Contract Administration Supplementary Course Notes Definition and purpose of contract A simple definition of contract is an agreement between two

o parties. According to the Oxford Dictionary of Law, a contract is a legal binding agreement. An agreement arises as a result of offer and acceptance. For an agreement to be legally binding, (1) there must be consideration (unless the contract is by deed); (2) the parties must have an intention to create legal relations; (3) the parties must have capacity to contract; (4) the agreement must comply with any formal legal requirements; (5) the agreement must be legal; and (6) the agreement must not be rendered void either by some common law or statutory rule or by some inherent defect. Why do we need contracts? The parties to the contract are legally bound to discharge their obligations and liabilities under the contract. Any aggrieved party may sue the other party for breach of contract to recover his/her loss. What are the essential elements of a contract? They are offer, acceptance, consideration and intention to create legal relations. Offer 1. 2. 3. 4. An offer is an indication of willingness to do or refrain from doing something. An offer may be addressed to one person, a group of persons or the world at large. Revocation of an offer must be communicated. An offer must be distinguished from an invitation to treat, which is the invitation of an offer.

Gibson v Manchester City Council (HL) A person wanted to buy a house from a council. The council wrote to him stating that it might be prepared to sell the house and inviting him to make an application to buy using the enclosed application form. The person did so. The council later informed the person that it did not prepare to sell the house to him. The person claimed that the councils first letter was an offer and the submitted application form was the acceptance and hence there was a binding contract. The court held that there was no binding contract. The councils first letter was just an invitation to treat. 5. An invitation to submit tender is not an offer, but one kind of invitation to treat. The submitted tenders are offers. The party inviting tenders is not bound to accept any tender. An exception to this rule is that the party binds himself to accept the best submitted tender. Harvela Investments Ltd. v Royal Trust of Canada Ltd. (HL) A invited B and C to make sealed competitive bids for a parcel of shares, stating that We bind ourselves to accept the highest bid. B submitted a bid of $2.2 million. C submitted a bid of $2.1 million or $0.1 million in excess of any other offer. A believed that Cs bid should be accepted. The court held that the invitation to tender
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amounted to an offer to sell the shares to the highest bidder, however, the referential bid of the type adopted by C was not permissible in a transaction of this kind and A was bound to accept Bs bid. Acceptance 1. An acceptance is an unconditional agreement to all the terms of the offer. 2. The postal rule states that where acceptance by post is an appropriate and reasonable means of communication between the parties, acceptance is complete when the letter of acceptance is posted, even if the letter is delayed, destroyed or lost in the post so that it never reaches the offerer. Household Fire Insurance v Grant (CA) A offered to buy shares of Company B. Company B posted a letter accepting the offer. The letter never arrived, but As name was entered as the shareholder. A no longer wanted to buy the shares at such price. The court held that as soon as the letter was posted, there was a binding contract, even if the letter was lost or delayed. 3. Acceptance can be inferred from conduct. Consideration 1. Consideration is an act, forbearance or promise by one party to a contract that constitutes the price for which one buys the promise of the other party. 2. Consideration does not need to be adequate. 3. The performance of an existing contractual duty is not sufficient consideration. 4. Past consideration is not consideration. Re McArdle (CA) A woman carried out work to a house jointly owned by members of her family. After the work had been completed, her relatives signed a document promising to pay her for the work. They subsequently refused to pay. The court held that the woman could not recover the sum promised as her consideration was past. As revealed from the decisions of later cases, if the woman had been firstly requested by her relatives to carry out the work, or in circumstances where it was understood that payment would follow, the womans consideration would not have been regarded as past. Intention to create legal relations 1. Contractual intention is not presumed in domestic agreements (agreements between family members) and social agreements (agreements between friends). 2. Contractual intention is presumed in commercial agreements. Other requirements for a legally binding contract 1. In order for a contract to be valid, the work to be performed under the contract must be legal. 2. A contract must not be obtained by misrepresentation. 3. A contract must not be obtained by duress (force). Contracts in construction projects
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Employers, generally the Government or the private developers, need professionals to assist them in carrying out professional duties during the various stages of a project. They either employ these professionals themselves or enter into consultancy agreements (employ consultants). Moreover, consultants may sometimes need to employ sub-consultants to assist them in performing some specialized tasks. The Government needs to employ consultants: 1. To supplement the existing staffing resources to cope with a fluctuating demand for resources or to accelerate project delivery; 2. To provide specialist expertise not available in the Government; 3. To provide an independent view on a particular project/problem; and 4. To facilitate a multi-disciplinary approach. The project cycle can be separated into three main stages, namely investigation (I), design (D) and construction (C). The Government usually employs consultants to provide service on either one of these three stages or any combination of them. Similarly, employers need contractors to carry out construction work. The only exception to this rule is when the employer is a contractor himself. However, even in this case, he may still need to employ sub-contractors. There are cases where a consultant needs to employ a contractor or a contractor needs to employ a consultant. In some consultancy agreements which contain site investigation work, it is likely that the consultant who has been awarded the consultancy will employ a contractor to carry out such site investigation work. Moreover, it is common for a contractor to employ a consultant to assist him in carrying out temporary work design. Types of contract After the completion of the detailed design, the employer or his consultant has to decide the type of contract to be adopted and prepare the tender documents for the invitation of tenders. The types of contract commonly adopted in the construction industry are: 1. Remeasurement contract Payment under the contract is based on the contract rates (rates in the accepted tender) and the actual quantity of work carried out. The quantities in the bills of quantities are only estimated quantities. Therefore, a remeasurement contract requires the measurement of the actual quantities of work carried out to determine the amount of contract payment. Interim payments are usually provided in construction contracts. In remeasurement contracts, the amount of payment for each interim period should be the total contract payment until the end of such interim period minus the sum of the previous contract payments. This avoids the accumulation of measurement errors. However, if the actual quantity of work carried out deviates substantially with the
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quantity as stated in the bills of quantities, the contracting parties may claim the use of a new rate. Such claim may be justified on the change in the method of construction and the resources to be deployed. Remeasurement contracts were commonly used by the Government in the past 20 years. 2. Lump sum contract A lump sum contract is a contract where the quantities are substantially measured firm and the final price to be paid is ascertained by adding to or deducting from the accepted tender price the value of variations, provisional quantities and contingency items. Lump sum contracts may have or may not have bills of quantities. If a lump sum contract contains bills of quantities, the rates in the bills of quantities may be used to value variations ordered under the contract. Good financial management demands as much certainty as possible over the final cost of a contract. A lump sum approach will increase that certainty as compared to the remeasurement approach. The adoption of lump sum contracts can save time and effort in performing remeasurement of the quantities of work. However, the design of the works has to be well advanced at the tender stage. It is currently the policy of the Government that whenever a substantial part of the works is unlikely to change a construction contract should be awarded as a lump sum contract. 3. Term contract A term contract typically comprises schedules of rates. The tenderer is required to enter the rates of the works items included in the term contract. Once the contract is accepted, the employer may issue works orders during the contract period to instruct the contractor to carry out certain work specified in the term contract. The contractor is entitled to payment according to the rates in the schedules of rates for the work executed. Term contracts are commonly used in maintenance works. Nowadays, this type of contract will also be adopted when the employer wishes to retain a discretion on the scope and sequence of the works to be executed. The risk on the contractor is relatively higher as the quantity of work to be executed is uncertain. Therefore, it is likely that the rates quoted by the contractors are relatively higher. 4. Cost reimbursement contracts Under a cost reimbursement contract, the contractor is paid his reasonable costs plus either a percentage of the costs or a lump sum as his profit. This type of contract is commonly used in building contracts where it is not possible to confirm the design standard before the works commence.
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As there is no incentive for the contractor to control the costs, the risk on the employer is relatively higher. Tender documents The employer or his consultant needs to prepare the tender documents for the invitation of tenders. The tenderers are invited to submit their tenders comprising the tender documents with priced bills of quantities or schedules of rates and any information required by the employer. Tender documents typically comprise the following: 1. Conditions of tender They are conditions setting out the requirements to be eligible tenderers, the information to be provided by the tenderers, the tender closing date, the rules of correcting and interpreting tender prices, the rules of tender assessment, the method of tender acceptance, the method of submitting tender queries, the method of lodging complaints to the tender assessment process, and the rules regarding the use, retention and correction of the information in the tenders by the employer. In public works contracts, conditions of tender are divided into general conditions of tender and special conditions of tender. The former are conditions commonly included in such contracts. The latter are special conditions tailored for each contract. The special conditions of tender make amendments, additions, deletions or modifications to the general conditions of tender. Conditions of tender generally do not form part of the contract. 2. Form of tender In the form of tender, there is a statement that the tenderer, having inspected the site and examined the tender documents, offer to construct, complete and maintain the works in accordance with the conditions of contract, specification, drawings and bills of quantities. The form of tender also sets out the tender validity period, the date for the commencement of the works, the time for the completion of the works, the period of maintenance of the completed works, and the liquidated damages to be compensated by the contractor for delay in completing the works. The tender validity period is the period for which the tender may be accepted after the tender closing date. It can only be extended by the employer if the tenderer agrees so. Liquidated damages (LD) are the genuine pre-estimate of the likely loss of the employer if the contractor fails to complete the works on time judged at the time the contract is entered into. LD is not punitive in nature. The amount of LD is made up of the following: 1. Loss of profit of employer (in Government projects, interest on capital invested); 2. Additional supervisory cost; 3. Additional price fluctuations (may be positive or negative); and 4. Special damages, if any (for example, the delay in handing over the site may affect the commencement of the works under another contract). The form of tender must be signed by a person authorized to sign tenders on the
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tenderers behalf. Government procedures usually require tenderers to submit the form of tender in duplicate. 3. Conditions of Contract The conditions of contract comprise rules governing the contracting parties. They also set out the rights and obligations of the employer and the contractor and the duties and powers of the architect, engineer or quantity surveyor. In public works contracts, conditions of contract are divided into general conditions of contract and special conditions of contract. The former are conditions commonly included in such contracts. The latter are special conditions tailored for each contract. The special conditions of contract make amendments, additions, deletions or modifications to the general conditions of contract. In public works contracts, one of the following publications of the Government is commonly adopted as the general conditions of contract: 1. General Conditions of Contract for Civil Engineering Works (1999 Edition); 2. General Conditions of Contract for Building Works (1999 Edition); 3. General Conditions of Contract for Electrical and Mechanical Engineering Works (1999 Edition); 4. General Conditions of Contract for Term Contracts for Civil Engineering Works (2002 Edition); 5. General Conditions of Contract for Term Contracts for Building Works (1988 Edition); 6. General Conditions of Contract for Term Contracts for Electrical and Mechanical Engineering Works (1994 Edition); and 7. General Conditions of Contract for Design and Build Contracts (1999 Edition). The Government is considering the use of New Engineering Contract (NEC) created by the Institution of Civil Engineers (ICE), United Kingdom in construction contracts to replace the traditional conditions of contract. NEC uses simple language which is easy to understand. Its use stimulates good maintenance of the relationship between the contracting parties. There are several options of NEC developed for selection. 4. Specification Specification is typically rules which set out the requirements on the quality of the materials and the workmanship. There are two types of specification, namely performance specification and method specification. Performance specification states the quality of the completed works, which is to be verified by tests. For example, fill material should be compacted to 95% relative compaction. Method specification states the process which the contractor should go through to ensure that the quality of the works can achieve the requirement. The process is usually monitored by site supervision. For example, to ensure that fill material can be compacted properly, each 300mm thick fill layer should be compacted by a 20 tonne roller with 10 passes. In public works contracts, specification is divided into general specification and particular specification. The former comprises quality requirements commonly included in such contracts. The latter comprises quality requirements tailored for each contract. The particular specification makes amendments, additions, deletions or
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modifications to the general specification. The General Specification for Civil Engineering Works (2006 Edition) published by the Government is commonly adopted in public works contracts. 5. Bills of quantities (or schedules of rates) and their method of measurement The bills of quantities in the tender documents are pre-printed with the works items, their quantity and their unit of measurement. Tenderers are required to fill in the rate for each works item and calculate the amount (the multiple of the quantity and the rate). The schedules of rates in the tender documents are pre-printed with the works items and their unit of measurement. Tenderers are required to fill in the rate for each works item. The method of measurement stipulates the rules of measurement and the coverage of each works item. Contractual disputes commonly occur as a result of different interpretations of the method of measurement. In public works contracts, the Standard Method of Measurement for Civil Engineering Works (1992 Edition) will form the basis of the method of measurement. It will also be supplemented by preambles tailored for each contract. 6. Drawings Drawings in the tender documents are called tender drawings. Once a tender has been accepted, the drawings become contract drawings. Care must be taken to separate tender drawings from information drawings, which are drawings for information only, such as drawings showing the location of existing utilities. The latter do not form part of the contract. Pre-tender estimate A pre-tender estimate can be worked out according to the following sequence: 1. Prepare the bills of quantities with all the works items included; 2. Take off the quantities of the works items with reference to the tender drawings; 3. Estimate the contract rates with reference to the rates of some recent contracts with a similar scope of work and any unreasonably high or low reference rate should be discarded; 4. Estimate the provisional sum and the contract contingency sum for risks; and 5. The pre-tender estimate is the sum of the estimated prices of all the works items, the provisional sum and the contract contingency sum. In remeasurement contracts, payment to be made to the contractor is based on the rates in the bills of quantities. Therefore, contractors may have an incentive to insert unreasonably high or low rates in a tender to take advantage of any anticipated discrepancy between the quantity of work specified in the bills of quantities and the actual quantity of work to be carried out. Methods of calling tenders The common methods of calling tenders are:
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1. Open tendering An advertisement is published on the press inviting all interested firms to tender. The disadvantage of this method of calling tenders is that some interested firms may lose interest in submitting their tender as they anticipate that a large number of tenders will be submitted and their chance of success is low. Moreover, the employer may incur substantial administrative cost in assessing all the received tenders. 2. Selective tendering In selective tendering, a tender will not be considered unless the tenderer has met certain qualification requirements. The Government generally invites tenders from tenderers on a particular List of Approved Contractors for Public Works not being suspended from tendering on the date set for the close of tender. The Government also keeps the records of the past performance of these listed tenderers in previous Government contracts. It is an important criterion to be considered by the Government in selecting the best contractor. 3. Single or restricted tendering Under single or restricted tendering, only a particular tenderer or some short-listed tenderers are invited to submit tenders. The Government only uses single or restricted tendering under certain circumstances, such as the existence of an extreme urgency for the works. 4. Prequalified tendering Prequalified tendering is a two-stage process with tendering following the prequalification exercise. The main objective of prequalification is to identify those contractors who are interested and capable of undertaking the contract and to keep tendering cost to the minimum. Tenders will only be invited from the list of prequalified tenderers. The qualification requirements should be limited to those which are essential to ensure that the prequalified tenderers are capable of executing the contract. Tender queries and tender addenda During the tender period, a tenderer may submit tender queries to the employer. The employer, though not bound to do so, should reply to the tenderer promptly. The reply to the tender queries should also be copied to other tenderers invited to submit tenders to ensure fairness to all tenderers. The employer may also amend the tender documents, by issuing tender addenda, during the tender period. The tenderers should be requested to sign a record acknowledging the receipt of the tender addenda. If any reply to tender queries or any tender addendum is issued to the tenderers immediately before the tender closing date, the employer should extend the tender closing date to allow reasonable time for the tenderers to digest the information in the
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reply to tender queries or the tender addendum. Preparation of tenders by contractors Contractors need to submit competitive tenders to bid contracts. The tenders are prepared with reference to the following information: 1. Costs of labour, plant and materials required for the work; 2. Overhead costs, such as electricity, water and telephone charges, to be incurred; 3. Expected profit margin; 4. The market condition; 5. The site condition; 6. The construction difficulties; and 7. The contractual risks. The contractor may also study the tender documents to look for discrepancies or contractual problems. They may adopt certain pricing tactics, such as the insertion of a high rate for an under-estimated work item. However, once such pricing tactics have been identified by the employer, the relationship between the two parties may be harmed. Alternatively, the contractor may choose to notify the employer of the identified discrepancies and contractual problems so that the employer may have time to remove them before the tender closing date. In this case, the contractors competitors will no longer be able to take advantage of such discrepancies or problems. Tender assessment After the receipt of tenders, the employer or his consultant should assess the tenders. The following actions should be carried out: 1. Check whether the tender has contained all the required information, such as the form of tender in duplicate and the priced bills of quantities; 2. Check whether the tenderer is eligible to tender; 3. Check whether the tender is signed by a person authorized to sign on the firms behalf; 4. Check whether there is any unauthorized qualification (alteration) of the tender documents; 5. Check whether there is any arithmetic error; If the rules of correcting arithmetic errors have been specified in the conditions of tender, the arithmetic errors should be corrected accordingly. In Government projects, the responsible officer will notify the tenderer of the correction and request him to confirm his intention to abide by the tender after the correction. 6. Check whether there is any over-priced or under-priced item; The tender rates should be compared with the average tender rates and the rates in the pre-tender estimate. Any over-pricing or under-pricing may be a tactic of the tenderer. The quantity of the concerned works items should be checked to ensure correctness. If the quantity of the over-priced or under-priced items is overestimated or under-estimated, the implication of such over-pricing or under-pricing should be assessed. In Government projects, the responsible officer will notify the tenderer of such identified over-priced and under-priced items and request him to confirm his intention to abide by the tender with such knowledge. Moreover, the Government may consider undergoing negotiation with the tenderer with an aim to revise the over-priced or under-priced rates. Any tender negotiation should be exercised with due care in order not to prejudice other tenderers.
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7. Compare the tender sum of all the tenders; 8. Review the past performance of the concerned tenderers; and 9. Check the financial capability of the concerned tenderers. The employer is not bound to accept any tender, unless he expressly states in the tender documents that he will award the contract to one of the eligible tenderers. Acceptance of tender A letter of acceptance will generally be issued by the employer to the tenderer, notifying him that his tender has been accepted. Care must be taken to ensure that the acceptance should not be communicated after the tender validity period as stated in the form of tender, unless an agreement has been reached between the employer and the concerned tenderer on the extension of the tender validity period. In Government projects, after the issue of the letter of acceptance, the employer will invite the contractor to execute the articles of agreement under seal. Contract documents Contract documents for the construction of public works typically comprise the following: 1. Articles of agreement 2. Form of tender 3. Letter of acceptance 4. Conditions of contract 5. Specification 6. Bills of quantities (or schedules of rates) and their method of measurement 7. Drawings Employment of sub-contractors and suppliers It is likely that a contractor needs to employ sub-contractors to assist him in completing part of the works under a works contract. Moreover, it is likely that he needs to enter into contracts with the suppliers for the provision of materials or the hiring of plant. With no control under the contract, it is anticipated that the selection of sub-contractors and suppliers will mainly be based on commercial decisions. In Government contracts, in order to ensure the quality of the works, the contractor may be required under the contract to employ only sub-contractors and suppliers under the List of Approved Contractors for Public Works or the List of Approved Suppliers of Materials and Specialist Contractors for Public Works maintained by the Government. Moreover, the employer may also specify the employment of nominated sub-contractors under a contract. Nominated sub-contractors are specialists, merchants, tradesmen and the like executing any part of the works or supplying any materials or services for the works nominated by the employer and employed by the contractor. Problems of multi-layer sub-contracting
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The problems of multi-layer sub-contracting are: 1. It blurs the accountability for assuring built quality. 2. It drains the financial resources available for the actual execution of works. 3. It creates no added value for project delivery. Measures to improve the quality of works The Government has implemented the following measures to improve the quality of works: 1. The contractor is not allowed to sub-contract all the works under the contract. 2. The contractor should employ his own staff to manage and supervise his subcontractors. 3. The contractor should submit to the engineer a sub-contractor management plan and review it regularly. 4. The contractor should only employ sub-contractors registered under the Voluntary Subcontractor Registration Scheme (VSRS). 5. All site personnel should be engaged with a written sub-contract with some standard terms specified by the employer, such as statutory holiday arrangement and Mandatory Provident Fund (MPF) arrangement. 6. The sub-contracting of part of the works by the contractor is limited to two tiers. 7. The contractor should provide a team of suitably qualified staff, such as a project manager, a site agent and a safety officer, to manage and supervise the contract and such staff should be under the direct employment of the contractor. 8. The contractor is required to include some quality provisions in sub-contracts he enters with his sub-contractors.

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