Assignment Project Contract Management - Mr Anas Alam Faizli - EMCM5103

Name: Anas Alam Faizli Student ID No. CGS 00385017 Centre of Graduate Studies MPM Intake: January 2009

ASSIGNMENT – EMCM5103

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SEPTEMBER SEMESTER 2009

CONTRACT MANAGEMENT – EMCM5103

ASSIGNMENT (45%)

LECTURER

MR DAVID LEE

STUDENT

ANAS BIN ALAM FAIZLI



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SEPTEMBER SEMESTER 2009 CONTRACT MANAGEMENT – EMCM5103

ASSIGNMENT Part A – 20% Part B – 25%

INSTRUCTIONS: ANSWER ALL QUESTIONS.

PART A

Question 1 a) What are the EIGHT (8) parties involved in the traditional project contract procurement

strategy?

[2 marks]

The eight parties involved in the traditional project contract procurement strategy in order

of ownership, responsibility in the project are as below:

1. Promoter

2. Project Board

3. Project Director

4. Project Team

5. Consultants

6. Site Supervision

7. Contractors

8. Subcontractors

This can be grouped into three main categories:-

a. Clients who initiates and sanction the project – Promoter, Project Board, Project

Director and the Project Team

b. Consultants who undertakes the feasibility and design works – Consultants

c. Contractor who is responsible for implementing the project – Site Supervision,

Contractors and Subcontractors



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b) List the roles and responsibilities for each of the parties.

[2 marks]

The roles of each party are as below:

1. Promoter – The promoter authorized the project implementation through the project

board and has contractual commitments, statutory obligations and is responsible

for market forecasts. The promoter is the ultimate client in a project

implementation and is on top of the project chain.

2. Project Board – Reports to the promoter with regards to all project matters, statute

changes and market changes. Project board have full control authority, and

ensure the implementation of project objectives or any objective changes through

the project director. Statutory restraints play a role directly to the project board.

3. Project Director – Reports to project board for all project related matters, directly

involved in any objective changes and review control system. The project director

is responsible for overall project execution and is the ultimate person in charge for

the project team. Project director are also responsible to appoint the contractor.

4. Project Team – Reports all project execution related to the project director. Project

team provides details of project brief, risk review, budgets programmes and any

change orders to the project director. Project team also verifies reports &

recommendations from consultants, site and contractors. Involve in all

construction review activities and reports back to project director.

5. Consultants – The consultants will be involved in hazard performance, cost reviews

design brief and design programmes and submit for approval through the project

team for a joint review. Any changes from the project team will be design and

implemented by the consultants. The consultants also responsible for drafting

construction contract and assess possible contractors and submit to the project

director. Contract strategy will also be recommended to the project director.

Consultants are also responsible and have supervisory powers to the site

supervision team and control variation orders to the contractors.



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6. Site Supervision – The team provides reports & recommendations to the project

director. The team also provides instruction & approvals for construction works to

the contractors, with the design taken from the consultants and the project team.

7. Contractors – Contractors report directly to the site supervision team and will

provide ongoing proposals, reports and claims to the site supervision team. The

contractors will be responsible to appoint subcontractors, plan the construction and

mobilize to site along with the subcontractors.

8. Subcontractors – Reports directly to contractor and execute construction works

and also specialized construction works. The subcontractors will be at the furthest

down of the project chain.

c) What are the THREE (3) fundamental roles of the traditional contract procurement

strategy?

This three traditional contract procurement strategy has been used extensively in UK

construction industry. The three fundamental roles of the traditional contract procurement

strategy are as follows:

1. To initiate and sanction a project

2. Perform feasibility studies and design

3. Implement the project and perform construction

The roles and responsibilities of the eight parties which was mentioned in the answer for

question no. 1(a), can be combined into the three fundamental roles as listed above. This

strategy is not as popular as it was back then, but still accounts for more than 50% of UK

heavy civil engineering construction industry.

[2 marks]

[TOTAL: 6 MARKS]



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Question 2 a) Name, and describe briefly, the TWO (2) main types of alternative procurement

strategies.

1. Integrated Strategy

Simply put, integrated strategy is the integration of roles and responsibilities for phases of

project, such as the integration of design, engineering and construction phases. The

traditional practice is to have a separate bid for every phases of the project, whereas there

will be a design contractor, an engineering contractor and the main contractor for the

construction phases. However, the traditional strategy usually will be a cause of dispute

and conflict. Furthermore, the time taken to prepare the bidding and tender documents

will lengthen the project execution time. By integrating all the scope of work and awarding

it to one main contractor that execute all this phases – the client will be able to interface

the activities, complete the project faster and at a cheaper cost. However, the client will

lose control over a major part of the project cycles. Among others, the integrated

strategies can be design and build, turnkey, or the concession strategy.

2. Management Strategy

The management strategy engages a project management team as a contractor or hence

called as management contractor will break down the work into smaller components and

contracts. The consultant will be reporting to the client’s project manager giving inputs as

the project progresses. The management contractor will also report directly to the client’s

project manager. This strategy provides for additional emphasis on management of

project to enhance benefits in terms of fitness for purpose, constructability, performance

and risk management. However, as the contract is awarded by the management

contractor, the client will have no direct contractual relationship with the consultant or work

contractors. The trust and commitment will play a major role between the client and the

management contractor if the project is ever, to reach its maximum potential.

[3 marks]



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b) Discuss the following alternative procurement strategies:

� Design and build

The client will have a front end engineering design done in-house or with a consultant,

then instead of appointing a consultant to do the design, awarded the whole project of

completing the detail design and construction to the design and build contractor.

Typically the contract is paid on a fixed-price lump sum basis to ensure the

contractor’s effectiveness in saving the cost and delivering the project in time and is

relatively a project of a smaller scale where no significant risk or variations is expected.

� Turnkey

The client will award the whole phases of the project to one contractor. Turnkey

contractor have the responsibility of design, procurement, construction and

commissioning phase of the project. The cost is much higher with as the responsibility

is bigger and the client’s role is severely limited. Normally the tender submission will

be done in two tier – the technical and commercial submission. Typically the contract

is paid on a fixed-price lump sum basis. However, due to the nature of the contract,

the client’s role will be severely limited as the contractor will have full control of the

project.

� Concession

The client will transfer almost the entire project to one contractor, in addition to the

turnkey contract; a concession also calls for the operation and maintenance roles to

the contractor. The concession contractor will be required to perform almost all of the

project life cycle and will be integrated into a single organization typically known as the

promoter. The contract is paid by having the promoter to arrange the project financing

them, and generate income to service the debt, operate and earn profit. This provides

for the contractor to execute the project that ensures higher return and maintainability

as the returns will be provided by operating the project after completing it.

� Joint Ventures and Partnering

Joint ventures and partnering is basically a contractual agreement joining together two

or more parties for the purpose of executing a particular business undertaking. All

parties agree to share in the profits and losses of the enterprise. It is collaboration



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between the parties to form a working group, usually project specific, with the

amalgamation and introduction of new roles. Explaining this from another perspective

it is a legal contract entered into by two or more parties in which both party agree to

furnish a part of the capital and labour or expertise for the project and which each

shares a proportion of profits or losses.

� Public Private Partnership

Consist of public and private sector funding. This means that the contract involves

between a public sector authority and a private party, in which the private party

provides a public service or project and assume financial, technical, and operational

risk in the project. Involvement of public sector reduces risk to a tolerable level, and

allows for risk sharing, concessions for existing revenue generation facilities and

provision of indirect benefits. It usually requires the development of a new hybrid

organization. There are also some cases where the cost of using the service is borne

by the users of the service and not by the taxpayer. Government contributions to

public private partnership may also be in kind.

[5 marks]

[TOTAL: 8 MARKS] Question 3 a) What are the THREE (3) main ways in which the contract price may be expressed or

calculated?

The three main ways which the contract price can be expressed or calculated are:

- Lump Sum

The contract price is fixed lump sum upfront with minimum provisions for variations

or claims. However, the contractor must be provided with full details to tender

realistically failing which might lead to big variations. This is the most ideal

payment from a purchaser/client’s point of view as the price is fixed up-front with

minimum risk of cost over-runs. This method also provides motivation for the

contractor to complete the project earliest and minimize the cost as it will provide

for bigger profit to the contractor. However it is critical that the design are as



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accurate as possible as any changes will lead to variation and when the client are

put in this position, the contractor will be in a better position to deal for a better

rates on the variation and changes.

- Re-measurement, schedule of rates or bill of quantities

The contract price is fixed lump sum upfront using quantities which form part of the

contract. This is for the quantities of work described in the bills of quantity. If

greater works or quantities are required the contractor will be paid extra based on

the variations clause in the contract. Prior to the award of the contract, the

surveyors will accurately calculated the bill of quantities required to execute the

particular project. From this bill of quantities each item will be fixed price. The

entire itemized item will then be totalled up to make up for the total price of the

contract. Any variation of the quantities will refer to the unit price outline for each

item.

- Cost reimbursement

The contract price is based on the actual cost and to be included within the

comparison between target and actual costs. In short, the client will pay the total

cost spent by the contractor for the project at an added fee which is based as a

percentage from the total project cost spent. However, this will breed inefficiencies

as the profit will be coming from the total project cost. The contractor will not be

motivated to minimize the cost as their profit will be increased if the cost is

increased. However, there are an alternative to mitigate this problem whereas the

client will offer incentive for early completion. The client will offer a percentage of

incentive if the project is completed ahead of time, where normally a table will be

provided showing a range from the highest to the lowest incentive offered which is

time based.

[2 marks]

b) Discuss the pros and cons of the following terms of payment methods:

� Impose minimum stress on the contractor’s financial resources

Should the client decided to have minimum stress on the contractor’s financial

resources, the list of companies that can be included in the tender list will grow to



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include the smaller companies which might lack the financial but has the technical

capabilities to perform the job. This also ensure that the bidders does not increase

their cost just to cover their financial charges where in many instances they have to

borrow from bank to provide upfront cash. Client would also releases themselves

from situation where the project is delayed due to the contractor’s financial

difficulties and also allows the client to take advantage of companies having

technical superiorities with lack of cash.

However despite all this, the setback would be that the client will have to bear and

support the contractor financially along the project completion within stages

throughout the project and the client will not be able to use the cash elsewhere. In

short, the purchaser’s capital is tied up prior to the return of the purchaser’s

investment.

� Impose minimum financial stress on the owner’s financial resources

Should the client decided to have minimum stress on its own financial they could

also stated that the contractor would only be paid upon completion of the project.

This instead of imposing liquidated damage for delays offer a far more catching

incentives to the contractor to rush completion on time. However would limit the

number of bidders as the contractor involved would need to have a very strong

financial back-up. Another option is to pay monthly as the work progresses. This

allow for small contractor to take part in the work where they will be paid

progressively each month by the amount of work completed. This will also

minimize purchasers risk commercially.

However paying the contractor monthly might not be to the owner’s advantage, and

so does paying at the completion of the job which requires strong financially back

up contractors. Another potential problem is that the contractor will over measure

work accomplished each month in order to get higher payment every month and

artificially increasing the rates of items completed early. This also will discourage



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the participation of smaller contractors but with the technical ability to undertake

the work and is possible to inflate the tender price due to contractor financing

charges.

[4 marks]

[TOTAL: 6 MARK]

PART B Question 1

a) Explains why a corporative project organization will lead to a win-win situation for the

owner and the contractor

[1 marks]

Cooperation between both parties will always lead to a win-win situation where both are

working within a positive mindset of bringing profits to both sides. In a corporative project

organization, the contracts are written which aligns both contractor’s and the client’s

objectives in creating the cooperative project organization. This will ensure that the

employees, individuals and staffs from both parties work hand in hand and are motivated

to act towards one common project objectives.

b) Describe the importance of the following aspects of contract and contract

management:

� Provide for ex-ante incentivization in a contract (reward, risk & safeguard)

Ex-ante incentivization is importance where it provides incentive and safeguard to deal

with the risk that is forecasted in advance. If the risk is high, the contractor should be

complimented with higher returns as the contractor is buying and paying up front for all

the risks. Decided if the owner absorbs some of the risk, then the return could be

lower. Whereby, that if the initial risk is low, then the incentives can be lower as well.

This works in tandem. However, it is important to note that ex-ante incentives do not

deal with unforeseen circumstances and Act of God.



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� Flexible farsighted ex-post governance in contract management (incentive intensity,

adaptiveness, transaction costs & court ordering)

Where the ex-ante incentive does not provide for unforeseen circumstances, flexible

farsighted ex-post governance does. This allows it to adapt through mutual agreement

and will harmonizes communication throughout the project execution. It also

generates communication between both parties which will follows through as the

project progresses, problems are identified from time to time and will be dealt

cooperatively, this continues to provide incentive for the contractor to ensure that the

client’s objective is delivered and ensures that neither party has to proceed with legal

counsel which is usually a lose-lose situation.

[2 marks]

c) List the twelve types of contract on the basis of payment

1. Cost plus percentage fees

2. Cost plus fixed fees

3. Cost plus incentive fees

4. Alliance contracts, or cost plus gain share

5. Remeasurement based on a schedule of rates, effectively cost plus

6. Remeasurement based on a bill of quantity

7. Remeasurement based on a bill of materials, effectively fixed price plus variations

8. Fixed price based on a detailed design, effectively remeasurement

9. Fixed price design and build based on a scope of design

10. Fixed price design and build based on cardinal points (a functional specification)

11. Target cost

12. Time and materials

[2 marks]



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d) Identify the best and worst types of contract (on the basis of payment) in terms of ex—

ante incentivization and ex-post governance.

1. The best type of contract would be of contract is alliance contracts. This is the best

as both the client and the contractor will work hand in hand to minimize or reduce

the scope of work and this will definitely reduce the project cost. The project will

move toward to achieve a set of key performance indicators as outlined by the

client. The contractor will be further motivated as there is an incentive offered

through the gain share fund. Both ex-ante incentivization and ex-post governance

are well aligned in this type of contract.

2. The worst type of contract is cost plus percentage fee. This is because the

contractor will tend to ensure that the price is as high as possible as the contractor

is making profit from the numbers. The higher the cost the higher the profit would

be for the contractor. The contractor will be motivated to spend as much as

possible and delay the project, as their profit lies in the high cost. There would be

no motivation for the contractor to neither save cost nor reduce the scope of work

as there would be no interest for the contractor to do so.

[2 marks]

[TOTAL: 7 MARKS]

Question 2 a) What are the advantages of standard forms of contract?

[1 marks]

Standard form of contracts are generally prepared or written by an organization or a

body in a particular industry. It differs from an industry to another. There are many

advantages of using a standard form and among many is that it provides a fair and

equal distribution of risk to both party – the contract writer and the contract taker. For

the writer it is an ease of use and the writer do not to bespoke or re-write the contract



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each times it needed to enter into a contract. For the contract taker, it prevents the

writer from adding last minute addition to the contract which is in a way offers some

form of protection. It also minimise the times it take to review the contract for both

parties as the contents are standard. The standard forms also provide a representative

of which industry the contract taker and writer serves. Using the standard form also

the writer can demonstrate that they abide by the industry standard and are not

imposing unfair terms on the contract, which is always called as one sided contract.

Standard forms also provide advantages where it saves efforts, time and cost.

b) List a number of sources where one may obtain forms of contract.

[2 marks]

In general contracts can be obtained from organization or bodies in every industry.

Among them are like in the UK from the construction industry we have the Joint

Contracts Industry (JCT). We also have institutions providing it also like the APM,

JCT, IChemE, and ICE. The standard forms of contract can also be obtained from

UK’s Association of Project management, UK’s Joint Contract Tribunal, Institution of

Chemical Engineers, Royal Institute of Chartered Surveyors, Institution of Civil

Engineers and many others. In Malaysia, in the Oil & Gas industry there is also

standard forms provided by Petronas and also clients like ExxonMobil and Talisman

ranging from vessel supply contracts, offshore platform constructions and many

others. Bimco provides all the form of contracts for vessel charter.

[TOTAL: 3 MARKS]

Question 3 a) What are the laws which are related to contracts and contract management?

[2 marks]

The main law in Malaysia will be the Contract Law (1957) and Tort. Understanding

contract and Tort under the common law will assist to understand which law are

related to contracts and contract management. Acts which can be referred from case

to case basis will be as follows:



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- The Contracts Act (1950 Act 136) amendment 1976

- The Sale of Goods Act (1957)

- Hire Purchase Act (1967)

- Companies Act (1965)

- Civil Law Act (1956)

- Government Contracts Act (1949)

Previous court cases could also be referred in order to understand more on the Law

referring to contract and the management of contract.

b) What are the essential elements for a binding contract between two parties?

[2 marks]

There are four (4) essential elements for binding a contract between two parties as

such:

- Offer: An offer has to be made by a party. It is a statement of terms and

willingness to contract if terms are accepted. Offer can be withdrawn.

- Acceptance: The second party that received the offer has to accept without stating

any terms or condition and accepting fully the term offered by the offerer. Any

variation to the terms will be considered as counter-offer and the deal will only be

on if the offerer accepted.

- The intention to be legally bound – All transaction by default between two

organizations or more are legally bound unless it is stated or expressed that they

do not wish to be legally bound.

- Consideration: When two party have an exchange of an act or promise to deliver

the contract by payment versus the other of work and product.

c) Describe in detail the terms “offer” and “acceptance”, and how these actions affect the

formation of a contract.

An Offer is a statement of the terms that a party is willing to enter into a contract

and an expression of willingness to do so if an acceptance is made by the other party



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which will bind a contract. An offer can be withdrawn at any time before it is accepted

by the party that an offer is being made. An offer can be revoke prior to acceptance of

the offer by the other party. If the offer has been accepted, a revocation is no longer

valid and a valid contract has already existed.

An acceptance is the acceptance of the other party that receives an offer. The

acceptance became valid when acceptance is communicated to the party that made

the offer. Legally an acceptance is also only valid if the acceptance is made without

condition and accepting fully all the terms offered. If not, then it will be considered as a

counter offer, which has three possibilities:

- No acceptance is made but transaction with regards to the contract is made, i.e

delivery of goods. This will regard that the seller accept the buyer’s term.

- The other party returns a tear off acceptance slip and states it accepts the buyer’s

conditions

- The seller replied by giving a letter specifically quoting that their acceptance is

based on their terms of sale, this is considered as a counter offer which then the

party that made the offer has a decision whether to accept or not.

d) What are the conditions for a contract between two or more parties to be legally

bounded? Under what conditions can a contract be not legally bounded for one or

more of the parties?

[2 marks]

When two commercial organizations or more enter into an agreement, by default they

are legally bounded. However if the parties do not wish to be legally bounded they

may express their intention to be not legally bounded. The court will give effect to this,

which is still a rare case. A more common instance would be when one party made

their offer ‘subject to contract’ showing their non intention to be legally bounded.

Another method is when they have pending issues or disagreement which is yet to be

settled can be considered as their intention not to be legally bounded until all terms

and conditions are thrashed out. If the offer or the contract is still open for negotiation

then it is considered to be as the intention not to be legally bounded also. It is back to



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the basics of and offer and acceptance where the acceptance has to be made without

changing the terms and conditions and giving a full acceptance of the offer.

[TOTAL: 6 MARK]

Question 4 a) Describe the main causes of variations in contract.

[2 marks]

Variations are often described as cancer to contract. It is usually inevitable to have

variations in contract. This is often caused by having changes after the

implementation of the said contract. Factors contributing to this would be such as:

- Inadequate allowance of time or bidding period. Contract owner always rush to

execute the contract ahead of time but ending up with plenty of difficult to manage

variations

- Inadequate specifications. When the bid is not written in details, what the

contractor have in mind will usually end up mismatching what the contract owner

had and end up in variations

- Improvements over time. As the contract progresses the contract owner might

want to add new technology or made changes to the job which will lead variations

- Mismatching wish list. The contractor might have different opinion of what actually

the contract owner wanted which leads to variation.

- Genuinely unforeseeable circumstances. There are also some cases where the

variations are completely unpredictable where both the contract owner and the

contractor didn’t see coming.

b) During the cause of a contract, a two pieces of equipment need to be replaced

after installation due to design changes. List the impact (i.e, additional work and

cost) of this variation on the contractor.

[2 marks]

The impacts involved due to replacing installed equipment would be:



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- Removing the installed two pieces equipment and the miscellaneous related works

(additional work and cost)

- Purchasing a new equipment to replace the old equipment (additional work and

cost)

- Logistic cost of transporting the new equipment (additional work and cost)

- Installation of the new equipment and the miscellaneous installation works – cable

installation, wiring, tubing, fitting, etc (additional work and cost)

- Additional design work, if required (additional work and cost)

c) List the basic guidelines on the preparation and presentation of claims?

[2 marks]

Basically, all data should be kept from day one of a project execution which will assist

greatly during the presentation of a claim. From day one, keep all records where there

is a risk of variation. It has to be accurate and complete with time. Ensure all

correspondences are kept and minutes of meeting recorded properly. Having all this

data at hands, claim presentation will be an easy task. When presenting, ensure it

has:

- A short executive summary of the claims or the scope of work involved

- Clear references on which the claim is based refers to which term of the contract

- All data is available with the claim – dates, variation orders, variation request etc

- Supporting documents are attached – scope of work, minutes of meeting and other

documents to support the claim

d) What are the advantages of arbitration over litigation?

[1 marks]

Arbitration has some advantages which made them a choice to settle disputes among

two parties, among many are:

- Confidentiality and privacy. Big corporations tend to shy away from media and

public when it comes to the matter of courts – this might have to do with their stock



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shares, option and such. Arbitration provides such thing as all proceedings are

held in private.

- Informality – Arbitration does not call for formal ceremony of the court

- Speed – Arbitration is definitely way faster from the court – court cases can take a

number of years to settle whereas arbitration can settle as fast as one session or

few months if it is a big case

An example of an arbitration would be the case of Talisman Malaysia Limited vs

Hyundai Heavy Industries of Korea over a construction project for the fabrication of

BR-E Offshore Platform where Talisman was instructed to pay USD10 million. The

arbitration was held in England quietly and it never made it to the main stream media.

The case was settled behind door and both companies’ reputation is safe guarded.

[TOTAL: 7 MARKS]



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REFERENCE

1. Harold Kerzner (2006) Project Management: A Systems Approach to Planning,

Scheduling, and Controlling, John Wiley & Sons Inc.

2. J. Rodney Turner (2009), Contracting for Project Management, Gower Publishing

Limited

3. Arjunan and Baksh (2008), Contract Law in Malaysia

Documents

Assignment Project Contract Management - Mr Anas Alam Faizli - EMCM5103