20/02/2017 – 2016: The Year in Contracts

In addition to our professional development products, informed provides a contract review service to help consultants understand the insurance and risk implications of professional services agreements.[1] Reviewing over 1300 contracts each year puts us in a unique position to observe changes in client-drafted contracts, and gives us a general snapshot of the construction industry. In 2016, this is what we saw.

General Procurement

The project principal engaged the consultant in 75% of the contracts we reviewed. In 15% of contracts, the consultant was engaged by the builder, and the rest of the time the other contracting party was another consultant or a project manager.

Commercial projects accounted for 77% of the contracts sent to us. The remainder was largely State government (8%) and local government (6%) projects and university procurement (7%), with Federal government projects at less than 1%.

The domestic sector barely registers in our statistics. Contracts from domestic projects are rarely sent to our review service because consultants predominantly use an industry pro forma contract, or their own terms, and only seek our advice if their client seeks to make contentious amendments.

Novation

Nationwide, 41% of contracts included provisions allowing for the consultant to be novated. This was a slight increase on the 2015 figure of 35%.

The trend towards novation was led most strongly by projects in Queensland and Victoria, where close to 50% of reviewed contracts provided for novation. The NSW figure was more moderate (36%), and in the remaining states and territories was less than 25%.

Proportionate Liability

The protection of proportionate liability has been enshrined in legislation across Australia since the early 2000s, but several states allow “contracting out”. In 2016, 20% of contracts contained an express exclusion of proportionate liability. The state-by state breakdown is informative:

Proportion of contracts with express contracting out of proportionate liability

NSW	28%
WA	28%
Queensland	15%
Victoria	15%
Tasmania, SA, ACT and NT	0 or low

[1] Currently available only to some clients of our sister business, Planned Cover.

NSW and WA have higher levels of contracting out because the law in those states expressly allows it. Victoria, where the law is silent, has a lower rate. Remarkably, in Queensland, we are still seeing 15% of contracts purporting to contract out, even though the Queensland legislation currently renders such provisions void.

Base Contract

Unsurprisingly, the contracts with which our clients most wanted assistance were client-drafted contracts, making up 83% of our 2016 reviews. Of the remainder, 7% were based on Australian Standard 4122-2010, and 2% were based on Australian Standard 4904-2009 (in both cases, the client had usually amended the original terms quite heavily). Surprisingly, 1.5% of contracts sent to us were based on AS4122-2000, even though that version was superseded seven years ago.

In 2016, we surveyed some of our larger clients to gain some additional insight into what base contract tends to be used, and these were the results:

What form of contract do you predominantly use?

graph2

Government Contracting

Government projects where the consultant was engaged directly by the government party comprised about 12% of the total contracts we reviewed. It might be hoped that government clients would favour Australian Standard contracts, in the interests of balance and efficiency. However, on these projects, the base contract used was as follows:

Base contract where consultant engaged directly by government

graph2

Contracts on Public Private Partnership projects (PPPs) made up less than 2% of our reviews in 2016. Of those, the projects were overwhelmingly in the transport sector, predominantly road and rail, with a smaller component of hospitals.

Take-away points

Professional services contracts sent to our review service in 2016 show:

A slight increase in the use of AS4122-2010 as the base contract (from 5% in 2015 to 7% in 2016);
A small rise in use of novation, most strongly in Victoria in Queensland;
Moderate levels of contracting out of proportionate liability, most prominently in NSW and Western Australia;
A tendency by procurers at all levels of government to use client-drafted contracts rather than supporting Australian Standard contracts.
Our contract numbers, insofar as they reflect the health of the construction industry, paint a picture of stability. Since a decline in 2012-2013, the number of contracts sent to us for review has remained fairly consistent.

Wendy Poulton

Risk Manager