What is a contract?

A contract is a mutual business agreement recognized by law under which one party undertakes to do work (or provide a service) for another party for a previously agreed sum of money.
Contracting arrangements would cover:

  • Contract conditions;
  • Commercial terms & pricing arrangements;
  • Scope of work (technical); and
  • Project execution plan.


Why have a contract?

A written contract provides the document by which the risks, obligations and relationships of all parties are clearly established, and ensures the performance of these elements in a disciplined manner. In the owner’s situation, the contract is the means by which the contractor can be controlled and ensures that the work and end product satisfy the owner’s requirements.


Parties to the contract

Most projects are executed under a three-party contractual relationship:

  • The Owner, who establishes the form of contract and the general conditions;

  • The Engineer, who can have the following three roles:

    • Designer - carrying out the detailed engineering work, and purchasing equipment and material on the owner’s behalf

    • Arbitrator - acting as the owner’s agent in administering the contract and deciding, impartially, on certain rights of the parties under the contract

    • Project Manager – on the owner’s behalf handling design, procurement, and construction or construction management/services; and

  • The Contractor, who executes the work.

The normal contractual relationship among these three parties on a single project is for the owner to have one contract with the engineer for design, procurement, and other services, and a separate contract with the contractor for the construction work. No contractual relationship exists between the engineer and the contractor.

This is usually referred to as a “divided or split responsibility” arrangement. In an alternative arrangement, called “single responsibility”, a general contractor is awarded total responsibility for the engineering, procurement and construction.

The project manager must carefully decide on a specific contracting arrangement.


Contract responsibility

The project manager is essentially responsible for the contract strategy, which is developed as part of the project strategy. However, the proposed division of work, contracting arrangements, forms of contract, and bidders’ lists should be developed in conjunction with the company’s contracts department.

This combined responsibility of the project manager and the contracts department in the contracting process can lead to inefficiencies, delays and disagreements and can negatively impact the project cost and schedule when there are organizational conflicts.

Close coordination and effective communications must exist between all groups to ensure complete agreement and commitment to the proposed contracting program. This is particularly important in all submissions to contract committees and/or senior management.

The project manager must obtain agreement from the company’s contracting department and insurance department before committing to contractual language regarding liability, indemnity or insurance.


Contract strategy

The following would be major considerations when developing a contract strategy for the project:

  • When and how will the work be divided up?

  • How will the division of work affect owner; project team; main contractor; vendor and subcontract interfaces? (This division enables project coordination procedures to be properly prepared);

  • What type of contract should be used? Segment the project into discrete work packages to facilitate management and subject the work packages to available resources. Consider the contract philosophy, the type of contract best suited to the project, contract interfaces, bid evaluation techniques and bid documentation. This enables the contract strategy to be produced in liaison with the contracts department;

  • What roles are licensors and consultants expected to play? This allows arrangements to be made for prequalifying suitable contractors, issuing invitations to bid, evaluating bids, and making award recommendations;

  • Are there potential conflicts of interest with other owner projects in contractors’ offices, in vendors’ workshops or within fabrication yards? Such conflicts can have an impact on the bidder’s list;

  • What is the availability of skilled labor? What is the industrial relations climate local to fabrication yards and local to the construction site? Lack of labor can delete a contractor from the bidder’s list; and

  • What is the quality and availability of personnel to develop, evaluate, and administer the required type of contract/contract conditions?



Thanks to Ignacio Manzanera for providing this book


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