ENGINEERING CONTRACT MANAGEMENT
Engineering Contract Law
• What is a contract? Why use a contract?
• What are rights and obligations?
• What are the six elements of a contract?
• What are the three types of contracts?
Engineering Contract Law
• WHAT IS A CONTRACT?
• An agreement between parties that can be enforced by law
• A contract covers:
– Rights and obligations of various parties.
– How project is to be completed.
In other words, a contract is a f formal agreement between two
parties where the contractor obligates itself to perform a
service and the client obligates itself to do something in return.
Definitions
• Right - A justified claim or entitlement, or the freedom to do
something
• Obligation – Something that must be done
MAIN CONTRACTUAL RELATIONSHIPS
Client
Contractual Relationship
Non- contractual Relationship
ct
Co
tra
ns
on
ult
C
an
on
cy
cti
Co
tru
nt
ns
ra
Co
ct
Reporting
Contractor Engineer
Supervision
Note – this is for a Design Bid Build Project Delivery
WHY USE A CONTRACT?
Why use a Contract?
• Provides mutual understanding of contract agreement
• Detail rights and obligations of each party
• Protect both parties
• In engineering contracts used to deliver project deliverables
It is important to ensure that engineering contracts are legally
binding.
What elements must an Engineering Contract contain to be legally
binding?
Engineering Management
ELEMENTS OF A CONTRACT
DISCUSSION:
LIST THE 6 ESSENTIAL ELEMENT OF A CONTRACT
© Unitec New Zealand 5
CONTRACT FORMATION
• For a contract to be binding (i.e. legal) it needs to be properly
formed.
• Elements of a Contract – Things that must be in place in order
for a contract to be properly formed
ELEMENTS OF A CONTRACT
1. Offer and acceptance. Each party must agree to what the
contract is about.
2. Consideration – Things of value need to be exchanged in the
contract (e.g. provision of contract work in exchange for
payment)
3. Intention - An intention to create a legal relationship
4. Legal Capacity - The parties must be legally competent
5. Genuine Consent - Each party must freely enter the contract.
Without any force, pressure or blackmail
6. Legality - The subject matter must be lawful
Engineering Management
OFFER AND ACCEPTANCE
DISCUSSION:
WHAT IS THE MEANING OF “OFFER”?
WHAT IS THE MEANING OF “ACCEPTANCE”
8
OFFER AND ACCEPTANCE
Offer
• Say you will do something for a set compensation
• Must affect legal relationship being formed
• In words or conduct
• Can be revoked before acceptance
Acceptance
• Agree to the offer
• Unconditional acceptance – absolute and unqualified
• Any additional qualifications of conditions make it a counter –
offer and not an acceptance e.g. I accept your offer subject to
me getting finance for the work.
OFFER AND ACCEPTANCE
Tender invitation WHAT IS BEING OFFERED?
Tender
Tender Documents Issued
Document
Tenderers Meeting Communications
Notices to Tenderers in Tender Period
Offer Tender submission Tender
Submission
Tender Report
Principal‘s decision
Accept a tender
Acceptance Tender Acceptance letter
OFFER + ACCEPTANCE = CONTRACT FORMED
CONSIDERATION
• Something of value in return for work.
• Consideration should be adequate, have some value, be legal
and come from the other party.
• Most common consideration is money or services.
In Engineering Contract
• Contractor – offers to perform contract works for payment
• Principal – offers payment in return for performance of contract
works
INTENTION
Both parties have an intention to enter into a legal relationship.
In engineering contracts
• Contractor - Tender submission and price
• Principal - Tender documents and Letter of Acceptance
LEGAL CAPACITY
Some people may not be able to enter
into a contract
• Age – restriction on how old a person
has to be to enter into a contract
• Mental condition - person is not
capable of rational judgement due to
• Mental illness
• Influence of alcohol or drugs
• Authority - Organisation not able to
enter into contract
GENUINE CONSENT
Parties are not forced or tricked into entering into the contract.
Vitiating Elements – actions that result in a person
entering into a contract without their genuine
consent. Includes:
• Undue influence – e.g. “You will agree to the
contract or I will have you kicked out of the golf
club”.
• Duress – physical or economic threat e.g. “agree
to the contract or I will hit you”
• Innocent misrepresentation – Misleading the
other party but not doing it deliberately
• Fraudulent misrepresentation – Deliberately
misleading the other party
• Mistake - Significant mistake between parties
LEGALITY
The act of the contract must be legal and the subject matter
must be lawful.
• Contract works are legal
• Consideration(form of payment) is legal
ELEMENTS OF A CONTRACT
Once again the 6 elements of a legal contract are:
1. Offer and acceptance. Each party must agree to what the
contract is about.
2. Consideration – Things of value need to be exchanged in the
contract (e.g. provision of contract work in exchange for
payment)
3. Intention - An intention to create a legal relationship
4. Legal Capacity - The parties must be legally competent
5. Genuine Consent - Each party must freely enter the contract.
Without any force, pressure or blackmail
6. Legality - The subject matter must be lawful
Engineering Management
CONTRACT DOCUMENTATION &
INTERPRETATION
© Unitec New Zealand 17
Contract Documentation
Contract Terms
What are Conditions of a Contract?
Conditions of Contract – are terms and conditions
that set the rights and obligation of the contract
partners. when a contract is awarded or entered into
Conditions of Contract can be classified into:
– General conditions of Contract
– Special Conditions of Contracts
For tenders, we talk of Conditions of Tendering
Contract Documentation
Contract Terms
• Conditions of Tendering – “rules” for the tendering
process
• General conditions of Contract- “rules” common to
all types of contracts
• Special Conditions of Contracts – “rules” that are
peculiar to a specific contract.
• Specific statements overrule general statements.
– Example – “all fittings to be stainless steel” (standard
specification)
– But drawing shows bracket as being galvanised steel (specific)
Contract Types
• Contract Types
1. Lump Sum
2. Cost-Reimbursement
3. Measure and Value
Contract Types
Contract Types
1. Lump Sum (also called Fixed Price)
Involves setting a fixed total price for a defined product or service to
be provided. Sellers (Contractors)are legally obligated to complete the
contracts or possibly suffer financial damages. Buyers (Clients)are
obligated to adequately describe the product or services being
procured or be subject to contract price changes from an expanded
scope
In a Lump Sum contract the Contract Price shall be the sum stated in
the Contract subject to such adjustments as are provided in the
Contract
Fixed Price - Lump Sum
Description Advantages Disadvantage Uses
In lump sum The Principal’s cost There is no basis for Small well defined
contracts, works is fixed pricing variations projects where
are totally (theoretically) chance of
defined at time of significant change
tender, and is small
contractor
quotes a fixed
price for Financial Contractor carries Most common
executing the administration of all the risk example builder
works the contract is building a house
simple for a client
Costs higher
because of
contractor's risk
Used in an attempt to limit or define the amount that the Principal will pay
for the work.
Contract Types
2. Cost-Reimbursement Contract ( also called Cost-
Reimbursable or Cost-Plus contract)
– The contractor is reimbursed for all direct allowable
costs (materials, labor, travel) plus an additional prior-
negotiated fee (set as a percentage of the total costs)
to cover overhead and profit.
– Risk to client is in relying on the contractor’s best
efforts to contain costs.
– Controls on contractors:
• Performance and schedule incentives
• Costs-sharing clauses
Cost Reimbursable - Direct Labour
Contracts
Description Advantages Disadvantage Uses
Using Principal- Work can be carried No competition In emergencies
employed out at short notice
supervisory staff
and labour. There is no profit The Principal carries For maintenance
element which (in all the risk work
theory) reduces the
Employers costs;
The Principal has The Principal has no
total control clarity of his financial
commitment
Cost Reimbursable - Cost + Percentage *
Description Advantages Disadvantage Uses
The Principal pays The Principal pays There is little In situations of
actual costs for what he gets incentive to uncertainty
incurred by minimise costs
contractor in
executing works , The contractor is Accurate tender With only with
plus an agreed assured of a profit evaluation is reputable
percentage, difficult contractors
representing his
profit The cost of tender Administration of Where there is
preparation is the project is adequate facilities
reduced difficult for proper
supervision and
The Principal total control
cost is not well
defined at start
* Cost + Fixed fee is the same except that contractor's profit is now fixed
and his incentive to minimise costs is therefore increased.
Contract Types
Contract Types
3. Measure and Value (also Time and Materials)
A Measure and Value contract may be used only when it is not possible at the time
of placing the contract to estimate accurately the extent or duration of the work or
to anticipate costs with any reasonable degree of confidence.
A Measure and Value contract is a hybrid of the lump Sum and Cost-Reimbursement
contracts
12–26
* Measure and Value
• Measure and value contract is where Contractor carries out work
described in Contract documents
• Principal pays for measured quantities as determined by
Engineer at rates in the schedule
• Contract price is adjusted by value of actual work done. Can be
up or down. If significant variations then loss or profit or rate can
be renegotiated
• Contractor is deemed to have checked accuracy of description as
schedule and allowed for this in rates
Most engineering contracts are this type of contract
Shared Risk between Principal and Contractor
Types of Contracts and sharing of Risk
BUYER =CLIENT/PRINCIPAL SELLER = CONTRACTOR
Contract Types can have variations!!
• Contract Types and sub-types
1. Lump Sum (Fixed Price) Contracts
– Firm Fixed Price Contracts (FFP)
– Fixed Price Incentive Fee Contracts (FPIF)
– Fixed Price Economic Price Adjustment Contracts (FP-EPA)
2. Cost-Reimbursement (Cost Plus) Contracts
– Cost Plus Fixed Fee (CPFF or sometimes just Cost Plus)
– Cost Plus Incentive Fee (CPIF)
– Cost Plus Award Fee (CPAF)
– Cost Plus Percentage of Costs (CPPC) or CPF
3. Measure and Value (Time and Materials )
Engineering Contracts & Standards
We need to look at the following
• Engineering Contracts
– Short form
– Long form
• Conditions of Contract, Standards & codes
– NZS3910,
– FIDIC,
– NEC,
– NZCIC
12–30
