and easily understood
 Clearly defined roles for all parties
 Well documented approach used in most government projects
 Insurance and bonding are well defined

Disadvantages
 Long time
 Least-cost approach requires higher level of inspection
 Initial low bid might not result in ultimate lowest cost or final best
value.
 Design does not benefit from construction expertise
 Conflict between owner, contractor and A/E 15
PROJECT DELIVERY METHODS
Direct labor
 Owner organization performs both the design and construction
using its in-house labor force.
 Used by large authorities
 The owner performs both the design and the construction
 May use consultants for some specialized designs
 Most suitable for small projects
 Can be used when expertise are available
 Low risk projects

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PROJECT DELIVERY METHODS
Design-Build Approach
 A single organization is responsible for performing both design
and construction.
 Involve a single contract between the project employer and a
design-build contractor.
 The contract might be negotiated with a single design-builder
or result from competitive proposals.
 The selection can be based on low price or on a set of value
criteria (experience, staff, bonding capacity, etc.).
Appointing design & construction
contractor

Tendering Designing Constructing 17

PROJECT DELIVERY METHODS
Design-Build Approach
Advantages:
 One contract that may include know-how
 Minimum owner involvement
 Used for fast-track projects in order to reduce time
 Co-ordination between design and construction and easier in implementing
the changes (flexibility in the selection)

Disadvantages
 Cost may not be known until end of the construction
 High risk to contractor and more cost to owner
 Design-build company may reduce quality to save cost
 Reduced opportunities for smaller, local construction firms.
 Fewer competitors and increased risk may result in higher initial costs.
 Less Engineer control over final design.
 Traditional funding may not support fast-tracking construction 18
PROJECT DELIVERY METHODS
Turnkey
 Similar to the design-build approach but with the
organization being responsible for performing both
design, construction, and project financing.
 Owner payment is then made at the completion
(when the contractor turns over the “key”).
 An example is franchise projects in which a new
branch of a restaurant chain needs to maintain the
same design, construction quality, and food service
quality.

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PROJECT DELIVERY METHODS
Build-operate-transfer (BOT)
 A business entity is responsible for performing the design,
construction, long-term financing, and temporary operation of the
project.
 At the end of the operation period, which can be many years,
operation of the project is transferred to the owner.
 This approach has been extensively used in recent years.
 An example of its use is in express routes such as Faisalabad -
Lahore GT road.
 A consortium of companies shares the cost (design, construction,
financing, operation, and maintenance) and the profits gained
from user fees, for a stipulated number of years.
 Project returns to the government to become publicly owned.
 This approach has also been used extensively in large
infrastructure projects financed by the World Bank in parts of the
world that cannot afford the high investment cost of such
projects.
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PROJECT DELIVERY METHODS
Professional construction management (PCM)
 Owner appoints a PCM organization (also known as
Construction Management Organization) to manage and
coordinate the design and construction phases of a project
using a teamwork approach.
 The design may be provided by specialist design firms and in
some cases by the PCM organization.
 With high level of coordination between the participants,
innovative approaches of design and construction (i.e., fast
tracking) can be adopted.
 The PCM organization aims at holding a friendly position
similar to that of the consultants in the traditional approach.
 The services offered by the PCM organization overlap those
traditionally performed by the architect, the engineer, and the
contractor.
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PROJECT DELIVERY METHODS
Professional construction management (PCM)
 This may include: management and programming of design;
cost forecasting and financial arrangements; preparation of
tender documents; tender analysis and selection of
contractors; selection of methods of construction;
recommendations on construction economics; planning and
scheduling construction works; materials procurement and
delivery expedition; provision for site security, cleanup, and
temporary utilities; supervision of control of construction
contractors; construction quality assurance; cost control;
costing of variations and assessment of claims; and
certification of interim and final payments to contractors.
 The use of PCM approach, therefore, should be considered
when there is a need for time saving, flexibility for design
changes is required, and owner has insufficient management
resources. 22
CONTRACTUAL RELATIONSHIPS

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ASSIGNMENT # 2
 Describe in detail the advantages and disadvantages of
turnkey methods, direct labor approach, BOT and
professional construction management (PCM) methods.
 Describe the measurement units of major materials
used in the constructions industry and collect their unit
rates (price) from the local market of any city. Dates and
locations need to be mentioned for each material.
 Crush (all available and sizes), cement (all types and
industry), bricks (all classes), steel (all types), marble, tiles,
glass, aluminum, paints and varnishes (all types), wood/
timber, labor rates, shuttering or formwork, scaffolding, pipes
for water supply and sanitary system, etc.
 Submission: March 04, 2014 @ 3 PM 24
QUESTIONS?

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