Professional Practice Final: understanding contracts

Understanding Contracts

Professional Practice

JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZAYNAH PROFESSIONAL PRACTICE 2014-2015


SCOPE:

ANALYSING AND COMPARING COMMON CONSTRUCTION CONTRACTS IN INDIA AND UNITED STATES AND TRYING TO FORMULATE CONDITION THAT CAN MAKE INDIAN CONSTRUCTION CONTRACTS MORE EFFICIENT AND BENEFICIAL FOR ALL PARTIES INVOLVED


METHODOLOGY:

WHAT IS CONTRACT?

TYPES OF CONTRACTS(INDIAN CONTEXT)

LUMPSUM CONTRACTITEM RATE CONTRACT

COST PLUS PERCENTAGE OF COST CONTRACT

about, suitability, merits and demerits discussed in both Indian and US context

TALKING ABOUT GENERAL ISSUES FROM ABOVE

AND COMPARING IT IN BOTH CONTEXTS

HOW US SYSTEM HAVE OVERCOME THE ISSUES?

AMERICA’S SOLUTION TO OVERCOME SUCH ISSUES : IPD CONTRACTS

about, suitability, merits and demerits

HOW IPD CONTRACT’S CAN HELP IN EVOLUTION OF INDIAN CONTRACTS?

WHAT IS A CONTRACT?

A properly prepared legal agreement between owner and architect or between architect and construction team that clearly communicates a project’s terms and conditions, determines responsibilities of each party and set expectations for schedule and payment for services. The most successful architectural projects are those where open lines of communication are established, and trust and respect are mutually granted. In order to best communicate the legal framework from which a project will be developed, professionals use written agreements. It’s the first step toward a successful project.

JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZYNAH PROFESSIONAL PRACTICE 2014-2015


TYPES OF CONTRACTS:

There are many types of contracts available, some of which are: Item rate contract Percentage rate contract Lumpsum contract Labour contract Materials supply contract Piece-Work agreement Cost plus percentage rate contract Cost plus fixed fee contract Cost plus fluctuating fee contract Target contract

However this document shall focus on the 2 of the contracts used in India:i. Item rate Contractii. Cost plus percentage rate contract


INDIAN CONTRACTS


What is Lumpsum contract?

1. The contractor offers to do the whole work as shown in drawings and described by specifications

2. Work done for a total stipulated sum of money3. No individual rates quoted4. Difficult to make adjustments in contract value if changes are made

later5. Schedule of different items of work is not provided6. Deposit of 10 % security money and other conditions are included in the

contract 7. After completion of work, a fixed Lumpsum amount is paid to the

contractor. 8. Whole work is compared and checked with drawings and specifications

before releasing the payment.9. Large projects, payments are made at different stages of work on

agreed terms. 10.If the contractor stops the work in between he is not entitled for any

further payment.

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Suitability of Lumpsum Contract:

1. Suitable for works for which contractors have prior construction experience.

2. Experience enables the contractors to submit a more realistic bid.3. Not suitable for difficult foundations, excavations of uncertain

character, and projects susceptible to unpredictable hazards and variations.



Merits:

i. The owner can decide whether to start or shelve the project knowing the total Lumpsum price quoted by different contractors.

ii. The contractor can earn more profit by in-depth planning and effective management site.

Demerits:

i. Before the contract is awarded, the project has to be studiedthoroughly and the complete contract documents has to beprepared in advance.

ii. In this type of contract, unforeseen details of work are not specified in the contract document. Many additional items may have to be undertaken as the work progresses, giving opportunity to the contractor for claiming higher rates of theextra items not included in the contract agreement.


What is Item Rate contract?

1. Also called a schedule contract2. based on estimated quantities of items included in the

project and their unit prices.3. The contractor undertakes the execution of work on an item

rate basis4. Amount to be received by the contractor, depends upon the

quantities of various items of work actually executed.5. Payment is made on the basis of detailed measurements of

different items of work actually done by him.6. accommodates flexibility for price adjustment.

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Suitability of Item Rate Contract:

1. Most commonly used for all types of engineering works financed by public or government bodies.

2. Suitable for works which can be split into various items and quantities under each item can be estimated with accuracy.


Merits:

i. no need for detailed drawings at the time of allotting contract.

ii. Changes in drawings and quantities of individual items can bemade as per requirement within agreed limits.

iii. The payment to the contractor is made on the actual work done by his at the agreed rates. The contractor has to initially invest his own money for starting the work

iv. Safety and quality is ensured as architect is involved

Demerits:

i. total cost of work can only be known upon completion. the owner may incur financial difficulty if the final cost increases.

ii. Additional staff is required to take detailed measurements of work done for releasing payments.

iii. Scope for additional saving with the use of inferior quality materials may prompt the contractor to use such materials in the work.

iv. As quantities may increase or decrease, it requires careful considerations to avoid heavy losses due to unbalanced tender.


What is Cost plus Percentage of Cost Contract?

1. the purchaser agrees to pay the cost of all labor and materials plus an amount for contractor overhead and profit (usually as a percentage of the labor and material cost).

2. Work is given on certain percentage over the actual cost of construction.

3. Actual cost of construction is reported by the contractor and is paid to him by the owner together with a certain percentage as agreed earlier.

4. Contractor agrees to do the work in accordance with the drawings, specifications and other conditions of contract.

5. Proper control has to be exercised by the owner in the purchase of materials and in arranging labour.

6. Complete records of all time and materials spent by the Contractor on the work must be maintained.

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JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZYANAH PROFESSIONAL PRACTICE 2014-2015

Suitability of Cost plus Percentage of Cost Contracts:

1. This type of contract is suitable for works required to be completed expeditiously and where it is difficult to foretell what difficulties are likely to be encountered.

2. This contract is also suitable for important structures where the cost of construction is immaterial.


Merits:

i) In this type of contract, actual cost is to be borne by the owner. Therefore, the contractor performs the work in the best interest of the owner resulting in good quality work.

ii) The work can be taken in hand even before the detaileddrawings and specifications are finalized.

iii) Changes in design and method of construction if needed can be easily carried out without disputes.

iv) The work can be executed speedily.

Demerits:

i) This form of contract cannot be adopted normally in case of public bodies and Government departments.

ii) The final cost of the work is not known in advance and thismay subject the owner to financial difficulties.

iii) The tendency of the contractor to increase the cost of work to earn profit by way of percentage of enhanced actual cost.

iv) Quality of work cannot be checked by an expert, as there is no involvement of architect.


AMERICAN CONTRACTS


Lump Sum or Fixed Price:

This type of contract involves a total fixed priced for all construction related activities. Lump sum contracts can include incentives or benefits for early termination, or can also have penalties, called liquidated damages, for a late termination. Lump Sum contracts are preferred when a clear scope and a defined schedule has been reviewed and agreed upon.

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Merits:

With a lump-sum contract, you know what you're getting and how much it's going to cost. The client’s price stays the same even if the builder underestimates things. The working side benefits from a lump sum price because, if they manage to keep costs below their estimate, they keep the money they would otherwise have spent on costs. The result is a higher profit margin on the contract.

Demerits:

Among the drawbacks, there there’s no "transparency." The paying side doesn’t know how large or small a profit margin the working side has. If the paying side suspects it’s too big, they’re inclined to think they’re overpaying. If they suspect it’s too little, they could think there’s a risk of too little quality control with the working side tempted to cut corners to maintain their margin


UNIT PRICE CONTRACT:

An owner and contractor may agree to structure the contract on specified unit prices for the estimated quantities of the work. Unit price contracts are somewhat more common on public works, engineering, and road building projects. In a unit price arrangement, the contractor is able to provide the owner with a specific price for a particular task or scope of work.

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Merits:

A unit price agreement provides benefits to both owners and contractors. The owner will only pay for actual quantities performed, supplied, or constructed on the project. Thus, if the estimated quantities turn out to be greater than the actual amount of work required on the project, the owner will only pay for those actual quantities. This system may help to eliminate or reduce the inclusion of general contingencies that protect the contractor in the event that its quantity estimates are inaccurate.

Demerits:

Ultimately, this may result in lower costs of construction for the owner


Cost Plus Contracts:

This type of contract involves payment of the actual costs, purchases or other expenses generated directly from the construction activity. Cost plus contracts must contain specific information about certain pre-negotiated amount (some percentage of the material and labor cost) covering contractor’s overhead and profit. Costs must be detailed and should be classified as direct or indirect costs.

• Who Gets the Savings? "Savings" is the difference between (a) the GMP and (b) the final cost of the Work, plus the working side’s fee:Savings = (GMP) – ((Total Cost of the Work) + (Total Working Side Fee))

By default, the paying party benefits from savings. They’re obliged to pay no more than the cost of the Work plus the fee. So if that amount is lower than the GMP, the paying side owes no more and they enjoy all of the savings.

• Sharing the Savings. Usually the contract will identify a percentage of savings that goes to the working party. SometimTo offer the working side extra incentive to minimize the cost of the Work – thereby maximizing savings – some GMP contracts set up a sharing of any savings. es it’s a single percentage of all savings.

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Merits:

The allure of keeping savings often attracts the paying side to a GMP contract, especially when the paying side is an owner. But it’s easy to overlook the extra costs that come with the GMP contract.

Demerits:

It may be worth it for owners (a) with the in-house construction expertise to analyze and manage the payment process and scrutinize cost of the Work reporting or (b) have the budget to hire qualified consultants. But owners who don’t have either should really stop and think twice before opting for a GMP contract. They may just be better off with a lump sum contract, especially if the project isn’t really big enough to justify the extra professional costs needed to negotiate a GMP contract and review cost of the Work in each application for payment.


There are multiple variations for Cost plus contracts and the most common are:

• Cost Plus Fixed Percentage• Cost Plus Fixed Fee• Cost Plus with Guaranteed Maximum Price Contract **• Cost Plus with Guaranteed Maximum Price and Bonus Contract. **

**Cost Plus with Guaranteed Maximum Price Contract

A variation of a cost-plus contract is a guaranteed maximum price (“GMP”) agreement. Essentially, a GMP is a cost-plus agreement with a cap on the owner’s total liability for the costs of construction of the project. The owner is obligated to pay the contractor for the actual costs of construction up to a certain sum. If the construction costs exceed that sum, the contractor is liable for the cost overrun.

** Cost Plus with Guaranteed Maximum Price and Bonus

Contract.

Apart from behaving as a Cost plus + GMP, Compensation is based on a fixed sum of money. The total project cost will not exceed an agreed upper limit and a bonus is given if the project is finished below budget, ahead of schedule etc.


ANALYSIS


GENERAL OBSERVATION FROM US CONTRACTS:

1. Contract document has all the speciation of each and every person involved in the job process.

2. Duties responsibilities and limitations of authority of contract manager and architect as set forth in contract document

3. Any changes made in the drawings have to be done through a change order or a construction change directive which goes to each and every party n needs to be signed by each person

4. Contracts present for each and every person involved 5. The shop drawings are made by the contractor6. The contractor guarantees performance of the built work7. Any damages through fault of contractor will be paid by contractor8. All the money needs to be present with the owner – the contractor can

demand to see the owners ability to pay for the project9. Any change in the work or schedule etc. The contract sum & time will

be change accordingly. 10.Contractor has to get all permits except building permit and fees which

is got by owner11.Schedule of work done by contractor – and approved by architect and

contract manager

How the Documents are Organized?

The AIA organizes contract documents by two methods:1. By families based on types of projects or particular project delivery

methods2. By series based on the use of the document

Nearly 200 forms and contracts comprise AIA Contract Documents. These forms and contracts define the relationships and terms involved in design and construction projects




For use when the owners project is divided into separate for design( architect) and construction (contractor)

Suitable for conventional project delivery (design bid build)

Owner retains architect

Architect n his/ her consultants prepare drawings and specifications

Contractors and sureties obligate to owner for bid performance and payment bonds

Contractor and sub contractor make shop drawings and build the work


Owner retains and architect and a construction manager, who acts as an additional adviser to the owner.

Construction manager gives owner construction management advice through design and construction phases – increased expertise in managing a project from start to finish.




Owner enters into a contract with a single entity Design builder

Design builder is then obligated to both design and construct the project.

Owner may also hire a consultant to assist owner in working with design builderDesign builder then enter into contracts with architect and/ or construction contractor, if necessary

Design builder may be- A developer or single purpose entity- An architect led organization- A contractor led organization


DEADLINE AND DELAYS:

A construction contract will often have many deadlines, but one deadline looms largest: substantial completion. That’s because substantial completion is when the Work reaches the point where an owner can rent it, sell it, or work or live in it. And there’s usually a tight schedule for reaching that point. The deadline for substantial completion is often also critical to satisfy obligations to third-parties: local government requirements for completion by a specified date, availability of public incentives.

Major points:• Identifying deadlines• "Excused Delays" that postpone deadlines• Delays caused by an owner, or another, up-the-chain, contractor that

postpone deadlines and increase contract prices• Delay notices• Delay damages


DEADLINE AND DELAYS:

Changes are No. 4 on the list of top ten construction contract terms. Few construction projects go from start to finish without a change. It could be a change in the work, a change in the price, or a change in the schedule. Usually, there’s changes to more than one, and often more than one change. Here we’re going to cover the different kinds of changes, how your contract affects them, and how they affect your contract.

Generally, changes fall into one of three types:• Change Orders• Construction Change Directives• Minor Changes


AMERICA’S SOLUTION TO OVERCOME SUCH ISSUES : IPD

CONTRACTS

INTEGRATED PROJECT DELIVERY:

A project delivery approach that integrates people, systems, business structures and practices into a process that collaboratively harnesses the talents and insights of all participants to optimize project results, increase value to the owner, reduce waste, and optimize energy efficiency through all phases of design, fabrication, and construction.


The American Institute of Architects (AIA)



Involvement of the different Parties:



Merits:

(i) Cost savings for the owner (ii) Faster completion(iii)Bonuses paid to the designers

and contractors (iv)Reduced risk of design and

construction defects(v) Reduced liability for the

designers and contractors(vi)Less disagreements leading to

court cases

Concerns:

(i) Unfamiliar with IPD and decline to participate

(ii) Multi-party agreement could prove to be impossible or exasperating

(iii)An owner might have difficulty securing financing

(iv)The party that suffers the economic damages will be left “holding the bag”

(v) Budgets and schedules have to be scrutinized carefully

(vi)Must be supported by strong leadership.

(vii)Ownership goes to whom(viii) The legal system and the

liability


Types of Contracts

Setbacks of Indian Contract Integrated Project Delivery

Lump Sum

Claiming higher rates of extra items not included in contracts agreement

All the stakeholders form part of the project at the starting only, so such issues as the need for extra items at the construction stage is eliminated.

Item Rate

Total cost known only after completion

With the help of a collaborative team work approach, a more accurate estimation of the cost can be reached. Usually that happens before the construction stage and is subjected to very minimal changes.

Scope of saving using inferior quality of materials.

A very transparent system since everyone work together from the initial stage itself.

Heavy losses due to quantity increasing or decreasing.

Such issues usually do not arise since the stakeholders are part of the project at an initial stage and such issues can be predicted and taken care of. However if such disputes arise the two tierce system is adopted for consensus.


Types of Contracts

Setbacks of Indian Contract Integrated Project Delivery

Cost plus percentage

Tendency of contractor to increase cost of work for more profit generation

A BIM approach is adopted so that all the parameters of the project are fixed and so cost of work does not get increased in the construction process

Quality of work cannot be checked

Liabilities and profits are collectively shared and manage leading to a more performance and quality approach.

Delay Faster completion as all the parties are present from the earliest design phase