Unit 3 Notes on CONTRACTS AND TENDERS

INTRODUCTION:

A proposal made and accepted becomes a promise. Every promise and every set of
promise forming the consideration for each other is an “ agreement”.

When a work is carried out by entering into an agreement with another party for its
execution, the work is said to be done on “contract basis”.

Contract means any kind of undertaking written or verbal by a private person or a firm
for construction, maintenance or repairs of a work for the supply of material. This
agreement is enforceable by law.

Contractor

A person who enters into an agreement with another person or department for the
execution of the work or supplies to be made, under certain conditions is called
“contractor’.

Qualifications of contractor

There are no fixed norms of qualifications of a contractor. There are some essentials
which a contractor is expected to have such as: -

1. He should be financially sound

2. He should have sufficient knowledge to read the drawings
3. He should be well versed with the procedure of the department to carry out the work,
submission of bills and other formalities
4. Good reputation and experience
5. Should have ability to handle labour and material efficiently and properly.
6. Should be capable of arranging men and material as per requirement.

Legal implication of a contact

1. Agreement should not violate the provisions of law

2. It should not have any adverse effect on the morals of the society
3. The form of contract should be writing and each page of the document of the
contract should be signed by both the parties
4. The contractor who refuse to carry out the work before completion can be sued in
a court of law for breach of contract.

Quotation

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The rates quoted by a contractor in response to tender call are called” Quotations”.

Tenders

It is defined as on offer in writing to execute a specified work or supply. In this offer,

some specific articles are required by the department mentioning approximate rate, under
certain conditions of contract. An agreement between the contractor and the department
is executed, Fixation of time is the main clause, for the completion of the job.

Earnest money

It is a guarantee is the shape of money, gives by the contractor along with their tenders,
confirming their willingness to work for the department. Mode of earnest money to be
sent is informed by the department which is in the shape of draft in favor of the
department (Competent Authority). It is generally 2% of the total estimate.

In case, if the tender of the contractor is not accepted. The money is refunded
immediately.

Security money

This is the money which the contractor is has to deposit with the department when the
contract is allotted to him. It is 10% of the total estimate. This money also includes
earnest money already deposited by the contractor. This deposit is kept as check so that
the conditions of the contract agreed upon are fulfilled and the work is completed to the
satisfaction of the authorities. This money can be forfeited by the department if the
progress and quality of the work is not satisfactory.

Classification of Tenders
i) Open or public tender
ii) Selected or limited tender
iii) Negotiated tender

i) Open or public tender: In this type of tender any contractor can enter into
competition and all formalities of giving opportunity to compete are to be fulfilled. It
is compulsory for public works and because of competition, it may result in low cost.
But there are chances of dispute as mistakes found at later stage area difficult to be
adjusted. It is also not suitable for complicated and specialized jobs.

It is also proves to be laborious for the engineer as the work may have to be entrusted
to an unknown contractor. This end result is likely to be that the work goes to a
contractor who is not fit for the work and even though the initial price is low, the final
cost including the cost of delays, claims, extra items, non-tender items etc is likely to

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 be substantially higher. In the end nobody neither the contractor or public or client is
happy.

ii) Selected or limited tender: For this type of tender, the architect after
consultation with his client, invites a limited number of contractors for filling up the
tender or the project. It results into competition on a small scale. But it proves to be
useful for specialized and skilled works. It also leads to early successful completion
of the project.

iii) Negotiated or Single party or Exclusive tender: This is the advanced form of
selective tender and the contract is given by negotiations with one or at the most two
contractors. As such there is no competition in this type of tender and hence, it may
prove to be costly. But when the work is to be completed in target time without
sacrificing for the quality the negotiated tender may prove to be the only alternative

Classification of contracts

The contracts can be classified as under:

a) Scheduled contract or item rate contract
b) Lump sum contract
c) Combination of both

a) Scheduled contract or item rate contract

In such types of contracts, the contracts, the contractor undertake to execute the work at
fixed rates as mentioned in P.W.D. schedule of rates book plus premium as prevailing at
that time. The amount is paid to the contractor on the quantity and kind of work done or
supplies made.

b) Lump sum contract

In this type of contract, the contractor agrees to execute the work as per supplied
drawings and specification, with all contingencies at a fixed sum of money. This practice
of giving contracts on lump sum basis is generally followed in Military Engineering
Service (M.E.S.)

Characteristics of Lump sum contract

a) A schedule of rates is specified in order to regulate the amount to be added to or

deducted from the fixed sum of money and account of additional and alteration not
covered by the contract or work not executed as per given.
b) Departmental estimate of the work, schedule of rates or quantities of work to be done
are not referred in the contract.
c) Detail of measurement are not to be done except additions and alterations, in this
contact.

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C) Combination of both

In this type of contract fixed sum is proposed for the completion of work as specified and
a schedule of rates as agreed upon by which to regulate the price to be paid or to be
adjusted for additions and alterations.

It is not a general type of agreement in use in all departments but is used only in the
department where its use has been permitted by the government concerned. Conditions
and limit of cost of work is also fixed by the government concerned.

Generally “ Piece Work “ systems are agreements given in the form of “Work order”. It
contains only description of various items of work and rates to be paid for each item.
Quantities of work are not mentioned.

As is only an agreement the Govt. can ask the contractor to stop work, if not satisfied
with the quality and progress of the work. On the other hand, the contractor can refuse to
carry out the work, if not satisfied with payment or other reasons concerning work.

PIECE WORK AGREEMENT

In this system, agreements are executed on “Work order Form”. It contains only
description of the work and rates to be paid for each item. Quantity of the work is not
mentioned. Quotations are invited from the contractors to complete such type of works.

In this case, the limit of the work is upto Rs. 10,000/- or any other limit fixed by the
department. It is only an agreement and the competent authority can ask the contractor to
stop the work if not satisfied with his work. On the other hand, the contractor can refuse
to carry out the work, if not satisfied with the payment procedure or any other reason
concerning work.

PUNJAB FORM Stereo B & R No .34

Book No……… Work order No ……..

WORK ORDER FORM

Dated ………….

Order for work described below given to …………………………………….. to

be executed as per conditions at the rates specified below: -

Description of work Rate Per remarks

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Contractor office –in –charge

PREPARATION FOR CONTRACTS

(PRE – TENDER PLANNING)

Before floating a tender, a department must have the following conditions fulfilled, so as
the allotment of the contract to the contractor becomes a smooth process.

a) A set of detailed drawings of the proposed work, with complete data (technical)
b) Material statement mentioning material to be supplied by the department and the
material to be brought by the contractor.
c) The time required to complete the project.
d) Mode of payment and deductions to be from each bill as security.
e) Penalty to be imposed on the contractor in case of delay on the part of the contractor.
f) Complete specifications of scheduled and non-–scheduled items as per P.W.D.
specifications.
g) Conditions regarding arrangement of stay of labor and rates of minimum wages as
fixed.

NOTICE INVITING TENDERS (N.I.T)

It is prepared by the administrative wing after all the above mentioned formalities are
complete including Administration approval. Technical sanction, funds, land acquisition
etc. Sealed tenders are invited by giving advertisement in leading newspapers, by sending
letters to reputed contractors and displaying notice board of the department. The date of
issue of the notice should be about 4 weeks before the receipt of tenders. Mode to send
the earnest money should be mentioned in the advertisement. Cost of tender from and its
availability should be mentioned. Incomplete tender forms are likely to be rejected as per
mentioned.

OPENING OF TENDERS

The tenders are opened at the place mentioned in the tender form. i.e. in the office of
executive Engineer, on the date and time mentioned. Executive Engineer, Divisional
Accountant and office superintendent represent the departments on one side and
contractors or their representatives are on the other side. The lock of the box in which
sealed tenders are dropped by the contractors is opened in the presence of all. After
checking the seals of the tender covers, these are opened and are signed by both the
parties. Comparative statement is prepared item wise and the work is allotted to the
lowest bidder. The competent authority has powers to reject the tender of the lowest
bidder, but he has to give reasons and confidential remarks, financial position and
reputation of the contractor is also considered. Earnest money to the bidders of rejected is

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returned. Signature of each contractor is taken as token of certificate that tenders were
opened in their presence and the allotment has been done to the right bidder.

POWER OF ACCEPTANCE OF TENDERS

The following officers have been given powers to accept a tender in P.W.D. the limit of
power may vary from department and state to state.

Chief Engineer: Full power with in budget

Superintending Engineer: up to RS. One lakhs or any other limit fixed by the department.

ACCEPTANCE LETTER

The following points should be kept in mind while an acceptance letter is prepared

a) The amount quoted in the letter of acceptance should be the same as agreed in the
tender.
b) Endorsement of the letter to Accountant General of the State Covering the following
points:
i) Amount of the Administrative Approval accorded for the work included in the
contract.
ii) Reference to Technical sanction.
iii) Comparative statement of the tenders (original) also any covering note for NOT
accepting the tender of the lowest bid is attached.

CONTACT AGREEMENT

It is a contract deed between the government and the contractor. Divisional Engineer
signs on behalf of government. He is responsible for correct preparation and execution of
the agreement.

The condition of the different departments varies for the preparation of the contract
agreement. Preferably these should be between the framework of manual of order.

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 COPY OF LETTER FROM S.E. TO CONTRACTOR

Office of Superintendent Engineer Date …………….

North circle, P.W.D. Patiala

To
Sh. ABC
Contractor
Patiala

Subject: Reference No. ____________, Construction of Panchayat Bhawan at paitla

Reference you tender No. ___________, Dated __________________

Dear Sir,

On behalf of Governor of Tamil Nadu, I am accepting your tender for the above
mentioned work. Please attend ‘Divisional Office (North) immediately, for instructions
regarding taking over the site and commencement of the work.

Please attend this office on ___________ to complete your contract agreement

The number allotted to this contract is SE-N / PTA-4/2011. This number should be
quoted for your future correspondence.

A copy of each of the following is forwarded here with:

1) Schedule I and II
2) Particular Specifications
3) Complete set of drawings (duty signed by both the parties )

You are requested top return the copy of this letter singed as a token of acceptance.

Yours faithfully
Signature of the Contractor

Copy circulated to:

A.G. Tamil Nadu
Divisional Engineer (North)
SDE III (North Division)

Note: Schedule No I: It deals with the requirement and their rates per unit. In case of supply, approx
quantity is also mentioned.
Schedule No II: It deals with issue of stores to the contractor. Rates and place of issue is also mentioned.

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Types of Contracts

1. Labour contracts
2. Negotiated contracts
3. Schedule of price contracts
4. Package deal contracts
5. Demolition contracts
6. Turnkey Contracts

1. Labour contracts

Some times, the owner is in a position to purchase the required materials himself. In such
cases, he invites tenders only for the labour work. The contractors put up their rates for
the labour required per unit execution of each item. It is absolutely necessary to state that
these rates include:

i. Use of the contractor’s plant and equipment

ii. All necessary falsework
iii. Contractor’s supervision
iv. Contractors profit

Overlall responsibility of the work is of the contractor and he has to arrange in such a
way that proper rate of progress is maintained for the work. The owner has al has to see
that the necessary materials are brought on site as and when required. The owner has also
to watch that there is no wastage of the materials since the contractor is to be paid only
for the labour work.

2. Negotiated contracts

When a contract is awarded simply by negotiation, it is known as a negotiated contract. It

may be of any form of the contract as discussed previously. In case of negotiated
contracts, there is no open competition and the owner carries out negotiations with
selected contractors after studying their previous experience, financial status, general
reputation etc. It is quite clear that negotiated contracts cannot be awarded for the public
works due to absence of open competition. However, in case of emergency period or
under special circumstances, when time of completion is a major consideration, the
negotiated contracts for the public works can be given by special laws.

3. Schedule Price contracts

In this type of contracts, the tender contains only description of all possible items of
construction . In another form of this type of contract, the engineer quotes his rates in the
tender and the competing contractors are simply asked to quote a higher or a lower
percentage to the rates mentioned by the engineer. This form of contracts is useful for the
simplest type of work such as maintenance work.
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 4. Package deal contracts

In this type of contract, the owner gives his requirements in broad outline to the
contractors together with the site data. The contractors then proceed to prepare their own
design of the project and finally submit the same to the owner with the estimated cost of
the project as per their design on a lump sum basis. The construction work of the project
is then given to the contractor whose design is accepted by the owner. This type of
contract is suitable only under certain circumstances, especially when the project
demands special considerations for its design and successful completion. Eg oil
refineries, nuclear power stations, important bridges, sewage treatment plans, chemical
factory, engineering workshop etc.

5. Demolition contracts

This is the simplest type of contract in the sense that the owner invites tenders for the
demolition of an existing structure so that the land on which such structure is standing
can be developed in the best lucrative manner. As such is no construction activity and the
successful tenderer has to take all the materials of the old building and to hand over the
site in the form of an open plot of land. The contractor in turn pays a specified amount to
the owner.

Following points should be noted:

i. The contracts is given to the contractor quoting the highest amount and not the
lowest one as in case of ordinary building contracts.
ii. The owner should take the entire amount from the contractor before handing over
the building to him for demolition.
iii. The contractor must clearly state that the contractor is responsible for making
necessary arrangements for cutting off the existing service connections of water
supply, draining and electricity,
iv. The contractor should be asked to take out insurance policies for labourers, third
party risks etc. and to keep the owner free from all such claims.

6. Turnkey contracts

1. In a turnkey contract, the contractor takes full responsibility for design,

construction & commissioning of the facility of defined scope for a fixed lump
sum price.
2. The contractor has to bear the normal risk of unforeseen site conditions, poor
weather and foundation problems.
3. For a turnkey contractor, time is truly equal to money & schedule slippage may
adversely affect his profitability. A bonus or penalty clause may be included as an
incentive or disincentive to the contractor to the work on time.

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 4. This type of contract is suitable for projects where all the functional parameters
are finalized and changes and extras are not made later. These types are common
in commercial defence and interior projects of multi disciplinary character and
when timely completion is important.

Difference between Types of Tenders

ITEM RATE LUMP SUM COST PLUS PERCENTAGE

1.Balanced one as no 1.Unbalanced one 1. Unbalanced one
undue profit or loss to resulting in excessive resulting in more cost
the contractor. profit or loss to the of construction and
2. Speculation to a contractor. hence more profit for
very small extent. 2. More of a speculative contractor unless
3. Work can be nature. checked by bonus and
commenced after 3. Unless all the penalty clause.
complying with a few formalities are compiled 2. No speculation at all.
formalities like with the work cannot be 3. Work can be
acceptance of tender, commenced. commenced
etc. immediately without
4. All plans, 4.All the details, plans, waiting for all
specifications should elevations, formalities.
be prepared in specifications, etc. 4. All details, elevations
advance. Elevations required to be prepared etc. need not to be
and details can be in advance. prepared prior to the
supplied later on. commencement of the
5. Standard quality of 5.Standard quality of work.
materials and good materials and good 5. Standard quality of
workmanship are workmanship are not materials and good
assured. assured. workmanship at the
cost of economy.

Arbitration

The process by which the parties under a contracts get their disputes and differences
settled through the intervention of an impartial person or a committee of experts in a
judicial manner is known as arbitration. The impartial person or persons are known as
arbitrators.

Thus the definition of arbitration includes the following three concepts:

1) It is the reference of disputes and differences by parties which are at least two in
number

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 2) Such reference is made to a person or persons other than court of law of
competent jurisdiction
3) The person or persons determine the award in a judicial way after hearing the
parties concerned.

Arbitrator and referee:

It some times happens that the parties to a suit agree to refer the matter to a referee
and they agree to honour the statement made by the referee. In this case, the referee
makes only the statement or pronounces his opinion from the facts and data available
to him. The court of law then decides the case and gives judgment on the basis of the
contents made by the referee.

Matters for reference to arbitration:

It is generally understood that all matters may be referred to the arbitration except
those which are prohibited by a statute or which are against the public policy. The
matters which can be reffered to arbitration under the provisions of the act can be
summarized as follows:

1. All disputes except those of criminal nature

2. Martimonial dispute under certain circumstances
3. Pure questions of the law and fact including questions of territorial jurisdiction;
4. The matters pertaining to the protection of private rights under civil litigation.

Following are, however the matters which cannot be referred to arbitration under the
provisions of the Act:

1. Dispute which are purely criminal

2. Insolvency proceedings
3. Lunacy proceedings
4. References for illegal transactions
5. Criminal proceedings
6. Suit for divorce
7. Testamentary matters such as genuineness of a will etc.

There are three kinds of Arbitration

1. Arbitration without intervention of a court

2. Arbitration with intervention of a court where there is no suit pending
3. Arbitration in suits

The arbitration without intervention of a court arises from the execution of an arbitration
agreement. Only in exceptional circumstances, the court may set aside the award of the
arbitrators. After the award by the arbitrator is declared the parties concerned can apply
for a decree on the award, same as any other decree of a court of law.

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Arbitration with intervention of a court where there is no suit pending where the
following condition to be fulfilled for taking advantage of this section

1. The arbitration agreement between the parties must be valid and it should have
been entered between them before the institution of any suit.
2. A dispute or a difference must have arisen to which the arbitration agreement
applies
3. The dispute or a difference must be of such type that a valid arbitration can be
enforced for it.

Arbitration by suits when a suit is pending before a court and when the parties desire to
settle the same through arbitration before the judgements is pronounced, they can apply
for the same and in such cases the court may refer the matter to the arbitrator appointed in
such a manner as may be agreed upon between the parties

Arbitrators

An arbitrator is more or less like a private judge chosen by the parties and endowed by
them with power and privilege to decide the matter of dispute between them.

Following are the qualities of a good arbitrator

1. He must act fairly and honestly in the arbitration proceedings throughout the
reference
2. He must have a clear idea about contractual obligation in general because he
cannot ignore the contents or obligation of the contract
3. He must not allow his award to be influenced by negotiation for settlement of
disputes between the parties before him
4. He should have a working knowledge of the law

It should, however be noted that an arbitrator is not bound by the technical rules of
procedure which the court must follow as such he is not supposed to record separate
findings on the various points referred to him and it is not necessary for him to write a
reasoned judicial decision. As a matter of fact an arbitrator is only required to give an
intelligible decision which embodies or determines the rights of the parties with respect
to the subject matter of reference.

Explain the intent of following in conditions of contract for civil Engineering works
(May 2010 = 16 Marks)
i) Arbitration ii) Sub-letting
i) Arbitration
The main purpose of including this clause is to avoid the tedious procedure of litigation
and thus to avoid legal formalities delays and expenses. It is a procedure in which the
parties concerned submit their disputes to any impartial person or a committee of experts.
The important points to be included in this clause would be

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 1. Appointment of the arbitrator
2. Powers of the arbitrator
3. Period of the notice
4. Delay of the work
5. Remuneration of the arbitrator
6. Award of the arbitrator
A typical clause can be frames as follows
All disputes of the parties concerned under this contract shall be submitted to an
arbitrator who shall be appointed by the President, the Institution of
Engineers(India). The arbitrator thus appointed shall have full power to open up,
revise and review any option instruction decision or certificate of the engineer.

The notice regarding the submission of the dispute to arbitration shall be given in
writing within a reasonable period after the dispute has risen. But no case such
demand shall be entertained after the date of the final payment. It is further
agreed that the contractor shall not cause a delay in the works during the
arbitration proceeding unless agreed upon in writing with the owner.

The remuneration of the arbitrator shall be decided by the arbitrator himself only,
unless otherwise agreed in writing and he shall fix the share of the costs and
charges of the proceeding on either or both the parties concerned. It is understood
and agreed that the award is given by the arbitrator shall be final and binding to
both the parties concerned.

ii) Sub-letting
In order to guard against the behaviour of the sub contractors appointed by the main
contractor, this clause is included in the conditions of contract. The clause should also
provide for two important points:

1. Written permission to appoint sub contractors to be obtained from the

owner.
2. Main contractor to be considered responsible for the works as a whole.

A typical clause is as follows

It is hereby agreed that the contractor shall not sub-let or assign any part of the
works under this contract to any person or persons without obtaining the written
consent of the owner through the engineer. It is also further agreed and
understood that assigning or sub letting any part of the works shall not in any way
give a cause the contractor to get himself released from the obligations, terms and
conditions of this contract. The owner shall consider the contractor responsible for
all the works carried out by the sub contractors. The payment to all sub-contractor
shall be made by the contractor and not by the owner in any case.

e-Tendering

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An internet based process wherein the complete tendering process;
from advertising to receiving and submitting tender-related information are done online.
This enables firms to be more efficient as paper-based transactions are reduced or
eliminated, facilitating for a more speedy exchange of information.

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