Table of Contents

Module 1: Introduction to Construction Contract Administration 1

a. Overview of Contract Administration
b. Contractual Arrangements
c. Types of Construction Projects
d. References and Interpretation in Contract Management

Module 2: Contract Processing 23

a. Contract Agreement
b. Performance Security
c. Construction Schedule

Module 3: Variation Order 40

a. Cause and Effect of Variation Order
b. Contract Provision for Variation Order
c. Factors affecting Valuation of Variation Order
d. Managing Construction Variations and Claims
e. Practices to Reduce Variation Order

Module 4: Suspension of Work and Extension of Contract Time 53

a. Suspension of Work
b. RA 9184
c. Extension of Contract Time

Module 5: Payment Considerations to the Contractors 64

a. Advance Payment
b. Progress payment
c. Retention Money

Module 6: Project Closing Out 78

a. Project Completion/Acceptance
b. Defects/ Liability Period
c. Warranty Period for Structural Defects/Failure
d. Liquidated Damages
e. Contract Termination
Module 7: Price Adjustments and Price Escalation 93
a. Price Adjustments
b. Price Escalation
c. Extraordinary Circumstances
d. Extraordinary Inflation or Deflation
e. Fortuitous Event
f. Review and Approval Process

Module 8: Extra Ordinary Claims 106

a. Un-booked Claims
b. VAT Differential
c. Idle Equipment and Manpower Claim
d. Interest Due to Delayed Payments

Case Studies
a. Lump Sum Contract 112

b. A Dissection of the Required Elements of a Complete Contract 122

c. Formal Awarding of Time Extension 130

d. Contractual Improvements To Minimize, Avoid, or Mitigate The 137

Effects of Construction Failures

e. Lump Sum Contract 145

 CONTENTS
Introduction to
Construction Contract
Administration

a. Overview of Contract
Administration

b. Contractual
Arrangements

MODULE 1
c. Types of
Construction Projects

d. References and
INTRODUCTION TO Interpretation in
Contract Management
CONSTRUCTION
CONTRACT
ADMINISTRATION
 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 1

LEARNING OBJECTIVES

The objective of this research is to give the reader an understanding about the
Construction Contract Administration. The topic will greatly help the Project
Manager to improve construct administration by providing education related to the
administration and enforcement of contract requirements during the construction
phase of the project.

OVERVIEW OF CONTRACT ADMINISTRATION

CONSTRUCTION CONTRACT ADMINISTRATION

Involves making decisions and the timely flow of information and decisions to
enable completion of the project as required by the contract documents including
review and observation of the construction project

This is important to the Owner and Consultant not only to determine that the work
is proceeding in conformity with the contract documents, but also because it allows
a final opportunity to detect any inaccuracies, ambiguities or inconsistencies in the
design.

The management of contracts made with customers, vendors, partners, or

employees. The personnel involved in contract administration required to
negotiate, support and manage effective contracts are often expensive to train and
retain.

A building project, whether under design build contract or conventional contract

type, has to undergo three specific stages namely, design, tender and construction
 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 2

Construction Contract Administration

Good contract administration is required to manage

 design specification

 contractual agreement

 competitive tendering

 evaluation

 cost control

 variations

 final accounts

 claims and even disputes

This will eventually helps to reduce construction costs.

• Poor management in any of these aspects would lead to unnecessary

claims and disputes and eventually higher construction costs.

CONTRACTUAL ARRANGEMENT

Contractual Arrangement

• A contractual arrangement or relationship involves a legal agreement

between people.

• May be legally binding or not, depending on the substance of the

arrangement between the participating entities.

• Some of the elements characteristically found in a legally binding contract,

beyond provisions to share costs, risks and benefits, such as:

a. Jurisdictions for dispute resolutions

b. Ownership of intellectual property and work products

 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 3

c. Limitation of liability provisions

d. Offer and acceptance

e. Intention and capacity to create legal relations

f. Consent of both parties

Consultations with legal services can help clarify questions about whether the
arrangement may be legally binding or not.

Contractual

 Agreed in a contract: "a contractual obligation“

 A contract is a voluntary arrangement between two or more parties that is

enforceable at law as a binding legal agreement. Contract is a branch of the
law of obligations in jurisdictions of the civil law tradition. A contract arises
when the parties agree that there is an agreement.

An agreement is any understanding or arrangement reached between two or more

parties. A contract is a specific type of agreement that, by its terms and elements,
is legally binding and enforceable in a court of law.

Contractual Arrangement

“Contractual Arrangement” is a generic term, often referred to by other names,

including, but not limited to:

 Memorandum of Understanding – (MOU) is a formal agreement between

two or more parties. Companies and organizations can use MOUs to
establish official partnerships. MOUs are not legally binding but they carry
a degree of seriousness and mutual respect, stronger than a gentlemen's
agreement.

 Memorandum of Agreement - (MOA) is a written document describing a

cooperative relationship between two parties wishing to work together on a
project or to meet an agreed upon objective. An MOA serves as a legal
 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 4

document and describes the terms and details of the

partnership agreement.

 Comprehensive Research and Development Agreement - An agreement

on an order given to an undertaking to perform research and development
for a principal. This type of agreement is somehow similar to subcontracting,
since there is a hierarchy between the parties involved.

 Collaborative Arrangement - as a contractual arrangement that involves two

or more parties that both: Actively participate in a joint operating activity.
Are exposed to significant risks and rewards that depend on the commercial
success of the joint operating activity.
 Letter of Agreement - Written list of goods, services, or space to be provided
at the agreed-to prices, terms, and time. It becomes a binding contract when
signed by the associated parties.

 Exchange of Service Agreement - A general contract for two parties

entering into an agreement to exchange (trade) services in their respective
domains, which would otherwise incur a monetary fee.

Regardless of the name of an arrangement, the elements contained therein will

dictate the effects or consequences that the arrangement has on the parties.

For the projects studied, three factors were found to be related to contract
selection:

1. The characteristics of clients, particularly their experience and expertise in

construction,

2. The level of performance required by clients

3. The construction complexity of projects

Key criteria to determine the right instrument:

 What are you paying for?

 Who directly benefits and who will use it?

 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 5

 Who are you paying?

 Who is making the payment?

 What is the source of funds?

 Do you have the requisite authority to engage in the activity?

TYPES OF CONSTRUCTION PROJECTS

The construction industry is the largest industry in the world. Since it

consumes a wide range of employment circle of labor, it is regards to be
an indicator of the economic condition of a certain country. It is also indeed
more challenging than other industries due to its uniqueness in nature; every
project is one – of – a – kind; and many conflict parties are involved; and
constrained by time, money, quality and high risk. Just like engineering
itself, it has a wide range of disciplines, that mastery of each discipline by
one entity is quite impossible. And so, before proceeding to any construction
works, it is very important to know the different types of construction projects,
because the laws that governs each types varies.

There are three major types of construction projects: (1.) Building

Construction (2.) Infrastructure Construction and (3.) Industrial Construction.
These types were categorized according to the character of the actual facility
being constructed, not by the party underwriting the cost of the construction.

1. BUILDING CONSTRUCTION

Building construction, sometimes referred to as Vertical Construction

is probably the most known type of construction. It is the process of adding
structures in to an existing real property or on-going building construction. It
is the process in which frameworks or models are being put together. It
includes renovations of existing houses or offices, such as adding a small
 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 6

room, changing the walls of bathrooms, etc. It comes in various job sizes
considering some common elements such as design, financial, estimating
and legal considerations. Although the owner of the property may not be
familiar with the construction industry, he is able to select suitable
professionals to supervise the process of the whole construction. Specialty
architects and engineers are often engaged for designing a specific type of
building, while the builders or general contractors undertaking such projects
may also be specialized in only that type of building.

The building construction can be categorized into two: (1.a.)

Residential Building and (1.b.) Non-residential / Commercial Building.

(1.a) Residential Building

It refers to any structure being built to become a residential

facility. It includes houses for a single-family with less than 3 or 4
units, multi-family dwellings and high-rise apartments.
Condominiums are more likely to be commercial structures, unless
if you are only working with the single unit. The owner often acts
as the in-charge, the payroll, etc. Residential construction practices
and resources, must conform with the local building authority
regulations and codes of practice. It is heavily affected by general
economic conditions. Since many houses can be constructed at
different locations by different developers at the same time, it
attracts new builders which make this market a highly competitive
one with relative ease of entry.

(1.b.) Commercial Building

Commercial building or non-residential are often huge in sizes

which includes building restaurants, grocery stores, skyscrapers,
shopping centers, sports facilities, hospitals, private schools and
universities, etc. Unlike the residential construction, this type usually
 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 7

takes a long process and time to complete. And since it takes

more time to construct, it is also contains greater sophistication
with higher cost. Few competitors are engaged with this segment
of market.

2. INFRASTRUCTURE CONSTRUCTION

Infrastructure construction sometimes called as horizontal or heavy

construction, refers to constructing structures usually owned by public such
as highways, bridges, mass transit systems, tunnels, bridges, pipelines,
drainage systems and sewage treatment plants. This category of construction
is characterized by a high degree of mechanization, which has gradually
replaced some labor intensive operations. It involves sets of complex
processes and so engineers or contractors are usually specialized for each
segment that requires different types of skills. The construction’s time frame
is highly critical since most of the works, such as highway repairs, may
cause some inconvenience in public transportations, the project is required
to be done as soon as possible. It can be also categorized into two types:
(2.a.) Highway Construction and (2.b.) Heavy Construction.

(2.a.) Highway Construction

It refers to construction of roads and bridges, or anything that

supports transportation. It also includes the alteration or repair of
roads, highways, streets, alleys, runways, paths, parking areas, etc.

(2.b.) Heavy Construction

Any construction that does not intentionally or incidentally

conjuncts with highway construction is called heavy construction.
Example of this type would be water and sewer line projects, dams,
sewage treatment plants and facilities, flood control projects, dredging
projects and water treatment plants and facilities.
 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 8

3. INDUSTRIAL CONSTRUCTION

Industrial construction although, is just a relatively small part of the

whole construction industry, its projects are usually large scales involving
complex processes and high degree technologies to build. It includes oil
refineries, steel mills, chemical processing plants and power generation plants.
Construction process takes amount of time and a lot of planning. Government
regulations especially those related with the environment are being
considered. The owners in this market segment were deeply involved during
the whole construction process and usually prefer to hire contractors to
whom they’ve developed good relations with.

To summarize the following, please see the table below:

 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 9

REFERENCES AND INTERPRETATION IN CONTRACT

CONTRACT MANAGEMENT

DEFINITION: The terms “contract management” and “contract

administration” are often used synonymously. However, “contract management”
is commonly understood as a broader and more strategic concept that covers the
whole procurement cycle including planning, formation, execution, administration
and close out of a contract and goes beyond the day to day “administrative”
activities in the procurement cycle.

PURPOSE: The purpose of contract management is to ensure that all parties to

the contract fully meet their respective obligations as efficiently and effectively as
possible, delivering the business and operational outputs required from the
contract and providing value for money. It also protects the rights of the parties
and ensures required performance when circumstances change.

Contract management is similar to project management. Each contract is a

mini-project. It has a unique goal, consumes resources, has a beginning and end
date, and requires coordination and planning of relevant activities, as well as
documentation in a contract file throughout the process.

Contract management includes monitoring and documenting performance.

Depending on the organization and goods or services procured, daily/regular
monitoring of the contract may be primarily the responsibility of the requisitioner.

The stages of contract management are intended to ensure that the parties
work together to achieve the objectives of the contract. Contract management is
based on the idea that the contract is an agreement, a partnership with rights and
obligations that must be met by both sides to achieve the goal. Contract
management is aimed not at finding fault, but rather at identifying problems and
finding solutions together with all contracting parties involved.
 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 10

PROCESS: The flowchart below shows each of the stages in the contract
management process.

1.) Enabling contract

management

2.) Contract performance

monitoring and control

3.) Change Management

4.) Dispute management and

resolution

5.) Financial Management /

Payment

6.) Contract completion and

close out
 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 11

Phase 1: Enabling contract management

In this phase the procurement officer ensures that there is a shared

understanding, distribution of responsibilities and systems and procedures in place
to monitor and control contract performance and effectively deal with potential
changes and disputes.

The supplier should be considered a member of the project team, with all
members striving for success. Upon signature of the contract, several steps should
be taken to ensure that roles, responsibilities and obligations are clearly allocated
among the parties and proper systems and procedures are put in place to monitor
performance and keep efforts well focused:

Contract file and documentation

The contract file should be opened by the procurement officer, and

the contract should be carefully analysed, taking note of the rights and
obligations of each party. Any issues requiring clarification or change of the
contract should be fully documented in this file. (The requisitioner will
normally have a separate file, with copy of the contract, as part of the project
management files.)

Although practice may vary among organizations, the following

documents normally are part of the contract file:

 original of contract and all amendments

 all related communication with the supplier (electronic, internal and

external correspondence)

 copy of the winning offer

 award documents

 minutes of meetings

 notes of phone conversations

 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 12

 reports

 pictures, video films

 proof of receipt of goods

 proof of payment

 supplier assessment report

 acceptance report from requisitioner/client.

Other related documents preceding the contract finalization, such as

Requisition, solicitation document, offers received, evaluation report, etc.
are usually part of other related files.

It is important to carefully document contract performance for the

following reasons:

 It constitutes proof of performance.

 It constitutes evidence in the event of disputes.

 Its content forms the institutional memory.

 It is used for audit purposes.

Contract analysis

As soon as possible, the responsible staff (programme manager,

requisitioner, or procurement officer) should analyse the terms and
conditions of the prospective contract and develop a contract work
breakdown structure that reflects both the technical and administrative
aspects of contract performance. The requisitioner and the procurement
officer should reach agreement on intermediate performance goals based
on contract performance obligations. Intermediate goals will enable the
organization to measure progress, detect significant performance
variances, take corrective action, and follow up.
 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 13

Pre-performance conference

Before performance begins on large or complex contracts, the

procurement officer and the requisitioner should meet with the supplier’s
team to discuss their understanding and joint administration of the contract.

The following is considered good practice:

 the meeting should be formal

 an agenda should be distributed in advance, minutes should be taken

and agreed by the parties.

 each party should appoint a person who will be the organization’s official
voice during contract performance.

The following topics should be covered by the parties:

 Review the contract terms and conditions and other key elements and
explain who will do what.

 Update the project/programme plan with the involvement of both parties,

to reflect the actual date of effectiveness as well as
milestones/deliverables of the contract and any changes which may
have occurred since it was planned.

 Review the performance assessment plan with the supplier, so that both
parties know the basis upon which performance will be established.
These should be understood as milestones for joint monitoring and not
as contractual obligations.

 Discuss how and when to measure and report actual performance. The
techniques, timing, and frequency of measurement and reporting should
reflect the nature and criticality of the work. A reasonable balance must
be struck between no measurement/reporting of any kind and excessive
reporting.
 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 14

 Clarify any remaining ambiguities and discuss procedures for managing

change and resolving differences.

 Clarify the communication plan.

For simple goods or equipment purchase orders, a telephone or

email contact is often sufficient to launch activities, supported by regular
expediting and monitoring.

Effective communication

Successful contract management is based on an open flow of

communication and willingness to take actions necessary for correction and
improvement, and is facilitated by:

 Attitude of teamwork, seeking to get the best results from joint efforts,
willingness to discuss problems without immediate recourse to
recriminations and to make the immediate adjustments that may be
necessary to correct problems detected through routine inspection.

 Well organized oral and written reporting system, which highlights

progress and problems and measures them against expected
performance and results.

 Contract performance and progress review meetings at appropriate

intervals. For complex works and services contracts, such meetings
could be as frequent as every two weeks or as infrequent as every two
months. For goods procurement, it may be sufficient to have an email or
telephone follow-up every few weeks.

Phase 2: Contract Performance Monitoring and Report

Once the contract has been awarded, the responsible procurement officer,
or the requisitioner, monitors performance, collects information, and measures
actual contract achievement. This is essential for effective control. The resources
 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 15

devoted to these tasks, and the techniques used to perform them, will depend on
the nature of the contract work, the size and complexity of the contract, and the
resources available.

In performance based contracts, performance indicators developed in the

contract are used. In some cases, the proposed supplier’s quality assurance plan
may be used as a basis for monitoring the supplier’s performance.

Observations are made in order to collect information related to those

aspects of performance that, when measured, will describe the progress of the
work. The reason for observing, collecting information, and measuring progress is
to have a basis for comparing actual achievement with planned achievement in
order to exert control. Each party must direct its attention internally to ensure that
it is fulfilling its own obligations, and externally to ensure that the other party is
fulfilling its obligations.

Phase 3: Change Management

Change management is the process of both avoiding unwanted changes

and incorporating necessary changes into the contract.

Effectively controlling changes entails establishing formal procedures for

changing the contract and limiting the number of people who are entitled to make
changes.

It is natural for staff in one contract party to work directly with their
counterparts in the other contract party’s organization, people who speak their
language and understand their policies and customs. These colleagues often
bypass formal channels of communication, and such relationships can lead to
informal, undocumented agreements that depart from contract terms and
conditions. Such informal agreements often lead to situations of unauthorized
commitment or forbearance caused by apparent authority communicated
involuntarily by the requisitioner. It is important that all parties keep in mind that
 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 16

the written contract is the agreement, until it has been formally modified – such
modification is not simply a formality.

“Constructive change” used to describe a contract change, derives from the

verb “to construe” and not from the verb “to construct.” So, a constructive change
is a situation that can be construed as having the effect of a bona fide contract
change. A constructive change occurs when the procurement officer, or other duly
authorized official, changes the contract without applying proper legal and
regulatory procedures. A constructive change can result from either a specific
action or a failure to act. Constructive changes need not have a cost impact;
unauthorized commitments always do.

Financial changes

Financial changes include in particular:

 Cost overruns, in which the cost of carrying out an agreed activity is

greater than the agreed amount. The organization seeks to avoid this
situation, and selects outputs and payment methods to make it less likely
to occur.

 Cost growth, when activities not included in the original contract are
added, they usually bring accompanying costs. Careful planning and
choice of language should reduce the frequency of this situation, but it
is still likely to occur in complex construction and services contracts.

Cost overruns versus cost growth

When accepting a contract, a supplier intends to make it profitable

by ensuring it can control its costs. Failure to do so will undermine the
contract’s profitability. The supplier will manage its business risk in a
manner that will eliminate wherever possible potential for cost overruns. UN
organizations also seek to structure contracts and administration to avoid
responsibility for cost overruns.
 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 17

Cost overrun

Examples of sources of potential cost overruns are:

 currency rate fluctuation

 underestimation of level of effort

 underestimation of costs of material

 increase in cost of materials or labour

 undocumented cost growth.

Cost growth

Cost growth is defined as a change in the scope of work or new terms

and conditions that have been requested by the buyer. The supplier may
accept cost growth provided the contract change is documented and that
the contract is amended accordingly.

Delays and variations

Handling claims of delays and variations involves dealing with

circumstances where a supplier makes a claim for additional unforeseen
work or costs, or where the organization has varied their requirements from
the supplier. Typical delays and variations which should be handled include:

 delays (excusable, non-excusable, shared/concurrent)

 minor variations to scope of work or execution conditions.

The three most significant types of contract delays can be grouped as

follows:

 excusable delays

 non-excusable delays
 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 18

 shared or concurrent delays.

Excusable delays

Excusable delays are delays beyond the control of the supplier and
without any fault or negligence on the supplier’s part. These include delays
caused or authorized by the organization and delays caused by acts of God
or other events beyond the supplier’s control, such as fire, flood, acts of war,
and so on. This is the only type of delay for which extending the period of
performance without obtaining consideration from the supplier is
appropriate. Some excusable delays do entitle the supplier to monetary
compensation in the form of an increase to a fixed-price/lump-sum contract.
This could be an increase in the ceiling price of a time-and-materials
contract. In addition, a time adjustment may be appropriate if the
organization caused or could have prevented the delay.

Non-excusable delays

Non-excusable delays are delays that are not authorized by the

organization and are, in some way, the supplier’s fault. Even delays that
may be excusable are deemed non-excusable if the supplier could have
controlled the effects of the delay in some way and failed to do so.

Phase 4: Dispute management and resolution

The inherent shortcomings of language as a medium of communication, the

organizational nature of the contracting process, and the dynamic nature of
contract relationships all contribute to the potential for disagreements between the
parties. In fact, disagreements, like changes, are virtually inevitable. They are to
be expected by all involved and are considered a normal aspect of contract
management. The larger and more complex the project, the greater is the potential
for misunderstandings and disagreement.
 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 19

Contract management planning should include agreement on the procedure

to follow to resolve disagreement between parties regarding responsibilities and
interpretation of the contract.

Differences of opinion will arise among qualified professionals in the course

of execution. Claims/requests for changes are part of normal contract execution,
and the procedure to review and escalate them when necessary should be
established from the beginning. There should be an agreed procedure for
escalating the concern to a higher level of authority. Nonetheless, the contract
should indicate which party has responsibility for a given decision, and the other
party should respect that responsibility.

Basic rules

Some basic rules for resolving ambiguous contract language are:

 Respect established order of precedence of documents.

 Apply dictionary definitions to everyday words and a law dictionary for legal
terms.

 Apply standard trade or technical definitions to technical words, unless the

context or usage indicates a different meaning.

 Define words in accordance with the contract definition.

 Presume that the same word used in different places means the same thing.

 Do not interpret or define contract language in such a way as to render it

meaningless or to render the rights and obligations of one party unrealistic.

 Interpret the contract as a whole and, wherever possible, consistently.

 Where the public interest is affected, apply an interpretation that favours the
public.
 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 20

 When conflict occurs between two sections of the contract and no directions
to the contrary exist, assume that:

o hand-written text takes precedence over typed text

o typed text takes precedence over pre-printed text on a standard form

o specific clauses take precedence over general clauses.

Phase 5: Financial management / payment

Among the rights of the supplier are the right to be paid in a timely matter
for efforts completed, according to the terms of the contract.

A payment made to a supplier may be one of the following five types:

 advance

 partial

 progress

 final

 holdback / retention (withholding payment).

 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 21

Phase 6: Contract completion and close out

The close out process ensures that all contractual obligations have been
met, and that residual obligations – such as warranties, guarantees and after-sales
service and support – are clearly defined in terms of responsibility, liability,
procedures and timeframes. Contract close-out occurs once all contractual
obligations have been fulfilled by the supplier. It includes the following key steps:

Step Action

1 Review and confirm appropriate action taken according to contract close-

out checklists.

2 Prepare final contract performance report (jointly by requisitioner and

procurement officer), including lessons learned.

Depending on the organization, this report may be purely internal or may

be shared with the supplier for their knowledge and comment
3 Prepare supplier assessment form and forward for appropriate action
4 Issue final acceptance on the basis of the requisitioner’s report
5 Make final financial settlements
6 Liquidate/return bonds and/or securities
7 Record any residual obligations (warranties, etc.) and advise requisitioner
of procedures

8 Close out contract file

QUESTIONS:

1. When is a contract required?

2. Why is it important to know the type of construction project?

3. How does a contract administration differ from management?

 MODULE 1: INTRODUCTION TO CONSTRUCTION CONTRACT ADMINISTRATION 22

REFERENCES

 http://csc-dcc.ca/Education/Construction+Contract+Administration/
11/22/16
 https://en.wikipedia.org/wiki/Contract_management 11/22/16
 https://www.tbs-sct.gc.ca/pol/doc-eng.aspx?id=28230 11/22/16
 http://www.thefreedictionary.com/contractual 11/22/16
 http://www.tandfonline.com/doi/abs/10.1080/01446198500000016
11/22/16
 http://pmbook.ce.cmu.edu/01_The_Owners'_Perspective.html 12/02/16
 https://www.zlien.com/articles/types-of-construction-projects/ 2/02/16
 http://ezinearticles.com/?Types-of-Construction-Projects&id=3935207
12/02/16
 http://csc-dcc.ca/Education/Construction+Contract+Administration/
11/19/16
 http://www.project-management-
knowhow.com/contract_management.html
 11/19/16
 https://www.ungm.org/Areas/Public/pph/ch03s10.htmL 11/19/16
 CONTENTS
Contract Processing

a. Contract Agreement

b. Performance Security

c. Construction
Schedule

MODULE 2
CONTRACT PROCESSING
 MODULE 2: CONTRACT PROCESSING 24

LEARNING OBJECTIVES

1. To state the purpose of contract processing in construction industry.

2. To identify the scope, liabilities and other guidelines for contract
agreements, performance security and construction schedule.
3. To stipulate and dissect areas of each contract process.
4. To highlight significant laws, procedures and topics of each area.

CONTRACT PROCESING

CONTRACT AGREEMENT

As per Republic Act No. 386 of June 18, 1949 of The Civil Code of the Philippines,

An act to ordain and institute the Civil Code of the Philippines of Chapter 1, General
Provisions, it is stated that under:

Art. 1305. A contract is a meeting of minds between two persons whereby one
binds himself, with respect to the other, to give something or to render some
service. (1254a)

Art. 1306. The contracting parties may establish such stipulations, clauses, terms
and conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public policy. (1255a)

[Citation: Chan Robles Virtual Law Library,

http://www.chanrobles.com/civilcodeofthephilippinesbook4.htm,11/22/16]

A construction contract is an agreement that outlines the way a construction job is

executed and the specific amount of compensation for the job.
 MODULE 2: CONTRACT PROCESSING 25

Construction contract types are usually defined by the way the disbursement is
going to be made and specifies other specific terms, like duration, quality,
specifications and several other items.

The most common types of construction contracts used in the construction industry
include:

1. Fixed Price or Lump sum contract – With this kind of contract the
engineer and/or contractor agrees to do the a described and specified
project for a fixed price. Also named "Fixed Fee Contract". Often used in
engineering contracts. A Fixed Fee or Lump Sum Contract is suitable if the
scope and schedule of the project are sufficiently defined to allow the
consulting engineer to estimate project costs.

2. Unit price contract – This contract type is based on anticipated quantities

of items which are counted in the project in addition to their unit prices. The
final price of the project depends upon the quantities required to carry out
the work. Generally, this contract is suitable only for construction and
supplier projects which involve accurate identification of different types of
items, but not their numbers, in the contract documents.

3. Incentive Contracts - The incentive contracts feature compensation based

on the contracting and/or architectural/engineering performance in accord
with an agreed target – schedule, quality, and budget. Incentive contracts
commonly fall into one of two common categories: Fixed Price Incentive
Contracts and Cost Reimbursement Incentive Contracts.

4. Percentage of Construction Contracts - This contract type is common for

architectural/engineering contracts. The compensation involved in these
contracts is based on a percentage of the cost of construction.

5. Cost plus percentage contract – In construction, a method of payment to

a contractor in which an additional amount of money, expressed as a
percentage, is paid by the client that is designated to cover the contractor's
 MODULE 2: CONTRACT PROCESSING 26

overhead costs. When paid as a predetermined profit, the client will usually
require a strict accounting of expenses.

6. Cost plus Lump-sum fee contract – Compensation is based on a fixed

sum independent the final project cost. The customer agrees to reimburse
the contractor's actual costs, regardless of amount, and in addition pay a
negotiated fee independent of the amount of the actual costs.

7. Cost plus Lump-sum fee plus Bonus contract - Compensation is based

on a fixed sum of money. A bonus is given if the project finishes below
budget, ahead of schedule etc.

8. Guaranteed Maximum Price Plus Bonus Contracts - Compensation is

based on a fixed sum of money. The total project cost will not exceed an
agreed upper limit.

9. Design-Build Contracts - Design–build (or design/build, and abbreviated

D–B or D/B accordingly) is a project delivery system used in the
construction industry. It is a method to deliver a project in which
the design and construction services are contracted by a single entity known
as the design–builder or design–build contractor.

[Citation: Fisher Stark http://fisherstark.com/ 11/22/16]

 MODULE 2: CONTRACT PROCESSING 27

PERFORMANCE SECURITY

WHAT IS PROCUREMENT ACT?

- The act of obtaining or buying goods and services.

- Purpose of prescribing the necessary rules and regulation of the procurement

activities.

- To adhere to the principle of transparency, accountability, equity, efficiency, and

economy in its procurement process.

• Purchase planning

• Standards determination

• Specifications development

SCOPE OF PROCUREMENT

• Supplier research and selection

• Value analysis

• Financing

• Price negotiation

• Making the purchase

• Contract administration

• Disposals and other related function

• Inventory control and stores

 MODULE 2: CONTRACT PROCESSING 28

PROCEDURE

i. Bid – For award of contract shall be made to the bidder with the lowest calculated
responsive bid or the highest responsive bid, at its submitted bid price or its
calculated bid price whichever is lower.

ii. Contract Award – Within period not exceeding 15 days from declaration by the
BAC. Notice of Award shall immediately issue to the bidder with the period
provided herein shall be 30 days within the same period provided herein.

iii. Contract Signing - The winning bidder or its duly authorized representative shall
formally enter into contract with the procuring entity concerned, and submit all
documentary requirements to perfect the contract, within ten (10) calendar days
from receipt by the winning bidder of the Notice of Award.

iv. Approval of Contract – After submitted all requirements, the bidder shall be
given a max of 20 days from receipt thereof, together with all documentary
requirements to perfect the said contract.

- In the case of GOCCs (government-owned and/or controlled corporations)

concerned board, the bidder or authorized representative shall act the approval of
the contract within 30 days from receipt thereof with all documentary requirements
to perfect the said contract.

v. Notice to Proceed – When approval contract released the successful bidder

given within 7 days from the date of approval of the contract by the appropriate
government approving authority.

- The effectivity date is provided in the Notice to Proceed

vi. Period of Action - The procurement process from the opening of bids up to the
award of contract shall not exceed three (3) months, or a shorter period to be
determined by the procuring entity concerned.
 MODULE 2: CONTRACT PROCESSING 29

- Case of deadline each activity falls on a non-working day (i.e. Saturday and
Sunday), legal holiday, or special non-working holiday, the deadline shall be the
next working day.

- To guarantee the faithful performance by the winning bidder of its obligations

under the contract prepared in accordance with the bidding documents, it shall
post a Performance Security upon the signing of the contract.

WHAT IS PERFORMANCE SECURITY?

- A performance bond , also known as a contract bond, is a surety bond issued by

an insurance company or a bank to guarantee satisfactory completion of a project
by a contractor. A job requiring a payment and performance bond will usually
require a bid bond, to bid the job.

PERFORMANCE SECURITY FORMS:

a) Cash, certified check, cashier’s/manager’s check, bank draft/guarantee

confirmed by a reputable local bank or in the case of a foreign winning bidder,
bonded by a foreign bank.

b) Irrevocable letter of credit issued by a reputable commercial bank or in the case

of an irrevocable letter of credit issued by a foreign bank, the same shall be
confirmed or authenticated by a reputable local bank.

c) Surety bond callable upon demand issued by any reputable surety or insurance
company.

d) A combination of the foregoing; or

e) A foreign government guarantee as provided in an executive, bilateral or

multilateral agreement, as may be required by the head of the procuring entity
concerned.
 MODULE 2: CONTRACT PROCESSING 30

Form of Security Minimum Amount in % of Total Contract Price

1. Cash, certified check, cashier’s check, manager’s check, bank draft or

irrevocable letter of credit Five percent (5%)

2. Bank guarantee Ten percent (10%)

3. Surety bond Thirty percent (30%)

4. Foreign government guarantee One hundred percent (100%)

• The Performance Security shall be posted in favor of the procuring entity

concerned, and shall be forfeited in favor of the procuring entity in the event it is
established that the winning bidder is in default in any of its obligations under the
contract.

a) It shall be executed in the form prescribed by the procuring entity concerned in

the Instructions to Bidders.

Performance security execution and condition

b) It shall at least be co-terminus with the final completion of the contract

c)The right to institute action on the penal bond pursuant to Act No. 3688 of any
individual firm.

• After the issuance of the Certificate of Completion, Performance Security be

released by the procuring entity concerned the issuance of Certificate of
Acceptance of the goods provided that there are no claims filed against the
contract awardee.

• The winning bidder shall post an additional performance security following the
schedule above to cover any cumulative increase of more than ten percent (10%)
over the original value of the contract as a result of amendments to order or change
orders, extra work orders and supplemental agreements.
 MODULE 2: CONTRACT PROCESSING 31

• In case of a reduction in the contract value for partially completed works under
the contract which are usable and accepted by the Government, shall allow a
proportional reduction in the original Performance Security, provided that any such
reduction is more than ten percent (10%) and that the aggregate of such reductions
is not more than fifty percent (50%) of the original Performance Security.

FAILURE OF CONTRACT & POST PERFORMANCE SECURITY

• If the bidder w/the calculated responsive bid fails, refuses or is unable to make
good its bid by entering into a contract, The bid security shall be forfeited and the
appropriate sanctions provided in Procurement RA 9184.

• In the case of failure, refusal or inability of the bidder with the Single Calculated
into contract and post the required Performance Security, as provided in this
Section, the BAC (Bid Award Committee )shall disqualify the said bidder, and shall
declare the bidding a failure and conduct a re-bidding.

Project Planning

• The process of choosing the one method and order of work to be adopted
for a project from all various ways and sequences in which it could be done.
(Antill and Woodhead, 1990)

• Those processes performed to establish the total scope of the effort, define
and refine the objectives, and develop the course of action required to attain
those objectives. (PMBOK 4th Edition, 2008)

CONSTRUCTION SCHEDULE

• Construction Schedule is the maximum time allowed in the contract for

completion of all work contained in the contract documents.
 MODULE 2: CONTRACT PROCESSING 32

• Construction Schedule is a programme in the required format and, within a

stipulated period, that indicates how to complete the contract within the
contract period as well as projected cash flow over the contract period.

• The contract time for most construction projects can be determined by

developing a progress schedule. A progress schedule shows the production
durations associated with the chosen production rates for the items of work.
The time to complete each controlling item of work included in the progress
schedule is computed based on the production rates applicable to that
project. Items should be arranged by chronological sequence of
construction operations. Minor items that may be performed concurrently
should be shown as parallel activities.
• In determining a progress schedule it should be remembered that the start
and end dates for each controlling item need to be based on the earliest
date for which work on that item will begin and how long it will take to
complete. The earliest start date for each activity will be determined by the
completion of preceding activities, and should allow for the fact that some
activities can begin before the preceding activity is entirely completed.
Additional time should be also allowed in the contract for initial mobilization.

Construction Schedule Determination

The determination of the timing and sequence of operations in the project and their
assembly to give the overall completion time.
 MODULE 2: CONTRACT PROCESSING 33

TECHNIQUES

Estimated Cost Method

The Estimated Cost Method of contract time determination utilizes a comparison

of dollar value to time. Based on historical information, tables illustrating project
cost versus project time are developed for different project types, traffic volume,
and geographic location. Examples of such project types include new construction,
reconstruction, overlay and widening projects, pavement repair, and bridge
construction. Contract time is essentially determined based solely on the amount
of the engineer's estimate. For non-complex projects and projects affecting small
volumes of traffic, this procedure may be appropriate. The estimated cost method
is not recommended for use on projects where completion time is a major factor.
Many items affecting the completion of a project are not taken into consideration
when applying this method. Any special features that are unique to a specific
project cannot easily be accounted for when using this very simplistic procedure.

Bar charts or Gantt charts

 Bar charts or Gantt charts are graphical representations of projects with

specific completion dates and activities. Bars or lines are drawn proportional
to the planned duration of each activity.
 A brief description of the procedure used to develop a bar chart to determine
contract time is as follows:
 The first step in developing a bar chart is to break a project down into
separate activities or operations necessary for project completion.
 Once all the activities necessary to complete a project have been listed, the
duration and completion date of each activity needs to be determined based
on production rates.
 With this data established, the bar chart can be prepared. A line or bar is
drawn on the chart showing the time when work will be performed for each
 MODULE 2: CONTRACT PROCESSING 34

activity. The resulting diagram will represent a project, showing when each
activity will be undertaken and completed.
 With bar charts, the progress of a project may be monitored for each activity
by drawing a bar or line below the original scheduled performance to show
the actual duration for each activity as it is completed.
 Bar charts are advantageous in that they are simple to develop and easy to
understand, and they offer a good method of determining contract time.
Some disadvantages are that they do not show the interrelationship and
inter-dependency among the various phases of work. Bar charts are difficult
to properly evaluate when construction changes occur. Also, controlling
items are shown in the same manner as minor items, thus making it more
difficult to determine which items actually control the overall time progress
of the project. The use of bar charts are not recommended for contract
administration and project management of large or complex construction
projects.

The Critical Path Method (CPM)

 The Critical Path Method (CPM) focuses on the relationship of the critical
activities, specifically, those which must be completed before other activities
are started. Working from the project's beginning and defining individual
project tasks and the number of days to perform each task, a logical
diagrammatic representation of the project is developed. A CPM depicts
which tasks of a project will change the completion date if they are not
completed on time. The evaluation of critical tasks allows for the
determination of the time to complete projects. Because of the size and
complexity of most projects, this method is most often applied using a
computer software program. Within the CPM software, the ability to use a
Program Evaluation Review Technique (PERT) provides a breakdown of
each activity to boxes. This enables the user to view the connection of
 MODULE 2: CONTRACT PROCESSING 35

relationships to each activity. CPM software also has the ability to display
the contract time in a bar chart view as well.

The first step in applying the CPM method is to break a project down into
separate tasks or operations necessary for project completion. Each of
these separate operations or processes is called an activity. The completion
of an activity is called an event.

1. Once all the activities necessary to complete a project have been listed, the
relationship of these activities to one another needs to be determined. In
some instances, several activities can be undertaken concurrently, and at
other times, certain activities cannot be undertaken until others have been
completed. Generally, when determining the sequence of operations, some
questions need to be asked such as: "What needs to be done before
proceeding with this activity" or "what can be done concurrently?" Every
activity has a definite event to mark its relationship with others with respect
to completing a task.

2. In working with this procedure, a diagrammatic representation of the project

is developed showing the correct sequence and relationship of activities and
events. Each activity is shown as an arrow leading to a node, which indicates
the completion of an event or the passage of time. The start of all activities
leaving a node depends on the completion of all activities entering a node.
Therefore, the event represented by any node is not achieved until all
activities leading to the node have been completed. The resulting diagram
will be a schematic representation of a project, showing all the relevant
activities and events in correct sequence.

3. An actual time can be set to each activity based on production rates and
other appropriate factors. The time to complete each activity is then shown
on each arrow to indicate the duration. The "early start" for each activity is
the earliest point in time that an activity can start, provided that all activities
before it have finished. This is not necessarily the point in time that it will
 MODULE 2: CONTRACT PROCESSING 36

start; however, it is the earliest time that it can start. The "early finish" for an
activity is merely the duration of the activity after its early start. As is the case
with the "early start," this is not necessarily the point in time that the work
represented by the activity will be over, but is the earliest point in time that it
can occur. A "finish" date in CPM is the first day after the physical completion
of the activity. The completion time of a project is the sum of the longest time
path leading to completion of the project.

4. The optimum time and cost for performing the project can be evaluated by
assigning resources i.e. equipment, labor hours, and materials to each
activity. The diagrammatic representation of the project then provides a
means to evaluate the costs incurred with respect to the completion of
specified activities.

5. Advantages of using the CPM include:

• It is an accurate technique for determining contract time and verifying

that the project can be constructed as designed and with identified
construction sequences;
• It is a useful tool for project managers in monitoring a project, especially
when dealing with relationships of work items with respect to time; and
• Activities responsible for delays can be identified and corrective
measures to keep a project on schedule can be determined.
6. Disadvantages of using the CPM include:
• The CPM requires experienced and knowledgeable staff to be used
effectively;
• They require regular updates to assure that the contractor's operation is
accurately represented.
 MODULE 2: CONTRACT PROCESSING 37

Importance of Construction Scheduling (Contractors)

• Calculate the project completion date

• Calculate the start or end of a specific activity

• Coordinate among trades and subcontractors, and expose and adjust

conflicts

• Predict and calculate the cash flow

• Improve work efficiency

• Serve as an effective project control tool

• Evaluate the effect of changes

• Prove delay claims

Importance of Project Scheduling (Owners)

• Get an idea on project’s expected finish date

• Ensure contractor’s proper planning for timely finish

• Predict and calculate the cash flow

• Serve as an effective project monitoring tool

• Evaluate the effect of changes

• Verify delay claims

 MODULE 2: CONTRACT PROCESSING 38

QUESTIONS:

1. Why do we need to create contract agreements? What are the advantages

and disadvantages of having a contract?
2. Why is performance security very important in construction industry?

3. What are the factors needed to create a Good Scheduling System?

ANSWERS:

The Human Factor. (A proficient scheduler that understands the concepts,

definitions, and applications of project scheduling)

The Technology. (A good scheduling computer system along with capable IT

support)

The Management. (A dynamic, responsive, and supportive management that

believes in the use of scheduling as part of management effort)
 MODULE 2: CONTRACT PROCESSING 39

REFERENCES

 US Department of Transportation, “FHWA Guide for Construction Contract

Time Determination Procedure”, FHWA National Highway Institute,
Course No. 134049, 1991. Retrieved November 21, 2016 at
www.virginiadot.org/business/resources/const/CTDR_Guidelines_FHWA.p
df
 Herbsman, Zohar J. and Ralph Ellis, "Determination of Contract Time for
Highway Construction Projects," NCHRP Synthesis Report 21,
Transportation Research Board, Washington, D.C., 1995.
 Copas, Thosmas L. and Pennock, Herbert A., "Contract Time
Determination," National Cooperative Highway Research Program
Synthesis of Highway Practice, (NCHRP) No. 79, October 1981.
 Hancher, Donn E. and Werkmeister, Jr., Raymond F., P.E. "Kentucky
Contract Time Determination System", June 30, 2000.
http://ntl.bts.gov/data/KY-CTDS.pdf
 Fisher Stark http://fisherstark.com/the-5-most-common-types-of-
construction-contracts/
 Chan Robles virtual law library
http://www.chanrobles.com/republicactno9184implementingrules.html#.W
DBNwdJ96Uk
 http://www.chanrobles.com/civilcodeofthephilippinesbook4.htm
 Asia Pacific Projects Update
https://en.wikipedia.org/wiki/Performance_bond
 BUSINESS DICTIONARY
https://www.businessdictionary.com/definition/procurement.html
 CONTENTS
Variation Order

a. What is Variation
Order

b. Who issues Variation

Order

c. Cause and Effect of

Variation Order

MODULE 3 d. Contract Provision for

Variation Order

VARIATION ORDER
e. Factors affecting
Valuation of Variation
Order

f. Managing
Construction Variations
and Claims

g. Practices to Reduce
Variation Order
 MODULE 3: VARIATION ORDER 41

LEARNING OBJECTIVES

The objective of this research is to provide understanding of Construction Variation

Order and discuss issues relative to the subject such as:

1. Define Variation Order

2. Determine who is authorized to issue variation order
3. What are some of the causes and effect of Variation Order
4. Provision for Variation Order in Contract Documents
5. Factors that affect the valuation of variation order
6. Practices in Managing and Reduction of variation order.

VARIATION ORDER

WHAT IS VARIATION ORDER?

 A variation order is issued whenever there is a variation to the contracted

works. This may include adding or omitting work, increasing or decreasing the
quantity of any work, changing the character or quality of any material or work,
the order in which the works proceed etc. Butt, G. (2014, July 12)
 "Change Order" is a just a technical term for an amendment to a construction
contract.A Change Order represents the mutual consensus between the
parties on a change to the work, the price, the schedule, or some other term of
the contract. Glazov, J (2011, January 17).
 The alteration or modification of the design, quality or quantity of the Works as
shown upon the Contract Drawings, Bill of Quantities and/or Specification, and
includes the addition, omission or substitution of any work, the alteration of the
kind or standard or any of the materials or goods to be used in the Works and
the removal from the Site of any work, materials or goods executed or brought
thereon by the Contractor for the purposes of the Works other than work,
materials or goods which are non in accordance with this Contract. Sikan,
H.H.(1999).
 MODULE 3: VARIATION ORDER 42

WHO ISSUES VARIATION ORDER?

 Variations can be requested by either the Contractor or Principal or come about

as a result of conditions outside the control of either party e.g. bad weather.
Butt, G. (2014, July 12).
 A Change Order is a bilateral amendment to a construction contract. Each
party to the contract must agree to the Change Order, usually by signing it. No
one can unilaterally issue or impose a Change Order. Not the owner, not the
contractor, not a subcontractor, and not the architect or any other designer.
Anyone may propose a Change Order. But a Change Order is something you
and the other side must both agree to; neither can issue one unilaterally.
Glazov, J (2011, January 17).

CAUSES AND EFFECT OF VARIATION ORDER

Cause of Variation Order

Variation orders arise for a variety of causes, of which some causes are
foreseeable and others are not, some of which are listed below according to
Memon et al.,2014.

o Change of Schedule - A change of schedule during the project

construction phase may result in major reallocation of resources. A change
in schedule means that the contractor will either be required to provide
additional resources or keep some resources idle. In both cases, additional
cost is incurred.
o Change in Scope - Change of plan or scope of the project is one of the
most significant causes of variation in construction projects. It is usually the
result of inadequate planning at the project definition stage or because of
lack of involvement of the owner in the design phase.
 MODULE 3: VARIATION ORDER 43

o Owners Financial Problem - The owner’s financial problems can affect

project progress. This problem often leads to change in work schedules and
specifications, affecting the quality of the construction.
o Impediment to Prompt Decision Making process - Prompt decision
making is an important factor for project success. Failure to make the
decision efficiently may result in the delay, causing the need for the change
order due to cost increments.
o Obstinate nature of the Owner - A building project is the result of the
combined efforts of the professionals involved, which have to work at the
various interfaces of a project. If the owner is obstinate then this could cause
major variations at the later stages of a project.
o Change in specifications by the owner- Changes in specification is a
common phenomenon in construction projects with inadequate project
objectives. If these changes in the specification of the design or requirement
are carried out, this leads to variations in the construction phase.
o Change in Design by Consultant - A change in design improvement by
the consultant is a norm in contemporary professional practice. Changes in
design were frequent in projects where construction starts before the design
is finalized. Such changes affect the project in various ways depending on
the timing of the change.
o Conflicts among Contract Documents - Conflict between contract
documents can result in misinterpretation of the actual requirement of a
project. It is essential that the contract documents are clear and precise.
Insufficient details in the contract documents may result in delays to the
project completion or cause variations in cost.
o Design Complexity - Complex designs require unique skills and
construction methods. Complexity affects the flow of construction activities,
whereas simpler and linear construction works are relatively easy to handle.
o Inadequate Working Drawing details - To convey a complete concept of
the project design, the working drawings must be clear and concise.
 MODULE 3: VARIATION ORDER 44

Inadequate working drawing details can result in misinterpretation of the

actual requirements for the project causing variations in the project.
o Changes in Specification by consultants - Changes in specification are
observed frequently in construction projects. Changes in specification
results in variations to the project, leading to delay and increased overall
cost.
o Unavailability of Equipment - Unavailability of equipment is a
procurement problem that can affect the project completion.
o Shortage of Skilled Manpower - Skilled manpower is one of the major
resources required for technological projects. Variations and delays may
occur due to shortages of skilled labor.
o Contractor’s Financial Difficulties - Construction is a labor intensive
industry. Whether the contractor has been paid or not, the wages of the
worker must still be paid. If a contractor experiences financial difficulties
during the course of a project, it may result in lacking of resource availability.
Consequently, the progress of the project is affected which may require
variation and extension of time.
o Poor workmanship - Defective workmanship may lead to demolition and
rework in construction projects. This results in delay and increased cost.
o Poor Procurement Process - Procurement delays have various adverse
effects on other processes in the construction cycle. Other processes in the
construction cycle are affected by poor procurement processes.
Consequently, variations are required.
o Lack of Strategic planning - Proper strategic planning is an important
factor for successful completion of a building project. The lack of strategic
planning is a common cause of variations in projects where construction
starts before the design is finalized.
o Inadequate Design - Inadequate design can be a frequent cause of
variations in construction projects.
 MODULE 3: VARIATION ORDER 45

Effects of Variation Order

 Delay in Completion -Variations often hinder the project progress, leading

to delay in achieving the targeted milestones during construction. In
reducing the delay of a project, the contractor would try to accommodate
the variations by utilizing the free floats in the construction schedules.
 Increase in Project Cost - Increase in project cost is regarded as the most
common effect of variations. Any alteration or addition in the design during
execution of the project may results in demolition or rework of any project
component and eventually increase the project cost. Hence, in order to keep
overall project cost unchanged; normally in every construction project a
contingency sum is allocated which caters possible variations in the project.
 Quality of projects - Variations affect the quality of work adversely. The
quality of work is frequently affected by frequent variations because
contractors have to compensate for the losses by cutting corners.
 Causes rework - Variations in construction often results in rework and
demolition if the variations occurred during the construction is underway or
even completed. This effect is to be expected due to variations during the
construction phase while variations during the design phase do not require
any rework or demolition on construction sites.
 Logistics Delays - Variation may cause requirement of new or additional
amount of material and equipments which results in logistics delays.
Logistics delays are among the significant effects of variations in
construction projects.

CONTRACT PROVISION FOR VARIATION ORDER

Standard forms of contract generally make express provisions for the contract
administrator(generally the architect or engineer) to instruct variations. Such
provisions enable the continued, smooth administration of the works without
the need for another contract. For example, FIDIC Clause 51.1.
 MODULE 3: VARIATION ORDER 46

FIDIC Conditions of Contract for Works of Civil Engineering Construction

(1987 amended 1992) Clause 51 Variations,

The Engineer shall make any variation of the form, quality or quantity of the
Works or any part thereof that may in his opinion, be necessary and for that
purpose, or if for any other reason it shall, in his opinion, be appropriate, he
shall have the authority to instruct the Contractor to do and the Contractor shall
do any of the following: Hardjomuljadi, S. (2016, November 26)

o Increase or decrease the quantity of any work included in the

Contract
o Omit any such work (but not if the omitted work is to be carried out
by the Employer or by another contractor
o Change the character or quality or kind of any such work
o Change the levels, lines, position and dimensions of any part of the
Works and
o Execute additional work of any kind necessary for the completion of
the Works
o Change any specific sequence or timing of construction of any part
of the Works

No such variation shall in any way vitiate or invalidate the Contract, but the
effect, if any, of all such variations shall be valued in accordance with Clause
52. Provided that where the issue of an instruction to vary the Works is
necessitude by some default of or breach of contract by the Contractor or for
which he is responsible, any additional cost attributable to such default shall be
borne by the contractor.

FACTORS AFFECTING VALUATION OF VARIATION ORDER

1. Changed conditions or circumstances- The varied work may be carried

out in different circumstances than those contemplated at tender stage for
 MODULE 3: VARIATION ORDER 47

reasons which are entirely related to the nature of the variation itself. For
example, the contractor may have allowed for excavation to reduced levels
using scrapers to deposit spoil in a temporary spoil heap for future disposal.
Following a variation to add a length of surface water drain across the site
in the location of the spoil heap, the contractor is forced to excavate and
load into Lorries and cart away most of the spoil in one operation. The
revised method takes longer so that more work is done in wet weather and
the operation is more costly. There is no delay or disruption to the works as
a whole. This change could, and should, be dealt with by valuation under
the variation provisions in the contract.

2. Changed quantities - Some changes in quantities have a significant effect

on cost, even when the nature of the work and the method of executing the
work are unchanged. For example, an increase in the volume of concrete
may require working overtime in order to complete a floor slab which may
be critical to the activity planned to commence the following day. Another
example is where an increase in quantities causessome of the work to be
carried out later. If the quantity of brickwork increased by twenty per cent,
and using the same resources, the time to execute the work (but not any
other activities or the contract as a whole) was extended into another pay
increase, then the extra costs resulting from the pay increase should be
reflected in the value of the variation (assuming a fixed price contract).

3. Changed timing - Work of a similar nature to that contained in the contract

may be ordered at different times so that material and labor costs are not
the same as those for the original work.

4. Small quantities - Variations requiring ordering and execution of similar

work in small quantities may involve loss of purchasing discounts and
increased prices payable to subcontractors who may have to return tosite
after completion of the original subcontract work.
 MODULE 3: VARIATION ORDER 48

5. Time-related costs - Where it is possible to isolate a period of delay to part,

or the whole, of the works to a single variation (or group of variations), the
time-related costs may be reflected in the value of the variation. For
example, a major variation to the ground floor structure may cause the time
taken to reach completion of the first floor slab to be delayed by one week.
If may be appropriate to include the costs of the entire concrete, steelwork
and carpenter resources, including concrete mixers, pumps, dumpers,
tower-crane, supervision and other preliminary items in the value of the
variation. Additional time may be required as a result of actual re-measured
quantities exceeding the quantities in thecontract bills.

Thomas, R (2001). CONSTRUCTION CONTRACT CLAIMS 2ND EDITION

MANAGING CONSTRUCTION VARIATIONS AND CLAIMS

Managing construction variations and claims are essential to successful

project management. In these very challenging and competitive markets where
the profit margin for construction projects is being squeezed, effectively
managing variations and claims could positively impact the company while
mismanagement could result to massive losses. To manage such variations
appropriately the following should be taken into accounts and thoroughly reviewed.

 Baseline Documents – at the outset of the project it is crucial that baseline

documents are not ambiguous and clearly defined for reference by both the
contractor and client. Such Baseline documents include the following
according to Algarme, N (n.d.) PICE 40th National Convention.
o Tender Documents
 The General Conditions of the Contract
This document highlights the contractual rights and
obligations of each party and forms part of each party’s
contractual baseline. Any change in The General Conditions
 MODULE 3: VARIATION ORDER 49

of Contract will likely alter therights of the parties and will

attract either a positive or negative variation.
 Technical Specifications
This document provides each party with the technical
requirements and detailed specifications for each of the
material, plant and labor components ofthe project, inspection
and testing including environmental, health and safety
requirements.
 Drawings
This document serves as the baseline for quantity,
construction methodology, labor, plant, environmental control,
quality control, and health and safety.
 Tender Schedule
This document is the reference for the start and finish date of
the project based on the tender documents. It highlights the
most important information to a successful project
execution comprising of the critical path, free float, sequence
of activities, and resourceloading.

 Construction Stage - During the construction stage, various changes occur

including changes in design, drawings, changes in specifications or new
specifications, re-sequencing of activities, addition or deletion in the scope
of work, changes in quantities of work, working hours, standard of work,
levels or elevations, site access or possession of site, latent conditions,
inclement weather, and government legislation.
 Variation Notifications - The contractor must submit a Notification variation
that will impact on the project objectives: cost, time,quality. It is critical that
all changes and their effects on theproject and schedule are immediately
evaluated and a Notice of Delay or a Variation Notification immediately
issued to the client/representative to ensure that the time bar period in the
contract agreement is never exceeded. To ensure that all notices of delay
 MODULE 3: VARIATION ORDER 50

or variation areimmediately issued and properly managed, the project office

must maintain an updated Variation and Delay Notices Register. It is also
best practice to update the Construction Schedule weekly with all the
changes included to ensure that the critical path is current and relevant and
the construction schedule on track.
 Time Bar - This is a condition of the contract that can operate to bar the
contractor / subcontractor from entitlement to an otherwise valid claim if
certain notices or submissions are submitted after the required time. This
is a significant issue for contractors andor subcontractors when
administering time provisions in construction contracts.
 Extension of Time and Liquidated Damages (LD’s) - Time is a very critical
element because contracts require the contractor to complete the project at
specified date and failure will result to the payment of liquidated damages
(LDs) to the client. The contractor will only be relieved of their
obligation to complete the project on time if an event occurs for which the
contractor is entitled to EOT. When it becomes evident that a delay caused
by the client or beyond the control of the contractor will protract the
contract completion date, thecontractor/subcontractor must immediately
prepare and issue a Notice of Delay.
 Claim - A Construction Claim is an assertion of a party’s right under the
terms of the contract. In the constructionindustry, this claim is more of
a right to additional time or additional payment or combination of both.

Algarme, N (n.d.) Managing Variation Order and Claims 40th National

Convention

PRACTICES TO REDUCE VARIATION ORDER

Two items from Dvorack, P (2010, August 06) Top 10 best practices for avoiding
construction change orders provides idea on how to minimize variation order in
construction project.
 MODULE 3: VARIATION ORDER 51

 Thoroughly review the contract to alleviate risk.

o Literally read through each every contract clause and think of
possible problems to be encountered on the project.
o “Identify the project areas you think are going to be problems and
spend your powder there,” says Stoel Rives”
 Keep the bidding Competitive.

o According to Fowler “There is always someone else lined up for the

next project. Aligning yourself with multiple trusted partners puts you
in a stronger position. If you have just one company bidding some
aspect of a project, then it is more difficult to spot issues as you have
no comparison and are in a far weaker position to fix the problem
when you find them.”

QUESTIONS

Relative to the research conducted, the following questions arise:

1. What determines a valid variation order?

2. How to limit the occurrence of variation order?

 MODULE 3: VARIATION ORDER 52

REFERENCES

 Butt, G. (2014, July 12). What is Variation Order? Retrieved from

https://www.quora.com/What-is-Variation-order
 Glazov, J (2011, January 17). Construction Contracts: Top 10 Terms –
Changes (Change Order). Retrieved from
http://www.constructionlawtoday.com/2011/01/construction-contracts-top-
10-terms-changes-change-orders/
 Sikan, H.H.(1999). Variation Orders in Construction Contract.
JurnalAlambina, 49-50. Retrieved from
http://eprints.utm.my/9909/1/HashimSikan1999_VariationOrdersinConstru
ctionContract.pdf
 Memon, A.F., Raman, I.A., Hasam, M.F.A (2014). Significant Causes and
Effects of Variation Order in Construction Projects. Research Journal of
Applied Sciences, Engineering and Technology, 7(21): 4494-4502.
Retrieved from http://www.maxwellsci.com/print/rjaset/v7-4494-4502.pdf
 Hardjomuljadi, S. (2016, November 26). Variation Order, The Causal or The
Resolver of Claims and Disputes in the Construction Projects. International
Journal of Applied Engineering Research ISSN 0973-4562 Volume 11,
Number 14 (2016) pp 8128-8135. Retrieved from
http://www.ripublication.com/ijaer16/ijaerv11n14_07.pdf
 Dvorack, P (2010, August 06).Top 10 best practices for avoiding
construction change orders. Retrieved from
http://www.windpowerengineering.com/construction/top-10-best-practices-
for-avoiding-construction-change-orders/
 THOMAS, R (2001). CONSTRUCTION CONTRACT CLAIMS 2ND EDITION
 Algarme, N (n.d.) Managing Variation Order and Claims 40th National
Convention
 CONTENTS
Suspension of Work
and Extension of
Contract Time

a. Suspension of Work

b. Important Notes in
RA 9184

c. Extension of Contract

MODULE 4
Time

d. Sample of Extension
of Contract time Claim
SUSPENSION OF WORK
AND EXTENSION OF e. Sample Guidelines of

CONTRACT TIME
a company on filing
Extension of Contract
Time
 MODULE 4: SUSPENSION OF WORK & EXTENSION OF CONTRACT TIME 54

LEARNING OBJECTIVES

1. To be able to determine the guidelines on proper suspending of work in

accordance with RA 9184.
2. To be able to know when and how to file Extension of Contract time claim
and the justifiable details to be stated and attached for such claims in order
for the EOT to be granted.

SUSPENSION OF WORK & EXTENSION OF CONTRACT TIME

Suspension of Work

Suspension is a contractually allowable delay during the course of construction

project. According to Philip L. Bruner and Patrick J. O’Connor, “Suspension of work
is a compensable delay authorized and addressed by contract.

Suspension of work provisions are included in construction contract which prevent

the contractor from claiming a breach of contract. Suspension of work provision
thereby prevents contractor from seeking all remedies that are associated with
breach such as a claim of “contract abandonment” by owner. A project with a
suspension of work clause would not automatically be able to terminate the
contract and would be required to continue to perform upon project’s
reinstatement. Refusal to do so would be considered a breach on the part of the
contractor.

In order for an owner to invoke the suspension of work clause, the owner must
provide the contractor with written notice of suspension (Suspension order). Upon
receipt of suspension order, the contractor is required to stop all work and take
reasonable steps to mitigate its damages during suspension. Without written notice
by the Owner, it is called as constructive suspension with compensable delays and
allows the contractor to recover under the contract and as approved to a claim for
breach.
 MODULE 4: SUSPENSION OF WORK & EXTENSION OF CONTRACT TIME 55

According to RA 9184 Annex E “Contract Implementation Guidelines for

Procurement of Infrastructure Projects” Section 9: Suspension of Work
 MODULE 4: SUSPENSION OF WORK & EXTENSION OF CONTRACT TIME 56

Important Notes in RA 9184 :

Section 9.1

The procuring entity shall have the authority to suspend WHOLLY or PARTLY by
WRITTEN ORDER for such period as may be deemed necessary due to :

a) Force majeure or any fortuitous event

b) Failure of the part of contractor to correct bad conditions
c) Unsafe conditions for general public
d) Failure to carry out valid orders given by procuring entity
e) Adjustment of plans to suit field conditions as found necessary during
construction.

Section 9.2

The contractor shall have the right to suspend work operation on any project or
activities along critical path after fifteen (15) calendar days from date of receipt of
written notice due to:

a) Existence of right of way problems

b) Non-issuance of construction plans by the owner
c) Peace and order conditions on that area
d) Failure of procuring entity to deliver government-finished materials
and equipment.
e) Delay in payment of contractors ‘ billing (beyond forty five (45)
calendar days from the time of contractor’s claim and is certified by
the procuring entity agent as complete.

Section 9.3

If Suspension is not due to any fault of contractor it may lead to contractor’s claim
of extension of contract.
 MODULE 4: SUSPENSION OF WORK & EXTENSION OF CONTRACT TIME 57

Extension of Contract Time

Extension of Contract time is an extension of contract granted to the contractor

due to delays that is not the fault by the contractor.

Extension of time can be considered an encouraging clause to claim for any undue
delay caused in the completion of construction due to events which are not
attributable to the contractor.

According to RA 9184 Annex E “ Contract Implementation Guidelines for

Procurement of Infrastructure Projects” Section 10 : Extension of Contract time
MODULE 4: SUSPENSION OF WORK & EXTENSION OF CONTRACT TIME 58
MODULE 4: SUSPENSION OF WORK & EXTENSION OF CONTRACT TIME 59
 MODULE 4: SUSPENSION OF WORK & EXTENSION OF CONTRACT TIME 60

Important Notes in RA 9184 :

Section 10.1

The procuring entity shall determine the amount of extension of such extension
based on the amount of additional work. A notice must be delivered to the
procuring entity before the contract expires and /or must be within thirty (30)
calendar days after such work has been commenced or after the circumstances
leading to such claim has arisen. Failure by the contractor to give such notice will
require constitute him a waiver by any claim. Procuring entity shall examine the
facts if it justify an extension.

Section 10.2

No extension of contract time must be claimed due to ordinary unfavorable weather

conditions or inexcusable failure or negligence of contractor.

Section 10. 3

Extension of contract time claim may be granted if the affected activities fall on the
critical path of PERT/CPM network.

Section 10.4

No extension of contract time will be granted if the reason given supporting the
claim is already considered at the pre-construction stage which leads to the
formation and determination of original contract time.

Section 10.5

Extension of contract time shall be granted for :

a) Rainy/unworkable days considered as unworkable for the workers and

based on the actual condition at site.
b) Existence of right of way, non-issuance of permit causing non-delivery of
items needed at site
c) Non-issuance of working drawings
d) Shortage of construction materials
 MODULE 4: SUSPENSION OF WORK & EXTENSION OF CONTRACT TIME 61

e) Labor strikes
f) Peace and order

Such factors must be certified by government agencies such as DTI, DOLE, DILG
and DND.
 MODULE 4: SUSPENSION OF WORK & EXTENSION OF CONTRACT TIME 62

Sample of Extension of Contract time Claim

Sample Guidelines of a company on filing Extension of Contract Time
 MODULE 4: SUSPENSION OF WORK & EXTENSION OF CONTRACT TIME 63

QUESTIONS

1. If the owner of a construction project chooses to suspend work, who will be

responsible for extra costs associated with suspension?
2. Can contractor terminate contract if suspension lasts for unreasonable
period of time?
3. What will be the relevance of filing EOT during the duration of contract? If
EOT is not filed, who will be responsible for the prolongation costs?

REFERENCES

 RA 9184 Implementing Rules and Regulations

 Wittbrudt, Richard. “Project Suspension : What Owners and Contractors
Need to Know- Now!”2009.
 https://www.designingbuildings.co.uk/wiki/extension_of_time_EOT_in_con
struction_contracts
 www.lexology.com/library/detail.aspx?g=31fe34a1-29bc-4521-94e1-
51200b003027
 CONTENTS
Payment
Considerations to the
Contractors

a. Advance Payment

b. Progress payment

c. Retention Money

MODULE 5
PAYMENT
CONSIDERATIONS TO THE
CONTRACTORS
 MODULE 5: PAYMENT CONSIDERATIONS TO THE CONTRACTORS 65

LEARNING OBJECTIVE

To be aware of payment considerations included in the contract when entering into

contract for a project or specific work.

SUSPENSION OF WORK & EXTENSION OF CONTRACT TIME

An agreement or contract entered into by a contractor with the client for a project
or specific scope of work, payment is expected to receive in return for the work or
service rendered. Payment comes in many terms depending on what is stipulated
in the contract. Advance payment, progress payment and retention payment are
some common terms or mode used in the contract.
 MODULE 5: PAYMENT CONSIDERATIONS TO THE CONTRACTORS 66

A. Advance payment

An advance payment is a type of payment that is made ahead of its normal

schedule, such as paying for a good or service before you actually receive the
good or service. Advance payments are sometimes required by sellers as
protection against non-payment, or to cover the seller's out-of-pocket costs for
supplying the service or product.

Advance payments can refer to one of two situations. First, advance payments can
apply to any sum of money provided prior to the contractually agreed upon due
date. Second, advance payments can refer to any required payment that is due
prior to the receipt of the requested goods or services.

Some everyday examples of advance payments are prepaid cellphones, as they

require payment for the services that will be used by the customer in the future.
 MODULE 5: PAYMENT CONSIDERATIONS TO THE CONTRACTORS 67

Advance payment of this nature is required, as the service will not otherwise be
provided.

Voluntary advance payment, or prepaying, can apply to any debt or obligation that
is paid prior to it being required, such as making payments on upcoming rent or
utilities before they are contractually due.

Advance Payments to Suppliers

In the corporate world, companies often have to make advance payments to

suppliers when their orders are large enough to be potentially burdensome to the
producer, should the buyer decide to back out of the deal before delivery. This can
assist producers who do not have enough capital to buy the materials needed to
produce a large order, as they can use part of the advance payment to pay for the
product they will be creating. It can also be used as an assurance that a certain
amount of revenue will be brought in by producing the large order. If a corporation
is required to make an advance payment, it is recorded as a prepaid expense on
the balance sheet under the accrual accounting method.

Advance Payment Guarantees

An advance payment guarantee serves as a form of insurance, assuring the buyer

that, should the seller fail to meet the agreed upon obligation of good or services,
the advance payment amount will be refunded to the buyer. This protection allows
the buyer to consider a contract void if the seller fails to perform, reaffirming the
buyer's rights to the initial funds paid.

This refers to any advance made on a future commitment or payment. The term,
advance funding, is used very broadly, ranging from personal or project loans,
future contractual payments like annuities or royalties and government
appropriations.
 MODULE 5: PAYMENT CONSIDERATIONS TO THE CONTRACTORS 68

An advance payment, or simply an advance, is the part of a contractually due sum

that is paid or received in advance for goods or services, while the balance
included in the invoice will only follow the delivery. It is called a prepaid expense
in accrual accounting for the entity issuing the advance. Advanced payments are
recorded as assets on the balance sheet. As these assets are used they are
expended and recorded on the income statement for the period in which they are
incurred. Insurance is a common prepaid asset, which will only be a prepaid asset
because it is a proactive measure to protect business from unforeseen events.

Why Advance Payment is use in Corporate World?

- When their orders are large enough to be potentially burdensome to the

producer.
- Assist producers who do not have enough capital
- Used as an assurance.

In Summary:

 A payment that is made before goods or services are provided

 The good-faith money your client pays when you both sign a contract or
letter of agreement

 A payment against future delivery of the product

 Payment in anticipation of a contingent liability or obligation

 A type of payment that is made ahead of its normal schedule

 TWO SITUATION

1. ADVANCE PAYMENTS can apply to any sum of money provided

prior to the contractually agreed upon due date
 MODULE 5: PAYMENT CONSIDERATIONS TO THE CONTRACTORS 69

2. ADVANCE PAYMENTS can refer to any required payment that is

due prior to the receipt of the requested goods or services

 In CORPORATE WORLD

1. Companies often have to make advance payments to

suppliers when their orders are large enough to be potentially
burdensome to the producer, should the buyer decide to back
out of the deal before delivery

2. Advance payment can assist producers who do not have

enough capital to buy materials needed to produce a large
order

3. Advance payment can also be used as an assurance that a

certain amount of revenue will be brought in by producing the
large order
 MODULE 5: PAYMENT CONSIDERATIONS TO THE CONTRACTORS 70

B. Retention money

Retention is a percentage (often 5%) of the amount certified as due to the

contractor on an interim certificate, that is deducted from the amount due and
retained by the client. The purpose of retention is to ensure that the contractor
properly completes the activities required of them under the contract. Retention
can also be applied to nominated sub-contractors, and the main contractor may
also apply retention to domestic sub-contractors.

Half of the amount retained is released on certification of practical completion

('substantial completion' for Institution of Civil Engineers (ICE) contracts) and the
remainder is released upon certification of making good defects (or 'final statement'
for design and build contracts such as Joint Contracts Tribunal (JCT) DB 05).

Interim certificates should make clear the amount of retention and a statement
should also be prepared showing retention for nominated sub-contractors.
 MODULE 5: PAYMENT CONSIDERATIONS TO THE CONTRACTORS 71

The contract may require that retention is kept in a separate bank account and that
this is certified to contractors. In this case, the client will generally keep any interest
paid on the account.

NB. On construction management contracts, a separate certificate of practical

completion must be issued for each trade contract and so there are a number of
defects liability periods. This means that retention must be released as required
for each individual trade contract. The same is true on management contracts,
where each works contract must be certified individually.

Retention is security held by a procuring contractor to guarantee the performance

of a supplying contractor and in particular to safeguard against defects in the event
that the supplying contractor fails to satisfactorily rectify them. The security is
usually in the form of cash withheld (retained) but is often substituted for a bank
guarantee or insurance bond.

Retention applies to both Headcontractor’s (both a procuring contractor and a

supplying contractor) and subcontractors (generally a supplying contractor only)
and is usually set at 5% of the value of the works.

This percentage is deducted from all of the interim payments made to the
headcontractor from its employer/client which in turn deducts it from all the
subcontractor’s.

Practical completion and defects liability period

Once the headcontractor’s works are complete, the percentage of monies to be

deducted as retention is generally halved with the other half paid out. This stage
of works has different names in different contracts but “practical completion” is a
common term.
 MODULE 5: PAYMENT CONSIDERATIONS TO THE CONTRACTORS 72

Ordinarily there then follows a period commonly known as the “defects liability
period.” This is usually either 6 months or 12 months but can be considerably
longer. During this period the headcontractor and subcontractors have to make
good any defects in the works

Usually, unless remedial work is urgent, the works are inspected at the end of the
defects liability period and a schedule of defects is produced. The headcontractor
and subcontractors remedy the defects and, when they have done so, the works
are inspected again and, if made good, the balance of retention is paid.

Collecting retention money

Regardless of whether you are a headcontractor or a subcontractor, to ensure you

get your retention back you must have automated systems in place to ensure you
make and receive appropriate, written notifications at the time of practical
completion and the expiration of the defects liability period.

o Notify the date of practical completion of your part of the works as

soon as possible after they have been completed.
o Your system should record the date of practical completion and
should also remind you that you have reached the end of the defects
liability period.
o You should always request in writing to release retention and not wait
for this to happen. This is usually in the form of a “claim for practical
completion” and, after defects remediation, a “claim for final
completion.”
o If retention is not released you should investigate why ASAP. You
may be entitled to interest on amounts paid late!
o Bank guarantees are effectively equivalent to cash (worse, they’re
often supported by mortgaged assets) and often even harder to get
back. Don’t neglect to chase just as hard to get these back!
 MODULE 5: PAYMENT CONSIDERATIONS TO THE CONTRACTORS 73

o It is essential to keep good records and copies of all correspondence

both sent and received.

In Summary:

What is billing retention?

Retention, sometimes called retainage, refers to the amount of payment withheld

from a contractor’s contract

Why hold retention?

For the owner to ensure that the contractor will complete the project; also, to
ensure that quality standards are delivered.

How much is the usual retention?

Usually 5% to 10% of the total contract price

When can the contractor claim his retention?

Usually claimed after the defects and liability period (DLP)

What are the usual requirements in claiming the retention?

- Certificate of completion (COC)

- Certificate of acceptance (COA)

- Affidavit of quitclaim

- Purchase order (PO)

 MODULE 5: PAYMENT CONSIDERATIONS TO THE CONTRACTORS 74

C. Progress payment

Progress Payments

The act or practice of paying a contractor in installments as different stages of

workare completed, rather than providing a single lump sum at the completion of
theproject. Progress payments reduce the client's working capital needs for the
project.

What is a progress payment?

In construction, a progress payment is a partial payment that covers the amount

of work that has been completed up to the point of invoicing. There are several
ways to structure these payments. The most common ways of billing for progress
payments are:

Billing by stage
 MODULE 5: PAYMENT CONSIDERATIONS TO THE CONTRACTORS 75

For example, a subcontractor using the percentage of completion method could

send an invoice when 30%, 60%, and 100% of the project is completed. Obviously,
this billing method assumes that the contract allows them to invoice for these
stages.

Why are progress payments difficult?

Progress payments are difficult to handle because they are often disputed.
Subcontractors and general contractors often disagree about the amount and
quality of work that has been completed. Disputes take time to resolve and often
leave all parties with less than they expected. This dispute resolution makes
financing these invoices difficult.

By the way, for this reason factoring companies don’t finance the retainage
payment part of a construction contract either.

Progress payments

Under most standard building contracts the contractor is paid progressively

throughout the project and is required to submit progress claims to the architect on
a regular basis. The architect assesses each claim on the basis of work
undertaken, the labour and materials used, and any other construction costs in
accordance with the construction contract, and then issues a progress certificate
which states the amount calculated by the architect to be due to the contractor at
the time of issue.

Under this system, your architect is able to protect you from being charged for work
not completed, or not in accordance with the requirements of the construction
documents.

At the time of letting the building contract the contractor should be asked to provide
a schedule for expected monthly (or other agreed period) progress payments. The
actual payments will depend on the amount of work the contractor has completed
and will be likely to vary from this schedule. However, a schedule can be a useful
guide for your budgeting.
 MODULE 5: PAYMENT CONSIDERATIONS TO THE CONTRACTORS 76

Under most building contracts the architect’s responsibility to prepare and issue
progress certificates is as an independent professional assessor upon whose
assessment and valuation both you and the contractor have agreed to abide. It is
one of the few instances under the contract that the architect does not act as your
agent and you must not do anything which prevents your architect from carrying
out that role of assessor and certifier independently of you.

The following is the usual process and your obligations for progress payments:

1.The contractor presents a progress claim to the architect. 2.The architect

assesses the claim, determines the monetary amount which the contractor is
entitled to under the contract and issues a progress certificate to the contractor.
3.The contractor presents the progress certificate and a tax invoice to you for
payment. 4.The building contract usually states a limited time within which you
must make the payment.

In Summary:

 In construction, a progress payment is a partial payment that covers the

amount of work that has been completed up to the point of invoicing.

 The act or practice of paying a contractor in installments as different stages

of work are completed, rather than providing a single lump sum at the
completion of the project.
 MODULE 5: PAYMENT CONSIDERATIONS TO THE CONTRACTORS 77

QUESTIONS

1. Why payment considerations should be included in the contract?

2. What are the advantages and disadvantages of using each of the payment
considerations?
3. How payment consideration affect the cash flow and financial position of a
company?

REFERENCES

 Advance payment, n.d., Retrieved from

http://www.investopedia.com/terms/a/advancepayment.asp
 Expenditure and Payments: Annex 2 Advance and Interim Payments, July
2012, Retrieved from
http://www.gov.scot/Topsics/Government/Finance/spfm/payment annex2
 Progress Payment, Retrieved from http://financial-
dictionary.thefreedictionary.com/progress+payments
 Progress Payment, Retrieved from
http://janecameronarchitects.com/progress-payments-during-construction/
 Retention Money, Retrieved from
https://www.designingbuildings.co.uk/wiki/Retention_in_construction_contr
acts
 CONTENTS
Project Closing Out

a. Project
Completion/Acceptance

b. Defects/ Liability
Period

c. Warranty Period for

Structural

MODULE 6
Defects/Failure

d. Liquidated Damages

PROJECT CLOSING OUT

e. Contract Termination
 MODULE 6: PROJECT CLOSING OUT 79

LEARNING OBJECTIVES

1. Be able to understand the standard processes involved in Project Closing

Out;
2. Define “Defects / Liability Failure” and identify the acceptable period for
Construction outputs;
3. Be aware of the A / E’s civil liabilities and warranty period, specifically on
Structural Defects / Failure;
4. Recognize the importance of the concept of Liquidated Damages in terms
of Construction Contracts; and
5. Understand the procedure, acceptable grounds, and effects of Contract
Termination for both the Owner and Contractor / Professional

PROJECT CLOSING OUT

Project Completion & Acceptance

As the project nears completion, typically the owner is anxious to move in and the
contractor is anxious to move on. Both are inclined to want to ignore small details
that may cause performance problems later. The construction administrator is in a
position to maintain the focus on quality construction through the contract
requirements that require the architect to prepare the certificate of substantial
completion for submission to the lender. (Mays, 2011)

Generally, Project Completion or Closeout has a sequence of preparation in order

to have a smooth transition of the ownership. The Contractor usually are the
initiator for the semi-final inspection, depending on the agreed duration of
completion, for it will depend on the complexity of work. This is also another way
of getting all the issues or defects to be repaired as soon as possible to prevent
prolonged work that can lead to total cost variances.
 MODULE 6: PROJECT CLOSING OUT 80

Final Inspection can be conducted after all the substantial activities are done:

1. Semi-final Inspection.
Though project may vary in range or in scope, usually the Construction
Manager initiates the invitation to conduct the semi-final inspection at
site. He/She will coordinate with the QA/QC, PM and Designer/Architect
and other participants to determine the date of the semi-final inspection
especially when the project is nearing completion and all elements of the
project have been constructed. The Inspection team must determine the
remaining work that must be done, any extras or additional work that
may require to satisfactorily complete the work and also important to
document all the agreement to fulfill the Contract.
2. Notice of Substantial Completion and Stopping Contract Time.
When all the elements of the contract have been accomplished and
items under Semi-final inspection have been addressed, the Project is
considered complete. It also must be safe and convenient for use by the
public or users.
3. Final Inspection.
The person to conduct the final inspection will be the Supervising
Engineer level or higher together with the Owner or its representative
and other Stakeholders. The inspection report must be furnished and
the items that needs to be corrected must be completed within the
specified remaining days of work to closeout the contract.

Defects & Liability Period

Defects are aspects of the works that are not in accordance with the contract.
Defects may occur because of:

a. Design deficiencies.
b. Material deficiencies.
c. Specification problems.
 MODULE 6: PROJECT CLOSING OUT 81

d. Workmanship deficiencies.

Defects can be:

(1) Patent - those which can be discovered by reasonable inspection.

(2) Latent - those which cannot be discovered by reasonable inspection.

Problems with foundations which may not become apparent for several years after
completion when settlement causes cracking in the building. When a latent defect
becomes apparent, it becomes patent rather than latent.

During the defects liability period, the client reports any defects that arise to the
contract administrator who decides whether they are defects in the works (i.e.
works that are not in accordance with the contract), or whether they are in fact
maintenance issues. If the contract administrator considers that they are defects,
then they may issue instructions to the contractor to make good the defects within
a reasonable time. It is the contractor's responsibility to identify and rectify defects,
not the clients, so if the client does bring defects to the contractor's notice, they
should make clear that this is not a comprehensive list of all defects.

At the end of the defects liability period, the contract administrator prepares a
schedule of defects, listing those defects that have not yet been rectified, and
agrees with the contractor the date by which they will be rectified. The contractor
must in any event rectify defects within a reasonable time.

When the contract administrator considers that all items on the schedule of defects
have been rectified, they issue a certificate of making good defects. This has the
effect of releasing the remainder of any retention and will result in the issuing of
the final certificate.

It is important to note that the defects liability period is not a chance to correct
problems apparent at practical completion, it is a period during which the contractor
may be recalled to rectify defects which appear. If there are defects apparent
before practical completion, then these should be rectified before a certificate of
practical completion is issued. This can put the contract administrator in a difficult
 MODULE 6: PROJECT CLOSING OUT 82

position, where both the contractor and the client are keen to issue the certificate
(so that the building can be handed over) and yet defects (more than a de minimis)
are apparent in the works. Issuing the certificate under these circumstances could
render the contract administrator liable for problems that this causes, for example,
in the calculation of liquidated damages.

If the contract administrator is pressured to certify practical completion even

though the works are not complete, they might consider informing the client in
writing of the potential problems of doing so, obtaining written consent from the
client to certify practical completion and obtaining agreement from the contractor
that they will complete the works and rectify any defects. If the contract
administrator is not confident about the potential problems that may result from
early certification, they might advise the client to seek legal advice. (Designing
Buildings Ltd., 2016)

Warranty Period for Structural Defects & Failure

It is the nature of construction projects that faults and defects caused by failures in
design, workmanship or materials, may not become apparent or readily detectable
(even with the exercise of reasonable care) until many years after completion of
the project, long after the end of the defects liability period. Such defects are known
as latent defects (as opposed to patent defects which are apparent).

Examples of common latent defects include:

 Defective basement tanking allowing water penetration.

 Inadequate wind-posts or wall ties causing movement damage to walls.
 Under-strength concrete or misplaced reinforcement allowing movement
damage to the structure.
 Inadequate foundations causing subsidence of the building.

It is also a feature of construction projects that the completed building will have a
life-cycle of many years often with a succession of future owners who had no
 MODULE 6: PROJECT CLOSING OUT 83

involvement in the original construction, but who have a liability to maintain the
structure.

After the end of the defects liability period the building owner does not have a
contractual right to insist that the contractor rectifies defects not notified during that
period (as will often be the case with latent defects). The building owner must
instead seek redress in an action for damages, for breach of contract, or for
negligence. In the case of dwellings there is a statutory remedy provided by the
Defective Premises Act 1972.

These rights of action are not perpetual; actions for breach of contract are time
barred after 6 years from the date of breach (usually the completion of the building
although with a failure of design the breach may occur earlier) see the Limitation
Act 1980 Section 5. For a contract under seal, the period is 12 years (see the
Limitation Act 1980 Section 8). Clearly therefore it is important to the building
owner that all contracts are made under seal; not so for the contractor, the
professional consultant or their insurers. Where the claim is for negligence, the
time limit is 6 years from the date on which the cause of action accrued, which will
be the date when the damage occurred.

Complex arguments arise in respect of economic loss. This may be many years
after the completion of the building. The provisions of the Latent Damage Act 1986
Section 1 (by way of a new Section 14A to the Limitation Act) provides a limitation
period for negligence of 3 years from the first knowledge of the cause of action and
(by way of a new section 14B to the Limitation Act) an overriding 15 year long-stop
from the act of negligence giving rise to the damage. Section 3 of the Act is
important as it gives a new cause of action to successive owners.

Commercial fixes for latent defects and successive owners include, collateral
warranties, guarantees, building warranty schemes and latent defects insurance.
Latent defects insurance first appeared in the UK in the 1980’s, imported from
Europe and known as decennial insurance. It soon fell out of favour as a result of
being over-hyped and overpriced. Latent defect insurance is now making a
comeback.
 MODULE 6: PROJECT CLOSING OUT 84

In the Philippines: As stated in the IRR RA 9184, Infrastructure projects shall be

one year from project completion up to final acceptance. During this period, the
contractor shall undertake the repair works, at his own expense, of any damage to
the infrastructure projects on account of the use of materials of inferior quality
within ninety (90) days from the time the head of procuring entity has issued an
order to undertake repair. In cases where structural defects and/or failures arise
during the warranty period, the following parties/persons shall be held liable:

a. Contractor.
Where structural defects arise due to faults attributable to improper
construction use of inferior quality/substandard materials, and any
violation of the contract plans and specifications, the contractor shall be
held liable.
b. Consultants.
Where structural defect arise due to faulty or inadequate design and
specifications and supervision, then the consultant who prepared the
design or undertook supervision shall be held liable.
c. Procuring entity or Construction Manager.
Shall be held liable in cases where the structural defect are due to willful
intervention in altering design and specifications.
d. Third Parties.
Be held liable in case where the cause of structural defect are caused
by a work undertaken by the entity, in which the applicable warranty to
such structure should be levied to third parties for their restoration works.
e. Users.
If due to abuse or misuse by the end-user, it can also due to non-
compliance of user to the specification or technical design or intended
purpose of the building or project.

The warranty against Structural defects shall cover the following periods from final
acceptance, except those occasioned by force majeure:

 Permanent Structures: Fifteen (15) years

 MODULE 6: PROJECT CLOSING OUT 85

 Semi-Permanent Structures: Five (5) years

 Other Structures: Two (2) years

Where the purpose of this writing is for the Project Managers to review the contract
defects from the viewpoint of Owner and Contractor and to consider how damages
for defects are assessed versus diminution in value.

By Law: "All design and build projects shall have a minimum Defects Liability
Period of

one (1) year after contract completion or as provided for in the contract

documents. This is without prejudice, however, to the liabilities imposed upon

the engineer/architect who drew up the plans and specification for a building

sanctioned under Article 1723 of the New Civil Code of the Philippines."

Liquidated Damages

Contracts generally include a provision for the contractor to pay liquidated

damages (or liquidated and ascertained damages, sometimes referred to as
LAD's) to the client in the event that the contract is breached. In building contracts,
liquidated damages usually relate to the contractor failing to achieve practical
completion (ie completing the works so they can handover the site to the client) by
the completion date set out in the contract.

Liquidated damages are not penalties, they are pre-determined damages set at
the time that a contract is entered into, based on a calculation of the actual loss
the client is likely to incur if the contractor fails to meet the completion date. They
might include, rent on temporary accommodation, removal costs, extra running
costs and so on. They are generally set as a fixed daily or weekly sum. There may
be a more complicated formulae where the works are phased, or where there will
be partial possession. It is important that the method of calculation is formally
documented.
 MODULE 6: PROJECT CLOSING OUT 86

If the contract prevents the client claiming liquidated damages, or if actual losses
are significantly different to those that were estimated at the time the contract was
entered into, then the client may pursue a claim for unliquidated (i.e. actual)
damages through the courts. This would require them to prove that an actual loss
had been incurred and that loss was not too 'remote'.

As liquidated damages are not a penalty, they must have been based on a genuine
calculation of damages when they were set. If they are not genuine, they may be
considered a penalty by the courts and so will be unenforceable (see Dunlop
Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd). Under these
circumstances, the client would still be able to pursue a claim for breach of
contract.

If the project is delayed by an event that impacts on the completion date, but is not
the fault of the contractor, then this may constitute a 'relevant event' for which the
contractor may be granted an extension of time (ie the completion date in the
contract is adjusted), and the contractor may be able to make a claim for loss and
expense. A relevant event might be a delay that is caused by the client, or a neutral
event such as exceptionally adverse weather.

Mechanisms allowing extensions of time are not simply for the contractor's benefit.
If there was no such mechanism and a delay occurred which was not the
contractor’s fault, then the contractor could no longer be required to complete the
works by the completion date and would only have to complete the works in a
'reasonable' time. With no enforceable completion date, the client would lose any
ability to claim liquidated damages.

Contract Termination

Most forms of contract will include termination clauses, setting out the
circumstances under which a contract may be terminated. When a contract is
terminated, the parties to the contract are no longer obliged to perform their
obligations under the contract.
 MODULE 6: PROJECT CLOSING OUT 87

Terminating a contract can be complex, and it is very important that the correct
procedures are followed. This may involve issuing notices setting out the grounds
for termination, allowing warning periods, and giving the opportunity to remedy
breaches.

There are a number of reasons why one or both parties to a contract may seek to
terminate the contract.

1. Breach of Contract. If the one of the parties to a contract fails to perform as

required by the contract, this may constitute a breach of contract. If the breach
of contract is serious (a material breach), then the innocent party may also
consider that it is discharged from any further obligations under the contract.
Where one party behaves in such a way as to indicate that it no longer intends
to accept its obligations under the contract, this is considered to be a
repudiatory beach (or fundamental breach) allowing the innocent party to
terminate the contract and to sue for damages. Generally the contract will set
out what those breaches are, but they might include:
 Refusal to carry out work.
 Abandoning the site.
 Removing plant from the site.
 Failure to make payments.
 Employing others to carry out the work.
 Failure to allow access to the site.
 Failure to proceed regularly and diligently.
 Failure to remove or rectify defective works.

Where repudiation is considered to have occurred, the innocent party can either
affirm that the contract will continue, or accept the repudiation and so terminate
the contract. In either case, they will have the right to claim damages. Either way,
it is important that there is some sort of response, as inaction may be considered
to be an affirmation of the contract.
 MODULE 6: PROJECT CLOSING OUT 88

Assessing the seriousness of breaches of contract depends on the particular

circumstances and terms of the contract. For example, if a contractor failed to carry
out the work to an agreed timetable, this might be considered a relatively minor
issue on some projects, whilst on others it could be an extremely serious breach.
The innocent party must be careful therefore to establish that there has actually
been a material breach before considering that the contract is terminated,
otherwise they might find themselves in breach of contract.

This can lead to disputes, where for example, the client refuses to make payment,
claiming that the contractor has failed to perform, whereas the contractor contends
that they are not performing because the client has refused to make payment.

An anticipatory breach (or anticipatory repudiation) occurs when one of the parties
to the contract declares to the other that they do not intend to perform their
obligations under the contract.

2. Frustration. Frustration occurs when circumstances that are not the fault of
either party mean it is impossible to continue with the contract. The contract will
come to an end without any party being considered to be in breach. However,
parties must be certain that a frustration event has occurred so as not to be in
breach of contract.

3. Convenience. Contracts may allow termination for ‘convenience’. This can be

useful for example if the client fails to secure sufficient funding for the project
to proceed. However termination for convenience can leave the terminating
party open to significant claims by the other party

Termination for convenience is only provided for in some forms of contract, and
is often only available to the client.

4. Rescission. Rescission is a process of returning both parties to the position

they would have been in had they not entered into a contract. This might be
appropriate for example if there is a serious error in the contract.
 MODULE 6: PROJECT CLOSING OUT 89

5. Suspension. Contracts may also allow suspension of performance. The

circumstances allowing suspension are generally similar to those allowing
termination. Suspension can be useful, for example, if the client has difficulty
in raising funds to pay for the work to proceed at the speed anticipated by the
contract. In addition, the Housing Grants Construction and Regeneration Act
gives the right to suspend performance for failure to make payment that has
been notified as due.

Either party may have the right to terminate at the end of a suspension period,
or if a suspension becomes prolonged with no prospect of work re-
commencing.

6. Others. Contracts may also allow termination under specific circumstances

peculiar to a particular project. They may also allow termination for insolvency
or bankruptcy.

QUESTIONS

A. Project Completion / Acceptance

1. What is the standard process of Project Completion / Acceptance
followed by your company? Does it follow the “industry standard”?
What do you think can be improved / added? Why, or Why not?
2. Who’s right is protected by this phase of Construction?
Who is more at risk? Who carries the greater burden of completion?
3. As a Construction Professional, what do you think is the purpose of
providing a standard process of Project Completion / Acceptance?
B. Defects / Liability Period
1. What is the difference between a “Patent” and “Latent” defect.
Provide at least five examples of defects you have encountered at
work. Which of these two types of defect is more common?
 MODULE 6: PROJECT CLOSING OUT 90

2. What are the common defects in Construction and what are their
“Liability Period”?
3. Discuss the acceptable liability period for the various Construction
outputs.
C. Warranty Period for Structural Defects / Failure
1. Why is the warranty period important? Can the A / E and / or
Contractor ensure the Structural Defect / Failure without a warranty?
2. What is the civil liability of the following professionals on a
Construction Project?
i. Architect – of – Record / Design Professional
ii. Architect – In – Charge of Construction
iii. Civil Engineer
iv. Contractor
v. Construction Manager
D. Liquidated Damages
1. Discuss the importance of Liquidated damages:
i. From the Owner / Client’s Perspective
ii. From the Contractor’s Perspective
2. As a Construction Project Manager, how can you help ease the
owner / client in understanding the importance of Liquidated
Damages?
E. Contract Termination
1. Enumerate and briefly discuss the possible reasons of Contract
Termination as identified by the Module presented.
2. Based from your experience, what are the common reasons for
contract termination?
3. As the lead Construction professional, what can you provide to the
Owner and / or Contractor to lessen the possibility of Contract
Termination?
 MODULE 6: PROJECT CLOSING OUT 91

REFERENCES

 Beesley, C. (2016). How to Start a Small Construction or General

Contracting Business. Retrieved from web 25 November 2016 at
https://www.sba.gov/blogs/how-start-small-construction-or-general-
contracting-business
 Designing Buildings Ltd. (2016). Defects in Construction. Retrieved
November 26, 2016.
https://www.designingbuildings.co.uk/wiki/Defects_in_construction
 Dykstra, A. (2016). Construction Project management: A Complete
Introduction. Retrieved from web:
https://www.smartsheet.com/construction-project-management-101
 Guntalilib, Paul Michael. (2016) Project Management Module. Polytechnic
University of the Philippines.
 Levi, S. Et al (2012). Construction Operations Manual of Policies and
Procedures, Fifth Edition. Accessed online at
https://accessengineeringlibrary.com/browse/construction-operations-
manual-of-policies-and-procedures-fifth-edition
 Perry, C. (2007) Architectural Engineering & Construction
Management Proposal. Retrieved from web 26 November 2016 at
http://www.wcharlesperry.com/projects_files/building_analysis/Lauriedale/
AECM%20Proposal%20-%20Complete%207-24-07.pdf
 “Project Management: Delivering Complex Projects Successfully”.
Retrieved from web 26 November 2016 at
https://www.mindtools.com/pages/main/newMN_PPM.htm
 “The Project Management Plan (PMP)”. Retrieved from web 26 November
2016 at http://2020projectmanagement.com/2013/08/the-project-
management-plan-pmp/
 “Termination in Construction Contracts.” (2014)
https://www.designingbuildings.co.uk/wiki/Termination_in_construction_co
ntracts
 MODULE 6: PROJECT CLOSING OUT 92

 Onyek, M. (2016) What is Construction Project Management? Retrieved

from web 26 November 2016 at https://www.smartsheet.com/construction-
project-management-101
 Mays, P. 2011. Completion and Closeout: Contract Administration.
Retrieved 30 November 2016 at
http://www.aia.org/aiaucmp/groups/aia/documents/pdf/aiab089226.pdf
 Project Management Institute (2013). A Guide to the Project Management
Body of Knowledge. 5th Edition. Newtown Square Pennsylvania. Project
Management Institute Inc.
 CONTENTS
Price Adjustments and
Price Escalation

a. Price Adjustments

b. Price Escalation

c. Extraordinary
Circumstances

MODULE 7 d. Extraordinary
Inflation or Deflation

PRICE ADJUSTMENTS AND e. Fortuitous Event

PRICE ESCALATION
f. Review and Approval
Process
 MODULE 7: PRICE ADJUSTMENTS AND PRICE ESCALATION 94

LEARNING OBJECTIVES

1. To define price adjustments and price escalation in Philippine construction

contracts
2. To identify the significances of the topic in Construction Management
3. To discuss the guidelines for Contract Price Adjustment and Price
Escalation

PRICE ADJUSTMENTS AND PRICE ESCALATION

In general, construction projects are usually of quite lengthy ranging from

several months to several years. Also, such construction projects are performed
according to a pre-confirmed contract amount and contract agreement in principle.
Therefore, there is a strong probability that the cost of labor and materials will rise
and fall periodically, to a greater or lesser extent, during the life of the project.
The price of specific materials is rising unexpectedly, if the total construction price
didn't increase 5% and more, the contract amount couldn't be adjusted. Thus, most
contractors had to bear considerable damage at that time, due to the sudden rise
of international raw materials or exchange rates under a lump sum or fixed-price
contract. Therefore, the provisions regarding contract price escalation should be
rearranged systemically to cope with the sudden price changes

Price Adjustments
Adjustment of Contract Price is described in the section 8 of Presidential
decree no. 1594, Prescribing policies, guidelines, rules and regulations for
government infrastructure contracts; as an adjustment of contract price for
construction projects may be authorized by the Minister of Public Works,
Transportation and Communications, the Minister of Public Highways, or the
Minister of Energy, as the case may be, upon recommendation of the National
Economic and Development Authority, if during the effectivity of the contract, the
cost of labor, equipment, materials and supplies required for the construction
 MODULE 7: PRICE ADJUSTMENTS AND PRICE ESCALATION 95

should increase or decrease due to direct acts of the Government. The

adjustments of the contract price shall be made using appropriate formulas
established in accordance with the rules and regulations to be promulgated under
Section 12 of this Decree.

Price Escalation
Price escalation, according to the Government Procurement Policy Board
(GPPB) refers to the increase in contract price during the contract implementation
based on the existence of “extraordinary circumstances” as determined by the
National Economic Development Authority (NEDA) and upon prior approval of the
GPPB.

Guidelines on Contract Price Escalation

1. These guidelines for the computation and payment of price escalations shall
apply to existing infrastructure contracts (as of August 27, 1980,), where a
specific price escalation clause is not provided therein or where there is no
specified methodology for calculation of price escalation. All infrastructure
contracts entered into after the date of effectivity of these guidelines (August
27, 1980) shall employ the escalation method using the parametric formulae
provided for in these guidelines. Formulae other than those prescribed herein
may also be used for price escalation purposes provided the adoption of the
same is clearly stipulated in the tender and contract documents provided to
tenderers prior to the bidding and agreed upon by the government and the
contractor, equipment supply contracts, whether or not included as an integral
part of the infrastructure contract, shall not be covered by this provision.
2. The respective implementing offices shall determine all price escalation in
accordance with these guidelines.
3. A committee shall be created by the NEDA Committee on Infrastructure which
shall review periodically the parametric formulae for the computation of contract
price escalation herein specified and shall revise the same whenever
necessary, such revisions to be made effective upon the approval by the NEDA
 MODULE 7: PRICE ADJUSTMENTS AND PRICE ESCALATION 98

escalation as may be determined by the NEDA, in accordance with the provisions

of the Civil Code of the Philippines, as enumerated in Section 4 hereof.
Extraordinary Inflation or Deflation. Refers to the decrease or increase of the
purchasing power of the Philippine currency which is unusual or beyond
the common fluctuation in the value of said currency, in accordance with the two
(2) standard deviation rule computed under Section 5.2.2 of these Guidelines, and
such decrease or increase could not have been reasonably foreseen or was
manifestly beyond the contemplation of the parties at the time of the establishment
of the obligation.
Fortuitous Event. Refers to an occurrence or happening which could not be
foreseen, or even if foreseen, is inevitable. It is necessary that the contractor or
supplier is free from negligence. Fortuitous events may be produced by two (2)
general causes: (1) by nature, such as but not limited to, earthquakes, storms,
floods, epidemics, fires, and (2) by acts of men, such as but not limited to, armed
invasion, attack by bandits, governmental prohibitions, robbery, provided that they
have the force of an imposition which the contractor or supplier could not have
resisted.
WPI. Refers to the Wholesale Price Index, which measures the monthly changes
in the general price level of commodities, usually in large quantities, that flow into
the wholesale trading system.
CPI. Refers to the Consumer Price Index, which measures the monthly changes
in the average retail prices of goods and services commonly purchased by a
particular group of people in a particular area.
PPI. Refers to the Producer Price Index, which measures the average change in
the unit price of a commodity as it leaves the establishment of the producer.

A. These extraordinary circumstances mean an occurrence or event or a series

of occurrences or events during contract implementation which give/s rise to
price escalation as can be determined by the NEDA and in accordance with the
provisions of the Civil Code of the Philippines.
 MODULE 7: PRICE ADJUSTMENTS AND PRICE ESCALATION 96

Committee on Infrastructure. The revised/updated parametric formulae, if any,

shall apply to works to be accomplished on a project after the
effectivity/approval of such revisions.
4. For on-going contracts and contracts bid out but yet unawarded as of 31
December 1990, the unit prices for the remaining balance of work based on the
approved/revised construction schedule, including any time extension granted,
shall be updated using the current parametric formulae to January 1991 prices
with the original unit prices multiplied by the fluctuation factors without the 5%
deduction. Such updated unit prices as of 01 January 1991, shall be used as
basis for computing regular progress billings thereafter. Any price escalation
after 01 January 1991 shall be calculated using the new parametric formulae
herein prescribed as applied to the updated unit prices as of 01 January 1991
5. All price escalation to be granted may be approved by the Secretary or head of
office/agency/corporation concerned in accordance with Section 8 of
Presidential Decree No. 1594 to become effective. Payments for price
escalation on works accomplished on a project beginning 01 January 1990 may
be made by the Secretary and/or agency head concerned irrespective of the
amount involved. For works accomplished prior to 01 January 1990, payments
for price escalation may be made by the Secretary/Agency Head concerned
within the limits of authority specified under the previously amended
Implementing Rules and Regulations as the case may be.
6. Escalation of prices for work accomplishment on infrastructure construction,
rehabilitation and/or improvement projects shall be made periodically, using the
parametric formula as described below, to compensate for fluctuation of prices
of construction supplies and materials, equipment and labor which would bring
about during the period under consideration an increase or decrease of more
than five percent (5%) of the original or adjusted contract unit price of items of
work.
7. Price escalation shall be reckoned from the month of bidding of the project, and
shall be allowed for every progress billing. When the contract has not been the
subject of competitive bidding, price escalation shall be reckoned from the
 MODULE 7: PRICE ADJUSTMENTS AND PRICE ESCALATION 97

month agreed upon in the contract and shall be granted for every progress
billing. For construction and related materials under government - controlled
prices, the computation of price escalation shall be reckoned from the actual
date of bidding the project, or the actual date agreed upon in the contract has
not been the subject of competitive project.
8. In case the project is behind schedule by more than five percent (5%) from the
approved PERT/CPM network on the date when computation of price
escalation is scheduled, computation on such portion of the work that should
have been, but was not actually, accomplished within the period (in accordance
with the PER/CPM network) shall be reckoned on the basis of the escalation
rate applicable during the period in which it should have been accomplished.
Payment of the computed amount shall not be made until the project activities
for the period under consideration as covered by such amount are completed.
This shall not in any way affect the final date of completion.
9. Payments for price escalation of work accomplished within the period shall be
based on actual escalation amount computed in accordance with appropriate
indices provided for in the formulate under this clause or expressly stipulated
in the contract.
10. In case of some project where advance payment of mobilization purposes and/
or purchases of supplies and materials is made, it is only fair to the Government
that price escalation shall not be made on the items of work or components
thereof to which such advance payments are applied, since these monies are
receive by the contractor in advance and may be used for the payment of
expenditures in connection with the prosecution of the project.

Definition of Terms
Price Escalation. Refers to an increase in the contract price during contract
implementation on the basis of the existence of "extraordinary circumstances" as
determined by the NEDA and upon prior approval of the GPPB.
Extraordinary Circumstances. Refers to an event or occurrence, or series of
events or occurrences during contract implementation which give/s rise to price
 MODULE 7: PRICE ADJUSTMENTS AND PRICE ESCALATION 99

Extraordinary circumstances are more particularly described as follows based on

the articles of the Civil Code of the Philippines:

Article 1174 – Ordinary Fortuitous Events

These are events that ordinarily happen or which are reasonable foreseen
however, inevitable such as but not limited to the following:

1. Typhoons;
2. Thunderstorms;
3. Flooding of lowly areas and;
4. Vehicular accidents

Provided that the following requisites are present:

1.1 That the cause of an extraordinary circumstance must be
independent of the will of the parties;
1.2 That the circumstance should me either unavoidable or
unforeseeable;

1.3 That the circumstance must be such as to render it difficult but not
impossible for the contractor or supplier to fulfil its obligation in a normal
manner within the parties’ contemplation;
1.4 That the supplier or contractor should be free from any participation
in or aggravation of the injury to the client or agency and;
1.5 That the allowance for the price escalation should an ordinary
fortuitous circumstance occurs is stipulated by the parties or the nature
of the obligation requires the assumption of risk.

Article 1250 – Extraordinary Inflation or Deflation

This particularly refers to the decrease or increase of the purchasing power of our
Philippine currency that is unusual or afar from the common fluctuation in its value
and such decrease or increase was not reasonable foreseen or was deliberately
 MODULE 7: PRICE ADJUSTMENTS AND PRICE ESCALATION 100

further that the contemplation of the parties at the time of the establishment of
obligation.

Article 1680 – Extraordinary Fortuitous Events

These are circumstances which do not usually happen such as but not limited to
the following:

1. Fire;
2. War;
3. Pestilence;
4. Unusual Flood;
5. Locusts and;
6. Earthquake

B. Review and Approval Process

Price escalation is being requested by the client/agency/procuring entity, hence, it
is subject to the review and approval of the NEDA. The requesting agency shall be
able to comply with the following requisites and conditions before the request for
price escalation can be acted upon.

1. Endorsement to the NEDA through its Director-General accompanied by

the following required documents:

1.1. Certification form the agency/procuring entity stating that its request
for price escalation is justified according to the R.A. 9184 , its IRR
and these Guidelines;
1.2. A description of the nature of the price escalation being requested
and the identification of the legal and technical parameters;
1.3. Certified true copy of the original contract including the awarded
original scope of work and original price;
 MODULE 7: PRICE ADJUSTMENTS AND PRICE ESCALATION 101

1.4. Original cost estimates and/or Bill of Materials of the goods, items or
components of the contract affected by the request for price
escalation and the proposed escalated prices as applicable to the
type of contract including the summary of computation;
1.5. Original and if necessary and applicable, the revised construction
schedule;
1.6. Original request for price escalation submitted by the
contractor/supplier to the agency/procuring entity including the
information on the materials quantity and/or scope of work being
proposed for price escalation;
1.7. Data on price indices of the materials or goods, including the source
of data used in the detailed computation of the proposed price
escalation which covers a historical thirty (30) month period
reckoned from the date of bid opening and;
1.8. Other pertinent information or documents that may be required by
the NEDA and/or GPPB.

2. Two-stage review process which shall commence only after the NEDA
has acknowledged the completeness of the price escalation request. The
same will only be granted if it satisfies the first and second stage reviews.

2.1 First Stage Review – Legal Parameters

In this stage, the legal basis of the extraordinary circumstances will be

established to allow such contract price escalation.

2.2 Second Stage – Technical Parameters

After the legal basis has been established, the price escalation request must
be reviewed further according to the technical parameters as follows:

2.2.1 Standard deviation

 MODULE 7: PRICE ADJUSTMENTS AND PRICE ESCALATION 102

The price escalation request shall be at least be two (2) standard

deviations from the mean which is calculated based on the historical
trend of historical trend of applicable price indices which covers a
historical 30-month data reckoned from the bid opening date.

In the said computation, the following shall be observed:

1. That the prevailing monthly price index which will be used shall be
determined based on volatility of the prices concerned. While data
for locally available goods, items or material components shall be
issued and /or published by the appropriate entity.
2. That in case of international goods, items or components wherein the
appropriate data may not be available from local sources, the date
shall be issued and/or published by the appropriate foreign entity.
3. That in case of variation orders which involve work items exactly the
same or similar to those in the awarded original contract, the
applicable price index for the said work items prevailing on the bid
opening date shall be used.
4. That in case of variation orders which involve new work items, the
applicable price index for the said new work items prevailing on the
approval date of variation order shall be used.

2.2.2 Ten Percent (10%) Increase

This will be applied should there be no available historical data for the
appropriate price indices such that Standard Deviation becomes
inapplicable. The price escalation request shall be reviewed pursuant to
this wherein the subject price index applicable should have registered
an increase of more than ten (10) percent as determined based on the
prevailing price index on the bid opening date.
 MODULE 7: PRICE ADJUSTMENTS AND PRICE ESCALATION 103

In cases where there are no applicable price indices for the items, goods
or material component, the general wholesale price indices shall be
used.

2.3 Detailed Technical Parameters/Applicable Price Indices for

Goods
The detailed computations and validations of price escalations for goods as
described above shall use the most appropriate price indices:

- Wholesale Price Index (WPI), that measures the monthly changes in

the general price level of commodities which are usually in large
quantities which flow into the wholesale trading system.

- Consumer Price Index (CPI), that measures the monthly changes in

the average retail prices of goods and services which are commonly
purchased by a particular group of people in a particular area.

- Product Price Index (PPI), that measures the average change in the
unit price of a commodity as it leaves the establishment of the
producer.

2.4 Detailed Technical Parameters/Applicable Price Indices for

Infrastructure Projects
The detailed computation and validation of price escalation for infrastructure
projects as described in 2.2 shall use the fluctuation factor K representing
the increase or decrease of the value of an item as a result of price
fluctuation.

Formula and computation are presented in the Revised Guidelines for

Contract Price Escalation of the GPPB
 MODULE 7: PRICE ADJUSTMENTS AND PRICE ESCALATION 104

3. Amount of Price Escalation to be Granted

The price escalation to be granted in the case of goods must only be the remaining
amount over and above the thresholds.

Formula and computation in the case of infrastructure projects are presented in

the Revised Guidelines for Contract Price Escalation of the GPPB.

4. Period and Frequency of Requests for Price Escalations

Price escalation requests must only be made for cost items which were already
incurred by the contractor/supplier as supported by documents such as official
receipts, sales invoice, and other documentary evidences and shall only be
granted is requests were made not less thansix (6) months reckoned from the
contract effectivity date and not less than 6-month period thereafter. Except for
price escalation requested at the project completion.
It cannot be requested for prospective applications

5. Misrepresentation
Automatic denial or disapproval of the price escalation will be granted in cases of
any misrepresentation by the agency/procuring entity or the contractor/supplier.

6. Recommendation and Approval

The responsibility to prove the occurrence of extraordinary circumstances that will
allow the price escalation is under the obligation of the procuring entity. The NEDA
must only respond to request with proper proof and documentation then it will
submit its recommendation to the GPPB for its appropriate action.

The GPPB shall approve or act upon the price escalation request during one of its
meetings which is to be attended by the head of the agency/procuring entity or his
duly authorized representative/s.
 MODULE 7: PRICE ADJUSTMENTS AND PRICE ESCALATION 105

QUESTIONS

1. What are the Limitations and Delimitations in Price adjustment and price
escalation in Contracts?
2. What are the purpose for Contract Price Escalation and Contract Price

Adjustment?

3. How to document a Contract Price Escalation and Contract Price

Adjustment?

REFERENCES

 P. D. No. 1594 and its Implementing Rules & Regulations as Amended 12

August 2000

 GPPB Resolution 07-2004, dated July 22, 2004; Annex “A”

 CONTENTS
Extra Ordinary Claims

a. Un-booked Claims

b. VAT Differential

c. Idle Equipment and

Manpower Claim

MODULE 8
d. Interest Due to
Delayed Payments

EXTRA ORDINARY CLAIMS

 MODULE 8: EXTRA ORDINARY CLAIMS 107

LEARNING OBJECTIVES

1. To define price adjustments and price escalation in Philippine construction

contracts
2. To identify the significances of the topic in Construction Management
3. To discuss the guidelines for Contract Price Adjustment and Price
Escalation

EXTRA ORDINARY CLAIMS

WHAT IS A CLAIM?

(Source: Law Teacher Website, http://www.lawteacher.net/free-law-

essays/contract-law/costing-of-claims-in-construction-contracts-contract-law-
essay.php, 2016)

A claim is defined as a general term for the assertion of a right to money, property,
or to a remedy. Essentially, claims in construction contracts, governed by FIDIC
conditions, may be based on any one of the following concepts:

Contractual Basis:

a) A claim under the contract based on the grounds that a particular provision of
that contract entitles a claimant to a remedy, which is specified if a certain event,
occurs.

b) A claim arising out of the contract based on the grounds that a term of the
contract has been breached but where the remedy is not designated (2)

Legal Basis:

A claim under the applicable law of the contract, based on the grounds of a specific
legal rule or principle. If the claim is successful, the remedy is generally a just and
equitable award, depending upon the particular circumstances of the case.
 MODULE 8: EXTRA ORDINARY CLAIMS 108

In the claim, the Claimant may seek additional monetary compensation or an

extension of time for completion of work, or both. It is always desirable that claims
are resolved through negotiations. However, when negotiation fails, the claimant,
whether Contractor, Designer or Owner, must resolve the claim through formal
dispute resolution processes such as arbitration or litigation.

for Business, http://www.cwilson.com/publications/construction/construction-

claims.pdf, 2016)

Construction claims can be caused by a number of factors. Understanding what

causes construction claims is the first step in avoiding them. In general,
construction claims occur because of the following:

• Delays in construction and completion of the contract;

• Delays in the delivery and supply of materials;
• Weather which slows down or prevents construction from proceeding;
• Owner requested changes;
• Changes which occur not at the request of the owner;
• Poor management and administration of the construction site;
• Site conditions which differ from those expected;
• The work becomes impossible to perform;
• Insufficient plans and specifications;
• Failure of any one party to disclose information which is material to the
construction;
• Conflicts between those involved in the construction of a project;
• Termination of the contract by the owner or the contractor;
• Acceleration of the work;
• Failure to adequately schedule and coordinate the work; and
• Failure of parties to cooperate with each other in the performance of the
work.
 MODULE 8: EXTRA ORDINARY CLAIMS 109

EXTRAORDINARY CIRCUMSTANCES

At times during the progress of work, certain happenings may take place which
involve the contractor in a much greater expense than he had anticipated, such
as, for instance, not being given a clear site, as may have been first promised.
Under such circumstances, it is obvious that the cost per unit of the particular work
affected must be greater than would have been the case had he had a clear run.
Such a matter cannot be dealt with by the quantity surveyor, whose business it is
to ascertain actual measurements of work executed and to value same as
previously described. Extraordinary happenings of the kind mentioned would be
dealt with by the architect. If the contractor disagrees with the architect's ruling, he
may have recourse to the clause appertaining to arbitration.
(http://quantumconsult.org/wp-content/uploads/2012/01/Construction-Contract-
Claims.pdf)

Disruption and Loss of Productivity The term 'disruption' when used in the context
of construction and engineering claims includes any one or a number of the
following considerations: (http://quantumconsult.org/wp-
content/uploads/2012/01/Construction-Contract-Claims.pdf)

 Delays to individual activities (whether, or not, such delay caused

completion of the works to be delayed), thereby causing manpower to be retained
over a longer period to execute the same amount of work
 Changed sequence of working arising out of delays to individual activities,
thereby causing the effective use of manpower to be interrupted and disturbed so
that no production takes place during such interruption and lower production
occurs in the initial stages of the activity to which the manpower has redeployed;
 Interruption and disturbance to other secondary activities (not directly
affected by the cause of disruption) caused by delay to the affected activities or
changed sequence of working so that lower production is achieved in carrying out
these secondary activities
 MODULE 8: EXTRA ORDINARY CLAIMS 110

 Idle (or non-productive) time caused by rescheduling and out-of-sequence

working, thereby adversely affecting the progress of the work
 Congestion in sections of the work to which rescheduled manpower is
transferred, thereby affecting productivity and progress of the work
 General loss of productivity due to work being done piecemeal.

Extra Ordinary Claims

a) Un-booked Claims - claims that are not recorded. These are claims wherein no
written contract exists due to the urgency for emergency projects but done under
circumstances when payment could be expected. Payments of unbooked claims
should be based on actual accomplishment.

b) VAT Differential

c) Idle Equipment and Manpower Claim - claims that are due to the

equipment that are not used or just kept on site and was not able to be operational
during the approved process and the manpower complications met on site.
Manpower claims may vary from the lack of manpower to the misconduct or bad
performance of the assigned personnel onsite.

d) Interest Due to Delayed Payments - claims that are due to the delayed release
of payments. The cause of the delayed of payments may have a numerous
reasons. Probable reasons can be the approval of budget for the project, lack of
documentation for the release of payment, wrong process was done for the
procurement process, budget allocation is imbalance, and other reasons that might
be from the standard protocols and processes of the company involve.
 MODULE 8: EXTRA ORDINARY CLAIMS 111

QUESTION

1. Define claim and how is it important in construction management and its

affect in the success of the project delivery.

REFERENCES

 http://quantumconsult.org/wp-content/uploads/2012/01/Construction-
Contract-Claims.pdf
 Clark Wilson, BC’s Law Firm for Business,
http://www.cwilson.com/publications/construction/construction-claims.pdf,
2016
 Law Teacher Website, http://www.lawteacher.net/free-law-
essays/contract-law/costing-of-claims-in-construction-contracts-contract-
law-essay.php, 2016