Understanding%20Construction%20Contracts.pdf

7/29/2019 Understanding%20Construction%20Contracts.pdf

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UNDERSTANDING CONSTRUCTION CONTRACTS

Understanding Construction Contracts, Course #400 Presented by:

PDH Enterprises, LLC

PO Box 942

Morrisville, NC 27560

(919)208-5296

www.PDHSite.com

Course Author:J.N. Ramaswamy, Ph.D., P.E.

Copyright J.N. Ramaswamy, Ph.D., P.E. Page 1 of 39
http://www.pdhsite.com/http://www.pdhsite.com/http://www.pdhsite.com/


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Table of Contents

I. IntroductionII. Primary Ingredients of Construction ContractsIII. Participants in Construction WorkIV. Types of Construction ContractsV. Some features of Construction ContractsVI. Subcontracts & Supply ContractsVII. Construction Contract ArrangementsVIII. Documents for Construction ContractsIX. Bidding for Construction ContractsX.

Negotiating Construction Contracts

XI. Administration of Construction ContractsXII. Claims and DisputesXIII. Dispute Resolution MethodsXIV. Completion of Construction ContractsXV. Payments in Construction Contracts



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I. Introduction:

Contracts have been in existence since the Roman days. Contracts are part of everybodysdaily life. Riding on a subway, buying a loaf of bread or a ticket to a movie and even

buying a new car are examples of a contract. Contracts in the most rudimentary form

appear to be fundamental for civilized existence

All construction work is done within a contract unless it is done by a person for himself.

Every time a contractor makes an offer to do any kind of construction work and the

owner accepts such an offer, a contract is made.

Usually, construction contracts are made without the aid of a lawyer. However, large andcomplex construction projects require the expertise of a lawyer.

Contracts usually need not be in writing to be valid, but they need to be in writing to be

enforceable. Oral contracts usually are legal and valid, but they cannot be enforced. Ifthe law requires the contract must be in writing, and if it is in writing, the contract hasvalidity. On the other hand, if the law requires it must be in writing and if it is not, the

contract has no validity. If the contract is not in writing and the law does not require it to

be in writing, it may be a valid contract but not enforceable

An important aspect of written contract is theparole evidence rule that excludes all priororal and written agreements between parties.

Construction is classified as follows:

1. Building construction (building for shelter and enclosures of all kinds)2.

Engineering construction (dams, bridges, highways, canals, etc.)3. Industrial construction (manufacturing, and processing plants, etc)

Building construction comprises of Residential, Commercial and Institutional. It is alsoclassified as light construction and heavy construction. Any building having three stories

or less is classified as light construction.



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II. Primary Ingredients of Construction Contracts

There are four ingredients of all construction contracts. They are as follows:

a. Mutual Agreement and Genuine Intentionb. Capacity to Contractc. Consideration in a Contractd. Object of a Contract.

a. Mutual agreement is the fundamental and readily-understood ingredient. It is the

mutual consent of the parties involved in the contract. Offer and acceptance areessential. Contract, by definition, is a promise enforceable by law and there must be

genuine intention on the part of the parties to take on the obligations agreed in the

contract. Meeting of minds or a consensus is required of all parties involved. Offer

and acceptance must be identical in substance as they are the natural expressions ofmutual agreement.

b. Capacity to contract refers to the competency of a person who can make a valid and

enforceable contract. A person who is under-age, insane, alcoholic, legally restrainedand restricted by the nature of his occupation does not have the capacity to make a

contract.

c. Consideration is something of value given by one party to the other in exchange of

something else. In contract law, consideration can be anything of value. The valuegiven by the contractor to the owner is the construction of the project and the value of

the owner given to the contractor is the stipulated sum of money for building the

project.d. The object of the contract must be lawful as the law will not enforce a contract for an

illicit purpose. Increasing the seating capacity of a room beyond its legal limit is an

example of illicit purpose.



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III. Participants in Construction work

The following are involved in construction work:

1. Owner He is the first participant in construction work. He owns the land where

the building is constructed and, eventually, owns the building after itsconstruction. He is the employer of the contractor and other personnel required

for the construction work. An owner can be classified as an individual, a

corporation or a government.

2. Designer He is the owners agent and is employed by the owner to design thework, to arrange for the construction contract, and to inspect the work during its

construction for its conformity with the contract. He is a technical person. He

can be an architect or an engineer depending upon the nature of construction. If

the emphasis of the building is aesthetics, more likely the architect will be thedesigner. On the other hand, if the emphasis is on the structural stability, an

engineer will be the designer. An architect and an engineer will be workingtogether in big construction work. The designers fee for his work will be in one

of the following methods: (a) a percentage of construction cost; (b) a fixed fee;

(c) a fixed fee plus expenses, and (d) a multiple of direct expenses. The

designers services are grouped in the following five phases: (a) schematic design;(b) design development; (c) construction documents; (d) bidding; and (e)

construction.

3. Designers consultants These are specialists in many fields of design who are

hired to provide the special services to the designer. Some examples of the special

services are: soils, structures, mechanical, electrical, acoustics etc.

4. Construction manager He is a consultant and agent of the owner engaged inadvising and managing the construction work. He also often provides site services

and advices on design, construction methods, and costs. Usually, he is not

responsible for the works performance.

5. Contractor He is the person who enters into a contract with the owner to

construct the work for a payment. He is also called a general contractor, a

primary contractor, a principal contractor, or a main contractor.

6. Management contractor He is employed by the owner to manage the projectwork which is performed by several contractors and subcontractors. He isresponsible for their performance

7. Sub-Contractor He is hired by the general contractor to do certain special typeof work which the general contractor does not have the expertise to do. Some

examples of special work include site work, form work, reinforcing, masonry,

metal work etc.



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8. Sub-subcontractor He is employed by a subcontractor to do parts of theconstruction work, on his behalf, when the subcontractor lacks expertise in that

part. An example of a Sub subcontractor is the one who does the duct work in a

mechanical subcontract.

9. Supplier He is the person supplying materials required for construction. He is in

fact a vendor. Some examples of material supply are: sand, brick, concrete etc. If

a construction item is manufactured conforming to a design at a remote locationand shipped to the construction site for installation by others, the manufacturer of

such an item becomes a sub-contractor even though he is not installing his

supplied item. Examples of such manufactured to a design are a roof truss,custom made window frame etc.

10. Quantity Surveyor He is an agent of the owner and works with thedesigner and deals with the financial and budgetary aspects of a construction

project both during design and construction. He is also called cost engineer or costconsultant.

11. Project manager He is employed by an owner, specially by a corporate or

government owner to act as his representative in a project and to do things that the

owner would otherwise has to do, including hiring the designer, constructionmanager, quantity surveyor, and other agents and employees, making payment for

services and work, and taking decisions about project-related things.



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IV. Types of Construction contracts

1. StipulatedSum Contract It is also called Lump Sum contract or Fixed priceContract and is the most common construction contract in the United States. The

concept of this contract is to pay a fixed sum for a complete job of work. The

contractor is required to provide and do everything necessary to complete the

work for the general purpose for which it is designed and intended. Items that areindispensably necessary to complete the whole work, and are reasonably

inferable, are included. The design must be practically complete and settled

before bids are sought. The best kinds of work to be done under this contract arethose of straight forward design and standard construction such as residential and

commercial construction. Changes cannot be made by the owner with out the

mutual agreement of the contractor.

The contractor has complete control of the work and is free to employ any means

to do the work. A contractor is required to employ a full-time superintendent. Thecontractor indemnifies the owner and his employees from all claims, damages,

losses and expenses arising out of the performance of the work. It is thecontractors right to get paid according to the terms and conditions of the contract.

If a payment is delayed for more than 30 days, the contractor, after giving written

notice, can terminate the contract and seek payment for work already done and

damages sustained. Payments are usually made once a month.

The owners primary duties are to furnish all the information about the project

and afford access to the site and to pay the contractor according to the terms and

conditions of the contract. Everything else is done by the designer on the owners

behalf. The owner generally issues instructions to the contractor through the

designer. The owner is required to provide all site surveys, pay for all easementsand show evidence of suitable financial arrangements to fulfill his obligations.

The owner has the right to stop the work if the contractor fails to correct thedefective work To rectify the defective work, the owner may require from the

contractor a performance bond furnished by a surety company. The owner has the

right to terminate the contract for causes such as the contractors bankruptcy, hispersistent refusal to get on with the work, his failure to pay subcontractors or

suppliers, his persistent disregard of laws and regulations and his substantial

violation of a term or condition of the contract. In the agreement for lump sumcontracts, there is a provision for collecting liquidated damages related to failure

to complete the contract on time.

The designer (an architect or an engineer) is not a signatory to the lump sum

contract and therefore has no obligations. Nevertheless, he is given specificduties. He is the owners representative and acts as an arbiter in case of disputes

between the owner and the contractor and thus he is considered as a quasi

adjudicator. But the designers decisions are rarely final and binding on the

parties who can then go for arbitration. The designer may make minor changes inthe work which affect neither the contract sum nor the contract time and which



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are consistent with the intent of the contract documents. Another important duty

of the designer is the certification of substantial completion of the work and therelated issuance of final certificate of payment. The designer makes periodic visits

to the site when the construction work in progress to make sure the work is

performed as required in the contract documents. The designer may keep at the

site a full-time representative to assist him in his duties, in which case the preciseduties and responsibilities of the representative must be set out in the contract

documents.

A subcontractor is not a party to a contract between the owner and a contractor in

a primary contract. There is no privity between him and the owner. Instead, he isa party to a subcontract with a contractor and such a subcontract could be for a

lump sum. He has privity with the contractor. Usually, a contractor is required to

provide the owner with a list of all subcontractors he proposes to employ on thework. This list may be provided either at the time of submitting the bid or soon

after the contract is awarded. The owner cannot force a contractor to have

contract with a subcontractor and at the same time the owner has the right to

approve of all subcontractors. A subcontractor has to perform his work accordingto the requirements of the primary contract. All subcontracts must be in writing

and the subcontract documents should reflect the primary contract both in formand in content to the extent required by the work of the subcontract. A

subcontractors obligations are a reflection and extension of the contractors

obligation in the primary contract.

Like a subcontractor, a supplier has no privity between him and the owner. Hehas privity with the primary contractor. A supplier may be classified as a

subcontractor if he is performing as already mentioned in Section III.

The primary advantage to the owner is that he can select a bid that is within his

budget. An owner has greater control of expenditure and, in order to achieve this,he must provide bidders with adequate design information. The details of the

design and the work must be settled before calling for bids. Because of this thereis a disadvantage to the owner as the work cannot start until the contract is made

and the contract cannot be made until the design is complete in its entirety. A

contractor is precluded from using his experiential knowledge in the design of

work and has been unable to make creative contributions to construction work.He is solely concerned with production of work already designed which is a loss

to the owner. The contractor has total control of the work. A contractor is paid to

carry the greater burden of risk by the owner, who carries a lesser burden of risk

2. Cost-Plus-Fee Contract This is also called Reimbursable contract or Time andMaterial contract. The owner pays the contractor all the costs of the work plus a

fee to cover the contractors operating overhead cost and profit. The owner takes

the greater portion of the risk. If the owner cannot get a contractor to do the workfor a contract sum which is economically acceptable, one of the owners

alternatives is to get into a cost-plus-fee contract.



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It is necessary to understand construction costs. Items of work are the units of

construction work used in estimating costs. Basic items of work are the smallestparts of construction work to which costs can be attributed by estimating. An

example for unit work is brick wall built in place and not individual bricks.

Work includes all labor, materials, equipment and services provided by the

contractor. Costs of work are classified as direct costs or reimbursable costs andindirect costs or non reimbursable costs. Direct costs include the following:

(1) Labor cost, (2) Material cost, (3) Tools, plant and equipment cost and

(4) Job overhead cost. These costs are readily identified and related to a specific

site and project. Labor costs are direct costs of wages, statutory payments,benefits and costs for such things as traveling, board and lodging. Material costs

are affected by quality, quantity, time, place, credit and discounts. Plant and

equipment costs depend on depreciation, maintenance, investment costs, and the

costs of mobilization, demobilization, and operation. Job overhead costs includesupervision, premium for insurances, bonds, fees for permits, costs for security

and protection, temporary services and facilities, costs of cleanup, cutting and

patching work, and closeout costs.

Indirect costs include: (1) Operating overhead costs and (2) Profit.

Operating overhead costs are those that cannot be directly identified with and

attributed to a specific project. They include office staff, rent, and all office costs for

equipment and supplies, communication and similar items. These are the costs of

being in business. Profit is a cost to owner and an income over expenditure for thecontractor.

The owner is concerned with all aspects of direct costs including job over head costs.

He is not concerned with the indirect costs as they are covered by a fee. The fee is

either a fixed lump sum or a fee calculated as a percentage of direct cost or somecombination of the two.

The contractors primary duty is to do the work according to the agreement andconditions of the contract. He should do the work as efficiently and economically as

possible. No essential staff should be on the job. No equipment should be taken to

the site unless it is required and when it is no longer needed should be removed. Thecontractor should purchase all materials at competitive prices and he should give the

owner the benefit of all trade discounts he is able to obtain as a contractor. He should

keep full records of all transactions and costs of the work in a system satisfactory to

the owner. In return, he is entitled to be paid on time in accordance with the terms ofthe contract. The usual procedure is to get paid on a monthly basis.

The owners duty is to pay for the work according to the terms of the contract, and to

provide information. He has the right to stop the work and terminate a contract if the

contractor does not provide enough labor or materials or does not carry out the workexpeditiously. The owner shall have access to all records kept by the contractor up

until a specified period after the final payment for the work.

The designer is much more involved in the work at the site and in the performance of

the work in addition to acting as the owners agent and an arbiter. It is essential to



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have a knowledgeable representative at the site who will check incoming materials,

time sheets and other things related to costs. The designer is more directly involved inthe making of sub contracts and has a greater part in the management of construction

work.

Subcontracts under a primary contract usually are lump-sum contracts. The amounts

of all subcontracts are part of the reimbursable costs and hence the owner has aninterest in the making of the subcontracts and in their amounts. Sub bids are received

by the primary contractor and selection is made in consultation with the owner.

Contracts for the supply of materials are given close attention by the owner and the

designer similar to that given to sub contracts.

The owner has the following advantages in this type of contract:

1. He can get construction work started with incomplete design information.2. He can have phased construction and flexibility leading to savings in

money and time.

The owner has the following disadvantages:

1. The owner does not know what the final cost would be.2. He does not know when the project would be completed3. He bears a greater risk

The contractors primary advantage is he takes smaller risk and the disadvantage

is the inconclusiveness of the contract.

3. Guaranteed Maximum Cost-Plus-Fee Contract This is a modification of the

Cost-Plus-Fee contract. Under this contract, with the provision of a certain critical

amount of design information and with a lump sum fee, bidders estimate a maximumcost for work. The project is bid as if it were a lump sum contract except that it hastwo sums a maximum cost and a fee. The project is administered as if it were a

cost-plus-fee contract. If changes are required during construction, they are

negotiated by the owner and the contractor and appropriate addition or deduction is

made to the contract sum. If the final cost exceeds the maximum cost stipulated in thecontract, the contractor bears all the extra cost. Conversely, if the final cost is less

than the maximum stipulated cost, there results a saving in the project cost. This

saving is shared between the contractor and the owner in the ratio of 50:50. This typeof contract is ideal where there is complexity of construction or a difficult site leading

to a need for flexibility and a project schedule leading to a need for phased

construction.

Standard forms of construction require care and attention in adapting them to

a particular project needs.



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4. Unit-Price Contract This is the least familiar contract in North America. It is used

for engineering construction work done in remote locations. The common unit ofmeasurement is the unit by which the primary material is brought and sold. Some

examples of units are as follows:

Excavation work, fill materials in place Cubic yard

Cast-in-place concrete Cubic yard

Reinforcing steel bars . Pound or ton

Unit prices are average prices. Unit prices are affected by varying job conditions and

quantities of items of work. Generally a unit price increases as the quantity of work

decreases and vice-versa. Unit prices are usually based upon approximate quantitiesof the variable items of work. Some examples of work performed under this contract

are pipe lines, sewers, roads, dams and piling for foundation. The work has to bemeasured accurately on site as it is completed and the contractor is paid according tothe quantities and at the unit prices.

The contractors duties are, as usual in other contracts, to do the work according to

the contract documents and get paid accordingly. In addition, it is necessary to

measure the completed work to ascertain the amount to be paid. If the actual quantityof an item varies beyond a certain percentage, (usually 15% from the original

contract), a new unit price is negotiated. Higher the quantity, lower the unit price andvice-versa. Accurate measurement of the work, as it progresses, for purposes of

payment, usually is done by representatives of both the owner and the contractor.

The owners obligations are, as in other contracts, pay for the work according to thecontract, provide information as required, and to retain a designer throughout thecontract as his representative to seek the contracts performance by both parties. The

owner has the right to do the work if the contractor is in default and ultimately to

terminate the contract. He has the right to change the quantity of work within plus or

minus 15 % of the contract quantities without a change in the unit price. Beyond the15 %, or if a new item is required by the owner, a new price has to be negotiated.

The new price may be based upon unit price or cost-plus-fee or stipulated and

accepted lump sum. Sometimes cash allowances are provided in the contract to coversuch items as openings, finishes and services and these parts of the work are done

based upon lump sum or cost-plus-fee or unit price.

The designer acts as the owners agent, the interpreter and arbiter of the construction

contract. It is the designers duty to verify the quantities of work completed whilecertifying payments to the contractor. Both the designer (on behalf of the owner) and

the contractor should measure work as it is done, and record the measurements of

work mutually made and agreed upon. The designer should check the unit prices inthe bid for arithmetical accuracy, their appropriateness to the items, and their relative

magnitude. The designer must ensure that the unit prices are realistic and not

distorted. In order to do this, the designer needs to have his own accurate and



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realistic estimate of the costs of the work for comparison with the unit prices in bids

when received and prior to contract award. A contractor is more amenable foradjustment of his unit prices before award of the contract. Also, contractors have a

tendency to over price certain items and under price certain others for their benefit.

By over pricing items of work to be done first on the job, the contractor is able to

partly finance the work with the owners money. This is called front end loadingand the designer should avert this by ensuring all unit prices are realistic. In some

projects, the contractor may deliberately over price some items of work and under

price some others. Instinctively, he believes that the quantities of the over priceditems will increase and the quantities of the under priced items will decrease enabling

him to make extra profit.

The obligations of a subcontractor/supplier are essentially a reflection of the primary

contractors obligations. Subcontracts to a unit price primary contract are notnecessarily unit-price subcontracts.

The primary advantage to the owner in this contract is that he can proceed with the

work with less risk. The main disadvantage to the owner lies in the possibility of

serious inaccuracies in the approximate quantities of work resulting in greaterexpenditure than what was originally anticipated. The additional expenditure will

become even more if the bid prices are distorted.

Such a situation will arise in case of unsuitable subsoil conditions requiring more

excavation and fill, underground water course requiring dewatering equipment tokeep the work dry, and similar contingencies., things that are unexpected or not

provided for in a contract because it is impossible to provide for every contingency.

The advantage to the contractor is that he need not measure the work to make a bid

and the attendant risk is eliminated. Time to prepare a bid is less and consequently heincurs a relatively smaller cost for bid preparation.

5. Design-Build Contract The concept is not new, as many builders designed what theybuilt for centuries including large cathedrals, castles, and potential buildings. The

industrial revolution required large buildings, then late in the nineteenth century the

building professions were established with architects committed exclusively todesigning. Modern construction has requirements, including expert advice for owners,

consultants for designers, cost estimates and other information for bidding,

management, and risk avoidance, and subcontractors who do most of the work. In the

traditional design first-and-then-build method, many problems arise especiallyallocating the responsibility between the designer and the contractor. If a defect is

noticed in the construction it could be due to a design deficiency or a construction fault.The designer will try to put the blame on the contractor and the contractor will do thesame on the designer. Combining designing and building under one entity will

eliminate this problem and the owner has to deal with one entity only. Since the

design-build is undertaken by one entity, fault finding between the designer and thecontractor does not arise. In the design-build contract, a builder may sub contract the

design work to a designer or a designer may hire a builder as a sub contractor. The

designer can be an architect or a professional engineer depending upon the type and



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what is emphasized on the building. If the emphasis is on the aesthetics or appearance,

the architect is the main designer and the engineer will be a consultant to him. On theother hand, if stability and strength are focused, the engineer is the main designer and

an architect will be a consultant to him. In many jurisdictions architects and

architectural practice are regulated and restricted by statute and cannot provide his

professional services except in that regulated capacity which means an architect cannotbe in the design-build entity. However a professional engineer is less restricted and so

can work for a construction company and approve and stamp a building projects plans

and specifications. Further, some structural engineers have enough aesthetic sense tomake the design acceptable to the owner. The owner needs a consultant to prepare the

design criteria and to advise on selection of a design-build contractor.

Advantages include the following:

1. Direct communication between the owner and the contractor and a resultantsaving in time and effort and a potential for a larger profit.

2. Less potential for disputes with fewer persons involved.3. Easier to place responsibility for defective woek.4. Fast track communication with the contractor and a saving in time and project

cost and the potential for larger profit.

5. Lower construction cost from the closer relationship between designer andcontractor resulting in an economic design, and therefore the potential for a largerprofit.

6. Potential for innovative design leading to a larger profit.Disadvantages include the following:

1. An owner who lacks independent advice on construction and its cost may besuspicious and hesitant and hamper a projects progress or unable to understand

and resort to complaint and dispute.2. Limited ability of the owner to directly communicate with the contractor.3. Potential conflict with statues that restricts the provision of architectural design

services, or do not recognize or do not support design-build contracts.

4. New design-build companies may not have the needed skills and experience fordealing directly with the owners.

5. Getting suitable Insurance coverage and performance & payment bonds may bedifficult or impossible for a design-build project

6. Owner may have to make a significant initial payment as it requires initialexpense in making a proposal.

7. Evaluating design-bid proposals may be problematic. The owner needs to hire aconsultant for evaluating the proposals.



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V. Some features of Construction Contracts

Liquidated Damages If a contract is breached, the common remedy for the affectedparty is to sue for damages. The affected party may seek (1) money damages, or

(2) specific performance of the contract or, (3) injunction from a court to refrain from

something which was the cause of damage. To avoid the problems inherent in obtaining

damages to the owner by due process for late completion of the work, provisions aremade in the construction contracts for payment of a predetermined amount of money.

This predetermined money is called the liquidated damages. Here, liquidatedmeansdeterminedorsettled. Before providing the amount in the contract, the owner has tocalculate the amount of damages (per day, or week, or month) he would, in fact, suffer in

the event of delay in completing the work. They should not be included without a good

reason and cause. The advantages of liquidated damages are: (1) an incentive for earlycompletion of the work by the contractor and (2) ease of collection of money damages

from the contractor.

Penalties and Bonuses Penalty is like fine or monetary punishment for latecompletion. Bonus is monetary reward for early completion. These are arbitrary in

nature and are not common in construction contracts because they are difficult to apply,

will cause the bidders to include contingency sums in their bid and courts generallydisfavor penalties especially if they are not followed by provision of bonus for early

completion.

Retainage One way to urge a contractor to complete the work is to hold back a part of

each payment until a certain proportion of the contract sum is held by the owner until thesubstantial completion. It is usually 10 % of all payments for the first half of the work,

representing a total of 5 % of the contract sum or 5 % of all payments until the project iscompleted. The purpose of retainage is two fold. One is protecting the owner againstfailure by the contractor and the other is imparting an incentive to the contractor to finish

the work early so he can get back his withheld amount. This retainage is different from

other money retained on account of lien statures, where applicable, or with amountsretained due to incomplete or defective work.

Delays Delays in work and resultant extension of contract time have an effect upon the

financial outcome of the project for both owner and contractor. Delays may be caused

by: (1) the contractor or his agent, (2) the owner or his agent and (3) external events(natural causes).

If the delay is caused by the contractor, the owner has reason to terminate the contract

provided such a reason exists and that a condition of the contract has been violated.

If the delay is caused by the owner or his agent, the contractor is entitled to get extension

of time of the contract. Evidence of owner delays must be established by the contractorwith proper documentation.

Delays due to external events (or natural causes) are beyond the control of the contractor

and he should not be held responsible. Thus, he is eligible for extension of time.



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Extension of Time A contractor is entitled to claim an extension of time for any cause

beyond his control. A contractor should not be granted an extension of time for delays bysubcontractors or suppliers. If the contract time is mentioned as critical in the contract

document, an extension of time normally should not be granted for late delivery of

equipment even if the delay is caused in transportation.

Planning & Scheduling The purpose of construction planning is to gain an orderlycontrol of the project.Planning is precedent to scheduling. Some of the elements to be

considered in planning are:

a. Legal procurement requirements.b. Utility considerations including relocation.c. Work and storage areas.d. Traffic routing and detour areas.e. Vehicular and pedestrian areas.f.

Environmental constraints and concerns.

g. Time constraints.h. Coordination with other contractors in the area (not subcontractors).i. Interdependency of tasks being performed by others.

Once the planning is complete, scheduling of the work can begin. Construction schedule

is a graphic depiction of the various work activities, their sequencing and times of

beginning and anticipated completion. Project schedules are essential to the successfulcoordination of the projects day-to-day activities. Schedules establish the start, duration,

and completion dates of the project or a task. Scheduled start dates determine when

goods and services need to be brought to the job site, when work force need to be

mobilized, and when equipment rentals begin. Construction schedules are acceptable incourt when disputes arise.

Scheduling methods are classified as shown below:

a. Bar chart schedules.b. Matrix schedules.c. Network schedules.

Bar chart scheduling is the simplest of all methods. Bar charts are also called Gantt

charts named after the man who devised them. Bar charts provide a quick, visual

overview of a project. A bar chart does not show the interrelationships or dependenciesof different activities and so cannot be used independently in scheduling. They are best

used in conjunction with network-based scheduling methods.

Matrix schedules are typically used for repetitive work, as on a high-rise office building.

It is used as a coordination schedule for communication and for presentation purposes.

Network schedules are depicted in diagrams. These diagrams are systems that record thegraphical work versus time relationships of each phase of the work and enable the user to

see the interrelation and dependencies of the work activities. There are two kinds of



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network schedules: (1) Critical Path Method (CPM) developed by E.I. du Pont de

Nemours Company in 1956, and (2) Performance Evaluation and Review Technique(PERT) developed by U.S. Navy in the 1950s.

CPM is an activity-oriented system and is most reliable and widely used. CPM net work

diagram consists of activities and events. Each major work item of the project is an

activity and the event is the instant of time that an activity is either just starting orfinishing. Each activity is dependent upon the premise that the preceding activity has

been completed. Time durations are established for each activity and the activities are

joined together in a logical sequence of construction operations to form a network. The

completed diagram will show the particular series of activities that are on the criticalpath. Non-critical activities will depict float time also called scheduling leeway.

There are a number of software programs available for developing a CPM schedule, but

the one most used by designers is Primavera software.

PERT is a statistical or event-oriented system mainly used in the research anddevelopment industry.

Substantial Completion. Substantial completion is defined as completion sufficient for

the owner to occupy the work, or designated portions of the work, and to put it to use. It

is also called practical completion and it is less than absolute completion or finalcompletion. A new building may be occupied and used despite the need for minor

deficiencies yet to be made good by the contractoras soon as possible. It is determined

and certified by the designer. The issuance of a certificate of completion releases the

contractor of all responsibility and obligations for further maintenance, security, safety ofthe work and ownership of the project passes to the owner. With the establishment of

substantial completion, the following events occur:

a. The guarantee/warranty provisions of the contract commence.

b. Construction insurance policies expire.

c. The assessment of liquidated damages ends.

d. The lien notice filing period commences.

When the owner occupies the work or designated portions of the work, the owner should

take the following actions:

a. Advice the contractor, in writing, of the specific portion of the work thathe is utilizing. The owner should accept the responsibility for

maintenance, security, and safety of the portion of the work he is utilizing.

b. The owner should advise the contractor of his responsibility of correctingminor defects, if any, in that portion of the work he is utilizing.

Final Completion It is also called total completion or contractual completion. It is the

total performance of the construction contract. The designer determines the time

necessary for the contractor to complete the work after the date of substantial completion.



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Changes in the Work Changes in work are allowed in lump-sum contracts only if the

contract says so. An owner and a contractor can mutually agree to anything that is legal.The work involved in a change must be within the general scope of the contract. If it is

not, a change can only be made with the full agreement of the parties. Changes can be

classified as (a) minor, (b) within the scope of the contract, and (c) beyond the scope of

the contract. Minor changes that are not inconsistent with the intent of the contract anddo not require adjustment to the contract time or contract sum can be covered by the

designers change order. If the change is within the scope of the construction contract,

the owner can issue a change order cost of which is based upon the unit price furnishedby the contractor in his bid. If it is beyond the scope of the construction contract, mutual

agreement by the parties is required prior to initiating a change order.

A change order, once executed by the parties, becomes a part of the contract documents.

While any of the parties can propose a change order, only the owner can authorize it.Sometimes, the owner issues a unilateral change order called change directive to expedite

the work with the understanding that a regular bilateral change order will be issued at a

later date to address the payment and time allowances.

Changes occur in a construction contract due to the following reasons:

1. Substantial departure from the original contract documents.2. Design changes required by the owner or mandated by regulatory agencies.

3. Errors and/or omissions in the plans and/or specifications.

4. In unit price contracts, excessive quantity variations from those estimated.5. Differing site conditions such as soils or other physical conditions.

6. Adverse weather conditions.

7. Field emergencies.

A change order must include the following information:

1. Identification of change order. They should commence with Change order Number 1 andbe numbered consecutively throughout the duration of the project.

2. Description of change, if necessary, attaching sketches or even drawings.3. Reason for change.4. Change in contract price.5. Change in unit prices in Unit Price contracts for adjustment in case there is a substantial

variation in quantities.6. Change to contract time.7. A statement about the impact on other work elements, subcontractors etc.8. Approvals with the signatures of the designer, the owner, and the contractor.

Cash Allowances In a stipulated sum contract, if certain parts of a work cannot be

determined in time such as the finish hardware, its exact type, quality and finish (which

will be decided at a later date during the progress of the work), it will be specified in thecontract documents that the bidders shall allow a cash allowance. Later, when a decision

is made, the contractor will be asked to get bids for the item from selected bidders. If



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satisfied, a bid will be accepted and the contractor will place a supply contract with the

selected bidder and pay for the item. If the amount paid is less than the cash allowance inthe contract, the difference is deducted by a change order from the contract sum. If the

difference is more, the contract sum is increased accordingly by a change order.

Common examples for cash allowances are: finish hardware, fittings, fixtures and,

installation of special equipment etc..

Cost Fluctuations Cost fluctuation provisions in a contract are a means of reducing risk.

Any change in the direct costs of the work is at the contractors risk. If the cost rises, thecontractor loses and if it falls he gains. The cost fluctuations are not commonly used in

ordinary building contracts.

Pre-construction meeting This is a meeting convened by the owner after signing

the agreement and before starting the work. All key members involved in construction,

including consultants, will be invited and they will be provided with the draft project workplan prepared by the designer. The plan will be discussed in the meeting and a final plan

will be formulated. Soon after this meeting all participants will receive the finalizedproject work plan and other pertinent documentation of the meeting.

Separate Contractors Sometimes an owner may have several separate contracts for the

same job at the same sitewith different contractors. Phased construction may be easier

to implement with several separate contractors.Cooperation among the different separatecontractors is essential. Where separate contractors are involved, specifications must be

clear about sharing temporary services and, using facilities, plant and equipment etc.



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VI. Subcontracts and supply Contracts

A subcontractor is defined as one who has a direct contract with a primary contractor toperform part of the work of the primary contractor at the site. A supplier is defined as one

who supplies raw materials such as soil, gravel, lumber and bricks for construction. In other

words he is a materials man. If a construction item is manufactured conforming to a special

design at a remote location and shipped to the construction site for installation by others,the manufacturer of such an item becomes a sub-contractor even though he is not installing

his supplied item. Examples of such manufactured to a design are: a roof truss, custom

made window frame etc.

A subcontractor/supplier has privity of contract with a primary contractor and not with the

owner or the designer. At the request of the subcontractor, the designer has to furnish himinformation regarding the degree of completion of work, the amount applied for by the

primary contractor for payment and any action taken on account of work done by the

subcontractor/supplier. Also, the designer will inspect the work done by thesubcontractor/supplier to approve it for payment by certification. The designer is notresponsible for subcontractors/suppliers or their work. Communication between the owner

and the subcontractor/supplier is through the primary contractor. A contractors primary

duty in a subcontract is to pay on time for the work done by the subcontractor as soon as hereceives payment from the owner.

A subcontractors/suppliers obligations in a subcontract should be a reflection of thecontractors obligations in the primary contract. There are certain things in the primary

contract that are implied but in a subcontract they have to expressly stated in the

subcontract. Some examples are: to provide temporary facilities and services that are

particularly related to the work of the subcontract; to provide specific construction plantand equipment; to provide specific materials and do specific work such as false work and

form work; to prepare shop drawings; to provide schedules and progress reports; to do

cutting and patching for the work of other subcontracts.

A subcontract should define clearly its own scope as distinct from other subcontracts. A

suppliers obligations are similar to those of a subcontractor. The sale of goods by asupplier is covered under the Uniform Commercial Code (UCC). Under the UCC, time

is always of the essence, and if sales contract specifies a date for delivery, a breach of the

contract occurs if the delivery date is not met. For sale of goods substantial performanceis not good enough.

Nomination of subcontractor/supplier is not extensive in the United States and, if used,

usually applies only to small sections of contracts. Normally, the primary contractor callsfor sub-bids for the sub trade work and selection is made on a competitive basis.



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VII. Construction Contract Arrangements

1. Owner/Developer and Contractor/Designer In this arrangement, there are only twoparties to the contract, the owner as the first party and the contractor/designer as the

second party. The owner may be an individual, a corporation or a developer. This

arrangement is called a package deal and projects built under this arrangement is termed

turnkey projects. The owner has only one contract for both the design and construction.Turnkey projects are often more for commercial and industrial construction. Many

turnkey projects are arranged by negotiation, and an owner does not receive competitive

bids. An owner can select a contractor/designer on a competitive basis also. If so, heselects the contractor/designer on the basis of a lump sum or percentage fee for design

and construction. A contractor may have designers as employees.

2. Owner/Developer as Designer In most places, the law requires major construction

works to be designed by a qualified designer. Some private and public corporations,

some government departments and some developers employ designers. This could causea problem when quasi adjudication is required of the designer. He may not act freelyand proclaim judgment against his own employer in case it is required.

3. Owner/Developer as Contractor- The purpose of the owner/developer becoming acontractor is to make money. Some developers operate their own construction

company. By this, they are able to maintain a higher standard of construction work

without the need for paying a full time inspector. It is preferable for owners who wantto be contractors to have separate companies for the different functions (owner and

contractor) and proper construction contracts must be made in writing between the two

companies.

4. Contractor/Supplier as Owner Some contractors feel it is more profitable to invest in

real estate than in the business of competitive bidding and participate in a joint venture

with an owner/developer. He does the construction work within a negotiated contractand receives shares in the new development. Some other contractors who have enough

capital have ventured out on their own as owner-developer. Generally, it is probable that

contractors will have better success as owners than owners will have as contractors.

5. Designer as owner Some designers having seen the profits made in development have

converted their design services into equity in commercial developments.

6. Designer as contractor Architectural institutes have not permitted architects to bebuilders. This is based upon the concept that the profession is an organized, self-

disciplining body of advisers and consultants with certain exclusive rights. Aprofessional engineer is not restricted to be a contractor.



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7. Financial Institution as Owner/Developer Some finance companies that provide muchof the money for developments went after construction with the intent of making money

in relatively short time. The accountants of the financial companies cannot understand

the quantitative information provided by surveyors and realize that cost accounting in

construction is different from what they have been used to. Because a person can deal infinance, and real estate does not mean he can also deal with construction and its costs.

Therefore, financial companies generally should stay with financing, make good loan and

employ good contractors for any construction work.



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VIII. Documents for Construction Contracts

There are two kinds of documents bidding documents and contract documents. The

documents that are used to make and obtain bids constitute bidding documents. Most

bidding documents become contract documents when a contract is made.

The following is the list of bidding documents:

1. Notice to contractors/Invitation to bidders, Solicitation of bids.2. Instructions to bidders.3. Bid form (blank).4. Agreement.5. General conditions.6. Supplementary conditions.7. Specifications.8. Drawings.9. Bid bond.10.Performance bond (blank).11.Payment bond (blank).12.Addenda.

The following is the list of contract documents:

1. Bid form (completed).2. Agreement.3. General conditions.4. Supplementary conditions.5. Specifications.6. Drawings.7. Performance bond (completed).8. Payment bond (completed).9. Addenda.10.Modifications.

1 Notice to contractors/Invitation to bidders/Solicitation of bids This is a noticepublished in newspapers and journals to advertise that an owner is seeking bids fromcontractors. The notice should include the following information:

a. Name of owner and a statement of owners readiness to receive bids.b. Name of the designer.c. Title and brief description of work and its location.d. Time and place for the receipt of bids, and whether bids will be opened in

public.e. Location and time periods for the examination of bidding documents.



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f. Places where the bidding documents can be purchased, the amount and towhom the payment has to be made.

g. Amount of bid security (bid bond).h. Stipulation regarding submission and withdrawal of bids, that is, the

period for which bids must remain open to acceptance after opening.

i.

Methods of permissible withdrawal prior to opening.j. Statement of owners right to accept or reject bids.k. Name and address of person issuing notice/invitation/solicitation.l. Bid due date.m. Start and completion dates.

The content of this document varies considerably depending upon who makes them. Somedocuments contain references to specific instructions to bidders or to specific conditions of

the proposed contract such as the pre qualification of bidders, requirements for the

provision of bonds and statutory requirements regarding minimum wages and employmentconditions. This also includes a date for a pre-bid conference which is intended to meet

with contractors, subcontractors, material suppliers, and manufacturers before the bid dateto ensure that each understands the components of the documents. An early pre-bid

conference can be valuable to the owner. It focuses potential bidders on the project andgives the designer a forum to explain the intent of the project. It may uncover holes in the

documents or ambiguous wording and allows contractors to ask questions to be followed

up with written response.

2. Instructions to bidders This is a comprehensive and useful document and contains

articles dealing with the following:

a Definition of terms.b. Bidders representation that he has read and understood the bidding

documents, visited the site, and bid on the materials, systems, and

equipment specified.c. Bidding documents and their uses.

d. Bidding procedures, regarding form and style of bid, bid security, bid

submission, and bid modification or withdrawal.

e. Consideration of bids, including opening, rejection, and acceptance of bids.f. Qualification of bidders.

g. Other post-bid information regarding submission of the list of

subcontractors and the owners financial capability.h. Performance bond and labor and materials payment bond.

i. Form of agreement between owner and contractor.

j. Bid due date.k. Location to deliver the bid.

3. Bid forms A bid is also called an offer, a proposal or a tender. The bid form is the

document on which the bidder submits the price. A blank bid form, as designed accordingto the specific requirements of a project, is part of the bid package. The bidder is required

to complete the blank form with his price and resubmit it along with the bid.. It may be



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brief and simple for a stipulated-sum contract if no further information is required. It may

be longer and more complex for a contract requiring alternates, unit prices or a list of subtrades. If bids are not submitted in the bid blanks provided, the bids should be rejected.

The following information should be in the bid form:

a. Name of the bidder.

b. Price both in words and numbers.

c. Price breakdown for the major trades.d. Amount of bid bond.

e. Unit prices if quantities are not firm.

f. Time required for the job.g. Space for the bidder to acknowledge receipt of all agenda issued.

h. Key subcontractors names.

i. Signature, title, and date.

4. Agreements The agreement is the heart of contract. It should list all contract documentsexcept the subsequent modifications to a contract. It should contain a complete and

detailed list showing the number of pages in each document; the sections of thespecifications and number of pages in each; the drawings by title, drawing number, date,

revision date or mark; any addenda identified by number, title and date of issue; and the

alternates, if any, that apply to the contract. The agreement should contain the followinginformation:

a. The date of the agreement which is the date of signing of the agreement bythe parties.

b. The works title entered in the agreement should be the same as that used inall other documents and it should be sufficiently descriptive of the work and

its location.

c. The time of commencement of work cannot be earlier than the date of theagreement. If the date for commencement or the time period for

construction is stated in the bid, these should be entered in the agreement

unless the parties mutually agree in writing on other dates.

d. Provision for liquidated damages or penalty-bonus clause. Thephrase, Time is the essence of this Contract, must be included to

emphasize the timely completion especially if liquidated damages is

included as a provision.e. The contract sum must be entered in both words and figures. This sum must

be the same as the sum provided in the accepted bid or as subsequently

modified in writing by mutual agreement.f. Date of substantial completion.

g. Progress payments.

h. Interest rates (if the contractor is not paid within a certain period of time

agreed upon, interest rates will be charged to the owner).i. Final payment.

j. Enumeration of contract drawings.



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A contractor should not start the work prior to signing the agreement. If there is a genuinereason for the delay in signing of the contract by the parties and it is in their interests to begin

the work as soon as possible after acceptance of the offer, then the owner should issue a letter

of intent to the contractor. The substance of the letters content should at least be:

a. An authorization for the contractor to start the preliminary parts of the work.b. A statement of intent to enter into a formal contract by a specified date.c. A statement of agreement to pay for work done if for any reason a formal

contract is not entered into.

Once a formal contract is signed by the parties, the letter of intent becomes void. Any payment

already made will be credited to the owner.

5. General conditions The purpose of the general conditions is to establish the legal

responsibilities, authority, and rights of all parties involved in the project. As their nameimplies, these conditions are general in nature and apply to any construction project.

Although an owner can devise his own general conditions, most prefer to use a standardversion. Standard versions have been prepared by: (1) Associated General Contractors,

(2) American Society of Civil Engineers, (3) U.S Government, and (4) Engineers JointContract Documents Committee, (5) American Institute of Architects, and others. The

special requirements of any owner can be provided for by supplementary conditions, with

amendments as required to the general conditions. General conditions should address thefollowing:

a. Definitions.b. Rights of way.

c. Permits.d. Subsurface conditions.

e. Contract security.

f. Safety and protection..

6. Supplementary conditions These are amendments and amplifications to standard

general conditions and are special and peculiar requirements of a particular owner and a

project. Sometimes they are called special conditions or supplementary specialconditions. There are two kinds of supplementary conditions: (1) Amendments to the

general conditions and (2) Additional conditions which may be needed for a particular

project. Some of the usual items that are found in supplementary conditions are as shownbelow:

a. Copies of drawings and specifications, numbers, costs, copyright andreturnability.

b. Full-time representative of the owner at the site, and their authority and

functions.

c. Shop drawings and detailed instructions for particular submissions.d. Samples of materials and detailed instructions for submission and

disposition.



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e. Applications for payment and detailed requirements as to format, and

amount of information and supportive evidence required with submission.f. Payments and holdbacks, amounts, proportions, periods and interest

payments.

g. Liquidated damages withheld by the owner for late completion.

h. Penalty for late completion and bonus for early completion.i. Bonds and Insurance.

j. Changes in the work; methods of valuation and specific amounts to be

added to direct cost of extra work as a fee.k. Cash allowances; detailed instructions as to their use.

l. Labor legislation requirements.

m. Protection of life and property and safety requirements.n. Arbitration of disputes.

o. Provision for prevailing wages.

p. Parking, and Use of toilet facilities.

7. Specifications These are the documents that directly complement the drawings. Thereshould not be any inconsistencies between the specifications and drawings. Other

documents such as geotechnical data and various reports and information provided by theowner also are included. Specifications are part of the project manual which also includes

bidding/contract documents and schedules for doors, windows, furnishings and fixtures etc.

Specifications are written usually following the Construction Specification Institutes (CSI)format. CSI is a trade association made up of constructors, designers, construction product

manufacturers, and specification writers. The CSI format was originally developed in 1962

and consisted of the following divisions:

Division 0 Bidding and contract requirements.Division 1 General requirements.

Division 2 Site work.

Division 3 Concrete.Division 4 Masonry.

Division 5 Metals.

Division 6 Wood and plastics.

Division 7 Thermal and moisture protection.Division 8 Doors and windows.

Division 9 Finishes.

Division 10 Specialties.Division 11 Equipment.

Division 12 Furnishings.

Division 13 Special construction.Division 14 Conveying systems.

Division 15 Mechanical.

Division 16 Electrical.

CSI format was followed until 2004 when Master Format was developed to address changes

in the industry. New and changing materials, developing areas of technology, increased use



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of data bases, and life cycle considerations are all incorporated in this new and expanded

format. The expanded format, shown below, contains a total of 50 divisions out of which 34are active and 16 are held in reserve.

Division 0 Procurement and contracting requirements.

Division 1 General requirements.Division 2 Existing conditions.

Division 3 Concrete.

Division 4 Masonry.Division 5 Metals.

Division 6 Wood, plastics, and composites.

Division 7 Thermal and moisture protection.Division 8 Openings.

Division 9 Finishes.

Division 10 Specialties.Division 11 Equipment.

Division 12 Furnishings.Division 13 Special construction.

Division 14 Conveying system.Division 15 20 Reserved.

Division 21 Fire suppression.

Division 22 Plumbing.Division 23 Heating, ventilation, and air conditioning.

Division 24 Reserved.

Division 25 Integrated automation.Division 26 Electrical.

Division 27 Communications.Division 28 Electronic safety and security.

Division 29&30 Reserved.

Division 31 Earthwork.Division 32 Exterior improvements.

Division 33 Utilities.

Division 34 Transportation.

Division 35 Waterway and marine construction.Division 36-39 Reserved.

Division 40 Process integration.

Division 41 Material processing and handling equipment.Division 42 Process heating, cooling, and drying equipment.

Division 43 Process gas and liquid handling, purification and storage

equipment.Division 44 Pollution control equipment.

Division 45 Industry-specific manufacturing equipment.

Division 46&47 Reserved.

Division 48 Electrical power generation.Division 49 Reserved.



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The contents of a project manual containing the specifications are as follows:

a. Title page.b. Table of contents.c.

Bidding documents.d. Contract documents.

e. Definitions of frequently used terms.f. Technical specifications following the CSI format.

No section of a specification should contain the work of more than one sub-trade. Some

relevant rules and maxims for writing specifications are as shown below:

a. Be fair do not write conditions and requirements involving incalculable

risk.b. Be realistic do not specify requirements that cannot be enforced.

c. Be current do not specify obsolete materials and methods.d. Be consistent use the same terminology and style throughout.

e. Be brief use a concise style without superfluous words.f. Be clear avoid ambiguity and obscurity.

g. Be precise do not use general terms to describe something. Be specific

about it.

8. Drawings These should embody the same requirements as for specifications; should be

fair, realistic, current, consistent, concise, clear, and, precise. Drawing is a general terminclusive of plans, elevations, sections, diagrams, details of several projections, isometric

and perspective drawings. There are two ways to revise a drawing. One way is to revisethe original drawing and the other is to produce a new one. The usual way of arranging

the different types of drawings in building construction is in the following order:

a. Titles, legends.

b. Demolition drawings.

c. Site drawings.

d. Topographic survey.e. Soil boring data.

f. Site demolition.

g. Civil.h. Landscape.

i. Architectural drawings..

j. Structural. drawings.k. Plumbing.

l. Fire protection.

m. HVAC.

n. Electrical..o. Standard details.



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In the event of a conflict, drawings of larger scale govern over those of smaller scale of the

same date. All drawings are otherwise equal.

9. Addenda These are issued during the bidding period to make changes in bidding

documents. They become a part of the contract documents when a contract is made.

They add to, delete from or otherwise modify any document during the biddingperiod. They are prepared and issued by the designer to all those who purchased the

bidding documents. They should be issued when absolutely necessary. Care should

be taken to prepare the addenda and a hastily prepared one will lead to under pricingor over pricing a project.

10. Modifications These are similar to addenda but always issued after the contract ismade. They should be prepared with due care and involve addition or deletion to the

contract document. Modification must be in writing and can be accomplished in one of

the following methods:

. a. A mutual amendment to the contract signed by both parties.b. A change order to modify the work, the contract sum, or the contract time,

or all of these.

c. A construction change directive.

d. An order for a minor change not affecting the contract sum or amount.



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IX. Bidding for Construction Contracts

There are two ways an owner can make construction contracts: (1) by getting competitive bids,

and (2) by negotiations. Most contracts are let through competitive bidding. Competitivebidding may be Open Bidding or Closed Bidding.

Open Bidding, when advertised by the owner, provides opportunity for all qualified bidders to

bid without restriction. Also, it is more open to public scrutiny. All public agencies are requiredby statutes to go for open bidding and the rule of awarding a contract by a public agency is

always to the lowest bidder.

Closed Bidding is for many private contracts. A limited number of contractors is selected and

asked to bid for the work. An owner is free to accept or not to accept any bid.

Bidding period begins as soon as Invitation to Bidders is issued by the owner. Competitive

bidding is influenced by law, ethics, custom, tradition, business tragedies, greed, and price etc.

The primary reason for the competitive bidding is to seek to pay the lowest possible price for thework. Competitive bidding for a lump sum contract presupposes the following:

a. Bidders want the work and will compete for it.

b. Bidders can find out all they need to know about the work.c. Bidders can find out all they need to know about the site of the work.

d. Bidders can estimate the direct cost of the work to within an acceptable margin of the ultimate

cost.

Contract time is critical in lump sum contracts. It is second only to contract sum in importance if

the contract says that time is essence of the contract. Alternates in lump sum contracts are

common.

A bid bond in the amount of usually 5 percent of the cost of the project is required to be submitted

along with the bid. The primary purpose of the bid bond is to guarantee the owner that the bidderwhose bid he accepts will enter into and perform the contract. If he fails to enter into a contract, the

bidder (or his guarantor, the surety company issuing the bid bond) will pay to the owner money

damages in the amount that his bid is less than the amount of the next lowest bid.

In unit price contracts, each bidder is required to submit a bid based on the approximate quantities

and his unit price. There is a clause in the agreement for unit price contracts to adjust the unitprices up or down if the actual quantity varies by more than 15 percent. The unit price for the new

quantity is settled by mutual acceptance. Also, it is a usual practice, in unit price contracts, torequire bidders to price some parts of a project such as a retaining wall at an outfall sewer by

lump-sum prices.

In cost-Plus-Fee contracts, only the fee is the subject of competitive bidding. Costmust be clearlydistinguished from work. There is a provision in the contract for adjustment of the lump-sum fee

in the event of a change in the scope of the work. Of course, if the fee is based on a percentage of

the construction cost, it will be self adjusting. If the scope of the work varies significantly, it is



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usual to have a varying scale of fee, with the fee declining as the cost of the work increases, and

vice-versa. The reputation of the bidders, and their key staff, especially the proposedsuperintendent, are to be carefully considered by the owner.

Maximum Cost-Plus-Fee contracts are bid like a lump-sum contractand administered like a cost-

plus-fee contract. With the stipulated maximum cost, it is comparable to lump-sum contract andthe financial administration is similar to that of a cost-plus-fee contract. Provision must be made

in the contract documents for a sharing class and the proportions that will go to either party. It is

desirable to adjust the lump-sum fee should the maximum cost is significantly changed. This isusually prescribed in the form of a sliding scale.

Bidding for subcontracts and supply contracts is governed by the same principles of bidding forprimary contracts.

Bid shopping (or Bid Peddling) and establishing a bid depository are peculiar to sub-contracts.Bid shopping is a practice by some contracting companies which, having received sub-bids for

work, suggest separately to each of the sub-trade bidders with the lowest sub-bids that theyreconsider their bids and submit new and lower sub-bids because their original sub-bids were, they

say, not quite low enough. By this, the contractor seeks to increase his profit margin at theexpense of his intended subcontractor. Bid shopping is not ethical and is contrary to industrys

best interests. To discourage this practice and to regulate sub-bidding, Bid depositories are

established by associations of contractors, subcontractors, and suppliers. A bid depository is aplace where sub-bids are deposited by sub-bidders, according to a set of rules, registered, and

subsequently transmitting to general builders as designated by the sub-bidders, who may say

whether their sub-bids are available to all, or only to certain builders. Usually, the biddingauthority requires or authorizes a bid depository.

It should be stated in the Instructions to Bidders that the owner shall have the right to waive any

informality or irregularity in any bid or bids received which, in his judgment, is in his own best

interests.

Instructions to Bidders state the latest time, the date, and the place for the submission of bids, but

bids may be submitted earlier. A bid can be withdrawn anytime prior to the last time for

submission. Bids cannot be withdrawn any time prior to a stipulated period (15, or 30, or 60 days)after the date for receipt of bids.

Only responsive bids for public works are required by law to be opened in public and the amountsof the bids are read aloud to the audience.

Soon after the bid opening, a briefstatement of the bids receivedis issued. This statement shouldinclude names of bidders and the amount of each bid.

Public owners, by statute, are required to accept the lowest bid provided it is valid and timely.

Private owners have much more latitude in dealing with bids and bidders.



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X. Negotiating Construction Contracts

For negotiation, an owner chooses a contracting company due to its reputation and therecommendation of others who have used the company before. He selects three companies and

requests them to provide schedule of prices. After consideration of the schedule of prices, he

selects the one best suited to his needs and starts negotiating with that company. Negotiating for a

contract is often a better way than bidding both for owner and contractor, but usually it requiresmore effort than bidding Establishing a primordial agreement (a latent agreement based upon

common tradition and practice.) early, minimizes the effort in negotiations. A standard

construction contract forms a part of such tradition and practice.

Effective negotiations require preparations, including estimate of costs, a primordial agreement,

and others that will help to establish as early as possible a basic agreement as a foundation for theentire contractual agreement.

The representative in negotiations must be knowledgeable and should have adequate authority.Negotiating parties should understand their mutual position and objectives. A contractorsnegotiator needs to be capable of grasping an owners business and its building requirements. An

owners negotiator needs a good cost estimate.

Negotiations go from generalities to particulars, that is, from the known to the unknown (from

primordial agreement to a full agreement) and seek mutual agreement.

Risks must be identified and distributed to whoever has the greater control over them.

Minutes must be kept and, as the negotiation progresses, agreed-upon items must be recorded.

Standard form of agreement and standard general conditions serve as guide for topics to be agreed.

A high level of mutual agreement, contractors input in the design, and a better equitable contract

are some of the advantages. Time needed for negotiating can be a disadvantage.



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XI. Administration of Construction Contracts

1. Construction Laws.

To administer is to manage and supervise the execution of a construction contract. Contractadministration usually is by a representative of the owner. He may be an architect, engineer,

construction manager or cost consultant. The performance of construction contracts is regulated by

laws. These laws include federal, state, and local besides their rules and ordinances These lawscan he grouped as follows:

1. Laws and regulations that affect making of contracts.2. Laws relating to execution of the work such as labor laws, safety standards, workers

compensation, permitting rules, and lien laws.3. Laws applicable to settlement of disputes arising out of the performance of work.4. Licensing laws covering businesses practices and personal qualification standards of engineers,

architects, contractors and other support personnel who are involved in construction.

All public-funded and many private sector contracts are subject to the provisions of certain labor laws

as shown below:

1. Labor-Management Relations The first federal law, the Sherman anti trust law was enacted byUS Congress in 1890. Since then numerous labor-related laws have been enacted explaining

federal labor policy.

2. Equal Employment Opportunity Laws The first law to eliminate discrimination in employmentwas the Civil Rights Act of 1964. Subsequently, many laws and executive orders have been

enacted to ensure equal employment opportunities exist for all classes of people. Quotas forminority and women businesses are mandated as a condition of awarding contract in public-

funded projects,

3. Americans with Disability Act This act was enacted in 1990 to prohibit employmentdiscrimination based on disability by any employer having more than 14 employees.

4. Wage and Hour Law The Davis-bacon Act of 1931, Copeland Anti-Kick Act 0f 1934, and theFair Labor Standards Act of 1938 all contained provisions regarding minimum wage, maximum

hours, employee kickbacks, overtime pay, equal pay and other wage and hour related matters.Since then, Congress has passed many additional laws relative to wage and hour provisions.

5. Workers Compensation The laws of all states require employers to be responsible for thepayment of compensation benefits to employees who suffer job-related illness or injuries. The

payments include cost for medical care and time lost due to injury. Contractors cover these risks

by purchasing Workers Compensation Insurance from insurance companies that offer this type

of policy. The benefits are paid to an affected employee at rates set by the state law.



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6. Construction Safety Act - Prior to 1970, there were no legally enforceable uniform safetystandards in the construction industry. Personal injuries and illnesses in construction work

activities resulted in loss of production, loss of wage, medical expenses, and disability

compensation payments. As a result, Congress passed Occupational Safety and Health Act of

1970. The act imposed nationwide safety standards on the construction industry. The Actestablished the Occupational Safety and Health Administration (OSHA) which promulgates

safety and health standards and the rules and regulations to implement them. Construction

Safety and health Regulations published in the Code of Federal Regulations, Part 1926, containsall the applicable rules and regulations. The document covers all working conditions. All

contractors are required to have copies of OSHA regulations pertaining to the areas of their

expertise. Substantial penalties will be imposed for non-compliance.

When accidents occur at the construction site, they must be documented by the Inspector at the

site. He will report the accident to OSHA, prepare a written report describing the accident, itsprimary cause, safety regulations violated, and recommendation for corrective action. He must

also take pictures of the accident site.

To administer a contract, the following additional information is required:

1. A Cost estimate.2. Site surveys.3. Financial statements.4. Notices and instructions.5. Shop drawings and samples.6. Interpretations and decisions.7. Modification and minor changes.8. Directives, change orders, and change directives.



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XII. Claims and Disputes

Most construction claims fall into the following categories:

1. Delays in the work - Delay claims are of three types: non-excusable, excusable, and compensable.Non-excusable delay is one that is caused by factors within the contractors reasonable control.

An excusable delay is caused by factors beyond the Contractors control, but is not the result ofthe owners actions. A compensable delay occurs when the owner has failed to meet an

obligation in the contract.

2. Schedule changes When the owner elects to either accelerate or decelerate the work schedule,the contractor may have a valid basis for a claim since the change can have an effect on project

operations.

3. Differing site conditions Changed or unforeseen subsurface and other physical conditions at thesite

4. Constructive changes A constructive change authorizes a modification to the contract due to anaction or inaction by the owner. The following are some examples for a constructive change:

a. Defective contract documents.b. Change in standard of performance.c. Change in construction sequence.d. Designers interpretation f documents.e. Improper inspection and rejection.f. Owner nondisclosure of pertinent facts.

5. Severe weather conditions Weather events that depart from normal weather occurrences andcause conditions that are detrimental to contractors operations.

6. Failure to agree on change-order pricing This is when there is no agreement on a price foradditional work between the owner and the contractor

7. Miscellaneous problems such as breach of contract, owners failure to make payments, workbeyond contract scope, etc.

Some of the actions that can be taken to minimize claims are as follows:

1. Properly assign and allocate risks by allocating them to the party who has the competence and theresource necessary to minimize or control it.

2. Properly document all facets of the planning, design and construction activities.



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3. Insure that the project is subjected to a thorough constructability analysis during the planning anddesign phases.

4. Insure that the plans and specifications are project specific.5.

Maintain sufficient staffing at the project site. T