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CONSTRUCTION CONTRACT MANAGEMENT BY MUMTAZ HUSSAIN PROJECT DIRECTOR

CONSTRUCTION CONTRACT MANAGEMENT BY MUMTAZ HUSSAIN PROJECT DIRECTOR CAPITAL DEVELOPMENT AUTHORITHY. Today’s reality…. Construction is complex and challenging. Delays, changes, disputes, accidents cost more than ever.

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CONSTRUCTION CONTRACT MANAGEMENT BY MUMTAZ HUSSAIN PROJECT DIRECTOR

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  1. CONSTRUCTION CONTRACT MANAGEMENT BY MUMTAZ HUSSAIN PROJECT DIRECTOR CAPITAL DEVELOPMENT AUTHORITHY

  2. Today’s reality… • Construction is complex and challenging. • Delays, changes, disputes, accidents cost more than ever. • Construction contracts are among the most complex forms of contract around because determinations of satisfactory performance of the obligation is difficult to determine.

  3. INTRODUCTION • A contract is a formalized means of communication between two parties. • This facility is used very commonly by the project manager and owner to control the delivery of their projects. • A contract has the added advantage of forcing owners to define their, requirements, organize and arrange their thinking, and make a commitment to their project.

  4. BASIC REASONS FOR A CONTRACT • BASIC REASONS • It defines the work and the owner’s delegation of responsibilities to the various parties to complete the work • It inherently defines the nature and extent of risk to various parties. • It defines the transfer of financial incentives to complete the work.

  5. CONTRACT • THE WORD CONTRACT IS DERIVED FROM LATIN WORD ‘CONTRACTUM’ WHICH MEANS DRAWN TOGETHER;

  6. WHAT IS A CONTRACT? • A contract may be defined as a voluntary agreement enforceable at law, made between two or more parties, whereby rights are acquired by one party to act or forbearances by the other. According to the Construction Specification Institute (CSI) Manual of Practice, a contract is “a promise or a set of promises for the breach of which the law gives a remedy of the performance of which the law recognizes a duty” (CSI 2008). • The agreement is reached by the acceptance of an offer made by one party to do something for other for a stipulated consideration.

  7. ELEMENTS OF A CONTRACT These are the five basic elements of a contract • OFFER • CONSIDERATION • ACCEPTANCE • LEGAL PURPOSE • LEGAL CAPACITY

  8. CONTRACT AGREEMENT • The agreement is designed to formalize the contract. It brings together all the other contract documents by reference to them and is legal instrument verifying the contract.

  9. CONTRACT MANAGEMENT That function of a project which is responsible for conformation of performance within the stipulations of contract. • CONSTRUCTION CONTRACT A contract under which one party promises to furnish service & materials to build a structure for another party who promises to pay for the work performed. There are two basic types of construction contracts • Fixed price (or lump sum) • Cost type

  10. CONSTRUCTION CONTRACT (Contd.) The success of a project is often judged on the construction performance because this activity is highly visible. The success of a project is also influenced by; • The accuracy and details of its documentation • The understanding between parties and acceptance of their particular responsibilities • How professionally and accurately the day to day administration is handled • How conflict or contractual problems are resolved.

  11. Construction Project Development Phases Typical construction project development phases includes; • Preliminary planning and feasibility studies • Preliminary engineering and design • Detailed Engineering design • Procurement • Construction • Operation • Demolition

  12. Contracts are used during all phases of construction projects. In the first phase , which is the feasibility phase, contracts are formed between an owner and a consultant, an engineering firm, or an architectural firm to perform a feasibility and site selection study. In the construction phase contract are formed between an owner and a Contractor firm.

  13. Construction Contract Documents Characteristics of a “good” contract document: • Carefully considered • Expressed clearly • Time-tested • Comprehensive • Fair • Balanced • Applicable to the elements of a construction projects

  14. PEC BIDDING DOCUMENTS • Standard Form ofBidding Documents (Civil Works) (to be used for estimated value of more than Rs. 25 Millions) • Standard Form of Bidding Documents for Procurement of Works (E&M) (to be used for estimated value of more than Rs. 25 Millions) • Standard Form of Bidding Documents for Procurement of Works (For Smaller Contracts) (to be used for all type of procurement for estimated value of not more than Rs. 25 Millions) • Standard Form of Contract for Engineering Consultancy Services (For Large Projects) – Time Based Assignments (to be used for consultancy fee over Rs. 2 Millions) • Standard Form of Contract for Engineering Consultancy Services (For Large Projects) – Lump Sum Assignments (to be used for consultancy fee over Rs. 2 Millions) • Standard Form of Contract For Engineering Consultancy Services (For Smaller Projects) (to be used for consultancy fee not more than Rs. 2 Millions)

  15. A NORMAL SET OF TENDER DOCUMENTS • INSTRUCTIONS TO BIDDERS • CONDITIONS OF CONTRACT (GENERAL PART-I & PARTICULAR PART-II) • FORMS OF TENDER & CONTRACT SECURITIES • SPECIFICATIONS & SPECIAL PROVISIONS • BILLS OF QUANTITIES OR SCHEDULES OF PRICES • DRAWINGS • SUPPLEMENTARY DATA

  16. STAGES OF CONTRACT MANAGEMENT • PRE-REQUISITION OF INVITATION TO TENDER • FORMULATION OF TENDER DOCUMENTS • TENDERING/EVALUATION/AWARD • CONTRACT ADMINISTRATION

  17. STAGES OF CONTRACT MANAGEMENT (Contd.) A - PRE-REQUISITION FOR INVITATION TO TENDER A-1. COMPLETION OF FEASIBILITY STUDIES • TECHNICAL FEASIBILITY • ECONOMIC VIABILITY • ENVIRONMENTAL IMPACT ASSESSMENT(EIA) A-2. DETAILED ENGINEERING DESIGN • DESIGN OF PROJECT COMPONENTS • FINALIZATION OF TECHNICAL REPORTS • SPECIFICATIONS • COMPUTATION OF QUANTITIES • FORMULATION OF ENGINEER’S ESTIMATE

  18. STAGES OF CONTRACT MANAGEMENT (Contd.) A-3. ADMINISTRATIVE APPROVAL • PREPARATION OF PC-1 PROFORMA • APPROVAL BY THE GOVERNMENT A-4. ARRANGEMENT OF FINANCES • LOCAL & FOREIGN EXCHANG COMPONENTS A-5. LAND ACQUISTION A-6. PREQUALIFICATION OF CONTRACTORS

  19. STAGES OF CONTRACT MANAGEMENT (Contd.) • B. FORMULATION OF TENDER DOCUMENTS • Specifications • Detailed Design • Tender Drawings • Estimation of Quantities • Decision About Specific Provisions • Decision About format-ADB/IDA • Conditions of Contract - Part 1 & II.

  20. TENDER DOCUMENTS • General Conditions of Contract • These define the legal rights and obligations of the parties and may be described as the regulations under which the contract will be performed. • Nominates an independent third person called the “Engineer” who is responsible for administering the contract • General conditions vary from country to country and organization to organization • Conditions of Contract internationally • Federation Internationale des Ingenieurs- Counseils (FIDIC), Switzerland, 1992. • Pakistan Engineering Council

  21. Tender Documents (Contd.) • Special Conditions of Contract • These are additions to, deletions from or amendments to the General Conditions to make them project or party specific. • Specifications • Give full description of work to be carried out • Detail the materials and workmanship that the Contractor is to utilize in the project • Define the quality and standards of workmanship required • Act as a legal evidence in the event of litigation

  22. Tender Documents (Contd.) • Drawings • Bill of Quantities • Quantities are estimates only and should have limits of accuracy • Tender • Formal offer to undertake the project. Price, conditions and method statements are detailed. It should be noted that all documents submitted with a tender form part of the tender • Letter of Acceptance • Relevant Correspondence • This often include points of clarification of either the Tender Documents or a tender.

  23. INSTRUCTIONS TO BIDDERS This Contains Information's And Instructions Which A Prospective Contractor Is Required To Know Or Abide By For Participation In Tendering:- • Name Of Work To Be Constructed • Source Of Funds For The Works • Eligibility & Qualification Requirement • Firms And Persons Authorized To Submit Tender • Cost On Tendering Not Reimbursable • What Makes A Tender Non-responsive • Holding Of Pre-tender Conference, If Required

  24. Stages of Contract Management (Contd.) • TENDERING/EVALUATION C-1. Tendering • Tendering Process • Packaging • LCB/ICB Tendering • Types of Tender

  25. Stages of Contract Management (Contd.) C-2. Evaluation • Tender Opening • Preliminary Evaluation • Detailed Evaluation • Procedure for Preference

  26. C-2 TENDER EVALUATION C-2.1 AT TENDER OPENING • IS TENDER SECURITY ACCOMPANIED WITH TENDER? • IS TENDER SIGNED, STAMPED & ACCOMPANIED BY? • POWER OF ATTORNEY • JOINT VENTURE AGREEMENT • DISCOUNT (IF ANY)?

  27. TENDER EVALUATION (Contd.) • GENERAL CONFORMITY OF: • Legal & Contractual Evaluation • Cost & Financial Evaluation • Technical Evaluation • Deviations: • Major • Minor

  28. TENDER EVALUATION (Contd.) C-2.2 PRELIMINARY EXAMINATION OF ALL TENDERS • ELIGIBILITY & QUALIFICATION • ARITHMETIC CHECK • CURRENCY PROPORTION • ADJUSTMENT ON ACCOUNT OF FOREIGN COMPONENT?

  29. TENDER EVALUATION (Contd.) C-3. Detailed Evaluation Of Substantially Responsive Tenders Only • Detailed Scrutiny Of Minor Deviations: • LEGAL & CONTRACTUAL ASPECTS • TECHNICAL ASPECTS • COST & FINANCIAL EVALUATION • Clarifications (If Required) • Loadings Of Tenders For Minor Deviations

  30. Legal & Contractual Evaluation • Evaluation for Responsiveness • Evaluation of legal & Contractual Aspects • Comparison with Pre-qualification Status

  31. Cost & Financial Evaluation • Correction of Errors • Adjustment of Foreign Currency Components • Interest Rate for Delayed Payments • Price Adjustments • Evaluated Tender Price • Balanced Tender

  32. Program of Work Key Personnel Mobilization Method of Construction Equipment Dewatering Sub-Contractors Materials Technical Evaluation

  33. TENDER EVALUATION (Contd.) • RANKING OF SUBSTANTIALLY RESPONSIVE TENDERS • COMPARISON OF TENDERS AFTER ALLOWING DOMESTIC PREFERENCE • ISSUANCE OF LOA • PERFORMANCE SECURITY

  34. Design phase • Preparation of Pre-qualification Documents • Advertisement • Pre-qualification Criteria • Pre-qualification Finalization • List of pre-qualified Contractors • Invitation to Pre-qualified Bidders • Instructions to Bidders • Bid submission Process • Pre-bid meeting • Evaluation of bids • Lowest Evaluated Bid • Letter of Acceptance • Submission of Performance Bond • Signing of Contract Agreement • Letter of Commencement/ Notice to proceed • Financial Assistance in form of Mobilization Advance

  35. Bidder Conferences/Pre-Bid Meetings Bidder conferences (sometimes called contractor conferences, vendor conferences, and pre-bid conferences) are meetings with all prospective sellers and buyers prior to submittal of a bid or proposal) are meetings with all prospective sellers have a clear and common understanding of the procurement (both technical and contractual requirements), and that no bidder receive preferential treatment. • Responses to questions can be incorporated in to the procurement documents as amendments. • To be fair, buyers must take great care to ensure that all prospective sellers hear every question from any individual prospective seller and every answer from the buyer.

  36. TENDER SECURITY/BID BOND • Bid Bonds are used to protect owners when the contractor that is lowest, responsible , responsive bidder on a competitively bid project refuses to enter into the contract for the project. • Amount of security shall be in form of Cash Deposit, Certified Cheque, Bank Draft, Letter of Credit, Guarantee from a Scheduled Bank in Pakistan or Foreign Bank Acceptable to Employer. • If Tender is not accompanied by an acceptable Tender Security (1-3% of Est. Cost, whereas 3% for smaller Contracts). It will be rejected being non-responsive and having major deviation.

  37. CONTRACT ADMINISTRATION • Performance Bond • Financial Assistance/Mobilization Advance • Appointment of the Engineer and Authority • Priority of Contract Documents • Retention Money • Insurances and risk management • Clause 14 Work Program • Liquidated Damages • Bonus • Variation Orders • Claims • Dispute Resolution • Price adjustment Clause • Taking over Certificate • Defect Liability Certificate

  38. Performance Bonds Performance bonds are guarantees by the surety that a contractor will perform the work as required by all of the conditions and terms of the contract The Performance Security shall be of an amount equal to 10% of the Contract Price stated in the Letter of Acceptance. Such Security shall, at the option of the bidder, be in the form of either (a) bank guarantee from any Scheduled Bank in Pakistan or (b) bank guarantee from a bank located outside Pakistan duly counter-guaranteed by a Scheduled Bank in Pakistan or (c) an insurance company having at least AA rating from PACRA/JCR. "Commencement Date" means the date upon which the Contractor receives the notice to commence issued by the Engineer pursuant to Clause 41.

  39. “The Engineer" means the person appointed by the Employer to act as Engineer for the purposes of the Contract. The Engineer shall obtain the specific approval of the Employer before carrying out his duties in accordance with the Clauses mentioned in document e.g.: • Consenting to the sub-letting of any part of the Works under Sub-Clause 4.1 “Subcontracting”. "Letter of Acceptance" means the formal acceptance by the Employer of the Tender.

  40. Liquidated Damages Rather Than have a contractor be in breach of contract if he or she is not able to complete a project as scheduled, liquidated damages provides compensation to owners when this situation occurs at the end of a construction project. Fixed per day maximum amount 10% of contract price

  41. Insurance of Works and Contractor's Equipment • Damage to Persons and Property • Insurance Against Accident to Workmen The Contractor shall, except if and so far as the Contract provides otherwise, indemnify the Employer against all losses and claims in respect of: (a) death of or injury to any person, or (b) loss of or damage to any property (other than the Works), • Third Party Insurance (including Employer's Property)

  42. Changes in plans and specs • clarification, correction, modifications prior to bid are referred to as “addenda” • owner must maintain a system of distributing and acknowledging receipt of addendum • plan and spec changes after award are referred to as “revisions”, and generally require issuance of a Variation order(s)

  43. 51.1 Variations • The Engineer shall make any variation of the form, qualify or quantity of the Works or any part thereof that may, in his opinion, be necessary and for that purpose, or if for any other reason it shall, in his opinion, be appropriate, he shall have the authority to instruct the Contractor to do and the Contractor shall do any of the following: (a) increase or decrease the quantity of any work included in the Contract, (b) omit any such work (but not if the omitted work is to be carried out by the Employer or by another contractor), (c) change the character or quality or kind of any such work, (d) change the levels, lines, position and dimensions of any part of the Works, (e) execute additional work of any kind necessary for the completion of the Works, or (f) change any specified sequence or timing of construction of any part of the Works.

  44. Variations Orders • a written order issued by the owner to the contractor for a change to the contract within the scope of work • change orders are written for: • extra work • increasing or decreasing the contract quantities • alterations • change orders state the basis and amount of payment and time extensions

  45. Ability to influence cost over time • Greatest potential to influence cost is during the pre-construction design phase • Claims avoidance begins during pre-construction • Design phase • Intensive preparation and review of contract documents • Careful consideration of methods and equipment = consider overall constructability

  46. Extension of Time for Completion In the event of: (a) the amount or nature of extra or additional work, (b) any cause of delay referred to in these Conditions, (c) exceptionally adverse climatic conditions, (d) any delay, impediment or prevention by the Employer, or (e) other special circumstances which may occur, other than through a default of or breach of contract by the Contractor or for which he is responsible,

  47. Taking-Over Certificate When the whole of the Works have been substantially completed and have satisfactorily passed any Tests on Completion prescribed by the Contract, the Contractor may give a notice to that effect to the Engineer with a copy to the Employer, accompanied by a written undertaking to finish with due expedition any outstanding work during the Defects Liability Period.

  48. Defects Liability Certificate The Contract shall not be considered as completed until a Defects Liability Certificate shall have been signed by the Engineer and delivered to the Employer, with a copy to the Contractor, stating the date on which the Contractor shall have completed his obligations to execute and complete the Works and remedy any defects therein to the Engineer's satisfaction. The Defects Liability Certificate shall be given by the Engineer within 28 days after the expiration of the Defects Liability Period, or, if different defects liability periods shall become applicable to different Sections or parts of the Permanent Works, the expiration of the latest such period, or as soon thereafter as any works instructed, pursuant to Clause 49 and 50, have been completed to the satisfaction of the Engineer. Provided that the issue of the Defects Liability Certificate shall not be a condition precedent to payment to the Contractor of the second portion of the Retention Money in accordance with the conditions set out in Sub-Clause 60.3.

  49. ADMINISTER PROCUREMENT: Claims Administration Contested changes and potential constructive changes are those requested changes where the buyer and seller cannot reach an agreement on compensation for the change, or cannot agree that a change has occurred. These contested changes are variously called claims, disputes, or appeals. Claims are documented, processed, monitored, and managed throughout the contract life cycle, usually in accordance with the terms of the contract. If the parties themselves do not resolve a claim, it may have to be handled in accordance with alternative dispute resolution (ADR) typically following procedures established in the Contract. Settlement of all claims and dispute through negotiation is the preferred method.

  50. CONTRACT CLAIMS • Contract Claims could occur at any stage in the execution of a project. • Typical causes of claims include: • Differing site conditions • Delays • Design error or changes • Interpretation differences • Acceleration or suspension of work • Additional work • Deleted work • Construction failures

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