Construction Contract Essay Example

1. What is a Construction Contract? A construction contract is a legally binding agreement between two parties under the terms of which one party agrees to perform a specific job for which the other party agrees to pay. This type of contract covers very expensive and complex as well as simple projects. There are two types of clients that use construction contracts namely residential and commercial. A residential construction contract includes three basic elements. They are project scope, schedule of work and payment details.

This type of contract takes place between the property owner who has requested the work and the project manager for the construction company. The project scope is a statement showing all the details of the construction work included in the contract. A schedule of work specifies the start date, milestones, and project completion date. Finally, the payment details section includes the total project cost and payment dates. The basis of payment of all construction projects is based on percentage of completion.

At the beginning of a project, a deposit of no more than five percent of the total costs is provided and the subsequent payments are made with the completion of the predefined section of work. On the contrary, commercial construction contracts vary slightly from residential contract format, as more details are required in this type of contracts. In addition to the standard items mentioned above, a commercial construction contract has procurement process details, specifications about legislative coverage, contingency plans, and dispute resolution instructions.

The principle signatory document lists all the people who are involved in the project, their role, and reporting structure. This document is especially important on a large project, as it ensures that all parties have agreed to the authorization for changes, payment, and design elements. 2. 1 Why use a standard form of contract? The use of standard form construction contracts has a number of advantages for the various parties that participate in the construction process, including the speed at which tender documents can be produced and familiarity for contract administrators and tendering contractors.

Most construction professionals are familiar with their operations, limitations and drawbacks thus leading to administrative ease and cost efficiency. According to Nayagam and Pathmavathy (2005), “Standard Form construction contracts provide a basic legal framework identifying the rights, obligations and duties of the parties; establish the ambit of the powers and duties of the contract administrator”. Moreover, standard form contracting reduces transaction costs substantially by precluding the need for the parties involved to negotiate the many details of a contract each time a fresh project is started.

This saves a lot of time and costs as well. Further to this, tender comparisons are made easier since the risk allocation is same for each renderer. So parties are assumed to appreciate that risk allocation and their prices can be accurately compared. On the other hand, there are few disadvantages of following a standard form of contract. Firstly the lengthy boilerplate terms are often in fine print and written in complicated legal language which often seems irrelevant. Coupled with the often large amount of time needed to read the terms, the expected payoff from reading the contract is low and few people would be expected to read it.

For the reason that the follow-on contract is often a compromise, they are opposed to change. Much-needed changes take a long time to bring into effect. 2. Different forms of contract Different forms of contracts are used in every nation for its various purposes. This includes both international as well as national forms of contracts. In this report, I would distinguish between one of the most recognized and commonly used forms of contracts used in European countries namely FIDIC and the format which is exercised by the Malaysian government namely PWD or Public Works Department. 3.

2 PWD (Public Works Department) FORM OF AGREEMENT This is a form of contract which was taken by the Public Works Department of Malaysia. It has to be noted that there are some similarities between this form of contract and FIDIC, however, PWD is more customized according to customer requirements. This is one of the most popular government contracts which was planned, revised and translated to English in 2007 by Public Work Department of Malaysia (PWD). This form of contract is also called JKR, PWD Revised 2007 is standard form of design and build contract available by Public Work Department (JKR).

However, this one is more like design and production combined into one package. The main responsibilities of this contractor are to plan, design, construct, complete, test and commission the work. It remains the duty of the contractor to provide all design, services, labor, materials, contractor’s equipment, temporary works, transport to and from and in or concerning the site and all whether of a temporary or permanent nature required in and for such planning, design, construction, completion, testing and commissioning so far as the requirement for given that the same is specified in or sensibly to be incidental from the contract.

The contractor undertakes the task to comply with all requirements, statutory or otherwise regulating or relating to the conduct, trade, business or profession of a contractor and he is completely and solely accountable for all costs incurred. Moreover, this one is commonly used in Malaysia as a local form. 2. 2 FIDIC The name FIDIC is derived from the French word Federation Internationale Des Ingenieurs-Conseils, in French meaning the International Federation of Consulting Engineers.

FIDIC the international federation of national associations of independent consulting engineers was founded in 1913 by three associated European countries. Currently, over 60 countries are members of FIDIC. Following the end of World War 2 most of the world’s developing countries joined FIDIC. The major activities of FIDIC constitute of preparation of standard forms of contract and other documents as well as promoting their common interests through seminars, conferences and regular discussions with concerned financial associations and other international associations.

The FIDIC suite of construction contracts is written and published by the International Federation of Consulting Engineers. The most well known and commonly used FIDIC contracts are the Red Book which includes building and engineering works designed by the Employer and the Yellow Book comprising M&E, building and engineering works designed by the Contractor. With the rapid growing world, FIDIC has also been adding new series of books to their suites of contracts. Amongst the new books, the Orange book for design, build and turnkey work was the first one to be added.

Subsequently, FIDIC published a revised suite of contracts with updated versions of the Red and Yellow books together with a Green Book as the short form of contract and a Silver Book for turnkey contracts in the year 1999. Quite recently in 2005 FIDIC published an amended version of the Red Book for use by Multilateral Development Banks, and in 2007 published a seminar edition of the Gold Book for Design, Build and Operate contracts. And in 2006 a Turquoise Book for Dredging and Reclamation Works was published although it is not highly recognized unlike other books.

The Green book or the short form of contract consists of agreement, general conditions, and rules for adjudication and notes for guidance. The Short Form of Contract is targeted for engineering and building work of small capital value. The Guidance Notes for the Green Book suggested that generally it should be used on projects with a contact value less than US$500,000 and less than a period of 6 months. Alternatively, the Green book can also be used for contracts of greater value under certain circumstances.

By using the Green book the contract could be made flexible and would be easy to amend the contract. In addition to this, the Green book is also suited for short projects which do not require the need of sub contractors. Moving on, the Red book is also known as the conditions of contract for construction. Main contents of the contract book contain general conditions, guidance for the preparation of the particular conditions, forms of tender and contract agreement and dispute adjudication agreement. The Red book mainly gives conditions of contract where the design is carried out by the employer.

The earliest versions of red book were based on civil engineering, however, the title of ‘civil engineering’ dropped with the rapid expansion and growth of the industry. Today, the new Red book could be applied to any work in the construction industry where the employer carries out the design. The Yellow book which is also known as the conditions and contract for plant and design build consist of General Conditions, guidance for the Preparation of the particular conditions, forms of tender and contract agreement and dispute adjudication agreement.

Unlike the Red book, this book provides conditions of contract for construction where the contractor carries out the designs. The Yellow Book is also applicable for the provision of electrical and mechanical plant, and for the design and execution of building or engineering work. The yellow book concludes with example forms for the letter of tender, the contract agreement, and a dispute adjudication agreement. In addition, the Orange book, which is known as the conditions of contract for design build and turnkey, contain general conditions, guidance for the preparation of the particular conditions, forms of tender and agreement.

Since the publishing of the latest Red and Yellow books, the type of project has been focused less and more concentration has been given for the implementation of different procurement strategies. It is now likely that an Employer requiring a design and build or turnkey project under a FIDIC contract would use a 1999 edition of the Yellow Book for design and build or a Silver Book for Turnkey. The Orange book is designed for use where the contractor carries total liability for design.

It has to be noted that the main advantage of using FIDIC is that it is adopted worldwide thus familiarizing the conditions of the contracts to all the nations using it. This also has enabled many countries to set up their own contracts by taking FIDIC into consideration, although there could be some differences. 3. Main differences between both forms of contract As mentioned earlier, I plan to discuss the main differences between FIDIC and PWD in this report, in order to prove that one standard form of construction contract cannot meet the need of every project.

Thus, following points would be discussed further regarding this matter. * Payments * Variations * Extension of time * Unforeseen ground conditions * Delays and costs Figure- 1 4. 3 Payments Payments are of main concern to Contractors and Employers. Since the period of the construction projects are normally long, the amount involved in contracts are large and payments are only gradually paid fairly then on release, therefore the payments are support of the construction industry.

In common law and in the deficiency of any provision in the contract for interim payments all through the progress of work, the Contractor would not be entitled to such payment for his work done gradually if not he has fully or substantially completed his contracted work. Therefore in theory it is possible in the case of a contract with a 30 days’ payment duration to be terminated after 37 days. Not surprisingly the PWD Form does not allow for termination by the contractor under any circumstances. The FIDIC Form carries very weighty provisions at clause 16.

2 against the Employer which permit the Contractor to terminate the Contract in the event of delay in certification (paragraph (b)), and delay in payment (of 42 days after due date for payment, at paragraph (c)). FIDIC also permits termination by the contractor in the event that the employer is unable to provide evidence of satisfactory financing arrangements for the works. 4. 4 Variation It is very important to understand what variation actually means in terms of construction contract. Variation is defined in several ways in different forms of construction contract but the meaning remains the same in most cases.

Actually the term ‘variation’ means a change, modification, adjustment, revision or amendment to the original intent of the contract and/or its works. The contractor is required to construct the contract works to comply with what the contract spells out. Therefore, if a contractor is required to carry out works which are additional (c. f. that which is outside in which case the contractor is entitled not to comply with the instruction) to those spelt out in the contract (normally included in the specifications and drawings), then the contractor is entitled to additional payment.

There are five points to note in this respect, i. e. on how the variation is to be evaluated: i. Based on the rates in the contract where the additional works are identical to those already included in the bills of quantities (PWD, and FIDIC); ii. Based on the rates in the contract but with an adjustment to reflect the fact that the work “may not be executed in similar conditions” to those in the contract (PWD). FIDIC contains arguably similar provisions but is worded differently.

Thus for example, if the details of certain windows in a building are changed in that the rubber sealant is to be of a higher quality, then the same composite rate per window shall be changed to reflect the additional cost of the new sealant. As such, if an item has been underpriced, the same under pricing shall affect the new rate; iii. If none of the existing rates are applicable, the contractor will be entitled to completely new rates based on day works rates (as in the contract if available otherwise as per actual) the actual cost to the contractor plus 15% (PWD) or actual cost plus reasonable profit (FIDIC); and iv.

If the varied works are such as to substantially affect the final contract sum, then the contractor is entitled to have the impact of this taken into account in determining the applicable rates. It is pertinent to note that if the additional works instructed are outside the scope of the contract in either the nature of the works (such as for example substantial earthworks to a building contract) or physical limits of the contractor, the contractor is entitled to refuse to carry out the new works.

Furthermore, even if the contractor wishes to carry out the works, it is strongly advisable that confirmation by the employer itself is obtained as the S. O. /architect/engineer is not empowered to vary the contract (as against vary the works). In such a situation the contractor is also entitled to agree to the applicable rates and terms before proceeding. 4. 5 Extension of time Every construction contract usually contains necessities for time extension and monetary claim in the result of delay.

The related events causing delay which shall be the ground for the contractor to apply for an EOT are detailed and stated under FIDIC 2001, clause 23, and PWD 203A clause 43. The standards form of contract used in Malaysia embrace a process relating to the granting EOT (extension of time). Diversely, these procedures contain the capitulation of an initial notice concerning the delay, submission of support up details to bear the initial notice and further details to keep up to date the information previously submitted.

4. 6 Unforeseen ground conditions According to Hudson’s, this is the reason why provisions are included in construction contracts to enable contractors to claim for “unforeseeable physical conditions” (used in FIDIC) as otherwise the fear is that the consequence of the eventuation of such a risk may “break the contractor’s back” and consequently adversely impact on the employer’s interests. Only FIDIC contains such a provision (at clause 4. 12) whereas PWD and other forms of contracts are silent on it.

It is interesting to note in this connection that where soil investigation data are provided and adverse ground condition not discernable from the data is encountered, contractors may succeed in claiming. The rationale behind is that such data are provided to help secure more competitive bidding (by reducing or eliminating uncertainty which invariably push up the tender price) and as such when the conditions are in fact worse than they are represented to be, then the employer must foot the bill for the additional cost. The basis at law for the contractor’s entitlement is misrepresentation.

If there is no representation, then there is no possibility of misrepresentation. 4. 7 Delays and Costs Generally – both forms of contracts allow the contractor to claim both for time for completion to be extended and costs incurred as a result of the delay. The local form contains clauses which expressly list the situations when the contractor can claim for delays caused, whereas FIDIC does not distinguish costs (defined in clause 1. 1. 4. 3 to essentially cover expenditure and overheads) incurred in delays from costs incurred in overheads in for example carrying out variations.

The contractor’s entitlement is recognized in individual clauses addressing various issues. Thus, if the carrying out of a variation requires the contractor to mobilize, say, an extra crane and it is not convenient to include this in the rates, it will be recognized as a “Cost” together with the additional overheads incurred in the delay and prolongation (clause 13. 3). Other instances of entitlement to costs which may involve delay costs is that incurred in opening up for inspection of works already covered up and which shows the relevant works to be compliant.

In fact FIDIC expressly preserves the contractor’s rights to claim at law (clause 20. 1). This therefore allows the contractor to claim for costs involved in circumstances not specifically recognized in FIDIC but which would otherwise comprise rights at law such as for example as a result of disputes with neighboring owners (recognized for example at clause 43(c) of PWD Form). 4. The construction industry In today’s global world, the construction industry has become one of the most challenging industries.

Each project is exclusive in its own way and totally different from other projects. For instance, if one project was to be carried out as the same way in a different area, there would definitely be numerous differences in terms of the environmental conditions as well. A change in a location of a project makes a huge difference in the entire project because different countries have different climates and environments. Moreover, the nature of the soil of the land and the availability of land are certain factors that make each project different and unique.

Therefore my view is that it is not an easy task to make one form of contract in every project which is carried out. It is very essential to make different forms of contract for each project by taking into account the above mentioned factors. For example, in the Green book of FIDIC, a short form of contract is considered to be in the range of USD 500,000 with a duration period of 6 months. Inevitably, the economic levels of countries differ hugely from each other. Also the USD exchange rate would positively be different in each country.

Thus, in some countries USD500, 000 might become a million or more when converted to their currency, which cannot be considered as a short form of contract in the case of that particular country. The point here is that due to such factors one single form of contract cannot be applied for the completion of every project. Moreover, we are well aware that every country has its own culture. They would have their own beliefs, uniqueness, religion, literature, language, race. etc. In addition the geographical environment of every country controls the lifestyle of the people of the country.

Even though some countries have similarities in their forms of contracts, majority of the factors would be totally different, which would make it literally impracticable to combine all the features of various cultures and environments together and apply a single form of contract to all projects. Therefore in my opinion, it is not possible to use one form of construction contract to complete all the projects. It also does not mean that we should create independent forms of contract for each project, however, there would be some cases where one form of contract could be applied in more than one project.

But in such similar cases, editing the format according to the complexity and environment of the project can be an option. 5. Conclusion Overall, I would like to state that based on the research which I have done, a single form of contract cannot be used to carry out different projects, as it is not achievable. Most of the government projects would not be subject to profits, thus I recommend that firms could generate more profit by using PWD form of contract for the completion of projects assigned by the government and to apply FIDIC forms of contract for private projects.

I hope that my point of view have been proved precisely in this report. 6. References 1. BEST PRACTICE GUIDELINE #C2 “choosing an appropriate form of contract for engineering and construction works” (September 2005 Second edition of CIDB document 1010) 2. S. Mitkus, E. Trinkuniene, 2008. “The 25th International Symposium on Automation and Robotics in Construction”; Institute of Internet and Intelligent Technologies. 3. “International Accounting Standards Board”; Website: http://www. iasb. org (accessed …) 4. “General conditions for construction contracts-public housing programs” U.

S. Department of Housing and Urban Development. 5. “The nature of Construction Contracts” 6. “COMPREHENSIVE INTERN DEVELOPMENT PROGRAM HANDBOOK”; CALIFORNIA ARCHITECTS BOARD 7. Gellert Ivanson Limited, 2009. “Construction Contracts Act 2002” 8. “DESIGN/BUILD CONTRACT BETWEEN OWNER AND DESIGN/BUILDER”; (year) 9. F. Tatarestaghi, M. Dr. Zuhairuse Md Darus, M. F. I Irfan Md Nor, 2011. EuroJournals Publishing, Inc. “An Overview of Comparison between Parties of Construction Contracts In Malaysia” 10. P. Jenkinson, FIDIC Conditions of Contract, “Overview of the FIDIC FORMS OF CONTRACT” 11.

“STANDARD FORM CONSTRUCTION CONTRACTS” 12. S. RAJOO, 2006. “STANDARD FORM OF BUILDING CONTRACT — A CHANGE IN RISK ALLOCATION” 13. “Solomons Europe tips and tactics” 14. P. S. Caldwell, 2008. Society of Construction Law International Construction Law Conference: “THE WORLD BANK FORM OF CONTRACT” 15. http://www. wisegeek. com/what-is-a-construction-contract. htm 16. http://www. scribd. com/doc/10109497/Lect-2-Standard-Forms 17. http://www. gnpgroup. com. my/download/Avoiding_Resolving_Disputes_In_Construction_Contracts. pdf 18. http://eprints. utm. my/6658/1/OngRuiYingMFAB2007TTT. pdf.