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1. ASSESSMENT OF THE IMPACT OF CONSTRUCTION
CONTRACT TYPES ON THE CONTRACT MANAGEMENT IN
TANZANIA
The case of LGAs Construction Projects in Mbeya Region
Emmanuel James
MSc.Construction Management, Dissertation
University of Dar es Salaam
October, 2015

2. ASSESSMENT OF THE IMPACT OF CONSTRUCTION
CONTRACT TYPES ON THE CONTRACT MANAGEMENT IN
ANZANIA
The case of LGAs Construction Projects in Mbeya Region
By
Emmanuel James
A Dissertation Submitted in Partial Fulfillment of the Requirement for the
Degree of the Master of Science in Construction Management
University of Dar es Salaam
October, 2015

3. i
CERTIFICATION
The undersigned certifies that he has read and hereby recommends for acceptance by
the University of Dar es Salaam a dissertation entitled: Assessment of Impact of
Construction Contract types on the Contract Management in Tanazania: The case
of LGAs Construction projects in Mbeya region, in fulfillment of the requirements
of the degree of Masters of Science in Construction Management.
………………......................
Dr. Ramadhani, S. Mlinga
(Supervisor)
Date……………………………

4. ii
DECLARATION
AND
COPYRIGHT
I Emmanuel James, hereby declare that the contents of this dissertation are the
results of my own findings and to the best of my knowledge, they have never been
presented to any University for similar or any other degree award.
Signature……………………
This dissertation is copyright material protected under the Berne Convection, the
Copy Right Act of 1999 and other international and national enactments, in that
behalf, on the intellectual property. It may not be reproduced by any other means, in
full or in part except for short extract in fair dealing; for research or private study,
critical scholarly review or discourse with an acknowledgement, without the written
permission of the Directorate of Postgraduate studies, on behalf of both the author
and the University of Dar es Salaam.

5. iii
ACKNOWLEDGEMENT
I would like to express my sincere gratitude and appreciation to all those in one way
or the other contributed towards the success of this work.
Special thanks go to Dr. Ramadhani, S. Mlinga of the University of Dar es Salaam
who was a supervised this work for his invaluable time, constructive comments,
advice and suggestions which enabled me to complete this dissertation.
Thanks also should go to my employer, Regional Administrative Secretary (RAS)-
Mbeya who financed and gave me a permission to attend this course. I am grateful to
extend my appreciation to those who spent their time responding to questions from
questionnaires despite of some of them being too demanding.
I also extend my heartfelt gratitude to my lecturers in the Department of Structural
and Construction Engineering University of Dar es Salaam-CoET for their comments
during the presentation and when I faced them for consultation. Last but not least,
thanks should go to my fellow classmates for assisting me on providing various
information in the course of this dissertation.
I wish to express my most sincere gratitude to my family especially my wife Devotha
Ngoma Damas for her moral support, patience and understanding during my course
work and research period.
May Almighty God bless you all!

6. iv
DEDICATION
This work is dedicated to my daughters Glory and Gracious who did not enjoy my
care while I was away for studies. I left Glory when she was only 5 years old;
Gracious was not born and she was born later when I was in First Semester of
Coursework study. Also my dedication should go to my beloved wife Devotha for
her endless love, courage and support that proved the success of this carrier. I love
you all and may almighty God bless you!

7. v
LIST OF ACRONOMYS AND ABRREVIATIONS
AQRB Architects Quantity Surveyors Registration Board
ASCSA Association of School of Construction of Southern Africa.
CAG Chief Auditor General
CRB Contractor Registration Board
DBES Department of Building and Engineering Services in Botswana
ERB Engineers Registration Board
GCC Gaborone City council
GDP Gross Domestic Production
LGAs Local Government Authorities
MDAs Ministries, Departments and Agencies
MUST Mbeya University of Science and Technology
NHC National Housing Cooperation
PE Procurement Entity
PPA Public Procurement Act 2011
TPPR, 2013 Tanzania Public Procurement Regulation 2013
PPRA Public Procurement Regulatory Authority
RS Regional Secretariet
TBA Tanzania Building Agency

8. vi
ABSTRACT
This study aimed at assessing the Impact of Construction Contracts Types on the
Contract management in Tanzania. The case study was LGAs Construction Projects
in Mbeya region.
Researcher used qualitative research approach and a descriptive research design. The
research was conducted in Mbeya region and respondents were those involved in
construction works. This study involved 38 LGAs’s staff, 3 RS’s staff, 10
Contractors, 7 TBA’s staff, 2 AQRB’s staff, 2 NHC’s staff and 18 participants from
MUST making a total of 80 participants who were selected from a population of 108
by using purposive sampling. Primary data were collected through structured
questionnaires while the secondary data were obtained from different related
literature reviews. The researcher analyzed data by using Statistical Package for
Social Science (SPSS) version 21 and Microsoft Excel 2007.
The findings have shown that, LGAs in Mbeya region was using fixed price contract
for all type of construction works projects. Financial risks transferring to contractors,
restriction of variation and limitation of changing the building rate were criteria used
to select the fixed priced contract. The challenges revealed were inappropriate
prepation of project budget, lack of technical personnel to select appropriate
construction contracts, project cost overrun and delay which were caused by wrong
choice of Construction contract type.
It is therefore recommended that there is need for PPRA to revise the existing
Construction contracts types to reflect the LGAs working environment; Client and
Contractor should negotiate type of Construction contract type that fits the nature of
project and that Project budget should depend on actual budget and not Government
budget ceiling. Lastly, knowledgeable technical personnel should select the right
construction contract type and manage them.

9. vii
TABLE OF CONTENTS
Certification ..................................................................................................................i
Declaration and Copyright...........................................................................................ii
Acknowledgement ......................................................................................................iii
Dedication...................................................................................................................iv
Abstract…...................................................................................................................vi
Table of Contents.......................................................................................................vii
List of Tables .............................................................................................................xii
List of Figures...........................................................................................................xiii
CHAPTER ONE: INTRODUCTION......................................................................1
1.1 Background information ............................................................................1
1.2 Types of Contracts and their Conditions for Use as Described by PPRA-
Tanzania.....................................................................................................5
1.2.1 Lump Sum/ Fixed Price Contract. .............................................................5
1.2.2 Time Based Contract..................................................................................6
1.2.3 Retainer and/or Success Fee Contract........................................................7
1.2.4 Percentage Contract ...................................................................................7
1.2.5 Indefinite Delivery Contract (Price agreement).........................................7
1.2.6 Running Contract.......................................................................................8
1.3 Practice of Construction Contracts in LGAs’ Projects in Developing
countries.....................................................................................................9

10. viii
1.4 Status of Contract Management in LGAs’ Projects in Developing
countries...................................................................................................12
1.5 Statement of the problem........................................................................15
1.6 Research Objectives.................................................................................16
1.6.1 General Objectives...................................................................................16
1.6.2 Specific Objectives .................................................................................16
1.7 Research questions...................................................................................17
1.8 Organization of the study.........................................................................17
1.9 Significance of the study.........................................................................18
1.10 Limitation and scope of the study............................................................20
1.11 Motivations for doing the Research on the Construction Contract types 20
1.12 Definition of Central terms. .....................................................................21
1.13 Chapter Summary. ..................................................................................22
CHAPTER TWO: LITERATURE REVIEW.......................................................23
2.1 Introduction..............................................................................................23
2.2 Formation of the Contract........................................................................23
2.3 Standard contracts....................................................................................25
2.4 Selection of contract type.........................................................................28
2.5 Factors Influencing the choice of Construction Contract ........................30
2.6 Existing Construction contract types. ......................................................33
2.6.1 Lump-Sum Contract.................................................................................33
2.6.2 Unit Price Contract ..................................................................................36
2.6.3 Cost plus Contracts ..................................................................................38

11. ix
2.6.4 Design-Build Contract .............................................................................41
2.6.5 Turnkey Contract .....................................................................................41
2.6.6 Management-Oriented Contract...............................................................42
2.6.7 Construction by Day Labor......................................................................42
2.6.8 Target Estimate Contract .........................................................................43
2.6.9 Guaranteed Maximum Price Contract .....................................................43
2.6.10 Contracts with Quantities.........................................................................44
2.6.11 Construction Management Contract ........................................................45
2.7 Challenges facing Clients (LGAs) on using inappropriate Construction
Contracts ..................................................................................................47
2.8 Challenges facing Contractors on Using Inappropriate Construction
Contracts ..................................................................................................47
2.9 Contract Management..............................................................................48
2.9.1 Contract Administration Cycle ................................................................49
2.9.2 Contract Amendments .............................................................................51
2.9.3 Contract Delivery Follow –up .................................................................51
2.9.4 Contract Closeout Cycle ..........................................................................52
2.10 Challenges facing LGAs and Contractors in Contract Management......53
2.11 Gaps and Recommendations....................................................................54
2.12 Chapter Summary ....................................................................................56
CHAPTER THREE: RESEARCH METHODOLOGIES...................................57
3.1 Introduction.............................................................................................57
3.2 Research Methodology ............................................................................57

12. x
3.3 Research Strategy.....................................................................................58
3.3.1 Quantitative Research ..............................................................................58
3.3.2 Qualitative Research ................................................................................58
3.4 Research design .......................................................................................59
3.5 Variables. .................................................................................................60
3.6 Research Hypothesis................................................................................61
3.7 Area of study............................................................................................62
3.8 Targeted population .................................................................................62
3.9 Sample size ..............................................................................................62
3.10 Criteria for selection of Sample size........................................................65
3.11 Sampling technique..................................................................................66
3.12 Method/tools of data collection ...............................................................66
3.13 Data analysis procedures..........................................................................68
3.14 Ethical Consideration and Inform the respondents.................................68
3.15 Chapter summary.....................................................................................68
CHAPTER FOUR: DATA ANALYSIS AND PRESENTATION OF
FINDINGS..............................................................................................70
4.1 Introduction..............................................................................................70
4.2 Response Rate..........................................................................................70
4.3 General respondent particulars ................................................................72
4.4 Construction Contract types used by LGAs............................................73
4.5 Criteria used by LGAs in selecting the Construction Contract types ......75

13. xi
4.6 Challenges faced by LGAs (Clients/Consultants) and Contractors when
using the Fixed Price Contracts. ..............................................................78
4.7 Ways and Means of Improving the Performance of Construction
Contracts for LGAs..................................................................................83
4.8 Chapter summary....................................................................................90
CHAPTER FIVE: SUMMARY, CONCLUSION AND
RECOMMENDATIONS.......................................................................91
5.1 Introduction..............................................................................................91
5.2 Summary of findings................................................................................91
5.3 Conclusion ...............................................................................................92
5.4 Recommendations for action ...................................................................93
5.5 Recommendation for further studies........................................................94
REFERENCES.........................................................................................................96
APPENDICES..........................................................................................................99

14. xii
LIST OF TABLES
Table 2. 1: Types of Fixed-price Contracts.......................................................... 35
Table 2. 2: LGAs Staff in works department-Mbeya region................................ 54
Table 3. 1: Characteristics of Quantitative and Qualitative Research
Methodologies.................................................................................... 59
Table 3. 2: The Distribution of Population and Sample size. .............................. 66
Table 3. 3: Methods and Techniques of Data Collection..................................... 67
Table 4. 1: Questionnaire Response Rate............................................................. 71
Table 4 . 2: Demographic Characteristics of Respondents ................................... 72
Table 4. 3: Experience of Respondents in Construction Industry........................ 72
Table 4. 4: Respondents by Institution Category................................................. 73
Table 4. 5: Identification of the Construction Contracts types used by LGAs .... 74
Table 4. 6: Identification of the Criteria used by LGAs in selecting the fixed price
contract type....................................................................................... 76
Table 4 .7: Identification of the Challenges faced by LGAs (Clients/Consultants)
and Contractors when using the fixed price contract......................... 79
Table 4 .8: Suggestion of Ways and Means of Improving the Performance of
Construction Contracts for LGAs. ..................................................... 84

15. xiii
LIST OF FIGURES
Figure 1. 1: Sketch of Structure of the Study ..................................................... 17

16. 1
CHAPTER ONE
INTRODUCTION
1.1 Background information
The Construction industry in Tanzania is one among the most important sectors in
National economy. According to the Tanzania National Bureau of Statistics (2014),
in year 2014 this industry contributed to 12.5% of national GDP compare to 10.8%
in 2013. Construction contracts is a fundamental part of construction practices which
involve two parties: one is service provider (contractor) and the second is project’s
financier (client).These two parties who engage in the service must have something
which bind them together (aagreement) which is known as “cconstruction contract”.
A contract is a key component of a procurement cycle and it is an essential element
required between two parties collaborating for a work. A contract impresses upon the
parties the solemnity of the occasion. It requires the parties to seriously consider the
effects of performance and non-performance upon themselves. Contract as defined
by Veld & Peeters (1989) as “an agreement between two parties, whereby one party
commits itself to deliver goods or services to a second party within a certain delivery
time and for an agreed price”. The contracts used by the Client can be of different
types and different strategies.
Contract strategy is the main component of the process used to determine how the
project will be procured. Wearne (1995) proposes that different contract strategies
must be applied for every project. According to the procurement guide: procurement
and contract strategies (2003). Contract strategy determines the level of integration

17. 2
of design construction and of going maintenance for a given project and should
support the main project objectives in term of risk allocation, delivering,
incentivisation and so on.
Infrastructure maintenance projects like any other project requires effective
application of project management principles as laid down by the PMBOK Guide
(2012).This is in order to attain project objectives and meet the stakeholders
‘expectation. Stakeholder needs and expectations in the discussion at hand include
the attainment of good value for money. PMBOK Guide (2012),defines Project
management as the application of knowledge, skills, tools and techniques to project
activities in order to meet or exceed stakeholder needs and expectations from the
project. Contract strategy is one of the tools within the project management that is
used to accomplish stakeholder needs and expectations on a project.
PMBOK Guide (2012) states that, different types of contract strategies are more or
less appropriate for different types of projects and the type of contract strategy to be
used including the specific term and conditions set the degree of risk for meeting or
not meeting stakeholder needs or expectations. PMBOK Guide (2012) further points
out that, contract strategies generally fall into one of the three broad categories
namely: Fixed-price or Lump sum contracts, Cost-reimbursable contracts and Time
and Materials (T&M) Contracts. For purposes of this research I looked at Fixed-price
Contract and Cost-plus (Reimbursement cost Contract).

18. 3
Bower (2003) states his views on the importance of contract strategy .According to
him; contract strategy has a major impact on the timescale and ultimate cost of the
project. He further emphasizes the negative effects on the project outcomes when
there is inappropriate selection of contract strategy for a project. Bower (2003)
emphasizes that when a wrong contract strategy is selected it may cause over budget
of project and delay in completion time. Perry (1985) in his study outlines the key
decision for contract strategy which are: the project characteristics, organizational
structure for design and construction, types of contract, tendering process including
condition of contracts, contract selection and tender analysis.
Smith (1995) outlines some topics to be considered for setting up a contract strategy
These are:-project objectives, organization system for design and implementation,
risk allocation, terms of payment and the condition for contract. Aboushiwa &
Bower (2000) have the view on introduction of contract sstrategy as early as possible
into the project brings success in the project. The Aboushiwa & Bower (2000)
support this point by saying that the contract strategy is the most important aspects of
a project success because it forms the foundation on which everything else is built.
Therefore the early the contract strategy, the better will be the project outcomes.
Murdoch and Hughes (2008) explain that construction contracts are governed by the
general law of contract. Construction contracts include any agreement in writing, or
evidenced in writing, under which a party carries out construction operation,
arranged for others to carry out construction operations such as through subcontracts,
provides labor for the carrying out of construction operations, alteration, repair,

19. 4
maintenance, decorations and demolition. It covers not only structures but also the
installation of services like site clearance, excavation, scaffolding, site restoration
and landscaping (Murdoch and Hughes, 2008).
The construction contracts are fundamentally different from major service contracts.
There are various types of construction contracts. The choice of contract depends on
the basis of pricing and the contract strategy that best meets the project objectives.
The various types offer different ways of handling pricing, risk transfer,
responsibility for performance, cost certainty, and complexity (Murdoch and Hughes,
2008).
Contracting is not a “one size fits at all” proposition. Success or failure of any
alternative service delivery arrangement depends on how well prepared the contract
and the capability of the Local Governments to manage the entire process, from
assessing the feasibility of contracting for particular services, through implementing
contract arrangements, monitoring and evaluating project outcomes and contractor
performance–activities that require strong government management capacity (Brown
and Potoski , 2003).
If a local government authority, can easily and quickly write very detailed contracts
describing exactly what actions the contractor should take and what outcomes the
contractor should achieve, it will reduce the risks of contract failure and
consequently the costs inherent in negotiating, implementing and monitoring a
contract relationship will be low. However, real world complexities and uncertainties

20. 5
in social interaction often exceed Local Governments’ ability to predict future
events, specify contract provisions for all circumstances, and ensure that actual
outcomes match defined objectives (Brown and Potoski, 2003).
Unlike the past where the local governments were doing most of the development
activities such as construction for its people, the current policy stipulates that the
Government roles have changed from being a provider to a facilitator or enabler of
development, (Brown and Potoski, 2003). Under pressure to do more with less, Local
Governments across the country have increasingly moved from direct service
provision to providing services via contracts. Citizens today receive services not
only from their general service local governments, but also from a variety of vendors
working under contract, including for-profits, non-profits and government agencies
from other Authorities. Of course, there are many accounts of successful
contracting. Advocates of such alternative service delivery arrangements promote
competitive contracting with promises of efficiency, cost savings, and improved
effectiveness, (Ferris and Grady,1991).
1.2 Types of Contracts and their Conditions for Use as Described by PPRA-
Tanzania
1.2.1 Lump Sum/ Fixed Price Contract.
The fixed price contracts, otherwise referred to in this Part as “lump sum contracts”
are used mainly for assignments in which the content and the duration of the
services and the required output of the consultants are clearly defined. The lump
sum contracts may be used for simple planning and feasibility studies, environment

21. 6
studies, detailed design of standard or common structures, preparation of data
processing systems, and so forth. Payments shall be linked to outputs (deliverables)
such as reports, drawings, bill of quantities, bidding documents, and software
programs.
1.2.2 Time Based Contract
Time based contracts are used when it is difficult to define the scope and the length
of services, either because the services are related to activities by others for which
the completion period may vary, or because the input of the consultants required to
attain the objectives of the assignment is difficult to assess. Time based contract may
be used for complex studies, supervision of construction, advisory services, and most
training assignments and payments are based on agreed hourly, daily, weekly, or
monthly rates for staff (who are normally named in the contract) and on reimbursable
items using actual expenses and, or agreed unit prices and the rates for staff include
salary, social costs, overhead, fee or profit, and, where appropriate, special
allowances. Such contracts include a maximum amount of total payments to be made
to the consultants and the ceiling amount should include a contingency allowance for
unforeseen work and duration, and provision for price adjustments, where
appropriate. The client closely monitors and administers time based contracts to
ensure that the assignment is progressing satisfactorily, and payments claimed by the
consultants are appropriate.

22. 7
1.2.3 Retainer and/or Success Fee Contract
Retainer and success fee contracts may be used where consultants such as banks or
financial firms are required for preparation of companies for sale or merger of firms,
notably in privatization operations. The remuneration of the consultant may include a
retainer and a success fee, the latter being normally expressed as a percentage of the
sale price of the assets.
1.2.4 Percentage Contract
The percentage based contracts may be used where it is appropriate to relate the fee
paid directly to the estimated or actual cost of the contract. The percentage based
contract clearly defines the total cost from which the percentage is to be calculated
and the consultant or service provider are required to indicate his cost as a percentage
of the total cost of the assignment. The use of such a contract is recommended only if
it is based on a fixed target cost and covers precisely defined services.
1.2.5 Indefinite Delivery Contract (Price agreement)
The indefinite delivery contracts are used where a procuring entity needs to have "on
call" specialized services to provide advice on a particular activity, the extent and
timing of which cannot be defined in advance, may be used to retain "advisors" for
implementation of complex projects expert adjudicators for dispute resolution panels,
institutional reforms, procurement advice, technical troubleshooting, and so forth,
normally for a period of a year or more. The procuring entity and the firm agrees on
the unit rates to be paid for the experts, and payments are made on the basis of the
time actually used.

23. 8
1.2.6 Running Contract
A running contracts are used for contracts in which continuity of expert service is
desirable. The services include financial auditing, procurement agency contracts and
inspection agency. The procuring entity and the firm agree on the unit rates to be
paid for the experts, and payments are made on the basis of the time actually used.
The use of running contacts shall be subject to approval of the Authority.
JCT (2011) reports that; under traditional procurement, there are three types of
Construction contracts. These are;-Lump sum contract, where the contract sums is
determined before construction work is started. Measurement contract, where the
contract sums is not finalized until after completion of the project, but is assessed on
measurement to a previously agreed basis. Cost reimbursement contracts, where the
sum is arrived at the basis of prime (actual) costs of labour, plant and materials, to
which there is added an amount to cover overheads and profits. For the purposes of
this research, the researcher looked at the two types of construction contracts which
are lump sum contract and costs reimbursement contract.
In experience with RS and LGAs, Lump Sum contract is used in the Post-contract
stage (Construction stage). In reality, Lump sum contracts are rarely used in
Consultancy services. For this reason, the researcher concentrated on the Lump sum
contract and Costs reimbursement contract.

24. 9
1.3 Practice of Construction Contracts in LGAs’ Projects in Developing
countries
For years, construction and non-construction stakeholders in Tanzania have been
complaining on the poor performance of construction contracts in Local Government
Authorities (LGAs). Most of projects ended with delays, cost overrun, low quality,
conflicts and even stoppage, (Musingi, 2007).
Musingi (2007) states that, most of the funds from the Central Government, donors
such as World Bank, United Nation, Embassies and other financiers, are posted to
LGAs where different development projects have to be carried out. Many of these
projects are outsourced to the contractors making the LGAs clients to enter contracts
with contractors.
According to the CRB (2010), Contracts which are prepared by Procurement Entity
(PE) do not favour Contractors as many contracts are one-sided without price
fluctuations clauses; this impedes the growth of Contractors. Procurement entity
should prepare and apply contracts with equitable conditions and which include price
fluctuations clauses.
In contracting, there are three aspects to a contract that must be managed while the
assignment is being carried out namely; time, cost and performance. Time and cost
must be measured against the budget and projected time required to complete the
contract to detect deviations from the plan. The performance of the contract must be
checked to ensure that the targets are being met (Mlinga, 2008).

25. 10
Bockrath (2000) and Clough (1981) suggest that, if the work required by the contract
is not accurately determined in advance of field operation and in all its features at the
time of bidding, a lump sum contract is not suitable and should not be used. Bockrath
(2000) notifies that, it would be unfair to the bidders to expect them to bind
themselves to the performance of work of which cannot be outlined in advance. In
this type of contracts, bids are requested based on a complete set of plans and
specifications, this allowing for easy comparison of bid prices and fostering
competition (Fisk & Reynolds, 2006).
Seppala (2000) insists that transferring risks blindly from the employer to the
Contractor do not necessary ensure that the works are done on time or at the agreed
price. Instead, this may, at best, cause more claims and disputes and, at worst,
bankrupt the contractor, thereby requiring the employer to re-bid the job and almost
inevitably, pay a higher price to get the work done.
Helen and Priest (2000) in their research on the treatment of specific risks under
selected international standard form of contract, report on the consequences of
unawareness on ground conditions, legal and physical impossibilities, cost of the
works, third party interferences, change in law, subcontractors relations, notice and
time bar provisions, variation valuations, disputes resolutions and value engineering.
According to the research done by Okumbe and Verster (2008), 100% of the large
general contractors from a mixture of local, national and international organizations
indicated that they were aware of different types/forms of building contracts in

26. 11
Botswana. Also according to the results, 67% of this population revealed that the
wrong choice of a contract contributed to project failures in the industry. All
Contractors agreed that contractors and clients were the only two institutions that
suffered losses due to the wrong choice of a contract. Contractors were also asked
whether contract documents were adequately prepared by clients/consultants.
83.33% of contractors indicated that contract documents were not adequately
prepared by the clients/consultants. Respondents generally showed that, contractors
and clients still bore the costs of the anomalies that resulted from the inadequate
preparation of documentations.
Okumbe and Verster (2008) also revealed that, all consulting architects from a
mixture of local, national, and international organizations indicated that they were
aware of different types of building contracts in Botswana. Their most frequent
preference on how the wrong choice of contract contributed to project failures was
66.67% for moderately and only 33.33% for greatly. All Architects showed that
clients/governments suffered losses due to projects failures. All Project Quantity
Surveyors were surveyed from local, national and international organizations and
were found to be aware of different types of building contracts. When asked whether
the wrong choice contributed to project failures the response was 60% for
moderately and 20% for greatly. Sixty percent of respondents agreed that contract
documents were inadequately prepared by the client and that they also maintained
that contractors and clients suffered losses due to project failures. The Project
Engineers were surveyed from a mixture of local, national and international
organizations and all indicated that they were aware of different types and forms of

27. 12
contracts in the Botswana construction industry. 50% of project engineers indicated
that, wrong choice of a contract contributed ‘moderately’ to project failures. They
also maintain that contractors and clients were the main institutions who suffered
losses due to the above.50% of respondents indicated” yes” while 50% said “no”
when asked whether contract documents were normally prepared adequately by
client/consultant.
Okumbe and Verster (2008) from the point of clients view revealed that, 50% of
GCC and DBES indicated that the wrong choice of contract contributed greatly and
the remaining 50%’ moderately’, to project failures. According to the results,
institutions that have suffered losses due to the wrong choice of a contract are
government and clients. GCC answered the question whether contract documents
were adequately being prepared by Clients/Consultants with a 100%’ No’ while
DBES showed a mixture of ‘yes’, no’,’ unsure’and’ other’.
1.4 Status of Contract Management in LGAs’ Projects in Developing
countries
Research conducted by Kelman (1994) on guide to best practices pointed out that
Contract administration involves those activities performed by government officials
after the contract has been awarded to determine how well the government and the
contractor performed to meet the requirement of the contract. In Contract
administration, the focus is on obtaining supplies and services of requisite quality, on
time and within budget.

28. 13
According to Kelman’s (1994) in a report carried out on Civilian Agencies
contracting practices, several weaknesses were identified in contract administration
practices. The principal problem is that contracting officials often allocate more time
to awarding contracts than to administering existing contracts. This often leads to
problems in contractor performance, cost overruns and delay in receiving
construction goods and services. Several other deficiencies were noted. There were
unclear roles and responsibilities of the contracting officer’s technical
representatives, excessive backlogs in contract close out and incurred costs audits,
improperly trained officials performing contract oversight, unclear statement of
works that hinder contractor performance and inadequate guidance on voucher
processing and contract close out.
In Tanzania, to the best of our knowledge, there is little study which have been
undertaken on Impact of Construction Contract types on Contract management
compared with other developing Countries as explained above. In experience with
Regional Secretariet (RS) and Local Government Authorities (LGAs), selection of
construction contract types like Lump sum contract rely on transferring risk to
contractor and does not depend on or reflect the criteria as described by PPRA, on
the other hand the applicability is not only for small and well defined project but is
used either for small, large and not well defined projects. Construction Contract
types selection depend so much on the availability/disbursement of funds to the
projects, type/nature of project and the time required to complete the project.

29. 14
In LGAs preparation of Drawings and Tender documents depend on budget ceiling
of that financial year and not on the actual cost of the project. LGAs do not adhere to
the procedures as stipulated by Architects and Quantity Surveyors Bylaw
(AQRB, 2000) which states that, any project at Pre contract stage, Preparation of
drawings and Procurement of Contractor should follow under the following
procedures: inception stage, feasibility study, and sketch design, scheme design, and
detail design, production of information/bill of quantities, tender action and project
planning. Post contract stage (Construction of the project) and every stage mentioned
above is required to have presentation to the users for comments and approve. In
addition to that post contract stage depends so much on pre contract stage, if there
were Poor preparation of drawings and BOQ results in poor performance of contract
and project in general. So Construction Contract type selection which reflect
Contract management depend so much on the following factors: procurement process
of acquisition of consultant/contractor, prepation of drawings, bill of
quantities/tender document, availability/flow of funds, preparation of project budget
and technical personnel on project management and contract management.
CAG (2013) on the financial statement for MDAs and LGAs has revealed some
challenges regarding to the Contract and Project Management. These challenges are:-
 Payment to contractors for work not performed
 Projects funds not transferred to the respective project accounts
 Payments for advances to contractors beyond the approved limits,

30. 15
 Overpayment on contracts for consultancy services arising from foreign
exchange, fluctuations, loss of public funds resulted from inadequate control
on funds transferred to levels for implementation of projects
 LGAs entered into contracts having no binding provisions that would
specifically indicates the rights and obligation of each part, performance gaps
on contract management which had serious negative consequences in the
delivering of services, goods and infrastructure facilities including delivering
delays, cost overruns poor quality of services, goods and works and loss of
public funds and the compliance on general contract administration, time,
quality and scope control were relatively low at 60% of all 32MDAs audited.
1.5 Statement of the problem
The government in the 2013/14 financial year increased spending on infrastructure to
2.16trn/- compared to 1.94trn/- in the previous fiscal year. Despite of increase of the
infrastructure funds still there are complaints on no value for money for some of the
projects in LGAs. In support of that CAG (2003) describes the poor performance of
contract in several LGAs. Most of the projects end with delays, cost overrun, low
quality and conflicts.
The poor performance has been attributed to several factors, some of them being:
inappropriate selection of construction contract types without analysis the nature/type
of project, unavailability of fund of the project, disbursement of funds which do not
reflect the nature of the project, challenges of the prime cost/provisional sum and

31. 16
contingency clauses in the contract and lack of the technical personnel to select and
manage the contract.
Lack of criteria of selecting the construction contract types which lead to
inappropriate choice of construction contract types as well as challenges facing
LGAs and contractors when using the existing construction contract types which
cause consequences in contract management are factors which contributes to the
failure of projects in LGAs in Tanzania and developing countries. This state is
supported by Okumbe and Verster (2008).
Thus, an assessment of the impact of the construction contract types on the contract
management can be one step of trying to find way of improving construction contract
performance for LGAs in Tanzania by providing the criteria of selecting the
construction contracts types for construction works.
1.6 Research Objectives
1.6.1 General Objectives
The main objective of this study was to assess the impact of construction contract
types used by LGAs’ on the Contract management in Mbeya Region.
1.6.2 Specific Objectives
To achieve the above objectives, the following were the specific objectives
(a) To identify the construction contract types used by LGAs ;

32. 17
(b) To identify the criteria used by LGAs in selecting the construction contract
types;
(c) To find out the challenges faced by LGAs (clients/consultants) and
contractors when using the construction contracts; and
(d) To suggest ways and means of improving the performance of construction
contracts for LGAs.
1.7 Research questions
Out of the reserved objectives, the following research questions arise:
(a) What are the construction contract types used by LGAs?
(b) What are the criteria used by LGAs in selecting the construction contract
types?
(c) What are the challenges faced by LGAs (clients/consultants) and contractors
when using the construction contracts?
(d) In which ways and means of improving the performance of construction
contracts for LGAs?
1.8 Organization of the dissertation
The Research is presented in five chapters. Chapter one comprised background
informations; problem statement; objectives of the study and research questions of
the study. Chapter two presented literature Review, while chapter three presented
research methodology. Chapter four provided results and discussion and finally
chapter five presented summary of the study, conclusion and recommendations. The
summary of the organization of the study is presented in the figure 1.1 below.

33. 18
Figure 1. 1: Sketch of Structure of the Study
1.9 Significance of the study
Construction Contract type knowledge such as knowledge of the criteria in selecting
the construction contract types in relation to the nature and type of project and
challenges related to those contracts which happen during execution of projects is
very important because it helps to reduce the challenges in the contract management,
if three of the parties of the contract, client, consultant and contractor acquire this
Chapter 1
Introduction
Chapter 2
Literature review
Chapter 3
Research
methodology
Chapter 4
Data analysis
Chapter 5
Conclusion
 Background information
 Problem statement
 Identification of objectives
 Identification of research questions
 Significance and limitation of study
 Review of literature on construction
contract types and contract
management
 Identify the research gaps.
 Research design
 Identify and justify the targeted
populationa and sample size.
 Sample techniques & methods/tools
of data collection
 Present findings
 Data analysis
 Report results
 Presents findings and
recommendations


34. 19
knowledge. It reduce if not eliminating the issues of projects delay, cost overrun and
poor quality of the projects and bring the value for money for LGAs projects.
However, in Tanzania to the best of our knowledge there is little study which have
been undertaken regarding to impact of construction contracts on contract
management for LGAs projects, as the result there is few literature relating this area
Lack of knowledge about the impact of Construction contract on the Contract
management for LGAs projects, can be one of the gaps which needs to be assessed
and provide knowledge for overall development of the construction industry in
Tanzania.
Looking at this situation, this study attempted to establish and provide the useful
information which will help and guide Construction practitioners in modifying their
own practices. Also theories and findings will help the LGAs
(Clients/Consultants/Supervisors) to improve their performance in selecting the
construction contract and administering contract in future.
The study will increase the body of knowledge on construction contract type’s
selection and contract management for LGAs staff and stakeholders in the
construction industry in Tanzania. Also it will be as the guidance and reference tool
for future researchers who want to do the research on construction contract types and
contract management for LGAs in Tanzania.

35. 20
1.10 Limitation and scope of the study
The LGAs is broad, there are 167 LGAs in Tanzania, according to the 2012 National
Census. All of them practice construction projects. For purpose of this study the
following were the limitations:-
This study is restricted to the Local Government Authorities which have experience
in construction industry for more than ten (10) years and for the contractors who
have entered contract with LGAs for more than three (3) contracts in Mbeya Region.
The study discussed the Construction contracts types used by LGAs and contractors
assessed the criteria used to select the construction contract types, challenges faced
them and the way to improve those challenges for construction projects as
undertaken by LGAs and contractors.
The study was also confined only to the Public funded projects, i.e funded by the
Government. The study also concentrated on the LGAs technical staff who deal with
process of preparing the construction projects budgets, acquiring the consultants/
Contractors and manage the contract like architects, engineers, quantity surveyors
and suppler/procurement officers. Also the study discussed with contractors who
have technical knowhow on the construction industry.
1.11 Motivations for doing the Research on the Construction Contract types
Since July, 2006 up to date, I have been participating in the Tanzania Construction
Industry as employee for private firm and public entity. Being in this industry, I have
encountered with challenges facing the clients/consultants and contractors on the

36. 21
construction contract types selection and challenges in contract management. So for
the purpose of improving the situation in this industry was among the reason driven
me to undertake research in this area.
1.12 Definition of Central terms.
(a) Assessment: According to the Oxford English dictionary, to assess is to look
at the value/importance/quality of services being delivered.
(b) Impact: According to Oxford Dictionary impact means the effect on the
something which may have negative of positive effects, it is similar to the
word effect which has negative and positive effect, based on this study the
research look at the negative impacts.
(c) Management in business and organizations, is the function that coordinates
the efforts of people to accomplish goals and objectives using available
resources efficiently and effectively. Management comprises planning,
organizing, staffing, leading or directing, and controlling an organization to
accomplish the goal. Resourcing encompasses the deployment and
manipulation of human resources, financial resources, technological
resources, and natural resources. Management is also an academic discipline,
a social science whose objective is to study social organization.
(d) Local Government Authorities (LGAs): Local Government is
administrative office that is smaller than a state. The term is used to contract
with the offices at nation state level, which are referred to as the central
government, national government, or (where appropriate) federal
government. According to Ferris and Grady (1991), the existence of LGAs is

37. 22
the result of decentralization which relates to transferring or exchanging the
power of planning, decision making by subsiding the administration power
from a central government to a local organization.
(e) Procurement Entity (PE) means a Public body or any other body, or unit
established and mandated by the government to carry out public functions.
1.13 Chapter Summary
Chapter One has discussed the background information to the contract, contract
strategy, construction contracts types, types of contracts as per PPRA,practices of
construction contracts and contract management, problem statement, objectives,
research questions. This chapter also discussed the organization of the study,
significance of the study, limitation and scopes of the study and finally defined the
key words of the study. The following chapter represents the relevant literature
reviews that were available during the course of the study.

38. 23
CHAPTER TWO.
LITERATURE REVIEW
2.1 Introduction.
After discussing the overview of contracts and contract types as described by PPRA,
Construction contracts, practice of contract management in developing countries like
Tanzania and contract strategy in the proceeding chapter, this chapter gives an
overview on contract, elements towards the formation of contract, standard contract,
construction contracts and types of construction contract beyond to what explained
by PPRA, as well as selection and factors influence the choice of construction
contracts.
The review also presents the challenges related to the construction contract types and
challenges faced by LGA and contractors in using the existing construction contract
types, issue of contract management and contract administration and challenges
faced by LGAs and contractors in Contract management during the execution of
projects. Together with these, this chapter looks at the literature gap from real
situation of construction contract types in LGAs and how different authors have
contributed.
2.2 Formation of the Contract
Dr.Emad Elbeltagi defined a contract as: "an agreement made between two or more
parties which is enforceable by law to provide something in return for something else
from a second party". Contracts can be very simple or may be very long and
complicated legal documents. When a contract is properly set-up it is legally binding

39. 24
upon two parties or more. The two parties are expected to perform the various
obligations they have undertaken, as expressed in a mutually agreed set of contract
documents. A contract therefore, is necessary to protect both client and contractor.
According to its simple definition, a contract is an agreement enforceable at law.
However not all agreements are contracts. Some elements must be present before an
agreement becomes a contract. These elements are:
 Competent Parties: For an agreement to be a contract there must be two or
more competent parties. In order to be considered competent, a part must
have a certain legal standing.
 Proper Subject Matter: The purpose of the contract must be a legal one in
order for the contract to be valid. Subject matter is not proper if it is contrary
to public policy (such as an agreement to commit a tort or a crime or an
agreement in restraint of trade), immoral (the only use of the subject matter is
to violate the law), or if it violates a statute (such as a gambling contract or a
usurious contract).
 Consideration: There must be a lawful and valuable consideration given
between both parties. A consideration often called "something for
something." A consideration must be something which is possible.
 Agreement: For valid contract, there must be a mutual agreement. An
agreement is considered to have been reached when an offer made by one
party is accepted by the second party. Both parties must wish and intend their
bargain to be enforceable by law.
 Proper Form: The terms of a contract must be written so that both parties are
very sure of what their rights and responsibilities are.

40. 25
 Consent of the Parties: The agreement must be free from: misrepresentation,
duress undue influence, etc.
In construction industry, Bockrath (2000) defines the contract as the entire agreement
between the parties, mainly including the form of contract of agreement together
with the specifications, the advertisement, and the information to bidders, the
contractor’s proposal, the contract drawings and the conditions of the contract both
general and supplementary.
A contract is a document that spells out the rights and obligations of parties and the
administration of this interaction while protecting the parties against the risks that
emanate from various relationships, actions and production. Although the legal
systems in countries are very specific to each country, there are important aspects
that need to form part of any construction contract in any country to insure harmony,
the parties’ understanding of duties and the effective administration of obligation
Verster (2005).
2.3 Standard contracts.
A Standard contract/Standard form of contract (sometimes referred to as an adhesion
or boilerplate contract) is a contract between two parties, where the terms and
conditions of the contract are set by one of the parties, and the other party has little or
no ability to negotiate more favorable terms and is thus placed in a "take it or leave
it" position. Examples of standard form contracts are insurance policies (where the
insurer decides what it will and will not insure, and the language of the contract) and

41. 26
contracts with government agencies (where certain clauses must be included by law
or regulation).
Just as any type of contract can be chosen by the parties concerned, so any form of
agreement be used to determine the terms of the agreement. In 1964, the Banwell
Committee found that it will be preferable to develop a standard form of contract for
the entire Construction industry. Some employers, particulary large bodies like
government departments, may insist on using their own form. For example,
GC/WKS/1 which is used on government association contracts places a heavier
burden upon the contractor than is usual in private contracts. Furthermore, certain
professional bodies have developed their own forms (e.g. The Institution of Civil
Engineers and the Faculty of Architects and Surveyors), (Greenstreet, 1989).
According to the PPA (2011) section (38): the role of selecting the contract and
preparing the contract document is in the hand of Procurement Management Unit
(P.M.U). Experience with Regional Secretariet and Local Government Authorities,
construction contract types are selected with Regional Secretariet Engineers/District
engineers (Works’ Department) for the case of Buildings/Roads or Water projects.
Selection and preparation of construction contract types based on one side the
(client) and participation of contractor is very minor. This brings the biasness to the
contract. It is in the rarely situation where you may find the PMU selects and
prepares the contract documents.

42. 27
Formulation of PMU in most of the LGAs do not involves technical personnel who
can select, prepare the contract documents. In my opinion, formation of PMU should
involve, engineer, architect, quantity surveyor, lawyer, procurement/supplier officer,
economist and accountant. As it known, PMU is the secretariat of the tender board
and advisor of the Accounting Officers on all matter relating to the procurement,
like proper selection of construction contract type.
In LGAs construction projects, contractors are not part and parcel of contract
selection and contract formulation, contract rely or serve on one part (employers) and
the contractor are only called during the signing ceremony. Contractors are normally
signing the contract without thorough scrutinizing the contract. So normally
Contractors sign contracts which they do not know what is inside as the result
bringing the challenges to the Contract management. Sometimes consultants are not
involved in the process of procuring the contractors (Evaluation Committee).The
Consultants are given the Contract documents to start supervising the project without
participating in the procurement process of procuring the contractor. It seems that;
this may bring challenges in the contract because the experience and contribution of
consultant is very important in contractor selection.
Construction Contract type selection and formulation should involve the parties who
are entering in the contract; contractors should be given enough time of scrutinizing
the contracts before signing. This will bring the essence of the contract. PMU
formulation should involve the technical personnel like architects, quantity
surveyors, engineers, lawyers and procurement officers/supplier officers, Accountant

43. 28
and economists with the aim of sharing the knowledges and advise well the
accounting officers and tender boards.
2.4 Selection of contract type
The selection of contract type to be used for a construction project is made by the
owner, acting upon the advice of his engineer and his legal advisor. The selection
must meet the owner’s objectives and takes into account the constraints that might
relate to the project. Consultants and contractors should be fully informed by the
project objectives and Constraints. The scope, risk allocation and the nature of the
project will primarily affect the selection of type of contract.
The Contractual goal of the procurement of any goods or services is successful
project completion. Success project completion is the successful of procurement of
goods or services at the right time, with the right quality, at the right time with the
right quality known as 5”R’s”Thai & IPP (2004).
To complete a project successfully, contractual goals should be established to
accomplish each of the “5R’s. The establishment contract goals begin with
identifying the typical contract risk and potential contract administration problems
associated with purchase that could affect any of the “5R’s (Davisons & Wright,
2004).
By understanding the relationship between the contract type and potential contract
problems, procurement professionals can anticipate the types of contract

44. 29
administration problems that are likely to occur for a specific type of purchase. In
turn, this will allow them to prepare effective specifications, contracts, and contract
administration plans to avoid the potential problems or minimize the potential
negative consequences (Davison & Wright, 2004).
Manuel (2014) states that, selection of the contract type for a particular procurement
is generally within the contracting officer’s discretion. The contracting officer
typically decides on the contract type prior to issuing a solicitation. This decision is
made after considering a range of factors including the degree of price competition in
the procurement, the type and complexity of the requirements, the urgency of the
requirements, the period of performance or length of the production run, and the
acquisition history. These factors can cut in various ways in any given procurement.
For example, while the requirements might be simple enough for a fixed-price
contract, the procuring activity’s need for them might be urgent, a circumstance
which could be seen to justify use of cost-reimbursement contracts.
Particularly in negotiated procurements however, selection of the contract type can
also be “a matter for negotiation” between the“procuring activity” and the contactor.
Most reports by the Government Accountability Office or agency inspectors general
discussing agencies’ use of particular types of contracts allege not because the type
used was unlawful but because it was imprudent, it left the government vulnerable to
paying too much, especially if agency oversight of contractor performance was
inadequate. Provided they do not unilaterally modify particular contracts, procuring
activities may generally change the type of contract used in the course of an

45. 30
acquisition program, a series of contracts for recurring requirements, or a single
long-term contract, so as to shift more risk to the contractor as the uncertainties
associated with the procurement are reduced (Manuel, 2014).
There are many different types of construction contracts, distinguished primarily by
the method of determining the final contract price. Regardless of the method used,
the goal is the same quality construction completed on time and to all specifications
for the lowest possible price while allowing the contractor an opportunity to make a
fair profit. The type of contract chosen may depend on several factors, including the
identity and relationship, if any, of the owner and contractor, the completeness of the
design and its complexity; the types of work to be done; the need or desire of
competitive pricing (Fisk&Reynolds, 2006).
2.5 Factors Influencing the choice of Construction Contract
According to JCT (2011) the choice of appropriate types of construction contracts
might be greatly influenced by external factors. Choice should never be made on
some arbitrary basis but always after a careful analysis of the situation, and taking
into account considerations such as the following:
 The nature of the project: For example – is this a completely new detached
building; an extension to an existing building; a refurbishment job;
restoration of an historic structure; reinstatement after fire damage or neglect;
a repair and maintenance programme involving many buildings?

46. 31
 The scope of the works: For example – is there something unusual about the
size, complexity or location of the works; are there site problems of access,
storage or movement; does the work involve the basic trades and skills of the
industry; does an innovative design demand sophisticated construction
methods; is there specialist subcontractor’s work with a design content; is
there a high content of specialist engineering installations; is this a single
construction operation, phased work, or part of a term programme?
 Measure of control by the client: For example – should design be wholly in
the hands of the client’s consultants; can some detail design be placed as a
contractor’s responsibility; should there be provision for design by specialist
subcontractors; to what extent does the client wish to control selection of
specialist subcontractors; what measure of control will the client wish to exert
over materials and workmanship; how much reliance can be placed on
performance specified requirements?
 Accountability: For example – does the client aim for single point
responsibility; is it the intention to appoint a project manager or client’s
representative; where is responsibility intended to lie for specific matters —
with consultants, contractor, specialist sub-contractors?
 Appointment of a contractor: For example – is this to be by negotiation or
by competitive tendering; is the contractor to be appointed to carry out
construction work only; is the contractor to have some responsibility for
design; is the contractor to be appointed early to undertake primarily a
management role?

47. 32
 Certainty of final cost: For example – is a lump sum contract preferred; will
it be a fixed price or with fluctuations; do the circumstances dictate
remeasurement and an ascertained final sum; must all tenders be on a
competitive basis?
 Start and completion times: For example – is this to be ‘fast track’ with the
shortest overall programme a priority; is an early start date desirable; will
there be adequate time to prepare full information for tendering purposes; do
circumstances dictate a specific completion date; can the contractor be
provided with exclusive possession right from the start.
 Restrictions: For example – does the site raise security problems or problems
in relation to surrounding property such as access or noise; are there
restrictions on working hours; will the building be still in operation and
occupied during the course of the works; is the work to be phased; is there a
specific requirement concerning the sequence of operations?
 Changes during construction: For example – is there a likelihood of design
changes during the course of the works; can the contract satisfactorily
accommodate variations and the valuing of such work; to what extent might
approximate quantities or provisional sums be required?
 Assessment of risks: For example – is this to be a contract with the lowest
possible risk to the client overall; what are the priorities in apportioning the
risks concerning cost, time, and quality or performance; where are the
speculative risks intended to lie?

48. 33
 Building relationships with the supply chain: For example – is a long term
relationship with a supplier or the supply chain required so as to provide
continuous improvement?
2.6 Existing Construction contract types.
Construction contracts may be classified into the following types:
2.6.1 Lump-Sum Contract
Also known as stipulated sum and fixed price contract. Bockrath (2000) defines it to
be the contract in which the contractor agrees to perform for a stated amount of
money. Fisk & Reynolds (2006) write that the lump sum contract is one in which the
contractor agrees to do specified construction for a fixed price set forth in the
contract, The only changes allowed to the fixed price are for extras or change orders.
Clough (1981) argues that, the satisfactory completion of the work for the stated
amount of money remains the obligation of the contractor, regardless of the
difficulties and troubles that may be experienced in the course of construction
activities, even though the total cost of the work may turn out to be greater than the
contract price. However, the contractor can be relieved of this contractual
responsibility because of impossibility of performance, where there is contract
provision for price adjustment in the event of changed conditions, and possibly
because of other contingencies.

49. 34
Hendrickson (2008) and Collier (1994) emphasize that in this type of contract, the
owner has essentially assigned all the risk to the contractor, who in turn takes almost
all the risks by offering to do the work for a stipulated sum. He adds that, beside the
fixed lump sum price, other commitments are often made by the contractor in the
form of submittals such as specific schedule, management reporting system or
quality control program. Collier (1994) recommends that for an owner there is a risk
of default in performance of the work by the contractor, this risk can be reduced by
requiring and paying for a performance bond. In this kind of contract a contractor can
minimize his risks and minimize his profit.
This type of contract is popular from the owner's viewpoint for the obvious reason
that the total cost of the project is known in advance. Clough (1981) state that, this
type of contract can be used successfully for the routine construction of schools, mill
buildings, warehouses, and similar structures with which the average contractor has
had considerable experience. Although these projects involve many different kinds of
work, a capable and experienced contractor can generally estimate the total cost and
prepare the bid with a fair degree of accuracy. Fixed contracts can be divided into
several types as shown in the table below:

50. 35
Table 2. 1: Types of Fixed-price Contracts
S/N Type Description Use Condition on Use
01 Firm-fixed-price
contract
Contractor
agrees to provide
supplies or
services to the
procuring
activity for a
specified price.
Used when acquiring
the commercial items
or other supplies and
services when there
are reasonably define
specifications, and
fair and reasonable
prices can be
established at the
outset.
N/A
02 Fixed-price
contract with
economic price
adjustments.
Contractor
agrees to provide
supplies or
services to the
procuring
activity for a
specified price
that could be
adjusted if
certain
conditions
change during
performance of
the contract
Used when the
stability of market or
labour conditions
during an extended
period of contract
performance is
uncertain, and
contingencies that
would otherwise be
included in the
contract price can be
identified and
separately addressed
the contract.
Contracting officer
must determine that
a price adjustment
clause is necessary
to protect the
contractor and
government against
significant
fluctuations in
costs, or to provide
for price adjustment
in the event of
changes in the
contractor’s
established prices.
03 Fixed-price
contract with
prospective
price
redetermination
Contractor
receives a firm
fixed price for a
specified initial
period of
performance,
with the price for
later periods
revised in an
equitable manner
based on
variables agreed
upon by the
parties.
Used to acquire
quantity production
or services when it is
possible to negotiate
a fair and reasonable
firm fixed price for
the initial period but
not for later ones.
Negotiations have
established that
conditions for use
of firm-fixed price
contract are not
present and a fixed-
price incentive
contract is not more
appropriate; the
contractor’s
accounting system
is adequate for
redetermination;
pricing periods can
be made to conform
to accounting
system; and there is
reasonable
assurance
redetermination
will take place as
scheduled.

51. 36
Table 2.1 Continued…………….................
04 Fixed-ceiling-
price contracts
with retroactive
price
redetermination
Contractor
receives no more
than a fixed
ceiling price that
was agreed upon
when the
contract was
formed; the
determination of
the actual price
occurs after
contract
performance,
based on
previously
agreed upon
variables.
Used for research and
development
contracts whose
anticipated value is
less than $150,000
when other fixed
price contracts cannot
be used.
Contractor’s
accounting system
is adequate for
price
redetermination;
there is reasonable
assurance
redetermination
will take place as
scheduled; and the
head of the
contracting activity
(or other higher-
level officials)
approves use in
writing.
05 Firm-fixed-
price, level-of-
effort term
contracts.
Contractor
receives a fixed
amount for
providing a
certain level of
effort over a
certain period of
time on work
that can be stated
only in general
terms.
Investigation or study
in a research and
development area
whose anticipated
value is generally less
than $150, 000,
usually yields a
report describing the
R&D results.
Work required
cannot otherwise be
clearly defined;
required level of
effort is identified
and agreed upon in
advance; and there
is reasonable
assurance that the
intended result
cannot be achieved
by less effort.
Source: Manuel (2014)
2.6.2 Unit Price Contract
Bockrath (2000) defines unit price contract as the one in which payment for the work
is to be made upon the basis of the computed quantities of specifically stated items of
work actually performed and materials furnished and used by the contractor in the
project, each such quantity being multiplied by the contractor’s bid price for that
unit. Halpin & Woodhead (1980) stated that in the unit price contract, the project is

52. 37
broken down into work items that can be characterized by units, and the contractor
quotes the price by units rather than as a single total contract price.
This type of contract is based on estimated quantities of certain well-defined items of
work and costs per unit amount of each of these work items. The estimated quantities
are compiled by the engineer, and the unit costs are those bid by the contractor for
carrying out the stipulated work in accordance with the contract documents. The total
sum of money paid to the contractor for each work item remains an indeterminable
factor until completion of the project because payment to the contractor is made on
the basis of units of work actually done and measured in the field. Therefore the
exact ultimate cost of the construction is not known to the owner until completion of
the project. The contractor is obligated to perform the quantities of work actually
required in the field at the quoted unit prices, whether they are greater or less than the
engineer's estimates (Clough, 1981).
Hendrickson (2008) notes that in this type of contract, the risk of inaccurate
estimation of uncertain quantities for some key tasks has been removed from the
contractor Collier (1994) repeats that unit price contracts are not always a separate
kind of contract, but they are often a form of fixed price contract with separate unit
prices and separate sums stipulated for each item of work required. This type of
contract is most often used in heavy construction and public works contracts, such as
pipelines, highways, earthworks, bridges, tunneling and transit facilities; in situations
where it is difficult to calculate quantities in advance (Fisk & Reynolds ,2006).

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2.6.3 Cost plus Contracts
Also called cost reimbursable contracts, are contracts in which the contractor is paid
the actual costs of the construction plus a specified markup to cover overhead and
profit. Typically, the contract defines costs as including all expenses for materials,
labour, and subcontractors and suppliers (Fisk & Reynolds, 2006).
Bockrath (2000) mentioned several reasons that an owner may choose to use a cost
plus contract. The work may be such that the owner fears that the bidders will add
large contingencies, or in an emergency situation requiring construction of something
without time to develop plans for it, a contractor may not be able to make a proposal
on a lump sum basis. A unit price basis is equally undesirable because it is difficult
to foresee all that is required. In such a situation it is preferable to engage a
contractor to do the work on the basis of cost plus some allowance for overhead and
profit. Also he recommended that cost plus contract may also be useful in situations
that are not emergencies, especially when it is uncertain what troubles or difficulties
will be encountered in the work. In this way, decisions can be made as the work
progresses.
Fisk and Reynolds (2006) comment that this type of contract is appropriate where,
due to an incomplete or very complex design, a contractor would be unable to give a
lump-sum price without including a large contingency for unknown factors. Cost
plus contracts can be divided into several types as follows:

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 Cost Plus Fixed Percentage of Cost Contract
In this type of contract, the contractor is paid his/her actual costs plus a specified
percentage for costs of overhead. Thus, the contract would specifically exclude
actual overhead expenses from the definition of eligible costs. To the total of costs
and the overhead is then added a specified percentage for profit (Fisk & Reynolds,
2006).
For certain types of construction involving new technology or extremely pressing
needs, the owner is sometimes forced to assume all risks of cost overruns. The
contractor will receive the actual direct job cost plus a fixed percentage, and have
little incentive to reduce job cost. Furthermore, if there are pressing needs to
complete the project, overtime payments to workers are common and will further
increase the job cost (Hendrickson, 2008). However, Hendrickson (2008) does not
advise the owner to use this type of contract, unless there are compelling reasons,
such as the urgency in the construction of military installations.
 Cost Plus Fixed Fee Contract
In this type of contract, the contractor is paid his/her actual costs plus a fixed fees
that is set in advance, and it may or may not specify that costs include a set daily rate
for overhead (Fisk & Reynolds, 2006). Hendrickson (2008) mentions that under this
type of contract, the contractor will receive the actual direct job cost plus a fixed fee,
and will have some incentive to complete the job quickly since its fee is fixed
regardless of the duration of the project. Bockrath (2000) points that this type of

55. 40
contract overcomes the possible weakness of the cost plus percentage type, imply the
more non productive and wasteful the contractor is, the more profit he makes.
The contractor here receives only the stipulated fixed fee sum regardless of what the
costs of the project and his overhead and profit are. If staff salaries are to be paid out
of this fee, the contractor will endeavor to expedite the project so as to make as much
profit as possible. Even if staff salaries are to be classed as a part of the general costs
of the job, the contractor will still want to rush the work so that his workers can be
available for another contract as soon as possible (Bockrath, 2000).
 Cost Plus Variable Percentage Contract
For this type of contract, the contractor agrees to a penalty if the actual cost exceeds
the estimated job cost, or a reward if the actual cost is below the estimated job cost.
In return for taking the risk on its own estimate, the contractor is allowed a variable
percentage of the direct job-cost for its fee. Furthermore, the project duration is
usually specified and the contractor must abide by the deadline for completion
(Hendrickson, 2008). Hendrickson (2008) finds that this type of cost plus contract
allocates considerable risk for cost overruns to the owner, but also provides
incentives to contractors to reduce costs as much as possible.
 Cost plus Incentive Fee
The contract here specifies time and quality criteria. If the contractor meets those
criteria, it is paid its costs plus a set fee. If the contractor exceeds those criteria,
perhaps by completing the job early, the contractor is paid an additional fee based on

56. 41
a scale set forth in the contract. If the contractor does not meet those criteria, the fee
is less (Fisk & Reynolds, 2006).
2.6.4 Design-Build Contract
Design-build contract permits an owner to contract with one entity to provide both
design and construction services. It involves a single contract for both design and
construction services rather than one contract for design and another for construction.
It combines into a single role the design responsibility of the project and the building
function of the prime contractor (Toler, 2007).The design-builder may be a single
company, or it may be a joint venture. The design-builder need not have in-house
capability to perform both construction and design; a construction contractor may
subcontract the design work, or an engineering firm may subcontract the construction
work. Some design-build contracts are “turnkey” contracts.
2.6.5 Turnkey Contract
Turnkey contract is an American term for “all in” or package contract. Under this
arrangement, a contractor is commissioned to undertake the responsibilities for
everything necessary and required for the construction, completion, commissioning
and hand over the project. The word “turnkey” means that, upon completion, the
client is given the key and he can then enter the project by “turning the key”. The
contractor will have to do everything from preparing project brief, getting approval,
designing, financing, construction, furnishing and decorating to commissioning and
handing over completed, cleaned and ready for use project (Allen, 2001).

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2.6.6 Management-Oriented Contract
Management contracting is a process whereby an organization is appointed to the
professional team during the initial stages of a project to provide construction-
management expertise under the direction of the contract administrator. The
management contractor employs and manages works contractors who carry out the
actual construction of the project and he is reimbursed by means of a fee for his
management services and payment of the actual prime cost of the construction
(Masterman ,2002 cited in Murtaja, 2007).
2.6.7 Construction by Day Labor
Also called force account, which means that the owner does the work with his own
forces, pays for all labor, all materials furnished, and all expenses of any kind that
are required for the completion of the job. He also provides or rents the equipment.
The workmen may be his own regular employees or others whom he has recruited
for the job. The owner may supervise the work directly, handle it through the
services of the engineer, have a superintendent appointed from his own staff, or hire
a superintendent for the job. He may even hire a contractor to do this supervision,
paying him a salary or a fee to do so (Dunham et al, 1979).

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2.6.8 Target Estimate Contract
This is another type of contract which specifies a penalty or reward to a contractor,
depending on whether the actual cost is greater than or less than the contractor's
estimated direct job cost. Usually, the percentages of savings or overrun to be shared
by the owner and the contractor are predetermined and the project duration is
specified in the contract. Bonuses or penalties may be stipulated for different project
completion dates (Hendrickson, 2008).
2.6.9 Guaranteed Maximum Price Contract
Fisk & Reynolds (2006) note that this type of contract is a variation of the cost plus
contract where the owner and contractor agree that the project will not cost the owner
more than a set price, the guaranteed maximum. The contractor is paid on a cost plus
fixed fee or percentage of cost basis, but in no event more than the set maximum
price.
Hendrickson (2008) comments that when the project scope is well defined, an owner
may choose to ask the contractor to take all the risks, both in terms of actual project
cost and project time. The owner and the contractor agree to a project cost
guaranteed by the contractor as maximum. There may be or may not be additional
provisions to share any savings if any in the contract.
Whereas Barrie & Paulson (1992) have the view that under this type of contract, the
owner takes the scope risk and the contractor takes the price risk over a guaranteed
maximum or upset amount. Savings below the guaranteed maximum price are

59. 44
normally shared between contractor and owner on a negotiated basis. This type of
contract permits work to begin prior to final design and, if the scope is well defined,
can fix a maximum price for the work. As in the fixed price contract, problems arise
when scope changes are made by the owner or when changed conditions are
encountered.
Fisk and Reynolds (2006) comment that, in some guaranteed maximum price
contracts, a savings clause provides that if the project costs the owner less than the
guaranteed maximum price, the owner and contractor are to split the difference
between the costs and the guaranteed maximum price; typical splits are (50/50)
percent and (60/40) percent (owner/contractor). Guaranteed maximum price
contracts give contractors great incentive to keep costs as reasonable as possible to
ensure themselves as much profit as possible.
2.6.10 Contracts with Quantities
In some countries a form of unit price contract is used for many major building
projects. These are called contracts with quantities. The main difference between
contracts with quantities and unit price contracts is primarily in the quantities of
work provided in a contract with quantities. For the most part, contracts with
quantities have quantities that are not approximate. They are accurate quantities
measured by an agent of the owner known as a quantity surveyor. Also, a
professional quantity surveyor may handle the financial administration of a building
project, from the initial conceptual estimates to the settlement of the final account. In
contracts with quantities the quantity surveyor is responsible to the owner for the

60. 45
accuracy of the quantities provided to bidders in the bidding documents. If there is
any subsequent variation from those quantities in the contract, the owner pays the
contractor according to the actual quantities of work done (Collier, 1994).
2.6.11 Construction Management Contract
A professional construction management program featuring phased construction and
competitively bid fixed price contracts offer early completion advantaged coupled
with fixed price contracts, but may not offer a high quality price guarantee since
work begins prior to finalizing all individual contracts. Changes to the work after
contracts have been awarded or nonperformance by individual contractors can result
in major delays and disputes between owner, construction manager and project
contractors (Barrie & Paulson,1992).
Currently the standard conditions of contract used in works projects in Tanzania
specify that for a contract that is expected to last for 18 months or more price
adjustment should be provided for. The philosophy behind providing price
adjustment for contracts extending beyond 18 months is the assumption that one is
able to forecast changes in price for the next 18 months. However, in analyzing the
suitable projects duration for providing for price adjustment one must consider the
trend of inflation in that particular country. If there is justification that inflation in the
country is so bad that it is no longer possible to forecast prices for say a period of
twelve (12) months or so, then tender for a contract that is expected to last twelve
(12) months or more from the time of bidding to the time of completion should not

61. 46
be called on a fixed price basis and a price adjustment provision must be included in
the tender documents and subsequently in the contract.
Price adjustment may be applied to labour and material costs as well as currency
exchange rates for goods purchased in foreign currency. In normal contracting
strategies, cost adjustment provisions should only be applicable to costs, typically
long term costs that might cause bidders to overestimate or uneconomically
underestimate contract prices. There is a risk that during the course of a contract, the
costs of performing a contract will change from those initially estimated. The risk is
not directly controllable by either the PE or the bidder. The risk to a
supplier/contractor or service provider who contracted at a fixed price and having to
fulfill his contract under conditions of escalating prices is obvious. What is not so
obvious is that, by insisting on contracting on a fixed price basis the PE is in fact,
subjecting himself to unnecessary risks. Bidders required to bid on a fixed price basis
will take into account possible price escalation and build any anticipated price
increases into their bids. To be reasonably safe, the possible price escalation is
invariably estimated on the high side.
In the implementation of the contract if the actual price escalation turns out to be far
less than estimated by the bidder, the PE effectively winds up paying more than is
necessary under the contract. In other words, in a fixed price contract both the
supplier/contractor or service provider and the PE are exposed to risks brought about
by unforeseen price fluctuations. However, once a contract has entered into force the
conditions of contract are the governing principle. In this perspective, for the case

62. 47
whereby the contract is a fixed priced contract and prices have fluctuated, the PE
needs to consider amending the contract so as to be fair to the contractor. Altering
the contract is necessary for the benefit of both the PE and the Contractor. The PE
benefits by treating the PE fairly and thus achieving equity.
2.7 Challenges facing Clients (LGAs) on using inappropriate Construction
Contracts
LGAs face delayment of projects, poor quality of project, costs overrun and disputes
when use Lump sum contract to the projects, this is contributed by inappropriate
preparation of tender documents which results to variations and increase on the
project costs, projects will not be delivered on time as required and poor quality of
the project caused by contractor due to contractor to fail to deliver good quality
caused by fixed rate and no contingency. Unrealistic project budgets which cause the
client to transfer financial risks to contractor is among the challenges encountered by
contractors when using fixed price contract.
2.8 Challenges facing Contractors on Using Inappropriate Construction
Contracts
CRB & Shi (2009) reports that, in Tanzania Small and Medium contractors bear
more risks in the market. For instances, in order to control cost, clients attempt to use
Fixed Price Contracts so that the risks of unforeseen contingencies related to an
overheated economy are passed on to contractors.

63. 48
Due to the fixed price contract, when it happens that in the contract there is no
contingency and variation occur contractors sometime use their own money which
direct them to become bankrupt and some of the contractors due to some debt they
decide to kill themselves. Increase of costs of materials due to inflation rate in the
country and cause fluctuation in the project budget is another challenges
encountered by contractors. Unstable flow of fund to the project it is another problem
which hinder the contract to fail to complete the project on time and cause contractor
to find other source of find to execute the project while the contract is fixed.
2.9 Contract Management
Contract management is the process that enables both parties to a contract to meet
their obligations in order to deliver the objectives required from the contract. It also
involves building a good working relationship between customer and provider. It
continues throughout the life of a contract and involves managing proactively to
anticipate future needs as well as reacting to situations that arise. The central aim of
contract management is to obtain the services as agreed in the contract and achieve
value for money. This means optimising the efficiency, effectiveness and economy
of the service or relationship described by the contract, balancing costs against risks
and actively managing the customer–provider relationship. Contract management
may also involve aiming for continuous improvement in performance over the life of
the contract (OGC, 2002).

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2.9.1 Contract Administration Cycle
Contract administration is an important aspect in the procurement cycle which
ensures that the client gets what she/she procured. Unfortunately, is a stage which is
not given adequate attention during contract implementation that cause unnecessary
complaints of the parties to a contract and to the public in large and this become
peculiar in Public procuring entities (Mlinga, 2008).
Clients put in a lot of efforts in the procurement process to ensure that they select a
contractor, supplier or service providers who shall deliver the works, goods or
services of the required quality, in a timely manner and within the agreed costs. The
selection process in some cases, not supported by a vigorous system which ensures
that what was bought is indeed what is delivered (Mlinga, 2008).
According to Mlinga (2008), contract administration involves those activities
performed by Procuring Entity (PE) after a contract has been awarded to determine
how well the PE and the contractor performed to meet the requirements of the
contract. It encompasses all dealings between the PE and the contractor from time to
time the contract is awarded until the work has been completed and accepted or the
contract terminated, payment has been made, and disputes have been resolved. As
such, contract administration constitutes that primary part of the procurement process
that assures the PE gets what it paid for.
There are three aspects to contract that must be managed while assignment is being
carried out: time, cost and performance. Time and Cost must be measured against the

65. 50
budget and projected time required to complete the contract to detect deviation from
the plan. The performance of the contract must be checked to ensure that the targets
are being met and sound effective. Without complete records any possible disputes or
claims may be difficult and time consuming to sort out (Mlinga, 2008).
The specific nature and extent of contract administration varies from contract to
contract. It can range from minimum acceptance of delivering and payment to the
contract to extensive involvement by programme, audit and procurement officials
throughout the contract term. Factors influencing the degree of contract
administration include the nature of the work, the type of contract and the experience
and commitment of the personnel involved (Mlinga, 2008).
According to Mlinga (2008), good contract administration ensures that the end users
are satisfied with the product or services being obtained under the contract. It is
absolutely essential that those entrusted with the duty to ensure that the government
gets all that it has bargained for are competent in the practice of contract
administration and aware of and faithful to the content and limit of their found in the
prerequisites of good contract management. Good contract management ensures that
each party to a contract gets what it has bargained for. In order for this to happen, the
following are important prerequisites.
(a) There has to be very clear terms on what must be accomplished by each
party;
(b) Rights and Obligation of each party must be defined very clearly;

66. 51
(c) There must be a system in place of ascertaining that the rights and obligations
of each party have been accomplished;
(d) There must be a system in place to handle disagreement; and
(e) There must be a system in place for winding up the contract.
2.9.2 Contract Amendments
Contract amendments are used to change the original contract. The need for an
amendment may be the result of negotiations, changes in the original requirement, or
the need to deal with something unforeseen. The contractor must agree with the
amendments, when there is a need to amend a contract because the quantity, time,
cost or quality is different from the original requirement, PE’s agreement must be
obtained before asking the contractor to implement the amendment. Normally the
format for an amendment follows the form of the original contract. The amendment
should identify, by using complete clauses, any changes, additions or deletions. Any
aspects of the contract which will be affected by the amendments must be identified
and deal with the amendment (Ndibalema, 2010).
2.9.3 Contract Delivery Follow –up
One important aspects of contract management is to follow up on the state of what
has been bought after it has been delivered, to ensure that the PE is satisfied. The
extent of the follow up may vary depending on the contract value or the commodity
involved. Responsible PEs staff should establish any expected delivery follow up
requirements at the time the contract is being set up. In many cases problems arise

67. 52
during the implementation because the mitigation measures were not taken into
account during the preparation of contract (Mlinga, 2008).
It is normally required to deal with reports of unsatisfactory delivery immediately. A
decision must be made concerning a contractor who has not delivered goods of the
expected quality or who has not delivered on time, as to whether it should be
considered as a contract default and what steps should be taken. Contract delivery
follow-up is also responsible for dealing with contractors whose goods, during the
warranty period become defectives or fail to meet contract requirements as a result of
faulty manufacture, materials or workmanship.
2.9.4 Contract Closeout Cycle
A completed contract is one that is both physically and administratively complete. A
contract is physically complete only after all deliverable items and services called for
under the contract have been delivered and accepted by the guarantee. These
deliverable items include such things as reports, spare parts, warranty documents and
proof of insurance(where required by the contract terms).These deliverable items
may or may not have been priced as discrete pay items in the contract, but they are
required deliverable, and the contract is not physically completed until all
deliverables are made. A contract is administratively complete when all payments
have been made and all administrative actions accomplished. The Steps that must be
completed to close out a contract will depend upon the type and/nature of the
contract.