Project Construction Management

EPM5760

The Basis of a Contract

Unit: EPM5710 Project Procurement management

Lecturer: William Lai Tee
Week 3
Contact Detail

Amir Ghapanchi
Course Coordinator – Master of Project Management
Contact:
Phone +61399194714
Email: Amir.Ghapanchi@vu.edu.au

William Lai H. Tee

Lecturer – EPM 5710 Project Procurement Management
Contact:
Email: Lai.Tee@vu.edu.au
Week 5 – Pre-lecture Reading
Read Chapter 1 & 2:
Devonport, P and Uher, TE 2002, Fundamentals of building contract management, University of New South Wales Press, Sydney, Australia
Available in e-format:
• https://search.ebscohost.com/login.aspx?direct=true&AuthType=shib&db=cat06414a&AN=vic.b1929723&site=eds-live&custid=s1145751

Read Chapter 1:
Goldfayl, G 2004, Construction contract administration, UNSW Press.
Available in library:
• https://search.ebscohost.com/login.aspx?direct=true&AuthType=shib&db=cat06414a&AN=vic.b4396494&site=eds-live&custid=s1145751

Read Chapter 5:
Construction Specification Institute 2011, Construction contract administration practice guide, John Wiley & Sons, New Jersey, USA.
Available in e-format:
• https://search.ebscohost.com/login.aspx?direct=true&AuthType=shib&db=cat06414a&AN=vic.b5772479&site=eds-live&custid=s1145751

Read Chapter 1:
Phillips, CS 2009, Construction contract administration, Society of Mining, Metallurgy, and Exploration, Littleton, CO.
Available in e-format:
• https://search.ebscohost.com/login.aspx?direct=true&AuthType=shib&db=cat06414a&AN=vic.b5597575&site=eds-live&custid=s1145751

Explore the following Websites:

• https://www.claytonutz.com/knowledge
• https://www.australiancontractlaw.com/contractlaw.html
• https://www.accc.gov.au/consumers/contracts-agreements

View Video by Anthony Marinac:(He has prepared numerous videos on Contract Law Australia and Case notes)
Marinac, A n.d., Contract Law Australia – Anthony Marinac Videos, YouTube, viewed 15th June 2020 <https://www.youtube.com/user/AnthLovesAdmin/videos>.
Lecture Topics
 Contract Models
 What Does A Contract Look Like
 Key Contractual Clauses
 Bespoke Vs Standard Forms of Contract
 Acts and Regulations
 The Trade Practices Act 1974
Learning Outcomes
After completing this module, you will be able to:

• Understand and define what is Contract.

• Understand and explain the elements of contract necessary for validity of a contract
• Understand and describe the various types of Price-Based and Cost-Based Contract
available.
• Describe the advantages and disadvantages of each contract type.
• Understand the risk allocation of each types of contract.
• Understand and differentiate between Bespoke and Standard Forms of Contract
application.
• Understand the various Standard Forms of Contract are available for Building and
Non-building sector.
• Know and understand The Trade Practices Act 1974.
Contract Models
Introduction

• Once the decision on the most appropriate option of project delivery has been made,
followed closely is then making a decision on the most appropriate option for the
contract price.
• The price payable under the contract to members of a project team for specific work
and services may either be pre-ascertained in the form of a lump sum or price rates.
• The former approach is known as a
o fixed-price contract while the latter is usually cost-plus.
• These two options for a contract price will now be discussed in more detail.
Contract Models

Once the decision on the most appropriate option of project delivery has been made, followed closely is then
deciding on the most appropriate option for the contract price.

 Many Types of Contract Models used in Construction

 Each contract type has its advantages and disadvantages with respect to the owner and the contractor

 Categorized in two major groups as per method of payment to the contractor or seller:

Price Based Cost Based

Lump Sum Contract / Fixed-Price Cost Plus Contract

Source: The Constructor, Civil Engineering

https://theconstructor.org/construction/types-of-construction-contracts-comparison/14268/
Contract Types
Generally it is possible to group all contracts under two broad families of legal contractual relationships,
although each offers a totally different configuration on profit maximisation and risk minimisation (the two main
reasons people and business enter into contractual arrangements):

1. Fixed-price: The common types of fixed-price contracts in use are:

i. Firm Fixed Price Contracts (FFP)
ii. Fixed Price Incentive Fee Contract (FPIF)
iii. Fixed Price with Economic Price Adjustment Contract (FP-EPA)
iv. Unit Price Contract

2. Cost Reimbursable: The common types of cost-reimbursable contracts in use are:

i. Cost Plus Fixed Fee Contract (CPFF)
ii. Cost Plus Incentive Fee Contracts (CPIF)
iii. Cost Plus Award Fee Contracts (CPAF)
iv. Time and Materials contract: A hybrid type of contractual arrangement that contain aspect
of both fixed-price and cost-reimbursable contracts
Fixed-Price Contracts
▪ In fixed-price contracts a contract price for specific work and services is ascertained
before any work is carried out. This price is said to be fixed at the start of the contract
but it may change during its execution if the contract conditions allow cost adjustment.
▪ The most common contract conditions that allow cost to be adjusted are:
» variations,
» latent site conditions,
» rise and fall,
» provisional or prime cost items, and
» clauses for other risks beyond the control of the contract party claiming
such cost adjustments.

https://www.turtons.com/blog/the-5-key-elements-of-a-latent-condition-clause
Fixed-Price Contracts (Cont’d)
▪ Need a well-defined scope/product & cannot change without a price change
▪ The principal’s intent is to shift the risk of cost overruns onto the contractor. This practice
may be justified in some situations but only when:

» the project risk is very low

» the brief is complete
» the design documentation is accurate
» the principal will not make changes to the brief and the design
» the design consultants are competent.

▪ Risk is on contractor – contractor legally obligated to complete the contract, with possible
financial damages if they do not.
▪ May incorporate financial incentives for achieving or exceeding selected project objectives –
such as schedule delivery dates, cost or technical performance etc.
Types of Fixed-Price Contract

The common types of Fixed-Price Contract are:

i. Firm Fixed Price Contract (FFP)

ii. Fixed Price Incentive Fee Contracts (FPIF)
iii. Fixed Price with Economic Price Adjustment Contracts (FP-EPA)
iv. Unit Price Contract
i. Firm Fixed Price Contract (FFP):
➢ Favoured by most buying organisation because the price for goods is set at the
outset and not subject to change unless the scope of work changes.

ii. Fixed Price Incentive Fee Contracts (FPIF):

➢ A FPIF is similar to the FFP; however, FPIF gives the buyer and seller some
flexibility which allows for deviation from performance, with financial incentives tied
to achieving agreed metrics such as cost, schedule or technical performance of
the seller.
➢ For example, a buyer might give the seller an incentive fee if the seller completes
the product early.
iii. Fixed Price with Economic Price Adjustment Contracts (FP-EPA):
➢ This contract type is used whenever the seller’s performance period spans a
considerable period of years
➢ It is a fixed-price contract, but with a special provision allowing for pre-
defined final adjustments to the contract price due to changed conditions,
such as inflation changes, or cost increases (or decreases) for specific
commodities.
➢ The EPA clause needs to relate to some reliable financial index, which is
used to precisely adjust the final price.
➢ The FP-EPA contract is intended to protect both buyer and seller from
external conditions beyond their control.
Strengths and Weaknesses of Fixed-Price Contract
Strengths:
▪ In a lump sum contract, the Owner has assigned most of the risks to the Contractor.
▪ The construction means, methods, techniques, sequences, and procedures are the Contractor’s responsibility.
▪ The contractor has strong incentive to control cost and try to finish as early as possible.

Weaknesses:
▪ The Contractor can be expected to ask for a higher markup in order to take care of unforeseen contingencies.
▪ Besides the fixed lump sum price, other commitments are often made by the Contractor in the form of submittals,
such as a specific schedule, the management reporting system, or a quality control program.
▪ If the actual cost of the project is under estimated, it will reduce the Contractor’s profit by that amount. May cut
cost by reducing the quality.
▪ Any modifications to scope, design, or schedule will give rise to a cost change.
▪ Fixing a contract price for the entire contract period may not be in the principal’s best interest. It is also worth
noting that this practice is likely to lead to the development of an adversarial relationship between the parties to a
contract.
iv. Unit Price Contract
▪ Under this form, the detailed bill of quantities is prepared by the quantity surveyor of the Consultant based
on drawings and specifications.
▪ The contractors quote their rates against these calculated quantities on basis of unit rate method.
However, the contractors are paid for the work measured in place on the basis of actual quantity
multiplied by quoted rate.
▪ This method is advantageous when the quantities cannot be accurately identified in advance or in such
works having a high content of ground surface work where the quantities are rather unpredictable. This
method is particularly favored for linear construction like roads, railway tracks, sewers, water mains, or
buried/aerial utility lines.
▪ The estimated quantities at the proposed unit prices submitted by bidders are used in comparing the bids.
▪ If changes occur, the unit prices and rates in the bill of quantities can be used as a basis for valuation.
Typically, a change or variation in quantities up to 15% is permitted in this type of contract without the
need of a formal change order as long as the items remain generally the same as in the initial contract.
▪ Disadvantage is that total project cost unknown until project is completed.
Unit Price Contract - Strengths and Weaknesses
Strengths:
• Easy for contract selection.
• Early start is possible.
• Saves the heavy cost of preparing many bills
of quantities by the contractors.
• Fair basis for competition.
• In comparing with lump-sum contract,
changes in contract documents can be made
easily by the owner.
• Lower risk for contractor.
Weaknesses:
• Final cost not known from the beginning (BOQ only is estimated)
• Staff needed to measure the finished quantities and report on
the units not completed.
• Unit price sometime tend to draw unbalanced bid.
• (For Unit-Price Contracts, a balanced bid is one in which each
bid is priced to carry its share of the cost of the work and also its
share of the contractor’s profit. Contractors raise prices on
certain items and make corresponding reductions of the prices
on other items, without changing the total amount of the bid)
Cost-Reimbursable Contracts
Cost-Reimbursable Contract
• This type of contract involves payments ( cost reimbursements) to the seller for all legitimate
actual costs incurred for completed work, plus a fee representing seller profit.
• Cost-reimbursable contracts may also include financial incentive clauses whenever the seller
exceeds, or falls below, defined objectives such as costs, schedule, or technical performance
targets.
• A cost-reimbursable contract provides the project flexibility to redirect a seller whenever the
scope of work cannot be precisely defined at the start and needs to be altered, or when high
risks may exist in the effort.
• Types of Cost-Reimbursable Contract:
i. Cost Plus Fixed Fee (CPFF) (also known as Cost-Reimbursable Contract)
ii. Cost Plus Incentive Fee (CPIF) (also known as Target Cost Contract)
iii. Cost Plus Award Fee (CPAF)
iv. Guaranteed Maximum Cost Contract (GMC Contract)
v. Time-and-Material (T&M) Contract
i. Cost Plus Fixed Fee (CPFF) (also known as Cost-Reimbursable Contract)
❖ The seller is reimbursed for all allowable costs for performing the contract work, and receives a
fixed-fee payment calculated as a percentage of the initial estimated project costs.
❖ The fixed-fee is set at the beginning of the contract, and even if legitimate expenses increase, this
fixed-fee remains the same – i.e. The fee is paid only for completed work and does not change
due to seller performance.
❖ Fee amounts do not change unless the project scope changes.

ii. Cost Plus Incentive Fee (CPIF) (also known as Target Cost Contract):
❖ The seller is reimbursed for all allowable costs for performing the contract work and receives a predetermined
incentive fee based upon achieving certain performance objectives as set forth in the contract.
❖ For this type of contract, the Contractor agrees to a penalty if the actual cost exceeds the estimated job cost or a
reward if the actual cost is below the estimated job cost.
❖ The Contractor’s fee is made up of two parts: a fixed amount and a variable amount depending upon the
relationship between the target cost and the actual cost.
❖ Furthermore, the project duration is usually specified and the contractor must abide by the deadline for completion.
❖ In CPIF contracts, if the final costs are less or greater than the original estimated costs, then both the buyer and
seller share costs from the departures based upon a pre-negotiated cost-sharing formula, for example, an 90/10
split over/under target costs based on the actual performance of the seller.
 CPIF Contract (Cont’d)
❖ This type of contract allocates considerable risk for cost overruns to the Owner but also provides incentives to
contractors to reduce/control costs as much as possible but has the disadvantage of requiring the target cost to
be fixed on the basis of a rough estimate. The variable fee concept is illustrated in the following example:

Example Sourced from: Surahyo 2018, p.49

iii. Cost Plus Award Fee (CPAF)
❖ The seller is reimbursed for all legitimate costs, but the majority of the fee is earned only
based on the satisfaction of certain broad subjective performance criteria defined and
incorporated into the contract.
❖ The determination of fee is based solely on the subjective determination of seller
performance by the buyer, and is generally not subject to appeals.
iv. Guaranteed Maximum Cost Contract (GMC Contract)
▪ GMC arrangement is based on Target Cost Concept and it is gaining popularity amongst property
developers, public, quasi-government transportation and major international projects.
▪ When the project scope is well defined, the Owner and the Contractor may agree to a project cost
guaranteed by the Contractor as maximum, also known as a ceiling price.
▪ In this system Contractor takes all the risks, both in terms of actual project cost and project time. Thus, a
guaranteed maximum cost arrangement imposes a penalty on a Contractor for cost overruns and failure
to complete the project on time.
▪ With a guaranteed maximum price contract, any amounts below the maximum are typically shared
between the Owner and the Contractor, while the Contractor is responsible for costs above the maximum.
▪ See example in next slide.

(Surahyo 2018)
GMC Contract - Example

Consider an example in which the Owner agreed with the Contractor to

the following arrangement:

Target Cost: $ 500,000

Target Profit: $ 50,000
Target Total Cost: $550,000
Sharing ratio agreed: 70/30 (Owner 70%, Contractor 30%)
Ceiling price: $600,000

(Surahyo 2018)
GMC Contract - Example
Scenario 1: Cost Underran
Suppose the cost of construction decreases or underran the target cost, the Owner and Contractor would split
the savings according to the share ratio.
For example: if the cost of work completed is $450,000 ($50,000 less than target cost), the Contractor’s share is
30% of underrun, i.e., $15000. Hence, the Contractor will get:
Cost of work done ($ 450,000) + target profit ($ 50,000) + underrun share $15,000.00 = $515,000
Scenario 2: Cost Overran
In this scenario, consider that the Contractor completes the work with cost overrun but below ceiling price, say at
$520,000.00, overrunning the target cost by $20,000. The Contractor’s share of overrun is 30% of $20,000 ($6,000).
The target profit will be reduced by this amount ($50,000 - $6,000) equal to $44,000. Hence, the Contractor will then
get:
$520,0000 + $44,000 = $564,000, which is $36,000 below the ceiling price

Scenario 3: Cost Exceed Ceiling Price

If the cost of work done exceeds and overrun the ceiling price of $600,000.00, the Contractor will receive no profit
and has to bear the additional costs.
The Contractor will only be paid Target Cost ($500,000) + Target Profit ($ 50,000) = $550,000.00.
Therefore, Contractor will bear to loss of over $50,000.00
 GMP Contract – Strengths & Weaknesses
Strengths:
• Greater price certainty for clients as the contractor
normally includes a sum for future design
development and for risks.
• GMP promotes pre-agreement of changes as its
philosophy links neatly with a contractual
requirement to pre-agree the cost and time
implications of any potential changes.
• GMP provides greater control over spending as the
contractor is bound to a maximum price. This alerts
the team to any potentially expensive items of
design development.
• GMP aligns the contractor with client and
consultants encouraging team work with mutual trust
and common goals.
• Less administration is required as changes are
limited; there is quick settlement of the final account
Weaknesses:
▪ The client might pay too much as the contractor takes
on greater risk and thus includes in the price an
allowance for design development and risk. Often a
competitive price is sacrificed in lieu of appointing a
contractor early.
▪ Contractor’s with design and build experience may
have useful knowledge.
▪ There is no standard form of contract for GMP so there
is a greater possibility of errors and misunderstandings
of liabilities between the parties that may result in
conflict.
▪ Scope changes tend to cost more, it is accepted that
scope changes to design and build are more likely to
be more expensive than with a traditional contract, the
same can also be said for GMP contracts.
v. Time and Materials Contract
▪ Under this contract, the Contractor is paid on the basis of actual cost of labor at fixed hourly rates, actual
cost of materials and equipment used, and agreed-upon markup to cover the Contractor’s overhead and
profit. T&M is commonly known as “Force Account.”
▪ T&M contracts contain aspects of both contract categories (cost reimbursable and fixed price). They
resemble fixed price type arrangements in that they are priced on fixed hourly rates, and they also resemble
cost reimbursable type arrangement because they are open ended as the total cost of material and
equipment is unknown. Therefore, T&M basis is considered when the scope of work cannot be well defined.
▪ T&M contracts are not considered beneficial because the Contractor is paid for the number of hours
actually used to perform the job and cost of material installed. Hence, the Contractor has no incentive to
control material costs or manage the labor force efficiently.
▪ Therefore, proper surveillance on the Contractor is required to assure that the Contractor is performing
efficiently and using effective cost control measures. Daily work records must be prepared either by the
Contractor or by Contract Administrator reporting the labor and equipment employed and the material used
and signed by both parties on a daily basis. It is also advisable that the contract shall include a ceiling or
not-to-exceed price.
▪ Under this arrangement, the Contractor will be bound to charge for labor and material up to a certain
maximum and will assume the excessive costs.

(Rathod 2014)
Cost plus Contracts - Strengths and Weaknesses
Strengths:
▪ These contracts are faster, as scope or
design need not to be defined
completely.
▪ There is flexibility for changes during
execution of the work.
▪ Use of guaranteed maximum cost
types provide owners with some cost
certainty.
▪ Additionally, owners have to pay only
for the actual work performed and cost
actually incurred.
Weaknesses:
▪ The total cost is not well defined.
▪ It requires close inspection and review of
construction.
▪ Since under cost plus contracts, the scope is
not well defined, most of the risks are shifted to
the Owner.
▪ Contractor also needs to develop adequate
accounting systems. Certainty of cost is limited
until the project is complete.
▪ Under T&M, the Contractor has no incentive to
be efficient to control the cost; hence, more
efforts for monitoring are required by the Owner.

(Surahyo 2018)
 Comparison Between Different Types of Contracts
Point of Differentiation Lump Sum Contract Unit Price Contract Cost Plus Contract Target Cost Contract
Rewards for any savings
Advantages with respect to
Incentives for early finish Low risk No risk between actual and
the contractor
target cost
Disadvantages with respect No incentives for No incentives for Share risk with the
High risk
to the contractor early finish early finish owner
No risk Can start project
Advantages with respect to Share risk with the Target cost is defined at
Total cost is defined at without finishing
the owner contractor early stages
early stages designs
High risk
Contractor desire to Total cost is
Disadvantages with respect Total cost is Share risk with the
decrease costs may be uncertain at early
to the owner uncertain at early contractor
to detriment of quality stages
stages
Has flexibility to More flexible to
Flexibility of design changing Limited flexibility Limited flexibility
change design design stages
Table sourced from: https://theconstructor.org/construction/types-of-construction-contracts-comparison/14268/
 Contract Models
Project managers should be aware of the benefits and risks of different
contract types from a buyer’s perspective and a seller’s perspective.

(FFP) Firm Fixed Price
(FFIF) Fixed Price Incentive Fee
(FF EPA) Fixed Price Economic Price Adjustment
(T&M) Time and Materials
(PO) Purchase Order
(CPFF) Cost Plus Fixed Fee
(CPIF) Cost Plus Incentive Fee
(CPAF) Cost Plus Award Fee
(CPPC) Cost Plus Percent of Cost
allows buyer to budget fixed price; requires seller to detail scope and
accurately estimate price; very common
includes incentive to motivate seller to produce at greater speed
compensates for year to year economic changes
typically used for smaller initiatives
typically used for commodity items
typically variable costs are cost-plus and predictable costs are fixed fee
actual costs plus incentive to motivate seller to produce at greater speed
actual costs plus award based on customer satisfaction with agreed criteria
actual cost plus % of actual; the higher the cost, the higher the fees
Known and unknown risks in contracts
The identification and allocation of risk is a lengthy process that will require a number of iterations for optimum
results. During project appraisal, risks that may occur throughout the whole life of the project should be identified
for the whole supply chain. These could then be considered on the basis of:

• which party can best control events

• which party can best manage risks
• which party should carry the risk if it cannot be controlled
• what is the cost of transferring the risk.
Selection of Type of Contracts
One of the characteristics of projects is its uniqueness. Every project has its special
circumstances, so it’s important to select the contract type which suits the project. The
process of selecting the type of contract is developed by the owner.

Factors which affect the selection of construction contract are:

1. Project objectives: The type of contract should meet with project objectives.

2. Project constraints: There isn’t any construction project without constraints. Thus,
project constraints should be considered while selecting type of construction contracts.

3. Project delivery method: Project delivery method determines the relationships

between parties getting involved in the project and how they interact with each other
from project initiation to project closure.
What Does A Contract Look Like
What does a Contract look like?
 Contract content depends on the complexity of the scope
 There are a number of forms used
❖ PO – Purchase Order
❖ Short Form Agreement https://legalvision.com.au/should-i-use-a-long-form-or-short-form-sale-of-goods-agreement/
❖ Long Form Agreement

 The Contract consist a number of Sections

 For a typical Long Form Contract the following sections are used
❖ Section I – Form of Agreement
❖ Section II – Definitions & Interpretation
❖ Section IIIA – Special Terms & Conditions
❖ Section IIIB – General Terms & Conditions
❖ Section IV – Schedule of Scope
❖ Section V – Schedule of Prices
❖ Section VI – Administration
 Sections of a Contract
▪ Sets out the purpose
▪ Term of the contract
▪ Contracting Parties
▪ Outlines the Agreement
▪ Authorised Signatures
▪ Glossary of the terms used in the
contract
▪ Additional terms and conditions
specific to the contract
▪ Clear knowledge of these
negotiated terms
▪ Sets out the manner how the
contract will be administered over
the tenure
▪ Invoicing requirements and
payment cycles
▪ Variation for scope changes
▪ Claims process
Typical Long Form
Section I Form of Agreement
Section II Definitions & Interpretation
Section IIIA Special Terms & Conditions
Section IIIB General Terms & Conditions
Section IV Schedule of Scope
Section V Schedule of Prices
Section VI Administration
Sections Insurance, Quality, HSSE,
Local Content, Ethics &
Compliance, Social
Performance
▪ The general terms and conditions of the contract as
issued by the tenderer
▪ Tenderer’s terms not necessarily acceptable to
bidder – hence needs to be negotiated and agreed
▪ Use of industry standards may be more agreeable
(AS4000 – 1997 General T&Cs of Construction Contracts)
▪ Section which details the work scope
▪ Clarity of work scope is important
▪ Sets out the specifications, schedules and
resources
▪ Need to consider – what-ifs
▪ Section sets out how the Vendor will be paid
▪ Schedule could include hourly rates, unit rates,
fixed rates – depending on contract scope
▪ Complexity in pricing schedules will lead to more
monitoring requirements
▪ Consider maintenance of the pricing schedule in the
ERP Systems
▪ Include price adjustments mechanism
What does a Contract look like?

Other Sections (Red Threads) would include:

 Requirements on Insurance coverage
 Quality Standards applicable
 HSSE requirements
 Ethics and Compliance
 Local Content and ATSIC participation
 Social Performance

The inclusion of these Sections add to the Technical Specification and the Code of Conduct expected or required
of the Vendor
Key Contractual Clauses
Key Contractual Clauses
Suspension
❖ Company may suspend the contract to address issues related to the contractor’s breach of the contract.
❖ Company has suspension rights under the contract but no expressed suspension rights are granted to
contractor. This asymmetry is justified as it may incur significant financial losses if the contractor suspends
work that can affect Company’s operational capabilities

Termination By COMPANY
Company may terminate the contract or reduce scope if contractor breaches Business Principles, violates Anti-
Bribery Laws, applicable competition laws, or HSSE Standards, or Contractor wilfully delays or demonstrates the
intention not to continue performance of the CONTRACT
❖ Termination (or the threat of termination) is a useful remedy to remove an under-performing contractor and to
safeguard Company’s interests
❖ Rights to terminate are narrower for the contractor
❖ Contractors often ask for reciprocal termination rights
❖ A contractor should only be able to terminate for non-payment
Key Contractual Clauses
Liquidated Damages
❖ Company may claim damages if the contractor breaches a contractual obligation
❖ Liquidated damages are “pre-agreed” damages for a breach
❖ Consequences need to be clearly defined
❖ Contractors often seek liquidated damages to define and to limit risk.
❖ May seek a “no harm, no foul” qualification to the liquidated damages provisions. (Company must prove
damages and show that damages were caused by the breach.)
❖ “No harm No foul” qualifications make liquidated damages clauses nearly impossible to claim
❖ Reject such qualifications during negotiations
❖ Parties could amend the contract by agreement or use the variations process.
❖ Liquidated damages will only apply if specifically included in the contract. If liquidated damages are not specified in
the contract, should still be able to claim general damages as a fall back option.
❖ Contractors often request that liquidated damages be the sole remedy (for example, for delay) or that liquidated
damages be capped at a percentage of the contract price. That should be avoided or, if unavoidable, done with
caution.
https://www.interface-consulting.com/construction-claims-articles/no-harm-no-foul-an-equitable-view-on-liquidated-damages-for-
delay/#:~:text=This%20no%20harm%20%E2%80%93%20no%20foul,recover%20compensation%20for%20the%20delay.
Key Contractual Clauses

Liabilities & Indemnities

❖ Claims on contractual liabilities may be looked at from the perspective of level of risk in a contract
❖ Low risk contracts are best handled “at law” while high risk contracts are on “knock-for-knock” basis
❖ “Knock-for-knock” is an industry term for a risk allocation where each party takes responsibility for its own costs
in the defined areas. Each party takes full responsibility regardless of how the injury or loss was caused

The Intent of some Liabilities and Indemnities Clauses used in Contracts

Contractor Group People and Property
❖ Contractor assumes responsibility for its own property and Company’s property under its care and any harm to
its employees

Company Group People and Property

❖ Company assumes responsibility for its own property, except for its property that is in the contractor’s custody or
for which the contractor has the risk of loss and any harm to its employees
Key Contractual Clauses
The Intent of some Liabilities and Indemnities Clauses used in Contracts

Liabilities for Pollution

❖ Each party is responsible for the damages, losses, etc. related to pollution that emanates from its own property,
except that the contractor is also responsible for pollution that emanates from Company’s property in the
contractor’s custody

Indemnity for Own CONSEQUENTIAL LOSS

❖ Each party is excluded from claiming “consequential loss” from the other
❖ Consequential losses are losses that do not arise directly and immediately from the act of a party, and typically
include items like business interruption, i.e. loss of production, loss of revenue or profit, and indirect damages
 Key Contractual Clauses
The Intent of some Liabilities and Indemnities Clauses used in Contracts

Applicability of Obligations to Indemnify in Case of Negligence, GROSS NEGLIGENCE, WILFUL

MISCONDUCT or other Circumstances
❖ Each of the preceding allocations of liability (own property, own people, own pollution, and own consequential
loss) applies regardless of the ordinary negligence of a party
❖ Does not apply in cases where the incident was caused by the “gross negligence” or “wilful misconduct”

Mutual Waiver and Indemnity

❖ This is intended to create a similar knock-for-knock risk profile between the contractor and Company’s “other
contractors”
❖ The end result is that all parties present at the Company worksite will be solely responsible for their own
consequential losses and any damage sustained to their own people or property

Knock for Knock Indemnities – risk allocation in offshore oil & Gas Contracts
Key Contractual Clauses
FORCE MAJEURE

❖ The term ”force majeure” literally means a greater force.

❖ A party is relieved from its obligations under the contract to the extent that it cannot perform due to a force
majeure event. In other words, the parties agree that they will not enforce the contract if performance is
prevented by certain named events, which are generally regarded as outside the parties’ control. For example:
“Acts of God”, war, riots, natural disaster and other events beyond the control of the obligated party.

❖ Force majeure events need to be confined to an exhaustive list of specific events. Rather than adding a “catch-
all” force majeure provision (e.g. “any event beyond the reasonable control of a party”)

❖ A party is not excused from its obligations if the force majeure event results from that party’s error, negligence,
or fault, or could have been reasonably been provided for or avoided. Failure to secure funds and other
financial limitations does not constitute a force majeure event.

❖ The contractor, if affected by force majeure, is not entitled to any additional payment or compensation.
However, the scope supply schedule may need to be adjusted. Company may terminate the contract if a force
majeure event causes a delay of 90 consecutive days or 180 cumulative days.
Implied Terms
Items in the Contract document are expressed terms
❖ The more lengthy and comprehensive the contract, the less likely it is that any term will be implied

Implied Terms not specified in the contract arises from:

❖ Implied By Law
➢ “proper or reasonable care” in discharge of duties
➢ Supply materials which are of “good quality” and “fit for purpose”

❖ Implied By Statute
➢ Laws relating to the “Sale of Goods Act”
➢ Provisions in the “Trade Practices Act”
The Contract Cycle
LEGAL CONSIDERATIONS

Tying The What Is Within Defects In Who Is Within Untying

Bond The Bond The Bond The Bond The Bond
• Offer • Expressed Terms • Absence of Formality • Privity of Contract • Performance
• Misrepresentation ➢ Contracted • Mutual agreement to
• Acceptance • Implied Terms
parties may sue discharge or vary a
➢ In Fact • Duress and undue
• Consideration for breach contract
➢ In Law influence
➢ Problematic
• Intention • Mistake with 3rd Parties • Frustration
• Exemption
Clauses • Unenforceable Clauses • Assignment • Breach
➢ Force Majeure • Conflict with a Legal Rule • Remedies
• Agency
• Incapacity

❖ Purchaser enters into a contract is acting for himself or as an agent for the enterprise that employs him:
❖ In the event of a disagreement, the law of contract has to determine if whether there was a contract, its terms, how a breach is
to be settled, what happens in a particular situation, questions of compensation, ratification, damages or penalties and even
the mode of dealing with the problem. It may provide for negotiation, variance, arbitration or resort to court litigation
AS4000 - 1997
Contracts from a Procurement Perspective
Contract Development
❖ Contract Document needs to be comprehensive
❖ Deliver a Clear Message
➢ Contract intent
➢ Code of Conduct
➢ Set outcome expectations
❖ The Contract is more than Terms & Conditions
It takes time to negotiate contract terms
❖ Do not use Supplier Terms
❖ Check for Battle of Forms
❖ Do not copy and paste from a previous contract
❖ Try not to change Company’s T&Cs
Just because you have done a unit of EPM5710 doesn’t make you a Legal Eagle
Expediency is sometimes a fallacy
❖ Letter of Intent – generally takes the time
pressure off and requires additional effort
❖ Consider the life of a contract and plan for it
❖ Include options to extend the contract
Negotiations
❖ Don’t Be Adversarial in dealing with Vendors
❖ Commercial terms – responsibility of CP
❖ Avoid termination and litigation
❖ Involve a Legal partner and don’t make
concessions if you don’t have the authority
Bespoke Vs Standard Forms of Contracts

A Contract may be either:

• Bespoke (tailored) Contracts, or
• Standard Forms of Contracts

(Goldfayl 2004, ch.1.2.1)

Bespoke Contracts
• Bespoke contracts are written specifically to suit the circumstances of the relationship they are to control.
• For instance, if you wanted an extension built on your house, you might draw up a bespoke contract with a local
builder which sets out various facets of the relationship such as:
– when the builder is to start and finish the project;
– how much the builder will get paid and when; and
– what happens if the extension is not to the agreed quality standard.
• The bespoke contract if tailored a small project, effort required to write such a document should not be too arduous.
However, it is a legal document and advice should be sought from an appropriate expert, and this will obviously
add cost to the task.
• For a more complex undertaking the drafting of a bespoke contract can be extremely arduous as well as
expensive. Usually drawn up by a lawyer with experience in the building and construction industry to suit a
particular client and project.
• By virtue of its uniqueness, it is capable of distributing the risks, rights and responsibilities to suit the initiating party.
• It may well be to the owner’s advantage to use a unique contract, which will, at least in principle, allocate the
desired distribution of contractual risk to the contractor.
• However, due to its very uniqueness, and therefore its unfamiliarity, it may also incorporate some unintended
consequences, thus entailing unforeseen legal traps for both parties.

(Goldfayl 2004, ch.1.2.1)

Standard Forms of Contracts
• A standard contract is one which has been drawn up by specialists in building and construction contracts
to suit a particular range of contractual arrangements, for general use by a wide range of owners and
contractors and which may be purchased over the counter. This applies to other industry as well.
• The widespread use of a standard contract means a large body of architects, engineers, quantity
surveyors, contractors and others are familiar with most of its provisions and practical implications.
• With an unamended standard contract, the distribution of contractual risk is largely out of the owner’s
hands, since the contractual obligations of both parties are mostly predetermined, in kind if not in degree.
• Furthermore, the risk of either the owner or the contractor finding that it has acquired some unexpected
contractual obligations is largely eliminated, since the implications of the contract should be well known to
the advisers of both parties. There tend to be, therefore, few unpleasant surprises arising from a standard
contract.
• Research have shown that 68% of the contracts used were based upon Standard Forms. (Sharkey 2014).

(Goldfayl 2004, ch.1.2.1)

Standard Forms of Contracts (Cont’d)
• The most commonly used construction contract forms in the Australian construction industry are:
o Australian Standards (AS) 2124:1992 and
o AS 4000-1997, along with their respective design and construction variants (AS 4300-1995 and AS 4902-2000).
o AS 4000 and AS 4902 are the flagship forms among a fleet of construction contracts launched progressively by
Standards Australia between 1997 and 2003. This suite includes not only building contracts but also forms for
ancillary services such as equipment supply and installation and asset maintenance/facilities management.

• Other forms in use in Australia include the Australian Building Industry Contract (ABIC) suite promulgated jointly by
Master Builders Australia (MBA) and the Royal Australian Institute of Architects (RAIA). The major works contract is
designated ABIC MW-1 2003.
• Forms drafted from the point of view of one of the parties also continue to have wide use in the Australian industry.
For example, the Australian Department of Defence has its own suite of facilities contracts for the construction and
maintenance of its significant estate throughout the country.
• Private sector organisations, whether they be procurers of, or contractors for, construction work, likewise commonly
put into the market bespoke forms representing the terms on which they expect to do business. An example of an
industry body promulgating such a form explicitly to represent its preferred contracting strategy is the Project Contract
PC-1 1998 published by the Property Council of Australia.
Above list are just some example of Standard Forms of Contracts – there are many not listed.

(Goldfayl 2004, ch.1.2.1)

 International Standard Forms

• The use of internationally recognised forms is not unknown in Australia. This is especially the case where one or
more of the parties (or their advisers/project personnel) is based outside of Australia. Such forms include the
“rainbow” of forms (nicknamed to reflect the colours used on the covers of the various contracts) published by
o FIDIC (Fédération Internationale des Ingénieurs-Conseils – International Federation of Consulting Engineers),
and
o the New Engineering Contract (NEC) published by the Institution of Civil Engineers based in England

• As Australian contractors, developers, consultants and lawyers continue to win work around the world,
construction personnel are required to be familiar with local and international forms in the jurisdictions in which
they work.

• Therefore, most Australian construction professionals need at least a working knowledge of a wide range of forms
representing a spectrum of risk allocation and procurement models.
 Acts and Regulations
• Building and construction contracts are formed, administered and discharged within the
boundaries of common law and statute law.
• Common law is judge-made law based on that originally developed in England, and subsequently
in Australia, over many centuries. Past legal cases.
• Statute law (legislation) is law made by a parliament or pursuant to a power given by a law made
by a parliament. Each parliament has a specific jurisdiction.
• Since (except for Commonwealth Acts) legislation is different in each Australian State or Territory
and from time to time new legislation is made and old legislation is amended or repealed, it is
beyond the scope of this course.
• An Act (of the parliament) is a law made by Parliament; a bill which has passed all three readings
in each house and has received the royal assent.
• A regulation is made by the Governor on the recommendation of a minister pursuant to a power
given in an Act.

(Davenport 2002, p. 20)

The Trades Practices Act 1974
http://www7.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/num_act/tpa1974149/

• The Trades Practices Act 1974 is an Act of the Commonwealth Parliament of Australia.
• Main purpose of the Act was to eliminate restrictive business practices, namely price fixing, collusion and
restrictions on competition, and to provide protection to the public.
• The effect of the Act on building and construction contracts includes the area of price fixing and collusion among
contractors and subcontractors.
• The Act promotes open competition without undue restrictions and limitation.
• A most important provision of the Act is s. 52 (in Part V) which provides that: ‘A corporation shall not, in trade or
commerce, engage in conduct that is misleading or deceptive or likely to mislead or deceive’.
http://www7.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/num_act/tpa1974149/s52.html

• Section 82 of the Act provides that ‘A person who suffers loss or damage by conduct of another person that was
done in contravention of a provision of Part IV or Part V may recover the amount of the loss or damage by an
action against that other person or against any person involved in the contravention’.
http://www7.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/num_act/tpa1974149/s82.html

(Davenport 2002, p. 26)

 References
 Clarke J 2018, Contract law, Australian Contract Law, viewed 15th June 2020, < https://www.australiancontractlaw.com/contractlaw.html >.

 Clarke J 2012, Agreement, Australian Contract Law, viewed 15th June 2020, < https://www.australiancontractlaw.com/law/formation-agreement.html#offer >.

 Clarke J 2013,Terms of contract, Australian Contract Law, viewed 15th June 2020 <https://www.australiancontractlaw.com/law/scope-terms.html >.

 Clarke J 2018, Avoidance of contracts, Australian Contract Law, viewed 15th June 2020, < https://www.australiancontractlaw.com/contractlaw/avoidance.html>

 Clarke J 2010, Discharge by frustration, Australian Contract Law, viewed 15th June 2020, < https://www.australiancontractlaw.com/law/termination-frustration.html >.

 Clarke J 2018, Waltons Stores (Interstate) Ltd v Maher (Promissory Estoppel), Australian Contract Law, viewed 15th June 2020, <
https://www.australiancontractlaw.com/cases/walton.html>.

 Munoz E 2020, What are the different types of implied terms?, Legal Vision, viewed 15th June 2020, <https://legalvision.com.au/different-types-of-implied-terms/>.

 Bazzi A n.d., What is estoppel?, Gotocourt.com.au, viewed 15th June 2020 <https://www.gotocourt.com.au/civil-law/estoppel/>.

 AS4000 – 1997 General Terms & Conditions of Construction Contracts

 AS4915 – 2002 Project Management General Conditions

 AS4916 – 2002 Construction Management General Conditions

 Masson B 2018, Introduction to AS4000, Turtons, viewed 20th June 2020, <https://www.turtons.com/blog/introduction-to-as-4000>.

 Henry G 2017, 10 things you should know about AS4000, Turtons, viewed 20th June 2020, <https://www.turtons.com/blog/10-things-you-should-know-about-as-4000 >.

 Korotia Y 2017, Time and material vs fixed price: which to choose for your project?, Medium, viewed 15th June 2020 < https://medium.com/@Eugeniya/time-and-
materials-vs-fixed-price-which-to-choose-for-your-project-11dc6adc758b
ANY QUESTIONS?