Peter Macnish and Jennifer Holdstock
visit North West Southside College and Bonga Binga Small Good
School to find out what can go right, and wrong, when schools
renovate or upgrade their facilities. The focus is on two differing
construction experiences that highlight the importance of good
planning, thoughtful contract drafting, diligent project
management, input from competent consultants, and the need to be
aware of and understand legislation relating to payment claims on
construction projects.
North West Southside College
The board of North West Southside
College is at last in a position to fund a long-awaited renovation
and upgrade of its school gymnasium. A member of the building
subcommittee with some construction experience arranges for the
school's lawyers and an experienced construction project manager to
meet with the subcommittee for preliminary discussions - both are
happy to do that without charge in the hope that they'll later
become part of the consultant team on the project.
Following the meeting, the subcommittee
resolves to engage design and other consultants to prepare the
design and obtain the necessary planning approval. Once those tasks
are completed, it will engage the project manager and lawyer to
prepare the tender request and construction contract. These two
consultants will provide assistance dealing with tender queries and
negotiations with the chosen builder. The project manager will then
manage the construction phase, reporting back to the business
manager, who in turn will report to the building subcommittee.
Eventually a builder is chosen and a
contract entered into for a lump sum price with construction to
commence and be completed in six weeks over the Christmas vacation
period - the project manager and builder have specifically dealt
with issues regarding the procurement of labour, supplies and
subcontractors during the vacation period in pre-contract
negotiations.
The project begins on time and
progresses smoothly. The project manager meets weekly with the
builder and the school's business manager and is on site as needed,
usually for a couple of hours on two or three days each week. The
project manager manages the payment claims and payments, ensuring
that claims are promptly passed to the school's quantity surveyor
for approval and to the business manager for payment.
Early in the construction period there
are several days of heavy rain which delay the project. The builder
applies for an extension of time to complete, in accordance with
the contract, and the project manager recommends to the business
manager that the extension be granted. At the same time the builder
and project manager agree on a revised program to bring the project
to completion before the commencement of the new school year
without additional cost to the school.
While demolishing internal walls, the
builder finds asbestos sheeting in poor condition covered up in an
earlier renovation. The contract has set out the steps to be taken
should such a contingency arise and allows the builder to claim for
the extra expense - $15,000 - involved in dealing with the asbestos
as if this had been a variation requested by the school. A claim is
made and paid. Fortunately, in the early, pre-tender stages, the
school's consultants had recommended that the budget include a
$50,000 contingency for just such unexpected events.
On day one of the new school year the
parents, teachers and students are presented with the rejuvenated
gymnasium ready for use. Any defects, should any become apparent,
will be dealt with in the six month defect period under the
guidance of the project manager. The school board, subcommittee and
business manager have delivered the project on time and on budget
with minimal stress and worry, having engaged the appropriate
design, project management, legal and other consultants to
assist.
Bonga Binga Small Good School
Bonga Binga Small Good School has been
expanding rapidly. It's a new school with a competent and
experienced board, but without any directors who have experience in
overseeing the running of a primary school or in construction
projects. The board determines that a new classroom block will be
needed in eight months for the start of the next school year.
Funding has been a problem but is now in place. Time is running
out.
One of the directors is a passing
acquaintance of Bob, the director of Glorious Constructions Pty
Ltd, who says that his company can build the project for the money
and in the time. Bob's advice to the directors is not to worry too
much about the contract terms as they can work those out as they go
along. He presents the board with a contract he 'always uses.' It's
a standard contract for building work, but drawn heavily in favour
of the builder. It later transpires that the builder's lawyers have
amended the standard contract in a way that further shifts risks
from the builder to the school.
The contract is for a lump sum price;
however, the circumstances in which the price can change are almost
unlimited. The contract requires the project to be built by the
first day of term, but the circumstances in which the builder will
be excused for being late are also almost unlimited. In any case,
there are no negative consequences for the builder if the project
runs overtime.
The board overrides the business
manager's suggestion that lawyers be engaged to check the contract
and advise generally, as well as his suggestion that a project
manager be engaged on a sessional basis to help with day-to-day
project management. The board is of the view that the cost is not
warranted.
From the start there are problems. The
bank is not happy with the contract and amendments need to be made.
There are also problems with the building permit and small changes
to the plans are required. Bob immediately puts in a claim for a
price increase which he is entitled to under the contract. The
price increase is reflected in the first payment claim which
arrives before the first sod has been turned. The claim is made
under Victoria's Building and Construction Industry Security of
Payment Act 2002. The board objects and directs the business
manager not to pay the extra amount and to tell the builder that
the building just has to be finished on time. In due course, Bob is
paid the lesser amount and says nothing.
Start up is delayed with very little
work done before 24 December. Bob announces that he will be taking
two weeks Christmas leave and puts in a claim for extra time due to
the bank and permit delays, even though the contract and building
permit were his responsibility. The contract is ambiguous as to
Bob's claim for time; however, there is an argument that he is
entitled to the extra time.
The board is furious and directs the
business manager to ignore the claim, but tells Bob to finish on
time 'or else.' The business manager is struggling in his dealings
with the builder - each time he raises an objection to Bob's
claims, the builder gets the contract out and points to yet another
clause unfavourable to the school.
Two weeks into the new school year the
new classroom block is not yet finished. Fortunately, the weather
is fine, allowing for plenty of outdoor sporting events and nature
study classes, although the school has had to hire space in the
local community centre at its own considerable and unbudgeted
expense.
Bob gives the school notice that the
project is complete, despite the site being strewn with building
debris, mounds of earth and other rubbish. When the business
manager objects, Bob tells him to check the contract, which he
does, and finds that the builder has the final say on what
constitutes the finished job and that there is no obligation on the
builder to leave the site clean and tidy.
The final payment claim arrives, as
with all the others, served pursuant to the Building and
Construction Industry Security of Payment Act 2002. It's
enormous, and includes the numerous earlier claims for increases to
the price and also the numerous claims for extra time to complete,
which the school has ignored.
The board directs the business manager
not to pay and to instruct lawyers versed in construction law. At a
meeting with the board, the lawyers deliver their advice. It's all
bad news. The contract puts the school in a very difficult position
since virtually all the claims for extra time and money are
permitted under the contract, which specifically precludes the
school from claiming for its costs such as the cost of the hire of
the community centre.
Salt is rubbed into the wounds when the
lawyers advise that the school's failure to object to amounts
claimed under the Building and Construction Industry Security
of Payment Act 2002 within 10 business days of the claim has
resulted in the board becoming immediately liable to pay the full
amount of all money claimed regardless of merit.
In short, the school must pay up now
and sue to recover any resulting overpayment. The advice regarding
recovery of any overpayment is that it will take at least 10
months, it will be very expensive and it might not succeed because
of the contract's heavy bias in favour of the builder.
With a limited budget and cash flow,
the school is forced to take out an expensive short-term loan,
guaranteed personally by the directors, and to go to the parents
with an apology and a request to double their fundraising
efforts.
Teachers and students, meanwhile, are
grumbling about the mess and poor workmanship. There's no six-month
defect period and the builder is arguing about every defect pointed
out by the business manager.
Without the good and timely assistance
of experienced consultants, the school has been ill equipped to
deliver the project.
The business manager, who is very
popular with parents, is actively looking for a position with
another school.
Lessons learned
With all the school construction work
being undertaken around the country at the moment, it's timely to
think about what can go wrong.
The importance of a well-documented
contract, solid project management and the appropriate use of
consultants cannot be over-emphasised. The experience at Bonga
Binga Small Good School also highlights the pitfalls of disputed
payment claims and of failing to understand the significance of the
security of payment legislation. Failure to deal properly with
disputed payment claims can result in the claim becoming payable
immediately, without regard to the merits of the claim.
As a checklist, ensure that:
- proper scoping and design work is done at the outset - not on
the run;
- formal contract documentation is in place, delivered with the
request for tender - your legal team is behind the eight ball if
the price or contract terms are all but agreed before it's
consulted;
- payment claims are dealt with expeditiously - seek immediate
advice if you think that a dispute is looming;
- pricing and timing mechanisms are clearly set out in the
contract and understood; and
- variations are properly documented and agreed at the time that
they arise.
Legal and project management advice at
the outset will always be cost effective, when compared with the
cost and inconvenience of intractable disputes arising out of poor
documentation and poor project management. Protect your school's
interests, by utilising your school's consultant team in a timely
way.
North West Southside
College and Bonga Binga Small Good School are entirely fictitious,
as are the case study details described above. Any similarity with
any actual school is unintended.
(Authored by Peter Macnish and Jennifer Holdstock)