INTERNATIONAL CONSTRUCTION CONTRACTS

PREAMBLE

• The contract system: There is no universal contract form that is used for international construction projects. If the project is funded from a private scoter, the client may choose to use the system practiced in the home country. But for projects funded by multilateral development banks, the contract systems usually used are those recommended by the banks.
• Parties involved in the contract: Parties involved are the same as that for any domestic contract: (1) Owner, (2) Architect-Engineer, and (3) Contractor.
• Selection of contractor: Selection of contractor may be done using any of the following procedures:
  • Competitive bidding: The owner selects a contractor by calling a tender for the job. The work is usually awarded to the lowest responsive bidder. It is the most widely used method for selection of contractors. The contract stipulates that when a bid is selected by the owner, the contractor must complete the project for the bid amount.
  • Negotiated contract: The owner selects a contractor on the basis of her/his technical and financial capabilities and negotiate a contract. This type of contract is usually limited to privately funded projects.
  • Competitive negotiation: Contractors are first prequalified on the basis of their technical expertise and bid prices. They are then ranked in order of their technical qualifications to do the job. The bid of the first ranked contractor is opened. If the owner is satisfied with the price, the contractor is awarded the job. If not, they negotiate a price. In case the negotiations fail, the owner opens the bid of the second ranked contractor and commences negotiation with him/her. The process continues until a contractor is selected. Fresh tenders are usually called if the negotiations with even the third ranked contractor fails.
• Contract types: The contract types available are the same as that for domestic construction:
  • Construction services only: The contractor provides only the construction services; design is provided by an architect-engineer company. The architect-engineer acts as a professional intermediary between the owner and the contractor and represents the owner in matters of construction contract administration.
  • Single prime contract: The owner awards construction of the entire project to a single prime contractor. The contractor coordinates and directs the activities of the various parties and agencies involved with the construction and assumes full responsibility to the owner for delivery of the project within specified time. The general contractor is completely accountable for construction according to the contract and for all payment of costs and performance associated with the subcontractors.

  

  Figure 1. Contract Services Only or Single Prime Contract

  • Bridging: Bridging is a hybrid technique that merges elements of both traditional design/bid/build and design/build. With bridging, the owner hires an architect to define the preliminary design and performance specifications of the project, which are then used to solicit bids from design/build entities to execute the project. Based on the owner's initial documents, a firm price is agreed upon with the design/builder and a contract is set. The contractor’s architects and engineers then prepare final construction documents and specifications. The design/builder acts as the architect/engineer of record and builds the project.
  • Design-Build: The owner contracts with a single firm for providing both design and construction services. An extension of this type is a "turnkey" project where the contractor obtains project financing, procures land, provides design and construction services, and hands it over to the owner ready for occupancy.
  • Build-Operate-Transfer (BOT) Model: A special financing model developed for realizing projects that require advanced technology and high capital investment. This allows for private participation in public services, without sacrificing ownership of assets. BOT schemes and related variants have emerged as the most important infrastructure finance vehicles in developing countries. Other variations of the model are Build-Own-Operate (BOO) and Build-Own-Operate-Transfer.
  • CM at Risk: It is a process that allows a client to select a Construction Manager (CM) based on qualifications; make the CM a member of a collaborative project team; centralize responsibility for construction under a single contract; obtain a bonded guaranteed maximum price; produce a more manageable, predictable project; save time and money; and reduce risk for the client. CM at Risk, a more professional approach to construction, is taking its place along with design-build, bridging and the more traditional process of design-bid-build as an established method of project delivery.

  

  Figure 2. Construction Management at Risk

• Costs
  • Material
  • Direct and indirect labor
  • Equipment
  • Recruiting cost of labor when professional recruiters are used
  • Transportation cost of labor, materials, and equipment from country of origin to site
  • Cost of setting up a camp: living quarters, sanitary, and recreational facilities
  • Cost of visas, repatriation costs
  • Orientation and training
  • Financing, expediting progress payments
• Payment
  • Lump-sum method
  • Cost reimbursable method
  • Unit price method

INTERNATIONAL FEDERATION OF CONSULTING ENGINEERS (FIDIC)

• What is FIDIC?
  • FIDIC is the International Federation of Consulting Engineers. The acronym represents the French version of the organization’s name.
  • Most of the countries around the world use the conditions of contract promulgated by FIDIC for use in international construction contracts. The World Bank has adopted this form with certain modifications for for procurement of works by borrowing countries.
• FIDIC Conditions of Contract
  • The FIDIC conditions of contract are usually used for works that are measured and valued using a Bill of Quantities.
  • For lump-sum, cost plus, or other types of contracts, the forms are required to be modified to suit the type of work.
  • It is a comprehensive document that contains conditions of contract along with a form of tender and a form of agreement.
  • The FIDIC conditions of contract are are divided into several parts:
    • Part I: Contains the general conditions of contract
    • Part II: Contains the particular conditions of contract (job specific)
    • Part III: Contains the particular conditions of contract (job specific) related to dredging and reclamation works.
  • Some important clauses:
    • Quantities: The quantities set out in the Bill of Quantities are the estimated quantities of the work, but they are not to be taken as the actual and correct quantities of the works to be executed by the contractor in fulfillment of his/her obligations under the contract.
    • Maintenance: The contractor has to enter a period of maintenance (usually a year) after the completion of works. During this period, the contractor executes works of repair, reconstruction, or making good defects.
    • Completion certificate (known as maintenance certificate) is issued to the contractor after the expiry of the maintenance period.
    • Changes in law: In the event of changes to statutes, laws, decrees, and ordinances within thirty days of submission of bids and if these changes effect the contract price, then the contract price will be changed accordingly.
    • Rates of exchange: The contract legislates that, where it provides for payment in whole or in part in foreign currencies, then such payments will not be subject to variation in rates of exchange between the currencies of the home and host countries.
    • Loss due to currency restriction: In the event that after the signing of the agreement some currency restrictions are imposed by the host country, the client agrees to reimburse any loss or damage to the contractor resulting from such imposition.
    • Government regulations: The contractor is required to conform with all local regulations concerning but not limited to:
      • Use of explosives
      • Bribery and corruption
      • Taking of photographs of the works
      • Religious observations
      • All matters that might effect the security of the country
    • Arbitration: In case of disputes, if they are not amicably settled, the rules of conciliation and arbitration of the International Chamber of Commerce will apply.

PROCUREMENT UNDER WORLD BANK CREDIT

• Loan Agreement
  • The Loan Agreement governs the legal relationship between the Borrower (i.e. the country that receives the credit) and the Bank, and also the guidelines for procurement of goods and works for the project for which the credit has been made available.
  • The rights and obligations of the Borrower and the providers of goods and works for the project are governed by the bidding documents, and by the contracts signed by the Borrower and the providers of goods and works, and not by the Loan Agreement.
• General guidelines
  • The responsibility for implementation of the project and the award and administration of contracts under the project rests with the Borrower.
  • The Borrower has to ensure the Bank that the proceeds of the loan are used only for the project for which it was granted.
  • In order to maintain the transparency of the procurement process, the projects are to be awarded through International Competitive Bidding (ICB), with suitable allowance for domestic contractors.
• Eligible contractors
  • Funds from Bank loans can be disbursed only on expenditures for works provided by contractors who are national of Bank member countries. Materials used by the contractors have to be produced in Bank member countries.
  • Nationals of non-member countries are disqualified from bidding for contracts intended to be financed either in whole or in part from Bank loans.
  • There are more than 180 countries who are presently members of the World Bank. The list can be obtained on-line.

INTERNATIONAL COMPETITIVE BIDDING FOR WORLD BANK FUNDED PROJECTS

• Objective: The objective of the ICB is to provide all eligible prospective bidders with timely and adequate notification of a Borrower’s requirements and an equal opportunity to bid for the required works.
• Notification: The Borrower is required to prepare and submit a General Procurement Notice to the Bank for publication in the United Nations Development Business (UNDB).
• Prequalification: Prequalification of bidders is necessary for large and complex works.
• Bidding Documents: The bidding documents shall furnish all information necessary for a prospective bidder to prepare bid for the works to be provided. They generally include:
  • Invitation to bid
  • Instruction to bidders
  • Form of bid
  • Form of contract
  • Conditions of contract (both general and special)
  • Specifications and drawings
  • Bill of quantities
  • Delivery time or schedule of completion
• Validity of Bids and Bid Security: Bids submitted are required to be valid for a specified period of time. Bid securities are required by the borrower as protection against irresponsible bids.
• Language: Prequalification and bidding documents are prepared either in English, French, or Spanish.
• Standards: Internationally accepted standards such as those issued by the ISO are specified, as far as possible.
• Brand Names: Brand names, catalog numbers, or similar classifications are avoided.
• Pricing: Bidders for works contracts are required to quote unit prices or lump sum prices for the performance of works. Such prices should include all duties, taxes, and other levies.
• Price Adjustment: Bid prices may either be fixed or the documents may allow for price adjustments. In case of adjustments, the prices may be adjusted by the use of a prescribed formula which breaks down the total price into different components.
• Transportation an Insurance: To be provided by the bidder.
• Currency of Bid: Bidder may express the bid price in the currency of any member country, or in European Currency Unit (ECU or Euro).
• Currency Conversion: For the purposes of comparing prices, the bid prices are converted to a single currency selected by the Borrower.
• Currency of Payment: Payment of the contract price is made in the currency or currencies in which the bid price is expressed in the bid of the successful bidder.
• Payment: Bidding documents specify the payment methods and terms offered. Mobilization advances, in appropriate cases, are usually made.
• Conditions of Contract: Scope of work, right and obligations of the parties involved, and functions of the architect/engineer are clearly defined in the conditions of contract.
• Performance Security: Performance bond or bank guarantee is required to be furnished by the contractor. A portion of this security extends beyond the date of completion of works to cover the defects liability period.
• Liquidated Damages: Provisions of liquidated damages are included in the contract to cover the extra cost or loss of revenue to the Borrower in case of delay in the completion of works.
• Force Majeure: The contract stipulates that failure on the part of the parties to perform their obligations under the contract will not be considered a default if such failure is the result of an event beyond the control of the parties involved.
• Arbitration: Settlement of disputes are encouraged to be resolved using international commercial arbitration methods.
• Time for Bid Preparation: Not less than six weeks from the date of invitation to bid.
• Bid Opening: Bids are opened at the stipulated time and place in presence of the bidders or their representatives.
• Examination of Bids: Bids are required to be responsive to the bidding documents.
• Evaluation and Comparison of Bids: All bid prices are converted to a single currency for the purpose of bid evaluation. The bid with the lowest evaluated cost is usually selected for award.
• Domestic Preferences: Domestic contractors are allowed a margin of preference of 7.5 per cent.
• Award of Contract: Contract is awarded to the lowest evaluated responsive bidder.
• Price revision formula (used only when there is provision for revision of contract prices):
  • P₁ = (P₀/100)*[a+b*(M₁/M₀)+c*(W₁/W₀)]
  • Where:
    • P₁ = price payable under index clause
    • P₀ = initial price as stipulated in the contract
    • a = percentage of price excluded from adjustment
    • b = percentage of price of materials covered by this weighting
    • c = percentage of price of wages covered by this weighting
    • M₀ = base level of price indices for materials specified under ‘b’
    • M₁ = comparable level of price indices for materials specified under ‘b’
    • W₀ = base level of price indices for wages specified under ‘c’
    • W₁ = comparable level of price indices for wages specified under ‘b’
    • a+b+c = 100% of price payable under index clause