labour and materials: contracts
J McMullan
1.1 Forms adopted by Building
Owners
There are a range of contract types which may be attractive on a particular
building project.
Most major projects within the private
sector do not employ standard form
Conditions of Contract.
This may be due to a lack of confidence,
by project lawyers, usually the Principal's lawyers, in those documents when
the stakes are high. Alternatively,
however, and more likely, it seems to me that the standard form of Conditions
of Contract available, to date, have simply been unsuitable on very large
projects, where a substantial amount of consultant advice, including legal
advice, is usually taken prior to execution of the project documents.
For example, most of the standard form
Conditions of Contract are based on the traditional principal/contractor
relationship, with a Superintendent acting in the dual agent/independent
certifier role. In recent years, however, many
major projects have proceeded on the basis of a completely different
project delivery system including, for example:-
Design and Construct
Warranted
Maximum Price
Project Management
Construction Management
Turnkey
BOT
(Build/Own/Transfer)
Each of these project delivery systems
has been used, to my knowledge, on one or more major projects in Australia in
the last five years. The standard form
Conditions of Contract have, perhaps, not kept up with the emerging preference
for such project delivery systems.
The choice of a particular style of
project delivery system will nearly universally be made by the Owner, driven by
factors such as:
·
ease of
design (buildings vs complex building projects);
·
desire for
design flexibility during construction;
·
availability
of suitable builders/project managers, and balance sheets of such builders;
·
political
considerations;
·
budget
constraints vs performance of completed project.
On major public sector projects, the use
of standard form fixed-price contracts would be more prevalent than on similar scale private sector projects
(though, in contrast, BOT projects are essentially public sector projects
delivered by the private sector).
1.
Fixed
Price Contracts
The traditional form of construction contract has been a fixed price contract.
The general operation of this type of contract requires the Builder to tender
on, and then take the risk in relation to, the price of the works. The Builder,
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 Owner delays the Builder in obtaining the site, the
contract would usually provide for an increase in the Contract Sum.
The critical characteristic, however, of a fixed price contract, is that the
Builder 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.
Cost
Plus
The critical characteristic of the cost plus contract is that there is no risk,
as to cost, borne by the Builder.
The Builder and the Owner agree, at the time entering into the Contract, that
the Builder will perform the works, and that the Owner will pay for those
works, on the basis of the actual cost of the Works to the Builder, plus 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
Builder.
This does not mean, however, that the Contractor is entitled to charge whatever
he likes. The Contract will usually
provide that the Builder has to verify and/or justify the cost of the works to
be charged under the Contract. Further,
one could envisage circumstances where, through negligence by the Builder or
some other reason, the Builder 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 Owner.
For example, the Owner might have a strict budget to comply with, and may be in
a position of being able to increase or reduce the Works as they are performed
(for example, by deleting or adding parts of the Works, or by increasing or
decreasing the quality of the selected materials) to ensure that the final cost
of the Works remains within that strict budget. (In theory, this should be equally possible under a fixed-price
contract. For the reasons referred to
above, however, in certain instances the Contract Sum being able to be
adjusted, a Cost Plus Contract, where the Works themselves are able to be
changed during construction, might, conceivably, provide a more convenient
method of ensuring that the cost stage within particular limits, albeit that
the Works to be performed may change from that which was originally proposed.)
The nature of cost-plus contracting, therefore, is that the Builder agrees to
perform the works but that the risk as to the final cost of those works is
borne by the Owner, not the Builder (the reverse of the position under the
fixed price contract).
3.
Design
& Construct Contract
A design &
construct contract requires the Builder to tender on the works described in the
Design Brief (prepared by the Owner), 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 Owner.
The nature of this type of contract is such that the Owner is able to enjoy the
advantages of design efficiencies which Builders, 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 Owner 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 Owner being able to rely on the design &
construct contract.
4.
Project
Management Agreement
A project management
agreement is one in which the Owner contracts, not with a Builder who would
perform the construction (or the design and construction) works, but with a
person who would manage the project on behalf of the Owner, whether by
performing the works in part or wholly himself, or by contracting out part or
all of the works on behalf of the Owner, or a combination of all of the above.
There is an infinite variety of possible project management contract types
(these are discussed further below).
The nature of a project management agreement, however, is that the Owner
engages a person to manage the project on its behalf, rather than engaging a
Builder 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 Builder. Further, 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 Builder.
The types of functions performed by a project manager, pursuant to a project
management agreement, typically include the design, or procurement of the
design on behalf of the Owner, the construction or procurement of the
construction on behalf of the Owner, and, in particular instances, other
activities including, for example, site selection, site acquisition, permit
approvals, advertising of the project, leasing or pre-leasing of the project,
and/or other activities which might otherwise need to be performed by the
Owner.
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.
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 builders on behalf of the Owner, and
potentially, the provision of preliminaries for those trade builders.
The functions performed by the construction manager might include any or all of
the functions set out in Schedule A[1].
6.
Managing
Builder Contract
The Managing Builder 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 Builder contracts with the Owner to manage the construction of
the works on behalf of the Owner;
*the Managing Builder contracts with the Owner to provide, at a fixed price, or
alternatively at a percentage of the total contract price, certain aspects of
the works (for example, the preliminaries, including crane hire, site sheds,
supervision services...);
*the Managing Builder may perform all or part of the design services for the
Owner;
* the Managing Builder will arrange the trade packages, tender and enter into
the trade contracts on behalf of the Owner and, potentially, itself perform
some of the trade contract works;
* the Managing Builder will perform the usual supervision, reporting activities
required on the project to keep the Owner informed of the progress of the
works.
The attraction of the Managing Builder type of contract is its flexibility and
the skills which the Managing Builder may be able to bring to bear in the
procuring the Works, to assist the Owner.
7.
Warranted
Maximum Price Contract
A Warranted Maximum Price Contract is, in substance, a cost-plus contract
between the Owner and the Builder, which, in turn, is subject to an upper limit
(the Warranted Maximum Price), above which, subject to certain conditions, some
of which are discussed below, the Builder will bear the risk as to costs.
Under a Warranted Maximum Price contract, the Builder is to be paid on a
cost-plus basis up to a certain limit.
Over and above that limit, the Builder is 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, where the Owner varies the works, or
where the Owner causes delay and/or additional cost to the Builder).
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 (this is discussed further below in paragraph
2.3.2).
8.
Build
Own Operate Transfer (BOOT) Project
In recent years, in Australia, there have been a substantial number of major
construction projects which have been performed using the BOOT, or BOT vehicle.
The basic structure of a BOOT project is that the Builder agrees with the Owner
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 Owner.
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.
1.2 STANDARD FORMS
There are a number of standard form
Conditions of Contract generally in use in Australia, particularly within the
public sector. Those standard forms include:
AS2124/AS4000
JCC
NPWC3-1981
PropCon 1
AS2124/AS4000
AS2124 is the Standards Association of
Australia produced General Conditions of Contract for construction projects.
The document was first published in 1952
and was then known as CA24. Since that
time it has been reproduced in several editions, changing its designation in
1978 to AS2124. AS2124 was revised in
1978, 1981, 1986 and 1992.
The Standards Association of Australia
has, in recent years at least, hoped to encourage universal use of AS2124 on
building 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. (In
the 1986 revision, therefore, many of the features of NPWC3‑1981 were
incorporated.) This hope has only been
partially successful, perhaps for some of the reasons suggested below.
There are, however, a number of unfortunate drafting errors in the 1992
revision of the document, attributable no doubt to the committee process of
revision, which would need to be remedied before the document is suitable for
use on major building projects.
In brief, those drafting flaws include:
(i) The
document, in its treatment of Bills of
Quantities, places the risk of pricing the works with the Owner rather than
the Builder (contrary to the recommendations contained in "No
Dispute" which recommended the reverse).
(ii) uncertain
risk allocation in a number of
important areas (e.g. default of selected Sub‑builders);
(iii) inadequate
security/retention provisions, which
disentitle the Owner from access to security or retention in the event of
defective work removing the commercial equivalence of bank guarantees to cash;
(iv) no
provision of collateral contracts
within the document (perhaps this is a reflection of the failure of the
committee to follow the commercial trends);
(v) complex
logical difficulties relating to the conflicting roles of the Superintendent
(as between his role as agent for the Owner and as an independent certifier);
(vi) the
document does not include an acceleration
clause;
(vii) the
latent conditions clause is a
subjective test likely to favour inexperienced Builders;
(viii) the
extension of time clause has a
number of logical and commercial difficulties;
(ix) the
certificate of progress payments by
the Superintendent requires the Superintendent to certify for claims, which may
involve a legal judgment, and for claims, which may arise out of his own error,
which are likely to result in challenges to the certificate by the Builder;
(x) the
dispute resolution clause does not
constitute a binding arbitration agreement.
It seems that,
irrespective of the worthy aims of Standards Association of Australia, the
document is certain to be substantially amended by Owners prior to use on major
projects, or not used at all.
AS4000 (until
recently AS2124) is the Standards Association of Australia produced General
Conditions of Contract for construction projects.
The document was first published in 1952
and was then known as CA24. Since that
time it has been reproduced in several editions, changing its designation in
1978 to AS2124. AS2124 was revised in
1978, 1981, 1986 and 1992. AS4000 is the 1997 revision of this standard form.
There will be debate as to the extent to
which the latest revision should be adopted in favour of the previous revision.
There will also be debate as to the extent to which the latest revision should be amended prior to using that document. I simply add my vote to the use of the AS2124 family, wherever possible, with as little amendment as possible (having regard to the size and complexity of the particular contract). It seems to me that, drafting problems accepted, the universal adoption of this family of contracts will ultimately increase the prospects of lower tender price.
JCC
The JCC family of contracts was first
released in January 1985 in two documents:-
JCCA - 1985 Building Works Contract (with quantities)
JCCB - 1985 Building Works Contract (without quantities)
The document was prepared jointly by the
Royal Australian Institute of Architects, the Master Builders Federation of
Australia, and the Property Council of Australia (then BOMA). It effectively replaced the previous
standard form conditions of contract which were in common use, the RAIA Edition
5b-1970 Conditions of Contract.
The contract was prepared by a committee
comprised of representatives of those three organizations, hence the title JCC
(Joint Contracts Committee). Recently
the Joint Contracts Committee released two new versions of the document:-
JCCC - 1993 Building Works Contract (with quantities)
JCCD - 1993 Building Works Contract (without quantities)
Those editions were released in March
1993 and represent the present state of the JCC contract.
The JCC document, it may be fair to say,
has, at least until recently when there have been a number of new options,
become the most commonly used form of Conditions of Contract amongst the various standard form
conditions available.
There may be, on some views, some
difficulties with the document, however nothing which could not be remedied
easily. Perhaps the following comments
might be made of the JCC family of documents:-
(i) the
latent conditions clause might
reasonably be limited to "material" and/or "substantial"
differences in conditions, and could be amended to impose a positive obligation
on the Builder to investigate the site and draw its own conclusions as to the
site conditions likely to be encountered;
(ii) the
document, no doubt in the interest of risk/sharing in the hope of a more even
contractual approach, introduces an option, in the Appendix, for the parties to
insert a percentage of delay costs to be paid to the Builder in respect of a
number of delays not attributable to the Proprietor (the better view,
for Proprietors, might be that the Builder is only to be entitled to delay
costs where a delay is caused by the Proprietor);
(iii) clause
12.09 is, in the view of some commentators, at best meaningless, and at worst,
provides an unnecessary and illogical tactical advantage to both parties (but
more so, it seems to me, to the Builder);
(iv) the
contract provides an arbitration clause which, even if arbitration is to be
preferred, is unnecessarily procedurally complex.
Having said this, the document has many
excellent features, in particular, a clear designation of the role of the
Architect, on the one hand when acting as agent of the Proprietor, and on the
other when acting as independent assessor.
Further, it has the added attraction of being widely in use. Accordingly, this is a well understood
standard form.
The recent editions have expanded the
insurance clauses.
On balance, JCC remains a viable and
popular option.