CONTRACTS MANAGEMENT

ASSESSMENT OF RISKS
WHILE PREPARING
TENDER ESTIMATES
RED FLAG CLAUSES
K GANESAN
Tender Costing
Usually the cost of tender items of work
are calculated as below
Material
+
Labour
+
Equipment
+
Power & Water
+
Overheads + Profit
Tender Costing

The above generally result in less than

optimal pricing as the following major
cost elements are NOT considered
Taxes, Duties and other Statutory
payments
+
Cost of Risks due to the various
contract conditions & stipulations
which are NOT separately reimbursed
Owner-Construction Contractor Prime
Contract Red Flag Clauses
Before submitting the bid, the
contractor should know what kind of
contractual situation will be
encountered if the bid is selected and
contract awarded
Will the contract be fair, or will it be
heavily biased in favour of the owner?
Aside from the risk of performance
associated with the actual construction
work, what contractual risks lie buried in
the contract language?
Owner-Construction Contractor Prime Contract
Red Flag Clauses
Old adage: Do not sign a contract
until you have read and understood
every single word
Not possible in most cases.
Preparation of cost estimate time
consuming and expensive
Do not undertake a cost estimate and
start bid preparation until you have
read and understood the potential
contract
Carefully examine and understand the
provisions of certain key contract
clauses red flag clauses.
Important Red Flag Clauses

Time provisions
Liquidated or actual damages for late
completion
Site availability and access to the site
Payment and retention provisions
Reports on physical site conditions
Measurement and payment provisions
Variation in quantities
Escalation provisions
Important Red Flag Clauses

Changes to Contract scope

Delays, Suspension and Extension to
the Contract period
Taxes, Duties and Changes in
Legislation
Exculpatory clauses
Insurance and bond provisions
Indemnification clauses
Important Red Flag Clauses

Time provisions
Are project specific and are broader than
simply a statement of how much time the
contractor has been given to complete the
work.
Contractor should look at:
What are the notice to proceed (NTP) provisions?
What is the time period after NTP within which the
contract work must be completed?
Is a single completion time for the total project
specified or is a series of milestones listed that
must be met within specified time limits, each
milestone completion time pertaining to a discrete
part of the contract work?
Important Red Flag Clauses
Liquidated or actual damages for late
completion
Type of contractor liability that will result in
the event of late completion
If the required contract work is not completed
with in the stated period, the contract has, in
effect, been breached by the contractor and the
owner is entitled to be paid damages.
Monetary amount by one of the following
ways:
Most construction contracts include a liquidated
damages provision
If the contract does not contain a liquidated
damages provision, the owner is entitled to be paid
the actual monetary damages suffered due to late
completion.
Important Red Flag Clauses
Site availability and access to the site
Implied obligation of the owner is to make
the project site and reasonable access to it
available to the contractor at the time of
notice to proceed without restrictions
unless the contract contains provisions to
the contrary.
Certain contracts may restrict the
contractors right to occupy the site to
certain days and/or certain hours of the
day.
Important Red Flag Clauses
Payment and Retention Provisions
Payment frequency
Payment for value of materials and
fabricated products
Retained percentage provision
Mobilisation advance
Interest on delayed payments
Final Payment
All the above will impact the
contractors cash flow and consequently
the cost of carrying out the work
Important Red Flag Clauses

Measurement and payment

provisions
Item rate contracts
Basis of quantity measurement and
exact rules determining which items of
work will be separately paid and which
will be included in payment for other
items are very important
Usually found in the specifications
Procedures for recording
measurements and levels of checking
before certification and payment
Important Red Flag Clauses

Changes Clause

While most contract now-a-days has a changes

clause, the details vary from contract to contract
The clause generally defines
The owners right to change the contract scope
unilaterally
Places limitations on that right
Establishes the contractors duty to perform the
change, and
The right to be paid for performing the change.
Vary from being even-handed to being grossly
unfair
Important Red Flag Clauses
Variation in quantities

Important in Item rate contracts where

estimated quantities are large and can
potentially underrun or overrun.
Rates quoted by the contractors contain two
components
Direct cost of performing the work
Component to cover contractors overheads
and general and administrative expenses
If underrun the contractor loses, and if
overrun contractor gains
Widely used clause provides that the bid
price will apply if the work falls with in a
range +/- 15% or 25%. Any variation beyond
this, rates will be recalculated.
Important Red Flag Clauses
Escalation provisions
Long-term contracts
Essential idea in order to induce a lower bid
price, the owner agrees to take the risk, or part
of the risk, of increases in the cost of labour and
key construction materials above the levels that
existed at the time the bids were taken.
Some contracts only provide for escalation on
certain basic materials while many Govt
contracts provide escalation on material prices,
labour wages & cost of POL based on variation in
cost indices
Several contracts prohibit any additional
payments towards escalation and require a
Firm Price for the various items of work
during the entire contract period including
extended durations.
Additional Red Flag Clauses
Differing Site Conditions Clause

Sometimes called changed conditions or

concealed conditions clause.
Normally applies to any physical site
condition found during contract
performance that materially differs from
those indicated in the contract documents or
from conditions normally encountered in
that type of work.

Many contracts are either silent or they pass

on all such risks to the contractor
Additional Red Flag Clauses
Taxes, Duties & Changes in Legislation

Most of the contracts require the contract price

to include all taxes and duties and other charges
payable to various authorities
In certain contracts, Service Tax and VAT (Value
added Tax) is reimbursed on actuals
Changes in Legislation could involve
introduction of new taxes or ( even withdrawal
of subsidies already provided) impacting the
cost of carrying out the works.
In CPWD contracts where escalation is payable,
changes in tax rates, say, from 12% to 14% is NOT
reimbursable
Additional Red Flag Clauses
Foreign Currency Fluctuations
Several contracts include procurement of
materials and equipment from overseas,
whereas the payment terms define payments
only in Indian rupees.
Also in many No change Firm price
contracts no separate clause is included to
allow for such exchange rate variations.
As the foreign currency exchange rate is
subject to market demands and volatile
fluctuations, certain amount of contingency
need to be included to account for likely
exchange rate fluctuations.
Additional Red Flag Clauses

Delays and Suspensions of Work

Construction contracts usually impose severe

liabilities on the contractor because of
generally stringent requirements of work to
meet narrow technical standards within fixed
time requirements.
However, both owners and contractors
understand that certain conditions may occur
under which the contractors failure to
perform within required time limits will be
excused.
Additional Red Flag Clauses

Delays and Suspensions of Work

The clause usually enumerates what

constitutes a reason for excusable delay
Questions arise regarding responsibility
for extra costs arising when the owner
either delays or suspends the work. Who
pays?
Ranges from owner pays for delays caused
by them to those that are completely silent
of the issue to those containing no-
damages-for delay clauses limited to
extension of time only.
Additional Red Flag Clauses
Terminations and Partial Terminations
Owners right to unilaterally terminate all of the
work of the contract or to terminate some
divisible part of the work. Usually under the
following circumstances:
Default of the contractor: When the
contractors performance is either far behind
a reasonable time schedule or results in work
that fails to meet contract quality
requirements, or when the contractor
becomes financially insolvent. Called default
terminations.
The owner may terminate the contract without
disclosing any reason. Called convenience
termination.

What are the contractual relief/ compensation

in case of Termination / Partial terminations??
Additional Red Flag Clauses
Dispute Resolution and Governing
Law Clause
Who will resolve contract disputes and by
what set of rules?
A well drafted clause spells out
Precisely what steps the contractor,
architect/engineer, and owner will take
to resolve disputes between them
Define time limits within which various
procedural steps must be initiated
Extreme cases contract states that that
A/Es or owners decision is final and
binding. Whether legally enforceable
depends on the laws and parties involved
(public or private).
Additional Red Flag Clauses
Dispute Resolution and Governing Law
Clause

Means for dispute resolution

Submittal to an administrative
board of the owner-agency
involved
Submittal to a specially
appointed contract disputes
review board
Arbitration
Formal trial in a court of law
Important Red Flag Clauses
Insurance and bond provisions
Usually, contractors will be able to meet the
insurance requirements, provided they are not
so stringent or unusual that the required
policies are not available in the insurance
market
Insurance premium cost must be included in
the bid cost estimate
Security bond requirements
Cost
Whether the contractor will be able to obtain the
bonds at all?
Bid bond, performance bond, and labour and
materials bond
Important Red Flag Clauses

Reports on physical site conditions

Especially crucial in projects involving
underground construction

Exculpatory clauses or disclaimers

Many knowledgeable persons oppose this
type of clauses and many courts are
reluctant to enforce them
However, their use persists
Contractors who encounter them in
contract documents and assume they will
not be enforced do so at their peril
Important Red Flag Clauses

Indemnification clauses
Many contracts require the
contractor to indemnity and hold
harmless the owner and A/E from
all losses that they may suffer arising
from any act or failure to act of the
contractor in performance of the
contract
Imposes serious potential liabilities
on the contractor.
Is the risk insurable?
Typical Contract Wordings
Escalation

No escalation of rates will be entertained during the period

due to any reason whatsoever. The rates will be final and
firm till the period of construction. Same rates shall also be
applicable for all other similar nature of works for new
buildings/ extension of old building planned to be
commenced at later stage but during the validity of this
contract.

The Contractor shall not be entitled for any additional

payment / escalation due to extension of contract and also
no compensation shall be paid for the said extension
period.

The Contract Price shall be deemed to cover any escalation

in prices of materials, labour, consumable and any other
inputs to the Works during the contract period including
any extensions, and any claim by the Contractor for any
escalation/additional costs shall not be admissible.
Typical Contract Wordings
Interest on delayed Payment and Interest
charges on withheld amount

No interest shall be payable by the OWNER on

any sum due to the Contractor in terms of the
Contract be it the security deposit, additional
security deposit/ retention money, interim or
final bills.
The Owner, shall not, under any
circumstances be liable to pay to the
Contractor interest on any sum payable to the
Contractor under or arising out of the
Contract, whether upon the certificate of R.A.
bills the Owner or otherwise, including the
refund of earnest money, Performance
Guarantee, Retention Money or payment of
R.A. Bills or final bills etc.
 Typical Contract Wordings
Correctness of details
The CONTRACTOR shall be entirely and exclusively
responsible for the horizontal and vertical alignment, the
levels and correctness of every part of the WORK and
shall rectify effectively any errors or imperfections there
in, such rectifications shall be carried out by the
CONTRACTOR at his own cost, when instructions are
issued to that effect by the ENGINEER-IN-CHARGE

Errors or omissions in Contract Documents or the wrong

description of details of Work shall not relieve Principal
Contractor from performing such omitted work or
wrongly described details of the Work and they shall be
performed as if fully and correctly set forth and
described in the Drawings and the Technical
Specifications. The cost of such work shall be included in
the cost of the Work, but in no event shall such work
entitle Principal Contractor for extra claims.
 Typical Contract Wordings
Taxes & Duties
No exemption or reduction of customs duties, excise
duties, sales tax, sales tax on works CONTRACT quay or
any port dues, transport charges, stamp duties or
Central or State Government or local Body or Municipal
Taxes or duties, taxes or charges (from or of any other
body), whatsoever, either prevailing as on date and/or
as may be levied in future will be granted or obtained, all
of which expenses shall be deemed to be included in and
covered by the schedule of rates.

All Duties, Taxes and other Levies payable by the

Contractor under the contract or for any other cause,
shall be included in the Total Tender Price submitted by
the Tenderer. Any Variation during execution in above
duties/ taxes / other levies not be considered
Typical Contract Wordings
Foreclosure of Contract due to Abandonment or
Reduction in Scope of work
The Contractor(s) shall have no claim to any payment or
compensation whatsoever on account of any profit or
advantage which he/they might have derived from the
execution of the work in full as specified in the tender but
which he/they did not derive in consequence of the increases or
decreases of the works nos. of dwelling unit by reasons of
alterations, omissions or variations or in consequence of the
full amount of the work not having been carried out.

If at any time after acceptance of the tender, Engineer-in-

Charge shall decide to abandon or reduce the scope of the
works for any reason whatsoever and hence not require the
whole or any part of the works to be carried out, the Engineer-
in-Charge shall give notice in writing to that effect to the
Contractor and the contractor shall act accordingly in the
matter. The contractor shall have no claim to any payment of
compensation or otherwise whatsoever, on account of any
profit or advantage which he might have derived from the
execution of the works in full but which he did not derive in
consequence of the foreclosure of the whole or part of the
works.
Typical Contract Wordings
Suspension/ Foreclosure /Termination

CONTRACTOR shall not be entitled to claim

compensation for any loss or damage sustained by him
by reason of temporary suspension of the WORKS
aforesaid. An extension of time for completion,
corresponding with the delay caused by any such
suspension of the WORKS as aforesaid will be granted to
the CONTRACTOR should he apply for the same provided
that the suspension was not consequent to any default or
failure on the part of the CONTRACTOR

The decision of the Engineer in charge shall be final on

the amount of compensation payable on account of any
idle labour /employees and idle plant/machinery.
Recovery of installments towards all advances shall
remain suspended during the period the suspension of
work lasts, and no interest on advance shall be charged
for the said period of suspension. Apart from this, the
contractor has no other remedies in connection with
suspension.
Typical Contract Wordings
Variations in Quantities
The quoted rates shall not alter on account of any
variation/deletion/ substitution nor shall it vitiate
the work order in any way. It is stressed that no
escalation or claim for loss, compensation on
grounds of increase/decrease in the quantities will
be entertained under any circumstances, nor will
the contractor be entitled to prefer any claim.
Variation limit to be 25% of total Contract Value
& no limit of the contract items within the BOQ.

EIC/owner reserves the right to alterations ,

omissions, deductions or additions , in part or in
whole any of the quantities or to totally omit any
/most items of work and the contractor shall not
claim any extra or damages on these grounds.
Typical Contract Wordings
Commencement on Site/Possession of Site

The Employer shall hand over complete or part

possession of the site to the Contractor 7 days in
advance of construction programme. At the start
of the work, the employer shall handover the
possession of at least 75% of the site.

If there is delay in handing over the Site, in full or

in part, the Owner shall grant reasonable
extension of time for the delay in the completion of
Works but the Contractor shall not be entitled to
claim any compensation, whatsoever in this
regard.
SAMPLE CALCULATION FOR IMPACT OF RISK
FACTORS

All figures in Rs. Lakhs

Sl. Risk Factor Likely cost Probability Cost to be Remarks

No Impact (C) (P) ( 0 to 1) added (C X P)

1
Less Contract Duration 25.0 1 25.0
( Overtime / Acceleration/
Expedition expenses)

2
Liquidated Damages 3.0 0.8 2.4
5000 per day X 60 days
3 10.0 0.9 9.0
Price Escalation
4
OH during extended contract 15.0 1 15.0
period ( 5 lakh per month for 3
months)

5 10.0 0.5 5.0

Changes in Taxes & Duties

6 TOTAL