Introduction to Construction Contracts

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Introduction to

Construction Contracts

By

Eng. Ahmed Moustafa B.Sc

Email: [email protected]

Telephone Number: 00201003437028

mailto:[email protected]:[email protected]:[email protected]:[email protected]


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Introduction

Name: Ahmed Moustafa Mohammed

• Title: Contract Adminstator

• Department: Structure Engineering & Construction Management

• University: Zagazig University

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Main Topics

Introduction to Construction Contracts:

1. Introduction to Construction Projects

2. What is Project Delivery System

3. What are Tenders

4. What are Contracts

5. What are Construction Contracts

6. What is FIDIC


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Construction

•

It is the process of producing a structure, it is simply “the buildingprocess”

Construction

Projects

ProjectDeliverySystem

Tenders ContractsConstruction

ContractsFIDIC


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Construction Industry

•

It is the industry that is related to the construction field.

Construction

Projects



ContractsFIDIC


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Properties of Construction Industry

• Service based industry, not product base

• Uniqueness of each project

• Higher level of risk

• Temporary

Construction

Projects



ContractsFIDIC


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Importance of Construction Industry

• Good indicator of the country’s economy

• Contributes to the development of the country

• Linked with other industrial sectors

Construction

Projects



ContractsFIDIC


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Construction Project Parties

• This is the traditional (most commonly used) relation

between project different parties.

Construction

Projects



ContractsFIDIC


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Owner

(Client/Employer)

Contractor Engineer

(Consultant/Architect /Designer)

Construction Project Parties

The person/organization has the idea/concept &

money for a project.

The person/organization with the level

of experience capable of interpreting the

owner’s idea into project documents(drawings, specs, … )

The person/organization with the required

resources and experience capable of

converting the project document into aphysical construction work .

Owners Role:

1. Feasibility study

2. Product Specification/Design Requirements

3. Financing methods

4. Contract type selection

5. Contractor selection method

Consultant Role:

1. Project Design

2. Project Specification

3. Engineering Estimate

4. Construction Supervision

Contractor Role:

1. Design Review

2. Construction method

3. Project Construction


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Construction Project Resources

1. Labor

2. Material

3. Equipment

4. Subcontractor

5M

Manpower

Material

Machine

Money

Method

Another way to look at

Project Resources

Construction

Projects



ContractsFIDIC


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Different types of Construction Projects

• Residential Projects:

Example; Residential houses/ compounds, etc ….

• Non - Residential Projects:

Example; hospitals, schools, etc …

• Infrastructure/Engineer Projects:

Example; highways, bridges, water/waste treatment plants, etc …

• Industrial Projects:

Example; industrial factories

Construction

Projects



ContractsFIDIC


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Different types of Construction Projects

PercentageResourcesFinancingContractorEngineerOwnerProject Types

40 – 45%

No special

resource needed,

mainly labor

LowGeneral

ContractorMostly Archt.

Mostly

Private Residential

25 – 30%

May require

some special

resource, mainly

labor

Low -

Intermediate

General

Contractor

Mostly Archt.

& Civil

Mostly

PrivateNon-Residential

20 – 25%

Requires a high

level of

resources, mainly

equipment

High (may require

special financing)

Large Scale

ContractorMostly Civil

Mostly

PublicInfrastructure

5 – 10%

Requires a high

level of specific

resources, mainly

equipment

Intermediate -

High

Specialized

Contractor

Mostly Specific

Civil

Mostly

PrivateIndustrial

Construction

Projects



ContractsFIDIC


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Construction Project Stages

Feasibility &Strategy Stage

Design Stage

Tendering &

ContractingStage

ConstructionStage

Testing, Primary

Taking Over andGrantee (Intial)Stage

Final Taking

Over andGrantee (Final)Stage

Construction

Projects



ContractsFIDIC


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Project Delivery System (PDS)

• It is the system used by the owner for organizing, financing design,

construction, operation and maintenance for a project .

• It identifies different project parties assigning each party specific

responsibilities and authorities and it also defines how different

parties interact with one another.

Construction

Projects



ContractsFIDIC


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Project Delivery System (PDS)

1. Force Account

2. Traditional – Design/Bid/Build ( DBB)3. Design Build (DB)

4. Multiple Prime Contractor (MPC)

5. Construction Management (CM)

6. Turnkey (BOT)

Construction

Projects



ContractsFIDIC


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PDS: Force Account

Owner performs the construction work using own

resources, suitable for small maintance project.

Advantages:

1. Cheap (No Engineer, No Contractor)

2. Time effective

3. No conflict as there is only 1 party

4. Change orders are easily performed

Disadvantages:

1. Not suitable for large projects (owner isn’t experience enough)

S di i l i / id/ ild ( )


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PDS: Traditional – Design/Bid/Build (DBB)

Owner assigns an Engineer to design project and a

Contractor to construct the project.

Advantages:

1. Project documents are completed before bid start

2. Owner has a great idea of the full project details

3. Decrease change order made during execution

4. Chance to use open tender to get lowest cost

Disadvantages:

1. Conflict may occur between different parties

2. No co-ordination between Engineer & Contractor

3. Contractor is not part of design (decrease constructability)

4. Time consuming

Benefit to Owner:

1. Owner deals with 1 Contractor only

2. Traditional, well known & recognized approach3. Design is impartial

Risk to Owner:

1. Failure to co-ordinate between different parties

2. Conflict may occur during project execution

PDS D i /B ild (DB)


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PDS: Design/Build (DB)

Owner assigns an design – build company which designs and constructs project, here

construction could overlap with design, suitable for major project (heavy construction)

Advantages:

1. Time effective (as construction may begin before design is finished).

2. Coordination between designer & contractor assures higher

constructability.3. Decreases headache on owner as project responsibility is carried by

firm.

Disadvantages:

1. No bidding, no competition i.e. higher price.

2. Owner is not as involved in project as other PDS

Benefit to Owner:

1. Saves time

2. Less conflict between parties

Risk to Owner:

1. Integration of design is eliminated (no complete vision)

2. Owner has less control on project

PDS M lti l P i C t t (MPC)


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PDS: Multiple Prime Contractor (MPC)

Owner assigns multiple contractors each for a specific part of the project, suitable for

large multidiscipline projects like water structures, ….

Advantages:

1. Cheaper as there is not subcontracting.

2. Utilizes different expertise and vast amount of resources.

Disadvantages:

1. Very high chance of conflict between contractors

2. Extremely difficulty to coordinate between parties

PDS C t ti M t


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PDS: Construction Management

Owner assigns a CM with high managerial skills/experience to assist him in coordination

and construction project management.

Advantages:

1. Cheaper as there is not subcontracting.

2. Utilizes different expertise and vast amount of resources.

3. Decreases conflict and increases coordination between parties4. Decease Owner’s responsibility for managing and coordinating

Disadvantages:

1. Expensive but may be proven efficient

PDS T k


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PDS: Turnkey

Owner (usually government) assigns a company to do all design, construction, financing

and operating tasks ex. BOT (Build/Operate/Transfer)

Advantages:

1. Time effective as 1 party does all the work

2. Owner relieved from construction problems

3. Owner doesn’t have to worry about project financing

Disadvantages:

1. Very high benefit costs

2. Project may be handed over in a bad condition


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Factors affecting PDS selection

Factors related to market Factor related to ownerFactors related to project

Availability of PDS in market Owner past practices and

experienceTime Constraints

Package size compared to market Owner resource capabilityFinancial Constraints

Restriction on method for certain

owners

Pre-construction Services

Distribution of risk Design Process Involvement

Construction SophisticationShareholder interests

Construction

Projects



ContractsFIDIC


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Tender

The tender process is the process of choosing a contractor to execute the design works; it is of different

types, some of which are:

• Direct order: owner directly chooses a contractor to perform the services;

Suitable for:

Projects of a special nature (where only a small number of contractor are able to

perform)

Advantages:

Not time consuming

Disadvantages:

May cost more than other tender types

Construction

Projects



ContractsFIDIC


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Tender



• Open/General tender: owner announces project in public and any contractor can submit;

Suitable for:

Generally all project, specially government projects (because of administrative

restrictions)

Advantages:

Ensures high competition thus lower cost

Disadvantages:

Time consuming

Unqualified tenderers may be choosen

Construction

Projects



ContractsFIDIC


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Tender



• Selected/Limited tender: owner announces project to the previously pre- qualified short listed

contractors;

Suitable for:

Generally all project, specially large projects

Advantages:

Ensures high quality a contractor is pre-qualified

Disadvantages:

Time consuming (but less than Open/General tender, due to the lower number of

tenderers)

Less competition, higher cost

Construction

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Tender



• Open/General practice: similar to open/general tender expect that the owner negotiates publicly to get lowest

price “reverse auction” while standardizing all other criteria.

• Selective/Limited practice: similar to open/general practice expect that the owner negotiates with selected

contractors to get lowest price.

• Note that:

1. The negotiations are made either in a negotiation meeting (with all the tenderers present) or via

correspondents .

2. The owner informs the tenderers with their competitors offers’ so that each tenderer (if he wishes)

would lower his offer, in order to be choosen by the owner.

3. The problem with practices is that it may cause tenders to submit initially higher offers (as they know

that these offers will be lowered in the negotiation process).

Construction

Projects



ContractsFIDIC


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• A Contract is an agreement made in good faith between 2 or more capable parties to perform an

act for a certain specific purpose.

• In construction field the contract is usually between owner and contractor to perform

construction services.

• The Contract is a legally bidding document that defines exactly the rights and obligations of each

party in the contract.

Steps to contract:

1. Invitation to bid/tender (Tender Process) from Owner “party A” to Contractor “party B" to

perform a certain task or a service with certain conditions.

2. Offer (tender/bid) from the Contractor (B) is made to the Owner (A) to perform the task

(complying with all or some of the conditions)

3. Acceptance where the Owner (A) has the right to accept or refuse the Contractor (B) offer, if

accepted then a contract is born (legally bidding for both parties).

Construction

Projects



ContractsFIDIC

Contracts


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Types of Contracts

Contract can be categorized according to the payment method, such categories include:

• Fixed price contracts

Lump sum: a pre-determined fixed priced is set for all project/items; price includes overhead, profit

and all other necessary costs, this price can be paid:

Once the project is delivered

According to work progress (time progress or quantity progress or percent progress)

In this type of contract:

The scope should be fully detailed

No or minimal changes should be allowed during execution

Fair mechanisms for long – term risk allocation should be placed in the contract (ex. Escalation

Formula).

Construction

Projects



ContractsFIDIC


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Types of Contracts


• Remeasure contracts

Unit price: (most common contracts) where a fixed unit price (price/quantity “unit”) is pre-

determined for each work item which includes all necessary costs; here the contract is remeasured i.e.

exact contract cost depends on the actual quantities executed, the price can be paid:

According to a BOQ containing estimate quantities (most common)

Rate Only (suitable for small works, maintenance works or rehabilitation works), rates may be

over priced as there is no quantities to place rates on.

Construction

Projects



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Types of Contracts


• Cost reimbursement contracts

Where the contractor agrees to perform the work for certain price which includes:

1. Direct cost of the item plus,

2. A certain pre-defined fee which covers the profit & overhead.

The different types of the cost reimbursement are:

Cost plus percentage fee

Cost plus fixed fee

• Target cost contracts

Where a target cost is set , whatever the final cost turns out to be, the saves/losses are divided

between the owner and the contractor.

Construction

Projects



ContractsFIDIC

Construction Contracts Types & Risk


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Construction Contracts Types & Risk

Max.

Min.

Max.

Max.

Max.

Min.

Max.

Min.

Min.

Min.

Little

Alot

Little

Alot

Owner Risk

Contractor Risk

Owner Control

Control Effort

Design Changes

Info.

required

for tender

Info.

required

for control

Lump Sum

Unit Price

Target Cost

Cost + Fixed Fee

Cost + % Fee

Risk Distribution & Contract Types Price/Contract


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Risk Distribution & Contract TypesCost Plus

Contracts

Remeasure

Contracts

(Red Book )

Target

Cost

Contracts

Design – Build

(Yellow Book )

Contractor

Risk Increase

Employer

Risk Increase

Contract Financing Risks are carried by Employer

Site, Work Quality & Contractor’s Crew Risks are carried by Contractor

Force Majeure Risks are carried by Employer Insurable FM

Un - Insurable FM

Traditional

Contracts

EPC/ TurnkeyContracts

EPC/Turnkey

(Silver Book )

Contractor

carries all

the risks

with

limited

chances of

claiming

extension oftime or

additional

costs

Turnkey,

BOT, BOOT,

etc…. R i s k A l l o c a t i o n

Price/Contract

Type Relation


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FIDIC

• FIDIC (Fédération Internationale des Ingénieurs – Conseils or International

Federation of Consulting Engineers) is an international federation ofassociations of consulting engineers representing the profession in their

respective countries.

• FIDIC's Contracts Committee is responsible for producing the most commonly

used standard forms of contract for international construction projects.

• FIDIC contracts are generally known by the color of their cover: the Red Book ,

Yellow Book , Silver Book , Green Book , Pink Book , Gold Book , Blue Book and

White Book .

Construction

Projects



ContractsFIDIC


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FIDIC Forms of Contracts

• Main Forms of Contract before 1995 included:

1. From1913

(establishment ofFIDIC

) till1957

,FIDIC

didn’t

produce any form of contracts.

2. In 1957, the 1st edition of “Conditions of Contract for Works of Civil Engineering

Construction” was published and its cover was red.

3. In 1962, the 1st edition of “Conditions of Contract for Electrical and Mechanical Works –

Including Erection on Site” was published and its cover was yellow.

4. In 1969, the 2nd edition of “Conditions of Contract for Works of Civil Engineering

Construction” was published and its cover was also red.

5. In 1977, the 3rd edition of “Conditions of Contract for Works of Civil Engineering

Construction” was published and its cover was also red.

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ContractsFIDIC


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• Main Forms of Contract before 1995 included:

7. In 1980, the 2nd edition of “Conditions of Contract for Electrical and Mechanical Works –

Including Erection on Site” was published and its cover was also yellow.

8. In 1987, the 3rd edition of “Conditions of Contract for Electrical and Mechanical Works –

Including Erection on Site” was published and its cover was also yellow and the 4th edition

of “Conditions of Contract for Works of Civil Engineering Construction” was published and

its cover was also red, the covers were internationally recognized and the contracts were

known as Red Book and Yellow Book .

9. In 1995, the FIDIC published of 1st edition of “Conditions of Contract for Design-Build and

turnkey” and its cover was orange.

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• Other Forms of Contract included:A. Client/Consultant Model Service Agreement

1. In 1990, the 1st edition of “Client/Consultant Model Service Agreement ” was published and its

cover was White.

2. In 1991, the 2nd edition of “Client/Consultant Model Service Agreement ” was published and

its cover was also White.

3. In 1998, the 3rd edition of “Client/Consultant Model Service Agreement ” was published and


4. In 2006, the 4th edition of “Client/Consultant Model Service Agreement ” was published and


B. Sub-Consultant Agreement & Joint Venture Agreement

1. In 1992, the 1st edition of “Sub-Consultant Agreement ” was published and 1st edition of “Joint

Venture (Consortium) Agreement ”.

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ContractsFIDIC


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• Other Forms of Contract included:

C. Sub-Contract Agreement

1. In 1994, the 1st edition of “Sub-Contract Agreement ” was published and its cover was

red in relation with the “Conditions of Contract for Works of Civil Engineering

Construction”.

Construction

Projects



ContractsFIDIC


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• Main Forms of Contract after 1995 :

After publishing the Orange Book in 1995, FIDIC formed a committee to update theRed and Yellow Books (Red Yellow Update Committee) which took into

consideration the following:

1. Simplifying the language that is used in the forms

2. Unifying the numbering & language formats in all the forms

3. Re-drafting the contracts not based on work but based on the risk allocation

Construction

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ContractsFIDIC


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• Main Forms of Contract after 1995 :

In conclusion the following were produced:

1. New Red Book : Conditions of Contract for Construction for Building and Engineering

Works Designed by the Employer, where the Employer (his representative, Engineer, …)

supplies design of the Works (which could include: civil, electrical, …) (some designs may

be presented by the contractor, for which he carries their liability)

2. New Yellow Book : Conditions of Contract for Plant and Design-Build, where the

Contractor designs and builds the Works (which could include: civil, electric, …),recommended for plant (where major work is electrical or mechanical).

Construction

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ContractsFIDIC


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• Other Forms of Contract published after 1995 included:

1. Silver Book ”Conditions of Contract for EPC/Turnkey Projects”: recommended for turnkey

mega projects (infra structure, mega project, …) here contractor carries total responsibility for

design and execution (with little involvement of the Employer) to produce a fully equipped

facility for operation.

2. Green Book ”Conditions of Short Form of Contract ”: due to the negative criticisms on the Red

book for not being fit for use for small projects (low capital, short duration, low risk) or

repetitive projects.

Construction

Projects



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• By September 1999 the FIDIC published four new suits:

New Red Book : Conditions of Contract for Construction for Building andEngineering Works Designed by the Employer.

New Yellow Book : Conditions of Contract for Plant and Design-Build.

Silver Book : Conditions of Contract for EPC/Turnkey Projects.

Green Book : Conditions of Short Form of Contract .

Construction

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ContractsFIDIC


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FIDIC Forms of Contracts• Now FIDIC package includes:

Red Book : Conditions of Contract for Construction for Building and Engineering

Works Designed by the Employer 1st Ed. 1999.

Construction Subcontract 1st Ed. 2011.

Yellow Book : Conditions of Contract for Plant and Design-Build 1st Ed. 1999.

Silver Book : Conditions of Contract for EPC/Turnkey Projects 1st Ed. 1999.

Green Book : Conditions of Short Form of Contract 1st Ed. 1999.

Pink Book : FIDIC conditions incorporated in the standard bidding documents of

multilateral development banks June 2010 Ed. Gold Book : FIDIC Design, Build and Operate Projects 1st Ed. 2008.

Blue Book : Contract for Dredging and Reclamation Works 1st Ed. 2006

White Book : Client/Consultant Model Services Agreement 4th Ed. 2006.

Sub-Consultancy Agreement 1st Ed. 1992.

Joint Venture (Consortium) Agreement 1st Ed.1992.

Model Representative Agreement 1st Ed. 2013.

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Construction

Projects



ContractsFIDIC


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The End

By Eng. Ahmed Moustafa Mohammed

• Email: [email protected]

• Facebook account: http://www.facebook.com/eng.ahmed.moustafa.mohammed

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