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.