Chapter#09 Management of engineering contracts Lecture No. 09 Course: Engineering Management Chapter#09 Management of engineering contracts COURSE INSTRUCTOR : PROF. DR. SHAHAB KHUSHNOOD MED DEPARTMENT, U.E.T TAXILA

What is a Contract…?

Contract According to R. W. Abbett; “Contract is an agreement enforceable by law. Contract signing parties are bound by the contracted terms.” The law governing a certain contract will be determined by the place where the contract was originally signed.

Significance of Contract in An Engineering Industry In an engineering industry contracts are important because they provide information such as: The starting date of the project. Expectation from the parties which sign the contract. Methods of payment for the services. The project completion date.

Contract Enforcement Through Court In order to be enforceable through the courts, following these elements must posses by a contract: The contract must be set forth, with regard to form, according to the contract. The contracting parties must be competent. A valid consideration must be given for all parties to the contract. For the well-being of the contract there must be a real agreement among the contracting parties to the terms specified in the contract. The contract must posses lawful subject matter.

Essential Provisions for a contract According to to R. W. Abbett, Any engineering services contract should have provisions for the following essential items. Statement on starting and completion time of contract work. Date when the contract agreement is signed. Contracting parties names, addresses and descriptions. Description of the engineer’s service scope. Payments for the work to be performed. Compensation for the termination of service prior to the actual completion date. Provisions for cancellation of service prior to the actual completion date. Plans or copyrights reuse. Compensation for the additional work.

Engineering Contract Documents

Engineering Contract Documents The Tender: This forms the “offer” given by the contractor for the costumer’s eventual acceptance without any condition. Contract Conditions: These are simply those rules by which the contract is governed.

Engineering Contract Documents Specifications: This describes the work ‘s description and design information, test procedures, performance standards to be met, maintenance requirements, etc. Work Execution Related Data: These are those data which will affect the execution of the work, such as constraints on work hours, site conditions, geological data.

Engineering Contract Documents Rules to be observed at work site: These rules are imposed by the customer on the contractor and may concern fire safety, labor relations, cleanliness of site and noise. Formal Agreement: This agreement usually displays the principal features of the contract such as finishing dates, payments terms, price of the contract, a list of contract documents.

Engineering Contract Documents Scope of the contract Statement: This is concerned with the subject matter of the contract and describes broadly the customer requirements. Bills of Quantities: The customer usually issues these bills when inviting tender. This bill itemize different services for which prices are required from the tenderers.

Engineering Contract Documents Work Schedule: This is concerned with recording the critical dates during the lifetime of the contract in question. Objective of these dates is that the customer is aware of the progress of the project.

Classification of Contracts Contracts Classification Determining Factors: Competition for the contract. Risk. The type of equipment to be procured. Design complexity of the equipment. Project urgency. Contractor’s past performance. Earlier dealing with the same contractor. Difficulty in estimating procurement cost. Accounting procedures used by the contractor. Contractor’s or customer’s inclination towards a specific type of contract. Life span of the project under consideration. Administrative costs.

Classification of Contracts Types of Contracts Under this classification contracts are classified by method of determining contract. Some of these contracts are: Cost Reimbursement Type Contract: When the performance costs cannot be estimated with certain accuracy, then these type of contracts are used.. Letter of Intent: This document authorizes the contractor to start work on the project immediately.

Classification of Contracts Types of Contracts Fixed Price: This type of contracts are used when the specified price is paid upon the completion of services or delivery of the product to the customer. Fixed Price Incentives Contracts: This type of contracts are used to give incentives to the contractor to improve efficiency and lower costs without lowering the quality of the product.

Classification of Contracts Types of Contracts Fixed Price with Escalation Clauses: This type of contract is used when certain contingencies are beyond the control of the contractor or the supplier. Fixed Price Re-determinable Contracts: This type of contract is used when sound estimates of labor and materials, accurate specification and so on are not initially available.

Classification of Contracts Types of Contracts Fixed Price Contract with Prospective Price Re-determination at a Specified point of time: This contract type is used when the early phase of the project’s cost is specified. This type of contract has frequent applications in quantity production purchases.

Classification of Contracts Types of Contracts In this category the contracts are classified other than by method of determining contract costs. Some type of these contracts are listed below: Turnkey Package Serial Negotiated Continuation Competitive

Contractor Selection Factors

TYPES OF TENDER AND DETERMINING THE PROGRESS OF A CONTRACT

Types of Tenders There are various types of tenders which are used for contracting. Some of them are: 1- Selective. 2- Serial. 3- Open. 4- Negotiated.

Determining the Progress Costumer and contractor must monitor the contractual progress on a regular basis to complete the project successfully as planned.

Determining the Progress Both customer and contractor can utilize the progress information to serve various purposes. Examples of such purposes are: To identify the potential areas of difficulty so that necessary actions can be planned well in advance. To provide useful information on already incurred cost for the project under progress. To make interim payments for the work which is already accomplished. To identify any departure from the project completion date and to obtain information on the expected completion date of the project.

A Contract Negotiation Procedure In contract business, the task negotiating a contract is very important and to be systematically accomplished. This procedure has following steps: Contract proposals solicitation. From desirable contractors. Contractor proposals evaluation. Contractor selection. Bargaining for desirable terms and work conditions. Contract requests. Signing of contract.

ATTRIBUTES OF A CONTRACT NEGOTIATOR AND USEFUL KEY POINTS FOR SUCCESSFUL NEGOTIATION

Attributes of a Negotiator A contract negotiator must posses following certain attributes or qualities. Ability to effectively express thoughts and arguments. Efficient thinking capability. Facility to think clearly. Patience and objectively. Mental ability to determine current situation and take necessary steps. Ability to translate information such as financial and technical into desirable language. Impersonality.

Useful Key Points for a Successful Negotiation According to T. G. Hicks, the contract negotiator must give consideration to the following points. Preparation for changes. Survey of work facilities. Listening Capacity. Treatment of other Negotiators as Human Beings. Alertness of the Negotiator throughout the contract negotiation. Preparation for a battle of wits. Preparedness for negotiation.

Management Bids There are three important items concerned with bids which are: 1- Advertisement for the Invitation to Bid. 2- Information for Bidders. 3- Bid preparation procedure

1- Advertisement for the Invitation to Bid. The following items should be included in the advertisements: Names and addresses of the owner and the person to whom the bids should be submitted. Project location Brief summary of the work to be performed. Bid and contract sureties. Important items of the projects and their numbers. Bids character. Payments conditions. Contract award conditions. Names of the authorized engineer or representatives and statement of their authorization. Plans and specifications information.

2- Information for Bidders The instructions to bidders document should contain all the items included in the advertisement together with the following: Starting and finishing time of the project. Bidder’s qualifications. Responsibility for the accuracy of bidding information, i.e, whether it is of customer or bidder. Bid writing and submission approach to be used. Legal implications associated with the awarding of contract or project. Formalities associated with the bids. Informalities rejection provision. Plans and specifications list. Miscellaneous information.

3-Bid Preparation Procedure According to R. W. Abbett, the bid form should be composed of the following items: Starting and completion time of the contract. Information on the sub-contractors to be employed by the bidding company. Bidding company’s qualifications, such as information on available facilities for the project, financial history, and past records. Bid and contract sureties. Contractor’s price for the project in question. Necessary signature and witness. Declaration that there were no illegal practices. Confirmation that bidder investigated the project site.

FORMULAS FOR DETERMINING ESCALATION IN PRICE Formula-1: This formula is used to determine increase or decrease in contract price due to changes in labor and material costs. The equation to determine increase and decrease in contract price Cc :

Formula-1: Again Concentrate on the Formula

FORMULAS FOR DETERMINING ESCALATION IN PRICE Formula-2: This formula is used to determine the price adjustment factor for labor. According to P. D. V. Marsh, the formula equation is:

Formula-2:

FORMULAS FOR DETERMINING ESCALATION IN PRICE Example:

Example: Solution

THANKS