Contract

Proposal: when a person signifies to another person his willingness to do or to abstain from
doing anything with a view to obtain the consent of that other, he is said to make proposal.

Promise: when the person to whom the proposal is made signifies or expresses his consent,
the proposal is said to be accepted and a proposal thus accepted becomes a promise

Agreement: Every promise or set of promises, which forms some consideration for each other,
is known as an agreement.

Contract: contract word is derived from the Latin word contractum which means drawn
together.

A contract is an agreement which can be enforced by law. (Contract Act 1872)

A contract comes into the existence only when there is consensus or assent of the contracting
parties. The assent of the parties may be established by facts preceding the formation of a
contract. It should however be remembered that an agreement without any obligation does not
develop any legal relationship. Hence it is said that every contract is an agreement, but every
agreement is not necessary a contract.

Building construction contract: A building construction contract is basically a form that sets out the
jobs that the owner, under the advice of the architect/ engineer has agreed with the contractor.

It sets each job out in detail, along with a cost, payment, and time schedule, so that all the contracting
parties are aware of their responsibilities, duties and liabilities.

Classification of Contracts:

1. Lump-sum contract

2. Target (lump sum plus percentage) contract

3. Indirect lump-sum contract for flats or bungalows

4. Cost plus a fixed percentage contract

5. Cost plus a fixed fee contract

6. Cost plus a fixed sum with profit - sharing contract

7. Cost plus a fixed sum with bonus /penalty contract

8. Cost plus a variable percentage or sliding scale contract

9. Percentage rate contract

10. Item rate contract

11. Labour contract

13. Turn-key contract

14. BOT system

15. Negotiated contract

16. Demolition contract

1. Lump-sum contract: In this system, the contractor undertakes the execution of a specific work for a
definite lump-sum amount within a specified time period. On completion of the work, it is checked as per
drawings and specifications and if approved the amount is paid to the contractor. The quantities of
various items are not measured.

For the construction of sculptures and decorative works this system is adopted.

Advantages of lump sum contracts:

1. Definite amount: Total cost of construction is known in advance and as such the owner can make the
necessary arrangements for the finance.

2. Early completion of the work: The contractor will try to complete the work as early as possible so as to
have good margin of profit that his equipments will be free earlier which can be utilized on his other jobs.

3. Work load reduction: Work load of engineer and the architect is reduced, as no detailed
measurements are required to be taken for each item of the work executed.

4. Low cost: Each contractor works out the lump-sum at his own rates with a certain profit. Due to
competition among the contractors, the percentage of the contractor’s profit may go lower, resulting in
the low cost of the work to the owner.

Disadvantages of lump sum contracts:

1. Disputes: Accurate & complete working drawing with details and flawless specification are required for
such contracts, failing which disputes arise, which is often the case.

2. Claim for extra: Though the contract is made on a fixed price, the contractor may claim extras by
giving different reasons, as in most of the cases the working drawings, details and specifications are not
clear.

3. Inferior work: If ambiguous specifications persist in the contract, the contractor can use alternative
brands of materials leading to inferior work.

2. Target (lump sum plus percentage) contract

The contractor is paid a fixed fee on a prime cost basis for the work performed under the contract and in
addition he receives a percentage on the savings effected against either a prior agreed estimated total
cost or a target value arrived without changing the specification.

It was presumed that by proper management of the work, the contractor can reduce the cost of work.
But due to tremendous increase in the cost of materials it never materialise and hence this system is not
getting popularity.
3. Indirect lump-sum contract for flats or bungalows

In this system the rate of construction per sq.m. of plinth area is jointly fixed by the contractor and owner
which includes contractor’s profit also. Once this agreement is made the contractor starts the work and
receives payment at regular intervals during the different stages of work. Sometimes the specifications,
drawings are prepared by the builder.

4. Cost plus a fixed percentage contract

In this system a fixed fee is given as contractor’s profit irrespective of the total cost of work. This is to
control the tendency of the contractor to increase the cost of the project unnecessarily.

Smaller the completion time more is the profit and hence the contractors hurry to complete the work and
the quality of workmanship is not maintained.

This system is not generally used.

5. Percentage rate contract (B1 system)

In this system the contractors are required to quote single percentage either higher or lower at which he
wants to execute the job. Here scrutiny of the tenders become easier and as cement and steel is usually
supplied by the department chances of manipulation is less. This the most commonly adopted system of
contract in the different departments of our state.

6. Item rate contract (B2 system)

Here the contractor gets the payment depending on the rate at which he has quoted every item of the
work. It was rather difficult to scrutinise the tenders submitted by various bidders and the system was
hence modified and now the department quotes the items of work along with their quantities and the
bidders are required to quote the percentages at which he can execute the various items.

7. Labour contract

This is the most commonly adopted system for the construction of private individual buildings in small
cities. The contractor arranges all necessary labour, tools & plant and equipments required. The
materials are supplied by the owner and he appoints an Engineer to supervise the work to maintain the
quality and economy in construction.

This system is suitable in the works of Govt. departments as they are in a privileged position to buy large
quantities of materials at cheap rates.

8. Joint venture contract

In case of huge important projects the construction works can be categorised into different parts and
each part can be given to a specialised contractor in that field. This method improves the quality of work
and the project can be completed within a short period of time.

Thus the project works can be divided among different contractors and hence joint venture system of
contract developed.
9. Turn-key contract

In this system all the works related to a project including designing, planning, execution etc. are to be
done by the contractor. Once the project is completed it is handed over to the owner. The owner has to
complete the transaction works and occupy the structure by simply turning the key, ie. opening the door.

10. Indirect lump-sum contract for flats or bungalows

In this system the rate of construction per sq.m. of plinth area is jointly fixed by the contractor and owner
which include contractor’s profit also. Once this agreement is made the contractor starts the work and
receives payment at regular intervals during the different stages of work. Sometimes the specifications,
drawings are prepared by the builder.

11. BOT system

Build operate and transfer is a new system in which the land is acquired by the Govt. and the contractor
is asked to build the structure and then operate it until he collects the money he had spent for the
construction, as fees from the users. Once the construction cost is recovered, the structure is handed
over to the owner. No payment is made to the contractor by the owner/Govt.

Security is provided to the builder by the Govt. regarding law and order problems if any.

Bridges and roads are usually constructed by adopting this system of contract. Toll is collected from the
users/vehicles passing over it by the contractor to recover the construction cost.

BASIC PRICE CONTRACTS

When the market is unstable and the prices of essential materials are fluctuating to a great extent, it is
quite likely that no contractor will come forward to carry out the work or if the contract is already in
existence the owner and the contractor is already will come into conflict quite often. Hence a slight
modification of unit- price or item rate contract is made. The contractor mentions in his tender the basic
prices of some of the essential engineering materials such as cement, steel ,bricks, etc. It is thus
understood that the rates of various items mentioned by the contractor are based on these basic prices.
Hence, If there is rise or fall in the prices of these materials, the same is adjusted without any serious
conflict between the owner and the contractor.

FIRM PRICE & FIRM PERIOD

Sometimes owner award the work at a firm price or fixed rate. As the labour wages and materials cost
increases, it is advisable to provide escalation and over run compensation.

Firm period is the duration of time over which the firm price is valid.

SECURITY DEPOSIT

Security deposit is the amount the contractor has to deposit with the owner before awarding a work, after
his tender is accepted. This amounts to generally 5% to 10% of estimated cost of the project and is
inclusive of the EMD already deposited by the contractor along with the tender. This will be refunded to
the after the completion of the project. No interest is paid on SD.
The contractor has to fulfill all the terms and conditions laid down in the contract and maintain quality and
speed satisfactorily. If he fails to do so, a part or whole of the SD is forfeited by the department. If there
is any fault in the construction and the contractor refuses to demolish and reconstruct then the
department will carry out that work using the SD.

SD is not collected in the case of a contract for supply of materials, as the supplied materials become the
security.

RETENTION AMOUNT

If the cost of the project is a huge amount, the contractor is made to deposit only 50% of the amount in
the initial stage and then the rest of the SD is deducted in installments from the running bills of the
contractor. These installments are retained with the owner and is known as “Retention amount” .

Purpose of retention amount

1. To make good the defect before the final certificate has been issued.

2. To meet the claim, damages, compensation, etc.

3. To make the necessary payment to the nominated sub contractor in case the contractor fails in
the same.

CONTRACT DOCUMENTS

When the tender of a contractor is accepted, an agreement between the contractor and the owner takes
place and the documents defining the rights and obligations of he owner and the contractor are attached
to the agreement bond and this is called a contract document. Each page of the contract document
bears the signature of the contractor and the accepting authority and any correction in it is initiated.

The contract document must contain

1. Title page – name of work, name of owner, name of contractor, contract agreement no., contents, etc.

2. Index page – contents of the agreement with reference pages no.

3.Tender notice – brief description of work, estimated cost of work, date and time of receiving tender,
amount of EMD and security deposit, time of completion, etc.

4. Tender form – the bill of quantities, contractor’s rate, total cost of work, time of completion, amount of
security deposit, etc.

5. Schedule of issue of materials – list of materials to be issued by the owner/department to the

6. Drawings – complete set of drawings including plan, elevation, sections, detailed drawings, etc. all
fully dimensioned.

7. Specifications – (a) General Specifications which specify the class and type of work, quality of
materials, etc. (b) Detailed specifications – detailed description of each item of work including material
and method to be used along with the quality of workmanship required.
General Conditions of contract

a) Rates of each item of work inclusive of materials, labour, transport, plant/equipment and other
arrangements required for completion of work

b) Amount and form of earnest money and security deposit

c) Mode of payment to contractor including running payment, final payment and refund of security
money, etc.

d) Time of completion of work

e) Extension of time for completion of work

f) Engagement of sub contractor and other agencies at contractor’s cost and risk

g) Penalty for poor quality and unsatisfactory work progress

h) Termination of contract

i) Arbitration for settlement of disputes

j) Special conditions – depending upon the nature of work taxes and royalties included in the rates,
labour camp, labour amenities, compensation to labour in case of accidents, etc.

k) Deed of pledge.

Group of conditions of contract

The following groups of conditions are relating to:

1) Documents : Bill of quantities(BOQ) & schedule of prices, Drawings, BIS specifications, Notices,
Provisional & prime cost sums

2) Obligations of the contractor : Access to work, Acts, Bye laws & regulations, Fencing ,Watching
&lighting, Instructions of engineer, insurance, setting out, site.

3) Labour and personnel: Accident to workmen, subcontractor, architect’s assistant, first aid, rates of
wages, removal of employees of contractor.

4) Execution of the work: Alterations of work, amount for extra work, damages, defects, materials,
protection of trees & shrubs, public travels, water for construction, work at night and on holidays.

5) Measurements and payments: method of measurements of completed works, method of payment,

6) Default and non- completion: Abandonment of the work by contractor, bankruptcy of contractor,
failure to complete the work in time, Right to suspend the work by the owner, time of completion.

7) Settlement of disputes : Arbitration, when architect’s decision is to be final.

8) Special condition : Equipments, names of firms supplying materials, pollution of environments.

The Indian institute of architects (IIA) has prescribed a model form of Articles of agreement &
conditions of contract . This form of contract is used mostly on item rate tender. It is accepted by
courts in a number of disputes relating to building projects.

Typical clauses are as following:

1) Definition: Owner, contractor, architect, engineer, subcontractor, site, written notice, drawings,
works.

2) Contract documents : Articles of agreements, conditions of contract, specifications and bill of

3) Nature of contract: Item rate contract, lump-sum, etc.

4) Schedule of quantities: BOQ, Rate of items, etc.

5) Contract Drawings : Set of working drawings at various required stage.

6) Contract sum: The total sum of all priced tender items .The said sum is not allowed to be
adjusted or altered without the permission of architect or owner.

7) Contract bills : Contract bills are known as bills of quantities that is priced schedule of quantities.

8)Scope and intent of contract:

Scope: The general character and the scope of the work is illustrated & defined by drawings ,
specification and bill of quantities.

Intent: The intent of the document is to include all material and labour necessary for proper
execution of work.

DEFINITIONS

Owner: The owner is the person who has signed the contract as the first party or his legal representative,
successor, assignee, etc.

Contractor: The contractor is the person who has signed the contract as the second party or his legal
representative, successor, assignee, etc.

Nominated Sub contractor: A person nominated by the contractor & approved by the architect, who can
work as assistant or representative of contractor. Contractor shall submit a list of all sub contractors he
wishes to engage for architect’s approval. Once the names of sub contractors are approved they are
designated as “Nominated sub contractors”.

Site: The site means the actual plot on which the building is to be built and shall include any adjoining
piece of land where material may have been stored or any work shop where articles required for the
building are assembled or fabricated.

Virtual completion: Virtual completion means the stage of completion of the building when the architect
certifies in writing that the same is complete and ready for occupation by the owner.
Final completion: Final completion means the stage when the defect liability period mentioned in the
contract is over.

LIQUIDATED DAMAGES

It is an amount of compensation payable by a contractor to the owner due to delayed construction. This
amount of compensation is not related with real damage. This does not relieve the contractor from his
obligations and liabilities under the contract. In case if a part of the project or premise is used by the
owner before its completion, the amount to be paid is reduced in proportion to the value of the part that
has been utilized, after issuing the certificate of occupancy.

UNLIQUIDATED DAMAGES

It is an amount of compensation payable when a contract is broken. The party who suffers such a
breach is entitled to receive this amount from the party who has broken the contract.

DIRECT AND INDIRECT COSTS

From the contractor’s point of view, the cost of structure can be divided into two categories

1. Direct cost: The cost of various materials such as bricks, cements, steel, etc. plus the cost of labour
required to incorporate these materials in the structure will constitute the direct costs.

2. Indirect cost: The contractor is carrying out a number of works at a time and there are certain items,
the costs of which cannot be imposed on one particular work. These costs are known as the indirect
costs.

DEFECT LIABILITY PERIOD

This is like a warranty period given by a manufacturer. Any defect observed during this period in the
building shall be made good by the contractor free of cost to the owner. Defect liability period shall be
minimum one year, after virtual completion of the building, so that the building has experienced all the
seasons of the year.

DEFECTS

For defective workmanship and defective materials through the architect can be said to be responsible
but there is an implied warranty by the contractor that so far as the materials and the workmanship are
concerned, the same are good enough for safe construction.

The defects have been classified in two categories:

1) Patent defects 2) Latent Defects

Patent Defects

Patent defects are those which should have been identified before the issue of the final certificate. The
architect is liable to his client for patent defects which he should have noticed in the course of his
supervision but which he failed to notice or failed to instruct whose list is generally sent to the contractor
at the end of the defect liability period.
Latent Defects

Latent defects are those which could only have been identified after the issue of the final certificate. For
latent defects of materials, other than those due to faulty specification, or workmanship, the architect is
not liable to his client but the contractor is liable for it to the employer. For latent defects of design, or
specification, the contractor is not liable to the employer, but the architect is liable to his client, if it can be
proved that there was negligence or incompetence on the architect's part.

Clerk of works

Clerk of works is a person is approved by the architect and appointed & paid by the owner for day to day
supervision of work on the site. The clerk of works shall work under the direction and orders of the
architect to inspect the work in the absence of the architect from the site. The contractor shall give all the
facilities and assistance on the site to the clerk of works for the work and checking of the building
material on the site.

Contract Sum

It is the total of all priced tender items, the total of which has been arrived at by multiplying the tendered
quantity with tendered rates. The said sum is not allowed to be adjusted or altered. The contract sum can
be altered only in accordance with the express provisions of these conditions of contract. The architect’s
interpretation of these documents (which includes drawings and specifications as well) shall be final.

Performance bond / Guarantee

Contractor shall deposit security Deposit with in 10 days of signing the contract. The security shall be in
the form approved by architect and remain so deposited with the architect till the end of the defect
liability period. The said security deposit shall assure the owner against loss from defect arising from
any clause under the contract or due to the failure of the contractor to promptly carry out any matters
arising the contract.

Samples & Shop drawing

All samples of material, fittings etc. shall be submitted by the contractor within 60 days of the works
order. Shop drawing of items to be fabricated shall also be submitted within 60 days. The architect will
approve the same promptly.

Contract drawing

Drawing will indicate dimensions, position and construction. Specifications will indicate qualities, methods
and order of carrying out work. Contractor shall not deviate from the drawing. Architect’s interpretation of
his drawing is final. Errors and inconsistencies in drawing and local conditions affecting the work must be
brought to the notice of the architect.

Variations

During the construction, the architect may find it necessary to alter or modify the design or item of
construction and may ask the contractor accordingly. This changes in item is called “Variation in work.”
Provisional sum

At the estimate level, without going into the details, a certain amount based on earlier experience, is
provided in the tender against an item by the architect, usually for purchased of goods. This amount is
further included in Contract Sum.

Prime cost

Prime cost is the basic cost of the material. As per the general condition of the contract, the prime cost of
material shall be the amount payable after deducting any discount, but including the sale taxes and the
cost of packing and transport to the site.

Voidable contract

That is, not binding to one or other of the parties and hence, the contract can be avoided by injured
party.

Void contract

That is, without any legal effect and thus, not binding to either of the party concerned.

Extension of time

The contractor has to give a written notice to the architect immediately if he has lost the time of work for
the reasons beyond his control. If the reason is true and reasonable, the architect shall inform in writing
to the contractor and the owner as well, the number of days of extension granted beyond the date of
completion as mentioned in the appendix of contract.

The extension of time to complete the project can be given by the architect only under certain conditions
given below:

1. Loss of working day to inclement weather.

2. Loss of damages to work due to fire, storm, heavy rains etc.

3. 3.Loss of working days due to a civil commotion.( band)

4. Loss of working days to a strike or a lockout affecting any of the trades employed upon the work or
any of the trades engaged in preparation, manufacture or transportation of any of the goods or the
materials required on the site for the work.

5. Delay of supply of as specified materials due to strike with manufacturer.

6. Delay due to receiving details from the architect’s office.

7. Delay on the part of the nominated sub- contractor.

8. Any other reasonable reason.