How to use AS 4916 Construction Management Contract

AS 4916 is one of the most commonly used - and also misused - forms of construction management contract in Australia. This article explains how it works and also identifies areas where users frequently get it wrong.

What is AS 4916-2002?

AS 4916 is a form of construction management contract published by Standards Australia. (Read more about construction management contracts here.)

AS 4916 was first released in 2002. It was prepared by a committee comprising a number of different industry stakeholders, and consequently is a relatively balanced form of construction management agreement, assuming it is used as was originally intended.

Where can you buy AS 4916?

AS 4916 is protected by copyright, meaning that you have to pay to use it. You can buy a licence to use AS 4916 here.

How does AS 4916 work?

Under AS 4916, the principal engages the construction manager to manage the construction process on the principal’s behalf. This may include both pre-construction and/or defects rectification services, depending on how the Annexure Part B is completed.

The fee payable to the construction manager is intended to be identified in the Annexure Part C. The fee can be expressed as a lump sum, as a percentage of the project value, by reference to rates, or a combination.

The general intention behind a conventional construction management agreement is that, where the construction manager is dealing with third parties (including trade contractors), it does so as the principal’s agent. This means:

• from a legal perspective, the trade contracts are effectively between the trade contractors and the principal (even where they are signed by the construction manager on the principal's behalf);
• the construction manager is not accountable for any default by a trade contractor; and
• the construction manager will generally only be responsible for matters that are within its direct control.

There is a standard form of trade contract published by Standards Australia intended for use in connection with AS 4916, being AS 4917-2003. You can buy a licence to use AS 4917 here.

What risks are assumed by the Construction Manager?

The level of risk assumed by the construction manager under AS 4916 is intended to be significantly less than that ordinarily assumed by a contractor in a lump sum arrangement, assuming AS 4916 is used as was originally intended.

This is because the construction manager’s role is merely to manage the trade contractors, without assuming the risk of their non-performance. 

The construction manager is also not expected to carry many of the usual risks that are imposed on a head contractor under a lump sum contract. For example, under AS 4916: 

• There is no obligation on the construction manager to ensure practical completion of the project occurs by the date for practical completion.
• There is no provision for liquidated damages in the event of delay.
• There is an ability for the construction manager to claim extensions of time and delay costs for delays caused by the trade contractors. (By way of contrast, under AS 4000, the contractor will be liable for any acts or omissions of subcontractors as if they were its own.)
• The construction manager has no liability for defects in the work performed by trade contractors (unless the construction manager has somehow caused the defect).
• There is no requirement for the construction manager to provide any security. 
• There is no equivalent provision to clause 14 of AS 4000, which contemplates the contractor assuming the risk of any damage or personal injury that occurs on the site while it is in the contractor’s possession (subject to certain ‘excepted risks’).

Where the construction manager acts as agent for the principal, it must act transparently and always in the principal's best interests. This is because, as agent, it will owe fiduciary obligations to the principal. (Read more about fiduciary duties here.) 

The scope of the ‘Services’ and the Annexure Part B – where things go wrong

All of the construction manager's obligations in AS 4916 relate to the 'the Services'. The definition of 'the Services’ points to the Annexure Part B, where 'the Services' are intended to be described in detail.

The Annexure Part B gives you two options:

• you can insert your own list of tasks (and ignore the ‘pick list’ that appears in the unamended Australian Standard); or
• you can choose from the pick list.

As we explain below, things often go awry when the default pick list is used.

‘Agent’ versus ‘not as agent’

The list of tasks in the Annexure Part B of AS 4916 requires you to identify, for each task, whether the construction manager will act ‘as agent’ for the principal or ‘not as agent’.

Although in principle this might seem like a good idea, there are three fundamental issues with this.

First, where a traditional construction management arrangement is intended, the choice between 'agent' and 'not as agent' should generally be fixed. That is, the construction manager is always likely to exercise the same function in the same way, regardless of the project concerned. There should not be any reason for this to change between projects, and therefore no reason why users should be required to choose.

Second, for some of the tasks, it is very difficult to determine which tick box should be applied. For example, 'change control' is the first task listed. It is unclear whether this is intended to be a task that involves the construction manager providing advice to the principal (in which case the box should be 'not as agent'), or whether this means acting on the principal's behalf in effecting the change (in which case the box should be ticked 'agent'). There are many tasks like this.

Third, sometimes the parties will tick a box that makes little sense. For instance, one of the tasks is for the construction manager to negotiate with authorities and service providers. 

It would seem odd if this box were ticked 'not as agent'.  Indeed, if the construction manager is not permitted to negotiate with authorities or services providers 'as agent for the principal', it is not clear how the construction manager could effectively deal with authorities or service providers at all.

What happens if the parties get 'agent' and 'not as agent' wrong?

If the Annexure Part B is not used correctly, this creates significant ambiguities in the contract and/or leaves one or both parties exposed to risks that may not be immediately apparent.

For example, three of the tasks in the list are:

• obtain tenders from contractors and suppliers;
• negotiate with contractors and suppliers; and
• award contracts in consultation with the Principal.

Under a conventional construction management arrangement, all three boxes would be ticked 'as agent'. This would result in the construction manager dealing with trade contractors and suppliers on the principal's behalf, and having to discharge its fiduciary duties to the principal in the process.

Sometimes a principal will tick the ‘not as agent’ for one or more of these tasks. 

Where that occurs:

• the construction manager may no longer owe a fiduciary duty to the principal in relation to that task;
• the principal runs the risk of losing transparency and control over the relationship between the construction manager and the trade contractors;
• the construction manager may assume the risk of a trade contractor’s performance;
• the principal will not have any security in respect of the construction manager or trade contractor’s obligations;
• the principal will not have the ability to deduct liquidated damages in the event of a delay from the construction manager, and will also not have the ability to apply liquidated damages against the trade contractors (as it will no longer have any direct relationship with them);
• the construction manager may have limited ability to claim extensions of time and delay cost; and
• it is unclear what is intended to happen in the event of a discovery of a latent condition (with one real possibility being that the risk of latent conditions will lie with the construction manager).

Some principals (or their project managers) seem to take the view that, by ticking all of the boxes in the Annexure Part B ‘not as agent’, this will have the effect of transferring all of the construction risk to the construction manager whilst preserving all of the ‘open book’ benefits of a conventional construction management arrangement. 

Quite apart from this approach potentially not having the desired effect:

• it will likely result in the principal losing the benefit of fiduciary obligations; 
• it will expose the principal to additional risks, including those described above; and
• it will create significant ambiguities and therefore increase the potential for dispute if the project does not go to plan.

If you are a principal or project manager looking to set up a modified form of construction management agreement, don't assume that simply ticking the boxes in the Annexure Part B in a particular way will be sufficient to do the trick. Indeed, this type of approach may result in the principal assuming a significant amount of unnecessary and unwanted additional risk.

What's the solution?

Before deciding to use AS 4916, make sure this is the right kind of contract for your project. (If you're not sure which type of contract is best for your project, click here for some guidance.)

If you intend to use AS 4916 as a traditional construction management arrangement, the best approach is to:

• insert a bespoke list of tasks into the Annexure Part B that you develop yourself, so as to avoid the 'agent' or 'not as agent' issues mentioned above; or
• if you wish to use the default ‘tick-box’ task list, delete the headings ‘agent’ and ‘not as agent’ and then just tick the boxes for the tasks that are required. This approach also avoids you having to choose between 'agent' and 'not as agent' and running into the issues mentioned above.

Conversely, if the intention is not traditional construction management, and your intention is for the construction manager to assume more of the risk that would normally be the case and for the construction manager to become directly responsible for carrying out the work and delivering the project:

• you will need to modify the contract (for example, through special conditions), to explain exactly how the arrangement is intended to work and allocate risk between the parties in an appropriate way; or
• use a different form of contract that better reflects the commercial intent. The most typical way this is done is through a bespoke form of ECI Agreement (unfortunately there is no Australian Standard for this), typically coupled with a lump sum form of contract (e.g. AS 4000, AS 4902 etc).

Key Takeaways

AS 4916 is a reasonably balanced contract if it is used for its intended purpose, namely traditional construction management. Care needs to be taken when identifying the 'Services' in the Annexure Part B.

If you are contemplating an arrangement that is not traditional construction management, don't assume that this intent can be achieved simply by ticking the boxes in the Annexure Part B in a particular way. If you don't want a traditional construction arrangement, you will need to make amendments or look to some other form of document, such as an ECI agreement coupled with a lump sum form of contract.

You can read more about ECI contracting here.