In a bid to deal with increasing complaints about construction projects, the Government recently issued a regulation on construction contracts strictly defining the responsibilities of the parties to these contracts.
To take effect on July 1, Decree No. 48/2010/ND-CP applies to contracts to build works with 30% or more state capital. Organizations and individuals related to contracts to build works with less than 30% state capital are also encouraged to apply the provisions of this decree. It will also apply to ODA-funded construction projects, unless otherwise provided by treaties to which Vietnam is a party.
Construction contracts were previously regulated in Decree No. 99/2007/ND-CP on the management of construction costs, and further guided by Circular No. 06/2007/TT-BXD dated July 25, 2007.
Decree No. 48 classifies types of construction contracts based on two major criteria. By nature of work, construction contracts are classified into eight types: consultancy contract; construction contract; contract to supply technological equipment; engineering and construction (EC) contract; engineering and procurement (EP) contract; procurement and construction (PC) contract; engineering, procurement and construction (EPC) contract; and turnkey contract.
By unit prices, construction contracts are classified as lump-sum contract, fixed unit-price contract, adjustable unit-price contract, time-based contract and cost percentage contract.
The decree details each type of contract. Notably, if the contractor is in partnership with many contractors, information on all partners must be indicated in the contract, including the leading contractor. Under Circular No. 06, a contract may be signed by the leading contractor as agreed upon by members of the partnership.
For a construction contract involving a foreign party, the languages used must be Vietnamese and English. When a bilingual contract is signed, the parties must decide on the language used in the process of performing the contract and the priority order for the use of this language in settling disputes arising from the contract.
In practice, for a large project, the investor has to sign contracts with multiple contractors. Therefore, according to director of the Ministry of Construction’s Construction Economics Department, Pham Van Khanh, the contents of these contracts must be uniform in terms of construction progress and quality to ensure the overall effectiveness of the project. The most important is that the scopes of these contracts must not overlap and be continuous in time so that the entire project can be commissioned on schedule.
The decree sets the maximum level of advance payment on a contract at 50% of the contract price. As for amounts paid to secure contract performance, Article 16 of the decree caps these security amounts at 30% of contractual value.
The time limit for settling a construction contract is 60 days or 120 days for larger contracts.
Contractual terms serve as a basis for not only making payment but also settling arising disputes. In light of this, the decree makes clearer provisions on the rights and obligations of parties to a construction contract regarding temporary cessation and termination of contract, work warranty and other issues.
Under the decree, the contractor has responsibility to warrant the constructed work and its equipment as agreed. For works of special grade and grade I, the warranty duration must be at least 24 months from the date of putting works into use with a warranty amount equal to 30% of contractual value. The warranty duration must not be less than 12 months for remaining works.
The decree provides for specific remedies for contractual breaches. If a contractor stops construction for 45 consecutive days, the investor may suspend the contract. Upon termination of a contract, if either party fails to settle the performed work volume for construction to proceed, the other party will have full freedom to make decision. Before terminating a contract, one party must give the other at least a 21-day notice and they must reach agreement on contract liquidation within 45 days. Two days after terminating a contract, the contractor must move all of its assets out of the construction site, or the principal will be entitled to dispose of these assets.
One issue that draws much attention in the decree is the specific guidance on the adjustment of work volumes, unit prices and performance progress. This was the most problematic issue in the past, Mr. Khanh said.
The decree clearly stipulates that adjustment of contractual prices applies only to fixed unit-price contracts and time-based contracts, when fuel, supplies and equipment prices abnormally fluctuate or taxation and salary policies change, directly affecting contract prices. However, such adjustment is subject to approval of investment principals and contractual parties. Investors may decide on adjustments to prices and construction contracts that do not result in an investment amount exceeding the approved level.
This provision will offer a favorable condition for investors to permit appropriate adjustment of contractual prices to prevent delayed performance of construction contracts due to fluctuating prices.
For lump-sum contracts, adjustment may be only made with regard to work volumes additionally arising outside the scope of signed contracts. Specifically, for arising volumes accounting for more than 20% of the corresponding work volume indicated in the contract or having no available unit prices, the parties will agree on unit prices in accordance with the principles established in the contract. If the arising work volume accounts for not more than 20% of the corresponding work volume indicated in the contract, the unit prices prescribed in the contract may be applied.
In a construction contract, the parties must agree on cases in which the contract performance progress may be changed. The investor and contractor may negotiate and agree on changes that do not extend the project completion deadline. For changes that will prolong construction duration, the investor must report them to the investment principal for consideration and decision.
Adjustment of prices and construction contracts may be effected only during the performance of signed contracts. Circular No. 09/2008/TT-BXD that guides the adjustment of prices and construction contracts only permitted the adjustment of prices of construction materials under lumps sum contracts.
The decree was issued without any contract or annex forms. According to Mr. Khanh, the Ministry of Construction would issue these forms later. They would, however, are not compulsory but for reference only. Since construction contracts may take very simple or complex forms, the parties to a contract may use a contract form suited to their specific construction job, scope and volume.(VLLF)-