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The right contract: minimize risks

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 the repair and improvement of existing ones. Every customer wants to carry out such work qualitatively at the forecasted price and in the planned terms. Only interests of the customer and the contractor do not always coincide. It happens that the contractor often postpones the work or asks to reconsider the estimate. Also, many contractors have not escaped the problem of outflow of qualified personnel. This affects both the quality of the work performed by the contractors and the discipline of the workers on the construction site. Low level of 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 disagreements that arise between the customer and the contractor? It is possible to solve problems in process of their receipt, and it is possible to work qualitatively on the contract, to predict possible disputable situations and to provide algorithms of their decision. In this article we will try to dwell on some practical points that should be taken into account when concluding a contract.

What is regulated in a row?

 At once I will note that relations between customers and contractors are regulated in great detail by the legislation. 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 consider Chapter 33 of the Civil Code of Ukraine and the resolution of the Cabinet of Ministers of Ukraine №668 from 01.08.2005 «About the statement of the General conditions of the conclusion and performance of contracts in capital construction. »(Hereinafter also - General Terms). Therefore, customers and contractors are limited in concluding contracts and cannot provide 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.

Essential terms of the contract

 It is also worth paying attention to the list of essential terms of contracts. Without the agreement of all these conditions, the contract can be considered not concluded. For the construction contract, this list is quite significant (Part 5 of Article 318 of the Economic Code of Ukraine) the name of the parties; place and date of imprisonment; 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 calculations for the performed works, conditions on defects and warranty periods; risk insurance, financial guarantees; liability of the parties (compensation of losses) for 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 when performing contract work. Let's limit here repair and construction works as the infringements admitted by the contractor during their performance can lead to considerable negative consequences for the customer.

As a general rule (paragraph 4 of the General Terms and Conditions), the customer is obliged to provide the contractor with a construction site (front of works), to submit permit documentation, as well as duly approved design documentation.

The obligation to draw up permit documentation, 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 taking the permit documentation very seriously, because 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 a notice of commencement of construction work. If you literally read the provisions of the Law of Ukraine "On regulation of urban planning activities", the right to perform construction work arises for the customer and the contractor from the next day after submitting to the supervisory authority a notice of their commencement. At the same time, some regulatory authorities consider such reports within thirty days and may refuse to register it on formal deficiencies on the last day of this period. Such a 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 notification of the start 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 the notification. The results of the inspection are very diverse - from the cancellation of the message to several tens of thousands of fines for unauthorized construction.

 Cancellation of the message or refusal in its registration will lead to a termination of performance of contract works. 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 design documentation can 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, it is necessary to regulate in detail in the contract the procedure for making changes to it, if such a need arises during the construction work.

 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: construction site boundaries; type and procedure for installing a fence; the procedure for admission to the construction site; locations of construction equipment and construction materials; the organization of a life of workers of the contractor; installation of fire shields, fire extinguishers and other preparatory activities 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 production of works and their coordination with the representative of the customer.

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

Labor protection

 Clearly state in the contract, it is the contractor who is responsible for organizing health and safety activities 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, in particular: the customer has a moral responsibility for the life and health of employees performing work at its facilities; Frequent injuries or deaths among workers at the facility can result in serious reputational losses for the customer, the safety of the customer's property and the health of employees who work alongside contractors.

It is not enough for the customer to simply provide the contractor with a set of all labor protection rules that exist at the enterprise and it is not to be hoped that he will comply with them.

 Even at the stage of choosing a contractor, it is necessary 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 attracted by the contractor. For this purpose it is expedient to provide in the contract the obligation of the contractor to coordinate with the customer of the candidacy of the subcontractors.

 When formulating the requirements for the organization of labor protection in the contract, it is necessary to take into account the specifics of individual contract works. It is also advisable to notify the contractor in writing of all possible sources of danger and risks that exist at a particular site.

 It is permissible to use in the contract references to individual DSTU, DBN (for example, DSTU OHSAS 18001: 2010 "Occupational health and safety management systems" or DBN A.3.2-2-2009 "Occupational health and 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. This also applies to references to the customer's internal acts. Again, the customer should not hope that the contractor will prove the provisions of these standards and regulations to its employees. We recommend including provisions in the contracts, giving 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 interference in his current work.

Be sure to include in the contract the customer's right to stop work that is performed with safety violations, the right to remove individual contractor employees 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 accidents through the fault of the contractor.



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. But it is not so easy to distinguish between the customer and the contractor responsibility for violation of 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 that environmental legislation establishes for the performance of such works. Be sure to identify temporary storage and storage of waste. Establish the schedule and the order of their export. Ensure that the contractor maintains the necessary waste accounting documentation. It is worth paying attention to the regulation of the procedure for handling fuels and lubricants and paints and varnishes. In the course of work such materials can pollute the soil or water. In addition to the negative consequences for the environment, this can result in fines for the customer.


Do not forget to also 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 terms of their receipt and the consequences in case the relevant authorities refuse to issue them will be canceled based on the results of the inspection. This is especially true for work, linking with the removal of the surface layer of the soil 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 the contract work, it is sometimes advisable to determine by the contractor an individual employee, will be responsible for organizing compliance with all requirements of environmental legislation in 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.


Contractor liability measures

The customer should not be a permanent controller and establish in the contract only sanctions for violation of its terms. It is necessary to remember that the customer and the contractor are partners. Sanctions in the contract can be preventive or compensatory. Precautionary sanctions are aimed at deterring the contractor from violating its obligations. We recommend that the customer 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 and the like. 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 there are often provisions in the law that establish the offsetting nature of sanctions in the contract. What does this mean? If the contractor has committed a breach for which a penalty is established in the contract, and such a breach has resulted in damages to the customer, the amount of the fine is credited to the amount of damages. Therefore, we recommend that the contract directly stipulate that all fines and penalties are not included in the damages to be reimbursed.


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 losses that are 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;

identification 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 approach the determination of the size of such a penalty with restraint. Too large a fine can lead to the fact that the contractor will lose the economic motivation to complete the work on which he allowed delays.


It is much more effective to establish a mechanism to eliminate the breach of deadlines due to 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 and attract additional contractors. It is also necessary to provide for the obligation of the contractor to compensate for the difference in the cost of contract work, which arose in connection with the change of the contractor or the attraction of additional labor.


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