The Special conditions of Contract, PPA-2006 Version

As per the January-2006 Version of PPA-The following Special Conditions of

Contract (SCC) shall supplement the General Conditions of Contract (GCC).
Whenever there is a conflict, the provisions herein shall prevail over those in
the GCC

GCC Special Conditions

Clause
Reference

The Employer is [insert name and address of Employer and name of authorized representative].
GCC 1.1
The Engineer is [insert name and address of the Engineer (assuming the Engineer is an entity) and
the name of its authorized representative].
[For smaller contracts, there may be no full-time person acting as Engineer. However, the Employer
may nominate an authorized spokesman from among its own staff to act as its representative. Where
an Employer has appointed a consultant or independent body as the Engineer, the Employer should
be careful not to exercise any of the Engineer’s or representative’s powers itself, in order to avoid the
risk of conflicting instruction or decisions. The authority of the Engineer can be limited in SCC 4.1 if
required].
The name and procurement reference number of the Contract is [insert name and number].
The Works consist of [insert brief summary, including relationship to other contracts under the
project].
The Site is located at [insert location] and is defined in Drawings Nos.: [insert numbers].
The Start Date shall be [insert date. The intended Start Date and Intended Completion Date may be
best specified in terms of days or weeks after the Letter of Acceptance is issued (provided that the site
is available to the Contractor at this juncture) rather than stating specific calendar dates. For small
contracts, 14 days may be sufficient. For larger contracts, longer will be required. The Start Date is
not necessarily the same as any Site Possession Dates].
The Intended Completion Date for the whole of the Works shall be [insert date or period after
Letter of Acceptance. If different dates are specified for completion of the Works by section
(“sectional completion”), these dates should be listed here.].

GCC 2.3 The following documents also form part of the Contract: [list any other documents e.g. schedule
of information provided by the Contractor].

GCC 3.1 The language of the Contract is English and the law governing the Contract is that of the
Federal Democratic Republic of Ethiopia. [Amend if an alternative language or law is to be
used].

GCC 4.1 The Employer’s specific approval is required for: [insert any decisions for which the Employer’s

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 approval is required].
[e.g. If it is considered that the standard GCC clause gives too much authority to the Engineer, or
there is no full-time engineer as Engineer, the following clause may be inserted to limit the authority
of the Engineer and require him to get the Employer’s approval where there are potential additional
costs or extensions of time involved:
“The Engineer shall obtain specific approval from the Employer before carrying out any of his duties
under the Contract which in the Engineer’s opinion will cause the amount finally due under the
Contract to exceed the Contract Price or will give entitlement to extension of time. This requirement
shall be waived in an emergency affecting safety of personnel or the Works or adjacent property.”]
[See also the additional optional clauses below.]

GCC 8.1 The Schedule of Other Contractors [insert “is” or “is not”] part of the Contract. [Ensure the
Schedule is attached if required. It is vital to provide all relevant information on other contractors
working on the site. Failure to do so with the result that the Contractor’s work is affected by the work
of others is likely to lead to claims for additional payment].

GCC 9.1 The Schedule of Key Personnel [insert “is” or “is not”] part of the Contract. [Ensure the
Schedule is attached if required].

GCC 11.1 The Employer’s risks are as specified in the GCC. [Amend if the risks in the GCC are to be
modified].

GCC 14.1 Site Investigation Report(s) [insert “are” or “are not” and provide details and references of the
specific documents if part of the contract. Reports should not be included if the PE is not
confident of their accuracy, as the Contractor has the right in the contract to rely on them and to
claim a compensation event if ground conditions turn out to be substantially more adverse] part of
the contract.

GCC 25.2 Fees and types of reimbursable expenses to be paid to the Adjudicator are: [insert details of fees
and expenses]. [Where no Adjudicator is to be appointed, replace the text with “No Adjudicator is
to be appointed under this contract”].

GCC 25.3 The institution whose arbitration procedures shall be used is: [insert name of institution ]
Arbitration shall take place at: [state place e.g. Addis Ababa or any other convenient location or
delete if arbitration is not applicable]

[Where arbitration is not being used, replace the text with “Arbitration shall not be used under
this contract and disputes shall be resolved in accordance with GCC 25.1”].

GCC 26.1 The Appointing Authority for the Adjudicator is: [insert name of Authority. The Appointing
Authority should preferably be an independent professional institution or an official (e.g.
president) of such an institution. An individual should not normally be nominated]. [For smaller
contracts, where the Employer has decided not to appoint an Adjudicator, the text should be
replaced with “No Adjudicator is to be appointed under this contract”].

GCC 27.1 The Contractor shall submit the Program for the Works within [insert number] days of delivery
of the Letter of Acceptance. [For small contracts, 14 days may be sufficient. For larger contracts,

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 longer may be required. Where no Letter of Acceptance is issued, amend to “contract document”].

GCC 27.3 The period between Program updates is [insert number] days. [For a short contract, this could
be monthly and for longer contracts, every two months. For very small contracts, no updates may be
required, in which case the text should be amended accordingly].
The amount to be withheld for late submission of an updated Program is [insert currency and
amount, which should be sufficient to encourage prompt submittal].

GCC 35.1 The Defects Liability Period is [insert number] days. [The period is normally 365 days (i.e. one
year), but may be shortened for smaller contracts or where the risk of defects is considered to be
low].

GCC 37.1 This Contract is a [insert “Admeasurements” or “Lump Sum”, ensuring that it is consistent with
clause 13.1 of the Bid Data Sheet. PEs should note that it is possible to include lump sum elements
within an admeasurements contract, but that the SCC must clearly state which type of contract
applies] Contract.

GCC The following events shall also be Compensation Events: [insert list of events or state “none”]
44.1(l)

GCC 45.1 The Engineer shall not adjust the Contract Price if taxes, duties and other levies are changed
that subsequently affect the Contract Price. [Amend if the Procuring Entity will amend the
contract to reflect any changes in taxes e.g. a change in the rate of VAT]

GCC 47.1 The Contract [insert “is” or “is not”] subject to price adjustment in accordance with Clause 47
of the Conditions of Contract.
[Price adjustment is recommended for contracts which provide for time of completion exceeding
18 months. Bidders are required to propose the weightings for each cost element (labour,
materials, equipment etc) and the sources of indices. These are subject to approval by the
Engineer and should be carefully analyzed by the PE, prior to acceptance of the Bid].

GCC 48.1 The proportion of payments retained is [insert percent] percent.[This is normally 5 percent, but
should not exceed 10 percent].

GCC 49.1 The liquidated damages for the whole of the Works are [insert percent] of the final Contract
Price per day.
[If Sectional Completion and Damages per Section have been agreed, the latter should be specified
here.]
The maximum amount of liquidated damages for the whole of the Works is [insert percent] percent of
the final Contract Price.
[Usually liquidated damages are set between 0.05 percent and 0.10 percent per day, and the total
amount is not to exceed between 5 percent and 10 percent of the Contract Price.

It may be seen that if the lower or upper limits of the rate and total amount are applied, the
maximum liquidated damages are imposed after 100 days delay. If the rate of 0.05% and the total
amount of 10% are assumed, then the maximum liquidated damages are imposed after 200 days

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 delay. The number of days for which the maximum amount of liquidated damages can be paid, as
calculated under this clause, affects termination for delaying the works as provided for in Clause
59, Termination in Sub-clause 59.2, Paragraph (g).]

GCC 50.1 The Bonus for the whole of the Works is [insert percent of final Contract Price amount. Insert
zero if not applicable. If Sectional Completion and Bonus per Section have been agreed, the latter
should be specified here.] of final Contract Price per day. The maximum amount of Bonus for the
whole of the Works is [percent] percent of the final Contract Price.
GCC 51.1 The Advance Payment will be equivalent to [insert percentage or state if no advance payment is to
be made] percent of the Contract Price and will be paid in Ethiopian Birr. It will be paid to the
Contractor no later than [insert period within which payment will be made. This may be best
entered as a number of days after the issue of the Letter of Acceptance. In setting the number of
days, consideration should be given to the time needed to effect disbursement of funds].
GCC 51.3 The Advance Payment will be repaid by deducting proportionate amounts from each payment
certificate during the period starting [insert number] months after the Start Date and ending
[insert number] months after the Start Date. [This Sub-Clause allows the repayment of the
advance payment to be made over the whole of the contract period, or alternatively, more stringent
repayment terms may be inserted].
GCC 52.1 The Contract Security shall be for [insert percentage, normally between 5 and 10%] of the
Contract Price.
GCC 58.1 The date by which operating and maintenance manuals are required is [insert date or period
before or after Date of Completion].
The date by which “as built” drawings are required is [enter date or period before or after Date
of Completion].
GCC 58.2 The amount to be withheld for failing to produce “as built” drawings and/or operating and
maintenance manuals by the date required is [insert amount, which should be high enough to
encourage timely submission of all documents] Ethiopian Birr.
GCC 60.1 The percentage to apply to the value of the work not completed, representing the Employer’s
additional cost for completing the Works, is: [insert percent. This percentage is intended to
compensate the Employer for the additional costs that will be incurred in completing the works
following termination. A value between 10 and 20% is considered equitable].

Additional Optional Clauses in “PPA’s Special Conditions of

Contract”

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The following draft clauses are provided for consideration and use by Procuring Entities. They
are not intended to be inserted in all Bidding Documents but to be used on an “as needed” basis.

Where the clauses are required, they should be inserted into the Special Conditions of Contracts.
No changes should be made to the GCC.

GCC Clause (4) Engineer’s Decisions

If it is desired that the limitations on the Engineer’s authority be more clearly defined, then the
following may be used instead of the text in the SBD:

“The Engineer shall obtain the specific approval of the Employer in writing before taking any of
the following actions specified in the General Conditions of Contract:

(a) Certifying additional costs under Clause 44;

(b) Determining an extension of the Intended Completion Date under Clause 28;
(c) Issuing a variation order under Clause 40 except in an emergency situation as reasonably
determined by the Engineer or if the variation does not increase the Contract Price;
(d) Fixing rates under Clause 40;
(e) Ordering suspension or termination under Clause 59;
[Add other limitations and quote clauses]”

GCC Clause (7) Subcontracting

The following conditions shall apply to subcontracting: [insert any additional conditions relating
to subcontracting e.g. The Contractor shall not impose inequitable or onerous conditions on his
appointed subcontractors and shall pay all subcontractors promptly each month, irrespective of
the Contractor himself having received payment for work performed by the subcontractor.]

GCC Clause (9) Personnel

Unskilled and Semi-Skilled Labour

Only Ethiopian Nationals shall be employed as unskilled labour. Only Ethiopian Nationals shall
be employed as semi-skilled labour unless the Contractor can demonstrate that no suitably
trained Ethiopian Nationals are available.

Rates of Wages and Conditions of Labour

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The Contractor shall pay rates of wages and observe employment conditions not less favorable
than those established for the trade and industry where the work is being carried out. In the
absence of any established rates or conditions in the locality, the Contractor shall follow those by
other employers for similar trades and industries.
Burial of the Dead

The Contractor shall be responsible for the transport to his /her home of any expatriate employee
or members of their families who may die in Ethiopia. The Contractor shall be responsible for
arrangements for the burial of local employees who may die while engaged upon the Works.

Visas and Permits

The Contractor shall be responsible for all arrangements and costs of obtaining visas, work
permits and other documents for his employees and shall comply with all immigration and
residence regulations of Ethiopia.

Repatriation of Employees

The Contractor shall be responsible for repatriation of all non-Ethiopian national employees to
their country of residence or to their point of recruitment and for their maintenance until the time
of the return.

GCC Clause (19) Safety

Safety Officer

The Contractor shall employ a full-time qualified Safety Office on site until the Works have been
completed. The Safety Officer shall be responsible for compliance with the Contractor’s Site
Safety Plan by all employees and shall hold regular safety meetings with all employees. He shall
be given authority to halt any unsafe working methods or practices on site
GCC Clause (55) Completion

In order that the Engineer may certify Completion of the Works, the Works shall be capable of
being used for the purpose intended. This shall not necessarily include reinstatement of ground or
surfaces unless the reinstatement is required to ensure the safety and convenience of the public or
others.
Care of the Environment

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The Contractor shall execute the Works in an environmentally friendly manner and shall avoid all
unnecessary damage to property and flora. All waste material shall be disposed of in a proper
manner to the satisfaction of the Engineer.
Confidentiality

The Contractor shall treat the Contract and everything in connection with it as private and
confidential. In particular the Contractor shall not publish or issue any information or photograph
concerning the Works and shall not use the site for any commercial purpose except with the
consent of the Engineer and subject to any conditions he may impose.

The Evolution of International Conditions of Contract

In the contract for international engineering projects, the function of Conditions of Contract is of
greatest importance providing the rights, obligation and responsibility for the parties concerned
in the Contract execution. During the past half century, the International Federation of
Consulting Engineers (FIDIC) has devoted itself to the compilation of management documents
for all kinds of projects, among which the FIDIC Conditions of Contract are of the highest
influence and are the most popular application.

The first edition of FIDIC Conditions of Contract for Works of Civil Engineering Construction
(“Red Book”) was compiled in 1957, and later its second, third, and fourth edition were issued in
1963, 1977, and 1987 respectively.

But these editions were mostly compiled in the reference of the related documents of the
Institution of Civil Engineers (ICE). The FIDIC and European International Contractors (EIC)
entrusted the University of Reading in 1966 to summarize the experience and to draw lessons
from the application of the former documents.

With the investigation of the governments, employers, contractors and consulting engineers all
over the world about their application of the “Red Book”, 204 finding reports were returned.

According to the findings, the FIDIC Contract Committee organized a group of experts to
compile the new Contract Condition models to be applied in the 21stcentury.

The new models of FIDIC include:

 FIDIC Conditions of Contract for Construction, the (New Red Book)

 FIDIC Conditions of Contract for Plant and Design/Build, the (New Yellow Book)
 FIDIC Conditions of Contract for EPC Turnkey Projects, the (Silver Book)
 FIDIC Short Form of Contract, the (Green Book)

The test edition of these models was published in 1998, and FIDIC solicited opinions throughout
the world for additional time to publish the official texts in 1999. Now FIDIC condition of

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contract has been applied worldwide, especially in the projects invested by World Bank, Asia
Development Bank, Africa Development Bank etc

The Relation of GCC/SCC to Laws, Codes and Standards

The Civil Code of Ethiopia-1960 (The Law) explicitly describes the importance of General and
special conditions of contracts; let’s see the following Articles:

Art. 3135. - General conditions applicable to administrative contracts.

Model specifications, general clauses and conditions and common directives may be drawn up
by each interested administrative authority and may be declared to be applicable.

Art. 3136. -2. Definition

 Model specifications shall constitute standard specifications, formulated in advance and in a

general way by the administrative authority, for the special consideration of public services.
 General clauses and conditions shall fix the provisions applicable to all or some of the
contracts concluded by a specified administrative authority.

 Common directives shall fix the technical provisions applicable to all contracts relating to a
given kind of works.

Art. 3137. - Effect of specifications, clauses, conditions and directives.

The provisions of General clauses and conditions concerning the manner in which a contract is to
be concluded by the administrative authority may be invoked by the candidates to the contract
and in particular by the tendered in the case of allocation of contracts by tender.

Art. 3138. - 2. Contents of contract

The provisions of model specifications, general clauses and conditions or common directives,
concerning the interpretation, contents and execution of a contract shall not apply to a specified
contract unless such contract expressly makes reference thereto.

Art. 3139. - Modification to specifications, etc.

1. Where the rights and obligations of the parties are determined by reference to specifications,
general clauses and conditions or common directives, such specifications, clauses, conditions
and directives shall be considered such as they existed at the time when the contract was
concluded.
2. The rights and obligations of the contracting parties shall not be affected by modifications
subsequently made to such specifications, clauses, conditions and directives.

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The GCC clause 16 of PPA states that “The Contractor shall construct and install the Works in
accordance with the Specifications and Drawings”. Specifications are derived from acceptable codes and
standards, Hence, signifying the direct relevance of GCC to codes and standards.

The GCC clause 23 of PPA states that “The Contractor shall carry out all instructions of the Engineer,
which comply with the applicable laws where the Site is located”, signifying the importance of observing
other applicable relevant laws during execution of construction activities.

The Application of “The Law of Contract” to Civil Works Construction

Introduction

The current competitive and complex construction industry requires careful consideration in the
formation of the construction contract to ensure that the contract is equitable and the
specifications and timetable feasible, and that liability and obligations are clearly defined.

Properly prepared contractors, subcontractors, architects, engineers, and developers can avoid
anticipated problems, reduce performance disputes and receive payment for works performed.

Construction Law is a vibrant area of law involving a wide range of professionals. Construction
Law is constantly developing through case law and legislation to meet the challenges thrown up
by the development of the industry worldwide, the Construction Industry is very much in the
attention. In the process Construction Law has emerged as a set of legal concepts and rules that
operate Networking opportunities with professionals from all sectors of the industry

New legislation has transformed how disputes are handled in a sector which was known for
embedded adversarial attitudes. This coupled with a much more sophisticated approach to front
end risk analysis and dispute management techniques have created a cultural shift. Other
dynamics such as globalization and environmental/sustainability issues are all at work in shaping
the future of the Industry.

Construction Law is specialized and covers a number of legal areas. This is due to the nature of
the industry, the numbers and range of parties involved; the nature of the issues, and the large
financial stakes. This is reflected, in particular, in the use of complex and lengthy standard form
contracts and a range of elaborate legislative provisions affecting the industry.

The term Contract used in the Construction management can be defined as: "An agreement
entered into by two parties under the terms of which one party agrees to perform a specific job
for which the other party agrees to pay. Contract documents attached to and/or stated in the
agreement form integral parts of the contract"

Formation of Contract

The completed Agreement will form part of any resulting Contract. However, the details to be
completed on the Agreement are specific to the respective Bid. After notification of award, the

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Employer shall prepare the Agreement using the Agreement Form and send it to the successful
Bidder.
It is rare that a major works contract is awarded on the basis of only the bid, as negotiations are
normally held with the best evaluated Bidder to settle any minor matters arising from the bid or
clarifications. It is good practice to conform the contract document in accordance with any
agreements reached during negotiations and any modifications during evaluation. The Agreement
prepared should therefore incorporate any corrections or modifications to the Bid resulting from
corrections of errors, selection of an alternative offer, acceptable deviations, or any other
mutually-agreeable changes allowed for in the Conditions of Contract, such as changes in key
personnel, subcontractors, scheduling etc. The contracting parties will then sign the conformed
document.

Validity of a Construction Contract

 The parties to the contract must be competent, and legally capable of playing their intended
part. The law can not enforce the agreement on someone who has not the legal capacity to
enter into an agreement. This could be due to infancy, lunacy, drunkenness, or being
restricted from entering into such agreement by a prior in date agreement or scope of
authority.
 The subject matter of the contract must be lawful and definite in respect of requirements
and duties of each party. For example a contract violating municipal regulation is not binding
and is void in courts. Also uncertainty in respect of what is wanted may result in the contract
being not enforceable by law.

 Proposal and acceptance: There must be a proper proposal by one party and its absolute
acceptance by the other party. The proposal is not binding without a clear acceptance and is
not binding beyond its date of validity.

 Free consent of parties to the contract: Consent is said to be free when it is not caused by
force, or undue influence or fraud or misrepresentation.

Performance of Contract

As has been discussed earlier; an acceptable contract is binding between the contracting parties
(shall bind them as though it were law for them), it creates rights and obligations of the parties to
the contract. Hence fulfilling the respective legal obligations of the parties under the said
contract is what is termed as “Performance of the Contract”.

Breach of Contract

Breach of Contract is the failure to perform it. However, not every failure to perform an obligation
amounts to a true breach, as there are a number of excuses for non performance. When a contract has

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been broken without sufficient excuse or justification, the party who suffers by such breach is entitled to
receive from the party in default, a compensation for any loss or damage caused by such breach.

Termination of Contract:

A Contract may be terminated or brought to an end in either of the following ways:

 Full and satisfactory performance by both parties to their obligations under the contract.
 Breach of contract, when the default of one party releases the other party from the contractual
obligations.
 Mutual agreement of the parties to terminate the contract.
 Unforeseen circumstances beyond the control of either party render it impossible to perform
his duties or obligations stated in the contract.
 Operation of law to terminate a void contract.

Construction Risks- affecting proper performances

The construction risks which may affect the proper performances in the construction contracts
can be broadly grouped under the following categories:

Technical Risks

 Incomplete design.
 Inadequate site investigation.
 Uncertainty over the source and availability of materials.
 Appropriateness of specifications.

Logistical Risks

 Availability of resources - particularly construction equipments, spare-parts, fuel & labor.

 Availability of sufficient transportation facilities.

Construction site Risks

 Uncertain productivity of resources.

 Weather and seasonal implications.
 Industrial relations problems.

Financial Risks

 Inflation.
 Availability and fluctuation in foreign exchange.
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  Delay in Payment
 Repatriation of funds
 Local taxes

Political Risks

 Constraints on the availability and employment of expatriate staff

 Customs and import restrictions and procedures
 Difficulties in dealing with plants and equipments
 Insistence on use of local firms and agents

Construction Delay Causes

The duration of construction projects right from inception to completion is assuming great
importance in the construction industry. Clients or consumers are no longer content merely with
minimal cost and adequate functional performance for their projects; increasing interest rates,
inflation and other commercial pressures, among other factors, mean that it is in many instances
most cost-effective to complete a project within the shortest possible time.

The following factors have been traced to be the construction time influencing factors, with
different weights assigned to them by each individual planner.

Delay Factors pertinent to Clients

 Financial ability/ financial arrangement for the project

 Previous working relationship
 Category ( Public, private)
 Priority on construction time
 Specified sequence of completion
 Possible changes to initial design

Delay Factors pertinent to Consultants

 Completeness and timeliness of project information

 Build-ability of design

 Provision for ease of communication

 Previous working relationships

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  Priority on construction time

Delay Factors pertinent to contractors

 Availability of suitable management team given firm's current work load.

 Programming construction work.
 Previous performance of site management team
 Number of sub-contractors

Delay Factors pertinent to Contract Form

 Suitability to project time

 Use of standard form of contract

Delay Factors pertinent to project conditions

 Function or end use (office, residential, industrial,)

 Complexity
 location

External Delay Factors

 Weather
 Regulations

Types of contracts commonly used in construction

The Contracts for execution of civil engineering works (Construction) may be of the following types:

 Item rate contract

 Lump sum Contract
 Lump sum & Scheduled contract
 Cost plus fixed fee contract
 Cost plus percentage of cost contract
 Target Contract:
 Cost plus Fluctuating Fee contract
 Hybrid Contracts
 Special contracts

The unit- price, also called {“item rate”/ “ad-measurement” /or Schedule contract}

In this type of contract, the contractor undertakes the execution of the works on an item rate
bases. The specification & estimated quantities are compiled by the designer during the

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conception phase & the unit costs by the contractor for carrying out the stipulated work in
accordance with the contract document.

The amount to be received by the contractor depends up on the quantities of various items of
work actually executed. The payment to the contractor is made on the basis of detailed
measurements of different items of work actually done by him. This type of contract is most
commonly used for all types of engineering works financed by public / government bodies.

Suitability:

 Is suitable for works which can be split into various items.

 This type of contract is suitable for a competitive bid.

Advantages:

 Promotes open competition involving quantities of work that can not be accurately forecast at
the time of bidding.
 More transparent & easier for supervision & control
 There is no need for detailed drawings at the time of allotting contract as in the case of lump
sum contract. The detailed drawings can be prepared after the contract is awarded.
 Changes in drawings and quantities of individual items can be made as per requirement
within agreed limit.
 The payment to the contractor is made on the actual work done by him at the agreed rates.

Disadvantages:

 The actual cost is known only when the project is completed. Hence the owner may incur
financial difficulty if the final cost increases substantially.
 Additional staff may be required to take detailed measurement of works done for releasing
payments to the contractor.
 The scope for additional saving with the use of inferior quality materials may prompt the
contractor to use such materials in the work.

The Lump-Sum contract:

In this type of contract the contractor offers to do the whole work as shown in drawings and
described by specifications, for a total stipulated sum of money.

There are no individual rates quoted thus it becomes difficult to make adjustment in contract
value if any changes are to be made in the work later on.

The schedule of different items of work is not provided and the contractor has to complete the
work as per drawings and specifications for the agreed lump sum amount.

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The satisfactory completion of work for the stated price remains the obligation of the contractor,
regardless of the difficulty & troubles encountered in the course of its construction

In large projects, part payments are made to the contractor at different stages (phases) of work on
mutually agreed terms.

Suitability

 A lump sum contract is more suitable for works for which contractors have prior construction
experience. This enables them to submit a more realistic bid.
 This type of contract is not suitable for difficult foundations, excavations of uncertain
character and projects susceptible to unpredictable hazards and variations.

 This type of contract is suitable for a competitive bid.

Advantages:

 The owner knows the total cost of the project in advance. Hence, can decide whether to start or drop
the project.
 The contractor can earn more profit by in-depth planning and effective management at site.
Disadvantages:

 Limited to construction programs that can be accurately & completely described at the time of
bidding, (Before the contract is awarded, the project has to be studied thoroughly and the complete
contract document has to be prepared in advance)

 In this type of contract, unforeseen details of work are not specified in the contract document. Many
additional items may have to be undertaken as the work progresses, giving opportunity to the
contractor for claiming higher rates for the extra items not included in the contract agreement.

Lump sum and Scheduled contract

This is similar to the lump sum contract except the schedule of rates is also included in the contract
agreement. In this type of contract, the contractor offers to do a particular work at a fixed sum within a
specified time as per plans and detailed specifications. The schedule of rates for various items is provided
which regulates the extra amount to be paid or deducted for any additions or deletions made during the
progress of work.

Measurements of different items of original work are not required but extra items are required to be
measured for payment. The original work shall however be checked and compared with the drawings and
specifications.

Suitability:

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This type of contract is more suitable for construction works for which contractors have prior
work experience and can consequently estimate the project cost more realistically.

Advantages:

 Additional staff for recording detailed measurement of original item of work is not required
for making payment to the contractor.
 The owner can know from tenders as to what the project will cost him. Knowing the financial
implications, the owner can decide to start or defer the project.

Disadvantages:

 Before the contract is awarded the project has to be studied thoroughly and all the contract
documents are required to be completed in every respect.
 The non-scheduled extra items arising out of changes made in the drawings and
specifications are often a source of dispute because the contractor presses for rates higher
than the prevailing market rates.

Cost Plus contract

The concept of this system is reimbursement of the actual cost-plus additions for the contractor’s
overhead profit & risks depending on the mutual agreement to be reached between the parties.

This type of contract is suitable for negotiated contracts between client & contractor.

Some of such varieties are

 Cost plus percentage of cost contract:

 Cost-plus fixed fee contract
 Target Contract
 Cost plus fluctuating Fee contract

Cost plus percentage of cost contract:

In this type of contract, instead of awarding the work on lump sum or item rate basis, it is given
on certain percentage over the actual cost of construction, i.e. this type of contract fixes
percentage of the cost of the construction for the profits & risks to be due to the contractor.

The actual cost of construction is reported by the contractor and is paid to him by the owner
together with a certain percentage as agreed earlier.

In short in this type of contract: the contractor is paid the actual cost of the work, plus an agreed

percentage in addition, to allow for profit.

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The contractor agrees to do the work in accordance with the drawings, specifications, and other
conditions of contracts. In this type of contract proper control has to be exercised by the owner in
the purchase of materials and in arranging labor.

This type of contract is particularly well suited to cover work of which, its scope &
characteristics can be only poorly defined at the beginning of the construction operation.

Advantages:

 For an emergency nature that, time is not available for the advance preparation of contract
documents and the usual bidding routine.

 The work entitled may be such that no one can be ascertain what difficulties will be
encountered or even of what order of magnitude the eventual cost may be.

Disadvantages:

 It doesn’t urge the contractor to maintain & practice strict economy in the interests of the
owner.

Cost-plus Fixed Fee Contract:

A popular type of cost-plus contract is one in which the contractor’s fee is established as a fixed
sum of money. In this type of contract, the contractor is paid by the owner an agreed lump­sum amount
over and above the actual cost of work.

This work must be of such a nature that it can fairly be well defined & reasonably good estimate
of cost approximated at the time of negotiations. The contractor computes the amount of his fee
on the bases of the size of the project, estimated time of construction, nature & complexity of the
works, hazards involved, location of the project, equipment & manpower requirements & other
similar conditions.

In other words, Cost plus fixed fee contract is desirable when the scope and nature of the work
can at least be broadly defined.

In this type of contract, the contractor is selected on the bases of merit rather than fee alone. In
case of cost plus percentage contract, the contractor has a tendency to increase his profit by
increasing the cost of work. But this drawback is overcome in cost plus fixed fee contract
because here the contractor’s fee is fixed and does not fluctuate with actual cost of work. Once
this fee is fixed the contractor can not increase the cost of work.

Suitability

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 This type of contract is suitable for works required to be completed expeditiously and where
it is difficult to foretell what difficulties are likely to be encountered.
 Is also suitable for important structures where the cost of material is immaterial.

Advantages:

 Time saving in the preparation of contract documents & the usual bidding document ( the
work can be taken in hand even before the detailed drawings and specifications are finished)
 Actual cost is to be borne by the owner. Therefore, the contractor performs the work in the
best interest of the owner, resulting in good quality work.
 Changes in design and method of construction, if needed, can be easily carried out without
disputes.
 The work can be executed speedily

Disadvantage:

 The contractor should work in a diligent manner & failure to do so will cause additional office,
overhead expenses to be incurred for which he is not reimbursed.
 This form of contract can not be adopted normally in case of public bodies and government
departments.
 The final cost of the work is not known in advance and this may subject the owner to
financial difficulties.

Target Contract: This is the type of contract where the contractor is paid on a cost-plus
percentage work performed under this contract. In addition, he receives a percentage plus or
minus on savings or excess effected against either a prior agreed estimate of total cost or a target
value arrived at by measuring the work on completion and valuing at prior agreed rates.

Cost plus Fluctuating Fee contract: In this type of 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 the parties.

Hybrid Contracts: is a contract that combines two or more contract types.

Special contracts

There are certain special contracts which are used at different occasions. Some of these contracts
are listed below:

 Turn key contract

 Package Contract

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  Negotiated contracts
 Continuing contract
 Running Contract
 Design-Construction Contract:
 Piece Rate Work (PRW)
 Labour contract
 Materials supply contract

Turn key contract

Turn-key contract is a lump sum contract for a complete project or a plant including:
engineering, procurement, manufacturing, inspection, quality control, supply, transport, storage,
civil work, erection, insulation, electrical, instrumentation, testing, commissioning, training of
operating personnel, as built drawings, operation & maintenance manual and initial maintenance
spares for one year or two.

Owner shall approve of the plant capacity, design parameters and all specifications in advance.
The contractor shall fulfill them in his performance.

For the purpose of payment and probably even for escalation purpose, the lump sum price shall
be divided reasonably, fixing values for major items of work, preferably before the award of the
contract.

Therefore, Turn key contract is an integrated contract in which all works pertaining to various
disciplines such as civil, electrical, mechanical etc are in the hands of a single contractor, called
the main contractor. The main contractor can subtle the contract to sub contractors who are
specialists in their respective fields.

In this contract the main advantage to the owner is that he need not coordinate the work of
different contractors. The main contractor is responsible for all kinds of jobs starting from
planning to commissioning stage. The owner takes over the entire work (Which is fully
operational and of proven performance) from the main contractor.

Package contract

In a package contract, two or more related jobs, each of which could form a separate contract are
combined in a single contract. In the field of civil engineering generally, design and development
are combined with construction and supply of maintenance.

In this type of contract, plan of work and standards are established and the work is carried out
accordingly by the contractor. The main contractor is responsible for safeguarding the owner’s

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interest and for this reason, prior approval of design and technical aspects have to be taken from
the owner. Responsibility for the correctness of the design lies with the main contractor.

Negotiated Contracts

In this type of contract, negotiations across the table takes place between representatives of the
owner and the main contractor for project cost and other conditions of contract. In this type of
contract, detailed project specifications are arrived at by discussion between the owner and the
main contractor. A negotiated contract involves extended discussions for finalizations as a
competitive contract.

Continuing Contract

In this type of contract, new or additional work is awarded to the contractor on the basis of
agreed terms and conditions of an existing contract. Such contracts do not require re-tendering
and hence can save time and money.

Running Contract

Such contracts provide goods and services at specified intervals or as and when required by the
owner. The contract price is not fixed and payment is based on actual goods supplied and
services rendered as specified in the contract document

Design-Construction Contract:

This type of contract refers to both the design & the field construction. Such a project is called “a
turn key” or “EPC” or “Package deal”. Both design & construction can be included in one
contract with the owner on a fixed-sum or cost-plus bases. This is a common practice in
industrial construction that requires special skill in the work.

Piece Rate Work (PRW)

The owner provides all site facilities, tools, equipment and services. Skilled workers, either
individually or in properly composed groups, are engaged for doing the work, against payment
based on pieces or units produced.

Labour contract: This is a contract where the contractor quotes rates for the item work exclusive of the
elements of materials which are supplied by the client’s Department.

Materials supply contract: In this form of contract, the contractors have to offer their rates for
supply of the required quantity of materials, inclusive of all local taxes, carriage and delivery

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 charges of materials to the specified site within the time fixed in the tender.

The Concept “Contractual Obligation/Liability”

Contractual liability is a very important concept in the world of risk management. Yet, what is meant
by contractual liability and how it actually works is not always well understood. Contractual liability
(or liability because of a contract) has a very broad meaning—a promise that may be enforced by a
court.

Let’s consider the following simple example:

Some one agrees to execute the plumbing work of your house for ETB 3,000 and collects ETB 500
(as an advance payment) prior to the job. After he collects the ETB 500, He obtained a more
profitable offer somewhere else and never showed up again to your house. You may then go to court
and claim the ETB 500 that you have already paid to him, as he has breached the contract. Such type
of claim is then said to be a “Contractual Liability Claim”.

Emerging Professional Liability in Construction

As the construction industry heads toward the next century, professional liability increasingly will
become a significant source of exposure. The real or perceived exposures will increase the liability
imposed upon general contractors and construction managers.

To protect contractors from the liability associated with these exposures, prudent risk management
techniques will continue to evolve. The risk management techniques used by contractors will require
continuing diversification and sophistication to protect their financial well-being while protecting
their company from the liabilities associated with new construction delivery methods.

Design/construction professionals are also increasingly exposed to liability for their work, facing
legal attacks based on everything from negligent supervision to underestimated costs.

In general an understanding of basic risk management is essential for all construction participants.
Before entering into a construction contract, understanding how responsibilities, risks, and costs are
to be allocated between the owner and all others involved in the project is highly crucial.

All such participants need to be able to recognize the general risks involved in a construction project,
and identify the risks associated with their particular roles in that project. Construction participants
need to evaluate their options for managing those risks as well. At a very basic level, there are three
ways to handle construction-related risks:

(1) Transfer the risk to other construction entities through contracts;

(2) Mitigate or eliminate the risk by modifying the behavior; or

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(3) Purchasing insurance.

Historically, insurance companies have played a significant role in such protections.

When determining the company from which to purchase liability insurance, the following points
may be assessed:

Coverage - Which company offers the best and most applicable coverage?

Limits & Deductibles - The liability insurer is only obligated to pay claims up to the aggregate
policy limit and usually the policy imposes per claim/occurrence limit restricting the amount of
coverage available for each claim.

Stability - How long has the insurer been in the particular business of writing professional liability
policies? Has the company come in and out of the market depending on the economic climate?

Solvency - Is the insurer economically viable and capable of withstanding changes in the insurance
market?

Price - Construction professionals should analyze the premiums required from various insurers for
the limits of liability and coverage provided.

Underwriting - What are the company’s underwriting procedures? Does the company accept poor or
average risks?

Claim Service - Does the company have a history of complaints about its claims handling? etc

Liability Insurance in the Construction Industry­ USA Experience

In the USA, The two main types of liability insurance available to Architects and Engineers are
Commercial General Liability insurance policies and professional liability insurance policies.

These policies are designed to cover completely different risks. It is very important for the
construction professional in USA to understand the differences between the policies and the type of
loss each policy covers.

Commercial General Liability Insurance (CGL)

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A Commercial General Liability (“CGL”) policy typically provides coverage for four types of
damages: (1) “bodily injury”; (2) “property damage”; (3) “personal injury”; and (4) “advertising
injury.”

“Advertising injury” usually relates to claims of defamation, assault of privacy, or copyright

violation.

“Personal injury” usually is defined to include false arrest, cruel prosecution and unlawful
deportation.

“Bodily injury” means “bodily injury, sickness or disease sustained by a person, including death
resulting from any of these at any time.”

In the construction context, the most litigated damage issue usually involves the definition of
“property damage.

” Under the typical CGL policy, “property damage” is defined to mean:

1. Physical injury to tangible property, including all resulting loss of use of that property.

2. Loss of use of tangible property that is not physically injured.

Professional Liability Insurance Policy

Professional liability coverage is sometimes referred to as “errors and omissions” insurance. By

definition, a professional liability policy is specialized and limited. It is designed to insure members
of a particular professional group against liability arising out of a special risk inherent in the practice
of the profession. It provides the primary coverage for bodily injury, property damage and
consequential damages caused by an architect’s/engineer’s negligent performance of professional
services.

Professional Liability Exposures

 Design errors such as means and methods, field changes to construction drawings, etc.
 Contractual/vicarious/contingent liability from a subcontracted design entity

 Environmental or geotechnical damages

 Quality control/quality assurance and construction inspection

 Supervisory issues

 Site health and safety

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  Scheduling and coordination

The two main duties imposed on the insured in liability policies of USA are:

a) The duty to timely notify the insurer of a claim; and

b) The duty to cooperate

It is very important for the insured to notify any and all liability insurance companies of a claim.
Under a CGL policy, the insured is required to give timely notice of any complaint as well as any
“occurrence” that may give rise to a court case.

Under both CGL and professional liability policies, the insured has an ongoing duty to cooperate
with the insurer. This is particularly relevant when the insurer agrees to defend the insured.

In those circumstances, the insured is expected to assist in obtaining and producing witnesses and
documents, to attend depositions, and to attend trial. The time an engineer or architect spends in
cooperating with the insured can be very expensive but the insured bears the expense itself and
cannot seek reimbursement from the insurer.

Indemnity requirements pursuant to the GCC of PPA-2006, Local Experience

Clause 13 of the “cited GCC” States:

(13.1 ) The Contractor shall provide, in the joint names of the Employer and the Contractor, insurance cover
from the Start Date to the end of the Defects Liability Period, in the amounts and deductibles stated in the
Special Conditions of Contract for the following events which are due to the Contractor’s risks:

a) Loss of or damage to the Works, Plant, and Materials;

b) Loss of or damage to Equipment;

c) Loss of or damage to property (except the Works, Plant, Materials, and Equipment) in connection
with the Contract; and

d) Personal injury or death.

(13.2) Policies and certificates for insurance shall be delivered by the Contractor to the Engineer for the
Engineer’s approval before the Start Date. All such insurance shall provide for compensation to be payable
in the types and proportions of currencies required to rectify the loss or damage incurred.

13.3 If the Contractor does not provide any of the policies and certificates required, the Employer may effect
the insurance which the Contractor should have provided and recover the premiums the Employer has paid
from payments otherwise due to the Contractor or, if no payment is due, the payment of the premiums shall be
a debt due.

(13.4) Alterations to the terms of insurance shall not be made without the approval of the Engineer.

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(13.5) Both parties shall comply with any conditions of the insurance policies;

Local Insurance Coverage/ Policies available to the Construction Industry

The locally available insurance coverage related to the construction sector includes :

1. Contractor’s “All Risks” (C.A.R.) Insurance

It is an all risk policy. It offers comprehensive and adequate protection against loss or damage in respect
of the contract works, construction plant and equipment and/or construction machinery, as well as against
third-party claims in respect of property damage or bodily injury arising in connection with the execution
of a building/civil project.

Main Causes of losses identifiable under CAR policy are

 Fire , Lighting and explosion

 Natural Perils
 Theft , Burglary
 Lack of Skill and Negligence

2. Erection All Risk (EAR) Insurance

This branch of Engineering insurance offers comprehensive and adequate protection against all the risks
involved in the erection of machinery, plant and steel structures of any kind, as well as third-party claims
in respect of property damage or bodily injury arising in connection with the execution of an erection
project.

EAR insurance provides a very wide cover. Almost any sudden and unforeseen loss or damage occurring
to the property insured on the erection site during the period of insurance will be indemnified.

3. Contractor’s Plant and Machinery (CPM) Insurance

This is an insurance of contractor’s plant and machinery on an annual basis. It covers any loss or damage
from any cause whatsoever occurring at work, at rest or during maintenance operations and is not limited
to a specific construction site.
The cover does not include third party legal liability unless it is incorporated in Contractor's All Risks
(C.A.R.) Insurance.
4. Machinery Breakdown Insurance

It was developed to grant industry effective insurance cover for plant, machinery and mechanical
equipment at work, at rest or during maintenance operations.

By its very nature, Machinery insurance is “All Risk” insurance for machinery supplementing
the coverage afforded by Fire insurance. Thus it covers unforeseen and sudden physical loss of
or damage to the insured items necessitating their repair or replacement.

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All types of machinery, plant, mechanical equipment and apparatus may be covered under
Machinery Insurance.

If possible, all the machines of plant or workshop or of a separate plant section should be
included in the insurance in order to ensure that the risk is adequately balanced.

Only those items having a short service life compared to the entire plant are normally excluded
from machinery insurance, i.e. mainly:
 All types of interchangeable tools
 Sieves, engraved cylinders, stamps, dies, ropes, chains, belts

 Parts made of glass, ceramic or wood, rubber tires

 Operating media of any kind such as fuel, gas , refrigerants, catalysts, liquids, lubricants
(oil in transformers and circuit breaks is, however, included since it is not only a coolant
but also serves as an insulation agent)

Machinery insurance cover is limited to the insured’s premises and does not include Third Party
Liability and perils that could be catered in other policies unless superficially included by
endorsements.

Loss or damage covered under Machinery insurance is mainly due to the following causes:
 Faulty design
 Faults at work or in erection

 Defects in casting and material

 Faulty operation, lack of skill, negligence, malicious acts
 Tearing apart on account of centrifugal force
 Physical explosion, flue gas explosion in boilers
 Electrical causes like short circuit
 Shortage of water in boilers

5. Boiler and Pressure Vessel Insurance Policy

It provides cover against losses or Damage (other than by fire) to any boiler or pressure vessel
and to other property of the insured, liability of the insured at law for damage to property not
belonging to the insured, liability of the insured at law on account of fatal or non-fatal injuries to
any persons other than the insured’s own employees or workmen or members of the insured’s
family, caused by and solely due to explosion or collapse of any boiler or pressure vessel whilst
in the course of ordinary working.

6. Electronic Equipment Insurance (EEI)

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 7. Workmen’s Compensation

It covers the insured employees against death or bodily injury by accident or occupational
diseases occurring at the place assigned to them for work or arising from their work and during
the time of their work.

The insurance can also be extended to provide cover while the employees are in transit to work
and back to their home in the most uninterrupted route.

8. Professional Indemnity Insurance

It insures ‘professional’ persons or firms for their legal liabilities to third parties arising from
their professional error & omission negligence of that of their employees.

Not only can they cause bodily injury or damage to property through their negligence, they can
fail to exercise the skill and care that is expected of them.

9. Performance Bonds etc.

Each, insurance coverage has its own application/proposal form;

Underwriting

During the underwriting process, it is common to check some factors about the person or
property being insured. Such factors can be related to either the insured or the subject of
insurance or to both. For life insurance, such factors could relate to age, medical condition, life-
style, etc. For an automobile, it could include the physical condition of the vehicle, its market
value, its ownership and its use. For a residence such factors could include natural hazards --
flood, earthquake zone -- the replacement cost and location, as in a low or high crime area. For
commercial properties, such factors as replacement cost, use of the property, value of raw
materials and finished goods on site, etc.

As many such factors are complex and require some degree of special skills to assess, many
products and services to support their proper determination have been developed and are usually
assessed by the insurer’s professionals.

Joint & Several Liabilities in Construction Contracts:

Construction contracts exist between three chief parties: the property owner, the contractor, and the design
firm. Disputes can exist between owners and contractors for faulty construction, or between
owners/contractors and designers for faulty design.

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Assume a contractor makes an implementation error, which comes on top of a design error made by the
architect and the implementation error is then also overlooked by the supervising engineer (as well) while he
gives the contractor permission to continue. In view of this fact, the errors were causally linked (between the
3 parties), hence all the responsible parties are jointly and severally liable to the damage, if any.

Extra Contractual Obligation/Liability

The term "Extra Contractual Obligations" is defined as those liabilities not covered under any other provision
of the Contract. Hence, it is imposed by Law not by the contract it self.

Basis of Extra-Contractual Liability:

In short, the basis of extra-contractual liability may be grouped in three manners:

a) Fault: Damage resulting from the direct Faults of the person

b) Vicarious Liability: When a party is made responsible for the fault of another

c) Strict Liability: When the law makes a person liable regardless of his fault.

The Ethiopian Civil Code also covers about extra-Contractual Liability at its Articles 2027:

Art. 2027. - Sources of extra-contractual liability.

1. Irrespective of any undertaking on his part, a person shall be liable for the damage he causes to
another by an offence.
2. A person shall be liable, where the law so provides, for the damage he causes to another by an
activity in which he engages or by an object he possesses.

3. A person shall be liable where a third party for whom he is answerable in law incurs a liability
arising out of an offence or resulting from the law.

Art. 2028. - General principle: Whosoever causes damage to another by an offence shall make it good.

Art. 2029. - Types of offence.

1. An offence may consist in an intentional act or in mere negligence.

2. An offence may consist in an act or failure to act.

“The Law of extra-contractual liability” is a private law whose purpose is to safeguard victims of
damage of a wrong from becoming social burdens.

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