CHAPETR – 5

CONTRACT

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OUTLINE

 Principles of Contract Law

 Types of Construction Contract

 Contract Documents

 Contract Management

…
 Principles of Contract Law
 Why use contract in construction?
 Describe the scope of work

 Establish the time frame

 Establish cost and time provision

 Set forth obligations and relationship

 Manage multiple risks

 Establish control mechanism

 Minimize disputes

 improve economic return on investment

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 Principles of Contract Law
Legal Definition of Contract
according to the Civil code of
Ethiopia, Art.1675:
 A contract is an agreement whereby
two or more persons as between
themselves create, vary or extinguish
obligations of a proprietary nature.
 An agreement that affects the legal
relationship between two or more
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parties.
 Principles of Contract Law
Elements of a Contract ‐ What does it take
to have a legally binding contract?

Contracts require 4 basic elements

 Mutual Agreement
▪ Offer

▪ Acceptance

 Legal Objective
 Valid Consideration

 Legal Capacity of the parties 5

 Principles of Contract Law
i. What is Mutual Agreement?
 It should show evidence that there was
‘MEETING OF MIND’’
▪ Offer – is an indication that one party is willing to be
bound by specific terms set out in the contract.
▪ Acceptance – clearly accepting deal offered &
anything else – Counteroffer & Non acceptance

ii. What is legal objective?

 The thing contracted must
be legal in and of itself. 6
 Principles of Contract Law
iii. What is a valid consideration?
 In exchange for the offer to perform, the
recipient or client must offer something of
value
▪ Money

▪ Promise of future work or revenue

▪ Goods or Services

 Without valid consideration a contract is

invalid & unenforceable.
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 Principles of Contract Law
iv. What is legal Capacity?
 In simplest form, parties must be:
− Of Age

− Mentally Competent

 In construction environment,
parties must have:
− Legal authority to issue & execute
contracts

− Must have proper license to have legal

capacity
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 Principles of Contract Law
 Concepts and Basic Terms of Contracts: ‐

 Offer: ‐ proposal to enter into a contract.

 Acceptance: ‐
 Performance of Contracts: ‐
▪ Performance – fulfilling respective legal
obligations

 Contractual Liability:- insured contract

for "bodily injury" or "property damage"

 Extra – Contractual Liability: ‐

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 Types of Construction Contracts

 Contracts for the execution of civil engineering

works are of following type:

A. Lump sum contract

B. Unit rate contract

C. Lump sum and schedule contract

D. Cost plus fixed fee contract

E. Cost plus percentage of cost contract

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 Types of Construction Contracts
A. Lump Sum Contract( Fixed Price)
 The contractor agrees to build a project with a specific
scope for a fixed price.
 Lump sum contract are typically used for buildings.
 is suitable if the scope and schedule of the project are
sufficiently defined to allow the contractor to fully
estimate project costs.
 Not suitable for unpredictable conditions.
 A Lump Sum Contract mainly includes Contract
Agreement, Conditions of Contract, Drawings and
Technical Specifications.
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 Types of Construction Contracts
B. Unit Price or Bill of Quantity (Fixed Price)
 Used for work where it is not possible to calculate the
exact quantity of materials that will be required.

 The amount to be received by the contactor depends

upon the quantities of various items of work actually
executed

 Unit‐price contracts are commonly used for

heavy/highway work.

 Items whose actual quantity varies from the estimated

quantity by more than 15 or 20%, either above or below
the estimated quantity, are sometimes subject to
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renegotiation of the unit price.
Types of Construction Contracts

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 Types of Construction Contracts

C. Lump sum and BOQ, scheduled contract

 Combines the features of the Lump

sum and schedule contracts

 Additional items are amounted as per

the attached item rate.

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 Types of Construction Contracts

D. Cost plus
 Used when it is impossible to predict their costs
during the negotiation, bid, and award process.
 Factors ‐ unpredictable and extreme weather
conditions, transportation problems, combat or
war, or contracts where the amount of effort that
will be required depends on another contractor’s
work.
 Cost plus contracts take many forms: most
common cost plus fixed fee and cost plus a
percentage. 15
 Types of Construction Contracts
D.1. Cost plus Fixed Fee Contact
 Is desirable when the scope and nature of the work
can at least be broadly defined.

 The amount of fee is determined as a lump sum from a

consideration of the scope of work, its approximate
cost, nature of work, estimated time of construction,
manpower and equipment requirements etc.

 The contractor in this type of contract is selected on

the basis of merit rather than the fee alone.
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 Types of Construction Contracts
D.2. Cost plus Percentage of Cost Contract
 In this type of materials and labour are arranged
between the client and the contractor.

 The tendency of the contractor to increase the

cost of work to earn more profit by way of
percentage of enhanced actual cost is the major
demerit of this contract type.

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 Types of Construction Contracts

Special Types of Contracts:

▪ Turn – key Contract

▪ Package Contract

▪ Negotiated Contract

▪ Running Contract

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.

…
 Contract Documents
Invitation to tender,

Instruction to tender,

Form of tender,
documents are:

The Agreement,
The main
contract

Condition of contract( General and

Particular),
Specification (General and
Particular),
Bill of Quantities,

Drawings,

Addenda
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Appendix to Tender.
 …Cont. Doc.
 Invitation to Tender: -

 An initiation letter to the contractor to participate in the

tender with an acknowledgment attached.

 Instruction to Tenders: -

 The contractor is given directive of what is required of tenders:

▪ Tendering procedures, bid bond, data, space, time

▪ Scope of work

▪ Tender basis

▪ Tender bond (possible) 21

 …Cont. Doc.
 Form of Tender
 This is a document where the contractor:
▪ Confirms, that he has examined all the tender
documents

▪ Confirms that he will perform the work

▪ Promises that the validity of the tender is open for a

certain period

▪ Shows his understanding that the lowest bid or any after

may be rejected

▪ States that part of the work may only be accepted

▪ Confirms that he will enter into an agreement if awarded

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 …Cont. Doc.
 Agreement

 The agreement is the document that represents and

reflects the legal contract between the owner and the

contractor. Or obviously there is agreement b/n GC and

SC, or supplier,

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 …Cont. Doc.
 Conditions of Contract

 The condition of contract is a document that states

the obligations and highs of the parties and detail the

conditions under which the contract is to be carried

act.

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 …Cont. Doc.
 Condition of contract includes:
i. General Conditions
− defines the responsibilities of the parties involved in the contract- the
owner and the general contractor.

ii. Supplementary/ Special Provisions or Special/Particular

Conditions
− to provide an extension of the General Provisions of the contract to fit the
specific project at hand.
– number of copies of contract documents to be received by the
contractor
– Survey information to be provided by the owner
– Materials provided by the owner
– Changes in insurance requirements
– Phasing requirements
– Site visit
– Start date of the construction. etc
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 …Cont. Doc.
 Specifications/ Technical provisions

 written instruments to be used in conjunction with

the drawings, so together the drawings and the

specifications fully describe and define the

requirements of the contract, to include the quality

that is to be achieved.

 guide bidders in the preparation of cost proposals

as well as field execution of the work.

 guide the contractor through the processes of

ordering materials and construction and

installation of the facility. 26

 …Cont. Doc.
 Bill of Quantities

 Describe the expected amount of work

(measured) in works; it sets out the units of

measurement, the units of work, the unit

price and the total cost of the works.

 Drawings/ blueprints

 the means by which the designer conveys the

physical, quantitative, and visual description

of the project to the contractor.

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 …Cont. Doc.

 Addenda

 Any change to the bid documents after they are

released for bidding but before bids are actually

received requires the issuance of an addendum.

“And” :

 Appendix To Tender

 Forms and Formats

 History of Conditions of Contracts

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 …Cont. Doc.
 In Ethiopia Construction Industry the following

standard conditions of contracts are commonly

used:

 FIDIC (1987) – Condition of Contract

 PPA, Standard Bid Document

 MoWUD, Standard Condition of Contract (1994)

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 …Cont. Doc.
 FIDIC Conditions of Contracts

 FIDIC is the international federation of national

associations of independent consulting engineers.

 Founded in 1913 by the national associations of three

European countries (France , Belgium and Switzerland)

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 …Cont. Doc.
 FIDIC conditions of contracts have two parts:
 General Condition of Contract
 Particular Conditions of Contract

 FIDIC can be:

 1957 – RED BOOK
− The very first edition – civil engineering work
− Contract type – Add Measurement Type

 1963 – YELLOW BOOK

− For mechanical and Electrical works

 1987 – OLD FIDIC

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− Comprises the RED and YELLOW Books.
 …Cont. Doc.
 1995 – ORAGE BOOK
▪ For Design Build and Turnkey Projects

 1999 – GREEN BOOK

▪ For short period projects ( 6 months)

▪ Low contract value ($ 500,000)

 1999 – SILVER BOOK

▪ For turnkey for power plants, factories and facilities

 MBD – Harmonized Edition

▪ Multi‐later banks (MDBs) tried to harmonize the FIDIC

conditions to suite there procurement needs.

▪ World Bank – has published one in 2004

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 …Cont. Doc.

Ethiopia Conditions of Contract

 In the Ethiopia the first condition of contract was

published in 1959 by the Ministry of Housing.

▪ 1987 – Building and Transport Construction and Design Authority

(BaTCoDA) published another condition of contract which has

been used during the Dereg’s Regime.

▪ In 1994 – Ministry of Works and Urban Development (MoWUD)

developed a condition of contract based on FIDIC RED Book.

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Contract Management : Contract
Administration and Closing

Contract management process

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 Contract Administration
 Identifying contractual responsibilities of Stakeholders.
 Reviewing the Terms of Contract Documents
 Extract Monitoring Responsibilities
 Preparing Monitoring Responsibility Summary Sheets

 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
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Breakdowns & Schedules and Time Schedules.
 …Cont. Adm.
 Record, Monitor and Evaluate Progress of Mobilizations,

Works and Completions.

 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

 Mediate Disputes 36
 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.

Closing of Accounts: release of remaining retention

moneys and performance securities

Completion Certificates: is certificate that concludes

the contractual agreement. 37

 Claims and Dispute Management
 Dispute in simple terms is a difference in a line of
thought.
 Claim is mostly concerned with entitlements and
liabilities arising under, or as a result of, a legally valid
contract.
 A construction claim is therefore can be a demand for
payment of additional compensation, adjustment of the
partiesʹ respective contractual obligations, Extension
of Time or compensating delay damages, or any other
change with regard to the contractual conditions or
terms. 38
 …Claims and Dis. Mgt.
 Claims can be associated with three major categories that
can be understood as the different types of claims.

 These are:-
 Time Related Claims: Claims associated with delay or in time
completion of projects where either of the following six
Entitlements or Penalties are subjected to:

▪ Time Extension only

▪ Liquidated Damages only

▪ Time Extension and Cost Compensation

▪ Concurrent Compensations

▪ Bonus

▪ Reliving of Obligation 39
 …Claims and Dis. Mgt.

 Cost Related Claims: Claims associated with monetary

compensation where either of the following entitlements

or penalties are entertained:

▪ Additions requiring rate adjustments

▪ Price Changes

▪ Provisional sum adjustments

 Default by Contracting Parties: Claims associated with non

performances of contractual obligations such as:

 Delay in Payment Certificates

 Suspensions and Terminations 40

Alternative Dispute Resolution System

 NEGOTIATION: is between two people who

wish to come to an agreement.

 MEDIATION : process parties to a dispute, with

a neutral third party (the mediator), identify

the disputed issues and acts as chairman and

leaves matters to the parties

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 ADR
 CONCILIATION : process parties to a dispute, with a

neutral third party (the conciliator) identify the disputed

issues, develop options. The conciliator may have an advisory

role not determination role.

 ARBITRATION : is the reference of dispute or difference

between not less than two parties for determination, after

hearing both sides in a judicial manner, other than a

court of competent jurisdiction.

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