Construction Contract - General Overview

A construction contract is a contract purposely carried off for the construction of an asset or a group of interdependent or interrelated assets relating to the design, technology and function or ultimate purpose or use.

A fixed price contract denotes to a contract where the contractor consents to a fixed contract price or a fixed rate per unit of output, which may be subject to cost escalation clauses in some incidents.

A cost plus contract denotes to a contract where the contractor is recouped for permissible or otherwise defined costs in addition percentage of these costs or a fixed fee.

Under IAS 11, if a contract addresses two or more assets, the construction of each asset reported for individually if (a) separate proposals were submitted for each asset, (b) portions of the contract regarding each asset were negotiated independently, and (c) costs and revenues of each asset can be evaluated. If not, the contract is reported for in its entireness. [IAS 11.8]

Two or more contracts are accounted for as a single contract if they were negotiated together and the work is interconnected. [IAS 11.9]

If a contract provides an alternative to order one or more extra assets, construction of every extra asset is accounted for as a separate contract if either (a) the additional asset dissents considerably from the original asset(s) or (b) the price of the additional asset is separately negotiated. [IAS 11.10]

Schedule of Quantities
A schedule of quantities is formed for all the projected works after the creation of architectural and engineering design. The true project cost will be determined by putting estimated unit rate adjacent to each work item. In order to keep the design intact the cost of budget should be amended with the change of building material or lower requirement of specification.

Estimation / Cost Planning
An estimate of capital cost along with direct & indirect cost and an estimate of capital expenditure containing plant , labor , material , temporary works , fixed overhead , subcontractors , suppliers , operation and maintenance etc. should be prepared for financial schedule to evaluate the economic viability. Simultaneously, an income schedule must be set up for a commercial project to anticipate the profitableness and rate of return.

Financial Support
Financing of a project, particularly for a commercial project, may significantly affect the choice of project size and type of contract to be selected by the client. In case the financial status mainly governs the size and sequence of the project, the client itself should know well about the financial schedule of its capital investment and expenditure. If short of funding, it should look for supports well in advance from outside parties or banks when necessary.

Contingency
In spite of preliminary investigations in engineering design stage, there are always possibilities of experiencing unanticipated problems after the commencing of work. With the purpose of doing away with the situation of running out of budget, the client or its engineer frequently take into accounts a contingent sum of money to cope with the unpredicted additional works.

Preparation of Contract Documents
During the design phase the engineer should have arrange for the right form of contract documents to be utilized with construction to the client. Sincere attention and sufficient time should be given to organize the contract documents failing which may cause sudden additional expenditure. Now-a-days some common forms of contract known as FIDIC Contract are available.

Preparation of Tender Documents
At the time of submitting tenders some vital information like represent the full design , detailed requirements , stage completions of works , contractor’s responsibilities , terms of payment and any other special conditions should be included into tender drawings , specifications , bills of quantities , works programme and the contract documents so that the renderers’ can easily understand the value of work to render a competitory but precise quoted price to cover the whole of the work. Inadequate information in the tender documents will cause disputes and claims accordingly throughout and at the end of the contract.

The following documents should be included into a tender:
a) Instructions to tenderers
b) Form of Tender
c) General Condition of Contract
d) Special Condition of Contract
e) General Specification
f) Particular Specification
g) Bills of Quantities
h) Methods of Measurement
i) Tender Drawings
j) Additional appendices
k) Form of Agreement

Preparation of Bills of Quantities (BoQ)
The bill of quantities contains a schedule of predetermined work items for item-by-item portion of contract works. It presents the brief description of the necessitated work and with estimated quantity taken off from the tender drawings. To get over the complete work the contract may include a series of bills which constitute a part of the tender documents for the renderers to estimate against each item with a unit rate or unit price. On the ground of the total offered price will then be developed. Assessment of the BoQ items will be based on the “preamble” and compliant with the process described in the “Standard Method of Measurement (SMM)”. A brief examination must be carried out to resolve the errors related with the “BoQ unit” and the numerical figures of the “ BoQ quantity”.

Though construction contracts are considered as the systems for evaluation construction cost, they also constitute the allotment of risk to the different parties involved in the construction. The owner is empowered to select the type of contract to be utilized for a specific facility to express the terms in a contractual agreement.

Posted by Rajib Dey
Business Development
Global Associates
A pioneer company in construction estimating
Join our estimating forum