Fresh building works always bring an air of excitement. Whether a new construction or renovations, resources have been gathered, plans have been made, planning and other obstacles cleared, the various teams arrive on site. And the vision of the new property, for commercial or residential use, gives a fresh air of anticipation for the future.
Yet this optimism can sometimes lead parties to a project into discord. As the works get under way, the opportunity of the new construction can take the owner’s fancy, and they want to make further improvements – move a wall, add a room, pop in another window.
All this is readily manageable, and the builder is happy to comply. But these changes – known as contract variations – bring cost as well as scheduling implications. And in the excitement of an ongoing build, with little time for paperwork and focusing on nitty gritty details, it is all too common for the parties to fail to agree the exact specifications and in particular the precise additional costs.
Unclear variations can mean that even successful projects end in sharp disputes, with the client surprised by the final cost and the builder at risk of significant loss if the bill is disputed. Inadequate paperwork can escalate the conflict, and undermine the builder’s ability to use available fast-track adjudication mechanisms to resolve the matter.
In a typical recent case, a modest-sized building contractor was tasked with the renovation of the ground floor of a hotel premises on a short deadline. As the project was urgent, only an overall, indicative budget figure was agreed. The hotelier also didn’t have any detailed plans. It was assumed that, as a straightforward job, the builder would merely invoice for the agreed works, and there would be no problem.
Inevitably, almost as soon as the project started, the client began to ask for additions. A shifted wall here, more reception space there – nothing complex or out of the ordinary, but cumulatively a significant number of further components which had not been originally discussed.
Without a detailed initial contract, there was no clear roadmap for assessing the implications of each variation. Further, the variations were not clearly defined, drafted up and presented for formal sign-off by the client.
This was a recipe for conflict. Although the works were completed successfully, the final bill turned out to be double the original estimate. It is little surprise the client reacted with frustration, even though all the works had been done according to their requests and the costs were justified.
Under Australian law, builders have access to a rapid adjudication process, which aims to resolve such disputes within four weeks. But the burden of proof falls on the claimant – that is, the builder – to prove both that the costs were incurred and were at the client’s request.
When contracts and variations are properly drafted and agreed, this poses little problem, and builders should be able to use the fast-track dispute-resolution system to secure full payment.
However, when written variations have not been put in place, the administrative challenge of documenting increased costs can be considerable. In this case, there were more than 500 additional charges to justify – in both material and labor – and included recovering all itemized receipts.
It also imposes the difficult and time-consuming challenge of proving that each cost was specifically approved by the client. This can mean a huge effort to trawl through countless emails and texts, and matching up precise charges with often vague conversational language. In this case, a significant proportion of their claims were rejected through the adjudication process, and they were awarded less than a half of their actual invoices.
The obvious solution is to ensure not only that all building jobs start out with a detailed contract but especially that all variations are written down, costed in detail and signed off by the client before any additional works are carried out. When done properly, the client will not be surprised by additional charges, while the builder will be protected and should have every expectation of success in cases where adjudication is required.
Clearly, a professional contracts function should be part of any construction company. But even where head office personal is limited, early consultation with Sajen Legal can provide builders with bespoke standard-form contracts as well as variation notices and clarification of what supporting documentation may be required. In fact, the more clear and specific agreements are made, the less subsequent administration and procurement cost will be required.
In this case, engaged to work on an appeal within the normal civil court system – or ideally to reach a negotiated settlement if possible – Sajen Legal has advised the building firm on how to reform their standard form documentation so that they are protected going forward and so that legal fees can be kept to a minimum.
Larger firms also face the challenge of documenting variations, especially when serving as a sub-contractor to the general contractor of a large project. Such jobs are often driven by strict deadlines for milestones, with financial penalties in place for any delays. At times, general contractors may request variations but refuse to document them in writing. They may be rushed, or they may be seeking to shift risk and liability for timely performance onto the sub-contractor. They may even be seeking to carve out their own additional profit. Sub-contractors should refuse to undertake additional works until a written variation is provided, but this can undermine relationships, trigger penalties for delays and hold up critical staged payments.
The fast-track adjudication mechanism is designed to resolve such despites quickly, so that contractors – who often work within tight cash-flow schedules – are not unduly impacted. However successful claims require written and agreed variations, and the challenge of ensuring that these are in place can still be significant.
Seeking legal advice as early as possible – either in securing the correct agreements in the first place or in supporting an adjudication claim when required – is ultimately a cost-effective way for building contractors to ensure that their relationships with clients or general contractors remain positive and without surprises, and that final invoices for their work are paid in full
Contact Sejan Legal for further information and advice – click here.