Construction Contracts

Contract Environment:
 The construction industry is structured by the contractual relationship
 A contract: an agreement between two or more competent to do something for a
consideration
o Can you not want to sign the contract?
o Competent: mentally stable; has the legal capacity
o Consideration: something of value; an exchange for something
 The subject of agreement should be legal and possible to accomplish
o Ex: drugs
 Voidable vs. void contract
o Void contract cannot be enforced at any given time
o Voidable contract can be enforced for the benefit of one party
 Ex: get into contract with a minor to mow the lawn for a salary
 The minor shows up then the contract is active, and you must pay
him
 If he doesn’t show up, you can’t hold it against him
 Role of the court: parties of their contract, their promises, and other aspects of contractual
agreement
o Ex:
 Contractual privity: having a contractual relationship between two parties
o A lack of privity may limit the party’s ability to assert claims
 Very obvious in construction contracts
 Contractor can’t sue the engineer or the designer because you are
in contract with the owner and there is no direct contractual
agreement between the contractor and the engineer
 In this case we must make it clear that we have contractual privity
o Ex:
 You see someone painting your house and you leave them
 They give you the bill once they’re done when you didn’t ask for their
services
 They take you to court and the court orders you to pay them
 This is an implied contract
 Spearin Doctrine: a legal concept based on a decision issued in 1918 by the United States
Supreme Court in U.S. vs. Spearin
o Spearin was hired to build a dock for the navy. The plans that were provided to
him were missing information about an underwater dam. The dock floods and the
Navy wants him to pay for fixing it. He says he was not responsible for the
flooding since he built according to the given specifications. They denied him pay
so he sued them.
o If a contractor is bound to build according to plans and specifications prepared for
the owner, the contractor will not be responsible for the consequences of defects
in the plans and specifications
Purchasing a Construction Project:
 Construction projects are purchased before being manufactured
o Think of them like a meal when you go to a restaurant
 Owners usually prefer to work with a single source to produce their projects; however,
this is a very rare case
o The more entities you have the more tedious it becomes when it comes to
contractual obligations
 Two major contracts that provide the owner with the privilege of dealing with one party
are:
o Design-built contracts
o Construction management contracts

Major Construction Contract Types:

 Construction contracts can be classified as:
o Competitively-bid contracts
 The most common contract format
 Are very popular in public projects
 They are mandatory because it is public money and must remain
transparent. Preventing indecent actions
 Two main categories:
 Lump/stipulated sum contract
o A hard bid
 Unit price contracts
o Negotiated contracts
 The main category of negotiated contract is the cost-plus contract
 The method of selection involves inviting a group of qualified contractors
to submit their proposal
 The proposal presents: contractor’s credentials, an estimate of the
project costs, and the fee required for his work
o The estimated costs reflect the direct and indirect costs
 The negotiated contract is not suitable for public projects
 Because here it is done based on negotiation
 They can be the only type of contracts suitable for some projects
 Highly specialized type of projects and you know only 3-4 local
companies can perform this
 If the project is classified (you don’t want to announce it)

Competitive Bidding Contracts:

 In these contracts, the award of the contract is made to the lowest responsible bidder
 The bids are opened and read publicly, and the owner reviews the bidder’s qualifications
in an ascending order
o Why:
 Factors that define the contractor as “responsible”
o Technical competence and experience
o Current financial position based on:
 Balance sheet and income statement
 o Bonding capacity
 The availability of the contractor to purchase the required bonds
 The rank in the industry
o Current amount of work she/he is contracted for
 Might be too busy
o Past history of claims and litigations
o Defaults on previous contractors
 Advantage of competitive bidding contracts:
o Ensures obtaining the lowest responsible price, theoretically
 You can hire the contractor initially as the lowest responsible bidder, but
in reality, the contractor knows this project will have many change of
orders that will change the price
 All contractors are treated with fairness, which is a very critical aspect in
public projects
o Disadvantage of competitive bidding contracts:
 The plans and specifications must be fully complete before the bidding
process
 The contractor is providing you with one bid price, so you must
provide him with complete details about your project or they can
exaggerate the bid price

Lump-Sum Contacts:
 A contract in which the contractor submits one price that covers all works and services
stipulated in the contract
 They require a complete set of drawings and specifications
 The contractor includes all his/her direct and indirect costs in the contract
 Progress payments are made based on the percentage of completed works
 Accuracy in measuring the works completed should be enough to establish an actual
percentage
 Advantages:
o The owner knows beforehand the exact amount of money needed to finance the
project
o The total cost of the project cannot exceed the stipulated price in the contract
 Disadvantages:
o A complete set of drawings and specifications should be available before the
project starts
o The flexibility in accommodating changes to the contract is very limited
o The contractors tend to increase the contingency
 I might base my price on the current cost of materials but two months
down the road the price might change
 Very popular when it comes to residential buildings

Unit-Price Contracts:
 A contract in which the project work items can be itemized by units
 We break down the project into a list of items and we provide quantity, a description and
a unit for measuring the work items
 o It’s very important to pay attention to the unit
 Work item for excavation: the unit would be cubic feet; meaning that you
are measuring a volume
 In this type of contract, the contractor quotes the price per units rather than a single
contract price
 The bid price is determined by summing the total price of all the work items listed
 Some work items cannot be measured in units
o Ex: mobilization
 Give it a unit of lump-sum
 Unit of Ea (each)
 If a work item has a small quantity specified, the unit price is higher and vice versa
o The economy of scale: when you have mass production your overhead is divided
by a large number so the unit cost is small
 Unit-price contracts are flexible in negotiation in the event of significant deviations from
the listed quantities
o Most contracts allow for a deviation up to 10% from the estimated quantities for
the same price
o If the deviations exceed 10%, the owner might ask the contractor to lower the
price and vice versa
 The contractor should reflect his overhead on all of the work items of the project
 The progress payment is based on the precise measurement of works completed on site
 The owner may reject the bid if it is unbalanced
o Mobilization bid item: to overcome the need to unbalance the bid, the owner may
pay the contractor a mobilization cost (advance payment)