Construction Contracts and Contracting

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2012

CONSTRUCTION CONTRACTS AND

CONTRACTING SODE-NCP 23

Contract administration and monitoring is the most important area of

construction management. Contract administration process should start

right from the day work is assigned to the company. Discuss any project

contract currently in progress with your company and how

administration and monitoring is being done. Draw the organization

chart for this activity and explain all the functions carried out. Do you

think the system is achieving results? Discuss.

SUHAIB J UWALE



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NAME OF PROJECT

Akash Water Supply System at Ratnagiri, Maharashtra.

SCOPE OF WORK

Completing Design and engineering, manufacture, supply, transport, handling, erection, testing

and commissioning including performance guarantee test for water supply system and related

substation, pipe line, WBM Road for supply of Raw Water from Kaveri Reservoir to Akash

Steels Smelter & captive power plant at Ratnagiri, Maharashtra.

IMPORTANT DETAILS OF CONTRACT

Name of the company : Akash Steels

Ratnagiri, Maharashtra.

Name of contractor : Confidential

TYPE OF CONTRACT

Lump sum construction contracts

Under the FIDIC Conditions, the financial outcome of a project is not absolutely fixed, because the

promoter has to pay for any extra work caused by conditions ‘which an experienced contractor

could not have foreseen’. This does not suit some promoters who wish to be certain what an

intended project will cost, so ‘fixed price’ contracts came into use, often for a lump sum. Under

them the construction contractor has to take all risks, such as meeting unexpected ground

conditions. Such fixed price contracts can be satisfactory for both promoter and contractor for

relatively simple, easily defined works involving little below-ground work.



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Naturally a contractor’s price for undertaking a contract for a fixed sum is higher than for a bill-of-

quantities contract for the same work under which he is paid by measure of the work he is required

to do. But this can suit a promoter who prefers to be certain about his financial commitment and

where the works he requires can be well defined in advance. However, if the possible risks on the

contractor appear high due to many imponderables – such as the works being large or complicated,

or ground conditions being uncertain – then the extra charge made by the contractor for shouldering

the risks may be high. Should the promoter require amendments as construction proceeds, then

these will also prove expensive.

The contract is Lump sum Fixed Price type turnkey contract. The above contract includes

complete design, engineering, supply, erection, testing and commissioning of equipment. In

case any item is missed out or omitted from the list of technical specification for

completion of the job as per contract provision it is also deemed to be in scope of the

supplier without any cost implication to the company.

COST OF CONTRACT

A lump sum price may be called for, or a series of lump sums. This is best suited to easily defined,

relatively simple constructions, involving little below-ground work. However, some quite large

above-ground constructions are paid for by lump sum. Sometimes a separate section of the bill for

pricing allows for the foundation work of a building to be paid for ‘on measure’. In some kinds of

civil engineering work the lump sum payment method can pose serious risks upon a contractor,

causing him to add a substantial sum to his tender. This is particularly so for design-and-build or

‘turn-key’ projects where the contractor has to undertake detailed design as well as construction.

The employer has to pay these additional sums whether or not any risks materialize.



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A disadvantage is that an employer may have to pay a high price for any alteration or addition he

wants to the project, because the contractor is only committed to undertaking a fixed amount of

work for the fixed payment. Payments under lump sum contracts are usually made in installments as

set out in the contract according to stipulated stages of completion, or linked to a program or

activity schedule.

The contract price payable by the company to the supplier in consideration of all the supplies to

be made and all services to be provided by the suppliers according to the terms of the

contract shall be:

i. Supply of equipment including Confidential

Commissioning spares, packing

Forwarding, transit Insurance

ii. Design, Engineering, Unloading, Confidential

Storage, Handling, Erection and

Commissioning including all civil

Work etc. with supervision and

Insurance for storage and erection

Of the “water Supply System”

In Complete

The above prices are exclusive of Transport, Excise Duty with education cess, sales Tax,

entry Tax, but inclusive of work Contract Tax and other taxes and duties as applicable to the

scope of the contract.

Price Variation

In times of inflation it may be advisable to include clauses within the contract which set out how the

contractor is to be reimbursed his extra costs due to any inflation of prices after he has tendered.





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corridor due to any reason attributable to Akash Steels, the contract period shall be extended

correspondingly without any financial impact to the company.

Similarly for the construction of intake well and channel inside the Kaveri Reservoir, in case

any delay in the construction due to change in stipulation of government of the Orissa and

central government or Dam authority etc. the contract period will also be extended

correspondingly without levying and LD.

Payment Terms

Most standard conditions of contract contain specific provisions for interim payments and require

payment of interest to the contractor if the employer fails to pay on time. The timing of these

interim payments as the work proceeds is of importance to both employer and contractor. A

contractor has to lay out large sums of money to get work started, hence the earlier he can receive

substantial payments the less he has to borrow from his reserves or the bank.

On the other hand the earlier the employer has to pay out money, the more interest he will have to

pay on his borrowings to fund the project. Also, he cannot pay out too large a sum or he may not

recover his payment should the contractor get into financial difficulty and be unable to complete the

work. The same result can follow if he pays out too little, and forces a contractor who is not in a

strong financial position into further financial difficulties.

The payment of the contract price will be made by the company in accordance with the

following terms on receipt of invoices and other related documents:

For supplies

1. 12% contract value as advance with LOI against of BG.

2. 8% of contract value against the submission & approval of GA drawings.



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3. 50% of contract along with 100% taxes & duties on pro-rata as per approved billing

schedule against lawful invoice.

4. 13% of contract value against achievement of milestone.

5. 7% of contract value after issuing of commissioning certificate against performance

bank guarantee of equivalent amount.

6. 10% of contract value against issue of final acceptance certificate (FAC). i.e. after

completion of defect liability period of 12 months from date of commissioning

certificate.

For Civil, Erection, Testing & Commissioning

1. 12% contact value as mobilization advance against of BG of equivalent.

2. 8% of contract value against the submission & approval of GA drawings.

3. 50% of contract along with 100% taxes and duties on pro-rata as per approved billing

schedule against lawful invoice.

4. 13% of contract value against achievement of erection milestone.

5. 7% of contract value after issuing of commissioning certificate against performance

bank guarantee of equivalent amount.

6. 10% of contract value against issue of final acceptance certificate (FAC). i.e. after completion

of defect liability period of 12 months from date of commissioning certificate.

Quality inspection and testing during manufacturing

A contractor may run a quality assurance (QA) system and some employers take this into

consideration when making a list of selected contractors for tendering. QA is an administrative

system for checking that the quality of a firm’s output complies with some set standards. For

example a contractor may issue a design manual for formwork; this is his ‘quality standard’. His



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QA system then only stipulates the actions required to ensure conformity to such standards. Such

actions may include:

1. Designers must use the design manual;

2. Must have their designs checked by the firm’s formwork specialist;

3. The specialist must check and sign the design as approved;

4. The signed design sheets must be filed, indexed and kept;

5. The agent or his site engineer must check and sign that the formwork is erected as designed;

6. The contractor’s safety supervisor is to inspect and sign that the formwork erected is safe for

use.

A QA system can cover a few or a whole range of a firm’s operations, but to ensure that it meets the

intended objectives (which have to be defined) it has to be audited. Audits can be carried out

internally by a member of the firm, or by a client proposing to employ the firm, or by an

independent authorized certifying body who can issue a certificate of approval. In the last case the

QA system is said to be certified. Repeat auditing is required from time to time.

The company will be entitled at all reasonable times to witness the inspection, examination

and testing of the equipment and erection & construction work at workshop of supplier. For

this the contract should give one week prior notice to company for testing.

The supplier should provide such assistance, labour, material, electricity, fuels, apparatus and

instrument etc. for carry out test. If after inspecting, examination, or testing any part of the

equipment and erection & construction work, the company should decide that such part is

defective or not in accordance with the terms and specification for the contract, then it may

reject such part by giving to supplier seven working days written notice of such defect. The

company will bear all the costs and expense for deputing its inspector.



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Warranty

The supplier warrant that all materials and services provided by him should be new, free from

defect in workmanship and material for which they are supplied.

The supplier warranty shall be effective for 18 months from last date of receipt of supplies or 12

month from the date of successful commissioning.

During the warranty period if there is any failure, the supplier should repair, make good, replace or

modify will all speed without any additional cost to company.

If supplier does not commence the correction activities, the company may correct the defect at

supplier expenses. In such case the warranty period will extend to 12 month from date on which

such repair or replacement is completed.

IMPORTANT POINTS FROM CONTRACTOR’S POINT OF VIEW TO BE MONITORED /

RESOLVED

1. The company should furnish all the pertinent data and information available to it

without charges and within a reasonable time and t as per schedule. should give such

assistance as should reasonably required by the supplier for carrying out the supplier

obligations under the contract

2. The supplier , in carrying out its responsibilities, shall comply with the legislation, laws,

by-laws, rules, regulations of the Govt. of India, the state of Orissa and other local

authorities as may be applicable including those relating to environment, labour and

safety.

3. The company should make timely payment to the suppliers for all amounts due to

suppliers under the contract in accordingly with the terms and provisions of the

contract.



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4. The Engineer-in-charge (EIC) carryout such duties in issuing certificates, decisions,

instructions and order as per contract to be carried out by the supplier. EIC shall have

the full authority to act on behalf of the company or all purpose in connection with

the contract and shall be supplier primary point of contact with company in relation to

the execution of the work. The supplier shall proceed with the works in accordance

with decision, instruction and order given by EIC subject to and in accordance with the

contract, including provision for variation hereof.

5. Liaison and coordination for processing of all statutory clearances with State Government

Authority at Ratnagiri or at District Level or with the DAM authorities shall be carried by the

supplier.

6. During the contractual period, the supplier shall indemnify the company to coordinate and

ensure to take care of all the Local, socio, economic, cultural, education and political

requirement of various non profitable organizations, association, institution including district

and local administration if any form time to time as a part of their contractual and social

obligation with due consultation and approval from the company.

7. The supplier shall also get approved by the company the list of its vendors engaged for the

purpose of contract.

8. The supplier shall make its own arrangement for land, supply of water, electricity or any other

facilities required for fabrication, erection and commissioning of the work.

9. The supplier shall indemnify to the company that they will create as environment of awareness

and physical being that is conducive to a safe and healthy workplace, in accordance with all

federal, state, local and corporate regulation and contractual obligations. The supplier shall

provide safety programs that are effective in identifying and reducing hazards at workplace and

impart training to their employees to develop safe work practices that efficiently produce

quality products in a safe manner with an objective to have an injury free workplace and zero

accident.



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10. The supplier shall use liberal factors of safety throughout the design and shall f1ollow all other

relevant IS and also international codes, wherever applicable.

ORGANIZATION CHART

Consultant

The Consultant will be totally responsible for all the engineering of projects going on at

all the branches. He will be involved in each activity from initial idea, generation of layout

drawings with all infrastructure requirements, detail working drawings, estimates, and site

execution up to hand over.

The Consultant would be responsible for preparation of drawings and documentation within

their various disciplines with regard the Service. Site-visits would be made by the

consultants at specified milestones, or as may be required.

CONSULTANT

GROUP HEAD

PROJECT IN CHARGE

PROJECT MANAGER

SITE IN CHARGE

ASSISTANT SITE

INCHARGE



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Group Head:

The group head’s role would be the monitoring of the designer’s output and activities, and

taking responsibility for all the work that is generated by the group.

Project In Charge:

Interaction with contractors to detail out their requirements, obtaining signoffs and overseeing

the tendering and negotiating process. Subsequently, during the execution stage, he monitors

the project for cost, quality, and schedules and local administration.

Project Manager:

The project manager audits the project during the drawing/design stage, for conformance to

the stipulated process, and for adherence to agreed schedules. Subsequently, during the

execution stage, he monitors the project for cost, quality, and schedules.

Site In Charge:

The site in charge is responsible for achieving quality on site, interpreting the drawings and

documents on site, and raising reports on quality and scheduling.

Assistant Site In Charge:

The role of a Assistant site In Charge is the day to day monitoring of site activities.

Monitoring of day to day schedules and raw material quality fall within the scope of

duties. He is responsible for Co-ordination between Vendors and the generations of daily

and weekly status reports.



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METHOD FOLLOWED FOR ADMISTER AND MONITOR

Project Management, Coordination, Monitoring and Supervision

The supplier should depute at their own expense duly qualified supervisors to supervise the erection

and construction work and putting in the operation at site.

The supplier should provide supervisory services for project management, installation and

commissioning and bear all the cost against the facilities provided to its supervisors.

All the work should be complete on or before time. If any site supervisor deputed at site is not able

to complete the work on time or is guilty of serious misconduct, the supplier should replace such

persons at supplier expense so as not to cause any interruption in carrying out the erection and

construction work or delay in any specified time schedule for work.

The supplier should provide adequate on-the-job training to operating and maintenance staff of the

company at site during erection and commissioning without charging any additional cost to the

company. Liaison and coordination for processing of all statutory clearances with State Government

Authority at Mumbai or at District Level shall be carried out by the supplier.

Liquidated Damages (L.D) for delays and shortfall in performance

In the event of delay in completion of supply and commissioning of the water supply system,

beyond the completion period as per schedule, the supplier shall pay LD @ 0.5% of the contract

price per week of delay subjected to a maximum of 5% of the contract prices for both supply and

erection order value. The payments of deduction of liquidated damages shall in no way relieve the

supplier from completing the supplies and works and discharging all its other obligations under the

contract provided however that the above mentioned liquidated damages are the supplier only



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obligation to financially compensate the company in case of delay completion of the facility and/or

failure to achieve the performance guarantees.

RECOMMENDATIONS / CONCLUSION

Ex-contractual Payments

These are payments made by an employer to a contractor which are not authorized by the contract.

They are occasionally paid when a contractor has performed very much to the satisfaction of the

employer but has shouldered some extra cost clearly not attributable to his own actions, such as

exceptionally bad weather or some other misfortune outside his control. Only the employer can

decide to make an ex-contractual payment, not the engineer or other person acting on his behalf;

and the employer must himself have power to make the payment. Hence a private person or

company may be able to make an ex-contractual payment; but a public authority will usually have

no such power.

1. In this contract ther e is no provision and any point hasn’t made about change of the

scheme for drawl of water from the reservoir and change in the price of the contract

according to that change.

2. The contract doesn’t have the provision of the penalty as per contract. The contract

can’t leave the provision of the liquidity damage maximum of 5% of the contract value.

The contract has to complete the work and if there is any defect in the work the

contractor has to rectify it on his own expenses within the guarantee period in case of

any delay of contract due to unsatisfactory work the company will suffer the loss by

unavailability of the water at plant area.



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Bibliography

NICMAR publication lesson book on Construction Contracts and Contracting

Butterworth-Heinemann publication, The Management of Construction by F. Lawrence Bennett,

PE, PhD

Butterworth-Heinemann publication, Civil Engineer Project Management by Alan C. Twort & J.

Gordon Rees

Various articles on websites

Documents

Construction Contracts and Contracting