Construction Contracts And Some Relevant Issues Should Be Noted (Part 2)

–  The contract duration shall be calculated from the effective date of the contract to the date on which both parties fulfill their obligations under their signed construction contract.

–  The contractor shall submit the detailed schedule to the hirer which specify:

+ The order of work, schedule of work, duration of construction of primary work items, work items and the construction works.

+  Date for checking and inspecting the work, work items and construction works.

+  Reports on applicable construction techniques and main construction phases; reports on the number of officers, workers, and equipment required for each main construction phase. The contractor shall follow the detailed schedule approved by the hirer.

– The contract schedule shall specify milestones and date of transfer of the primary works.

1. Contract prices

According to the properties, nature, and scale of the contract, the hirer may select one of the types of contracts and comply with its requirements stipulated in Article 15 of the Decree No. 37/2015/ND-CP.

–  The contract price is a sum of money that the hirer commits to pay the contractor for their performance of contract according to the workload, quality, schedule, and terms of payment, advance, and other terms of the contract.

–  The contract price includes all expenses for the contract performance, royalties, profits of the contractor, and every involved tax under provisions of laws. The construction contract shall specify types of expenses, taxes, and charges (if any) that are not included in the contract price. The parties shall adjust the contract price in consistence with the price elements and shall specify in the contract. Where more than one type of currency is used for settling the contract, both parties shall specify the contract price by type of currency.

–  The contract price may include costs of materials, workers or construction vehicles; equipment; storage or installation including storage or freight charges; construction techniques, water and electricity, insurance premiums for the contractor and third party; testing and commissioning, warehouse, traffic, road maintenance, and repair; safety assurance, environment handling fees, safety assurance for adjacent construction sites and other expenses.

–  The cost of equipment may include the costs of the following elements: equipment, taxes and charges under the provision of laws on import tax, customs service charges, VAT and other charges (if any); freight charges, premiums, and other expenses incurring in connection with the freight, technical service charges for the execution of the contract, work items and construction works.

–  The contract value is determined according to the contract negotiation, decision on the winning price (or approval for proposed contract prices in case of contract directing) under the bidding document (or requests for proposal).

2. Advances

The advance shall be made in accordance with Article 18 of Decree No. 37/2015/ND-CP. The advance recovery method shall be stipulated in the contract on the following principles:

–  The advance shall be deducted by payment after the contractor receives the advance.

–  Where the payment is equal to 80% of the contract value, the advance shall be cleared.

–  The advance shall be conformable to the construction documents.

3. Payments

The contract shall be settled in accordance with Article 19 of the Decree No. 37/2015/ND-CP and the following provisions:

–  It may be paid in lump-sum or installment;

–  The payment may be made by period of time (by month or quarter); or by the work (concrete or steel, etc.), construction phase, construction part (foundation, body, completion, road-bed or road surface), work item, or construction works;

–  The date of payment is stipulated in the contract according to the payment period;

–  Payment documents are conformable to that in Article 20 of the Decree No. 37/2015/ND-CP;

–  Methods of payment:

+  For lump-sum contracts: The payment shall be made by the percentage of the contract value or by respective workload for each respective payment period.

+ For fixed-price contracts: the payment equal (=) the actually completed workload approved during the payment period (whether an increase or decrease, if any) multiplied (x) by its unit price stipulated in the contract.

+  For adjustable price contracts: the payment shall equal (=) according to the actually completed workload approved during the payment period (whether increase or decrease, if any) multiplied (x) by its adjusted unit price stipulated in the contract. Where it is not eligible for adjusting the unit price during the payment period, the unit price in the contract or unit price temporarily adjusted shall apply. When the unit price is officially adjusted, both parties shall re-calculate the sum of payment for the respective payment period according to the officially-adjusted unit price.

+  For combined-price contract; the payment shall be made according to the payment period stipulated in the set forth contracts.

–  The construction contract workload shall be adjusted in accordance with Article 37 of the Decree No. 37/2015/ND-CP, Article of Circular 09/2016/TT-BXD hereof and the following provisions:

+  Any force majeure event that causes changes in the workload shall be dealt with in accordance with Article 10 of Circular 09/2016/TT-BXD.

+  For lump-sum contracts: Any change in the design that is approved by the hirer resulting in changes in the workload (whether an increase or decrease) shall be reasonably adjusted as a basis for contract price adjustment.

+  For fixed-price contracts and adjustable price contracts: the adjustment to such types of contracts shall be made in accordance with point b, clause 2, Article 37 of the Decree No. 37/2015/ND-CP.

+  Both parties shall decide the unit price of any workload that is beyond the scope of the contract and its unit price is not included in the contract prior to the contract execution.

–  The contract schedule shall be adjusted in accordance with Article 39 of the Decree No. 37/2015/ND-CP, Article 10 of Circular 09/2016/TT-BXD, and the following provisions:

+ In case of changes in contract schedule due to the hirer’s fault, the hirer shall grant an extension and pay all expenses (if any) incurring due to contract extension. In case of changes in the contract schedule due to the contractor’s fault, the contractor shall pay all incurred expenses (if any) as agreed in the construction contract.

+  Where any force majeure event occurs affecting the contract schedule, both parties shall project the duration of delay due to the force majeure event as the basis for adjusting the contract performance progress.

+ The contractor is entitled to adjust the detailed schedule (by week, month, etc.) provided that it is consistent with the contract schedule.

–  The contract price and unit price shall be adjusted in accordance with Circular No. 07/2016/TT-BXD on adjustment to construction contract prices dated March 10, 2016, by the Minister of Construction.

– Other adjustments shall be decided by both parties in accordance with terms of the contracts and relevant provisions of laws.

1. Insurances

–  Every hirer shall buy the construction works insurance for the project affecting the community safety and environment or those applying sophisticated construction techniques or complicated construction conditions. Where the insurance premium is included in the contract price, the contractor shall buy the construction works insurance under provisions of laws.

–  The contractor shall buy necessary insurances such as insurances for construction workers, the third party or construction equipment, etc.

2. Warranties

–  The contractor shall provide warranties on the construction works and equipment as agreed in the contract. Every agreement on warranty period and warranty claim shall conform to laws on construction;

– The warranty obligation may be guaranteed by a sum of guarantee or other methods agreed by both parties; however, the guarantee for warranty obligation is strongly recommended.

–  The guarantee shall be returned to the contractor after the warranty period is ended and the warranty obligation is certified “fulfilled” by the hirer.

–  The contractor shall deliver their warranty obligation within 21 days from the date of receipt of notice of defects from the hirer during the warranty period; if the contractor refuses to deliver their obligation, the hirer is entitled to hire other organization or individual to repair and pay them with the guarantee amount.

–  The period of warranty on Class 1 or Special- Class work items or construction works shall be at least 24 months; the period of warranty on the remaining work items or construction works shall be at least 12 months. The period of warranty on housing shall be at least 05 years.

–  The period of warranty on equipment shall be conformable to that in the construction contract but not shorter than the warranty period provided by the manufacturer and shall be calculated from the date of acceptance of equipment installation.

–  The warranty on any work item which contains quality defects or suffers breakdown repaired by the contractor may last longer according to the agreement by both parties prior to the acceptance.

–  The minimum guarantee amount is as follows:

+  For class-1 or special-class construction works: 3% of the contract value.

+  For every construction works other than class-1 or special-class construction works: 5% of the contract value.

–  The contractor shall be entitled to refuse to perform the warranty if the defects or breakdown occurs by the hirer’s fault or force majeure events.

–  After the warranty period, the contractor shall submit a report on the fulfillment of warranty obligations to the hirer. The hirer shall issue a Certificate of the fulfillment of warranty obligations to the contractor.

–  There may be more than one subcontract in a prime contract. Every EPC contractor, prime contractor or foreign contractors shall:

+  Only enter into subcontracts with qualified subcontractors.

+ Every foreign contractor as the prime contractor of construction projects in Vietnam shall employ Vietnamese subcontractors that satisfy the construction requirements, and enter into subcontracts with foreign subcontractors only when Vietnamese contractors fail to meet the construction contract. Every material or equipment temporarily imported for re-export shall be specified in the contract on the principle that the Vietnamese material or equipment satisfying construction contract requirements is prioritized.

+  Every subcontractor not included in the list of subcontractors shall obtain the hirer’s approval.

+  Every EPC contractor or prime contractor shall be responsible for the construction progress, quality, HSE, their errors, and their subcontractor’s work towards the hirer.

+  Neither EPC contractor nor prime contractor is entitled to get their whole work stipulated in the contract done by subcontractors.

During the negotiation and conclusion of the contract, both hirer and contractor shall specify the list of subcontractors, subcontractor’s scope of work, and the value of the work expected to be carried out by subcontractors. Prior to the addition to the subcontractor’s work other than those specified in the subcontractor’s scope of work approved by the hirer, the prime contractor shall obtain the hirer ‘s consent.

–  Subcontractors designated by hirers (if any)

+ The subcontractor designated by the hirer (hereinafter referred to as “designated subcontractor”) refers to any subcontractor who is appointed by the hirer to help the EPC contractor or prime contractor carry out demanding jobs; or where the prime contractor or EPC contractor fails to meet requirements for HSE, quality or construction progress at the hirer’s request.

+ For any construction work needing designated subcontractors, the hirer and contractor shall specify cases in which the subcontractor is designated by the hirer.

+  The EPC contractor or prime contractor has the right to refuse the designated contractor if the EPC contractor or prime contractor or their subcontractors carries out the work in conformity with terms of the contract or has pieces of evidence or proofs of failure to satisfy the contract requirements by the designated subcontractor.

– The designated subcontractors have all rights and obligations under Circular No. 09/2016/TT-BXD and relevant regulations of laws.

Risks and force majeure are defined in Article 51 of the Decree No. 37/2015/ND-CP and the following provisions:

–  Force majeure event herein means any adverse event that may occur beyond the control and assumption by both parties prior to the conclusion of the contract during the construction include karst topography, antiquities, or slug bags.

–  Responsibilities for risks by both parties:

+  Where a risk whose cost is estimated in the contract price occurs, the damage shall be paid by the contractor.

+  Where any risk under the coverage of the insurance occurs, the damage shall be covered by the insurer and shall not be included in the contract price.

+  The contractor shall compensate for damage, losses, and costs (including legal fees and charges) incurred in connection with his/her fault.

+ The hirer shall compensate for damage, losses, and costs (including legal fees and charges) incurred in connection with his/her faults.

–  Notice of force majeure

+  Either party encountering force majeure events shall promptly send a written notice of the force majeure event to another party in which the failure to perform the contract in relation to consequences of the force majeure event shall be specified.

+ The party encountering force majeure events shall be relieved from liabilities for the delay of the performance of the contract during the time of force majeure.

–  Responsibilities for force majeure

+  If the performance of the contract is delayed or any expense is incurred due to the force majeure event that is notified to the hirer under terms of the contract, the contractor shall be entitled to:

~  Be granted an extension of payment due date under terms of the contract

~  Have all additional expenses covered under terms of the contract.

+  The hirer shall consider approving requests by the contractor.

+  The payment obligations by both parties shall not be affected by force majeure event consequences.

–  Contract termination due to force majeure, settlement, or obligation fulfillment

If the period of delay due to force majeure is longer than that in the notice, either party has the right to terminate the contract.

In this case, the hirer shall pay:

–  For any work that has been done at the cost stipulated in the contract.

–  Costs of equipment or materials sent to the contractor or items that shall be delivered by the contractor (as the time of payment by the hirer, such equipment and materials shall become the hirer’s assets ( and liabilities) and are used by the hirer).

The form of construction contract issued together with Circular No. 09/2016/TT-BXD is used by organizations and individuals to draft contracts for construction contracts between the investor and the contractor. If the principal is a general contractor, the parties shall apply such contract form to suitably perform.

See more issues related to construction contracts:

– Construction contracts and some relevant issues should be noted (part 1);

– A number of fundamental issues about construction contracts (Part 1);

– A number of fundamental issues about construction contracts (Part 2).