ACLN - Issue #64 17

Contracts ---------------1

The Design And Construct System ForProject Delivery - Critical Issues

- Geoff Wood, Partner,Mallesons Stephen Jaques, Sydney.

1. ADVANTAGES AND DISADVANTAGESOF USING DESIGN AND CONSTRUCTCONTRACTS

1.1 What is a "design and construct"contract?

Design and construct ("D&C") is a contractualpattern for project delivery where both the design and theconstruction is supplied by the Contractor. Legalresponsibility for the design, its suitability and the

performance of the completed works after completion restswith the Contractor to varying degrees.

The essential element of a D&C contract is theallocation of design responsibility to the Contractor.

A D&C contract may be contrasted with thetraditional contractual approach to project delivery. Thistraditional approach involves a Principal contracting withtwo parties (a designer and a contractor). The essentialdesign for the project is supplied by the Principal and thePrincipal's design consultants.

r-- Owner

Designresponsibility

I

Designer

Constructionresponsibility

I

Builder

Owner

Design andconstruction responsibilities

I

Design and ConstructContractor

Traditional Approach

1.2 Advantages

CostProponents of D&C contracts argue that they are

more economical as the design is prepared by the partywho will also construct the project.

For a Principal, the D&C contract also has thepotential to offer significant savings of professionalconsultants' fees.

D&C Contractors are almost invariably engaged ona lump sum payment basis. This payment structure usuallyoffers greater certainty as to the final cost of the project.

Design and ConstructionApproach

If instalment payments are linked to milestone events(rather than being based upon a valuation of work done) aPrincipal can also forecast his future budget commitmentsmore precisely.

TimeBecause the design should take full account ofaccess

and construction problems, as well as the particularmethods of working employed by. the Contractor, thereshould be substantial time savings when D&C contractsare used.

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If instalment payments are linked to milestone I 2.events, there is also a significant incentive to the Contractorto work expeditiously.

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DESIGN RESPONSIBILITIES ANDSUITABILITY FOR PURPOSE

BuildabilityIn a D&C contract, it is likely that factors such as

access, proposed methods of construction and other"buildability" issues will be better catered for in the designprocess.

Single point responsibilitySingle point responsibility is usually cited as the

greatest advantage of the D&C contract. This is becausefor a Principal, it removes the problems - both technicaland procedural - of identifying whether a fault is due to adefect in design or a defect in construction. The Contractoris responsible for the fault, whether it is due to a design ora construction defect.

In addition, the Principal gets a guarantee of a resultfrom the D&C contractor, regardless of fault. Under thetraditional approach, the Principal does not get anequivalent guarantee from either the designer or theContractor. Instead, the Contractor agrees to constructwhat has been designed, and the designer agrees to exercisethe appropriate degree of skill in designing the project. Ifthis standard of skill is met, the designer's obligation isdischarged, even if the design does not fulfil the Principal'srequirements. By contrast, under a D&C contract, theD&C contractor is liable if the project does not fulfil thePrincipal's stated requirements, even though he may nothave been negligent.

1.3 Disadvantages

Competitive pricingIt is extremely difficult to make any genuine

assessment or comparison of prices where designs differ.If such a comparison is attempted, the result can often bea competition in under-design.

Under-designUnder-design is frequently not detectable by the

Principal's professional advisers. If the Principal doesattempt to check the design's efficiency the basic costsaving of consultants' fees is likely to prove illusory, as itcan cost as much to properly check design work as it doesto design from scratch.

A particular problem area may be under-design ofdesign elements that impact adversely on the recurrentoperational or maintenance costs of the finished facility.Perceived cost savings thus prove in the long run to beillusory.

Long-term costThe long-term cost of tendering is increased due to

the design costs borne by unsuccessful tenders.

2.1 Responsibility for design in a design andconstruct contract

In the traditional contractual pattern, in the absenceof an express provision to the effect, the professionaldesigner engaged by an owner is not responsible forguaranteeing that the design he produces will be reasonablyfit for its intended purpose; rather, he will only be requiredto exercise reasonable care and skill in designing theproject.

George Wimpey & Co Ltd v D V Poole (1984) 2Lloyds Reports 499.By contrast, it appears that in most cases - and

certainly where it can be clearly established that thePrincipal made his purpose known to the Contractor andwas relying on the Contractor's skill and judgment - therewill be implied into a Design and Construct Contract awarranty that the design the Contractor produces will bereasonably fit for its intended purpose.

See:Peters v CW McFarling Floor Surfacing Limited

(1959) SASR 261Independent Broadcasting Authority v EMI

Electronics Ltd & BICC Construction Ltd (1980) 14 BLR 9Viking Grain Storage Limitedv TH White Installations

Ltd and TH White Limited (1985) 3 Con LR 52Doug Rea Enterprises Pty Limited v Hymix

Australia Pty Limited (1988) BCL 67

Obviously, the advantage for the Principal ofhavingthe fitness for purpose warranty is that the Contractor'sobligation is absolute; the Principal need only prove thatthe Contractor failed to produce the desired result - it isnot necessary to show that the Contractor has beennegligent in any way.

See also:Mansal Pty Limited v Harold William Brokenshire

(1982), unreported, Supreme Court of Western Australia,3 December 1982.

The compelling justification for this "extra"responsibility of the design and construct contractor overthat of the traditional design professional was succinctlystated by Ian Duncan Wallace in his book "ConstructionContracts: Principles and Policies in Tort and Contract"(1986) at pp367-368:

"... satisfactory long-term contractual protectionin regard to the suitability ofthe work and its designis rarely if ever offered, ... The provision of thoseprotections is absolutely imperative. What issometimes offered is a warrantyfor a limitedperiodbased on a concept of professional negligence.Having regard to the fact, however, that thecontractor, unlike a consultant, is underoverwhelming commercial pressures to 'design

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down' as far as possible, subsequentfailures ofthebuilding are inherently more likely, and with sucha limited warranty are likely to produce little butlitigation in. which the issue will be whether theeconomy of the design exceeded the limits ofprofessional responsibility at the time - often ahighly controversial question offact. The warrantyoffered must therefore guarantee the suitability ofthe building for its known purpose, and beindependent offault. "

2.2 Control of design in a design and constructcontractAs we have seen, a Principal who follows the

traditional project delivery route ultimately retains totalcontrol over the design of his project, whether or not thedetailed design work has been completed before heengages a Contractor. He can be reasonably confident ofreceiving at the end of the day a finished product that isexactly as he envisaged it (or at least, as his architectconvinced him was what he wanted). Of course, he mustbe aware of the price he pays (both in money and time)for retaining this luxury!

However, in adopting a design and construct projectdelivery approach a Principal, as the quid pro quo for allthe advantages he perceives it will give him, must foregothis control of design and give it to the design andconstruction Contractor.

It is imperative that the design and constructContractor has control of the design. Why? Becausewithout such control, he could not be held to the warrantyof fitness for purpose that we have seen is the mainadvantage gained by the Principal adopting the design andconstruction solution. If the Principal or his advisersparticipate in any way or attempt to exert control over thedesign process, there is a risk that the efficacy of the fitnessfor purpose warranty will be eroded or eradicated. Waysin which the Principal may become implicated inresponsibility for design include:

Where there are defects in any preliminarydesign prepared by the Principal or itsconsultants and passed over for completionor adoption by the Contractor.Where the Principal or its consultants"interfere" in the design process (regardlessof whether the contract contemplates anyinvolvement).

See, for example, Cable v Hutcherson Bros Pty Ltd(1969) 123 CLR 14.

Where the Principal or its superintendentdirect changes to the design during the courseof the design or construction processes. Thedraftsman of a design and construct contractshould ideally give the Contractor the rightto object to Principal-directed variationswhere their effect would be to adverselyimpact upon the Contractor's designresponsibility.

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Where there is active involvement by thePrincipal or its consultants in any review orapproval process in relation to theContractor's design.

See, for example, RW Miller & Co Pty Ltd v Krupp(Australia) Pty Ltd & Ors (1995) 11 BCR 74.

As well as the effect it may have on the fitnessfor purpose warranty, any involvement by thePrincipal in the design process will almostinvariably have adverse effects on the timeand cost aspects of the project, thus againnegating two of the main perceivedadvantages of the design and constructcontractual model.

3. STRUCTURING THE DOCUMENTATION

3.1 What are the "contract documents"?The following documents are typically included in

a design and construct contract ("D&C contract"):formal instrument of agreement;

• general conditions of contract; andUser Brief; and sometimestechnical specification (which may include aschedule of finishes); anddrawings.

Note the effect of using a deed (longer limitationperiod on bringing actions for breach).

It is vital that the D&C contract (as with any othercontract) clearly sets out which documents constitute thecontract. If this is done, many potential disputes can beavoided. However, it often happens that this is overlooked,or not made clear enough.

Under the traditional approach to construction, thedesign documentation is complete at the time of enteringinto the construction contract.

The nature of the design and construction system ofproject delivery virtually dictates that designdocumentation will not be complete at the time ofenteringinto the D&C contract (although it is, of course,theoretically possible to place upon a Contractorresponsibility for design that has already been fullyprepared by others - no doubt at a cost!).

The fact that the Contractor has responsibility forthe post-contract development and documentation of thedesign means that at least some (and usually most) of thedesign documents will come into existence after enteringinto the D&C contract.

This problem of ''future'' documents must becarefully considered when drafting a D&C contract.

One approach commonly seen is to define thecontract documents as including documents which havenot yet been created but which, after the date of theContract, are created by the Contractor and approved bythe Principal.

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Two issues arising out of this approach are:There is a fundamental conceptual problemwith defining a present agreement byreference, in part, to documents which do notyet exist.If one party has the ultimate say in issuing afuture contract document, what impact doesthat document have on the scope of work andthe contract price?

The better approach is to provide that the Contractormust complete the design in accordance with therequirements ofthe contract documents existing at the dateof the Contract. If this approach is used, the Principal'srole is typically to review the design documents as theyare developed to ascertain whether they comply with therequirements in the contract documents.

However, the implications of this review processfOf the Contractor's warranty of fitness for purpose mustbe carefully considered.

3.2 Allocation of design responsibilityAllocation of design responsibility requires careful

consideration when drafting a D&C contract.• Specify precisely the design liability of the

Contractor:• obligation to use reasonable care; or• warranty of fitness for the known

purpose, independent of fault.

Unl'ess the latter is given, the advantageto the Principal of using the D&C systemof project delivery must be questioned.

• Make it clear where design liability lies inrespect of:• the Principal's stated requirements;

any design work done prior to the dateof the D&C contract; and

• design work done after the date of theD&C contract.

• Specify the extent to which the Contractor isto base its proposals upon informationsupplied by the Principal concerning thetopography of the site, the subsoil, theavailability of public utility services, etc.If such information is provided and theContractor bases its design on thisinformation, disputes are likely to resultunless this issue has been anticipated by theD&C contract.

• Make sure your intended allocation ofdesignliability is not inadvertently changed by:

the involvement of a party or itsconsultants, particularly in review ofContractor-produced designdocumentation; or

• the Principal exercising a power tonominate or select specialistsubcontractors or suppliers.

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3.3 Role of Principal/SuperintendentSpecify the role (if any) which the Principal or its

Superintendent is to play in the development or review ofthe design.

Specify the consequences of the Principal's orSuperintendent's involvement. What impact does theirreview or approval have on the Contractor's designwarranties?

Consider providing for a meeting structure such asa project control group.

Consider carefully the role of the Principal'sconsultants:

What role can these consultants perform whenthey may be unfamiliar with the design? Doestheir engagement as extra "checkers" defeatsome of the purposes of design and construct- single line responsibility of the Contractorfor design and construction, and cost savings?What impact does these consultants'involvement have on the Contractor's designwarranties?

Specify the Principal's and its consultants' rights ofaccess and powers to give instructions. This is also relatedto the Contractor's design warranties; note the veryinterventionist role given to the Principal in the standardform construction only contracts (and indeed in AS4300- see section 8). Can a Principal expect a court to find hehas relied on a Contractor's skill and judgment if he hasreserved to himself or his consultant the right to stick hisnose into everything the Contractor is doing and order himwhat to do?

Bearing these limitations in mind, a D&C contractshould still make provision for a number of the functionstraditionally performed by the Superintendent including:

• the opening up for inspection of any workcovered up;requiring the removal of work, materials orgoods not in accordance with the contract;granting extensions of time;determining when the works reach practicalcompletion;

• handling the machinery for liquidateddamages;preparing a schedule of defects;

• requiring defects to be made good; andissuing a notice of final completion.

4. THE USER BRIEF - THE PIVOTALDOCUMENT

4.1 IntroductionThe User Brief is the contract document that sets

out the Principal's "end-user" requirements for the project.In this document, the Principal must ensure that the

purposes it requires the finished product to fulfil arearticulated as clearly as possible.

The Principal's ability to sheet home design liabilityto the Contractor will be optimised if its requirements havebeen clearly articulated in the User Brief.

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The User Brief typically contains:general requirements which are usually basedon performance criteria or functionalrequirements;some specific ''fixer!' design requirements(for which, if mandatory, the Principal cannotexpect the Contractor to assume designliability).

The User Brief may be prepared by the Principaland its advisers or by the Contractor, or be a combinationof components prepared by both.

4.2 How detailed should the User Brief be?This depends on the type of project; compare for

example:a public sector principal who wants a buildingthat must house very sophisticatedcommunications equipment; andan overseas investor who simply wants a CBDbuilding that will deliver a certain rental return.

The question of the amount of detail to be includedin the User Brief illustrates the inherent tensions betweenContractor and Principal in the context of a design andconstruction system of project delivery.

The Principal's point of view:More detail and specificity in the User Briefhas the

following advantages for the Principal:Since the scope ofwork is more clearlydefined, the Contractor has lessopportunity to claim variations.The Principal has greater certaintyabout what it is going to get for itsmoney.Detailed quality and performancespecifications reduce the risk of"under-design" by the Contractor.

Less detail and specificity will, however, be moreconsistent with the liability for fitness for purpose of thefinished product remaining squarely with the Contractor.

The Contractor's point of view:Less detail and specificity in the User Brief has the

following advantages for the Contractor:The Contractor has more freedom tomove within general requirements setout in the User Briefin order to containits costs.

• The Contractor has more opportunityto provide input into the"constructability" aspects of thedesign.Conflict between the Principal'srequirements and the Contractor'sdesign proposals is less likely.

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The impact of the above three factors on aContractor's attitude to the User Brief may be reduced incircumstances where the Contractor has itself preparedthe User Brief.

4.3 The role of the User BriefThe User Brief is the pivotal contract document in a

D&C contract.The role of the User Brief must be clearly set out in

the D&C contract.The contract must clearly deal with the effect ofany

specific requirements set out in the User Brief:Are the specific requirements mandatorycriteria within which the Contractor isrequired to design in a particular way and inrespect of which there is no reliance on theContractor?

• Are the specific requirements merelyindicative, with the Contractor left free toinnovate?

The contract should deal with the issue of adjustingthe contract sum in circumstances where the Principal'sUser Brief and outline specification are inadequate andextra work must be performed (see section 6 below).

For a Principal to obtain the warranty of fitness forpurpose (Le. Contractor guarantees a result, regardless ofnegligence), he must show that he relied on theContractor's skill and judgment, having made itsrequirements known. The User Brief is where this shouldbe done.

Specify the performance or functional criteria whichthe Contractor's design must meet. For example, the NSWHealth Department recently required tenderers to estimatemaintenance costs over the life of the project, and towarrant that those estimates would not be exceeded.

If a particular element is so important that you wishto leave no discretion to the Contractor regarding its design,then make this clear; but recognise that in this respect,you cannot expect the Contractor to be liable if what yousay you want doesn't in fact meet your purpose.

5. NEW DIRECTIONS: NOVATION, DESIGNAND CONSTRUCT AND MAINTAIN

5.1 NovationIntroduction:

Novation essentially describes a process ofcontract substitution, where one contract isdischarged and replaced by another. The newcontract .may involve only the original parties,or some or all of the original parties plus thirdparties.

Example:A and B· are the parties to a contract. C is athird party.

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This contract may be novated by agreementbetween A, Band C. Party B is replaced byparty C; the old contract between A and B isreplaced by the new contract between A and C.

Novation and the design and construct process:Novation can have the effect of transforminga traditional contractual pattern into a designand construct pattern.

• Pre-novation contractual pattern

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The Principal, Contractor and designconsultants must enter into a contract (anovation contract) under which the originalagreements between the Principal and designconsultants are replaced by new contractsbetween the Contractor and the designconsultants.

Contracts

Principal

Contracts

Contractor

+---- Contracts -------t

Contracts

Design Consultant

Subcontractor Subcontractor

• Post-novation contractual pattern

~rinciP~I

Contracts

I

Gntrac~I

Contracts ---------------,I

ConstructionSubcontractor

ConstructionSubcontractor

Design Consultant(here also a

subcontractor)

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Commercial reasons for using novation:Why would a Principal wish to change "mid­stream" from a traditional pattern to a designand construct pattern? Why not simply usethe design and construct method from thebeginning?Through the use of novation, the Principalmay obtain the benefits of both methodswithout some of the associated problems.Novation can result in advantages for thePrincipal:

A close relationship between theprincipal and the design consultants atthe beginning of the project to ensurethat the Principal has an opportunityto monitor, and provide some directinput into, the design process.A close relationship between theContractor and the design consultantsin the later stages of the design processso the design can take account ofaccess problems, constructionproblems and the working methods ofthe Contractor.

• A close working relationship betweenthe Contractor and the designconsultants can result in cost savingsand often results in speedierconstruction.

• The Contractor accepts responsibilityfor design and construction defects,and may warrant that the finishedproject is fit for its intended purpose.

• Compared to the standard D&Ccontractual arrangement there is ahigher degree ofcertainty in the designsolution to the user brief. This allowsdifferent tenders to be more easilycompared.

PrincipalThe Principal has the advantages outlined above but

should realise that there may be restrictions on directcommunication with the design consultants after novation.After novation, the design consultants are in a directcontractual relationship with the Contractor and not thePrincipaL The importance of this depends on the closenessof the working relationships with the design consultants,and the importance of control over the final stages ofdesign.

By including the appropriate terms in the novationcontract, the Principal can retain the right to monitor andcomment on the design process. However, the Principalshould be careful not to do anything inconsistent with theContractor's responsibility for the design. This means thatthe Principal should not do anything that could beperceived as an acceptance of responsibility for design.

On paper, the use of novation may look great, butnovation requires the agreement of all parties involved.

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From the Principal's point of view, it is critical that theContractor accepts responsibility for the design. Withoutthis distribution of responsibility, novation is ofquestionable use. Ideally, the Principal wants theContractor to warrant that the project will be fit for itsintended purpose.

Contractor

In a novation arrangement, the Contractor is notinvolved in the initial design process. Yet on novation,the Contractor must accept responsibility for it. TheContractor must decide whether this arrangement isacceptable and if so, how much time and money shouldbe spent checking the design. .

The most important decision for the Contractor IS

to determine the extent to which it will warrant the design.It may be to a level of reasonable care and skill or awarranty that the project will be fit for its intended purposeor some other standard. This is a question of riskallocation, to be assessed on a case by case basis.

Design consultantAfter novation, the design consultants are paid by

the Contractor instead of the Principal. This may haveimplications if the Contractor is not as financially stableas the Principal or vice versa. It is also imperative for thedesign consultant to ensure that there is crystal clarity inits consultant agreement concerning its scope of work, andprocedures for valuing variations, to minimise argumentswith the Contractor post-novation regarding variations tothe scope and payment for them.

After novation, the design consultants deal on a dayto day basis with the Contractor instead of the Principal.This may be a difficult adjustment if the Consultant hasenjoyed a close working relationship with the Principaland has never been involved with the Contractor.

Novation contracting is an example of using legalconcepts to influence the management and structure ofthe project.

Consider the use of novation contracting fornominated suppliers or sub-contractors. Is this a meansof achieving the advantages of nomination without thedisadvantages?

5.2 D&C~aRdJllaintain

D&C and Maintain is the contractual pattern forproject delivery where both the design and the constructionis supplied by the contractor and the contractor alsoprovides maintenance of the facility for a period of tim~.The Roads and Traffic Authority of NSW has used thISmethod of project delivery in the SilverwaterRoadextension project. The inclusion of a 10 year maintenanceperiod within the contractor's responsibilities instilledassurance of the long term performance of the project andcreate a sense ofownership in the project for the contractor.

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6. D&C IN PRACTICE - VARIATIONSThe variations/scope of work issue is a tension point

in D&C contracts.What is a "variation" in the D&C context? Is any

design change a variation? Or should the concept belimited to changes the Principal wishes to make to therequirements stipulated in the User Brief?

The Contractor will want the right to make designchanges in the interest of discharging its designresponsibilities (where, for example, there are newdevelopments in construction techniques, or earlier errorsare discovered).

However, the lack of control of and knowledge ofthe work in progress by the Principal and its consultantsin the D&C context means that the Principal has a limitedability to:

test the justification for any design changeproposed by the Contractor; orvalue the cost of the design change, and itseffect on the final completed work (includingits recurrent cost/life cycle costingimplications).

The Principal will typically want the right to directvariations:

Is such a right consiste~ with the designresponsibilities of the Contractor?A possible solution is to give the Contractorthe right to object to variations proposed bythe Principal. The variation clause could:• be silent as to the grounds upon which

the Contractor may object; or• specify the specific grounds on which

the Contractor may object (forexample, where the Contractorreasonably considers that the effect ofthe variation would be to adverselyimpact on the Contractor's designresponsibilities).

• Will a Principal be comfortable with this orfeel that such a right gives too much powerto the Contractor?

Is it practically possible to identify during the courseof a· project those directions which are variations withrespect to construction only and, therefore, do not impacton the Contractor's design responsibilities?

The variations clause will need to deal with the effectof any variations on the contract sum. Distinguishvariations made unilaterally by the Contractor andvariations directed by the Principal and not justifiablyobjected to by the Contractor.

For Contractor initiated design changes, considerbuilding in a mechanism whereby the Contractor warrantsthat the change it is proposing will not adversely affectthe functional integrity or quality standard of the facility.Consideration should also be given to incorporating a cost­sharing mechanism, so that both parties may benefit fromdesign refinements that reduce construction cost withoutcompromising the owner's end-user requirements.

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7. D&C IN PRACTICE - PAYMENT VALUATION

7.1 Ensuring ultimate certainty of priceThe Principal is in a different position in relation to

verification of the contract sum and subsequentadjustments to the contract sum in a D&C contract.

A lump sum price is normally sought by a Principalin a D&C contract.

Even with a lump sum, does the Principal reallyknow what he is getting for his money?

7.2 Payment under a D&C structureA D&C contract does not lend itself ideally to the

traditional method of payment, that is, interim paymentbased on the valuation (certified by the Superintendent)of the work done.

This is because it is very difficult for the Principal'sconsultants (who ordinarily have not been intimatelyinvolved in the design) to accurately ascertain the valueof the work done.

Accordingly, a payment regime allowing forspecified amounts to be paid to the Contractor when itreaches certain pre-determined project milestones hasmuch to commend it from the Principal's point of view.

Such a payment regime also has the advantage, fromthe Principal's point of view, ofoffering a real inducementto the Contractor to maintain progress - unlike the situationunder the traditional system where the Contractor may betempted to direct resources to first completing moreprofitable work on another project.

8. STANDARD FORM - AS4300-1995

8.1 Approach to a design and constructstructureIn the context of considering the essential

requirements ofa design and construct ("D&C") structure,it has been said:

"Probably enough has been said to show that thereis hardly a provision of the traditional form ofcontract which does not require radical rethinkingand revision in order to safeguard the interests ofboth parties and provide a viable commercialdocument."

(Extract from Hudson's Building and EngineeringContracts, by I N Duncan Wallace QC, EleventhEdition, p430.)

Why is this "radical rethinking and revision"necessary? For a number of reasons, including;

• under a D&C contractual pattern for projectdelivery, the Contractor is responsible forboth the design and construction risk;accordingly:• it is imperative that the D&C

Contractor has control of the design.Why? Because without such control,it might not be held to the warranty of

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8.3 Circumstances in which it is said AS4300can applyAS4300 is intended to cover a D&C structure, in

anyone of three different scenarios described in the prefaceto AS4300 as:

"design and construct" - where the Principaldoes not provide preliminary design to theContractor or require novation of anysubcontractors;"design, development and construct" - wherethe Principal provides a preliminary design

fitness for purpose that is seen as themain legal advantage gained by aPrincipal adopting the D&C structure.If the Principal attempts to exertcontrol over the design process, thereis a risk that the efficacy of the fitnessfor purpose warranty will be eroded oreradicated;there is the need to include and dealwith a User Briefin the D&C Contract;the appropriateness of functions of theSuperintendent (found in AS2124)need to be reconsidered in the D&Ccontext; andthe appropriateness of quality relatedobligations (found inAS2124) need tobe reconsidered in the D&C context.

8.2 Approach to AS4300AS4300 is based substantially on the "construct

only" contract AS2124.However, some concepts taken from AS2124 do not

seem to fit neatly into a D&C regime. For example in thecontext of the provision of security:

"Security shall be provided within 30 days ofthe Date ofAcceptance of Tender." (clause5.4 of AS4300.)

• The term Date of Acceptance of Tender isdefined as:"the date which appears on the notice inwriting ofacceptance ofthe tender." (clause2.)

In a D&C tender process it is unlikely that aproponent's tender is in a form which willbe accepted by a Principal without negotiationand thus a change to a tender. Accordingly,the concept of the date of acceptance of atender is not altogether appropriate in a D&Cstructure.If a tender is accepted, there is a contract onthe terms accepted. However, clause 6 inthose circumstances also contemplatesanother document - a Formal Instrument ofAgreement to be prepared and executed bythe parties.

The principal differences between AS2124 andAS4300 seem to fall into two broad categories:

those that are "cosmetic" changes which seekto "tidy up" aspects from AS2124 regardlessof the D&C structure. For example:

by moving defined terms (fromsubstantive clauses) to clause 2 - forexample the definition of "direction"and "test" are defined respectively inclause 23 and clause 31 of AS2124whereas they are defined in clause 2of AS4300;

•

by inserting new defined terms inclause 2 - for example "Certificate ofPractical Completion", "Daywork" ,"Final Certificate" and "FinalPayment Claim";by re-organising the valuation ofvariation clause (clause 40.5);by the re-organising of clause 44.11dealing with insolvency;by the recasting of the notification ofclaims clause (clause 46);by the re-organising of the disputesresolution clause (clause 47); andby the numbering of the items listed inthe Annexure; and

those that have been included having regardto the D&C contractual pattern of AS4300.For example:

by inserting new defined terms in clause2 relating specifically to the D&Cstructure - for example "Consultant","Contractor's Design Obligations","Design Documents", "PreliminaryDesign" and "Principal's ProjectRequirements";by deleting the bill of quantities clauseand replacing it with a new clausecontaining warranties by the Contractor(clause 4);by amending the supply of documentsclause (clause 8.4);by including the option of novation ofprior contracts entered into by thePrincipal (clause 10) including pro­forma deeds of novation (Part D andPart E of the Annexure);by re-wording the intellectual propertylights clause (clause 13);by including a requirement on theContractor to effect professionalindemnity insurance (clause 21);by the recasting ofthe Contractor's rightto access the Site (clause 27.1); andby the amending of the types ofvariations permitted under the contract(clause 40.1).

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but does not require novation of anysubcontractors; or"design, novate and construct" - where thePrincipal provides preliminary design andrequires novation of specified subcontractors(including consultants) or "SelectedSubcontractors" .

8.4 Primary obligations of the Contractor underAS4300In considering how these different types of "project

procurement methods" are dealt with in AS4300, it isimportant to understand how some of the Contractor'sprimary obligations are expressed in AS4300.

• "The Contractor shall execute and completethe work under the Contract in accordancewith the requirements of the Contract."(clause 3.2.)"Without limiting the generality ofClause 3.1,the Contractor warrants to the Principal thatthe Contractor:(a)(b)(c)

(d) shall execute and complete theContractor's Design Obligations andproduce the Design Documents toaccord with the Principal's ProjectRequirements and, ifClause 10 applies,accept the novation and retain theConsultants for any work the subject ofa prior contract with the Principal; and

(e) shall execute and complete the workunder the·Contract in accordance withthe Design Documents so that theWorks, when completed, shall:(i) be fitfor their stated purpose; and(ii) comply with all the requirements of

the Contract and all LegislativeRequirements." (clause 4.1.)(Emphasis added.)

The use of the words "and produce the DesignDocuments" in clause 4.1(d) above is''''superfluous as theterm "Contractor's Design Obligations" includes the"preparation of the Design Documents".

8.5 Relevant definitions in AS4300In determining how each of the three scenarios (as

described in item 8.3 above) fits within the Contractor'sobligations (as described in item 8.4 above), it is necessaryto examine some of the definitions that are included inAS4300 which were not in AS2124. It is from these newdefinitions that the type of project procurement methodas noted in item 8.3 above can be identified.

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Turning specifically to clause 4.1 (d) ofAS4300 andrearranging the clause for convenience's sake the clause(in part) requires that:

"The Contractor warrants to the Principal that theContractor shall:

execute and complete the Contractor'sDesign Obligations; andproduce the Design Documents toaccord with the Principal's ProjectRequirements;

ifclause 10 applies, accept the novation andretain the Consultants for any work thesubject ofa prior contract with the Principal;andwill execute and complete the work under theContract in accordance with the DesignDocuments. "

"Design and Construct" or "design, developmentand construct"

It is from the definition of Contractor's DesignObligations that one identifies whether there is to be a"design and construct" method of project procurement.The definition of Contractor's Design Obligationsmeans:

all tasks necessary to design and specify the Worksrequired by the Contract, including:• preparation of the Design Documents; and

if the documents stated in Annexure Part Aas describing the Principal's ProjectRequirements include a Preliminary Design,developing the Preliminary Design.

Only if "the documents stated in Annexure Part Aas describing the Principal sProject Requirements includea Preliminary Design" will there be a "design, developmentand construct" method. If there is no "PreliminaryDesign" then there will be a "design and construct"method.

The definition of Design Documents is:"the drawings, specifications and otherinformation, samples, models, patterns andthe likerequired by the Contract and created (andincluding, where the context so requires, those tobe carried out by the Contractor) for theconstruction ofthe Works."

The definition of "Works" is:"the whole ofthe work to be executed in accordancewith the Contract, including variations providedforby the Contract, which by the Contract is to behanded over to the Principal."

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The definition ofPrincipal's Project Requirements is:"the written summary or outline of the Principal sRequirements for the Works described in thedocuments stated in Annexure Part A and:

(a) shall include the statedpurposeforwhichthe Works are intended;

(b) may include the Principal s design, timingand cost objectives for the Works; and

(c) where stated in Annexure Part A, shallinclude a Preliminary Design."

10. Preliminary Design(Clause 2)

11. The Principals Project Requirementsare described in the followingdocuments(additional to those listedin the Annexure item for PreliminaryDesign): (Clause 2)

"Design, novate and construct"Only if:

"the documents stated in Annexure Part A asdescribing the Principal's ProjectRequirements include a Preliminary Design";anditem 24 of Annexure Part A is completed,

will there be a "design, novate and construct"method.

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This, then, for AS4300 is the "User Brief'discussed in detail above in section 4 of this paper.

The definition of Preliminary Design is;"any preliminary design of the works included inthe documents stated in Annexure Part A asdescribing the Principals Project Requirements."

The relevant extracts from Annexure Part A ofAS4300 relating to the above definitions are:

(A) A Preliminary Designis includedis not included

in the Principal s Project Requirements.

(B) Ifa Preliminary Design is included in thePrincipal s Project Requirements, theDocuments stating the Preliminary Design are:

Documents describing the Principal s Projectrequirements are:

Preliminary Design (ifincluded in Annexure Item 10)

.....................................................................................

•

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8.6 Putting items 8.3, 8.4 and 8.5 all together -Overview of types of "project procurement methods" in AS4300

Contractor must execute and complete:• Contractor's Design Obligations to accord with Principal's

Project Requirements; andwork under the Contract in accordance with Design Documentsso Works are fit for their stated purpose.

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I"design and

construct'

Principal's ProjectRequirements withoutPreliminary Design(Le. delete "is included'in item 10, Annexure)

"design, developmentand construct'

IPrincipal's ProjectRequirements withPreliminary Design(Le. delete "is not included'in item 10, Annexure)

"design, novateand construct'

IPrincipal's ProjectRequirements withPreliminary Design(Le. delete "is not included'in item 10, Annexure)

and Clause 1°applies(complete item 24, Annexure)

8.7 The role of the Superintendent underAS4300

"Superintendent" is defined in clause 2 as:"the -person stated in Annexure Part A as theSuperintendent or other person from time to timeappointed in writing by the Principal to be theSuperintendent and notified as such in writing to theContractor by the Principal and, so far as concernsthe functions exercisable by a Superintendent'sRepresentative, includes a Superintendent'sRepresentative."

"direction" is defined in clause 2 to include:"agreement, approval, authorisation, certificate,decision, demand, determination, explanation,instruction, notice, order, permission, rejection,request or requirement."

Clause 23 of AS4300 is headed "Superintendent"and provides:

"The Principal shall ensure that at all times there isa Superintendent and that in the exercise of thefunctions ofthe Superintendent under the Contract,the Superintendent:(a) acts honestly andfairly;(b) acts within the time prescribed under the

Contract or where no time is prescribed,within a reasonable time; and

(c) arrives at a reasonable measure or value ofwork, quantities or time.

Ifpursuant to a provision of the Contract enablingthe Superintendent to give directions, theSuperintendent gives a direction, the Contractorshall comply with the direction.

Except where the Contract otherwise provides, adirection may be given orally but the Superintendentshall as soon as practicable confirm it in writing.

If the Contractor in writing requests theSuperintendent to confirm an oral direction, theContractor shall not be bound to comply with thedirection until the Superintendent confirms it inwriting.

The Superintendent shall have:(i) access to the Site and the work under

the Contract; and(ii) after reasonable notice to the

Contractor, access to any place otherthan the Site where work

under the Contract is being carried out ormaterials are being prepared or stored,

for the purposes ofdischarging the functions oftheSuperintendent under the Contract."

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The Superintendent has functions and powersin various clauses throughout AS4300, including(among others):

extensions of time (clause 35.5);• variations (clause 40.1);

payment (clause 42);certificate of practical completion (clause42.3); and

• dispute resolution (clause 47).

8.8 The effect of the Superintendent's roleunder AS4300 on the risk allocationagreed by the parties

In AS4300 (as in many other standard forms) therole of the Superintendent is central to the contract, owingto the wide-ranging powers and discretions which areattached to this position.

These powers effectively give the Superintendentbroad discretions in relation to major components of thecontract. The independent exercise of these discretionshas the potential to affect the allocation of risk betweenthe Contractor and the Principal. For example, a powerof the Superintendent to grant variations for almost anyreason has the potential to increase the Principal's costs.

A Superintendent should primarily administer itscontractual responsibilities in a way which supports therisk allocation pattern agreed between the parties.

To the extent that, contractually, the Superintendentis given powers· in relation to matters including defects,extensions of time and certification ofpractical completion,it is possible for the Superintendent to lessen therequirements of the contract without recourse to thePrincipal. This effectively enables him to unilaterally varythe commercial parameters of the deal previously agreedbetween the parties.

The powers of the Superintendent under AS4300are very similar to the corresponding powers underAS2124even though the basic obligations on the Contractor underAS4300 are very different.

8.9 Principal's duty to ensure theSuperintendent's performanceUnderAS4300 the Principal undertakes to "ensure"

that the Superintendent exercises its functions in themanner specified in clause 23 (see item 8.7 above).

This means the Principal will be in breach ofcontractif it does not ensure that the Superintendent performs itsrole in accordance with the requirements of the Contract.

This express undertaking on the part of the Principalunder AS4300 demands that a Principal must ensure thatits Superintendent carefully exercises its role at all stagesof his performance. It can be argued that it virtuallyrequires the Principal to concern himself with all aspectsof the administration of the contract.

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8.10 Design Risk - Contractor's WarrantiesUnlike AS2124, AS4300 contains a clause dealing

with Contractor's warranties to the Principal.The warranties are set out in clause 4.1. Under this

clause the Contractor warrants to the Principal that theContractor:

H(a) at all times shall be suitably qualified andexperienced, and shall exercise due skill, careand diligence in the execution and completionof the work under the Contract;

(b) subject to Clause 9, shall engage and retainthe Consultants identified in the Contractor Stender and who are suitably qualified andexperienced;

(c) has examined and carefully checked anyPreliminary Design included in thePrincipal S Project Requirements and thatsuch Preliminary Design is suitable,appropriate and adequate for the purposestated in the Principal's ProjectRequirements;

(d) shall execute and complete the ContractorsDesign Obligations and produce the DesignDocuments to accord with the PrincipalsProject Requirements and, if Clause 10applies, accept the novation and retain theConsultantsfor any work the subject ofa priorcontract with the Principal; and

(e) shall execute and complete the work underthe Contract in accordance with the DesignDocuments so that the Works, whencompleted, shall:(i) be fit for their stated purpose; and(ii) comply with all the requirements ofthe

Contract and all LegislativeRequirements."

As we have seen the pivotal document in a D&Ccontract is the User Brief - in AS4300 the "PrincipalsProject Requirements". This contract document must setout the Principal's requirements, including the "statedpurpose for which the Works are intended". In thisdocument the Principal must ensure that the purposes itrequires the finished product to fulfil are articulated asclearly as possible. The Principal will only be able tosheet home design liability to the Contractor to the extentthat its requirements have been clearly articulated in the"Principal S Project Requirements". For a Principal toobtain the warranty of fitness for purpose (Le. Contractorguarantees a result regardless of whether or not it has beennegligent) it must show that it relied on the Contractor'sskill and judgment, having made its requirementsknown. The "Principal S Project Requirements" is wherethis should be done.

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Clause 4.2 states that the warranties in clause 4.1:"shall remain unaffected notwithstanding:

(a) that design work (including thePreliminary Design) has been carried outby or on behalf of the Principal andincluded in the Principal's ProjectRequirements;

(b) that the Contractor has entered into anovation ofany prior contract between thePrincipal and a consultantofthe Principalunder Clause 10 and thereafter hasretained that consultant in connection withthe work under the Contract;

(c) any receipt or review of, or comment ordirection on, the Design Documents by theSuperintendent; and

(d) any variation under clause 40."

The position in paragraph (c) of the above extract issupplemented by the paragraph in clause 8.4 of AS4300which provides:

"Neither the Principal nor the Superintendent shallbe bound to review or comment upon the DesignDocuments or to check the Design Documents forerrors, omissions or compliance with therequirements ofthe Contract. The Principal s or theSuperintendent s receipt of, or review of, or commenton, the Design Documents and any other documentsprovided by the Contractor, shall not relieve theContractorfrom responsibility for the Contractor serrors or omissions or departure from theContractor's Design Obligations or otherrequirements of the Contract."

However, the above extracts should be contrastedwith the following paragraph also found in clause 8.4 ofAS4300:

"If the Contract provides that the Contractor mustobtain the Superintendent's direction whetherdocuments are suitable or are not suitable then,within the time stated in Annexure Part A or, if notime is stated, within 14 days after receipt of thedocuments, the Superintendent shall notify theContractor that the documents are suitable or arenot suitable. If the Superintetrde'1U .notifies theContractor that the documents are not suitable, theSuperintendent shall give reasons why the documentsare not suitable and the Contractor shall submit newor amended documents for the Superintendent'sdirection pursuant to this Clause 8.4."

How can the above extracts be reconciled?On the one hand, under clause 8.4 and clause23 of AS4300 the Contractor must (forexample) comply with a direction from theSuperintendent to amend documents (whichdirection could affect the efficacy of thedesign).

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On the other hand, under clause 4.1 ofAS4300the Contractor must warrant that the works(regardless, for example, of the number andextent of any directions from theSuperintendent to amend design documents)are fit for their stated purpose.

8.11 Variations - Clause 40 of AS4300In a D&C contract the Contractor must be given the

ability to unilaterally vary the design, because of itscontinuing responsibility to ensure the efficacy of thatdesign. The Principal's power to vary the design shouldbe limited. A variation clause in a D&C structure shouldempower the Principal (or the Superintendent on its behalf)only to vary its requirements as stated in the Principal'sProject Requirements; not the design itself, which is theContractor's responsibility.

Clause 40.1 of AS4300 provides:"The Superintendent may direct the Contractor todo anyone or more ofthe following:

increase, decrease or omit any part of thework under the Contract;change the character or quality of anymaterial or work or ofanything described inthe Principal s Project Requirements or theDesign Documents;change the levels, lines, positions ordimensions of anything described in thePrincipals Project Requirements, the DesignDocuments, or any part ofthe work under theContract;execute additional work;demolish or remove material or work nolonger required by the Principal.

The Contractor shall not vary the work under theContract except as directed by the Superintendentor approved in writing by the Superintendentpursuant to Clause 40.

The Contractor is bound only to execute avariation which is within the general scope oftheContract.

Except where otherwise provided in the Contract,the Superintendent shall not direct a variation afterthe Date for Practical Completion."

The above extract seems at first glance to be a selfcontained regime regarding variations. However, clause8.4 (headed "Supply ofDocuments by Contractor") alsoneeds to be considered in this context, which relevantlyprovides:

"A direction by the Superintendent to vary anythingin the Design Documents shall be a variation tothe work under the Contract only to the extent thatthe Design Documents, before such variation,complied, or would have complied, with thePrincipals Project Requirements."

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How can one decide whether or not a DesignDocument (before a variation) would have complied withthe Principal's Project Requirements (especially thewarranty as to the fitness for purpose)?

Is the unilateral right on the Principal to directvariations consistent with the design responsibilities ofthe Contractor? A possible approach is to give theContractor the right to object to variations proposed bythe Principal. The variations clause could:

be silent as to the grounds upon which theContractor may object; orspecify the specific grounds on which theContractor may object (for example, wherethe Contractor reasonably considers that theeffect of the variation would be to adverselyimpact on the Contractor's designresponsibilities).

Will a Principal be comfortable with this or feel thatsuch a right gives too much power to the Contractor?

8.12 Payment under AS4300In the context of payment, clause 3.1 of AS4300

relevantly provides:"The Principal shall pay the Contractor:(a) for workfor which the Principal accepted a

lump sum, the lump sum; and(b) for work for which the Principal accepted

rates, the sum ascertained by multiplying themeasured quantity ofeach section or item ofwork actually carried out under the Contractby the rate accepted by the Principal for thesection or item,

adjusted by any additions or deductions madepursuant to the Contract."

Clause 42.1 ofAS4300 provides (in part):"At the timesfor payment claims or upon completionofthe stages ofthe work under the Contract statedin Annexure PartA ..., the Contractor shall deliverto the Superintendent claimsfor payment supportedby evidence ofthe amount due ... Claimsfor paymentshall include the value of work carried out by theContractor in the peiformance of the Contract tothat time together with all amounts then otherwisedue to the Contractor arising out ofthe Contract ...

Within 14 days ofreceipt ofa claimfor payment, theSuperintendent shall assess the claim and shall issueto the Principal and to the Contractor a paymentcertificate stating the amount ofthe payment which,in the Superintendent's opinion, is to be made by thePrincipal to the Contractor, or by the Contractor tothe Principal ..." (Emphasis added.)

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The principle change to clause 42.1 in AS4300 (dueto the D&C structure) from AS2124 is the inclusion of thewords "or upon completion ofthe stages ofthe work underthe Contract". However, there are no other appropriateconsequential changes. For example:

the clause still refers to the Contractorproviding evidence as to the "value ofworkcarried out by the Contractor"; andthere is no mechanism in clause 42 forspecified payments to be stated in respect ofthe agreed "stages of the work". 0