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TOPIC 8

PROJECT DELIVERY SYSTEM,


PRINCIPLES LAW OF CONTRACT
AND
TYPES OF CONSTRUCTION
CONTRACTS
TOPIC 8

LESSON OUTCOMES (LO)

At the end of this module, students should be able to:


Explain Project Delivery System (Traditional, Turnkey and other types of
contract practice in Malaysia.
Understand contract application in construction projects.
Explain the concept and basic principles of construction contract.
Distinguish different types of construction contracts (Price and Cost
Based System).
INTRODUCTION

Project Delivery System and Procurement

Project Delivery System refers to a method used in implementing the project and
the parties involved such as Owner/Client and professional members (architect,
engineers and QS) in construction project. It is the overall processes by which a
project is designed, constructed, and/or maintained.
Procurement is the action of obtaining or procuring something and buying goods
such as materials and equipment. It is the process of finding, agreeing terms and
acquiring services or works from an external source, often via a tendering or
competitive bidding process to ensure the buyer receives goods, services or
works at the best possible price, when aspects such as quality, quantity, time, and
location are compared. 

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PUBLIC PROCUREMENT STRATEGIES

Procurement of Public
Assets and Services

Conventional Public-Private Partnership


Public ector initiates, (PPP)
designs, finances, owns, Public and Private Sectors
operates, maintains; work in partnership (PPPs)
contractor constructs or to deliver public assets and
design and constructs services
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Method Method
Traditional, also knows as Design- Funding arrangement through
Bid-Build concession agreement between
Design-Build/Turnkey the public sector and the private
Management based. i.e. either sector:
Management Contracting or ‒  Privatization
Construction Management ‒  Private Finance Initiative (PFI)

(Khairuddin, 2008) ‒ Private Finance Initiative (PFI): Concept and Method of Procurement for
Construction Projects (with Specific Reference to Malaysia)
CONVENTIONAL PROCUREMENT

Conventional Procurement Options

Method of project delivery


Among the approaches are :-
1) Traditional Contract 
2) Turnkey (Design and Build) Contract
3) Construction Management
4) BOT (Build, Operate Transfer) 

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TRADITIONAL CONTRACT

General Flowchart of Traditional Contract

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TRADITIONAL CONTRACT

Characteristics of Traditional Contract

Design and construction are separated.


Consultant/Designer (architect, architect/ engineer, or engineer) will be
employed by Owner for preparing a design and Contract Documents:
‒  Negotiated professional fee for design services
‒  Fixed price (Lump sum), unit price, guaranteed maximum, or cost plus a        
   fixed construction contract = BQ take president 
Then, the Main Contractor (MC) will be employed by the Owner for
construction via competitive bid or negotiate tender.
Construction supervision and inspection of the work is coordinated by a
Project Manager (PM) appointed by Owner (who is normally the Consultant
on behalf of the employer)  

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TRADITIONAL CONTRACT

Advantages of Traditional Contract

FIX CONTRACT SUM


The traditional method is a known quantity to owners, designers and
constructors. The procedures and contractual rules of conduct have been
worked out and are well understood. 

SEQUENTIAL FUNCTION

Many professionals prefer this well defined relationship, which reduces


uncertainty. This means that a project is more likely to proceed smoothly from
beginning to end. 

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TRADITIONAL CONTRACT

Advantages of Traditional Contract

DOCUMENTED DESIGN AND SPECIFICATIONS 


The mode also contains considerable contractual protection for the Owner. The
allocation of risk for construction performance rests almost completely on the
contractor and the subcontractors.

COMPETITIVE TENDER

The open bidding procedure, in which the lowest bidder is the ‘winner’ gives
the owner the lowest price available in the marketplace and presumably the
greatest, economic efficiency.  

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TRADITIONAL CONTRACT

Disadvantages of Traditional Contract

The  construction professional does not enter process until the design is
completed, meaning that the design is not usually reviewed for constructability
before it is finished due to problems as follow; 
‒  More responsibility to coordinate and check on the project by Client (PM).  
‒  Additional work for investigation required, when there is design and                    
    supervision problem occur.
‒  Risks in claims against owner in design faults.
The traditional approach is difficult to reduce the time required to do both
design and construction. 

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TRADITIONAL CONTRACT

Typical Traditional Procurement programme for


a 12 month project 

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TURNKEY CONTRACT

General Flowchart of Turnkey Contract

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TURNKEY CONTRACT

Characteristics of Turnkey Contract

Also well known as Design and Build (D&B) Contract.


Design and construction is NOT separated.
The owner hires a contractor who undertakes the entire responsibility of the
project (Design + Construction + Commission).
Consultant/Designer (architect, architect/ engineer, or engineer) will be
employed by the MC.
Some Owner might hire a Project Management Consultant (PMC) to act as
advisor to them.

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TURNKEY CONTRACT

Advantages of Turnkey Contract

SAVE TIME
The Owner is less heavily involved and sits outside the direct day-to-day
communication between designer and constructor. 

DESIGN LIABILITY BY MC
This keeps owner staffing to a minimum and puts the full responsibility for
good communication, problem solving, and project delivery on design/ build
team. THEREFORE:
‒  Design and supervision problems, it is contractor responsibility.
‒  No claims against Owner for design faults. 

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TURNKEY CONTRACT

Advantages of Turnkey Contract

WORK PROGRESS AHEAD


Good communication and collaboration between the designers and the
construction professionals allows construction input early in the design
phase, therefore the project is easily to be fast tracked, cutting down on
overall schedule for the project.  

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TURNKEY CONTRACT

Disadvantages of Turnkey Contract
SUB-STANDARD WORK 
Sub-standard work (lower quality) are rarely occur due to factors as follow; 
‒  Owner control lesser on the design and specification of the project.
‒  Designer works for the same company as the builder.
‒  Lack of checks and balances, which MC doing in-house design.  

HIGH CONTRACT PRICE


The main contractor will charge more than actual contract price in line with the
factors as follow; 
‒  Consultant’s fees for additional responsibility and risk on design and                      
    supervision.
‒  Any real pricing is not possible. Instead, an owner usually enters this                      
    arrangement with a conceptual budget but without the guarantee of a firm          
    price. 

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COMPARISON

COMPARISON OF TRADITIONAL CONTRACT & TURNKEY CONTRACT

MERITS
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DEMERITS
PUBLIC-PRIVATE PARTNERSHIP

What is PPP?

Public-Private Partnership is a cooperative arrangement between one or


more public and private sectors, typically of a long term nature of
relationship.
It is when a government agency enters into a working relationship with a
private entity to deliver public infrastructures and/or services.
It involves a long term development and service contract between the
government and private partner.

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PUBLIC-PRIVATE PARTNERSHIP

A Focus efficient
performance- allocation of risk, whole
based life service approach,
PPP
procurement private sector
model which innovation and
optimize management skill.
value for
money.
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Long term Synergies from


partnership linking design,
between public and finance, build and
private sector. operate.

(Ahmad Zamri Khairuddin, 2010) ‒ Public-Private Partnership in Malaysia Development


PUBLIC-PRIVATE PARTNERSHIP

Goals and Key Objectives of PPP

Use government resources to attract private investments.


Improve efficiency in service delivery.
To work together in delivering infrastructures or public services
successfully.

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PUBLIC-PRIVATE PARTNERSHIP

PPP Approach

1)  Private sector contribution:


     i.   Support Financial Investment
     ii.  Improve Technologies
     iii. Efficiency in Service Delivery

2)  Public sector contribution:


     i.  Financial gap funding to make projects commercially viable - reduce 
         the  upfront  capital  costs  of pro-poor  private infrastructure
         investments by  providing  grant  funding  at  the  time  of  financial 
         close,  which  can  be  used  during construction.
     ii. Providing institutions support guidance and regulations.

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PPP, PRIVATIZATION AND PFI

PPP ‒  Government works


hand in hand with the
private sector

Privatization Private Finance Initiative


Government owned (PFI)
agencies sold-off to the The delivery of public assets
public and services using private
sector funding and
expertise.
Method
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Corporatization
Management contracts
Method
BLT
Service Sold
BOT
Financially Free Standing
BOOT
Joint-Venture
BOO
DBFO

(Khairuddin, 2008) ‒ Private Finance Initiative (PFI): Concept and Method of Procurement for
Construction Projects (with Specific Reference to Malaysia)
PRIVATIZATION

What is Privatization?

Privatization means allowing profit-making corporations to take over the duties that
have been performed by public agencies. This means the government will contract out
work to private companies that previously was performed by public employees.

The objectives are to: 


- Cut costs 
- Provide a workforce with specialized skills
- Give financial incentives for managers to work harder

Issue: Faced with tight budgets, many sees privatization as a quick fix. But in the long
run, privatization often ends up costing taxpayers more, while putting private profit
ahead of the public interest.

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PRIVATE FINANCE INITIATIVE (PFI)

What is PFI?

Alternative public procurement strategy. 


Relates to the delivery of public assets and services that in the past were
the realm of the public sector, using private sector project financing and
expertise. It uses private sector capacity and public resources in order to
deliver public sector infrastructure/services according to a specification
defined by the public sector.

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PFI & PRIVATIZATION

Differences between PFI &


Privatization 

Privatization seemed to favor the utility and transport sectors and on


selected services of local governments.
PFI encompasses much wider economic sectors. The utility and transport
sectors, education, health, housing, public buildings and infrastructures.
  

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PFI & PRIVATIZATION

Differences between PFI &


Privatization (cont.) 

Unlike privatization, PFI requires that  

‒  The private sector must genuinely assume risk.


‒  There should be competition where government facilitates a project  
    or seeks a private sector partner or purchases service as customer.
‒  The initiative would not only apply to infrastructure projects but also  
    to any other capital investment  providing service to the public.  

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PRIVATE FINANCE INITIATIVE (PFI)

Projects That Are Suited For


Implementation Of PFI

Long-term stable project: A significant part of the benefit of private


finance projects comes from the whole life approach to contracts that
last for 25‒30 years. For example, school.
Size and complexity: A project where the requirement can be clearly
specified at the outset and which are of the size that the private sector
company can take on their balance sheets.
Extending the reach of private finance: Private finance could be used
in other areas particularly in the provision of services.

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PRIVATE FINANCE INITIATIVE (PFI)

Advantages of PFI

Benefit of project to owner, concessionaire and public in many ways:


As alternative procurement strategy.
Strategic partnering for future development.
Risk transfer valuation to the party that is able to limit and control them.
Challenges to integrate innovation in their project.
Provide contract and project management experience.
Improve interaction of all parties at onset of the construction project.

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PRIVATE FINANCE INITIATIVE (PFI)

Disadvantages of PFI

High costs are usually incorporated when tendering for PFI projects.
Agreements are brought through complex negotiations where the
attitude of government, supportive or otherwise, may either ease or
complicate the problems.
The cost of finance is considerably high, given that government is able to
make loan less than that of private firms.
There could be disparity problems between the private and public sector
in terms of differing modes of operations, decision making and
accountability.

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PFI IN MALAYSIA

PRIVATE FINANCE BEAUTY


INITIATIVE (PFI) It should be aesthetically
PROJECT (2006-2010) pleasing.

UTILITY
It should be suitable for the
purposes for which it is used.

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BASIC PRINCIPLES OF CONSTRUCTION CONTRACT

Contract

Basically a contract is an agreement, which is composed of an


offer and an acceptance.
Agreement is a statement (oral or written) of an exchange of
promises. 
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
deceive the other party. 

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DEFINITION AND CONCEPT

Definition

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

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DEFINITION AND CONCEPT

Definition (cont.)

In drawing a contract, they must 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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DEFINITION AND CONCEPT

Concept

There are 4 elements to form a legal contract:  

1.  The principles of a contract which include an offer, an acceptance,


     and consideration.
2.  Validity of Contract.
3.  The reasons a contract is considered illegal.
4.  The way an agreement without valid consideration may become    
     valid.

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CONCEPT OF CONTRACT

1. Principle (Offer & Acceptance)

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.
When a contractor tendered for a project accepting all the
conditions in the tender, that document is considered to be an Offer
from the contractor to carry out the construction of the project. 
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”.

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CONCEPT OF CONTRACT

1. Principle (Offer & Acceptance)

Expression referred is such as a letter, newspaper, fax, email and even


conduct, as long as there are communication in which the “Offeror”
(person who make an offer) is prepared to contract. 
A document said by one party might constitute an Offer although the
party putting forward does not use the word 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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CONCEPT OF CONTRACT

1. Principle (An Invitation To Treat)

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 than an 'Offer'. It does not bind the owner to accept the
lowest tenderer or any of the tenders received. 

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CONCEPT OF CONTRACT

1. Principle (An Invitation To Treat)

Example:

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 goods for sale at a very low
price, they not responsible to sell it for that amount.
Advertisement and auctions are considered as an Invitation To Treat.

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CONCEPT OF CONTRACT

Comparison between  ‘An Invitation


To Treat’ and ‘An Offer’

AN INVITATION TO TREAT AN OFFER

When Owner invites When Contractor response


contractors to tender, it is an to the invitation, it is
Invitation To Treat. considered as ‘an Offer’.
The terms are not definite in The tender price and
nature. construction period are
The Owner does not have to definite or firmed.
accept any tender (even An Offer can only be valid up
lowest). An Invitation To to the validity period. 
Treat can only be valid as
advertised.

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CONCEPT OF CONTRACT

1. Principle (Consideration)

Another essential element 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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CONCEPT OF CONTRACT

1. Principle (Consideration)

Example:

1.  If A signs a contract to buy a car from B for RM50,000, A's consideration
     is the RM50,000, 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 RM700, A's consideration is the service of painting B's house, and B's
     consideration is RM700 paid to A. 

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CONCEPT OF CONTRACT

2. Validity of The Contract

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 may 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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CONCEPT OF CONTRACT

3. Invalid/Illegal Contract

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 where it is done by fraud,
crime, by pressure, under influence etc.
Contract without valid considerations, involve the act or a promise to
do something by a party in relation to promise or giving interests or
money to the other party. Impossible promises or acts are not
entertained because this is not a valid consideration. 

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CONCEPT OF CONTRACT

4. Validity Of An Agreement Without


Valid Consideration

Consideration ‒ An agreement without consideration 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 and by the 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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CONTRACT DOCUMENT AND APPLICATION IN CONSTRUCTION PROJECTS

In Malaysia context, these following documents are legally bind and form
as part of the Contract:

1.  Article of Agreement
2.  Contract Form
3.  Conditions of Contract
4.  Letter of Acceptance
5.  Contract Drawings
6.  Bill of Quantities
7.  Working Standard Specification
8.  Bank Guarantee/Performance Bond
9.  Insurance Guarantee

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CONTRACT DOCUMENT AND APPLICATION IN CONSTRUCTION PROJECTS

1. Article of Agreement

Article of Agreement is a binding document that needs to be signed by


both the Client and the Contractor to fulfill the promise in which there
exists an Offer and Acceptance as agreed by both parties.
ie.: It is the obligation of the Client to make payment upon completion of
the job and to liase with the Contractors on the job requirements. It is
the obligation of the Contractor to perform the job accordingly and
adhere to the requirements of the Client.  

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CONTRACT DOCUMENT AND APPLICATION IN CONSTRUCTION PROJECTS

2. Contract Form

Form of Agreement/Contract needed to be filled up between Owner and


Contractor for the execution of the project. 
Contain the basic rights and obligations of parties involved in the contract. 
Normally incorporated into Conditions of Contract to indicate participation
of contractor in the tender.
Contractor will state the price and duration to complete the work as agreed.
Possible to get less than price during bidding after amendment. Include
signature from Contractor, C&S, M&E, Client and witness.
Only the unit is included whereas item pricing is not included. Unlike in
tender, where it is compulsory to include price per unit and total sum.

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CONTRACT DOCUMENT AND APPLICATION IN CONSTRUCTION PROJECTS

3. Conditions of Contract

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 rules, specific requirements
and details in the Contract.
General conditions define the terms under which the work is to be
carried out, the relationship between employer, personnel required at
site, employer and contractor, the duties of the contractor, authority of
the engineer, terms of payment and etc.
It is to promote the practice to use a standard Conditions of Contract
with adjustments where required to suit special conditions for a project. 

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CONTRACT DOCUMENT AND APPLICATION IN CONSTRUCTION PROJECTS

4. Letter of Acceptance

The Client issues the Letter of Acceptance of the tender to the


successful contractor.
Generally, the issuance of Letter of Acceptance and the Tender
Document legally binds the Client and the Contractor pending the
execution of the Contract Agreement (Article of Agreement) 

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CONTRACT DOCUMENT AND APPLICATION IN CONSTRUCTION PROJECTS

5. Contract Drawings

Ideally the drawings should detail the entire of 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 requirement.
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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CONTRACT DOCUMENT AND APPLICATION IN CONSTRUCTION PROJECTS

6. Bill of Quantities

The Bill of Quantities must be filled up with their quantity figures and
price. The bill should be priced so as to represent a reasonable amount
in the contract document as agreed.
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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CONTRACT DOCUMENT AND APPLICATION IN CONSTRUCTION PROJECTS

7. Working Standard Specification

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 expected.

Note: 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 Client. 

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CONTRACT DOCUMENT AND APPLICATION IN CONSTRUCTION PROJECTS

7. Working Standard Specification

‒  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 specify the
result to be achieved. 
Since the method is not specified, all the cost for any damages or
failure will be liable to the Contractor.   

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CONTRACT DOCUMENT AND APPLICATION IN CONSTRUCTION PROJECTS

8. Bank Guarantee/Performance Bond

The Contractor has to furnish the Client a Performance Bond (Bank


Guarantee) 5% of the contract sum and it shall be valid until the
Certificate of Practical Completion (CPC) 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 necessary to ensure that the contract  will be
implemented properly and provide protection to the Client.
If Contractor goes bankrupt or did not proceed the work, then the Client
may use this Bank Guarantee to compensate his loss. 

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CONTRACT DOCUMENT AND APPLICATION IN CONSTRUCTION PROJECTS

9. Insurance Guarantee

The Contractor has to furnish the Client's, an Insurance Guarantee for


workmen compensation and social security registration to give benefits
to the workers especially when they got involved with unwanted
precedence at site.     

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TYPES OF CONSTRUCTION CONTRACTS

There are many methods of awarding a contract available. The contract


practiced in Malaysia can be classified under 2 major headings such as:

Price Based System/Fixed Price Contract: 


1.  Lump Sum (LS) Contract
2.  Schedule of Rates (SoR) Contract
3.  Bill of Quantities (BoQ) Contract

Cost Based System/Cost Reimbursement Contract: 


‒  Cost Plus Percentage of Cost Contract
‒  Cost Plus Fixed Fee Contract
‒  Cost Plus Fluctuating Fee Contract
‒  Cost Plus Incentive Fee Contract

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TYPES OF CONSTRUCTION CONTRACTS

Price Based System/Fixed Price Contract:


In Priced Based System, contract sum is the prices being submitted by
the Contractor in his bid. It is also known as “Fixed Price Contract”.

Cost Based System/Cost Reimbursement Contract: 


In Cost Based System, contract sum is the actual cost incurred by the
Contractor and reimbursed together with fee to overcome overheads
and as profit. Also known as “Cost Reimbursement Contract”.
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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TYPES OF CONSTRUCTION CONTRACTS (PRICE BASED SYSTEM)

1.  Lump Sum (LS) Contract

A simplified form of contract where it 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 as 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 what the contract specifies. 
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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TYPES OF CONSTRUCTION CONTRACTS (PRICE BASED SYSTEM)

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TYPES OF CONSTRUCTION CONTRACT (PRICE BASED SYSTEM)

Examples of Project for Lump Sum Contract

Bridge 
Painting 
Guardrail 
Landscaping 
Lighting 
Sidewalks 
Signing 
Signalization 

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TYPES OF CONSTRUCTION CONTRACTS (PRICE BASED SYSTEM)

1.  Lump Sum (LS) Contract

Advantages:
Suitable for projects where later changes are not expected, and a simple
and quick form of payment is preferred.
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.
No physical measurements need to be taken, general visualization is
sufficient.

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TYPES OF CONSTRUCTION CONTRACTS (PRICE BASED SYSTEM)

1.  Lump Sum (LS) Contract

Disadvantages:
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.
Lesser control of cashflow from point of view of the Owner. Sometimes
Owner has to pay more or sometimes less than the value of the actual
work completed.
There is no provision of payment for materials at site.  

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TYPES OF CONSTRUCTION CONTRACTS (PRICE BASED SYSTEM)

2. Schedule of Rates (SoR) Contract

There are two types:


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. or;
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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TYPES OF CONSTRUCTION ON CONTRACTS (PRICE BASED SYSTEM)

2. Schedule of Rates (SoR) Contract

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, 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 will be provided for the
valuation of variations purpose.

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TYPES OF CONSTRUCTION ON CONTRACTS (PRICE BASED SYSTEM)

2. Schedule of Rates (SoR) Contract

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.
Furthermore, 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. 

awang295@sarawak.uitm.edu.my
TYPES OF CONSTRUCTION ON CONTRACTS (PRICE BASED SYSTEM)

2. Schedule of Rates (SoR) Contract

Advantages:

Variations in quantities are easily accommodated.


Owner will 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 saves time as no quantities shall be provided. 

awang295@sarawak.uitm.edu.my
TYPES OF CONSTRUCTION ON CONTRACTS (PRICE BASED SYSTEM)

2. Schedule of Rate (SoR) Contract

Disadvantages:

Since only approximate quantity of work is known at tendering stage, it is


difficult to estimate the actual contract price, hard to plan properly the
contract programme and not easy 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 at later stages. 

awang295@sarawak.uitm.edu.my
TYPES OF CONSTRUCTION ON CONTRACTS (PRICE BASED SYSTEM)

3. Bill of Quantities (BoQ) Contract

A quantified and completed list of works describing the full requirements


in the drawings and specifications.
Most common type of fixed-price contract used in the industry.
Items rate in the 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 as
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. 

awang295@sarawak.uitm.edu.my
TYPES OF CONSTRUCTION ON CONTRACTS (PRICE BASED SYSTEM)

3. Bill of Quantities (BoQ) Contract

Advantages:

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.
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.
Material on site is paid 90% of the actual value.
Easier for pricing. When a quantity of each trade is known, it will be easier
for the contractors to name their price.

awang295@sarawak.uitm.edu.my
TYPES OF CONSTRUCTION ON CONTRACTS (PRICE BASED SYSTEM)

3. Bill of Quantities (BoQ) Contract

Advantages:

Owner knows exactly what he pays for. BQ shows the breakdown of every
item of works and how the total price is summed up.
Lesser risk to Owner and Contractor. They pay exactly according to rates
quoted in the bill.  

awang295@sarawak.uitm.edu.my
TYPES OF CONSTRUCTION ON CONTRACTS (PRICE BASED SYSTEM)

3. Bill of Quantities (BoQ) Contract

Disadvantages:

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 and implementation cost. The consultants need to be paid
(normally based on the percentage (%) of the contract price) for the
preparation of BQ and subsequent supervision of work. 

awang295@sarawak.uitm.edu.my
TYPES OF CONSTRUCTION ON CONTRACTS (PRICE BASED SYSTEM)

Comparison between LS Contract & BQ Contract

LS Contract BQ Contract

Detail price of each item is not Detail price of each item


quoted.  is quoted.
awang295@sarawak.uitm.edu.my

Higher risk (Variation) to owner Lower risk (due to Variation


and contractor as rate of each Order) as rate of each item
items are not specified. are specified.

Take lesser time to prepare A lot of time spent just to


Tender Document. prepare the BQ.
Comparison between SR Contract & BQ Contract

SR Contract  BQ Contract

There is no implied guarantee given that all or All of the work scheduled will be
any of the work scheduled will be carried out. carried out and verified.

More items are scheduled for temporary works Lesser items are scheduled for
than usually appear in BQ, because the amount temporary work as items need
of temporary works that the contractor has to to be quantified.
undertake is uncertain.
awang295@sarawak.uitm.edu.my

Lesser time spent in preparing Tender A lot of time spent just to


Document by adopting the standard Schedule prepare the BQ.
of Rates.

No guarantee on the quantities stated. The The quantities stated is abstract


quantities against individual items may not be from Drawings and Specification,
stated; may indicated as estimated amount or which have certain level of accuracy
round figure. regarding the work to be carried
out.
Comparison between SR Contract & LS Contract

SR Contract LS Contract

Contractor quotes detail price Detail price of each item is not


of each item. quoted.

Lower risk (Variation) to Owner and Higher risk (Variation) to Owner


awang295@sarawak.uitm.edu.my

 Contractor as rate of each item and Contractor as rate of each


 are specified. item are not specified.

Take longer time to prepare Take lesser time to prepare


Tender Document. Tender Document.
TYPES OF CONSTRUCTION ON CONTRACTS (COST BASED SYSTEM)

Cost Reimbursement Contract

Contractor will reimburse and they will be paid based on the actual Prime
Cost spent for the work plus a certain fee to cover his overheads and
profits.
There is no finite sum tendered by the Contractor nor is the one
established at the time of contracting.
The actual contract sum will only be determined on completion of the
works and the ascertainment of the final account figure.

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TYPES OF CONSTRUCTION ON CONTRACTS (COST BASED SYSTEM)

Cost Plus Percentage (%) of Cost


Contract

The Contractor in this form of contract will charge an agreed fee in terms
of a percentage (%) of the cost of the actual work executed.
The percentage normally varies from 5% to 20%.

awang295@sarawak.uitm.edu.my
TYPES OF CONSTRUCTION ON CONTRACTS (COST BASED SYSTEM)

Advantages

Since the entire cost is to be charged to the Client, there is a less


likelihood on negligence on quality of material, construction and
supervision, [doe not matter how complicated the work might be] -›
(this is the disadvantages). 
When there is uncertainty in the case of work to be executed, as for
example in the case of foundation work, this form of contract is
suitable. 
The Client gains great flexibility to get involve in the project
effectively. It also allows the Contractor to be involved at design stage
to gain experience.
Contractor can be confident on an equitable payment should there
be any changes.

awang295@sarawak.uitm.edu.my
TYPES OF CONSTRUCTION ON CONTRACTS (COST BASED SYSTEM)

Disadvantages

There is no incentive to complete the works as soon as possible,


or to try to reduce costs.
Dishonest Contractor could increase his profit by manipulating
the contract price. ex. Cost of construction increases when there
are delays, expensive materials, poor control in supervision and
negatives practices. In a particular case, the maximum repetitive
utilization of formwork was avoided by disposing/destroying/burning
the formwork which is not fully reused. Furthermore, there may be
wastage in terms of hardened cement, inexperienced labour and
supervisors.

awang295@sarawak.uitm.edu.my
TYPES OF CONSTRUCTION ON CONTRACTS (COST BASED SYSTEM)

Cost Plus Fixed Fee Contract 

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 fixed fee may have been negotiated on a percentage basis on an
anticipated cost of work to be executed.   

awang295@sarawak.uitm.edu.my
TYPES OF CONSTRUCTION ON CONTRACTS (COST BASED SYSTEM)

Advantages

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 to finish
early, so that the Contractor could earn his fixed fee as early as
possible and utilize the resources on the other job.   

awang295@sarawak.uitm.edu.my
TYPES OF CONSTRUCTION ON CONTRACTS (COST BASED SYSTEM)

Disadvantages

The Contractor may try to reduce the cost of supervision, expedite


with the work, neglecting the correct procedure in construction
process to maximize the profit.
No incentive to the Contractor even when the work can be completed
early.

awang295@sarawak.uitm.edu.my
TYPES OF CONSTRUCTION ON CONTRACTS (COST BASED SYSTEM)

Cost Plus Fluctuating Fee Contract 

This is also known as Cost Plus Sliding Scale of Fee Contract, since the
fee paid to the Contractor is based on 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 becomes lesser.  

awang295@sarawak.uitm.edu.my
TYPES OF CONSTRUCTION ON CONTRACTS (COST BASED SYSTEM)

awang295@sarawak.uitm.edu.my
TYPES OF CONSTRUCTION ON CONTRACTS (COST BASED SYSTEM)

Advantages

In this case the contractor shall not try to increase the actual cost.
The actual cost is lower and lower so both the owner and the
contractor will be benefited.  

Disadvantages

Estimated cost should be accurate. Otherwise the contractor get


profit if the actual cost is much higher than the estimated cost.

awang295@sarawak.uitm.edu.my
TYPES OF CONSTRUCTION ON CONTRACTS (COST BASED SYSTEM)

Target Cost Contract

Is an extra payment to the contractor when the construction work is


completed satisfactorily and earlier than the specified time. This
extra payment rate should have been agreed prior to binding the
contract.
The contractor is paid by the owner the actual cost of construction
plus an amount of fee inversely variable according to the increase or
decrease of the estimated cost agreed first by both parties. thus the
higher the actual cost, lower will be the value of fee and vice versa.

awang295@sarawak.uitm.edu.my
TYPES OF CONSTRUCTION ON CONTRACTS (COST BASED SYSTEM)

Target Cost Contract

A basic fee is generally quoted as a percentage of an agreed target


estimated obtained from a priced BQ.
Actual fee paid to the Contractor is derived by increasing or reducing
the basic fee, by an agreed percentage, of the saving or access
between the actual cost and the agreed target estimate. ie.:

awang295@sarawak.uitm.edu.my
TYPES OF CONSTRUCTION ON CONTRACTS (COST BASED SYSTEM)

Advantages

Encourages the Contractor to execute the work as cheaply as


possible.
Saving of cost is shared between the Owner and the Contractor.
Owner gains great flexibility to involve in the project effectively
where the target estimated may be adjusted for variation in
quantity and design and fluctuations in the cost of labour and
material, etc.
In some cases, a bonus or penalty (disadvantage) based on the
time of completion may be applied.

awang295@sarawak.uitm.edu.my
TYPES OF CONSTRUCTION ON CONTRACTS (COST BASED SYSTEM)

Disadvantages

There is no incentive to complete the works as quickly as possible.


Contractor may try to reduce the cost of supervision, expedite with
the work, neglecting the correct construction process so that the
profit can be maximized.

awang295@sarawak.uitm.edu.my
SUMMARY

Project Delivery System will decides on how the project will be carried out.
Usually the application of different types of contract in construction industry
will very much depends on the types of project desired to be carried out
since there are various options in contracting.
The selection on method of contracting also depends on varied situations,
suitability and the capacity of business entities involved in the project.

awang295@sarawak.uitm.edu.my
ACKNOWLEDGEMENTS
Janidah Eman (UiTMPP)
Nur Muizzah Nawi (UiTMJ)
Muhammad Isha Ismail (UiTMP)
Noor Raifana Ab Rahim (UiTMJ)
REFERENCES
Hendrickson, C. (1998). Project Management for Contract. Pittsburg:
Prentice Hall.

Levy, S. M. (2002). Project Management in Construction (4th ed.).


McGraw-Hill.

Murdoch, J., Hughes, W. (2008). Construction Contracts Law and


Management (4th ed.). Taylor & Francis.

Additional notes:

Peterson, S. (2012). Pearson’s Pocket Guide to Construction


Management. Prentice Hall. Chapter 2: The Project Manual.

Pellicer, E., Yepes, V., Teixeira, J. C., Moura, H. P., Catalá, J. (2013).
Construction Management. Wiley-Blackwell. Chapter 3: Procurement
Approaches, Chapter 13: Progress Payment.

Contract Strategy

Project Delivery Systems: How They Impact Efficiency and


Profitability in the Buildings Sector (2014)
CONTENT DEVELOPERS