What is a contract review? A contract review is where your building contract is checked to identify any potential issues that you will undoubtedly wish you had been informed about if things go wrong.
All written contracts should be assessed in detail by an experienced person to ensure that important topics are addressed within the contract, and that inequitable terms are identified so that they can be addressed before you enter into a contract.
Discussion about contract terms helps the parties to know their obligations and avoid disputes later on down the track.
The implications of not performing this exercise can be fatal.
What to watch for.
Typically potential issues can be categorized as follows:
- Prescriptive dispute processes
It would be possible to write books on this topic and we will only look at significant issues which are relatively easy to identify within a contract review.
Quality standards should be objective. This favors both the builder and the owner.
This means that the contract should avoid referring to subjective quality standards which exist only in the mind and/or opinion of an individual or organization. Contract reviews identify these issues and propose different terms.
It is not enough to require that works are to be performed ‘to the satisfaction of individual A’.
The contract should expressly set out what is deemed to be defective work so that applicable standards can be applied to the works as a rule.
This helps to avoid potential disputes in scenarios where parties simply have a difference in opinion, be it biased or not.
The amount of time in which the build must retain its quality is also a factor to be considered. Contract risk reviews identify these issues.
The ‘defects liability period’ (DLP) is the period in which the builder must re-attend the project to remedy any defects following completion of the build.
Different contracts provide different DLP periods. This must be expressly set out within the contract if additional expectations are required over and above those provided by the Building Act 2004.
Use a specification
Essential to quality standards is the use of a ‘specification’.
The specification sets out which materials and equipment must be used and how installation must occur. Acceptable tolerances are expressly stated so that objective standards are agreed at the outset.
Contract risk reviews should consider the detail provided by the specification and ensure clear language is used.
Management of quality standards is important. Frequent quality management steps such as QA inspections may be mandated to afford parties regular opportunities to record quality issues before minor issues missed/covered over, and/or become larger issues.
A helpful breakdown of several trades and possible associated quality standards are available at the Building. Govt website.
Commonly, time is underestimated as being a primary factor within a building contract, however this couldn’t be further from the truth.
Time delays seldom come without cost implications, the bearer of such costs is inevitably set out by the terms of the contract, or lack thereof.
Liability for delays and delay costs
Most standard form contracts include provisions for extending the completion date of the contract, however the reasons which give rise to an extension of time should have particular attention paid to them.
Depending on the entitlements of the contract, a party may find itself liable for delay costs and/or the impacts of the delay itself due to no fault of its own.
Covid 19 delays in construction
Covid 19 lockdown is a good example of a delay to a construction project which is not the ‘fault’ of either party.
Should a building project suffer prolongation as a result of a lockdown, this likely does not limit the contractors liability to pay for its plant and equipment which cannot be used to do the work during the delay.
This can lead to unexpected additional cost and less time to finish the project.
How each delay is treated (i.e. who pays for delays) can often turn on the use of a particular sentence within the contract or term of trade which is unlikely to be understood but for experience in contract assessments / project management.
Contract risk reviews are often provided with Covid 19 liability guidance.
Ownership of float
A common cause of dispute found with contracts that require the builder to produce a programme of the works to the owner, is the ownership of terminal float.
Terminal float is the period of time between the completion date required by the contract and the actual expected date the builder ‘should/will’ achieve completion.
For example, imagine a building project is contracted between December to December (12 months) and due to good fortune, the builder realizes mid project that things are going very well, the project will actually be complete in 9 months total. So far so good…
Then imagine the home owner/client introduces a design change which adds approximately 3 months to the project.
The builder no doubts believes it is entitled to a claim for the impact of the additional 3 months time.
The client may believe that they have already paid for those 3 months and there is no actual change to the contract duration. This is an example of a terminal float dispute.
Float disputes can occur early in construction projects too. Contracts which require the submission of critical path programmes (such as NEC3 / 4) inevitably demonstrate some element of task float or terminal float.
The float is ‘wiggle room’ within the programme and may typically be used on a first come first served basis i.e. the client may instruct additional works during the float periods.
However, what happens at the end of the project if a delay event occurs which the contractor IS responsible for, when the client has used all of its terminal float ?! the Contractor may face potentially fatal costs which would have been mitigated if the Client had not asked for additional work or delayed the project.
Contract reviews identify how float must be treated so that changes can be managed accordingly.
Another common reason for float disputes is a scenario where a contractors extension of time claim quantum cannot include its terminal float period because the completion date recorded in the contract is not reflected by the as built programme referred to by the contractor.
There are several nuanced scenarios which can occur which impact the use of float.
Contract risk reviews often set out terms which identify what is defined as float and who may reap the benefits of float when it exists.
It’s important to define what the parties actually bean by ‘completion’.
Some contracts prescribe ‘practical completion’ (i.e. NZS3910:2013).
This is where as long as the property/build can be used for it’s intended purpose then the owner takes possession and the builders retention liabilities are decreased and/or the DLP period begins in earnest.
The difference between this definition and actual completion is that the builder can finish off minor jobs such as defect remediation and other cosmetic touch ups while the end user can enjoy their purchase.
The nuanced differences in the definition of ‘completion’ can lead to significant time vs cash flow issues because retentions and/or security payments take longer to recover than anticipated.
Death by a thousand cuts
A particularly common scenario in the commercial construction space is where a contractor encounters many small changes, so that it is difficult to understand the impact of any part of the whole issue until the issues are well developed and the glaringly obvious bigger picture dawns on the contractor.
It is easy for those small variations/delays to quickly accumulate but it remains difficult to quantify any one small event. We refer to this scenario as ‘death by a thousand cuts’.
Time-bar terms and definitions of ‘entitlement’ should be particularly scrutinized to ensure the contractor has administrative freedom to recover the associated time and cost (or not, whatever the intention is).
Re-measurable SOQ provisions around time
Contracts may include a Schedule of Quantities (SOQ).
There are different types of SOQ.
Some contracts use SOQ’s as a guide for prices only but whatever is written in the SOQ is the entitlement/ contract sum.
This is to say that the actual quantities of the work performed is never ‘re-measured’. The Contractor ‘should have’ measured the project works from the contract documents (plans) in this scenario and been happy with the quantities in the schedule when it entered into the contract.
Another way to administer SOQ contract is to actually re-measure the works performed on the worksite and pay the rates x the work which has been performed. This is commonly referred to as being ‘re-measurable’.
Re-measurable schedules often fail to provide terms for how to deal with time as a result of the remeasure.
It is advised for both developers and contractors that the contract include a method to adjust the completion date on the basis of quantity changes when considering the SOQ vs as-built requirements of the project.
The benefit to developers is so that time is not rendered ‘at large’, in which case under law the contractors obligations could be limited to complete the contract ‘within a reasonable time’ only.
Often the most scrutinized terms of contract deal with cost. So it must be hard to sneak anything past an unwitting party ?. Wrong.
Cost plus contracts
Several contracts (usually tailored to the builders needs) use a cost+ method to establish the contract sum.
This means whatever cost the builder reasonably (or sometimes not) incurs is recoverable from the owner/developer, alongside a percentage to cover offsite overheads and profit margin.
Disputes often occur when assessing the amount of time spent when relevant to the claim.
Cost+ projects should be avoided for projects of any significant size if budget is at all a concern. This is equally important to the builder who would find long term benefit in the avoidance of disputes.
Another issue regarding costs are overly restrictive time-bar clauses (we look closer at time-bar terms here).
Is it not in the interest of the industry for parties not to be paid unless absolutely necessary. Unless actual harm would result from the lack of immediate time notifications, then parties should avoid overly draconian time-bar terms.
Interest and debt recovery costs
Contracts should provide for interest on late payments. Without terms to this effect it may be that the party expecting payment may not be entitled to apply interest to cover inflation during the late payment period.
Similarly, contracts may provide protection of the cost to recover debts. This helps to avoid unnecessary administration and/or legal costs if payments have not been made.
Insurances must be of sufficient value and scope to cover risks adequately. An understanding of insurance law is often helpful to understand which claimant must initiate insurance claims, and which party is entitled to be paid from the insurance company accordingly.
Prescriptive dispute methods
The CCA 2002 provides a helpful, quick dispute resolution method. Be wary of terms which set out that disputes must be arbitrated pursuant to the Arbitration Act 1996, as this may extinguish your statutory right to adjudicate disputes under the CCA 2002.
An experienced eye may assist parties to understand limitations of the contract i.e. reasons why some terms are not enforceable in law.
A common example is head/main contractors not paying out subcontract retentions until completion of the head contract and payment of the head contract retentions. This type of arrangement is very likely a conditional payment which is ineffective due to s13 of the CCA
These terms should be addressed before entering into contract to avoid disputes at a later date when the terms are sought to be enforced.
Reasons for termination
To avoid potential termination vs repudiation disputes, it is often helpful for thee contract to set out the terms in which one party may terminate the agreement.
Often, parties disagree that party A was entitled to terminate the contract, and it follows that Party B then believes Party A has breached the contract by ceasing to perform the work.
By expressly setting out the scenarios in which termination of the contract is an option, the parties avoid disputes about disputes.