LECTURE 14 :ENGINEERING

CONTRACTS

Julius Pucker
0705666065
[email protected]

Kyambogo
University
21.10.2023
Types of Engineering Contracts
A contract is a mutually and legally binding agreement
that obligates the seller to provide specified
products or services, and obligates the buyer to pay
for them. Different types of contracts are suited to
particular circumstances, below are some broad
categories:
• Fixed price or lump sum: involve a fixed total
price for a well-defined product or service.
• Cost reimbursable: involve payment to the seller
for direct and indirect costs.
• Unit price contracts: require the buyer to pay the
seller a predetermined amount per unit of service.
There are more types of contracts…..
1.Fixed Price Contracts
Fixed price or lump sum contracts involve a fixed
total price for a well defined product or service.
These contracts are particularly suited where
supplies or services can be clearly specified before
tenders are invited.
The buyer incurs little risk in this situation.
Fixed price contracts may also include incentives for
meeting or exceeding project objectives. They may
also include safeguards in the form of penalty
clauses, however these may be difficult to apply
before the
2.Cost Reimbursable Contracts
Cost reimbursable or cost-plus contracts involve
payment to the seller for direct and indirect actual
costs. Under this type of contact, the owner agrees
to pay the complete cost of the materials and labor
needed to needed to build the project along with a
fee for the contractor’s overhead and profit. This
contract type is favored where the scope of work is
highly uncertain or indeterminate and the type of
labor, material, and equipment needed to build the
project is also uncertain in nature.
These contracts are often used for projects that
include the provision of goods and services associated
with new technologies.
Cost Reimbursable Contracts…….
This type of contract involves payment of the actual costs,
purchases or other expenses generated directly from the
construction activity. Under this arrangement, complete
records of all time and materials spent by the contractor on
the work must be maintained. Cost Plus Contracts must contain
specific information about certain pre-negotiated amount
(some percentage of the material and labor cost) covering
contractor’s overhead and profit. Costs must be detailed and
should be classified as direct or indirect costs.
There are multiple variations for Cost plus contracts, and the
most common are:
a. Cost plus Fixed Percentage Contract – Compensation is
based on a percentage of the cost;
b. Cost plus Fixed Fee Contract – Compensation is based on a
fixed sum independent the final project cost. The owner
agrees to reimburse the contractor’s actual costs, regardless
of amount, and in addition pay a negotiated fee independent of
Cost Reimbursable Contracts……….
c. Cost plus Fixed Fee with Guaranteed Maximum Price
Contract – Compensation is based on a fixed sum of money.
The total project cost will not exceed an agreed upper limit;
d. Cost plus Fixed Fee with Bonus Contract – Compensation
is based on a fixed sum of money. A bonus is given if the
project is finished below budget, ahead of schedule, etc.;
e. Cost plus Fixed Fee with Guaranteed Maximum Price
with Bonus Contract –Compensation is based on a fixed sum
of money. The total project cost will not exceed an agreed
upper limit and a bonus is given if the project is finished
below budget, ahead of schedule, etc.; and
f. Cost plus Fixed Fee with Arrangement for Sharing Any
Cost Savings Contract – Compensation is based on a fixed
sum of money. Any cost savings are shared with the buyer
and the contractor.
Cost Reimbursable Contracts……….
The Cost Plus Fixed Fee construction contract is more
predictable than Cost Plus Fixed Fee Percentage Construction
Contract because the contractor’s fee for overhead and
profit is, as its name suggests, predetermined. Regardless of
what the cost of construction ultimately amounts to, the
contractor’s fee remains the same.
Conversely, the Cost Plus Fixed Percentage Construction
Contract provides more variability with respect to the
amount of the contractor’s fee because it is directly linked to
the cost of construction, which in these types of
arrangements is inherently unpredictable.
In fact, the Cost Plus Fixed Percentage Construction
Contract arguably incentivizes the contractor to not keep the
costs low because its fee increases with the cost of
construction.
Cost Reimbursable Contracts……..
The Cost Plus with Guaranteed Maximum Price
Contract seeks to eliminate some of the risks
associated with Cost Plus Contracts in that it caps
the owner’s overall financial exposure. Thus, while
the contract price is to be determined based on the
cost of construction and the contractor’s fee,
owner's costs are capped at a certain amount.
These types of Cost Plus Construction Contracts are
oftentimes grouped with bonus contracts, built-in
contingencies, or cost savings contracts which
incentivize the contractor to complete the project
with agreed targets regarding schedule, quality, and
budget in exchange for additional compensation on
the project.
Cost Reimbursable Contracts……..
The buyer absorbs more risk with the type of contract, which
has three forms:
•Cost plus incentive fee (CPIF): the buyer pays the seller for
allowable performance costs plus a predetermined fee and an
incentive bonus.
•Cost plus fixed fee (CPFF): the buyer pays the seller for
allowable performance costs plus a fixed fee payment usually
based on a percentage of estimated costs.
3.Unit Price Contracts
Unit price contracts require the buyer to pay the seller a
predetermined amount per unit of service, and the total value
of the contract is a function of the quantities needed to
complete the work.
Unit price contracts are also called a time and materials
contract, and may incorporate volume discounts.
This type of contract is often used for services that are
needed when the work cannot be clearly specified and total
costs cannot be estimated in a contract. Many contract
programmers and consultants prefer to use unit price
contracts.
4. Time and Material Contracts
Time and Material Contracts are usually preferred if the
project scope is not clear, or has not been defined. The
owner and the contractor must establish an agreed hourly
or daily rate, including additional expenses that could arise
in the construction process. The costs must be classified
as direct, indirect, mark-up, and overhead. Sometimes the
owner might want to establish a cap or specific project
duration to the contractor that must be met, in order to
have the owner’s risk
minimized.
5. Incentive Contracts
Compensation is based on the contracting performance
according an agreed target - budget, schedule and/or quality.
The two basic categories of incentive contracts are
o Fixed Price Incentive Contracts
o Cost Reimbursement Incentive Contracts
Fixed Price Incentive Contracts are preferred when contract
costs and performance requirements are reasonably certain.

6. Guaranteed Maximum Price Contract

A Guaranteed Maximum Price (also known as GMP, Not-To-
Exceed Price, NTE, or NTX) contract is a cost- type contract
where the contractor is compensated for actual costs incurred
plus a fixed fee subject to a ceiling price.
Guaranteed Maximum Price Contract………….
The contractor is responsible for cost overruns, unless the
GMP has been increased via formal change order (only as a
result of additional scope from the client, not price overruns,
errors, or omissions). Savings resulting from cost underruns
are returned to the owner. This is different from a lump-sum
contract where cost savings are typically retained by the
contractor and essentially become additional profits.
Sometime, savings are shared between the owner and the
contractor as an incentive to keep costs down.
7. Design-Build Contract
A design-build contract is appropriate when the project delivery
method is design-build. Traditional contracts are awarded using a
design-bid-build system, where the project owner starts by hiring
an architect. Once the architect has finished the design phase, the
project is put out for bid to general contracting companies. The
contractor with the lowest bid is awarded the project and is
responsible for completing the job according to the plans created by
the architect.
With a design-build contract, the owner awards the entire project
to a single company. It is typically awarded to a contractor, though
architects or engineers may be awarded one in some specialized
cases.
Once the contract is signed, the contractor is responsible for all
design and construction work required to complete the project. This
system allows the owner to deal with a single source throughout the
duration of the job, rather than coordinating between various
parties.
Design-Build Contract …….
When this type of contract is awarded to a contractor, he must hire all architects
and engineers required to complete the design work. The owner is still given the
right to approve or reject design options, but is no longer responsible for
coordinating or managing the design team. Once the owner approves the design, the
same contractor then oversees the construction process, hiring subcontractors as
needed. Most of these contracts are awarded through negotiation rather than
through a bid process.

8. Integrated Project Delivery Contract

Integrated Project Delivery (IPD) contracts represent the latest trend towards a
more collaborative approach to delivering construction projects. IPD contracts are
unique in that they require the involvement of owners, designers, contractors, and
key stakeholders on a project as early as possible—
sometimes even at the conceptual stage. This contract type results in more
transparency among all the parties involved on a construction project. Additionally,
both risk and reward are shared by the parties who enter into the IPD contract,
resulting in greater integration of resources, processes, and expertise than would
be possible under more traditional contract arrangements, as well as maximizing
efficiency through all phases of design, fabrication, and construction.
CONDITION OF CONTRACTS
The conditions of contract are the terms that collectively
describe the rights and obligations of contracting parties (i.e.
the employer and the contractor) and the agreed procedures for
the administration of their contract. Contract conditions
determine the allocation of risk and consequently, price.
Typically these conditions address the following:
a) The parties’ main responsibilities e.g., the employer provides
the site and the right of access thereto while the contractor
provides the works in accordance with the requirements
established in the contract.
b) The timing of the works, e.g. start date, time for completion,
period for defects liability, etc.
c) Testing and remedying of defects.
d) Payment, e.g. manner in which the works are to be assessed
and certified, time for payment and interest on overdue
amounts.
CONDITION OF CONTRACTS…….
e) Variations and claims, e.g. the manner in which variations to
the contract are to be evaluated and paid for and how the costs
which result from employer liabilities are assessed and paid for.
f) Title (ownership) to objects, materials within the site, etc.
g) Risks and insurances, e.g. what are the employer’s and
contractor’s risk and what insurances each party will take out.
h) Termination, e.g. the reasons for termination, the procedures
for termination and the payment to be made upon termination.
i) The resolution of disputes, e.g. by adjudication, mediation,
arbitration, litigation (court of law) or a combination thereof.
Conditions of contract can be standardized so that the same
conditions of contract can be used on different projects, in
which case they are referred to as standard forms of contract.
SITE MANAGEMENT
Site management is often under - resourced and neglected in
favour of production pressures. Site administration and site
management is the ‘nerve centre’ of operations and if these
functions are not functioning effectively, they will hamper
production output and quality will suffer.
Good contract administration is required to manage design
specification, contractual agreement, competitive tendering,
evaluation, cost control, variations, final accounts, claims and
even disputes, this will eventually help to reduce construction
costs.
A building project, has to undergo three specific stages
namely, design, tender and construction. In all three stages,
good contract administration is required to manage design
specification, contractual agreement, competitive tendering,
evaluation, cost control, variations, final accounts, claims and
even disputes. Poor management in any of these aspects would
lead to unnecessary claims and disputes and eventually higher
construction costs.
SITE MANAGEMENT………………………………..
RECORD KEEPING
Construction is a complex business to operate and there are many
different activities that need to be managed at any one time. It is not
possible to remember what happened at what time, and who did it, and
why. Record keeping is essential to ensure that events can be recalled
at a later stage.
There are several main types of records that need to be kept including:
1) Site diary.
2) Drawing register.
3) Written notices, correspondence and site instructions.
4) Site photographs.
5) Contractual documents.
6) Occupational health and safety documents.
It is essential to also ensure that these records are properly filed so
that they can be easily found when needed. By implementing a standard
way of keeping and filing records, the contractor will save time and
effort when starting new projects. It will also improve the contractor’s
ability to monitor and improve on production, quality and cost controls.
SITE MANAGEMENT………….
Site diary
The site diary should be kept by the contractor’s site agent or site manager
responsible for the site. This site diary should keep specific information
relating to the work that is done each day, what problems were encountered,
what instructions were issued by the employer’s representative (principal
agent, project manager, supervisor, engineer), what drawings were received,
and production and milestones achieved. Each project is different and the
site diary for each contract will change depending on the type of work to be
done.
There are standard records that need to be kept which are needed for
contractual reasons. Information kept for all projects should include:
a) Day.
b) Date.
c) Rainfall measured.
d) Personnel schedule.
e) Equipment schedule.
f) Record of any reportable accidents that occur.
g) Production targets and achievements.
h) Site instructions received.
i) Drawings received.
Issues that are causing delays.
k) Work that is to be rectified.
SITE MANAGEMENT………………
The contractor can decide how they wish to implement
the site diary and there are different approaches that
are commonly used. Some contractors produce a
customised printed book with carbonated copies for use
on site. This is useful for specific sites where the site
agent will write in the diary what the records are for the
day and issue a copy to the employer’s representative.
Another approach is to develop a spreadsheet with the
required information on it. Each day this spreadsheet is
filled in and e - mailed to the employer’s representative
who can then store it electronically or print it out for
their files or pass it on for information to the employer
or other parties.
CONTRACTUAL DOCUMENTS
The most important document for any construction project is
the contract. This details all the rights, responsibilities and
obligations of the parties to the contract. There should always
be a copy of this document available for site personnel to refer
to. Other contractual documents are also important and should
be stored carefully. Documents that have contractual reference
include:
a) The main contract.
b) Subcontracts.
c) Labour contracts
d) Plant - hire agreements.
e) Delivery notes.
f) Programmes and bar charts.
Site - meeting minutes.
h) Notifications for inspections.
i) Correspondence with the employer/employer’s representative.
j) Payment certificates.
k) Completion certificates.
CONTRACTUAL DOCUMENTS…………………………..
l) Daily labour sheets and materials and equipment usage
where work is performed on a cost reimbursable basis.
m) Health and safety file containing relevant health and
safety documents.
Conditions of contract must be read in conjunction with
specification documents, drawings bills of quantities,
activity schedules and special conditions. Standard form
contracts often comprise suites of contracts with ‘back to
back’ subcontracts, consultant appointments and collateral
warranties. The use of core conditions with option
schedules or supplemental provisions is also now common
(see NEC contract)
Fully-designed project, the contract documents may include:
a) Articles of agreement and conditions of contract, for
completing as a simple contract (or as a deed) –
commonly referred to as General Conditions of Contracts
b) Contract drawings.
Bills of quantities.
d) Project Specifications
e) Specifications.
f) Schedules of work.
On design and build projects, the contract documents may
comprise:
a) The articles of agreement and conditions of contract.
b) The employer's requirements.
c) The contractor's proposals.
d) The contract sum analysis.
e) Possibly bills of quantities (for some or all of the design).
Statement of Work (SOW)
Many contracts include a statement of work (SOW). A
statement of work is a description of the work required
for the procurement. The SOW describes the work in
sufficient detail to allow prospective sellers to determine
if they are capable of providing the goods and services
required, and to allow them to determine an appropriate
price.
A good SOW gives bidders a better understanding of the
buyer’s expectations, and therefore should be as clear,
concise and as complete as possible. It should describe all
the services required, and include performance reporting
requirements. The SOW should specify the product of the
project, use industry terms, and refer to industry
standards.
Statement of Work (SOW) template
I. Scope of Work: Describe the work to be done to detail. Specify the
hardware and software involved and the exact nature of the work.
II. Location of Work: Describe where the work must be performed.
Specify the location of hardware and software and where the people must
perform the work
III. Period of Performance: Specify when the work is expected to start
and end, working hours, number of hours that can be billed per week, where
the work must be performed, and related schedule information.
IV. Deliverables Schedule: List specific deliverables, describe them in
detail, and specify when they are due.
V. Applicable Standards: Specify any company or industry-specific
standards that are relevant to performing the work.
VI. Acceptance Criteria: Describe how the buyer organization will
determine if the work is acceptable.
VII. Special Requirements: Specify any special requirements such as
hardware or software certifications, minimum degree or experience level
of personnel, travel requirements, and so on.
Contract Administration
Contract administration ensures that the contractor’s
performance meet contractual requirements. Contracts are
legal relationships, and are subject to the contract law in the
country where the project is conducted, and in the case of
international projects, the country of supply.
• The process that begins from when the contract is awarded
to when the work is completed and accepted or the contract
terminated; payment has been made;
and disputes have been completely resolved (“Cradle to Grave”)
&
• Is a primary part of the procurement process that assures
the project owner gets a quality product for what it has
bargained &
• Assures that users are satisfied with the final product.
Contract Administration - Purpose
•Monitoring the actual contract and progress,
•Comparing measured performance to established standards,
•Open communication throughout the process,
•Receive product and/or service that meet all
requirements, and
•Documentation of all final results.
Contract Administration - Influences

The following factors influence Contract Administration:

•Nature of the work,
•Type of contract, and
•Experience and commitment of the personnel involved.
Contract Administration – Focus
Obtaining quality supplies and services that
meet or exceed contract specifications,
•Schedule – complete project on time,
•Budget – complete project within budget, and
Contract Administration - Monitoring
• Develop a master schedule and a work breakdown structure that incorporates
every important date or milestone in the contract.
• List contract deliverables and their evaluation criteria in detail, with checklists
for the people who perform the tasks.
• Set a schedule and reminders for required reports, including the format and
delivery method.
• For each party involved in the contract, document change orders and contract
modifications that require rescheduling of any deliverables.
• Ensure that expenses charged to the contract are allowable, allocable and
reasonable.
• Give room for competing priorities.
• Develop a master schedule and a work breakdown structure that incorporates
every
important date or milestone in the contract.
• List contract deliverables and their evaluation criteria in detail, with checklists
for the people who perform the tasks.
• Set a schedule and reminders for required reports, including the format and
delivery method.
• For each party involved in the contract, document change orders and contract
modifications that require rescheduling of any deliverables.
• Ensure that expenses charged to the contract are allowable, allocable and
reasonable.
• Give room for competing priorities.
 Contract Administration - Weaknesses
• Allocation of more time to awarding contracts rather than
administering existing contracts.
• Unclear roles and responsibilities of the Project Manager
(PM) and his/her team.
• Excessive backlog in contract closeout and incurred costs
audits.
• Improperly trained officials performing contract oversight.
• Unclear statements of work that hinder contractor
performance, and
• Inadequate guidance on voucher processing and contract
closeout.
 Suggested Process
• Begin with post award orientation – either by conference, letter or some
other form of communication;
• Establish good communication process – helps both parties (project owner
and contractor) to achieve a clear and mutual understanding of the
contract requirements; & the contractor to understand the roles and
responsibilities of the PM who will administer the contract, and reduces
future problems
• Pre-construction meeting with applicable program and contracting
officials prior to the post award orientation conference so that there is a
clear understanding of their specific responsibilities and restrictions in
administering the contract;
• Discuss authority of the project owner’s personnel who will administer
the contract, quality control and testing, the specific contract deliverable
requirements, special contract provisions, etc.;
• Ensure there is an alternative dispute resolution technique in place –
known as
"partnering" to help avoid future contract administration problems;
• To ensure that the end users are satisfied with the product or service
being obtained under the contract, obtain input directly from the
customers through the use of customer satisfaction surveys.
 Contract Close-out
Contract close-out is the final project procurement management
process. It includes:
• Product verification to determine if all work was completed
correctly and satisfactorily.
• Administrative activities to update records to reflect final
results.
• Archiving information for future use.
Procurement audits are often undertaken during contract close-out
to identify lessons learned in the procurement process.

Conclusion
It is essential that organisations obtain good contracts that
minimise risk while ensuring optimum results through effective
contract administration.
With the current competitive and demanding conditions found in
information technology projects, it is very important to prepare
contracts with great care and expert assistance. It is equally
important to initiate and follow effective contract administration
procedures
What is the future of
contract management in the
next 200yrs???????
End

33