Monday, February 8, 2010

Conventional Construction Contracts

1.1 Introduction

The conventional ad-measurement contract is one in which the Employer employs Consultants to design The Works and to supervise a Contractor in the performance of the Work.

The Contractor is selected on the basis of his suitability for the type of work and the competitiveness of his price relative to other Contractors. He enters into a contract with the Employer undertaking to perform the Works in accordance with the terms and conditions of the contract for an agreed price.

The Engineer, who is usually one of the Consultant's team, acts as the Employer's expert; as the Employer's Manager (with delegated responsibilities); and as initial Arbiter between Employer and Contractor. 

The conventional procedure goes along a path that requires development of sufficient information for Contractors to tender in competition against each other in respect to the whole scope of works that is the subject of the contract. 

Almost invariably for large projects, bet not of necessity, the price is on a firm basis, either a lump sum or unit prices with provision for re-measurement of quantities. Provisional sums for certain undefined items may also be included together with escalation for certain agreed items. .

The advantages of this conventional approach include the following

1.2.1 It is conventional, it is accepted and recognized that it works and that all parties are able to function in their designated roles towards completion of the project. It is time honored and widely understood. 

1.2.2 It allows the Employer to choose Consultants who will be specialists in their field and among the best available. 

1.2.3 It allows the Employer time and the ability to develop and express his requirements, in consultation with his consultant and to ensure that the documents fully describe these requirements 

1.2.4 It allows the Employer and his Consultant to pre-qualify and select Contractors from whom tenders will he sought, and choose the most economic conforming tender. 

1.2.5 The contract that results should have a fixed price that will vary only by the extent to which variations occur sometimes to a specified limit and by a11owed escalation. 

The disadvantages of conventional contracts include the following:

1.3.1 The considerable amount of time required to take the project through all of the necessary stages. The Consultant has a distinct role - he has tasks that he must fulfill - he requires time to do this - there is consultation with the Employer but too much involvement on an ants length contact divides responsibility and delays the design and the documentation, The design stage is a specific contractual undertaking and the Consultant must be allowed discretion and scope. 

1.3.2 With the passage of tine during the design and bid stage, it is sometimes necessary to let contracts with specialist Sub-contractors prior to the letting of the main Contract and this process can lead to serious interface problems particularly in regard to the overall project schedule. 

1.3.3 In order to place a firm price contract it is necessary that the design and documentation is fully developed by the time the firm price is requested. A firm price can only by given by a contractor on the basis of full information, A considerable amount of time must therefore he devoted purely to the design and documentation stage and during this period no physical construction work can he undertaken. 

1.3.4 In giving a firm price the Contractor evaluates the information given to him and puts a value on this. More often than not the true variation between different Contractors conforming tender prices is the value included for risk and contingencies. Firm price contracting requires that the Contractor adds money into his prices for these items when in fact they may not he necessary. It is often more economic for the Employer to cover certain risks himself than to create a situation wherein the Contractors have to guess at these and include large contingency sum in their prices which may not he required

1.3.5 In giving a firm price, the Contractor enters into obligations to perform the work for that price. These are his obligations but his motivation is to maximize his profit. This is why he is in business. From the moment the contract is signed the Employer and the Contractor are, to a degree, adversaries, The common purpose is completion of the contract but the Contractor, healthily pursuing his own interests, must do so at the best possible return to himself, There would have to be very special provisions in the contract if this best possible return was achieved by finishing ahead of time and at a lower cost to the Employer. Probability and experience prove the contrary. In many cases the cost and time over-run are such that whereas the Employer believed that he knew the extent of his commitments at the time of placing a contract, the out-turn is in fact quite different.

1.4 Conclusion
The foregoing is a brief statement on advantages and disadvantages of conventional contract seen in the context of a single contract. When related to a single contract that stands by itself without a great deal of inter-relationship with other contracts, then the advantages of the conventional approach probably outweighs the disadvantages subject to there being sufficient time to allow all the conventional processes, from appointment of the Engineer to award of contract, to take place. Further the conventional and customary approach has, because it is the norm, been found to be acceptable for Public Sector business but there is no doubt that when time is not available and/or where flexibility is needed then the advantages of adherence to all the usual normal processes are outweighed by the disadvantages of this procedure, 

The conventional approach is inappropriate when:

1.4.1 There is insufficient time for the conventional processes to take their due course or when the work is of such complexity and size that the project would benefit from physical work being commenced at an early date prior to complete development of design; 

1.4.2 A project is large and complex with many major Contractors working in varying disciplines presenting organizational problems particularly at contract interfaces and where each Contractor's objectives do not conform to those of the Employer; 

1.4.3 There is restricted access.

1.4.4 The work is of a high-risk nature; 

1.4.5 There is inadequate definition of the work. 

1.4.6 Emphasis is only early completion. 

1.4.7 There are special industrial relations requirements, including training for the future. 

1.4.8 The Employer requires flexibility in the selection of Plant and equipment; 

1.4.9 The maintenance and operation of the plant is of paramount importance as in the case of an extension to an existing plant. In this example the Employer/Owner will require to be directly involved in not only the selection of Plant and equipment to ensure compatibility but also in the direction of site operations including the commissioning.

One of the alternatives to the ad-measurement form of contract which takes account of the above factors is the Target Cost/Fee Contract described below.

The Target Cost Contract Alternative

2.1 Introduction
Two major weaknesses of simple cost-reimbursable contracts are the lack of knowledge of financial commitment by the Employer and lack of incentive for the Contractor to control costs. Both may make it difficult for publicly accountable Employers to demonstrate that they are able to control their financial commitment. In addition, in sate organizations, there is an attitude that cost-reimbursable contracts are a last resort. 

However, cost-reimbursable contracts, particularly when incentives are incorporated, have many advantages for both Employer and Contractor. These include flexibility to change, fairer apportionment of risk, potential saving in the time and cost of tendering, men-book accounting, and a reduction in the resources of all parties expanded on claims. One of the greatest benefits is the opportunity for the Employer to establish a common objective for both parties to a contract, with the resulting identity of interest and elimination of the adversarial stance between them. It is with these parameters in mind that the Target Cost/Fee type of contract has been developed with the added advantage that design and construction can coincide leading to early completion reducing the inflation effect on Capital cost and to sate extent interest charges on borrowings. A further advantage in the case of a hydro plant or other revenue earning utilities is the benefit of receiving early income from sales. 

At the outset of the Contract, targets are agreed in respect of cost, time and when applicable, plant performance and formulae are devised for the distribution between parties to the contract of the gains or losses arising from actual variations to the targets.

2.2 Basic Principles

2.2.1 The Conditions of Contract are the International conditions published by the International Federation of Consulting Engineers (F. I. D. I .C) or similar conditions suitably amended to suit the particular circumstances of the project. There are standard conditions other than F. I. D. I. C, which may be as readily amended, but the F. I. D. I. C. ones are generally proposed as they are universally recognized, well understood and trusted. However, the Engineer's powers require amendment in the light of the special nature of Target Cost/Fee contracts. Other amendments would be necessary where the Employer employs a Project Manager 

2.2.2 A Target cost for the project is proposed by the contractor, then checked and agreed by the Employer. This Target, which does not include any profit for the Contractor, becomes the principal instrument in budgetary control of the Works and is updated at regular intervals until the end of the work when a Final Target Cost is established. 

2.2.3 A schedule and target time for completion are agreed, and these are regularly updated to take cognizance of any new circumstances arising during the currency of the contract.

2.2.4 Similarly a Performance Target is agreed. 

2.2.5 Payment of the actual cost of the work as it is incurred is made from a fund established under the financial provisions of the contract. These payments are limited to the actual net at of the Work including the Contractor's overhead costs.

2.2.6 The Contractor receives a fee for his services, the amount of which is related to his services against the agreed targets and is the only payment to him, which allows for his profit. It is customary for the Contractor to be assured a stated minimum fee. However, additional specific bonuses can be built into a Target for early completion or the Employer might desire other special incentives to be incorporated.

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