Cert IV - M. S. Martin April 2012

Resolve Business Disputes and Select and Prepare a

Construction Contract

Lesson Ten

Cert IV - M. S. Martin February 2012

Todays Lesson

• Contract Retention and Securities Money– Ref: Chapter two and – contract samples, web based references

• Where could disputes arise from the above ?

Cert IV - M. S. Martin January 2012

Definition – “Retention”• Provision in a contract that allows a customer to withhold a portion

of the contract price until the determination that the project or goods meet the predetermined or standard specifications.

• A commonly used amount is 5% or 10% of the contract sum• It should be noted that some industry organisations (HIA for

example) recommend against the use of retention clauses. OFT contracts also do not have retention clauses.

• We will look at their contracts later and see how they deal with it instead

Cert IV - M. S. Martin January 2012

Two sides of the argument

• Those in Favour of: say because of difficulties in getting contractors back on site to remedy defects, retentions are simply good practice and keep contractors on their toes and focussed on the job in hand.

• Those opposed to: say it is often a system abused by employers who withhold payments unreasonably, their objective being either to speed up work and/or to achieve cost savings with only marginal interest placed in indemnifying the employer against defects.

Cert IV - M. S. Martin January 2012

Security and Retention – from text

• This is money that must be available in case one party can not perform is contractual obligations.

• For example:– where the Contractor can not complete work on time and the

Principal seeks liquidated damages.– If scheduled payments do not occur to the Contractor

• Securities may be required for Contractor and the Principal– Once ‘practical completion’ is reached the security amount is

reduced– When ‘final certificate’ of completion is issued the security must

be returned.

Cert IV - M. S. Martin January 2012

Sample One – Independent Contract

Relative clauses follow

Cert IV - M. S. Martin January 2012

Sample clause with retention

• 3.3 Contractor shall submit to (STATE NAME OF ORGANISATION) a detailed invoice, specifying the services, which have been completed.(STATE NAME OF ORGANISATION) will pay Contractor approved fees and expenses for services performed in accordance with this Agreement within 30 days after receipt of invoice. In case of any direct payment to suppliers of goods and services by (STATE NAME OF ORGANISATION), related to this contract will be deducted from the contract sum.The Engineer shall if requested by the Contractor at intervals of minimum of two weeks calculated from the date of commencement inserted in Clause 3 certify interim payments to the Contractor in respect of the value of the works executed as per the payment schedule indicated here below. All payments made to contractor will be subject to 10% reduction to cater for retention money amounting to 10% of the contract sum.

Cert IV - M. S. Martin January 2012

Payment schedule for same contract, note payment of retention

• Initial payment will be 20 % of the contract sum. This payment will be made on signing of the contract. This payment will be used for mobilisation and starting of the works.

• The second payment will be 30 % of the contact sum. This payment will be made on completion of 50% of the works.

• The next payment will be 20% on completion of 75% of the works. • The next payment will be 30% on completion of 100% of the works. A

copy of Certificate of Practical Completion will be a requirement for payment of this amount.

• The payment of retention money amounting to 10% of contract sum will be made after expiry of Warranty Period of Eight Weeks and after the issuing of certificate of completion. All necessary repairs will have been done to the satisfaction of The Engineer before this payment is made.

Cert IV - M. S. Martin January 2012

Sample of how $ retention is deducted

• Using the previous schedule and say a contract sum of $800,000.00• Retention is 10% in total, therefore = $80,000.00• Initial Payment is 20% = $160,000 – 10% = $144,000.00 (now holding $16,000)• Second payment 30% = $ 240,000 – 10% = $ 216,000.00 (now holding $ 40,000)• Next payment 20% = $ 160,000 – 10% = $144,000.00 (now holding $ 56,000)• Next payment 30% = $ 240,000 – 10% = $ 216,000.00 (now holding $ 80,000)

• This $80,000.00 by these terms is now held for Eight Weeks and after the issuing of certificate of completion

• Also remember, if defects are not completed to the satisfaction of the engineer in this case this eight weeks could be longer.

Cert IV - M. S. Martin January 2012

Sample Two – Part HIA Contract

Relative clauses follow

Cert IV - M. S. Martin January 2012

‘Some’ initial clauses – P3 - 4

Cert IV - M. S. Martin January 2012

Security Account – P14

Cert IV - M. S. Martin January 2012

Defects Liability Periods - P24

Cert IV - M. S. Martin January 2012

Liquidated Damages – P25

Cert IV - M. S. Martin January 2012

Summary of HIA Contract

• Within this contract, the only real retention is any monies held until practical completion is achieved

• And / or liquidated damages if applicable, however these are a stipulated amount, not a percentage like retention.

• Check me now! I couldn’t find specifics on monies held while the 13 week defects liability period is happening?

Cert IV - M. S. Martin January 2012

HIA Payment Schedule – P5• This schedule for

payment is structured in consultation with both parties

• Or do you write it?• The stages are to be

determined and there is nothing stopping within this clause a statement of monies withheld until the completion of defects liability

• Or do other clauses prevent this?

• Discuss

Cert IV - M. S. Martin January 2012

Types of Contracts• Chapter 3 looks at types of contracts• Also it gives you a list of AS codes

relative to contracts• Even if you cant look at an individual

contract itself…• You can access the standard and see

what is required by law!• Check me, but this chapter gives you

36 examples of “different” contracts• Each one will have a slightly different

scope and conditions.• Then you have all the purpose

written contracts, like our first example today.

Cert IV - M. S. Martin January 2012

Reality Check• Entering into contracts is a serious event• It is also a legal requirement, so as contractors and Builders we have to do it• Never enter into contracts lightly• The requirement to initial each page is for a purpose, because you need to understand it!• If they are complex, you can take time to look over them, seek legal advice even, if you deem necessary• Remember there are also cooling off periods, again for a reason!• The structure is already there, we just need to be aware of and understand• Reality is if you break a contract you break the law, similarly if you are in breach of an act, Building, WHS

etc. You are breaking the law. If you break the law, you can receive substantial fines or at worst go to gaol.

• This statement isn’t intended to scare you, just be aware! If you break the laws on the road, the same principles apply, so don’t think I’m saying anything new, we all travelled to TAFE today.

• My personal thoughts – Don’t dwell on the negative (above in this case), it’s a reality, but it shouldn’t be what drives us. Always think “glass half full” and do the best job you possibly can, maintain your integrity, respect your peers and colleagues, maintain honesty throughout. Don’t be afraid to make mistakes, just learn from them, and try not to do them again. A man who never made a mistake, never made anything! Its simple principles that make good business with longevity, focus on the work, not on the money.

Cert IV - M. S. Martin January 2012

References• Competency text for ‘Resolve Business Disputes and Select and Prepare a

Construction Contract’ • Web sites as listed below:http://www.businessdictionary.com/definition/retention-clause.html#ixzz1tgpklopphttp://www.boyesturner.com/news-article.html?id=67https://docs.google.com/viewer?a=v&q=cache:zb3MWoAS0QkJ:log.logcluster.org/

response/procurement/LOG-2-3-PROCUREMENT-SAMPLE-Works%2520Contract%2520Sample-WV.pdf+sample+of+retention+clause&hl=en&gl=au&pid=bl&srcid=ADGEESgU3khFp_DaVWVAubQxTwAVIFPUmiJbRqFh2ekKfjnCeDyvxFo0fXLpXXiKtoEdVMfCjJl2RPio5_NF8NRGptcQTLq2zfP1hemQoi9hYF1Ue0gfRTjQwWoWqDqn7gKvaBnHrCP4&sig=AHIEtbQBAnl5rITVJj6IzDMxNTH5Adw1zw

www.comlaw.gov.au/Details/F2009C01105 http://www.fairtrading.nsw.gov.au/default.htmlhttp://www.cttt.nsw.gov.au/Dispute_resolution.html