Understanding Project Contracts
Project contracts invariably involve construction and therefore we will discuss contracts necessarily involving construction in this section. In addition to construction, other areas of work like design, engineering and procurement are involved in project contracts, but all these up front areas of work have to be followed by construction and subsequent commissioning of the project. In this section we will discuss about contracts combining some or all of these areas.
A construction contract between Principal and Contractor can be formed by:
- Competitive tendering.
- Combination of both.
Mode 1 contract is formed by direct negotiation by the principal with one contractor. This mode is adopted only when work is very urgent, or when the principal believes that only one contractor is capable of building the project, or when the principal believes that time and money spent on tendering is wasteful. This is practically non existent in government contracts, but can occur, although rarely, in private industry.
Mode 2 competitive tendering is inviting for bids from several contractor to extract the best performance from the contractors. Competitive tendering exists invariably in public contracting.
Mode 3 is an approach to negotiate with two or three bidders for securing the best possible price. When this is a post-bid negotiation, there is a danger that the lowest price bid agreed in the contract may not be realised on account of the contractor as he may have been coerced to accept a low price for getting the contract. The danger is that the cost risk gets transferred either to the principal through claims under the contract or to subcontractors.
Whatever be the mode of contracting adopted, we will now discuss contracts from the viewpoint of the scope of design and construction. When the two areas of work that is, design and construction is involved in a project, a third dimension of work viz. coordination necessarily arises. This combination means that the project manager must thoroughly understand the contracting strategies that can be adopted to ensure the ultimate achievement of the project deliverables.
There are two broad methodologies in this section viz D-B-B (Design, Bid, Build) and D-B (Design and Build).