Construction Contracts and
Other Agreements
Professor Joseph McCahery
Lecture 4
1. Traditional
(Transactional) View
Construction Contracts
Designed with specific performance
criteria for fixed or predictable price and
completed on specific date.
Contract provides all engineering and
construction work,procurement of
equipment and supplies, and start-up and
testing.
Construction Practice
.Key tension between contractor and company--turnkey nature of construction contract. Problem
of delivery on fixed price and date, warranted to perform at certain level and difficulty of
predicting events that could cause delay, and to ensure that there are sufficient contractual
excuses to satisfy performance guarantees. Increased construction costs could result in higher
risk and debt charges.
An example
National Construction Company responds to Wilson Properties’
RFP for a new office building, negotiates the details (offer and
acceptance), and enters into a construction contract, agreeing
to supply and construct the office building (something of value
for Wilson Properties) in accordance with the drawings and
specifications contained in the RFP.
National Construction Company also agrees to perform the
work within a fixed time period and for a certain fixed price
(something of value for National Construction Company).
National Construction Company is to receive a downpayment
from Wilson Properties prior to starting the work, and will
receive the balance upon satisfactorily completing the building.
Article 1 - Scope of Work and Price
National Construction Company agrees to supply and build
a one-story office building on a site provided by Wilson
Properties strictly in accordance with the attached Plans
and Specifications for a fixed, lump-sum price of $250,000.
Article 2 - Schedule
National Construction Company agrees to complete the
one-story office building within one year from the date of
this Contract.
Article 3 - Terms of Payment
Wilson Properties agrees to pay National Construction
Company $50,000 as downpayment immediately upon the
signing of this Contract, and the balance of $200,000
immediately upon the completion of the one-story office
Article 1 - Scope of Work and Price
National Construction Company agrees to supply and build a one-story office building on
a site provided by Wilson Properties strictly in accordance with the attached Plans and
Specifications for a fixed, lump-sum price of $250,000.
Article 2 - Schedule
National Construction Company agrees to complete the one-story office building within
one year from the date of this Contract.
Article 3 - Terms of Payment
Wilson Properties agrees to pay National Construction Company $50,000 as
downpayment immediately upon the signing of this Contract, and the balance of $200,000
immediately upon the completion of the one-story office building.
Article 4 - Insurance
National Construction Company will provide statutory Workers’ Compensation insurance
in accordance with state laws, Comprehensive General Liability insurance in the amount
of $1,000,000, and Automobile insurance in the amount of $300,000.
The steps to a
contract
• Receive an inquiry or Request For Proposal
(RFP) from the owner (Expression of Interest /
Request For Qualification).
• Prepare a proposal for the work and submit it to
the owner.
• Letter of Intent
• Negotiate all the details of the contract with the
owner.
• Sign the contract.
The Bid Process - the
good
• The priority is a competitive bid process
- market conditions is a major
consideration
• Competition theory - competition
stimulates innovation, new technology,
efficiency at the enterprise &
microeconomic level, lower prices
(value for money)
The Bid Process - the
bad
• The winner’s curse
• Ex-post renegotiations and ex-ante
biased incentives
Form of contracts
• Preamble
• Parties
• Recitals
• Definitions
• General contract & the commercial terms & conditions
• Scope of work
• Terms of payment & cash flow
• The schedule, etc.
• Special terms & conditions
• Attachments incorporated by reference
• Signature block
• Order of precedence
Construction Contract Commercial Terms and
Conditions
Low probability of High probability of
potential liability potential liability
ADMINISTRATIVE
LIABILITY TERMS
TERMS
Standards and Codes Scope of work
Safety Terms of payment
First aid Schedule
Representatives Performance assurances
Cooperation with others Insurance
Expediting Indemnity
Equal opportunity Changes
Progress reporting Disputes
Communication Warranty
Quality assurance Termination/suspension
Contractor’s representative Force majeure
Cleanup Damages
Article 25 - Performance Guaranty
Contractor shall provide a guaranty of his obligations
under the Contract in the form of a Performance True Performance Guaranties
Guaranty provided by a surety company acceptable to
Owner.
Article 25 - Performance Guaranty
Contractor shall provide a Performance Guaranty in the
form of an irrevocable bank guaranty in the amount of
10% of the Contract Price payable on the first demand of
Owner to guarantee the performance of Contractor ’ s
obligations under the Contract. On-Demand Bonds
Article 25 - Performance Guaranty
Contractor shall provide a guaranty of his performance
under the Contract by providing a Performance Bond in
the amount of 10% of the Contract Price and in the form
of an irrevocable guaranty payable on Owner ’ s first
written demand.
Article 25 - Performance Guaranty Standby Letters of Credit
Contractor shall provide a guaranty of his performance
under the Contract by providing a Performance Bond in
the form of a standby letter of credit for the full value of
the Contract Price.
Parent Company Guaranties
Article 25 - Performance Guaranty
Contractor shall provide a guaranty of his performance
under the Contract by providing a Parent Company
Guaranty.
Broad form indemnity: The contractor assumes the
potential financial liability for claims arising out of any
amount of the owner’s negligence, including the owner’s
sole negligence
Intermediate form indemnity: The contractor assumes the
potential financial liability for claims arising out of any
amount of the owner’s negligence, except those claims
attributable to the owner’s sole negligence
Limited form indemnity: The contractor assumes the
potential financial liability for claims arising only out of his
negligence. The contractor does not assume the financial
liability for claims arising out of any amount of the owner’s
negligence.
Example
Article 20 - Indemnity
20.1 Contractor shall defend, indemnify, and save from all claims for injuries to, or death
of, any and all persons, and for loss of or damage to property arising under or by reason
of this Contract, except claims resulting from the sole negligence of Owner, his
employees, his subcontractors, agents, or representatives.
Example
Article 20 - Indemnity
20.1 Contractor shall defend, indemnify, and save from all claims only to the extent a
claim is caused by the negligence of Contractor and only for injuries to, or death of,
any and all persons, and for loss of or damage to existing property occurring only
during the on-site performance of Contractor’s work under this contract and only
while Contractor is physically present on the job site. arising under or by reason of
this Contract, except claims resulting from the sole negligence of Owner, his employees,
his subcontractors, agents, or representatives.
Article 21 - Limitation of Liability (new clause)
Contractor’s total liability under this Contract, including any defense costs on
behalf of Owner, shall not exceed US$1,000,000 in the aggregate.
Knock-for-Knock
Article 20 - Indemnity
20.1 Owner agrees to indemnify and hold harmless Contractor from any claims,
regardless of how caused and regardless of Contractor’s negligence, that arise out of
personal injury to or death of Owner’s employees and loss of or damage to Owner’s
property during the on-site performance of the Work.
20.2 Contractor agrees to indemnify and hold harmless Owner from any claims,
regardless of how caused and regardless of Owner’s negligence, that arise out of
personal injury to or death of Contractor ’ s employees and loss of or damage to
Contractor’s property during the on-site performance of the Work.
Example
Article 22 - Changes
22.1 Owner may order extra work or changes to the Work by altering, adding to, or deducting from the Work.
Any extra work or changes ordered by Owner shall be executed by Subcontractor in accordance with all
terms and conditions of this Contract.
22.2 Any claim by Contractor for an adjustment in the Contract Price or the Contract Completion Schedule
under this Article must be submitted to Owner in writing within seven (7) calendar days from the date any
extra work or a change is ordered.
22.3 In the event Owner and Contractor fail to agree upon the extent or amount of an adjustment to the
Contract Price or Contract Completion Schedule, Contractor shall nevertheless proceed with the completion
of the extra work or change.
22.4 If Contractor does not notify Owner of any increase in Contractor’s cost or time within the seven (7)
calendar days, it shall be presumed by Owner that there is no increase in the Contract Price or the Contract
Completion Schedule and Contractor shall forfeit its rights to any increases.
22.5 Owner shall have the authority to order minor changes in the Work that do not involve extra costs, but
otherwise, no extra work or changes shall be done without a written order from Owner, except in an
emergency endangering life or property.
22.6 For all extra work or changes, the amount of the Contract Price shall be adjusted as may be agreed
upon between the parties.
Example
Article 22 - Changes
22.1 Owner may order extra work or changes to the Work by altering, adding to, or deducting from the Work.
Any extra work or changes ordered by Owner shall be executed by Subcontractor in accordance with all
terms and conditions of this Contract.
22.2 Any claim by Contractor for an adjustment in the Contract Price or the Contract Completion Schedule
under this Article must be submitted to Owner in writing within seven (7) fourteen (14) calendar days from
the date any extra work or a change is ordered.
22.3 In the event Owner and Contractor fail to shall agree in writing upon the extent or amount of an
adjustment to the Contract Price or Contract Completion Schedule prior to the work being performed by
Contractor., Contractor shall nevertheless proceed with the completion of the extra work or change.
22.4 If Contractor does not notify Owner of any increase in Contractor’s cost or time within the seven (7)
fourteen (14) calendar days, it shall be presumed by Owner that there is no increase in the Contract Price
or the Contract Completion Schedule and Contractor shall forfeit its rights to any increases.
22.5 Owner shall have the authority to order minor changes in the Work that do not involve extra costs, but
otherwise, no No extra work or changes shall be done without a written order from Owner, except in an
emergency endangering life or property.
22.6 For all extra work or changes, the amount of the Contract Price and Contract Completion Schedule
shall be adjusted as may be agreed upon between the parties in accordance with the provisions of
Article 22.3.
Enforcement
• Legally enforceable
• Breach of contract/material breach of
contract
• Reputation issues (also if non-legally
enforceable)
• The contract deals with the effects if they
happen
• Managing risk (is avoiding litigation,
penalties, etc.)
[Link] Forms
Country National International (FIDIC)
Argentina - X
Australia Standards Australia X (international parties)
Austria ÖNORMEN X (international parties)
Belgium - X
Brazil - X
Canadian Construction Documents
Canada Committee X (international parties)
Chile - -
China GF-99-0201 X
Finland YSE 1998 X (international parties)
France afnor X (international parties)
Germany VOB/B X (international parties)
Ghana - X
India X
Japan MLIT X (international parties)
Mexico - X (international parties)
Country National International (FIDIC)
Netherlands UAV 1989 X (international parties)
Norway NS X (international parties)
Poland - X
Qatar Qatar Petroleum X (international parties)
Russia - X
Singapore Real Estate Developers’ Association X (international parties)
Spain - X
Sweden AB X (international parties)
Switzerland SIA X (international parties)
Turkey General Specification of Public Works X (international parties)
Ukraine Model Construction Contract X (international parties)
United Arab Emirates X
United Kingdom JCT/NEC3
United States AIA/AGC
Institutional Managerial Contracting
Governance
Support Strategy Approach
Transfer of risk
Price in advance
Legal rules
Profit at risk
Penalties
Formal
Defined scope
documents Mechanism
Classical Employer’s team
design and
Contracting Skill and Care
Self-enforceable partner selection
Compliance/reme
dies driven
Regulative
Silos
adjudication
Avoid vague
terms
Governance Institutional Support Managerial Strategy Contracting Approach
Transfer of risk
Price in advance
Legal rules
Profit at risk
Penalties
Formal documents
Defined scope
Mechanism design
Classical Contracting Employer’s team
Self-enforceable and partner selection
Skill and Care
Compliance/remedies
Regulative
driven
adjudication
Silos
Avoid vague terms
Scope and goals
Change management
Communication and
Incomplete contracts
reporting
(complex / costly) Mechanism design
Neoclassical Responsibilities
and partner selection
Measurement and
Arbitration of disputes
evaluation
Price/Price changes
Dispute resolution
Parties in a FIDIC contract
Employer Administers on
behalf of
employer
Dispute Adjudication Contract
Engineer
Board
Contractor
Sub-Contractor
Clauses
12.1 - Works to be measured
12.2 - Method of Measurement
Measurement and evaluation 12.3 - Evaluation
12.4 - Omissions
13.1 - Right to vary
Variations and adjustments 13.2 - Value engineering
13.3 - Variation procedure
Contract price and payments
Claims, dispute and
arbitration
Typical Sequence of Dispute Events Envisaged in Clause 20 of the
FIDIC Contracts
20.4 A Party 20.4 A Party may 20.6 Parties
20.2 Parties refers a dispute issue a “notice of initiate
appoint to the DAB dissatisfaction” arbitration
the DAB
8.1 Com-
mencement
Date of the Project
Parties present
Amicable Settlement
submissions to the DAB
< 28d < 84d < 28d < 56d
DAB gives its decision
Arbitrator(s) appointed
Dispute Adjudication
Dispute Review Board Board
Source: Michael Polkinghorne (2007)
Alternative Dispute
Country Arbitration or Litigation Arbitration
Resolution
Argentina Litigation
Australia No preference ACICA/ICC
Mediation (not for
Belgium No preference CEPANI/ICC
public tenders)
France Litigation ICC
Litigation (national) Pre-judicial dispute
Germany Arbitration (international) LCIA/ICC
resolution
Construction Work
Japan No preference JCAA/ICC
Disputes Committees
Construction Industry
Netherlands Arbitration ICC
Arbistration Council
United Arab Emirates Arbitration LCIA/ICC
28-day adjudication
United Kingdom Arbitration LCIA/ICC
process
Dispute Review
United States No preference ICC
Boards
III. Relational View
Procurement Options
Public Private
Conventional Partnership Full
Procurement (PPP) Privatization
- Design, Build,
The Procurement of Finance and Transfer Publicly regulated but
assets by the public (DBFT) privately owned in
sector using -Design, Build, perpetuity
conventional funding Finance, Operate and
Transfer (DBFOT)
Public Private
Partnerships
BD, BT, PFI
Work &
BTO, DBO, Private
Service Partnering
BOT , Finance
Contracts
BOOT Initiative
Relational
