The importance of managing the contract
Contract management is a key activity after the project contract is executed.
Contract management incorporates all the activities required to identify, monitor and mitigate all risks over the life of the contract to assist the TAFE in achieving its project objectives, intended benefits and maximise value for money.
Managing change during construction
Contract management includes activities such as:
- managing payments during construction
- managing change within thecontract, and
- managing extensions of time (EOT).
The contract for the works will establish the timing and form in which the contractor may make a claim for payment. The TAFE's contractual obligations regarding contractor payments are further strengthened by its statutory obligations under the Building and Construction Industry Security of Payment Act 2002 (SOP Act). The TAFE will either make payment at the completion of the works (for small or minor projects); on a milestone basis – commonly called a progress payment - following the completion of specific sections (milestones) of the works; or, more commonly monthly, based on an assessment of the value of works completed. The contract will determine the means of assessment, which is generally undertaken by the superintendent on the advice of the head consultant or quantity surveyor.
Contractors must submit their payment claims in accordance with procedures outlined in the contract.
Generally, for construct-only and design and construct projects, the superintendent will issue a progress certificate to the TAFE, in which the superintendent has certified the amount of work completed, the value the contractor is entitled to and the contractor’s claim for payment.
Once a claim is reviewed and the superintendent has confirmed its value, the TAFE will issue the payment to the contractor.
Further detail of the superintendent’s typical role within the delivery phase is available.
Payment claims during construction
The contract will set out the information which the contractor must include in their payment claim.
In a standard form contract this generally includes:
- contractor's estimate of the value of the work completed (i.e. percentage complete), including any variations
- details of the totals of previous claims, certificates and payments and the amount of security held (which is an amount of money held by the TAFE from the progress payment for a specified amount of time)
- amounts for specified subcontractors to the contractor, and
- statutory declarations confirming the correctness of the claim and that all payment obligations under the SOP Act have been met.
Payment schedules and disputes
In addition to contractual obligations regarding progress payments, the SOP Act further regulates payment claims and progress payments and aims to prevent insolvency in the construction industry.
Following submission of the contractor's payment claim, the contract superintendent, on behalf of the TAFE, will assess the claim in accordance with the contract documentation and site progress. The contract superintendent will likely issue a payment schedule to the contractor, which indicates the progress payment to be made in response to the payment claim. If the payment schedule is not for the full amount, an explanation must be provided, after which the contractor will issue a revised payment claim for the assessed amount. If no payment schedule is issued, or the process is not carried out in accordance with the contract conditions, you may be liable to pay the full amount stated in the payment claim, within the time period as specified in the contract (usually 10 working days).
If there are unresolved disputes based on the payment schedule, the contractor may choose to apply for further adjudication.
A final claim will be made by the contractor in the manner outlined in the contract.
Typically, this will be when the contractor has completed the contract work and fulfilled its contractual obligations at the end of the defects liability period (DLP).
The superintendent will issue a final certificate certifying that any defects that arose during the DLP have been resolved.
The final certificate is the conclusion of the contractual relationship between the TAFE and the contractor.
Final payment and release of security held
Final completion occurs at the conclusion of the DLP and involves the final payment release of any remaining security held by the TAFE. This effectively ends the contractual agreement between the TAFE and the contractor.
The security is held to guarantee the performance of the contractor and in particular to safeguard against the cost of fixing defects in the event that the supplying contractor fails to satisfactorily rectify them.
The structure of the final payment and its terms and conditions may differ depending on the selected procurement model and the form of security obtained. The OTCD recommends using unconditional bank guarantees in preference to other forms of security. This security is usually about 5-10% of the value of the works and is received at the commencement of the contract.
At the end of the DLP, you should ensure the works are inspected and that all defects have been addressed before the balance of any securities is released.
A variation is a change, addition or omission to the agreed contract works to be performed by the contractor. Variations can take three key forms: scope, price and program. A variation may also be made to the terms of the contract itself, although this is less common. Works or services that are already part of the agreed scope cannot be considered a variation.
It is important to identify whether a change, is in fact, a “variation” within the meaning of the contract. Both the contractor and the TAFE can initiate a variation. Variations from the contractor must be approved by the TAFE.
The contract will prescribe a process for dealing with variations and the contractor will not be able to vary the works unless directed in writing.
Variations must be documented and approved at the appropriate level based on project governance.
It is important to understand the relevance and consequences of time bars within the contract.
A time bar is a clause or condition which limits the time within which certain contractual rights can be enforced. A notice must be given under a contract in order for it to be effective in building up a contractual entitlement. Time bars occur in construction contracts in different clauses for different purposes.
Steps in assessing variations
1. Forecasting variations
2. Check the contract
Once you have determined the nature of the claim, check the relevant clauses of the contract to see what is required.
It is important to consider all potentially relevant clauses, noting that there may be more than one that applies.
Clauses that deal with variations, extensions of time (EOT) and delays may be contained in three separate sections of the contract.
Consider the time bars identified in the contract and what time frames you need to respond to in the claim.
3. Reviewing the contractor's claim
The contractor must be able to substantiate their claim. The type and level of information that will be required to achieve this will depend on the nature of the work and the amount of time and cost involved.
The contractor’s claim should include:
- detailed description of all work that may be required to effect the change
- the impact (if any) this will have on the program and whether an EOT may be needed (and if so, whether delay costs may apply)
- detailed assessment of the impact on project costs as a result of the change, and
- the contractor’s entitlements to claim additional preliminaries, overheads and/or margin.
If the contractor is submitting a claim for an EOT, they will need to be able to demonstrate that the variation affects an item on the critical path of the current construction program. The contract may require the contractor to explain the steps they have taken to minimise or mitigate the variation.
Depending on the cost of the variation, approval will be provided by the appropriate delegated authority.
4. Provide a written direction to the contractor
Most contracts will require a direction to proceed with a variation to be in writing and will place the contractor in breach of the contract if they proceed with a variation without written direction.
Once the contractor has completed the work, they are able to claim payment for the variation.
Reporting of variations
In line with Buying for Victoria guidance, a summary variation representing all variations must be disclosed on the contract record. The summary variation must:
- describe the total value of all variations, and
- individually describe each variation with a value greater than the highest value of the following:
- $100,000 (including GST), or
- more than 10% of the contract value.
These variations should be disclosed prior to practical completion of the works.
The contract will outline strict procedural requirements around any extension of time (EOT) claims submitted by the contractor. When the contractor submits an EOT claim, they believe they have a claim to extend the date for practical completion. If the date for practical completion is extended without a legitimate claim, the contractor may be subject to liquidated damages (or compensation payable to the TAFE in accordance with the contract) for the negative cost consequences of delivering the works later than agreed under the contract.
Typically, the process starts when the contractor issues a notice of delay. This is not an EOT claim, it is a notice of intent to claim.
If the contractor does not issue a notice of delay and does not make a claim within the specified time in the contract, they will lose any entitlement to make an EOT claim for that particular delay.
You should ensure that the contract includes a specific time bar clause for an EOT claim. Under Australian standard contracts, the contractor will typically not be entitled to an EOT claim if they do not notify in writing, within 28 days of becoming reasonably aware of the reason for delay.
In some contracts, if the TAFE or the superintendent does not respond to the contractor’s request for an EOT within 28 days of receiving it, the request is deemed to have been approved and an EOT will be granted for the full amount of time claimed.
Whether or not the contractor is entitled to an EOT will depend on:
- cause of the delay
- whether the contractor should reasonably have been able to mitigate the impacts of the event causing the delay on the critical path by rescheduling works, and
- specific clauses within the contract around EOT claims.
The contractor may also be able to claim delay costs in some circumstances as described in the contract.
When responding to an EOT claim, the TAFE may agree to ‘additional time, but no costs’, ‘no additional time and no additional costs’ or ‘both additional time and costs’ based on the EOT assessment.
If the contractor submits a claim for an EOT, they will need to demonstrate that the variation affects an item on the critical path of the current construction program. To assist in the analysis of the EOT request, you may wish to engage commercial, technical and other specialist consultants as appropriate.
Key contractual terminology
It is important to understand the key terms and roles specified in the contract to assist you in contract management. These include:
- the role of the superintendent in construct-only and design and construct contracts
- practical completion vs final completion, and
- defects liability period.
In a construct-only or design and construct contract, the superintendent is appointed by the TAFE to act on its behalf and act as an independent administrator of the contract. The specific obligations of the superintendent will vary according to the construction contract.
The superintendent and the project manager roles are often intertwined, and it is not uncommon for the same person to fulfil the responsibilities of both roles.
The project manager may oversee a project before the delivery phase, ensuring that the project is delivered on program and within budget. However, the role of the superintendent is to administer the works contract during the delivery phase only, to ensure the contractual obligations are performed on the TAFE's behalf.
The superintendent is typically responsible for:
- confirming the contractor’s compliance with the requirements of the contract
- addressing queries from the contractor in relation to contractual matters or matters of construction
- acting as an agent for the TAFE, and
- acting as an independent assessor of the completed works.
Practical completion occurs when:
- works are complete in accordance with the contract, plans and technical specifications (except for minor defects which do not prevent the completed works from being reasonably used for their stated purpose)
- all required statutory approvals and certificates have been received
- all necessary tests and commissioning of plant, equipment and services have been carried out and passed, and
- essential documents and information have been provided to the superintendent or project equivalent.
Final completion occurs at the conclusion of the defects liability period and involves the final payment release of any remaining security. This effectively ends the contractual agreement between the TAFE and the contractor.
The defects liability period (DLP) is a period after practical completion, during which the contractor (and where relevant, subcontractors) amend any defects arising in their works. The DLP is governed by the contract and is usually 12 months in duration from the date of practical completion.
You should not use the DLP to fix defects known at the time of practical completion. This should be done during the construction works.