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31 January 2018 Principal Contractors: The Rules of Engagement

By Michael Byrnes, Partner

The role of principal contractor is critical in managing the work health and safety risks on construction projects.

Even so, misunderstandings still arise as to the application of the rules relating to the engagement of principal contractors under the Work Health & Safety Regulations 2017 (NSW) (WHS Regulations).  (These rules are in identical or materially similar terms in the states and territories that have adopted the harmonised WHS regime.)

The fundamentals

Every construction project must have a principal contractor.

A "construction project" is defined by the WHS Regulations as a project that involves "construction work" where the cost of the construction work exceeds $250,000.

The principal contractor on a construction project must manage and control the WHS risks associated with that work, as well as perform specific duties additional to those ordinarily imposed upon a person conducting business or undertaking (PCBU) under the WHS Regulations and Work Health & Safety Act 2011 (NSW) (WHS Act), including duties in relation to signage and WHS management plans.

Who is the principal contractor?

The PCBU that "commissions" a construction project is, at least initially, the principal contractor for the project.  It is the default principal contractor.

The word "commissions" is not defined in either the WHS Act or the WHS Regulations. Further, the term "commissions" in this context has not been judicially considered. 

Applying the Oxford Dictionary definition of the verb "commission", the question to determine the default principal contractor can be formulated as "Which PCBU is ordering or authorising the construction project?" 
A few examples help illustrate the issue.

Example One – The Lease: The landlord of a building undertakes structural repairs to the building during the course of a lease; as the commissioning PCBU, it becomes the default principal contractor. If the tenant undertakes major fit-out works during the lease then it, as the commissioning PCBU, becomes the default principal contractor.

Example Two – The Development: A landowner engages a developer to commercially develop its land.  To achieve this the developer, pursuant to a design and construct contract, engages a contractor to design and construct a commercial building to its specifications on that land.  The developer, as the commissioning PCBU, becomes the default principal contractor.  

Identifying the commissioning PCBU will not, however, always be beyond doubt having regard to the different models and structures used for construction projects and the many types of such projects. It is a matter warranting serious consideration in every case, particularly given the restriction (discussed below) on engaging a different PCBU to be the principal contractor.

The right to engage another principal contractor

Under the WHS Regulations the default principal contractor has the right to engage another PCBU as principal contractor for the construction project. To effectively do this the default principal contractor must also give the PCBU it so engages authorisation to have management or control of the workplace and to discharge the duties of principal contractor under the WHS Regulation.

Only the default PCBU, however, has the right to engage another PCBU as principal contractor.  If the default principal contractor engages a PCBU to be principal contractor, that PCBU cannot in turn appoint a third party to be the principal contractor. This restriction, which doesn't always neatly align with commercial reality, is sometimes overlooked or disregarded.

Applying this principle to Example Two above the contractor could not appoint another party to become the principal contractor.  That right sits with the developer and is non-transferable. The developer would to make any such engagement.
There are other principal contractor rules of engagement under the WHS Regulations that are sometimes breached as well. 

One principal contractor at a time

A construction project can only have one principal contractor at any given time.

The conceptual rationale for this is clear.  The principal contractor has management or control of the workplace and it would therefore be inconsistent with that power if it was conferred upon more than one PCBU at any given point in time.

There are, however, a number of considerations that arise from this rule.

First, there is nothing preventing more than one principal contractor being engaged for a project provided there is not more than one engaged at any given time during the life of the project. One principal contractor can "pass the baton" to another (although, as discussed above, the engagement of any principal contractor must be made by the default principal contractor).  

If more than one principal contractor is engaged, it is very important that there be a clearly identified time at which the principal contractor changes, with an effective transition protocol in place to give effect to the change.

Second, there might be scope for a definition of "project" to be legitimately adopted for the purpose of WHS Regulations that is narrower than the colloquial or even commercial use of the term (although there is value in consistency, which should always be an objective).  There could, for instance, be a number of projects within a broader program of works enabling the appointment of multiple principal contractors for the program but one for each "project" consistent with the rule in the WHS Regulations.

That said, such an approach should be adopted with care and only after taking specific advice on the particular circumstances of the broader development being undertaken.  The definition of "project" adopted needs to have a genuine basis with a clear delineation between projects (and physical barriers between the projects reflecting this delineation).

Where there are projects being undertaken side-by-side (or in close proximity) with different principal contractors as part of a program of works it is imperative that all of them comply with the obligation under the WHS Act for each PCBU to, as far as reasonably practicable, consult, co-operate and co-ordinate activities with the others . For example, consideration needs to be given to the management of common access and egress points to each project workplace.

Are you playing by the rules?

The proper engagement of a principal contractor is fundamental to managing WHS risk in construction projects.

In an understandable desire to achieve commercial outcomes, some development agreements (and other property related agreements) disregard one of more of the rules because they are inconvenient or inconsistent with the particular model or structure being adopted. That is a problematic scenario which can leave parties, particularly the PCBU that commissions a construction project and is therefore the default principal contractor, dangerously exposed.

As such, when preparing or reviewing such agreements careful consideration should be given to ensuring that their terms are consistent with the principal contractor provisions of the WHS Regulations. Comprehensively addressing these considerations at the beginning can help avoiding enormous pain down the track. An inability to quickly and unequivocally identify the principal contractor in the event of an incident can be a "red flag" to the regulator that safety risks have not been properly managed. 

Michael Byrnes, Partner  |  Phone: +61 2 9233 5544  |  Email: mjb@swaab.com.au

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This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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