Contract Practice

Question 1

Contract formation

Answer 1

• consideration, each side must promise to give or do something for the other.
• intent, the parties must intend the agreement to be legally binding.
• offer, an offer is willingly made by an offeror with the intention that it will become binding as soon as the offeree accepts.
• acceptance, a final and unqualified acceptance of the terms of an offer. To make a binding contract the offeree must accept all the terms of the offer (mirror image)

Question 2

HGCRA 1996

Answer 2

The Housing Grants, Construction and Regeneration Act 1996 aims for
- payments to be made promptly throughout the supply chain
- disputes to be resolved swiftly.

It applies to all construction contracts which means an agreement with a person for any of the following;
(a) the carrying out of construction operations;
(b) arranging for the carrying out of construction operations by others, whether under sub-contract to him or otherwise;
(c) providing his own labour, or the labour of others, for the carrying out of construction operations.

Question 3

Insurances

Answer 3

Insurances are required within construction to protect individuals/ companies against claims which due to the nature of the works can be costly. It also ensures anyone owed money from a claim receives what they are rightfully owed.

Question 4

Construction all risk insurance

Answer 4

The Employer gets this and it covers damage or injury to the works themselves and the cost of reinstating them. E.g. if there was a fire at the worksite which damaged the works under construction, or if cabling was being installed and was stolen from site. The insurers will pay up to the value specified each time there is a separate event to cover the cost of repair/reinstatement.

Question 5

Public liability insurance

Answer 5

The Employer gets this and it provides cover in the event that TfL/our contractors are negligent and cause damage to third party property or cause injury to a third party. This might be because they didn’t make a site safe and a customer trips over a discarded piece of building material that should have been cleared away.

Question 6

Employer’s liability insurance

Answer 6

The contractor gets this and it covers claims where any employee suffers an injury during the course of their work as a result of their employer’s negligence. E.g. it must provide a safe place and system of work under the various H&S Acts. If they told me to visit a construction site, but without providing PPE or appropriate briefing, and I broke my foot because something heavy was dropped on it, I could make a claim against TfL. The EL policy would settle that claim.

Question 7

Contractor’s Equipment loss insurance

Answer 7

The contractor gets this and it covers the Contractor’s tools and plant. We aren’t insuring them; they aren’t our property, and we’re not responsible for the security of the site. If tools/kit disappear or get damaged, the contractor should use their own insurances to cover that loss.

Question 8

Professional Indemnity insurance

Answer 8

The contractor gets this and it covers losses we might suffer as a result of negligent professional advice or services from the contractor. A typical textbook example is if an architect designs a new house but messes up the calculation for the foundations – they’re not deep enough. The builder construct the foundations and house exactly in accordance with the architect’s design. But the walls start to crack because the foundations aren’t deep enough. It’s the architect’s error (not the builder). The house owner would pursue a claim against the architect for the cost of fixing the defect, the loss of use of the house, cost of temporary accommodation. And that typically would be covered by the architect’s PI insurance.

Question 9

Standard Forms of Contract

Answer 9

NEC Options A-F
JCT Traditional lump sums (SBC with & without quantities, minor works)
JCT Traditional measurement (SBC with approximate quantities)
JCT Traditional cost reimbursement (prime cost building contract)
JCT D&B
JCT Management
JCT Partnering
ACA Form of Building Agreement
ACA Form of Subcontract
ACA Framework Alliance Contract

Question 10

NEC A Priced Contract with Activity Schedule

Answer 10

The activity schedule is the key fundamental when using NEC Contract Option A. For a developer it’s beneficial as the contractor cannot claim monies for a work element not satisfactorily complete. Careful consideration is required during tender to ensure the schedule is structured in such way as to best manage cash flow. The programme and activity schedule are to be regularly updated taking allowance of any CE’s. Greater financial risk on the contractor but requires scope certainty.

Question 11

NEC B Priced Contract with Bill of Quantities

Answer 11

the main difference with NEC Option B is the use of a bill of quantities – similar to that of a JCT. Unlike Option A where specific elements of work within an activity schedule are certified for payment upon full completion, when using Option B the Contractor is entitled to be paid interim payments based on Percentage of Completion of each BoQ Item. Greater financial risk on the contractor but requires scope certainty.

Question 12

NEC C Target Contract with Activity Schedule

Answer 12

Target price agreed based on an activity schedule. If the Contractor overspends and exceeds the target price of the contract then the Contractor and Employer will share this overspend. This is called the ‘pain share’. Equally, if the Contractor delivers the final cost within the target price then this benefit is called the ‘gain share’ or, formally known as the ‘share ranges’. Shared financial risk but still requires scope certainty to set an accurate target cost.

Question 13

NEC D Target Contract with Bill of Quantities

Answer 13

Similar to option C a target cost is set at the outset of a project, with cost savings and overruns shared based on a pre-agreed formula. However unlike Option C this target cost is based on a BoQ in the same way as a BoQ is produced for Option B.

Question 14

NEC E Cost Reimbursable Contract

Answer 14

Often referred to as “cost plus.” Under this option the developer will largely take on the financial risk. The contractor is reimbursed for all of their actual costs plus a pre-agreed overhead and profit percentage. Is useful when works cannot be properly defined at the project outset and/or risks associated with the works are high.

Question 15

NEC F Management Contract

Answer 15

a cost reimbursable contract wherein the works are designed and/or constructed by multiple subcontractors who are contracted to a management contractor. The management contractor will ultimately be responsible for the procurement, co-ordination and implementation of the works in exchange for a fee i.e. the cost/tendered price of works + an agreed percentage. Often, the client takes on the financial risk.

Question 16

Key parties/ roles within the NEC contracts and their responsibilities

Answer 16

The project manager – administers the contract, similar to the role of engineer under ICE or architect/contract administrator under JCT.
The supervisor – has responsibility for quality, similar to the role of clerk of the works.
The contractor – responsible for delivering the project in accordance with the works information.
The employer – the paying party.

• only contractor and employer in NEC ECSC

Question 17

Contract admin responsibilities/ requirements under NEC

Answer 17

Under NEC the contract administration duties fall to the Project Manager, however these responsibilities are often delegated to the commercial manager/ QS.
The contract administrator is responsible for administering the terms of the building contract between the parties. Contract administration duties involve;
a) Ensuring that the works are progressing in accordance with the contract programme and therefore that the completion date is achieved by the parties.
b) Report to the employer on progress of works.
c) Managing the commissioning of works.
d) Supervising works and inspecting works.
e) Providing instructions to the contractor.
f) Managing defects.
g) Determining applications for an extension of time.
h) Managing adjustments to the contract price.
i) Keeping records. This could include keeping records of site visits, correspondence etc.
j) Certifying works and issuing Practical Completion Certificates.

Question 18

Key clauses & procedures within Option A and E NEC contracts

Answer 18

Most NEC3 contracts have nine core clauses:
1. General terms- details any optional clauses
2. Contractor’s main responsibilities- scope of works, references WI
3. Time- key dates
4. Testing and Defects- defects date/ correction period
5. Payment- for option A it is a periodic assessment of the activities that have been completed to date and all those completed are paid. For option E it is an assessment of the defined costs within the period plus the agreed fee, the defined cost is all cost incurred by the contractor not including disallowed cost.
6. Compensation events
7. Title.
8. Risk and insurance- minimum insurance cover
9. Termination.

Question 19

NEC payment process

Answer 19

• The Contractor submits an application for payment to the Project Manager in a form prescribed by the Works Information not less than fourteen days prior to each assessment date.
• The Project Manager certifies a payment not later than five days after each payment due date which is the later of
• the assessment date and
• fourteen days after the date of receipt by the Project Manager of the Contractor’s application for payment
• Not later than five days after receipt of the payment certificate the Contractor delivers to the Employer (copied to the Project Manager) a VAT invoice

Question 20

NEC CE process

Answer 20

• If CE instructed by PM they notify Contractor of CE and instruct them to submit a quotation.
• If Contractor aware of CE must notify within 8 weeks of becoming aware
• PM must respond in 1 week and will assess if it should be a CE as per the list in the contract and if so instruct the contractor to submit a quotation. Must also assess if it is an event that should have been subject to an EWN.
• Once Contractor requested to submit quotation, standard response period is 3 weeks unless longer period specified.
• PM has 2 weeks to respond once quotation submitted. If no response the contractor notifies that if it is not responded to within another 2 weeks it is deemed as accepted. (extensions of time for reply periods can be requested).
• Reply will be one of the following;
• an instruction to submit a revised quotation,
• an acceptance of a quotation,
• a notification that a proposed instruction will not be given or a proposed changed decision will not be made or
• a notification that he will be making his own assessment.

Question 21

NEC Contract Documentation

Answer 21

• form of agreement
• conditions of contract
• contract data part 1 & 2
• prices/ activity schedule/ BoQ
• Works information
• Site information

Question 22

TfL bespoke T&Cs

Answer 22

As they are tailored to the underground environment and for the supply of goods/ services instead of works. They are usually for lump sum contracts however they can also be amended for re-measurable contracts.

Question 23

What is TUPE

Answer 23

TUPE stands for Transfer of Undertakings (Protection of Employment).
When a business changes owner, its employees may be protected under the TUPE
A ‘TUPE transfer’ happens when:
- an organisation, or part of it, is transferred from one employer to another
- a service is transferred to a new provider, for example when another company takes over the contract for office cleaning.
To transfer under TUPE, you must be part of an ‘organised grouping of employees’. This is the group of employees carrying out work for the ‘client’

Question 24

NEC vs TfL T&Cs for PAS, process of evaluation

Answer 24

The TfL T&C’s are more suited to the supply of non-complex gods and services, therefore the NEC contracts were better suited to the works contract required for PAS. NEC have the option for a short form contract which was used due to the works being low risk/ complexity, with the scope well known due to it being the second phase and TfL wanting to take on as little financial risk and responsibility as possible for the design and build, the selected contract was a ECSC lump sum.

Question 25

OSR contract evaluation

Answer 25

Option 1- NEC3 Option E with amendments
TfL retain ability to recover costs against current liabilities, however it continued the cost and programme uncertainty.

Option 2- NEC3 Option A
This achieved the client’s objectives, however was perceived by the main contractor to attract considerable risk to subcontract accounts and associated prolongations proved commercially unviable.

Option 3- NEC3 Option C
Whilst this achieved accountability through the pain/gain mechanism, it offered challenges in setting a Target Price, due to the lack of alignment in EFC.

Option 4- Full NEC3 Option E
This allowed transparency of costs and would settle ambiguity in the current contract. However was discounted as it did not achieve the clients key objectives and worsened the main contractor’s commercial standing.

Option 5- NEC3 Option A & E
The agreed option was to change to a hybrid model. A fixed price on the main contractor’s time related preliminaries achieved accountability, whilst remaining cost reimbursable for works packages reduced risk to the main contractor. This resolved the majority of commercial issues in the fixed price element, maintaining full transparency in the cost of the works.

Question 26

NEC assessment of entitlement to EoT or Cost

Answer 26

CE entitlement for cost is only the impact on Defined Cost

Entitlement to EoT is only based on impact on critical path from last accepted programme (even if time is at large)

Question 27

HGCRA 1996 Amendments

Answer 27

The HGCRA 1996 was amended by the Local Democracy, Economic Development, and Construction Act 2009

Key amendments were;
- a new payment regime (new default notice & withholding notice replaced by pay less notice)
- an enhanced right of suspension
- limited changes to the statutory adjudication process

Question 28

NEC3 vs NEC4

Answer 28

NEC4 superseded NEC3 in 2017 with key changes being:
- Wording now gender neutral
- Employer replaced with Client
- Works/ Services Information now referred to as Scope
- No response to submitted programmes no longer deemed as unacceptance. If no response provided by the PM, the contractor can issue a notification and if no response to that it is deemed as accepted
- Contractor can now be penalised for not submitting a Payment Application
- New contracts e.g. Design, Build & Operate
- New X clauses e.g. X21 whole life costing, contractor option to propose changes to Scope that will benefit the client in reducing whole life cost

Question 29

NEC vs JCT

Answer 29

• JCT approach more adversarial whilst NEC focuses on collaboration
• NEC attempts to eliminate legal terms and is said to be written in plain english
• NEC contracts offer more flexibility including bespoke Z clauses, JCT is not as flexible
• NEC has inclusion of EWN process as a way of working to mitigate risks, whilst JCT aims to allocate all risks to either of the parties prior to contract commencing
• JCT has defined role of contract administrator whilst NEC has PM who carries out administration roles
• JCT deals with time and cost separately, whereas NEC deals with the effects of time and cost together

Question 30

Factors to be considered when selecting a form of contract

Answer 30

• type of works
• level of scope certainty
• level of risk/ who is best placed to manage the risk
• price certainty required

Question 31

Acceleration in NEC

Answer 31

• bringing forward the Completion Date at the request of the PM
• must be agreed by the Contractor and based on their assessment
• In NEC4 contractor has 3 weeks to make assessment of acceleration and PM has 3 weeks to respond
• Acceleration will often result in increased costs due to night/ weekend working rates, additional resources, additional risk to contractor due to reduced timescales

Question 32

Sectional completion in NEC

Answer 32

• x5 is the provision for sectional completions and is when the works are split into sections with a PM required to issue a certificate for completion for each section and take over responsibility of these sections
• sectional completion allows reduced responsibility for the contractor due to handing back of sections and can also lead to reduced damages costs on completion of each section
• under NEC there is often still no payment of retention on sectional completion, only completion of the whole works

Question 33

How to evaluate the appropriateness and implications of Z clauses

Answer 33

• should avoid the use where possible and stick with standard wording to avoid ambiguity/ misunderstanding
• if necessary then legal should be consulted to ensure they are properly incorporated with no ambiguity/ contradiction in the contract
• to decide if necessary you should look at whether the contract has any standard mechanism already in place

Question 34

What is a third party and what are third party rights in construction contracts?

Answer 34

• a third party is one who is not a party as per the contracts but could still benefit from the performance of the contract
• third party rights in a contract may give the third party right to compensation if the contract is not fulfilled

Question 35

How are third party rights governed/ determined?

Answer 35

• The Contracts (Rights of Third Parties) Act 1999 gives power to third parties in certain circumstances to enforce terms of the contract

Question 36

What must be in place for a contractual provision to be enforceable by a third party?

Answer 36

• third party must be expressly identifiers in the contract
• the provision must confer a benefit on the third party

Question 37

How are third party rights included in construction contracts?

Answer 37

• Collateral Warranties: agreement associated with another contract which passes the duty of care of one of the contracting parties to a third party not part of the original contract
• Third Party Rights as per the Act: an alternative to CW and gives a third party rights to enforce certain terms of the contract

Question 38

Collateral Warranties vs Third Party Rights

Answer 38

• both provide rights to a third party
• collateral warranties transfers rights of the entire contract and adjudication can be applied if dispute arises
• third party rights transfers certain terms/ rights, which can be quicker and simpler to add to a contract (no signing by warrantor), however adjudication does not apply

Question 39

What are ‘express terms’?

Answer 39

Terms which are expressly stated and agreed within a contract

Question 40

What are ‘implied terms’?

Answer 40

A contractual term which is not expressly stated or agreed within the contract but has been implied into the contract by common law or statute

Question 41

What is the difference between statutory provisions and contract provisions?

Answer 41

Statutory provisions are set out by the law and must be complied with regardless

Contract provisions relate to the specific contract and only apply to the project at hand

Question 42

What is the difference between a relevant event and a relevant matter?

Answer 42

Relevant event - An event on or off site that causes delay to the completion of works, entitles the contractor to claim additional time

Relevant matter - a matter for which the client is responsible that materially effects the progress of the works, entitles the contractor to claim additional costs (loss and expense)

Question 43

Difference between JCT Relevant Event & Relevant Matter vs NEC Compensation Event

Answer 43

JCT splits out contractor claims for cost (Relevant Matter) and time (Relevant Event) whereas NEC allows it be be claimed under one Compensation Event

Question 44

What are liquidated damages?

Answer 44

A genuine pre-estimate of loss suffered by the employer because of late completion of the works

not a penalty

can be based on loss of rent or income, additional professional fees, etc

Question 45

What are the 3 Secondary Option Clauses under NEC ECC?

Answer 45

X clauses- They allow a risk to be reallocated e.g., delay damages, Contractor’s design liability

Y clauses- They deal with specific UK situations e.g., HGRA 1996

Z clauses- This is where parties can form a schedule of amendments e.g., to include public sector clauses to comply with PCR 2015

Question 46

What are Z clauses under NEC?

Answer 46

used to amend standard form NEC contracts

can be inserted into NEC contracts as a means of adding conditions or amending wording

Question 47

What is the difference between damages and liquidated damages?

Answer 47

Damages - amounts awarded by a court as compensation for loss or injury suffered by one party due to a breach of contract or breach of duty by another party

Liquidated damages - amounts for damages that are ascertained and fixed in advance

Question 48

Difference between Employers Agent, Contract Administrator and Project Manager

Answer 48

• Contract Administrator (JCT role) carries out solely the administration of the contract on behalf of the Employer (whilst acting impartially) and used on traditional contracts
• Employers Agent (JCT role) act on behalf of the Employer/ Client on all matters (as if they were the Employer) whilst still being obliged to act impartially. Used on D&B contracts
• Project Manager (NEC role) similar to the EA in that it impartially acts on behalf of the Employer as well as being responsible for the administration of the contract

Question 49

How did you advise on suitable X clauses for OSR DoV?

Answer 49

X1- due to pre-existing ambiguity regarding mechanism for price adjustment I advised that this needed to be adjusted to make it clear that BCIS PAFI would be used to adjust staff rates as intended in the framework

X5- contractor requested X5 to be included for the different sections (peninsula, highways & sub-surface) I advised this should not be added as the client did not want to be responsible for any area of the site until all works are complete

X6- I advised this be removed as due to re-baselining the programme we did not want to continue with the offer of a bonus on early completion of the revised date

X7- as per negotiations X7 was to be adjusted to reduce the damages free period places greater accountability on the contractor

X20- Whilst I advised that the KPIs should still be included regarding performance and achievement of key milestones, I advised that the incentivisation payments against these should be removed due to the issues already experienced on the project

Question 50

Why was X1 included in an Option E which is actual cost (should only be for option A/B)

Answer 50

• as neither DoV1 or DoV2 were traditional Option E contracts. Both contracts had pre-agreed staff rates based on framework rates instead of actuals and therefore to be adjusted to reflect current rates

Question 51

What are the different type of NEC Contract clauses

Answer 51

Core clauses: nine covering such matters as the parties’ main obligations, the programme, quality management, compensation events, copyright, insurance, and termination.

Main option clauses: are designed to adapt the contract to a particular pricing/payment mechanism, therefore one option must be adopted e.g. A,C,E

Dispute avoidance clauses: The parties also have to select which dispute resolution option is to apply to their contract. Most common for us is W2 (adjudication where HGCRA 1996 applies)

Secondary option clauses: are truly optional clauses: they are not mandatory, but they are helpful to allocate risks

Question 52

Why did you choose NEC ECSC over NEC Option A

Answer 52

• Both options had the cost certainty/ reduced financial risk on the client which met their priority.
• Therefore the main reason ECSC was selected over ECC option A was due to the project being low risk and straightforward and therefore a less complex contract with reduced administration was more suitable

Question 53

Difference between ECSC & ECC

Answer 53

ECC has 5 sections: core clauses, main option, secondary options, SoCC & contract data whereas ECSC has 2 sections: contract data (which picks up some secondary options e.g. LDs and conditions of contract (same 9 core clauses but much simplified)

No schedule of cost components any CE’s that have a cost other then stated in the prices is based on simplified definition on Defined Cost

Reduced list of compensation events & CE’s must be notified within 4 weeks instead of 8 weeks.

ECSC has no project manager or supervisor, just client & contractor

Question 54

How did you advise on defined cost?

Answer 54

Whilst the subcontractor accounts were under Option A/B and that check only required compliance with a CE under clause 60, I then had to check that when paying the principle contractor through the option E contract that this was a defined cost as per their contract. This involved checking that any CE’s had not come about as a result of not following an agreed process in the WI (HKL skirting install prior to design completion), caused by another subcontractor (contra charge for scaffolding contractor damaging concrete beam), had the correct evidence (OAG MSE movement, awaiting engineering report for design/ construction issue).