The building contract a tool to minimise disputes and enhance productivity

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1 Page 1 of Pages The building contract a tool to minimise disputes and enhance productivity INTRODUCTION Most Standard Building Contracts include a number of clauses to deal with a variety of situations the employer and the contractor may encounter during the execution of a building project. Where a situation occurs that may cause delay and/or additional expense standard contracts generally include a procedure to follow including time bars to encourage the speedy resolution of such events. Not solving potential problems promptly often results in an acrimonious situation later in the life of a contract, usually with broken relationships, delayed projects and other consequential damages that could have been avoided if all parties worked together and followed simple, defined procedures POTENTIAL PROBLEMS THAT MAY BECOME DISPUTES There are many successful building and construction projects but also a not insignificant number where things go wrong including:- 1 Poor project definition 2 Inadequate exploration of appropriate design options 3 Poor final design not the optimum solution 4 Flawed procurement processes 5 Personality clashes and competence issues 6 Poor governance of the project 7 Delays on site 8 Cost overruns, payment delays Many of these issues have their origin in decision making early in the project life cycle:- 1 Has the need for the project been established in terms of business strategy, current and future technology, market conditions etc? 2 Is the location critical suitable greenfield or brown field sites? 3 Has the project been properly defined in terms of space requirements, appropriate materials, construction and operational skills > specification of services, utilities, finishes and maintenance and other operational criteria for its economic lifespan? 4 Is the use of new materials and/or novel construction techniques proposed? 5 What statutory requirements are applicable? 6 Do international or other quality standards apply? 7 Must particular performance dates be achieved? 8 How is the project financed? (not necessarily with all funding in the bank but available to suit project cash flow) 9 How is the project designed in house team, external consultants, combination of both? 10 How is the project executed traditional execution using an employer provided design (where the employer has control over the outcome) or s design + build type solution where the outcome to a large extent is determined by the contractor s experience and resources?

2 Page 2 of Pages 11 Hence - What forms of contract are appropriate? An experienced project manager, or team of project managers with different skills, may be the only person(s) to see a project through all its phases and be able to ensure that critical decisions are reviewed and made timeously by corporate management and/or by statutory and other authorities Where this has not been done the construction team may my have to resolve issues in a hurry on site. This is likely to be a compromise solution probably involving delays and likely to attract addition costs = crisis management! At this stage the employer may be in an uncomfortable situation vis-à-vis his customers and is now looking for explanations - if not someone to blame who can be made to pay for the late delivery? DISPUTE AVOIDANCE OPTIONS The employer organisation must be able to deal with projects in a professional manner 1 Has a project been hierarchy developed of persons with appropriate skills to make decisions without having to refer to a board meeting in two months time? 2 Where professional consultants are appointed be critical of their competence. It is not unusual that a well known firm is appointed but the executant with that firm may have limited experience and or competence As the employer - insist on a reports in a format that can easily be audited in terms of the original performance criteria and appropriate standards - and ensure that the consultant has adequate Professional Indemnity Insurance! 3 As the employer in consultation with the professional team ensure that sufficient time been allowed to explore alternatives to find the optimum solution for the project at hand? 4 Has sufficient time been allowed to realistically design and document a project? 5 Has sufficient time been allowed for the statutory and other approval processes? 6 Is the money available not necessarily the full amount on day one, but to suit the project cash flow? 7 Has a project administration system been developed to file and retrieve information? 8 Has quality management system appropriate for the project been designed? 9 Does the company have an appropriate Health and Safety policy and plan for the project? 10 Has a project review process been created to audit, monitor, and if necessary, make changes? 11 Who has the authority to implement such actions quickly? * In essence this is a risk management exercise in the employer organisation The project execution team would like to be reassured that the employer is part of the team and can be called upon to resolve potential issues before they become problems PROCUREMENT It is not unusual that employer organisations have a (series of) policies dealing with the acquisition of goods and services but, to quote from a CIDB document The Preferential Procurement Policy Framework (Act 5 of 2000) requires that building tenders are awarded in accordance with a system that is fair, equitable, transparent, competitive and cost effective. (SANS 294 Construction Procurement Processes, Methods and Procedures)

3 Page 3 of Pages Where in this definition is competence of the various contractors mentioned? 1 Have the tender documents been properly compiled to enable realistic pricing? 2 Can the complexity and the method of construction be gauged by the contractor + subcontractors? 3 Is there sufficient time to price a tender realistically? 4 Are specified materials / construction equipment / skills readily available? 5 From the contractor s experience what has been left out that may develop into a dispute later? (employer expecting 5 star finishes from a 2 star specification?) * The contractor must assess his risk in tendering and hence execution of the project based on the available information poor information results in unreliable pricing and becomes the employer s risk to proceed CONTRACT EXECUTION Assume the employer (and his agents) have followed the various procedures described to initiate the project, complied with the procurement processes and have decided to award the building tender:- The contractor 1 Has carefully read and understood the tender documents the Bill of Quantities, the drawings provided and any other documents to check: 2 Checked if there any contradictions between the various documents? 3 Checked if any items are hidden in the Preliminaries or other Bills that may vary the standard conditions of contract and other rights the contractor may have? 4 Has insisted that an original unaltered form of standard building contract is provided for signature by the employer + the contractor before the start of the works and a copy provided to the contractor? 5 Checked if securities must be provided between the parties? 6 Checked who is responsible for (specified) insurances provided before the start of the works? 7 Checked if applicable statutory approvals been obtained to allow the work to commence on the intended dates? 8 Checked if there are other reasons to prevent access to the site / execution of the works? 9 Agrees to provide the same/back to back contractual documentation to subcontractors relevant to their specialisation 10 Confirmed that all relevant documentation is available? 11 Confirmed that key responsibilities and relevant persons have been identified by both parties? Assuming these criteria are met construction can begin! If not then the contractor may have a claim for additional time before the project has started, this may be the employer s risk? THINGS THAT CAN and DO GO WRONG Delays 1 Insufficient information 2 Late information 3 Incorrect information 4 Non availability of specified products 5 Non compliance with statutory requirements

4 Page 4 of Pages 6 Changes initiated by the professional team 7 Changes initiated by the employer 8 Poor workmanship 9 Poor performance 10 Poor relationship with subcontractors 11 Interference by the employer Payment 1 Inadequate / late / incorrect information generally cause delays that cause additional expense 2 Any delays generally attract cost as additional preliminaries charges and/or material and labour charges 3 Late payments traditionally result in delayed payments to others in the project team who may be prevented from performing their tasks due to an inadequate cash flow MANAGEMENT OF DELAYS 1 Proper contract administration 2 Promptly and competently dealing with claims as they occur 3 Employer to involve a dispute avoidance board throughout the project MAINTENANCE AND OPERATIONS 1 The employer must be provided with all as built documentation, product warranties and operating manuals in an agreed format before occupation of the building 2 Where warranties extend beyond the final completion date (air conditioning, lifts, landscaping, etc) how are these dealt with? HOW DOES THE BUILDING CONTRACT ASSIST IN DISPUTE AVOIDANCE? All standard building and construction contracts include procedures in individual clauses to deal with items that may become a dispute if not resolved timeously including but not limited to 1. Provision of information to the contractor 2. Delays to the project for various reasons 3. Additional costs 4. Appointment of subcontractors 5. Performance by subcontractors 6. Performance by the principal contractor 7. Changes instructed by the employer 8. Changes for statutory compliance 9. Late or non payment by the employer 10. Late or non issue of payment certificates by the contract administrator (also completion certificates) 11. professional contract administration is a serious and time consuming responsibility!

5 Page 5 of Pages The contract administrator (the principal agent, the engineer, the project manager) must fulfill their duties described in the various standard contracts as well as coordinating the obligations and the rights of the contractor and the employer. Simplistically Either party must give notice of becoming aware of a potential problem (usually within a defined time period) The contract administrator must act on such information to hopefully resolve the issues raised Where an identified problem is not resolved generally a further notice is required before the contractor (and possibly the employer) can invoke the suspension or termination clauses Similarly the dispute resolution clauses may be invoked Following the procedures is critical to ensure a project is brought to conclusion within the agreed construction period 1. It is crucial that the contract administrator, as well as the parties to the contract promptly communicate in writing and keep records of relevant information (site photos, delivery notes, etc) to create an auditable information trail should events need to be proved in a dispute scenario 2. Keeping minutes of all meetings in an agreed format and the prompt issue of such minutes and the approval of minutes, or the noting of corrections are equally crucial should they be required as evidence later 3. The parties must resolve contractual claims as they occur whilst the facts pertaining to the scenario and persons involved may be contacted to find an appropriate solution. Leaving this to the end of the contract creates uncertainty, and will most likely become a dispute as either party may offer a myriad of excuses that he/she did not see / know / agree IN SHORT Keep accurate records in a format that can easily be accessed - Agree communication procedures and stick to them! Speedily deal with all notifications of any potential problem and find a solution by consensus Uwe Putlitz, CEO JBCC