Topic 8(a)

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 Lesson Learning Outcome:
◦ Explain several types of procurement methods
[CO2:PO11]

◦ Analyze each procurement method (advantages &

disadvantages). [CO2:PO11]

◦ Analyze which method is suitable for the various

type of project. [CO2:PO11]

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 The basic of a contract is an agreement, which
is composed of an offer and an acceptance.
 Agreement is the statement (oral or written) of
an exchange of promises.
 According to the Commercial Law of Malaysia,
the word „contract‟ is defined as an agreement
between two or more parties that is legally
binding between them.

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 In a written contract, no party can deny in
agreeing to the terms.
 While in a verbal contract (oral), the injured
party may deny in entering into any
agreement or „ganging up‟ with witness to
cheat the other party.

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 A contract is an agreement between the
contractor, who agrees to provide a product
or service (deliverables), and the customer,
who agrees to pay the contractor a certain
amount in return.
 A contract is an official document that
becomes a medium for establishing good
customer-contractor communications and
ensure the project success.

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 In drawing a contract, ensure that all terms,
conditions and pricing are stipulated and
leave nothing open ended.
 It is an advantage to state a specified amount
of deposit as it will lead to a better chance of
securing the award and financial
commitment.

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 The concept of a contract shall be categorized
into 4:

 The principles of a contract include an offer, an

acceptance, and consideration.
 Validity of Contract.
 The reasons a contract is considered illegal.
 The way an agreement without valid
consideration may become valid.

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 The basis of a contract is an agreement.
 An agreement is composed of an offer and an
acceptance.
 In order to see that a contract has been
made, one party has to make an offer.
 An offer must be distinguished from „An
invitation to treat‟, which is referred to as a
mere attempt to negotiate.

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 Offer-is an expression of willingness to
contract on certain terms, made with
intention that it shall become binding as soon
as it is accepted by the person to whom it is
addressed, known as “Offeree”.
 Expression-referred such as a letter,
newspaper, fax, email and even conduct, as
long as it is communicates the basis on which
the “Offeror” (person who make an offer) is
prepared to contract.

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 A document said by one party might
constitute an offer although the party putting
forward does not use the word offer.
 When a contractor tendered for a project
accepting all the conditions in the tender,
document is considered to be an offer from
the contractor to carry out the construction of
the project.

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 An invitation to treat is something by its
nature is incapable of being accepted binding
without further negotiation.
 An invitation to tender sent by the
owner/client is an invitation to treat rather on
'offer'. It does not bind the owner to accept
the lowest tenderer or any of the tenderers
received.

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 A shop owner displaying their goods for sale is
generally making an invitation to treat. They do not
obliged to sell the good to anyone who is willing to
pay for them, even if additional signage or tag
price such as “special offer” accompanies the
display of the goods.

 Means that if a shop mistakenly displays a good s

for sale at a very low price, it is not responsible to
sell it for that amount.

 Advertisement and auctions are consider as an

invitation to treat

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 AN INVITATION TO TREAT AN OFFER

When owner invites When contractor response to

contractors to tender, it is an the invitation, it is considered
invitation to treat. as „an offer‟.

The terms are not definite in The tender price and

nature. construction period are
definite or firmed

The owner does not have to An offer can only be valid up
accept any tender (even lowest). to the validity period.
An invitation to treat can only
be valid as advertised.

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 Another essential to the formulation of a contract is
that the agreement must be supported by
consideration.
 Consideration-It is anything of value promised to
another when making a contract. It can take the form
of money, physical objects, services, promised
actions, etc (something of value, such as money or
personal services, given by one party to another in
exchange for an act or promise).
 In civil engineering contracts, the consideration for
the promise made by the contractor i.e. promise to
carry out the work will usually be the promise by the
owner to pay for the price 'offered' by the contractor.
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1. If A signs a contract to buy a car from B for
$5,000, A's consideration is the $5,000,
and B's consideration is the car.

2. Additionally, if A signs a contract with B

such that A will paint B's house for $500,
A's consideration is the service of painting
B's house, and B's consideration is $500
paid to A.

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 Legally competent parties: Parties entering into the
contract should be legally competent i.e. signing
officer should be in power to sign the contract.

 Free consent: For the contract to be legal parties

signing the agreement must do so legally without
being forced to and there must not be any
misstatement or misinterpretation to deceive any
parties. In such cases the defrauded party can avoid
the contract and can also claim for damages.

 Contract conditions according to law: All conditions

must be according to the established local public
policy and should put up a good example on the
morals of the society as a whole.

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 Contract for constructing a building without getting its
plan approved by local authorities.
 Contract with the element of deceit such as illegal
arrangement with various contractors either not to
compete (to create a monopoly) or ganging up in order
to receive undue profit.
 Contract not signed under free consent. Contract is
done by fraud, crime, by pressure, under influence etc.
 Contract without valid considerations: is defined as the
act or a promise to do something by a party in relation
to promise or giving interests or money by the other
party. Impossible promises or acts are not entertained
because this is not a valid consideration.

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 An agreement without considerations may be valid in
the following circumstances, which are based on the
principles of equity:

 The agreement in writing

 The agreement must be registered in the registration of
company office.
 The parties must be in near relation with each other.

Contract in Writing should be signed by both parties by

authorized persons. The exact names or legal titles of
the parties must be indicated in the signatories and the
seal of public body will be fixed with the agreement.

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In Malaysia context, these following documents are
legally bind and form as part of the Contract:
 Article of Agreement
 Form of Tender
 Letter of Acceptance
 Condition of Contract
 Contract Drawing
 Bill of Quantities
 Specification
 Bank Guarantee
 Insurance Guarantee

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 Article of agreement is a binding document that
needs to be signed by both the customer and the
contractor to fulfill the promise in which there
exists an offer and acceptance as agreed by both
parties.
 For instance: it is the obligation of the customer to
make payment upon completion of the job and to
liaise with the contractors on the job requirements.
It is the obligation of the contractor to perform the
job accordingly and conform to the requirements
of the customer.

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 Form of tender is a form required to be filled
up by the contractor and signed and must be
duly witnessed by a third party.
 In this form, the job is stated clearly and the
amount of the job to be paid. If the
contractor fails to comply with the conditions
stated, the customer reserves the right to
reject the tender.

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 The customer issues the Letter of Acceptance
on the tender to the successful contractor.
 Generally, the issuance of Letter of
Acceptance and the Tender Document
legally-binds the customer and the contractor
pending the execution of the contract
agreement (Article of Agreement)

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 The Malaysian Government has an
established standard form of contract that all
registered contractors in Malaysia have to
comply with the Conditions of Contract
stipulate all the rule, specific requirements
and details in the Contract.

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 General Conditions define the terms under
which work is to be carried out, the
relationship between employer, employer and
contractor, the duties of the contractor,
power of the engineer, terms of payment and
etc.
 It is generally the practice to use a standard
Conditions of Contract with adjustments
where required to suit special conditions.

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 Ideally the drawings should detail the entire
Contract work.
 For many reasons this is not always practicable,
but tenderers (contractors) must be given
sufficient information to enable them to
understand what is the project require.
 All available information on the topography of
the site and the nature of the ground should be
made accessible to tenderers preferably by being
shown on the drawings.

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 All bidding contractors are required to fill up the
Bill of Quantities with their quantity figures and
price. The Bill should be priced so as to represent a
reasonable amount in the Document Tender.
 The price stated is inclusive of provision, delivery,
unloading, storage, packing, carriage and cartage,
hoisting all labour setting, fitting and fixed
position, use of plant, supervision, establishment
charges, profit, labour and everything else that is
necessary for the due completion of the job.

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 Specification amplifies the information given in
contract drawings and BQ.
 It describe in detail the work to be executed under
the contract, the nature and quality of material to
be used, etc. It may specify the method to be
adopted and any special responsibilities to be
borne by the contractor.
 The contractor must abide to these specifications
given. If the contractor is not able to comply to the
specifications, or uses materials or products which
are different from the specifications, he needs to
seek and secure prior approval from the customer.

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 The purpose of a civil engineering specification
is to instruct the contractor precisely
regarding:
◦ The construction method that he may or may
not allow to use.
◦ The works that he has to carry out.
◦ The type and quality of materials and
workmanship.

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 Method Specification
◦ Method specification states or explains precisely
equipment and procedure to be used in performing
the construction.
◦ Since everything is stated, if any damage occur the
liability for damages will be liable on the
owner/engineer's side.

 Performance Specification
◦ Performance specification or Result specification
only specified the result to be achieved.
◦ Since the method is not specified, the contractor
will liable all the cost for any damages or failure.

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 The contractor has to furnish the client a
performance bond (bank guarantee) 5% of the
contract price and it shall be valid until the
certificate of practical completion is issued.
 The contractor has to furnish the money before
start the project. If contractor fail to do so, then he
cannot start the works.
 Bank guarantee is implement to ensure that
contract will be implement properly and to protect
client importance.
 If contractor bankrupt or do not proceed the works
then client can take this bank guarantee.

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 The contractor has to furnish the client
Insurance guarantee for workmen
compensation and social security registration.

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 There are many methods of awarding a contract.
Some of this method practiced in Malaysia can be
classified under 2 major headings such as:

 Price Based System:

◦ Lump Sum Contracts
◦ Schedule of Rate Contracts
◦ Bill of Quantities Contract

 Cost Based System/Cost Reimbursement Contract:

◦ Cost Plus percentage of cost contract
◦ Cost plus fixed fee contract
◦ Cost plus fluctuating fee contract
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Priced Based system
 In priced based systems, prices being submitted by
the contractor in his bid. It is also known as “Fixed
Price Contract”

Cost Based system

 In cost based system, the contracts are “Cost
Reimbursement Contract”, which mean the actual
cost incurred by the contractor is reimbursed
together with fee to overcome overheads and as
profit.
 Include the cost of material, labour, supervision,
equipment and other items having residual value.
 He is also paid for his services in the management
of the work and as profit.

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◦ Lump Sum Contracts
◦ Schedule of Rate Contracts
◦ Bill of Quantities Contract

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 An easy and simplified form of contract. Mean is
easy to manage since payment is made only once.
 The contract price is a fixed sum quoted by the
contractor for the entire works as specified in the
contract documents, which is contains of the
drawing, specification and etc.
 No individual rates are quoted for each item of work.
 Detailed or approximate quantities may not be issued
with the form of tender.
 As a rule, construction contractors are not entitled
to receive more money than the contract specifies.

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 In most cases, there is no provision to vary the
contract price even if the actual work executed
differs in quantities from those on which the tender
was based.
 However, there may be provision if the specified
work is varied.

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i. Suitable for projects where later changes are
not expected, and a simple and quick form of
payment is preferred.
ii. Payments are made in stages, as identified in
agreement form. For example 10% of the
contract price shall be paid upon the
completion of foundation stage.
iii. No physical measurements need to be
taken, general visualization is satisfactory

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i. . If there is any change in the plans and or
drawings, the value of the change should be
negotiated with the contractor. This may
cause delay and sometimes disputes
ii. Lesser control of cash flow from point of
view of the owner. Sometimes owner has to
pay more or sometimes less than the value of
the actual work completed.
iii. There is no provision of payment for
materials at site.

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There are two types :

i. The tenderer is issued with a document having the

schedule of items, prepared for a particular
contract, where he is required to enter the unit
price or rate for each item.

ii. The tenderer is issued with a printed schedule of

price fixed by the engineer. The tenderer may
agree or quote a percentage above or below the
price printed in the schedule, for which he is
prepared to carry out the work of a particular
project.

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 For either type of schedule, it may or may not state
the approximate quantities to be executed for
each item of work.
 The „contract price‟ is thus determined by
summing up the amounts obtained by multiplying
the respective quoted rates and actual quantity of
each item of work to be executed.
 Provision for valuation on a day-work basis or
otherwise is usually made in this form of contract,
in cases where the quoted rates are not applicable.
 A schedule listing the works with the rates to
provide a list of rates for the valuation of variations
purpose.

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 This type of contract is chosen usually for urgent
works, maintenance, uncertain (piling) work,
reinstatement work after a fire/earthquake.
 The government does not prefer this method of
contracting, because the advantage of discounts
on bulk buying by the executers of works cannot
be considered at the tender stage, since the
volume of work is not certain.
 Further the executor has to base his quotations on
actual market price without discounts. In order to
be competitive, he has to guess the volume of
work to be done.

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 Variations in quantities are easily accommodated.
 Owner pay for the cost of work actually executed.
 Experienced consultant may be able to accurately
prepare the schedule of items. Experienced
Architect or Engineer are able to forecast the
types of works and methods appreciate, thus
prepare the schedule of items, even before the
design drawings and specifications are
completed.
 It save time as no quantities shall be provided.

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 Since only approximate quantity of work is known at
tendering stage, it is difficult to estimate the actual
contract price and to plan properly the contract
programme, and to project the cash flow.

 The quotations for the unit rates tend to be high. In the

case of rehabilitation projects or reinstatements works
the executor of the work cannot exactly estimate the
type and quantum of the different items of work to be
replaced or repaired. Hence the quotations for the rates
may be high.
 Contractors may quote at lower rates to be more
competitive; which may lead to financial problems.

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 A quantified and completed list of works describing
the full requirements in the drawings and
specifications.
 Most usual type of fixed-price contract
 Item rate contract are based on detailed BQ
 Contractor quotes unit price or rate for each item of
work.
 The „Contract Price‟ is the sum total of prices of each
item of work mentioned in the BQ.
 Payments are generally made on the basis of the
actual measured quantity of work executed for each
item in the BQ and the rate quoted.


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i. Changes made in the drawings at later stages may increase or
decrease the quantity of work to be done. Since the price is
based on the rates, variations can easily be identified and
calculated.
ii. Flexibility for owner in term of cash flow management. If the
owner has difficulty to manage his cash flow, he may identify
particular items to change the item to be done at lower cost.
iii. Material on site is paid 90% of the actual value.
iv. Easier for pricing. A quantity of each trade is known, thus
easier for the contractors to price.
v. Owner knows exactly what he pays for. It shows the
breakdown of every item of works and how the total price is
arrived at.
vi. Lesser risk to owner and contractor. They pay exactly
according to rates quoted.

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 It may be necessary to supervise to assure the
quality of work.
 Time consuming for BQ preparation. This may vary
from 2 to 6 months; thus extent the time spends
for initial planning.
 Time consuming for tender analysis (analyzing of
BQ contracts, tender documents, quantities, price
difference in particular item may consume 2-3
months).
 Planning & implementation cost. The consultants
need to be paid (normally base on % the contract
price) for the preparation of BQ and subsequent
supervision of work.

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 LS Contract
Detail price of each item is
not quoted
Higher risk (variation) to
owner and contractor as
rate of each items are not
specified
Take lesser time to
prepare tender document
BQ Contract
Detail price of each item is
quoted
Lower risk (due to
Variation Order) as rate of
each item are specified
A lot of time spends to
prepare BQ
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 Schedule of Rates Contract BQ Contract
There is no implied guarantee given that All of the work scheduled
all or any of the work scheduled will be will be carried out
carried out
More items are scheduled for temporary Lesser items are
works than usually appear in BQ, because scheduled for temporary
the amount of temporary works that the work
contractor has to under take is uncertain
Lesser time spend in preparing tender A lot of time spend to
document, just adopt the standard prepare BQ
schedule of rates
No guarantee on the quantities stated. The The quantities stated is
quantities against individual items may not abstract from drawings
be stated; may indicated as estimated &specification, which have
amount or round figure certain level of accuracy
regarding the work to be
carried out
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◦ Cost Plus percentage of cost contract
◦ Cost plus fixed fee contract
◦ Cost plus fluctuating fee contract

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 The contractor in this form of contract
charges an agreed fee in terms of a
percentage of the cost of the actual work
executed.
 The percentage varies from 5% to 20%.
 In case of UTM, Skudai project a 15% margin
was awarded.

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i. Since the entire cost is to be charged to the
employer, there is a less likelihood on negligence
on quality of material, construction and
supervision, however complicated the work may be.
ii. Where there is uncertainty in the case of work to
be executed, as for example in the case of
foundation work, this form of contract may be
suitable.
iii. The owner gains great flexibility to involve in the
project effectively.

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i. There is no incentive to complete the works as
quickly as possible, or to try to reduce costs.
ii. Contractor could increase his profit by increasing
the contract price. Such as cost of construction
increase by delays, expensive materials, poor
control in supervision and negatives practices.

For example in a particular case the maximum

repetitive utilization of formwork was avoided by
destroying/burning the twice use of formwork.
Further there may be wastages in terms of
hardened cement, inexperienced labour and
supervisors.
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 The fixed fee charged by the contractor is an
agreed predetermined lump sum and it does
not fluctuate with the cost of the work
executed.

 The fix fee may have been negotiated on a

percentage basis on an anticipated cost of
work that had been to be executed.

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 The contractor is not inclined to push up the
cost of work, as his profit from his
undertaken job is already fixed.
 It is to the contractor‟s advantage if the work
is accelerated (early finish), so that the
contractor could earn his fixed fee as early as
possible and utilize the resources on the
other job.

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 The contractor may neglect the correct
procedure to expedite the work. The
contractor may try to reduce the cost of
supervision, expedite with the work,
neglecting the correct construction process to
maximize the profit.

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 This is also known as Cost Plus Sliding of Fee
Contract, since the fee paid to the contractor is
based upon some form of a sliding scale.
 It is designed in such a way that the contractor may
have a definite financial incentive to effect
economy in the cost of work (to the owner).
 As the cost of the project increases, the percentage
become lesser

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 Project Cost % of fee
Below RM2 million 30
RM2 million – RM12 million 10-20

Above RM12 million 12-15

Cost Fluctuating Fee Total

2 30% 2+0.6=2.6

10 15% (say) 10+1.5=11.5

5 12% (say) 5+0.6=5.6

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-THE END-

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