Contracts in Procurement

MSc in Construction Law and Dispute Resolution 1

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Suranga JayasenaSuranga Jayasena1

MSc in Construction Law and Dispute ResolutionMSc in Construction Law and Dispute Resolution

CONTRACTSCONTRACTSCONTRACTSCONTRACTSCONTRACTSCONTRACTSCONTRACTSCONTRACTS

Day Two

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Some Preliminaries

What is Price? Amount of payment (compensation) given by

one party to another in return for goods or services.

What is Value? Various explanations

Value-in-use: what benefit provided to the buyer Exchange value: how much of other goods given up Value = price: market mechanism

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Value = Price

if Price = Cost + Profit : for the seller/contractor

Value = value-in-use : for the buyer/client Value = exchange value : for the buyer/client

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In a Contract

We should be able to see the link between

Value&

Price

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A Contract

...is a legally binding agreement (usually) between two parties.

Usually a written (& sometimes not) All agreements are not contracts Test

Offer and acceptance Intention to create legal relationship

Thus, all contracts are agreements6

Contracts in Procurement

MSc in Construction Law and Dispute Resolution 2

Contract Development

Decision on type of contract, conditions of contract and contract documentation

Selection of the contractor Establishment of contract price (or how the

price will be arrived at)

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Contracts in Procurement

The focus is on Validity of Contracts Legal grounds for challenge Judicial precedents ...

No It is on what is agreed by the parties.

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What is agreed

...defines Rights and Obligations

of parties under the agreement.

Clients right: to get the project done. Contractors right: to get paid

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Rights and Obligations

Rather than what they are, we may also look how they are defined.

Contract defines What is to be designed What is to be built and How much to be paid

How these are defined maybe used to classify the contracts

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Contract Classification

Simplest maybe to look at design and build responsibilities, i.e. classification by responsibility. A design contract A building/construction contract A design and build contract

This classification may not be deep enough for our purposes

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Classification by Reward

Looks at how reward (payment) is paid to the contractor by the client. >> What is agreed at the time of contract.

Broadly, either Price Based, or Cost Based

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Contracts in Procurement

MSc in Construction Law and Dispute Resolution 3

Price Based Contracts

Broadly Two

Lump Sum Contracts

Measurement Contracts

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Lump Sum Contracts

Contract Sum (for the total contract) is agreed before construction starts.

Appropriate for most of contracts. Client has the maximum price certainty

before contractor starts performing.

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Measurement Contracts

Agree for a mechanism to arrive at final sum based on actual quantities of work done.

Price certainty only at the end of performance.

Higher price risk compared to lump sum. Some, are re-measurement contracts.

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Measurement Contracts Cont.

Most effective when works are substantially designed but final details not yet completed.

Client can shorten overall programme at the expense of price certainty.

Fair Price ...?

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Cost Based Contracts

Agreed for mechanism for final price Price = Costs + Agreed Allowance Costs

Actual costs (prime cost) incurred by the contractor in performing the contract >> labour, plant, material, fuel, etc.

Allowance A fee: which needs to be agreed.

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Cost Based Contracts Cont.

Known as Cost Reimbursement Contracts Used When not appropriate to measure

even approximate quantities: scope not clear, risk unreasonable to price, etc. Risk >>> Profit Margin

Examples: emergency building repair after fire, Civil Engineering work under water.

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Contracts in Procurement

MSc in Construction Law and Dispute Resolution 4

Cost Based Contracts Cont.

Provide for great flexibility for change Programme, scope, quantity of works, etc.

Price risk to contractor is low; to client high Weakness in lack of incentive for

contractor minimize his prime cost Few variants depending on the way the

fee is applied.

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Cost Reimbursement Contracts

Cost + Percentage Fee

Cost + Fixed Fee

Cost + Fluctuating Fee

Target Cost Reimbursement Contract20

Alternative Classification

Drawings and Specification Performance Specification Schedule of Rates Schedule of Prices Bills of Firm Quantities Bills of Approximate Quantities

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Drawings and Specifications

Simplest type Complete drawings and full specifications Comprises of large amount of tender

information Most pricing risk to the contractor Tendency to overprice due above Known to be used with lump sum price

(and no BoQ)22

Drawings and Specification

with Lump Sum Price

Each bidder quantifies for pricing >> wasteful

Difficult to evaluate bid prices Design needs to be fully completed for

signing of the contract Variations might become problematic to

value

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Performance Specification

Price based on employers brief and user requirements (documented as a performance spec)

Within the parameters laid down, contractor chooses methods, materials and the design (often)

Flexibility to the contractor Defined performance to be achieved

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Contracts in Procurement

MSc in Construction Law and Dispute Resolution 5

Performance Specifications Cont

Lump sum price Natural to offer least expensive materials

and construction methods Difficulty is to draft the Performance Spec

perfectly Suits projects of any size.

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Schedule of Rates

Similar to BoQ but no quantities Principles of SMM used Bidders insert their rates Neither contract sum nor final price

predictable Difficult to price in absence of quantities Used when not possible to predetermine

the extent of proposed work26

Schedule of Prices

Similar to Schedule of Rates, but tender includes rates (from current market)

Bidders offer discounts (+/-) for work sections

Facilitate bid evaluation Usage of standard allows familiarity >>

better pricing

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Bills of Firm Quantities

Both Quantities and Unit Rates form part of contract

Design to be virtually completed Clear picture of commitment of both

parties Detail breakdown of bid/tender sum >>

better bid evaluation Unit rates >> basis for pricing variations

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Bills of Firm Quantities Cont.

Bid can be compared on bid sum alone Widely used, suits projects of any size

Lot of time on design and bill preparation Risk of quantity errors in BQ is with bidder

Bidder to rate strategically May cause problems in variations pricing

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Bills of Approximate Quantities

Used when not possible to measure work accurately

Price certainty comparatively less than previous

Entire work re-measured on completion Only Unit Rates form part of contract Quantities ...?

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Contracts in Procurement

MSc in Construction Law and Dispute Resolution 6

Bills of Approximate Quantities Cont

Less pressure to fully complete the design Signing of contract before finalizing the

design Lesser overall time No risk to bidder on quantity errors in the

bill (what if for large deviations) Extra expense (time/money) on bill of firm

quantities avoided >> but, what about remeasuring

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Contracts

Further Comments?

Reflections?

Summarizing?

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Thank You

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