A GUIDE TO

CONSTRUCTION
CONTRACTS
BOWMANS

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 A Guide to Construction Contracts

Contents

04 Introduction

05 What is a contract?

05 Construction contracts

07 Working with the employers representative

08 Different forms of contracts

11 Different ways of contracting

12 Construction contract arrangements

13 Construction Industry Development Board

14 Deciding on which contract to use

18 Common construction contract terms/ procedures

22 Key concepts

26 Applicable legislation

27 Useful links

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Introduction

Construction projects play a vital

role in South Africas development,
not only in respect of its physical
infrastructure, but also in its broader
economic and social development.
They also create employment
opportunities on a large scale.

The construction industry is valued

at approximately

ZAR 145 billion

and provides job opportunities
to approximately

429 000
individuals
The industry continues to grow.
This handbook provides some basic
knowledge and understanding regarding
contracting in this industry.

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 A Guide to Construction Contracts

What is a Construction
contract? contracts

A contract is an agreement entered into It is not the beauty

between two or more people with the
of a building you
intention of creating legally enforceable
obligations. Once properly concluded,
should look at, its the
a contract is binding on each party. construction of the
This means that each party has a legal foundation that will
obligation to do the things which the
stand the test of time.
contract requires him or her to do. If a
party does not do so, he or she may be
David Allen Coe
in breach of the contract and the other
party will have certain remedies, such as
claiming for additional costs caused by the A construction contract is an agreement
breach (called damages). They are also between an employer (sometimes referred
able to get a court order to force the party to as the client) and a contractor to
in breach to do what is required of them construct, repair, modify, renovate or even
under the contract. demolish something in an agreed time
frame, for an agreed price and to
The contract should describe agreed standards.
the following:
The contract is signed by both the
What will be done; employer and the contractor. As with any
How long it will take to complete; contract, once the construction contract
How much it will cost and the is signed, both the contractor and the
payment terms; employer must follow the terms of the
What will be done if either party contract or face possible legal action.
defaults; and
The extent to which the common
law, which would usually apply,
is adhered to.

Ensure that you have read the entire

contract and understand the terms
and conditions contained therein
before signing.

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ROLE PLAYERS WITHIN THE (appointed separately by either party or in

CONSTRUCTION CONTRACT some cases jointly by both parties), who
assist in the construction process.
Although the construction contract
typically only has two parties, (the The role players are set out below (for
employer and contractor), there are a a more detailed description of the role
number of role players usually involved players refer to the sections that follow):

Requires the construction

Employer
work and provides payment

Employers Acts on behalf of the

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

Contractor Commissioned to
construct the works

Subcontractor Appointed by the

contractor to perform a
part of the construction
works under a subcontract

Adjudicator/ Settles disputes

Arbitrator/ Court between the parties

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 A Guide to Construction Contracts

Working with the

employers representative

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

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Different forms
of contracts

to execute, talk to the representative The type of contract form to be used will
who issued the instructions as soon as depend on the employers preference as
possible to see if it can be done in a well as the works to be executed. Two
different way do not delay. common ways in which parties can contract
are either through a bespoke contract or
a standard form contract.

In this way you BESPOKE CONTRACT

are likely to avoid
disputes. Should a This is a type of contract that is not
based on a standard form contract and is
disagreement actually
specially drafted and fully customised to
arise, it is best to cater for specific needs or requirements for
look for possible the parties. This type of contract is not

compromises to commonly used by lenders or banks

who sometimes provide the funding of
resolve the dispute.
construction works. According to
the Construction Industry Development
Board (CIDB, additional information
If the contractor disagrees with any decision provided on page 13), when contracting
taken by the employers representative, with government entities (state-owned
the contractor should, as soon as possible, companies, government departments etc.)
give notice of a dispute (if stipulated in the only standard form contracts should be used.
contract) in terms of the contract to the This is to ensure a measure of consistency
employers representative. In some contracts and uniformity in the terms of construction
time bars are also in place for when a dispute agreements concluded with the government.
should be disclosed and submitted to an
adjudicator or arbitrator. The contract should STANDARD FORM CONTRACTS
always be studied to see if such time bars
apply, and to ensure that they are followed. There are usually risks and issues which will
be common for all construction projects

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 A Guide to Construction Contracts

and activities. Accordingly, a number

of standard form contracts have been
developed which set out standard terms for
a construction contract to cover the related
issues and risks that will most likely apply.
There are standard form contracts for both
construction work and construction-related
professional services (for example pure
design work, or supervision work
for construction).

Standard form contracts are useful because

they can be obtained and understood in
advance and, therefore, are usually easier
to agree on instead of drafting the entire
contract from scratch. The parties simply
agree on specific changes to the standard
terms based on the requirements for the
specific construction project concerned.

It is therefore very important for a

contractor to become familiar with the
relevant standard form contracts, which
could be used for the type of construction
work which the contractor would normally
consider tendering for. A list of standard
form contracts that are typically used in
South Africa is set out on page 13 (these
standard forms are approved by the CIDB,
further information regarding the CIDB is
provided on page 13).

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Specific types of standard form contracts

(approved by the CIDB)

CONSTRUCTION PROFESSIONAL SERVICES

FIDIC French Initials for International CIDB Standard Professional Services

Federation of Consulting Engineers (1999) Contract 3rd Edition
Short Contract and Red, Yellow and
Silver Books

GCC General Conditions of Contract NEC New Engineering Contract

for Construction (2010) (Professional Services Contract)

JBCC (JBCC series 2000) (Principal

Building Agreement and Minor
Works Agreement)

NEC New Engineering Contract

(Engineering and Construction Contract
and Engineering and Construction
Short Contract)

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 A Guide to Construction Contracts

Different ways
of contracting

There are different ways in which a the main contractor, these rights and
prospective contractor can participate in a responsibilities will be exercised by
construction contract. Some examples are and between the subcontractor and
listed below: the main contractor.

Main contractor The contractor himself The subcontractor does not have a
or herself concludes a contract with an contract with the employer, and in most
employer to build/ construct something. instances does not have a relationship
(eg building a school). with them. In some instances, however, the
employer can take up this responsibility.
Joint venture partner The contractor
forms an agreement with one or more When an employer wants to use a
other contractors on an equal footing. subcontractor of their choice, the
They then jointly sign a contract to subcontractor is referred to as a
build/ construct all or a part of the nominated subcontractor and in
project. It is important to note that in certain instances, the employer will
this case, each contractor in the joint take up risk due to its nomination.
venture is responsible to the employer
for all obligations under the contract.
In other words, as between the employer
and the members of the joint venture,
each member of the joint venture is
responsible for the actions or breach
of any other member.

Subcontractor The subcontractor

has an agreement with the main
contractor to complete a part of the
works, and will not have any contract
with or obligations to, or rights against,
the employer. Subcontractors will
usually have the same rights and
responsibilities as the main contractor.
But since subcontractors contract with

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Construction contract
arrangements

These can be created by standard form Engineer, procure and construct

contracts or catered for/ created on a This is a form of contract where the
bespoke basis. The most commonly contractor is responsible for design/
used arrangements are as follows: engineering, procurement/ sourcing of
materials and construction of the works
Pure construction contract This is a (including ensuring that the work is fit
form of contract where the contractor for its stated purpose). The contractor
is responsible for the construction of bears the majority of the risk and the
the works as per the specifications and employer will regard him or her as the
design provided by (or by a third party single point of responsibility for the
on behalf of) the employer. With this whole project. This is, therefore, the
type of contract, the contractor bears most expensive type of arrangement.
the lowest risk. The price is often re- The contractor is usually required to
measurable, based on a bill of quantities provide a fixed lump sum price, with
(a document detailing specific prices for fewer entitlements to adjustments than
goods and services the contractor will under any other arrangement, and must
provide) since the design is not usually therefore appropriately price in the risks.
complete and fully available at the point
that construction work is to commence. The table below illustrates the arrangements
described above with regards to pricing.
Design-build This is a form of contract
where the contractor is responsible for Price vs risk graph
both the design and the construction of
the works. Due to this fact the contractor
bears more risk when compared to a
pure construction contract (including
ensuring that the work is fit for its Engineer,
Procure and
intended purpose). Therefore, this is a Construct
Price

moderately priced arrangement; usually

a fixed lump sum price is required for Design-Build

doing both design and construction, but

appropriate adjustments to the price
Pure Construction
are provided for events outside of the
contractors responsibility.
Risk

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 A Guide to Construction Contracts

Construction Industry
Development Board

The Construction Industry Development According to the CIDB regulations, public

Board (CIDB) is a body created in sector construction procurement must be
terms of the CIDB Act to regulate the undertaken on standard form contracts
construction industry. approved or prepared by the Construction
Industry Development Board Regulations
The CIDB Act 38 of 2000 (CIDB Act) (CIDB Act Regulations). In addition, only
requires and gives the CIDB the power to: contractors with an appropriate registration
in terms of the CIDB Act and regulations
Establish a national register of may tender for and be appointed to perform
contractors and of construction construction work in the public sector.
projects to regulate, monitor and
promote the performance of the The CIDB also encourages using these
industry for sustainable growth, standard form contracts for private
delivery and empowerment. sector construction procurement to
promote efficiency.
Promote improved delivery
management capacity and a standard For more information regarding the CIDB
and consistent application of as well as registration requirements, refer
procurement policy throughout all to the list of useful links on page 27.
spheres of government.

Promote improved performance and

best practice of public (government)
and private sector clients, contractors
and other participants in the
construction delivery process.

Promote continued and consistent

participation of the emerging
construction sector.

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Deciding on which
contract to use

The idea of standard form contracts is to Main contractor and subcontractor (rights,
include provisions that are beneficial to both responsibilities and risks)
parties to the contract in accordance with
good practice. Some contracts are, however, Usually in construction contracts the main
not based on the approach of good practice. contractor will be responsible for the entire
project. He or she will take responsibility
It is therefore important to be familiar for the safety of his or her employees and,
with the three Rs when deciding which most of the time, the subcontractors.
contract to use: A summary of the more common rights,
responsibilities and risks follows:
 ights these are entitlements that one
1. R
party has against another, entitling the 1. RIGHTS
party who has the right to compel the
other party to do or not to do something. Timeous payments the main
contractor is entitled to be paid within
2. Responsibilities these are obligations the time stated in the contract, failing
to do, or not to do something, for the which he or she should usually be able
party who has the right. to claim interest on late payment.

 isks these are the possibilities of

3. R Extensions of time the main
something happening or not happening, contractor can claim for an extension
which can result in additional liability of time for completion in accordance
arising for either or both parties. Risks with the instances catered for in the
can be absorbed, avoided, shared, contract. The usual test is whether or
transferred or mitigated under the terms not the particular act/ incident that
of the contract. In this way, they can be will delay time for completion is within
dealt with in a way that both parties are his or her control or not.
comfortable with and not caught off-
guard, as long as they are not ignored Access to site the main contractor
or not considered at all. has a right to access to the site at
which the works are to be completed
at the time stated and agreed in the
contract agreement.

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 A Guide to Construction Contracts

Upon termination of the contract Insurances the main contractor

the main contractor usually has the will in some instances be required to
right to terminate the contract should acquire insurance for the works, site,
a material breach or a force majeure its employees, materials, etc. This is to
event occur. ensure that risk remains mitigated at
all times.
Appointment of subcontractors
the main contractor usually has the Administrative procedures/ compliance
right to appoint subcontractors if not with all applicable laws the main
otherwise provided for in the contract contractor has to ensure that the
(see section regarding nominated required licences, permits and the like
subcontractors on page 11), whom he are obtained before, during and after
or she will be held responsible and the construction works proceed. It is
accountable for. imperative for the contractor to obtain
all licences within the time periods
2. RESPONSIBILITIES allocated in order to avoid situations
where these issues lead to a delay in
Completing works the main the construction process and therefore
contractor has the responsibility to a delay in the works.
complete the works within the time
allocated in the contract agreement. Response to communications
Guarantees in some instances, the main contractor has an obligation
especially where the contract is a to respond to all communications from
design-build or EPC (Engineer, Procure the employer or his or her representative
and Construct), the main contractor at all times during the subsistence of
will be required to provide performance the works. These might be variations,
guarantees. This is a mitigation of risk progress updates, suspension of works,
strategy on the part of the employer access to site issues, delayed payment
to ensure that if the works are not notices, etc.
performed to the correct standard or
specifications, he or she will be covered Substantiation of claims in the
accordingly. This will usually be priced instance where the contract agreement
in by the contractor. makes provision for a claim mechanism,

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unless otherwise stated in the contract Delays the main contractor should
agreement, the contractor must also ensure that materials are delivered
substantiate such a claim in order on time, licences obtained and that
to ensure swift settlement of such his or her employees perform the
a payment. works timeously. Failure to do so will
lead to a situation where delays occur
Subcontracts main contractors should and depending on the wording of the
ensure that written agreements are contract the main contractor might be
entered into between themselves and subject to delay damages.
the subcontractors. This is to ensure
that they are able to properly hold Penalties the main contractor should
such subcontractors liable should be aware of the fact that depending
any issue arise. on the wording of the contract, he or
she might be liable for penalties should
3. RISKS he or she fail to meet certain set dates
or fail to meet certain performance
Financial loss: guarantees. It is important to note
though, that if a penalty applies, the
Errors in calculations the main employer does not have to prove that
contractor should ensure that his or her loss stemming from the
measurements regarding the works price breach is equal to the penalty, but may
are done completely and accurately. not claim further amounts from the
The contractor must also include a contractor in respect of the breach
contingency amount within the price to which the penalty applies. In other
for loss that could be suffered for risks words the contractors liability to pay
for which no additional compensation is damages for the breach is limited to the
allowed under the contract. amount of the penalty.

Poor management the main contractor Insolvency of employer the main

should ensure that he or she manages contractor is at risk of this occurring
the project accordingly, especially when especially when the employer is a
subcontractors are involved as this might private individual or small company.
lead to dire financial consequences. The main contractor can mitigate this

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 A Guide to Construction Contracts

risk by acquiring bank guarantees Emerging contractors can develop

from the employer guaranteeing management skills and technical expertise
performance (payment) of the amounts through association in joint ventures with
owed. The main contractor must established contractors.
remember that he or she has a builders
lien over the constructed property It is important to set up a joint venture
which would stand against a claim agreement which endeavours to assign risk,
for insolvency, provided that such a responsibility and reward fairly between
contractor maintains possession of joint venture partners.
the works.

Joint venture partners (rights,

responsibilities and risks)

Joint ventures may be formed for various

reasons, such as:

Size and complexity of the project;

If the project requires specialised
skills and expertise.

A joint venture may be entered into as either

the main contractor or a subcontractor
which means the three Rs discussed on
page 14 will apply to joint ventures.

A joint venture is a partnership which
requires the partners to be jointly and
severally liable for all obligations of the
joint venture. Therefore, one partner may
be sued for the full debt of the partnership;
this partner in turn has a right to sue the
other partner/ s for their pro rata share
of the debt.

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Common construction
contract terms/
procedures

Main contractors must ensure that Not all contracts will follow the terms/
communication with subcontractors procedures listed below this is intended
remains at an optimum level, and to provide an overview of possible and
if there are various subcontractors, common contract terms/ procedures.
ensure that they have access to
the site at the time which they CONTRACT PROCEDURES
are promised access.
The contractor must check if Tendering and contract award
standard form contract conditions
have been changed by the employer The tender is advertised by the
and how this will affect him or her. employer or his or her representative;
Always stick to the timelines Contractors submit their tenders by
allowed within the contract. the required date;
The tenders are evaluated, and a
Ensure there is a contract in place tender evaluation report is produced
between the subcontractor and the recommending the preferred
main contractor. As a subcontractor tender bid;
one should look out for the following The employer reviews the tender
conditions, which should be avoided evaluation report and awards
or negotiated against: the contract;
The contract is negotiated and
Reduction of and/ or set-off from eventually signed by both the
amounts certified for payment contractor and the employer;
to the subcontractor to cover The contractor is responsible for the
amounts allegedly owed to the provision of insurance and the surety/
main contractor; guarantee as stipulated in the contract;
Settling disputes only through The site is officially handed over to
the courts with no provision for the contractor;
adjudication or mediation; The contractor establishes his or her
The subcontractor only gets camp and site office and orders the
paid once the main contractor has materials required to start construction;
been paid by the employer; and The contractor sets out the work and
Unreasonable retention percentages starts construction.
and periods.nancial Loss:

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 A Guide to Construction Contracts

Monthly activities during the contract The employer (or his or her agent)
carries out a final inspection. If he or
Daily, weekly or monthly site meetings she (or his or her agent) is satisfied that
between the employer and the the works/ project is now substantially
contractor and inspection of the work complete, he or she or his or her agent
by the employers representative to will certify/ confirm that the works/
ensure quality; project is ready to be handed over;
Preparation of monthly payment The contractor hands the works/
certificates by the contractor; project over to the employer (that is,
Review and certification of the payment the employer takes possession of the
certificate. Queries are referred to works/ project).
the contractor;
The certified payment certificate is Final account
submitted for payment by the employer;
Payment is made to the contractor The contractor or the employer
within the period specified in (as required in terms of the contract)
the contract. prepares the final account during the
handover period and submits it to
Handover procedure the employer;
The final account is certified and issued
The contractor requests the employer to the employer once the employer
to inspect the completed project prior has issued a (practical/ taking-over)
to handover; completion certificate;
The employer inspects the project, The employer pays the final account less
identifies outstanding items to be the retention money;
completed by the contractor prior to This retention money is released to the
the handover of the project and issues contractor at the end of the defects
a snag list to the contractor listing liability period.
the outstanding items;
The contractor completes the Defects liability period and final completion
outstanding items and notifies the
employer that the project is complete The contractor is responsible for making
and ready for a final inspection; good items which show defects during
the defects liability period;

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Near the end of the defects liability on which he or she became or ought to
period, the contractor requests the have become aware of the latent defect.
employer to inspect the project and
identify any defective items which the Disputes and how to resolve them
contractor is responsible for making
good in terms of the contract; Most standard form contracts will cater
The money held in retention by the for a dispute resolution mechanism
employer will only be paid when the which will state the procedure to be
contractor has properly completed followed when a dispute arises. If a
the list of defects; bespoke contract is used, it is best
Once the employer has issued a copy to have a clause that prescribes a
of the final completion certificate, he dispute resolution mechanism as such
or she is required to pay the retention mechanisms can lead to disputes being
money due to the contractor. settled timeously and amicably.

The project is now complete Claims procedure

The contract should provide for a
The contractor is usually still liable procedure to be followed once a
for the repair of any latent defects contractor or the employer realises
for several years. Latent defects are that they have a claim. Submission for
defects which were not apparent and and against such a claim will usually be
which a reasonable inspection would made. The contract will usually set out
not have revealed during the defects time periods for the contractor to give
liability period. Different contracts notice of a claim and to submit a claim.
deal with the liability for latent These must be identified, noted and
defects differently. complied with by the contractor.
For latent defect liability not to apply it
must be expressly excluded. If nothing Determination
is said about latent defect liability, The submissions referred to above are
the common law applies; namely usually made to the representative of the
the employer has a right to hold the employer. This individual will determine
contractor responsible for a latent if indeed a claim exists and if so, the
defect within three years of the date amount claimable.

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Dispute Court
If either party is not satisfied with the If no provision is made for arbitration
determination made, they can declare in the contract, and the parties
a dispute or notify their dissatisfaction do not agree to this or any other
and, depending on the provisions of mechanism to resolve the dispute,
the contract, either: try to mediate the the normal South African court
dispute; approach a DAB/ arbitration; system may be followed to settle
approach the court or follow any other the dispute.
mechanism set out by the contract.
Contractors should ensure that after the
DAB/ Arbitration award of a tender the agreement tendered
In employing this mechanism parties for is the agreement that they sign.
will usually negotiate and conclude an
arbitration/ adjudication agreement Contractors should note that they may
which will state the exact procedure to ask for the relaxation of certain strict or
be followed in arbitrating/ adjudicating unfair terms of the contract, but they must
the dispute. An arbitrator(s)/ ensure that this does not render them
adjudicator(s) will be agreed upon, and disqualified, and they must voice this
dates for submissions and argument, concern in the prescribed format
issues relating to costs, and all other (usually tender specific).
logistical issues will be agreed in
a meeting with the arbitrator(s)/ Although arbitration offers a quicker,
adjudicator(s). This agreement will then controlled and much more discreet
be followed until a decision is made by solution to disputes, it is not always
the arbitrator(s)/ adjudicator(s). It is the cheapest solution.
important to note that the ruling of an
arbitrator/ adjudicator is binding on the
parties and can be made an order of
the court. If it is agreed that the award
by an arbitrator or adjudicator is final
and binding, a court will, save in the
most exceptional cases, not overturn
the award.

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Key concepts

CONTRACT DELIVERABLE CONTRACT RISK

The deliverable in a construction To respectively allocate the foreseeable and

contract is the completed works unforeseeable/ likely and unlikely risks to
(the completed building, structure). each of the parties.
The completed works should be
described as correctly and clearly as CONTRACT TERMS
possible at the time of contract, and
to allow it to evolve in a controlled The following terms are key and regularly
manner (deliverable); used in construction contracts. It is
therefore very important that contractors
To define the completion date of the know and understand what they mean:
deliverable based on what is known
and what ought to be reasonably BOQ: This is a detailed statement of
foreseeable by an experienced the work, materials, prices, dimensions
contractor at the time, and to allow and other details for the construction
the completion date to change in a of the work. This document will be
controlled manner by providing for used in remeasurable contracts.
circumstances where the completion
date can be extended. Contractor: The person or firm who
signs the contract to do the work.
CONTRACT PRICE
Defect: Defects are aspects of the
There are various pricing options to works that are not in accordance
consider, for example: with the contract. They usually occur
because of design deficiencies,
Lump sum contract material deficiencies, specification
Unit price contract/ problems or workmanship deficiencies.
remeasurable contract
Fixed price Defects liability period: The period
for which the contractor is required
Please see the section dealing with contract to guarantee the completed works
arrangements on page 12. and to rectify any defects that may be
discovered or appear.

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 A Guide to Construction Contracts

The defect liability period starts when Escalation clauses: Caters for the rise
the employer is satisfied that the and fall of economic factors, where a
works are complete and takes delivery. project/ contract exceeds a duration of
The defects liability period varies, one year, eg labour rates, commodity
depending on the nature of the prices, etc.
work, and can range from three
to 12 months. Extension of time (EOT): An
extended time for completion of the
Deviation: When a plan, design works, relieving the contractor from
or specifications agreed by the having to pay penalties for
parties is not followed during the delay.
the construction process.
Force majeure: An exceptional event
Disputes: In general, a dispute is or circumstance beyond a partys
defined as an unresolved matter of control that renders performance of
dissatisfaction or difference. the works impossible for a period of
time or forever (eg war, terrorism, etc).
Employer: Also known as the client,
the employer may be a person or a Performance guarantee: A guarantee
government agency or a corporation, procured by the contractor from a
and is the party who wants the project financial institution in favour of the
constructed and who will pay for the employer as security for the due
work. The employer also signs performance of the contractors
the contract. obligations under the contract. The
employer can claim against this
Employers representative: security should the contractor fail to
A representative of the employer, perform the obligations for which the
usually a professional architect, security has been given. The security
engineer, project manager or quantity is returned when the contract is
surveyor. This is the person with whom satisfactorily completed. The terms
the contractor will have the greatest of the guarantee will determine the
contact during the contract. nature thereof, and the instances in
which it can be called, and must for
that reason be read very carefully.

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Payment guarantee: A guarantee or a failure to achieve certain

procured by the employer from guaranteed levels of performance of
a financial institution in favour of the works. Penalties are an agreed
the contractor as security for the upon amount of money which is
employers compliance with its deemed to cover the innocent partys
payment obligations under the loss in respect of the breach for which
contract. The contractor can claim the penalty is imposed. In agreeing
against the guarantee where the a penalty, it should be considered
employer has failed to make due whether the penalty proposed bears
payment to the contractor in terms of some measure of potential harm to the
the contract. This security is returned innocent party and the innocent party
when the employers payment should be made to explain the amount
obligations have been fulfilled. The proposed, if it is proposed.
terms of the guarantee will determine
the nature thereof, and the instances Pricing options: Options available to
in which it can be called, and must for a contract when pricing a particular
that reason be read very carefully. contractor (eg lump sum, measurable,
activity based, time-based etc).
Limitation of liability: This is usually a
clause in the contract which apportions Retention: This is money, usually
liability between the parties. It is an from 5% to 10% of the value of the
attempt to limit, define, estimate and work done, that is held back by the
manage liability between the parties employer to correct defective work.
themselves and third parties. A cap When the project is delivered to the
on damages may be used. employer, part of the retention money
is returned to the contractor, and the
Overhead costs: Costs incurred by balance is released at the end of the
the contractor in establishing and defects liability period.
maintaining site.
Subcontractor: Usually appointed,
Penalties: Most contracts contain a managed and paid by the contractor;
penalty for failure to complete the enters into a contract with
project within the contracted period the contractor.

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 A Guide to Construction Contracts

Variation: Any change to the contract

which is instructed or approved. Most
standard form contracts provide for
a procedure to be followed when
such a change is required.

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BOWMANS

Applicable legislation

THE CONSTRUCTION INDUSTRY NATIONAL BUILDING REGULATIONS

DEVELOPMENT BOARD ACT 38 OF 2000 AND BUILDING STANDARDS ACT 103
OF 1977
This Act regulates the construction industry
as a whole and publishes standards, This Act prescribes the standards and
directives and regulations to give effect requirements to which any building
to this objective. If a contractor intends to be used for occupational purposes
to tender for public sector works, regard should comply.
should be had to this Act and regulations,
in particular, the requirements for registration. THE CONSUMER PROTECTION ACT
68 OF 2008
THE OCCUPATIONAL HEALTH AND
SAFETY ACT 85 OF 1993 This Act protects consumers when
entering into contracts with contractors.
This Act prescribes standards and
requirements according to which the THE COMPETITION ACT 89 OF 1998
contractors employees and/ or all
individuals on site are to be treated. This Act protects employers against
The construction regulations (the latest collusion during the tender phase of
published in 2014) under this Act prescribe the contract.
the requirements to ensure health and
safety in construction activities. MUNICIPALITY BY-LAWS

NATIONAL ENVIRONMENTAL These are by-laws promulgated by the

MANAGEMENT ACT 107 OF 1998 municipality regarding buildings.

This Act provides the requirements and

procedures necessary where the construction
of any works pose a risk to the environment.

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 A Guide to Construction Contracts

Useful links

Association of Arbitrators London Court of International

(Southern Africa) Arbitration (LCIA)
www.arbitrators.co.za www.lcia.org

Department of Trade and Industry Construction Industry

www.thedti.gov.za Development Board
www.cidb.co.za
Tokiso Dispute Settlement
(Pty) Ltd Council for the Built Environment
www.tokiso.com www.cbe.org.za

Arbitration Foundation of South South Africa Federation of Civil

Africa (AFSA) Engineering Contractors
www.arbitration.co.za www.safcec.org.za

United Nations Commission on

International Trade Law (UNCITRAL)
www.uncitral.org

International Chamber of
Commerce (ICC)
www.iccwbo.org

27
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