It is essential that the administration and management of contracts results in reducing risks, maximizing cost savings, minimizing claims, and improving economic return. These results can only be achieved through effectively managing contract risks: developing tough but fair contract documents, engaging in aggressive negotiating practices, and employing outstanding communication skills.

The process of reaching a contract requires a specific sequence of steps. In taking these steps, the project manager must make a series of choices between priorities for project objectives, degrees of risk to be assumed by the contracting parties, control over project activities, and the cost of achieving selected goals. This process must first be fully understood by the project manager, then be tempered by experience, and finally be expanded into the ability to reach a contract through the exercise of negotiating and communicating skills.


A contract is a mutual business agreement recognized by law under which one party undertakes to do work (or provide a service) for another party for a "consideration." Owner contracting arrangements would cover:

• Contract Conditions

Commercial Terms & Pricing Arrangements Scope of Work (Technical) Project Execution Plan


A written contract provides the document by which the risks, obligations, and relationships of all parties are clearly established, and ensures the performance of these elements in a disciplined manner. In the owner situation, the contract is the means by which the contractor can be controlled and ensures that the work and end product satisfy the owner's requirements.


Most projects are executed under a three-party contractual relationship:

• The owner, who establishes the form of contract and the general conditions.

• The engineer, who can have the following three roles:

- Designer— carrying out the detailed engineering work, and purchasing equipment and material on the owner's behalf

" Arbitrator—acting as the owner's agent in administering the contract and deciding, impartially, on certain rights of the parties under the contract

- Project manager—handling design, procurement, and construction or construction management/services.

• The contractor

The normal contractual relationship among these three parties on a single project is for the owner to have one contract with the engineer for design, procurement, and other services, and a separate contract with the contractor for the construction work. No contractual relationship exists between the engineer and the contractor. This is usually referred to as a "divided or split responsibility" arrangement. In an alternative arrangement, called "single responsibility," a general contractor is awarded total responsibility for the engineering, procurement, and construction.

The projectmanager must carefully decide on a specific contracting arrangement, as outlined in the section below on Contract Strategy, and in Chapter 6, Planning.

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