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Decoding design and construct contracts: Time (part 4)

09 September 2022

#Construction, Infrastructure & Projects

Published by:

Andrea Wilson

Decoding design and construct contracts: Time (part 4)

In this fourth article breaking down the popular AS4902 standard form design and construct contract, we’ll be considering the concept of ‘time’ under the contract as specifically utilised in clause 34.

How does time operate under the contract?

Under the standard AS4902, clause 34.1 provides that the contractor shall ensure the works under the contract are completed by the date for practical completion. The date for practical completion will be subject to pre-contractual negotiations, agreement, and may be dictated by other stakeholders to the transaction (such as tenants who may need to occupy by a certain date).

Reaching practical completion

Practical completion is defined by clause 1 of the general conditions to AS4902 as follows:

is that stage in the carrying out and completion of WUC when:

  • the Works are complete except for minor defects:
    • which do not prevent the Works from being reasonably capable of being used for their stated purpose
    • which the Superintendent determines the Contractor has reasonable grounds for not promptly rectifying
    • the rectification of which will not prejudice the convenient use of the Works
  • those tests which are required by the Contract to be carried out and passed before the Works reach practical completion have been carried out and passed
  • documents and other information required under the Contract which, in the Superintendent’s opinion, are essential for the use, operation and maintenance of the Works have been supplied.

This standard definition essentially requires the works to be completed to a state that renders the works fit for use but not entirely free from defects (i.e. not practical perfection). As the definition also demonstrates, it is the Superintendent who has the discretion in relation to whether the works have in fact achieved practical completion. Given the broad discretion conferred on the Superintendent, this definition is often one of the most heavily negotiated aspects of the AS4902, often due to an effort to add more certainty in relation to the exact condition the works must achieve before the Contractor is considered to have practically completed the works. 

An example of a particularly strict definition of practical completion can be found in the decision of Grocon Constructors (Qld) Pty Ltd v Juniper Developers No.2 Pty Ltd & Anor [2015] QSC 102. The definition in this case was so specific that practical completion could not be reached until the Contractor had completed minute steps like providing 2 sets of keys for the Works fitted with plastic tags having approved label inserts”.

Date ‘for’ and date ‘of’ – what is the difference?

In the AS4902, there are two different terms often used in conjunction with practical completion – the date for practical completion and the date of practical completion.

The date for practical completion is the fixed date for when the works are supposed to be practically complete (as practical completion is defined). The date for practical completion can only be moved if an extension of time is granted (which is discussed further below).

Alternatively, the date of practical completion is the date when the Superintendent determines or otherwise certifies when practical completion (as defined) is reached.

If the Contractor does not reach practical completion by the date for practical completion, there can be financial consequences such as liquidated damages levied by the principal and prolongation costs incurred by the Contractor, which are not recoverable. For this reason, the date for practical completion and date of practical completion are often the source of dispute on a project.

Extensions of time

The date for practical completion can change pursuant to an extension of time (EOT) being granted under clause 34.3. A Contractor can only validly obtain an EOT if it has experienced a qualifying cause of delay.

A standard AS4902 includes a default number of qualifying causes of delay, generally restricted to circumstances reasonably outside the Contractor’s control. However, this definition is also often heavily negotiated and the scope of what will be considered a qualifying cause of delay can wildly vary from project to project.

The granting of an EOT can also be subject to the Contractor strictly complying with notice requirements. These can include time bars or preceding notices of delay. Failure to comply can mean even though the Contractor did experience a qualifying cause of delay, it may not be entitled to an EOT. For this reason it is extremely important for all parties to understand and follow the processes for notifying, claiming and assessing EOTs under the contract.

Delay damages

One thing that all parties need to remain aware of is the difference between a qualifying cause of delay, and a compensable cause. Whilst experiencing a qualifying cause of delay entitles a Contractor to an EOT, it does not automatically entitle it to delay damages. Under clause 34.9 of the unamended AS4902, a Contractor is only entitled to delay damages if:

  • it is awarded an EOT
  • the EOT was for a compensable cause
  • it make a claim under clause 41.1 (the notification of claims clause).

Therefore, whilst a Contractor must always have experienced a qualifying cause of delay to be eligible for an EOT, not every qualifying cause of delay is a compensable cause.

Generally, compensable causes are limited to the qualifying causes of delay that are outside the control of the Contractor, and those which the Contractor will not necessarily be required to consider at the time of preparing its program.

For example, under clause 1 of an unamended AS4902, a compensable cause is only for acts, defaults or omissions by the Principal (or its agents, consultants etc) or the Superintendent. It does not extend to delays associated with inclement weather as this is generally a cause of delay that the Contractor is expected to have factored in to its program for the works. However, further compensable causes can be included at Item 31 of Part A to the contract if negotiated by the parties.

We also sometimes see Part A of the contract amended to include a new Item number specifying a delay damages rate or cap on the daily delay damages claimable by a Contractor.

This prevents a Contractor being able to claim all of its loss, however it could also have the opposite result in giving a Contractor more than it incurs if the rate is expressed as a liquidated entitlement to delay damages, rather than a cap on what is actually claimable by the Contractor.

Liquidated damages

There are many circumstances where a Contractor may be delayed for reasons which are not qualifying causes of delay and is therefore not entitled to an EOT.

Should this occur, the Contractor may not achieve practical completion by the required date. Under clause 34.7, the Principal may levy liquidated damages for each day after the date for practical completion that the Contractor is late. 

The daily liquidated damages rate can be specified by the parties at Item 29 of Part A to the contract. We often see this rate being the subject of significant negotiation. If the Principal overreaches in determining this rate, the result can be that the liquidated damages rate is found to be a penalty and subsequently unenforceable. When setting a liquidated damages rate, reasonable effort should be made to align the rate of liquidated damages with a reasonable pre-estimate of loss for delayed completion, rather than seeking to recoup over and above any loss potentially incurred.

Bonus for early practical completion

Whilst the Contractor can be out of pocket for a delay in reaching practical completion, under clause 34.8, it can also be rewarded for reaching it early. Clause 34.8 of an unamended AS4902 provides that a Contractor can receive a bonus for reaching practical completion early. The daily rate for this bonus can be included at Item 30(a) of Part A, and a limit can be similarly included at Item 30(b).

Therefore, it should come as no surprise that delays are one of the biggest dispute items experienced on projects. There can be significant costs incurred if a Contractor miscalculates its program, or a Superintendent is unreasonable in recognising when an EOT should be awarded.

As dispute resolution specialists, we are equipped to assist all parties in resolving these issues, if and when they arise. Should you require assistance with any of the above, send your enquiry here.

Authors: Jacqui Doyle & Andrea Wilson

  • Andrea Wilson is an Associate in our national Construction, Infrastructure & Projects group. This article was originally published in the September edition of Holding Redlich’s Junior In-House Monthly, which you can subscribe to here.

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Andrea Wilson

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