WALLAGA UNIVERSITY, SHAMBU CAMPUS

FACULTY OF TECHNOLOGY
DEPARTEMENT OF WATER
RESOURCES AND IRRIGATION
ENGINEERING

CONTRACT, SPECIFICATION AND QUANTITY

SURVEY
CHAPTER- 2
CONSTRUCTION CONTRACT

BY: Muleta e. filate

2.1. Principles of contract
2.1.1. General Back Ground
✓ Contract is a written agreement between or among two or more
parties where by each party promises to do or not to do something
and agrees to terms (conditions and Warranties) set out in the
contract.
✓ Conditions of Contract are terms in which parties in the contract are
governed / administered with. That is, an administrative law which is
the legally binding part of the contract.
✓ These promises and terms shall be enforceable by law and
incorporates the Rights, Obligations and Remedial rights of each
contracting parties.
✓ Generally, a contract is an agreement or willful promise enforceable
at law. However, not all agreements or promises are contracts. Some
may lack enforceability at law.
✓ A construction contract is a product of an agreement between the
employer & the contractor & it is enforceable at law.

✓ “Enforceable at law” means that if the agreement reached between

the employer & the contractor breached (deviations occur from the
promises) by one of the parties, the aggrieved party, either the
employer or the contractor, may bring a legal action against the other
to demand the enforcement of its rights with the support of law.
2.1.2. Legal definition of a contract
✓ According to Article 1675 of the Civil Code: “A contract is an
agreement whereby two or more persons as between themselves
create, vary or extinguish obligations of a proprietary nature.”
✓ The definition contains the following elements. These are:
• That the contract is an agreement;
• The agreement is to be made between two or more
persons; The Form of Agreement, in the construction
contract, clearly presents the Agreement reached between the
employer & the contractor.
• That the agreement is binding between such two or more
persons;
• The agreement is to create, vary & extinguish obligations;
• That the nature of obligations is proprietary;
✓ The construction contract clearly fulfills all the elements given to
the definition of contract.
2.1.3. Elements of a contract
✓ According to Article 1678 (Elements of Contract) of the Civil
Code: No valid contract shall exist unless:
• The parties are capable of contracting and give their consent
sustainable at law.
• The object of the contract is sufficiently defined and is
possible and lawful.
• The contract is made in the form prescribed by law.
✓ The following are the fundamental elements of contract.
• Capacity of the contracting parties;
• Consent of the contracting parties;
• Object of the contract; and
• Form of contract, if any
A. Capacity
Capacity means competence to enter into a legally binding
agreement.
Parties entering into an agreement or contract shall, therefore,
be capable of contracting.
Legal capacity is of two types.
Personal (Own) capacity; and
Representative (Agent) capacity;
Capacity of persons is legally presumed unless the contrary is
proved. Persons could be: -
Natural (physical) persons; or
Juridical (legal) persons;
i. Natural Persons
Natural or physical persons are human beings.
Their legal capacity is determined by law.
The scope of capacity of physical persons is relatively unlimited
unless the contrary is proved.
Physical persons are the subject of rights & duties from birth to
death. See Article 1 of the Civil Code.
ii. Legal Persons
Legal persons are of two types in terms of determining their
coming into being & their legal capacity. These are: -
By legislation; (In case of public bodies); and
by registration; (In case of non-public bodies);
The existence of public bodies (Ministries, Commissions, Bureaus,
Authorities, Agencies …) & their legal capacity to enter into contract
& bind themselves emanates from the Civil Code & the special legal
instrument (legislation), which establishes that specific public body.
The legal capacity of non-public bodies (Plc.'s, Share Companies,
Corporations…) & their legal existence comes in to being by
registration. The act of registration by competent public authority
confers legal personality & therewith (limited) legal capacity to enter
into contract & bind themselves.
 The capacity of legal persons is only related with their purpose or
objective, for which they are created.
The following may not have (legal) capacity to enter in to contract
& bind themselves. These are: -
Minors (under the age of 18);
Companies adjudged or declared bankrupt;
Judicially and Legally interdicted persons;
Persons, whose civil rights are suspended by the court;
Non-nationals, unless permitted by law or special prerogative;
Non-authorized Agents;
Agents, whose Power of Attorney has been revoked;
Agents, the Scope of their Power of Attorney does not cover
the intended; and others;
 Natural persons or legal persons may enter in to contract directly by
themselves (in their own capacity) or through other persons called
agents.
The power of agents (i.e., their representative capacity) should
always be checked, with respect to construction project, at:
The tendering stage;
The negotiation stage;
The contract signing stage; and
The Contract implementation stage;
The Power of Attorney creates a derivative legal capacity for
agents.
B. Consent
Consent is a declared will of the individual to enter in to contract.
It is the willingness of the parties to enter in to a legally binding
relation.
Consent of the intended contracting parties decomposes in to: -
Offer; and
Acceptance;
i. Offer
Offer is defined as a proposal expressing the declared willingness
of the offeror to enter in to an agreement, if the offer is accepted.
Offer is a legal process which is a declaration of willingness or
intent to be bound by specific terms set out.
Offer may be made:
- Orally;
In writing;
By sign; By conduct; and
By specially stipulated manner for acceptance.
Characteristics of Offer: These are that the offer should be: -
Certain;
Communicated;
Unconditional;
Distinguished from invitation to treat;
ii. Acceptance
Acceptance is a declaration of will to enter in to a legally binding
contract.
By acceptance, a contract shall be completed, where the offeree
accepts the offer without any reservation.
❑ Forms of Acceptance : The following could be forms of
acceptance.
▪ Orally;
▪ In writing;

▪ By sign;
▪ By conduct;
▪ As specially stipulated by the offeror;
Defects in consent
Consent given in the process of offer & acceptance should be free
from defects in consent or vices of consent.
Defects in consent or vices of consent are the following.
Mistake: Mistake is defined as a misunderstanding of or
erroneous belief about a matter of fact or a matter of law.
raud: Fraud means a false representation, by means of a statement,
conduct made knowingly or recklessly in order to gain a material
advantage.
Duress: Duress means a threat of imminent danger, which may be a
future, or immediate danger posted against the contract and himself
or his nearest relatives.
C. Object of Contract
The object of contract is the very obligations of the contracting parties
ex, in the construction contract, the obligations of the employer and the
contractor.
The possible objects, i.e., the obligations of the contracting
parties, of contract are: -
obligation to do (perform);
obligation not to do; or
obligation to deliver;
The obligations of the contracting parties could be divided in
to two broad terms: Promises; and Considerations;
The object of contract (i.e., both promises & considerations)
shall be: - Sufficiently defined; Possible; Lawful; Not
immoral.
 The object of a construction contract shall be sufficiently
defined.
The object of contract, even though sufficiently defined, it has
to be possible or capable of performing.
The object of contract shall be lawful. Contract agreements cannot
serve to achieve illegal objectives.
D. Form
Form may mean types of contracts.
Form may also mean the making of the contract orally or in
writing.
Should the contract is to be made in certain prescribed form, it
means that contract should be made in writing.
In this case, form is related with the validity & proof of the contract
itself.
By form, under these circumstances, we mean the making of the
contract in writing, if the law imperatively prescribes so or if the parties
voluntarily wish to do so.
2.1.4. Why Use Contracts in Construction
The purposes of a contract in construction are:
To describe scope of work
To establish time frame
To establish cost & payment provisions
To Set forth obligations & relationships
To Manage multiple risks
To Establish control mechanisms
To Minimize disputes
To Improve economic return on investment
2.2. Types of Construction Contract
There are many types of construction contracts, which are applicable
based on the prevailing specific project conditions and largely the
interest of the owner, as listed below:
A. Lump sum fixed price contract
B. Lump sum fixed price and schedule rate contract
C. Unit rate contract
D. Cost plus percentage of cost contract
E. Cost plus fixed fee contract
A. Lump sum fixed price contract
The contractor agrees to execute the project based on a fixed lump
sum price which is not subject to any variations unless the drawings
and specifications are altered beyond the maximum limit stated in the
contract conditions by the owner.
The contractor is fully responsible to quantify the volume of works
based on the given specifications and drawings.
 Overestimating the volume of works will result in losing the job, if it
is on competitive basis and underestimating the volume of works will
result irreversible loss, which cannot be corrected during the execution
of the contract at any level.
Moreover, the contractor must be in a position to estimate the
influence of cost escalation in the future during the execution of the
project and these anticipated additional costs should be incorporated in
the tender prices.
A lump sum contract is more suitable for works for which contractors
have prior construction experience. The experience enables the
contractors to submit a more realistic bid.
Advantages of Lump sum fixed price contract
The owner decided whether to start or shelve the project knowing the
total lump sum price quoted by different contractors.
The contractor can earn more profit by in-depth planning and
effective management at site.
Disadvantages of Lump sum fixed price contract
All competing contractors are required to carry out enormous take off
works where only one contractor will be successful. It consumes
excessive time of the contractors.
All bidding documents such as the technical specifications and
drawings have to be clearly prepared and delivered during tendering
stage to the contractor.
Claims and variation works are very difficult to handle in this kind of
construction contracts due to the absence of agreed unit rates.
Contractors tend to include higher percentages of contingencies in
their tender prices to cover price escalation, take off errors, clarity of
drawings and specifications which inevitably raises the tender prices.
Unless the bidding documents are sound and sufficient enough to
define the intended projects, contractors may not compete on the same
ground.
B. Lump sum fixed price and schedule rate contract
This is another extension of lump sum fixed price contract but it
incorporates unit prices of different activities which will help to
manage variation works and claims during execution of the project.
oreover, the contractor shall not account contingencies for
additional works and claims but contingencies for price escalation of
materials, labor and equipment’s shall be considered in the tender
prices.
C. Unit Rate Contract
The unit rate contract is also called item rate contract.
In this case, the construction contract is based on priced bill of
quantities where by estimated quantities of certain well defined work
items and fixed unit prices of each of these defined work items are
agreed upon.
The estimated quantities may increase or decrease during the
execution of the project and the contractor is obliged to accept these
variations without additional costs as far as these variations in quantity
are within the agreed limits with the owner.
The unit rate contract is the most commonly used for all public and
governmental projects where by the estimated quantities and
specifications of works are well known in advance.
Advantages of Unit Rate Contract
There is no need for detailed drawings as in the case of lump sum
contracts and these detailed drawings can be prepared after the award
of the contract.
Changes in drawings and quantities can be made as required by
the owner within the agreed limits.
Additional works and claims can be handled in a better way especially
when the priced bill of quantities includes these additional work items
and claims.
It gives a better opportunity to compete on the same ground.
Disadvantages of Unit Rate Contract
The total cost of the project can only be known upon completion
of the project.
The contract doesn’t contain provision for price escalation and
the contractor may increase his construction cost estimates.
Clearly defined work specifications shall be prepared in advance and
issued with the bidding documents to contractors participating in the
tender.
The preparation of technical specifications and estimated bill of
quantities may take longer time, which will affect the overall
completion of the intended project.
D. Cost Plus Percentage of Cost Contract
The contract is agreed between the owner and the contractor based on
the actual direct cost records plus agreed percentage of these actual
direct costs expended by the contractor to cover overhead costs as well
as profit and income tax.
Cost plus percentage of cost contracts are usually suitable when
the nature of the work may be such that;
it is impossible or impracticable to prepare complete drawings and
specification due to unusually pressing speed of construction is
required or
major changes during construction are expected such as finishing
works which may deteriorate the agreed contract or
it may be difficult to define properly the scope of works such as
underground works with poor or no geological studies.
 In this kind of contract, it is very important to have a common
understanding regarding the accounting methods to be followed during
execution of the project.

Advantages of Cost-Plus Percentage of Cost Contract

The contractor executes works to the best interest of the
owner resulting in good quality of works.
The project can commence as early as possible even before
detailed drawings and specifications are finalized.
Changes in design and method of constructions, if required, can
easily be carried out by the contractor without disputes.
The progress of works can be speed up to the maximum
possible shortening the overall completion time of the project.
Disadvantages of Cost-Plus Percentage of Cost Contract
The total cost of the project is unknown until completion of
the project putting the owner in financial difficulties.
It encourages the contractor to increase the actual direct costs of the
project unnecessarily as the contractor’s profit increases with the
increment of these costs.
In the cost-plus percentage of cost contract, the contractor shall
focus mainly on identification of company head office overhead costs,
site overhead costs and relevant income tax laws as well as anticipated
profit.
Moreover, it is also very important to estimate the total scope of
work, which is very important in fixing the percentage of cost.
E. Cost Plus Fixed Fee Contract
One of the major shortcomings of the cost-plus percentage of cost
contract is the tendency of the contractor to increase the cost of the
project and cost-plus fixed fee contract discourages this tendency of the
contractor.
In this case, the contract is based on actual direct costs plus fixed fee
and the amount of fixed fee covers the overhead costs, profit and
income tax of the contractor.
However, cost plus fixed fee contract has also the following
disadvantages as compared to the cost-plus percentage of cost contract:
The scope of works shall be properly defined in advance to
reach an agreement on the fixed fee with the contractor.
 Claims and disputes may occur when major changes are
required by the owner during execution of the project.
The contractor will insist higher fixed fee depending on the
clarity of the defined scope of works.
In this type of contract, the contractor has to be very careful in
identifying all other anticipated costs other than the direct costs to fix
the amount of fixed fee.
Moreover, the time for completion of the project has to be predicted
based on the defined scope of works as most of overhead costs are time
related costs to the contractor.
2.3. Contract Documents
The tender documents become contract documents if completed by the
prospective contractor, and finally agreed & signed by the parties.
The Tender Document, in addition to the following shall also include
the Invitation for Bids & Instruction to Tenderers & Amendments
thereto, if any.
The following are typical tender (contract) documents in the
Construction Contract & divided in to legal, commercial & technical
parts.
I. The Legal Part
The Contract Agreement;
The (latest) Minutes of Meeting, if any;
The Letter of Acceptance (Award);
The Tender (NB: Including the Appendix to Tender, if any);
The Special Conditions of Contract;
The General Conditions of Contract;
Others, if any;
II. The Commercial Part
The Performance Security Form;
The Payment Security Form;
The Advance Payment Guarantee Form;
The Bid Security Form;
The Insurance Forms;
The Retention Money Security Form; Others, if any
III. The Technical Part
The Technical Specifications;
The Drawing;
The Bill of Quantities;
Others, if any;
The Contract Agreement shall also declare the priority of the Contract
Documents i.e., which Contract Document shall have precedence or
priority over the other in case of ambiguity or discrepancy between or
among the relevant Contract Documents.
Standard Conditions of contract
The condition of contract is a document that states the obligations and
rights of the parties and detail conditions under which the contract is to
be carried out.
Some of the subjects to be defined in the conditions of contract are:
-
Definitions & interpretations
Duty & responsibilities of the engineers
Contract period
Method of payment and periods
Retention money
Payment for materials on site
Payment for variation orders
 Escalation (wages, cost of materials)
Procedures on sub-contracting
Insurance & indemnities
Liquidated damages
Granting of extension time
Conditions for contract termination

In Ethiopia Construction Industry the following standard

conditions of contracts are commonly used:
FIDIC (1987) – Condition of Contract
PPA, Standard Bid Document
MoWUD, Standard Condition of Contract (1994)
BaTCoDA, Condition of Contract
FIDIC Conditions of Contract
FIDIC is the international federation of national associations of
independent consulting engineers.
Its full name is Federation International Des Ingenieurs-
Conseils;
Founded in 1913 by the national associations of three European
countries (France, Belgium and Switzerland)
Now with membership from over 74 countries, members are
generally national associations with the Ethiopian Consulting
Engineering and Architects Association being one.
FIDIC has evolved into a leading body for development of model
standard forms of contract for use in the international construction
industry.
MoWUD Conditions of Contract
Officially, known a s “Standard Conditions of Contract for
Construction of Civil Work Projects”.
It has been in practice since December, 1994.
It contains 75 clauses including Form of Agreement & Form of
Performance Bond.
Its structure & content resembles that of FIDIC Standard
Conditions of Contract for Civil Engineering Works.
The Project Delivery System adopted is that of Design-Bid-
Build.
The type of contract is based on BOQ i.e. it is an ad
measurement contract type (see Clauses 55-57).
The role of the Engineer is maintained.
PPA Conditions of Contract
The PPA, under its legal mandate provided under The Public
Procurement Proclamation, it has prepared & issued certain standard
tender & contract documents for the purpose of public procurement.
The conditions of contract are applicable to the procurements
of the federal government.
It has been in practice since 2006.
The Standard Conditions of Contract cover the following types of
procurement.
These are Standard Conditions of Contract for the procurement
of: -
Consultancy Services;
Non-consultancy Services;
Works;
Goods;
Procurement of Works
The Standard Conditions of Contract for the purpose of the
procurement of Works have been prepared for International
Competitive Bidding (ICB) & National Competitive Bidding (NCB),
separately.
User’s Guide has been also prepared, separately, both for the ICB & the
NCB.
The Conditions of Contract have been also prepared both in
Amharic & English language.
The conditions of contract are based on Design-Bid-Build project
delivery system.
The type of contract could be based on BOQ, in which case it becomes
measurement based. Or based on Activities Schedule, in which case it
becomes lump sum.
The documentation is divided in to the following three parts,
namely,
i. Bidding Procedure;
ii. Schedule of Requirements; and
iii. Contract;
i. Biding Procedure and Documentation
Under this part, the following are included, namely,

Section 1: Instruction to Tenderers (ITB);

General;
Bidding Documents;
Preparation of Bids;
Submission of Bids;
Bid Opening & Evaluation;
Award of Contract;

Section 2: Bid Data Sheet (BDS)

Section 3: Evaluation & Qualification Criteria (EQC)
Average Annual Volume of Construction Work;
Experience as Prime Contractor;
Acquisition of essential Equipment (by way of
ownership, hire or lease);
Personnel;
Liquid Assets and/or Credit Facilities;
The issue of Joint Venture;
Section 4: Bidding Forms
Bid Submission Form;
Priced Schedules (BOQ or Schedule of Activities);
Bid Security;
Qualification Information;
Section 5: Eligible Countries
ii. Schedule of Requirements and Documentation
Section 6: Schedule of Requirements
Scope of Works;
Technical Specification;
Drawings;
Bill of Quantities or Activity Schedule;
iii. Contract and Contract Documentation
Section 7: General Conditions of Contract
The GCC is composed of 62 Clauses.
It contains the following parts.
• General; (Clause 1-Clause 26)
• Time Control; (Clause 27-Clause 32)
• Quality Control; (Clause 33-Clause 36)
• Cost Control; (Clause 37-Clause 54)
• Finishing the Contract; (Clause 55-Clause 62)
General: This section includes the following items:
definitions, interpretations, language & law, engineer’s
decision, delegation, communications, sub-contracting, other
contractors, personnel, employer’s & contractor’s risks,
insurance, site investigation reports, queries about the special
conditions of contract, contractor to construct the works, the
works to be completed by the intended completion date,
approval by the engineer, safety, discoveries, possession of site,
access to site, instructions, disputes, procedure for disputes,
replacement of adjudicator.

Time Control: This section includes the following items:

Program, extension of the intended completion date,
acceleration, delays ordered by the engineer, management
meetings, and early warning.
Quality Control: This section includes the following items:
identifying defects, tests, correction of defects,
uncorrected defects.
Cost Control: This section includes the following items:
or activity schedule, change in the BOQ or activity
schedule, variations, payment for variations, cash flow
forecasts, payment certificates, payments, compensation events,
tax, currencies, price adjustment, retention liquidated damages,
bonus, advance payment, securities, day works, and cost of
repairs.
 Finishing of Contract: This section includes the following
items:
Completion, taking over, final account, operating &
maintenance manuals, termination, payment upon termination,
property, and release from performance.

Section 8: Special Conditions of Contract (SCC)

Section 9: Contract Forms

Which includes: Agreement; Performance Bank Guarantee;
Performance Bond; Advance Payment Guarantee;
2.4. Contract Administration
Identifying contractual responsibilities of Stakeholders.
Reviewing the Terms of Contract Documents
Extract Monitoring Responsibilities
Preparing Monitoring Responsibility Summary Sheets

Determining and understanding the construction components

of the project.
Reviewing the Contract Drawings and Technical
Specifications
Extract the Construction Methods and Sequences
Prepare Construction Methods and Over all Sequences Sheets
Review submitted (Integrated) Schedules and Breakdowns for
operations such as Organizational Breakdowns, Resources
Breakdowns & Schedules and Time Schedules.
Report Project Status daily and / or periodically and
Completions.
Certify qualities of materials, shop drawings, samples,
workmanships and works.
Measure Works, Record Site Potentials and Certify Payments
and Completions
Take off sheet and Bending Schedules are used for
Measurement of Works
Method of Measurement is according to standard practices
Site Potentials such as material, equipment and Manpower on
site together with appropriate site organization is recorded
Advance, Interim and Final Payments are certified
Mediate Disputes.
I. TIME
Time is an extremely important issue in construction. Together with
cost and quality, it is a primary objective of project management, and
a major criterion by which the success of a project is judged (Charmer
1990).
On the Date of Possession; “possession of the site shall be given to the
contractor who shall there upon begin the Works, regularly and
diligently proceed with the same and shall complete the same on or
before the Completion Date.”
This identifies the three basic time-related issues as commencement,
progress and completion. In fact, there are also two other issues: the
contractor’s continuing obligations after completion, and the
extensions of time which may be available to the contractor when the
work is delayed by certain specified causes.
II. Payment
The provisions relating to payment concern the way the
contractor is paid by the employer.
The primary obligation upon the employer is to give the contractor the
sum of money which forms the consideration for the contract.
oney must be paid promptly and fully unless there are specific
reasons for withholding it.

Contract Price
The contract price is dealt with in different ways by different contracts.
If the contract is admeasurement, the bid by the contractor is based
upon the work described and quantified in the contract bills.
If any quantities are altered because of variations in the client’s
requirements, then the contract sum will be altered. Otherwise, the
contractor is paid the amount of the tender.
Time of Payment
It is common practice in the construction industry, for payment
of the contract sum to be made by installments.
Payment by installments should eliminate the need for the
contractor to borrow money pending final payment.
The time of payment should be as clearly depicted in the
contract document.
Variation
Introduction
Construction project usually undergoes through a complex
process, which requires close cooperation and coordination among the
stakeholders.
The construction process is influenced by highly changing variables
and unpredictable factors that could result from different sources.
sign plays an important role in improving the development of
construction industry. A good design will enhance value generation,
reduce variation, dispute and improve the work flow.
Variations are common in all types of construction projects.
The nature and frequency of variation occurrences vary from
one project to another depending on various factors.
Definition
ariation work is the work that can be imposed with in the contract
documents. It is a change or alteration to the plans or specifications for
a number of reasons implicit in the original agreement, these reasons
could include, but are not limited to, omissions in the design
documents, recognition of better methods or materials to achieve the
required effect, resolution of problems recognized, resolution of
unforeseen conditions not anticipated, and similar adjustments with in
the intent of the original contract.

Effects of Variation
There are many effects of variation order to either party of the
construction project. Some well-known ones include: Delay, Cost
overrun, Claim and Dispute.
Causes of variation with respect to their originator
A. Owner related changes
1. Change of plans or scope by owner
2. Change of schedule by owner
3. Owner's financial problems
4. Replacement of materials or procedures
5. Change in specifications by owner
B. Contractor related changes
1. Unavailability of equipment
2. Differing site conditions
3. Defective workmanship
4. Unfamiliarity with local conditions
5. Contractor's lack of required data
C. Design Consultant related changes
1. Change in design by consultant
2. Errors and omissions in design
3. Conflicts between contract documents
4. Inadequate working drawing details
5. Noncompliance design with government regulations
6. Noncompliance design with owner's requirement
7. Change in specifications by consultant
D. Other changes
1. Weather conditions
2. Safety considerations
3. Change in government regulations
4. Change in economic conditions
5. Socio-cultural factors
6. Unforeseen problems
Guarantees and Bonds
bond or guarantee is an arrangement under which the performance
of a contractual duty owed by one person (A) to another (B) is backed
up by a third party (C).
What happens is that C promises to pay B a sum of money if A fails
to fulfill the relevant duty.
In this context A is commonly known as the principal debtor or simply
principal; B is called the beneficiary; and C is called the bondsman,
surety or guarantor.
Bid Bonds
id Bonds guarantee that the bidder will carry out the terms of a
contract at the bid price upon award of the bid.
Thus, it is a guarantee that a contractor will enter into a contract at the
amount of bid and post the appropriate performance bonds, providing
financial assurance that the bid has been submitted in good faith.
These bonds are used by owners to pre-qualify contractors
submitting proposals on contracts.

Bid bonds have two purposes:

i. To guarantee that the contractor will enter into a contract if
determined to be the lowest responsive bidder and
ii. To guarantee the contractor will provide the required
payment and performance bonds, and insurance policies.
 When the performance and payment bonds have been submitted,
the contractor is released from the bid bond obligations.

Bid Withdrawal
If a bid is withdrawn before the bid is opened, the bid security shall be
returned to the bidder. No action is taken against the bidder or bid
security if a bidder is permitted to withdraw the bid before award.
Conversely, a successful bidder may not withdraw the bid after bid
opening without forfeiture of bid security, unless the bidder can
establish by clear and convincing evidence that a non-judgmental
mistake was made in the bid.
If withdrawal of a bid after bid opening is permitting, no action may
be taken against the bidder or bid security.
Performance Bonds
Performance bonds guarantee the performance of the contract
requirements at that stated bid price. In effect, the surety is saying it
guarantees the performance of the contractor, or it will complete the
project as described in the plans and specifications.
Performance Bonds guarantee the contractor will faithfully
perform the contract or the terms of the contract.
This protects the owner from financial loss should the contractor fail
to perform the contract in accordance with its terms and conditions.
While a bid bond is submitted with the bid, a performance bond is
submitted by the winning bidder upon award of the contract.
The surety is in the position of being asked to guarantee the
contractor’s performance.
Therefore, the contactor must demonstrate an ability to perform before
the surety is willing to issue payment and performance bonds.
The sureties will visit the contractor’s home office and job sites, and
will contact the owners of recently completed contracts.
Payment Bonds
Payment Bonds ensure subcontractors, laborers and material suppliers
used in fulfilling a contract will be paid.
payment bond is a contract bond that guarantees payment of the
contractor's obligation under the contract for subcontractors, laborers
and material suppliers associated with the project, providing assurance
that they will be paid if the contractor defaults.
The payment bond is a protection for those supplying labor or
materials to a public job.
In most cases, payment bonds and performance bonds are issued
together as one bond; the same application covers both.
Advance Payment Bonds
These are bonds or guarantees given to the owner by the contractor
assuring the owner that the contractor will pay back any advance
payment that he has received.

Price Adjustment
The purpose of a Price Adjustment clause is to provide a mechanism
for reimbursing contractors for changes in input prices over which they
have no control at all.
No adjustment is to be applied to work valued on the basis of cost
or current prices.
2.5. Claim and Dispute Management
General
Claims & Construction might be inseparable, unless a relentless attempt
has been made by the contracting parties to the Construction Contract
to avoid their occurrence.
Unresolved claims are the basis for the existence of construction
disputes.
The basis of remedy for the claims or disputes may be the contract
and/or the applicable law.
ispute in simple terms is a difference in a line of thought.
laim is mostly concerned with entitlements and liabilities arising
under, or as a result of, a legally valid contract.
construction claim is therefore can be a demand for payment of
additional compensation, adjustment of the parties' respective
contractual obligations, Extension of Time or compensating delay
damages, or any other change with regard to the contractual conditions
or terms.
 Claim in practice can also be understood in different ways based
on the perceptions held by contractual stakeholders.
A claim is a disguised form of a blackmail,
A claim is the last chance to bail out of a losing job, and
A claim is an assertion to a contractual right.

Definition of Claim
fined in ERA‟s Claims Manual (SMEC) as:-
“A claim is an assertion of a right to property, money or a remedy”
claim is legally defined as an assertion to right. The nature of
right may relate to time, financial, or other remedies. Claim is
therefore, a substantive demand, for example, by the Contractor
against the Employer.
The Employer may have its own substantive demand against the
Contractor. We can call this a counterclaim. It is an independent
demand originated from the same contractual relationship.
The basis of claim/counterclaim is either the contract and/or the
applicable law.
There is also other basis of claims (like extra contractual or tort claims,
or in case where no contract exists, or if one existed, the contract is
found to be void, or ex gratia claim…).
Types of Claims
A. Time Related Claims: Claims associated with delay or in time
completion of projects where either of the following six Entitlements
or Penalties are subjected to:
Time Extension only
Liquidated Damages only
Time Extension and Cost Compensation
Concurrent Compensations
Bonus
Reliving of Obligation
B. Cost Related Claims: Claims associated with monetary compensation
where either of the following entitlements or penalties are
entertained:
Additions requiring rate adjustments
Price Changes
Provisional sum adjustments
Cost related claims are mainly due to
with respect to Variation;
Measurement Changes;
Adverse Physical Conditions;
The Employer’s Risks;
Compliance with statutes, regulations, price fluctuations,
currency & other economic causes;
Defects & unfulfilled obligations (NB: It relates to breach
of the Contract);
Failure to commence, critical or non-critical delays,
suspension of work, release from performance, default &
termination;
Delay in certifying payments;
C. Default by Contracting Parties: Claims associated with non-
performances of contractual obligations such as:
Delay in Payment Certificates
Suspensions and Terminations
Reduction of the progress of the execution of works;

Causes for Claims

Causes for claims may be the occurrences of deviations from the
promises made under the construction contract during the performance
of the Construction Contract.
These deviations may reflect themselves in terms of or in relation
to: -
completion time;
construction cost;
quality performance; and
safety requirements.
The following factors may also cause claims.
Poor or unclear tender and/or contract documents;
Poor or inadequate administration of responsibilities by
stakeholders; and
Unforeseen or uncertain situations during execution of the
Construction Project;

The following categories of factors may also contribute to the

emergence of claims.
Changed conditions;
Additional works;
Delay for cost overruns & time extension;
Requirements for Claims
For the claim to be successful, it has to fulfill certain valid
requirements. These requirements are related to:
A. Substantive requirements;
B. Procedural requirements; and
C. Proof requirements;
A. Substantive Requirements
substantive requirement we mean supporting or giving
justification for the claim by specifically citing or invoking the
provisions:
Of the Construction Contract; and/or
of the applicable law.
The provisions of contract mean the relevant clause in the contract,
which has been signed between the parties.
B. Procedural Requirements
procedural requirement we mean the serving of the required prior
written notice to the designated party under the contract. This is called
intention to claim.
This prior written notice shall also be given within the contractually
designated time scale. The time scale might be specific or reasonable.
The non observance of the procedural requirement may result whole or
partial loss of the substantive claim.
C. Proof Requirements
By proof requirement we mean the submission of the relevant
documentation, which supports/corroborates the claims under
consideration.
The relevant documentation may relate, for example, to: -
Time (delay & disruption) claims;
Cost (additional payment) & profit claims;
Variations claims; and
Other construction claims;
They may contain a form of letters, notices or otherwise.
In case of disputes the proof requirement, in addition to the relevant
documentation, may also include: -
Factual Witnesses; Expert Opinion; Site Visit or Inspection; etc
Process of Claim
The claim process generally classified into the following three
A. Claim Submittal;
B. Claim Processing; and
C. Claim Enforcement;
A. Claim Submittal
This is a process by which the claimant is obliged to claim within a
reasonable period of time (28-30 days in most contracts) followed by
the claimant‟s preparation for all substantial documents & legal aspects
supporting its entitlements for an official submittal.
This constituted that a claim has been filed for its consideration if all
the three sub-processes called Claim Notification, Claim Preparation &
Claim Submittal are fully undertaken by the claimant.
B. Claim Processing
This phase is classified further in to the following three sub-
processes,
i. Claim Handling;
ii. Dispute Resolution;
iii. Claim Approval;
i. The Claim Handling
This sub-process initiates checking of the claim whether, it is legally or
contractually supported or not, documents provided are valid and
reliable to substantiate the claim for consideration or not, and overall
procedural requirements have been followed or not.
After verifying the validity of the claim proper computations &
evaluations will be carried out to present the proposed compensation
for the contractual parties the claim is applicable to.
ii. Dispute Resolution
The contractual parties will pass through different dispute resolution
system depending on their acceptance over the proposed compensation
varying from the simplest mediation by the consulting engineer to the
final court ruling in the form of litigation. Three types of dispute
resolution systems are well recognized. These are,
 Three types of dispute resolution systems are well recognized.
These are,
Preventive Dispute Resolution System; ( by use of
partnering, dispute resolution advisors, facilitators, …)
Amicable Dispute Resolution System; (through negotiation,
mediation, conciliation, mini-trial, …)
Judgmental Dispute Resolution System; (through Dispute
Adjudication Board, Arbitration, Litigation…)
Where dispute was handled in any form of its resolution system,
it is termed as Dispute Resolution.

iii. Claim Approval

Once the contractual parties agree on the final outcome of the claim
process, then they have reached in to a stage where the claim is
approved.
C. Claim Enforcement
This phase is sub-divided in to the following two sub-processes.
Claim Enforcement;
Claim Closure;
The claim enforcement sub-process will entertain the inclusion of the
approved claim in to payment certificates where their enforcement is
due.
Once this compensation or entitlement is due in accordance with the
approved claim and its enforcement requirements, then it is concluded
for its closure.
In order to account for such an administration process contracts,
provide claim clauses with in their provisions in their conditions of
contract.
Dispute Resolution
ispute resolution may have the following aspects/ dimensions,
namely,
Preventive dimension;
Amicable settlement dimension; and
Judgmental dimension;
In relation to this there is also the concept of ADR: Alternative
Dispute Resolution. Alternative to what?
The concept of ADR is related to alternative to litigation or sometimes
alternative to all binding decision-making process (including the
decision of the arbitrator & adjudicator).
Both preventive & amicable dispute resolution systems may be
categorized under Alternative Dispute Resolution (ADR). There is no
any binding or imposed decision by a third party in them.
In this respect, except with respect to the preventive aspect, the
Ethiopian law recognizes both the amicable & the judgmental aspect of
dispute resolution systems.
The scope of the Ethiopian law may be limited in this regard.
Because not all amicable & judgmental forms of dispute resolution
systems are recognized.

Amicable Settlement Dimension

Negotiation
Conciliation
Judgmental Dimension
Litigation
Arbitration
A. Preventive Dispute resolution System
To prevent construction disputes, there are a host of factors to be
considered.
The following aspects may contribute to the prevention of
construction disputes. To mention few of them: -
To have a well-planned project;
To have a well-studied project;
To have a well-designedproject;
To have a clear, accurate & complete tender dossier &
document;
To have a clear, accurate & complete contract document;
To have a balanced (in terms of allocation & distribution of
risks, rights & obligations) contract document;
To discharge the expected contractual & legal obligations by
the contracting parties;
To have a good project governance;
 The following are some of the internationally recognized dispute
prevention systems.
o Partnering
o Alliancing and
o Dispute Review Boards
i. Partnering
Partnering is a team-building effort in which the parties establish
cooperative working relationships through a mutually developed,
formal strategy of commitment and communication.
It can be used for long-term relationships or on project-specific basis.
When used on a project-specific basis, partnering is usually instituted
at the beginning of the construction process after the contractor has
been selected, by holding a retreat among all project personnel who
have leadership & management responsibilities.
ii. Alliancing
Alliancing is generally a tender arrangement where all the principal
tenderers organize into groups with common aims, prior to submitting
the tender.
iii. Dispute Review Boards
DRB - a representative from the owner, one from the contractor and a
third, selected by these two representatives. The third member chairs
the board.
The members usually have experience in the kind of construction
work being undertaken and are also familiar and experienced in dispute
resolution. It is important that all the board members are independent
of any of the contracting parties, although they are paid by them.
B. Amicable Aspect
The very feature of amicable settlement is that the disputing parties
shall have full control both over the process & the outcome.
There is no third-party imposition of solution on the parties to the
dispute.
The following are some of the highly recognized amicable
settlement methods.
Negotiation;
Mediation;
Conciliation;
i. Negotiation
Negotiation is a give & take process, a serious attempt to reach a
settlement agreement. Negotiation could be: -
Direct negotiation; or
Assisted negotiation;
irect negotiation is held directly between the very parties to the
dispute. The parties may, of course, be assisted by their own internal
advisors.
In case of assisted negotiation, mediation & conciliation come in to
picture.
Negotiation requires two qualities or skills:
knowledge on substance or the subject matter to be negotiated;
and
knowledge on the art & skill or process of negotiation.
 There are two types of negotiation:
Interest based negotiation; and
Rights based (positional) negotiation;
Alternatively, they may also be called:
Competitive or hard-bargaining (for rights based); and
Cooperative or soft-bargaining (for interest based) negotiation;
Negotiation
The Principled negotiation have seven elements. These are:
Alternatives;
Interests;
Options;
Legitimacy;
Communication;
Relationship; and
Commitment;
 good deal in negotiation therefore:
One that is better than your Best Alternative to a
Negotiated agreement;
One that satisfies your interests & the other person’s interests;
One that has been achieved after you have brainstormed &
explored numerous options;
Based on a standard of legitimacy that is fair, persuasive for you,
and the other negotiator;
One that has been achieved through effective communication,
where you have interactively listened to the other negotiator;
One where the relationship has been maintained, if not improved,
and certainly not destroyed; and
One where the appropriate level of commitment is made at the end
of the negotiation, not at the beginning;
ii. Mediation
Mediation describes the process of a neutral & disinterested person
helping disputing parties to negotiate a resolution to their dispute.
Mediation is simply a facilitated or assisted negotiation. To agree or
not to agree is left to the decision of the parties.
The mediator helps disputing parties to understand the dispute in a way
that will maximize their chances to reach a mutually acceptable &
lasting solution.
mediator facilitates the discussion or negotiation. He will never
propose a solution for the settlement of the dispute. He is a mere
facilitator.
He simply performs the task of persuading the parties in dispute to
change their respective positions in the hope of reaching a point where
those positions coincide, without actively initiating any ideas as to how
the dispute might be settled.
The advantages of mediation include informality, speed & economy, but
more importantly perhaps, it often leads to an agreed settlement between
the parties rather than an imposed award or judgment.
It also preserves relationships and Maintain confidentiality and
privacy.

The process of mediation is described as follows.

Setting the Table;
Story Telling;
Determining Interests;
Setting out the Issues;
Brainstorming Options;
Selecting the Durable Options; and
Closure;
iii. Conciliation
Similar to mediation, conciliation is a voluntary form of dispute
resolution where a neutral party, the Conciliator, is appointed to
facilitate negotiation between the parties in dispute & to act as a catalyst
for them to reach a resolution of their dispute.
Unlike the mediator, the conciliator under the conciliation process, takes
a more active role probing the strengths & weaknesses of the parties‟
case, making suggestions, giving advice, finding persuasive arguments for
& against each of the parties‟ positions, and creating new ideas which might
induce them to settle their dispute.
Under the mediation method of dispute resolution, if the parties to the
dispute fail to reach agreement, the neutral party himself is then required
to draw up & propose a solution which represents what, in his view, is
a fair & reasonable compromise of the dispute.
The conciliator cannot decide the dispute for the parties. This is the
difference between conciliation & arbitration.
Conciliation is sometimes called evaluative mediation.
Conciliation is a more formal process than mediation & it generally
involves the engagement of legal representatives, thus making it a more
expensive process than mediation.
ring the conciliation process, it is necessary for each party
carefully to prepare a document containing the following material.
The Facts:
The Issues:
The Legal Principle:
The Remedy or Remedies
the Time Frame:
There are internationally recognized specific Conciliation Rules. Like:
International Chamber of Commerce (ICC) Conciliation Rules;
The UNCITRAL Conciliation Rules;
The ICE Conciliation Procedure;
C. Judgmental Dispute Resolution System
The very feature of judgmental form of dispute resolution is that the third
party known as the court judge, the arbitrator or the adjudicator decides
the case before him for the parties.
The parties to the dispute shall have no control over the process
(especially in case of the court system) and/or the outcome of same in
all the three cases.
Under the judgmental forms of dispute resolution, the following are
recognized.
Adjudication;
Arbitration; and
Litigation;
i. Adjudication
Adjudication can be defined as a process whereby an appointed neutral
& impartial party is entrusted to take the initiative in ascertaining the
facts & the law relating to a dispute & to reach a decision within a short
period of time.
Under the FIDIC Conditions of Contract Dispute Board is
suggested.
Adjudication could be:
▪ Permanent adjudication; or

▪ Ad hoc adjudication;
The permanent one is normally set up at the course of the contract &
remains in place & the members are remunerated throughout its
duration.
An ad hoc one only established after the dispute has been arisen & its
existence comes to an end after it gives is determination,
Recommendation or Decision.
The Adjudication could also be composed of:
- sole member; or
three members;
In case of single or sole member DB, the member may be called a
Dispute Review Expert. Such member only gives Recommendation
& not a Decision.
The parties to the dispute & the member(s) of the DB shall jointly sign
a common contract document, called Three Party Agreement.
The professional fee & the costs of the members of the DB shall be
shared & paid equally by the parties to the dispute, i.e. the employer &
the contractor.
ii. Arbitration
Arbitration is a process whereby parties in dispute agree to submit the
matter in dispute to the decision of a person or persons in whom they
have confidence & trust & undertake to abide by that decision.
The arbitral submission is the contract whereby the parties to a dispute
entrust its solution to a third party, the arbitrator, who undertakes to
settle the dispute in accordance with the principles of law.
The very nature of arbitration is that it is fundamentally consensual.
Arbitration is based on contract between the parties to the construction
contract & the dispute.
The parties to the dispute control the process but not the outcome
i.e., the decision called the award.
 The pre-requisite to a valid arbitration is the following:
The existence of a dispute;
Agreement to refer the dispute to arbitration when the dispute
arises;
Agreement to be bound by the award;
Initiation of the arbitration;
Arbitrator
He is private in so far as
He is chosen and paid by the disputants
He does not sit in public
He acts in accordance with privately chosen procedure so far as
that is not repugnant to public policy
So far as the law allows, he is set up to the exclusion of the state
courts
His authority and powers are only whatsoever he is given by the
disputant’s agreement
Advantages of Arbitration
In relative terms, the following may be taken as advantages of
arbitration.
Neutrality; (of the arbitrators)
Confidentiality; (no publicity of both the process & the
outcome)
Procedural flexibility; (the parties in dispute are capable of
designing their own process)
Expert arbitrators;
Speed & cost;
Finality of awards; (no appeal, if not always)
 Enforcement of awards; (recognition of the
award by national courts)
Limited powers of arbitrators; (no coercive power)
multi-party disputes; (no joinder & no consolidation of
third parties without their express consent)
Awards not binding on third parties;
Hearing are private
The procedures are open to the parties
iii. Litigation
Litigation takes place at the court of law having jurisdiction
over the case.
The courts play here their dispute resolution role.
Litigation is the most serious & adversarial method of dispute
resolution.
The procedure before the court is so rigid & not tailor made to
the construction dispute resolution.
The courts are following the standard procedure established under
the civil procedure code, which applies for all types of disputes
brought to them.
The advantages of arbitration are all missing under litigation.
The clear disadvantage of litigation is that it being the most
time consuming.
The clear advantage of litigation is that the court itself enforces
its own orders & judgments.