A construction contract is a legally binding agreement between two parties on the details and cost of a construction project. This type of contract covers very expensive, complex projects and simple renovations. There are two types of clients that use construction contracts: residential and commercial. Each client has different requirements that determine what is included in the contract.
A residential construction contract includes three basic elements: project scope, schedule of work and payment details. The project scope is a statement of exactly what construction work is included in the contract. Both parties must agree that this section provides an exact representation of the required work.
The payment details section includes the total project cost and payment dates. All construction projects are paid on a percentage of completion basis. A deposit of no more than five percent of the total costs is provided at the start of the project. The next payment is made when the predefined section of work is completed.
4.1.2. Contract Management
Contract Management could be defined as a multi-stage process that goes on through the entire duration of the contract and ensures that the parties meet their contractual obligations in order to deliver the specific objectives provided in the contract.
Therefore, the ultimate objectives of contract management are:
The first and foremost condition of successful contract management is getting the job done. This translates in the fact that the ultimate scope/objective of the contract is accomplished:
Just getting the job done is not enough for a successful contract management. We should also be concerned about how the job is getting done. The aim should always be to get the job done in the best possible way. This means that the scope/objective of the contract is accomplished within the agreed:
Note: Achieving efficiency should not be mistaken for an unrealistic chase for cost savings, or unreasonable pressure to squeeze more output from the contractors for less money or less time. These practices frequently backfire and may result in more time and resources being misdirected towards a false objective.
4.1.3. Management of Civil Works Contract
The civil works contracts are among the most complex contracts generally throughout the business world. They are therefore the most challenging in terms of contract management.
To begin with, there is a very large variety of types of civil works with various degrees of complexity and risks and even more various types of expertise required for their management.
Type of civil works – large infrastructure projects (highways, bridges, roads, irrigation systems, dams etc.), smaller scale municipal infrastructure projects (rehabilitation of buildings, roads, sewage, water or power utilities), environmental rehabilitation projects (earthworks, planting, seeding, water management etc.).
4.1.4. Construction Contracts
The legally essential elements of a construction contract include an offer, an acceptance, and a consideration (payment for services to be provided). The offer is normally a bid or proposal submitted by a contractor to build a certain facility according to the plans, specifications, and conditions set forth by the owner. Acceptance takes the form of a notice of award. Consideration usually takes the form of cash payment, but it may legally be anything of value.
Contracts may be classified in several ways. Principal methods of classification are:
1. method of award is the method used during a procurement in order to evaluate a proposal.
While government procurement regulations establish formally advertised competitive bidding as the normal process, negotiated contracts are permitted under special circumstances. Private owners may, of course, award a contract in whatever manner they choose.
2. method of pricing. There are two types of contract by method of pricing. Each of these types has a number of variations. The choice of which construction contract to use oftentimes comes down to the owner’s risk tolerance.
The principal disadvantages of unit-price contracts are the requirement for accurately measuring the work actually performed and the fact that the precise contract cost is not known until the project is completed. A combination of lump-sum and unit-price provisions may be used in a single contract.
cost-type contracts are available in a number of forms. Some of these include:
Under a Lump Sum or Fixed Price Contract, the contractor agrees to perform the work specified and described in the contract for a fixed price. The price of a fixed contract can only be changed upon the execution of a change order, under which the owner and the contractor either:
These types of contracts are appropriate when a clear scope and a defined schedule have been reviewed and agreed upon.
The benefit of using Lump Sum or Fixed Price Contracts is that the owner’s construction costs are more predictable. The owner’s cost will be capped by the contract price, so long as no change orders are issued and no disputes arise on the project.
There are not many drawbacks with the use of the Lump Sum or Fixed Price Contract. To ensure that the Lump Sum or Fixed Price Contract fulfills this function, i.e., provides a predictable and accurate cost of construction for the owner, it is very important for the scope of work under the contract to be clearly defined. This will eliminate the owner’s risk of the contractor attempting to increase the contract price through the issuance of change orders for the performance of additional work that is arguably not part of the original scope of work but should be. Additionally, the schedule should clearly define the work and the deadlines that must be met. This could perhaps be a drawback to the use of the Lump Sum or Fixed Price Contract because it would require additional time and money to clearly define the scope of work and create a detailed schedule (though this is something that should be done on every construction project to protect the owner).
In addition, other types of contracts, such as Cost Plus Fee or Time and Materials Contracts, could arguably be cheaper if the actual cost of construction were less than the contractor’s estimated cost of construction on which the fixed price is based. But these types of construction contracts could also be more expensive if the actual cost of construction were to exceed the contractor’s estimated costs.
Therefore, the Lump Sum or Fixed Price Contract is a relatively safe and predictable contract type that could be used on a construction project.
4.1.5. Format of Contracts
The following subjects may well be considered as somewhat typical of many construction contract documents though international projects usually have their own standards, usually FIDIC (International Federation of Consulting Engineers):
The agreement describes the work to be performed, the required completion time, contract sum, provisions for progress payments and final payment, and lists the other documents making up the complete contract.
Government projects utilizes standard contract documents. The use of such standard contract forms will minimize the amount of legal review that the contractor must perform before signing a contract. However, even if the contractor is familiar with the standard contract forms being used, care must be taken to fully evaluate all special conditions as well as the plans and specifications.
In the Philippines we generally use one of the following standard forms of contract when engaging main contractors for construction works contracts:
4.1.6. Conditions of Contract
The conditions of contract are the terms that collectively describe the rights and obligations of contracting parties (i.e. the employer and the contractor) and the agreed procedures for the administration of their contract. Contract conditions determine the allocation of risk and consequently, price. Typically, these conditions address the following:
Classification of Contract Conditions