Course Notes Administer a Construction Contract CPCCBC4016A

CPCCBC4016A Administer a Construction Contract

CPCCBC4016A - Administer a Constrution Contract

SECTION 1 – INTRODUCTION TO CONTRACTS (Part ( Part 1) ............................................. ............................................. 4 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10

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CONTRACT DOCUMENTATION .......................................................... ................................................................................ ...................... 32 2.1 2.2 2.3 2.3 2.6 2.7

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Whether Work Constitutes a Variation ............................................................. ...... 60 Payment for Variations without Written Instruction ........................................ 61 Valuation of Variations.................................................................................................. 61

EXTENSION OF TIME ................................................................................................... ................................................................................................... 65 7.1 7.2

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Types of Risks ................................................................................................................... 52 Nature of Risks ................................................................................................................. 53 Quantification of Claims......................................................... ....................................... 56

VARIATIONS ........................................................... ................................................................................................................... ........................................................60 6.1 6.2 6.3

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Value of Completed Work/Value to Complete ...................................................... 48 Bill of Quantities/Fixed Price/Schedule of Rates ................................................ 48 Schedule of Rates ............................................................ ................................................. 49 Bill of Quantities .............................................................................................................. 49 Priced Bill of Quantities ................................................................................................ 49 Payment for Offsite Goods................................................................ ............................ 50

Construction Contract Risks .............................................................. .................................................................................... ...................... 52 6.1 6.2 6.3

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Prior to Practical Completion ..................................................................................... 45 Defects Liability Period ................................................................................................. 45 Final Completion ............................................................................................................. 46

VALUATION OF PROGRESS CLAIMS............................................................. CLAIMS ........................................................................ ........... 48 5.1 5.2 5.3 5.4 5.5 5.6

6.

Progress Claim ................................................................ .................................................. 42 Progress Certificate ........................................................................................................ 43 Progress Payment ........................................................................................................... 43

CASH RETENTION / BANK GUARANTEE SECURITY ..........................................45 4.1 4.2 4.3

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The Range of Contract Types ........................................................... ............................ 32 Standard Form Construction Contracts............................................................. ...... 33 Types of Contracts.......................................................... ................................................. 34 Fixed Price v Cost-Plus Contracting .......................................................................... 39 Cost Control of Cost-Plus Contracts .......................................................................... 40 Features of the Trade Contracts ................................................................ ................. 41

3. PROGRESS CLAIMS/PROGRESS CERTIFICATES/PROGRESS PAYMENTS 42 3.1 3.2 3.3

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Fundamentals of a Contract ............................................................. ............................... 4 Legislation That Impacts Construction Works ........................................................ 9 Contract Components .................................................................................................... 10 Different Roles and responsibilities ........................................................ ................. 19 Key Contract Terms ................................................................. ....................................... 20 Contractor’s Obligations ............................................................................................... Obligations ............................................................................................... 21 Principal’s Obligations .................................................................................................. Obligations .................................................................................................. 24 Key Commercial Issues ........................................................... ....................................... 24 Concepts of Contract Law ............................................................................................. 29 Breach of Contract .......................................................... ................................................. 29

Delays .................................................................................................................................. 65 Notification of Claims .............................................................. ....................................... 67

LIQUIDATED DAMAGES .............................................................................................. ..............................................................................................70 8.1

Penalties and liquidated damages ............................................................................ 73

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DEFECTS ................................................................... .......................................................................................................................... ....................................................... 75 9.1 9.2 9.3

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Judgment of the Superintendent................................................................................ 75 Direction to Remedy....................................................................................................... 75 DEFECTS LIABILITY PERIOD............................................................ ............................ 78

Contract Administration and Notices ............................................................... ............................................................... 82

10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10

11 11.1 11.2 11.3 11.4 11.5 11.6

12 12.1 12.2 12.3 12.4 12.5 12.6 12.7 12.8 12.9

Contract progress monitoring .................................................................................... 82 Quality Control and Assurance ....................................................... ............................ 82 Cost Control ....................................................................................................................... 83 Change Control ................................................................................................................. 83 Contract finalisation ................................................................ ....................................... 83 Assessing and submitting variations ........................................... ............................ 84 Link Between Variation Approach and Relationship Type .............................. 84 Payment Process ............................................................................................................. 85 Extensions of Time and other claims .................................................................. 86

Latent Conditions ................................................................... .................................................................................................... ................................. 89 What are Latent Conditions ......................................................................................... 89 Who is Responsible for Latent Conditions ............................................................. 89 Case Study on Latent Conditions ............................................................... ................. 90 What happens when you find a latent condition? ............................................... 91 Managing the Risk of Latent Conditions.................................................................. 91 Excluding or limiting liability for f or latent conditions ........................................... 92

DISPUTES ............................................................ .................................................................................................................... ........................................................93 Contract Clauses .............................................................................................................. 93 Methods of dispute dis pute resolution ........................................................ ............................ 94 Conciliation............................................................ ............................................................ 95 Mediation ........................................................................................................................... 96 Appraisal ..................................................... ................................................................. ...... 96 Mini-Trials ......................................................................................................................... 96 Senior Executive Appraisal .............................................................. ............................ 96 Arbitration ............................................................. ............................................................ 97 Choosing a dispute resolution method .............................................................. ...... 99

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SECTION 1 – INTRODUCTION TO CONTRACTS (Part 1) 1.1 Fundamentals of a Contract

A contract is an agreement between two or more people or organisations that is legally binding. Six legal elements need to be in place before a contract can be considered legally binding and enforceable. The elements are: 1. Offer and Acceptance 2. Intention to create legal relations 3. Consideration 4. Consent 5. Legal capacity 6. Illegal and void contracts

1.1.1 Offer and acceptance A contract is formed when an offer by one party is accepted by the other party. An offer must be distinguished from mere willingness to deal or negotiate. For example, X offers to build and sell to Y apartments. Before any agreement is reached on size, quality, style or price, Y decides not to continue. At this stage, there is no legally binding contract between X and Y because there is no definite offer for Y to accept until the essential terms of the bargain have been decided. An offer need not be made to a specific person. It may be made to a person, a class of people, or to the whole world. An offer is a definite promise to be bound, provided the terms of the offer are accepted. This means that there must be acceptance of precisely what has been offered. For example, a builder offers to erect for B the frame of a house for $100,000, without any fit out. If B decides to proceed with engaging A, but insists that the fit out be included, then B is not accepting the builder's offer. Rather, B is making a counter offer. It is then up to the builder to accept or reject the counter offer. A person can withdraw the offer that has been proposed before that offer is accepted. For withdrawal to be effective, the person who has proposed the offer must communicate to the other party that the offer has been withdrawn. To continue the example above, the builder may say to B that he'll check with his business partners and maybe fit out can be included. If, while waiting for a reply, B decides he does not want to engage the builder and he tells the builder of his change of mind, then there is no binding contract.

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Acceptance occurs when the party answering the offer agrees to the offer by way of a statement or an act. Acceptance must be unequivocal and communicated to the person making the offer: the law will not deem a person to have accepted an offer merely because they have not expressly rejected it. 1.1.2 Intention to create legal relations A contract does not exist simply because there is an agreement between people. The parties to the agreement must intend to enter into a legally binding agreement. This will rarely be stated explicitly but will usually be able to be inferred from the circumstances in which the agreement was made. For example, offering a friend a ride in your car is not usually intended to create a legally binding relation. You may, however, have agreed with your friend to share the costs of travelling to work on a regular basis and agree that each Friday your friend will pay you $20 for the running costs of the car. Here, the law is more likely to recognise that a contract was entered into. Commercially based agreements will be seen as including a rebuttable intention to create a legally binding agreement. Both in common law and in civil law, a rebuttable presumption (in Latin, praesumptio iuris tantum) is an assumption made by a court, one that is taken to be true unless someone comes forward to contest it and prove otherwise. For example, a defendant in a criminal case is presumed innocent until proved guilty. However, the law presumes that domestic or social agreements are not intended to create legal relations. For example, an arrangement between siblings will not be presumed to be a legally binding contract. A person who wants to enforce a domestic or social agreement will need to prove that the parties did intend to create a legally binding agreement. 1.1.3 Consideration 

Consideration is usually evidenced by the payment of money

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It can also be demonstrated as effort

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It moves from the Promisor to the Promisee

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May be avoided in formal contracts

Consideration is the price paid for the promise of the other party. The price must be something of value, although it need not be money. Consideration may be some right, interest or benefit going to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other party. So long as consideration exists, the court will not question its adequacy, provided that it is of some value. For example, the promise to pay a dollar in return for the lease of a house would be good consideration. Of course, the consideration must not be illegal or impossible to perform. There is an exception to the rule: documents under seal (deeds) do not require consideration for there to be a binding contract. However, since few building August 2014

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contracts between people are made in this way, it is not discussed further in this chapter. 1.1.4 Consent 

For a contract to be binding consent must be genuine

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Must be contracting over the same subject

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Needs to be a meeting of the minds

Entering into a contract must involve the elements of free will and proper understanding of what each of the parties is doing. In other words, the consent of each of the parties to a contract must be genuine. Only where the essential element of proper consent has been given is there a contract which is binding upon the parties. The ultimate consequences of establishing that no proper consent was given to enter the contract are matters dealt with when considering remedies for breach of contract. Proper consent may be affected by any of the following matters: mistake

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false statements

duress

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undue influence/unconscionability

1.1.5 

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Legal capacity

Only parties with the appropriate authority or capacity can make a contract binding and enforceable Minors and bankrupts have limited capacity to contract

Not all people are completely free to enter into a valid contract. The contracts of the groups of people listed below involve problematic consent, and are dealt with separately, as follows: 

corporations (people acting on behalf of a company)

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people who have a mental impairment

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young people (minors)

bankrupts

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prisoners

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1.1.6 Illegal and Void Contracts The law will not enforce all contracts. There are some categories of contract to be wary of. August 2014

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Where a contract is illegal, this may affect its enforceability. Contracts that are illegal by statute will be regulated as to enforceability by the statute; thus the statute will need to be read and interpreted. Contracts absolutely prohibited by statute will be void, whether the parties know of the illegality or not. However, where one party performs an otherwise legal contract in a manner that breaches legislation, the other party, if having no knowledge of the facts giving rise to the illegality, can still enforce the contract or recover damages for breach of it. They may also recover money or other property transferred under the contract. Contracts made void by statute are treated differently; while they remain valid contracts, the courts will not enforce them. Again, the precise extent of the enforceability of, or the recovery of any money paid under, a void contract will depend on the particular statute. Certain types of contracts are illegal at common law, because they are contrary to the public good. These include contracts: 

to commit a crime, a tort or a fraud

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which are sexually immoral

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which prejudice public safety, including good relations with other states or countries

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which prejudice the administration of justice

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which tend to promote corruption in public life

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to defraud the revenue

Illegally formed contracts are generally void and unenforceable by either party at common law. Therefore, property or money transferred cannot be recovered. Where legally formed contracts are performed in an illegal manner (i.e. the illegal conduct was not an intended or required part of the contract but merely incidental to the way it happened to be performed) then the contract is not void, but: 



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no remedies are available to the guilty party the innocent party retains all rights and remedies (provided they did not know the contract was to be performed illegally) Certain types of contracts are void at common law, being contrary to the public good. These include contracts

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to oust the jurisdictions of the courts

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prejudicial to the status of marriage

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in restraint of trade (unless the restraint is reasonable both between the parties and in the public interest). The courts here will look at the relative bargaining power of the parties. Restraint imposed between equals is viewed with more favor than, for instance, a contract between an employer and employee in unequal bargaining positions.

The general rule is that the contract is void only so far as it is contrary to the public good; it is not void entirely. That is, the offending part can be removed provided that the rest of the contract continues to make sense. However, contracts illegal at common law are not "severable"; that is, the "illegal" parts of the contract cannot be removed or severed from the "legal" parts. Money paid or property transferred under a contract that is void at common law may be recoverable because the effect of the contract being void is that there is no contract, so that the parties should be put back to their original position. Other kinds of conduct that might or might not affect the enforceability of a contract are covered by the Trade Practices Act, which include: 

prohibitions against

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misleading or deceptive conduct; unconscionable conduct

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misrepresentation in particular matters

EXERCISE 1 – OFFER AND ACCEPTANCE

1. Choice a small job/task that you have performed in the past. Give a clear description of the ‘offer and acceptance’ that best described the activity.

Reflect back on your past work experiences and what you know of the term ‘consideration’.

2. Give two examples of what you believe could be accepted as fair consideration.

3. Following the above give two examples of what would not be accepted as fair consideration.

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SECTION 2 – INTRODUCTION TO CONTRACTS (Part 2) 1.2

Legislation That Impacts Construction Works

In additional to contractual requirements, the following legislation may also impact construction work. Although an in depth discussion regarding each of these Acts is beyond the scope of this course, participants in the construction industry should be familiar with their existence. 

Occupational Health and Safety Act 2004 (Vic)

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National Greenhouse Energy Reporting Act 2007 (Cth)

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Information Privacy Act 2000

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Australian Government Building and Construction OHS Accreditation Scheme

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Building and Construction Industry Improvement Act 2005 (Cth)

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Corporations Act 2001 (Cth)

Environmental Protection Act

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Copyright Act 1968 (Cth)

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Native Title Act 1993 (Cth)

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Electrical Safety ( Network Assets) Regulations 1999 (Vic)

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ISO:2008 Security of Payment Act (VIC)

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Trade Practices Act 1974 Workplace Relations Act 1996

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National Code of Practice for the Construction Industry (Code) and the Australian Government Implementation Guidelines for the National Code of Practice for the Construction Industry, August 2009 (Guidelines)

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GST Act

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Security of Payment Act 2002

ATTACHMENT: RELEVANT LEGISLATION

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EXERCISE 2 – IMPACTING LEGISLATION

List as many types of Legislation that impacts our work (list at least 5) 1. 2. 3. 4. 5.

Answers:

In additional to our contractual requirements, the following legislation may impact our work: 

Rail Corporations Act 1996

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Rail Safety Act 2006 (VIC)

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National Greenhouse Energy Reporting Act 2007 (Cth)

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Information Privacy Act 2000

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Workplace Health and Safety Legislation

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Corporation Act 2001 (Cth)

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Environmental Protection Act

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Copyright Act 1968 (Cth)

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Native Title Act 1993 (Cth)

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Electrical Safety ( Network Assets) Regulations 1999 (Vic)

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Occupational Health and Safety Act 2004 (Vic)

ISO:2008

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AS3666, AS1851 etc depending on what are required to provide

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Trade Practices Act

1.3

Contract Components

Engineering contracts are typically made up of a number of usual documents:

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the general conditions of contract

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special conditions

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the drawings

the specification

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the schedule of quantities, rates and prices

The technical description of the work to be undertaken in the contract is contained in the drawings and the specification. The schedule of quantities, rates and prices describes the amount of work and its costs. The general conditions of contract and the special conditions describe the rights and obligations of the parties. The general conditions are intended to be common to all projects while the special conditions are particular to each project. Additionally, and also part of the contract, there will be: 

the tender (if any)

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the instrument of agreement

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the correspondence between the parties The tender is the contractor’s offer to do the work, usually for a sum of money. Once accepted a binding contract is formed. The instrument of agreement is an encompassing document that identifies all the documents that the parties agree to go to make up the contract. The instrument of agreement is not always used. Any relevant correspondence between the parties such as changes to the specification, drawings etc. would also usually form part of the contract.

1.3.1 The general conditions of contract The general conditions of contract contain the rights and obligations of the parties that are considered sufficiently applicable across all projects. An example is Australian Standard AS2124 - “General Conditions of Contract”. However there are other standard conditions published by various professional bodies. There are advantages in having standard conditions. At the tendering stage, the contractor is aware from past experience of the risks that he is expected to carry. At the contract administration stage he is aware from past experience of the procedures to follow. In dispute resolution he may be aware from legal precedents of his standing and his chances of winning the dispute. Textbooks and manuals are developed by the legal and engineering communities based on these standard conditions. The table below shows the list of contents of AS2124. From this you can see the type of information covered in a typical set of general conditions.

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CONTENTS

CONSTRUCTION OF CONTRACT INTERPRETATION NATURE OF CONTRACT BILL OF QUANTITIES SECURITY, RETENTION UNDERTAKINGS

MONEYS

AND

PERFORMANCE

EVIDENCE OF CONTRACT SERVICE OF NOTICES CONTRACT DOCUMENTS ASSIGNMENT AND SUBCONTRACTING SELECTED AND NOMINATED SUBCONTRACTORS PROVISIONAL SUMS LATENT CONDITIONS PATENTS, COPYRIGHT AND OTHER INTELLECTUAL PROPERTY STATUTORY REQUIREMENTS PROTECTION OF PEOPLE AND PROPERTY CARE OF THE WORK AND REINSTATEMENT OF DAMAGE DAMAGE TO PERSONS AND PROPERTY OTHER THAN THE WORKS INSURANCE OF THE WORKS PUBLIC LIABILITY INSURANCE INSURANCE OF EMPLOYEES INSPECTION AND PROVISIONS OF INSURANCE POLICIES CLERK OF WORKS AND INSPECTORS SUPERINTENDENT SUPERINTENDENT’S REPRESENTATIVE CONTRACTOR’S REPRESENTATIVE CONTROL OF SUBCONTRACTORS

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CONTRACTOR’S

EMPLOYEES

AND

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SITE SETTING OUT THE WORKS MATERIALS, LABOUR AND CONSTRUCTIONAL PLANT MATERIALS AND WORK EXAMINATION AND TESTING WORKING HOURS PROGRESS AND PROGRAMMING OF THE WORKS SUSPENSION OF THE WORKS TIMES FOR COMMENCEMENT AND PRACTICAL COMPLETION DELAY AND DISRUPTION COSTS DEFECTS LIABILITY CLEANING UP URGENT PROTECTION VARIATIONS DAYWORK CERTIFICATES AND PAYMENTS PAYMENT OF WORKERS AND SUBCONTRACTORS DEFAULT OR INSOLVENCY TERMINATION BY FRUSTRATION TIEM FOR NOTIFICATION FOR CLAIMS DISPUTE RESOLUTION WAIVER OF CONDITIONS

ANNEXURE PART A

APPROVED FORM OF UNCONDITIONAL UNDERTAKING ANNEXURE PART B

INDEX TO GENERAL CONDITIONS OF CONTRACT AS 2125AUSTRALIAN STANDARD GENERAL CONDITIONS OF TENDERING AND FORM OF TENDER AS 2127AUSTRALIAN STANDARD FORM OF FORMAL INSTRUMENT OF AGREEMENT

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Table – (AS2124-1992) – Table of Contents EXERCISE 3 – CONTENTS OF A CONTRACT

Review the standard contract contents here and highlight those that you feel are most important to your work. CONTENTS

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37.

CONSTRUCTION OF CONTRACT INTERPRETATION NATURE OF CONTRACT BILL OF QUANTITIES SECURITY, RETENTION MONEYS AND PERFORMANCE UNDERTAKINGS EVIDENCE OF CONTRACT SERVICE OF NOTICES CONTRACT DOCUMENTS ASSIGNMENT AND SUBCONTRACTING SELECTED AND NOMINATED SUBCONTRACTORS PROVISIONAL SUMS LATENT CONDITIONS PATENTS, COPYRIGHT AND OTHER INTELLECTUAL PROPERTY RIGHTS STATUTORY REQUIREMENTS PROTECTION OF PEOPLE AND PROPERTY CARE OF THE WORK AND REINSTATEMENT OF DAMAGE DAMAGE TO PERSONS AND PROPERTY OTHER THAN THE WORKS INSURANCE OF THE WORKS PUBLIC LIABILITY INSURANCE INSURANCE OF EMPLOYEES INSPECTION AND PROVISIONS OF INSURANCE POLICIES CLERK OF WORKS AND INSPECTORS SUPERINTENDENT SUPERINTENDENT’S REPRESENTATIVE CONTRACTOR’S REPRESENTATIVE CONTROL OF CONTRACTOR’S EMPLOYEES AND SUBCONTRACTORS SITE SETTING OUT THE WORKS MATERIALS, LABOUR AND CONSTRUCTIONAL PLANT MATERIALS AND WORK EXAMINATION AND TESTING WORKING HOURS PROGRESS AND PROGRAMMING OF THE WORKS SUSPENSION OF THE WORKS TIMES FOR COMMENCEMENT AND PRACTICAL COMPLETION DELAY AND DISRUPTION COSTS DEFECTS LIABILITY

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38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48.

CLEANING UP URGENT PROTECTION VARIATIONS DAYWORK CERTIFICATES AND PAYMENTS PAYMENT OF WORKERS AND SUBCONTRACTORS DEFAULT OR INSOLVENCY TERMINATION BY FRUSTRATION TIEM FOR NOTIFICATION FOR CLAIMS DISPUTE RESOLUTION WAIVER OF CONDITIONS

ANNEXURE PART A

APPROVED FORM OF UNCONDITIONAL UNDERTAKING ANNEXURE PART B

IDEX TO GENERAL CONDITIONS OF CONTRACT AS 2125AUSTRALIAN STANDARD GENERAL CONDITIONS OF TENDERING AND FORM OF TENDER AS 2127AUSTRALIAN STANDARD FORM OF FORMAL INSTRUMENT OF AGREEMENT 1.3.1.1

Special Conditions

Since engineering projects are unique, there will always be a need to cater for the particular characteristics of each project. From a contractual viewpoint such information is contained in the special conditions. They are supplementary to the general conditions and are often found as annexures to the general conditions. Typical details included in the special conditions would be the project completion date, damages payable for late completion, peculiar work restrictions and so on. 1.3.1.2

The Drawings

The drawings are a pictorial representation of the project and in conjunction with the specification give the technical description of the work. The drawings and the specification should be developed in a complementary way. Repetition of information between drawings and the specification should be avoided.

1.3.1.3

The Specification

The specification gives a description of the work and any mandatory requirements regarding quality of materials and work practices. It finds use in the preparation of bids and also surfaces again in deciding disputes on the standard of the finished work.

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Goods specifications use plain clear language. They either specify the method or the result of the finished work. A specification is a detailed description of the work to be performed, showing matters which do not appear from the drawings. The specification begins with a section on General Conditions and then deals with technical matters trade by trade. The specification may be, but is not ordinarily, contained in the bills of quantities. Some humorous examples from actual specifications (definitely not to be emulated): 1. The Contractor shall submit his claim to the Engineer and his decision shall be final (etc). 2. The Contractor shall be paid for not more than a trench the width of which shall be less than the diameter of pipe plus 18 inches and more than the diameter of the pipe plus 12 inches. 3. If the engineer deems any employee of the Contractor to be inefficient or dishonest he shall be dismissed forthwith. 4. The Contractor shall leave the site in the same condition when the work is finished as it was before operations were begun, and shall be cleaned of all rubbish to the satisfaction of the engineer. 5. The material for the embankment shall be obtained as far as possible from the road. 6. When completed, the Contractor shall leave the job in a neat and orderly fashion. 7. After the pipe is laid the trench shall be backfilled with bulldozers. 8. The Contractor shall make monthly claims for extra work with invoices attached to the engineer. 9. The ready-mix subcontractor shall be in position at the forms 20 minutes before the concrete placement begins and shall remain in position until 20 minutes after the concreting is finished. 10. All the water for the concrete in the marine structure shall be passed by the engineer.

1.3.1.4

The Schedule of Quantities, Rates and Prices

This document breaks down the work into its various classes and within each class into its various units. The schedule (or bill) of quantities is particularly useful when preparing bids. The schedule of rates which attaches cost rates to each work unit is used in establishing progress payments and in pricing variations (changes) to the work scope. August 2014

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Prime cost (pc) items are items which are known to be in the work but for which no detailed cost has been established. For such items the owner may nominate a certain amount of money (an allowance) in the schedule, to be adopted by all contractors. The contract sum is later adjusted when the real cost of the items are known. Provisional quantities and amounts in the schedule of quantities are estimates of quantities and costs of labour and materials to cover parts of the work which cannot be realistically priced at the tender stage. Unknown work such as rock excavation, connection of services etc. fit this category. After the work is done the cost is adjusted in line with the actual cost. EXERCISE 4 – SCHEDULE OF QUANTITIES

1. Some owners do not include a schedule (bill) of quantities in the tender documents for fear that if there are errors in the quantities they will be the subject of a later claim by the contractor. In such cases all tenderers have to prepare their own schedule of quantities and this represents a large duplication of effort. What are your views on this?

2. The term ‘loophole engineering’ is sometimes used to include situations where the contractor gains (at the owner’s expense) from some error, ambiguity or inconsistency in the contract documents. What is your view on such a practice?

1.3.1.5

Instrument of Agreement

The instrument of agreement is an optional document maybe no more than one or two pages, and identifies the contract documents, the work, the price and the parties.

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AUSTRALIAN STANDARD FORM OF FORMAL INSTRUMENT OF AGREEMENT

AGREEMENT made the ………….day of……………………………….20… … BETWEEN………………………………………………………

…………………

……………………………………………………………… …..… (the Contractor) AND………………………………………………………… ………………………… …………………………………………………………… …………..(the Principal) IT IS AGREED that the annexed documents marked as follows: TITLE

MARK

Tender dated…………………………………………………………………………………… Letter of acceptance dated…………………………………………………………………… AS 2124-1992 General Conditions of Contract and Annexure. (Agreement Signed and all pages initialled by parties) Specification……………………………………………………………..…………… …………………………………………………………………………………………… Drawing No.s …………………………………………………………………………………………… …………………………………………………………………………………………… ……………………………………………………………………………………………

Other Documents …………………………………………………………………………………………… ……………………………………………………………………………………………

(Use extra sheets if necessary to list all documents and drawings) shall together comprise the contract between the parties AND if the Contractor or the Principal is two or more persons then they shall be bound jointly and severally. Signed by the Contractor………………………………………………………………… Signed by the Principal……………………………….…………………………………

Figure - A typical instrument of agreement

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Different Roles and responsibilities

A contract document generally describes the roles and responsibilities of all parties to the contract. In simple building agreements the Contractor is required to complete the work as described in the contract documentation. The documentation usually prescribes a standard of quality and a timeframe for completion which is the minimum required. The Principal/Client is required to pay the sum of money outlined in the contract for the work to be completed. The Principal is also required to honour the contract that they have signed and are generally precluded from engaging (without consent) another contractor to complete any or all of the works. They are also required to complete the necessary tasks to ensure timely access for the contractor to the work-site in order that works commence. The Superintendent is a role commonly found in construction contracts and is particularly important in the Australian Standard form of contracts. They are generally required to act in a fair and reasonable manner and be impartial in their decision making. The Project Manager has different degrees of responsibility (and acceptance of risk) based upon the nature of their relationship to the Principal/Client. The Barnett Classification System describes four types of project management roles: Consultant PM plays a role which is largely as an adviser to the Principal/Client. As an adviser, the Project Manager may be involved in the development of briefs or general coordination of the project, but would not be responsible for the decisions made by the client. An Executive PM, as for a consultant PM, there would be no responsibilities for cost, quality and time but there may be responsibility for the management of these parameters (via the line management of other consultants) without financial penalty for failure. A Commercial PM is used where there is an emphasis on risk sharing and is sometimes referred to as a Managing Contractor. A commercial project manager would take responsibility for time, cost and quality. A commercial PM is generally acting as an agent of the client. An Entrepreneurial PM, as the name suggests, considers adoption of all risk. An Entrepreneurial PM would generally engage all consultants, direct and appoint contractors and may enter other contracts (such as subcontractors). An entrepreneurial PM is no longer an agent of the client but a vendor of the client.

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1.5

Key Contract Terms

Commercial Operation: the stage when practical/substantial completion of the

Construction Works has been achieved and the Operational Commissioning Tests have been passed. Date of Commercial Operation: the date on which Commercial Operation is

achieved. Delay Liquidated Damages: liquidated damages for delay payable by the

Contractor to the Principal. Design Development: an alteration, change, amendment, enhancement to the

finalisation of the design of the Construction Works. Endorsed Drawings and Specifications: the drawings and specifications

prepared by the Contractor, and then approved by the Principal. Equipment: equipment, machinery, apparatus, materials, etc. to be provided and

incorporated in to the Facility by the Contractor. Facility: the facility to be designed, engineered, procured, constructed,

equipped, commissioned and delivered by the Contractor. Government Approval: an authorisation, consent, approval, licence, lease,

ruling, permit, required from a Government Authority relating to the Construction Works. IP Rights: intellectual property rights (present or future) including rights

conferred under statute, common law and equity, including those in and in relation to inventions, patents, designs, copyright, registered and unregistered trademarks, trade names, brands, logos and names. Also included are circuit layouts and confidential information and all other rights resulting f rom intellectual activity in the industrial, scientific, literary or artistic fields. Major Subcontract: a subcontract under which a Major Subcontractor (above an

agreed amount) provides services, Equipment costing more than some specified amount or involving certain critical components or services of the Construction Works. Milestone: the dates of completion of phases of the Construction Works, the

Operational Commissioning Tests and Commercial Operation. Operation and Maintenance Manual: Facility instructions of the operation

(including anticipated modes of operation during normal and emergency conditions) and maintenance of the Facility produced by the Contractor. Operational Commissioning Tests: tests and criteria described in the Contract,

to be achieved as a pre-condition to commencing operation. Training Works: training programs, courses and development of the technical

and support systems to be carried out by the Principal or its subcontractors during the Construction Period. August 2014

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1.6

Contractor’s Obligations

The Contractor’s obligations should include the provision of all Equipment and the performance of all works and services required for the design, engineering, procurement, construction, equipping, commissioning and delivery of the Facility and the completion of the Construction Works in accordance with the Contract. The Contractor should be required to do the following: 1.6.1 Completion of the Design and Construction Works The Contractor should perform all such work, including the required design and construction work, and supplying all Equipment, (including work and Equipment not specifically mentioned in the Contract but which can be reasonably inferred from the Contract). 1.6.2 Execution of the Construction Works The Contractor should execute the Construction Works in a professional, efficient, cost effective, safe and environmentally responsible manner. This should be done in accordance with the Endorsed Drawings and Specifications, all Government Approvals and all applicable Laws. 1.6.3 Operation of facility The Contractor should be required to operate and maintain the Facility in accordance with the Contract, for the agreed operation period, commencing on the Date of Commencement of Operations in accordance with the Contract requirements: a)

keeping the Facility available

b)

operating the Facility to specified performance levels

c)

maintaining the Facility

d)

reporting

e)

delivering back the Facility at end of the Contract

1.6.4 Government Approvals The Contractor should acquire all Government Approvals which are necessary for the performance of the Construction Works. 1.6.5 Industrial Relations The Contractor should be responsible for industrial relations connected with the performance of the Construction Works. It should keep the Principals Representative informed of any disputes with or demands by its subcontractors workforce and any other circumstances which could result in industrial action affecting the normal working on the site. The Contractors and the Subcontractors employees should be obliged to work in accordance with the relevant awards, site agreements and the arrangements in place at the time. August 2014

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1.6.6 Services The Contractor should obtain all services at or in the vicinity of the site which are necessary for the performance of the Construction Works and the ongoing operation of the facility. 1.6.7 Operation and Maintenance Manual The Contractor should prepare and submit for the approval of the Principal’s Representative an Operation and Maintenance Manual, including a process for the following components: a)

the engagement and training of appropriately qualified operations and maintenance personnel to provide services for the operation and maintenance of the Facility

b)

the operation and maintenance of the Facility in an environmentally and aesthetically acceptable manner

c)

all relevant instructions manuals and special directions from the relevant manufacturers of any equipment and provision of such written instructions which are not available from such manufacturers

d)

establishment of an inspection and maintenance system

e)

any reports to be provided by the Contractor

1.6.8 “As executed” Drawings The Contractor should provide to the Principal a complete, accurate and correct set of “as executed” drawings. Attachment – Independent Contractors FAQs

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EXERCISE 5 – KEY CONSTRUCTION CLAUSES KEY CLAUSE

WHY IS IT IMPORTANT

Performance of works Inspection documentation and directions System Acceptance Payment Notices Client Reviews Conforming Works Final Acceptance Liquidated Damages Time is of the Essence

EXERCISE 6 –CONTRACT TYPES

Within your organisation, find a copy of the contract being used on a recent project and answer the following questions: 1. What type of contract is it? (Design and Construct? Design? Construct?)

2. Who wrote the contract? (Australian standard or other party?) details.

3. Review the list of Contractor’s obligations in section 1.6. additional responsibilities in this instance? List them:

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Are there any

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Principal’s Obligations

The Principal should be required to do the following: 1.7.1 Payment The Principal should make timely payment to the Contractor of all amounts due under the Contract as and when due. 1.7.2 Access to and possession of Site The Principal is responsible for acquiring and providing legal and physical possession of the Site and providing possession and use of and access to all other areas reasonably required for the proper execution of the Construction Works, and to give possession/access on or before the Commencement Date. 1.7.3 Site Information The Principal should make available to the Contractor prior to the Commencement Date such data on climatic, hydrological and general conditions relating to the Site as should have been obtained from the Principal from investigations undertaken relevant to the Works and/or the Site. 1.7.4 Contract Price The Principal is to pay the Contract Price (usually a fixed lump sum for the Design & Construct Work , with some payment regime for the Operation Phase). 1.8

Key Commercial Issues

The DBO (Design, Build and Operate) contract will usually include terms negotiated commercially providing for the following: 1.8.1 Security The Contractor should be required to provide the security specified in the Contract (this is usually a major commercial issue) in favour of the Principal at the times, and in the amount, manner and form specified in the Contract. The Contractor will usually be required to provide the security, at the date of execution of the Contract, in the form of an on demand, unconditional and irrevocable bank guarantee, to secure the due performance of the Contract. 1.8.2 Intellectual Property rights The Contract usually provides for the following: 1. all intellectual property rights created in relation to the project are vested in the Principal 2. the Contractor agrees not to contest the title to IP Rights owned by the Principal August 2014

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3. the Principal will usually grant the Contractor a non-exclusive royalty-free non-transferable licence to use, reproduce, modify and adapt the Principal’s IP Rights for the sole purpose of performing its obligations under the Contract 4. the Contractor will usually be asked to warrant that the execution of the Contract should not infringe any IP Rights of any third party. 1.8.3 Subcontracts Prior approval of the Principal’s Representative should be required for Major Subcontracts, where the subcontract value exceeds an agreed amount. The Contract should impose the following restrictions on the Contractor when subcontracting: 1. The Contractor should only engage Subcontractors who are safe, environmentally responsible, careful, skilled, experienced, and competent in their respective disciplines. 2. The Contractor should provide to the Principal full particulars in writing of the Construction Works to be subcontracted and the name and address of the proposed Major Subcontractor, the proposed site for the subcontracted work, information establishing the financial, technical and personnel capacity (including details of previous experience and safety and environmental records) to successfully execute such subcontracted work. 3. The Contractor should ensure that the Major Subcontractors enter into a tripartite agreement including the Principal. Subcontracts should include provisions that the Subcontractor undertakes to the Contractor obligations and liabilities which should enable the Contractor to discharge the Contractor’s obligations and liabilities to the Principal under the terms of the Contract in respect of the subcontracted work. 1.8.4 Design The Contractor is responsible for the design of the Construction Works in accordance with the Specifications. The Contract should provide that the Contractor produce drawings and specifications for approval by the Principal, and, when approved by the Principal, endorsed by the Principal to become the Endorsed Drawings and Specifications. The Contractor is then required to construct the Works in accordance with the Endorsed Drawings and Specifications. The approval by the Principal of the Endorsed Drawings and Specifications does not affect the obligations of the Contractor under the Contract. 1.8.5 Procurement The Contractor is to procure the Equipment and transport it, at its own risk and expense, to the Site.

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1.8.6 Quality assurance The Contractor should establish, implement and maintain a quality assurance and control program to achieve the following: 





that purchased purchased Equipment, Equipment, the Facility and all related documentation meet the requirements of the Contract; that the quality of the Facility not be degraded degraded during during receiving, receiving, storing, transporting, handling, erection, installation, inspection and testing; and that systems, systems, namely namely Equipment and structures are fabricated, installed and erected in strict compliance with all applicable instructions.

1.8.7 Substantial Completion The Contractor is required to bring the Works to Commercial Acceptance by the Date for Commercial Acceptance. 1.8.8 Operational Commissioning Upon Practical/Substantial Completion, the Contractor should be required to carry out Operational Commissioning Tests described in the Contract. 1.8.9 Manufacturer’s warranties The Contractor should obtain for the Principal, from the respective manufacturers, the best available and legally enforceable warranties for the Equipment extending extending to at least the end of the Defects Defects Liability Period, requiring requiring the respective manufacturers at their expense to remove and replace Equipment which are defective. 1.8.10 Completion guarantee The Contractor will be required to guarantee that it will achieve Commercial Operation of the Facility by the Date for Commercial Operation. 1.8.11 Delay Liquidated Damages Where the Contractor fails to attain Commercial Operation of the Facility by the Date for Commercial Operation, the Contractor will be required to pay to the Principal - Delay Liquidated Damages. 1.8.12 Defects Liability Period The Contractor guarantees that the Facility or any part is free from defects in design and engineering, the Furniture and Fittings, the Equipment and the Construction Works. If, during the Defects Liability Period, any defect is found in the design and engineering, the Equipment or the Construction Construction Works, the Contractor Contractor should, at such times as the Principal reasonably requires and in a manner which causes as little disruption to the operation of the Facility as reasonably possible, August 2014

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promptly and at its cost repair, replace or otherwise make good (as the Contractor may at its discretion determine) such defect as well as any damage to the Facility caused by such defect. 1.8.13 Transfer of ownership and risk The Contract will usually provide that the ownership of the Equipment transfers to the Principal: 1. when the relevant relevant Equipment is identified as being intended solely for incorporation, use or consumption in the Construction Works; or 2. where such such Equipment Equipment cannot cannot reasonably be so identified, at the time when it is incorporated, used or consumed in the Construction Works; or 3. in any event no later than payment of of the relevant relevant progress claim the value of which includes the Equipment. 1.8.14 Care of Construction Works The Contractor is always made responsible for the care and custody of the Construction Works until the Date of Commercial Operation and is required to make good at its own cost any loss or damage that may occur to the Construction Works from any cause whatsoever prior to that date. 1.8.15 Insurance The Contract should provide that the Contractor is to arrange from the Commencement Date, for the relevant periods, and amounts: 1. construction all risks insurance policy; 2. public liability policy covering legal liability to third parties for personal injury or property damage; 3. professional indemnity; 4. workers' compensation; 5. other insurances (eg motor vehicle, marine, etc); under policies containing terms , exclusions and excesses, approved by the Principal. 1.8.16 Other Terms The DBO Contract will include terms (similar in most respects to construction contracts) in relation to: Site conditions Unforeseen conditions Force majeure August 2014

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Delay costs Termination Termination for the Principal’s convenience EXERCISE 7 – 7 – KEY KEY COMMERCIAL ISSUES

Refer back to a project you worked on as a contractor on a construction project. If you have not yet done any construction contract work, select a project pr oject that you would like to work on as a contractor. Many key commercial issues are associated with construction contract work. List three key commercial issues that you have encountered before, or think that t hat you may encounter. Give a description of these issues and how they were/can be resolved.

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Concepts of Contract Law

It is important to understand that contract law differs from other branches of law in most jurisdictions. Common Law generally establishes the rights and duties that the law will enforce, however, Contract law regulates the relationships between people who have agreed to do something mutually beneficial. When disputes arise with contractual agreements, a court of law will refer to any contract and associated documentation to determine rights and/or obligations of any of the parties to a contract. A breach of a contract entitles the injured party to seek damages in the form of money from the person guilty of the breach. In general, the damages must reflect the cost to put the injured party into the same position they would have otherwise been in without the breach occurring. This essentially means that damages cannot provide profit to an injured party. 1.10 Breach of Contract

1.10.1 What Is a Breach of Contract? A breach of contract is a failure to fulfill the duties under the contract terms. A contract can be breached in the following ways: 





One party does not perform as he or she promised One party does something that makes it impossible for the other party to perform the duties under the contract One party makes it clear that he or she does not intend to perform the contract duties

1.10.2 Damages Award When one party has breached the contract, the party who has performed is entitled to various remedies for the breach. One of the more common remedies for a breach of contract is a damages award. This is monetary compensation that must be made by the breaching party to compensate the other party for losses and other expenses connected with the breach. A damages award may include: 



Consequential damages - This requires the breaching party to pay the nonbreaching party an amount that puts the non-breaching party in the same position they would have been in if the contract was performed Punitive damages - Courts can force the breaching party to make a payment as a punishment for the breach of contract

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



Liquidated damages - The parties agree, at the time they make the contract, that if one party breaches the contract, the breaching party should pay a specified sum. Thus, this is an amount written in the contract Nominal damages - This is a minimal amount provided to the non-breaching party if that party won the case but did not financially lose much

1.10.3 Equitable Remedy In some breach of contract claims, a damages award may not be appropriate, or it may not be allowed under law. In such cases, the court may order an “equitable remedy” rather than a monetary damages award. An equitable remedy consists in the court ordering one or both of the parties to take certain actions to resolve the dispute. Some equitable remedies include: 



Specific performance - A court can require the breaching party to perform their duties under the contract. This is afforded for unique circumstances. Rescission - A court can pretend like the contract never existed. Here, neither party would be required to perform the obligations under the contract. If there has been performance by one party, the court does its best to put that party in the same position he or she was in before the contract was formed.

1.10.4 The Time Limit for Filing a Breach of Contract Lawsuit Every state has a certain time limit, called a statute of limitations, in which a lawsuit must be filed after a breach of contract. If a party wants a remedy for a breach, and they do not file within this time limit, that party cannot file a lawsuit. The amount of time for filing a breach of contract lawsuit varies by state. ATTACHMENT – How to Sue Someone for a Breach of Contract EXERCISE 8 – CONTRACT REVIEW

Refer back to the contract you sourced for the previous exercise (Section 3). Review the document and answer the following questions: 1. What is the target date for completion of the project?

2. What are the liquidated damages applicable to a failure to meet the target completion date?

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3. What insurances are required to be provided by the Contractor? What approvals process (if any) is in place for the Principal or their agent to review these insurances?

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SECTION 6 – CONTRACT DOCUMENTATION (Part 1) 2

CONTRACT DOCUMENTATION

2.1 The Range of Contract Types

There are a range of contract types which may be attractive on a particular project. The choice of a particular style of project delivery system will depend on many factors, for example: 

ease of design (buildings vs. complex engineering projects)



desire for design flexibility during construction



availability of suitable contractors/project managers and balance sheets of such contractors



political considerations



budget constraints vs. performance of completed project

The choice of any particular project delivery system is made at the commencement of the project. Historically, however, little or inadequate consideration is given to the many types of possible contract structures available for any particular project. In fact, there is an unlimited number of potential project delivery systems based on the above or a combination of any or all of the above which might be suitable to any particular project. The choice will usually depend on factors such as: 



the need for strict cost control the need for flexibility in what is to be constructed throughout the construction period



the complexity of what is to be constructed



the in-house resources of the Principal



the expertise of the likely tenderers



particular budget constraints



financing considerations On major public sector projects the use of standard form fixed-price contracts would be more prevalent than on similar scale private sector projects.

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2.2

Standard Form Construction Contracts

There are many standard form General Conditions of Contract available for use on construction projects in Australia. AS2124-1992 is the widely-used Standards Association of Australia produced General Conditions of Contract for construction projects. The Standards Association of Australia has, over several editions, hoped to encourage universal use of AS2124 on engineering projects. In particular, in the 1986 revision, and again in the 1992 revision, SAA hoped to discourage the use of the alternative NPWC3-1981 General Conditions of Contract by the public sector in favour of AS2124. AS2124-1992 is the genesis of several hybrid versions of General Conditions of Contract, in particular: AS2124-1992

Construction Works

AS2545-1987

Sub-Contract

AS2987-1987

Equipment Supply and Installation

AS3556-1987

Supply

AS4300-1995

Design & Construct

AS4305-1996

Minor Works

AS4000-1997 is the current version of the Standards Association of Australia General Conditions of Contract for Construction. AS4000-1997 has (theoretically) superseded AS2124-1992 as the Standards Association of Australia produced General Conditions of Contract for construction projects. AS4000-1997 (like its predecessor) has spawned hybrid versions, in particular: AS4000-1997

Construction Works

AS4902-2000

Design & Construct

AS4905-1996

Minor Works (Principal administered)

AS4906-1996

Minor Works (Supt administered)

In fact, AS4000-1997 has been slow to replace AS2124-1992 to date.

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SECTION 7 – CONTRACT DOCUMENTATION (Part 2) 2.3

Types of Contracts

2.3.1 Fixed Price Contracts The traditional form of a construction contract has been a fixed price contract. The general operation of this type of contract requires the Contractor to tender on and then take the risk in relation to the price of the works. The Contractor, irrespective of the actual cost of the works, will be entitled to be paid no more than and no less than the Contract Sum as agreed between the parties prior to commencing the works. In fact, for a number of reasons which are discussed elsewhere in this and related topics, a fixed price contract is rarely performed for exactly the amount of the originally agreed Contract Sum. For example, if the Principal delays the Contractor in obtaining the site, the contract would usually provide for an increase in the Contract Sum. The critical characteristic of a fixed price contract is that the Contractor takes the risk as to the ultimate price and that the parties agree to pay the Contract Sum (as adjusted pursuant to the provisions of the Contract). 2.3.2 Cost Plus The critical characteristic of the cost plus contract is that there is no risk, as to cost, borne by the Contractor. The Contractor and the Principal agree at the time entering into the Contract that the Contractor will perform the works and that the Principal will pay for those works on the basis of the actual cost of the Works to the Contractor. This would also include an agreed fee, usually an agreed percentage of that sum (or some other agreed incentive over and above the actual cost of the works). A cost plus contract is therefore risk-free as to cost for the Contractor. This does not mean, however, that the Contractor is entitled to charge whatever he likes. The Contract will usually provide that the Contractor has to verify and/or justify the cost of the works to be charged under the Contract. Furthermore, one could envisage circumstances where through negligence by the Contractor or some other reason, the Contractor would not be entitled to recover the full cost of those works. There are flexibility reasons why such an arrangement may be attractive from time to time for a Principal. The nature of cost-plus contracting therefore is that the Contractor agrees to perform the works but that the risk as to the final cost of those works is borne by the Principal, not the Contractor (the reverse of the position under the fixed price contract).

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2.3.3 Design & Construct Contract A design & construct contract requires the Contractor to tender on the works described in the Design Brief (prepared by the Principal), and tender not only for the construction of the works described in that Design Brief, but also for the completion of the detailed design consistent with that Design Brief. There are a number of construction reasons which suggest that the design & construct method of contracting has the potential to reduce the overall cost of construction to the Principal. The nature of this type of contract is such that the Principal is able to enjoy the advantages of design efficiencies which Contractors, through their contracting experience, may be able to incorporate into the design of the works which may have the effect of reducing construction cost (this is discussed further below). The Principal is still required to adequately specify (in the Design Brief) the works to be completed for the Contract Sum. The degree to which that work is specified, however, is less than that which would occur under a construction only contract. The accuracy of the Design Brief (which again is discussed further below) is critical to the Principal being able to rely on the design & construct contract.

2.3.4 Project Management Agreement A project management agreement is one in which the Principal contracts not with a Contractor who would perform the construction (or the design and construction) works but with a person who would manage the project on behalf of the Principal. This would happen whether by performing the works in part or wholly himself, or by contracting out part or all of the works on behalf of the Principal, or a combination of all of the above. There is an infinite variety of possible project management contract types. The nature of a project management agreement, however, is that the Principal engages a person to manage the project on its behalf rather than engaging a Contractor to construct the Works. The functions typically performed by a Project Manager therefore are usually more extensive than those which might be performed by a Contractor. Furthermor the risks borne by a project manager under a project management agreement are typically less than, or at least different to, those borne by a Contractor. The essential feature of the project management agreement is that the works to be performed pursuant to the agreement are the necessary management services rather than the contract construction works.

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2.3.5 Construction Management Agreement A construction management agreement is similar in most respects to a project management agreement, except that, typically, the services to be provided by the Construction Manager are restricted to construction activities only (rather than, for example, design activities, site acquisition, leasing activities...). Accordingly, construction management agreements are, typically, similar in structure to project management agreements. The substantive functions to be performed by construction management, typically, include engaging trade contractors on behalf of the Principal, and potentially, the provision of preliminaries for those trade contractors. 2.3.6 Managing Contractor Contract The Managing Contractor Contract might be characterised as a hybrid of a project management/cost-plus/fixed price contract. Typically the features of such a contract would include: 









the Managing Contractor contracts with the Principal to manage the construction of the works on behalf of the Principal the Managing Contractor contracts with the Principal to provide, at a fixed price, or alternatively at a percentage of the total contract price, certain aspects of the works. For example, this may include the preliminaries, including crane hire, site sheds, supervision services etc.) the Managing Contractor may perform all or part of the design services for the Principal the Managing Contractor will arrange the trade packages, tender and enter into the trade contracts on behalf of the Principal and potentially itself perform some of the trade contract works the Managing Contractor will perform the usual supervision and reporting activities required on the project to keep the Principal informed of the progress of the works. The attraction of the Managing Contractor type of contract is its flexibility and the skills which the Managing Contractor may be able to bring to the project to assist the Principal.

2.3.7 Warranted Maximum Price Contract A Warranted Maximum Price Contract is in substance a cost-plus contract between the Principal and the Contractor which in turn is subject to an upper limit (the Warranted Maximum Price). Above this price will be subject to certain conditions and the Contractor will bear the risk as to the costs. Under a Warranted Maximum Price contract, the Contractor is to be paid on a cost-plus basis up to a certain limit. Over and above that limit, the Contractor is August 2014

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not entitled to any further payment. That limit, however, as in the case of the Contract Sum under a Fixed Price Contract, is subject to adjustment in certain circumstances. For example, this would occur where the Principal varies the works or where the Principal causes delay and/or additional cost to the Contractor. The benefit of the Warranted Maximum Price contract is in giving some upper limit degree of comfort as to the total cost of works, provided those works are adequately described as to scope, yet allow the parties to enter into the contract on a cost-plus basis where that is an appropriate vehicle for them. 2.3.8 Build Own Operate Transfer (BOOT) / PPP Recently in Australia there have been a substantial number of major construction projects which have been performed using the BOOT, or BOT vehicle. This type of project is now more usually called a PPP or Public/Private participation project. The basic structure of a BOOT project is that the Contractor agrees with the Principal not only to build the project but to arrange finance for the project and then using that finance to build the project, to own the project for a limited period, to operate the project throughout that period, and then, at the end of that period, to transfer the project to the Principal. Typically, this style of structure is employed on public infrastructure projects where, but for the intervention of private sector financing, the project might not proceed. EXERCISE 9 – TYPES OF CONTRACTS

Complete the following table by giving an example of a construction project that would be suitable for the following types of contracts. Type of Contract

Suitable Construction Project and Description

Fixed Price Contract

Cost Plus Contract

Design and Construct Contract

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Project Management Agreement

Warranted Maximum Price Contract

Build Own Operate Transfer (BOOT) / PPP

ATTACHMENT – Commercial Standard Form Contracts

EXERCISE 10 – Research

1. Complete some research of your own. Identify three (3) projects completed in Australia (list the name and state) under a Build Own Transfer (BOT) or Build Own Operate Transfer (BOOT) model. List two reasons why you think that model was selected for these projects and not a more traditional delivery method (like Design and Construct, or Construction Management).

2. Survey senior personnel in your company. Identify which forms of Construction Contracts have been used in the last 12 months.

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SECTION 8 – CONTRACT DOCUMENTATION (Part 3) 2.3

Fixed Price v Cost-Plus Contracting

2.4.1 What is Fixed Price? In theory, a Fixed Price Contract is one in which the Principal contracts with the Contractor to perform agreed works for a fixed price. Accordingly, irrespective of whether the works actually cost more or less than the agreed Contract Sum, the Contractor is entitled to receive no more than and no less than the Contract Sum at the end of the works. In practice, however, there are a number of ways in which the Contract Sum can (and usually does) alter during the period of construction on the works, including, for example: 1. the Principal failing to deliver the site to the Contractor on time 2. the Principal failing to deliver exclusive access of the site to the Contractor at the agreed time 3. the Principal failing to provide the detailed contract drawings and/or specifications required of the Principal under the Contractor by the agreed time 4. the drawings and/or specifications provided by the Principal having errors or omissions or being incomplete 5. the site having characteristics different from that which was described in the tender documents 6. material to be dealt with on the site being different from that which was anticipated under the tender documents 7. other reasons pursuant to which the Contractor would reasonably be entitled to claim more or less than the Contract Sum on the basis that the works as ultimately performed were different to those works which were described in the tender documents. In fact, as a matter of practice, a Fixed Price Contract is rarely performed for the exact amount of the original Contract Sum. This is not surprising when one considers the nature of a construction contract (in comparison, for example, with a Contract of Sale for land). The nature of a construction contract is such that works as generally described in detailed and complex contract documents are to be performed over an extended period of time, subject to a large number of variable conditions, which the parties need to anticipate and which may bear on the actual cost of construction.

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2.5

Turnkey Contracts

The Fixed Price Contract is different to a true “turnkey” contract. (Unhappily, the word “turnkey” is often used interchangeably with “fixed price contract”, or what are in fact fixed price contracts are wrongly called “turnkey” contracts on particular projects, thereby giving rise to the confusion.) A turnkey contract is one in which the Principal and the Contractor agree on a fixed Contract Sum to be paid upon completion of the works to a particular standard and/or performance criteria, and in relation to which the Principal does not participate in any way in the actual performance of the works but, at the end of the works, is invited to inspect the works and, subject to the works being adequately constructed and performing to the requisite criteria, the Principal then paying the full amount of the Contract Sum and taking over the works. (The Principal is said to simply hand over the cheque, turn the key and commence operation.) In a fixed price contract, by comparison, the Contract Sum is adjusted throughout the contract period. A true turnkey contract, therefore, is more akin to a purchase contract than to a construction contract. 2.6

Cost Control of Cost-Plus Contracts

The Principal may impose a number of cost controls in a cost-plus contract. Capping For example, there may be an overall cap on the Maximum Price (usually referred to as a Warranted Maximum Price Contract), subject to the following: 



the Warranted Maximum Price is subject to the scope of the Works being adequately described the Warranted Maximum Price as adjustable, just as the Contract Sum is adjustable under a fixed price contract.

Trade Contracts Alternatively, the Contractor, although being on a cost-plus basis, may be required to procure all or an agreed part of the works through fixed price trade contracts, each of which is to be vetted and approved by the Principal. The Principal would, with the assistance of the Project Manager, negotiate and enter into prime contracts with the proposed Alliance Contractors, the technology providers and other major contractors as are identified at the time of allocating work/supply contracts between the prime contractors. This structure has been successfully used on a number of major projects around Australia.

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Wherever this project structure has been successful, however, the Principal has been protected from the possibility of unlimited cost overruns by incorporating all of the work (say, 85% of the work) in fixed price trade contracts. The Principal enters into a cost-plus contract with the prime contractor, the work is then contracted out by the prime contractor on a fixed price basis. The prime contractor will be entitled to cost-plus reimbursement by the Principal for those trade contract prices. Effectively, the Principal has the benefit of fixed price contracting. 2.7

Features of the Trade Contracts

The Contractor would be required to perform the works within a number of trade contracts. There are a number of contractual protections (for the Principal) which should be incorporated into those trade contracts to ensure the time/cost targets are ultimately met on the project: a)

the trade contracts should be fixed price

b)

the terms of the trade contracts generally should be agreed between the Principal and the Contractor

c)

the trade contracts should be put out to open tender

d)

there should be an approval process whereby the Principal may review the proposed tender process and shall have final approval of any particular trade contract (subject to, if necessary, such trade contracts having a value above a minimum trade contract value)

e)

the trade contracts should provide adequate security for the performance of the contract and provisions for liquidated damages

Subject to these protections, the Principal would have effective contractual remedies in respect of the works should there be a failure to perform in accordance with the targets ultimately developed between the Principal and the Contractor. EXERCISE 11 – INTERVIEW A PROJECT MANAGER

1. Interview an experienced project manager. Identify the circumstances where a client might chose a fixed price contract. Similarly, identify the type of project where a cost plus contracting arrangement is used. Discuss and record the differences between the two.

2. Consider the construction of a major hospital building. List the major trade contracts you would expect to have in place and consider the difficulties that may result from having different contracts in place (consider issues that may arise when a drainage contractor may wish to work at the same time as an electrical contractor). August 2014

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SECTION 9 – CLAIMS, CERTIFICATES AND PAYMENTS 3 3.1

3. PROGRESS CLAIMS/PROGRESS CERTIFICATES/PROGRESS PAYMENTS Progress Claim

In all traditional standard form contracts, the Contractor is required to periodically deliver, to the Superintendent, progress claims for payment under the contract. The Contractor is required to submit details supporting its claim for payment. In most standard form contracts in Australia, the Superintendent is required to assess those progress claims (by reference to the degree of completeness and the quality of the materials and workmanship). For example, in AS2124-1986, clause 42.1 provides, in part, as follows: “ 42.1- Payment Claims, Certificates and Time for Payment. At the times for payment claims stated in the Annexure...the Contractor shall deliver to the Superintendent claims for payments supported by evidence of the amount due to the Contractor and such information as the Superintendent may reasonably require. Claims for payment shall include all amounts then due to the Contractor under the Contract or for breach thereof.”

Accordingly the Superintendent must calculate the amount due at that time, paying attention to: a)

work carried out by the Contractor in performance of the contract

b)

claims for breach of contract.

This is potentially a complex calculation. But perhaps the more complex area is the assessment of payment claims for "breach" of contract. Claims for breach of contract might include, for example: 







additional payment to the Contractor for latent conditions claims for delay costs arising out of extensions of time which were the fault of the Proprietor claims for variations which arose out of the Proprietor's failure to give access to the site, or additional work caused by faulty design documentation claims for variations arising out of directions by the Superintendent relating to works not included in the contract/tender documents

In addition, in recent times, the Superintendent might expect from time to time to receive even more complex claims, such as:

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





restitution/quantum meruit claims (where the works as constructed are so different from that tendered on, that the contract sum is no longer applicable) claims for negligence (for example, for additional works caused by negligent preparation of the design drawings specifications) claims for misleading and deceptive conduct under the Trade Practices Act (Cth) and/or the state Fair Trading Acts

ATTACHMENT – Example Progress Claim Form

ATTACHMENT – Progress Claim by Stage

3.2

Progress Certificate

When the Superintendent has assessed the progress claim, he then issues the Progress Certificate. For example, clause 42.1 of AS2124-1992 provides: Within 14 days after receipt of a claim for payment, the Superintendent shall issue to the Principal and to the Contractor a payment certificate stating the amount of the payment which, in the opinion of the Superintendent, is to be made by the Principal to the Contractor or by the Contractor to the Principal. The Superintendent shall set out in the certificate the calculations employed to arrive at the amount and, if the amount is more or less than the amount claimed by the Contractor, the reasons for the difference

It is critical that the progress certificate be issued by the time stated in the Contract (under some contracts, if the certificate is not issued within the time, the Contractor is entitled to payment of the whole claim.

Where the Superintendent is not satisfied by the material submitted by the Contractor, the correct course is to make the assessment rather than wait for the additional information (in the absence of written agreement from the Contractor). 3.3

Progress Payment

The Progress Certificate is provided to both the Principal and the Contractor. To the extent that either party disputes that Progress Certificate, they are required under the Contract to take certain steps within a particular number of days to dispute that Progress Certificate.

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Failing any dispute arising in relation to the Progress Certificate, the Principal then becomes contractually obliged to make the Progress Payment to the Contractor, in accordance with that Progress Certificate, within the number of days as set out in the Contract. For example, clause 42.1 of AS2124-1992 provides: “ Subject to the provisions of the Contract, within 28 days after receipt by the Superintendent of a claim for payment or within 14 days of issue by the Superintendent of the Superintendent's payment certificate, whichever is the earlier, the Principal shall pay to the Contractor or the Contractor shall pay to the Principal, as the case may be, an amount not less than the amount shown in the Certificate as due to the Contractor or to the Principal as the case may be.”

Progress certificates, and progress payments, do not constitute evidence that the works are properly performed, or that they have been accepted. Progress certificates, and progress payments, merely constitute interim assessments, and interim payments on account. The Principal’s obligation to pay on the Progress Certificate is critical. The failure to pay on a certificate has caused serious contractual problems to principals, wrongly believing that this obligation could be avoided because of some other factor (for example, defects, lateness, etc, not, for some reason addressed in the progress certificate.) EXERCISE 12 – PROJECT CLAIMS

Within your organisation, identify a project manager who can help you to locate a copy of a project claim and related progress certificate from a recent project. Review these documents against each other and identify whether there were any differences between the two. If there were, discuss why the amount shown on the payment certificate was different to the amount claimed. Was this difference substantiated (ie was it explained – and linked to the contract?). If there was no difference, review the contract and list the clauses that outline the requirements of the payment claim and confirm whether or not the claim you see meets the requirements of the contract.

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SECTION 10 – CASH RETENTION / BANK GUARANTEE SECURITY 4 4.1

CASH RETENTION / BANK GUARANTEE SECURITY Prior to Practical Completion

The Superintendent, in issuing the Progress Certificate, will calculate the cash retention, if any which is to be taken into account in making any progress payment. The convention, historically, was for the Contractor to provide security for the performance of his obligations to the Principal, by the Principal deducting cash retention from progress payments, usually of the order of 5% of the value of work completed to any point, up to the Date of Practical Completion. The purpose of allowing the deduction of cash retention from the value of works completed, up to the point of Practical Completion, was to enable the Principal, should the need arise, to use those funds to pay others (if necessary) to rectify and/or complete the Contract Works in part or in total as the case required. In recent times, in fact, cash retention security has been substantially replaced by bank guarantee security. From the time of commencing the work up until practical completion, therefore, when issuing Progress Certificates, the Superintendent will usually note the amount of cash retention to be deducted, or not, from such Progress Payments. The Contract will usually provide that such cash retention or security is to be returned, in part (usually 50%) at Practical Completion. 4.2

Defects Liability Period

The Contract will usually expressly provide for a Defects Liability Period. Typically such a period might be of the order of 12 months on a major construction contract and could be as little as 3 months on a minor construction contract. It may also conceivably be for 2 years or more on a complex industrial project requiring lengthy commissioning periods for equipment. In practice, however, on major works, the Defects Liability Period would usually be of the order of 12 months. During that Defects Liability Period, the Contractor will usually be expressly obliged to return to the site and rectify defects which become apparent. Accordingly, at practical completion, part of the cash retention or bank guarantees will usually be returned to the Contractor. The balance of the cash retention or bank guarantees will be retained throughout the Defects Liability Period. That security which is retained throughout that period is retained for the purpose of, should the need arise, the Principal rectifying such defects.

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4.3

Final Completion

At the end of the Defects Liability Period, usually referred to as Final Completion, the Contractor will usually be required to submit a Final Payment Claim. This will include all claims which he wishes to make under the Contract. The Contract will usually expressly exclude any further claims being made by the Contractor under the Contract. The Contractor is usually expressly barred from bringing any further claims under the Contract (remembering that the work has now been completed for 12 months or more). For example, clause 42.7 of AS2124-1992 provides: “ Final Payment Claim Within 28 days after the expiration of the Defects Liability Period, or where there is more than one, the last to expire, the Contractor shall lodge with the Superintendent a final payment claim and endorse it "Final Payment Claim".

The Contractor shall include in that claim all moneys which the Contractor considers to be due from the Principal under or arising out of the Contract or any alleged breach thereof. After the expiration of the period for lodging a Final Payment Claim, any claim which the Contractor could have made against the Principal and has not been made shall be barred The Principal/Superintendent will then issue the Final Certificate, and return the balance of any cash retention or security monies will be returned to the Contractor (with deductions as may be necessary for uncompleted work, if any). For example, clause 42.8 of AS2124-1992 provides: “ Final Certificate Within 14 days after receipt of the Contractor's Final Payment Claim or, where the Contractor fails to lodge such claim, the expiration of the period specified for the lodgement of the Final Payment Claim by the Contractor, the Superintendent shall issue to the Contractor and to the Principal a final payment certificate endorsed "Final Certificate". In the certificate the Superintendent shall certify the amount which in the Superintendent's opinion is finally due from the Principal to the Contractor or from the Contractor to the Principal under or arising out of the Contract or any alleged breach thereof.”

Unlike other certificates, the Final Certificate will usually be evidence of the satisfactory completion of the Contractor’s obligations under the Contract. The Principal is not (in standard form and other well drawn contracts) barred from making further claims (for example, defects may not become apparent in substantive structures for several years…). For example, clause 42.8 of AS2124-1992 provides:

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Unless either party, either before the Final Certificate has been issued or not later than 15 days after the issue thereof, serves a notice of dispute under Clause 47, the Final Certificate shall be evidence in any proceedings of whatsoever nature and whether under the Contract or otherwise between the parties arising out of the Contract, that the Works have been completed in accordance with the terms of the Contract and that any necessary effect has been given to all the terms of the Contract which require additions or deductions to be made to the Contract Sum, except in the case of (a)

fraud, dishonesty or fraudulent concealment relating to the Works or any part thereof or to any matter dealt with in the said Certificate;

(b)

any defect (including omission) in the Works or any part thereof which was not apparent at the end of the Defects Liability Period, or which would not have been disclosed upon reasonable inspection at the time of the issue of the Final Certificate; or

(c)

any accidental or erroneous inclusion or exclusion of any work, plant, materials or figures in any computation or any arithmetical error in any computation.

EXERCISE 13 – CONTRACTS DETAILS

Refer again to the contract used in previous exercises, and answer the following questions: 1. List the key requirements for achieving Practical Completion

2. What is the defects liability period?

3. What must be done by the Contractor to receive Final Completion?

4. What form of security is required? Is it a Bank Guarantee or Cash Retention?

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SECTION 11 – PROGRESS CLAIMS 5 5.1

VALUATION OF PROGRESS CLAIMS Value of Completed Work/Value to Complete

The nature of a construction contract is that payment is to be made progressively throughout the completion of the Works until practical completion. The Contractor’s entitlement to payment, however, will be in accordance with the Contract Sum, not the actual value of work. All being equal, the two amounts (the Contract Sum, and the actual value of the work), should be reasonably similar. The Contract Sum, however, is a matter for the tenderers to compete on and accordingly one could imagine that the Contract Sum could be greater than or less than the actual value of the work. Accordingly, when the Superintendent comes to value the progress claims, he will usually make his assessment on the basis of percentage completion of the Works relative to the Contract Sum, rather than the actual value of work completed. There are, however, a number of possible alternative methods for valuation which would include: (i)

the value of the completed work on a pure valuation basis

(ii)

the value of the work still to be completed under the Contract, on a pure valuation basis, deducted from the total Contract Sum

Where financiers are involved in the funding of construction work, the latter method of valuation has tended to be adopted from time to time. In this case the financiers have been concerned to ensure that for the purposes of their security, there are at all times sufficient funds left in the finance facility to complete the work if necessary. Accordingly, in certain cases, the Superintendent in assessing the progress claims may be interested in the calculation of the value of the work to be completed, as opposed to the percentage of work completed on a pro-rata basis. 5.2

Bill of Quantities/Fixed Price/Schedule of Rates

The Contract Sum which is included in the tenders is a matter for competition between the respective tenderers. The Contract will provide that the Contract Sum is to be a lump sum, a schedule of rates or any other combination. For example, clause 3.1 of AS2124-1992 provides: “ Performance and payment

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The Contractor shall execute and complete the work under the Contract. The Principal shall pay the Contractor (a)

for work for which the Principal accepted a lump sum, the lump sum

(b)

for work for which the Principal accepted rates, the sum ascertained by multiplying the measured quantity of each section or item of work actually carried out under the Contract by the rate accepted by the Principal for the section or item

The Principal will usually decide as to whether the Contract Sum is to be a fixed price, or alternatively, on a Schedule of Rates basis (for example, where the rough quantities are known, but for flexibility and/or difficulty of calculation reasons, the exact final quantities are not known and the Principal prefers to compare the tenderers on the basis of their unit rates rather than a total fixed price.” 5.3

Fixed Price

The tenderers will all bid a single price to be the Contract Sum. The price (subject to variations and other such matters expressly provided for in the Contract) will not vary, irrespective of the quantities ultimately encountered on the Contract. 5.3

Schedule of Rates

The tenderers all submit a price based on unit rates. Those prices are, however, submitted pursuant to a schedule containing quantities. This is usually prepared by the Principal and which indicates quantities within a certain limit of accuracy. Where the quantities are ultimately outside that limit of accuracy (whether or not that limit of accuracy is expressly provided in the Contract) those rates may ultimately be inapplicable under the Contract. ATTACHMENT – Example Schedule of Rates. 5.4

Bill of Quantities

From time to time, the tenderers will be asked to bid on a fixed price basis but subject, however, to a bill of quantities. In such circumstances, the fixed price is to be applicable only so far as the bill of quantities is accurate within certain limits (whether or not those limits are expressly provided within the Contract itself). ATTACHMENT – Bill of Quantities 5.5

Priced Bill of Quantities

In addition to the above, the Contract may also provide for the Contractor, after he has been awarded the Contract (and the price has been agreed) to prepare a Priced Bill of Quantities. The Priced Bill of Quantities is usually prepared to assist the valuation of progress claims, variations and other assessment purposes. August 2014

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In assessing progress claims, therefore, the Superintendent will sometimes be required to have regard to whether certain quantities for particular items are within a limit of accuracy expressly or impliedly included for particular items in either a schedule of rates or a bill of quantities. Where such items are outside such a limit of accuracy (whether an express limit of accuracy or an implied limit of accuracy) the Contractor will potentially be entitled to claim payment based on a reasonable sum for the work performed. 5.6

Payment for Offsite Goods

The Contract will usually expressly provide whether the Contractor is entitled to include, in progress claims, an amount for goods which have been either ordered, or supplied, but for particular reasons not yet delivered to the site. Such items might include, for example, bulk steel where that steel has to be purchased and then shipped to a fabrication site prior to delivery to the construction site. The Principal is potentially exposed to loss where goods are to be paid for which have not yet been delivered to the site (for example, if the goods are lost, stolen, or damaged while offsite and out of the Principal’s control, or alternatively if the goods are not adequately identified and the Contractor, having received payment for the goods, then goes into liquidation, thereby exposing the Principal to a potential dispute over ownership of the goods). For example, clause 42.4 (this is an alternative clause) of AS2124-1992 provides: “ Unfixed Plant and Materials If the Contractor claims payment for plant or materials intended for incorporation in the Works but not incorporated the Principal shall not be obliged to make payment for such plant or materials but the Principal may make payment, if the Contractor establishes to the satisfaction of the Superintendent that: (i)

such plant or materials have reasonably but not prematurely been delivered to or adjacent to the Site;

(ii)

ownership of such plant and materials will pass to the Principal upon the making of the payment claimed; and

(iii)

such plant or materials are properly stored, labelled the property of the Principal and adequately protected.

Upon payment to the Contractor of the amount claimed, the plant or materials the subject of the claim shall be the property of the Principal, free of any lien or charge.”

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The Contract should always expressly provide for, at the minimum, the following where payment is to be made for offsite goods: 





adequate written evidence of the passing of title in the goods to the Principal, upon payment for those goods; adequate identification of the particular goods, appropriate labelling, and separation of those goods from other goods not within the ownership of the Principal, at all times; adequate insurance of those goods while out of control of the Principal, so as, in the event of their loss, to enable Principal to have, at a minimum, a good claim against an insurer for the cost of those goods.

In the absence of any of the above, the Superintendent should not certify for payment of goods which have not yet been delivered to the site

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SECTION 12 – CONTRACT RISKS (Part 1) 6.

Construction Contract Risks

6.1

Types of Risks

Construction contract risks might include any or all of the following: 

Lack of possession

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Lack of information

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Errors on drawings

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Frequent amendment of drawings

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“Design as you go”

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Inconsistencies in documents

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Errors in survey information

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Changes in statutory requirements

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Late approvals by outside bodies

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Injunction proceedings

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Latent conditions on site

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Problems with designated materials

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Suspension of works

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Programme changes

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Unreasonable administration

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Late or inconsistent decisions

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Measurement of quantities

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Large quantity changes

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Variations, extra works

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“Fiddling” with quantities

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Principal’s failure to make tests

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Opening up and testing work

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“Excepted risks”

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Late payments

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Bankruptcy of nominated subcontractor

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

Inclement weather

Strikes

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Delay in contractor supplied materials

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Interface or interference problems – other contractors

Acceleration

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6.2

Nature of Risks

These risk areas might be characterised as administrative/performance/technical/site, for example: 6.2.1 Administrative Based 1. Errors in interpretation of the contract language 2. Changes to previously unspecified administrative requirements 3. Government interference and revised statutory requirements 4. Changed industrial guidelines and limitations including hours of work 5. Suspension of work 6. Unreasonable and inflexible contract administration, considering normal engineering/architectural practice and criteria on which the construction would have been based 7. Inconsistent decisions by the Principal or Superintendent 8. Interpretation and implementation of rise and fall provisions 9. Quantum deficiencies in owner supplied material and its effect 10. Late progress payments 11. Effects of bankruptcy of a nominated sub-contractor 12. Non provisions of facilities in a timely fashion 13. Unilateral site agreement negotiations and amendments 6.2.3 Technical Based 1. Defective plans and specifications i.e. Engineers/Architects should show due care and accuracy. 2. Drawing discrepancies and errors. 3. Revisions to Specifications.

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4. Non disclosure of technical information. 5. Higher standards of performance. 6. Prototype “design as you go approach”. 7. Design versus faulty workmanship. 6.2.4 Performance Based 1. Late access to site or inadequate possession. 2. Late order to proceed. 3. Late issue of initial “For Construction” drawings. 4. Late inspections. 5. Late material and equipment supplies subject to defined responsibility. 6. Unreasonably delayed instructions, replies and information. 7. Late or frequent revisions to drawings. 8. Delays and interference by the Sub-contractors. 9. Delayed set out in survey. 10. Delays due to strikes – an area of responsibility often hotly disputed due to interplay with, and interference of, the Superintendent. 11. Delays outside the Contractor’s control but within his responsibility. 12. Late approval of submitted drawings. 13. Delays due to the weather. 6.2.5 Site Based 1. Relocation of existing work. 2. Working out of sequence. 3. Limitations on methods to be used and changes in methods. 4. Over inspection whereby unreasonable interference is experienced. 5. Improper inspection and changes to inspection methods. 6. Unreasonable punch lists on Contract completion. 7. Increased safety requirements. 8. Improper rejections. 9. Improper testing methods. August 2014

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10. Frustrated performance due to changed circumstances. 11. Impracticability or impossibility of performance at a reasonable cost due to changed circumstances. 12. Latent conditions of site differing from what was expected. 13. Programme changes including differing priorities required by the Principal or Superintendent. 14. Failure of the Facilities Officer to carry out tests specified as his responsibility in the Contract. 15. Instructions to accelerate the works by the setting of dates inside those reasonably expected, taking into account circumstances and extensions of time.

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SECTION 13 – CONTRACT RISKS (Part 2) 6.3

Quantification of Claims

The most important types of claims set out below. The first two (direct costs and job-related overheads) are able to be calculated precisely. The latter two (non job-related overheads and loss of productivity) are hypothetical and they must only be based on assumptions which may or may not be valid. The types of claims might be characterized as follows: 6.3.1. Direct Costs This is the total of the additional materials and labour attributable to the claim. This is calculated by collating each item of material and labour which can be allocated, in whole or in part, to the claim. It will include, for example: sub-contractors



suppliers



equipment



labour



This type of claim requires no more than detailed record collection and collation of each item. 6.3.2. Job-Related Overheads This type of claim relates to overheads specifically related to this project. It excludes items in the above claim. It requires the pro-rata allocation, in whole or in part (usually in part), of overhead items relating to this particular claim. It will include, for example, the fair share of the following items, able to be allocated to this particular claim: 

site shed hire



supervisor salaries



site security



electricity, and other services



crane usage

This type of claim should require no more than detailed record collection and collation of each item. 6.3.3 Non-Job Related Overheads This type of claim relates to the fair share of organisation-wide overheads which should be allocated to each claim on a particular project. Items under this type would include the fair share of the following (attributable to this claim): August 2014

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1. contribution to organisation head office costs 2. profit (return to shareholders) This type of claim requires a series of hypothetical assumptions in its calculation. In theory, the best way to calculate such items is to apply, prorata, the organisation-wide turnover against overhead costs and profit over the past few years (say, 3-5 years), to the period of the particular claim. The method of calculation, which would need to be proved if the claim was not settled, requires the contractor to calculate (and disclose) over the arbitrarily chosen period (the contractor would be better to select a more profitable period) the following: (a)

total organisation overheads, profit, against turnover over the chosen period

(b)

project turnover over the period of the claim

to determine, ultimately, an organisation-wide percentage of overheads to turnover. This requires certain hypothetical assumptions. It presumes that: 1. the profitability of the organisation during the period of the claim is the same as occurred over the past 3 years, 5 years, or whatever arbitrary sample is taken, and that the profitability of the organisation remains constant throughout the period of the particular project 2. the particular project, and claim period, is typical (i.e. that the particular project or claim period is not unusually profitable or non-profitable) 3. that the particular claim item is typical on the project (that the particular claim item is not likely to have not unusually high or unusually low overheads associated with it, relative to other items on the particular project). From this, the percentage of organisation overheads and profit to turnover is determined, and applied to the particular claim period, to produce a daily non job-related overhead cost. This can then be multiplied by the number of additional days caused to the project by each claim. 6.3.4

Loss of Productivity

This type of claim refers to the additional cost caused to a contractor, where the contractor is delayed in performing work on the basis that the work was tendered. For example, where a contractor is meant to have sole access to a work area, but finds that there are other contractors on that site, and this has the effect of increasing the duration which might be expected for a particular task, the contractor will have a claim, for extension of time and delay costs, to reflect that loss of productivity.

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Losses of productivity can arise from a number of areas including, for example: 



Increased labour or additional crews arising from acceleration or increased work scope. Trade Stacking.

Overtime.





Adverse weather.



Out of sequence work.



Disruption or remobilisation to alternate work-faces due to holds placed on the works.



Contract changes.



Restricted access. The usual method of calculating such claims is to compare the actual time for completion of the work with the tendered time for completion of that work. Again, this requires certain hypothetical assumptions: 1. that the real rate of work would have accorded with the rate of work presumed for the purpose of preparing the tender 2. that there were no intervening reasons why this activity would have been able to occur more quickly or more slowly 3. that the tender was properly estimated Again, the method of calculation is hypothetical. It requires the contractor to determine, and potentially prove if the claim is not settled, theoretical activity times (whether at the time of tender, or in preparing the claim), for comparison with the actual activity time. The calculation of construction cost claims, therefore, is, in part, mere record collection and collation of recordable data.

ATTACHMENT – Risk Identification Checklist

ATTACHMENT – Impact of Risks on Contracts

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EXERCISE 14 – IDENTIFYING CONTRACTUAL RISKS

Consider the most recent project you worked on, or identify a senior project manager who you can ask the following questions: 1. What process is/ was used to identify contractual risks?

2. How are contractual risks managed?

3. How are claims substantiated? What processes are used to support claims for work completed?

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SECTION 14 – VARIATIONS 6

VARIATIONS

6.1 Whether Work Constitutes a Variation

The usual area in which the Superintendent is required to regularly exercise legal judgments under the Contract is in the authorisation and valuation of variations. These are two separate issues. The Contractor may assert from time to time that particular works which he has been required to perform (either in accordance with the contract documents, or alternatively pursuant to a direction of the Superintendent) constitute a Variation. The test applied by the Courts is, in substance, that particular work constitutes a variation if it is work outside the works upon which the Contractor tendered/contracted, having regard to the terms of the Contract. A number of issues regularly arise in relation to whether or not work constitutes a variation, including: 





whether work subsequently performed by the Contractor is or is not included in the contract documents whether particular work to be performed by the Contractor is, in accordance with the terms of the Contract, to be inferred from the contract documents whether the circumstances in which work properly described in the contract documents is to be performed are different from the circumstances described in the tender/contract documents.

These types of variations differ from the easy to understand type of variation, namely where the Proprietor wishes to change the work described in the original contract documents and seeks a quotation from the Contractor prior to that work being performed, which quotation the Proprietor then accepts and orders the variation or not. The Superintendent's assessment of whether or not work constitutes a variation is more than a technical assessment. It requires skills in interpreting contract documents, a judicial impartiality in listening to the views of the Proprietor and the Contractor, and an ability to interpret documents which often are nonspecific in relation to the subject matter of the asserted variation. As was the case in relation to the assessment of complex claims under the contract in certification of progress claims, the Superintendent is appointed by both parties to the contract to make this assessment. The choice of the Superintendent is, in theory, a matter for the parties at the time of entering into the contract, but is, in practice, a matter which is usually decided solely by the Proprietor.

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ATTACHEMENT – Example Letter of Variation 6.2

Payment for Variations without Written Instruction

The Contract will usually provide that the Contractor is not entitled to payment for variations unless the Principal/Superintendent has given the Contractor a written instruction. In fact, there are several cases where the Contractor will be entitled to additional payment, albeit that he has not been given a written instruction. Those examples include: 





where the work required to be performed by the Contractor is beyond the scope of the Works described in the contract documents where work is wrongly rejected by the Principal/Superintendent, and is therefore re-performed/rectified by the Contractor where there is a separate agreement to pay for the additional work, or to waive the requirements for the written instruction

The basis for claiming additional payment in these circumstances is not to be found in the Contract Conditions. The basis for the claim would be that the Contractor was directed to perform extra work, beyond that which was included in the Contract. In such circumstances, the Contractor’s claim is based in restitution rather than (or even despite) the express contract provisions. 6.3

Valuation of Variations

The second complex area of assessment for the Superintendent in relation to variations is in the valuation of variations. The common contract regime for valuing variations is, generally, as follows: 





the Proprietor (usually through the Superintendent acting as agent of the Proprietor) and the Contractor attempt to agree on the value of the approved variation failing such agreement, the Superintendent assesses the value of the variation in accordance with any pre-agreed (at the time of entering into the contract) rates which may be applicable for such variations where there is no such applicable pre-agreement, the Superintendent determines a "reasonable sum", including an amount for the builders oncosts and profit (but, depending in all circumstances, on the express language of the contract).

This regime cannot be avoided. In practice, the tiered analysis of the valuation of variations is set out in detail.

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For example, clause 40.5 of AS2124-1992 provides: “ Valuation Where the Contract provides that a valuation shall be made under Clause 40.5, the Principal shall pay or allow the Contractor or the Contractor shall pay or allow the Principal as the case may require, an amount ascertained by the Superintendent as follows (a)

if the Contract prescribes specific rates or prices to be applied in determining the value, those rates or prices shall be used;

(b)

if Clause 40.5(a) does not apply, the rates or prices in a Priced Bill of Quantities or Schedule of Rates shall be used to the extent that it is reasonable to use them;

(c ) to the extent that neither Clause 40.5(a) or 40.5(b) apply, reasonable rates or prices shall be used in any valuation made by the Superintendent; (d)

in determining the deduction to be made for work which is taken out of the Contract, the deduction shall include a reasonable amount for profit and overheads;

(e)

if the valuation is of an increase or decrease in a fee or charge or is a new fee or charge under Clause 14.3, the value shall be the actual increase or decrease or the actual amount of the new fee or charge without regard to overheads or profit;

(f)

if the valuation relates to extra costs incurred by the Contractor for delay or disruption, the valuation shall include a reasonable amount for overheads but shall not include profit or loss of profit;

(g)

if Clause 11(b) applies, the percentage referred to in Clause 11(b) shall be used for valuing the Contractor's profit and attendance; and

(h)

day-work shall be valued in accordance with Clause 41.”

When under Clause 40.3 the Superintendent directs the Contractor to support a variation with measurements and other evidence of cost, the Superintendent shall allow the Contractor the reasonable cost of preparing the measurements or other evidence of cost that has been incurred over and above the reasonable overhead cost. Effectively, the Superintendent is being asked to put a valuation on works which, by definition, was not agreed between the parties at the time of entering into the contract. It is work which the Contractor is obliged to perform (the Contractor bound himself to do this by entering into a contract which included a variation clause). The parties did not agree, at the time of entering into the contract, on how much the Contractor would be paid for such work. They merely agreed on the valuation regime.

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It is a contractual term, therefore, between the parties, decided upon at the time of entering into the contract, that the Superintendent is to have the last word on the valuation of variations. EXERCISE 15 – AS 2124

Consider the excerpt from the Australia Standard (AS 2124) relating to Variations (clause 40) above. “(d) in determining the deduction to be made for work which is taken out of the Contract, the deduction shall include a reasonable amount for profit and overheads;”

In what circumstances do you think the clause above would be used? Describe what it would mean on a contract, in plain English. EXERCISE 16 – VARIATION SCENARIO ONE

The Client, DevelopUs, issued a notice for a change to the carpet covering. Exner had provided a selection of samples for the client to choose from at the commencement of the project, and the carpet had been chosen at that point. Exner had proposal to use the same carpet DevelopUs chosen, for the two other apartment blocks they were constructing (due to the cheaper rates for a larger quantity). You are the Contract Manager: Comment on whether Exner have a Variation Claim, for the change in carpet if: (i) (ii) (iii)

change was made prior to carpet being ordered if Exner experienced increase costs due to loss in bulk buying power increased costs after one level of carpet had been delivered and laid

EXERCISE 17 – Variation Scenario Two

You are the contract manager: Exner had engaged a Fire Services Subcontractor to complete the f ire services installation, for the entire building. Due to a design review, post-contract award, the Client, DevelopUs decided they could reduce the fire services scope by 50%. Comment on whether Exner have a Variation Claim, for the change in fire services scope: (i) (ii) (iii)

variation for a reduced scope of work against the Client what premise would Exner have for a claim of increased costs. the Client wants a 50% Variation reduction for the reduced scope. How would Exner respond?

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The Client, DevelopUs, issued a notice for a change to the carpet covering. Exner had provided a selection of samples for the client to choose from at the commencement of the project, and the carpet had been chosen at that point. Exner had proposal to use the same carpet DevelopUs chosen, for the two other apartment blocks they were constructing (due to the cheaper rates for a larger quantity).

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SECTION 15 - EXTENSION OF TIME 7 7.1

EXTENSION OF TIME Delays

The Contractor’s obligation is to bring the Works to practical completion by the Date for Practical Completion. A failure to bring the Works to practical completion by that date will usually expose the Contractor to a claim for damages (usually “liquidated damages”) by the Principal. The requirement to bring the Works to practical completion are generally to be found in this form in such major standard form contracts as AS2124, JCC, NPWC3 and others. For example, clause 35.2 of AS2124-1992 provides: “ Time for Practical Completion The Contractor shall execute the work under the Contract to Practical Completion by the Date for Practical Completion. Upon the Date of Practical Completion the Contractor shall give possession of the Site and the Works to the Principal.”

Delays enabling the Contractor to claim an extension of time under the Contract could usually be characterised as follows: 7.1.1 Delays caused by the Principal Certain delays under a construction contract are caused by the Principal. Such delays might include, for example: 

delays in providing clear access to the site



delays in providing detailed drawings and specifications



errors in the drawings and specifications



failure to provide certain matters to be provided under the Contract by the Principal (for example, water, electricity, gas...)

Where the Principal delays the Contractor in the performance of the Works, the Contract should expressly provide that the Contractor is to be entitled to an extension of time. The Contract also should provide that the Contractor is expressly entitled to payment for the costs associated with that delay, usually referred to as “delay costs There is a substantial body of law as to the effect of such delays where the Contract does not expressly provide the Contractor with a right to an extension of time and/or delay costs.

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In brief, where the Principal prevents the Contractor from performing his contractual obligations, and the Contract provides no mechanism to extend the time under the Contract. The Principal is unable to enforce his contractual remedies against the Contractor in respect of the Contractor’s failure to perform the works by the time under the Contract. Alternatively time is said to be “set at large” (meaning no more than that, in the absence of a contractual mechanism to extend time, the Date for Practical Completion has no contractual effect). This does not have the result that the Contract has no completion date, rather the Contractor is required to complete the work under the Contract within a reasonable time. In practice, modern construction contracts always expressly provide an entitlement for the Contractor to both an extension of time (and to delay costs), where delays are caused by the Principal to the Contractor in the performance of the Works. 7.1.2 Delays caused by the Contractor Certain delays are caused by the Contractor. Such delays might include, for example: 





where the Contractor is late in arriving on site where the Contractor performs the Works at too slow a rate to complete the Works by the Date for Practical Completion (or has allowed insufficient time in his tender) where the Contractor perform the Works in a defective manner, and the work has to be rectified

In such circumstances, the Contract should not (and rarely does) provide that the Contractor is entitled to an extension of time and/or additional payment in respect of those delays. These are all matters for which the Contractor is contractually responsible. 7.1.3 Neutral delays/force majeure Certain delays which occur on major engineering contracts are not caused through the fault of either party but are referred to from time to time as “force majeure” delays or events. Such delays might include, for example: 

inclement weather



industrial stoppages



acts of God, civil wars...

It is a price-sensitive commercial matter for negotiation by the parties, at the time of entering into the Contract, as to whether particular force majeure events will or will not entitle the Contractor to an extension of time, and/or an adjustment of the Contract Sum, under the Contract. Where the Contract August 2014

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expressly provides that the Contractor is to be entitled to an extension of time for such events, one might expect lower tender prices. Where the Contract does not expressly provide for an extension of time in such events, one might expect higher tender prices. The entitlement to, and assessment of, claims for extension of time is a major area of potential dispute under engineering contracts. ATTACHMENT – Notice of Delay 7.2

Notification of Claims

Where delays occur under a construction contract and the Contractor intends to claim an extension of time (and/or delay costs) the Contract usually expressly provides for a notification regime and for the assessment of such claims. 7.2.1 Notification of the Claim The Contractor is usually expressly required to give notice of circumstances which might lead to a delay of any kind immediately the Contractor becomes aware of such circumstances. This provision usually applies not only to circumstances out of which the Contractor might ultimately claim an extension of time, but to all circumstances where the Contractor is likely to be delayed in achieving practical completion by the Date for Practical Completion. If the delay was caused through the Contractor’s own fault, the Contractor is not entitled to such an extension of time. The obligation of the Contractor to give the first notice (in AS2124-1992, when it becomes aware of a delay, giving notice of the mere fact of a possible delay and the cause) appears, in AS2124-1992, in the first paragraph of clause 35.5: “ When it becomes evident to the Contractor that anything, including an act or omission of the Principal, the Superintendent or the Principal's employees, consultants, other contractors or agents, may delay the work under the Contract, the Contractor shall promptly notify the Superintendent in writing with details of the possible delay and the cause.”

In most contracts, there is a two-tier notification requirement, namely that the Contractor notify the Superintendent (or the Principal as the case may be) immediately upon becoming aware of the likely occurrence of a delay, and again, providing details of the extent of the delay and other such matters, within a reasonable time of the Contractor being able to calculate the extent and likely cost and effect on the construction program of that delay. The obligation of the Contractor to give the second notice (in AS2124-1992, within 28 days of the delay occurring, giving details of the claim, and the facts upon which it is based) appears, in AS2124-1992, in the third paragraph of clause 35.5:

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“If the Contractor is or will be delayed in reaching Practical Completion by a cause described in the next paragraph and within 28 days after the delay occurs the Contractor gives the Superintendent a written claim for an extension of time for Practical Completion setting out the facts on which the claim is based, the Contractor shall be entitled to an extension of time for Practical Completion.” Completion.”

The Contract will usually provide that where the Contractor fails to give the necessary notice (or as the case may be, either of the necessary two notices), the Contractor will be barred under the Contract from bringing a claim for an extension of time and/or delay costs. There is a substantial body of law as to the effect of such time bar clauses (see below). From time to time, the Courts have declined to give give effect to such time bar clauses for various reasons. The Contractor who wishes to make such a claim should strictly comply, however, with such time bar notice provisions. 7.2.2 Criticality/float A pre-requisite to claiming an extension of time, often expressly included in the Contract, is that the Contractor will, in fact, be delayed in achieving practical completion by the Date for Practical Completion. In effect, the Contract will usually provide that even though a delay might occur, occur, unless that delay occurs to a critical activity (namely, an activity which, if delayed, will consequently delay the Works from being brought to practical completion by the Date for Practical Completion), the Contractor is not to be entitled to an extension of time. This pre-requisite to an extension of time is not articulated in every contract and in some contracts, there is no expression of this requirement. This has been confused, from time to time, with a separate issue as to “Who Owns the Float?” On one view, where a Contractor has carefully carefully arranged his affairs (or “husbanded” his time) so as to make certain activities non-critical, non -critical, then delays which are caused to the Contractor, for which the Contract provides an extension of time, should result in an extension of time (thereby, in fact, giving the Contractor even even more time “up his sleeve”). The opposite view is that the Contractor, where delayed on a non-critical activity, should never be entitled to an extension of time where he will not, in fact, be delayed under the Contract. Contract provisions usually expressly provide for the latter (namely, that the Contractor is not entitled to an extension of time unless that delay is likely to delay him in achieving practical completion, i.e. that the delay occurs to a critical activity only). only). Despite this, the Courts have tended towards a view that the Contractor, where he has carefully husbanded his time in a particular way, should not be penalised by being denied an extension of time in such circumstances.

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Such issues will need to be resolved in each case depending on the particular provisions of the Contract. Contract. The likelihood is, however, however, that a Court would would prefer to find in favour of a Contractor where a delay is caused by the Principal (albeit to a non-critical activity) where such an interpretation is available to it. ATTACHMENT – ATTACHMENT – Extension Extension of Time for Practical Completion EXERCISE 18 – 18 – E.O.T E.O.T’’S

Review the contract you have used in previous exercises and answer the following questions: 1. If there has been a successful claim regarding regarding latent conditions on your project, is there a direct entitlement to an extension of time? Include details of the clauses that support your view. 2. Is there a limit to the maximum amount of of time allowed before before an extension of time claim can be refused by the client/principal? What is this time period? Include the clause that shows this. EXERCISE 19 – 19 – Common Common Causes of E.O.T’ E.O.T’S

ATTACHMENT – ATTACHMENT – CASE CASE STUDY – STUDY – Changes, Changes, Delays and Time Extensions

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SECTION 16 - LIQUIDATED DAMAGES 8

LIQUIDATED DAMAGES

The contractual obligation on the Contractor, in respect of time under the Contract, is to bring the Works to practical completion by the Date for Practical Completion. Where the Contractor breaches the Contract by failing to bring the Works to practical completion by the Date for Practical Completion, the Principal would, in the absence of any other provision, have a contractual entitlement to sue for general damages. The convention has evolved, for the common convenience of the parties, that such damages damages are pre-agreed pre-agreed at the time of entering into the Contract. Contract. For these purposes, such damages are usually referred to as “liquidated damages” (in this context, the use of the word “liquidated” means, a specific amount, rather than an amount to be determined by the Courts). The requirements to bring the Works to practical completion are generally to be found in this form in such major standard form contracts as AS2124, JCC, NPWC3 and others. For example, clause 35.6 of AS2124-1992 provides: “ Liquidated Liquidated Damages for Delay in Reaching Practical Completion If the Contractor fails to reach Practical Completion by the Date for Practical Completion, the Contractor shall be indebted to the Principal for liquidated damages at the rate stated in the Annexure for every day after the Date for Practical Completion to and including the Date of Practical Completion or the date that the Contract is terminated If after the Contractor has paid or the Principal has deducted liquidated damages, the time for Practical Completion is extended, the Principal shall forthwith repay to the Contractor any liquidated damages paid or deducted in respect of the period up to and including the new Date for Practical Completion.” Completion.”

In fact, though such liquidated damages are to be paid by the Contractor to the Principal (usually, in fact, they are deducted by the Principal from monies due to the Contractor, where the Principal decides to deduct such liquidated damages at all), the liquidated damages provision is in fact, primarily for the benefit of the Contractor. The operation of a liquidated damages clause effectively limits the potential exposure of the Contractor to damages for late completion. There are a number of issues which arise in respect of liquidated damages as follows: 1.

The Courts have generally declined to enforce enforce “penalty” clauses (see below). For this reason, it is usual to make the liquidated damages damages a genuine pre-estimate of the damages likely to be suffered by the Principal

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in the event of late completion (albeit that this pre-estimate is made at the time of entering into the Contract rather than when the delay occurs, at the end of the construction period). It may suffice to say, however, that a daily estimate of damages is rarely (if ever) treated as a penalty clause by the Courts. Penalty clauses usually take the nature of an amount unrelated to the actual damage suffered, and which penalty only comes into effect on a particular date. 2.

The quantum of liquidated damages is usually estimated by the parties at the time of entering into the Contract, based on the damages likely to be suffered by the Principal if in fact the Contractor is late in completing the Works. Accordingly, as a matter of contractual negotiation, the amount of damages is typically a “genuine pre-estimate” of those damages. In the absence, however, of agreement on that amount, the parties are open to leave out the liquidated damages clause altogether. In such circumstances, the Principal could sue the Contractor for general damages if the Contractor was late in completing the Works. (The usual reason why the Contractor will insist on a liquidated damages clause is for the reason set out above, namely to limit his potential exposure in such circumstances.)

3.

From time to time, parties (usually by mistake, but this could sometimes be the commercial agreement) insert the word “Nil” in the item for liquidated damages. Courts have interpreted this to mean what it says, namely that the Contractor, if late, pays zero damages to the Principal in respect of that lateness. (If the parties, in fact, intended to delete the liquidated damages clause, and rely on general damages for any lateness, they should delete the entire liquidated damages provision, rather than write “Nil”).

4.

There is no requirement on the Principal to establish that it has, in fact, suffered loss (the whole purpose of pre-agreeing liquidated damages is to avoid the potential upside/downside on losses).

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EXERCISE 20 – Liquidated Damages Case Study

Answer the following questions: 1. In construction, what do the most common Liquidated Damages claims relate to?

2. What does it mean when damages are Unliquidated?

3. What effect do Liquidated damages have in terms of the effect on your contract, your ability to recover money, risk management etc. List at least 4 effects.

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Answers:

1. Liquidated Damages (LD’s) In construction, the most typical clauses for LD’s relate to late achievement of practical completion. PC The typical calculation mechanism is a formula prescribing an agreed dollar amount for each day from the date of PC to the actual date of PC. The LD clause does not have to stipulate a particular dollar amount, which can create significant problems for the parties. 2. Liquidated Damages (LD’s) Damages are unliquidated when they are not specified in a contract, therefore leaving it up to a court to assess the amount. When parties agree a mechanism for calculating damages, they are called liquidated – which is more specific than a general right. 3. Liquidated Damages (LD’s) LD’s have the following effect – they: Eliminate the need to prove damage has actually been suffered Eliminate the need to prove the actual damage Encourage contract compliance because of immediate enforceability Provide certainty of risk and outcome for the principal, contactor and their financiers Give the financier greater certainty that interest payable on the project can be recovered if completion is delayed Provide the contractor with a basis for comparing between costs of accelerating to achieve PC by the date for practical completion as against the liability for a breach Establish a cap on liability (these caps can operate in a number of ways) Are recoverable irrespective of the amount of the actual loss    





 

8.1

Penalties and liquidated damages

Liquidated damages or penalties provisions in building contracts typically relate to the obligation to complete the work within the specified time. In cases where the act concerned is a breach of contract, the court may inquire whether the payment or forfeiture provided for in the contract is a penalty, or liquidated damages. If it is deemed to be a penalty, the party claiming that it will not be allowed to recover the full amount, if his damage was in fact less, yet on the other hand will not be limited to that amount if his damages have been greater. If it is held to be liquidated damages, the aggrieved party will be entitled to the stipulated sum, whether the real damage be greater or less or absent.

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The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage. Whether a sum stipulated is a penalty or liquidated damages in construction, is to be decided upon in relation of the terms and inherent circumstances of each particular contract, judged as at the time of the making of contract, not as at the time of the breach. The task of construction has suggested various tests from time to time: 







It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid. There is a presumption that it is a penalty when a single lump sum is made payable by way of compensation, on the occurrence of one or more events, some of which may occasion serious and others trifling damage”. It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties.

EXERCISE 21 – CALCULATING LIQUIDATED DAMAGES

Review your contract document. What is the applicable charge for liquidated damages? Investigate how this was calculated/agreed.

Is there a cap (maximum penalty) on liquidated damages? Include the details of how it is to be applied.

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SECTION 17 - DEFECTS AND DEFECTS LIABILITY PERIOD 9 9.1

DEFECTS Judgment of the Superintendent

In most engineering contracts there is a person in the role of the Superintendent (whether it be a Superintendent or the principal himself performing the same role). The test on quality, historically, in engineering contracts, is exercised by that person subjectively. The identification of defects in engineering works can be complex. It will usually require a personal engineering skill on the part of the person making the assessment. Further, such judgments are often the subject of bitter disputes. For example, a contractor may take the view that work has been satisfactorily completed, albeit that some minor defects are apparent (for example rough fabrication on steel work, or for example inaccuracies in fabrication elements), those minor defects being capable of easy rectification. Accordingly, therefore, the Superintendent when making an assessment as to quality, will usually be required to exercise engineering judgment and contract judgment. The determination by a Superintendent that work is “defective” will usually have serious consequences and it is likely, perhaps, that this will colour the Superintendent’s subjective engineering judgment. 9.2

Direction to Remedy

Where the Superintendent concludes that work is defective, there is a usual regime which the Superintendent can follow to procure compliance by the Contractor with the quality standards under the contract. The first step which the Superintendent should follow is to give the Contractor formal notice, in writing, that particular work is defective and that such work is to be remedied. For example, in AS2124-1992, Clause 30.3 provides that the Superintendent may give the Contractor a notice to rectify defective work, at the contractor’s expense. Defective Materials or Work If the Superintendent discovers material or work provided by the Contractor which is not in accordance with the Contract, the Superintendent may direct the Contractor to (d)

remove the material from the Site

(e)

demolish the work

(f)

reconstruct, replace or correct the material or work

(g)

not to deliver the material or work to the Site.

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The Superintendent may direct the times within which the Contractor must commence and complete the removal, demolition, replacement or correction. If the Contractor fails to comply with a direction issued by the Superintendent pursuant to Clause 30.3 within the time specified by the Superintendent in the direction and provided the Superintendent has given the Contractor notice in writing that after the expiry of 7 days from the date on which the Contractor receives the notice the Principal intends to have the work carried out by other persons, the Principal may have the work of removal, demolition, replacement or correction carried out by other persons and the cost incurred by the Principal in having the work so carried out shall be a debt due from the Contractor to the Principal.

The effect of that notice is to require the contractor to rectify those works within a reasonable time. Failing this, the Superintendent may choose to give a further notice threatening to take those works out of the contractor’s hands and rectified by others at the contractor’s expense. The notice requiring that rectification should be clear and should expressly refer to the clause pursuant to which the notice is being made. In particular, the Superintendent should be careful to ensure that the direction is clear that the works are required because the contractor has failed to comply with the contract. There is a common dispute where the Superintendent gives such a direction. The contractor will usually assert that the work is either not defective, or that he will carry out the necessary rectification at a more convenient time, that necessary rectification being minor and more conveniently performed as a final clean up. Further, in some cases, the notice, if not clearly given, might be construed (usually wrongly) as a direction to perform additional works as a variation.

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The form of the Notice under clause 30.3 might be as follows: NOTICE PURSUANT TO AS2124-1992 CLAUSE 30.3

PROJECT: CONTRACT NO: PRINCIPAL: CONTRACTOR: DATE ISSUED: TO:

The Contractor

Pursuant to Clause 30.3 of the General Conditions of Contract, the Superintendent notifies the Contractor that the following materials or work are not in accordance with the Contract: [[

insert details ]]

The Superintendent directs the Contractor to reconstruct, replace or correct the material and/or work set out above (“the rectification work”) and directs that the Contractor complete the rectification work within [[ ]] days of the date upon which the Contractor receives this notice. AND TAKE NOTICE THAT if the Contractor fails to comply with this direction within the time specified in this direction then after the expiry of [[ ]] days from the date on which the Contractor receives this notice the Principal intends to have the rectification work carried out by other persons, and the cost of that rectification incurred by the Principal shall be a debt due from the Contractor to the Principal.

……………………………………….. Superintendent

Figure – Defective Materials or Works Notice

To complicate matters further, from time to time the contractor might conclude that the works may require rectification, but that the performance of that rectification would be outside the terms of the contract upon which he tendered. Aga in, in that circumstance, even if the Superintendent clearly required the works to be rectified, those works would be performed as a variation.

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9.3

DEFECTS LIABILITY PERIOD

9.3.1 Right and Privilege of the Contractor Once the Contractor achieves practical completion, the Defects Liability Period will commence. Typically, on major engineering contracts, there will be a 12 month Defects Liability Period within which defects which become apparent are to be rectified. This is upon the Contractor being given reasonable notice and to be performed by the Contractor at his expense. The Defects Liability Period may extend for any time, that being a matter for the parties to negotiate under the Contract. However, the convention is for the Defects Liability Period on major works to be of the order of 12 months. The period might be as little as, for example, 12 weeks on a minor residential building contract, or long as several years on a major industrial equipment contract. The critical obligation throughout the Defects Liability Period on the Contractor is that upon being given reasonable notice, he attends the site (remembering that by this time he has left the site), within a reasonable period and rectifies the defect. There is a fundamental misconception as to the nature of this obligation. In fact, the Defects Liability Period provisions constitute both a right and an obligation. For example, clause 37 of AS2124-1992 provides: 37. “

DE FE C TS L IA B IL IT Y

………………… As soon as possible after the Date of Practical Completion, the Contractor shall rectify any defects or omissions in the work under the Contract existing at Practical Completion. At any time prior to the 14th day after the expiration of the Defects Liability Period, the Superintendent may direct the Contractor to rectify any omission or defect in the work under the Contract existing at the Date of Practical Completion or which becomes apparent prior to the expiration of the Defects Liability Period. The direction shall identify the omission or defect and state a date by which the Contractor shall complete the work of rectification and may state a date by which the work of rectification shall commence. ………… If the work of rectification is not commenced or completed by the stated dates, the Principal may have the work of rectification carried out at the Contractor's expense, but without prejudice to any other rights that the Principal may have against the Contractor with respect to such omission or defect and the cost of the work of rectification incurred by the Principal shall be a debt due from the Contractor.”

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It is the privilege of the Contractor to be entitled to return to the site and rectify defects as they appear during the Defects Liability Period. The alternative would be for the Principal to have the defects rectified by others, at the Contractor’s expense, and to deduct the costs of that rectification from the security money still being withheld by the Principal throughout the Defects Liability Period. It would be substantially cheaper, as a rule, for the Contractor to attend the site and rectify the Works himself. In addition, it is also the obligation of the Contractor to return to the site within the period specified under the Contract (or where such a period is not specified, within a reasonable period) to rectify those defects. In this respect, the provisions constitute an obligation on the Contractor to attend and rectify. 9.3.2 Failure to Rectify/Rectification by Principal In the same manner that the Contract usually provides that, where the Contractor fails to rectify defects, the Principal may take those works out of the hands of the Contractor and perform those Works at the Contractor’s expense, similar provisions apply to a failure by the Contractor to rectify defects throughout the Defects Liability Period. Where the Contractor fails to attend within a reasonable time throughout the Defects Liability Period and rectify such defects, the Principal becomes entitled to have those works rectified by others, and to deduct the cost of that rectification from the monies presently held by the Principal as security for that purpose.

NOTICE PURSUANT TO AS2124-1992 CLAUSE 37

PROJECT: CONTRACT NO : PRINCIPAL: CONTRACTOR: SUPERINTENDENT: DATE ISSUED: TO:

The Contractor

Pursuant to Clause 37 of the General Conditions of Contract, the Superintendent notifies the Contractor that the work contains omissions or defects (“the defective work”) as follows: [[ insert details ]] The Superintendent directs the Contractor to commence to rectify the defective work within [[ ]] days of the date of this notice, and to August 2014

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complete the work of rectification within [[ this notice.

]] days of the date of

The Superintendent directs that in respect of the work of rectification there shall be a separate Defects Liability Period of 12 calendar months which separate Defects Liability Period shall commence on the date the Contractor completes the work of rectification. AND TAKE NOTICE THAT if the work of rectification is not commenced or completed by the stated dates, the Principal may have the work of rectification carried out at the Contractor's expense, but without prejudice to any other rights that the Principal may have against the Contractor with respect to such omission or defect and the cost of the work of rectification incurred by the Principal shall be a debt due from the Contractor. ……………………………………….. Superintendent

FIGURE – Rectification Notice

9.3.3 Liability for Defects after Defects Liability Period The Contract will usually expressly provide that upon the completion of the Defects Liability Period and upon the issue of the Final Certificate, the Contractor shall make no further claim under the Contract against the Principal. The rationale for this limitation is that, by that time, the Contractor will have had time to sufficiently calculate any entitlement to which he claims to be entitled and to give notice of such a claim, and for the Superintendent to deal with all such claims under the Contract. In some cases, where the parties so negotiate, a similar exclusion on making claims may be imposed on the Principal. This, however, is rare and there is no logical reason why this should be so.

ATTACHMENT – Case Study – Defective Work EXERCISE 22 – Defects Liability Period

Review your contract once more. Consider the following: 1. What is the time allowed for the defects liability period?

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2. If there are defects repaired during the defects liability period, does this impact upon the defects liability period? (On some projects, a repair to an item will trigger an extension to the defect liability period, or the creation of a separate defects liability period for that particular item!)

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SECTION 18 – ADMINISTRATIONS AND NOTICES 10 Contract Administration and Notices 10.1.1 General Concepts

Contract administration involves those activities performed after a contract has been awarded, which monitor and assess how well the contractor is performing to meet the requirements of the contract. It can vary from contract to contract and ranges from the minimum acceptance of a delivery and payment to the contractor to the more complex assessment of progress claims, variations and management of disputes that can be associated with some contracts. In general, there are a number of major activities that are associated with contract administration these include: 

Contract progress monitoring



Quality control and assurance



Cost control



Change control



Contract finalisation

Good contract administration generally means that there are few, if any, surprises relating to the execution of contractual requirements either before, during or after completion.

10.2 Contract progress monitoring

This is a process that ensures that a number of requirements are met to ensure: 







Timely delivery according to schedule Details of any potential delays are detected as early as possible, and necessary corrective action is implemented Any joint requirements (inspections, tests, meetings) are organised and communicated Information relating to the items above are communicated and understood.

10.3 Quality Control and Assurance

Quality assurance is a generally understood area in building projects – developed from a need to more efficiently ensure that quality products/services are delivered than the labour intensive inspection of each and every element.

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When considered in the context of contract administration, the requirements relate more to the monitoring of the quality system than the outputs themselves. 10.4 Cost Control

It is important to ensure that the payments made on a project are only those that are admissible under the contract. Cost control requires the verification and authorisation of any claims for payment. The more complex area of cost control, relating to management of variations is covered in the next section “Assessing and submitting variations”. 10.5 Change Control

Most major contracts vary in their requirements, timings or other issues over the course of a project. These changes can result from either the client or the contractor – and irrespective of the reason and originator of a change, a contr act can only be changed by mutual agreement. Given that any change in requirements can generally only be delivered by the contractor, it is intelligent for the client to ensure that all information is provided to allow a fair negotiation for acceptance. Many items requiring change control are covered by the general concept of variations, which is covered (along with the associated cost implications) in the next section titled “Assessing and submitting variations”. ATTACHMENT – Change Control Form 10.6 Contract finalisation

Sometimes called contract completion, this is an important step in any project. Once all parties agree that a contract has reached its conclusion, there are a number of actions required: 







Finalising all payments (including any outstanding variations owed to the contractor or damages or other price reducing elements due to the client). Return of necessary equipment, materials and/or documentation (provided by the client to the contractor during the course of the project) Provision of any necessary documentation as required (eg equipment manuals, warranties) Advising of the commencement of any ongoing obligations (maintenance requirements etc)



Return/release of retention monies and bank guarantees



Completion of any required final documentation, such as deeds of release.

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10.7 Assessing and submitting variations

One of the roles of contract managers is the control and processing of variations to the contract. The contract manager will need the authority and a flexible approach from which change can be based. They may need to negotiate such matters as price, the standards to be delivered and a timeframe for actioning. The contract manager will need enough information to be able to negotiate a fair price, agree whether standards are realistic and reflect client expectations and set a realistic timeframe for application. Being prepared for negotiations can take considerable effort in, for example, clearly defining the change, establishing a market price using industry experience and confirming client/stakeholder expectation. The approach taken for the variation(s) depends on the form of contract used for the service delivery and is summarised by relationship type (see Table 15). Under a traditional contract (that relies on control and compliance), variations will tend to be fully scoped with pricing established before the work is undertaken. In alliance and partnering relationships (based on a more flexible and cooperative working approach), variations may be less structured, for example with invoices provided after the work is done and based on an initial agreed cost structure. Renegotiating the initial contract to accommodate variations is likely only to be necessary for significant changes to the original scope. 10.8 Link Between Variation Approach and Relationship Type

Refer to the following figure. Variation approach

Traditional

Type of change

fully identified fully identified and scoped and scoped

Cooperative

Partnering

Alliance

not necessarily fully identified and scoped

for significant change to scope only

Method of similar to a obtaining price single point tender

similar to a possibly at 'cost' single point tender but with closer relationship

possibly at 'cost'

When to obtain price

prior to starting the works

prior to starting possibly at any time if paying the works cost

possibly at any time if paying cost

Competitive rates

probably not

possibly, depends on relationship

probably yes

probably yes

Figure – Variation Approach and Relationship Type August 2014

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Regardless of the type of contract and relationship established, the contract manager should consider the following matters in establishing an effective variation processing over the life of the contract: •

•

•

•

•

an upper dollar limit in the contract for variations to prevent a contract being agreed and approved for a small task and then being changed drastically to address a totally different need a standard contract variation form that provides for changes in the price, quantity, timeframe and appropriate authorisations; authority levels to match variation levels, eg. contract managers can approve up to 10% of the contract price in variations. All other variations to be approved by executive management amendment of the PMS to include monitoring of contract variations maintenance of a contract variation register to monitor the numbers and types of variations proposed and agreed.

Contractors need to monitor the type and number of variations made against a contract. If a large number of variations are made to a contract, this may be because: •

the wrong contract relationship was established (for example traditional rather than partnering)

•

the SLA (Service Level Agreement) and contract service specifications were poorly or incorrectly stated

•

problem solving or root cause analysis was not undertaken

•

the wrong provider was chosen It is important if any or all of the above has occurred that the contract manager identify the issue and take remedial action immediately to ensure the continuity of the business. Further information on business continuity planning is available in the ANAO Better Practice Guide, Business Continuity Management (January 2000). In some situations it may be appropriate to develop updated contract documentation incorporating any variations made previously.

10.9 Payment Process

Before payment to the provider can be approved, the contract manager needs to be satisfied the work has been completed in accordance with the contract and SLA. The PMS (Project Management System) and reporting documentation, discussed earlier in this Guide, play an important part in providing that assurance to the contract manager. It is important the contract manager agrees that:

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•

the processes for payment to the provider - Will payment be a regular monthly installment, a cheque delivered in response to an invoice or electronic funds transfer (EFT). Increasingly, organisations are adopting EFT as cheque preparation is becoming more costly. EFT has the added advantage of avoiding cheque clearance periods

•

the format of invoices - Electronic or hard copy, mailed or delivered in person and how much information is provided. Providers should be encouraged to develop electronic invoices that can be electronically added to the payment system.







the timing of invoices - It is preferable to send invoices at the beginning of the month to ensure the minimum time between sending the GST (Government Sales Tax) amount to the Australian Taxation Office (ATO) and receiving payment from the supplier. This should be done because Business Activity Statements (BAS) are prepared at the end of the month, at which time Goods and Services Tax becomes payable. The use of EFT would facilitate this approach; the establishment of a minimum level of information to be included in invoices what checking will be undertaken before invoices will be paid - Will the contract manager be solely responsible for checking the contract, SLA, and/or the PMS in order to be satisfied the goods or services have been delivered satisfactorily Traditional contracts will generally rely on detailed checking of invoices and performance information in line with their control and compliance focus. Provider checking of invoices is becoming the norm in partnering and alliance contracts where trust levels are higher and the relationship is based on a sharing of risks and a cooperative approach. The effort to check every part of the contract in the invoice period can be non-productive in this environment. The information to be included in invoices and the level of checking required should be based on a comprehensive risk assessment that includes identification and management of risks associated with all contract processes

10.10 Extensions of Time and other claims

11.10.1 Extensions of Time All standard building contracts have some requirement for the time by which delivery is required. Most (if not all) have provisions for the management of extensions to this time of completion to allow for delays or events which affect the completion date. Some of the more common causes of extensions of time are: 



Industrial disputes Variations requiring additional work

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

Inclement weather

In general, a contract will provide for a specific timeframe within which an extension of time must be requested.

11.10.2 Quantum Meruit Claims The phrase “Quantum Meruit” comes from Latin and means “as much as was deserved” and where considered in conjunction with the concepts of contract law, it generally refers to an estimate of “reasonable value”. Essentially, quantum meruit can apply in circumstances where someone is engaged to do work without their being agreement regarding compensation. In this situation, the law provides that the employer (or employing body) will pay as much as is reasonably deserved for the service. An important element of the interpretation of “reasonable” is that no one should unfairly profit from the lack of a contractual arrangement. ATTACHMENT – Case Study Reading READING

The Full Court of the Supreme Court of South Australia handed down a decision in January 2007 relating to the payment for building work performed in the absence of a contract. The case W Cook Builders Pty Ltd (in liq) v Lumbers & Orrs (30 Jan 2007, unreported) M. Lumbers and W. Lumbers had agreed with W Cook & Sons Pty Ltd to design and construct a house. The company was selected due to their reputation for complex developments and an additional personal relationship between W. Lumbers and a manager of the W.Cook and Sons Pty Ltd. There was no written contract signed. Without advising their client, W.Cook and Sons arranged for a subsidiary company to complete the work. This subsidiary was not a licensed builder and it went into liquidation prior to the payment of the final amount owing on the construction. The arrangements regarding payment were informal due to a high degree of trust between parties – and accordingly no written invoices were issued. A total of $420,000 was paid prior to the builder going into liquidation, with the l iquidator identifying later that there was an amount of $261,715 still owing. Consequently, the Lumbers were sued for the balance of the costs. At trial, W. Lumbers claimed that he would not have agreed to the assignment of the building contract from W. Cook and Sons (and hence did not feel obliged to make the payment).

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In the absence of a contract, the builder claimed that it should be paid for the work completed on a quantum meruit basis as it would be unconscionable for the Lumbers to benefit from having a home they didn’t pay for in full. The counter argument reflected that due to the lack of the required registration under the Builders Licensing Act 1986 (SA), which requires a person to be licensed before they are entitled to any payment (unless the person’s failure to be licensed resulted from “inadvertence”). The court upheld that the Builders Licensing Act only prevented an unlicensed builder from suing for a contract sum and not from making a quantum meruit claim. In their finding the Court held the Lumbers were obliged to make a payment to the builder on the principles of unjust enrichment and quantum meruit. This was largely due to the fact that the builder incurred actual expenses from which the Lumbers benefited and that the Lumbers knew the services were not being provided for free. There was little significance placed on the claim by W. Lumber that he would not have accepted the “benefit” (the house) if he had know it was being provided by a subsidiary company – as there was no indication that this resulted in any difference in quality of the final construction.

ATTACHMENT – Show Cause Notice Response

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SECTION 19 – LATENT CONDITIONS 11 Latent Conditions 11.1 What are Latent Conditions

Generally, latent conditions are those that cannot be identified during site inspection and reasonable investigation. Latent conditions cover not only those things which are obvious on the surface of the land and the soil itself but also utility services, mine shafts, contamination and other subsurface features. The question of whether a particular feature is a latent condition or not will often depend on the terms of the contract. Each of the Australian and New Zealand standard form contracts contain similar definitions of latent conditions (AS40001997, AS2124-1992, JCC-F and AS4300-1995) and the terms of those standard form contracts and of construction contracts generally govern which party bears the risk for those latent conditions. Claims and disputes about latent conditions have become more common as projects become increasingly complex and innovative. 11.2 Who is Responsible for Latent Conditions

Latent conditions are usually dealt with by a process of shifting or sharing the risk for latent conditions. In the past, the principal often shouldered the risk of latent conditions, because they often have more knowledge of the site. In more recent years the normal practice has been to impose that risk on the contractor. This is a shift which has followed increased expectations about the contractor's expertise. When decisions are made about the allocation of risk for latent conditions at the site, consideration needs to be given to: 

the physical conditions of the site



the existing information about the site





whether there are any investigations into the site (including the brief to the entity who investigated the site and the outcome of the investigations) the level of expertise of the person who carried out the investigation.

A good approach to allocating risk from a principal's perspective is to provide the contractor with as much information as possible without providing a warranty as to accuracy. Where this occurs it is necessary to determine in what manner, if at all, any geotechnical data provided to potential contractors should be or is qualified, noting in particular any limited scope of the reports which are provided. When deciding who can best shoulder the risk of latent site conditions, it is useful to ask:

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





who is best equipped (i.e. has the most information or the better expertise) to bear the risk what disclosures or disclaimers have been made in the tender documents Should there be any special principles or procedures to deal with latent conditions

In the Australian Standard contracts, there are similar provisions for extensions of time for latent conditions and for variations for the increased cost of dealing with latent conditions. In the Property Council's PC-1 standard form contract the process of dealing with latent conditions is similar to the Australian Standards but the principal also gives a warranty that it has made all relevant information about the site available to the contractor. 11.3 Case Study on Latent Conditions Abigroup Contractors Pty Ltd v Sydney Catchment Authority (No 3) [2006] NSWCA 282 Facts

The principal, Sydney Catchment Authority (SCA) went to tender for the construction of a spillway for Warragamba Dam. Abigroup was the successful contractor and entered a contract which required them to take the risk for any latent conditions at the site. Abigroup's tender was based on information disclosed by SCA, which contained a representation that no plans existed for a particular outlet pipe, which, if the plan had existed, would have provided information for Abigroup to determine an accurate drill depth. In fact, plans for this pipe did exist. The question for the court was: did the failure to provide the plans amount to misleading and deceptive conduct? Result

Abigroup was successful on this issue upon appeal. SCA's representation was misleading and deceptive and had been relied upon. The express contractual terms of allocating risk of latent conditions to the tenderer provided no protection to SCA for that incorrect representation. Abigroup was entitled to damages for the extra costs of the additional work required because the plans were not made available at tender. As a result, it is important for principals who are seeking to pass on the risk of latent conditions to the contractor to locate and provide the contractor with all information the principal has on the site.

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11.4 What happens when you find a latent condition?

The contract needs to say what a party must do if they encounter a latent condition. The contract should deal with the following issues: 











if a party discovers what they consider is a latent condition then they must promptly tell the other parties about that condition how the parties will decide if the condition is a latent condition how the parties will decide what action to take to address the latent condition whether an extension of time will be issued because of latent conditions whether, if an extension of time is granted, the contractor is also entitled to delay costs whether the contractor is entitled to the additional costs of addressing the latent condition, and if so, on what basis (e.g. a schedule of rates, expert determination etc)

11.5 Managing the Risk of Latent Conditions

One step in managing latent conditions is to make sure that the question of site conditions is addressed in the contract. The conditions which are identified in that process will not be latent conditions but will be site conditions which the contractor must take into account in determining the price and in performing the work. At the pre-contract or investigation phase it is necessary to: •

•

•

•

•

•

decide who will be responsible for the risk of latent conditions provide the person responsible for the latent conditions with the opportunity to inspect the site and perform their own investigations (subject to any time limits) provide a mechanism for the person responsible for latent conditions to have input into the design process to allow for conditions which their investigations uncover decide who will conduct testing of the site, who will pay for testing, what tests will be conducted and how the results will be interpreted and distributed provide for historical searches about how the site and any adjoining land has been used provide a process by which the parties must share knowledge of any conditions which they might suspect exist or which are uncovered during any investigation or testing

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11.6 Excluding or limiting liability for latent conditions

Principals often try to shift the risk of latent conditions to the contractor by: 





exclusion of the principal's liability for latent conditions and anything contained in or omitted from information supplied to the contractor a disclaimer saying that the contractor cannot rely on information provided by the principal and must rely on their own investigations an indemnity from the contractor that they will pay for the cost of any work which needs to be performed because the contractor tried to rely on the information provided by the principal

This is often the case where the project is the subject of a tender or where the principal has substantial bargaining power - but principals need to be careful that any exclusion clauses are properly drafted. For a principal to be able to rely on the transfer of risk for latent conditions to the contractor: 





the principal must not be negligent, or be misleading or deceptive in providing information (or failing to provide information that it has) it must be possible to say that it is reasonable for the principal to transfer that risk provision should be made for the contractor to have the time and opportunity to either fully inform themselves about the conditions on the site or otherwise deal with the risk before committing to the contract

EXERCISE 23 – Latent Conditions

1. What does the term Latent Conditions Mean?

2. What are common examples of Latent Conditions?

3. Do you think the definition of a Latent Condition could be complex?

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SECTION 20 – DISPUTES(Part 1) 12 DISPUTES

It is almost inevitable that disputes and conflicts will arise in any project. The source of the disputes may be to do with personalities – different people have different values and desires. It is almost inevitable that disputes and conflicts will arise in any project. The source of the disputes may be to do with personalities – different people have different values, desires, needs and habits. The source may be from the interpretation and performance of the contract. The notes are structures in two sections: 

Contract Clauses



Methods of Dispute Resolution

The first section discusses the form of dispute resolution clauses encountered in contracts; the second discusses the various ways disputes may be resolved.

12.1 Contract Clauses

Disputes are anticipated with the inclusion of dispute resolution clauses in most standard contracts. For example, consider Australian Standard AS2124-1992, “General Conditions of Contract”: “DISPUTES Submission to the Superintendent

If a dispute between the Contractor and the Principal arises out of or in connection with the Contract including a dispute concerning rectification or frustration of the Contract: (a)

Each party shall furnish in writing to the Superintendent details of that party’s claim or, where the other party is the claimant, the reasons for rejecting the other party’s claim, and shall request the Superintendent to make a decision under Clause 46.

(b)

Within 28 days after receipt from each party of the information referred to in Clause 46.1(a), the Superintendent shall give each party a written decision on the dispute.”

Notwithstanding the existence of a dispute, each party shall continue to perform the Contract. In particular, the Contract shall continue with the work and the Principal shall continue to comply with Clause 42.1. August 2014

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“ ARBITRATION If either party is dissatisfied with the decision of the Superintendent or the Superintendent fails to make a decision within 28 days or the party required by Clause 46.1(a) to furnish to the Superintendent reasons for rejecting the other party’s claim fails to provide the reasons within 28 days after a request by the other party to do so, the dispute may be referred to arbitration.”

Unless the parties agree upon an arbitrator, either party may request the person specified in the Annexure to nominate a single arbitrator. If a person is not specified in the Annexure, the person to nominate an arbitrator shall be the chairperson of the Chapter of the Institute of Arbitrators Australia in the State or Territory referred to in Clause 1. The request shall indicate that the nominee shall not be an employee of the Principal or the Contractor, a person who has been connected with the work under the Contract nor a person in respect of whom there has been a failure to agree by the Principal and the Contractor. Notwithstanding Clause 42.9, the Arbitrator may award whatever interest the Arbitrator considers reasonable. If one party has overpaid the other, whether pursuant to a Superintendent’s certificate or not and whether under a mistake of law or fact, the Arbitrator may order repayment together with interest. 12.2 Methods of dispute resolution

The challenge on any project is to resolve the disputes generally as quickly as possible with minimal disruption to the project in terms of delay and costs, in a way acceptable to all parties involved. By far the most common and preferred way of resolving disputes on contractual matters is by negotiation. It is also the cheapest and quickest method available. Arbitration has always been a favoured alternative to a court hearing in many contractual disputes. Arbitration however commonly occurs after the project is complete and in some instances mirrors the formalities and costs of litigation. Courts can refer matters to arbitration as well as technical matters to external referees. Added to these usual methods of dispute resolution, has been a push by certain groups to include ADR (alternative dispute resolution) methods. These generally use an independent third party, are non-binding and are intermediate in cost between negotiation and arbitration. ADR includes methods under the name of:

conciliation

mediation

appraisal







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

mini trial



senior executive appraisal



dispute review board

The following gives a brief outline of some of these methods. 12.3 Conciliation

The term ‘conciliation’ is sometimes used in a general sense to mean any ADR process whereby a third party assists the parties with the resolution of a dispute. Such assistance may include mediation or appraisal. The term ‘conciliation’ may also be used in the more limited context of bringing the parties together for the purposes of dispute settlement. In this more limited context, the Conciliator’s role is to assist the parties establish a process by which they will attempt to resolve their dispute. The Conciliator provides the facilities for settlement negotiation, such as premises and support services. The Conciliator is not involved in the substantive issues of the dispute.

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SECTION 21 – DISPUTES(Part 2) 12.4 Mediation

Mediation is a flexible process designed to assist the parties resolve a dispute by agreement. The essential feature of mediation is achieving agreement between the parties. The Mediator appointed by the parties is far more actively involved than a Conciliator in the substantive issues of a dispute. The Mediator is a neutral expert who helps the parties to negotiate; a catalyst who facilitates an agreement between the parties. The Mediator has no authority to impose a settlement but creates a positive attitude in the parties toward settlement. The Mediator must be impartial, a good listener and must establish credibility and trust with the parties. 12.5 Appraisal

Appraisal involves an independent person acceptable to the parties formulating an opinion on the matters in dispute. An Appraiser takes an active, inquisitorial role to identify and understand the matters in dispute. The purpose of the opinion is to facilitate a subsequent negotiated settlement between the parties. 12.6 Mini-Trials

The term ‘mini-trial’ is a misnomer, as it is, in fact, not a trial but a structured information exchange attended by representatives of the parties authorised to settle the dispute. In the Australian context it may be more acceptable to refer to the process as a ‘settlement conference’, or similar expression, to avoid any misunderstanding as to the legal status of the process. The persons attending a mini-trial comprise an advocate and an authorised decision maker from each party and, usually, a neutral adviser selected by the parties. The role of the neutral adviser is not essential to the conduct of a mini-trial and some mini-trials have been successfully concluded without such an adviser. 12.7 Senior Executive Appraisal

Senior executive appraisal has an apparently similar format to a mini-trial, but adopts a less adversarial and a more consensus-oriented approach. The persons attending a senior executive appraisal comprise the authorised decision makers (the executives) from both parties, representatives of the parties who are aware of the matters at issue, and a neutral adviser selected by the parties.

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14.8

Disputes Board of Review

Consideration should be given in contract formulation to the use of a Board of Review as another option to resolve disputes. Boards of Review are similar in nature to the mediation structure and are in increasing use. The structure of a Board of Review would normally contain a senior executive from each disputant party and an impartial agreed third party. In many respects the third party has the ability in such a caucus to act as both an expert appraiser and a mediator. The involvement of senior management ensures that issues of little consequence are quickly dismissed. Ironically, it is these minor issues that at the working level negotiations, by their collective nature or by mere principle, pose insurmountable hurdles to reaching negotiated resolution. Senior management would normally have the ability of cutting through claims, and making commercial decisions which, while a compromise, are acceptable and efficient. The expert third party (particularly if that person is experienced as an arbitrator) may indicate the likely decision that could issue from any arbitration on the dispute, which would be helpful to the disputing parties. A variation on the Board of Review theme is access by the Board to an expert recommended by each disputant and an approved impartial third party. It is unlikely that this system would be as that where senior management from each party is directly involved in the Board with full powers of commercial judgement and decision. Such a process could still facilitate resolution of disputes which cannot be resolved by genuine discussion/negotiation. 12.8 Arbitration

Arbitrations have been described by the Institute of Arbitrators Australia as: “… a method of settling disputes and differences between two or more parties by which such disputes are referred to one or more persons, chosen or nominated for the purpose, for determination after a hearing in a quasi-judicial manner either instead of having recourse to an action at law or by order of a Court after such an action has been commenced.”

Arbitration in Australia has its roots in English arbitration. Today all States of Australia have arbitration Acts which with the introduction of the 1990-1991 amendments are reasonably uniform across the country. The sometimes termed “Uniform Acts” have their dates of assent from 1984, following work of the Standing Committee of Attorneys-General. This, of course, refers to commercial arbitration as opposed to industrial arbitration. The latter looks after matters of wages, conditions of employment etc.

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ATTACHMENT – Commercial Arbitration vs. Industrial Arbitration

The following article (extracted from the Arbitrator, August 1990, p 83) is a humorous account of how arbitration was formerly practised. “… a form of arbitr ation which flourished in County Down during the last century. The parties agreed on an impartial chairman, who sat at the head of a long table with the parties on either hand. Down the middle of the table a line was drawn, and grains of oats were placed along it at intervals of a few inches. A foot or so from the head of the table the line stopped, and two grains of corn were placed a few inches from the middle one in front of each party. Then with the chairman as umpire, a hen turkey was gently placed on the table at the far end. The turkey would then delicately peck her ladylike way all up the table until, when she reached the two grains of corn at the top, she delivered her award in favour of one party or the other by taking first the grain nearer to him.”

It is, however, recorded that on one occasion the loser in such an arbitration was a litigious character who refused to accept the decision as just, and brought a civil bill in the county court against the winner. On the facts being proved, the county court judge dismissed the action, whereupon the plaintiff exercised his right to appeal to the assize judge. This was an aged and learned equity lawyer, Lefroy C.J., who unlike counsel for the defendant knew little of local customs. During cross-examination of the plaintiff the following passage occurred: Counsel: “Tell me, wasn’t the turkey for the defendant?” No answer. Counsel: “Tell my Lord the truth, now. Wasn’t the turkey for the defendant?” Chief Justice: “What on earth has a turkey to do with this case?” Counsel: “It’s a local form or arbitration, my Lord” Chief Justice: “Do you mean to tell me that the plaintiff has brought this case in disregard of the award if an arbitrator?” Counsel: “That is so, my Lord” Chief Justice: “Disgraceful! Appeal dismissed with costs here and below” Counsel (sotto voce): “The Lord Chief Justice affirms the turkey” It will, I am sure, be at once obvious that this form of arbitration, although perhaps unattractive to professional arbitrators, has in large measure most of the merits claimed for this form of dispute resolution. It is very inexpensive, the more so since the bird can be used again. It is private. It enables the parties to select an expert tribunal. It minimises, as the story shows, the opportunities for judicial intervention. And … it promotes the expeditious determination of references.

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12.9 Choosing a dispute resolution method

Table 11.1 indicates the circumstances under which the various dispute resolution techniques might be used. Appropriate professional advice should always be sought before embarking on any of the techniques. The advice should include a comparison of the time and cost involved of each technique; there should also be comment on the cost of winning in order that a reasoned commercial decision may be made as to how or whether to pursue any claim. From a business viewpoint there may be no value in winning legally if you lose financially.

ATTACHMENT – Choice of Dispute Resolution Method Table

EXERCISE 24 – NEW APPROACH TO RESOLVING CONTRACT DISPUTES READING

A new approach to resolving contract disputes before they escalate has been suggested for Australia following its success in the US. The story below (Engineers Australia, 20 September 1991, pp 27-35) describes how this approach involving dispute review boards operates. Contract disputes are often costly and stressful affairs and principal s and contractors are always seeking new ways to avoid disputes or to minimise their adverse effects. Although contract disputes have declined recently as a result of the recession there is a general view that during the 1980s there was a large increase in the incidence of contractual claims and disputes in the building and construction industry. It was because of concern about the increasing cost burdens of disputes that a special research group made up of representatives from the Australian Federation of Construction Contractors (AFCC), the Australian Institute of Quantity Surveyors and Federal and State Government construction authorities was set up in 1988 to look at “Strategies for the reduction of claims and disputes in the construction industry”. It visited a number of countries in Europe, North America, Asia and the Pacific and published its findings as the end of that year. A joint working party drawn from senior people in all sectors of the industry was set up in 1989 and its report, “No Dispute”, was published by the National Public Works Conference in conjunction with the National Building and Construction Council in May last year. “No Dispute” was intended to encour age discussion and debate and to contribute to the implementation of practices that would improve performance and result in fewer disputes.

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If disputes do occur, “No Dispute” advocates that negotiation and alternative dispute resolution (ADR) techniques are preferable to arbitration and litigation, which should be used only as a last resort. Accordingly to Mike Delaney, a civil engineer who has been engaged in contract dispute work on behalf of his employer Leighton Contractors, disputes are best solved “by involving an independent and expert third party at the earliest possible step in the process. He believes the most effective mechanism for achieving this is to set up Dispute Review Boards (DRBs). Such boards were first used in the US 16 years ago on the Second Eisenhower Tunnel in Colorado and they have now been widely accepted in the US tunnelling industry, he said. Each DRB is made up of three people – one nominated by the owner; one nominated by the contractor; and a third member nominated by the first two. The DRB continues in existence for the duration of the contract and its fees are shared by the two parties. The DRB is required to keep up with the progress of works with regular visits to the site and is also kept informed with regular reports detailing the progress of the contract. Also, if a dispute is looming or if other circumstances require it, the DRB can be asked to visit the site and to canvas views. According to Delaney, those chosen for DRBs are invariably experts in the field with a technical background, have an understanding of the contracting industry and have the respect of their peers. “Just the knowledge that such a board exists is often all that is required to stop disputes from developing”, he said. “Also, if there is a dispute the chance of a quick resolution is strong. And, as has been documented in the recent American Society of Civil Engineers publication” Avoiding and Resolving Disputes During Construction”, since 1975 63 out of 64 disputes in the US have been resolved where DRBs were part of the contract. It is significant that 70% of 1990 tunnelling contracts in the US include DRB clauses. “The referral of a potential dispute to a DRB would mean that unsustainable arguments would be identified objectively at an early stage, the quality of presentation of claims and the grounds for their validity would be more carefully established and justification for rejection would be more carefully considered”. Delaney also believes that regular on-site reviews by third part ies will encourage more openness and fair play between parties and “many potential claims would be settled prior to the need for review”. According to Doug Jones, a Sydney-based partner in Morris Fletcher & Cross, an Australia-wide firm specialling in engineering and construction law, DRBs are

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particularly suited to large projects like tunnels and dams where the project is of long duration and where many unknowns are involved. On smaller projects, he believes, the site superintendent (who is often an engineer) should be chosen and have his / her salary paid by both parties. He said the traditional role of Superintendents where they act as agents of the owners and as certifiers of work carried out by the contractors is not working because contractors regard them as having a conflict of interest. “So regardless of their personal integrity and professionalism, the commercial reality is that Superintendents are not seen by most contractors as being truly independent.” Jones said it is of utmost importance when a dispute arises, that it be taken away from the site and that the parties involved consider alternative dispute resolution (ADR) strategies. ADRs can take a number of forms ranging form conciliation (introducing a neutral third party to get the parties in dispute to agree on a mutually satisfactory solution) which is nonbinding to an independent expert determination which may or may not be binding. Jones pointed out that in the case of a nonbinding expert determination the parties are free to accept, reject or amend the determination. But where a binding determination is agreed on there is no right of appeal. Also, unless the parties agree otherwise, an expert does not have to include reasons for his / her determination. “In view of this, it is essential that the expert selected be acceptable and respected by both parties as they will have to live with his or her decision,” he said. However, he warned that mechanisms adopted to deal with disputes arising from construction contracts can end up exacerbating the problems. “Indeed, dispute resolution systems designed to produce faster and easier solutions than the courts have often become even more ossified and expensive.” “Arbitration has developed an undeservedly poor reputation because of lawyers’ mimicking traditional court procedures.” Accordingly to James Ferry, a civil engineer and lawyer with the Melbourne office of the law firm Sly & Weigall, the appointment of an engineer-adjudicator concurrent with the framing of a contract could be well worthwhile. He said the New Engineering Contract (NEC) for engineering and construction work recently published by the British Institution of Civil Engineers (ICE) includes provisions for adjudicating contract disputes. The NEC defines the traditional components of the engineer’s role, but breaks them up into four categories of project manager, designer, and supervisor of

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construction and adjudicator of disputes. He said the role of the adjudicator it to facilitate the early resolution of disputes. He said that although this move is welcome suitable adjudicators with the necessary personal attributes must be chosen. “Not every engineer makes a good adjudicator. Some engineers have a natural aptitude for it, some can be trained to become good adjudicators, and others just don’t have it,” he said … Russell Richmond, the AFCC’s national executive director, believes the competitive tendering system which is still widely practised in Australia is the cause of a lot of problems with contracts. At a recent building industry conference in Sydney … he said the competitive tendering system results in small profit margins which place “intense pressure on line-managers to perform. Consequently there is a temptation to bend the rules.” Richmond believes the industry needs more carefully negotiated contracts based more on qualifications and other aspects of management than on price. For example a firm prior to being considered for a contract could be required to demonstrate prequalification such as commitment to R&D, and occupational safety and training. According to the NSW chairman of the Institute of Arbitrators Australia, John Muirhead, the current slump in contract disputes has merely disguised the longterm upward trend. He said arbitrators are increasingly dealing with courtreferred arbitration now that State Supreme Courts are referring disputes involving technical matters to outside referees. He said the courts have been doing this to clear backlogs and it has proved effective to the extent that more disputes are being turned over to the courts. “Thus the parties in dispute get both a technical and a legal judgement without lengthy delays,” he told Engineers Australia. However, Muirhead accords strongly with the view that well thought out clauses need to be included in contracts. He said in some recent contracts drawn up by the Department of Defence a panel of adjudicators including three architects, three structural engineers and three quantity surveyors has been adopted. He said the adjudicators are notified of a dispute within seven days of it arising and can be notified of a meeting within three days. The decision of the adjudicators is binding for the duration of the contract. Jones and other construction industry specialists agree that there is “no one right way to resolve construction disputes”, but if a number of “guiding principles” are followed effective outcomes are possible. He said the guiding principals should include: 

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construction contracts structured to encourage or force the early identification and notification of issues likely to be disputed on-the-run dispute resolution

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contract can be settled at site level and to directly negotiate at executive level before they try arbitration or litigation use of independent third parties and ADR approaches recognition that arbitration or litigation is merely a step in reaching a commercial solution and is not an end in itself a need for both parties to make a good estimate of both the external and internal costs of arbitration or litigation, so they can make clearheaded judgments about simplifying procedures and reducing these costs consideration of the possibility of further negotiation by means of ADR or direct contract awareness of all the options to simplify arbitration or litigation processes, if ADR or direct negotiation continue to be unproductive.

Finally, he believes that lawyers, who advise their clients to undertake procedures designed to delay or create oppressive costs for the other party, should be the subject of ethical sanctions. “This would effectively deter lawyers from advising clients to adopt these tactics. At present, in contrast, lawyers have an ethical duty to give this advice if it’s in their client’s best interests and the procedures are legitimate.” “the legal profession needs to carefully consider the propriety of using some of the delaying tactics presently employed in arbitrations and, to a lesser extent, in litigation.” EXERCISE

What are your views to having a dedicated third party (or dispute review board) for each contract? The third party would maintain interest in the progress of the project and would make nonbinding decisions on claims as they arise. Work on the project continues meanwhile with the parties having the option of, say, later arbitration on any decision with which they disagreed.

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READING

(ASCE News, January 1991, p 3) “Corporations now pay their litigating attorneys over $20 billion per year to handle their court cases; it takes five to eight years to get to trial today; and all the trend lines are up,” said attorney John Wilkinson, who spoke to representatives of more than 50 of the largest U.S. design firms at a loss prevention convocation last November in Englewood, Colo. (Wilkinson, an authority on Alternative Dispute Resolution or ADR, has his audience members of the Design Professionals Risk Control Group). Said Wilkinson: “Ninety-five percent of these cases will settle before they get to trial. So why spend millions of dollars over the interminable years as the prelude to inevitable settlement that might well have been achieved at the outset? By the same token,” he added, “why are equally complex matters such as takeover battles, preliminary injunctions and other disputes handled in a few weeks?” As a result of those kind of questions, W ilkinson said new and innovative forms of ADR are emerging; he then gave a list of reasons why the concept has become so popular, namely that: ADR shifts the focus from minutiae to the big picture; disputants are permitted their day in court more quickly and with strong, more concentrated advocacy; real experts get involved early on; business people are allowed to be more personally involved, affording more creativity and a “win-win” environment; money is saved; ADR avoids having to educate judge or jury on complex matters of a potentially unfamiliar industry; and it has a 95% success rate in one format (minitrial). To back his assertions, Wilkinson gave proof of ADR as a mushrooming growth industry. “State statues and court programs are proliferating,” he said. “Although ADR traditionally has not been used much by attorneys, today twothirds of the nation’s law schools have classes in it. Federal statutes on ADR are pending. And Sen. Joseph Biden is pursuing methods that will revamp the court system to feature ADR as the preferred means of dispute resolution”. The Colorado meeting was sponsored jointly by DPIC Companies and the Design Professional Risk Control Group, a purchasing group of more than 55 leading A-E firms ($7.5 million in fees or more) whose goal is to minimise and stabilise the cost, and ensure the availability of professional liability insurance for engineers and others.

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Course Notes Administer a Construction Contract CPCCBC4016A

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