CONTRACT

Contract

A contract is the agreement entered into voluntarily by two or more parties

who promise to exchange money, goods, or services according to a specified
schedule and are legally enforceable.

Contractor: A person or a firm who undertakes any type of contract.

Essentials of a Valid Contract

1. There must be mutual agreement between the two parties,

2. There must be an offer made by one party called the promisor.
3. The other party called the “promise” must accept the offer.
4. There must be considerations, which usually, payments in the form of
money for doing of an act or abstinence from doing a particular act by
promisor for promise.
5. The offer and the acceptance should relate to something that is not
prohibited by law.
6. The offer and acceptance constitute an agreement that when enforceable by
law becomes a contract
7. The contracting parties entering into agreement should be competent, i.e.
not disqualified by either infancy or insanity to make such agreement
Forms of Contract:
Contracts offered by PWD departments are mostly of following types:
1. Lump sum contract
2. Schedule contracts or Item Rate contract
3. Percentage Rate Contract
4. Labour contract
5. Materials supply contract

1.Lump sum contract (/Drawings and Specifications Contract)

In this type of contract, the contractor undertakes the construction
work or the execution of the specified work and completes it in all respects for
a fixed amount of money. Detailed specifications of all items of works, detailed
drawings, plans etc., are supplied by the department to the contractor. The
contractor on the basis of given details, works out the total cost of the
construction and quotes it in lump sum. The design, shape and materials are
as per the choice of contractor, but they have to be got approved before the
start of the work.
Advantages:
 The final price is known, by the owner, before the work commences.
 The contractor has more incentive to reduce his cost to increase the
profit.
 The contractor hopes to complete the job as quickly as possible, to
minimize overhead, to maximize profit and to move to the next Job.
 When level of risks is low and quantifiable, and
 When the client does not wish to be involved in the management of his
project.
  That can be accurately and completely described at the time of bidding
such as residential and building construction.
 When limited variation is needed.
 The materials used on the temporary works during construction are
relieved earlier resulting in their effective use in other works also.
Disadvantages:
 The owner tries to get the maximum work out of money he spends,
whereas the contractor tries to get the maximum profit, this causes
conflicting interests.
 It becomes very difficult to adjust the additions and alterations in the
plan and the specifications at a later stage.
 If the plans and specifications are not clear, the contractors will quote
higher rates, resulting in high cost of the work.
 The contractor carries much of the risks. The tendered price may
include high risk contingency.
 Competent contractors may decide not to bid to avoid a high-risk lump
sum contract.
2.Item Rate Contract (unit price)
In this type of contract, the contractor undertakes the work on the item
rate basis. The payment is done on the basis of quantities of items done and
payments are made on the basis of their respective rates. The quantities of
various items are worked out by detailed measurements. This type of contract
is also known as unit price contract. The approximate quantities of all possible
items of work are worked out and are shown in the tender form. Every
contractor quotes his rates against each item are arrives at the final total
amount of the work. This is the most common type of contract system, which
is widely adopted.
Advantages:
 The additions and alterations in the plan and specifications can be easily
made at any stage.
 As the contractor gets the payment against the actual quantities of items
done by him, the method is economical. No possibility for excess
payment. As the rates are item-wise the contractor is not worried
regarding the uncertainties in the plan and specifications.
 The work can be started after accepting the tenders without waiting for
all the detailed drawings and specifications.
Disadvantages:
 The total cost of the work can only be computed after completion of
entire project. In such case the owner may face financial difficulties if
final cost increases abnormally.
 Before preparing the bills for payment of money to the contractor, all
measurements of various items of work have to be carefully taken and
suitably entered in the measurement book.
 Great care shall be taken by the department officers to strictly enforce
the specifications during execution of work to avoid the using of
substandard materials by the contractor.
 Contractor raises prices on certain items if he apprehends the quantity
of those items is likely to increase during execution and make
corresponding reductions of prices on other items, whose quantity
likely to reduce during execution. This increases total cost of the project.
3.Percentage Rate Contract (cost-plus percentage)
In this type of contract the contractor agrees to take the work of
construction for fixed percentage over the actual cost of construction. This
type of contract is given when no contractor is agreeing to do work on other
types due to uncertainties and fluctuations in the market rates of materials
and labour. The department keeps the actual up to date records of the
expenditure incurred on the work and pays the fixed percentage as agreed
over it to the contractor. The contractor arranges for the labour, materials
required for completion of the work, and maintains proper account of the
construction costs.
The cost plus or percentage contracts can be of the following types:
a. Fixed Percentage of Cost
Contractor is paid the actual cost of the work and agreed percentage in
addition to allow for profit.
b. Cost plus a fixed sum
The contractor gets actual cost of construction plus an amount of fee (in
percentage of construction cost) which is inversely variable according to
increase or decrease of estimated cost agreed first by both the parties.
c. Cost plus a fixed sum with profit sharing
In this type of contract the contractor is reimbursed at cost with an agreed
upon fee up to the GMP (Guaranteed Maximum Price) which is essentially a
cap. Beyond this point the contractor is responsible for covering any
additional cost within the original project scope. Additionally an incentive
clause is there, which specifies that the contractor will receive additional
profits as reward to the contractors who minimizes the cost.
d. Cost plus variable percentage
Contractor is paid the actual cost of the work and a variable percentage in
addition to allow for profit. Variable percentage allows the contractor to get
better profit for completing the work at minimum cost.
4.Labour contract
In this type of contract, all materials for the construction are arranged
and supplied at the site of work by the department or owner. The labour
contractor engages the labour and gets the work done according to
specifications. The contract is on item rate basis for labour portion only. The
contractor is paid for the quantities of work done on measurement of the
different items of work at the stipulated rate as in agreement. Contractor uses
his own tools for working. Plants and machineries are arranged by the
department or owner. This system of contract is not generally adopted in
government works but preferable for private sectors
5.Materials supply contract
In this form of contract, the contractors have to offer their rates for
supply of the required quantity of materials, inclusive of all local taxes,
carriage and delivery charges of materials to the specified site within the time
fixed in the tenders.
Factors Influencing Selection of Contract System
 Quantity and quality of work
 The appropriateness for providing an adequate incentive for efficient
performance by the contractor
 The ability to introduce changes
 The allocation of risks
 The start and completion date of the project

Contract Documents
Following documents are included in the contract documents.
1. Title page: Name of work, contract bond number, etc.
2. Index page: Content of the agreement with page references.
3. Tender notice: Giving brief description of work, etc. Usually 2% of the
estimated cost is deposited along with tender.
4. Tender form: Contractor’s rates and time of completion, penalty clause, etc.
5. Bill of quantities: Giving quantities and rates of each item of work and the
total cost of the whole work.
6. Schedule of issue of materials: Giving list of materials to be issued to the
Contractor with rates and place of issue.
7. General specifications: Specifying the class and type of works.
8. Detailed specifications: Each item of work and of each material to be used
in the work.
9. Drawings: Complete set of drawings like plans, elevations, etc. and site
plan, of fully dimensioned

Conditions of Contract
 Both parties of a construction team should be fully acquainted with
their rights and duties. So while preparing the contract agreement, certain
clauses related to the work are laid down and these will be binding on both
parties. The main purpose of the conditions of contract is to avoid dispute and
keep the parties as far as possible out of the court of law.
Therefore it is imperative that all the clauses of conditions of contract
must be precise and definite and there should not be any room for ambiguity
or misconstruction therein.
The conditions of contract mainly depend upon the nature of the work. For
most of the civil engineering construction projects following clauses are
mostly provided in the contract documents:
1. Rates inclusive of materials, labour, etc.
2. Amount of security money
3. Time for completion of work
4. Progress to be maintained
5. Penalty for bad work
6. Mode of payment
7. Extension of time limit for delay
8. Termination of contract
9. Compensation to labour, minimum wages, etc