Construction Contracts Administration

M.Sridhar

N.C.C. Lucknow Region

2nd November 2016

Some Aspects of Contract Administration

Contract Administration as a separate discipline as Project Management

Administration Vs Management Difference in Approaches

Contract --- A legally enforceable Agreement

having legal implications , creating obligations

Generating Rights , Defining Duties

Emanating from good practices , approaches followed by experienced field

Engineers ‘Contract Administration’ is emerging as a discipline which is a

blend of technical and legal subjects

All Contracts are governed by Indian Contract Act 1872 .

A Contract is “ an Agreement enforceable by law ” .
An agreement is nothing but a set of reciprocal promises .
All agreements are not contracts . But all contracts are agreements.

No legal condition that an agreement to be in writing except that Arbitration

Agreement .

Some Essential Conditions for valid contracts :

• Minimum Two parties
• Consensus Ad idem ( Identity of minds on the subject )
• Consideration ( Some Monetary value past , present or future )
• Free Consent ( No Coercion , Threat or Undue influence )

Distinction between a Void Contract , Voidable Contract

Breach of Contract
Cond…
Making / Forming of a Commercial Contract :

Offer
Invited Bid

Owner Bidder
Owner Bidder
Counter /Negotiations Offer
Offer

Confirmation
Acceptance

Acceptance

Once the Acceptance of the offer is communicated there is a binding contract

formed between parties. Signing of Agreement is a formality and part of
documentation Process .
Acceptance should be absolute and unconditional .

Types of Contracts :
Owner – Engineer – Contractor Model ( FIDIC Model )
Employer – Contractor Model
Cond…
 Important Provisions of Contract Act
• Offer
• Consideration
• Acceptance and communication
• Free consent
• Conses Ad idem ( Identity of minds)
• Coercion , Threat
• Undue influence
• Misrepresentation
• Fraud
• Mistake of facts ( unilateral , bilateral)
• Lawful agreements
• Voidable , Void agreements
• Intention of parties , conduct & Estoppels
 Definitions of terms
 Instruction to Bidders ( ITB )
 General Conditions of Contract (GCC)
 Financial Aspects : Retention, Mobilization advance, Performance Gurantee ,
Secured Advance
 Extension of time
 Liquidated Damages
 Price Variation
 Payment terms
 Deviation limit
 Variations/ Extra, Substituted items
 Force majure events, hindrance events
 Dispute Resolution Procedure
 Statutory provisions wages , labour regulation etc.
 Taxation , insurance
 Special Conditions of Contract with overriding effect

Cond…
Contractual Obligations
On performance of a duty as an obligation right is generate
Employer's Obligations :
 Handing Over site, work fronts
 Supply of Agreed materials in time
 Issue of drawings
 Decisions , Approvals
 Deliver agreed facilities
 Timely payments as per agreed terms
Contractor’s obligations : Timely execution, Quality , progress etc
EOT , Limitation periods specified if any in agreement on intimations
On hinderance , Occurance of Extra items , deviations
Dispute notifications

Cond…
 Correspondence
Correspondence is one of the most important requirement of good Contract
Administration.
Types of Correspondence - Necessary , Obligatory , General
Some Tips
• Correspondence be brief, to the point with brevity
• With decency , decorum and official sense
• No circastic remarks , critical comments , no personal
• With relevant references
• Body of the letter is important – what is the issue what
one intends to communicate or put it on record
• No Narrative and lengthy
• Simple language , simple sentences
• Language effects and Style
• Simple Arts of letter writing
Cond…
 Important Tips for Correspondence
Correspondence that is the Letter communications with Client are used as
Exhibits as Documentary Evidence to Prove the EOTs or Claims
• Address the Letters to Concerned designated Person ( Engineer , Employer)
• The Subject after the Name of work should convey the Purpose and
Issue Categorization ( Delay in payments , Delays and Hindrances in work )
• Do not Copy Owner’s Subject while Reply - If their Subject is Slow Progress
Change subject like ‘ Reasons for Slow progress ‘or ‘Hindrances affecting progress’
• Give all relevant references of our Recent Earlier letters in Chronology
• During Arbitrations Parties will dispute not only contents of Letters but also
Existence of Documents
• With Chain References Proving the Documents and cross references of
Acknowledgements will be Easy
• Contents should not be Vauge , Firm and Point wise / Para wise in Reply with
Self Explanatory and Narrative of Issues
Maintenance of Records
Time is the Essence of any Contract .
Records , evidence of hindrances ( files , correspondence, Minutes of
meetings, site diaries , Documentation)
Excessive rains , site specific problems
Apply for EOT well in time.
Extra scope of works – records ,instructions, inputs
Say Dewatering operations
Idle Resources
• Records of manpower, wages
• Records of machinery
• periodic communications , reporting
• Damages are viewed as compensation for actual losses
• Hence Authentication on deployments Cond…
Other Functions of Contract Manager

• Conversant with applicable taxes , taxation issues

• Applicable technical specifications for work
• Billing and Quantity surveying , Reconciliations of materials
• Analysis of rates , variations valuations
• Periodic communications , reporting ( MIS)
• Resources planning , Progress monitoring , controlling
• Budgeting and Quality control aspects
• Laws applicable for Construction contracts
• Statutory Compliance aspects
 Construction Claims

Claims in Construction Contracts are inevitable.

Different Types of Claims

• Contractual Claims
• Extra Contractual Claims
• Quantum Meruit Claims
• Ex-gratia Claims
• Counter Claims

Potential Causes of Claims :

• Defaults of the parties in contractual obligations like delays in

drawings , decisions , materials issue, site handing over etc.
• Not adhering to agreed terms, variations , deviations
• Rate derivations for extra scope works
• Misinterpretation of contract provisions ambiguities existing ,
• Poor drafting with multiple interpretations
• Prolongation of works
Cond…
 Preparation and Substantiation of Claims

Legally Speaking for the claims , the burden of proof lies with Claimant.

Preparation of claims and presentation is a systematic process.

It requires preparation of grounds , good record keeping during execution.

Important Aspects for solid grounds of defending claims :

• Substantiation with evidence , documentation
• Systematic Correspondence during execution phase
• Record keeping , maintenance of records ( progress schedules, Site diaries
Minutes of meetings etc. )
• Generation of Data and working out details
• Communications as per Contractual terms , claim notifications etc.

Cond…
Disputes arise from Claims
Potential Causes of Disputes :

 Delays in handing over of site, work fronts.

 Variation in data/information supplied and that actually encountered during

execution

 Late supply of drawings, decisions, approvals

 Disruption/disturbance caused due to untimely or unjustified instructions.

 Employers defaults affecting performance like delayed payments, illegal recoveries

etc. Ambiguities persisting in Terms

 Deviations , variations beyond agreement provisions , change in scope

 Non approval of justified rates for Variations , extra scope works

 Violation of Contract conditions , stipulated and agreed provisions Cond…

 Avoidance and Remedies
• Planning is tedious, time consuming , complex
• Appreciation of Planning function
• Correct and optimum Planning right from conception to completion
• Unambiguous , fair , workable conditions
• Avoidance of poor drafting
• No cut paste methods
• Practicable specs , norms, standards
• Sharing of risks , responsibilities in execution
• Fair Contract Administration
• Harmonious working relations
• Viewing the other party as a resource to get the work done
• Good Communication , no cults
• Discussions , Amicable settlements
Cond…
 Dispute Resolution
Differentiation between a claim and dispute
The process right from claiming something , establishment of dispute , notice of
Dispute resolution invocation follows a systematic procedure as laid down in
Dispute resolution terms of agreement. Follow the procedure scrupulously .
Normally in construction contracts Arbitration is not direct and one or few ADR
Steps stipulated as a precursor.
Alternate Dispute Resolution (ADR) :
1. Engineer’s decision
2. Negotiation between authorized representatives or managements
3. Mediation as in village panchayat
4. Conciliation – Conciliator assists parties in arriving a settlement
5. Dispute Resolution Board ( DRB) – a technical body constituted by parties
which is expected to make site visits and offer guidance
When disputes are referred and recommendations given as recommendatory.
Cond…
 Arbitration
Arbitration shall be through a written agreement as per prevailing law.
Arbitration agreement ( clause) is viewed as a separate agreement subsisting even after
termination of Contract.
Either by a sole Arbitrator or a Through Tribunal
Governed by Arbitration and Conciliation Act 1996 ( Amendment 2015)
( old 1940 Act)
Legally Enforceable Awards binding on both parties.
Ad hoc Arbitrations & Institutional Arbitration
Rules , regulations , procedure, time frame governed by the Arbitral Institute
• ICA , ICADR , CIDC-SIAC , SCOPE Forum
Evidence : Strict rules of evidence ( evidence act 1872) not for Arbitration .
Normally evidence is based on documents and records and facts of the case
Concepts of Fast Track Arbitration and Online Dispute Resolutions

Cond…
 Construction Sector account for 9% of GDP
 Only next to agriculture in employment generation
 Provides direct, indirect employment to 30 million
 Construction witnessing growth of 15%
 1 billion $ investments in this sector in XII plan starting 2012 ( 8 lakh
crores per annum)
 Around 85,000 crores are locked up in litigation at various stages
( CIDC)
 More than 80% projects are undergoing cost, time over runs
 Around 84% contracts are riddled with tortuous litigations (NICMAR)
 In disputes in around 70% cases state is a party to litigation
 50-60% disputes because of ambiguities in contracts
 15 to 20% on account of variations, out of scope works, valuations
 15 to 20% on LDs, delays , time extension etc..

… Contd
  Ambiguity derives meaning from Latin origin
‘Ambiguous’ meaning ‘ doubtful’
 Meaning from oxford dictionary - Quality of having
more than one possible meaning or lacking in clarity
 Ambiguous term in contract can’t give the correct
meaning or clear interpretation
 Each party to contract interprets the term in his own
way to suit his interest
Principles of Resolution of Ambiguities
Harmonious construction of contract as a whole
From Bidding , ITB , Formation of contract , Diff
documents , Conduct of parties
 Variation/Deviations ( Case Study )

Terms in an Existing contract

1) The employer shall have power to make any deviations that are
necessary during the course of execution of works.
2) Any variation, extra works, additions/omissions and alterations or
substitutions are referred as deviations.
3) The deviation limits shall be 30% in individual items of work and / or
the over all deviation limit of plus 20% over which actual market, prices
shall be paid.
Comments : As one can notice, the clause is poorly drafted and has
certain ambiguities. It has no clarity. ( Please read the term at no (3)
carefully and the meaning for noticing the ambiguity).
The complexity of interpretation is self explanatory as can be seen
 Idling of resources and prolongation of work
• Owner caused delays are common which delay the work
• Delay causes less performance than anticipated and prolongation
of work.
• The turn over is less where in costs incurred can’t be fully recovered
• Overhead costs , profit anticipated are Unabsorbed resulting in losses.
• Legal entitlement for compensation for losses.
Numerous theories , formulae for calculation of losses
Hudson’s formula , Emden’s formula
OH / profit % / Original contract value
------------------ x ---------------------------- x Period of owner caused delay
100 Original Contract period
= Total HOOH owed

Cond…
Example:

 104 crores - contract value

 Stipulated Time : One Year (52 Weeks)
 Owner caused Delay : 10 Weeks
 Based on company’s : Performance say =HooH/profit 25%
 Then Total HooH owed = unabsorbed HooH component * 10
weeks
= 25/100 *(104/52)*10
= 0.5 crores *10 = 5 crores
 Loss of productivity
In large Construction projects when machinery , manpower component
Is high loss of productivity is calculated as per actual .

Under utilization / Idle factor ( % ) worked out based on

Anticipated or budgeted turn over Vs actual achieved .
Idling Costs – manpower , machinery and equipments costs are worked.

Example :
Budgeted/ Planned Turnover: Rs . 10 Cr. in a month
Actual Achieved = Rs. 2 Cr.
Utilization Factor = 2/10 = 1/5 i.e. 20%
80% capacity is idle (Underutilized)
Hence 80% Manpower, Machinery costs are unabsorbed i.e. loss.
 Machinery cost
S.No Equipment M Year of Nos Capital Hire Life Interest Depreciation Total cost
a Purchase Cost Charges per ( years) 12% per Int +Dep
k Day year
e

1 Hyd T 2004 1 270000 9 27000 20250 47250

Excavator A 0 per
PC 70 LC T month
A

Note :
12% Interest Charges
 10 years equipment life

 with 10% salvage value

 27,00,000*0.9/10*12 = 20250
 Manpower Costs :

S.No Designation No.Required CTC Remarks

( Per
month)

1 General 1 90,000
Manager

2 Senior 3 30,000
Engineer

3 Quantity 2 30,000
Surveyor

4 Junior Engineer 1 18,000

Some Tips :

 Dealing Variations, deviations, Out of Scope works

effectively.

 BOQ probing -- drawings, specifications

 Billing , Measurements and QS related issues
 Arbitration during execution only in case of
Closure/Termination.
 Not to quote dispute resolution Clauses in correspondence
 Only Claim Notifications.
 Time limitation terms in Notifications.