CONTRACTS PREPARING THE PRINCIPAL S REQUIREMENTS FOR A CONSTRUCTION PROJECT

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1 CONTRACTS PREPARING THE PRINCIPAL S REQUIREMENTS FOR A CONSTRUCTION PROJECT David Nancarrow, Senior Associate Mallesons Stephen Jaques, Melbourne The task of writing down the detailed requirements for a construction project is one of the most difficult tasks the project principal will undertake. It requires foresight, a thorough analysis of the many influences on the project, technical skills and above all else project management expertise. The question is can (and should) a construction lawyer assist in this task? INTRODUCTION As a construction lawyer one of the first questions you should ask your client is what do you want from this project? The follow up question should be where is this documented? It still surprises me how often the answer to these questions is not readily available even to those personnel from the client s organisation that are directly involved in or have carriage of the project. If the client cannot articulate what it wants then how can a contractor be expected to understand its obligations and even more critically, how can it fulfil those obligations? The ability and discipline to turn concepts into words and then into language that describes the requirements in a manner that can be included in a construction contract is rarely found within one organisation. It is common for our clients to have no internal expertise in relation to the construction process. An organisation that manufactures cars or chocolates is unlikely to understand the intricacies of the construction process. And in reality why should it have this skill and experience if it only is involved in the process infrequently? The answer then for our clients is to engage suitably experienced and skilled consultants to provide them with advice and resources to get them through the construction phase of their project with the smallest amount of pain as possible. There are numerous consultants that offer the expert advice that our clients might need architects, engineers, programmers, accountants, project managers to name a few. It is not that the right advice is not available. Rather it is managing the input from these consultants and bringing it all together that is the most difficult task. In our view a good construction lawyer is invaluable for this task. So what can we as construction lawyers provide our clients with? When we are asked to provide a construction contract it is easy to generate the general terms and conditions, attach the schedules provide by the client and say there is the contract. What needs to be considered is who should prepare the real documents that describe the project specifics and how do these documents interact with the other parts of the construction contract? I m sure you have all had the experience of preparing general terms and conditions and the client providing the scope of work/specifications/brief. Ideally these documents should not be prepared in isolation but unfortunately they often are. This paper is about the issues surrounding the preparation of the documents that describe the principal s project requirements. It will hopefully contain some content that you find informative and maybe even be helpful when you are advising your clients in the future. OVERALL REQUIREMENTS (STAGE 1) It is very important to establish the goals for the project and write them down at the outset of the project. Without a plan it is difficult, if not impossible, to manage the difficult and complex process that is any project involving construction. Ideally, it is at this time that the principal 34 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #109 JULY/AUGUST 2006

2 consults with its lawyers for the first time. And ideally, the lawyers provide advice on how the overall construction process works. The principal should set out all of its requirements for the project including commercial, technical, timing, impact on existing operations as early as possible in the project. It doesn t matter if the requirements are not finalised as this document can be updated as the project progresses. The factors that should be considered at this early stage the overall timing of the project there are two considerations; understanding the principal s business market currently and where it will be when the principal needs to be selling the product generated by the construction project; and at what point in the boom/bust cycle is the construction industry in at the time of the project. It also important to revisit this issue at all key stages of the project. It could have a material effect on marketing, sales, construction and operations: specific timing requirements what are the crucial stages of the project and when are they required to be completed; budgetary restrictions what are the principal s economic drivers; source of finance does the principal have the money or does it need to go to the market; and availability of resources both internal and external. The exercise of putting these requirements into writing forces the principal to consider each issue in turn and allows the priorities for the project to be determined. The requirements will determine the content of the project plan (section 3 below) and the detailed briefs for the consultants and ultimately the project brief (section 6 below). PREPARING A PROJECT PLAN (STAGE 2) Once the principal has written down its requirements it then needs to consider preparing a detailed plan for the actual project. This plan can serve multiple purposes including being a useful project management tool and also as a basis for internal reporting within the principal s organisation. At this stage the plan should the principal s goals including time, cost and quality; resources plan identify internal resources and where external resources are required; budgets; program; and other specific requirements of the principal. It is at this stage the key decision of how the construction project will be delivered needs to be considered. Ideally the principal s lawyers are involved and the pros and cons of the different methods can be critically assessed. CHOOSING THE METHOD OF DELIVERY (STAGE 3) There are numerous options to choose from including: design by principal construction by contractor; design and construction by contractor; design by principal construction by trade contractors management by construction manager; and design commenced by principal design completion and construction by contractor. The selection of the most appropriate method (there is usually no right or wrong way to deliver the project) requires careful thought and consideration of many of the factors noted above in sections 2.3 and 3.2. Of course the principal may not have any say in selecting the delivery method. For example the method of delivering PPP projects in Australia is that the principal (as project company or concessionaire) tenders for the project on the basis of signing a project agreement that requires the principal to deliver the entire project including financing, construction and operations. On these projects the only feasible option for the construction phase of the project is for the principal to prepare a design and construct contract that passes the project agreement obligations through to the contractor. It is very important to understand that the principal will still need to prepare documents that describe its requirements. The principal cannot rely on the documents prepared by the State as it has different requirements to the principal (refer to section 6.9 below). This paper will not provide any analysis of the delivery methods but for the purposes of illustrating the process of preparing the detailed documents for a project the last option above will be used as the basis for the discussion. Again, it should be noted that regardless of the delivery method it is still essential for the principal to set out its requirements for each contract it enters into. The method of the principal commencing the design before requiring the contractor to complete it is commonly used because of two key criteria the principal has a significant input into the early stages of the design and after the contractor is engaged (and consultants AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #109 JULY/AUGUST

3 are novated) there is one entity with responsibility for delivering the project on time, on cost and so that it meets the stipulated technical requirements. For the purpose of this paper it is a useful basis for the discussion because the principal has to prepare documents for both design and construction. PREPARING THE CONSTRUCTION DOCUMENTS (STAGE 4) Now that the delivery method has been selected the task of preparing the detailed documents that will describe the principal s requirements begins in earnest. The key construction related documents that are required consultancy agreements; novation agreements; and the construction contract. On most projects the construction lawyers are now involved (but strangely not on all projects) and it is essential to ensure that all of the documents are clear and consistent. When preparing each document the same question that was (or should have been) asked at the beginning of the project is relevant again now what does the principal want out of this particular agreement? CONSULTANCY AGREEMENTS The principal must prepare a clear brief that articulates what the principal wants the consultant to do. The brief should be prepared based on the information gathered by the principal in determining its overall project requirements and preparing the project plan. It is in this brief that the purpose of the project is described. It is for the principal to articulate the purpose so that the consultants can design to meet that purpose. The purpose can be developed as the design develops but it should be included in all of the consultancy agreements entered into by the principal. The ultimate goal is to have the contractor assume the fit for purpose promise upon execution of the design and construct contract so it is essential that the design prepared by the consultants when engaged by the principal also meets this requirement. Three other important parts of the consultancy agreements are: clear description of the scope of services for each consultant; which party is responsible for managing and coordinating the design; and the process and mechanism for novating the consultant to the design and construction contractor (if this is required). Each consultant should also be required to assist the principal to prepare the project brief (refer to section 6 below). NOVATION AGREEMENTS The deed of novation (to be signed by the principal, the consultant and the design and construct contractor) should be attached to the consultancy agreements. Its form should be simple with the following points clearly stated: the novation means the original contract (between principal and consultant) ends and a new contract (between contractor and consultant) starts; the principal is released from all claims by the consultant from the date of novation; the contractor is not liable to the consultant for claims arising from events before the date of novation; and the consultant is liable to the contractor for all design regardless of whether it is carried out before or after the date of novation. The novation process must be straight forward. Preferably the novation occurs when the principal notifies both the consultant and the contractor. This must be stated in both agreements. The execution of the deed of novation is then a matter of process. The parties should then sign (and usually want to) the deed of novation. By setting up the process to work in this manner the execution of the deed is merely a step in the process rather than being some form of bargaining position. THE CONSTRUCTION CONTRACT (STAGE 5) Regardless of the delivery method the construction contract must set out the principal s requirements very clearly. The principal s requirements will be in both the general conditions and the schedules or annexures to the contract. The guiding principle must be to clearly articulate the requirements to the contractor. To be clear the principal must understand its requirements and must then put them into the contract in a manner that is unambiguous. The relevant documents or sections of the construction contract project brief; completion and commissioning requirements; and any existing design. Project Brief From the principal s perspective the project brief is the most important document in a design and construction contract. It is the culmination of the principal s planning and detailed work that commenced at the outset of the project. It is the document that describes the principal s technical requirements and will be used by all parties during the project. At the end of the project the contractor s performance will 36 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #109 JULY/AUGUST 2006

4 be measured against the project brief. The detailed considerations the scope or extent of the works; performance requirements and how will satisfaction be determined; and which items need to be prescribed? The scope or extent of the works must be clearly delineated. The key question is what work does the principal want this contractor to carry out? In order to answer this question the principal will have to consider whether the works will be carried out by others and then consider the critical issue of the interaction between those parties. Factors to consider the physical limits of the works including a description of the site boundaries and any connection points for services; a list of exclusions; interface with existing plant; and interaction with other contractors. Describing the performance requirements for the works is essential for a design and construct arrangement. The principal will have had to determine these requirements when analysing the merits of the project at concept stage but the project brief is the location where the requirements are set out in final form. The principal must consider its: internal requirements; and external requirements (including regulatory and contractual obligations). At a minimum the contractor must meet the performance requirements that the principal is obliged to meet under its contractual arrangements with its customers and clients. The documents that could be relevant agreement for lease; supply agreements; contracts of sale; transportation agreements; and project agreement or concession deed. Preparing the project brief from scratch is a difficult task for a principal but an equally difficult (if not more) task is preparing a clear brief when the project already has a document or documents in existence. For example, on the recent Public Private Partnerships deals we have worked on the State has prepared comprehensive documents that articulate its requirements for the projects. These documents have varying degrees of clarity in relation to the State s requirements but it is crucial to recognise that they contain the State s requirements and not the principal s requirements. The principal has to consider its requirements and add them to the project brief for the construction contract. The principal must consider: designing for whole of life requirements; the operator s requirements (including access for maintenance and repairs); the principal s detailed requirements during the operation phase that the State has not considered; and any areas of the State s documents that do not contain adequate detail or prescribed performance requirements that do not meet the principal s goals for the project. Prescribing specific items should be done very carefully by a principal. For example telling the contractor that you want a certain type of roofing material in a design and construct contract is not only unnecessary but can lead to difficulties in enforcing the contract against the contractor in relation to design promises. The question should be which party should be responsible if the material or equipment ultimately does not perform as required? If the principal wants the answer to be the contractor then the principal should not tell the contractor what to use. The types of descriptions that should be avoided include sizes, thickness, strength, suppliers, models. Of course if the principal has a specific requirement then it must clearly set that requirement out. Completion and Commissioning Requirements The first consideration should be which party is best placed to carry out the commissioning and completion activities? Obviously before this question can be answered the scope of the activities needs to be understood. Preparation of the project brief will identify what needs to be done. Again both the principal s internal and external requirements need to be considered. Issues to be considered principal supplied resources (both personnel and materials); responsibility for output may be blurred if principal provides resources; provision of input material (i.e. gas for pipeline or coal for generator) the quantity and quality should be described; provision for delayed testing if input material is not available; and can the contractor do all of the required tests there may AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #109 JULY/AUGUST

5 be some things that only the operator or the principal can do. Existing Design One issue that is peculiar to the delivery method involving the novation of the principal s consultants to the contractor is the status of the design work by the consultants under the agreements with the principal. The theory of the process is that the contractor is solely responsible for the design under the design and construct contract but the key question is what happens to the design already carried out? Firstly, it cannot form part of the project brief. The project brief sets out the principal s requirements the principal is responsible for the content of the project brief but does not want responsibility for the design work performed by the consultants. This is the domain of the design and construct contractor. So if it is not part of the project brief what role does the existing design have under the design and construct contract? Again, we return to the question of what does the principal want? If the existing design contains elements that the principal absolutely must have included in the project then these elements must be transferred to the project brief. The existing design should be considered as a work in progress that the contractor can develop and change as design development proceeds. It is possible to prohibit any changes by the contractor to the existing design (unless necessary to meet the requirements of the project brief) but this removes an important commercial benefit to the contractor and should be considered in that context. The contractor will include in its price the cost savings it believes it can make by developing the design to suit its construction methods. This balancing act between the requirements of the principal and the commercial driver of the contractor is a very important dynamic to understand and should be foremost in the principal s mind when selecting the project delivery method and then when deciding on the level of detail to be included in the project brief. OTHER ISSUES There are other areas of a construction contract that require consideration as they also describe the principal s requirements. These defect rectification period and access requirements; subcontractor warranties specific items or materials for which the principal wants a direct ongoing contractual relationship with the manufacturer or supplier in relation to defect rectification; staging of the works separable portions; and contract administration representative of the principal or third party. CONCLUSION The real issue in all of this is communication. The principal must identify its requirements and then communicate those requirements to the parties that need to take action. The first task is to gather the technical information from within the principal s organisation and communicate that information to the construction lawyer. The earlier this process begins the better off the project will be. It should also be recognised that it is an ongoing process that continues up to the date the contract is signed. The second task is to ensure that the principal s requirements are consistently and clearly articulated to the consultants and contractors in their respective contracts. This task cannot be done by people working in silos there must be communication between the technical, legal and commercial personnel involved in the project. David Nancarrow s article was previously published on Mallesons Stephen Jaques web site January Reprinted with permission. 38 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #109 JULY/AUGUST 2006