Types of Modern Construction Contracts - Literature review Example

Modern Construction Contracts Student’s Name Subject Professor University/Institution Location Date As Yu & Cheng (2005) argues, construction contract warrant that an executed job will compensated with specified amount and the manner in which the compensation is to be distributed. It is an agreement which sets the way an owner is to pay the contractor for performed work. They are of several types but some types are preferred by professionals in construction. The way disbursement is made defines the type of construction contract with other specified terms including specification, duration, quality and other items. This paper dialogues of types of construction contracts, contractor and contract management and the model of project management. Types of construction contracts Lump sum It is also known as drawing and specifications and involves total fixed price to all construction activities. It may include benefits or incentives if termination is reached earlier than the set duration. It may also have penalties for late termination which are known as liquidated damages. Lump sum contracts in most cases are preferred if a clear scope and defined schedule is reviewed and the parties agree upon it. The contractor agreement to perform the stipulated job depends on the exchange for a fixed amount of money. The tendered price is set for completion of specified work in a certain date and client satisfaction. Payment may be made at time intervals by completion of milestones. Its usefulness proceed from its accuracy and complete description at bidding time for instance in building and residential construction. It is also suited if there are limited variation needed, low and quantifiable level of risks and if client will not be involved in project management (Martin Skitmore & Thomas Ng 2003). Martin Skitmore & Thomas Ng (2003) continues the argument that, it is the responsibility of the contractor to determine the work items, describe them, obtain quantity specifications and form drawings and accurately estimate quantities as estimated. The contractor then includes everything that is necessary to carry out the work in his price. The advantages of lump sum is that it gives the owner precise details of final price before commencement of work. The contractor can increase incentive by reducing the cost and increase profit. He may also complete the work quickly to maximize profit and minimize overhead. However, it entails great deal of preparation for estimates and time and any changes of specification or drawings can cause trouble and be expensive making the contract limited to flexibility of design changes. The contractor risks are higher and competent ones may be less willing to bid in avoidance of high-risk. Unit price The contract depends on items and their estimated quantities in the project with their unit prices. The quantities required to carry out the work determines the final project price. Those project with well established scope suit this contract since the different items are accurately identifiable in contract documents (Ewerhart & Fieseler 2003). Cost plus As Berends (2000) elaborates, this type of contract is agreed as the purchaser agrees on payment of work cost, including materials, equipment contractor profit and overhead. If work scope is indeterminate and highly uncertain together with the kind of material, labor and equipment, this contract is favored. Integrated project delivery According to Kent & Becerik-Gerber (2010), the contracts are a recent trend for collaborative approach to deliver construction project. The owners, builders, designers and the key stakeholders are involved on project from its initiation or conceptual stage. This endears transparency on involved parties and the project risks and reward are shared amongst the parties in the contract. There is greater integration of processes, resources and expertise compared to traditional contract agreements. As Du, Foo, Boyd & Fitzgerald (2004 January) argues, The Australian Contract’s General Conditions (AS 2124 - 1992) dictate and secure the conduct of contracts which informs the roles of the principal, contractor, contract administrator and other parties in the contract. From acceptance date for the tender the Principal consent that the Contractor is the principal. The contractor is under Regulation that relate to the work set in the contract. This means that he has authorized the contract to manage and control the workplace where Contract is undertaken and the site and to discharge duties of principal contractor according to the regulation. The prior contractor agreement is taken for fulfilling the requirements and effect engagement. The contractor complies to discharge the obligations imposed and other regulation such as health and safety. He is also to consult the principal and designers to ensure elimination of risk to health that arises. As the contractor performs his obligations under contract it is his responsibility to take account and appropriate action in accordance to information given either by principal or contractor administrator concerning the risks and hazards at work and work vicinity. As by AS2124 conditions, the contractor indemnifies the principal for any action, claim, loss, damage, demand, expense or cost brought against, incurred or suffered by principal due to breach of a clause by contractor or an obligation under the Regulation, the Act or health and safety regulation. Contract Administrator must then be keen in communication, understanding the issues of the contract, the progress, the actions to be taken and the consequences of any failure to him, the principal and the contractor. The parties in the contract are bound by the contract together with respective executors, successors, administrators and the principal. Furthermore, the conditions sets out the service of notices, contract documents, the terms of assignment and subcontracting, different subcontractors, provisional sums and latent conditions (Quick 2002). Contract management As Cooper (2012) argues, a contract administrator in modern construction contracts may be an individual experienced professional person or a firm. There are main roles involved with contract administrator in a formally engaged contract. The role covers all the construction phases, subcontracting, engineering services installation and procurement, commissioning, defect rectification works handover and extends to final project financial close. Contract administrator exercises professional judgments as an agent of the principal. This also entails handling the direct communication and issue instructions with the contractor. Secondly, is acting as independent agent to assess, certify and value the quality and quantity of the work which is done by the contractor alongside with issuance of certificates by owner payment for the work done. This role is performed with fairness, impartiality and with integrity. This eliminates the conditions whereby the principal may influence the administrator to perform his role in principal’s favor. Generally, contract administrator instructions are issued in writing. The CA attends meetings for provision of progress reports to the principal. The CA uses the tools and techniques to manage the construction, manage risks, create and manage corporate quality and ensure quality assurance mechanisms. This also combines the earned value analysis and budgetary controls. Simply, a construction project involves tools, people and techniques which the CA oversees. Managing the programs and communicating expectations are key roles which drives strategies, operations for benefits. Contract administration is meant to deliver the benefits in form of financial through avoided costs and additional profit, strategic through provision of a platform of moving forward with organization’s or individual’s strategic aims and legislative which pertains to fulfilling of absolute requirement which were laid down at the onset of contract (Mincks & Johnston 2010). First, the CA manages the delivery of project and of work associated and in accordance with executed contract documents (Murdoch 2007). The contract elements will demarcate the roles to be carried out by the CA. In most cases, the aspects of intention, consent, capacity, agreement, offer, acceptance and legality are available in a contract and this guides the CA. He then builds on it to communicate efficiently and clearly while maintaining the appropriate records involved between the contractor and the principal. Contract fact pattern must have a mutual consent to establish a contract through a detailed description of realty, money and items. As Ali (2006) argues, the contract lay down the mutual exchanges of the valuables; skills, labor and products on the contractor side and payment and recommendation on principal side. This validate the contract by detailing individual’s rights, the transfer or exchange and repossession, elaborated with the terms of risk and with set deadlines for completion and transfer. Performance is detailed from the start to the completion and delivery to enforce the contract through described actions. The contract is finally signed to provide surety and firmness of the contract. The facts reached by mutual consent may also include elements like security agreement, the conditions for contract termination and other special provisions. Secondly, CA ensure fulfillment of contractor’s responsibilities, the duties and outcomes as documented in the requirements of the contract and statutory requirements. The CA controls the construction contract to authorise work, capture the progress information and review the progress, work quality, risk and issues status. At the same time he captures and log issues and analyse impacts of the issues. At this point he constantly reports the progress to the principal, escalate problems to the principal and take corrective actions accordingly. The fundamental principles in control are to focus on delivery in accordance to laid down tolerance or agreement on terms (Cooke & Williams 2004). This means the construction is controlled according to the agreed products, stated quality standards, within the time agreed, cost and effort and ultimately achieve defined benefits. The CA focuses on achievement of this success through stage’s products delivery, the resources which are used during a stage to the end while keeping those risks under control. This is promoted by keeping the construction contract under review and carefully monitors any changes away from agreed direction at the start stage which avoids the scope from creeping and focuses loss (Milosevic, et al 2004). The CA after the construction is approved handles day-to-day management. The core work s to control every stage to drive managing product delivery. He authorises the work package and specifies reports and return the confirmation of satisfactorily completion of a work package. However control can be done on regular basis or be driven by rising problems and circumstances assuming an ad hoc nature. Controlling drives the objectives of the principal in order to deliver right products and ensure achievement of quality as planned. An important role of control is to update plans to line with actual and enable progress check against its plan. Thus also correctly ensure deviations are managed and all parties timely informed about the construction progress. Reporting to the stakeholders is a major role of the CA. This relates to the skills of managing people, integration and communication. The principal and the contractor may have god understanding of tools, techniques and processes and efficiently and timely apply them. However, this is never the whole answer as there is a greater puzzle for construction project success which is driven by administrator. The contract acceptance sets the ground of CA exercise based on agreed business value, clarified vision and direction and determined requirements. Through the process the CA builds team, mitigates risks and resolves issues. This increases the likelihood of the project success (Forsberg, Mooz & Cotterman 2005). His skills are important to identify factors to influence success and managing them. The independence of stakeholders is regulated through CA as a reporting structure. This is because communication between individuals is critical while information flow is a challenge. The administrator clarifies the activities so that the stakeholders may not be negatively be affected by the construction project results. The contract administrator is assigned to oversee construction and interacts the principal and contractor on equal basis. This person approves operational and technical decisions and directs work flow segments. The CA communication role is relevant to work within the set culture. He manages the stakeholder expectations as he understands the objectives clearly by drawing from the contract. This promotes efficient solution to problems in knowledgeable, effective and clear decisions. CA focuses on essential information through timeliness, relevance and accuracy. One source of information is important in reducing potential errors and increases the likelihood of accuracy (Page 2011). According to Humphreys, Matthews & Kumaraswamy (2003), in modern contract communication may vary in types. This is due to the tendency of written reports and requirements piling-up due to lack of time to read or understand. The CA may use verbal means by presentations and briefing sessions done on one-on-one which are to some extent effective. He may also use electronic though personal email to stakeholders, written mail outs for important documentation. This may take the form of letter, factsheet or memorandum. Communication may also take visual type more so in a construction project to display details and requirements as agreed in the layout of the contract. This ensures compliance for wide activities laid down in the construction. According to Love & Irani (2003), the purpose of documentation is important to ensure that progress is measured. This also ensures reporting in a manner which is suitably accurate without exaggeration of progress. If information collection is based on product, it becomes easier to measure the status and progress of the project. It is through the analysis of earned value that the principal is able to obtain accurate view of the expenditure. Checkpoint meetings are held on regularly or on an ad hoc manner depending on construction factors like geography and size. Stags and work package status is mainly given by checkpoint reports. Various queries, problems and changes that occur are mediated through the role of CA. Since they occur in haphazard manner and there is a need to capture them in consistent and reliable way. They are then assessed through prior agreements and managed properly. Documentation review and information is needed for management information, usage and explanation. The new project issues are captured with the input and issues raised from whatever source for further decisions. Issue log is needed to update project issues and status. Finally, CA ensures that proper payments are made to the building contractor for the work that is suitably done. This is by suitable response to payment claims, issuing payment schedules for payment to be made in timely manner. He assesses and certifies progress payment and issue notices when dealing with provisions of payment. It is his duty to ascertain losses and expenses the building contractor incurs due to instructions (Potts 2008). In case the whole payment is withheld, he advises the claimant of the reason in a prescribed manner. In the process of construction he may approve a prolongation of claims and costs which are to be awarded to contractor (Jones 2006). It is his mandate to issue final payment certificate to contractor. Project management model As Turner & Simister (2001) views, a construction project management model may assume some six important steps. At conception the stakeholders; the principal, administrator, contractor and subcontractors defines or agrees on meeting objectives and include the terms to guide their relationship together with reference to other associated authority and acts. The model proceeds to planning stage where the work is broken down, teams formed and authority designed. The effort and duration is estimated and agreed upon. This allows the scheduling, determination of resources, and budgeting and risk analysis for a comprehensive plan. The teams form to perform with identified leadership and motivation to start the work. The functions here determine to a larger extents on the works of leaders, their qualities and activities being carried out. There must be incentives which are made available to motivate others. In the course of the project, control is assumed and effected on cost, schedule, progress meetings and replanting activities. The whole process revolves around communication which might be formal or informal through the use of reports, notes and presentations. The model finally ends with review and exit of the project. References Ali, S 2006, ‘A “Construction Industry Payment and Adjudication Act”: Reducing payment-default and increasing dispute resolution efficiency in construction’. Berends, T C 2000, ‘Cost plus incentive fee contracting—experiences and structuring’, International Journal of Project Management, 18(3), 165-171. Cooke, B & Williams, P 2004, ‘Construction planning, programming and control,’ Wiley-Blackwell. Cooper, T L 2012, ‘The responsible administrator: An approach to ethics for the administrative role,’ Jossey-Bass. Du, R, Foo, E, Boyd, C, & Fitzgerald, B 2004 January, ‘Defining security services for electronic tendering,’ In Proceedings of the second workshop on Australasian information security, Data Mining and Web Intelligence, and Software Internationalisation-Volume 32 (pp. 43-52). 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