construction contracts - legal engg (sp)

8/8/2019 Construction Contracts - Legal Engg (Sp)

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Construction

Contracts

Maj Shahid

Pervaiz


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INTRODUCTION TO CONTRACTS

Why use contracts in construction?

Describe scope of work

Establish timeframe

Establish cost & payment provisions

Set forth obligations and relationship

Manage multiple risks

Establish control mechanism Minimize disputes

Improve economic return on investment


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Objective

Exposure various dimensions of construction

contracts, different types of construction

contracts, the types of contractors and risk

allocation and its analysis with a view to offer

viable recommendations.


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DefinitionsWhat is a contract?

Legal Definition

Mutually binding agreement that obligates the seller

to provide the specified product or services &obligates the buyer to pay for the same.

An agreement that affects the legal relationship

between two or more parties.

A construction contract is a contract specificallynegotiated for the construction of an asset or a

combination of assets that are closely interrelated or

interdependent in terms of their design, technology and

function or their ultimate purpose or use.


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Definitions

A construction contract may be negotiated for

the construction of a single asset such as a

bridge, building, dam, pipeline, road, ship or

tunnel.


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ESSENTIAL ELEMENTS OF A CONTRACT

Contracts require four basic elements:-

Mutual Agreement

Offer

Acceptance

Legal Objective

Valid Consideration

Legal capacity of the parties


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Mutual Agreement?

Must have evidence that there was a meeting

of minds

Offer

Clear & unambiguous

Acceptance

Clearly accepting the deal offered

Anything else = counter offer and not

acceptance


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Legal Objective?

The object of a contract must be lawful, for the

law will not enforce a contract for an illicit

purpose.

But, some contracts modifications may be

illegal & thus, unenforceable

Verbal modifications Modifications beyond partys authority

Cardinal changes


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Valid Consideration?

Consideration is something of value given by

one party in a contract to the second party in

exchange for something else.

In contract law, consideration can be anything

of value and the law usually is not concerned

with the amount of value. Its sufficiency is amatter for the parties to bargain over and

agree to.


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Legal Capacity?

Capacity refers to the competency to make

valid and enforceable contracts.

In simplest form parties must be

Of age

Mentally competent

In construction environment, parties musthave

Legal authority to issue & execute contracts

May have to be properly licensed to have legal

capacity


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Must a contract be in writing?

Generally, no

but they may need to be in writing to be

enforceable. Usually a contract must be in writing, if it cannot be

performed within a year. Therefore, most major

construction projects require a written contract.

An oral contract is unsubstantial and difficult to prove,

and because it cannot be demonstrated by tangible

evidence (except to the extent it has been performed),

it is always a potential source of misunderstanding.


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Contract Documents

Drawings graphically provide:

Arrangements Materials

Dimensions

Configurations

Other...


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Contract Documents

Specifications provide:

Written instructions that detail projectrequirements

Information that is not easily shown on

drawings


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Contract Documents

Other key documents:

Contract

Subcontract

General conditions

Supplemental conditions

Addenda and change orders Performance and payment bonds

Request for information (RFI)


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Contract Documents

Other key documents:

AIA Doc.521 and EJCDC Doc. 1910-16 address the question of

where to place or find a specific subject in contract documents andoffer a uniform approach to the organization of contract

documents.

Several components of the construction contract documents are

available as standard forms to define the agreement for a particular

project.

AIA, AGC, DBIA, and EJCDC have developed high qualitystandard

forms, agreements, general conditions, and other documents.


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INTEREST GROUPS

Owner wants to achieve best value for their

investment.

Contractors desire to bid low enough to win but highenough to realize profit on investment.

Workers hope to achieve better living standards and

working conditions.

Architect and Engineers are not directly associatedwith the above groups.

Professional achievement more attractive.


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ORGANIZATIONAL RELATIONSHIPS

Architech/Engineer Owner

General Contractor

Organizational Relationships


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General Contractor

Subcontractor Subcontractor Subcontractor



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General Contractor


2nd Tier Subcontractor

3rd Tier Subcontractor



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General Contractor




Supplier



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Specialists General Contractor




Supplier



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Specialists Construction Manager




Supplier



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Specialists Construction Manager

General Contractor




Supplier



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Owner

Architech/Engineer Design Builder

SpecialistsSubcontractor Subcontractor Subcontractor



Supplier



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SpecialistsSubcontractor Subcontractor Subcontractor



Supplier



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Beneficiary Owner Performance Bond

Principal General Contractor Surety


2nd T ier Subcontractor

3rd T ier Subcontractor

Supplier



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Beneficiary Owner Payment Bond

Principal General Contractor Surety


Beneficiary



Supplier



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Types of Contracts

Fixed Price

Reimbursable

Lump Sum

Unit Price

Cost + Fixed Fee

Cost + Incentive Fee

Cost + Award Fee

Cost + % of Cost


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Types of Contracts Lump sum

Contractor free to use any means and methods to

complete work

Contractor responsible for proper work performance

Work must be verywell defined at bid time

Fully developed plans and specs required

Owners financial risk lowand fixed at the outset

Contractor has greater ability to profit


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Requirements

Good project definition

Stable project conditions

Effective competition essential when bidding

Much longer time to bid and award this type of project

Minimal scope changes

Types of Contracts Lump sum


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Require sufficient design definition to estimate quantities

of units

Contractors bid on units of work

Time and cost riskshared

Owner - - At risk for total quantities

Contractor - - At risk for fixed unit price

Large quantity changes (>15 25%) can lead to

increases or decreases in unit prices

Types of Contracts Unit Price


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Requirements

Adequate breakdown and definition of work units

Good quantity surveying and reporting system

Adequate drawings

Experience in developing bills of quantities

Payment terms properly tied to measured work completion

Owner-furnished drawings and materials must arrive on time

Quantity sensitive analysis of unit prices to evaluate total bid price for

potential quantity variations

Types of Contracts Unit Price


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Less design definition required

Final costs are owners responsibility

Can contract in early stages of project

Can mix fixed costs with reimbursable costs

Overhead and profit at fixed rate

Reimbursed labour, material and equipment at cost

Owner has more control over contractor

Contractor has little riskand no incentive to control costs

Types of Contracts Reimbursable


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Requirements

Competent and trustworthy contractor Close quality supervision by owner

Careful cost control by owner

Detailed definition of work items to be performed Detailed payment terms covered by both lump sum

and all inclusive rates

Types of Contracts Reimbursable


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How to Assess Contract Types?

Complexity & uniqueness of projectOwners ability to manage design

and construction

Considerations

Local marketplace factorsOwners tolerance for risk

Owners tolerance for decreased

project control

Owners ability to select

Right contractor

Likelihood of changes ordelays on project

Owners financial condition

Amount of time to complete project


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How to Select Contract Type?

Factors Conditions

Scope Definition Extensive Low

Uniqueness of work Routine UnusualCost Importance High Low

Market Conditions Buyers sellers

Economic Conditions Stable Unstable

Project Duration Normal LongSchedule Importance High Low

Buyers Resources Low High

Pricing style Indicated Fixed Price Reimbursable


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What is Construction Law?

Construction Law deals with all legal issues relating to

the construction process, including:-

Advising on the most appropriate form ofproject delivery

Drafting, tender documents and a variety of contracts

including building contracts, subcontracts, architect/client

agreements and engineering and supply contracts.

Advising on, and seeking to resolve construction claims

through ADR, arbitration and litigation and

Advising on and assisting with resolving insurance issues.


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Halsburys Definition of Construction Law

The body of legal principles relating to the

construction of structures on land. Building lawcan be seen as a particular manifestation of the

law relating to the provision of services and

labour. A feature of building law is that the

structure is ultimately fixed on land so that titlepasses to the proprietor of the land by operation

of law.


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What Areas of Law Does Construction Law Deal With?

Torts

Contract Law Trade Practices

Equity

Dispute Resolution (including civilprocedure, arbitration and ADR)


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What Construction Law Does NOT Cover?

Property Law

Planning Law

Environmental Law and

Project Finance.


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So Construction Law is

An industrydefinedarea oflaw

A complex area to practicein becauseofthediversityofissues andskills required

A verypractical area oflawto workin

A highlyspecialisedfield


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So Construction Law is

A highly varied field with projects ranging from small

domestic renovations to the construction of City linkand Eureka, the tallest residential building in the world

&

A challenging area to work in because it is constantlychanging and evolving frequently new ideas and

improved ways of doing things initiate from

construction law issues and cases.


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Like all contracts, construction contracts are about the

prior allocation of risk.

Windward (1991) draws attention to the constructionindustrys need to make a profit on the employment of

capital

If risk is an essential ingredient of the system which

generates your profit, it is inevitable that there must bea structure for resolving disputes. It brings the

relationship of the disputants back into balance so that

life can resume its normal course.

Risk Allocation in Construction Contracts


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TERMINOLOGY

Hazard - a particular event which has the potential if

it occurs of an adverse effect.

Risk - the probability of occurrence of a defined

hazard and the magnitude of the consequences.

Risk Assessment - the estimation and evaluation of the

risk, the magnitude of the consequences together with

the probability of the consequences.


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TERMINOLOGY

Risk Identification - an awareness of those risks which

could adversely affect the outcome of the project.

Risk Management - the identification, measurement

and economic control of risks.



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Inclement weather

Unforseen ground conditions

Industrial action Deficiencies in design

Insolvency or non-performance by a sub-contractor

Unavailability of materials Cost overruns in labour and materials and

Occupational health and safety

Examples of Risks

in Construction


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RISK ANALYSIS


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RISK MANAGEMENT PROCESS


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Controlling

It can be assumed i.e. risk taking;

It can be priced i.e. built into the tender price; It can be laid off i.e. insured or passed on to another

entity e.g. subcontractor;

It can be refused i.e. decline the job; or

It can be shared i.e. in alternative contractualarrangements such as alliancing and partnering.

But it should never be ignored!!!


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Abrahamson Model of

Risk Allocation

A party to a contract should bear a risk where:-

The risk is within the partys control

The party can transfer the risk, e.g. through insurance, andit is most economically beneficial to deal with the risk inthis fashion.

The preponderant economic benefit of controlling the risklies with the party in question.

To place the risk upon the party in question is in the

interests of efficiency, including planning, incentive andinnovation.

If the riskeventuates, the loss falls on that party in the firstinstance.


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Applying the Abrahamson Model of Risk Allocation

The Principal should not ask a Contractor to price an

unquantifiable risk that is within the control of the

Principal e.g. ground conditions.

The Principal, may ask the Contractor to manage and

control a neutral risk e.g. weather.

The Contractor should carry the risk for the safetyof

its own workers.


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Conclusions and Recommendations

Contract Documents

The Contract Documents do not include unlessspecifically enumerated in the Agreement,

Bidding requirements (advertisement or invitation to bid

Instructions to Bidders

Sample forms

The Contractors bid

Portions of Addenda relating to bidding requirements


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Scope of Work

An ambiguous description of the Work occurs when the owner

interprets the Scope of Work more broadly than does the

contractor.

The Supplementary Conditions, Drawings and Specifications

should all be thoroughly reviewed to

be sure that all Work has been properlyidentified and

to attempt to eliminate conflicts within the ContractDocuments.


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Some hierarchical contract issues include:-

Contract Efficiency Factors. These are regulatory and financial conditions

ensuring project finance when the work is commenced by the contractor

Taking over a Building on Completion of Construction. The conditions of

taking over the responsibility for the completed project by the employer

and dismissal of the contractor

Insurance. This concerns the external risks and liability of the 3rd party

The Right of the 3rd party for Intellectual Property. It is a definition ofrisks associated with 3rd party patents and their violation


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Criteria Effect of Contract Form on Mgmt

Positive Negative

Specifications Concentrated on key areas Too detailed

Price Reasonable Not beneficial forcontractor

Terms of payment Favorable for contractor Unfavorable for contractor

Schedule Rational delay time High coverage of lossesPerformance guarantees Concentrated on key areas Too detailed

Warranties Rather limited All including

Liability Not High wrt contract price High wrt contract price

Securities Not broad wrt contract price Broad wrt contract price

Major Contract Provisions and their effect on Contract Management


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A comparison ofconstruction contracts of three forms by

the DSS UniComBOS (Ashikhmin et al.,2003) yielded

the results according to which the Incentive Contract

was found to be better than the Fixed Price Contract

while theCost Reimbursable Contract

was rated third.


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Alternatives Criteria

Tech

Specs

Price of est Terms of

payment

Sch Per

guarantee

Warranties Limit of

liability

Fixed Price Highestconsistency

Suitable for

contractorFixed in

advance

Rational

delay time

Very imp High High

Incentive Well defined Suitable forcontractor

Not fixed Rational

delay time

Imp Intermediat

e

intermediat

e

EPCP Not welldefined

Not suitablefor

contractor

Not fixed Inadmissibletime

Imp Low Low


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