MANAGEMENT OF CONSTRUCTION PROJECTS
Contract/Agreement Formats - Critical Terms and Conditions
1.0 INTRODUCTION
1.1 Terms and conditions in construction contract/agreement formats
are considered to be legal documents. Thus, it is important that the
conditions be drafted by legal experts to ensure that the terminology is
valid, binding and enforceable in a court of law, if need be. The legal
practitioners are expected to ensure that the terminology and conditions
contained therein protect the interest of the party on whose behalf the
formats are to be designed. The legal practitioners are also expected to
ensure that all aspects relevant to the scope of construction works
comply with laws of the country and the relevant local authority
requirements where the project works is to be located and also of any
relevant industry practices and standards. The scope of these terms and
conditions relevant to works includes aspects in which the legal
practitioners may not have the relevant knowledge and thus it is
essential that they obtain the advice of other professionals, especially
those with technical and financial expertise. The format should contain
all the terms and conditions that are effective and relevant to the
scope of works.
2.0 Client’s Right – Contract Formats [Terms & Conditions]
2.1 It is the right of the Client to prescribe the terms and conditions which are included in the contract/agreement format. In the case of Malaysia, the Government and its Agencies have their own contract formats that are prescribed for Government-funded construction projects with relevant documents covering various aspects that are commonly referred to in JKR 203 series formats. The terms and conditions normally differ for the various types of implementation, such as: pricing of works to be based on Bills of Quantities, Drawings/Specifications and Schedule of Rates, Lump Sum, etc and type of works, such as: Buildings, Infrastructure, etc. It is important that the scope of terms and conditions are relevant and take into account these important aspects. Similarly, there are other formats for private sector usage in Malaysia that are available for common use in the Malaysian construction industry. These formats are designed by the ‘Malaysian Institute of Architects’ [‘PAM’ Format] that is mainly used for Building Works to be implemented using the BOQ and Drawings & Schedule of Rates for purpose of pricing the cost of the works. Similarly, the Malaysian Construction Industry Development Board has also designed several formats to cater to the needs of Building projects and for Infrastructure Works.
2.2 In all countries the Governments and its Agencies have their own
standard construction contract formats that are in compliance with
policy, local laws and relevant to the type of projects and
implementation method of works. Similarly, the private sector may also
have standard contract formats designed by the relevant professional
organizations or any appointed Agency.
2.3 The construction industry players are well versed with the
terminology, terms and conditions contained in these formats. It is
advisable for Clients who wish to use these common-user formats to ensure
that they are modified to make them compatible to their organization
structure, existing policies, procedures, internal controls, scope of
works and any other relevant aspects.
3.0 Contractor’s Right – Contract Formats [Terms & Conditions]
3.1 It is the responsibility of bidding contractors to study the terms
and conditions together with their financial and legal implications prior
to computing their bids. Prospective bidders should also make all
necessary enquiries, clarifications and explanations on the terms and
conditions and other contractual documents PRIOR to finalizing their bid
values and submitting them to the Client as changes are not permitted
after the submission and withdrawal may result in forfeiture of the
prescribed deposits.
4.0 Specialized Terms & Conditions
4.1 There are projects for which the terms and conditions contained in the standard formats may not be suitable for the scope of works to be constructed. Examples of such projects include infrastructure works such as railway tracks, power plants, ‘Oil and Gas’ related works, etc or methodology that may be complex such as ‘Design and Build’, ‘Turnkey’, ‘Build-Operate-Transfer’, etc. Such projects may also be referred to as mega projects that are generally implemented under joint venture agreements with foreign partners who may possess relevant implementation expertise and experience. In these cases it is a standard practices to have professionals with relevant expertise design them. In such cases it is advisable to obtain external relevant expertise to draft the terms and conditions that should be contained in formats for these mega projects. It will thus ensure that local legal requirements are included in the formats to protect the local joint venture partner as the foreign partners will ensure that their interests are covered and legal obligations of his home country are incorporated.
5.0 Types of Terms and Conditions
5.1 There are about sixty conditions in these common-user construction contract formats that may be provided as main conditions or be provided as sub-conditions under the main conditions. This is the practice in Malaysia but other countries may have more or less similar conditions. These conditions can be divided into two main categories, as follows:
[a] Informative/Advisory
[b] Mandatory.
5.2 Examples of ‘Informative’/’Advisory’ conditions include the following:
[a] Definitions and Interpretations
[b] Patent Rights and Royalties
[c] Quality in Construction - Materials and Workmanship [d] Fossils and
Antiquities
[e] Superintending Officer or ‘Architect’ or Representative [f] Notices
[g] Contract Documents
[h] Scope of Works
[i] Bills of Quantities - Pricing
[j] Prime Cost and Provisional Sums
[k] Variation [Change Orders] and Valuations
[l] Payments [Interim/Final]
[m] Measurement Records and Valuation of Works
[n] Fluctuation of Prices
[o] Possession of Site and Completion [Full or Partial] of Works
[p] Penalties for Non-Completion
[q] Defects after Completion and Claims for Unfulfilled Obligations
[r ] Determination of Works by Client or Contractor
[s] Const. Plant, Works, Materials, Goods on Site - Ownership
[t] Works Program and Method Statement
5.3 Examples of ‘Mandatory’ conditions include the following:
[a] Obligations of Employer and Contractor
[b] Compliance with Laws/Regulations: Employment Ordinance, EPF, SOCSO,
Environmental Matters, Safety at Site, Employment of Workmen & Records.
Others
[c] Assignment and Sub-Contracting
[d] Indemnities to Client
[e] Financial Safeguards - Performance Bond
[f] Insurance Policies – Public Liability, Workmen’s Compensation, Works
and Adjoining Properties
[g] Settlement of Disputes – Arbitration/Mediation
[h] Applicable Laws - Stamp Duties/Statutory Fees
6.0 Conclusion
6.1 This introductory article lists the more important selected terms and conditions that have financial and legal implications. Many of these selected terms and conditions contained in the above referred contract formats may have weaknesses and shortcomings that could provide opportunities for mismanagement and susceptible to planning and creation of fraudulent situations. This possibility of financial/legal/fraudulent implications arising from misinterpretations of prescribed terms and conditions has been confirmed during audit of Contraction Projects during the last thirty-seven years of audit service and also through the reading of cases pertaining to the private and public sector as reported in the print media and Internet. The reports issued by the Auditing Authorities such as GAO [USA] and Comptrollers and Auditor Generals of many countries including UK, Australia, New Zealand, India, etc and also the periodical newsletters issued by the Association of Certified Fraud Examiners [ACFE], Institute of Internals Auditors [IIA], American Institute of Certified Public Accountants [AICPA] are a good source of information and knowledge.
Writer’s Note: Explanatory Notes with Financial/Legal Implications pertaining to listed terms and conditions will be provided in coming Monthly Newsletters of AuditNet. The reason for this serialization is to avoid having a very lengthy article. The writer welcomes comments and exchange of view for mutual enhancement of knowledge.
E-mail: gursharan38@gmail.com sharwant38@yahoo.com
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