An-Najah National University Faculty of Graduate Studies Construction Contracts in Palestine from Engineering and Legal Perspectives By Minnat-Allah Salem Saqfelhait Supervisors Dr. Riyad Abdel-Karim Awad Dr. Ali Mohammad Sartawi This Thesis is Submitted in Partial Fulfillment of the Requirements for the Degree of Master of Engineering Management, at Faculty of Graduate Studies, An-Najah National University, Nablus, Palestine. 2012 II Construction Contracts in Palestine from Engineering and Legal Perspectives By Minnat-Allah Salem Saqfelhait This thesis was defended successfully on 26/2/2012 and approved by: Defense Committee Members Signature - Dr. Riyad Awad (Supervisor) - Dr. Ali Sartawi (Co-supervisor) - Dr. Basem Makhool (External Examiner) - Dr. Ayham Jaaron (Internal Examiner) III Dedication “To my parents, my brothers and sisters, my family my lecturers, my friends, my colleagues and to all Muslims” May Allah give them blessings all IV Acknowledgement First and foremost I am extremely grateful to Almighty, Allah for what I am and for everything I have. I would like to express my sincere gratitude and appreciation to my supervisor Dr. Riyad A. Awad for his guidance and assistance during all phases of this study. I would like to thank Dr. Ali M. Sartawi for his support and advice. I would like to give thank and deep appreciation to my defense committee members: Dr. Basem Makhool and Dr. Ayham Jaaron for their time and effort in reviewing this work. I would like to express my love, sincere thanks, and forever appreciation to my family; my father, my mother, my brothers & sisters, and all my family for their continuous support. Without their love, kindness, patience, encouragement and assistance; this dissertation would not have been possible. Special thanks go to all official institutes, all contractors and engineers who helped in providing the needed data for my thesis. Finally, I would like to express my profound thanks to my friends, colleagues and all who supported me to achieve my study successfully. Thank you doesn’t seem sufficient but it is said with full appreciation and respect to every one of you. V االقرار :رسالة التي تحمل عنوانال مقدم ادناه الموقع انا Construction Contracts in Palestine from Engineering and Legal Perspectives باستثناء ما تمت االشارة اليه , نتاج جهدي الخاص هو أقر بأن ما اشتملت عليه هذه الرسالة انما ل أية درجة علمية أو بحث أو أي جزء منها لم يقدم من قبل لني, وأن هذه الرسالة ككل, حيثما ورد .علمي أو بحثي لدى أية مؤسسة تعليمية أو بحثية أخرى Declaration The work provided in this thesis, unless otherwise referenced, is the researcher’s own work, and has not been submitted elsewhere for any other degree or qualification. Student Name: اسم الطالب: Signature التوقيع : Date: التاريخ VI Table of Contents NO Content Page Dedication III Acknowledgement IV Declaration V List of Tables X List of Figures XII Abbreviations XIII Abstract XIV Chapter One: Introduction 1 1.1 Background 1 1.2 General Profile of Palestine 3 1.3 Palestinian Economy 6 1.4 Overview on Construction Industry in Palestine 8 1.5 Construction Contractors in Palestine 9 1.6 Sectors Working in Construction Industry 10 1.6.1 The Private Sector 10 1.6.2 The Public Sector 12 1.7 International Financing of Construction Sector 13 1.8 Research Objectives 13 1.9 Methodology 14 1.10 Limitations 15 1.11 Thesis Outline 15 Chapter Two: Literature Review 16 2.1 Introduction 16 2.2 Construction Industry 17 2.3 Construction in Palestine 18 VII 2.4 Types of Construction 21 2.5 Construction Contracts 24 2.6 Construction Contracts in Palestine 26 2.7 Parties of Construction Contracts 26 2.8 Construction Contracts’ Documents 28 2.9 Types of Construction Contracts 35 2.9.1 Lump-Sum Contracts 36 2.9.2 Unit Price Contracts 38 2.9.3 Cost Plus Contracts 04 2.9.4 Design-Build Contracts 04 2.9.5 Turnkey Contracts 00 2.9.6 Management-Oriented Contracts 00 2.9.7 Construction by Day Labor 04 2.9.8 Target Estimate Contracts 04 2.9.9 Guaranteed Maximum Price Contract 04 2.9.10 Contracts with Quantities 04 2.9.11 Construction Management Contracts 04 2.10 Law for Engineers 04 2.11 Construction Contracts Law 04 2.12 Disputes Resolution in Construction Contracts 44 2.13 Construction Contractors 44 2.14 Construction Contractors in Palestine 40 Chapter Three: Methodology 45 3.1 Introduction 45 3.2 Research Objectives 44 3.3 Research Strategy 44 3.3.1 Quantitative Research 44 VIII 3.3.2 Qualitative Research 44 3.3.3 Triangulation Method 54 3.4 Research Design 56 3.5 Research Population 54 3.6 Research Location 54 3.7 Sample Method 50 3.8 Sample Size 50 3.9 Questionnaire Design 55 3.10 Personal Interviews 54 3.11 Case Study 54 3.12 Data Measurement 54 3.13 Data Analysis 54 3.14 Reliability of the Research 44 3.15 Study Limitations 44 3.16 Study Barriers 44 Chapter Four: Results and Discussion 47 4.1 Introduction 47 4.2 Profile of Contracting Companies 47 4.3 Facts about Contracting Practices 46 4.4 Specifications of Construction Contracts used in Palestine 44 4.4.1 Construction Contracts in General 44 4.4.2 Specific Types of Construction Contracts 640 4.5 Results Related to Study Hypotheses 664 Chapter Five: Conclusions and Recommendations 664 5.1 Introduction 664 5.2 Conclusions 665 IX 5.3 Recommendations 664 5.4 Proposed Further Studies 674 References 670 Appendices 674 ب الملخص X List of Tables No. Table Page 3.3 Degrees used in Likert scale and their meanings 69 4.1 Types of executed projects 73 4.2 Number of accomplished projects during the last five years 74 4.3 Value of accomplished projects during the last five years 75 4.4 Types of construction contracts performed 77 4.5 Preferred and non-preferred contracts types 78 4.6 Disputes of owners and contractors 79 4.7 Disputes resolution mechanisms 80 4.8 Contractors categories invited by owners 81 4.9 Contractors categories gaining bids 82 4.10 Contractors categories accomplishing best projects 83 4.11 Best institutes contracts 84 4.12 Responsibility of laws consideration 86 4.13 Contracts documents priorities 87 4.14 Disputes period 88 4.15 Dispute parties 89 4.16 Disputes responsibility 90 4.17 Disputes caused by owner, engineer, contractor, and contract 91 4.18 Description of applied contracts 93 XI 4.19 Contracts problems 94 4.20 Causes of arbitration failure 96 4.21 Contracts specifications in general 99 4.22 Contracts specifications in general 103 4.23 Specifications of lump-sum contracts 105 4.24 Specifications of unit price contracts 107 4.25 Specifications of cost plus contracts 109 4.26 Preferred type of contract 110 4.27 Chi-Square Test (First Hypothesis) 111 4.28 Chi-Square Test (Second Hypothesis) 112 4.29 Chi-Square Test (Third Hypothesis) 113 4.30 Chi-Square Test (Fourth Hypothesis) 114 XII List of Figures No. Figure Page 1.1 Map of Palestine 4 2.1 Traditional Construction Contract Relationships 74 3.1 Methodology Flow Chart 57 3.2 Respondents Distribution According to Location 54 3.3 Distribution of Sample According to Position of Respondents 54 4.1 Types of executed projects 40 4.2 Preferred and non-preferred contracts types 44 4.3 Best institutes contracts 44 4.4 contracts documents priority 44 4.5 Disputes responsibility 44 XIII Abbreviations WBGS West Bank and Gaza Strip PLO Palestinian Liberation Organization UN United Nations GDP Gross Domestic Product PCU Palestinian Contractors Union PECDAR Palestinian Economic Council for Development & Reconstruction US United States GC General Conditions NGOs Non Government Organizations FIDIC International Federation of Consulting Engineers PCBS Palestinian Central Bureau of Statistics USAID United States Agency for International Development XIV Construction Contracts in Palestine from Engineering and Legal Perspectives By Minnat-Allah S. Saqfelhait Supervisors Dr. Riyad Awad Dr. Ali Sartawi Abstract The construction industry in Palestine is one of the most important industries. It plays a significant role in the development and civilization. Construction contracts are generally the agreements between two parties: owners and contractors containing documents that identify the rights and obligations of these parties. The purpose of this study was to give a description of the contracts used in Palestine, also to diagnose engineering, legal, and Islamic law problems appear when applying different types of contracts. In order to achieve the objectives of the study; three methods of data collection were used; a questionnaire was conducted and distributed to 80 contractors, the response rate was (59%). Several interviews were held with experts with law and religion, and also with arbitrators, contractors and owners. In addition, several construction contracts were revised, examined, and analyzed. These contracts were collected from different institutes such as: governmental institutes, municipalities, local private institutes, NGOs, etc. XV The main results of the research were that building projects are the major work for the Palestinian contractors. The results also showed that the majority of contractors prefer contracting with unit price contract. Besides, more than half of contractors don’t prefer to contract with lump-sum contracts. The results also revealed that more than half of contractors have disputed with owners due to misinterpretation of contracts. The study recommends that:  The government is recommended to introduce additional laws, regulations, and polices that manage contracting process.  Interested institutes are recommended to conduct training programs in order to improve contractors’ knowledge and capabilities.  Contractors are advised to review all contracts documents before signing; they also should take advice from experts in law.  Owners are recommended to quicken contractors’ payments and not delay them.  All parties are invited to form a specialized body that adopts all issues related to contracting process. 1 Chapter 1 Introduction Background The construction sector plays a strategic role in developed and developing countries. Employing more than (16%) of Palestinian work force, the sector is the largest employer in Palestine. It accounts for (17%) of the value added to the gross national product (Enshassi et al., 2007). The contract from a legal point of view is "a binding agreement between two or more persons or parties; especially, one legally enforceable" (Merriam Webster Dictionary). In terms of the legal status, “construction contracts” are service contracts by which the investors entrust to one or several entities such as contractors, the construction of a new or reconstruction of the existing building (Matijevic’, 2008). The aim of this research is to give a description of the contracts used in Palestine, also to diagnose engineering, legal, and Islamic law problems which appear while applying different types of contracts. This chapter introduces the thesis; it gives a general profile of Palestine, Palestinian economy, and presents the development of construction sector in Palestine. Besides, it presents the objectives of the 2 thesis, justifications for carrying it out, limitations, and the steps of research methodology are presented with the thesis outline. Research Questions The research questions have been designed based on several observations on problems appearing when applying construction contracts. The research questions were as follows: - Does the current situation of construction contracts used in Palestine suffer from any problem? - What are the most important problems appear in construction contracts? - How can we overcome these problems? - Are construction contracts used to contract with contractors suitable to be applied to different projects? Research Hypothesis - Hypothesis 1: There is no relation between company classification in the Palestinian Contracting Union and number of accomplished projects by this company during the last five years. - Hypothesis 2: There is a relation between types of construction contract used and type of institution that uses this contract. 3 - Hypothesis 3: There shouldn’t be any relation between type of construction contract used in one project and the priority of contracts documents used when a conflict exists between contract documents. - Hypothesis 4: There should be a relation between types of construction contracts and reasons for contracts disputes. General Profile of Palestine Palestine is yet to find its place on the world’s map as an independent state after long years of conflict and military occupation that forced around (60%) of the population to seek refuge in other countries. In 1948, thousands of Palestinians were forced to flee to neighboring Arab countries following the establishment of Israel and the war that ensued. After the 1967 war, Israel occupied the West Bank and the Gaza Strip (WBGS) and annexed Arab Jerusalem to its territories. The Israeli- Palestinian conflict developed a new dimension in 1987 upon the outbreak of the first Palestinian intifada, which paved the way for the 1991 Middle East Peace Conference, for the decision of the two sides to resolve the conflict through negotiations. This commitment to peace was translated in September 1993 upon the signing of the “Declaration of Principles on Interim Self - Government Arrangements between Israel and the PLO, representing the Palestinian People” (UN, 2001). The new arrangement engendered high expectations of improvement for the Palestinian areas. Self-government was envisaged as setting free the 4 WBGS from the harsh conditions of the Israeli occupation, and creating a new environment conducive to the expansion of production and trade. However, fourteen years of limited self-rule have not lived up to these high expectations. The reversion to the old habits of daily clashes between the Israeli forces and the Palestinians protesting Israeli practices has led to a deterioration of economic conditions and prevented any serious movement toward reconstruction and development of the Palestinian economy. This untenable situation precipitated the eruption of the Al-Aqsa Intifada on September 2000, culminating at the end of March 2002 with the Israeli Army reinvading most of the West Bank (MAS, 2008). The location of Palestine is excellent geographically, forming an economical and cultural platform and point of contact between three continents – Europe, Asia and Africa. The combined area of the West Bank and the Gaza Strip (WBGS) is 6,020 km². The West Bank covers 5,655 km², is 130 km long and ranges between 40 and 65 km in width. The land area of the Gaza Strip is equal to 365 km², and is 40 km long and 5-12 km wide (PASSIA, 2008; cited in MAS, 2008). See figure 1.1. 5 Figure 1.1: Map of Palestine (Source: PCBS). Most of the population of Palestine is young, with about (57%) below the age of 20 and (65%) below the age of 25. This offers a golden opportunity for growth in the next two decades. It is estimated that about 500,000 persons will join the labor force during the next five years (MAS, 2008). 6 The WBGS has an abundant labor supply with a high level of education and skills. The services sector makes the highest individual contribution to employment with a rate of (36.4%), followed by commerce, restaurants, and hotels (19.7%), agriculture and fishing (15.3%), and mining, quarrying and manufacturing (12.3%) (MAS, 2008). Palestinian Economy Palestine has witnessed rapid economic growth in the period between the years (1994-1999), with an increase in the rate of growth in the Palestinian gross domestic product (GDP) of more than (10%) per year. However, growth in GDP has decreased significantly during the peak of the second intifada (2000 - 2002), but growth resumed in 2003, approaching its previous levels before beginning of the second intifada in September 2000. This indicates that a real growth opportunity exists in Palestine during the normal stable political and economic conditions. The figures of the macroeconomic framework, which emerged in December 2007, expected further growth in GDP by (15%) by 2010 if the political situation is somewhat stable. Unfortunately, this did not happen due to continued political uncertainty and restraints imposed by Israel on the Palestinian economy (PFI, 2009). The services sector plays a leading role in the Palestinian economy. This sector includes financial, insurance, real estate, engineering designs, accounting, legal, transportation, communications, information, domestic 7 wholesale and retail operations, public administration, personal services (tourism), and health and education services (MAS, 2008). During the first quarter of 2012, this sector contributed (23.8%) of GDP (PCBS, 2012). The industrial sector contribution in total GDP has increased from (8%) in the mid-eighties to (17%) in the late-nineties, then dropped down during the first years of the intifada and approached nearly (16%). During 2007, the industrial sector has employed an average of 81586 workers, an average of (13%) total work force. This sector includes: stone and marble, textiles and garments, food processing, engineering and metallurgical industries, chemical industries, pharmaceuticals and veterinary, construction industries, handicrafts, paper and printing, furniture, leather and shoes, and plastics (PFI, 2009). This sector contribution to GDP in the fourth quarter of 2011 was (9.1%), this percentage decreased in the first quarter of 2012 and reached (8.8%) (PCBS, 2012). The construction sector contributed around (2.5%) of GDP and (11.6%) of total workforce in 2007 (PFI, 2009). In the first quarter of 2012 it contributed (14.6%) of GDP (PCBS, 2012). This sector is susceptible to the political situation and to the trends of international donations. It is featured by highly intermittent temporary employment rates (PFI, 2009). Agriculture contribution in 2006 was about (8%) of GDP, (10%) of the total exports, and (16%) of the total workforce (PFI, 2009). But in the fourth quarter of 2011 it contributed with (5.3%) of GDP, and in the first quarter of 2012 its contribution to GDP was (4.7%) (PCBS, 2012). 8 Overview on Construction Industry in Palestine The construction industry in Palestine was one of the leading sectors that achieved high rates of economic growth in the 1970s and up to the mid-1980s. During that period of time, the contribution of this sector has increased in terms of providing job opportunities for the Palestinian labor force. Since then, this sector has been subjected to many setbacks which have decreased its role in building up the Palestinian economy in contrast with its counterparts in many developing and neighboring countries (Enshassi et al., 2006). The construction sector is one of Palestine’s most important industries although it is significantly affected by changes in the political environment. Besides private firms, three major nongovernmental organizations play integral roles in this industry, namely the Palestinian Contractor’s Union, the Syndicate of Engineers and the Palestinian Construction Industries Union. High population growth and a decline in construction activity mean that there is an increasing demand for additional affordable housing. Due to the linkages with other parts of the economy a vibrant housing sector has the potential to stimulate and revive the Palestinian economy (Palestine Investment Conference, 2008). The construction sector is currently expanding, contributing around (2.5%) of GDP and (11.6%) of employment in the Palestinian Territory in the third quarter of 2007 (MAS, 2008). And in the first quarter of 2012 its contribution to GDP was around (14.6%) (PCBS, 2012). This sector is very 9 important for growth as it carries significant forward and backward linkages, ranging from simple manufacturing plants to major construction materials and processing industries. In addition, the construction sector has also provided an impetus for local investment, and has contributed to the consolidation of the Palestinian economic base (MAS, 2008). Despite the substantial success achieved by the construction industry in the Palestinian territories, in terms of economic growth, its contribution to the local output, employment and meeting partially the local needs of the Palestinian society, this industry suffers from a number of problems that have prevented it from resuming its big role in the Palestinian economy (Enshassi et al., 2006). Construction Contractors in Palestine The contractor is the individual or company operating in the construction sector and who shall be registered and classified at the Palestinian Contractor’s Union (PCU). According to PCU by-law, the contractor is any natural or legal person who shall have the right to practice construction contracting profession in accordance with operative laws and regulations. Such contractor shall be registered at the PCU (PCU, 2003). According to PCU (2003), contractors classified according to their specialties are divided into five categories each of which shall be subcategorized into several specialties and every category may have a grade from (1 -5) where 1 is highest. These categories are: 10 1. Building contractors. 2. Road Construction contractors. 3. Water and sewer contractors. 4. Electro-mechanics contractors. 5. Public works and maintenance contractors. Sectors Working in Construction Industry Sectors working in construction industry in Palestine are classified to (According to PCU, 2003): 1.6.1The Private Sector This sector involves the construction contracting sector, engineering sector, testing laboratories, private project owners such as investors and private sector corporation, manufacturing construction materials and service sector. 1.6.1.1Construction Contracting Sector According to PCU by-law, construction contracting is any work pertaining to the construction of buildings, roads, installations, various engineering projects in addition to the operation and maintenance of such construction projects. The contractor is any natural or legal person who 11 shall have the right to practice construction contracting profession in accordance with operative laws and regulations. 1.6.1.2Engineering Sector and Testing Laboratories The engineer operating in the construction sector shall be specialist in the planning and construction project management. Such an engineer shall rely upon relevant science and technology in order to verify and prove facts. The engineer shall also rely upon engineering principles, methodologies and theories to apply them in practice. Further, the engineer shall be responsible for designing and supervising construction projects on the ground. In addition, engineering sector is represented by individual engineers, engineering advisory offices registered at the Engineers’ Syndicate and testing laboratories. On the other side, there are many testing labs for construction materials. They belong to private sector, academic institutions, and syndicate of engineers. 1.6.1.3Private Project Owners Owners of private projects are individuals or private companies who manage private projects, such as road construction, water, sewer, buildings and installations, etc. 1.6.1.4Subsidiary Construction Industries Sector These industries play a complementary role to the contractor’s task. Such industries are an indispensable part of construction. In order for 12 construction industries to attain international standards, construction factories must play a distinguished role in order to attain required levels. 1.6.1.5Service Sector Service sector constitutes transportation companies, importing firms and insurance corporations. This sector efficiently complements construction works, and also contributes to the development of the construction sector. 1.6.2The Public Sector The public sector is the governmental institutions that owns or manages public projects, such as road construction, water and sewer, buildings and installations, etc. The construction sector is directly connected with governmental institutions; they may be the owner of a construction project, or they may control and supervise the construction sector in accordance with the Law. The governmental institutions directly related to construction sector are the Ministry of Public Works and Housing, Ministry of Labor and Palestinian Standards Institute. On the other hand, governmental institutions indirectly contributing to construction sector are: Ministry of National Economy, Ministry of Planning and International Cooperation, Palestinian Water Authority, Palestinian Energy Authority, Ministry of Health, Ministry of Higher Education, Ministry of Local Government, Ministry of Finance, Ministry of 13 Transportation and Communications, PECDAR as well as other official institutions and ministries. International Financing of Construction Sector To secure financing necessary for the construction sector; to give Palestinian contractors the priority to carry out large-scale projects; to entrust local contractors; to ensure that contractors actually acquire the skills and capacities required for more productivity and to support and assist them are the bases of the development of construction sector and building the Palestinian contractor’s capacities. International bodies and organizations are the major donors of construction projects in Palestine. These bodies and organizations offering grants to the construction sector are the Islamic Development Bank (IDB), the United Nations Relief and Work Agency (UNRWA), World Bank (WB), the U. S. Agency for International Development (USAID), United Nations Development Program (UNDP), the European Union (EU), German and Japanese institutions (PCU, 2003). Research Objectives The aim of studying construction contracts in Palestine is to achieve the following five objectives: (1) To recognize all types of contracts used in Palestine. http://www.unrwa.org/ http://www.worldbank.org/ http://www.usaid.gov/ http://www.undp.org/ 14 (2) To assess and clarify all aspects related to contracts used in Palestine from engineering, legal and Islamic law perspectives. (3) To examine, review, and evaluate practices related to contracts. (4) To present recommendations that hoped to be used by intended parties. Methodology The methodology used in this study can be summarized as: - Desk research: which is based on library related books, scientific journals, and periodicals. Also to review all contracts studies and reports recently completed. - Internet research: web based search, and databases, to review existing related literature. - A series of meetings and interviews with engineers, contractors, project managers, lawyers, arbitrators, and general directors of several organizations and institutes. - Developing a proper questionnaire. - As a contract analysis, different contracts used by contractors are selected, reviewed, and evaluated. This will give feedback to further development of the future contract forms. 15 Limitations This research is concerned to study contracts in West Bank-Palestine with contractors who are registered in the Palestinian Contractors Union at the year 2010-2011. Thesis Structure This thesis is consisted of five chapters. The first chapter was the introductory chapter which outlines of the thesis. Chapter 2 will provide the thesis with a review on related literature on construction contracts and other related topics. Chapter 3 will represent the selected methodology. Chapter 4 will analyze and discuss results. Chapter 5 will give the conclusions and recommendations for the study. 16 Chapter 2 Literature Review 2.1 Introduction “From architects’ and engineers’ dreams to the final coat of paint, construction is responsible for many of our noblest works. Designers and constructors from history left us the Egyptian pyramids, the Gothic cathedrals, the Great Wall of China, and quite literally; the physical as well as the technological foundations upon which many of our modern structures are built. The scope of construction industry today is immense: from suburban homes to skyscrapers; from city sidewalks to dams and tunnels for irrigation and hydroelectric power; from recreational marinas to complete harbors and even structures in the deep open sea; from bicycle shops to aircraft factories; thermal power plants, petroleum refineries, and mining developments; bridges, highways, and rapid transit systems that not only span physical spaces, but bring people together in their social, political and economic endeavors. One can find that the constructed environment is among the most ubiquitous and pervasive factors in our lives” (Barrie & Paulson, 1992). The construction industry has unique characteristics that sharply distinguish it from other sectors of the economy. It is fragmented, very sensitive to the economic cycles and political environment. Throughout the world, the relative ease of entry to this industry gives rise to a large number 17 of contracting firms competing fiercely in the market exposing many of them to business failure (Enshassi et al., 2006). 2.2 Construction Industry The construction industry is a conglomeration of diverse fields and participants that have been loosely lumped together as a sector of the economy. The construction industry plays a central role in national welfare, including the development of residential housing, office buildings and industrial plants, and the restoration of the nation's infrastructure and other public facilities. The importance of this industry lies in the function of its products which provide the foundation for industrial production (Hendrickson, 2008). Construction has many features common to both manufacturing and service industry as it does not accumulate significant amounts of capital when compared with industries such as steel, transportation, and petroleum (Enshassi & Kaka, 1997). Construction refers to all types of activities usually associated with the erection and repair of immobile facilities. Contract construction consists of a large number of firms that perform construction work for others, and is estimated to be approximately (85%) of all construction activities. The remaining (15%) of construction is performed by owners of the facilities, and is referred to as force-account construction. Although the number of contractors in the United States exceeds a million, over (60%) of 18 all contractor construction is performed by the top 400 contractors. Construction is a significant factor in the Gross National Product although its importance has been declining in recent years. Not to be ignored is the fact that as the nation's constructed facilities become older, the total expenditure on rehabilitation and maintenance may increase relative to the value of new construction (Hendrickson, 2008). Enshassi and Kaka (1997) comment that in order to complete a construction project on time, at the right budget, and high quality, local construction companies need to improve their organizational and management structure, increase social, economic, and environmental constraints, and improve the interrelationships between all individuals involved in the project. 2.3 Construction in Palestine The construction sector is one of the key economic sectors and is the main force motivating the Palestinian national economy. Upon the establishment of the Palestinian National Authority and the assumption of its powers over the Palestinian territories in 1994, the construction sector has witnessed noticeable expansion and activities. This has resulted in the recovery of the construction contracting profession and subsidiary industries, encouraged the investment of the Palestinian expatriates’ capital in the local construction sector, and contributed to the creation of jobs for thousands of Palestinians. Therefore, the construction sector has occupied 19 the foremost position among the rest of sectors, mainly in the attraction of investments and creation of new jobs (PCU, 2003). The construction sector in Palestine was one of the leading sectors that achieved high rates of economic growth in the 1970s and up to the mid-1980s. During that period of time, the contribution of this sector has increased in terms of providing job opportunities for the Palestinian labor force and the generation of local production. Since then, this sector has been subjected to many setbacks which have decreased its role in building up the Palestinian economy in contrast with its counterparts in many developing and neighboring countries. In addition to its social role in providing homes, public facilities and infrastructure for economic enterprises, the construction and housing industry is a driving force and a vital contributor to the Palestinian economy (Enshassi et al., 2006). The construction sector’s share of GDP increased from under (10%) in 1972 to over (17%) in mid 80’s. During that period the contribution of sector had fluctuated in an upward long run trend bounded by (9%) and (19%) during 70’s and by (15.2%) and (23%) during 80’s. Several factors had contributed to the growth of the sector during that period, most important is the high growth of income experienced by Palestinians due to the integration of the Palestinian Economy into the larger and wealthier Israeli economy, and also to the oil boom which enabled Palestinians in the Gulf to increase their Capital inflows into Palestine, most of which were invested in construction and housing. Following 1985 and till 1991 the 20 sector was exposed to many external shocks which affected not only construction but also the whole economic and social conditions in Palestine. Economic Slowdown in related economies, high inflation rates, devaluation of the Jordanian Dinar and the Intifada had exerted a passive effect on the performance of the sector and the economy as a whole. Despite these facts, it seems that the construction activity was less affected than the total economy; its average share of GDP during the period (87-91) was around (21%) as compared to (17.2%) during the period (80-86). The special particularities of the Palestinian economy had buffered the construction sector and protected it from serious and strong shocks that affected the whole economy. Post 1991 construction share had reached an unprecedented level. The share of construction and housing in 1994 was (25%) (PCBS figure) of GDP the advent of the peace process had leveled off the adverse impact of the Gulf war and has promoted construction activity in the WBGS as a result of the positive environment prevailed due to the Oslo agreement (PECDAR, 1997). However, it appears that in 2004 the construction sector’s contribution to the GDP was reduced to (9%) due to the second Intifada in Palestine (World Bank, 2004; PCBS, 2004 cited in Enshassi et al, 2007). Recently, and accurately in the years 2010 and 2011, the figures show a bit increase in the construction sector’s contribution to GDP to reach (9.2%) at 2010, and more increasing at the first two quarters of 2011 to reach (9.9%) and (11.5%) at the first and second quarters of 2011, respectively (MAS, PCBS, & PMA, 2011). 21 2.4 Types of Construction The construction industry is a conglomeration of quite diverse segments and products. Some owners may procure a constructed facility only once in a long while and tend to look for short term advantages. However, many owners require periodic acquisition of new facilities and/or rehabilitation of existing facilities. It is to their advantage to keep the construction industry healthy and productive. In planning for various types of construction, the methods of procuring professional services, awarding construction contracts, and financing the constructed facility can be quite different (Hendrickson, 2008). According to Hendrickson (2008), the broad spectrum of constructed facilities may be classified into four major categories, each with its own characteristics. These categories are: 1. Residential Housing Construction Residential housing construction includes single-family houses, multi-family dwellings, and high-rise apartments. During the development and construction of such projects, the developers or sponsors who are familiar with the construction industry usually serve as surrogate owners and take charge, making necessary contractual agreements for design and construction, and arranging the financing and sale of the completed structures. Residential housing designs are usually performed by architects and engineers, and the construction executed by contractors who hire 22 subcontractors for the structural, mechanical, electrical and other specialty work. The residential housing market is heavily affected by general economic conditions, tax laws, and the monetary and fiscal policies of the government. Often, a slight increase in total demand will cause a substantial investment in construction, since many housing projects can be started at different locations by different individuals and developers at the same time. Because of the relative ease of entry, at least at the lower end of the market, many new builders are attracted to the residential housing construction. Hence, this market is highly competitive, with potentially high risks as well as high rewards. 2. Institutional and Commercial Building Construction Institutional and commercial building construction encompasses a great variety of project types and sizes, such as schools and universities, medical clinics and hospitals, recreational facilities and sports stadiums, retail chain stores and large shopping centers, warehouses and light manufacturing plants, and skyscrapers for offices and hotels. The owners of such buildings may or may not be familiar with construction industry practices, but they usually are able to select competent professional consultants and arrange the financing of the constructed facilities themselves. Specialty architects and engineers are often engaged for designing a specific type of building, while the general contractors 23 undertaking such projects may also be specialized in only that type of building. Because of the higher costs and greater sophistication of institutional and commercial buildings in comparison with residential housing, this market segment is shared by fewer competitors. Since the construction of some of these buildings is a long process which once started will take some time to proceed until completion, the demand is less sensitive to general economic conditions than that for speculative housing. Consequently, the owners may confront an oligopoly of general contractors who compete in the same market. In an oligopoly situation, only a limited number of competitors exist, and a firm's price for services may be based in part on its competitive strategies in the local market. 3. Specialized Industrial Construction Specialized industrial construction usually involves very large scale projects with a high degree of technological complexity, such as oil refineries, steel mills, chemical processing plants and coal-fired or nuclear power plants. The owners usually are deeply involved in the development of a project, and prefer to work with designers-builders such that the total time for the completion of the project can be shortened. They also want to pick a team of designers and builders with whom the owner has developed good working relations over the years. 24 Although the initiation of such projects is also affected by the state of the economy, long range demand forecasting is the most important factor since such projects are capitals intensive and require considerable amount of planning and construction time. 4. Infrastructure and Heavy Construction Infrastructure and heavy construction includes projects such as highways, mass transit systems, tunnels, bridges, pipelines, drainage systems and sewage treatment plants. Most of these projects are publicly owned and therefore financed either through bonds or taxes. This category of construction is characterized by a high degree of mechanization, which has gradually replaced some labor intensive operations. The engineers and contractors engaged in infrastructure construction are usually highly specialized since each segment of the market requires different types of skills. However, demands for different segments of infrastructure and heavy construction may shift with saturation in some segments. For example, as the available highway construction projects are declining, some heavy construction contractors quickly move their work force and equipment into the field of mining where jobs are available. 2.5 Construction Contracts Bockrath (2000) defines the contract as the entire agreement between the parties, mainly including the form of contract of agreement together with the specification, the advertisement, the information for bidders, the 25 contractor's proposal, the contract drawings, and conditions of the contract both general and supplementary. A contract is a document that spells out the rights and obligations of parties and the administration of this interaction while protecting the parties against the risks that emanate from various relationships, actions and production. Although the legal systems in countries are very specific to each country, there are important aspects that need to form part of any construction contract in any country to insure harmony, the parties’ understanding of duties and the effective administration of obligations. The general terms that should be included in the construction contract include (Verster, 2005): - Objectives: Offer acceptance and performance. - Preparation: Documents, design responsibility, agents, site representation, regulations, works risk, indemnities, insurances, securities, guarantees, etc. - Execution: Preparation, access to the works, contracts instructions of variations, setting out the works, assignment, nominated and selected subcontractors, direct contractors. - Completion: Practical works and final completion, defects liability periods, sectional completion, revision of dates, penalties. - Payment: Interim payments to the contractor, adjustments, recoveries, final accounts. 26 - Cancellation: By the owner or contractor and the rights related to default and disaster. - Disputes: Litigation, arbitration, adjudication, and mediation. 2.6 Construction Contracts in Palestine The selection of the contract type in Palestine depends on several factors such as: agency type, project type, and sponsor identity. Sometimes the local agencies are enforced to use the sponsor country contract for projects financed by that sponsor. Also the agency may use more than one type of contracts according to the project type. Most of the agencies presume the special conditions in order to overcome some of the general conditions provisions that are not suitable to the agency (Enshassi & Abu Rass, 2008). 2.7 Parties of Construction Contracts 1. The Owner Also called the employer, he is the party that owns and finances the project, either from his own resources or from sources of external financing (Clough, 1981). He has rights to land, initiate construction, employ engineers and contractors, and pay for the construction work; which is his first obligation in the contract (Collier, 1994). Owners may be either public or private. Public projects are paid for by appropriations, bonds, tax levies and other forms of financing and are constructed to meet some defined public need. Private owners may be individuals, partnerships, or 27 corporations. Most of them have the structure constructed for their own use (Clough, 1981). 2. The Contractor Bockrath (2000) defines the contractor to be the party who undertakes to supply goods or to perform a construction job or other project for the owner. He does not only control the work of construction, but also acts as intermediary between the engineer and the artisans. See figure 2.1. Figure 2.1: Traditional Construction Contract Relationships. (Fisk & Reynolds, 2006) 3. Other Parties of Construction Contracts In addition to the parties of the contract, there are several other persons involved, who may include the architect or engineer, the quantity surveyor, and other consultants. Although they are not parties, they may Owner Architect/ Engineer General Contractor Sub- contractors Suppliers Fabricators 28 materially affect the legal relationship between the contractor and the owner (May, 1995). - The Engineer Bockrath (2000) defines the engineer as the architect or the engineer or both of them who acts for the owner in the transaction. - The Subcontractor The contractor frequently subcontracts, or sublets, much of the work to subcontractors (May, 1995). 2.8 Construction Contracts’ Documents Contracts documents are very important pieces of information that make a binding obligation between two or more parties, thus being evidence that a contract exists. These contracts documents usually take the form of an agreement, some general conditions, drawings, specifications, all sufficient information to show the extent and nature of the contract they represent. These documents are used by architects, engineers and contractors to convey technical and legal messages and ideas to various parties of the contract. Due to these reasons, it is desirable that a uniform approach to the production and interpretation of contract documents be fostered throughout the construction industry (Gofhamodimo). The phrase contract document is used to describe the entire scope of a construction contract. In fact, the contract documents form the contract 29 and are the sole declaration of agreement between the parties involved. Contract documents normally consist of agreement, general conditions, supplementary conditions, bills of quantities, specifications, drawings, addenda, bonds, insurance, contractor’s bid or proposal, notice of award, and notice to proceed. In some cases supplements such as the invitation to bid, instructions to bidders, shop drawings, written interpretations, or clarifications are part of the contract documents (PHD center, 2010). Following are the main contract documents with some details: 1. The Agreement It is the main document used to signify and formalize the construction contract between the Owner and Contractor (PHD center, 2010). It sets out the date; the parties; the intended works and the consideration (May, 1995). A good agreement is divided into sections called articles numbered consecutively; these articles define the terms of the agreement and establish the contractual obligations for each party. Standard articles define the work, the engineer/architect, the contract time, monetary damages for delayed work completion, and contractor’s price as defined in the bid, payment procedures, and the contract documents (PHD center, 2010). 2. General Conditions The legal aspects of the contract documents are outlined in the general conditions (GC’s) (PHD center, 2010). These conditions are made 30 part of the contract and attempt to provide for the various problems which can arise during and after the execution of the works (May, 1995). The GC’s are the legal standards that have been established to promote fair and objective contractual stipulations between all parties involved in construction projects. There are several types of them available for inclusion in contract documents, and a comparison should be made by the end-user to determine which GC’s are best suited for the project and type of work involved. A primary benefit of using standardized GC’s is that the document has been prepared with the advice of legal counsel and experienced professionals. The articles contained in the GS’s describe the legal rights, responsibilities and contractual requirements of the owner, contractor, and engineer (PHD center, 2010). 3. Supplementary Conditions Whenever a modification to the general conditions is desired, the supplementary conditions can be utilized. Generally, the GC’s should not be amended within itself. The supplementary conditions are the part of the contract documents where an engineer or owner can amend, modify, or supplement the articles of the standardized GC’s (PHD center, 2010). 4. Bills of Quantities Bills of quantities quantify the works in detail and are ordinarily prepared in accordance with an agreed standard method of measurement (May, 1995). May (1995) adds that bills of quantities may not form part of 31 the contract although submitted to the contractor for tender, and it generally requires express words in the articles of agreement to make them a contract document. 5. Specifications They are the documents which describe the work to be done and the goods to be supplied. There is no standard or customary method for the preparation of a specification and its meaning must be considered in each contract (May, 1995). The various specifications outline to the contractor the type of material, pertinent material data, and performance requirements of the material placed in construction. The engineer may also stipulate construction sequencing depending upon the needs of the owner or as required by existing conditions affecting the project (PHD center, 2010). 6. Drawings Drawings created by the design professional constitute the basis for the construction of the project. They are inherently part of the contract documents but should be specifically stated as such in the agreement (PHD center, 2010). 7. Addenda An addendum is a formal written document issued to modify, add or delete any part of the contract documents prior to submission of the bids. 32 Addenda are important documents and will often facilitate adjustment to a contractor’s bid. For this reason diligence should be used to ensure that all contractors providing bids for a given project receive addenda and acknowledge receipt thereof either in the bid or prior to submission of bids (PHD center, 2010). 8. Bonds: Bonds are provided by a surety company and are the legal documents that guarantee to an owner that the project will be completed, is constructed properly, and all labor, materials and equipment will be paid for in the event the contractor defaults on the original contract (PHD center, 2010). Bonds include bid, performance, payment, maintenance and other instruments of security. Blank or sample bond forms are provided with the contract documents prior to the bid (PHD center, 2010). These are different types of bonds in some details (PHD center, 2010): - Bid Bond: submitted with the bid by the contractor. It is security to the owner that the successful bidder will enter into an agreement for the work and not withdraw or nullify its bid after submission. Typical bid bonds are for (5%) of the amount of the contractor’s proposal. In the event a contractor desires to withdraw or nullify its bid, the owner has the right to enforce its receipt of (5%) of the bid price. 33 - Performance Bond: included with signed contract documents. This bond guarantees the owner that the project will be completed for the contract price in the event the original contractor fails to perform the work. - Payment (or Statutory) Bond: included with signed contract documents. This bond guarantees the owner that all labor, equipment, and materials will be completely paid for in the event the original contractor fails to perform the work. - Maintenance Bond: included with signed contract documents. This bond guarantees the owner that any defects found after the work has been completed will be corrected by the original contractor or other agent of the surety company. The maintenance bond is effective for a predetermined amount of time past the date when the work is satisfactorily complete. Typical maintenance periods range from one to three years, and the bond amount is also predetermined and typically ranges from (50%) to (100%) of the original contract value. 9. Insurance Any good set of contract documents should include clauses requiring the contractor, and in some cases the owner, to carry insurance to protect the public, property affected by or adjacent to the work, and financial interests of the parties involved in the project. These clauses are usually located in the general conditions and amended as necessary in the supplementary conditions. The types of coverage and policy amounts can differ by project or owner (PHD center, 2010). 34 10. Contractor’s Bid (Proposal) A bid is the price proposed by a contractor to complete the work described in a set of contract documents. It becomes the money amount of the agreement between an owner and contractor. The value of the contract can only be modified by a change order as agreed to by all parties (PHD center, 2010). 11. Notice of Award The notice of award is the written notice by the owner to the apparent successful bidder stating that upon compliance by the bidder with the conditions presented in the notice the owner will sign the agreement. The notice can be as simple as a letter drafted by an authorized representative of the owner or a formal standardized document created for the stated purpose (PHD center, 2010). 12. Notice to Proceed The notice to proceed is a written notice from the owner to the contractor that establishes the date on which the contractor shall begin performing its duties and obligations as outlined in the contract documents. This notice can be as simple as a letter drafted by an authorized representative of the owner, or a formal standardized document created for the stated purpose (PHD center, 2010). 35 13. Supplemental Documents Some owners and engineers prefer to reference in the agreement the invitation to bid, the instructions to bidders, shop drawings and other written interpretations or clarifications. The invitation to bid is a legal notice alerting the public and all interested parties of an owner’s intent to receive bids for predetermined goods or services at a specific time and location as outlined in the notice. The invitation to bid is placed in local newspapers where prospective bidders can find and read it. Owners and engineers also may send the notice directly to bidders that have bid on previous projects for them. The instructions to bidders are an important written matter as it describes to the prospective bidders how to formally submit the bid to the owner (PDH center, 2010). 2.9 Types of Construction Contracts There are many different types of construction contracts, distinguished primarily by the method of determining the final contract price. Regardless of the method used, the goal is the same quality construction completed on time and to all specifications for the lowest possible price while allowing the contractor an opportunity to make a fair profit. The type of contract chosen may depend on several factors, including the identity and relationship, if any, of the owner and contractor; the completeness of the design and its complexity; the type of work to be done; and the need or desire of competitive pricing (Fisk & Reynolds, 2006). 36 Construction contracts may be classified into the following types: 2.9.1 Lump Sum Contracts 2.9.2 Unit Price Contracts 2.9.3 Cost Plus Contracts 2.9.4 Design-Build Contracts 2.9.5 Turnkey Contracts 2.9.6 Management-Oriented Contracts 2.9.7 Construction by Day Labor 2.9.8 Target Estimate Contracts 2.9.9 Guaranteed Maximum Price Contracts 2.9.10 Contracts with Quantities 2.9.11 Construction Management Contracts Here are these types of contracts with some details: 2.9.1 Lump-Sum Contract Also known as stipulated sum and fixed price contract. Bockrath (2000) defines it to be the contract in which the contractor agrees to perform for a stated amount of money. Fisk & Reynolds (2006) write that the lump sum contract is one in which the contractor agrees to do specified 37 construction for a fixed price set forth in the contract, The only changes allowed to the fixed price are for extras or change orders. Clough (1981) argued that the satisfactory completion of the work for the stated amount of money remains the obligation of the contractor, regardless of the difficulties and troubles that may be experienced in the course of construction activities, even though the total cost of the work may turn out to be greater than the contract price. However, the contractor can be relieved of this contractual responsibility because of impossibility of performance, where there is contract provision for price adjustment in the event of changed conditions, and possibly because of other contingencies. Hendrickson (2008) and Collier (1994) emphasized that in this type of contract, the owner has essentially assigned all the risk to the contractor, who in turn takes almost all the risks by offering to do the work for a stipulated sum. He writes that beside the fixed lump sum price, other commitments are often made by the contractor in the form of submittals such as a specific schedule, the management reporting system or a quality control program. Collier (1994) recommends that for an owner there is a risk of default in performance of the work by the contractor, this risk can be reduced by requiring and paying for a performance bond. In this kind of contract a contractor can minimize his risks and minimize his profit. This type of contract is popular from the owner's viewpoint for the obvious reason that the total cost of the project is known in advance, its use is limited (Clough, 1981). It can be used successfully for the routine 38 construction of schools, mill buildings, warehouses, and similar structures with which the average contractor has had considerable experience. Although these projects involve many different kinds of work, a capable and experienced contractor can generally estimate the total cost and prepare the bid with a fair degree of accuracy. Bockrath (2000) and Clough (1981) suggests that if the work required by the contract is not accurately determined in advance of field operation and in all its features at the time of bidding, a lump sum contract is not suitable and should not be used. Bockrath (2000) claims that it would be unfair to the bidders to expect them to bind themselves to the performance of work of which cannot be outlined in advance. In this type of contracts, bids are requested based on a complete set of plans and specifications, thus allowing for easy comparison of bid prices and fostering competition (Fisk & Reynolds, 2006). 2.9.2 Unit Price Contract Bockrath (2000) defines unit price contract as the one in which payment for the work is to be made upon the basis of the computed quantities of specifically stated items of work actually performed and materials furnished and used by the contractor in the project, each such quantity being multiplied by the contractor’s bid price for that unit. Halpin & Woodhead (1980) stated that in the unit price contract, the project is broken down into work items that can be characterized by units, and the 39 contractor quotes the price by units rather than as a single total contract price. This type of contract is based on estimated quantities of certain well- defined items of work and costs per unit amount of each of these work items. The estimated quantities are compiled by the engineer, and the unit costs are those bid by the contractor for carrying out the stipulated work in accordance with the contract documents. The total sum of money paid to the contractor for each work item remains an indeterminable factor until completion of the project, however, because payment to the contractor is made on the basis of units of work actually done and measured in the field. Therefore the exact ultimate cost of the construction is not known to the owner until completion of the project. The contractor is obligated to perform the quantities of work actually required in the field at the quoted unit prices, whether they are greater or less than the engineer's estimates (Clough, 1981). Hendrickson (2008) notes that in this type of contract; the risk of inaccurate estimation of uncertain quantities for some key tasks has been removed from the contractor. Collier (1994) discusses that unit price contracts are not always a separate kind of contract, but they are often a form of fixed price contract with separate unit prices and separate sums stipulated for each item of work required. 40 This type of contract is most often used in heavy construction and public works contracts, such as pipelines, highways, earthworks, bridges, tunneling and transit facilities; in situations where it is difficult to calculate quantities in advance (Fisk & Reynolds, 2006). 2.9.3 Cost Plus Contracts Also called cost reimbursable contracts, are contracts in which the contractor is paid the actual costs of the construction plus a specified markup to cover overhead and profit. Typically, the contract defines costs as including all expenses for materials, labor, and subcontractors and suppliers (Fisk & Reynolds, 2006). Bockrath (2000) mentioned several reasons that an owner may choose to use a cost plus contract. The work may be such that the owner fears that the bidders will add large contingencies, or in an emergency situation requiring construction of something without time to develop plans for it, a contractor may not be able to make a proposal on a lump sum basis. A unit price basis is equally undesirable because it is difficult to foresee all that is required. In such a situation it is preferable to engage a contractor to do the work on the basis of cost plus some allowance for overhead and profit. Also he recommended that cost plus contract may also be useful in situations that are not emergencies, especially when it is uncertain what troubles or difficulties will be encountered in the work. In this way decisions can be made as the work progresses. 41 Fisk and Reynolds (2006) comments that this type of contract is appropriate where, due to an incomplete or very complex design, a contractor would be unable to give a lump-sum price without including a large contingency for unknown factors. Cost plus contracts can be divided into several types as follows: - Cost Plus Fixed Percentage of Cost Contract In this type of contract, the contractor is paid its actual costs plus a specified percentage for costs of overhead. Thus, the contract would specifically exclude actual overhead expenses from the definition of eligible costs. To the total of costs and the overhead is then added a specified percentage for profit (Fisk & Reynolds, 2006). For certain types of construction involving new technology or extremely pressing needs, the owner is sometimes forced to assume all risks of cost overruns. The contractor will receive the actual direct job cost plus a fixed percentage, and have little incentive to reduce job cost. Furthermore, if there are pressing needs to complete the project, overtime payments to workers are common and will further increase the job cost (Hendrickson, 2008). However, Hendrickson (2008) does not advise the owner to use this type of contract; unless there are compelling reasons, such as the urgency in the construction of military installations. 42 - Cost Plus Fixed Fee Contract In this type of contract, the contractor is paid its actual costs plus a fixed fee that is set in advance, and it may or may not specify that costs include a set daily rate for overhead (Fisk & Reynolds, 2006). Hendrickson (2008) mentioned that under this type of contract; the contractor will receive the actual direct job cost plus a fixed fee, and will have some incentive to complete the job quickly since its fee is fixed regardless of the duration of the project. Bockrath (2000) discussed that this type of contract overcomes the possible weakness of the cost plus percentage type, which is that the more nonproductive and wasteful the contractor is; the more profit he makes. The contractor here receives only the stipulated fixed fee sum regardless of what the costs of the project and his overhead and profit are. If staff salaries are to be paid out of this fee, the contractor will endeavor to expedite the project so as to make as much profit as possible. Even if staff salaries are to be classed as a part of the general costs of the job, the contractor will still want to rush the work so that his workers can be available for another contract as soon as possible (Bockrath, 2000). - Cost Plus Variable Percentage Contract For this type of contract, the contractor agrees to a penalty if the actual cost exceeds the estimated job cost, or a reward if the actual cost is below the estimated job cost. In return for taking the risk on its own 43 estimate, the contractor is allowed a variable percentage of the direct job- cost for its fee. Furthermore, the project duration is usually specified and the contractor must abide by the deadline for completion (Hendrickson, 2008). Hendrickson (2008) finds that this type of cost plus contract allocates considerable risk for cost overruns to the owner, but also provides incentives to contractors to reduce costs as much as possible. - Cost Plus Incentive Fee The contract here specifies time and quality criteria. If the contractor meets those criteria, it is paid its costs plus a set fee. If the contractor exceeds those criteria, perhaps by completing the job early, the contractor is paid an additional fee based on a scale set forth in the contract. If the contractor does not meet those criteria, the fee is less (Fisk & Reynolds, 2006). 2.9.4 Design-Build Contract Design-build contract permits an owner to contract with one entity to provide both design and construction services. It involves a single contract for both design and construction services rather than one contract for design and another for construction. It combines into a single role the design responsibility of the project and the building function of the prime contractor (Toler, 2007). 44 The design-builder may be a single company, or it may be a joint venture. The design-builder need not have in-house capability to perform both construction and design; a construction contractor may subcontract the design work, or an engineering firm may subcontract the construction work. Some design-build contracts are “turnkey” contracts (Friedlander). 2.9.5 Turnkey Contracts In a turnkey relationship, the design-builder not only designs and constructs the project; it also ensures that the plant is functioning and ready to operate for the owner. The term “turnkey” derives from the concept that the owner may figuratively insert a key into a slot and turn it to begin successful operation of the plant (Friedlander). 2.9.6 Management-Oriented Contracts Management contracting is a process whereby an organization is appointed to the professional team during the initial stages of a project to provide construction-management expertise under the direction of the contract administrator. The management contractor employs and manages works contractors who carry out the actual construction of the project and he is reimbursed by means of a fee for his management services and payment of the actual prime cost of the construction (Masterman, 2002; cited in Murtaja, 2007). 45 2.9.7 Construction by Day Labor Also called force account, which means that the owner does the work with his own forces, pays for all labor, all materials furnished, and all expenses of any kind that are required for the completion of the job. He also provides or rents the equipment. The workmen may be his own regular employees or others whom he has recruited for the job. The owner may supervise the work directly, handle it through the services of the engineer, have a superintendent appointed from his own staff, or hire a superintendent for the job. He may even hire a contractor to do this supervision, paying him a salary or a fee to do so (Dunham et al., 1979). 2.9.8 Target Estimate Contract This is another type of contract which specifies a penalty or reward to a contractor, depending on whether the actual cost is greater than or less than the contractor's estimated direct job cost. Usually, the percentages of savings or overrun to be shared by the owner and the contractor are predetermined and the project duration is specified in the contract. Bonuses or penalties may be stipulated for different project completion dates (Hendrickson, 2008). 2.9.9 Guaranteed Maximum Price Contract Fisk & Reynolds (2006) noted that this type of contract is a variation of the cost plus contract where the owner and contractor agree that the project will not cost the owner more than a set price, the guaranteed 46 maximum. The contractor is paid on a cost plus fixed fee or percentage of cost basis, but in no event more than the set maximum price. Hendrickson (2008) comments that when the project scope is well defined, an owner may choose to ask the contractor to take all the risks, both in terms of actual project cost and project time. The owner and the contractor agree to a project cost guaranteed by the contractor as maximum. There may be or may not be additional provisions to share any savings if any in the contract. Whereas Barrie & Paulson (1992) discussed that under this type of contract, the owner takes the scope risk and the contractor takes the price risk over a guaranteed maximum or upset amount. Savings below the guaranteed maximum price are normally shared between contractor and owner on a negotiated basis. This type of contract permits work to begin prior to final design and, if the scope is well defined, can fix a maximum price for the work. As in the fixed price contract, problems arise when scope changes are made by the owner or when changed conditions are encountered. Fisk and Reynolds (2006) comment that in some guaranteed maximum price contracts, a savings clause provides that if the project costs the owner less than the guaranteed maximum price, the owner and contractor are to split the difference between the costs and the guaranteed maximum price; typical splits are (50/50) percent and (60/40) percent (owner/contractor). Guaranteed maximum price contracts give contractors 47 great incentive to keep costs as reasonable as possible to ensure themselves as much profit as possible. 2.9.10 Contracts with Quantities In some countries; a form of unit price contract is used for many major building projects. These are called contracts with quantities. The main difference between contracts with quantities and unit price contracts is primarily in the quantities of work provided in a contract with quantities. For the most part, contracts with quantities have quantities that are not approximate. They are accurate quantities measured by an agent of the owner known as a quantity surveyor. Also, a professional quantity surveyor may handle the financial administration of a building project, from the initial conceptual estimates to the settlement of the final account. In contracts with quantities the quantity surveyor is responsible to the owner for the accuracy of the quantities provided to bidders in the bidding documents. If there is any subsequent variation from those quantities in the contract, the owner pays the contractor according to the actual quantities of work done (Collier, 1994). 2.9.11 Construction Management Contracts A professional construction management program featuring phased construction and competitively bid fixed price contracts offer early completion advantaged coupled with fixed price contracts, but may not offer a high quality price guarantee since work begins prior to finalizing all 48 individual contracts. Changes to the work after contracts have been awarded or nonperformance by individual contractors can result in major delays and disputes between owner, construction manager and project contractors (Barrie & Paulson, 1992). 2.10 Law for Engineers Dramatic increases in regulations and increased liability exposure in the past few decades have made it imperative that engineers should be at least conversant with the basics of law. However, it is necessary for engineers an elementary understanding of how law works (Bockrath, 2000). An engineer ordinarily uses a logical method to solve problems, trying generally to identify and control variables and eliminate guesswork from the final equation. Objectivity is important. The result of the process generally has few subjective components or disregards them in the interest of maintaining the integrity of the scientific process. While in law, however, the logic of the process is secondary to the fact of the result. Experience and analogy are most important in the process of legal thought (Bockrath, 2000). Bockrath (2000) recommends that law should be thought of as a process rather than a set of rules: a process by which disputes are resolved. He adds that rules exist, but economic and political pressures and 49 considerations are a part of the process, as are the personalities of the litigants, judges, and attorneys. 2.11 Construction Contracts Law Fisk & Reynolds (2006) discussed that the performance of construction contracts is regulated by law as with most endeavors, but the difference between them and other enterprises seems to lie in the fact that there are more jurisdictional agencies involved, and thus more laws to contend with. They find that these laws fall into four major categories: 1. Contract law: those laws and regulations that affect the making of contracts, both public and private. 2. Laws governing the execution of the work being performed under the contract. 3. Laws that relate to the setting of differences and disputes that may develop out of the performance of the contract. 4. Licensing laws that govern not only the business practices but also the personal qualifications standards of the various people involved in the construction process. Contract law is called residual, since it mainly deals with things not dealt with by statute law, or legislated law. It is largely traditional common law modified by statute. Contracts are the means by which all commerce and business works. Considering how much the law impinges on 50 individuals and construction, the courts interfere very little in the making of contracts. People make contracts every day, and yet the law remains unconcerned with most of them (Collier, 1994). According to Bockrath (2000), the engineer’s involvement with the law especially in cases related to construction contracts may occur in these situations: 1. Preparing contract documents and specifications. 2. Conducting contractual relationships and the handling of claims and payments. 3. Interpreting contract clauses and the settlement of disputes arising. 4. Educating attorneys regarding engineering matters and customs. 5. Settlement of disputes out of court. 6. Participating as an expert witness in many cases such as: regular jury trial, cases heard before judges, mediation and arbitration of disputes. 2.12 Disputes Resolution in Construction Contracts Once a contract is reached, a variety of problems may emerge during the course of work. Disputes may arise over quality of work, over responsibility for delays, over appropriate payments due to changed conditions, or a multitude of other considerations. The mechanism for 51 contract dispute resolution can be either specified in the original contract, or can be decided when a dispute arises (Hendrickson, 2008). Changes in construction technology and the complexity of projects have made building more complicated. Present used contracts and project management techniques are struggling to keep up with the dynamics of industry. In addition, owners have become highly leveraged with tighter budgets and restricted cash flow. Pressures to get projects up and running have led to tighter time schedules and experiments with new accelerated project delivery methods. The cumulative effect of these factors has caused traditionally cooperative relationships to deteriorate, and be replacing by adversarial, antagonistic relationships, ‘win-lose’ attitudes, and general dissension (Roxene, 1998; cited in Enshassi & Abu Rass, 2008). Hendrickson (2008) emphasized that the most prominent mechanism for dispute resolution is adjudication in a court of law. This process tends to be expensive and time consuming since it involves legal representation and waiting in queues of cases for available court times. In adjudication, the dispute is decided by a neutral, third party with no necessary specialized expertise in the disputed subject. Legal procedures are highly structured with rigid, formal rules for presentations and fact finding. On the positive side, legal adjudication strives for consistency and predictability of results. The results of previous cases are published and can be used as precedents for resolution of new disputes (Hendrickson, 2008). 52 The high cost of adjudication has inspired a series of non-traditional dispute resolution mechanisms that have some of the characteristics of judicial proceedings. These mechanisms include (Hendrickson, 2008): - Private judging in which the participants hire a third party judge to make a decision. - Neutral expert fact-finding in which a third party with specialized knowledge makes a recommendation. - Mini-trial in which legal summaries of the participants' positions are presented to a jury comprised of principals of the affected parties. Negotiation among the contract parties is a second important dispute resolution mechanism. These negotiations can involve the same sorts of concerns and issues as with the original contracts. The negotiation process is usually informal, unstructured and relatively inexpensive. If an agreement is not reached between the parties, then adjudication is a possible remedy (Hendrickson, 2008). A third important dispute resolution mechanism is the resort to arbitration or mediation and conciliation. In these procedures, a third party serves a central role in the resolution. These outside parties are usually chosen by mutually agreement of the parties involved and will have specialized knowledge of the dispute subject. In arbitration, the third party may make a decision which is binding on the participants. In mediation and conciliation, the third party serves only as a facilitator to help the 53 participants reach a mutually acceptable resolution. Like negotiation, these procedures can be informal and unstructured (Hendrickson, 2008). 2.13 Construction Contractors Builders who supervise the execution of construction projects are traditionally referred to as contractors, or more appropriately called constructors. The general contractor coordinates various tasks for a project while the specialty contractors such as mechanical or electrical contractors perform the work in their specialties. Material and equipment suppliers often act as installation contractors; they play a significant role in a construction project since the conditions of delivery of materials and equipment affect the quality, cost, and timely completion of the project (Hendrickson, 2008). Hendrickson (2008) divided contractors into three categories as follows: 1. General Contractors The function of a general contractor is to coordinate all tasks in a construction project. Unless the owner performs this function or engages a professional construction manager to do so, a good general contractor who has worked with a team of superintendents, specialty contractors or subcontractors together for a number of projects in the past can be most effective in inspiring loyalty and cooperation. The general contractor is also knowledgeable about the labor force employed in construction. 54 2. Specialty Contractors Specialty contractors include mechanical, electrical, foundation, excavation, and demolition contractors among others. They usually serve as subcontractors to the general contractor of a project. In some cases, legal statutes may require an owner to deal with various specialty contractors directly. In most cases, the owner will hold the general contractor responsible for negotiating and fulfilling the contractual agreements with the subcontractors. 3. Material and Equipment Suppliers Major material suppliers include specialty contractors in structural steel fabrication and erection, sheet metal, ready mixed concrete delivery, reinforcing steel bar detailers, roofing, glazing etc. Major equipment suppliers for industrial construction include manufacturers of generators, boilers and piping and other equipment. Many suppliers handle on-site installation to insure that the requirements and contractual specifications are met. 2.14 Construction Contractors in Palestine Construction contracting is considered the hub for construction sector in Palestine. Hence, Palestinian contractors have proved their national role and outstanding ability in construction and reconstruction. The contractor is the individual or company operating in the construction sector and who or which shall be registered and classified at the Palestinian 55 Contractor’s Union (PCU). The contractor is any natural or legal person who shall have the right to practice construction contracting profession in accordance with operative laws and regulations. Such contractor shall be registered at the PCU according to its by-law. Construction contracting profession is any work pertaining to the construction of buildings, roads, installations, various engineering projects in addition to the operation and maintenance of such construction projects. The PCU member is the contractor registered at the Palestinian Contractor’s Union and who acquires a classification grade according to the standards specified in the “Instructions of Contractor Classification” issued by the National Classification Committee (PCU, 2003). The typical image of the construction contracting profession, whether in the Arab World or in Palestine does not match the role active contractors’ play in the building of their societies. Contractors are effective entities involved in all professions subsidiary to the construction sector through a complementary relationship. Further, contractors possess the skills necessary for financial management and project administration. Taking into account that a large number of Palestinian contractors are engineers, contractors’ professional experience is also consolidated by Palestinian expatriates. Such status has led to the upgrading of the construction contracting profession in Palestine as regards quality, specialty and professionalism (PCU, 2003). 56 Chapter 3 Methodology 3.1 Introduction This chapter presents and discusses the methodology used during the research. Research methodology refers to the principles and procedures of logical thought processes that are applied to a scientific investigation. Methods concern two techniques: first are techniques that are available for data collection, data analysis, etc., and second those techniques which are actually employed in a research project. Any research project should answer certain questions in order to achieve its goals; these questions are: What? Why? Where? When? How? Whom? How much? (Fellows & Liu, 2008). The adopted methodology used to accomplish this study includes review of literature related to construction contracts, personal interviews, questionnaire, and analysis of construction contracts. This chapter also includes information about research background, research strategy, research population and location. In addition, sample method, data analysis, and finally study limitations are also included. 57 3.2 Research Objectives It is important first to determine the scope of the work; the most important issue for a researcher is to determine accurately what is required from the work, what can be achieved, and the amount of work that can be done (Fellows and Liu, 2008). This research is considered to achieve the following objectives of the study: 1. To study the current situation of construction contracting in Palestine. 2. To assess the current construction contracts performed and used in several institutes. 3. To highlight the most important problems in construction contracts. 4. To determine the contribution of owners, contractors, engineers in performing a contracts from an engineering and legal perspectives. 5. To contribute to improve construction contracting in Palestine. 58 3.3 Research Strategy Naoum (2007) defined the research strategy as “the way in which the research objectives can be questioned”. There are two types of research strategies; the first type is quantitative research, and the second type is qualitative research. Deciding on which type of research to follow depends mainly on the purpose of the study, and the type and availability of information required (Naoum, 2007). 3.1.1 Quantitative Research Quantitative research is ‘objective’ in nature. It is the inquiry into a social or human problem, based on testing a hypothesis or a theory composed of variables, measured with numbers, and analyzed with statistical procedures, in order to determine whether the hypothesis or the theory hold true. In this type of research, one uses a theory deductively and places it towards the beginning of the plan for a study. The objective is to test or verify a theory, rather than develop it. One thus begins the study advancing a theory, collects data to test it, and reflects on whether the theory was confirmed or unconfirmed by the results in the study. The theory becomes a framework for the entire study (Creswell, 1994 cited in Naoum, 2007). 59 3.1.2 Qualitative Research Qualitative research is ‘subjective’ in nature. It emphasizes meanings, experiences, description and so on (Naoum, 2007). Fellows and Liu (2008) noted that in qualitative research, an exploration of the subject is undertaken without prior formulations, so the object is to gain understanding and collect information and data such that theories will emerge. When comparing quantitative and qualitative research methods, Hancock (1998) noted that qualitative research is concerned with finding the answers to questions which begin with: why? how? in what way? Whereas quantitative research is more concerned with questions like: how much? how many? how often? to what extent? Table 3.1 introduces the characteristics of both quantitative and qualitative methodologies and the differences between them. 60 Table 3.1: Characteristics of Quantitative and Qualitative Research Methodologies Quantitative Research Qualitative Research Considered a hard science Considered a soft science Objective Subjective Deductive reasoning used to synthesize data Inductive reasoning used to synthesize data Focus - concise and narrow Focus - complex and broad Tests theory Develops theory Basis of knowing - cause and effect relationships Basis of knowing – meaning, discovery Basic element of analysis – numbers and statistical analyses Basic element of analysis – words, narrative Single reality that can be measured and generalized Multiple realities that are continually changing with individual interpretation Source: Jones & Bartlett Learning, LLC. 3.1.3 Triangulation Method Triangulation is the use of multiple methods, usually quantitative and qualitative research in the study of the same research problem (Denzin, 1989 cited in Burns & Grove, 1997). Triangulated studies reduce or eliminate disadvantages of each individual approach whilst gaining the advantages of each, and through this 61 combination; the multi-dimensional view of the subject is gained through synergy (Fellows & Liu, 2008). This combination of both quantitative and qualitative methods is more than simply collecting and analyzing these both kinds of data; it also involves the use of both approaches in tandem so that the overall strength of a study is greater than either one of them (Creswell & Plano Clark, 2007 cited in Creswell, 2009). In this study, both quantitative and qualitative methods are used. The questionnaire and the interviews contained both questions that combined facts and opinions together, while the contracts analysis is a quantitative approach which aimed to gather factual data. 3.4 Research Design Research design is a blueprint for the conduct of a study that maximizes control over factors that could interfere with the desired study outcomes; the type of design directs the selection of a population, sampling procedure, methods of measurement, and a plan for data collection and analysis (Burns & Grove, 1997). In research design, one has to decide the methodological approach in finding solutions or answers to the research problem or research questions. It is about stating the way in which the researcher accomplishes the research objectives (Fellows & Liu, 2008). 62 In this research; the questionnaire approach, the interviews, and literature research related to construction contracts, were all approaches used in collecting data. The questionnaire and the interviews were used as both quantitative and qualitative research method. The contracts analysis was used as a quantitative method for collecting data. Figure 3.1 illustrates a flowchart which describes the methodology used during the research. Figure 3.1: Methodology Flow chart Topic Selection Literature Review Field Surveying Interviews Questionnaire Result Analysis Conclusions Recommendations Contracts Studying 63 3.5 Research Population There are two populations targeted in this research, they are contractors and owners. Contractors are all Palestinian contractors who have valid registration in the Palestinian Contractors Union (PCU) in the first of June, 2011; in all types of work fields that include buildings, roads, water and sewage, electro-mechanics, and public works of 1 st , 2 nd , 3 rd , 4 th , and 5 th categories. The study targeted all five categories because contracts are a core subject for all contractors working under all categories, and in order to help to improve realistic contracts practices. According to PCU records, the total number of contractors under all five categories is 323 contractors until the first of June, 2011. Owners targeted in the study are owners of construction projects working in Palestine. Owners may include governmental ministries, municipalities, NGOs, and private agencies. 3.6 Research Location The research was carried out in the West Bank. West Bank consists of 11 governorates; they are Jenin, Tubas, Tulkarm, Nablus, Qalqilya, Salfit, Ramalla & Al-Bireh, Jericho & Al-Aghwar, Jerusalem, Bethlehem, and Hebron. 64 3.7 Sample Method The term sample means a specimen or part of a whole population which is drawn to show what the rest is like (Naoum, 2007). Sampling involves selecting a group of people, events, behaviors, or other elements in order to conduct a study (Burns & Grove, 1997). Selecting the sample is very important; a great care must be taken when choosing the type of sample design and the researcher has to ensure that the characteristics of the sample are the same as of its population and act as representative of the population as a whole (Naoum, 2007). 3.8 Sample Size The sample size consisted of 80 contractors, it was chosen as a stratified random sample from the whole population according to the location of the contracting company. The sample represented (25%) of the whole population of 323 contractors. The respondents were 50. Three of them were not valid so they were dropped, and 47 were approved. Figure 3.2 shows the distribution of respondents according to location. 65 Figure 3.2: Respondents distribution according to location Figure 3.3: shows the distribution of respondents according to position. Jenin 17% Tulkarm 4% Nablus 32% Qalqilya 2% Salfit 4% Ramalla & Al- Bireh 21% Jericho & Al- Aghwar 2% Jerusalem 7% Bethlehem 4% Hebron 7% Figure 3 : Distribution of sample according to Position of the respondent Other 4.3%Site/office Engineer 21.3% Project Manager 23.4% Company director 51.0% 66 This result illustrates that nearly three-fourth (74.4%) of respondent’s designation is either company director or projects manager. The higher designation of respondents increases the accuracy of the results. 3.9 Questionnaire Design Closed ended questions were used in the questionnaire. Closed questions require a short response in the form of Yes or No, Agree or Disagree, Important or Not Important, etc (Naoum, 2007). Closed questions are easy to ask and quick to answer, they require no writing by respondent, and their analysis is straightforward (Nachmias and Nachmias, 1996 cited in Naoum, 2007). The questionnaire was designed in Arabic language in order to be easily understood by contractors especially that most of them are not familiar with English language. It is then translated into English language and attached in the appendix. (See appendices 1 & 2). The questionnaire was consisted of thirteen pages starting with a covering letter that explained the purpose of the research, the importance of information presented, the top security of information presented, and the questionnaire contents. In order to accomplish the aim of the research, the questionnaire was divided into three sections: 1. Profile of the contracting company. 67 2. Facts about some contracting practices. 3. Specifications and aspects of construction contracts that are used in Palestine. The first two sections’ questions were multiple choice ones, and the last sections’ questions were agreement scale questions. 3.10 Personal Interviews They are face-to-face interpersonal role situations, in which an interviewer asks respondents questions designed to take answers pertinent to the research hypothesis, and it can take three forms, they are: unstructured, structured and semi-structured interviews (Naoum, 2007). Advantages of personal interviews (Creative Research Systems, 2011): 1. The ability to let the interviewee see and feel the interviewer. 2. The ability to find the target population more easily than any other method. 3. Longer interviews are sometimes tolerated. People may be willing to talk long face-to-face. In this research, semi-structured interviews were used in interviewing lawyers, arbitrators, contractors, etc. These interviews were 68 used in this research to support the questionnaire; they were used to answer questions resulted from the questionnaire. 3.11 Contracts Analysis Several construction contracts were collected from different parties to be analyzed, these parties included: contractors, ministries, municipalities, owners, engineers, etc. These contracts were examined, reviewed, and evaluated. 3.12 Data Measurement Two formats were used in the questionnaire. The first was the checklist, and the second was the Likert scale. The checklist type of question is essentially a list of items that respondents are offered to mark about themselves, an organization or an event. It is a straightforward means of collecting information and the data can be analyzed easily. The checklist questions are specially designed for a group of respondents who have accurate information and can an