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APC Building Surveying Revision > Contract Practice > Flashcards

Contract Practice Flashcards

1
Q

What if the Client tells you the LADs are going to be £100,000 per week?

A
  • I would check that the LAD figure is based on a genuine pre-estimate of financial loss and explain that in the event that LAD’s are to be applied, they would need to substantiate this figure.
  • I would also explain that if the figure inserted into the contract is shown to be punitive and not based on genuine financial loss it is not likely to be enforceable.
  • In this scenario the Employer will have to pursue the Main Contractor for any actual direct loss that can be substantiated through a formal dispute resolution procedure.
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2
Q

What are Extensions of Time?

A

EoT’s adjust the completion date and relieves the Contractors liability to pay liquidated damages for the period of the extension.

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3
Q

What are liquidated damages?

A

A genuine pre-estimate of the likely loss incurred by the Employer should the completion date not be met.

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4
Q

What must be in place before liquidated damages can be deducted?

A
  • A Non-Completion Certificate
  • A Withholding Notice
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5
Q

In terms of the liquidated damages stated in the Contract, what if the Employer actually suffers no loss or damage?

A

It doesn’t matter. If the contract over-runs damages can still be deducted at the value stated in the contract.

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6
Q

What are the benefits of being able to grant an extension of time?

A
  • It relieves the Contractors liability for liquidated damages for a delay they did not cause.
  • It enables another completion date to be set, which maintains the Employers ability to deduct liquidated damages if another delay occurs.
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7
Q

What happens when “time is at large”?

A

There is no completion date.
- The Contractor only has the obligation to complete the works in a “reasonable time”.
- Liquidated damages cannot be claimed as there is no date to take them from.
- The Employer would have to try and prove that the Contractor had not completed in a reasonable time.

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8
Q

What are the Relevant Events in a JCT form of Contract?

A

They are events that entitle the Contractor to an extension of time.
There are 13 Relevant Events:
- Variations
- Instructions
- Execution of an approximate quantity that is not a reasonably accurate forecast.
- Deferment of possession of the site.
- Suspension by the Contractor for non-payment.
- The carrying out of work by Statutory Authorities
- Impediment, Prevention, or default by the Employer.
- Loss or damages occasioned by the Specific Perils.
- Exceptionally adverse weather conditions.
- Strike or Lock-Out
- Civil Commotion or Terrorism.
- The exercise of any statutory power after the base date by the UK government.
- Force Majeure

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9
Q

What are the main elements you would include within an interim valuation?

A
  • Preliminaries
  • Measured Work
  • Variations
  • Materials on Site
  • Materials off Site
  • Loss & Expense
  • Retention
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10
Q

What needs to be in place for you to include payments for materials on site?

A
  • The materials should be for the works.
  • They should be adequately protected
  • Delivered to programme
  • In a reasonable quantity.
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11
Q

What needs to be in place for you to include payments for materials off-site?

A
  • Proof that ownership will transfer to the employer upon payment (Vesting Certificate).
  • Insurance until materials arrive on site.
  • Materials are clearly labelled as for the site and set apart from other materials.
  • A materials off-site bond has been provided if required.
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12
Q

What is a Retention of Title Clause?

A
  • Where the sub-contractor or the supplier retains ownership of materials until they are paid by the contractor.
  • This highlights the importance of Vesting Certificates as the Employer may subsequently pay for materials that are not owned by the Contractor.
  • This legal principle can lead to disputes in the event of insolvency.
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13
Q

How do you evaluate interim valuations?

A
  • Go to site and inspect the works to form a view on the percentage of works undertaken.
  • Check for materials on site and materials off-site.
  • Value time related and fixed preliminaries items undertaken.
  • Value any agreed variations and claims.
  • The valuation amount is presented as the gross valuation, less previous payments made and retention.
  • Finally, I would send my recommendation to the Architect or CA for them to prepare the Payment Certificate.
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14
Q

How do stage payments work?

A
  • The stages and their values are set out in the Contract Particulars.
  • The stages are usually related to the completion of significant design items, for example, completion of the sub-structure or achieving a watertight structure.
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15
Q

What is the Interim Certificate conclusive of?

A
  • Interim Certificates are not conclusive.
  • They carry no contractual significance to state that the quality of materials or workmanship is satisfactory.
  • It is only the Final Certificate which is conclusive.
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16
Q

What is retention?

A

It is a percentage of each interim certificate deducted and retained by the Employer from each interim payment to the Contractor.

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17
Q

What is the purpose of retention?

A
  • It provides an incentive for the Contractor to rectify the defects within the contract Defect Liability Period.
  • It provides some financial security to the Employer in the event of a Contractor default.
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18
Q

When is the retention released to the Contractor?

A
  • Half of the retention is released in the Interim Certificate after Practical Completion.
  • The remaining retention is released in the Final Certificate after the Certificate of making Good Defects is issued.
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19
Q

What is a typical retention percentage under JCT contracts?

A

Usually retention is between 3-5%, depending on the form in use.

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20
Q

What is a Retention Bond?

A
  • A bond provided by the Contractor in lieu of taking retention from interim payments.
  • It should be equal to the same value as the retention deducted.
  • The requirement for the bond should be stated in the Contract Particulars.
  • A standard form is provided in the JCT contract schedules.
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21
Q

What happens if the Contractor does not maintain the retention bond?

A
  • The Employer can deduct retention from interim payments.
  • If the bond is subsequently taken out , the retention deducted must be repaid to the Contractor.
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22
Q

Why might a Retention Bond be taken out?

A

It may be used in difficult market conditions to aid the Contractor’s cashflow.

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23
Q

What are the disadvantages of a retention bond?

A
  • The Employer would have to pay the premium for taking out the bond.
  • It may reduce the Contractor’s incentive to complete making good defects promptly.
  • It reduces the Employer’s cashflow.
  • The Employer would not get the interest accruing on the amount of the retention bond.
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24
Q

What is Acceleration?

A

The completion of works in a shorter timeframe than that anticipated at tender, or the act of programme recovery by the Contractor if they are in delay.

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25
Q

What options may be considered to achieve acceleration?

A
  • Re-sequencing the works or making sequential activities parallel.
  • Increasing the working time by using longer working hours.
  • Increasing the resources employed by using larger gangs.
  • Changing the working methods, for example using a dehumidifier to dry out the works faster.
  • Increasing incentives, for example offering bonus payments.
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26
Q

Which are the most and least efficient acceleration options?

A
  • Re-sequencing can be the most cost efficient and effective.
  • The least efficient is usually increasing working time and increasing resources employed. This usually results in lower productivity.
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27
Q

What is a Fixed Price Contract?

A

Where adjustments to the Contract Sum are limited to changes in statutory contributions, taxes and levies.

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28
Q

What is a Fluctuating Price Contract

A

Where the Contract Sum is adjusted for changes in the cost of materials and labour, as well as statutory contributions, taxes and levies.

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29
Q

What is the Date for Completion?

A

The date fixed and stated in the Contract Particulars.

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30
Q

How does the Date for Completion differ from the Completion Date?

A

This is the date for completion of the works, that may be adjusted to take into account any agreed Extensions of Time.

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31
Q

What does it mean when “time is at large”?

A

There is no fixed completion date. The contractor must only complete works in a “reasonable time”.

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32
Q

What is Practical Completion?

A
  • When the works are substantially complete, with minor defects only.
  • The Employer is able to gain beneficial occupancy of the building.
  • Half of the retention is released.
  • The Employer surrenders the right to apply liquidated damages.
  • The Employer takes back possession of the works and is responsible for arranging insurances.
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33
Q

What is Sectional Completion?

A

The completion and handover of the works to the Employer in agreed stages.

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34
Q

Do the works have to be totally completed before Practical or Sectional Completion is achieved?

A
  • Practical Completion is a vague concept and it is not defined in JCT. It is reliant on the Architects opinion that the works are complete.
  • It should not be conditional.
  • It is common practice for PC to be granted when the works are substantially complete, however, there may be minor defect or omissions with nothing to prevent the Employer from taking beneficial occupancy.
35
Q

What is Partial Possession?

A

Where the Employer requests, and the contractor consents to the employer taking possession of the works, or part of the works, before the date for practical or sectional completion.

36
Q

What is the difference between partial possession and sectional completion?

A
  • Sectional completion is a contractual obligation to hand over the section at the stated date.
  • Partial completion relies on the contractors consent.
37
Q

What does the Architect have to do at partial possession?

A

Issue a written statement to the contractor showing the relevant part and stating the relevant date.

38
Q

What is the rectification period?

A

The contractor has an obligation to make good any defects, shrinkages or other faults that arise during this period of time.

39
Q

How long is the rectification period?

A

It depends on the form of contract that is in use, but it is typically 12 months so the building can be observed in all seasons.

40
Q

What is a non-completion certificate?

A

This is issued by the Architect to certify that the works, or works section, have not been completed by the relevant completion date.

41
Q

What are the consequences of a Non-Completion Certificate?

A

The Employer has the right to withhold liquidated damages, so long as a withholding notice has been given.

42
Q

What are the different certificates you are aware of under JCT forms of Contract?

A
  • Interim Certificates
  • Practical Completion Certificates
  • Non-Completion Certificates
  • Certificate of Making Good
  • Final Certificate
43
Q

What are the three ways that benefits can be transferred under JCT contracts?

A
  • Collateral Warranties
  • 3rd Party Rights
  • Assignment
44
Q

What are Collateral Warranties?

A

They create contractual relationships between the main parties of a contract with the external 3rd party, for instance a sub-contractor.
The contractual relationship would not exist with the 3rd party due to privity of contract.

45
Q

Why are Collateral Warranties used?

A

Due to the principle of privity of contract, the right and obligations under a contract can only be enforced by a party to that contract.
Collateral Warranties give remedies to 3rd Parties, such a funder, that would otherwise not have them.

46
Q

Who might want a Collateral Warranty?

A
  • A 3rd party with a financial investment in the project but not party to the main contract.
  • Funding institutions, future tenants or purchasers.
  • The employer may want a collateral warranty with key sub-contractors or suppliers, as if the main contractor were to go into liquidation, they would have no contractual link with them for redress in case of defective workmanship or product.
47
Q

What are the common clauses / terms in collateral warranties?

A

The obligations should mirror that of the main contract. therefore if any party is in breach of the main contract they are also in breach of the collateral warranty.
Common terms include:
- Limitation of liability
- Reasonable skill and care or fitness for purpose
- Requirements for PI insurance.
- Assignment Rights
- Novation Rights

48
Q

name some standard forms of collateral warranty that may be used.

A

CWa/F- JCT Standard form for a Funder
CWa/P&T - JCT Standard form for a future purchaser or tenant.

49
Q

What is Assignment?

A

Where the rights and benefits of one contractual party are transferred to a 3rd Party.

50
Q

What is the standard commercial position regarding assignment?

A
  • It is standard to allow assignment of rights twice without consent.
  • The assignment should be notified in writing to the other party.
51
Q

What is novation, and how does this differ from assignment?

A

Novation is where a new contract transfers the rights and obligations of one contractual party to a new third party.
Assignment is the transfer of contractual rights or contractual benefits only, as burdens cannot be assigned.

52
Q

What is the key issue once a design team has been novated?

A

Whether the new party has the right to take action against the novated party for any breaches that occurred before the novation.

53
Q

How does novation affect the Employers rights?

A
  • They lose all contractual relations with the novated party, and therefore the right to take action for a breach.
  • It is therefore common for there to be a collateral warranty between the Employer and the novated party.
54
Q

What is a limitation clause?

A

These are clauses that limit a party’s liability for potential losses.
Examples of limitation clauses would be:
- Limitation to a fixed sum
- Limitation to the extent of PI Insurance
- Exclusion of consequential loss
- Limitation to loss that can be recovered from a third party.
- Limitation to responsibility or a net contribution clause.`

55
Q

What is available to protect clients from sub-contractors failing?

A

Collateral warranties can be used as a direct link between the Employer and the sub-contractor.
- In the event that the sub-contractor fails to carry out their obligations the Employer has a contractual remedy to sue the sub-contractor for breach.
- Performance Bond’s are also an available tool.

56
Q

What are Step-In Rights and why do they exist?

A

-They typically permit Funders to step into another parties shoes, usually the Employer.
- They provide Funders protection in the event that the Employer defaults on their loan.
- The Funder can then take ownership of the development and sell it if required.
- A key problem is that the main cause of default often occurs when the developer is not able to sell the development, resulting in them being in arrears.
- The Funder will stand less of a chance of selling the asset than an experienced developer.

57
Q

What is reasonable skill and care?

A

The ordinary skill and care expected of an ordinary competent person carrying out the particular service.

58
Q

What is fitness for purpose?

A
  • The provision of a service that is suitable for the Employers intended purpose.
  • It is clearly a more onerous obligation than “reasonable skill and care”.
59
Q

What is a Bond?

A
  • A Surety Bond is a guarantee from the surety in favour of the Employer that the contractual obligations will be fulfilled by the main contractor.
  • The Bond, if called upon, will provide financial compensation up to a stated value if the other party does not fulfil their obligations under the contract.
  • It does not guarantee the completion of the works.
60
Q

What form must a Bond be in?

A
  • It must be in writing. It is common for it to be executed as a Deed.
  • It will contain a duration, usually until Practical Completion, and a financial limit.
61
Q

What is a Retention Bond?

A
  • An alternative to the normal contractual retention provisions where the Employer holds retention monies from the Contractor, which does not help cashflow.
  • A Retention Bond will increase in value from the start of a project to mirror retention normally withheld through the project.
  • They may reduce in value upon completion.
  • Clients need to be wary of hidden costs to the Employer such as loss of interest on retained monies, and the cost of the Retention Bond being passed to the Employer through the tender price.
62
Q

When would you use a Retention Bond?

A
  • When the Client does not wish to hold retention on the Contractor, but does require some assurance or some financial cover for rectifying defects at the end of the contract should the Contractor fail to return and undertake this obligation.
63
Q

What is a Parent Company Guarantee?

A
  • An arrangement where the contractual performance of one company is underwritten by the other members of the group.
  • This mean that the “Parent” company must complete the works itself, if it can, or pay the financial equivalent.
64
Q

Which is the most type of Bond in the construction industry?

A

Performance Bonds.
- Performance Bonds are typically provided by banks or insurance companies.
- They give the Employer a guarantee of payment up to a certain amount should they suffer a loss as a result of the Contractors breach of their contractual obligations.

65
Q

What is the standard value of a Performance Bond?

A
  • 10% of the contract value.
  • The premium for taking out the bond is added to the Contract Sum.
66
Q

How can the Employer call for payment of a Performance Bond?

A
  • They have to prove that the Contractor has defaulted on their obligations under the main contract, and that a loss has been suffered.
67
Q

What is the purpose of a Tender Bond?

A
  • This covers the party inviting the tender (the Employer) if the lowest Tenderer refuses to enter into a contract with them.
  • This can be important if the inviting party is in turn tendering for work on the basis of that tender.
  • It should also prevent idle tendering as there is an incentive to submit a price.
68
Q

What is a Notional Final Account?

A
  • A Final Account that is prepared when the Main Contractor is facing insolvency.
  • This will typically be of greater value than the original forecast final account due to costs incurred by the client to appoint a new Contractor to complete the works.
  • The typical uplift might be 1-5% of the tender sum.
69
Q

What is the purpose of a Materials Off-Site Bond?

A

It covers the Employer against loss or damage to materials already paid for through interim valuations before the materials are delivered to site.

70
Q

What are the arguments against requesting bonds?

A
  • They shouldn’t really be needed if the Tenderer selection process is operated effectively, as only reliable and capable contractors are then selected.
  • Unnecessary premiums are added to the contract sum which are unlikely to be called upon.
  • If the Developer is a serial developer this may add a lot of money to their project costs.
71
Q

Where might Bonds be appropriate?

A
  • If the Contractor is new or unproven.
  • To protect the interests of a “one-off” developer.
  • In a difficult economic climate, when the risk of insolvency is higher and Parent Company Guarantee’s are risky.
72
Q

What are the pro’s and con’s of parent Company Guarantee’s?

A
  • They are not a secure as Bonds because of the financial link between a parent company and subsidiaries, whereas a performance bond is provided by a 3rd party financial institution.
  • Advantages are that they do not need to be paid for, they can be unlimited, and they can make the parent company responsible for performance as well as a financial guarantee.
73
Q

What is an “On-Demand” Bond?

A
  • An “on-demand” bond is one which is to be paid straight away upon the default occurring and request for payment.
  • There is no requirement to satisfy any review or specific condition to demonstrate the default.
  • Whereas with conditional Bonds, the Employer must satisfy the surety that the default has occurred and the bond must identify what this condition is. It may also require litigation or arbitration resulting in delays and costs.
74
Q

What is a Highway Bond?

A
  • A Developer who undertakes speculative housing developments will frequently be required to enter into an agreement with a Local Authority for the adoption of roads and sewers.
  • If for any reason the Developer fails to complete the adoption of the roads and sewers to the required standards then the Local Authority will complete this on the Developers behalf and call on the bond to claim back costs.
75
Q

What risk mitigation provisions are available for ensuring the Contractor carries out works properly?

A
  • To provide assurance that the Contractor shall perform their obligations a parent Company Guarantee (PCG) or a Performance Bond may be provided.
  • A PCG can only be used where the Contractor is a subsidiary to another company. The parent company provides the guarantee and will become liable if the Contractor does not perform.
  • Alternatively, a Performance Bond can be provided by the assurers. It is used to protect the Client in the event the Contractor does not meet their specific performance requirements described in the contract.
76
Q

What is the difference between insurance and indemnity?

A
  • The purpose of indemnity is to protect against legal responsibility or to compensate. It is open ended.
  • Insurance is a fund that enables the indemnifying party to make any payments which may arise. It includes time and financial limits.
  • A Contract will set out the insurances required to cover the indemnities that the party is liable for.
77
Q

What is Insurance?

A

Transfer of a defined risk to an insurance company in exchange for a premium.

78
Q

What are the two main types of insurance?

A
  • Liability Insurance - Offers financial cover for the legal liabilities that the insured party owes to others.
  • Loss Insurance - Offers financial cover for losses that fall directly on the insured party.
79
Q

What is Subrogation?

A

A legal technique where the insurer steps into the shoes of the insured in order to take the benefit of any legal rights or remedies the insured might have against a third party responsible for the loss.

80
Q

What does “Joint Names” mean?

A
  • It is where the Employer and the Contractor are both insured under the same policy.
  • It stops the insurer having the right of subrogation against the other party if they caused the loss.
81
Q

Is a Letter of Intent (LoI) that includes a spend limit any use to a Contractor?

A
  • It is only useful to the Contractor if the LoI is legally binding. In order for it to be legally binding it must have the basis of a simple contract (offer, acceptance, and consideration), and both parties must intend to create legal relations.
  • Without either of these 4 criteria the LoI is worthless.
82
Q

When are Letters of Intent used?

A
  • Usually when an early start on site is required.
  • They can be used to instruct initial design or survey works, or for procurement of materials on a tight programme.
  • Often issued to commence works while discussions concerning the main contract are ongoing.
83
Q

Are Letters of Intent legally binding?

A
  • There is no legal significance of a LoI.
  • The Courts will look at all the correspondence between the Parties to establish if a contract has been formed. If it is found that a contract does exist then the court will determine the obligations.
  • If there is no contract then the LoI will have no effect and quantum meruit will be applied. This is a common law method for assessing damages.

APC Building Surveying Revision (17 decks)

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