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8/8/2019 Construction Contracts - Legal Engg (Sp)
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Construction
Contracts
Maj Shahid
Pervaiz
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INTRODUCTION TO CONTRACTS
Why use contracts in construction?
Describe scope of work
Establish timeframe
Establish cost & payment provisions
Set forth obligations and relationship
Manage multiple risks
Establish control mechanism Minimize disputes
Improve economic return on investment
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Objective
Exposure various dimensions of construction
contracts, different types of construction
contracts, the types of contractors and risk
allocation and its analysis with a view to offer
viable recommendations.
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DefinitionsWhat is a contract?
Legal Definition
Mutually binding agreement that obligates the seller
to provide the specified product or services &obligates the buyer to pay for the same.
An agreement that affects the legal relationship
between two or more parties.
A construction contract is a contract specificallynegotiated for the construction of an asset or a
combination of assets that are closely interrelated or
interdependent in terms of their design, technology and
function or their ultimate purpose or use.
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Definitions
A construction contract may be negotiated for
the construction of a single asset such as a
bridge, building, dam, pipeline, road, ship or
tunnel.
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ESSENTIAL ELEMENTS OF A CONTRACT
Contracts require four basic elements:-
Mutual Agreement
Offer
Acceptance
Legal Objective
Valid Consideration
Legal capacity of the parties
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Mutual Agreement?
Must have evidence that there was a meeting
of minds
Offer
Clear & unambiguous
Acceptance
Clearly accepting the deal offered
Anything else = counter offer and not
acceptance
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Legal Objective?
The object of a contract must be lawful, for the
law will not enforce a contract for an illicit
purpose.
But, some contracts modifications may be
illegal & thus, unenforceable
Verbal modifications Modifications beyond partys authority
Cardinal changes
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Valid Consideration?
Consideration is something of value given by
one party in a contract to the second party in
exchange for something else.
In contract law, consideration can be anything
of value and the law usually is not concerned
with the amount of value. Its sufficiency is amatter for the parties to bargain over and
agree to.
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Legal Capacity?
Capacity refers to the competency to make
valid and enforceable contracts.
In simplest form parties must be
Of age
Mentally competent
In construction environment, parties musthave
Legal authority to issue & execute contracts
May have to be properly licensed to have legal
capacity
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Must a contract be in writing?
Generally, no
but they may need to be in writing to be
enforceable. Usually a contract must be in writing, if it cannot be
performed within a year. Therefore, most major
construction projects require a written contract.
An oral contract is unsubstantial and difficult to prove,
and because it cannot be demonstrated by tangible
evidence (except to the extent it has been performed),
it is always a potential source of misunderstanding.
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Contract Documents
Drawings graphically provide:
Arrangements Materials
Dimensions
Configurations
Other...
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Contract Documents
Specifications provide:
Written instructions that detail projectrequirements
Information that is not easily shown on
drawings
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Contract Documents
Other key documents:
Contract
Subcontract
General conditions
Supplemental conditions
Addenda and change orders Performance and payment bonds
Request for information (RFI)
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Contract Documents
Other key documents:
AIA Doc.521 and EJCDC Doc. 1910-16 address the question of
where to place or find a specific subject in contract documents andoffer a uniform approach to the organization of contract
documents.
Several components of the construction contract documents are
available as standard forms to define the agreement for a particular
project.
AIA, AGC, DBIA, and EJCDC have developed high qualitystandard
forms, agreements, general conditions, and other documents.
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INTEREST GROUPS
Owner wants to achieve best value for their
investment.
Contractors desire to bid low enough to win but highenough to realize profit on investment.
Workers hope to achieve better living standards and
working conditions.
Architect and Engineers are not directly associatedwith the above groups.
Professional achievement more attractive.
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ORGANIZATIONAL RELATIONSHIPS
Architech/Engineer Owner
General Contractor
Organizational Relationships
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ORGANIZATIONAL RELATIONSHIPS
Architech/Engineer Owner
General Contractor
Subcontractor Subcontractor Subcontractor
Organizational Relationships
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ORGANIZATIONAL RELATIONSHIPS
Architech/Engineer Owner
General Contractor
Subcontractor Subcontractor Subcontractor
2nd Tier Subcontractor
3rd Tier Subcontractor
Organizational Relationships
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ORGANIZATIONAL RELATIONSHIPS
Architech/Engineer Owner
General Contractor
Subcontractor Subcontractor Subcontractor
2nd Tier Subcontractor
3rd Tier Subcontractor
Supplier
Organizational Relationships
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ORGANIZATIONAL RELATIONSHIPS
Architech/Engineer Owner
Specialists General Contractor
Subcontractor Subcontractor Subcontractor
2nd Tier Subcontractor
3rd Tier Subcontractor
Supplier
Organizational Relationships
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ORGANIZATIONAL RELATIONSHIPS
Architech/Engineer Owner
Specialists Construction Manager
Subcontractor Subcontractor Subcontractor
2nd Tier Subcontractor
3rd Tier Subcontractor
Supplier
Organizational Relationships
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ORGANIZATIONAL RELATIONSHIPS
Architech/Engineer Owner
Specialists Construction Manager
General Contractor
Subcontractor Subcontractor Subcontractor
2nd Tier Subcontractor
3rd Tier Subcontractor
Supplier
Organizational Relationships
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ORGANIZATIONAL RELATIONSHIPS
Owner
Architech/Engineer Design Builder
SpecialistsSubcontractor Subcontractor Subcontractor
2nd Tier Subcontractor
3rd Tier Subcontractor
Supplier
Organizational Relationships
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ORGANIZATIONAL RELATIONSHIPS
Architech/Engineer Owner
SpecialistsSubcontractor Subcontractor Subcontractor
2nd Tier Subcontractor
3rd Tier Subcontractor
Supplier
Organizational Relationships
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ORGANIZATIONAL RELATIONSHIPS
Beneficiary Owner Performance Bond
Principal General Contractor Surety
Subcontractor Subcontractor Subcontractor
2nd T ier Subcontractor
3rd T ier Subcontractor
Supplier
Organizational Relationships
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ORGANIZATIONAL RELATIONSHIPS
Beneficiary Owner Payment Bond
Principal General Contractor Surety
Subcontractor Subcontractor Subcontractor
Beneficiary
2nd Tier Subcontractor
3rd Tier Subcontractor
Supplier
Organizational Relationships
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Types of Contracts
Fixed Price
Reimbursable
Lump Sum
Unit Price
Cost + Fixed Fee
Cost + Incentive Fee
Cost + Award Fee
Cost + % of Cost
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Types of Contracts Lump sum
Contractor free to use any means and methods to
complete work
Contractor responsible for proper work performance
Work must be verywell defined at bid time
Fully developed plans and specs required
Owners financial risk lowand fixed at the outset
Contractor has greater ability to profit
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Requirements
Good project definition
Stable project conditions
Effective competition essential when bidding
Much longer time to bid and award this type of project
Minimal scope changes
Types of Contracts Lump sum
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Require sufficient design definition to estimate quantities
of units
Contractors bid on units of work
Time and cost riskshared
Owner - - At risk for total quantities
Contractor - - At risk for fixed unit price
Large quantity changes (>15 25%) can lead to
increases or decreases in unit prices
Types of Contracts Unit Price
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Requirements
Adequate breakdown and definition of work units
Good quantity surveying and reporting system
Adequate drawings
Experience in developing bills of quantities
Payment terms properly tied to measured work completion
Owner-furnished drawings and materials must arrive on time
Quantity sensitive analysis of unit prices to evaluate total bid price for
potential quantity variations
Types of Contracts Unit Price
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Less design definition required
Final costs are owners responsibility
Can contract in early stages of project
Can mix fixed costs with reimbursable costs
Overhead and profit at fixed rate
Reimbursed labour, material and equipment at cost
Owner has more control over contractor
Contractor has little riskand no incentive to control costs
Types of Contracts Reimbursable
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Requirements
Competent and trustworthy contractor Close quality supervision by owner
Careful cost control by owner
Detailed definition of work items to be performed Detailed payment terms covered by both lump sum
and all inclusive rates
Types of Contracts Reimbursable
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How to Assess Contract Types?
Complexity & uniqueness of projectOwners ability to manage design
and construction
Considerations
Local marketplace factorsOwners tolerance for risk
Owners tolerance for decreased
project control
Owners ability to select
Right contractor
Likelihood of changes ordelays on project
Owners financial condition
Amount of time to complete project
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How to Select Contract Type?
Factors Conditions
Scope Definition Extensive Low
Uniqueness of work Routine UnusualCost Importance High Low
Market Conditions Buyers sellers
Economic Conditions Stable Unstable
Project Duration Normal LongSchedule Importance High Low
Buyers Resources Low High
Pricing style Indicated Fixed Price Reimbursable
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What is Construction Law?
Construction Law deals with all legal issues relating to
the construction process, including:-
Advising on the most appropriate form ofproject delivery
Drafting, tender documents and a variety of contracts
including building contracts, subcontracts, architect/client
agreements and engineering and supply contracts.
Advising on, and seeking to resolve construction claims
through ADR, arbitration and litigation and
Advising on and assisting with resolving insurance issues.
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Halsburys Definition of Construction Law
The body of legal principles relating to the
construction of structures on land. Building lawcan be seen as a particular manifestation of the
law relating to the provision of services and
labour. A feature of building law is that the
structure is ultimately fixed on land so that titlepasses to the proprietor of the land by operation
of law.
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What Areas of Law Does Construction Law Deal With?
Torts
Contract Law Trade Practices
Equity
Dispute Resolution (including civilprocedure, arbitration and ADR)
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What Construction Law Does NOT Cover?
Property Law
Planning Law
Environmental Law and
Project Finance.
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So Construction Law is
An industrydefinedarea oflaw
A complex area to practicein becauseofthediversityofissues andskills required
A verypractical area oflawto workin
A highlyspecialisedfield
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So Construction Law is
A highly varied field with projects ranging from small
domestic renovations to the construction of City linkand Eureka, the tallest residential building in the world
&
A challenging area to work in because it is constantlychanging and evolving frequently new ideas and
improved ways of doing things initiate from
construction law issues and cases.
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Like all contracts, construction contracts are about the
prior allocation of risk.
Windward (1991) draws attention to the constructionindustrys need to make a profit on the employment of
capital
If risk is an essential ingredient of the system which
generates your profit, it is inevitable that there must bea structure for resolving disputes. It brings the
relationship of the disputants back into balance so that
life can resume its normal course.
Risk Allocation in Construction Contracts
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Risk Allocation in Construction Contracts
TERMINOLOGY
Hazard - a particular event which has the potential if
it occurs of an adverse effect.
Risk - the probability of occurrence of a defined
hazard and the magnitude of the consequences.
Risk Assessment - the estimation and evaluation of the
risk, the magnitude of the consequences together with
the probability of the consequences.
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TERMINOLOGY
Risk Identification - an awareness of those risks which
could adversely affect the outcome of the project.
Risk Management - the identification, measurement
and economic control of risks.
Risk Allocation in Construction Contracts
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Inclement weather
Unforseen ground conditions
Industrial action Deficiencies in design
Insolvency or non-performance by a sub-contractor
Unavailability of materials Cost overruns in labour and materials and
Occupational health and safety
Examples of Risks
in Construction
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RISK ANALYSIS
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RISK MANAGEMENT PROCESS
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Controlling
It can be assumed i.e. risk taking;
It can be priced i.e. built into the tender price; It can be laid off i.e. insured or passed on to another
entity e.g. subcontractor;
It can be refused i.e. decline the job; or
It can be shared i.e. in alternative contractualarrangements such as alliancing and partnering.
But it should never be ignored!!!
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Abrahamson Model of
Risk Allocation
A party to a contract should bear a risk where:-
The risk is within the partys control
The party can transfer the risk, e.g. through insurance, andit is most economically beneficial to deal with the risk inthis fashion.
The preponderant economic benefit of controlling the risklies with the party in question.
To place the risk upon the party in question is in the
interests of efficiency, including planning, incentive andinnovation.
If the riskeventuates, the loss falls on that party in the firstinstance.
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Applying the Abrahamson Model of Risk Allocation
The Principal should not ask a Contractor to price an
unquantifiable risk that is within the control of the
Principal e.g. ground conditions.
The Principal, may ask the Contractor to manage and
control a neutral risk e.g. weather.
The Contractor should carry the risk for the safetyof
its own workers.
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Conclusions and Recommendations
Contract Documents
The Contract Documents do not include unlessspecifically enumerated in the Agreement,
Bidding requirements (advertisement or invitation to bid
Instructions to Bidders
Sample forms
The Contractors bid
Portions of Addenda relating to bidding requirements
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Conclusions and Recommendations
Scope of Work
An ambiguous description of the Work occurs when the owner
interprets the Scope of Work more broadly than does the
contractor.
The Supplementary Conditions, Drawings and Specifications
should all be thoroughly reviewed to
be sure that all Work has been properlyidentified and
to attempt to eliminate conflicts within the ContractDocuments.
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Conclusions and Recommendations
Some hierarchical contract issues include:-
Contract Efficiency Factors. These are regulatory and financial conditions
ensuring project finance when the work is commenced by the contractor
Taking over a Building on Completion of Construction. The conditions of
taking over the responsibility for the completed project by the employer
and dismissal of the contractor
Insurance. This concerns the external risks and liability of the 3rd party
The Right of the 3rd party for Intellectual Property. It is a definition ofrisks associated with 3rd party patents and their violation
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Conclusions and Recommendations
Criteria Effect of Contract Form on Mgmt
Positive Negative
Specifications Concentrated on key areas Too detailed
Price Reasonable Not beneficial forcontractor
Terms of payment Favorable for contractor Unfavorable for contractor
Schedule Rational delay time High coverage of lossesPerformance guarantees Concentrated on key areas Too detailed
Warranties Rather limited All including
Liability Not High wrt contract price High wrt contract price
Securities Not broad wrt contract price Broad wrt contract price
Major Contract Provisions and their effect on Contract Management
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Conclusions and Recommendations
A comparison ofconstruction contracts of three forms by
the DSS UniComBOS (Ashikhmin et al.,2003) yielded
the results according to which the Incentive Contract
was found to be better than the Fixed Price Contract
while theCost Reimbursable Contract
was rated third.
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Conclusions and Recommendations
Alternatives Criteria
Tech
Specs
Price of est Terms of
payment
Sch Per
guarantee
Warranties Limit of
liability
Fixed Price Highestconsistency
Suitable for
contractorFixed in
advance
Rational
delay time
Very imp High High
Incentive Well defined Suitable forcontractor
Not fixed Rational
delay time
Imp Intermediat
e
intermediat
e
EPCP Not welldefined
Not suitablefor
contractor
Not fixed Inadmissibletime
Imp Low Low
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