New Zealand: New NZS3910 contract - more than a chip off the old block

Brief Counsel

The new standard construction contract, NZS3910:2013, although the product of what was billed by the Standards Committee as a "limited technical review", contains a number of significant changes and new features.

On balance, we like it - but there is a lot for users to digest. Principals, in particular, will need to modify their standard amendments to reflect the changes.

Key changes

These include:

  • a new structure with the form of Contract Agreement now at the front of the document (formerly included as the Second Schedule)
  • new guidelines which no longer have contractual status
  • new provisions governing cost reimbursement contracts
  • a prohibition on assignment of the contract by either the Principal or the Contractor without the consent of the other party (such consent not to be unreasonably withheld or delayed)
  • new provisions setting out when the Principal cannot call on a Contractor's Bond, a positive obligation on the Principal to release a Contractor's Bond within five working days after the Principal receives the Practical Completion Certificate, and a requirement for the Contractor to procure a replacement Bond where the Bond has an expiry date that will occur before the Principal is obliged to release the Bond
  • more comprehensive clauses dealing with programmes, including the option for a Comprehensive Programme
  • specific provisions in the general conditions setting out the requirements for Safety, Quality and Traffic Management, including contract specific safety, quality and traffic plans
  • new advance notification obligations
  • updated provisions governing insurances and new insurance forms (retained as schedules)
  • substitution of "Defects Liability Period" with "Defects Notification Period" and "Defects Liability Certificate" with "Final Completion Certificate", including a requirement on the Contractor to remedy defects within five working days unless otherwise agreed by the Engineer
  • clearer provisions for notifying and valuing Variations
  • an express entitlement to the Contractor for time and money for delay to completion caused by the Principal or any Person for whom the Principal is responsible
  • the introduction of Provisional Items (being different from Provisional Sums)
  • more streamlined processes for issuing payment schedules
  • a more comprehensive "checklist" Specific Conditions of Contract schedule (Schedule 1) which contains provision for capturing information on the Contract which might otherwise be documented in other contract documents, including insurances and the valuing of Variations
  • the inclusion of standard forms of Contractor and Subcontractor warranty, Agreement for off-site Materials, Practical Completion Certificate and Final Completion Certificate
  • acceptance of notices by email, and
  • revised Conditions of Tendering.

Many of these changes will be welcomed by the construction industry. We discuss some of them in more detail below. In addition, a number of technical amendments have been made to clarify the meaning of the standard form or to simplify its procedures.

Structure and new forms

Putting the Contract Agreement first is consistent with the order in which Contract Documents are usually assembled in practice.

The more comprehensive Specific Conditions of Contract schedule (Schedule 1) will assist parties to record the key commercial terms in one contract document.

The inclusion of standard forms of Contractor and Subcontractor warranty, Agreement for off-site Materials, Practical Completion Certificate and Final Completion Certificate is also sensible given that such forms are already widely used.

Cost reimbursement contracts

The new cost reimbursement provisions set out a method of calculating the Contract Price being either:

  • the Net Cost of the items used in the Contract Works plus allowances for On-site Overheads and Off-site Overheads and Profit, or
  • rates, where the Contract contains rates. Allowances for On-site Overheads and Off-site Overheads and Profit will only be added to the rates if the rates have not already made allowance for these amounts.

All costs claimed by the Contractor for reimbursement must be verifiable by the Contractor's records. Where an indicative estimate of the Contract Price is included in the Specific Conditions, each of the Contractor's payment claims must include a reconciliation of the claim against the estimate and an explanation where there has been any variance from, or to, the estimate.

Providing a standard approach to calculating the Contract Price under a cost reimbursement contract is a good step as the previous version of NZS3910 left it to the parties to describe the process in the Contract. But, while this addition will promote more consistent approaches to cost reimbursement contracts, parties should take care to select the right contracting method where rates are used, as a measure and value approach may be more appropriate.

Comprehensive Programme

The ability to require the Contractor to provide a Comprehensive Programme - including details such as work sequencing, a critical path analysis showing activity durations and dependencies and key dates relating to site access together with the provision of Principal supplied materials and services and the works of Separate Contractors - reflects current best practice. Both hard and soft copies of the Comprehensive Programme must be provided.

A Comprehensive Programme will allow the parties and the Engineer to better monitor and evaluate the impact of Variations and interface issues with Separate Contractors and may be useful to the Engineer in assessing delay and/or extension of time claims.

Safety, Quality and Traffic Management Plans

Although the previous version of NZS3910 included in an option to require the Contractor to provide specific safety plans, quality plans and/or traffic management plans as necessary, it was left to the Principal or Engineer to document elsewhere in the Contract what the Contractor must provide by way of these plans.

The inclusion of the specific requirements for each type of plan in the new form will promote a more consistent standard on how these project management tools are to be effectively implemented.

Advance notification

The new form also includes an obligation on both the Contractor and the Engineer to notify the other when either of them becomes aware of any matter which is likely materially to alter the Contract Price, delay completion of the Contract Works or result in a breach of a statutory duty in connection with the Contract Works.

The Contractor or Engineer is then entitled to require the other to meet in order to explore proposals for avoiding or reducing the impact of the notified matter. Where the Contractor fails to give advance notification, its failure may affect the valuation of any Variation arising out of the matter. This obligation will encourage the Contractor to communicate matters early, which can only be good for the project.

Defects Notification Period and Final Completion Certificate

Replacing "Defects Liability Period" with "Defects Notification Period" and "Defects Liability Certificate" with "Final Completion Certificate" (as used in other standard forms, such as FIDIC), is sensible. The new terms will help dispel a common misconception that the "Defects Liability Period" limits the liability of the Contractor to remedy defects and that liability ceases upon the issue of the "Defects Liability Certificate".

Insurances

The new insurance provisions and the revised information for insurance forms contained in the Schedules are far more comprehensive. They:

  • require the parties to elect the specific events which are to be covered by the insurances
  • set out which party will be liable for insurance deductibles or excesses (depending on the party arranging the insurance and whether the claim arose from an act or omission of the Contractor), and
  • provide that forces of nature which are identified as covered in the Specific Conditions will not be treated as an "excepted risk". (This removes an anomaly in the previous version of NZS3910 which permitted the Contractor to exclude from its insurance cover any "excepted risks". Principals typically take the risk of loss or damage to the Contract Works caused by the "excepted risks".)

Variations

The changes to the Variation provisions, particularly the valuation of Variations, should make the processes clearer and easier to apply. However, there is still no formal process for the Principal or Engineer to request the Contractor to quote a price for a Variation before it is instructed.

Payments

Similarly, the system for issuing payment schedules under the Contract has been simplified to avoid the need for a separate provisional payment schedule and a progress payment schedule each time a payment claim is submitted.

Changes include:

  • the progress payment schedule issued by the Engineer, while initially provisional, will apply unless the Principal notifies the Engineer of any amendments or deductions
  • provision in the Specific Conditions for the parties to elect whether Progress Payment Schedules are to be issued as GST invoices or whether a separate GST invoice corresponding to a Progress Payment Schedule must be issued
  • reduction from two months to one month of the deadline for submitting a Final Payment Claim after the issue of the Final Completion Certificate
  • a new requirement that the Engineer issue the Final Payment Schedule no later than 35 working days following receipt of the Final Payment Claim and a Provisional Final Payment Schedule no later than 20 working days following receipt of the Final Payment Claim. Previously there were no time limits
  • an explicit provision that the Final Payment Claim will be the Contractor's final payment claim under the Contract, and
  • a change to the default interest rate payable by the Principal for payment default to one and a half times the monthly small-to-medium-sized enterprise overdraft rate published by the Reserve Bank (from one and a quarter times the rate payable by the Contractor for overdraft facilities).

Provisional Items

Provisional Items allow the parties to include individual elements of work for which a rate has been agreed in the Schedule of Prices against nominal quantities. Provisional Items will only be carried out on the instruction of the Engineer and the Contractor will be paid at the agreed rate. Provisional Items differ from Provisional Sums in that the latter are instructed and valued as Variations.

Conditions of Tendering

A number of changes have been made to the Conditions of Tendering forming part of NZS3910. For example, provision has been included to enable the Principal to include tender evaluation criteria. However, we note that the Conditions of Tendering still do not provide protection for Principals from potential liability in respect of process contracts.

Timely introduction of new forms

The Standards Committee, in response to feedback from the sector, has decided to publish three new Standards in place of NZS3910:2003. The other two Standards, due out shortly, are:

  • NZS3916 Conditions of contract for building and civil engineering – Design and construct, and
  • NZS3917 Conditions of contract for building and civil engineering – Fixed term.

These new forms are timely given that construction activity in New Zealand is about to intensify, particularly in Christchurch and Auckland. However, with a number of projects already in train in Christchurch using NZS3910:2003 as the base document, and given the numerous changes in NZS3910:2013, it may take time for the updated version to catch on.

Our thanks to Arthur Chung for writing this Brief Counsel.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

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