Situations where a contractor performs additional work under a construction contract occur often in practice. In such a situation various questions arise. Is the contractor obliged to perform additional work? Does he or she have the right to demand payment for it and how can he or she reduce the potential risks of not being paid? Let's examine these questions.
Let's begin with an example from our recent experience.
A Contractor concludes a contract for construction with a Customer, the terms of which establish that he will receive a fixed sum in return for the completion of a certain amount of work. In the course of performing the work, the Contractor discovers that the project documentation does not contain a certain necessary amount of work (for example, instructions are missing regarding a certain aspect of the work, meaning that the facility cannot be constructed). Not all the costs associated with the work in progress were included in the estimate. Despite the Contractor having given notice to the Customer of the defects in the project documents and not receiving the consent of the Customer for the provision of additional work and an increase in the estimated cost of construction, the Contractor completed most of the additional work in order to complete the project on time. The Contractor only stops working when it becomes clear that the Customer will not give his consent for the performance of additional work. Thus a substantial amount of additional work has already been done. The Customer subsequently refuses to sign the act of acceptance for the additional work and pay for it. The Contractor then in view of the Customer's refusal to pay for the additional work approaches the court.
How to protect against similar situations? This question never ceases to be important. And so we must first seek to understand what is 'additional work'?
What is the additional work and how can an agreement with the customer be regarding them?
In Kazakhstan it is often encountered in practice that in the course of construction it is necessary to perform certain operations which are not included in the project documents, the implementation of which will cause an increase in the estimated cost of construction and without which the continuance of further construction will be impossible. At the same time the mere fact that additional work has been performed by the contractor does not in itself constitute a circumstance giving rise to an obligation on the part of the customer to pay for the work.
If it becomes necessary to perform additional work, the Contractor, according to paragraph 4 of article 654 of the Civil Code of the Republic of Kazakhstan (hereinafter – 'Civil Code of Kazakhstan'), must inform the Customer. If the Contractor has not received an answer from the Customer within ten days, then, provided that another timeframe has not been stipulated in a legislative act or in the contract, he or she may bring a halt to current operations and charge the Customer for expenses incurred as a result of halting the work.
Analysis of legal practice shows that notification and agreement regarding additional work with the Customer is an essential condition for receiving payment for additional work. It is clear that legislators, by setting these mandatory conditions, are aiming to protect the customers from unjust demands of contactors who unreasonably inflate the cost of construction.
In the event that the Contractor does not fulfill his obligation to notify the Customer of the necessity for additional work, then according to paragraph 5 article 654 of the Civil Code of Kazakhstan, he forfeits the right to demand payment for them from the Customer, as well as to claim compensation for resultant losses, unless he proves that the necessity for immediate action was in the interests of the Customer, particularly if halting operations would potentially result in losses or damage to the object under construction.
With the agreement of the Customer having been obtained for the additional work and the payment thereof, the Contractor has the right, under paragraph 6 article 654 of the Civil Code of Kazakhstan, to refuse to perform the specified work, only if it does not fall within the professional competence of the Contractor or if such work cannot be fulfilled by the Contractor owing to reasons beyond his control.
As can be seen from the above, the Civil Code of Kazakhstan anticipates various scenarios for the evolution of the relations of the Customer and the Contractor in identifying work which is not envisaged in the project estimate documentation.
The Contractor performed additional work but did not warn the Customer that it was necessary to do so. In this case the Contractor forfeits the right to demand payment for the additional work and the right to compensation for costs incurred in connection with this, unless he can prove that immediate activity was in the Customer's interests.
The Contractor warned the Customer that it was necessary to perform additional work but the Customer refused to accept changes in the estimate and the increased costs of the construction facility. In this case the Contractor can put operations on hold, with all costs arising in connection with this to be borne by the Customer, unless the Customer proves that additional work is required.
The Contractor warned the Customer that it was necessary to perform additional work and the Customer agreed to this and accepted the increase in the estimate, but the additional work does not fall within the particular professional sphere of the Contractor's activity (and so the Contractor has the right to refuse to perform the work) or these activities cannot be performed by the Contractor for reasons beyond his control.
The Contractor gave warning to the Customer that additional work would need to be performed, and the Customer agreed to the additional work and the increase in the estimate by signing an additional agreement to the Contract.
Thus we can make the following summary: in accordance with paragraph 4 article 654 of the Civil Code of Kazakhstan, the Contractor has the right to demand payment for additional work not anticipated in the construction contract, only if the following conditions are all observed:
- at the time of the signing of the contract the Contractor must not know about the need for additional work which is not included in the project estimate documentation provided by the Customer;
- the additional work must unavoidably entail an increase in the cost of construction;
- the Contractor promptly notified the Customer in writing regarding the need for additional work as well as the increased cost of construction;
- the Customer gave his consent regarding additional work and the parties signed an additional agreement regarding the additional work;
- the Customer accepted the results of the Contractor's work and did not raise any objections to it.
Besides this, according to paragraph 5 article 654 of the Civil Code of Kazakhstan, it is also possible to claim from the Customer the cost of additional work if the Contractor proves that not performing the additional work could result in the loss of or damage to the construction facility. In this case, notifying the Customer in advance regarding the need for additional work, and likewise receiving his agreement for the performance of the work, is not obligatory.
In conclusion, in our view, parties engaged in construction business as contractors should bear the following in mind:
- when the need for additional work has been discovered, the Contractor should immediately notify the Customer in writing. The Contractor should also collect proof of the Customer's awareness of the need for performing additional work: for example, a written notice with a mark of his acceptance by the customer, mail receipt of the notification sent to the customer, etc.;
- the Customer's consent for the need to perform additional work not envisaged in the original project estimation documentation should be in the form of an additional agreement to the contract or in a form in which the main construction contract was executed;
- if the Customer does not react to the notification of the Contractor within the period established either by law or in the agreement, work should immediately be brought to a halt. Otherwise in order to claim payment for additional work the Contractor might be required to prove in court that halting the performance of additional work could likely result in destruction, damage or other serious negative consequences for the Customer (which in practice is quite rare).
- control should be exercised over the Customer's acceptance of the result of additional work (acts of acceptance of the completed work in the form of a KC-2 and even KC-3 for additional work). In addition one must remember that an act of acceptance of additional work only confirms the fact that the Contractor's work has been accepted and does not signify the Customer's agreement to pay for additional work in the absence of an appropriate agreement to that effect.
It should be noted that judicial practice in this area is quite inconsistent: in this sort of case judges sometimes deny the Contractor the right to recover costs associated with additional work, but in other instances they allow such claims to be satisfied. In the author's opinion, when the need for additional work arises which entails an increase in the costs of construction, in order to avoid confusion and costs, the Contractor should immediately halt operations, notify the Customer and come to an agreement regarding issues associated with the performance of this additional work and increased cost estimates. The author suggests that such a course of action would help reduce the potential risks of not receiving payment for additional work performed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.