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CONSTRUCTION CONTRACT MANAGEMENT

BY

MUMTAZ HUSSAIN

PROJECT DIRECTOR

CAPITAL DEVELOPMENT AUTHORITHY

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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.

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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 CONTRACTA 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 (Contd.)

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 studies2.Preliminary engineering and design3.Detailed Engineering design4.Procurement5.Construction6.Operation7.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 considered2. Expressed clearly3. Time-tested4. Comprehensive5. Fair6. Balanced7. Applicable to the elements of a construction projects

PEC BIDDING DOCUMENTS• Standard Form of Bidding Documents (Civil Works)

(to be used for estimated value of more than Rs. 25 Millions) • Standard Form of Bidding Documents for Procurement of Works (E&M)

(to be used for estimated value of more than Rs. 25 Millions)

• Standard Form of Bidding Documents for Procurement of Works (For Smaller Contracts) (to be used for all type of procurement for estimated value of not more than Rs. 25 Millions)

 • Standard Form of Contract for Engineering Consultancy Services

(For Large Projects) – Time Based Assignments(to be used for consultancy fee over Rs. 2 Millions)

 • Standard Form of Contract for Engineering Consultancy Services

(For Large Projects) – Lump Sum Assignments(to be used for consultancy fee over Rs. 2 Millions)

 • Standard Form of Contract For Engineering Consultancy Services

(For Smaller Projects) (to be used for consultancy fee not more than Rs. 2 Millions)

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1. INSTRUCTIONS TO BIDDERS2. CONDITIONS OF CONTRACT (GENERAL PART-I &

PARTICULAR PART-II)3. FORMS OF TENDER & CONTRACT SECURITIES4. SPECIFICATIONS & SPECIAL PROVISIONS5. BILLS OF QUANTITIES OR SCHEDULES OF PRICES6. DRAWINGS7. SUPPLEMENTARY DATA

A NORMAL SET OF TENDER DOCUMENTS

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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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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

STAGES OF CONTRACT MANAGEMENT (Contd.)

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STAGES OF CONTRACT MANAGEMENT (Contd.)

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. Specificationsb. Detailed Designc. Tender Drawingsd. Estimation of Quantitiese. Decision About Specific Provisionsf. Decision About format-ADB/IDAg. Conditions of Contract - Part 1 & II.

STAGES OF CONTRACT MANAGEMENT (Contd.)

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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.

Pakistan 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?

TENDER EVALUATION (Contd.)

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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

TENDER EVALUATION (Contd.)

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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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TENDER EVALUATION (Contd.)

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

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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 Pakistan 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 BondsPerformance bonds are guarantees by the surety that a contractor will perform the work as required by all of the conditions and terms of the contractThe 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 Pakistan or (b) bank guarantee from a bank located outside Pakistan duly counter-guaranteed by a Scheduled Bank in Pakistan 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)

51.1 Variations

• 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 AdministrationContested 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 

53.1 Notice 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.

 

53.2 Contemporary 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.

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53.3 Substantiation 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 67.1Engineer'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 CONTRACTThe 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-IIClause 70- Increase or Decrease of CostAdjustment 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

Weightages

Applicable index

(i) Fixed Portion - 0.35

(ii) Labour Government of Pakistan (GP) Federal Bureau of Statistics (FBS) Monthly Statistical Bulletin.

(iii) Cement- in bag FBS

(iv) Reinforcement Steel Pakistan Steel Mills/ FBS

(v) HSD PSO

(vi) Bricks FBS

(vii) Bitumen Attock/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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Methods of Procurement – Consultancy Services

Quality and Cost Based Selection (QCBS) Least Cost Selection (LCS) Fixed Budget Selection (FBS) Quality Based Selection (QBS) Single Source Selection (SSS) 

What is a Major Difference Between a Partnership and a Joint Venture?

A partnership is a voluntary association of two or more individuals to carry on a business for profit, usually on a permanent basis. A limited partnership provides for limited liability of one or more of the partners.

A joint venture, consists of two or more companies combining their resources to form a new company, as a separate entity from the existing companies, for the purpose of performing a contract. Once the contract is completed, the joint venture is dissolved along with the new company that was formed to perform the contract.

Plan Contracting

Procurement documents:

• Request for Proposal (RFP) - requests a detailed proposal on how the work will be done, who will do it, . . . , basically a Project Execution Plan from the contractor

• Invitation for Bid (IFB, or RFB) - requests one price to do all the work.

• Request for Quotation (RFQ) - Requests a price quote per item, per hour charges, etc.

Test yourself:

Procurement Document Contract Type Scope of Work

RFP

IFB

RFQ

Cost Reimb. (CR)

Fixed Price (FP)

Time/Mat’l (TM)

Performance

Design

Any

Executing – Project Procurement Management

Contract Types Versus Risk

• Employer• Contractor• Consultant• The Engineer• Engineer’s Representative

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Methods of Procurement – Consultancy Services

Quality and Cost Based Selection (QCBS) Least Cost Selection (LCS) Selection Based on Consultant’s

Qualifications (SBCQ) Single Source Selection (SSS) Fixed Budget Selection (FBS) Quality Based Selection (QBS) Individual Consultants