DCC 2073: CONTRACT & ESTIMATING

CHAPTER 3:
THE CONTRACT PROCEDURE

RUKINAH SAMUING
JAB.KEJURUTERAAN AWAM
HP NO: 0128439725
 LEARNING OUTCOMES
 Upon completion of this course, students should
be able to:

CLO 1
Understand the concept on construction industry,
tender procedure, contract procedure and terms of
contract in Malaysia

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 DEFINITION OF CONTRACT
 An agreement with specific terms between two or more
persons or entities in which there is a promise to do
something in return for a valuable benefit known as
consideration.

 The relationships among these parties are maintained

by forming contract. A contract is a legal agreement
made between two or more parties for a delivery of
certain services in return for money or any other value.

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 In a construction industry contracts the Contractor
obligates to carry out works of construction and other
ancillary obligations. Majority of the civil engineering
works are performed under the contract which requires
the Contractor to finish the work and the Client to pay
for it.

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 FUNCTIONS OF CONTRACT
 The main functions of contract are:
1. To specify the work to be done.

2. Stipulating the amount to be paid.

3. To assign responsibility to the concerned parties to

finish the work.
4. Decide who takes charge for the unexpected events if
they occur.

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 PRINCIPLES OF CONTRACT
 Based on Contract Act 1950, there are seven (7)
elements of a valid contract:
1. Offer/ Tawaran.

2. Acceptance/ Penerimaan.

3. Consideration/ Balasan.

4. Intention to create legal relations/ Niat.

5. Capacity/ Persetujuan sah dari segi undang-undang.

6. Certainty/ Ikatan kontrak boleh laksana.

7. Free consent/ Tiada kecacatan dikedua-dua pihak

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 OFFER/ TAWARAN
 Section 2 (a) of the Contract Act 1950:-
1. is an act or willingness of the person to be bound by
his promises implied in the act or utterance and with a
view to obtaining the assent of the other person.
2. an offer must signify the willingness of the proposer
(offeror) to fulfill his promise if accepted by the
offeree.
3. must be differentiated from an enquiry and of the
intent to trade. Advertisements, catalogues and
circulars are not usually an offer.
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 ACCEPTANCE/ PENERIMAAN
 According to section 2 (b) of the Contract:
1. when a person to whom an offer is made signifies his
assent thereto, the offer is said to be accepted.
2. Acceptance may be expressed, that is oral or written
and implied from conduct of the offeree.
3. An acceptance must also comply with certain rules
before it becomes valid and enforceable.
4. According to section 7(a), the acceptance must be
absolute and unqualified. Its means that the offeree’s
intention to accept must be clearly understood, without
any doubt, from his conduct.
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 CONSIDERATION/ BALASAN
 According to section 2 (d) of the Contract Act,
1. consideration is an act done or abstention from doing
an act, or a promise to do or a promise to abstain
from doing something.
2. usually done, either orally, inscribed or act.

3. Consideration must be of value (at least to the

parties), and is exchanged for the performance or
promise of performance by the other party (such
performance itself is consideration).
4. There are three forms of consideration- executed
consideration, executor consideration and past
consideration. 9
INTENTION TO CREATE LEGAL RELATIONS/
NIAT
 An Agreement must be deliberate, or seriously intended,
to be enforceable, so that it is understood that in the
event of a breach of obligation, the parties could enforce
the contract through the courts.
 Shown that the parties to the agreement intended to be
legally bound by the agreement.
 In law agreements are categorized into two, which is
social and domestic contract or agreements and
commercial contract or agreements.
 In the government context, however, many documents
are signed which are not intended to create legal
relationships such a Memoranda of Understanding.
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CAPACITY/ PERSETUJUAN SAH DARI SEGI
UNDANG-UNDANG

 Capacity to contract means the legal competence of a

person to enter into a valid contract and the
competence to perform some act.
 The basic element to enter into a valid contract is that
s/he much has a sound mind.
 Certain classes of people are exempted from the
category of people who are capable of entering into
contract:
1. Infants/minors

2. Insane.

3. People under the influence of drug. 11

4. Bankrupt
CERTAINTY/ IKATAN KONTRAK BOLEH
LAKSANA
 The formation of a contract depends on a meeting of
the minds or consensus as to the terms of the
proposed contract.
 Both parties must have a clear understanding of their
rights and duties in the transaction for there to be
consensus.
 An agreement to agree on certain terms later on is not
a contract.
 Certainty of terms is the essence of a contractual
agreement. It should be noted that terms of a contract
are the documentation to understanding. 12
FREE CONSENT/ TIADA KECACATAN
DIKEDUA-DUA PIHAK
 If this agreement satisfies certain conditions, a legally
enforceable contract is formed.
 On basis, every contract must be voluntarily done
without any negative element which affect a person’s to
make independent decision.
 According section 10 states that every agreement is a
contract if it’s made by the free consent of parties. And
in section 14 consent is said to be free if it not caused
by coercion, undue influence, fraud, misrepresentation
or mistake.
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 CONTRACT TYPES
 The factors that the contracting officer should consider
in selecting and negotiating the contract type:

1. Price competition.
2. Price analysis.
3. Cost analysis.
4. Type and complexity of the requirement.
5. Combining contract types.
6. Urgency of the requirement.
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7. Period of performance or length of production run.
8. Contractor’s technical capability and financial
responsibility.
9. Adequacy of the contractor's accounting system.
10. Concurrent contracts.
11. Extent and nature of proposed subcontracting.
12. Acquisition history.

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 CONVENSIONAL CONTRACT
Conventional Contract Implementation

Planning Construction Operation

Design Maintenance

Procurement

Government Contractor Government

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 FEATURE
 The conventional contract is one in which the Employer
employs Consultants to design The Works and to
supervise a Contractor in the performance of the Work.
Consultants appointed by the government are
responsible for the design and any design
imperfections.
 The Contractor is selected on the basis of his suitability
for the type of work and the competitiveness of his
price relative to other Contractors. the contractor
enters into a contract with the Employer undertaking to
perform the Works in accordance with the terms and
conditions of the contract for an agreed price.
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 The Engineer, who is usually one of the Consultant's
team, acts as the Employer's expert; as the Employer's
Manager (with delegated responsibilities); and as initial
Arbiter between Employer and Contractor.
 Contractor appointed by the government is responsible
for the construction, failure and / or defects.
 The main contractor must have enough capacity from
the technical and financial aspects.
 Work progress on site will be monitored by
government through S.O .
 Conventional are divided in two categories:-

1. Contract sum based on Bill Quantities.

2. Contract sum based on specification and drawings.

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CONTRACT SUM BASED ON BILL
QUANTITIES (BQ)
 Feature:
1. Most common type of contract.

2. Plans are provided and all work items and quantities

specified in the tender documents before tenders are
invited.
3. Tenderers who participate in the tender will determine
the price for work details contained in the tender
documents

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4. Bills of Quantities contain some breakdown of the
total tender price of each building element such as:-

a) General conditions and preliminaries.

b) Site preparation.
c) Piling works.
d) Building works.
e) M&E works.
f) External works.
g) PC and Provisional Sum

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CONTRACT SUM BASED ON
SPECIFICATION AND DRAWINGS
 Feature:
1. Contractor is required to perform the work for each
element of a specified sum amount (as has been
tendered).
2. Details are contained in the plan. Detail of work and
materials are described in the specifications but bill
quantity is not provided.
3. Schedule of rates will be used as the basis for evaluate
progress payment for completed works and also to
evaluated variation order.
4. If the Variation Order which exists not listed in the rate
schedule, Quantity Surveyor will negotiate with the 21
contractor to agree an appropriate rate.
 Advantages:-
1. Both parties can easily understand their work areas
when using contracts based on bills of quantities.
2. The rates contained in the contract documents will be
made the basis for evaluating the progress payment
for work completed by the contractor and evaluated
variation order.
3. Contractors can use to calculate the quantity of bills
of quantities for the purchase of building materials.
4. Contractors can also determine quotations from sub-
contractors.
5. Contractor can ensure that the work done is covers
the field of contract 22
 Disadvantages:-
1. Quantity Surveyors and architects take a relatively
long time to prepare the plans and bills of quantities.
2. This contract may only be used if it has enough time
to provide and prepare the plans and bills of
quantities.

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ADVANTAGES OF THIS CONVENTIONAL
CONTRACT
1. Accepted and recognized that it works and that all
parties are able to function in their designated roles
towards completion of the project.
2. It allows the Employer to choose Consultants who will
be specialists in their field and among the best
available.
3. It allows the Employer time and the ability to develop
and express his requirements, in consultation with his
consultant and to ensure that the documents fully
describe these requirements.
4. It allows the Employer and his Consultant to pre-
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qualify and select Contractors and choose the most
economic conforming tender.
DISADVANTAGES OF CONVENTIONAL
CONTRACTS
1. The considerable amount of time required to take the
project through all of the necessary stages.
2. sometimes necessary to let contracts with specialist
Sub-contractors prior to the letting of the main
Contract and this process can lead to serious interface
problems particularly in regard to the overall project
schedule.
3. In order to place a firm price contract it is necessary
that the design and documentation is fully developed
by the time the firm price is requested.
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4. In giving a firm price the Contractor evaluates the
information given to him and puts a value on this. Firm price
contracting requires that the Contractor adds money into his
prices for these items when in fact they may not be
necessary.
5. In giving a firm price, the Contractor enters into obligations
to perform the work for that price. These are his obligations
but his motivation is to maximize his profit.

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DESIGN AND BUILD/TURNKEY
CONTRACT
Design and Build/Turnkey Contract Implementation

Planning Construction Operation

Design Maintenance

Procurement

Contractor Contractor Government

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 FEATURE
 Contract basis is that the whole responsibility rests with
the contractor starts from the planning, design and
supervision of construction up to the completion of the
project with the time frame and agreed price.

 There are two factors why Turnkey/D&B contract

introduced:
1. urgent need for a specific project.

2. Owners lack the expert group.

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3. Main Contractor shall appoints or a qualified as
design consultants to carry out their professional
responsibilities in the design and construction
supervision.
4. Contractors are required to appoint a consultant for
work testing and commissioning.
5. Appointment of consultants is based on contractor or
through recommendations from government

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 ADVANTAGES
1. Reduce the of the project implementation. Time
savings can be made because the fully involvement
of contractors in the construction process from
beginning to the end.
2. Responsibilities one party.
3. Fixed project cost.
4. Easier and effective communication.
5. Innovation in design and construction because of the
early involvement of the contractor.
6. Can reduce direct owner involvement on matters
related to technical problems, cost, time and other. 30
 DISADVANTAGES
1. High cost of project.
2. Scope of variation is limited.
3. Wastage will occur during the construction stage.
4. Affect the participation of local consultants because
the contractor will typically hire a own consultancy.
5. New contractor and Bumiputera contractors cannot
compete to participate due to it is used for project
management and high cost

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REIMBURSTMENT CONTRACT/COST
PLUS CONTRACT
 Feature:
1. Cost-reimbursement types of contracts provide for
payment of allowable incurred costs, to the extent
prescribed in the contract.
2. This contract means reimbursement/repayment of all
costs expenses incurred by the contractor.
3. This includes the cost of materials, plant and labor
called Prime Cost Sum and added with payment (fee) to
cover profit and administrative expenses (overhead).
Suitable for complex projects and should be completed
immediately.
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4. This contract is divided into 3 types: -
i. Prime Cost + Fixed Fee.
ii. Prime Cost + Fee Percentage.
iii. Prime Cost + Target Fee

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PRIME COST SUM + FIXED FEE.
 Contractors paid by the amount of the actual
construction added administrative costs and profit.
 Costs and profits must have been agreed by the owner
and the contractor either through tender or negotiation.

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Prime Cost + Fixed Fee RM RM
1. Labour Cost 39000
2. Material Cost 59000
3. Sub-Contractor Cost 10000
4. Plant Cost 2000 110000
Add: Fixed Fee 15000

125000
Project Cost
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PRIME COST SUM + FEE
PERCENTAGE.
 Contractors paid by the amount of the actual
construction costs added administrative costs and
profits in accordance with a predetermined percentage.
 Management costs and profits must be agreed upon by
the owner and contractor.
 Percentage fees computed from the total construction
cost.
 The more of expenses incurred by the owner on prime
cost (PC), contractor will get higher remuneration

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Prime Cost + Fee RM RM
Percentage.
1. Labour Cost 40000
Add; 25 % 10000 50000
2. Material Cost 60000
Add; 10% 6000 66000
3. Sub-contractor Cost 10000
Add; 5 % 500 10500
4. Plant Cost 2000
Add; 10 % 200 2200
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Project Cost 128700

PRIME COST + TARGET FEE
 Target cost for a construction must be agreed by the
owner and contractor.
 Have incentives factors to contractors to encourage
the management cost savings.
 Profits will be given to the contractor if the actual
construction cost less than the cost of the original
target.
 Contractor will be fined / deduction amount which
should be acceptable if construction costs exceed
target costs.
 Contractors have the initiative to save costs and speed
up the completion of construction projects for the 38

bonus.
 Some important things that must be agreed upon in
this contract:
i. Total of target cost .
ii. bonuses or penalties need to be paid.
iii. Quality of work to be accomplished

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Prime Cost + Target Cost
(Target Cost - RM 110,000) RM RM
1. Labour Cost 38000
2. Material Cost 58000
3. Sub-contractor Cost 10000
4. Plant Cost 2000 108000
Value of target cost 15000
Add 20% to RM2000 400 15400
(RM 110,000  RM
108,000)
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Project Cost 123400
Prime Cost + Target Cost
(Target Cost RM 110,000) RM RM
1. Labour Cost 41000
2. Material Cost 58000
3. Sub-contractor Cost 10000
4. Plant Cost 2000 111000
Value of target 15000
Less 20% to RM1000 (-) 200 14800
(RM 110000 – RM 111000)
Project Cost 125600
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 ADVANTAGES
1. Projects to be completed faster.
2. Contractors have the motivation to complete the
project quickly.
3. losses on the part of clients is minimized

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 DISADVANTAGES
1. Risk to loss if the contractor fails to complete the
project within the stipulated period.

2. High project costs

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B.O.T (BUILD, OPERATION,
TRANSFER CONTRACT)
 What is a build-operate-transfer (BOT) contract?
1. BOT contracts are assigned either through competitive
bidding or direct negotiation.
2. Winning investors builds an infrastructure project and are
allowed to commercially operate it for a fixed period of
time in order to earn back the capital they invested as well
as collect profit.
3. The projects are then handed back to the government.
4. Under a BOT contract, the investor is completely in charge
of the construction and management of a project over a
specific period, after which the project is to be transferred
to the State without further compensation
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 FEATURE
 Mechanism or form of privatization by the government.
(Privatization Policy 1983)
 government appoint an appropriate private sector to
design, finance, build and subsequently handling the
facility for an agreed period and then transfer
ownership to the government without involving any
shifting cost.
 operating period is usually 10-50 years (the
concession)
 Project example:

i. Toll Highway (PLUS).

ii. Port. 45

iii. Water Supply

 ADVANTAGES

1. Reduce the financial burden of the government.

2. Improve efficiency and job production.

3. To encourage the economic growth.

4. Efficient distribution of resources.

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 DISADVANTAGES

1. Risk of loss to the company appointed if no feasibility

study done carefully.

2. Difficulty in obtaining investors for projects less

profitable.

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THE DEFINITION AND FEATURES OF
SUBCONTRACT
Sub-Contract:-
 Subcontract is a contract between the main contractor
and subcontractors to perform the work or a part of
work on the same project.
Sub-Contractor:-
 A subcontractor is an individual that signs a contract to
perform part or all of the obligations of another's
contract.
 A subcontractor is a person who is hired by main
contractor to perform a specific task as part of the
overall project and is normally paid for services
provided to the project by the originating main
contractor. While the most common concept of a 48
subcontractor is in building works and civil engineering.
DOMESTIC SUB-CONTRACTORS
 Is the person / company that were taken to carry out
the work on behalf of the main contractor for the
completion of a job.

 Selected/appoint by the main contractor.

 Claim payment is through the main contractor.

 The work is commonly done is install floor & wall tiles,

cement work, concrete work, etc.
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 Why the main contractor appoints the Domestic Sub-
Contractor: -

a) Main Contractors do not have a skilled staff in certain

job.

b) Needs a certain type of work was not continuous.

c) Lower cost because of the higher productivity from

diligent supervision of sub-contractors.

d) Less risk because only adding some profits and

services (profit and Attendance) to the rate of sub-
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contractors.
 The right of Main Contractor to the Domestic Sub-
Contractor.

i. Supervise the work of Sub-Contractor.

ii. Rejected the work of Sub-Contractor.

iii. deduct the payment.

iv. appoint another sub-contractor.

v. terminate the contract

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 Responsibility of the main contractor to Domestic Sub-
Contractor:-

i. Coordination of sub-contractors.

ii. Provide the work equipment.

iii. Connecting the Sub-Contractor with consultants.

iv. Solve the problem of sub-contractors.

v. Supervise the work of sub-contractors.

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 The rights of domestic sub-contractor to the main
contractor: -

i. Have access to carry out sub-contract work.

ii. Obtain payment.

iii. Postpone the implementation of the sub-contract

work.

iv. Entitled to an extension of time

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 Domestic Sub-Contractor responsibilities: -

i. Compliance with the quality value.

ii. Maintain the cleanliness of the construction site.

iii. To ensure the public safety.

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NOMINATED SUB-CONTRACTORS
 The person / company that were taken to carry out the
work on behalf of the main contractor for the
completion of the work.
 Appoint to carry out special work which requires
expertise as piling, electrical installations, air-
conditioning systems, elevators.
 Payments for work completed are made by owners
directly to nominated subcontractors (14 days-
payment to main contractor) or through Main
Contractor.
 Appointed by client through tender or direct
appointment.
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 why clients appoint the nominated sub-Contractor:-

i. That particular work performed by an experienced

firm.

ii. The construction or special method of construction

can only be performed by a particular firm.

iii. sub-contractor needs expertise in the early stages,

particularly associated with the design and M & E
works

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 NOMINATED SUPPLIER
 Appointed by the owner / S.O to provide materials and
construction goods to the main contractor in the
project.

 Fasten the contract with the main contractor

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 appointed for reasons of:

i. The owner may not be able to make decisions that

work for some finishing work etc.

ii. Changes of goods in the market such as electrical

equipment, paper wall etc.

iii. Supplier can ensure the supply of materials / goods

in the market and work to be completed on schedule.

iv. Suppliers are usually able to determine just only

quality goods are used.
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THE DIFFERENCE BETWEEN THE NOMINATED SUB
CONTRACTOR AND DOMESTIC SUB CONTRACTOR.
DOMESTIC SUB-
CONTRACTOR
Responsibility of the main No formal contractual
contractor
Work progress payments Payments obtained depends on
the main contractor
Appointment Main Contractor
Right of main contractor Main Contractor
on claims payments
Field/work  Certain type of work was
not continuous.
 The work is commonly done
is install floor & wall tiles,
cement work, concrete
work, etc.
NOMINATED SUB-
CONTRACTOR
There formally contractual
relationship
Payments obtained based on
completed works
Owner/S.O
Owner
 needs expertise in the
early stages, particularly
associated with the
design and M & E works
 Appoint to carry out
special work which
requires expertise as
piling, electrical
installations, air-
conditioning systems,
elevators. 59
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