Procurement & Contract Management

1. Defining a Contract
2. Contract Type
3. Contract Framework
4. Contract Preparation
5. Contract Award
6. Contract Administration
7. Contract Management Best Practice

Defining a Contract
Contract is a binding agreement between two or
more parties to perform or not to perform a task /
affair
A binding agreement is legally enforceable by governing Law. A
contract must exhibit clearly the OFFER, ACCEPTANCE and the
CONSIDERATION

Elements of a Contract
Following is the list of six conditions that must be fulfilled by the
contracting parties to ensure a formation of a legally binding
contract.
1. An Agreement
2. Competent Multiple parties (two or more)
3. Genuine consent / assent of the contracting parties
4. Supported by the Consideration
5. A legal objective / goal
6. In form required by the applicable law
There must be an agreement. The contracting parties must be
competent in getting into an agreement. Every party must
possess required mental capacity (i.e. not mentally impaired),

Every party must possess legal capacity (i.e. not children). The
objective that has planned to be achieved / the commodity to be
procured through the contract must be legal (i.e. must not be
marked to be illegal by the governing law, or terrorism, drugs
etc.). Every party must display genuine consent of getting into
the contract. (I.e. no party has been forced into the contract by
blackmailing etc.). The contract should be supported by the
consideration. The consideration must be of a fair value to the
receiving party.
The contract must clearly define the rights and obligation of
the parties to the contract.
It is NOT necessary for parties to have negotiations prior to
getting into a contract (E.g. There are non-negotiable
contracts like EULAs of software vendors etc.)
It is NOT necessary to have the contract in written form.
However, there are contracting situations where it is
required to have the contract in written form (E.g. Land
Dales, Copy Right etc.) Handshake would be enough to
form a contract.
If a written document is there, the written document is NOT
necessarily required to be consistent with parties
negotiations
If a written document is there, the parties should NOT
necessarily have read and understood it.
A signature is NOT necessarily be in the place
It does NOT matter whether the terms and conditions of the
contract are fair and reasonable.
A Contract is NOT necessarily be reviewed and approved by
a Lawyer / Attorney. However if you can have an attorney, it
would be nice.

It is NOBODYs responsibility to step into the contract and do the

needful to rescue YOU from horrible consequences of a contract
for a bad / illegal / unfair deal. It is your responsibility to do prior
research and being ensured that it is safe to engage in a
contract.

The Metaphor

A Contract can be seen as the OWNERS MANUAL of the

relationship between the contracting parties
The goal of a contract is for the parties to have thought through
about their relationship, transactions and objectives and they
come to a true meeting of their mind.
The more the parties can think it through and clarify as much as
possible the mutual rights and obligations of the parties upfront,
there will less likely for disputes to occur in the course of the
execution of the contract
The biggest source of contract disputes is caused by not
meeting the minds of the parties. During the period within the
contract is being formed, the parties may have assumed
responsibilities of the other party (and vice versa) and have
caused inevitable disputes during the execution of the contract.

SoWhat should be in a contract?

Who?

The parties
beneficiaries

are mentioned,
(if any)

3rd

What?

The rights and obligations of the parties

party

Where?

The place of the performance of the contract

(Not seen in every contract. It is not necessary to incorporate the
location of performance of the agreed contractual works in to the
contract document)

When?

Why?
How?
How
much?
What if?

This is very important. This states the duration

of the contract, expiration, renewability,
automatic renewal unless cancelled, deadlines,
milestones, and other time related aspects of
the contract
The general goal of the contract
The method of performance
Who is being paid? Payment terms? How big
the payment is?
What are the remedies if the contract is
breached? Can parties sue each other?

A Contract is NOT a legal document. It is a Business

Document that is enforceable by the law.
All above W questions are Business questions. Not law
questions.
In the heart of a contract, there is a business deal. The lawyer
has to nothing in connection with the business matters. Lawyers
do not know what the business deal actually is. However, when
drafting a contract, a lawyer / attorney can assist you.
You are the one who should be thorough on the contracts
content. If you have not precisely specified what you need, the
other party may provide anything at their convenience.
Eventually, you will end up with not getting what you wanted
genuinely.
There is famous quote;
You do not get what you deserve. You get what you negotiate
Therefore it is extremely important to specify your requirements
(or ensured that your rights) are precisely laid out in the
contract.
In addition, the other thing is you can literally negotiate any
contract even though it is not meant to be negotiated.

There is NO MAGIC language the key is just to be CLEAR AND

COMPLETE as much as possible, to avoid misunderstandings
and disputes
If there is a dispute, its not what you think the contract says. It
is usually what an outsider (like a judge), thinks the contract
says usually by looking only within the four corners of the
contract it self

Watch Out for This

ENTIRE AGREEMENT CLAUSE

This Agreement contains the entire agreement of the parties
with respect to its subject matter and supersedes all prior
negotiations, agreements, and understandings with respect
thereto. This Agreement may be amended only by a written
document duly executed by both parties
In contract law, an integration clause, merger clause,
(sometimes referred to as an entire agreement clause) is a
clause in a written contract that declares that contract to be the
complete and final agreement between the parties. It is often
placed at or towards the end of the contract.
This clause negates the effects of various prior negotiation,
communications between contracting parties, which have not
been included (however which were supposed to be included) in
the final Agreement. Existence of such effects is not favorable to
the successful execution of the contract hence should be
eliminated since they can provide sources for contract disputes.
A contract that has such a clause may be deemed an integrated
contract.

Procurement route
Contents
1) Construction management
2) Custom build
3) Design and build
4) Design build finance and operate (PPP / PFI / DBO / BOOT)
5) Emerging cost contracts
6) Engineering procurement and construction contract (EPC) / turnkey contract
7) Engineering procurement and construction management contract (EPCM)
8) Fast-track construction
9) Furniture, fixtures and equipment (FF&E)
10)

Framework agreements

11)

Guaranteed maximum price

12)

Lump sum contract

13)

Management contract.

14)

Measured term contracts

15)

Measurement contract (re-measurement or measure and value contract)

16)

Partnering

17)

Prime cost contract / cost plus contract / cost reimbursable contract

18)

Prime contracting / prime-type contracting

19)

Public procurement

20)

Schedule of rates term contract

21)

Self-build

22)

Single-stage tender

23)

Traditional contract (Design-Bid-Build)

24)

Two-stage tender

Introduction
Procurement is the process of purchasing goods or services.
There are many different routes by which the design and
construction of a building can be procured. The selected
procurement route should follow a strategy, which fits the
long-term objectives of the client's business plan.
When determining the appropriate procurement route, following
are considered:

Speed

Cost

Quality

Specific project constraints

Risk

Asset ownership

Financing

Construction management
Construction management is a procurement route in which the works are
constructed by a number of different trade contractors. These trade contractors are
contracted to the client but managed by a construction manager. The construction
manager, acts as an agent for the client, administering and co-ordinating the works
contracts.
The construction manager is generally appointed early in the design process so their
experience can be used to improve the buildability and packaging of proposals as they
develop.
For more information see: Construction management.

Custom build

Custom-build homes are a less 'hands-on' variation of self building in which the
prospective home owner works with a developer that can take on the design and
construction of the home on their behalf and may help find and acquire a site and
arrange finance.
See Custom-build home for more information.

Design and build

Design and build is a procurement route in which the main contractor is appointed
to design and construct the works. Design and build can be attractive to clients as it
gives a single point of responsibility for delivering the project.
Design and build projects can follow either a single-stage or two-stage tender
processes.
For more information see: Design and build.

Design build finance and operate (PPP

/ PFI / DBO / BOOT)
A single contractor (perhaps a special purpose vehicle (SPV), with design, construction
and facilities management expertise as well as funding capability) is appointed to
design and build the project and then to operate it for a period of time. The contractor
finances the project and leases it to the client for an agreed period (perhaps 30 years)
after which the development reverts to the client.
Variations include: Design Build Operate (DBO) and Build Own Operate Transfer
( BOOT).
An example of a design build finance and operate procurement route is Public
Private Partnership (PPP), the most common form of which is the Private Finance
Initiative (PFI).
For more information see: Design Build Finance and Operate, PFI and PPP.

Emerging cost contracts

An emerging cost (Time and Materials or T&M) contract is a management contract for
works and services where the management contractor is paid direct costs identified in
an 'estimate of project costs'. It is often applied over a certain period of time. This
means that design and workmanship should give greater consideration to long-term
performance issues. Emerging cost contracts are often used on projects such as
railway infrastructure contracts. They provide for sophisticated management services
along with sub-contracting the construction of the works.
For more information see: Emerging cost contract.

Engineering
procurement
and
construction contract (EPC) / turnkey
contract
EPC contracts, sometimes called turnkey contracts are similar to design and build
contracts, in that there is a single contract for the design and construction of the
project, but generally with an EPC contract, the client has less say over the design of
the project and the contractor takes more risk. Generally, EPC contracts are used on
engineering and infrastructure projects, where the aesthetics of design might be
considered less important than performance and cost certainty.
For more information see: Engineering procurement and construction contract.

Engineering
construction
(EPCM)

procurement
and
management contract

EPCM contracts are similar to EPC contracts (see above), but the client employs the
necessary trade contractors to construct the works. The 'contractor' acts as a
construction manager, managing the trade contractors. Effectively they are
performing the roll of a consultant during the construction phase.
For more information see: Engineering procurement and construction management
contract.

Fast-track construction
Typically associated with construction management and management contract
projects, fast-track construction overlaps project tasks (such as design and
construction) to reduce the overall project duration.
For more information see: Fast-track construction.

Furniture,
(FF&E)

fixtures

and

equipment

FF&E refers to the procurement of Furniture, Fixtures and Equipment. This might be
procured separately to the main construction contract, particularly by clients that may
already have systems in place for procuring fixed and loose furniture, fittings and
equipment, for example schools or hospitals. It is very important under such
circumstances to define which contract every element of FF&E is within. It is also
important to ensure that any building work required for installation is identified and
procured, that any services required are identified and that installation is properly
integrated into the main contract.
For additional information see: Furniture Fixtures and Equipment.

Framework agreements
Clients that are continuously commissioning construction work might want to reduce
timescales, learning curves and other risks by using framework agreements. Such
arrangements allow the client to invite tenders from contracts to be carried out over a
period of time on a call off basis as and when required.
For more information see: Framework contract.

Guaranteed maximum price

A guaranteed maximum price (GMP) is a form of agreement with a contractor in which
it is agreed that the contract sum will not exceed an specified maximum. Typically this
is a mechanism used on design and build contracts where the contractor has
responsibility for completing the clients design and for carrying out the construction
works, so they are in a good position to control costs.
For more information see: Guaranteed maximum price.

Lump sum contract

A lump sum contract is the traditional means of procuring construction, and still the
most common form of construction contract. Under a lump sum contract, a single
lump sum price for all of the works is agreed before the works begin. It is generally
appropriate where the project is already well defined when tenders are sought and
changes are unlikely. A lump sum contract is not a fixed price. There is more certainty
over the final cost, but there are still mechanisms that allow the contract sum to
change.
For more information see: Lump sum contract.

Management contract.
A management contract is one where the works are constructed by a number of
different works contractors who are contracted to and managed by a management
contractor. A management contract structure is similar to a traditional contract,
however, instead of taking the risk associated with a fixed price, the management
contractor is reimbursed the amounts paid to works contractors, and is paid a fee
usually in the form of a percentage.
For more information see: Management contractor.

Measured term contracts

Measured term contracts are used where the client has a regular programme of works
that they would like to be undertaken by a single contractor. They are generally used
for minor works or for maintenance work.
For more information see: Measured term contract.

Measurement
contract
(remeasurement or measure and value
contract)
Measurement contracts (sometimes called 're-measurement' or 'measure and value'
contracts) can be used where the design, or type of works can be described in
reasonable detail, but the amount cannot. For example, excavation, where the
quantity required is difficult to assess until after the works have begun. The contract
sum cannot be determined when the contract is entered into, but instead is calculated
on completion based on re-measurement of the work carried out.
For more information see: Measurement contract.

Partnering
Partnering arrangements are intended to enable full integration of design,
construction and operation. Partnering arrangements are linked by bi-party contracts
and can include contractors, suppliers and specialist designers. Collective and
individual incentive schemes for delivery can be included in cost reimbursement and
fee payments. Partnering requires heavy involvement from the client acting as
employer and adjudicator of disputes.
For more information see: Partnering.

Prime cost contract / cost plus

contract / cost reimbursable contract
Prime cost contracts are sometimes called cost plus contracts or cost reimbursable
contracts. They might be used where the nature or scope of the work to be carried out
cannot be properly defined at the outset, and the risks associated with the works are
high. They are often used where an immediate start on site is required, for example
for urgent alteration or repair work. Tendering proceeds based on an outline
specification, any drawings and an estimate of costs. The Contractor is paid the prime
cost (the actual cost of labour, plant and materials) and a fee for overheads and profit.
For more information see: Prime cost contract and Cost reimbursable contract.

Prime
contracting
contracting

prime-type

Prime contracting is a form of procurement in which the client enters into a long-term
relationship with a contractor who provides a single point of contact (prime contract)
for a supply chain to deliver one or more projects. This is one of the three
procurement routes recommended by Government Construction Strategy for
publicly-funded projects (where it is described as prime-type contracting).
For more information see: Prime contract.

Public procurement
The Common Minimum Standards, referred to in the Government Construction
Strategy, state that '... Procurement routes should be limited to those which
support integrated team working (PPP/PFI, Design & Build, the Prime-type Contracting
approach and framework arrangements...).' Under each of these, the client appoints a
single integrated supply team (including designers, contractors, suppliers and perhaps
facilities managers) based on an output-based specification before design
commences.
Public projects or publicly-subsidised projects may be subject to OJEU procurement
procedures.
For more information see: Public procurement, OJEU, PFI, Private developer scheme
and Crown build.

Schedule of rates term contract

This form of contract is normally used when the nature of work is known but cannot be
quantified, or if continuity of programme cannot be determined. In the absence of an
estimate, tenderers quote unit rates against a document that is intended to cover all
likely activities that might form part of the works. Indicative quantities may or may
not be given to tenderers but do not form part of the contract.
For more information see: Schedule of rates term contract.

Self-build
Self building is an alternative to the traditional model of house building in the UK.
Traditionally, houses are built speculatively by a developer, and then people buy them
and move in. With self building, the prospective home owner instigates the
development of the home themselves, whether by purchasing a kit house, employing
a design and build contractor, employing consultants (such as an architect) and a
contractor, or managing the entire process and ordering all the goods and services
required themselves.
See Self-build home for more information.

Single-stage tender
Single-stage tendering is the traditional route for procuring in the construction
industry. It is used when all the information necessary to calculate a realistic price is
available when tendering commences and so the complete contract can be awarded
based on tenders received.
For more information see: Single-stage tender and Two-stage tender.

Traditional contract (Design-Bid-Build)

The 'traditional' procurement route (sometimes referred to as design-bid-build) is a

single-stage, fully designed project where the design is developed in detail by a
consultant team working for the client and a contractor is then appointed under a
lump-sum construction contract which includes penalties for late completion. The
contractor may have no responsibility for any design other than temporary works.
For more information see Traditional contract.

Two-stage tender
Two-stage tendering is used to allow early appointment of a contractor, prior to the
completion of all the information required to enable them to offer a fixed price. In the
first stage, a limited appointment is agreed allowing the contractor to begin work and
in the second stage, when more detail is available, a fixed price is negotiated for the
rest of the contract.
It can be used to appoint the main contractor early, or more commonly as a
mechanism for early appointment of a specialist contractor such as a cladding
contractor. It may also be adopted on a design and build project.
For more information see: Two-stage tender.

Procurement Routes
1. Traditional: Lump sum
2. Traditional: Re-measurement
3. Design & Build
4. Construction Management
5. Management Contracting
6. Partnering
7. Public Private Partnerships (PPP)
8. Other

Traditional (lump sum)

1. A Separate approach, i.e. Non-collaborative stake holders
2. The contractor assumes the responsibility and financial risk
for constructing the project in accordance with the design
produced by the employers team of professional
consultants, for the agreed contract sum and within the
agreed contract period.
3. The employer bears the responsibility and risk for the
design and performance of the team of professional
consultants.
4. The fixed price lump sum is what the employer will pay to
the contractor for carrying out the works described in the
construction contract.
5. Contract piece can be changed because of;
a. Variations: if the employer requests changes to the
project during its construction
b. Claims: if certain events that are specifically stated in
the construction contract to entitle the contractor to
more money, e.g. employer delays to the project
c. Price Fluctuation: by the inclusion of fluctuations
clauses, which allow the contractor to claim increased
costs of materials and/or labor

6. Hence the final contract sum that is paid to the contractor

may be higher or lower than the original contract sum
stated in the construction contract
7. Projects with CDPs (i.e. Contractor Designed Portions) will
still be considered as Traditional Contracts (Not Design &
Build Contracts.) CDPs may frequently be Piling works,
Audio Visual Installation, BMS Installations, other works that
need specialists design
8. Even though projects with CDPs are still considered
Traditional, they demand certain additional requisites from
the contractor for the specific CDP (as opposed to pure
traditional contracts)
a. Take out and maintain professional indemnity (PI)
insurance
b. The contractor should grant the employer a Copyright
license to use the contractors copyrighted material for
his CDP
c. The contractor should provide the employer a
warranty assuring that the contractor will display the
best professional competency and skill in designing the
CDP

PROFESSIONAL INDEMNITY INSURANCE

Important
for
design
consultants
/
professionals and Design & Build contractors

construction

It is widely used where professional services are being

provided to a developer or contractor
PI insurance provides insurance cover against claims of
professional negligence

 It will cover up to a specified insured sum where negligence

is proven to have been committed on the part of the service
provider
Size of the insured sum depends upon the size and type of
the business, nature of the professional services
For the professional who obtains the insurance, the policy
will also cover the cost of defending claims of negligence
made against it, if the professional has paid the initial
additional amount mentioned in the policy.

 The policy will not usually provide cover against allegations

of;
o
o
o
o

Criminal behavior
Non-negligent workmanship
Deliberate intention of wrongdoing
Incidents that has occurred before the date of obtaining
the PI insurance

The scope of policies can vary greatly and the policy should
be renewed annually.
Policy extensions can be provided to provide cover against
employee theft (fiduciary cover) and breach of duty.

Design & Build

1)A contractor is appointed to design and construct the
works, as opposed to a traditional contract [where the
client appoints consultants to design the development and
then a contractor is appointed to construct the works]
When Are Design Build Contracts Used?
Primarily, design-build is used when owner to save time
by having construction begin before the final design has
been completed. The traditional system of design-bidbuild has been used for many years. It is based on the
assumption that the owner has fully completed the design
before bidding out the construction on a project. Many
projects could be more cost-effective if they could
2)Design and build can appeal to clients as it gives a single
point of responsibility for delivering the entire project.
3)However, some clients consider it is only appropriate for
simple projects, where design quality is not the main
consideration.
4)The contractor can be appointed to carry out all of the
design and execution of works
5)Alternatively, if the client needs to have a greater control
over the design, a concept design and outline (or
performance) specification can be prepared by a
consultants employed by the client, and then the
contractor is appointed to complete the design and
carry out the construction.
6)The contractor may use his own in-house designers to
design the building, or he can appoint consultant
designers, or the client's designers can be employed
by the contractor to complete the design (either by
novation or consultant switch).

7)If the contractor is appointed at the beginning of the

project, expecting that the contractor can contribute to the
development of the design from the beginning,
a. Contractor may be appointed through a two-stage
process.
b. In the first stage, the contractor is selected based on
a fee, preliminaries, overheads and profit. They
then work with the design team (who may be employed
either by the contractor or by the client at this stage) to
develop the design.
c. Based on this design, a fixed price is negotiated for the
second stage; construction, when the design team may
be novated to the contractor if the contractor does not
already employ them.
8)There is a tendency that governments of many
countries to prefer Design and build as a better
procurement route since it allows a fully integrated team to
work together on the project from the beginning eliminating
the waste of public funds for which they are accountable.
9)Design and build contracts can be awarded on a
fixed-price, lump-sum basis, but price certainty is then
dependent on not making any subsequent changes as these
could prove to be expensive as prices charged by the
contractor for those changes will not be subject to
competition.
10)
It is very important therefore that the client gives a
great deal of attention to the preparation of
employer's requirements.
11)
If any designers appointed by the client are novated or
switched to work for the contractor, the client may then
wish to appoint independent client advisers to review
contractor's design proposals, administer the contract and
monitor works on site.

Design-Build Characteristics
Typically, the owner prepares a request for qualification (RFQ)
where sources are analysed under fair competition based on
certain criteria and weighed factors. A design-build contract
is usually the preferred contracting method under a tight
schedule as it has intended to save time.
Preferred when it needs fast track schedules as the final project
can be obtained faster, and the return on investment (ROI) is
capitalized sooner.
Using a design-build contract, designers and builders work
hand-in-hand to produce construction drawings and analyse a
logical construction sequence.
Usually, the design process is scheduled in phases, just as the
builder is ready to start that particular phase.
Design-Build Advantages
Design builds contracting offers the following benefits:

Reduces design time (with Fast track schedule)

Simplifies construction drawings

Value engineering alternatives are always up for discussion

and analysis

Minimizes communication channels with single point of

contact.

Minimal change orders

Customized to actual site conditions easily

Identify long lead items earlier

Allows the project to be repeated

Design-Build Drawbacks

Design build contracts can also produce some downsides to

consider:

The project outcome might not produce the expected result.

A project that is not scheduled

substantially delayed. Why???

The contract does not affect labour costs. why???

Final costs can be reasonably higher than original estimates

some conflicts might appear between the contractor and

the design team???

The architects
contractor.???

If the projects inspector and team are not experienced,

problems could become frequent and costly repairs will be
needed???

vision

could

properly

appear

to

might

favor

be

the

Variations to the pure Design-Build Concept

1. Bridging: The owner develops a preliminary project design
at a level of 30-50 present.
2. Turnkey: The owner requires outside expertise and then
allows the entity to turn over the keys at project completion.
3. Design-Build-Warranty (D-B-W): Combines a warranty
provision with design-build.
4. Design-Build-Maintain (D-B-M): Combines maintenance
provisions with design-build.
5. Privatization: A private entity designs, builds
maintains a section of roadway in turn for a toll or fee.

and

Design Build: Insurance Problems

Issues relating to insurance and bonding affect the
relationship between the
design-build
parties.
Design
professionals errors and omissions insurance (PI Insurance)
usually exclude construction services and contractors general

liability policies exclude professional services. Certain countries

have anti-indemnity laws for construction projects that limit the
parties contractual ability to redress this disparate impact. One
solution is appropriate cross agreements with the design
professional and the contractor, supported by the design
professionals errors and omissions insurance.
Design responsibility
Obviously, this resides with the contractor, although most forms
of contract assume that the client will have its own design team
produce "employer's requirements" and employ a contractor to
complete the detailed design.
The employer can ensure complete single-point liability for the
design by novating its design team's appointments to the
contractor. This has been dubbed "dump and build" because the
client dumps design liability on the contractor without allowing it
to contribute to the design process.
Contractors try to avoid implied liability for "fitness for purpose"
because if the contractor warrants that the building will be fit for
its purpose and it is not, the employer does not have to prove
negligence in the design or workmanship in order to succeed in
a claim.
But these efforts may be misguided, because if a contractor
knows a building's purpose, such a term will usually be implied
in a design-and-build contract. Without a specific exclusion of
fitness for purpose, no amount of tinkering with the words of the
contract will help.
Variations
The contractor has an obligation to complete the work; the cost
of "design development" - often a euphemism for items omitted
from the agenda - must be met
It is very difficult for a contractor that has underpriced a designand-build contract to recover. Under JCT81, for example, the
contractor has a general obligation "to complete the works", so
even if the client gives the contractor information that turns out

to be incorrect, the contractor will have to redesign at its own

expense, provided the employer was not negligent.
If the employer changes its mind about what it wants, it must
pay, but the cost of "design development" sometimes a
euphemism for items omitted from the tender must be met by
the contractor.
Delays
In practice, the scope for a contractor to obtain an extension of
time with loss and expense is severely curtailed. Under JCT81,
the contractor's task is "to complete the design for the works".
Even if the detailed design is sublet to specialists, the
substantial task of co-ordinating the various design elements
almost always resides with the contractor.
This is particularly onerous in design, manage and construct
contracts where the contractor, despite having sublet the
design, cannot easily pass down responsibility for delays caused
by its failure to co-ordinate drawings. In those circumstances, it
faces a liability for liquidated and ascertained damages that
would not be accepted by a design consultant in the same
position.
Other problems
Design consultants were once thought to be reluctant to work as
"subcontractors" to contractors, but relationships between
design-and-build contractors and their consultants have been
surprisingly harmonious, possibly because they are all working
towards the same goal.