Procurement Contracts Coursework
Procurement Contracts Coursework
Introduction
Construction project require strong management in order to be successful. Many constructions project take a longer period than expected, resulting increased costs and disputes between the contractors and their clients. One of the essential determinants of the success of construction project is the construction contract. Construction contracts describe the relationship between the contractors, consultants and clients. They also guide and direct the administration of the construction project. Thus, the contract drives the management of construction projects. This paper has evaluated the procurement contracts that govern construction projects. The paper has evaluated legal principle that governs construction industry and the various procurement routes. The paper has also analyzed the Engineering and Construction Contract (ECC). This is relatively new procurement route that is designed to introduce flexibility and clarity in the management of construction project. The paper then compares the ECC procurement contract with traditional ICE procurement contract.
General Legal Principles Governing Construction Contracts
Promise
There are three general legal principles that govern construction contracts. The first principle is a promise (Zarrokh, 2009). There must be a promise between two or more parties concerning certain obligations. One party needs to make an offer to another party in order to establish a contract. The other party must also accept the offer for it to become legally binding. This principle of a promise is concerned with various elements of a contract. One of these elements is establishing proof that the parties had an objective intention to make the promise (Zarrokh, 2009). Thus, the principle is interested in understanding the motivation of parties in making the promise. Another element that forms the focus of the principle of promise is establishing that one entity made an offer, and another entity accepted the offer (Zarrokh, 2009). This is an essential element for any contract to become valid. The offer stipulates terms that the party making the promise is willing to abide. The acceptance stipulate that the other party has unconditional agreed to the terms offered by the other party. Another element of the principle of promise is consideration. This element focuses on requirements that one or the other party has to fulfill in order for a contract to become valid. For example, the contract may require the client to make a down payment of a certain amount to the contractor for the contractor to commence with the project activity. The contractor does not have an obligation to honor the contract if this requirement is not fulfilled.
Legal Duties
The second principles address the legal duties that arise from the promise between parties (Zarrokh, 2009). The promise gives rise to certain obligation. If the contractor makes a promise to deliver the housing project with six months, he has a legal obligation to fulfill this promise. This principle also governs the relationship between the client and third parties. If the contractor enters into an agreement with suppliers, the suppliers have an obligation towards the client though they were not in direct transactions.
Remedies of Breach of Duty
The third legal principle that governs construction contracts seeks to identify remedies for breach of duty (Zarrokh, 2009). This principle defines actions that need to be taken if one of the parties within the contract fails to fulfill the duties stipulated by the contract. This principle focuses on four vital elements. The first element is proving that the contract existed. The principle also examines whether the complainant fulfilled his duties as the contract stipulate. The third element focuses on proving that the other party failed to fulfill some of the duties that the contract stipulates (Zarrokh, 2009). The fourth element focuses on establishing that the plaintiff was harmed by the other entity’s failure to fulfill their contractual obligations.Breach of contract may be anticipatory in nature or actual. Actual breach refers to a situation where one party has refused to fulfill his responsibilities within the appropriate time (Zarrokh, 2009). Anticipatory breach occurs when one party makes an advance proclamation that he has no intent of satisfying his contractual obligations. Award of damages is the most common remedy for breach of contract. Damages refer to a sum of money that the court fixes to compensate the plaintiff losses associated with the other parties’ failure to fulfill contractual obligations.
Legal Relationships
The legal relationship between the contractor and the client is dependent on the procurement routes and payment methods between the parties involved in the procurement process. There are varieties of procurement routes with the construction industry.
Procurement Routes
Procurement routes should consider the design of construction and the mode of allocating responsibilities. It should also consider where the risks lie. Construction risks often involve disruption of the procurement process and delays.
Traditional procurement
Traditional procurement or general contracting is whereby the client hires designing services from consultants and construction services from contractors (Tookey & Murray, 2008). Consultant function end at the design stage while the contractor deals with workmanship responsibilities.
Design and build procurement
In this procurement route, the contractor bears the responsibility of designing and workmanship provided (Wadani, 2004). The contractor engages the consultant on behalf of the employer. Thus, the contractor bears most of the responsibility of the construction activity
NEC: Engineering and Construction Contract (ECC)
This procurement route is recent emergence and reflects the procurement needs of present times (Tookey & Murray, 2008). This is a procedure based contract that requires parties to perform certain actions at certain times. The ECC procedures grant the client and the contractor a lot freedom to control the cost and outcome of the project. It encourages significant cooperation between the client and the contractor thus reducing disputes. It requires parties to interface on matter sooner than waiting for the matter to go out of hand.
NEC: Engineering and Construction Contract (ECC)
The NEC engineering contract originated in the 1991 (Lewendon, 2008). This procurement contract was established to introduce flexibility and clarity in the management of construction contracts. The NEC allows flexibility by providing a variety of primary and secondary payment options. It also promotes clarity by using straight forward language, structures and flowing procedures.
Conditions Guiding Payment in the NEC 3 ECC Conditions of Contract
ECC offers a range of payment options in order to deal with the uncertainties’ that are associated with the construction sector (Lewendon, 2008). This allows the employer to select the payment mechanism that best matches to his needs.
The Price Contract with Activity Schedule
This is the first option of payment. The price contracts option is made in situations where the employer is able to define to the contractor what is required in the project (Lewendon, 2008). The employer does not have to come up with the complete design of the project, but rather a clear statement of what he requires. In this option, the employer provides activity schedule for the contractor to follow. The contractor is left with the responsibility of defining the quantity of work that he needs in order to complete each activity within the schedule (Lewendon, 2008). Thus, the price of each activity is set as a lump sum is expected to cover all works that comprise the activities. The contractor bears the risk since he will not be compensated for changes in the quantity of work unless the employer changes instructions. The sum of the lump sums of all activities within the schedule makes up the tendering price.
The Price Contract with a Bill of Quantity
This is a payment option whereby the employers get the design of the work before seeking for tenders from the contractor (Lewendon, 2008). This traditional form of procurement means that the employer has to hire the services of consultant in order to design activity schedule and determine the quantity of work needed for each activity. The employer has to bear the cost that arises from a shift in the quantity of work.
Target Cost Contract with Activity Schedule
Target cost contract option is suitable in a situation where the span of the project is adequately developed to enable the contractor to establish a price for the entire project (Lewendon, 2008). In this option, the contractor tenders a price based on the activity schedule. This means that the contractor bears the responsibility of establishing the quantity of work for each activity. It also means that the contractor bears the risks that arise from changes in the quantity of works.
- Target Cost Contracts with Bill of Quantities
In the target cost contract with a bill of quantity option, the contractor establishes the price for each activity based on the quantity of work (Lewendon, 2008). This means that the employer has to hire consultants to design the activity schedule and establish the quantity of work. It also implies that the employer bears the loss that may arise from changes in the quantity of work.
- Cost Reimbursable Contract
The cost reimbursable contract requires the contractor to implement the project using his own funds to be reimbursed later by the employer (Lewendon, 2008). In addition to reimbursing the contract actual cost, the employer also reimburses the contractors offsite expenses plus profit. The parties calculate the profit using a percentage fee that the contractor gives at the tendering stage. This option gives the contractor little incentive for minimizing cost, but may be instrumental in a project where time and quality are the most essential consideration. This option simply reimburses the contractor for time and material he has used.
Management Contracts
In the management contracts option, the employers pay the actual cost of the contractor and an additional fee (Lewendon, 2008). However, unlike the cost reimbursement option where the contractor implements the project himself, in the management contracts option the contract subcontracts the project activities. The employer reimburses the contractor’s cost of subcontracting. The primary responsibility of the contract within this arrangement is to organize and coordinate the project activities.
Secondary Payment Option
The employers implement secondary payment options in order to refine the primary options. They also introduce flexibility to the contracting process of construction project (Lewendon, 2008). There are a number of secondary payment options.
- Performance Bond and Option
The performance bond and option enable the employer to claim back the funds paid to the contractor if the contractor fails to fulfill the project task or liquidate the company (Lewendon, 2008). The security amount is usually stated in the contract.
- Advanced Payment to the Contractor
Advanced payment to the contractor option requires employers to make the compensation before the start of the project (Lewendon, 2008). This option is suitable for projects that involve significant upfront costs. The amount that the employer needs to pay to the contractor is indicated in the contract.
- Multiple currency option
This option provides the employer with the freedom to deliver payment to the contractor in other currency (Lewendon, 2008). However, this secondary option only applies to the price contract option. The target cost options and the management options have this provision.
- Limitation of the Contractor’s liability
In most construction projects, the liability of the contractor is usually based on the contractor’s capability to fulfill the objective of the project (Lewendon, 2008). This secondary reduces the contractor’s liability to reasonable skills and standard. This means that the contractor evaluates the contractor based on his ability to exercise reasonable skills and degree of care.
Conditions Governing Contractual Program
- Preparation of Tender Inquiry Documents
The ECC procurement procedure requires careful design of the tender inquiry document (Weddell, 2006). This is because the contractor does not bear the responsibility for changes in the scope of work. Thus, the employer needs to be accurate in defining the scope of work. The employer has the responsibility of presenting accurate information during the tendering process. The work information that the employer provides forms the basis for defining the contractual responsibilities of the contractor and the position of the tender.
2Contractor’s Design
The ECC procurement procedure requires flexibility in the design arrangement in order to enhance cost efficiency and optimize the design (Weddell, 2006). Employers expect the contractors to use their expertise to enhance the buildability of the design and make the design safe and cheap.
3.Program and Time
In the tradition ICE procurement procedures, parties use the contract procedures as a vehicle for justifying delays and extension of completion time (Weddell, 2006). However, the ECC requires all parties to use the contract programs to evaluate progress, delay and regulate future actions. This implies that the programs are not used as a last resort when the project falls out of schedule. All parties use the program proactively to enhance the realization of the desired outcomes.
4.Early Warning Procedure
The early warning procedure is a key area of strength for the ECC procurement procedure. This early warning procedure requires any party that notes issues that could adversely affect the project to inform all other parties (Weddell, 2006). If one party notes an issue that could increase cost or delays the project, he has a responsibility of informing the other parties. The notifying party has the right to call others for a gathering to converse about the issue of concern and others need to oblige. This system motivates parties to be proactive in identifying problem that could have a significant impact on the success of the project. It also enables the contracting parties to be proactive in solving problems.
5.Valuation of Change and Compensation events
The ECC has a different approach of valuating change. In the traditional ICE procurement contract, the engineer instructs changes as they occur and subsequently determine the price (Weddell, 2006). This means that the changes takes place after the actual work is carried out. The employer bears the additional cost of the delay. However, the ECC procurement procedure requires the contractor to quote change based on forecasts or actual costs. This means that the contracting parties get more insight about the time and cost implication of the change. This means that the project manager will be aware of cost that the employer is likely to incur.ECC identifies several compensation events that apply to all pricing options. One of these events is the change in the works information (Weddell, 2006). The ECC assigns the responsibility of defining the work information to the employer. This means that if the work information changes resulting in delays or increased costs, the employer has a responsibility to compensate the contractor. Another compensation event is when the employer fails to make a necessary provision. The ECC contract requires the employer to compensate the contractor for delays or losses that arise from the employer failure to provide at item that the contract requires him to provide. The contract may also require the employer to compensate if the project manager issue instructions to stop the venture or the commencement of the venture. The contract may also necessitate the employer to reimburse the contractor for losses or delay arising from physical conditions that the contractor has no ability to control.
Engineering and Construction Contract (ECC) Dispute Resolution
The traditional ICE procurement procedure offers three main methods of dispute resolution. These methods include; arbitration, conciliation and adjudication (Weddell, 2006). Conciliation entails resolving disputes by use of conciliator. The conciliator meets with disputing parties in separate occasions in the attempt of resolving their differences. The conciliator seeks to identify a middle ground for both parties. They also seek to enhance communication between disputing parties, reduce tension, interpreting issues, exploring solution and providing technical help. This method has no legal standing.Arbitration entails resolution of dispute outside court. The disputing parties refer to arbitrators to help in the resolution of the dispute (Weddell, 2006). This process has a legal backing and, therefore, the decision of the arbitrator is binding to all parties. However, an aggrieved party may appeal the decision of the arbitrator. The arbitrator evaluates the facts presented by both parties in order to come to the most appropriate decision. Adjudication involves resolving disputes in court. The judge evaluates facts and uses legal reasoning to make a decision concerning the dispute. In addition to the above three methods of dispute resolution, NEC also provides the option of a tribunal. A tribunal is an institution that has the legal authority to pass judgment concerning a dispute. Adjudication is also a popular method of resolving dispute under the NEC.
Comparison between ECC and ICE Conditions of Contract
In the ICE contract condition, the employer appoints a contractor who is responsible for design and administration of the contract (NEC, 2011). The ECC takes a different approach. In the ECC, the employer appoints a project manager and a supervisor. The responsibility of the project manager is to administer the contract and ensure that the objectives of the project are realized. On the other hand, the responsibility of the supervisor is to ensure that the workmanship goes as the contract stipulates. The ICE contract provides room for separating the design contract from the construct contract (NEC, 2011). This enable the contract to escape the responsibilities associated with increased work quantities. The ECC enables the employer to merge the design and construct responsibilities and apportion them to the contractor. Shifting the liability to the contractor will motivate him to reduce cost and maintain the schedule of activity.
The ICE condition sets the date of commencing the project the conclusion date and leaves the engineer to come up with work schedule (NEC, 2011). This means that this contract is often used for referral purposes. On the other hand, the ECC contract has become an effective management tool. The ECC contract focuses is used to define the project expectation as well as report progress. It enables the parties to evaluate the progress of the contractor.ICE contracts have claims because the contracts react to changes. The ECC contracts have no claims since the contract deals with changes differently from how the ICE addresses these changes (NEC, 2011). The ICE value variation in project on the basis of additional work conducted under similar condition or similar work conducted under different conditions. In both cases, the contractor has the right to make claims and receive compensation from the employer. In the ECC contracts, these change events are assessed on a forecast basis. This proactive approach of dealing with changes eliminates claims since the employer will be aware of the responsibilities that may arise from the changes.
Conclusion
Procurement contracts are essential determinants of the success of construction projects. These contracts define the relationship between employers and contractors. This paper has evaluated some of the general principle of law that governs construction contracts. The paper has identified three main principles; promise, legal duty and remedies for breach of contract. The paper has also examined the Engineering and Construction Contract (ECC). This is new procurement route that seek to introduce flexibility in the management of construction project. The paper has also compared the ECC contract with the traditional ICE contract. The paper concludes that the ECC presents a new and proactive approach of managing project. This procurement route has enhanced flexibility by providing a variety of payment options.
References
Aeberli P. (2010). Construction Laws- Basic Principles. November 27, 2012. http://www.aeberli.com/uploads/papers/BLS-CONSTRUCTION_LAW_INTRODUCTION_2011.pdf
Lewendon R. (2008). The Use of NEC: Engineering and Construction Contract. November 27, 2012. https://www.waterways.org.uk/pdf/restoration/the_use_of_nec__engineering_and_construction_contract
NEC (2011). Comparison of ECC with ICC Condition of Contract. November 27, 2012. http://www.neccontract.com/documents/news/FAQs%20comparison%20of%20ECC%20with%20ICE%20Conditions.pdf
Tookey J & Murray M. (2008). Construction Procurement Routes. Journal of Construction and Architectural Management. 8 (1): 20 -30
Wadani M. (2004). Comparing Procurement Methods for Design Build Projects. November 27, 2012. http://www. /TR_046_ElWardani_2004_DB_Proc_Methods.pdf
Weddell B. (2006). Choosing the Right NEC Contract. November 27, 2012. http://www.thomastelford.com/books/SampleChapters/Choosing%20the%20right%20NEC%20contract.pdf
Zarrokh E. (2009). Practical Concepts in Contract Laws. November 27, 2012. http://mpra.ub.uni-muenchen.de/10077/1/Practical-concepts-in-Contract-Law.pdf
Is this your assignment or some part of it?
We can do it for you! Click to Order!
