Thailand: Government construction contracts and the EEC

  • Of the THB1tr in investment expected to pour into the government’s flagship Eastern Economic Corridor in Chachoengsao, Chon Buri and Rayong, about THB500bn is expected to take the form of public procurement – government construction contracts and purchase agreements—with THB200bn to be financed by borrowing spread over the five years.
  • Under these contracts, state agencies or enterprises will directly hire domestic and international contractors, using funds from the government budget, to develop EEC infrastructure and other facilities for 10 targeted industries, in parallel with another THB580bn to be financed by the public private partnership (PPP) method.
  • In preparation for the massive EEC programme, the government has prescribed the standard form of government construction contracts to be utilised for all development projects nationwide, effective from 20 Feb 18.
  • Any private-sector contractor, Thai or foreign, who enters into a construction contract with a government agency under the EEC scheme must use this standard form, which has the effect of law. Failure to use the standard form, or arbitrary revisions of material provisions that are not authorized by the Office of the Attorney General (OAG), could render the entire contract null and void.
  • Some provisions in the new form can be seen as imposing hefty burdens on the contractor, compared with construction contracts in the private sector.
  • The most prevalent practice in any construction project is subcontracting. But subcontracting of the entire work is absolutely prohibited. Second, partial subcontracting or work must receive prior written approval from the owner agency. A breach by the contractor of this clause is punishable by a mandatory penalty of at least 10% of the subcontract value, without prejudicing the right of the owner to terminate the contract.
  • Liquidated damages for delays are likewise far stricter than in a private-sector contract. The owner agency has discretion to impose daily liquidated damages in a wide range of 0.01% to 0.1% of the contract value – the contractor can learn the exact rate from the invitation to bid. The rate of liquidated damages can go up to 0.25% per day in an infrastructure contract where delays affect road traffic.
  • In stark contrast to a private-sector contract, the standard form does not limit the liability of the contractor at 10% of the contract value, which means the liquidated damages could ultimately eat up 100% of the value if there are protracted damages.
  • On top of the liquidated damages, the contractor must pay the daily fees of the consulting company that the owner agency hires to supervise construction for each day of delay.
  • Express consent of the contractor is stated to pay other damages to the government, should they exceed the liquidated damages and the consultant’s fee. Under these delay circumstances, the owner agency can terminate the contract if it deems that the contractor is unlikely to be able to complete the work as scheduled.
  • In that case, the liquidated damages do not end on the missed completion date but continue to run until the actual contract termination date. Both the performance bond and retention money will be confiscated and the contractor will be compelled to pay back the remainder of the advance payment.
  • In case of termination by the government, the owner agency will no longer pay instalments; thus the repayment of the advance will be accelerated and the bond called.
  • To the dismay of banks and their overseas counter-guarantors and contractors alike, the advance payment and performance bonds for government contracts usually do not specify expiry dates.
  • The good news is that in international bidding that involves multinational contractors, the government now accepts bid bonds and performance bonds issued by foreign banks without any presence in the country.

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