Procurement Management and Contract Administration Andualem Endris Yadeta

1. University
Madda Walabu
Procurement Management and Contract Administration
CoTM 4242
Instructor
Andualem Endris (M.Sc)
andu0117@yahoo.com
www.facebook.com/aendris1
www.linkedin.com/in/andualem-yadeta
www.twitter.com/andualemyadeta
7/31/2021
INTRODUCTION TO CONTRACT
Chapter One
College of Engineering
Construction Technology and Management Department
1
CoTM 4242

2. WHAT IS A
CONTRACT?
• Definitions
• “An agreement enforceable by law is a Contract.”
• “Every promise and every set of promises, forming the
consideration for each other , is an Agreement.”
• “The agreement must create legal obligations between
the parties is an Enforceable.”
• Contract: It is an undertaking by a firm or a person
to do any work under certain terms and conditions.
• Contractor: A person or a firm who undertakes any
type of contract.
7/31/2021 CoTM 4242 2

3. Definitions ... Cont’d
• Construction contracts: are the agreements between
service providers (contractors) and the clients.
• Management: is the set of activities (planning,
organizing, leading and controlling) directed at the
organization’s resources i.e. human, financial, physical
and informational, with the aim of achieving the
organizational goals, in an efficient and effective manner.
• Client: is the promoter or the project initiator. He
develops a need for a structure, establishes his
requirements and provides resources that are required
for the realization of the project
• The contractor assembles resources into the final
product
7/31/2021 CoTM 4242 3

4. Definitions ...Cont’d
From a Legal Point of View:
 Contract is a mutual agreement between two or
more parties that something shall be done, an
agreement enforceable at law.
According to FIDIC:
 Contract means the General Conditions, the
Supplementary Conditions, the Specifications, the
Drawings, the Bill of Quantities, the Tender, the
Letter of Acceptance, the Contract Agreement.
7/31/2021 CoTM 4242 4

5. Purpose of a Construction Contract
• The fundamental purpose of a construction
contract is to:
 Describe scope of works;
 Establish time frame;
 Establish cost and payment provisions;
 Set obligations, rights and relationships;
 Balance risks;
 Set project execution plan;
 Establish control mechanisms; and
 Minimize disputes.
7/31/2021 CoTM 4242 5

6. Evolution of Construction
Contracts
7/31/2021 CoTM 4242 6

7. Evolution of Construction
Contracts ... Cont’d
• The earliest building contract comes from
one of the Laws of Hammurabi, the
Babylonian, conquer:
“If a Contractor builds a house for a
man, this man shall give the contractor
two shekels of silver as recompense.
If a contractor builds a house and does
not build it strong enough and it
collapses and kills the owner the
contractor shall be put to death.”
• This ancient law explicitly expresses the
rights, obligations and remedial
measures for non-compliance of
contracting parties.
7/31/2021 CoTM 4242 7

8. Evolution of construction contracts
... Cont’d
• Between 1200-1600 AD
construction work was
undertaken by master
craftsmen organized into
guilds.
• Formal construction
contracts have been
around since 1870, J.
Murdoch and W. Hughes
(2001).
7/31/2021 CoTM 4242 8

9. Evolution of construction
contracts ... Cont’d
• By 1800 AD the contracting system emerged
and many works required designs to be
complete, including estimates for materials and
labour.
• This marked the beginning of construction
contracts as we know them today.
• Need for contract comes with many short falls to
be managed which can be termed as risks. The
following are some of the risks:
7/31/2021 CoTM 4242 9

10. Construction Risks
• Owner’s risk is due to the following factors:
• Will the contractor be able to carry out work as per
specifications?
• Can the work be completed within quoted cost and
time?
• Will the plant/project perform at the required level?
• Will the contractor stay on job till its completion?
• Will the contractor co-operate with the owner and
rectify defects later?
• Will the relationship continue?
• Does he/she understand his/her intent fully?
7/31/2021 CoTM 4242 10

11. Construction Risks … Cont’d
• Contractor’s risk is due to the
following factors:
• Termination of work before its completion
• Prompt payments
• Reimbursement for extra claims
• Penalization for failures beyond his control.
• Interruptions in progress and change of scope
• Compensation for pure escalation.
7/31/2021 CoTM 4242 11

12. Construction Risks … Cont’d
Other construction risks include
1. The unforeseen conditions:
• unexpected ground conditions
• unpredicted weather conditions
• a shortage of materials in the market
• a shortage of skilled labour
• accidents, whether by fire, flood or
carelessness
• innovative design that does not work or
proves impossible to construct.
• The length of the contract.
7/31/2021 CoTM 4242 12

13. Construction Risks … Cont’d
2. Projects vary in the time needed for
completion, from days to years. During that
time the risk allocation agreed at the time of
contracting can change substantially. This is
especially so with regard to the availability of
materials and its costs. A contractor may have
‘bought’ the job because work was scarce at
the time and the price of components was low.
7/31/2021 CoTM 4242 13

14. Construction Risks … Cont’d
3. The number of participants, and parties in the project
and the corresponding length of contractual chain cause
their own problems. The risk of insolvency increases, the
longer the chain.
4. The particular relationship (often referred to as a
triangular relationship of costs, time and quality) in
which conflict is inherent. Contracting parties have
different perceptions of how these factors of their
relationship interact.
7/31/2021 CoTM 4242 14

15. Construction Risks … cont’d
5.The interaction between liability for defective
workmanship and for faults in design. Lack of
coordination between design and construction is
a common source of dispute. Much of the
innovation in procurement systems of recent
years stems from creating ways of minimising
the effect of this clash.
7/31/2021 CoTM 4242 15

16. Construction Risks … Cont’d
• Construction contracts are drawn to ensure duties,
responsibilities and risks are shared and distributed
amongst the project participants. The use of standard
forms of agreements has been developed and generally
adopted in the construction industry to help guide the
relationships between the parties and also to ensure
construction projects are managed in a sound and
effective way. The adoption of a suitable form of
agreement, its implementation in executing the work
until project close out is the object of construction
contract administration.
7/31/2021 CoTM 4242 16

17. Standard forms of
construction contracts
7/31/2021 CoTM 4242 17

18. Standard forms of construction
contracts ... Cont’d
• They are standardized construction contracts
documents which can be adopted by contracting
parties depending on the type and nature of the
project and client body.
• They are widely used in the industry.
• They are formulated by industry players
(associations) usually to reduce the incidence of
disputes
7/31/2021 CoTM 4242 18

19. Standard forms of construction
contracts ... Cont’d
• There are many advantages to be gained by using a
standard form of contract.
Advantages
• The standard form is usually negotiated between the
different bodies that make up the industry. As a result
the risks are spread equitably.
• Using a standard form avoids the cost and time of
individually negotiated contracts.
• Tender comparisons are made easier since the risk
allocation is same for each tenderer. Parties are assumed
to understand that risk allocation and their prices can be
accurately compared.
7/31/2021 CoTM 4242 19

20. Standard forms of construction
contracts .... Cont’d
Disadvantages
• The forms are cumbersome, complex and often
difficult to understand.
• Because the resulting contract is often a
compromise, they are resistant to change.
• Much-needed changes take a long time to bring
into effect.
7/31/2021 CoTM 4242 20

21. Special features of a construction
contract
• The carrying out and completion of this contract
(whether made using a standard form of contract or
other) differs from other contracts.
• The most important background fact which should be
kept in mind is that building construction is not like other
industries, for example the manufacture of goods. The
size of the project, site conditions, the use of many
materials and the employment of various kinds of
operatives make it virtually impossible to achieve the
same degree of perfection that a manufacturer can.
7/31/2021 CoTM 4242 21

22. Special features of a construction
contract … Cont’d
• As a result of the nature of construction projects
themselves, the construction contracts are:
 Fluid and slippery until the works get completed
 Involve many parties who have a bearing on the
main contract e.g. subcontractors, suppliers etc
7/31/2021 CoTM 4242 22

23. Stages of Contract
Administration
7/31/2021 CoTM 4242 23

24. Stages of Contract Administration
... Cont’d
• Contracts will be administered at:
Pre-contract stage
Construction stage
Post construction stage
7/31/2021 CoTM 4242 24

25. 1. Administering Contracts at Pre-
contract Stage
• This involves the definition of the work to be carried out. In
this case the contract manager or the consultant will do the
following:
• Define the scope and quality of the work (interpret the brief).
• Allocate each task or group of tasks to respective participants
• Choose the procurement method (Open bid, selective bid, etc)
• Choose the best form of contract (PPA, MoWUD, FIDIC, etc)
• Ensure timely completion or substantial completion of tasks
assigned before advancing to the next stage.
• Over see the preparation of contract documents which
essentially marks the beginning of construction contract
administration.
7/31/2021 CoTM 4242 25

26. Administering Contracts at Pre-
contract Stage ... Cont’d
• The documents will include:
– Letter of invitation to tender
– Instructions to Bidders
– General conditions of contract
– Special conditions of contract
– Technical specifications
– Scope drawings
– Bill of quantities
– General information about the site
– Form of tender
– Form of agreement
– Appendices.
• Close out this phase and inter into the next phase.
7/31/2021 CoTM 4242 26

27. 2. Administering Contracts at
Construction Stage
• Upon contract award, the manager will have to device a
system of contract administration during construction.
Such a system will ensure early detection of contentious
issues in the contract or work.
• The bulk of contract administration during construction
stage is built into the construction agreement and no
changes can be done to the agreed and signed contract.
• The main work of the contract manager will be to
interpret the obligations, rights and responsibilities of the
parties to the agreement at this stage.
• The contract manager shall ensure that the parties to
the contract perform their obligations effectively.
7/31/2021 CoTM 4242 27

28. Administering Contracts at
Construction Stage ... Cont’d
Obligations of the Contractor
• Executing the work within the contract period,
cost, and good standard of work –
workmanship, materials, and methods
• Statutory obligations- hoarding, environmental
protection, health and safety measures
• Coordination and management of the work-
entry and exit from site, workers, subcontractors
• Insurances and bonds.
7/31/2021 CoTM 4242 28

29. Administering Contracts at
Construction Stage ... Cont’d
Obligations of the Employer
• Non hindrance and cooperation
• Payment
• Site obligations – possession, description and
identification
• The other areas of concern during the construction stage
are the procedures, relationship and process issues.
Such issues include:
 How to effect change orders
 How to apply for payments, partial handing over, etc.
7/31/2021 CoTM 4242 29

30. 3. Administering Contracts at Post
Construction Stage
• There are a number of concerns that should be
addressed after completion of the work
depending on the type of the project:
 In-use inspection and reporting – on attaining practical
completion
 Rectification of defects
 Final handing over
 Final payments and closing of accounts
 Surrender of bonds and insurances.
7/31/2021 CoTM 4242 30