pem - types of contract

Project Proposals & Tendering

Types of Contract

Prof. Debopam Roy

• Agreement between competent parties enforceable at law

• Formation of Contract:– Object– Proposal / Offer– Acceptance– Consideration– Reciprocal promise

What is a contract

Typical Parties for Works Contract• Owners

– Public Owner (Government bodies)– Private Owner (also include quasi-public bodies)

• Architect/Engineers (A/E)• Prime/General Contractor• Sub-contractors• Suppliers• Banks & Financial Institutions• Specialized Service Agencies• Labor• Regulatory agencies• General Public

Rules for the Participants• Contracts

• Tort Law

• Laws, Statutes, and Regulations of Government Agencies

Typical contractual relations between parties of a construction project

Nature of Contractual Services

• Design Only• Construct Only• Design & Construct• Turnkey• Construction Management Services

Nature of Contracts

• Owner – Architect Contracts and Owner – Engineer Contracts

• Owner – Construction Manager Contracts

• Owner – Contractor Contracts

• Subcontracts ; Purchase Orders; Insurance Contract

The Prime Contract

STANDARD FORMS OF CONTRACT-India

• CPWD• MES• State PWD• Model Standard Contract For Domestic Construction – CIDC

• ONE-OF-A-KIND CONTRACTS– Created for a particular project– Little about them is standard or traditional

STANDARD FORMS-OF-CONTRACT - International

• American Institute of Architects (AIA) Contracts– Standard form of Agreement Between Owner and

Contractor– Most widely used form for fixed-price building

construction works in USA.• FIDIC - International Federation of Consulting Engineers– http://www1.fidic.org/resources/contracts/which_contrac

t.asp

http://www1.fidic.org/resources/contracts/which_contract.asp

http://www1.fidic.org/resources/contracts/which_contract.asp

Conditions of Contract for Construction, which are recommended for building or engineering works designed by the Employer or by his representative, the Engineer. Under the usual arrangements for this type of contract, the Contractor constructs the works in accordance with a design provided by the Employer. However, the works may include some elements of Contractor-designed civil, mechanical, electrical and/or construction works.

These Conditions of Contract are recommended for engineering and building work of relatively small capital value. However, depending on the type of work and the circumstances, the Conditions may be suitable for contracts of considerably greater value.They are considered most likely to be suitable for fairly simple or repetitive work or work of short duration without the need for specialist sub-contracts. This form may also be suitable for contracts which include, or wholly comprise, contractor-designed civil engineering, building, mechanical and/or electrical works.

Conditions of Contract for Plant and Design-Build, which are recommended for the provision of electrical and/or mechanical plant, and for the design and execution of building or engineering works. Under the usual arrangements for this type of contract, the Contractor designs and provides, in accordance with the Employer’s requirements, plant and/or other works; which may include any combination of civil, mechanical, electrical and/or construction works

Conditions of Contract for EPC Turnkey Projects, which are recommended where one entity takes total responsibility for the design and execution of an engineering project. Under the usual arrangements for this type of contract, the entity carries out all the Engineering, Procurement and Construction: providing a fully-equipped facility, ready for operation (at the "turn of the key"). This type of contract is usually negotiated between the parties.

The purpose of these guidelines is to present the commonly used methods of consultant selection, to explain the respective procedures and to combine them all in one compact document, as well as to emphasize and explain FIDIC's policies on the subject of selection.

The terms of the Client Consultant Model Services agreement (The White Book) have been prepared by FIDIC and are recommended for general use for the purposes of pre-investment and feasibility studies, designs and administration of construction and project management, where proposals for such services are invited on an international basis: They are equally adaptable for domestic agreements.

TYPICAL DOCUMENTS COMPRISING THE CONTRACT

• Bidding documents consisting of the Invitation to Bid, the Instruction to Bidders, and the Bid Form

• General Conditions of Contract

• Special Conditions of Contract

• Specifications

• Drawings

• Reports of investigations of physical conditions

BIDDING DOCUMENTS

• Normally begins with an advertisement– Identifies the project for which bids are desired– The owner– Time and place of bid opening– Instructions to potential bidders on how to obtain a full set

of contract documents

• Invitation for Bids (IFB) or Request for Proposals (RFP)– IFB used when bidders must strictly confirm to drawing

and specs.– RFP when bidders may propose variations for the project

• IFB or RFP typically include:– A description of the contract work– The identity of the owner– The place, date, and precise time of the bid opening– The penal sum of the required bonds (bid bond,

performance bond etc.)– A description of the drawings and specs, their cost, and

where they may be obtained– Rules regarding withdrawal, modifications, late bids etc.

BIDDING DOCUMENTS

BIDDING DOCUMENTS

• Instructions to Bidders• Bid Form– Bidders complete this document, sign, seal and turn it in– Constitutes the “offer”– To constitute a responsive bid, the bid form must be

completely filled, signed and sealed in accordance with the IFB or RFP and Instructions to Bidders

BIDDING DOCUMENTS

• Bid Forms Contents– A definitive statement of the general terms and

conditions of the offer– The format of the commercial terms applying to the offer– Supplementary information that the owner may want to

know about the bidder– Requirement for public projects– Bid security

GENERAL CONDITIONS OF CONTRACT

• Very definitive statements, clause by clause, of all general terms and conditions that will govern the performance of the contract work

• The general concept of this section is to include all clauses that will remain the same, contract after contract, changing very infrequently

SPECIAL CONDITIONS OF CONTRACT

• Also known as Supplementary Conditions

• Project specific matters

• Those that are either site specific or in some other way apply only to the specific contract

SPECIFICATIONS

• The technical requirements for each division of work in the contract will be completely detailed in specifications

• Conforms to Uniform Construction Index or Masterspec format

• Should be carefully drafted so that both parties to the contract have a mutual understanding of the precise technical requirements

DRAWINGS

• Complement the specifications• Should be sufficiently clear to adequately show exactly what is

to be built• Certain features may be shown in fairly general terms,

requiring the contractor to prepare the detailed drawings• In fixed-priced bids should be adequately sufficient and clear

REPORTS OF INVESTIGATION OF PHYSICAL CONDITIONS

• Often concern the geotechnical aspects of subsurface conditions

• Usually appear in the form of written evaluations and soil boring logs

• Other examples are weather records, stream flow hydrographs etc.

• Is such material to be considered part of the contract documents?

• Owners often use disclaimers, to escape liability

Types of Prime Contract• Measurement Contract

– Item Rate– Percentage Rate

• Fixed Price– Lump Sum– EPC, Turnkey, Design Build

• Cost Reimbursable– Cost plus percentage fee (CPPF)– Cost plus fixed-fee (CPFF)– Cost plus incentive fee (CPIF) (Also called as “Target Estimate”)– Guaranteed Maximum Terms (GMP)

• Concessions

Measurement Contract

• Contract is Broken Down into a series of bid items, each for a discrete element of work of the project

• The two parties are not bound by the total value of work. They are bound by each individual rates

• Payment is based on actual measured quantity of work

• Most common type is Item Rate

Item Rate Contract

• Also called unit-price contract• Bid document includes a schedule-of-bid-items or

Bill of Quantities• The schedule contains the following columns: – Sl. No.– Description of each item of work – Unit of Measurement– Estimated quantity– Rate or Price per unit of work– Value of the particular item of work– Remarks if any

Item Rate ContractSl. No. Item

DescriptionUOM Quantity Rate Amount Remarks

Item rate Contract

• The schedule with item description and quantities is given with bid form

• The bidders fill in the rate column for each of the item• The rate or unit price includes the contractor’s

overheads and profits• By totaling all the arithmetic products (Quantity x Rate),

the estimated total cost of the project is obtained• The project is awarded to the lowest responsible and

responsive bidder; i.e. the bidder with lowest estimated cost who satisfies all pre-conditions

Item Rate Contract• As the actual work progresses, the payment is made on

quantity of work physically measured• If no changes are made in nature of work, the quantity of

work actually performed can vary from the quantities in BOQ (subject to limits), without change in rate

• If the quantity of work changes beyond limits, the rates may be revised

• The final contract price will depend on the actual quantity of work. The estimated value of contract is not binding

• For new items of work, not in original schedule, the rates need to be separately negotiated

Item Rate Contract• Bid Documents– Notice Inviting Tender– Instruction to the Bidders– Qualification Criteria– General Conditions of Contract– Special conditions of contract– Project Details– Bill of Quantities– Basic Drawings– Specifications– Details of Bid Bonds

Item Rate Contract• Mode of Payment

– The contractor has to take measurements of the work carried out, prepare and submit the bill periodically ( generally every month )

– The engineer either accompanies the contractor or his representative while the measurements, or checks the quantities afterwards.

– If no discrepancy is found recommends the bill for payment. – The amount recommended by the engineer is the cost of the work

less retention money and the cost of material supplied to the contractor by the owner and actually used on the work during the period under consideration.

– If any item occurs during execution which is not included in the bill of quantities, It is usually possible construct that item by a combination of other items already in the bill, otherwise It is paid for as an ‘extra’ item as a specially analyzed rate.

Item Rate Contract• Pros

– The tender can be floated right after preparation of preliminary drawings

– Beneficial when there is lack of design information– Tendering process, Mobilization, etc. can be carried out in parallel

with design & drawing– Easier to accommodate changes due to differing site conditions,

change in requirements, etc.– Less risk of contractor making error in quantity estimation during

short time period available during bidding– Less tendency of contractor to bid conservatively– What the owner pays to the contractor is the actual cost of the work

at the agreed rates. This arrangements is fair to both the parties

Item Rate Contract

• Cons– Owner can not be sure of total cost till completion

of project. Can lead to huge cost escalations– Needs lot of book keeping. Increases overheads– No incentive on contractor to reduce quantity /

cost. No scope for value engineering– Dispute regarding extra items– Malpractices (Insider trading)– Front loading

Item Rate Contract

• Dispute regarding extra items– The contractor invariably presses for higher rates

than he would have tendered in the beginning– May threaten to not perform the extra items if his

demand not made. Difficult to get the extra items done by another contractor

– In most cases owner has to meet the demands

Item Rate Contract

• Malpractices– The bidder, by bribing an insider, can get information on an

item, which has more probability of increase in quantity– He may bid high rate for that particular quantity, and bid

low for another which he knows may decrease in quantity– He may be awarded the contract on becoming L1, and on

actual completion, the payment made may be much more than what would have been made if project was awarded to the L2 bidder

– Through corruption the quantities can even be intentionally changed to facilitate such malpractice

Item Rate Contract

• Front Loading– The contractor may put a higher rate for works to

be completed earlier, and a lower rate for ending items

– This ensures that contractor becomes cash rich upfront, and can manage his working capital better

– However if the bid is heavily front loaded, contractor may run away, after completing the profitable items

Percentage Rate Contract• Another type of measurement contract• Devised to get rid of unbalanced / front loaded bids• The rates are estimated by the owner himself, and included

in the BOQ, in addition to item description and quantity• The bidder has to quote a percentage above / below / at

par with the rates given in the BOQ• Rates of all items will be increase/decreased by the

percentage quoted by the bidder• The bids will be compared based on value of work derived

based on the revised rates

Percentage Rate Contract

• No scope for – Unbalanced bids– Front loading– Malpractices through insider tips

• used in preference to the item rate contract for the works where the estimated quantities are uncertain and likely to change considerably.

Percentage Rate Contract

• Documents– Same as item rate, only rate column of BOQ filled

by owner and not bidder• Mode of payment– Same as item rate

Lump sum Contract

• It is a Fixed Price Contract, i.e. the contractor will be paid an agreed fixed price for the contractually stipulated services

• The lump sum amount can be decided by negotiation or competitive bidding

• The bidder’s quotations are compared on the basis of only one figure, the bottom-line or total estimated contract value

• The value of the works is estimated by the contractor based on the drawings and specifications provided.

Lump sum Contract

• Fixed price contract needs complete and accurate set of drawings and specifications

• Even with complete drawings, estimation of the fixed price in short time available for bid preparation becomes difficult

• Contractor may quote very conservatively• Sometimes, the agreement makes provision to adjust

the ‘fixed sum’ allowing for the cost of extra work, variation , omission, etc., through deviation schedule.

Lump sum Contract

• Deviation schedule– The work is broken into a no. of items, as in a BOQ– Gives a complete break-up of the fixed price,

including item description, quantity and rate– In case of variation, the amount payable for that

particular item is decided based on the deviation schedule

Lump sum Contract• Even though the fixed price is for the total completion of job,

working capital management becomes difficult if there is no interim payment

• Milestones are decided• Payment is linked with completion of milestones• Payment schedule is mostly back loaded• In case the contractor abandons midway, he can only receive

payment for completed milestones and not the actual portion of work done

• The engineer’s interim certificates form the basis of part payments to the contractor by the owner

Lump sum Contract• Bid Documents

– Notice Inviting Tender– Instruction to the Bidders– Qualification Criteria– General Conditions of Contract– Special conditions of contract– Project Details– Complete set of Detailed Drawings & site investigation data– Specifications– Details of Bid Bonds– Deviation Schedule– Payment Schedule

Lump sum Contract

• Pros– If no extras are contemplated the tenders tell the owner

exactly what the project will cost him. This is a sound footing on which he can take the decision whether to start the project or abandon the same

– Owner need not employ too many staff to keep periodical accounts of the contractor’s materials, labour and output. All that the engineer has to do on his behalf is to see that the work is being executed exactly according to the terms of the contract and issue interim certificates to the contractor

– There is incentive on the contractor to save on quantity / cost. Considerable scope for value engineering and innovation

Lump sum Contract

• Cons– Before a contract is let out the project has got to be

thoroughly investigated and all the contract documents kept ready in every respect. This entails costly and time consuming work and which is often difficult to accomplish.

– If the nature , extent, and details of the work are not properly defined by the contract documents, many additional features may have to be determined and provided for as the work progresses. These features not being part of the original agreement give opportunity to the contractor for claiming payment at abnormal rates

Lump sum Contract

• A lump sum contract can be used successfully for the construction of works with which the contractors have had considerable experience and whose cost they can predict with reasonable accuracy. Examples of such works are public and private building, warehouses, workshops , etc.

Lump sum Contract• This type of contract is not suitable for works of which extent and

nature cannot be predicted in advance. It is then unfair to make the contractor assume all risks and uncertainties. Example of works unsuited to a lump sum contract are :– Works involving difficult foundations : Where it is no possible to know in

advance the characteristics and quantity of excavation, dewatering of foundations, shoring etc.

– Emergency projects that have to be rushed through without time to prepare complete set of contract documents.

– Works, such as additions and alterations to existing structure which involves the maintenance of operations while the work is being performed.

– The works subjected to unusual and unpredictable hazards such as floods beyond the control of contractors.

EPC / Turnkey Contract• EPC Engineering Procurement Construction• Turnkey Ready to be commissioned at turn of a key• These projects include design as well as construction (i.e.

Combination of A/E contract & Prime Contract)• The owner only provides preliminary conceptual drawings (Front

End Engineering) & specifications during bidding. Detailed Design & Working Drawings (Detailed Engineering) is done by the contractor as per specifications provided by owner

• In most cases specifications lay down the performance criteria only. Methods decided by the contractor

• A Construction Management Service or a Project Management Consultant may be employed by owner to check progress and quality of works

EPC / Turnkey Contract

• Commercial Terms can be– Lump sum– Item rate– A combination of both– Cost plus

• Mode of payment can be– Measurement Based– Milestone Base– Combination of Both


• In case of LSTK (Lump Sum Turn Key), deviation schedule is mandatory since in absence of all drawings, it is impossible for bidder to estimate the final cost correctly

• Hence the bid documents include a BOQ, which contains rates of all items and initial quantities (estimated by the bidder), used as a back up to arrive at the Lump sum. The BOQ is revised after all drawings are completed, and the lump sum fixed based on previous rate

• Lump sum includes design fees


• In case of unit price EPC contract, the BOQ contains all items of work, including design services, escalation, etc.

• The quantities and rates are estimated and submitted by the bidders. The rates are fixed, but quantities may be changes depending on the drawing (to any extent)

• The payment is based on actual measured quantity


• In big projects, some portions may have lump sum price, and some other portions may be item rate (i.e. some related items may be bundled into a lump sum, other items stay unbundled and are paid on unit price)

• Example: In a highway contract, excavation, earthwork, WMM, asphalt, may be item rate (paid on per LM) whereas Flyovers, CD structures, Toll Plazas may be lump sum

• Invoicing schedule will contain both milestone and measurement

EPC / Turnkey Contract• Bid Documents

– Notice Inviting Tender– Instruction to the Bidders– Qualification Criteria– General Conditions of Contract– Special conditions of contract– Project Details– Preliminary Drawings– Specifications– Details of Bid Bonds– Invoice Schedule– Bill of Quantities– Milestone schedule– Deviation schedule

EPC / Turnkey Contract• The work can be greatly expedited under such contracts as extensive

plans and specifications need not be prepared by the employer. Project is fast track since design and construction can proceed in parallel

• There is no division of responsibility, hence contract management is simpler

• Owner needs to employ less no. of professional staff• Enables the contractor, with specialized knowledge of his own

techniques, to design so as to produce maximum economy, and therefore a leaner price, in a way that an architect or engineer without knowledge of these techniques would not be able to produce.

• More scope and incentive for innovation and value engineering

Cost Plus Contracts

• In these contracts the owner agrees to pay the contractor the actual cost of carrying out the work, plus an additional amount which would cover his profits and indirect overheads

• Not as common as lump sum / item rate but sometimes may become necessary due to various circumstances– Unusual nature of work– Lack of interest among contractors

Cost Plus Contracts• The items, expenses under which will constitute actual cost,

are to be carefully defined in the agreement• Generally the following are not included as cost, and is

considered to be part of the percentage fee paid– Salaries of he contractor’s supervisory staff.– Contractor’s general office expenses such stationery,

postage , telephone accounts etc.– Salaries or portion of salaries or traveling expenses of the

officials of the firm who may visit the work.– Charges for the use of any equipment that the contractor

would not normally use for the performance of the work.

Cost plus percentage fee (CPPF)

• The owner agrees to pay to the contractor the actual cost of the work plus an agreed percentage of the actual or allowable cost


• Bid Documents– Notice Inviting Tender– Instruction to the Bidders– Qualification Criteria– General Conditions of Contract– Special conditions of contract– Project Details– Details of Bid Bonds

Cost plus percentage fee (CPPF)• Pros

– Early completion of the work : The work can be started even before the drawings, designs, estimates and specifications are prepared; these being prepared as the work progresses. The decisions can be taken speedily. These factors lead to the rapid execution of the work.

– Extra Works : No work or a portion thereof that the contractor is directed to perform can be called an “extra work”. This flexibility allows the adoption of alternative ways and methods of construction from which to choose the most economic one for the work as a whole. This may reduce the cost of the work. Disputes arising due to extra work are eliminated.


• Pros– Quality of Work : The contractor is assured of a

reasonable amount of profit even though the prices of materials and the labour charges are subjected to fluctuations . Similarly , the use of inferior type of materials than specified and hurried completion resulting in poor workmanship do not increase the contractor’s profit. This induces him to perform the work in the best interest of the owner. The final result is therefore a better quality work.


• Cons– Lack of Incentive : Other than professional ethics

and goodwill, There is no incentive for the contractor to complete the work speedily, and economically by proper planning and efficient management . On the contrary any increase in the construction cost due to delay, wastage of materials, changes in the drawings and designs result in increase of his profit.


• Cons– Unpredictability : The final cost is not known to

the owner. This may lead the owner to financial difficulties. Since profits of the contractor are linked with cost of materials, labour and equipment, a high cost gives the contractor a higher amount of profits. This results in waste, inefficiency and extravagance by contractors

Cost plus percentage fee (CPPF)• Cons–Accounts Keeping : Both the parties have to do a lot of

accounts keeping regarding the materials purchased and used, the labour and plant employed and other miscellaneous expenses incurred on the work.

– Illegal for Public Works : Where the owner happens to be a public body or government department this form of contract cannot be adopted except during emergencies.


• Suitability– When there is an emergency or any other condition that requires

constructing a facility in a hurry without time to develop plans for it, neither the employer nor the contractor is sure about the cost of construction, a ‘cost plus percentage’ contract is generally used

– Works ( in situations which are no emergencies )Where no one can foretell with certainty just what troubles would be encountered in the work, and correct decisions cannot be taken except during the progress of the work

– Construction of expensive structures e.g. palaces, where the cost of the work is of no consequences but the materials to be used and the methods to be adopted are to suit the choice and taste of the owner


• The owner should exercise great care in selecting a contractor to carry out the work for him. A person or firm of known integrity , who will not exploit the weakness of this type of contract to his advantages, will be the best choice

Cost plus fixed fee (CPFF)• The contractor is reimbursed the actual cost incurred by

him on materials and labour and is given a fixed amount of money as his fee.

• It has evolved because of the potential for abuse in CPPF format

• The profit of the contractor is not linked with the cost. The contractor receives only the stipulated sum for his part in overseeing and doing the job, no matter what the cost of the project may be

• The contractor will, therefore, try to complete the job as fast as possible, to reduce his overheads

Cost plus fixed fee (CPFF)

• The agreement specifies the fixed lump sum to be paid to the contractor by the owner over and above the actual cost of the work.

• The employer can select a reliable contractor to execute the work. The parties can work in harmony and accomplish amazingly fine results.

• However, there is no incentive for the contractor to do the work economically

Cost plus fixed fee (CPFF)

• Mode of Payment, Documents, Suitability– Same as CPPF

Cost plus incentive fee (CPIF)

• A more sophisticated form of cost reimbursable contract

• The contractor is paid the actual costs for carrying out the work, and an incentive amount, worked out by a pre agreed formula, which is directly proportional to the savings over a target estimate

Cost plus incentive fee (CPIF)• The target estimate is an estimate agreed upon by the arties

prior to entering into the contract, as the most probable cost of providing the contemplated services.

• A fee as payment for the services is also agreed to based on the magnitude of the target estimate, with the provision that the parties will share the benefits or penalties of any underruns or overruns in the actual costs incurred in providing the services, compared to the target estimate.

• The exact formula for sharing is also agreed to at the onset and may vary from contract to contract

• Usually there is a cap on the contractor’s share of overruns ( the agreed upon fee)

Cost plus incentive fee (CPIF)• By introducing an element of incentive for the

contractor to carry out the work in the most economic way an attempt is made in this form of contract to overcome the main drawback of the previous two types of cost-plus contracts.

• This is achieved by suitably changing the nature of the agreement in respect of the fee is determined by reference to some form of sliding scale. Thus higher the actual cost, lower will be the value of the fee that the contractor receives and vice versa.

Guaranteed maximum price (GMP)• The parties agree on an initial estimate for the cost of the

contemplated services and on a fee for the provider • The estimated cost ; fee ; contingencies are added to yield the

Guaranteed maximum price• The GMP is the owner’s maximum financial exposure• The owner reimburse the contractor for all costs incurred and

pays the fees pro-rata• No further payment after GMP is reached• If the cost exceeds the GMP, the contractor suffers a loss • If cost is less than GMP, owner receives total benefit of savings• Contractors may be interested in GMP only in case of very high

fees

Concession• The contractor undertakes to design, finance , construct ,

operate and maintain the works for a concession period • The contractor recuperates his cost from the collection

of charges levied on the beneficiaries who use the work and in some cases annuity payment each year.

• The facility is returned back to the government and all rights of concessionaire cease to exist

• Depending on the type of ownership, this may be further subdivided into different formats used in different countries at different times

Concession• BOT• BOOT• BTO• DBFO• BOLT• ROT• LOO• Annuity• FBOOT• BOOST• BRT• BOO

Concession• Build Operate Transfer• Build Own Operate Transfer• Build Transfer Operate• Design Build Finance Operate• Build Operate Lease Transfer• Rehabilitate Operate Transfer• Lease Own Operate• Annuity• Finance Build Own Operate Transfer• Build Own Operate Subsidies Transfer• Build Rent Transfer• Build Own Operate

Concession• The cost of construction of the project is ascertained in

the manner of a lumpsum or item rate contract• The bidder then works out the cost of financing the

project and its recovery from the collection of toll or similar method till the cost of construction together with the cost of finance and expected profit is fully recovered

• The cost of maintenance of the project during the period in question has also to be added to the basic cost

• Each year’s income will recover the cumulative investment till the net becomes zero or negative

Concession

• The concession period worked out by each bidder will depend upon the cost of construction worked out by each bidder and also the rate of interest considered for financing the project and expected profit.

• The bidder who submits the cash flow projections seeking the minimum period of concession is generally awarded the contract.

Concession• In some cases the total income predicted over any reasonable

concession period does not adequately cover the total cost (EPC + O&M)+ interest + profit

• The authorities can provide some grants to bridge the gap• Known as Viability Gap Funding• The authority fixes the period of concession and seeks offers

on the basis of grant expected from the employer• The bidder expecting the least grant is generally awarded the

contract• The grant may be in the form of annuity payment or released

in a phased manner as mutually agreed by the parties

Concession

• In some cases, the bidders do not need grant, and the cumulative income from the years of concession fixed by the authority, far exceeds the total cost

• In these cases, the concessionaire may quote an upfront negative grant, or a share in revenues to the authority

• The bidder offering maximum negative grant or share in revenues will be awarded the contract

Concession

• Documents– In addition to the usual contract documents cash flow

projections giving details of how the contactor intends to generate finance and use it till the recovery of his capital, investment cost and profit during the concession period , forms an integral part of the contract

Concession– The main agreement contains several schedule describing

• the project site• project facilities• site delivery schedule• design requirements• construction requirements• operation and maintenance requirements• cash flow projections• annuity / grant payment schedule• performance security• state support agreement• substitution agreement• hand back requrements

Concession

• Pros– public authority is not required to finance the

project immediately– project is made to generate the funds and be self

financing to the extent possible– greater autonomy for the contractor– more scope for value engineering and innovation– quality is assured since poor quality means

increased maintenance cost for the contractor

Concession

• Cons– greater risk on contractor– Contractor needs expertise in not only

construction but other areas like finance, O&M as well

Concession

• Ideal type of contract for highways and expressways, bridge , tunnels , electricity power generation and supply etc that save the cost of operation or time of travel for which users will pay reasonable charges

• Not suitable for works that are not likely to generate capital for self financing eg. rural water supply projects, village roads , city roads, etc.

Subsidiary Agreements Required for Main Contract

• Insurance• Surety• Purchase Orders• Subcontracts

Surety Bonds / Guarantees

RELEVANT PARTIES AND SURETY BOND TERMS

• Surety: A financial institution/entity possessing great wealth, and will pay up on default of the principal

• Principal: The entity that actually furnishes the bond

• Obligee: The entity who is guaranteed payment by the bond. For example, in case of bonds furnished by the prime construction contractor, the owner of the project is the obligee

RELEVANT PARTIES AND SURETY BOND TERMS

• Guarantee: The promise made by the surety to the obligee, essentially underwriting the performance of the principal

• Penal Sum: The monetary limit to the guarantee is called the penal sum. May vary from 10% in bid bonds to 100% in performance bonds

• Premium: The fee that the principal pays to the surety in exchange for providing the guarantee

• Indemnitor: A person or entity, who promises to pay the surety back for any cost that the surety incurs if called upon to make good the guarantee

HOW DO SURETY BONDS WORK?

• The potential liability assumed by a surety greatly exceeds the premium charged for underwriting the performance of the principal

• The considerations lying behind the willingness of the surety to assume the liability are:– Indemnity Agreement: Will provide that the principal and/or the

indemnitors will pay the surety back for an losses that the surety incurs in making good the guarantee

– Surety bonds v/s Insurance contracts: Surety bonds are called on only when the principal fails to ‘perform’

– How good is the guarantee? Surety must be reputed and at the same time be financial stable for the obligee to have confidence in the guarantee

– Surety’s belief in the Contractor’s ability to perform

BID BONDS

• The bid bonds protects the interests of the owner against the potential loss that it may incur upon the refusal of the lowest bidder to sign the contract

• Bid bond guarantee– The surety guarantees to the obligee that the principal will

enter into a contract in the event of an award– The principal will furnish the performance bond and

insurance policies required by the contract

BID BONDS

• Bid bond penal sum: can be expressed in either of the two ways:– As either a fixed amount of money or as a percentage of

the bid total– It can be stated in the form of actual damages suffered, up

to a stated limit

PERFORMANCE BONDS

• Invoking the performance bond: – Requires proof of default– Delay may be because of conditions of force majeure – In most cases, proof of actual default leads to litigation

• Ways to make good the guarantee: (once default is established)– Assist principal to remedy default by providing financial

assistance– Take control of contract and complete project by hiring

another contractor or by the principal itself– Allow obligee to get it completed and pay the obligee

PERFORMANCE BONDS

• How much does surety pay?– Penal sum is 100% of the contract price– Determination of surety’s obligation can be reached in

various ways:• Surety and obligee agree on a fixed amount (upto the

penal sum limit). If actual costs are higher, surety doesn’t pay anything, if costs are lower, oblige keeps the difference• Another way would be to pay: actual costs incurred –

any unpaid contract balance + liquidated damages (due under contract), subject to maximum (penal sum)

PERFORMANCE BONDS

• Owner’s misconception about performance bonds– Possessing the bond does not imply absolute power over

contractor– Surety won’t act until they believe principal is truly in

default. – If surety pays up and later it is discovered that there really

wasn’t any default on part of the principal, the surety can’t recover the paid up money from indemnitors

– To collect eventually on the performance bond guarantee, the obligee must be legally correct on the facts of the default

PERFORMANCE BONDS

• Excess early contract payments– In cases when the contract is heavily front loaded, the

obligee may actually not recover all costs incurred– Surety is not liable to pay for such losses and will contest

‘excess early payment’• Contractor protection of bonding capacity– Small contractors won’t want the surety to receive

complaints about their performance – If surety takes control of project (after default), the

contractor will have to pay up later for all expenses incurred by surety

PURCHASE ORDER AND SUBCONTRACTOR AGREEMENTS

• Additional contracts closely related to the construction contract between owner and prime contractor.

• On similar lines but fundamentally different in purpose.

• Need to understand clearly the purpose and key features of each in order to decide which should be used for a particular business transaction

PURCHASE ORDERS

• Intended for transactions that involve the sale of goods by a seller and delivery of those goods to a contractor buyer at the site of a construction project.

• Should be distinguished from the provision of services or the performance of work involving labour at or on the construction site

• For example, providing fabricated structural or reinforcing steel

PURCHASE ORDERS

• Goods or Provision of Services?– Whether a particular transaction constitutes the sale of

goods or the provision of services?– Treat all transactions involving the provision of significant

amounts of on-site construction labour as a construction operation requiring the use of a subcontract agreement

– Transactions that do not involve the provision of significant amounts of labour at the site should be treated as the sale of goods. It should be handled with a purchase order

– In India, Sale of Goods Act. 1930 applies

PURCHASE ORDERS

• Use of purchase orders for certain jobsite services– That involve minimal labor like provision and collection of

trash containers

• Purchase order quantity limitations– PO can be limited to a “one-time” transaction or may

provide for a continuing supply of goods on an “as-required” basis

– PO for continuing supply may be open ended or limited to stipulated maximum quantity.

PURCHASE ORDERS• Conflicts with seller’s sales quotations– The fine print on the back of the preprinted vendor’s sales

quotation document conflicts with similar fine print on the back of preprinted purchase order document – “boilerplates”

– Both vendors and contractors/purchasers try to obtain the most favorable terms

– Drafter of PO should ensure that the conflicts are avoided• Flow-Down Language from Prime Contracts– PO may contain explicit flow-down language intended to

make all applicable provisions of the prime contract also apply to the PO

“RED FLAG” PURCHASE ORDER PROVISIONS

• Necessary Identifying information– Construction project for which the prime construction

contract is held by the buyer– Owner for that project– A/E– Contractor buyer– Seller

• Description of the Goods Purchased– Accurate and complete description of each separate item

including appropriate references– Quantity of each separate item


• Shipping Instructions– Exact name and address of the intended receiving party and

instructions on how the goods are to be packaged and marked.

• Pricing and Basis for Quantity Measurement– May contain flow-down provisions– Prime contractors often purchase many items for which

payment will be completely unrelated to the provisions of the prime contract


• Payment and Retention Provisions– Issues similar to the conditions under the prime contract to

the owner– “No pay until paid” clause– Does not excuse the prime contractor from eventually

paying– Presence of “condition precedent”• It is specifically understood and agreed that the payment

to the trade contractor is dependent, as a condition precedent, upon the construction manager receiving contract payments, including retainer from the owner.


• Specified Delivery Schedule– Equivalent to the statement of allowed contract time in

prime contract• Required Delivery Point– Example, F.O.B. construction jobsite

• Sales and Service Taxes• Purchase Order General Conditions– Contain most of the general clauses for prime contracts

• Special/Supplementary Provisions– Courts give more weight to specially recorded terms than

to preprinted terms

SUBCONTRACT AGREEMENTS

• A prime contract between an owner and a prime contractor must exist before a construction subcontract can exist

• Prime contractor decides to “lay off” or subcontract, a portion of the work to another contractor called a subcontractor

• Prime contractor still retains the original liability to the owner for the performance of the work.

• Subcontract work can be directly spelled out in the prime contract or it may be work incidental to the contractor

SUBCONTRACT “RED FLAG” PROVISIONS

• Necessary Identifying Information– Project for the prime contract– Owner for that project– A/E– Prime contractor– Subcontractor

• Description of the Subcontract Work– Must be carefully and completely described– Should incorporate direct references to all applicable

drawings and technical specifications and sections of the prime contract


• Pricing and Basis of Quantity Measurement– If the subcontract work is incidental than payment is not

related to the provisions of prime contract• Payment and Retention Provisions• Contractor Control of Performance Time Requirements– “Subcontractor shall perform the subcontract work on a

schedule to be determined by contractor”• Damages in the Event of Late Completion– Subcontract often explicitly states the flow of contract

liability


• Subcontract Changes Clause– Most subcontracts will give the prime contractor the right to

make changes unilaterally in the subcontract work, delay, suspend or terminate it in the same manner as the owner can in prime contracts

• Insurance and Bond Requirements– The subcontract may or may not require the subcontractor

to furnish a performance bond and a labor & material payment bond

• Indemnification– Owner may be protected by sovereign immunity, the prime

contractor is not and thus requires indemnification


• 48-Hour and 72-Hour Clauses– Pertains to the contractor’s right, after directing the

subcontractor to remedy some default, to perform the necessary work with contractor’s forces for the account of the subcontractor if the subcontractor fails to remedy the default within 48 hours of receipt of contractor’s directive

INSURANCE CONTRACTS

• Primary parties– Construction Contractor – the insured– Insurance Company – the carrier– Additional Parties – additional named insured

• Policies for the construction industry– Worker’s compensation and employer’s liability policies– Public (or third-party) liability policies– Builder’s risk policies– Equipment floater policies– Miscellaneous policies for special situations and needs

WORKER’S COMPENSATION AND EMPLOYER’S LIABILITY POLICIES

• Statutory liability on employers which occurs when the employees are killed or injured in the course of performing their duties.

• The Workmen’s Compensation Act 1923– provides for compensation to workmen or their survivors in

cases of industrial accidents and occupational diseases, resulting in disablement or death

– compensation in case of death ranges from Rs 50,000 to Rs 4.56 lakh and in the case of permanent total disablement from Rs. 60,000 to Rs. 5.48 lakh

• Employer's Liability Act, 1938

PUBLIC LIABILITY POLICIES

• Public Liability Insurance Act, 1991 – The essence of the public liability insurance contract is that

the insurance company, in exchange for the premium, agrees to assume the liabilities of the insured contractor subject to a stated deductible amount, up to stated monetary limits of the policy.

– These policies do not protect contractors aginst contractually assumed business risks such as failure to complete the project.

PUBLIC LIABILITY POLICIES

• Exclusions, Endorsements and Deductibles– Exclusions like XCU Hazards ( Explosion, Collapse and

Underground)– Endorsements are special provisions added to the policy to

extend its coverage– Deductible is an amount stated in the policy that must be

exceeded before the insurance company has any liability

• Monetary limits – Primary and Umbrella policies– Primary: tailored to meet the monetary limit requirements of

the prime contract– Umbrella: designed to raise the monetary limits to a much

higher level

BUILDER’S RISK POLICY

• Also called as “installation floater” insurance• Does not include consequential damages such as lost time or

increased cost of performance• It can be obtained as either a named peril or an all risk policy• Traditionally cover losses to the contractor’s temporary

structures in addition to the losses to the permanent work• Does not cover contractor’s construction equipment or tools

EQUIPMENT FLOATER POLICIES

• Protects the contractor against physical damage or loss to tools and construction equipment (including theft)

• Method of determining loss:– Replacement value– Book value– Pre-agreed value

• Equipment floater insurance for Marine Equipment Operations– Called as hull insurance – http://www.uiic.co.in/mhull.jsp

http://www.uiic.co.in/mhull.jsp

MISCELLANEOUS POLICIES FOR SPECIAL SITUATIONS

• Railroad protective insurance• Transit insurance• Business interruption insurance• Fidelity and forgery insurance

• Owner provided insurance programs