Much has been said about the unacceptable level of risk being imposed under construction contracts in NZ. A recent article in the Herald by John Walton succinctly summarised some of the main causes. Construction contracts do allow for some risk by providing for an adjustment in the contract price for unforeseen events, and for variations instructed by the Principal. However too many principals enter contracts having not sufficiently considered issues such as supplier pricing and subcontractor pricing and availability. He said these issues can be exacerbated by unrealistic expectations on the part of principals that they can “fill in gaps in design and instruct changes at their whim, without cost consequences”. We often see the consequences on subcontractors of these expectations.
It is common for contractors to try and impose on subcontractors the same obligations they have under the head contract in respect of the subcontract works. This is generally acceptable given it is the subcontractor carrying out those works. However, if the principal has failed to properly cost a build, or the contractor has under quoted a build, often the consequences get passed down the contractual chain. We too often end up representing subcontractors who have had reasonable variation claims knocked back without justification. While the subcontractors may have remedies under their subcontract or under the Construction Contracts Act regime, the reality for many is that the time and cost of pursuing such claims are unaffordable.
We also see too often contractors attempting to pass undue risk on to the subcontractor, much greater risk than the Contractor assumes under the head contract. It is not uncommon for contractors to include in subcontracts extensive special conditions that have the effect of increasing the risk assumed by the subcontractor. Special conditions may impose unrealistic or difficult to follow procedural steps on a subcontractor in order for the subcontractor to claim for a variation. Special conditions also often pass undue substantive risk on to the subcontractor. For example, we often see the standard conditions relating to unforeseen ground conditions amended so that the subcontractor is deemed to have completed its own assessment of ground conditions, and so that the subcontractor assumes sole responsibility for virtually any ground condition encountered.
While we are always willing to assist contractors and subcontractors to pursue their contractual claims, the better option is to review each contract for risk before signing. There are some obvious risk indicators such as large suites of special conditions, or inadequate provisions relating to cost fluctuations and increases. There are also less obvious risk indicators such as the wording of the clauses that bring down into subcontracts the obligations of the head contractor to the principal. Understanding the risk you are being asked to take on, then making an informed decision as to whether or not to proceed, is the best way to proactively manage risk.
At Talbot Law we are increasingly being asked to review contracts by clients. Our experience in dealing with construction disputes means we have a good understanding of risk in construction contracts. We can identify the risk and help you to understand the nature and extent of the risk you are being asked to assume, so you avoid any surprises once the works are underway. Often our assessments result in clients seeking to negotiate aspects of contracts they feel unduly increase their risk. So, if you have a construction contract presented to you and are not certain as to the nature and extent of the risk, a review by us at the outset may well save a lot of grief and expense down the track. We remain willing to assist if and when disputes arise, but prevention is always better than cure.