A CONTRACT IS A LEGALLY ENFORCEABLE AGREEMENT. Its essential elements: OFFER, ACCEPTANCE, CONSIDERATION, CAPACITY, FREE CONSENT, and a LAWFUL OBJECT. In Nepal, contracts are governed by the CONTRACT ACT 2056 (2000) and, for public works, the Public Procurement Act. THE ORGANISING IDEA OF THE WHOLE TOPIC: A CONSTRUCTION CONTRACT IS AN INSTRUMENT FOR ALLOCATING RISK. THE PRICING MECHANISM DETERMINES WHO BEARS THE CONSEQUENCE IF COSTS OR QUANTITIES TURN OUT DIFFERENTLY FROM EXPECTED. ── THE MAIN TYPES ────────────────────────────────────────── 1. LUMP SUM (FIXED PRICE) One price for the whole defined scope. RISK: THE CONTRACTOR carries almost all cost risk. REQUIRES: a complete, unambiguous design before tender. ADVANTAGES: the client knows the price; minimal measurement administration; strong incentive for efficiency. DISADVANTAGES: the contractor prices a RISK PREMIUM into the bid; changes are expensive because there is no competitive pressure on a variation; and A CONTRACTOR SQUEEZED ON A FIXED PRICE WILL PURSUE CLAIMS AGGRESSIVELY. The client pays for certainty either way. 2. UNIT PRICE / ITEM RATE (MEASURE AND VALUE) The bidder rates each item in the BILL OF QUANTITIES; payment follows the QUANTITY ACTUALLY MEASURED. RISK: THE CLIENT carries the QUANTITY risk; THE CONTRACTOR carries the RATE risk. THE COMMONEST FORM FOR CIVIL WORKS, precisely because earthworks and foundations cannot be quantified exactly in advance. ADVANTAGES: work can start before quantities are final; changes are priced at pre-agreed rates. DISADVANTAGES: the final cost is not known at award; measurement is administratively heavy; and it is vulnerable to FRONT LOADING and to UNBALANCED BIDDING, where a contractor rates items highly whose quantities they expect to increase. 3. COST PLUS The contractor is reimbursed actual cost plus a fee: COST PLUS PERCENTAGE — the fee is a percentage of cost. NOTE THE PERVERSE INCENTIVE: THE HIGHER THE COST, THE HIGHER THE FEE. This form is rightly rare and is prohibited in many public systems. COST PLUS FIXED FEE — the fee does not rise with cost, so the perverse incentive is removed but no efficiency incentive replaces it. COST PLUS INCENTIVE FEE — the fee varies with performance against a target cost, sharing savings and overruns. THE BEST-ALIGNED OF THE THREE. RISK: THE CLIENT carries nearly all of it. USED WHEN THE SCOPE GENUINELY CANNOT BE DEFINED — emergency works, unpredictable repair, early-stage R&D. 4. TARGET COST — a target is agreed, and savings or overruns against it are SHARED in an agreed ratio (a "pain/gain" mechanism). A deliberate middle position. 5. TURNKEY / EPC — design and construction for one price, with the contractor carrying design risk as well. THE SPECTRUM, which is the diagram worth drawing: CONTRACTOR RISK ◀──────────────────────▶ CLIENT RISK LUMP SUM TARGET COST UNIT PRICE COST PLUS AND THE PRINCIPLE THAT SHOULD GOVERN THE CHOICE: RISK SHOULD BE ALLOCATED TO THE PARTY BEST ABLE TO CONTROL IT. Allocating a risk to a party who cannot control it does not remove the risk; it simply means they price it, or fail to price it and later claim. Transferring ground conditions risk to a contractor who was given no time to investigate the ground is a transfer in words only, and it produces disputes rather than protection.

── THE PARTIES ───────────────────────────────────────────── EMPLOYER (client) — commissions and pays CONTRACTOR — executes THE ENGINEER (or Project Manager) — administers the contract: supervises, certifies payment, issues instructions and variations, and DETERMINES CLAIMS IN THE FIRST INSTANCE. THE ENGINEER'S DUAL ROLE IS THE STRUCTURAL TENSION OF TRADITIONAL CONSTRUCTION CONTRACTS: engaged and paid by the employer, yet required to act IMPARTIALLY when deciding between employer and contractor. Modern forms respond by moving disputes to an independent board, but the tension is inherent and worth stating in an exam answer. SUBCONTRACTORS — contracted to the contractor, with NO contractual relationship with the employer (no "privity of contract"), which is why a subcontractor cannot generally sue the employer directly. ── THE KEY CONTRACTUAL MECHANISMS ────────────────────────── SECURITIES AND GUARANTEES · PERFORMANCE SECURITY — commonly 5% of the contract price, called if the contractor defaults · ADVANCE PAYMENT GUARANTEE — secures mobilisation money · RETENTION — typically 5–10% deducted from each payment, HALF released at completion and half after the DEFECTS LIABILITY PERIOD. Its purpose is to leave the contractor with money at stake until the defects period expires. TIME · COMMENCEMENT DATE and TIME FOR COMPLETION · EXTENSION OF TIME (EOT) — granted for delays that are the employer's responsibility or are neutral events, which RELIEVES THE CONTRACTOR OF DAMAGES BUT DOES NOT AUTOMATICALLY ENTITLE THEM TO MONEY. Time and money are separate claims, and conflating them is a classic error. · LIQUIDATED DAMAGES — a pre-agreed sum per day of culpable delay. IT MUST BE A GENUINE PRE-ESTIMATE OF THE EMPLOYER'S LOSS; if it is set as a deterrent it may be struck down as a PENALTY and become unenforceable, leaving the employer to prove actual loss. PAYMENT · INTERIM PAYMENT CERTIFICATES against measured work, less retention and advance recovery · PRICE ADJUSTMENT (escalation) formulae for material and labour cost movements on long contracts · FINAL ACCOUNT and the FINAL PAYMENT CERTIFICATE CHANGE · VARIATION ORDERS — the employer's right to alter the works, valued at BOQ rates where applicable, at pro-rata rates for similar work, or at fair rates for genuinely new work. · THE POWER TO VARY IS ESSENTIAL — without it any change would require a fresh contract — but it is also the main channel through which the final cost departs from the tender sum. DEFECTS LIABILITY PERIOD — typically 12 months after completion, during which the contractor must remedy defects appearing in the works. FORCE MAJEURE — exceptional events beyond either party's control (earthquake, war, epidemic) which suspend obligations without fault. HIGHLY RELEVANT IN NEPAL, and contracts should define it explicitly rather than rely on general law. ── CLAIMS ────────────────────────────────────────────────── A CLAIM is an assertion of entitlement to additional time or money. THE PROCEDURE MATTERS AS MUCH AS THE MERITS: 1. NOTICE within the period stated in the contract — often 28 days from the event. MANY CONTRACTS MAKE TIMELY NOTICE A CONDITION PRECEDENT, WHICH MEANS A LATE NOTICE EXTINGUISHES AN OTHERWISE VALID CLAIM ENTIRELY. This is the single most practically important sentence in the topic. 2. CONTEMPORARY RECORDS kept from the moment of the event. CLAIMS ARE WON AND LOST ON RECORDS — site diaries, instructions, correspondence, photographs, delay analyses. A claim asserted months later from memory fails whatever its merits. 3. DETAILED SUBMISSION: the contractual basis, the cause, the effect, and the quantification. 4. The Engineer's determination. 5. Dispute resolution if rejected. COMMON GROUNDS: variations; late issue of drawings or instructions; delayed possession of the site; UNFORESEEN GROUND CONDITIONS; employer-caused disruption; suspension; changes in law. ── DISPUTE RESOLUTION, in escalating order ───────────────── 1. NEGOTIATION — cheapest, fastest, preserves the working relationship 2. MEDIATION / CONCILIATION — a neutral third party assists, without a binding decision 3. DISPUTE ADJUDICATION BOARD (DAB/DRB) — a standing panel giving a decision that BINDS UNLESS AND UNTIL OVERTURNED BY ARBITRATION. Its value is that WORK CONTINUES while the dispute proceeds, which is exactly what litigation fails to achieve. 4. ARBITRATION — a private tribunal, binding and enforceable. In Nepal under the Arbitration Act 2055. Faster and more confidential than court, and the arbitrator can be a person who understands construction. 5. LITIGATION — the courts. Slow, public, and generally the last resort. THE PRACTICAL PRINCIPLE: DISPUTES ARE CHEAPEST TO RESOLVE EARLY AND CLOSE TO THE FACTS. A disagreement settled on site in a week costs a meeting; the same disagreement in arbitration three years later costs both parties more than the sum in issue. THE ESCALATION LADDER EXISTS TO KEEP DISPUTES AT THE LOWEST RUNG THAT CAN RESOLVE THEM. ── CONTRACT CLOSURE ──────────────────────────────────────── substantial completion certificate → defects liability period → final inspection → performance certificate → final account agreed → retention released → securities returned → contract discharged. AND, AS IN THE LIFE CYCLE TOPIC: THE LESSONS RECORDED, or the same disputes recur on the next contract.