CHAPTER 3: CIVIL ENGINEERING CONTRACTS

3.1 Definitions
A. From a Legal Point of View
A mutual agreement between two or more parties that something shall be done, an agreement enforceable at law

B. According to FIDIC
Contract means the General Conditions, the Supplementary Conditions, the Specifications, the Drawings, the Bill of
Quantities, the Tender, the Letter of Acceptance, the Contract Agreement, and such further documents as may be
expressly incorporated in the Letter of Acceptance or Contract Agreement.

C. According to Method of Payment

The agreement of how the owner will pay the contractor for work performed such as a lump-sum or cost-plus
payment.

3.2 Elements of a Contract

The first step in a contract question is always to make sure that a contract actually exists. There are certain elements
that must be present for a legally binding contract to be in place:
a) Offer
An offer: an expression of willingness to contract on a specific set of terms, made by the offeror with the
intention that, if the offer is accepted, he or she will bebound by a contract.

b) Acceptance
Acceptance: an expression of absolute and unconditional agreement to all the terms set out in the offer. It
can be oral or in writing. The acceptance must exactly mirror the original offer made.

c) Counter-offer
A counter-offer is not the same as an acceptance. A counter-offer extinguishes the original offer: you can’t
make a counter-offer and then decide to accept the original offer.

A counter-offer is when a person would like to accept an offer but on differentterms than those set out in
the original offer. Again, there has to be anacceptance of the counter-offer for there to be a contract.

d) Request for information

A request for information is not a counter-offer. If you ask the offeror forinformation or clarification about
the offer, that doesn’t extinguish the offer;you’re still free to accept it if you want.

e) Invitation to treat
Is an invitation for other people to submit offers.Some everyday situations which we might think are offers
are in fact invitations to treat.

NB: an offer can be revoked at any time before it is accepted, so long as you inform the person you made
the offer to that the offer no longer stands.

f) Consideration:
Consideration is the concept of legal value in connection with contracts. It is anything of value promised to
another when making a contract. It can take the form of money, physical objects, services, promised
actions, abstinence froma future action and much more. Each party to the contract must receivesomething
of value.

This is best illustrated by an example: Suppose I promise to give you my watch,but you don’t give me
anything in return. If I break my promise and keep mywatch, you can’t then go to court and make me give
it to you. The contract isn’tlegally binding: you didn’t give me any consideration for my promise.

So put simply, consideration is the price paid for the other’s promise.

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 g) Intention to create legal relations
If the parties, make an agreement without any intention of being legally bound then that agreement will not
be regarded by the courts as a contract. In commercial agreements there is a presumption that the parties
intend the agreement to be legally binding. To rebut this presumption a party will have to produce clear
evidence to that effect.

3.3 Factors Influencing the Choice of the Type of Contract

 The appropriateness for providing an adequate incentive for efficient performance by the contractor.
 The ability to introduce changes.
 The allocation of risks
 The start and completion date of the project

3.4 Types of Construction Contracts

The following types of contracts are covered in the following section.
1. Lump Sum Contact.
2. Contract based on a Bill of Quantities (Sometimes called Unit Price Contract)
3. Schedule of Rates Contract
4. Cost Reimbursement Contracts
5. Cost plus Percentage of Cost
6. Cost plus Fixed Fee
7. Target Cost with Variable Fees Contract
8. Special Contracts

1. Lump Sum Contact.

Sometimes called Drawings and Specifications Contract

a) Main Aspects of Lump Sum Contract

i. The contractor agrees to perform a stipulated job of work in exchange for a fixed sum of money. In other
words, a single tendered price is given for the completion of a specified work to the satisfaction of the
client by a certain date.
ii. Payment may be staged at intervals of time on the completion of milestones.
iii. Useful for construction works:
 that can be accurately and completely described at the time of bidding such as residential and
building construction,
 when limited variation is needed,
 when level of risks is low and quantifiable, and
 when the client does not wish to be involved in the management of his project.
iv. The contractor is responsible for preparing his B.O.Q. i.e., determination of work items, description of
work items, obtaining his own quantity form drawings and specifications and taking the responsibility for
the accuracy of the estimated quantities.
v. The responsibility is on the contractor to include in his price everything necessary for carrying out the
work.

b) Advantages of Lump Sum Contract

i. The final price is known, by the owner, before the work commences.
ii. The contractor has more incentive to reduce his cost to increase the profit.
iii. The contractor hopes to complete the job as quickly as possible, to minimize overhead, to maximize profit
and to move to the next Job.

c) Disadvantages of Lump Sum Contract

i. A great deal of work should be done by the contractors prior to preparing the estimate. It is wasteful of a
skilled estimator’s time.
ii. Changes in drawings and specifications can be very expensive and source of trouble. In other words the
contract has very limited flexibility for design changes.
iii. The contractor carries much of the risks. The tendered price may include high risk contingency.
iv. Competent contractors may decide not to bid to avoid a high-risk lump sum contract.

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 2. Contract based on a Bill of Quantities
Sometimes it is called Unit Price Contract

a) Main Aspects of Unit Price Contract

i. Items of work of the contract are specified with estimated quantities in the Bills of Quantities.
ii. Estimated quantities are surveyed by Architect/Engineer.
iii. Contractors enter unit prices against the estimated quantities of work.
iv. The contract is based on estimated quantities of work items and unit price for each of these work items.
v. Payment is made based on units of work actually done and measured in the field multiplied by the unit
prices.
vi. Re-determination of unit prices when substantial quantity deviations occur is stipulated in contract
conditions.
vii. Useful on projects where the nature of the work is well defined, but the quantities of work cannot be
accurately determined in advance of construction. Suitable for highways, dams, airports

b) Advantages of Unit Price Contract

i. Saving the heavy cost of preparing many bills of quantities by the contractors.
ii. Fair basis for competition.
iii. In comparing with lump-sum contract,
 Changes in contract documents can be made easily by the owner.
 Lower risk for contractor.

c) Disadvantages of Unit Price Contract

1. The exact final price of the project is not known to the owner until the completion of the project.

3. Schedule of Rates Contract

a) Main Aspects of Schedule of Rates Contract
i. A Schedule of the work items without quantities (or inaccurate quantities; possibly with upper and lower
probable limits) is prepared by the owner and /or A/E to be rated by the contractor.
ii. The descriptions of items and the units of measurement are similar to those used in a normal B.O.Q., but
no quantities are given.
iii. It is common for separate rates to be quoted for labor, plant, and materials.
iv. Used for repair and maintenance works or under conditions of urgency.

b) Advantages of Schedule of Rates Contract

i. Work can be commenced earlier than if a full B.O.Q has been prepared.

c) Disadvantage of Schedule of Rates Contract

i. No indication of the final price of the works.
ii. Very difficult to determine which contractor submitted the most advantageous offer.
iii. May cause financial problems to the public owners.

4. Cost Reimbursement Contracts

a) Main Aspects of Cost Reimbursement Contract

i. The contractor will be reimbursed for all actual costs plus an agreed fee to cover his services (overhead
and profit).
ii. The contractor must make all his records and accounts available for inspection by the client or by some
agreed neutral third party.
iii. The fee can be designated as:
 A fixed percentage of the cost of the work.
 A fixed fee.
 A fixed fee with a guaranteed top price.
 A fixed fee with bonus.

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  A fixed fee with an arrangement for sharing any cost saving.
iv. Suitable:
 when the requirements of the client are vague,
 when it is desirable for design to proceed concurrently with construction
 for emergency projects, repairs, maintenance work, and alterations.
 for project with unknown technologies or major changes.
 where the contractor possesses a special ability.
 when the client wishes to be involved in contract management.
 Confidential processes.
v. Topics that should be negotiated between owner and contractor before signing a cost reimbursement
contract include:
 Subcontract-letting.
 Determination and payment of fee.
 Accounting methods.
 Overheads (site and office).

b) Advantages of Cost Reimbursement Contract

i. Start construction without waiting for the whole set of drawings and specifications.
ii. More flexibility for the owner to make changes as work progresses.
iii. Draw the contractor expertise during design.

c) Disadvantages of Cost Reimbursement Contract

i. It is difficult to predict the final cost and the distribution of it, which may cause financial
problems to the owner.
ii. Contractor pays less attention to cost control.

5. Cost plus Percentage of Cost

a) Main Aspects of Cost plus Percentage of Cost
i. The contractor is reimbursed for all his costs with a fixed percentage of costs to cover his services.
ii. Project/site overheads may be covered by the percentage or computed as one of the costs.

b) Advantages of Cost-plus Percentage of Cost

i. Construction can start before design is completed.
ii. If the contractor is efficient in the utilization of resources, then the cost to the client should
represent a fair price for the work undertaken.

c) Disadvantages of Cost-plus Percentage of Cost

i. The project total cost is completely unknown before the project start.
ii. No incentive for the contractor to be efficient in his use of labors, materials or equipment.
iii. Minimum efficiency maximizes the profit.
iv. Owner must exercise tight cost control, which may be difficult and/or costly.

6. Cost plus Fixed Fee

a)Main Aspects of Cost plus Fixed Fee
i. The owner pays all costs of construction with a fixed sum of money. The fee is fixed and does not
fluctuate with the actual cost of the project.
ii. The work must be fairly well defined by the owner.

b) Advantages of Cost-plus Fixed Fee

i. There is no incentive for the contractor to inflate costs.
ii. There is incentive for the contractor to complete the work as quickly as possible since his fee
remains constant.

c) Disadvantages of Cost-plus Fixed Fee

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 i. Major variations create problems. The fee must be re-negotiated to take account of such
variations.
ii. The speed of commencing the work is undermined since before a fee can be agreed a fairly
detailed description of work must be made.

7. Target Cost with Variable Fees Contract

a) Main Aspects of Target Cost Contract

i. The contractor and owner agree to a target estimate of construction.
ii. Bonus or penalty arrangements are tied to this target figure.
iii. The work must have a fairly definite nature. Drawings and specifications must be sufficiently
developed to enable a reasonably accurate cost to be determined.
iv. Cost target: sharing of savings.
v. Time target: fixed sum of money for each day.

b) Advantages of Target Cost Contract

i. There is an incentive to carry out the work as quickly and as economically as possible.
ii. The client also stands to benefit through the contactor's efficiency.

c) Disadvantages of Target Cost Contract

i. Difficulties may arise in agreeing on a revised target cost if there are major variations or cost
inflation.
ii. A tight cost control must be exercised, which may be difficult and/or costly.

8. Special Contracts
There are certain contracts which are used at different occasions. Some of these contracts are listed below:
 Turn-key Contract.
 Package Contract
 Negotiated Contract
 Continuing Contract
 Running Contract

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

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

Negotiated Contract
 In this type of contract, negotiation across the table takes place between representatives of the owner and
the main contractor for project cost and other conditions of contract.
 In this type of contract, detailed projects specifications are arrived at by discussions between the owner and
the main contractor and consultant.

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  A negotiated contract involves extended discussions for finalization as a competitive contract. Most of the
consultancy projects of World Bank are negotiated contracts.

Continuing Contract
 In this type of contract, new or additional work is awarded to the contractor on the basis of agreed terms
and conditions of an existing contract.
 Such contracts do not require re-tendering and hence can save time and money.

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

3.5 Contract Documents

The contract documents are all documents which, when combined, forms the basis of the contract. A possible list of
documents that make up the contract documents include:

1. Agreement - The agreement to be used by the contracting officer (owner) and the contractor. The most
essential part of the contract documents.

2. General Conditions - This contract document will define the obligations and rights on how to execute the
project.

3. Special Conditions - This is usually an extension of the contract and to the general conditions. This part must
specify specific conditions and clauses to each particular project or job.

4. Bill of Quantities - This is formed by the list of diverse trades, and materials included that form part of the
construction. Sometimes this document is not required by the contracting officer.

5. Drawings - All set of drawings that form part of the job to be performed. These drawings are usually the latest
drawings and must be received by the contractor prior to the date of commencement. It must include all
drawings from consultants and will constitute the entire project being contracted.

6. Specifications - The technical requirement to complete, execute and/or perform every little task or material
being incorporated in the construction projects. It will add intelligence to the construction drawings; specify
common standards, deviations accepted, materials accepted and the required testing for all materials. Usually,
specifications are composed by referencing construction standards and codes.

7. Schedules / Programme of Works - The construction schedule is an important piece of the document. In this
part, the contracting office will know how and when the project will be completed. Sometimes, construction
contracts will require updated schedules throughout the construction progress, and might form part of the
monthly, or agreed term, application for payments.

8. Pricing Schedules or Cash Flow Estimate - Breakdown of all items being incorporated in the construction
project. This is usually the base of the application for payment. It can be detailed per item or in a lump sum
form, not specifying individual items.

9. Insurances - This part will be an essential part to the contracting officer, since; it will provide the guarantee to
the owner that the contractor has the means and the economic backup to perform the construction contract. It
will include specific types of coverage’s, required bonding, and all insurance protections to the owner, the
contractor and third parties.

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3.6 Specifications
 Specifications are statements which describe the nature and class of work, materials to be used, labour to be
employed, method of work, precautions to be taken, quality of workmanship etc. The cost of the work
depends much upon the specifications. The nature of work can be easily understood from the study of
specifications.

 Specifications serve the following purposes:

o Guide the bidder at the time of tendering for arriving at a fair price for the work involved.
o Provide guidance for execution and supervision of work and purchase of materials.
o State the acceptance criteria for different items of work.

3.6.1 Types of Specifications

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

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

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

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

3.7 Drawings
This section seeks to explain the salient features of different types of drawings necessary during contract
implementation:

i. Tender drawings
o It is necessary for an engineer to decide the extent of preliminary designs to be carried out at
briefing/report stage. Detailed design at this stage would be a waste of time as project scheme might be
changed completely depending upon the final selection of particular alternative.
o Once formalities are over and the project proposal has been cleared, an engineer must prepare a set of
engineering drawings known a ‘Tender drawings’.
o Tender drawings together with the other tender documents, bill of quantities, specifications etc.
describe the project scheme to the contractor so that he can price the construction work accordingly.

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 o In the case of small projects, design work at preliminary stage may be sufficiently detailed depending
upon experience and background of the designer. In such cases, tender drawings, contract drawings,
working drawings and perhaps even as-built drawings may be same.
o However, in the case of large projects, these drawings are prepared at various stages of execution.
Tender drawings are the first evidence of the project scheme regarding type and quality of the work
involved and hence these are prepared by engineers with great care and with particular attention to
drafting and presentation for clarity and ease of understanding.
o The contractor is always concerned with the clarity and logical expression of engineering details.

ii. Contract drawings

o The engineer can carry on with detailed design only after the completion of tender drawings. During
the tendering stage, contractors will be busy in interpreting the tender drawings and preparing their
bids.
o Sometimes a contractor may be skilled in a particular method of construction that is different from the
one shown in the tender drawings. He may submit a tender based on his specialty even though it
proposes a modification in the original design envisaged in the tender notice.
o If a contractor’s price is competitive and engineer agrees with the proposal, modified drawings will
have to be prepared. Once the contractors have submitted their tenders, the engineer will have to
evaluate and compare these in regard to the contract price and see whether the proposed construction
methods are suitable and economical or not.
o On the basis of engineers report, the owner will accept one of the tenders and legally binding contract
document will be prepared and signed.
o Contract drawings are printed on good quality paper and are provided with cloth packaging to
withstand handling and long storage.

iii. Working drawings

o The working drawings fill the gaps in the construction details not reflected in the tender drawings.
o As the name suggests, they are used for working, manufacturing, construction or building purposes and
must therefore represent the engineer’s final decisions and design details.
o Changes in drawings hereafter can be expensive, particularly when the construction work has already
commenced.
o In case of small projects, tender drawings may contain most of the construction details. If changes are
small, technical staff at the site can often cope with them.
o However, for large projects with only outline drawings at the tender stage, the drawings office will
have to prepare detailed working drawings.
o In case working drawings lack finer design /construction detail, note and instruction are incorporated
on the drawings to facilitate construction and avoid delays.

iv. Completion drawings/As-built drawings

o Completion drawings are also called completion drawings. In any project, it is unlikely that the
construction will be carried out exactly as per the working drawings.
o They are bound to be certain variations, additions or alterations due to unforeseen site conditions and
advancement of technology.
o However small the variations, additions or alternations might be, these recorded on a set of drawings
called ‘complete’ or ‘record’ drawings.
o For large projects, where each phase may take months to be completed and is worth millions of
shillings, the ‘Record’ drawings should be prepared simultaneously as the work proceeds.
o For small works, ‘Records’ drawings may be prepared upon completion of work. The variations are
marked on the set of drawings in red ink.

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