Assosa University

College of
Engineering
Department of civil engineering
CONSTRUCTION MANAGEMENT

1
 CHAPTER FOUR
PROCUREMENT AND
CONTRACTUAL MANAGMENT

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 [Link] and Contract
Management Process
 Procurement is the process of acquiring something. It may
be service ,good or work.
 Construction Industry involves procurement and contract
management systems in order to ensure fair competition
and distributions of obligations and rights among
stakeholders.
 Things to be Procured: Goods, Services and Works.
 Procurement of Goods: Physical resources used as
components for undertaking construction works
such as Materials and Equipment are made available
using Procurement of Goods. 3
 Cont.…
 Procurement of Services: often termed as consultancy
services procurement.
Pre-feasibility and feasibility studies, design and
contract administration of projects, Construction
management consultancy services, research or study
based consultancy services, etc.
 Procurement of Works: mean the procurement of
contractors to carryout the actual physical
infrastructures.
 Competition in procurement helps:
The Project Providers’ to get impartial and neutral
4

Opportunity for business.

 Cont.…
An effective and efficient procurement method ensures the
following rights called the "Five Rights“ for the
owner. These are:
 The Right Quality- technical expectation and
economic consideration (price & availability)
 The Right Quantity- not mistakenly small or high
 The Right Cost / Price /,-the cost will not be
extremely high
 The Right Counterpart- the parties are fit to the job
 The Right Time.- 5
 Cont.…
 Procurement and Contract management has a
strong linkage and relationship with
Construction Process and Stakeholders
Management.
 Thedelivery system chosen, the procurement
method adopted and the contract types
decided upon determine the construction process
involved and the relationships and roles of
stakeholders along the process.
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 Procurement and Contract Management involves three major
processes: Contract Planning, Procurement Management and
Contract Management.

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 Contract planning
 This phase often pass through the identification,
feasibility and financing stages of Projects.
 Contract is a customary tool used to implement
formulated projects.
 Contract planning includes decisions on proposed
Delivery Systems, Procurement Methods and
Contract Types to be followed and used together with
its provisions for alterations.

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 Procurement Management
 Itis a process of selecting individuals or
organizations to carry out the intended services
and /or works.
 Itinvolves the preparation of procurement
documents, their invitation and submission of
tender proposals, and Opening and Evaluation
of tenders.
 On the bases of results from tender evaluations,
the procurement team will recommend the best
responsive bidder for Contract Management 9

Phase.
 Contract Management
 is a process of reaching contractual agreement
for implementation, its administration and
finally concluding the contract.
 Itinvolves negotiation based on tender
evaluation recommendations and signing of
contractual agreement followed by its
administration for contractual implementation,
progress tracking, and changes, claim and
disputes administrations.
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 [Link] and Contract Delivery
System

 Isthe way Project Owners, Regulators & Financiers

determine the assignment of responsibilities.
 Project Delivery method is an organizational concept
which assigns specific responsibilities and authorities to
people and organizations and which defines relationship
of the various elements in construction of a project.
 Itis often determined during the basic planning phase of
the construction process.
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 Cont…
 Generally,
there are five types of Procurement
and Contract Delivery systems. These are:
1. Force Account -
2. Design Bid Build (DBB) –
3. Design Build (DB) / Turnkey -
4. Build operate transfer(BOT) -
5. Construction / Facility Management -

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 [Link] account
 When the Project Owners engage themselves to
undertake the project, it is called a force account
delivery system.
 Often
such a system is promoted if the Project
Owners believe that there is a comparative
advantage in Cost, Time and Quality issues.
 When there is a lack of capacity from the private
sector to undertake very large and technologically
new projects, public companies do undertake such
projects using Force account delivery systems.
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 2. Design Bid Build (DBB)
 Afterproject owners did prepare the Basic
Planning that identifies construction project
programs, they call upon the participation of
Design and / or Supervision Consultants either
by tender or by negotiated contracts.
 Thisconsultant will carry out the design together
with the necessary tender documents which will
be the bases for tendering to select contractors.
 These process is called Design - Bid – Build.

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 Cont…
 Designers
have not been required to guarantee results but
rather methods.
 Thatis, they are held accountable on the basis of their
superior knowledge and sufficient competency and ability
to design with a reasonable degree of technical skills.
 Asa result, contracts and courts focused on professional
duty of care, not results or project goals.
 Contractorsare also responsible to construct works with
due care and diligence and complete them in accordance
with the contract, but they are not held responsible for
design deficiencies. 15
 Cont…
 The
following standard forms of DBB Conditions of
Contract are known for use for such delivery system
FIDIC White Book for Consultancy Services (Design
and Supervision)
FIDIC Red Book for Construction Works
Standard Conditions of Contract for Construction of
Civil Works, 1994; MoWUD
FIDIC-(Federation internationale Des Ingenieurs –
Conseils) (The international federation of consulting
engineers) 16
 [Link] Build (DB)/Turnkey
 Design Build or Turnkey by principle reduces
numbers of procurement processes engaged in
the fragmented process and employ only one
procurement process and a single contractor to
provide the entire Construction Implementation
Process (Design and Construction
Implementations).
The complete design and building of the project
is carried out by a single contractor.
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 Cont…
Reduces fragmentation, adversarial relations
and Project Owners' risk.
The disadvantage of this delivery system is loss
of control, cost of tender and cost of risks.
Contractors in order to provide reasonable offer,
their tender cost is higher than in the case for
DBB delivery system. This is because they need
to carryout acceptable design for project cost
offers.
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 Cont…
 World Bank suggested a Two staged procurement
method based first on technical merit and followed by
financial competition .
 The increase in risk transferred onto the contractor will
be counterbalanced by the increase in contract prices
which can be taken to include these costs of risks.
 The following standard form of DB Conditions of
contract is known for use for such delivery systems:
 FIDIC Orange Book

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 [Link] / Build Operate
Transfer
(BOT)
A private company is contracted to
finance, design, construct, operate
for a certain period (usually 10 years)
and transfer.

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 5. Construction / Facility Management
Consultancy

 A construction management consultancy firm is

used to coordinate all activities from concept
inception through acceptance of the facility.
There are two types:
 CM at Risk –where the consultant is responsible for
any risks associated with the project ( increase in cost,
change of ground conditions, etc)
 CM at Free –the client will bear all the risks.
 Facility management –consultancy adds operation
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of facility during operation

 [Link]
 Contract is a written agreement between two or more
parties whereby each party promises to do or not to do
something and agrees to terms (conditions and warranties)
set out in the contract.
 Conditions of contract are terms in which parties in the
contract are governed/ administered with.
 Thatis, it is an administrative law which is the legally
binding part of the contract.
 These terms shall be enforceable by law and incorporates
the rights, obligations and remedial rights of each
contracting parties.
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[Link] of Construction Contracts
 Contractsfor the execution of civil
engineering works are of the following
parts:
a) Lump sum contract
b) Unit rate contract
c) Lump sum and schedule contract
d) Cost plus contract type
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 A. Lump Sum Contract
 In this type of contract, the contractor offers to do the
whole work as shown in drawings and described by
specifications, for a total stipulated sum of money.
 Lump sum contract are typically used for buildings.
 Difficult to make adjustments.
 A lump sum contract is more suitable for works for which
contractors have prior construction experience.
 Not suitable for difficult foundations, excavations of
uncertain character, and projects susceptible to
unpredictable hazard and variations. 24
 B. Unit Price or Bill of Quantity
 Also called a schedule contract, contractor undertakes
the execution of work on an item rate basis and gets
paid for executed amount of work.
 In this case, the construction contract is based on
priced bill of quantities whereby estimated quantities
of certain well defined work items and fixed unit
prices of each of these defined work items are agreed
upon.
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 Cont…
 Contractors submit a price for each item on a unit-price
contract. Unit prices are multiplied by the engineer’s
estimated quantities and totaled.
 The low bidder is the bidder with the low total cost of
all the items.
 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
renegotiation of the unit price.
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 Bill of Quantity
 The unit price contracts are usually presented in the
Bill of Quantity.
 A Bill of Quantity (BOQ ) shows the items present for
the construction work with the associated specification
and the estimated quantity with the Unit price for each
of the items.

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28
C. Lump sum and scheduled contract
 Combines the features of the Lump sum and schedule(unit rate)
contracts.
 Additional items are amounted as per the attached item rate.
D. Cost plus
 Cost plus (cost reimbursable) contracts are used in situations that make
it difficult or impossible for either the owner or the contractor to predict
their costs during the negotiation, bid, and award process.
 Factors - unpredictable and extreme weather conditions,
transportation problems, combat or war,
 Cost plus contracts take many forms, the most common being cost plus
fixed fee and cost plus a percentage of cost. 29
 Cont.…
Cost plus Fixed Fee Contract
 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 will not be tempted to increase
the cost to get more revenue. 30
 Cont.…
Cost plus Percentage of Cost Contract
 The actual cost of construction is reported by
the contractor and is paid to him by the owner
together with a certain percentage as agreed
earlier.
 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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[Link] in Construction
The following are the formal stages for a construction project

[Link] and feasibility 4. Bid Evaluation

[Link] and Design 5. Award of Contract

[Link] Stages [Link] Stage

7. Commissioning and Acceptance

 Provisional Acceptance
 Final Acceptance
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 [Link] and Feasibility
 Owner puts his visions and wishes.
 Selection and Evaluation of Consultants
 Public announcement
 Short listing
 Direct negotiation
 For all the three procedures, the owner has to prepare
the Terms of Reference (TOR) for the consultancy
service that is required to be performed and the
evaluation criteria or guide line set.
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 Cont…

 Term of Reference is a document prepared by

the procuring agency, either public or private, for
the procurement of goods, services and works.
 It indicates what is expected from the
procurement process and states the expected
end result. Such a document shall be prepared
with much care and expertise.
 Term of References can have different forms.
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 Cont…

 General Guideline for Evaluation

◦ The firm’s general experience in the field of
assignment.
◦ The qualification and competence of the
personnel proposed for the assignment
◦ The adequacy of the proposed work plan and
approach in responding to the TOR.

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 [Link] and Design

 Includes
 Carry out detailed technical investigations
 Prepare detailed designs
 Prepare working drawing and specifications
 Prepare final cost estimates (engineering
estimate)
 Prepare construction schedule
 Get the project approved by regulatory bodies
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 [Link]
 At this stage contractors are invited to offer
their best technical and financial offers as
per the conditions and specifications depicted
in the contract documents.
 Usually about 2% of the total price (bid
bond) is required so as not let him disappear.

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 Ways of inviting to Construction
Tendering
 Open tendering: this is a method where the
construction work will be advertised, inviting all
eligible constructors to compete for winning the job.
 Advantages:
 Allows all interested contractors to participate
 Avoids bias
 Ensures good competition
 Prevents formation of rings by contractors
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 Cont…
 Short listing:
 Certain construction firms are invited to
participate in the tendering.
 Negotiated contract:
 A Known contractor is identified and
negotiation is conducted with him.

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4. Bid Evaluation / Evaluation of Tenders

 The following qualities are expected from

contractors:
 Contractor’s reputation in business:
 Contractor’s financial standing:
 Contractor’s potential resources:
 Contractor’s normal conduct of business:
 Contractor’s attitude on contractual claims

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 Cont.…

 The first step in the evaluation of bids is the public

opening and reading of offers in the presence of all
competitors.
 At this stage the names of tenderers, offering bids are
read out as written and recorded,
 Next to this the client/consultant then starts the formal bid
evaluation process.

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 Cont.…

 Over the years the bid evaluation process has been

updated and refined to reflect the changing trend of
the construction industry.
 In general it can be considered to have two
components. Which are:
 Technical Evaluation,
 Financial Evaluation.

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 [Link] of Contract

 A contract will be awarded to the successful

contractor.
 letter of acceptance will be written.
 Write a letter to the contractor to proceed with
the works
 Performance bond: 10% a guarantee that he
will do the job as per agreed.
 Contract is signed between the client and the
winning contractor
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 [Link]
 Hereis where the actual execution of the works takes
place as per scheduled.
 Construction schedule comprises of:
 Performance schedule
 Equipment schedule
 Material delivery schedule
 Manpower schedule
 Financial schedule

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 [Link] and Acceptance

◦ Commissioning is a process where by the consultant makes sure

that all installed mechanical or electrical parts are operational.
Acceptance has two stages:
Provisional acceptance:
◦ The client accepts the completed works on provisional basis for a
period one year which is called the defect liability period.
◦ During this period all payments except the retention money are
paid.
◦ The other option is to release the retention money and require for a
bank or insurance security.
Final acceptance:
◦ The contractor is assumed to have completed his contractual
obligation from this time on. 45
 [Link] document
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.
In other words, a contract is
an agreement that affects the legal
relationship between two or more parties.
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 [Link] of contract
Contractrequires four basic elements
Mutual agreement

• Offer & acceptance

 Legal objectives
Valid consideration
Legal capacity of the parties
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 Cont.…

[Link] agreement
Must have evidence that there was a “meeting
of the minds”
• Offer ‐clear & unambiguous
• Acceptance ‐clearly accepting deal offered,
indication of consent,

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 Cont…

[Link] objective
 The thing being contracted for must be legal
 Most construction contracts are legal, Assumes
correct party issues the contract
 But some contract modifications may be illegal
& thus unenforceable
Verbal modifications
Modifications beyond scope of the party’s
authority 49
 Cont.…
[Link] capacity
– In simplest form, parties must be
 Of age
 Mentally competent
– In construction environment, parties must have
Legal authority to issue and execute contracts
May have to be properly licensed to have
legal capacity 50
 Cont.…
[Link] consideration
 In exchange for the offer of performance, the recipient
must offer something of value
◦ ‐Money(most typical)
◦ ‐promise of future work or revenue
◦ Goods or Services
 – Without consideration a contract is not valid
Note: In most cases a construction contract must be
in written form to be enforceable.
But verbal contract can be enforceable under proper
circumstance. 51
 [Link] Contract Documents
 The tender documents become contract documents if
completed by the prospective contractor, and finally agreed &
signed by the parties.
 The following are typical tender (contract) documents in the
Construction Contract & divided in to legal, commercial &
technical parts.
I. The Legal Part
 The Contract Agreement;
 The (latest) Minutes of Meeting, if any;
 The Letter of Acceptance(Award);
 The Tender ( NB: Including the Addenda to Tender, if any);
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 Cont.…
The Specific Conditions of Contract;
The General Conditions of Contract;
II. The Commercial Part
 The Performance Security bond;
 The Payment Security bond;
 The Advance Payment Guarantee bond;
 Cont.…

 The Bid Security Form;

 The Insurance Forms;
III. The Technical Part
 The Technical Specifications;
The Drawing;
The Bill of Quantities;
 The contract document includes:


Invitation to Tender:
 An initiation letter to the contractor to participate in the tender
Instruction to Tenders: -
 The contractor is given directive of what is required of tenders. It
includes:
 Tendering procedures, bid bond,
 Commercial requirements
 Information in what shall be submitted with the tender (alternative
proposals etc)
 Scope of work
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 Cont.…

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
 Confirms that he will enter into an agreement if awarded
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 Agreement
 The agreement is the document that represents and
reflects the legal contract between the owner and
the contractor.
 Obviously there is also a contract between the owner
and the designer, and between the general contractor
(GC) and the subcontractors, or between the
contractors and the suppliers for those contracts.
 It is simply a letter that constitutes legal evidence that
a contract exists, and forms the basis for its
enforcement.
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 Cont.…
 Conditions of Contract
 The condition of contract is a document that states
the obligations and rights of the parties and detail
the conditions under which the contract is to be
carried out.
 It states to what extent should be the relation
between the engineer, contractor and client.
 It includes General and Supplementary or
Special/Particular conditions of contract.
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 Specifications
 Specification may also be known as Technical provisions.
 They are 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.
 They supplement the drawings and provide information that
cannot be shown in graphic form, or information that is too
lengthy to be placed within the drawings.
 They guide bidders in the preparation of cost proposals as well as
field execution of the work.
 They also guide the contractor through the processes of ordering
materials and construction and installation of the facility.
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 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
 Drawings are the means by which the designer conveys the
physical, quantitative, and visual description of the project
to the contractor.
 The drawings are a two dimensional representation of the
physical structure that meets the objectives of the owner.
 They are also known as plans or blueprints.
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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.
 This formal document changes the original bid documents and
becomes a part of the bid package.
 At the time of bid opening, bidders must in their bid documents,
acknowledge all addenda.
 Technically addenda may be issued to change the bid opening
date, to modify the original design, to delete or add items, or to
correct errors.
 Addenda may not be issued within about five days of bid opening
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unless the bid date is also extended accordingly.
 2.5. Condition of contract
The condition of contract is a document that
states the obligations and rights of the parties
and detail conditions under which the contract is to
be carried out.
 Some of the subjects to be defined in the
conditions of contract are:-
Definitions & interpretations
Duty & responsibilities of the engineers
 Contract period
 Cont.…
 Method of payment and periods
 Retention money
 Payment for materials on site
 Payment for variation orders
 Standard conditions of contract are comprehensive
contractual codes that contain all practices normally
encountered in civil Engineering construction.
 The forms of condition of contract most frequently used
in Ethiopia are
 FIDIC, 1987 standard conditions (harmonized and updated in
2010)
 The standard conditions of contract for Civil Engineering
construction projects of ministry of works and urban
development(MoWUD, 1994).
 PPA (public procurement agency) 2006 and updated in
2011.
 Cont.…
 Thereare several version of the FIDIC conditions of
contract ,among this mostly used are
 Fourth Edition issued in 1987 (the old Redbook) by
the international federation of consulting engineers
recommended for use both on international and
domestic Civil Engineering Contracts.
 FIDIC issued in 1999 the “Conditions of Contract for
Construction of building or engineering works designed
by the employer or his representative, the engineer
(known as the new Red Book) These form contains an
entirely new numbering of clauses.
 Cont.…
 FIDIC Fourth edition 1987 (the old Red book)
 An introduction to the basic provisions or clauses will be discussed
as follows:
 Engineer’s and Engineers representative
 Assignment and sub contracting
 Contract documents
 General obligation
 Materials and workmanship
 Suspension
 Commencement and delays
 Defects Liability
 Cont…
 Alterations, Additions and Omissions
 Procedure for claims
 Contractors Equipment material
 Measurement
 Nominated subcontract
 Certificates and payment
 Cont.…
 Remedies
 Special Risks
 Settlement of disputes
 Notices
 Default of the employer
 Changes in cost & legislation
 Currency and rate of exchange
 Cont.…
General condition of contract: are usually
prepared to set out procedures of general
application which can be used for different types
of projects without any modifications it defines
terms of contract
The rights and responsibilities of the
parties
Responsibilities and power of the
engineer
 Cont.…
 The special conditions: are meant for those particular
contexts and requirements that can not be standardized
and generalized into common conditions of contract.
 Specific contractual requirements linked to the special
circumstances of the country, the Employer, the
Engineer, the sector, the overall project, and the
contract Works are included in special condition of
the contract.
Clauses in both conditions of contract shall be the
same.
 [Link] and Dispute Management
 In the day to day progress of the works misunderstandings
may occur between the parties to a contract.
 These misunderstandings may be a result of interpretation
of contract documents, request for compensations for
damages sustained or request for time extension as a
result of delays caused by one party etc.
 These requests for compensation are called claims.
 In general claims in construction industry are defined as
demands for compensation in terms of money, time
extension or a combination of these that a party rightly
or wrongly believes that he is entitled to.
 Cont.…
 Disputable claim arises when a claim of one party is
not accepted by the other contracting party or when the
decision of a neutral party is not being accepted by any
or all the contracting parties.
 Non-disputable claims are claims acceptable by the
contracting parties
 Major causes of claims
Variations

Defect in contract document

Unforeseen condition

Failure in contract administration

Claims may be for:

An extension in time for completion of the

works, or
Extra payment, or

An extension in time and extra payment,

 Construction Disputes Resolution
Systems
 There are several methods of resolving disputes in the
construction industry. Mainly they are categorized as:
¨ [Link],
¨ [Link]-judgmental (amicable),
¨ [Link],
 Cont.…

 [Link]

 This method is a mechanism of avoiding disputes Rather

than allowing issues to grow until they become real dispute,
 [Link]: It is a process which aims to create a

good principal-contractor relationship from the outset,

which aims on encouraging contracting parties to have
operative team based approach.
 Cont..
 [Link] Review Board (DRB) involves a panel
of expert neutral persons being setup at the
beginning,
 DRB members made an independent assessment and
visits the site regularly during construction & they keep
on advising the parties and solve the dispute among
them.
 Cont.…
[Link] non-judgmental
 The non-judgmental methods bring the disputants to a
round table and mutually resolve their dispute
 [Link] is a common dispute resolution process in which
parties themselves, or their representatives, try to solve the dispute
without involving any neutral third party.
 As negotiation is consensual, it requires willingness by both
parties to attempt resolution by this method.
 [Link] is a dispute resolution mechanism in which a
neutral third party meets with the disputants and facilitates
negotiation to the parties to come to their own solution.
 The mediator controls the processes, but he/she does not impose
any resolution or opinion on the merits of the case,
 Promoting a win/win situation, leaving the disputants themselves
to control the outcome,
 Mediation can occur by contractual agreement or after a dispute
arises,
 Cont.…

 [Link] is a process similar to mediation except that the

mediator can express an opinion on the merits of the case, and is
required to recommend a solution if the parties fail to agree.
 Cont.…

[Link]
 [Link] is a process where a third party who is
independent of parties, but may be selected by them, makes
an award determining the dispute, The award is binding
and can be enforced at courts,
 Cont.…

 [Link] is a dispute resolution method whereby

the disputant initiates legal action against the other party
by going to court,
 It has a win/lose outcome,
 It is usually initiated when the disputants cannot agree
to other forms of dispute resolution.
E nd
of c
ha p
t er f
our !
!!!

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