Getting the contract right

Abernethy_square.jpgBy Malcolm Abernethy
Executive officer, NZ Contractors' Federation

I continue to be concerned that alternative forms of contract are being widely adopted in New Zealand. 

Every year we see the promotion of a particular form of contract that tries to formalise collaborative behaviours within a standard form of contract, known as NEC3.  This standard form of contract had its genesis from a dysfunctional industry that was poorly performing, having low productivity rates and was extremely adversarial. 

It is time the industry practiced what it preaches. It is time we stopped promoting one form of contract as being better than another and it is time we worked collaboratively within the industry.

The New Zealand infrastructure construction industry is mature and understands the currently used standard conditions of contract NZS 3910 very well. Provided the standard conditions are not overly modified, all parties understand their roles and responsibilities and, on the whole, work in a collaborative way using NZS 3910 as the standard form of contract. 

The industry is generally not adversarial and understands how to work together with clients, principals and contractors all wanting to achieve the best outcomes for all parties and to work toward ‘best for project’ outcomes.  Disputes do occur and these are resolved using the terms and conditions contained within the contract if negotiation fails.

There are many forms of contract available for clients and engineers to use.  They are the tools that provide an agreement between parties that should be fair, balanced and to provide procedures for administering the contract including dispute resolution procedures.

One particular form of contract may be no better than another with the selection needing to be made when the contract is put out for tender.

For any contract, essential elements include a description of the work to be done, the price and how it may be determined and how payments are to be made.  The contract will include conditions that cover default by either party, how variations are to be considered and dispute resolution procedures.

The client will determine the amount of risk they are prepared to accept and, so, will choose the contracting arrangement that best suits the risk profile for the job. Risks are identified and apportioned, generally, to those parties that can best deal with the risk. 

It is this area of risk allocation that the industry experiences large modifications to a standard form of contract. Writers of special conditions make changes that change the risk allocation and, when pricing, a contractor may not fully understand the effect of that change in the work they are required to construct.  Contractors will either accept the risk or provide prices that cover the perceived risk.  In some cases contractors have sought legal advice to fully understand their risk exposure.

Conditions of contract come in all shapes and sizes, from the simple handshake agreements to verbal agreements supported by an exchange of correspondence, to short form contracts, to standard conditions of contract, partnering, collaborative working arrangements and alliances.

A simple handshake or verbal contract inevitably starts with all parties in what appears to be full agreement, however, when things go wrong, then the conditions of that verbal contract are frequently misinterpreted or not clearly understood by each party. 

Verbal agreements supported by and exchange of correspondence will better define the work to be done, the standard of the work and how and what payments are to be made making any dispute a little easier to resolve as the conditions may be better understood. 

Both of these types of contract should be avoided and, at the very least, a short form of contract used that defines responsibilities, contains payment clauses and other conditions for dealing with variations and should contain some dispute resolution clauses. Lower value and technically simple contracts may be best suited to this form of contract.

Standard contract conditions using NZS 3910 or NZS 3915 are then available for simple to complex projects as these documents have all the necessary conditions that will accommodate most situations.  They contain procedures for administering the contract, how

variations are to be dealt with and how and when payments are to be made.  They allow for collaborative relationships to enable willing parties to work toward ‘best for project’ outcomes.  They also include dispute resolution procedures for when things go wrong.

Partnering, collaborative working agreements and alliances are much more complex contractual relationships that are developed specifically for the project.  This type of contract will include statements from each party to record their commitment to the project and how the relationship is structured based on each parties role, resources, skill, experience and ability to accept risk. Contracts of this type will be developed in consultation with legal advice to define responsibilities, risk allocation, pain share/gain share and many other issues but in each case the contract will include dispute resolution procedures.

Contractor Vol.33  No.7  August 2009
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