Contract Notes 

A contract states who takes a risk in a contract, what is to be done, who is to do it, where it takes place, when it has to be completed and the financial implications of all actions associated with it.

The tender price is no more than a record of the value of the work at a particular point in time based on the information available at the time.

There are several factors that impact on tenders and they are handled in different ways depending on the size and nature of the works

Work is often tendered before all the documents are complete.    The specification may be complete but quite often the drawings may only have reached a 60% complete status – possibly enough to obtain a building consent but often with critical information or decisions yet to be confirmed.    Designers in this situation make allowances in the documents to cover these costs such as provisional sums and contingency funds. These sums are credited from the tender sum when the true cost is agreed at a later date.

Subcontractors and suppliers to the main contractor time ‘tag’ their pricing for acceptance commonly their price is fixed for 30 days.    Consequently after 30 days if their price has not been accepted they have the option of withdrawing their price.

If tenders have been called prior to the obtaining of a consent the local authority will often have additional work required before they will issue a consent.    As this work was not shown on the contract documents the contractor cannot be expected to have been able to allow for it and consequently will request a variation for an increased scope of work.

Once work has commenced unknown site conditions such as underground obstructions, rock, unstable ground unmarked services or unseen defects in the existing structure may require instruction to the contractor from the design team.

Specialist imported items may be subject to exchange rate fluctuations and locally supplied products will be subject to inflation

The client may increase or decrease the scope of the contractors work.

All of the above are financial risks to the parties to the contract and unless documented otherwise, will constitute a variation to the contractor’s original tender sum as the conditions that they priced the work under have changed.

The approach is generally that the risk should be allowed for by the party best

placed to control it.

Time risk on tender acceptances is the client’s risk and is negotiated at the time of tender.    It is critical that the time the contractors is able to commence work is clearly established as delays will affects their ability to control costs

Changes to drawings or increased details will not be deemed as variations to the contractor unless they can prove that the detail has materially affected their scope of work, that is the detail increase the volume of work, the quality of finish or the time required to carry out the work.    Otherwise it will be deemed that the contractor had the experience to carry out the work as drawn.    That is, how else was the contractor going to do the work and how has the increased detail changed that process.

If a Schedule of Quantities has been provided then this becomes obvious with a remeasure of the works with supporting evidence from the contractor.

If the change is due to the local authority then it is always a client risk unless there is a specific agreement in a design and build type contract in which case if the designer has failed to comply with known statutory requirements then the risk is the designer builder.    If the requirements have changed then the risk may be the clients.

With respect to time for acceptance tags the risk is that suppliers and subcontractors will increase their price after the contract has been negotiated which is a serious risk to the contractor.     The contract start and finish and tender acceptance dates are critical, fixed prices from suppliers and subcontractors must be agreed prior to commencement and likely dates of any price increases for supply should be stated. Builders often tag their prices to supplier’s price lists and this becomes a client risk.

In most cases the simplest solution in small contracts is to have the builder take the risk for the duration of the contract.    There is however a point that needs to be noted when a variation is priced as a change of scope the builder can charge at the new rate of supply, they should not be forced to carry out work outside their original scope for what might be a loss. The same principle applies to work carried out outside the original contract period where the contractor has been granted an extension of time.

Extensions of time will be granted to the contractor where circumstances are beyond their control.    Traditionally contractors were allowed time extensions for inclement weather, in most modern contracts they are deemed to have allowed for inclement weather with their tender and no time extension is given unless the time lost can be proven as genuine and beyond what might reasonably have been allowed for.    Easy solution is for the contractor to state days allowed for and to be granted additional days if proven.    Regardless it is not normal for weather related extensions of time to have monetary values attached to them.    That is the contractor receives additional time to carry out the work without penalty but no cash.

This is not the case with other extensions of time where the contractor has been delayed by circumstances beyond their control such as design related issues, client supply items, changes in scope of works etc.    The contractor is entitled for compensation for the cost of continuing to run the contract.    The cost of running the contract for an extension of time becomes a variation charge to the contract.

It is critical for both parties that the contractor’s margin for pricing variations is agreed at the time the contract is signed.     The margin will include profit at a nominated rate plus the preliminary and general charges (on site overhead) for running the contract.    The contractor may add a charge for processing variations and recovery of off site overheads.    This can be contentious and should be negotiated before the works commence.     It is our view that the contractor is entitled to recover the cost of off site processing of the variation plus off site supervision where addition time is required.

When variations decrease the value of the contract the decrease is exclusive of the contractor’s margin and the cost of processing is deducted from the decrease.

Essentially the works are complete when the owner takes possession.    This can be highly contentious but in effect when the client has use of the property it is practically complete.    If it is not practically complete the client should not be given possession.

This can be very difficult if not clearly defined especially when the works are within an occupied building and the client is employing others to fit soft furnishings, plant and equipment etc.    In all cases the designer, client’s representative or engineer to the contract should sign a Practical Completion Certificate for the works to be used by the client prior to possession taking place.      This may apply to a section of the works and not the entire contract – normally referred to as sectional completion.

The problem comes if a Code Compliance Certificate is not issued by the local authority which could mean that while the building is practically complete and the client has been able to fit out the works they are not able to occupy.  Every case is different and the clauses associated with Practical Completion clearly defined.

If the contractor does not complete on time the cost to the client should be clearly stated.    The liquidated damages need to be stated at the time of tender and need to be      justifiable.       In a domestic situation this may be the rental cost of temporary accommodation, the situation for a commercial customer may however be far more serious in that the profitability of the client may be affected.

On green fields sites insurance is always the contractor’s cost.    Where the client is resident in an existing structure the client should extend their policy to include the building works.