Construction contracts, in infrastructure projects mainly refer to airports,
structures, bridges, roads, dams, ports, and other civil engineering activities.
Historical data suggests that in most government awarded contracts, particularly
of high value, the bidders tend to underbid so as to achieve the status of L-1
with an ultimate aim of subsequently claiming additional costs from the
The duration of such contracts may last for months or even years, and a midnight
or overlooked clause, or an unanticipated, underestimated, or miscalculated
aspect, can ensnare contracting parties in seemingly endless litigation
involving time and costs.
Faced with such significant risks, and given that a contract is an agreement
enforceable in law, both parties prefer to protect their interests by utilising
all available means and procedures.
Since agreements may expose the employer to risks of time and costs, the
procurement process is frequently guided by the employer's policies and
procedures. The procurement process begins with the employer's team deciding the
procurement route, after the project management team having determined the
sections of the project work that will be awarded to the contractors and
identified the kind of contractual obligations required from the contractors to
successfully execute the project.
The plan establishes the relationship between
the employer, the main contractor, sub-contractors, etc., as well as, a
procedure for resolving issues arising during the course of execution of the
work to meet the project requirements.
This article, in two parts, focuses on the different procurement routes and
factors that the employer and its advisers should consider while deciding on a
particular route in issuing the tender or finalizing the contract conditions.
First, the general concepts which broadly explains the principles for
consideration while selecting a procurement route; and second, it deals with the
practical application of a contract selection.
This part deals with commonly adopted procurement routes, standard form of
construction contracts for use prescribed by International Organizations.
It is necessary that only after identifying and analyzing all the factors
influencing the construction of a project viz. topography, weather and climate,
altitude etc. and its requirements, the employer or its advisors/consultants
should analyze the different procurement routes available, and the one that is
found to be the most suitable and beneficial to the employer should be selected.
The different procurement routes available to the employers are briefly
discussed as follows:
Under this method of procurement, a construction contractor is appointed by the
employer who is given the responsibility of successful construction of works
within the agreed scheduled timelines, in accordance with the designs provided
by the employer's team of design consultants, in consideration of the fixed
amount of contract sum. The design development and supervising the performance
of the main contractor is the responsibility and risk of the employer. As its
name suggests, such contracts by their nature are founded on a 'fixed price
lump-sum' basis, usually called the Contract Sum
The Contract Sum payable to
the contractor upon successful completion of the project remains fixed, except
for revisions upwards or downwards under certain circumstances that are also
envisaged in the contract viz. change in the scope of work, or issue of
variation orders necessitated for the benefit of the works. Such variation
orders may be contractor's suggested or employer's instructed – in either ways,
the contractor is duty bound to comply and execute the variations.
contractor would need to be compensated for the additional work that it is
required to undertake due to a variation order, which increases his work; and
correspondingly, if there is a saving for the contractor, then he would be
required to share the savings due to reduced scope of work, with the employer
after retaining his share of profits of such reduced scope of work. declared in
his bid documents.
Although there is separation of the responsibility of the construction and
design, at times the employer might ask the contractor to design a distinct
element of a project then it would be known as 'Contractor's Designed Portion or CDP'.
'Measure and Value' or 'Re-measurement'
The major difference between this method and the 'lump-sum' method is the basis
on which payments are made to the contractor for completing the works. A
re-measurement contract is founded on the principle that each part or portion of
the works that gets completed is measured and valued at the agreed rates. The
contractor is paid for the completed work that is certified by the employer's
officials. Under this method, the bill of quantities ('BOQ') is essentially a
rate schedule for each unit or item of work that becomes a part of the complete
works or project. The main advantage of this method over the lump-sum method is
that any change in the quantity of work is paid according to the pre-fixed
rates, and does not require any variation order to be issued by the employer.
Design and build
In this method the contractor takes the responsibility of both construction as
well as design development. To perform the combined roles of design and
construction, it is necessary that a contractor who is equipped with the design
development capabilities should be engaged. The contractor may either have its
in-house design team or may engage a professional design development team. In
order to ensure that the contractor fulfils the employer's requirements, it is
advisable for the employer to engage its own design consultant(s) to supervise
the design submitted by the contractor till their finalization process is
As the name suggests, the contractor is made responsible for executing the
project's design and construction work within the agreed-upon contract cost and
time frame. Under this method, the employer's team provides the contractor with
a basic or concept design at the time of entering into the contract, or even at
the tender stage. Thereafter, based on the concept design, the contractor
develops the detailed design for approval of the employer.
Till the basic design
is finalized and labelled as 'final design' the employer may make changes to the
design as per its needs. One of the most common point of discord that arises is
when the employer does not provide its comments to the design/revised design
within the period stipulated in the Contract, but initiates some change before
the finalization of the design, the contractor demands that the change made by
the employer to the design require issue of a 'change order' involving
additional time and cost, since the employer failed to provide its comments on
the design submitted within the requisite period, after which the said design
had deemed to have attained the status of a final design, though not declared as
such. It is possible that all disputes of such nature may not be resolved
immediately, and the contractor makes its cost claims against the employer once
the work is completed.
Construction and Management Contracting
The employer hires a design team (such as the architect, structural engineer,
and building services engineer), and alongside, a fee-earning construction
manager is hired to oversee, program, and coordinate the design and construction
activities, as well as to foster collaboration.
The construction manager helps the employer in selection of specialized
contractors (for example, for foundations, concrete, electrical work, or
decorating). The construction manager is given the charge of managing the
contractors, but he does not enter into any contracts on behalf of the employer,
unless he has been specifically authorized by the employer.
In this approach,
the construction manager is answerable to the employer for the proper
performance of its construction management services, and advises the employer on
the design and/or construction activities of the project performed by the
contractors. The construction manager is usually given the responsibility of
supervising the contractor's works by the employer, except to take decisions
involving time or cost, which are reserved with the employer.
In contrast, management contracting entails a hundred percent sub-contracting
by the employer. Every aspect of the construction project is subcontracted to
the works contractors through the management contractor. It is the
subcontracting element that sets management contracting apart from the
construction contracting, in which all agreements are made directly between the
employer and the contractors.
The amount paid to the management contractor is
the prime cost of the entire work under the management contract, along with the
management contractor's fee. The contract between the employer and the
management contractor can be perceived as a 'prime cost' or as 'cost
Partnering per-se is not a procurement route. It is a co-operative relationship
formed between business partners to improve performance in delivering projects.
The accurate meaning of partnering differs between parties, projects and
contracts, however, it can be applied on project-specific basis or as a part of
a multi-project relationship which would be for a longer time. Most common form
of partnership is the Public Private Partnership which is used by Government
agencies for construction of its projects. Salient features of such partnership
are briefly described below.
Public Private Partnerships (PPP)
Although Public Private Partnerships is an umbrella term, it typically means
when private entities enter into a partnership with a public sector/Govt. body
for construction, providing or supporting a public service. A key feature of PPP
is that the public sector transfers the development and financing risk and
responsibility to the private entity.
In exchange, after the asset is created,
the public sector/Govt. body pays a regular service charge to the private entity
for the duration of the contract term for the asset's operation. Typically, the
private entity is entrusted with the responsibility to develop/construct the
asset out of its own finds, but as per the requirements of the public/Govt.
body, and after a specified number of years, the possession of said asset is
transferred back to the public/Govt. body.
Ownership of the asset always remains
with the public/ Govt. body. The estimated amount payable to the private entity
over the period of defined term, known as the 'operation period' is sufficient
to cover the construction & operation costs, lender's charges, and profit of
the private entity. The payment model to the private entity differs from project
to project. It may be based on annual payment by the public sector or collection
of revenue by the private entity from the users of the asset.
makes provisions for all contingencies – during the construction or the
operation phase. In India, this mode of construction of assets, especially
infrastructure assets which require money and time, is being preferred from
1990's onwards particularly the roads and airports sector leading the pack.
Standard Form Construction Contracts
It is a normal practice for the construction contract to be based on a "standard
form construction contract" when establishing a project, particularly in
infrastructure development areas. These contracts are often developed by
industry organizations with the object of providing a set of ready-made standard
terms and conditions for employers and contractors to contract on.
Standard forms are mostly sector specific based on experience of entities in a
particular sector of the construction industry. The complexities and risks
involved in various construction and engineering sectors, as well as the
difficulty, if not impossibility, of attempting to create a single standard form
construction contract that could apply to the entire construction industry, have
led to the development of these various types of standard form construction
contracts. Other standard form construction contracts are created by specific
industry bodies or trade associations, and the risk distribution in those
contracts may be more favorable to those industry bodies or trade associations'
Most standard form construction contracts aim to assign risk to the party most
suited to handle it, but since this varies from industry to industry and sector
to sector, each standard form construction contract takes a different approach
to risk apportionment. As a result, just because a certain risk is treated one
way in one standard form construction contract, it may not be treated in the
same way in other standard form construction contract. Therefore, it becomes
necessary for the people involved in selecting a contract for a project to be
familiar with the risk allocation provisions of the different standard form
The most commonly used standard form construction contracts in the World and in
India are developed by FIDIC, which was founded in 1915 by Belgium, France and
Switzerland. FIDIC is the name given to the body of International Federation of
Consulting Engineers, headquartered in Geneva, Switzerland.
With reference to the construction agreements, the main purpose of FIDIC was to
create standard contracts that may be used for a variety of construction and
installation projects, on the assumption that constructing any project around
the world are based on similar principles governing the relationship of an
employer and contractor. These standard form contracts have been developed after
decades of experience in construction and installation projects, and take into
account in a balanced manner, the interests of both employer and the contractor.
FIDIC contracts are widely used internationally, including by the World Bank for
its projects. In 1999, first edition of the FIDIC 'Rainbow Suite' of New
Contracts was published. The commonly referred FIDC suites briefly are described
Silver Book form of contract is mostly used for EPC (Engineering, Procurement
and Construction) contracts and makes the contractor responsible to complete the
works on a 'turn of a key' i.e., 'turnkey' arrangement.
The Silver Book approach is suitable for large construction projects as it
provides a greater level of cost certainty in comparison with other forms. For
achieving this high cost certainty, the contractor is required to accept a
higher level of risk than what is attributed in other forms of contract.
employer transfers the risks of ground conditions to the contractor, with the
force majeure conditions being the exception. The Contractor assumes the
responsibility of the accuracy of requirements of the employer.
Due to the
presence of high level of risk for the contractor, the employer is required to
give sufficient time to the Contractor for its procurement programme so that the
contractor can obtain and consider all relevant information before entering into
the contract. The employer assumes the risks for war, terrorism and other force
majeure events. Other risks assumption by the contractor may be deviated before
signing the contract through the use of Particular or Special Conditions.
Under this form of contract, the contractor has the freedom to conduct his
activities in the manner he chooses, provided the work is in consonance with the
criteria specified by the employer. Therefore, the employer has only a limited
control over the work of the contractor.
In the Silver Book, there is no reference to an independent engineer as there is
less influence of the employer on the engineering aspects, however, the employer
may, for its own advisory engage a consultant to ensure that the contractor is
adhering to the design and engineering requirements set out in the contract. The
Silver Book provides for 'Tests on Completion' and 'Taking Over' only happens
place after successful completion of the tests.
The documents that normally form part of the contract documents are Contract
Agreement, Conditions of a Contract (Particular and General), Employer's
Requirements, Tender, etc.
The industry name given to the Conditions of Contract for Plant & Design-Build
for Electrical and Mechanical Plant and for Building and Engineering Works is
the Yellow Book. This form of contract is a Design-Build contract in which the
contractor has the responsibility of preparation of design as per the employer's
requirements as well as construction. The contractor has to fulfil his
responsibility in adherence to the requirements of the employer which may
involve any combination of civil, mechanical, electrical and/or construction
works. This is a lump-sum price contract and contains the provision for progress
payments based on the independent engineer's certification. This form of
contract is mostly used for electrical or mechanical plant projects and for
projects where the design and build method is required.
The contractor, under the Yellow Book form of contract, undertakes a
fitness-for-purpose obligation which covers design, along with material and
workmanship in construction.
The independent engineer carries out the supervision of the work and
administration of the project. He is responsible for the issue of instructions,
certification of payments and determination of completion. The engineer also has
the responsibility to consult with the parties in case of a dispute, and try to
settle the same.
The documents in a Yellow Book form of contract, are the Contract Agreement,
Letter of Acceptance, Tender, Addenda (if any), Conditions of Contract
(Particular Conditions & General Conditions), Employer's Requirements,
Schedules, Contractor's Proposal and any other documents that form part of the
The General Conditions and Particular Conditions collectively make the
Conditions. Guidance is provided so that the Particular Conditions can be
prepared/modified, if it becomes necessary to modify the General Conditions. The
Guidance also provides different security options such as advance payment bond,
parent company guarantee, or retention guarantee which may be selected by the
employer as per the requirement.
This form of contract is intended for use in projects which are relatively small
in value, have a short construction time or involve simple or repetitive work
and where specialists' sub-contracts are not needed. It is a flexible contract
which contains all necessary administrative and commercial arrangements and it
is possible to amend the same easily as well. The design responsibility may be
undertaken by either the contractor or the employer.
The nature of the project
i.e., construction, electrical, mechanical, or other engineering work does not
matter. An aspect of this form of contract is that there is no reference of an
independent engineer in the contract. There is a provision for the nomination of
a member by the employer to fulfil the duties typically carried out by the
engineer. Since there is no provision of an engineer in the contract, the
mechanism of payments is required to be mentioned in the Appendix.
All contract documents are intended to be added in the Appendices to the
agreement. Therefore, the Appendices may include offer of the contractor,
employer's acceptance and all other relevant correspondences. The General
Conditions are applicable on majority of the projects, however, there is a
provision for Particular Conditions as well, in order to amend the General
Conditions to provide for the project's special circumstances.
This form of contract is intended to be used in projects where the employer
retains the main responsibility of the design work. The work by the contractor
is carried out in accordance with the employer's design. There may, however, be
certain aspects of the project which the contractor may be asked to carry out
the duty of design.
The work completed by the contractor is measured and the
payment is made in accordance with the bill of quantities, however, the option
for making payment on a lump-sum basis is also available. Supervision of the
work carried out by the contractor is done by the engineer engaged by the
He is responsible for certifying payments, giving instructions etc.
Payments to contractor are determined by the measurement of completed work and
value method. However, there is an option for payment on a lump-sum basis. As in
the Yellow Book form of contract, the engineer may be given the responsibility
to settle a claim or determine a matter raised by any of the parties in
consultation with both parties.
The documents forming such contract are the Contract Agreement, Letter of
Acceptance, Letter of Tender, Addenda, if any, Conditions of Contract
(Particular and General), Specifications, Drawings and any other documents that
the parties may decide.
Type of contracts used by the following government agencies:
National Highways Authority of India (NHAI)
The National Highways Authority of India awards contracts for construction of
national highway projects. NHAI uses the following types of contracts:
Public Private Partnership (PPP)
There are three types of PPP contracts that are used by NHAI
- BOT (build-operate-transfer) Toll or Annuity;
- Special Purpose Vehicles (SPVs); and
These projects have different duration terms and commercial risks that are borne
by the contractor, who is called the concessionaire. The contract provides a
fixed term for construction, and thereafter another term, usually around 17-18
years, is provided for the concessionaire to recoup its costs and earn profits.
In this period, the concessionaire is also required to maintain the toll road.
A BOT-Toll contract gives the right to the concessionaire to levy toll from road
users, however, SPV and the BOT-Annuity do not give such a right. In the
BOT-Annuity contracts, the contractor is paid a fixed amount bi-annually,
irrespective of the earnings on the toll plazas. The entire toll collection is
retained by NHAI.
The common features of all types of PPP contracts is that the responsibilities
of designing, financing, construction, operations and maintenance are borne by
Item Rate contracts
Popularly called 'item-rate
' (IR) contracts, the traditional contracts are
another type of contracts commonly used for highway construction projects. Under
this type of contract, the contractor is only responsible for the construction
of the road and not its maintenance. The construction cost-related risks are
shared between the contractor and NHAI, specifically which arise due to
difference in quantities of items of work.
Government agencies, especially in the Energy Sector prefer the Engineering,
Procurement and Construction (EPC) form of contracts. Such form of contracts are
most prevalent utilized for large and complex infrastructure development
projects. As discussed earlier, an EPC contract requires a contractor to provide
a complete facility to a developer who simply has to turn a key to begin
operating the facility, which is why EPC contracts are also known as turnkey
Aside from providing a full facility, the contractor is
also required to deliver it at a given price, by a promised date, and at the
specified level of performance. Failure to meet any standard results in
penalties on the contractor.
Some essential features of an EPC Contract are:
- The responsibility for design, procurement, engineering, construction,
testing and commissioning activities lies with the contractor
- The contract price is fixed.
- Liability is limited for the contractor.
- The contractor is generally supposed to provide performance security.
- The time period for completion of the project is fixed.
Application Of The Concepts
This part deals with the practical application of the concepts discussed above,
such as inter-relationship between tendering, procurement and contract
selection, factors influencing choice of contract, etc.
Procurement and Tendering
Professional consultants advising an employer on contract selection must be
clear that the choice of procurement channel and other criteria influences the
selection of a form of the construction contract. A contract should not be
"pre-selected" and then used to guide procurement decisions. Procurement being
the general process of obtaining services or goods from external sources,
includes the plan on how to acquire those goods and services with respect to
time, cost and quantity, based on the requirements of the employer. Tendering,
which is an important phase, is the bidding process and the actual process of
appointing a contractor.
Additional factors to be considered for selecting a construction contract
Apart from the choice of procurement route, the other factors to be considered
- Types of work required and sector
- Size, value and complexity of the project
- The employer's level of familiarity with the project
- Balance of Risk/ Risk Allocation
- Design Responsibility
- Method of contract sum and payment
- Control over sub-contractors
Selection of a suitable strategy for a project is a complex decision because it
plays a major role in deciding the project's cost and timeline. In recent years,
many procurement systems have been created in addition to the existing methods,
making this decision more complex. As discussed, there are many factors which
should be considered before selecting the type of contract, such as procurement
route, risk allocation, type of work and sector etc.
mostly involve high stakes and hence they should be signed after making sure
that all the factors have been considered and deliberated upon. The FIDIC
standard form contracts are used internationally, and hence the parties while
entering into one should take care that the contract that they are choosing, and
its conditions are suitable for the jurisdiction in which the project works are
situated and the law governing the contract.
With time, the options for standard
form contracts have increased with more industry specific structures providing a
wide range to choose from. Hence, the employers and the consultants should
benefit from this range by carefully analyzing their needs rather than getting
confused by variety and making the wrong selection. The successful completion of
a project depends upon the suitability and adjustability of the contract entered
by an employer with a contractor.