Contractual Procedures In The Construction Industry Essay

Discuss about the Contractual Procedures In The Construction Industry.

Answer:

Introduction

A principal refers to any corporate or any person who engages another to carry out any given task or job for personal reward or gain, other than as an employee. The exception is usually on engaging someone to do work on your own home, if one engages a self-employed person, the roles of the principal under the act apply as long as the person meets the accepted tests for that person being an independent contractor and not an employee (Kremers et al, 2010).

The contracts 2002 Act was introduced in order to combat the poor payment practices in the construction industry. From the observations that have been made by the various researchers and scholars it is very evident that the contracts in the construction industry are usually unwritten and usually there is no agreement governing the payment between the contractors and the subcontractors.

the construction industry, subcontractors splay a fundamental role. In order for a construction project to be successful, there has to be a good relationship between subcontractors and the general contractors. However, there is insufficient information about the existence of this relationship between the two parties. Subcontractors are experts’ agents who perform a specific task by supplying equipment, designs, tools and manpower.

In the event of a dispute or claim arising as a result or in relation to an agreement, both parties involved will attempt, in good faith, to resolve the dispute by appointing representatives of each of the parties to negotiate and settle the dispute.

Essay body

A principal refers to any corporate or any person who engages another to carry out any given task or job for personal reward or gain, other than as an employee. The exception is usually on engaging someone to do work on your own home, if one engages a self-employed person, the roles of the principal under the act apply as long as the person meets the accepted tests for that person being an independent contractor and not an employee. Usually the contractor is considered as a principal with respect to the subcontractor. This is very essential point for the business to consider. A principal contractor is usually appointed by the client to over the construction stage of any given construction project which involves more than one contractor. The principal constructors play a very significant role in the management of health and safety risks that are likely to occur during the construction stage of the project and due to that it mandatory that the principal contractors must have the knowledge, experience and skills to do this work. The term contractor is used to refer to any person who is engaged other than the employee, by another person to carry out a given task or job for reward or personal gain. The contractors can be self-employed people, corporate entity, or a person engaged on some other basis than as an employee (Chow, Cheung and Chan,2012).

For a principal contractor to carry out his or her duties effectively he/she must;

  • Plan, coordinate, monitor and manage the entire construction phase
  • Take care of the safety and health risks to everyone effected by the work, in planning and managing the measures that are required to control them.
  • Link with principal designer and the client for the duration of the project in order to ensure that are the risks that are likely to occur are appropriately managed.
  • Developed a written construction phase plan much before the construction phase starts, implement and then often review and make changes in order to ensure it remains appropriate for the intended purpose.
  • Ensure to have ongoing arrangements in place for the managing safety, healthy and the welfare
  • Ensure that there are appropriate welfare facilities which are provided from the start to the end of the construction stage.
  • Regularly consult and engage with the workers regarding to their health, welfare and safety (Lock, D. (2016).
  • To check out that all the staff that was appointed have the required, experience, skills and knowledge, which are required to carry out their assigned tasks safely without any risk being posed to their health.
  • The principal contractor must ensure b that all the staff on site have site-specific inductions, and any further information and facts regarding to the training the workers need,
  • Take actions to prevent unauthorized access to the site
  • Liaise with the chief designer to share any significant information that can be considered relevant to the management, planning and coordination of the construction phase of the project.

In the situations where the principal engages the main contractor, they have duties of care in order to ensure safety and health of the contractors and other stakeholders in the construction as outlined occupation safety and health Act of 1984.Specifically, in the situations where the contractor are going to be exposed to the hazards and the risks that are associated with performing the task on behalf of the business , the safe system of the work for the contractors must be prescribed. Contractors usually forms part of the system of work for which the principal is directly responsible. Hence the law specifies that the duty owed by the principal to the contractors may not be different from that owned by an employer to the employee (Cooke and Williams, 2013).

In some situations, some principals adopt the system of hands off approach with the contractors with as believe that they can remove themselves from the liability for the safety and health responsibilities in the situations where the contractors cause work-related injuries and accidents to themselves or any other third party. This may not be necessary the case. The role of care ensures that the safety and health are shared by everyone at the workplace. Nonetheless, the level of the responsibilities of the parties involved is dependent on their degree of control over the matter.

Compliance with the provisions of the Construction Contracts Act 2002

The contracts 2002 Act was introduced in order to combat the poor payment practices in the construction industry. From the observations that have been made by the various researchers and scholars it is very evident that the contracts in the construction industry are usually unwritten and usually there is no agreement governing the payment between the contractors and the subcontractors (Durdyev and Mbachu, 2011). Enforcing payment is very challenging in this situations and usually even the courts can have difficulties in interpreting the presumed intentions of the contracting parties.

the construction sector has occupied the foremost position among the rest of sectors, mainly in the attraction of investments and creation of new jobs. In addition to subsidiary industrial and productive sectors, construction sector is the largest and most important of all other sectors. As such, the construction sector has been crucially significant, mainly in the past two years, for the role it plays in construction of infrastructure, reconstruction and road rehabilitation (Ashworth and Perera,2018).

tremendous involvement can be associated with change from the old craft methods to increased dependence on powerful technology in production; As a result, general contractors are now concentrating their focus on overseeing construction site activities than sourcing for direct labor to perform the specific work. In addition, another reason for this trend is the increased complexity of both the organizational relationship and the construction of building. Subcontractors contribute significantly to the managerial efforts, capital risk, resources and business expertise that support the construction industry. This trend towards subcontracting increased as the technical development of construction materials and methods escalated the requirement for craft skill and knowledge (Schooner,2011). Quality control and labor management challenges on construction projects became less complicated for general contractors utilizing specialty trade subcontractors in lieu for furnishing all craft labor themselves.

Comparison between the head contract and the contracts between the Head Contractor and subcontractors

the construction industry, subcontractors splay a fundamental role. In order for a construction project to be successful, there has to be a good relationship between subcontractors and the general contractors. However, there is insufficient information about the existence of this relationship between the two parties. Subcontractors are experts’ agents who perform a specific task by supplying equipment, designs, tools and manpower. They act as agents of the contracting company in the production system and they only execute the subcontracted part of the workmanship. Furthermore, in the entire construction process, subcontractors contribute the greatest value of the project. This tremendous involvement can be associated with change from the old craft methods to increased dependence on powerful technology in production; As a result, general contractors are now concentrating their focus on overseeing construction site activities than sourcing for direct labor to perform the specific work. In addition, another reason for this trend is the increased complexity of both the organizational relationship and the construction of building. Subcontractors contribute significantly to the managerial efforts, capital risk, resources and business expertise that support the construction industry. This trend towards subcontracting increased as the technical development of construction materials and methods escalated the requirement for craft skill and knowledge. Quality control and labor management challenges on construction projects became less complicated for general contractors utilizing specialty trade subcontractors in lieu for furnishing all craft labor themselves (Thomas and Wright,2016).

Construction sector is one of the key economic sectors and is the major driving force in the New Zealand economy. In the recent past, this sector has witnessed significant growth and expansion of its activities. The contribution of the construction sector to the GDP is currently rising as a percentage of the total labor force and in actual terms. Construction sector contributes one third of the GDP in New Zealand. This is a large proportion covered by this sector, thus positively impacting various social, economic, educational and vocational sectors as well as other institutions. Throughout New Zealand cities and towns, construction is one of the most crucial sectors in the absorption of labor force. It contributes largely to different sectors of economic investment, such as manufacturing of construction materials. In addition, it provides materials needed for construction, such as stone, marble, brick, floor tiles, etc. Further, the sector is one of the main resources of the commercial sector in New Zealand. This has resulted in the recovery of the construction contracting profession and subsidiary industries, encouraged the investment of the New Zealand expatriates’ capital in the local construction sector, and contributed to the creation of jobs for thousands of New Zealand (Idoro,2011).

Therefore, the construction sector has occupied the foremost position among the rest of sectors, mainly in the attraction of investments and creation of new jobs. In addition to subsidiary industrial and productive sectors, construction sector is the largest and most important of all other sectors. As such, the construction sector has been crucially significant, mainly in the past two years, for the role it plays in construction of infrastructure, reconstruction and road rehabilitation.

Any country in the world including New Zealand, the typical image of the construction contracting profession, does not match the role active contractors’ play in the building of their societies? Contractors are effective entities involved in all professions subsidiary to the construction sector through a complementary relationship. Further, contractors possess the skills necessary for financial management and project administration. Taking into account that a large number of contractors are engineers, contractors’ professional experience is also consolidated by New Zealand expatriates. Such status has led to the upgrading of the construction contracting profession in New Zealand as regards quality, specialty and professionalism. Construction contracting is considered the hub for construction sector in New Zealand. Hence, the contractors have demonstrated and proved their role and outstanding capabilities in construction and reconstruction in New Zealand.


From the general contractors’ perspective, a decision to subcontract part of the process should be a strategic decision, and not one driven primarily by resource challenges. It may involve consideration of the significance of design re-use and internal control of the design and manufacture of the product, as well as long-term strategic views related to the core skills required for the company’s future. Most general contractors have indicated that, subcontracting someone to execute a specific operation is a beneficial common practice that makes their work easy.

There are many reasons why contractors choose to work with subcontractors such as, subcontractors provide experienced and skilled labor, reduce overhead costs, and also reduce the pressure on the main contractors. Quality control, monitoring and controlling, safety management, and labor management challenges on construction projects become less complex for general contractors. It is clear from the results that informal relationship is common phenomenon between subcontractors and general contractors. General contractors have indicated that selection of subcontractors is based on previous experience with the same subcontractors and the complexity of the task.

Sometimes, subcontractors fail to exercise due diligence and care when submitting their bids; even failing to visit construction sites for supervision and during the estimation process. General contractors commit to the selected subcontractors during the tendering stage; they negotiate with subcontractors after winning the contract in orders to reduce the agreed costs in the tendering stage. This is due to the sever competition between contractors which enforce them to reduce the tenders price, and thus asked the subcontractors to review and reduce their previously estimated costs. Overall, general contractors always have a good working relationship with subcontractors and most of them are satisfied with their performance

It is convenient to develop and review the subcontractors position towards the general contractor, by upgrading the provisions of all contract terms such as; wording and potential for negotiations of conditions including indemnity, payment and retention terms, warranties and call backs, schedule of work, delays and liquidated damages, lien and bond rights, and of course scope of work. It is advisable to establish a subcontractors’ union for better networking improves the quality and conditions of work, improving the terms of contracting and place subcontractors in a good position in the local market (Fugar and Agyakwah-Baah, 2010).

Dispute resolution

It is advisable to take keen consideration to binding clauses when drafting or reviewing a dispute resolution agreement. The clauses provide direction on how and where the dispute will be heard and with the help of a local legal expert, a party should check to ensure that the provisions are appropriate, enforceable and within the relevant jurisdiction. Dispute resolution mechanisms differ dramatically depending on how the agreements are interpreted and also whether they are enforceable in a given jurisdiction or not. It’s by no means easy to overstate the benefits of such provisions.

In the event of a dispute or claim arising as a result or in relation to an agreement, both parties involved will attempt, in good faith, to resolve the dispute by appointing representatives of each of the parties to negotiate and settle the dispute. In the event that the parties involved fails to amicably resolve the dispute within two weeks (14 days) from the date on which either party involved in the dispute is served with a written notice, then, the remaining provision of this clause shall apply (Tazelaar and Snijders,2010) me of the alternative dispute resolution mechanism contained in a contract agreement;

Arbitration

In a dispute involving the operator and the owner, concerning the interpretation of any provision or the performance of any of the terms of this agreement, such matter (s) in dispute, shall be settled;

  • under the Rules of Conciliation and Arbitration of the International Chamber of Commerce;
  • by three arbitrators, one appointed by each Party, and the third, who shall be the chairman, selected by the two appointed arbitrators and failing agreement by the Chairman of the International Chamber of Commerce;
  • The place of the arbitration shall be agreed by the parties involved; and
  • English shall be the language of the arbitration

Joinder

In the event of any dispute to be referred to arbitration under this agreement, raises issues which are, in the opinion of the operator or owner, substantially same as or related with issues raised in the same dispute between any of the following entities:

  • Contractor
  • Any subcontractor
  • Any of the counter parties to the project contracts

Which has already been referred to arbitration in accordance with arbitration provisions substantially the same to this clause then:

  • the dispute under this contract shall be referred to the arbitrators appointed to determine the related dispute; and
  • the arbitrators shall have power to make such discretions and awards in the same way as if the rules of relevant courts as to joining one or more defendants or third parties or consolidating actions were applicable to the Parties and to the arbitrators

Or if the dispute under this Agreement has already been referred to arbitration under this clause, then any related dispute may be joined or consolidated with the dispute under this Agreement.

Referral to the Expert

In the event of a dispute involving technical or financial matter (s), the following provisions shall apply between the parties with respect to any matter, difference or dispute which this contract provides is to be referred to an expert:

  • Where any matter is referred to an Expert in accordance with this Clause, the expert shall be appointed by the Parties, or in default of agreement upon such appointment within one week of a Party notifying the other Party of its decision to refer the matter to an expert, an expert is appointed by;
  • in relation to disputes of a primarily technical nature; or
  • The President of the Institute of Chartered Accountants in respect of all other matters.

Failing agreement between the parties as to the nature of the dispute, the expert for the time being shall be appointed by the [President of the Institute of Chartered Accountants.

  • The Expert will resolve or settle such matter or dispute in such matter as he shall in his absolute discretion see fit. The Expert shall be requested to reach his decision within thirty (30) days of the matter being referred to him. The decision of the expert shall be final and binding on the Parties.
  • The cost of the Expert in settling or determining such matter or dispute shall be borne equally by the Parties unless the Expert otherwise determines

Performance to Continue During Dispute

During arbitration proceedings or any other dispute resolution mechanism pursuant to Clause, performance of this contract shall continue. Except to the extent that such payment is the subject of such dispute, no payment due or payable by the Owner or the Operator shall be withheld on account of a pending reference to arbitration or other dispute resolution mechanism.

Court system

A dispute should be taken on the local court system within a relevant jurisdiction where provisions are appropriate and enforceable, length of time for processing claims or disputes is reasonable, objectivity of judiciary, quality of the judiciary and whether it has had experience of similar contractual arrangements successfully settled, whether the procedures of the court are clear and are followed, the cost of litigation and the time and cost involved in enforcing judgments are some of the factors parties consider before submitting to court. For instance, a government party is likely to want to be subject to its court system, but an operator, particularly a foreign one, may be unwilling to subject itself to an unfamiliar court system and the potential that local courts will be tempted to rule in favor of government interests. For the same reason, where foreign lenders are involved they may also be anxious to avoid local court systems. The compromise is usually to follow an interim dispute resolution procedure and then proceed to arbitration.

If the parties are willing to submit to courts in a specific jurisdiction;

The contractual agreement should specify the jurisdiction under which disputes would be settled and they may also wish to identify particular courts within the country’s court system, for example, commercial courts or an arbitration mechanism administered by the courts. The laws determining what jurisdiction applies to a particular situation can be confusing and sometimes conflicting, particularly where a transaction involves different nationals or services being provided in a third country, with several courts being able to claim jurisdiction.

The jurisdiction clause should be correctly and clearly worded to specify jurisdictions under which parties can resolve their disputes as follows.

This provision is called an “exclusive jurisdiction clause” and goes as far as possible to prevent disputes being heard in other jurisdictions. Local legal experts should be consulted since how these provisions are interpreted may differ from one jurisdiction to another.

  • There may be circumstances where the parties wish to have flexibility as to jurisdiction or where one party with greater negotiating power wishes the other party to be bound as to jurisdiction, as a result, wanting to maintain flexibility of jurisdiction for itself and to its advantage. In such cases, a non-exclusive jurisdiction clause may be appropriate, for instance,
  • This may be of interest where enforcement of awards may occur abroad, and where such courts view an exclusive jurisdiction clause as restrictive of their ability to enforce award (in particular arbitration awards).

The law around non-exclusive jurisdiction clauses is complex and local advice should be sought.

  • Sovereign immunity to jurisdiction and execution: A state's immunity to jurisdiction results from the belief that it would be inappropriate for one state's courts to call another state under its jurisdiction. Therefore, state entities are immune from the jurisdiction of the courts of another state. This immunity can generally be waived by the state entity. A state will also have immunity from execution, as it is deemed to be improper for the courts of one state to seize the property of another state. Immunity from execution may also generally be waived.

In a contract agreement, it is fundamental for the parties involved in a contract to be able to understand the importance of to maintaining the provisions of the contract, at the same time, apply relevant dispute resolution mechanism to handling claims or disputes such that justice prevails.

References

Ashworth, A., & Perera, S. (2018). Contractual procedures in the construction industry. Routledge.

Chow, P. T., Cheung, S. O., & Chan, K. Y. (2012). Trust-building in construction contracting: Mechanism and expectation. International Journal of Project Management, 30(8), 927-937.

Cooke, B., & Williams, P. (2013). Construction planning, programming and control. John Wiley & Sons.

Durdyev, S., & Mbachu, J. (2011). On-site labour productivity of New Zealand construction industry: Key constraints and improvement measures. Construction Economics and Building, 11(3), 18-33.

Fugar, F. D., & Agyakwah-Baah, A. B. (2010). Delays in building construction projects in Ghana. Construction Economics and Building, 10(1-2), 103-116.

Idoro, G. I. (2011). Comparing occupational health and safety (OHS) management efforts and performance of Nigerian construction contractors. Journal of Construction in developing Countries, 16(2), 151-173.

Kremers, J., Rietjens, B., Voordijk, H., & De Boer, S. J. (2010). Construction contracting and civil–military interaction. Construction management and economics, 28(8), 871-883.

Lock, D. (2016). Project management in construction. Routledge.

Schooner, S. (2011). Desiderata: Objectives for a system of government contract law.

Tazelaar, F., & Snijders, C. (2010). Dispute resolution and litigation in the construction industry. Evidence on conflicts and conflict resolution in The Netherlands and Germany. Journal of Purchasing and Supply Management, 16(4), 221-229.

Thomas, R. W., & Wright, M. (2016). Construction contract claims. Macmillan International Higher Education.

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