The introduction of VAT scheduled for January 2018 is going to have an impact on construction and consultancy contracts already in place and will be a pertinent point for consideration in new contracts being drawn up in the UAE. Those well ahead of the game may have already included articles to deal with the direct and indirect costs associated with VAT but it is highly likely that a great number have not. For those that have not included such clauses, the additional costs will most probably have to be absorbed under the existing payment terms which will have a knock-on effect to profitability. Those that have included the relevant clause will have the ability to add these costs over and above the contract rates or will at the very least have the grounds to take effective action to do so. As the time for implementation is fast approaching, having your contracts reviewed is something not to be put off any longer.
For many contracts across the construction sector in the UAE, the FIDIC standard forms are commonly used, particularly the FIDIC Conditions of Contract for Construction 1999 (Red Book). The Red Book specifically states that the contractor is obliged to pay all taxes as required under the law hence the contract price is understood to include such taxes based on the applicable rates in force at the ‘Base Date.’ That being said, there are also sections in the same book that state a contractor is able to claim additional costs that arise as a result from a change in the laws of the country where the works are being carried out.
Clause 14.1 (b) of the General Conditions of the Red Book states:
“the Contractor shall pay all taxes, duties and fees required to be paid by him under the Contract and the Contract Price shall not be adjusted for any of these costs except as stated in Sub-clause 13.7 [Adjustments for Changes in Legislation].
Clause 13.7 of the General Conditions the Red Book helpfully provides,
“The Contract Price shall be adjusted to take account of any increase or decrease in Cost resulting from a change in the Laws of the Country (including the introduction of new Laws and the repeal or modification of existing Laws) or in the judicial or official government interpretation of such Laws, made after the Base Date, which affect the Contractor in the performance of obligations under the Contract.”
The Base Date is defined as “the date 28 days prior to the latest date for submission of the Tender.”
What is particularly important to note is that Clause 14.1 includes the phrase “Unless otherwise stated in the Particular Conditions…” That translates to mean if the conditions do not impact clause 14.1 (b) or clause 13.7, a contractor may be permitted to claim amendments to the Contract Price because of the introduction of VAT. For a contractor to make such a claim for extension of time and/ or costs, the contractor should consider the notice requirements under clause 13.7. When looking carefully at additional conditions you should also be wary of sub clause 13.8 which refers to Adjustments for changes in cost and whether such a claim for changed costs has already been dealt with to ensure such a change is not doubly applied.
This standard clause is not included in contracts for Dubai Municipality and the costs of VAT will need to be absorbed in the contract price.
Construction contracts post January 2018
It is safe to conclude that the introduction of VAT will have an impact on the contract price of construction contracts. Specifying whether VAT is to be paid on top of the tender price or if it is included in the Contract Price will be necessary to avoid any misunderstanding or confusion.