Under the contract requirements of AS 2124 - 1992, the principal agrees to pay the contractor a stated amount or lump sum for completion of the works, subject to the provisions of the contract. This lump sum is known as the contract sum.
Changes to the contract sum may occur as a result of variations, arising from requests for amendments, generally from the principal or health service / agency, leading to additions, deletions or alterations during the course of construction, or for required adjustments to the contract documents.
It is critical for the health service / agency and consultants to control and restrict these changes to an absolute minimum in order to effectively manage the project within the approved budget and program.
Variations are often a cause of contract conflicts and may lead to negotiation, mediation or arbitration. The principal, contractor and superintendent should collectively seek to resolve such conflicts at the earliest time and in the least expensive way wherever possible.
The contractor is paid progressively as the work proceeds. The superintendent issues progress certificates based on an assessment of the value of completed work. The progress certificate states that a certain value of work has been completed and therefore the work should be paid for. For larger or complex projects a quantity surveyor is responsible for assessing the status of the contract's progress and the evaluation of the contractor's progress claim.
When a security of payment claim is received from the contractor, the superintendent is to ensure compliance with the current provisions of the Security of Payment (SOP) Act. Contract conditions stipulate a specified period, e.g. 28 days, for the payment. This period should be strictly adhered to.
Security of payment legislation has been enacted to ensure that contractors and subcontractors receive payments in a timely manner. The easiest way to avoid activating the requirements of the SOP act is to ensure that payment schedules are issued within the designated period, that reasons for reducing or withholding payment are clearly explained, and that payments are made in a timely manner.
Progress payments are based on a progress claim prepared by the contractor on a monthly basis. The claim outlines the breakdown of the trade work and the percentage of work completed against each trade. The progress claim also usually shows approved contract variations and percentage completion against the variations.
The superintendent and / or quantity surveyor will then verify the amount claimed and, if appropriate, recommend that the principal make a payment (certify the progress claim). In some instances the amount claimed may be more or less than the value of works assessed as completed. The superintendent will adjust progress payments accordingly. In making any adjustment, the superintendent should be aware of GST requirements and must notify the contractor of the reasons for varying the claim within the time specified in the contract.
To obtain a reimbursement from the government for the progress payment, the health service / agency must complete the approved Department of Health and Human Services claim form and forward this, together with a copy of certified progress claim, to the department.
Provisional sums and quantities
The final cost of a construction contract may be influenced by provisional sums and quantities. A provisional sum is a nominated amount of money, usually estimated by a quantity surveyor, where the exact scope and cost of specific work cannot be determined at the start of the contract, such as for removal of rock.
It is included in the original contract sum, but is monitored carefully so that the sum can be adjusted as required. The provisional sum may be used for work carried out by subcontractors or for materials and components to be provided by suppliers, or for schedule of rates works, where an agreed price rate has been reached, e.g. $30 per sqm for plastering existing damaged walls. These items are included where no firm price can be obtained or the full extent of the work cannot be determined at the time the building contract is let.
The final adjusted contract sum will vary from the original contract sum when the expenditure against these items differs from that nominated in the contract document. Provisional sums and quantities should be kept to a minimum to minimise budget variations.
A variation can best be defined as, ‘The change or modification of the design, quality or quantity of the works or the addition or omission or substitution of any work, materials or goods'.
Variations can only be implemented if the superintendent issues an instruction in writing. Variations may occur because of:
- correction of errors and omissions in the contract documents
- site / building conditions differing from those described in the contract documents
- change requested by the principal (these should be kept to an absolute minimum).
Some variations entail cost and / or time adjustments to the contract. Such variations should be priced by the contractor, valued by the quantity surveyor and accepted if satisfactory by the superintendent prior to being implemented.
The extent to which a variation to the works is reflected in an adjustment to the contract sum is determined by the valuation of the variation. After a variation has been valued and agreed, an adjustment can be made to the contract sum.
The department requires that the process for approving variations is managed in a manner that is rigorous and consistent and a template has been developed for managing the variation of a contract - see sample form attached in appendix 7.
Refer to governance guidelines on delegations regarding approvals of variations and financial powers.
Contract sum adjustments
A contract sum adjustment is a monetary adjustment to the initial contract sum, during the course of the contract.
The final contract sum, after contract sum adjustment, may be for a higher or lower amount than the original contract sum, depending on the nature of the adjustment.
Some contract sum adjustments may occur as a result of:
- approved variations
- superintendent's instructions, or lack of them
- discrepancies arising from quantities specified in the contract or the bill of quantities
- changes to authority levies
- unexpected site conditions (latent conditions)
- provisional sums included in the contract being insufficient or excessive for the actual cost of the chosen product or work activity.
Variations may cause a reduction or increase to the original scope of the contract.
A contingency amount should normally be allowed in the budget for new and refurbishment works. The steering committee / project control group (PCG) can set a separate amount depending on the specifics of the project. The amount should never be disclosed or stated in the tender or contract documents nor should this information be provided to parties who may communicate with the contractor. This sum is available solely for the principal to manage risks and is intended to cover the cost of unknowns or unforseen matters that may arise and adjustments for discrepancies in the documents. The amount is not available for increases in the scope of the project.
Contingency is a key element to be established and managed by the steering committee / PCG to ensure the project is constructed appropriately and within the allocation provided by the Department of Treasury and Finance.
The project budget includes contingencies that are to be approved by the department following endorsement by the steering committee / PCG who should assess the need to use the contingencies based on a recommendation from the superintendent.
The term practical completion describes the stage when:
the work has been completed, all equipment installed, tested and found to be in running order
the project is deemed safe and fit for occupation to the satisfaction of the superintendent
the facility is fit-for-its-purpose, complies with service delivery performance requirements
the facility commissioning has been undertaken
operation and maintenance manuals, training and documentation have been provided.
The Australian standard contract AS2124-1992 provides that the superintendent may issue a certificate stating a date that, in the superintendent's opinion, the building works are practically complete, meaning that all works are complete, with the exception of minor omissions and defects which will not affect handover to, and occupation by, the principal and facility users. At this time the finalised works are handed over to the health service / agency with necessary documentation including a certificate of occupancy, operation manuals, warranties etc.
Practical completion does not relieve the contractor from the need to rectify omissions and defects in a timely manner, and it is important that the superintendent closely monitors progress on rectifying omissions and defects.
It is important to determine and advise the date of practical completion for its contractual implications.
Other contractual effects, which occur at the time practical completion is reached, are the:
- beginning of the defects liability period
- contractual end to the contractor's liability for liquidated damages or the principal's liability for prolongation costs
- partial reduction of security or bank guarantee, required under the contract.
Where a project contains separable portions, apply the practical completion individually to each of the separable portions under the contract.
The principal has no contractual right to occupy any part of the works area (portion of the site for which the contractor is given possession for the purpose of executing the construction works) before practical completion without the consent of the contractor. The department requires that occupation occur only following the issue of a certificate of occupancy.
A full inspection prior to issue of a practical completion certificate is necessary. If the facility is not suitable for occupancy, a follow-up inspection will be required following remedial works by the contractor.
An omissions and defects list is to be prepared by the superintendent and provided to the contractor at practical completion. It should only contain minor omissions & defects that do not restrict the facility being used for its intended purpose or require closure for restorative works.
Under the contract, if the contractor fails to bring the works to a stage of practical completion by the due date (i.e. the date stated in the contract, adjusted for any agreed extensions of time), then the principal is entitled to liquidated damages (LDs). The amount of LDs is set out in the contract at the start of the project and must be justifiable (see below).
It is important that all time based contractual issues related to variations to the original scope of works and other delays have been resolved prior to the application of LDs.
Losses and costs due to delay can be claimed at the rate stated in the contract by the health service / agency, providing the correct steps have been followed. The nominated amounts must have been a genuine pre-tender estimate of costs and must be able to be substantiated. For example, the cost of engaging an alternative facility to deliver health services or costs associated with continuing to use the existing facilities.
As a minimum, LDs may be based on the capital investment at the long-term bond rate, plus an allowance for additional costs of maintaining the superintendent and other consultants for an extended period.
The health service / agency is notified of the LDs that are to be deducted from the contract sum, by the superintendent.
LDs are normally assessed at the time that contractual issues are being completed and outstanding variations are considered.
In the standard contract form that governs the usual ‘lump sum' building contract, the builder / contractor is responsible for the majority of risks. However, delays and costs may result from the principal's instructions causing a delay. Such delays include a delay in making decisions or in providing information to the contractor or may arise from excessive requests for variations and changes to be made.
The contractor may be entitled to claim compensation under the contract for delays caused by others, e.g. the superintendent or principal. The claim may be for idle equipment, staff and overheads (e.g. scaffolding, plant, cranes, foreman's time, offices and sheds), disruptions of the program, storage and other costs.
The superintendent is to notify the principal and PCG if such an issue arises and the major cost implications involved. Prolongation claims should be valued by the quantity surveyor and determined to be clearly justifiable prior to endorsement by the superintendent. Department approval is required of all prolongation cost claims prior to their acceptance.
Security and retention moneys
To ensure that the contractor performs in accordance with the contract, the principal should request an appropriate form of guarantee from the contractor.
The most common forms of guarantees are either security or retention monies. These are described in detail below.
Security (preferred option)
The acceptance from the contractor of an unconditional bank guarantee. Similar forms of security may be considered. The amount is equivalent to the amount stated in the contract and is held by the principal should the contractor default. The amount of security is normally set by assessing financial risk. An industry standard minimum is 5% of the contract sum.
The normal practice is for security, in the form of a bank guarantee, to be provided to the principal following tender acceptance, and prior to site possession by the contractor. It is held in two equal parts. Half is normally released at practical completion and the balance when final certificate is issued after the defects liability period has finished.
This form of guarantee is recommended for all contracts in excess of $1M using the standard form available.
The balance of security must be released on the issue of the final certificate.
Non preferred option, but may be applicable to very small contracts, generally below $50,000. A percentage (up to 10%) of the amount due on each progress certificate (payment) is retained until a stated sum is reached. This sum is a safeguard for the principal should the contractor default. It is known as the retention amount. Normally the total retention does not exceed 5% of the contract sum. Half of the retention is normally released to the contractor on issuing the notice of practical completion and the balance when the final certificate is issued (after the defects liability period has finished).
The defects liability period is the period stated in the contract that provides for the rectification of minor defects and/or omissions or items that fail to perform suitably, that may be outstanding or occur after practical completion. The principal, superintendent and contractor still have obligations and rights during this period. There may also be particular items of equipment, finishes and services under particular warranties / guarantees (e.g. roofing), which exceed the defects liability period. These guarantees require contractor sign off and continual monitoring until their expiry date.
Care is to be taken by the principal, not to void warranties or the contractor's responsibility, e.g. by using another contractor to undertake repair on works or equipment associated with the completed main contract, during the defects or warranty period.
A minimum defects liability period of 12 months is recommended. The principal should check with the superintendent to determine the most suitable period of time, and to arrange a process for the recording and referral of issues for action by the contractor.
Upon completion of the defects liability period the superintendent issues a final certificate on the basis that the contractor has rectified all outstanding omissions/defects according to the contract. This usually involves a final inspection by all parties.