Report on Contractual Arrangement for Construction Industry Projects

This report delves into the critical aspect of selecting appropriate contractual arrangements within the construction industry, particularly in the context of a 30-story high-rise project in Hong Kong. It meticulously examines various procurement methods, including traditional lump sum, re-measurement, design and build, construction management, partnering, and New Engineering Contract (NEC) procurement. The report dissects the advantages and disadvantages of each method, considering factors such as cost, time, risk allocation, and quality control. Through a comparative analysis, the report recommends the lump sum contract as the most suitable option for the specified project, emphasizing its ability to balance cost, quality, and risk mitigation. The rationale behind this recommendation includes the project's sufficient design preparation time, the potential for competitive tendering, and the employer's ability to control design costs. The report also addresses the limitations of other procurement methods, such as the higher costs associated with re-measurement contracts, the single-tender nature of design and build, and the complexities of construction management and partnering contracts, especially in the context of the project's timeline and private sector nature. The report concludes by highlighting the importance of a well-defined scope of work and competitive bidding in maximizing project profitability and minimizing construction risks.

Assignment 2:
In the financial environment for the construction industry, selection of contractual
arrangement is very important to the project.
In this report, the writer shall analysis the features for the different contractual
arrangement in order to select the appropriate form of contract for the project with
details as below:
- 30-storey high tower on a 5-storey podium;
- Carparking provisions;
- Medium to high standard;
- Construction period of 500 calendar days;
- Conditions of Building Contract for use in HKSAR, private edition, with
quantities, 2005 edition;
- The site possession in 12 months’ time and therefore sufficient time for design
and tender preparation;
Commonly, there is several procurement methods could be chosen in Hong Kong.
They are traditional procurement, Re-measurement procurement, Design and Build
procurement, Construction Management procurement, Partnering as well as New
Engineering Contract (NEC) procurement etc.
Type of Procurement
Traditional procurement is known as Lump Sum procurement. Davis, et al. (2008)
stated that in the traditional approach, the employer accepts that design work is
generally separate from construction. The main feature for this procurement is that the
design process is separated from the construction. In lump sum contract, contract sum
is agreed in advance based on plans and specifications. Employers can hire quantity
surveyors to prepare the bill of quantities from the drawing. The contract sum of the
project is derived from the total priced items in the bill of quantities. This can give
competing contractors a quantitative analysis of the contract works. And contractors
are appointed by competitive tendering. Lump sum with quantities contract also allow
employers to control the cost of the design through its consultants and retain the
design risk. Any possible increase or decrease variation orders shall be issued by
architect. And final account shall be obtained by adjusted by professional quantity
surveyor.
Re-measurement procurement based on a schedule of prices is that the contract sum is

ascertained by measurement and valuation related to bills of approximate of quantities
or to a schedule of prices included in a contract. A schedule of rate consists a list of
measured items with units shall be provided, but without quantities to contractor
price. Contract sum shall be finalized in according to the works carried out by
contractors and measured and priced at the rate in schedule of prices. Contract sum
shall be finalized until after completion. This type of contract is commonly used
where the employer can’t determine the requirements in advance or at the time the
contract is formed.
Design and Build is a type of contract that a single contractor shall be responsible to
complete of design and construction of the building. Contractor is often appointed by
two stage tendering. In the pre-contract stage, client’s requirements shall be pointed
out. Contractor is required to submit his design proposals and cost proposals to
approve by clients. After approval of design and cost proposals, contractors then start
the detailed design is completed.
Construction Management procurement is that employer hired a construction manager
as a agent to manage, programme and co-ordinate design and construction activities.
Construction works are carried out by Trade contractors through direct contracts with
employer. Construction manager is responsible to manage the works carried by each
trade constructors.
Partnering is not a specific procurement method but a procurement philosophy
emphasizing collaborative working, common objectives, and problem solving.
Larmour (2011) explains that the public private partnership procurement method
involves two or more organisations working together to improve performance by
agreeing to mutual objectives. It is an opening booking accounting that is isolate of
profit and cost. It is often used in public sector procurement in the form of Public
Private Partnership (“PPP”). PPP is that joint working between public and private
sectors to share the risks.
New Engineering Contract (NEC) is a family of standard contracts that embraces the
concept of partnering and encourages contracting partners to work together in a spirit
of mutual trust and cooperation. There are 6 modular form of contract about pricing,
risk, allocation and payment mechanism. Employer can choose the most suitable
modular form according to their project requirements. NEC is projects tool that
drivers clearly and timely decision making by parties. Each party should response
their decision within specified time, and requiring each party to work together

towards a common goal.
Factors to influence Procurement method:
A project may be regarded as successful if the building is completed as scheduled,
within budget and quality standards as well as achieving a high level of client
satisfaction. (Shamil Naouma and Charles Egbua, 2015) different clients have
different needs and requirements, and construction projects vary considerably in every
respect, no single procurement system can be suitable for every project (Luu, Thomas
and Chen, 2003) Before choosing the most suitable procurement method, the
advantages and disadvantages for different methods should be identified. And
procurement strategy is that choosing of the best way to achieve the above objectives
of the project. The aim of it is to achieve the balance of risks, control and funding for
a project.
Table 1 clarifies advantages and disadvantages and suggests when each procurement
method should be used. (Marina L., 2017)
Procurement
method
Advantages Disadvantages
Traditional
(Lump Sum)
-Competitive fairness
- Public accountability
- Early price certainty
- Well known procedure
- Changes can be implemented easily.
-Facilitate high level of quality
- Late start on site and longer project
duration
- Adversarial relationship
- Design risk lies with client
Re-measurement -Saving time to prepare tender documents
- Allow overlapping of the design and
construction process
- Employer has a reasonable commitment
form contractor the cost and time to
complete contract
- client requirements can’t define in
advance and can’t get eventual
outcome and objective
- components of work without
quantities lead to difficulty to quoting
realistic prices and result in higher
price
- less certainly of the cost at the outset
than with a firm bills of contract
- difficult to establishing final cost

Design and
Build
- Reduced project time due to overlap of
design and construction activities.
- Improved buildability due to Contractor’s
input into design.
- Contractor’s design liability may be
extended to include fitness for purpose
- Price certainty before construction
starts and price higher that other
procurement method
- Less competition in tendering stage
- Difficult to control design standards
(single tender)
- variations difficult to assess and
could be expensive
Construction
Management
- Reduce project duration
- Allow early start construction work
because works divided by trade
construction
- Improve buildability of design
- Clear roles, risks and relationship for all
participants
- Flexibility for design changes, greater
adoptability and flexibility for the employer
to defer decisions on later trades
- No contractual completion date
- higher overall construction cost
- lower cost control with design less
advanced at commencement
- Cost uncertainty until award of last
trade package.
- Client needs a technically and
commercially competent project
management team to assess the
recommendations of CM.
- Need close control of time and
information, greater risk to employer
for communication mistakes
Partnering /
NEC
- Can implemented in wide variety of
formats
- Parties share risks
- Stimulus to good project management
- Early warning
- Clear requirements for programme
and detailed procedure,
comprehensive plan required.
- Each party shall highly involve,
difficult to manage each party
Table 1. Advantages and Disadvantages for Each Type of Procurement Method
Employer decide to adopt the type of procurement is mainly to concern times, cost,
profit, risks and quality.
Traditionally, clients are shy of taking any responsibility, and employer often to
choose a procurement method to minimize the risks. Choosing a procurement method

is largely a process of ensuring that risks are allocated to the organization best able to
accommodate them so that the overall costs of managing these risks will be
minimized.
By comparing to the advantages and disadvantages for different procurement method,
writer is suggesting to adopt the lump sum contract which can balance of the cost and
quality as well as minimize of the risks.
Due to the cost for adopting re-measurement is higher than lump sum contract. Lump
sum contract is allow employer to establishing the cost of the project in advance.
However, re-measurement contract that the final cost is formed by the final
measurement. Employer can’t have a better indication of the final cost of the work. It
is less certainly of the cost at the outset than with a firm bill of contract. Variation
works is harder to assess outset than the bill of contract. And result in higher
expenditure of the project.
Although design and build contract can reduce project time because of allowing
overlap of design and construction activities and it is allowed constructors involve the
design of the construction project, it is powerful and improve the buildability of the
project. Constructor is responsible to design the work is fit for purpose and fit to end
user. It can ensure that the quality of the construction work. However, design and
build contract is allow single tender involved in the contact, it result in the higher
contract sum awarded in final.
Construction management contract is also can improve the buildability of the project.
Since the construction works carried by different professional trade constructors, high
quality of the construction work has be obtained. Hence, higher overall construction
cost with lower cost control in a result. Final construction cost uncertainty until award
of last trade package. Project adopting this procurement is difficult to set up the
construction complete date. Employer need closely control of time and information,
otherwise employer shall bear a greater risk for communication mistakes. Also, this
project has a construction period with 500 calendar days which not allow the project
delayed. Hence, construction management contract is not recommended.
Partnering or NEC contract is not suitable to be adopted in this project because
partnering often used in public private partnership construction work. The project
mentioned above is held by private sector. And partnering or NEC commonly used for
large projects with long construction period with 20~30 years. So it is not suitable to

be adopted in this project.
Typically, employer develop the construction project mainly aimed to earning profit
from the project. In order to getting larger profit, competitive contractual arrangement
should be adopted. Comparing to the procurements mentioned above, lump sum
contact is recommended. Contract sum could be determined before the construction
starts. Although the design risk shall be laid on employer, it has sufficient time to
allow design well. The project mentioned above which has site possession in 12
months’ time which has sufficient time for design of the project. It allows designer to
complete a fully comprehensive design. During this design period, designer can be
well-designed with high quality. All tenderers are participated in the competitive
tendering. Well-designed can achieve higher quality with drawings and bill of
quantities can reduce the cost of design variation changed. Price under the bill of
quantities item is known as basis of evaluating the cost of variations. Extent of work
is certain and substantial variations are expected. So that, employer could be minimize
the cost of construction by adopting of this procurement method. Employer can also
obtain a comprehensive set of unit rate to facilitate valuation of variations by the bill
of quantities and thereby allowing a better cost control.
Lump sum with quantities contract also can balance risks of the construction project
between the employer and contractors. This procurement method can minimize of the
construction risk placed on employer. It is advised price-based payment method for
the project is that it can place the cost risks on the constructors. Since the works are
well and fully defined at the time of the tender period, contractor can only charge the
price which they tendered and agreed before construction starts. Hence, if the actual
cost of the construction is larger than the agreed price, contractor shall bear the loss of
this construction. And there is no allow of adjustment to the tender sum for errors in
tendering.
Revise the terms of a standard contract in meeting the requirement of a client.
In order to reduced the risk to employer, lump sum without quantity shall be
recommended in this project.
Lump sum with quantities contract, under clause 1.7(4) “The rates in the Schedule of
Quantities and Rates shall form part of the Contract and shall be used for valuing
Variations and estimating interim payments.”

Another hand, Lump sum without quantities contract, under clause 14.3 (1), “An
error in description or in quantity {in} or the omission of an item from the Contract
Bills shall not vitiate the Contract nor release the Contractor from any of his
obligations or liabilities.”
The difference between lump sum with quantities contract and lump sum without
quantities is that bill of quantity. Quantities in the schedule of rate in lump sum with
quantities contract shall form part of contract, but Quantities in lump sum without
quantities contract shall not.
The lump sum without quantities price for an item or section of work included in the
Contract Bills was priced based on the Contract Drawings and the Specification only
without further detailed bills of quantities which quantities were agreed not to form
part of the Contract, the quality and quantity of the work included in the lump sum
price shall be deemed to be that which is shown on the Contract Drawings or
described in the Specification. Any error in the Contract Drawings and/or the
Specification shall be subject to the same rules as stated in clause 14.3 with the words
“the Contract Bills” substituted by “the Contract Drawings and/or the Specification”.
Contractor is deemed to confirm the accuracy of the bill of quantity / bill of schedule
of rate. The contractor shall bear the risk of any error in the bill of quantity.
For a selected construction project compare how different terms of
contracts may meet the requirements of the client (such as contract
documents, quality, specific conditions, time and cost).
Contract documents & specific conditions
Under SFBC 2005 clause 5.1, the order of precedence of lump sum without quantity
contract document forming the contract shall include following:
(a) the Articles of Agreement
(b) Form of Tender
(c) General and special conditions of contract
(d) Conditions of Tender
(e) Specification
(f) Contract Drawing
(g) Contract Bills
(h) Summary of Tender

However, lump sum with quantities contract has the order of precedence of the
documents forming the Contract shall be as listed in paragraphs (a) to (h) and
following (i) & (j):
(i) for the purpose of adjusting the Contract Sum, the Contract Bills shall take
precedence over the Contract Drawings and the Specification, and the
Specification shall take precedence over the Contract Drawings unless otherwise
stated in the Specification
(j) for all other purposes including carrying out the construction of and completing
the Works, the Contract Drawings and the Specification shall take precedence
over the Contract Bills.
Cost
Under SFBC 2005, there are clauses that ensure the employer not to over paid amount
the contractor. According to clause 32.1(1), it is requiring the Architect to issue an
interim certificate at the end of each period of interim certificates stated in the
Appendix commencing not later than 42 days after the commencement Date
Clause 32.1(2) obliges the employers to pay that amount to contractor, less any
deductible by the employer under clause 32.1(6), within the period for payment of
certificates stated in the Appendix.
For the lump sum without quantities contract, following clause shall be revised form
SCC-8:
“The Architect may issue instructions in regard to the execution of work of the
provision of materials or goods which have been included in the Schedule of Rates or
Summary of Tender by way of quantities described as “Provisional”.
Subject to any express provision to the contrary contained in the Schedule of Rates or
Summary of Tender or any instruction of the Architect. The quantity of work for any
“Provisional” item included in the Schedule of Rate or Summary of tender shall at the
time of re-measurement and valuation of the work be omitted and in its place shall be
added any such work as ay have been required by the Architect. Subject to any
instruction of the Architect, both such omission and addition shall be valued at the
contained in the Schedule of Rates or Summary of Tender for such “Provisional”
items and not otherwise.”
Quality
Under SFBC 2005, there are clauses that ensure the construction work completed with

specific quality and fitness for the purposes. Under Clause 17.1, the Architect is
required to issue substantial completion certificate when he is satisfied that
(1) The work have been substantially completed
(2) Passed inspections and tests required by the contract, and
(3) All unfinished items of work shall be completed as soon as practicable after the
issue of such certificate, or as instructed by the Architect, in any case before
expiry of Defects Liability Period (Clause 1.6).
Contractor couldn’t complete the work with specific quality; the substantial
completion certificate shall not obtain. And the final payment as well as the retention
also shall not obtain.
Time
Under SFBC 2005, there are clauses to ensure the construction work complete on time
or under programme. Once the Contract has commenced, the Contractor shall proceed
regularly and diligently with the execution of the Works and complete on or before
the Completion Date of the Works stated in the Appendix. Under Clause 24.1(1), the
Architect is required to issue a certificate to certify the Contractor’s failure to
complete on a date by which the works ought to have been completed. i.e. Non-
completion certificate. And all claims for EOT have been addressed according to
Clause 25. Under Clause 25.4, contractor shall bear the responsibility of delay caused
by Contractor’s default.
“Where and to the extent that a listed event resulting in delay to the completion of the
Works or a Section beyond the Completion Date was, in the Architect’s opinion,
contributed to, or aggravated by a breach of contract or other default by the
Contractor or any person for whom the Contractor is responsible, the Architect shall
take the effects of that contribution or aggravation into account in fixing the new
Completion Date.”
And the measure of delay recovery shall be calculated according to Clause 26.
Discuss how the relationship between contractors and subcontractors influence
the contractual arrangements.
In Hong Kong, most of the construction contract included sub-contracting which is
providing the flexibility on project procurement. About more than 90% of main
contractors engaged sub-contractors and about 60% of sub-contractors engaged sub-
sub-contractors. (HKSAR Government, 2015) Sub-contracting is widely used in

construction industry. “Pay-when-piad” or “Paid-if-paid” are usually applied to the
contract between main contractor and sub-contractors. It means that the sub-
contractor shall receive the payment until the main contractor obtained the payment
from the employer.
According to the research of Hasmori et al.(2012), it stated that client wrongly hold
the payments of the employees. Employers withhold payment to main constructor and
sub-contractors for variety factors and result in late payment or non-payment. Such
delay and failure shall affect the profitability of parties and cause the serious cash
flow problems. Aibinu and Jagboro stated that seriously delayed payments not only
influence time, cost and quality of a construction project, but also causing dispute,
arbitration or litigation. (Aibinu and Jagboro, 2002)
In order to prevent of the non-payment or payment delay, security of payment
legislation is proposed to be introduced. Hong Kong Government (2015) decides to
introduce the security of payment legislation (SOPL) in construction industry.
Security of payment is a generic term to describe the entitlement of all partier in the
contractual chain to receive payment under the terms of their contract from the higher
party in the chain.
The scope of the SOPL shall be applied into the all construction government contract
and contract issued by specified statutory and/or public bodies and corporations. It
could also applied to the contracts for new building with value over 5 million dollars
in private sector.
Payments claim should submit to the client after 30 calendar days, and client should
respond payment within 30 calendar days while receiving payment claim. And the
payment should be released not exceed 30 calendar days of the payment certificated.
Final payment shall not exceed 120 calendar days to all parties.
‘Pay when paid’ clauses will not be effective or enforceable. “Pay when paid” clause
is that the payer could pay the payment after they have received payment form a third
party. If any party has not received payment, they have the right to suspension.
Hong Kong Governing proposed the security of payment legislation for construction
industry in order to improve the regularly and timely payment during the construction
industry.

Conclusion
It seems that the current procurement methods (traditional) have directly contributed
to projects in terms of cost and time. And due to the characterized of lump sum
without quantity contract with the separation of design and construction phase, and
the cost could be controlled by employer, employers can benefit by these benefit.
Hence, the writer is suggesting adopting lump sum without quantity contract to this
project.

Reference
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delivery in Nigerian construction industry”, International Journal of Project
Management, Volume 20, pp.593-599, Ile-Ife, Nigeria
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Methods. Research Project No: 2006-034-C-02. Brisbane, Australia: Icon.Net Pty.
Ltd.
3. Hasmori M F, et al. (2012) “Issues of Late and Non-Payment Among Contractors
in Malaysia”, 3rd International Conference on Business and Economic Research
Proceeding, 12-13 March 2012, Golden Flower Hotel, Bandung, Indonesia.
4. HKSAR Government, (2015), ‘Proposed Security of Payment Legislation for the
Construction Industry – Summary and Guide’, Development Bureau (DEVB) of
Hong Kong Special Administrative Region (SAR) Government, Hong Kong
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