By Malcolm Abernethy
Executive officer, NZ Contractors’ Federation
When a contract is proposed, many processes need to be completed before construction can commence. These processes and activities may include, but are not limited to, concept design, client approval, investigation, resource consent, final design, advertising, tender process, and the letting of the contract.
Some projects may require only weeks or months to complete this process while other large or complex projects may take many years. During this process delays do and will occur – but the client will still want the project completed by a certain date for commercial or financial reasons within an agreed price and to the specified quality.
To achieve the clients’ requirements the contract duration will frequently be squeezed, making construction more difficult to complete within the shorter timeframe and may require the contractor to provide additional resources.
There is the added possibility of running overtime, so that when the required completion date is not met, liquidated damages may be imposed on the contractor. When low contract values and squeezed timelines and quality are combined, something has to give, as it is very difficult to achieve a positive result to the specified quality, for a low price, in a short construction period.
There are very few projects that can be constructed without a variation occurring. A bold statement, but true, particularly where the project requires earthworks or foundations.
Inadequate investigation, design inputs and documentation may also result in variations, leading to quality, time and cost consequences. When variations occur, there will inevitably be extensions of time, placing strain on contractual relationships due to increased costs and extended deadlines.
In today’s market, pricing by contractors is very sharp with lean margins, and, in some instances, no margin at all. Contracts are being awarded well below the engineer’s estimate, resulting in strained contractual relationships from the start of the contract.
In these circumstances it is perceived that contractors try to recover some margin by requiring their subcontractors to submit low prices or to do the subcontract work at cost. Other parties consider the contractor will claim variations or reduce the quality of the work.
Where a low bid price is accepted by the client, any apparent ‘saving’ in contract price may be then spent in management and observation of the project.
From the contractor’s perspective, a low bid price means the contractor needs to work innovatively and productively to ensure the project is delivered within the contracted price. There is also the notion that a low bid price allows a contractor to maintain work for both the company’s human and equipment resources as well as the employees’ skills it has invested in when building the business.
Contractors want the work for their resources in this still relatively lean market, however, they should not be prepared to take on risk that is inequitable. Contractors are in business to construct and/or maintain projects for clients.
Many times the project provides a solution to a problem. Contractors are in business to fix a client’s problem but they should only enter into contracts that are fair and equitable, and they need to be able to recover costs incurred while delivering the project on time and to the quality specified.
Clients need to ensure that contract documents are complete, following thorough investigation and a design is actually able to be constructed. Contractors can then offer innovative construction methods and work programmes that deliver a completed project.
Contractors should be aware that by accepting unfair contract conditions and taking on the client’s problem that they are contracted to fix, they are accepting a greater risk that should have been carried by the consultant or client. Negotiation remains the key to fair and equitable contracts that are acceptable to all parties.
Certainty of contract conditions, and what is to be constructed to the desired quality, should reduce the opportunity for disputes as the project is progressed. This can be achieved by thorough and complete contract documentation.
Contractors fix a client’s problem – they do not own it. Sound investigation, design and documentation, with certainty of contract conditions, should ensure delivery of a successful project for all parties.
Contractor Vol.34 No.7 August 2010
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