13. Contract Practise Flashcards
What if your client tell you the LADs (Liquidated and are to be £100,000 per week?
Firstly I would check the Liquidated and ascertained damages figure is based on a genuine pre-estimate of financial loss and explain in the event of LAD’s are to be applied, they would need to substantiate this figure
What are extensions of time?
Extensions of time adjust the completion date and relieves the contractor’s liability to pay liquidated damages
What are liquidated damages?
A genuine pre-estimate of the likely loss incurred by the employer should the completion date not be met
What must be in place before LDs can be deducted?
Employer must issue non completion certificate and a withholding notice
What if the employer suffered no loss or damage? (Liquidated damages)
It doesn’t matter the damages can still be deducted
What are the benefits of being able to grant an extension of time?
Advantage to the contractor is that is relieves the contractor’s liability damages for a delay they did not cause
It sets a new completion date with maintain’s the employers ability to deduct LDs if another delay occurs
What happens when ‘time is at large’
There is no contractual completion date.
The contractor only has the obligation to complete the works within a reasonable time
LDs cannot be claimed as there is no set date
What are the main elements you would include within an interim valuation?
Preliminaires
Measured work
Variations
Materials on and off site
Loss and expense
Retention
What needs to be in place for you to include payments for materials on site?
The materials should be for the works, they should be protected, delivered to programme and in reasonable quantity
What needs to be in place for you to include payments for materials off site?
Proof that ownership will transfer to the employer upon payment (vesting certificate)
Insurance until materials arrive at site
Materials are clearly labelled s for the sitr and set apart from other materials
A materials off site bond has been provided if required
What is a retention of title clause?
Where a subcontractor or supplier retains ownership of materials until they are paid for them by the contractor. This is why a vesting certificate is needed as the employer may subsequently pay for materials that are not owned by the contractor
How do you evaluate interim valuations?
This will depend on payment mechanism used however for example if lump sum is used, you will go to site and inspect thr works to form a view on the percentage of the works undertaken
You check for materials on site and off site
Value time related and fixed preliminaries items undertaken
Value any agreed variations
This then gets presented a gross valuation less previous payments made and retention then I would make my recommendation to the CA for them to prepare the certificate
How do stage payments work?
Each stage of the project and value assigned will be set out in the contract. When a stage is complete for example completion of concept design, the value assigned to that will be paid out.
What is retention?
It is a percentage of each interim certificate deducted and retained by the employer from each interim payment to the contractor
What is purpose of retention?
It provides an incentive for the contractor to rectify any defects within the contract defects liability period
When is the retention released to the contractor?
Half of the retention is released in the interim certificate after Practical completion
The remaining retention is released in the final certificate after the certificate of making good defects is issued
What is a retention bond?
This is a bond provided by the contractor instead of taking retention from interim payments. It should be equal to the same value as the retention deducted.
The requirement for the bond should be stated in the contract particulars
What happens if the contractor does not maintain the retention bond?
The employer can deduct retention from interim payments
Why might a retention bond be used?
If market conditions are difficult, this can be used to aid the contractor’s cashflow
What are the disadvantages of a retention bond?
It may reduce the incentive for the contractor’s incentive to complete making good defects.
It reduces the employer’s cashflow.
The employer would not get the interest accruing on the amount of retention bond
What is acceleration?
Acceleration is reducing the project timeline and therefore completion of work would be carried out in a shorter timeframe than anticipated or this is also used to carry out programme recovery as a result of delay
What options may be considered to achieve acceleration?
Resequencing works
Increasing the working time by using working longer hours
Increasing resources employed by using larger gangs
Changing the working methods
Increasing the incentives for example offering bonus payments
Which are the most and least efficient? (Resequencing works)
Resequencing the works can be the most cost effective and efficient
The least efficient would be increasinfg working time and resources employed which usually results in lower productivity
What is a fixed price contract?
Where the contract sums are limited to changes. It is an agreed price anything missed off by the contractor will be at their risk
What is a fluctuating price contract?
Where the contract sum is adjusted for changes in the costs of materials, labour
What is the date for completion?
The date stated in the contract for which the project will be finished by
How does this differ from completion date?
Completion date is when the project is finished wheres date for completion is the projected date that also considers the EOT
What does it mean when ‘time is at large’
No fixed completion date
The contractor must complete the works in a reasonable time
What is practical completion?
When the works are substantially complete with minor defects only
The employer is able to gain beneficial occupancy of the development
Half retention is released
The employer surrenders the right to apply liquidated damages
What is sectional completion
The completion and handover of the works to the employer in agreed stages
What is partial possession?
Where the employer requests and the contractor consents to the employer taking possession of the works
What is the difference between partial and sectional completion?
Sectional completion is a contractual obligation to hand over the section at the stated date, partial possession relies on the contractor’s consent
What does the architect have to do at partial possession?
Issue to a written statement to the contractor showing the relevant part and stating the relevant date
What is the rectification period?
This is the time period where the contractor has a contractual obligation to make good any defects
How long is the rectification period?
It will depend on the form of contract but typically 52 weeks
What is a non-completion certificate?
This is issued the employer to certify that the works or work section have not been completed by the relevant completion date
What are the consequences of a non-completion certificate?
Employer may apply LDs
What are the three ways that benefits can be transferred over under JCT contracts?
Collateral Warranties
Third party rights
Assignment
What are collateral warranties?
These create a contractual relationships between the main parties of the contract with an external third party
The contractual relationship would not exist with the third party due to privity of contract
Why are CWs used?
Due to the principle of privity of contract , the rights and obligations under a contract can only be enforced by a party to that contract
Collateral warranties give remedies to external third parties that due to privity of contract would not otherwise have them
Who might want a collateral warranty?
Any third party with a financial investment in a project but not a party to the main contract
Key subcontractors
What are the common clauses/terms in collateral warranties?
Obligations of the collateral warranties should mirror that of the main agreement
Common terms include:
Limitation of liability
Reasonable skill and care or fitness for purppose
Requirements for PI insurance
Assignment rights
Novation rights
What is assignment?
Where the rights and benefits of one contractual party are transferred to a third party
What is the standard commercial position regarding assignment
It is standard to allow assignment of rights twice without consent
The assignment should be notified in writing to the other party
What is novation and how does this differ from assignment
Novation is where a new contract transfers the rights and obligations of one contractual party to a new third party
Assignment is the transfer of contractual rights or contractual benefits only as burdens cannot be assigned
What is the key issue after a design team has been novated?
Whether the new party has the right to take action against the novated party for breaches that occured before the novation
How does novation affect the employer’s rights?
- They lose all contractual relations with the novated party and therefore the right to take action for a
breach. - It is therefore common for there to be a collateral warranty between the employer and novated party
What is a limitation clause?
These are clauses that limit a party’s liability for potential losses
What is available to protect clients from sub -contractors failing?
Collateral warranties. In the event the subcontractor fails to carry out their obligations the employer can have a contractual remedy to sue the subcontractor for a breach of contract
A performance bond can also be used
What are step in rights and why do they exist?
- Step-In Rights means the right of one party to assume an intervening position to satisfy all terms of an agreement in the event the other party fails to perform its obligations under the agreement.
- They typically permit funders to step into another parties’shoes, usually the employer.
- They provide funders protection in the event employer defaults on its loans.
- The funder can then take ownership of the development and sell it off if required.
- A key problem is that the main cause will often result from the developer not being able to sell the
development resulting in them being in arrears. - The funder will stand less of chance of selling the asset than an experienced developer.
What is reasonable skill and care?
The ordinary skill and care expected of an ordinary competent man carrying out the particular service
What is fitness for purpose?
The provision of a service that is suitable for the employer’s intended purpose.
* It is clearly a more onerous obligation than reasonable skill and care.
What is a bond?
A guarantee from the surety in favour of employer that the contractual obligations will be fulfilled by the main contractor.
The bond if called upon will provide financial compensation up to a stated value if the other party does not fulfil their obligations under the contract.
It does not guarantee the completion of the works
What form must a bond be in?
Must be in writing
It will contain a duration, usually until practical completion and a financial limit
What is a Retention Bond?
This is an alternative to the normal contractual retention provisions whereby the Employer holds retention money from the Contractor, which does not help the Contractor’s cashflow
When would you use a retention bond?
When the client does not wish to hold retention on the contractor but requires some assurance or financial cover for rectifying defects at the end of the contract in the event that the contractor fails to return and correct them himself
What is a parent company guarantee?
An arrangement where the contractual performance of one company in a corporate group is underwritten by the the other members of that corporate group
This means that it must complete the works itself if it can or pay financial equivalent
What does parent company guarantee do?
Typically provided by banks or insurance companies
They give the employer a guarantee of payment up ti a stated amount should they suffer a loss as result of the contractors breach of his contractual obligations
What is the standard value of a performance bond?
10% of the contract value, the premium for taking out a bond is added to the contract sum
How can the employer call for payment?
Employer has to prove that the contractor has defaulted in their obligations under the main contract and that loss has been suffered
What is the purpose of a tender bond?
This covers the party inviting the tender if the lowest tenderer refuses to enter into contract with them
This can be important if the inviting party is in turn tendering for work on the basis of that tender
What is a notional final account
A final account that is prepared when the main contractor is facing insolvency
This will typically be of a greater value than the original forecast final account due to costs incurred by the client to appoint a new contractor
What is the purpose of a materials off site bond?
Off site material bond is used to ensure materials are delivered to site. If they fail to deliver the materials employer can then call on the bond
They shouldn’t really be needed if the tenderer selection process is operated effectivrly as only reliable and capable contractors ate then selected
Unnecessary premiums are added to the contract sum, which are unlikely to be called upon
Where might bonds be appropriate?
If the contractor is relatively new and unproved
In difficult economics climate
What are the pros and cons of Parent Company Guarantees
Cons : They are not as secure as bonds
Pros: They do not need to be paid for, they can be unlimited, and they can make the parent company responsible for performance as well as a financial guarantee
What is an ‘on demand’ bond?
Bond that is paid straight away upon the default occurring and request for payment
There is no requirement to satisfy any review or specific conditions to demonstrate the default
Whereas with conditional bonds, the employer must satisfy the surety that the default has occured and the bond must identify what this condition is.
What provisions are available for ensuring Contractor carries out works properly?
Parent company guarantee or performance bonds
What is the difference between insurance and indemnity?
The purpose of indemnity is to protect against legal responsbility or to compensae ot, it is open ended
What is an insurance?
A transfer of a defined risk to an insurance company in exchange of a premium
What are the two types of insurance?
Liability and loss insurance
What is liability insurance?
Insurance that covers against legal liabilities that the insured party owes to others
What is a loss insurance?
Financial cover for losses that fall directly on the insured party
What is subrogation?
A legal technique where the insurer steps into the shoes of the insured in order to take the benefit of any legal rights or remedies they may have against a third party responsible for the loss.
What does ‘joint names’ mean?
Is an LOI that includes a spend limit any use to a contractor?
When are Letter Of Intent used?
Are letters of intent legally binding?
You mentioned the vital role of contract documentation in construction agreements. Can you elaborate on how precise and comprehensive documentation serves as the blueprint for project execution? Can you provide an example from your experience?
How do contractual mechanisms vary throughout the different stages of a construction project? Can you provide an example where you applied different mechanisms at different stages to ensure project success?
In your understanding of payment mechanisms, why is accurate invoicing, certification, and payment schedules crucial for maintaining financial integrity in a construction project? Can you provide an example where precise payment mechanisms positively impacted the project’s financial management?
Can you discuss your awareness of the significance of contract variations, change orders, and claims processes in construction projects? How have you effectively managed these aspects to ensure project continuity and client satisfaction?
Can you provide specific examples of the contractual documents you compiled for the P Programme scheme, including activity schedules, project specifications, and programmes?
How did you ensure that the contractual documents you issued to the contractor were precise and aligned with regulatory standards?
What challenges did you face in ensuring that every contractual term was correct, and how did you overcome them?
In instances where contractors caused delays on the Capital Maintenance Projects scheme, how did you leverage your knowledge of liquidated damages to address the issue?
In the context of the contract stating that extensions can only occur due to force majeure or client-requested changes, how did you manage situations where contractors were responsible for delays?
When conducting the rate review for the Capital Maintenance Projects framework, how did you ensure compliance with the contract’s stipulation that rate increases cannot exceed the CPIH rate? Can you provide an example of a situation where you had to challenge contractor rates?
In advising the project delivery team on change control procedures, how did you ensure that lump sum payments provided both cost certainty and fair risk allocation? Can you share an example where this approach effectively managed project costs?
How did you balance the allocation of risk between the company and contractors when awarding contracts? Can you provide an example of a change in a project and the corresponding additional payment made to the contractor?
Can you give me an example of providing advice to a client regarding contract selection?
Can you elaborate on the process of reviewing and agreeing on new contractor rates? How did you determine the appropriate rates, and what considerations were taken into account?
How would you ensure that lump sum payments provide both cost certainty and fair risk allocation?
How does the Construction Act 2009 account for payment terms?
What changes were made from Construction Act 1998 to 2009
Changes to notice regime, the paying party is now required to notify the sum being paid and introduced new rules on payment and withholding notices
Allowing clauses which permits an employer to withhold payments without notice in the event of a contractor’s insolvency
New rights for contractors who suspend performance for non-payment
LDEDCA 2009
Under the HGCR Act a construction contract must have an ‘adequate mechanism’ for determining what payments are due, and when they become payable. The term ‘adequate mechanism’ was not defined, but the intention was to prevent pay-when-paid provisions
The Housing Grants, Construction and Regeneration Act what can you tell me about it
