13 - Contract Practice

Question 1

377 - What is a contract? (2)

Answer 1

1) A contract is a LEGALLY BINDING PROMISE (written or oral) by one party to FULFIL AN OBLIGATION to another party in RETURN FOR CONSIDERATION.
2) A basic binding contract should COMPRISE FOUR key ELEMENTS; OFFER, ACCEPTANCE, CONSIDERATION and INTENT TO CREATE LEGAL RELATIONS.

Question 2

378 - Please define ‘express terms’? (2)

Answer 2

1) Express terms are the TERMS OF the AGREEMENT which are EXPRESSLY AGREED between the parties.
2) IDEALLY, they will be WRITTEN down in a CONTRACT between the parties but where the contract is agreed verbally, they will be the terms discussed and agreed between the parties.

Question 3

379 - Please define ‘implied terms’?

Answer 3

A contractual term that has NOT BEEN EXPRESSLY AGREED between the parties BUT HAS BEEN IMPLIED into the contract either by COMMON LAW or by STATUTE.

Question 4

380 - What is tort? (3)

Answer 4

1) A tort is a CIVIL WRONG.
2) Part of the CIVIL LAW.
3) A claim in tort is concerned with LOSS OR HARM.

Question 5

381 - How do statutory provisions and contract provisions differ? (2)

Answer 5

1) Statutory provisions are SET OUT BY LAW and MUST BE COMPLIED WITH REGARDLESS.
2) Contract provisions relate to the contract in question and therefore ONLY APPLY TO A SPECIFIC PROJECT / CONTRACT.

Question 6

382 - What is your opinion of oral contracts?

Answer 6

Whilst they are LEGALLY BINDING, the DIFFICULTY lies in PROVING the SPECIFIC TERMS AND CONDITIONS of the agreement. Having a written contract is always the PREFERRED OPINION.

Question 7

383 - What is a breach of contract?

Answer 7

A breach of contract occurs when ONE PARTY in a BINDING AGREEMENT FAILS TO DELIVER ACCORDING TO the TERMS of the agreement. A breach of contract can happen in both a written and oral contract.

Question 8

384 - What is the Local Democracy, Economic Development and Construction Act 2009? (3)

Answer 8

1) October 2011 - the Local Democracy, Economic Development and Construction Act 2009 (the “2009 Act”) came into force in England and Wales.
2) The Act AMENDED the Housing Grants Construction and Regeneration Act 1996 (the “Construction Act”).
3) The Act CHANGED the way CONSTRUCTION CONTRACTS ARE ENTERED INTO and in particular, INTRODUCED an AMENDED regime for PAYMENT and ADJUDICATION.

Question 9

385 - What are the key provisions under the LDEDC 2009 Act? (6 sections, 12 points in total)

Answer 9

1) CONTRACTS
a) The LDEDC Act REPEALS the REQUIREMENT for construction CONTRACTS TO BE IN WRITING therefore, contracts that are partly in writing or wholly oral are now covered. This will allow parties to go to adjudication, even if their involvement is not formally recognised in writing.

2) PAYMENT
a) Under the HGCR Act, a construction CONTRACT MUST HAVE an ‘ADEQUATE MECHANISM’ for DETERMINING what PAYMENTS are due and when they become payable.
b) PAY-WHEN-CERTIFIED CLAUSES can NO LONGER be USED to prevent paying a sub-contractor on the basis that a certificate in the main contract is yet to be issued.

3) PAYMENT NOTICES; CONTRACTUAL REQUIREMENTS
a) The construction contract must specify that either the payer or the payee (but not both) will issue the payment notice.
b) This must be issued not later than 5 days after the payment due date and paid before the final date for payment identified by the construction contract (the parties being free to agree how long the period is between the date the sum becomes due and the final date for payment).
c) The payment notice must specify the sum the payer / payee considers to be due at the payment due date and the basis on which that sum was calculated. A payment notice must be issued, even if the amount of the payment notice is nil.

4) PAYMENT NOTICES; PAYEE’S NOTICE IN DEFAULT OF PAYER’S NOTICE
a) If the payer is required by contract to issue a payment notice and fails to serve that notice in the required form or in the set timeframe, the payee is entitled to issue a default payment notice.
b) A default payment notice obliges the payer to pay the amount due and allows the payee their statutory right to suspend performance for non-payment.

5) PAY LESS NOTICE
a) Paying partied are required to either pay the notified sum specified in either the payment notice or default payment notice, by the final date for payment or serve an effective pay less notice. This allows the payer to amend the sum due if it is later discovered that work covered, or the amount notified within the payment notice turns out to be unsound.
c) To be effective, a pay less notice must specify the sum that the paying party considers to be due on the date the notice is served, the basis on which that sum is calculated and be served no later than the prescribed period prior to the final date for payment.

6) SUSPENSION OF PERFORMANCE FOR NON_PAYMENT
a) The LDEDC Act clarifies the contractor’s right to suspend carrying out the work in the event of non-payment.
b) To validly suspend performance of its obligations by reason of non-payment, a default notice must be issued and there must have been failure to pay. The party in default (the party who has not paid) is liable to pay the payee (contractor stopping work) a reasonable amount by way of costs and expenses incurred by exercising the suspension of all or part of the work.

Question 10

386 - What is a letter of intent? (2)

Answer 10

1) Typically used to describe a LETTER FROM an EMPLOYER TO CONTRACTOR (or from a main contractor to a subcontractor) INDICATING the employer’s INTENTION TO ENTER INTO A FORMAL WRITTEN CONTRACT for works described.
2) The letter of intent typically ASKS the CONTRACTOR TO BEGIN those works BEFORE the FORMAL CONTRACT is EXECUTED.

Question 11

387 - What information is typically included in a letter of intent? (9)

Answer 11

1) Detailed description of the work to be completed
2) Contract sum (if agreed)
3) Date for possession
4) Date for completion
5) Insurance provisions required
6) Method of payment
7) Expiry date of letter
8) Typically states employers’ right not to award the main contract for whatever reason
9) ADR method

Question 12

388 - What are the advantages of a letter of intent?

Answer 12

Allows WORK TO COMMENCE (or place orders) BEFORE main CONTRACT is AGREED / SIGNED.

Question 13

389 - What are the disadvantages of a letter of intent? (3)

Answer 13

1) May LEAD TO COMPLACENCY and DISINCENTIVISE both parties from SIGNING the main CONTRACT.
2) Contractually LESS ROBUST than the main contract.
3) The EMPLOYER LOSES INCENTIVE in NEGOTIATIONS of the main contract.

Question 14

390 - Who issues the letter of intent?

Answer 14

The employer

Question 15

391 - In what circumstances might a letter of intent be used? (3)

Answer 15

1) Where the EMPLOYER NEEDS to COMMENCE works before a certain date.
2) Where MATERIALS have LONG LEAD in times and early procurement would aid the programme.
3) Starting construction works might TRIGGER EARLY FOUNDING.

Question 16

392 - Who signs the letter of intent?

Answer 16

Both the EMPLOYER and the CONTRACTOR.

Question 17

393 - What would you say if the client asked you to draft a letter of intent?

Answer 17

It is a legally binding agreement like a contract; therefore, we would NOT DRAFT those.

Question 18

394 - What are the different types of letters of intent? (3)

Answer 18

1) COMFORT LETTER - letter EXPRESSING a PARTY’S INTENTION to ACT in a particular way at some point in the FUTURE, or at the time of issuing the letter.

2) INSTRUCTION TO PROCEED WITH CONSENT TO SPEND - letter with instructions to proceed and consent to spend is sometimes referred to as an “IF” CONTRACT. This type of letter ALLOWS WORK to PROCEED UP TO a CERTAIN VALUE while the contract itself is being finalised.

3) RECOGNITION OF CONTRACT - referred to as a LETTER OF ACCEPTANCE and is used by some forms of contract (such as FIDIC) to FORMALLY EXECUTE the CONTRACT itself. Generally, such a letter will be issued only once the contract has been substantially agreed and usually marks the completion of negotiations between the parties.

Question 19

395 - Are you aware of any case law relating to letter of intent?

Answer 19

AMPLEFORTH ABBEY TRUST v TURNER & TOWNSEND.

The DEFENDANT PROJECT MANAGERS were retained by the Trust in relation to a project to build new accommodation at a school. The defendant’s retainer included obligations ‘facilitating, assisting and being involved in the procurement of the building contractor and the building contract.’ The CONTRACTOR NEVER SIGNED the building CONTRACT and the whole of the works (which were COMPLETED LATE) were PROCURED using LETTERS OF INTENT. The effect of this was that the TRUST was NOT ABLE to CLAIM LIQUIDATED DAMAGES under the building contract for the late completion of the works.

HHJ Keyser QC held that the DEFENDANT had been NEGLIGENT in failing to take the steps reasonably required of a competent project manager for the purpose of finalising the building contract between the Trust and the contractor.

Question 20

396 - What is a parent company guarantee?

Answer 20

A parent company guarantee (PCG) is a FORM OF SECURITY that may be required by clients to PROTECT them in the EVENT OF DEFAULT on a contract BY a CONTRACTOR that is CONTROLLED BY a PARENT COMPANY (or holding company). Typically, such a default might be caused by the insolvency of the contractor.

Question 21

397 - In what circumstances may a PCG be required?

Answer 21

Parent company guarantees can be particularly USEFUL WHERE a SMAL CONTRACTOR is PART of a LARGE, FINANCIALLY STABLE group of companies. The guarantee is GIVEN by the PARENT COMPANY to the client and in the EVENT the CONTRACTOR DEFAULTS on their obligations, the PARENT COMPANY is REQUIRED TO REMEDY THE BREACH, meeting all the contractor’s obligations under the contract (and / or covering loss and expense incurred by the client).

Question 22

398 - Are there any Acts which govern third party rights?

Answer 22

Contracts (Rights of Third Parties) Act 1999

Question 23

399 - What is the overarching purpose of the (Third Parties) Act? (2)

Answer 23

1) The Act ALLOWS THIRD PARTIES TO ENFORCE terms of contracts that THEY are NOT a PARTY TO, but which benefit them in some way, or which the contract allows them to enforce.
2) It also gives PARTIES ACCESS to various REMEDIES IF those CONTACT TERMS are BREACHED

Question 24

400 - What are the advantages of third party rights? (3)

Answer 24

1) TIME AND COST - Since no separate document (i.e. a collateral warranty) is being entered into, using the Act CUTS DOWN on the TIME and COST associated WITH WARRANTIES being drawn up, signed and circulated.

2) CERTAINTY - Once the rights to be conferred on third parties are negotiated and agreed by all parties, there is LIMITED ROOM TO REVISIT the wording when protection is required as is often the case when new collateral warranties are circulated for signature.

3) SUB-CONTRACTORS - The third party rights process can also be EXTENDED ONTO SUBCONTRACTS, so that (provided the relevant building contract and subcontract are drafted accordingly) an employer can CONFER THIRD PARTY RIGHTS in relation to work done by subcontractors UNILATERALLY. This avoids the need to chase large numbers of individual warranties.

Question 25

401 - What are the disadvantages of third party rights? (2)

Answer 25

1) LACK OF FLEXIBILITY - ONCE the SCHEDULE of third party rights being conferred has been AGREED, there is LIMITED ROOM for NEGOTIATION. While this can be an advantage, as it will help to keep costs down, in some circumstances the INFLEXIBILITY COULD CAUSE a PROBLEM if a specific provision is required for a particular party, such as an incoming tenant or purchaser.

2) NEED FOR CAREFUL DRAFTING - Recent cases have shown the IMPORTANCE of DRAFTING PROVISIONS relating to the ENFORCEMENT of third party rights VERY CLEARLY to ensure that all the necessary rights are conferred on the third party, for example, the right to commence adjudication proceedings if this is required.

Question 26

402 - Why might third party rights be used instead of collateral warranties? (2)

Answer 26

1) IF A LOT OF COLLATERAL WARRANTIES are REQUIRED, it can involve a lot of administration and cost.
2) Third party rights are EASIER TO GET IN PLACE because there is no separate document required.

Question 27

403 - What is a collateral warranty?

Answer 27

A collateral warranty is a FORMAL CONTRACTUAL AGREEMENT which RUNS ALONGSIDE ANOTHER CONTRACTUAL AGREEMENT - its purpose is to CREATE A CONTRACTUAL RELATIONSHIP between two parties (e.g. companies; individuals) where one would not otherwise exist.

Question 28

404 - Can you provide a working example how a collateral warranty could be used?

Answer 28

The EMPLOYER places a CONTRACT WITH a CONTRACTOR, the contractor then places several subcontracts with its suppliers to actually do the works, the employer has a direct contractual relationship with the contractor, but he has no contractual relationship with any of the subcontractors (this is known as ‘PRIVITY OF CONTRACT’).

In these circumstances the EMPLOYER MAY WISH to have a DIRECT CONTRACTUAL RELATIONSHIP WITH the SUBCONTRACTOR so that it can enforce the obligations that the subcontract owes directly, or to create other obligations and rights between them. This might be considered as a security measure if the contractor should become insolvent or if its employment were to be terminated for any reason.

Question 29

405 - Who might want a collateral warranty? (2)

Answer 29

1) ANY THIRD PARTY with a financial or inherent INTEREST IN the PROJECT but is not party to the main contract e.g. funding institution, future tenants, purchasers etc.
2) THE EMPLOYER may want a collateral warranty with KEY SUBCONTRACTORS OR SUPPLIERS, if the contractor were to go into liquidation, otherwise they would have no contractual link with them for redress in case of defective workmanship etc.

Question 30

406 - What is the difference between a bond and collateral warranty? (3)

Answer 30

1) A bond is usually a FINANCIAL COMMITMENT BACKED UP BY A THIRD PARTY, a collateral warranty PASSES ON CONTRACTUAL OBLIGATIONS.
2) Bonds are contained WITHIN THE CONTRACT.
3) Collateral warranties are a SIDE AGREEMENT to the contract.

Question 31

407 - Are there any alternatives to collateral warranties?

Answer 31

An alternative method to confer such rights is provided by the CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999 which allows third parties to obtain the benefits from contracts, which are entered into by others.

Question 32

408 - What are the three ways that benefits can be transferred under a building contract? (3)

Answer 32

1) Collateral warranties
2) Third party rights
3) Assignment

Question 33

409 - Are you aware of any case law relating to collateral warranties?

Answer 33

Parkwood Leisure v Laing O’Rourke

Question 34

410 - What happened in the case of Parkwood Leisure v Laing O’Rourke

Answer 34

In light of the PARTICULAR WORDING used in the collateral warranty, there was no doubt that it should be treated as a construction contract under section 104 of the Housing Grants, Construction and Regeneration Act 1996 (also known as the Construction Act)

Question 35

411 - There is a high probability that collateral warranties will be needed under a D&B contract, can you explain why?

(See book for diagram)

Answer 35

The DESIGN TEAM typically SIT BELOW the CONTRACTOR under a D&B contract; therefore, the EMPLOYER WILL NEED TO RETAIN a CONTRACTUAL LINK with the design team (using a collateral warranty).

Question 36

412 - What is assignment?

Answer 36

Assignment is the PROCESS whereby the BENEFIT OF A CONTRACT IS TRANSFERRED from one party to another, but the BURDEN OF THE CONTRACT REMAINS with the original party to the contract.

Question 37

413 - Can you provide a working example to explain how assignment might be applied? (2)

Answer 37

1) Assignment can arise where a PARTY to a construction contract, collateral warranty or consultant’s appointment WANTS TO ASSIGN THE BENEFIT under the contract TO a THIRD PARTY, such as a purchaser or tenant of the building.
2) BANKS and other FUNDERS will also frequently take an assignment of the benefit of a SUITE OF construction DOCUMENTS in respect of a development, as an additional part of the SECURITY PACKAGE for their loan to finance the development. A bank will want to acquire the benefit of such documents to be able to ASSUME the POSITION of the EMPLOYER under them in the event of the employer defaulting on its financial obligations during the works.

Question 38

414 - What are some of the typical clauses of assignment? (2)

Answer 38

1) It is standard to allow assignment of rights TWICE WITHOUT CONSENT.
2) The assignment should be NOTIFIED IN WRITING to the other party.

Question 39

415 - What is a bond? (2)

Answer 39

1) Construction bonds are PROTECTION for the owner against non-payment, lack of performance, company default and warranty issues.
2) An arrangement where a contractual duty owed by one party to another is BACKED UP BY A THIRD PARTY.

Question 40

416 - Can you list 5 different bonds which might be used on a project? (5)

Answer 40

1) Performance bond
2) Retention bond
3) Off-site materials bond
4) Advance payment bond
5) Tender bond

Question 41

417 - What is a performance bond? (2)

Answer 41

1) A performance bond is a FORM OF SECURITY provided by a contractor to a developer or employer.
2) It consists of an undertaking by a BANK or INSURANCE COMPANY to MAKE A PAYMENT TO the EMPLOYER in circumstances where the CONTRACTOR has DEFAULTED under the contract.

Question 42

418 - When might the employer want a performance bond? (4)

Answer 42

1) If the CONTRACTOR is NEW or UNAPPROVED.
2) If there is CONCERN over the CONTRACTOR’S FINANCES / commercial standing.
3) The ECONOMY might be heading into RECESSION.
4) The EMPLOYER simply WANTS to PROTECT their COMMERCIAL EXPOSURE.

Question 43

419 - What is the difference between on-demand and conditional performance bonds? (2)

Answer 43

1) ON-DEMAND BONDS - Money set out in the bond is IMMEDIATELY AVAILABLE ON DEMAND without needing to satisfy any PRECONDITIONS whatsoever (including establishing the contractor’s liability) unless the demand is fraudulent.
2) CONDITIONAL BONDS - Requires the EMPLOYER TO PROVIDE EVIDENCE that the contractor has not performed their obligations under the contract and that they have suffered a loss consequently.

Question 44

420 - What is the typical value of a performance bond?

Answer 44

Usually 10% of the contract sum

Question 45

421 - What is the typical cost of a performance bond?

Answer 45

The cost largely DEPENDS on the FINANCIAL STABILITY of the contractor and the number of previous claims (if any).

Question 46

422 - What is the risk of not having a performance bond? (3)

Answer 46

1) In the event a CONTRACTOR goes into INSOLVENCY and there is no bond in place, the EMPLOYER will be LIABLE to PAY all the costs to deal with the insolvency.
2) Costs include sourcing a new contractor to complete the works and any premium that will attract.
3) The employer will not be able to pursue the contractor as the company will be in the process of liquidation.

Question 47

423 - Are there any alternatives to a performance bond? (2)

Answer 47

1) If the contractor is part of a group of companies, then the employer may wish to consider a PARENT COMPANY GUARANTEE (PCG).
2) If the smaller company breaches the contract, the parent company is obligated to step in and remedy the breach.

Question 48

424 - What is a tender bond? (3)

Answer 48

1) Requested by the Employer when INVITING CONTRACTORS TO TENDER for a contract.
2) A tender bond provides SECURITY AGAINST the risk of the successful bidder FAILING to ENTER the CONTRACT.
3) It should help to PREVENT IDLE TENDERING.

Question 49

425 - What is an off-site materials bond?

Answer 49

Covers an Employer against the RISK OF PAYING the contractor FOR MATERIALS being manufactured OFF-SITE. If the contractor or subcontractor BECOMES INSOLVENT, the employer can claim on the bond for goods paid for (in the event they are not delivered to site).

Question 50

426 - What is a retention bond?

Answer 50

A retention bond is a TYPE OF PERFORMANCE BOND. Like all surety bonds, it involves three parties;

1) Contractor
2) Employer
3) Bond provider (surety company)

In the bond agreement, the surety will act as guarantor between the two parties. The surety will PAY THE EMPLOYER up to the full amount (like they would have in place of cash retention) IF THE CONTRACTOR FAILS to perform OBLIGATIONS or remedy defects immediately after contract completion.

Question 51

427 - What are the disadvantages of a retention bond? (2)

Answer 51

1) The employer will ultimately have to PAY the PREMIUM for taking out the bond (usually through the contract sum).
2) May REDUCE the CONTRACTOR’s INCENTIVE TO COMPLETE the works promptly and to the desired standard.

Question 52

428 - Why might a retention bond be used?

Answer 52

May be used in DIFFICULT MARKET CONDITIONS to aid the contractor’s cashflow.

Question 53

429 - What is an advanced payment bond? (3)

Answer 53

1) An advanced payment bond is required to PROTECT and SUPPORT PAYMENTS to contractors by the employer in ADVANCE of works being done.
2) Some contracts require the PURCHASE OF MATERIALS IN ADVANCE of a contract commencing, there is always a risk to the employer in advancing money to a contractor who may not be well known to them to allow the purchase of goods to enable the contract to commence.
3) An advanced payment bond protects the payment being advanced in exchange for a bond underpinned by a suitable guarantor to give peace of mind to both parties.

Question 54

430 - What are antiquities? (4)

Answer 54

Items such as;
1) Historical artefacts, pottery and coins
2) Bones or fossils
3) Something of historical interest or value
4) Archaeology

Question 55

431 - What should the contractor do if they discover antiquities? (3)

Answer 55

1) CEASE WORK and SEEK ADVICE prior to proceeding.
2) Take necessary measures to PRESERVE in existing LOCATION and CONDITION.
3) INFORM the CONTRACT ADMINISTRATOR or project manager of the discovery and the location.

Question 56

432 - When objects of interest are discovered, who is liable for the delay and expense incurred? (2)

Answer 56

This DEPENDS on HOW the RISK is ALLOCATED within the contract.

When objects of interest (such as archaeological finds or unexpected artifacts) are discovered during construction, liability for delay and expense typically depends on the contract terms. Under standard contracts like JCT or NEC, these are often treated as Employer’s Risk or Relevant Events:

Contractor’s Liability:

If the contractor knew about potential discoveries in advance or if these were reasonably foreseeable, they might bear some responsibility.
However, if no warning was given and the discovery is unexpected, liability usually shifts to the employer.
Employer’s Liability (Relevant Event):

In most cases, discoveries like artifacts are considered a Relevant Event (JCT) or Compensation Event (NEC), entitling the contractor to an extension of time and sometimes additional expenses.
The employer typically covers delay costs, especially if such risks were not disclosed in pre-construction documents.
Third-Party or Statutory Intervention:

Often, the delay may require involvement from heritage or archaeological authorities, which can extend project timelines.
Costs related to compliance with legal requirements generally fall to the employer.
In summary, unexpected discoveries are usually an employer risk, entitling the contractor to relief from delays and, where applicable, compensation for extra expenses.

Question 57

433 - What are defects? (3)

Answer 57

1) Broadly defined as a DEFECT IN WORKMANSHIP, DESIGN, MATERIALS or SYSTEMS USED. The result is a FAILURE of the building project or structure that causes damages to people or property. This, in turn, leads to financial losses or harm to the owner.

The NEC contract defines a defect as;
2) A part of the works which is NOT IN ACCORDANCE with the WORKS INFORMATION or,
3) A part of the works designed by the contractor which is NOT IN ACCORDANCE with the APPLICABLE LAW or the CONTRACTOR’S DESIGN which the project manager has accepted.

Question 58

434 - What are patent defects? (2)

Answer 58

1) Patent defects are those which can BE DISCOVERED BY REASONABLE INSPECTION.
2) Patent defects would include wall cracks, sagging gutters, broken windows, missing tiles etc.

Question 59

435 - What are latent defects?

Answer 59

Latent defects are those which CANNOT BE DISCOVERED BY REASONABLE INSPECTION, for example problems with foundations which may not become apparent for several years after completion when settlement causes cracking in the building.

Question 60

436 - Why is the defect rectification period typically 12 months?

Answer 60

12 months will ALLOW the BUILDING to GO THROUGH ALL SEASONS OF THE YEAR, therefore, most defects (with exception to latent defects) should become apparent within this period.

Question 61

437 - What is novation? (2)

Answer 61

Novation is the process of transferring both rights and obligations of a contract from one party to another, effectively replacing the original contracting party with a new one. In construction, novation commonly occurs when the design team or consultant engaged by the client is transferred to the main contractor once the project reaches the construction phase.

1) Under design & build contract, novation normally refers to the PROCESS by which DESIGN CONSULTANTS are INITIALLY CONTRACTED TO THE CLIENT, but are THEN ‘NOVATED’ TO THE CONTRACTOR.
2) The contractor will THEN go on to MANAGE THE REMAINING DESIGN PROCESS with the existing design team, rather than bring their own consultants onboard.

Question 62

438 - Are novation agreements required under traditionally procured projects?

Answer 62

Not usually, this is because the DESIGNERS are typically RETAINED by the EMPLOYER.

Question 63

439 - What are some of the advantages of novation? (2)

Answer 63

1) REDUCED LEARNING CURVE - working with the client at an early stage, the design team can gain a strong understanding of the project requirements. If the design team are not novated, this learning is potentially lost and parts of the process will need to be replicated with a new design team.
2) REDUCED CONTACTUAL RISK FOR THE EMPLOYER - the process of novation and the transfer of responsibility to the contractor means the employer assumes minimum risk contractually.

Question 64

440 - What are some of the disadvantages of novation? (3)

Answer 64

1) Following novation of consultants, the employer will generally require COLLATERAL WARRANTIES.
2) The client may need to employ a SHADOW TEAM for compliance purposes.
3) There is potential for CONFLICT-OF-INTEREST, particularly in relation to services that remain to be performed.

Question 65

441 - What is retention?

Answer 65

A percentage of the sums certified for payment under the construction contract (typically 3-5%) is held by the employer during the construction phase.

Question 66

442 - Are you aware of any guidance issued by RICS associated with retention?

Answer 66

Retention - 1st edition 2012

(See book for QR code link to document)

Question 67

443 - What is the purpose of retention?

Answer 67

It is used as an ASSURANCE of project completion and is intended as a SAFEGUARD against subsequent defects that the contractor may fail to remedy.

Question 68

444 - What can the employer use retention monies for? (2)

Answer 68

1) If the CONTRACTOR DOES NOT return to CORRECT DEFECTS, then the retention held may be used to FUND the PAYMENT OF OTHERS to correct the defects.
2) The project manager / contract administrator will need to check the contract on the ability to do this and the relevant notices that should be given to the contractor prior to appointing others to undertake the works.

Question 69

445 - How is retention released to the contractor? (2)

Answer 69

Typically, retention monies are released in two stages;
1) At the time of issuing the completion / practical completion statement, the first half of retention monies will be certified and released.
2) The second half of retention monies will be rectified and released upon the expiry of rectification period.

Question 70

446 - Who typically benefits from interest accruing on retention money?

Answer 70

Usually, the employer

Question 71

447 - Are there any alternatives to holding retention?

Answer 71

It is possible to procure a RETENTION BOND to cover retention that would otherwise have been deducted.

Question 72

448 - What is professional negligence?

Answer 72

Professional negligence is when a PROFESSIONAL FAILS TO PERFORM THEIR RESPONSIBILITIES TO THE REQUIRED STANDARD OR BREACHES A DUTY OF CARE. This poor conduct subsequently results in a financial loss, physical damage or injury of their client or customer.

Question 73

449 - How can the employer / client recover a loss if the consultant or contractor is professionally negligent?

Answer 73

Make a claim on their professional indemnity insurance (PII).

Question 74

450 - What is product liability insurance? (2)

Answer 74

1) MANUFACTURERS and / or SUPPLIERS of products incorporated in construction works are AT RISK OF CLAIMS BEING made against them for damages if defects in these products result in damage or injury.
2) Product liability insurance PROTECTS the POLICY HOLDER AGAINST LIABILITY resulting from these defects.

Question 75

451 - What is public liability insurance? (2)

Answer 75

1) Public liability insurance protects against liabilities for injury to third parties or their property.
2) For example, a member of the public could make a claim if a fallen brick damaged their car, or if a supplier trips over an unsecured cable.

Question 76

452 - What is employer liability insurance?

Answer 76

Employers liability insurance can any the compensation amount and legal costs if an employee claims compensation for a work related illness or injury.

Question 77

453 - What is Contractor Designed Portion (CDP)?

Answer 77

Typically used on traditionally procured projects, design responsibility for SPECIFIC ELEMENTS of the building is TRANSFERRED to the contractor.

Question 78

454 - What is the difference between traditional procurement with CDP and design & build? (2)

Answer 78

1) Traditional procurement with CDP - the design responsibility lies WITH THE EMPLOYER EXCEPT FOR CERTAIN ELEMENTS that are transferred under CDP.
2) Design & build - all responsibility for the design rests WITH THE CONTRACTOR.

Question 79

455 - How are CDP elements executed?

Answer 79

A PERFORMANCE SPECIFICATION is provided at tender stage which the contractor provides the design proposals in response. These proposals are then reviewed by the design team and either accepted, commented upon or rejected.

Question 80

456 - Can you list typical CDP elements which the employer may wish to transfer? (5)

Answer 80

1) Steelwork connections
2) Cladding
3) Roofing
4) Temporary works
5) MEP elements

Question 81

457 - What are domestic subcontractors? (2)

Answer 81

1) Domestic subcontractors are CHOSEN BY the CONTRACTOR to execute a package of works.
2) The employers consultants (e.g. architect, PM, QS etc.) nor the employer themselves influence the appointment or the conditions.

Question 82

458 - What are named subcontractors? (3)

Answer 82

1) The EMPLOYER provides a list of named subcontractors which are PRE-APPORVED.
2) The CONTRACTOR SELECTS ONE FROM THE LIST through the tendering process.
3) Once appointed by the contractor, they then BECOME A DOMESTIC SUBCONTRACTOR.

Question 83

459 - What are the advantages of naming subcontractors?

Answer 83

Naming the subcontractor provides the employer with MORE CONTROL to the selection of a subcontractor by the contractor, while still leaving them with the element of choice and the responsibility of monitoring their performance.

Question 84

460 - What are nominated subcontractors? (2)

Answer 84

1) A nominated subcontractor is SELECTED BY the EMPLOYER to carry out an element of the works (still employer by the contractor).
2) Nominated subcontractors are usually IMPOSED UPON THE CONTRACTOR.

Question 85

461 - What are the disadvantages of nominated subcontractors? (2)

Answer 85

1) As the subcontractor is being imposed on the contractor, the CONTRACTOR will generally be allowed the RIGHT TO OBJECT under certain conditions (safety reasons for example).
2) The contractor and subcontractor may have CONFLICTING procedures, ethics, attitudes etc.

Question 86

462 - What are the advantages of nominated subcontractors?

Answer 86

On the basis the employer has nominated them in the first instance, their WORK SHOULD BE of HIGH QUALITY and ACCEPTABLE to the employer.

Question 87

463 - Are you aware of any guidance issued by RICS associated with subcontracting?

Answer 87

Subcontracting - 1st edition, April 2021

(See book for QR code link to document)

Question 88

464 - What is insolvency?

Answer 88

Insolvency is concerned with the INABILITY TO PAY DEBTS.

Question 89

465 - What can be done at tender stage to identify potential contractor insolvency? (6)

Answer 89

1) Thoroughly CHECK FINANCIAL ACCOUNTS for stability.
2) CHECK for FRONT LOADING of the tender submission.
3) BANK REFERENCES.
4) USE CREDIT CHECKING agencies (Dun & Bradstreet report).
5) PREVIOUS REFERENCES (from consultants and employers).
6) REQUEST A BOND and / or PARENT COMPANY GUARANTEE - this will not prevent insolvency but will give the employer comfort in the event of default.

Question 90

466 - What is termination?

Answer 90

When a contract is terminated, the parties to the contract are no longer obliged to perform their obligations under the contract.

Question 91

467 - Can the contractor suspend works for non-payment? (3)

Answer 91

1) If the notified sum is not paid by the final date for payment, the Construction Act 2009 puts the payee in a stronger position than before. The contractor can now suspend performance of any or all its obligations, not just the work.
2) The contractor can stop insuring the works, postpone applying for a necessary consent or refuse to implement a variation instruction.
3) The payee will be entitled to a “reasonable amount” for its re-mobilisation costs, as well as an extension of time.

Question 92

468 - What are delay damages / LDs? (Statement + 4 key points)

Answer 92

A GENUINE PRE-ESTIMATE OF LOSS suffered by the employer because of late completion of the works. The damages are inserted into the contract prior to signing by the contracting parties.

Key points;
1) LDs should not be a penalty.
2) Quick remedy to avoid having to prove actual loss due to the breach.
3) The contractor knows their liability.
4) The employer should calculate the figure (consultants should not do this on their behalf).

Question 93

469 - What sort of expenses / costs can employers include in the damage calculation? (7)

Answer 93

1) Loss of rent or other income.
2) Additional professional fees.
3) Expected costs incurred by other parties.
4) Cost of not having facility (storage, rent, abortive costs etc.).
5) Capital salaries.
6) Associated legal costs.
7) The figure should not be construed as a penalty; thus the employer needs to be realistic when identifying potential costs.

Question 94

470 - What if your client tells you the damages are £100,000 per week? (2)

Answer 94

1) EXERCISE DUE DILIGENCE - check they do believe £100,000 per week is a genuine pre-estimate of likely loss.
2) If there is a concern - explain the dangers that the damages MIGHT BE CONSTRUED TO BE A PENALTY (they may not be enforceable).

Question 95

471 - Under JCT contracts, what contractual documents should be in place before damages can be deducted? (3)

Answer 95

1) A non-completion notice / certificate.
2) The contractor is formally notified that the employer intends to levy liquidated damages.
3) A pay less notice is served.

Question 96

472 - What is a LD holiday or LD free period? (2)

Answer 96

1) This is essentially just a GRACE PERIOD during which the contractor has NO COMMERCIAL LIABILITY FOR DELAY.
2) For example, if the contractor has a two week LD holiday, LDs will only begin accruing after the delay has continued for two weeks.

Question 97

473 - What is the implication of inserting ‘nil’ or £0 against the damage clause?

Answer 97

Placing ‘nil’ or £0 against the clause effectively means there are NO LIQUIDATED DAMAGES. This action may als prevent the employer from pursuing the contractor for unliquidated damages.

Question 98

474 - What is the implication of leaving the damage clause blank?

Answer 98

If the clause is left blank then the employer CAN PURSUE the contractor for UNLIQUIDATED DAMAGES if they choose to do so.

Question 99

475 - What is the difference between liquidated and unliquidated damages? (2)

Answer 99

1) Contracting parties might agree to pay a certain amount on breach of contract. When such provisions are CREATED IN THE CONTRACT, they are known as liquidated damages.
2) Unliquidated damages are GRANTE BY THE COURTS based on an assessment of the loss or injury caused to the party suffering such breach of contract.

Question 100

476 - If the date for completion is adjusted, what affect would this have on delay damages?

Answer 100

Damages cannot be deducted from the original date, damages are levied FROM THE REVISED practical completion / completion DATE.

Question 101

477 - Can the employer levy liquidated damages if they do not actually incur the loss identified in the initial calculation? (2)

Answer 101

In essence YES, provided that;
1) The damages levied are NOT DEEMED TO BE A PENALTY on the contractor.
2) The original calculation is a GENUINE PRE-ESTIMATE OF LOSS.

Question 102

478 - What is a pre-construction services agreement (PCSA)? (2)

Answer 102

1) A CONTACT between the employer and contractor for PRE_CONSTRUCTION SERVICES.
2) The PCSA documents the services that the contractor is to perform before signing the building contract and identifies the terms and conditions under which these services are to be performed

Question 103

479 - When might a PCSA be used?

Answer 103

In a two-stage tender approach to facilitate early contractor involvement.

Question 104

480 - How can a PCSA benefit the project?

Answer 104

EARLY INVOVLEMENT of the contractor should improve the BUILD-ABILITY and COST-CERTAINTY of the design as well as creating a better integrated project team and reducing the likelihood of disputes.

Question 105

481 - What sort of activities can the PCSA be used for? (6)

Answer 105

1) Contribute to the design process.
2) Advise on build-ability, sequencing and construction risk.
3) Advise on the selection of specialist subcontractors.
4) Help develop the cost plan and construction programme.
5) Help develop the method of construction.
6) Assist with any planning application matters or other approvals.

Question 106

482 - What should be considered when drafting a PCSA? (3)

Answer 106

1) Arrangements DO NOT COMMIT the employer to enter into the building contract. It is important that the employer have means of securing an alternative bid is second-stage negotiations fail.
2) The SCOPE OF SERVICE for the contractor is clearly defined and unambiguous.
3) Usual programme and delay damages clauses are carefully DRAFTED by the LEGAL TEAM.

Question 107

483 - What are the main forms of building contract? (4)

Answer 107

1) JCT (Joint Contracts Tribunal).
2) NEC (New Engineering Contract).
3) FIDIC (International Federation f Consulting Engineers).
4) Bespoke contracts are also widely used.

Question 108

484 - What are some of the considerations when selecting the appropriate construction contract? (8)

Answer 108

1) Nature of the client.
2) Priorities - cost, time, quality and risk allocation.
3) Procurement choice.
4) Value of work.
5) Type / nature of work.
6) Public or private employer.
7) Complexity of work.
8) Size and location of work.

Question 109

485 - What is a bespoke contract? (2)

Answer 109

1) Bespoke contracts are contracts that are TAILORED TO FIT the SPECIFIC REQUIREMENTS of a PROJECT.
2) Bespoke contracts are often used when standard forms are not suitable.

Question 110

486 - What are the advantages of standard forms over bespoke contracts? (3)

Answer 110

1) WRITTEN by experts.
2) Rights and obligations of each party are CLEARLY SET OUT to the required LEVEL OF DETAIL.
3) Parties should be FAMILIAR with the provisions in the form - greater consistency in application and fewer unforeseen anomalies.

Question 111

487 - What are the disadvantages of bespoke contracts? (6)

Answer 111

1) FAMILIARITY is DECREASED as they are rarely used.
2) EXPENSIVE to DRAFT (legal fees).
3) May be POORLY DRAFTED and lead to AMBIGUITY.
4) NOT FAMILIAR to the party administering the contract.
5) Clauses / provisions might be UNTESTED IN COURT.
6) This type of contract could be UNAPPEALING TO the CONTRACTOR.

Question 112

488 - When would a bespoke contract be appropriate to use (rather than a standard form)?

Answer 112

When AMENDING a STANDARD CONTRACT will not do, the most efficient means of achieving a client’s requirements might be to create a bespoke contract.

Question 113

489 - Have you amended a standard contract? Can you explain exactly how you did this? (2)

Answer 113

1) As consultants, we do NOT HAVE LEGAL TRAINING, so we do not amend the contract ourselves.
2) All amendments should be DRAFTED BY the LEGAL TEAM.

Question 114

490 - What are some risks associated with amending a standard contract? (5)

Answer 114

1) Amendments can spoil the DELICATE BALANCE of RISK ALLOCATION.
2) Can create LEGAL UNCERTAINTY.
3) Can ATTRACT A COST premium to tenders.
4) Amendments must be REASONABLE and COMPLY WITH LEGILSATION.
5) COURTS can STRIKE OUT AMENDMENTS if contrary to good faith.

Question 115

491 - What does JCT stand for?

Answer 115

Joint Contracts Tribunal

Question 116

492 - What are some of the contracts in the JCT family? (12)

Answer 116

1) Standard Building Contract
2) Intermediate Building Contract
3) Minor Works Building Contract
4) Major Project Construction Contract
5) Design & Build Contract
6) Management Building Contract
7) Construction Management Contract
8) JCT Constructing Excellence Contract
9) Measured Term Contract
10) Prime Cost Building Contract
11) Repair & Maintenance Contract
12) Homeowner Contract

Question 117

493 - What are key project characteristics which influence which JCT contract is used? (6)

Answer 117

1) Size, value and type of project
2) Need for a contractor design
3) Certainty on final cost
4) Appetite for risk ownership and risk transfer
5) Employer experience
6) Programme requirements

Question 118

494 - When would you use the JCT Minor Works Contract?

Answer 118

The contract is designed for SMALLER, BASIC construction projects where the work is of a SIMPLE NATURE. Minor Works Building Contracts are suitable for projects PROCURED via the TRADITIONAL METHOD.

Question 119

495 - What are the key features of the JCT Minor Works Contract? (4)

Answer 119

1) The EMPLOYER is RESPONSIBLE for the DESIGN. The employer (through its advisors) will need to provide drawings, a specification, or work schedules to specify the quantity and quality of work at tender stage.
2) If the appointed contractor is to be responsible for designing specific parts of the works, then a Minor Works Building Contract with Contractor’s Design must be used.
3) The Minor Works Building Contract is NOT SUITABLE where the project is COMPLEX enough to require bills of quantities, detailed contract procedures, or provisions to govern work carried out by named specialists.
4) Minor Works Building Contracts are normally administered by the architect or a contract administrator.

Question 120

496 - When would you use the JJCT Intermediate Contract? (2)

Answer 120

1) The contract is designed for construction projects INVOLVING ALL the recognised TRADES and skills of the industry, where fairly detailed contract provisions are needed, but WITHOUT COMPLEX building service installations or other SPECIALIST WORKS.
2) Intermediate Building Contracts are suitable for projects PROCURED via the TRADITIONAL METHOD.

Question 121

497 - When would you use the JCT Standard Building Contract? (3)

Answer 121

1) Designed for LARGE or COMPLEX construction projects where detailed contract provisions are needed, suitable for projects PROCURED via the TRADITIONAL METHOD.
2) Te EMPLOYER is RESPONSIBLE for the DESIGN, however, Standard Building Contracts also have OPTIONAL PROVISION for a ‘CONTRACTOR’S DESIGN PORTION’ if the appointed contractor is to be responsible for the design of specific parts of the works.
3) Works can be carried out in sections.

Question 122

498 - When would you use the JCT Major Project Construction Contract? (3)

Answer 122

1) Designed for LARGE SCALE construction projects where major works are involved.
2) It is used by employers who regularly procure large-scale construction work and the work is carried out by CONTRACTORS with the EXPERIENCE and ABILITY to take greater risk than would arise under other JCT contracts.
3) Major Project Construction Contracts are suitable for projects PROCURED via the ‘DESIGN & BUILD’ method.

Question 123

499 - What are the key features of the JCT Major Project Construction Contract? (5)

Answer 123

1) Often in Major Projects, a ‘novation’ agreement is put in place so that the architect or designer who initially worked with the employer continues to complete the design under the responsibility of the contractor.
2) The employer usually employs a representative to exercise their powers and functions under the contract.
3) Project can be carried out in sections.
4) The employer and contractor have their own detailed in-house procedures, so only limited procedures need to be set out in the contract conditions.
5) The contractor is responsible for the design, as well as completing the works. The scale of design work to be carried out by the contractor can vary.

Question 124

500 - When would you use the JCT Design & Build Contract?

Answer 124

The JCT Design & Build Contract is designed for construction projects where the contractor carries out both the design and construction work. Design & build projects can vary in scale, but the design & build contract is generally suitable where detailed provisions are needed.

Question 125

501 - What are the key features of the CT Design & Build Contract? (5)

Answer 125

1) The scale of design work needed to be carried out by the contractor can vary greatly on design & build projects.
2) Contractor will complete a design based on a concept provided through the employer’s advisers or will be responsible for producing and completing the design right from the outset.
3) The design requirements and responsibility of the contractor in design & build projects go beyond that covered in a traditional contract with a contractor’s design portion.
4) The employer normally uses an agent to administer the contract.
5) Works can be carried out in sections.

Question 126

502 - When would you use the JCT Prime Cost Contract? (3)

Answer 126

1) Designed for projects that require an early start on site, often for alterations or urgent repair work (such as fire damage).
2) Usually the exact nature and extent of the work is not known until the project is underway, so full design documents are not completed until work has commenced.
3) Suitable for projects procured via the traditional method, using a cost reimbursement or cost-plus payment structure.

Question 127

503 - When would you use the JCT Measured Term Contract? (2)

Answer 127

1) Designed for use by employers who have a REGULAR FLOW OF MAINTENANCE, MINOR WORKS AND IMPROVEMENTS PROJECTS that they would like to be carried out by a single contractor over a specified period.
2) Measured term contracts are suitable for projects procured via the traditional method, using a measurement payment structure.

Question 128

504 - When would you use the JCT Construction Management Contract? (2)

Answer 128

1) For use on construction projects where the employer appoints SEPARATE TRADE CONTRACTS to carry out the works and a construction manager to OVERSEE the completion of the works for a fee.
2) Construction management contracts are suitable for projects procured via the management method.

Question 129

505 - What are the key features of the JCT Construction Management Contract? (4)

Answer 129

1) Works can be carried out in sections.
2) The contract is used where separate contractual responsibility for design, management and construction of the project is desired.
3) The employer provides the design and enters into direct separate trade contracts with suppliers to carry out the construction works.
4) The construction manager is appointed by the employer to manage the project and act as an agent on the employers behalf. The construction manage also administers the conditions of the trade contract.

Question 130

506 - When would you use the JCT Management Building Contract? (5)

Answer 130

1) Management Building Contracts are suitable for large, complex projects, where flexibility and an early start on site is required.
2) Construction is completed under a series of separate works contracts, which the management contractor appoints and manages for a fee.
3) The management contractor employs works contractors to carry out the construction and the works contractors are directly and contractually accountable to the management contractor.
4) Works can be completed in sections.
5) The employer is responsible for the design and his is usually supplied to the management contractor by the architect or design team working on the employers behalf.

Question 131

507 - What are relevant events? (2)

Answer 131

1) A relevant event is an event on or off site that CAUSES A DELAY TO the COMPLETION DATE of the works.
2) For example, a relevant event could be something that happens during the design and manufacture process to delay things, or a site event that prolong the installation works.

Question 132

508 - Can you provide examples of relevant events in the contract? (11)

Answer 132

1) VARIATIONS and instructions.
2) Deferment of POSSESSION of the site.
3) Suspension by the contractor for NON-PAYMENT.
4) The carrying out of work by STATUTORY UNDERTAKERS.
5) Impediment, prevention, or DEFAULT by the EMPLOYER.
6) Loss or damages occasioned by a SPECIFIED PERIL (fire, flood etc).
7) Exceptionally adverse WEATHER conditions.
8) STRIKE or LOCKOUT.
9) CIVIL COMMOTION or TERRORISM.
10) The exercise of any STATUTORY POWER after the base date by the UK Government or Local or Public Authority.
11) FORCE MAJEURE

Question 133

509 - What is force majeure?

Answer 133

Force Majeure events are usually defined as certain ACTS, EVENTS or CIRCUMSTANCES BEYOND the CONTROL OF THE PARTIES, for example, natural disasters or the outbreak of hostilities.

Question 134

510 - Can you provide some examples of a force majeure event? (5)

Answer 134

1) War, hostilities, invasion, act of foreign enemies.
2) Rebellion, revolution, insurrection, civil war.
3) Contamination by radioactivity.
4) Riot, commotion, strikes, go slows, lock outs or disorder.
5) Acts or threats of terrorism.

Question 135

511 - What happens when a relevant event occurs? (6)

Answer 135

1) Upon it becoming reasonably APPARENT that a delay will occur, the contractor NOTIFIES the contract administrator IN WRITING, stating the particulars and extent.
2) The contractor MUST STATE one of the RELEVANT EVENTS and detail of how and why the delay is occurring or likely to occur.
3) The contractor should give an ESTIMATE OF DELAYY in his notice so that the contract administrator can form his / her own opinion.
4) The contract administrator RESPONDS WITHIN 12 WEEKS stating whether. A relevant event has or has not occurred.
5) If the event HAS OCCURRED, the contract administrator ASSESSES THE DELAY.
6) A NEW COMPLETION DATE is then fixed (extension of time).

Question 136

512 - Assuming the relevant event has occurred and is accepted by the contractor administrator, is the contractor entitled to loss and expense? (2)

Answer 136

1) Relevant events entitle the contractor to claim an EXTENSION OF TIME ONLY.
2) The contractor will need to demonstrate a RELEVANT MATTER has occurred to CLAIM LOSS AND EXPENSE.

Question 137

513 - What are relevant matters? (2)

Answer 137

1) A matter for which the EMPLOYER iS RESPONSIBLE that MATERIALLY AFFECTS the PROGRESS of the works.
2) This may enable the contractor to claim direct loss and / or expense that has been incurred.

Question 138

514 - Can you give some examples of relevant matters? (4)

Answer 138

1) Failure to give the contractor POSSESSION of the site.
2) Failure to give the contractor ACCESS to and from the site.
3) Delays in RECEIVING INSTRUCTIONS.
4) Disruption caused by WORK carried out BY the EMPLOYER.

Question 139

515 - What is the difference between a relevant event and relevant matter? (2)

Answer 139

1) Relevant EVENTS entitle the contractor to claim additional TIME.
2) Relevant MATTERS entitle the contractor to claim additional COSTS (loss and expense).

Question 140

516 - What is a loss and expense claim?

Answer 140

Loss and expense claims are often associated with DELAYS but can be for ANY EVENT here the Contractor INCURS LOSS due to the FAILURE OF the EMPLOYER (relevant matter).

Question 141

517 - What is the key thing to remember when assessing loss and expense claims? (2)

Answer 141

1) It should be ACTUAL LOSS incurred by the contractor.
2) The PRICES in the CONTRACT bill of quantities, contract schedule of rates or preliminaries should NOT be USED (actual costs may be more or less than these).

Question 142

518 - What are the common heads of claim in loss and expense? (5)

Answer 142

1) PROLONGATION (extra site overheads i.e. preliminaries).
2) THICKENING of preliminaries (extra site supervision).
3) DISRUPTION (causing plant and labour to be underutilised / unproductive).
4) INCREASES in labour and material COSTS during the period of delay.
5) FINANCE CHARGES (i.e. interest)

Question 143

519 - What are prolongation costs? (2)

Answer 143

1) Prolongation costs are a type of FINANCIAL CLAIM made by contractors in respect of LATE running of PROJECTS.
2) They typically include claims for the cost of time related resources such as site management, site accommodation and key items of plant and machinery.

Question 144

520 - What is partial possession? (2)

Answer 144

1) A building contract may allow the employer to take partial possession of part of the works, before they have been formally completed.
2) Partial possession often requires the agreement of the contractor but allows the employer to use part of the works for its intended purpose (prior to completion of the whole of the works).

Question 145

521 - What are the key points of partial possession? (4)

Answer 145

1) Not agreed in advance (prior to signing the building contract).
2) Usually, completion is deemed to have occurred for that section.
3) A voluntary agreement between employer and contractor.
4) Contractor must give consent.

Question 146

522 - Can the contractor refuse to give partial possession? (2)

Answer 146

1) Partial possession can only be taken with the consent of the contractor, but that consent may not be UNREASONABLY WITHHELD.
2) The contractor would be entitled to withhold if occupation of completed areas would hinder their ability to complete the remaining areas.

Question 147

523 - What are the typical implications of partial possession (for both the contractor and employer)? (5)

Answer 147

1) HALF RETENTION is released (proportionate to the area of possession).
2) The constructors responsibility for INSURING the works (for the relevant part) ends.
3) The contractors liability for LIQUIDATED DAMAGES ends (proportionate to the area of possession).
4) The employer becomes responsible for any DAMAGES to the works.
5) The DEFECT REcTIFICATION PERIOD commences.

Question 148

524 - What is sectional completion under a JCT contract? (2)

Answer 148

1) Sectional completion refers to a provision within the building contract which allows different completion dates to be set for different sections of the works.
2) Once it is in the contract, the contractor has an obligation to achieve the sectional completion date. Liquidated damages are agreed up front should the section be delivered late.

Question 149

525 - What is the difference between sectional completion and partial possession? (2)

Answer 149

1) SECTIONAL COMPLETION differs from partial possession in that it is PRE-PLANNED and DEFINED IN the CONTRACT documents.
2) Typically, if an employer knows in advance that it wants one part of the works finished ahead of the rest, it should provide for sectional completion.

Question 150

526 - What are the benefits of sectional completion over partial possession? (2)

Answer 150

1) Sectional completion LEAVES LESS TO CHANCE, because the parties have agreed many of the practical consequences of that completion in advance.
2) If something does go wrong (a delay to parasitical completion for example), it is EASIER for the contract administrator TO DEAL WITH DELAYS, changes or even acceleration with sections in place.

Question 151

527 - What are the main options for insuring the works under a JCT contract (3)

Answer 151

1) OPTION A - The CONTRACTOR takes out and maintains joint names all risks insurance of the works for new buildings.
2) OPTION B - The EMPLOYER takes out and maintains the joint names all risks insurance oof the work for new buildings.
3) OPTION C - The only option referring to renovations and involving EXISTING STRUCTURES. This is where the employer takes out and maintains a joint names all risk insurance of the works and the policy also insures the existing structure and contents against ‘specified perils’.

Question 152

528 - What is contractors ‘all risk’ insurance? (3)

Answer 152

1) The essence of the contractors ‘all risk’ cover is protection against the PHYSICAL LOSS or DAMAGE to the WORKS being undertaken.
2) Sometimes referred to as ‘CAR Insurance’.
3) The policy will pay for repair or replacement of the insured works following damage caused by an insured event.

Question 153

529 - What are specified perils? (Statement + 4 examples)

Answer 153

Specified perils tend to be significant EVENTS that would CAUSE VERY SIGNIFICANT DAMAGE to the works, including but not limited to;
1) Fire
2) Explosions
3) Earthquakes
4) Flooding

Question 154

530 - What is subrogation?

Answer 154

Subrogation is a CONCEPT that allows an INSURANCE COMPANY that has paid a loss to STEP INTO the SHOES of its INSURED TO then SUE a party that may be responsible for causing the loss.

Working example; If a contractors crane drops a steel beam (causing damage), the owners builders risk insurer pays the loss, the owners insurer can step into the shoes of the owner and sue the contractor for the loss it caused.

Question 155

531 - What is a joint names insurance policy? (2)

Answer 155

1) Policy in the names of two or more parties (i.e. contractor and employer).
2) Under a joint names policy, the INSURER will have NO RIGHT OF SUBROGATION against any of the insured parties, even where an insured party has caused the loss for which the insurer has had to pay out.

Question 156

532 - What does NEC stand for?

Answer 156

New Engineering Contract

Question 157

533 - What does ECC stand for?

Answer 157

Engineering and Construction Contract

Question 158

534 - Please can you give me an overview of the NEC ECC contract? (10)

Answer 158

1) Suitable for any CONSTRUCTION-BASED contract between an employer and contractor.
2) It is intended to be suitable for ANY SECTOR of the industry, including civil, building, nuclear, oil & gas.
3) There are SIX MAIN OPTIONS to choose from.

Key Points;
4) NO REFERENCE to the QS in the contract.
5) PM assumes FULL AUTHORITY on behalf of the employer.
6) PM CONTROLS TIME AND COST as an administrative function.
7) PM UPDATES THE RISK REGISTER and issues instructions.
8) It is widely accepted that the contract GENERATES a LARGE VOLUME of PAPERWORK / administration.
9) Programme is a contract document.
10) Requirement for parties to give EARLY WARNINGS.

Question 159

535 - What are some of the perceived advantages of using the NEC ECC contract? (4)

Answer 159

1) The contract is based on MUTUAL TRUST AND COOPERATION.
2) Focuses on PRO-ACTIVE RISK MANAGEMENT rather than on what happens when things go wrong.
3) Entourages all parties to RESOLVE COST AND PROGRAMME ISSUES ‘up front’ rather than waiting until the final account.
4) The contract is written in PLAIN ENGLISH.

Question 160

536 - What are the 6 main options (NEC3 ECC)? (6)

Answer 160

1) Option A - Priced contract with activity schedule
2) Option B - Priced contract with bill of quantities
3) Option C - Target contract with activity schedule
4) Option D - Target contract with bill of quantities
5) Option E - Cost-reimbursable contract
6) Option F - Management contract

Question 161

537 - Can you provide an overview of NEC3 ECC Option A please? (2 main points + 4 key points)

Answer 161

1) Option A is a priced contract with an activity schedule where the RISK of carrying out the work at the AGREED PRICES is largely borne by the CONTRACTOR.
2) The advantage of using an activity schedule is that it SIMPLIFIES the administration of the INTERIM PAYMENT PROCESS. With subsequent interim payments being made against the completion of each activity - so no partial payments.

Key Points;
1) Lump sum contract
2) Project is usually well defined at tender
3) Payment on completion of defined tasks
4) Suitable for traditional and design & build

Question 162

538 - Can you provide an overview of NEC3 ECC Option B please? (2)

Answer 162

1) Option B is a priced contract with a bill of quantities (BoQ) where the RISK of carrying out the work at the AGREED PRICES is borne by the CONTRACTOR.
2) Unlike Option A where specific elements of work within an activity schedule are certified for payment upon full completion, when using Option B the contractor is entitled to be paid interim payments based on a percentage of each BoQ item in line with the contract payment schedule.

Question 163

539 - Can you provide an overview of NEC3 ECC Option C please? (3 main points + 3 key points)

Answer 163

1) Option C is a target cost contract with an activity schedule where the out-turn financial RISKS are SHARED between the client and the contractor in an agreed proportion.
2) The Option C contract allows the financial risks to be shared between the parties (employer and the contractor) which MOTIVATES the contractor to deliver the works in the MOST COST-EFFICIENT WAY.
3) The target cost is agreed between the parties which is made up of the contractor’s estimate of the ‘Defined Costs’ plus a fee which is to cover the contractor’s costs, overheads and profit.

Key Points;
1) The target cost is set by the activity schedule
2) The target moves with compensation events
3) The contract uses the pain & gain mechanism for sharking risk

Question 164

540 - Can you provide an overview of NEC3 ECC Option D please? (2 main points + 3 key points)

Answer 164

1) Option D is a target cost with a bill of quantities where the out-turn financial RISKS are SHARED between the client and the contractor in an agreed proportion.
2) The contract operates in a similar way to Option C, however, a BoQ is used instead of an activity schedule.

Key Points;
1) Target cost set by the bill of quantities
2) Target moves with compensation events
3) The contract uses the pain & gain mechanism for sharing risk

Question 165

541 - Can you provide an overview of NEC3 ECC Option E please? (3)

Answer 165

1) Option E is a cost reimbursable contract, often referred to as ‘COST-PLUS’.
2) Under this option, the EMPLOYER will largely take on the financial RISK, the contractor is reimbursed for all their actual costs plus a pre-agreed overhead and profit percentage.
3) Option E might be used where the NATURE or SCOPE OF the WORK to be carried out CANNOT BE PROPERLY DEFINED at the outset, such as emergency work (urgent alteration or repair work).

Question 166

542 - Can you provide an overview of NEC3 ECC Option F please? (3)

Answer 166

1) Option F is a COST REIMBURSABLE management contract.
2) The works are designed and / or constructed by MULTIPLE SUBCONTRACTORS who are contracted to a management contractor.
3) The management contractor is responsible for the work and is paid a fee (the costs that it pays the works contractors plus an additional fee), while the financial risk is largely taken by the client.

Question 167

543 - Which NEC ECC main option carries the least financial risk for the employer?

Answer 167

Option A, this is because it is a fix price contract

Question 168

544 - Which NEC ECC main option carries the most financial risk for the employer?

Answer 168

1) Option E, this is because the contractor is reimbursed the actual costs they incur in carrying out the works, plus an additional fee.

(See chart in book which demonstrates how commercial risk is apportioned for each of the 6 contracts)

Question 169

545 - What are the Secondary Options under NEC3 ECC? (4 categories)

Answer 169

1) W clauses - Dispute resolution
W1
W2

2) X clauses
X1 - Price adjustment for inflation
X2 - Changes in the law
X3 - Multiple currencies
X4 - Parent company guarantee
X5 - Sectional completion
X6 - Bonus for early completion
X7 - Delay damages
X8 to X11 - Not used in ECC
X12 - Partnering
X13 - Performance bond
X14 - Advanced payment to the contractor
X15 - Limitation of the contractor’s liability for his design to reasonable skill & care
X16 - Retention
X17 - Low performance damages
X18 - Limitation of liability
X20 - Key performance indicators

3) Y clauses - dealing with national legislation
Y(UK)2 - The housing grants, construction and regeneration act 1996
Y(UK)3 - The contracts (right of third parties) act 1999

4) Z clauses - bespoke amendments

Question 170

546 - What are Z Clauses?

Answer 170

Z clauses are USED TO AMEND standard form NEC contracts. They can be inserted into NEC contracts as a means of adding conditions or amending wording.

Question 171

547 - What problems can potentially arise when drafting Z clauses into the contract? (2)

Answer 171

1) Poorly drafted Z clauses can be problematic if it DOES NOT WORK effectively with the core clauses in the standard contract. For example, a Z clause which amends one part of the core clauses MAY IMPACT UPON OTHER CORE CLAUSES as there may already be a complex interaction between many of the terms.
2) Z clauses should therefore only be drafted by individuals with a good knowledge of NEC contracts and who understand both the intention of the parties and how the clauses will affect the rest of the contract.

Question 172

548 - What are the different types of float on a NEC programme? (3)

Answer 172

1) Total float
2) Time risk allowance
3) Terminal float

Question 173

549 - Can you explain what total float is please? (3)

Answer 173

1) The time an activity can be delayed from its early start date without delaying planned completion.
2) Available either to the employer or to the contractor (on a first come first served basis).
3) In the case in the example (see book for diagram), total float is 3 weeks, activity F could be delayed by 3 weeks prior to effecting the planned completion milestone.

Question 174

550 - Can you explain what time risk allowance is please? (3)

Answer 174

1) This is the duration allowed in each activity by the contractor to account for the risk in not completing that activity in the minimum possible period.
2) It is ‘owned’ by the contractor and cannot be used to mitigate the effect of a compensation event.
3) For example, an activity might take 3 weeks and 2 days to complete assuming normal circumstances and conditions. However, downtime and poor weather might result in the activity actually taking 4 weeks to complete (time risk allowance is therefore 3 days).

See book for diagram

Question 175

551 - Can you explain what terminal float is please? (3)

Answer 175

1) The duration between planned completion and the current contract completion date.
2) This is also ‘owned’ by the contractor and cannot be used to mitigate the effect of a compensation event.
3) If planned completion moves forward due to unused risk allowance and the gap between the planned completion and contract completion become greater, this can be ‘banked’ as terminal float.

See book for diagram

Question 176

552 - How can the completion date be changed? (2)

Answer 176

1) By a compensation event
2) By acceleration

Question 177

553 - How can the planned completion date be changed? (2)

Answer 177

1) Anything can change it.
2) For example, the contractor could be delayed in completing activities or works could be going faster than originally anticipated.

See book for diagram

Question 178

554 - With reference to the contractor’s programme, how does NEC differ from JCT? (2)

Answer 178

1) The programme is not a contract document under JCT, under NEC it is.
2) The programme plays a significant role in the NEC contract, one of its key functions is to assist with the compensation event assessment process.

Question 179

555 - What are the key responsibilities of the project manager under an NEC contract? (5)

Answer 179

1) The NEC contract has no contract administrator, clerk of works or architect (named in the contract). As such, the project manager is the FOCAL POINT. It is the project manager’s duty to manage the contract on behalf of the employer.
2) The project manager will administer the contract on behalf of the employer and is the designated authority to issue all instructions, notifications and other communications required under the contract.
3) The project manager is the only person who can change the works information using his / her expertise and judgment.
4) The project manager should be on site regularly and be aware of progress, including any changes to price, defects and compensation events.
5) Monitors the execution of project and ensures all parties adhere to conditions of contract.

Question 180

556 - What are the key responsibilities of the supervisor under an NEC contract? (3)

Answer 180

1) Defined as an individual or a team responsible for the contractor’s compliance with the works information (basically to check for defects and is independent to the project manager).
2) The traditional clerk of works role (JCT contracts) is the closest comparison; however, the supervisor is much more involved and has significant authority under the NEC contract.
3) The supervisor raises defects notices for works not in accordance and can issue instructions to search for a defect.

Question 181

557 - What are the key responsibilities of the employer under the NEC contract? (5)

Answer 181

1) Give site ACCESS.
2) Ensure any TRANSFER OF AUTHORITY over and above what is normal within the contract is communicated to the contractors.
3) MAKE PAYMENTS in accordance with the contract.
4) Take out any NECESSARY INSURANCE PROVISIONS.
5) The employer is defined as an organisation and not an individual. This is common practice and avoids issues i.e. when individuals move on within an organisation the liability is kept with the organisation as it is the organisation’s ultimate responsibility.

Question 182

558 - What is the key requirement for the contractor under an NEC contract?

Answer 182

The contractor’s responsibilities are outlined in Clause 2 of the contract. The key / overarching responsibility is to PROVIDE THE WORKS IN ACCORDANCE WITH THE WORKS INFORMATION.

Question 183

559 - What is works information (WI) in an NEC contract? (3 + 3 key points)

Answer 183

1) Works information SPECIFIES and DESCRIBES the works the contractor is to provide and SETS OUT ANY CONSTRAINTS to how the contractor provides the works.
2) Good quality works information is vital to achieving better outcomes for projects and reducing misunderstandings and disputes. Works information should be prepared with individual project requirements and the operation of the ECC in mind.
3) If works information is not precise, there is a risk that the contractor will interpret it differently from the employer’s intention.

Key Points;
4) Specifies and describes the works.
5) States any constraints on how the contractor provides the works.
6) Works information provided by the employer includes; technical information, specifications and drawings, constraints e.g. specific safety requirements, employer’s requirements for work to be designed by the contractor.

Question 184

560 - How can you make the NEC3 ECC a design & build contract?

Answer 184

You would SPECIFY IN the WORKS INFORMATION that the contractor is responsible for carrying out all aspects of the design.

Question 185

561 - What are compensation events? (2)

Answer 185

1) Compensation events are events which are usually not the fault of the contractor and CHANGE THE COST of the work, OR THE TIME needed to complete it.
2) As a result, the prices, key dates or the completion date may be reassessed and in many cases, the contractor will be entitled to more time or money.

Question 186

562 - Does the NEC contract have relevant events and relevant matters like JCT? (2)

Answer 186

1) No, NEC contracts deal with these issues under the SINGLE HEADING - compensation events.
2) Compensation events deal with both time and money.

Question 187

563 - Where are compensation events detailed in the NEC ECC contract and can you provide examples? (1 + 5 examples)

Answer 187

1) Compensation events are dealt with under CLAUSE 60.1

Examples
1) The PM gives an instruction changing the works information.
2) The employer does not allow access to and use of part of the site.
3) The project manager gives an instruction to stop or not to start any work or to change a key date.
4) A test or inspection done by the supervisor causes unnecessary delay.
5) The project manager or the supervisor changes a decision which he has previously communicated to the contractor.

Question 188

564 - What happens if the contractor notifies a compensation event 12 weeks after becoming aware of the event in an NEC ECC contract? (2)

Answer 188

1) The contractor is NOT ENTITLED TO A CHANGE in the prices, the completion date, or a key date. Clause 61.3 requires the contractor to notify a compensation event within 8 weeks of becoming aware of the event.
2) There are exceptions to this - if the event arises from the project manager or the supervisor giving an instruction, issuing a certificate, changing an earlier decision, or correcting an assumption (the 8 week rule does not apply).

Question 189

565 - Will a PMI (project manager instruction) always result in a compensation event?

Answer 189

No, there are numerous instructions that could be given which would not give rise to a compensation event e.g. instructing the contractor to submit a revised programme, or instruction the contractor to remove a person from site (for a reason that is safety related).

Question 190

566 - What are early warning notices?

Answer 190

The early warning process is a mechanism for both parties to identify potential problems to the project. The contract emphasises that both parties are obliged to notify the other as soon as they become aware of a matter that could affect time, cost or quality.

Clause 16.1;
The contractor and the project manager give an early warning by notifying the other as soon as either becomes aware of any matter which could:
- Increase the total of the prices.
- Delay completion.
- Delay meeting a key date,
- Impair the performance of the works in use.

Question 191

567 - What are the key updated from NEC3 to NEC4? (8)

Answer 191

1) NEC4 has introduced TWO NEW CONTRACTS into its suite of contracts;
- Design Build and Operate (DBO) Contract - The DBO contract combines the functions of design, construction, operation and / or maintenance to enable it to be procured from a single supplier.
- Alliance Contract (ALC) - This contract is for clients who wish to enter a single contract with several participants to deliver a project or programme of work. The focus of the contract will be on collaborative working encouraging all parties to work together in achieving client objectives.
2) The RISK REGISTER has be re-named the EARLY WARNING REGISTER to distinguish it from the project risk register often used for wider project management purposes.
3) EMPLOYER becomes CLIENT and WORKS INFORMATION becomes SCOPE.
4) A 4 week PERIOD FOR ESCALATION AND NEGOTIATION OF A DISPUTE has been introduced, which takes place prior to commencing any formal proceedings. This requires nominated senior representatives of each party to meet and try to reach a negotiated solution.
5) In secondary option X12, PARTNERING has been changed to COLLABORATION to better reflect the intent.
6) There is NOW ONLY ONE FEE PERCENTAGE, with no separate fee percentage for subcontracted works.
7) Payments - Contractors MUST SUBMIT APPLICATIONS FOR PAYMENTS, rather than the project manager being obliged to assess if they fail to do so.
8) Language - all contracts are WRITTEN GENDER NEUTRAL (no more he / his).

Question 192

568 - What are the key differences between NEC and JCT construction contracts? (11)

Answer 192

1) NEC is drafted in PLAIN ENGLISH. NEC attempts to eliminate the use of legal terms and instead provides for simple language and gives words their natural meaning.
2) NEC operates an EARLY WARNING process where both the project manager and contractor are required to notify each other of any matter which could affect time, cost or quality.
3) JCT SPLITS UP THE COMPONENTS OF TIME AND COST, dealing with them and their subparts independently at various stages after a change arises. NEC deals with the effects of time and cost together.
4) CHANGES - JCT = variations. NEC = compensation events.
5) Each has an allotted PERSON to ACT on BEHALF of the EMPLOYER - JCT = contract administrator. NEC = project manager.
6) NEC uses 6 main options and secondary options. JCT uses separate contracts (for example Minor Works, Standard Building Contract, Design & Build).
7) The QS is NOT MENTIONED in NEC, only project manager.
8) NEC is considered a more COLLABORATIVE APPROACH to working. Parties are required to work in the spirit of mutual trust and cooperation.
9) Under NEC, the PROGRAMME is a CONTACT DOCUMENT, 25% of monies due can be withheld if the contractor does not submit an accepted programme.
10) NEC has PERIODS OF REPLY (incentivises the parties to respond to each other in a timely manner); however, the contract is heavy on administration.
11) JCT allows for PROVISIONAL SUMS, NEC does not.

Question 193

What is the Housing Grants, Construction and Regeneration Act 1996 (Construction Act)

Answer 193

The Housing Grants, Construction and Regeneration Act 1996 (HGRA - also known as the Construction Act) is intended to ensure that payments are made promptly throughout the supply chain and that disputes are resolved swiftly.

Provisions of the act include:

The right to be paid in interim, periodic or stage payments.
The right to be informed of the amount due, or any amounts to be withheld.
The right to suspend performance for non-payment.
The right to adjudication.
Disallowing pay when paid clauses.
The Act applies to all contracts for ‘construction operations’ (including construction contracts and consultants’ appointments). If contracts fail to comply with the act, then the Scheme for Construction Contracts applies.

Question 194

The Local Democracy Economic Development Act 2009, what is it?

Answer 194

The Local Democracy Economic Development Act 2009 was introduced in 2011 and amended the Housing Grants Construction and Regeneration Act 1996 (the Construction Act). The Act changed the way construction contracts are entered into and in particular, introduced an amended regime for payment and adjudication.

Question 195

Can you provide a working example to explain how assignment might be applied?

Answer 195

Example: Assignment of a Building Contract to a New Property Owner
Initial Scenario:

A property developer (Client A) hires a contractor to build a commercial office building under a Design and Build (D&B) contract.
Midway through the project, Client A decides to sell the property to another developer (Client B).
Assignment of the Contract:

Instead of terminating the contract with the original contractor, Client A assigns the contract to Client B.
Through assignment, Client B now steps into Client A’s role, taking on all the rights and obligations of the original contract, including any warranties, payments, and oversight responsibilities.
Benefits of Assignment:

This assignment allows seamless continuation of the project without requiring a new contract, saving time and costs associated with re-negotiating terms.
The contractor continues the work without interruption, now under Client B’s ownership.
Limitations and Requirements:

For assignment to be valid, the contract may require consent from the contractor before transferring rights to Client B.
Once assigned, Client B holds the right to enforce the contract and is responsible for all obligations (e.g., payments and approvals) going forward.
In summary, assignment allows Client A’s contract rights and obligations to transfer to Client B, facilitating project continuity and maintaining contractual terms despite the ownership change.