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Construction Contract

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    Construction Contract

    1.0 Background:

    The construction industry has the characteristic feature of being an industry which is prone to disputes and conflicts. In the industry there are certain special and unique factors which make the delivery of each project a challenging one. The unique features can be enumerated as below;

    (i)     Each new project will be reacting as if it is a prototype getting attended to for the first time. There will be challenges being posed by the soil conditions of the site and the weather conditions prevailing at the time when the construction work is undertaken. In those occasions there may be issues to be solved even with the design has previously been approved. (HK Institution of Engineers)

    (ii)   The industry requires the execution of the various projects involving a variety of skills and expertise which may not be available with s single organization. This requires gathering of skills in an efficient process management. However the problems of meeting the varied expertise can be countered by appointing able subcontractors. But still this may pose a problem in the Hong Kong context where either the services are rare to get or they will be much expensive.

    (iii) Traditionally the industry is working on large sums of cash requirements but used to trade with a very thin margin. This leaves very little or no scope for any errors. The cash flow is considered as the life line of the industry and any obstruction there would delay the execution of the project considerably.

    (iv) There are obstacles to entry into the market at certain levels resulting in higher prices and in some other areas there is excess capacity which acts as a barrier to the new entrants.

    (v)   In view of the number of stakeholders involved in a project there are bound to be interfaces and conflicts of interest. These conflicts have a tendency to multiply and hence the construction management should be performed with utmost care and diligence.

    The formal and a versatile mechanism that can be used to mitigate the above issues is a ‘construction contract’. The construction contract in fact can take varied forms depending on the nature and size of the project. All these different kinds of forms of contract have a common objective of allocating the risk in respect of the project among the various parties involved in the contract.

    With this background this paper analyses the relative merits and demerits of adopting either

    a) General conditions of contract for Design and Build contract (1999 Edition) or

    b) Building Contract (Agreement & Schedule of Conditions of Building Contract for use in Hong Kong 1986 Edition by RICS; HK Branch)

    in the matter of a large resort development involving a 5-star hotel, luxury SPA center and a small casino in the Chap Lap Kok by Well Man. The paper envisages advising the company

    on the issues covering the performance of the contract, risk sharing principles, dispute resolution, administration of the contract including nomination, variation, delay and the costs and expenses involves, while adopting the building contract. The paper also makes some recommendations which are general in nature.

    2.0 Type of Contract:

    There are two alternative form of construction contracts can be employed for the proposed construction activity. It can be taken up in the traditional form of design-bid-build construction project or a design and build contract. In the design-bid- build contract which is traditionally were being awarded as design-bid-build contract in which the employer enters into separate contracts for designs as well as for construction. The contract for design is entered into with professionals like architects. The architect in turn may employ other professionals like engineers. On completion of the design process and approved by the employer, tenders are invited for the building on the basis of the completed design and the best bidder in terms of price and reputation is awarded the construction contract. (Joseph G. Springer, 2000)

    2.1 Design and Build System of Contract:

    Because of the complexities involved many project owners prefer to award the construction phase of a project to the same firm that produces the design. (Hoovers) The American Institute of Architects (AIA) defines the term as “a process in which the Owner contracts directly with one entity that is to provide both design and construction services.” (Samuel Niece, 2004)

    In a design and build system the employer enters in to a single composite contract with a design builder who has specialized in both designing and building. The design builder may also employ other professionals like architects and engineers; but such professionals will be responsible for the contractor and not to the employer directly. The design and build contracts carry the advantage of one point responsibility for the progress of the construction and thus avoids possible conflicts between the design and construction work. In the traditional form of construction contract whenever there is a problem the architect will find fault with the contractor for a faulty work and the contractor will complain about faulty designs.

    The additional advantage of the design and build contract the employer will be able to complete the project within the budgeted construction cost. It is also quite possible that the builder will start working on the construction without waiting for the approval of the design as making the final design is within the hands of the builder. This increases the flexibility of the construction work and there are possibilities that the construction can be completed faster than the traditional construction projects. In the design and build contracts the contractors would be able to offer better pricing as they are well informed of the designs and offer different options of designs based on the financial budget of the employer. The contractor is in a position to undertake the value engineering studies with respect to the contract from the start of the contract and can analyse it for improvements at every stage of the contract. In the design and build system the contractor will be able to work out a better project scheduling and can order for those item which need longer lead times much in advance even before the completion of the design process and thus save valuable time for the construction process. In the design bid build contracts the design process has necessarily to be completed before the bids can be invited and this can consume longer time.

    2.2 Precautions to be taken while entering in to a Design and Build Contract:

    There are certain demerits associated with the Design and Build system of contract. In a design and build contract the employer cannot place a complete reliance on the architect to act in his interest, as he is the employee or associate of the contractor. Under the old system of construction contracts the architect will on behalf of the employer inspect the site, make a review of the requests for payments and changes in the contracts, and will also be helpful in resolving any dispute between the employer and the contractor. But this is not possible in a design and build contract and hence the employer may have to appoint another architect to discharge these functions which not only increases the costs but also to some extent take away the advantages of the system.

    Another area that needs careful attention is the contract documentation. “It is hard to use legal concepts which have grown out of the traditional design-bid-build history to predict how disputes arising within the design-build framework will come out.” (Mark L.Fleder)

    Since the design-bid-build contracts are there for many years the courts are familiar with interpreting the terms and conditions included in a regular construction contract relating to the performance and insurance issues in general. Sine the design and build contracts are relatively new the courts and insurance companies are now only catching up with the issues involved in the design and build contracts. Hence it becomes crucially important that the contacts pertaining to the award of design and build contracts are drafted with utmost care.

    2.3 Decision on the System of Contract and the Form of Contract:

    With the design-build method the employer gets a clear advantage of savings in administration costs as the design of the project and its construction are incorporated in a single contract. (Issue Brief) Based on the above discussion it may be observed that the advantages of the design and build contract system outweighs the inconveniences and hence for the proposed construction project for the resort it is advisable to adopt the system of design and build contract and the necessary tenders may be advertised for competitive bidding by major design and build contractors.

    As regards the form of contract there two alternative forms of contracts available for consideration; one is the ‘General conditions of contract for Design and Build contract (1999 Edition)’ (shortly called ‘GCC’ for the purpose of this paper) and the other is the ‘Building Contract (Agreement & Schedule of Conditions of Building Contract for use in Hong Kong 1986 Edition by RICS; HK Branch)’ (Shortly called as ’Building Contract’ for the purpose of this paper)

    Out of the two alternatives available the GCC contains exhaustive provisions relating to various aspects it generally relates to the large Design and Build contracts being awarded by the government. Being a form representing to be used in connection with the government contracts it can be expected to have dealt with the all the aspects of the design and build contracts in detail.

    The other alternative is also one of the building contracts designed by a renowned international organization ‘Royal Institution of Chartered Surveyors’ – Hong Kong Branch to be used as a basic template in drafting construction contracts under different systems. In designing the contract for the proposed project the provisions of both the standards will be analysed to take the best one and incorporate into the final contract for the design and build contract for the construction of the resort.

    3.0 Performance of the Contract:

    Since the contractor will be made responsible for both the design as well as construction of the project the contract will have only two parties the Well Man ( hereafter will be denoted by the term ‘the company’ and the successful bidder ( hereafter will be denoted by the term ‘the contractor’.

    As regards the performance of the contract the GCC puts forth the condition that the

    The Contractor is allowed to transfer or assign any part of the contract to another sub contractor only with the express and written approval of the employer. The employer can specify the conditions under which such transfer or assignment can be made. (GCC)

    This is one of the important provisions which restrict the transferability of the entire contract to another sub-contractor. This is important from the point of view of the quality and timely completion of the contracts. However GCC do not restrict the contractor in subcontracting the other works involved in the project. However it has made it necessary that any such subcontracting is to be done with the express knowledge of the employer.

    Another important feature is that GCC makes it mandatory for the contractor to appoint the architect within 14 days from the date of the acceptance of the contract. This can be viewed as the condition that helps to speed up the process of completion of the project on time. GCC also provides for a stringent condition that the employer may terminate the contract on the failure of the contractor to appoint the architect within the stipulated time.

    GCC further provides that:

    “The sub-contracting of the execution of any part of the construction element of the Works or the design element of the Works or any part thereof shall not relieve the Contractor from any liability or obligation under the Contract” (GCC)

    This clause specifically removes any ambiguity in the role of the contractor with regard to the design aspects of the project, as he will be made completely responsible for the design irrespective of the fact that he has subcontracted the design work to other professionals. Similarly the contractor is under an obligation to furnish the full particulars of all the sub-contractors he proposes to appoint for various works in connection with the project. GCC also provides for the inclusion of conditions relating to the appointment of an independent architect by the contractor which inter alia specifies that the independent architect shall not use or divulge any information provided by the employer except for the purposes of carrying out his obligations under the terms of appointment.

    The ‘Building Contract’ on the other hand does not contain such exhaustive provisions relating to the appointment of the architect etc. as the contract is mainly intended to be used in the traditional forms of design –bid – build contract, where the appointment of the architect becomes the responsibility of the employer himself. In this case the building contract provides exhaustive provisions concerning the instructions of the architect to the contractor and the obligations of the contractor in connection with such instructions.

    Nevertheless the building contract contains provisions which prohibit the main contractor from assigning the contract and also sub-contracting the works to other sub-contractors except with the written consent of the employer. It also specifies that the main contractor will not be absolved of his responsibility on the contract by the act of subcontracting some works under the contract and the main contractor is under an obligation to furnish to the employer the details of all sub contractors appointed by him.

    3.1 General Obligations:

    In respect of the general obligations of the contractor, clause 10 of the GCC provides:

    It becomes the responsible of the Contractor to make available all the materials, labour and equipment and supervision required for the execution of all the works connected with the design and construction of the project. Such provision may be of a temporary or permanent nature depending on the nature of the contract undertaken by the contractor. (GCC)

    This provision more or less fixes the complete responsibility for the execution of the contract, by providing an exhaustive list of obligations expected of the contractor in connection with the execution of the project. GCC includes other general obligations like:

    ·         Executing an Articles of Agreement with the employer

    ·         Provision of a bank guarantee for a mutually agreed sum for ensuring the performance under the contract

    ·         Carrying out within the specified period of an inspection of the site, its surroundings and the roads and other means of communication with the site

    ·         Carrying out a test for the inspection of the sub-surface condition of the site within a specified period and make a report there on

    If on the basis of an examination of the sub-surface conditions there is any necessity to alter the contract proposal in terms of the design, time of completion and the value of the contract, then the contractor should advise the employer about the proposed changes that may have to be incorporated in the contract. The notice of such variation and the proposal for changes should be made within the time stipulated in the contract as otherwise

    Once the tender for the contract is submitted by the contractor it is assumed that he has examined and inspected the Site and its surroundings. It is also assumed that on such examination has satisfied himself about the suitability of the soil and has taken into account the form and nature of the site. It is further assumed that the contractor has obtained all the necessary information about the nature of work, the materials required for completing the work, available means of accessing the site and all other information as to the risk, contingencies and circumstances that have a bearing on the pricing of the contract and submission of the tender (GCC)

    No claim shall be allowed to the contractor subsequently during the continuance of the contract works on any of the above grounds.

    ·         The contractor shall within a specified time of the acceptance of the contract furnish to the employer a ‘programme’ showing the sequence, method and timing including allowances for the execution of special works and work by other utility undertakings for the provision of water, electricity and other utilities.

    ·         The sub-contractors employ only persons possessing required technical skill including designers for carrying out the jobs entrusted to them and also such skilled, semi-skilled and unskilled workers as may be necessary.

    ·         It is the responsibility of the Contractor to arrange for the Works, in relation to the information contained in the drawings and the Specification related to the contract or on the basis of the information provided by the employer. He is also made responsible for the correctness of the position, level, dimensions, and alignment of all parts of the Works. In addition the contractor should provide for the necessary instruments, appliances and labour in connection with the contract awarded. (GCC)

    ·         During the continuance of the contract works the contractor shall be responsible for the stability and safety of all operations of the site as well as for the safety of all the persons in the site and it is also the responsibility of the contractor to keep the site out of danger.

    ·         The contractor is under the obligation to select the plant and materials required by the design in case he is relied upon the employer to do so and it is his responsibility to ensure that such plant and materials are fitting to the purposes intended by the contract.

    ·         The contractor is obligated to abide by the provisions of any enactment, regulations, bye-laws of any local authority and other rules and regulations of public bodies and statutory authorities.

    Another important provision which fixes the absolute responsibility of the contractor goes like as follows specified in clause 23 (3).

    “No examination or lack of examination of whatsoever nature by the Employer, its agents or employees of the Contractor’s drawings, documents, calculations or details relating to the execution of the Works or otherwise nor any certification, comment, rejection or approval expressed by such persons in regard thereto, either with or without modification, shall in any respect relieve or absolve the Contractor from any obligations or liability under or in connection with the Contract.” (GCC)

    This makes the contractor bound to his obligations under the contract.

    3.2 Differences between GCC and Standard Form of Building Contract

    There are some differences in the provisions of General conditions of contract for Design and Build contract, and the Building Contract (Agreement & Schedule of Conditions of Building Contract for use in Hong Kong 1986 Edition by RICS; HK Branch) in the area of performance of the contracts which are analysed below:

    HK General Conditions of Contract (GCC)
    Special Form of Building Contract

    (SFBC – RICS)
    Possession of Site/Date of Completion:
    The contractor shall be given possession of the site from time to time depending on the order in which the relevant portion of the site in the order in which the works have to be executed. Then the contractor shall be given the notice of the date of commencement by the employer under clause 47 to enable the contractor to commence in accordance with the programme referred to in clause 16.

    However under clause 48(2) where the contractor has incurred additional expenditure by reason of the progress of Works or any part of the site failure of the employer to give any possession, then the surveyor shall ascertain the cost incurred and shall certify in accordance with clause 79.
    Possession of Site/Date of Completion:
    The date of possession shall be the date specified in the appendix to the contract and it is obligatory for the contractor to complete the work with diligence on or before the date of completion unless there is a provision for the extension of time in clause 23 and 23(1)(c) of the conditions.

    From the clause 21 of SFBC it is not clear whether the contractor can apply to claim as the site could be possessed based on the specified in the appendix

    4.0 Risk Sharing under the Contract:

    According to Grover Report there are different mechanisms by which the risk can be shared by the employer and the contractor. Some of these mechanisms include the percentage sharing of the cost overruns of the project, award of additional time rather than money, making a limitation on the types of recoverable costs, setting very low liquidated damage rates, and using monetary caps on different liabilities under the contract. (Grove Report)

    Clause 84 (i) of the GCC provides for the occasions of ‘special risks’ under which the execution of the contract may be in jeopardy. These circumstances are:

    If during the currency of the Contract, there shall be:

    “(a) an outbreak of war (whether war be declared or not) in any part of the world which, whether financially or otherwise materially affects the execution of the Works, or

    (b) an invasion of Hong Kong, or

    (c) civil war, rebellion, revolution or military or usurped power in Hong Kong, or

    (d ) riot, commotion or disorder in Hong Kong otherwise than amongst the employees of the Contractor, any sub-contractor or Specialist Contractor currently or formerly engaged on the Works or Specialist Works, or

    (e) act of foreign terrorists in Hong Kong”

    Under the above circumstances unless the contract is terminated on the volition of the employer, the contractor shall take all the efforts to complete the contract. It may be necessary for the contractor to arrange for insurance in the joint name of the contractor and the employer against the loss to the contract property by any of the above mentioned risks.

    4.1 Insurance against Injury to Persons and Property:

    GCC does not contain any provisions relating to obligations of the contractor in respect of insurance to be covered against any of the abovementioned special risks or insurance against injury to persons or property. But it is vitally important that the contractor takes adequate cover against injury to persons or property during the continuance of the contract. It is also necessary that a provision is made in the contract in this respect as provided by the building contract. In the matter of insurance the building contract provides that:

    The main contractor shall maintain and also insist on the sub contractor to maintain the insurance as may be necessary to cover the liability of the main contractor or the sub contractor in respect of the personal injuries or deaths that may arise as a result of carrying out the contract work.

    It is also provided for by the building contract that the main contractor shall take an insurance cover in the joint names of the employer and the main contractor himself to protect against loss or damage that may be caused to the contract properties by “fire, lighting, explosion, storm, typhoon, flood, bursting or overflowing of water tanks, apparatus or pipes, earthquake, aircraft and other aerial devices or articles dropped there from, riot and civil commotion”. The insurance cover may be taken for the full value plus a reasonable percentage of the contract properties to cover professional fees, the value of work executed and materials delivered to the site belonging to the employer. But such insurance may not include the value of materials, tools, and implements belonging to the contractor which may be covered by a separate insurance policy cover to be maintained by the main contractor himself. The building contract contains detailed provisions relating to the maintenance of insurance policies and the items to be covered thereby to be maintained by the main contractor and the sub contractors.

    4.2 Extension of Time:

    The building contract provides for the extension of time when there is a delay in the progress of the work due to some reason or other. In such cases the contractor has to give a written notice of the cause of delay to the architect since the building contract deals with cases of design-bid-contract where the architect is appointed by the employer. But in our case the notice in writing for the extension of time is to be given to the employer explaining the circumstances for such delay. The delay may occur due to any of the following conditions:

    (i) By force majeure

    (ii) By reasons of changed weather conditions

    (iii) By reason of the loss or damage caused by natural calamities

    (iv) By reason of civil commotion, strike or lockout of workers

    (v) By delay on the part of the nominated subcontractors in completing their work

    (vi) By reason of inspection and rejection of any materials being used in the contract or the work already carried out which needs rework

    4.3 Dispute Resolution:

    The contract should contain unambiguous clauses for the determination of the liabilities on any disputes arising between the parties to the contract. GCC has given a clear definition of the term dispute under the construction contract. According to GCC, the term ‘Dispute’ denotes any dispute or difference of any kind whatsoever that arises between the Employer and the Contractor. But it is necessary that the dispute should arise under the terms of the contract or out of or in connection with the Contract or the execution of the Works related to the contract. The dispute may arise concerning any decision, opinion, instruction, notice, order, direction, withholding of permission or consent, determination, certificate, statement of objection, assessment, or valuation of the Engineer. The dispute may arise at any time during the execution of the Works relating to the contract, or at any time thereafter. Such dispute may also arise at any time before or after the termination, abandonment, or breach of the Contract or the termination of the Contractor’s employment under the Contract. The dispute shall be deemed to have arisen when the employer or the contractor gives a notice in writing stating that the existence and nature of the dispute. The resolution of the dispute shall have to be attended by either party within a specified period of time to determine the extent of loss caused by the dispute and the manner in which the dispute can be settled.

    Unless the contract is terminated by the employer due to the seriousness of the dispute, the contractor shall continue to work on the contract till such time a decision is taken on the dispute as to the continuance or otherwise of the contract.

    It the parties are unable to come to any resolution on the dispute on their own accord then the dispute may be referred to mediation or arbitration as the case may be depending on the seriousness of the dispute and the mutual intentions of the parties. If the employer or the contractor is dissatisfied with the resolution of the dispute by the employer or the contractor as the case may be then either party is entitled to make a request to the other party to refer the issue to mediation in accordance with and subject to The Government of the Hong Kong Special Administrative Region Construction Mediation Rules or any modification thereof being in force at the date of such request.

    Further if the dispute could not be resolved by such mediation or either the employer or the contractor does not wish the matter to be referred to mediation, then either the employer or the contractor may require that the dispute shall be referred to arbitration in accordance with and subject to the provisions of the Arbitration Ordinance or any statutory modifications thereof for the time being in force. Any reference to mediation or arbitration shall be made within a time frame to be stipulated in the contract in this connection.

    It must be mentioned in the contract that

    ‘The Hong Kong International Arbitration Centre Domestic Arbitration Rules shall apply to any arbitration instituted under this contract unless the parties agree to the contrary and the reference to arbitration under the contract shall be a domestic arbitration for the purposes of Part II of the Arbitration Ordinance.’

    4.4 Differences between GCC and Standard Form of Building Contract

    The differences in the provisions of General conditions of contract for Design and Build contract, and the Building Contract (Agreement & Schedule of Conditions of Building Contract for use in Hong Kong 1986 Edition by RICS; HK Branch) in the area of risk sharing are analysed below:

    HK General Conditions of Contract (GCC)
    Special Form of Building Contract

    (SFBC – RICS)
    Insurance of the Works
    Clause 21 specifies that the contractor shall take the full responsibility for the care of works which includes materials and things whatsoever on the site which is delivered or placed on the site until 28 days after the completion of the works certified by the architect. If there is any outstanding works then the contractor shall undertake to bear the risk in respect of such works including the materials and things.

    The contractor shall arrange for the insurance of the site including the equipments and materials in the site either in the name of the employer or in the joint names of the employer and the contractor.
    Insurance of the Works
    Clause 20 deals with the insurance of the works. This clause is applicable in respect of the erection of a new building under sub-clause (A) or in respect of an extension of building under sub-clause (B). If it is the case of an erection of a new building then it is possible to strike out clause (B) and retain clause (A) only. The responsibility for keeping the works including the equipments, materials, and goods shall be insured for the total cost of such goods and equipments with an addition of 4 percent to cover the professional fees until 14 days after the completion of the works. It may be noted that the period of insurance is limited to 14 days as against the 28 days prescribed under the GCC
    Settlement of Disputes
    Under clause 86 of the GCC, if there is any dissatisfaction on the part of the employer or contractor about the decision of the architect then either the employer or the contractor may request that the matter be referred to mediation. However if the matter cannot be resolved through mediation or the parties do not wish the matter to be referred to mediation then the matter shall be referred to arbitration.

    The settlement of disputes arising out of building contracts through methods which does not involve litigation are common as they would yield quicker and cheaper results than the legal route, Arbitration is the usual process by which the building contract disputes are settled. But the GCC provides for a mediation process as an alternative to the arbitration in settling disputes.
    Settlement of Disputes
    Clause 35 of the SFBC deals with the settlement of the disputes. This clause provides the settlement of any disputes or differences may be referred to arbitration and the final decision of the arbitration will be agreed to between the parties to the contract.

    5.0 Contract Administration:

    The administration of a construction contract includes the certificates and payment, variations in the terms of the contract, delays, and any claims arising under the contract. With respect to the certificates and payments the contractor has the option to submit a statement for payment after the completion of each milestone as mentioned in the Appendix to the contract. This statement for claiming the milestone payment shall include:

    a.       The cumulative value of the contract completed at the end of each milestone and

    b.      The amount of valuation of variation with regard to the expenditure of provisional and contingency sums included in the employer’s requirements and

    c.       “any further sums which the Contractor considers to be due to him under the Contract”

    Alternatively instead of mile stone payment statements at the end of completion of the milestone activity the contractor may issue to the employer interim certificates at the end of each period as may be mentioned in the appendix to the contract. The interim statement should show:

    “(a) the estimated contract value of the work done in accordance with the Contract up to the end of such period, with sums payable in respect of instructions by the Supervising

    Officer in regard to the expenditure of Provisional and Contingency Sums included in the Employer’s Requirements and adjustments for Variations listed separately;

    (b) a list of any goods or materials delivered to the Site for but not yet incorporated in the Permanent Works and their value

    (c) any further sums which the Contractor considers to be due to him under the Contract.” (GCC)

    5.1 Variations, Valuations, and Claims:

    On submitting and acceptance of the tender and on subsequent signing of the contract the contractor shall be deemed to have calculated and specified in the contract price all costs, expenses, and profit that is required for the proper completion of the project.

    The contractor has the right to make a proposal for variation in the terms of the contract in respect of the following provided he has sufficient details and justifications for such variations proposed by him. The variation may be as to:

    (i)     The reduction of time for construction of the building

    (ii)   The reduction in the future maintenance cost

    (iii)  Improvement in the quality of the design or the construction

    (iv) Any reduction in the contract sum that can be offered by the contract for any reason

    If the contractor wants to claim a higher rate or price than that agreed upon on the contract earlier then he has to give a notice in writing of his intention to do so within a specified period of completion of that part of the work in respect of which he demands such variation. It is also necessary for the contractor to provide the justification for such claim and he should also mention under which clause of the contract he is entitled to such higher rate or price.

    Any contingency sum included in the contract shall be used by the contractor only with the written approval of the employer and such sums used shall be deducted from the contract sum.

    5.2 Differences between GCC and Standard Form of Building Contract – On Administration of the Contract:

    Though the General conditions of contract for Design and Build contract, and the Building Contract (Agreement & Schedule of Conditions of Building Contract for use in Hong Kong 1986 Edition by RICS; HK Branch) are similar in nature in protecting the interests of both the employer and the contractor they differ in some respects which are analysed below:

    HK General Conditions of Contract (GCC)
    Special Form of Building Contract

    (SFBC – RICS)
    In the matter of valuation of the contract clause 60 of the GCC contains the detailed conditions relating to the additions, eliminations, replacements, alterations, changes in the quality, form, character, kind, position, dimension, level or line; The conditions are clustered in one clause which leads to lesser clarity on the issues to be addressed.
    The SFBC – RICS provides the conditions relating to the valuation under different sub-clauses of clause 11; for instance clause 11 deals with the alteration or modification, addition or omission or substitution of works and removal of any materials or goods used for the construction work is deemed as another method of variation.
    Valuation of Variation
    Under clause 61 the authority is given to the surveyor to determine the sum to be added or deducted. The surveyor may decide to make such deduction:

    (i)                 At the rate specified in the contract

    (ii)               Same as or similar in character of work

    will be valued at the rate specified in the contract

    (iii)                   (iii) In the case of works which are not same or similar in character the valuation shall be done at the rate mutually agreed between the surveyor and the contractor

    (iv)             In case if there is no possibility to reach an agreement the surveyor will fix a reasonable notice and advise the contractor of his decision.

    (v)                      Clause 62 further provides that in the case of variation in the contract the architect shall issue a written order to the effect of variations on a daily basis. Then it becomes the duty of the contractor to provide the relevant quotation of materials that is required to be used in the variation of works. The contractor shall also submit the receipts or vouchers in respect of the payments made by him for the materials to be used in the variation works. There should be a monthly report submitted on the variation made

    Valuation of Variation
    Under clause 11 (4) (a) in the case of work of similar character and executed in similar conditions the valuation will be determined on the basis of the rates included in the Bill of Quantities.

    Under clause 11 (4) (b) the works which are not similar in character or executed under similar conditions will be valued applying the pro-rata rates mentioned in the Bill of Quantities

    Clause 11 (4) (c) deals with works, that cannot be measured properly or otherwise valued. The clause advises the use of day works with written evidence of time spent and materials used to carry out variation. There should be a proper record of the variation on the day works sheet duly signed by the COW.

    The variation is valued on the basis of

    Day Work Rates + (Material Cost + Cost of packing and carriage + Cost of Delivery)  X 1.15 (15 percent is added up towards the profit and overhead)

    Under clause 11(4) (d) if the omission of work is required by the architect varies significantly the conditions of carrying out the remaining the balance of works then the said works shall be valued using any of the above mentioned methods. In case if it is required by the architect the contractor shall submit a detailed estimation on the total value of the variation within 14 days.
    Liability on Practical Completion and Defects
    Clause 53 deals with this aspect of the building contract. The request for the issue of a certificate of completion in respect of the Works when the Works have been competed substantially and satisfactorily passed any tests that may be prescribed by the contract may be issued by the contractor in the form of a notice in writing. The notice shall be accompanied by an undertaking to complete any outstanding work during the Maintenance period.

    The architect is authorized to issued the Certificate of Practical Completion of Works if he is satisfied with the works that they are completed practically and passed any final test and receipt of the certificate such as F.S and

    O P from Final Survey Department and Billing Department respectively

    The architect shall have the power to demand the contractor to carry out any outstanding work as soon as practicable after he issues the certificate of practical completion. The architect shall also give reasonable directions in this respect; but such instruction must be given before the expiry of the maintenance period. In addition the contractor is under an obligation to provide service and maintain, site offices, latrines and the like and shall be continued till such time the outstanding works are completed.
    Liability on Practical Completion and Defects
    Clause 15 of the SFBC – RICS gives the freedom to the architect to issue the certificate of completion forthwith on his own when the works are practically completed. Practical completion shall be deemed to have taken place on the day named in such certificate and this date shall be the date of practical completion for all practical purposes.
    Damages for Non-Completion/ Liquidated Damages for Delay
    Under clause 52 of the GCC the damages for non-completion by way of liquidated damages can be measured subject to the sectional completion date, EOT, and other …using the rate per day. It provides the employer the freedom to deduct the payment of the liquidated damages first and then reimburse back to contractor if subsequently granted an extension of time.

    Hence under GCC the employer will settle the contractor lesser than the claimed amount if there is a delay in the completion of the work. This situation is different from that of the SFBC. The provisions relating to deduction of liquidated damages are contained under clause 52 of the GCC and clause 22 of SFBC – RICS. Under the later contract the employer is entitled to deduct such sum from any monies due or become due the contractor under the contract. However the provisions under clause 83(1) and (2) of GCC where there exists a liability of the contractor for the delay in completion of the work then the employer is entitled to deduct such sums of damages from monies due to hum under the contract from any sum including the retention money and the employer shall also have the right to recover any sum unrecoverable under this contract from the monies due to the contractor under any other contract between him and the contractor.
    Damages for Non-Completion/ Liquidated Damages for Delay
    Under clause 22 of SFBC the liquidated damages for non-completion shall be calculated based on the direct or indirect losses caused by the employer owing to the delay caused by the contractor. Under this clause for delay in the completion of the contract, the employer is entitled to deduct such sum from any monies due or become due the contractor under the contract.
    Extension of Time
    Clause 23 of the SFBC and the clause 50 of the GCC relating to the extension of time are very similar in nature. However there exist a difference in the provision relating to ‘inclement weather’ under sub clause 50 (1) (b) of the GCC and sub clause 23 (b) of the SFBC.

    Under GCC the clause reads’ inclement weather and/or its consequence adversely affected the progress of works.
    Extension of Time
    For the purpose of clause 23 (b) the ‘inclement weather’ is defined as a rainfall in excess of 20mm in twenty four hour period as recorded by the Hong Kong observatory.
    Loss and Expenses caused by Disturbance of Regular Progress of the Works
    Clause 63 (a) to (d) of the GCC and Clause 24 (1) (a) to (d) dealing with the losses and expenses caused by disturbance of regular progress of the works are similar in nature. However there is some difference in the wordings of both the clauses. Clause 63 (a) to (d) entitles the contractor to recover the losses and expenses incurred by him due to loss and expenses caused by the disturbance of the regular process of work from the employer. The wording in this clause under GCC includes the losses incurred and also ‘likely to be incurred’ by the contractor. Clause 63 (e) includes the losses and expenses incurred by the contractor on account of delay in supply of materials, plant and equipment by the employer for claiming by the contractor.

    Loss and Expenses caused by Disturbance of Regular Progress of the Works
    Under clause 24 (1) (e) allows the contractor to claim the reimbursement of losses and expenses incurred by reason of the delay in the works caused by the instructions issued by the architect towards the postponement of any work to be executed under the contract. However unlike the GCC clause 24 (1) includes only the losses and expenses already incurred by the contractor and such expenses and losses likely to be incurred are not included.
    Termination of the Contract
    The contract is terminable by the employer under clause 81. In the presence of sufficient reasoning for the termination, the employer may give a notice in writing to the contractor and terminate the contract.

    Similarly clause 88 of the GCC gives the right to the contractor to terminate the contract in the event of default by the employer. On such incidence the contractor shall be entitled to remove his property from the contract site with all reasonable dispatch and also the contractor is entitled to any other right or remedy to which he is legally entitled under the contract.
    H. Termination of the Contract

    Clauses 25 and 26 of the SFBC – RICS deal with the termination of contracts. There can be the termination by the employer as well as by the contractor if the circumstances so warrant. The difference lies in the forms of communication of the termination and provisions under both the contract forms are similar.

    5.3 Differences between GCC and Standard Form of Building Contract – On Certificates and Payment:

    There are certain material variations observed between the GCC and the SFBC – RICS with respect to the clauses relating to the certificates and payment under the contract. These differences are tabulated below:

    HK General Conditions of Contract (GCC)
    Special Form of Building Contract

    (SFBC – RICS)
    Additional Payment
    With regard to the time frame for submitting the notice of claim for additional payment clause 24 of the GCC prescribes no definite time frame and the contractor can apply within a reasonable time frame if it has become apparent that the progress has been delayed.

    Additional Payment
    Clause 28 deals with the situation of claim for additional payment. Clause 28 (1) provides that the contractors intends to make a claim for any additional payment under the contract the contractor shall give a notice in writing to the Architect of his intention to make the claim (a) within 28 days of it becoming apparent that the contractor that such an event entitling the contractor has occurred; (b) within 7 days after receipt of claim from NSC. Clause 28(3) If the conditions precedent to the contractor’s entitlement to additional payment is not fulfilled by the contractor then the claim shall be deemed to have been waived by the contractor.
    Interim Certificate
    Clause 30 of the GCC deals with the issuance of the interim certificate and the time frame for quantity surveyor to submit valuation to the architect. However this clause does not mention any time frame for the issuance of the interim certificate.
    B. Interim Certificate

    Clause 32.1 (5) of SFBC provides a time frame of 7 days before the issue of interim certificate
    Certificate of Practical Completion
    Clause 15 just mentions the wordings ‘Certificate of Practical Completion. There is also not mention about the requirement of the contractor about any inspection or testing for getting the certificate of practical completion.
    C. Certificate of Practical Completion

    Under clause 17 (1), the term is changed to ‘substantial completion’. The term is well defined that the state of completion may not be an absolute completion or entirely free from defects. The architect shall issue the substantial completion certificate when he is satisfied that the works had been substantially completed and have passed the inspection and tests.
    Late Payment
    Clause 30 does not contain any provision relating to the interest payment if the payment is delayed by the employer.
    Late Payment
    Under clause 32 (13), the contractor is entitled to payment of interest for 7 days after the latest date on which should be paid.
    Rectification of Defects
    In case the contractor does not rectify the defects within a reasonable time the employer may employ others to complete the rectification.

    Similarly the architect has a right to instruct the contractor not to rectify the defects.

    The GCC does not contain any express provision in these respects.
    Rectification of Defects
    Under clause 17.3 (4) if the contractor does not comply with architect’s instruction to rectify the defects as listed clauses 4.3 (3) and 4.3 (4) shall apply with respect to the cost recovery from the contractor. Under clause 17.3 (5) the architect may instruct the contractor not to rectify some or all of the defects with a reasonable deduction in the contract sum
    Certificate o Making Good Defects
    Under clause 15 this is called a ‘Certificate of Making Good Defects

    Certificate o Making Good Defects
    Under clause17.4 it is called a ‘Defects Rectification Certificate’
    Final Certificate
    Clause 30 (6) defines the final certificate
    G. Final Certificate

    Clause 32.8 deals with the issue of final certificate

    And the clause clearly defines the effect and proceedings

    6.0 General Recommendations:

    The construction contract being of a complex nature, it requires a careful approach for the drafting so that all the aspects of the contract are considered and provided for in the contract. The terms of the contract are drafted in such a way that there is a minimum of or no ambiguity in the roles and responsibilities of both the employer and the contractor. The following are some of the recommendations that may be considered to make an effective system of contracting out for the proposed project of the resort development.

    (1) The guidelines for the follow up of the progress of any design and build contract is of vital importance. It would always be advisable to use the performance criteria to assess the progress of the contract instead of the prescribed specifications in the contract. This would greatly enhance the efficiency of the design and build process of contracting. The contract document may contain suitable provisions to include the flexibility in the design criteria for use of performance criteria which will encourage creativity on the part of the contractor.

    (2) It is important that the contractor is apprised of the project goals which the company want to achieve as a result of the completion of the project. This would enhance the creativity of the contractor both in terms of the design and the construction. Perhaps the contract may include some clauses in this direction as a preamble so that the contractor clearly understands the corporate goals in connection with the proposed resort project.

    (3) Another important step the company has to take is to locate and employ an efficient project team to coordinate with the contractor. This would greatly facilitate the work of the contractor and in turn will result in the speedy and efficient completion of the project.

    (4) There should be regular meetings organized and open communication channels are to be maintained so that small issues are resolved then and there. Leaving the issues unresolved for longer duration may lead to bigger issues to crop up at a later stage. The criticality of various issues involved and raised by the contractor should be thoroughly analysed to find solutions to mitigate those issues at the earliest available opportunity. The contract document may contain clauses specifying the periodicity of such project meetings and a list of broad issues that may form part of the agenda of such joint meetings between the contractor and the project team. The contract may also provide for making and circulating minutes of the joint meetings.

    (5) There should be an effective working relationship established between the project team and the contractor which will go a long way in improving the quality of the construction as well as improve the efficiency of the contractor. “Communications between the design and construction personnel are facilitated, resulting in minimization of overall project duration and more effective transformation of design concepts into construction reality.”

    (Mark C. Friedlander)

    (6) In order to improve the efficiency of the designs the company may adopt an approach of keeping the preliminary designs at the lowest level possible so that the contractor will be in a position to make amendments to the designs to the best advantage of the project both financially and aesthetically.

    (7) It is very important that the company develops a comprehensive procedure for the review of the project at every stage. By undertaking such reviews the company may be in a position to assess the utility of the designs and ask for suitable modifications in the designs from the contractor wherever it was found that the design adopted did not provide the utility expected of that particular design. Especially in a resort project involving the construction of a 5 – star hotel this aspect is of particular importance as the project must be completed with maximum utility designs during the construction process.

    (8) The creation of a cohesive and explicit bidding documents are at the root of getting a better price and value for money. The bidding documents should contain as much details possible about the expectations of the company in terms of the proposed construction project. The bidding document should be capable of spelling out very clearly the expectations from the prospective contractor both in terms of the designs and the construction of the buildings. This way the company would be in a position to win half of its project objectives even before the contract is awarded. (Federal Highway Administration 2006)

    (9) A clear definition along with detailed explanations for the contract terms and the scope of the contract with respect to the design part and the construction part should be incorporated in the contract deed so that there is no ambiguity in the role and action of the contractor. All terms in respect of certification and payments at every stage clearly spelt out in the contract would carry the morale of the contractor to a great extent.

    (10) One another important step that may be taken is to incorporate the utilities design and construction into the contract documents, making them as a requirement of the design and build contractor. This would ensure that there are no major deviations in the provision of the utilities in the project in terms of designs as well as construction details. This is very important in a hotel and resort project as the ultimate customer satisfaction would depend greatly on the timely provision of adequate utility support.

    (11) Even though it is advisable to use a standardized contract with the usual language for the design build contract which includes the general and project specific requirements, it would increase the efficiency in the completion of the project if certain refinements in the project scope and definitions are attempted. For instance the providing upfront information such as information on soil conditions, other geotechnical details, accessibility and rights of way information and any other baseline information that may be useful in arriving at a realistic contract price by the contractor would not only speed up the process of deciding on the prospective contractor but also may also result in an early start of the project. The benefits out of this approach would more than outweigh the cost of colleting these details and information. (Federal Highway Administration 2006)

    (12) The most important aspect of any construction project is the quality of the construction. The contract should amply provide for an assessment of the quality by clearly spelling out the quality expectations for both the designs and construction. In fact it would be a better option that a quality review and reporting by an accredited international agency on the completed works may ensure the quality of the construction. This would instill a fear in the mind of the contractor about meeting the quality requirements. At the same third party inspection would reduce the chances of dispute between the employer and the contractor in respect of the quality issues. (Federal Highway Administration 2006)


    Building Contract (Agreement & Schedule of Conditions of Building Contract for use in Hong Kong 1986 Edition by RICS; HK Branch)

    Federal Highway Administration (2006) ‘Design – Build Effectiveness Study’


    GCC ‘General conditions of contract for Design and Build contract (1999 Edition)’            <>

    Grove Report ‘The Grove Report: Key Terms of 12 Leading Construction Contracts Are Compared and Evaluated’


    HK Institution of Engineers (2007) ‘New Frontiers – Trends in Risk Allocation and Contract Forms’ Paper presented at “Globalization of Building Construction and Contracting” The 6th Annual Seminar organized by the Building Division of The Hong Kong Institution of Engineers in March 2007


    Hoovers ‘Industry Overview: Commercial Construction Contractors’


    Issue Brief ‘Design – Build Contract’


    Joseph G. Springer (2000) ‘Is a Design-Build Contract Right for You?’


    Mark C. Friedlander ‘A Primer on Industrial Design-Build Construction Contracts’


    Mark L. Fleder ‘Design – Build Construction Contracting’


    Samuel Niece (2004) ‘Design-Build Contracts as an Alternative Method for Public Construction by California Cities’


    US Department of Transportation ‘Michigan: Spanning the Past: The I-94 Rehabilitation Project: Skill Set Recommendations’



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