Contract Administration CONS 6812 - Class exercise No.

7 + ANSWERS
This Topic is NZS 3910, Fluctuations and defects Thursday 17th August 2017

The following refer to NZS 3910:2013

Q1. Define cost fluctuations as it is applied to construction work not performed under a fixed price
contract [cost fluctuations are also referred to as increased costs and rise & fall clauses]. Cost
fluctuations allow the Contractor to submit a bid based on rates existing at the time of tender.
Inflationary costs over the duration of the contract can then be recovered by an express contract
term that either allows their recovery by adopting a formula that can be used to determine the
inflationary content of each months claim or by a system using base rates at time of tender and
thereafter examination of material invoices and labour time sheets. Inflationary costs include
general nationwide price movements due to such factors as currency exchange rates, oil and other
commodity price movements and similar, it does not include suppliers who simply increase their
prices. It is a crude approximation of cost and a formula can be adjusted to allow nearly full
increases or just a percentage. It is only used by the client to encourage competitive bids. When
contracts involve larger sums of money, are of more than two years duration, or less in periods of
high inflation, contractors are wary of the risk of pricing because margins on sales/turnover are low
and if inflation rises too sharply the consequences on the contractors solvency can be dramatic.
Inflation does not include tax changes, and these are invariably written into the contract as being at
the owners risk [APPENDIX A of the Fluctuations handout seems to suggest otherwise. A tax such as
GST may be subject to a large change typically an increase and would be dealt with separately.
Other taxes e.g. income tax may change, but they do not directly affect inflation, they adjust the
amount of money which the government takes from employees, although this may indirectly affect
wages. NZS 3910 relies on Statistics New Zealand indices so the source of the inflation will be of less
concern] WARNING inflation is of general application spread across many items but if a substantial
piece of equipment is involved, especially if it is sourced from overseas, any inflationary costs such
as currency exchange rates, may have a substantial impact on the contractors cost out of proportion
to the total contract price. Imported material should be considered carefully, New Zealand is a small
country, and has relatively limited local access to some goods.

Q2. Which of the 3 terms in Q1. used to describe the same thing is arguably misleading and why?
Rise and fall and fluctuations reflect the fact that adjustments are made according to whether
inflation or deflation is predominant, but increased costs assumes that prices always rise, which to
some extent is true, but deflation does occur from time to time, in times of economic decline.

Q3. What are the 3 options set out in Schedule 1 Special Conditions of Contract Specific
Conditions of Contract for fluctuations?

12.8 Cost fluctuations (select one to apply, (a), (b), or (c))

(a) Cost fluctuations shall not be paid;
(b) Cost fluctuations shall be paid in accordance with Appendix A;
(c) Cost fluctuations shall be paid in accordance with the method described in: e.g. recovery
based on invoices and time sheets

For detailed information on fluctuations go to:

file:///C:/Users/gparish/Downloads/CPFS%20guidelines%2020111219-E%20(1).pdf

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Q4. Where are the indices found for use in APPENDIX A COST FLUCTUATION ADJUSTMENT BY
INDEXATION? Statistics New Zealand prepares them

Q5. How often are the indices updated? Every quarter i.e. every three months

Q6. How often can the Contractor make fluctuations cost claims Included in its monthly payment
claims 12.1.3 The Contractors payment claims shall: [include] (v) The estimated value of Cost
fluctuations for which payment is provided under 12.8

Q7. When is a summary of fluctuations payment claims submitted to the Principal? When the
Contractor makes its final payment claim: 12.8 Cost fluctuations12.8.2 Payment claims for Cost
fluctuation adjustments in accordance with 12.8 may be submitted by the Contractor each Month
and a detailed summary of all such payment claims shall be submitted with the final payment claim.

Q8. Are further cost fluctuation claims allowed for any period of time beyond the due date for
completion? Generally not. APPENDIX A COST FLUCTUATION ADJUSTMENT BY INDEXATIONA5
The Contractor shall not be entitled to claim or have deducted any Cost fluctuation adjustment for
any further changes* in indices which occur after the Due Date for Completion of the Contract.

* The Due Date for Completion of the Contract includes 10.2.1(b) All extensions of time, if any,
awarded under 10.3 so if the Contractor finishes late for reasons it has control over, and has no
extension of time to cover the delay, it will still be working on Site and a Practical Completion
Certificate will not yet have been issued. The Contractor is entitled to claim for fluctuations on the
value of that work but is not entitled to claim for any further rise in Costs that occurred after
Practical Completion was achieved. If Statistics New Zealand figures are being used, they are three
months in arrears anyway, so the last available figures before Practical Completion should apply
from that point on.

Q9. How are cost fluctuations dealt with for Daywork, Prime Cost Sums, and Variation components of
the Contract Price? APPENDIX A COST FLUCTUATION ADJUSTMENT BY INDEXATION A3 For the
purpose of calculating the Cost fluctuation adjustment, any Daywork, Prime Cost Sums, Variations,
and other payment items which are based on actual Cost or current prices and any advances shall be
excluded from the Engineers valuation. I.e. they are left out. Circumstances vary, but if Costs change
so that when work carried out under these items has changed from when it was priced, Cost
fluctuations can be adjusted on an individual basis.

Q10. How are indices dealt with when they have not been published for the relevant time period
yet? APPENDIX A COST FLUCTUATION ADJUSTMENT BY INDEXATION A7 Where indices for the
quarter have not yet been published, interim payments will be made on the basis of the indices for
the most recent quarter for which indices are available.

Q11. What happens if indices are no longer available from the original source? APPENDIX A COST
FLUCTUATION ADJUSTMENT BY INDEXATION A8 Ifindicesin A2no longer published or basis
ofindex is materially changedadjustmentusing [an]other index, or in manner [to] fairly reflect
the changes.

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Q12. Calculate the Cost fluctuation adjustment in the 3 following scenarios:

C $? $? $?

V $78,000 $192,356 $99,998

L 1083 1004 1072 New quarter

L 1079 1000 1052 Previous quarter

M 1017 1004 1072 New quarter

M 1000 1000 1052 Previous quarter

When a record started [there were many sheets concerning different areas of the economy, not just
the two adopted for the NZS 3910 formula] it was given a nominal indice of 100. If inflation during
the quarter was 1%, the new indice became 101, the larger numbers in successive quarters indicate
the percentage rate of inflation.

H
V2 $78,000 $192,356 $99,998
L3 1083 1004 1072
L' 4 1079 1000 1052
M 5 1017 1004 1072
M' 6 1000 1000 1052
C Cost fluctuation $911 $769 $1,901
C =H2*((0.4*(H3-H4)/H4)+(0.6*(H5-H6)/H6))

Q13. What do the indices in the formula represent? Numbers

Q14. What do the 0.4 and 0.6 numbers in the formula represent? They assume that 40% of the value
of work claimed is Labour content and the remaining 60% is Material content. If the Contractor is
unhappy with the way fluctuations are calculated it can allow for an appropriate adjustment sum in
its bid price, in either direction i.e. more $ or less $. Much more complicated formulas are used on
projects according to the nature of the work, its value, and the composition of the Contractors
resources e.g. more direct labour employed and less work subcontracted.

Q15. How does the Contractor know when it has to provide warranties? 11.5 Warranties 11.5.1
The Contractor shall provide the Principal with written warranties where required by the Special
Conditions. The Contractor studies the Special Conditions and then studies the Contract documents,
especially the Specification which is one popular place for putting this kind of information. Be careful
if the references in Schedule 1 do not match listed items of work in the Specifications. It is safest
to assume that a combination of both sources will need to be allowed for in the bid, but check with
whoever is organising the tender process if there are discrepancies.

Schedule 1 Special Conditions of Contract Specific Conditions of Contract

11.5 Warranties
11.5.1 (select one to apply, (a) or (b))

(a) No warranties are required;

(b) The Contractor shall provide warranties as set out in the Contract for the following items of work:
(state the items)

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Q16. What effect does the provision of warranties have on the issue of a certificate of Practical
Completion? 11.5 Warranties11.5.2 Such warranties shall be supplied to the Engineer in writing
before the Engineer issues the Practical Completion Certificateabsent any warranties the Engineer
may refuse to issue the Certificate which but for the absence of warranties s/he would have issued.

Q17. If the Contractor is the warrantor offering a warranty to the Principal what does the
Contractor affirm as to the nature of the work carried out under the Contract? Schedule 13 Form
of Contractor (or Subcontractor) warranty 1 The Warrantor warrants to the Principal that the
Warranted Works are as required in the Contract. If not otherwise specified the works shall be in
accordance with good trade practice.

Q18. How does a Schedule 13 warranty impact on manufacturers warranties issued under the
Contract or warranties implied into the Contract by legislation?

G11.5 Warranties

Warranties are normally provided bySubcontractor or supplier [or] Contractor. They warrant
performance ofpart of the works, andan undertaking to remedy Special Conditions identify
warranties required period [of] and form of [which] may be [as] Schedule 13 or [other] asa
deedsigned byPrincipalContractor andwarrantor (Contractor orSubcontractor/supplier),
and deals withscope ofwarrantywarrantors obligations, andconsequences offailure to
remedy defects under the warranty. Other forms of warranty, such as standard manufacturers
or suppliers warranties, may be acceptable to the Engineer.

Schedule 13 warranties bind both the Contractor and the warrantor, and IT IS HEREBY AGREED
2 This warranty shall be in addition to andnot derogate* from any manufacturers warranty or any
warranty implied by law

* To derogate is to detract from, therefore a Schedule 13 warranty cannot reduce either the value of
manufacturers promises or rights that are established under legislation. Legislation over-rides
Schedule 13 warranties but sets minimum standards, so whereas it can improve rights offered by
Schedule 13 it will not stop manufacturers improving on it. Manufacturers warranties that reduce
their statutory obligations are ineffective. Legislation establishes a default standard. Schedule 13
warranties are particularly useful because they record the parties who have obligations under them.

Q19. What action must the Contractor take if the Principal advises of a defect in the Contract Works
during the warranty period? Schedule 13 Form of Contractor (or Subcontractor) warranty 3.1
The Warrantor agrees that, if within the Warranty Period the Warrantor is advised by the Principal in
writing of any defect in the Warranted Works for which the Warrantor is liable under the terms of
this warranty, the Warrantor will promptly take steps to remedy the defect.

Q20. What happens if the cost to rectify a defect or replace materials is out of proportion to the cost
of so doing compared to the detrimental effect of allowing the defect to remain in place? Schedule
13 Form of Contractor (or Subcontractor) warranty 3.3 WhereCost of replacement out of all
proportion toconsequencesornotcapable of rectification without substantial expenseout of
all proportion toCost ofWarranted Works: (a) Ifreasonably able to be rectified by repair rather
thanreplacementWarrantors obligation to repair ormake good(b)Warrantor may propose
compensation in lieu of remedyingor (c)Warrantor may propose combination ofrepair and
compensation. 3.4Principal shall considerWarrantors proposals andparties shall endeavour
to reach agreement.

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Q21. What action can the Principal take if the warrantor fails to satisfactorily deal with defects?
Schedule 13 Form of Contractor (or Subcontractor) warranty 4.1 IfWarrantor fails tocarry out
remedial work orpropose acceptable repair or compensationPrincipal mayarrangeremedial
workby others.

Q22. Are there limits on the liability of the warrantor to rectify according to the cause of the defect
or damage and if there are, describe 3 of them? Schedule 13 Form of Contractor (or
Subcontractor) warranty 5 ExclusionsWarrantornot liable fordefect or damage caused by:
(a) Wilful act or negligence ofany Person other thanWarrantor; (b) Fire, explosion, earthquake,
war, subsidence, slips, faulty materials, or workmanship other than caused bydefect...(c)force of
natureWarrantor could not have reasonably foreseen; (d)delay byPrincipalgiving noticeof a
defectbecoming apparent; (e) Design faultsunlessWarrantor undertook...design; (f) Use of
Worksforpurpose notintended; (g) Failureto maintainin accordance with good practice;
or (h) Fair wear and tear*.
* (h) the warrantor is not liable for wear and tear which it is reasonable to expect, but if the
deterioration is greater than should be expected then the warrantor would be liable, but if the
deterioration is greater than expected because of the use the work has been put to is
improper, it would fall under the (f) exclusion.

Q23. How does the Contractor know when it has to provide guarantees? 11.6 Guarantees
11.6.1 The Contractor shall provide the Principal with written guarantees where required by
the Special Conditions and SCHEDULES TO GENERAL CONDITIONS OF CONTRACT Schedule 1
Special Conditions of Contract Specific Conditions of Contract 11.6 Guarantees
11.6.1, 11.6.2 (select one to apply, (a) or (b))
(a) No guarantees are required;
(b) The Contractor shall provide guarantees in the following form: (state form)
The Special Conditions only nominate whether or not guarantees are required, other Contract
documents will specify what trades or materials require them, usually the Specification. By
11.6.2guarantees shall be supplied to the Engineerbefore [s/he] issuesPractical Completion
Certificate so care should be taken to ensure that Subcontractors and suppliers supply them on
good time so as to avoid the problem of the Engineer refusing to issue a because s/he has not
received one. Withholding payment to a Subcontractor usually encourages them to promptly
produce what they promised in their contracts. For the purposes of satisfying the payment schedule
requirements on the Construction Contracts Act it would be reasonable to nominate a dollar value
on failure to produce a guarantee

Q24. What is a typical difference between a warranty under Schedule 13 provided by the
Contractor [or a Subcontractor) compared to a guarantee? GUIDELINES - G11.6 Guarantees:
Guarantees are generally provided by third parties (such as parent companies) guaranteeing the
Contractors performance. No standard form of guarantee is included in the General Conditions, so
that where required in the Special Conditions a specific form of guarantee should be included in the
tender and Contract. A warranty is provided on a standard form [Schedule 13] prepared as a deed
[so it can be enforced without the need for consideration being present] signed by the Principal, the
Contractor, and the warrantor [the Subcontractor when the Contractor and warrantor are the same
person]. https://www.consumer.org.nz/articles/building-guarantees#article-master-build-
guarantees is a Consumer web site comparing guarantees offered by builders, principally house
builders, in NZ. The law books are replete with cases discussing guarantees/bonds/warranties/letters
of comfort which are no more than labels for a standard form or a letter, which place uncertain
obligations on third parties, the uncertainty of which only becomes apparent when the third party is
asked to pay to fix something. A short answer to Q24. might be that the terms are interchangeable
and the only difference between them in regard to NZS 3910 is that the warranty follows a standard
format [Schedule 13] and a guarantee does not.

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 Q25. What are the differences between guarantees and warranties generally? Try:
http://www.access-legal.co.uk/free-legal-guides/whats-the-difference-between-a-guarantee-and-a-
warranty-1314.htm for assistance.

Guarantee

A guarantee is usually free and is a promise about an item by the manufacturer or company
It's a promise to sort out any problems with a product or service within a specific, fixed period of
time
Whether you paid for a guarantee or not, it is legally binding
The guarantee must explain how you would make a claim in a way that is easy to understand
It adds to your rights under consumer law
It will take effect whether or not you have a warranty

Warranty

A warranty acts like an insurance policy for which you must pay a premium - Sometimes a warranty
is called an 'extended guarantee'
May last longer than a guarantee and cover a wider range of problems
A warranty is a legal contract
The terms of the contract should be clear and fair
Does not reduce your rights under consumer law
A warranty can be in place with a guarantee

More about guarantees

Some items you purchase may come with a manufacturer's guarantee. Often there will be a
registration card that needs to be completed and returned. Before you leave the shop, ensure the
seller has filled in any details of the purchase s/he needs to otherwise the guarantee may not be
valid. Once you have sent off the card keep all the documentation in a safe place in case you need to
make a claim later. [Insofar as supply of goods is concerned the Consumer Guarantees Act 1993
implies guarantees into the sale and purchase of goods and services but does not apply to buyers in
trade, in which case the Sale of Goods Act 1908 applies only goods, not services].

Many different businesses and service providers will offer guarantees. Whilst this may give you
confidence in them, be careful not to choose a business just because of a guarantee. It may turn out
to be worthless if the organisation goes out of business. Some guarantees are insurance backed and
these may prove more secure.

guarantees are there to increase your protection and they cannot be used to limit or exclude
responsibility of a business for selling faulty products.

Q26. What form do guaranties take under the Contract? See Q24 above, there is no standard form.

Q27. What is a Producer Statement? Try Auckland Council at:

http://www.aucklandcouncil.govt.nz/EN/ratesbuildingproperty/consents/Consent%20documents/ac
2301producerstatementpolicy.pdf for help. By s2 Interpretation of the Building Act 1991 - Producer
statement means any statement supplied by or on behalf of an applicant for a building consent or by
or on behalf of a person who has been granted a building consent that certain work will be or has
been carried out in accordance with certain technical specifications: The term did, and does not
appear in the 2004 Act.

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The following is an extract from Auckland City AC2301 Producer Statement Policy: refer:
http://www.aucklandcouncil.govt.nz/EN/ratesbuildingproperty/consents/Consent%20documents/ac
2301producerstatementpolicy.pdf

2.4 The Building Act 2004 does not refer to the use of producer statements; however, Council
continues to use them as a mechanism for establishing compliance with the New Zealand Building
Code and they are widely accepted by the industry.

2.5 It is envisaged that memoranda (certificates of work and records of work) issued by Licensed
Building Practitioners (LBPs), will eventually replace producer statements. Licensing of LBPs
commenced in 2009 and became mandatory in March 2012.

Q28, Whether, a warranty, a guarantee, or a Producer Statement applies, what is the common
essential factor that determines their value to the Principal? The financial stability and longevity of
the warrantor who can fix problems that materialise after the Contract Works are supposedly
complete.