Main Problems in Standard Contract Documents of Turkish Construction Industry

Cakmak, P.I. Istanbul Technical University

(email: irlayici@itu.edu.tr) Tas, E.

Istanbul Technical University (email: tase@itu.edu.tr)

Abstract

Today, construction projects have gradually been more complicated and extensive while having to be performed in a wide geography. Contractor firms undertake several projects by operating both in domestic and international construction markets. When the risks caused by this complexity added to the basic risks lie in the unpredictable nature of the construction activities; construction contracts become one of the most important tools in the construction industry. Turkish contractor firms undertake private and public projects not only in domestic construction market, but also in international ones. While the execution of these projects, they encounter different types of construction contracts. Even they have successfully completed several construction projects in different geographies; they have still faced some problems in practice. These problems generally caused by the insufficient standard contract documents and general conditions of the contract documents which are used in public construction works in Turkey. In this study, main problems regarding standard contracts and general condition of the contract documents are identified by comparing Turkish standard documents with AIA document. The differences between these documents are put forward and appropriate suggestions are improved.

Keywords: construction contracts, contract documents, general conditions, AIA A201, Turkish construction industry

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1. Introduction

Today, construction projects have gradually become more complicated and extensive, requiring coordinated efforts of various professions. Construction projects involve huge amounts of money and a union of skills, materials and equipments. In order to successfully manage both money and work, there is a need for managerial skills and good documentation. An owner can no longer rely on verbal agreements, or leave work requirements, quality of construction, and matters of cost to trust or chance (Poage, 2000). A written, legally agreement is required in order to complete the construction project within the desired time, cost and quality. This written, legally agreements is defined as a construction contract in the construction industry.

The aim of this study is to identify the main problem areas regarding standard contracts and general condition of the contract documents which are used in the public works of Turkish construction industry. In order to reach this aim Turkish standard documents are compared with AIA A201 document, the differences between these documents are put forward and appropriate suggestions are improved.

2. Construction contracts

A contract is a legal agreement between two or more parties. They can be individuals, companies, joint ventures or any combination of them. These parties are bound to each other for a certain period of time by a unique and exclusive relationship they have created for their mutual benefit (Collier, 2001). In construction industry, these parties can be an owner, a contractor, an architect, a consultant and subcontractors. The most common contract is the agreement between the owner and the contractor for construction industry.

Although there are many types of construction contracts, these are mainly identified based on the method of payment to the contractor. Construction contracts differ according to the time schedule, cost, contractor’s profit, quality and risk of the parties. These are named mainly as: lump-sum contracts, unit-price contracts, cost-plus-fee contracts and the guaranteed maximum price contracts.

Lump-sum contracts: In lump-sum contracts, the contractor agrees to perform all work specified in the contract at a fixed price. In this type of contract, the contractor takes most of the risk since he offers to accomplish the work for the stipulated sum including the profit. Lump-sum contracts are preferred when the scope of the project is well defined with predictable costs and low implementation risks (Collier, 2001).

Unit-price contracts: Unit price contracts are based on the unit price for each parties of the construction. In this type of contract, the owner takes the advantage of not paying risk margin to the contractor. However, the owner takes the risk on make the contractor complete the project within the budget. Whereas, the contractor does not take any risk. The decision whether to choose working with

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unit price contract depends on the amount of risk which is inversely proportional to the indefiniteness of the available information (Collier, 2001).

Cost-plus-fee contracts: Cost-plus-fee contracts are derived either by adding a pre-established percentage mark-up to each item in the schedule, or by applying a fixed pre-determined fee for overhead and profit (Poage, 2000). This type of contract provides the maximum flexibility to the owner and minimizes the risks that the contractor takes. On the other hand, this type of contract has some disadvantages since it encourages specification of high-cost features and excessive design changes by owner which can cause time extension and increase in cost (Ferreira and Rogerson, 1999). There are various types of cost-plus-fee contracts such as cost plus percentage contracts, cost-plus-fixed fee contracts, cost-plus incentive fee contracts and maximum cost-plus-fee contracts.

Guaranteed maximum price contracts: A guaranteed maximum price contact is agreed upon maximum contract sum not to be exceeded. In this type of contract, the contractor guarantees that the project will be constructed in full accordance with the drawings and specifications and the cost to the owner will not exceed some total upset price (Clough et al., 2005). Furthermore, the owner has a possibility of reducing costs and the contractor has a chance to increase his profit.

As they are listed above, there are different types of contracts depending on the money paid to the contractor and risk shared between the two parties. The main issue is choosing the right type of contract in the right construction projects. Owners and contractors can select contracts from a variety of different sources. The American Institute of Architects (AIA) (www.aia.org), the Engineer’s Joint Contract Documents Committee (EJCDC) (www.ejcdc.org), the Construction Management Association of America (CMAA) (www.cmaanet.org) and International Federation of Consulting Engineers (FIDIC) (www.fidic.org) and others have developed standard construction contract forms. These construction contract forms are based on similar purposes, applications and clauses and are commonly used and accepted throughout the construction industry. In this paper the documents of the American Institute of Architects (AIA) are given as examples for contract documents.

2.1 Contract documents

The usual construction contract consists of a number of different documents. In order for the work to be completely defined, the contract must be accompanied by a number of other documents that (for the sake of convenience and propriety) are prepared separately from the body of the contract (Poage, 2000). This collection of documents is known as contract documents. Although which documents constitute construction contract is variable, the following is a listing of documents that are essential in most construction contracts.

The Agreement: The agreement is a document specifically designed to formalize the construction contract. It acts as a single instrument that serves the purpose of presenting a condensation of the contract elements, stating the work to be done and the price to be paid for it, and provides suitable spaces for the signatures of the parties (Clough et al., 2005). AIA Document A101-2007 Standard

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Form of Agreement between Owner and Contractor is an example for a standard agreement form and is intended for use on construction projects where the basis of payment is a stipulated sum.

Addenda: Addenda are critical documents because they are issued during the bidding period to make changes in bidding documents, and so usually they become part of the contract documents when a contract is made; unless they are issued solely to modify a bidding document that does not become a contract document (Collier, 2001). The purpose of these documents is modifying or clarifying the intent of the contract documents.

General Conditions of the Contract: The General Conditions serve as the definitive or explanatory document among the contract documents. The General Conditions draw the responsibilities of the owner, the design professional, the contractor and subcontractors. The General Conditions also contain miscellaneous provisions to define time, and include matters pertaining to payments and completion, protection of persons and property, insurance requirements, changes in the work, uncovering and correction of unacceptable work, and termination of the contract (Poage, 2000). AIA Document A201-2007 General Conditions of the Contract for Construction is an example for a general conditions form which provides the terms and conditions under which the owner, contractor and architect will work together during the building construction process.

Supplementary Conditions of the Contract: Supplementary Conditions are modifications of and additions to statements which are made in the General Conditions. Supplementary Conditions are amendments and amplifications to standard General Conditions, and are of the same nature as General Conditions; and while standard General Conditions usually are basic to most projects, Supplementary Conditions should be for the special and peculiar requirements of a particular owner and project (Collier, 2001). AIA Document A503-2007 Guide for Supplementary Conditions is a document which contains amendments to the standard General Conditions and additional conditions which may be needed for a particular project.

Drawings: Drawings are important component of the contract documents. The CSI Manual of Practice defines the drawings as they are a graphic representation of the work to be done and they indicate the relationships between the components and materials (2005). The drawings, also known as the plans or blueprints are the primary vehicle by which the physical, quantitative, or visual description of the project is conveyed (Hinze, 2001). Drawings and specifications cannot be considered as independent documents. As with the writing of specifications, well-prepared drawings should be orchestrated to be in harmony with the other contract documents (Poage, 2000).

Specifications: Specifications are the contract documents which complement the drawings. The Construction Specifications Institute (CSI) (www.csinet.org) and Construction Specifications Canada (CSC) (www.csc-dcc.ca) created the MasterFormat which is the specifications writing standard for construction projects. It lists titles and section numbers for organizing data about construction requirements, products, and activities. By the help of specifications, communication among architects, specifiers, contractors and suppliers is provided and owners’ requirements, timelines and budgets are met.

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Modifications: Construction contracts should be designed to allow for changes, additions or deletions. Modifications are the documents which are issued after the contract has been made. Although modifications have much common with addenda, they are not subject to the same urgency. Change orders to modify the work, a construction change directive or an order for a minor change are examples for modifications which are made to the construction contracts.

The documents listed above are the contract documents that are essential and necessary for the successfully completion of a construction project within the desired time, quality and budget. Contract documents play an important role in the development of a project and provide the bridge between the owner’s conceptual image of a project and the actual construction of the physical facility (Hinze, 2001). All of the contract documents are construed together for purposes of contract interpretation, each giving meaning and effect to each other, because it is presumed that everything in the contract has been inserted deliberately and for a purpose (Clough et al., 2005).

2.2 Contract documents in Turkey

In Turkey, Public Procurement Authority (Kamu Ihale Kurumu-KIK) (www.ihale.gov.tr) is the only organization which develops standard construction contract documents. All the contract documents are developed based on the Turkish Public Procurement Law- 4734. The purpose of this law is to establish the principles and procedures to be applied in procurements held by all public entities and institutions governed by public law or under public control or using public funds. Although owners and contractors are free to use any standard contract documents in their private construction works, using the standard contract documents which are developed by KIK is compulsory for the public construction works in Turkey. Contract documents that used in Turkish public construction works are as follows:

Standard Contract for Construction Works: This document is the agreement which is used in the public construction works.

General Specifications for Construction Works: This document is the general conditions of the construction contract. The purpose of the General Specification is to establish the general principles and procedures that will be applied in performance of the works that are contracted as per Turkish Public Procurement Contracts Law- 4735. This General Specification covers the works that are awarded as per the provisions of the Law by the contracting entities subject to Public Procurement Law- 4734 and that are contracted over the lump sum or unit cost as per Public Procurement Contracts Law- 4735.

Administrative Specifications: Administrative specifications are prepared on the basis of the Standard Administrative Specification annexed to the Regulation on Implementation of Construction Works Procurements hereby according to the procedure applicable in the construction works procurement.

Technical Specifications: The technical specification indicating the technical details and requirements, and the project of the works to be performed are prepared and included in the contract

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documents. It is essential that the technical criteria set forth in the technical specifications to be prepared by the owner ensure productivity and functionality, and do not contain the matters hindering competition, but provide equal opportunity for all bidders.

All these contact documents are the standard documents which are used in the public construction projects in Turkey. In addition to the contract documents listed above drawings, location lists, clarifications and other appendixes are considered as other contract documents.

3. Comparison of the general conditions

All the contract documents are important for successfully completion of a construction projects, but general conditions are vital as they constitute basic principles and procedures of construction contracts and sets forth the responsibilities of the owner and contractor. In this part, the general conditions prepared by Public Procurement Authority (KIK) in Turkey are compared with the general conditions of American Institute of Architects (AIA). Thus, the standard general conditions document KIK General Specifications for Construction Works (GSCW) are compared with AIA Document A201-2007 General Conditions of the Contract for Construction.

AIA Document A201-2007 General Conditions of the Contract for Construction is the most commonly used general conditions document on building projects in the United States. The American Institute of Architects (AIA) published the first general conditions document in 1911 and A201-2007 is the sixteenth edition. A201-2007 document provides the basic legal framework for the construction contracts. It is considered the keystone document of the A201 family of documents, and is incorporated by AIA Owner-Contractor agreements. The document contains fifteen basic articles in terms of the purposes, agreements and responsibilities between and among the parties.

KIK General Specifications for Construction Works is the general conditions document on public construction projects in Turkey. Public Procurement Authority (KIK) prepared this document in 2001, in order to establish the general principles and procedures that will be applied in performance of the works that are contracted as per public procurement contracts. The document composed of ten basic chapters which consist 51 articles.

Following tables compares the general conditions of AIA A201-2007 General Conditions of the Contract for Construction and KIK General Specifications for Construction Works (GSCW) in terms of the basic articles they are composed of. To compare the two general conditions document, firstly AIA A201-2007 document’s basic articles are given in separate tables from 1 to 15 and these articles are expanded. Then, it is searched that whether the KIK GSCW document contains these articles and corresponding ones are given in the tables.

Firstly, KIK / GSCW document is compared with AIA A201-2007 document in terms of general provisions (Table 1). In both documents, definitions are given concerning the contract documents, contract, work, project, drawings and specifications.

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Table 1: Comparison of general conditions in terms of general provisions

AIA / A201-2007 KIK / GSCW Article 1. General Provisions Chapter 1. General Provisions 1.1. Basic definitions 4. Definitions 1.2. Correlation and intent of the contract documents 1.3. Capitalization 1.4. Interpretation 1.5. Ownership and use of drawings, specifications and other instruments of service

1.6. Transmission of data in digital form

Both documents give information about the owner’s roles, rights and responsibilities during the construction process (Table 2). The only difference is the articles are given by the name of projects in KIK document.

Table 2. Comparison of general conditions in terms of owner’s roles, rights and responsibilities

AIA / A201-2007 KIK / GSCW Article 2. Owner Chapter 3. Projects 2.1. General 2.2. Information and services required of the owner 11. Handover of application projects to the contractor

in turnkey lump sum works 2.3. Owner’s right to stop the work 2.4. Owner’s right to carry out the work 25. Maintenance and correction responsibilities of

contractor

Furthermore, both documents clarify the contractor’s roles, rights and responsibilities in the construction work (Table 3). In spite of AIA A201-2007, there is not any information about warranty, taxes, permits, fees, samples, royalties, patents and copyrights in the KIK document.

Table 3. Comparison of general conditions in terms of contractor’s roles, rights and responsibilities

AIA / A201-2007 KIK / GSCW Article 3. Contractor Chapter 5. Execution of the Work 3.1. General 14. Supervision of works 3.2. Review of contract documents and field conditions by contractor

14. Supervision of works

3.3. Supervision and construction procedures 14. Supervision of works 18. Contractor being present at work

3.4. Labor and materials 19. Personnel and tools necessary for the execution of the work 27. Expenses to be borne by the contractor

3.5. Warranty 3.6. Taxes 3.7. Permits, fees, notices and compliance with laws 3.8. Allowances 27. Expenses to be borne by the contractor 3.9. Superintendent 3.10. Contractor’s construction schedules 17. Work schedule 3.11. Documents and samples at the site 3.12. Shop drawings, product data and samples 15. The authorizations of the construction supervisor

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3.13. Use of site 3.14. Cutting and patching 3.15. Cleaning Up 10. Clearing the worksites and removing the facilities 3.16. Access to work 3.17. Royalties, patents and copyrights 3.18. Indemnification

As it is shown in Table 4, in the KIK document there is no evidence about architect’s roles, rights and responsibilities.

Table 4. Comparison of general conditions in terms of architect’s roles, rights and responsibilities

AIA / A201-2007 KIK / GSCW Article 4. Architect 4.1. General - 4.2. Administration of the contract - Subcontractor’s roles, rights and responsibilities are given in the both general conditions document (Table 5).

Table 5. Comparison of general conditions in terms of subcontractor’s roles, rights and responsibilities

AIA / A201-2007 KIK / GSCW Article 5. Subcontractor Chapter 5. Execution of the Work 5.1. Definitions 20. Award of subcontractors and responsibilities 5.2. Award of subcontracts and other contracts for portions of the work

20. Award of subcontractors and responsibilities

5.3. Subcontractual relations 20. Award of subcontractors and responsibilities 5.4. Contingent assignment of subcontracts

Table 6 gives the articles of AIA document in terms of the roles, rights and responsibilities when the construction work is done by owner or separate contractors. On the contrary, there is no information on this matter in the KIK document.

Table 6. Comparison of general conditions in terms of separate contractor’s roles, rights and responsibilities

AIA / A201-2007 KIK / GSCW Article 6. Construction by Owner or by Separate Contractors

6.1. Owner’s right to perform construction and to award separate contracts

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6.2. Mutual responsibility - 6.3. Owner’s right to clean up -

In AIA document, sufficient information is given about changes in the work in terms of change orders, construction change directives and minor changes. Although changes are vital in construction projects, it is not mentioned in the KIK document (Table 7).

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Table 7. Comparison of general conditions in terms of changes in the work

AIA / A201-2007 KIK / GSCW Article 7. Changes in the Work 7.1. General - 7.2. Change orders - 7.3. Construction change directives - 7.4. Minor changes in the work - In Table 8, the comparison of AIA and KIK documents in terms of time is shown. In both documents, there is information about the progress of the work, delays and extensions.

Table 8. Comparison of general conditions in terms of time

AIA / A201-2007 KIK / GSCW Article 8. Time Chapter 5. Execution of the Work 8.1. General 29. Duration and extension of the work 8.2. Progress and completion 29. Duration and extension of the work 8.3. Delays and extensions of time 29. Duration and extension of the work

Payments and completion are mentioned in both AIA and KIK documents (Table 9). Both in documents information concerning progress payments, substantial completion, final completion and final payment are given.

Table 9. Comparison of general conditions in terms of payments and completion

AIA / A201-2007 KIK / GSCW Article 9. Payments and Completion Chapter 8. Progress Payments 9.1. Contract sum 9.2. Schedule of values 39. Temporary progress payment reports 9.3. Applications for payment 39. Temporary progress payment reports 9.4. Certificates for payment 39. Temporary progress payment reports 9.5. Decisions to withhold certification 9.6. Progress payments 39. Temporary progress payment reports 9.7. Failure of payment 9.8. Substantial completion 41. Temporary acceptance 9.9. Partial occupancy or use 9.10. Final completion and final payment 40. Final payment report and closing accounts

44. Final acceptance

In Table 10 it is shown that both in the AIA and KIK documents, information concerning protection are given. In AIA A201-2007 protection is examined in four headings such as safety precautions and programs, safety of persons and property, hazardous materials and emergencies. However, in KIK / GSCW these are only explained by protecting and insuring the works and worksites.

Table 10. Comparison of general conditions in terms of protection of persons and property

AIA / A201-2007 KIK / GSCW Article 10. Protection of Persons and Property Chapter 2. Worksites 10.1. Safety precautions and programs 9. Protecting and insuring the works and worksites 10.2. Safety of persons and property 9. Protecting and insuring the works and worksites 10.3. Hazardous materials 9. Protecting and insuring the works and worksites

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10.4. Emergencies 9. Protecting and insuring the works and worksites

In AIA A201-2007, insurance is mentioned in terms of contractor’s liability, owner’s liability and property. Moreover, performance bond and payment bond are also mentioned in the same article (Table 11). As it is in the previous table, KIK only points out protecting and insuring the works and worksites. There is not any evidence about performance or payment bonds.

Table 11. Comparison of general conditions in terms of insurance and bonds

AIA / A201-2007 KIK / GSCW Article 11. Insurance and Bonds Chapter 2. Worksites 11.1. Contractor’s liability insurance 9. Protecting and insuring the works and worksites 11.2. Owner’s liability insurance 9. Protecting and insuring the works and worksites 11.3. Property insurance 9. Protecting and insuring the works and worksites 11.4. Performance bond and payment bond

Table 12 shows the AIA’s and KIK’s articles concerning uncovering and correction of work. Both documents give information about faulty, defective, incomplete works, works that are not in compliance with the contract, maintenance and correction responsibilities of contractor.

Table 12. Comparison of general conditions in terms of uncovering and correction of work

AIA / A201-2007 KIK / GSCW Article 12. Uncovering and Correction of Work Chapter 5. Execution of the Work 12.1. Uncovering of work 23. Works that are not in compliance with the contract

24. Faulty, defective and incomplete works 12.2. Correction of work 25. Maintenance and correction responsibilities of

contractor 12.3. Acceptance of nonconforming work

Table 13 deals with the general conditions in terms of miscellaneous provisions. These are governing law, notices, rights, remedies, tests, inspections and so forth. Both documents mention about these subjects. Only KIK document does not have any information about time limits on claims.

Table 13. Comparison of general conditions in terms of miscellaneous provisions

AIA / A201-2007 KIK / GSCW Article 13. Miscellaneous Provisions 13.1. Governing Law 1. Purpose 13.2. Successors and Assigns 13.3. Written Notice 5. Notices, consents, approvals, certificates and

determinations 13.4. Rights and Remedies 13.5. Tests and Inspections 16. The authorizations of the construction supervisor 13.6. Interest 13.7. Time Limits on Claims

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Both documents deal with the termination and suspension of the contract (Table 14). However, in the KIK document termination by the contractor is not mentioned.

Table 14. Comparison of general conditions in terms of termination or suspension of the contract

AIA / A201-2007 KIK / GSCW Article 14. Termination or Suspension of the Contract

Chapter 10. Contractual Relations

14.1. Termination by the contractor 14.2. Termination by the owner for cause 47. Termination of the contract and dissolution of the

work 14.3. Suspension by the owner for convenience 14.4. Termination by the Owner for Convenience 47. Termination of the contract and dissolution of the

work

The last article is concerning claims and disputes. As it can be seen in Table 15, only AIA document gives information about mediation and arbitration for resolution of disputes.

Table 15. Comparison of general conditions in terms of claims and disputes

AIA / A201-2007 KIK / GSCW Article 15. Claims and Disputes Chapter 10. Contractual Relations 15.1. Claims 51. Resolution of disputes 14.2. Initial decision 14.3. Mediation 14.4. Arbitration

4. Conclusion

Construction contracts are vital documents which define various aspects, obligations and relations between participants of the construction project. These documents are also really important in order to complete the construction projects within the expected time, quality and budget. In order to reach the expected goals, general conditions play an important role as they constitute basic principles and methods of the construction contracts.

In Turkey, Public Procurement Authority (KIK) is the only organization that prepares standard contract documents for construction projects. Although using these standard documents is compulsory for public construction, there are many problems due to the lack of the nature of these documents.

In this study, standard general conditions in the United States and Turkey are compared. For comparison, AIA Document A201-2007 General Conditions of the Contract for Construction and KIK General Specifications for Construction Works (GSCW) are used. It is found that some important aspects are missing in the KIK Document. The most important one is the lack of supplementary conditions. When there is a need of making modifications or additions to the statements in the general conditions, it is impossible to make changes in the GSCW document. While GSCW document is basic to all projects, another document –supplementary conditions- is necessary

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for the special and peculiar requirements of a particular project. The second problem concerns the changes in the work. Because of the nature of the construction itself, construction contracts should allow changes in projects. In KIK document changes in the work such as change orders, construction change directives or minor changes are not even mentioned. Another problem in the GSCW document is the lack of a mechanism about dispute resolution procedure. If any dispute arises between the parties, GSCW document should propose a mechanism such as mediation or arbitration as there are in the AIA document.

To conclude, in order to successfully complete of the construction projects within the desired goals, contract documents are vital. Especially general conditions are need to be sufficient, correct and up-to-date, as they serve as the definitive or explanatory document among the contract documents.

References

Clough R H, Sears G A and Sears S K (2005) Construction Contracting: a Practical Guide to Company Management, Hoboken, N.J., J. Wiley.

Collier K (2001) Construction Contracts, Upper Saddle River, N.J., Merrill/Prentice Hall.

Ferreira M L and Rogerson J H (1999) “The Quality Management Role of the Owner in Differnet Types of Construction Contract for Process Plant”, Total Quality Management 10: 401-411.

Hinze J (2001) Construction Contracts, New York, McGraw-Hill.

Poage W S (2000) The Building Professional’s Guide to Contract Documents, Kingston, R.S. Means Co.

The Construction Specifications Institute (2005) The Project Resource Manual: CSI Manual of Practice, New York, McGraw-Hill.

www.aia.org, The American Institute of Architects (AIA)

www.ihale.gov.tr, Public Procurement Authority (KIK)

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