MMK226783 - Analysis of Construction Contracts & Dispute Management

This report provides a comprehensive analysis of two types of construction contracts: cost plus profit and guaranteed price. It begins by defining construction contracts and dispute resolution management, setting the context for a Local Government Authority (LGA) project in England to build a secondary school. The report delves into the details of cost plus profit contracts, including direct costs, overhead, and profit margins, and discusses various types such as cost plus fixed percentage fee, cost plus fixed fee, and cost plus fixed percentage/fee and incentive. Advantages and disadvantages of this contract type for the LGA are explored, along with a relevant case law example (Balfour Beatty Regional Construction Limited v Van Elle Ltd). The report then examines guaranteed price contracts, highlighting their feature of a guaranteed price at the time of agreement. The report concludes by offering a recommendation for the LGA, considering the benefits and drawbacks of each contract type. Desklib provides access to similar solved assignments and past papers for students.

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Matriculation Number: Year of Study: 2021-22
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Project Title: Coursework 2 (CW2 ≡ 70%)
Module: Construction Contracts & Dispute Management (MMK226783)
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CONSTRUCTION CONTRACTS & DISPUTE
RESOLUTION MANAGEMENT
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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
LITERATURE REVIEW................................................................................................................1
Presenting cost plus profit contract.........................................................................................1
Guarantee Price Contract.............................................................................................................4
Recommendation.........................................................................................................................8
CONCLUSION..............................................................................................................................10
REFERENCES................................................................................................................................1
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INTRODUCTION
Construction contract can be defined as legal agreement find between two parties to
accomplish the goals. Along with this, this type of contract detail about construction is included
such as budget, parties, time as estimated cost. That is required to complete the task in limited
frame of time. In addition to this, it also includes policy and procedure that are need to be
followed by both parties and if condition is not followed then the contact will be considered as
void. Furthermore, the parties deal with legal property and there can be more than two
contractors. On the other hand, dispute relation management can be described process of dealing
with the issues arise at construction. This procedure include details about the customer that has
initiated dispute as well as it is settled with cash. However, it helps in solving the dispute in
effective way and the court will give the final decision regarding the issues. In addition, to this
judiciary will make binding decision on the parties in order to get the outcome. The present
report is based on LGA (Local government Authority) that is located in England wants to open a
secondary school for the children. The study will discuss about the types of contract that will be
helpful for them in order to accomplish their plan. At last, project will recommend the
company to select the best contract for planning the construction.
LITERATURE REVIEW
Presenting cost plus profit contract
The cost plus profit contract is known as type of agreement in that cost is involved for
completing the project. However, cost can further be segregated into three types such as direct,
overhead and indirect cost that will require for conducting business activity. On the other
hand, plus is associated with the word profit in this contract that means in this agreement certain
percentage of income is set by the parties (Pinchuk, Maizel and Bezrukikh, 2019). The profit
will be determined on the basis of income earned above the total cost set by parties. However,
the three major components of cost plus contract is direct cost, overhead and profit. Along, with
this Direct cost is consisted of cost that is incurred by the contractor that is necessary for
completing the construction. For, instance, labour cost, professional consultancy charges as well
as material cost. This type of cost is basically the amount that is required in business in order to
meet the daily expenses and keep running the business. However, the LGA company has to
decide a particular capital in order to meet the need of construction. Moreover, overhead cost
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include expenses such as travelling expense, office rent and office supplies and allocable cost to
the contract (Sinha and Jha, 2020). Along, with this, Profit is usually a fix percentage and the
amount that is calculated on the cost that is used to complete the project. There are various types
of Cost- Plus contract and the agreement can vary on the aspect of payment or free component.
The cost + Fixed Percentage Fee in this contract LGA will receive a fixed percentage of profit
that has already been Pre decide on the cost contract (Moza and Paul, 2018). The Another type
is Cost+ Fixed Fee contract in this amount that has to be paid to the contractor is independent
of the decided cost of the contract. However, the third type of contract is Cost + Fixed
percentage/ Fee and Incentive. In this agreement there are certain incentive that is given to the
contractor if case is completed early as mentioned in the terms of contract. Thus, the contractor
will be very beneficial for LGA company as if the contractor will be receiving incentive and
profit it will be completing the project early to the estimated date. However, this contract can be
successful only if certain systems are correctly executed in the contract. Along with this, for
achieving the success LGA has to check the expenses that will be required during the
construction so that company will have estimation of the capital required (Lee, Yi and Son,
2019). In addition, to this, LAG has to set up proper communication between the parties
so that both contractor and contractee has proper knowledge about the terms and
condition. As well as there is no chaos among parties and it can work effectively.
Moreover, all the terms and condition need to be true and accurate so that there is no
dispute in future. LGA can include terms such as both the parties are bound to follow the
mentioned condition. The language of the contract will be in UK English as well as
time for completion of the contract will be 365 days and it cannot exceed more than 1
month (Wang and et.al., 2019). The another term include complete information about the
plan such as construction Map and the total budget. The payment of contract will be
Pound and each party will receive the payment within 28 days. However, if there is any
dispute then company dispute will solve by Institutional Civil Engineers Adjudicator
(Foy, 2018). And in case of damage all amount need to paid by the worker. Along
with this, the advance payment will be paid to the contractor within 300 days
as well as with 25% in case of instalment. And 3% of profit will be given to the
contractor with 50000 amount as incentive if the contract is competed before
the decided day of completion.
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The LGA company will enjoy certain advantages of using Cost + Fixed
Percentage contract such as contractor will be paid a fixed amount of percentage so in
case of overrun there will be no burden on the contractor And contractee has to
bear with it (Gunduz, and Elsherbeny, 2020)..
The another benefit LGA will get is that final cost of the agreement will be
lower than normal contract as there will be no increase in the cost by contractor.
Along with this, another advantage of having this type of agreement that LGA will get
that contractor will have less incentive to control the project as compare to other
fixed contract. Moreover, if contractor will get fixed amount of incentive it will
work more effectively and construction of new school will easily be achieved. In
addition, to this, due to providing both share or profit contractor will provide high
quality of output as compare to normal contract. Along with this, the contracted will
have full knowledge regarding expenses that will be required in order to complete the
project (Finnie, Ameer Ali and Park, 2019). Due to this contract if there is breach done by
any party it can be sue and asked for the compensation of damage. Thus, it
eliminates the risk of not competing the task. However, the final cost of the project
is low as compare to the estimate cost that will benefit the contracted.
On the other hand disadvantage that LGA will face due to this contract is that total
cost may not be clear at the start of negotiation. Along with this, in this agreement
it require more administration in order to know the oversight of the project. As well
as to keep check on the contractor that it factoring on every factor associated
with construction (Davis, 2018). In addition to this, it required less incentive as compared to
other agreement an in order to complete the task in effective manner. Moreover, there can
be rise of dispute between the contractor and contracted while deciding the expense.
Furthermore, more expense will be required to avoid the disagreement while settlement of
contract cost. The expense will include monthly report etc. However, the contractor will
not be able for eligible extra incentive if the project is not completed on particular time
that has been decide by parties. As well as contractor will liable for penalties if the
project got delayed. The case law related to construction contract Balfour Beatty Regional
Construction Limited v Van Elle Ltd [2021] EWHC 794 (TCC). In this case a sub contract was
found that it was covering the work carried out by the sub-contractor however it was
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unsinged at the time work was carried out. Along with this, court said that formal sub
contract governed all work even the work carried out by the parties before singing the
formal contract. Moreover, the construction company has to make proper standard terms of
the contract and should read properly before signing the agreement.
Guarantee Price Contract
Guarantee price contract the name itself demonstrate the feature of this contract. The term
guarantees price agreement itself indicate about the price that is guaranteed against at the time of
competition of the agreement. Customer involve in the contract need to pay this guarantee
amount against the contract is made. Local Government Authority (LGA) can obtain the
guarantee maximum price contract option for its new project. This contract involve ensuring the
grantee value in against to the contract is established. Guarantee maximum price is a category of
contract which set a certain limit in respect to pricing involve in contract (Basques, Nezam
Uddin and Zarma, 2019). The contact certainly allows the customer to pay a value guarantee in
against to the contract is made. The total cost incurred to deliver the terms of contract are
certainly overshadowing at the time customer is willing to pay the price against the contract. This
contract option will allow the stakeholders to set a cap for the contract. This cap will also denote
to the guarantee price that has been ensured against the contract is made Customers of the
contract will only be liable to pay the cap that is set for the contract.
General conditions
In context to the LGA the guarantee maximum price contract option would lead the
stakeholders for setting a contract cap. The set cap of contract would demonstrate the price
customer need to pay in against to the contract is established between the parties. The cap value
will denote the maximum amount the customer would be liable at the end for the contract is
developed. General condition involve in the contract is only about to set up a price that customer
willing to pay or bear in against of taking the services involve in contract. Setting up a standard
or guarantee price value is a basic condition involve with the guarantee price contract. Except the
price cap other conditions are not disclosed as general in this contract type. The major difference
between the guarantee price contract and other form of contract agreement is to set a price at the
time contract is established between the parties involved in the contract (Tia and et.al., 2019).
The contractor and contracted both the parties are satisfied with the price structure that will be
governed in against to the contract is made. Apart from the basic requirement involve with this
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contract option other conditions are also associated as a general condition in this contract option.
Performance or on site assembly and start-up of the standard goods is also involve in this
contract option. The contract option will also ensure the Local Government Authority to furnish
tools require for assembly and maintenance of supplied goods. Furnishing all the tools that will
be needed to provide the quality construction service is necessary in case of the construction
contract type. Further the guarantee price contract would lead to a general condition like
furnishing of a detailed operation and maintenance manual for each appropriate unit of the
supplied good. This is also involving in the general condition in respect to the guarantee price
contract. The performance related supervision is also involving as a general condition involve in
the contract.
The guarantee maximum price contract contains option to design the whole contract
based upon the convenience of parties involve in the contract. Terms and condition under this
contract type may influence according to the convenience of the parties associated with the
contract. Payment condition may also change or set according to the feasibility of the contactor
and contracted (Yan and et.al., 2020). Construction contract is usually taken time to complete
which require the contracted and contractor to select price structure that contracted involve in the
contract would be liable to pay at the end of each contract stage. This contract option does not
generalize the payment structure involve with the contract. It’s all depend upon the convenience
of the parties involve in the contract. Apart from this contractor and contracted may associate
any general condition in the contract on the basis of the convenience of the stakeholders involve
in contract. General condition usually demonstrates about the basic term and conventions involve
with the contract agreement that parties would require fulfilling. This may also involve the
documentation related conditions, verification of paper, signature and all other legal documents
that both parties involve ion contract would be required to bring in processing further with the
agreement.
Special condition
The special conditions demonstrate with all the term of the contract that is not officially a
part of the general condition attached with the contract. Special condition is usually not disclosed
in the general condition. These are the conditions which further involve by contractor and
contractee associate with the contract. These conditions may include documentation of the
contract, total number of parties involve in contract, terms of the project and such other
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conditions. All these conditions make contract more specific in nature (Bednar and et.al., 2018).
Further, apart from the contract nature if the contractor and contractor would like to involve any
condition than this contract type also allow the parties to associate such conditions. LGA can
also undertake the advantage of this condition by involving special conditions to protect the
individual interest of the organisation in contract. The special condition is further related to the
documentation process, payment terms, percentage of completion for the contract and such other
aspect related to the agreement. Nominee can also be attached by the LGA as a part of the
special condition included in the contract. The special condition usually plays a vital role in
improving the authenticity and feasibility attached with the contract. This is usually followed to
protect the interest of the contractor and contracted tat directly been involved with the contract.
Scope of work
Scope of work in the guarantee price contract involve all the areas that will be
undertaken as a part of the contract option. LGA is planning to develop the school project as a
part of the contract agreement. The scope of work will involve the entire structure of the
construction, all specific areas that will be a part of the contract, payment condition involve in
the contract and such other aspects. The entire scale of the project would associate under the
scope of work. Different areas involve in construction project will also disclose in the scope of
work. This section involves in the guarantee price contract disclose all the key construction areas
that LGA and contracted will require to complete in order to achieve the complete construction
of the school (Bakhsh and Sade, 2018). This is more like an evidence of the work that need to
perform or the agreement that contract ensured to complete as a part of this project. Contractor
also secure the individual interest with the inclusion of this section as in the end if the LGA
would claim that some specific section is not completed by the contractor that it can be claimed
with the use of this section. Usually the guaranteed value in this contract type is depend upon the
scale or areas of work that need to perform as a part of this contract. Scope of work disclose all
such key construction areas.
Drawings
Drawing is more like a pictorial description of the whole contract. This is usually done
and prepare by the architecture working with the project. This is a basic structure presented to all
the stakeholders involve with the contract. This is usually done over paper with the use of
computer to demonstrate the complete structure of the school project. LGA also need to take an
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approval from the government and drawing will play a key role in granting approval for the
project (Hnetynka and et.al., 2018). Drawings are usually take place at the initial phase of the
contract when project was planned. On the basis of the drawing the scale of work is decided by
the contractor. This pictorial form of presentation of the contract is important in respect to the
entire construction as it indicate all key areas part of the contract.
Specifications
Specification is a section involve under guarantee price contract. This section will allow
the LGA and contractor to involve all the specific condition associated with the contract. The
school project will take a longer time duration complete. Specification will allow the practices
involve ion the contract to disclose all the specific conditions like payment related terms,
consequences in case of failure to meet any condition and such like of terms are included. All
such areas that specifically needed to mention become a part of this section. LGA will get to
disclose all the major areas involve with the contract.
Bill of quantities
Bill of quantities is a section included under guarantee price contract. This section would
require to attached all the bills related to material, equipment and all other procurements that is
done to construct the whole project (Federgruen, Lall and Şimşek, 2019). Bill of quantities is
collected so that proper evaluation can be done about the total cost incurred to complete the
whole contract. Bills of quantity favour the contract to maintain proper records of cost, profits
that is incurred out of the construction contract and such other aspects.
Construction Schedule
Construction schedule is a perform that disclose completion stage at each individual that
included in the contract. Usually the payment of the contract is based on the percentage of
competition or the construction schedule that contractor will provide to the contracted. LGA will
get to know how much the payment it needed to make on the competition of different stages of
the contract.
Schedule of Values
Schedule of value is also related top the payment of the contract. LGA will get to know
the payment terms with the use of schedule of payment. Usually the payment in the construction
contact is depended upon the mutual settlement of both contractor and contracted involve in the
contract (Li and et.al., 2019). This schedule of value will direct the LGA in respect to the
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proportion of the payment that requires making at completion of each individual stage in the
contract.
Advantage of contract:
 Acceleration in schedule is among the key advantage that LGA will entertain in against to
adopt this contract type.
 This contract type is capable to save the incentives included in the contract that benefit to
the contractor.
 This contract type will benefit the LGA in the form of proper detailing about what price
need to give to the contractor for completing the whole contract.
Risk factor of contract:
 Cost reporting become a challenge in this contract option.
 This contract option improve risk for the contractor as contracted will only require to pay
instalment in against of completion (Li and et.al., 2017). Many times customers are not
able to pay the instalment money on time that create a liquidity related risk for the
contractor.
 Construction contract usually govern long duration which further involve fluctuation in
the price of material and labour. This increased price further reduces the profits of the
contractor.
Recommendation
 It is recommended to LGA company to select Cost + fixed cost contract as it
cover all the extra expense such as direct cost, overheads that will help
organization in understanding the overall expenses. Along with this, in this
contract contractor will be provide with the specific percentage of profit as
well as with extra incentive (Chirieac, 2020). If the contractor is provided with
this, such perks than it will work more effectively and there will be no delay in the
task. Furthermore, it will also show both the parties about the expense related
to office expense and travelling. However, if contractor has not done the project on
time then no incentive will be given to it. In addition, to this, I f any terms and
condition is not fulfilled in the contract then both the parties will be liable
for paying the compensation if any damage has been caused. Along with this,
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