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The right contract: minimize risks

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The development of an industrial enterprise is directly related to the need to perform contract work. This is either the creation of new production facilities, or repair and improvement of existing ones. Every customer wants to carry out such work qualitatively at the forecasted price and in the planned terms.

But the interests of the customer and the contractor do not always coincide. It happens that the contractor often postpones the work or asks to review the estimate.

Also, many contractors have not escaped the problem of outflow of qualified personnel. This affects both the quality of work performed by contractors and the discipline of workers on the construction site. Low staff discipline sometimes leads to injuries and accidents during the contractor's work. The consequence of this is additional checks not only of the contractor but also of the customer.

How to resolve all differences that arise between the customer and the contractor? You can solve problems as they come, and you can work well on the contract, predict possible disputes and provide algorithms for solving them.

In this article we will try to dwell on some practical points that should be considered when concluding a contract.

What is regulated in a row?

I will note at once that the relationship between customers and contractors is regulated in great detail by law. For all contract works it is Chapter 61 of the Civil Code of Ukraine, and for repair and construction works it is also necessary to take into account Chapter 33 of the Commercial Code of Ukraine and the Resolution of the Cabinet of Ministers of Ukraine №668 of 01.08.2005 "On approval of General Terms and Conditions. "(Hereinafter - the General Terms). Therefore, customers and contractors are limited in concluding contracts and cannot provide them with conditions that will directly contradict the provisions of the above legislation.

If the customer regularly engages contractors to perform work at the enterprise, it is advisable to develop and approve internal regulations for the selection of contractors, interaction with them during the work, and evaluation of their work after its completion.

If you need to enter into a contract that will protect your interests, or analyze the submitted contract to determine the risks, contact us for help

Significant terms of the contract

You should also pay attention to the list of essential terms of contracts. Without the agreement of all these conditions, the contract can be considered as not concluded. For the construction contract, this list is quite significant (Part 5 of Article 318 of the Commercial Code of Ukraine): the name of the parties; place and date of conclusion; subject of the contract (name of the object, volumes and types of works provided by the project); terms of the beginning and end of construction, performance of works; rights and obligations of the parties; cost and procedure for financing the construction of the object (works); the order of logistical, design and other construction support; mode of quality control of works and materials by the customer; the order of acceptance of the object (works); the order of payments for work performed, conditions of defects and warranty periods; risk insurance, financial guarantees; liability of the parties (damages); settlement of disputes, grounds and conditions of change and termination of the contract.


Preparatory work

Now consider how the responsibility is distributed between the customer and the contractor during the performance of contract work. We will limit ourselves here to repair and construction work, as violations committed by the contractor during their implementation can lead to significant negative consequences for the customer.

As a general rule (clause 4 of the General Terms and Conditions), the customer is obliged to provide the contractor with a construction site (front of works), to transfer the permit documentation, as well as the project documentation approved in accordance with the established procedure.

The obligation to issue permits, such as a notice of commencement of preparatory or construction work or a construction permit, may be delegated to the contractor. However, in order to perform this duty, a power of attorney must be issued to the authorized persons of the contractor. I recommend to take the permit documentation very seriously, because already at this stage there may be obstacles that will make it impossible to perform construction work at all.

For example, take the simplest construction work that can be performed on the basis of notification of the start of construction work. If you literally read the provisions of the Law of Ukraine "On Regulation of Urban Development", the right to perform construction work arises for the customer and the contractor from the day after the submission to the supervisory authority of the notice of their commencement. At the same time, some regulatory authorities consider such notifications within thirty days and on the last day of this period may refuse to register it due to formal deficiencies. This disadvantage can be even the wrong order of the customer's details in the header of this message.

Also, within three months from the date of submission of the notice of commencement of construction works, the bodies of state architectural and construction control may come with an unscheduled verification of the accuracy of the data specified in such notice. The consequences of the inspection are very diverse - from the cancellation of the notice, to tens of thousands of fines for unauthorized construction.

Cancellation of the notice or refusal to register it will lead to the suspension of contract work.

Therefore, the customer must agree in advance with the contractor on who will be responsible for the correctness of all permits required to begin construction or repair work.

The development of project documentation can also be entrusted to a contractor. In this case, we recommend that these works be executed either in a separate contract, or at least allocated in a separate stage in the general contract. If the design documentation was drawn up separately by the customer or another contractor, the contract should regulate in detail the procedure for making changes to it, if such a need arises during the construction works.

The order of transfer of the construction site and the conditions of its return must also be fixed in the contract. Agree with the contractor: the boundaries of the construction site; type and procedure for installing a fence; the procedure for admission to the construction site; locations of construction equipment and construction materials; organization of the life of the contractor's workers; installation of fire shields, fire extinguishers and other preparatory measures necessary to ensure fire safety at the construction site; conditions of connection to electric networks and the order of lighting; the procedure and terms of development of projects of performance of works and their coordination with the representative of the customer.

Preparing for construction can involve a lot of different work. When determining the order of their implementation it is necessary to take into account DBN A.3.1-5-2009 "Organization of construction production". 


      Occupational Health

Make it clear in the contract that the contractor is responsible for organizing health and safety measures for his employees.

It is obvious that the customer is interested in the contractor's compliance with labor protection requirements. This is caused by many factors, including:

  • the customer has a moral responsibility for the life and health of employees who perform work on its facilities;
  • frequent injuries or deaths among employees at the site can cause serious reputational damage to the customer;
  • preservation of the customer's property and the health of employees working alongside contractors.

It is not enough for the customer to simply pass to the contractor a set of all the rules of labor protection that exist in the company and hope in vain that he will comply with them.

Even at the stage of choosing a contractor, you need to make sure that he has a sufficient number of occupational safety specialists and qualified line managers. These criteria should also be applied to subcontractors involved by the contractor. For this purpose, it is expedient to stipulate in the contract the obligation of the contractor to agree with the customer on the candidacy of subcontractors.

When formulating in the contract requirements for the organization of labor protection must take into account the specifics of each individual contract work. High-risk work will require detailed specification of the necessary safety measures. It is also advisable to notify the contractor in writing of all possible sources of hazards and risks that exist at a particular site.

It is permissible to use in the contract reference to certain DSTU, DBN (for example, DSTU OHSAS 18001: 2010 "Occupational health and safety management systems" or DBN A.3.2-2-2009 "Occupational safety and industrial safety in construction") or other rules and labor protection rules. However, in this case it is advisable to add their texts to the annexes to the contract. The same applies to references to internal acts of the customer.

Again, the customer should not expect the contractor to bring the provisions of these standards and regulations to its employees. We recommend including provisions in the contracts that will give the customer the opportunity to check the availability of the necessary instructions of the contractor's employees, as well as the opportunity to check the completeness of the contractor's knowledge in the field of labor protection. If you regulate in detail the procedure and scope of such inspections and a certain range of persons who may conduct them, it will not be perceived by the contractor as an interference in his current work.

Be sure to include in the contract the right of the customer to stop work performed with safety violations, the right to remove individual employees of the contractor or groups of employees who violate safety requirements or do not have sufficient knowledge in the field of labor protection, the right to terminate the contract in case of gross safety violations or the occurrence of accidents through the fault of the contractor.

Ensure that the moments of transfer to the contractor and return to the customer of the construction site, tools, materials and any other property, moments of admission of employees to work and persons responsible for such admission so that in case of any emergency it is possible to document the reasons its occurrence, determine its consequences and identify responsible persons.                         

If you need to enter into a contract that will protect your interests, or analyze the submitted contract to determine the risks, contact us for help

Environmental protection

In the case of labor protection, the responsibility for its organization and provision rests with the employer, so the contractor will be liable for violations in this area in relation to its employees. Instead, it is not so easy to differentiate between the customer and the contractor responsibility for violating environmental requirements in the process of contracting.

Taking into account the specifics of specific works, the customer, either independently or together with the contractor, it is advisable to determine the basic requirements established by environmental legislation for the performance of such works.

Be sure to identify places for temporary accumulation and storage of waste. Establish a schedule and procedure for their removal. Ensure that the contractor maintains the necessary documentation related to waste accounting.

It is worth paying attention to the regulation of the handling of fuels and lubricants and paints. In the course of work such materials can pollute soil or water. In addition to the negative consequences for the environment, this can result in fines for the customer.

Do not forget to differentiate between the contractor and the customer responsibilities for obtaining permits in the field of environmental legislation. Clearly define who and what documents should be received, the deadlines for their receipt and the consequences in case the relevant authorities refuse to issue them or cancel them as a result of the inspection.

This is especially true for work that is associated with the removal of the topsoil or emissions into the atmosphere.

Do not forget about the organization of water supply and drainage in places of contract work. It may be necessary to obtain permits for special water use, or change the permits that the customer already has.

Taking into account the specifics of contract work, it is sometimes advisable to determine on the part of the contractor an individual employee who will be responsible for organizing compliance with all requirements of environmental legislation during the performance of the contract.

It is also necessary to determine the procedure and frequency of cleaning the area where the contractor performs the work.

As in the case of control over compliance with labor protection requirements, control by the customer may provide for the right of the customer to suspend certain contract work or the right to dismiss contractor employees who commit gross violations of environmental legislation.

Measures of responsibility of contractors

The customer should not be a permanent controller and establish in the contract only punitive rules for violation of its terms. It is necessary to remember that the customer and the contractor are partners. Sanctions in the contract may be preventive or compensatory.

Precautionary sanctions are aimed at deterring the contractor from violating its obligations.

We recommend the customer to determine the list of possible violations by the contractor, which he may commit in the process of work and determine the individual penalties for each of them. It is also advisable to include violations in the field of labor protection, fire safety, etc. The amount of the fine should be determined in such a way that it depends on the possible consequences of the breach, does not create an excessive financial burden for the contractor, but at the same time deters the contractor from committing such a breach.

Please note that the law often has provisions that set the nature of the sanctions in the contract. What does it mean? If the contractor has committed a violation for which the contract provides for a fine, and such a violation has caused damage to the customer, the amount of the fine is included in the amount of compensation for damages. Therefore, we recommend that the contract directly stipulate that all fines and penalties are not offset against damages.

Compensatory sanctions are related to the compensation of possible losses of the customer from violations by the contractor. Among such sanctions, we recommend that the contractor provide compensation to the customer for all amounts of fines that will be imposed on the customer and / or its officials for breach of contract or legal requirements in the course of the contractor's work.

It is also possible to provide for the contractor's obligation to reimburse all costs associated with appealing against documents issued as a result of inspections by regulatory authorities, if such inspections revealed violations of the law related to the contractor's work under the contract.

Be sure to establish in the contract the obligation of the contractor to reimburse all damages caused to the customer as a result of:

  • occurrence of an emergency situation during the performance of contract works or after their completion, if its occurrence is related to the activities of the contractor;
  • detection of deficiencies in the results of work performed by the contractor during the warranty period and failure of the contractor to eliminate such deficiencies within the agreed period;
  • theft, destruction of the customer's property by the contractor's employees.

Separately, we will focus on liability for violation of deadlines. It is very common and logical to establish liability for such a violation in the form of a penalty for each day of delay. However, it is necessary to be restrained in determining the size of such a penalty. Too large a penalty can cause the contractor to lose economic motivation to complete work that he has overdue.

It is much more effective to establish a mechanism to eliminate violations of deadlines through the replacement of the contractor for the unfinished phase of work or the involvement of additional contractors to assist the existing contractor. In this case, it is necessary to clearly define the criteria when the violation of the deadlines is such that gives the customer the right to change the contractor or attract additional contractors. It is also necessary to provide for the contractor's obligation to compensate for the difference in the cost of contract work that has arisen in connection with the change of contractor or the involvement of additional labor.

If you need to enter into a contract that will protect your interests, or analyze the submitted contract to determine the risks, contact us for help


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