Contract and Types of Contract
- 1. A Contract is a legal agreement between two or more people for an exchange of goods or services. Contracts are enforceable by Contract law. There are many different types of Contracts and they vary between industry and according to the type of services performed. WHAT IS A CONSTRUCTION / BUILDING CONTRACT? A Contract between an Owner of a site and a Building Contractor, se@ng forth the terms under which construcAon is to be carried out, the basis of remuneraAon, the Ame scale, and the penalAes, if any, (for failure to comply with terms of the Contract) is termed as a Building/ConstrucAon Contract. Architects in India generally adopt IIA form of 1979 WHAT ARE THE COMMON CONTRACT DOCUMENTS? The Contract Documents are all documents which, when combined, forms the basis of the Contract. It is recommended that both parAes to the Contract execute or endorse complete sets of all Contract documents and these should be preserved intact. A possible list of documents that makeup the Contract Documents include: The Contract or Agreement to be used by the parAes. CondiAons of the Contract – these define the legal rights and obligaAons of the parAes; another way of describing the general condiAons is as the rules by which each party will operate in performing their obligaAons as set down under the Contract. Special condiCons of Contract – these are an extension to the general condiAons and apply specifically and individually to each project/Contract. Bill of quanCCes – it lists quanAAes of the various items and the material to be included in the Contract. It can also be used as the basis for valuaAon of variaAons and assists the preparaAon of progress claims. The extent to which the Owner warrants the completeness of a bill of quanAAes or a schedule of rates depends upon the terms of the Contract. All drawings required in building the structure (contract plans including Architectural and Structural). These include drawings from relevant Consultants. All SpecificaCons – sets out the technical requirements of the work It describes the project and adds clarity to its drawings; describes the requirements for materials and workmanship. All other documents considered necessary, for example, Schedule or Annexure to the Contract completed, all technical schedules, all pricing schedules. CONTRACT
- 2. APPLICATION TO BUILDING CONTRACT The contractor as a promisor makes a proposal to carry out a construcAon job for a specified consideraAon. This offer is called the tender. The owner to whom this offer is made gives his assent, which means that he has accepted the proposal and is ready to pay for the cost of the work. This results in a valid contract. The assent is given by the employer or his architect in the form of work order. MODE OF ACCEPTANCE The acceptance of tender can be in wriAng or it can be oral acceptance when the employer hands over the possession of the site and permits the contractor to commence the works (unless the tender provides foe a wriRen acceptance only). However the acceptance has to be : 1. In absolute that is without counter offer and 2. Must be within reasonable Ame if the tender does not provide period during which tender is to remain in force. EXECUTION OF CONTRACT The contract is executed on stamp paper of the value as prescribed under Indian Stamp Act 1899 and must be signed, sealed (in case of public bodies) and delivered. Unstamped documents cannot be admiRed in evidence before an arbitrator or court. In such cases parAes will be asked to get the document duly stamped by paying Stamp duty as well as penalty. Proper stamping before the execuAon of contract results in the saving of Ame labour and money. CONTRACT BY PRIVATE PARTY AND PUBLIC BODY The contract by a private party is executed by signing the necessary contract document whereas in case of Public bodies, Government and Local AuthoriAes, the same should be made under their respecAve seals. RETROSPECTIVE APPLICATION OF CONTRACT It is common pracAce to sign building contracts a[er the work has already started. In spite of this it is understood that contract will apply retrospecAvely to works already executed. DISCHARGE OF CONTRACT A contract can be discharged in four ways: 1. By agreement 2. By performance 3. By being excused by law from performing it 4. By breach The contract becomes void due to 1. MisrepresentaAon 2. Fraud 3. Mistake
- 3. WHAT HAPPENS IF THERE ARE INCONSISTENCIES BETWEEN PRINTED MATTERS IN THE CONTRACT AND WRITTEN CLAUSES When there are printed and typewriRen clauses in a contract, they have to be given equal effect unless there is an inconsistency between the two in which case greater force is given to the laRer. This is due to the fact that wriRen words are the immediate language and express their meaning. However printed porAon cannot be discarded in toto. UNAUTHORIZED WORKS Now-‐a days in Mumbai and out of Mumbai there has been a sprawl of unauthorized works. The contractor in such cases would be at loss 1. When he has entered into a contract to commit an illegal act whereby the contract becomes void and 2. When he has entered into a contract unaware of it being illegal. This happens when the owner produces necessary plans and structural drawings duly signed by the professionals, but not approved by the authority. Here he stands at the losing end because the act is illegal and the contract becomes unenforceable.
- 4. Contracts are usually categorized according to the type of payment but can be tailored to incorporate common elements from several different Contract types. Some of the common forms of Contract are examined below. • UNIT PRICE (ITEM WISE) CONTRACT • LUMP SUM ( FIRM FIXED PRICE) CONTRACT • LABOUR CONTRACT • COST + CONTRACT • PROJECT MANAGAMENT CONTRACT WHAT IS UNIT PRICE (ITEM WISE) CONTRACT? This kind of Contract is based on esAmated quanAAes of items included in the project and unit prices which have been agreed to. The final price of the project is dependent on the quanAAes of the items needed to carry out the work. The terms of this type of Contract o[en accommodates flexibility for price adjustment. The agreed to value may be subject to amendment if the volume is reduced or exceeds the original negoAated terms and price. WHAT ARE THE ADVANTAGES OF UNIT PRICE CONTRACT? • The Architect is involved in this type of Contract because it is he who provides the quanAAes of each item (in the Bill of quanAAes), and negoAates the unit prices with the Contractor. Moreover, in this type of Contract, the Owner makes payments to the Contractor only a[er the Architect has verified the measurements at Site and cerAfied the Contractor’s bills for payment. This way the Owner is safe as he is paying only for the volume of work done at site and not paying anything extra. Also, he is assured (because the Architect is involved), that the quality of the work will be up to the mark. • In this type of Contract, the Contractor has to iniAally invest his own money for starAng the work, and so the Owner need not worry about giving the Contractor a big advance. • In general this Contract is considered the most scienAfic and most suitable for construcAon projects where the different types of items, but not their numbers, can be accurately idenAfied in the Contract documents. • The Contractor is also safeguarded against any conAngencies, or variaAons in labour or material rates. WHAT ARE THE DISADVANTAGES OF THE UNIT PRICE CONTRACT? The Contractor has to invest his own money iniAally.Though this is one of the most preferred Contracts in ConstucAon/Buildings, it is not unusual to combine a Unit Price Contract for parts of the project with a Lump Sum Contract or other types of Contracts. TYPES OF CONTRACT
- 5. PROBLEM CondiAon No. 4 of I.I.A. form of contract lays down that the owner reserves the right to: 1. Increase any of the quanAAes 2. Decrease any of the quanAAes 3. Totally omit any item of work And the contractor shall not claim any extras or damages on these grounds. CondiAon 4 further provides that any error in descripAon or in quanAty or omission of item from the contract bill shall not viAate this contract but shall be treated as a variaAon. However in pracAce to avoid unpleasant situaAon of depriving the contractor of reasonable profit, the construcAon industry and the government departments agree that increase or decrease in quanAAes cannot be beyond a specified percentage and/ or amount. For example, The Mumbai Housing and Area Development Board provides for such a conAngency subject to certain terms and condiAons as below: 1. QuanAAes of item below plinth may vary to any extent due to local condiAons for which the contractor will not be enAtled to the revised rates. 2. For super structure items the contractor is bound to execute works in excess up to 25% of the tendered quanAAes without claiming revised rates for such excess. 3. Even if the executed quanAAes are more than 25% of the tendered quanAAes the contractor will not be enAtled to the revised rates for such excess quanAAes if the value of such excess excess quanAes at the tendered rate does not exceed Rs5000/-‐. ILLUSTRATION Tender QuanAty Rate Amount 50mm G.I. pipes QuanAty executed It exceeds permissible limit of 25% value of excess quanAty at tender rate 100 R.M. 150 R.M. 50 R.M. Rs. 95/-‐per R.M. Rs.9500/-‐ 50xRs.95/-‐ = Rs. 4750/-‐ This amount is less than Rs.5000/-‐and hence the contractor is not enAtled to the revised rates.
- 6. WHAT IS A LUMP SUM (FIRM FIXED PRICE) CONTRACT? With this kind of Contract the Contractor agrees to do the construcAon and compleAon of the building at a designated Ame for a fixed price or Lump Sum. Also named “Fixed Fee Contract”, this type of Contract is o[en used in Building Contracts. Fixed Fee or Lump Sum Contract is suitable if the scope and schedule of the project are sufficiently defined to allow the esAmaAon of the project costs. The scope of the Contract defines the expectaAons of both parAes. This type of Contract provides a degree of certainty for both parAes because the Contract clearly spells out what is involved. WHAT ARE THE ADVANTAGES OF LUMP SUM CONTRACT? • A lump sum Contract provides for a price that is not subject to any adjustment on the basis of the Contractor’s cost experience in performing the Contract. This Contract type places upon the Contractor maximum risk and full responsibility for all costs and resulAng profit or loss. • Since the price is fixed, any unforeseen conAngencies or variaAons in material or labour prices do not affect the Owner. • It provides maximum incenAve for the Contractor to control costs and perform effecAvely and imposes a minimum administraAve burden upon the ContracAng parAes. Lump-‐sum Contract can be 1. A fixed sum contract or lump-‐sum contract 2. Area based Contract Turn key Contracts: It is a broad classificaAon of Lump-‐sum contract. In this case the builder/developer contractor purchases the land, employs his own architect/engineer and agrees to hand over completed tenements to the employer (usually a society) against specified rate per S.M. of area; subject to payments by installaAons as the work progresses.
- 7. • A lump sum Contract can be used in conjuncAon with an award-‐fee incenAve and performance incenAves, when the award fee or incenAve is based solely on factors other than cost. The Contract type remains Lump Sum when used with these incenAves. A lump sum Contract, shall be used when the risk involved is minimal or can be predicted with an acceptable degree of certainty. However, when a reasonable basis for firm pricing does not exist, other Contract types should be considered, and negoAaAons should be directed toward selecAng a Contract type (or combinaAon of types) that will appropriately Ae profit to Contractor performance. WHAT IS A LUMP SUM CONTRACT WITH PRICE ADJUSTMENT? It provides for upward and downward revision of the stated Contract price upon the occurrence of specified conAngencies. A lump sum Contract with economic price adjustment may be used when there is serious doubt concerning the stability of market or labor condiAons that will exist during an extended period of Contract performance, and conAngencies that would otherwise be included in the Contract price can be idenAfied and covered separately in the Contract. Economic price adjustments are adjustments: • based on established prices of specific items or the Contract end items, • based on actual costs of labor or material that the Contractor actually experiences during Contract performance and • based on cost indexes of labor or material that are specifically idenAfied in the Contract. In establishing the base level from which adjustment will be made, one shall ensure that conAngency allowances are not duplicated by inclusion in both the base price and the adjustment requested by the Contractor under economic price adjustment clause. WHAT ARE THE DISADVANTAGES OF THE LUMP SUM CONTRACT? • An Architect is not involved as this Contract is an agreement between the Owner and the Contractor for a final fixed price. So the Architect does not have a role to play , and so quality of work cannot be checked and controlled by an expert. • Since specificaAons are not clear, the Contractor can use alternaAve/inferior brands of materials. • Also there is a lot of ambiguity in the specificaAons, measurements, mode of payment, etc. • Though the Contract is made on a fixed price, the Contractor may claim extras by giving different reasons, since the specificaAons, measurements are not clear. • The Contractor takes money in advance from the Owner, and then he proceeds with the work at his own pace. Also someAmes, the Contractors deliberately hold up work towards the end, so as to extract maximum money from the Owner. So the Owner feels helpless as his money is with the Contractor.
- 8. WHAT IS A LABOUR CONTRACT? In this type of Contract, the Owner buys and supplies all the material required for the construcAon to the Labour Contractor and only uses his labour. The system of employing Contract labour is prevalent in most industries including ConstrucAon, involving skilled and semi skilled jobs. A workman is deemed to be employed as Contract Labour when he is hired in connecAon with the work by or through a Contractor. Contract workmen are indirect employees; persons who are hired, supervised and remunerated by a Contractor who, in turn, is compensated by the Owner of the site. Contract labour has to be employed for work which is specific and for definite duraAon. WHAT ARE THE ADVANTAGES OF A LABOUR CONTRACT? • This kind of Contract is someAmes preferred by the Owner, because he buys all the material by himself and thus saves a lot on the Contractor’s profit. • Moreover, the Owner can buy the materials of his choice and can be sure of the brand that will be used in the construcAon. WHAT ARE THE DISADVANTAGES OF A LABOUR CONTRACT? However, I personally would discourage a Client from entering into this type of Contract for the following reasons: • In this Contract also, the Architect does not have a role to play, and so quality of work cannot be checked and controlled by an expert. • There is a lot of headache and tension involved in running around and arranging for the supply of materials at site, on Ame as the work progresses. • It is easy to get fooled on the quality of sand, bricks etc. because the Owner is not very experienced in assessing the quality. • It is difficult to strike a good bargain when negoAaAng with suppliers and vendors, because the Owner is a one Ame Client, whereas the Contractor normally has an advantage as he is a regular Client and a relaAonship is built between him and the suppliers. • There is every possibility of pilferage of the material stored at site. • Very o[en labourers, masons etc do not turn up to site as they may be lured for a day to some other site and hence the work gets delayed. • Since the workers are generally paid for the work on a daily basis, the labour Contractor may purposely go slow so that he he takes longer to complete the job and so get paid more. • Inferior labour status, casual nature of employment, lack of job security and poor economic condiAons are the major characterisAcs of Contract labour. While economic factors like cost effecAveness may jusAfy system of Contract labour, consideraAons of social jusAce call for its aboliAon or regulaAon. • In fact, in my experience, I have seen that in most cases, the Owner ends up spending almost as much, at the end of the project as he would have if he had chosen any other type of Contract.
- 9. WHAT IS A COST + CONTRACT? This type of Contract is not popular in India. This is a Contract agreement wherein the Owner agrees to pay the cost of all labor and materials plus an amount for Contractor overhead and profit (usually as a percentage of the labor and material cost). It is like a Labour Contract, but here the Contractor buys the materials and provides the labour and is reimbursed accordingly. This type of Contract is favored where the scope of the work is indeterminate or highly uncertain and the kinds of labor, material and equipment needed are also uncertain. Under this arrangement complete records of all Ame and materials spent by the Contractor on the work must be maintained. This type of Contract can be altered according to the basis on which the addiAonal amount paid to the Contractor is fixed. COST + FIXED % CONTRACT– It is based on a percentage of the cost COST + FIXED FEE CONTRACT – It is based on a fixed sum independent of the final project cost. COST + FIXED FEE BONUS CONTRACT –It is based on a fixed sum of money and a bonus is given if the project finishes below budget, ahead of schedule etc. COST + FIXED FEE WITH SHARING ANY COST SAVINGS CONTRACT– It is based on a fixed sum of money and any cost savings are shared with the Owner and the Contractor. INCENTIVE CONTRACTS – It is based on the Contractor’s performance on the agreed target – budget, schedule and/or quality. WHAT ARE THE ADVANTAGES OF THE COST + CONTRACT? It has the advantages of the Labour Contracts. • In addiAon, since the Contractor gets an addiAonal amount at the end of the project, it provides maximum incenAve for the Contractor to control costs and perform effecAvely and on schedule. WHAT ARE THE DISADVANTAGES OF COST + CONTRACT? • In this Contract also, the Architect does not have a role to play, and so quality of work cannot be checked and controlled by an expert. • Since the Contractor is reimbursed based on the records of the workers he has employed and the materials he has bought, one can never be sure if these records are genuine, as there is no way of verifying them. So, this type of Contract is rarely adopted in India.
- 10. WHAT IS A PROJECT MANAGEMENT CONTRACT? Project Management Contracts are a type of Contract where the Architect agrees to manage the Contract, as defined by the scope of the agreement, for a specified duraAon of Ame for monetary consideraAon. This type of Contract can be short term or long term. WHAT ARE THE ADVANTAGES OF PROJECT MANAGEMENT? • The Clients can focus on their core operaAons while the Architect (Project Manager) looks a[er the management of Projects, people and issues, ensuring that deadlines are met, quality is maintained and costs are controlled. • The Project Manager coordinates with all the agencies, including the Consultants, the Contractor and the Suppliers to ensure that the construcAon of the project goes on smoothly. WHAT ARE THE DISADVANTAGES OF PROJECT MANAGEMENT? Some Clients hesitate to go in for Project Management Contract as they have to pay extra for project management, in addiAon to the fees paid to the Architect. However, there are lots of Clients nowadays, who opt for Project management as it saves them from a lot of headache and they can concentrate on their work as the building comes up. Moreover, in the long run, since the project is completed on Ame, and costs are controlled, the Client actually saves.