Contract

and
Contract Management

Dr.P.R.Patel
Professor
Civil Engineering Department
Nirma University
parul.patel@nirmauni.ac.in
02717-241911 (Ext. 214)

11/27/2016 Dr. P. R. Patel, Nirma University 1

 Objectives of this Chapter
What is contract?
Essentials of valid contract
Types of construction contracts
Factors affecting choice of contracts
Termination of contracts
Liquidated damages and retention money
 References
Jagjit Singh
Gurucharan singh
Rangwala
B S Patil
A S Kotadia
Birde

11/27/2016 Dr. P. R. Patel, Nirma University 3

 Ordinary Meaning of Contract
Contract

All agreements made by a person are contract

11/27/2016 Dr. P. R. Patel, Nirma University 4

 Definition of Contract by ICA
Only those agreements are contract which are
enforceable as such, having been made by free
consent of parties, by person competent to
contract, for lawful consideration to which a
contract should be in writing, attested by
witness and registered according to law of
registration in force at the time

11/27/2016 Dr. P. R. Patel, Nirma University 5

 Contract
Accepted definition as per

Indian Contract Act 1872

An agreement enforceable in Law

11/27/2016 Dr. P. R. Patel, Nirma University 6

 An Agreement entered into by two
competent parties, under the terms of which
one party agrees to perform a given job for
which the other party agrees to pay

Mutual Agreement between two parties that

something shall be done, an agreement
enforceable at law

11/27/2016 Dr. P. R. Patel, Nirma University 7

 Essential of a Valid Contract
Indian Contract Act, Section 10,11 & 68
1. There must be a Proper Proposal and its
acceptance/object must be lawful
2. Parties to the contract should be competent to
contract
3. Parties to the agreement must give their free
consent
4. There must be a lawful consideration/ valid
Consideration

11/27/2016 Dr. P. R. Patel, Nirma University 8

5. The subject matter of the agreement must
be legal and definite/ contract condition
according to law
6. The agreement must comply with the
provision of law requiring it to be in writing or
attested or registered
7. The agreement must not be expressly
declared to be void

11/27/2016 Dr. P. R. Patel, Nirma University 9

 1. Proper Offer
Indian Contract act defines

An Offer must be something which invites,

and is intended by the offeror to invite,
Acceptance

11/27/2016 Dr. P. R. Patel, Nirma University 10

 An offer may be defined as the signification
by one person of willingness to contract with
another on certain terms
Offer is conditional promise
Offer is communication of one person
(offeror) to another person (offeree) of an
intent to enter into a mutual agreement
based on definite and certain terms
Offer may be revoked before acceptance by
offeree
Contract offer should be free from ambiguity
11/27/2016 Dr. P. R. Patel, Nirma University 11
 Acceptance
When the person to whom the proposal is
made signifies his assent thereto, the
proposal is said to be accepted

A proposal , when accepted , become a

promise

11/27/2016 Dr. P. R. Patel, Nirma University 12

 In order to constitute an agreement

There must be proposal

Acceptance of proposal

For such agreement to become legally binding

Results in a valid contract

11/27/2016 Dr. P. R. Patel, Nirma University 13

2.Parties to the contract is competent
At least two parties to an agreement each of
whom must be legally capable of playing his
intended part
Law can not enforce the agreement on
someone who does not have the legal
capacity to enter into an agreement
The contract done between unlawful or
unauthorized person is legally invalid (signing
officers from owner side and person signing on behalf of
contractor)

11/27/2016 Dr. P. R. Patel, Nirma University 14

 Infancy (Indian Majority Act, 1875)
minor, minors contract is VOID, not enforceable
by law (majority is achieved at the age of 18
years)
Lunacy (Mental illness)
Unsound mind of person, not capable of
understanding of subject matter
Drunkenness
Any contract made by intoxicated person is invalid
Contracts of a corporation
Nature of corporation & terms of its incorporation impose
some restrictions upon its contractual powers
11/27/2016 Dr. P. R. Patel, Nirma University 15
 Person is not disqualified from contracting by
any law to which he is subjected to.

11/27/2016 Dr. P. R. Patel, Nirma University 16

 3. Free Consent
Two or more persons are said to consent when they
agree upon the same thing in the same sense. (All
terms and conditions of the contract should be clearly
understood by both the parties, if not understood
well, may lead to litigation)
Consent is said to be free when it is not caused by
force or undue influence or fraud or
misrepresentation or mistake or threatening
The defrauded party can avoid the contract and can
also claim for damages
One of the party is not dominating the other party
11/27/2016 Dr. P. R. Patel, Nirma University 17
 4. Valid Consideration
According to law the contract work can be
done totally free of charge
Valid consideration in the legal sense that can
be defined as the act or a promise to do
something by a party in return of money or
promise or giving interests by the other party
In civil engineering contracts, the
consideration for the contractors promise to
carry out the work is usually the owners
promise to pay the price
11/27/2016 Dr. P. R. Patel, Nirma University 18
 Consideration may not be adequate or a full
return of promise, but it must be competent,
real and should not be illegal, ambiguous,
impossible or uncertain.
Impossible promises or act are not
entertained by court because there in no
valid consideration

11/27/2016 Dr. P. R. Patel, Nirma University 19

 As per Indian Contract Act, the agreement
without any consideration may be valid in the
following circumstances which are based on
the principles of equity

Agreement should be in writing

It should be registered in registrars office
Party should be in near relation with each other
It should be done due to natural love and
affection between party

11/27/2016 Dr. P. R. Patel, Nirma University 20

 As per Indian Contract Act 1872, the consideration, given in
exchange for a promise, by the other party may be one of the
following
Exchange of promises : This is often used in bilateral
contracts; it is valid. Exchange of promises is the most
common form of consideration
A promise for an act : This is often used for an unilateral
contracts. A promise in exchange for an act is
consideration itself.
Forbearance means refraining from an action. The promise
to act or the forbearance from acting must be given in
exchange for the promise or consent of something to
which the forbearer has legal right
Detriment: Simply put means surrendering a legal right
or the assumption of legal burden
4. contract condition according to law
All contract condition should be according to law,
because the court can force only those conditions
which are according to the established public policy
Contract for construction of building without
approval of local authority/violation of municipal
regulation
Contract for Construction of infrastructure
without acquisition of land
Contract done by fraud, crime, by pressure,
undue influence or for pure gambling

11/27/2016 Dr. P. R. Patel, Nirma University 22

5. a proper proposal and its acceptance
In engineering contracts,

Both proposal and acceptance are generally

expressed and communicated in writing

11/27/2016 Dr. P. R. Patel, Nirma University 23

 6. Contract in writing, signed by
both the parties
Signed by authorised person from both the
parties
Exact name/legal titles of both the parties
must be indicated in signature/seal required
Sign followed by office addresses

11/27/2016 Dr. P. R. Patel, Nirma University 24

 Types of Construction Contracts
Two broad categories
Price given in advance contracts (price based
contract)
Cost reimbursement contracts (cost-based
contract)

11/27/2016 Dr. P. R. Patel, Nirma University 25

 Factors affecting choice of contracts
The appropriateness for providing an
adequate incentive for efficient performance
by the contractor
The ability to introduce changes
The allocation of risk
The start and completion date of the project

11/27/2016 Dr. P. R. Patel, Nirma University 26

 Types of contracts
Price Based Contracts
Lump-sum Contract
Unit price Contract/Item Rate
Reimbursement contracts
Cost plus fixed fee Contract
Cost plus fixed Percentage Contract
Cost plus fixed sum with profit sharing
Cost plus variable Percentage Contract
Cost plus an incentive /penalty Fee Contract
Piece work Contract
Labour Contract
Turn-Key Contract /Package deal
Rate Contracts

11/27/2016 Dr. P. R. Patel, Nirma University 27

 Lump-sum Contract
Contractor undertakes the construction work as per
drawing, specification, design supplied to them by owner for
some fixed amount of money
Single tender price is given for completion of a specified
work to the satisfaction of client by a certain date
Payment is on the basis of progress of work
Up to plinth
Up to lintel
Up to 1st roof level
Payment of items of work involved for any additions and
alterations not covered by the original work, is done
according to the departmental SOR
Final Payment is done without detailed measurement of
work, quality of work will be checked with original plan,
design and specification
11/27/2016 Dr. P. R. Patel, Nirma University 28
Adopted for construction work
Where number of items are limited
Can be accurately and completely described at the
time of bidding such as residential building
When limited variation is needed
When level of risk is very low and quantifiable
When client does not wish to be involved in the
management of his project
septic tank, compound wall, watchman room, man
hole, soak pits, overhead tank, similar quarters of
identical tenements of housing society, fabrication of
equipment, electric piping, insulation system,
demolition of existing structures, etc.
11/27/2016 Dr. P. R. Patel, Nirma University 29
 Quantities of items are not provided. Contractor is
responsible to prepare BOQ by referring
specification, drawing
He is responsible for the accuracy of estimated
quantities
All risk on head of contractor
It is good for owners point of view, he knows the
total cost of project in advance

11/27/2016 Dr. P. R. Patel, Nirma University 30

Advantages of Lump-sum Contract
Because of competition, contractor is ready to
complete work at low profit margin
Early completion of work to reduce overhead
Total cost of project is known, better planning and
execution of work
owner can manage required finance
No need to keep the record of items except addition
and alteration
Contractor has more incentive to reduce his cost to
increase the profit

11/27/2016 Dr. P. R. Patel, Nirma University 31

Disadvantages
Contractor tries to get maximum profit/ quality of work may
suffer
Difficult to adjust addition and alteration
If plans and specification are not ready in advance/clear in
beginning, contractor may quotes higher price, increase the
project cost
More possibilities of conflicts between contractor and owner
in case of alteration and addition, uncertainties, act of GOD
High risk on contractor side, competent contractor may not
be ready to bid

11/27/2016 Dr. P. R. Patel, Nirma University 32

 Unit-Price/Item Rate Contract
Contractor under takes work on item rate basis
Approximate quantity of all items are shown in BOQ
(checked by engineer, Architect)
Contractor quotes his price against each item and
arrives at the final total amount of work
Contractor may quotes (%) above or below the price
given in SOR
Payment is done on the basis of quantities of items
actually done and their respective rates (BOQ)
quantities of items are worked out by detailed
measurement on site

11/27/2016 Dr. P. R. Patel, Nirma University 33

 It is useful on the project where the nature of
work is well defined but quantities of items
are not exactly known for in advance
Suitable for highway, dams, airports etc.
Quality of work is better
Most common types of contract system
Re-determination of unit prices when
substantial quantity deviations occur is
stipulated in contract condition
Advantages
Addition and alteration can be accommodate easily at
any stage of work
Contractor gets payment on the basis of actual
quantity of item done, hence economical no excess
payment required
Rates are according to item wise, no need to worry
about uncertainties in the plan and specification (low
risk on contractor part)
Work can be started immediately after accepting
contract without drawing and specification
Saving the heavy cost of preparing many bills of
quantities by contractor
Disadvantages
Difficult to find out final cost of Project
Owner has to bear the risk
Contractor may charge higher for the items,
which are not mentioned in BOQ
Sometime difficult to classify work (soil
ordinary/rocky), contractor would like to
change his price
 Cost Reimbursement Contracts
Contractor will be reimbursed for all actual
costs plus an agreed fee to cover his services
(Overhead + Profit)
Contractor must keep his all records and
accounts available for inspection by the client
or by third neutral party

11/27/2016 Dr. P. R. Patel, Nirma University 37

 Suitability of contract
When requirement of client is vague
When it is desirable for design to proceed
concurrently with construction
For emergency project, repairs, maintenance
work and alterations
For project with unknown technologies or
major changes
Where contractor possesses a special ability
When client wishes to be involved in contract
management
11/27/2016 Dr. P. R. Patel, Nirma University 38
Things to be negotiated before entering to
contract
Subcontract-letting
Determination and payment of fees
Accounting methods
Overhead ( office + site)

11/27/2016 Dr. P. R. Patel, Nirma University 39

 Reimbursable Cost
Requirement for Success
Competent & trustworthy contractor
Must be able to select contractor and not simply take
low bidder
Close quality supervision by owner
Careful cost control by owner
Detailed definition of work items to be
performed
Detailed payment terms covered by both lump
sum and all inclusive rates

11/27/2016 Dr. P. R. Patel, Nirma University 40

 Reimbursable Contract
Advantages
Flexibility in designing with changes
Important when dealing with ill-defined work
scope
Useful if anticipate delays and disruptions
Owner can exercise control of all aspects of project
Construction work can start without waiting for
whole set of drawings and specification
More flexibility for owner to make changes as work
progresses
11/27/2016 Dr. P. R. Patel, Nirma University 41
 Reimbursable Contract
Disadvantages
Difficult to evaluate proposals
No intensive for contractor to finish early on time
No intensive for contractor to control the cost
Contractor can assign second best people, use a
lot of subs or use job for training purpose
Owner carries most of risk of project
Difficult to predict cost and distribution of it,
which may cause financial problem to owner

11/27/2016 Dr. P. R. Patel, Nirma University 42

Types of Reimbursable Contracts

Cost plus fixed Percentage Contract

Cost plus fixed fee Contract

Cost plus fixed sum with profit sharing

Cost plus variable Percentage Contract

Cost plus an incentive /penalty Fee

Contract

11/27/2016 Dr. P. R. Patel, Nirma University 43

 Cost Plus Fixed Percentage
Contractor is reimbursed for all cost with a fixed
% age of cost to cover his services
Projects/site overheads may be covered by the %
age or computed as one of the costs
If contractor is efficient in utilization of resources,
client will be benefited cost will be less
No incentive for contractor to be efficient
Minimum efficiency maximizes the profit
Owner exercises tight cost control

11/27/2016 Dr. P. R. Patel, Nirma University 44

 Cost plus fixed fee
Cost of construction + fixed fee
Fee not fluctuate with actual cost of project
work must be fairly well defined by owner, owners
risk
No incentive for contractor to inflate cost
Incentive for contractor to complete work quickly
Major variation creates problem, fee must
renegotiate
Fairly detailed description of work must be made in
advance
Useful for very big projects like power plant, refinery
11/27/2016 Dr. P. R. Patel, Nirma University 45
 Cost plus fixed sum with profit
sharing
Contractor paid cost plus fixed fee
Further agreement made to share profit if
the economy obtained in the estimated cost
of the work
It results in the profit of owner as well as to
contractor

11/27/2016 Dr. P. R. Patel, Nirma University 46

Cost plus variable percentage Contract
Variation of profit sharing approach
Which provides bonus for under run project and
penalty for over run project to contractor
Amount of fee increases as the contractor falls
below the target
Amount of fee decreases as the contractor over
runs the target value
Fees to be paid to the contractor varies inversely
with the actual cost to the contractor

11/27/2016 Dr. P. R. Patel, Nirma University 47

 Fee = R (2T-A)
R = base percentage
T = targeted value of project
A= Actual cost of construction

11/27/2016 Dr. P. R. Patel, Nirma University 48

Cost plus an incentive/Penalty fee contract
If work completed within scheduled time
Contractor paid actual cost of construction +
fixed sum + Bonus/(- Penalty) per day

11/27/2016 Dr. P. R. Patel, Nirma University 49

 Piece Work Agreement
For urgent Small work not costing much,
without inviting tender
Executed on work order basis
Not a contract in a true sense
Security deposit, penalty clause not applicable
Can be terminated by either party at any time
contract operated by sub divisional officer in
their jurisdiction for unimportant work
Inferior quality work because of inferior
material
11/27/2016 Dr. P. R. Patel, Nirma University 50
 Labour Contract
Tenderer undertakes the contracts for labour
portion for each item of work
Construction material arranged/supplied by
owner at site
Labour contractor engages labours and gets
work according to specification
Payment to contractor on the basis of actual
quantity of work measured at site
Contractor uses own tools for working.

11/27/2016 Dr. P. R. Patel, Nirma University 51

 Labour Contract
Plants, machineries, scaffolding, centering &
shuttering provided by owner as per
condition of contracts
Condition of contracts/BOQ/Rates ready
before agreement
Contractor use material haphazardly, control
from owner is necessary
Good quality work
Not adopted for government department, but
adopted in private building
11/27/2016 Dr. P. R. Patel, Nirma University 52
 Turn-Key Contract /Package deal
l want to deal with only
Owner envisaging construction
one party for all the services both engineering and
construction
Owner gives broad out line requirement to contractors
contractors prepares own design alternatives, submit
the owner with estimated cost on a lump sum basis
Owner decides the design and work given to contractor
It is suitable when project demands special
consideration
Planning, designing, execution is done by contractor
Not suitable for civil engineering work, not popular
11/27/2016 Dr. P. R. Patel, Nirma University 53
 Material Supply Contract
Supply of material to the department
Includes all material construction, sanitary,
water supply, electrical, mechanical
Some times tools and plants
Supplier expect immediate payment
Supplier quotes their lowest rates inclusive
of all taxies, duties, carriage and freight

11/27/2016 Dr. P. R. Patel, Nirma University 54

 Rate Contracts
In order to supply some manufactured articles
Pipe, A.C.sheet, C.I. specials, different types of
office furniture etc.
Head of department invites tender and fix rates of
such material and makes rate contract with
manufacturer or supplier to supply articles or
material for certain period of times
It is popularly known as D.G.S. and D rate contract
(D.G.S. Director General of Supply and Disposal
of Central Government)

11/27/2016 Dr. P. R. Patel, Nirma University 55

 In department some officers authorised to
purchase/place an orders directly against this
contracts through prescribed form
They will endorse copies of such orders to the
controller of accounts, department of supply and
director of inspection
98% payment done by controller of accounts
department of supply on proof of inspection and
dispatch.
2% after receipt of the goods in good condition
made by the department or by controller of account
after receiving the endorsement from the
department concern
11/27/2016 Dr. P. R. Patel, Nirma University 56
 Negotiated Contract
Contract awarded on the basis of negotiation
No open competition
Negotiation done with competitive contractor
only
Can not be used for public work
In case of emergency and under special
circumstances, when time of completion is a
major consideration
Negotiated contractor can be given on special
law
11/27/2016 Dr. P. R. Patel, Nirma University 57
 Termination of Contracts
By agreement
By breach
By impossibility to complete
By Bankruptcy
By performance (Completion of work)
Termination by the provisions of the law

11/27/2016 Dr. P. R. Patel, Nirma University 58

 What is Liquidated Damages ?

11/27/2016 Dr. P. R. Patel, Nirma University 59

 Liquidated Damages
Though best practice followed for construction
methods and use Network Analysis (CPM/PERT)
Most of the construction projects overrun original
contract period.
An employer will not be able to use project intended
for
An employer has to incur additional costs or suffer a
delay in receiving income from the project.
For the contractor, delay to the completion of the
project may result in a liability for delay damages to
the employer.
11/27/2016 Dr. P. R. Patel, Nirma University 60
 As a result of this danger, most building contracts
fix the damages that will be payable to the
employer for late completion in advance (not more
than 10% of total cost)
These are referred to as Liquidated Damages' (LDs).
Without a fixed completion date, LDs will not be
chargeable.
For this reason, construction contracts will include a
fixed completion date
Payment/deduction of such damages shall not
relieve the contractor from his obligations and
liabilities under contracts
11/27/2016 Dr. P. R. Patel, Nirma University 61
 Time limit may be extended through
extension of time provisions.

Extension of time From a contractor's

perspective:
they cover delays that are neither the fault
nor the responsibility of the contractor;

a contractor will not normally be liable to pay

damages for delay if completion time is
validly extended.
11/27/2016 Dr. P. R. Patel, Nirma University 62
 Extension of time from an employer's
perspective, extensions of time:

provide certainty as to how the completion

date is to be fixed, and under what
circumstances it may be adjusted;
To protect a right to claim LDs for delay in
relevant circumstances.

11/27/2016 Dr. P. R. Patel, Nirma University 63

 Types of LD provision
LD provisions are usually expressed as a
certain sum payable for each day, or week or
part of week by which practical completion is
delayed.
A straight lump sum
A fixed percentage of the contract sum
A maximum rate, which reduces as part or
parts of the project become available for
occupation and use.

11/27/2016 Dr. P. R. Patel, Nirma University 64

 Genuine Pre-Estimate of loss
Client should able to show LD estimated in contract is a
realistic estimate of likely loss to Client, if contractor is
late in achieving practical completion.
The Clients chances of defeating an argument from the
Contractor that the LDs clause constitutes a penalty are
considerably improved if the Client show how he arrived
at the figure in question, with calculations, projections
etc, taking into account such factors as loss of income
and increased financing costs.
Estimate needs to reflect the position at the time of
contract, not at the time when the claim arises.

11/27/2016 Dr. P. R. Patel, Nirma University 65

 Retention Money
RM is Money of contractor retained by department
If any claim arises out of or under contract against
the contractor
Authority entitled to withhold some/whole security
deposit till finalization/adjustment of such claim
If security deposit amount is not enough to recover
claim, department is entitled to with hold the
amount from any some found payable to the
contractor from the department

11/27/2016 Dr. P. R. Patel, Nirma University 66

 Contract Documents
Title Page : Name of work, contract agreement
number, estimated amount
Index : content and page numbers
Notice Inviting Tender
Instructions to Tenderer
Tender Form
Letter Acceptance
Any letter given by contractor with tender in
clarification of rate or terms
11/27/2016 Dr. P. R. Patel, Nirma University 67
 BOQ
SOR
General Specification
Detailed Specification
Drawings
Conditions of contract
Special Conditions of Contract

11/27/2016 Dr. P. R. Patel, Nirma University 68

 Labour Safety Rules/compensation/minimum
wage
Protection of health and sanitary agreement
for workers
Contractors labour regulations/ appendices
Forms for
Performance Bank Guarantee
Mobilization advance
Extension of time Part I, II, III
Guarantee Bond for Specific work (anti-termite
treatment, water proofing etc.)

11/27/2016 Dr. P. R. Patel, Nirma University 69

 Conditions of Contract
Condition/Clauses pertaining to the work as a
whole are written in a separate document
Condition of contract are also known as General
Provision
Mainly to avoid disputes between parties
prepared in the legal phraseology
It is based on nature of work
Government has own standard condition of
contract in printed form

11/27/2016 Dr. P. R. Patel, Nirma University 70

 Types of COC
General Condition ( Applicable to all construction
work) - GCC
Special Condition (nature of work, regulating taxes,
royalties, labour amenities, compensation to labour etc)

11/27/2016 Dr. P. R. Patel, Nirma University 71

 FIDIC
Federation Internationale Des Ingenieurs
Conseil (International Federation of Consulting
Engineers)

11/27/2016 Dr. P. R. Patel, Nirma University 72

 Need and Principle of FIDIC
Government conventional contract system in
India is one-sided
Globalization of economy and many
multinational companies contracting for
various infrastructure and development
project
Conventional system is not suitable for global
contract
FIDIC is well balanced and equitable form and
clearly define the role and responsibilities
11/27/2016 Dr. P. R. Patel, Nirma University 73