Chapter Six

Contract Management

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 Content
6.1. Introduction
6.2. Procurement & contract delivery systems
6.3. Contract Planning Process
6.4. Contract management Process
6.5. Settlement of claims or dispute

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Definition & legal aspect of contract
Once a contractor has been selected then it is necessary to come to some
agreement that he should do the work for some consideration (payment)
According to Article 1675 of the Civil Code:
A contract is an agreement whereby two or more persons as between
themselves create, vary or extinguish obligations of a proprietary nature.
a proprietary means trade marked or registered
Agreement of at least two parties with purpose of creating legal obligation

between the parties and capable of being enforced by the court of law.
Contract = offer + acceptance + consideration.
However, not all agreements or promises are contracts. Some may lack

enforceability at law.
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Definition & legal aspect of contract
Agreement must consist of an offer and acceptance of the offer
Offer (proposal)
Revocation (withdrawal):- before accepted
Acceptance: must be unconditional.
If conditional it becomes counter offer.
Consideration :- without this there no contract (what ever the amount)
Rectification:-in case of error, mistake. If both parties agree, mistake can

be changed

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 Elements of Contract
According to Article 1678 ( Elements of Contract) of the Civil Code:
No valid contract shall exist unless
The parties are capable of contracting and give their consent sustainable at

law.
The object of the contract is sufficiently defined and is possible and lawful.
The contract is made in the form prescribed by law.

The following are the fundamental elements of contract.

Capacity of the contracting parties;
Consent of the contracting parties;(offer &acceptance)
Object of the contract; and
Form of contract, if any;
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Consideration 5
 The purpose of the contract is to produce
 A quality construction project

 On time construction project

 Construction project with in budget

 Safely executed project

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 Contract management
delivery systems

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 Contract delivery systems
 Decisions made in determining kind of contract

 Number of contracts

 Basis of payment

 Project Delivery system

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Number of Contracts
Single Prime Contract – most common, uses competitive bidding .
Owner has contract w/ A/E & contractor; but A/E & contractor do NOT

have contract

Multiple Prime Contract – Owner divides the work among several

contractors & has separate contract w/ each of them.

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 Major Contract Types (traditional)based on Payment

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Lump Sum Contract
 Work must be well defined at bid time.
 Fully developed plans and specifications
 Cost known at outset and fixed
 One price for the whole contract & Contractor selection is easy.
 Lump sum includes costs plus overheads and profits
 Payment based on a scheduled percentage scheme (monthly progress claims)
 The contractor is free to use means and methods to complete the work and

responsible for proper performance

 Changes is difficult and costly ( pricing for change difficult).
 Low risk on the owner, Higher risk to the contractor
 The risk to contractor is high and likely to submit very high price to cover
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Unit Price (measurement)
 Quote Rates / Prices by units
 No total final price
 Re-negotiate for rates if the quantity or work considerably exceeds the

initial target.
 Payment to contractor is based on the measure.
 Ideal for work where quantities can not be accurately established before

construction starts.

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 Unit Price contract
• Time & cost risk (shared)
 Owner : at risk for total quantities
 Contractor : at risk for fixed unit price.
price

• Large quantities changes can lead to increase or decrease of unit price.

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Unit Price / Requirement
Adequate breakdown and definition of work units
Adequate drawings.
Payment based on the measurement of the finished works.
Quantity sensitive analysis of unit prices to evaluate total bid price for
potential quantity variation.

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 Unit Price / advantages
 Suitable for competitive bid (easy to compare tenderers)

 The client has a fairly accurate estimate of total cost

 Easy for contract selection

 Early start is possible

 Possible to vary the amount of work during construction

Flexibility : quantities and scope can be easily adjusted

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 Unit Price / disadvantages
 Final cost not known from the beginning (BOQ only is estimated) details of

BOQ is not completed during start

 Staff needed to measure the finished quantities and report on the units not

completed.
 Contractors raise prices on certain items and make corresponding reductions

of the prices on other items ,without changing the total amount of the bid)
 A tender has no obvious place to put major temporary works costs hence

detailed comparisons may be meaning less.

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Cost Plus (Cost Reimbursement)
1. Actual cost plus a negotiated reimbursement to cover overheads and profit.

2. Different methods of reimbursement :

 Cost + percentage
 Cost + fixed fee
 Cost + fixed fee + profit-sharing clause.

3. Higher risk to owner

4. Compromise : guaranteed maximum price (GMP) reduces risk to owner

while maintain advantage of cost plus contract.

5. By using this type of contract the contractor can start work without a clearly
defined project scope, since all costs will be reimbursed and a profit
guaranteed.
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 Cost Plus(Cost Reimbursement)

7 Work can get under way quickly before design completed

8 Suitable for use when amount and type of work not known

9 Client has little idea of total cost

10 Every invoice, pay sheet, material record, must be checked by the Engineer
and his auditors as well as the contractor to ensure it was really paid for
work on the contract and it is reimbursable.

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 Cost + Percent of Cost
Fee = percentage of the total project cost

 i.e. (Cost = $500.000, Fee = 2%)

Contractor is not concerned about losing money on the contract –

high quality workmanship obtained.

Advantages Disadvantages

Profitable for the contractor No incentive to finish job quickly

Owner does not know total price

Larger the cost of the job, the higher

the fee the owner pays

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Cost + Fixed Fee
 Fee = percentage of the original estimated total figure

 Utilized on large multi-year jobs

 Ex: project x(Cost = $200 million, Fee = 1%)

 $200 Million 1% fee = $2 Million

 Contractor is not concerned about losing money on the contract –

high quality workmanship obtained

Advantages Disadvantages
Fee amount is fixed regardless Expensive materials and construction
of price fluctuation techniques maybe used to expedite
construction

Provides incentive to complete

the project quickly
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 Cost Plus Fixed Fee
Most common form of negotiated contracts
COST = Expenses incurred by the contractor for the construction of the

facility
 Includes: Labor, equipment, materials, and administrative costs
 FEE = Compensation for expertise

 Includes: profit

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 Cost + Fixed Fee +Profit-Sharing Clause
 Rewards contractors who minimize cost

 Percentage of cost under GMP is considered profit and shared with the

contractor
 Guaranteed Maximum Price (GMP)
 % of profit sharing is specified in contract

Advantages Disadvantages

Provides incentive to the Contractor must absorb any amount over the

contractor to save money GMP

Plans & specs. need to detailed

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 Cost + Fixed Fee + Profit-Sharing Clause
Variation of this type of contract is called a guaranteed maximum price
(GMP).
 In this type of contract the contractor is reimbursed at cost with an agreed-

upon fee up to the GMP,

 Which is essentially a cap; beyond this point the contractor is responsible

for covering any additional costs within the original project scope
 An incentive clause, which specifies that the contractor will receive

additional profit for bringing the project in under the GMP.

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Procurement & contract management
delivery systems
PROJECT DELIVERY SYSTEM
(Construction Contracting&
Procurement Method)

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 Project Delivery Systems(PDS)
PDS describes how the participants are organized to interact, transforming the
owner’s project goals and objectives into a finished facility
Factors affect the selection of PDS:
Past practices, traditions, and experience;

The advice of consultants;

Funding sources and constraints;

The effective use of staff and working capital;

The interests of other project stakeholders

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 Project Delivery Systems
Project delivery systems are basically classified in to two broad areas:
a)Outsourced ; and
b)Force Account

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 Project Delivery Systems
Outsourcing
Design/Bid/Build (DBB)
Design/Build (DB)
Turnkey
Turnkey Variations
Construction management

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Project Delivery Systems
Traditional Approach (D-B-B):
“the traditional or standard approach” or “design-bid-build”,

Employer assigns the design and construction phases to two different firms

(consultant/designer and contractor).

Appointing Appointing Main

Consultant Contractor

Constructing
Designing

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 Design -Bid-Build
Three Sequential Phases
1. Design Phase
◦ Owner hires team of architects and engineers to build plans and specs
used to solicit bids
2. Bid Phase
◦ “open process”-any qualified bidder
◦ “select process”-limited number of pre-selected bidders
3. Construction Phase
◦ Winning contractor becomes General Contractor
◦ General Contractor hires sub-contractors

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Advantages of D-B-B Approach
 Applicable to a wide range of projects.
 Well established and easily understood.
 Clearly defined roles for all parties.

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 Disadvantages of D-B-B Approach
 Innovation not optimized;

 Disputes between parties;

 Client retains risks; Owner responsible for errors & omissions;

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Design-Build Approach
 Design-build approach is a project delivery system involving a single contract
between the project employer and a design-build contractor covering both the
design and construction of a project.
 The design-builder performs design and construction according to
 design parameters,
 performance criteria and
 other requirements established by the employer or his representative.

Appointing design &

construction contractor

Tendering Designing Constructing

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 Design-Build Approach
 The contract might be negotiated with a single design-builder or result from
competitive proposals.
 The selection can be based on low price or on a set of value criteria (experience,
staff, bonding capacity, etc.).
 Design-build provides the owner with a single point of contact for project
responsibilities, eliminating the need to assist in resolving designer-contractor
disputes.
 Construction begins as each segment is designed
 Design and construction phases overlap

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 Design-Build Approach
 The employer approaches a contractor with a set of requirements defining what
the employer wants.
 The contractor responds with proposals, which will include production as well as
design work.
 The other feature is that Design-Build delivery method deals is a guaranteed
maximum price (GMP). .
 As an incentive to the contractor, any savings made by completing the project for
a price below the GMP may sometimes be shared between the client & the
contractor.

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Advantage of Design-Build Approach
 Innovation and quality improvements through:
- Alternative designs and construction method suited to the contractor’s
capabilities

- Flexibility in the selection of design, materials, and construction methods.

 One firm designs and constructs the project
 Reduced delivery schedule

 Saves time, therefore saves money

 Most risks transferred to the design-builder

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Disadvantage of Design-Build Approach
 Reduced opportunities for smaller, local construction firms.
 Fewer competitors and increased risk may result in higher initial costs.

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Turnkey
 Turnkey adds to the design-builder’s responsibilities the operation and/or
maintenance of the completed project.
 Three forms of turnkey project delivery:
 Design-build-operate-transfer (DBOT)

 Design-build-operate-maintain (DBOM)

 Design-build-own-operate-transfer(DBOOT)

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Turnkey Variation
 Variations on turnkey add financing as a key component.
 FDBT (Finance, design, build, transfer)

 FDBOT (Finance, design, build, operate, transfer)

 FDBOOT (Finance, design, build ,own, operate, transfer)

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Construction Management
CM is of two types:
This distinction determines the contractual approach to CM.
 CM At Free/as Agent &

 CM At Risk/as Constructor.

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 Construction Manager (CM) as Agent
This is a form of CM under which the Construction Manager acts as an agent
of and advisor to, the Owner.
The Owner enters in to multiple trade contracts with the trade contractors &

suppliers.
The Construction Manager is retained on a fee for services basis & acts on

the Owner’s behalf in managing & coordinating the trade contracts in the best
interests of the Owner.
The Owner retains all of the contracting risks inherent in each of the trade

contracts.
It essentially involves the Owner acting as its own general contractor, with

the assistance of a Construction Manager.

This form of CM is sometimes also referred to as the “CM as Advisor” or
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“owner contacted form of CM”.
Advantages may include:

CM At Free
 Provides a managing & administering for all phases of a project;

 Treats planning, design, construction as an integrated tasks;

 Some costs & schedule control;

CM At Risk
 Good for clients with insufficient staff;

 Responsible for time & cost overrun;

 Holds & manages the trade contractors;

 Constructability design review;

 Same legal position as a General Contractor

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Disadvantages may include;

CM At Free
 No contractual relationship with trade contractors;

 No contractual responsibility for outcomes of a project;

 Client retains the risks;

CM At Risk
 Duplication of administration & additional paperwork;

 More paper work for the client;

 Some duplication of administration;

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Force Account
 When the Project Owners engage themselves to undertake the project, it is

called a force account delivery system.

 Used when:

 projects are small and places are remote such that reaching them is difficult

 It provides a comparative advantage in Cost, Time and Quality issues.

 When there is a lack of capacity from the private sector to undertake very

large and technologically new projects.

 When projects are unattractive to bidders.

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 Contract management &
settlement of claims

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 P&CM process
P&CM involves three major processes:

1. Contract Planning

2. Procurement Management and

3. Contract Management

Delivery System Contract Formulation

Procurement Method Contract Administration
Contract Types Contract Closing
Procurement
Contract Management
Contract
Planning
Management

Procurement Preparation
Tendering
Tender Evaluation & Notice of Acceptance
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Contract Planning Process
Contract Planning Process includes planning of project
Delivery System
Procurement Method
Contract Types

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 Contract Management Process
Contract Management is the management of its
Processes,
Stakeholders and their Performances

 Planning, Implementation and Monitoring +

Evaluation Cycle of the functions of Management.

It’s idealized into three major processes. These include

Contract Formulation,
Contract Administration, and
Closing of Contract Processes

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Contract Management Process

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 Contract Formulation: involves two sub processes:
 Negotiation and
 Signing of Contract Agreement.

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 Contract Administration
Contract Administration: is a process that ensures the successful completion
of the project under consideration with substantial compliance of the Terms of
the Contract.

Identifying contractual responsibilities of Stakeholders.

 Reviewing the Terms of Contract Documents

 Extract Monitoring Responsibilities

 Preparing Monitoring Responsibility Summary Sheets

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Contract Administration cont.….
Determining and understanding the construction components of the project.
Reviewing the Contract Drawings and Technical Specifications

Extract the Construction Methods and Sequences

Prepare Construction Methods and Over all Sequences Sheets

Review submitted (Integrated) Schedules and Breakdowns for operations such as

Organizational Breakdowns, Resources Breakdowns & Schedules and Time

Schedules.

Record, Monitor and Evaluate Progress of Mobilizations, Works and

Completions.

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Contract Administration cont.….
Report Project Status daily and / or periodically and Completions.
Certify qualities of materials, shop drawings, samples, workmanships and
works.
Measure Works, Record Site Potentials and Certify Payments and
Completions
 Take off sheet and Bending Schedules are used for Measurement of Works
 Method of Measurement is according to standard practices

 Site Potentials such as material, equipment and Manpower on site together

with appropriate site organization is recorded

 Advance, Interim and Final Payments are certified

Mediate Disputes.
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Contract Closing
Closing of Contract looks into issues related to Maintenance Period and
Remedial works, Dealing with Left Over Claims and Disputes, if any, Closing
of Accounts and Completion Certificates.

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Overview of the contract documents and
conditions

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 Construction documents
Construction Documents are defined as the written and graphic documents
prepared or assembled by the A/E for communicating the design of the project
and administering the contract for its construction.
2 major groups

1.Bidding Requirements

Used to attract bidders & explains bidding process

2.Contract Documents

Legally enforceable requirements that become part of the contract

Include all construction documents except bidding forms

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Construction documents bidding requirements
Bidding(Tender) document
All of the construction documents issued to bidders before the signing of an owner-contractor agreement.
Invitation to bid
Instruction to bidders
Information to bidders & bid data
Biding Forms
General conditions of contract
Specific condition of contract
Specification
BOQ
Drawings

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 Bid Package
Documents available to the contractor and on which he must make a
decision to bid or not

A set of plans and technical specifications, Proposal form, general

conditions, special conditions,

Description of the project to be constructed

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 Construction Agreement Forms
 Agreement – legal, binding, written document signed by owner & contractor
 Defines the relationships and obligations that exist
 By reference it incorporates ALL OTHER CONTRACT DOCUMENTS

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Agreement
 is a short document signed by both parties

 references the other portions of the contract

 The agreement must contain

◦ Date of the agreement

◦ Names and addresses of the contracting parties

◦ Description of the scope of work

◦ Time durations

◦ Contract payment

◦ Payment conditions

◦ Reference to other documents

◦ Signatures

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Specification
 Define the material and workmanship quality requirements of a contract

 Specifications provide information regarding

 The quality of materials

 The quality of workmanship

 Erection and installation methods

 Test and inspection requirements and methods

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Specification must satisfy
 Technical accuracy and adequacy

 Definite and clear stipulations

 Fair and equitable requirements

 A format that is easy to use during bidding and construction

 Legal enforceability

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Bonds
A bond is a special form of contract whereby one party guarantees the
performance by another party of certain obligations.

Three types of bonds are normally used on construction projects:

1. Bid bonds
2. Performance bonds
3. Payment bonds
Insurance practice in construction industry
General principles
 Essentially insurance is a contract. The insured pays sum of money, premium , to the insurer on the
condition that if a specified event occur the insurer will recompense the insured

Special rules
 Utmost Good faith ( you don't disclose all that you know) disclose no reimbursement
 Insurable interest
 Subrogation (allows the party who pays for a loss suffered by another party to assume the rights of that
other party for the purpose of recovering that loss from a third party)
 Indemnity (insured as the same position after loss as it was immediately before happening )
 conditions

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Insurance practice in construction industry
Conditions
 Who insured
 What risk insured
 What period is the policy effective over
Types of civil engineering insurance police
 Professional indemnity (client has to prove negligence of design)
 Contractor all risk (loss or damage what ever cause to contract work during performance of
contract and maintenance period ) all inclusive, with the exceptions of what are called the
excepted risk( meaning not accepted)
 Contractor third party liability
 Contractor employee liability

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 Conditions of the Contract
 Define basic rights, responsibilities, and relationships of the parties
involved in the construction process in greater detail than the agreement

General conditions of the Contract

 General conditions (provisions) set the manners and procedures whereby

the provisions of the contract are to be implemented according to accepted

practices in the construction industry.
 They are not intended to regulate the internal workings of either party to

agreement, except the activities that may affect the contractual rights of the
other party or the proper execution of the work.

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General conditions of the Contract
 Definition and interpretation  Measurement
 Engineer and Engineers representatives
 Provisional sum
 Assignments and subcontracting
 Contract documents  Nominated sub contractor
 General obligations  Certificates and payments
 Labour
 Remedies
 Material, plant and workmanship
 Suspension  Special risks
 Commencement and delays  Release from performance
 Defect liability
 Alternation, addition and omission
 Settlement of disputes
 Procedure for claim  Notices
 Contractors equipment, temporary works and materials
 Default of employee
 Changes in cost and legislation
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Construction Specification Institute (CSI)
1. Definitions 6. Subcontractors

2. Contract documents 7. Separate contracts

3. Rights and responsibilities 8. Time

of the owner 9. Payments and completion

4. Duties and authorities of 10. Changes in the work

architect-engineer 11. Protection of persons and property

5. Rights and responsibilities 12. Insurance and bonds

of the contractor 13. Disputes

14. Termination of the contract
15. Miscellaneous provisions

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Conditions of particular application
Reasons for the particular application
 Where the wording in part I specially requires further information is to be
included.
 Where the type, circumstances or locality of necessity additional clause or
sub clauses.
 Where the law of country or exceptional circumstances necessities an
alternation in part I, stating in part II part one deleted or giving substitute
clause.

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 Supplementary Conditions
General conditions is intended to apply to a relatively broad range of
construction and must be adjusted at times to conform to special conditions a
given project.
• This is accomplished by a section of the specifications called the
supplementary conditions or special conditions.
Common examples of supplementary Conditions:
– Number of contract documents
– Special instructions to the contractor
– Changes in insurance requirements
–Special documentations required by the owner as a condition of final
payment.
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 Supplementary Conditions
Additional articles to those in General Conditions:
– Conditions of project location
– Order of procedure
– Times during which the work must proceed
– Owner provided materials or equipment
– Other contracts
– Unusual contract administration requirements
– Early occupancy by the owner
– Time of project completion
– Liquidated damages

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Contract management &
settlement of claims

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 Contract administration &Settlement of claims or
dispute resolution mechanisms

Precedence
If the contractor finds a conflict, error, or discrepancy in the contract documents,
In resolving such conflicts the documents give preference in the following order:
1. Agreement
2. Specifications
3. Drawings

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 Contract administration &Settlement of
claims or dispute resolution mechanisms
Precedence
Agreement governs over specifications

Specifications govern over drawings

Detail specifications govern over general specifications

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 Contract administration &Settlement of
claims or dispute resolution mechanisms
Precedence
Within the specifications, the order of precedence:
1. Addenda.
2. Supplementary Conditions (Special Conditions)
3. Instruction to Bidders.
4. General Conditions.
5. Technical Provisions.
6. Standard Specifications.

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 Contract administration &Settlement of
claims or dispute resolution mechanisms
Precedence
Within Drawings:
1. Figures govern over scaled dimensions
2. Detail dwgs govern over general drawings
3. Change order dwgs govern over contract drawings
4. Contract dwgs govern over standard dwgs
5. Contract dwgs govern over shop drawings
6. Shop dwgs that deviate substantially from the requirement of the contract
documents must be accompanied by a written change order.
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 Contract administration &Settlement of
claims or dispute resolution mechanisms
(Assignment II)
Handling the formal governance of the Claim and dispute to the contract
documentation
Negotiation
Mediation
Conciliation
Adjudication
Arbitration
& Others
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