Construction Contract Law

This document discusses construction contract law, including delivery methods, contract pricing options, risks, and requirements for a valid contract. It explores the best delivery model for a project, contract pricing options, risks associated with accepting a cover note, suitable circumstances for using a cover note, issues arising from the selection process, and requirements for a valid and enforceable contract.

Running head: CONSTRUCTION CONTRACT LAW
CONSTRUCTION CONTRACT LAW
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Construction Contract Law
Issue One
Delivery Method
Considering the size and complexity of this project and the needs of the client, the best
delivery model for the project is construction management at risk (CMAR). This is because
Cameron Cadbury, the Managing Director of Truffle Chocolate (TC), wants the project to be
completed within a specified period and budget hence it is very important to engage the general
contractor (construction manager) from a very early stage of the project. In CMAR delivery
method, the owner of the project selects the design team, architect and general contractor early
and involve them starting from the design phase (Farnsworth, Warr, Weidman, & Hutchings, 2016).
This enables the general contractor to thoroughly understand the details and scope of project
works, make his contributions on better alternative designs, and provide better cost feedback to
the design team (Cho, 2016). The entities also develop trust and mutual sense of understanding
even before the start of construction (Gransberg, et al., 2013). This method clearly defines and
separates the responsibilities of the client, architect, design team, general contractor and
subcontractors.
Since Cameron and Ms. Belinda Bucket (the Development Manager of TC) had recently
tendered for and gone through the process of constructing a similar factory in Thorburn, it means
that they have a good understanding of the scope of the project works, the estimated cost of the
project, and the potential risks associated with the project. The previous experience will help in
speeding up the design process, preparing complete contract documents, avoiding design errors,
increasing the accuracy of estimating the cost of the project at early stages, preventing or solving

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disputes or conflicts that may arise between different parties, and implementing strategies that
will reduce the cost and completion time. The construction manager will advise Cameron and act
as his representative, provide value-engineering advice that will save money and time, provide
advice and be responsible for project schedule and budget, and ensure that the project is
completed at a guaranteed maximum price (GMP). In this method, the construction manager ill
bear most of the risks especially the risk of cost overruns in case the GMP is exceeded (DBL Law,
2013).
Contract pricing options
Some of the contract pricing options that could be used by TC for this project are:
Fixed price or lump sum: this is the contract pricing option where a client agrees to pay a
contractor a fixed price for the project works. The fixed price is agreed upon between the client
and contractor before official award of the contract to the contractor.
Cost plus: in this option, the client pays the actual costs, expenses and purchases incurred
by the contractor in carrying out the construction works specified in the contract, plus the
contractor’s overhead and profit, which can be a fixed fee or a percentage of the actual cost.
Unit pricing: this option involves dividing the project into several items or components
and determining the cost of each item/component. The total cost of the project is then determined
by finding the sum of each item/component multiplied by its unit price.
Guaranteed maximum price (GMP): this is the option where a contractor agrees to
complete the specified work in the contract without surpassing a specified maximum price.
When the actual cost exceeds the GMP, the contractor bears the extra costs but if the actual cost
is less than the GMP, the savings can go to the contractor, client or be shared.

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The recommended contract pricing option for this project is GMP. This is because
Cameron has previous experience in a similar project and therefore he is certain about the
estimated cost of the project. Belinda is also sure of what she wants to be built, the time it should
take and maximum total cost of the project. This means that the possibility of design variations
and price changes is very low hence the client is certain that the GMP is adequate to complete
the project. This option is best for Cameron because he will have transferred the cost overrun
risks to the contractor and in case of cost underrun, he will retain the savings or decide to share it
with the contractor (Burger, 2018). This option will also see the contractor strive to complete the
project early and to the best quality possible so as to save more and avoid reworks that can make
him loose money.
Issue Two
Risks associated with Appendix A
Some of the risks associated with Cameron accepting the cover note at Appendix A include the
following:
Fixed project timeline: it is very risky for Cameron to expect the project to be completed
by March 28, 2014 for the factory and shop to be operational during Easter period. This is not
practical because the possibility of unforeseen factors, outside the contractor’s control (Raymond,
2011), that may arise and affect completion of the project cannot be overlooked. There is also
need for adequate time for project commissioning and handover. Therefore Cameron’s project
timeline and completion date are not realistic and contractors may be tentative to bid for this
project, do poor quality work or provide expensive bids.

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Very quick turn-round time: the timescale or turn-round time given in the cover note at
Appendix A is not adequate for tenderers to prepare comprehensive and competitive bids.
Cameron may end up receiving incomplete and inaccurate bids.
Unwillingness to negotiate: this is another risk because negotiations on terms of
agreement are inevitable in construction projects. Therefore Cameron’s unwillingness to
negotiate on any issue is a red flag for many contractors and they may not be willing to enter into
a contract with such conditions of no negotiations, or they may provide very expensive bids to
cover for this risk.
Incomplete documentation: the note at Appendix A does not provide adequate
information to help tenderers prepare comprehensive For example, there is no information about
project overview, request for tender conditions and process, information needed from tenderers,
programme of works and schedule of prices. This means that Cameron will be receiving
incomplete and inaccurate bids.
Disputes: there is high possibility of disputes between Cameron and contractor, and
breach of contract by the contractor due to uncertainties, unrealistic conditions and incomplete
information provided.
Suitable circumstances to use Appendix A
The cover note at Appendix A would be suitable for use under the following circumstances:
 If Cameron was planning to award the tender to the contractor who was involved in
building the factory in Thorburn that was destroyed by the Kaikoura earthquake. Since
the new factory is similar to the previous one, it means that the previous contractor has all
the necessary information about the project and the experience of dealing with Cameron.

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 If the potential contractors were involved in the design phase of the project and therefore
have all other details and information about the project to help them prepare complete
and accurate tenders.
 If price was not an issue and Cameron was ready to pay any cost as long as the project
was completed within the stipulated timeframe.
 If the actual cost of the project was substantially lower than the fixed price quoted in the
cover note at Appendix A.
 If all the money needed for the project was readily available.
 When the project would be useless if it failed to be completed within the stipulated
timeframe and budget.
Suitable tender note
Cameron should use the cover note enclosed as Appendix B for his tender process because of the
following reasons:
 The cover note does not have impractical demands or conditions that may scare away
competitive and most qualified contractors
 The cover not has all the necessary documents and information needed to prepare a
complete and competitive tender
 The cover note does not have apparent uncertainties that may make it difficult for
contractors to prepare complete and competitive tenders.
 The information and demands in the cover note are very clear and realistic hence there is
very minimal likelihood of the contractor breaching the contract
 The cover note does not have unnecessary disclaimers or conditions that are scary to
potential contractors.

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 The cover note has specified that TC is ready to review the tender quotations. This is a
very important pronouncement for contractors.
 The cover not has not included a fixed price for the project and this is very essential for
Cameron because it allows contractors to estimate the cost of the project and make it
easier for Cameron to choose the most competitive and qualified contractor.
 The language used in the cover note is appropriate and does not sound like giving
unnecessary demands to potential contractors.
Issue Three
Issues arising
Some of the issues arising from the scenario in issue three are:
 Even though this was an open tender, due process of competitive bidding was not
followed in selecting the best tenderer. From this scenario, it is clear that Cameron had a
preferred bidder (Fast and Fearless Development (FFD)). He did not allow other
tenderers (Mega Money Limited (MML) and Esteem Construction Limited (ECL)) to
submit their tenders. This means that all tenderers were not treated equally, which is
against the principles of open tendering (Lynch, 2019).
 Cameron did not take time to look at the qualifications of FFD but only considered the
tender price and the information he heard about FFD completing their work on time. The
general contractor must always be selected based on price and qualifications. It is not
obvious that the contractor with the lowest bid price is the most qualified (Lam & Yu,
2011); (Plebankiewicz, 2012).

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 There was favoritism in the selection process because one of the reasons why Cameron
chose FFD is because he knew the company’s director – they were flatmates in
Wellington.
 The information (including technical specifications) provided in the cover note at
Appendix B was adequate for bidders to prepare complete and competitive tenderers.
 Cameron did not have an objective and clear evaluation criteria of tenderers and that is
why he quickly selected FFD after receiving their tender.
 Cameron did not act professionally by notifying MML and ECL that the tender had
already been awarded yet the closing date and time of submitting tenders had not
reached. This is against the code of ethics of open tendering (Adedokun, Ibironke, &
Babatunde, 2013).
 Cameron may have missed on finding the most qualified and lowest bidder by not
considering tenders from MML and ECL. This is because open tendering spurs
competition among tenderers and this gives the client an opportunity to save more money
(Hanak & Muchova, 2015).
Issue Four
Requirements for a valid and enforceable contract
The requirements for a valid and enforceable contract include:
Offer: a valid and enforceable contract must have an offer being provided by one party to
another party. This is basically a description of what the contractor will be doing or not doing
when he signs the contract with the client (Walker, 2010). The offer must be clear and objective.

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Bargain and acceptance: in a valid and enforceable contract, the offer provided by one
party must be accepted by another party after bargaining or negotiations. In other words, parties
must agree to the offer’s conditions and accept the contract without duress (Sobel, 2017).
Competent and authorized parties: the parties entering and signing the contract must be
competent – they should be of legal age, have the necessary mental capacity, and should not be
impaired (UpCounsel, 2019).
Legal subject matter: the contract’s subject matter must be legal (the activities to be
performed in the contract must be legal). In other words, the agreement should be legally binding
and must be undertaken by following relevant laws and regulations (Leonard, 2019).
Mutuality of obligation: the parties must have entered into the contract knowingly and
voluntarily.
Consideration: the contract must clearly specify what the party will get or be paid upon
signing and completing the contract. The payment must be in form of something of value, and is
usually (though not compulsory) defined in monetary terms.
Writing: most valid and enforceable contracts are required to be in writing. However,
some contracts can also be oral but this must be supported by an oath in a court of law to make
certain the existence of the contract.
Existence of a contract
Yes, a contract exists between TC and FFD for the project. This is because after Cameron
had assessed the tenders submitted by FFD, MML and ECL, he decided to award the contract to
FFD. Cameron went ahead to call Mr. Brighton, the Director of FFD, informing him about the

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award of contract and invited him to go and sign the contract. Later, TC and FFD attended a site
established meeting and discussed different details related to the contract works. A few days
later, FFD commenced the contact works and officially signed the contract six days later. All
these can only happen between parties that have a contract and therefore they are a proof that
there exists a contract between TC and FFD.
The contract came into effect on 20 June 2018. This is the day when TC and FFD
attended a site establishment meeting and discussed several other details about the contract
works. The fact that the two parties attended the meeting and held discussions related to the
contract works means that both parties had accepted the contract. It is also said that FFD
commenced the contract works on 1 July 2018 and signed the contract on 7 July 2018. The
effective date does not necessarily have to be the same as the date of signing the contract or
commencing the contract work. The effective date can either be earlier (also known as
backdating) or later (also known as predating) than the date of signing (Jain, 2013). In this
scenario, the effective date was backdated meaning that the contract came into effect before it
was signed. However, it is important to note that the contract terms only became binding when
FFD signed the contract – on 7 July 2018.
Works Cited
Adedokun, O., Ibironke, O., & Babatunde, S. (2013). Assessment of competitive tendering methods of
procuring educational building projects in Nigeria. Journal of Facilities Management, 11(1), 81-
94.

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Burger, R. (2018, December 13). Inside Guaranteed Maximum Price (GMP) Contracts. Retrieved from
https://www.thebalancesmb.com/guaranteed-maximum-price-contracts-845345
Cho, Y. (2016). A review of construction delivery systems: Focus on the construction management at risk
system in the Korean public construction market. KSCE Journal of Civil Engineering, 20(2), 530-
537.
DBL Law. (2013, April 23). The Benefits of a Construction Manager At Risk. Retrieved from
https://www.dbllaw.com/the-benefits-of-a-construction-manager-at-risk/
Farnsworth, C., Warr, R., Weidman, J., & Hutchings, D. (2016). Effects of CM/GC Project Delivery on
Managing Process Risk in Transportation Construction . Journal of Construction Engineering and
Management, 142(3), 1-12.
Gransberg, D., Shane, J., Schierholz, J., Anderson, S., Del Purto, C., Pittenger, D., & McMinimee, J. (2013).
A Guidebook for Construction Manager-at-Risk Contracting for Highway Projects. Washington,
DC: National Academies.
Hanak, T., & Muchova, P. (2015). Impact of Competition on Prices in Public Sector Procurement.
Procedia Computer Science, 64(1), 729-735.
Jain, V. (2013, November 19). When Does a Contract Take Effect? Retrieved from
http://www.shakelaw.com/blog/when-does-a-contract-take-effect/
Lam, K., & Yu, C. (2011). A multiple kernel learning-based decision support model for contractor pre-
qualification. Automation in Construction, 20(5), 531-536.
Leonard, K. (2019, February 4). 5 Requirements for a Contract. Retrieved from
https://smallbusiness.chron.com/5-requirements-contract-15616.html
Lynch, J. (2019, February 9). Open Tendering. Retrieved from https://procurementclassroom.com/open-
tendering/
Plebankiewicz, E. (2012). A fuzzy set based contractor prequalification procedure. Automation in
Construction, 22(1), 433-443.
Raymond, D. (2011, May 18). Top 10 Procurement Risks – Tender Preparation. Retrieved from
https://pmhut.com/top-10-procurement-risks-tender-preparation
Sobel, H. (2017, March 7). The Requirements for a Valid and Enforceable Contract. Retrieved from
https://www.sobellaw.com/the-requirements-for-a-valid-and-enforceable-contract/
UpCounsel. (2019). Enforceable Contract: Everything You Need to Know. Retrieved from
https://www.upcounsel.com/enforceable-contract
Walker, C. (2010, July 21). The nuts and bolts of an enforceable contract. Retrieved from
http://www.ilovelibraries.org/article/nuts-and-bolts-enforceable-contract