Introduction to

Construction Contracts
By
Eng. Ahmed Moustafa B.Sc
Email: [email protected]
Telephone Number: 00201003437028

Introduction

Name: Ahmed Moustafa Mohammed

Title: Contract Adminstator
Department: Structure Engineering & Construction Management
University: Zagazig University

Main Topics
Introduction to Construction Contracts:
1. Introduction to Construction Projects
2. What is Project Delivery System
3. What are Tenders
4. What are Contracts
5. What are Construction Contracts
6. What is FIDIC

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

FIDIC

Construction
It is the process of producing a structure, it is simply the building
process

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

Construction Industry
It is the industry that is related to the construction field.

FIDIC

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

FIDIC

Properties of Construction Industry

Service based industry, not product base

Uniqueness of each project

Higher level of risk

Temporary

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

FIDIC

Importance of Construction Industry

Good indicator of the countrys economy

Contributes to the development of the country

Linked with other industrial sectors

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

FIDIC

Construction Project Parties

This is the traditional (most commonly used) relation
between project different parties.

Construction Project Parties

Owner
(Client/Employer)
Owners Role:
1. Feasibility study
2. Product Specification/Design Requirements
3. Financing methods
4. Contract type selection
5. Contractor selection method

The person/organization has the idea/concept &

money for a project.

Consultant Role:
1. Project Design
2. Project Specification
3. Engineering Estimate
4. Construction Supervision

Contractor Role:
1. Design Review
2. Construction method
3. Project Construction

Contractor
The person/organization with the required
resources and experience capable of
converting the project document into a
physical construction work.

Engineer
(Consultant/Architect /Designer)
The person/organization with the level
of experience capable of interpreting the
owners idea into project documents
(drawings, specs, )

Project
Delivery
System

Construction
Projects

Tenders

Construction
Contracts

Contracts

FIDIC

Construction Project Resources

1. Labor

Another way to look at

Project Resources
Manpower

2. Material

Material
5M

3. Equipment

Machine
Money

Method

4. Subcontractor

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

FIDIC

Different types of Construction Projects

Residential Projects:
Example; Residential houses/ compounds, etc .

Non - Residential Projects:

Example; hospitals, schools, etc

Infrastructure/Engineer Projects:
Example; highways, bridges, water/waste treatment plants, etc

Industrial Projects:
Example; industrial factories

Construction
Projects

Project
Delivery
System

Tenders

Construction
Contracts

Contracts

FIDIC

Different types of Construction Projects

Project Types

Owner

Engineer

Contractor

Financing

Resources

Percentage

Residential

Mostly
Private

Mostly Archt.

General
Contractor

Low

No special
resource needed,
mainly labor

40 45%

Non-Residential

Mostly
Private

Mostly Archt.
& Civil

General
Contractor

Low Intermediate

May require
some special
resource, mainly
labor

25 30%

Infrastructure

Mostly
Public

Mostly Civil

Large Scale
Contractor

High (may require

special financing)

Requires a high
level of
resources, mainly
equipment

20 25%

Intermediate High

Requires a high
level of specific
resources, mainly
equipment

5 10%

Industrial

Mostly
Private

Mostly Specific
Civil

Specialized
Contractor

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

FIDIC

Construction Project Stages

Feasibility &
Strategy Stage

Design Stage

Tendering &
Contracting
Stage

Construction
Stage

Testing, Primary
Taking Over and
Grantee (Intial)
Stage

Final Taking
Over and
Grantee (Final)
Stage

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

FIDIC

Project Delivery System (PDS)

It is the system used by the owner for organizing, financing design,
construction, operation and maintenance for a project.

It identifies different project parties assigning each party specific

responsibilities and authorities and it also defines how different
parties interact with one another.

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

Project Delivery System (PDS)

1.
2.
3.
4.
5.
6.

Force Account
Traditional Design/Bid/Build ( DBB)
Design Build (DB)
Multiple Prime Contractor (MPC)
Construction Management (CM)
Turnkey (BOT)

FIDIC

PDS: Force Account

Owner performs the construction work using own
resources, suitable for small maintance project.
Advantages:
1. Cheap (No Engineer, No Contractor)
2. Time effective
3. No conflict as there is only 1 party
4. Change orders are easily performed
Disadvantages:
1. Not suitable for large projects (owner isnt experience enough)

PDS: Traditional Design/Bid/Build (DBB)

Owner assigns an Engineer to design project and a
Contractor to construct the project.
Advantages:
1. Project documents are completed before bid start
2. Owner has a great idea of the full project details
3. Decrease change order made during execution
4. Chance to use open tender to get lowest cost

Benefit to Owner:
1. Owner deals with 1 Contractor only
2. Traditional, well known & recognized approach
3. Design is impartial

Disadvantages:
1. Conflict may occur between different parties
2. No co-ordination between Engineer & Contractor
3. Contractor is not part of design (decrease constructability)
4. Time consuming

Risk to Owner:
1. Failure to co-ordinate between different parties
2. Conflict may occur during project execution

PDS: Design/Build (DB)

Owner assigns an design build company which designs and constructs project, here
construction could overlap with design, suitable for major project (heavy construction)
Advantages:
1. Time effective (as construction may begin before design is finished).
2. Coordination between designer & contractor assures higher
constructability.
3. Decreases headache on owner as project responsibility is carried by
firm.

Benefit to Owner:
1. Saves time
2. Less conflict between parties

Disadvantages:
1. No bidding, no competition i.e. higher price.
2. Owner is not as involved in project as other PDS

Risk to Owner:
1. Integration of design is eliminated (no complete vision)
2. Owner has less control on project

PDS: Multiple Prime Contractor (MPC)

Owner assigns multiple contractors each for a specific part of the project, suitable for
large multidiscipline projects like water structures, .
Advantages:
1. Cheaper as there is not subcontracting.
2. Utilizes different expertise and vast amount of resources.

Disadvantages:
1. Very high chance of conflict between contractors
2. Extremely difficulty to coordinate between parties

PDS: Construction Management

Owner assigns a CM with high managerial skills/experience to assist him in coordination
and construction project management.
Advantages:
1. Cheaper as there is not subcontracting.
2. Utilizes different expertise and vast amount of resources.
3. Decreases conflict and increases coordination between parties
4. Decease Owners responsibility for managing and coordinating

Disadvantages:
1. Expensive but may be proven efficient

PDS: Turnkey
Owner (usually government) assigns a company to do all design, construction, financing
and operating tasks ex. BOT (Build/Operate/Transfer)
Advantages:
1. Time effective as 1 party does all the work
2. Owner relieved from construction problems
3. Owner doesnt have to worry about project financing

Disadvantages:
1. Very high benefit costs
2. Project may be handed over in a bad condition

Project
Delivery
System

Construction
Projects

Tenders

Contracts

Construction
Contracts

FIDIC

Factors affecting PDS selection

Factors related to project

Factor related to owner

Factors related to market

Time Constraints

Owner past practices and

experience

Availability of PDS in market

Financial Constraints

Owner resource capability

Package size compared to market

Pre-construction Services

Restriction on method for certain

owners

Design Process Involvement

Distribution of risk

Shareholder interests

Construction Sophistication

Project
Delivery
System

Construction
Projects

Tenders

Contracts

Construction
Contracts

FIDIC

Tender
The tender process is the process of choosing a contractor to execute the design works; it is of different
types, some of which are:

Direct order: owner directly chooses a contractor to perform the services;

Suitable for:
Projects of a special nature (where only a small number of contractor are able to
perform)

Advantages:
Not time consuming

Disadvantages:
May cost more than other tender types

Project
Delivery
System

Construction
Projects

Tenders

Contracts

Construction
Contracts

FIDIC

Tender
The tender process is the process of choosing a contractor to execute the design works; it is of different
types, some of which are:

Open/General tender: owner announces project in public and any contractor can submit;
Suitable for:
Generally all project, specially government projects (because of administrative
restrictions)

Advantages:
Ensures high competition thus lower cost

Disadvantages:
Time consuming
Unqualified tenderers may be choosen

Project
Delivery
System

Construction
Projects

Tenders

Contracts

Construction
Contracts

FIDIC

Tender
The tender process is the process of choosing a contractor to execute the design works; it is of different
types, some of which are:

Selected/Limited tender: owner announces project to the previously pre- qualified short listed
contractors;
Suitable for:
Generally all project, specially large projects

Advantages:
Ensures high quality a contractor is pre-qualified

Disadvantages:
Time consuming (but less than Open/General tender, due to the lower number of
tenderers)
Less competition, higher cost

Project
Delivery
System

Construction
Projects

Tenders

Contracts

Construction
Contracts

FIDIC

Tender
The tender process is the process of choosing a contractor to execute the design works; it is of different
types, some of which are:

Open/General practice: similar to open/general tender expect that the owner negotiates publicly to get lowest
price reverse auction while standardizing all other criteria.

Selective/Limited practice: similar to open/general practice expect that the owner negotiates with selected
contractors to get lowest price.

Note that:
1. The negotiations are made either in a negotiation meeting (with all the tenderers present) or via
correspondents.
2.

The owner informs the tenderers with their competitors offers so that each tenderer (if he wishes)
would lower his offer, in order to be choosen by the owner.

3.

The problem with practices is that it may cause tenders to submit initially higher offers (as they know
that these offers will be lowered in the negotiation process).

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

Contracts

A Contract is an agreement made in good faith between 2 or more capable parties to perform an
act for a certain specific purpose.

In construction field the contract is usually between owner and contractor to perform
construction services.

The Contract is a legally bidding document that defines exactly the rights and obligations of each
party in the contract.

Steps to contract:
1.

Invitation to bid/tender (Tender Process) from Owner party A to Contractor party B" to
perform a certain task or a service with certain conditions.

2.

Offer (tender/bid) from the Contractor (B) is made to the Owner (A) to perform the task
(complying with all or some of the conditions)

3.

Acceptance where the Owner (A) has the right to accept or refuse the Contractor (B) offer, if
accepted then a contract is born (legally bidding for both parties).

FIDIC

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

FIDIC

Types of Contracts
Contract can be categorized according to the payment method, such categories include:

Fixed price contracts

Lump sum: a pre-determined fixed priced is set for all project/items; price includes overhead, profit
and all other necessary costs, this price can be paid:
Once the project is delivered
According to work progress (time progress or quantity progress or percent progress)

In this type of contract:

The scope should be fully detailed
No or minimal changes should be allowed during execution
Fair mechanisms for long term risk allocation should be placed in the contract (ex. Escalation
Formula).

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

FIDIC

Types of Contracts
Contract can be categorized according to the payment method, such categories include:

Remeasure contracts
Unit price: (most common contracts) where a fixed unit price (price/quantity unit) is predetermined for each work item which includes all necessary costs; here the contract is remeasured i.e.
exact contract cost depends on the actual quantities executed, the price can be paid:
According to a BOQ containing estimate quantities (most common)
Rate Only (suitable for small works, maintenance works or rehabilitation works), rates may be
over priced as there is no quantities to place rates on.

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

FIDIC

Types of Contracts
Contract can be categorized according to the payment method, such categories include:

Cost reimbursement contracts

Where the contractor agrees to perform the work for certain price which includes:
1.
Direct cost of the item plus,
2. A certain pre-defined fee which covers the profit & overhead.

The different types of the cost reimbursement are:

Cost plus percentage fee
Cost plus fixed fee

Target cost contracts

Where a target cost is set, whatever the final cost turns out to be, the saves/losses are divided
between the owner and the contractor.

Construction Contracts Types & Risk

Alot

Little

Lump Sum
Unit Price

Info.
Info.
required
required
for tender for control

Target Cost

Cost + Fixed Fee

Little

Cost + % Fee

Alot

Min.

Owner Risk

Max.

Contractor Risk

Min.

Owner Control

Min.

Control Effort

Min.

Design Changes

Max.
Min.
Max.
Max.
Max.

Cost Plus
Contracts

Remeasure
Contracts
(Red Book)

Target
Cost
Contracts

Design Build
(Yellow Book)

EPC/Turnkey
(Silver Book)

Site, Work Quality & Contractors Crew Risks are carried by Contractor

Contractor
Risk Increase
Employer
Risk Increase
Insurable FM

Price/Contract
Type Relation

Contractor
carries all
the risks
with
limited
chances of
claiming
extension of
time or
additional
costs
Turnkey,
BOT, BOOT,
etc.

Force Majeure Risks are carried by Employer

Un - Insurable FM

Contract Financing Risks are carried by Employer

Traditional
Contracts

EPC/ Turnkey
Contracts

Risk Allocation

Risk Distribution & Contract Types

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

FIDIC

FIDIC

FIDIC (Fdration Internationale des Ingnieurs Conseils or International

Federation of Consulting Engineers) is an international federation of
associations of consulting engineers representing the profession in their
respective countries.

FIDIC's Contracts Committee is responsible for producing the most commonly

used standard forms of contract for international construction projects.

FIDIC contracts are generally known by the color of their cover: the Red Book,
Yellow Book, Silver Book, Green Book, Pink Book, Gold Book, Blue Book and
White Book.

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

FIDIC

FIDIC Forms of Contracts

Main Forms of Contract before 1995 included:

1. From 1913 (establishment of FIDIC) till 1957, FIDIC didnt produce any form of contracts.

2. In 1957, the 1st edition of Conditions of Contract for Works of Civil Engineering
Construction was published and its cover was red.
3. In 1962, the 1st edition of Conditions of Contract for Electrical and Mechanical Works
Including Erection on Site was published and its cover was yellow.

4. In 1969, the 2nd edition of Conditions of Contract for Works of Civil Engineering
Construction was published and its cover was also red.
5. In 1977, the 3rd edition of Conditions of Contract for Works of Civil Engineering
Construction was published and its cover was also red.

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

FIDIC

FIDIC Forms of Contracts

Main Forms of Contract before 1995 included:

7.

In 1980, the 2nd edition of Conditions of Contract for Electrical and Mechanical Works
Including Erection on Site was published and its cover was also yellow.

8.

In 1987, the 3rd edition of Conditions of Contract for Electrical and Mechanical Works
Including Erection on Site was published and its cover was also yellow and the 4th edition
of Conditions of Contract for Works of Civil Engineering Construction was published and
its cover was also red, the covers were internationally recognized and the contracts were
known as Red Book and Yellow Book.

9. In 1995, the FIDIC published of 1st edition of Conditions of Contract for Design-Build and
turnkey and its cover was orange.

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

FIDIC

FIDIC Forms of Contracts

Other Forms of Contract included:

A.

Client/Consultant Model Service Agreement

1. In 1990, the 1st edition of Client/Consultant Model Service Agreement was published and its
cover was White.
2. In 1991, the 2nd edition of Client/Consultant Model Service Agreement was published and
its cover was also White.
3. In 1998, the 3rd edition of Client/Consultant Model Service Agreement was published and
its cover was also White.
4. In 2006, the 4th edition of Client/Consultant Model Service Agreement was published and
its cover was also White.

B.

Sub-Consultant Agreement & Joint Venture Agreement

1. In 1992, the 1st edition of Sub-Consultant Agreement was published and 1st edition of Joint
Venture (Consortium) Agreement.

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

FIDIC

FIDIC Forms of Contracts

Other Forms of Contract included:

C.

Sub-Contract Agreement
1. In 1994, the 1st edition of Sub-Contract Agreement was published and its cover was
red in relation with the Conditions of Contract for Works of Civil Engineering
Construction.

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

FIDIC

FIDIC Forms of Contracts

Main Forms of Contract after 1995 :

After publishing the Orange Book in 1995, FIDIC formed a committee to update the
Red and Yellow Books (Red Yellow Update Committee) which took into
consideration the following:
1. Simplifying the language that is used in the forms
2. Unifying the numbering & language formats in all the forms
3. Re-drafting the contracts not based on work but based on the risk allocation

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

FIDIC

FIDIC Forms of Contracts

Main Forms of Contract after 1995 :

In conclusion the following were produced:
1. New Red Book: Conditions of Contract for Construction for Building and Engineering
Works Designed by the Employer, where the Employer (his representative, Engineer, )
supplies design of the Works (which could include: civil, electrical, ) (some designs may
be presented by the contractor, for which he carries their liability)
2. New Yellow Book: Conditions of Contract for Plant and Design-Build, where the
Contractor designs and builds the Works (which could include: civil, electric, ),
recommended for plant (where major work is electrical or mechanical).

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

FIDIC

FIDIC Forms of Contracts

Other Forms of Contract published after 1995 included:

1. Silver Book Conditions of Contract for EPC/Turnkey Projects: recommended for turnkey
mega projects (infra structure, mega project, ) here contractor carries total responsibility for
design and execution (with little involvement of the Employer) to produce a fully equipped
facility for operation.
2. Green Book Conditions of Short Form of Contract: due to the negative criticisms on the Red
book for not being fit for use for small projects (low capital, short duration, low risk) or
repetitive projects.

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

FIDIC

FIDIC Forms of Contracts

By September 1999 the FIDIC published four new suits:
New Red Book: Conditions of Contract for Construction for Building and
Engineering Works Designed by the Employer.
New Yellow Book: Conditions of Contract for Plant and Design-Build.
Silver Book: Conditions of Contract for EPC/Turnkey Projects.
Green Book: Conditions of Short Form of Contract.

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

FIDIC

FIDIC Forms of Contracts

Now FIDIC package includes:
Red Book: Conditions of Contract for Construction for Building and Engineering
Works Designed by the Employer 1st Ed. 1999.
Construction Subcontract 1st Ed. 2011.
Yellow Book: Conditions of Contract for Plant and Design-Build 1st Ed. 1999.
Silver Book: Conditions of Contract for EPC/Turnkey Projects 1st Ed. 1999.
Green Book: Conditions of Short Form of Contract 1st Ed. 1999.
Pink Book: FIDIC conditions incorporated in the standard bidding documents of
multilateral development banks June 2010 Ed.
Gold Book: FIDIC Design, Build and Operate Projects 1st Ed. 2008.
Blue Book: Contract for Dredging and Reclamation Works 1st Ed. 2006
White Book: Client/Consultant Model Services Agreement 4th Ed. 2006.
Sub-Consultancy Agreement 1st Ed. 1992.
Joint Venture (Consortium) Agreement 1st Ed.1992.
Model Representative Agreement 1st Ed. 2013.

Construction
Projects

Project
Delivery
System

Tenders

Contracts

Construction
Contracts

FIDIC Forms of Contracts

FIDIC

The End
By Eng. Ahmed Moustafa Mohammed

Email: [email protected]
Facebook account: http://www.facebook.com/eng.ahmed.moustafa.mohammed
Telephone Number: 00201003437028