Contract Administration

Question 1

What is a contract?

Answer 1

An agreement between two or more parties by which they confer personal rights and impose personal obligations on one another.

Question 2

What is the difference between Assignment and Novation?

Answer 2

An assignment transfers the benefit of a contract from one party to another, but only the benefit, not the burden. In contrast, a novation will transfer both the benefit and the burden of a contract from one party to another.

Question 3

What elements form a contract?

Answer 3

Offer, Acceptance, Intent, Consideration.

Question 4

What is a Latent Defect?

Answer 4

Latent defects are defects that are not apparent at the time of completion but which subsequently become apparent months or years later.

Question 5

What is a Patent Defect?

Question 6

What is the role of a Contract Administrator?

Answer 6

To impartially administer the contract terms between the Employer and the Contractor.

Question 7

How does the role of Contract Administrator differ to that of an Employer’s Agent?

Answer 7

Contract admin - impartial admin of the contract
Employer’s agent - act exclusively in the interests of the employer

Question 8

What are some of the key tasks undertaken by the Contract Administrator?

Answer 8

• 1) Chairing meetings, specifically the pre-start meeting
• 2) Periodically inspecting the works
• 3) Giving instruction regarding variations or changes
• 4) Authorising interim payments to the contractor
• 5) Certifying the date of completion
• 6) Settling the adjusted contract sum (final account)
• 7) Determining any applications for extensions of time by the Contractor

Question 9

Does the role of Contract Administrator include design responsibilities?

Answer 9

No, however the appointed contract administrator can undertake design responsibilities by separate arrangement.

Question 10

What is a Relevant Event?

Question 11

What is a Relevant Matter?

Question 12

What is a Letter of Intent?

Answer 12

This is a document often used as an ‘interim’ contract to allow the contractor to proceed before the full contract is signed. These can be used to provide an early start but to prevent future issues you should ensure they contain all relevant information linked to the form of contract to be used.

Question 13

What are the three key documents which cover contract administration?

Answer 13

RICS Appropriate Contract Selection Guidance Note
JCT Guide on deciding on the appropriate JCT contract 2016
RICS contract administration Guidance Note

Question 14

How are disputes handled between contractual parties?

Answer 14

All recognised forms of contract contain a specific ‘Dispute resolution’ method in the event of a dispute between the client and the principal contractor which both parties agree to by signing the contract.

Question 15

When does the role of a Contract Administrator technically commence?

Answer 15

The Contract administrator’s role does not technically commence until the ‘post contract’ delivery phase of the project, i.e RIBA stages 5,6 and 7.

Question 16

What are some issues with verbal agreements between parties?

Answer 16

Verbal agreements are unprofessional and risky as there is no evidence of what has been agreed. These should be avoided at all costs.

Question 17

What are the two most common payment types within a contract?

Answer 17

Lump Sum
Cost Reimbursement

Question 18

What is a lump sum payment?

Answer 18

Where a figure is agreed between parties typically after tendering the works to multiple contractors. This sum can change though.

Question 19

What is a cost reimbursement payment?

Answer 19

This is where the contractor is paid for the actual cost of work carried out plus an agreed percentage of profit.

Question 20

Can you name some suites of contract?

Answer 20

JCT
FIDIC
NEC

Question 21

What does JCT stand for?

Answer 21

The Joint Contracts Tribunal.

Question 22

What factors would you consider when choosing which contract to use?

Answer 22

The value of the work
The timescale of the project
The complexity of the work
Whether specialist subcontractors are required

Question 23

What are some key contract provisions/mechanisms?

Answer 23

Client control
Design responsibility
Commencement and completion
Selection of subcontractors
Variations
Testing and opening up
Fluctuations
Payment
Insurance
Warranties
Dispute Resolution

Question 24

What guidance is available to building surveyors relating to tendering building works?

Answer 24

RICS tendering strategies guidance note
JCT Tendering 2017 practice note

Question 25

What is a Certificate of Making Good?

Answer 25

This certificate needs to be completed by the contract administrator to certify the rectification of defects. This will trigger the final payment to the contractor. If defects haven’t been rectified, a certificate of not making good will be issued and the client can withhold money until they have been dealt with.

Question 26

What are Liquidated Damages?

Answer 26

LDs are sum of money included within the contract to incentivise the contractor to complete on time and may be deducted from the contractors final monthly payments and retention (see retention later). LDs are a reasonable estimate of loss as a result of the project not completing on time (for example £250 per week due loss of rent of a residential property).

Question 27

What happens at Practical Completion?

Answer 27

The final months payment (known as the Penultimate Payment).
Release of the contractors insurance obligations (which may be expensive).
Exemption of the contractor’s liability to pay Liquidated damages.
Start of the rectification period

Question 28

What would be a standard agenda for a pre-start meeting?

Answer 28

Health and safety
Access arrangements
Storage
Programme
Valuation and payment arrangements
Site progress meetings
Project insurance
Person in charge
Any other business

Question 29

What is a Provisional Sum?

Answer 29

A provisional sum is a figure specified within the tender and contract documents which is included to fund an item which cannot be fully specified prior to work commencing for various reasons. An example would be an inclusion of £10,000 to cover provision of new foundations which cannot be specified due to the uncertainty of the ground conditions. The contractor will then be required to complete the work within that sum – therefore the sum included should be adequate.

Question 30

What is a Contract Instruction and what should it include?

Answer 30

A contract instruction is an important legally binding document and may well be referred to in any disputes or legal action which may arise between the client and the contractor – so it is essential that the CA ensures the format and content of the document is accurate and compliant with legal protocol.

The format should be as follows:

In writing (but can be verbal initially)
Name the parties involved
Include the Project Name
Specify the Date
Provide an issue number
Circulate to all necessary parties
Quantify the financial implication

The content of instructions will include the following:

Only what the contract states e.g.
Variation of the works
Removal of work not in accordance with the contract
Expenditure of Provisional Sums
Opening up of the works for inspection/testing

Question 31

What is a Contract Sum?

Answer 31

The ‘Contract Sum’ is the agreed lump sum the client will pay the contractor for the work. This figure will quite often be subject to change (normally an increase) and this will then become the ‘Final Account’ figure.

Question 32

Why are certificates produced?

Answer 32

Confirmation of certain events, milestones and occurrences eg.

Practical completion
Making good of defects
Partial possession
Making good to relevant part
Non-completion

Question 33

What is a Payment Certificate?

Answer 33

The CA will normally issue interim ‘payment certificates’ to the client on a monthly basis following receipt of the contractors invoice. This is effectively a formal instruction to pay the contractor within a certain period. The CA will first check the validity of the contractors invoice against the contractors programme in conjunction with the design information.

The Penultimate payment is made at Practical completion stage and the Final payment is made after the Rectification period.

Question 34

What is a Retention?

Answer 34

This is a sum of money the CA deducts from each monthly payment which may be released back to the contractor in various stages. A typical figure is 5% of the agreed sum to be paid therefore the contractor receives only 95% of the value of the completed work. This money is held back from the contractor as an incentive to complete the project on time – and to rectify defects during the rectification period – as 2.5% of the 5% is released at ‘Practical Completion’ and 2.5% is released after the rectification period.

The final payment is made at the end of the rectification period once the CA has completed the ‘Making good of defects’ certificate.

Question 35

What are Payment Terms?

Answer 35

The payment terms specify the frequency and dates by which the Client must pay the Contractor for the work carried out – and also the penalty for late payment by the client. Cash flow is extremely important for both parties to the contract but in particular the contractor as he is likely to have a supply chain below him to remunerate.

Question 36

What are the contract payment terms with regards to valuing works and issuing certificates?

Answer 36

During the period up to the due date for the final payment fixed under clause 4.8.1, the due dates for interim payments to the Contractor shall in each case be the date 7 days after the relevant Interim Valuation Date. Not later than 5 days after each due date the Architect/Contract Administrator shall issue an interim certificate for the applicable percentage, as stated in the Contract Particulars, of what he considers to be the total value at the due date of:

work properly executed, adjusted where relevant for any amounts ascertained or agreed under clause 3.6, 3.7 or 4.7, and
materials and goods reasonably and properly brought on to the site for the purpose of the Works that are adequately protected against weather and causalities
…Subject to clause 4.5.3, the final date for payment of each interim payment shall be 14 days from its due date.

Question 37

What is a Performance Bond?

Answer 37

Most employers will request a performance bond from the contractor, who in turn obtains it from a bank or insurance company in favour of the employer. The bank or insurance company usually obtains a counter-indemnity from the contractor or a parent or associated company of the contractor. Performance bonds take 1of 2 forms: either an ‘on-demand’ bond (which is an indemnity) or a ‘default’ bond (which is a guarantee).

Both forms of performance bond will provide the same relief to the employer: an agreed sum of money (usually 10% of the contract sum) payable by the bondsman to the employer (either ‘on demand’ or on ‘default’ depending on the bond’s terms). This is usually payable where the contractor has failed to comply with its obligations to the employer to carry out and complete the works under or in accordance with the building contract.

Question 38

What is a Parent Company Guarantee?

Answer 38

A parent company guarantee (PCG) is a guarantee provided by the contractor’s ultimate parent or holding company to answer for the debt, default or miscarriage of the contractor. It is subject to the same legal principles as those applied to default bonds discussed earlier. While a default bond will usually provide a financial guarantee only, a PCG may be a performance guarantee, a financial guarantee or a combination of both.

Question 39

What is a Collateral Warranty?

Answer 39

A collateral warranty is a contract which is ancillary or ‘collateral’ to a principal contract, such as a building contract, a subcontract or a consultant appointment. It is entered into between the person employed under the principal contract (for example, a contractor) and a third party (known as the ‘beneficiary’) having or acquiring an interest in the development, such as a funder, a purchaser, a tenant or a management company. In a collateral warranty, the person employed under the principal contract (‘the Warrantor’) generally warrants to the third party that it has complied with its obligations under the principal contract.

Question 40

What is a Bond?

Answer 40

A bond is a promise (usually by deed) whereby the person giving the promise (the bondsman) promises to pay another person (the employer) a sum of money. The bondsman only becomes obliged to make payment when called on to do so

Question 41

What is the difference between an on-demand and a default bond?

Answer 41

The essential difference between an ‘on-demand’ bond and a ‘default’ bond is that, under an ‘on-demand’ bond, the employer does not have to prove default. Provided that they can show that they have complied with the conditions for ‘demanding’ the bond, the employer can call on it. This is not true of a default bond where the employer must prove that the conditions necessary to call on the bond have been met.

Question 42

Why might a Parent Company Guarantee be required?

Answer 42

An employer concerned about a contractor’s financial viability may require a PCG as assurance that the contractor has the financial backing of the (potentially considerably larger) group of companies. This may be particularly important where the contractor is a new company, the financial viability of which has not been tested, or where there are concerns as to its solvency, or where the contractor does not have sufficient assets for the employer to feel secure that if the contractor breaches the contract they will be able to meet any damages to which the employer could be entitled.

Question 43

What relevance does Contract (Rights of Third Parties) Act 1999 have with regard to Contract Administration?

Answer 43

It is the only recourse available to interested third party beneficiaries against the perpetrators of such defects was in contract, through the use of collateral warranties.

The Act provides an alternative to the use of collateral warranties. It overturns the principle of ‘privity of contract’ in that it enables third-party beneficiaries such as funders, purchasers, tenants to enforce a term of a contract, such as a consultancy agreement or building contract, to which they themselves are not a party.

The Act cannot impose obligations through a contract on a third party; it can only be used to confer a benefit.

Where contracting parties wish to avoid the possibility that a contract might give a third party rights by implication, they should draft the contract to contain a statement that excludes the operation of the Act.

Question 44

What is the purpose of a Collateral Warranty?

Answer 44

The main purpose of collateral warranties is to provide contractual remedies for interested third parties against other parties from which none would otherwise be available or against which any remedies would be limited or uncertain under statute or under the tort of negligence.

Question 45

What things must be considered before issue of a final payment certificate?

Answer 45

identification of defects and their making good by the contractor
valuation of any abatement or counterclaim arising from a failure to make good the defects
expiry of any defects liability period
issuing of a certificate of making good defects or equivalent
determination of any extension of time and the corresponding completion date
operation of any contractual mechanism for the payment of liquidated damages
finalisation of the adjusted contract sum, generally including the submission of accounts, including loss and expense, by the contractor, and
calculation of VAT.

Question 46

What is a Pay Less Notice?

Answer 46

if the party by whom the final payment is stated to be payable intends to pay less than the stated balance due to be paid, they shall not later than five days before the final date for payment give the other party a pay less notice.

If a pay less notice is given, then the amount to be paid is the amount stated in that pay less notice. However, if a pay less notice is not given, then the amount to be paid is the amount stated on the final certificate.

Question 47

If a contractor anticipates they are no longer able to achieve the completion date, what should they do?

Answer 47

The contractor should submit notice of delay so that an extension of time can be considered.

Question 48

What is the difference between Sectional Completion and Partial Possession?

Question 49

Can contracts be terminated once signed?

Answer 49

Yes, many contracts include a termination clause that makes a detailed provision regarding when and how a termination may take place. Strict adherence to the detail of the clause is important in order to avoid terminating unlawfully.

Question 50

Would you advise a client on terminating a contract?

Answer 50

No, I would encourage them to seek legal advice as it is quite a complex legal matter with substantial consequences if not adhered to properly.

Question 51

What is meant by the term repudiatory breach of contract?

Question 52

What is a Loss and Expense Claim?

Question 53

What is a Prime Cost Sum?