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Construction Contract

Written by Nick Gillies and Michael O'Brien on January 30th, 2014.

The Construction contract most closely resembles the old NZS 3910:2003.  It is intended for traditional procurement arrangements involving only construction work.
Structure and terminology
The structure and layout of the Construction contract has been altered to make it more user-friendly.  This includes:
  • Moving the Contract Agreement to the front.It was previously buried near the back as Schedule 2.
  • Re-writing the Guidelines and stipulating that they no longer have contractual status.
  • Turning Schedule 1 (Special Conditions of Contract) into a comprehensive tick-box type table to be completed by the parties.
  • Adding new schedules (nos. 13-16) to incorporate widely-used documents – ie a form of warranty, an agreement for off-site materials, a practical completion certificate and a final completion certificate.
Some terminology has also changed:
  • ‘Defects Liability Period’ is now known as the ‘Defects Notification Period’.
  • ‘Defects Liability Certificate’ is now known as the ‘Final Completion Certificate’.
  • The reference to ‘Contract Documents’ has gone and a new definition of ‘Contract’ has been included.
Cost Reimbursement contracts (clause 2.4)
Clause 2.4 has been added to avoid confusion in cost reimbursement contracts by setting out more clearly how the Contract Price is to be calculated.  In summary, this will be determined by either:
  • The Net Cost of the items used in the Contract Works (ie plant, materials, labour and sub-contractor costs) plus allowances for On-Site and Off-Site Overheads and Profit at the percentages stated in the Special Conditions. A reasonableness requirement has also been added: ‘Net Cost’ now means “the reasonable actual or assessed expense or direct cost to the Contractor, plus return on investment in Plant, after deduction of trade discounts and exclusive of [overheads and profit]”; or
  • Rates where the contract contains rates.  Allowances for On-Site and Off-Site Overheads and Profit may only be added if they are not already included in the rates, which must now be stated in the Special Conditions.
Parties can adopt other cost reimbursement methods, but these would need to be expressly incorporated in the Special Conditions.
Clause 2.4 goes on to make clear that certain costs are not claimable – eg where the costs: are not justified from the Contractor’s records, were not reasonably and actually incurred, or were incurred because of a default by the Contractor.  The Contractor is required to maintain records of its costs and allow the Engineer to inspect these.
Further, the parties can elect in the Special Conditions that the Contractor will provide an estimate prior to the start of the works.  If required, when submitting each payment claim, the Contractor must also provide a reconciliation of the claim against the estimate, an explanation for any differences and an updated estimate of the Final Contract Price.  This is intended to avoid any ‘surprises’ for the Principal but will put pressure on the Contractor to avoid or justify any material departures from the initial estimate.
Programmes (clause 5.10)
Under clause 5.10 the Contractor must now submit a ‘simple’ programme for the works within 10 working days of its tender being accepted.  This needs to demonstrate how the Contractor proposes to meet the due date for completion. 
Alternatively, the Special Conditions may require a ‘Comprehensive Programme’, in which case the Contractor has 20 working days from acceptance to submit this.  As the name suggests, a Comprehensive Programme is more detailed and must include:
  • the proposed sequence of works and the dates for commencement and completion of the various activities;
  • the critical path network; and
  • the dates by which access to the site, or materials, services or work, is to be provided.
The time for submitting either programme is short and, importantly, the Contractor will not be entitled to payment until it has done this.  In some instances, it may be sensible to agree a longer period. 
Advance Notification (clause 5.21)
Clause 5.21 is an entirely new provision and appears to be based on the early warning system contained in the NEC contracts.
The Contractor and the Engineer are required to notify each other in writing as soon as they become aware of any matter that is likely to: (a) materially alter the Contract Price; or (b) materially delay completion; or (c) result in a breach of a statutory duty.  Either of them can also require the other to meet to explore proposals to reduce the impact of the matter or avoid it altogether, which seems sensible.
If the Contractor fails to give advance notice, this may affect the value of any variation arising out of the matter (eg if steps could have been taken to avoid or reduce the impact).  However, such notice should not be a condition precedent to claiming a variation.
Insurance (section 8)
The insurance provisions have been completely re-written to make them easier to follow, introduce flexibility and bring them into line with current market practice.  In summary:
The parties will elect in the Special Conditions the risks that are to be insured and who is to arrange the relevant cover.
The party who arranges the insurance will pay the deductible unless the claim arose from an act or omission of the Contractor.  This helps clarify responsibility.
The forces of nature (eg landslips, earthquakes, etc) selected in the Special Conditions must now be covered by the construction insurance and are no longer excepted risks or excluded perils in relation to care of the works.  This is a direct consequence of the Canterbury earthquakes. 
If the Contractor’s plant is to be insured (as is likely in most cases), the parties can elect to limit this to: (a) specified items that are critical to the performance of the project (ie items that could delay the works if lost or damaged) or (b) plant above a specified market value.  This may help reduce project insurance costs since other (‘typical’) plant can be readily hired and therefore may not need to be insured. 
Variations (section 9)
Oral notice of a matter that the Contractor believes is a variation and which is recorded in writing (eg site minutes, correspondence, etc) has been removed.  This means the Contractor will need to issue a proper written notice and can no longer rely on (sometimes vague) statements in project documents.  The same goes for the Engineer when notifying the Contractor whether the variation is confirmed or disallowed.  This ought to reduce disputes about whether a matter was a variation or has been properly ‘notified’.
When it comes to valuing variations, clause 9.3.2 has been modified to allow the Contractor to propose a value – within one month (or as soon as practicable) after the variation is ordered or confirmed by the Engineer.  This effectively formalises the previous variation price request process and allows a Contractor to propose a value for a variation. 
The method of valuation has also been clarified.  Where there is an applicable (or derivable) rate, this is to be used, otherwise the value is to be based on Net Cost plus the nominated (or reasonable) percentages for overheads and profits (see clause 2.4 above).  As before, if the value is not agreed, it will be determined by the Engineer.
Defects Liability (section 11)
The timeframes for dealing with defects have been tightened up.  Upon receiving notice of a defect from the Engineer, the Contractor has 5 working days (or a reasonable time if agreed) to remedy it.  If the Contractor fails to so, the Engineer must give the Contractor a further five days notice.  At the expiry of this, if the defect has still not been remedied the Engineer can direct others to do the work at the Contractor’s cost.  Previously, under NZS 3910:2003, the Engineer could only take that step after allowing the Contractor a “reasonable time”, which was ambiguous and blunted the threat to Contractors who fail to remedy defects.
Payments (section 12)
The payment system has been simplified and contains different time periods. 
For progress payments:
  • The Engineer has 7 working days after receiving a progress payment claim to issue a provisional Progress Payment Schedule.
  • The Principal then has until 10 working days after receipt of the claim to notify any amendments or deductions, with reasons.
  • The amount to be paid is determined within 12 working days after receipt of the claim, and is the crucial deadline.If the Principal has notified amendments/deductions, the Engineer will provide a replacement Progress Payment Schedule.Alternatively, if no amendments/deductions have been notified, the provisional schedule is deemed to be the Progress Payment Schedule.Previously, NZS 3910:2003 required the Engineer to re-issue the provisional schedule.
  • Payment is due 17 working days after receipt of the claim.
Broadly speaking, the same process applies for the final payment, but with different timeframes:
  • The Contractor must submit its final payment claim within 1 month after the Final Completion Certificate.Under NZS 3910:2003, the Contractor had 2 months.
  • The Engineer then has 20 working days to issue a Provisional Final Payment Schedule.Previously there was no time limit.
If the Engineer cannot meet that deadline, they must explain why and issue a Progress Payment Schedule as an interim measure by this deadline.  However, a long-stop has been introduced, requiring the Final Payment Schedule no later than six months after the Final Completion Certificate.
  • The Principal has 30 working days from the claim to notify any amendments or deductions, with reasons.
  • The final amount to be paid is determined within 35 working days from the claim.If the Principal has notified amendments/deductions, the Engineer will provide a replacement Final Payment Schedule.Alternatively, if no amendments/deductions have been notified, the provisional schedule becomes the Final Payment Schedule.
  • Payment is due 45 working days after service of the claim.
The Guidelines (pp 158 – 160) include useful summary tables, which set out the steps and deadlines in relation to progress and final payments.
If payment is late, the Contractor is no longer required to have their accountant or bank manager certify the rate they would have earned.  Instead, interest will be calculated at 1½ times the monthly SME overdraft rate published by the RBNZ.  This is a welcome change by simplifying the entitlement to and calculation of interest.
Disputes (section 13)
The most significant change to the dispute resolution provisions is that every decision, valuation, or certificate of the Engineer will now be final and binding after three months unless it has been referred to the Engineer for review or to adjudication (see clause 13.1.1).  It follows that, if there is a dispute about payment, the relevant party (usually the Contractor) will need to make sure they take one of these steps before the time limit expires.
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