Construction contracts
Question Two
Standard contracts are precisely drafted contracts designed to suit the particular requirements of a specific project. In today’s legal environment, especially the sophisticated projects, the creation of standard contracts is preferred since they are the most efficient means for agreement to contract terms. The standard contracts are also widely used for day-to-day supply agreements where owners of the projects may deem standard form contracts unnecessarily complicated and inflexible. This question will address a contract administrator’s functions under NZS3910:2013 standard contracts form and challenges faced by contract administrators working as independent professionals or client’s agent( Faqiri & Rasool, 2020).
The NZS 3910: 2013 is the most used standard form of contract used for New Zealand construction works. This standard form of contract has been designed in line with common law clauses. The contract form defines the functions and roles of a contract administrator under different names.
Functions and roles of a contract administrator under NZS 3910: 2013 contract form
Under clause 5.1 of NZS 3910:2013, a contract administrator is an engineer in charge of the project. A contractor administrator is a general term used in the construction industry. In SCC 2018, a contract administrator is referred to as the architect while NEC 4, the contract administrator, is referred to as the project manager( Faqiri & Rasool, 2020).
In most building and construction, the Principal appoints engineering projects a contractor administrator, commonly referred to as the Engineer in charge. Contract administrators are not a party to construction contracts; their primary function is the administration of the contract on the Principal’s behalf with the overall objective of ensuring proper execution and completion of the project. Clause 6.2 declares a contract administrator as the professional Engineer, architect, and surveyor directly appointed by the project’s Principal to be the contract engineer.
Clause 6.2.1 of the NZS 3910:2013 gives the contract administrator the dual role as the Principal’s agent and certifier of ensuring work is completed on time, quality, and budget( Faqiri & Rasool, 2020). The primary function of the contract administrator, in this case, is to act in the sub role of an expert advisor and agent. This permits the Engineer to make decisions that are binding to the Principal within the scope directed by their Principal. As a contract administrator, an engineer is directly required to handle all decision-making processes, ongoing value works issue work certificate of recognition fairly and impartially independently of the contracting parties.
Under close 5.9 of the NZS3910, it expressly states that the Engineer is not a party to the contract. This is because the contract administrator has been given the Principal’s authority under a separate employment and consultancy agreement, which can only be dismissed by the Principal. Clause 6.2 also states that the Engineer, as the contract administrator is responsible for the dispute resolution processes where parties in the project can request a formal review of decisions, issued certificates, and valuations.
On the other hand, the contract administrator should act in the Principal’s interest, where the decisions of the contract administrator bound the Principal. Where the contract administrator is acting on behalf of a principal, he/she has to act in a fair and impartial role in cases of disputes between the Principal and contractor. A perfect example happened with the Brown & Doherty v Whangarei DC case law; the judge ruled that engineers ought to act as reasonable and honest men who have to discharge their duties as contract administrators fairly and impartially. Under clause 5.5 of NZS3910, the contract administrator breach is also the breach of the Principal. Therefore, the Principal is liable for any damages in case a contract administrator breaches contract.
Under the NZIA SCC 2016, the standard form contract uses the architect’s term, but the functions and roles are the same as in NZS3910( Faqiri & Rasool, 2020). Also, the architect acts on behalf of the Principal where their role on a project is
- Representing the Principal
- Issuing directions and responsibilities to the contractor
- Administration of the contract and also acting as a bridge of impartiality between the Principal and the contractor.
The extent of the contractor’s duties
Under clause 6.21 of the standard form contract NZS3910, an engineer’s duty is based on two roles. They can vary depending on timing, variations, and payments of the contract
- The first duty is to act on behalf of the Principal and giving instructions to the contractor
- To act as an independent mediating party. The contract administrator has to act fairly and impartially in making decisions as stipulated in the contract.
These two duties will depend on several factors as listed below.
Variations
Clause 6.1 of NZS 3910 stipulates that all standard contract forms should have a variations clause in them. This gives the Principal the powers via the contract administrator to make variations in a project. This clause stipulates what can be varied, the process of variation to be used, and how the contract’s variation would be valued( Wilson, 2020). The duty of a contract administrator under this clause is to carefully check the powers of the Principal in making variations if this could significantly affect the contractor’s design work. The contract administrator should also ensure that the variation is within the initially agreed scope of work.
A contract administrator must also act as an impartial party in case of disagreements concerning variations between the Principal and contractor. In this case, the Engineer has a duty to act fairly and impartially in resolving such disputes. Arguments normally arise when one party decides to revalue a variation after terms have been agreed upon.
Time
NZS 3910 standard form contract has a provision for setting the period to be used in calculating the project completion date. In this case, the contract administrator has a duty to ensure time is correctly stipulated concerning the amount of time set for the project( Wilson, 2020). The contract administrator has to supervise the contractor to ensure works are completed onset time. In this case, the Engineer has to set the start date and completion date for the contractor to ensure the contractor can plan for the project on time. In case the Engineer fails in this role, then the contractor’s obligation will be to ensure the completion of these works in a reasonable period. The other duty of the contract administrator concerning time usually is in determining the extension of a contract’s time. He/she should ensure this process is fair and impartial to both parties. Clauses 10.3.1a provide for variations in the extension of time and what the contract administrator should consider in extending a project’s time.
Payments
Payments in a project will vary from damages in case of breach of contract, warranties, and other related contracts. A contract administrator must ensure that the work of the contractor is within stipulated budgets. The contract administrator also ensures that the contractors receive any necessary payments. Under the 13th schedule of NZS3910:2013, it requires that the contract administrator to warrant on behalf of the Principal that the terms of the contract are executed within the period of the project (Burr, 2016).
Challenges of a contract administrator
Contract administrators regularly face several challenges. Balancing between the interests of the Principal and contractors can prove very tasking and challenging. One of the challenges contract administrators face is ensuring compliance with the contracts. The contract administrator is acting in the capacity of the Principal, he/she, has to ensure that all parties in the project fulfill their part of obligations. Monitoring and ensuring the terms of the contract are adhered to can prove to be challenging. Also, the ability to follow the progress and status of a project at any one time can be tasking for contract administrators and managers. They have to constantly report their project’s status until its completion (Finnie et al., 2019. They may also continuously experience challenges in coordinating site inspectors since they have to ensure strict compliance with the project quality standards. This may require the contract administrator to constantly work with contractors, which may lead to disputes severally. One of the roles of the contract administrator is issuing and processing of tenders. This could prove challenging since choosing the best contractors to work with is not an easy task.
Question 2
Contractual risk assessments on the effects of COVID-19 in construction projects
Covid-19 pandemic, which started in China in February 2020, has certainly affected many economic sectors, including the construction industry in New Zealand. Several consequences are emerging because of extension time and contracts’ cancellation because of strict covid 19 restriction rules.
Several issues have come up during the virus crisis, and parties to construction projects have to consider their risk assessment measures in light of the pandemic. Some of the issues include work suspensions, variations, and extension of time (EOT) and, in some cases, termination of construction contracts. In light of these emerging issues, there is a need to do a risk assessment of contractual obligations to assess the way forward. It is a fact that covid-19 has contributed to several challenges and risks for the industry where employers and contractors have to contend with (MMgmt & Fnziqs, 2019).
Covid 19 escalation caused New Zealand to institute a level 4 lockdown on March 26 2020. These are crucial dates in the construction industry in terms of contractors accessing their need to claim for extensions of time and additional costs claims in projects that have been affected because of restrictions of Covid19. Close 10.3 stipulates that a contractor can claim for time extension for delays resulting from matters that were not reasonably foreseeable at the time of issuing of the contract. Therefore, as a result of covid 19 associated delays, such as supply chain disruptions, and lockdowns, the contractor is entitled to claiming an extension of time. Dates after March 22 2020 are crucial as well since the contractor’s right to time extension will vary depending on when the contract was awarded. Site restrictions because of the covid 19 social distancing rules have led to project delays in construction projects, which entitles contractors of these projects to extension of time.
Another risk associated with covid 19 pandemic is that contract administrators (engineers) under NZS3910 have suspended contracts: 2013 clause 6.7.1 and under 6.7.3 mutual agreement clause. The suspension of works under these clauses gives the contractors a right to claim variations, costs and EOT. Therefore, most contractors have been making their claims based on the working day rate as the basis of calculation of these costs( Faqiri & Rasool, 2020). The contractors have had to comply with several law provisions to cope with the risks of covid 19 disruptions in the delivery of their works. Such risk mitigation measures include labor redeployments and relying on government subsidies among other factors.
Since June, the government has relaxed some restrictions, which has prompted some site works to reopen, which means that it will be very unreasonable and unpractical for contractors to claim for extensions of time, costs and variations.
Another major impact of covid 19 has been the disruption in the supply chain of construction materials from overseas. Materials from countries such as china and transport of materials because of travel restrictions has disrupted the construction industry, which could have risks in project completion and delivery. Under clause 5.11.10, the contractors may argue that the covid 19 travel restrictions have increased the cost of performing the contract hence argue for this factor to be treated as a variation (Wang, 2016). In addition, where the Engineer in charge, the suspensions, has done suspension of construction works may be treated as variations under clause 6.7.4 of the NZS 3910:2013. The parties will need to conduct a valuation of this variation depending on the contract terms.
The contractors have a right to claim of liquidation damages in cases where the impact of covid 19 has been significant. The parties to the contract will need to access whether the various restrictions and recent lifting of those travel restrictions have had any significant impact on completion of projects time. This implies that in most cases, contractors will not have any rights to claim for liquation damages since the contract administrator will invoke the clause 6.7.3 that the contractor can finish the project within a reasonable time.
Covid 19 has led to price escalation in materials especially imported from overseas. These may lead to further delays in completion time of projects. There is a significant risk of price escalation on projects materials due to covid 19 disruptions on supply chains all over the world. Therefore, the parties to the contract will trigger the clause regarding price escalation as a result( Wilson, 2020).
Covid 19 impacts on construction projects will also trigger contractors to claim time related costs, which requires them to come up with risk mitigation strategies these, include reprogramming of projects among other strategies in order to curb the impact of the lockdown measures.
Health and safety of all parties in construction projects have been considered in site restrictions due to covid 19 risks. This has affected many projects. For essential projects, contractors have to put in place strategies and measures to protect their workers against the risks of contracting covid 19. In light of these restrictions, the government has come up with guidelines that apply to NZS3910 contracts in light of multiple variations due to suspension and termination of contracts.
Covid 19 overall impact to the economy has triggered force majeure events in contracts due to termination of contracts. (Flattery, 2020) It is important for parties to contracts to consider clause 5.6.1 under NZS 3910 by including Covid 19 as risk to responsibility. This may limit the number of unnecessary claims due to suspensions of contracts.
Covid-19 has definitely led to deteriorating economies all over the world, which will lead to negative impacts on the construction industry for many years to come (Baker, Wilson & Anglemyer, 2020). Many projects will be suspended while new planned projects will be cancelled. These are some of the risks that will face stakeholders for the rest of 2020 and it is therefore important that they plan ahead using NZS 3910 guidelines provided by the government on how to handle various contractual issues arising in the industry.
References
Baker, M. G., Wilson, N., & Anglemyer, A. (2020). Successful elimination of covid-19 transmission in new zealand. New England Journal of Medicine, e56.
Flattery, J. (2020). What will be the impact of covid-19 on the New Zealand construction industry?. Built Environment Economist: Australia and New Zealand, (June/August 2020), 38.
Wilson, S. (2020). Pandemic leadership: Lessons from New Zealand’s approach to COVID-19. Leadership, 1742715020929151.
Wang, J. D. (2016). The Duality of the Engineer as Contractor Administrator under FIDIC Contract Conditions. In Advanced Material Engineering: Proceedings of the 2015 International Conference on Advanced Material Engineering (pp. 379-387).
Faqiri, A., & Rasool, A. (2019). Influence of construction contract management on the completion of Public-Private Partnership Projects. International Journal of Management, IT and Engineering, 9(4), 28-42.
MMgmt, P. D., & Fnziqs, M. (2019). NZS 3910. BUILT ENVIRONMENT, 13.
Finnie, D., Ameer Ali, N., & Park, K. (2019). Design development post contract signing in New Zealand: client’s or contractor’s cost?. Proceedings of the Institution of Civil Engineers-Management, Procurement and Law, 172(4), 146-156.
Burr, A. (Ed.). (2016). Delay and disruption in construction contracts. CRC Press.