Module 2

CONTRACTS
 Syllabus Contents

Definition as per Indian Contract Act (1872)

Formulation process for Valid Contract

Contract packages on projects

Methods of invitation of tenders

Types of Contracts

Important Terms used in contract

CONTRACT DOCUMENT

What is a contract?
When two or more persons have common intention communicated to each other
to create same obligation between them there is said to be an agreement. An
agreement which is enforceable by law is a Contract.

Types of building contracts –

There are basically five types of contracts which are adopted for execution of
works by government departments or by private owners depending on the nature
of work (as per The Indian Contract Act 1972):
• Measurement Contracts
• Lump sum Contracts
• Cost plus fee Contracts
• Turnkey Contracts
• Build-Own-Operate and Transfer (BOOT) Contracts.
 The Indian Contract Act 1972: there are several types of contracts.
Contracts involve issues relating to
1. Technology
2. Finance
3. Administration and Management

Contracts involve high monetary stakes. Contracts should be properly administered,

governed and controlled as per provisions of Indian Contract Act 1972
All contracts if theyare to be valid and enforceable at law must
have certain ingradients viz.

1. Mutual agreement between the contracting parties as to the terms

and conditions of the contract.
2. Genuine intention of the parties to accept and fulfill their respective rights and
duties under the contract.
3. Legal capacity of the parties to make a valid contract.
4. Consideration of some value (such as paymentfor construction
work done) exchanged by the parties.
5. Lawful nature of the object of the contract (eg: to build a
structure that conforms to all laws and regulations)
MEASUREMENT CONTRACTS

1. Percentage Rate Contracts –

For small works and works of repetitive nature, percentage rate contracts are
adopted. Owner indicates quantities and estimated rates for all items of work.
The estimated cost is reflected in tender schedule.
1. The tenderer quotes % above or % below the estimated cost put to
tender.
2. Payment is made on the basis of actual quantities
executed and measured.

2. Item Rate Contracts –

1. For major works, item rate contracts are adopted. Owner indicates
quantities and units only for all items of work and the tenderer quotes
rates for each individual item.
2. Payment is made for the actual work done based on measurements.
LUMP SUM CONTRACTS

•Scope of Work, construction drawings & detailed specifications are given to

tenderer along with terms and conditions of contract.

•Schedule of quantities may or may not form a part of tender documents. The
tenderer quotes a fixed price for whole work tendered.

•If this type of contract is adopted, the owner will be knowing cost of work.
However, this is subject to the conditions that there is no variation in scope of
work.

•This type of contract can be considered when scope of work is frozen; when
planning, designing and working drawings are completed before inviting tenders.
 COST PLUS FEE CONTRACTS

• This method of contract is adopted for-

Emergency works
For miscellaneous works
For works in which scope cannot be defined properly at tender stage.

•Contractor is paid his actual cost of materials, labour, hire charges of machinery & a
fee towards his profit and overheads.

•This fee may be a percentage of total cost with or without a ceiling or a lumpsum
amount.

•Here contractor’s risk is minimum and owner’s liability is not known before
commencement of works.

•Under some circumstances, this type of contract is adopted in government or private

sector works.
TURNKEY CONTRACTS

•In a turnkey contract, the contractor takes full responsibility for design,
construction & commissioning of the facility of defined scope for a fixed lump sum
price.

•The contractor has to bear the normal risk of unforeseen site conditions, poor
weather and foundation problems.

•For a turnkey contractor, time is truly equal to money & schedule slippage may
adversely affect his profitability.

•A bonus or penalty clause may be included as an incentive or disincentive to the

contractor to the work on time.

•This type of contract is suitable for projects where all the functional parameters
are finalized and changes and extras are not made later.

•Such type of contractors are seen more in commercial defence and interior
projects of multi disciplinary character and when timely completion is important.
 INTERPRETATION CLAUSES:

1. Proposal: When one person signifies to another his willingness to do or to

abstain from doing anything with a view to obtain the assent of the other to
such act or abstinence, it is called “proposal”. The person making the proposal is
called “promisor” (Contractor)

2. When the person to whom the proposal is said to be accepted and it becomes a
promise. The person accepting the proposal is called the promisee (owner).

3. Consideration is the price in terms of money, good or services paid of the thing
that the promisor wishes to have.

4. An agreement enforceable by law is a contract: an agreement not enforceable

by law at the option of others is a voidable contract.
TENDERS

A 'tender' is called upon for executing certain specified work, or supplying specified
materials; subjected to certain terms and conditions like rates, time limit, etc.
It is an offer in written form: Legally speaking, it is an offer to receive an offer for
the work, within the specified financial limits.
An architect must observe the following, before inviting tenders:
a) Accuracy in bill of quantities as far as possible.
b) All plans, specifications and details are correct, without any ambiguity.
c) No item should be over looked and special condition.

The tender documents issued to various contractors must be complete in every

respect and should specify details of the work. Each tender form must contain the
following:
1. Special notice issued either in name of the owner or the architect.
2. Tender acceptance letter from the contractor.
3. Articles of agreement with special conditions of contract.
4. General specification.
5. Bill of quantities incase of item rate tender.
6. Special conditions and detailed specificationsof work in caseof
lump sum
tender.
TYPE OF TENDERS
ITEM RATE LUMP SUM COST PLUS PERCENTAGE

1.Balanced one as no undue 1.Unbalanced one resulting 1. Unbalanced one resulting in

profit or loss to the in excessive profit or loss to more cost of construction
contractor. the contractor. and hence more profit for
contractor unless checked
by bonus and penalty
2.More of a speculative clause.
2.Speculation to a very small nature. 2. No speculation at all.
extend.
3.Work can be commenced 3.Unless all the formalities 3. Work can be commenced
after complying with a few are compiled with the work immediately without waiting
formalities like acceptance of cannot be commenced. for all formalities.
tender, etc.
4.All plans, specifications 4.All the details, plans, 4. All details, elevations etc.
should be prepared in elevations, specifications, need not to be prepared
advance. Elevations and etc. required to be prepared prior to the commencement
details can be supplied later in advance. of the work.
on.
5.Standard quality of 5.Standard quality of 5. Standard quality of
materials and good materials and good materials and good
workmanship are assured. workmanship are not workmanship at the cost of
assured. economy.
6.Extra works are minimized. 6. More and more of extra 6. More and more of extra
works. works.

7.Total cost of construction 7. Total cost of construction 7. Total cost of construction

is not known prior to is known prior to is not known in advance.
commencement of work. commencement of work.

8.Variations in the drawing 8.Variations will be required 8.Variations can be made

can be made if required as considerable thinking due to resulting in the increased
the items of the works are exorbitant claims that can be cost of construction.
measured and paid for. made by the contractor for
the extra work.

9.Essential variations can be 9. Design is likely to be 9.Variations can be made so

made so as not to spell the spoiled due to restrictions on as not to spoil the design.
design. the variations.
INVITATION OF TENDER
PUBLIC TENDER SELECTED TENDER NEGOTIATED TENDER
Suitable for public and private Suitable for private works Suitable for private works of small
works. Compulsory for public magnitude or for repair works, and
works. works of additions and alterations to an
existing building.
Keen competition and Competition on a small scale, No competition and no syndicate.
formation of a syndicate chances of formation of a
syndicate are there.
Financial integrity and Financial integrity, etc. are Financial integrity, etc. are known.
organization for the work are not known.
known
More chances of disputes Less changes of disputes Less changes of disputes.
Opens field for new brilliant New contractors do not step in Negotiated with one or maximum of two
contractors. the field. known contractors, and hence question
of new contractors does not arise.
Not very well suited for Suitable for specialized and Suitable for specialized and skilled works
specialized and skilled works. skilled works. but cost will be very high.

Cost of work will be low. Cost of work will be on a higher Cost will be very high
side.
Tenders must be opened in Not essential that the tenders No opening of the tenders in this case
presence of the tenderers who should be opened in the
choose to remain present. presence of the tenderers.
Mistakes committed by the Mistakes of the contractors can Mistakes of the contractors can be
contractors cannot be checked in be checked and rectified prior to checked and rectified.
 OPENING OF TENDERS

Following points should be observed while opening the tenders:

1. The tender should be opened in presence of the owner or committee members.

2.A record must be kept for the list of tenderers and the money deposited by
them. The earnest money should preferably be accepted in the form of bank
draft.

3.If the owner is not present, the architect along with one assistant should open
the tender. The architect shall scrutinize the same, prepare comparative
statements and forward them to his client, with his recommendation as to whom
the work should be awarded and why.

4.The lowest tender should be accepted after close investigating the reputation and
standing of that contractor.

5.Public tenders are invariably opened in the presence of the tenderers who choose
to remain present.

6. It is essential to ensure that they have been thoroughly checked and are
without any mistakes.
 Classification of Contracts

1. Lump-sum Contract
2. Cost plus a fixed percentage
contract
3. Cost plus a fixed fee
4. Target Contract
5. Percentage rate (B1 system)
6. Item rate tender (B2 system)
7. Labour Contract
8. Joint venture tender
9. Turn-key Contract
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10. Indirect lump-sum contract for flats or
 1. Lump-sum Contract

• In this system, the contractor execution of a specific

work for a definite lump-sum amount within a specified time
period. On completion of the work, it is checked as per
drawings and specifications and if approved the amount is
paid to the contractor.

• The quantities of various items is not measured.

• For the construction of sculptures and decorative

works this system is adopted.

• This system is adopted only in the case of emergency

works. 16
 2. Cost plus a fixed percentage

• Under this system, the contractor furnishes labour and

materials and completes the work for the actual total cost
plus an agreed percentage of it as the profit of the
contractor.

• The speed and quality of work is maintained in this system

but there is always tremendous wastage of materials as the
contractor’s aim is to increase the total cost of the work.
3. Cost plus a fixed fee Contract

• In this system a fixed fee is given as contractor’s

profit irrespective of the total cost of work. This is to
control the tendency of the contractor to increase the
cost of the project unnecessarily.

• Smaller the completion time more is the profit and

hence the contractors hurry to complete the work and
the quality of workmanship is not maintained.

• This system is not generally used.

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 4. Target Contract

• The contractor is paid a fixed fee on a prime cost basis for

the work performed under the contract and in addition he
receives a percentage on the savings effected against either
a prior agreed estimated total cost or a target value arrived
without changing the specification.

• It was presumed that by proper management of the work, the

contractor can reduce the cost of work. But due to
tremendous increase in the cost of materials it never
materialize and hence this system is not getting popularity.
5.Percentage rate tender (B1
system)

•In
this system the contractors are required to quote single
percentage either higher or lower at which he wants to
execute the job. Here scrutiny of the tenders become
easier and as cement and steel is usually supplied by the
department chances of manipulation is less. This the most
commonly adopted system of contract in the different
departments of our state.

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 6. Item rate tender (B2 system)

•Here the contractor gets the payment depending on the rate at

which he has quoted every item of the work.

•Itwas rather difficult to scrutinize the tenders submitted by

various bidders and the system was hence modified and now
the department quotes the items of work along with their
quantities and the bidders are required to quote the
percentages at which he can execute the various items.
 7. Labour Contract

This is the most commonly adopted system for the

construction of private individual buildings in small cities.
The contractor arranges all necessary labour, tools & plant
and equipments required. The materials are supplied by
the owner and he appoints an Engineer to supervise the
work to maintain the quality and economy in construction.

This system is suitable in the works of Govt. departments as

they are in a privileged position to buy large quantities of
materials at cheap rates.

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8. Joint venture Contract

• In case of huge important projects the construction works can be

categorized into different parts and each part can be given to a
specialized contractor in that field.

• This method improves the quality of work and also helps to get the
completion of work in a given time frame.
 9.Turn-key
Contract
•Inthis system all the works related to a project including designing,
planning, execution etc. are to be done by the contractor. Once the
project is completed it is handed over to the owner. The owner has to
complete the transaction works and occupy the structure by simply
turning the key, ie. opening the door.

•10.Indirect lump-sum tender for flats or

bungalows.
•Inthis system the rate of construction per sq.m. of plinth area is
jointly fixed by the contractor and owner which includes
contractor’s profit also. Once this agreement is made the
contractor starts the work and receives payment at regular
intervals during the different stages of work. Sometimes 24 the
specifications, drawings are prepared by the builder.
 11. BOT system

• Build operate and transfer is a new system in which the land is

acquired by the Govt. and the contractor is asked to build the
structure and then operate it until he collects the money he had
spent for the construction, as fees from the users.

• Security is provided to the builder by the Govt. regarding law

and order problems if any.

• Bridges and roads are usually constructed by adopting this

system of contract. Toll is collected from the users/vehicles
passing over it by the contractor to recover the construction
cost.
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SECURITY DEPOSIT

• Security deposit is the amount the contractor has to deposit

with the owner before awarding a work, after his tender is
accepted. This amounts to generally 5% to 10% of
estimated cost of the project and is inclusive of the EMD
already deposited by the contractor along with the tender.
This will be refunded to the after the completion of the
project. No interest is paid on SD.
• The contractor has to fulfill all the terms and conditions laid
down in the contract and maintain quality and speed
satisfactorily. If he fails to do so, a part or whole of the SD is
forfeited by the department.
• If there is any fault and construction contractors refuses to
demolish and reconstruct then the department will carry
out that work using the SD.
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SECURITY DEPOSIT

•Ifthe cost of the project is a huge amount, t the contractor is

made to deposit only 50% of the amount in the initial stage
and then the rest of the SD is deducted in installments from
the running bills of the contractor.

•SD is not collected in the case of a contract for supply of

materials, as the supplied materials become the security.
TH A N K
Y O U