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Contracts And Form of Contract

CONTRACTS AND FORM OF CONTRACT

            When two or more persons have a common intention communicated to each other to create some obligation between them, there is said to be an agreement.  An agreement which is enforceable by law is a “Contract”.
According to section 10 of the Indian Contract Act, 1872 only those agreements are enforceable by law which are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object and are not expressly declared to be void.  This is subject to any special law according to which contract should be in writing and attested by witnesses.
The following are the essential ingredients of a contract:

  1. Offer made by one person called the “Promisor”.
  2. Acceptance of offer made by the other person called the “Promisee”.
  3. Doing of an act or abstinence from doing a particular act by promisor for promise a called consideration.
  4. The offer and acceptance would relate to the something which is not prohibited by law.
  5. Offer and the acceptance constitute an agreement, which, when enforceable by law, become a contract.
  6. In order to make a valid and binding agreement, the party entering into such an agreement should be competent to make such agreement.

For the purpose of an agreement, there mush be a communication of intention between the parties thereto.  Hence in the forms of a Contract there is:

  1. A proposal
  2. Communication of the proposal
  3. A communication of the acceptance of the proposal

A contract is an agreement enforceable by law.  It may be noted that the works ‘agreement’ and ‘contract’ are very often used as synonyms, but in fact they are not.  All contracts are agreements but all agreements are not necessarily contracts; agreements not enforceable by law are not contracts.
To be legally enforceable, the agreements must satisfy two things, viz, intention to be bound and consideration.  However, according to the Indian contract Act 1872, an agreement is a contract if ‘it is made by the free consent of parties competent to contract, for lawful consideration and with a lawful object, and is not expressly declared to be void.
The contract must be definite and its purpose should be to create a legal relationship.  A contract creates an obligation i.e. a duly cast upon a person by law.  When the parties to a contract exchange promises, it gives rise to a contractual obligation.

TYPES OF CONTRACTS

         

         Contracts for the execution of civil engineering works are of following types:
  1. Lumpsum contract
  2. Item rate contract
  3. Lumpsum and schedule contract
  4. Cost plus fixed fee contract
  5. Cost plus percentage of cost contract
  6. Special contracts

Lumpsum Contract
In this type of contract, the contractor offers to do the whole work as shown in drawings and described by specifications, for a total stipulated sum of money.  There are no individual rates quoted, thus it becomes difficult to make adjustments in the contract value if any changes are to be made in the work later on.  The schedule of different items of work is not provided and the contractor has to complete the work as per drawings and specifications for the agreed lump sum amount.
Deposit of 10 % security money and other conditions of the contract are included in the contract agreement.  Upon the completion of work, a fixed lumpsum amount is paid to the contractor.  Detailed measurements of different items are required but the whole work is compared and checked with drawings and specifications before releasing the payment.  In large projects, part payments are made to the contractor at different stages of work on money agreed terms.  In case the contractor stops the work in between he is not entitled for any further payment.

Suitability
A lumpsum contract is more suitable for works for which contractors have prior construction experience.  This experience enables the contractors to submit a more realistic bid.  This type of contract is not suitable for difficult foundations, excavations of uncertain character, and projects susceptible to unpredictable hazards and variations.
Merits

  • The owner can decide whether to start or shelve the project knowing the total lumpsum price quoted by different contractors.
  • The contractor can earn more profit by in-depth planning and effective management site.

Demerits

  • Before the contract is awarded, the project has to be studied thoroughly and the complete contract documents has to be prepared in advance.
  • In this type of contract, unforeseen details of work are not specified in the contract document.  Many additional items may have to be undertaken as the work progresses, giving opportunity to the contractor for claiming higher rates of the extra items not included in the contract agreement.

Item Rate Contract
Also called a schedule contract, in this contract, the contractor undertakes the execution of work on an item rate basis.  The amount to be received by the contractor, depends upon the quantities of various items of work actually executed.  The payment to the contractor is made on the basis of detailed measurements of different items of work actually done by him.

Suitability
The item rate contract is most commonly used for all types of engineering works financed by public or government bodies.  This type of contract is suitable for works which can be split into various items and quantities under each item can be estimated with accuracy.
Merits

  • In this type of contract, there is no need for detailed drawings at the time of allotting contract as in the case of lumpsum contract.  The detailed drawings can be prepared after the contract is awarded.
  • Changes in drawings and quantities of individual items can be made as per requirement within agreed limits.
  • The payment to the contractor is made on the actual work done by his at the agreed rates.

Demerits

  • The total cost of work can only be known upon completion.  As such, the owner may incur financial difficulty if the final cost increases substantially.
  • Additional staff is required to take detailed measurements of work done for releasing payments to the contractor.
  • The Scope for additional saving with the use of interior quality materials may prompt the contractor to use such materials in the work.

Lumpsum and Scheduled Contract
This is similar to the lumpsum contract except the schedule of rates is also included in the contract agreement.  In this type of contract, the contractor offers to do a particular work at a fixed sum within a specified time as per plans and detailed specifications.  The schedule of rates for various items is provided which regulates the extra amount to be paid or deducted for any additions or deletions made during the progress of work.  Measurements of different items of original work are not required but extra items are required to be measured for payment.  The original work shall however be checked and compared with the drawings and specifications.
Suitability
This type of contract is more suitable for construction works for which contractors have prior work experience and can consequently estimate the project cost more realistically.
Merits

  • In this type of contract, additional staff for recording detailed measurements of original item of work is not required for making payment to the contractor.
  • The owner can know from tenders as to what the project will cost him.  Knowing the financial implications, the owner can decide to start or defer the project.

Demertis

  • Before the contract is awarded the project has to be studied thoroughly and all the contract documents are required to be completed in every respect.
  • The non-scheduled extra items arising out of changes made in the drawings and specifications are often a source of dispute because the contractor presses for rates higher than the prevailing market rates.

Cost Plus Fixed Fee Contract
Cost Plus fixed fee contract is desirable when the scope and nature of the work can atleast be broadly defined.  The amount of fee is determined as a plump sum from a consideration of the scope of work, its approximate cost, nature of work, estimated time of construction, manpower and equipment requirements etc.  In order to negotiate such a type of contract, it is essential that the scope and some general details of the work are defined.  The contractor in this type of contract is selected on the basis of merit rather than the fee alone.  In case of cost plus percentage contract, the contractor has a tendency to increase his profit by increasing the cost of work.  But this drawback is overcome in cost plus fixed fee contract because here the contractor's fee is fixed and does not fluctuate with actual cost of work.  Once this fee is fixed, the contractor cannot increase the cost of work.
Suitability

  • This type of contract is suitable for works required to be completed expeditiously and where it is difficult to foretell what difficulties are likely to be encountered.
  • This contract is also suitable for important structures where the cost of construction is immaterial.

Merits

  • In this type of contract, actual cost is to be borne by the owner.  Therefore, the contractor performs the work in the best interest of the owner resulting in good quality work.
  • The work can be taken in hand even before the detailed drawings and specifications are finanlised.
  • Changes in design and method of construction if needed can be easily carried out without disputes.
  • The work can be executed speedily.

Demerits

  • This form of contract cannot be adopted normally in case of public bodies and Government departments.
  • The final cost of the work is not known in advance and this may subject the owner to financial difficulties.

Cost Plus Percentage of Cost Contract
In this type of contract, instead of awarding the work on lumpsum or item rate basis, it is given on certain percentage over the actual cost of construction.  The actual cost of construction is reported by the contractor and is paid to him by the owner together with a certain percentage as agreed earlier.
The contractor agrees to do the work in accordance with the drawings, specifications and other conditions of contract.  In this type of contract, proper control has to be exercised by the owner in the purchase of materials and in arranging labour.
The suitability merits and demerits of this type of contract are similar to cost plus fixed fee contracts.  An additional demerit is the tendency of the contractor to increase the cost of work to earn profit by way of percentage of enhanced actual cost.
Special Contracts
There are certain contracts which are used at different occasions.  Some of these contracts are listed below:

  • Turn-key Contract
  • Package Contract
  • Negotiated Contract
  • Continuing Contract
  • Running Contract

(i)  Turn-key Contract
A turn-key contract is an integrated contract in which all works pertaining to various disciplines such as civil, electrical, mechanical etc. are in the hands of a single contractor called the main contractor.  The main contractor can sublet the contact to sub-contractors who are specialists in their respective fields.
In this contract, the main advantage to the owner is that he need not coordinate the work of different contractors.  The main contractor is responsible for all kinds of jobs starting from planning to commissioning stage.  The owner takes over the entire work (which is fully operational and of proven performance) from the main contractor.
(ii)  Package Contract
In a package contract, two or more related jobs, each of which could form a separate contract are combined in a single contract.  In the field of civil engineering, generally, design and development are combined with construction and supply or maintenance.
In this type of contract, plan of work and standards are established and the work is carried out accordingly by the contractor.  The main contractor is responsible for safeguarding the owner's interest and for this reason, prior approval of design and technical aspects have to be taken from the owner.  Responsibility for correctness of the design lines with the main contractor.
(iii)  Negotiated Contract
In this type of contract, negotiation across the table takes place between representatives of the owner and the main contractor for project cost and other conditions of contract.  In this type of contract, detailed projects specifications are arrived at by discussions between the owner and the main contractor and consultant.
A negotiated contract involves extended discussions for finalization as a competitive contract.  Most of the consultancy projects of World Bank are negotiated contracts.
(iv) Continuing Contract
In this type of contract, new or additional work is awarded to the contractor on the basis of agreed terms and conditions of an existing contract.  Such contracts do not require re-tendering and hence can save time and money.
(v)  Running Contract
Such contracts provide goods and services at specified intervals or as and when required by the owner.  The contract price is not fixed and payment is based on goods supplied and services rendered as specified in the contract documents.
III. Contract Documents
The contract document consists of the contract agreement (on non-judicial stamp paper of prescribed value) and the following set of documents, each page of which is signed both by the owner and the contractor.
a)       Cover Title Page: It contains the name of work, name of owner, name of contract, contract agreement number, contents etc.
b)       Contents Page: It contains the contents of the agreement with page references.
c)       Notice Inviting Tender (NIT): It contains a brief description of work, estimated cost of work, date and time of receiving the tender, amount of earnest money, security money, time of completion etc.,
d)       Tender Form: It comprises bill of quantities, contractor's rates, total cost of work, time for completion, security money to be deposited and penalty clauses etc.
e)       Schedule of Issue of Materials:  It contains the list of materials to be issued by the department or owner to the contractor with rates and place of issue.
f)        Drawings:  These comprise a complete set of fully dimensioned drawings including plans, elevations, and sections detailed drawings and site plan.
g)       Specifications:  It is not practicable to include detailed information of each item of work in the limited space of description in the bill of quantities.  As such detailed specifications form a part of the contract agreement.  Specifications should be clear and precise covering all items of the bill of quantities.  Following specifications are normally included in the contract document.
i.  General Specifications: These specify the class and type of work quality of materials etc, in general for the work as a whole.
ii. Detailed Specification: These give detailed description of each item of work including material and method to be used along with quality of work manship required.
h)      Conditions of Contract:  The terms and conditions of contract specify the following.
i.   Rates of each item of work inclusive of materials, labour, transport, plant/equipment and other arrangements required for completion work.
ii.  Manner of payment of contractor including running payment final payment, refund of security money etc.
iii. Time of completion of work.
iv. Proportionate progress to be achieved.
v.  Penalty for poor quality and unsatisfactory work, lack of proportionate progress and for delay in completion.
vi. Extension of time for completion of work.
vii.          Engaging other agency at contractor's cost and risk.
viii. Termination of contract.
ix. Subletting of the work.
x.  Changes in design/drawings etc and valuation of variations.
xi. Arbitration for settlement of disputes.
In addition to the above, performance and payment bonds are also sometimes considered as part of the contract document.  All the above stated documents collectively constitute a contract document.  The documents are considered together for the purpose of contract interpretation, giving rise to meaning and effect to each part of the contract.  In general, the intention of contracting parties is determined from the contract executed by them.  The contractor should carefully read and understand the contract before executing the work.

SPECIFICATIONS - DEFINITION AND EXPLANATION

        Specifications are statements which describe the nature and class of work, materials to be used, labour to be employed, method of work, precautions to be taken, quality of workmanship etc.  The cost of the work depends much upon the specifications.  The nature of work can be easily understood from the study of specifications.  The drawings of a building or structure show the arrangement of rooms and dimensions (length, breadth and height) and include a brief description of the different parts.  Drawings do not furnish the details of different items of work, the quantity of materials, workmanship etc., which are all description in the specifications.  Specifications serve the following purposes:

    • Guide the bidder at the time of tendering for arriving at a fair price for the work involved.
    • Provide guidance for execution and supervision of work and purchase of materials.
    • State the acceptance criteria for different items of work.

Specifications are of the following Types

      • Contract Specifications
      • Guide Specifications
      • Standard Specifications

(a) Contract Specification:  The specifications prepared for a particular job to accompany the working drawings are contract specifications.  These are further claussed at:

  • General Specifications
  • Detailed Specification

          General Specifications are also called brief specifications.  These give a general ideas of the class and type of work giving brief descriptions of materials, quality and workmanship.
Detailed specifications provide a detailed description of each item as per schedule of quantities, specifying the materials to be used including their proportions, method of work quality of workmanship required etc.  The specifications are written, as far as possible, in the same sequence or order in which the work is carried out.
(b)  Guide Specifications:  These specifications provide a guideline for preparing contract specifications and give a broad idea about class and type of construction for a particular purpose.
(c)  Standard Specifications:  These specifications are prepared for various materials or group of materials for the guidance of all concerned with construction or construction industry.  These specifications include methods of manufacture methods of tests, code of practice etc., Indian Standards Institution and other such institutions have prepared a wide range of standard specifications.
(d) Manufacturer's Specifications:  Manufacturers prepare specifications of their products for the guidance of users.  These specifications also include installation instructions and other guidelines for use and maintenance of products.  These specifications are generally provided in the form of manuals.  Clear understanding of specifications plays a vital role in the successful completion of a construction project.

ENLISTMENT OF CONTRACTORS

               PROCEDURE FOR ENLISTMENT OF CONTRACTORS
          Before entering into contract with the Public Works Department, every individual or firm is required to register himself as a contractor, after paying the registration fee, for taking up works in the appropriate classes of registration.  The copy of rules for registration of contractors is supplied to the contractors on payment of Rs.5/- plus sales tax.

    Fee for application and Registration    

    Classification of Contractor

    Money Limit

    Application Fee

    Registration Fee

    a.

    For works at Divisional Level

     

     

     

     

    Class V upto

    Rs.40,000

    Rs.5/-

    Rs.50/-

     

    Class IV upto

    Rs.1 lakh

    b.

    Circle Level

     

     

     

     

    Class III upto

    Rs.2 lakhs

    Rs.10/-

    Rs.100/-

    c.

    State Level

     

     

     

     

    Class II upto

    Rs.5 lakhs

    Rs.10/-

    Rs.200/-

     

    Class I upto

    Rs.10 lakhs

     

    Class I above

    Rs.10 lakhs

         The above fee will not be refunded under any circumstances.  Interested ayacutdars and beneficiaries are exempted from Registration fee, works upto Rs.10,000/- for irrigation and Rs.5000/- for buildings.  The registering authority for class IV and V will be Executive Engineer and for the rest Superintending Engineer.

    Following are exempted from the Registration Fees:

       
             i.        Scheduled Castes and Scheduled Tribes.
    ii.       Repatriates from Burmah and Ceylon.
    iii.      Labour contract co-operative societies.
    iv.      Industrial co-operative societies.
              The registration of a contractor for works in a division or a circle is on a territorial basis and as such separate registration is not necessary in a special division or special circle of the same department, for taking up works lying in the territorial area covered by the first registration.  For taking special works in places outside the area of his registration, the contractor should register himself in the special circle.  Contractor may register themselves in more than one territorial unit of division or circle of the same department after payment of the requisite fee in each case.  No contractor shall be permitted to get himself registered under more than one name in the same territorial area.  When a contractor has registered as a partner of the ‘Firm’ he cannot once again be permitted to register his name as a contractor in his individual capacity, in respect of the same business, in the same territorial area.  The contractor’s application for a higher classification or reinstatement to original class in the case of demoted contractor or resumption to the original status after removal of or suspension will be treated afresh and the application shall be considered on its merits, after the levy of the prescribed fee.
              The Registering Authority shall have full powers to reject any application, but before doing so he shall issue a show cause notice to the applicant giving 7 days time and specifying the reasons for the proposed rejection.
              The applicants when found satisfactory with reference to their financial standing and other particulars in the application by the enquiry officer, should be given intimation in writing by giving class, area etc.  The applicant within 15 days of the receipt of intimation shall remit the registration fee into the treasury and sent the challan.  The officer on receipt of challan, shall enlist the applicant in the Register of contractors and inform the applicant and also the officers of the department about that registrant.  In token of having read through and understood the standard preliminary specification he is required to sign in the Tamilnadu standard specification.
              The status of the contractor, especially his financial soundness should be checked annually by the registering authority, for weeding out from the approved list, such contractors are have not secured any work during three consecutive years.  The Registering authority may demote a contractor to a lower class, if he fails to execute a contract or proved to be responsible for defective construction, or his financial position is not good, or found to violate any important contract conditions etc. as to justify his demotion.  The fact of demotion need not be sent to the contractor but the registering authority shall intimate to the Chief Engineer through the next higher authority.
              The Registering authority may remove the name of contractor from the approved the list, if the contractor

    1. fails to secure any work during three consecutive years.
    2. has on more than one occasion failed to execute contract.
    3. persistent violation of important conditions of contract.
    4. violation of Labour act etc.

    The decision should be taken only after issue of show cause notice and the orders should be communicated to the contractor concerned, and afterwards for other department officers for their guidance.  Income tax and sales tax clearance certificates shall be furnished by the contractor and the failure shall prevent the contractor from tendering for works till such time the certificates are furnished.
    Jobless or unemployment Engineers should register themselves with any one of the Executive Engineer after paying the prescribed fee for registration.  Then only then can avail the concessions entitled for unemployed Engineers.
    The solvency certificate required will be
    i)        Works upto 50,000                  -nil
    ii)       Above 50,000 upto 2 lakhs      -10% of value of work
    iii)      Above 2 lakhs                          -25% of value of work
    The rules regarding Registration, removal, etc. shall apply to this category also.