NZ Building Industry Regulation & Compliance Conference Tina Hwang (Associate of Queen City Law) & Brett Heaven (Director of N Compass)

Transcription

1 NZ Building Industry Regulation & Compliance Conference 2018 Tina Hwang (Associate of Queen City Law) & Brett Heaven (Director of N Compass)

2 The Interplay between Head Contracts & Subcontractors Tina Hwang (Associate of Queen City Law) & Brett Heaven (Director of N Compass)

3 INTRODUCTION: PRESENTERS Tina Hwang, Associate of Queen City Law Brett Heaven, Director/PM of N Compass

4 INTRODUCTION: PRESENTATION 1. Key Factors to be mindful of in a Head Contract 2. Key Factors to be mindful of in a Subcontract 3. How does a Head Contract affect a Subcontract in practice?

5 1) HEAD CONTRACT A) Type of Contracts B) Conditions of Contract C) Accuracy and Co ordination of Drawings D) Timeframes E) Relationships F) Ability to Service the Project G) Key Subcontractors H) Guarantees/Warranties I) Uncertainty & Risk J) Changing Market

6 1) HEAD CONTRACT A) Type of Contracts NZS series (NZS 3910 build only, NZS 3915 building & civil engineering, NZS 3916 design and construct, NZS 3917 fixed term, (some in 2003, 2005 and 2013)) (most common) NZIA series (SCC, NBC, NBC SW) / NZIS SCC Master Build Contracts (never used in commercial head contract, but very common in residential) The in house tailored contracts The British FCEC and JCT (very rare) The FIDIC rainbow suites (very rare) NEC3 (ECC, ECSC, ECSS, TSC) (very rare) Standards Australia (AS 2124, AS 400 series and 4911) (phasing out)

7 1) HEAD CONTRACT A) Type of Contracts (II) Fixed lump sum price vs GMP v measure and value vs cost plus contract? Any separable portions? Design and Build or Build only? Engineer to the contract or Architect to the Contract? Traditional tender vs negotiated? Negotiated contracts typical with commercial, but not much else NB: Local and national government contracts will never be negotiated

8 1) HEAD CONTRACT B) Conditions of Contract Contract will undoubtedly contain special conditions Some of these must be passed onto the Subcontractors Order of precedence different from legal and PM Payment timeframes, Retentions, Bonds, LDs, Bonuses? Who will be responsible for CCC? Defects liability? Clauses around variations, insurance, termination Critical Path? Comprehensive Programme? Requirement of plan (safety, quality, traffic, geo) who has the risk? Tags and qualifications

9 1) HEAD CONTRACT C) Accuracy and Co ordination of Drawings Expect variations Never seen a project that was completed on original drawings Q of what is considered major changes warranting express variations and what are considered minor changes? (residential vs commercial) Principal driven variations?

10 1) HEAD CONTRACT D) Timeframe Are the timeframes realistic? Not uncommon for projects to have delay to both commencement and completion dates how will this be controlled? Handover date often different to one in contract (which came from the tender) roll on effect to subcontractors

11 1) HEAD CONTRACT E) Relationships Very common now for head contractors to subcontract work out expect this to happen No construction companies have the capacity to complete its own projects Will have the principal, head contractor, and subcontractor in the legal background, but on the project you will have the workers, foreman, site manager, QS, project manager(s) working together Tension, but working towards the same goal

12 1) HEAD CONTRACT F) Ability to Service the Project The Principal would have required information on the Head Contractor including: Relevant experience Financials Insurance Relevant skills, Technical skills, Management skills Key personnel (in practice this often changes on the project) Methodology for health and safety, quality and construction Track record

13 1) HEAD CONTRACT G) Key Subcontractors Often gets overlooked and head contractors simply list a few subcontractors and subsequently change this Head contractors tend to use the same subcontractors Ensuring good subcontractors are used can make or break a project Key subcontractors are particularly important in the current market where it is difficult to get good subcontractors on board due to high demand

14 1) HEAD CONTRACT H) Guarantees/Warranties Standard guarantees and warranties specified? Continuity guarantees required when you have multiple companies More than just a piece of paper?

15 1) HEAD CONTRACT I) Uncertainty & Risk Construction Contracts are all about managing risk Allocating risks for insurance and general risk to the project to each party Pressure on P&G and Margins? What is the agreed rate for variations? On site overheads and off site overheads and profit? Agreed rate per working day or nominated amount? If you agreed to reasonable amount, what is reasonable? (cant be enforced!) Provisional sums

16 1) HEAD CONTRACT J) Changing Market Between the date of the contract and the commencement date the market changes Price escalation Unavailability of products/subcontractors

17 2) SUBCONTRACT A) Type of Contract B) Conditions of Contract C) Accuracy and Co ordination of Drawings D) Relationships E) Commencement/Completion Dates F) Ability to Service the Project G) Market H) Guarantees/Warranties I) Subcontractors access to head contract J) Uncertainty & Risk

18 2) SUBCONTRACT A) Type of Contract Normally sign a in house contract with the relevant head contractor or typically use the Registered Master Builders Federations (SA 2009) Following a similar contract type to the head contract is a good idea or should ensure similar conditions are adopted (but often disconnect) Subcontractor will always be subject to the head contract which they were never a party to Remember a subcontract is administered by a head contractor in accordance with the head contract (but often there is disconnect between the two) NB: not uncommon (despite regulations requiring works over $30k to be in writing) for subcontractors to NOT have a written contract

19 2) SUBCONTRACT B) Conditions of Contract (As per the points for Head Contracts above) The subcontract must make reference to the head contract Most conditions will be passed down from the head contract Payment terms will inevitably be dictated by the head contractor, however subcontractors often demand different terms to the head contractor (e.g. 20 working days under the head contact vs fortnightly payments under the subcontract)

20 2) SUBCONTRACT C) Accuracy and Co ordination of Drawings (As per the points for Head Contracts above) The accuracy of the head contract is important for the subcontractor when taking on a project the risk of (in)accuracy may increase/decrease its costs Variation requests may be even more difficult as the request will need to be put to the head contractor who will then need to put this request to the principal E.g. Drainage subcontractor will need read the civil, architectural and structural drawings, in reality this often does not happen and drainage will be put on wrong place (typically a problem at tender stage and results in subcontractor underpricing works) (Brett to explain)

21 2) SUB CONTRACT D) Relationships (As per the points for Head Contracts above) Subcontractor will be affected by other subcontractors or even subsubcontractors as they further subcontract works out Often other subcontractors can delay the commencement date for a subcontractor Sometimes work will be contingent upon another subcontractor finishing their works first which can often ruin a relationship from the delay Disputes arise from a breakdown of relationships

22 2) SUBCONTRACT E) Commencement/Completion Date Subcontractor will never receive handover of the full site Subcontractor will almost always be sharing the site with the head contractor and/or subcontractors Commencement/completion dates will be more vulnerable for subcontractors who are almost always reliant on other parties

23 2) SUBCONTRACT F) Ability to Service the Project The Head Contractor would require similar information on the subcontractor (as per the points for Head Contracts above) Market now: often interviewing the key personnel now as CVs no longer enough Capacity is a central Question However subcontractors are often chosen on the lowest tender price (or availability) rather than capability

24 2) SUBCONTRACT G) Market The subcontractors are currently calling the shots and driving the construction industry Precast & Steel are simply not accepting bonds, LDs or retentions as part of the tender/contract Tail wagging the dog Massive shortage of labour! Massive shortage of subcontractors!

25 2) SUBCONTRACT H) Guarantees/warranties Many subcontractors are simply refusing to provide guarantees/warranties Meaningless unless continuing guarantee or personal guarantee E.g. Bob Construction No. 1 Limited, Bob Construction No. 2 Limited

26 2) SUBCONTRACT I) Subcontractors access to head contract Innate right to view the Head contract Almost all subcontractors do NOT exercise this right Some subcontracts actually state the subcontractor acknowledges that they have inspected the head contract and many just simply sign Subcontractors are affected by the head contract which they have never seen Recommend all subcontractors view the head contract

27 2) SUBCONTRACT J) Uncertainty & Risk (As per the points for Head Contracts above) Inequality in bargaining power (traditionally with head contractor, now shifting to the subcontractor) More and more partnerships forming between a head contractor and subcontractor partnerships may mean the subcontractor is familiar with the head contractor s specialised conditions of contract and the head contractor is familiar with the subcontractor s standard qualifications and tags

28 3) HEAD CONTRACT & SUBCONTRACT A) Relationships & Disputes B) Risk Management C) Health and safety D) LDs E) Tension F) Retentions G) Defeats Liability

29 3) HEAD CONTRACT & SUBCONTRACT A) Relationships & Disputes The relationship of all parties all vital You should not have too many friends on a project If disputes arise, you want to put out the fire early Leverage on head contractor to withhold payment vs subcontractor to suspend works and not provide producer statements Possibility for misinterpretation or discrepancies will lead to disputes Disputes are unavoidable, but damaging to all Good faith negotiations, mediation, arbitration, adjudication, court? Variations are also unavoidable, but question of extent Arbitration/adjudication/court are not happy places to end up

30 3) HEAD CONTRACT & SUBCONTRACT B) Risk Management Uncertainties? Getting the price right? Contract and procurement all about allocating risk and liability How will the head contractor decentralize their risk/liability? In NZ, most projects have a new tailored design no prefabricated works so increased risk Construction methodologies can be difficult and complex builders may simply be unable to build complex designs Awarding of subcontracts often happens during the project impacts availability and price of subcontractor If something goes wrong on the project, the head contractor will be sued by the owner/principal in the first instance, not the subcontractor

31 3) HEAD CONTRACT & SUBCONTRACT C) Health and safety New regulations and cases tightening up the obligation on head contractors Principal/head contractor are responsible for the overall control and management of the site Directors can now be personally liable for breaching this obligation One High Court case stated the central issue was whether principal took all reasonably practicable steps to ensure contractor or employees not harmed while doing work. Often relying upon the expertise of consultants/subcontractors Who is responsible?

32 3) HEAD CONTRACT & SUBCONTRACT D) LDs how will this be shared? LDs in the head contract can be substantial How will this be shared with the subcontractor? Often see disproportionate LD flowing onto the subcontractor which if enforced, will easily liquidate/bankrupt the subcontractor Other extreme is no LDs in subcontract

33 3) HEAD CONTRACT & SUBCONTRACT E) Tension Adversarial relationship with a shared common goal Project Manager / Engineer to the Contract are very important roles Like the idea of relationships being arms length and cost driven Head contractor has the most risk and will try to decrease the risk by sharing and allocating some of these risks to the subcontractor Opportunity for both the head contractor and subcontractor to profit BUT if the head contractor or sub contractor got their prices wrong at the start, this will create inevitable tension Recent market trend HC s margins decreasing creating more tension

34 3) HEAD CONTRACT & SUBCONTRACT F) Retentions New Retention regime requires this to be kept separate and kept in trust (cf trust account and separate bank accounts can have a general account and liquid assets) Scheme holds us significant cash flow at various levels (Brett to explain) The first subcontractor is often waiting on a substantial part of their payment for one or two years to be released from the principal/head contractor

35 3) HEAD CONTRACT & SUBCONTRACT G) Defeats Liability Often end up having defects to a project and each subcontractor blames the other The use of labour only subcontractors may mean the head contractors are still liable Who is responsible? Allocating liability is not always straight forward

36 Thank you, any Questions? Tina Hwang (Associate of Queen City Law) & Brett Heaven (Director of N Compass)