Contract & Contracting:

Contracts are Agreements which are enforceable by law & as

such having been made by free consent of parties, by persons

competent to contract, for lawful consideration, & lawful object,

& which are not expressly declared to be void by any statute.

Therefore:
All Agreements are Contracts, if

They are made by the free consent of parties

Competent to contract,
For a lawful consideration
With a lawful object
&
Are not expressly declared to be void by law.
 If the agreement is entered into by:

Minors
Persons of unsound mind,
&

When the consent of persons is obtained for agreement by

coercion, excessive influence,

Then, such agreements are not contracts

Essentials of Contract validity

9The parties to the contract must be competent & legally

capable of playing their intended part;

9The subject matter of the contract must be lawful &

definite in respect of requirements & duties of each party

9Proposal & acceptance (Consideration)

9Free consent of parties to the contract

Contracting:
When one person signifies to another his willingness to do or to

obtain from doing anything, with a view to obtaining the assent

of the other to such act, he is said to make a “Proposal”.

9 When the person to whom the proposal is made

signifies his assent thereto, the proposal is said to be

accepted.

9 A proposal, when accepted, becomes A “Promise”.

9 The person making the promise is called the “Promisor”

9 The person accepting the proposal is called the

“Promisee”.

9 Every promise & every set of promises, forming the

consideration for each other, is an “Agreement”.

9 An Agreement enforceable by law is a “Contract”.

 Construction Contracts

9 It is a common practice in construction for a contract

to be formalized by a written contract document.

Contd.

9 The basic purpose of a contract document is to define

exactly & explicitly the rights & obligations of each party
thereof.

9 It describes precisely the legal, financial, & technical

provisions of the work.
Contd.

9 A contract determines the expected actions from the

respective contracting parties.

9 The contracting parties are bound to each other for a

certain period of time by a unique & exclusive relationship

they have created for their mutual benefit.

It usually contains clauses that specify:

9 Completion time of the project,

9 Liquidated damages,

9 Particulars concerning payments, Scope & nature

of the work to be done etc.

Contd.

9 The contract document is signed by both parties (owner &

contractor).

9 It is an agreement which is reached by the acceptance of

an offer made by one party to do something for the other

for a certain consideration.

9 In engineering contracts, the offer usually takes the form

of a proposal (also called a bid or tender) by a contractor

to do the work specified by the owner for a monitory

consideration, under certain conditions laid down by the

owner.
Contd…

The elements of a contract, therefore, are the:

9 Offer;

9 Monitory consideration &

9 Acceptance;
9 The complex nature of construction dictates a form of

contract that is Relatively lengthy, Detailed & Binding

document in order to describe precisely the legal,

financial, & technical provisions & requirements.

Contd…

9 Construction contracts are substantially different from the

usual commercial variety.

9 The product concerned is not a standard one but a

structure that is unique in its nature & its realization also

needs A considerable Time, Cost & Hazard.

Contd…

9 The contract document comprises the full package tender

document including any addenda issued thereto with the

technical & financial offer of the successful bidder.

(Agreement, Letter of acceptance, contractors bid, SCC, GCC, Spec,

Drawing, BoQ, etc..)

Contd…

9 Here, both parties put there respective signature & seal on

the agreement form which was included in the tender as

contractual information.
Like any other groups of contract, construction contracts, are
also supposed to fulfill the following primary elements:

9 Mutual Agreement & Genuine Intentions

9 Offer &Acceptance
9 Capacity to contract
9 Consideration in a contract
9 Lawful object
9 Contract time
Types of Contracts Commonly used in
Construction

9 Item Rate Contract

9 Lump sum Contract
9 Lump sum & Scheduled contract
9 Cost plus fixed fee contract
9 Cost plus percentage of cost contract
9 Target Contract:
9 Cost plus Fluctuating Fee contract
9 Hybrid Contracts
9 Special contracts
 The Item Rate Contract

Also called:

¾Unit- Price Contract

¾Ad-measurement Contract
¾ Schedule contract
Contd…

9 The contractor undertakes the execution of the works on

an item rate bases;

9 The specification & estimated quantities are compiled by

the designer during the conception phase & the unit costs

by the contractor for carrying out the stipulated work;

9 The amount to be received by the contractor depends up on

the quantities of various items of work actually executed;

9 Most commonly used for all types of engineering works

financed by public / government bodies.

Suitability/Advantage:

9 Suitable for works which can be split into various items.

9 Suitable for a competitive bid.

9 Promotes open competition involving quantities of work that

can not be accurately forecast at the time of bidding.

9 More transparent & easier for supervision & control

Contd…
9 No need for detailed drawings at time of allotting contract

9 Changes in drawings & quantities of individual items can

be made as per requirement within agreed limit.

9 The payment to the contractor is made on the actual work

done by him at the agreed rates.

 Disadvantages:

9 The actual cost is known only when the project is

completed.

9 Additional staff may be required to take detailed

measurement of works done for releasing payments to the

contractor.
Contd…

9 The scope for additional saving with the use of inferior

quality materials may prompt the contractor to use such

materials in the work.

 The Lump-Sum Contract:

9 The contractor offers to do the whole work as shown in

drawings & described by specifications, for a total

stipulated sum of money;

Contd..

9 There are no individual rates quoted thus it becomes difficult

to make adjustment in contract value if any changes are to be

made in the work later on;

9 The schedule of different items of work is not provided &

the contractor has to complete the work as per drawings &

specifications for the agreed lump sum amount;

Contd…

9 The satisfactory completion of work for the stated price

remains the obligation of the contractor, regardless of the
difficulty & troubles encountered in the course of its
construction;

9 In large projects, part payments are made to the contractor

at different stages (phases) of work on mutually agreed
terms;
 Suitability/Advantage

9 More suitable for works for which contractors have prior

construction experience as this enables them to submit a

more realistic bid.

9 Is suitable for A Competitive bid.

Contd…

9 The owner knows the total cost of the project in advance;

9 Hence, can decide whether to start or drop the project;

9 The contractor can earn more profit by in-depth planning

& effective management at site;

Disadvantages:

9 Limited to Construction programs That can be accurately

& completely described At the time of bidding, Before the

contract is awarded,

9 The project has to be studied thoroughly & the complete

contract document has to be prepared in advance;

Contd….

9 Not Suitable for Difficult foundations, Excavations of

uncertain character & Projects susceptible to Unpredictable

hazards & Variations.

Contd…

9 In this type of contract: Unforeseen details of work Are not

specified in the contract document.

9 Many additional items May have to be undertaken As the

work progresses, Giving opportunity to the contractor For
claiming higher rates For the extra items not included in the
contract.
 Lump sum & Scheduled Contract

9 Is similar to the lump sum contract except the schedule of

rates is also included in the contract agreement.

9 The contractor offers to do a particular work at a fixed

sum within a specified time as per plans & detailed
specifications;
Contd….

9 The schedule of rates for various items is provided which

regulates The extra amount to be paid or deducted for any

additions or deletions made during the progress of work.

Contd…

9 Measurements of Different items of Original work Are

not required But extra items are required to be measured

for payment.

9 The original work shall be checked with the drawings &

specification.
 Suitability/Advantage:

9 Is more suitable for construction works, For which

contractors have prior work experience & Can consequently

estimate the project cost more realistically.

Contd…

9 Additional staff for Recording detailed measurement of

Original item of work is not required For making payment to

the contractor.

9 The owner knows The Project Cost in-advance/can decide

to start/not
 Disadvantages:

9 Before the contract is awarded: The project has to be studied

thoroughly & All the contract documents are required to be

completed;
Contd…

9 The non-scheduled extra items: Arising out of changes made

In the drawings & specifications are often A source of

dispute because the contractor Presses higher rates than the

prevailing market rates;

 Cost Plus Contract

The concept of this system is:

Reimbursement of The Actual Cost

Plus (+)
Additions for the contractor’s overhead, profit & risks
Depending on the mutual agreement;

Is suitable for negotiated contracts

The contractor computes his fee on the bases of:

9 The size of the project;

9 Estimated time of construction;

9 Nature & Complexity of the works;

9 Hazards involved;

9 Location of the project;

9 Equipment & manpower requirements &

9 other similar conditions.

 Some of such varieties are

9Cost plus percentage of cost contract:

9Cost-plus fixed fee contract

9Target Contract

9Cost plus fluctuating Fee contract

 Cost plus percentage of cost contract:

In this type of contract: It is given on certain percentage

over The actual cost of construction

The actual cost of construction is:

Reported by the contractor
&
Is paid to him by the owner
Together with a certain percentage as agreed earlier.
 Advantages:
An emergency nature: Time is not available For the
preparation of documents & The usual bidding process;
9 Suited to cover works of which: Its scope & characteristics

can be only poorly defined at the beginning; No one can

ascertain what difficulties will be encountered;

9 It doesn’t however urge the contractor to maintain &

practice strict economy in the interests of the owner

 Cost-plus Fixed Fee Contract:

9 The contractor is paid by the owner An Agreed lump-sum

amount over & above the actual cost of work.

9 Must be of such a nature that: It can fairly be well defined

& Reasonably good estimate of cost Approximated at the
time of negotiations.
9 In case of cost plus percentage contract, the contractor has a

tendency to increase his profit by increasing the cost of work.

9 But this drawback is overcome in cost plus fixed fee contract

as the contractor’s fee is fixed/ does not fluctuate with the

actual cost;
 Suitability
Is suitable for works:

9 Required to be completed expeditiously;

9 Where it is difficult to foretell What difficulties are likely

to be encountered.

9 Important structures where the cost of material is

immaterial.
 Advantages:

9 Time saving in the preparation of contract documents;

9 Can be performed In the best interest of the owner;

9 Resulting in good quality work, as Actual cost is to be borne

by the owner;
Contd…

9 Changes in design & method of construction, can be easily

carried out;

9 The work can be executed speedily;

Disadvantage:

9 The contractor should work In a diligent manner, Otherwise

entails Additional office/ overhead expenses For which he is

not reimbursed.

9 Can not be adopted normally in case of public bodies;

9 The final cost of the work is not known in advance

 Target Contract:
9 The contractor is paid on a Cost-plus percentage work
performed under this contract.

9 In addition, He receives: A percentage Plus or Minus On

savings or excess effected Against either A prior agreed
estimate of total cost or A target value arrived at By
measuring the work on completion & valuing at prior agreed
rates;
 Cost plus Fluctuating Fee
Contract:
The contractor is paid :
The actual cost of construction
Plus
An amount of fee inversely variable
According to the increase or decrease
Of the estimated cost
Agreed first by both the parties;
 Hybrid Contracts:
A contract that combines two or more contract types.
 Special Contracts
9Turn key Contract
9Package Contract
9Negotiated contracts
9Continuing contract
9Running Contract
9Design-Construction Contract:
9Piece Rate Work (PRW)
9Labour contract
9Materials supply contract
 Turn key Contract

9 Is a lump sum contract for a complete project/ A plant:

9 It is an integrated contract in which all works pertaining to

various disciplines Such as civil, electrical, mechanical etc

Are in the hands of a single contractor;

9 The main advantage to the owner here is that He need not
coordinate the work of different contractors.

9 The main contractor is responsible For all kinds of jobs

starting from Planning to commissioning stage.

9 The owner takes over the entire work (Which is fully

operational & of proven performance) from the main
contractor.
 Package Contract

Here:
Two or more related jobs,
Each of which could form
A separate contract
Are combined In a single contract.
 Negotiated Contracts

9 Negotiations across the table takes place Between The

owner & The contractor For project cost & other
conditions;

9 Detailed project specifications: Are arrived at by

discussion between them;
 Continuing Contract
In this type of contract: New/additional work is Awarded
To the contractor on the basis of Agreed terms &
Conditions of An existing contract;

Such contracts:
Do not require Re-tendering
&
Hence, Save time &money;
 Running Contract

9 Such contracts provide: Goods & Services at specified

intervals or as & when required by the owner.

9 The contract price is not fixed & payment is based on Actual

Goods Supplied & services rendered as specified in the
contract document
 Design-Construction Contract:

9 Refers to both the design & the field construction in one

contract;

9 Such A project is called “Turn key” or “EPC” or

“Package deal”.
 Piece Rate Work (PRW)

9 The owner provides: All site facilities; Tools, equipment

& services;

9 Skilled workers: Either individually /Groups, Are

engaged for doing the work, Against payment based on
pieces/ units produced;
 Labor Contract:

9 Where the contractor quotes rates for the item work

exclusive of the elements of materials which are supplied by

the client’s Department.

 Materials Supply Contract:

9 The contractors have to offer their rates for supply of the

required quantity of materials; inclusive of all local taxes,

carriage & Delivery charges of materials to the specified

site within the time fixed in the tender;