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A suitable and attractive contract may bring large profits and lower the risk caused by uncertain information in project management; thus, how to design incentive contracts under uncertainty has been the most pressing demand for the owner. This paper investigates the project incentive contract design problem with random asymmetric information, in which a risk-neutral owner (he) engages a risk-averse contractor (she) to complete a project. The contractor’s construction capacity is private information and characterized as a random variable. Furthermore, two incentive contracts, duration-based contract and deadline-based contract, are designed, where the owner offers a fixed payment and a penalty or bonus factor based on the real project duration and a predetermined deadline for the contractor in these two different contracts. Then, a project duration contract and a deadline-based contract model are developed with the purpose of maximizing the owner’s expected payoff, respectively. The optimal contracts are investigated, and the values of the contractor’s construction capacity information for the owner under these two contracts are quantified. The results show that the owner benefits better from getting more construction capacity information and should commit an information rent to the contractor due to asymmetric information, which distorts the penalty factor under both contracts. Moreover, regardless of contract type, the deadline has no effects on the owner’s incentive term and only affects the fixed payments. Further, the contractor is more likely to keep information private, while the owner benefits more from knowing the contractor’s construction capacity when the deadline-based contract is used.

Construction contractors may utilize unbalanced markup bidding strategies, e.g. front-loading, to seek more beneficial cash flows, or even protect their target profits. A difference between ethical and unethical unbalanced bidding is whether the bid has been mathematically or even materially modified: the former may be allowable, but the latter should be rejected, as it fails to cover even the cost of later activities. Unbalanced bidding adds to the complexity of cash flow models and requires a new model that can calculate different scenarios accurately and efficiently. Basic new theory is explored for unbalanced bidding in cash flow models by employing the range-based class of singularity functions. First, a new synthetic balanced cash flow model that can accurately consider the time value of money (TVM) and retainage is derived to serve as the foundation; second, various unbalanced markup functions including two-phase, linear, and non-linear types are defined both cumulatively and non-cumulatively; thir...

Contractors for the construction of the risk in the contract clause clear analysis is an important content of construction project risk management. Based on the 1999 edition of FIDIC contract conditions for construction of the demonstration text as the research object, according to the risk and responsibility on the contractor risk clause matching principle clear classification. To provide the contractor some experience for reference which the contractor could better control of engineering project contract risk.

The initial contract status was formed when the contract was signed, firstly, this paper analyzed necessities of adjusting contract sum and practicable routes that could be followed for classifying and compensating contract status; which was initiated under three contract types, lump sum contracts, unit rate contracts and cost plus contracts for balancing the rights and obligations for both contract parties and aims to provide a reference for pushing forward construction progress smoothly.

All construction works take birth in a contract. An agreement enforceable by law is a contract. Thus a contract requires an agreement which is enforceable by law. An agreement consists of two essential requisites.

In the domestic construction market, the project general contract administration is a common mode of project administration. As for the unit who contracts the project, it is an issue to be discussed that how to utilize the capital reasonably to reduce the cost of material stocking with a better system of material administration. Keywords: project general contract, material stocking, material administration, control The construction project general contract mode, named as general contract mode, can be defined as that the project contract unit establishes an effective organization with capable staff, according to the contract system (including the general contract, monitoring contract, and division contract). It can administrate the project in the whole course and from all aspects by effective administration method so as to fulfill the clauses listed in the contract system and to realize the goal of the project. The general contract administration's advantage is that it can satisfy the market's requirement legally, adjust the project itself, and adapt to the dynamic administration and control. How to utilize the capital reasonably to reduce the cost with high efficiency to ensure the material stocking can meet the request of project quality. It is a key point in the stocking control and administration of general contract mode. To control the cost of stocking is not only responsible to the investor but also a guarantee of contractor's profit. The stocking administration requires an evaluation to the providers, then a select of eligible one; while stipulates the demand of material and the machinery's quality, also the measure to ensure that.

In any construction contract, the use terms and conditions in construction contract clauses has a great impact on the project performance, which in turn affects the achievement of the project completion date. Clauses within a contract should fit together to form a reasonably allocated risk among project parties and relevant to the complexity of projects. The General Condition clauses, which were looked at in this study, consist of the ones that relate to the time performance of the contract as well as that deal with action required at specific points in time within a contract. As we know, a clear and more complete General Condition documentation should end up with win-win situations for parties involved. If there are much unclear and even unknown information within the General Condition, the parties contracting will encounter uncertainties with relations to time that during the project execution. For the parties contracting, it is always to their advantage if more complete and comprehensive documentation used as it means fewer disputes, less conflicts, and time and energy saving during construction instead of claiming and debating over the provisions. The paper is to present an analysis on the time related clauses and provisions in the current local (used in Malaysia) and international construction contracts.

Subcontractors are very important to the successful completion of most construction projects, yet the many issues involved in subcontracting practice are seldom acknowledged. A literature review indicates that these issues include the timeliness of payments by general contractors, the process of selecting subcontractors, subcontractor bonding, construction insurance, safety issues on the construction site, partnering arrangements with various parties, and productivity issues. A questionnaire survey was administered to subcontractors, general contractors, and construction owners to investigate these issues and to determine the differences in perceptions between the parties. The results confirm the existence of the issues identified in the literature and in addition indicate that (1) the practice of retainage withheld by general contractors seems to be acceptable to many subcontractors unless its magnitude is large relative to the size of the firm; (2) postaward bid shopping by general contractors is sometimes justified, particularly in cases where the scope of subcontract work is modified; and (3) current bonding and insurance practices are adequate unless the additional transferred risks are excessive. Recommendations are made on the basis of the findings to minimize the negative effects of said issues.

In recent past the United States Department of Transportation has implemented a number of changes in regulations regarding federal-aid transportation projects. Some of these regulations are designed to help the disadvantaged business enterprise (DBE) firms and subcontractors in general, by requiring the general contractors to pay their subcontractors in a timely manner. Further, these regulations require that general contractors pay their subcontractors' retainage after the subcontracts are completed, even if they have not received their own retainage from the owner. This paper reviews these new regulations and introduces a financial model for quantifying the effect of these new regulations on the contractors' profit and the cost of transportation projects. The analysis is done using a spreadsheet-based cash flow model that takes into consideration the expenditure curve, the owner and general contractor's payment and retainage policies, front money, finance charge on negative cash flow, and interest income on positive cash flow, and final payment and return of retainage policies. A survey was conducted among contractors in Massachusetts and their input was used to run the cash flow model. The results of the analysis for eight different projects are presented and it is shown that the new regulations, on average, reduced the contractor's profit by 4.35%. It is also shown that the average potential cost increase for transportation projects is 0.14%.

Construction contract is a code conduct for both the contractor and the outsourcer to abide in the Market Economy environment, as a result, the enforcement and improvement of contracts management becomes essential. By analyzing the issues laying in the construction contracts management and their causes, this paper puts several proposals for enhancing the construction contracts management.

The contractor has an obligation to complete the works within the time for completion, and the employer should not impede the contractor in performing its obligations under the contract. To this end, if the contractor is prevented from completing by the date for completion by an act of prevention by the employer and there is no corresponding right to extend time for completion as a result of such act, or the time for completion is not properly extended, time becomes ‘at large’. Accordingly, the contractor is not under the obligation to complete the works within the original time for completion and he should complete within a reasonable time. This paper used a two-step research methodology where the time ‘at large’ principle is explained within the context of the common law legal system and is consequently applied to various standard forms of contract. The standard forms of contract examined in this paper include the Joint Contracts Tribunal (JCT) Design and Build Contract of 2011, the World Bank Conditions of Contract (WB Contract) included in the Standard Bidding Documents for Procurement of Works (SBDW), the Federation of Consulting Engineers (FIDIC) Conditions of Contract for Construction issued in 1999, and the American Institute of Architects (AIA) Conditions of contract for Construction (A201) of 2007. The authors highlighted the provisions related to delays and extension of time and mapped to them the principle of time ‘at large’ to conclude when time could become ‘at large’ under the subject contracts. This study helps employers and contractors - entering into projects using any of these standard forms of contract within a common law legal system - to avoid conflicts, claims, and disputes associated with and/or resulting from the time ‘at large’ principle. This should support effective and efficient contract administration of construction projects.

This paper reviews the important issues related to determining if substantial completion of a construction project has been reached. This milestone is important because it means that the contractor is entitled to the release of retainage, less deductions for uncompleted work. Because the owner has the right to occupy and use the facility, there can be no breach of contract beyond this point in time because of late completion. Liquidated damages cannot be assessed beyond substantial completion. Equipment warranties also take effect. Four questions are addressed: Was the purpose of the project defeated? Did the owner benefit from using the project? How extensive are the defects? And, how easy are the defects to correct? Of these questions, the principle one is whether the purpose of the project was defeated. If no, or if the owner benefitted from the work, substantial completion has likely been achieved. Several examples are given.

This chapter explores project evaluation and analysis requirements as well as necessary documentation for a front-end analysis review as well as necessary requisition format documents. In addition, the need for a lender's pre-construction meeting is explained including the more common issues to be discussed during this meeting. The various processes for executing the project are presented such as the Notice to Proceed, photo documentation, loan disbursements, and draw application reviews. Other issues such as stored materials funding, Change Orders, retainage, waivers of lien, general conditions, and preparing the Project Status Report (PSR) are also explained. The need for a payment and performance bond is clearly articulated as well as the issuing of building permits and other approvals. Toward the end of the chapter, final certification and project closeout are explained and the required documents typically required for this. As-built drawings, contractor's Certificate of Compliance, Certificate of Substantial Completion, final punch list, final waivers of lien, Certificate of Occupancy, quality control, and other relevant issues are also discussed and explained.

With the development of theory and practice of the international project claim management, the contractor carrying out the contract claims is no longer based solely on the contract agreement, but rather towards the combination of contractual and legal trends. In FIDIC Conditions of Contract for Civil Engineering Construction (Red Book, 1987 edition), there has a more comprehensive description and requirements of the rights of the employer, engineer and the contractor. So the specific acts of the parties involved the contract may result in "Breach of Contract" and trigger claims of time and cost. In this paper, according to a further analysis of a series of claim cases based on the Red Book we have studied the background of the contractual and legal of "Breach of Contract" in depth.

This chapter presents various aspects of the construction contract which include schedule-of-value exhibit, guaranteed maximum price, change orders, and liquidated damages. After execution of the contract and prior to commencement of work, the architect will request the contractor to submit what is called a schedule of values for the project. This schedule will list the assigned value the contractor places on each component of construction. The estimate in a guaranteed maximum price contract is generally prepared by the general contractor on incomplete drawings and is based on projecting or anticipating what those final plans and specifications will contain and what their associated costs will be. Change orders can occur for many reasons: a change in scope as directed by the owner, a request from the general contractor for added costs due to a recognized, and an accepted omission in the contract documents or some unforeseen condition arising generally in the site can be inserted into the contract that will make those requests somewhat easier to resolve. A liquidated damages clause reinforces the need of adherence to a schedule, but the contract schedule will include any increases in the original schedule if and when change orders have been approved, increasing both contract sum and contract completion dates.

This chapter discusses pros and cons of construction contracts. A letter of intent is a contract of restricted scope that can authorize the start of construction to perform a limited amount of work. A complete set of documents, plans, and specifications prepared and reviewed by the design consultant — the architect and consulting engineers — before being issued for bidding purposes is a critical component of the lump-sum contract approach. The comfort level of a cost plus a fee contract depends on the quality and integrity of the contractor. While contractor selection is a key ingredient in a successful cost-plus project, equally as important is defining the nature of the work as closely as possible. A construction-management contract is often referred to as an “agency” contract, since the construction manager acts as the owner's agent, performing work on the owner's behalf on construction-related matters. A construction-management contract is often referred to as an “agency” contract, since the construction manager acts as the owner's agent, performing work on the owner's behalf on construction-related matters.

Scholars in China debate on the difference between dissolution of the contract and termination of the contract. The Contract Law seemingly takes the stance to treat the dissolution as one of the circumstances under which a contract may be terminated. A contract may be dissolved under certain circumstances, and the occurrence of a circumstance that leads to dissolution of a contract would serve as an excuse for the party involved not to perform its contractual obligations. Generally, the termination discharges both the rights and obligations of the contractual parties, whereby the performance of contract is called to a complete stop. The Contract Law provides a laundry list of the causes to terminate a contract. In light of termination of a contract, assumption would become a cause if there is a consolidation of parties or a combination of contractual rights and obligations upon one party.Keywords: China; contract dissolution; contract law; contract termination; contractual obligations; contractual rights

Contract performance concerns the accomplishment of legal duties or obligations that become due as agreed upon by the parties under the contract. This chapter reviews the principles that govern the performance of contract. As in civil law, the Contract Law has a clear emphasis on the principle of compete and adequate performance because performance is what the contract is all about in terms of realizing the goal for which the parties have bargained. Closely related to the complete and adequate performance is the principle of good faith performance. The right of defense to non-performance of contract is a civil law concept that is designed to protect obligor from being harmed by the abuse of right of the obligee. In addition to the rights of subrogation and cancellation, the parties may set forth through agreement a guarantee to ensure the performance of the contract.Keywords: adequate performance; compete performance; contract law; contract performance; good faith performance

Most construction contracts include a provision to withhold 10 percent from each requisition submitted by the contractor, and this retainage, which often represents the contractor’s entire overhead and profit for the job, is not to be released until all of the close-out requirements included in the contract have been met. Human nature being what it is, at the end of a project everyone is thinking about that new job starting in a few weeks, and the pressure applied all through the current project seems to level off as construction activity winds down. But an extra effort must be exerted to clean up all loose ends and obtain final payment before moving on to another project, leaving a satisfied owner on the just-completed building.

As work is completed under the contract, the contractor is paid, but not in full. Part of the value of the work, typically 10 percent, is retained by the program pending completion of the project (see Example 9, “Standard Contract Payment Language”). This amount, representing the contractor’s profit from the project, is then paid to him upon completion. This acts as incentive for timely and satisfactory completion. The amount of the retainage is sometimes reduced after a substantial portion of the contract has been completed. When retainage is used in combination with a Letter of Credit, it is recommended that it remain at a full 10 percent until project completion. Payments for work completed should be made as quickly as possible to assist the contractor in cash flow management and reduce his cost of financing. Contractors will include their cost of financing projects in their bid to programs which are known to be “slow paying.” This payment procedure is covered more completely under Escrow Agreements discussed later on in the manual. (See Step 37.)

It is understood the contractor needs to be able to pay his workers, suppliers, and subcontractors in a timely manner. However, the contractor is not entitled to any money in excess of the cost of the work produced. Based on the agreed-upon Schedule of Values discussed in the Bidding Stage, progress payments are made to the contractor on a regular basis, usually monthly. The central idea is that the contractor only gets paid for the value of the work in place, less any retainage agreed to. In addition to fulfilling the contract obligations of the program, careful attention to prompt payment maintains the good will of the contractor and provides an effective bargaining chip in future negotiations. It is the Architect’s and Construction Specialist’s (as owner representative) responsibility to approve the payments. The Construction Specialist’s additional role is to facilitate rapid payment after approval.

In developing the Construction Contract, a number of issues concerning risk control must be resolved. They include: the amount of the contractor’s liability insurance; bonding versus irrevocable letter of credit; the amount of retainage of contractor’s fees; and the contract form to be used. These decisions become part of the contract signed by the contractor. (See the Program Planning Stage, Steps 10–12, for a detailed discussion of these issues.)

“Bad profits” are identified as the cause of more than one-half of all business failures in construction. To improve the profitability of the construction contractors, the Fair and Reasonable Markup (FaRM) is defined as the smallest markup that satisfies the Required Rate of Return (RRR) of the contractor for the particular (or at least the general) risk class of the project at hand. The microcomputer-based FaRM Pricing Model provides a systematic and efficient framework for analyzing the forecast cash-flow stream of the project and for estimating the Minimum Acceptable Price (MAP). The model utilizes LOTUS 1-2-3 spreadsheet and can be implemented on most IBM or compatible microcomputers. The computerized model delivers speedy responses to a variety of what-if questions investigating the sensitivity of FaRM and MAP to the billing policy and the Required Rate of Return (RRR) of the contractor and to the payments time lag and the retainage policy of the owner. Once the FaRM Pricing Model has been implemented, contractors should bid lower on projects which are more attractive; thereby, they should become more competitive. This should result in lower costs to owners while satisfying the RRR of the contractors. Conversely, contractors can maintain their RRR on the less attractive projects by submitting higher bid prices.

Holdback (or retainage) policies on contract payments place a financial burden upon contractors. A technique for measuring the relative severity of different policies is presented. Holdback policies enforced on Canadian provincial highway construction contracts were surveyed by mail. They were evaluated by simulating their effects on a bank contract earnings data obtained from one province, using an APL program. The key measure used for the severity of holdback policies is the average percentage reduction in the present value of contract payments which they cause.