A GUIDE TO CONSTRUCTION CONTRACTS
BOWMANS
2
A Guide to Construction Contracts
Contents
Introduction
04 05
What is a contract?
05
Construction contracts
07
Working with the employer’s representative
08
Different forms of contracts
11
Different ways of contracting
12
Construction contract arrangements
13
Construction Industry Development Board
14
Deciding on which contract to use
18
Common construction contract terms/ procedures
22
Key concepts
26
Applicable legislation
27
Useful links
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Introduction Construction projects play a vital role in South Africa’s development, not only in respect of its physical infrastructure, but also in its broader economic and social development. They also create employment opportunities on a large scale.
The construction industry is valued at approximately
ZAR 145 billion and provides job opportunities to approximately
429 000 individuals The industry continues to grow. This handbook provides some basic knowledge and understanding regarding contracting in this industry.
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A Guide to Construction Contracts
What is a contract?
Construction contracts
A contract is an agreement entered into
“It is not the beauty of a building you should look at, it’s the construction of the foundation that will stand the test of time.” – David Allen Coe
between two or more people with the intention of creating legally enforceable obligations. Once properly concluded, a contract is binding on each party. This means that each party has a legal obligation to do the things which the contract requires him or her to do. If a party does not do so, he or she may be in breach of the contract and the other party will have certain remedies, such as claiming for additional costs caused by the
A construction contract is an agreement
breach (called damages). They are also
between an employer (sometimes referred
able to get a court order to force the party
to as the client) and a contractor to
in breach to do what is required of them
construct, repair, modify, renovate or even
under the contract.
demolish something in an agreed time frame, for an agreed price and to
The contract should describe
agreed standards.
the following: The contract is signed by both the •
What will be done;
employer and the contractor. As with any
•
How long it will take to complete;
contract, once the construction contract
•
How much it will cost and the
is signed, both the contractor and the
payment terms;
employer must follow the terms of the
What will be done if either party
contract or face possible legal action.
•
defaults; and •
The extent to which the common law, which would usually apply, is adhered to.
Ensure that you have read the entire contract and understand the terms and conditions contained therein before signing. 5
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ROLE PLAYERS WITHIN THE
(appointed separately by either party or in
CONSTRUCTION CONTRACT
some cases jointly by both parties), who assist in the construction process.
Although the construction contract typically only has two parties, (the
The role players are set out below (for
employer and contractor), there are a
a more detailed description of the role
number of role players usually involved
players refer to the sections that follow):
Employer
6
Requires the construction work and provides payment
Employer’s Representative
Acts on behalf of the employer and may be referred to as engineer, project manager, principal agent, etc.
Contractor
Commissioned to construct the works
Subcontractor
Appointed by the contractor to perform a part of the construction works under a subcontract
Adjudicator/ Arbitrator/ Court
Settles disputes between the parties
A Guide to Construction Contracts
Working with the employer’s representative Employers usually elect to work through
•
Handover in good time all notices,
a representative who may be an architect,
advices, time delay claims, bad weather
an engineer, a project manager, a quantity
reports, certificates for payment,
surveyor or any other qualified third party.
invoices, lists of workers, plant
The employer gives his or her representative
on-site, etc.
the authority to act on his or her behalf in the execution of certain provisions of
•
the contract.
Make sure claims are submitted in strict compliance with the applicable contractual provisions, in writing within
The representative’s role is to oversee and
the period stated in the contract. If a
administer the contract and the project itself.
claim cannot be prepared within the
It is important to develop a good working
required period, extensions should
relationship with the employer and/ or his or
be sought prior to the expiry of the
her representative, as the contractor always
period. If no extension is granted or
benefits from trust and co-operation arising
communicated prior to the expiry of
from this relationship.
the time periods, the claim (even if not fully complete) and all documents
Importantly, the employer’s representative
available at that time should be
is usually the person to whom all notices,
submitted (explaining if possible why
invoices and claims must be submitted and is
the claim cannot be completed and
the person who determines the amounts due
submitted on time), with any further
to the contractor.
documents and information required to be provided thereafter.
There are some important steps a contractor can take to develop this relationship such as:
•
Only make reasonable claims for additional payment. Inflated or
•
Report all problems to the employer,
frivolous claims will be rejected.
through the appointed representative, as quickly as possible. This is very important if the problems could cause
•
Carry out all written instructions. If the instructions are difficult or impossible
cost increases or delay completion.
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Different forms of contracts to execute, talk to the representative
The type of contract form to be used will
who issued the instructions as soon as
depend on the employer’s preference as
possible to see if it can be done in a
well as the works to be executed. Two
different way – do not delay.
common ways in which parties can contract are either through a bespoke contract or a standard form contract.
In this way you are likely to avoid disputes. Should a disagreement actually arise, it is best to look for possible compromises to resolve the dispute.
BESPOKE CONTRACT This is a type of contract that is not based on a standard form contract and is specially drafted and fully customised to cater for specific needs or requirements for the parties. This type of contract is not commonly used by lenders or banks who sometimes provide the funding of construction works. According to the Construction Industry Development Board (CIDB, additional information
If the contractor disagrees with any decision
provided on page 13), when contracting
taken by the employer’s representative,
with government entities (state-owned
the contractor should, as soon as possible,
companies, government departments etc.)
give notice of a dispute (if stipulated in the
only standard form contracts should be used.
contract) in terms of the contract to the
This is to ensure a measure of consistency
employer’s representative. In some contracts
and uniformity in the terms of construction
time bars are also in place for when a dispute
agreements concluded with the government.
should be disclosed and submitted to an adjudicator or arbitrator. The contract should
STANDARD FORM CONTRACTS
always be studied to see if such time bars apply, and to ensure that they are followed.
There are usually risks and issues which will be common for all construction projects
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A Guide to Construction Contracts
and activities. Accordingly, a number of “standard form” contracts have been developed which set out standard terms for a construction contract to cover the related issues and risks that will most likely apply. There are standard form contracts for both construction work and construction-related professional services (for example pure design work, or supervision work for construction). Standard form contracts are useful because they can be obtained and understood in advance and, therefore, are usually easier to agree on instead of drafting the entire contract from scratch. The parties simply agree on specific changes to the standard terms based on the requirements for the specific construction project concerned. It is therefore very important for a contractor to become familiar with the relevant standard form contracts, which could be used for the type of construction work which the contractor would normally consider tendering for. A list of standard form contracts that are typically used in South Africa is set out on page 13 (these standard forms are approved by the CIDB, further information regarding the CIDB is provided on page 13).
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Specific types of standard form contracts (approved by the CIDB)
CONSTRUCTION
PROFESSIONAL SERVICES
FIDIC – French Initials for International
CIDB – Standard Professional Services
Federation of Consulting Engineers (1999)
Contract 3rd Edition
Short Contract and Red, Yellow and Silver Books GCC – General Conditions of Contract
NEC – New Engineering Contract
for Construction (2010)
(Professional Services Contract)
JBCC – (JBCC series 2000) (Principal Building Agreement and Minor Works Agreement)
NEC – New Engineering Contract (Engineering and Construction Contract and Engineering and Construction Short Contract)
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A Guide to Construction Contracts
Different ways of contracting There are different ways in which a
the main contractor, these rights and
prospective contractor can participate in a
responsibilities will be exercised by
construction contract. Some examples are
and between the subcontractor and
listed below:
the main contractor.
•
Main contractor – The contractor himself
The subcontractor does not have a
or herself concludes a contract with an
contract with the employer, and in most
employer to build/ construct something.
instances does not have a relationship
(eg building a school).
with them. In some instances, however, the employer can take up this responsibility.
•
Joint venture partner – The contractor forms an agreement with one or more
When an employer wants to use a
other contractors on an equal footing.
subcontractor of their choice, the
They then jointly sign a contract to
subcontractor is referred to as a
build/ construct all or a part of the
“nominated subcontractor” and in
project. It is important to note that in
certain instances, the employer will
this case, each contractor in the joint
take up risk due to its nomination.
venture is responsible to the employer for all obligations under the contract. In other words, as between the employer and the members of the joint venture, each member of the joint venture is responsible for the actions or breach of any other member. •
Subcontractor – The subcontractor has an agreement with the main contractor to complete a part of the works, and will not have any contract with or obligations to, or rights against, the employer. Subcontractors will usually have the same rights and responsibilities as the main contractor. But since subcontractors contract with 11
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Construction contract arrangements These can be created by standard form
•
Engineer, procure and construct –
contracts or catered for/ created on a
This is a form of contract where the
bespoke basis. The most commonly
contractor is responsible for design/
used arrangements are as follows:
engineering, procurement/ sourcing of materials and construction of the works
•
Pure construction contract – This is a
(including ensuring that the work is fit
form of contract where the contractor
for its stated purpose). The contractor
is responsible for the construction of
bears the majority of the risk and the
the works as per the specifications and
employer will regard him or her as the
design provided by (or by a third party
single point of responsibility for the
on behalf of) the employer. With this
whole project. This is, therefore, the
type of contract, the contractor bears
most expensive type of arrangement.
the lowest risk. The price is often re-
The contractor is usually required to
measurable, based on a bill of quantities
provide a fixed lump sum price, with
(a document detailing specific prices for
fewer entitlements to adjustments than
goods and services the contractor will
under any other arrangement, and must
provide) since the design is not usually
therefore appropriately price in the risks.
complete and fully available at the point that construction work is to commence.
The table below illustrates the arrangements described above with regards to pricing.
•
Design-build – This is a form of contract where the contractor is responsible for
Price vs risk graph
both the design and the construction of the works. Due to this fact the contractor bears more risk when compared to a pure construction contract (including Engineer, Procure and Construct
intended purpose). Therefore, this is a moderately priced arrangement; usually a fixed lump sum price is required for
Price
ensuring that the work is fit for its
Design-Build
doing both design and construction, but appropriate adjustments to the price are provided for events outside of the contractor’s responsibility. 12
Pure Construction
Risk
A Guide to Construction Contracts
Construction Industry Development Board The Construction Industry Development
According to the CIDB regulations, public
Board (CIDB) is a body created in
sector construction procurement must be
terms of the CIDB Act to regulate the
undertaken on standard form contracts
construction industry.
approved or prepared by the Construction Industry Development Board Regulations
The CIDB Act 38 of 2000 (CIDB Act)
(CIDB Act Regulations). In addition, only
requires and gives the CIDB the power to:
contractors with an appropriate registration in terms of the CIDB Act and regulations
•
Establish a national register of
may tender for and be appointed to perform
contractors and of construction
construction work in the public sector.
projects to regulate, monitor and promote the performance of the
The CIDB also encourages using these
industry for sustainable growth,
standard form contracts for private
delivery and empowerment.
sector construction procurement to promote efficiency.
•
Promote improved delivery management capacity and a standard
For more information regarding the CIDB
and consistent application of
as well as registration requirements, refer
procurement policy throughout all
to the list of useful links on page 27.
spheres of government. •
Promote improved performance and best practice of public (government) and private sector clients, contractors and other participants in the construction delivery process.
•
Promote continued and consistent participation of the emerging construction sector.
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Deciding on which contract to use The idea of standard form contracts is to
Main contractor and subcontractor (rights,
include provisions that are beneficial to both
responsibilities and risks)
parties to the contract in accordance with good practice. Some contracts are, however,
Usually in construction contracts the main
not based on the approach of good practice.
contractor will be responsible for the entire project. He or she will take responsibility
It is therefore important to be familiar
for the safety of his or her employees and,
with the three Rs when deciding which
most of the time, the subcontractors.
contract to use:
A summary of the more common rights, responsibilities and risks follows:
1. R ights – these are entitlements that one party has against another, entitling the
1. RIGHTS
party who has the right to compel the other party to do or not to do something.
•
Timeous payments – the main contractor is entitled to be paid within
2. Responsibilities – these are obligations
the time stated in the contract, failing
to do, or not to do something, for the
which he or she should usually be able
party who has the right.
to claim interest on late payment.
3. R isks – these are the possibilities of
•
Extensions of time – the main
something happening or not happening,
contractor can claim for an extension
which can result in additional liability
of time for completion in accordance
arising for either or both parties. Risks
with the instances catered for in the
can be absorbed, avoided, shared,
contract. The usual test is whether or
transferred or mitigated under the terms
not the particular act/ incident that
of the contract. In this way, they can be
will delay time for completion is within
dealt with in a way that both parties are
his or her control or not.
comfortable with and not caught offguard, as long as they are not ignored or not considered at all.
•
Access to site – the main contractor has a right to access to the site at which the works are to be completed at the time stated and agreed in the contract agreement.
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A Guide to Construction Contracts
•
Upon termination of the contract –
•
Insurances – the main contractor
the main contractor usually has the
will in some instances be required to
right to terminate the contract should
acquire insurance for the works, site,
a material breach or a force majeure
its employees, materials, etc. This is to
event occur.
ensure that risk remains mitigated at all times.
•
Appointment of subcontractors – the main contractor usually has the
•
Administrative procedures/ compliance
right to appoint subcontractors if not
with all applicable laws – the main
otherwise provided for in the contract
contractor has to ensure that the
(see section regarding nominated
required licences, permits and the like
subcontractors on page 11), whom he
are obtained before, during and after
or she will be held responsible and
the construction works proceed. It is
accountable for.
imperative for the contractor to obtain all licences within the time periods allocated in order to avoid situations
2. RESPONSIBILITIES
where these issues lead to a delay in •
Completing works – the main
the construction process and therefore
contractor has the responsibility to
a delay in the works.
complete the works within the time allocated in the contract agreement. •
•
Response to communications –
Guarantees – in some instances,
the main contractor has an obligation
especially where the contract is a
to respond to all communications from
design-build or EPC (Engineer, Procure
the employer or his or her representative
and Construct), the main contractor
at all times during the subsistence of
will be required to provide performance
the works. These might be variations,
guarantees. This is a mitigation of risk
progress updates, suspension of works,
strategy on the part of the employer
access to site issues, delayed payment
to ensure that if the works are not
notices, etc.
performed to the correct standard or specifications, he or she will be covered
•
Substantiation of claims – in the
accordingly. This will usually be priced
instance where the contract agreement
in by the contractor.
makes provision for a claim mechanism,
15
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unless otherwise stated in the contract
•
Delays – the main contractor should
agreement, the contractor must
also ensure that materials are delivered
substantiate such a claim in order
on time, licences obtained and that
to ensure swift settlement of such
his or her employees perform the
a payment.
works timeously. Failure to do so will lead to a situation where delays occur
•
Subcontracts – main contractors should
and depending on the wording of the
ensure that written agreements are
contract the main contractor might be
entered into between themselves and
subject to delay damages.
the subcontractors. This is to ensure that they are able to properly hold
•
Penalties – the main contractor should
such subcontractors liable should
be aware of the fact that depending
any issue arise.
on the wording of the contract, he or she might be liable for penalties should he or she fail to meet certain set dates
3. RISKS
or fail to meet certain performance guarantees. It is important to note
Financial loss:
though, that if a penalty applies, the •
•
16
Errors in calculations – the main
employer does not have to prove that
contractor should ensure that
his or her loss stemming from the
measurements regarding the works price
breach is equal to the penalty, but may
are done completely and accurately.
not claim further amounts from the
The contractor must also include a
contractor in respect of the breach
contingency amount within the price
to which the penalty applies. In other
for loss that could be suffered for risks
words the contractor’s liability to pay
for which no additional compensation is
damages for the breach is limited to the
allowed under the contract.
amount of the penalty.
Poor management – the main contractor
•
Insolvency of employer – the main
should ensure that he or she manages
contractor is at risk of this occurring
the project accordingly, especially when
especially when the employer is a
subcontractors are involved as this might
private individual or small company.
lead to dire financial consequences.
The main contractor can mitigate this
A Guide to Construction Contracts
risk by acquiring bank guarantees
Emerging contractors can develop
from the employer guaranteeing
management skills and technical expertise
performance (payment) of the amounts
through association in joint ventures with
owed. The main contractor must
established contractors.
remember that he or she has a builder’s lien over the constructed property
It is important to set up a joint venture
which would stand against a claim
agreement which endeavours to assign risk,
for insolvency, provided that such a
responsibility and reward fairly between
contractor maintains possession of
joint venture partners.
the works. Joint venture partners (rights, responsibilities and risks) Joint ventures may be formed for various reasons, such as: •
Size and complexity of the project;
•
If the project requires specialised skills and expertise.
A joint venture may be entered into as either the main contractor or a subcontractor which means the three Rs discussed on page 14 will apply to joint ventures. A joint venture is a partnership which requires the partners to be jointly and severally liable for all obligations of the joint venture. Therefore, one partner may be sued for the full debt of the partnership; this partner in turn has a right to sue the other partner/ s for their pro rata share of the debt. 17
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•
Common construction contract terms/ procedures
Main contractors must ensure that
Not all contracts will follow the terms/
communication with subcontractors
procedures listed below – this is intended
remains at an optimum level, and
to provide an overview of possible and
if there are various subcontractors,
common contract terms/ procedures.
ensure that they have access to the site at the time which they
CONTRACT PROCEDURES
are promised access. •
The contractor must check if
Tendering and contract award
standard form contract conditions have been changed by the employer
•
and how this will affect him or her. •
Always stick to the timelines
The tender is advertised by the employer or his or her representative;
•
allowed within the contract.
Contractors submit their tenders by the required date;
•
The tenders are evaluated, and a
Ensure there is a contract in place
tender evaluation report is produced
between the subcontractor and the
recommending the preferred
main contractor. As a subcontractor one should look out for the following
tender bid; •
conditions, which should be avoided
evaluation report and awards
or negotiated against:
the contract; •
•
Reduction of and/ or set-off from
contractor and the employer; •
amounts allegedly owed to the Settling disputes only through
guarantee as stipulated in the contract; •
the courts with no provision for adjudication or mediation; •
Unreasonable retention percentages and periods.nancial Loss:
18
The contractor establishes his or her camp and site office and orders the
paid once the main contractor has •
The site is officially handed over to the contractor;
•
The subcontractor only gets been paid by the employer; and
The contractor is responsible for the provision of insurance and the surety/
main contractor; •
The contract is negotiated and eventually signed by both the
amounts certified for payment to the subcontractor to cover
The employer reviews the tender
materials required to start construction; •
The contractor sets out the work and starts construction.
A Guide to Construction Contracts
Monthly activities during the contract
•
The employer (or his or her agent) carries out a final inspection. If he or
•
Daily, weekly or monthly site meetings
she (or his or her agent) is satisfied that
between the employer and the
the works/ project is now substantially
contractor and inspection of the work
complete, he or she or his or her agent
by the employer’s representative to
will certify/ confirm that the works/
ensure quality; • •
Preparation of monthly payment
project is ready to be handed over; •
The contractor hands the works/
certificates by the contractor;
project over to the employer (that is,
Review and certification of the payment
the employer takes possession of the
certificate. Queries are referred to
works/ project).
the contractor; •
The certified payment certificate is
Final account
submitted for payment by the employer; •
Payment is made to the contractor
•
The contractor or the employer
within the period specified in
(as required in terms of the contract)
the contract.
prepares the final account during the handover period and submits it to the employer;
Handover procedure • •
to the employer once the employer
to inspect the completed project prior
has issued a (practical/ taking-over)
to handover; •
The final account is certified and issued
The contractor requests the employer
The employer inspects the project,
completion certificate; •
identifies outstanding items to be completed by the contractor prior to
The employer pays the final account less the retention money;
•
This retention money is released to the
the handover of the project and issues
contractor at the end of the defects
a “snag list” to the contractor listing
liability period.
the outstanding items; •
The contractor completes the
Defects liability period and final completion
outstanding items and notifies the employer that the project is complete and ready for a final inspection;
•
The contractor is responsible for making good items which show defects during the defects liability period; 19
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•
Near the end of the defects liability
on which he or she became or ought to
period, the contractor requests the
have become aware of the latent defect.
employer to inspect the project and identify any defective items which the
Disputes and how to resolve them
contractor is responsible for making good in terms of the contract; •
•
•
Most standard form contracts will cater
The money held in retention by the
for a dispute resolution mechanism
employer will only be paid when the
which will state the procedure to be
contractor has properly completed
followed when a dispute arises. If a
the list of defects;
bespoke contract is used, it is best
Once the employer has issued a copy
to have a clause that prescribes a
of the final completion certificate, he
dispute resolution mechanism as such
or she is required to pay the retention
mechanisms can lead to disputes being
money due to the contractor.
settled timeously and amicably.
The project is now complete
•
Claims procedure The contract should provide for a
•
•
The contractor is usually still liable
procedure to be followed once a
for the repair of any latent defects
contractor or the employer realises
for several years. Latent defects are
that they have a claim. Submission for
defects which were not apparent and
and against such a claim will usually be
which a reasonable inspection would
made. The contract will usually set out
not have revealed during the defects
time periods for the contractor to give
liability period. Different contracts
notice of a claim and to submit a claim.
deal with the liability for latent
These must be identified, noted and
defects differently.
complied with by the contractor.
For latent defect liability not to apply it must be expressly excluded. If nothing
20
•
Determination
is said about latent defect liability,
The submissions referred to above are
the common law applies; namely
usually made to the representative of the
the employer has a right to hold the
employer. This individual will determine
contractor responsible for a latent
if indeed a claim exists and if so, the
defect within three years of the date
amount claimable.
A Guide to Construction Contracts
•
Dispute
•
Court
If either party is not satisfied with the
If no provision is made for arbitration
determination made, they can declare
in the contract, and the parties
a dispute or notify their dissatisfaction
do not agree to this or any other
and, depending on the provisions of
mechanism to resolve the dispute,
the contract, either: try to mediate the
the normal South African court
dispute; approach a DAB/ arbitration;
system may be followed to settle
approach the court or follow any other
the dispute.
mechanism set out by the contract. Contractors should ensure that after the •
DAB/ Arbitration
award of a tender the agreement tendered
In employing this mechanism parties
for is the agreement that they sign.
will usually negotiate and conclude an arbitration/ adjudication agreement
Contractors should note that they may
which will state the exact procedure to
ask for the relaxation of certain strict or
be followed in arbitrating/ adjudicating
unfair terms of the contract, but they must
the dispute. An arbitrator(s)/
ensure that this does not render them
adjudicator(s) will be agreed upon, and
disqualified, and they must voice this
dates for submissions and argument,
concern in the prescribed format
issues relating to costs, and all other
(usually tender specific).
logistical issues will be agreed in a meeting with the arbitrator(s)/
Although arbitration offers a quicker,
adjudicator(s). This agreement will then
controlled and much more discreet
be followed until a decision is made by
solution to disputes, it is not always
the arbitrator(s)/ adjudicator(s). It is
the cheapest solution.
important to note that the ruling of an arbitrator/ adjudicator is binding on the parties and can be made an order of the court. If it is agreed that the award by an arbitrator or adjudicator is final and binding, a court will, save in the most exceptional cases, not overturn the award.
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Key concepts CONTRACT DELIVERABLE
CONTRACT RISK
•
The deliverable in a construction
To respectively allocate the foreseeable and
contract is the completed works
unforeseeable/ likely and unlikely risks to
(the completed building, structure).
each of the parties.
The completed works should be described as correctly and clearly as
CONTRACT TERMS
possible at the time of contract, and to allow it to evolve in a controlled
The following terms are key and regularly
manner (deliverable);
used in construction contracts. It is therefore very important that contractors
•
To define the completion date of the
know and understand what they mean:
deliverable based on what is known and what ought to be reasonably
•
BOQ: This is a detailed statement of
foreseeable by an experienced
the work, materials, prices, dimensions
contractor at the time, and to allow
and other details for the construction
the completion date to change in a
of the work. This document will be
controlled manner by providing for
used in remeasurable contracts.
circumstances where the completion date can be extended.
•
Contractor: The person or firm who signs the contract to do the work.
CONTRACT PRICE • •
Defect: Defects are aspects of the
There are various pricing options to
works that are not in accordance
consider, for example:
with the contract. They usually occur because of design deficiencies,
• Lump sum contract
material deficiencies, specification
• Unit price contract/
problems or workmanship deficiencies.
remeasurable contract • Fixed price
•
Defects liability period: The period for which the contractor is required
Please see the section dealing with contract
to “guarantee” the completed works
arrangements on page 12.
and to rectify any defects that may be discovered or appear.
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A Guide to Construction Contracts
The defect liability period starts when
•
Escalation clauses: Caters for the rise
the employer is satisfied that the
and fall of economic factors, where a
works are complete and takes delivery.
project/ contract exceeds a duration of
The defects liability period varies,
one year, eg labour rates, commodity
depending on the nature of the
prices, etc.
work, and can range from three to 12 months.
•
Extension of time (EOT): An extended time for completion of the
•
Deviation: When a plan, design
works, relieving the contractor from
or specifications agreed by the
having to pay penalties for
parties is not followed during
the delay.
the construction process. • •
Force majeure: An exceptional event
Disputes: In general, a dispute is
or circumstance beyond a party’s
defined as an unresolved matter of
control that renders performance of
dissatisfaction or difference.
the works impossible for a period of time or forever (eg war, terrorism, etc).
•
Employer: Also known as the client, the employer may be a person or a
•
Performance guarantee: A guarantee
government agency or a corporation,
procured by the contractor from a
and is the party who wants the project
financial institution in favour of the
constructed and who will pay for the
employer as security for the due
work. The employer also signs
performance of the contractor’s
the contract.
obligations under the contract. The employer can claim against this
•
Employer’s representative:
security should the contractor fail to
A representative of the employer,
perform the obligations for which the
usually a professional architect,
security has been given. The security
engineer, project manager or quantity
is returned when the contract is
surveyor. This is the person with whom
satisfactorily completed. The terms
the contractor will have the greatest
of the guarantee will determine the
contact during the contract.
nature thereof, and the instances in which it can be called, and must for that reason be read very carefully. 23
BOWMANS
•
Payment guarantee: A guarantee
or a failure to achieve certain
procured by the employer from
guaranteed levels of performance of
a financial institution in favour of
the works. Penalties are an agreed
the contractor as security for the
upon amount of money which is
employer’s compliance with its
deemed to cover the innocent party’s
payment obligations under the
loss in respect of the breach for which
contract. The contractor can claim
the penalty is imposed. In agreeing
against the guarantee where the
a penalty, it should be considered
employer has failed to make due
whether the penalty proposed bears
payment to the contractor in terms of
some measure of potential harm to the
the contract. This security is returned
innocent party and the innocent party
when the employer’s payment
should be made to explain the amount
obligations have been fulfilled. The
proposed, if it is proposed.
terms of the guarantee will determine the nature thereof, and the instances
•
Pricing options: Options available to
in which it can be called, and must for
a contract when pricing a particular
that reason be read very carefully.
contractor (eg lump sum, measurable, activity based, time-based etc).
•
Limitation of liability: This is usually a clause in the contract which apportions
•
Retention: This is money, usually
liability between the parties. It is an
from 5% to 10% of the value of the
attempt to limit, define, estimate and
work done, that is held back by the
manage liability between the parties
employer to correct defective work.
themselves and third parties. A cap
When the project is delivered to the
on damages may be used.
employer, part of the retention money is returned to the contractor, and the
•
Overhead costs: Costs incurred by
balance is released at the end of the
the contractor in establishing and
defects liability period.
maintaining site. • •
24
Subcontractor: Usually appointed,
Penalties: Most contracts contain a
managed and paid by the contractor;
penalty for failure to complete the
enters into a contract with
project within the contracted period
the contractor.
A Guide to Construction Contracts
•
Variation: Any change to the contract which is instructed or approved. Most standard form contracts provide for a procedure to be followed when such a change is required.
25
BOWMANS
Applicable legislation THE CONSTRUCTION INDUSTRY
NATIONAL BUILDING REGULATIONS
DEVELOPMENT BOARD ACT 38 OF 2000
AND BUILDING STANDARDS ACT 103 OF 1977
This Act regulates the construction industry as a whole and publishes standards,
This Act prescribes the standards and
directives and regulations to give effect
requirements to which any building
to this objective. If a contractor intends
to be used for occupational purposes
to tender for public sector works, regard
should comply.
should be had to this Act and regulations, in particular, the requirements for registration.
THE CONSUMER PROTECTION ACT 68 OF 2008
THE OCCUPATIONAL HEALTH AND SAFETY ACT 85 OF 1993
This Act protects “consumers” when entering into contracts with contractors.
This Act prescribes standards and requirements according to which the
THE COMPETITION ACT 89 OF 1998
contractor’s employees and/ or all individuals on site are to be treated.
This Act protects employers against
The construction regulations (the latest
collusion during the tender phase of
published in 2014) under this Act prescribe
the contract.
the requirements to ensure health and safety in construction activities.
MUNICIPALITY BY-LAWS
NATIONAL ENVIRONMENTAL
These are by-laws promulgated by the
MANAGEMENT ACT 107 OF 1998
municipality regarding buildings.
This Act provides the requirements and procedures necessary where the construction of any works pose a risk to the environment.
26
A Guide to Construction Contracts
Useful links •
•
Association of Arbitrators
•
London Court of International
(Southern Africa)
Arbitration (LCIA)
www.arbitrators.co.za
www.lcia.org
Department of Trade and Industry
•
www.thedti.gov.za
Construction Industry Development Board www.cidb.co.za
•
Tokiso Dispute Settlement (Pty) Ltd
•
www.tokiso.com •
•
Arbitration Foundation of South
Council for the Built Environment www.cbe.org.za
•
South Africa Federation of Civil
Africa (AFSA)
Engineering Contractors
www.arbitration.co.za
www.safcec.org.za
United Nations Commission on International Trade Law (UNCITRAL) www.uncitral.org
•
International Chamber of Commerce (ICC) www.iccwbo.org
27
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