Public Sector Contracts

New Public Sector Contracts

New public-sector contracts came into force in 2007 replacing GLDA.  A significant motivation for  the new contracts was to prevent extra costs and costs overrun by passing the risks and responsibilities to the contractors and consultants insofar as possible. The contract seek to give the public-sector a significant advantage relative to the previous position.

The new contracts use new languages and phrases. Their ultimate effect is and how they will be adopted by industry, difficult to tell. They were introduced in the context  of a collapse in construction and significant retrenchment of public expenditure consequence of the financial crisis.

The public works contracts seek to transfer much of the risk, traditionally borne by the employer to the contractor. It was likely that contractors will seek to price this risk into the overall price. The contractor may not be the best party to carry the risk, given that, in many cases, it will be a limited liability company, perhaps a member of a group, a special purpose vehicle.

The standard public works contract provides that every contract is  a lump sum contract. It provides that the initial contract sum including VAT is a lump sum and shall be adjusted only when the contract say so.

Sub-clause 9.4 provides that where the contractor has included in the initial contract sum and shall include in the program a contingency for delays to the date substantial completion of the works caused by compensation events, contract provides for an extension of time due to employer’s breaches. Accordingly, contract time will not become at large under this contract. The contract transfers the risk of delay, even delay caused by the employer to the contractor in the above fashion.

An accordingly, the contractor is deemed to include in his tender price, contingency for delay. Compensation events are set out in the schedule in the form applicable to the employers design 21 events that may give rise to an entitlement to extra payment, may give rise to an entitlement to extra time or both. The schedule comprises three columns, naming the event and specifying whether issue is a delay event or a compensation event.

The list is predetermined in the schedule. An extension of time when compensation arises from a variation instructed on behalf of the employer. Insert, if possible points 1 to 21.

The employer is entitled to a time extension only, where the delay is caused by neutral or third-party event such as weather, strikes etc. In the case of a breach by the employer delaying works, that is not listed, it is both a delay and compensation event.

If an instruction is given for additional works, not additional works completion of the works, will entitled him to additional time and payment but they will not be entitled to compensation for delay nor granted an extension of time to the extent that the delay period is already provided for in a contingency provision.

If the variation causes the contractor to complete after the date of substantial completion, contractor may be obliged to pay liquidated damages. Accordingly, the contractor must make full provision in its contingency period or otherwise risk having to pay liquidated damages. He is not given an extension of time to the extent the delay is within the contingency provision.

The extent of contingency depends on the contract. The employer must complete the schedule in respect of two threshold periods. It is provided:

that program contingency to drive extension is unless delay exceeds the first threshold, there is no extension. If the delay exceeds the first threshold, but is less than an equal to the first threshold and twice the second threshold, extension equals half of the result obtained by subtracting the first threshold from delay. If the delay is more than the sum of the first threshold and twice the second threshold, extensions equals delay and minus the first threshold minus the second threshold.

Accordingly, for example, the first threshold is 20 site working days and the second is 30 site working days, delay of 38 site working days leads to nine site working day extensions under rule two. A delay of 90 site working days leads to 40 site working day extensions under rule three.

Sub-clause 10.8 of the public works contract provides for price variation in accordance with either clause PV1 price variation option one, or PV2 price variation option two. The employer is to elect a tender stage which shall apply. PV1 provides for increases or decreases in worker’s salary or expenses and materials and arising out of changes of law. The contract sum is adjusted to take account of changes in employee salaries and expenses after the base date being the first day of the 31st month after the contract date. Accordingly, no contingencies arise for 30 months. Thereafter, adjustments in labour rates are allowed only in accordance with registered trade agreements.

PV1 allows the contractor to recover increases in cost of materials only, prior to the base date to the extent that the increases exceed 50% of the cost of the item at either the designated date or the first date of the business month on which the item was actually purchased, which ever of the two increases is higher. The contractor may only recover the excess of that increase over the extent to which it exceeds 50%. An adjustment is to be made in respect of purchase of materials after the base date where the costs increase by more than 10% by the time it is purchased. The contractor is allowed excess over 10% only.

Where increases in the sum results in changes in law, taking place after the contract date, increases are allowed in the contract sum, insofar as they are referable to changes in specified taxes and duties only.

Under PV2, the base date is the 37th calendar month after the designated date. The exceptions, contract price is accordingly fixed for a three year period. The adjustments made to the base date are adjustments with arise from changing taxes and duties, changes, fluctuations arising from exceptional increases for materials and fuel. Exceptional increases are increase in excess of 50% from one month to the next. The contractor is to recover the excess over that 50% only. Accordingly, hyperinflation condition would apply. After the base date, clause PV2 together with appendices provide computations allowing calculation of the amount by which the price sum is to be adjusted with reference to fluctuations. Formula in calculating increasing cost of materials, labour, plant, are provided for. First 10% of increases are excluded. Also excluded are a number of items and claims.

The public work contracts consist of a two-page agreement, 59 pages of conditions and a schedule with a further 22 pages.

 

Article 4 provides:

the contractor has satisfied itself before entering the contract of all circumstances that may affect the cost of executing and completing the works and of the correctness and sufficiency of the contract sum to cover cost of performing the contract. The contractor has included in the initial contract sum, allowances for all risks, customs, policies, practices and other circumstances that may affect the performance of the contract whether they could or could not have been foreseen, except for events for which the contract provides for adjustment for the initial contract sum.

As set out above, it is provided that the contractor has included in the initial contract sum and shall include in its program a contingency for delays to the date of substantial completion caused by compensation events.

The number of days delay in terms of cost and duration is to be set out in the schedule to the contract. In the assessment by the engineer of the time and cost allowed in relation to compensation events, the compensation is allowed for the first 11. Time but not compensation is allowed for items 12 to 15, last five items 7 to 21 are optional.

Item 18 provides the contractor encounters on the site unforeseeable ground conditions or manmade obstructions in the ground other than utilities. This allows for a tentative time, but not necessarily compensation (even subject to contingency). The minor works form or standard works contracts form. The minor works contract form entitles the contractor to compensation. In other matters, cases, it is a matter for insertion and negotiation.

Site investigation reports may be furnished but the public authority may seek to exclude compensation. Perversely the less, the poor quality the report, the more favorable it is to the public authority.

Item 19 in the schedule is:

a condition, circumstance or occurrence is foreseeable, if an experienced contractor tendering for the works could not reasonably have foreseen it,  on the designated date, having inspected the site and its surroundings, and having satisfied itself (in so far as practicable, and taking into account any information in connection with the site provided by the employers for), as to all matters concerning the site including its form, nature, and it’s geotechnical, hydrological and climactic conditions.

The words in brackets do not apply in the case of contractor designed works.

Under the contract, the position accordingly, is that the contractor is entitled to an extension to be set off against a contingency period in his contract program. He will be entitled to compensation under the minor work contracts but it will depend on what is provided under the principal agreement. The public works contracts provide that the risk of statutory contents are transferred to the contractor.

Statutory Consents

“The employer has or shall obtain the consents that the work requirement, say the employer is to obtain. The contractor shall obtain all other contents.”

Consent is defined as meaning any planning permission, order, approval, certificate, licence, permit or other consent required by law for the execution or completion of the works or identified as a consent in the works requirement.

It is provided, if in the employer’s representative’s opinion, it is physically impossible or contrary to legal requirements to complete the works, in accordance with the works requirements, the employer’s representative shall give a change order.

The public works contracts place the risk of legislative enactments on the contractor but then go further.

The contractor shall, in performing the contract, comply with all legal requirements and ensure that the contractor’s personnel comply with all legal requirements.

Legal requirement is defined as including a consent, law, decision of court, requirements of an authority, requirements of any person with whose systems the works will connect, the legal rights of any person.

Contrary to earlier forms, it is provided that the contractor is deemed to have included in his price, allowance for all risks, customs, policies, practice and other circumstances that may affect its performance of the contract, whether or not they could have been foreseen except for sums for which the contract provides for adjustment of the initial contract sum.

Termination

The public works contracts allows termination of the contract for convenience, without the employer becoming liable for the damage or loss of profit. These were commonly incorporated under earlier contracts. They allow the employer to discontinue the project in effect.

The public works contracts goes further and provides that to some extent the contractor takes the risk of unlawful termination by the employer of the contract. The contractor’s compensation is limited to the value of works completed and reasonable cost of demobilization. This would appear to be the case, even if the employer has terminated, the public sector employer has determined the contract in breach of contract.

The grounds of employer’s termination are set out including that of contractor’s default. It is not subject to a test of reasonableness on the employer’s part. Provided that the employer may but is not required to refer to conciliation any matter, the issue of whether the employee is entitled to terminate the contractor’s obligations to complete under certain clauses. If the conciliator recommends the employer is entitled to terminate, and it is subsequently found that he was not entitled to do so, the contractor’s entitlement is the same as if there had been a valid termination. Accordingly, the conciliator’s decision is not subject to compensation, if found wrong.