The new year seems to have taken off at a reasonable pace in the construction and engineering sectors, despite a definite shrinking of project availability.

In a shrinking market, margins become tighter simply because there are more companies (and people) who are looking for projects than those currently in projects, and therefore companies and people will be prepared to do a lot more for a lot less and take on more risk just to keep their head above water.

With that in mind, at what point does a company (SME) or independent contractor (IC) draw the line on accepting further risk?

Realistically, SMEs are going to be able to absorb more risk than ICs, presumably due to the dynamic size of the differing operations. However, by absorbing more risk, this means the SMEs will be exposed to more risk, and there is no guarantee that they are any better prepared to manage and mitigate the risk than an IC.

The vast majority of engineering and construction contracts are some rendition of Australian Standard form contract. I say some rendition of, because from the cut and paste plagiarised examples that come across my desk on a daily basis, it would seem that the only section of such contracts that remain unchanged and unviolated is the Standards Australian logo!

Let’s be clear about one simple but unbelievably important fact – an Australian Standard standard form contract is not a legal document, nor does it have any recognition in Australian legislation. It only becomes a legal document when executed by both parties. All it is really is a document that has been developed by a committee and is used by industry as a standard form contract.

This does not mean that the clauses in the standard form contract are balanced or fair. In fact, very few of the clauses in an AS standard form contract are balanced or fair. Furthermore, most AS standard form contracts are severely outdated and not aligned with current federal and state laws, as Standards Australia and SAI Global (distributor of AS) are quick to point out in their disclaimers.

So think for a moment about considering submitting to a contract that is quite possibly unfair, unjust and above all does not reflect current legislation. Ask yourself in whose interest does the strength of this contract best serve? I can assure you, it is not yours.

The Superior Courts in Australia are loath to interfere with the wording of contracts between parties, unless one such party alleges oppressive or unconscionable conduct relating to one or more clauses – and then the Court will only deem that particular clause unenforceable, not the whole contract. If you go ahead and blindly sign a standard form contract without negotiating a more balanced sharing of risk and responsibility, you may very well end up with no valid defence under law.

Contract risk is the single most vitiating factor for the high number of insolvencies in the construction and engineering industries in Australia, and of all the contract risks the risk of blindly accepting the contract remains the highest of them all.

As a contractor (IC or SME) your business is a commercial entity, and with any commercial enterprise there will be inherent risk. The difference between success and failure of your enterprise will be wholly and solely dependent on how you manage and mitigate your risk. Manage and mitigate, do not ignore and rely on luck.

Take a look at your operation, and specifically what work you will do under the project. If your work has no design element, do not sign a Design and Construct contract. If your work takes one week to complete then why accept a contract that requires a security payment from you which the main contractor will keep for a period of a minimum 12 months? If your work carries no defects warranty (and you would be quite surprised as to just how many processes fall into this category) then why accept a contract that requires you to warranty your service for 12 months?

Equally, do you have the capacity and capability to administer your contract once you’ve negotiated it? Do you have the knowledge and personnel to query each site instruction, apply for variations, and answer Non Compliance Reports and dispute back charges?

It all comes back to management and mitigation of risk.

As always, risk smartly, risk safely.

  • Mervyn, you ably describe an Australian construction calamity. The challenge is the growing proportion of uninformed construction clients who are now dependent upon outsourcing project procurement to consultants who often do not understand the nature of the deal between the client and the contractor. These consultants – mostly project managers and quantity surveyors are risk adverse and like to minimise any skin in the game.
    I believe that Design and Construct or any residue of it conveniently shovelled over the line to a contractor at tender time is a cancer eating away at the industry. I cannot see justification for any project under $25 million these days not being fully documented and a single point of design team leader being held accountable for the fitness for purpose of the documentation for tender and construction.
    There is no way to push for improved productivity and innovative new work practices to be spawned under the current cat and mouse game.
    On a positive note, I sense some clients are getting the need for change and showing more interest in creating a better deal framework.

    • David
      I've found that the majority of risk averse behavior at the project management level is usually because of (a) lack of risk management education, and (b) the actual quality of management is woefully deficient.
      Standards Australia, which at this time seems to take its instructions from a publicly (?) owned SAI Global, has just recently released a draft standard AS11000 which purports to replace AS2145 and AS4000. I say purports because from first look, other than a slight reqording to accommodate the various SOP regimes, the spirit and foundation of the document is the very same one-sided risk averse piece of unadulterated rubbish synonymous with this publisher.
      By the by, I requested a copy from Standards Australia of the document sans the DRAFT watermark, for ease of reading and comparison, which was declined and I was referred to the SAI Global website as the only means of communication in this regard.
      If this is not a clear indication of the corrupt ineptitude that so insidiously prevails in our industries, then what is?

    • Did we learn nothing from "No Dispute" ?

      I might take up a couple of points (1) don't blame the building consultants, I have seen standard contracts maligned by the legal profession … trying to reinvent AS2124 as a D&C contract for example and making a terrible mess because they don't understand customs of the construction industry, and (2) most of the "risk" clauses are pushed by the financiers who are 200% risk averse … they have their own understanding on which party is best aligned to manage risks.

      I will add that the 'problem' is moreso because parties to the contract and/or their administrative representatives seem to think that a knowledge of contract and its processes are redundant (put it in the draw) and that being a 'nice guy' is all that is needed, the 'relationship', … they don't comprehend that the 'relationship' is defined by the contract and that the 'friendship' is what gets them into problems.

      Maybe my opinion is wrong ? But, I've been around doing this for a long time. 😉

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