For better or worse, it seems that novation is here to stay.

For consultants who work on commercial projects (especially high-rise development) in Brisbane, Sydney or Melbourne, novation tends to be commonplace, and traditional procurement (where the Principal engages the design team separately from the Contractor) is even becoming the exception. Larger clients in other states, and in the government and institutional arena, are also more inclined to give novation a try. Across the 1000+ consultancy agreements we review each year, about 40% of contracts include provisions allowing for the Consultant to be novated. This trend is led most strongly by projects in Queensland and Victoria (close to 50%), followed by NSW (36%), leaving a rate of less than 25% in the remaining states and territories.

How can consultants get the best outcomes on novated projects? Here are five key factors that can lead to a better novation experience:

 

1. Work with a committed Principal and an experienced Contractor

Consultants consistently tell us that the approach of the Principal and the Contractor makes all the difference between success and hardship. An experienced Contractor understands how novation changes their relationship with the Consultant, and knows how to manage the additional control and responsibility for design that novation gives them. A Contractor who prices and plans the job more realistically is less likely to resort to slashing quality and cost to keep the project on the rails.

As for principals, they need to understand that novation fundamentally changes their relationship with the consultant team. After novation, the consultants belong to the Contractor. A committed principal recognises that stepping outside the traditional procurement model will reduce the Consultant’s control over quality and hand that control to the Contractor, and that the Principal needs to apply greater vigilance in monitoring and directing the Contractor’s work.

Consultants should be cautious if working with principals or contractors who lack experience of novation, invest time in explaining to novice principals how novation changes the Consultant’s role and, where they can influence the Principal’s choice of contractor, use that power wisely.

 

2. Get clear agreement on pre- and post-novation fees

Generally, the novation deed will provide that the Principal pays the Consultant’s fees for pre-novation work, and the Contractor pays their fees for post-novation work. But what happens when both of them deny responsibility for a particular part of the services?

Practically speaking, the further past novation you get, the more reluctant the Principal will be to pay outstanding fees. Your greatest leverage may be found at the point of novation itself, by refusing to accept novation until the amount of your pre-novation fees has been agreed, stated in the novation deed, and paid.

If the amount of outstanding fees cannot be agreed at the point of novation, it would be prudent to at least state in the novation deed that you are not giving up your right to continue claiming your full entitlement. Otherwise, many client-drafted novation deeds will extinguish your right to claim any fees or related entitlements for pre-novation work.

 

3. Define “variations” carefully

You might think that these scenarios should count as variations:

• The Contractor instructs you to re-issue all of your documentation in trade packages;

• Purely for cost savings, the Contractor instructs you to replace your existing window system with a cheaper alternative, requiring extensive redocumentation.

Whether or not these are variations, and whether you can claim additional fees or time, depends on how “variation” is defined in your consultancy agreement. This is an important commercial aspect to check on any project, and especially when novation is contemplated.

 

4. Use a good novation deed

Novation requires a special contract – a novation deed – to effect the change in contractual relationships. Signed by the Consultant, the Principal and the Contractor, the novation deed usually provides that your original contract with the Principal is ended, and replaced with a new, identical contract with the Contractor.

What makes a better novation deed? One factor is your right to keep the Principal informed, particularly if there are shortcomings in the works. So look for a clause confirming your right to communicate with the Principal. However, that should stop short of becoming an obligation. Under some novation deeds, the Principal seeks to have its cake and eat it too, by novating you to the Contractor but also requiring you to provide the Principal with indemnities or other contractual obligations (such a duty to report inaccuracies in minutes of site meetings). This kind of duplicated liability risks rendering you liable for the Contractor’s actions, and may jeopardise your professional indemnity insurance cover.

The Contractor should not provide you with a new contract at novation, because the very concept of novation assumes a continuation of an existing contractual obligation.

One simple indicator to look out for is length. Novation deeds longer than 2-3 pages are more likely to be full of restrictive procedures and the sort of risks mentioned above. The novation deed we make available to informed subscribers runs for 2½ pages.

 

5. Lock in design elements before novation

A recent government tender sent to our review service stated that, for this Principal, novation “generally occurs between Concept Design and Schematic Design”. However, at such an early stage, the design will not include enough detail to lock in quality. The Contractor will have a great deal of latitude to fill in the details and, under pressure to produce a low tender price, will probably gravitate towards cheaper alternatives. This creates liability risks for the consultant team if the cheap alternative products fail, and reputational risks if their name is attached to a poor project.

Developing a more detailed design before novation helps lock in better quality outcomes and protect the investment the Principal has made in the pre-novation design work. This is an important reality to explain to novice principals who think they can find savings in an early novation. Novation traditionally did not occur before commencement of the contract documentation stage, and something like 75% completion is often mentioned as the ideal point for novation.

 

informed has a series of example contracts, certificates and checklists which are available as part of an annual subscription. One of these is a novation deed – a rare example of a deed that accommodates the Consultant’s interests. Other documents include a data transfer letter (useful for sending documents in editable form), example certificates, and a contract negotiation checklist. You can find out more about subscriptions here.

 

Wendy Poulton

Risk Manager, informed