CC202 CONTRACT PROCEDURE

CHAPTER 3
CONTRACT PROCEDURE

CONTRACT PROCEDURE

Definition of Contract
o Contract is an agreement occurred when one parties agrees
to accept an offer from another parties.
o While in terms of construction, contract is a binding
agreement between two parties which is contractor and
owners to carry out works. The contractor will perform the
work perfectly, and the owner will be responsible for making
payment for the completed works. This agreement made in
handwritten documents that using legal forms.

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Principles of contract
Based on Contracts Act 1950 (Revised 1974) there are several principles
of contract should be known as below :

Offer
According to the Contracts Act 1950 (Revised 1974) - Section 2 (A), an
offer is made when one person(parties) made the proposal and expressed
willingness to another persons about its intention to made or refraining
from making something with the purpose of obtaining approval from the
parties.

Acceptance
Based on Contracts Act 1950 (Revised 1974) - Section 2 (B), acceptance
occurred when proposal opinions submitted by the proposes being accepted
and assented by the party that receiving the proposal without any
conditions . Conditional acceptance is invalid and not enforceable by
contract law. A accepted proposal becomes an agreement.

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Consideration

Consideration is an action taken by the recipient to accept the offer.

Acceptance of an offer usually made by orally, in writing or by actions.
Intent
The intent is to create relations between the two parties such as
sincere, honest and trustworthy and does not against conditions of
contract agreement.
Approval is valid under the law
Any agreement between the proposes and the receiver must not against
law of the country. Agreement that violates state law is invalid and can
not be enforced in accordance with the Contract Act 1950 (Revised
1974).

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Contract can be implemented

Before a contract being enforce, both parties involved should ensure that
the agreements will not burdened any parties that can lead to some
problems for one or both sides.

There is no disablement to both sides

Disablement is a record or performance in the past. Actions such as
careless work, against the contractual agreement, exceeding the completed
time accoding with contractual agreement and others are part of the
disablement.

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The connections between contract and tender

Tender is a method to invite contractors to submit their prices/rates
based on an offer made by owners/clients. The document is known as
Tender Documents.
When the tender prices has been agreed between the owner and the
contractor, an agreement is made by Contract Document. This document is
important because its explain the responsibilities of each parties that
involved according with the contract.

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Types, characteristics, requirements, advantages and disadvantages of
acquisition (procurement)

Contract is important due to size and difficulty in construction industry

nowadays. Usually construction works nowadays involving a lot of skilled
workers , modern machinery and plants, and also the use of small
contractors or well known as sub-contractors. There is various types of
contract being implemented in construction industry as stated below : -

Contract Documents based on Bills of Quantities-BQ

This is a common type of contract. Basically construction drawings/plans

are prepared and all work items and quantities specified in the tender
documents before tenders being sold open to the contractors. Tenderers
who participated in the tender will determine the price for the details of
the work in the Tender Documents. Bills of Quantities can divided into
some fraction from the total tender prices for example divided by each
building elements such as external walls, internal walls, frames, windows,
doors, staircases, roofing and other.

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Advantages :
Both parties can easily understand each field of work when using the
contract documents based on Bills of Quantities
The price rates contained in the contract documents act as a basic for
assessing interim payment for the works done by contractor and also
for variation order/work changes.
Contractors can use the list of Bills of Quantities for calculating the
quantity to purchased materials.
Contractors also would be able to determine the quotations from sub
contractors.
Contractor can determine its scope of works according with contract
document.
Disadvantages :
Quantity Surveyors and architects take a long time to prepare
construction drawings and contract documents based on bills of
quantities.
This contract may only be used if owner and consultants had enough
time to prepare construction drawings and Bills of Quantities-BQ
projects.

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Contract Documents based on Drawings and Specifications.

In this contract, the contractor is required to carried-out works for each

element according with prices of the tender being submitted previously.
For this types of contract, tenderers are not provided with Bills of
Quantities but given the standard schedule of rates attached in the tender
documents. Details of the work can be found in construction drawings while
the method /scope of works described in the specification.
Schedule of rates to be used as a basis for assessing the progress of
interim payment for the completed and variation orders. If the changes of
works (Variation Order) that exists not listed in the standard schedule of
rates, quantity surveyor will consult with the contractor to agree a suitable
prices.

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Turnkey Contract

Turnkey contract is a contractual agreement where the chosen contractor

had a responbilities from the beginning to the end of the construction
works. Usually this types of contract, the chosen contractor had to plan,
design and observe until the project completed successfully according with
contact documents.. There are few factors why the turnkey contract was
introduced:
i. urgent need of a specific project

ii. owners lack of the specialist group.

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Advantages :

Reduce the project time. Time savings can be made because the contractor
is fully involved in the construction process from beginning to end.
Contractor involvement at an early stage can ensure the success of the
project. Contractors can give their views and opinions entirely related to
construction projects.
To reduce the direct involvement of the owners on matters related to
technical problems, cost, time and other.
Disadvantages :

The price for a project is high compared with the traditional system.
Could affect the participation of local consultants as the turnkey
contractor normally will appoint its own consultants.
Local and Bumiputera contractors hardly to take part because have to
compete with more established contractors.

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Cost Reimbursement Contract

Cost reimbursement contracts, also known as Cost Plus Contract. This

contract means that the repayment of the cost made by the contractor.
This includes the cost of materials, plant and labor which is called prime
cost sum with added administrative expenses to gain profits and overhead
Suitable for complex projects and to be completed soon.
Overhead expenses include:
manager salary
rental offices
Tools / office equipment
bills such as electricity, telephone, water, etc.
insurance
Taxes
Bank Interest
car allowances, transportation, travel, etc.

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This type of contract can be divided into three types: -

a) Prime Cost Sum + Fixed Fee.

Contractors has been paid by the actual construction cost plus the
costs of profits and overhead. Both parties should agree with the costs
of profits and overhead either by tender or negotiation.
Prime Cost Sum + Fixed Fee

RM

1. Labour Cost

39000

2. Material Cost

59000

3. Sub-contractor cost

10000

4. Machinery and plant

2000

RM

110000

added fixed fee

15000

Project costs

125000

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Prime Cost Sum + Percentage Fee

This type of contract can be

divided into three types: -

RM

1. Labour Cost

40000

(+) 25%

10000

2. Material Cost

60000

(+) 10%

6000

3. Sub-contractor cost

10000

RM

50000

b) Prime Cost Sum +

percentage fee.

Contractors has been paid based

on actual construction works
plus the costs of profits and
overhead based on percentage
that being agreed by both
parties earlier. The fee
percentage is calculate from the
actual construction costs. If
the owner spent big on prime
cost sum, contractor will get a
big amount of money.

66000

(+) 5%

500

10500

4. Machinery and plant

2000

2200

(+) 10%

200

Project costs

128700

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c) Prime Cost Sum + target fee

For this type of contract the target cost of a construction works must be
agreed by the owner and contractor. This type of contract has a incentives
factor to encourage contractors save profits and overhead costs by
present construction cost less than estimates cost.. But the contractor will
be fined /deduction of a sum which should be accepted if the construction
cost exceeds the target cost. By this way the contractor has the initiative
to reduce construction costs and accelerate completion of the project to
get bonus.

important things that must be agreed in this contract:

total cost targets
payable bonus or penalty
quality of work to be accomplished

CONTRACT PROCEDURE

Prime Cost Sum + cost target

(cost target RM 110,000)

Prime Cost Sum + cost target

RM

RM

(cost target RM 110,000)

RM

1. Labour Cost

38000

1. Labour Cost

41000

2. Material Cost

58000

2. Material Cost

58000

3. Sub-contractor cost

10000

3. Sub-contractor cost

10000

4. Machinery and plant Cost

2000

4. Machinery and plant Cost

2000

Negotiate fee

15000

Negotiate fee

15000

(+) 20% of RM 2000

400

108000

15400

(RM 110000 - RM 108000)

Project costs

(+) 20% of RM 1000

(-)200

RM

111000

14800

(RM 110000 - RM 111000)

123400

Project costs

125600

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domestic subcontractor

Differences between domestic subcontractor and nominated subcontractor

nominated subcontractor

there Is no
contract
bond

contract bond is
occurred

payments receiced

payment made by
owner

work progress
payment

depend on main
contractor

based on
completed
works

appointment

main contractor

owner/project
developer

contractor right on
payment

through main
contractor

through subcontractor

main contractor
responbility

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The types of Form of Contract

Usually for Public Work Department (JKR)
JKR 203Sem. 10/83( PWD 203-Rev. 10/83)
PWD 203 Rev. 2007 (LATEST)

JKR 203a-Sem. 10/83( PWD 203a-Rev. 10/83)

PWD 203a Rev. 2007 (LATEST)

THE END