FAQ's Principal Building Agreement

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Clause 30
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Question 1

Please could you clarify whether an Employer can claim both penalties & damages from a Contractor for late completion? I’m the Principal Agent on the job and it is my opinion that the Contractor’s liability is limited to penalties only. The Employer has a different view and believes that he can still claim damages under common law. I’m hoping that your opinion will put his mind at rest.

Ref: P30.001

Answer

Both you and the employer are wrong in one form or the other. The primary issue is that in terms of the Agreement both Penalties and Damages can be applicable but not for the same event. Therefore should the contractor fail to achieve P Completion by the current Completion date penalties will apply. However should the employer validly terminate (‘cancel’ in earlier editions) the Agreement before P Completion is achieved damages will apply as it is clear that penalties are not due. Further should the contractor be liable for penalties and then brings the works to P completion where penalties cease but then fails to proceed to final completion the employer could terminate and claim damages in relation to the loss and expense incurred. [36.5.8]

 

Question 2

I have received notice from the principal agent that the employer intends recovering penalties from me for late completion of the works in the amount stipulated in the contract data plus VAT. Is the employer entitled to add VAT to the amount of the penalties?

Ref: P30.002

Answer

The employer is not correct as penalties do not attract VAT. It is for this reason that the recovery statement makes provision for penalties to be deducted before VAT is calculated. The effect of this is that penalties are an expense and therefore reduce the value certified to the contractor on which VAT is calculated [see recovery statement item 1.2.1 and payment certificate item 10.2].

 

Question 3

I am a contractor engaged in the construction of a small office complex which the employer has agreed to rent out to a tenant upon completion. The project has been delayed and whilst the agreement provides that penalties are payable at the rate of R2 500,00 per day I have ascertained that the tenant’s monthly rental amounts to only R50 000,00. In the circumstances is the employer entitled to recover the full amount of the penalties from me or is this to be reduced accordingly?

Ref: P30.003

Answer

According to the Conventional Penalties Act No 15 of 1962 the parties to a contract may provide for the payment of a penalty in a predetermined amount in the event of non-performance. Where this is provided for in the agreement the party imposing such penalty will not be required to prove that he has suffered a loss whether in the amount of the penalty or at all. In your case, therefore, the fact that the penalty is in excess of the rental is irrelevant and the whole amount of the penalty remains payable.

 

Question 4

In terms of my agreement with the employer the date for practical completion of the works was set at 30 November 2007 although as a result of various delays this was not achieved until 31 January 2008. I have now received notification from the principal agent that the employer has elected to impose penalties for such delay at the agreed rate of R500,00 per day for the entire period from 1 December 2007 until the date of practical completion including the period of the builders’ break and a number of rain days. Is this correct or should the period of the builders’ break and the rain days be excluded from such calculation?

Ref: P30.004

Answer

Clause 30 provides that where the contractor fails to achieve practical completion of the works by the current practical completion date he will be liable for the penalty “per calendar day” which, according to the definition contained in clause 1, includes working and non-working days. In determining the amount of the penalty, therefore, where applicable the period of the builders’ holiday is to be included as are Saturdays, Sundays and public holidays. This will also apply to rain days and any other extensions which occurred during this period (other than those for which the employer is directly responsible) as they had no effect on the practical completion date.

 

Question 5

What procedures are to be followed before the employer can impose and deduct penalties?

Ref: P30.005

Answer

Clause 30 simply provides that the contractor will be liable for penalties should practical completion of the works not be timeously achieved. It is not necessary for the employer to notify the contractor of his intention to impose penalties and the relevant amount need only be reflected in the recovery statement [item 1.2.1] with the appropriate adjustment to be made in the payment certificate [item 10.2].

Furthermore penalties may be recovered at any time until settlement of the final account which effectively settles al financial issues between the employer and the contractor arising from their agreement.