Understanding Construction Contracts

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.
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Table of Contents
I. II. III. IV. V. VI. Introduction Primary Ingredients of Construction Contracts Participants in Construction Work Types of Construction Contracts Some features of Construction Contracts Subcontracts & Supply Contracts VII.
Construction Contract Arrangements VIII. Documents for Construction Contracts IX. Bidding for Construction Contracts X. XI. XII. XIII. XV. Negotiating Construction Contracts Administration of Construction Contracts Claims and Disputes Dispute Resolution Methods Payments in Construction Contracts
XIV. Completion of Construction Contracts
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I.
Introduction:
Contracts have been in existence since the Roman days. Contracts are part of everybodys daily 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 and complex 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. If the law requires the contract must be in writing, and if it is in writing, the contract has validity. 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 the parole evidence rule that excludes all prior oral 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 also classified 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. b. c. d. Mutual Agreement and Genuine Intention Capacity to Contract Consideration in a Contract 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 are essential. 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 of mutual 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 restrained and 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 value given 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 its construction. 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 the work, 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 the designer. 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 working together 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 in advising 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 project work which is performed by several contractors and subcontractors. He is responsible for their performance 7. Sub-Contractor He is hired by the general contractor to do certain special type of 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. Copyright J.N. Ramaswamy, Ph.D., P.E. Page 5 of 39
8. Sub-subcontractor He is employed by a subcontractor to do parts of the construction 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 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. 10. Quantity Surveyor He is an agent of the owner and works with the designer and deals with the financial and budgetary aspects of a construction project both during design and construction. He is also called cost engineer or cost consultant. 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, construction manager, 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 price Contract 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 are indispensably 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 are those 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. The contractor indemnifies the owner and his employees from all claims, damages, losses and expenses arising out of the performance of the work. It is the contractors 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 easements and 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 the defective 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, his persistent 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 sum contracts, 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 specific duties. 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 in the work which affect neither the contract sum nor the contract time and which
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UNDERSTANDING CONSTRUCTION CONTRACTS 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 the related 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 precise duties 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 is a 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 the work. 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 according to the requirements of the primary contract. All subcontracts must be in writing and the subcontract documents should reflect the primary contract both in form and 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. He has 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 there is 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 and Material 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 work for 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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UNDERSTANDING CONSTRUCTION CONTRACTS 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 smallest parts 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 and indirect 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 include supervision, 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 the contractor. 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 some combination of the two. The contractors primary duty is to do the work according to the agreement and conditions 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. The contractor 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 of the 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 work expeditiously. 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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UNDERSTANDING CONSTRUCTION CONTRACTS 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 in the 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 an interest 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 completed 3. 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 maximum cost for work. The project is bid as if it were a lump sum contract except that it has two 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 the contract, 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 type of 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 of measurement 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 Reinforcing steel bars . Cubic yard Pound or ton
Cast-in-place concrete Cubic yard
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 quantities of 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 be measured accurately on site as it is completed and the contractor is paid according to the 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 quantity of 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 and vice-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 the contract, provide information as required, and to retain a designer throughout the contract 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 the 15 %, 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 cover such 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 while certifying 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 in the 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 Copyright J.N. Ramaswamy, Ph.D., P.E. Page 11 of 39
UNDERSTANDING CONSTRUCTION CONTRACTS 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 for adjustment 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 loading and 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 priced items 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 not necessarily 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 greater expenditure 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 to keep 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 he incurs a relatively smaller cost for bid preparation. 5. Design-Build Contract The concept is not new, as many builders designed what they built 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 to designing. 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 especially allocating 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 the same 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 the contractor 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 Copyright J.N. Ramaswamy, Ph.D., P.E. Page 12 of 39
UNDERSTANDING CONSTRUCTION CONTRACTS 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 the other 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 cannot be 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 to make 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 resultant saving 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 and contractor resulting in an economic design, and therefore the potential for a larger profit. 6. Potential for innovative design leading to a larger profit. Disadvantages include the following: 1. 2. 3. 4. 5. 6. 7. An owner who lacks independent advice on construction and its cost may be suspicious and hesitant and hamper a projects progress or unable to understand and resort to complaint and dispute. Limited ability of the owner to directly communicate with the contractor. Potential conflict with statues that restricts the provision of architectural design services, or do not recognize or do not support design-build contracts. New design-build companies may not have the needed skills and experience for dealing directly with the owners. Getting suitable Insurance coverage and performance & payment bonds may be difficult or impossible for a design-build project Owner may have to make a significant initial payment as it requires initial expense in making a proposal. Evaluating design-bid proposals may be problematic. The owner needs to hire a consultant 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 affected party 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 are made in the construction contracts for payment of a predetermined amount of money. This predetermined money is called the liquidated damages. Here, liquidated means determined or settled. Before providing the amount in the contract, the owner has to calculate 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 early completion 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 late completion. 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 generally disfavor 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 the substantial 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 is completed. The purpose of retainage is two fold. One is protecting the owner against failure 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 amounts retained 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 contractor with 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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UNDERSTANDING CONSTRUCTION CONTRACTS 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 by subcontractors 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 orderly control 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 successful coordination 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 in court 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 dependencies of 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 the graphical 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 Copyright J.N. Ramaswamy, Ph.D., P.E. Page 15 of 39
UNDERSTANDING CONSTRUCTION CONTRACTS 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 or finishing. 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 critical path. 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 and development 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 final completion. A new building may be occupied and used despite the need for minor deficiencies yet to be made good by the contractor as 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 of the work and ownership of the project passes to the owner. With the establishment of substantial completion, the following events occur: a. b. c. d. The guarantee/warranty provisions of the contract commence. Construction insurance policies expire. The assessment of liquidated damages ends. 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 that he 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 correcting minor 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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UNDERSTANDING CONSTRUCTION CONTRACTS 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 and do 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 furnished by 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. 2. 3. 4. 5. 6. 7. Substantial departure from the original contract documents. Design changes required by the owner or mandated by regulatory agencies. Errors and/or omissions in the plans and/or specifications. In unit price contracts, excessive quantity variations from those estimated. Differing site conditions such as soils or other physical conditions. Adverse weather conditions. Field emergencies.
A change order must include the following information: 1. Identification of change order. They should commence with Change order Number 1 and be 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 the contract 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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UNDERSTANDING CONSTRUCTION CONTRACTS 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 in the 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, the contractor 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 work plan 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 finalized project 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 site with different contractors. Phased construction may be easier to implement with several separate contractors. Cooperation among the different separate contractors 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 to perform 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 him information 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 the subcontractor/supplier to approve it for payment by certification. The designer is not responsible 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 he receives payment from the owner. A subcontractors/suppliers obligations in a subcontract should be a reflection of the contractors 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 plant and 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 a supplier 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 performance is 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 calls for 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 two parties 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, he selects the contractor/designer on the basis of a lump sum or percentage fee for design and construction. A contractor may have designers as employees. 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 cause a problem when quasi adjudication is required of the designer. He may not act freely and proclaim judgment against his own employer in case it is required. Owner/Developer as Contractor- The purpose of the owner/developer becoming a contractor 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 want to 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. 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 contract and 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. Designer as owner Some designers having seen the profits made in development have converted their design services into equity in commercial developments. Designer as contractor Architectural institutes have not permitted architects to be builders. This is based upon the concept that the profession is an organized, selfdisciplining body of advisers and consultants with certain exclusive rights. A professional engineer is not restricted to be a contractor.
2.
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7. Financial Institution as Owner/Developer Some finance companies that provide much of 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 in finance, 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 notice published in newspapers and journals to advertise that an owner is seeking bids from contractors. The notice should include the following information: a. b. c. d. Name of owner and a statement of owners readiness to receive bids. Name of the designer. Title and brief description of work and its location. 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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UNDERSTANDING CONSTRUCTION CONTRACTS f. Places where the bidding documents can be purchased, the amount and to whom 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. Some documents 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 employment conditions. 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 date to 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 and gives 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 according to 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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UNDERSTANDING CONSTRUCTION CONTRACTS 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 sub trades. 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. b. c. d. e. f. g. h. i. Name of the bidder. Price both in words and numbers. Price breakdown for the major trades. Amount of bid bond. Unit prices if quantities are not firm. Time required for the job. Space for the bidder to acknowledge receipt of all agenda issued. Key subcontractors names. Signature, title, and date.
4. Agreements The agreement is the heart of contract. It should list all contract documents except 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 the specifications 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 following information: a. The date of the agreement which is the date of signing of the agreement by the parties. b. The works title entered in the agreement should be the same as that used in all 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 the agreement. 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. The phrase, 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 genuine reason 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 name implies, 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 standard version. Standard versions have been prepared by: (1) Associated General Contractors, (2) American Society of Civil Engineers, (3) U.S Government, and (4) Engineers Joint Contract 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 the following: a. b. c. d. e. f. 6. Definitions. Rights of way. Permits. Subsurface conditions. Contract security. Safety and protection..
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 special conditions. 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 shown below: a. Copies of drawings and specifications, numbers, costs, copyright and returnability. 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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UNDERSTANDING CONSTRUCTION CONTRACTS 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. There should not be any inconsistencies between the specifications and drawings. Other documents such as geotechnical data and various reports and information provided by the owner 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 Division 1 Division 2 Division 3 Division 4 Division 5 Division 6 Division 7 Division 8 Division 9 Division 10 Division 11 Division 12 Division 13 Division 14 Division 15 Division 16 Bidding and contract requirements. General requirements. Site work. Concrete. Masonry. Metals. Wood and plastics. Thermal and moisture protection. Doors and windows. Finishes. Specialties. Equipment. Furnishings. Special construction. Conveying systems. Mechanical. 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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UNDERSTANDING CONSTRUCTION CONTRACTS 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 34 are 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. b. c. d. e. f. Title page. Table of contents. Bidding documents. Contract documents. Definitions of frequently used terms. 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 term inclusive 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 revise the 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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UNDERSTANDING CONSTRUCTION CONTRACTS 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 bidding period. 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 pricing or over pricing a project. 10. Modifications These are similar to addenda but always issued after the contract is made. 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. Competitive bidding 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 required by 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 the work. Competitive bidding for a lump sum contract presupposes the following: a. b. c. d. Bidders want the work and will compete for it. Bidders can find out all they need to know about the work. Bidders can find out all they need to know about the site of the work. 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 bidder whose 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 unit prices 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, to require 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. Cost must be clearly distinguished 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 Copyright J.N. Ramaswamy, Ph.D., P.E. Page 30 of 39
UNDERSTANDING CONSTRUCTION CONTRACTS 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 proposed superintendent, are to be carefully considered by the owner. Maximum Cost-Plus-Fee contracts are bid like a lump-sum contract and administered like a costplus-fee contract. With the stipulated maximum cost, it is comparable to lump-sum contract and the 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 is usually prescribed in the form of a sliding scale. Bidding for subcontracts and supply contracts is governed by the same principles of bidding for primary 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 they reconsider 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 the expense 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 a place 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 bidding authority 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 amounts of the bids are read aloud to the audience. Soon after the bid opening, a brief statement of the bids received is issued. This statement should include 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 the recommendation 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 requires more 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 the entire contractual agreement. The representative in negotiations must be knowledgeable and should have adequate authority. Negotiating parties should understand their mutual position and objectives. A contractors negotiator 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. Contract administration 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 laws can 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 by US 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 employment was 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 for minority and women businesses are mandated as a condition of awarding contract in publicfunded projects, 3. Americans with Disability Act This act was enacted in 1990 to prohibit employment discrimination 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 the Fair 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 the payment 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 safety standards 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 Act established 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, contains all 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, its primary 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. 2. 3. 4. 5. 6. 7. 8. A Cost estimate. Site surveys. Financial statements. Notices and instructions. Shop drawings and samples. Interpretations and decisions. Modification and minor changes. 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 of the 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 the site 4. Constructive changes A constructive change authorizes a modification to the contract due to an action or inaction by the owner. The following are some examples for a constructive change: a. b. c. d. e. f. Defective contract documents. Change in standard of performance. Change in construction sequence. Designers interpretation f documents. Improper inspection and rejection. Owner nondisclosure of pertinent facts.
5. Severe weather conditions Weather events that depart from normal weather occurrences and cause 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 for additional work between the owner and the contractor 7. Miscellaneous problems such as breach of contract, owners failure to make payments, work beyond 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 the resource necessary to minimize or control it. 2. Properly document all facets of the planning, design and construction activities.
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UNDERSTANDING CONSTRUCTION CONTRACTS 3. Insure that the project is subjected to a thorough constructability analysis during the planning and design phases. 4. Insure that the plans and specifications are project specific. 5. Maintain sufficient staffing at the project site. The Resident Project Representative and staff must be properly trained and should have adequate experience in projects of a similar size, type, and scope. 6. Have an effective inspection plan and a quality assurance program containing a record of all quality control requirements of the project.
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XIII. Dispute Resolution Methods

Four methods, as shown below, are available for resolution of construction disputes: 1. Negotiation This process involves, presentation of each partys position, analysis and evaluation of the other partys position, and compromise. Settlement costs are minimal and the time taken to reach an agreement can be very short. These are the advantages. The findings are non-binding. Mediation A trained third party is involved in assisting disputed parties to reach an agreement that resolves the dispute. The advantages are it is relatively fast and the settlement costs are minimal. The findings are not binding. This process is informal and not structured. Arbitration It is the voluntary submission of a dispute to one or more impartial persons for final and binding determination. The process is formal and well structured. It is an orderly proceeding governed by the rules of procedure and standard of conduct that are prescribed by law. The arbitrator has broad powers to determine matters of fact, law, and procedure and has final power of decision. The process can take several months for scheduling, preparation, extended hearings etc. It is not as economical as negotiation or mediation due to arbitrators and attorneys fees. Additional charges such as filing fees, charges for a hearing room, written transcripts and administrative expenses are incurred. All agreements to arbitrate are valid, irrevocable, and enforceable. Litigation Litigation is the last resort for parties if they cannot resolve their dispute by any one of the above methods. It is very expensive in terms of attorneys fees and time costs. It may take months or even years for the case to reach a trial.
2.
3.
4.
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XIV. Completion of Construction Contracts

Contract time: It is that stipulated in a contract. Time is of contracts essence if the contract says so. If not, time is determined by what is reasonable for the construction. Time, contractually, is measured in either calendar days or working days. Construction time and project duration depend on the work and prevailing conditions. Contract sum depends upon the contract time. A delay in the work and granting of extension of time may be grounds for increase in contract sum. Information to support claims for time extension in contracts can be obtained from the following documents: 1. 2. 3. 4. 5. 6. 7. 8. The project schedule in the contract documents. A project diary kept by the superintendent. Delivery tickets, time sheets, etc. Progress reports and dated photographs of the work. Production and cost records from job costing. Site and other meeting minutes. Correspondence, instructions, etc. Official weather reports and on-site weather records.
For a description of the substantial completion and final completion, please see Section V. During the finishing stages of the work, the designer and contractor must make frequent and careful inspections of the work to assure the correction of any faulty or defective work. A punch list is prepared of such items. The punch list obligations of the contractor are as follows: a. Check carefully all work including those of the sub-contractors. b. Correct all unsatisfactory/non-conforming work immediately. c. When the project has been completed in all respects, send a Certificate of Completion to the designer. The punch list obligations of the designer/site representative are as follows: a. Inspect the work as it progresses. b. Establish dates for equipment and systems testing and performance. c. Prepare a punch list. The list should be numbered consecutively and must be signed and dated. d. Meet with the contractor to resolve defective work. e. Check the record drawings (or as built drawings) to insure that all changes and departures from the original contract drawings have been noted and marked on the printed set of drawings. f. Obtain from the contractor submitted documents (from manufacturers, suppliers and vendors) such as operating and maintenance manuals, special tools, keys, spare parts, and similar items and g. Authorize the issuance of a certificate for final completion.
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XV. Payment in Construction Contracts

The general conditions of the contract usually stipulate the manner of payments to the contractor for work performed. Most contracts call for monthly progress payments through the work. Typically, the contractor submits a pay request about 10 days prior to the payment date. The pay request is reviewed by the designer and, on his satisfaction, issues a certificate for payment. Based upon this certificate, the owner makes the payment to the contractor. As a protection to the owner, payment requests should be accompanied by the contractors partial waiver of lien along with partial waivers of lien from subcontractors/suppliers covering work performed on the preceding pay request. In addition to partial payments for work performed under the original contract, the pay requests may include payments for the following items: d. Approved lump-sum change orders. e. Approved change orders for work performed on a cost-plus basis. f. Equipment and/or materials delivered to the job site, but not yet incorporated into the work. Payment for this item supported by invoices to the contractor must be attached to the pay request. As a general rule, payment for any additional item must be supported by the proper documentation from the contractor. Final payment is paid to the contractor when the work is completed in all respects. The application for final payment is on the same form used for partial payments, but it should be noted as Final. The final payment consists of all amounts due the contractor, including retainages, less the following: a. Liquidated damages. b. The value of any lien claims received. c. Any other disputed values. Before the designer issues the certificate for final payment, the following requirements also must be met: a. b. c. d. The certificate of substantial completion has been issued. All lien releases have been obtained. Consent of surety has been obtained. Final affidavit of payments has been obtained from the contractor.
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Understanding Construction Contracts

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UNDERSTANDING CONSTRUCTION CONTRACTS