With a lump sum contract, the bidding package price and contract price must factor in risks related to cost escalations while the contract is being implemented.— File Photo

by lawyers of Mai Counsel

On 11 December 2013, the Government issued Decree No. 207/2013/ND-CP amending a number of articles in Government Decree No. 48/2010/ND-CP (7 May 2010) that deal with construction contracts

Supplementing a principle for signing construction contracts

The Decree supplements the principle that a construction contract can only be signed once the party awarding the contract has a valid plan to make payments to the party that will execute it under the schedule specified in the construction contract, except when the work must be constructed on an emergency basis.

Conditions for construction contract pricing

1. Lump-sum: With a lump sum contract, the bidding package price and contract price must factor in risks related to cost escalations while the contract is being implemented.

The lump sum contract price can only be applied for bidding packages at the time of contractor selection and negotiations to sign a contract that can define the contract volume, quality, performance progress and unit-price for performing jobs; or in some cases, where it is not possible to determine the volume and unit price (such as EC, EP, EPC and turnkey contracts), the contract receiving party is qualified in terms of capacity and experience to determine a lump sum contract price.

2. Fixed unit-price: The unit price for contractual work must include risk factors related to the escalation of costs during contract implementation.

The fixed unit-price can only be applied for bidding packages at the time of selecting contractors and negotiating to sign a contract where contract quality, performance progress and unit-price to perform jobs can be defined, but where the work volume is yet to be determined.

3. Adjustable unit-price: This can be applied only for bidding packages at the time of selecting contractors and negotiating contracts where the volume and price escalation factors for unit-prices to perform contractual work cannot be determined.

4. Time-based and percentage pricing: These are applied for contracts for construction investment consultation (excepting construction surveys) and insurance for construction activities.

New rule on guarantee for contract advance payment

Before the awarding party makes an advance payment to the receiving party, the latter must issue a guarantee to the former for funds equal to the advanced amount. If the receiving party is a consortium of contractors, each member of the consortium must give the awarding party a guarantee for contract advance payment received, except in cases where consortium members agree to let the consortium leader issue the guarantee for contract advance payment received.

The effective term for guarantees issued for contract advance payments is extended until the awarding party recovers the amount advanced. The value of guarantee issued will fall corresponding to the amount of advance payment recovered under the schedule agreed to by both parties.

This Decree takes effect on 1 February 2014. Construction contracts that have been signed and begun implementation before this date will not be affected by its provisions.—VNS