CONSTRUCTION CONTRACTS
THE SEEDS OF INTRODUCTION
DISPUTES IN DESIGN & Construction contracts are
concerned with the prediction and
CONSTRUCT CONTRACTS management of very complicated
James Forrest, Partner future events.
Mallesons Stephen Jaques In a design and construct
relationship, one party, the
principal, has an idea (such as
the appearance of a building) or a
goal (such as the production of a
certain profit level) and requires
another party (the contractor)
to bring that idea into reality or
achieve that goal.
In order to do so thousands
of designs must be produced,
hundreds of people organized,
governments managed, weather
and geological conditions
overcome and the labour market
pacified. In addition there are
many unforeseeable issues that
will arise and might be the bases
of disputes.
Into this maelstrom arrives the
contract draftsman who, it is
hoped, will bring certainty to
chaos.
The purpose of this paper is to
examine some of the difficulties
confronted by the draftsman in
preparing design and construct
contracts and some of the areas
that are particularly susceptible to
disputes in design and construct
contracting.
WHY DESIGN AND
CONSTRUCT?
In its very essence the concept of
a design and construct contract
involves a conflict of interest.
Principals desire to have
constructed a product of the best
possible quality for the lowest
possible price.
The contractor however is more
likely to make a higher profit if the
product is of a lower quality (and
therefore, cost) and a higher price
(as opposed to cost).
While that position is self
evident in a lump sum contract,
it is actually present in any
50 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #104 SEPTEMBER/OCTOBER 2005
arrangement that involves a time
or cost bonus.
So, why do principals put the fox
in charge of the chicken coup?
The first reason is the availability
of resources.
Many principals do not have the
internal resources to undertake
major construction projects.
Their resources are generally
supplemented either by retaining
an external project manager to
undertake the co-ordination of
design and to administer the
construction of the project; or by
entrusting all material tasks to
a contractor as a single point of
responsibility.
In the latter case the contractual
responsibility of the contractor is
not limited to co-ordination.
The contractor assumes a
contractual responsibility to carry
out the design itself. Of course
in practice it will discharge
that responsibility by retaining
consultants, most of whom will be
novated from the principal.
The second and often more
dominant reason is the risk profile
demanded by the principal and
its bankers or equity investors
requires that the total risk of the
design and construct process be
allocated to a single party with
a substantial balance sheet and
insurance policies.
If the principal remains
responsible for the production of
the design it will assume the risks
associated with the performance
of the design consultants and
other vicissitudes such as
complications with government
authorities and geological
conditions.
It is a perceived advantage of
design and construct contracts
that the risk of the timely
delivery of a quality project within
budget is seamlessly achieved
by allocating most risks and
responsibilities to a design and
construct contractor.
In a legal sense, those risks
can be reduced by allocating
responsibility for many of
the tasks in the design and
construction process to the
contractor.
Notwithstanding the imperatives
listed above it remains the case
that the design and construct
process involves a fundamental
conflict of interest which is the
ultimate source of disputes.
The decision of the principal
should be made with that
underlying risk clearly in mind.
In addition, there are a number
of other inherent factors that
contribute to the susceptibility of
the design and construct process
to dispute.
Firstly, the passing of risk is often
accompanied by the abrogation
of responsibility and the loss of
control.
The passing of risk does not
assure an optimal project
outcome.
It does no more than give rise
to potential legal defences and
claims, which are themselves
uncertain and unsatisfactory.
While a contract might
contain an elaborate system
of promises, procedures and
time bars, ultimate reliance
on them is affected by many
factors, including lapses in the
administration of the contract,
the performance of witnesses
in Court, the vagaries of the
judicial mind and, perhaps most
importantly, the will of those
involved to endure the trauma and
cost of the litigation process.
In an even more essential sense
the principal must appreciate
that the right to sue a design and
construct contractor is of little
comfort if the project has been
unsuccessfully implemented.
Legal action can rarely result in
the achievement of the principal’s
initial commercial goals in
undertaking the project.
The selection of the design and
construct process will inevitably
result in a loss of control of
decision making power in respect
of some of the key project issues.
The consultants cease to answer
to and be controlled by the
principal; rather, they answer to,
are paid by and are instructed by
the contractor. While the general
nature of the project will not be
altered, under the design and
construct model, final decisions
relating to aesthetics and quality
will be substantially influenced by
the discretion of the contractor.
Indeed, many of the issues
that are the subject of such
discretions might never be known
by the principal.
This loss of control restricts the
ability of the principal to manage
problems as they arise and can
lead to a build up of issues that
are only recognized late in the
project when they cannot be
resolved in a practical way to the
satisfaction of the principal.
The loss of control also strikes
at a key expectation of most
principals, who, rightly, regard the
project as ‘my project’.
As will be discussed in more
detail in the section of this paper
concerned with the project
brief, this mindset is at odds
with the allocation of risks and
responsibilities to the contractor.
The project will always remain in
the ownership of the principal,
but what it looks like and how it
works are materially within the
control of the contractor in the
design and construct process.
In advising clients in relation to
the appropriate delivery system,
it is important that they are aware
of all of the above factors. In
particular, clients must accept
that the selection of the design
and construct model does not
permit them to wash their hands
of the delivery of the project but,
rather, alters the role they must
AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #104 SEPTEMBER/OCTOBER 2005
play in ensuring that a successful
outcome is achieved.
THE FUNDAMENTAL
OBLIGATION
In broad terms, design and
construct contracts are formed in
one of two circumstances:
• where no material design and
construction activities have been
undertaken by the principal; or
• where material design and
construction activities have been
undertaken by the principal.
It will be extremely rare that the
principal has not undertaken
any tasks related to the design
and construction of the project.
Usually the principal will at least
have obtained a development
approval from the relevant
authority and, in order to do that,
will have prepared a reasonable
amount of design.
The selection of the options set
out above will be dependent on
the timing of the appointment
of the design and construct
contractor and the extent to which
the principal wishes to retain
control over the design of the
project.
In both cases, the fundamental
obligation is to design and
construct something. The
‘something’ is supposed to be
particularised in the project brief.
The role of the project brief is
discussed in greater detail in
section 4 of this paper, however,
for present purposes it must
be noted that the project brief
is the central document in the
design and construct process.
The core obligation of the design
and construct contractor is to
design and construct the project
in order to fulfil the requirements
of the project brief. All contractual
arrangements must be aligned to
achieve that outcome.
I want the Royal Hawaiian
The following conversation
occurred in relation to a project
51
with which a colleague of mine
was involved on the Gold Coast.
The design and construct
contractor, pointing at an empty
block of land, asked the Japanese
client (in a somewhat exasperated
tone):
Well what do you want your hotel
to be like?
The Royal Hawaiian, was the only
reply.
For those who don’t know, the
Royal Hawaiian is a rather famous
hotel in Hawaii. For the Japanese
client, that was enough for a
project brief. The fact that the
Royal Hawaiian is a low rise hotel
in the northern hemisphere did
not seem to concern the client,
who had obtained a development
approval for a high rise hotel in
the southern hemisphere.
The response of the client in that
situation, while humorous, was
not unusual.
It reflects the difficulty in
conveying an accurate and
comprehensive understanding
of the principal’s requirements,
particularly at an early stage
when a limited amount of concept
design has been completed.
The decision to appoint the
contractor at an early stage has a
number of advantages.
Firstly, from a practical point of
view, the project can be run by a
sole point of control from start to
finish, which will usually result
in improved co-ordination and
greater efficiency, particularly in
the timeliness of completion.
Secondly, there will be a
realistic allocation of risk and
responsibility in a seamless way.
While the contractor will bear the
risk of the majority of activities, it
will actually have responsibility for
undertaking those activities and
will have the contractual means
of obliging the consultants and
subcontractors to perform. This is
to be contrasted with the situation
52 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #104 SEPTEMBER/OCTOBER 2005
described below, where the
seamlessness of risk profile can
only be achieved by the somewhat
artificial deeming of responsibility
for past acts undertaken by the
principal.
In general terms, there are two
disadvantages, both of which
increase the likelihood of a
dispute.
Firstly, the clarity and specificity
of the project brief will often be
diminished if it is prepared at
a time when the parties do not
have a mature understanding
of the project. That uncertainty
can make it difficult to sensibly
stipulate the aesthetic, time, cost
and quality requirements for the
project which, in turn, will lead to
the misalignment of the parties’
expectations.
Secondly, the principal will
effectively cede control of the
design process from an early
point. The project might effectively
become the project of the
contractor and the principal may
be relegated to a monitoring and
verification role.
In a situation where the design
and construct obligations are to
be assumed by the contractor at
an early stage, the fundamental
role of the design and construct
contract is to manage the
uncertainty which is inherent
in that delivery process and
ameliorate the principal’s control
of key issues.
That management can be
achieved by particularly focussing
on a number of key elements in
the contract.
• The project brief must be
prepared with particular care to
ensure that as much objective
guidance as possible is provided,
particularly in relation to
performance requirements.
• The engagement of the design
and construct contractor can be
on a staged basis so that, if the
relationship is not working out,
the agreement can be terminated
at an appropriate time.
• The principal must maintain a
role in the selection and retention
of consultants.
• The design approval process
should be stipulated with
considerable care, allowing
adequate, but not excessive,
times for the principal to assess
designs.
• As soon as possible, a cost
plan should be produced, and
thereafter continually refined so
that design and construction are
driven by the economic feasibility
of the project, rather than
aesthetic extravagance.
• Similarly, from an early point,
a design and, thereafter, design
and construction program should
be produced so that all parties
can work to an agreed, achievable
timetable.
• It must be clear that ownership
of intellectual property vests in
the principal (through legally
effective means) and that the
principal can use the designs if
the contract is terminated.
• Consultancy agreements must
be prepared on the basis that the
principal can step into them if the
design and construct contract is
terminated.
• The means by which the
contract sum is determined
must be considered with care.
If the contractor is retained at a
very early stage it might not be
possible to sensibly agree on a
lump sum at the time of entering
into the contract. If that is so,
then alternative systems must
be considered. If it is not feasible
to agree on a lump sum, then
any proposed alternatives must
first be approved by the project
lenders.
In summary, in this situation, the
design and construct contract
must be drafted to recognise
the evolutionary nature of the
relationship and the considerable
degree of uncertainty that will be
present at the time of entering
into the contract.
I have a cunning plan …
At the other end of the design
and construct spectrum is the
situation where the principal has
undertaken significant design
and/or construction work prior to
the formation of the design and
construct contract.
In this situation, while there is
considerable detailed design
in existence, two problems are
encountered: the description
of the principal’s requirements,
as opposed to the design that
has been done to embody those
requirements; and the allocation
of risk and responsibility for the
prior works and the existing
design.
The first problem is discussed in
detail later in this paper.
In relation to the second problem,
usually it will be very difficult to
define the point where existing
work has ceased and new work
begins. Furthermore, errors
made in the prior work or existing
design might not manifest
themselves until later works
are undertaken and might be
exacerbated by other errors made
at a future time.
In short, the contractual
seamlessness that is desirable in
all contracting is fractured and it
can be difficult to identify a chain
of causation in order to allocate
unforeseen costs to one of the
parties.
The response of some principals
to this problem is to devise a
cunning plan and oblige the
design and construct contractor
to accept responsibility for the
existing design and the prior
works as though the contractor
had carried out those activities
itself.
As is usually the case, confidence
in the cunning plan that is devised
in this situation is all too often
ill-deserved.
That approach, while legally neat,
might attract a price premium
in tendering and must be
implemented with regard to the
following considerations.
• The contract must be drafted
and administered as though
the prior work and existing
design were undertaken by the
contractor. All design becomes
the design of the contractor.
All work must be thought of
as having been done by the
contractor.
• There should be an express
warranty that the prior works
and existing design fulfil the
requirements of the project brief
and the contract.
• In contrast, the principal should
make no representations in
relation to the quality of the prior
work and existing design and,
indeed, should expressly stipulate
the absence of such warranties.
• In order to empower the
contractor to sensibly deal with
the risks and responsibilities it
is assuming, all contacts must
be drafted so as to permit the
contractor to fulfil the obligations
which are imposed on it. In
particular, the consultancy
agreements and early works
contracts must be prepared
so that the obligations and
processes contained in them are
matched with the design and
construct contract.
• In order for the contractor to
gain some comfort in relation
to the prior work and existing
design, careful administrative
procedures, including
consultants’ certifications,
should be instituted during the
performance of the early works
and the existing design. That is
particularly the case for work
which has been covered up or
cannot be checked for other
reasons. In that way there is a
AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #104 SEPTEMBER/OCTOBER 2005
paper trail that can verify the
quality of work undertaken. The
progress claim and payment
system should also be carefully
administered in order to minimise
confusion at the point of handover
of contractual responsibility.
• The consultancy agreements,
early works contracts and the
design and construct contract
should make provision for the
novation of consultants and early
works contractors in an orderly
manner so that the contractor
has the contractual capacity to
fulfil its obligations.
• It is essential to always
understand that once the
design and construct contract
is formed, the responsibility for
the production of the design in
order to fulfil the requirements
of the project brief is vested in
the contractor. As a result of
that responsibility, the power
to produce the design and, in
the absence of provisions to the
contrary, to amend the existing
design, is also vested in the
contractor. It is highly likely
that there will be aspects of the
existing design that the principal
will not wish to have amended.
For example, there may be
issues of aesthetics or key long
term quality issues affecting
operational expenses that the
principal does not want to have
changed.
• Both the consultancy
agreements and the design and
construct contract should impose
an obligation on the contractor
not to sack consultants without at
least notifying the principal and,
in the case of key consultants,
obtaining the consent of the
principal.
In a structural sense, the
relationship between the relevant
parties will be altered in the
manner described in the following
diagram once the design and
construct contract is formed.
53

Pre design and construct formation:
Principal
Consultants
Post design and construct formation:
Principal
Contractor
Consultant
In considering the type of design
and construct discussed above,
the principal must bear in mind
three important practical issues.
Firstly, from a practical point of
view, the change in control of the
design process can lead to a loss
of information and expose the
project to an increased risk of
failure.
Secondly, as discussed, control
over the consultants and the
destiny of the design will be
shifted to the contractor.
Thirdly, while the contractor
will be contractually liable for
the prior works and existing
design, it may well not assume
a tortious liability because it will
be difficult to establish that the
contractor has been negligent in
respect of activities over which it
has had no control. Accordingly,
the contractor’s professional
indemnity insurance might not
respond to claims made on the
basis of errors contained in the
prior works or the existing design.
THE PROJECT BRIEF
The project brief is fundamental
to identifying precisely what
it is that must be designed
and thereafter constructed.
The project brief is the central
point from which all obligations
emanate. If it is flawed, then all
of the obligations assumed by the
design and construct contractor
will be imperfect.
54 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #104 SEPTEMBER/OCTOBER 2005
Early Works Contractor
Early works and other
subcontractors
The project brief will also be
the fundamental document that
will be the focus of lenders,
purchasers and tenants. In
summary, all external parties will
have arrangements that oblige
the principal to ensure that the
project is constructed in order
to fulfil the requirements of the
project brief. Those obligations
must be passed on to consultants,
early works contractors and,
ultimately, the design and
construct contractor.
The level of detail contained
in the project brief will vary
depending on the timing of its
preparation and the formation
of the design and construct
contract. Clearly, the later the
brief is prepared the more detail
that can be incorporated into it.
The preparation of the project
brief is an excellent litmus test to
ascertain whether the principal is
in a position to sensibly articulate
its requirements for the project.
If the principal cannot describe
its requirements with certainty in
the project brief, then it must be
questioned whether the project
has reached a point where it can
be put to tender.
It is useful to use the following
checklist in assessing the content
of the project brief.
• The detailed objectives of the
principal should be listed. The
emphasis in this regard is on
providing detailed objectives,
rather than general statements
of motherhood, in an inclusive,
rather than an exclusive, list.
• The key obligations that must
be satisfied by the principal
should be stipulated. These
will include development
approvals, environmental
approvals, agreements for lease,
sale agreements and banking
requirements. Fundamentally, in
preparing the project brief, the
principal must ask itself whether
it has procured the design and
construct contractor to fulfil all
of the principal’s own relevant
obligations.
• The performance requirements
of the building must be
exhaustively stipulated.
For example, the detailed
performance requirements for
air conditioning, lifts and other
services, car park numbers, net
lettable areas and apartment
sizes should be carefully
described.
• The principal must ensure
that its requirements in terms
of operational expenditure are
also set out. Reduced capital
expenditure, which might be
a source of savings for the
contractor, will often only be
achieved at the expense of
increased operating expenses,
which must be borne by the
principal.
• Where appropriate, industry
standards, such as those for
commercial buildings stipulated
by the Property Council of
Australia, can be helpfully
employed. Considerable care
should be taken before stipulating
a benchmark building since
it will be rare that any other
building will encapsulate all of the
requirements of the principal in a
perfect manner.
• Other practical matters such
as the standard of finishes, floor
coverings and sound proofing
should be described, as should
the telecommunications and
security requirements.
• If there are special staging
requirements for the construction
process, particularly where the
development is to occur adjacent
to other operating buildings,
those requirements should also
be set out.
• The project brief should not
contain the design that has been
undertaken by the Principal prior
to the formation of the contract.
That design is work which has
been undertaken in order to fulfil
the principal’s requirements,
responsibility for which will often
be assumed by the contractor.
• It is not a statement of the
requirements themselves.
The contractor also has an
interest in ensuring that the
project brief is not ambiguous and
cannot be construed to impose
higher standards than those
which are the basis of the tender.
The contractor must remember
that throughout the process the
principal will hold its securities
and its progress payments. In the
event of a dispute arising out of an
ambiguity in the project brief, the
principal will generally have the
upper hand simply because it has
the money. From a tactical point
of view the contractor should
seek to tie down the principal
to accept a specific product as
soon as possible. It will often be
in the interests of both parties
to construct a prototype so that
issues of finishes and design
functionality can be worked
through at an early point in the
design and construction process.
Fundamentally, the contractor
must seek to contain the
expectations of the principal and
to curb the enthusiasm of the
consultants in order to ensure
that the project brief can be
fulfilled within the scope of the
assumptions made in compiling
the tender.
PROFESSIONAL Fundamentally, the
INDEMNITY INSURANCE contractor must seek to
AND SECURITY contain the expectations
These issues have been grouped of the principal and to
together because they are relied curb the enthusiasm of
on by the principal for a similar
the consultants in order to
purpose. Both measures provide
a fund of money in the event ensure that the project brief
that the contractor either does can be fulfilled within the
not have the money or refuses scope of the assumptions
to honour its obligations under made in compiling the
the contract or arising out of tender.
a breach. In effect, they are a
source of financial comfort.
Frequently, these issues are not
assessed in a co-ordinated way
as part of an overall risk analysis.
Principals have tended to have
a knee jerk reaction to their
requirements for professional
indemnity insurance without
assessing the genuine risk
elements in the project. In the
current insurance environment
the cost and availability of
professional indemnity insurance
and bank securities will require
principals to scrutinise these
matters with greater care and
sophistication.
Professional indemnity
insurance
At the outset, it must be
appreciated that, unless the policy
which is effected covers general
legal liability risks, a professional
indemnity insurance policy will
only respond to the negligence
of the contractor in undertaking
professional duties. Many of
the activities undertaken by
contractors are not ‘professional’
in nature; and many of the risks
assumed by contractors in
design and construct contracts,
while imposed contractually,
will not manifest themselves as
negligence actions. As discussed
previously, the contractor’s
‘deemed responsibility’ for
existing design and prior works
might well fall into that category.
Generally, the proceeds of
professional indemnity insurance
will only become available to a
AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #104 SEPTEMBER/OCTOBER 2005 55
The amount of the security
is influenced by the nature
of the project and the
financial capacity of the
contractor. It would be rare
for security to be provided
in excess of 10% and,
more frequently, security
in the amount of 5% of the
contract sum is provided.
56 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #104 SEPTEMBER/OCTOBER 2005
principal after years of expensive
and difficult litigation against a
well funded professional litigant
- the insurance company.
It is also important to understand
the nature of the policy and the
limit of cover. The insurance cover
effected by the contractor will
generally only be effective from
year to year, so that the crucial
time is not when the contract is
formed, but when the claim is
made; and the cover might well
be in respect of all claims made
in a particular year, rather than in
respect of the specific project.
If the principal identifies that
professional indemnity insurance
is an essential part of its risk
management strategy, then it
should investigate the taking out
of project specific insurance and
it must familiarise itself with the
terms of the insurance policy and
the financial status of the insurer.
Both the principal and the
contractor should ensure
that the consultants take out
professional indemnity insurance
on appropriate terms and for a
sensible level of cover. In reality,
in the current insurance climate
most consultants will restrict
their insurance requirements to
$5 million - $10 million or even
less.
In any event once the novation
of consultants is effected and
the contractor is responsible for
their performance, the dispersion
of insurance cover for modest
amounts among a number of
consultants places the contractor
in a position where it has a
considerable exposure and will
not be able to adequately back to
back its liability to the principal.
Security
The threshold issue to be
considered by the parties is
whether the purpose of the
security is to provide a fund in
the event that an entitlement
of the principal is established;
or whether the security is to be
available to the principal while its
entitlement is being determined.
This is essentially a cash flow
issue. Must the principal wait or
can it use the security while the
legal position is being sorted out?
Of course, from the point of view
of the principal it is desirable
for the security to be available
pending the final determination of
its rights and, just as clearly, the
contrary position is favourable to
the contractor.
Whatever is agreed by the parties,
it must be clearly documented
in the contract. If acting for a
principal, the terms dealing with
security should make it plain
that the principal may access the
security on the basis of a claim
which is asserted, rather than a
claim which is finally established.
The contractor, even if it
concedes on this issue, will
argue that it should be entitled
to notice before the security can
be accessed. Such a request
is not unreasonable, although
it does provide the contractor
with the opportunity to obtain an
injunction restraining the calling
up of the security. Nevertheless,
if the security clause is properly
drafted, commercial common
sense indicates that it is not
inappropriate for notice to be
given to the contractor.
The amount of the security is
influenced by the nature of the
project and the financial capacity
of the contractor. It would be
rare for security to be provided
in excess of 10% and, more
frequently, security in the amount
of 5% of the contract sum is
provided.
Security will normally be provided
in one or a combination of the
following five forms:
1. an unconditional undertaking
given by an Australian bank;
2. an unconditional undertaking
given by a foreign bank;
3. an unconditional undertaking
given by an Australian non-
banking institution;
4. an unconditional undertaking
given by a foreign non-banking
institution; and
5. a conditional undertaking given
by a non-banking institution.
The first point of difference
between those securities is
that the fifth security will be
payable only when the conditions
precedent to payment have been
fulfilled. It is not an unconditional
promise to pay money on
demand, which is the essential
form of the other securities.
The fundamental distinction
between the other securities lies
in the identity of the promisor.
From the point of view of a
principal, it is desirable to require
the security to be in the form of
an unconditional undertaking
given by an Australian bank. If a
Mallesons client wishes to depart
from that formula, then it must
satisfy itself as to:
• the financial capacity of the
actual promisor (as opposed to a
parent);
• the place of incorporation of the
promisor;
• how a demand is to be made on
the promisor; and
• the ability to enforce a judgment
in the jurisdiction where the
promisor’s assets are located.
All of the above matters will
require a considerable amount of
due diligence.
Contractors should be prepared
to provide that information
to assuage the concerns of
conservative principals.
Finally, most securities are
returned, in part, at practical
completion and, in full, on the
issue of the final certificate. In
considering the timing of the
return of the security, regard
should also be had to the
delivery of as built drawings
and maintenance and operation
manuals; and the resolution
of any outstanding disputes,
including the payment of costs
incurred by the principal.
VARIATIONS
‘We paid you for a casino. That
looks like a casino.’
So said the project manager of a
casino project that went wrong.
It was in response to a claim
made by the design and construct
contractor based on hundreds of
variations. It was a simple, but
compelling, message and in the
end we couldn’t escape its logic.
In construct only contracts, it is
comparatively easy to identify
instructions which are variations.
The principal will have produced
the design and changes to that
design will be variations. Of
course, these variations will not
necessarily have time or cost
ramifications.
Obviously, the situation is more
complex in design and construct
contracts where the contractor
has carriage of the design.
An instruction by, or on behalf of,
the principal to amend a design
will generally only amount to a
variation if it:
• amends the project brief; or
• it amends a design or
work which has already been
undertaken and which complied
with the contract.
If the project brief has been poorly
prepared, that assessment can be
contentious.
Changing principal requirements
can be particularly irritating as
well as time consuming during
the design development phase.
The contractor might simply
not produce designs that satisfy
the aesthetic taste or subjective
functional requirements of the
principal. What we’ve found is
that the situation will usually be
exacerbated if the project brief
AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #104 SEPTEMBER/OCTOBER 2005
does not provide clear guidance
as to these requirements.
From the principal’s perspective,
it will be important to ensure
that it is permitted enough time
to review designs and can make
comments on them.
Ideally, those comments should
not detract or derogate from the
obligations of the contractor.
Conversely, and again ideally, the
contractor should ensure that it
is not delayed by the principal’s
delays in reviewing proposals
and is not exposed to the
consequences of the principal’s
fickle whims.
In preparing D&C contracts
it is important to ensure
that a carefully considered
administrative structure is
established. From the point of
view of the principal, it will be
important to ensure that no
approval derogates from the
fundamental obligation to fulfil
the requirements of the project
brief.
If acting for the contractor, we
would look to institute a system
that adjusts the requirements
as designs and concepts are
approved. The contractor will not
want the principal to make design
work redundant, once it has been
approved, on the basis that the
principal subsequently forms
a view that the work does not
comply with the brief.
RELATED AGREEMENTS
The D&C contract will not stand
alone in the suite of agreements
that will be entered into by the
principal. Depending on the type
of project, it will be closely linked
to a number of the principal’s
other agreements. Many of those
other agreements must be taken
into account when preparing the
D&C contract. This is particularly
critical in respect of project
financed or limited recourse
projects.
57
A building development
documentation flow is as follows:
• Government approvals
• Agreements for Lease
• Sale Contracts
• Lender Agreements
• Principal’s objectives
requirements are set out in the
project brief and draft D&C
• Project brief is prepared
together with a draft D&C. Brief
forms basis of the consultants’
services.
• Consultants’ agreements are
formed – to embody the brief and
be consistent with the D&C.
• D&C is finalised on the basis
of the brief and the principal’s
other [anticipated] contractual
requirements.
• Consultants’ agreements
are [usually] novated to the
contractor; bank side deed
and other related agreements
executed.
An important consideration is that
some of the related agreements
will not be in existence until
after the D&C contract is signed.
That’s where our job becomes
more complex and planning and
awareness of what input these
future documents will have on the
D&C contract, and vice-versa, is
particularly important.
Consultancy agreements
The consultants will actually carry
out most of the design.
The principal will usually
have entered into many of the
consultancy agreements prior
to the formation of the D&C
contract and might have strong
preferences in relation to the
other consultants to be appointed.
The existing consultancy
agreements, with the exclusion of
the quantity surveyor, will usually
be novated to the contractor.
The QS will often not be novated
58 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #104 SEPTEMBER/OCTOBER 2005
because the principal prefers to
retain its financial knowledge.
It is important to remember that,
from the point of novation, the
consultant:
• will owe its contractual
obligations to the contractor;
• will be directed by the
contractor; and
• will be paid by the contractor.
The relationship between the
principal and the consultant will
change in a fundamental way
from the date of novation.
It is essential that the consultancy
agreements are negotiated and
drafted in the knowledge that
they will ultimately be novated
and that the D&C contractor
is likely to scrutinize them to
ensure consistency with, ensure
to compliance with the D&C
contract.
In certain respects the
consultancy agreements will
also have to take account of
the requirements of lenders,
particularly in connection with
certification obligations.
I’ll mention briefly some of the
issues that must be taken into
consideration when preparing
consultancy agreements in the
light of their eventual novation to
the D&C contractor.
• Firstly, and not surprisingly,
it must compel the consultant
to undertake its services in a
manner that permits it to comply
with the requirements of the
project brief.
• The description of the services
should be consistent with the
requirements of the D&C contract
throughout the various phases:
• concept design;
• design development;
• detail design;
• contract administration;
• practical completion;
• defects liability period; and
• final certification.
• In particular, the ‘services’
(as the term is defined in the
consultancy agreement) should
stipulate the monthly design
certifications and sign-offs
required for progress payments,
the certifications required at
practical completion and the
certifications required for the
issue of the final certificate. It
is usually pointless requiring
the contractor to produce
these certificates if it cannot
procure them from the relevant
consultants.
• Administrative issues such
as reporting and attendance at
meetings should be documented
in a manner consistent with the
D&C contract.
• The services should be
delivered in accordance with a
program that is consistent with
the D&C contract.
• The fees to be paid to the
consultant should consistent with
the payments to be made under
the D&C contract, both in relation
to amount and payment cycle.
• The consultancy agreement
must be made subject to novation.
And…
• Restrictions on the termination
of the consultancy agreement
should be built in so that a valued
consultant cannot be replaced by
a less expensive one in the post
novation phase. Certainly not
without very good reason or the
approval of the Principal.
Lenders
There is considerable variation
between banks in relation to the
extent they will intrude into the
relationship between the principal
and the D&C contractor.
Clearly, banks will require the
parties to enter into a bank side
deed or tripartite agreement. It
is desirable for that deed to be
annexed to the tender documents
or, preferably, the D&C contract.
If that isn’t possible, the contract
should at least contain an
agreement by the contractor to
enter into a bank side deed and
list the terms which are likely to
be found in that document. The
identity and requirements of the
bank are essential in drafting
D&C contracts.
The bank’s requirements extend
beyond entry into a tripartite
agreement, particularly in
relation to monthly sign-offs
or certifications prior to the
drawdown of funds.
On PPPs and project financed
deals, the banks go a lot
further and will want to re-open
previously hard fought issues
in a D&C contract if they don’t
meet their very extensive set of
‘bankability’ requirements. If
acting for the principal, our role is
very much to prepare the contract
so as to anticipate the banks
internal ‘bankability’ checklist.
In the tripartite agreement, they
usually want to ensure that they
have access to information,
restrictions on termination rights
(certainly on timing) and an ability
to step-in if the principal defaults
under the financing agreements.
Some of these requirements must
also be built into the consultancy
agreements.
Agreements for lease and
sale contracts
Development projects, which are
projects designed to be sold or
leased, will generally not obtain
finance and proceed unless
tenants or presales have been
achieved.
Accordingly, agreements for lease
and sale contracts will usually
predate the D&C contract.
It is essential to build into the
project brief obligations that deal
with fulfilling the requirements of
those leases and sale contracts.
This can often be a complex
undertaking. In particular,
agreements for lease will
sometimes contain concessions
which have been made by the
principal that directly affect
matters such as:
• the timing of construction;
• responsibility for separate
contractors;
• the pricing of variations; and
• the requirements for
completion.
These are all matters which must
be built into the D&C contract.
CONCLUSION
The purpose of this seminar has
been to briefly discuss some of
the complexities of design and
construct contracting that can
lead to disputes.
The issues mentioned are by no
means complete.
As most of you are aware,
the process of design and
construction is really concerned
with managing the unforeseen
and dealing with problems.
Contracts must be negotiated
with that understanding in mind.
James Forrest’s paper was
previously presented at the
Chartered Institute of Building
Australia seminars in Brisbane
on 17 March, Melbourne on 22
March, and Sydney on 23 March.
Reprinted with permission.
AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #104 SEPTEMBER/OCTOBER 2005 59