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Unformatted text preview: FundamentalsText2proof2009:•Fundamentals/text F U N D A M E N TA L S OF BUILDING CONTRACT MANAGEMENT Second Edition 6/5/09 4:10 PM Page i FundamentalsText2proof2009:•Fundamentals/text 6/5/09 4:10 PM Page ii FundamentalsText2proof2009:•Fundamentals/text Thomas E Uher 6/5/09 4:10 PM Page iii & Philip Davenport F U N D A M E N TA L S OF BUILDING CONTRACT MANAGEMENT Second Edition UNSW PRESS FundamentalsText2proof2009:•Fundamentals/text 6/5/09 A UNSW Press book Published by University of New South Wales Press Ltd University of New South Wales UNSW Sydney NSW 2052 AUSTRALIA © Thomas E Uher and Philip Davenport 2002, 2009 First published 2002 Reprinted 2006, 2007 This edition 2009 This book is copyright. Apart from any fair dealing for the purpose of private study, research, criticism or review, as permitted under the Copyright Act, no part may be reproduced by any process without written permission. Inquiries should be addressed to the publisher. National Library of Australia Cataloguing-in-Publication entry: Author: Uher, Thomas E. (Thomas Edward). Title: Fundamentals of building contract management. Thomas E. Uher, Philip Davenport Edition: 2nd ed. ISBN: 978 1 74223 021 4 (pbk.) Bibliography. Notes: Includes index. Bibliography. Subjects: Construction contracts — Management. Construction contracts — Australia — Management. Other Authors/Contributors: Davenport, Philip. 692.8068 Printer Ligare Cover design Di Quick 4:10 PM Page iv FundamentalsText2proof2009:•Fundamentals/text 6/5/09 4:10 PM Page v CONTENTS Preface Abbreviations PART I PRE-CONSTRUCTION CONTRACT ADMINISTRATION 1 Introduction to contract administration 1.1 What is a contract? 1.2 Contracts in context 1.3 The elements of a contract 1.4 General comments on contracts 1.5 Acts and regulations 1.6 A brief history of building contracts 1.7 Fundamentals of contract administration xi xiii 1 1 6 8 18 20 21 25 2 Project lifecycle 2.1 Introduction 2.2 Conceptual stage 2.3 Design stage 2.4 Tendering stage 2.5 Pre-construction stage 2.6 Construction stage 2.7 Commissioning stage 2.8 Post-occupancy evaluation (audit) 28 28 29 36 45 46 46 47 48 3 Contract strategy 3.1 Introduction 3.2 Contract strategy 3.3 Project delivery methods 51 51 51 54 4 Options for contract price 4.1 Introduction 4.2 Fixed-price contracts 4.3 Cost-plus contracts 60 60 60 64 5 The traditional method of project delivery 5.1 Introduction 5.2 Nature of the traditional method 5.3 Organisation structure of the traditional method 68 68 68 69 FundamentalsText2proof2009:•Fundamentals/text 5.4 5.5 5.6 5.7 6 6/5/09 4:10 PM Page vi Advantages to the principal Disadvantages to the principal Traditional contract strategy Standard forms of general conditions of contract for use with the traditional method of project delivery 72 73 73 74 Non-traditional methods of project delivery 6.1 Introduction 6.2 Design and construct method 6.3 Construction management method 6.4 Project management method 6.5 In-house development method 6.6 Public private partnership 6.7 Performance of different methods of project delivery 6.8 Impact of non-traditional methods on different contractual parties 6.9 Impact of non-traditional methods on the construction industry 76 76 77 86 101 113 113 117 7 Administration of managed methods of project delivery 7.1 Introduction 7.2 The agency CM method 7.3 The non-agency CM method 7.4 General comments on managed delivery methods 7.5 Construction packages 7.6 Cost administration 7.7 Time administration 7.8 Incentives 122 122 122 127 129 129 130 131 131 8 Partnering and strategic alliance 8.1 Introduction 8.2 Definition of partnering 8.3 History of partnering 8.4 Essential elements of partnering 8.5 Types of partnering 8.6 Partnering process 8.7 Performance of partnering 8.8 Partnering performance indicators 8.9 Reward for performance 8.10 Legal issues in partnering 8.11 Strategic alliance 132 132 133 135 136 146 150 155 163 164 167 169 9 Competitive tendering 9.1 Introduction 9.2 Formation of building contracts and subcontracts 172 172 173 vi Fu n d a m e n t a l s o f b u i l d i n g c o n t r a c t m a n a g e m e n t 118 119 FundamentalsText2proof2009:•Fundamentals/text 9.3 9.4 9.5 9.6 9.7 6/5/09 4:10 PM Page vii Tender documentation Tender process Selection of the best tender A model of effective tender administration Cost of tendering 177 183 186 189 194 10 Subcontracting practice 10.1 Introduction 10.2 History of subcontracting 10.3 Subcontracting in the US, UK and Australian construction industries 10.4 Risks in subcontracting in Australia 10.5 Subcontract conditions 10.6 Subcontracting and the principal 10.7 Bid shopping in the construction industry 198 198 199 11 Risk allocation: a new approach 11.1 Risk allocation theory 11.2 Analysing the theory 11.3 An alternative approach 216 216 217 219 PART 2 CONSTRUCTION CONTRACT ADMINISTRATION 12 Analysis of general conditions of contract 12.1 Introduction 12.2 Risk allocation 12.3 Flow of information 12.4 General contract clauses 12.5 Latent conditions 12.6 Responsibilities of contractual parties 12.7 Assignment and subcontracting 12.8 Time 12.9 Payment to contractor 12.10 Adjustment of contract sum 12.11 Contract insurance 12.12 Defective work 12.13 Termination of contract 12.14 Disputes 225 225 229 229 237 243 247 256 259 266 274 281 284 284 286 13 A guide to the selection and preparation of contracts 13.1 Introduction 13.2 Types of contract 13.3 Cost risk by type of delivery method 13.4 Clauses and conditions of contract 289 289 290 291 292 vii Fu n d a m e n t a l s o f b u i l d i n g c o n t r a c t m a n a g e m e n t 201 203 203 207 209 FundamentalsText2proof2009:•Fundamentals/text 13.5 13.6 6/5/09 4:10 PM Page viii Risk in specific contract clauses Special conditions of contract 292 297 14 Defective work 14.1 Introduction 14.2 Duties of superintendent 14.3 Implications of concurrent tort liability 14.4 Estoppel 14.5 Agreement to overcome defect 14.6 Rectification order 14.7 Trifling defect 14.8 Progress payments 14.9 Electing to accept defective work 14.10 Valuing involuntarily accepted defective work 14.11 Variations to overcome a defect 14.12 Summary 302 302 304 306 309 311 312 312 313 314 318 320 321 15 Legislation and registration 15.1 Legislative framework 15.2 Contracting entity 15.3 Licensing and registration 15.4 Unlicensed contracting: offence 15.5 Unlicensed contracting: payment 15.6 Limits on freedom to contract 15.7 Trade Practices Act 323 323 323 324 326 326 328 330 16 Construction programs 16.1 Introduction 16.2 Purpose of programs 16.3 Interpretation of construction programs 333 333 334 336 PART 3 POST-CONSTRUCTION CONTRACT ADMINISTRATION 17 Contract disputes 17.1 Introduction 17.2 Contractual notice provisions 17.3 Common sources of contractor’s claims 17.4 Types of claims 17.5 Claims preparation 17.6 Quantifying a claim 17.7 Damages 17.8 Unjust enrichment 17.9 Latent defects and economic loss 17.10 Hudson formula and prevention principle 341 341 342 343 344 347 347 350 356 360 363 viii Fu n d a m e n t a l s o f b u i l d i n g c o n t r a c t m a n a g e m e n t FundamentalsText2proof2009:•Fundamentals/text 6/5/09 4:10 PM Page ix 17.11 Frustration 17.12 Termination 368 371 18 Dispute resolution 18.1 Introduction 18.2 Resolution by agreement 18.3 Resolution by a binding decision of a third party 18.4 Litigation 18.5 Arbitration 18.6 Expert determination 18.7 Differences between experts and arbitrators 374 374 374 376 376 377 379 380 19 Security of payment 19.1 Introduction 19.2 Payment culture of the construction industry 19.3 Means of securing payment 19.4 Building and Construction Industry Security of Payment Act 1999 (NSW) 19.5 Operational features of the amended NSW Act 19.6 Acceptance or otherwise of the NSW Act by courts 19.7 Brief overview of different security of payment schemes 383 383 385 387 388 392 398 408 Appendix A Partnering evaluation forms Appendix B Partnering charter Appendix C Example of a tender form References Index ix Fu n d a m e n t a l s o f b u i l d i n g c o n t r a c t m a n a g e m e n t 417 421 422 423 432 FundamentalsText2proof2009:•Fundamentals/text 6/5/09 4:10 PM Page x FundamentalsText2proof2009:•Fundamentals/text 6/5/09 4:10 PM Page xi PREFACE Construction contracting has its own terminology, its own doctrines (legal and otherwise) and its own body of legislation. It is different. That is why this book was written. The book is intended not only for those new to the construction industry but also for those in the industry who want to know how and why it is different, and particularly those who have ambition to improve it, or at least avoid the pitfalls. This book is intended to fill a gap in the literature on construction contracting. It is not a legal casebook, although many cases are referred to for illustration. It is not intended as a definitive statement of the law, although it does attempt to explain relevant law in simple terms. Neither is it intended to provide guidance to the reader on solving any particular problem. That is for a specialist. Every particular problem turns on a unique set of facts. The book may assist the reader to be better informed about when specialist advice is necessary and better able to understand that advice. Most importantly, it is intended as a guide to avoiding situations where problems arise and specialist advice is required. Contracts are vital to the construction delivery process. Design and construction are carried out under contracts. A contractor’s only obligation to build is created by a contract. Usually, a contractor’s only right to payment is covered by the contract. The principal’s right to compensation for defects is created by a contract. Contracts direct and govern every move. In any major project there are thousands of individual contracts. Some are contracts of employment, some are for supply of services by public utilities, some are with insurers. This book is concerned with contracts that the principal makes for the provision of design services and construction work, the management of those services and that work, and the chain of subcontracts made down the line. There is a confusing array of contracts and much competition between proponents of various forms of contract. The purpose of this book is to strip the legal mystique and mumbo jumbo from contracts and expose the basic logic. The book is directed to contractors, principals, project managers, architects, engineers, lawyers, students and others involved in the construction industry. xi Preface FundamentalsText2proof2009:•Fundamentals/text 6/5/09 4:10 PM Page xii Examples included in this book are not meant to be recommended precedents but examples of what is actually used in the industry. There is no best way of contracting. It is a matter of ‘horses for courses’. The book should help the reader to find the best contracts for a particular project and having chosen them, to administer them efficiently. After some background on what contracts are, Part I looks at the options for project delivery, the various types of contracts available, and the pros and cons of the various types. Part II looks at the administration of construction contracts. It covers the basic principles applicable to all construction contracts. Part III deals with the aftermath, claims, defects and disputes. It also deals with remedies outside the contract, for example those based on unjust enrichment. Most disputes are founded on ignorance — the ignorance of the claimant or the ignorance of the party resisting the claim or the ignorance of those advising them. The ignorance may be of the facts, the law or the most efficient means of resolving disputes. Part III is directed to dispelling some of the ignorance. Included in Part III is a new chapter on security of payment in NSW. Similar legislative schemes operating in other States of Australia, and in the UK, NZ and Singapore are reviewed. xii Fu n d a m e n t a l s o f b u i l d i n g c o n t r a c t m a n a g e m e n t FundamentalsText2proof2009:•Fundamentals/text 6/5/09 4:10 PM Page xiii ABBREVIATIONS ABN Australian Business Number ACDC Australian Commercial Disputes Centre ACEA Association of Consulting Engineering of Australia ACN Australian Company Number ANA Authorised Nominating Authority ADOT Arizona Department of Transportation AFCC Australian Federation of Construction Contractors AGC Associated General Contractors of America APC adjusted progress claim AS Australian Standard BCIRS Building and Construction Industry Reform Strategy BISCOA Building Industry Specialist Contractors Organisation of Australia BOMA Building Owners and Managers Association of Australia BOOT build, own, operate, transfer BOT build, operate, transfer CIDA Construction Industry Development Agency CM construction management CTT Consumer, Trader and Tenancy Tribunal xiii Abbreviations D&C design and construct FIDIC Fédération Internationale des Ingénieurs-Conseils GCMP main contractor’s markup GCP main contractor’s preliminaries GST goods and services tax IT information technology KPI key performance indicator MBA Master Builders Association MBFA Master Builders Federation of Australia NEC New Engineering Contract NEDO National Economic Development Office NPWC National Public Works Conference PC Property Council of Australia PM project management PMBOK Project Management Body of Knowledge PPP public private partnership PWD Public Works Department RA risk allowance RAIA Royal Australia Institute of Architects RFIs requests for information SB suppliers’ bid prices SCB subcontractors’ bid prices TQM total quality management TTP total tender price USACE US Army Corps of Engineers FundamentalsText2proof2009:•Fundamentals/text 6/5/09 4:10 PM Page xiv FundamentalsText2proof2009:•Fundamentals/text 6/5/09 4:10 PM Page xv PART 1 PRE-CONSTRUCTION CONTRACT ADMINISTRATION FundamentalsText2proof2009:•Fundamentals/text 6/5/09 4:10 PM Page xvi FundamentalsText2proof2009:•Fundamentals/text 6/5/09 4:10 PM Page 1 CHAPTER 1 INTRODUCTION TO CONTRACT ADMINISTRATION 1.1 WHAT IS A CONTRACT? If A says to B, ‘I will repair your house’ and B makes no promise in return, there is no agreement. If B says, ‘I will pay you $1000’, then there is still no agreement. Why? Because it takes two to make an agreement. An agreement involves an exchange of promises or goods. A has not yet agreed to accept $1000 for doing the work. If A says, ‘I will accept $1000’ there is agreement on price, but is there a contract? Unless there is agreement on all the essential terms, the law does not recognise the existence of a contract. Is there agreement on the actual work to be done to repair the house? It may be that A and B know exactly what work is necessary, for example repair of a leak in the roof. In that event, the actual work to be performed is agreed and there may be a contract. The contract consists of the following express terms: A will repair B’s house B will pay A $1000 A will accept $1000 These terms are said to be ‘express’ because they are the actual words spoken. 1 Introduction to contract administration FundamentalsText2proof2009:•Fundamentals/text 6/5/09 4:10 PM Page 2 The contract also includes two types of ‘implied’ terms. An implied term is one that ‘goes without saying’. The first type of implied term is implied from the circumstances — since A and B know exactly what repair work they are referring to, the implied term is: ‘The work is the repair of the leak in the roof’. The second category of implied term is implied by law. The law implies certain terms in any contract in which the express terms do not cover the matter. Some of the terms that the law would imply in this contract would be: • • • • the work will be completed within a reasonable time payment will be made upon completion of the work the work will be done in a reasonably workmanlike manner B will give A reasonable access to the roof to enable A to carry out the work. Terms may also be implied by statute, for example in New South Wales, the Building and Construction Industry Security of Payment Act 1999 may give a right to progress payments each four weeks. In most States of Australia there is legislation governing contracts for residential building work. This legislation prescribes some of the conditions of contract, such as express warranties of workmanship. Chapter 15 deals with such legislation. The contract is the sum of these express and implied terms. There will be other implied terms, but unless there is a dispute it will not be necessary to identify them. An agreement that is legally binding is a ‘contract’. But lawyers usually use the terms ‘agreement’ and ‘contract’ interchangeably. To confuse the matter more, lawyers often call an agreement that is not a contract a ‘void contract’. A void contract is not a contract at all. Writing is usually not necessary to create a contract. Many everyday contracts are made without words, for example when shopping at the supermarket or catching a bus. A contract made by spoken and not written words is an ‘oral contract’. A contract that is made without words is an ‘implied contract’. A contract may be partly oral, partly written and partly implied. That part which is not implied is said to be ‘express’. Not all agreements are contracts. Agreements that are not contracts cannot be enforced by legal process. Agreements may be unenforceable for a number of reasons. Some are where: • the agreement was not meant by the parties to create a legal relationship (e.g. an agreement by a parent to buy a child an ice-cream if the child behaves properly — it was never envisaged by either party that breach would give rise to a right to sue for damages) 2 Pre-construction contract administration FundamentalsText2proof2009:•Fundamentals/text • • • • 6/5/09 4:10 PM Page 3 one party did not have capacity to make a legally binding bargain (e.g. a minor, i.e. a person under 18, or someone mentally handicapped) the promise of one party was made under duress (e.g. at knife point) the performance of the agreement would involve a crime or a tort the terms of the agreement are not sufficiently certain. Much has been written about ‘offer and acceptance’ and ‘consideration’. These are concepts that raise the question of whether there is an agreement. If A offers to do certain work for $1000 and B says ‘I will pay you $500 for that work’, there is no acceptance of A’s offer and no agreement. B has merely made a counter-offer. But if A says ‘I accept your price’, then there is agreement. On the face of it, the agreement is legally binding and is therefore a contract. For one of the five reasons mentioned above, the agreement may not be legally binding or it may be that the contract is unenforceable by one or both parties. This would arise where a law bars action on the contract. For example, in New South Wales the Home Building Act 1989 s. 10 prevents a contractor from suing an owner under a contract for residential building work unless the contract is in writing. The owner is not barred from suing the contractor. Similar legislation governing contracts for residential building work will be found in most other Australian States (see Chapter 15). If A offers to do certain work for B and B makes no promise in return, there is said to be no ‘consideration’ and hence no contract. Consideration is a legal doctrine that in practice is unlikely to cause concern. Atiyah (1986: 56) says: ‘The conventional account of the doctrine of consideration no longer accords with the law actually enforced in the courts’. While it is a good idea to read textbooks on the law of contract, care must be taken that statements of alleged principle are not taken too literally. The law is continually changing and developing, and a statement that is true today may not be true tomorrow. Building contracts involve the provision of goods or services or both. The goods are usually building materials. The services are usually labour and use of p...
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