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Chapter 1 [compatibility mode]

Procurement Management and Contract Administration

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Chapter 1 [compatibility mode]

  1. 1. Introduction Chapter One University Madawalabu Procurement Management and Contract Administration CoTM 4242 Instructor: Andualem Endris (M.Sc) College of Engineering, Construction Technology and Management Department
  2. 2. WHAT IS A CONTRACT? • Definitions • “An agreement enforceable by law is a Contract.” • “Every promise and every set of promises, forming the consideration for each other , is an Agreement.” • “The agreement must create legal obligations between the parties is an Enforceable.” • Contract: It is an undertaking by a firm or a person to do any work under certain terms and conditions. • Contractor: A person or a firm who undertakes any type of contract.
  3. 3. Definitions ...Cont’d • Construction contracts are the agreements between services providers (contractors) and the clients. • The client is the promoter or the project initiator. He develops a need for a structure, establishes his requirements and provides resources that are required for the realization of the project • The contractor assembles resources into the final product
  4. 4. Definitions ...Cont’d From a Legal Point of View:  Contract is a mutual agreement between two or more parties that something shall be done, an agreement enforceable at law. According to FIDIC:  Contract means the General Conditions, the Supplementary Conditions, the Specifications, the Drawings, the Bill of Quantities, the Tender, the Letter of Acceptance, the Contract Agreement.
  5. 5. History of construction contracts • Formal construction contracts have been around since 1870, J. Murdoch and W. Hughes (2001). • Between 1200-1600 AD construction work was undertaken by master craftsmen organized into guilds.
  6. 6. History of construction contracts ...cont’d • By 1800 AD the contracting system emerged and many works required designs to be complete, including estimates for materials and labour. • This marked the beginning of construction contracts as we know them today. • Need for contract comes with many short falls to be managed which can be termed as risks. The following are some of the risks:-
  7. 7. Construction risk • Owner’s risk is due to the following factors: • Will the contractor be able to carry out work as per specifications? • Can the work be completed within quoted cost and time? • Will the plant/project perform at the required level? • Will the contractor stay on job till its completion? • Will the contractor co-operate with the owner and rectify defects later? • Will the relationship continue? • Does he/she understand his/her intent fully?
  8. 8. Construction risk cont’d • Contractor’s risk is due to the following factors: • Termination of work before its completion • Prompt payments • Reimbursement for extra claims • Penalization for failures beyond his control. • Interruptions in progress and change of scope • Compensation for pure escalation.
  9. 9. Construction risk cont’d Other construction risks include 1. The unforeseen: • unexpected ground conditions • unpredicted weather conditions • a shortage of materials in the market • a shortage of skilled labour • accidents, whether by fire, flood or carelessness • innovative design that does not work or proves impossible to construct. • The length of the contract.
  10. 10. Construction risk cont’d 2. Projects vary in the time needed for completion, from days to years. During that time the risk allocation agreed at the time of contracting can change substantially. This is especially so with regard to the availability of materials and its costs. A contractor may have ‘bought’ the job because work was scarce at the time and the price of components was low.
  11. 11. Construction risk cont’d 3.The number of participants, and parties in the project and the corresponding length of contractual chain cause their own problems. The risk of insolvency increases, the longer the chain. 4.The particular relationship (often referred to as a triangular relationship of costs, time and quality) in which conflict is inherent. Contracting parties have different perceptions of how these factors of their relationship interact.
  12. 12. Construction risk cont’d 5.The interaction between liability for defective workmanship and for faults in design. Lack of coordination between design and construction is a common source of dispute. Much of the innovation in procurement systems of recent years stems from creating ways of minimising the effect of this clash.
  13. 13. Construction risk cont’d • Construction contracts are drawn to ensure duties, responsibilities and risks are shared and distributed amongst the project participants. The use of standard forms of agreements has been developed and generally adopted in the construction industry to help guide the relationships between the parties and also to ensure construction projects are managed in a sound and effective way. The adoption of a suitable form of agreement, its implementation in executing the work until project close out is the object of construction contract administration.