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Construction Contracting

1.1 The Construction Industry

Construction projects are complex undertakings. The owner of the structure,

either from his own resources or by some form of external financing, provides
the capital necessary to finance the entire operation. The structure must be
designed in accordance with applicable codes and standards, culminating in
drawings and specifications that describe the work in sufficient detail for its
accomplishment in the field. The building of a structure of even modest
proportions involves many skills, materials and equipments.

Construction Categories

The field of construction is as diversified as the uses and forms of the many
types of structures that it produces. However, construction can be divided in to
four categories, although there is some overlap among these divisions and
contain projects do not fit into any one of them.

The four main divisions are housing, nonresidential building, engineering, and
industrial construction.

a) Housing Construction

This includes the construction of single-family homes, high-rise apartments, low-

rise, garden type apartments and the rehabilitation of existing house units.

b) Nonresidential Building Construction

This category includes buildings that are erected for institutional, educational,
commercial, social, religious and recreational purposes. The combination of
housing and nonresidential building construction is commonly referred as
building construction.

c) Engineering Construction

This category covers structures that are planned and designed by engineers.
Engineering construction can be divided into three groups – highway, heavy and
utility construction.

d) Industrial Construction

It includes the erection of projects that are associated with the manufacturing or
production of a commercial product or service. Petroleum refineries, steel mills,
chemical plants, electric – power generating stations and similar installations are
all examples of industrial construction.

1.2 Drawings and Specifications

The design of construction projects is performed by architects and/or engineers,

the division of responsibility between the two depending on the nature of the
construction involved. As a general rule, building construction is primarily of an
architect nature, with structural, electrical, mechanical and sanitary engineers
providing supportive services as may be required. High way, heavy, utility and
industrial projects are predominantly engineering projects, with architectural
services obtained if needed. Within this text, “architect – engineer” (A/E) is used
to designate the organization, person, concern, or team responsible for project
design, whether it be architect, consulting engineer, or a combination of both.

Services Provided by Architect – Engineer

When the owner has his own in – house design capability or when a design –
construct contract is contemplated, the owner is not faced with the necessity of
choosing an architect – engineer to design his project. Otherwise, he must go
through some selection process. The usual procedure is for the owner to notify
various design firms, selected on the basis of personal acquaintance, reputation
or recommendation, about his forthcoming project. Each interested architect –
engineer firm then presents the owner with information concerning its past
projects, names of ex – clients, qualifications of its staff, manpower available for
assignment to the project, and perhaps some specific ideas about the owner’s
upcoming job. After interviews and discussions, the owner selects the company
that he deems the most desirable and negotiates a contract with it. A private
owner may not choose to follow this procedure, preferring to negotiate
immediately a design contract with a selected concern.

The scope of service required of the architect – engineer is subject to

considerable variation, depending on the needs and wishes of the owner. Basic
to such services is the preparation by the architect – engineer of several
documents required for bidding or negotiation, and for construction purposes.
These documents typically include the instructions to bidders, proposal form,
general conditions, supplementary conditions, drawings, technical specifications,
and agreement.

Subsequent to the award of a construction contract, the scope of services of the

architect – engineer depends considerably on the construction management
capabilities of the owner. Responsibility of the architect – engineer to the owner
may cease when the contract documents are prepared and delivered. On the
other hand, the owner may desire him to provide full construction phase services

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including project inspection, approval of payments to contractor, change orders,
and assistance in the selection and obtaining of interior furnishings. Although the
architect – engineer is not a party to the construction contract between the
owner and contractor, it delineates those functions that he is to perform on
behalf of the owner during the construction phase. Ordinarily, the status of the
architect – engineer during construction is defined in the general conditions.

Ownership of Design

Ownership of the drawings and specifications and their possible reuse can be a
matter of considerable importance to the architect – engineer. So long as the
documents remain with the architect – engineer, he has a common – law
copyright on his design that is regarded as intellectual property. The protection
afforded by a common – law copyright is against unauthorized copying and
unauthorized use without his consent. However, when the work is delivered to
the owner – client and the fee is paid, ownership of the drawings and
specifications now lies with him. This is, however, in the absence of any
contractual provision to the contrary. Normally, the contract between the owner
and the architect – engineer makes explicit provision regarding ownership.

1.3 Estimating and Bidding

Construction estimating is the compilation and analysis of the many items that
influence and contribute to the cost of the project. Estimating, which is done
before the physical realization of the work, requires detailed study of the
drawings and specifications. It also involves a careful analysis of the results of
the study in order to arrive at the most accurate estimate of the probable cost
consistent with the bidding time and the accuracy and completeness of the
information submitted.

Although negotiated contracts frequently lack the competitive element, the

accurate estimating of construction costs constitutes important aspect of such
contracts. The contractor is expected to provide the owner with reliable advance
cost information, and his ability to do so determines in large measure his
continuing ability to attract owner – client. In design – construct and
construction management contracts, the contractor is called on to provide expert
cost assistance and advice as the design develops. The estimation of costs is a
necessary part of any construction operation.

There are different estimating procedures: lump – sum, unit – price and
approximate estimates.

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Advertisement for Bids

In all jurisdictions, laws regulate and control the award of public construction
projects. These legal requirements start with first step in the construction
process; that is, notice must be given to interested and qualified members of the
construction industry in advance of the bidding of any project financed by public
funds. In addition, all bidders must be treated alike and be afforded an
opportunity to bid under the same terms and conditions.

The contracting agency may be required to give notice by placing advertisements

for bids in newspapers, magazines, trade publications, or other public media. An
advertisement of this type is commonly referred to as a “Notice to Bidders”.

The advertisement describes the nature, extent and location of the work, and the
authority under which it originates, together with the time, manner, and place in
which bids are to be received. The place where bidding documents are available
and the deposit required are designated, and information is listed concerning the
type of contract, bond requirements, dates when the work is to be started and
completed, terms of payment, and the owner’s right to reject all bids.

However, private owners may proceed in any manner they choose to select a
contractor.

Submission of Proposal

It is the responsibility of the contractor to deliver his bid to the proper place prior
to the closing time designated. The completed proposal form together with the
necessary information is sealed in an envelope that is addressed as directed to
bidders. Bids may be submitted at any time previous to the deadline scheduled
for their acceptance.

Award of Contract

After competitive bid proposals have been submitted, the owner and his architect
– engineer, after a careful study and evaluation of bids received, must identify
the contractor to whom the project will be awarded. Private owners, after a
closed bidding, may negotiate with the two or three lowest bidding contractors
before this decision is made. Open biddings, involving both private and public
owners, customarily award the job to the “lowest responsible bidder”. This is
mandatory on public financed projects.

It is interesting to note that the American preoccupation with the low bidder
normally being the successful bidder is not shared by many other parts of the

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world. There are some very good arguments why the lowest price is not
necessarily the best price for the owner. By its very nature, competitive bidding
places the contractor and the owner in adversary positions; the award to the
lowest bidder can exacerbate the relationship.

I. In one European country the award is made to the bidder whose bid is
nearest to the average of all bids received.

II. In another European country, the successful bidder is the one nearest
to the average after the two highest and the two lowest bids have
been rejected.

III. The bid that is more than but nearest to the average of all bids
received, but is still below the owner’s estimate, wins in an Asian
nation.

On selection of a contractor, the owner advises him in writing that his proposal
has been accepted. This acceptance is conveyed to the contractor together with
information concerning arrangements for the signing of the contract. It is
usually in letterform and sets forth the conditions pertaining to the award.

1.4 Construction Contracts

The usual mode of accomplishing construction work is where the owner and
contractor, as separate parties, enter into a contract with one another. The
contract describes in detail the configuration of the project and how the work is
to be carried out. The owner is required to pay the contract in accordance with
the provisions of the contract. In return, the contractor is obligated to construct
the project in full accordance with the contract documents.

The means by which the contractor is identified, the form of contract between
owner and contractor, and the scope of duties assumed by the contractor are
highly variable with each individual case. The contractor may be selected on the
basis of competitive bidding of one sort or another, the owner may negotiate a
contract with a selected contractor, or perhaps a combination of the two may be
used. The entire project may be included within a single general contractor, or
separate prime contracts for specific portions of the job may be used. The
contract may include project design as well as construction, or the contractor’s
responsibility may be primarily managerial.

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1.4.1 Types of Construction Contracts

Although there are many different types of construction contracts, they may be
grouped into two large divisions – competitive bid contracts and negotiated
contracts.

The competitive - bid contracts are prepared on a fixed - price basis and consist
of two types: the unit – price contract and the lump – sum contract.

The negotiated contracts can be on any mutually agreeable basis: lump sum,
unit price or cost plus fee.

The Lump – Sum Contract

For small works and repairs, it is not usual or necessary to prepare bills of
quantities. Drawings with a specification are sent to the tendering builders and
they are requested to send in a lump sum price for carrying out the building
scheme. The main difficulty in this type of contract is the valuation of any
variations that may arise.

The Unit – Price Contract

This type of contract is based on estimated quantities of certain well – defined

items of work and costs per unit amount of each of these work items. The
estimated quantities are compiled by the architect – engineer, and the unit costs
are those bid by the contractor for carrying out the stipulated work in accordance
with the contract document.

Unit – price contracts offer the advantages of open completion on projects

involving quantities of work that cannot be accurately forecast at the time of
bidding.

Cost – Plus Contract

Contracts of the cost – plus variety are usually used when the work is to be
conducted in accordance with terms negotiated between the owner and the
contractor. Contracts are negotiated between the two parties for a number of
reasons. The owner may want a particular contractor to do the work. The nature
of the construction may be such that it is impossible or impracticable to prepare
complete drawings and specifications before operations are begun. Unusual
speed of construction may be a pressing requirement. Perhaps many major
changes in the work are apt to become necessary during the construction
program. Extensive changes can be very troublesome under a competitive type
of contract.

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1.4.2 Contract Clauses

Construction contracts contain many nontechnical provisions that pertain to the

conduct of the work. These contract clauses constitute the general conditions,
supplementary conditions and provisions of the agreement. (Refer Appendices C,
D, G and H from Clough Richard H. – Construction Contracting – that are
reproduced documents for illustrative purposes)

The general conditions, sometimes called general provisions, will typically include
the following items:

 Definitions
 Contract documents
 Right and responsibilities of owner
 Duties and authorities of architect – engineer
 Right and responsibilities of contractor
 Separate contracts
 Time
 Payment and completion
 Changes in the work
 Insurance and bonds
 Disputes
 Termination of the contract

These clauses are devised predominantly for the protection of the owner and
must be carefully examined and studied by the contractor so that he thoroughly
understands the obligations he is to assume.

The contract clauses of many construction contracts are not standard and are
prepared by the architect – engineer. These sometimes impose burdensome, one
- sided obligations on the contractor, who may single out such documents for
more than the usual hurried scanning. Obviously, the time for a careful reading
of such contract articles is before rather than after the contract is signed. After
execution of the contract, all its provisions bind the contractor, whether he has
read them or not.

1.4.3 Rights and Responsibilities

The Owner

The owner, as a contracting party, has several rights especially reserved for him.
Depending on the type of contract and its specific wording, he may be
authorized to award other contracts in connection with the work, to require
contract bonds from the contractor, to approve the surety proposed, to retain a

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specified portion of the contractor’s periodic payments, to make changes in the
neglect work, to carry out bonds from the contractor ‘s periodic payments, to
make changes in the work, to withhold payments to the contractor for adequate
reason, and to terminate the contract for cause. The right of the owner to
inspect the work as it proceeds, to direct the contractor to expedite the work, to
use completed portions of the project before contract termination, and to make
payment deductions for uncompleted or faulty work are common construction
contract provisions.

By the same token the contract between owner and contractor imposes certain
responsibilities on the owner. For example, construction contracts make the
owner responsibilities for furnishing property surveys that describe and locate
the project site, securing and paying for necessary easements, providing certain
insurance, and making periodic payments to the contractor. The owner is
required to make extra payment and grant extensions of time in the event of
certain eventualities provided for in the contract. When there are two or more
prime contractors on a project, the owner has a duty to coordinate them and
synchronize their field operations.

It is important to note that the owner cannot intrude on the direction and control
of the work. By the terms of the usual construction contract, the contractor is
known at law as an “independent contractor.” Even though the owner enjoys
certain rights with respect to the conduct of the work he cannot issue direct
instructions as to method or procedure, unreasonably interfere with construction
operations, or otherwise unduly assume the functions of directing and controlling
the work. By so doing, the owner can relieve the contractor from many of the
latter’s rightful legal and contractual responsibilities. If the owner oversteps his
rights, he may not only assume responsibility for the accomplished work but also
become liable for negligent acts committed by the contractor in the course of
construction operations.

The Architect-Engineer

Other than cases in which both design and construction are performed by the
same contracting party or in which the owner has his own in-house design
capability, the architect-engineer is not a party to the construction contract, and
no contractual relationship exists between him and the contractor. He is a third
party who derives his authority and responsibility under the contract from the
owner. When the owner utilizes private design professionals are utilized by the
owner, the construction contract substitutes the architect-engineer for the owner
in many important respects. However, the jurisdiction of the architect-engineer
to make determinations and render decisions is limited to and circumscribed by
the terms of the construction contracts. The architect-engineer represents the
owner in the administration of the contract and acts for him during the day-to-

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day construction operations. The architect-engineer advises and consults with
the owner, and communications between owner and contractor are made
through the architect-engineer.

Construction contracts of this type impose many duties and bestow considerable
authority on the architect-engineer. All construction operations are conducted
under his surveillance, and he generally oversees the progress of the work. It is
his direct responsibility to see that the workmanship and the materials fulfill the
requirements of the drawings and specifications. To ensure this fulfillment, he or
his designated representative exercises the right of job inspection and approval
of materials. In addition, he may exercise the privilege of approving the
contractor’s general program of field procedure and even the construction
equipment that the contractor proposes to use. Should the work be lagging
behind schedule, the architect-engineer may reasonably instruct the contractor
to speed up his activities.

The foregoing paragraph does not mean that the architect-engineer will assume
responsibility for the contractor’s methods merely because he retains the
privilege of approval. The rights of the architect-engineer are essentially
concerned with verifying that the contractor is proceeding in accordance with the
contract documents. It should be pointed out, however, that the architect-
engineer cannot unreasonably interfere with the conduct of the work or dictate
the contractor’s procedures. Here again, if the direction and control of the
construction are taken out of the hands of the contractor, he is effectively
relieved of many of his legal and contractual obligations.

The contract documents authorize the architect-engineer to interpret the

requirements of the contract. The usual stipulation is that “the decision of the
architect-engineer shall be final and binding on both parties.” Actually, the
jurisdiction of the architect-engineer is restricted to the settlement of questions
of fact, such as what quantity and quality of materials are required or whether
the work performed meets contract requirement. The answers to questions of
fact require the professional knowledge and skill of the architect-engineer, and it
is proper that he should make such decisions. In the absence of fraud, bad faith,
or gross mistake, the decision of the architect-engineer may, in fact, be
considered as final, provided that the subject matter falls within the proper scope
of his authority. Most public contracts, however, provide for appeals to higher
authority from decisions made by the architect-engineer or the contracting
officer.

With respect to disputed questions of law, however, the architect-engineer has

no jurisdiction. He cannot deny the right of a citizen to due process of law, and
the contractor has the right to submit a dispute concerning a legal aspect of the
contract to arbitration or to the courts. Whether a particular matter is one of fact

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or one of legal construction can depend on the language of the contract. Matters
pertaining to time of completion, liquidated damages, and claims for extra work
usually involve points of law.

The Contractor

As one might expect from a document prepared especially for the owner, the
contractor has few rights and many obligations under the contract. His major
responsibility, of course, is to construct the project in conformance with the
contract documents. Despite all the troubles, delays, adversities, accidents, and
mischances that may occur, the contractor is expected to “deliver the goods” and
finish the work in the prescribed manner. Although some casualties are
considered as justification for allowing him more construction time, only severe
contingencies such as impossibility of performance can serve to relieve him from
his obligations under the contract.

The contractor is expected to give his personal attention to the conduct of the
work, and either he or his representative must be on the jobsite at all times
during working hours. The contractor is required to conform to laws and
ordinances concerning job safety, licensing, employment of labor, sanitation,
insurance, zoning, building codes, and other aspects of the work. Many contracts
now include tough rules designed to decrease air and noise pollution on
construction projects. These rules imposing regulations and restrictions
concerning trash disposal, pile driving, riveting, demolition, fences, and
housekeeping.

The contractor is responsible for and warrants all materials and workmanship,
whether put into place by his own forces or those of the subcontractors.
Contracts typically provide that the contractor shall be responsible for the work
until its final acceptance, although engineering projects commonly include “act of
God” exclusion. Even though the contractor has no direct responsibility for the
adequacy of the plans and specifications, he can incur a contingent liability for
proceeding with faulty work whose defects should be manifest to one in his
position. Should an instance occur in which the contactor is directed to do
something he feels is not proper and is not in accordance with good construction
practice, he should protect himself by writing a letter of protest to the owner and
the architect-engineer, stating his position before proceeding with the matter in
dispute.

Insurance coverage is an important contractual responsibility of the contractor,

both as to type of insurance and policy limits. The contractor is required to
provide insurance not only for his own direct and contingent liability, but
frequently also for the owner’s protection. He is expected to exercise every

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reasonable safeguard for the protection of persons and property in, and adjacent
to the construction site.

The most important contractor rights concern progress payments, recourse

should the owner fail to make payments, termination of the contract for cause,
right to extra payment and extensions of time as provided, and appeals from
decisions of the owner or architect-engineer. Subject to contractual requirements
and limitations therein, the contractor is free to subcontract portions of his
contract, purchase his materials where he chooses, and process the work in any
way and in any order that he pleases.

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