Construction contract, contract document, classification of engineering contracts, bidding process, CPWD contract conditions, FIDIC form of contract agreement, subcontracting
5.1 CONSTRUCTION CONTRACT
Contract as per the Indian Contract Act 1872 means ‘agreements which are enforceable as such having been made by free consent of the parties, by persons competent to contract for a lawful consideration and lawful object and which are not expressly declared to be void by any statute.’ From the definition, we can infer the criteria required for a contract to be valid. These criteria are:
- There must be mutual agreement between the two parties.
- There must be an offer made by one party called the promisor.
- The other party, called the promisee, must accept the offer.
- There must be considerations, which is usually payment in the form of money for doing of an act or abstinence from doing a particular act by promisor for promisee.
- The offer and acceptance should relate to something that is not prohibited by law.
- The offer and acceptance constitute an agreement that when enforceable by law becomes a contract.
- The contracting parties entering into agreement should be competent, i.e., not disqualified by either infancy or insanity to make such agreement.
Theoretically speaking, there could be an oral contract (one that is not in written form). However, it is virtually impossible to enforce it in the context of construction since keeping track of the scope of agreement reached between the parties will be difficult. Construction contracts are invariably in the written form. The purpose of construction contract essentially is to help achieve a quality construction project within stipulated time and cost, while adhering to all the safety norms.
Various types of contracts have been evolved to suit the various subject matters of contracts complying with the legal requirements. However, the discussions on contracts will be restricted to construction contracts. Important sections of the Indian Contract Act 1872 are covered in Appendix 2. Construction contracts also have many variants and these vary from country to country. In Appendix 3, a brief note on some of the important acts applicable to establishments engaged in building and other construction works have been provided.
5.2 CONTRACT DOCUMENT
A construction contract comprises essentially the following documents:
- The contract drawings
- The specifications
- The general conditions of contract (GCC)
- The special conditions of contract (SCC)
- The agreement
- The bill of quantities (BOQ) if applicable
The turnkey tender documents may be having only the preliminary system drawings and may not have the bill of quantities.
5.2.1 The Contract Drawings
The contract drawings are the means through which the physical, quantitative and visual descriptions of the project are conveyed to the contractor. These are normally provided in the form of a two-dimensional diagram, referred to as the plan or the blueprint; however, in some cases, the drawings could be provided in the form of a softcopy consisting of ‘read only’ Autocad drawing files. The drawings are classified into—(a) site drawings, (b) architectural drawings giving all the details to convey to the contractor an overall picture of the total work, (c) structural drawings, (d) HVAC—heating, venting and air conditioning, and other services drawings, (e) electrical drawings, and (f) special details. Depending on the nature of work, there could be fire-fighting details, public-announcement system details, building automation details, etc.
5.2.2 The Specifications
Specifications, or technical provisions, are written instructions to carry out a work. It also contains information not possible to show on a piece of drawing. Drawings mentioned earlier together with specifications furnish the complete instructions to convert an architect’s and a designer’s imagination into reality. The drawings and specifications are also useful for preparing the cost estimates of work items of a project. Specifications commonly deal with the following aspects:
- The quality of materials
- The quality of workmanship
- The frequency of testing
- The approved manufacturers
- The relevant Indian standards describing the material
- The inspection and installation method
The specification could be of any type mentioned in Figure 5.1.
5.2.3 The General Conditions of Contract (GCC)
The general conditions of contract are an essential part of the contract. The term ‘general’ implies that the document is a standard one used in all the contracts entered by a party (the owner). Different owners such as CPWD, MES and IOCL have evolved standard forms of general conditions. The GCC evolved by American Institute of Architects is a popular document and many owners have formulated their GCC along these lines.
Figure 5.1 Types of specifications
The general conditions of contract set out the responsibility and obligation of parties to the contract. It spells out the scope and performance of the contract, valuation and payment terms, arbitration and laws, labour regulations, safety code, various forms used for the tender and required deeds under the general conditions of contract. It is advisable to use standard general conditions of contract since most of these conditions have been tested in court over a period of time.
In India, for government jobs, CPWD conditions of contract are most widely used, though there is a growing trend of use of FIDIC contract conditions in large projects, especially those funded by World Bank (WB) and Asian Development Bank (ADB). The FIDIC conditions of contract are discussed elsewhere in the text.
5.2.4 The Special Conditions of Contract (SCC)
Certain amendments/additions/deletions are made in general conditions of contract in order to make it suitable for a particular project. These amendments are contained in a separate document called special conditions of contract (SCC). SCC may commonly address the following issues depending on the requirement of a project:
- Materials provided by the owner
- Site visits
- Mobilization advance
- Start date of construction
- Requirement of various reports related to progress
5.2.5 The Bill of Quantities (BOQ)
The bill of quantities shows the net quantity to be executed in each item of work. Items are classified into earthwork, anti termite treatment, waterproofing, brickwork, concreting, whitewashing and painting, flooring and finishing, doors and windows, structural steel, aluminium works, stonework, etc.
5.3 CLASSIFICATION OF ENGINEERING CONTRACTS
This section focuses on a brief description of some of the commonly used types of contracts in the construction industry.
It should be pointed out that the discussion here is particularly relevant to large and complex construction projects that are multidisciplinary in nature. It may further be borne in mind that the ‘owner’ organization, which finally owns and operates the facility, need not have specialized knowledge related to the very diverse engineering issues that may be involved in the design and construction of the project. For example, if a business house wants to enter the oil business and set up a refinery to refine crude oil, it may find that instead of handling all of it in-house, it may be much easier to hire the services of a consultant for the technical details such as process and instrumentation diagram, drawing up of appropriate specifications, design of equipment, identification of suitable contractors and vendors, and supervision of construction and commissioning works.
While the above example is for a refinery project, it is not difficult to see that a similar breakdown can be drawn up for other major civil engineering projects such as construction of a power plant and other industrial complexes. In fact, in the construction of a bridge or a housing complex also, there is an involvement of several agencies.
The activities in a construction project can be taken to comprise largely the following classes:
These activities include issues related to process finalization, structural analysis and design, technical issues related to equipment design and selection, etc.
The procurement of materials equipment, etc., comes under this category, which may also be taken to include identification of suitable vendors.
This covers the construction, installation and test run of a constructed facility before it is handed over to the owner for actual operations.
Thus, it is clear that in a construction project several agencies are involved, and the owner needs to have well-defined ‘contracts’ with each of them, clearly defining the scope of goods and services to be rendered, and the payment to be made to the contactor in return for these services. Apart from issues related to (partial) payments, etc., contracts also need to address aspects related to risk allocation, compliance with schedule, safety and labour norms, liabilities for delay in completion, rectification of defects, performance guarantees, arbitration, etc.
Traditionally, contracts were made with a clear description of different measurable items, and payments made for the quantities of work actually executed. Although the contracting process has been explained separately, it should be recalled that at the outset the client carries out a preliminary estimate based on diverse factors such as past experience and the likely quantities and rates of different items involved, etc. Now, based on the method of contracting to be followed, the contractors submit a ‘bid’, which is evaluated by the client before the job is awarded to a contractor.
While it is not the intention here to trace the evolution of the different modes or types of contracts that are commonly used in the construction industry, it may be noted that almost all over the world, civil engineering projects were largely in the domain of varying degrees of state control till quite recently, and each society developed different contracting procedures. The ongoing privatization and globalization in the construction industry have led to a sea change in contracting procedures, and the following paragraphs only briefly describe some of the more important categories of contracts that are used in the construction sector today.
Broadly speaking, in execution of civil engineering works, the categories of contract systems used can be classified as given in Figure 5.2.
In addition to the above, sometimes other methods such as rate contracts or term contracts are also used. A brief discussion on some other forms of contract, such as BOT, is also included in the following paragraphs.
Figure 5.2 Categories of contract
5.3.1 Separated Contract
The separated contract, which is a sequential process, has been the traditional system adopted for construction contracts. In separated contracts, there is a clear division between the design and construction responsibilities. The design phase comprising project briefing, feasibility studies, outlining proposals, scheme design and detail design is taken care of by some entity, while the construction is taken care of by some other entity. The preparation and approval of drawings, and the mistakes found in design documentation are frequent causes of delay in the design phase. In this method, sufficient time is needed (sometimes, it may need several months) for the preparation of full documentation by all consultants and for the quantity surveyors to complete a final estimate prior to calling tenders. The construction phase normally does not begin until the design is completed. As a result, the whole of the development process gets delayed.
Such type of traditional procurement requires a lengthy tendering period, to allow for complexity of the work and for tenderers to read the documentation, visit the site, and prepare for the tender. The traditional system, therefore, is often recommended for fairly simple small- to medium-sized projects, where time is not a critical factor. The major criticisms of the traditional system identified in literature are:
- Time-consuming aspects of the development process
- The effect of cost uncertainty
- The effect of buildability
- Fragmentation of organizational interfaces
Some of the variants of separated contracts are discussed briefly in the following paragraphs.
In this form of contracting, from the drawings and other details of the project provided by the client, the contractors quote a single lump-sum figure, which is the total contract value of the work. Obviously, the contractor arrives at this figure on the basis of his own analysis of rates and estimated quantities. This lump-sum amount refers to the total sum of money for which the contractor agrees to build the required facility, accepting all responsibility for factors relating to the supply of raw materials, uncertainties relating to construction hazards, and other difficulties. From the point of view of the client, this form of contract has one big advantage—he knows the exact amount of funds required for the completion of the structures.
For a lump-sum contract to be successful, it should be ensured that:
- The quantities of the different items involved are calculable at the stage of tendering itself. In other words, the design and specification must be fully developable.
- The nature of the work to be done must be reasonably measurable.
- The contractor must be given all the facilities to which he is contractually entitled.
It may be noted that the amount in a lump-sum contract is also subject to a revision under certain conditions, which may be considered outside the contractor’s control. A change in the design or specifications made by the client could be one condition requiring a revision of the lump-sum amount. Also, a change in the cost of certain important items, such as statutory wages, transportation charges and customs duties, would justify a change in the lump-sum value. Normally, the stages or milestones are specified for the payment of bills to the contractor on a certain predefined percentage.
In turnkey and lump-sum contracts, by the very nature of the agreement, there is no need to do any detailed measurement of the work carried out by the contractor. However, a large body of contracts requires that payments be made according to the actual work carried out, which should be determined on the basis of physical measurements. Such contracts are referred to as ‘measurement contracts’ and could be either (a) item rate or (b) percentage rate, as briefly discussed below.
Item rate contract This contract is so called because more than the total amount or the quantity of work in any item, it is the rate of the item quoted by the contractor that is held sacrosanct. In other words, it is held that the contractor agrees to carry out a unit quantity of a particular work (may be in units of cubic metres, square metres, numbers) for a particular sum of money. This form of contract is in contrast to a lump-sum contract, where the agreement is for delivering the entire project for a certain sum.
In the item rate contract, the tender document contains a detailed bill of quantities (BOQ), where an estimated quantity of the work for each item involved in the particular work is listed, along with a detailed description. The contractor carries out a detailed analysis to determine the rate of each individual item and writes the same in a column next to each item. The total contract value of the work is found out by multiplying the quantity of each item by the quoted rate of the contractor and adding the cost of all items. A sample of a few items in a BOQ is given in Table 5.1, along with the applicable units of measurements. As the details of the estimated quantities are also available, the contractor works out his rates for each item and fills them under the rate column.
Although the list of items in the BOQ is supposed to be exhaustive, the possibility of an item not being covered in the BOQ, but essential for the completion of a job, cannot be ruled out. In such cases, the applicable rates are determined on the basis of labour, material, equipment and overheads involved.
Naturally, in such contracts, an accurate account of the actual work (for each item) is kept, and the payment is made only for the actual work carried out. In other words, there can be a difference in the quantities of work actually executed and those foreseen in the estimate.
Percentage rate contract In this form of contract, tender documents also contain the analysed schedule of rates for each item, in addition to the detailed estimated quantities expected in the execution of the works. Thus, an estimate of the total value of the work is clearly available to the contractor. Now, the contractor works out his rates for the items in the usual manner, and arrives at his total price, which is converted to a percentage (positive or negative) by which his amount differs from the estimate given. This percentage is submitted as a quotation by the contractor—in other words, there is an overall modification in the rates of the contractor with this factor. An illustrative example showing the operation of this method is given in Table 5.2.
Table 5.1 Sample illustrative extract from a BOQ
Table 5.2 Sample illustrative example of a percentage rate contract
The contractor has worked out the total amount to be z.
If z < the given amount of w, the % rate quoted would be = × 100% above w.
If z > the given amount of w, the % rate quoted would be = × 100% above w.
In this contract, for additional quantities of work done, and for items not included in the bill of quantities, payment is made on the basis of actual costs worked out on the basis of appropriate analysis of rates, which are then modified in accordance with the percentage agreed upon.
The method requires a detailed analysis of the rates to be carried out by client organizations, and usually only government departments or large organizations adopt this system. From the point of view of a client, the method results in tenders that are easier to evaluate and removes problems such as front-loading. However, it is important that the rates used are frequently updated lest there are anomalies in the escalation clause, or the percentages quoted become too high.
Cost Plus Percentage
In this kind of contract, the client agrees to pay the contractor a certain percentage of the (actual) cost incurred by the contractor while completing a job, in addition to the cost itself. Thus, the tenderer only quotes this percentage. Often, the client makes a part of the material available to the contractor, who is otherwise required to keep a detailed account of the expenses incurred in order to be able to claim them in his (subsequent) bills. This type of contracts is usually used in an emergency, when time may not be available to draw up an estimate and work out details of items involved. The contract may also be used for very small jobs where the traditional forms of contract may not be justified. Since all costs related to material, labour, etc., are borne by the client, only the final measurements are taken and the cost of materials involved is worked out on the basis of established guidelines. In certain cases, the cost of the material brought to site is directly paid for (against appropriate bills), and any material remaining after the completion of the project is retained by the owner for future consumption.
5.3.2 Management Contract
There are, in general, three variants under management contract.
In this type of contract, the managing contractor is appointed at the earliest possible time. This helps the client to avoid dealing with a large number of small contractors. In management contract, the client has to deal with a single (principal) contractor besides a designer. The principal contractor provides planning, management and coordination services to the client. The design services are provided by the designer, who is separately appointed by the client. Some of the responsibilities assigned to the management contractor are:
- Preparation of overall construction schedule
- Preparation of work package schedule
- Coordinating with the designer to steer through the design stage
- Assistance in subcontractor(s) selection
- Coordinating among different subcontractors
Usually, the principal contractor is barred from executing the construction work himself, though in some cases the principal contractor can contribute some resources such as formwork, cranes, etc., to the subcontractors.
Construction Management Contract
In the construction management contract, construction manager is appointed by the client at an early stage to provide planning, management and coordination. The owner also appoints the designer and contractors for different works. The role of construction manager, therefore, is mainly coordination among different contractors, besides ensuring timely completion of project within the budgeted cost according to the specifications. Some of the responsibilities assigned to the construction manager are:
- Advising the designer
- Advising on drawing suitable work package
- Assisting in procurement
- Managing the bidding process
Similar to the management contract, here too, the construction management firm is barred from executing the construction work on its own.
Design, Management and Construction Contract
In this arrangement, the client appoints a single (principal) contractor to take care of design and construction. Thus, the client has to deal with a single agency for both design and construction. The basic design concepts may be provided by the client himself or through an independent agency. After the basic design concepts are frozen, the client calls for the tender and selects the appropriate agency for providing design, management and construction services. In practice, the design, management and construction contractor sublets the design and construction work to subcontractors and suppliers, and coordinates among them.
5.3.3 Integrated Contract
This is a form of contract in which the contractor takes up the responsibility for both design and construction, based on basic plans drawn up by the client. In other words, design and construction are handled within a single organizational structure, and a perennial conflict between the designer and the contractor is avoided. This also facilitates application of uniform standards. In most cases, a cost-plus-fee contract or a lump-sum contract that includes both design and construction costs may be adopted. Contracts of this form are often adopted when the client has no in-house design and engineering departments, and when subcontracting (or outsourcing) only the design to a separate agency is considered inappropriate. Obviously, the contracting agency in such cases should have expertise in both design and construction. In very large projects, however, separate companies specializing in design and construction can always form a joint venture and bid for such a project, with appropriate financial and legal arrangements.
Apart from encouraging a holistic and comprehensive approach that tends to bring the costs down, the method also stimulates development of technical prowess in contractors, and reduces the number of disputes and lawsuits.
The Turnkey Contract
As the name suggests, this comprehensive contract entrusts the responsibility of all activities involved to the contracting agency, and the owner simply wants to ‘turn the key’ at completion to take over the facility. Thus, in such contracts all activities related to surveying, drawing up specifications, design, project planning, construction and test operation are entrusted to one large contracting organization, which may break the activities down and engage other agencies to carry out specific jobs. At times, the contract may also include operating the facility for a limited period. Such contracts have been found to be especially useful in projects involving a combination of civil, electrical, mechanical, chemical and mining engineering, and are seen typically in design and construction of industrial complexes including petrochemical plants and nuclear power stations.
The following developments have contributed to the growing popularity of this method of contract:
- Modern construction has become very complex and the client prefers to deal with a single organization rather than with a multiple of specialist contractors, each with his own contractual peculiarity.
- Large contracting firms have both the technical and managerial skills to take up such works. Several large public-sector contracting agencies like Engineers India Limited (EIL), Bechtel, Larsen & Toubro, and Hindustan Construction Company (HCC) often handle turnkey projects in India and abroad.
At the outset of such a project, the client first prepares documents stating the requirements of the facilities to be constructed, and either selects the best proposal from those submitted by multiple bidders or designates a specific contractor from the beginning and enters into a contract when negotiations begin.
From the viewpoint of a client, the system has the merit of clearly laying out responsibility. These comprehensive contracts may include not only civil engineering and building works, but also procurement and installation of equipment and systems. In fact, depending upon the scope, a contract may also include training of operators in the operation of a facility. The terms ‘package deal contract’ and ‘general turnkey contract’ are often used to describe the kind of contract described here.
Build, Operate and Transfer (BOT) Contract
Apart from the responsibilities of the turnkey contract, this throws in the responsibility of fundraising for the project in the contractor’s court. In return, the contractor is allowed to ‘operate’ the facility for an agreed period of time to recover the cost incurred in the design and construction of the facility. This system of contracting is useful when the client does not want to invest directly in the project, and wants to encourage development projects through external funding and investment. It is also a method of attracting and involving the private sector in public projects and infrastructure development, which typically involve very heavy capital investment. For example, a power corporation may ask bidders to set up a power plant on BOT basis, wherein the bidder agrees to design and construct the plant in return for rights to operate the plant for, say, 10 years, during which the contractor can generate and sell the power. Design and construction of certain toll highways or airports can also be similarly done on a BOT basis. Very often, financial institutions are an integral part of such a contract, precisely to take care of long-term financial implications.
Since these contracts often involve long-term relationships and commitments, it is crucial that the contractor carries out his own research into not only the economic and technical feasibility but also the social and administrative aspects of the project. A judicious system for risk allocation is called for to address some of the concerns of a contracting agency. Often, the client somehow guarantees the contractor’s operating income. For example, the contractor needs an assurance that the power produced will be used and paid for, at a rate to be determined in an agreed manner, with or without a base minimum. A contractor may also seek a mechanism to redress a situation when estimates go awry — for example, the traffic on a toll highway does not grow at an anticipated rate for whatever reason, and the contractor is unable to ‘collect’ at the estimated rate.
5.3.4 Discretionary Contract
The important variants under discretionary contract such as partnering and joint venture are discussed in the following sections.
This is a new form of agreement or system, adopted within normal construction contracts or design–build contracts, in which the client and the contractor together form a project team based on mutual confidence and then work together to manage the project to a successful conclusion, yielding a profit for both parties.
The fundamental philosophy behind partnering is the mutual trust among parties involved in the partnering. The concerned parties meet before the start of the project to set out the project goals and then strive to achieve them. The dispute arising during the execution of project and afterwards are settled based on the agreed method of dispute resolution. The relationship between the parties is called a partnership or an alliance. One agreement is usually valid for a number of years, but agreements for shorter periods or those for a single project are also possible. The agreement typically covers planning, design, engineering, procurement and construction supervision. Payment provision is made based on a cost-plus-fee basis.
The advent of partnering was fundamentally to avoid contractual confrontations and disputes. How far this has been achieved is yet to be reported, as partnering has been in use since the early 1980s only. Besides, there are very few examples of partnering in public works.
In large projects, very often no single contracting company has adequate expertise and/or resources to be able to bid alone and become the main contractor. In such cases, several contractors pool in their resources and form a joint venture, and bid for the project together. Very often, a company is formed especially for that particular project.
The companies usually sign an MOU and form such a venture. Naturally, the MOU spells out the terms and conditions of this ‘mini-merger’ or ‘part-merger’, including the individual shares of the participating companies. The company providing the project leader (resident manager) is also specified in the MOU. In a manner of speaking, the MOU defines a kind of common minimum programme—which is usually a one-point agenda of bidding and completing a particular project. A copy of the MOU is submitted along with the tender document, and thus, the client is also aware of the objective-specific new company.
In the case of a JV, the proportions of shareholding among partners vary. A partner with 51 per cent or more shareholding usually controls ownership of the joint venture.
It may also be pointed out that the different participating companies contribute staff to a JV, as may be clearly spelt out in the MOU. Such personnel are often treated as staff of the JV, and treated as on deputation from their parent organization. Of course, once the project is completed, they return to their parent cadre.
5.4 BIDDING PROCESS
For the purpose of discussion, the process that starts with the owner inviting parties to ‘bid’ for a project and culminates in a contract being signed between the owner and a party identified to carry out the job has been called the bidding process.
Open bidding is adopted for small-value projects that involve typical nature of work. The risk involved in the project is less here. The owner specifies some minimum eligible criteria for issue of the tender document. If these criteria are satisfied by a contractor, the tender document is issued to him. Upon issue of tender document, the owner may invite separate technical and financial bids or may ask for a single-package bid.
Selective Bidding (Limited Tender)
Selective bidding is adopted for very specialized projects. In this approach, a two-tier procedure is adopted. The first step is the pre-qualification process for selection of a set of contractors. In selective bidding, the tender document is issued only to selected bidders who had qualified from the pre-qualification process. The selective bidding is normally adopted for projects having large contract value, difficult construction, etc. Indeed, the risk involved in such projects is substantial.
As is discussed in the following paragraphs, the bidding process can be looked upon as the sum total of the following—notice inviting tenders (NIT), submission of completed bids, analysis of submitted tenders, acceptance of tender, letter of intent (LOI), work order and agreement in case of an open bidding, whereas the pre-qualification of contractor also gets added to the bidding process in case of selective bidding. In case of selective bidding, after the completion of pre-qualification process the tender documents are issued to the selected contractors. The selected contractors bid for the project and the contract is awarded usually to the lowest responsive bidder. In the following sections, we discuss about the pre-qualification process.
5.4.1 Pre-qualification Process
Construction procurement is a risky proposition. An owner has a lot at stake. He tries to make every move cautiously. He realizes that a wrong move in the very beginning itself such as choosing the wrong contractor for his proposed project may not augur well for his project. The terms ‘right’ and ‘wrong’ contractor are subjective and have to be dealt with on a project-to-project basis. How to choose a set of right contractors for the project, is the essence of the pre-qualification process.
The term ‘right contractor’ signifies ‘fitness of purpose’ for the proposed project. The term ‘right contractor’ has nothing to do with a large or a small contractor, since it may so happen sometimes that the large contractor may not be the right contractor for a proposed project if it is of low value. Similarly, a contractor, even if he is a leader in the heavy civil construction sector, may not be the ‘right contractor’ for a project that involves buildings with complex architectural features. The process of selecting a pool or set of right contractors is the purpose of the pre-qualification process.
A typical pre-qualification process would take anything between 8 weeks and 10 weeks, and may involve considerable efforts on the part of the owner organization. Selection of the ‘wrong contractor’ has been identified as one of the causes of project failures. Hence, the gains in long terms that result from pre-qualification process are worth the time and effort spent on it.
There are other terminologies and processes that closely serve the function of the pre-qualification process. These are licensing, registration of contractors, enlistment of contractors, and rating or grading of contractors. Some organizations, instead of resorting to the pre-qualification process again and again, enlist or register some contractors for doing a particular type of work, and they also specify the limit of contract value (say, up to Rs 5 crore, Rs 5 crore–Rs 25 crore, more than Rs 25 crore, and so on) for which the contractors are eligible. As and when any project of certain value is undertaken by these organizations, the tender document is issued to the contractors enlisted for the said contract value. Indeed, this process saves time and effort for the owner as well as the contracting organization. The enlistment or registration is done for a particular period. Upon the expiry of the registration period, fresh application may have to be submitted in order to be registered.
In some countries, there is a system of providing license to the contractors. Under this system, a project beyond a certain value can be executed by a licensed contractor only. Under the licensing system, the contractors are awarded license in different categories, such as common contractors, and special contractors for different types of works such as civil works, plumbing and sanitary works, and electrical works. These classifications are done based on the amount of work executed by the applicant and a number of other factors including experience of the contractor in relevant construction work; available staff strength; sales volume of completed projects; financial parameters such as ratio of current assets to current liabilities, ratio of fixed assets to capital, ratio of net profit to total liabilities and net worth; construction machinery owned by the contractor; and safety and labour relations record.
As explained earlier, the enlistment or registration system helps in saving time as every time the pre-qualification process need not be repeated. However, for any unusual or specialized kind of work, pre-qualification process is carried out afresh. Pre-qualification of contractors is done by government as well as private organizations.
The announcement of pre-qualification process is advertised in leading dailies, trade journals, etc., and sometimes also intimated individually to reputed contractors.
Notice for Pre-qualification
Upon receipt of pre-qualification document from the owner, the contractor fills up the different information required for the purpose. Although the information required for pre-qualification varies from project to project and from owner to owner, there are certain aspects that are typically desired by an owner or employer for selecting the prospective bidders for a proposed project. These are discussed in the following sections.
Typical Documents Required for Pre-qualification
Letter of transmittal Sometimes, in order to maintain uniformity, even the sample letter to be submitted along with the pre-qualification document is provided. The applicant has to write his name and address in the specified places in the letter of transmittal. The essence of the letter of transmittal is to convey to the owner that the contractor has read the documents carefully and the information provided by the contractor is true to the best of his knowledge. Letter of transmittal also gives a list of enclosures with the pre-qualification document.
Power of attorney A copy of power of attorney stating the signing authority is also required to be furnished along with the pre-qualification document.
Financial information This statement shows the financial information of the applicant organization. Information such as gross annual turnover details of the applicant in the last 3 or 5 or 7 years as well as profits earned for the same period are asked.
Further, the financial arrangement for carrying out the proposed work is also asked from the applicant. The applicant can utilize his own funds through reserves or can show proof of credit limit enjoyed by the applicant with different banks. For the latter, the applicant needs to show the banker’s certificate. A typical format is shown in Figure 5.3.
Owners also ask for income tax clearance certificate (ITCC), usually for a three- or five-year period. However, some Government organizations do not ask for ITCC these days. Sometimes, a certificate from the chartered accountant indicating the value of liquid assets and a solvency certificate from nationalized banks are also asked from the applicant. In addition to the above, the owners may also prefer to review the balance sheet and the profit-and-loss account of the applicant. For a typical government organization, all of the above-mentioned information are given in a typical form called Form ‘A’.
Figure 5.3 Typical certificate issued by the bank showing credit limit enjoyed by the applicant
Figure 5.4 A typical format for details of similar works done
Figure 5.5 A typical format for showing concurrent commitment
Details of similar works Usually, owners ask for details on the experience of the applicant in executing projects of similar nature in the last five or seven years. This is expected since owners would like to award the project to those contractors who have sufficient experience and, hence, will be in a better position to anticipate problems and sort them out. A typical format in which such details are desired is reproduced in Figure 5.4.
Concurrent commitment ‘Concurrent commitment’ means the projects under execution by the applicant or just awarded to the applicant. This information is required to assess the bid capacity of the applicant as well as to know the intention or willingness of the applicant to take up the proposed project. A typical format in which such details are desired is reproduced in Figure 5.5.
The applicants establish their claim of concurrent commitment by producing letter of intent or agreement copy for running projects.
Certificates for completed jobs The applicants are supposed to establish their claim of experience by producing completion certificates of the completed projects. Sometimes, the applicants also furnish photographs of the projects executed by them in order to create a better impression.
Structure and organization Through this questionnaire, information related to structure and organization is obtained. Some of the answers that an owner typically looks for are:
- Name and address of applicant, contact details such as telephone and fax numbers, email ID
- Legal status—this information is required to know the legal status of the applicant, such as whether the applicant is an individual, a proprietary firm, a partnership firm, or a limited company or corporation. In order to verify the legal status, owners ask for copies of documents such as incorporation certificate defining the legal status
- Particulars of registration with various government bodies such as CPWD, MES, or department of sales tax. For verifying this, attested photocopy of the enlistment certificate is submitted by the applicant
- Names and titles of directors and officers who are going to be concerned with the proposed work
- Designation of individuals authorized to act for the organization
Figure 5.6 A typical format for showing details of technical and administrative personnel
Figure 5.7 A typical format for showing details of plant and equipment
Details of technical and administrative personnel The owners may wish to know about the proposed organization structure for the project, with details of qualification, responsibility and experience of the key members. A typical format in which such details are desired is reproduced in Figure 5.6.
Although for a smaller organization it may be easier to provide exact names, qualifications and experiences of the personnel proposed to be employed, for large contractors a tentative list of personnel proposed for the project is furnished along with the total list of staff available with the contractor.
Details of plant and equipment The owner may wish to know about the availability of required plant and equipment with the applicants. A typical format used for extracting such information is given in Figure 5.7.
Some other questions In addition to the above information, the pre-qualification document contains some typical questions as given below:
- Was the applicant ever required to suspend construction for a period of more than six months continuously, after you commenced the construction? If so, give the name of the project and the reasons for suspension of work.
- Has the applicant or any constituent partner ever abandoned the awarded work before its completion? If so, give name of the project and the reasons for abandonment.
- Has the applicant or any constituent partner, in case of a partnership firm, ever been debarred/blacklisted from tendering in any organization at any time? If so, give details.
- Has the applicant or any constituent partner, in case of a partnership firm, ever been convicted by a court of law? If so, give details.
- In which field of civil engineering construction do you claim specialization and interest?
- Specify the minimum and maximum values of contracts executed by you.
- Would you be prepared to work with nominated subcontractors? If yes, what type of arrangement do you propose?
- Specify the list of disciplines that can be executed in-house.
- Specify a list of subcontractors.
- Do you have any minimum value of contract that will be acceptable to you?
- Why should you be hired for construction for the proposed project?
- Any other information considered necessary but not included above
Other details The following details may also be desired in some cases of pre-qualification process.
- Quality assurance plan: Contains questionnaire regarding quality policy, responsibility and statement of purpose
- ISO certification (if any)
- Safety, health and environment management plan: Questionnaire related to policy, responsibility and statement of purpose
- Planning, scheduling and monitoring plan, and reporting methodology
- Commissioning and handing over plan
- Project close-out strategy
- Questionnaires related to penalties in case the time schedule, the agreed quality standards, and the safety, health and environment standards are not adhered to/complied with
Construction methodology A typical construction methodology for a project is given in Appendix 4. Needless to say, construction methodology will change from project to project.
Upon receipt of the completed pre-qualification document from interested applicants, owners—either themselves or by appointing a consultant—evaluate each application in the light of the predetermined criteria. A panel of reputed contractors is drawn up for issue of the complete tender document.
The criteria are framed in such a way (see Box 5.1) that it results in neither too many applicants qualified for bidding for the project nor too less applicants. The idea is to encourage fair competition among the selected contractors. Usually, the number of applicants is restricted between five and seven. In a nutshell, the pre-qualification process provides a level-playing field for competitors and eliminates the odd one among the various applicants.
5.4.2 Notice Inviting Tender
For execution of work through contract, especially in an open bidding system, the jobs need to be given due publicity. A common practice is to publish a formal ‘notice inviting tender’ (NIT), with the following details:
- Name of the authority inviting the bids
- Name of the project
- Conditions for eligibility of contracting agencies to submit a bid
- Brief details of the project
- Estimated cost and time of completion of the project
- The cost of the tender documents
- Earnest money to be deposited with the completed tender
- Date and time by which the bids are to be submitted and the place of submission
- The date and time of opening of the bids
The detail of a typical NIT is given in Box 5.2.
Box 5.1 Suggested guidelines for establishing pre-qualification criteria
Minimum annual financial turnover for construction works in any one year (from among last five years of operations) should usually be not less than two-and-a-half times of the estimated annual payments under the contract.
The contractor should have satisfactorily completed three works costing not less than the amount equal to 40% of the estimated cost, two similar works costing not less than the amount equal to 50% of the estimated cost, or one similar completed work costing not less than the amount equal to 80% of the estimated cost.
The contractor must show proof of carrying out concrete and excavation items usually 80 per cent of the expected peak rate for the proposed construction.
The contractor must show the availability a project manager with not less than five years experience in implementation/construction of similar work for the proposed project.
The contractor must show credit lines/letter of credit/certificates from banks for meeting the funds requirements, etc., usually the equivalent of the estimated cash flow for three months in peak construction period.
Bidders who meet the minimum qualification criteria will be qualified only if their available bid capacity is more than the total bid value. The available bid capacity is calculated as under:Assessed available bid capacity A × N × 2 – B
where N = Number of years prescribed for completion of the subject contract
A = Maximum value of works executed in any one year during last five years (at current price level)
B = Value at current price level of existing commitments and ongoing works to be completed in the next N years
In spite of contractor’s meeting all the criteria, they can be disqualified if it is established that the contractor made misleading statements and has dubious records in terms of abandoning the works, not properly completing the contract, inordinate delays in completion, litigation history, or financial failures.
Box 5.2 Notice inviting tender, ABC Institute, New Delhi
Job No. XXX
Date of NIT 05.05.2003
Last date for sale of tender forms
15.05.2008 up to 2 pm
Last date for receipt of completed tender forms
16.05.2008 up to 3 pm
Date and time of opening of tender forms
16.05.2008 at 3:15 pm
Sealed tenders are invited by the works department of our institute for earthwork involving cutting, filling, compacting and making level a part of the campus located at Hauz Khas, New Delhi.
Tender forms along with terms and conditions and specifications can be obtained from the office of the undersigned upon payment of Rs 2,000 as tender fee payable in cash between 10 am and 2 pm on any working day till 15.05.2008.
Duly completed tender forms along with earnest money, ITCC and all other required documents should be submitted at the office of the executive engineer before 3 pm on 16.05.2008. Tenders will be opened in the presence of the officers of the institute and tenderers present at 3.15 pm on the same day. The institute reserves the right to reject any or all the tenders without assigning any reason whatsoever. Conditional tenders may be summarily rejected.
Works and Estate Division
ABC Institute, New Delhi
Notices inviting tenders are generally publicized through press or the Internet. In the latter case, owner organizations upload the required information on their websites. Some websites are also dedicated to hosting information related to business-related opportunities in the construction industry. It may be pointed out that an online bidding process is still not very common, though there are growing numbers of cases where tender documents, along with the drawings and other conditions of the job, can be downloaded directly from a website.
5.4.3 Submission of Bids
Once a contracting agency, through an NIT or otherwise, learns of the availability of an opportunity, and decides to make an offer, it obtains the required tender documents and other details, carries out its own analysis of the job, and determines the cost at which it is willing to carry out the project. Normally, contracting agencies carry out a survey by visiting the site to check the availability of water, labour, power, transport, etc., and study issues like the kind of construction methodology and temporary infrastructure that would be required to be set up.
Depending upon the nature and size of the project, the bids may be submitted as a single package or in two parts containing the technical and financial parts separately.
5.4.4 Analysis of Submitted Tenders
As mentioned above, contracting agencies may be required to submit their offers in a single package or break it up into technical and financial packages (with the two being submitted separately). Evaluation of offers is generally carried out by an evaluation committee usually consisting of three persons, with one person being from the finance department. The seniority of members of the committee depends upon the value of the contract. The committee scrutinizes the submitted tenders, prepares a comparative statement containing the rates of all the offers and conditions, if any, and submits a recommendation for the award of the job. The committee is authorized to negotiate with the tenderer, wherever necessary, to lower the rates and also regarding any conditions if included by the tenderer. Normally, negotiations are first done with the lowest tenderer (L1). At times, if the rates remain high even after negotiations, the next lowest tenderer is called for negotiation, and so on. The objective is to make all possible efforts to save the resources spent in the bidding process, though the owner clearly reserves the right to reject all offers, without assigning any reason. The final recommendation is based on the rates and conditions agreed upon after negotiations, after the committee has scrutinized the financial and technical competence of the agencies and their experience. It may be noted that the committee is usually not empowered to enter into the contract, and only make the final recommendation, which itself may or may not be binding on the competent authority. In case of public works, negotiation with only L1 is permitted under specified conditions.
The process needs to be appropriately modified in cases where the technical and financial bids are submitted separately. It should be reiterated that such separate bids are invited only in large projects, where the client is desirous of holding negotiations on technical issues related to the project, without the negotiations being at least directly influenced by the financial details. Further, this practice can be followed in both open and designated systems of bidding.
In such cases, as a first step, only the technical bids are opened, and negotiations held between the owner and the contracting agencies on the technical details. This exercise is followed by the opening and analysis of financial bids, and the issue of letter of intent (LOI) to the contractor chosen to carry out the job. A brief description of the technical and financial bids is given below.
The package should contain all the information that may be required to establish the credentials of the tenderer, and exclude financial requirements and conditions relating to the particular project. Therefore, the technical package usually contains (a) earnest money deposit (EMD), (b) copy of power of attorney, (c) valid financial papers such as income and sales tax clearance certificates, (d) details of concurrent commitments and past experience, (e) proposed project schedule, (f) the proposed organization chart for the project with appropriate details, including description of personnel responsibilities and bio-data of key personnel, (g) detailed cash-flow projections, (h) details of subcontractors proposed to be used, (i) list of plant and machineries to be deployed, and (j) details of materials proposed to be used, including their source and brand names, where applicable.
The financial package consists of total price of the contractor to complete the project. The total price and discount or rebate, if any, is conveyed to the owner by means of a cover letter included in the financial bid. Further, the financial bid also contains filled-up bill of quantities in which the contractors enter their rates in words and figures for all the items of the project.
5.4.5 Basis for Evaluation and Acceptance
Indeed, while the quoted cost is perhaps the most widely used basis for drawing up a comparative statement, other aspects of past performance of a contracting agency such as safety, compliance with quality standards, and dispute resolution are also being increasingly considered.
It should be noted that a system based purely on the lowest cost is highly vulnerable to
- issues like safety and quality being compromised by an agency due to the intense competition that the method seeks to generate
- formation of pre-bidding ‘ring’ among contracting agencies, which is the equivalent of ‘cartels’. This tendency is essentially an outcome of a conviction among the contracting agencies that the owner has no alternative but to execute the works, and that all contractors benefit if they ‘agree’ to a certain minimum cost
- a tendency among the contracting agencies to first submit a low bid to get the job, and then try to obtain additional payments through dispute resolution
It is obvious that these factors can vitiate the atmosphere of goodwill between the contracting agency and the client, and are detrimental to maintaining of schedule, quality and safety. Besides, there is also the danger of the project turning out to be more costly than estimated. Therefore, acceptance of an offer needs to be done very carefully, keeping a comprehensive view of the situation in mind. It should, however, be pointed out that increasing efforts are being made to develop other criteria than cost.
5.4.6 Letter of Intent
If the competent authority approves the recommendations of the tender committee, a letter of intent is issued to the contractor requesting him to submit necessary documents like partnership deed in case of partnership firm, and income tax clearance (if not submitted earlier). At this stage, the earnest money deposit of the successful tenderer is converted to a security deposit, and the contracting agency is requested to pay any balance amount towards the security deposit. At times, there is also a provision in the conditions of the contract that such amounts could be adjusted against the initial running bills.
5.4.7 Work Order
After the contracting agency accepts the offer and submits necessary documents, a work order is issued detailing the special terms and conditions, the mode of payment, the payment of security deposit, the total value of the contract, etc. In the work order, the contractor is asked to enter into an agreement with the owner and initiate the work.
At this stage, the contractor contacts the engineer-in-charge of the project, and while preparing to start work at the site, enters into an agreement with the owner. The agreement includes previous relevant documents like the letter of intent, the work order, the general conditions of contract, the special conditions of contract, and the specifications and drawings. After the documents are signed by both parties, it becomes a contract, which is legally binding.
5.5 CPWD CONTRACT CONDITIONS
As pointed out earlier, CPWD conditions of contract are widely used and, hence, our discussion keeps these as a reference point. In Appendix 4, a brief description of contract clauses from CPWD Form No. 7 and Form No. 8 is given. Some of the important contract clauses that ordinarily find place in various projects are:
- Compensation for delay and incentive for early completion (Clause 2 and 2A)
- Determination and/or rescission of contract (Clause 3)
- Time and extension for delay (Clause 5)
- Payment on intermediate certificate to be regarded as advances (Clause 7)
- Completion certificate and completion plans (Clause 8)
- Escalation clauses (Clause 10C, 10CA, 10CC)
- Deviation/Variations (Clause 12)
- Action in case work not done as per specification (Clause 16)
- Work not to be sublet and action in case of insolvency (Clause 21)
- Settlement of disputes and arbitration (Clause 25)
- Employment of technical staff and employees (Clause 36)
- Return of material and recovery for excess material issued (Clause 42)
Compensation for delay and incentive for early completion (Clauses 2 and 2A) These clauses refer to recovery of compensation from the contractor for delays and defaults on his part. This clause can be divided into three parts:
- Observation of time allowed for completion of work
- Payment of compensation by contractor for non-commencement, not finishing in time, or slow progress during execution
- The decision of the superintending engineer regarding compensation payable by the contractor shall be final
Clause 2A provides for incentive payable to the contractor in case of early completion of work.
Determination and/or rescission of contract in the event of breach (Clause 3) This clause is very important. It empowers the owner organization to determine or rescind the contract in the event of breach of contract by the contractor. It further allows the department to complete the balance work either departmentally or through another contractor at the risk and cost of the original contractor. In the event of recourse to this clause, the security deposit of the contractor is forfeited.
Time and extension for delay (Clause 5) Time is the essence of the contract on the part of the contractor. This is, however, not the case as far as the department is concerned. Accordingly, there is a provision for granting extension of time for the delay that may be caused by the department in meeting its obligation to the contractors in terms of handing over the site, furnishing of drawings/designs, etc., in taking appropriate decisions from time to time, and in issuing departmentally materials required for the execution of works. Extension of time may also be given in the event of increase in scope of work.
Payment on intermediate certificate to be regarded as advances (Clause 7) This clause deals with the circumstances under which the intermediate payments can be made to the contractor. To claim the payment, the contractor has to submit the bill.
Completion certificate and completion plans (Clause 8) According to this clause, a completion certificate is to be given by the engineer-in-charge to the contractor on completion of the work. This completion certificate is also a prerequisite for the contractor claiming the final bill.
Action in case work not done as per specification (Clause 16) This clause is important as it casts an obligation on the contractor and the departmental staff to ensure execution of good-quality work. Under this clause, the contractor can be asked to make good the defects in work at his own expenses, or re-execute the work if it is not in accordance with the specification, design, etc.
Work not to be sublet and action in case of insolvency (Clause 21) This clause specifies the circumstances under which tender accepting authority can rescind the contract. Under Clause 21, permission to sublet or assign the contract to another party should not be given to a contractor by the divisional officer without prior reference to the authority who accepted the tender.
Settlement of disputes and arbitration (Clause 25) This clause provides for appointment of an arbitrator in case of questions and disputes arising at any stage between the parties. This clause, however, does not apply to actions taken under clauses for levy of compensation for delay, determination of contract in the event of breach, extension of time in the event of delay caused by the department, and derivation of rates for additional and altered items. The contractor cannot go to a court of law for the redressal of his grievances unless he has exhausted the channel of arbitration. The Government of India has appointed a panel of arbitrators in the ministry of works and housing, and the disputes between the Government and the contractors are referred to arbitration by one of them. The authority of an appointed arbitrator can be revoked only with the order of the court. The award of the arbitrator is final and binding on the parties to the contract, unless it is set aside by the court.
Employment of technical staff and employees (Clause 36) This clause casts an obligation on the contractor to deploy well-trained, qualified and skilled professionals at site of work to execute quality work, and spells out the consequences that would arise on his failure to do so.
Return of material and recovery for excess material issued (Clause 42) This clause imposes an obligation on the contractor to manage an effective inventory control of the expensive and essential stipulated materials, and spells out the consequences in case of non-observance of diligence in their usage by the contractor. The intention behind the clause is to ensure that the contractor shall take only the required quantity of materials, and if any such materials remain unused at the time of completion or determination of the contract, it has to be returned to the engineer-in-charge.
Escalation clauses (Clause 10C, 10CA, 10CC) According to Clause 10C, the contractor can be reimbursed due to increase — caused as a direct result of coming into force of any fresh law or statutory rule or order (but not due to any change in sales tax/VAT)—in price of material incorporated in the work and/or wages of labour, compared to prevailing rates at the time of receipt of tender for the work. Clause 10CA provides for varying the amount of contract due to increase or decrease in prices of various materials pertaining to the work. In the contract where clause 10CC is applicable, this clause shall not be operational. For materials covered under clause 10CA, price variation under clause 10C shall not be applicable.
Price escalation clause According to this clause, the contractor is entitled to compensation for such increase as per provisions detailed in the clause for all major works. In the event of escalation in the price of material, labour and petroleum, oil and lubricant (POL), the cost of work on which escalation is possible is reckoned as 85 per cent of the cost of work as per the bills, minus the amount of the value of materials supplied departmentally as per the terms of the agreement. Thereafter, the compensation is worked out as per the increase in material cost index, consumer price index, consumer price index for industrial labour, and average index number of wholesale price for fuel, etc. The components of material, labour and POL are taken as certain percentages, and are predetermined for every work and incorporated in the tender document. In the case of building works, the component of POL is negligible and the components for material and labour are taken as 75 per cent and 25 per cent, respectively.
The compensation for escalation for materials, labour and POL is worked out as per the formula given below:
VM = Variation in material cost, i.e., increase or decrease in the amount (in rupees) to be paid
W = Cost of work done
X = Component of materials expressed as percent of the total value of work
MI and MIO
= All-India wholesale index for commodities for the period under reckoning, as published by Economic Advisor to Government of India, Ministry of Industry and Commerce, for the period under consideration
VL = Variation in labour cost, i.e., increase or decrease in the amount (in rupees) to be paid or recovered
W = Cost of work done
Y = Component of labour expressed as percent of the total value of work
LI and LIO
= Consumer price index for industrial labour (all-India) declared by Labour Bureau, Government of India, as applicable for the period under consideration and tenders, respectively
W = Cost of work done
Z = Component of POL expressed as percent of total value of work, as indicated under the special conditions of contract
FI and FIO
= Average index number of wholesale price for group (fuel, power, light and lubricants) as published weekly by the Economic Advisor to Government of India, Ministry of Industry, for the period under reckoning and valid at the time of receipt of tenders
- The following principles are adhered to while working out the indices mentioned above.
- The index relevant for any month is the arithmetic average of the indices relevant to the three calendar months preceding the month in question.
- The base index is the one relating to the month in which the tender was stipulated to be received.
- The composition for escalation is worked out at quarterly intervals and it is with respect to the cost of work done during the previous three months. The first such payment will be made at the end of three months interval.
- In the event the price of materials and/or the wages of labour required for execution of the work decrease/s, there is downward adjustment of the cost of work, so that such price of materials and/or wages of labour are deductible from the cost of work under the contract.
- The escalation is normally not applicable for project duration of less than 18 months. Earlier this duration was taken as 6 months.
Addition, alternation, substitution, derivation of rates This clause empowers the department to order addition, alternation and substitution as may be required during the execution of the work. The rates for the altered, additional, or substituted items are to be derived in accordance with the priority set out in the clause—such as derivation of rates from tendered rates for similar items, scheduled rates plus enhancement, or based on market rates.
5.6 FIDIC FORM OF CONTRACT AGREEMENT
FIDIC stands for Federation Internationale des Ingenieurs Conseils (International Federation of Consulting Engineers). It was founded in the year 1913 in Europe, and now has about 70 countries as members. The secretariat is situated in Switzerland. The FIDIC form of contract has evolved over a period. The contract conditions are equally suitable for use on domestic contracts. Prior to 1999, FIDIC had three forms of building and engineering contracts—the Red Book for civil engineering construction, the Yellow Book for electrical and mechanical works, and the Orange Book for design and build contracts. In September 1999, FIDIC published four new editions of the forms of contract (see Box 5.3). They are briefly described in the following sections.
Conditions of contract for construction These include the set of conditions recommended for building or engineering works where the employer provides most of the design. However, the works may also include some contractor-designed civil, mechanical and/or electrical construction works (Red logo).
These days, it is very common for the contractor to design a significant portion of works on his own and, accordingly, the conditions of contract for construction contains more provisions that are applicable under such cases.
Conditions of contract for plant and design–build These include the set of conditions recommended for the provision for electrical and/or mechanical plant and for design and construction of building or engineering works (Yellow logo). Under the usual arrangements for this type of contract, the contractor designs and provides, in accordance with the employer’s requirements, the plant and other works; this may include any combination of civil, mechanical, electrical and/or construction works.
The conditions are also suitable for the design and construction of building and engineering works. These contract conditions require the employer to appoint ‘the engineer to administer the contract.’
Conditions of contract for EPC (engineering-procurement-construction)/turnkey projects These are suitable for use in projects of turnkey basis, such as projects for a power plant or a process factory, an infrastructure project, or any developmental works. In this type of contract, there is a higher degree of certainty on the price and time. The contractor undertakes total responsibility for the design and the execution of the project, including the guarantees for the performance (Grey logo). Under the usual arrangements for this type of contract, the entity carries out the engineering, procurement and construction, providing a fully equipped facility ready for operation (at the turn of a key). This type of contract is usually negotiated between the parties.
In such contracts, the contractor has a greater freedom to satisfy the requirements of the end user as specified in the contract. The contractor enters into such a contract with the expectation that it would be more profitable than under the traditional procurement principles and is, thus, prepared to accept a greater degree of risk.
Short form of contract This form of contract is suitable for small works (small capital value) of short duration, or for relatively simple and repetitive works. This form of contract is suitable for any discipline of engineering irrespective of who provides the engineering (Green logo). Depending on the type of work and the circumstances, this form may also be suitable for contracts of greater value.
Box 5.3 FIDIC forms of contract
In this form of contract, the contractor constructs the works in accordance with the design provided by the employer or by his representative (if any), but this form may also be suitable for a contract that includes, or wholly comprises, contractor-designed civil, mechanical, electrical and/or construction works.
5.6.1 Need and Principles of FIDIC Contracts
The conventional contract forms being used in various government departments in India are considered to be one-sided. Due to globalization of economy and many multinational companies contracting for various infrastructure and developmental projects in India, the conventional form of contract is not considered to be suitable and the global contract form such as that of FIDIC is in vogue. The FIDIC form of contract is considered to be a well-balanced and equitable form that clearly defines the role and responsibility of all parties to a contract. It has a fair apportioning of risks, rights and obligations between the parties. It is in wide use for international contracts and is supported and recommended by various development banks such as World Bank and Asian Development Bank. It contains a set of effective, clear and complete conditions. It has time limits specified for different actions to be taken by different parties. Besides, it also has effective provisions for adjudication.
The basic principles behind all FIDIC contracts are given below:
- To achieve optimum results by not expecting contractors to quote for risks that could not be reasonably foreseen or evaluated
- For the employer to assume responsibility for costs arising from events that may never occur, which lie outside the contractor’s control or which cannot be covered by insurance at a reasonable premium (i.e., employer’s risks)
- Close cooperation and teamwork between employer/contractor and engineer within the framework of the contract, with a mutual desire to produce a satisfactory end product
- To remove mistrust or lack of confidence, with all parties performing their duties under the contract responsibly and correctly
- The use of independent ‘engineer’, who is required to exercise his discretion with impartiality, even if he is an employee of the employer
5.6.2 Salient Features of FIDIC Form of Contract
In FIDIC, the obligations of contractor as well as owner/employer and engineer are set out clearly. The obligations under a building contract for the contractor, employer and engineer are given below:
- To give possession of site
- To make payment
- To nominate a supervising officer (engineer/architect)
- To supply instructions to carry out the works
- To supply necessary plans, drawings and data
- Not to interfere with the progress of the works
- To nominate specialist subcontractors and suppliers
- To supply materials for use in the works (where applicable)
- To permit the contractor to carry out the whole of the works
- To complete the works (including defects liability period)
- To ensure suitability or effectiveness of the works using the materials specified
- Design responsibility (where not specified) especially in relation to materials and workmanship (e.g., concrete mix and reinforcement)
- To warn the employer in relation to an impracticable design
Engineer Under FIDIC conditions, the engineer may be the employee of the employer department, but he is not a signatory or party to the contract between the employer and the contractor. He has to perform as an interpreter of the contract and as a judge of its fulfilment by both the parties. Decision/opinion taken by the engineer may be opened up, reviewed, or revised by the arbitrator if challenged within the stipulated time.
Delay and Extension
Procurement of all materials, plant, equipment and other things required for execution of work is the responsibility of the contractor. However, if the delay is caused due to failure or inability of the engineer to issue any drawing or instruction for which notice has been given by the contractor, or due to failure on the part of the employer to give possession of the site, then the contractor is entitled for (1) extension of time and (2) additional amount (compensation).
Performance security shall be refunded to the contractor within 14 days of the issue of the defect liability certificate. The performance security/guarantee shall be in the form annexed to these conditions or in such other form as may be agreed upon between the employer and the contractor. Generally, the guarantees are conditional.
Suspension of Work
The engineer can order suspension for any reason. Contractor shall not be entitled for any compensation if suspension is—(1) otherwise stated in the contract; (2) due to default of contractor; (3) necessary by reasons of climatic conditions on the site; or (4) necessary for proper execution of work or for safety of the works (except in the case of defaults by engineer or employer, or when involving employer’s risk).
If such suspension exceeds 112 days (after 84 days of suspension, contractor gives notice for restoration within 28 days), the contractor may elect to treat the suspension, where it affects the whole of the work, as an event of default by the employer and terminate his employment. In the event of such termination, the contractor is entitled for reasonable compensation.
The engineer can make any variation in the form, quality, or quantity of the work, or any part thereof that in his opinion is necessary. No deviation limit is specified; however, if deviations exceed 15 per cent of the effective contract price, then the contract price shall be adjusted.
Sharing of Risks
This form contains various conditions regarding obligation of both the parties towards the risk. ‘Employer’s risks’ are generally events or circumstances over which neither party will have any control (e.g., war, hostilities and the like), or events or circumstances caused by the employer, directly or indirectly. For example, some of the employer’s risks are—loss or damage due to the use or occupation by the employer, loss or damage due to defective design provided by the employer or the engineer, and so on.
The contractor is required to take full responsibility for the care of the works, materials and plant, from the commencement date until the taking-over certificate is issued for the works. If any of the contractor’s equipment, plant, or temporary works on or near or in transit to the site sustain destruction or damage by special risk, then the contractor shall be entitled to payment for replacing or rectifying such equipment.
If during the execution of the works the contractor encounters physical obstructions or conditions, which an experienced contractor cannot foresee, then the contractor shall be entitled to (1) extension of time and (2) reasonable compensation.
FIDIC describes the procedure for additional claims under Section 53 as given here:
- Notice of claims by the contractor
- Contractor to keep contemporary records to support claims
- Inspection of such contemporary records by the engineer
- Substantiation of claims
- Payment of claims
Payment of Bills
The contractor shall submit to the engineer after the end of each month a statement showing the amount to which the contractor considers himself to be entitled. The engineer shall, within 28 days of receiving such statement, deliver to the employer an interim payment certificate, and the payment is to be made by the employer within 28 days after receipt of the engineer’s certificate.
Taking Over of Completed Work
The engineer shall issue a taking-over certificate within 21 days after receipt of the contractor’s notice and undertaking, if work is substantially completed in his opinion.
Unless the parties otherwise agree, reference to arbitration may be made before completion of work (during execution of work) or after completion of work.
Contract Price and Payment
Contract price is to be agreed to and determined under Sub-clause 12.3, and subject to adjustments under the contract. The price is inclusive of all taxes, duties and fees, and not to be adjusted except for the reasons as stated in Clause 13.7 (adjustments for changes in legislation). The quantities mentioned in the bill of quantities are estimated quantities.
Employer is to make advance payment in the form of an interest-free loan for mobilization. The engineer shall issue the first interim payment certificate after receiving the application for the same and the performance security and guarantee for advance payments, with such advance payments to be repaid through percentage deductions.
The engineer shall issue to the employer an interim certificate of payment within 28 days of receiving a statement and supporting documents, which shall stipulate an amount that the engineer fairly determines to be due, with supporting documents. Withholding of the interim payment certificate shall not be done, but in cases where anything supplied or work done by the contractor is not in accordance with the contract, the cost of rectification or replacement may be withheld till it has been completed, and if the contractor has been failing to perform any obligation under the contract and has been notified earlier, the value of work or obligation may be withheld until performed.
Measurement and Evaluation
The engineer is to proceed in accordance with Sub-clause 3.5 (determinations) to agree to or determine the contract price by evaluating each item of work, applying the measurement agreed to or determined in accordance with 12.1 and 12.2, and the appropriate price for each item.
The major construction agencies are essentially civil engineering organizations. More often than not, they are required to engage a variety of vendors and subcontractors for execution of specialized works in a modern-day project. Any project involves a number of items. For example, a multi-storey building may have works similar to the ones listed below that need to be executed:
- Waterproofing work, woodwork, painting work, aluminium works, plumbing (internal and external) and sanitation, flooring and tile work, false ceiling, electrical works (internal and external), air conditioning, interior works, networking, telephone wiring, horticulture and landscaping, thermal insulation, automation, acoustic control, external development, fit-out, façade work, building management services (BMS), and mechanical, electrical, and plumbing (MEP) services etc.
As can be seen from the above list, it is very difficult to be a specialist for all the activities/works involved in a project. In such cases, a part of activities is sublet or subcontracted by the main contractor to other contractors, known as subcontractors to the main contractor for this project.
Works are subcontracted to avail the expertise of other agencies in order to do it economically, within a given time schedule and given quality standards. Subcontracting normally results in speedy mobilization. It also increases the productivity of staff of the main contractor, as with the limited staff a large quantum of invoicing or billing can be done. Sometimes, subcontracting is resorted to in order to avoid legal hurdles, to do away with directly employing a huge fleet of workforce, and to honour contractual commitments entered into by the main contractor for the project. Subcontracting also helps in risk-sharing.
Figure 5.8 Different types of subcontract agreement
For ensuring the engagement of quality vendors, it is imperative to provide a list of reputed vendors in the contract itself, wherein the contractor may be given a choice of three vendors each. Alternatively, the qualification of each vendor may be defined in the contract and the contractor may be given the freedom to employ a vendor who fulfils the eligibility criteria.
5.7.1 Classification of Subcontractors
There are different types of subcontractors, depending on the type of agreement that the main contractor has entered into with subcontractors. The subcontract may also be of different types such as — item rate contract; work with materials, labour and plant; work with material and labour; work with labour alone; and lump-sum contract. The classification of subcontractors can be understood from Figure 5.8.
The subcontractors undertaking such works are known as general subcontractors (piece-rate workers [PRW]) and sometimes also referred to as petty contractors.
When the requirement is that of supplying materials alone, the supplying agencies are also known as vendors or suppliers, and the contract is known as supply contract.
General contractors hire equipments for a variety of reasons. The hiring rate depends on market conditions, duration of hire, payment terms and other terms and conditions, besides a host of other factors. The terms and conditions of hiring should be clearly spelt out. It should contain information such as equipment model and capacity, responsibility for providing operators and helpers for maintenance, minimum working hours, responsibility of fuel, lubricants, other consumables and spares, responsibility of mobilization cost, and period of mobilization. It is always better to check hire charges from different agencies before finalizing the hiring rates.
Sometimes, general contractors also resort to subcontracting a work package in totality. Needless to say, these subcontractors are cash-rich contractors and command respect in the industry. Such arrangements should be thoughtfully considered, though. The terms and conditions should be spelt out clearly, and details such as performance guarantee, mobilization advance and bank guarantee, retention, item description and general conditions of contract be made very clear right in the beginning. The responsibility towards preparing drawings and maintaining the desired quality should be well-defined.
Labour, Material and Equipment
They are referred to as specialized subcontractors or speciality contractors. Sometimes, these contractors are specified by the owners themselves. In such cases, they are called nominated subcontractors.
After going through the tender documents and studying the scope of work, the general contractor splits the entire bill of quantities into two broad heads — one that would be performed by the general contractor himself, and the other that would be performed by the subcontractors. The subcontracting involves selection of subcontractors, inviting quotations from them, and selecting the most suitable rates for the subcontractors. The first set of role played by the subcontractor ends here.
The next important role is played out after the award of the contract in favour of the general contractor. At this stage, some general contractors re-invite the quotations from normally those subcontractors who had participated during the tendering process. Out of these subcontractors, the most suitable subcontractor is selected and the work awarded to him by issuing the work order by the general subcontractor.
During the execution, subcontractor’s measurement is made and he is paid according to the agreed terms and conditions. At the end of the total scope of work in the subcontract, the general contractor prepares the final bill, does reconciliation and closes the contract. The process described here is the usual process adopted in the industry for subcontracting. Some issues related to subcontracting are discussed below in detail.
5.7.2 Selection of Subcontractors
The process adopted for subcontractor selection is similar to the general contractor selection process adopted by an owner, though the process may not be rigorously followed. It consists of floating enquiries, collecting quotations, evaluating and short-listing subcontractors.
Similar to the contractor selection methodology adopted by owners, the main contractor also lays down some criteria for selecting his subcontractors. These criteria may include past experience of the subcontractor, technical capability to execute the work, mobilization capacity in terms of human resources and plant and equipment, financial capacity, the quality of works executed in the past, record in terms of working relationships with the main contractor, record of work safety and workers’ welfare, and capability to chalk out construction methodology and work as per the same. Indeed, the rate offered by subcontractors is an important criterion as well.
The general contractor may also wish to inspect the facilities of subcontractors, if required. Finally, the rates submitted by the subcontractors are negotiated. Before negotiating the rates, the general contractor usually prepares his own estimates for the subcontracted items.
Usually, these estimates are a rough order of magnitude estimates based on past experience, existing rates in the project locality, or productivity. However, if required, the general contractor may sometimes carry out a detailed rate analysis of the subcontracted items as well. This helps him in comparing the price quoted by the subcontractors for these items. While negotiating on the subcontract after the general contractor has been awarded the contract, he also keeps the tender provision in mind.
Further, the registration of the subcontractors with the provident fund (PF) and sales tax (ST) authorities are also noted.
5.7.3 Work Order
Once the subcontractor has been finalized for a work, work order is prepared. This is a legally binding agreement between the main contractor and his subcontractor, and should be treated as a sacrosanct document in order to avoid disputes at a later date. The preparation of work order should be given considerable thought and all the terms and conditions clearly spelt out.
Table 5.3 Tax and deductions
1.1% to 2.2% for specialized subcontractor
The work order should contain scope of work (what it includes and what it does not), clear and unambiguous specification, relevant drawings, provision of samples, mock-ups and inspection, and clear mobilization and delivery programme/schedule. The work order should mention the mode of measurement as many a time, disputes arise due to ambiguity in mode of measurement.
It should also mention all the taxes and deductions that are applicable. The taxes and deductions are made to account for income tax, workmen compensation, administrative expenses and retention money. Table 5.3 shows typical details of taxes and deductions that are usually there in a work order. The amounts shown may vary from company to company, and from work order to work order.
There can be a number of types of work order issued to a subcontractor. The work order may be a running work order; a first and final work order; a labour supply work order; a work order for individual bill of quantity items such as concrete, erecting and dismantling scaffolding, formwork and reinforcement; or even a work order for non-bill of quantities activities such as construction of temporary structures, housekeeping and miscellaneous repairs.
Before issuing the work order to the subcontractor, it has to be approved by the competent authority within the general contractor organization. Depending on the value of the work order, different levels of management personnel such as resident engineer, construction manager, or project manager are given authorization to approve a work order within a general contractor organization. Work order is issued after getting their approval. Sometimes, it may be required that work orders are issued to a subcontractor who is not the lowest bidder; in such cases, the specific reasons for doing so should be mentioned in order to get the approval of the competent authority.
5.7.4 Terms and Conditions
The following terms and conditions are usually mentioned along with any subcontract to spell out the obligation and responsibility of each party (general contractor and subcontractor) to the subcontract. These are:
- Performance guarantee to be deposited by the subcontractor
- Commencement and completion dates
- Applicable taxes and duties on works contracts, insurance, value-added tax and income tax deduction
- Variation in rate
- Site working and access
- Method of measurement
- Variation in scope of work
- Liquidity damages
- Maintenance and defect liability period
- Payment terms
- Obligation towards labour
- Subcontractor’s obligations and responsibility
- Facilities to be provided by general contractor
- Arbitration clause in case any dispute arises
5.7.5 Subcontractor Management—Some Guidelines
Subcontractors are important team members for any multidisciplinary project. It is important that mutual trust and faith exist between the general contractor and the subcontractors. Although there are instances of bitter fight among them during execution, it is essential to maintain good coordination not only among the general contractor crew and the subcontractor, but also among different subcontractors working at a project site. The process of managing the subcontractor right from their selection till the subcontract is closed out is essential for the success of a project, given the fact that in some projects more than half of the project value is subcontracted.
Screening of subcontractors is an essential first step in subcontract management. Care should be taken that run-of-the-mill and fly-by-night subcontractors are not selected even if the rates offered by them are relatively low. These subcontractors do not show any commitment towards the subcontract assigned to them, and they run away at the slightest instance of loss in sight during the execution of contract. It is always better to lay down a set of guidelines for subcontractor selection. Only those subcontractors should be encouraged who have registered themselves with the provident fund and income tax authorities. It is preferable to maintain a data bank of subcontractors who have left the subcontract in between and have been blacklisted in some other project sites.
Once a subcontractor has been selected, and his rates negotiated, it is a good practice to get the performance security from the subcontractor as well as get the work order signed from the competent authority, before the work is started at site by the subcontractor. These actions save a lot of harassment later during the execution and payment stage.
In order to maintain better coordination at sites, it is preferable to award the subcontract to a single subcontractor which involves interface at work. For example, a single subcontractor should be engaged for formwork, reinforcement and concreting, since it becomes very difficult to coordinate, say, three subcontractors for the purpose. The involvement of a number of subcontractors for these operations results in idle time for one or the other subcontractor, leading to different kinds of dispute at the time of payment.
During the execution of the subcontract, the representative of the general contractor should ensure that necessary fronts are released and all inputs given to the subcontractor to avoid idling of the subcontractor’s crew. The work carried out by the subcontractor should be promptly measured and bills of the subcontractor promptly made. These things keep the subcontractor motivated enough to get involved with the work and show his commitment. Further, before making payments the general contractor should also ensure that the workmen of the subcontractors are paid their due. No miscellaneous measurements shall be made by site engineer for adjusting any payments, as this sets a wrong precedence and subcontractors try to take advantage of it.
General contractors do engage some labour from the subcontractor on supply basis, in which the number of labour days is counted for making the payment. As far as possible, this practice should be avoided since it is very difficult to monitor the productivity of the supply workers. Subcontractors sometimes even engage physically unfit workers as well as some child workers for these supply works, exposing them to hazards of construction activities.
Finally, all the final bills pertaining to a subcontract should be prepared before the closing of site.
1. Central Public Works Department (CPWD), http://www.cpwd.gov.in.
2. Federation Internationale des Ingenieurs Conseils (International Federation of Consulting Engineers), FIDIC, http://www.fidic.org.
3. Harris, F., and McCaffer, R., 2005, Modern Construction Management, 5th ed., Blackwell Publishing.
4. Indian Contract Act (1872).
5. Lutz, J.D., and Halpin, D.W., 1992, ‘Analyzing linear construction operations using simulation and line of balance’.
6. Schexnayder, C.J., and Mayo, R.E., 2004, Construction Management Fundamentals, Singapore:
- State whether True or False:
- When time is the essence of contract, the completion time can be extended.
- When time is the essence of contract, liquidated damages clause can apply.
- When time is the essence of contract, penalty can be charged for delayed completion.
- When time is the essence of contract, full payment by employer is delayed.
- The agreement is voidable under Indian Contract Act when both parties are under mistake.
- The agreement is voidable under Indian Contract Act when awarded without consideration.
- The agreement is voidable under Indian Contract Act when the objective is unlawful.
- The agreement is voidable under Indian Contract Act when agreement is without free consent.
- Explain the common types of engineering contracts and compare the following types of contract:
- Item rate contract v/s lump-sum contract
- Cost plus contract v/s turnkey contract
- What is pre-qualification of contractors, and what criterion is applied for taking a decision by the client? Suggest weightage rate for merit rating.
- Write short notes on CPWD contract conditions and special conditions of contract.
- How is a contractor normally qualified to carry out certain types of work for government’s departmental work?
- What are the conditions of contract in a contract document? Why is it recommended to use standard forms of contract? What are the matters to be defined in the conditions of contract? Elaborate.
- What are the contents of a tender document? Enumerate the complete tendering procedure with illustrations.
- Write short notes on (a) price escalation clause and (b) liquidated damages and penalty.
- Explain the necessity of involving private participation in infrastructure development. What are the structure and salient features of BOT form of public–private partnership? You may explain with the background of road construction on BOT basis.
- What is a bid? How is it submitted? What are the various stages and types? How does the presentation of the bid and its evaluation take place?
- What is the content of specification? What are the different types of specification?
- What are the criteria that ensure validity of a contract?
- Discuss in brief different contract documents.
- Collect a few contract documents and list out the common general contract conditions.
- Analyse some special contract conditions for a few projects being executed in and around you.
- What do you mean by bill of quantity and how is it important for a construction project? Prepare a bill of quantity from the set of drawings for a project under construction in your locality.
- Discuss different categories of contract in detail and differentiate them with respect to their important characteristics.
- Differentiate between design–build, BOT and turnkey contracts.
- What is meant by earnest money deposit?
- Why do general contractors use subcontractors rather than performing all the work on a project?
- What risks do general contractors incur by using subcontractors?
- Why might a project manager require performance and payment bonds from a subcontractor?