Why No one Takes Notice of ‘Contract Notices’ 4

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Friday, June 20th, 2014
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In many building contracts, there is a regime of notices. Simply put, the contract will note all the events, situations, or circumstances which require the contractor to issue a formal written notice to the client. Typical notices include extensions of time, ambiguities in the contract, directions that create variations, and latent conditions.

These aim to ensure the client can be fairly put on notice that the contractor may have grounds for a claim for additional payment or an extension of time, or else be made aware of a situation that requires its intervention to mitigate cost or give direction.

From the contractor’s point of view, such notices are excellent forms of contemporaneous evidence showing that a variation was requested, an extension of time requested for certain reasons, and so on. For the client, receipt of such notices provides the ability to issue a written response setting out why it approves or does not approve of certain requests or variations. There will then be no ambiguity or misunderstandings.

So why is it that most contractors do not issue such notices and when they do, why do so many contractors and clients ignore them?

It seems to me that contractors are mostly unaware that certain events require a notice, or else think a simple email or (far worse) a phone call is enough. They aren’t. If the contract requires a notice, then issue one. You can then sit safely until you get a response. Clients appear not to respond in the hope that the problem will go away or to avoid admitting or conceding extensions of time or that a variation is in fact required.

This problematic behaviour causes the following entirely unnecessary disputes:

  1. A contractor issues a notice of delay or a variation that requires an EOT. The client ignores it so as to avoid considering an extension of time because it cannot finish late under its contract. This ultimately becomes a dispute over liquidated damages, which should be abolished but unfortunately remain a reality for now.
  1. The client issues a direction to the contractor. The contractor considers the direction as constituting a variation but does not issue a notice to the client advising him or her of such. The contractor then does the additional work without a variation approval. This common problem then becomes a payment dispute over the variation as to both approval and value.
  1. The contractor becomes aware that it must change some of the specifications of its work due to external factors, such as the work of other trades, latent conditions or materials availability, but does not provide a notice to the client and instead resolves the issue by creating a workaround or some other change. The client then labels the work ‘defective’ to avoid payment. This too ultimately becomes a payment dispute.
  1. The most common dilemma is practical completion. Even when all boxes are ticked, we still see clients refusing to issue a Certificate of Practical Completion and/or contractors failing to ask for one. In this case, you are both to blame! As we often see, the client avoids issuing such a notice in order to sidestep the requirement to pay the first retention. Even when the architect or superintendent signs off, practical completion is still not acknowledged.

This issue will soon be solved in New South Wales once the Office of the Small Business Commissioner starts to administer the retention trust fund. It will be interesting to see if the number of disputes over retentions drops once the money is held in trust rather than by the Client. I suspect it will.

The bottom line is that contract notices are all about communication that creates a record. This is an invaluable tool and one I suggest you take on as part of running your contracts. Often it is more valuable to be able to show that the other party failed to respond, rather than the response itself.

In the spirit of goodwill, it is better to be arguing over an issue than going ahead without it being the subject of a notice and dealt with at the time. For example it is better to issue a variation notice and argue about it before you carry it out, than to simply dot the work can argue about it six months after you leave the site.

When you get that next contract, read it, make a list of the events that require you to issue a notice, and then send those notices!

I once offered to create all notices for a client civil company to demonstrate the power of this practice. Of the $1.3 million dollar contract, $1.27 million was paid without argument because every time the client queried something we were able to supply all the contract notices and correspondence we’d sent, along with proof of receipt. As for the final $30K, the client claimed the site was not adequately cleaned and got someone else to do it before we could take photos.

So take notice of notices. For contractors, it puts money in your pocket. For clients, it avoids arguments.

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4
  1. Andrew Heaton Andrew Heaton

    No doubt paperwork can be extremely frustrating when you just want to get things done and one could imagine these kind of little details would be easily overlooked when one is primarily focused on the tasks at hand on the job on site.

    Yet this is obviously one area where contractors could lose lots of money if things go wrong.

  2. David Chandler OAM

    The reality is that the Construction industry seems locked into its business as usual methods and dependency on lawyers and judges to sort out its conflicts i.e. Royal Commissions, Productivity Commissions, Insolvency Inquiries, Warranty Working Groups and the list goes on. But no matter what comes out of these illuminations its back to business as usual in a year or two. The challenge confronting construction is the need to reorganise its business model. The current wasteful muddle of changes and disruptions on-site and their consequences is unsustainable. Its time to remap the construction process to focus on better, faster, cheaper every year for the next two decades. You don't need a lawyer reinforcing old practices you need leadership.

    • JN

      The construction industry does need a better way of operating. Disputes will only stop occuring when the builder STOPS funding developments and everyone moves to a cost plus model. Get rid of LUMP SUM, and most disputes will be eliminated in my opinion. I still don't understand why the builder has to carry the financial risk of a building that the builder doesn't even own! Just doesn't make sense to me.

  3. Tim Swift

    As a construction services trade sub contractor working for contractors we find the contracts offered are very heavily weighted in favor of the contractor . A problem we regularly face is when this weighting is pointed out and requests made to balance or make some changes we are seen as being difficult or too particular. We would like to see a contracts become a national standard document with a simple list of whats in or out as multiple choice ticks.