guide – construction contracts · 2017-09-26 · consider tendering for. a list of standard form...
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GUIDE – CONSTRUCTION CONTRACTS
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04 Introduction05 Whatisacontract?
05 Constructioncontracts
07 Workingwiththeemployer’srepresentative
08 Differentformsofcontracts
11 Differentwaysofcontracting
12 Constructioncontractarrangements
13 ConstructionIndustryDevelopmentBoard
14 Decidingonwhichcontracttouse
18 Commonconstructioncontractterms/procedures
22 Keyconcepts
26 Applicablelegislation
27 Usefullinks
Contents
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Introduction
Construction projects play a vital role in South Africa’s development, not only in respect of its physical infrastructure, but also in its broader economic and social development. They also create employment opportunities on a large scale.
Theconstructionindustryisvaluedatapproximately
Theindustrycontinuestogrow.Thishandbookprovidessomebasicknowledgeandunderstandingregardingcontractinginthisindustry.
andprovidesjobopportunitiestoapproximately
ZAR 145 billion
429 000 individuals
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What is a contract?
Construction contracts
Acontractisanagreemententeredinto
betweentwoormorepeoplewiththe
intentionofcreatinglegallyenforceable
obligations.Onceproperlyconcluded,
acontractisbindingoneachparty.
Thismeansthateachpartyhasalegal
obligationtodothethingswhichthe
contractrequireshimorhertodo.Ifa
partydoesnotdoso,heorshemaybe
inbreachofthecontractandtheother
partywillhavecertainremedies,suchas
claimingforadditionalcostscausedbythe
breach(calleddamages).Theyarealso
abletogetacourtordertoforcetheparty
inbreachtodowhatisrequiredofthem
underthecontract.
The contract should describe
the following:
• Whatwillbedone;
• Howlongitwilltaketocomplete;
• Howmuchitwillcostandthe
paymentterms;
• Whatwillbedoneifeitherparty
defaults;and
• Theextenttowhichthecommon
law,whichwouldusuallyapply,
isadheredto.
Ensurethatyouhavereadtheentire
contractandunderstandtheterms
andconditionscontainedtherein
beforesigning.
Aconstructioncontractisanagreement
betweenanemployer(sometimesreferred
toastheclient)andacontractorto
construct,repair,modify,renovateoreven
demolishsomethinginanagreedtime
frame,foranagreedpriceandto
agreedstandards.
Thecontractissignedbyboththe
employerandthecontractor.Aswithany
contract,oncetheconstructioncontract
issigned,boththecontractorandthe
employermustfollowthetermsofthe
contractorfacepossiblelegalaction.
“Itisnotthebeauty
ofabuildingyou
shouldlookat,it’sthe
constructionofthe
foundationthatwill
standthetestoftime.”
–DavidAllenCoe
Guide–ConstructionContracts
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ROLE PLAYERS WITHIN THE
CONSTRUCTION CONTRACT
Althoughtheconstructioncontract
typicallyonlyhastwoparties,(the
employerandcontractor),therearea
numberofroleplayersusuallyinvolved
(appointedseparatelybyeitherpartyorin
somecasesjointlybybothparties),who
assistintheconstructionprocess.
Theroleplayersaresetoutbelow(for
amoredetaileddescriptionoftherole
playersrefertothesectionsthatfollow):
EmployerRequirestheconstruction
workandprovidespayment
Commissionedto
constructtheworks
Settlesdisputes
betweentheparties
Actsonbehalfofthe
employerandmaybe
referredtoasengineer,
projectmanager,principal
agent,etc.
Appointedbythe
contractortoperforma
partoftheconstruction
worksunderasubcontract
Contractor
Subcontractor
Adjudicator/
Arbitrator/ Court
Employer’s
Representative
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Working with the employer’s representative
Employersusuallyelecttoworkthrough
arepresentativewhomaybeanarchitect,
anengineer,aprojectmanager,aquantity
surveyororanyotherqualifiedthirdparty.
Theemployergiveshisorherrepresentative
theauthoritytoactonhisorherbehalf
intheexecutionofcertainprovisionsof
thecontract.
Therepresentative’sroleistooverseeand
administerthecontractandtheprojectitself.
Itisimportanttodevelopagoodworking
relationshipwiththeemployerand/orhisor
herrepresentative,asthecontractoralways
benefitsfromtrustandco-operationarising
fromthisrelationship.
Importantly,theemployer’srepresentative
isusuallythepersontowhomallnotices,
invoicesandclaimsmustbesubmittedandis
thepersonwhodeterminestheamountsdue
tothecontractor.
Therearesomeimportantstepsacontractor
cantaketodevelopthisrelationshipsuchas:
• Reportallproblemstotheemployer,
throughtheappointedrepresentative,
asquicklyaspossible.Thisisvery
importantiftheproblemscouldcause
costincreasesordelaycompletion.
• Handoveringoodtimeallnotices,
advices,timedelayclaims,badweather
reports,certificatesforpayment,
invoices,listsofworkers,plant
on-site,etc.
• Makesureclaimsaresubmittedin
strictcompliancewiththeapplicable
contractualprovisions,inwritingwithin
theperiodstatedinthecontract.Ifa
claimcannotbepreparedwithinthe
requiredperiod,extensionsshould
besoughtpriortotheexpiryofthe
period.Ifnoextensionisgrantedor
communicatedpriortotheexpiryof
thetimeperiods,theclaim(evenif
notfullycomplete)andalldocuments
availableatthattimeshouldbe
submitted(explainingifpossiblewhy
theclaimcannotbecompletedand
submittedontime),withanyfurther
documentsandinformationrequired
tobeprovidedthereafter.
• Onlymakereasonableclaimsfor
additionalpayment.Inflatedor
frivolousclaimswillberejected.
• Carryoutallwritteninstructions.Ifthe
instructionsaredifficultorimpossible
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toexecute,talktotherepresentative
whoissuedtheinstructionsassoonas
possibletoseeifitcanbedoneina
differentway–do not delay.
Ifthecontractordisagreeswithanydecision
takenbytheemployer’srepresentative,
thecontractorshould,assoonaspossible,
givenoticeofadispute(ifstipulatedinthe
contract)intermsofthecontracttothe
employer’srepresentative.Insomecontracts
timebarsarealsoinplaceforwhenadispute
shouldbedisclosedandsubmittedtoan
adjudicatororarbitrator.Thecontractshould
alwaysbestudiedtoseeifsuchtimebars
apply,andtoensurethattheyarefollowed.
Inthiswayyou
arelikelytoavoid
disputes.Shoulda
disagreementactually
arise,itisbestto
lookforpossible
compromisesto
resolvethedispute.
Different forms of contracts
Thetypeofcontractformtobeusedwill
dependontheemployer’spreferenceas
wellastheworkstobeexecuted.Two
commonwaysinwhichpartiescancontract
areeitherthroughabespokecontractor
astandardformcontract.
BESPOKE CONTRACT
Thisisatypeofcontractthatisnot
basedonastandardformcontractandis
speciallydraftedandfullycustomisedto
caterforspecificneedsorrequirementsfor
theparties.Thistypeofcontractisnot
commonlyusedbylendersorbanks
whosometimesprovidethefundingof
constructionworks.Accordingto
theConstructionIndustryDevelopment
Board(CIDB,additionalinformation
providedonpage13),whencontracting
withgovernmententities(state-owned
companies,governmentdepartmentsetc.)
onlystandardformcontractsshouldbeused.
Thisistoensureameasureofconsistency
anduniformityinthetermsofconstruction
agreementsconcludedwiththegovernment.
STANDARD FORM CONTRACTS
Thereareusuallyrisksandissueswhichwill
becommonforallconstructionprojects
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andactivities.Accordingly,anumber
of“standardform”contractshavebeen
developedwhichsetoutstandardtermsfor
aconstructioncontracttocovertherelated
issuesandrisksthatwillmostlikelyapply.
Therearestandardformcontractsforboth
constructionworkandconstruction-related
professionalservices(forexamplepure
designwork,orsupervisionwork
forconstruction).
Standardformcontractsareusefulbecause
theycanbeobtainedandunderstoodin
advanceand,therefore,areusuallyeasier
toagreeoninsteadofdraftingtheentire
contractfromscratch.Thepartiessimply
agreeonspecificchangestothestandard
termsbasedontherequirementsforthe
specificconstructionprojectconcerned.
Itisthereforeveryimportantfora
contractortobecomefamiliarwiththe
relevantstandardformcontracts,which
couldbeusedforthetypeofconstruction
workwhichthecontractorwouldnormally
considertenderingfor.Alistofstandard
formcontractsthataretypicallyusedin
SouthAfricaissetoutonpage13(these
standardformsareapprovedbytheCIDB,
furtherinformationregardingtheCIDBis
providedonpage13).
Guide–ConstructionContracts
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Specific types of standard form contracts
(approved by the CIDB)
CONSTRUCTION PROFESSIONAL SERVICES
FIDIC–FrenchInitialsforInternational
FederationofConsultingEngineers(1999)
ShortContractandRed,Yellowand
SilverBooks
CIDB–StandardProfessionalServices
Contract3rdEdition
GCC–GeneralConditionsofContract
forConstruction(2010)
NEC–NewEngineeringContract
(ProfessionalServicesContract)
JBCC–(JBCCseries2000)(Principal
BuildingAgreementandMinor
WorksAgreement)
NEC–NewEngineeringContract
(EngineeringandConstructionContract
andEngineeringandConstruction
ShortContract)
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Different ways of contracting
Therearedifferentwaysinwhicha
prospectivecontractorcanparticipateina
constructioncontract.Someexamplesare
listedbelow:
• Main contractor –Thecontractorhimself
orherselfconcludesacontractwithan
employertobuild/constructsomething.
(egbuildingaschool).
• Joint venture partner –Thecontractor
formsanagreementwithoneormore
othercontractorsonanequalfooting.
Theythenjointlysignacontractto
build/constructallorapartofthe
project.Itisimportanttonotethatin
thiscase,eachcontractorinthejoint
ventureisresponsibletotheemployer
forallobligationsunderthecontract.
Inotherwords,asbetweentheemployer
andthemembersofthejointventure,
eachmemberofthejointventureis
responsiblefortheactionsorbreach
ofanyothermember.
• Subcontractor –Thesubcontractorhas
anagreementwiththemaincontractor
tocompleteapartoftheworks,and
willnothaveanycontractwithor
obligationsto,orrightsagainst,the
employer.Subcontractorswillusually
havethesamerightsandresponsibilities
asthemaincontractor.Butsince
subcontractorscontractwiththe
maincontractor,theserightsand
responsibilitieswillbeexercisedby
andbetweenthesubcontractorand
themaincontractor.
Thesubcontractordoesnothavea
contractwiththeemployer,andinmost
instancesdoesnothavearelationship
withthem.Insomeinstances,however,the
employercantakeupthisresponsibility.
Whenanemployerwantstousea
subcontractoroftheirchoice,the
subcontractorisreferredtoasa
“nominatedsubcontractor”andin
certaininstances,theemployerwill
takeupriskduetoitsnomination.
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Construction contract arrangements
Thesecanbecreatedbystandardform
contractsorcateredfor/createdona
bespokebasis.Themostcommonly
usedarrangementsareasfollows:
• Pure construction contract –Thisisa
formofcontractwherethecontractor
isresponsiblefortheconstructionof
theworksasperthespecificationsand
designprovidedby(orbyathirdparty
onbehalfof)theemployer.Withthis
typeofcontract,thecontractorbears
thelowestrisk.Thepriceisoftenre-
measurable,basedonabillofquantities
(adocumentdetailingspecificpricesfor
goodsandservicesthecontractorwill
provide)sincethedesignisnotusually
completeandfullyavailableatthepoint
thatconstructionworkistocommence.
• Design-build –Thisisaformofcontract
wherethecontractorisresponsiblefor
boththedesignandtheconstructionof
theworks.Duetothisfactthecontractor
bearsmoreriskwhencomparedtoa
pureconstructioncontract(including
ensuringthattheworkisfitforits
intendedpurpose).Therefore,thisisa
moderatelypricedarrangement;usually
afixedlumpsumpriceisrequiredfor
doingbothdesignandconstruction,but
appropriateadjustmentstotheprice
areprovidedforeventsoutsideofthe
contractor’sresponsibility.
• Engineer, procure and construct –
Thisisaformofcontractwherethe
contractorisresponsiblefordesign/
engineering,procurement/sourcingof
materialsandconstructionoftheworks
(includingensuringthattheworkisfit
foritsstatedpurpose).Thecontractor
bearsthemajorityoftheriskandthe
employerwillregardhimorherasthe
singlepointofresponsibilityforthe
wholeproject.Thisis,therefore,the
mostexpensivetypeofarrangement.
Thecontractorisusuallyrequiredto
provideafixedlumpsumprice,with
fewerentitlementstoadjustmentsthan
underanyotherarrangement,andmust
thereforeappropriatelypriceintherisks.
Thetablebelowillustratesthearrangements
describedabovewithregardstopricing.
Price vs risk graph
PureConstruction
Design-Build
Pri
ce
Risk
Engineer,ProcureandConstruct
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Construction Industry Development Board
TheConstructionIndustryDevelopment
Board(CIDB)isabodycreatedin
termsoftheCIDBActtoregulatethe
constructionindustry.
TheCIDBAct38of2000(CIDBAct)
requiresandgivestheCIDBthepowerto:
• Establishanationalregisterof
contractorsandofconstruction
projectstoregulate,monitorand
promotetheperformanceofthe
industryforsustainablegrowth,
deliveryandempowerment.
• Promoteimproveddelivery
managementcapacityandastandard
andconsistentapplicationof
procurementpolicythroughoutall
spheresofgovernment.
• Promoteimprovedperformanceand
bestpracticeofpublic(government)
andprivatesectorclients,contractors
andotherparticipantsinthe
constructiondeliveryprocess.
• Promotecontinuedandconsistent
participationoftheemerging
constructionsector.
AccordingtotheCIDBregulations,public
sectorconstructionprocurementmustbe
undertakenonstandardformcontracts
approvedorpreparedbytheConstruction
IndustryDevelopmentBoardRegulations
(CIDBActRegulations).Inaddition,only
contractorswithanappropriateregistration
intermsoftheCIDBActandregulations
maytenderforandbeappointedtoperform
constructionworkinthepublicsector.
TheCIDBalsoencouragesusingthese
standardformcontractsforprivate
sectorconstructionprocurementto
promoteefficiency.
FormoreinformationregardingtheCIDB
aswellasregistrationrequirements,refer
tothelistofusefullinksonpage27.
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Deciding on which contract to use
Theideaofstandardformcontractsisto
includeprovisionsthatarebeneficialtoboth
partiestothecontractinaccordancewith
goodpractice.Somecontractsare,however,
notbasedontheapproachofgoodpractice.
Itisthereforeimportanttobefamiliar
withthethreeRs whendecidingwhich
contracttouse:
1. Rights –theseareentitlementsthatone
partyhasagainstanother,entitlingthe
partywhohastherighttocompelthe
otherpartytodoornottodosomething.
2. Responsibilities – theseareobligations
todo,ornottodosomething,forthe
partywhohastheright.
3. Risks –thesearethepossibilitiesof
somethinghappeningornothappening,
whichcanresultinadditionalliability
arisingforeitherorbothparties.Risks
canbeabsorbed,avoided,shared,
transferredormitigatedundertheterms
ofthecontract.Inthisway,theycanbe
dealtwithinawaythatbothpartiesare
comfortablewithandnotcaughtoff-
guard,aslongastheyarenotignored
ornotconsideredatall.
Main contractor and subcontractor (rights,
responsibilities and risks)
Usuallyinconstructioncontractsthemain
contractorwillberesponsiblefortheentire
project.Heorshewilltakeresponsibility
forthesafetyofhisorheremployeesand,
mostofthetime,thesubcontractors.
Asummaryofthemorecommonrights,
responsibilitiesandrisksfollows:
1. RIGHTS
• Timeous payments – themain
contractorisentitledtobepaidwithin
thetimestatedinthecontract,failing
whichheorsheshouldusuallybeable
toclaiminterestonlatepayment.
• Extensions of time –themain
contractorcanclaimforanextension
oftimeforcompletioninaccordance
withtheinstancescateredforinthe
contract.Theusualtestiswhetheror
nottheparticularact/incidentthat
willdelaytimeforcompletioniswithin
hisorhercontrolornot.
• Access to site – themaincontractor
hasarighttoaccesstothesiteat
whichtheworksaretobecompleted
atthetimestatedandagreedinthe
contractagreement.
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• Upon termination of the contract –
themaincontractorusuallyhasthe
righttoterminatethecontractshould
amaterialbreachoraforce majeure
eventoccur.
• Appointment of subcontractors –
themaincontractorusuallyhasthe
righttoappointsubcontractorsifnot
otherwiseprovidedforinthecontract
(seesectionregardingnominated
subcontractorsonpage11),whomhe
orshewillbeheldresponsibleand
accountablefor.
2. RESPONSIBILITIES
• Completing works –themain
contractorhastheresponsibilityto
completetheworkswithinthetime
allocatedinthecontractagreement.
• Guarantees –insomeinstances,
especiallywherethecontractisa
design-buildorEPC(Engineer,Procure
andConstruct),themaincontractor
willberequiredtoprovideperformance
guarantees.Thisisamitigationofrisk
strategyonthepartoftheemployer
toensurethatiftheworksarenot
performedtothecorrectstandardor
specifications,heorshewillbecovered
accordingly.Thiswillusuallybepriced
inbythecontractor.
• Insurances –themaincontractor
willinsomeinstancesberequiredto
acquireinsurancefortheworks,site,
itsemployees,materials,etc.Thisisto
ensurethatriskremainsmitigatedat
alltimes.
• Administrative procedures/ compliance
with all applicable laws –themain
contractorhastoensurethatthe
requiredlicences,permitsandthelike
areobtainedbefore,duringandafter
theconstructionworksproceed.Itis
imperativeforthecontractortoobtain
alllicenceswithinthetimeperiods
allocatedinordertoavoidsituations
wheretheseissuesleadtoadelayin
theconstructionprocessandtherefore
adelayintheworks.
• Response to communications –
themaincontractorhasanobligation
torespondtoallcommunicationsfrom
theemployerorhisorherrepresentative
atalltimesduringthesubsistenceof
theworks.Thesemightbevariations,
progressupdates,suspensionofworks,
accesstositeissues,delayedpayment
notices,etc.
• Substantiation of claims –inthe
instancewherethecontractagreement
makesprovisionforaclaimmechanism,
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unlessotherwisestatedinthecontract
agreement,thecontractormust
substantiatesuchaclaiminorder
toensureswiftsettlementofsuch
apayment.
• Subcontracts –maincontractorsshould
ensurethatwrittenagreementsare
enteredintobetweenthemselvesand
thesubcontractors.Thisistoensure
thattheyareabletoproperlyhold
suchsubcontractorsliableshould
anyissuearise.
3. RISKS
Financial loss:
• Errors in calculations –themain
contractorshouldensurethat
measurementsregardingtheworksprice
aredonecompletelyandaccurately.
Thecontractormustalsoincludea
contingencyamountwithintheprice
forlossthatcouldbesufferedforrisks
forwhichnoadditionalcompensationis
allowedunderthecontract.
• Poor management –themaincontractor
shouldensurethatheorshemanages
theprojectaccordingly,especiallywhen
subcontractorsareinvolvedasthismight
leadtodirefinancialconsequences.
• Delays –themaincontractorshould
alsoensurethatmaterialsaredelivered
ontime,licencesobtainedandthat
hisorheremployeesperformthe
workstimeously.Failuretodosowill
leadtoasituationwheredelaysoccur
anddependingonthewordingofthe
contractthemaincontractormightbe
subjecttodelaydamages.
• Penalties –themaincontractorshould
beawareofthefactthatdepending
onthewordingofthecontract,heor
shemightbeliableforpenaltiesshould
heorshefailtomeetcertainsetdates
orfailtomeetcertainperformance
guarantees.Itisimportanttonote
though,thatifapenaltyapplies,the
employerdoesnothavetoprovethat
hisorherlossstemmingfromthe
breachisequaltothepenalty,butmay
notclaimfurtheramountsfromthe
contractorinrespectofthebreach
towhichthepenaltyapplies.Inother
wordsthecontractor’sliabilitytopay
damagesforthebreachislimitedtothe
amountofthepenalty.
• Insolvency of employer –themain
contractorisatriskofthisoccurring
especiallywhentheemployerisa
privateindividualorsmallcompany.
Themaincontractorcanmitigatethis
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riskbyacquiringbankguarantees
fromtheemployerguaranteeing
performance(payment)oftheamounts
owed.Themaincontractormust
rememberthatheorshehasabuilder’s
lienovertheconstructedproperty
whichwouldstandagainstaclaim
forinsolvency,providedthatsucha
contractormaintainspossessionof
theworks.
Joint venture partners (rights,
responsibilities and risks)
Jointventuresmaybeformedforvarious
reasons,suchas:
• Sizeandcomplexityoftheproject;
• Iftheprojectrequiresspecialised
skillsandexpertise.
Ajointventuremaybeenteredintoaseither
themaincontractororasubcontractor
whichmeansthethree Rsdiscussedon
page14willapplytojointventures.
Ajointventureisapartnershipwhich
requiresthepartnerstobejointlyand
severallyliableforallobligationsofthe
jointventure.Therefore,onepartnermay
besuedforthefulldebtofthepartnership;
thispartnerinturnhasarighttosuethe
otherpartner/sfortheirpro ratashare
ofthedebt.
Emergingcontractorscandevelop
managementskillsandtechnicalexpertise
throughassociationinjointventureswith
establishedcontractors.
Itisimportanttosetupajointventure
agreementwhichendeavourstoassignrisk,
responsibilityandrewardfairlybetween
jointventurepartners.
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• Maincontractorsmustensurethat
communicationwithsubcontractors
remainsatanoptimumlevel,and
iftherearevarioussubcontractors,
ensurethattheyhaveaccessto
thesiteatthetimewhichthey
arepromisedaccess.
• Thecontractormustcheckif
standardformcontractconditions
havebeenchangedbytheemployer
andhowthiswillaffecthimorher.
• Alwayssticktothetimelines
allowedwithinthecontract.
Ensurethereisacontractinplace
betweenthesubcontractorandthe
maincontractor.Asasubcontractor
oneshouldlookoutforthefollowing
conditions,whichshouldbeavoided
ornegotiatedagainst:
• Reductionofand/orset-offfrom
amountscertifiedforpayment
tothesubcontractortocover
amountsallegedlyowedtothe
maincontractor;
• Settlingdisputesonlythrough
thecourtswithnoprovisionfor
adjudicationormediation;
• Thesubcontractoronlygets
paidoncethemaincontractorhas
beenpaidbytheemployer;and
• Unreasonableretentionpercentages
andperiods.nancial Loss:
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Common construction contract terms/ procedures
Notallcontractswillfollowtheterms/
procedureslistedbelow–thisisintended
toprovideanoverviewofpossibleand
commoncontractterms/procedures.
CONTRACT PROCEDURES
Tendering and contract award
• Thetenderisadvertisedbythe
employerorhisorherrepresentative;
• Contractorssubmittheirtendersby
therequireddate;
• Thetendersareevaluated,anda
tenderevaluationreportisproduced
recommendingthepreferred
tenderbid;
• Theemployerreviewsthetender
evaluationreportandawards
thecontract;
• Thecontractisnegotiatedand
eventuallysignedbyboththe
contractorandtheemployer;
• Thecontractorisresponsibleforthe
provisionofinsuranceandthesurety/
guaranteeasstipulatedinthecontract;
• Thesiteisofficiallyhandedoverto
thecontractor;
• Thecontractorestablisheshisorher
campandsiteofficeandordersthe
materialsrequiredtostartconstruction;
• Thecontractorsetsouttheworkand
startsconstruction.
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Monthly activities during the contract
• Daily,weeklyormonthlysitemeetings
betweentheemployerandthe
contractorandinspectionofthework
bytheemployer’srepresentativeto
ensurequality;
• Preparationofmonthlypayment
certificatesbythecontractor;
• Reviewandcertificationofthepayment
certificate.Queriesarereferredto
thecontractor;
• Thecertifiedpaymentcertificateis
submittedforpaymentbytheemployer;
• Paymentismadetothecontractor
withintheperiodspecifiedin
thecontract.
Handover procedure
• Thecontractorrequeststheemployer
toinspectthecompletedprojectprior
tohandover;
• Theemployerinspectstheproject,
identifiesoutstandingitemstobe
completedbythecontractorpriorto
thehandoveroftheprojectandissues
a“snaglist”tothecontractorlisting
theoutstandingitems;
• Thecontractorcompletesthe
outstandingitemsandnotifiesthe
employerthattheprojectiscomplete
andreadyforafinalinspection;
• Theemployer(orhisorheragent)
carriesoutafinalinspection.Ifheor
she(orhisorheragent)issatisfiedthat
theworks/projectisnowsubstantially
complete,heorsheorhisorheragent
willcertify/confirmthattheworks/
projectisreadytobehandedover;
• Thecontractorhandstheworks/
projectovertotheemployer(thatis,
theemployertakespossessionofthe
works/project).
Final account
• Thecontractorortheemployer
(asrequiredintermsofthecontract)
preparesthefinalaccountduringthe
handoverperiodandsubmitsitto
theemployer;
• Thefinalaccountiscertifiedandissued
totheemployeroncetheemployer
hasissueda(practical/taking-over)
completioncertificate;
• Theemployerpaysthefinalaccountless
theretentionmoney;
• Thisretentionmoneyisreleasedtothe
contractorattheendofthedefects
liabilityperiod.
Defects liability period and final completion
• Thecontractorisresponsibleformaking
gooditemswhichshowdefectsduring
thedefectsliabilityperiod;
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• Neartheendofthedefectsliability
period,thecontractorrequeststhe
employertoinspecttheprojectand
identifyanydefectiveitemswhichthe
contractorisresponsibleformaking
goodintermsofthecontract;
• Themoneyheldinretentionbythe
employerwillonlybepaidwhenthe
contractorhasproperlycompleted
thelistofdefects;
• Oncetheemployerhasissuedacopy
ofthefinalcompletioncertificate,he
orsheisrequiredtopaytheretention
moneyduetothecontractor.
The project is now complete
• Thecontractorisusuallystillliable
fortherepairofanylatentdefects
forseveralyears.Latentdefectsare
defectswhichwerenotapparentand
whichareasonableinspectionwould
nothaverevealedduringthedefects
liabilityperiod.Differentcontracts
dealwiththeliabilityforlatent
defectsdifferently.
• Forlatentdefectliabilitynottoapplyit
mustbeexpresslyexcluded.Ifnothing
issaidaboutlatentdefectliability,
thecommonlawapplies;namely
theemployerhasarighttoholdthe
contractorresponsibleforalatent
defectwithinthreeyearsofthedate
onwhichheorshebecameoroughtto
havebecomeawareofthelatentdefect.
Disputes and how to resolve them
• Moststandardformcontractswillcater
foradisputeresolutionmechanism
whichwillstatetheproceduretobe
followedwhenadisputearises.Ifa
bespokecontractisused,itisbest
tohaveaclausethatprescribesa
disputeresolutionmechanismassuch
mechanismscanleadtodisputesbeing
settledtimeouslyandamicably.
• Claims procedure
Thecontractshouldprovidefora
proceduretobefollowedoncea
contractorortheemployerrealises
thattheyhaveaclaim.Submissionfor
andagainstsuchaclaimwillusuallybe
made.Thecontractwillusuallysetout
timeperiodsforthecontractortogive
noticeofaclaimandtosubmitaclaim.
Thesemustbeidentified,notedand
compliedwithbythecontractor.
• Determination
Thesubmissionsreferredtoaboveare
usuallymadetotherepresentativeofthe
employer.Thisindividualwilldetermine
ifindeedaclaimexistsandifso,the
amountclaimable.
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21CONTENTS PAGE
• Dispute
Ifeitherpartyisnotsatisfiedwiththe
determinationmade,theycandeclare
adisputeornotifytheirdissatisfaction
and,dependingontheprovisionsof
thecontract,either:trytomediatethe
dispute;approachaDAB/arbitration;
approachthecourtorfollowanyother
mechanismsetoutbythecontract.
• DAB/ Arbitration
Inemployingthismechanismparties
willusuallynegotiateandconcludean
arbitration/adjudicationagreement
whichwillstatetheexactprocedureto
befollowedinarbitrating/adjudicating
thedispute.Anarbitrator(s)/
adjudicator(s)willbeagreedupon,and
datesforsubmissionsandargument,
issuesrelatingtocosts,andallother
logisticalissueswillbeagreedin
ameetingwiththearbitrator(s)/
adjudicator(s).Thisagreementwillthen
befolloweduntiladecisionismadeby
thearbitrator(s)/adjudicator(s).Itis
importanttonotethattherulingofan
arbitrator/adjudicatorisbindingonthe
partiesandcanbemadeanorderof
thecourt.Ifitisagreedthattheaward
byanarbitratororadjudicatorisfinal
andbinding,acourtwill,saveinthe
mostexceptionalcases,notoverturn
theaward.
• Court
Ifnoprovisionismadeforarbitration
inthecontract,andtheparties
donotagreetothisoranyother
mechanismtoresolvethedispute,
thenormalSouthAfricancourt
systemmaybefollowedtosettle
thedispute.
Contractorsshouldensurethatafterthe
awardofatendertheagreementtendered
foristheagreementthattheysign.
Contractorsshouldnotethattheymay
askfortherelaxationofcertainstrictor
unfairtermsofthecontract,buttheymust
ensurethatthisdoesnotrenderthem
disqualified,andtheymustvoicethis
concernintheprescribedformat
(usuallytenderspecific).
Althougharbitrationoffersaquicker,
controlledandmuchmorediscreet
solutiontodisputes,itisnotalways
thecheapestsolution.
Guide–ConstructionContracts
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22CONTENTS PAGE
Key concepts
CONTRACT DELIVERABLE
• Thedeliverableinaconstruction
contractisthecompletedworks
(thecompletedbuilding,structure).
Thecompletedworksshouldbe
describedascorrectlyandclearlyas
possibleatthetimeofcontract,and
toallowittoevolveinacontrolled
manner(deliverable);
• Todefinethecompletiondateofthe
deliverablebasedonwhatisknown
andwhatoughttobereasonably
foreseeablebyanexperienced
contractoratthetime,andtoallow
thecompletiondatetochangeina
controlledmannerbyprovidingfor
circumstanceswherethecompletion
datecanbeextended.
CONTRACT PRICE
• Therearevariouspricingoptionsto
consider,forexample:
•Lumpsumcontract
•Unitpricecontract/
remeasurablecontract
•Fixedprice
Pleaseseethesectiondealingwithcontract
arrangementsonpage12.
CONTRACT RISK
Torespectivelyallocatetheforeseeableand
unforeseeable/likelyandunlikelyrisksto
eachoftheparties.
CONTRACT TERMS
Thefollowingtermsarekeyandregularly
usedinconstructioncontracts.Itis
thereforeveryimportantthatcontractors
knowandunderstandwhattheymean:
• BOQ:Thisisadetailedstatementof
thework,materials,prices,dimensions
andotherdetailsfortheconstruction
ofthework.Thisdocumentwillbe
usedinremeasurablecontracts.
• Contractor: Thepersonorfirmwho
signsthecontracttodothework.
• Defect:Defectsareaspectsofthe
worksthatarenotinaccordance
withthecontract.Theyusuallyoccur
becauseofdesigndeficiencies,
materialdeficiencies,specification
problemsorworkmanshipdeficiencies.
• Defects liability period:Theperiod
forwhichthecontractorisrequired
to“guarantee”thecompletedworks
andtorectifyanydefectsthatmaybe
discoveredorappear.
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23CONTENTS PAGE
Thedefectliabilityperiodstartswhen
theemployerissatisfiedthatthe
worksarecompleteandtakesdelivery.
Thedefectsliabilityperiodvaries,
dependingonthenatureofthe
work,andcanrangefromthree
to12months.
• Deviation:Whenaplan,design
orspecificationsagreedbythe
partiesisnotfollowedduring
theconstructionprocess.
• Disputes: Ingeneral,adisputeis
definedasanunresolvedmatterof
dissatisfactionordifference.
• Employer:Alsoknownastheclient,
theemployermaybeapersonora
governmentagencyoracorporation,
andisthepartywhowantstheproject
constructedandwhowillpayforthe
work.Theemployeralsosigns
thecontract.
• Employer’s representative:
Arepresentativeoftheemployer,
usuallyaprofessionalarchitect,
engineer,projectmanagerorquantity
surveyor.Thisisthepersonwithwhom
thecontractorwillhavethegreatest
contactduringthecontract.
• Escalation clauses:Catersfortherise
andfallofeconomicfactors,wherea
project/contractexceedsadurationof
oneyear,eglabourrates,commodity
prices,etc.
• Extension of time (EOT):An
extendedtimeforcompletionofthe
works,relievingthecontractorfrom
havingtopaypenaltiesfor
thedelay.
• Force majeure: Anexceptionalevent
orcircumstancebeyondaparty’s
controlthatrendersperformanceof
theworksimpossibleforaperiodof
timeorforever(egwar,terrorism,etc).
• Performance guarantee: Aguarantee
procuredbythecontractorfroma
financialinstitutioninfavourofthe
employerassecurityforthedue
performanceofthecontractor’s
obligationsunderthecontract.The
employercanclaimagainstthis
securityshouldthecontractorfailto
performtheobligationsforwhichthe
securityhasbeengiven.Thesecurity
isreturnedwhenthecontractis
satisfactorilycompleted.Theterms
oftheguaranteewilldeterminethe
naturethereof,andtheinstancesin
whichitcanbecalled,andmustfor
thatreasonbereadverycarefully.
Guide–ConstructionContracts
CONTENTS PAGE
BOWMANS
24
• Payment guarantee:Aguarantee
procuredbytheemployerfrom
afinancialinstitutioninfavourof
thecontractorassecurityforthe
employer’scompliancewithits
paymentobligationsunderthe
contract.Thecontractorcanclaim
againsttheguaranteewherethe
employerhasfailedtomakedue
paymenttothecontractorintermsof
thecontract.Thissecurityisreturned
whentheemployer’spayment
obligationshavebeenfulfilled.The
termsoftheguaranteewilldetermine
thenaturethereof,andtheinstances
inwhichitcanbecalled,andmustfor
thatreasonbereadverycarefully.
• Limitation of liability:Thisisusuallya
clauseinthecontractwhichapportions
liabilitybetweentheparties.Itisan
attempttolimit,define,estimateand
manageliabilitybetweentheparties
themselvesandthirdparties.Acap
ondamagesmaybeused.
• Overhead costs:Costsincurredby
thecontractorinestablishingand
maintainingsite.
• Penalties:Mostcontractscontaina
penaltyforfailuretocompletethe
projectwithinthecontractedperiod
orafailuretoachievecertain
guaranteedlevelsofperformanceof
theworks.Penaltiesareanagreed
uponamountofmoneywhichis
deemedtocovertheinnocentparty’s
lossinrespectofthebreachforwhich
thepenaltyisimposed.Inagreeing
apenalty,itshouldbeconsidered
whetherthepenaltyproposedbears
somemeasureofpotentialharmtothe
innocentpartyandtheinnocentparty
shouldbemadetoexplaintheamount
proposed,ifitisproposed.
• Pricing options:Optionsavailableto
acontractwhenpricingaparticular
contractor(eglumpsum,measurable,
activitybased,time-basedetc).
• Retention:Thisismoney,usually
from5%to10%ofthevalueofthe
workdone,thatisheldbackbythe
employertocorrectdefectivework.
Whentheprojectisdeliveredtothe
employer,partoftheretentionmoney
isreturnedtothecontractor,andthe
balanceisreleasedattheendofthe
defectsliabilityperiod.
• Subcontractor:Usuallyappointed,
managedandpaidbythecontractor;
entersintoacontractwith
thecontractor.
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25CONTENTS PAGE
25
• Variation:Anychangetothecontract
whichisinstructedorapproved.Most
standardformcontractsprovidefor
aproceduretobefollowedwhen
suchachangeisrequired.
Guide–ConstructionContracts
CONTENTS PAGE
BOWMANS
Applicable legislation
THE CONSTRUCTION INDUSTRY
DEVELOPMENT BOARD ACT 38 OF 2000
ThisActregulatestheconstructionindustry
asawholeandpublishesstandards,
directivesandregulationstogiveeffect
tothisobjective.Ifacontractorintends
totenderforpublicsectorworks,regard
shouldbehadtothisActandregulations,
inparticular,therequirementsforregistration.
THE OCCUPATIONAL HEALTH AND
SAFETY ACT 85 OF 1993
ThisActprescribesstandardsand
requirementsaccordingtowhichthe
contractor’semployeesand/orall
individualsonsitearetobetreated.
Theconstructionregulations(thelatest
publishedin2014)underthisActprescribe
therequirementstoensurehealthand
safetyinconstructionactivities.
NATIONAL ENVIRONMENTAL
MANAGEMENT ACT 107 OF 1998
ThisActprovidestherequirementsand
proceduresnecessarywheretheconstruction
ofanyworksposearisktotheenvironment.
NATIONAL BUILDING REGULATIONS
AND BUILDING STANDARDS ACT 103
OF 1977
ThisActprescribesthestandardsand
requirementstowhichanybuilding
tobeusedforoccupationalpurposes
shouldcomply.
THE CONSUMER PROTECTION ACT
68 OF 2008
ThisActprotects“consumers”when
enteringintocontractswithcontractors.
THE COMPETITION ACT 89 OF 1998
ThisActprotectsemployersagainst
collusionduringthetenderphaseof
thecontract.
MUNICIPALITY BY-LAWS
Theseareby-lawspromulgatedbythe
municipalityregardingbuildings.
26
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BOWMANS
27CONTENTS PAGE
Useful links
• Association of Arbitrators
(Southern Africa)
www.arbitrators.co.za
• Department of Trade and Industry
www.thedti.gov.za
• Tokiso Dispute Settlement
(Pty) Ltd
www.tokiso.com
• Arbitration Foundation of South
Africa (AFSA)
www.arbitration.co.za
• United Nations Commission on
International Trade Law (UNCITRAL)
www.uncitral.org
• International Chamber of
Commerce (ICC)
www.iccwbo.org
• London Court of International
Arbitration (LCIA)
www.lcia.org
• Construction Industry
Development Board
www.cidb.co.za
• Council for the Built Environment
www.cbe.org.za
• South Africa Federation of Civil
Engineering Contractors
www.safcec.org.za
Guide–ConstructionContracts
CONTENTS PAGE
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