CHAPTER -2 CONTRACT 2012E.

CHAPTER II
CONTRACT
2.1. Principles of Contract Law
Contract is a written agreement between or among 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. That is, it is an administrative law which is the legally binding part of the
contract. These premises and terms shall be enforceable by law and incorporates the rights,
obligations and remedial rights of each contracting parties.
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 between two or more parties to do or not to do
something for a certain consideration that fulfill the following seven requirements:
Parties are capable of participating: lawful and capable
Consent of contracting parties is necessary: intent
Object of the contract is sufficiently defined, possible and lawful: Legal and Distinct
Use of contract form prescribed by law, if any: Standard
Payment for the promise: Consideration
Constitute two parties: Offer and acceptance
Parties enter into agreement: agreement
Lawful and capable is to mean they are legally allowed to enter into contract and provides
statements of facts (statement of opinion and knowledge) for their ability to perform their
obligations. Misrepresentation of facts both for Fraudulent or innocence actions are liable for
damages and /or rescission.
Intent is willingness or consent by the contracting parties to create a legal contract.
Legal and distinct is a description of both the promises and considerations 9including rights
and obligations) clearly and distinctly stated and they should be practicable and legally
binding.
Standards can be conditions, forms, formats, schedules, instructions, etc. which are created
for use as part of contracts. Consideration can simply interpreted as ‘price for the promise’
which involves a benefit accrued from the offeree in exchange for the promise the offeror is

Prepared by Course Instructors. Page 1

 CHAPTER -2 CONTRACT 2012E.C
bound by the contract. An offer is indication that one party is willing to bind by specific
terms set out in the contract. An offer can remain open unless conditioned for termination
using the following ways:
Refusal or counter offer
Closure of the offering organization
Non-acceptance within the offer time
Failure of the offer condition
An acceptance is the key for the formation of a contract which must be absolute, indication
of consent, and communicated to the offering entity by the offeree.
An agreement though proves the existence of a contract; there are situations where it can be
considered as there isn’t. For instance, if contracts violates statutorily prohibited conditions
such as promoting gambling; and /or also violets unlawful conditions by the common law
such as agreements to commit civil wrongs, discrimination, against the benefit of the state, to
promote corruption, that devalue the value of one party, etc.
Following these characteristics; while the contract is understood as the sub-framework of the
law which can be understood as the private law, the law provides a framework within which
the services and works of the construction industry is governed with. Therefore the
significance of any contract is that the promise is obliged for their performances against a
certain return and if failed to compensate for non-performance and at the same time be
legally enforceable. On the other hand, a contract is not a mental state but an act which is a
matter of inference from conduct. That is, the parties are judged not by what is in their minds,
but by what they have said or written or done. Essential terms, certainty, Agreements to
agree, Subsequent words or conducts, agreements after commencement, Agreement by
conduct, Formalities are some issues to be clearly understood when dealing with contractual
matters.
The purposes of a contract are therefore:
To describe scope of work
To establish time frame
To establish cost and payment provisions
To set forth obligations and relationships
To manage multiple risks
To establish control mechanisms
To minimize disputes

Prepared by Course Instructors. Page 2

 CHAPTER -2 CONTRACT 2012E.C
To improve economic return on investment
2.2 Types of Construction contract
Contracts for the execution of civil engineering works are the fallowing types:
a) Lump sum contract
b) Unit rate contract
c) Lump sum and schedule contract
d) Cost plus fixed fee contract
e) Cost plus percentage of cost contract
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 contracts are
typically used for buildings. The qualities of the materials required can be calculated with
sufficient accuracy during the building process to allow contractors to submit a single lump
sum price for the work. There are no individual rate quoted, thus it becomes difficult to make
adjustments in the contract value of any changes are to be made in the work later on.
A lump sum contract is more suitable for works for which contractors have prior construction
experience. The experience enables the contractors to submit a more realistic bid. This type
of contract is not suitable for difficult foundations, excavations of uncertain charter, and
projects susceptible to unpredictable hazard and variations.
B. Unit Price or Bill of Quantity
Also called schedule contract, in this, contractor undertakes the execution of work on an item
rate basis. The amount to be received by the contractor depends upon the quantities of various
items of work actually executed. The payment to the contractor is made on the basis of
detailed measurements of different items of work actually done by him.
Unit price contracts are used for work where it is not possible to calculate the exact quantity
of materials that will be required. Unit price contracts are commonly used for heavy/highway
work. The designer may calculate that 1,000m3 of earth needs to be moved, but the owners
and contractors know that after the work has been completed, the contractor may not move
exactly 1,000 m3. The exact quantity will usually vary. 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 the low total of all 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.

Prepared by Course Instructors. Page 3

 CHAPTER -2 CONTRACT 2012E.C
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. Refer to figure 2.1. The item rate
contract is most commonly used for all type of engineering works financed by public or
government bodies. This type of contract is suitable for works which can be divided into
various items and quantities, under each item, can be estimated with accuracy.

C. Lump Sum and Scheduled Contract

This is similar to the lump sum contract but schedule of rates is also included in the contract
agreement. In this type of contract, the contractor offers to do a particular work at a fixed sum
within a specified time as per plans and detailed specifications.
The schedule of rates for various items is provided which regulates the extra amount to be
paid or deduced for any additions or deletions made during progress of work. Measurements
of different items of original work are not required but extra items are required to be
measured for payment. The original work shall however be checked and compared with the
drawings and specifications. The type of contract is more suitable for construction works for
which contractors have prior work experience and can consequently estimate the project cost
more realistically.
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 the costs during the negotiation,
bid and award process. Factors that make the calculation of costs impossible include
unpredictable and extreme weather conditions such as would be encountered in the Antarctic,

Prepared by Course Instructors. Page 4

 CHAPTER -2 CONTRACT 2012E.C
known transportation requirements to remote locations, combat or war, or contracts where the
amount of effort that will be required depends on another contractor’s work.
Cost plus contracts take many forms, the most common being cost plus fixed fee and cost
plus a percentage. Most owners prefer cost plus fixed fee because then the amount of profit
the contractor will earn cannot increase, thereby removing any incentive for the contractor to
be anything less than thrifty, or to produce poor quality work.
Cost plus percent contracts may be fair in situations that are very difficult, or when the time
to complete the work is not known with any certainty, but some incentives to maintain
productivity are needed.
D.1. Cost Plus Fixed Fee Contract
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 consideration,
manpower and equipment requirements, etc.
In order to negotiate such a type of contract, it is essential that the scope and some general
details of the work are defined. The contractor in this type of contract is selected on the bases
of merit rather than the fee alone. In case of cost plus percentage contract, the contractor has
the tendency to increase his profit by increasing the cost of work.
But this drawback is overcome in cost plus fixed fee contract because here the contractor’s
fee is fixed and does not fluctuate with actual cost of work. Once this fee is fixed, the
contractor cannot increase the cost of work.
D.2. Cost Plus Percentage of Cost Contract
In this type of contract, instead of awarding the work on lump sum item rate basis, it is given
on certain percentage over the actual cost construction. The actual cost construction is
reported by the contractor and is paid to him by the owner together with a certain percentage
as agreed earlier. The contractor agrees to do the work in accordance with the drawings,
specifications and other conditions of contract. In this type, materials and labor are arranged
between the client and the contractor. The tendency of the contractor to increase the cost of
the work to earn more profit by way of percentage of enhanced actual cost is the major
demerit of this contract type.

Prepared by Course Instructors. Page 5

 CHAPTER -2 CONTRACT 2012E.C

2.3 Contract Documents

The main contract documents are invitation to tender, instruction to tender, form of tender,
the agreement, condition of contract (General and particular) specification (general and
particular), Bill of Quantities, Drawings, Addenda and appendix to tender.
2.3.1 Invitation to Tender:
An initiation letter to the contractor to participate in the tender with an acknowledgement
attached.
2.3.2 Instruction to Tenders:
The contractor is given directive of what is required of tenders. It includes:
Tendering procedures, bid bond, data, space, time
Commercial requirements
Information in what shall be submitted with the tender (alternative proposals, etc.)
Scope of work
Tender basis
Tender bond (possible)
2.3.3 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 certain period
Shows his understanding that the lowest bid or any after may be rejected
States that part of the work may only be accepted
Confirms that he will enter into an agreement if awarded.
2.3.4 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 sub-contractors and supplies for
those contracts. It is simply a letter that constitutes legal evidence that a contract exists, and
forms the basis for its enforcement.
2.3.5 Conditions of Contract
The Condition of contract is the document that states the obligations and highs of the parties
and detail the conditions under which the contract is to be carried out. It states to what extent

Prepared by Course Instructors. Page 6

 CHAPTER -2 CONTRACT 2012E.C
should be the relation between the engineer, contractor and client. It includes general and
supplementary or special/particular conditions of contract.
[Link] General conditions
A document called the general conditions is an essential part of the contract. It defines the
responsibilities of the parties involved in the contract – the owner and the general contractor.
It describes the guidelines that will be used in the administration of the contract.
It is often referred to as boilerplate, implying that the same documents are standard to all
contracts. Contractors must know exactly what is contained in the boilerplate.
Various standard forms of the general conditions have been developed by different
organizations. These forms are familiar to all parties concerned and the wording is not only
clearly understood, but has also been tested in the courts.
[Link] Supplementary Conditions
The supplementary conditions are sometimes known as special provisions or
special/particular conditions. The purpose of the supplementary conditions is to provide an
extension of the general provisions of the contract to fit the specific project at hand. They
serve as amendments or augmentations to the general conditions. Items included in the
supplementary conditions are entirely subject to the discretion of the owner, and may include
topics such as:
The number of copies of contract documents to be received by the contractor
Survey information to be provided by the owner
Materials provided by the owner
Changes in insurance requirements
Phasing requirements
Site visit
Start date of the construction
Requirements for security and temporary facility
Procedures for submittal and processing of shop drawings
Cost and schedule reporting requirements
Traffic control and street cleaning requirements
Responsibilities for testing of materials
Actions to be taken in the event of discovery of artifacts or items of historical value

Prepared by Course Instructors. Page 7

 CHAPTER -2 CONTRACT 2012E.C

2.3.6 Specifications
Specifications may also be known as technical provisions. They are written instruments to be
used in conjunction with 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 processing of ordering materials and construction and installation
of the facility.
2.3.7 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.
2.3.8 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
representations of the physical structure that meets the objectives of the owner. They are also
known as are plans or blueprints.
2.3.9 Addenda
Any change to the bid documents after they are released for bidding but before bids are
actually received requires 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 unless the bid date is also
extended accordingly.

Prepared by Course Instructors. Page 8

 CHAPTER -2 CONTRACT 2012E.C

2.3.11 Forms and Formats

Different forms, formats and schedules are also part of the contract document. Refer to Table
2.2shown below.

2.3.12 History of Conditions of Contracts

Conditions of contract for civil engineering works are commonly prepared by four bodies:
Multi-lateral donors, Business associations, Professional associations, and Public authorities
as shown in Figure 2.2. Each of the bodies expresses their interest on the different conditions
but the public condition of contracts are assumed to be the fairest of all.

Prepared by Course Instructors. Page 9

 CHAPTER -2 CONTRACT 2012E.C

FIDIC is the International Federation of National Association of Independent Consulting

engineers and was founded in 1913 by the national association of three European countries
(France, Belgium and Switzerland). FIDIC has now membership from over 74 countries and
members are generally national associations with the Ethiopian consulting Engineering and
Architects Association being one. Over the past years, FIDIC has evolved into a leading body
for development of model standard forms of contract for use in the international construction
industry.
FIDIC condition of contract has two parts:
General condition of contract – where the overall clauses are stated
Particular conditions of contract – where modifications, changes and omissions to the
general condition of contract are stated.
FIDIC has published different conditions of contract over the years. The main conditions of
contracts published include:
1957-RED BOOK
The very first edition – Civil engineering
Contract type – Add measurement type
1963 – YELLOW BOOK
For mechanical and electrical works.
1987 – OLD FIDIC
Comprises the RED and YELLOW books

Prepared by Course Instructors. Page 10

 CHAPTER -2 CONTRACT 2012E.C
1995 – ORANGE BOOK
For design build and turnkey projects
1999 – GREEN BOOK for short term projects (6 months)
Low contract value ($ 500,000)
1999 – SILVER BOOK
For turnkey for power plants, factories and facilities
Multi-lateral donors like World Bank have also published standard conditions of contracts
based on the FIDIC condition of contract. MBD – Harmonized edition.
2.3.13 Ethiopian Condition of Contracts
In Ethiopia, the first condition of contract was published in 1959 by the Ministry of Housing.
In1987 Building and Transport Construction and Design Authority (BaTCoDA) published
another condition of contract which has been used during the Derg’s regime. However, 1994
– Ministry of Works and Urban Development (MoWUD) developed a condition of contract
based on FIDIC REDBOOK. This book essentially changed a certain aspects of FIDIC to
make it suitable for use in domestic projects. Under this condition of contract claim and
dispute management was carried out by the Ministry itself and thus making difficult the use
for private contacts as the Ministry is that the only option.
The most comprehensive standard bid document was established by the Public Procurement
Authority of the Ministry of Finance and development. This includes the standard bid
document for both national and international competitive biddings for procurement of goods,
services and for the first time works.
Though there are many changes from the MoWUD 1994 condition of contracts, the following
are worth mentioning:
Dispute/Claim management
For the first time provision for an adjudicator is provided.
Price escalation
The MoWUD states that price escalation shall be made only when the price of the item is
changed by decree. This means that only fuel will be a cause for price escalation. However,
the 2004 directive on the issue of price escalation included cement, Reinforcement and
Bitumen to the list. This means that only fuel, cement, reinforcement and bitumen were open
for price escalation. The PPA condition of contract introduced the FIDIC price escalation
formula. Though this formula seems to be adequate having the proper base and current price
makes it virtually impossible for use in Ethiopian Construction Industry.

Prepared by Course Instructors. Page 11

 CHAPTER -2 CONTRACT 2012E.C
Advance Payment
The provision for advance payment has been placed in the special condition ofcontract
making it possible to have different advance payments.
Duration – Special condition of contract
The provision for duration of contract has been placed in the Special Condition ofcontract
making it possible to propose a completion date by the bidders.
2.4 Contract Management
Contract management is the management of its processes, stakeholders and their
performances along the planning, implementation and monitoring + evaluation cycle of the
functions of management. Contract management process can be idealized into three major
processes. These include contract formulation, contract administration and closing of contract
processes (Figure 2.3).

2.4.1 Contract Formulation

Contract formulation involves two sub processes, namely negotiation and signing of contract
agreement. Negotiation is a process by which project owners together with their professional
representatives deal with the recommended winner of the tender on the requirements of the
tender exclusively which will become the bases for contractual agreements. Contract
agreement when signed forms the contract document which will be the bases for contract
administration. A construction contract document includes:
Signed and sealed form of contract agreement,
General and particular conditions of contracts,
Technical specification and methods of measurement,

Prepared by Course Instructors. Page 12

 CHAPTER -2 CONTRACT 2012E.C
Priced bill of quantities, drawings and general notes to drawings if necessary, and
Forms formats and schedules.
2.4.2 Contract Administration
Contract administration is a process that ensures the successful completion of the project
under consideration with substantial compliance of the terms of the contract. As a result, the
following activities or tasks are included in contract administration services:
Identifying contractual responsibilities of stakeholders
O Reviewing the terms of contract documents
O Extract monitoring responsibilities
O Preparing monitory responsibility summary sheets.

Determining and understanding the construction component of the project.

O Reviewing the contract drawings and technical specifications
O Extract the construction methods and sequences
O Prepare construction methods and overall sequences sheets
Review submitted (Integrated) schedules and breakdowns for operations such as
organizational breakdowns, resources breakdowns and schedules and time schedules.
Record, monitor and evaluate progress of mobilizations, works and completions.
Report project status daily and /or periodically and completions.
Certify qualities of materials, shop drawings, samples, workmanships and works.
Measure works, record site potentials and certify payments and completions.
 Takeoff sheet and bending schedules are use for measurement of works
 Method of measurement is according to standard practices
 Site potentials such as material, equipment and manpower on site together
with appropriate site organization is recorded.
 Advance, interim and final payments are certified.

Prepared by Course Instructors. Page 13

 CHAPTER -2 CONTRACT 2012E.C
Mediate disputes: such services are carried out
 to ensure projects are completed successfully
 to follow up and evaluate project cost, time and quality
 to ensure health, safety and environmental requirements
 to ensure project fitness for its purpose intended objective.
The following seven points are worth noting as vital issues to consider during contract
administration services:
1. The contractor shares, in most cases, the owner’s desire for the final product of high
quality; however, a contractor who becomes caught in an irreconcilable conflict
between providing that level of quality and realizing what he believes to be a
reasonable profit will usually choose to pursue the profit.
2. Construction is recognized as much an art as a science and that the attainment of
something less than perfection is accepted by the owner.
3. Contract administrator is not a party to the contract between the owner and the
contractor, but is a participant in the construction process to promote the successful
performance of projects in compliance with the contract.
4. Successful contract administrators will know and admit the limits of their knowledge
and will seek the assistance of experts in the interpretation and, if necessary, the legal
enforcement of the contract.
5. An overzealous contract administration is a disservice to both the owner and the
contractor and himself.
6. It is clearly the financial interest of the contractor that interim payments be
maximized, and it is clearly in the interest of the owner that such payments not exceed
the value of work completed. In this situation, the contract administrator shall
determine what is critical for the success of the project in the interests of fairness to
both the owner and contractor.
7. Contract administrator’s difficult task is to represent the owner’s interests effectively
by monitoring and influencing the activities of the contractor without jeopardizing
those interests by intruding upon prerogatives to the contractor.
2.4.3 Closing of Contract
Closing of contract looks into issues related to maintenance period and remedial works,
dealing with left over claims and disputes, if any, closing of accounts and completion
certificates.

Prepared by Course Instructors. Page 14

 CHAPTER -2 CONTRACT 2012E.C
Maintenance period and remedial works: Construction works are subjected to maintenance
periods (usually one year) in order to reveal quality problems overseen by supervisors. The
focus is not on normal wear and tear but rather damages seen on the construction components
which are solely under the responsibility of the contractor. These often include sanitary and
roof leakages, poor quality door and window handles and locks, electrical fittings, structural
damages, cracks, pavement subsidence, settlement, etc.
Left over Claims and disputes: If claims and disputes are not settled before provisional
certificate of completion, they can be dealt during this phase.
Closing of accounts: Final accounts together with the release of remaining retention money
and performance securities are carried out in accordance with the current situation at the time
of closing and final payment certificate is issued.
Completion Certificate: This is to entitle that the contractor is no longer responsible
afterwards if satisfactory performance is proved by maintenance period and its certification,
outstanding claims and disputes are settled, and closing of accounts are made. Completion
certificate is a certificate that concludes the contractual agreement and will not be considered
binding there after unless otherwise it is proved illegal.

Prepared by Course Instructors. Page 15