Chapter 7

Contract Management
 Contract management
Objectives
Ensure Project Completion
• On Time,
• Quality,
• Minimum cost
• Without any Disputes
• Manage Changes in Scope
Major events in contract management
• Post bid conference
• Work plan & schedule
• Progress & quality monitoring
• Reporting
• Interim payment
 Contract management
• Variation Order
• Cost price adjustment
• Time extension
• Claim
• Conflict management
• Contract termination
• Liquidated damage (@ 0.05 % per day but not more than 10 % of
contract amount)
• Prize (@ 0.05 % per day but not more than 10 % of contract
amount)
• Taking over certificate
• Defect liability period
• Work completion report (As built drawing
• Final payment
• Work completion certificate
 Disputes : Causes and Resolutions
Claim
• Claims arise when the Contractor believes he has been impeded
in some way from executing the works according to the contract.
• Common causes of claims, whether justified or not, are :

Cause Responsibility
Delay in obtaining possession and access to Employer
the site
Delay in obtaining work permits, customs Employer
clearance
Delay in obtaining drawings and instructions Consultant
 Disputes : Causes and Resolutions
Causes of claim cont…
Cause Responsibility
Delay of commencement or completion of Employer
works by others

Delay in payment Employer

Disputes over quantities Consultant
Errors in setting out with data provided by the Consultant
Consultant
Interpretation of specifications Consultant
Unusual weather conditions None
Force majeure None
 Disputes : Causes and Resolutions
• It is essential that the Employer and the Consultant do not
provide the Contractor with any reason for a claim through
lateness or negligence in carrying out their responsibilities under
the contact.
• For claim basic actions which should be followed by the
Contractor are:
 Start keeping a detailed record simultaneously with occurrence of
an “event” which gives rise to a claim.
 Give notice of intention to claim within specified time limit,
usually 28 days of the event.
 Act on the Consultant’s instructions regarding additional records
needed to substantiate the claim.
 Submit a claim with supporting information within specified
time limit, usually 28 days of notice of intention.
 Disputes : Causes and Resolutions
 For an event with continuing effect, submit an interim account of
claim on a regular basis.
 Include an application for payment in addition to actions.
• If claim is accepted by employer, then no disputes occurs. If
claim is not accepted by employer, then dispute occurs between
two contracting parties.
Causes of disputes
• Incomplete and / or unsubstantiated claims
• Failure to understand and/ or comply with its contractual
obligations by the Employer / Contractor / Subcontractor
• Failure to properly administer the contract
• Failure to make interim awards on extensions of time and
compensation
 Disputes : Causes and Resolutions
Causes of disputes cont…
• Errors and / or omissions in the Contract Document
• Employer imposed change
• Contract selection was not a ‘best fit’ when compared to the
project’s characteristics
• Third party or Force Majeure events
• Differing site conditions
• Conflicting party interests
• Unrealistic risk transfer from Employers to Contractors
In summary
• Poor contract documentation that arise from the organizational
system (inadequate or incomplete design information, ambiguities
in contract documentation)
 Disputes : Causes and Resolutions
• Scope changes that arise from uncertainty that exists within the
project management system (variations due to client, design
errors, site conditions)
• Educational and behavioral adaptations of individuals within the
system (poor communication, poor management, skill and
experience, and personality traits).
We could summarize these again as — design, contract
administration and personality issues.
Dispute Resolutions
• Contractual disputes are time-consuming, expensive and
unpleasant.
• They can destroy client/supplier relationships painstakingly built
up over a period of time and can impact on the supply chain.
 Dispute Resolution cont…
• They can add substantially to the cost of a contract, as well as
nullifying some or all of its benefits or advantages.
• They can impact on the achievement of value for money.
• Identify the needs to resolve disputes and choose the right
technique
• The desirable features are:
– Fast
– Inexpensive
– Fair
– Simple and economical process
 Characteristic of a Dispute Resolution process

General characteristics should be:

– Settlement in short period/ Minimum delay
– Fair Decision
– Settlement achieved is final
– Minimum costs
– Control of process
– The ability to preserve the relationships between the parties
– Confidentiality
– Flexibility
 Disputes : Causes and Resolutions
Dispute resolution techniques (Methods) include:
a) Negotiation – The most common form of dispute resolution where
the parties themselves attempt to resolve the dispute.
• Negotiation is by far the most common form of dispute resolution.
• The objective of sensible dispute management should be to
negotiate a settlement as soon as possible.
• Negotiation can be, and usually is, the most efficient form of
dispute resolution in terms of management time, costs and
preservation of relationships.
• It should be seen as the preferred route in most disputes.
Its advantages are:
 Speed
 Disputes : Causes and Resolutions
a) Negotiation cont...
 Cost saving
 Confidentiality
 Preservation of relationships
 Range of possible solutions
 Control of process and outcome
• If you are unable to achieve a settlement through negotiation, you
will need to consider what other method or methods of dispute
resolution would be suitable.
• But remember it will still be possible or may be necessary to
continue negotiating as part of or alongside other forms of dispute
resolution.
 Disputes : Causes and Resolutions
b) Mediation – A private and structured form of negotiation assisted
by a third party that is initially non-binding. If settlement is reached
it can become a legally binding contract.
• Mediation is negotiation with the assistance of a neutral third party.
It is often referred to as ‘structured negotiation’.
• It has all the advantages of conventional negotiation as set out
above but the involvement of the neutral can make the negotiation
more effective.
• It should be seen as the preferred dispute resolution route in most
disputes where conventional negotiation has failed or is making
slow progress.
 Disputes : Causes and Resolutions

Mediation…
• Format – mediation is essentially a flexible process with no fixed
procedures. At an opening joint meeting each party briefly sets out
its position. This is followed by a series of private and confidential
meetings between the mediator and each of the teams present at the
mediation. This may lead to joint meetings between some or all
members of each of the teams. If a settlement is reached, its terms
should be written down and signed.
• The mediator – the mediator’s role is to facilitate negotiations. The
mediator will not express views on any party’s position.
 Disputes : Causes and Resolutions
Mediation…
• Participants – the team attending the mediation should be kept as
small as possible but must include a lead negotiator, preferably a
senior executive or official within the organisation, with full
authority to settle on the day without reverting to others not
involved in the mediation.
• Preparation – each party usually prepares a brief summary of its
position for the mediator and the other party, with the key
supporting documents. These are exchanged between the parties,
and sent to the mediator, at least a week before the mediation. The
parties should enter into a mediation agreement once the details of
the mediation (e.g. place, time, name of mediator) have been
agreed.
 Disputes : Causes and Resolutions

c) Conciliation – As per mediation, but a conciliator can propose a

solution.
d) Neutral evaluation – a private and non-binding technique whereby
a third party, usually legally qualified, gives an opinion on the
likely outcome at trial as a basis for settlement discussions.
• The aim of a neutral evaluation is to test the strength of the legal
points in the case. It can be particularly useful where the dispute
turns on a point of law.
• Each side submits an outline of their case with an indication of
what evidence they would be able to produce at trial.
 Disputes : Causes and Resolutions
Neutral Evaluation…
• A third-party neutral, usually a retired judge or a lawyer, gives a
confidential opinion as to what the outcome of a trial would be.
• This procedure can be carried out entirely on paper, saving the
parties the time and expense of an oral hearing.
• The opinion can then be used as a basis for settlement or for further
negotiation.
e) Expert determination – A private process involving an
independent expert with inquisitorial powers who gives a binding
decision.
• In expert determination, the parties agree to be bound by the
decision of an expert in the field of dispute.
 Disputes : Causes and Resolutions
Expert determination…
• This process can be useful where the dispute is about a technical
matter.
• The expert will commonly be given powers to investigate the
background of the dispute himself, rather than just relying on the
evidence the parties choose to present.
f) Adjudication – An expert is instructed to rule on a technical issue –
primarily used in construction disputes, where awards are binding
on the parties at least on an interim basis, i.e. until a further process
is invoked.
g) Arbitration – A formal, private and binding process where the
dispute is resolved by the decision of a nominated third party, the
arbitrator or arbitrators.
 Disputes : Causes and Resolutions
g) Arbitration cont...
• It is a process for resolving disputes in which both sides agree to be
bound by the decision of a third party, the arbitrator.
• If court proceedings are begun by one party they will normally be
stayed on the application of the other party relying on the
arbitration clause.
• The agreement to arbitrate should be in writing.
• It can take the form of a clause within the original contract or can
be made after a dispute has arisen.
• It is possible, as long as all parties agree, to amend an arbitration
agreement at any stage so that it better serves the needs of the
parties.
 Disputes : Causes and Resolutions
g) Arbitration cont...
• The Arbitration Act gives the widest discretion to the parties to
decide between themselves how their dispute is to be resolved but
provides a fallback position if agreement cannot be reached.
Its advantages are:
 Some control of process – parties/arbitrator can tailor procedures
 Possible cost saving over litigation
 Confidentiality
 Parties can choose an arbitrator who is an expert in the relevant
field
 Resolution is guaranteed
 Decisions are legally binding and enforceable
 Disputes : Causes and Resolutions
h) Litigation – the formal process whereby claims are taken through
the civil courts and conducted in public. The judgments are binding
on parties subject to rights of appeal.
• If the use of a consensual process is not provided for in the contract
and cannot otherwise be agreed, the only alternative is litigation.
• Litigation will involve preparation for trial before a judge, and may
well be a lengthy, drawn-out and costly process.
Its advantages are:
 Possible to bring an unwilling party into the procedure
 Solution will be enforceable without further agreement
Its disadvantages are:
 Potentially lengthy and costly
 Adversarial process likely to damage business relationships
 Disputes : Causes and Resolutions
h) Litigation cont...
 Outcome is in the hands of a third party, the judge
• Remember, the court can now refer parties to mediation or another
form of alternative dispute resolution, if appropriate.
Alternative Dispute Resolution (ADR)
• Alternative Dispute Resolution is a commonly used term to include a
range of processes which involve the use of an external third party
and which are regarded as an alternative to litigation, however they
do not replace litigation. ADR is defined as, “a collective description
of methods for resolving disputes otherwise than through the normal
trial process”.
Except negotiation and litigation other methods of dispute
resolution can be considered as ADR.
 PPA/PPR Provision
Dispute Settlement Mechanism
• Dispute between the Contracting parties (Public Entity and
Contractor/ Supplier/ Service Provider/Consultants) to be
settled through mutual consent
• Contract to provide mechanism for dispute not settled by
amicable settlement.
• Dispute will be settled by Arbitration in accordance with
prevailing laws if no mechanism is stipulated in a contract
• The Employer and the Contractor shall attempt to settle
amicably by direct negotiation any disagreement or dispute
arising between them under or in connection with the
Contract.
 PPA/PPR Provision
Dispute Settlement Mechanism…

• Any dispute between the Parties as to matters arising pursuant to

this Contract which cannot be settled amicably within thirty (30)
days after receipt by one Party of the other Party‘s request for such
amicable settlement may be referred to Arbitration within 30 days
after the expiration of amicable settlement period.
• In case of arbitration, the arbitration shall be conducted in
accordance with the arbitration procedures published by the Nepal
Council of Arbitration (NEPCA)
 Dispute resolution procedure
Cost of construction disputes
• It has been estimated that across major infrastructure projects, the
average value of matters in dispute is 8-10 % of the contract’s price.
• The costs of disputes are not only borne by the client, designer or
contractor but through the community through additional taxes and
costly delays to the commissioning of vital projects.
Direct cost
• obtaining legal advice
• engaging experts and consultants
• the diversion of in-house resources while staff are engaged in
activities associated with the pursuit or defense of the claim
 Dispute resolution procedure
Cost of construction disputes cont…
• the preparation for the arbitral or court hearing.
Indirect cost
• the costs incurred by the parties as a result of delays to the project
• adverse performance of the project
• distraction and over burdening of staff on the project
• reduced morale
• erosion of trust and confidence in working relationships
• adverse impact on the reputation of the parties
• emotional impact on the people involved
• lost opportunities for future work
 Dispute resolution procedure
Indirect cost cont…
• destruction of business relationships
• loss of people to the industry because of wasted effort.
Avoidance of disputes
• Prevention is better than cure, so at the beginning of a construction
project, identify the potential risks and put in place procurement
strategies and contract structures that are most likely to allow the
project to progress smoothly.
Mitigation
• Should a dispute arise, recognizing the problem and dealing with it
quickly is key. Having the right expertise available to isolate and
manage issues swiftly will mitigate the effects of the dispute, thus
avoiding expensive and lengthy difficulties.
 Extension of Time: Principles and Practice
• Delay analysis
• Responsibility

Types of Delay

Delay

Excusable Delay Non excusable Delay Concurrent Delay

Compensable Delay

NonCompensable Delay
 Types of Delay …
• Excusable delay: delay beyond the fault of either the Contractor or the
owner; or not caused by Contractor’s negligence for which Time
compensation possible
 Delay not caused by either party
 Delay caused by Owner
 Delay caused by Engineer
• Non-excusable delay: delay reasonably foreseeable and within control
of the contractor for which no monetary compensation or time extension
will be granted.
 E.g. Slow progress, faulty workmanship, inadequate labor force, late
delivery of materials, failure to coordinate subcontractors
• Compensable delay: Excusable delay for which the Contractor may be
entitled Monetary compensation and Time extension
 Types of Delay
 E.g. Unforeseen ground conditions, Delay caused by Owner, Delay
caused by Engineer
• Non-compensable delay: excusable delay for which the contractor
may be entitled to an extension of time but no additional monetary
compensation.
– E.g. Adverse weather
• Concurrent delay : Concurrent delay is experienced when two or
more separate delay events occur during the same time period and
each, independently, affects the completion date.
• Several combinations of delays
• Resultant delay
– Detailed analysis of updated schedule
– Dominant cause, etc.
– The claimant has the proof of burden
 Compensation Events
• Delayed possession of sites
• Delayed issuance of drawings, specifications, instructions
• Employer instructs to uncover or to carry out tests upon work
which is then found to have no defect
• Employer unreasonably delays to approve subcontract to be let
• Unforeseeable ground conditions
• Delayed caused by other Contractors and Public authorities
• Delayed advance payment
• Effect of Employer’s risk
• Delayed issue of Taking Over Certificate
• Variations etc.
Liquidated Damages for Delay
Extension of Time: Provisions of PPA &PPR
• The Contractor to give notice at least 7 days prior to intended
completion date
• Analysis of situation (reasons of delay) by employer
• The employer shall give extension of time (EOT) if a
Compensation Event occurs
Authority to extend time
• Up to six month by tender approving authority
• Above six month by head of department
Priced acceleration proposal from contractor
• Only if there is provision in bidding document & EOT have to
be awarded
• If accepted, they are incorporated in contract & treated as
variation
 Termination of contract

To terminate a contract means to end the contract prior to the

parties performing all of their respective obligations required by
the contract, their duty to perform these obligations ceases to exist.
 Termination of contract …
• A contract is a legal document that binds at least two parties to one
another. A contract requires one or both parties meet obligations
detailed in the contract before it is completed. In some instances,
contract termination can occur that will make the contract void of
legal binding. Only the parties involved in the agreement may
terminate a contract.
• A Procurement contract shall specify the ground on which it may be
terminated.
Possible situations of terminating contract
a) Impossibility : If one party to a contract is unable to perform his or
her obligations due to the impossibility of such performance, he or
she may have a legal right to terminate the contract. The reason for
the impossibility of performance must not be the fault of the party
who finds it impossible to perform; due to either god act or third
party.
 Termination of contract …
Possible situations of terminating contract cont…
b) Fraud : Fraud occurs when one party intentionally makes a
false representation regarding a material matter of fact, upon
which the other party relies, and as a result is injured. The
representation must be false and made intentionally. It must also
be in regard to a material matter.
c) Breach of contract by the other party: If one party knowingly
fails to comply with the terms of the contract, the other may
terminate the contract. A breaching party has no right to
complain that the other has ended the contract, which he or she
breached.
 Termination of contract …
Possible situations of terminating contract cont…
d. Lack of capacity : A contract entered into by a party who lacks
capacity, or ability, to contract, such as a minor, or a person with a
mental illness, is voidable by the party who lacks capacity.
e. Illegality : A contract entered into for an illegal purpose is void.
This means that either party may terminate the contract at any
time, because legally, there is no contract.
f. Mutual mistake: If both of the parties make a mistake concerning
a material fact, the party affected by the mistake may terminate
the contract, so long as the other party has not yet performed.
 Termination of contract …
Provisions of Public Procurement Act, 2063 cont…
a) The grounds in which it may be terminated may include
termination of the contract by public entity on the grounds of
default of the supplier, consultant, service provider or the
construction entrepreneur in the performance of the work in
accordance with the procurement contract.
b) Termination of the procurement contract by the public entity on
the ground of convenience for public interest (“termination by
convenience”).
c) The ground on which the supplier, consultant, service provider or
construction entrepreneur may terminate the procurement
contract and
d) Termination of procurement contract on the ground of force
majeure event.
 Termination of contract …
Fundamental Breach of Contract
• Contractor stops work for more than 30 days (not shown on the
Current program and no consent from project manager)
• The employer or the contractor is made bankrupt or goes into
liquidation other than a reconstruction or amalgamation.
• Non payment for more than 90 days of date of payment certificate
• Contractor fails to correct the defect within a time prescribed by the
project manager
• Contractor does not maintain security which is required by contract
• Contractor delays the work by number of days for which maximum
liquidated damages can be paid
• Contractor involves in corrupt or fraudulent practices
 Termination of contract …
Consequence of termination
• Financial settlement and provision of damages in the event of
termination of procurement contract :
 Payment of any amount, if any, due and outstanding for any
work, delivery or service satisfactorily performed;
 Liability on the part of a defaulting supplier, consultant, service
provider or construction entrepreneur for increased cost to be
incurred by the public entity to do or cause to be done the work
set forth in the procurement contract.
 Actual amount of loss and damage suffered by the supplier,
consultant, service provider or construction entrepreneur from the
termination of the procurement contract by the public entity
without default on the part of contractor.
 Termination of contract …
Consequence of termination
• If the contract is terminated by convenience of the public interest
public entity shall make additional payment :
 Where there is provision of reimbursement of payment of any
expenditure, such actually spent expenditure;
 Value of goods prepared specifically for the public entity under
the procurement contract;
 Expenditure incurred in the termination of procurement contract
except profit lost. e.g. for the value of work done, materials
ordered, cost of removal of Equipment, repatriation of contractor’s
personnel and contractor’s cost of protecting and securing works.
• If the contract is terminated, the contractor shall stop the work
immediately, make the site safe and secure, and leave the site as
soon as possible.
 Closing of contract
• Closing contract means execution of various activities just before
ending the contract after the project is completed. Major steps to
be followed for closing contract are :
 Preparation of snag list (or punch list) of activities
 Achieving substantial completion
 Issuing taking over certificate (Starts defect liability period)
 Completion of activities in punch list
 Inspect and verify that the outstanding works have been
satisfactorily completed
 Remedy detected defects
 Closing of contract
 Final taking-over of project at end of defects liability period
 Issuance of defects liability certificate
 Final statement submittal after issuance of defects liability
certificate
 Submission of recoded drawings (as built drawing, maintenance
manuals & Warranties)
 Final payment
 Work completion report
 Final acceptance of work
 Issuing of work completion certificate
 Final Report
 Closing of contract
Substantial completion
• This term substantial completion, if used on the project, should be
defined in the contract specifications. Generally, it represents the
recognition that the project is “substantially completed” except for
certain minor punch list items which do not hamper the use of the
facility .
• Substantial Completion is defined as the scope of work that is
required by the Contract that has been completed except for work
having a Contract price of less than 1 percent of the adjusted total
contract price, or substantially all of the work has been completed
and opened to public use except for minor incomplete or
unsatisfactory work items that do not materially impair the
usefulness of the work required by the Contract.
 Closing of contract
Substantial completion cont…
• When the Contractor reaches “substantial completion”, the
Contractor will request a semi-final inspection of the work. The
Project Manager will inspect the work and inform the Contractor:
• If the Project is “substantially complete”, the PM shall immediately
prepare a written declaration to that effect and transmit this to the
Contractor, along with a Punch List.
• If the Project is not “substantially complete”, the PM shall inform
the Contractor that the project is not “substantially complete”. The
written notification (normally within 21 days after receipt of the
Contractor’s certification of “substantial completion”) shall list
outstanding or incomplete work items remaining that demonstrates
the project is not “substantially complete”.
 Closing of contract
Substantial completion cont…
• If the authority fails to respond by presentation of a written
declaration or itemized list within specified time, then the
contractor’s certification shall take effect as the authority’s
declaration that the work has been “substantially completed”.
Taking over certificate
• When it is declared that work is substantially completed, a written
commitment is taken from contractor to complete any outstanding
work in punch list in defect liability period and taking over
certificate is issued.
• Issuing of taking over certificate implies:
 The work is completed to the satisfaction of authority
 Transfer of insurance and care of work to employer
 Closing of contract
Issuance of defect liability certificate
• Defect liability period (DLP) starts from the date of completion of
the works certified.
• When defect liability certificate is issued, it should be understood
that the contract is effectively completed.
• It is issued after completion of defect liability period. Before issuing
defect liability certificate, the contractor shall:
 Complete the outstanding work on the date stated in taking over
certificate
 Rectify all kind of defects
• If the contractor fails to rectify defects and complete the outstanding
works, the job is carried out by employer using fund of performance
security and retention money.
 Closing of contract
Final payment
• Once work completed is accepted by the public entity, final payment
shall be made in accordance with terms of contract.
• In making final payment, performance security and 50 % of
retention money shall be returned after expiry of defect liability
period. The remaining 50 % of retention money shall be returned
upon submission of evidence issued by the concerned inland revenue
office that income returns have been submitted.
Work completion report
• No later than 30 days after completion of a construction work the
contractor shall submit an as built drawing of the work.
 Closing of contract
Work completion report cont…
• After expiry of DLP, following the completion of construction work,
the chief of public entity shall have a technical employee to examine
and inspect whether the construction work is in compliance with
agreement or not.
• The technical employee shall submit a report to chief of public
entity.
• The concerned public entity shall submit the as build design and the
submitted work completion certificate to tender approving authority,
and to the one level higher authority if chief and chief of PE is same
person.
• After examining the work by technical expert if required, such
authority shall accept work within 45 days of submission of the
report
 Closing of contract
Environmental checklist for close out
• The PM is required to fill out an environmental checklist before
the project can be closed out.
Lesson learned
• The PM is required to record and complete a lessons learned form
for both professional services and construction contracts prior to
contract close out.
• During project closeout, PM is required to fill out the form, and
archive the lessons learned with the project records.
• Final Contractor Performance Evaluation Rating Sheet - The
Project Manager must complete a Final Contractor Performance
Evaluation Rating Sheet, which reviews the performance of the
Contractor.
Any Question?