KIOT

What is a Contract?
The agreement between two parties creating
rights and duties, which is enforceable by
law to undertake certain work for the payment
of a sum of money is known as contract.
The contract inevitably follows a proposal
from one party and its acceptance by the
other.
Such contract legally binds the two parties to
undertake the works on the one hand and
to pay for the work on the other hand.
 Cont’d…
What is an Agreement?
Agreement is defined as “every promise and
every set of promises forming the
consideration for each other is an
agreement.”
Two main characteristics of an Agreement
 Plurality of persons: - Two or more persons
 Consensus in idea: - Identity of minds
What is a Promise?
“When the person to whom the proposal is made
signifies his assent there to, the proposal is said to
be accepted thus a proposal when accepted
becomes a promise.”
 Cont’d…
Difference between Agreement and
Contract
 Agreement = offer + acceptance

 Contract = agreement +
enforceability
 Purpose of contract:
 To enforce law
 To clearly show that terms and
conditions of contract which the parties
agree with.
 To clearly show the rights and
obligations of performances from the
contracting parties.
 To clearly show the remedial measures
in cases for non-performances.
 To clearly show special risks and their
treatment. Etc.
 Contract Management and
Its Process:
Contract management process can be idealized
in to three major processes.

Closing of
Negotiations accounts
Contract agreement Contract evaluation

Contract formulation Contract

administration Contract closing

Contract implementation
Change management
Claims and dispute management
Contract laws vary from one country to another
country, and the law governing a specific
contract will be determined by the place where
the contract was made or by the place of
performance unless expressly provided otherwise.
Contracts are referred to in a number of
ways.
When one party makes a promise for the
performance of an act, the contract is unilateral,
because only one obligation is outstanding.
In an exchange of promise, on both sides, at the
time the contract is made, the contract is
bilateral.
 The parties to contract:
The construction team for a major project most
commonly consists of three primary members:
1) client: who initiate, pays for and is the
ultimate owner of the project.
2) the contractor: “supplier” shall mean the
bidder whose bids will be accepted by the owner
for the award of the works and carries out the
actual construction.
3) consultant: who may design the work and
supervise the work in the role of the engineer.
 In some big project there is also a fourth entity
with an interest in the contract which is Funding
agency.
 Cont’d…

There are formal legal agreements between the

funding agency and the client, the client and the
contractor, the client and the consultant
(engineer). But there is no legally binding
contract or agreement between the consultant
and the contractor.
 Rights and
Responsibilities
Right of the Owner: Depending on the type of contract
and its specific wording, he may be authorized:
to require contract bonds, from the contractor,
to approve the surety proposed,
to retain a specified portion of the contractor’s periodic
payments,
to make changes in the neglect work,
to with hold payments to the contractor for adequate
reason, and
 to terminate the contractor to expedite the work,
 to use completed portions of the project before contract
termination, and
To mark payment dedication for uncompleted or faulty
work are common construction contract provisions.
 Responsibilities of the owner
Construction contracts make the owner
responsibilities for furnishing property surveys
that describe and locate site,
Securing and paying for necessary easements,
Providing certain insurance, and making periodic
payments to the contractor.
The owner is required to make extra payment
and grant extensions of time in the event of
certain eventualities provided for in the
contract.
When there are two or more prime contractors
on a project, the owner has a duty to coordinate
them and synchronize their field operations.
 Right of the architect-engineer
The architect-engineer represents the owner in
the administration of the contract and acts for him
during the day - to- day construction operations.
The architect-engineer advises and consults
with the owner, and communications between
owner and contractor are made through the
architect-engineer.
It is his direct responsibility to see that the
workmanship and the materials fulfill the
requirements of the drawings and specifications.
Interpreting the requirements of the contract. The
usual stipulation is that “the decision of the architect-
engineer shall be final and binding on both parties.”
Answering to questions of fact.
 The Contractor
The contractor has few rights and many
obligations under the contract. His major
responsibilities are:
To construct the project in conformance with the
contract documents
The contractor is expected to give his personal
attention to the conduct of the work
The contractor is required to conform to laws and
ordinances concerning job safety
The contractor is responsible for and warrants all
materials and workmanship
Insurance coverage is an important contractual
responsibility of the contractor
The most important contractor
rights
Asking progress payments according to
contract document.
Termination of the contract for cause,
 Right to extra payment and extensions of time
as provided,
Appeals from decisions of the owner or
architect-engineer.
The contractor is free to subcontract portions of his
contract,
Purchase his materials where he chooses, and
 Process the work in any way and in any order
that he pleases.
 Basic elements of
contracts
To be valid and enforceable, a
contract must contain four basic
elements:
1. Agreement (meeting of minds)
resulting from an offer and
acceptance:
2. Consideration or mutual obligation:
3. Competent parties:
4. A lawful purpose:
 1. Offer and acceptance.
When an owner sends a letter of award to a
contractor this act is a legal offer to get the work
executed in accordance with the terms stated in the
award letter/order.
However, agreement does not exist, until the
contractor accepts the offer, when this occurs, the
law deems that a “meeting of the minds” exists
regarding the proposed contract.
In the event that an owner invites a quotation/tender
from a contractor, the contractor’s quotation
responds for the offer. Agreement then exists, when
the owner accepts the quotation.
The law required acceptance of an offer in terms
that were identical with the terms of the offer.
 2. Consideration
In addition to the “meeting of minds” a valid
contract must also contain the element of
obligation.
Most contracts are bilateral and both the parties
agree to do something.
The contract must be drawn so that each party
is bound. If both the parties are not bound, in
the eyes of the law no contract exists.
In this “mutual obligation” concept, the
statement regarding bill of quantities,
specifications, price, time schedule etc. must be
specific enough to bind both the parties to
definable level of performance.
 3. Competent parties
A valid contract must be made by persons having
full contractual capacity. A contract made by a
minor or by an insane or intoxicated person is
usually entirely void or voidable at the option of the
incompetent party.
4. Legality of purposes.
A contract whose primary purpose is legal but one
of whose ancillary terms are illegal, may be either
void or valid, depending upon the seriousness of the
illegality and the extent to which the illegal part can
be separated from the legal part of the contract.
 Essential features of a
contract
1. The first and most important feature of a good
contract is that both the parties- the owner and
the contractor-should know exactly as to what is
expected from each of them, and what the
financial commitments are. The drawings and
the schedule of quantities taken together should
be able to spell out clearly as what is to be done
by the contractor.
2. The quality of materials and workmanship
required should be elaborated clearly. Where
possible reference of standard specification
books should be given.
 Cont’d…
3. The contract should be made equitable both to
the owner organization and the contractor. This
will facilitate timely, efficiently and properly
completion of the project, without centering into
litigation, claims, and disputes. Since there is
always a necessity for an appropriate, fair, just and
practically workable contracts.
4. In order to keep prices as fair for both the parties,
it is necessary that conditions of the contract must
be reasonable, specific and clear. Payments should
be prompt; powers of supervising staff should be
clearly defined. Otherwise the contractor will
increase the rates for vague and unreasonable
conditions, so as to meet the uncertainties.
 Cont’d…
5. Targets of desired quantity of finished work
ensuring quality and its planning and monitoring
system should be specified in the contract so as
to avoid cost over-runs. Efforts should be made
to cove-up the backlog.
6. Provision should be made for contract progress
review meetings to be held with the contractors.
It is preferred that item wise targets should be
fixed weekly (or monthly for long duration
project). For such meetings network charts,
resource allocation etc. should be used.
 CIVIL ENGINEERING
CONTRACTS
The civil engineer may be called upon to design and carry
out the construction of a large variety of works such as
residential and public buildings, roads, bridges, railways,
dames, docks, airports, power stations, water supply and
drainage schemes, tunnels, land reclamation and similar
other works.
 Most construction works fall under one of the following
two groups:
I. Public Works: Works which are constructed in the
interest of the public. Typical of such works are highways,
railways, dames, and public buildings. These are financed
by the government or public bodies.
II. Private Works: Works constructed for an individual, or
group of individuals or a corporation or body that is or
proposes to be in private business, are called private
works and are met from private funds.
 Types of Contracts
Contracts for the civil engineering works may be
broadly classified as under:
1. Lump- sum contract
2. Item rate or unit price contract
3. Percentage rate contract
4. Cost- plus- percentage contract
5. Cost plus fixed fee contract
6. Cost plus fluctuating fee contract
7. Target contract
8. All in contract or Turn- key contract
9. Labor contract
 1. Lump- sum contract
1.1 Nature of agreement
The contractor agrees to carry out entire work as
shown in the drawings and described by the
specifications, supply labor and materials, all for a
total stipulated sum of money.
There is no individual rates quoted, thus it becomes
difficult to make adjustment in the contract value if
any change are to be made in the work latter on.
 But sometimes the agreement makes
provisions to adjust the ‘fixed sum’ allowing
for the cost of extra work, variations,
omissions, etc.
 Cont’d…
1.2. Mode of payment to contractor
A lump- sum contract is usually an ‘entire’ contract
and such no payment can be recovered until the
whole work is completed.
 However, invariably the agreements include a special
provision for series of partial payments to the
contractor as work progresses, rather than final
settlement after acceptance of work by the owner.
1.3. Advantages
The owner can decide whether to start or to shelve
the project knowing the total lump sum price quoted
by different contractors.
If no extras are contemplated, the tenders tell the
owner exactly what the project will cost to him.
 Cont’d…
He needs not to employ the staff to keep
periodical accounts of the contractor’s materials,
labor and output.
From the contractor’s standpoint of view, the
greatest advantage is that whatever benefits
the contractor can earn, depends upon his
excellent planning an efficient management.
1.4. Drawbacks
Before the contract is let out, the project has got
to be thoroughly investigated and all the
contract documents to be kept ready in every
respect.
 Cont’d…
If the nature, extent, and details of the
work are not properly defined by the
contract documents, many additional
features may have to be determined and
provided for as the project progresses.
These features may not be the part of the
original agreement and hence may give
opportunity to the contractor for claiming
their payment at abnormal rates.
The contractor may submit high tenders to
protect him from the un-certainties of the
work.
 1.5. Suitability of contract
A lump- sum contract can usually be used
successfully by a contractor who has
considerable experience in the similar type of
works and whose cost he can predict with
reasonable accuracy.
The kind of work which is suitable for such type
of contract may be enumerated as:
Work involving difficult foundations, emergency
projects that has to be rushed through without
time to prepare complete set of contract
documents and maintain operations
 2. Item- rate or unit price
contract:
2.1 nature of agreement: An item rate contract is one which
the contractor agrees to carry out the work as per drawings, bill
of quantities and specifications in consideration of a payment
to be made entirely on measurements taken as the work
proceeds, and at the unit- prices tendered by the contractor in
the bill of quantities.
 2.2 Advantages
The owner can avoid the delay that would be necessary in
making a large number of contract drawings to show in details
everything that would be needed as on the case of lump- sum
contract.
Bill of quantities which forms a part of contract documents
greatly assists on keeping the tendered sum as low as possible.
It allows within limits, variations in quantities of different items.
Thus what the owner pays to the contractor is the cost of the
work at the rates which is fair arrangement for both parties.
 Cont’d…
 2.3 Disadvantages
The owner cannot be absolutely sure of the cost
to him until the work is completed.
A lot of book- keeping and computations are
involved on both sides as work progresses.
As quantities are likely to vary and so there is a
possibility that the contractor may be submitting
an unbalanced tender on the basis of shrewd
anticipation.
The ‘extra items’ are often a source of trouble.
Cont’d…
2.4 Suitability of item rate contract.
 It is widely used in the execution of
project works, financed by the public
bodies or the government. Generally,
suitable large works which can be split into
separate items and the quantity under
each item can be estimated with
reasonable accuracy
 Assignment one
Compare and contrast by writing the
Nature, Advantages, Disadvantages and
Suitability of the following types of
contract. [(a) 1, 5; (b) 2, 6; (c) 3, 4]
1. Percentage rate contract
2. Cost plus fixed fee contract
3. Cost plus fluctuating fee contract
4. Target contract
5. All in contract or Turn- key contract
6. Labor contract
Submission date: November 25
 Contract Documents
Contract documents are the
documents in which the scope and
the requirements of a project are
comprehensively laid down.
In these documents the obligations and
responsibilities of the parties to the
Contract as well as the Engineer’s
powers, duties and functions which flow
from such a Contract are defined.
 The Contract Documents adopted for Civil

Engineering construction comprises the

following elements:
 A. Instruction to
renderers
The instructions to Tenderers are usually the first
section included in the bound volume of the tender
Documents. And it consists:
(a) Instructions on filling in tender form
(b) Data to accompany tenders:
(c) Delivery of Tenders:
(d) Letter of Capacity
(e) Validity and Price Variations:
(f) Special Conditions
(g) Instructions on completion of the Bill of
Quantities, Schedule of Rates, Day work Schedule
 B. Form of Tender
 The Form of Tender is the part of the document that
Tenderers is required to fill in to make an offer to
execute the works.
The Form of Tender is accompanied by an Appendix
which forms part of the Tender. In the Appendix,
figures which need to be inserted under the various
clauses in the Conditions of Contract are filled in.
C. Form of Agreement
The Form of Agreement is the formal document
conforming the existence of a Contract between the
Employer and the Contractor.
 Parties in government construction contracts are
required to execute the agreement with
signatures and their seal.
 D. Form of Bond
The form of Bond is the legal document by which
the Contractor gives effect to the requirement of
providing a performance bond for the
Contract in a sum usually not exceeding 10 per
cent of the Tender Sum.
E. Conditions of Contract
It is the standards Form of Contract such as:
 The Institution of Civil Engineers (ICE) Conditions
of Civil Engineering Construction prepared by the
Association of Consulting Engineers, and
 The International Conditions of Contract (FIDIC)
or modifications thereof.
 F. Special Conditions of
Contract
The special Conditions of Contract are
essentially those which have to be drafted to
suit a particular situation.
They are matters for which clauses are not
included in the standard Conditions of
Contract.
G. Specifications
The scope of works together with the general
and technical requirements of a project is
described in the Specifications.
. They also define the quality of materials and
workmanship as required from the contractor
 H. Tender Drawings
The Contract Drawings are the drawings
on which the Works are to be carried out
and which the Contract price is based.
I. Bill of Quantities
A Bill of Quantities is the document
where brief descriptions of items of work
required under the Contract together
with the quantities of such items of work
are listed.
 document
The preparation of tender document is the first step in
the contract system. Main constituents of tender
documents are:
1)Notice Inviting Tender (NIT). This is the general
notice issued by the owner inviting tenders from the
prospective constriction firms.
 This tender notice generally covers the following:
Name, and details of types or work, its estimated
value, program
Earnest money and the manner of its payment.
 Price of tender document, and date and place up to which
it can be purchased.
Place, and last date and time of submission of tender
documents, and date and time of its opening.
Class of contractors eligible to tender.
 Cont’d…
2) Definitions: - To avoid any ambiguity various
terms should be defined.
3) Clauses of contract (Conditions of Contract):-
Various contract conditions are mentioned in the
documents for better contract management. Some
the common clauses are mentioned hereunder.
 Security Deposit: - This is also known as ‘retention
money’ and is collected by the owner by deducting a
percentage of the measured value of the work from
the ‘’on account payment’’ to the contractor.
 Contract Duration: - The time schedule is laid down
in the contract.
Defect Work: - According to this clause owner can
ask the contractor to rectify or remove and re –
execute any defection of item of work.
 Cont’d….
Defect Liability Period: - This is also termed as
the ‘’maintenance period’’. The work once passed
or accepted may reveal defects after some time.
Rescinding of the Contract: - The owner can
rescind the contract on account of lapses of
contractor like, progress, failure to complete work
within stipulated time, failure to rectify the
defective work, within stipulated time,
performance in inefficient or improper manner,
unauthorized practices, breach of terms and
conditions etc.
Payment Terms: - Small value contracts, or
where work is stipulated to be completed within a
month, only full and final payment is made.
 Cont’d…
Escalation of Contract Amount: - In most
contracts, contractors are paid according to the
contracted rate. But in certain longer duration
contracts, there is provision of adjustment in contract
amount based on the variation in market rates of
materials and labour.
Alterations in Specifications, Drawings and
Designs: - Due to certain constraints, sometimes it
becomes necessary to modify the contracted work.
Execution of Extra Items: - Sometimes it becomes
necessary to execute certain items, to complete the
defined works, which are missing in schedule of
quantities. Such items are known as extra items’.
Payment of Taxes: - There is a provision in the
contact for payment of sales tax or other local taxes
etc. by the contractor.
 Cont’d…
Arrangement of Tools, Accessories, Appliances,
Water, and Electricity:- The contract specifies
that contractors is responsible for making
arrangement of necessary tools plants, accessories,
appliances, implements, scaffolding etc.
Schedule of Tools, Plants and Machineries: -
items of tools, plants and machineries which will be
provided by the owner for use by the contractor are
mentioned in this schedule.
Labour Laws:- Contract should clearly specify that
contractor should follow all the relevant acts
Special Conditions of Contract: These special
conditions are also known as supplementary or
additional conditions.
 Types of Tendering
Following are the three types of tendering:
1. Open Tendering.
2. Limited (or restricted) Tendering.
3. Single Tendering.
1. Open Tendering: - Where the owner has
registered the contractors, each and every
registered contractor, in this system, is free to
submit tenders in response to invitation for tenders.
2. Limited ( restricted) Tendering: - In
this system, tenders are invited form restricted list of
firms. This system is generally adopted when either
value of work is limited or the work is of special
used nature requiring special
technique/equipment/experience.
 Cont’d…
3. Single Tendering: - In this system,
tender are invited for one party only. Single
tendering is adopted:
When value of work is very small
Work is of high technical nature and only one
firm has experience for the same
When the firm who has been invited offers
the rates is reliable, well known for
reasonability of rates.
 Assignment Two

1. What are causes of dispute in any

construction project?
2. Write all the dispute resolution methods.
(Discuses briefly and widely)

Submission date: November 25

END