GUIDE –

CONSTRUCTION
CONTRACTS

LAST UPDATED - MARCH 2019

BOWMANS

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 Guide – Construction Contracts

Contents

04 Introduction to Construction Contracts

06 Types of Construction Contracts

11 Working with the Employer’s Representative

13 Security Against Construction Risks

16 Dispute Avoidance and Resolution

19 Useful links

20 Overview of Bowmans Construction Team

22 Key Contacts

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Introduction to
Construction Contracts

Construction plays WHAT IS A CONTRACT?

a vital role in Africa’s

So, what is a construction contract? In
development, not only basic terms, it is an agreement between

in respect of its physical an employer (sometimes referred to as

the client) and a contractor to construct,
infrastructure, but also repair, modify, renovate or even demolish
in its broader economic something in an agreed time frame, for
an agreed price and to agreed standards.
and social development. It should describe:
This Guide provides some
• What will be done;
basic knowledge and
• How long it will take to complete;
understanding in relation • How much it will cost and the
to construction contracts, payment terms; and
• The consequences of failing to meet
industry standard forms the requirements of the contract.
and typical approaches
Once properly concluded, each party has
to risk allocation in
a legal obligation to do the things which
construction projects. the construction contract specifies. Like
any contract, if a breach occurs, the
other party will have certain remedies,
such as claiming for additional costs
caused by the breach.

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 Guide – Construction Contracts

ROLE PLAYERS IN THE (the employer and contractor), there

CONSTRUCTION PROCESS are a number of other role players who
contribute to the construction process.
Although the construction contract
typically only has two parties, The role players are set out below:

Requires the construction

Employer
work and provides payment

Employer’s Acts on behalf of the employer

Representative and may be referred to as
engineer, project manager,
principal agent, etc.

Professional Team Group of consultants appointed

by the Employer, including
e.g. architect, structural engineer,
cost consultant, environmental
consultant, etc.

Commissioned to construct the

works or to design/ construct
Contractor
the works

Appointed to perform parts of

Subcontractors
the design/ works on behalf
of the contractor

Adjudicator/ Settles disputes between

Arbitrator/ Court the parties

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Types of Construction
Contracts
The type of construction contract to be available but are less commonly used,
used for a project will depend on various particularly in Africa.
factors such as: the nature of the works
to be executed; whether design and Traditional Procurement
construction are combined or separated;
the split of responsibilities between the Traditional procurement (sometimes
contractor and the professional team; referred to as “general contracting”
the approach to risk allocation; financing or “design-bid-build”) is regarded as
terms; and market practice in a particular the most commonly used method of
industry or region. This section of the procuring building works. The main
Guide contains a summary of the various distinguishing feature is that the design
procurement strategies available for a and construction processes are separate.
construction project, taking account of The employer’s professional team will
these factors. It then considers some design the works and prepare the
of the most commonly used industry tender documents, including drawings,
standard form contracts in Africa. specifications and bill of quantities.
Contractors are then invited to submit
CHOICE OF PROCUREMENT METHOD tenders for the construction of the project
on a competitive basis. The employer
Every construction project is underpinned carries design risk, although in some
by a procurement strategy which projects the contractor is responsible for
determines the structure of the certain discrete elements of the design.
contractual arrangements, the roles and The employer will typically appoint a
responsibilities among the various key member of his professional team to
players and the approach to the allocation administer the contract.
and management of risk. There are
generally considered to be three main Various pricing mechanisms are
procurement methods: (i) Traditional used in traditional procurement but
Procurement (ii) Design and Build (iii) the main options are: (i) lump sum,
Construction Management/ Management (ii) re-measurement and (iii) cost
Contracting. Partnering and alliancing plus (sometimes referred to as
based procurement methods are also “cost reimbursement”).

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 Guide – Construction Contracts

Lump sum: A single “lump sum” price Cost-plus: The contractor is reimbursed
for the project is determined before the the actual costs incurred in carrying out
works commence. This is an appropriate the works (i.e. labour, plant, materials,
option where the works are well defined sub-contractors, etc), plus an additional
at the time of tender and there is a low fee to cover overheads and profit. This
likelihood that the employer’s requirements option is appropriate where the scope of
will change. Although the price may alter the work cannot be well defined at the
during the carrying out of the works outset but the employer nevertheless
(e.g. due to variations, provisional sums, requires an early start on site. As the
the occurrence of certain “relevant events”, contract is typically entered into on
etc.), this pricing option tends to give the the basis of an estimate of the costs
employer a reasonable amount of price only, cost-plus contracts are generally
certainty at the outset of the project. high risk for employers. As a means of
incentivising efficiency and cost control,
Re-measurement: The price for the works a “target cost” mechanism is sometimes
is not determined when the contract used, whereby the contractor and the
is entered into. It is calculated based employer share the risk of cost overruns/
on the “re-measurement” of the actual savings on a pre-agreed basis.
work carried out. The re-measurement
calculation is undertaken using agreed Design and Build
rates/ unit prices which the contractor
originally tendered on the basis of the The key feature of design and build
drawings and bill of quantities provided by procurement is that the contractor
the professional team. As the total cost of carries responsibility for both the design
the works is not determined at the outset, and the construction of the works,
employers tend to carry greater risk under to the employer’s requirements. The
a re-measurement contract. It is therefore approach to the preparation of the
suitable where there is a lack of certainty design will differ from project to project,
as to the volume of work required, even depending on the degree of influence the
though the design, specification and employer wishes to have over the design
quality requirements can be reasonably development process. For example,
well defined at tender stage. on some projects the employer will

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appoint a design team to prepare an initial, design and the contractor will generally
concept design. The contractor will then carry a greater level of risk in terms of time,
be required to complete the design and cost, quality and performance. For this
undertake the works. The contractor may reason, EPC contracts are often referred to
use his own in-house designers or appoint as “turn-key” contracts. They are typically
external design consultants or take over used for engineering and infrastructure
the employer’s design team. projects where performance and cost
certainty are the most critical factors for
A design and build contract will usually the employer. EPC is also common where
be based on a lump sum price (with no a limited recourse financing structure is
bill of quantities). The employer has used to fund a project.
greater price certainty than under
traditional procurement because the Construction Management/ Management
contractor is required to design and build Contracting
the works for an agreed price and within
an agreed time for completion. While Under the Construction Management
adjustments to the price and programme (CM) model, contracts for the various
may still arise due to e.g. variations and packages of work are entered into by
the occurrence of certain “relevant events”, the employer but the management and
there is generally less opportunity for supervision of those work packages, as
contractor’s claims under design and build well as the coordination of the design,
contracts. This means greater risk for the is undertaken by the construction
contractor and therefore a higher price. manager. The construction manager is
appointed under a form of professional
Engineering, Procurement and services agreement, with authority to
Construction (EPC) contracts are similar act on behalf of the employer in relation
to design and build contracts in that the to the management of the project.
employer appoints the contractor to carry While the employer takes the risk in the
out both design and construction but performance of the various package
the employer will have less influence over contractors, the construction manager

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 Guide – Construction Contracts

is liable for bad management, planning

and coordination. The construction
manager is typically paid on the basis of
reimbursable costs plus a management
fee, covering both pre-construction and
construction phase activities. Under the
Management Contracting (MC) model,
by comparison, contracts for the various
packages of work are entered into by the
management contractor directly rather
than by the employer.

Engineering, Procurement and

Construction Management (EPCM)
contracts can be regarded as a variant
of CM and MC models. The main
differentiating feature is that an EPCM
contractor will undertake design and
other engineering activities as part of
his scope of services. The level of risk
assumed by an EPCM contractor in
relation to the works will be driven by
project specific factors but typically, the
employer will seek to include incentive
mechanisms in the EPCM contract to
ensure the EPCM contractor has a degree
of responsibility in relation to the project
programme and budget. EPCM models
are most often used in the mining,
petrochemical and power sectors.

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BESPOKE OR STANDARD FORM The long awaited new FIDIC “Rainbow

CONTRACT? Suite” was launched in December 2017.
The changes to the Red, Yellow and
One of the key decisions to be made Silver Books are primarily designed to
by the employer, when designing the make the contracts more balanced,
procurement strategy for a project, is comprehensive and prescriptive. They
whether a bespoke or industry standard also place greater emphasis on dispute
form contract should be adopted. avoidance rather than dispute resolution.

Over the years, industry norms in relation The new NEC4 suite of contracts was
to risk allocation across the most common launched in June 2017. The changes
types of construction and engineering bring more clarity, simplicity and
projects have emerged. This has led to the flexibility to the standard terms. New
development of a number of international measures, like value engineering and
standard form contracts. The most early contractor involvement were also
commonly used standard forms in Africa introduced to enhance collaboration
are FIDIC, NEC and (in Sub-Saharan Africa) between employer and contractor.
JBCC. Often employers will elect to use Like the 2017 FIDIC, there is also more
a standard form contract rather than emphasis on dispute avoidance.
preparing a bespoke contract because
using an industry recognised set of terms
makes the procurement process more
efficient and competitive.

International standard forms such as FIDIC

and NEC have been around for decades.
However, they have recently been updated
in response to industry feedback.

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 Guide – Construction Contracts

Working with the

Employer’s Representative

Employers usually elect to work through There are some important steps a
a representative who may be an architect, contractor can take to develop this
an engineer, a project manager, a quantity relationship such as:
surveyor or any other qualified third
party. The employer gives his or her • Report all problems to the employer,
representative the authority to act on his through the appointed representative,
or her behalf in the execution of certain as quickly as possible. This is very
provisions of the contract. important if the problems could cause
cost increases or delay completion.
The representative’s role is to oversee and
administer the contract and the project • Handover in good time all notices,
itself. It is important for the Contractor advices, time delay claims, bad
to develop a good working relationship weather reports, certificates for
with the employer and/ or the employer’s payment, invoices, lists of workers,
representative, as the parties will benefit plant on-site, etc.
from a relationship based on trust and
co-operation. • Make sure claims are submitted
in strict compliance with the
Importantly, the employer’s representative applicable contractual provisions,
is usually the person to whom all notices, in writing within the period stated
invoices and claims must be submitted and in the contract. If a claim cannot be
is the person who determines the amounts prepared within the required period,
due to the contractor. extensions should be sought prior
to the expiry of the period. If no
extension is granted or communicated
prior to the expiry of the time periods,
the claim (even if not fully complete)
and all documents available at that
time should be submitted (explaining

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if possible why the claim cannot It is important for

be completed and submitted on the contractor to
time), with any further documents
develop a good
and information required to be
provided thereafter. working relationship
with the employer
• Only make reasonable claims for and/or the employer’s
additional payment. Inflated or
representative, as
frivolous claims will be rejected.
the parties will benefit
• Carry out all written instructions. If the from a relationship
instructions are difficult or impossible based on trust and
to execute, talk to the representative
co-operation.
who issued the instructions as soon as
possible to see if it can be done in a
different way – do not delay.

If the contractor disagrees with any

decision taken by the employer’s
representative, the contractor should, as
soon as possible, give notice of a dispute
in terms of the contract to the employer’s
representative. In some contracts time
bars are also in place for when a dispute
should be disclosed and submitted to an
adjudicator or arbitrator. The contract
should always be studied to see if such
time bars apply, and to ensure that they
are followed.

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 Guide – Construction Contracts

Security Against
Construction Risks

The management and mitigation of risk is Liquidated damages

a core feature of any construction project.
The contract itself will allocate the various Liquidated damages provide an employer
risks between the parties, based on the with a contractual remedy against the
general principle that the party best risk of delay and performance failure.
able to control or manage a risk should The essential characteristic of liquidated
carry responsibility for it. However, there damages is that the parties agree, in
are parties external to the contract who advance, a predetermined sum (or
are also likely to play a role in providing means of calculating that sum) payable
security against these risks, including, by the contractor to the employer if a
for example, the parent company of particular breach occurs. In common
the contractor, major sub-contractors, law jurisdictions, there are rules which
insurance companies, banks and other limit the scope of liquidated damages.
financial institutions. In such instance, an employer would
not be required to prove its damages as
In general terms, there are three main with a normal damages claim, but simply
types of security against construction that the breach occurred. In order to be
risks: (i) contractual forms of security such enforceable, they must be designed to
as delay liquidated damages, performance fairly compensate the employer for the
liquidated damages, retentions, etc; breach and not act as a penalty against
(ii) insurance policies; and (iii) security the contractor. In addition, they must be
instruments issued by third parties such a reasonably foreseeable consequence of
as guarantees, bonds and letters of credit. the breach.
In most cases, all three of these types of
security will be adopted as part of the risk Liquidated damages are most commonly
management strategy for a project but associated with delays to the completion
the level and value of the security will vary of the works. They are usually calculated
depending on the nature and complexity daily or weekly and will be capped to
of the project, the financial standing a percentage of the overall value of
of the parties, pricing/ commercial the works. Most contracts will specify
considerations and market practice. that the liquidated damages are the

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sole remedy for delay, save that the contract will set out who is responsible
employer’s rights to terminate the for taking out and maintaining each of
contract will be preserved. the required insurances and at what
minimum levels of indemnity. It will also
In projects involving an output based specify which of the project participants,
specification, such as those in the energy, with an interest in the works, should be
water, waste/ wastewater sectors, named insured on the policies. Given
there may also be liquidated damages the criticality of the insurances as a risk
payable by the contractor where the mitigation tool and the expense involved
required performance levels specified in purchasing cover from reputable
in the employer’s requirements are not insurance companies, it is advisable to
achieved. These types of regimes are take specialist advice from an insurance
designed to recognise that while the broker with good knowledge of the
contractor has delivered a functioning local and, in some cases, international
plant/ facility, the employer should insurance markets.
still be compensated for the loss of
expected output. Security instruments

Insurance Depending on the financial standing

of the contractor, the employer may
Many of the major risks involved in require a parent company guarantee
construction projects, in terms of loss, to be provided as a means of backing
damage and liability, can be insured up the contractor’s obligations, both
against. The main types of insurance in terms of performance and payment.
policies likely to be required include: Parent company guarantees are
construction all risks insurance; public considered particularly useful as a
liability insurance; employer’s liability means of securing the contractor’s
insurance; professional indemnity obligation to pay compensation
insurance; political risk insurance; following the early termination of the
environmental insurance; delay in start up contract, where the sums involved are
or advance loss of profit insurance. The likely to be substantial.

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 Guide – Construction Contracts

In addition, employers may seek a

guarantee or bond from a bank or
Given the criticality of
other financial institution to secure the insurances as a risk
the fulfilment of the contractor’s mitigation tool and the
obligations. These instruments can be
expense involved in
on-demand or conditional in nature and
will secure an employer against certain
purchasing cover from
non-performances by the contractor reputable insurance
under the contract. It is important to companies, it is advisable
remember that the substance of the
to take specialist advice
instrument will determine its nature
and scope, i.e. what it says on the tin is
from an insurance broker
not necessarily what the tin contains. with good knowledge of
Although organisations such as FIDIC the local and, in some
and the ICC (responsible for the Uniform
cases, international
Rules for Demand Guarantees) have
attempted to standardise the terms
insurance markets.
of such instruments, it is still the case
that these documents are often heavily
negotiated and that there is, in some
jurisdictions, a lack of uniform practice
in this area. It is therefore essential that
both employers and contractors take
specialist legal advice in relation to
these documents, particularly where
guarantees are being given by a local
bank in respect of a foreign contractor,
in which case a counter-guarantee will
be given in favour of the local bank by
the contractor’s relationship bank in
another jurisdiction.

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Dispute Avoidance
and Resolution
Most international standard form notice may have to be issued within a
construction contracts provide for a prescribed period of time, failing which,
dispute resolution mechanism, including the contractor may forfeit any entitlement
the procedure to be followed when a to relief under the contract. These types
dispute arises between the parties to the of time prescriptions often do not apply
contract. If parties conclude a bespoke to an employer’s claim, although recent
construction contract, it is recommended developments in some of the international
that the parties provide for a dispute standard forms have paved the way for a
resolution clause and agree to a dispute more balanced claims procedure.
resolution mechanism that will be
best suited considering the nature of Where the contractor has issued a notice
construction project and disputes that of claim, he will generally also be required
may arise between the parties. to deliver details of the claim within a
specific period of time after delivery of
Contractual Claims procedure the notice. As with delivery of the notice
of claim, the particulars of claim may also
Each of the standard forms of be subject to a time-bar provision where
construction contract provides for a it is submitted out of time. The particulars
specific procedure that the parties of claim need to show supporting
should follow if either one of the parties evidence for the claim, including details
believes it is entitled to claim relief in on the quantum of the claim and, often,
terms of the contract. Generally the a revised programme of works where the
party that believes an event entitles it to claim is one for extension of time.
relief under the contract will be required
to deliver a notice to the opposing The notice and particulars of claim are
contract party. The notice usually has to submitted to the employer’s independent
provide details of the event, the effect contracts manager (referred to mostly
or damage caused by the event, and the as “Engineer”, “Project Manager” or
relief which the party seeks as a result of “Principal Agent”) for determination
the event. Often, for the contractor, such within a specified period of time.

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 Guide – Construction Contracts

Determination Some contracts provide that the claim may

be resolved by dispute resolution where
The contracts manager will make the contracts manager does not determine
a determination upon assessment same within a prescribed period. The
of the particulars of claim, which claim may, likewise, be referred to dispute
determination will be implemented resolution where either party is dissatisfied
upon determination. A determination with the determination, subject to notice
for money is, mostly, given effect to in obligations. Some contracts provide that
the next payment certificate through such notice of dissatisfaction be given
inclusion of an additional sum due to within a prescribed time period.
either the contractor or the employer.
A determination for additional time is, Dispute
mostly, given effect to by extending the
date for completion and by acceptance Subject to the provisions of the contract,
of a revised programme of works. the parties may resolve a dispute by
mediation, adjudication, arbitration,
A claim for delay damages by the litigation or any other mechanism set
employer may be implemented as soon out by the contract.
as the completion date has passed and
the contractor has not yet completed Certain contracts require the parties
the works. The contracts manager may to first endeavour to reach amicable
deduct the delay damages from any settlement of the disagreement within a
amount due to the contractor in the next specified period of time (usually between
interim payment certificate. senior management representatives of
the parties), failing which the parties may
The determination will include a finding proceed with formal dispute resolution
on the merits of the claim and the relief procedures. Mostly, a contract would
sought by the claiming party. provide for resolution of a dispute firstly by

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adjudication (either by a single adjudicator

or by a Dispute Adjudication Board), and
thereafter arbitration.

Some contracts provide for an adjudicator

or arbitrator to be agreed between the
parties at the time the contract is entered
into. If this is not done, the contract will
provide a process for the parties to agree
an adjudicator or arbitrator when a dispute
arises. Failing agreement, an adjudicator or
arbitrator will be appointed by a nominating
body (which is agreed between the parties
at the time of contract conclusion).

The party who wishes to commence

with a formal dispute resolution process,
will be required to make a referral to the
adjudicator or arbitrator (once appointed).
The contracts often provide a time period
within which a referral to adjudication or
arbitration should be made. The referral
should set out the relevant background and
detail of the claim and set out the claim(s)
required to be resolved. An adjudicator or
arbitrator may only make determinations on
disputes referred by the parties.

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Useful links

• Association of Arbitrators • Construction Industry

(Southern Africa) Development Board
www.arbitrators.co.za www.cidb.co.za

• Department of Trade and Industry • Council for the Built Environment

www.thedti.gov.za www.cbe.org.za

• Tokiso Dispute Settlement • South Africa Federation of Civil

(Pty) Ltd Engineering Contractors
www.tokiso.com www.safcec.org.za

• Arbitration Foundation of South • FIDIC

Africa (AFSA) www.fidic.org
www.arbitration.co.za
• NEC
• United Nations Commission on www.neccontract.com
International Trade Law (UNCITRAL)
www.uncitral.org • JBCC
www.jbcc.co.za
• International Chamber of
Commerce (ICC) • SCL
www.iccwbo.org www.scl.org.uk

• London Court of International • Society of Construction Law

Arbitration (LCIA) for Africa
www.lcia.org www.sclafrica.org

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Overview of Bowmans
Construction Team
We are proud to be one of the most Our recent experience includes assisting
recognized full service construction teams South Africa’s principal energy utility
in the sector in Africa. with all aspects of its two new flagship
coal-fired power plants; advising an
We assist clients throughout the project Asian port authority on the first public
life cycle of complex infrastructure and private partnership port in East Africa;
construction projects. This includes all and representing an important member
stages of development and delivery and of China’s real estate industry before the
extends to financing and disputes under National Environmental Tribunal against a
all forms of construction contracts. third party seeking to halt the development
of its African real estate headquarters in
We have a wealth of experience that cuts Kenya. In addition, we are presently advising
across multiple specialist sectors including on the development and construction of
energy, manufacturing, mining, real estate, East Africa’s first carrier neutral data centre,
transport, telecoms and utilities. based on a suite of FIDIC contracts.

Our thorough understanding of various Through our footprint in Africa, including the
standard forms of contracts, including OHADA region, and our strong relationships
FIDIC, the NEC and the JBCC, allows us with firms on the ground in other key
to help clients manage their risk in tandem jurisdictions, we are well placed to provide
with their risk appetites. cross-border advice spanning the full range
of legal services to clients doing business
Our disputes expertise extends from in this sector.
mediation, arbitration and litigation
to negotiating and structuring major Our specialist construction and engineering
settlement agreements which often lawyers serve clients ranging from
deal with interconnected and complex major contractors to promoters, leading
commercial and regulatory issues developers, funders, purchasers, tenants
related to the public sector. and occupiers among others.

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Our specialist services include assisting

with/ advising on:

• Applicable legislation across the

African continent
• The entire spectrum of construction
and engineering law and the related
regulatory environment
• Various standard forms of contracts,
including FIDIC, the NEC and the JBCC
• Construction aspects of financing
agreements, purchase agreements,
PPP project agreements and
agreements for lease
• Operation and maintenance and
facilities management agreements
on completed projects
• Construction and engineering
disputes including mediation,
arbitration and litigation

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Key Contacts

ALEX NJAGE
Head of Real Estate and Construction
Nairobi, Kenya

T: +254 20 289 9000

E: [email protected]

ANDREW VAN NIEKERK

Partner
Johannesburg, South Africa

T: +27 11 669 9370

E: [email protected]

LLOYD CHATER
Partner
Johannesburg, South Africa

T: +27 11 669 9315

E: [email protected]

LIZE-MERÉ LUDICK
Partner
Johannesburg, South Africa

T: +27 11 669 9473

E: [email protected]

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 Guide – Construction Contracts

SPENCER NAICKER
Partner
Johannesburg, South Africa

T: +27 11 669 9388

E: [email protected]

TUMISANG MONGAE
Partner
Johannesburg, South Africa

T: +27 11 669 9530

E: [email protected]

STEPHANIE MCDONALD
Consultant
Cape Town, South Africa

T: +27 21 480 7819

E: [email protected]

To view profiles of our lawyers,

please visit www.bowmanslaw.com

CONTENTS PAGE 23
 Cape Town
T: +27 21 480 7800
E: [email protected]

Dar es Salaam
T: +255 76 898 8640
E: [email protected]

Durban
T: +27 31 265 0651
E: [email protected]

Johannesburg
T: +27 11 669 9000
E: [email protected]

Kampala
T: +256 41 425 4540
E: [email protected]

Nairobi
T: +254 20 289 9000
E: [email protected]

Follow us on Twitter:
@Bowmans_Law

www.bowmanslaw.com

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