Module 2 : Contractual Relation & Contract Management
In this Module, we have five lectures, viz.
1. Various Parties Involved in Construction Management
2. Contracts
3. Types of Contracts
4. Stages of Awarding a Contract
5. Disputes & Arbritation
Click the proper link on the left side for the lectures
Contractual Relation and Contract Management
We shall call the group, which is involved with construction as contractor. In the civil
engineering project, in a narrow sense, ideas of owners is translated into engineering. Creation
by designer/architect and is given real force by contractor. We have a three party system as -
This isthe simple model for the party involved in the civil engineering construction. These three
bodies are having contradictory objectives, but they work in non-adversery conditions and
should help each other.
In the civil engineering project, major activities are -
a. Design
b. Construction
All the activity and process are to help them. Thus, we can broadly say that design is
(shown on the next slide ) -
c.
d. Thus, the persons involved in design are involved with the mechanics and properties of
materials. We shall call the group of people involved in designs as designer. A designer
may be a person or a group of persons or a company.
e. Other engineering creation of designer has to translate into the real facilities. This is
process of construction, which is -
f.
Contractual Relations
During the life cycle of projects, various parties come together and work to fulfill objective of
the project. We need to know how these parties are communicating to each other and what ways
are they communicating among themselves. The first point is called delivery methods or
contractual relations and the second issues are termed as type of contracts. The flow of
information between various parties involved takes place in many ways. i.e . there are different
approaches used to organize the project team to manage the entire design and construction
process. Thus we shall discuss various delivery methods. The relations existing between various
parties also vary in terms of monetary payment and goods as well as service delivery. These
points we shall discuss for type of contracts.
The owner needs to know how to communicate with contractor or designer. Designer or
contractor can direct report to him or owner can hire a person or company which can help him in
fixing, communicating designer, contractor. There are other many possibility such that he can
have in-house specialists who can help him in designing or supervising the work. Similarly,
owner can pay the contractor or designer based on unit work of execution or percentage of the
total cost based on the contractual agreements. In this chapter, we shall discuss the various
arrangements between project team and contractual agreements existing between them. We shall
also discuss the process of awarding contracts, documents involved.
Although the exact nature of arrangement in terms of reporting sub reporting getting feed-back,
payments of execution is unique to the particular project, these discussions will help us in
understanding particular project team arrangement. Also, we can make our own arrangement
depending upon the local nature of the project.
From the degree of freedom point of view we can classify the project as
a. Public project.
b. Private project.
Public project:
As we have discussed earlier, public project consists of primary infrastructure project. Public
projects work on fixed sets of guideline fixed by particular department. For example in India,
Central Public Works Departments (CPWD) works with their own rules. These are called CPWD
manuals. These manuals are well documented and describe what to do when and how. Deviation
from these documents needs special permission from apex body depending on the nature of
change or sometimes there is almost no scope of change.
Similarly each state government maintains its own contract rules to execute the work. Like
Assam public works departments has its own way of doing the things. Similarly Indian railways
execute the works based on guidelines fixed by the department. Similar situation are existing in
other countries. As for example, US transport department does the work according to its own
document. But, there are many points common between their contractual arrangement as well as
contractual agreements.
Contracts are selected based on competition bidding. In our country, public project mainly works
on minimum cost bidding system. In recent year, much effort has been paid to improve the low
cost bidding system by introducing technical bidding and price bidding separately.
Private project: There are more flexibilities in the private project. Depending on the nature of
the project, the owner or project manager can arrange the project team. Whom to select, how to
select and what kind of information exchange systems will exists between various project team
members is dependent on the owner. Due to these natures, various forms of delivery methods
have developed in practice. Owner select the designer or contractor based on the quality and
reputation of the contractor plus the negotiated money or competition bidding.
Contractual Relationship or Delivery methods:
We are going to talk about how different member during of project team gets organized during
the life cycle of the project or in the process of design and construction in particular, or life cycle
of project. The different approaches are called Delivery methods. In general, the relations
existing in a particular form follows specific pattern. But we shall discuss major arrangement
followed in the construction industry. The following delivery methods cover wide arrange of
contractual arrangements
a. Traditional Methods
b. Design- construct
c. Project management method
a. Traditional Method: In this method, owner acts as overall coordinator of the project.
He engages a designer or design form to design the facilities and also prepare complete
set of contract documents. With complete set of contract documents, owner employs
contractor either through negotiation or competitive bid. The contractor hired is totally
responsible for the delivery of the project. The designer may employ other
designer to do the specific work. Such as many designer takes help of other team to do
the electrical,. mechanical design in the building project and prepare the structural design
in- house.
The main designer works as a coordinator of the design-process. Similarly, the contractor may
subcontract out some job to subcontractor. These subcontractors will be directly reporting to the
main contractor. There is no formal agreement between contractor and designer. Owner himself
oversees the quality control. Sometimes designer may get involved in overseeing construction
work depending upon the owner need.
Thus we can see, for large project, owner needs to maintain an engineering department to hire
designer and contractor and oversees the work. There are many variations of these arrangements.
Owner may have their own design group and hires only designer for specific jobs or owner can
subcontract the jobs himself and oversees the project, such as award the contract of piling for one
company and superstructure to other company. A typical government organization in India such
as Central Public Works Department (CPWD), irrigation department works with this pattern. IIT
construction work is generally carried out by this method. A typical relation is shown in the
figure , on the next slide.
The ways fees are paid to contractor or designer depend up the type of contract. We shall
discuss this point later on. It may be unit price, percent of cost or lump-sum etc.
depending on the nature and agreement in the project. We shall now discuss the
advantages and disadvantages of this contractual agreement.
Advantage:
a. As the owner receives complete set of drawing and specification of the work, he gets the
fixed price of the project. He can award the contract in any type of contract; he will have
good idea of the cost of project.
b. This system is followed in public sector project. Owner, designer, contractor works in the
fixed frame work. They might be working many projects. Generally well-documentations
are available for different process. CPWD maintains well documented procedure.
c. Competitive biding is easy to implement as complete set of contract document is
available before construction starts.
d. Owner need not to worry about day to day activity of the project. He gets involved only
at the specific points.
Disadvantage:
a. Contractors and subcontractors have no input in the design. Material or methods specified
may not be available or contractors have knowledge of efficient methods and materials.
b. It is difficult to have overlap between design and construction phase. So fast tract
construction may not be possible.
c. Sometimes there may exist different interpretations of contract document by owner and
contractor.
d. The change in the methods or material of construction may give rise to conflict.
Unforeseen changes are difficult to implement.
Design-Construct
In this method of delivery, design and construction is carried out by the same company. The
company may be a single unit or joint venture of two companies or more than two companies. A
single company can take a job for design and construction, but the company sub-contract or
contract the construction, but engaged himself in the management of construction. There are
different variations available for this mode of delivery. But common point is that the same
company takes the job from conceptual design phase to construction and implementation. The
variations of this mode are turn-key project.
Design-manage
This method of delivery has been practiced in the specialized job in industrial sector.
Petrochemical industry, manufacturing plants, nuclear plants, offshore oil drilling platform. In
IIT Guwahati , air-conditioning was done by “Blue Star” as design-construct methods. This
method has also been used in building project recently. A typical relation is shown in figure.
Mode of payment may vary depending on the type of construction. It may be unit price, cost plus
fees, lump-sum contract. We shall discuss the advantages and disadvantages of this method of
delivery in the following
Advantage:
1. In this method of delivery, designers get benefit of the input from the contractor. Thus
quality of design improves.
2. Due to good coordination between design and construction phase, project duration can be
decreased.
3. Scope of constructability analysis and value engineering is facilitated.
4. Unforeseen changes can be easily incorporated and scope of dispute doesn't arise.
Disadvantage
1. Price of the constructed facility is not known before the construction starts.
2. Quality gets sacrificed if project is awarded as fixed price and design construct cost is in
adverse situation.
3. In the case of unit price contract, inefficient form may increase the total cost of
construction.
4. Owner is not aware of the construction and design. This lack of knowledge may be
handicapped during maintenance phase.
5. In the traditional form, owner monitors the quality of conformance with the design
document. But in design-construct method of delivery, there is no standard for the owner
to check and monitor.
6. This arrangement doesn't guaranteed the best possible price.
Project Management Method
There are many variations of this mode of delivery. Some of these variations are program
management; construction management, professional construction management. In this method
of delivery, owner hires a construction management firm at start of the project and involves them
in the project from conceptual design through implementation [start up]. The degree of
involvement of the construction management firm depends upon the expertise and requirement
of the owner. Owner may involve the management firm to select designer, coordinate the work
between designer and contractor, monitor the constructions. A typical arrangement is shown in
the figure, on the next slide .
Advantages :
1. It establishes the good communication between design and construction together with the
owner awareness and monitering.
2. Cooperation between different team members increases the value engineering.
3. Designer and contractor can agree on the same coordinated schedules.
4. Many a time, owner is directly involved with subcontractor, thus, getting benefit of
competition in terms of price.
5. Unforseen changes are easy to implement.
Advantages :
1. It establishes the good communication between design and construction together with the
owner awareness and monitering.
2. Cooperation between different team members increases the value engineering.
3. Designer and contractor can agree on the same coordinated schedules.
4. Many a time, owner is directly involved with subcontractor, thus, getting benefit of
competition in terms of price.
5. Unforseen changes are easy to implement.
Disadvantages :
1. Irresponsiveness of any team member can spoil the coordination.
2. Requires owner knowledge about project management.
3. Risks involved during the execution of project is high.
Types of Contract
Contract is an agreement between two or than two parties in which one is agreed to provide
goods and services to other for which he will get the return in the some form. The contract is
legal document and binding on both the parties. The form in which return for providing goods
and services is delivered, is called type of contracts. There are different types of contracts which
can be employed in any of the delivery methods. Owner can pay the money to the contractor, in
lump-sum, based on measured work with unit price, based on percentage plus quantity involved.
In the following, we shall briefly discuss the different type of contract.
a. Lump-sum contract: This is a single fixed price contract. In this contract, contractor
agrees to perform specified job for fixed sum. The owner provides the contractor exact
specification of the work. In this contract both the parties try to fix the conditions of the
work as precisely as possible.
Following are the advantages of the fixed price contract.
a. Owner is aware of the cost of the project before the project construction starts.
b. It avoids a lot of details and accounting by both owner and contractor.
c. Contractor gets free hand to execute the work.
d. If this contract is used with design-construct method of delivery, contractor gets
opportunity to use value engineering.
Disadvantage:
a. It is very difficult to accommodate any charge in design and specification.
b. This contract is as good as the accuracy of the contract document. If errors exist in
the contract document, the contract need to be renegotiated and hence more risk is
involved from the owner ride.
c. In the case of unforeseen hazard during the construction, contractor may be put in
adverse situation.
This type of construct is suited for small job, precisely specified job, low risk with construction
job. This is generally suited for the job where it is easy to make the measurement. Lump-sum
contract should be avoided for underground work.
Lump-sum contract with design construct method of delivery is often called turn key contract.
Payment by the owner can be carried out in lump-sum contract as total amount at time or
percentage of total cost after finishing certain amount of work. For example suppose a water tank
was awarded as lump-sum contract. It can be said that 15% of amount will be paid after
construction of foundation 50 % of total amount will be paid after construction of staging and
80% of the total amount will be after the construction of the tank. Rest will be paid only when
the tank becomes operational. Lump-sum contract in often used in sub-contracting for labour
contract. In our country many laborers for excavation, plastering work with this method.
b. Unit price contract:
In this type of contract, the price is paid per unit of the work carried out. There are
different variations of this type of contract. Some of them are mentioned below.
Bill of quantities contract: In this type of contract owner provide the drawing, quantities
of work to be done and specification. The contractor bid based on the unit cost of the
items of construction. The contractor overhead, profit and other expenses can be included
in the unit cost of the item of work. Sometimes contractor quotes the unit price of the
work and lump-sum amount separately as profit overhead. The estimated quantities of the
work to be done called Bill of the quantities is fixed. Minor variation in the quantities is
admissible in this type of contract. The drawing of the work is not suppose to change.
Although change and deviations from original drawing could be accepted during
construction but even then unit price does not change.
This type of construction is usually followed in government sector for large infrastructure
construction. This type of contract provides owner a competitive bid. Disadvantage of the
methods are:
a. Owner needs to measure the quantity of work done in the field, hence requires
owner presence at the site.
b. Final price of the construction is not known precisely until last price of work is
completed. If there is significant difference between the estimated quantities and
the reality of the situation, owner is put in adverse situation. Mistaken quantities
is called unbalanced bid . Significant unbalanced bid now considered as
unethical.
Schedule of rate contract: Many a time, the quantity of work to be executed is
not known before. Contract is signed based on the unit cost of the item of work.
Generally more items are inserted in the contract than to be executed because it
becomes sometimes difficult to exactly specify all the items. There is no
guarantee that all the items mentioned will be used in the construction. This type
of contract are widely used in underground work, flood control and road
constructions. Advantages and disadvantages of this type of contract in the same
as the bill qualities contract. There are other variations of schedule of rate contract
where unit price plus profit is charged as the cost which we shall discuss next.
c. Cost plus contract: In this contract, the payment is made based on the work
carried out plus the fee which includes overhead, profit etc. Sometimes a cap is
put on the type of contract by provided maximum and minimum cost limit such as
guaranteed maximum cost contract. If project cost exceed this limit, contractor is
responsible for that.
Sometimes incentive clause is also included if the contractor bring the project before
certain specified limit.
The advantage of this type of contract is that considerable overlap is provide between
design and construction. Hence the project can be executed in the fast-tract basis. This
contract is suitable for the work where it is difficult to define the task to be done before
the awarding the contract.
Stages of awarding contract
The stage of awarding construction contract is dependent of the methods of delivery of the
project. In the tradition way of delivery, contract documents are prepared after the completion of
design. Generally designer helps the owner to prepare estimate of the project. If owner maintains
an engineering department, an estimate is prepared by the engineering department. Specification
of the items used for construction is very important from point of view of quality of design and
quality of construction. Specification is generally prepared by the designers. During the design,
designer may take owner advice in preparing specification of the items. The drawing and
specification prepared by designer form the basis for the awarding contract.
A tender notice is advertised in the news paper depending upon the type of work. It may be in
nation newspaper or local news paper. In a large project, tenders are invited from
person/company from any country called the global tendering . A typical tender notice is given
in the table. Sometime this process is carried out in two stages. In the first stage the aim is to
select the contractor who has good experience of executing the similar kind of job and have
required technical competence. The process is called “pre qualification”. The contract documents
are sold to these pre qualified contractors. Many a time designer himself identifying the
competent contractor based on his experience.
The contract document is bought by the contract or by paying some fees. Contractor prepares
their offer and submit to the owner. The offer by contractor to the owner is called Tender and
process is called submitting tender. Sometime owner ask to submit the tender in two separate
documents. The first offer provides the specification of the item to be used. This is called
“technical bid ”. And price offer is given separate which is “price-bid”.
After getting the tender, owner studies the tender documents, does comparatives studies and
awards the contract to the lowest quoted contractor or who has given better technical deal.
Sometimes contractor quotes the specifications which are higher or lower than the owner
specifications. To get competitive bid, owner may provide this specification to other contractor
and ask them to go for price bid. There is scope of using value engineering in this process also.
Thus the complete process of awarding contract can be summarized as follows.
1. Preparation of contract document.
2. Advertising the tender, tender notice.
3. Submitting Tender by contractor.
4. Study of the tender by owner
5. Clarification regarding conditions or specifications
6. Preparing comparative list
7. Awarding contact
Contract documents
Documents related to awarding contract are called contract documents, generally it contains
following
i. drawing
ii. specification of items
iii. general conditions of contract
iv. general explanation
A tender is the offer by the contractor to the owner to construct and the execute the work
according to the drawing, specification (provided by owner or changed by contractor) and
general condition of controls.
Finally all the parties involved in the project (owner and contract) sign the legal agreement with
respect to well defined intentions. If bidding is carried out with internationally, contract
document consists of general conditions of site, its location local laws regarding labor etc.,
general condition for execution of the work etc.
Disputes And Arbitration
During the performance of the contract, disputes may arise between the employer, engineer and
contractor for various reasons of default in performance, progress payment, rates, time, etc.
Negotiated amicable settlement is the endurable, quick solution, which requires mutual trust,
cooperation, give and take policy, flexibility instead of rigidity of one's view, and vision for
future relations. Unresolved disputes can conveniently be resolved through arbitration, which
bears the stamps of law of natural justice, than resolution in court. Again, arbitration cannot
succeed unless there is cooperation between contractor, client and arbitrator(s). Many times,
when the award received is not palatable to either of the contesting parties, the unhappy party
tries to drag on further in court to set aside the award. This defeats the very purpose of the
arbitration process. The court does not set aside the award on flimsy ground or sits again for the
judgment but on specific grounds. The court may even ask the arbitrator to review his award if
any item is omitted. The responsibility imposed on the arbitrator is conduct the proceedings with
prudence and diligence and not arbitrarily or whimsically and discharge his responsibilities in a
cordial manner. The reasons for setting aside the award has been set out in Arbitration Act, 1940,
which has since been modified in Arbitration & Conciliation Act 1996. As per the new Act, the
award itself is considered as a decree and it need not be filed in the court. It is final and binding
on both parties unless disputed by either party. The tendency to challenge the award should
vanish, instead the aim should be to reach a negotiated, agreed, amicable and early settlement. It
is hoped that better awareness and acceptance of this method fructifies in future.
Why does disputes arise?
1. There are errors, ambiguities and omissions in the drawing and specification. Also, there
is lack of proper coordination during construction.
2. Not complying with the intent of the contract or not adhering to the standards in the
performance of work(Quality of conformance problem).
3. Incomplete, delayed, inaccurate response to the question by any of the party in the
contract.
4. Unforeseen changes in sub surface conditions.
5. If site condition differs from those described in contract documents.
6. Extra work or changed work order
7. Not meeting schedule by the contractor.
8. Inadequate financial strength on the part of the owner, contractor or subcontractor.
9. Origin of Arbitration
10. Resolution of disputes through arbitration is an accepted method from time immemorial.
China, India and Italy are the first few countries that used this method. British India, from
the 18 th century, had regulations on arbitration in Bengal, Bombay, Madras, etc. The
first Indian Act of Arbitration was enacted in 1899; The next was the Arbitration Act
1940; The recent one is Arbitration and Conciliation Act of 1996.
11. Arbitration Acts
12. The arbitration Act, 1940 has been repealed under Section 85 of Arbitration and
Conciliation Act 1996. Not withstanding such repeal, the provisions of the Arbitration
Act 1940 still apply to arbitral proceedings which commenced before this Act came into
force unless otherwise agreed by the parties, but the Arbitration Act 1996 applies to
arbitral proceedings which commenced on or after the Act came into force.
13. Principal Differences In Implementation Of Award
14. The principal differences between the Indian Arbitration Act 1940 on the one hand and
the 1996 Act on the other regarding the courts powers regarding an award are as shown in
Table-1.
15. Table 1: Principal Differences In Indian Arbitration Act 1940 and Arbitration Act
and Conciliation Act 1996
16. Indian Arbitration Act 1940
17. Arbitration Act and Conciliation Act 1996
18. Power to modify an award if it is on matter not referred to arbitration [S.15 (a)].
19. Power to modify and award if it contains an obvious error, which can be amended
without affecting such decisions [S.15 (c)].
20. Power to remit the award when the award has left undermined any of the matter referred
to Arbitration [S.16 (a)].
21. Power to remit an award where it discloses error of law apparent upon its face [S.16 (c)].
22. Power to set aside the award for misconduct, both legal and personal [S.30].
23. Power to decide the existence and the validity of arbitration agreement [S.33].
24. Under S.32 (2)(a)(iv), the court has the power to set aside an award which deals with a
dispute not falling within the terms of the submission to arbitration;
25. Power to arbitrator for correction of computation, clerical or typographical errors only.
26. No power to remit the award the act provides no remedy in case of an arbitrator not
deciding a dispute referred to him;
27. No power to remit the award. No power to set aside.
28. No power to set aside the award on the ground of misconduct.
29. Power to decide the existence limited to the question whether the award decides a dispute
not contemplated by the parties.
30. No power to decide if the omission by the arbitrator to decide a dispute which fell within
his jurisdiction is valid or not.
31. Power to decide the validity of the arbitration agreement.
Dr. A.S. Anand, the Hon'ble Chief Justice of India, while addressing a conference on the dispute
resolution for Alternative dispute resolution organized by the International Centre for Alternative
Dispute Resolution, on 12.12.98, stressed the need to give the Panchayats more powers to set up
family courts and conciliation centers in all the districts which will be able to dispense justice
quickly and at less expenses to litigants. He maintained that the administrative institutions had
failed to monitor the status, substance and pace of litigation in courts. “We have not so far
succeeded in developing any effective mechanism for the pretrial settlement of legal dispute with
the result that there is a heavy inflow of all sorts of civil, commercial and criminal matters into
courts”, the Chief Justice said. Sharing the same concern, it is considered that and award made
under the Arbitration Act 1940 should also be given the same treatment for enforcement as under
the Arbitration and Conciliation Act 1996.
