Government Contracts for Construction by arj82890


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									Understanding the New Government Contracts
Mark Varian discusses new forms of Government construction contracts.

The political and public outcry about cost overruns for large infrastructure projects has been
well documented. In response to this the Government, in May 2004, sought to reform how
these projects would be procured. The stated aim was to achieve cost certainty and better
value for money.

The result was the production of 5 construction contracts and a consultant’s letter of

This talk focuses on the construction contracts which are,

1. A Contract for Building Works Designed by the Employer

2. A Contract for Building Works Designed by the Contractor

3. A Contract for Civil Engineering Works Designed by the Employer

4. A Contract for Civil Engineering Works Designed by the Contractor, and

5. A Contract for Minor Civil Engineering and Building Works Designed by the Employer

PART A - Who is Obliged to Use Them

Guidance issued by the Department of Finance, via Circular 33/06 (“the Guidance”), states
that projects procured directly by,

1. Government Departments

2. Bodies under the aegis of Government Departments (ie the NRA, RPA etc)

3. Local Authorities

4. Other relevant bodies that provide public services (ie schools, hospitals etc), and

5. Commercial Semi-State where “more than 50% of the funding for the project concerned
   comes directly or indirectly from the Exchequer” (emphasis added)

The first four categories are reasonably identifiable given their nature. The word “directly”
would suggest that if the public body is not “directly” employing the Contractor then the
new forms of contract are not required to be used.

I make this point as we have been involved with a number of Local Authorities and public
bodies who have entered into joint ventures, development agreements and PPP style
arrangements. In these types of contractual structure it is invariably the private sector
entity that procures the construction of the project. In such circumstances, I would be of
the view that there is no obligation to use the New Government Contracts.

The position of the Commercial Semi-State bodies is less clear. In essence, if 50% or more
of direct or indirect funding comes from the Exchequer, the New Government Contracts
must be used. The Guidance states the position in the negative and specifically mentions
the ESB, Bord Gais and An Post as bodies to whom the New Government Contracts would
prima facia not apply.

You could get into a philosophical debate over what “indirect funding” of a Semi-State body
means. Ultimately, each Semi-State body will have to seek guidance from the Department
of Finance as to whether they should use the New Government Contracts or not. This may
even be on a case by case basis depending on the nature of the project. It seems the
intent would be that there is no obligation to do so but the language is less than precise.

Finally on this point, paragraph 8 of the Guidance states that even if there is no obligation
to use the New Government Contracts, there use should be encouraged as best practise.
In particular, Clause 5.3 entitled Pay and Conditions of Employment must be included in
whatever forms or contract are used.

Sanctions – what happens if you don’t use them?

As per all guidance, Circular 33/06 is not legally binding. However, a public body will open
itself up to criticism if the Guidance is not followed. The Public Accounts Committee and
the Comptroller and Auditor General will no doubt carefully watch the situation.

I don’t believe, the non use of the New Government Contracts by a public body, would give
an unsuccessful bidder a right of action against the public body. However, I could see an
unsuccessful bidder trying to “muddy the waters” by bringing judicial review proceedings.


According to the Guidance, all amendments to the New Government Contracts, must be
approved by the GCCC before use by a public body. This would seem overly prescriptive.
However, perhaps understandable if greater systemisation is one of the overall goals of the
Department of Finance.

PART B - Things to Watch Out For

As most of you will be aware debate has raged about all aspects of the New Government
Contracts. Are they needed? the risk allocations etc.

As mentioned, the central aim was to achieve greater cost certainty and obtain value for
money. This goal will only have been achieved when a number of projects have been
completed on budget.

What can be said is that a maximisation of risk transfer has been achieved in the new
Government Contracts. The job of the Contractor has, as a result, become a lot more
difficult. If value for money is ultimately to be achieved the private sector will have to be
put in a position to effectively manage the risks transferred.

This is not virgin territory, the FIDIC Silver Book Contract has roughly the same risk
allocations and has been used in a number of projects that I have been involved in.

This next section highlights some of the issues that the private sector will need to be aware
of before “pricing” a contract.

1. Claims for Delay and Disruption

   When researching this paper, I read some of the commentaries on the New Government
   Contracts written by other parties. Much has been made about the provisions of Clause
   10.3.2. It states that “[if] the Contractor does not give notice and details in accordance
   with and within the time provided…the Contractor shall not be entitled to an increase to
   the Contract Sum or an extension of time”.

   I would make two points about this. Firstly, we have been amending the RIAI and IEI
   to this effect for quite some time now. And we are alone in this. The time periods in
   the New Government Contracts are 20 working days to notify (Clause 10.3.1) and a
   further 20 working days to provide further details as set out in that clause. This
   compares with the JCT Major Projects Form of 28 days notice.

   I am an advocate of this type of clause. Contemporaneous notification brings more
   efficient claims management and should be welcomed. However, I remember one hard
   bitten contracts manager saying that “each time a pigeon flew over the site he would
   have to serve a notice”!

   Secondly, in previous seminars, I have highlighted the UK case of City Inns vs
   Sheppard. In this case, it was stated if compliance with a time period was stated to be
   a condition precedent to recovery of a claim then if the time period was not complied
   with no recovery should be made. In the New Government Contract the language is
   precise but the words “condition precedent” are not used. Equally, the Irish Courts
   have shown themselves in the past to have a more flexible attitude when it comes to
   compliance with time periods.

   I suspect that, as a result of the above, these provisions may well be the first to be
   judicially tested.

2. The Schedule to the New Government Contracts and the Works Requirements

   Similarly to other standard form contracts, the terms and conditions of the New
   Government Contracts make extensive references to a Schedule which is to be attached
   to these terms and conditions. This Schedule will need to be completed for each
   particular project.

   From a public sector perspective, a detailed knowledge of what is required to be
   included in the Schedule and in particular, the Works Requirements, is an absolute

   For example,

  A.    The definition of Works – The “Works” are to be described in the Works
        Requirements.      Generally in a construction contract, from an Employer’s
        perspective, the most you will get is what you actually ask for. Therefore
        sufficient clear detail is required here. From a Contractor’s perspective, if this
        definition includes items not being procured by the Contractor (but by others) the
        contractor may expose itself to obligations that were not intended. For example,
        Clause 3.2 states that Contractor is fully responsible for the Works and Works
        Requirements unless used or occupied by the Employer or the Employers
        Personnel (Clause 3.1). If the Works are described too broadly, the Contractor
        may have a legal responsibility to parts of a development it is not constructing.
        (see also the Contractor’s Warranties below)

  B.    Insurance – Clause 3.9.9 states that “[if] the Works Requirements include
        provision for an owner controlled insurance programme, the parties shall comply
        with those provisions including any amendments they made to this Clause 3”.

        Again, it is to be admired that there is sufficient flexibility in the documents. But
        both Employers and Contractors will have to take great care in ensuring the
        insurance provisions in the Works Requirements are adequately described.

   C.   Novation – Clause 5.4.3 states that if a Specialist is named in the Works
        Requirements and its contract with the Employer is included, then, if required, the
        Contractor shall accept a novation of the Specialist’s contract.

        Again, forethought from the public sector will be required. From the Contractor’s
        perspective, it he is only obliged to novate, if the Specialist’s contract is included
        in the Works Requirements. Therefore, the Contractor will know of the position
        pre-tender. However, the Contractor may as a result have to take on a sub-
        contractor where the warranties in the sub-contract are not “back to back” with
        the New Government Contracts. As a result the Contractor may “inherit” further

   D.   Possession – Clause 7.1.3 states the Contractor is not entitled to exclusive
        possession of the Site if so stated in the Works Requirements.

        Again, care and co-ordination with the insurance provisions of the Works
        Requirements are required, if unnecessary risk to the Contractor is to be avoided.

   The four examples above are exactly that - examples. Care and forethought will be
   required from both the Employer and Contractor alike to ensure the Works
   Requirements are appropriately completed. If not, I can see an avenue for claims being
   opened up.

3. Contractors Warranties – There are a number of warranties to be provided by the
   Contractor which are onerous and I would specifically draw your attention to three:-

   A.   Risk to Health - Under Clause 2.5, the Contractor must warrant that the Works
        can be maintained safely and without risk to health, in so far as is reasonably
        practicable. This terminology is taken from the Safety, Health and Welfare at
        Work Act 2005 and the subsequent regulations made pursuant to that Act.

        Much rests with the words “in so far is reasonably practiseable”. There is an
        expression used by lawyers - “hard cases made bad law”. The courts in their
        willingness to alleviate the misfortunes of an individual have sometimes placed a
        liability on the person with the deepest pockets. I can see the State seeking an
        indemnity on foot of this warranty from a Contractor if a personal injuries claim is
        made against the State by a Third Party.

   B.   Fit for Purpose - Under Clause 8.2, the Contractor must warrant that “the Works
        are designed, executed and completed… fit for their intended purpose as stated in
        or to be inferred from the Works Requirements”. Much is already been written
        about fit for purpose warranties. As a result, Contractors will need to take advices
        from their insurance brokers to assess this particular risk. One thing you can be
        almost certain on is that the Contractor’s design team will be unwilling to go “back
        to back” on this warranty.

   C.   Design - Under Clause 5.1 the Contractor takes the entire design risk including
        that of its subcontractors. Will the Contractor get “back to back” warranties from
        its sub-contractors. This must be doubtful.

4. Payment – You will note from above that the Guidance states that the payment
   provisions of Clause 5.3 should be included in all publicly procured construction
   contracts. With this in mind, it is vital for Contractors to understand what this clause
   includes. The pension obligations set out in Clause 5.3.3 are particularly onerous.

   In this clause, the Contractor is obliged to ensure that each employer of a “work
   person” pays “all pension contributions and other amounts due to be paid on behalf of
   each work person”.

   A “work person” not only includes the Contractor’s employees but also the employees of
   subcontractors and “other persons assisting the Contractor to perform the Contract”.

   The intention of the Government are admirable.          However, these are absolute
   commitments. There is no “reasonability” language included here and I believe they go
   way beyond what is in fact reasonable. Due to the use of the word “ensure”, I believe it
   will be insufficient to discharge this warranty by simply inserting similar language in

   What right of action will the Employer have? Even if there is a breach the Employer,
   itself, will not have suffered loss. An action for specific performance could be made.
   However, it is difficult to see how this would work. Termination is probably the most
   likely route and given the particular sensitive nature of this area, a public relations
   battle will follow.

Conclusion –

Much has been made of the risk allocation in the New Government Contracts. Great care
will have to be taken by Contractors in assessing this risk. Value for money is not achieved
by simply transferring risk. It is achieved by transferring risk effectively to a person who is
in a position to manage that risk.

Great care will have to be taken by the public sector to ensure the New Government
Contracts and their Schedules are completed appropriately. If they are not, claims will

This paper is intended to highlight some of the contentious areas but it is clearly not
intended to be exhaustive.

We are in unchartered waters. Only time will tell if the Government has achieved its “value
for money” goal.


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