CONSTRUCTION CONTRACTS CONSTRUCTION CONTRACTS

DOCUEMENTS DOCUEMENTS
APPLIED CIVIL ENGINEERING DEPT APPLIED CIVIL ENGINEERING DEPT
BY
LECTURER
Maha Muhaisen
Resources Resources
p Construction Documents and Contracting, Joseph D.
Coleman , 2004, Prentice Hall
p Construction Contracts, Keith Collier, 1987, Prentice
Hall
p Construction Management, by Daniel W. Halpin and
Ronald W. Woodhead, 2nd Edition , John Wiley & Sons
p Fidic Conditions of Contract for Construction, FOR
BUILDING AND ENGINEERING WORKS DESIGNED BY
THE EMPLOYER, 2005
p Fidic Tendering Procedures, prequalification, tendering
and award the contract, 1994.
p Handouts and lecture notes
Grades
Research Projects & homework 30 %
Midterm Exam. 30%
Final Exam. 40%
Course Outline Course Outline
1. Introduction to construction project stages, overview of
the construction contracting methods, and contracts
types.
2. Bidding document
n Invitation to bid
n Instruction to bidders
n Information to bidders & bid data
n Biding Forms
n General conditions of contract
n Specific condition of contract
n Specification
n BOQ
n Drawings
n Contract forms
3. Methods of Tendering, Bidding and Awarding
4. Contract Documents and Conditions
5. FIDIC Form of Contracts
Introduction to Construction Project
Stages
Lecture (1)
Major Project Phases Major Project Phases
p The major phases in the project cycle that are common to most design
and construction projects are :
Project Planning
Design
Schematic Design
Design Development
Contract Documents
Construction Procurement (Bidding Phase)
Construction
Post Construction
Construction Project Characteristics Construction Project Characteristics
Construction projects are different than other types of
projects due to the following characteristics;
v Construction projects are complex undertaking.
v Every construction project is unique.
v Construction projects involve a lot of uncertainties,
lack of information and variables.
Project Life Cycle
Most of Construction projects life-cycle have common
characteristics, Construction projects start with low cost and
resources, high risk and uncertainty.
The life-cycle of a typical construction project could be summarized
as following :
Stage I : represents the project formulation, feasibility studies,
and the strategic decisions needed for project continue.
Stage II : represents planning, basic design, budgeting,
tendering and placing the project major contracts.
Stage III : involves the construction phase of the project,
equipment installation and testing.
Stage IV : represents the final phase in the project which
includes the project turnover, final testing and start-up.
Project Life Cycle
P
e
r
c
e
n
t

C
o
m
p
l
e
t
e
Stage I
Stage II Stage III Stage IV
Project "GO"
Decision
Major Contracts
Let
Installation Substantially
Complete
Full
Operations
Feasabilit y
- Project Formulation
- Feasabiltiy Studies
- Strategies Design &
Approval
P lanning & Design
- Base Design
- Cost & Schedule
- Contract Terms &
Conditions.
- Detailed Planning
Turnover
& St art Up
- Final Testing
- Maintenance
Const ruct ion
- Manufacturing
- Delivery
- Civil Work
- Installation
- Testing
Figure 1.1 : Construction Projects Life-Cycle (Ref: PMBK, 2000)
Construction Contracting Method Construction Contracting Method
(delivery methods) (delivery methods)
Traditional Approach (D-B-B):
The most common delivery system is called the
traditional or standard approach or design-bid-
build, in which the employer assigns the design and
construction phases to two different firms
(consultant/designer and contractor).
Constructing
Designing
Appointing
Consultant
Appointing Main
Contractor
Traditional Approach (D-B-B):
v For many years, DBB has been the most common method of
project delivery for public projects, and for many private projects
as well.
v Design Bid-Build is effective on projects
n where the owner needs both professional design services and
construction services
n where the designer does not require detailed knowledge of the
means and methods of construction.
v DBB provides the owner with a high degree of control. Thats why
it is the preferred project delivery system for owners who:
B): B): -- BB -- Traditional Approach (D Traditional Approach (D
The owner defines project goals and objectives, secures the financing,
and specifies the standards and contract terms.
The owner may perform planning, conceptual design and full design,
or may engage an outside design professional (designer) for some or
all of these tasks.
During this planning and preliminary stage, owner and designer work
as a team to obtain required permits and conduct necessary site
investigations.
The designer prepares the construction bid documents to reflect the
owners project goals and objectives, the projects site conditions, and
sound engineering practices.
Prospective contractors prepare their bids from these complete and
specific bid documents.
The bidders submit their proposals to the owner, who determines the
most responsive (typically the lowest) bid meeting project
requirements.
In certain circumstances, owner may be justified in selecting a
contractor outright and negotiating contract terms directly.
Advantages of D Advantages of D--BB--B Approach B Approach
x Applicable to a wide range of projects.
x Well established and easily understood.
x Clearly defined roles for all parties.
x Provides the lowest initial price that competitive
bidders can offer.
x Extensive litigation has resulted in well established
legal precedents.
x Insurance and bonding are well defined.
B Approach B Approach -- BB -- Disadvantages of D Disadvantages of D
Least-cost approach requires higher level of inspection.
Initial low bid might not result in ultimate lowest cost or
final best value.
Designers may have limited knowledge of the true cost
and scheduling implication of design decisions.
Build Approach Build Approach -- Design Design
Design-build approach is a project delivery system involving a
single contract between the project employer and a
design-build contractor covering both the design and
construction of a project.
The design-builder performs design, construction engineering,
and construction according to design parameters,
performance criteria and other requirements
established by the employer or his representative.
Constructing Designing
Appointing design & construction
contractor
Tendering
Design Design--Build Approach Build Approach
The owner contracts with a single entity to provide the design
and to construct the project according to that design.
The contract might be negotiated with a single design-builder
or result from competitive proposals.
The selection can be based on low price or on a set of value
criteria (experience, staff, bonding capacity, etc.).
Design-build provides the owner with a single point of contact
for project responsibilities, eliminating the need to assist in
resolving designer-contractor disputes.
With the contractor playing a major role in design, costs are
typically defined and maintained to a greater degree, and the
coordination of fast-track management to achieve early
completion is greatly simplified.
The design-builder makes many decisions that owner would
make under DBB, due to delegation of greatly increased
authority.
Design Design--Build Approach Build Approach
p For many owners, delegation of responsibilities leads to
satisfactory projects. However, if the parties are
inexperienced and do not cooperate, the transfer of control
and risk can be disappointing.
p The owner may need to restructure his/her internal
procedures to accommodate design-build approach.
p Compared to DBB, this involves a significantly different set
of requirements and expectations for process, timelines and
communications.
p A clear understanding and documentation of design-build
processes enhances the quality of design-build projects
Advantage of Design Advantage of Design--Build Approach Build Approach
pInnovation and quality improvements through:
- Alternative designs and construction methods
suited to the contractors capabilities
- Flexibility in the selection of design, materials, and
construction methods.
Earlier schedule and cost certainty
Disadvantage of Design Disadvantage of Design--Build Approach Build Approach
G Reduced opportunities for smaller, local construction firms.
G Fewer competitors and increased risk may result in higher
initial costs.
G Elimination of traditional checks and balances. Quality may
be subordinated by cost or schedule considerations.
G Less Engineer control over final design.
G Higher procurement costs.
G Traditional funding may not support fast-tracking
construction or may require accelerated cash flow.
G Accelerated construction can potentially overextend the
workforce.
Others
pp Turnkey Turnkey
pp Turnkey Variations Turnkey Variations
pp Direct Labor Approach. Direct Labor Approach.
pp Construction management Construction management
Turnkey
p Turnkey adds to the design-builders
responsibilities the operation and/or maintenance
of the completed project.
p Turnkey delivery has the potential for bringing a
new project on line more quickly.
p Three forms of turnkey project delivery:
n Design-build-operate-transfer
n Design-build-operate-maintain
n Design-build-own-operate-transfer
Turnkey Variation
p Variations on turnkey add financing as a key
component. While financing arrangements are
unique for each project, developer financed
projects generally resemble one of the turnkey
delivery methods:
n FDBT (Finance, design, build, transfer)
n FDBOT (Finance, design, build, operate, transfer)
n FDBOOT (Finance, design, build ,own, operate, transfer)
p In each case, the transfer of the project occurs
only after the developers interests and financial
obligations have been satisfied.
Assignment ( Assignment (11))
p Describe the turnkey methods, turnkey
variation methods, direct labor approach,
and construction management method,
highlighting on advantage and
disadvantage of each one.
2
nd
lecture
p The contract, and contract types,
overview of the construction documents.
Contract Definition Contract Definition
p Agreement of at least two parties with purpose of
creating legal obligation between the parties and
capable of being enforced by the court of law.
p Contract = offer + acceptance + consideration
Introduction to contracts Introduction to contracts
Why Use contract in construction:
v Describe scope of work
v Establish time frame
v Establish cost and payment provision
v Set fourth obligations and relationship
v Minimize disputes
v Improve economic return of investment
Content of the contract Content of the contract
o Identify the parties
o Promises and responsibilities
o Scope of work
o Price and payment terms
o Commercial terms and conditions
o Project execution plan.
Major Contract Types (traditional)
Lump Sum Contract
p One price for the whole contract
p Lump sum includes costs plus overheads and profits
p Higher risk to contractor
p Price quoted is a guaranteed price as per contract
documents.
p Payment based on a scheduled percentage scheme
(monthly progress claims)
p The contractor is free to use means and methods to
complete the work and responsible for proper performance
p Work must be well defined at bid time.
p Fully developed plans and specifications
Lump Sum Contract/ advantage
p Low risk on the owner, Higher risk to
the contractor
p Cost known at outset
p Contractor will assign best personnel
p Contractor selection is easy.
Lump Sum Contract/ disadvantage
p Changes is difficult and costly.
p Contractor is free to use the lowest cost of
material equipment, methods.
Unit Price
v Quote Rates / Prices by units
v No total final price
v Re-negotiate for rates if the quantity or work
considerably exceeds the initial target
v Payment to contractor is based on the measure.
v Unbalanced bids
v Higher risk to owner
v Ideal for work where quantities can not be
accurately established before construction starts.
Unit Price contract
v Require sufficient design definition to estimate
quantities of units
v Contractors bid based on units of works
v Time & cost risk (shared)
Owner : at risk for total quantities
Contractor : at risk for fixed unit price.
v Large quantities changes (>15-25%) can lead to
increase or decrease of unit price.
Unit Price / Requirement
p Adequate breakdown and definition of work units
p Good quantity surveying and reporting system.
p Adequate drawings.
p Experience in developing BOQ
p Payment based on the measurement of the finished
works.
p Quantity sensitive analysis of unit prices to evaluate
total bid price for potential quantity variation.
Unit Price / advantages Unit Price / advantages
p Suitable for competitive bid
p Easy for contract selection
p Early start is possible
p Flexibility : quantities and scope can be easily
adjusted
Unit Price / disadvantages Unit Price / disadvantages
vFinal cost not known from the beginning (BOQ
only is estimated)
vStaff needed to measure the finished quantities
and report on the units not completed.
vUnit price sometime tend to draw unbalanced bid.
(For Unit-Price Contracts, a balanced bid is one in which each bid
is priced to carry its share of the cost of the work and also its
share of the contractors profit.
Contractors raise prices on certain items and make corresponding
reductions of the prices on other items ,without changing the total
amount of the bid)
Cost Plus
1. Actual cost plus a negotiated reimbursement to
cover overheads and profit.
2. different methods of reimbursement :
Cost + percentage
Cost + fixed fee
Cost + fixed fee + profit-sharing clause.
3. Higher risk to owner
4. Compromise : guaranteed maximum price
(GMP) reduces risk to owner while maintain
advantage of cost plus contract.
5. By using this type of contract the contractor can start
work without a clearly defined project scope, since all
costs will be reimbursed and a profit guaranteed.
Cost + Percent of Cost
nFee = percentage of the
total project cost
p(Cost = $500.000,Fee =
2%)
Advantages Advantages Disadvantages Disadvantages
profitable for profitable for
the contractor the contractor
No incentive No incentive
to finish job to finish job
quickly quickly
Owner does Owner does
not know total not know total
price price
Larger the Larger the
cost of the cost of the
job, the job, the
higher the fee higher the fee
the owner the owner
pays pays
Cost + Fixed Fee
p Fee = percentage of the
original estimated total figure
n Utilized on large multi-
year jobs
n Ex: WW treatment plant
Facility (Cost = $20
million, Fee = 1%)
n $20 Million 1% fee =
$200,000 Million
Advantages Advantages Disadvantages Disadvantages
Fee amount is Fee amount is
fixed fixed
regardless regardless
of price of price
fluctuation fluctuation
Expensive Expensive
materials and materials and
construction construction
techniques may techniques may
be used to be used to
expedite expedite
construction construction
Provides Provides
incentive to incentive to
complete complete
the project the project
quickly quickly
Cost Plus Fixed Fee
n Most common form of negotiated contracts
n COST = expenses incurred by the contractor
for the construction of the facility
p Includes: Labor, equipment, materials, and
administrative costs
n FEE = compensation for expertise
p Includes: profit
Cost + Fixed Fee +
Profit-Sharing Clause
n Rewards contractors
who minimize cost
n Percentage of cost
under GMP is
considered profit
and shared with the
contractor
p Guaranteed Maximum
Price (GMP)
p % of profit sharing is
specified in contract
Advantag Advantag
es es
Disadvantages Disadvantages
Provides Provides
incentive incentive
to the to the
contracto contracto
r to save r to save
money money
Contractor Contractor
must absorb must absorb
any any
amount over amount over
the GMP the GMP
Plans & specs. Plans & specs.
need to need to
detailed detailed
Cost + Fixed Fee +
Profit-Sharing Clause
variation of this type of contract is called variation of this type of contract is called a guaranteed a guaranteed
maximum price ( GMP) . maximum price ( GMP) .
pp In this type of contract the contractor is reimbursed at cost In this type of contract the contractor is reimbursed at cost
with an agreed with an agreed--upon fee up to the GMP, which is essentially upon fee up to the GMP, which is essentially
a cap; beyond this point the contractor is responsible for a cap; beyond this point the contractor is responsible for
covering any additional costs within the original project covering any additional costs within the original project
scope scope
pp An An incentive clause, incentive clause, which specifies that the contractor which specifies that the contractor
will receive additional profit for bringing the project in will receive additional profit for bringing the project in
under the GMP. under the GMP.
Construction Documents
u Bidding requirements
u Notice to Bidders
u Instruction to Bidders
u Proposal Form
u Contract Documents
u Contract Forms
u Conditions of the Contract
u Specifications
u Drawings
u Addenda
u Change Orders
u Agreement.
Construction Documents
p Construction Documents are defined as the written and graphic documents
prepared or assembled by the A/ E for communicating the design of the
project and administering the contract for its construction.
p 2 major groups
1.Bidding Requirements
Used to attract bidders & explains bidding process
2.Contract Documents
Legally enforceable requirements that become part of the contract
Include all construction documents except bidding forms
CONSTRUCTION DOCUMENTS
CONSTRUCTION DOCUMENTS
BIDDING REQUIREMENTS
BIDDING REQUIREMENTS
Bidding Requirements are used to attract bidders and explain the procedures to be followed
in preparing and submitting bids .
Bidding requirements help bidders follow established procedures and submit bids that will
not be disqualified because of technicalities. They do not become part of the contract
documents
Bidding documents
All of the construction documents issued to bidders before the signing of an owner-
contractor agreement.
Bid Package
Documentsavailabletothecontractor andonwhichhemust makeadecisiontobid
or not
A set of plans and technical specifications, Proposal form, general conditions,
special conditions,
Descriptionof theproject tobeconstructed
BidPackageispreparedby: