BAHIR DAR UNIVERSITY

BAHIRDAR INSTITUTE OF TECHENOLOGY

FACULITY OF CIVIL AND WATER RESOURCES ENGINEERING

Contract Administration , Specification and Quantity Survey

(Ceng3162)

Nehassie 2014
 CHAPTER ONE

CONSTRUCTION CONTRACT
 CONTENTS 3

1. Construction Contract
1.1. General Background about Construction
1.2. Basic Principles of Contract
1.2.1. Definition
1.2.2. Formation of Contract
1.2.3. Non- Performance of Contract
1.3. Purpose of Construction Contracts
1.4. Types of Construction Contract
 4
1.1. General Background about Construction
 Construction is a process of constructing something either under the
ground or above the ground by human being for one purpose or another. It
may be a road, bridge, a dam, a dwelling place, an airport, a commercial
building, etc.
 It might be installation, repair, maintenance, renewal, renovation,
alteration, excavation, dismantling or demolition of a fixed asset like
building and engineering infrastructure.

 1.1. General Background….
5

 The broad spectrum of constructed facilities have the following

categories, each with its own characteristics:

A. Building construction:

B. Infrastructure and heavy construction:

C. Industrial construction:
 1.1. General Background…
A. Building construction 6

 Residential housing construction

Apartment
Single family house
 1.1. General Background…
 7
Institutional and Commercial Building Construction

University
 1.1. General Background…
8  Institutional and Commercial Building Construction

Stadium Church
 1.1. General Background…
9 B. Infrastructure and heavy construction:

Bridge

Highway

Rail way
 10
1.1. General Background…
Dam

Three Georges Dam in Chaina

GERD
 1.1. General Background…
11 C. Industrial construction:
 Involves very large scale projects with a high degree of technological
complexity, such as oil refineries, steel mills, chemical processing plants
and nuclear plants.
 1.1. General Background…
12 Stage 1: Initial stage
I. Inception and feasibility
II. Planning and Design stage

Stage 2: Tendering stage The Life Cycle of

Construction Project
I.Tender Invitation

II.Tender Evaluation

III. Award of Contract

Stage 3: Construction Stage

Stage 4: Commissioning and Acceptance

 1.1. General Background…
13 Main Parties in Construction Project
 The practice of planning, designing, constructing, and operating a
facility is most usually a collective effort of different groups of
professionals and trades.
 Depending on the size, complexity, and purpose of a particular
construction project, the project team may include:
 A client or an owner: Individuals, government, real estate developers etc.
 Financial institutions or other investors that provide the funding
 Local planning and code authorities
 Consultants or Licensed architects and engineers
 Contractors who provide construction services and install systems
 Facility managers who are responsible for operating the facility.
14

1.2 Basic Principles of contract

15

 What is the difference between

contract, agreement and promise?

 What are the Basic elements of

contract?

 What does it mean by breach of

contract? And what are the causes
for breach of contract?
 1.2.1. Definitions'
16

 Contract is a written agreement between or among two or more

parties whereby each party promises to do or not to do something
and agrees to terms (conditions and Warranties) set out in the
contract

 These promises and terms shall be enforceable by law and

incorporates the Rights, Obligations and Remedial rights of each
contracting parties.
 1.2.1. Definitions‘
17

Legal definition of a contract

 According to Article 1675 of the Civil Code: “A contract is an agreement

whereby two or more persons as between themselves create, vary or
extinguish obligations of a proprietary nature.”
Agreement=Offer + Acceptance
Contract = Agreement + Enforceability
 A construction contract is a product of an agreement between the
employer & the contractor & it is enforceable at law.
 “Enforceable at law” means that if the agreement reached between
the employer & the contractor breached ( deviations occur from the
promises) by one of the parties, the aggrieved party, either the
employer or the contractor, may bring a legal action against the other
to demand the enforcement of its rights with the support of law.
 1.2.2. Formation of contract
18

 The following are the fundamental elements of contract,

 Capacity of the contracting parties;

 Consent of the contracting parties

 Object of the contract; and

 Form of contract, if any;

 1.2.2. Formation of contract
19
 Formation of contact involves the criteria that the state uses in order to
determine whether or not it has to execute agreements of persons
between themselves.

 According to Article 1678 ( Elements of Contract) of the Civil Code: No

valid contract shall exist unless:

 The parties are capable of contracting and give their consent

sustainable at law.

 The object of the contract is sufficiently defined and is possible

and lawful.

 The contract is made in the form prescribed by law.

 1.2.2. Formation of contract…. 20
1. Capacity
 Capacity means competence to enter into a legally binding agreement.

 Persons could be:-

 Natural persons; or

 Artificial persons;

 Physical persons are the subject of rights & duties from birth to death.
(See Article 1 of the Civil Code).

 Natural (physical) persons; (Art 192): Unless he is declared

incapable by the law every physical person is capable of
performing all contracts.
 1.2.2. Formation of contract…. 21

1. Capacity…

 Artificial (legal) persons;

 There are two types of Legal persons in terms of determining their
legal capacity and coming into being.These are:-

 By legislation; In case of public bodies (Art 394-Art 398)

Eg. State, Ministries, Public & Administrative authorities, Church..

 By registration; (In case of non-public bodies).

 Natural persons or legal persons may enter in to contract directly by

themselves (in their own capacity) or through other persons (Agents).
 22
1.2.2. Formation of contract….
 The following may not have (legal) capacity to enter in to contract
 Minors (under the age of 18);

 Companies adjudged or declared bankrupt;

 Judicially and Legally interdicted persons;

 Persons, whose civil rights are suspended by the court;
 Non-nationals, unless permitted by law or special prerogative (Art.389-393)
 Non-authorized Agents;

 Agents, whose Power of Attorney has been revoked;

 Agents, the Scope of their Power of Attorney does not cover the
intended; and others
 1.2.2. Formation of contract….
23

2. Consent ( Art. 1679 - 1710)

 Consent is a declared will of the individual (the willingness of the

parties) to enter in to a legally binding relation.

 Consent of the intended contracting parties decomposes in to :-

 Offer; and
 Acceptance;

 The ways of communication are oral, written, signal and conduct

(Art. 1681)
 1.2.2. Formation of contract…. 24

I. Offer
 Offer is defined as a proposal expressing the declared willingness
of the offeror to enter in to an agreement, if the offer is accepted.
 Proposal must be : (1) complete and
(2) made with contractual intention
 Letus take three simple proposals to illustrate the requirement
that, in order to amount to an offer, a proposal must be complete:

1. 'I offer to sell you this car’

2. 'I offer to sell you this car for $40,000;

3. 'I offer to sell you this car for $40,000 payable in installments’
 1.2.2. Formation of contract….
25

 Proposal 1 is not an offer because one of the basic terms of

the transaction, namely the price, is not clear.

 proposal 2, the goods to be sold and the price to be paid for

them are both clear, and this proposal is an offer:

 proposal 3 however, although the basic terms of the transaction

are clear, the proposal is that the purchase price is paid in
installments. But it is not clear how many installments there will
be, when they will be due or what interest (if any) will be
payable.
 26
1.2.2. Formation of contract….

 In short offer contains three important elements,

 The content of the contract,

 The agreement of an offeror to be bound and

 Request of the offeror to the offeree to be bound by the offer.

Note:
 The person making the offer is called “offeror”.

 The person to whom the offer is made as “offeree“

 1.2.2. Formation of contract….
27
 Declaration of intention Art 1687 (a)

 Sending price list or tariffs Art 1687 (b)

 Display of goods for sale to the public Art 1687 (b)

 Sale by Auction (Art 1688 ). Read also Art 2403-2407.)

 Public Promise of Reward (Art 1689). Special Offer

 It is notifying the public that whosoever performs a certain act

indicated in the notice will be given benefit of proprietary
nature by the promisor.
 1.2.2. Formation of contract….
28 II.Acceptance

 Acceptance is a declaration of will to enter in to a legally binding

contract. (Positive response to an offer )

 By acceptance, a contract shall be completed, where the

offeree accepts the offer without any reservation.

 The offeree does not have a duty to give response to the proposal
of the offeror. He can respond negatively or positively only if he
wants to respond. That means the offeree has the right to remain
silent.

 Therefore silence shall not amount to acceptance (Art. 1682).

 1.2.2. Formation of contract….
29
 Silence may be taken as a sign of acceptance by the offeror.

A. Duty to accept:

 When the offeree is a monopoly supplier of goods or provider of

services.
For example,  They have to notify with in
time specified in the offer, if
 Ethiopian Electric Power Corporation, any (Art. 1690(1) or within a
reasonable time (Art
 Ethiopian Telecommunication, 1691(1). Otherwise their
silence is considered as an
 Water & Sewerage Authorities acceptance (Art.1683).
 1.2.2. Formation of contract….
30
B. Preexisting Contractual Relation: Silence may also amount to
acceptance where;
 The content of the offer is to vary, supplement or complement
preexisting contractual relation (Art. 1684 (1).

 Variation of a contract means changing, modifying or avoiding some

of the provisions of the contract. Variation of contract itself is a
contract and hence needs consent of parties.
C.The offer contains warning that silence amounts to acceptance.

 The offeror should also expressly indicate in his offer that he

considers the silence of the offeree as acceptance after expiry of time
limit indicated in the offer Art. (1690(1) or reasonable period
(Art.1691 (1) (Art 1684 (2)
 1.2.2. Formation of contract….
31
Defects in consent ( Art 1696 – 1710 )

 The following are the causes of defect.

 Wrong information (mistake, false statement, fraud)

 Threat (duress, reverential fear, threat to exercise rights)

or lesion

 Defect in consent may be a cause for invalidation of contract (Art

1696).
 1.2.2. Formation of contract…. 32

 Consent given in the process of offer & acceptance should

be free from defects in consent.
 1.2.2. Formation of contract….
33

3. Object of Contract (Art 1711-1718)

 The object of contract is obligation (agreement) of the

contracting parties to act, not to act, or to give.

 Example 1. In the construction contract, The object of contract is

the employers‟ agreement to pay wage and contractor‟
agreement to do certain thing.

 Example 2. In contract of sale of house; the obligation of the

seller is to transfer ownership and possession to the buyer and
the obligation of the buyer is to pay price.
 1.2.2. Formation of contract….
34

 The obligations of the contracting parties could be divided in to

two broad terms:-

 Promises and

 Considerations

 The object of contract shall be defined, possible, lawful, not

immoral. (Art 1714-1716).
 1.2.2. Formation of contract….
35
4. Form of Contracts (Art 1719 – 1730)

 Form is the way in which the content of the contract exists or

appears to others.

 It answers the question as to how third parties such as court

could know the agreement of parties.

 Contract may exist either in written form or oral form. (Art

2002)

 The contract should be made in certain prescribed form, it

means the contract should be made in writing. In this case, form
is related with the validity & proof of the contract itself.
 1.2.3. Non- performance of contract
36
 Non-performance refers to parties failure to perform
contractual obligations in conformity with the terms of the
contract and the law. It is also called breach of contract.
 In most legal systems, the law of contract generally recognizes
three remedies (Article 1771 ).

 Enforcement of the contract.

 Cancellation of the contract.

 Compensation for damages or loss as a result of non-performance.

 The legal remedies for non-performance protect the interest of the

party that is affected by non-performance (Art 1886-1895)
 1.2.3. Non- performance of contract….
37
 Enforcement takes place through court order either through
Forced performance or substituted performance

 Forced performance implies the compelling of the debtor to

discharge his obligation. It refers to performance directly
imposed on the debtor through the execution process (Art.
1776).

 Substituted performance as a remedy for non-performance

under articles 1777 and 1778. Substituted performance is made
at the expense and cost of the debtor.
 1.2.3. Non- performance of contract….
38
What is the difference between invalidation, cancellation &
termination of contract ?

 Invalidation means making an effective contract ineffective when

it has a problem in its formation.

 Cancellation on the other hand is making a contract ineffective

when there is non-performance.

 Termination of contract refers to the stoppage of obligations

created by the contract. It ceases the existence of the obligations
as of the time the contract is terminated. It can be made by
agreement, unilaterally by one party or by court order.
 1.3. Purpose of Construction Contracts
39
 Purposes of construction contract are to :-

 Describe scope of work

 Establish time frame

 Establish cost & payment provisions

 Set out obligations & relationships

 Manage multiple risks

 Establish control mechanisms

 Minimize disputes
 Improve economic return on investment
 1.4. Contract Type 40

 There are many types of construction contracts, which are

applicable based on the main specific project conditions and
largely the interest of the owner.
Contract
Types

Priced based Cost based

Lump sum Unit price Cost Plus Target Cost

 1.4. Contract Type….
41
A. Lump sum contract

 The contractor agrees to execute the project based on a fixed lump

sum price which is not subject to any variations

 The contractor is fully responsible to quantify the volume of works

based on the given specifications and drawings.

 Overestimating the volume of works will result in loosing the job, if it is

on competitive basis and underestimating the volume of works will
result irreversible loss, which can not be corrected during the
execution of the contract at any level.
 1.4. Contract Type….
42

 Moreover, the contractor must be in a position to estimate the

influence of cost escalation in the future during the execution of the
project and these anticipated additional costs should be
incorporated in the tender prices.

 A lump sum contract is more suitable for works for which

contractors have prior construction experience. The experience
enables the contractors to submit a more realistic bid.
 1.4. Contract Type….
43
 1.4. Contract Type….
44 B. Unit Rate Contract
 The unit rate contract is also called item rate contract.

 In this case, the construction contract is based on priced bill of

quantities whereby estimated quantities of certain well defined work
items and fixed unit prices.

 The estimated quantities may increase or decrease during the

execution of the project and the contractor is obliged to accept these
variations without additional costs as far as these variations in
quantity are within the agreed limits with the owner.

 The unit rate contract is the most commonly used for all public and
governmental projects whereby the estimated quantities and
specifications of works are well known in advance.
 1.4. Contract Type….
45
 1.4. Contract Type….
46
C. Cost Plus Percentage of Cost Contract

 The contract is agreed between the owner and the contractor

based on the actual direct cost records plus agreed percentage
of these actual direct costs expended by the contractor to
cover overhead costs as well as profit and income tax.

 It is suitable when the nature of the work may be;

 impossible or impracticable to prepare complete drawings

and specification due to unusually pressing speed of
construction is required or
 1.4. Contract Type….
47

 Major changes during construction are expected such as

finishing works which may deteriorate the agreed contract or

 it may be difficult to define properly the scope of works such

as underground works with poor or no geological studies.

 Contractors may increase the actual direct cost of the project

unnecessarily as the contractors profit increase with the
increment of these cost.
 1.4. Contract Type…. 48

 One of the major shortcomings of the cost plus percentage of cost

contract is the tendency of the contractor to increase the cost of the
project and cost plus fixed fee contract discourages this tendency of the
contractor.
D. Cost Plus Fixed Fee Contract
 In this case, the contract is based on actual direct costs plus fixed fee and
the amount of fixed fee covers the overhead costs, profit and income tax
of the contractor.

 In this type of contract, the contractor has to be very careful in

identifying all other anticipated costs other than the direct costs to fix
the amount of fixed fee.
 1.4. Contract Type…. 49

E. Cost Plus Percentage of Cost with Guaranteed

Maximum Cost Contract

 The major shortcoming of the cost plus percentage of cost

contract is the owner doesn't know the total cost of the project
before its completion.

 So, a fixed maximum cost of the project is agreed.

 If the cost of the project exceeds the guaranteed maximum cost,

the contractor absorbs these excess costs.
 In this way, a maximum project price is established, in which the
owner is assured that this maximum project cost will not be
exceeded
 1.4. Contract Type….
50

F. Cost Plus Fixed Fee with Guaranteed Maximum Cost Contract

 The contract is based on the actual cost of the project plus fixed
fee as well as the maximum cost of the project is also agreed
whereby if the actual cost of the project exceeds the maximum
guaranteed cost, the contractor absorbs these excess costs.
 If the cost of the project is less than the guaranteed maximum
cost , the contractor and the owner shares the benefit
according to the contract.
 1.4. Contract Type…. 51

 Factors to be considered to select construction contract types are:-

 Complexity and uniqueness of project

 Owners ability to manage design and construction

 Local market place factors

 Owners ability to select the right contractors

 Likelihood of changes or delays on project

 Owners financial conditions

 Owners tolerance for risk , etc.

 1.4. Contract Type….
52
 In general the main idea behind any contract system is

1.To get lowest total cost of construction.

2. To achieve greatest speed of construction to have minimum

indirect expenditure.

3.To have best workmanship

4. To have future business between owner and contractor based

upon previous experience.
 Assignment 1
1. 53
List the contract types and arrange them in ascending order with respect to risks to the client
and risks to the contractor?

2. Explain the following:Valid contract,Void contract,Voidable contract and Implied contract?

3. Define briefly the terms cancellation, termination and invalidation of contract? Give examples
for each term

4. List and describe briefly the fundamental elements of contract?

5. In most legal systems, the law of contract generally recognizes three remedies (Article 1771 ).
List these remedial measures?