Contract Practice Flashcards
What 6 conditions need to be met for a contract to be in place?
- Offer by one party (OFFER)
- Acceptance by the other party (ACCEPTANCE)
- Consideration of the office (CONSIDERATION)
- Intent to form a contract (INTENT)
- Legality of contract (LEGALITY)
- Capacity to make agreement (CAPACITY)
What is a contract?
A legally binding agreement (between two parties) to provide goods or services within a specified timeframe.
What are the two ways in which a contract can be executed?
- Under seal – signed by both parties, witnessed and executed as a deed
- Under hand – signed by parties (simple contract)
What are the differences between under-hand and under-seal contracts?
Under seal:
- Requires valuable consideration (something of value)
- Executed as a deed (binding )
- Limitation period of 12 years
Under had:
- Does not require above
- Limitation period of 6 years
What is the construction act’s proper name? (HGCRA)
The Housing Grants, Construction and Regeneration Act (1996)
What does the HGCRA do?
Ensures that payments are made promptly throughout the supply chain and that disputes are resolved swiftly (provides adjudication mechanism)
Provides a framework for fairer contracts and working relationships.
- Fairer payment conditions (Interim payments for contracts over 45 days; must state a date for final payment)
- Set off / Improve the cashflow of the industry - (Employer must issue a withholding notice / pay less notice 7 days before the final date for payment)
- Suspension – (Contractor has a right to suspend if not paid in accordance with the contract)
- Adjudication - (Statutory right for parties to refer any dispute to adjudication)
What are the main suites of construction contract
- JCT 2016 – Joint Contracts Tribunal
- NEC 4 – New Engineering Contract
- ICE 7 – Institution of Civil Engineers
- FIDIC – International Federation of Consulting Engineers
Why use standard forms of contract?
- Save time in drafting contracts
- They are cheaper than getting a bespoke contract drawn up
- Offer a level of familiarity with contract terms between the parties
– Readily understood by construction professionals - Provides a checklist of items to be agreed
- Benchmark for negotiating terms
- Benefit from judicial precedents
– Tried and tested contracts in court, therefore you should be able to predict the outcome in the courts.
Name some NEC forms of contract
- ECC (Engineering Construction Contract)
- TSC (Term Service Contract) – appointment of supplier to manage/provide a service e.g. site security
- PSC (Professional Services Contract) – design and consultancy work
- SC (Supply Contract)
- ECS (Engineering and Construction Subcontract) – trickle down version of ECC for C & SC.
- Short version of all of the above for more straight forward low risk work
What are the main types of NEC contract?
- Option A – fixed price with activity schedule
- Option B – fixed price with bill of quantities
- Option C – Target cost with activity schedule
- Option D – Target cost with bill of quantities
- Option E – Cost reimbursable
- Option F – Management contract
- Option G – Term contract (for the appointment of a consultant based on a priced schedule of tasks)
What is a target cost contract and why use it?
A ‘target cost’ is agreed between the parties which is made up of the Contractor’s estimate of the ‘Defined Costs’ plus a fee which is used is to cover the Contractor’s costs, overheads and profit.
Pros:
-beneficial where isn’t yet fully defined
- where risks anticipated are greater than usual
- motivates contractors to work in most cost-efficient way
- promotes innovation
- lump sum contract can often be overinflated to account for risk
Cons:
- contractor may use cheaper products of a lesser quality
- Differences may occur between the contractor and the client if changes occur during the project due to which cost may increase.
- Requires a lot of commercial support and auditing to maintain the contract
Why use an Option E contract?
For emergency works – cost isn’t a priority and client carries all financial risk
What is the build of the NEC contract?
- Core Clauses [1-9] (5. Payment, 6. Compensation Events)
- Main Option Clauses [A-F] (C – Target contract with Activity schedule)
- Dispute resolution [W1-W2]
- Secondary option clauses [X1-X22], [Y(UK)1-Y(UK)2] & Z’s
- Schedule of Cost Components (People, Equipment, Insurance) [and/or short]
- Contract Data
– Part one – Data provided by the Client
– Part two – Data provided by the Contractor
What are defined costs in the NEC?
- Used to assess CEs in all NEC4 ECC main options
o Stated in SSCC for options A & B
o SCC for C-E - For cost-reimbursable options C, D, E and F, it is also used for routine payment.
– essentially costs that can be recovered by the contractor - Defined Cost is costs based on rates and percentages stated in the Contract Data and other amounts at open market or competitively tendered prices
Essentially, Defined Cost = payments due to subcontractors + the cost of components for other works (such as plant, equipment, people etc.) - disallowed cost.
What are disallowed costs in the NEC?
Cost the Contractor may have incurred and fall within the definition of Defined Cost, but which the PM decides:
- The costs have only been incurred due to some failure or default of the Contractor (inc. certain defects)
- is not justified by the Contractor’s accounts and records;
- should not have been paid to a Subcontractor or supplier in accordance with his contract;
- was incurred only because the Contractor did not:
follow an acceptance or procurement procedure;
give an early warning which this contract required.
Disallowed Costs are therefore cost borne entirely by the Contractor
What is the NEC payment process?
Contractor submits AFP before due date > PM has 7 days to assess from due date > payment must be made within three weeks of due date.
Monthly assessment date - Amount due = Price for Work Done to Date - less retention
What is the schedule of cost components (SCC)?
It is NOT a list of rates or prices.
It just sets out what the contractor will be paid for and how that is calculated. And nearly all the items in the schedule of cost components are paid for at what they have actually cost the contractor.
What are the categories in the SCC / SSCC?
- People
- Equipment
- Plant and Materials
- Subcontractors
- Charges
- Manufacture and fabrication
- Design
- Insurance
