Circular No. 02/2005/TT-BXD guiding construction contracts

CIRCULAR

Guidelines for Contracts in Construction Activities

Pursuant to the Construction Law No. 16/2003/QH11 dated November 26, 2003 of the National Assembly, session 4;

Based on Decree No. 16/2005/NĐ-CP dated February 7, 2005 of the Government on project management for construction investment projects and other relevant legal provisions;

On the basis of Decree No. 36/2003/NĐ-CP dated April 4, 2003 of the Government stipulating the functions, tasks, powers, and organizational structure of the Ministry of Construction;

The Ministry of Construction provides specific guidelines regarding contracts in construction activities as follows:

Part I

GENERAL PROVISIONS

1. A contract in construction activities (hereinafter referred to as a construction contract) is a written agreement between the tenderer and the contractor to undertake the entire or part of one or several tasks within construction activities. A construction contract is a legal document binding the rights and obligations of the parties involved, which must be fulfilled according to the terms agreed upon, serving as the basis for payment and resolution of disputes (if any) arising from contractual relations;

2. Scope and Applicability:

a) Scope of Application: Investment construction projects, consulting and construction tender packages using investment funds as prescribed in Decree No. 16/2005/NĐ-CP dated February 7, 2005 of the Government on project management for construction investment projects.

In cases where projects are funded by foreign aid, construction contracts must also comply with the provisions of the signed aid agreements.

b) Applicability:

This Circular applies to tenderers and contractors, both organizations and individuals, inside and outside Vietnam, who have the necessary qualifications and capabilities to participate in signing and implementing construction activities in Vietnam.

It is encouraged that investors implementing construction projects with other sources of funding sign and execute construction contracts in accordance with the guidelines set forth in this Circular.

3. Types of Contracts:

Depending on the scale, nature of the project, type of work, and relationships among the parties, construction contracts may take various forms with different contents, specifically:

a) Consulting Contract: Signed between the tenderer and the contractor to perform consulting tasks such as planning construction; preparing investment construction project proposals; construction surveying; designing construction projects; selecting contractors; supervising construction works; managing construction investment projects; reviewing designs, total estimates, budgets, and other related consulting activities.

b) Construction Contract: Signed between the tenderer and the contractor to carry out construction works, project components, or parts of construction works according to the design and construction budget.

c) General Construction Contract: Signed between the investor and a contractor or a consortium of contractors (referred to collectively as the general contractor) to undertake one type of work, several types of work, or all works of the construction investment project, such as: design; construction; design and construction; design, supply of materials and equipment, construction (EPC Contract); preparation, design, supply of materials and equipment, construction (Turnkey Contract).

4. For each type of contract mentioned in Point 3, the tenderer and the contractor may agree on the contract price and payment method in one of the following forms:

- Lump Sum Contract;

- Fixed Unit Price Contract;

- Adjustable Price Contract;

- Combination of the above prices.

5. Construction contracts shall be drafted based on a unified model suitable for the type of construction contract issued together with this Circular.

Part II

SPECIFIC PROVISIONS

I. Contract Documents Include:

- The Contract;

- Supporting documents attached to the contract.

1. The main content of the contract includes: the scope of work to be performed; quality and other technical requirements of the work; time and progress schedule; acceptance and handover conditions; pricing and payment methods; warranty period; liability for breach of contract; other agreements specific to each type of contract; language used in the contract.

2. Supporting documents attached to the construction contract are integral parts of the contract. Depending on the scale, nature of the work, and the form of contractor selection, supporting documents may include all or part of the following: tender award notice or tender designation document; special and general contract conditions; contractor's proposal; technical instructions; design drawings; written amendments and supplements; tables and charts; performance bond, advance payment guarantee, and other guarantees if applicable; negotiation minutes; other related documents.

The parties to the contract shall agree on the priority order when applying these contract documents.

3. It is encouraged that the parties to the contract refer to and apply the guidance documents on construction contracts compiled by the International Federation of Consulting Engineers (FIDIC).

II. Specific Provisions Regarding Certain Main Contents of the Contract:

1. Main Work Volume and Standards Applied:

Depending on the product of the construction contract, the main work volume and the standards to be applied must be clearly defined.

2. Time and Progress Schedule:

The contract must specify: start date, completion and delivery date of the contract product; progress schedule for each component and task must align with the overall project schedule. If the tenderer signs multiple contracts with the contractor to undertake construction tasks, the schedules of these contracts must be coordinated to achieve the overall project schedule. The parties to the contract must establish an appendix, an inseparable part of the contract, to clearly state the progress requirements for each task to be performed.

3. Contract Price:

The contract price is the price agreed upon between the tenderer and the contractor to perform the work volume according to the contract content.

3.1. Types of Contract Prices:

3.1.1. Lump Sum Contract Price (Package Price):

a) The lump sum price is the value of the contract determined at the time the parties sign the construction contract to undertake a portion or the entirety of the construction project or component specified in the contract and remains unchanged throughout the contract execution period, except in the cases stipulated in Section 3.2 below.

b) The lump sum contract price is typically applied in the following situations:

- The project or tender package can be clearly defined regarding quantity, quality, and execution time;

- The contractor must have sufficient capacity, experience, and design documents to calculate, determine the lump sum price, and related risks associated with determining the lump sum price;

- The contract has an execution period under twelve months or longer but the market conditions are likely to remain stable in terms of pricing.

3.1.2. Contract price based on fixed unit price:

a) The fixed unit price is the price determined for a unit of work or volume required to be performed under the construction contract and does not change throughout the execution of the construction contract, except in cases stipulated in Section 3.2 below. The fixed unit price is determined at the time of signing the construction contract and serves as one of the bases for payment of completed work or construction volume. The payment value is calculated by multiplying the completed work volume with the fixed unit price recorded in the contract;

b) The contract price based on fixed unit price is usually applied in cases where:

- The project or tender package includes repetitive works, with sufficient conditions to determine unit prices for each type of work to be performed but unable to accurately estimate the volume of work;

- The contractor must have sufficient capacity, experience, and design documents to determine unit prices and related risks associated with determining the fixed unit price;

- The contract has an execution period under twelve months or longer but the market conditions are likely to remain stable in terms of pricing.

3.1.3. Contract price based on adjustable price:

a) The adjustable price is a provisional price for volumes of work executed under the construction contract that, at the time of signing the construction contract, do not have sufficient conditions to accurately determine the volume of construction work to be performed, cost factors to determine unit prices, or both;

b) The contract price based on adjustable price is usually applied in cases where:

- The project or tender package cannot be accurately defined regarding quantity, quality, and execution time;

- The contract has an execution period over twelve months;

- Works within the contract do not have unit prices.

3.1.4. Contract price may combine the above types of prices:

a) The parties base their agreement on the types of work according to the contract, including some works priced on a lump sum basis, some works priced on a fixed unit price basis, and some works priced on an adjustable unit price basis;

b) Contracts based on combined prices are typically applied to large-scale projects or packages with complex technology and long execution periods.

3.2. Adjustment of construction contract price:

Price adjustments must be clearly stated in the contract and adjusted in the following cases:

a) Supplementing or adjusting the volume of work compared to the contract:

- If the additional work volume already has a unit price in the contract, the value of the additional volume is calculated based on that unit price;

- If the additional work volume does not have a unit price listed in the contract, the value of the additional volume is calculated based on the local unit price at the construction site at the time of occurrence, if there is no local unit price, both parties agree to establish a new price and submit it for approval by the competent authority for application;

- If the work volume changes (increases or decreases) by more than twenty percent compared to the volume listed in the contract, the parties may negotiate to determine a new unit price.

b) State policy changes: changes in wages, changes in material prices managed by the state, changes in exchange rates for parts using foreign currency, or changes in new systems and policies affecting the investment construction price level. In this case, adjustment is only allowed with permission from the competent authority.

c) Force majeure cases such as natural disasters like earthquakes, typhoons, floods, landslides, fires, wars, or the threat of war, and other unforeseen disasters. In these cases, the parties involved in the contract negotiate to determine the adjusted contract value in accordance with the provisions of the law.

4. Advance payment under the contract:

Advance capital payments are agreed upon by both parties and implemented immediately after the construction contract becomes effective. The advance payment amount is carried out according to the guidelines set forth in Article 41 of Decree No. 16/2005/NĐ-CP dated February 7, 2005, of the Government on project management for investment construction projects, except in cases where the parties have agreed otherwise.

5. Payment under the contract:

5.1. Based on the contract price and agreements in the contract, and based on the volume of work completed, the parties may make payments in stages, based on completed work phases, or in one lump sum upon completion of the entire contract.

5.2. Payment amount:

- For EPC contracts or turnkey contracts, when technical designs and total estimates have not been approved, provisional payment of at least eighty-five percent of the value of completed work volume is allowed;

- Other cases are agreed upon by the parties.

Upon completion of all work volumes under the contract, the parties will conduct acceptance and final settlement and terminate the contract, the Tenderer must pay the full amount according to the signed contract.

For contractors who must perform warranty services, the parties must determine the warranty amount that the Contractor must deposit according to regulations, which can be deducted directly from the amount payable to the Contractor.

If the Tenderer delays payment to the Contractor, the Tenderer must pay interest on late payment to the Contractor at the agreed credit interest rate recorded in the contract on the delayed payment amount.

5.3. Payment documents:

- A certificate confirming the volume of work completed over time or in stages, signed by representatives of the Tenderer, supervisory consultants (if hired), and the Contractor;

- A table calculating the value of the work volume to be paid according to the agreed price type between the parties (not applicable for lump sum contracts);

- A list of work items not measured by volume

6. Suspension or cancellation of construction contracts:

6.1. Suspension of contract execution:

Cases of suspension of contract execution:

- Caused by errors of the Tenderer or the Contractor;

- Force majeure cases;

- Other cases agreed upon by the parties.

A party has the right to decide to temporarily suspend the contract due to the fault of the other party, but must notify the other party in writing and discuss to resolve the issue so that the signed construction contract can be continued; if the suspending party causes damage to the other party without notification, it must compensate the damaged party.

The time and level of compensation for losses caused by the temporary suspension of the contract shall be agreed upon by both parties to address the issue.

6.2. Cancellation of the Contract:

a) A party has the right to cancel the contract without having to compensate for damages when the other party breaches the contract in a manner that constitutes a condition for cancellation as agreed by the parties or as provided by law. The breaching party must compensate for damages;

b) The party cancelling the contract must immediately inform the other party about the cancellation; if not notified and causing damage to the other party, then the party cancelling the contract must compensate the damaged party;

c) When the contract is cancelled, it becomes ineffective from the moment of cancellation and the parties must return property or money to each other;

6.3. Disputes in Resolution:

In case of disagreement between the parties, disputes shall be resolved through mediation, arbitration, or court proceedings in accordance with the provisions of the law.

7. Rights and Obligations of the Parties Involved in the Contract:

The rights and obligations of the parties involved in the contract must be clearly and specifically defined. These provisions are conditions binding the parties in the performance of the contract and serve as the basis for resolving differences and disputes.

8. Effectiveness of the Contract:

The effectiveness of the contract shall be agreed upon and clearly stated in the contract by both parties.

Part III

IMPLEMENTATION

1. This Circular takes effect fifteen days after its publication in the Official Gazette.

2. The Ministers, Heads of ministerial-level agencies, Chairpersons of People's Committees of provinces and centrally-run cities, Boards of Directors of State-owned Joint Stock Companies, and Heads of relevant units are responsible for organizing the implementation of this Circular.

3. Any difficulties encountered during implementation should be promptly reported to the Ministry of Construction for study and resolution./.