Engineering Ethics and Professional

Conduct (SOE 4161)

Contract Basics

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 Introduction
• Contract is a legally binding agreement
between two or more persons which the
law will enforce

• Agreement arises as a result of offer and

acceptance

• It generates rights and obligations that

may be enforced by the law .
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 Formation of contract
• This is where the contractual journey begins; if
no contract is formed, neither of the parties can
be under any obligations.

• In order for a legally

, binding agreement to be
formed, there are four basic elements to be met:
1) An offer,
2) acceptance,
3) intention to create legal relations,
4) consideration.

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1) Offer
• Is a voluntary but conditional promise submitted by one party
(offeror) to another (offeree) for acceptance, and which becomes
legally enforceable if accepted by the offeree.
• An offer is a clear indication of the offeror's willingness to enter into
an agreement with the offeree and its acceptance will result in a
binding contract.

2) Acceptance
• The point at which one party agrees to the other parties offer
• It occurs when an offeree agrees to be mutually bound to the terms
of the contract by giving something of value as consideration.

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3) Intention to create legal relations
• The parties must intend to enter into a legally
binding arrangement in which the rights and
obligations of the agreement are enforceable.

• It consists of readiness of a party to accept the

legal sequences of having entered into an
agreement.

• No intentions to create legal relations in domestic

and social friends relations. e.g husband failing to
honor promise to wife
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4) Consideration
• Something of value promised in exchange for
the specified action.
• This can take the form of a significant
expenditure of money or effort, a promise to
perform some service.
• Consideration occurs as the requirement in
order to enable the party to enforce a
promise.

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 Forms of contracts
A bilateral contract
• Is a reciprocal agreement between two parties by
which each promises to perform an act in
exchange for the other party's act.

• Each party is both an obligor to its own promise,

and an obligee on the other party's promise.

• If either party fails to honour the promise, then

the result is a breach of contract which can be
enforced in the courts of law.
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Unilateral Contract
• Is a contract in which one of the parties (offeror) demands
performance from the other party (offeree), instead of a
promise.

• Is a type of contract in which only one of the contracting

parties is under an enforceable obligation.

• Under insurance contracts, only the insurer makes a

promise to pay compensation in case of a loss.

• Another practical example are rewards, Mr. X (offeror)

offers a reward of 50,000 frw for the safe return of his lost
laptop. Mr. Y will claim only if he finds the laptop.

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Lump Sum or Fixed Price Contract
• This is the type of contract where all construction-related
activities are regulated with a total fixed price agreement
before the works begin.

• the service provider agrees to provide a defined service

for a specific period of time and the client agrees to pay a
fixed amount of money for the service.

• The main advantages of this type of contract is that the

contractor knows the total project cost before the
project commences.

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Unit Price contract
• Under a unit price contract, a contractor is paid for
the actual quantity of each line item performed as
measured in the field during construction.

• Each unit price includes all labor, material,

equipment, overhead, and profit attributable to that
scope of work.

• Unit price bidding is used in projects for which the

quantity of materials or the amount of labor involved
in some key tasks is particularly uncertain.

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Cost Plus contract
• Also termed as cost reimbursement contract, is
a contract in which the client pays the
contractor the actual costs of the materials and
labor plus an additional negotiated fee or
percentage over that amount for profit.

• In cost-plus contracts the client/contractor has

the right to see exactly what the expenses are.

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Incentive contracts
• Incentive contracts include only cost incentives, which take
the form of a profit or fee adjustment formula and are
intended to motivate the contractor to effectively
manage costs.

• Amount of this adjustment is determined by a formula based

on the relationship between total negotiated cost and the
target cost or the actual cost, or some other agreed upon
factor.

• This type of contract is common for the projects involving

pilot programs or the project that harness new technologies.

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Incentive contracts cont’d …
• The main mechanism of Incentive contract is to divide any
target price overrun between the client and the service
provider in order to minimize the business risks for both
parties.

• After completion of the contract, the incentive payment is

computed on the basis of the contractor's actual cost plus a
sliding scale of profit.

Retainer contracts
• A retainer agreement is a work for hire contract. The client pays
in advance for professional work to be specified later.

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 Tendering procedure
What is a tender ?
• A tender is a submission made by a
prospective supplier or contractor in response
to an invitation to tender

What is tendering ?
• The process that is used to obtain offers
leading to a contract between client and
service provider.
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 Tendering process
The process for securing tenders take a number of different basic
forms:
• Open tendering:
offers an equal opportunity to any prospective bidder to
submit tender.

• Selective tendering:
only allows to submit tenders by invitation.

• Negotiated tendering:
This requires negotiating with a single contractor. It applies
for specialised skills.
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 Tendering process cont’d
• Serial tendering:
- It is used for clients who have a number of
phases of similar work.
- The original competitive tender will serve as a
framework to negotiate following phases of work.
- Advantage is that the contractor selection is
through competition
- Disadvantage is that the pitfalls of first
negotiation still apply to subsequent phases and
renegotiation may be a bit complicated.
- Its common where the client has a regular program of
works that would like to be undertaken by a
single contractor. 16
 Tendering cont’d . .
• Framework tendering:
This involves inviting tenders from contractors to be carried
out over a period of time on a call off basis (purchase orders
over a period of time) when required.

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 Steps to tender process
1) Determination of needs/Preparation of
Terms of Reference
2) Preparation of request for tender outlining
what is required and Contractual requirements
3) Invitation to tender (publications or adverts)
4) Bidders response (submission of bids)
5) Evaluation and selection
6) Notifications (provisional and final)
7) Contract establishment and management.

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 Contracts which are not binding
• A contract is not binding when it cant be
enforceable by law.

• This happens when one or more elements

that makeup a binding contract is/are missing:
- intentions to create legal relations,
- consideration,
- capacity,
- its against public policy or in violation of law.

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 Discharge of contracts
• Discharge of a contract occurs when the main
obligations of a contract end. It is due to one
of the following Causes:
- Performance
- fraud
- breach
- agreement

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 Legal disputes
• Legal Dispute means any action, suit or
proceeding among the Parties arising in
connection with any of the following:
- disagreement
- controversy
- claim by one party.

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 Litigation
• An action brought in court to enforce a
particular right.
• It is that act of putting a dispute before a
court or tribunal.

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 Arbitration
• Is the process of bringing a business dispute
before a disinterested third party for resolution.

• The third party, an arbitrator, hears the evidence

brought by both sides and makes a decision.

• Arbitration is a form of alternative dispute

resolution (ADR), used in place of litigation in the
hope of settling a dispute without going to court.

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 The Arbitration Process

• Filing and Initiation: An arbitration case begins when

one party submits a Demand for Arbitration to the
authority. The other party (the respondent) is notified
by the authority and a deadline is set for a response.

• Arbitrator Selection: The authority works with the

parties to identify and select an arbitration based on
the criteria determined by the parties.

• Preliminary Hearing: The arbitrator conducts a

preliminary hearing with the parties, to discuss the
issues in the case and procedural matters

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 The Arbitration Process cont’d …
• Information Exchange and Preparation: The parties then
prepare for presentations and exchange information.

• Hearings: At the hearing, both parties may present

evidence to the arbitrator.

• Post-Hearing Submissions: After the hearing, both parties

may present additional documentation, as allowed by the
arbitrator.

• The Award: Finally, the arbitrator closes the record on the

case and issues a decision, which is called an award.

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 Parties in the Engineering and
construction industry
• Client/employer
This is typically the owner or developer.

• Contractor
Engaged by the client to carry out and complete the works. will usually
engage sub-contractors to carry out and complete separate parts of the
works

• Professional team
The team of professional consultants. (Project manager, Architect,
Engineers, Quantity Surveyor etc…)

• Financier
Financing institution or agency

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 Assignment 2
• In your normal groups, write and submit before
January 20 through (jkalamagye@gmail.com),

• Short notes on the Essential Contract Documents

for Construction Projects.

• Content should be about 3 pages

• Late submission will be penalised.

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