Contract Administration

Question 1

How did you issue the instructions at Hotham’s Court?

Answer 1

In writing (Contract Instructions).

Question 2

Can you issue instructions verbally?

Answer 2

Yes, but should be followed up with a written instruction.

Question 3

Under JCT Minor Works can an employer issue instructions?

Answer 3

No, they must be issued by the CA/Architect.

Question 4

How did you finalise the final account at Hotham’s Court?

Answer 4

By reviewing the contract sum and any additional costs incurred through variations, provisional sums, loss and expense…

Question 5

How do you agree final account?

Answer 5

Negotiate the costs incurred throughout the project in addition to the contract sum, whilst considering any variations, provisional sums, prime costs, loss and expense.

Question 6

What happens if you cannot agree FA?

Answer 6

Refer the matter to ADR.

Question 7

Can you explain the standard payment terms under JCT?

Answer 7

• The contractor can make an application for payment any time up to IVD (no later than 7 days prior to the Due Date for IC).
• The Due Date is 7 days after the IVD.
• The payment certificate should be issued no later than 5 days after the due date.
• The Final Date for Payment is 14 days following the Due Date (sometimes adjusted to 21 days).

Question 8

What is the purpose of interim valuations?

Answer 8

The valuation provides advice to the certifier (CA) for issuing of payment certificates and interim notices.

Question 9

What happens if the CA doesn’t issue their payment cert in 5 days?

Answer 9

The contractor’s payment application becomes a payment notice.

Question 10

What should you do if a contractor does not submit a payment application?

Answer 10

The CA should carry out their own assessment of the works and issue a payment certificate on that basis.

Question 11

What is the purpose of a pay less notice?

Answer 11

It is a notification from the Employer of the intention to pay less than the amount previously certified.

Question 12

Who can issue a pay less notice?

Answer 12

The Employer, or the CA on behalf of the Employer.

Question 13

Can you talk me through the standard JCT Payment terms.

Answer 13

Interim Payments

• Contractor submits interim payment application 7 days prior to due date.
• CA required to issue payment certificate within 5 days of the due date.
• Final date for payment is 14 days from the due date.
• Employer (or CA on behalf of) to issue pay less notice no less than 5 days prior to final date for payment.

Final Account

• Contractor to issue documentation for computation of the FA within 6 months of PC (3 month default period for MW).
• Final account to be ascertained within 2/3 months from receiving the documentation, depending on the form of contract.
• IC, SBC (3 months)
• DB (2 months)
• 28 days for MW

Question 14

How do the payment timescales differ between the JCT contracts?

Answer 14

• Minor works – payment application can be made on or before the due date.
• Intermediate & SBC – payment application must be submitted no later than 7 days before the due date.

Question 15

When are interim payments required?

Answer 15

When the duration of a project is 45 days or more.

Question 16

Do you know where the 45 day timescale for interim payments is stipulated?

Answer 16

Housing Grants, Construction and Regeneration Act 1996.

Question 17

What is the purpose of the Housing Grants, Construction and Regeneration Act 1996?

Answer 17

• Intention to ensure payments are made promptly throughout the supply chain and that disputes are resolved quickly.

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 (payment of sub-contractors when main/principal contractor has been paid).

Question 18

What is the significance of the Local Democracy, Economic Development and Construction Act 2009?

Answer 18

• Introduced in 2011 and amends the HGCRA 1996.
• The Act removes the requirement for contracts to be in writing.
• Enables parties to enter adjudication even when a contract has not been formalised in writing.

Question 19

What other methods of payment may be included within a contract?

Answer 19

Stage payments – these payments will be due at certain stages of the works, for example, completion of the substructure, construction of external walls, construction of the roof, internal fit-out etc.

Question 20

What is a provisional sum?

Answer 20

A sum provided for work which is not completely designed.

Question 21

What is the difference between a defined and undefined provisional sum?

Answer 21

Defined Provisional Sum

A defined provisional sum includes information relating to:

• Nature and construction of work.
• How and where the work is to be fixed to a building and what other work is to be fixed thereto.
• A quantity or quantities that indicate the scope and extent of the work.
• Any specific limitations and the like defined.

The contractor is deemed to have made allowance in their tender submissions for pricing/preliminaries, planning and programming.

Undefined Provisional Sum

• A sum provided for work which is not completely designed and less well described than defined provisional sum items.
• The contractor is not deemed to have made any allowance in their tender submissions for pricing/preliminaries, planning and programming.
• The contractor may be entitled to an extension of time and/or the recovery of loss and expense.

Question 22

Can you provide an example of a defined provisional sum item?

Answer 22

Replacement of roof tiles, however the exact specification of tiles has not yet been decided upon.

Question 23

Can you provide an example of an undefined provisional sum item?

Answer 23

Works below an existing structure.

Question 24

What are the contract implications of defined and undefined provisional sums?

Answer 24

• The contract sum is subject to change once a firm cost can be provided by the contactor.
• The contractor may be entitled to an extension of time and/or loss and expense (undefined).

Question 25

You said you advised on the provision of a Pay Less Notice at Sefton Avenue. Can you explain what is the purpose of a pay less notice?

Answer 25

A pay less notice notifies the contractor that the employer intends to pay less than the amount previously certified within the payment certificate.

Question 26

Who can issue a pay less notice?

Answer 26

The employer or the contract administrator on behalf of the employer.

Question 27

Can you issue a pay less notice?

Answer 27

Yes, if asked to do so by the employer.

Question 28

What should a pay less notice contain?

Answer 28

• The revised amount.
• Reasoning behind the reduced payment.
• Any supporting documentation.

Question 29

What constitutes a valid pay less notice?

Answer 29

• It must be issued in time (no later than 5 days before the final date for payment).
• It must provide a basis for the calculation and must show the revised amount to be paid.

Question 30

What constitutes a change under a contract?

Answer 30

Includes any change to the works regarding:

• Quantity
• Quality
• Design
• Working conditions
• Sequencing
• Additions, omissions or substitutions

Question 31

When assessing a variation, what advice should you give to the client?

Answer 31

• The impact upon cost, time and suitability of the proposed works.
• Possible extensions of time (relevant event).

Question 32

What is the final account?

Answer 32

• The conclusion of the contract sum (including all necessary adjustments) and signifies the agreed amount that the employer will pay the contractor.
• Typically include any loss and expense associated with EoT’s and any other claims the contractor believes they are due under the contract.
• Will not typically include liquidated damages, VAT or interest on overdue payments.

Question 33

What should be accounted for when preparing the final account?

Answer 33

• Provisional sums (which can only be expended by issue of a contract instruction)
• Agreeing prime cost sums (where applicable)
• Any loss and expense associated with EoT’s
• Adjustment of provisional/approximate quantities
• Fluctuations
• Any set-off/contra charges (typically a sub-contractor issue)

Question 34

What is the purpose of the final account and who prepares it?

Answer 34

• To enable the final certificate to be produced.
• Prepared by QS (CA for MW).

Question 35

When should FA be ascertained?

Answer 35

• Within 2 months (DB) of information being provided by contractor.
• Within 3 months (SBC) of information being provided by contractor.

Question 36

When must the final certificate be issued?

Answer 36

Should be issued no later than 5 days of the due date.

Two months from the later of:

• End of rectification period.
• Issue of the certificate of making good.
• When the final account is agreed.

Question 37

What must the final certificate state?

Answer 37

• Total adjusted contract sum.
• Total of all additions / deductions.
• Total of all previous interim payments made to the contractor.
• The difference – expressed as a debt due from one party to the other.

Question 38

What is released to the contractor in the final certificate?

Answer 38

Remaining retention.

Question 39

What are the payment timescales for final account under JCT MW?

Answer 39

• Due date is 28 days from the contractor providing documentation to the CA (or later if specified).
• Final certificate to be issued within 5 days of the due date.
• The final date for payment is 14 days from the due date.

Question 40

How long does a party have to commence proceedings (adjudication / arbitration) after issue of the final certificate?

Answer 40

28 days.

Question 41

How long does the contractor have to submit documentation to the CA required for computation of the final payment?

Answer 41

• 6 months after practical completion certified (can be amended in MW, however is typically 3 months).
• Including substantiation to variation figures, subcontractor quotations, daywork sheets, loss and expense claims and build-up to fluctuations.

Question 42

What if the contractor does not submit information for the FA within 6 months?

Answer 42

• CA to issue one month notice to contractor requesting information if not provided.
• If the contractor fails to supply information within one month, CA to produce Final Statement.

Question 43

What happens if you cannot agree FA?

Answer 43

• Consider using ADR.
• Starting with mediation or conciliation (strongly advised by RICS).
• Adjudication will provide a quick turnaround (28 days for binding decision to be made following referral).

Question 44

If variations have not been formally agreed at FA stage, what do you do?

Answer 44

Issue a ‘wrap up’ instruction for the variations not previously instructed.

Question 45

Why may FA’s not be agreed?

Answer 45

• Disputes over final account sum.
• Disputes over extent of works instructed to be carried out by the contractor.

Question 46

What should be in a FA statement?

Answer 46

• The final account sum as adjusted.
• The sum of amounts already stated as due in Interim Certificates plus the amount of any advance payment made and (where relevant) any sums paid in respect of any such Payment Notice.

Question 47

At which point would you consider a project to be practically complete under a JCT contract?

Answer 47

• When the works are substantially completed to a point which allows the employer to take beneficial occupation of the works and to use them for their intended purpose.
• PC is subject to a test of reasonableness, known as the de minimis principle.
• PC should not be refused if there are only very minor defects in the works.

Question 48

What is the significance of issuing practical completion?

Answer 48

• Employer takes occupation and control of the building.
• Contractor is no longer liable for delay damages (LAD’s).
• Risk of loss or damage to works passes to the employer (employer to insure the works), which terminates the requirement for the contractor to insure and secure the works.
• Commencement of defects liability period.
• Half of retention is released – remaining released upon issue of certificate of making good defects and final certificate.
• Requirement for an account of the works to be prepared (contractor to issue information within 6 months of PC).
• Obligations under third party agreements.

Question 49

How are defects dealt with during the defects liability period?

Answer 49

• Employer notifies CA of any defects.
• CA assesses them to decide if they are classed as defects (i.e. works that are not in accordance with the contract), or whether they are maintenance issues.
• CA to issue notice to the contractor to make good the defects within a reasonable time.
• At the end of the defects liability period, the contract administrator prepares a schedule of defects, listing those defects that have not yet been rectified, and agrees with the contractor the date by which they will be rectified. The contractor must in any event rectify them within a reasonable time.
• When the contract administrator considers all the items on the schedule of defects have been rectified, they issue a certificate of making good defects. This has the effect of releasing the remainder of any retention and results in the final certificate being issued.

Question 50

What happens if the contractor fails to make good any defects within a reasonable time?

Answer 50

An alternative contractor can make good the defects. The cost of the works would be deducted from any remaining retention.

Question 51

How are defects dealt with after the defects liability period?

Answer 51

• The contractor is not contractually obliged to make good any defects.
• The employer must instead seek redress in an action for damages, for breach of contract, or for negligence. In the case of dwellings there is a statutory remedy provided by the Defective Premises Act 1972.
• The rights of action are time barred (6 years for contracts executed underhand & 12 years for contracts executed as a deed).

Question 52

What is the difference between partial possession and sectional completion?

Answer 52

• Sectional completion allows for different completion dates for different sections of the works, allowing the client to take possession of the completed parts whilst construction continues on others.
• Sectional completion differs from partial possession in that it is pre-planned and defined in the contract documents.
• The contractor is not obliged to allow partial possession (although permission cannot be unreasonably withheld), and may not wish to if, for example, access routes are difficult to achieve, it would disrupt the works, or it would incur additional costs.

Question 53

Can you explain the implications of issuing partial possession?

Answer 53

• Any part for which partial possession is given is deemed to have achieved practical completion.
• Half of the retention for that part must be released.
• The defects liability period begins for that part.
• Liquidated damages reduce proportionally.
• The client is responsible for that part and should insure it.

Question 54

What are the key parts of the construction act?

Answer 54

• 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.

Question 55

What does the act say about payment?

Answer 55

Interim, periodic or staged payments must be allowed for in projects lasting at least 45 days.

Question 56

What happens if there aren’t any mechanisms for payment in a contract?

Answer 56

The payment mechanisms in the Scheme for Construction Contracts Regulations 1998 apply.

Question 57

At what periods within a project are interim payments normally due?

Answer 57

• The first interim payment should be no later than one month after works commencement date.
• Intervals between interim valuations should be no more than one month.

Question 58

What should be included within an interim payment application?

Answer 58

Total value as at the due date of:

• work properly executed, including the value of any variation and/or provisional sum works that has been properly executed and instructed under a contract administrator’s instruction
• materials and goods that have reasonably and properly been brought on to site for the purpose of the works and are adequately protected against weather and other casualties

Less:

• the total sums stated as due to the contractor in previous interim certificates and
• any sums paid in respect of any payment notice given after the issue of the latest interim certificate.

Question 59

What must you consider before including materials on site within an interim valuation?

Answer 59

Materials and goods must:

• Be delivered to or adjacent to the works.
• Have been reasonably, properly and not prematurely brought to or adjacent to the works.
• Must be adequately protected against weather and other casualties. ‘Other casualties’ includes theft and certain other risks referred in the contract conditions.

Question 60

What must you consider before including materials off-site within an interim valuation?

Answer 60

Materials and goods must:

• Not have a retention of title in the supply contract of the materials or goods.
• Once the materials have been built into the works and cannot be removed without causing damage, the ownership passes to the employer, despite any retention of tile clauses.
• A vesting certificate provided by the supplier or sub-contractor can protect an employer in the event that the contractor becomes insolvent when the materials are still within their possession.
• There is no provision in MW contract for payment of off-site materials.

Question 61

How would you go about certifying an interim valuation where works have not been carried out in accordance with the contract?

Answer 61

• Deduct the cost of works from the interim valuation and request that the contractor redoes or amends the works.
• Alternatively, the defective works may be accepted by the CA and the cost of works is deducted from the payment certificate.

Question 62

What is the purpose of retention?

Answer 62

• Retention provides a financial security for the employer and an incentive for contractors to make good any defects identified within the defects liability period.
• Retention is a sum of money (the retention fund) held by the employer as safeguard against defective or nonconforming work or materials provided by the contractor. It is to safeguard the employer against latent defects (i.e. defects that may subsequently develop during the rectification period, or defects liability period, which were not identified at practical completion) and the contractor’s possible failure to complete the contract.

Question 63

How much retention is held as standard in the various JCT contracts?

Answer 63

• 3% - SBC, DB
• 5% - MW, IBC

Question 64

What is the alternative to retention?

Answer 64

The use of a retention bond.

Question 65

What is a retention bond?

Answer 65

• Used an as alternative to withholding retention from interim payments.
• May be used in difficult market conditions to help contractor’s cash flow.
• Put in place by the employer.

Question 66

How do you assess costs for variations to ensure they are fair and reasonable?

Answer 66

Assess costs using the Valuation Rules:

• Measurable work
• Day work
• Change of conditions for other work
• Additional provisions
• Contractor’s design portion - valuation

Question 67

Who can terminate a contract under JCT?

Answer 67

• The contractor or the employer.
• May be terminated by default where frustration occurs, making it impossible or illegal for the terms of the contract to be fulfilled.

Question 68

Why may an employer terminate the contract?

Answer 68

• Insolvency by the contractor.
• Specified default by the contractor e.g. failure to proceed regularly and diligently with the works, suspension of works without reasonable cause, refuses or neglects to comply with an instruction to remove any work/materials/goods not in accordance with the contract. Breach of CDM.
• Corruption – Contractor commits an offence under the Bribery Act 2010.

Question 69

Can you outline the specified defaults by a contractor?

Answer 69

• Without reasonable cause wholly or substantially suspends carrying out the works.
• Failure to proceed regularly and diligently with the works.
• Refuses or neglects to comply with a notice or instruction to remove any works, materials or goods not in accordance with the contract.
• Assignment without consent.
• Failure to comply with sub-contracting obligations…..
• Failure to comply with CDM.

Question 70

How can a contract be terminated by the employer?

Answer 70

• Notice served by CA specifying the default of the contractor.
• If the contractor continues a specified default for 14 days from receipt of the notice under clause 8·4·1, the Employer may on, or within 21 days from, the expiry of that 14 day period by a further notice to the Contractor terminate the Contractor’s employment under this Contract.

Question 71

What happens once an employer terminates a contract?

Answer 71

• The employer can choose to either proceed with the works using another contractor.
• If within the period of 6 months after termination the employer does not proceed with the works, they must notify the contractor.

Question 72

Why may a contractor terminate the contract?

Answer 72

• Insolvency by the employer.
• Specified default by the employer e.g. failure to adhere to payment timescales or the employer obstructs or interferes with the issuing of any certificate due under the contract.
• Failure of employer to comply with CDM.

Question 73

How can a contract be terminated by the contractor?

Answer 73

If a specified default or a specified suspension event continues for 14 days (7 days for MW) from the receipt of notice, the Contractor may on, or within 21 days (10 days for MW) from, the expiry of that 14 day period by a further notice to the Employer terminate the Contractor’s employment under this Contract.

Question 74

What is the meaning of frustration in the context of contracts?

Answer 74

• Frustration occurs when any event or circumstances beyond control of both parties changes the contractual obligations or makes it impossible or illegal to fulfil their contractual obligations. The happening of such events automatically discharges contract.
• If a frustration event occurs, the contract automatically ends and the parties are excused from their future obligations, although any accrued liabilities will remain. For example, such liabilities could be defects for the work already undertaken and the remaining defects period remains in place.
• There will be no contractual mechanism for dealing with a frustration event.

Question 75

What is novation?

Answer 75

• Novation is where a new contract transfers the rights and obligations of one contractual party to a new third party.
• This is common on design and build projects where the design team are appointed by a client to carry out initial studies or prepare a concept or detailed design, but then when a contractor is appointed to carry out or complete the design and construct the works, the design team (or part of it) is novated to work for them.

Question 76

What are the advantages of novation?

Answer 76

This can be beneficial to clients as it maintains continuity between pre-tender and post-tender design whilst leaving sole responsibility for designing and building the project with the contractor. Novation effectively over-writes the contractual history to give the impression that the consultant has worked for the contractor throughout the project.

Question 77

What issues may occur following the novation of a design team?

Answer 77

There may be disputes regarding errors made within the design before the design team was novated over to the contractor.

Question 78

How does novation affect the Employer’s rights?

Answer 78

• 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.

Question 79

What is assignment?

Answer 79

Assignment is the transfer of contractual rights or contractual benefits only as burdens cannot be assigned.

Question 80

Under what circumstance may assignment take place?

Answer 80

Assignment of the rights under a collateral warranty to a different tenant / purchaser.

Question 81

You said you advised your client at Sefton Avenue of the implications of non-payment and the contractor’s right to suspend performance. Can you please explain the process involved should the contractor wish to suspend performance?

Answer 81

• If the employer fails to make payment to the contractor by the final date for payment, the contractor can then serve notice to the employer of their intention to suspend performance, along with confirmation for grounds for the suspension.
• If payment has not been made by the employer within the 7-day notice period, the contractor may suspend performance of any or all of their contractual obligations until payment is made in full.
• The contractor will be entitled to reasonable cost and expense incurred by them as a result of the suspension.
• Applications for cost and expense should be made to the CA. The amount of which will be included within the next interim certificate.

Question 82

What are the implications of non-payment?

Answer 82

• The payee will be entitled to interest on the amount due for the period from the final date for payment until payment is made.
• Any such amount will be recoverable as a debt.

Question 83

What was the amount of interest due for non-payment?

Answer 83

5% per annum over the official bank rate of the Bank of England is payable by the Employer for the period until payment is made.

Question 84

You said you certified practical completion at Sefton Avenue. Can you please explain the process and what documentation would be required for this?

Answer 84

• I undertook an inspection of the works to ensure they had been completed to the point in which the employer was able to take beneficial occupation and to make use of the works for their intended purpose.
• I ensured that all documentation including gas/electrical test certificates and any warranties/guarantees had been provided by the contractor prior to issuing PC.
• Upon reviewing the works, I issued the certificate of practical completion to the contractor.

Question 85

You say you advised the client on the implication of non-payment, please can you run through those implications?

Answer 85

• Contractor within their contractual right to suspend performance of any / all obligations under the contract if the employer fails to make payment and after the expiry of the 7 day notice period given by the contractor.
• Contractor entitled to reasonable loss and expense.
• Interest will be accrued on the amount due.
• Suspension period ceases once payment is made.

Question 87

What steps should be taken in the event of a contractor becoming insolvent?

Answer 87

• Ensure that the contractor has formally entered into administration before considering terminating the contract.
• Secure the site for H&S reasons and to ensure that no materials can be removed by contractors.
• Inspect the site to ascertain the extent of works undertaken to date.
• Establish any materials offsite which have / haven’t been paid for. Any items paid for and ownership transferred to the Employer should be clearly marked to avoid the administrator assuming the materials belong to the contractor.
• Review any sub contracts, supply contracts, appointments and collateral warranties.
• Establish the sum of payments made to date to the contractor.
• Prepare a notional final account.

Question 88

What other remedies may a contractor consider as a substitute to suspension of performance?

Answer 88

• Commencing an adjudication;
• Claiming contractual interest, or interest under the provisions of the Late Payment of Commercial Debts (Interest Act) 1998 of 8% over Base Rate;
• Issuing a Letter of Claim in compliance with the Practice Direction: Pre-Action Protocols and commence legal proceedings.

Question 89

What should be included within the description of work for a provisional sum item?

Answer 89

• The nature and construction of the work.
• A statement of how and where the work is fixed to the building and what other work is to be fixed thereto.
• A quantity or quantities that indicate the scope and extent of the work.
• Any specific limitations and the like.

Question 90

What should be included within the description of work for a provisional sum item?

Answer 90

• The nature and construction of the work.
• A statement of how and where the work is fixed to the building and what other work is to be fixed thereto.
• A quantity or quantities that indicate the scope and extent of the work.
• Any specific limitations and the like.

Question 91

When agreeing the final account, what should be done if there are any unused provisional sums?

Answer 91

They should be formally omitted by instruction.