It’s no doubt that in recent times you’ve heard about the increases in construction materials and labour costs, which have affected all builders. The impact of these increases has resulted in many of our clients reviewing their procurement contracts and terms of engagement to best protect their business.
What is a Procurement Contract?
A procurement contract is just another name for a purchasing contract. That is a legal binding contract between a buyer and a seller of either services or products, which sets out the rights and obligations of each party. In the building industry, a procurement contract may be a contract between a builder and a supplier or a building entity and a contractor.
We often hear our clients say that they do not have any engagement contracts, they simply have purchase orders or just quotations. This can leave your business vulnerable, because if things should go wrong, these documents do not have the essential terms required to consider the basis of the engagement or issues like withholding payment or delay damages.
Do I need to have a Contract when engaging suppliers and/or contractors?
Most definitely, yes. It may not always need to be a long formal contract, but you should always have a document which sets out the terms, rights and obligations of the services to be provided. Otherwise, if there is a dispute down the track (for example, parties may dispute the final price to be paid, the quality of the services delivered, the right to back-charge for defective works, etc) the parties do not necessarily have a legal basis to mount their case.
What are some of the key terms your Contract should cover?
A procurement contract should (at a minimum cover the below topics):
- Identify the Parties:
- The legal entity that is being engaged to carry out the service or provide the goods
- The legal entity who is responsible for the payment
- Goods and services:
- Clearly identify the services/goods that are to be provided/performed
- Identify if there are any rights of assignment to others to perform the works
- The fees or rates should be clearly identified
- Any rights to variations (and how they are managed)
- The timing of obligations to carry out the services/provide goods
- Any term for the agreement
- Performance Obligations: The expectations of the parties in the delivery of the services/provision of goods, for example:
- What is the quality of the services/goods expected?
- What are the obligations of each party?
- Who is to provide the equipment to perform works (if required)?
- Any access requirements/obligations
- Whether any insurance(s) are required prior to work commencing
- Disputes: You should identify what happens if things go wrong, for example:
- Can the paying party withhold payment?
- Is there a right to set-off against other jobs?
- Are their delay damages or other damages that can be charged?
- What (if any) are the rights of termination?
- Do you want a dispute resolution process (before a party goes to Court/Tribunal)?
- Interest: Is interest payable on late payments?
- IP: If you are providing plans or IP, who retains the IP and are any IP licences required?
- Confidentiality: Are there any confidential terms which are required to be protected?
Do you need different types of contracts for different consultants, suppliers, and trades?
It is important to ensure your contract reflects the engagement you are trying to protect. For example, a ‘consultant’ is different to a ‘contractor’ as a consultant has been engaged for its expertise. A consultant may be someone like an engineer or an architect who are engaged to provide specialised services that require opinions and advice. Whereas a contractor may be someone like a trade who is simply engaged to perform the works a building entity may direct and manage.
It is also important to make sure that any consultants or contractors are truly independent of your business and not in fact employees. If they are truly employees, you could be caught for sham contracting which has significant consequences. This of course is a topic in itself, but in general you should ensure that all contractors:
- Are engaged for particular works and not all works. In saying that, they should also have other work outside of your organisation to show that they are not exclusively working for you
- A contractor should be in control of their own work, and therefore can (even if to a degree) dictate their hours, the manner in which they conduct the work, provide their own tools
- Provide you with an invoice, operate under an ABN, provide you with copies of their insurances
- Are responsible for their own GST, PAYG, superannuation etc (but this must be genuine)
As we approach 2023, take the opportunity to review your procurement contracts or your terms of engaging contractors and trades and ensure your business is protected.
Chat to us if you’d like more information.