Costs incurred outside of construction contracts are one of the issues that cause numerous disputes among the parties involved in the project. Failure to foresee these costs or lacking a clear agreement on paying these cost can lead to conflicts between the investor and the contractor, affecting the project’s schedule and efficiency. This article by TNTP will analyze in detail the types of incurred costs, current legal regulations, and methods of dispute resolution to help parties involved in construction projects protect their interests reasonably.
1. Causes of costs incurred outside of construction contracts
During construction, additional costs outside the contract can occur from various reasons. Some common reasons for these incurred costs include:
• Changes requested by the investor: During construction phase, the investor may request design changes or add new items. If the terms regarding incurred costs are vague in the contract, this may lead to disputes on who will be responsible for paying these costs (e.g., when the investor requests a design change, incurred costs may include purchasing new materials and extending the construction period). Change that is outside in the contract can also lead to additional costs.
• Unexpected construction conditions: Environmental factors or unforeseen terrain in the initial survey may incur costs. Changes in legal regulations may also require project adjustments, leading to additional costs.
• Inaccurate estimation of cost: Incurred costs may result from parties not accurately calculating the work volume at the time of signing the contract, often due to the lack of information or changes in construction conditions.
• Objective conditions: Natural disasters such as floods or earthquakes can suspend the construction and incur costs related to time and labor. Pandemics or material shortages may also significantly increase costs.
• Costs from government requirements: Sometimes, changes in government regulations during project execution may require the addition of items or changes in construction plans and lead to additional costs that were not anticipated in the contract.
• Costs arising from contractor faults:
– Incorrect construction procedures: If the contractor does not adhere to technical regulations or design drawings, leading to the project not meeting requirements, rework will incur additional costs.
– Delays due to contractor’s fault: If a contractor delays construction, leading to an extension of the construction period, the investor may incur additional management costs or penalties for late delivery, affecting the project’s total cost.
2. Legal basis for costs incurred outside of construction contracts
However, not all incurred costs are predictable in the contract. Therefore, when additional costs arise outside the contract, parties may negotiate amendments to the construction contract. Amendments should be based on the following criteria:
• Legal regulations on costs incurred outside of contracts:
– According to The Construction Law 2014, general adjustments for all construction contracts entail that contract adjustments regarding volume, schedule, unit prices, and other contents are based on mutual agreement and apply only during the contract’s execution period.
– For construction contracts related to public investment projects, the project will be subject to Decree 37/2015/ND-CP. In case of volume adjustments, parties need to agree on specific terms regarding volume, scope, and procedures. Adjustments vary between fixed-price contracts and unit price contracts. For fixed-price contracts, if additional work does not exceed the approved bid price, a supplement must be signed; if it exceeds, a decision from an authorized person is required. For unit price contracts, volumes without unit prices must be agreed upon before execution.
• Construction contracts: The construction contract between parties needs to specify cases of incurred costs outside the contract and how to distribute them.
– Contract price adjustment methods: In cases of changes in work volume, construction conditions, or requests from the investor, the contract should specify how to calculate and how incurred costs will be paid.
– Responsibilities of the parties: The contract should clearly define which party is responsible for paying incurred costs and the necessary conditions to confirm that these costs are valid.
According to the Civil Code 2015, if parties do not have specific agreements in the contract regarding incurred costs, the payment responsibility will be determined based on the principles of renegotiation or compensation claims in case of fault from one party.
So, what should contractors do if parties cannot negotiate costs incurred outside of construction contracts? According to legal regulations, contractors have the right to refuse to perform additional work without mutual agreement. However, in practice, completing additional work is often a prerequisite for contractors to receive payment and continue performing other tasks. When investors do not cooperate in negotiations, many contractors have to accept continuing work without exercising their right to refuse, leading to unwanted disputes.
3. Grounds for effective dispute resolution
Parties need to gather complete documentation and evidence: Collecting documentation and evidence is crucial in the dispute resolution process.
• The contract is the basic document, helping to determine the terms agreed upon between the two parties.
• Communication exchange documents between the parties will provide information about discussions and decisions related to work, including changes incurred outside the contract agreed upon by the parties. Change request documents will serve as the basis for determining whether the incurred requests are approved.
• Evidence proving incurred costs, such as invoices for material purchases and subcontracts with subcontractors. Proper storage of these documents not only provides a solid ground for the affected party to claim compensation but also increases the likelihood of achieving favorable outcomes in disputes settlement.
Understanding rights and obligations is crucial in minimizing and resolving disputes. This helps parties clearly identify incurred costs they are entitled to claim for payment, ensuring that such claims comply with legal regulations. When all parties are well aware of their rights and obligations, the likelihood of disputes decreases, and in case of disputes, the ability to protect rights improves.
Consultancy from lawyers and legal experts is also vital as they will provide parties with advice on rights, obligations, and relevant legal regulations, thereby protect the parties’ rights when disputes occur.
Disputes over costs incurred outside of construction contracts are but and complex. To resolve these disputes effectively, parties need to understand legal regulations, engage in negotiation and mediation, and, if necessary, bring the case to court or arbitration. It is essential to build clear, detailed contracts and having specific agreements on incurred costs from the outset to minimize unnecessary disputes during project performance.
This article, “Disputes over costs incurred outside of construction contracts?” is brought to you by TNTP. We hope this article proves helpful to our readers.
Respectfully.
