Contract, specification and quantity survey hand out 2009E.

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CHAPTER TWO
CONTRACT ADMINISTRATION
2.1 INTRODUCTION
 A contract is written or oral legally binding agreement having a lawful object entered into
voluntarily by two or more parties, each of whom intends to create one or more legal
obligations between them.
 The elements of a contract are "offer" and "acceptance" by "competent persons" having
legal capacity who exchanges "consideration" to create "mutuality of obligation.
 Proof of some or all of these elements may be done in writing, though contracts may be
made entirely orally or by conduct.
 The remedy for breach of contract can be "damages" in the form of compensation of
money or specific performance enforced through an injunction.
 Both of these remedies award the party at loss the "benefit of the bargain" or expectation
damages. The parties may be natural persons or juristic persons.
 A contract is a legally enforceable promise or undertaking that something will or will not
occur.
A Construction Contract between the Contractor and the Owner is very important for successful
completion of a construction project. This Construction Contract will help to engage a Contractor
to do all the work and provide all the materials, tools, machinery and supervision necessary for the
construction of a structure on real property. A Construction Contract should identify each party
and their responsibilities, fully define the work to be done, and fix the amount and timing of
payment. The terms and conditions are incorporated in a contract agreement signed by both
parties.

Contract management or contract administration is the management of contracts made with

customers, vendors, partners, or employees. Contract management includes negotiating the terms
and conditions in contracts and ensuring compliance with the terms and conditions, as well as
documenting and agreeing on any changes or amendments that may arise during its
implementation or execution. It can be summarized as the process of systematically and efficiently
managing contract creation, execution, and analysis for the purpose of maximizing financial and
operational performance and minimizing risk.

Contract administration is one of the most important jobs related to construction projects and
involves numerous tasks occurring before and after contract execution and work order issuance.
All works must be administered in accordance with the contract specifications, terms and
conditions, state and federal laws and regulations, and department policy.
Proper contract administration includes:
 developing proper and accurate bid and contract documents
 complying with contract documents and specifications
 enforcing state and federal regulations
 ensuring quality control by overseeing, inspecting and reviewing sampling and
testing of all materials and work
 keeping and maintaining accurate project records

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 recording, verifying and preparing monthly pay estimates
 negotiating and processing of change orders, supplemental agreements and other
contract modifications in a timely manner
 promoting good public relations and
 Setting and maintaining a high professional standard.

2.2 LAW OF CONTRACT APPLIED TO CIVIL ENGINEERING CONSTRUCTION

The Law is, a set of general statements aimed at regulating choices in possible human behavior
that is defined or recognized, publicized and sanctioned or rewarded by the State. The Law
generally performs its regulatory function by demanding its subjects/citizen to do something
(permissive) or by ordering not to do something (prohibitive).

2.3 CONSTRUCTION CONTRACT TYPES AND DELIVERY SYSTEM

Types of contract types

Every construction project has its own set of circumstances that can involve timing, legal
obligations, ownership configuration, cost limitations, financing objectives, owner in-house
resources, and more. The following is a list of the basics of the various contractual arrangements
available in order to assist in your decision-making process.
1. LUMP SUM or Fixed price contracts:
Involve a fixed total price for a well-defined product or service. The contractor agrees to build a
project with a specific scope for a fixed price. A lump-sum contract is suitable if the scope and
schedule of the project are sufficiently defined to allow the contractor to fully estimate project
costs.

2. COST PLUS
Cost plus is a contract agreement where in the purchaser agrees to pay the cost of the work,
including all trade contractor work, labor, materials, and equipment, plus an amount for contractor
overhead and profit. These types of contracts are favored where the scope of work is
indeterminate or highly uncertain, and the kinds of labor, material, and equipment needed are also
uncertain.

3. GUARANTEED MAXIMUM PRICE

A guaranteed maximum price (GMP) contract is a cost-type contract, in which the construction
contractor is compensated for actual costs incurred, plus a fixed fee subject to a ceiling price. The
contractor is responsible for cost overruns, unless the GMP has been increased via formal change
order as a result of additional scope from the client. Savings resulting from cost under runs are
returned to the client.

4. UNIT PRICE
This kind of contract is based on estimated quantities of items included in the project and their
unit prices. The final price of the project is dependent on the quantities needed to carry out the
work. In general, this contract is only suitable for projects in which the scope is reasonably well

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established, and the different types of items (but not their numbers) can be accurately identified in
the contract documents.

5. COST-REIMBURSABLE ALTERNATIVE
With cost-reimbursable alternative contracts, contractors are paid for the work with a mix of
reimbursable and fixed or incentive costs. Cost-reimbursable alternative contracts are effective
when the general scope of work and schedule are defined, but there is uncertainty in quantities or
execution. Under cost-reimbursable alternative contracts, uncertainty in project scope is borne by
the client. Cost-reimbursable alternative contracts offer significant flexibility for responding to
conditions that are uncertain. There are different variations of basic cost-reimbursable alternative
contracts, including cost-reimbursable plus fixed fee, cost-reimbursable plus performance-based
incentives, direct cost-reimbursable plus fixed construction management costs, and others.

6. INTEGRATED PROJECT DELIVERY/ALLIANCE

Integrated Project Delivery (IPD) contracts, or “Alliance” contracts, represent the latest trend
towards a more collaborative approach to delivering construction projects. IPD contracts are
unique in that they require the involvement of owners, designers, builders, and key stakeholders
on a project as early as possible— sometimes even at the conceptual stage. This contract type
results in more transparency among all the parties involved on a construction project. Additionally,
both risk and reward are shared by the parties who enter into the IPD contract, resulting in greater
integration of resources, processes, and expertise than would be possible under more traditional
contract arrangements.

Types of Delivery System

1. Force Account: - is the payment method used for extra work if the contractor and the owner
cannot agree on a unit price or lump sum amount, or if those methods are impracticable. Force
account payments cover labor, materials, and equipment. They may also cover other
miscellaneous expenses. Prime contractors are paid only one allowance for force account work.
The allowance covers administration, general superintendence, additional bond and other
overhead expenses.

2. Design Bid Build: - In practice, the owner usually enters into a contract with an
architect/engineer to plan and design a project to satisfy the owner's particular needs. The owner
participates during the design period to set criteria for design, cost, and time limits for completion
and to provide decision-making inputs to the architect/engineer. Upon completion of the planning
and design process, the project is ready for construction and the advertising or selection process
to obtain a qualified construction contractor begins.

After selection of a qualified construction contractor, or, as in the case of public works projects,
selection of the lowest bidder, the owner enters into a contract directly with the contractor, who will
then be fully responsible directly to the owner or the owner's designated representative for
building the project in accordance with the plans, specifications and local laws.

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On the typical project, there are only two prime contracts with the owner: one with the
architect/engineer for the design and planning of the project; the other with a single construction
contractor or occasionally several prime construction contractors to build the project.

Figure. I Traditional construction contract relationships

Owner

Contractual r/ship

Field observation only

Arch/eng. G. Contractor

Sub- Sub- Sub-

contractor contractor contractor

 Separate designer
 Single general contractor
 Numerous subcontractors
 Negotiated professional fee for design service

3. Design/Build: - In a design/build contract, the owner contracts a single firm to design and build
the project. In this type of contracting system, the contractor is appointed based on an outline
design or design brief to understand the project owner’s intent. The owner has to clearly define his
or her needs and scope of work before the signing of the contract. It is imperative that the project
definition be understood by the contractor to avoid any conflict, as the contractor is responsible
for detailed design and construction of the project. A design/build type of contract is often used to
shorten the time required to complete a project. Since the contract with the design/build firm is
awarded before starting any design or construction, a cost plus contract or reimbursable
arrangement is normally used instead of lump sum, fixed-cost arrangement. This type of contract
requires extensive involvement on the part of the owner during the entire life cycle of the project.
He or she has to be involved in making decisions during the selection of design alternatives and
the monitoring of costs, schedules, and quality during construction and, therefore, the owner has
to maintain/hire a team of qualified professionals to perform these activities. Design/build
contracts are used for relatively straightforward work, where no significant risk or change is
anticipated and when the owner is able to specify precisely what is required.

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Figure. 2 Design/build type contracting system

Project Owner
Civil
Design/Build Contractor
Mechanical

Electrical

Specialist Electrical Sub- Civil Sub- Specialist

Sub-contractor Contractor contractor contractor

Advantages: contractor

 By integrating design and construction management in a single organization,

many of the conflicts between designers and constructors might be avoided.
 A design/build type of contract is often used to shorten the time required to
complete a project.
 One of the most obvious advantages of the integrated design/construct process
is the use of phased construction for a large project
 to exploit the possibility of using the turnkey approach whereby an owner can
delegate all responsibility to the design/construct firm which will deliver to the
owner a completed facility that meets the performance specifications at the
specified price.

Disadvantages

 This type of contract requires extensive involvement on the part of the owner
during the entire life cycle of the project.
 An owner engaging a design/construct firm must insure that the quality of the
constructed facility is not sacrificed by the desire to reduce the time or the cost
for completing the project.
 He or she has to be involved in making decisions during the selection of design
alternatives and the monitoring of costs, schedules, and quality during
construction and, therefore, the owner has to maintain/hire a team of qualified
professionals to perform these activities.

4. The Turnkey Contract: - As the name suggests, these are the types of contracts where, upon
completion, one turns a key in the door and finds everything working to full operating standards.
In this type of method, the owner employs a single firm to undertake design, procurement,
construction, and commissioning of the entire work. The firm is also involved in management of
the project during the entire process of the contract. The client is responsible for preparation of

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their statement of requirements, which becomes the strict responsibility of the contractor to
deliver. This type of contract is used mainly for the process type of project and is sometimes called
engineering, procurement, and construction (EPC).

5. Build–Own–Operate–Transfer: - This type of method is generally used by governments to

develop public infrastructure by involving the private sector in financing, designing, operating, and
managing the facility for a specified period and then transferring the facility to the same
government free of charge. The terms BOOT and BOT are used synonymously.

Examples of BOT projects include

• Airports
 Bridges
 Motorways/toll roads
 Parking facilities
 Tunnels

2.4 VARIATION ORDER IN CONSTRUCTION PROJECT

In some literatures, variation order is referred or named as change order. In this handout, change
or change order means variation order.

 Variation order is any modification to the contractual guidance provided to the contractor by

the Employer or Employer's representative (Arain & Pheng, 2005b).

 Variation orders involve additions, omissions, alterations and substitutions in terms of quality,

quantity and schedule of works.

 Variation order is typically understood as the difference between the contract requirements as

set forth in the original agreement between the parties (often as established at the time of
bid) and the requirements imposed subsequent to this agreement (usually recognized during
the actual construction of the project).
 Variation orders cannot be avoided completely.

 Various authors intimate that variation orders are common to all types of projects.
 Variation orders may arise from changes in the minds of parties involved in the contract.

 Not all the Consultant's instructions constitute variation orders.Variation order do not change
the scope of work, in fact, the requirement of the variation order must be within the original

scope of work. Changes that are outside the scope of work require a supplementary
agreement.

 Variation orders change the details or conditions of the work

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 Variation orders are issued by the Consultant and must be given in writing or oral instruction
should be subsequently confirmed in writing. Since the contractor is not bound to comply

with the oral instructions, all oral instructions have to be confirmed in writing by either the
consultant or the contractor.

Causes of Variation Order in Construction Projects

The causes of variation order may vary from project to project. There are many causes of variation

orders. The following may be the causes of variation orders in Construction Projects:

 Omissions or discrepancies in the design;

 Conflict discovered between the contract documents;

 inadequate working drawings;

 Inconsistency between drawings and site conditions;

 citation of inadequate specification;

 ambiguous design details which are difficult to interpret;

 delay by a consultant in issuing instructions to vary;

 Differing or changed site conditions;

 insufficient site investigation by the Consultant;

 Different underground condition or underground seepage after excavation;

 Suspension of work by the Employer;

 Termination for convenience, when owner can terminate project prior to its completion or

delete major portions of the work;

 Termination for cause or default of the Contractor– generally due to poor or

nonperformance by the contractor;

 Safety considerations

 Natural incident such as heavy rainfall, landslides, flooding and failure of temporary form of
work or earth-retaining shields.

 Change of work rules/regulation;

 Changes of decision making authority during the course of construction maybe due to

politics, general election, early occupation of the newly built facility or conflicting views by
higher authorities;

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Effects of Variation Orders on Construction Projects performance
Variation orders affect project performance as they adversely affect productivity and project costs.

The following may be the effects of Variation Order on Construction Projects performance:

 Disputes between Employer and contractor;

 Cost overruns;  Rework;

 Additional payment for  increase of overhead;

contractor;  demolition;
 reduced Construction  rate and/or price adjustment;

productivity of the Project;  Quality degradation;

 influencing labor activity  Health and safety; and

through the entire project;  Relationships between the

 Time overruns (i.e. delay); project team

Factors influencing the occurrence of variation orders

The frequency of their occurrence varies from one project to another depending on

various factors (Arain & Pheng, 2005b).

Factors influencing the occurrence of variation orders include:

 The nature of the works,

 The complexity of the project and
 The procurement method.
The extent to which an activity is impacted by Variation order depends on a number

of factors:

 Timing of the change(at early stage or at later stage),

 Extent of the change (whether small or large),

 Re-works,
 Re-ordering,

 Job relocation,
 Scheduling

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Managing Variation order in construction projects

The role of Consultant in managing Variation order in Construction Projects

 Advising the Employer on technical, legal and financial matters.

 Issuing a Variation Order, where deemed necessary, for improvement

purposes.

 Focusing more effort during the design phase because this would contribute
greatly to the reduction of the occurrence of variation orders during the

construction phase.
The role of Contractor in managing Variation order in Construction Projects

 Advising the consultant to issue a variation order when technical problem is

discovered;
 Discovering an obvious discrepancy, omission, error, or conflict in the contract

document and request that the Consultant reviews that problem, discuss the
additional costs to correct the situation, agree on a price, and authorize the

variation order;
 Proposing alternative construction methods where the contractor's experience

shows that the proposed technology will not fulfill the desired fitness and
function of a design:

The role of Employer in managing Variation order in Construction Projects

 Spending more time and money on the design phase of the Project or work;

2.5 CLAIM MANAGEMENT

Claims is a demand or assertion by one of the parties seeking as a matter of rights,

adjustments or interpretation of contract terms, payment of money, extension of
time or other relief with respect to the terms of the contract.

Claims and Disputes

 a claim is a request by a contractor for additional compensation or time
extension for occurrences beyond the contractor’s control including:
◦ differing or unexpected site conditions

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◦ change in scope
◦ delays caused by the owner
 owner has duty to provide adequate, accurate data to the bidders
 Owner is liable to contractor when:
◦ inaccurate data are given
◦ extras develop because of improper design
◦ design is significantly changed after the contract is signed (constructive
change)
 Contractor must prove entitlement and the associated damages
 Contractor must provide timely notice of claim upon discovering impact

What is a Delay Claim?

In simple terms:

 Contractor: A request for compensation and/or time due to owner-caused

delays
 Owner: An assessment of liquidated damages or a claim for actual damages
due to contractor-caused delays

Types of Claims
◦ delay or disruption claim
◦ extra work claim
◦ acceleration
◦ impossibility-of-performance claim
◦ defective design claim (error or omission)
◦ interference claim
◦ superior knowledge claim

Claims Avoidance
 producing comprehensive, accurate, contract documents
 constructability review
 clear understanding of contract requirements prior to bidding
 having good administrative procedures in place
 open and honest communication
 timely troubleshooting

Alternative Dispute Resolutions System

Alternative dispute resolution is the term applied to methods of resolving disputes
other than litigation. The American Arbitration Association a nonprofit organization
and pioneer in alternative dispute resolution, has established and is a financial
supporter of the National Construction Industry Disputes Resolution Committee. This
group comprises representatives of all the major organizations concerned with
construction.

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Dispute Resolution

A. Preventive DRS
Early settlement between parties
B. Amicable DRS
Alternative depute resolution (ADR)
1. Avoidance
Even avoidance isn’t avoidance
 In construction we have lots of reasons to avoid confrontation
 In construction, 99% of avoided disputes become bigger – they fester –
they don’t self-resolve But sometimes resolution takes a while …

2. Negotiation
• Dispute resolution between the parties involving only the parties
• Casual Conversations, emails, texts, phone calls
• Formal Meetings, documentation, presentations
• Resolution Regardless of how Put it in writing

3. Mediation – neutral advisors. Bringing in a respected, neutral, uninvolved

person to help everyone reach a mutually acceptable resolution

 The mediator DOES NOT decide

 Mediation may not resolve a dispute
 Key Points
 Voluntary
 The resolution is binding, but the process is not
 There is no such thing as “Binding Mediation”
 You set the rules
4. Dispute Review Board (DRB)
 3 or more odd number of board members selected evenly by
both sides
 A contractually defined process
 3 members – all are neutral:
 Contractor nominated, Owner nominated
 Those two appoint the 3rd neutral
 Typically defined in the contract
 But can be established any time the parties agree to do so
 Regular site visits
 Conducts hearings

5. Arbitration

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Arbitration is the submission of a dispute to one or more impartial persons for

a final and binding decision, known as an "award." Awards are made in writing
and are generally final and binding on the parties in the case
C. Judiciary DRS
 Litigation
◦ sometimes unavoidable; usually undesirable; but sometimes best
method
◦ May be a Federal or State Agency
◦ Board of Contract Appeals, for example
◦ In a courtroom, you get to choose
◦ Judge: “Bench Trial”
 Yesterday, the Judge sentenced a rapist to life, today, the Judge is
hearing you argue about money and time
◦ Jury: Your “Peers”
 Check that jury pool – do any of them really understand the nuances of a
construction project?

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