Professional Documents
Culture Documents
CONTRACTING
WHAT IS A CONTRACT
Architect/Engineers (A/E)
Prime/General Contractor
Sub-contractors
Suppliers
Banks & Financial Institutions
Specialized Service Agencies
Labor
Regulatory agencies
General Public
Flows from the contract but is not in the form of explicit statement
Come from long-standing, commonly held understandings that are
implied by the contract
Tort Liability
Based on tort law
A tort is a civil wrong
Central Concept: in living our daily lives, we cannot, with
impunity, either intentionally or unintentionally conduct
our affairs in a manner that will injure or damage others
Does not depends on the existence of a contract
Many individuals believe that their liabilities are limited
to those resulting from breach of the provisions in the
contracts to which they are party
A mistaken notion is that tort liability arises only when a
person knowingly and intentionally acts in a manner that
injures or damages another
An intentional tort may constitute a criminal act in
addition to a civil wrong
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
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 asrequired basis
PO for continuing supply may be open ended or limited to
stipulated maximum quantity.
PURCHASE ORDERS
Conflicts with sellers sales quotations
The fine print on the back of the preprinted vendors 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
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
INSURANCE CONTRACTS
Primary parties
Construction Contractor the insured
Insurance Company the carrier
Additional Parties additional named insured
Policies for the construction industry
Workers compensation and employers liability policies
Public (or third-party) liability policies
Builders risk policies
Equipment floater policies
Miscellaneous policies for special situations and needs
Named Exclusions
Additional Names Insureds
Deductibles
Policy Term
Subrogation
Policy Cancellations
Other issues
Claims-Made Vs. Occurrence Policies
Premium Escalation and Diminished Coverage
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
BIDDING DOCUMENTS
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
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
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
STANDARD FORMS-OF-CONTRACT
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/whic
h_contract.asp
Sub-consultancy Agreement
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
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
UOM
Descripti
on
Quantit Rate
y
Amoun
t
Remark
s
Mode of payment
Same as item rate
For
An item rate contract
A percentage rate contract
A Lump sum contract
An EPC contract (partial Item rate & Lump sum)
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
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 years 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
Concession
Pros
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.
Contractor's
profit
16.5
Total cost to
owner
13.5
16.5
16.5
16.5
13.5
1.35
14.85
16.5
1.65
18.15
13.5
14.5
16.5
17.5
13.5
1.75
15.25
16.5
0.25
16.75
13.5
1.35
14.85
16.5
16.5
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 suretys 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
doesnt 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
Owners misconception about performance bonds
Possessing the bond does not imply absolute power over
contractor
Surety wont act until they believe principal is truly in
default.
If surety pays up and later it is discovered that there really
wasnt any default on part of the principal, the surety cant
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 wont 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
Manifestation of Intent
Express contract terms
A contract prominently containing that express provision is by
far the best manifestation of intent
Course of Performance
The sequence of events during the contract from its beginning
to some particular time
The actions and attitudes of the parties during the period prior
to the occurrence of a dispute is very important
Course of Dealing
How parties previously dealt with each other, prior to the
current contract
Past actions indicate what parties are likely to have intended in
a new contract
Manifestation of Intent
Separately Negotiated terms
Such terms will be taken as strong manifestations intent
These were drafted specifically for the contract. Boiler
plate language can prove harmful in such cases
Customs and Trade practices
An express or an implied reference to the customs and
trade practices of the industry
They are determinate in resolving otherwise unclear
contract meaning
Parties are generally expected to interact according to the
customs and trade practices of the industry
Does it merit a
Breach of
Contract Law
Suit?