1.

Traditional contracting
History & Origin
Originally contracts in the civil engineering and construction industries were bespoke and
drafted by Chancery pleaders using their knowledge of leases rather than building
processes. In 1879, Royal Institute of British Architects for construction projects created
RIBA forms which lead to the Joint Contracts Tribunal, JCT forms. For civil engineering
the need for a formalized approach to contracts led the Institution of Civil Engineers to
produce the ICE formalized set of conditions of contract. In 1986, the ICE commissioned
the development of new form of contract as it was felt that there was a need for a form
that had clearer language, clearer allocation of responsibilities and reduced opportunities
for contractual gamesmanship. In 1991, this resulted in a consultative form of the New
Engineering Contract form of contract. The first edition was published in 1993. Wider
use of the NEC was recommended by the Latham Report in 1994.

Characteristics
A traditional contract, sometimes called stipulated sum, is the most basic form of
agreement between a supplier of services and a customer. The supplier agrees to
provide specified services for a specific price. The receiver agrees to pay the price
upon completion of the work or according to a negotiated payment schedule. In
developing a lump sum bid, the builder will estimate the costs of labour and
materials and add to it a standard amount for overhead and the desired amount of
profit.
Most builders will estimate profit and overhead to total about 12-16 percent of
the project cost. This amount may be increased based on the builder's assessment
of risk. If the actual costs of labour and materials are higher than the builder's
estimate, the profit will be reduced. If the actual costs are lower, the builder gets
more profit. Either way, the cost to the owner is the same. In practice, however,

costs that exceed the estimates may lead to disputes over the scope of work or
attempts to substitute less expensive materials for those specified.
The traditional contract may contain a section that stipulates certain unit price
items. Unit Price is often used for those items that have indefinite quantities, such
as pier depth. A fixed price is established for each unit of work.
Contractor free to use any means and methods to complete work. Contractor
responsible for proper work performance.
Work must be very well defined at bid time.
Fully developed plans and specifications required.
Owners financial risk low and fixed at outset.
Contractor has greater ability for profit.
Requirements:
1) Good project definition.
2) Stable project conditions.
3) Effective competition essential when bidding.
4) Much longer time to bid and award this type of project,
5) Minimum scope changes due to higher mark-ups than occurred at bidding

Applications
Urban construction/reconstruction.
Rehabilitation of movable bridge.
Projects with subsoil earthwork.
Concrete pavement rehabilitation projects.
Major bridge rehabilitation/repair projects where there are many unknown
quantities.
Bridge painting
Bridge projects

 Intersection improvements (with known utilities)

Landscaping
Lighting
Mill/Resurface (without complex overbuild requirements)
Minor road widening
Sidewalks
Signing & Signalization.

Advantages of Traditional contract

1) Low financial risk to Owner.
2) High financial risk to Contractor.
3) Know cost at outset.
4) Minimum Owner supervision related to quality and schedule.
5) Contractor should assign best personnel due to maximum financial
motivation to

achieve early completion and superior performance.

6) Contractor selection is relatively easy.

Disadvantages of Traditional contract

Perhaps, the main disadvantage of the traditional method is that it is slowest
method of project delivery. Due to its sequential characteristic, the design has to be
satisfactorily completed before the next stage can commence. The cumulative effect of
this process is that there can be no early start of work on site and ultimately the entire
project cycle.

In some circumstances, there may be an attempt to accelerate the project

duration by obtaining the tenders before the completion of the design. In such instances,
the bids obtained can only be considered as indicative of the final cost, and the Client is
thus vulnerable to claims for additional reimbursement from the Contractor (Clamp and
Cox (1990).

Other disadvantages of the traditional approach according to Potts (1995) and

may be applicable to offshore oil and gas development projects are: -

(i)

Greater co-ordination and control is required because of several parties

with different contractual relationship are involved

(ii)

Split responsibilities resulted in Client unable to identify the responsible

party in the event of major defects

(iii)

No opportunity for Contractor to contribute his construction expertise in

the design process

(iv)

Poor communication and create them and us attitude

2._Package deal contract

Origin
Package Deal agreement is the fastest technique of project submission in this area such
as Malaysia. The strategy is also the most misunderstood and poorly implemented. It has
also defined that contrary to the fact that the strategy has been developed to redress the
limitation of the traditional strategy, Package Deal kinds of agreement are merely old
bottles in a new bottle. This strategy of submission system has been around even before
the release of the traditional strategy.
There have been several hybrids and terminologies used to describe the Package
Deal method. Notable examples are listed below.

Package Deal Contract;

Contract with Contractors Design

Design and Build (D and B) Contract

Design and Construct (D and C) Contract

Turnkey Contract

Engineering, Procurement and Construction (EPC) Contract

Engineering, Procurement, Construction and Commissioning (EPCC)

Contract

Engineering, Procurement, Installation and Construction (EPIC) Contract

Characteristics of the Package Deal Contract

Package Deal type of contract is the combination of the essential tasks of a project e.g.
designs, procurement, construction, installation and commissioning into a single package.
As such, the Contractors primary scope is appropriately described by the title of the
methods.

For example, under Engineering, Procurement and Construction (EPC) Contract, the
Main Contractor is responsible for the Design, Procurement of materials for the work and
Construction of the facility. Ritz (1994) has also explained that under this mode, a single
firm or joint venture provides the engineering, procurement and construction (EPC)
services under a single contract.

Whereas, under Engineering, Procurement, Construction and Commissioning (EPCC)

Contract, the Main Contractor is responsible for the Design, Procurement of materials for
the work, Construction and Commissioning of the facility.

And, under Engineering, Procurement, Construction and Commissioning (EPCC)

Contract, the Main Contractor is responsible for the Design, Procurement of materials for
the work, Construction and Commissioning of the facility.
Often, the contractor in this environment is paid on a lump sum basis. Again, it is
unlikely that the amount paid to the contractor will equal this lump sum. However, the
advocates for this style of contracting argue that subject to good management, there is
less potential for cost overruns.

Application

Urban construction especially public constructions

Bridge / highway

Houses

Malls

offices building

Advantages of package deal contract

Single point responsibility
whereby the contractor is responsible for the engineering, design, procurement of
materials and the construction of the work. Therefore, if there are defects in the work,
the contractor must be responsible for the defect for he has the obligations in relation
to both design and construction.
allows for fast-track scheduling while still controlling the costs.
This is achievable as the contractor is responsible for the engineering, procurement
and construction, then it would be easy to have a fast track program which reduces
the overall project schedule. What it means is that the engineering, procurement and
construction can be substantially overlapped. The engineering (design) is developed
to a level where construction can commence. From then on design would progress
with construction will immediately follow from behind. In this way, the overall
project completion can be achieved earlier than under the traditional approach, where
construction will only commence once the design is completed.

Disadvantages of Package Deal contract

Little flexibility to change
Once a contract is awarded, the package deal type of contract offers little way for
Client to change his requirements. Any changes after the award will normally result
in increase in cost and extent the time for completion
Compromise in quality
Perhaps, the most concern factor about Package Deals type of contracting is the quality of
the finished product. It is frequently found that the quality of the product in term of

aesthetic and materials used are less, if compared to a similar product undertaken
through other contracting methods.
Minimal Employers Involvement
Under this technique, Customer participation for all element of the work is restricted,
once the agreement is in place. Customer has no immediate management over how the
performs are done, provided that at the end of the agreement interval the service provider
completes the performs in conformity with the employers specifications / agreement
conditions. This restriction of Companies participation may help to describe some of the
misgivings of the Package Deal kind of agreements.

3._Management construction contract

History/Origin
The most oldest, familiar types of contract in industry
The origin is from UK where:

the fast growth of professional consultant at that time

A lots of bulk government project

Characteristics:
Management construction contract written agreement between the owner of a project
(client) and a firm of professionals (called construction manager) for planning, design,
construction, and commissioning of a construction project.

Standardized Processes and Procedures

This helps to decrease maverick buying and decrease supply risk while increasing spend
leverage. The net effect is that buys as a whole become less costly and more valuable and
a much greater percentage of negotiated savings are captured by the business.

Spend Visibility

Probably the most valuable benefit of a contract management system which lets you
know if you are buying from the suppliers youre supposed to be buying from at the right
times, quantities and prices it can also help an organization standardize on consistent
contract terms and conditions. Furthermore, it also allows for easy identification of
contracts with suppliers in high risk zones due to natural disasters, political unrest, or
economic uncertainty, which is critical to the development of appropriate organizational
risk management strategies.

Solid Foundation for Spend and Performance Analysis

With all of the contract conditions and negotiated prices and fees in a central location, its
a lot easier to compare actual purchases against contracted buys. This allows policy or
regulation violations to be caught and dealt with immediately and insures that all spend is
known and available to be appropriately leveraged in sourcing projects.

Rebate Management

Contract Management systems make it easy to track rebates and insure that all of the
savings negotiated in a sourcing cycle are captured.

Application
In complex project involve high tech and need greater flexibility in
design
Where the project is too large
Where employers to capitalize involvement of large number of sub
con

The advantages of Management construction contract:

Time:

It can save a considerable amount of time by hiring out the management of various
contracts, time that can best be utilized running the business and soliciting new accounts.

Costs:

We can realize cost savings by using a management company to service the contracts.
Specialized software to track our contract obligations can be costly. Without it, we may
miss important deadlines or affect performance with overlapping workloads. By
centralizing our computer files with an outside agency, we can best utilize our resources
to fulfil the obligations. Contract managers can keep updated on important deadlines and
payment schedules when they link to our own communications systems. Finally, it save
administrative costs incurred when the employees must deal with change-orders, payment
schedules and reporting requirements.

Missed Opportunities:

If you have easy access to the data and can make accurate business projections.
Negotiations are based on real-time projections that take into account the current status of
your workload and obligations so that you don't miss any opportunities because you
didn't have an accurate view of your company's position.

Relationships:

Contract manager don't have to worry about harming relationships with clients when they
trust him can fulfill his contract obligations. Relationships become strained and lead to
fewer work orders when he miss deadlines and spend excessively over the agreed-on
budgets. A contract manager is always available to client when changes need to be made,
further enhancing his image as a reliable and responsive service provider. With various
supervisors and team leaders providing progress reports.

Disadvantages of Management construction contract:

Loss of Control

A major disadvantage of contract management is that the organization gives up a

considerable amount of control over the services that will be provided to customers.

Time Delays

Another potential drawback of contract management is that the contractor might not be
able to meet the deadlines spelled out in the contract. The business or organization
depends on the contractor to provide important services. When established deadlines
agreed on by both parties are not met, the contracting organization loses money and time.
Some people would also call the time delay a hidden cost that is associated with the
unpredictability of this type of business relationship.

Loss of Flexibility

Flexibility is an important part of doing business in a global economy. When the

organization outsources work to third parties, the organization reduces its capacity to
adapt its internal business processes to meet the needs of clients in a dynamic business
environment. The most ideal contractual relationship is one in which the contractor can
also be flexible in meeting the needs of the contracting organization it serves.

Loss of Quality

When a parent organization provides a certain level of quality in its products and
services, the result is a professional reputation gained in the industry. If individuals in the
contractor company are delivering products or services on behalf of their client, a loss of
quality could have disastrous effects on the reputation of the client firm. Before using
contract management, the firm should use a dependable request-for-proposal process to
find the most reliable contractor with a demonstrated track record of quality performance.

Compliance

Although a service contract between client and contractor is generally viewed as a legal
agreement, the client can face huge legal costs to enforce this document in the courts. The
contract should include mechanisms for ensuring that the contractor will provide services
as agreed. However, large firms should plan for unforeseen circumstances and legal costs
for contractual relationships in which the contractor fails to deliver the agreed-upon
products and services.

 Interview with the project manager

We visited the PROTASCO DEVELOPMENT SDN BHD Our interview was with Azhar
Abdul Aziz (the contracting counselor and the project manager of De-Centrum) about
the types of contracts that are in used in Malaysia and we concentrated about the contract
that they used in De Centrum. Mr Azhar Abdul Aziz provided sufficient information
about the type of contracting used in De Centrum project and answered our questions
about the contract.

Q1: what is the type of construction contract did they choose to contract the
project and why?
Mr. Azhar Abdul Aziz: it is management contract; we chose this for the following
reasons
1- Our project require this type of projects because it is very complicated
2- Fast in doing the work
3- Easy to deal with

Q2- What are the criteria that you look into in choosing the type of contract?
Mr Azhar Abdul Aziz:

The appropriateness for providing an adequate incentive for efficient

performance by the contractor

The ability to introduce changes

The allocation of risks

The start and completion date of the project

Q3- What is the advantages and disadvantages of this types of construction

contract?
Advantages:
Responsibility, Contract Management Company handles the day-to-day details of
the company, leaving time to focus on the big picture.

 Continuity, while managers may come and go, leaving you without a consistent
team in place to run your operations, a management contract firm can change the
players without affecting the continuity of your business model.

Lower Costs, Contract management helps us lower our business

costs, whether they relate to producing goods and services or running
ancillary business operations.
Easy to deal with
Disadvantages:
1- Misalignment between the owner and the individual contractors
The owner is primarily concerned with the delivery of the project as a whole
where as contractors only focus on the completion of the work they are paid for.
They have no further interest in the project once their service has been completed.

2- Misalignment between contractors

Traditional contracting structures often lead to misalignment between individual
contractors because each contractor has the financial interest in its own
performance only. They do not see any benefits in working proactively to
improve the efficiency of the project as a whole

Q-4 what are the challenges that you face and the appropriate solutions?
The most critical problem in traditional contract as visualized in traditional contract
when there are changes in design or specification of material, construction work on that
part cannot proceed. It is because of the nature in the traditional contract itself where it
promotes fragmentation in contracting. Any changes in construction work has to be
approved by parties involved in the construction and these processes consume took a lot

of time and may stop the construction work.

This situation will delay the project

delivery date and increase the construction cost.

A problem if combining the architect and civil engineers drawing
The lowest bid does not ensure quality as there may be error during the estimating
process. Error in the estimating process will affect the quality of work as contractors will
use

low

quality

material

that

will

lead

to

the

inequality

work.

The appropriate solution is to use software in estimating and other working programs.

5 Whats your recommendation?

My recommendation is to use traditional construction contract because you have
the freedom to choose the contractor that you want and the budget that is cheaper by
comparing to Deal Package you dont have the freedom to choose the contractor after the
designing because he is the one who keep the drawing made by his counselor and the
budget higher because he is the one who planned the project.

7. Conclusion
From those findings, we found that the management contract is a good choice.
Management contract is popular because of it is services it over to. Management contract
is considered as a good contract compared to other contracts. However, contractors who
used this type of contract said that there are also weaknesses in this type of contract. But
its weakness can be overcome by trying to solve it disadvantages. However, this study
has achieved its aims and objectives of studying the problem in management contract,
knowledge of the practitioners on relational contract.

Reference

Rashid K, 2002, Construction procurement in Malaysia

http://www.ehow.com/about_5554396_disadvantages-contract-managemen
http://www.slideshare.net/alejandratovar2/management-contracts-17692426
http://www.designingbuildings.co.uk/wiki/Management_contractor