contractual procedures

Contractual Procedures Unit Handbook

BTEC HND in Quantity Surveying & Building Economics - Distance Mode

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Edexcel International UK

Contents

Introduction Unit Outline

1. Post contract duties of a Quantity surveyor 1.1 The role of parties 1.2 Tendering process 1.3 Post contract responsibilities of various parties 1.4 Self-Assessment

2 Cost control by Quantity surveyor 2.1 RIBA plan of work

2.2 Stages of cost control 2.3 Control during construction 2.4 Self-Assessment

3 Contract administration

4.1What is Contract Administration 4.2 Various steps undertaken by a Quantity surveyor in contract Administration 4.3 Self-Assessment

4 Interim valuations variations and fluctuations

4.1 Preparation of interim valuations 4.2 Administering variations 4.3 Rise and fall formulae and its administration 4.4 Self- Assessment

5 Prime cost sums Provisional sums and Day works

5.1Definitions of Prime cost Provisional sums and Day works 5.2 Implementation

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6 Construction claims 6.2 Definition of claims 6.3 Claimable situations 6.4 Self- Assessment

7 Final Accounts 7.2 Preparation of final accounts 7.3 Discharge 7.4 Cessation of employers liability 7.5 Self- Assessment

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Introduction This is Unit 41542Y and is namely “Contractual Procedures”. A student should spend at least 60 hours on this unit which comprises of completing this unit Manuel as well as reading various text books pertaining to this module. The aim of this unit is to provide the student with a sound understanding of the post contract duties of a quantity surveyor. The unit develops the understanding on cost control and cost monitoring and prepares the student to apply them during the post contract phase of the project. PART I Post contract duties of a quantity surveyor

Cash flow forecasting and Monitoring Cost control Contract administration Assignment

PART II Interim valuations, Variations and Fluctuations Prime cost sums Provisional sums and day works Contractual claims Final Accounts Dispute resolution Assignment

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Unit Outline: Unit level : 5 Unit hours : 60 Description of the unit The aim of this unit is to provide the student with a sound understanding of post-contract duties of a quantity surveyor. The unit develops the understanding on cost control and cost monitoring and prepares the student to apply them during the post-contract phase of a project.

Summary of Learning Outcomes To achieve this unit a student must:

1. Understand and apply post contract quantity surveying functions 2. Present competency on post-contract cost management methodologies and practices 3. Develop knowledge and skills required for contract administration in the post contract

stage

Contents Post-contract quantity surveying functions Introduction: Contractor selection to facilitate effective post-contract management; Capacity in terms of financial, technical and human resource base, problems arising due to selection of non-competent contractors; Interpretation of conditions of contract; Interim valuations; Prime cost sums, provisional sums and day works; final accounts. Post contract cost management Cash flow forecasting and monitoring; cost controlling. Contract administration Variations and fluctuations; construction claims; dispute resolution, communication and documentation.

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Outcomes and assessment criteria

Outcomes Assessment criteria To achieve each outcome a student must demonstrate the ability to :

1. Understand and apply post contract quantity surveying functions

• Appreciate the need to select suitable contractors for successful management and completion of a project

• Explain problems and difficulties that the client may face if a suitably qualified contractor is not selected

• Identify the role of QS in post contract management

• Distinguish the post contract management functions

• Application and interpretation of contractual clauses for specific contracts

• Identify key issues in interim and final valuations

• Perform cost adjustments to prime cost / provisional sums

• Assess interim and final claims 2. Present competency on

post-contract cost management methodologies and practices

• Develop cash flow forecasts • Monitor cash flows • Reconcile planned versus actual cash flows • Identify strategies for cost control

3. Develop knowledge and skills required for contract administration in the post contract stage

• Preparation and evaluation of variations and fluctuations

• Preparation and evaluation of other claims and documentation

• Ability to communicate and negotiate to reduce disputes

• Ability to maintain systematic records and documentation

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RESOURCES SUGGESTED READINGS

ASHWORTH, A., 2005, Contractual Procedures in the Construction Industry, 5th ed. Prentice Hall.

THE AQUA GROUP, HACKETT, M. and ROBINSON, I., 2003, Pre-contract Practice and

Contract Administration for the Building Team, Oxford: Blackwell Publishing. OTHER RESOURCES

Technical journals.

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1. Post contract duties of a Quantity surveyor 1.1 The roles of parties: General: The following diagram illustrates the pattern of contractual relationship that exists between the various members of the design and production team on conventional or traditional form of contract. This may change depending on the type of contractual arrangement and the form of contract used. Collateral warranty/Nominated sub contract

Main Contract Collateral warranty It should be noted that only the parties to the main contract. That is the client and the contractor may be sued on this contract. The contracts between the client and or employer and his /her professional advisers are usually based on standard agreements produced by the respective professional institutions. There may be an agreement or a collateral warranty that would permit the client to sue a Subcontractor or supplier direct if the need arises. Also the client’s professional advisers could be liable to the contractor in tort notwithstanding the absence of a contractual link. Thus, if the architect was to exceed his/her authority without the knowledge of the contractor, the contractor could recover any loss suffered in an action for breach of warranty of authority. The Client / employer The success of the design will depend to a large extent upon the clarity with which the client organization states its present and future requirements. Therefore clients' role is to provide clear brief and make available, the funds necessary for the project. The Architect The architect is traditionally appointed first by the client although now there are many occasions when the initial appointment may be made to a project manager or to any other consultant. The architects' role is to interpret the clients brief and translate it into a viable building with in the stated constraints. The architect would also be responsible for obtaining the necessary approvals for planning compliance with regulations and for supervising the erection of the building. The architect is required to give periodical supervision as may be necessary to ensure that the works are being executed generally in accordance with the contract. The powers of the architect are limited by the term of the building contract and provided he/she does not exceed his/her authority, the client is

Client

The Architect

Quantity Surveyor

Subcontractor

The Head contractor

Supplier

Engineer



bound by the architect’s acts. The architect like any other professional is liable to the client if he/she carries out the duties in a negligent way. That is - Fail to use proper skill and care. The Quantity surveyor The client will usually make the appointment of the quantity surveyor either direct or on the advice of the architect. If the architect or any other agent of the client makes the appointment it is important to ensure that the principle is aware of his/her actions. The main function of the quantity surveyor includes cost planning the design, preparing bills of quantities, evaluating tenders, and the financial administration of the contract. This includes making interim valuations, valuing variations, where instructed by the architect, assessing the amount of loss and expense claims. The quantity surveyor, Like any other professional, owes a duty of care to the client to carry out his/her work and may be liable for professional negligence if fails to do so. Other consultants: The other consultants appointed at the same time of the appointment of the quantity surveyor are structural engineers, mechanical and electrical engineers and any other specialist consultants depending on the complexity of the project. They may be hydraulic engineer, geo-technical engineer, and interior designer, building surveyor, land surveyor and landscape architect. Main contractor Traditionally the contractor is appointed to be in charge of the construction of the whole project and co-ordinate the work of the various subcontractors. The main contractor is responsible for construction and delivery of the project according to the standards, workmanship and quality stipulated in the contract documents and according to the legal and statutory requirements. The main contractor is liable for defects in the subcontractors work. The relationship between the main contractor and the subcontractor depend on the terms of the sub-contract signed between the two parties and the responsibilities of each party depend on the contractual arrangement selected for the project. Suppliers The main contractor purchases most of the material required for the project from the suppliers. However the architect may nominate a particular source/firm for the supply of certain items. The roles of various parties connected with the building contract have been briefly outlined above. However good team coordination and successful communication systems between each member of the team are necessary if design and construction processes are to be effectively organized to achieve efficiency. Self assessment 1. Briefly discuss the roles of various persons connected with a building contract? 2. How and when does each of these persons fit into the overall design and construction process of a project?



1.2Tendering Process It is the process by which a client/employer procures a building project. A Tender • A tender is the final price or ‘offer’ which is submitted to the client by the contractor and is a

sum of money for which he prepared to carry out the work and will include not only the estimate but also the a margin of overheads and profit

• The conversion of the estimate into tender is undertaken by the management at an adjudication meeting where aspects other than pure cost are considered

Ethics in the tender process • The code is based on ten ethical principles • Tendering at all levels conducted honestly • Parties must conform to all legislative obligations including those required by Trade

practices and consumer Affairs laws • Parties should not seek and submit tenders without a firm intention to proceed • Parties should not be engaged in any practice which gives one party an improper advantage

over the other • Parties should not be engaged practices such as collusion on tenders, inflation of prices to

compensate unsuccessful tenders, hidden commissions or secret arrangements • There should not be conflict of interest among parties • Conditions of tender must be the same for each tenderer on any particular project • Tender documents must specify the clients requirements and indicate the criteria for

evaluation • The confidentiality of all the information provided must be preserved • Any party with conflict of interest must declare as the conflict is known to the party Tender documents • Must clearly define the contractual obligations of parties • Provide details of all work covered under the tender • Draw attention to any special conditions or obligations from normal practice • Must provide any supporting information required • Nominate person to provide necessary information • Should provide positive encouragement to tenderers allowing the option while submitting a conforming tender Contractor selection • Open tenders • Selective tenders • Pre-registered tenders • Invited-or pre-qualified tenders • Negotiated tenders



Decision to tender by the contractor • The contractor’s estimating capabilities are scarce resource • Producing of tenders cost money • Great care must be taken before committing to the costly estimating operation Criteria influencing the decision to accept or reject an invitation to tender • Genuineness of the invitation • The nature, the size and complexity of work • Three year continuous job may be tempting but with limited resource and equipment a

realistic contractor may not over stretch • Tackling one large job may limit himself/herself in the market for the next two years • The regular clients may forget him/her • The type of work may not be suitable The principal parties involved? • Who the client is? • Who the architect and quantity surveyor is? • Attitudes of the parties? • The consultants track record in terms of dispute generation and resolution • To keep good relations resulting in the possibility of further work The value of the main contractor’s own work, PC sums etc • The quantum of work to be carried out by his/her own work force • Number of nominated sub contractors (Administrative problems and target dates) Time allowed for tendering • Time available to prepare tender with a reasonable degree of accuracy (Only determined by the estimator) Firm or fluctuating price required • Contractor may not be ready to accept the risk or pricing firm price contracts • Only interested in a fluctuating price basis • Large degree of risk in attempting to predict what inflation is likely to be in an unstable economy Contract details • Important factors such as the contract period, starting date • whether any phased work exists • access to site, site conditions • Location • working conditions all having a bearing on the suitability of the project Current work load



• Number of contracts he/she engaged in Economic, Industrial and political climate • Market prices (Boom times the demand for material and labour forces the prices to go up) • Industrial relations (Labour productivity, industrial disputes and stoppages) The decision to tender All above information must be recorded by the estimator and submitted to the management to discuss the possibility of submitting a tender. If after due deliberations the management decides to tender then the acceptance to the invitation to tender must be submitted to the architect for the dispatch of the tender documents.



Chapter 1 - Self assessment questions 1. What should the contractors estimator consider prior to agreeing to tender for a project ? 2. What consideration should he make if the project was to be built on the slopes of Nuwara-eliya?

3. If you are selected to participate in a tender to Construct the Presidents residence in Pelawattha in Kotte, what Economic, industrial and political factors would you Consider in the decision to accept or reject an Invitation to tender?



Assignment one Task: 1. Select a Tender document of your own choice for a low cost commercial/ industrial project. 2. Evaluate the invitation to tender in the document and identify the criteria in the invitation to

tender, tender documents and conditions of contract that will influence a decision to tender identify construction and estimating workload conditions that will influence the a decision to tender

3. Assuming the following conditions • That you are a medium size construction company • At present you find yourself stretched to 75% of your capacity. • There is the possibility of a down tern in the construction industry due to introduction

of construction levy VAT, due to budget proposals. Identify the company conditions that will influence a decision to tender and prepare a response to the Invitation NB: The penalty for late submission will be 5% of the awarded mark for each day or part day late excluding weekends cheating and collusion will be dealt very strongly according to international standards.



2. Post contract responsibilities of the parties 2.1 Employer/Engineers responsibilities • Selection of the contractor • Preparation of the contract document • Award of contract identifying important aspects of the contract 2.2 Contractor’s responsibilities • Send the letter of acceptance • Get ready mobilization • Commencement at site • Get the bonds and guarantees • Get the relevant insurances • Submit the program 2.3 Quantity surveyor’s responsibilities It is the responsibility of the quantity surveyor to help in the preparation of the contract documents. The Contract document consist of in order of precedence the following: • Letter of acceptance • Contract agreement • MOU if any • Conditions of Particular application • Contract data • General conditions of contract • Copies of guarantees and bonds • Insurance • Drawings • Specifications • Bills of quantities • Any other pertaining documents 2.4 Preparation of the contract document In preparation of contracts it is necessary to eliminate any possibility of contract documents being rejected.. It is responsibility of the quantity surveyor to make sure that the documents are well prepared. The reasons for rejection of a document can be identified as: • Blanks • Ambiguities • Erasures • Alterations In order to avoid rejection, the following rules must be adhered to: • The blanks must be ruled and initialled • Ambiguities must be cancelled and initialled • Erasures must not be permitted



• Alteration should be made in ink or in the case of large alterations they should be completely re-typed and pasted over the appropriate area of the contract and initialled.

• Where an alteration has been made in error, the passage in error is marked “stet”. That means ‘let it stand as before’ and necessitates initialling.

What are Contract documents? • The size and the complexity of the project determine the amount of documentation that is

included in the contact documents. The list of documents included is unique to each contract. Some of the likely documents that are included are as follows:

• Agreements and conditions – A printed standard document signed by both parties with the

pages and changes initialled by each party and the special conditions and schedules filled in. • The drawings – the drawings may comprise of Architectural, Engineers drawings,

Mechanical services drawings and Landscape The drawings that are included in the contract document will be the original tender drawings without any changes or amendments. The drawings will be numbered and listed as a part of the contract documents.

• Specification – This is a document to be read in conjunction with the drawings. The purpose

of the specification is to give a written description of the works described in the drawings in terms of the standard, workmanship and the quality of the work expected from the contractor. It conveys the intentions of the Employer and informs the public authorities on details not shown on the drawings.

• Bill of quantities - It describes materials and workmanship in sufficient detail for pricing

and represents the quantities of work to be executed. Bill of quantity may or may not be included and its inclusion will depend on the conditions of contract chosen for the project,

• Schedule of rates – The schedule includes the material and labour costs including overheads

and profit margins for a particular work section or sections. The schedule is generally used if variations occur in the contract.

Program of work –The program stipulates the work to be carried out with in the agreed time

schedule It generally fits in with the Employers planned occupancy of the building at stipulated time during the contract

• Insurances – The contract conditions stipulates various insurances to be taken by the

contractor during the life of the contract such as Workers compensation, public risk etc. The insurance covers may require to be taken in both contractors and the Employer’s name. In this instance, an endorsed ‘cover note may form part of the contract documents.

• Evidence of Liquidity – On larger projects the contractor may be required to give a Bank

guarantee for a nominated amount. In this instance the endorsed bank guarantee may form part of the contract document.



General conditions of contract • The general conditions of a contract list the conditions under which the contract for a building is administered. Generally the various conditions that are stipulated comes in the form of a pre-printed document and covers areas such as Statutory obligations, Possession of site, Site conditions, Materials and Workmanship, Access to site, Sub-letting, Rise and fall, Progress payments, Prime cost and Provisional sums, Variations to the contract, Insurances, Delays and extension of time and Practical completion. Conditions of Particular application/ Special conditions of contract • The special conditions of contract cover those aspects that are unique to that particular project. The standard printed forms available may not be adequate to cover all the special aspects that are unique to that particular project. Therefore these forms generally include a blank sheet headed ‘Special conditions’ to type in the special arrangements, charges, conditions and commitments that is negotiated. Once it is written or typed, it is signed and countersigned by the respective parties and they become part of the contract. • Some examples of special conditions may include extended defects' liability periods, bonus or penalty payments. After Award of the contract- The responsibilities of the Engineer and its team • Monitor the program • Any delays claims should be submitted in time according to the program and evaluated by

the Engineer • Billing should be done on a monthly basis or as per the agreement by contractor and checked

by the consultants QS • Cash flows monitored by both parties • Project completed • Issue/Request for completion certificate after carrying out test of completion • Release of first half of the retention • Beginning of defects liability period • Rectification of defects • Final completion certificate • Release of final moiety or retention Forms of contracts used in various countries In Australia The JCC contract formulated by the Royal Australian institute of Architects and Master Builders’ federation of Australia In The United Kingdom In the United KINGDOM JCT1998 edition private with quantities and many other forms In UAE & Other Middle Eastern Countries



The conditions of contract for construction for building and engineering works designed by the Employer – FIDIC 1999 formulated by international federation of `Consulting engineers



Chapter 2 - Self assessment questions 1.0 Under a construction contract what consideration is given by

a) the client b) the contractor

2.0 What factors could harm a contract and render it void or void able? 3.0 Who are the parties to construction contract? Refer FIDIC 1999 ( red book) 4.0 Who may be the agents of the employer? 5.0 List four of the commonly used contract forms and describe when they are used? 6.0 List and describe most commonly used documents in the formation of a contract for a

building?



3. Cost control by Quantity surveyor during post contract stage 3.1 RIBA Plan of Work The following information is taken from "Services Supplement: Design and Management" from the RIBA publication "Standard Form of Agreement for the appointment of an architect"(SFA/99) available from RIBA Bookshops Reference: (http://www.ribabookshop.com) and you should refer to the whole document. The following RIBA plan of work identifies the stage of work of an architect. This is given so that the quantity surveyor is informed of the various stages at which he will have to carry out cost preparation, management and control during the life of the project. 3.2 Architect's design services: 1.1 Receive client's instructions 1.2 Advise client on the need to obtain statutory approvals and of the duties of the Client under

the CDM regulations 1.3 Receive information about the site from the Client (CDM Reg 11) 1.4 Where applicable co-operate with and pass information to the Planning Supervisor 1.5 Visit the site and carry out an initial appraisal A Appraisal 1 Carry out studies to determine the feasibility of the Client's requirement 2.

a) Review with client alternative design and construction approaches and the cost implications

OR b) Provide information for report on cost implications

B Strategic Brief 1 Receive strategic brief prepared by the client C Outline Proposals 1 Commence development of Strategic Brief into Project Brief 2 Prepare Outline Proposal 3

3a) Provide an approximation of construction costs or 3b) Provide information for cost planning

4 Obtain Client approval to Outline Proposals and approximate construction cost 5 Co-operate with Planning Supervisor where applicable D Detailed Proposals 1 Complete developments of Project Brief 2 Develop the Detailed Proposal from approved Outline Proposals 3.

3a) Prepare a cost estimate or



3b) Provide information for preparation of cost estimate 4 Consult statutory authorities 5 Obtain Client approvals to the Detailed Proposal showing spatial arrangements, material and

appearance, and a cost estimate 6 Prepare and submit application for full planning permission E Final Proposals 1 Design Final Proposals from approved Detailed Proposals 2

2a) Revise cost estimate 2b) Provide information for revision of cost estimate

3 Consult statutory authorities on developed design proposals 4 Obtain Client approvals to type of construction, quality of materials, standard of

workmanship and revised cost estimate 5 Advise on consequences of any subsequent changes on cost and programme F Production Information 1 Prepare production information for tender purposes 2.

2a) Prepare schedules of rates and/or quantities and/or schedules of works for tendering purposes and revise cost estimate, or

2b) Provide information for preparation of tender pricing documents and revision of cost estimate

3. 3a) Prepare and make submissions under building acts and/or regulations for other statutory

requirements OR

3b) Prepare and give building notice under building acts and/or regulations (not applicable in Scotland)

4 Prepare further production information for construction purposes G Tender documents 1 Prepare and collate tender documents in sufficient detail to enable a tender or tenders to be

obtained 2 Where applicable pass final information to Planning Supervisor for pre-tender Health and

Safety Plan 3

3a) Prepare pre-tender costs or 3b) Provide information for preparation of pre-tender cost estimate

H Tender Action 1 Contribute to appraisal and report on tender’s negotiations 2 If instructed revise production information to meet adjustments in the tender sum J Mobilization



1 Provide production information as requested for the building contract and for construction K Construction to Practical Completion 1 Make visits to the works in connection with the Architect's design 2 Provide further information reasonable required for construction 3 Review design information from contractors or specialists 4 Provide drawings showing the building and main lines of drainage and other information for

the Health and Safety File 5 Give general advice on operation and maintenance of the building L After Practical Completion 1 Identify defects and make final inspections 2

2a) Settle Final Account or 2b) Provide information required by others for settling final account

NB: If the architect is to provide cost advice Alternative A applies

If a quantity surveyor is appointed Alternative B applies Stages of cost control The important aspects of a contract are to manage the contract with in the following constraints:

– Time – Cost – Quality

Cost is our responsibility as a Quantity Surveyor whether you are contractor’s Quantity surveyor or the consultant’s Quantity surveyor. There is a close relationship between planning and management. The quantity surveyor uses the Bill of quantity as the management tool in managing the project. In managing the time of a construction project a construction program prepared by the contractor and accepted by the engineer Is used to mange the time since the all activities required to complete the project is identified and relationships between different activities and durations are identifies and can be easily monitored. If deviations occur, the remedial action could be taken to mitigate the delay. There is a close relationship between cost and time. Delay in the completion of the project inevitable means increases in cost. The costs on a project depend on the quantity of the work duration of the work and site establishment costs. In order to monitor the cost the quantity surveyor must prepare a resource based estimates During a project there will be deviations from normal or average circumstances and these will vary due to the site location design complexity political and economic factors. To manage these it is important to identify these at early stages by the quantity surveyor.



The main function of a quantity surveyor once work has commenced at site is to carry out project financial control. It is important to make sure that variations claims or extras do not raise the project cost at the final account stage above the budget of the employer. The following must be practiced by the quantity surveyor during construction phase: Liaise with the contractor at regular intervals for the valuations of variations To agree to re-measurement of work and discuss claims submitted by the contractors. All variations that have a cost effect is informed to the employer and is aware of and cost

overruns All variations as much as possible must be finalized at each interim valuations Requires close collaboration between the architect and the quality surveyor and other

consultants including there presence at sit meetings Early consideration should be given to expenditure against provisional sums and prime cost

sums Quantity surveyor must produce monthly forecast of all expenditure and to predict and

monitor the cash flow The receipt of periodic financial reports enables the employer to keep a track of expenditure

and be prepared for any future financial commitments It is the responsibility of the quantity surveyor to keep the employer informed of the

financial commitment and when he is required to make payments The design team in particular it is the responsibility of the quantity surveyor to effectively

control the expenditure on variations, contingency expenditure, provisional and prime cost sums, evaluate quotations, monitor completion to time and claims.



Chapter 3 - Self assessment questions 1.0 Read the RIBA plan of work and identify and discuss that stage at which costs of a project is

prepared by a Quantity surveyor and at what stages they are controlled. 2.0 How do the consultant quantity surveyor and the contractor’s quantity surveyor brief their

respective managements on the progress of the project? What methodologies would he/she use?

3.0 When a building project is implemented what factors will have an effect on the cost on the

project? Discuss them briefly.



4 Payments variations and fluctuations 4.1 Payments In construction contracts payments may be classified into two categories • Interim payments • Final payments Interim payments Interim payment occurs through out the contract construction period. They constitute the primary mechanism by which the contractor gets paid for the work carried out. This becomes the cash flow between the employer and the contractor. Generally the interim payment will occur at pre determined intervals. These payments are determined by the value of the work carried out by the contractor during this period. In general they may be called monthly valuations. How ever this is determined in the tender document. Some times the interim valuations can be called stage payments or mile stone payments paid at specific times when the contractor achieves the various stages of completion. (e.g. Completion of substructure etc) In order to arrive at stage payments it is advisable for the quantity surveyor to carry out a contract sum analysis so that unrealistic stage payments are not given in the contract. A contract sum analysis will become the basis for valuing variations. Where a project is subjected to stage payments and where there is no detailed pricing document, in such cases variations can be valued at Fair rates, day works or by obtaining quotations from the contractor and approving them prior to executing the variation. Under most contracts the commonly used document to value interim payments are the bill of quantities , the schedule of rates, It is important define the time period of submitting a interim valuation and the time period for evaluation by the consultant and the time period for honouring the payment by the owner. This usually stated in the contract document. The engineer to the contract usually issues the interim certificate however this varies form contract to contract and this should be verified Contents of an interim certificate • The value of work carried out according to the drawings specifications and the contract

Document ( the value of permanent work executed • Materials and goods on the site • Material off site if any • Any other items in the bill of quantities including those for contract equipment temporary

works day works etc • Claims. fluctuations if any in which the contractor may be entitled to under the contract In preparation of monthly certificate the amount is subjected to deduction for retention. When a an consultant/Engineer to the contract issues a certificate stating the sum due to the contractor from the employer that certificate is “condition precedent” to the contractors entitlement if either party is



dissatisfied from the sum certified and if discussion does not result in a correction to the certificate by the engineer then the remedy is dispute resolution which may be DAB and then arbitration.. Even if the engineer has certified an incorrect mount this could rectified in the next bill if the payments are made on a cumulative nature. It is the employer’s obligation to pay the net sum stated as due in the interim certificate deductions from an interim certificate generally are retention, any advance, and any previous payments. What is retention? It is amount retained by the employer for any defective that may occur during the construction period and the defects liability period. I t is kept by the employer on behalf of the contractor and it his responsibility to release it as stated in the contract once the defects are rectified to the satisfaction of the engineer. Normally fluctuations (variations to the price) are paid net and subject to retention similarly any formulae fluctuation provisions are also subject to retention. The following table generally gives frequency of the issue of interim certificates under various forms of contract. Contractor’s application JCT 80 ICE 6 FIDIC To issue of certificate Frequency monthly monthly within 28 days from date of application by ……………………. Engineer Period of honouring 14 days 28 days from date of with in 28 days from from date of certificate delivery to the Certificate employer Valuation date 7 days before none noted none noted Date of certificate Variations, Day-work, Rise and Fall Formulae, indices and calculations • A variation is defined in the Macquarie Encyclopaedic dictionary as - ‘to change or alter as in form or appearance, to cause to be different.’ • Variations in terms of a building project can be extras, additions, omissions, alterations, deviations, deductions to the building works. Due to the inevitability of a contract being varied most contract documents include provisions under which variations could be issued. • The variation clauses are written into the contract under general conditions. This Variation clause stipulate who has the power to order variations and give instructions and how variations could be valued under the terms of the contract. However the variations cannot vitiate or nullify the contract. However the issue of variations could vary the contract.



• It must be understood that the instructions for change should be with in the general scope of the contract. Most contract conditions require the variations to work to be priced and approved before the work is carried out. Generally a time limit of 14 days is stipulated in most contracts for a written quotation from builder on written advice being received of acceptance • Contractors generally plan the construction work as per the stipulated contract period and the work is completed in a sequential manner. Issue of variations during this process delays this progress of work and hampers this work plan resulting in the delay of the timely completion agreed with the Employer. Most often the issue of variations are considered as the greatest cause of dispute between the Employer and the contractor. Variations not only cause delay in the program, it leads to cost implications to the contract by way of savings or extra to the contract. Rarely is a variation that has neither cost nor time implications. The building contractor does not usually accept ‘savings’ happily due to the builder’s scope of work being reduced. • The contractors' administration office should have systems of operation for valuing and processing of variations with in the stipulated time in the contract. • Verify whether the person with whom the contractor has signed the contract or his or her authorised agent issued the variation. • Record the proposed variation and note the effect it will have on the original program by referring the contract documents. • Establish the manner in which the variation is to be determined, valued and prepare the estimated cost. • Submit the proposal for the variation with in the stipulated time to the Employer or the authorised agent. • Accept only if written approval is obtained either by the Employer or the authorised agent to proceed. • Proceed with the work and notify the Employer the contract sum adjustments including the variations to the contract. • The Employer or his or her agent could reduce incidence of variations • Preparing a carefully considered, objective, performance orientated Employers brief • Careful preparation and co-ordination of detail design and documentation • One point control of variations • Elimination or minimum use of provisional sum items. • The Employer awareness of all planning issues and is in agreement with same, • Awareness of adverse cost and time implications of variations during the construction stage. The variations to the contract can be any of the following: Time related changes Quantity related changes



Specification changes Scope changes Any other changes Delays and extensions of time Workmanship and materials Latent conditions Defective work Delay costs with damages Ambiguities in the contract document

The research into the building industry has found that variations are caused by:

1. Inadequate, incomplete or ambiguous documentation 2. Changes or additions to project requirements.

Contract Variations Variations to the contract are changes effected to the works that can result in a reduction or addition of work or a substitution of work or materials. These are normally requested by the proprietor via the Architect. However it is advisable to have the client approve the value of the variation before the work commences. Sequence of a Variation The cost of a variation is the cost involved in executing the variation from the time the instruction is received to the time the work is completed. The sequences of events considered and costed for valuing a variation are: • Receive the variation instruction. • Assess and order the necessary materials. • Instruct and co-ordinate the necessary workers. • The Worker tidies up from the job engaged at the time. (disestablishment) • The worker's) assess and acquire equipment and material required for new work. • The worker carries out the variation work. • The worker tidies up and returns waste to disposal. • The worker returns equipment and surplus back to stores. • The worker returns to original job (re-establishment) • The ‘administration’ adds the cost of materials, supervision, cost of site overheads for the

period and the cost of actually costing the variation to this to determine the value of the variation.

• All of the above activities incur a cost related to the variation and must be considered in its valuation and these will not be unfairly assessed by the Architect.

• You may or may not be entitled to add overheads and profits to the cost of costing a variation while some contracts allow a set percentage for it.

Rise and Fall/Fluctuations • Often building projects, particularly, large building projects are undertaken over a long



period of time. It is more than likely that the price of material used in a job and the rates of pay of the workmen will increase and even in some instances fall during the life of the contract. • Rise and Fall is the adjustment made to the contract price to offset or compensate for any rises and falls that occur during the period of contract. • This is beneficial to both the proprietor and the builder. In the case of the builder he is able to withstand any price rises which would have reduced his profitability and even caused him to make a loss and become insolvent. In the case of the proprietor he was able to avoid the possibility of being stuck with an incomplete project which would have been the result if the builder had become insolvent. Sample of a Rise & Fall Formula • You may be offered a ‘Rise and Fall formula’ in a contract if the project is likely to run for more than a reasonable period, say, nine months. In the absence of one you may ask for one to be included in your contract. The following is two fluctuation formulas in the Australian building contract. The FIDIC also have its own fluctuation formulae that can be used The following is an example of a fluctuation formula: • There are two rise and formulae used NCAP 1 (National Cost Adjustment Provision) and NCAP 2. • The most commonly used formula is NCAP2 which is:

Increase (or Decrease) = Effective Value x Proportionate Value x Current Index No.-Base Index No. Base Index No. • Base Index Number : Is the index number applicable for both labour and materials to the date 14

days prior to the date of closing of tenders or the date of builder’s offer in the absence of a tender. This remains constant through the contract period.

• Current Index Number : The current index number is the index number for both labour and

materials at the time of the progress claim. If no date is given for a current index no. it shall be : • Materials index : 42 days prior to the last day of the period of the relevant progress claim • Labour Index: 15 days prior to the last day of the period of the relevant progress claim.

• Proportionate Value: In NCAP formulae a proportional value is used for the calculation of

material and labour. It is apportioned as follows:-

• Labour = 0.45 or 45% • Materials = 0.55 or 55%

• Progress Claims: The value of claims is determined on:

• The actual value of work done • This method is based on actual measurement of work done. • Value of percentages of work done



• Contractual Implications The conditions of contract, normally stipulates: • When progress payments are to be made. • The method of presentation by the builder of his claim for progress payments. (the

information to be provided) • Method for fixing the estimate of the contract value of work executed including variations,

and unfixed materials on site.



Chapter 4 - Self assessment questions 1.0 Describe the situation when it will be considered variations to a building contract? 2.0 Give three situations in which the quantity surveyor exercises the cost control during the execution of the project? 3.0 Briefly describe what a variation is in relation to a building contract? 4.0 What are the most significant causes of variations to the contract? 5.0 Describe the procedure for management of variations by the contractor.



Assignment 2 Task: Compare the fluctuation formula given in this document, the FIDIC 1999 and ICTAD 1986 Discuss the pros and cons of the formulae and in your opinion which is most suitable. Workings should be given using numerically on a project that is being carried out by you NB: The penalty for late submission will be 5% of the awarded mark for each day or part day late excluding weekends cheating and collusion will be dealt very strongly according to international standards.



5. Day-works Prime cost sums and Provisional sums Day works • Day-work means payment for actual hours spent carrying out an operation as against

payments made based on prices given in the tender. For this reason a record of such work must be kept and signed by the party carrying out the work and paying for it.

• Day-work records • The minimum information recorded should include: • Hours worked by those engaged in day-work • Hours machines were hired from subcontractors on the site • Material used by the builder for day-work purposes • Day-work • Day-work means payment for actual hours spent carrying out an operation as against

payments made based on prices given in the tender. For this reason a record of such work must be kept and signed by the party carrying out the work and paying for it.

• Day-work records • The minimum information recorded should include: • Hours worked by those engaged in day-work • Hours machines were hired from subcontractors on the site • Material used by the builder for day-work purposes • Who orders day-work? • Day-work is primarily between a builder and subcontractors. • Day-work is only carried out for the proprietor in special situations. • An Architect will usually only request day-work in an emergency when there is insufficient

time to raise a variation quotation request. The same emergency may give the builder insufficient time to assess and cost a variation quotation.

• Another instance would be where tradesmen for a particular trade have to be brought back to do work in that trade when the work in that trade is completed.

Provisional sums The provisional sum means a sum included in the contract and so designate in the bill of quantities for those works that has not been properly detailed at the time of the tender. Provisional sum can be for the execution of the part of the work, for the supply of good, materials plant for services or for contingencies. This is used under the direction of the engineer in whole or part in respect of the above work Prime cost This means any fixed cost for supply only item which may be defined in the Bill of quantity for a particular item such as specifies cost of a tile or light fitting where the contactor can expend only up to that amount for a item



Chapter 5 - Self assessment questions 1.0 Write the definition of day works found in three contract documents with whom you are

familiar with? 2.0 Identify the clauses in the FIDIC that explain the use of provisional sums



6. Construction claims

The meaning of a claim A claim signifies a demand for something that is due. A construction claim is defined as a demand or a request or an application for something to which a contractor considers or believes or contends rightly or wrongly that he is entitled to but in respect of which agreement has yet not been reached Sources of disputes When breaches and variations occur in the performance of the strategies outlined in the contract, disputes are likely to occur. A dispute is essentially a difference of opinion. A dispute is the result of an unsettled conflict where the arguing parties are unable to settle their differences or reach a compromise. A dispute can arise at any stage of the project. Causes of disputes/claimable situations The traditional and common disputes that occur in the construction industry have often arisen due to the lack of clarity in the documents, poor communications and a lack of co-operation between the parties. Disputes are extremely costly and time consuming. Common causes of disputes are:

• Variations and value of variations • Delays and extensions of time • Workmanship and materials • Latent conditions • Defective work • Delay costs with damages • Ambiguities in the contract document

Types of claims Claims based on contract documents Extra contractual claims which arise out of hardships and which do not wholly rely on the

terms of contract Claims based on breach of of a common law duty of care Quantum meruit (as much as is deserved) claims which seel payment for work done where

the contract does not have a fixed price Claims for delayed payments Claims for time over runs Claims for price fluctuations Claims occurring when encountering unanticipated conditions’ Claims in dealing with Nominated sub contractors Claims for acceleration of works



Dispute resolution methods The dispute resolution methods commonly adopted by parties to the construction contracts are as follows:

• Negotiation • Conciliation • Mediation • Adjudication • Arbitration • Litigation

Negotiation Negotiation is where two or more parties attempt together to reach an agreement on a disputed matter. It involves unaided discussions between the disputing parties without legal representation. Negotiation as a dispute resolution process commences after the dispute has arisen and the parties necessitating a need to negotiate. Negotiation in dispute resolution takes many forms. It ranges from an informal chat or telephone conversation to highly structured process taking place over long period of time. Conciliation It is defined as a process where a neutral third party endeavors to help the disputing parties reach their own agreement. It is the role of the third party that distinguishes mediation from conciliation. Contrary to the mediators' role, the conciliator is expected to contribute personnel views and opinions during the process. Mediation Mediation is a flexible process designed to assist the parties resolve a dispute by agreement. The essential feature of mediation is achieving an agreement between the parties. The mediator acts as a facilitator who assists the two parties to negotiate and acts as a catalyst. The mediator must convince the parties that it is in their interest to work together to settle disputes. The mediator must be impartial, sympathetic and must establish credibility and trust with the parties. Arbitration Arbitration is an alternate to litigation. It originated as a method of resolving disputes, quickly and without legal formality. This is the most commonly found dispute resolution method stipulated in building contracts. No party is compelled to submit a dispute to arbitration unless both parties agree to do so within the terms of the contract. Once agreed to the method of arbitration the dispute cannot be litigated. Arbitration is the process by which a dispute between two or more parties is referred for determination by another person or persons other than the court after hearing both sides in a judicial/legal manner. The proceedings enable a determination by a knowledgeable person usually from the discipline appropriate to the matter in dispute and received in a manner which reflects the contractual and commercial aspects of the project. Arbitration is a private process and facilitates the parties to keep the details of their dispute private. Adjudication This is a process of making an award by a procedure similar to arbitration. The parties are not bound



at the time of making the appointment to accept the adjudicator’s award as final and binding and are given time after its publication to do so The main difference between adjudication and mediation is that the adjudicator does not look for a consensual compromise but judges the issues between the parties and are bound to give a decision, whether it is acceptable or not by the parties concerned. Litigation The process of resolving a dispute by judicial settlement is known as litigation. However reservations exist in the construction industries world over concerning litigious disputes. Particularly in relation to time and cost and the slow pace of justice. Litigation nevertheless has a place in the construction as much as any other methods of resolving disputes and parties must be able tot have recourse to it Alternate dispute resolution (ADR) The dissatisfaction of the court base resolution and due to the nature of the construction industry has given rise to a number of alternate methods of dispute resolution. The philosophy of ADR is that people who appreciate the strength and weaknesses of their positions and the risk of legally binding processes' and can amicability resolve their disputes outside a formal structured independent third party. The reasons for emergence of ADR are due to accelerating pace of business necessitating the disputes to be resolved without any delay. Further social, environmental and technological changes have created disputes that the court is ill equipped to handle. The term ADR includes all non-litigious forms of third party interventions such as negotiation, mediation, mini trials, expert determination, and conciliation. The word ‘alternate' is used in the context of alternate to litigation.



Chapter 6 – Self assessment questions 1.0 List the most significant causes of disputes in a contract? 2.0 List and describe the dispute resolution methods used in the construction industry? 3.0 What is meant by arbitration? list the arbitration clause found in a two building contracts of

your choice and compare them? 4.0 What is meant by Alternate dispute resolution? 5.0 What are the various methods of ADR available and what is the reason for it’s' emergence in

the construction industry?



7. Final Accounts Final Payments When the project has been completed according to the contract agreement the contractor submits his final valuation indicating all his dues. This will include the final value of work completed any variations extra work etc, which he is entitled to at the time of final completion after the certificate of completion has been issued by the engineer Under FIDIC conditions (1999) the procedure is as follows: • Within 56 days after receiving the performance certificate the contractor submits in 6 sets the

draft final account with all supporting documents in detail the following • The value of work done in accordance with the contract • Any future sums the contractor considers to be due to him under the contract • If the engineer and the contractor agrees on draft final statement then the engineer shall

deliver to the employer with a copy to the contractor an interim payment certificate for the agreed parts of the draft final account

• Discharge • If the final statement is agreed the contractor shall submit a written discharge which confirms

that the total of the final statement represent full and final settlement of moneys due to the contractor.

Preparation of final bill Issue of final payment certificate • With in 28 days after receiving the final statement and a written discharge the engineer

issues to employer the final payment certificate which states the following • The amount finally due • After giving credit to amount paid by the employer previously and there is no permanent

defects the final moiety of retention will be released with the final payment certificate Discharge Once the submission of the final statement the contractor give to the engineer a written discharge confirming that total of the final statement represents full and final settlement of all monies due to the contractor arising out of the contract. Provided that such discharge is given it is effective only once all monies have been paid by the employer Cessation of employers Liability Once the final statement is issued and all monies paid the statement of completion is given at such time the employers liability ceases to exist.



Lecture 7 Self assessment questions 1.0 Identify the steps undertaken by the quantity surveyor in preparing the final statement

according to FIDIC 1999? 2.0 What do you mean by Discharge and statement of completion and cessation of employers

responsibilities in term of FIDIC 1999

contractual procedures

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