DEPARTMENT: ARCHITECTURE
COURSE TITLE: PROJECT MANAGEMENT FOR ARCHITECTS
COURSE CODE: ARC819
LECTURER: ARC. TYABO mnia
REMEMBER; GOOD MORALS NEVER GO OUT OF STYLE +2348036303542 [Link]@[Link]
Module
WEEK 2: Contract Strategy
1. What is a Contract
2. Selection of Contract Type
3. Types of Contracts 24-02-25
4. Contract Administration
5. Selecting the Contractor
6. Sub-Contracting
Contract Strategy
What is a Contract?
Contract may be defined as an agreement
which is enforceable by law. It is a written
undertaking for execution of work or supply of
materials or performance of any service.
An agreement comes into existence whenever
one or more persons promise to one or others,
to do or not to do something.
Contract Strategy
What is a Contract?
Some agreements cannot be enforced through
the courts of law, e.g., an agreement to play
cards or go to a cinema. An agreement, which
can be enforced through the courts of law, is
called contract.
The Contract Act is the law governing
agreements which create obligations, and in
case of a breach of a promise by one party to
the agreement, the other has a legal remedy.
Contract Strategy
Parts of a Contract
1. Offer / proposal
When one person signifies to another his
willingness to do a work, he is said to make a
proposal. Communication of an Offer is done
by words or by actions.
Contract Strategy
Parts of a Contract
2. Acceptance
When the person to whom the proposal is
made signifies his assent thereto, the proposal is
said to be accepted.
Acceptance is considered valid subject to the
following conditions:
Contract Strategy
Parts of a Contract
1. Acceptance must be absolute;
2. It must be communicated;
3. It must be according to the mode
prescribed;
4. It must be given within the time specified or
within reasonable time.
Contract Strategy
Essential Elements of a Contract
An agreement becomes enforceable by law
when it fulfils certain conditions. These
conditions, which may be called the Essential
Elements of a Contract, are explained below:
1. Offer and Acceptance:
There must be a lawful offer by one part and a
lawful acceptance of the offer by the other
party.
Contract Strategy
Essential Elements of a Contract
Intentions to create Legal Relationship:
2.
There must be an intention (among parties) that the
agreement shall result in or create legal relations. An
agreement to dine at a friend‘s house is not an
agreement intended to create legal relations and is
not a contract. But an agreement to buy and sell
goods or an agreement to marry, are agreements
intended to create some legal relationship and are
therefore contracts, provided the other essential
elements are present.
Contract Strategy
Essential Elements of a Contract
3. Lawful Consideration:
Subject to certain exceptions, an agreement is legally
enforceable only when each of the parties involve
give something and get something. An agreement to
do something for nothing is usually not enforceable by
law. The “something” given or obtained is called
consideration. The consideration may be an act
(doing something) or forbearance (not doing
something) or a promise to do or not to do something.
Contract Strategy
Essential Elements of a Contract
Capacity of Parties:
4.
The parties to an agreement must be legally capable
of entering into an agreement; otherwise, it cannot be
enforced by a court of law. Want of capacity arises
from lunacy, idiocy, drunkenness and similar other
factors. If any of the parties to the agreement suffers
from any such disability, the agreement is not
enforceable by law, except in some special cases.
Contract Strategy
Essential Elements of a Contract
Free Consent:
5.
In order to be enforceable, an agreement must be
based on the free consent of all the parties. There is
absence of genuine consent if the agreement is
induced by coercion, undue influence, mistake,
misrepresentation and fraud. A person guilty of
coercion, undue influence etc. cannot enforce the
agreement.
Contract Strategy
Essential Elements of a Contract
Legality of the Object: The object for which the
6.
agreement has been entered into must not be
illegal or immortal or opposed to public policy.
Certainty: The agreement must not be vague. It
7.
must be possible to ascertain the meaning of the
agreement, for otherwise it cannot be enforced.
Possibility of Performance: The agreement must
8.
be capable of being performed. A promise to do
an impossible thing cannot be enforced.
Contract Strategy
Essential Elements of a Contract
9. Void Agreements:
Void agreements are those that cannot be
enforced by law. There are five categories of
agreements which are expressly declared to be
void. They are:
Contract Strategy
Essential Elements of a Contract
9. Void Agreements:
a. Agreement in restraint to marriage
b. Agreement in restraint of trade
c. Agreement in restraint of proceedings
d. Agreements having uncertain meaning
e. Wagering agreement
Contract Strategy
Essential Elements of a Contract
10. Writing Registration and Legal Formalities:
An oral contract is a perfectly good
contract, except in those cases where
writing and/or registration is required by
some statute.
Contract Strategy
Selection of Contract Type
The following factors affect the choice of
specific type of contract:
Nature and complexity of the works;
Size and duration of contract;
Degree of definition (scope, risk,
uncertainty);
Status of design;
Contract Strategy
Selection of Contract Type
The following factors affect the choice of
specific type of contract:
Technical/Supervisory resource of
Employer;
Budgetary/Financing/Borrowing
constraints;
Previous experience of Employer;
Standard documents of funding agency.
Contract Strategy
Types of Contract
While construction contracts serve
as a means of pricing construction,
they also structure the allocation of
risk to the various parties involved.
Contract Strategy
Types of Contract
The owner has the sole power to
decide what type of contract
should be used for a specific facility
to be constructed and to set forth
the terms in a contractual
agreement.
Contract Strategy
Types of Contract
It is important to understand the risks
of the contractors associated with
different types of construction
contracts.
Contract Strategy
Types of Contract
Construction contracts take the
following forms:
1. Competitive (fixed price) contract:
Lump Sum
Unit price
Contract Strategy
Types of Contract
2. Negotiated (Cost plus) Contract:
Cost plus fixed fee
Cost plus fixed percentage
Cost plus variable fee
Target cost/estimate
Guaranteed maximum price
Contract Strategy
Types of Contract
3. Special Contract:
There are certain special contracts used at different
occasions. Some of these contracts are:
Turnkey contract
Package contract
Negotiated contract
Continuing contract
Running contract
Joint venture contract
BOT contract
BOOT contract
Contract Strategy
1. Competitive (fixed price)
contract
Lump Sum Contract
Lump sum contracts are typically used for
buildings. The quantities of materials
required can be calculated with sufficient
accuracy during the bidding process to
allow contractors to submit a single lump
sum price for the work.
Contract Strategy
1. Competitive (fixed price)
contract
Lump Sum Contract
In a lump sum contract, the owner has
essentially assigned all the risk to the
contractor, who in turn can be expected to
ask for a higher markup in order to take
care of unforeseen contingencies.
Contract Strategy
1. Competitive (fixed price)
contract
Lump Sum Contract
Beside the fixed lump sum price, other
commitments are often made by the
contractor in the form of submittals such as
a specific schedule, the management
reporting system or a quality control
program.
Contract Strategy
1. Competitive (fixed price)
contract
Lump Sum Contract
If the actual cost of the project is
underestimated, the underestimated cost
will reduce the contractor's profit by that
amount. An overestimate has an opposite
effect, but may reduce the chance of
being a low bidder for the project.
Contract Strategy
1. Competitive (fixed price)
contract
Unit Price Contract
In a unit price contract, the risk of
inaccurate estimation of uncertain
quantities for some key tasks has been
removed from the contractor.
Contract Strategy
1. Competitive (fixed price)
contract
Unit Price Contract
However, some contractors may submit an
"unbalanced bid" when it discovers large
discrepancies between its estimates and
the owner's estimates of these quantities.
Contract Strategy
1. Competitive (fixed price)
contract
Unit Price Contract
Depending on the confidence of the
contractor on its own estimates and its
propensity on risk, a contractor can slightly
raise the unit prices on the underestimated
tasks while lowering the unit prices on other
tasks.
Contract Strategy
1. Competitive (fixed price)
contract
Unit Price Contract
If the contractor is correct in its assessment,
it can increase its profit substantially since
the payment is made on the actual
quantities of tasks; and if the reverse is true,
it can lose on this basis.
Contract Strategy
2. Negotiated (Cost plus)
Contract
Cost Plus Fixed Fee Contract
Under this type of contract, the contractor
will receive the actual direct job cost plus a
fixed fee, and will have some incentive to
complete the job quickly since its fee is
fixed regardless of the duration of the
project.
Contract Strategy
2. Negotiated (Cost plus)
Contract
Cost Plus Fixed Fee Contract
However, the owner still assumes the risks of
direct job cost overrun while the contractor
may risk the erosion of its profits if the
project is dragged on beyond the
expected time.
Contract Strategy
2. Negotiated (Cost plus)
Contract
Cost Plus Fixed Percentage
Contract
For certain types of construction involving
new technology or extremely pressing
needs, the owner is sometimes forced to
assume all risks of cost overruns. The
contractor will receive the actual direct job
cost plus a fixed percentage, and have
little incentive to reduce job cost.
Contract Strategy
2. Negotiated (Cost plus)
Contract
Cost Plus Fixed Percentage
Contract
Furthermore, if there are pressing needs to
complete the project, overtime payments
to workers are common and will further
increase the job cost. Unless there are
compelling reasons, such as the urgency in
the construction of military installations, the
owner should not use this type of contract.
Contract Strategy
2. Negotiated (Cost plus)
Contract
Cost Plus Variable Fee
For this type of contract, the contractor
agrees to a penalty if the actual cost
exceeds the estimated job cost, or a
reward if the actual cost is below the
estimated job cost. In return for taking the
risk on its own estimate, the contractor is
allowed a variable percentage of the
direct job-cost for its fee.
Contract Strategy
2. Negotiated (Cost plus)
Contract
Cost Plus Variable Fee
Furthermore, the project duration is usually
specified and the contractor must abide by
the deadline for completion. This type of
contract allocates considerable risk for cost
overruns to the owner, but also provides
incentives to contractors to reduce costs as
much as possible.
Contract Strategy
2. Negotiated (Cost plus)
Contract
Target Cost/Estimate
This is another form of contract which
specifies a penalty or reward to a
contractor, depending on whether
the actual cost is greater than or less
than the contractor's estimated
direct job cost.
Contract Strategy
2. Negotiated (Cost plus)
Contract
Target Cost/Estimate
Usually, the percentages of savings or
overrun to be shared by the owner
and the contractor are
predetermined and the project
duration is specified in the contract.
Bonuses or penalties may be
stipulated for different project
completion dates.
Contract Strategy
2. Negotiated (Cost plus)
Contract
Guaranteed Maximum Cost
When the project scope is well
defined, an owner may choose to
ask the contractor to take all the risks,
both in terms of actual project cost
and project time.
Contract Strategy
2. Negotiated (Cost plus)
Contract
Guaranteed Maximum Cost
Any work change orders from the
owner must be extremely minor if at
all, since performance specifications
are provided to the owner at the
outset of construction.
Contract Strategy
2. Negotiated (Cost plus)
Contract
Guaranteed Maximum Cost
The owner and the contractor agree to a
project cost guaranteed by the contractor
as maximum. There may be or may not be
additional provisions to share any savings if
any in the contract. This type of contract is
particularly suitable for turnkey operation.
Contract Strategy
3. Special Contract
Turnkey contract
A turnkey contract is an integrated contract
in which all works are in a single contract
called the main contract. The main
contractor can sublet the contract to sub-
contractors who are specialists in their
respective fields.
Contract Strategy
3. Special Contract
Package contract
In a package contract, two or more related
jobs, each of which could form a separate
contract are combined in a single contract.
Often times, design and development are
combined with construction and supplying
or maintenance.
Contract Strategy
3. Special Contract
Negotiated contract
In this type of contract negotiation across
the table takes place between the
representatives of the owner and the main
contractor for the project cost and other
conditions of contract. In this type of
contract, detailed project specifications,
are arrived at by discussions between the
owner and the main contractor.
Contract Strategy
3. Special Contract
Continuing contract
In this type of contract new or additional
work is awarded to the contractor on the
basis of the agreed terms and conditions of
an existing contract. Such contract do not
require retendering and hence can save
time and money.
Contract Strategy
3. Special Contract
Running contract
Such contracts provide goods and services
at specified intervals or as on when required
by the owner. The contract price is not fixed
and the payment is based on actual goods
supplied and services rendered as specified
in the contract document.
Contract Strategy
3. Special Contract
Joint venture contract
An extra ordinary large construction project
to be accomplished under a general
contract may require a greater
concentration of financial, administrative
and technical resources that can be
mobilized by another company.
Contract Strategy
3. Special Contract
Joint venture contract
This has led to the development of
joint venture(J.V) type of contract in
which several firms combined their
assets, plants and personnel to
undertake such a project.
Contract Strategy
3. Special Contract
BOT contract
Build - Operate – Transfer , a third-party
contract to build, then operate an assest
(e.g. building) for a specific amount of time
(for fee) and then transfer the asset back to
contracting company or entity (usually a
government entity). This is commonly used
by public sector for large capital projects.
Contract Strategy
3. Special Contract
BOT contract
For e.g: a power corporation may ask
bidders to setup power plant on BOT basis,
where in the bidder agrees to design and
construct the plant, in return for the right to
operate the plant; say for 10 years, during
which the contractor can generate and sell
the power.
Contract Strategy
3. Special Contract
BOOT contract
BOOT- Build – Own –Operate –Transfer is
similar to BOT except that rather than
receiving a fee for operating it, the third
party receives the net income from the
asset as if it owned it. This asset is a revenue
generating asset (e.g: toll bridges and
power stations).
Contract Strategy
Contract Administration
Contract Administration is the process of
managing and overseeing all aspects of a
building contract, including its negotiation,
execution, monitoring and dispute
resolution.
Contract Strategy
Contract Administration
This process ensures that the project is
completed according to the agreed terms
and specifications, while protecting the
interests of both the contractor and the
owner (client). The following aspects ensure
the smooth administration of a contract:
Contract Strategy
Contract Documents
The contract is defined by the contract
documents, which are developed from the
tender documents. In a logical order, these
documents refer to the following subjects:
Input from the client (task description).
Output of the contract (specifications,
results to be achieved).
Prices for the contractor's contribution.
Responsibilities and procedures (liability,
resources provided, time schedule,
payment conditions, change procedures,
etc).
Contract Strategy
Contract Documents
Legally, the Agreement is the most
important document here. It is sometimes
called the contract. Information usually
included in the agreement are of three
parts. The first part is a short introductory
paragraph which defines the parties, gives
the date of the agreement and states that
each party agrees to what follows.
Contract Strategy
Contract Documents
The second part contains the elements of
contract and defines the work to be
undertaken. The final paragraph confirms
the agreement and provides space for
signatures of the parties.
Contract Strategy
Conditions of Contract
The conditions of a contract are rules by
which the execution of the contract is to be
governed. They set-out the responsibilities,
rights and liabilities of the two parties. They
also set-out the actions to be taken by the
parties if and when certain eventualities
should arise. The terms of a contract legally
fall into two categories:
Contract Strategy
Conditions of Contract
Conditions: They are terms expressing
matters basic to the contract. A failure to
perform the requirements of a condition is a
fundamental breach of an essential
obligation giving the aggrieved party the
right to:
1. End the contract and claim damages
or
2. Continue the contract and claim
damages.
Contract Strategy
Conditions of Contract
Warranties: A Warranty is a guarantee
about the quality or characteristics of a
product, service or property. It is essentially
a minor term of contract.
The conditions of a contract usually
comprise the following:
Contract Strategy
Conditions of Contract
1. A standard form of general conditions of
contract appropriate to the nature of
the work involved
2. A series of amendments to the forging in
order to adjust to the circumstances of
the actual contract concerned
3. A number of special conditions, which
deal with matters peculiar to the
contract and not dealt with by the
standard.
Contract Strategy
Special Conditions of Contract
Special conditions are new clauses to
augment the general conditions of a
standard form. Usually, they deal with
subjects not touched on by the standard
form. It is often simpler to introduce a
special condition than to amend a
standard form condition.
Contract Strategy
Construction Claims
A construction claim is a request for
payment or time extension to which the
contractor considers him/herself entitled.
There are three types under which claims
are required:
Extension of time only
Additional cost
Both extension of time and additional cost
The main reasons for construction claims
may include:
Contract Strategy
Construction Claims
Late possession of site or late provision of
working drawings
Change of contract start date or activities
schedule
Design change and variation
Delays in approval and work inspection
Work acceleration by the client
Late delivery of materials supplied by the
client
Different ground and/or site conditions
Unforeseen events and disasters
Contract Strategy
Selecting the Contractor
Selecting key personnel and organizations
that will participate in a project is a major
step for the owner and can mean the
success or failure of a project. The
competitive bidding process has been the
main vehicle for contractors to obtain jobs.
Contract Strategy
Selecting the Contractor
The process is required by law for public
projects, which has been the largest
percentage of all projects, except in
emergencies such as war or natural
disasters. Under this process, a simple
quantitative criterion is used to award the
bid to the “lowest responsible bidder”, thus
potentially obtaining the lowest
construction cost.
Contract Strategy
Selecting the Contractor
The process, however, has its drawbacks,
including:
1. Overlooking important criteria such as
contractor’s experience and strength;
2. Potentially causing construction delays
and problems if the contractor bids
below cost to win the job;
3. Contributing to adverse relationships
between the owner and the contractor.
Contract Strategy
Selecting the Contractor
The competitive bidding process
encompasses three main steps:
announcement, bid preparation and bid
evaluation. To announce for a project, the
owner should have the design completed
and a bid package prepared with all
design information.
Contract Strategy
Selecting the Contractor
The owner then announces a general call
for bidders or sends a limited invitation to a
list of pre-qualified contractors. Through the
limited invitation, the owner can reduce
potential construction problems by
avoiding unknown contractors who
intentionally reduce their bids to win jobs,
particularly if the project requires a certain
experience.
Contract Strategy
Selecting the Contractor
Owners, therefore, need to maintain a list of
qualified contractors with whom they had
successful experience or by advertising a
call for pre-qualification.
Contract Strategy
Sub-Contracting
On almost all construction projects, some of
the works are sub-contracted to specialty
contractors, known as sub-contractors. The
greatest part of the work is sub-contracted
on building projects, with a lesser amount
usually sub-contracted on heavy
construction projects.
Contract Strategy
Sub-Contracting
The client retains the right to approve sub-
contractors. The contractor who employs
sub-contractors to carryout part of the
works must be totally responsible for their
workmanship, performance, and general
behavior on the contract.
Contract Strategy
Sub-Contracting
Any communication on these aspects
should be made between the main
contractor and the client. It is the former's
responsibility. If the client wishes a particular
sub-contractor to carryout part of the work,
he may then make such a nomination.
Contract Strategy
Sub-Contracting
Nominating sub-contractors in such way is
useful when work of a specialized nature
dictates such action. It is common for
clients to place other restrictions on sub-
contracting, which the main contractor has
to abide by.
Thank You