(1) allocate the duties between the parties;
(2) recognize and allocate the risk to the different parties; and
(3) reduce the uncertainty surrounding the project and allow the parties to plan for the project and the future as best as possible.
In Malaysia, the introduction of Construction Industry Payment & Adjudication Act 2012 ("CIPAA 2012") is envisioned to regulate payment disputes which currently afflicts the construction industry. The scope of CIPAA 2012 is expected to include the oil & gas industry, petrochemical, telecommunication, utilities, infrastructure supply contracts, project and management, in addition to typical building construction projects.
Construction work must be carried out wholly or partly in Malaysia, and any payment dispute arising from a written contract may be referred to an adjudicator registered with the KL Regional Centre for Arbitration. The approach of such process is "PAY NOW, ARGUE LATER".
Is a verbal agreement enforceable?
Construction
contracts may be verbal. However, it is recommended that construction contracts
be in writing in order to bring any payment dispute to be adjudicated within the ambit of CIPAA 2012. A written contract presents a clear record of the parties’
agreement, whereas and oral agreement is subject to the parties’ recollection
of the terms.
When entering into a
written contract, the parties should make certain that the writing accurately
reflects the agreement between the parties. The parole evidence rule may
prohibit evidence of contract terms differing from those in the written
agreement. The integration clause of a contract also prohibits evidence
of other terms or negotiations.It must be emphasized that CIPAA 2012 only recognizes written contracts and not verbal or oral contracts, to be adjudicated by a Kuala Lumpur Regional Centre of Arbitration (KLRCA) certified adjudicator.
Stipulated value or lump sum contracts?
This is the typical
contract with a negotiated lump sum price. This type of contract is
preferred by owners for the following reasons:
• owners
can utilize a competitive bidding process
• all
risks are placed on the general contractor
• the
general contractor must control costs and perform efficiently
Before entering into this
type of contract, the owner must have detailed plans and specifications for the
project, and the general contractor must have clear and specific instructions
and scope of work.What is a cost plus contracts with a management fee?
A cost plus contract is often used in the absence of detailed plans and specifications. The general contractor is paid for all costs incurred. The general contractor is also normally paid a fee for overhead and profit, plus a fee for general conditions. The owner assumes all risks of excessive costs. Frequently, an incentive provision is used to encourage cost savings by the general contractor.What is a GMP?
Similar to a
cost-plus contract, but with some protection for the owner, utilizing a GMP
(guaranteed maximum price) as a cap for project. The GMP is typically
adjusted with each change order, just as a lump sum contract price is adjusted.
This type of contract is amenable to the design build situation, where
the general contractor also serves as a designer. The GMP is arrived at
after the project has been completed to the design development stage.
What are the contract documents?
In most contracts,
the contract documents are "incorporated by reference."
Contract documents usually include plans and specifications, the “prime
contract” between the owner and all prime contractors, including the general
contractor, addenda, building codes and regulations, and modifications to the
plans and specifications after execution of the contract.
It is important for a
contractor to review all contract documents incorporated by reference, as the
terms of those documents may be binding on the contractor. For instance,
if a prime contract (between the owner and a general contractor) contains an
arbitration provisions, courts will typically enforce the arbitration
requirement against a subcontractor in contract with the general contractor. It is not necessary, however, that contracts provide for adjudication before payment disputes are brought for adjudication within CIPAA 2012.On a smaller scale, a written contract may be referenced within documents used in the supply of goods and/or services, such as work order, purchase order, invoice, delivery order, etc.
What is the scope of work?
Disputes regarding
scope of work are often the basis of construction claims. Scope of work
is defined as the extent of a contractor's responsibility to perform certain
contract work. To determine the scope of work, the contractor may have to
look to other contract documents – plans and specifications, contracts
with others – and to industry standards (building codes, etc.)
The scope of work
issues between the owner and the general contractor differ from the scope of
work issues between the general contractor and subcontractors. The
general contractor must be sure that all of the scope of work is contracted to
subcontractors, and that there are no overlapping scope of work issues.
Questions regarding scope
of work should be resolved in the written contract. Scope of work
references should be detailed in the contract. If detailed specifications
are available, refer to the specifications in designating scope of work.
It must be pointed out that the scope of CIPAA 2012 is limited to payment disputes.
What is the contract sum?
The price in the contract will either be lump sum, unit price, or time and material. The contract should include a definite price, or a definite method of determining price. Absent price, an otherwise valid contract will be interpreted as requiring payment of a fair value (quantum meruit).What are the methods for payment of the contract sum?
Progress payments are periodic
payments constituting partial payment of the contract sum. The contract
should include a specific provision for time and method of payment and
calculation of amount.
A schedule of
values should be prepared by the contractor and approved by the owner
and architect. The schedule should accurately break down the scope of
work into component parts, and assign a value to each component part.
Applications for
payment should be measured against the schedule of values. The
application typically includes the amount of work in place, the cost of
materials stored on site, the costs of labor to date, less an amount for
retainage and previous payments. The application is usually certified by
the architect or owner and the payment is due thereafter.
It must be noted that CIPAA 2012 prohibits conditional payment terms such as "Pay When Paid", "Back to Back" or " Pay If Paid".
Pay when paid, or pay if paid provisions
One of the greatest concerns and risks on a construction project
is payment by the owner, or main contractor or employer. Once the contract work has been fully performed,
everyone wants to be, and should be, fully paid. One of the risks of
nonpayment is the owner's or main contractor's or employer's potential inability to pay. Throughout the work chain of contractors, sub contractors, sub-sub contractors and suppliers there is a need to
agree on who bears the risk of nonpayment – the general contractor or the
subcontractor, etc
Contractors routinely try to shift the burden of nonpayment to
subcontractors. "Pay when paid" and "pay if paid" and "pay upon financial drawdown" provisions are popular and widely used. Such conditional payment terms only serve to delay the time
for payment to the subcontractor even in situations where the contracted work has been completed and complied with.
Typical pay when
paid clauses
provide something like:
"The total price
paid to [subcontractor] shall be [contract price], no part of which shall be
paid until 5 days after payment is received from owner."
or
". . . the
Contractor shall pay the Subcontractor each progress payment and final payment
. . . within three working days after he receives payment from the Owner . . .
."
In Thos. J.
Dyer v. Bishop International Engineering Co., the Sixth Circuit U.S.
Court of Appeals refused to enforce a pay when paid clause. In Dyer, a
general contractor was not paid on a project after the owner declared
bankruptcy. The general contractor, in turn, did not pay its
subcontractor for the work it performed.
The introduction of CIPAA 2012 deems that such conditional payment are void and unenforceable. This, I believe, is where the impact of CIPAA 2012 will be keenly felt by players in the construction industry in Malaysia.
Typical schedule provisions
The schedule for completion of the contract work is an essential
component of the contract, and a frequent focus of construction litigation.
In a perfect world, the contract will incorporate a detailed computer
generated completion schedule, with milestone dates for the essential tasks,
and the schedule will be updated periodically to reflect changes in the
schedule to reflect changes and progress.
At a minimum, the prime contracts should include a date of commencement of the work, a project duration (the time that the prime contractor agrees to
reach substantial completion of its scope of work), and a definition of substantial completion.
The date of commencement is subject to change, based on several
factors. The most common factors affecting the date of commencement
influenced by the owner are owner funding, the delivery of final plans and
specifications, the availability of the building permit. Changes in the
date of commencement change the date of substantial completion.
The
project duration is measure either in calendar days or working days, and is
based on the number of days that the parties predict it will need to complete
the project. Project duration is subject to lengthen based on several factors:
changes directed by the owner, unforseen conditions, force majeure, weather,
contractor issues.