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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 provisions
o Variation procedures and claims for extra as per provisions of red book
o Escalation? Importance and its effect on performance of contract in red
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 Works

Unlike procurement of goods, works are complex transactions spread over longer
period of time
o Scope of Bid
o Sources of Funds
o Eligible Bidders
o Eligible Materials, Plant, Supplies, Equipment and Services
o Qualification of the Bidder (experience, personnel capabilities,
equipment capabilities, financial position, litigation history, joint
o One Bid per Bidder
o Cost of Bidding
o Site Visit
Bidding Documents
o 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 Documents
o Amendment of Bidding Documents
Preparation of Bids
o Language of Bid
o Documents comprising the Bid
Bid Form
Appendix to Bid Form
Priced Bill of Quantities
Bid Security

o Bid Prices
o Bid Validity
o Bid Security
o Pre-bid meeting
o Format and Signing of Bid
Submission of Bids
o Sealing and Marking of Bids
o Deadline for Submission of Bids
o Late Bids
o Modifications and Withdrawal of Bids
Bid Opening and Evaluation
o Bid Opening
o Confidentiality
o Clarification of Bids
o Examination of Bids and Determination of Responsiveness
o 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 Instructions
It 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 Addenda
After 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 Contract
PWD 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 Contract
The conditions define in detail the rights, duties and liabilities of
o The contractor who carries out the work
o The owner for whom the construction is to be executed
o The architects and engineers who design and supervise the work

Schedule A: Materials to be Supplied by Employer

List of materials agreed to be supplied by the owner to the contractor
o Kind of Material
o Approximate Quantity
o Place of Delivery
o Rate of issue and mode of payment
o Ownership of Materials
o Return of Excess Materials
Schedule B: Bill of Quantities
The 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
Specifications 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 specifications
o Particular specifications
In the absence of complete specifications, the contractors obligation is
limited to the performance of only what is actually called for in such
incomplete specifications
Contract Drawings
A 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


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

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 Contract

FIDIC 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 Employer
Contractors right of access to site is not exclusive and is subject to
performance security being provided. Contractors claims are applicable in
case of delay by Employer
Employer 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. Employers claims
ratified by Engineer can be deducted from payment certificate issued to the
The Engineer
The Engineer has no authority to amend the project. The Engineers authority
and limitations can be defined in the contract. The Engineers 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 contract
Employer can replace Engineer with any other person against whom
contractor does not have any reasonable objections
The Contractor
The 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 contractor
The subcontractor can be named in the tender for other subcontractors
proposed during execution, the Engineers 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
o Comply with the applicable safety regulations
o 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. Contractors equipment when brought to site shall be
exclusively intended for the execution of the works and shall not be removed
without the Engineers consent
Progress Report
Reports containing charts, photographs and other documents showing
progress of the works shall be prepared and sent monthly. The progress
report shall cover details of contractors personnel and equipment, quality
assurance documents, safety statistics and comparison of actual and
planned. Also measures adopted to overcome delays are listed
Nominated Subcontractor
o Stated in the contract as being a nominated subcontractor
o Whom the Engineer instructs the contractor to employ as a
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 contractors money dues
Variation and Adjustment
Variation 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 performance
The 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 Employer
Employer 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
Termination by Contractor

Contractor is allowed to terminate the contract if contractor is not provided

o Employers financial arrangement
o Lack of interim payment when due
o Prolonged suspension of work by Employer
o Bankruptcy or insolvent Employer
o Substantial failure of Employer to perform his obligation under the
Risk and Responsibility
The contractor indemnifies and holds harmless the employer on following
o Injury, disease or death due to contractors 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
The Employer to indemnify and hold harmless the contractor for similar
actions carried out by Employers 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 Claims
Claims for damages for breach of contract at common law
Quantum Merit Claims
Provide 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
Ex Gratia Claims
No legal remedy is available to the contractor but arise out of hardship,
known as sympathy claims
Counter Claims
Claims 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 Claim
The 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 Facts
Facts 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
Supporting Evidence
The following supporting evidence can contribute immensely in proving the
o Site records, correspondence, records of site meetings, site diaries,
programmes and progress schedules, payments claimed and made

Drafting of a Claim
The 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
Brief 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 Claim
Reference 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
Substantiation of Claim

In order to substantiate the claim properly, the supporting evidence as well

as various details of expenses of the losses suffered with appropriate proof is
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 negotiation
The earlier the negotiations are commenced, the faster and easier are the
settlements because the events are still fresh in everybodys mind and all the
records are easily available.
Strategy for negotiation
Strategy should be planned in advance due to the following reasons
o The party best prepared can discuss its position with full confidence
o There is greater likelihood of unexpected occurring
o Checklist helps in evolving steps to be taken if problems develop
during negotiations
Communication and bargaining position
Constant 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) Methods
The 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
Inclusion of conciliation/ DRB in contract provision will give a clear signal of
the owners 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 others 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
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 settlement
Each 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
Mediation 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 mediators
assessment can be quoted though no binding
Each 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 visits
When 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 boards output to be given within 8 weeks consists of written,
non-binding recommendation for resolution of dispute explaining the boards
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 DRBs 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
Similar 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 Employer

These 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 Committee
Similar 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
The 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
A 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 Evaluation
They 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 Procedures
This 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 Arbitration
Other 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
arbitrators 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 clients data/ requirement
Right of Access to the Site
Clients 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