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TENDERING BIDDING &

CONTRACTING

Types of Contract : Introduction


Prof. Debopam Roy

WHAT IS A CONTRACT

Agreement between competent parties


enforceable at law
Formation of Contract:
Object
Proposal / Offer
Acceptance
Consideration
Reciprocal promise

Why study Contract?


All major construction projects are one off
jobs done though work contracts
The contractor goes to another persons
land and does something which becomes
permanently attached to the other
persons land & hence becomes the other
persons property
The contractor becomes unsecured
creditor (nothing is
hypothecated/mortgaged)

Typical Parties for Works


Contract
Owners
Public Owner (Government bodies)
Private Owner (also include quasi-public bodies)

Architect/Engineers (A/E)
Prime/General Contractor
Sub-contractors
Suppliers
Banks & Financial Institutions
Specialized Service Agencies
Labor
Regulatory agencies
General Public

Rules for the Participants


Contracts
Tort Law
Laws, Statutes, and Regulations of Government
Agencies

THREAD OF LIABILITY IN THE


CONSTRUCTION PROCESS
Contract Liability
Results when a party to the contract breaches the contract by
failing to conform to one or more of its provisions
Express Contract Provisions

Plainly written in the text of the contract document itself

Implied Contract Provisions

Flows from the contract but is not in the form of explicit statement
Come from long-standing, commonly held understandings that are
implied by the contract

THREAD OF LIABILITY IN THE


CONSTRUCTION PROCESS

Tort Liability
Based on tort law
A tort is a civil wrong
Central Concept: in living our daily lives, we cannot, with
impunity, either intentionally or unintentionally conduct
our affairs in a manner that will injure or damage others
Does not depends on the existence of a contract
Many individuals believe that their liabilities are limited
to those resulting from breach of the provisions in the
contracts to which they are party
A mistaken notion is that tort liability arises only when a
person knowingly and intentionally acts in a manner that
injures or damages another
An intentional tort may constitute a criminal act in
addition to a civil wrong

THREAD OF LIABILITY IN THE


CONSTRUCTION PROCESS
Statutory Liability
It is imposed by law or statute
Can be express or implied
Strict Liability
It is not necessary to prove fault or negligence to
establish that a person or entity is liable for some
act or failure of an act
The mere fact that the act or failure to act occurred
is all that is necessary to establish the liability
Usually associated with tort liability situations
Express warranties also impose strict liability on the
contractor

Typical contractual relations between


parties of a construction project
Owner A/E Contract
for
Professional Services
(Design and Bid Plans and Specifications)
Advertisement for Bids
Contractor
Joint Venture Agreements
Bids
Owner-Contractor Construction
Contracts (Prime Contracts)
Surety
Bonds

Insurance SubcontractorLabour Purchase Order


Contracts Agreements Agreements
Agreements

Nature of Contractual
Services

Design Only
Construct Only
Design & Construct
Turnkey
Construction Management Services

Nature of Contracts
Owner Architect Contracts and Owner Engineer
Contracts
Owner Construction Manager Contracts
Owner Contractor Contracts
Subcontracts ; Purchase Orders; Insurance Contract

PURCHASE ORDER AND


SUBCONTRACTOR AGREEMENTS
Additional contracts closely related to the construction
contract between owner and prime contractor.
On similar lines but fundamentally different in purpose.
Need to understand clearly the purpose and key features of
each in order to decide which should be used for a particular
business transaction

PURCHASE ORDERS
Intended for transactions that involve the sale of goods by a
seller and delivery of those goods to a contractor buyer at the
site of a construction project.
Should be distinguished from the provision of services or the
performance of work involving labour at or on the
construction site
For example, providing fabricated structural or reinforcing
steel

PURCHASE ORDERS
Goods or Provision of Services?
Whether a particular transaction constitutes the sale of
goods or the provision of services?
Treat all transactions involving the provision of significant
amounts of on-site construction labour as a construction
operation requiring the use of a subcontract agreement
Transactions that do not involve the provision of significant
amounts of labour at the site should be treated as the sale of
goods. It should be handled with a purchase order
In India, Sale of Goods Act. 1930 applies

PURCHASE ORDERS
Use of purchase orders for certain jobsite services
That involve minimal labor like provision and collection of
trash containers
Purchase order quantity limitations
PO can be limited to a one-time transaction or may
provide for a continuing supply of goods on an asrequired basis
PO for continuing supply may be open ended or limited to
stipulated maximum quantity.

PURCHASE ORDERS
Conflicts with sellers sales quotations
The fine print on the back of the preprinted vendors sales
quotation document conflicts with similar fine print on the
back of preprinted purchase order document boilerplates
Both vendors and contractors/purchasers try to obtain the
most favorable terms
Drafter of PO should ensure that the conflicts are avoided
Flow-Down Language from Prime Contracts
PO may contain explicit flow-down language intended to
make all applicable provisions of the prime contract also
apply to the PO

RED FLAG PURCHASE ORDER


PROVISIONS
Necessary Identifying information
Construction project for which the prime construction
contract is held by the buyer
Owner for that project
A/E
Contractor buyer
Seller
Description of the Goods Purchased
Accurate and complete description of each separate item
including appropriate references
Quantity of each separate item

RED FLAG PURCHASE ORDER


PROVISIONS
Shipping Instructions
Exact name and address of the intended receiving party and
instructions on how the goods are to be packaged and
marked.
Pricing and Basis for Quantity Measurement
May contain flow-down provisions
Prime contractors often purchase many items for which
payment will be completely unrelated to the provisions of
the prime contract

RED FLAG PURCHASE ORDER


PROVISIONS
Payment and Retention Provisions
Issues similar to the conditions under the prime contract to
the owner
No pay until paid clause
Does not excuse the prime contractor from eventually
paying
Presence of condition precedent
It is specifically understood and agreed that the payment
to the trade contractor is dependent, as a condition
precedent, upon the construction manager receiving
contract payments, including retainer from the owner.

RED FLAG PURCHASE ORDER


PROVISIONS
Specified Delivery Schedule
Equivalent to the statement of allowed contract time in
prime contract
Required Delivery Point
Example, F.O.B. construction jobsite
Sales and Service Taxes
Purchase Order General Conditions
Contain most of the general clauses for prime contracts
Special/Supplementary Provisions
Courts give more weight to specially recorded terms than
to preprinted terms

SUBCONTRACT AGREEMENTS
A prime contract between an owner and a prime contractor
must exist before a construction subcontract can exist
Prime contractor decides to lay off or subcontract, a portion
of the work to another contractor called a subcontractor
Prime contractor still retains the original liability to the owner
for the performance of the work.
Subcontract work can be directly spelled out in the prime
contract or it may be work incidental to the contractor

SUBCONTRACT RED FLAG PROVISIONS


Necessary Identifying Information
Project for the prime contract
Owner for that project
A/E
Prime contractor
Subcontractor
Description of the Subcontract Work
Must be carefully and completely described
Should incorporate direct references to all applicable
drawings and technical specifications and sections of the
prime contract

SUBCONTRACT RED FLAG PROVISIONS


Pricing and Basis of Quantity Measurement
If the subcontract work is incidental than payment is not
related to the provisions of prime contract
Payment and Retention Provisions
Contractor Control of Performance Time Requirements
Subcontractor shall perform the subcontract work on a
schedule to be determined by contractor
Damages in the Event of Late Completion
Subcontract often explicitly states the flow of contract
liability

SUBCONTRACT RED FLAG PROVISIONS


Subcontract Changes Clause
Most subcontracts will give the prime contractor the right to
make changes unilaterally in the subcontract work, delay,
suspend or terminate it in the same manner as the owner can
in prime contracts
Insurance and Bond Requirements
The subcontract may or may not require the subcontractor
to furnish a performance bond and a labor & material
payment bond
Indemnification
Owner may be protected by sovereign immunity, the prime
contractor is not and thus requires indemnification

SUBCONTRACT RED FLAG PROVISIONS


48-Hour and 72-Hour Clauses
Pertains to the contractors right, after directing the
subcontractor to remedy some default, to perform the
necessary work with contractors forces for the account of
the subcontractor if the subcontractor fails to remedy the
default within 48 hours of receipt of contractors directive

INSURANCE CONTRACTS
Primary parties
Construction Contractor the insured
Insurance Company the carrier
Additional Parties additional named insured
Policies for the construction industry
Workers compensation and employers liability policies
Public (or third-party) liability policies
Builders risk policies
Equipment floater policies
Miscellaneous policies for special situations and needs

WORKERS COMPENSATION AND


EMPLOYERS LIABILITY POLICIES
Statutory liability on employers which occurs when the
employees are killed or injured in the course of performing
their duties.
The Workmens Compensation Act 1923
provides for compensation to workmen or their survivors in
cases of industrial accidents and occupational diseases,
resulting in disablement or death
compensation in case of death ranges from Rs 50,000 to Rs
4.56 lakh and in the case of permanent total disablement
from Rs. 60,000 to Rs. 5.48 lakh
Employer's Liability Act, 1938

PUBLIC LIABILITY POLICIES


Public Liability Insurance Act, 1991
The essence of the public liability insurance contract is that
the insurance company, in exchange for the premium,
agrees to assume the liabilities of the insured contractor
subject to a stated deductible amount, up to stated
monetary limits of the policy.
These policies do not protect contractors aginst
contractually assumed business risks such as failure to
complete the project.

PUBLIC LIABILITY POLICIES


Exclusions, Endorsements and Deductibles
Exclusions like XCU Hazards ( Explosion, Collapse and
Underground)
Endorsements are special provisions added to the policy to
extend its coverage
Deductible is an amount stated in the policy that must be
exceeded before the insurance company has any liability
Monetary limits Primary and Umbrella policies
Primary: tailored to meet the monetary limit requirements of
the prime contract
Umbrella: designed to raise the monetary limits to a much
higher level

BUILDERS RISK POLICY


Also called as installation floater insurance
Does not include consequential damages such as lost time or
increased cost of performance
It can be obtained as either a named peril or an all risk policy
Traditionally cover losses to the contractors temporary
structures in addition to the losses to the permanent work
Does not cover contractors construction equipment or tools

EQUIPMENT FLOATER POLICIES


Protects the contractor against physical damage or loss to tools
and construction equipment (including theft)
Method of determining loss:
Replacement value
Book value
Pre-agreed value
Equipment floater insurance for Marine Equipment Operations
Called as hull insurance
http://www.uiic.co.in/mhull.jsp

MISCELLANEOUS POLICIES FOR SPECIAL


SITUATIONS

Railroad protective insurance


Transit insurance
Business interruption insurance
Fidelity and forgery insurance

Owner provided insurance programs

RED FLAG INSURANCE PROVISIONS

Named Exclusions
Additional Names Insureds
Deductibles
Policy Term
Subrogation
Policy Cancellations
Other issues
Claims-Made Vs. Occurrence Policies
Premium Escalation and Diminished Coverage

The Prime Contract

TYPICAL DOCUMENTS COMPRISING THE


CONTRACT
Bidding documents consisting of the Invitation to Bid, the
Instruction to Bidders, and the Bid Form
General Conditions of Contract
Special Conditions of Contract
Specifications
Drawings
Reports of investigations of physical conditions

BIDDING DOCUMENTS
Normally begins with an advertisement
Identifies the project for which bids are desired
The owner
Time and place of bid opening
Instructions to potential bidders on how to obtain a full set
of contract documents
Invitation for Bids (IFB) or Request for Proposals (RFP)
IFB used when bidders must strictly confirm to drawing
and specs.
RFP when bidders may propose variations for the project

BIDDING DOCUMENTS
IFB or RFP typically include:
A description of the contract work
The identity of the owner
The place, date, and precise time of the bid opening
The penal sum of the required bonds (bid bond,
performance bond etc.)
A description of the drawings and specs, their cost, and
where they may be obtained
Rules regarding withdrawal, modifications, late bids etc.

BIDDING DOCUMENTS
Instructions to Bidders
Bid Form
Bidders complete this document, sign, seal and turn it in
Constitutes the offer
To constitute a responsive bid, the bid form must be
completely filled, signed and sealed in accordance with the
IFB or RFP and Instructions to Bidders

BIDDING DOCUMENTS
Bid Forms Contents
A definitive statement of the general terms and
conditions of the offer
The format of the commercial terms applying to the offer
Supplementary information that the owner may want to
know about the bidder
Requirement for public projects
Bid security

GENERAL CONDITIONS OF CONTRACT


Very definitive statements, clause by clause, of all general
terms and conditions that will govern the performance of the
contract work
The general concept of this section is to include all clauses
that will remain the same, contract after contract, changing
very infrequently

SPECIAL CONDITIONS OF CONTRACT


Also known as Supplementary Conditions
Project specific matters
Those that are either site specific or in some other way apply
only to the specific contract

SPECIFICATIONS
The technical requirements for each division of work in the
contract will be completely detailed in specifications
Conforms to Uniform Construction Index or Masterspec
format
Should be carefully drafted so that both parties to the contract
have a mutual understanding of the precise technical
requirements

DRAWINGS
Complement the specifications
Should be sufficiently clear to adequately show exactly what
is to be built
Certain features may be shown in fairly general terms,
requiring the contractor to prepare the detailed drawings
In fixed-priced bids should be adequately sufficient and clear

REPORTS OF INVESTIGATION OF
PHYSICAL CONDITIONS
Often concern the geotechnical aspects of subsurface
conditions
Usually appear in the form of written evaluations and soil
boring logs
Other examples are weather records, stream flow hydrographs
etc.
Is such material to be considered part of the contract
documents?
Owners often use disclaimers, to escape liability

STANDARD FORMS-OF-CONTRACT
American Institute of Architects (AIA) Contracts
Standard form of Agreement Between Owner
and Contractor
Most widely used form for fixed-price building
construction works in USA.
FIDIC - International Federation of Consulting
Engineers
http://www1.fidic.org/resources/contracts/whic
h_contract.asp

These Conditions of Contract are recommended for engineering


and building work of relatively small capital value. However,
depending on the type of work and the circumstances, the
Conditions may be suitable for contracts of considerably greater
value.
They are considered most likely to be suitable for fairly simple or
repetitive work or work of short duration without the need for
specialist sub-contracts. This form may also be suitable for
contracts which include, or wholly comprise, contractor-designed
civil engineering, building, mechanical and/or electrical works.

Conditions of Contract for Construction, which are recommended


for building or engineering works designed by the Employer or
by his representative, the Engineer. Under the usual arrangements
for this type of contract, the Contractor constructs the works in
accordance with a design provided by the Employer. However,
the works may include some elements of Contractor-designed
civil, mechanical, electrical and/or construction works.

Conditions of Contract for Plant and Design-Build, which are


recommended for the provision of electrical and/or mechanical
plant, and for the design and execution of building or engineering
works. Under the usual arrangements for this type of contract, the
Contractor designs and provides, in accordance with the
Employers requirements, plant and/or other works; which may
include any combination of civil, mechanical, electrical and/or
construction works

Conditions of Contract for EPC Turnkey Projects, which are


recommended where one entity takes total responsibility for the
design and execution of an engineering project. Under the usual
arrangements for this type of contract, the entity carries out all
the Engineering, Procurement and Construction: providing a
fully-equipped facility, ready for operation (at the "turn of the
key"). This type of contract is usually negotiated between the
parties.

The purpose of these guidelines is to present the commonly used


methods of consultant selection, to explain the respective procedures
and to combine them all in one compact document, as well as to
emphasize and explain FIDIC's policies on the subject of selection.

The terms of the Client Consultant Model Services agreement


(The White Book) have been prepared by FIDIC and are
recommended for general use for the purposes of pre-investment
and feasibility studies, designs and administration of construction
and project management, where proposals for such services are
invited on an international basis: They are equally adaptable for
domestic agreements.

Sub-consultancy Agreement

BOT Contract: With an increasing number of projects being financed


privately through Build Operate Transfer or concession type structures,
lenders financing on a limited or non-recourse basis have also come to
know the FIDIC books. The Silver Book is, for the first time, expressly
aimed at providing a fixed price, date certain, engineering, procurement
and construction ("EPC") contract with a risk allocation which is suitable
for projects being financed by private lenders on a limited or non-recourse
basis. If it works, this is a very important contribution to the industry. in a
BOT Project, the EPC contract's primary reason for being there is in order
to enable the project company to satisfy the requirements of the
concession (or off take) contract that it has concluded with the grantor.

STANDARD FORMS OF CONTRACT-INDIA

CPWD
MES
State PWD
Model Standard Contract For Domestic Construction CIDC

ONE-OF-A-KIND CONTRACTS
Created for a particular project
Little about them is standard or traditional

Types of Prime Contract


Measurement Contract
Item Rate
Percentage Rate

Fixed Price
Lump Sum
EPC, Turnkey, Design Build

Cost Reimbursable
Cost plus percentage fee (CPPF)
Cost plus fixed-fee (CPFF)
Cost plus incentive fee (CPIF) (Also called as Target Estimate)
Guaranteed Maximum Terms (GMP)

Concessions

Measurement Contract
Contract is Broken Down into a series
of bid items, each for a discrete
element of work of the project
The two parties are not bound by the
total value of work. They are bound by
each individual rates
Payment is based on actual measured
quantity of work
Most common type is Item Rate

Item Rate Contract


Also called unit-price contract
Bid document includes a schedule-of-biditems or Bill of Quantities
The schedule contains the following columns:
Sl. No.
Description of each item of work
Unit of Measurement
Estimated quantity
Rate or Price per unit of work
Value of the particular item of work
Remarks if any

Item Rate Contract


Sl.
No.

Item
UOM
Descripti
on

Quantit Rate
y

Amoun
t

Remark
s

Item rate Contract


The schedule with item description and quantities is
given with bid form
The bidders fill in the rate column for each of the
item
The rate or unit price includes the contractors
overheads and profits
By totaling all the arithmetic products (Quantity x
Rate), the estimated total cost of the project is
obtained
The project is awarded to the lowest responsible and
responsive bidder; i.e. the bidder with lowest
estimated cost who satisfies all pre-conditions

Item Rate Contract


As the actual work progresses, the payment is made
on quantity of work physically measured
If no changes are made in nature of work, the
quantity of work actually performed can vary from the
quantities in BOQ (subject to limits), without change
in rate
If the quantity of work changes beyond limits, the
rates may be revised
The final contract price will depend on the actual
quantity of work. The estimated value of contract is
not binding
For new items of work, not in original schedule, the
rates need to be separately negotiated

Item Rate Contract


Bid Documents
Notice Inviting Tender
Instruction to the Bidders
Qualification Criteria
General Conditions of Contract
Special conditions of contract
Project Details
Bill of Quantities
Basic Drawings
Specifications
Details of Bid Bonds

Item Rate Contract


Mode of Payment
The contractor has to take measurements of the work carried
out, prepare and submit the bill periodically ( generally every
month )
The engineer either accompanies the contractor or his
representative while the measurements a quantities afterwards.
If no discrepancy is found recommends the bill for payment.
The amount recommended by the engineer is the cost of the
work less retention money and the cost of material supplied to
the contractor by the owner and actually used on the work during
the period under consideration.
If any item occurs during execution which is not included in the
bill of quantities, It is usually possible construct that item by a
combination of other items already in the bill, otherwise It is paid
for as an extra item as a specially analyzed rate.

Item Rate Contract


Pros
The tender can be floated right after preparation of
preliminary drawings
Beneficial when there is lack of design information
Tendering process, Mobilization, etc. can be carried out in
parallel with design & drawing
Easier to accommodate changes due to differing site
conditions, change in requirements, etc.
Less risk of contractor making error in quantity estimation
during short time period available during bidding
Less tendency of contractor to bid conservatively
What the owner pays to the contractor is the actual cost
of the work at the agreed rates. This arrangements is fair
to both the parties

Item Rate Contract


Cons
Owner can not be sure of total cost till
completion of project. Can lead to huge
cost escalations
Needs lot of book keeping. Increases
overheads
No incentive on contractor to reduce
quantity / cost. No scope for value
engineering
Dispute regarding extra items
Malpractices (Insider trading)

Item Rate Contract


Dispute regarding extra items
The contractor invariably presses for
higher rates than he would have tendered
in the beginning
May threaten to not perform the extra
items if his demand not made. Difficult to
get the extra items done by another
contractor
In most cases owner has to meet the
demands

Item Rate Contract


Malpractices
The bidder, by bribing an insider, can get information
on an item, which has more probability of increase in
quantity
He may bid high rate for that particular quantity, and
bid low for another which he knows may decrease in
quantity
He may be awarded the contract on becoming L1, and
on actual completion, the payment made may be
much more than what would have been made if project
was awarded to the L2 bidder
Through corruption the quantities can even be
intentionally changed to facilitatie such malpractice

Item Rate Contract


Front Loading
The contractor may put a higher rate for
works to be completed earlier, and a
lower rate for ending items
This ensures that contractor becomes
cash rich upfront, and can manage his
working capital better
However if the bid is heavily front loaded,
contractor may run away, after
completing the profitable items

Percentage Rate Contract


Another type of measurement contract
Devised to get rid of unbalanced / front loaded bids
The rates are estimated by the owner himself, and
included in the BOQ, in addition to item description
and quantity
The bidder has to quote a percentage above /
below / at par with the rates given in the BOQ
Rates of all items will be increase/decreased by the
percentage quoted by the bidder
The bids will be compared based on value of work
derived based on the revised rates

Percentage Rate Contract


No scope for
Unbalanced bids
Front loading
Malpractices through insider tips

used in preference to the item rate


contract for the works where the
estimated quantities are uncertain
and likely to change considerably.

Percentage Rate Contract


Documents
Same as item rate, only rate column of
BOQ filled by owner and not bidder

Mode of payment
Same as item rate

Lump sum Contract


It is a Fixed Price Contract, i.e. the contractor
will be paid an agreed fixed price for the
contractually stipulated services
The lump sum amount can be decided by
negotiation or competitive bidding
The bidders quotations are compared on the
basis of only one figure, the bottom-line or total
estimated contract value
The value of the works is estimated by the
contractor based on the drawings and
specifications provided.

Lump sum Contract


Fixed price contract needs complete and
accurate set of drawings and specifications
Even with complete drawings, estimation of
the fixed price in short time available for bid
preparation becomes difficult
Contractor may quote very conservatively
Sometimes, the agreement makes provision
to adjust the fixed sum allowing for the
cost of extra work, variation , omission, etc.,
through deviation schedule.

Lump sum Contract


Deviation schedule
The work is broken into a no. of items,
as in a BOQ
Gives a complete break-up of the fixed
price, including item description,
quantity and rate
In case of variation, the amount payable
for that particular item is decided based
on the deviation schedule

Lump sum Contract


Even though the fixed price is for the total
completion of job, working capital management
becomes difficult if there is no interim payment
Milestones are decided
Payment is linked with completion of milestones
Payment schedule is mostly back loaded
In case the contractor abandons midway, he can
only receive payment for completed milestones
and not the actual portion of work done
The engineers interim certificates form the basis
of part payments to the contractor by the owner

Lump sum Contract


Bid Documents
Notice Inviting Tender
Instruction to the Bidders
Qualification Criteria
General Conditions of Contract
Special conditions of contract
Project Details
Complete set of Detailed Drawings & site investigation data
Specifications
Details of Bid Bonds
Deviation Schedule
Payment Schedule

Lump sum Contract


Pros
If no extras are contemplated the tenders tell the owner
exactly what the project will cost him. This is a sound
footing on which he can take the decision whether to start
the project or abandon the same
Owner need not employ too many staff to keep periodical
accounts of the contractors materials, labour and output.
All that the engineer has to do on his behalf is to see that
the work is being executed exactly according to the terms
of the contract and issue interim certificates to the
contractor
There is incentive on the contractor to save on quantity /
cost. Considerable scope for value engineering and
innovation

Lump sum Contract


Cons
Before a contract is let out the project has got to be
thoroughly investigated and all the contract
documents kept ready in every respect. This entails
costly and time consuming work and which is often
difficult to accomplish.
If the nature , extent, and details of the work are not
properly defined by the contract documents, many
additional features may have to be determined and
provided for as the work progresses. These features
not being part of the original agreement give
opportunity to the contractor for claiming payment at
abnormal rates

Lump sum Contract


A lump sum contract can be used
successfully for the construction of works
with which the contractors have had
considerable experience and whose cost
they can predict with reasonable accuracy.
Examples of such works are public and
private building, warehouses, workshops ,
etc.

Lump sum Contract


This type of contract is not suitable for works of which
extent and nature cannot be predicted in advance. It is
then unfair to make the contractor assume all risks and
uncertainties. Example of works unsuited to a lump sum
contract are :
Works involving difficult foundations : Where it is no possible to
know in advance the characteristics and quantity of excavation,
dewatering of foundations, shoring etc.
Emergency projects that have to be rushed through without time
to prepare complete set of contract documents.
Works, such as additions and alterations to existing structure
which involves the maintenance of operations while the work is
being performed.
The works subjected to unusual and unpredictable hazards such as
floods beyond the control of contractors.

EPC / Turnkey Contract


EPC Engineering Procurement Construction
Turnkey Ready to be commissioned at turn of a key
These projects include design as well as construction (i.e.
Combination of A/E contract & Prime Contract)
The owner only provides preliminary conceptual drawings
(Front End Engineering) & specifications during bidding.
Detailed Design & Working Drawings (Detailed
Engineering) is done by the contractor as per
specifications provided by owner
In most cases specifications lay down the performance
criteria only. Methods decided by the contractor
A Construction Management Service or a Project
Management Consultant may be employed by owner to
check progress and quality of works

EPC / Turnkey Contract


Commercial Terms can be
Lump sum
Item rate
A combination of both
Cost plus

Mode of payment can be


Measurement Based
Milestone Base
Combination of Both

EPC / Turnkey Contract


In case of LSTK (Lump Sum Turn Key), deviation
schedule is mandatory since in absence of all
drawings, it is impossible for bidder to estimate
the final cost correctly
Hence the bid documents include a BOQ, which
contains rates of all items and initial quantities
(estimated by the bidder), used as a back up to
arrive at the Lump sum. The BOQ is revised
after all drawings are completed, and the lump
sum fixed based on previous rate
Lump sum includes design fees

EPC / Turnkey Contract


In case of unit price EPC contract, the
BOQ contains all items of work, including
design services, escalation, etc.
The quantities and rates are estimated
and submitted by the bidders. The rates
are fixed, but quantities may be changes
depending on the drawing (to any extent)
The payment is based on actual
measured quantity

EPC / Turnkey Contract


In big projects, some portions may have lump
sum price, and some other portions may be
item rate (i.e. some related items may be
bundled into a lump sum, other items stay
unbundled and are paid on unit price)
Example: In a highway contract, excavation,
earthwork, WMM, asphalt, may be item rate
(paid on per LM) whereas Flyovers, CD
structures, Toll Plazas may be lump sum
Invoicing schedule will contain both milestone
and measurement

EPC / Turnkey Contract


Bid Documents
Notice Inviting Tender
Instruction to the Bidders
Qualification Criteria
General Conditions of Contract
Special conditions of contract
Project Details
Preliminary Drawings
Specifications
Details of Bid Bonds
Invoice Schedule
Bill of Quantities
Milestone schedule
Deviation schedule

EPC / Turnkey Contract


The work can be greatly expedited under such contracts as
extensive plans and specifications need not be prepared by
the employer. Project is fast track since design and
construction can proceed in parallel
There is no division of responsibility, hence contract
management is simpler
Owner needs to employ less no. of professional staff
Enables the contractor, with specialized knowledge of his own
techniques, to design so as to produce maximum economy,
and therefore a leaner price, in a way that an architect or
engineer without knowledge of these techniques would not be
able to produce.
More scope and incentive for innovation and value
engineering

Cost Plus Contracts


In these contracts the owner agrees to
pay the contractor the actual cost of
carrying out the work, plus an additional
amount which would cover his profits and
indirect overheads
Not as common as lump sum / item rate
but sometimes may become necessary
due to various circumstances
Unusual nature of work
Lack of interest among contractors

Cost Plus Contracts


The items, expenses under which will constitute actual
cost, are to be carefully defined in the agreement
Generally the following are not included as cost, and is
considered to be part of the percentage fee paid

Salaries of he contractors supervisory staff.


Contractors general office expenses such stationery,
postage , telephone accounts etc.
Salaries or portion of salaries or traveling expenses
of the officials of the firm who may visit the work.
Charges for the use of any equipment that the
contractor would not normally use for the
performance of the work.

Cost plus percentage fee


(CPPF)
The owner agrees to pay to the
contractor the actual cost of the work
plus an agreed percentage of the
actual or allowable cost

Cost plus percentage fee


(CPPF)
Bid Documents
Notice Inviting Tender
Instruction to the Bidders
Qualification Criteria
General Conditions of Contract
Special conditions of contract
Project Details
Details of Bid Bonds

Cost plus percentage fee


(CPPF)
Pros
Early completion of the work : The work can be started
even before the drawings, designs, estimates and
specifications are prepared; these being prepared as the
work progresses. The decisions can be taken speedily.
These factors lead to the rapid execution of the work.
Extra Works : No work or a portion thereof that the
contractor is directed to perform can be called an extra
work. This flexibility allows the adoption of alternative
ways and methods of construction from which to choose
the most economic one for the work as a whole. This may
reduce the cost of the work. Disputes arising due to extra
work are eliminated.

Cost plus percentage fee


(CPPF)
Pros
Quality of Work : The contractor is assured
of a reasonable amount of profit even though
the prices of materials and the labour charges
are subjected to fluctuations . Similarly , the
use of inferior type of materials than specified
and hurried completion resulting in poor
workmanship do not increase the contractors
profit. This induces him to perform the work
in the best interest of the owner. The final
result is therefore a better quality work.

Cost plus percentage fee


(CPPF)
Cons
Lack of Incentive : Other than
professional ethics and goodwill, There is
no incentive for the contractor to complete
the work speedily, and economically by
proper planning and efficient management
. On the contrary any increase in the
construction cost due to delay, wastage of
materials, changes in the drawings and
designs result in increase of his profit.

Cost plus percentage fee


(CPPF)
Cons
Unpredictability : The final cost is not
known to the owner. This may lead the
owner to financial difficulties. Since
profits of the contractor are linked with
cost of materials, labour and equipment,
a high cost gives the contractor a higher
amount of profits. This results in waste,
inefficiency and extravagance by
contractors

Cost plus percentage fee


(CPPF)
Cons
Accounts Keeping : Both the parties have to
do a lot of accounts keeping regarding the
materials purchased and used, the labour and
plant employed and other miscellaneous
expenses incurred on the work.

Illegal for Public Works : Where the owner


happens to be a public body or government
department this form of contract cannot be
adopted except during emergencies.

Cost plus percentage fee


(CPPF)
Suitability
When there is an emergency or any other condition that
requires constructing a facility in a hurry without time to
develop plans for it, neither the employer nor the contractor is
sure about the cost of construction, a cost plus percentage
contract is generally used
Works ( in situations which are no emergencies )Where no one
can foretell with certainty just what troubles would be
encountered in the work, and correct decisions cannot be taken
except during the progress of the work
Construction of expensive structures e.g. palaces, where the
cost of the work is of no consequences but the materials to be
used and the methods to be adopted are to suit the choice and
taste of the owner

Cost plus percentage fee


(CPPF)
The owner should exercise great care
in selecting a contractor to carry out
the work for him. A person or firm of
known integrity , who will not exploit
the weakness of this type of contract
to his advantages, will be the best
choice

Cost plus fixed fee (CPFF)


The contractor is reimbursed the actual cost
incurred by him on materials and labour and is
given a fixed amount of money as his fee.
It has evolved because of the potential for abuse
in CPPF format
The profit of the contractor is not linked with the
cost. The contractor receives only the stipulated
sum for his part in overseeing and doing the job,
no matter what the cost of the project may be
The contractor will, therefore, try to complete the
job as fast as possible, to reduce his overheads

Cost plus fixed fee (CPFF)


The agreement specifies the fixed lump
sum to be paid to the contractor by the
owner over and above the actual cost
of the work.
The employer can select a reliable
contractor to execute the work. The
parties can work in harmony and
accomplish amazingly fine results.
However, there is no incentive for the
contractor to do the work economically

Cost plus fixed fee (CPFF)


Mode of Payment, Documents,
Suitability
Same as CPPF

Cost plus incentive fee


(CPIF)
A more sophisticated form of cost
reimbursable contract
The contractor is paid the actual
costs for carrying out the work, and
an incentive amount, worked out by
a pre agreed formula, which is
directly proportional to the savings
over a target estimate

Cost plus incentive fee


(CPIF)
The target estimate is an estimate agreed upon by the
arties prior to entering into the contract, as the most
probable cost of providing the contemplated services.
A fee as payment for the services is also agreed to
based on the magnitude of the target estimate, with
the provision that the parties will share the benefits or
penalties of any underruns or overruns in the actual
costs incurred in providing the services, compared to
the target estimate.
The exact formula for sharing is also agreed to at the
onset and may vary from contract to contract
Usually there is a cap on the contractors share of
overruns ( the agreed upon fee)

Cost plus incentive fee


(CPIF)
By introducing an element of incentive for
the contractor to carry out the work in the
most economic way an attempt is made in
this form of contract to overcome the main
drawback of the previous two types of costplus contracts.
This is achieved by suitably changing the
nature of the agreement in respect of the fee
is determined by reference to some form of
sliding scale. Thus higher the actual cost,
lower will be the value of the fee that the
contractor receives and vice versa.

Guaranteed maximum price


(GMP)
The parties agree on an initial estimate for the cost of the
contemplated services and on a fee for the provider
The estimated cost ; fee ; contingencies are added to
yield the Guaranteed maximum price
The GMP is the owners maximum financial exposure
The owner reimburse the contractor for all costs incurred
and pays the fees pro-rata
No further payment after GMP is reached
If the cost exceeds the GMP, the contractor suffers a loss
If cost is less than GMP, owner receives total benefit of
savings
Contractors may be interested in GMP only in case of
very high fees

Comparative effect of contract


commercial terms
Six Identical construction projects with estimated cost of
Rs. 15 Cr. are bid out through following modes of contract
1. Unit Priced
2. Lumpsum @ 10% premium over target estimate
3. CPPF @ 10%
4. CPFF @ Rs. 1 Cr.
5. CPIF @ Rs. 1 Cr. + 50-50 split
6. GMP (Rs. 15 Cr.) + 10% fee
What will be the financial implication on the owner and
contractor if:
1. The terminal cost is Rs. 13.5 Cr.
2. The terminal cost is Rs. 16.5 Cr.

Contractor's
profit

Type of Contract Terminal cost


13.5
Unit Priced
Lumpsum @ 10%
premium over
target estimate
CPPF @ 10%
CPFF @ Rs. 1 Cr.
CPIF @ Rs. 1 Cr. +
50-50 split
GMP @ Rs. 15 Cr. +
10% fee

16.5

Total cost to
owner

Varies depending on rates of


individual items

13.5

16.5

16.5

16.5

13.5

1.35

14.85

16.5

1.65

18.15

13.5

14.5

16.5

17.5

13.5

1.75

15.25

16.5

0.25

16.75

13.5

1.35

14.85

16.5

16.5

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