CHAPTER FOUR
CONTRACT ADMINSTRATION
1.Contract Documents
A construction contract consists of the following main documents:
1. Agreement
2. Conditions of the contract (usually general condition and special conditions).
3. Plans
4. Specifications
1. Agreement:
The agreement describes the work to be performed, the required completion
time, contracts provisions for progress payments and final payment, and lists
the other documents making up the complete contract.
2. Conditions of the Contract:
● General conditions: The general conditions contain those contract
provisions applicable to most construction contracts written by the owner.
● Special conditions: The special conditions contain any additional contract
provisions applicable to the specific project.
● Special Conditions
This is usually an extension of the contract and an addendum to the
General Conditions. The Special Conditions document should specify
certain conditions and clauses that pertain to specific portions of the job.
For example, if there are specific instructions that apply to only one
portion of the job, the Special Conditions section is where this will be
described.
The cost savings resulting from value engineering proposals accepted by the
owner are shared between the contractor and owner on the basis specified in
the contract.
These and other documents are shown in Fig. 4.1
Fig. 4.1 Contract Documents
2. Contract Time (period)
Number of working days or calendar days, from a specified commencement date to a
specified completion date, as provided for in a contract. Also called contract time.
Commencement date ...
Completion date ......
The time allowed (expressed as either days allowed or as required completion date)
for completion of a construction project is normally specified in the contract along
with the phrase "time is of the essence".
If no completion date is specified, a "reasonable time" as interpreted by the courts, is
allowed.
If the phrase "time is of the essence" is included in a contract and the project is not
completed within the specified time the contractor is liable for any damages
(monetary loss) incurred by the owner as the result of late completion.
- In such a case, the courts will hold the contractor responsible for the actual
damages that the owner incurs.
-
- A liquidated damages clause in the contract may be used to simplify the
process of establishing the amount of damages resulting from late
completion.
- Such a clause will specify the amount of damages to be paid by the
contractor to the owner for each day of late completion.
- If challenged in court, the owner must prove that the amount of liquidated
damages specified in the contract reasonably represents the owner's actual
loss.
- If the liquidated damages are shown to be reasonable, the courts will
sustain their enforcement.
3. Time Extension
Construction contracts normally contain provisions for time extensions to
the contract due to circumstances beyond the control of the contractor,
such as
- owner-directed changes
- acts of God (fire, flood, etc.) and
- strikes.
- The purpose of such provisions is, of course, to reduce the contractor's risk
from events beyond his control.
- If such provisions were not included, the contractor would have to increase
his bid price to cover such risks.
- It should also be pointed out that the owner is financial responsible to the
contractor for any owner-caused delay (delays and changes are discussed
later).
Time Extension From FIDIC
Extension of Time for completion
In the event of:
a) The amount or nature of extra or additional work; or (owner order)
b) Any cause of delay referred to in these conditions; or
c) Exceptionally adverse climate conditions; or
d) Any delay, impediment or prevention by the employer (owner or Employer);
e) Other special circumstances which may occur, other than through a default of
or breach of contract by the contractor or for which he is responsible.
4. Delay
delays are considered as time lag in completion of activities from its specified time as
per contract
or can be
defined as late completion or late start of activities to the baseline (planned) schedule,
directly affecting specified cost.
Delay Penalty
is an amount of money or portion of the contract price to be paid to the owner (buyer)
by contractor (seller) when the contractor fails to fulfill an agreed completion or
delivery date. (Called as the Liquidated Damage)
Classification of delays
1. Excusable compensable (time or cost, or both) delays
2. Excusable non-compensable delays
3. Non-excusable delays
4. Concurrent delays
5. Plans and Specifications
Plans (plans, sections and elevations = working drawings)
- Construction plans are drawings that show the location, dimensions, and
details of the work to be performed.
- Taken together with the specifications, they should provide a complete
description of the facility to be constructed.
- Types of contract drawings include site drawings and detail working drawings
(sections, elevations….)
- Contract drawings are usually organized and numbered according to specialty,
such as: Architectural, Structural, Electrical and Mechanical.
Specifications
● Construction technical specifications provide the detailed requirements for the
materials, equipment, and workmanship to incorporated into the project.
● Contract drawings and specifications complement each other and must be used
together.
● An item need not be shown on both the plans and specification to be required.
● Frequently, the item may be identified on only one of these documents.
However, when the provisions of the plans and specification conflict, the
General Conditions of the contract generally provide that the requirements of
the specifications will govern.
● The two basic ways in which the requirements for a particular operation may
be specified are by:
Types of specifications
1. Method specification or
2. Performance specification
1. Method Specification stated the precise equipment and procedure to be
used in performing a construction operation.
2. A performance (or result or end-result) specification, specifies only the
result to be achieved and leaves to the contractor the choice of equipment
and method.
Recent years have seen an increase in the use of performance specifications,
particularly by governmental agencies.
● Specification writers should avoid specifying both method and performance
requirements for the same operation. When both requirements are used and
satisfactory results are not obtain after utilizing the specified method, a dispute
based or impossibility of performance will invariably result.
● The format most widely used for construction specifications consists of 16
divisions, organized as shown in table 1.
● This format was developed by the Construction Specification Institute (CSI)
and is usually identified as the GSI format or Uniform System for Building
Specifications. Although developed for use on building construction projects,
it is also widely used for other types of construction.
Table 1: Organization of the Uniform System for Building Specifications
Division Title
1 General Requirements
2 Site Work
3 Concrete
4 Masonry
5 Metals
6 Wood and Plastics
7 Thermal and Moisture Protection
8 Door and Windows
9 Finishes
10 Specialties
11 Equipment
12 Furnishings
13 Special Construction
14 Conveying Construction
15 Mechanical
16 Electrical
6. Shop Drawings and Samples
Shop drawing
Shop drawings are drawings, charts and other data prepared by a contractor or
supplier which describe the detailed characteristics of equipment or show how
specific structure elements or items of equipment are to be fabricated and
installed. Thus they complement but do not replace the contract drawings
(plan).
Samples
Samples are physical examples of materials, equipment, or workmanship
which are submitted to the owner (or representative of owner) for approval
prior to their incorporation in a project.
Contract documents should contain the specific requirement for submission of
shop drawings and samples. Some suggested provisions include:
- Identification of items requiring samples or shop drawings.
- Procedure for submission of shop drawings, including format, marking,
and number and distribution of copies.
- Procedure for submission of samples, including size and number required.
- Eliminating the requirement for shop drawings and samples when standard
catalog items are to be use.
7. Contract Administration
7-1Progress Reports and Payment
- Construction contracts commonly require the contractor to submit a proposed
progress schedule (bar chart) to the owner shortly after contract award.
- Upon approval by the owner or his representative, this schedule form the basis
for judging the contractor's progress toward project complete.
The contract may require the contractor to submit his plan and schedule in
the CPM format and may also require periodic updating of the schedule as
work progresses. (Bar chart)
- The owner's representative must continuously evaluate the contractor progress
to keep the owner informed and to provide a basis for the approval of the
contractor's requests for progress payment.
- Failure of contractor to attain a satisfactory rate of progress may provide the
basis for termination of the contract by the owner, (as described later).
- For project expected to require more than a few months to complete, it is
customary for the owner to make progress payments to the contractor.
● Progress payments are make at the interval specified in the contract,
usually monthly or upon completion of certain milestones.
● Payment is customarily made for the work completed, materials delivered
to the work site, and work prefabricated but not yet incorporated into the
project.
● It is customary to with hold a percentage of the value of work completed
as a guarantee against defective work and to ensure that the remaining
work can e completed within the unpaid amount of the contract.
● The amount withheld is referred to as retainage or retention.
● A retain age of 10% is rather typical.
7.2 Change (Variation) Orders
Changes
- It is rare indeed if a construction project is completed without changes being
made.
- The usual construction contract contains a clause authorizing the owner or his
representative to order changes to the project within the general scope of the
contract.
- The document directing such a change is referred to as a "change order". The
contract also provides that an equitable adjustment in time and contract value
(cost) will be made for such change.
The majority of changes are due to design modifications initiated by the
owner or designer.
● However, change orders may also be used to formalize adjustments to the
contract required by site conditions differing from those anticipated at the
time of contract award (commonly referred to as "changed conditions").
- To minimize disputed, all change orders issued should contain the adjustment
in contract time and price which is mutually accepted to the contractor and
owner.
- However, it is frequently not possible to delay issuing a change order until
such an agreement has been reached without delaying the work in progress.
- As a result, many change orders are issued before an agreement has been
reached on the corresponding price and time adjustment.
- Agreement must therefore be reached later as work progresses or the item will
end up as a dispute.
- In estimating the cost associated with a change or owner- cause delay, the
contractor must be careful to evaluate its effect on other project activities.
- Frequently it will be found that changes or delay in one activity.
● Will necessitate changes in resource allocation or progress on other
activities that result in additional project cost.
● These costs are sometimes referred to as "consequential costs".
● To obtain reimbursement of consequential costs, the contractor must be
able to document their existence.
● A CPM network is a valuable aid in identifying and adjusting
consequential costs.
7.3 Acceptance and Final Payment
- The acceptance of a completed project is customarily based on a final
inspection performed by the owner's representative and conditioned upon the
correction of any deficiencies noted.
- The list of deficiencies to be corrected which is prepared at the final inspection
is sometimes referred to as the "punch list of record".
- If the facility or a portion thereof is substantial complete, the owner's
representative will execute a "certificate of substantial completion" for the
work. The contractor may then request and receive a final progress payment
for the completed portion of the project. However, sufficient retainage is
withheld to ensure the correction of any remaining deficiencies. The certificate
of substantial completion should clearly state the responsibilities of the
contractor and the owner for maintenance utility service, and insurance until
final acceptance.
- Upon correction of all deficiencies on the punch list of record, the contractor
should notify the owner's representative of this fact and submit a "request for
final payment", together with any other documents required by the contract
(such as releases of liens, an affidavit that a payrolls and bills connected with
the project have been paid, consent of surety to final payment, etc.). when
inspection confirms to correction of all deficiencies, the owner's representative
will issue a final "certificate of payment".
- The contract customarily provides a warranty against defective work for some
period, usually 1 year. Any deficiencies discovered after preparation of the
punch list of record should be handled under the warranty provision of the
contract. Final payment and its acceptance by the contractor usually constitute
a waiver of all claims by either the owner or contractor exit for unsettled liens
and claims and deficiencies having under warranty provision.
7-4 Claims and Disputes
Claim
- A claim is a request by the contractor for a time extension or for additional
payment based on the occurrence of an event beyond the contractor's control
that has not been covered by a change order.
- Examples of such events include unexpected site conditions, delays in delivery
of owner provided property, and changes directed by the owner.
- The usual construction contract empowers the owner's representative
(architect/engineer or governmental contracting officer) to decide on the
validity of such claims. However, if the contractor is not satisfied with the
decision, the matter becomes a dispute.
Disputes
- Disputes are disagreements between the contractor and owner over some
aspect of contract performance.
- In addition to unsettled claims, disputes may involve such matters as
substitution for specified materials, the responsibility for delays in project
completion, and the effect of changes ordered by the owner.
- In recent years there has been an increase in the use of arbitration for settling
disputes instead of taking the matter to court.
- In 1966, the American Arbitration Association, together with a number of
professional organizations involved in construction, established arbitration
procedures for the construction industry, known as the "construction Industry
Arbitration Rules".
- Under these procedures one or more independent professionals are appointed
to resolve the dispute.
- Hearing procedures are less formal than those of a trial and the arbitrators are
not bound by the legal rules of evidence.
- Because the parties to the dispute must agree to the use arbitration, no appeal
of the arbitration award is usually possible. Since laws governing the use of
arbitration vary a some states do not recognize use of a contract clause
required arbitration of all disputes arising under the contract.
7.5 Contract Termination
- Although contract termination is usually envisioned as an adversary process,
there are a number of non adversary methods by which a contract may be
terminated.
- Most construction contracts are terminated by satisfactory performance, one
method of contract termination.
- The principle adversary basis for contract termination is for breach of contract.
- The basis for termination by the contractor based on breach of contract is
usually the failure of the owner to make the specified progress payments or
owner-caused delay of the project for an unreasonable period of time.
- Termination by the owner for breach of contract is most commonly due to
failure of the contractor to make reasonable progress on the project or to
default by the contractor.
- When termination is due to breach of contract by the owner the contractor is
generally held to be entitled to payment for all work performed and the
expenses of demobilization and cancellation of orders, plus profit.
- When termination is due to breach of contract by the contractor the contract
commonly permits the owner to take possession of the work site and all
on-site equipment and tools owned by the contractor and to complete the
project at the contractor's (or surety's) expense.
Questions
References
1. Nunnally, S. W. “ Construction Methods and Management”, 7th Edition,
Upper Saddle River, New Jersey: Prentice Hall, 2007.
