1

SOME ASPECTS OF
CONTRACT
ADMINISTRATION

By

M.Sridhar
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SOME ASPECTS OF CONTRACT ADMINISTRATION

1.0 Introduction:
As some one rightly said the first two decades of the new millennium in India,
belong to Civil Engineers because of the growth in spurring industrial activity and all
around infrastructure development. All such construction activities are undertaken
through contracts whether it is a Government Organization or a Private Commercial
Enterprise. There are various types of contracts like Item rate contracts, percentage rate,
Lump sum or Turn key, EPC contracts and cost plus contracts.

All participants responsible for project executions - Owners, Contractors,

Consultants etc. have realized the need and necessity of efficient administration of
‘Contracts’ entered in to, for execution of project. This only will ensure timely execution
of projects by which litigations will be minimal, slippages in schedules, time and cost over
runs can be curtailed. It is disheartening to note that as per a Survey made, in India, in
construction industry, the amount locked up in litigations at various stages is around
Rs.50, 000.00 Crores. The leading construction houses with swelling order books and
almost doubling of operations by way of new contracts each year have recognized the
‘Contract administration ‘as a new and separate discipline distinct from Project
Management.

The Contract administration currently is viewed as a profession based on codified

knowledge rather than a skill. In olden days it emanated from good practices and
approach followed by some successful professionals and veteran field engineers. More
precisely this discipline is a blend of technical and legal subjects.

Some do synonimically use the word ‘contract management’ for ‘contract

administration’. Contract Management has a close relation to Project Management and
virtually refers the same. But for administering of the contract understanding of some
legal principles is required.

Contract is a set of promises made by parties with legally binding obligations,

duties with conferring rights. In true sense the contract can only be ‘administered’ and
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which can’t be ‘managed’. One can simply refer the meaning and difference in functions
of ‘Manager’ and ‘Administrator’ for this aspect.

Now let us look at some legal and technical aspects of this subject in subsequent topics.

2.0 Contract Act:

All the contracts are governed by law of contracts and will be within the preview of
Indian Contract 1872. There is no provision in the law to state that the contract must be in
writing except that the Arbitration agreement, if exists in the contract. Law specifically
states that the Arbitration Agreement must be in writing as per the Arbitration Act.

The term ‘Contract’ is derived from latin word ‘Contractum’ which means drawn
together. Thus a contract is defined as “ an agreement creating and defining obligations
between the parties”.

Section 2 (h) of the Indian Contract Act 1872 defines contract as “an agreement
enforceable by law is contract”.

Normally while referring the construction contract we use the terms ‘contract’ and
‘agreement’ interchangeably. But the above definition suggests that there is a subtle
difference between two.

Fundamentally an agreement is nothing but a promise or set of promises. All such

agreements are not contracts. Only those agreements which create legal obligations and
are enforceable by law are ‘Contracts’. The term ‘enforceable by ‘law’ implies that an
agreement must, fulfill certain conditions so that it is recognizable by law as a ‘Contract’.
Thus when it is a contract, then only the court can enforce it under the Contract Act.

Some of the essential conditions of a valid contract are enumerated below:

1. Minimum two parties: There must be minimum two parties for a valid contract.

2. Consensus Ad idem: This term means there must be “Identify of minds” between
parties for entering in to agreement.

This is an essential bed rock for a valid contract.

Both the parties should have clear in mind the same subject and object of the
contract. Suppose ‘A’ has two houses one at Hyderabad another at Vizag and offers
to sell his house to ‘B’. Say ‘B’ assumes that the house of ‘A’ at Vizag is for sale
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(but ‘A’ intends to sell the house at Hyderabad) and makes an agreement for
purchase of house (of course place not mentioned) then such contract is void since
there is no identify of minds between parties.

If there is a mistake or misrepresentation of facts by one of parties, while entering into an

agreement, such contracts can be proved void.

(Section 17, 20-22 of contract Act can be referred in detail)

3. Consideration: The agreement should be for a lawful consideration. Consideration may

not be always in monetary terms but ‘some thing in return’. An agreement without
consideration is void. ‘A’ enters into agreement with ‘B’ to construct his house for
Rs.10.00 Lakhs. Here the consideration of ‘A’ is Rs.10.00 Lakhs for ‘B’ it is his house.

Consideration can be present, past or future.

‘A’ made an agreement with ‘B’ for subletting part of his contract work in consideration to
form future business partnerships and joint ventures with ‘B’. This consideration is valid to
make a lawful contract since by offering some thing ‘A’ is also expecting some thing in
return, in future.

4. Free consent: The consent of the parties to the agreement must be free, given by
the free exercise of one’s will after his own judgment regarding terms and conditions.

If the consent is induced by coercion, threat, undue influence then the contract is null and
void.

(Section 15, 16 of contract act can be referred for details)

The above list of criterion for valid contracts is not exhaustive and touches those aspects
relevant to construction contracts only .
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3.0 Making of a Contract:

Normally in the process of entering into, construction contracts , the client
referred as ‘Owner’ or ‘Employer’ first invites the bids by issuing tenders which may
consist conditions, specifications, details of proposed work, drawings, data and BOQ. The
bidder based on this data, information will submit the tender with relevant particulars
quoting his price which is termed as ‘Offer’. The offer has a specific validity period, after
which it lapses.

After evaluation of bids the ‘Owner’ communicates the acceptance of offer.

Once the acceptance of offer is communicated, legally there is a binding contract arising
between the parties. Signing of agreement by parties is only a formality and part of
documentation process.

The parties may negotiate on the original offer in which case the negotiated offer is
accepted .
But, the acceptance shall be absolute, unconditional. Suppose if the owner invites the
bidder for negotiations for price reduction which is termed as ‘counter offer’ by other
party and for example the bidder keeps silent . The owner has now made a counter offer
which requires a confirmation by bidder ‘yes’ or ‘no’. In this case the original offer is no
longer valid for acceptance after such a counter offer.

Offer
Invited Bid

Owner Bidder
Owner Bidder Counter /Negotiations
Offer Offer

Confirmation
Acceptance

Acceptance
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4.0 Types of contracts:

Here the types of contracts are categorized based on mode of operation and parties
involved.

Engineer 1) FIDIC model contracts. Engineer as a

professional is vested with certain
authorities, powers and has specific
duties besides technical control, bill
certification etc.
Contractor
Owner

Presently the problems faced with FIDIC model are:

- FIDIC contract conditions are not truly followed. Most of the clauses are over
ridden with conditions of particular application or special conditions. Again such
FIDIC models or adopted FIDIC models violate basic philosophy converting them one
sided.

- Not only the true spirit of FIDIC model is lost, but with the cut & paste methods
there is poor drafting resulting in ambiguities, discrepancies creating disputes
during execution stage.

- The Engineer’s independence, authority is curtailed.

2) Owner – contractor model of contracts.

In Government Departments, Organized Private Sector

Departments where the owner has technical staff qualified.
There will be well defined rules , procedures and delegated
Owner Contractor authority in the hierarchical set up.

The owner exercises over all control himself and administers the contract.
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5.0 Important contract conditions:

Normally at field level the staff have a tendency to refer only the BOQ part for rates for
preparation of bills. At operation level for day to day of activities and progress this may
be alright and the contractual issues are dealt at higher levels.

But at senior levels and for a Project Manager , to be successful in execution , apart from
project management the skills of contract administration is imperative at all levels.
A thorough study of the entire contract documents is highly recommenced .

Following are some of the important sections / clauses in construction contracts .

1. Definition of terms : Generally the first few pages will define the terms and
terminology, parties & their roles. This is important and gives a legal meaning of
terms used like variation, deviation, approval etc.

2. Instructions to Bidders (ITB): The instructions to bidders present the information on

scope of work, qualification criterion, schedules and information to be furnished
and Security, EMD, Performance Guarantee details etc. Again this gives important
information including taxation and such data and particulars relying on which the
bidder is expected to quote his prices.

3. Conditions of contract and special conditions :

These are the general conditions of contract stipulating various terms for execution
of work through operation of contract.

Some important conditions in general pertain to the following:

Terms of payment, Interim payment certifications or R.A. Bill submissions

1. Financial aspects: Mode of recoveries for retention money, mobilization

advances terms, performance guarantee terms, secured advance on materials
etc.
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2. Time extension: Normally time is regarded as the essence of any contract. The
terms and events for granting extension of time are specified.

3. Liquidated damages: Normally stipulated as a fraction of % of contractor’s

value per week of delay subjected to a maximum limit.

4. Price variation: It is specifically mentioned whether it is a fixed price contract

or price variation (price escalation) provision exists. Generally the components
of work qualifying for variation, percentage or factors and the applicable
formulae based on consumer price indices and labour, POL indices are given.

5. Deviation limit: A deviation limit is normally stipulated + or - % of individual

quantities of items up to which the rates shall be valid.

Again there can be over all deviation limit specified on the contract value as a
whole.

6. Variations/ extra, substituted items: Terms and the rate deviation procedures,
notification of occurance of such events by contractor, submission of rate
analysis mentioned.

7. Force majure events, hinderance events are specified.

8. Dispute resolution procedures: The discrete methods steps and procedures for
dispute resolution are stated in this clause.

Normally arbitration as per Indian Arbitration and Conciliation Act, 1996

specified.

As already stated the contract need not be in writing but as per law, the
arbitration agreement, if exists, it shall be in writing. This also may specify the
terms, procedure and appointment of arbitrators.

The wording of dispute resolution, the series of discrete steps are important
and one is expected to be cautious on this.
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Again in some cases there can be a ‘finality clause’ (barring arbitration for
certain clauses treating them ‘excepted’ matters).

10. Statutory provisions: Certain provisions on applicable taxes, mandatory insurance

provisions specified.

Incorporation of statutory laws and some conditions on wages, labour & regulation,
working conditions stipulated.

Apart from these conditions of contract as a standard set of conditions in an

organization, there can be ‘special conditions of contract’ which override the GCC
and have higher precedence.

Generally Central, State, Government Construction Departments, Public Sector

Undertakings and some organized Private Departments do follow their own
standard set of contract conditions which normally followed for works contracted
by them.

Others follow such conditions of contract on a case to case basis. It is a normal

practice that the consultant / architect or engineer will draft a set of conditions
by following a FIDIC model or FIDIC with overriding conditions of particular
application.

There are a number of instances that such cut, paste method in conditions and lack
of standardization has resulted in poor drafting of contract conditions leaving scope
for errors, ambiguities.
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6.0 Contractual obligations:

During the execution phase, the contract administration is crucial for success of
implementation of project. The parties are expected to fulfill their respective contractual
obligations fully and fairly.

Thus a contract as a set of reciprocal promises, creates and defines the duties obligations
between the parties. Also it generates contractual rights. On performing the duty as on
obligation, the party will acquire a consequential right. For example the contractor has
executed the portion of work as per the terms after which be acquired a right to claim the
payment.

For performance of the work normally the owner or Employer has following obligations:
a) handing over of site
b) Supply the agreed materials in time
c) Issue of drawings
d) Decisions and approvals
e) Delver the agreed facilities
f) Timely payments as per agreed terms

The performance of the other party is obviously crippled for want of fulfillment of these
obligations.

It is imperative to go through the terms and conditions of contract carefully.

In general in construction contracts terms and time frame for releasing the payment are
specified which is the right of the contractor .

Further in contracts there will be certain terms and conditions specified for certain action
from contractors side in the event of occurrence of some events like delay, deviation,
variations etc.
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As an example the terms may be like, as follows:

1. In case of hindrance - to intimate the project-in-charge with details within seven days.

2. On occurrence of variation (extra) items beyond the scope, to intimate with in 15 days
along with rate analysis

1. Immediate intimation in case of deviation in BOQ quantities.

All these are nothing but contractual obligations to be performed, as duties, in legal
terms.

Neverthless if the intimation is not given in specified time, it is not that the claim or right
on deviation or extra item is lost. This is because the general limitation applicable by law
can’t be shortened or extended by mutual agreements.

The above time limitation may be construed as a check ensured by the client. But what is
the answer for the question - what prevented the contractor in giving such intimation, in
time, which was his duty.

So it would be appropriate to follow such conditions which are obligations. Just a two line
communication may be adequate to prove that, we have discharged our duty.

It is advisable to go through the terms of the contract in each case , thoroughly.

Such good practices if followed as matter of routine will definitely yield good results.
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7.0 Correspondence:

Correspondence is an essential part of contract administration.

Going by the literal meaning of the word (dictionary) ‘correspond’ means communicate by
exchange of letters.

For efficient site management the requirement of good correspondence is inevitable and
doesn’t need a special emphasis. From the perspective of execution of work at site
through a contract, the correspondence can be categorized in to three types based on the
purpose. The three types of correspondence are– General, Obligatory and Necessary.

General Correspondence:

The correspondence that is to inform (informative) or appraise or to communicate and

keep on record something, is general correspondence. This can be with reference to
progress, regular events at site or at times it can be directive or instructive to do or not to
do certain things.

Obligatory Correspondence:

This refers to the letters and communication exchanged as a binding or obligatory in

nature. Suppose one of the party to the contract is supposed to give a notice with in a
period specified on occurrence of a particular event, then such correspondence is
obligatory i.e., in fulfilment of a contract condition. The letter of Intent, communication
on work acceptance, issue of notices like commencement notice, completion notice,
termination notice etc., fall under this category.

Necessary Correspondence:

This is categorized as one which one party would like to keep on record with an intention
for any future reference. The party at a later date can use such communications and
correspondence as a matter of record that the other party was already intimated and has
full knowledge of the events.
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Nevertheless any correspondence whatever may be the purpose basically reduces to

writing of letters in official form and sense. We do all agree that letter writing is an art
and skill both, which partly can be inherent and the rest by practice. Again it is a myth
that for making a good correspondence one should be highly proficient in English language.
Even with simple language good correspondence can be made effectively .

Following are few tips for making good correspondence:

1) The subject mentioned for the correspondence should be brief and specific,
pointing to the gist. Mentioning too many references is not a good practice. Some
persons while replying have a habit of referring what all they had written
previously.

2) The body of the letter is important which reflects a particular style. This should
carry the decency and decorum of official correspondence.

3) Unnecessarily very lengthy and narrative style is not desirable.

4) Correspondence should be brief, specific and highlighting only what one intends
to convey.

5) Unnecessary references, such examples, usages of idioms & phrases sarcastic in

nature are highly undesirable. Even while replying to a derogatory letter received,
one is expected to be cautious in this regard.

6) Naturally the language and style one intends to employ in writing is influenced
by the mother tongue and the expression in writing is influenced by spoken
language. Some care is needed in this aspect.

7) It is better to go through the draft made twice or thrice for a review in initial
stages.

8) In the contract the roles of Engineer, Engineer-in-Charge, Project Manager etc.,

will be clearly defined. Based on this the correspondence has to be addressed to
the particular person regarding the issues like progress reporting, decisions etc.

9) Unnecessarily the dispute resolution clause should not be quoted in general

correspondence.
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8 .0 Maintenance of records:

Keeping something on the record through communication, recording & preserving the
documents etc. all are vital as a part of Contract administration.

Generally time is regarded as an essence of any contract. The onus of performance of

the job assigned within the stipulated time lies with the contractor which is one of his
prime contractual obligation. If there are reasons, causes by which performance got
effected or likely to get affected, then the contractor should keep a record of such
hindrances and shall timely intimate the employer. Suitable communication / application
shall be moved well in time for time extension. Generally this aspect is taken casually
which may have serious implications at later stages. As a matter of routine and as a good
practice the Project Manager is expected to apply for time extension well with in time,
with all records of hindrances and justifications.

Proper record of hindrances with evidence is a must.

8.1 Work hindrance during rains:

Rainy season has a special significance to the site personnel. On rainy days, due to
continuous downpour the work schedules are totally disturbed, labour displaced from work
places and work output is drastically reduced with progress and targets severely affected.

Yet a client may not like to understand this and may say:-

- No time extension because in stipulated time, effect of rainy season already

taken care of
- No hindrance can be recorded as rain is not continuous but only intermittent
- Contractor could have taken enough care to show desired progress even in
rainy season
- Delay will not be acceptable on account of rains

It is a well known fact that the progress will be affected and hampered in rainy season.
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Continuous rains do inundate the site making it difficult to work. Pits, low lying areas will
be filled up and water needs to be drained off each time. There will be slush, mud all
around. Movement of trucks, mixers will be affected due to wet roads and slippery tyre
conditions.

Even though the rain is intermittent, labour once disturbed from work and got displaced
on a particular day can’t be easily redeployed effectively. Working conditions for labour
are difficult to show much output during rains due to various factors. Construction being a
labour intensive activity can’t follow the logic of factory type of working with switching
off/on of machines to get the desired output.

8.2 Dewatering:

Again the construction activity may require dewatering operations. Ordinarily the
water seepage through underground (sub soil strata) during excavation is to be carried out
by contractor at his own cost as part of a technical condition. But what if the dewatering
operations necessitated due to rains or flooding of site and not by sub soil percolation.
This is obviously not envisaged initially while bidding. One is expected to keep a record of
such operations carried out like no. of pumps, days of dewatering through log books.
Proper timely communications with Employer are necessary.

8.3 Idle Resources:

Further there can be a situation of resources deployed for the work being idle or
under utilized for significant periods. Idle or under utilization (Partly idle) of resources
(man power, machinery) deployed for the work are the results of non fulfillment of
contractual obligations of other party like availability of work fronts, drawings, decisions,
required material supply in time.

Based on the work program and mutually accepted schedule, the contractor deploys his
men, machinery for the work. He incurs the costs towards man power like salaries,
establishment of site, office & overhead costs for maintenance of site establishment
besides mobiles, phone, fax, computer, printing, stationery, transportation etc. Normally
these will be expressed as a percentage of turnovers likely to be achieved as a
recoverable cost from turn over.
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Further the machinery, equipment deployed for the work is intended to give a planned out
put of work so as to recover the costs. So if the performance in the work is affected there
will be loss in anticipated turnover. This loss in turnover results in under utilization of
recovery of costs incurred.

1. These are viewed as damages suffered by one party due to the default of other
party. Damages are quantified as “Losses” suffered which attract compensation.
Obviously ‘losses to be compensated’ signify that one need to prove the ‘actual’
losses incurred.

2. Losses have to be claimed with the proofs and evidence on deployment of

machinery and men with knowledge of other party by suitable communication and
record keeping.

a) Pursue the contract conditions for remedy in case of delay events, owner’s risk
events and contractor’s risk events.
b) List of men & machinery that are actually deployed at site to be communicated
to employer by progress reports or periodic correspondence. Relevant details of
machinery like type, make, description, and numbers etc., to be invariably
listed and mentioned. Regarding the idle manpower the particulars of staff
deployed at site i.e. Names, designation, numbers etc. to be indicated.
c) Record keeping & evidence
d) Periodic correspondence with employer.

Calculation of actual losses arising due to idling of resources is depicted in next

subsequent sections.
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9 .0 Construction Claims:

9.1 Introduction:

Claims in construction contracts are inevitable. To tackle the problem of the claims
effectively it is necessary for both sides to have a better understanding of the basis and
principles of contract and therefore of the rights and obligations of the two parties. It is
necessary for professional representatives of both sides to have an understanding of
business side of industry so as to appreciate the circumstances in which the contractor
conducts the risks in which he can properly and contractually be expected to undertake
and the financial consequences if things go wrong. If things go wrong by reason of any
default on the part of contractor, it must remain his concern; however, if the default lies
with the employer or his management team, then the employer must face the financial
consequences and settle the claims without any loss of time to avoid any adverse effect on
progress of work.

It must also be born in mind that the whole question of claim is very complicated, since
the preparation of claim is not only difficult but lot of efforts are needed to extrapolate
the relevant data, fundamental details, figure, data and, other evidence together with the
establishment of sound basis so as to demonstrate fully the validity of claim argument.

Preparation and presentation of claims is a systematic process. Since the burden of proof
lies with the party raising claims, the supporting evidence together with the facts in issue
and basis of claims is to be presented. The substantiation of claim is done through site
records, correspondence, site diaries, progress schedules, minutes of meetings etc. The
contractor therefore needs an expert who can assist him in this area.

9.2 Different Types of Claims

i. Contractual Claims
ii. Extra Contractual Claims
iii. Quantum Meruit Claims
iv. Ex-gratia Claims
v. Counter Claims
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Contractual Claims

These are the claims, which arise out of the express provision of the particular
contract, i.e., for extra cost, expense and direct loss specifically provided as a remedy in
the contract for breach of contract on the part of the party concerned.

Extra Contractual Claims

These claims are also known as common law claims. These claims are for damages
for breach of contract at common law.

Quantum Merit Claims

Provide remedy for a person who has carried out work under the instruction of the
owner but no price has been agreed or where a new one has replaced original contract and
payment is claimed for work done under the substituted contract.

Ex-Gratia Claims

Ex-gratia claim is one where no legal remedy is available to the contractor but
arise out of hardship. On the ground of equity or favour the authority concerned may in
certain circumstances consider that hardship calls for mercy or moral liability. These
claims are also called sympathy claims. Wherever such claims are to be given it will be
better if these are given during the currency of the contract so that the money paid helps
in improving the progress of the work.

Counter Claims

These are the claims raised by the opposite party to counter the claims of the claimant.

9.3 Potential Causes of Claims:

i. Delays in handing over of site, work fronts
ii. Variation in data/information supplied and that actually encountered during
execution
iii. Late supply of drawings, decisions, approvals
iv. Disruption/disturbance caused due to untimely or unjustified instructions
v. Employers defaults affecting performance like delayed payments, illegal
recoveries etc.
vi. Deviations , variations beyond agreement provisions , change in scope
viii. Non approval of justified rates for Variations , extra scope works
ix . Violation of Contract conditions , stipulated and agreed provisions
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10.0 Dispute Resolution:

10.1 General:

The dispute resolution steps and the systematic procedure to be initiated will be
normally stipulated in a particular related clause in the agreement. For example clause 67
of contract conditions of FIDIC specifies the dispute resolution procedure.

It is recommended to thoroughly go through the dispute resolution clause and procedure

laid in the agreements. The dispute resolution clause shall not be quoted in normal
correspondence unless the disputes are to be dealt for resolution under such clause. The
entire process right from claiming some thing, establishment of dispute, notice and
invocation of dispute resolution should follow systematic steps as stipulated in agreement
and have to be done in a legal manner.

The readers are suggested to give a thought on the legal meanings and differentiation
between a ‘claim’ and ‘dispute’. For example you go on claiming something and the other
party keeps silent – does any dispute existing at this stage?
Say you claim something, other party denies then one can call it a dispute. Again one
party serves a notice to other party to settle something with in a time frame, other wise it
will be deemed as dispute. In certain cases the Dispute resolution clause itself specifies
the steps or procedure how to establish a dispute. Thus establishment
Of Dispute is important before invoking Dispute resolution Clause.

Normally in Contracts invoking Arbitration can’t be direct and one or few of following
mentioned ADR (Alternate Dispute Resolution) methods should have been generally
stipulated as a precursor procedure before Arbitration.

10.2 Alternate Dispute Resolution (ADR) :

These are some of the Alternative Dispute Resolution (ADR) methods.

1) Engineer’s decision has to be sought by making a reference to the dispute (FIDIC

model contracts has this provision)
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2) Negotiation Between authorized representatives of the parties or Managements

3) Mediation (The disputes are referred to a mediator as in village panchayats)

4) Conciliation (The conciliator assists the parties and facilitates in arriving an agreed
settlement)

5) Disputes Resolution Board (DRB) : Disputes are reviewed by a Board of technically

competent persons constituted by parties and recommendations made by the Board
on Disputes referred to them .

10.3 Dispute Resolution Board (DRB) :

The Board normally consists of 3 members (one will act as chairman) constituted by
parties consisting of technical professionals well acquainted and experienced with the
subject works. The Board is expected to make site visits and offer technical guidance. Also
the Disputes are referred to the Board which will review the Disputes and give the
recommendations on Disputes. The judgments of the board are in the form of opinions,
technical judgments and recommendatory in nature. Such recommendations have no legal
enforcements as in case of Arbitration awards.

The parties are expected to follow the recommendations made by the Board on
Disputes and attempt to settle the same. The recommendations of DRB are open for
review in the Arbitration.

10.4 Arbitration:

Arbitration if provided in the agreement shall be through a written agreement as per

prevailing law, as already dealt.

It is recommended to study the bear act provisions of Indian Arbitration and Conciliation
Act 1996 applicable for Domestic Arbitration.

Arbitration may be conducted by a sole arbitrator or by an Arbitral Tribunal.

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Normally the procedure of appointment of Arbitrators are stated in the concerned clause
of Dispute resolution or otherwise the rules and procedures can be as mutually agreed by
parties.

Different departments, organizations follow and adopt their own standard procedure of
rules and regulations for conducting Arbitration for construction contracts. To reduce the
time, to speed up the process and to standardize the procedure across the industry,
‘Institutional Arbitration’ is gaining more popularity in India for commercial contracts. The
entire Arbitration process, procedure of conducting Arbitration, time frames, rules &
regulations are governed by the Institute which has governing rules & procedures. ‘Indian
Council of Arbitration’ (ICA), ‘Construction Industry Development Council’ (CIDC) in
association with ‘SIAC’ (Singapore International Arbitration Centre) are the prominent
bodies providing institutional Arbitration mechanism in India .
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11.0 Idling of Resources and Prolongation of work:

Owner caused delays or delays brought about by owner-assumed issues are common

in construction projects. In the previous sections how to keep the records for such delays

was dealt in detail. Due to such delays the performance will be affected resulting in

prolongation work. The budgeted cash flows / monthly turnover will be reduced wherein

the machinery, equipments deployed for the work are under utilized in a way (loss of

production). Normally the contractor mobilizes and deploys the required resources based

on the quantum of work out put to be given and recovers such costs on manpower,

machinery, equipments from the turnover.

Besides other overhead costs such as office establishment, transport,

communication, travel etc., other such costs cannot be fully recovered with reduced

turnover .This results in losses since the incurred costs are not fully recovered. Again the

reduced turnover results in a loss of anticipated profit which the contractor expects to

derive from turnover. Nevertheless in the prolonged or extended period, the contractor is

constrained to block his resources in execution of same work otherwise he would have

deployed such resources in other works. This is termed as loss of opportunity .

Once the delay is established, the next question is the justified element of cost

compensation in consequence of such delay. Say how much will be the overhead costs as

losses and what would be the element of profit to work out the loss. Some standard data

books and Govt. departments adopt a fixed percentage say 10% as contractor’s profit and

take 10 to 25% as overhead costs, for the purpose of analyzing the standard costs or for

working rate analysis.

There are numerous theories, principles and formulae for estimating and working out

overhead costs. Among these, Hudson’s formulae, Emden’s formula are most popular and

used universally. Courts have also recognized the principles upon which such formulae are

based.
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For ready reference the brief description, methodology of such formula given below.

However the readers are advised to refer the text books like “Law relating to Building

and Engineering Contracts” by Sri Gajaria and search Internet for the philosophy of such

formulae.

The formula are based on the principle that

- A contractor is entitled to compensation for unabsorbed overhead costs resulting from

owner caused delay, if they meet certain criterion.
- There is no exact accounting method for calculation of such unabsorbed costs.
- A fair, realistic cost estimating formula is necessary to determine the compensation,
owed.

Hudson Formula:

This formula was deliberated widely in courts in U.K. and later exported to Canada. Off

site overheads are usually known in the industry as “Head office overheads (HOOH). It is

convenient to deal with these together with profits, because it is the practice most

contractors’ do follow by making their best estimate of the project by loading a single

percentage (profit & O.H) as factor on the prime cost worked out.

The percentage used in pricing for such overheads and profit obviously varies from

contractor to contractor which is a closely guarded secret. On analyzing the evidence

presented in courts by way of balance sheets, profit & loss accounts of companies, the

courts have also recognized the principle of such factoring or fixed percentages.

The Hudson’s formula derives its daily HOOH rate on the basis of the as-bid calculations

and assumes that the bid rate shall hold constant through out life of project.
 24

O.H. / Profit Percentage Original contract sum

________________ x _____________________

100 Original contract period (weeks)

x Period of owner caused delay (weeks)

= Total O.H . Cost owed

That is allocable overhead per day/per week x period of owner caused delay

=Total O.H cost owed.

Example:
Contract amount : Rs.120 crores
Stipulated period : One year (52 weeks)
Owner caused delay : 12 weeks
HOOH (i/c Profit) : 25% (15+10)

As per formulae

Allocable overhead per week = 25/100 x 12000 lakhs / 52 = Rs.57.7 Lakhs

Total cost owed = 57.7x12 = Rs.692.3 Lakhs
 25

12. Loss of Productivity :

Normally in large construction projects where more machinery and equipments are

deployed and their costs, component wise in overheads is significant then loss in

productivity is worked out based on the loss in turnover on proportionate basis. This not

only appears realistic but close to actual unabsorbed costs.

For an example in above case, for the project there may be certain requirement of

machinery and manpower either stated in bid or submitted along with the bid proposal.

Further there may be a works program or estimated cash flows month wise for the project

which is the basis for projected or budgeted turnover each month.

Nevertheless in absence of such anticipated or budgeted monthly turnover one can easily

work out the average monthly turnover for above example as 120/12 =Rs. 10 Crores.

By achieving this average monthly turnover, the contractor anticipates to recover his costs

incurred on various overheads. But the actual turnover achieved due to owner caused

hindrances is say for example is Rs. 6crores per month.

This shows that only 60% of utilization of resources with 40% loss in productivity. Hence

unabsorbed costs are 40% of costs incurred on actual basis for manpower and machinery.

12.1. Manpower Costs: Can be worked out as per actual deployment and payments on

CTC basis for the supervisory, technical and site staff.

12.2 Machinery Costs: Machinery costs can be worked out for the equipments deployed.

Theoretically for the owned equipments the costs are depreciation + interest costs and for

hired machinery, the actual hiring costs.

 26

For ready reference a tabular format shown for calculations.

S. Description M Yr. Of Nos Capital Hire Interest Depreciation Total

of Machinery a purchase . cost charges cost

No.
k per day Int+Dep

e .

For construction equipments normally 7 to 10 years of life assumed.

1. Straight line depreciation method (linear) normally assumed with 10% residual
value.
2. Commercial rate of interest taken
3. For own equipments if data is not available, market hiring charges can be adopted.

#####

SUGGESTED REFERENCES FOR READING:

1. Law Relating to Building and Engineering Contracts by Gajaria

2. Law of Contracts – Dr. Avtar Singh

3. Study Material of NICMAR on “Construction Contracts and Contracting”

4. Indian Contract Act, 1872

5. Indian Arbitration and Conciliation Act, 1996

Important Site Records

 27

The following are the important site records which are to be maintained at the site.
Periodic checking of these records and review by the project manager for ensuring
correct, timely entries and proper maintenance of such records is essential.

1. Site Diaries :

Just like personal diaries these are the ones to be recorded and maintained by all
operational site staff. In many organized departments as a practice, these are
maintained by field managers by recording the important happenings at site. The
information recorded in diaries should be as comprehensive as possible and include
following.

 The Date
 The Project
 The Author of Diary, Designation with initials
 Weather Conditions
 Areas of work supervised
 Progress Component wise
Programmed/ achieved
 Any type of obstructions /hindrances, problems encountered and
unusual events
 Reasons for delays , disruption in work
 Important conversations/meetings/instructions

The Format of such register is given in Annexure.

2. Correspondence files and such records :

The inward & outward correspondence shall be maintained in files in chronological

sequence and order. A log or a small database (Excel sheets) with both incoming and
outgoing shall be recorded with brief particulars, action by whom and tracking till
disposal. At sites it may happen that potentially damaging correspondence remains
unanswered for weeks, weakening the case if dispute arises.

The fact needs no special emphasis that the correspondence is recorded

documentary evidence which should be clear and evident of facts and circumstances,
contractual references on duties & obligations.

Like wise minutes of site meetings, instructions, observations on work programmes,

revisions in drawings etc. shall be properly maintained.

Again notices are to be given by contractor in prescribed time, in case of happening

of certain events like delay event, variation/ deviations occurrence claims etc.
These are to be strictly followed by the project management team.

3. Drawing Registers:

The Drawing registers are one of the important site records which specify when the
drawings were issued/ received for execution, the details of the drawings, the
corresponding revisions made and communicated.

The drawings register should be maintained for each work front /component wise.
Also it shows whom the drawings are marked for necessary action and
 28

implementation along with relevant details incorporated. The particulars like when
the drawings are received, the particulars have to be recorded. Again all the
revisions with dates, particulars of revisions date wise are to be recorded in the
register.

The Format of such register is given in Annexure.

4. Day Work sheets and Daily reports:

These are the records maintained on day to day basis on the activities, happenings
at site. It consists of details on work components, progress/ programme targeted Vs
achieved actually at site. Also weather conditions/ rainfall, the deployment details
of men & machinery and other resources like form work, shuttering etc. are to be
recorded.

The Format of such register is given in Annexure.

5. Variation Register:

This is a record showing the occurrence and details of all variations, extra items
details of deviations in BOQ Quantities. The reasons for all these changes due to
drawings/ instructions, the communications etc. can be recorded. It is a
comprehensive record on status of variations. Also it consists of valuation details of
variation items.

The Format of such register is given in Annexure.

6. Hindrance Register:

This is one of the important site records which is very useful for justifying time
extension and escalation claims.

It is a compressive record showing the obstructions/hindrances in work execution

with relevant details.

The Format of such register is given in Annexure.

7 Misc. Records like photographs, video :

These are such records and evidences to prove the state of affairs/site position/
progress at a particular instance of time in a visual presentation.

Certifications, recorded notes by authorized officials/persons, photographs,

pictures taken etc. in an album on stage & sequence wise come under this.

8. Manpower, plant & machinery deployment register:

This is one of the important site register showing the details of resources deployed
at site and allocated to various components with details at any instant of time. It
also ascertains the effective utilization / idling and helpful in formulating delay
claims.
 29

The register can have the following relevant details.

 Records of Manpower
 Category wise tech, skilled, unskilled
 Agency wise/Sub contractor wise
 Work component engaged in
 Quantity of work executed
 Working hours
 Idling hours
 Reference of grade for wages/ salary

 Log books of plant & Machinery

 Category – owned / hired
 Details of machinery make & type
 Working hours
 Break down hours
 Qty of work outputs
 Fuel issued

The Format of such register is given in Annexure.

9. Materials register ( cement, Reinforcement, structural steel)

Details of materials received from client or procured, date, quantities together

with quantity issued, component wise shall be maintained. While these are the
details on receipts, issue front again the consumption component / structure wise
are to be recorded. In case of reinforcement dia. wise details to be recorded for
above.

Though this appears tedious & cumbersome, for ascertaining the correct
consumption, this is inevitable. Again the consumption bill wise are to also to be
recorded for materials for efficient material management. Scrap available at site is
to be suitably assessed and efforts to minimize wastage shall be encouraged.

Periodic reconciliation of materials like total receipts/ issues, consumptions and

balance in stores to be properly accounted and checked for. Such reconciliation
shall also be done with respect to actual consumption and theoretical
consumptions for materials as assessed.

The Format of such register is given in Annexure.

Reconciliation :

Reconciliation is a very important aspect in each type of industry. It is a matter

of concern that nobody has written a book or stipulated a system or procedure
so that it is properly understood this crucial aspect. Only the practice followed
as a procedure in some companies, departments based on the experience of
professionals are the guiding principles.

An exercise done to correspond the receipt and utilization of materials is called

“Reconciliation”. This is required to ascertain the amount of wastage at a
 30

particular stage of project, and to take appropriate controlling, remedial

measures, in time. Ideally though reconciliation of materials is to be done on
monthly basis, at least on quarterly intervals is necessary, for exercising
effective control.

The reconciliation function consists of systematic procedure to check the

receipts, consumptions, ascertaining wastages. Also it consist checking the
theoretical, actual consumptions and ascertain the variations that are to be in
limits.

Parameters for carrying out reconciliation are :

 Receipts (A)
 Consumption (B)
 Theoretical Stock : A-B
 Physical stock
 Wastage/ Variation : Theoretical –Physical
(If diff. is + ve then wastage if (-) saving)
 Assessment of scrap quantity

Again wastages are on two accounts.

 Accountable wastage
 Unaccountable wastage

The accountable wastage can be justified documentary and unaccountable can’t be

justified which is treated mere misuse and often penal recovery enforced for such
over consumption.

Reconciliation shall be carried out for all major construction materials like cement,
sand, aggregates, reinforcement, structural steel, diesel etc. All this materials
account for at least 40 to 60% of cost of construction and at least a saving of 2 to
3% by way of waste reduction contributes significantly to productivity.

Correspondence

1.0 General :
 31

Correspondence is an essential part of contract administration. Going by the literal

meaning of the word (dictionary) ‘correspond’ means communicate by exchange of
letters.
For efficient site management the requirement of good correspondence is inevitable and
doesn’t need a special emphasis. From the perspective of execution of work at site
through a contract, the correspondence can be categorized in to three types based on the
purpose.

2.0 Types of Correspondence:

The three types of correspondence are – General, Obligatory and Necessary.

2.1 General Correspondence:

The correspondence that is to inform (informative) or appraise or to communicate and
keep on record something, is general correspondence. This can be with reference to
progress, regular events at site or at times it can be directive or instructive to do or not to
do certain things.

2.2 Obligatory Correspondence:

This refers to the letters and communication exchanged as a binding or obligatory in
nature. Suppose one of the party to the contract is supposed to give a notice with in a
period specified on occurrence of a particular event, then such correspondence is
obligatory i.e., in fulfillment of a contract condition. The letter of Intent, communication
on work acceptance, issue of notices like commencement notice, completion notice,
termination notice etc., fall under this category.

2.3 Necessary Correspondence:

This is categorized as one which one party would like to keep on record with an intention
for any future reference. The party at a later date can use such communications and
correspondence as a matter of record that the other party was already intimated and has
full knowledge of the events.

Nevertheless any correspondence whatever may be the purpose basically reduces to

writing of letters in official form and sense. We do all agree that letter writing is an art
and skill both, which partly can be inherent and the rest by practice. Again it is a myth
 32

that for making a good correspondence one should be highly proficient in English language.
Even with simple language good correspondence can be made effectively.

2.4 Tips for Correspondence:

Following are few tips for making good correspondence:
1) The subject mentioned for the correspondence should be brief and specific,
pointing to the gist. Mentioning too many references is not a good practice. Some
persons while replying have a habit of referring what all they had written
previously.

2) The body of the letter is important which reflects a particular style. This should
carry the decency and decorum of official correspondence.

3) Unnecessarily very lengthy and narrative style is not desirable.

4) Correspondence should be brief, specific and highlighting only what one intends to
convey

5) Unnecessary references, such examples, usages of idioms & phrases sarcastic in

nature are highly undesirable. Even while replying to a derogatory letter received,
one is expected to be cautious in this regard.

6) Naturally the language and style one intends to employ in writing is influenced by
the mother tongue and the expression in writing is influenced by spoken language.
Some care is needed in this aspect.

7) It is better to go through the draft made twice or thrice for a review in initial stages.

8) In the contract the roles of Engineer, Engineer-in-Charge, Project Manager, etc.,

will be Clearly defined. Based on this the correspondence has to be addressed
to the particular person regarding the issues like progress reporting, decisions etc.

9) Unnecessarily the dispute resolution clause should not be quoted in general

correspondence.

3.0 Letter Writing:

 33

Finally the function of correspondence reduces to letter writing which is an art and skill
both. Our aim is not to teach you this as in the case of a school curriculum but we do
take this opportunity to present some relevant points on making good correspondence
i.e. good letter drafting skills.

As we know the business letters consists different constituent parts like address, subject,
relevant references and most importantly the body of the letter. The body of the letter
can be divided into three parts in commercial / business correspondence, the styles &
formats of which are different from personal letters.

Example:

To
………………………..
………………………..
………………………..

Sub:- Together with name of work, the subject matter or purpose of

Letter to be mentioned. Like :
- Request for time extension
- Information of hindrances
- Submission of revised estimate
- Extra items etc.
Ref: - Reference Letters that will be given to be relevant, specific (no need to list all
previous correspondence.)
1. History of Background for sending the letter (the
crux / purpose)
Body
of 2. The main issue/details/narrative points etc.
Letter
3. What you want from the client / addressee (A request
like
needful action is solicited or this information is
given for
records for necessary approval etc.)

Concluding
Remarks: (Optional – Depends upon the issue)

Examples
1 ) Unless this is resolved within a week of this, the progress will be affected for which
we shall not be held responsible.
 34

2) Though we have sent numerous letters no action taken.

Hence your immediate kind attention in communicating the approval is desirable in
the interest of work.
3) Hence in view of above we cannot undertake
the Variation item as desired by you which is not in the scope of EPC contract unless
mutually agreed rate is payable extra.
Yours Sincerely,

…………………

---------------------------

Some Sample letters are presented below as templates / formats.

Sample Letter _ 1 : Delay Notification & Hindrances :

Date:_____________
To
_____________________
_____________________
_____________________ ( For Kind Attention : …………….)
_____________________

Dear Sir,

Sub: ( Name of work ) - Notification on delays – Regarding

Ref: 1.
2.

The above work has been awarded to us vide LOI No. ___________ dated _______ . Soon
after award of the work we have mobilized our resources at the site and commenced the
work which is in progress presently.

We are facing the following hindrances during execution of work which we would like to
bring to your kind notice.

1. Handing over of work fronts: Some work fronts pertaining to ……… , …………. are
yet to be handed over for commencing the work. During the site meetings and
 35

progress review meetings we have already mentioned this aspect which is due. We
are not in a position to organize the work in an efficient manner pending the
handing over of these work fronts.

2. Acquisition of land: _______ % of land / acres are yet to be acquired so that the
work of laying the pipe lines can be taken up. Even after ________ months of
commencing the work this is due by which we are crippled with planning and
organization of the work.

3. Delay in drawings and decisions: We have submitted the necessary drawings ,

offered the clarifications and also provided the required data , as directed. The
drawings are yet to be approved from your end for …… ,………. which is hindering
the progress and pace of execution of the work. Every time we have been
representing for issue of the drawings well before the execution, so that we can
plan resources and organize the work efficiently. Further there is a delay in
getting approval and decisions from the side of your employer.

4. Delay in supply of materials: We have been placing an indent indicating the

requirement of freely supply cement and steel well in advance in every quarter. At
the beginning itself we have submitted a statement indicating month wise
requirement of the required material so as to facilitate you in timely procurement
of the same. But it is unfortunate that every time there is a lot of delay in
supplying the required materials to us. It is a matter of record that the casting of
foundations had to be abruptly suspended for about a week owing to shortage of
cement. In view of this you are requested to keep the adequate stock of cement,
steel as intimated by us so that there is no hindrance in work .

5. Local problems: Right from beginning of the work there are serious problems
faced with the local labour and people who are obstructing the execution of work
frequently. Not only they are sitting in dharnas in the site obstructing the work
but also threatening the labour engaged by us. You are requested to kindly take
care of this local problem so that the problem is immediately found a solution for
smooth execution in work.

As per the __________ clause of the contract agreement the notifications on delays /
hindrances are being notified herewith.
 36

Separate communication will be sent at appropriate stage seeking suitable extension of

time on account of above hindrances.
It is bring to your kind notice that in view of above hindrances and reasons not
attributable to us , the progress in work is severely affected which is resulting in part
idling / under utilization of the resources like men and machinery deployed for the work.

Thanking you

Yours sincerely

………………..

Copy to

SAMPLE LETTER 2 : Extra Items / Variations / Deviations

Date:_____________
To
_____________________
_____________________
_____________________
_____________________

Dear Sir,

Sub: ( Name of work ) - Submission of extra items statement / notification on variation /

deviation - Regarding
Ref: 1.
2.

We would like to bring to your kind notice the following variations / deviations that
occurred in execution of above work.

1. Deviations in Quantities : As per _________ conditions of the contract under

clause _______ the deviation limit is stipulated for individual BOQ quantities as +
/ – 30% . The following items of BOQ got deviated beyond 30% stipulated
quantities due to change in drawings.

Sl.No. Brief Item BOQ Unit Rate Quantity Limit Executed Difference
description Quantity with 30% quantity
1
2
3
 37

Due to abnormal increase in prices of labour and construction materials the quoted rates
are not at all workable in view of the prevailing market conditions. However, as per
agreement conditions we had executed the above quantities at the same rates up to the
deviation limit stipulated even under going losses. Hence for the deviated quantities
beyond the limit , revised rates may please be approved .The rate analysis for above
items are worked out in accordance with agreement conditions which are enclosed
herewith.

You are requested to kindly approve the rates so that payments can be made as per the
revised rates

2. Extra items/ variation items: During the execution of work it necessitated the
execution of following items as per drawings / directions issued which items / works are
beyond the scope of contract agreement. Already this has been brought to your kind
notice within the stipulated time of two weeks to notify in the event of occurrence of such
variations. The rate analysis as per the actual consumption of materials and labour
together with the 25% overheads and profit components as per the agreement conditions
are made and enclosed herewith which may kindly be approved. The early necessary
action is requested in approving the rates because the payments as per the revised rates
can be received.

Thanking you

Yours sincerely
………………

xxxxxxxx (Name)
xxxxxxxxxx ( Designation)

Encl:

Copy to : 1.
2.

Sample Letter 3 : Delay in Payments

To
_____________________
_____________________
 38

Dear Sir,

Sub:

Ref :

It is to bring to your kind notice that the …. R.A Bill submitted during March 2010 has not
been paid yet, even after 3 months since we submitted the bill. We are facing severe
financial problems as the payments amounting to Rs. ________ Crores are held up. The
inordinate delay in receiving the payments due, is not only causing financial hardships to
us but also is badly affecting the progress in work. We owe huge sums due to be paid to
material suppliers, creditors and labour engaged for execution of work. Due to non
receipt of payments we had to borrow money at higher rate of interest to meet the
working capital requirements.

Again facing deep financial strain and piquant situation, we have been executing the
works incurring huge expenses on material procurement though facing cash flow problems.
Without getting any returns on the amount invested in execution of work we are
organizing the work in all available work fronts. This is because from March onwards till
arrival of monsoon we get normally good working season and we are simultaneously
organizing and executing the works in different fronts like bridges, …… ,……… etc. for
accomplishing the targets.

We are facing huge debt burden and under gone severe financial losses because of huge
interest charges on the money borrowed to meet the financial liabilities.

Because of delay in payment we are not in a position to keep the work in progress any
longer in view of mounting losses, huge debt and interest burden on us.

We fear that in view of the prevailing situation unless the payments are not released
immediately we have no other option except to suspend the work.

Kindly take necessary action in releasing the payments due to us immediately without
further loss of time.

YoursSincerely,
………………………… .