B.

Sc Civil
Engineering

Project & Contract

Management CE 206
Aqsa Shabbir

Department of Civil Engineering

UET LAHORE
Typical Contract Conditions
Typical Construction Contract Conditions/Clauses:

• A contract clause is a specific provision or section within

a written contract.
• Contract clauses are aimed at clearly defining the duties,
rights and privileges that each party has under
the contract terms.
• Each clause in a contract addresses a specific aspect
related to the overall subject matter of the agreement.
• Contract conditions set out the principal legal
relationship between the parties to a construction
project, determining the allocation of risk and
consequently, price. They must be read in conjunction
with specification documents, drawings bills of
quantities, activity schedules and special conditions.
Possession of the site by the contractor:
• Contracts generally grant the contractor exclusive
possession of the site until practical completion when a
handover meeting takes place and possession reverts
to the client.
• The contract may state the date for possession of the
site by the contractor (or commencement date), or, if
not, then the site must be handed over to the
contractor within a reasonable time after signing of the
contract.
Possession of the site by the contractor:
• If the client fails to give possession of the site to
the contractor, and there are no provisions for delay in
the contract, then they will be in breach of contract.
• Even if the contract does provide for delay in
giving possession of the site to the contractor, the
contractor will still be able to claim for an extension of
time and perhaps loss and expense.
Practical completion:
• The contract administrator certifies practical
completion when all the works described in the
contract have been carried out.
Completion date :
• Most construction contracts set a date by which the works
described in the contract must be completed.
• This is not the date by which all obligations under the contract
have to be discharged, but the date by which 'practical
completion' must be certified.
• That is, the date by which the works have been completed and
the client can take possession of the site, albeit there may be
very minor items outstanding that do not affect beneficial
occupancy by the client.
• The completion date may be altered during the course of the
contract, for example if the date the contractor takes possession
of the site to begin construction is delayed, or if an extension of
time is granted due to delays to the works that are not
the contractor’s fault.
Termination in construction contracts:
• Most forms of contract will include termination clauses
on breach of the contract i.e. setting out the
circumstances under which a contract is breached and
consequently be terminated.
• When a contract is terminated, the parties to the
contract are no longer obliged to perform their
obligations under the contract.
• 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.
Breach of contract:
Generally the contract breaches 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.
Breach of contract:
• If one of the parties to a contract fails to perform as required by
the contract, this may constitute a breach of contract.
• A breach of contract may entitle the innocent party to make a
claim for damages for the losses it has suffered.
• On construction contracts, it is generally in the interests of both
parties for the contract to continue and for the works to proceed
irrespective of minor problems. Whilst damages for breach of
contract may seek to put the innocent party in the position it
would have been in had there not been a breach of contract, the
delay and disruption caused, for example, by having to appoint a
new contractor can far outweigh the difficulties of proceeding,
albeit under difficult circumstances.
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.
• 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.
Extension of time (EOT) :
• Many construction contracts allow the construction
period to be extended where there are delays that are
not the contractor's fault. This is described as
an extension of time (EOT).
• If the contract administrator accepts that the delay was
caused by a relevant event, then they may grant an
extension of time and the completion date is adjusted.
Relevant event:
• Delays on a project will have different contractual
consequences depending on the cause of the delay:
– Where a delay which impacts on the completion
date is caused by the contractor, the contractor will
be liable to pay liquidated and ascertained
damages (LAD's) to the client.
– Where a delay which impacts the completion date is
not caused by the contractor, it may be a ‘relevant
event’, for which the contractor may be entitled to
an extension of time and to claim loss and
expense incurred as a direct result of the delay.
Relevant event:
• Relevant events may include:
– Variations.
– Exceptionally adverse weather.
– Civil commotion/disorder or terrorism.
– Failure to provide information.
– Delay on the part of a nominated sub-contractor.
– Delay in giving the contractor possession of the site.
– Loss from a specified peril such as flood.
– The supply of materials and goods by the client.
– National strikes.
– Changes in statutory requirements.
– Delays in receiving permissions that the contractor has taken reasonable
steps to avoid.
– Force majeure (events that are beyond the reasonable control of any
party, such as a war or an epidemic).
Force majeure in construction:
• The term ‘force majeure’ comes from French law, where it
translates as 'superior force‘.
• Very broadly, it relates to exceptional, unforeseen events or
circumstances that are beyond the reasonable control of a
party to a contract and which prevent or impede
performance of their obligations under the contract.
• Generally it cannot be an event that the party could
reasonably have avoided or overcome, or an event
attributable to the other party.
• Clauses referring to force majeure attempt to set out the
circumstances to which the term applies to and prescribe
how such situations should be treated.
Force majeure in construction:
• Following may be considered to constitute force majeure:
– Unforeseen changes to legislation.
– Wars and other hostilities (such as terrorism).
– Fires.
– Exceptionally adverse weather.
– Civil unrest, such as riots or revolution.
– Strikes (other than by the contractor or subcontractors).
– Natural catastrophes such as earthquakes, floods and
volcanoes.
– Epidemics.
Loss and expense :
• Construction contracts will generally provide for
the contractor to claim direct loss and / or expense as a
result of the progress of the works being materially
affected by relevant matters for which the client is
responsible, such as:
– Failure to give the contractor possession of the site.
– Failure to give the contractor access to and from the
site.
– Delays in receiving instructions.
– Opening up works or testing works that then prove
to have been carried out in accordance with the
contract.
Loss and expense :
– Discrepancies in the contract documents.
– Disruption caused by works being carried out by
the client.
– Failure by the client to supply goods or materials.
– Instructions relating to variations and expenditure
of provisional sums.
– Inaccurate forecasting of works described by
approximate quantities.
– Issues relating to Construction Design and
Management (CDM).
Insolvency in the construction industry:
• “Insolvency” describes the inability of a debtor to pay
its debts.
• In the United Kingdom insolvent individuals are made
“bankrupt”, while companies are put into “liquidation”
or “administration”.
• The specific aim of including this clause in contract is to
recover all available assets which are then distributed
to creditors to satisfy all debts to the greatest extent
possible.
Liquidated damages in construction contracts:
• Contracts generally include a provision for the
contractor to pay liquidated damages (or ascertained
damages) 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 (i.e. completing the works so they can
handover the site to the client) by the completion
date set out in the contract.
Fluctuations in construction contracts:
• Fluctuations are a way of dealing with inflation on large projects
that may last for several years.
• On smaller projects, the contractor will be considered to have
taken into account inflation when calculating their price (a firm
price).
• However, on the larger projects, the contractor may be asked
to tender based on current prices (prices at an agreed base date)
and then the contract makes provisions for the contractor to be
reimbursed for price changes to specified items over the
duration of the project (a fluctuating price).
• Fluctuation clauses in contracts may allow for:
– Changes in taxation.
– Changes in the cost of labour, transport and materials.
– Increases in head office or administrative costs
Defects in construction :
• Defects are aspects of the works that are not in accordance with the
contract. Defects can be 'patent' or 'latent'.
• Patent defects are those which can be discovered by
reasonable inspection.
• Latent defects are those which cannot be discovered by reasonable
inspection, for example 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.
• Defects may occur because of:
– Design deficiencies.
– Material deficiencies.
– Specification problems.
– Workmanship deficiencies.
Defects liability period :
• The defects liability period (or rectification period)
begins upon certification of practical completion and
typically lasts six to twelve months.
• During this 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.
Variations in construction contracts :
• A variation (sometimes referred to as a variation
instruction, variation order or change order) is an
alteration to the scope of works in a construction
contract in the form of an addition, substitution or
omission from the original scope of works.
• There should be express terms in contracts which give
the power to instruct variations. In the absence
of express terms in the contract the contractor may
reject instructions for variations without giving rise to
any legal consequences.
Variations in construction contracts :
• Variations may include:
– Alterations to the design.
– Alterations to quantities.
– Alterations to quality.
– Alterations to working conditions.
– Alterations to the sequence of work.
• Variations may be valued by:
– Agreement between the contractor and the client.
– The cost consultant.
– A variation quotation prepared by the contractor and
accepted by the client.
– By some other method agreed by the contractor and
the client.
Retention in construction contracts :
• Retention is a percentage (often 5%) of the amount
certified as due to the contractor, 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.
• Half of the amount retained is released on certification
of practical completion and the remainder is released
upon certification of making good defects.
Contract sum:
• The contract sum is the price agreed with
the contractor and entered into the contract.
• Preparing the final account is the process of calculating
and agreeing any adjustments to the contract sum at
the end of the defects liability period so that the
amount of the final payment to the contractor can be
determined.