Definition of a Contract
The term contract can be defined as an agreement that is enforceable by law.
Works contracts are different from other contracts.
Some of the special features of civil engineering works are:-
1. One-off projects – never the same, e.g. location, time.
2. Labour is transient and recruited on an ad-hoc basis.
3. Management team is freshly set up.
4. Dispersed in big geographical areas.
5. A tangible product results at the end of the contract.
6. It takes a longer period to complete the work.
7. It is performed in the open with exposure to the weather.
8. People with many specialties participate in its performance.
9. Payment is done in many stages.
The conditions of contract for works contracts should address the peculiarities like the above ones.
The main parts of a works contract
Letter of Acceptance
Memorandum of Understanding (if any)
Form of Bid
The Contract Data / Conditions of Particular Applications
Conditions of Contract
The Bill of Quantities
Conditions of Contract
These are a set of rules, agreed by the parties to the contract which govern their conduct.
Define the relationship between the employer and the contractor.
State explicitly what to do if the relationship is disturbed.
Define the apportionment of risk between the parties.
Define the rules under which one party is remunerated for the work done by it.
To prepare a set of conditions of contract one should think of all probable risks which can affect the execution of the works and write clauses to address them by apportioning these risks. It is a time-consuming exercise and many risks may be missed or they may be apportioned erroneously. The remedies suggested for these risks may not be commensurate with the level of risks. To overcome these difficulties, standard conditions of contracts are available. They contain the experience of many individuals who have participated in contract management.
While apportioning risks in works contract two principles are adhered to, namely;
Responsibility for risk is given to the party which can best manage that risk.
All other risks are given to the client since he is the initiator of the project.
Standard Conditions of Contract
There are many standard forms of contracts to tackle the performance of work contracts such as;
CIDA / ICTAD
With the acquisition of experience, the standard conditions of contracts have seen many revisions.
It is possible to disturb the balance found in the standard conditions of contract, by tinkering with them. But it is advisable not to disturb the balance in them, since this can result in the following:-
1. Higher bid prices
2. Disruption of the project implementation
3. Non-participation in the bidding process by genuinely serious contractors
4. Award of contract to a bidder who has not understood his responsibilities properly
5. Poor quality of work
6. Delayed completion
7. Unsatisfactory relationship between the Client and the Contractor
8. Frivolous claim by the Contractor
9. Frequent disputes
10. Termination of the Contract by non-performance
Since most of the works contracts performed in Sri Lanka are based on the CIDA / ICTAD conditions of the contract, we will look into them more deeply:-
There are four versions of Standard Conditions of Contract available under CIDA / ICTAD. They are for;
1. Major Works – Large scale contracts – recommended for contracts over LKR 100 million.
2. Works for Medium scale contracts – recommended for contracts between LKR 10 million to 100 million.
3. Works for Minor contracts – recommended for contracts up to LKR 10 million.
4. Design and Build Contracts – where the contractor is responsible for the design and construction of the work.
We will look into the Conditions of Contract for Major Works only. (CIDA / ICTAD – SBD2).
Some important features of the ICTAD/SBD2 Standard Conditions of Contract
1. It caters to the scenario where the bulk of the design is done by the Employer or a consultant appointed by the Employer. In both cases, the Employer is responsible for the design. The Contractor also can be given a small portion of the design for which the Contractor takes responsibility. All the
Temporary Works are designed by the Contractor and he takes responsibility for them.
2. Presence of an entity that is not a party to the Contract, but who has wide powers in the day-to-day running of the Contract is recognized in the Conditions of Contract. In a works contract the contract is between two parties, namely the Employer and the Contractor. But the conditions of contract for work contracts extensively talk of the responsibilities of three persons. In addition to the parties to the contract, the conditions of the contract talk a lot about a person called the Engineer. This Engineer is there to supervise the work and certify the payment statements.
Even though the Engineer is employed by the Employer, the Engineer is expected to be fair and reasonable in his dealings with the parties to the contract.
3. This has two parts, namely General Conditions of Contract and Contract Data.
The General Conditions of the Contract contain general clauses. The Contract Data has project-specific data. The user is not expected to change anything in the General Conditions of Contract. Whatever he wants to change he can change in the Contract Data.
4. The risk allocation between the parties is well-balanced. The risks which can be best managed by the Contractor are made his responsibility and all the other risks are given to the Employer.
Applicable Law will determine to what extent the Parties are bound to carry out their contractual obligations. In Sri Lanka, the applicable law is always the Sri Lankan law.
The Contractor is expected to complete the works before the Time for Completion. If he delays the work the Employer is entitled to recover his damages by way of Liquidated Damages from the Contractor. The damage per day is predetermined and stated in the Contract Data. A maximum limit for the cumulative Liquidated Damages is also stated in the Contract Data. Even when the maximum Liquidated Damages are imposed on the Contractor, he is expected to fulfill his obligations.
The estimate of the damage shall be a genuine estimate at the time of forming the Contract. The Employer cannot get undue benefit by fixing the daily rate of this damage very high. If he does so, he may lose his right to impose the Liquidated Damages.
Liquidated Damages can be imposed in most breaches of contract. But in ICTAD/SBD/02 it is imposed on delayed completion.
Usually, Contractors prevent the imposition of Liquidated Damages by requesting an extension of Time for Completion, whenever an opportunity presents itself.
Extension of Time for Completion
Variations, exceptionally adverse weather conditions, unforeseeable shortages of goods and personnel, and delays attributable to the Employer are some of the reasons which give an entitlement to the Contractor for the extension of Time for Completion. The Contractor should claim for an extension of Time for Completion.
Granting of extension of Time for Completion may sometimes result in the payment of prolongation costs to the Contractor.
Refusing to grant an extension of Time for Completion may result in the arbitrator/court deciding that the Employer cannot impose the Liquidated Damages.
Under this Clause, the contractual terms are defined.
Unless the key contractual terms are properly defined, the tendency for disputes increases. Each party will try to interpret the meaning of words to its advantage.
Cost is defined as the expenditure incurred by the Contractor and includes overheads but excludes profit.
If the Contractor incurs additional expenditure by the failure of the Employer to give access to the Site, he can get the extra cost and reasonable profit. But if he incurs additional expenditure due to the presence of some unforeseeable physical condition he is entitled only to additional cost.
The defined words are generally distinguished by having their first letter written in upper case letters. Therefore if the same word is used with the first letter in upper case in some places and lower case in some other places, the difference is that the first case is that of a defined word and the other one is an undefined word. The words contractor / Contractor and cost / Cost are words with different meanings depending on the case of their first letter.
The Engineer is appointed by the Employer and his authority is specified in the Contract.
The Engineer’s authority can be curtailed by suitable adjustments in the Contract Data. The Contractor can assume that all the authorizations have been obtained by the Engineer. Examples of curtailment are the Engineer is not allowed to give variation orders above a certain amount. Each variation order is given a limit and above a cumulative limit he is not allowed to give any variation. In each case, he is expected to get the Employer’s permission before giving a variation order.
Engage in similar acts if needed.
Sub-Clause 3.5 says that the Engineer shall exercise his discretion impartially.
Only the simplest of works is completed as planned in the beginning. Changes have to be made to the original plans. The changes can be due to natural reasons, due to a change of mind of the Employer or the Contractor proposes it. When changes are ordered, it has to be addressed contractually without both parties being affected unreasonably.
The Engineer can initiate a Variation at any time before issuing a Taking over Certificate. He cannot issue any Variation Order during the Defects Notification Period. He can issue either a Variation Order directly or request a proposal from the Contractor for an intended variation order. The proposals are requested to assess the cost and time implications. The Contractor has the right to inform the Engineer that the Goods required to carry out the Variation Order are not readily available.
A Variation may include:-
Changes in quantities
Change in quality or other characteristics
Change in levels, positions, and dimensions
Omission of some items (such items cannot be executed by anybody else other than the Contractor subsequently)
Change in the sequence of the work
If the Contractor proposes any change the benefit of that change is divided between the Contractor and the Employer.
Any activity which has an element of interaction between human beings has a possibility of disputes. Contracting is no different. Therefore there shall be some safety mechanism in the conditions of contract to foresee disputes and a clearly defined method of resolving them.
A two-stage dispute resolution method is given.
The first stage is the adjudication and the next stage is arbitration.