Case Study Flashcards
• What did your duties entail?
• Change Management
○ Instruct substation base
○ Instruct disposal on separate site
• Contract Admin
○ Completion /non
Monthly valuations
Taking meeting minutes• Why was the contractor facing material and labour issues?
- Increasing inflation (demand outstripping supply)
○ Brexit (change to existing supply chain - constrained supply)
○ Covid
- Widespread breaking of supply chains due to nationwide closures
- Pent up demand over lockdown and continued social restrictions - Interest rates rising but still historically low (cost of debt remains attractive)
- Supply shortages
- Labour shortages
• Why would this impact on their cashflow? (Material and labour increases)
Sub Contractors were unable to maintain price
Main contractors margine was squeezed
Could they not have foreseen issues with materials and labour?
Issues were known prior to contract but continued to worsen.
e.g. Ukraine Conflict
• Whose risk is this? (Rising costs)? Which procurement route would this be a client risk?
○ The Main Contractor takes the risk for cost (trade packages under D&B).
- Between contract award and sub contractor procurement prices increased which squeezed the MC's margins - On Construction Management this would be a direct client risk.
• What would the implications of non-completion be? Did you issue one?
○ Non-Completion identifies that the contractor has not completed the work as outlined in the contract.
The implication of this is that time is not at large in that now the MC is liable for liquidated damages.
Non completion notices were duly issued for all units.
• Why would the contractor request direct payment for materials?
The contractor was having cashflow issues.
Where usually the MC might acquire materials at the start of the month and then get paid at the end, due to increased demand they were having to cashflow this payment for 2-3 months.
• Signs of contractor cashflow
- Significantly reduced site labour / activity
- Overclaiming on valuations
- Subcontractors and contractor consultants reporting late or no payment
- Requests for advance payment
- Programme delays
- Difficult to get in contact
- High staff turnover / reduction in staff
• What is the main risk of making an advance payment to the contractor? What happens if the contractor is replaced?
- If a payment is made to the contractor but is not permitted under the contract i.e. cannot be directly attributed to something at least not in the correct way then this money would be at risk.
e. g. If £1m was certified and paid to the contractor but they subsequently became insolvent the main risk would be the accuracy of the works valuation.
Works could be taken over by another contractor after costs of securing site, clearance of existing site setup and the appointment of a new party.
However if the contractor was paid £100k directly from the client and they went insolvent then this payment would be lost if it was not appropriately aligned with the works
• Why did the client verbally agree to pay the contractor? (outside of contract)
- The contractor requested payment directly from the client to secure cladding materials however the client had not consulted me before doing this.
- The client was seeking to help the contractor to ensure materials were secured to avoid further delay but did not consider that this payment would be at risk
• What did you say to the client about this? (agreeing to pay the contractor for advance payment without contractual arrangement)
What did you suggest be done instead?
- I advised the client against paying the contractor directly as the funds would be at risk. (Not obligated to pay as not included in the contract)
- Discussion was required as to how to work with the contractor to improve progress but not put the client at risk.
Why could you not include the advance payment for the cladding in the valuation?
Would it not be the contractors risk if they were paid?
- Payment for the cladding was not listed in the contract.
- The clients fund would be at risk as there would be no mechanism for identifying the payment in the contract.
What is the advance payment process?
- Item listed in the contract and should include date of payment and when contractor will pay it back i.e. deducted over remainder of contract
- Vesting certificate (confirms transfer of ownership from supplier)
- Item clearly marked and protected (in storage facility)
- Insured against specified perils until delivery to site (contractor assumes risk)
- Must be an Advance Payment Bond to secure the payment against contractor default
- The Bond should be an on-demand bond to pay out immediately on demand rather than with preconditions
• Would a contractor not normally be expected to make an advance payment for materials?
Why were suppliers increasing requirements?
- Due to the unprecedented lack of supply vs demand suppliers have been de-risking themselves by increasing the requirements of securing materials with demand increasing as well as the material costs
• WHat was the impact on the MC from the supplier requesting payment before it would usually required?
As the supplier was requesting payment ahead of when the material would be required on site the contractor had not anticipated for this in their cashflow so they would be say outlaying say £100k and would not get this back for 2 or 3 months.
Whilst in isolation this might not appear significant, several key packages with this requirement across contractors projects can be a risk and is something they need to carefully consider. Hence why they requested payment from the client.
What is cashflow?
What is the main impact of the MC not managing cashflow?
WHat is the worse case scenario for poor cashflow managment?
- Cashflow is the management of money in and out on a month on a monthly basis.
- For the contractor they need to understand all their costs and when they will be due and when they will get paid from the client.
- If the contractor is slow to pay sub contractors this will likely impact their reputation and sub contractors are unlikely to perform and will look for work elsewhere.
- End result is that they are unable to pay debts and risk becoming insolvent.
What was the risk for the Client if they did not make the advanced payment to the Contractor?
The contractors cashflow position could worsen which would slow down progress against the programme.
Whilst this was the contractors risk it (LD’s) the programme would still suffer.
• In hindsight should you have refused to aid the contractor and left them to resolve the problem?
- There was a genuine concern that the contractor was facing cashflow issues that could have resulted in insolvency.
- It would not be in the clients interest to see the contractor fall into insolvency as re-tendering mid contract would have taken longer and been costlier than supporting the contractor.
• How did you deal with the fact that the client had agreed to pay the contractor ?
- I highlighted to the Client that their funds would be at risk as the advance payment was not listed in the contract.
- I iterated to the Contractor that the Client was not obligated to make an advance payment under the contract but I said we would work collaboratively to deal with the issue
• If the client payment could not be considered how could have it been dealt with to include it?
Whilst not obligated the same procedure could have been followed for advance payment.
A deed of variation to the contract would have to be instructed to list the item in the contract.
What is an advance payment bond?
Why was it not used? (Even if it was included in the contract?)
- An insurance backed product, provided by the Contractor as surety against the contractor not performing / becoming insolvent.
- The Bond should be an on-demand bond to pay out immediately rather than with preconditions (conditional - employer has to proove non-performance and resultant loss)
- Detrimental to programme and cost to contractor would worsen their cashflow (likely to be expensive given to procure a bond due to their cashflow issues)
How much would an advanced payment bond cost usually?
How would a contractor justify the cost?
How would the cost of the advanced payment relative to the contract sum impact on negotiation?
Would it be more given the contractors cash flow position?
○ Typically the would cost in the region of 10% of the insured value. e.g. £100k of advanced payment (Total Material Cost circa £1m) would cost £10k.
The contractor must weigh up whether the cost of this can be justified to ease its cashflow.
if an essential component of a scheme was 10%+ of the contract value then market might dictate that the client pays or shares cost with contractor but if an item was of a much lower value (relative to the contract) the bond cost would more likely have to be covered by the contractor.
When are advanced payment bonds typically used?
High value or tailored items have to be made well in advance (2 months+ from when they are required)
Cladding
Lifts
What sort of item might this relate to? advance payment
For example, a specialist MEP such as a lift which needed to be ordered well in advance of it being required onsite.
Steelwork - tailored to project
Cladding - specific colour made to order
• Why was the bond deemed commercially un-viable?
- The contractor was facing cash flow issues
- The cost of the bond would further increase the contractors costs and put greater pressure on them
- Question on whether they would have been able to procure a bond at all
Who would have paid the premium for the bond in this scenario?
Who would pay usually?
- The contractor would pay the premium
- The bond premium might get added to the contract sum if for example the item requiring advanced payment was significant relative to the contract sum (5/10% plus)
Did the contractor make an EoT claim?
- The contractor made a claim that they were impacted by the prevailing economic conditions in respect of material and labour shortages and price surges.
- However this could not be attributed to a Relevent Event under the contract.
NOTE - Client informally advised the contractor that he would not deploy LD’s if the contractor achieved the revised contractor projected completion date (revised programme).
This was not formally confirmed and the client reserved the right the issue LD’s anyway.
Why didn’t you award one an EoT if the client had suggested he would not deploy LD’s?
- Maintain the contractors responsibility for delivering the works (threat of LD’s)
The Client has appointed the contractor to undertake the works and although the economic climate was challenging the Contractor had knowingly agreed to undertake the works and be liable for Liquidated Damages should they fail to achieve the works in the set timescales.
How would you issue an EoT?
- Assess contract claim (RE)
- Respond within 12 weeks or sooner if completion sooner
- Confirm to the contractor the agreed revised completion date
L2 - Delay in approval of 2 weeks
How would the issue of an EoT remove the right of the employer to deploy LD’s?
The EoT put back the contract completion date
Why did you decide to not to issue LD’s?
- Progress was very slow and contractor readily admitting they were having cashflow issues.
- Commercial decision taken to avoid further squeezing contractor where they had lost their margin
- LD’s are primarily set to discourage the contractor from not progressing the works (otherwise there would be no reason for them to complete the works on time)
How was the client to supplier payment implemented?
Ok for Client to acquire materials directly
10% initially then full payment
MC/SC request when required
Delivered to site
Works valued via interim payment
Pay less notice for direct payment to SC and supplier
SC is paid directly
** Is supplier paid in full upon delivery?
Once the cladding had been assembled the works would be valued less the payment made direct to the supplier
What were the risks? (Direct Payment)
What was the main concern of paying the main contractor?
Contrast against advance payment to MC The main concern of paying the contractor in advance for materials when they were experiencing cashflow issues was that if they did become insolvent it would be challenging to reclaim the advance payment of the materials.
The key downside was that the client was having to outlay funds ahead of expected.
• Would the Client become responsible for the materials when they got delivered on site?
The Contractor would still be responsible for the materials when they arrived onsite in terms of protecting and securing them.
Why were you concerned about materials being delivered prematurely?
- It is not beneficial to have materials on site too early as they must be protected from weather and on site activity as well as being secure from theft.
• If the contractor were to remove (steal) materials from site would there be less risk if they were installed or not?
- If the materials had been installed and subsequently removed this would be preferable to the Client as they could initially be included in a valuation and then a pay less notice be issued to deduct payment to account for the theft.
• Did you not pursue other cladding suppliers?
○ We did discuss with the MC whether they could acquire materials from another supplier and we did consider amending the material however it was apparent that due to demand massively outstripping supply there were limited options.
In order to secure materials suppliers had started stipulated that greater sums be paid ahead of when they would usually request them. e.g. 10% deposit to secure order
• Why was the supplier doing this? (Aside from simply taking advantage of the situation)
The entire supply chain had become strained and costs were escalating across the board due to all the uncertainty of lockdown and limited labour supply
• How did you present the options to the client? e.g. critical analysis (consideration of contractual implications)
I clearly set out each of the options along with their pros and cons.
• How did you address the fact that paying the contractor directly was risky?
○ I was direct to the client in that they should not pay the contractor directly
○ Making a direct payment to the contractor not in accordance with the contractor will not benefit from the protection that the contract provides to the client.
• How did you demonstrate collaboration with the contractor?
○ In accordance with the contract there were no listed items for advance payment so the Client was under no obligation to make a payment.
○ I acknowledged the challenging economic climate in respect of material and labour availability and cost.
• Should you not always be collaborative? / Why was this significant?
- My first obligation was to protect the clients’ interests.
- Whilst the contractor could have been left to deal with the issue themselves, by taking a collaborative approach it was deemed to be beneficial overall to the project.
• How did you demonstrate Client Care? e.g. payment to contractor bad idea - looks at other options
○ Whilst the Client ultimately makes project decisions, they took a decision which could have placed their funds at risk.
○ I demonstrated Client Care by clearly outlining the risk they held by directly paying the MC for advance materials outside the contractual requirements.
What did you learn on the project?
- Collaboration is key to project success.
- The contract clarifies risk and responsibility for each party but they still need to work together.
• Is there something you could have done better?
- Whilst I wasn’t involved at the tender stage of the project the client negotiated very hard with the contractor squeezing their margins.
- Although the contractor agreed to the price for delivering the works, the project illustrated that there can be detrimental consequences to one party taking most of the risk.
• How could you of checked the contractor financial standing? Or how would you?
At tender stages:
- Request and review company accounts
- Credit rating,
- References from previous employers .
• What might be concerning / be a red flag? (Contractor Company Review)
○ A falling working capital ratio
○ Dropping profit levels / falling cash flow
○ High borrowing levels
○ Declining credit rating (Experian)
• Did anything else go wrong on the project?
○ Another one of the key sub-contractors (steelwork) contacted the client to say there were getting paid late by the MC. This followed on from slow progress and the MC requesting advance payment for cladding materials.
○ Following consultation with the MC and SC it was agreed that the SC would also be paid directly. This was implemented by certifying progress on site under the main contract and then issuing a pay less notice to the amount due to the contractor.
What was the cladding package value? Was the £100k a deposit/part payment?
£1m
Yes
• When would the client be repaid?
- The payment would be deducted over the the remaining duration of the project
e. g. £1m split over 5 months - £200k x 5
○ In essence the client was cash flowing the contractor for the cladding
• What were the implications of the project being on 3 separate sites?
○ There were efficiencies that were realized mainly due to the close proximity of the sites however each site still had to have its own site setup with temporary services, security.
• What was the cost per £/m2 of the scheme?
£60/ft2
• What were the key “Other Project” aspects
○ EA fee
○ CDM advisor
- Ecology Fee (Butterfly mound had to be protected from construction and regularly inspected)
• What is a dock leveller? Level access door? (Inc Construction details)
○ A dock leveller allows a lorry to reverse up to a warehouse and open its doors at the same level as the warehouse floor to make loading easy (avoid lifting)
○ The frame for the gap is pre cast concrete to protect when the lorry comes up against the warehouse (If it was just cladding it would get damaged)
○ Level access doors allow trucks to drive into the warehouse and typically have roller shutter doors
• Why didn’t you recommend a traditional contract? Construction management?
○ A traditional contract would not have provided cost certainty and the client would take the risk for the design.
Construction management would have been more economical however the client would take the programme risk and have to coordinate the works.
• Why did you chose a Parent Company Guarantee?
WHo was the PCG company?
DId you contact the PCG? Did they assist?
○ No cost
○ Parent company to take obligation of contract should contractor not perform
○ Utilized for the contract limitation period where as a Performance Bond expires on completion
Mark Wakefield Demolition
The Managing Director did attend meetings and generally aided the MC (ECE) in moving forward progress.
• Disadvantage to PCG?
If subsidiary company is insolvent then the Parent Company may also not be in good financial health (check PC as contractor) or disinterested to support a declining business.
Equally the PCG may be very motivated to support the MC to get them back into financial shape.
• How did you check the PCG?
○ I wasn’t involved at tender stage but if I was I would have undertaken the same checks for the contractor:
Credit check (Experian)
Turnover
Profit
Cash flow
• Why did you not also have a performance bond?
○ Cost circa 10% plus of contract and would further worsen contractor cashflow position
Question over the terms that would be available given the contractor was not performing well financially e.g. conditional pay out would have been likely which would not be favourable to CLient
• Are there any other security options?
○ Retention - for defects rectification
CW - Hold MC accountable to third parties (funder)
• What is assignment?
CW’s should be assignable e.g. client can pass rights to a buyer
• When would you use a letter of reliance?
○ For pre contract investigations such as GI, Flood risk where information has informed design
○ If the information provided proves to be inaccurate then the party can be pursued for damages
• Why would the contractor be interested in an LoR?
○ If there is no LoR then there would be a question as to the validity of the information.
- i.e. why would the informing party not wish to be held to account.
• What is the purpose of liquidated damages?
Discourage the contractor from failing to complete works by the contract completion date
• Whos sets the LDs?
Client
• How did you set the level of LD’s?
Did you advise what the figure should not be construed as?
○ I advised the client that they should establish what loss they might incur should the project complete later than agreed in the contract
- loss of rent
- increased finance
I was clear that the figure should not be construed as a penalty
• Why did you choose a single stage tender process?
The design was uncomplicated and so contractor input was not required
• Why was the retention set at 3%
○ This is the standard % for D&B.
○ It is a market accepted level
Deemed as a sufficient figure to incentivise the contractor to close out any defects
• Why was the defects rectification period 12 months?
○ A 12 month period allows for a full cycle of seasons to flush out any issues arising due to change in temperatures
• What component of a Collateral Warranty would be essential to a funder?
○ Step in rights - Allows the funder to take control of a project if a client becomes insolvent
• Who do you mean by cost certainty?
When might costs be increased? Which party might do this?
Example of contractor risk on the project
○ D&B passes the design risk to the contractor so any issues arising that result in further costs will be absorbed by the contractor
○ Providing the client does not vary the design then there is cost certainty
○ e.g. ground condition risk is held by the contractor
Levels issue adjcant to the warehouse requiring gabion walls to be built
• How does the MC retain the risk for the programme?
○ The MC retains programme risk as they become liable for LD’s should they not achieve the contract completion date
• How does the MC retain the risk for the Design?
What is a downside to D&B?
○ D&B passes the design responsibility to the contractor through the ER’s
Aspects that are not entirely clear the client is reliant on how well the ER’s describe the component.
e.g. radiator locations may be left down to the contractor if only a performance spec is provided.
• How does the MC retain the risk for Design Coordination?
○ The MC takes responsibility for all the works and therefore has to manage the trade packages and how the design is coordinated between these packages.
• Why was there no QS or project manager on the project?
Under D&B it can be common to just have an Employers Agent if:
- Project is uncomplicated i.e. few stakeholders
- There is not anticipated to be a high level of post contract change
• How might this differ on a traditional contract? (QS / CA role)
○ A quantity surveyor and a contract administrator would be appointed
○ UPS example (high level of post contract change)
○ CA administers contract
○ QS review variations /change control
• What is an Employers Agent?
○ An EA administeres the contract (D&B contract only)
• What is the difference between an EA and a Contract Administrator?
A CA is the term used on JCT Standard Building Contracts
• Why is the contractor entitled to interim valuations?
○ The contractor is entitled when the works are longer than 45 days
Housing Grant Regeneration Act
• Is there any legislation around this? (Interim valuation entitlement) WHat are the components?
○ Housing Grants, Construction and Regeneration Act 1996 (HGCRA)
- Interim payments (cashflow)
- Informed of amount due for payment (cashflow forecasting)
- Can suspend work for non-payment
- Adjudication
What is the Local Democracy, Economic Development and Construction Act 2009 (LDEDCA)
- Payment notice 5 days after due date
- Contractor can issue their own payment notice if none issed
- Informed of any revisions to amount due via a Pay less notice
- Adjudication Timescales set out
• What is the valuation process in terms of contract administration?
- Interim application for payment (SBC must be 7 days prior to due date) (D&B before or on Due Date)
- Due date (works valued up to this date)
- Payment notice 5 days (Certificate SBC)
- Pay less 5 days before final date for payment
Final date for payment 14 days after due date (usually amended to 21)
• How would you undertake a valuation on site?
- Wear PPE
- Ensure I had received a site induction inc. hazards
- Speak to site manager and sign in
- Photograph progress
- Mark up a floorplan / elevations to identify extent of works
• What is the difference between a payment certificate and payment notice?
Payment notice is associated with D&B
Payment Certificate is SBC
• What if a contractor does not submit an application for payment?
The EA/CA can issue their own
• What happens if the EA does not submit a payment notice?
The contractor is entitled to submit their own
• What is the purpose of meeting minutes?
- Record in writing what was discussed at meetings
- Issues arising
- Makes clear where actions sit
• What were you recording when the contractor was in delay in particular?
Why could it have been important to do this?
- In particular I was requesting a revised programme to identify how they were intending to mitigate the delay
- They repeatedly failed to provide one so I noted this in the minutes
- To defend against claims it would be beneficial to demonstrate that despite frequent requests to understand how they were going to improve their rate of progress they failed to respond.
• How would a progress meeting typically be arranged?
Review Previous minutes Contractor Report - Progress in the period - Building Control - Arch, SE, M&E report - Commercial Anything other business
• Why do you need to issue a non-completion notice?
Stop time being at large in order to preserve employers right to deploy LDs
• Did you receive any claims from the contractor?
- The contractor claimed that due to the shortages in labour and materials this had caused their delay
- Not significant to be deemed a Force Majeure, issue was already prevalent albeit did worsen
It was not a legitimate claim for an EoT (Relevent Event)
• Give an example of a contract amendment?
- Final date for payment is typically extended from 14 days to 21
ER’s are made to be the precedent document over CP’s in the event of a dispute
• Why did you not award the contractor an EoT?
Labour and material shortages does not come under any of the RE’s
• What are the Relevant Events in the contract?
- Change (material)
- Instructions (stop work due to coronavirus)
- Deferment of possession (start 2 weeks later)
- Antiquities (archaeology found)
- Suspension of works (e.g. Contamination required works to stop)
- Act or Ommission (UPS HV Power not available)
- Stat undertakers (services e.g. delay in connection)
- Weather (exceptional stopping work)
- Loss/damage by a specified peril (lightning breaking electrical equipment)
- Terrorism
- Strike
- Approval delay (client does not confirm aterial prior to last date for it to be ordered in line with programme)
- Force majeure (coronavirus prior to it becoming an accepted phenomena)
• What could have happened if there was no clause for covid when the pandemic arose?
○ Contractor suspend works due to works being exceeding the period allowable under the contract for works to be suspended for Force majeure
• Is Coronvirus still considered a Force Majeure?
○ Coronvirus is now accepted as something we have to deal with day to day rather than something that has emerged from nowhere.
○ The key consideration is that it is something that can be anticipated by contractors
○ If the government makes changes to the way works can be undertaken e.g. social distancing measures then the contractor is likely to be able to make a Relevant Event claim (act of government)
Did any change requests arise?
Client wished inert excavated material to be deposited at a nearby site due to the site levels needing to be built up (due to having the elevate up from the flood plain
• Were there any provisional sums?
○ There was a provisional sum for a substation base as the incoming power location had not been confirmed
• How were utilities included?
○ Allowance were included forconnections for each site (circa £50k)
○ Quotations had been acquired by the client which were included in the contract
○ Contractor was responsible for procuring the works
How did you provide the initial cost for it? (Substation)
○ I used cost information from another comparable project (e.g. Warehouse similar size no abnormal power requirements)
• What is a substation?
○ Substations transform voltage from high to low as it is easier and safer to deliver electricity to homes and business.
• How did you agree costs with the contractor?
○ The contractor submitted a breakdown of the works
○ Initially the rates used did not align with the CSA so these were adjusted
• How did you instruct the provisional sum?
The initial allowance was omitted and the agreed figure included
• Defined / undefined?
○ Defined - the extent of works were known but the exact location and details were to be confirmed.
• Why would you include a provisional sum?
The inclusion of a provision sum acknowledges that work is required but the full details are not known at the time of contract execution
• Did you have to issue any instructions?
○ Dispose of excavated material on another site as the site required significant build up to make a level site
How did you issue the instruction? What was the cost implication? (Off site disposal to another site)
TBC
• What could you have done if the contractor did not respond or refused?
○ The contractor must confirm in writing within 14 days (21 SBC)
Client must instruct within 10 days
○ If no response then the employer must give notice that they were find another party to undertake the element of works
○ 7 days must elapse following the notice before works with a 3rd party can commence
• How did you assess the extent of the delay?
○ I reviewed the contractors programme and established that they were circa 4 weeks away from where the programme suggested they should be
• What is a programme?
○ A programme clearly sets out the key construction activities required to complete the works.
• Was it a contractual requirement?
○ Under the JCT it is not a contractual requirement to have a programme but the contractor would be expected to provide one in order for it to be possible to review their progress
• What is the critical path?
The critical path is the activities that have to be completed before the project can progress to the next stage
• What is the critical path for your project?
○ Site strip ○ Pad foundations ○ Structural Frame ○ Cladding ○ Ground floor slab ○ Internal fit out ○ External works
• What were the sign that the contractor was facing cashflow issues?
○ Over claiming on interim payment applications
○ Sub Contractors started to approach the client stating that they were being paid late
○ Labour levels were notably low on site
○ The management team were unresponsive
• How did you present the options to the client?
○ I outlined that paying the contractor was not advisable
○ I outlined the pros and cons of each of the options
○ I concluded with my recommendation
• How did you make the cashflow?
○ I attributed the length of programme to the contract cost on excel using an S curve table
○ This gives an indication of the likely monthly cashflow outlay that the client will be due to pay the contractor
• You mentioned how the Contractor becoming insolvent was a concern – At tender stage was there any type of security you sought to protect against this risk?
○ A parent company guarantee was sought
• If the Contractor went into administration, what would you do?
○ Contact the Parent Company to confirm their obligation to complete the works
○ Secure the site, secure all valuable goods equipment and materials.
○ Prepare a detailed valuation of the completed work and an inventory of materials and equipment
○ Stop the processing of any payment to the contractor
○ Contact key S/Cs, suppliers and commence discussions about continuation contracts.
Contact the administrator or liquidator and client about their views with regard to project completion.
Keep a record of the time spent and costs incurred in dealing with and advising on the insolvency. Normal for additional fees to be chargeable in this respect.
• Your recommended option was to pay the supplier directly and enter into a direct contract with the sub contractor –
What was the direct payment agreement?
○ Direct Payment Agreement to supplement the Building Contract
○ Client - MC - SC
Agreement for CLient to pay SC directly to ensure prompt payment;
Outlines that the client pays SC directly and SC accepts payment in lieu of MC payment
○ SC submit invoice to Client agreed in line with interim valuation
○ Liability remains with MC if agreement is terminated
○ Payment to SC is deducted from Clients liability to pay MC
• Does it reduce responsibility of the Contractor?
○MC still fully responsible but allows payment to SC to be madeby theClient
The parent company would assume the obligation to complete the works.
• What if the Parent Company also became insolvent?
○ It might be possible to transfer rights and obligations (novation) to a 3rd party contractor
○ If the contract had recently commenced it might be possible to simply enter into a new contract.
○ If near completion and novation is not possible, new contractor and new contractor may be the only course of action which is likely to be at a premium cost.
Likely solution would be for the client to complete the works via consturction managment by the completion of the remaining subcontract packages
In your lessons learned you spoke about collaboration – how would you define a collaborative project.?
○ It can be easy to view the contractor as an opposing party.
○ A collaborative project is where all parties work as a team in order to achieve the client project requirements.
• Are there any contracts that promote collaboration?
○ JCT Constructing Excellence; all parties to encourage collaborative working;
risk registers,
clear risk allocation
KPIs
• Why did you advise against paying the £100k direct to the MC?
○ The client was not obligated to make the payment as the advance payment was not a listed item
Making the payment would not have been clearly identified under the contract and should the contractor become insolvent the funds would be at risk
• What was the cladding package value?
Circa £1m
• How would you have implemented an advance payment?
○ Variation to the contract listing the advance payment
○ Request a vesting certificate from the contractor ensuring ownership transfers upon payment from the supplier
○ Proof of insurance against specified perils until delivery to site
○ Must be set apart, clearly marked, identified and properly protected
• What is a vesting certificate?
○ Certifies that ownership of the materials will transfer from one party to the other (supplier to client) upon payment and confirming that they will be will be properly identified, separately stored, insured and are free from encumbrances (retention of title).
○ Provides evidence that ownership vests in the client upon payment, defeating third party claims such as claims of retention of title, and can help to identify items, if for example, the contractor becomes insolvent before the items have been delivered to site.
• Are there any issues with using vesting certificates as part of the advanced payment process without a bond?
- If for example the contractor became insolvent and took possession of the materials…
- But before the materials had been fitted but after the materials had been delivered to site
- The employer would have to pursue the contractor in court.
- However this is challenging if the contractor is now insolvent
This would not be an issue if the Client had procured an on demand advanced payment bond
• What were you careful to do when purchasing the materials via the SC and not the MC?
NOTE THAT MATERIALS WERE PROCURED DIRECTLY VIA SUPPLIER
○ Ensured that the cladding was not delivered prematurely
○ We liaised with the cladding sub-contractor to confirm when the materials would be required on site and ensured they were delivered and installed asap
• What is retention of title?
○ Prioritizes the contents of a premises over other parties.
e.g. a lender of a supplier may have retention of title where they can claim valuable items as security in the event of a default
○ Vesting certificates makes clear that a material has been purchased via a third party even though it may remain at the suppliers premises
• What sort of bond should be procured?
○ An on demand bond - the bondsman pays an amount of money set out in the bond immediately on demand in writing without needing to satisfy any preconditions whatsoever (including establishing the contractor’s liability)
What is the other type of bond?
○ Conditional - have to proove loss and contractor non performance
Likely to be
• Why is this inferior to an on demand?
○ The client provides evidence that the contractor has not performed their obligations under the contract and that they have suffered a loss as a consequence
Time consuming and payment is not guaranteed - risk to client
• How was this different (advance paymentprocess) from the client request to pay the contractor direct?
○ The client was suggesting to simply pay the contractor to ease their cashflow without clearly defining what the payment was for.
○ This was an issue as the payment was made outside of the contract
• How would a bond protect the client?
○ In the event that the contractor became insolvent the client could call on the bond to retrieve their advance payment
• Why did you not give the MC an EoT to ease their cashflow?
○ Whilst this would have provided comfort to them that they wouldn’t be liable for LD’s to a point they would have lost any urgency to complete the contract and would have been unlikely to improve progress
Loss of accountability
• How does a contract facilitate fair and working relationships?
○ A contract clearly identifies each parties responsibilities to one another to avoid disputes
• How might you discourage the Client from acting without guidance in relation to PI insurance?
○ If the client acted on their own merit i.e. without consultation of their consultants then would have no recourse following on from loss.
○ If the client sought advice from their consultants which resulted in loss then they might be able to make a claim
• What have you learnt from the project?
○ Collaboration is very important. In this instance the contractor faced significant cashflow issues and the client had to take action they usually would not be required to in order to make progress.
○ Whilst D&B places significant risk on the contractor if economic circumstances become challenging this can impact the client as well
• How would you assess a contractor was facing cashflow issues pre-contract?
○ Company account:
- Declining Turnover or Profitability
- Decline in Credit rating
- Previous client feedback
What is an advance payment?
Payment from the client to the contractor in advance of works being valued on site. Typically associated with items with long lead times that may be specialist (limited supply) or expensive.
What is an on-demand bond?
It is required to be paid back immediately by the bondsmen with no pre-conditions.
What is a conditional bond?
Why might it be difficult if a contractor is not performing but is still solvent.
The bondsman is only liable if it has been established that there has been a breach of contract.
Becoming insolvent would be a breach of contract. Aperiod of time may have to pass before it is deemed that acontractor is not progressing if they are not performing but sitll solvent
How would you implement a vesting certificate?
properly identified,
separately stored,
insured and are free from encumbrances (such as retention of title).
What is a benefit of making an advance payments for the client?
Programme security by way of assurance that a key item has been procured
When you used a vesting certificate what did you make sure it included?
- Title in the goods (i.e. ownership) transfers to you when payment for the materials is made to your supplier.
- No ‘retention of title’ clauses (ROT Clauses) are allowed
Why is Vesting Certificate important in relation to proving ownership?
- A vesting certificate is proof of ownership. The title (i.e. ownership) is vested in (i.e. belongs to) the person or company named on the certificate.
- It can be used to demonstrate to a third party (say the Receiver / Liquidator of an insolvent supplier) that you have paid for the goods identified in the certificate in full and that they belong to you
What information should a vesting certificate contain?
- The purchase price
- Date of payment
- Identity of the goods by reference to unique labels; project reference
- Location where the goods are to be stored
- Duration of storage / when the goods will be called on
- Details of insurances
What would you recommend doing prior to making payment for the good?
- Inspect the supplier’s factory to ensure the good are ready, protected, tagged ready for delivery.
If the client paid for material were which were delivered to site and then subsequently stolen how would you deal with this?
What would a big risk be if this happened and the contractor became insolvent?
Once delivered to site the material become the contractors responsiblity.
If the materials are stolen then the direct payment could be included in the valuation as a pay less notice.
e.g. Valuation of the works less payment for the materials
If the site progress in the period was limited (likely if contractor was facing insolvency). The payment e.g. £1m may mean that the contractor owed the client money
Did you do anything to mitigate risk when instigating direct payment to sub contractors?
- Reviewed their (SC) contract to identify it was less than MC - CSA
- SC makes claim - agreed and progress updated against CSA
a. £100k to SC
b. Update CSA
c. MC paid as usual for all works less £100k payment via Pay Less Notice
What is the current price of steel?
I’m not sure on the exact cost but if I was compiling a cost plan I would utilise comparable, recent data, re-base for time and location and make any inflation adjustments with reference to BCIS
Was the key function of the DPA to prevent insolvency or to ensure project delivery?
- DPA’s primary purpose was to provide assurance of payment to sub contractors.
- The Main Contractor was still liable for all contracts they had entered into. The DPA simply enabled the Client to pay Sub Contractors on the MC’s behalf. The Client could at anytime cease making payments to SC’s and the MC would assume this responsibility.
- Making direct payments de-risked the clients position as it would avoid any issues with funds not being passed from MC to SCs. Although this was not a Client issue directly it assured SC’s that they would be paid.
- It would not be possible to influence whether the MC became insolvent it was only possible to minimise risk and better manage the supply chain
Payment frequency - how was this implemented?
Implemented as an instruction changing from contract position (monthly) to twice monthly. Client was not obligated to make payments twice monthly but was doing so to improve MC cashflow
Did the client influence your decision on valuation?
- No. The Client wanted funds to be paid the the MC in the hope that this would improve their performance.
- I advised that essentially over paying the MC would not improve their performance as paying them for works completed would be sufficient
- Payments over and above what they were due would be at risk and the MC could use these funds to cashflow other projects
How did you undertake the DPA valuation process?
- Process remained the same but the MC provided the SC valuation claim and this would be assessed alongside the MC’s claim ensuring they would be back to back.
If the SC package increased over and above the MC price was this not a risk to the Client?
- The Client was not obligated to pay the SC they only obtained the MC’s permission to pay on their behalf in order to provide assurance of payment ot the SC.
- If say the SC package was 5% in excess of the CSA then the Client would pay up to the value of the Main Contract and the MC would be responsible for making up the difference
Have you read any articles recently?
- Construction industry - volatile inflation
- 11% inflation from Nov 21 to Oct 22
- Office for budget responsibility forecast significant fall in inflation
- Inflation is still increasing
- Issue is that CPI is not directly based on construction components and is far more general.
- e.g. Concrete reinforcement bards increased by 40% 21-22 but not included in CPI
Should Employers look to place all inflation risk on the contractor in fixed price contracts?
- If significant risk is required then this may result in large risk allowances
- On the other hand contractors keen to win work may take a risk but as on Wrexham results in poor performance not in the best interest of the Employer
- Early contractor engagement with the view of procuring materials in advance will de-risk projects but is easier said than done
What do you think could be a solution to mitigating the risk of inflation?
- The use of MMC has the potential to create greater stability if construction elements are standardised and stronger supply chains can be established.
- MMC is less subjected to labour variation and with fewer component part it is easier to anticipate inflation.
Which Relevant Event could you have issued as part of your option to reduce the MC’s liability for liquidated damages?
- Force Majeure potentially although consensus is that this would have not been legitimate (see seperate question)
- As the Client was offering to adjust the Completion date to provide more time for the contractor to complete the works a deed of variation could have been issued delaying the completion date.
- This would demonstrate the Client’s willingness to work collaboratively with the MC and then subsequent issuance of LD’s would have been fair
Would a Force Majeure been a legitimate RE for the Ukraine Conflict on a UK Construction Contract?
- The fact that contract performance has simply become more onerous or expensive is unlikely on its own be sufficient, meaning that force majeure (that entirely prevents performance) is harder to argue in situations where materials are more challenging to source or prices have increased.
Do you think the MC was blaming its failure to perform on the Ukraine Conflict?
- The steelwork package would have had to be procured early on on the project and significantly before the Ukraine Conflict broke out.
- Failure for the contractor to pay them was most likely due to issues within the wider business
- The general economic context (Brexit, Covid then Ukraine) undoubtedly contributed to cashflow issues within the business
Why do you think that the Main Contractor made a low bid given the issues they might have been facing?
- Unfortunately the likely reality would be that as the business cashflow becomes strained alongside the economic downturn
- Bidding low to win more work would have felt necessary to improve cashflow however poor performance on the project demonstrated that this approach was not sustainable
How do you think that the context of high inflation will impact the D&B market?
- Clients will want to continue to use D&B in order to pass price risk to the contractor.
- D&B contractors are likely to increase risk allowances / build in provision for inflation.
- However D&B contractors will likely price themselves out of the market and likely have to take on an element of risk as ultimately they are reliant on Employer’s awarding contracts
What is a pre-let agreement? Significance on the project
- Agreement between Landlord and Tenant to establish terms by which the unit would be let.
- On the project the Client advised that due to the delay the tenant Pre-Let might be jeopardised
What are the key components of a portal frame?
- Pad Foundation Support columns which support the main beams.
- Rafters support roof cladding
- Haunch is point whereby beams are supported by columns
- Columns set circa 6m apart
- CHS Circular Hollow Beams provide lateral support at ends of structure
What are the benefits of a steel portal frame design over other methods?
- Main advantage is clear span width. Circa 50m. Length 90m
- Open space ideal for storage / distribution space
- Racking can be installed upto haunch height (8m on project)
Why was a jct d&b used to procure the works? Are you aware of any other forms of contracts and have you worked on any of them?
- JCT typically associated with buildings
- NEC is generally associated with infrastructure projects
- Both can be used but market practice is as stated
Why was a single stage tender approach chosen?
- Works not deemed complicated so single stage was chosen to establish a price alongside the contractor appointment (Early cost certainty)
- Two stage - cost certainty only achieved at second stage appointment
What are the benefits of a performance bond? Did you propose to implement it when tendering the work?
- Client can call upon surety of bond in event that MC does not perform
- Bond conditional upon demonstrating breach of contract / termination
- I wasn’t involved at tender stage but the Client was happy to pay for the premium associated with the security
What would have happened if the pre-let agreement wasn’t met?
- Although I wasn’t privy to the PLA the Client advised that should the works become delayed past a point then the tenant could walk away
Was the main contractor due an increase in its contract price due to covid/Ukraine conflict?
- The contract was fixed price with no inflation provision included
Are you aware of inflation provisions in JCT? Why wasn’t it used on your project?
- I haven’t worked on a project with inflation provisions included but I understand they are typically used for project with durations over 18 months
- Quarterly percentage assessments of inflation are reviewed and then added to the projected figures allowing for price fluctuation.
- Enables a fair risk apportionment between client and contractor
- The programme length was only 7 month so the contractor is expected to manage this risk. The project did highlight that market volatility can still be a risk on short programmes however it is likely that the contractors poor performance was not just down to market factors and was a wider business issue
Could you have not amended the contract to include the cladding material off site payment?
This was considered but I decided that it would be best for the Client to purchase materials directly by the supplier and issue them to the Contractor
How did you assess the amount to be paid to the sub-contractor? Was this done on rates in the contract or did the main contractor have to discuss the amount to pay the subcontractor?
- The SC made application as usual to MC.
- I assessed the SC application to ensure the claim was back to back
- Client would then pay the SC on the MC’s behalf
- Main risk of paying MC was that they might not pay the SC who then may walk off site again, impacting on the programme
