Contracts in Procurement
MSc in Construction Law and Dispute Resolution 1
CONSTRUCTION PROCUREMENTCONSTRUCTION PROCUREMENTCONSTRUCTION PROCUREMENTCONSTRUCTION PROCUREMENTCONSTRUCTION PROCUREMENTCONSTRUCTION PROCUREMENTCONSTRUCTION PROCUREMENTCONSTRUCTION PROCUREMENTBE 5402BE 5402BE 5402BE 5402BE 5402BE 5402BE 5402BE 5402
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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