contract_management.ppt

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Today’s reality…
• Construction is complex and challenging.
• Delays, changes, disputes, accidents cost
more than ever.
• Construction contracts are among the most
complex forms of contract around because
determinations of satisfactory performance of
the obligation is difficult to determine.

3
INTRODUCTION
 A contract is a formalized means of
communication between two parties.
 This facility is used very commonly by the
project manager and owner to control the
delivery of their projects.
 A contract has the added advantage of forcing
owners to define their, requirements, organize
and arrange their thinking, and make a
commitment to their project.

BASIC REASONS FOR A CONTRACT
 BASIC REASONS
1. It defines the work and the owner’s
delegation of responsibilities to the
various parties to complete the work
2. It inherently defines the nature and
extent of risk to various parties.
3. It defines the transfer of financial
incentives to complete the work.

CONTRACT
• THE WORD CONTRACT IS DERIVED
FROM LATIN WORD ‘CONTRACTUM’
WHICH MEANS DRAWN TOGETHER;

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WHAT IS A CONTRACT?
 A contract may be defined as a voluntary
agreement enforceable at law, made between two
or more parties, whereby rights are acquired by
one party to act or forbearances by the other.
According to the Construction Specification
Institute (CSI) Manual of Practice, a contract is “a
promise or a set of promises for the breach of
which the law gives a remedy of the performance
of which the law recognizes a duty” (CSI 2008).
The agreement is reached by the acceptance of
an offer made by one party to do something for
other for a stipulated consideration.

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ELEMENTS OF A CONTRACT
These are the five basic elements of a contract
 OFFER
 CONSIDERATION
 ACCEPTANCE
 LEGAL PURPOSE
 LEGAL CAPACITY

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CONTRACT AGREEMENT
The agreement is designed to formalize
the contract. It brings together all the other
contract documents by reference to them
and is legal instrument verifying the
contract.

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CONTRACT MANAGEMENT
That function of a project which is responsible for
conformation of performance within the
stipulations of contract.
 CONSTRUCTION CONTRACT
A contract under which one party promises to furnish
service & materials to build a structure for another party
who promises to pay for the work performed. There are
two basic types of construction contracts
 Fixed price (or lump sum)
 Cost type

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CONSTRUCTION CONTRACT
The success of a project is often judged on
the construction performance because this
activity is highly visible. The success of a
project is also influenced by;
 The accuracy and details of its documentation
 The understanding between parties and
acceptance of their particular responsibilities
 How professionally and accurately the day to day
administration is handled
 How conflict or contractual problems are
resolved.

Construction Project
Development Phases
Typical construction project development phases
includes;
1. Preliminary planning and feasibility studies
2. Preliminary engineering and design
3. Detailed Engineering design
4. Procurement
5. Construction
6. Operation
7. Demolition

Contracts are used during all phases of construction
projects.
In the first phase , which is the feasibility phase,
contracts are formed between an owner and a
consultant, an engineering firm, or an architectural
firm to perform a feasibility and site selection study.
In the construction phase contract are formed
between an owner and a Contractor firm.

Construction Contract Documents
Characteristics of a “good” contract document:
1. Carefully considered
2. Expressed clearly
3. Time-tested
4. Comprehensive
5. Fair
6. Balanced
7. Applicable to the elements of a construction
projects

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A NORMAL SET OF TENDER DOCUMENTS
1. INSTRUCTIONS TO BIDDERS
2. CONDITIONS OF CONTRACT (GENERAL PART-
I & PARTICULAR PART-II)
3. FORMS OF TENDER & CONTRACT SECURITIES
4. SPECIFICATIONS & SPECIAL PROVISIONS
5. BILLS OF QUANTITIES OR SCHEDULES OF
PRICES
6. DRAWINGS
7. SUPPLEMENTARY DATA

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STAGES OF CONTRACT MANAGEMENT
A. PRE-REQUISITION OF INVITATION TO
TENDER
B. FORMULATION OF TENDER
DOCUMENTS
C. TENDERING/EVALUATION/AWARD
D. CONTRACT ADMINISTRATION

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STAGES OF CONTRACT MANAGEMENT (Contd.)
A - PRE-REQUISITION FOR INVITATION TO TENDER
A-1. COMPLETION OF FEASIBILITY STUDIES
 TECHNICAL FEASIBILITY
 ECONOMIC VIABILITY
 ENVIRONMENTAL IMPACT ASSESSMENT(EIA)
A-2. DETAILED ENGINEERING DESIGN
 DESIGN OF PROJECT COMPONENTS
 FINALIZATION OF TECHNICAL REPORTS
 SPECIFICATIONS
 COMPUTATION OF QUANTITIES
 FORMULATION OF ENGINEER’S ESTIMATE

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A-3. ADMINISTRATIVE APPROVAL
 PREPARATION OF PC-1 PROFORMA
 APPROVAL BY THE GOVERNMENT
A-4. ARRANGEMENT OF FINANCES
 LOCAL & FOREIGN EXCHANG COMPONENTS
A-5. LAND ACQUISTION
A-6. PREQUALIFICATION OF CONTRACTORS

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B. FORMULATION OF TENDER DOCUMENTS
a. Specifications
b. Detailed Design
c. Tender Drawings
d. Estimation of Quantities
e. Decision About Specific Provisions
f. Decision About format-ADB/IDA
g. Conditions of Contract - Part 1 & II.

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TENDER DOCUMENTS
 General Conditions of Contract
 These define the legal rights and obligations of the
parties and may be described as the regulations under
which the contract will be performed.
 Nominates an independent third person called the
“Engineer” who is responsible for administering the
contract
 General conditions vary from country to country and
organization to organization
 Conditions of Contract internationally
Federation Internationale des Ingenieurs- Counseils
(FIDIC), Switzerland, 1992.
 Engineering Council

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Tender Documents (Contd.)
 Special Conditions of Contract
 These are additions to, deletions from or amendments to
the General Conditions to make them project or party
specific.
 Specifications
 Give full description of work to be carried out
 Detail the materials and workmanship that the Contractor
is to utilize in the project
 Define the quality and standards of workmanship required
 Act as a legal evidence in the event of litigation

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Tender Documents (Contd.)
 Drawings
 Bill of Quantities
 Quantities are estimates only and should have
limits of accuracy
 Tender
 Formal offer to undertake the project. Price,
conditions and method statements are detailed.
It should be noted that all documents submitted
with a tender form part of the tender
 Letter of Acceptance
 Relevant Correspondence
 This often include points of clarification of either
the Tender Documents or a tender.

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INSTRUCTIONS TO BIDDERS
This Contains Information's And Instructions Which A
Prospective Contractor Is Required To Know Or Abide
By For Participation In Tendering:-
 Name Of Work To Be Constructed
 Source Of Funds For The Works
 Eligibility & Qualification Requirement
 Firms And Persons Authorized To Submit Tender
 Cost On Tendering Not Reimbursable
 What Makes A Tender Non-responsive
 Holding Of Pre-tender Conference, If Required

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Stages of Contract Management (Contd.)
C. TENDERING/EVALUATION
C-1.Tendering
• Tendering Process
• Packaging
• LCB/ICB Tendering
• Types of Tender

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Stages of Contract Management (Contd.)
C-2. Evaluation
• Tender Opening
• Preliminary Evaluation
• Detailed Evaluation
• Procedure for Preference

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C-2 TENDER EVALUATION
C-2.1 AT TENDER OPENING
• IS TENDER SECURITY ACCOMPANIED WITH TENDER?
• IS TENDER SIGNED, STAMPED & ACCOMPANIED BY?
• POWER OF ATTORNEY
• JOINT VENTURE AGREEMENT
• DISCOUNT (IF ANY)?

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TENDER EVALUATION (Contd.)
 GENERAL CONFORMITY OF:
 Legal & Contractual Evaluation
 Cost & Financial Evaluation
 Technical Evaluation
 Deviations:
• Major
• Minor

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C-2.2 PRELIMINARY EXAMINATION OF ALL TENDERS
 ELIGIBILITY & QUALIFICATION
 ARITHMETIC CHECK
 CURRENCY PROPORTION
 ADJUSTMENT ON ACCOUNT OF FOREIGN
COMPONENT?

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C-3. Detailed Evaluation Of Substantially Responsive
Tenders Only
 Detailed Scrutiny Of Minor Deviations:
 LEGAL & CONTRACTUAL ASPECTS
 TECHNICAL ASPECTS
 COST & FINANCIAL EVALUATION
 Clarifications (If Required)
 Loadings Of Tenders For Minor Deviations

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LEGAL & CONTRACTUAL EVALUATION
• Evaluation for Responsiveness
• Evaluation of legal & Contractual
Aspects
• Comparison with Pre-qualification
Status

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Cost & Financial Evaluation
• Correction of Errors
• Adjustment of Foreign Currency Components
• Interest Rate for Delayed Payments
• Price Adjustments
• Evaluated Tender Price
• Balanced Tender

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TECHNICAL EVALUATION
• Program of Work
• Key Personnel
• Mobilization
• Method of Construction
• Equipment
• Dewatering
• Sub-Contractors
• Materials

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 RANKING OF SUBSTANTIALLY RESPONSIVE
TENDERS
 COMPARISON OF TENDERS AFTER ALLOWING
DOMESTIC PREFERENCE
 ISSUANCE OF LOA
 PERFORMANCE SECURITY

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• Design phase
• Preparation of Pre-qualification Documents
• Advertisement
• Pre-qualification Criteria
• Pre-qualification Finalization
• List of pre-qualified Contractors
• Invitation to Pre-qualified Bidders
• Instructions to Bidders
• Bid submission Process
• Pre-bid meeting
• Evaluation of bids
• Lowest Evaluated Bid
• Letter of Acceptance
• Submission of Performance Bond
• Signing of Contract Agreement
• Letter of Commencement/ Notice to proceed
• Financial Assistance in form of Mobilization Advance
OVERALL FLOW OF CONTRACT PROCESS

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Bidder Conferences/Pre-Bid Meetings
Bidder conferences (sometimes called contractor
conferences, vendor conferences, and pre-bid
conferences) are meetings with all prospective sellers
and buyers prior to submittal of a bid or proposal) are
meetings with all prospective sellers have a clear and
common understanding of the procurement (both
technical and contractual requirements), and that no
bidder receive preferential treatment.
• Responses to questions can be incorporated in to the
procurement documents as amendments.
• To be fair, buyers must take great care to ensure that
all prospective sellers hear every question from any
individual prospective seller and every answer from the
buyer.

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TENDER SECURITY/BID BOND
• Bid Bonds are used to protect owners when the
contractor that is lowest, responsible ,
responsive bidder on a competitively bid project
refuses to enter into the contract for the project.
• Amount of security shall be in form of Cash
Deposit, Certified Cheque, Bank Draft, Letter of
Credit, Guarantee from a Scheduled Bank in
India or Foreign Bank Acceptable to Employer.
• If Tender is not accompanied by an acceptable
Tender Security (1-3% of Est. Cost, whereas
3% for smaller Contracts). It will be rejected
being non-responsive and having major
deviation.

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CONTRACT ADMINISTRATION
• Performance Bond
• Financial Assistance/Mobilization Advance
• Appointment of the Engineer and Authority
• Priority of Contract Documents
• Retention Money
• Insurances and risk management
• Clause 14 Work Program
• Liquidated Damages
• Bonus
• Variation Orders
• Claims
• Dispute Resolution
• Price adjustment Clause
• Taking over Certificate
• Defect Liability Certificate

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Performance Bonds
Performance bonds are guarantees by the surety that a
contractor will perform the work as required by all of the
conditions and terms of the contract
The Performance Security shall be of an amount equal to
10% of the Contract Price stated in the Letter of Acceptance.
Such Security shall, at the option of the bidder, be in the form
of either (a) bank guarantee from any Scheduled Bank in
India or (b) bank guarantee from a bank located outside India
duly counter-guaranteed by a Scheduled Bank in India or (c)
an insurance company having at least AA rating from
PACRA/JCR.
"Commencement Date" means the date upon which the Contractor
receives the notice to commence issued by the Engineer
pursuant to Clause 41.

“The Engineer" means the person appointed by the Employer to
act as Engineer for the purposes of the Contract. The
Engineer shall obtain the specific approval of the Employer
before carrying out his duties in accordance with the
Clauses mentioned in document e.g.:
• Consenting to the sub-letting of any part of the Works
under Sub-Clause 4.1 “Subcontracting”.
"Letter of Acceptance" means the formal acceptance by the
Employer of the Tender.

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Liquidated Damages
Rather Than have a contractor be in breach of
contract if he or she is not able to complete a
project as scheduled, liquidated damages
provides compensation to owners when this
situation occurs at the end of a construction
project.
Fixed per day maximum amount 10% of contract
price

• Insurance of Works and Contractor's Equipment
• Damage to Persons and Property
• Insurance Against Accident to Workmen
The Contractor shall, except if and so far as the Contract
provides otherwise, indemnify the Employer against all
losses and claims in respect of:
(a) death of or injury to any person, or
(b) loss of or damage to any property (other than the
Works),
• Third Party Insurance (including Employer's
Property)

Changes in plans and specs
• clarification, correction, modifications prior to bid are referred
to as “addenda”
• owner must maintain a system of distributing and
acknowledging receipt of addendum
• plan and spec changes after award are referred to as
“revisions”, and generally require issuance of a Variation
order(s)

51.1Variations
• The Engineer shall make any variation of the form, qualify or
quantity of the Works or any part thereof that may, in his opinion,
be necessary and for that purpose, or if for any other reason it
shall, in his opinion, be appropriate, he shall have the authority to
instruct the Contractor to do and the Contractor shall do any of
the following:
(a) increase or decrease the quantity of any work included in
the Contract,
(b) omit any such work (but not if the omitted work is to be
carried out by the Employer or by another contractor),
(c) change the character or quality or kind of any such work,
(d) change the levels, lines, position and dimensions of any part
of the Works,
(e) execute additional work of any kind necessary for the
completion of the Works, or
(f) change any specified sequence or timing of construction of
any part of the Works.

Variations Orders
• a written order issued by the owner to the contractor for a
change to the contract within the scope of work
• change orders are written for:
• extra work
• increasing or decreasing the contract quantities
• alterations
• change orders state the basis and amount of payment and
time extensions

Ability to influence cost over time
• Greatest potential to influence cost is during
the pre-construction design phase
• Claims avoidance begins during pre-
construction
• Design phase
• Intensive preparation and review of contract documents
• Careful consideration of methods and equipment =
consider overall constructability

Extension of Time for Completion
In the event of:
(a) the amount or nature of extra or additional work,
(b) any cause of delay referred to in these Conditions,
(c) exceptionally adverse climatic conditions,
(d) any delay, impediment or prevention by the
Employer, or
(e) other special circumstances which may occur, other
than through a default of or breach of contract by the
Contractor or for which he is responsible,

Taking-Over Certificate
When the whole of the Works have been
substantially completed and have satisfactorily
passed any Tests on Completion prescribed by the
Contract, the Contractor may give a notice to that
effect to the Engineer with a copy to the Employer,
accompanied by a written undertaking to finish with
due expedition any outstanding work during the
Defects Liability Period.

Defects Liability Certificate
The Contract shall not be considered as completed until a Defects
Liability Certificate shall have been signed by the Engineer and
delivered to the Employer, with a copy to the Contractor, stating the
date on which the Contractor shall have completed his obligations to
execute and complete the Works and remedy any defects therein to
the Engineer's satisfaction.
The Defects Liability Certificate shall be given by the Engineer within
28 days after the expiration of the Defects Liability Period, or, if
different defects liability periods shall become applicable to different
Sections or parts of the Permanent Works, the expiration of the latest
such period, or as soon thereafter as any works instructed, pursuant
to Clause 49 and 50, have been completed to the satisfaction of the
Engineer. Provided that the issue of the Defects Liability Certificate
shall not be a condition precedent to payment to the Contractor of the
second portion of the Retention Money in accordance with the
conditions set out in Sub-Clause 60.3.

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ADMINISTER PROCUREMENT:
Claims Administration
Contested changes and potential constructive changes are those
requested changes where the buyer and seller cannot reach an
agreement on compensation for the change, or cannot agree that a
change has occurred.
These contested changes are variously called claims, disputes, or
appeals.
Claims are documented, processed, monitored, and managed
throughout the contract life cycle, usually in accordance with the
terms of the contract.
If the parties themselves do not resolve a claim, it may have to be
handled in accordance with alternative dispute resolution (ADR)
typically following procedures established in the Contract.
Settlement of all claims and dispute through negotiation is the
preferred method.

CONTRACT CLAIMS
• Contract Claims could occur at any stage in the execution of a
project.
• Typical causes of claims include:
• Differing site conditions
• Delays
• Design error or changes
• Interpretation differences
• Acceleration or suspension of work
• Additional work
• Deleted work
• Construction failures

Claims Avoidance
• producing comprehensive, accurate, contract
documents
• constructability review
• clear understanding of contract requirements prior to
bidding
• having good administrative procedures in place
• open and honest communication
• timely troubleshooting
• Claims avoidance begins in the pre-
construction phase

Procedure for Claims
53.1Notice of Claims
Notwithstanding any other provision of the Contract, if the Contractor intends to claim any additional
payment pursuant to any Clause of these Conditions or otherwise, he shall give notice of his intention to the
Engineer with a copy to the Employer, within 28 days after the event giving rise to the claim has first arisen.
53.2Contemporary Records
• Upon the happening of the event referred to in Sub-Clause 53.1, the Contractor shall keep such
contemporary records as may reasonably be necessary to support any claim he may subsequently wish to
make. Without necessarily admitting the Employer's liability, the Engineer shall, on receipt of a notice under
Sub-Clause 53.1, inspect such contemporary records and may instruct the Contractor to keep any further
contemporary records as are reasonable and may be material to the claim of which notice has been given.
The Contractor shall permit the Engineer to inspect all records kept pursuant to this Sub-Clause and shall
supply him with copies thereof as and when the Engineer so instructs.
53.3Substantiation of Claims
• Within 28 days, or such other reasonable time as may be agreed by the Engineer, of giving notice under
Sub-Clause 53.1, the Contractor shall send to the Engineer an account giving detailed particulars of the
amount claimed and the grounds upon which the claim is based. Where the event giving rise to the claim
has a continuing effect, such account shall be considered to be an interim account and the Contractor shall,
at such intervals as the Engineer may reasonably require, send further interim accounts giving the
accumulated amount of the claim and any further grounds upon which it is based. In cases where interim
accounts are sent to the Engineer, the Contractor shall send a final account within 28 days of the end of the
effects resulting from the event. The Contractor shall, if required by the Engineer so to do, copy to the
Employer all accounts sent to the Engineer pursuant to this Sub-Clause.

Disputes
Under Construction—Problems & Disputes

Settlement of Disputes
67.1 Engineer's Decision
If a dispute of any kind whatsoever arises between the Employer and the Contractor in connection
with, or arising out of, the Contract or the execution of the Works, whether during the execution of the
Works or after their completion and whether before or after repudiation or other termination of the
Contract, including any dispute as to any opinion, instruction, determination, certificate or valuation of
the Engineer, the matter in dispute shall, in the first place, be referred in writing to the Engineer, with
a copy to the other party. Such reference shall state that it is made pursuant to this Clause. No later
than the eighty-fourth day after the day on which he received such reference the Engineer shall give
notice of his decision to the Employer and the Contractor. Such decision shall state that it is made
pursuant to this Clause.
Unless the Contract has already been repudiated or terminated, the Contractor shall, in every case,
continue to proceed with the Works with all due diligence and the Contractor and the Employer shall
give effect forthwith to every such decision of the Engineer unless and until the same shall be
revised, as hereinafter provided, in an amicable settlement or an arbitral award.
• Amicable Settlement
Where notice of intention to commence arbitration as to a dispute has been given in accordance with
Sub-Clause 67.1, the parties shall attempt to settle such dispute amicably before the commencement
of arbitration. Provided that, unless the parties otherwise agree, arbitration may be commenced on or
after the fifty-sixth day after the day on which notice of intention to commence arbitration of such
dispute was given, even if no attempt at amicable settlement thereof has been made

PRICE ADJUSTMENT IN
CONSTRUCTION CONTRACTS

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INCREASE OR DECREASE OF COST
• It is not in the best interest of the Employer
to ask tenderers to quote firm prices with
no provision of adjustments, especially for
long-term contracts.
• In bidding documents having provisions for
price adjustment, the Employer is expected
to receive more competitive offers from
reputable parties and will have to meet the
net variations in cost as may actually
occur.

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S.
No.
MATERIAL MARKET
PRICE
MARKET PRICE Difference
Dec-07/
Jan 08
31st
May-08 %
1 Cement 240 300 25.00
2 Reinforcement 47000 84000 78.72
3 Diesel 37.8 50.21 32.83
4 Bitumen 36395 48195 32.42
5
Labour
(unskilled) 250 300 20.00

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PRICE INCREASE
DEC 07/Jan 08
to
31st May 2008
March 2008
to
31st May 2008
39.40% 21.29%

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Why a formula?
• Make price adjustment (as a reasonable
compensation against variation in prices
of the selected materials and inputs) as
close as possible to the actual;
• Set out a simple procedure;
• Minimize ambiguities; and
• Make the contract more equitable.

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1.COMPLETION PERIOD OF THE
CONTRACT
Only contracts having duration of six months
or more should be liable to price adjustment.
2.COST OF THE CONTRACT
The Price Adjustment shall be applicable
only for the contracts having contract price
exceeding financial limit of PEC Contractors
Registration Category C-5 (Rs. 30 Million).

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Particular Conditions of Contract Part-II
Clause 70- Increase or Decrease of Cost
Adjustment Formula
Pn= A+ b*Ln/Lo+ c*Fn/Fo + d*Cn/Co+ e*Sn/So+
f*En/Eo + g*Mn/Mo ……..

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APPENDIX-C
Cost
Element
Description Base
Cost
Weighta
ges
Applicable index
(i) Fixed Portion - 0.35
(ii) Labour Government of India (GP)
Federal Bureau of Statistics
(FBS) Monthly Statistical
Bulletin.
(iii) Cement- in bag FBS
(iv) Reinforcement
Steel
India Steel Mills/ FBS
(v) HSD OIL PSU
(vi) Bricks FBS
(vii) Bitumen National Refinery
Total 1.0

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3. DECISION ABOUT ELEMENTS TO BE COVERED
4. WEIGHTAGE OF EACH COST ELEMENT
5. SELECTION OF SOURCE
In case the price adjustable elements are not
covered in the Federal Bureau of Statistics, the Base
price and the source thereof shall be mentioned by
the Employer.

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6. BASE COST PRICES
The base cost prices shall be those applying 28 days
prior to the latest day for submission of bids.

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