Contractual Issues

Rizwan Farooqui

Presentation Outline
þ Acceptance/Withdrawal of Bids
þ Chronology of Bid Procedure
þ Award of Contract
þ Contract Agreement
þ Time Extensions
þ Change Orders
þ Value Engineering
þ Liquidated Damages
þ Acceptance and Final Payment

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 Acceptance/Withdrawal of Bids

Acceptance period : The bid security protects the

owner from failure by the contractor to enter into a
formal construction agreement. The contractor is
protected by the acceptance periods.

Withdrawal of bids: No submitted bid may be

withdrawn for a period of sixty (60) days after the
scheduled closing time for the receipt of bid.

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Chronology of Bid Procedure

Project cycle - Construction Phase

Written notice
Notice to to proceed
bidders Bid
opening Formal
Contract

Bidding period Acceptance period

(60-90 days)

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 Award of Contract / Notice to Proceed

Ø The notice to proceed consummates the contractual

relationship from a legal view point despite the fact
that a formal agreement has not been signed.

Ø The letter implies that the site is free of

encumbrances and that the contractor can occupy
the site for work purposes.

Ø The letter also implies that work shall be completed

not later than certain specific calendar days after the
date of receipt by the contractor of notice to proceed.

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Contract Agreement

A contract is an agreement between two or more than

two parties (individuals or organizations) to perform or
not to perform certain acts. This agreement must also be
enforceable by law.

Contracts

Main Contracts Sub-Contracts

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 Types of Contracts

Construction Contracts

Risk sharing Project Delivery System

Lump sum fixed price Design-bid-build

’s risk

Unit price
Contractor

Design-build
Lump sum fixed price plus escalation
Design-Manage -Build (Turnkey)
Target cost incentive contracts

Build-Operate -Transfer (BOT)

Owner’s risk

Cost plus fixed fee with guaranteed maximum cost

Cost plus fixed fee Build-Own-Operate -Transfer (BOOT)

Cost plus percentage of cost Design-Build-Operate -Maintain (DBOM)

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Contract Documents

þ Agreement

þ General/Supplementary Conditions

þ Drawings and Specifications

þ Any Addenda

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 Agreement

þ The date of the agreement

þ The names of the contracting parties
þ The scope of work
þ Time limitations
þ Contract considerations
þ Payment conditions
þ Reference to other documents
þ Signatures

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General Conditions
þ Definition of contract documents
þ Document precedent
þ Duties and responsibilities of the parties
þ Duties and responsibilities of the design professional
þ Subcontractors
þ Separate contractors
þ Time aspects of the contract
þ Payments and completion
þ Insurance and bonds
þ Change in the work
þ Arbitration and termination of the contract
þ Miscellaneous provisions

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 Drawings

All drawings (tender drawings, working drawings)

included in the contract should be checked and signed
by the designated architects and engineers and
approved by the client.

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Specifications

The contract documents must specify about the

specifications in each type of engineering works as
negligence to this may create disputes during the
project execution stage.

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 Contract Clauses

þ Part of the contract documents.

þ Defines the responsibilities of the client, engineer and the

contractor in each phase of the project.

þ Defines the way in which the project will be executed and the
way disputes/conflicts will be solved.

þ Based on the local laws and regulations prepared by the

Government and its various subordinating departments such as
Civil engineering office, Buildings department, Roads and
highways authority etc.

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FIDIC Contracts

þ International Federation of Consulting Engineers (FIDIC-

Fédération Internationale des Ingenieurs-conseils).

þ Mostly used in international projects.

þ The FIDIC documents (latest edition 1999) are published in two

Parts:
Part I: the general conditions, index, tenders and contract
agreement.
Part II: conditions of particular clauses.

þ FIDIC Civil Engineering Contract is a two way-three party

process, with the Client entering into separate agreements with
the Engineer and the Contractor .

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 FIDIC Contracts: General Conditions

þ Responsibilities of each party and their limits

þ Right of the owner to terminate the contract
þ Right of the contractor to terminate the contract
þ Right of the owner to take over work
þ Obligations of the contractor
þ Supervision by the contractor
þ Handling of claims and protests
þ Lines, grades, and surveys; who perform and who pays
þ Defective work or materials
þ Provisions to allow access to all parts of the work
þ Inspection and tests; how administered and who pays

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FIDIC Contracts: General Conditions

þ Coordination with other contractors at the site or nearby

þ Suspension of all or part of the work
þ Stop notice procedures
þ Liquidated damages for delay
þ Right of owner to withhold payment
þ Provision for public safety
þ Changed conditions (unforeseen conditions)
þ Estimates and progress payments
þ Final payment and termination of liability
þ Protection and insurance
þ Disputes; settlement by arbitration

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 International Issues

þCulture
þPolitics
þLaw and Order
þCurrency

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Time Extensions

Claims for extension of time must be based on delays that

are caused by the owner or the owner’s agent or on delays
due to acts of God.

Delay sources:
• Design problems
• Owner Modification
• Weather
• Strike
• Late delivery
• others

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 Change Orders

“Changes that are dictated, for any reason, during

construction represent an alteration of a legal arrangement
and, thereof, must be formally handled as a modification to
the contract. This modifications to the original contract,
which themselves are small augmenting contracts, are
called change orders.”

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Changed Conditions

Due to:
• Inadequate information provided from the sub-
surface investigation.
• A condition may not be detected during design, and
the assumption is that it does not exist in real life.
• Variation in wind pattern.
• If the owner accepts the changed condition, the
extended scope of work represented will be included
in the contract as a change order.
• If the owner rejects the changed condition claim, the
validity of the claim must be established by litigation
or arbitration.

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 Value Engineering (VE)

Value engineering (VE) is a systematic approach to

identify a project's functional objectives with the goal of
optimizing design, construction, and future operations.
Value engineering studies are conducted by a
multidisciplinary team that focuses on a clearly defined
scope. While each member of the project team is free to
recommend that a value engineering study be undertaken,
it is typically the owner's responsibility to authorize and
formally initiate a VE effort.

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Value Engineering (VE)

The Concept of Value

Project value is determined by the relationship of the worth of

the project and its elements to their cost

The goal of the VE process is to identify alternatives that

maximize this value relationship.

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 Suspension, Delay or Interruption

General conditions in government contract:

Ø The contracting officer may order the contractor in writing

to suspend, delay, or interrupt all or any part of the the
work for such period of time as he may determine to be
appropriate for the convenience of the government.

Ø An adjustment shall be made for any increase in cost of

performance of this contract (excluding profit) necessarily
caused by such unreasonable suspension, delay, or
interruption and the contract modified in writing
accordingly.

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Liquidated Damages

Ø A project duration is specified in the contract

document.

Ø This duration is tied to the date the project is needed

for occupancy and utilization.

Ø If the project is not completed on this date, the owner

may incur certain damages due to the non availability
of the facility.

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 Progress Payments and Retainage

Ø Progress payments: At least ten days before the

date for each progress payment established in the
Owner- Contractor Agreement, the contractor shall
submit to the owner’s representative an itemized
Application for Payment.

Ø Retainage: In making progress payments, there

shall be retained 10 percent of the estimated
amount until final completion and acceptance of the
work.

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Percent Progress ReportingProgress Reporting

complete 100
work item
80
60
Constant
40 Rate
Planned Rate
20 of Progress Project
Bar Months
0 1 4
chart 2 3
100
80
Percent 60Planned Rate
complete
40
work item of Progress Actual
rate of
20
Progress
Project
Bar
Months
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 Acceptance and Final Payment

Ø Final acceptance of the project is implemented by a

joint inspection on the part of the owner’s
representative and the contractor.

Ø The owner’s representative notes deficiencies that

should be corrected and the contractor makes the
note of deficiencies.

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Legal Issues

Construction Disputes
If a construction dispute
cannot be resolved through
negotiation and compromise
between the disputants, it is
necessary to resolve the
disagreement by a third
party.

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 Legal Issues

Methods for Resolving Construction Disputes

þ Engineer Decision Clause

þ Negotiation
þ Administrative Boards

þ Litigation

þ Arbitration
þ Mediation

þ Dispute Review Boards

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Legal Issues

Construction Claims
Claim is a request by the contractor for recompense for
some loss or expense that he or she has suffered, or an
attempt to avoid the requirement to pay liquidated and
ascertained damages.

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 Legal Issues

Categories of Construction Claims

There are three categories of claims:

þ Contractual Claims
- Payment and Security
- Changes in the Scope of Work
- Construction Delays

þ Ex-Contractual Claims

þ Common Law Claims

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Legal Issues

Preparation of Construction Claims

þ Selection of appropriate contract clauses and giving of

notice.

þ Supporting information.

þ Possible consequences of engineer’s instruction.

þ Significant documents.

þ Accurate record.

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 Questions/Queries?

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