Construction LawLegal UpdatesTypes of Construction Project Contract

types-of-construction-project-contract

For engineering and construction project contracts, FIDIC contracts – as one of the most common standard contract forms – have been globally used in large and small construction projects in many countries. The International Federation of Consulting Engineers (“FIDIC”) Golden Rules (2019) explains:

 

“. . . FIDIC, in the furtherance of its goals, publishes international standard forms of contracts for works (Short Form, Construction, Plant and Design-Build, EPC/Turnkey) and agreements (for clients, consultants, sub-consultants, joint ventures, and representatives), together with related materials such as standard pre-qualification forms . . .  also publishes business practice documents such as policy statements, position papers, guides, guidelines . . . .”

 

Apart from that of the FIDIC, there are numerous standard forms of construction contracts available in the marketplace to satisfy the needs of all participants involved, such as the New Engineering Contract (NEC), JCT, ICC, SIA, and so forth.

A standard contract form does not of course fit all construction projects meaning that it may still demand necessary modifications in certain areas as per the needs of project owners and also that of other participants, such as contractors, sub-contractors, etc. However, a standard contract form is normally well understood by the related participants for having been widely used in the industry for over a period of time. Such a form is usually thorough and covers essential matters that should be included in a construction project. This generally results in fewer misunderstandings on the work. Also, those participants can look to the previous settlements on how standard contract terms and conditions have been interpreted and applied.

In the context of Indonesian construction services, as long as being compliant with Construction Law 02/2017 and Government Regulation 22/2020, the parties involved are allowed to accommodate any international standard forms of construction contracts above described.

 

Types of Risk-Based Construction Contracts

When scrutinizing parties’ rights and obligations using a standard or bespoke contract form, the participants must pre-allocate responsibilities between themselves concerning certain risks that may occur before, during, and after the execution of the contract (from conception, construction to operation and maintenance aspects). Knowing exactly which type of risk-based contract, that suits a project, will best assist owners, contractors, and suppliers manage risk allocations and ensure the work and payment go as smoothly as possible. The following are some types of related construction contract commonly found in the industry:

Lump-Sum: a construction service contract for the completion of all work within a certain time limit, with a fixed contract price, and all risks that may occur in the execution of work are fully borne by the goods/services provider or contractor.

Turnkey (Contractor’s Full Pre-financing): a contract where a contractor is responsible for financing all costs required to complete the project. Payment to the contractor is made after the building is delivered and ready for operation by the owner. As a guarantee for payment to the contractor, a bank guarantee letter is given for the total development costs  (pre-design, design, construction, interest expenses). The contractor can disburse the bank guarantee letter if the owner fails to pay at the agreed time after the contractor’s obligations have been fulfilled.

EPC (Engineering, Procurement, and Construction):  a contract system that covers the scope of responsibilities of the project owner and contractor for Engineering, Procurement, Construction and Commissioning to produce a production-capable system. EPC projects are generally paid according to work progress (earned value system). This system converts work progress into a monetary value or into a man-hour rate/value. The contractor has the right to submit ‘a monthly earn value progress’ (a progress calculation) for claim payment installment under the project owner’s approval.

Construction Only: a contract where a contractor builds a project in compliance with the design made by other parties. This is considered the lowest risk for contractors and is a popular delivery method for small-scale projects on domestic and commercial buildings, including infrastructure works.

Design and Build:  a contract where a contractor carries out both the design and construction works.

This is used to avoid risks of delivery schedule conflicts between the design phase and the construction phase of a project. The design-build contractor is responsible for all work on the project; therefore the owner may seek legal remedies for any fault directly from one party (contractor).

Cost Plus Fee (Cost Reimbursement): a contract for the procurement of construction where the contractor receives service fees from the owner as agreed. This contract authorizes the contractor to use the fee up to a certain cost limit.  After the cost limit is exceeded but the construction procurement has not fulfilled the existing agreement, all additional costs and risks to accomplish the project will become the responsibility of the contractor.

 

FIDIC and NEC Standard Forms

In carrying out international projects, it is necessary to consider the two most widely used standard construction contracts, namely FIDIC and NEC:

FIDIC (The International Federation of Consulting Engineers)

FIDIC is a Geneva-based publisher of the international standards organization for Consulting Engineering and Construction. Having been recognized as a traditional form of contract (first issued in 1913) and internationally adopted for a long time, the terminologies used are more legal than simple words.

However, this standard form is ideal for handling different kinds of construction and plant installation projects, such as infrastructure, high-rise buildings, real estate complexes, factories, refineries, etc. Different contract forms, depending on who performs the design, facilitate the risk allocation by choosing the right ones. This is valuable for large and complex projects where different participants are involved by applying the relevant forms subject to the specific role of each participant. And, in spite of its lengthy complex nature, this form has been clearly and in detail drafted to cover all kinds of issues that can occur during the construction process, for example, issues that are likely not yet regulated by applicable local laws and regulations.

NEC (New Engineering Contracts)

NEC is a UK-based publisher of guidance for the drafting of documents on civil engineering and construction projects aimed at obtaining tenders and awards, and administering contracts. As a modern standard contract, launched in 1991 and internationally adopted, it focuses on clarity, flexibility, and plain language, for example, minimizing the use of ambiguous terminologies, such as ‘reasonable’ and ‘fair’.

 

Time, Cost, and Quality Aspects in FIDIC and NEC Contracts

Time, cost, and quality aspects are some of the main terms discussed in both standard contract forms. The comparison between the two is as follows:

FIDICNEC
Time
The contractor must submit a detailed program schedule to the engineer (representing the employer), which is updated only when the actual work is no longer as planned, and the contractor will only claim for the losses (time and money) if the problem has already occurred.The contractor must regularly submit to the project manager (representing the employer) a detailed program for acceptance. There is a concept of “early warning”. Both the contractor and the project manager must advise each other when any unexpected events or errors occur and may affect the time, cost, and work quality. This allows both to detect problems immediately and minimize the associated risks.
Cost
FIDIC adjusts when there are changes, variations and claims related to time and costs. It analyzes each term (cost and time).NEC adjusts when there are changes, variations  and claims related time and costs. It analyzes both terms jointly. The contractor must provide a quotation and send it to the project manager for approval. This quotation will consider both the time and cost factors.
Quality
FIDIC identifies specific technical documents that indicate the employer’s quality requirements (requirements and specifications determined by the employer). These documents specify the quality requirements for work, workmanship, plant, and materials.NEC  identifies the specific technical documents that indicate the employer’s quality requirements (requirements and specifications determined by the employer). These documents specify the quality requirements for work, workmanship, plant, and materials. The contractor and the project manager notify each other when they detect any defect. As such, both can manage it to cap the time and cost impact.

 

 


ADCO Law earns the trust to represent clients from multinational companies to emerging entities across a wide range of industries to achieve their business objectives in Indonesia.

By combining commercial sensibilities and legal expertise, ADCO as a Law Firm Jakarta assists the clients to structure, organize and implement their business ventures and investments, including structuring, financing, and securing investments as well as establishing new foreign companies in Indonesia. Should you have more queries regarding this matter, please do not hesitate to contact us.

Dendi Adisuryo
dendi.adisuryo@adcolaw.com

Liza Mashita
liza@adcolaw.com

@2020 ADCO Law. All rights reserved.
This publication has been prepared for general informational purposes only to provide clients with information on recent legal developments and is not intended as legal advice or opinion.

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