Professional Practice Final: Understanding Contracts

Understanding
Contracts
Professional Practice
JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZAYNAH
PROFESSIONAL PRACTICE 2014-2015
SCOPE:
ANALYSING AND COMPARING COMMON CONSTRUCTION
CONTRACTS IN INDIA AND UNITED STATES AND TRYING
TO FORMULATE CONDITION THAT CAN MAKE INDIAN
CONSTRUCTION CONTRACTS MORE EFFICIENT AND
BENEFICIAL FOR ALL PARTIES INVOLVED
METHODOLOGY:
WHAT IS
CONTRACT?
TYPES OF CONTRACTS
(INDIAN CONTEXT)
LUMPSUM CONTRACT
ITEM RATE CONTRACT
COST PLUS PERCENTAGE OF COST
CONTRACT
about, suitability, merits and demerits
discussed in both Indian and US context
TALKING ABOUT GENERAL ISSUES FROM

ABOVE
AND COMPARING IT IN BOTH CONTEXTS
HOW US SYSTEM HAVE OVERCOME THE
ISSUES?
AMERICAS SOLUTION TO OVERCOME SUCH
ISSUES : IPD CONTRACTS
about, suitability, merits and demerits
HOW IPD CONTRACTS CAN HELP IN
EVOLUTION OF INDIAN CONTRACTS?
WHAT IS A CONTRACT?
A properly prepared legal agreement between owner and
architect or between architect and construction team that clearly
communicates a projects terms and conditions, determines
responsibilities of each party and set expectations for
schedule and payment for services. The most successful
architectural projects are those where open lines of communication
are established, and trust and respect are mutually granted.
In order to best communicate the legal framework from which
a project will be developed, professionals use written agreements.
Its the first step toward a successful project.
JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZYNAH
TYPES OF CONTRACTS:
There are many types of contracts available, some of which are:
Item rate contract
Percentage rate contract
Lumpsum contract
Labour contract
Materials supply contract
Piece-Work agreement
Cost plus percentage rate contract
Cost plus fixed fee contract
Cost plus fluctuating fee contract
Target contract
However this document shall focus on the 2 of the contracts used in
India:
i. Item rate Contract
ii. Cost plus percentage rate contract
INDIAN CONTRACTS
What is Lumpsum contract?

1. The contractor offers to do the whole work as shown in drawings and
described by specifications
2. Work done for a total stipulated sum of money
3. No individual rates quoted
4. Difficult to make adjustments in contract value if changes are made
later
5. Schedule of different items of work is not provided
6. Deposit of 10 % security money and other conditions are included in the
contract
7. After completion of work, a fixed Lumpsum amount is paid to the
contractor.
8. Whole work is compared and checked with drawings and specifications
before releasing the payment.
9. Large projects, payments are made at different stages of work on
agreed terms.
10.If the contractor stops the work in between he is not entitled for any
further payment.
Suitability of Lumpsum Contract:

1. Suitable for works for which contractors have prior construction
experience.
2. Experience enables the contractors to submit a more realistic bid.
3. Not suitable for difficult foundations, excavations of uncertain
character, and projects susceptible to unpredictable hazards and
variations.
Merits:
Demerits:
i. The owner can decide whether to

start or shelve the project knowing
the total Lumpsum price quoted by
different contractors.
i. Before the contract is awarded,

the project has to be studied
thoroughly and the complete
contract documents has to be
prepared in advance.
ii. The contractor can earn more

profit by in-depth planning and
effective management site.
ii. In this type of contract,

unforeseen details of work are not
specified in the contract document.
Many additional items may have to
be undertaken as the work
progresses, giving opportunity to
the contractor for claiming higher
rates of the
extra items not included in the
contract agreement.
What is Item Rate contract?

1. Also called a schedule contract
2. based on estimated quantities of items included in the
project and their unit prices.
3. The contractor undertakes the execution of work on an item
rate basis
4. Amount to be received by the contractor, depends upon the
quantities of various items of work actually executed.
5. Payment is made on the basis of detailed measurements of
different items of work actually done by him.
6. accommodates flexibility for price adjustment.
Suitability of Item Rate Contract:

1. Most commonly used for all types of engineering works financed by
public or government bodies.
2. Suitable for works which can be split into various items and quantities
under each item can be estimated with accuracy.
Merits:
Demerits:
i. no need for detailed drawings at

the time of allotting contract.
i. total cost of work can only be

known upon completion. the owner
may incur financial difficulty if the
final cost increases.
ii. Changes in drawings and

quantities of individual items can
be
made as per requirement within
agreed limits.
iii. The payment to the contractor is
made on the actual work done by
his at the agreed rates. The
contractor has to initially invest
his own money for starting the
work
iv. Safety and quality is ensured as
architect is involved
ii. Additional staff is required to take

detailed measurements of work
done for releasing payments.
iii. Scope for additional saving with
the use of inferior quality materials
may prompt the contractor to use
such materials in the work.
iv. As quantities may

increase or decrease, it
requires careful considerations
to avoid heavy losses due to
unbalanced tender.
What is Cost plus Percentage of Cost Contract?
1. the purchaser agrees to pay the cost of all labor and

materials plus an amount for contractor overhead and
profit (usually as a percentage of the labor and material cost).
2. Work is given on certain percentage over the actual cost of
construction.
3. Actual cost of construction is reported by the contractor and is
paid to him by the owner together with a certain percentage as
agreed earlier.
4. Contractor agrees to do the work in accordance with the
drawings, specifications and other conditions of contract.
5. Proper control has to be exercised by the owner in the purchase
of materials and in arranging labour.
6. Complete records of all time and materials spent by the
Contractor on the work must be maintained.
Suitability of Cost plus Percentage of Cost Contracts:

1. This type of contract is suitable for works required to be completed
expeditiously and where it is difficult to foretell what difficulties are
likely to be encountered.
2. This contract is also suitable for important structures where the cost of
construction is immaterial.
JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZYANAH
Merits:
Demerits:
i) In this type of contract, actual

cost is to be borne by the owner.
Therefore, the contractor performs
the work in the best interest of the
owner resulting in good quality
work.
i) This form of contract cannot be

adopted normally in case of public
bodies and Government
departments.
ii) The work can be taken in hand

even before the detailed
drawings and specifications are
finalized.
iii) Changes in design and method
of construction if needed can be
easily carried out without disputes.
iv) The work can be executed
speedily.
ii) The final cost of the work is not

known in advance and this
may subject the owner to financial
difficulties.
iii) The tendency of the contractor
to increase the cost of work to earn
profit by way of percentage of
enhanced actual cost.
iv) Quality of work cannot be
checked by an expert, as there is
no involvement of architect.
AMERICAN CONTRACTS
Lump Sum or Fixed Price:

This type of contract involves a total fixed priced for all construction
related activities. Lump sum contracts can include incentives or benefits
for early termination, or can also have penalties, called liquidated
damages, for a late termination. Lump Sum contracts are preferred when a
clear scope and a defined schedule has been reviewed and agreed upon.
Merits:
Demerits:
With a lump-sum contract, you

know what you're getting and how
much it's going to cost. The clients
price stays the same even if the
builder underestimates things. The
working side benefits from a lump
sum price because, if they manage
to keep costs below their estimate,
they keep the money they would
otherwise have spent on costs. The
result is a higher profit margin on
the contract.
Among the drawbacks, there

theres no "transparency." The
paying side doesnt know how
large or small a profit margin the
working side has. If the paying side
suspects its too big, theyre
inclined to think theyre
overpaying. If they suspect its too
little, they could think theres a risk
of too little quality control with the
working side tempted to cut
corners to maintain their margin
UNIT PRICE CONTRACT:

An owner and contractor may agree to structure the contract on specified
unit prices for the estimated quantities of the work. Unit price contracts
are somewhat more common on public works, engineering, and road
building projects. In a unit price arrangement, the contractor is able to
provide the owner with a specific price for a particular task or scope of
work.
Merits:
Demerits:
A unit price agreement provides

benefits to both owners and
contractors. The owner will only pay
for actual quantities performed,
supplied, or constructed on the
project. Thus, if the estimated
quantities turn out to be greater
than the actual amount of work
required on the project, the owner
will only pay for those actual
quantities. This system may help to
eliminate or reduce the inclusion of
general contingencies that protect
the contractor in the event that its
quantity estimates are inaccurate.
Ultimately, this may result in lower

costs of construction for the owner
Cost Plus Contracts:
This type of contract involves payment of the actual costs, purchases or

other expenses generated directly from the construction activity. Cost plus
contracts must contain specific information about certain pre-negotiated
amount (some percentage of the material and labor cost) covering
contractors overhead and profit. Costs must be detailed and should be
classified as direct or indirect costs.
Who Gets the Savings?"Savings" is the difference between (a) the
GMP and (b) the final cost of the Work, plus the working sides
fee:Savings = (GMP) ((Total Cost of the Work) + (Total Working Side
Fee))
By default, the paying party benefits from savings. Theyre obliged to pay
no more than the cost of the Work plus
the fee. So if that amount is
lower than the GMP, the paying side owes no more and they enjoy all of
the savings.
Sharing the Savings. Usually the contract will identify a percentage of
savings that goes to the working party. SometimTo offer the working
side extra incentive to minimize the cost of the Work thereby
savings
some
GMP
contracts set up PROFESSIONAL
a sharing ofPRACTICE
any
JENNIFERmaximizing
| MINAKSHI | PARUL
| REVINA
| SNEHA
| ZAYNAH
2014-2015
Merits:
Demerits:
The allure of keeping savings often

attracts the paying side to a GMP
contract, especially when the
paying side is an owner. But its
easy to overlook the extra costs
that come with the GMP contract.
It may be worth it for owners (a)

with the in-house construction
expertise to analyze and manage
the
payment
process
and
scrutinize cost of the Work
reporting or (b) have the budget to
hire qualified consultants. But
owners who dont have either
should really stop and think twice
before opting for a GMP contract.
They may just be better off with a
lump sum contract, especially if
the project isnt really big enough
to justify the extra professional
costs needed to negotiate a GMP
contract and review cost of the
Work in each application for
payment.
There are multiple variations for Cost plus contracts and the most
common are:
Cost
Cost
Cost
Cost
Plus
Plus
Plus
Plus
Fixed Percentage
Fixed Fee
with Guaranteed Maximum Price Contract **
with Guaranteed Maximum Price and Bonus Contract. **
**Cost Plus with Guaranteed

Maximum Price Contract
A variation of a cost-plus contract is
a
guaranteed
maximum
price
(GMP) agreement. Essentially, a
GMP is a cost-plus agreement with a
cap on the owners total liability for
the costs of construction of the
project. The owner is obligated to pay
the contractor for the actual costs of
construction up to a certain sum. If
the construction costs exceed that
sum, the contractor is liable for the
cost overrun.
** Cost Plus with Guaranteed

Maximum Price and Bonus
Contract.
Apart from behaving as a Cost plus
+ GMP, Compensation is based on
a fixed sum of money. The total
project cost will not exceed an
agreed upper limit and a bonus is
given if the project is finished
below budget, ahead of schedule
etc.
ANALYSIS
GENERAL OBSERVATION FROM US CONTRACTS:

1. Contract document has all the speciation of each and every person
involved in the job process.
2. Duties responsibilities and limitations of authority of contract manager
and architect as set forth in contract document
3. Any changes made in the drawings have to be done through a change
order or a construction change directive which goes to each and every
party n needs to be signed by each person
4. Contracts present for each and every person involved
5. The shop drawings are made by the contractor
6. The contractor guarantees performance of the built work
7. Any damages through fault of contractor will be paid by contractor
8. All the money needs to be present with the owner the contractor can
demand to see the owners ability to pay for the project
9. Any change in the work or schedule etc. The contract sum & time will
be change accordingly.
10.Contractor has to get all permits except building permit and fees which
is got by owner
11.Schedule of work done by contractor and approved by architect and
contract manager
How the Documents are Organized?

The AIA organizes contract documents by two methods:
1. Byfamiliesbased on types of projects or particular project delivery
methods
2. Byseriesbased on the use of the document
Nearly 200 forms and contracts comprise AIA Contract Documents. These
forms and contracts define the relationships and terms involved in design
and construction projects
For use when the owners project is divided into separate for
design( architect) and construction (contractor)
Suitable for conventional project delivery (design bid build)
Owner retains architect
Architect n his/ her consultants prepare drawings and specifications
Contractors and sureties obligate to owner for bid performance and
payment bonds
Contractor and sub contractor make shop drawings and build the work
Owner retains and architect and a construction manager, who acts as an

additional adviser to the owner.
Construction manager gives owner construction management advice
through design and construction phases increased expertise in managing
a project from start to finish.
Owner enters into a contract with a single entity Design builder

Design builder is then obligated to both design and construct the project.
Owner may also hire a consultant to assist owner in working with design
builder
Design builder then enter into contracts with architect and/ or construction
contractor, if necessary
Design builder may be
- A developer or single purpose entity
- An architect led organization
- A contractor led organization
DEADLINE AND DELAYS:

A construction contract will often have many deadlines, but one deadline
looms largest: substantial completion.
Thats because substantial
completion is when the Work reaches the point where an owner can rent it,
sell it, or work or live in it. And theres usually a tight schedule for
reaching that point. The deadline for substantial completion is often also
critical to satisfy obligations to third-parties: local government
requirements for completion by a specified date, availability of public
incentives.
Major points:
Identifying deadlines
"Excused Delays" that postpone deadlines
Delays caused by an owner, or another, up-the-chain, contractor that
postpone deadlines and increase contract prices
Delay notices
Delay damages
DEADLINE AND DELAYS:

Changes are No. 4 on the list of top ten construction contract terms. Few
construction projects go from start to finish without a change. It could be
a change in the work, a change in the price, or a change in the schedule.
Usually, theres changes to more than one, and often more than one
change. Here were going to cover the different kinds of changes, how
your contract affects them, and how they affect your contract.
Generally, changes fall into one of three types:
Change Orders
Construction Change Directives
Minor Changes
AMERICAS SOLUTION TO
OVERCOME SUCH ISSUES : IPD
CONTRACTS
INTEGRATED PROJECT DELIVERY:

A project delivery approach that integrates people, systems, business
structures and practices into a process that collaboratively harnesses the
talents and insights of all participants to optimize project results,
increase value to the owner, reduce waste, and optimize energy
efficiency through all phases of design, fabrication, and construction.
The American Institute of Architects (AIA)
volvement of the different Parties:
Merits:
Concerns:
(i) Cost savings for the owner

(ii) Faster completion
(iii) Bonuses paid to the designers
and contractors
(iv) Reduced risk of design and
construction defects
(v) Reduced liability for the
designers and contractors
(vi) Less disagreements leading to
court cases
(i) Unfamiliar with IPD and decline

to participate
(ii) Multi-party agreement could
prove to be impossible or
exasperating
(iii) An owner might have difficulty
securing financing
(iv) The party that suffers the
economic damages will be left
holding the bag
(v) Budgets and schedules have to
be scrutinized carefully
(vi) Must be supported by strong
leadership.
(vii)Ownership goes to whom
(viii) The legal system and the
liability
Types of
Contracts
Lump Sum
Item Rate
Setbacks of Indian
Contract
Integrated Project Delivery
Claiming higher rates

of extra items not
included in contracts
agreement
All the stakeholders form part of the project

at the starting only, so such issues as the
need for extra items at the construction
stage is eliminated.
Total cost known only

after completion
With the help of a collaborative team work

approach, a more accurate estimation of
the cost can be reached. Usually that
happens before the construction stage and
is subjected to very minimal changes.
Scope of saving using

inferior quality of
materials.
A very transparent system since everyone

work together from the initial stage itself.
Heavy losses due to

quantity increasing or
decreasing.
Such issues usually do not arise since the

stakeholders are part of the project at an
initial stage and such issues can be
predicted and taken care of. However if
such disputes arise the two tierce system is
adopted for consensus.
Types of
Contracts
Cost plus
percentage
Setbacks of Indian
Contract
Integrated Project Delivery
Tendency of contractor
to increase cost of
work for more profit
generation
A BIM approach is adopted so that all the

parameters of the project are fixed and so
cost of work does not get increased in the
construction process
Quality of work cannot

be checked
Liabilities and profits are collectively shared

and manage leading to a more
performance and quality approach.
Delay
Faster completion as all the parties are

present from the earliest design phase

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Understanding

JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZAYNAH

PROFESSIONAL PRACTICE 2014-2015

JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZAYNAH

PROFESSIONAL PRACTICE 2014-2015

TALKING ABOUT GENERAL ISSUES FROM

JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZAYNAH

PROFESSIONAL PRACTICE 2014-2015

JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZYNAH

PROFESSIONAL PRACTICE 2014-2015

PROFESSIONAL PRACTICE 2014-2015

JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZAYNAH

PROFESSIONAL PRACTICE 2014-2015

What is Lumpsum contract?

JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZAYNAH

PROFESSIONAL PRACTICE 2014-2015

Suitability of Lumpsum Contract:

JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZAYNAH

PROFESSIONAL PRACTICE 2014-2015

i. The owner can decide whether to

i. Before the contract is awarded,

ii. The contractor can earn more

JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZAYNAH

ii. In this type of contract,

PROFESSIONAL PRACTICE 2014-2015

What is Item Rate contract?

JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZAYNAH

PROFESSIONAL PRACTICE 2014-2015

Suitability of Item Rate Contract:

JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZAYNAH

PROFESSIONAL PRACTICE 2014-2015

i. no need for detailed drawings at

i. total cost of work can only be

ii. Changes in drawings and

JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZAYNAH

ii. Additional staff is required to take

iv. As quantities may

What is Cost plus Percentage of Cost Contract?

1. the purchaser agrees to pay the cost of all labor and

JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZAYNAH

PROFESSIONAL PRACTICE 2014-2015

Suitability of Cost plus Percentage of Cost Contracts:

JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZYANAH

PROFESSIONAL PRACTICE 2014-2015

i) In this type of contract, actual

i) This form of contract cannot be

ii) The work can be taken in hand

JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZAYNAH

ii) The final cost of the work is not

PROFESSIONAL PRACTICE 2014-2015

JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZAYNAH

PROFESSIONAL PRACTICE 2014-2015

Lump Sum or Fixed Price:

JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZAYNAH

PROFESSIONAL PRACTICE 2014-2015

With a lump-sum contract, you

Among the drawbacks, there

JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZAYNAH

PROFESSIONAL PRACTICE 2014-2015

UNIT PRICE CONTRACT:

JENNIFER | MINAKSHI | PARUL | REVINA | SNEHA | ZAYNAH

PROFESSIONAL PRACTICE 2014-2015