Contract practice Flashcards
What are the varying types of forms of contract available in the market place?
- *•** Lump sum contract – where the contract sum is known before works starts on site and the contractor agrees to undertake a defined amount of work for a specific amount. This type of contact is often based on firm bill of quantities and drawings.
- *• Measurement contracts** – where the contract is assessed and remeasured as on previously agreed basis. This type of contract can be based on approximate bill of quantities and drawings.
- *• Cost reimbursement contracts** – where a contractor is reimbursed on the basis of the prime cost of labour materials and plant plus an agreed percentage addition to cover overheads and profits.
- *• Design and build** - where the contractor both designs and builds a project
- *• Management contracts** – a management contractor managing the works although the contractor does not actually carry out any works.
- *• Target Cost -** A target cost contract is a type of cost reimbursable contract under which the contractor is paid the ‘actual cost’ against the target cost and then savings or cost overruns are shared based on an agreed mechanism.
When would design and build be used in comparison to a traditional form of contract?
- Where there is a need to make an early start on site – can overlap design and construction
- Where the client wishes to minimise their risk – no responsibility for design
- For technically complex projects which can benefit from the contractor’s expertise
- Where the employer does not want to retain full control over the design development
What are the benefits of Design & Build?
- Single point of responsibility for design and construction
- Earlier commencement on site
- Early price certainty
- Benefit of contractor’s experience harnessed during design
What are the disadvantages of using this form? (Design and build)
- Client may find it hard to prepare a sufficiently comprehensive brief
- Client has to commit to a concept design early
- Variations from the original brief can be difficult to arrange and expensive
- Harder to compare tenders and determine if they offer value for money
- Ease of fabrication may be prioritised above aesthetic quality
How do you deal with assignation clauses?
- An assignment transfers the benefit of a contract from one party to another, but only the benefit, not the burden.
- Assignment is a right created by statute, Section 136 of The Law of Property Act 1925 or by the law of equity;
- Whilst not a contractual right, the right to assign can be excluded, or restricted, by contract, for example, it is common in collateral warranties to restrict to one assignment without the written permission of the warrantor.
- In contrast, a novation will transfer both the benefit and the burden of a contract from one party to another. A novation creates a new contractual relationship - a ‘new’ contract is entered into.
What types of Damages are you aware of?
- Liquidated dames which are pre-determined damages set at the time that a contract is entered into, based on a calculation of the actual loss the client is likely to incur if the contractor fails to meet the completion date. They may include rent on temporary accommodation, removal cost, extra running cost
- Unliquidated damages are damages that are payable for a breach of contract, the exact amount of which has not been pre-agreed. The advantage of unliquidated damages is that it allows for the recovery of losses that may have been impossible to foresee or to estimate with any certainty before the breach.
What types of bonds are available for construction projects?
- A performance bond is commonly used as a means of insuring a client against the risk of a contractor failing to fulfil contractual obligations to the client, although they can also be required from other parties. Performance bonds are typically set at 10% of the contract value.
- Advance payment bond - If the client agrees to make an advance payment to the contractor, a bond may be required to secure the payment against default by the contractor.
- Off-site materials bond - This is similar to the situation where an advanced payment is made in that a bond secures the payment against default by the contractor and is likely to be an on-demand bond. The bond might be up to the value of the off-site items, with the value of the bond reducing as deliveries to site are made.
- Retention bond - it is an alternative to retention; retention bond, is where the client agrees to pay the amounts which would otherwise have been held as retention, but instead a bond is provided to secure the amount that would have been retained. As with retention, the value of the bond will usually reduce after practical completion has been certified.
What is an advanced payment bond? How does this work in practice?
The advanced payment bond may be required when the client agrees to make an advance payment to the contractor to secure the payment against default by the contractor.
For example, on NCA project, the Client agreed to make an advanced payment bond to the contract due the high cost of materials that had to be pre-order (lifts). In this case the advanced payment was approx. 20% of the construction work value. The advanced payment bond prepared together with the contract documentation and signed between the Client, the Contract and guarantor (executed as deed).
Can you outline the key changes under the introduction of NEC4?
- NEC4 updated introduced some new contracts:
- Design Build and Operate Contract – a single contract for providing a service which includes the design and build of assets to do so, or perhaps the upgrade of existing assets at any time in the ‘service period’.
- Professional Services Subcontract – the PSC in a subcontract form.
- Term Service Subcontract – the TSC in a subcontract form.
- Dispute Resolution Services Contact, which includes for the members of the new Dispute Advisory Board in secondary option W3 and replaces the NEC3 Adjudicator’s contract.
- Gender neutral language (not he or she but them)
- Changes in terminology
o Client instead of Employer
o Scope instead of Work information
o Early warning register not risk register
o Client’s liability instead of Employer’s risk
o In secondary option X12, ‘Partnering’ has been changed to ‘Collaboration’ better to reflect the intent. - New secondary options:
- Option X15: The contractor’s design (ECC only)
- Option X10: Information modelling - A new secondary option is added specifically to support the use of information models and digital engineering models.
- Option X21: Whole life cost (ECC only): this is just a prompt to the contractor to propose changes that will reduce whole life cost.
- Option X22: Early contractor involvement (ECC only)
- W1, W2 and W3 dispute resolution and avoidance: The works contracts now include a dispute avoidance option W3 which can be used if the UK Housing, Grants, Construction and Regeneration Act does not apply. This is to refer any dispute to a dispute avoidance board.
- New features
- Programming changes - There are new ‘dividing date’ provisions similar to those used in compensation events. New provisions provide for ‘treated acceptance’ of the contractor’s programme in situations where the project manager does not respond to a programme issued by the contractor for acceptance, or to a reminder. This is to unlock the impasse which can sometimes occur.
- Dispute negotiation - A 4 week period for escalation and negotiation of a dispute has been introduced, which takes place prior to commencing any formal proceedings. This requires nominated senior representatives of each party to meet and try to reach a negotiated solution.
- Financial agreement - For payment applications and final accounts, there are now procedures aimed at reaching agreement on the final amounts due. Provisions have been introduced to the cost-based contracts (main options C to F) that allow the contractor to instigate a review and acceptance of its defined cost by the project manager, upon request. This encourages checking and agreement of defined cost and disallowed cost progressively as the work proceeds, and not to defer the exercise until the project has been completed.
- Retention - The secondary option X16 for retention now includes the optional provision of a retention bond instead of having money retained.
- Confidentiality - A new core clause deals with confidentiality, restricting the disclosure of project information.
- Quality - Section 4 quality management provisions introduce a requirement for the contractor to prepare and issue a quality management system and a plan.
- Schedules of cost components - Some changes have been made to simplify the schedules of cost components and associated contract data inputs. The ‘Schedule of Cost Components’ is used only for main options C, D and E and the ‘Short Schedule of Cost Components’ has been removed from these contracts. The short schedule is now used exclusively in options A and B and only to assess compensation events.
- Fee percentage - There is now only one fee percentage, with no separate fee percentage for subcontracted works. The application of fee to defined cost is consistent across all main option
What does assignment in contracts means?
- The transfer of a right from one party to another.
- Assignment involves the transfer of an interest or benefit from one person to another
On the NCA Spring Gardens project, what was included in the
contract documentation you prepared?
On NCA Contract documentation included:
- Contract Conditions (Contract Data part 1 & part 2, incorporated secondary options and Z clauses)
- Works Information
- Pre-Construction information (description of the project, Employer’s arrangements, H&S regulation, environmental restriction)
- Programme
- Activity Schedule
- Advance Payment Bond contract
What were the contract options you advised on?
On NCA I advised the Client regarding different Main Option under NEC suite of contract that you could be incorporated and its consequences. My advice include recommendation with regards to risk allocation, payment mechanism and documentation required for each option.
- Option A priced contract with activity schedule - is a priced contract with an activity schedule, which relates to a programme where each activity is allocated a price and interim payments are made against the completion of each activity. Risk of carrying out the work at the agreed prices are with contractor.
- Option B: priced contract with bill of quantities
- Option C: target contract with activity schedule
- Option D: target contract with bill of quantities
- Option E: cost reimbursable contract - is a cost reimbursable contract in which the contractor is reimbursed the actual costs they incur in carrying out the works, plus an additional fee. The financial risk involved is largely taken by the client.
- Option F: management contract - is a cost reimbursable management contract in which the works are constructed by a number of different works contractors who are contracted to a management contractor. The management contractor is responsible for the work and is paid a fee (the cost that it pays the works contractors plus an additional fee), while the financial risk is largely taken by the client.
What were the “other documents required” you mention? (NCA)
Appart form the Works information the following document were included in Contract Documents for NCA Spring Gardens Project:
- Condition of the contract, Contract Data part one and part two,
- Pre-Construction information (description of the project, Employer’s arrangements,
- H&S regulation, environmental restriction)
- Programme
- Activity Schedule
- Advance Payment Bond contract
What are the risks from using a bespoke form of contract?
- They may not adequately or fairly make provision for all circumstances, and they are not supported by a history of case law.
- may be more difficult to administer as the contractor, PM and other parties do not get use to or familiar with the contractual mechanism (in comparison to standard forms of contract)
- risk of not aligning with the current law e.g. construction act,
How did you assess the figure to be included for L&A damages on
a contract?
- the value of the L&A damages should be calculated by the Client;
- hey are pre-determined damages set at the time that a contract is entered into, based on a calculation of the actual loss the client is likely to incur if the contractor fails to meet the completion date.
- They might include; rent on temporary accommodation, removal costs, extra running costs, and so on.
- They are generally set as a fixed daily or weekly sum, although there may be a more complicated formulae where the works are phased, where may be partial possession and so on.
- It is important that the method of calculation is precisely and formally documented.
My projects:
- NCA Spring Gardens - NEC3 Option A, under option X7 at £714 a day (with cap of 5% of the contract sum)
- GMH - JCT2016 Design and Build contract without quantitates, section 2-32-2 include rates for liquidated dames at £9,000 per day
- Project Winchester
- PCSDA - NEC 3 PSC; option X7 - delay damages at £143 per day (this was not yet in construction)
- Enabling Works - NEC3 ECC Short Contract - Contract data at £2,000 per week capped at 15 weeks.
Why are Liquidated and Ascertained damages included in a
contract?
- The liquidated damages clause allows contracting parties to agree on a reasonable estimate of the damages in case of breach of contract as a measure in order to avoid the potentially costly and time consuming process of trying to determine the amount of actual damages should the breach occur.
- It protect the Client’s from potential losses if the breach of contract occur.
What happens if it’s left blank in a signed contract?
The Client may not be entiteled to liquidated as well as unliquidated damages.
What was the change procedure under the Project Winchester
contract?
- Change Control is raised (should include scope of the change, originator, indication of programme and cost impact).
- Cost estimate of the change is produced and/or programme impact ( if programme permits request for quotation is issued)
- Change submitted for approval to the Client
- ————–
4a. If rejected - reason for rejection is recorded and change closed.
- ————–
5a. If approved change to be instructed, CE to be raised if relevant
5b. cost agreed between Contractor and us
5c. budget allocation adjusted
5d. Client’s cost approval before the implementation
5e. CE implemented.
What happened if it was not adhered to? (change control)
- the change would not be approved and instructed without the Change control procedure
- potential Daley to the project
- additional findings (if needed) would not be approved.
What was the process under the contract for carrying out the
interim valuations?
On Project Winchester the interim valuation process was as follow:
- the contractor was required to issue the application for payment on the agreed due date
- within 7 calendar days, I would issue my recommendation for payment to the PM
- within another 7 days, the PM would issue a Payment Notice with basis of the calculation,
- if required the Client could issue a Pay Less Notice up to 7 calendar day before the payment due
- the payment due day was 30 days from the Payment Notice, however the invoice was required to be issued by the Contractor within 2 day of the Payment Notice (this was agreed as a Z-clause specifically for this project)
What would have been the consequences had you not acted
within the contract valuation timelines?
- If the payer fails to issue a Payment Notice/Pay Less Notice, then the payee can commence a so called “smash and grab” adjudications. The so called “smash and grab” adjudication is one where payment is claimed under a construction contract in the absence of any Payment Notice or Pay Less Notice.
- If the Payment is not made on time, the Contractor is entitled to interest payment based on percentage agreed in the contract.
What was the final account procedure under this contract? (Project Winchester)
- NEC contract is design to deal with all the changes as a CE during the project duration in real time, therefore the final account was agreed on rolling final account basis.
- However, as the Project Winchester was based on option C, the final account figure needed to include the Consultant’s share value.
- In addition, I ensured that all disputes were resolved before agreeing the final account.
- under NEC contract the last valuation effectively become the last valuation.
RICS guidance on Final account procedures explained the procedures for different types of contract.
What was the procedure under this contract for notifying delays?
In order to prove a delay claim under NEC3, a contractor must follow a two step-process to show that (i) a compensation event has occurred; and (ii) that this event caused a delay to the completion of the project.
What would be included within a Letter of Intent?
A letter of intent is a document expressing an intention to enter into a contract at a future date but creates no contractual relationship until that future contract has been entered into. A letter of intent is not an ‘agreement to agree’.
A comprehensive letter of intent should address the following:
- Client authorisation to the contract administrator to represent them.
- Acceptance of the contractor’s offer and definition of the project.
- The agreed contract sum.
- Reference to the tender documents and subsequent amendments (with dates).
- Instruction to proceed on a certain date.
- Site possession date.
- Contract completion date (including details of any phases).
- A full description of the proposed form of contract, including warranties and performance bonds.
- Direction as to whether the contract will be executed by Deed, under seal or under-hand.
- Restriction of the work authorised by the letter of intent, by proceeding with which the contractor has fully accepted the terms of the letter of intent.
- Terms and provisions for cancelling the letter and determining the works at any time prior to signing the full contract
- Insurance provisions and indemnification.
- Agreement that there are no rights to assign the works.
- Disputes resolution procedures.
- Liquidated and ascertained damages to be applied to late completion.
Why was NEC form of contract used for the NCA Spring Garden
project?
- Its use stimulates a collaborative relationship between the two parties to the contract and, hence, of the work included in the contract.
- It can be used in a wide variety of types of work and in any location.
- It is a clear and simple document - using language and a structure which are straightforward and easily understood.
- The UK Cabinet Office recommends the use of NEC by public sector construction procurers on their construction projects (The Construction Playbook)
Why was a JCT or other form of contract not adopted? (NCA Spring Garden)
- not supporting collaboration and cooperation
- Client’s preferences
- better control over the budget through compensation events
- better risk management by Early Warnings
What do you consider are the risks associated with this? (not adopting JC contract)
- some Contractor may not have experience working with NEC contract
- additional training may be required for all Contractor, Client and PM
- if not managed correctly and in line with the timescale, issues may need to be escalated to ARD
- some may say that it required additional administration but it is relatively simple if administer correctly.
What level of insurances were required and why? (NCA Spring Garden)
- A performance bond is commonly used as a means of insuring a client against the risk of a contractor failing to fulfil contractual obligations to the client, although they can also be required from other parties. Performance bonds are typically set at 10% of the contract value.
- Advance payment bond - If the client agrees to make an advance payment to the contractor, a bond may be required to secure the payment against default by the contractor.
- Professional Indemnity insurance - Professional indemnity insurance protects you against claims for loss or damage made by clients or third parties as a result of the impact of negligent services you provided or negligent advice you offered. Compensation claims can be brought against you even if you provided a service or offered advice for free.
- Public liability insurance - Construction contracts will typically include a clause requiring the contractor to carry insurance to cover expense, loss, liability, claim or proceedings for personal injury or death arising from the carrying out of the construction works, or loss or damage to property other than the works.
- Terrorism cover - Damage to the buildings by terrorist action as defined up to the policy sum insured
Why was a consultants share mechanism included for the Project
Winchester scheme?
The Consultant’s share was required under NEC3 Option C contract to enable the Client and Consultant/Contractor to share the benefits of cost savings or cost overruns.
What advice do you provide your clients in relation to COVID-19
risk from a contractual point of view on various contract types
At the time when Covid-19 pandemic happened I was working at the Project Winchester when I was managing Enabling works contract under NEC3 ECSC Contract and NEC3 PSC Contract.
- Under NEC ECSC Contract Clause 60.1 (12), the Contractor was eligible for a CE due to an event which stops contractor from delivering the works and which neither party could prevent; however upon agreement with the contract at the begin of the pandemic it been agreed to temporary stop any enabling works on site. The Client agreed to cover the additional cost of mobilization/demobilization and standing cost for security aspect of site.
- Under NEC3 PSC there was no real change to the scope as the project was still at the design stage and the team was able to continue the works working form home at no additional cost.
What is the Construction Playbook?
The Construction Playbook sets out key policies and guidance for how public works projects and programmes are assessed, procured and delivered.
Outline NEC4 construct structure
- Contract Data Part 1 and Part 2
- Main Clauses (1-9)
- Main Option Clauses (A to F)
- Resolving and Avoiding Disputes (option W1 to W3)
- Secondary Option Clauses (Option X1 to X22 and Y(UK)1, Y(UK)2, Y(UK)3
- Additional condition of contract (Z Clauses)
- Schedule of Cost Components/Short Schedule of Cost components
What are the NEC4 Secondary Option Clauses?
- Option X1: Price adjustment for inflation (used only with Options A, B, C, D)
- Option X2: Changes in law
- Option X3: Multiple currencies (used only with Options A and B)
- Option X4: Ultimate holding company guarantee
- Option X5: Sectional Completion
- Option X6: Bonus for early Completion
- Option X7: Delay damages
- Option X8: Undertakings to the Client and Others
- Option X9: Transfer of rights
- Option X10: Information modelling
- Option X11: Termination by the Client
- Option X12: Multiparty collaboration (not used with Option X20)
- Option X13: Performance bond
- Option X14: Advanced Payment to the Contractor
- Option X15: The Contractor’s design
- Option X16: Retention (not used with Option F)
- Option X17: Low Performance damages
- Option X18: Limitation of liability
- Option X20: Key Performance Indicators (not used with Option X12)
- Option X21: Whole life Cost
- Option X22: Early Contractor involvement (used only with Options C and E)
- Option Y(UK)1: Project Bank Account
- Option Y(UK)2: The Housing Grants, Construction and Regeneration Act 1996
- Option Y(UK)3: The Contracts (Rights of Third Parties) Act 1999
What is a Compensation Event?
- A compensation event is a term used in NEC contracts to mean an event which can affect the cost to the Client of the work being carried out, the time when the works will be completed, or both.
- A compensation event is the only way in which these can be changed. There are no other ways in which a Contractor can claim additional payment for carrying out the works or be allowed additional time in which to complete them.
What is an Early Warning?
- it is a notification raised by the PM or the Contractor about any matter that could affect the cost, completion, progress or quality of the work.
- Clause 16 of NEC3 and Clause 15 of NEC4
What is a Pain/Gain Mechanism?
Used in Target Cost Option C & D - mechanism enabling the contractor, and the Client , to share in the benefits of cost savings, but also share some of the cost when there are cost overruns based on share percentage pre agreed in contract data.
What is required to form a contract?
- offer by one party
- acceptance by the otter party
- consideration of the offer
- intent to form a contract
- legality of a contract
- capacity to make an agreement
In what ways can contract be executed?
- *a. under seal** - signed by the parties, witnessed and most importantly made clear that it is executed as a deed; limitation period 12 years, does not have to be supported by valuable consideration
- *b. under hand** – a ‘simple contract’ that is just signed by the parties- limitation period 6 years – actions cannot be brought after 6 years from the date of which cause of the action occurred.
Valuable consideration – something of value in the eye of law.
What are the reasons for CE?
There are three categories of compensation events.
- An instruction or other change of the Project Manager or Supervisor provided for in the contract. The most significant of these is an instruction of the Project Manager which changes the Scope.
- A failure by the Client, the Project Manager or Supervisor to take an action which the contract requires them to do. This includes, for example, a failure of the Client to allow access at the time required by the contract, or the Project Manager failing to reply to a communication within the period required by the contract.
- A supervening event where the risk has been allocated to the Client under the contract. A significant example of that is the Contractor encountering unexpected physical conditions within the site.
Explain the process of CE
- Compensation Events must be for a reason stated in the contract (Clause 60)
- The PM and Contractor may notify a CE.
- The Contractor has 8 weeks of becoming aware of the event to issue a CE.
- If the PM do not respond to Construction notification within time allowed, the contractor may notify them of their failure. If failure continues for 2 weeks the notification is treated as accepted
- The Contractor is to submit a quotation for CE within 3 weeks (unless otherwise stated in the contract);
- the PM has 2 weeks to replay with a. acceptance of the quotation b. instruction to submit a revised quotation c. that the PM will make their own assessment.
- the PM implementing the CE.
Explain the process of Early Warnings?
- PM or Contractor notify EW as soon as they become aware of matter that could affect cost, programme, completion or quality of works.
- the PM prepares a first Early Warning Register and issue it to the contractor within one week from the start date
- The PM instruct the Contractor to attend the first Early Warning meeting within two weeks of the starting date and them at no longer internals than stated in the contract or when PM or Contractor instruct to attend Early warning meeting
- PM issues the updated Early Warning register within one week from the Early warning meeting.
How assessing the amount due differ between main options?
The different payment mechanisms for the six main Options are based on the use of three key defined terms; the Prices, the Price for Work Done to Date and Defined Cost:
- _Option A: Priced Contract with Activity Schedul_e - PWDD is price for the activates completed within the Activity Schedule; in terms of the Defined cost – this is used for CE assessment based on Schedule of Costs Components.
-
Option B: priced contract with bill of quantities- The PWDD is calculated using the Bill of Quantities rates and lump sums and the total re-measured quantity of work completed according to the definition and criteria stated in this clause
The basis of the definition of Defined Cost in these Options is the cost of the components in the Schedule of Cost Components less Disallowed Cost. - Option C: target contract with activity schedule; - Payments are based on the Contractor’s costs rather than what works were carried on; The PWDD is based on the Defined cost plus fee; the Prices in the Activity Schedule are not used to determine the PWDD but the total of the Prices is used when the target is calculated. the Contractor’s share is also calculated taking into account the differences between the total of Prices (contract + CE) and PWDD based on pre-agreed share percentage.
-
Option D: target contract with bill of quantities; Payments are based on the Contractor’s costs rather than what works were carried on; The PWDD is based on the Defined cost plus fee; BoQ is used to determine the total of the Prices but no for the PWDD.
The basis of the definition of Defined Cost in these Options is the cost of the components in the Schedule of Cost Components less Disallowed Cost. -
Option E: cost reimbursable contract; the contractor is reimbursed the actual costs they incur in carrying out the works, plus an additional fee. The financial risk involved is largely taken by the client.
o PWDD is the total Defined Cost plus the Fee
o the Prices are the forecast of the total Defined Cost for the whole of the works plus the Fee. -
Option F: management contract. - Option F is a cost reimbursable management contract in which the works are constructed by a number of different works contractors who are contracted to a management contractor. The management contractor is responsible for the work and is paid a fee (the cost that it pays the works contractors plus an additional fee), while the financial risk is largely taken by the client.
o PWDD is the total Defined Cost plus the Fee
o the Prices are the forecast of the total Defined Cost for the whole of the works plus the Fee.
Why is the Construction Act important in executing and managing construction contract?
The Housing Grants, Construction and Regeneration Act 1996 (HGRA - also known as the Construction Act) is intended to ensure that payments are made promptly throughout the supply chain and that disputes are resolved swiftly.
Provisions of the act include:
- The right to be paid in interim, periodic or stage payments.
- The right to be informed of the amount due, or any amounts to be withheld.
- The right to suspend performance for non-payment.
- The right to adjudication.
- Disallowing pay when paid clauses.
The Act applies to all contracts for ‘construction operations’ (including construction contracts and consultants’ appointments). If contracts fail to comply with the act, then the Scheme for Construction Contracts applies.
What do you mean by requirement to issue a payment notice under Construction Act?
Under Section 110A of the Construction Act, the payer should give a notice not later than 5 days after the payment due date with the sum that payer considers to e due and basis of the calculation.
What do you mean by the right to suspend performance for non-payment in Construction Act?
Under Section 112 of the Construction Act, if the payeer does not pay for works, the person to whom the payment is due have aright to suspend the performance.
the right of suspension can’t be executed without giving at least 7 days notice of intention to suspend the performance, stating its basis.
What do you mean by the right to adjudication in case of a dispute in Construction Act?
Under Section 108 the Parties have a right to refer a dispute to Adjudication for resolving the issue.
The contract shall :
- enable a party to give notice at any time of his intention to refer a dispute to adjudication;
- provide a timetable with the object of securing the appointment of the adjudicator and referral of the dispute to him within 7 days of such notice;
- require the adjudicator to reach a decision within 28 days of referral or such longer period as is agreed by the parties after the dispute has been referred;
- allow the adjudicator to extend the period of 28 days by up to 14 days, with the consent of the party by whom the dispute was referred;
- impose a duty on the adjudicator to act impartially; and
- enable the adjudicator to take the initiative in ascertaining the facts and the law.
How did you managed the changes on Project Winchester?
- changes were managed through Change Control process to ensure Client’s approval and availability of funding as well as in line with NEC3 procedure for implementing changes through CEs
What are requirements of the Housing Grants, Construction and Regeneration Act 1996 in terms of interim valuations?
Section 109 to 113 contains requirements regarding payments:
- the party of a construction contract are entitled to stage payment for work that are longer than 45 days.
- Every construction contract shall provide an adequate mechanism for determining what payments become due under the contract, and when, and provide for a final date for payment in relation to any sum which becomes due.
- Payment notice to be issue no later than 5 days after the payment due date with basic of the calculation
- the payer must pay the notified sum
What advice have you given to the Client with regards to audit on Project Winchester?
I explained to the Client that as the Contract was incorporating Option c, in line with clause 53 the Consultant/Contractor is obligated to keep accounts and records of their time and expanses and allow the Employer to inspect them at any time.
However as a good practice I recommended to inform the Consultant/Contractor about the audit to ensure their availability and access to all information required e.g invoces, payments made, timesheets.
How did you advice the Client regarding the Consultant’s share mechanism on Project Winchester
I explained to the Client that in line with the contract the Consultant/Contractor is entitled to share the benefits of cost savings, but also share some of the cost when there are cost overruns based on share percentage pre agreed in contract data.
On project Winchester PSC contract for design work was based on option c. I explained that to calculate the share I calculate the difference between the total of the Prices (target cost) and the Price for work done to date (actual cost) then based on pre agreed share percentage I calculated the Consultant entitlement.
On Project Winchester the Consultant was entitled to 50% share payment only if the share range (so the difference between target and actual cost) was between 95 and 100%.
Otherwise if the share range was less than 95% the cost benefits were 100% payable to the Employer and all cost overruns (so share range greater than 100%) was inccure the the Consultant/Contractor.
What are the standard form of Contract?
Standard Form Contracts are agreements that employ standardised, non-negotiated provisions, usually in pre-printed forms.
Example:
- JCT (The Joint Contracts Tribunal)
o DB: Design and build contract.
o CE: Constructing Excellence contract.
o CM: Construction management contract.
o IFC: Intermediate form of building contract.
o MC: Management building contract.
o MTC: Measured term contract.
o MW: Agreement for minor work.
o PCC: Prime cost building contract.
o MP: Major project construction contract.
o RM: Repair and maintenance contract (commercial).
o SBC: Standard Building Contract. - ACA (Association of Consultant Architects)
a. PPC: Standard form of contract for project partnering.
b. SPC: Standard form of specialist contract for project partnering. - Chartered Institute of Building
a. CPC 2013: CIOB Contract for use with Complex Projects. - FIDIC (Fédération Internationale des Ingénieurs-Conseils - the International Federation of Consulting Engineers)
FIDIC’s core suite of contracts includes:
o Conditions of Contract for Construction. The Red Book.
o Conditions of Contract for Plant & Design-Build. The Yellow Book.
o Conditions of Contract for EPC Turnkey Projects. The Silver Book.
o The Short Form of Contract. The Green Book. - NEC (The New Engineering Contract): Engineering and Construction Contract)
Option A: Priced contract with activity schedule.
Option B: Priced contract with bill of quantities.
Option C: Target contract with activity schedule.
Option D: Target contract with bill of quantities.
Option E: Cost reimbursable contract.
Option F: Management contract.
Option G: Term contract.
Other less commonly used forms of contract include:
• IChemE (The Institution of Chemical Engineers) forms of contract.
• ICC Infrastructure Conditions of Contract. A relaunch of CoC (see below)
• The ICE Conditions of Contract (CoC) (previously maintained by the Institution of Civil Engineers) have been withdrawn in favour of NEC contracts. See ICE Conditions of Contract for more information.
• IMechE/IET (The Institution of Mechanical Engineers / The Institution of Engineering Technology) Model Forms of General Conditions of Contract for electrical works (MF/1-4).
• The Civil Engineering Contractors’ Association (CECA) subcontracts for the ICC (above). Contract conditions
What did you learn about FIDIC contract during your trainings?
The FIDIC suite of construction contracts is written and published by the International
Federation of Consulting Engineers. The FIDIC acronym stands for the French version of the Federation’s name (Federation Internationale des Ingenieurs-Conseil).
The best known of the FIDIC contracts are the Red Book (building and engineering works designed by the Employer) and the Yellow Book (M&E, building and engineering works designed by the Contractor).
What are the NEC Suite of Contract?
- Engineering and Construction Contract (ECC)
- Engineering and Construction Short Contract (ECSC)
- Engineering and Construction Subcontract (ECS)
- Engineering and Construction Short Subcontract (ECSS)
- Term Service Contract (TSC)
- Term Service Short Contract (TSSC)
- Professional Service Contract (PSC)
- Professional Service Short Contract (PSSC)
- Supply Contract (SC)
- Supply Short Contract (SSC)
- Framework Contract (FC)
- Dispute Resolution Service Contract (DRSC) (previously NEC3 Adjudicator’s Contract)
- Design Build Operate Contract (DBO) NEW
- Alliance Contract (ALC) NEW
What is a contract?
A contract is a legally binding agreement between at least two parties in order to fulfil an obligation in exchange for something of value. Contracts can either be written, oral, or a combination of both.
What were the amendments to the Construction Act in 2011?
The act was amended in October 2011 to close loopholes within its provisions.
The act now applies to construction contracts including those that are not in writing. Adjudication clauses must still be in writing, otherwise the scheme for construction contracts applies.
It is no longer allowable to define within a contract who should bear the cost of adjudication, and adjudicators have the right to correct errors in their decisions within 5 days of delivering that decision.
Specific changes have also been made regarding procedures for making payments:
• The dates for payments must be set out in the contract.
• The client (or specified person) must issue a payment notice within five days of the date for payment, even if no amount is due. Alternatively, if the contract allows, the contractor may make an application for payment, which is treated as if it is the payment notice.
• The client (or specified person) must issue a pay less notice (previously a withholding notice) if they intend to pay less than the amount set out in the payment notice, setting out the basis for its calculation.
• The notified sum is payable by the final date for payment.
• If the client (or specified person) fails to issue a payment notice, the contractor may issue a default payment notice. The final date for payment is extended by the period between when the client should have issued a payment notice and when the contractor issued the default payment notice. If the client does not issue a pay less notice, they must pay the amount in the default payment notice.
• Pay when certified clauses are no longer allowed, and the release of retention cannot be prevented by conditions within another contract. So for example work contractors on a management contract project must have half of their retention released when their part of the works reach practical completion, not when the project as a whole reaches practical completion. This also applies to trade contractors on construction management contracts.
• There are also changes to the right to suspend work for non-payment or to suspend part of the works and to claim costs and expenses incurred and extension of time resulting from the suspension.
What is rectification period ?
The defects liability period (now called the ‘rectification period’ in Joint Contracts Tribunal (JCT) contracts) begins upon certification of practical completion and typically lasts six to twelve months.
During this period, the client reports any defects that arise to the contract administrator who decides whether they are defects (i.e. works that are not in accordance with the contract), or whether they are in fact maintenance issues. If the contract administrator considers they are defects, then they may issue instructions to the contractor to make them good within a reasonable time.
What are defects?
Defects are works that have not been carried out in accordance with the contract
how defects are dealt with under NEC?
Defects and process of dealing with defects are cover in Section 4 - Testing and defect (NEC3) and Quality Management (NEC4).
- the Contractor and the Supervisor notify each other of their tests and inspections
- If the test showing defect the contractor correct the defects
- until the defects date the Supervisor may instruct the Contractor to search for defect.
What is a purpose of a valuation?
To provide advice to the certifier on value to allow them to issue their interim certificate
What are the main element of valuation?
- Preliminaries
- Variations
- Extension of time and loss and expense
- Special payments for off-site goods and materials
- Acceleration cost
- provisional sums
- Contractor’s fee
- cost/expenses relating to the contractor’s rights
- specific adjustments (advanced payment, retention, fluctuation and so on)
What are loss and expanses?
Construction contracts will generally provide for the contractor to claim direct loss and/or expense as a result of the progress of the works being materially affected by relevant matters for which the client is responsible, such as:
- Failure to give the contractor possession of the site.
- Failure to give the contractor access to and from the site.
- Delays in receiving instructions.
- Opening up works or testing works that then prove to have been carried out in accordance with the contract.
- Discrepancies in the contract documents.
- Disruption caused by works being carried out by the client.
- Failure by the client to supply goods or materials.
- Instructions relating to variations and expenditure of provisional sums.
- Inaccurate forecasting of works described by approximate quantities.
- Issues relating to CDM.
- Claims may comprise costs resulting from disruption to the works or from delays to the works (prolongation).
The contractor must give written notice of a claim as soon as it becomes reasonably apparent that the regular progress of the works is being materially affected. This need not necessarily result in a delay to the completion date, and so claims for loss and expense and claims for extensions of time do not necessarily always run together.
Claims are restricted to ‘direct’ loss and expense and so ‘consequential losses’ (such as lost production) are generally excluded. Direct losses are those that ‘flow naturally’ from the breach of contract.
What is Hudson formula?
The Hudson Formula derives from Hudsons Building and Engineering Contracts and is used for the assessment of delay damages in construction claims.
The formula is:
(Head Office overheads + profit) ÷ 100 x contract sum ÷ period in weeks x delay in weeks
Where Head Office is head office overheads and profits percentage submitted in a tender.
how loss and expenses are dealt with under NEC?
The New Engineering Contract (NEC3) contains provision for the contractor to claim payment for ‘compensation events’ rather than loss and expense.
What is insurance? Where in contract (NEC, JCT)
Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured.
NEC4 – Cl. 83 insurance cover, Cl. 84 – Insurances policies, Cl. 85 – if contractor does not insure, Cl 86. insurance by the Client, X13 – Performance Bond, X14 (1-2) – Advanced Payment Bond, X16.3 – retention bond.
JCT2016 – Section 6: Injury, Damage and Property Damage: Personal Injury and Property Damage, Insurance of the Works and Existing Structures (sub-contractors – specified Perils cover, Terrorism Cover, Loss or Damages), Professional Indemnity Insurance, Joint Fire Code; Section 7: Assignment, Performance Bonds and Guarantees, Third Party Rights and Collateral Warrantees; Schedule 6: Form of Bonds – Part 1 – Advanced Payment Bond, Part 2 – bond in respect of payment for off-site materials and/ or goods, Part 3 – Retention Bond
What are the main insurances in construction?
- Collateral warranty - A collateral warranty is a legally binding agreement which is additional to a separate contractual agreement between two parties and which imposes an extended duty of care and a broader liability on those parties. Such a warranty effectively provides for a duty of care to be extended by a contracting party to a third party that is not party to the original contract. An example would be where an architect of a new office development owes a duty of care to an occupier of the development in so far as any subsequent defects which may arise are concerned.
- Contractors all-risks insurance/contract works insurances - This is a policy that covers all risks associated with a construction project, commonly issued under the joint names of a contractor and a principal client. Cover usually protects against the cost of unforeseen loss or damage to building works, machinery movement, advanced business interruption and public liability, installation and constructional plant during the construction period but can be extended to include the maintenance period too. In addition, cover can be included for tools, plant owned by the policy holder or plant hired in. This type of policy can be extended to include a range of additional covers such as public liability, business interruption and equipment erection.
- Directors and officers insurance - This type of insurance protects Company Directors and Officers from a claim by shareholders or creditors of a company in the event that a claim is made in respect of their alleged wrongdoing. All Company Officers owe a duty to their company and, in addition the concept of ‘Wrongful Trading’ is particularly hazardous if a company goes into administration or is liquidated.
- Employers’ liability insurance - All firms who employ staff are legally required to hold Employers’ Liability Insurance (EL). EL insurance will help pay compensation if an employee is injured or becomes ill because of the work they do for the employer.
- Public liability insurance and employer’s liability insurance are usually offered in a single policy which may also cover office contents and buildings insurance requirements.
- Flood insurance - The twin effects of climate change and development on flood plains have become increasingly problematical for homeowners and property insurers. Greater amounts of rainfall generally and more and more exceptional weather incidents have resulted in the insurance industry facing ever-rising flood-related insurance claims.
- Latent defects insurance - Latent defects insurance provides cover for new buildings (or new works to existing buildings) in the event that latent defects become apparent. Latent defects insurance is seen to provide more complete cover for defects than other methods, (such as collateral warranties) which may require proof of breach of contract. This can take considerable time and can be subject to complications such as net contribution clauses and insolvencies.
- Legal expenses insurance - This is a relatively inexpensive form of insurance which can either be insured via a specific policy or as a section of a combined policy. Such are the levels of legal costs, often with no certainty of recovery, that this type of insurance is seen as an inexpensive safety net.
- Office combined/contents/buildings insurance - Business owners will usually want to ensure that their assets are insured against damage or theft. In addition, these policies may have sections offering cover against Business Interruption or Consequential Loss as well as fraud.
- Business Interruption Insurance is particularly important as it covers the loss of profit which may be caused by an interruption to commercial activity occasioned by flood or fire. Loss of rent receivable from a tenant can also be insured in this way.
- Performance bond - A performance bond is commonly used in the construction industry as a means of insuring a client against the risk of a contractor failing to fulfil contractual obligations. The most common concern is that the contractor will become insolvent before completing the contract. Where this occurs, the bond provides guaranteed compensation up to the amount of the performance bond. Bonds can be issued either by an insurance company or bank. The cost of such a bond is usually borne by the contractor. Whether or not such a bond is required will depend, in the main, on the perceived financial strength of the party bidding to win a contract.
- Professional indemnity insurance - For all providers of professional services, professional indemnity insurance (PI insurance) is considered an ‘essential’. Indeed many clients will not enter into a contractual relationship with a supplier unless they can demonstrate that they hold professional indemnity insurance to a minimum level. Professional indemnity insurance is there to cover proven negligence on the part of the service provider. The consequences of such negligence on substantial construction projects can be enormously expensive to correct and this type of insurance should, if arranged at the commensurate level. In practice this form of insurance pays legal costs, not damages, and for this reason a willingness by a policyholder to meet, say, the first £10,000 of a potential claim should result in a lower overall premium as the insurer will have more confidence that they will not be called upon to pay out themselves.
- Public liability insurance - Public liability insurance is generally required of contractors to provide cover against personal injury or death, or loss or damage to property of third parties such as members of the public or independent sub-contractors. Public liability insurance and employer’s liability insurance are usually offered in a single policy which may also cover office contents and buildings insurance requirements.
- Terrorism insurance - This type of insurance can be obtained on a ‘stand-alone’ basis or as an addition to a conventional buildings or commercial combined policy. Simply stated, it covers material damage caused by an act of terrorism. It is therefore particularly relevant for projects or buildings located in areas which may be considered to be high-risk terrorist targets such as the City of London.
What is termination? which clauses in NEC
Most forms of contract will include termination clauses, setting out the circumstances under which a contract may be terminated. When a contract is terminated, the parties to the contract are no longer obliged to perform their obligations under the contract.
Terminating a contract can be complex, and it is very important that the correct procedures are followed. This may involve issuing notices setting out the grounds for termination, allowing warning periods, and giving the opportunity to remedy breaches.
NEC4 – Section 9: 90 – Termination, 91 – Reasons for termination, 92- Procedures on termination, 93- Payment on termination, X11 – Termination by the Client.
What is a breach to a contract?
A breach of contract is a violation of any of the agreed-upon terms and conditions of a binding contract. The breach could be anything from a late payment to a more serious violation such as the failure to deliver a promised asset.
Steps to follow when the contractor goes insolvent
- secure the site
- accurate assessment must be made of works completed and how much is required for completion. Interim valuation/notional final account/ financial position
- list of unfixed materials on and off side and paid by the employer
- assess amount due on termination (Cl 93.1)
- check to make sure that all works are still insured
- if the contractor required the contractor to take out a performance bond the underwriters should be informed.
What are the Collateral warranties, Third Party rights and Doctrine of privity of contract ?
- *The doctrine of privity of contract** is a common law principle which provides that a contract cannot confer rights or impose obligations upon any person who is not a party to the contract.
- *Collateral warranties** - A collateral warranty is a binding contract between a third party with an interest in the project under construction or in the completed project (such as a funder, purchaser or tenant) and a party who was involved in the design, management and/or construction of the project. A collateral warranty would allow a third party to make a claim against, for example, a structural engineer, if the engineer’s design fell below a required standard of skill and care and/or a contractor, if the building was built defectively. In order for any claim to be successful under a collateral warranty, as in any contractual claim, the third party would have to show that it suffered loss as a result of the defective design and/or workmanship.
- *The Contracts (Rights of Third Parties) Act, 1999 e**nables third party rights to be created by a contract. This is seen by some to offer an alternative to collateral warranties. The right created is to enforce a term of a contract, not the whole contract itself. For example, if a building contract contains a term that the contractor is required to use materials of good quality, then that term might be the subject of a third party enforcement right. However, the contract must expressly state that a third party has specific rights for the Third Party Rights Act to apply, and often these are excluded. Third party rights are typically provided for by way of a notice stating that the third party is entitled to rely on specific provisions of the contract.
What is a difference between assignment and novation?
Transferring an interest in a construction contract from one party to another can be done by either assignment or novation. The differences are minimal but important to understand, as the assignment of an interest when it could be novated might render one party liable for the contract if the other party is unable to perform their obligations.
Assignment is the right to transfer ‘choses in action’ defined as ‘all personal rights of property which can only be claimed or enforced by action and not by taking physical possession’. This definition includes benefits arising under a construction contract such as right to payment, but not burdens such as the obligation to pay. The definition also includes claims for breach of contract.
A common error is to assume that the right to assign must be agreed as part of a contract, like a novation. Assignment is a unilateral right created by statute, Section 136 of The Law of Property Act 1925 or by the law of equity (law developed by the Chancery Division of the High Court of England and Wales). However, the right to assign can be excluded, or restricted, by contract, for example, it is common in collateral warranties to restrict to one assignment without the written permission of the warrantor.
By comparison, novation is a process in which the contractual rights and obligations are transferred to a third party. The benefits and the burdens can be transferred by a novation agreement, rather than just the benefits as with assignment. In building design and construction, novation normally refers to the process by which design consultants are initially contracted to the client but are then ‘novated’ to the contractor.
What is a vicarious performance?
‘Vicarious performance’ refers to the carrying out of contractual obligations by a person who is not party to a contract, usually by sub-contract or assignment. So, for example, performance by a sub-contractor constitutes vicarious performance on behalf of the main contractor, who remains fully responsible for the work, except where the main contract provides otherwise. Whether the contractor is allowed to delegate vicarious performance of either all or some of their obligations to a third party will depend on the terms of the contract.
What is a partial possession?
A building contract may allow the employer to take partial possession of part of the works, before they have been formally completed. It is unusual (save in exceptional circumstances) to use both sectional completion and partial possession on a single project. Partial possession often requires the agreement of the contractor but allows the employer to use part of the works for their intended purpose prior to completion of the whole of the works.
What is an insolvency?
Insolvency is the state of being unable to pay the debts, by a person or company (debtor), at maturity; those in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency.
Cash-flow insolvency is when a person or company has enough assets to pay what is owed but does not have the appropriate form of payment. For example, a person may own a large house and a valuable car, but not have enough liquid assets to pay a debt when it falls due. Cash-flow insolvency can usually be resolved by negotiation. For example, the bill collector may wait until the car is sold and the debtor agrees to pay a penalty.
Balance-sheet insolvency is when a person or company does not have enough assets to pay all of their debts. The person or company might enter bankruptcy, but not necessarily. Once a loss is accepted by all parties, negotiation is often able to resolve the situation without bankruptcy.
What is Parent company guarantee PCG?
A parent company guarantee (PCG) is a guarantee given by one contracting party’s ultimate or intermediate holding company in favour of the other contracting party to secure the performance of that party’s obligations under the contract.
What is nomination?
A nominated sub-contractor is one that is selected by the client to carry out an element of the works. Nominated sub-contractors are imposed on the main contractor after the main contractor has been appointed.
The mechanism for nominating is an instruction in relation to a prime cost sum to which the main contractor is entitled to add a mark-up and attendance costs. It allows the client to have direct separate negotiations with major suppliers of goods or services and feed their appointment and design input into the contract after works by the main contractor have commenced.
Examples of situations where sub-contractors might be nominated could include:
- Long delivery items where ordering is necessary before the appointment of the main contractor. For example, lifts, switchgear, or refrigeration plant.
- Where specialist design input is required in the early stages of design development. For example, for a cladding system.
- Where the client directly orders a preferred item on which design is to be based. For example complex or specialist industrial plant or equipment.
What is the difference between a Provisional Sum & a PC Sum?
A provisional sum is an allowance (or best guess), usually estimated by a cost consultant, that is inserted into tender documents for a specific element of the works that is not yet defined in enough detail for tenderers to accurately price. A prime cost sum (PC or PC sum) is an allowance, usually calculated by the cost consultant, for the supply of work or materials to be provided by a contractor or supplier that will be nominated by the client (that is, a supplier that is selected by the client to carry out an element of the works and imposed on the main contractor after the main contractor has been appointed).
What are domestic subcontractors?
A domestic sub-contractor is any sub-contractor, other than a nominated-sub contractor, that the main contractor sub-contracts to carry out part of the works. The work of the sub-contractor is the responsibility of the main contractor as far as the contract between the main contractor and the client is concerned.
What are nominated subcontractors?
A nominated sub-contractor is one that is selected by the client to carry out an element of the works. Nominated sub-contractors are imposed on the main contractor after the main contractor has been appointed.
What are the reasons for CE? (paricular)
under NEC 4 there are 21 reasons for CE included in Clause 60. These are:
- The Project Manager gives an instruction changing the Scope
- The Client does not allow access to and use of each part of the Site by the later of its access date and the date for access shown on the Accepted Programme.
- The Client does not provide something which it is to provide by the date shown on the Accepted Programme
- The Project Manager gives an instruction to stop or not to start any work or to change a Key Date.
- The Client or Others do not work within the times shown on the Accepted Programme, or do not work within the conditions stated in the Scope or carry out work on the Site that is not stated in the Scope.
- The Project Manager or the Supervisor does not reply to a communication from the Contractor within the period required by the contract.
- The Project Manager gives an instruction for dealing with an object of value or of historical or other interest found within the Site.
- The Project Manager or the Supervisor changes a decision which either has previously communicated to the Contractor.
- The Project Manager withholds an acceptance (other than acceptance of a quotation for acceleration or for not correcting a Defect) for a reason not stated in the contract.
- The Supervisor instructs the Contractor to search for a Defect and no Defect is found unless the search is needed only because the Contractor gave insufficient notice of doing work obstructing a required test or inspection.
- A test or inspection done by the Supervisor causes unnecessary delay.
- The Contractor encounters physical conditions which
- A weather measurement is recorded within a calendar month at the value of which by comparison with the weather data is shown to occur on average less frequently than once in ten years.
- An event which is a Client’s liability stated in these conditions of contract.
- The Project Manager certifies take over of a part of the works before both Completion and the Completion Date.
- The Client does not provide materials, facilities and samples for tests and inspections as stated in the Scope.
- The Project Manager notifies the Contractor of a correction to an assumption which the Project Manager stated about a compensation event.
- A breach of contract by the Client which is not one of the other compensation events in the contract.
- An event which
• stops the Contractor completing the whole of the works or
• stops the Contractor completing the whole of the works by the date for planned Completion shown on the Accepted Programme, and which
• neither Party could prevent,
• an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable to have allowed for it and
• is not one of the other compensation events stated in the contract. - The Project Manager notifies the Contractor that a quotation for a proposed instruction is not accepted.
- Additional compensation events stated in Contract Data part one.
What are the NEC contract main option?
- Option A priced contract with activity schedule
- Option B: priced contract with bill of quantities
- Option C: target contract with activity schedule
- Option D: target contract with bill of quantities
- Option E: cost reimbursable contract
- Option F: management contract
What are the NEC4 Dispute resolutions Clauses?
- Option W1 – used when adjudication is the method of dispute resolution and the UK Housing Grants, Construction and Regeneration Act 1996 does NOT apply
- Option W2 – used when adjudication is the method of dispute resolution and the UK Housing Grants, Construction and Regeneration Act 1996 applies
- Option W3 – Used when a Dispute Avoidance Board is the method of dispute resolution and the UK Housing Grants, Construction and Regeneration Act does NOT apply.
What is a contractor expected to include within a Compensation Event?
- Actual defined costs for work already done (if any)
- Forecast defined costs for work anticipated
- The resulting fee
- Risk allowance for time and price for matters which have a significant chance of occurring and are a contractor’s risk
How are liquidated damages applicable under the NEC?
They are called ‘delay damages’ and are optional under clause X7 and specified in Contract Data Part One
Under which conditions can the activity schedule be adjusted?
- Compensation event
- Changes in a planned method of working (re-scheduling)
- Acceptance of a quotation for acceleration
What are defined costs?
- Defined Cost is the cost of components in the Short Schedule of Cost Components (Opt A & B) or in the Schedule of Cost Components less disallowed cost (Opt C & D & E).
- In Option F, defined cost is the amount of payments due to Sub-contractor plus prices for work done by the Contractor less Disallowed Cost.
What are disallowed cost?
In Option C & D & E disallowed costs is:
- not justified by the Contractor’s account and records,
- should not be paid to the Sub-consultant in line with the contract
- was incurred only because the Contractor did not follow an acceptance or procurement procedure stated in the Scope, gave an Early Warning, given notification to the PM of the preparation of adjudication
- correcting Defects after completion or caused by the Contractor, - Excluded in Opt F
- Plant and Material not used to Provide the Works, - Excluded in Opt F
- resources not used to Provide the Works - Excluded in Opt F
- preparation for an adjudication - Excluded in Opt F.
What kind of items are included in the Schedule of Cost Components?
People – directly and not directly employed by the Contractor
- Equipment
- Plant and Material
- Subcontractors
- Charges (water, gas, electricity, telephone, internet)
- Manufacture and fabrication – cost of manufacture and fabrication of Plant and Materials specifically for this work
- design
- Insurance
How are ambiguities and inconsistencies dealt with under the NEC?
Clause 17.1 – The Project Manager or the Contractor notifies the other as soon as they become aware of an ambiguity or inconsistency
Clause 60.3 – if there is an ambiguity or inconsistency within the Site information, the Contractor is assumed to have taken into account the more favourable conditions.
Clause 63.10 – the CE is assessed in favour of the party that did not make mistake
In summary, ambiguity in the Scope is the Employer’s risk and corrected by way of a compensation even
Ambiguity - something is unclear and can be interpreted in many ways and therefore possibly causing confusion.
Inconsistency - contains conflicting information
What is the role of the quantity surveyor under the NEC?
- Not mentioned in contract.
- Support role to contractor and PM to agree cost of compensation events.
- Options B and D involve quantities and measurement.
- Build up estimates for schedule of activities
- Agree target costs under options C and D
- Audit role in open book accounting in target contracts.
When is option A suitable?
When the employer’s requirements are defined accurately with drawings and specifications; or performance specification.
The contractor is responsible for measuring the works and preparing the schedule of activities.
The contractor provides a firm lump sum for each activity inclusive of design work if applicable. Well suited to D&B projects.
The contractor is paid when an activity has been completed, Stage payments.
The schedule of activities should relate to the programme.
When is Option B suitable?
When the design has been finalised at tender stage and little contractor’s design is required. The employer prepares a bill of quantities on accordance with the rules of NRM2 or CESSM4. The contractor price it.
Quantities are an employer’s risk.
Rarely suited to modern projects.
When are options C and D suitable?
When the extend of work is not fully defined
Where the client’s risks under option A would be too great
When the employer sees a benefit in encouraging collaboration
Financial risks are shared between the contractor’s and employer’s share percentages.
The contractor calculates the target cost based on assumed works. It includes defined costs + fees, O&P.
At final account the contractor and employer share the savings or additional costs. This encourages the contractor to reduce his costs.
When is option E suitable?
When early start on site is required but the scope of work is not sufficiently developed for a target contract.
Most risks are borne by the employer. The contractor is reimbursed defined costs + his fees.
Little incentive for contractor to reduce his cost but suitable when time and quality are overriding priorities. (urgent repairs, work of experimental nature, high employer’s involvement)
Design progress as works proceeds.
When is option F suitable?
Where there is a need to coordinate a number of sub-contractors and suppliers
When the employer does not have sufficient capability to manage the project When the programme is tight and requires an early start on site
The design progress as packages are being procured. The contractor manage interfaces.
What would you say if the Client asked you to draft a letter of intent?
- It is a legally binding agreement – like a contract – and we would NOT draft those The PM / contractor / employer may have some standard terms they use
- Legal advice should be sought
What should be included in a letter of intent?
To ensure that a letter of intent is fully enforceable and will withstand scrutiny, the following information should be included in clear and unambiguous terms:
- The parties – the names and titles of the parties as stated within the contract documents
- The works – described in clear and concise terms
- The price (if agreed) – clearly stating the currency and whether this price is to be considered a maximum expenditure limit until the formal execution of the contract
- A statement of the intention of the parties to enter into and be bound by a formal contract
- The dates for possession and completion and whether there is any sectional completion envisaged or required within the contract
- Entitlements of both parties upon the revocation, frustration or repudiation of the contract
- Procedure for calculating interim payments if work proceeds
- Procedure for calculating and issuing final payment should the work not proceed or if a formal contract is not executed between the parties
- Insurances that are to be provided
- The maximum expenditure limit allowed under the letter of intent
- Termination procedure
- Confirmation that the contract created by the letter of intent will terminate upon execution of the principle contract(s)
- Dispute resolution procedure.
Latent Defects – describe what they are and contractual issues associated?
It is the nature of construction projects that faults and defects caused by failures in design, workmanship or materials, may not become apparent or readily detectable (even with the exercise of reasonable care) until many years after completion of the project, long after the end of the defects liability period. Such defects are known as latent defects (as opposed to patent defects which are apparent).
Examples of common latent defects include:
- Defective basement tanking allowing water penetration.
- Inadequate wind-posts or wall ties causing movement damage to walls.
- Under-strength concrete or misplaced reinforcement allowing movement damage to the structure.
- Inadequate foundations causing subsidence of the building.
- It is also a feature of construction projects that the completed building will have a life-cycle of many years often with a succession of future owners who had no involvement in the original construction, but who have a liability to maintain the structure.
What is reasonable skill & care?
A contractual obligation to carry out works with reasonable skill and care creates a performance obligation which is analogous to the standard of care in negligence. It is an implied duty to exercise the level of skill and care expected of another reasonably competent member of the profession.
This is as opposed to a ‘fit for purpose’ obligation, which requires that works or services must be good enough to do the job they were intended to do.
The important distinction between reasonable skill and care and fitness for purpose is that fitness for purpose is an absolute obligation and provided the obligation is clearly established or defined by the contract document, the party in breach will not be able to plead as a defence that they have discharged their services with reasonable skill and care.
What is fit for purpose?
Fitness for purpose obligation imposes a higher duty, as it is an absolute obligation to achieve a specified result, a breach of which does not require proof of negligence. This duty stems from the Sale of Goods Act 19796 which imposes implied terms on any seller acting in the course of business that the goods supplied will be of satisfactory quality and, where the purchaser makes known any particular purpose, are reasonably fit for their intended purpose.
In a construction context, this means that a contractor is effectively guaranteeing that the components and the finished building will be fit for their intended purpose.
What are Prime Cost?
A prime cost sum (PC or PC sum) is an allowance, usually calculated by the cost consultant, for the supply of work or materials to be provided by a contractor or supplier that will be nominated by the client (that is, a supplier that is selected by the client to carry out an element of the works and imposed on the main contractor after the main contractor has been appointed).
Collateral warranties, Third Party rights and Doctrine of privity of contract – explain the difference
- The doctrine of privity of contract is a common law principle which provides that a contract cannot confer rights or impose obligations upon any person who is not a party to the contract.
- Collateral warranties - A collateral warranty is a binding contract between a third party with an interest in the project under construction or in the completed project (such as a funder, purchaser or tenant) and a party who was involved in the design, management and/or construction of the project. A collateral warranty would allow a third party to make a claim against, for example, a structural engineer, if the engineer’s design fell below a required standard of skill and care and/or a contractor, if the building was built defectively. In order for any claim to be successful under a collateral warranty, as in any contractual claim, the third party would have to show that it suffered loss as a result of the defective design and/or workmanship.
- The Contracts (Rights of Third Parties) Act, 1999 enables third party rights to be created by a contract. This is seen by some to offer an alternative to collateral warranties. The right created is to enforce a term of a contract, not the whole contract itself. For example, if a building contract contains a term that the contractor is required to use materials of good quality, then that term might be the subject of a third party enforcement right. However, the contract must expressly state that a third party has specific rights for the Third Party Rights Act to apply, and often these are excluded. Third party rights are typically provided for by way of a notice stating that the third party is entitled to rely on specific provisions of the contract.
What is termination? which clauses in NEC
Most forms of contract will include termination clauses, setting out the circumstances under which a contract may be terminated. When a contract is terminated, the parties to the contract are no longer obliged to perform their obligations under the contract.
Terminating a contract can be complex, and it is very important that the correct procedures are followed. This may involve issuing notices setting out the grounds for termination, allowing warning periods, and giving the opportunity to remedy breaches.
NEC4 – Section 9: 90 – Termination, 91 – Reasons for termination, 92- Procedures on termination, 93- Payment on termination, X11 – Termination by the Client.
What are the NEC4 Secondary clause?
Secondary Option Clauses
Option X1: Price adjustment for inflation (used only with Options A, B, C, D)
Option X2: Changes in law
Option X3: Multiple currencies (used only with Options A and B)
Option X4: Ultimate holding company guarantee
Option X5: Sectional Completion
Option X6: Bonus for early Completion
Option X7: Delay damages
Option X8: Undertakings to the Client and Others
Option X9: Transfer of rights
Option X10: Information modelling
Option X11: Termination by the Client
Option X12: Multiparty collaboration (not used with Option X20)
Option X13: Performance bond
Option X14: Advanced Payment to the Contractor
Option X15: The Contractor’s design
Option X16: Retention (not used with Option F)
Option X17: Low Performance damages
Option X18: Limitation of liability
Option X20: Key Performance Indicators (not used with Option X12)
Option X21: Whole life Cost
Option X22: Early Contractor involvement (used only with Options C and E)
Option Y(UK)1: Project Bank Account
Option Y(UK)2: The Housing Grants, Construction and Regeneration Act 1996
Option Y(UK)3: The Contracts (Rights of Third Parties) Act 1999
Option Z: Additional conditions of contract
How construction act is lined to NEC contract?
implemetnation of option Option Y(UK)2: The Housing Grants, Construction and Regeneration Act 1996
What are the dayworks/rates?
Daywork is a means by which a contractor is paid for specifically instructed work on the basis of the cost of labour, materials and plant plus a mark up for overheads and profit. It is generally used when work cannot be priced in the normal way.
