Contract Administration CONS 6812 - Class exercise No.

10(1) + GUIDE ANSWERS

These Topics are Time for completion Part 1 Thursday 24th August 2017

NZS 3910 applies to building contracts in Q4 and following questions:

Q1. Little Job Builders [LJB] agree to build a house extension and carry out renovations for Mr and
Mrs Smith for the fixed sum of $75,000. There is a complete set of building consent approved
drawings and specifications but no conditions of contract. LJB say it has a job to finish before
starting the Smiths work, but say nothing about when it is expected to finish or how long the
Smiths job will take to perform. LJB asks for and receive a 10% deposit [$7,500] from the
Smiths to buy materials for the work. The Smiths will move into alternative accommodation
while the work is in progress which will cost them $400 a week.

1.1 It is 3 months later, there has been no contact between LJB and the Smiths, and work has not
started yet. What do you think the Smiths should do? 3 months have gone by, LBJ has had
$7,500 of their money, and the Smiths have not contacted LBJ. Are the Smiths simple minded or
exceedingly rich? From LBJs perspective the Smiths are quite laid back over the issue, and LBJ
may assume starting on site late is not a problem. The priority for the Smiths is to contact LBJ
and find out why there is such a delay. Until the Smiths do that there is little point in
considering what happens next.

1.2 The Smiths phone LJB and ask for their $7,500 back. LJB says it has bought materials with it and
will be starting work in 3 months time because there has been a lot of extra work to do on the
job in progress. What do you think the Smiths should do? The Smiths could ask to see what LBJ
has bought with their money. It is technically the Smiths property. If they want to settle the
situtation amicably and not employ LBJ to do the work they need to be careful. They can ask for
the bought material but LBJ may not be pleased to lose the job. If the Smiths are keen to cancel
the agreement they should ask a lawyer for advice. A lawyer may suggest the Smiths give LBJ a
deadline either start work in 3 weeks time for example or face cancellation. First and foremost
the Smiths need to talk to LBJ. The situation will not be resolved by threatening legal action
where the outcome is uncertain and cost may exceed the $7,500 already paid over.

1.3 LJB have started work on the Smiths extension and it is going well. LJB tell the Smiths it should
be finished in 4 weeks. 5 weeks pass and there is still another 2 weeks work left. LJB says there
have been labour difficulties caused by a construction boom. What do you think the Smiths
should do? Nothing. LBJ have a valid reason for delay. Saying it should be finished in 4 weeks
does not produce an obligation to finish in 4 weeks. The Smiths provide no consideration in
exchange for a gratuitous, at best, promise. If there are labour problems it is reasonable that a
delay should arise. LBJ are still acting on the original agreement to finish in a reasonable time
period. What builders think is reasonable and what judges think reasonable are not the same
things. The wheels of justice turn slowly.

1.4 The Smiths are paying for work done fortnightly. They calculate 6 weeks delay and deduct
6 X $400 = $2,400 from the next payment. LJB say they are not liable to pay damages. Who is
correct, the Smiths or LJB and why? LBJ. A contractor only becomes liable to pay damages when
it has passed the due date for completion. There is no due date for completion here because LBJ
only has to finish in a reasonable time. Until and unless LBJ fail to complete with a reasonable
time given the circumstances LBJ cannot be liable to pay damages.

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Q2. Assume LJB had promised to complete the work in 10 weeks. A severe storm damages the work
in progress and it takes 20 weeks to complete it. The Smiths house Insurance covers the cost of
repair but not cost of delay. Is LJB liable to pay the Smiths extra accommodation of 10 weeks @
$400 per week = $4,000, and why? Yes. LBJ agreed to finish within a specified period and failed
to do so. LBJ is therefore liable to pay damages to the Smiths to compensate them for the extra
cost caused by LBJs breach.

Q3. Would it make any difference to your answer in Q2. If the Smiths had been on holiday when the
damage occurred and there was a week lost until they got back and contacted the insurer? The
Smiths arguably delayed LBJ for a week and by the prevention principle LBJ is relieved of any
obligation to finish by the agreed date. On the other hand it could be argued LBJs obligation was
to repair the damaged work and continue irrespective of the insurance issue. The outcome if the
matter goes to court is uncertain.

Q4. A Contractors prolongation costs [i.e. the cost it incurs for delay] are $5,000 per week.
There is a liquidated damages clause in the contract for $8,000 per week
The contract finishes 10 weeks after the original due date for completion
The contractor is given a 2 week extension for inclement weather
The contractor is given a 4 week extension for Variations

How much must the Principal pay the Contractor or the Contractor pay the Principal for delay
costs? The Contractor has 4 weeks extension for Variations and the Principal must pay the
Contractors prolongation costs = 4 weeks @ $5,000 per week = $20,000. 10.3.7 The Contractor
shall not be entitled to compensation for time-related Costs where an extension of time is granted
on grounds other than those in 10.3.1(a) or (g). (a) The net effect of any Variation. (g) Default by
the Principal, or any other Person for whose acts or omissions the Principal is responsible, which is
not a Variation. The Contractor finishes 10 weeks late, is excused from paying damages by
4 weeks for Variations and 2 weeks inclement weather = 6 weeks total. 10 less 6 = 4 weeks
liquidated damages for the Contractor to pay to the Principal @ $8,000 per week = $32,000. On
balance the Contractor owes the Principal $32,000 less $20,000 = $12,000.

Q5. Why does the contract often require the Contractor to pay liquidated damages to the Principal
but never requires the Principal to pay liquidated damages if the Principal delays the Contractor
e.g. by not providing the necessary design information on time? It is possible to calculate
liquidated damages in advance as a weekly amount which will either represent the Principals
lost income e.g. rent, or additional cost e.g. finding alternative accommodation. Delay costs of
the Contractor vary according to when during the contract the delay occurs e.g. a delay cost for
one week while a tower crane is on site will be different from the delay cost when the tower
crane has left site. As it is impossible to foresee when time extension circumstances may arise, it
is impossible to calculate a weekly damages figure in advance.

Q6. If the Contractor requires certain information on a certain date and the Principal provides it
two weeks late that may entitle the Contractor to a two week extension of time. If the
Contractor was however two weeks late anyway, would that make a difference to an extension
of time claim? Time extensions are given if they are the consequence of a particular cause. If the
Contractor is already in delay it is only entitled to an extension for delay actually caused by the
lateness. The Contractor asks for information far enough in advance of the work the information
relates to, so work is not delayed. If the information was received 2 weeks after the date it was
requested but the work was already 2 weeks late, the provision of the information could not
have caused delay. The Contractor received the information sufficiently in advance of the work
not to have delayed it. If the Contractor underestimates the time in advance of the work, that is
the Contractors problem to deal with.

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Q7. If there is a delay caused to the progress of work by two separate matters, otherwise known as
concurrent delays, one item is the Contractors responsibility and the other item is the Principals
responsibility, how is it possible to separate out the separate effect of each one? With great
difficulty. A Court will say it may be difficult but that does not stop the Court doing it. The Court
listens to expert opinion evidence and comes up with some kind of distribution between the two
matters. It would save much time and expense if Contractor and Principal sat down and came up
with an agreed compromise between themselves rather that expect a Court to wave a magic
wand over the process, which the Court does not have. For more detail try:
http://www.cpmiteam.com/ConcurrentDelayBoe.html

Q8. Describe the difference between a global or all in claim by a contractor wanting an extension
of time compared to calculating the time extension due for Variations, adding it to the time
extension due for neutral events, and deducting that sum from the actual period of delay, the
balance being the contractors responsibility for delay? In a global/all in claim the Contractor lists
all the delay events that occurred on the job [except any suggesting the Contractor caused some
delay by its own inefficiency]. It takes the period between the due date for completion and the
actual date for completion and says that delay was caused by events on the aforementioned list
and produces a programme which demonstrates/justifies that claim i.e. the Contractor
apportions total delay between all valid reasons for delay.

Q9. Explain whether liquidated damages be deducted from the Principals payments to the
Contractor when the Contractor is in delay during the course of the contract? No they cannot.
Damages can only be applied when the date by which the work should have been finished has
been passed and the work is still not completed. The Principal does not suffer any loss until the
due date for completion is passed and work is still not complete.

Q10. How are claims for liquidated damages dealt with under the contract e.g. does the Engineer
deduct them from the contractors progress payments? The Principal deducts the damages
itself, not the Engineer [except to the extent that the Principal may instruct the Engineer to
deduct them]. Damages for delay occur outside of the contract and the Engineer has no
jurisdiction over them. 10.5.1 The sum stated as liquidated damages in the Special Conditions
shall be paid by the Contractor to the Principal for the period between the Due Date for
Completion of the Contract Worksand the time of Practical Completion. 10.5.3 The Principal
maydeduct the amount of liquidated damages from any monies payable to the Contractor
under the Contract and, for that purpose, give notice to the Engineerrequiring the deduction. .

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