Construction Contracts and Contracting – IDM 23

o Key points for which tender notice should be studied?o Documents required with tender during submission?o How data for costing is generated?

Logical questions on red book provisionso Variation procedures and claims for extra as per provisions of red booko Escalation? Importance and its effect on performance of contract in red book

Various types of contracts? ADR methods? Advantages of ADR methods

o Engineer (FIDIC red book)o Employers Risk (FIDIC red book)o Termination of Contract (FIDIC red book)

Instruction to Bidders for Procurement of WorksUnlike procurement of goods, works are complex transactions spread over longer period of time

Generalo Scope of Bido Sources of Fundso Eligible Bidderso Eligible Materials, Plant, Supplies, Equipment and Serviceso Qualification of the Bidder (experience, personnel capabilities, equipment capabilities,

financial position, litigation history, joint ventures)o One Bid per Biddero Cost of Biddingo Site Visit

Bidding Documentso Content of Bidding Documents

Instructions to Bidders Conditions of Contract Schedule of Requirements Technical Specifications Bid Form and Price Schedules Bid Security Form Contract Form

o Clarification of Bidding Documentso Amendment of Bidding Documents

Preparation of Bidso Language of Bido Documents comprising the Bid

Bid Form Appendix to Bid Form Priced Bill of Quantities Bid Security

o Bid Priceso Bid Validityo Bid Security

o Pre-bid meetingo Format and Signing of Bid

Submission of Bidso Sealing and Marking of Bidso Deadline for Submission of Bidso Late Bidso Modifications and Withdrawal of Bids

Bid Opening and Evaluationo Bid Openingo Confidentialityo Clarification of Bidso Examination of Bids and Determination of Responsivenesso Corrections of Errors

Award of Contract

Contract Documents Tender Notice

Tender notice inviting bids is included and forms part of the contract document. The main purpose of reprinting the entire advertisement in the contract document is to protect the engineer against the possibility of a claim that he misrepresented the nature and conditions of the proposed work

General InstructionsIt is necessary to insert the rules and directions instructing the intending contractor as to how the tender should be completed and emphasising particulars, which may vitally affect his interest. The purpose of including the general instructions in the contract documents is to clearly define the requirements of the contract

Letters Exchanged and AddendaAfter the tender is opened and before it is accepted, the parties sometimes indulge in negotiations on the price/ rates to be agreed and/ or conditions to be added or modified. The final contract is subject to the additions or alterations agreed to by the parties and as such it is necessary that the correspondence exchanged and conditions modified are also made part of the contract documents

Forms of ContractPWD and other public bodies have specific, pre-agreed forms of civil engineering contracts, and these are issued in printed form. For major works, internationally adopted forms and conditions are adopted, for example, the FIDIC (International Federation of Consulting Engineers) form. These forms can be varied by agreement between the parties

Conditions of ContractThe conditions define in detail the rights, duties and liabilities of

o The contractor who carries out the worko The owner for whom the construction is to be executedo The architects and engineers who design and supervise the work

Schedule A: Materials to be Supplied by EmployerList of materials agreed to be supplied by the owner to the contractor

o Kind of Materialo Approximate Quantityo Place of Delivery

o Rate of issue and mode of paymento Ownership of Materialso Return of Excess Materials

Schedule B: Bill of QuantitiesThe bill of quantities is a list of constructional items necessary for completing the work. Those items, which are definite, readily measurable and of sufficient scope to cover the greatest practicable portion of the entire work, are normally included in the bill. Each item is fully described in the description column and the approximate quantity of each is mentioned in the quantities column. After signing of the contract, these statements cannot be changed

SpecificationsSpecifications are written instructions providing a clear and concise description of materials, labour and workmanship to be employed in or around a construction and the methods required thereof. It is not practicable to include all this information in the limited space of description in the bill of quantities. The specification should be exhaustive as required, but they should not contain irrelevant material nor should they repeat what is shown on the drawings. The specifications are related to the bill of quantities and drawings. The following types of specifications are normally included:

o General specificationso Particular specifications

In the absence of complete specifications, the contractor’s obligation is limited to the performance of only what is actually called for in such incomplete specifications

Contract DrawingsA complete set of drawings which gives full particular of the proposed work are prepared prior to invitation of the tender. These drawings are used to give the contractor the necessary information, which can be transmitted more effectively diagrammatically than by written description. They enable the contractor to visualize the nature of the work and anticipate probable constructional and other difficulties. The conditions of the contract usually specify that the contractor has to carry out the work as shown in the drawings. In addition to the contract drawings there are two other types of drawings which figure in almost every contract:

o Working Drawings: One of the condition of the contract specifies that the drawings, which form an integral part of the contract, are subject to change and the contractor has to carry out the work as per the revised drawings called “working drawings”. This is likely to result in disputes in future. To avoid such disputes, it is desirable for the owner to preserve at least of the original contract drawings for record on the basis of which tender has been called for. The working drawings are generally supplied after the work order is issued or along with it

o Record Drawings: The conditions of the contract stipulate that the contractor should submit to the employer a set of “as built drawings” on completion of the work. These drawings can be referred to in the future if any repairs or additions and alterations are to be carried out and in general for maintenance of the work

Types of Contracts – Chapter 3, page 32 All in Contract/ Entire Contract Lump sum Contract Item Rate or Unit Price Contract Percentage Rate Contract Cost plus Percentage Rate Contract

Cost plus Fixed Fee Contract Cost plus Fluctuating Fee Contract Target Contract BOT Contract

FIDIC (International Federation of Consulting Engineers) Conditions of ContractFIDIC is an organization best known for publishing standard forms of contract documents related to the procurement of engineering works. The Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer (New Red Book)

The EmployerContractor’s right of access to site is not exclusive and is subject to performance security being provided. Contractor’s claims are applicable in case of delay by EmployerEmployer has to provide reasonable assistance to contractor to obtain local permits/ approvals and to confirm financial arrangement for payment to contractor within 28 days of request for information. Employer’s claims ratified by Engineer can be deducted from payment certificate issued to the contractor

The EngineerThe Engineer has no authority to amend the project. The Engineer’s authority and limitations can be defined in the contract. The Engineer’s approval does not relieve the contractor from any responsibility. Engineer shall consult both parties to reach agreement on claims otherwise proceed to make a fair determination in accordance with the contractEmployer can replace Engineer with any other person against whom contractor does not have any reasonable objections

The ContractorThe Contractor shall deliver the performance security to Employer within 28 days of receipt of Letter of Acceptance. The Employer shall return the Performance Security to the contractor within 21 days of Performance Certificate issued on completion of the contractorThe subcontractor can be named in the tender for other subcontractors proposed during execution, the Engineer’s approval is required. Though Employer shall be responsible for any error notified items of reference, an experienced contractor should discover the error in time and seek the amendment. Claims due to above errors shall be entertained only if an experienced contractor could not have foreseen these errors. The contractor shall

o Comply with the applicable safety regulationso Institute a quality assurance system to demonstrate compliance

Compliance with quality assurance system shall not relieve the contractor of any of his duties or responsibilities. The contractor to ascertain all necessary information regarding risks and contingencies. If the contractor encounters adverse physical conditions which were unforeseeable, the contractor to give notice to Engineer. Contractor’s equipment when brought to site shall be exclusively intended for the execution of the works and shall not be removed without the Engineer’s consent

Progress ReportReports containing charts, photographs and other documents showing progress of the works shall be prepared and sent monthly. The progress report shall cover details of contractor’s personnel and equipment, quality assurance documents, safety statistics and comparison of actual and planned. Also measures adopted to overcome delays are listed

Nominated Subcontractoro Stated in the contract as being a nominated subcontractoro Whom the Engineer instructs the contractor to employ as a subcontractor

The contractor shall be under no obligation to employ a nominated subcontractor, against whom he raised reasonable objection. The employer may pay direct to the nominated subcontractor, if not paid by contractor without justification, and deduct it from contractor’s money dues

Variation and AdjustmentVariation of work can be initiated by the Engineer at any time up to taking over stage. Contractor is required to execute each variation unless contractor writes to Engineer about his inability to perform. Contractor may propose improvement or changes if beneficial to Employer due to lower value or better performance. The reduction in cost to the contract price due to above change shall be shared between Employer and Contractor after adjusting for loss if any in quality, life and operational performanceThe contract price is adjusted for any increase or decrease in cost resulting from a change in the laws of the country made after the Base Date in the contract. Escalation clause applies only if provided for in the contract. Such clause may or may not be sufficient for compensation due to rise in costs, which have gone up compared to “Base Date” data. If contractor fails to complete works within time for completion, adjustment of price will be linked to date 49 days prior to date of completion or current prices whichever is more favourable to Employer under Escalation clause

Termination by EmployerEmployer can terminate contract on many grounds such as failure to carry out the contract, subcontracting the whole of the works or assign the contract without agreement. The bribing for undue favour can be the basis of termination. Employer can even terminate the contract with 28 days’ notice without any reason but not for executing work himself or to appoint another contractor

Termination by ContractorContractor is allowed to terminate the contract if contractor is not provided with

o Employer’s financial arrangemento Lack of interim payment when dueo Prolonged suspension of work by Employero Bankruptcy or insolvent Employero Substantial failure of Employer to perform his obligation under the contract

Risk and ResponsibilityThe contractor indemnifies and holds harmless the employer on following issues

o Injury, disease or death due to contractor’s execution of work or during remedy of defects in works completion

o Damages or losses to property arising out of execution of work or attributable to negligence, wilful act or breach of the contract by the contractor

The Employer to indemnify and hold harmless the contractor for similar actions carried out by Employer’s personnel during execution or after completion during remedial work. The contractor takes full responsibility for care of the works from commencement till taking over by client, after which the responsibility passes to the Employer. Employer is required to meet the risks arising out of

o War, terrorism, riots, explosives, contamination by radioactivity, design of any part of the works by the Employer, forces of nature

Contractor is expected to make good loss or damage caused by above issues, but will be reimbursed for the same along with time extension for delays. The total liability of contractor in

the above issues shall not exceed the value of contract except for in case of fraud, misconduct and default

Different Types of Construction Claims Contractual Claims

Claims which arise out of the expressed provisions of the particular contract i.e. extra cost, expense and direct loss

Extra Contractual ClaimsClaims for damages for breach of contract at common law

Quantum Merit ClaimsProvide remedy for a person who has carried out work under the instruction of the owner but no price has been agreed or where a new one has replaced original contract and payment is claimed for work done under the substituted contract

Ex Gratia ClaimsNo legal remedy is available to the contractor but arise out of hardship, known as sympathy claims

Counter ClaimsClaims raised by the opposite party to counter the claims of the claimant

Preparation of Claims Burden of Proof

When the claim situation, arise the party attempting to demonstrate that it was prevented from performing or performed in excess of, than the other side performed contract to requirements has the responsibility of proving such a conduct. The accused party need not usually defend itself against the allegation until some evidence is presented by the party raising claim showing wrongful exercise. Therefore, the party claiming must bring out concrete evidence while raising the claim, which will not be easily demolished by the other party

Basis of ClaimThe party while preparing the claim must ensure that the relevant position of the contract law where the remedy is provided is precisely stated. In case remedy is not available under the express provisions of the contract, the party claiming should bring out the relevant provisions of contract law under which such a remedy is available. The party raising claim must also base its claim on a legal theory that is accepted as a reasonable ground of recovery under the law applicable to contract. The party raising claim should not only show that the owner is responsible for the harm for which relief is being sought, he should also prove that he is free from blame or have not made any contribution to the harm

Importance of FactsFacts are the glue which holds the claim together. If presentation is not coming to a logical conclusion, it must be accepted that some facts are lacking. If the facts exist, these should be verified and should be safely preserved so that claim can be supported by such hard evidence. When the facts give complete concrete evidence the claim can be resolved by the parties themselves and by doing so lot of time and money can be saved. The proof of expenditure is a pre-requisite for complete claim analysis by the owner

Supporting EvidenceThe following supporting evidence can contribute immensely in proving the claims

o Site records, correspondence, records of site meetings, site diaries, programmes and progress schedules, payments claimed and made

Drafting of a ClaimThe claim should be written after all the facts have been assembled. Each claim should be thoroughly discussed and written in a format, which proves the facts that a contractor requirement was breached and that a particular clause of contract entitles the contractor to relief

IntroductionBrief contract particulars relevant to the claim and brief description of the situation leading to the claim and reference to the relevant correspondence/ notices shall be covered

Ground of ClaimReference to relevant contract clauses which entitles the contractor for the claim and where the contract clauses do not provide any remedy, reference to the contract law section where the claim can be legally justifiable and admissible

Substantiation of ClaimIn order to substantiate the claim properly, the supporting evidence as well as various details of expenses of the losses suffered with appropriate proof is desirable

Negotiating Settlement Preparing before start of negotiation

Negotiation is an art and one must understand the psychology and approach of the other party so as to structure the relationship in such a way that it will not harm future dealing. It has also to be decided as to how many people are to be included in the negotiating team, and whether including too many negotiators will damage any rapport established earlier. It is also to be decided who will be the best spokesman for the group who can present the claim with clarity. The presentation has to be made in a firm and gentle manner. The team leader should be well prepared in having analysed and evaluated the claim because a well-informed negotiator lends credibility to a request for additional cost and time. It needs to be remembered what is wanted and what can be taken and the amount requested for a claim should permit flexibility during negotiation

Timing the negotiationThe earlier the negotiations are commenced, the faster and easier are the settlements because the events are still fresh in everybody’s mind and all the records are easily available.

Strategy for negotiationStrategy should be planned in advance due to the following reasons

o The party best prepared can discuss its position with full confidenceo There is greater likelihood of unexpected occurringo Checklist helps in evolving steps to be taken if problems develop during negotiations

Communication and bargaining positionConstant and continuing contact helps in removing the misunderstanding which sometimes develop. The bargaining position will depend upon the strength of the case and the reputation enjoyed with clients

Alternative Dispute Resolution (ADR) MethodsThe international trend is towards adoption of ADR and the arbitration is perceived as a less preferred procedure with its contentious and adversial proceedings being less conducive to promotion of goodwill between the parties. In ADR methods, parties can arrive at a settlement which is result of a consensus rather than imposition since it is the parties themselves which take a decision to either accept or reject the final settlement. The conciliator or mediator is thus neither an arbitrator nor a judge but only a facilitator. In ADR, the relations are more harmonious since solution is not necessarily bound by the contract and the acceptance is optional

Settlement through adjudicator/ mediator/ conciliator is part of dispute resolution methods. Presently these disputes are generally settled through arbitration, if amicable settlement is not reached between the parties. Arbitration generally starts too late, takes too long and costs too much. The ADR methods which have emerged during the last few years have been found to be most satisfactory involving least cost and time for resolving disputes and even in minimizing disputes. In this method, either a sole mediator/ conciliator be named by the parties or a provision for constitution of a Dispute Resolution Board (DRB) is made by providing that each party will nominate one member and third member can be nominated through a professional body or through any authority which enjoys confidence of both the parties. The independent mediator/ conciliator/ DRB is to provide independent assessment on the merit of the disputes. The mediator/ conciliator/ DRB members are expected to visit the site of work so as to acquaint with nature of work and various other difficulties involved. They are expected to get the dispute resolved within a period of 2-3 months as may arise from time to time during the execution of the project

Advantages of ADR Methods Since mediator/ conciliator/ DRB members are construction experts, wide experience in

management and contract administration, the party would find best insurance for an approach that emphasizes prevention and resolution of disputes

Inclusion of conciliation/ DRB in contract provision will give a clear signal of the owner’s desire for a contract administration committed for quick resolution of problems and fair dealing with the contractor

The conciliation/ DRB presence minimizes the disputes and helps both parties to put oneself in other’s shoes. This creates a positive attitude during the duration of the job

Mediator/ Conciliator/ DRB has proved to be a worthy watch dog and will also be effective in discouraging contractors in raising claims which do not steam from undisputable entitlements

The informality of the hearings conducted by the mediator/ conciliator/ DRB helps putting everybody at ease

The mediator/ conciliator/ DRB provides a forum to foster cooperation between the employer and the contractor and means for promptly and equitably resolving disputes

The mediator/ conciliator/ DRB does not interfere with the employee power to direct the work nor constitute an obstruction to the ultimate legal rights of recourse to arbitration if they are not satisfied with DRB recommendation

Some of the ADR processes in relation to construction industry are as under Conciliation

It is process of resolving disputes with the aid of natural mutually acceptable conciliator who assists the parties, privately and collectively, to identify the issues in a dispute and to develop proposals for satisfactory settlement of disputes. It is a voluntary non-binding process where the parties present their cases and after series of joint and separate discussions and clarifications, the conciliator develops options for settlementEach party has to submit a brief written statement to the conciliator about the dispute and additional information as requested. Conciliator can communicate orally or in writing with the parties together or separately with each. Each party may submit suggestions for settlement to the conciliator who can also formulate terms of a possible settlement and reformulate it after receiving observations of the parties. If the parties reach a settlement, a written agreement may be drawn up, signed by the parties and authenticated by the conciliator. All matters relating to conciliation proceedings shall be kept confidential. The costs are to be shared equally among the parties. The conciliator shall not act as arbitrator or representative of a party in judicial

proceedings in respect of the same dispute nor the parties shall represent him as their witness. The objective should be to find an acceptable compromise

MediationMediation process is almost identical to conciliation except that the neutral party i.e. the mediator, offers assessment of merit, in the stands of the parties. When mediation fails to bring a settlement agreement, the mediator records a note containing his assessment of merits of each dispute and his opinion about the solution and forwards it to the parties. Such a note can then enable the parties to review their respective rigid stand and decide whether to proceed with the arbitration/ litigation and the mediator’s assessment can be quoted though no bindingEach party gets an opportunity to educate and influence their opponents in the opening presentations and to test market a settlement proposal privately conveyed to the neutral party, the process enables each party a realistic look at their case and developing options for settlement. The process is economical, quick, with mutually satisfactory outcomes and high rate of compliance and preserves the ongoing relationships

Dispute Resolution Board (DRB)/ Dispute Adjudication Board (DAB)DRB is a panel of three experienced and impartial reviewers, one appointed by each party and a third nominated by these two members with the concurrence of parties to function as chairman. The members are chosen for their expertise and pragmatic qualities and not for the legal qualifications. The DRB members are provided with a copy of contract agreement and drawings and are kept abreast of progress problems and developments. The DRB meets with the owner and contractor during regular site visitsWhen any dispute on the job cannot be resolved, any party not satisfied with decision of the Engineer, can refer the dispute to the DRB. In arriving at a recommendation, the DRB considers the relevant contract provisions, correspondence, other documents and particular circumstances of the dispute. The board’s output to be given within 8 weeks consists of written, non-binding recommendation for resolution of dispute explaining the board’s evaluation of the facts, contract provisions and the reasoning which led to the conclusion. Decisions of DRB are usually accepted because there is little chance of doing better in arbitration. It is open to either party not to accept the DRB’s recommendation and invoke arbitration within a specified time limit. The members are paid retainer ship fee in addition to sitting fees for the meetings and other expenses. The DRB report is usually unanimous, if not, the minority view is also included. Either party can request DRB to reconsider its decision

AdjudicatorSimilar to DRB and is adopted for small size contracts. Instead of three members, there is a single adjudicator usually nominated by the employer in the bid documents. It is open to bidders to raise valid objections to the proposed name, while submitting bids

Claims Committee of EmployerThese are empowered committees to settle claims of contractor. It is open to contractor not to accept its decision and resort to litigation in court

Technical Advisory CommitteeSimilar to DRB, scope of the issues or disputes referred for its advice is limited to technical problems only. A three member expert team is appointed to keep abreast of developments and problems on the job through site visits and discussions. It is a non-binding advice

RefereeThe contracts having no arbitration clause, when certain disputes arise, the parties sometimes enter into an agreement to refer the matter for decision to a mutually agreeable neutral person instead of going for arbitration or litigation. The parties agree to abide by the decision of referee

who conducts proceedings and gives decisions in form of an award. The process is less formal and quicker than arbitration

PartneringA dispute prevention process that is used to help the project stakeholders avoid conflict and resolve problems before they become disputes. The partnering process starts at a retreat in the early stages of project and is managed by a neutral facilitation team. Two documents are usually created at the retreat, namely issue escalation matrix and partnering charter. Follow up mini retreats or workshops may also be held on a periodic basis

Mini Trial and Neutral EvaluationThey usually include the abbreviated presentation of evidence and arguments to one or more expert neutral facilitators on the presence of executives or others with decision making authority. Following the summarized presentation of evidence and a questioning period, the decision makers and the neutral evaluator will meet to consider the confidential written assessment of strengths and weaknesses of respective positions of the parties by the neutral evaluator and analysis of likely outcome of the case

ADR Trial ProceduresThis is an adjudicatory process in which a neutral third party is empowered to render a final and binding decision after hearing all evidence and arguments of the disputing parties. ADR trial procedures allow the parties to engage in pre-trial discovery that is managed by ADR trial arbitrator

Final Offer Arbitration or High Low ArbitrationOther variations of arbitration. In the former, the arbitrator, after completing the proceedings as usual, has to choose between the final settlement positions offered by the parties and awards one or other of the final positions. In the latter, the parties set a minimum and maximum range for the arbitrator’s decision. If the award comes out of the range, the award is automatically adjusted to the maximum or minimum figure. If the award falls in between the two figures, the figures become exact amount awarded

Contractual Risks in Construction Projects Delay in Drawings and Instructions by Client Errors in client’s data/ requirement Right of Access to the Site Client’s Claim against Contractor Setting out errors Unforeseeable physical conditions Completion Test Rejection and Remedial Work Delay caused by Authorities Rate of Progress of Work Delay Damages/ Penalty Handing over on Completion Failure to Remedy Defects Delayed Tests and Retesting Changes in Legislation Delayed Payment Suspension of Work Force Majeure Indemnities