Construction procurement guide: contract management

General management

Introduction

These general principles apply to the standard form contracts for construction work and to the professional services agreements for construction.

Contract management by an agency (including any project management organisations engaged by an agency) must ensure that:

• the principal's interests are protected and its obligations are met
• the contractual obligations of the service provider are met
• contract milestones are duly discharged
• key deliverables are received
• contract related processes are completed
• any variations, claims, issues, disputes, and any additional funding requirements are managed.

When a project management organisation is appointed, the agency remains responsible for the appropriate administration of each contract. The parties' obligations are largely set out in the contract documents, however, there are those created by law that will not be specified in the documents.

The principal in a construction contract

The principal's primary obligation under a contract is to make payments to the contractor, in accordance with the terms of the contract. Examples of other duties of the principal are:

• effecting insurance, if required by the contract
• responding to payment claims and making payments on time, to avoid the risk, under the Building and Construction Industry Security of Payment Act 1999, of being required to pay the contractor's claims in full
• giving instructions to the contractor as required
• responding to claims or requests for information from the contractor
• bringing or defending proceedings in the event of a dispute, including making decisions on resolution options and risks, and paying any entitlements determined
• taking appropriate action in circumstances such as the contractor's default or insolvency, for example by terminating the contract and pursuing the principal's subsequent rights.

The Principal in a construction contract guide provides guidance to assist agencies and their representatives to identify and name the principal in a contract, understand the principal's obligations and other requirements and to manage the payment claim proceed for construction contracts.

Authorised persons

Under the standard form contracts for construction, the principal and the contractor are required to nominate authorised persons to represent the parties.

The personnel in these positions should have the necessary skills, knowledge and experience for the roles involved, and be capable of developing good working relationships with their counterparts. They must be given the necessary authority (including with others' approvals to suit agency protocols) to fulfil their roles under the contract.

Delegated authorities

The principal should appoint an employee or other person as a delegate, with authority in accordance with the Public Finance and Audit Act 1983, s12, to appoint its representatives and define their authorities. Specific financial delegation from a Minister or agency is required for the commitment and expenditure of public monies. Administrative and contractual delegations are also required.

The appointed representatives (included with some approvals from the delegate or others to suit agency protocols) would then have the authority to, and would, act for the principal under the contract.

The principal must have the necessary systems, administrative procedures, authorities and structure to enable it to plan and implement its contractual obligations. This includes ensuring that payments are made, directions and notices are given, required response times are met in accordance with the conditions of the contract.

Only some of the principal“s obligations may be delegated to a private sector project management organisation.

The Public Public Finance and Audit Regulation 1995 and Public Finance and Audit Act 1983 limits the delegation of authority to commit and incur the expenditure of public monies.

Where the principal does not meet its contractual or other legal obligations, it will be exposed to claims under the contract and other legal actions.

The following schedules of contractual authorities are available to assist agencies:

• GC21 contracts
• Minor Works contracts
• Mini Minor Works contracts
• Consultant agreements.

Principal contractor statutory obligations

Under the Workers Compensation, Pay-roll Tax and Industrial Relations Acts

A principal or agency has responsibilities as a principal contractor under s175B of the Workers Compensation Act 2000 (NSW), section 31G-31J of the Pay-roll Tax Act 1971 (NSW), and section 127 of the Industrial Relations Act 1996 (NSW) on entering into a contract with a service provider.

The Acts hold the agency liable for the payment of a service provider“s workers compensation premiums, payroll tax and employee remuneration liabilities in certain circumstances.

These risks are managed by having each service provider sign a statutory declaration, declaring that these payments have been made, with every payment claim under the contract. These provisions are included in the standard form contracts for construction.

Further information on these matters is also available from the Office of Industrial Relations website at  www.commerce.nsw.gov.au and the Office of State Revenue website at  www.osr.nsw.gov.au.

Under the OHS Act 2000 (NSW)

The contractor becomes the principal contractor as defined in the OHS Regulation 2001 (NSW) unless specifically excluded from that role. Thus, where more than one contractor is operating at a site, one, and only one, must be appointed principal contractor.

For the regulation to be effective, the principal or agency must appoint the contractor in control of construction and work sites as a principal contractor under OHS Regulation 2001 (clause 210), with all the responsibilities of a principal contractor and controller of premises (under clauses 34 to 44 of OHS Regulation 2001) involved. These responsibilities particularly apply:

• when the cost of the construction work exceeds $250,000
• with demolition work and asbestos removal work that requires a licence (regardless of the cost of the work), where licensed work includes demolition, restricted demolition, friable asbestos removal and bonded asbestos work (See clause 317 of OHS Regulation 2001 for more information about licensed work and other definitions, as there are some exemptions with asbestos-related work)
• where high-risk construction work (See clause 209 of OHS Regulation 2001 for a definition, which includes most substantial construction work) is undertaken (regardless of the cost of the work).

The responsibilities of a principal contractor on the work site, under OHS Regulation 2001, all times include:

• ensuring OHS induction training is undertaken (clause 213)
• preparing, maintaining, updating and making available an OHS management plan to deal with its responsibilities (clauses 226 and 229)
• ensuring that each subcontractor provides written safe work method statements before commencing work (clauses 227 and 229)
• directing and monitoring compliance with the safe work method statements and legislation and taking action to comply (clauses 227 and 229)
• keeping a register of, and other records in relation to, all hazardous and other substances on the work site (clauses 228 and 229).

If the agency does not appoint a principal contractor, the owner is taken to be the principal contractor and has the responsibilities described above (clauses 210(4) and 210(6) of OHS Regulation 2001).

Contract records

Contract records

Accurate and orderly records are necessary to ensure effective and efficient contract management. Contract records:

• demonstrate accountability and openness
• record the progress of the project and highlight potential issues
• provide the information required to meet contractual obligations and properly administer and manage the contract
• provide the information for the assessment and resolution of claims, issues and disputes.

The various types of contract records include:

• the bond (or original) copy of the contract documents
• contract program
• project control records, detailing such matters as the date of the letter of award, security held, any defects liability or post-completion period, any liquidated damages and other set delay payments applying, current contract price, payments made, and variations and extensions of time
• dilapidation reports and building inspection reports
• photographs
• minutes of meetings
• correspondence and communications, and related registers including letters, facsimiles, e-mails, document transmittals, requests for information (RFIs) made and the responses
• site logbooks, instructions and memos
• quality, OHS, environmental and other management records
• regulatory authority approvals, permits and licences for the work
• work-as-executed drawings, and operation and maintenance manuals.

Bond documents

The bond is the agreement in writing which evidences the contract and includes documents that determine the parties' rights and obligations. The following documents constitute the bond for each contract:

• the exhibited copy of the tender documents, including drawings and specification
• addenda and supplementary notices, if any
• the original tender
• post-tender correspondence, if any
• the letter of acceptance.

The bond must be stored safely to protect against damage or loss. Particular care should be taken to ensure that the bond is closely safeguarded and not annotated, interfered with or altered in any way.

The bond should be retained for 8 years from the issue of the final payment certificate. Under the Limitation Act 1969 (NSW), legal action may be commenced within 6 years of the date of breach of contract; or from the date when the damage was known or manifest in the case of a tort.

For a breach of the Trade Practice Act 1974 (Cth) an action may be commenced at any time within 3 years after the date of loss or damage.

Copies of the bond should be prepared for use by the person(s) involved in the management of the contract.

Notices

Service of notices

A notice shall be deemed to have been given when it is received by the person to whom it is addressed or is delivered to the address of the person last communicated by the person to the person giving the notice, whichever is the earlier.

When the parties agree, an email or facsimile may be regarded as notice in writing under the provisions of the Electronic Transactions Act 2000 (NSW).

GC21 contracts

Clause 30.1 requires all notices (whether originating from the principal or the contractor) to be sent to the relevant persons and to the correct addresses:

• Notices from the contractor to the principal must always be sent to the principal's authorised person. Notices under clause 73.1 or 73.2 should be copied to the principal's senior executive.
• Notices from the principal to the contractor must be sent to the contractor's authorised person at the address provided.

Clause 30.2 requires that all notices must be in writing, and all instructions by the principal must be in writing or confirmed in writing as soon as practicable, where given orally when urgent action is required.

The names of the relevant persons and their addresses are specified in contract information items 4 to 11:

• office address (for delivery by hand)
• postal address (for delivery by post)
• facsimile number
• email address.

Minor Works contracts

Clause 1.1 requires that all notices and submissions to the principal must go to the principal's representative.

Contract meetings

Site meetings (all contracts)

During the course of a contract the parties must conduct regular site meetings to discuss matters related to the work being carried out to ensure a common understanding of any issues and to facilitate the actions required.

The first meeting should be arranged as soon as possible after the contract has been awarded. Its purpose is to establish a relationship and to discuss the mechanics under which the contract is to be administered.

Site meetings are generally attended by the principal's and contractor's personnel responsible for the administration and management of the contract.

Site meeting minutes

Site meetings minutes must be an accurate record the matters discussed, the issues resolved and the actions agreed by the parties. They must be expeditiously distributed to all parties.

GC21 meetings and workshops

Under GC21 based contracts there is a contractual requirement to hold:

For assistance in conducting these workshops and meetings refer to GC21 meetings and workshops guide.

Contract management responsibilities

Generally

Provisions in the standard form contracts for construction may require the contractor to submit:

• a program
• proof of insurance, and
• unconditional undertakings.

Insurance

The standard form contracts for construction require insurance of the constructed works (with construction covering loss and damage) and public liability insurance (covering death and injury to persons, and loss and damage to the property of third parties) to be taken out (arranged either by the service provider or the principal) and paid for by the service provider.

The insurance must cover both parties and any subcontractors or sub-consultants.

The contract forms also require the service provider to take out the workers compensation insurance required under NSW law, and ensure that all subcontractors and sub-consultants also have such insurance.

With contracts involving professional services involving significant risks, professional indemnity insurance is also required of the service provider and relevant subcontractors and sub-consultants (such as designers) to cover the main liabilities and thereby reducing the related risks (with any losses and damage not otherwise covered) to the principal and agency.

Where the service provider arranges the insurance, the insurance cover provided must be checked to ensure that it complies strictly with the contract requirements. A check is also required that the currency of all insurance is maintained over the time periods required.

Self-employed sole trader service providers without employees engaged in work under a contract must be insured against the results of sickness, accidents, injury and death either by the relevant contractor or consultant under its insurance.

Where the sole trader is a subcontractor or sub-consultant, this is possible or through a separate personal accident or mortality insurance policy.

Undertakings

An undertaking is the term used to describe the form of security required under the contract. It is a promise by a recognised financial institution, such as a bank or insurance company, to pay an amount of money to the principal on demand.

Provisions in the standard form contracts for construction stipulate the amount of security required. The contractor is required to provide the security to the principal in the form of an unconditional undertaking, payable on demand, provided by financial institutions on the contractor's behalf.

Financial institutions listed as being regulated by the Australian Prudential Regulation Authority are acceptable to give the unconditional undertakings required in the contracts.

Subcontracting

Provisions in the standard form contracts for construction require the contractor and consultant to:

• comply with the NSW Government Supplier Code of Conduct
• give the principal an opportunity to object to the appointment of each subcontractor and sub-consultant, and
• not assign a right or benefit under the contract without the principal's written consent.

Any objection to a subcontractor or sub-consultant must only be made on reasonable grounds.

As a general rule, an objection to a subcontractor or sub-consultant would only be raised where there is verified information available that shows the proposed subcontractor or sub-consultant does not have the capacity, capability or past performance required to undertake the work required.

On receipt of a notification from the service provider of a proposed sub-consultant, the principal must respond within the time required, or a reasonable time if no time is specified.

Under the standard contract form conditions, the absence of or raising of an objection by the principal to any subcontractor or sub-consultant does not relieve the service provider from any liability or obligation. The service provider remains responsible for all subcontractors' actions and omissions, and indemnifies the principal against loss or damage arising out of these actions and omissions.

Managing payment claims

The principal's obligations to make progress payments are governed by the terms of the contract between the principal and the contractor or service provider and by the Building and Construction Industry Security of Payment Act 1999.

The Act provides a statutory right to progress payments for a person (or company) that has undertaken to carry out construction work or to supply related goods and services under a construction contract.

Managing variations

The general conditions in each standard form of contract define what constitutes a variation in that particular standard form. In general terms, a variation is a change to the work required under the contract. For a construction contract, a variation is usually defined as a change to the works.

Each standard form contract also includes other provisions relating to variations and their management, which should be read in conjunction with these general principles.

If the principal's representative instructs or directs a variation, the contractor is obliged to carry out the instruction. The contractor is generally not entitled to change the works without agreement confirmed in writing by the principal's representative. A variation should generally be consistent with, or similar in nature to, the work under the contract.

A variation becomes part of the contract and all the contract conditions apply to the changed work, including provisions for extensions of time and site conditions, if applicable.

A variation instruction will often lead to claims from the contractor for additional payment and for an extension to the period for completion. The additional payment may include additional costs for delay, acceleration or disruption associated with the variation. Variations are one of the main reasons for cost and time overruns in construction contracts.

It is therefore important to manage variations effectively in order to reduce the risk of exceeding the budget and completing the works late.

Ideally, to meet the project budget and program, no variations will be directed during the course of the contract. The scope of the work under the contract will have been approved by the client agency before the contract is awarded and should not be changed without good reason. Note that it is not a role of the principal's representative to “improve” the approved design.

The Managing variations guide provides guidance to assist agencies and their representatives to manage the variations for construction contracts.

Avoiding delay

There is a risk that actions of the principal may delay the completion of a construction contract. They may also entitle a contractor to compensation payments.

The first and most effective step to minimise exposure to delay claims from contractors is to avoid or minimise delay caused by the principal.

The Avoiding delay guide provides guidance to assist agencies, project managers and those carrying out contract administration functions on their behalf to avoid causing unnecessary delays to completion of contracts.

Assessing extension of time claims

There are risks that failure to accurately assess delays to completion of a construction contract will result in:

• unnecessary extensions to the completion time
• excessive delay-related costs
• disputes about a contractor's entitlements to extensions of time or delay costs.

The first and most effective step in managing these risks is to avoid or minimise delays caused by the principal. The Avoiding delay guide suggests strategies to minimise the risks.

Ongoing monitoring of progress and accurate assessment of delays that occur will assist in minimising the adverse consequences.

The Managing extensions of time guide provide guidance to assist agencies and their representatives to assess claimed delays to completion of construction contracts and grant appropriate extensions of time.

Handling prolongation and disruption claims

If claims for delay costs resulting from prolongation or disruption by the principal are not handled appropriately, there are risks that excessive costs will be incurred or contract disputes will occur.

The Handling prolongation and disruption claims guide provide guidance to assist agencies and their representatives to respond appropriately to claims from construction contractors for additional costs for prolongation or disruption.

Protection of children and other vulnerable people

For projects where contact is likely or possible between the workers and children, agencies need to make themselves aware of the requirements of child protection legislation and the restrictions that apply to persons who may:

• be on the work sites
• enter premises such as schools, hospitals and other facilities where children would be present.

Such personnel restrictions would also apply where other vulnerable people are on or adjacent to work sites.

This requirement is recognised in the standard form contracts for construction. Where the contract requires protection of children and other vulnerable people the contractor must use the Prohibited Employment Declaration.

Volunteer labour and donated goods

Where volunteer labour is used for a project, the occupational health and safety obligations and liabilities of organisations and persons under NSW law are not altered by a person's volunteer status. The agency should ensure that it is aware of the legal and insurance implications and requirements with using volunteer labour, and that these are appropriately managed.

When goods are donated for a project the agency must ensure that their quality is appropriate and they conform to the project specification for such goods. A supplier bears legal liability for the quality of the supplied goods even though they are not purchased. The donor must be made aware of the quality and other specification requirements.

Statutory requirements and code of conduct

Compliance with code of conduct

The NSW Government Supplier Code of Conduct documents a minimum set of expectations and behaviours when doing business with the NSW Government.

Compliance with statutory requirements

The contractor is liable for compliance with all statutory requirements unless, because of the nature of the requirements, only the principal can comply. If a particular statutory authority refuses to accept a notice from a contractor and requires that notice to be provided by the principal, then the contractor cannot be made to give that notice.

The contractor is responsible for the giving of all notices necessary to comply with statutory requirements and the payment of all necessary fees, charges and other imposts, other than those notices and imposts to be given or paid by the principal under the contract.

The contract documents should include information about any statutory notices given or statutory costs paid by the principal prior to the award of the contract.

Documentary evidence of compliance

The principal will not agree that completion has been achieved until all original documents evidencing statutory approvals are received from the contractor. Otherwise, the principal runs the risk of being unable to operate, or occupy, the new facility because of lack of approval.

Goods and Services Tax (GST)

The standard form contracts provided for construction have incorporated the provisions of the A New Tax System (Goods and Services Tax) Act 1999 (Cth).

All Australian construction contractors should be familiar with the GST provisions and how the Act applies to their businesses. They may not all be familiar with the concept of a Recipient Created Tax Invoice (RCTI).

The need for RCTIs arises as explained below in simplified form:

• The Act requires that a tax invoice be created in respect of every business transaction that occurs between a payee and payer.
• The tax invoice raises a commitment for the payee to forward the relevant amount of GST to the Taxation Office.
• Except for excluded items, the amount of GST is directly related to the invoiced amount (1/11th of that amount).
• Once this tax commitment is raised, it is administratively difficult to adjust it.
• Because of the payment provisions of the contract, the amount claimed by the contractor as a progress claim is not necessarily the amount that the principal will pay in respect of that claim. It may be reduced in accordance with clause 63.
• It is therefore preferable for the principal to raise the tax invoice after the scheduled amount has been confirmed.

It is important that the contractor is aware that a tax invoice must not be raised by the contractor with the payment claim.

A principal wishing to issue RCTIs must obtain the authority to do so from the Tax Office.

A principal not wishing to issue RCTIs, or not having the authority to do so, will need to develop with the contractor a procedure that ensures that the tax invoice issued by the contractor represents the amount that the principal intends to pay.

Although there is provision in the contracts for the principal to withhold tax in accordance with the pay-as-you-go provisions of the tax system, it would be extremely unlikely that a construction contract would be awarded to a business that was not registered for GST.

Security of Payment Act

The Building and Construction Industry Security of Payment Act 1999, as amended in 2002, gives a claimant a statutory right to make progress payment claims and receive payments, even where the contract has no provisions for such progress payments.

Very serious consequences can flow to the project cash flow and budget if progress payment claims from the service provider are not dealt with expeditiously and within the time provisions of the Act.

This is recognised in the standard form contracts for construction.

Agencies and their project managers must make themselves aware of the very short time periods stipulated in the Act and reflected in the standard contract forms for provision of a payment schedule in response to a progress payment claim, and in the Act for response submissions required under the adjudication process that may be initiated by a claimant under the Act.

Long service levy

The contractor is required to pay the amount of the Long Service Levy. Details of the amount of the levy can be obtained from the Long Service Payments Corporation website.

The principal should seek documentary confirmation that the levy has been paid.

Building Code of Australia

Content to be added

EPA Act

Content to be added

Registration and licences

The principal should protect its interests by requesting evidence of the contractor's registrations and licences.

A contractor having the most basic quality management system would maintain a register of vehicles and plant, including details of plant registration and drivers licensed to operate the vehicles and plant.

NSW Government guidelines

Performance management

Performance reporting

The procurement system for construction includes a performance management system to ensure that project managers, consultants and contractors engaged for NSW Government construction contracts have appropriate expertise and capabilities.

For further information refer to the Performance management guide.

Authorisation for access to other records

Release of information

The NSW Government wishes to share, throughout its various agencies, information relating to the contractor and the contractor's performance. NSW Government does not wish to be constrained in its opportunity to share such information and makes the contractor aware of this intention.

Use of information

The contractor is made aware that unsatisfactory performance on this contract could lead to loss of future opportunities to do business with other government agencies.

Qualified privilege

If the principal provides to another party information, such as an unsatisfactory performance report, which is critical of the contractor, the contractor could seek retribution under defamation laws. This clause provides the principal with a defence against the contractor taking such action.

Release and indemnity

This clause provides the principal with further protection from legal action by having the contractor indemnify the principal against claims arising out of:

• making available the information in a contractor performance report
• the use, by another party, of the information in a contractor performance report.

Despite the safeguards written into the above clauses, NSW Government's objective in sharing contractor performance information among agencies will fail unless the procedures for performance reporting are carefully followed.

Disputes

Generally, a dispute first arises under a contract when a disagreement or difference of opinion occurs between the service provider's and the principal's representative, and one party gives notice to the other party that it wishes to raise this disagreement as a dispute.

For further information, refer to the Contract dispute resolution guide.

Related resources

Find more resources on the construction category page.