guide – construction contracts

GUIDE – CONSTRUCTION CONTRACTS

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04 Introduction05 Whatisacontract?

05 Constructioncontracts

07 Workingwiththeemployer’srepresentative

08 Differentformsofcontracts

11 Differentwaysofcontracting

12 Constructioncontractarrangements

13 ConstructionIndustryDevelopmentBoard

14 Decidingonwhichcontracttouse

18 Commonconstructioncontractterms/procedures

22 Keyconcepts

26 Applicablelegislation

27 Usefullinks

Contents

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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.

Theconstructionindustryisvaluedatapproximately

Theindustrycontinuestogrow.Thishandbookprovidessomebasicknowledgeandunderstandingregardingcontractinginthisindustry.

andprovidesjobopportunitiestoapproximately

ZAR 145 billion

429 000 individuals

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What is a contract?

Construction contracts

Acontractisanagreemententeredinto

betweentwoormorepeoplewiththe

intentionofcreatinglegallyenforceable

obligations.Onceproperlyconcluded,

acontractisbindingoneachparty.

Thismeansthateachpartyhasalegal

obligationtodothethingswhichthe

contractrequireshimorhertodo.Ifa

partydoesnotdoso,heorshemaybe

inbreachofthecontractandtheother

partywillhavecertainremedies,suchas

claimingforadditionalcostscausedbythe

breach(calleddamages).Theyarealso

abletogetacourtordertoforcetheparty

inbreachtodowhatisrequiredofthem

underthecontract.

The contract should describe

the following:

• Whatwillbedone;

• Howlongitwilltaketocomplete;

• Howmuchitwillcostandthe

paymentterms;

• Whatwillbedoneifeitherparty

defaults;and

• Theextenttowhichthecommon

law,whichwouldusuallyapply,

isadheredto.

Ensurethatyouhavereadtheentire

contractandunderstandtheterms

andconditionscontainedtherein

beforesigning.

Aconstructioncontractisanagreement

betweenanemployer(sometimesreferred

toastheclient)andacontractorto

construct,repair,modify,renovateoreven

demolishsomethinginanagreedtime

frame,foranagreedpriceandto

agreedstandards.

Thecontractissignedbyboththe

employerandthecontractor.Aswithany

contract,oncetheconstructioncontract

issigned,boththecontractorandthe

employermustfollowthetermsofthe

contractorfacepossiblelegalaction.

“Itisnotthebeauty

ofabuildingyou

shouldlookat,it’sthe

constructionofthe

foundationthatwill

standthetestoftime.”

–DavidAllenCoe

Guide–ConstructionContracts

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ROLE PLAYERS WITHIN THE

CONSTRUCTION CONTRACT

Althoughtheconstructioncontract

typicallyonlyhastwoparties,(the

employerandcontractor),therearea

numberofroleplayersusuallyinvolved

(appointedseparatelybyeitherpartyorin

somecasesjointlybybothparties),who

assistintheconstructionprocess.

Theroleplayersaresetoutbelow(for

amoredetaileddescriptionoftherole

playersrefertothesectionsthatfollow):

EmployerRequirestheconstruction

workandprovidespayment

Commissionedto

constructtheworks

Settlesdisputes

betweentheparties

Actsonbehalfofthe

employerandmaybe

referredtoasengineer,

projectmanager,principal

agent,etc.

Appointedbythe

contractortoperforma

partoftheconstruction

worksunderasubcontract

Contractor

Subcontractor

Adjudicator/

Arbitrator/ Court

Employer’s

Representative

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Working with the employer’s representative

Employersusuallyelecttoworkthrough

arepresentativewhomaybeanarchitect,

anengineer,aprojectmanager,aquantity

surveyororanyotherqualifiedthirdparty.

Theemployergiveshisorherrepresentative

theauthoritytoactonhisorherbehalf

intheexecutionofcertainprovisionsof

thecontract.

Therepresentative’sroleistooverseeand

administerthecontractandtheprojectitself.

Itisimportanttodevelopagoodworking

relationshipwiththeemployerand/orhisor

herrepresentative,asthecontractoralways

benefitsfromtrustandco-operationarising

fromthisrelationship.

Importantly,theemployer’srepresentative

isusuallythepersontowhomallnotices,

invoicesandclaimsmustbesubmittedandis

thepersonwhodeterminestheamountsdue

tothecontractor.

Therearesomeimportantstepsacontractor

cantaketodevelopthisrelationshipsuchas:

• Reportallproblemstotheemployer,

throughtheappointedrepresentative,

asquicklyaspossible.Thisisvery

importantiftheproblemscouldcause

costincreasesordelaycompletion.

• Handoveringoodtimeallnotices,

advices,timedelayclaims,badweather

reports,certificatesforpayment,

invoices,listsofworkers,plant

on-site,etc.

• Makesureclaimsaresubmittedin

strictcompliancewiththeapplicable

contractualprovisions,inwritingwithin

theperiodstatedinthecontract.Ifa

claimcannotbepreparedwithinthe

requiredperiod,extensionsshould

besoughtpriortotheexpiryofthe

period.Ifnoextensionisgrantedor

communicatedpriortotheexpiryof

thetimeperiods,theclaim(evenif

notfullycomplete)andalldocuments

availableatthattimeshouldbe

submitted(explainingifpossiblewhy

theclaimcannotbecompletedand

submittedontime),withanyfurther

documentsandinformationrequired

tobeprovidedthereafter.

• Onlymakereasonableclaimsfor

additionalpayment.Inflatedor

frivolousclaimswillberejected.

• Carryoutallwritteninstructions.Ifthe

instructionsaredifficultorimpossible


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toexecute,talktotherepresentative

whoissuedtheinstructionsassoonas

possibletoseeifitcanbedoneina

differentway–do not delay.

Ifthecontractordisagreeswithanydecision

takenbytheemployer’srepresentative,

thecontractorshould,assoonaspossible,

givenoticeofadispute(ifstipulatedinthe

contract)intermsofthecontracttothe

employer’srepresentative.Insomecontracts

timebarsarealsoinplaceforwhenadispute

shouldbedisclosedandsubmittedtoan

adjudicatororarbitrator.Thecontractshould

alwaysbestudiedtoseeifsuchtimebars

apply,andtoensurethattheyarefollowed.

Inthiswayyou

arelikelytoavoid

disputes.Shoulda

disagreementactually

arise,itisbestto

lookforpossible

compromisesto

resolvethedispute.

Different forms of contracts

Thetypeofcontractformtobeusedwill

dependontheemployer’spreferenceas

wellastheworkstobeexecuted.Two

commonwaysinwhichpartiescancontract

areeitherthroughabespokecontractor

astandardformcontract.

BESPOKE CONTRACT

Thisisatypeofcontractthatisnot

basedonastandardformcontractandis

speciallydraftedandfullycustomisedto

caterforspecificneedsorrequirementsfor

theparties.Thistypeofcontractisnot

commonlyusedbylendersorbanks

whosometimesprovidethefundingof

constructionworks.Accordingto

theConstructionIndustryDevelopment

Board(CIDB,additionalinformation

providedonpage13),whencontracting

withgovernmententities(state-owned

companies,governmentdepartmentsetc.)

onlystandardformcontractsshouldbeused.

Thisistoensureameasureofconsistency

anduniformityinthetermsofconstruction

agreementsconcludedwiththegovernment.

STANDARD FORM CONTRACTS

Thereareusuallyrisksandissueswhichwill

becommonforallconstructionprojects

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andactivities.Accordingly,anumber

of“standardform”contractshavebeen

developedwhichsetoutstandardtermsfor

aconstructioncontracttocovertherelated

issuesandrisksthatwillmostlikelyapply.

Therearestandardformcontractsforboth

constructionworkandconstruction-related

professionalservices(forexamplepure

designwork,orsupervisionwork

forconstruction).

Standardformcontractsareusefulbecause

theycanbeobtainedandunderstoodin

advanceand,therefore,areusuallyeasier

toagreeoninsteadofdraftingtheentire

contractfromscratch.Thepartiessimply

agreeonspecificchangestothestandard

termsbasedontherequirementsforthe

specificconstructionprojectconcerned.

Itisthereforeveryimportantfora

contractortobecomefamiliarwiththe

relevantstandardformcontracts,which

couldbeusedforthetypeofconstruction

workwhichthecontractorwouldnormally

considertenderingfor.Alistofstandard

formcontractsthataretypicallyusedin

SouthAfricaissetoutonpage13(these

standardformsareapprovedbytheCIDB,

furtherinformationregardingtheCIDBis

providedonpage13).


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Specific types of standard form contracts

(approved by the CIDB)

CONSTRUCTION PROFESSIONAL SERVICES

FIDIC–FrenchInitialsforInternational

FederationofConsultingEngineers(1999)

ShortContractandRed,Yellowand

SilverBooks

CIDB–StandardProfessionalServices

Contract3rdEdition

GCC–GeneralConditionsofContract

forConstruction(2010)

NEC–NewEngineeringContract

(ProfessionalServicesContract)

JBCC–(JBCCseries2000)(Principal

BuildingAgreementandMinor

WorksAgreement)

NEC–NewEngineeringContract

(EngineeringandConstructionContract

andEngineeringandConstruction

ShortContract)

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Different ways of contracting

Therearedifferentwaysinwhicha

prospectivecontractorcanparticipateina

constructioncontract.Someexamplesare

listedbelow:

• Main contractor –Thecontractorhimself

orherselfconcludesacontractwithan

employertobuild/constructsomething.

(egbuildingaschool).

• Joint venture partner –Thecontractor

formsanagreementwithoneormore

othercontractorsonanequalfooting.

Theythenjointlysignacontractto

build/constructallorapartofthe

project.Itisimportanttonotethatin

thiscase,eachcontractorinthejoint

ventureisresponsibletotheemployer

forallobligationsunderthecontract.

Inotherwords,asbetweentheemployer

andthemembersofthejointventure,

eachmemberofthejointventureis

responsiblefortheactionsorbreach

ofanyothermember.

• Subcontractor –Thesubcontractorhas

anagreementwiththemaincontractor

tocompleteapartoftheworks,and

willnothaveanycontractwithor

obligationsto,orrightsagainst,the

employer.Subcontractorswillusually

havethesamerightsandresponsibilities

asthemaincontractor.Butsince

subcontractorscontractwiththe

maincontractor,theserightsand

responsibilitieswillbeexercisedby

andbetweenthesubcontractorand

themaincontractor.

Thesubcontractordoesnothavea

contractwiththeemployer,andinmost

instancesdoesnothavearelationship

withthem.Insomeinstances,however,the

employercantakeupthisresponsibility.

Whenanemployerwantstousea

subcontractoroftheirchoice,the

subcontractorisreferredtoasa

“nominatedsubcontractor”andin

certaininstances,theemployerwill

takeupriskduetoitsnomination.


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Construction contract arrangements

Thesecanbecreatedbystandardform

contractsorcateredfor/createdona

bespokebasis.Themostcommonly

usedarrangementsareasfollows:

• Pure construction contract –Thisisa

formofcontractwherethecontractor

isresponsiblefortheconstructionof

theworksasperthespecificationsand

designprovidedby(orbyathirdparty

onbehalfof)theemployer.Withthis

typeofcontract,thecontractorbears

thelowestrisk.Thepriceisoftenre-

measurable,basedonabillofquantities

(adocumentdetailingspecificpricesfor

goodsandservicesthecontractorwill

provide)sincethedesignisnotusually

completeandfullyavailableatthepoint

thatconstructionworkistocommence.

• Design-build –Thisisaformofcontract

wherethecontractorisresponsiblefor

boththedesignandtheconstructionof

theworks.Duetothisfactthecontractor

bearsmoreriskwhencomparedtoa

pureconstructioncontract(including

ensuringthattheworkisfitforits

intendedpurpose).Therefore,thisisa

moderatelypricedarrangement;usually

afixedlumpsumpriceisrequiredfor

doingbothdesignandconstruction,but

appropriateadjustmentstotheprice

areprovidedforeventsoutsideofthe

contractor’sresponsibility.

• Engineer, procure and construct –

Thisisaformofcontractwherethe

contractorisresponsiblefordesign/

engineering,procurement/sourcingof

materialsandconstructionoftheworks

(includingensuringthattheworkisfit

foritsstatedpurpose).Thecontractor

bearsthemajorityoftheriskandthe

employerwillregardhimorherasthe

singlepointofresponsibilityforthe

wholeproject.Thisis,therefore,the

mostexpensivetypeofarrangement.

Thecontractorisusuallyrequiredto

provideafixedlumpsumprice,with

fewerentitlementstoadjustmentsthan

underanyotherarrangement,andmust

thereforeappropriatelypriceintherisks.

Thetablebelowillustratesthearrangements

describedabovewithregardstopricing.

Price vs risk graph

PureConstruction

Design-Build

Pri

ce

Risk

Engineer,ProcureandConstruct

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Construction Industry Development Board

TheConstructionIndustryDevelopment

Board(CIDB)isabodycreatedin

termsoftheCIDBActtoregulatethe

constructionindustry.

TheCIDBAct38of2000(CIDBAct)

requiresandgivestheCIDBthepowerto:

• Establishanationalregisterof

contractorsandofconstruction

projectstoregulate,monitorand

promotetheperformanceofthe

industryforsustainablegrowth,

deliveryandempowerment.

• Promoteimproveddelivery

managementcapacityandastandard

andconsistentapplicationof

procurementpolicythroughoutall

spheresofgovernment.

• Promoteimprovedperformanceand

bestpracticeofpublic(government)

andprivatesectorclients,contractors

andotherparticipantsinthe

constructiondeliveryprocess.

• Promotecontinuedandconsistent

participationoftheemerging

constructionsector.

AccordingtotheCIDBregulations,public

sectorconstructionprocurementmustbe

undertakenonstandardformcontracts

approvedorpreparedbytheConstruction

IndustryDevelopmentBoardRegulations

(CIDBActRegulations).Inaddition,only

contractorswithanappropriateregistration

intermsoftheCIDBActandregulations

maytenderforandbeappointedtoperform

constructionworkinthepublicsector.

TheCIDBalsoencouragesusingthese

standardformcontractsforprivate

sectorconstructionprocurementto

promoteefficiency.

FormoreinformationregardingtheCIDB

aswellasregistrationrequirements,refer

tothelistofusefullinksonpage27.


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Deciding on which contract to use

Theideaofstandardformcontractsisto

includeprovisionsthatarebeneficialtoboth

partiestothecontractinaccordancewith

goodpractice.Somecontractsare,however,

notbasedontheapproachofgoodpractice.

Itisthereforeimportanttobefamiliar

withthethreeRs whendecidingwhich

contracttouse:

1. Rights –theseareentitlementsthatone

partyhasagainstanother,entitlingthe

partywhohastherighttocompelthe

otherpartytodoornottodosomething.

2. Responsibilities – theseareobligations

todo,ornottodosomething,forthe

partywhohastheright.

3. Risks –thesearethepossibilitiesof

somethinghappeningornothappening,

whichcanresultinadditionalliability

arisingforeitherorbothparties.Risks

canbeabsorbed,avoided,shared,

transferredormitigatedundertheterms

ofthecontract.Inthisway,theycanbe

dealtwithinawaythatbothpartiesare

comfortablewithandnotcaughtoff-

guard,aslongastheyarenotignored

ornotconsideredatall.

Main contractor and subcontractor (rights,

responsibilities and risks)

Usuallyinconstructioncontractsthemain

contractorwillberesponsiblefortheentire

project.Heorshewilltakeresponsibility

forthesafetyofhisorheremployeesand,

mostofthetime,thesubcontractors.

Asummaryofthemorecommonrights,

responsibilitiesandrisksfollows:

1. RIGHTS

• Timeous payments – themain

contractorisentitledtobepaidwithin

thetimestatedinthecontract,failing

whichheorsheshouldusuallybeable

toclaiminterestonlatepayment.

• Extensions of time –themain

contractorcanclaimforanextension

oftimeforcompletioninaccordance

withtheinstancescateredforinthe

contract.Theusualtestiswhetheror

nottheparticularact/incidentthat

willdelaytimeforcompletioniswithin

hisorhercontrolornot.

• Access to site – themaincontractor

hasarighttoaccesstothesiteat

whichtheworksaretobecompleted

atthetimestatedandagreedinthe

contractagreement.

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• Upon termination of the contract –

themaincontractorusuallyhasthe

righttoterminatethecontractshould

amaterialbreachoraforce majeure

eventoccur.

• Appointment of subcontractors –

themaincontractorusuallyhasthe

righttoappointsubcontractorsifnot

otherwiseprovidedforinthecontract

(seesectionregardingnominated

subcontractorsonpage11),whomhe

orshewillbeheldresponsibleand

accountablefor.

2. RESPONSIBILITIES

• Completing works –themain

contractorhastheresponsibilityto

completetheworkswithinthetime

allocatedinthecontractagreement.

• Guarantees –insomeinstances,

especiallywherethecontractisa

design-buildorEPC(Engineer,Procure

andConstruct),themaincontractor

willberequiredtoprovideperformance

guarantees.Thisisamitigationofrisk

strategyonthepartoftheemployer

toensurethatiftheworksarenot

performedtothecorrectstandardor

specifications,heorshewillbecovered

accordingly.Thiswillusuallybepriced

inbythecontractor.

• Insurances –themaincontractor

willinsomeinstancesberequiredto

acquireinsurancefortheworks,site,

itsemployees,materials,etc.Thisisto

ensurethatriskremainsmitigatedat

alltimes.

• Administrative procedures/ compliance

with all applicable laws –themain

contractorhastoensurethatthe

requiredlicences,permitsandthelike

areobtainedbefore,duringandafter

theconstructionworksproceed.Itis

imperativeforthecontractortoobtain

alllicenceswithinthetimeperiods

allocatedinordertoavoidsituations

wheretheseissuesleadtoadelayin

theconstructionprocessandtherefore

adelayintheworks.

• Response to communications –

themaincontractorhasanobligation

torespondtoallcommunicationsfrom

theemployerorhisorherrepresentative

atalltimesduringthesubsistenceof

theworks.Thesemightbevariations,

progressupdates,suspensionofworks,

accesstositeissues,delayedpayment

notices,etc.

• Substantiation of claims –inthe

instancewherethecontractagreement

makesprovisionforaclaimmechanism,


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unlessotherwisestatedinthecontract

agreement,thecontractormust

substantiatesuchaclaiminorder

toensureswiftsettlementofsuch

apayment.

• Subcontracts –maincontractorsshould

ensurethatwrittenagreementsare

enteredintobetweenthemselvesand

thesubcontractors.Thisistoensure

thattheyareabletoproperlyhold

suchsubcontractorsliableshould

anyissuearise.

3. RISKS

Financial loss:

• Errors in calculations –themain

contractorshouldensurethat

measurementsregardingtheworksprice

aredonecompletelyandaccurately.

Thecontractormustalsoincludea

contingencyamountwithintheprice

forlossthatcouldbesufferedforrisks

forwhichnoadditionalcompensationis

allowedunderthecontract.

• Poor management –themaincontractor

shouldensurethatheorshemanages

theprojectaccordingly,especiallywhen

subcontractorsareinvolvedasthismight

leadtodirefinancialconsequences.

• Delays –themaincontractorshould

alsoensurethatmaterialsaredelivered

ontime,licencesobtainedandthat

hisorheremployeesperformthe

workstimeously.Failuretodosowill

leadtoasituationwheredelaysoccur

anddependingonthewordingofthe

contractthemaincontractormightbe

subjecttodelaydamages.

• Penalties –themaincontractorshould

beawareofthefactthatdepending

onthewordingofthecontract,heor

shemightbeliableforpenaltiesshould

heorshefailtomeetcertainsetdates

orfailtomeetcertainperformance

guarantees.Itisimportanttonote

though,thatifapenaltyapplies,the

employerdoesnothavetoprovethat

hisorherlossstemmingfromthe

breachisequaltothepenalty,butmay

notclaimfurtheramountsfromthe

contractorinrespectofthebreach

towhichthepenaltyapplies.Inother

wordsthecontractor’sliabilitytopay

damagesforthebreachislimitedtothe

amountofthepenalty.

• Insolvency of employer –themain

contractorisatriskofthisoccurring

especiallywhentheemployerisa

privateindividualorsmallcompany.

Themaincontractorcanmitigatethis

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riskbyacquiringbankguarantees

fromtheemployerguaranteeing

performance(payment)oftheamounts

owed.Themaincontractormust

rememberthatheorshehasabuilder’s

lienovertheconstructedproperty

whichwouldstandagainstaclaim

forinsolvency,providedthatsucha

contractormaintainspossessionof

theworks.

Joint venture partners (rights,

responsibilities and risks)

Jointventuresmaybeformedforvarious

reasons,suchas:

• Sizeandcomplexityoftheproject;

• Iftheprojectrequiresspecialised

skillsandexpertise.

Ajointventuremaybeenteredintoaseither

themaincontractororasubcontractor

whichmeansthethree Rsdiscussedon

page14willapplytojointventures.

Ajointventureisapartnershipwhich

requiresthepartnerstobejointlyand

severallyliableforallobligationsofthe

jointventure.Therefore,onepartnermay

besuedforthefulldebtofthepartnership;

thispartnerinturnhasarighttosuethe

otherpartner/sfortheirpro ratashare

ofthedebt.

Emergingcontractorscandevelop

managementskillsandtechnicalexpertise

throughassociationinjointventureswith

establishedcontractors.

Itisimportanttosetupajointventure

agreementwhichendeavourstoassignrisk,

responsibilityandrewardfairlybetween

jointventurepartners.


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• Maincontractorsmustensurethat

communicationwithsubcontractors

remainsatanoptimumlevel,and

iftherearevarioussubcontractors,

ensurethattheyhaveaccessto

thesiteatthetimewhichthey

arepromisedaccess.

• Thecontractormustcheckif

standardformcontractconditions

havebeenchangedbytheemployer

andhowthiswillaffecthimorher.

• Alwayssticktothetimelines

allowedwithinthecontract.

Ensurethereisacontractinplace

betweenthesubcontractorandthe

maincontractor.Asasubcontractor

oneshouldlookoutforthefollowing

conditions,whichshouldbeavoided

ornegotiatedagainst:

• Reductionofand/orset-offfrom

amountscertifiedforpayment

tothesubcontractortocover

amountsallegedlyowedtothe

maincontractor;

• Settlingdisputesonlythrough

thecourtswithnoprovisionfor

adjudicationormediation;

• Thesubcontractoronlygets

paidoncethemaincontractorhas

beenpaidbytheemployer;and

• Unreasonableretentionpercentages

andperiods.nancial Loss:

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Common construction contract terms/ procedures

Notallcontractswillfollowtheterms/

procedureslistedbelow–thisisintended

toprovideanoverviewofpossibleand

commoncontractterms/procedures.

CONTRACT PROCEDURES

Tendering and contract award

• Thetenderisadvertisedbythe

employerorhisorherrepresentative;

• Contractorssubmittheirtendersby

therequireddate;

• Thetendersareevaluated,anda

tenderevaluationreportisproduced

recommendingthepreferred

tenderbid;

• Theemployerreviewsthetender

evaluationreportandawards

thecontract;

• Thecontractisnegotiatedand

eventuallysignedbyboththe

contractorandtheemployer;

• Thecontractorisresponsibleforthe

provisionofinsuranceandthesurety/

guaranteeasstipulatedinthecontract;

• Thesiteisofficiallyhandedoverto

thecontractor;

• Thecontractorestablisheshisorher

campandsiteofficeandordersthe

materialsrequiredtostartconstruction;

• Thecontractorsetsouttheworkand

startsconstruction.

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Monthly activities during the contract

• Daily,weeklyormonthlysitemeetings

betweentheemployerandthe

contractorandinspectionofthework

bytheemployer’srepresentativeto

ensurequality;

• Preparationofmonthlypayment

certificatesbythecontractor;

• Reviewandcertificationofthepayment

certificate.Queriesarereferredto

thecontractor;

• Thecertifiedpaymentcertificateis

submittedforpaymentbytheemployer;

• Paymentismadetothecontractor

withintheperiodspecifiedin

thecontract.

Handover procedure

• Thecontractorrequeststheemployer

toinspectthecompletedprojectprior

tohandover;

• Theemployerinspectstheproject,

identifiesoutstandingitemstobe

completedbythecontractorpriorto

thehandoveroftheprojectandissues

a“snaglist”tothecontractorlisting

theoutstandingitems;

• Thecontractorcompletesthe

outstandingitemsandnotifiesthe

employerthattheprojectiscomplete

andreadyforafinalinspection;

• Theemployer(orhisorheragent)

carriesoutafinalinspection.Ifheor

she(orhisorheragent)issatisfiedthat

theworks/projectisnowsubstantially

complete,heorsheorhisorheragent

willcertify/confirmthattheworks/

projectisreadytobehandedover;

• Thecontractorhandstheworks/

projectovertotheemployer(thatis,

theemployertakespossessionofthe

works/project).

Final account

• Thecontractorortheemployer

(asrequiredintermsofthecontract)

preparesthefinalaccountduringthe

handoverperiodandsubmitsitto

theemployer;

• Thefinalaccountiscertifiedandissued

totheemployeroncetheemployer

hasissueda(practical/taking-over)

completioncertificate;

• Theemployerpaysthefinalaccountless

theretentionmoney;

• Thisretentionmoneyisreleasedtothe

contractorattheendofthedefects

liabilityperiod.

Defects liability period and final completion

• Thecontractorisresponsibleformaking

gooditemswhichshowdefectsduring

thedefectsliabilityperiod;


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• Neartheendofthedefectsliability

period,thecontractorrequeststhe

employertoinspecttheprojectand

identifyanydefectiveitemswhichthe

contractorisresponsibleformaking

goodintermsofthecontract;

• Themoneyheldinretentionbythe

employerwillonlybepaidwhenthe

contractorhasproperlycompleted

thelistofdefects;

• Oncetheemployerhasissuedacopy

ofthefinalcompletioncertificate,he

orsheisrequiredtopaytheretention

moneyduetothecontractor.

The project is now complete

• Thecontractorisusuallystillliable

fortherepairofanylatentdefects

forseveralyears.Latentdefectsare

defectswhichwerenotapparentand

whichareasonableinspectionwould

nothaverevealedduringthedefects

liabilityperiod.Differentcontracts

dealwiththeliabilityforlatent

defectsdifferently.

• Forlatentdefectliabilitynottoapplyit

mustbeexpresslyexcluded.Ifnothing

issaidaboutlatentdefectliability,

thecommonlawapplies;namely

theemployerhasarighttoholdthe

contractorresponsibleforalatent

defectwithinthreeyearsofthedate

onwhichheorshebecameoroughtto

havebecomeawareofthelatentdefect.

Disputes and how to resolve them

• Moststandardformcontractswillcater

foradisputeresolutionmechanism

whichwillstatetheproceduretobe

followedwhenadisputearises.Ifa

bespokecontractisused,itisbest

tohaveaclausethatprescribesa

disputeresolutionmechanismassuch

mechanismscanleadtodisputesbeing

settledtimeouslyandamicably.

• Claims procedure

Thecontractshouldprovidefora

proceduretobefollowedoncea

contractorortheemployerrealises

thattheyhaveaclaim.Submissionfor

andagainstsuchaclaimwillusuallybe

made.Thecontractwillusuallysetout

timeperiodsforthecontractortogive

noticeofaclaimandtosubmitaclaim.

Thesemustbeidentified,notedand

compliedwithbythecontractor.

• Determination

Thesubmissionsreferredtoaboveare

usuallymadetotherepresentativeofthe

employer.Thisindividualwilldetermine

ifindeedaclaimexistsandifso,the

amountclaimable.

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21CONTENTS PAGE

• Dispute

Ifeitherpartyisnotsatisfiedwiththe

determinationmade,theycandeclare

adisputeornotifytheirdissatisfaction

and,dependingontheprovisionsof

thecontract,either:trytomediatethe

dispute;approachaDAB/arbitration;

approachthecourtorfollowanyother

mechanismsetoutbythecontract.

• DAB/ Arbitration

Inemployingthismechanismparties

willusuallynegotiateandconcludean

arbitration/adjudicationagreement

whichwillstatetheexactprocedureto

befollowedinarbitrating/adjudicating

thedispute.Anarbitrator(s)/

adjudicator(s)willbeagreedupon,and

datesforsubmissionsandargument,

issuesrelatingtocosts,andallother

logisticalissueswillbeagreedin

ameetingwiththearbitrator(s)/

adjudicator(s).Thisagreementwillthen

befolloweduntiladecisionismadeby

thearbitrator(s)/adjudicator(s).Itis

importanttonotethattherulingofan

arbitrator/adjudicatorisbindingonthe

partiesandcanbemadeanorderof

thecourt.Ifitisagreedthattheaward

byanarbitratororadjudicatorisfinal

andbinding,acourtwill,saveinthe

mostexceptionalcases,notoverturn

theaward.

• Court

Ifnoprovisionismadeforarbitration

inthecontract,andtheparties

donotagreetothisoranyother

mechanismtoresolvethedispute,

thenormalSouthAfricancourt

systemmaybefollowedtosettle

thedispute.

Contractorsshouldensurethatafterthe

awardofatendertheagreementtendered

foristheagreementthattheysign.

Contractorsshouldnotethattheymay

askfortherelaxationofcertainstrictor

unfairtermsofthecontract,buttheymust

ensurethatthisdoesnotrenderthem

disqualified,andtheymustvoicethis

concernintheprescribedformat

(usuallytenderspecific).

Althougharbitrationoffersaquicker,

controlledandmuchmorediscreet

solutiontodisputes,itisnotalways

thecheapestsolution.


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22CONTENTS PAGE

Key concepts

CONTRACT DELIVERABLE

• Thedeliverableinaconstruction

contractisthecompletedworks

(thecompletedbuilding,structure).

Thecompletedworksshouldbe

describedascorrectlyandclearlyas

possibleatthetimeofcontract,and

toallowittoevolveinacontrolled

manner(deliverable);

• Todefinethecompletiondateofthe

deliverablebasedonwhatisknown

andwhatoughttobereasonably

foreseeablebyanexperienced

contractoratthetime,andtoallow

thecompletiondatetochangeina

controlledmannerbyprovidingfor

circumstanceswherethecompletion

datecanbeextended.

CONTRACT PRICE

• Therearevariouspricingoptionsto

consider,forexample:

•Lumpsumcontract

•Unitpricecontract/

remeasurablecontract

•Fixedprice

Pleaseseethesectiondealingwithcontract

arrangementsonpage12.

CONTRACT RISK

Torespectivelyallocatetheforeseeableand

unforeseeable/likelyandunlikelyrisksto

eachoftheparties.

CONTRACT TERMS

Thefollowingtermsarekeyandregularly

usedinconstructioncontracts.Itis

thereforeveryimportantthatcontractors

knowandunderstandwhattheymean:

• BOQ:Thisisadetailedstatementof

thework,materials,prices,dimensions

andotherdetailsfortheconstruction

ofthework.Thisdocumentwillbe

usedinremeasurablecontracts.

• Contractor: Thepersonorfirmwho

signsthecontracttodothework.

• Defect:Defectsareaspectsofthe

worksthatarenotinaccordance

withthecontract.Theyusuallyoccur

becauseofdesigndeficiencies,

materialdeficiencies,specification

problemsorworkmanshipdeficiencies.

• Defects liability period:Theperiod

forwhichthecontractorisrequired

to“guarantee”thecompletedworks

andtorectifyanydefectsthatmaybe

discoveredorappear.

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23CONTENTS PAGE

Thedefectliabilityperiodstartswhen

theemployerissatisfiedthatthe

worksarecompleteandtakesdelivery.

Thedefectsliabilityperiodvaries,

dependingonthenatureofthe

work,andcanrangefromthree

to12months.

• Deviation:Whenaplan,design

orspecificationsagreedbythe

partiesisnotfollowedduring

theconstructionprocess.

• Disputes: Ingeneral,adisputeis

definedasanunresolvedmatterof

dissatisfactionordifference.

• Employer:Alsoknownastheclient,

theemployermaybeapersonora

governmentagencyoracorporation,

andisthepartywhowantstheproject

constructedandwhowillpayforthe

work.Theemployeralsosigns

thecontract.

• Employer’s representative:

Arepresentativeoftheemployer,

usuallyaprofessionalarchitect,

engineer,projectmanagerorquantity

surveyor.Thisisthepersonwithwhom

thecontractorwillhavethegreatest

contactduringthecontract.

• Escalation clauses:Catersfortherise

andfallofeconomicfactors,wherea

project/contractexceedsadurationof

oneyear,eglabourrates,commodity

prices,etc.

• Extension of time (EOT):An

extendedtimeforcompletionofthe

works,relievingthecontractorfrom

havingtopaypenaltiesfor

thedelay.

• Force majeure: Anexceptionalevent

orcircumstancebeyondaparty’s

controlthatrendersperformanceof

theworksimpossibleforaperiodof

timeorforever(egwar,terrorism,etc).

• Performance guarantee: Aguarantee

procuredbythecontractorfroma

financialinstitutioninfavourofthe

employerassecurityforthedue

performanceofthecontractor’s

obligationsunderthecontract.The

employercanclaimagainstthis

securityshouldthecontractorfailto

performtheobligationsforwhichthe

securityhasbeengiven.Thesecurity

isreturnedwhenthecontractis

satisfactorilycompleted.Theterms

oftheguaranteewilldeterminethe

naturethereof,andtheinstancesin

whichitcanbecalled,andmustfor

thatreasonbereadverycarefully.


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24

• Payment guarantee:Aguarantee

procuredbytheemployerfrom

afinancialinstitutioninfavourof

thecontractorassecurityforthe

employer’scompliancewithits

paymentobligationsunderthe

contract.Thecontractorcanclaim

againsttheguaranteewherethe

employerhasfailedtomakedue

paymenttothecontractorintermsof

thecontract.Thissecurityisreturned

whentheemployer’spayment

obligationshavebeenfulfilled.The

termsoftheguaranteewilldetermine

thenaturethereof,andtheinstances

inwhichitcanbecalled,andmustfor

thatreasonbereadverycarefully.

• Limitation of liability:Thisisusuallya

clauseinthecontractwhichapportions

liabilitybetweentheparties.Itisan

attempttolimit,define,estimateand

manageliabilitybetweentheparties

themselvesandthirdparties.Acap

ondamagesmaybeused.

• Overhead costs:Costsincurredby

thecontractorinestablishingand

maintainingsite.

• Penalties:Mostcontractscontaina

penaltyforfailuretocompletethe

projectwithinthecontractedperiod

orafailuretoachievecertain

guaranteedlevelsofperformanceof

theworks.Penaltiesareanagreed

uponamountofmoneywhichis

deemedtocovertheinnocentparty’s

lossinrespectofthebreachforwhich

thepenaltyisimposed.Inagreeing

apenalty,itshouldbeconsidered

whetherthepenaltyproposedbears

somemeasureofpotentialharmtothe

innocentpartyandtheinnocentparty

shouldbemadetoexplaintheamount

proposed,ifitisproposed.

• Pricing options:Optionsavailableto

acontractwhenpricingaparticular

contractor(eglumpsum,measurable,

activitybased,time-basedetc).

• Retention:Thisismoney,usually

from5%to10%ofthevalueofthe

workdone,thatisheldbackbythe

employertocorrectdefectivework.

Whentheprojectisdeliveredtothe

employer,partoftheretentionmoney

isreturnedtothecontractor,andthe

balanceisreleasedattheendofthe

defectsliabilityperiod.

• Subcontractor:Usuallyappointed,

managedandpaidbythecontractor;

entersintoacontractwith

thecontractor.

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25CONTENTS PAGE

25

• Variation:Anychangetothecontract

whichisinstructedorapproved.Most

standardformcontractsprovidefor

aproceduretobefollowedwhen

suchachangeisrequired.


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Applicable legislation

THE CONSTRUCTION INDUSTRY

DEVELOPMENT BOARD ACT 38 OF 2000

ThisActregulatestheconstructionindustry

asawholeandpublishesstandards,

directivesandregulationstogiveeffect

tothisobjective.Ifacontractorintends

totenderforpublicsectorworks,regard

shouldbehadtothisActandregulations,

inparticular,therequirementsforregistration.

THE OCCUPATIONAL HEALTH AND

SAFETY ACT 85 OF 1993

ThisActprescribesstandardsand

requirementsaccordingtowhichthe

contractor’semployeesand/orall

individualsonsitearetobetreated.

Theconstructionregulations(thelatest

publishedin2014)underthisActprescribe

therequirementstoensurehealthand

safetyinconstructionactivities.

NATIONAL ENVIRONMENTAL

MANAGEMENT ACT 107 OF 1998

ThisActprovidestherequirementsand

proceduresnecessarywheretheconstruction

ofanyworksposearisktotheenvironment.

NATIONAL BUILDING REGULATIONS

AND BUILDING STANDARDS ACT 103

OF 1977

ThisActprescribesthestandardsand

requirementstowhichanybuilding

tobeusedforoccupationalpurposes

shouldcomply.

THE CONSUMER PROTECTION ACT

68 OF 2008

ThisActprotects“consumers”when

enteringintocontractswithcontractors.

THE COMPETITION ACT 89 OF 1998

ThisActprotectsemployersagainst

collusionduringthetenderphaseof

thecontract.

MUNICIPALITY BY-LAWS

Theseareby-lawspromulgatedbythe

municipalityregardingbuildings.

26

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27CONTENTS PAGE

Useful links

• Association of Arbitrators

(Southern Africa)

www.arbitrators.co.za

• Department of Trade and Industry

www.thedti.gov.za

• Tokiso Dispute Settlement

(Pty) Ltd

www.tokiso.com

• Arbitration Foundation of South

Africa (AFSA)

www.arbitration.co.za

• United Nations Commission on

International Trade Law (UNCITRAL)

www.uncitral.org

• International Chamber of

Commerce (ICC)

www.iccwbo.org

• London Court of International

Arbitration (LCIA)

www.lcia.org

• Construction Industry

Development Board

www.cidb.co.za

• Council for the Built Environment

www.cbe.org.za

• South Africa Federation of Civil

Engineering Contractors

www.safcec.org.za


CONTENTS PAGE

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T: +255768988640E: [email protected]

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guide – construction contracts

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