Contract Unfamiliarity Breeds Contempt
The potential for increased risks arises when the contractor is unfamiliar with the contract type, or when a standard form of contract has certain conditions that have been changed to reduce the employer’s risk. To minimise any potential risk, the contractor must be aware of the conditions agreed to in the contract and most importantly the contractor acquainted with the conditions stated and actively administer the contract in accordance to these conditions.
There is much discussion about the advantages and disadvantages of the various standard forms of contract. In essence, this is a discussion on risk and who takes the larger portion of it in any project. The identified risk associated with both the project and contract conditions is then quantified and a value included in the tender price. This is standard practice, and employers and contractors are familiar with the contract type – it is only the project that has to be evaluated for any risks. This is the main reason for the acceptance of any of the standard forms of contract.
The standard terms contained in contracts need to be understood and followed to reduce the risk of incurring additional costs and even having to compensate for delay damages. Many books are available on how to read and understand the various standard forms of contract. Unfortunately, experience shows that only once an event occurs do contractors refer to the contract conditions to acquire compensation for delays and or additional costs. The events associated with technical changes or variations such as additional equipment or materials are normally straightforward and dealt with timeously by means of a variation order based on instructions. Conversely, abstract events such as access delays and strikes become a minefield to navigate. The parties introduce in counter arguments of concurrency, time at large, and lack of progress at the time of the event. Arguments surround the method to be used to determine the impact of any delays. To address these issues employers include changes to the contract clauses in the particular conditions.
The parties, having experienced an event for which claims and counter claims have been submitted, seek to challenge any entitlements. This is done firstly within the confines of the contract agreement, failing which any “weak” points are identified and legal terminology is introduced quoting case law generally from England and Australia and even the USA. Terms such as “the prevention principle” or “time at large” are the more commonly used terminology.
The reasons for quoting or referring to case studies or using legal terminology, is generally as a result of the difficulty in providing sufficient evidence of entitlement or sufficient evidence to reject any entitlement. Contracts are drafted by the legal teams of both parties. In some instances, the subcontractors may not have access to legal support due to the costs thereof and will agree to the contract conditions provided by the potential employer. The conditions and the procedures contained in this legally drafted document must then be followed by project and commercial managers, engineers and technicians, as well as administrative personnel. It must be appreciated that the sense of priorities or strong points of these vocations may not necessarily lay within the legal or contractual ambit.
Albert Einstein once remarked: “Everything should be made as simple as possible, but not simpler”. This should form the basis for any contract agreement. As project agreements normally are “voetstoots” agreements (where a project is delivered as is and the employer accepts all risks), an easy to understand agreement is required. This agreement must be clearly understood by all parties and as such the responsibilities must be adopted and practised by the parties. Depending on the level of expertise and financial commitment required, the terminology could be adapted to suit. When a large international conglomerate undertakes a major project, the terminology used in the contract may (and should) differ when compared to a small subcontractor undertaking a small portion of the project.
Contract agreements should be drafted to ensure a fair reflection of the level of responsibility and price of the project. A small-sized subcontractor should not be subjected to the same contractual conditions of a larger contractor with in-house legal teams. Also the smaller subcontractors should not have to decide whether the costs of acquiring legal support will actually result in work lost due to the increased costs.
The type of contract is important and unfortunately, two consenting parties signing an agreement is considered a contract and is therefore considered binding. The party with the least risk will understandably make efforts to maintain the low risk even at the expense of the other party. This is not necessarily unfair but must be considered when pricing and agreeing to any contract agreement. This consideration should include the following reviews, legal, technical, commercial and the administration of the contract agreement before agreement is reached and the contract signed.
Proper Contract Administration
In the “Global Construction Disputes Report 2016” by Arcadis, it is stated that the main cause of disputes is the failure to properly administer the contract. This means that by administering the contract correctly, the contractor is able to address most issues timeously and increase the chance of avoiding a dispute. Despite popular belief, poorly drafted and unsubstantiated claims, errors in contract documents and or incomplete design is not the main cause of disputes.
This blog was authored by MICCP Stefan Müller, Managing Director, GibConsult (PTY) Ltd.