10. Contract Practise Level 1

Question 1

Why are contractual documents important?

Question 2

What forms of contract are you aware of?

Question 3

What are the conditions of a contract?

Question 4

Can you tell me how you assess an AFP

Question 5

What’s a payment certificate?

Question 6

What are sectional and practical completions

Question 7

What’s a defect liability period?

Question 8

What’s LDs?

Question 9

What is a final account and how would you prepare it?

Question 10

Can you tell me what a collateral warranty is?

Question 12

What are liquidated damages?

Answer 12

A genuine pre-estimate of the likely loss incurred by the employer should the completion date not be met

Question 13

What are extensions of time?

Answer 13

Extensions of time adjust the completion date and relieves the contractor’s liability to pay liquidated damages

Question 14

What must be in place before LDs can be deducted?

Answer 14

Employer must issue non completion certificate and a withholding notice

Question 15

What if the employer suffered no loss or damage? (Liquidated damages)

Answer 15

It doesn’t matter the damages can still be deducted

Question 16

How do you assess Cost when assessing a CE?

Answer 16

Actual Defined Cost
Work already done prior to the date the project manager instructed, or should have instructed, the contractor to submit a quotation.
• The contractor needs sufficient resources to maintain full and accurate cost records, which includes its own cost and/or subcontractor’s cost.
• It may require amending traditional application payment cycles while implementing an open book arrangement, so that at any point in time the contractor is able to identify the actual cost expended by subcontractors on works already carried out.

Forecasted Defined Cost

• Second is forecasting the defined cost of work not yet done.
• The assessment of these costs requires detailed knowledge of the progress of the individual work or trade packages and a realistic estimated final account for each subcontractor.
• As there is a limited period (the default being 3 weeks) for the contractor to submit its CE quotation, the Contractor has to have a means of forecasting the cost of the change inherent in the CE.

Adjustment of Fee

• The third matter is an adjustment of the fee which, as it is a percentage addition to the defined cost, is simply dependent on ensuring that the defined cost is correctly assessed

Question 17

What are delay damages?

Answer 17

• A genuine pre-estimate of the likely loss incurred by the employer should the completion date not be met.
• X7 in NEC3 ECC. Amount defined in Part 1 of Contract Data
• If Contractor does not achieve completion date and X7 selected then delays damages are due from Contractor to Employer

Question 18

What is a Bond?

Answer 18

• An arrangement where a contractual duty owed by one party to another is backed up by a third party
• It must be in writing, it is common for it to be a deed
• It will contain a duration and a financial limit
• Provided by bank for a fee

Question 19

What are the types of Bond?

Answer 19

• Performance bond
• Retention bond
• Materials off site bond
• Advance payment bond

Question 20

What is a performance Bond?

Answer 20

• “Contract of Guarantee” whereby one party (the Guarantor) undertakes to pay damages to a second party (the Employer) arising from breach of contract by a third party (the Contractor).
• Standard value is 10% of contract sum
• To call for payment Employer must prove that the contractor has defaulted in their obligations under the main contract and that loss has been suffered

Question 21

Whats is a Parent Company Guarantee?

Answer 21

An arrangement where the contractual performance of one company in a corporate group is underwritten by the other members of that corporate group.

Question 22

How are insurances dealt with under NEC3 ECC?

Answer 22

• Covered under section 8 - Risks and Insurance
  • Contractor provides insurance stated in insurance table and any additional stated in Contract Data unless Employer stated to provide
  • In joint names and covers Contractor’s risk events from starting date until defect cert or termination cert issued
  • Before start date and on each policy renewal, Contractor submits insurance certificates to PM
  • Any amount not received from insurer borne by risk owner (Contractor or Employer)
  • Employer can insure a Contractor’s risk, cost borne by the Contractor and vice versa
  • PM submits insurance policies and Certificates to be provided by Employer to Contractor for Acceptance.

Question 23

How are advanced payments covered under NEC3 ECC?

Answer 23

X14 Advanced Payments
o It allows the contractor to receive lump sum payment in advance
o The payments, values and dates should be set out in the contract particulars
o They may be used where the contractor incurs high costs at the start of a project
o E.g. items with long lead times or the need to purchase specialist plant for manufacturing

Question 24

What are the disadvantages of Advanced Payments?

Answer 24

o May reduce the incentive of the contractor
o Bad for the employer’s cashflow
o Concerns over why the contractor can’t fund the expenditure – insolvency worries

Question 25

What is the dispute resolution procedure under NEC?

Answer 25

If HGCRA applies then use W2, if not use W1 which contains far greater detail regarding adjudication. Party may refer a dispute to adjudicator at any time, who is appointed under the NEC Adjudicators Contract. If a party is not satisfied with adjudicators decision can serve notice within four weeks of decision to go to a tribunal which will be stated in Contract Data e.g litigation/arbitration. The adjudicator cannot be called as a witness.

Question 26

If Option C is incorporated, how does this amend the core clauses?

Answer 26

States how the application of the pain/gain mechanism shall work. States information in the activity schedule is not works or site information. Programme must show how the activities on the AS relates to the operations on the programme.

Question 27

How do you assess & implement changes to the Target Cost?

Answer 27

NEC3 - Compensation Events - Cost of work estimated & agreed up front before work carried out (If actual costs known then included). Contractor should be able to gain on the CE. Only client risks or CE listed in the contract can form a CE. An allowance is made in the target for contractors risks.

Question 28

How does a pain gain mechanism work?

Answer 28

The pain / gain mechanism is used on a target cost form of contract, and is included within the tender documents by the client upon issue. Once the target cost has been set for the project the pain gain mechanism acts as an incentive to beat the target. If the contractor beats the target he will gain a share in the savings made. If he exceeds the target, more than likely he will be responsible for 100% of the cost. This will depend on what is contained within the contract documents.

Question 29

How do you set a target cost?

Answer 29

Prepare the Tender Documentation & appropriate pricing document (AS or BQ) for issue to the Tenderers, who would return as part of the submission. Analyse the pricing document & look at the programme durations proposed by the contractor to ensure they were reasonable & the level of resources are appropriate. Review quantities & rates Labour - number & efficiency & rates, Plant - number & output & rates, Materials - quantity & rates. Subcontract - Verify procurement strategy & back to back contracts (competitive quotes recieved / benchmark rates / lowest quote used / subcontract uplift). Check rates for project staff & ensure only employed during the appropriate periods in the contract (planner & setting out engineer - 100%). Site compound is adequate for level of staff & labour to be provided. Check any unpriced items and determine if & where included. Determine where insurances are priced. Site vehicles - May be cheaper to purchase rather that rent. What risks have been priced or included for. Check level of Fee & Profit Target must be set at a realistic level & must be capable of being beaten (Too low - contractor penalised &will look for ways to increase target - Too high - no incentive to innovate & drive down cost) Pain / Gain Mechanism should be appropriate to allow contractor to make further profit

Question 30

How is a target cost built up?

Answer 30

Consists of a forecast of the construction costs, allowance for preliminaries, risk allowance, % additions for management fee

Question 31

How is the contractor reimbursed under a target cost?

Answer 31

Paid actual cost up to the value of the target for undertaking the works. PG mechanism then invoked & depending upon arrangement will affect how much the contractor will be reimbursed.

Question 32

What are the advantages & disadvantages of using a target cost?

Answer 32

Advantages: 1) Minimum enquiry definition 2) Short bid time / quick start on site 3) Conflict minimised / Partnering ethos 4) Contractor incentive to manage resources 5) Employer shares in savings 6) Does not pay full amount for risks that do not materialise 7) Early contractor involvement Disadvantages: 1) Employer risk of being financially exposed 2) Cost checks & monitoring can be time consuming & expensive 3) Bid evaluation difficult 4) Reduction in competition"

Question 33

What problems may arise when setting a target cost?

Answer 33

``` Design / specification insufficient to allow robust target to be set. Programme not realistic. No commitment from contractor. Risks not apportioned fairly. Lack of trust. ```

Question 34

How would you manage costs on a target cost contract?

Answer 34

Carry out monthly audits on the valuations which would be submitted based on actual cost - Check 10% of value. Staff timesheets & rates. Material / Plant invoices against returns. Labour payroll sheets. Subcontract certificates / invoices. Duplication of costs between management fee. Review programme & planned resources to determine actual progress & efficiency.