Anything that affects pricing affects the profitability of your contract. After all, you are in business to make money, so anything that impacts this requires special scrutiny. Understanding the key clauses relating to costs will ensure that you have the best chance of appropriately pricing the contract and carrying out the project profitably.
In the second of a series of articles on procurement and contracts, the first of which is available here, this article focuses on how to approach a contract review, particularly in respect of cost provisions. If a proposal sounds too good to be true, it often is, so we’ve set out below some helpful tips for both contractors and principals to consider.
Firstly, if there is no consideration, then legally there is no contract. Consideration means giving something for value in return for a promise. In construction contracts, this is generally in the form of a dollar amount, but a method for calculating consideration is also sufficient.
Clearly setting out the amount to be paid under the contract is of vital importance. If a contract price has been agreed based on certain assumptions, you should include these assumptions in the contract. The price is based on the contractor performing a particular scope of works, so the scope must be clear in order to make sure the price is clear.
Parties should also turn their mind to issues like whether amounts stated are inclusive or exclusive of GST or are in Australian dollars.
The payment process
Are there any preconditions to payment? If the contract makes it difficult to get paid, contractors should consider why. The clauses regarding payment should comprehensively set out when and how a payment claim is to be made, assessed and paid. It is important, for contractors in particular to ensure they can comply with the timeframes, as failure to do so can be a bar to payment.
Is the payment process consistent with the Building and Construction Industry Payments Act (Qld) 2004? The act cannot be contracted out of and any clause purporting to do so will be of no effect . It is often worthwhile ensuring that the payment process under the contract is consistent with this Act, so that parties only have one payment process to administer. If it is not consistent, then parties may have to use one process under the contract and potentially a separate one under the Act. Note, this act is expected to be replaced by the Building Industry Fairness Act (Security of Payment) Act 2017, although it is not clear when.
Set off clauses
Most principals want to ensure that they have a right to set off monies the contractor owes to them against monies they have to pay the contractor. Where this right only applies to amounts due and owing to the principal, it is not unreasonable to include it. If however the principal wants to include a right to set off amounts it claims are due, this is usually resisted by contractors. Arguably, a wide set off clause can be good for a principal, but can also lead to disputes and increase pricing, so both of these factors will need to be considered by principals.
For contractors it is important to understand the scope of your set off clause and what is the principal entitled to set off against amounts owing to you. Set offs should be limited to amounts actually owed to the principal and exclude for example, amounts for any potential claims or debts that the principal believes are owing. Also, is it only amounts due under this contract, or under any contract between the same parties?
Understand how your contract defines variation. This should be considered in light of the scope of works. If you don’t understand that original scope of works, you can’t identify what is a variation. This is one reason why doing your due diligence on a contract up front is so vital.
Consider how variations are issued and who controls this. Can the contractor claim that something is a variation, even if it is not issued as one? It is important that the parties are aware of any procedural requirements, particularly the timing for claiming or approving a variation. Failure to comply with timeframes can be a bar to claiming a variation ie the claim is prevented permanently.
Often requests or directions for changes to the works are made verbally on site. This can lead to disputes about whether they actually constitute a variation, so the contract should deal with the effect of any verbal representations (eg they are valid only if backed up in writing).
Once a variation is issued, how is it valued? Contractors should avoid clauses which allow the principal or superintendent to value variations in their “sole or absolute discretion”. A reference to a schedule of rates or valuation by agreement between the parties is preferable for both parties, since again it provides certainty and helps avoid disputes.
Is the contractor entitled to delay costs? If so, how are these calculated? Consider expenses such as offsite overheads and whether these are included. For principals, a limit on delay costs is usually preferable, but this will need to be assessed on a case by case basis. For contractors, consider the costs of dedicating resources to the project as a result of any delay and ensure that you are adequately compensated for costs actually incurred.
Finally, as a general rule, any hurdles in the way of getting paid can affect a contractors’ cash flow. This can have serious consequences, and are issues that (as a general rule) cannot just be accepted. Principals should also consider whether these hurdles are necessary, as they can arguably increase pricing. Striking the right balance, and driving the right behaviours and relationship between the parties, is important for a profitable and successful project.