Sei sulla pagina 1di 4

Question 18

Discuss the factors which the civil engineer should take into account when
advising a client as to which type of contract would be appropriate for a
particular project.

Contract strategy should be the first consideration when a client wishes to procure a
construction project, and there are various contract strategies available. The contract type
should be chosen to suit the clients objectives, primarily relating to risk, cost, time and
quality. Secondary objectives then follow which typically include the financing of the project,
the level of control that the client wants and the flexibility of the contract to incorporate
change. In this essay, I will discuss these factors, and go on to detail the forms of contract
that may be adopted for construction work.
The choice of contract strategy should be the first decision when planning construction work,
even before any design takes place. Indeed, the procurement of design and construction
should be given equal thought. There are two main options available in order to engage a
designer: traditional, or design and build. The traditional approach involves the client engaging
a designer, under a separate design agreement. By following this route, the client can exercise
reasonable control over the design since any additional construction costs due to his
requirements do not affect the design agreement.
The alternative is to adopt a design and build contract. This is suited to the client who does
not have the resources to manage separate design and construction contracts, and gives the
client a single point of contact. It also gives the client single point liability should any
problems arise. However, this approach allows the client little scope to influence the design
development. It is therefore important, with design and build contracts, that the client fully
specifies his requirements. The recent Construction Industry Board Report, Briefing the
team, gives the client some advice in this regard.
A major function of a construction contract is that it designates how risk is to be apportioned
between the parties. It is generally recognised that a particular risk should be allocated to
the party who can control the events leading to that risk being realised, and who can manage
and accept the risk should it occur. The client should think carefully about the level of risk
that he is prepared to accept, and the risks that he can sensibly transfer onto the Contractor.
With a cost-reimbursement contract, the client pays a contractor his costs in performing
work, plus an allowance for overheads and profit. In this type of arrangement, the client
carries nearly all the risk. With a lump sum agreement, however, the contractor is paid a fixed
price for performing the work. The contractor carries the majority of risk associated with
the work, for example the availability of resources, delays to the work, variations in required
quantities and cost fluctuations.
Under a re-measurement contract, such as the Institution of Civil Engineers (ICE) 6 th Edition
Conditions of Contract, the Contractor provides rates against items in the Bill of Quantities.
As the work proceeds, the actual quantity of work done is measured, and the Contractor is
paid accordingly. In this manner, the risk of increased quantities is transferred onto the
client. In practice, a re-measurement contract tends to allocate risks somewhere between the
extremes of cost-plus and lump sum agreements. It is important that the client understands
the difference between the Tender Price and the Contract Sum under the ICE 6 th Edition. The
Tender Price is what the Contractor submits at tender; the Contract Sum is the final cost of
the works derived from the actual quantities together with the costs of claims and variations.

Andy Alder, ICE Question 18

Page 1 of 4

The allocation of risk is determined by the conditions written into the contract, by stating
when the Contractor can claim for additional payment. For example, under Clause 12 of the
ICE 6th Edition the Contractor is entitled to additional costs due to ground conditions that
could not be foreseen at time of tender. This condition was written into the FIDIC Contract
under which the El Salaam Syphon was built. When the Contractor experienced delays due to
unforeseen boulders under the Suez Canal, he was paid his extra costs and granted an
extension of time for completion. Conversely, there was no such clause included in
construction contracts on the Kuala Lumpur LRT works. Therefore, when a particular
Contractor was delayed by several months as result of unexpected limestone, he had to accept
the consequences.
The client needs to assess how important it is that costs are known at the outset of the
project. If this one of the clients objectives, then a lump sum contract may be suitable. With
this arrangement, the Contractor adopts more risk as previously mentioned, and therefore
tender prices are higher. However, the client will save money since the administration
required for works under a lump sum agreement are significantly less than with other forms.
On the other hand, with a cost-reimbursement contract the client only pays for the work that
is done. The contractor is accepting less of the risks, and his margins are therefore lower.
Should the risks not materialise, the works will be cheaper for the client. This may therefore
be suitable in well-understood, low risk situations. There are two major drawbacks with the
cost-reimbursement route for procurement: the client does not have much idea of the cost at
the outset, and the contractor has no incentive to work efficiently. The use of a target-cost
contract, where a target cost is set and the contractor is given a higher profit if costs are
less than the target, addresses both of these issues. Partnering is a natural progression of
cost-based contracts, such as cost-reimbursement and target cost.
It may be that the client has a wish to complete the works in the minimum time. In this
situation, he will probably require a contract where the construction can start before the
design is compete. While this can be accommodated by most contracts, the design and build
and cost-reimbursement forms of contract are most suited. All forms of contract can
incorporate a time-related incentive, where the contractor is paid more for earlier completion.
For projects where a high level of quality is required, or where the client wants some degree
of control over design and construction, the choice of strategy is very important. With both
design and build and lump sum contracts, the clients control over quality is limited. In
particular, if a contractor is losing money in carrying out works for a fixed price, there is
little incentive for a high quality to be achieved. Re-measurement contracts give the client a
reasonable level of control, by the Resident Engineer only certifying for payment works that
meet the specification. The use of a cost-reimbursement or target price contract provides
and requires a significant involvement from the client.
The chosen contract type should allow the client to include changes that are anticipated, but
cannot be defined, at time of tender. A lump sum contract does not give much scope for
change, and gives little information to allow changes to be valued. A cost-reimbursement
contract gives the most flexibility, and since the costs of the work are known through openbook accounting, makes it easy to price changes. Similarly, a target-cost contract also allows
flexibility, by varying the target. Re-measurement contracts allow some scope for changes, by
issuing variations, and give a basis for valuing these. A drawback with these is that new work
cannot be easily priced.

Andy Alder, ICE Question 18

Page 2 of 4

The valuation of variations is a source of dispute within construction contracts. In his review
of industry practice, Constructing the Team, Sir Michael Latham recommended that
potential variations are priced prior to the contract being signed. In this manner, variations
can be implemented without extensive and costly arguments regarding their value.
There are various Conditions of Contract that are used for construction works. Standard
forms should be used, since they are widely understood and the interpretation of the contract
by the courts is known. The majority of civil engineering work is undertaken as a remeasurement contract, using the ICE 5 th or 6th Edition Conditions of Contract. Design and build
contracts could be undertaken using the ICE Design and Construct Conditions of Contract,
which are designed to be used as a lump sum agreement.
A recent development is the Engineering and Construction Contract (ECC). This includes
several options so that the various contract strategies discussed above can be adopted. The
transfer of design responsibility onto the contractor can be accommodated. By presenting the
choice of strategy, the client is forced to consider which would best suit the project. The ECC
is designed to be much less adversarial than the other standard forms, with clauses requiring
the co-operation of all parties. In particular parties are required to pre-warn each other of
potential delays or compensation events, such as unforeseen ground conditions, and must work
together towards the joint resolution of problems.
The ECC includes adjudication for the quick resolution of disputes, as is now required by
Housing, Grants, Construction and Regeneration Act. Another requirement of this legislation is
that Contracts must include a mechanism to determine when payment is due.

Other considerations when choosing the form of contract are the location and size of the
works. The FIDIC Conditions of Contract have been designed for use overseas, although the
ECC is written in a simple manner which makes for easy interpretation, and the Contract Data
allows for language and law other than English. For smaller or less complex works the ICE
Minor Works Contract and the Engineering and Construction Short Contract, which are
simplified versions of the main contracts, are available.
To conclude, there are various contract strategies available to the client, and he should adopt
that which best suits his objectives. A fundamental consideration is risk, and the effective
allocation of risk between the parties. Other primary factors include cost, the required
quality and level of control over the works, and the anticipated time for completion. When
selecting the form of contract, there are also many choices. The current trend within the
industry is to adopt the Engineering and Construction Contract. It allows flexibility in the
choice of contract strategy, and aims to foster relationships and to avoid disputes.

1650 words, if paragraphs in italics are deleted, it comes to 1500 words.

Andy Alder, ICE Question 18

Page 3 of 4

Question 18

Discuss the factors which the civil engineer should take into account when
advising a client as to which type of contract would be appropriate for a
particular project.

Essay Plan
Introduction
Contract strategy should be the first consideration.
The contract type should be chosen to best suit the clients objectives, primarily
relating to risk, cost, time and quality.
Secondary objectives then follow which typically include the financing of the
project, the level of control that the client wants and the flexibility of the
contract to incorporate change.
Body

Procurement of design and construction should be given equal thought: traditional,


and design and build.
Risk and its allocation: contract types.
Contract clauses apportioning risk.
Costs: costs to be paid, influence of risk, incentives. Target-cost.
Time: contract types that allow early completion.
Quality and level of control: NOT design and build.
Flexibility of the contract to incorporate and value changes.
Pre-priced variations.
Forms of Contract: ICE and ECC.
Benefits of ECC
Housing, Grants, Construction and Regeneration Act.
Overseas and Minor Works.

Conclusion
Various contract strategies available to the client, and he should adopt that which
best suits his objectives.
A fundamental consideration is risk; other primary factors include cost, the
required quality and level of control over the works, and the anticipated time for
completion.
Current trend within the industry is to adopt the Engineering and Construction
Contract. It allows flexibility in the choice of contract strategy, and aims to foster
relationships and to avoid disputes.

References
1. Engineering Project Management, N J Smith, Blackwell Science
2. Civil Engineering Construction Contracts, Dr M OReilly, Thomas Telford
3. Constructing the Team, Sir Michael Latham, HMSO
4. Briefing the Team, Construction Industry Board
5. Engineering construction risks, Peter Thompson and John Perry, Thomas Telford

Andy Alder, ICE Question 18

Page 4 of 4

Potrebbero piacerti anche