Contract Practice Flashcards
What do you understand by the term VE?
Value Engineering
An organised approach aimed at providing the necessary functions at the lowest cost, without detrimental affect to quality, reliability, performance or delivery
What do you understand by the term VM?
Value Management: Concerned with making explicit what value means to a client.
Concerned with early stages of design e.g. to ensure the need to build is verified.
VM aims to ensure that the right decisions are made the first time.
VE used to correct decisions when things go wrong
What is value, what does value mean?
Complex concept, Measure of worth, a relative measure of uselfulness of something in relation to the cost paid for it.
When does the VE/VM process occur?
Concept– VM Workshop 1
Feasibility– VM Workshop 2
Scheme design– VE
Detailed Design– VE
What happens during the VE process?
Design team brought together: QS, Arch, Eng, Contractor
Pool expertise, guided by a team leader
Higher chance of identifying and solving problems at an earlier stage– better value for money
Not a cost cutting exercise, this leads to reduced quality and value.
What are the phases of the VE process?
Information phase: Functional analysis of component: FAST diagram
Speculation phase: creative thinking techniques: BRAIN STORMING
Evaluation Phase: Evaluate solutions (Cost and Feasibility) List of Options
Development Phase: Detailed development of surviving ideas and interfaces: LCC techniques
Presentation Phase: Best solution identified and recommendation made: Written/ oral report.
What is a VE workshop?
Can be 40hr (working week) workshop or series of mini workshops or 2 day workshops.
40hr: Entire team/ neutral venue/ intensively work on design proposals
Mini: facilitator joins DT at briefing stage & remains throughout.
2 day: Most common in UK
NOTE: Detailed development work better tackled outside workshop
When does VE occur?
Stage C– CONCEPT (NOTE LATEST RIBA PLAN OF WORK 2007)
Stage D– Design Development
In practice VE studies are commissioned when things go wrong
Limits ability to make better and more effective design solutions
What are the limitations of VE?
Assumes all parties have a common understanding of functions being provided.
Assumes all feasible design alternatives provide same level of functional performance
THEREFORE assessed on basis of cost alone.
Why is VM needed?
Aim is to reach agreement of exactly what the nature of the problem is.
A shared understanding of what is being sought: Design objectives.
Construction clients are different groups with different priorities: If agreements are not reached on exact requirements then chances of project perceived as a failure increase.
Can you explain to me the VM process?
Workshops held where Client must make important decisions
VM 1– concept: The need to build, clear objectives set that are structured in a value tree
VM2– Feasibility: Outline brief complete, outline brief costed.
Review schemes and score against weighted objectives
Assess capital cost to determine options for best value for money.
What is a value tree?
BRAINSTORM: Everything that is required to ensure a certain level of value is obtained.
Primary objective––– sub–objective––– sub–sub objective
Members need to agree that the value tree is a fair representation of design objectives.
Weights applied to each branch of the tree.
Can you give me some benefits of VM?
1) Need for new investment is always verified and project goals are clearly defined.
2) Objectives and decisions are openly discussed and explicitly stated.
3) The Evaluation and re–evaluation frameworks are structured, rigourous and rational
4) Decisions are supported by data and made on the basis of defined performance criteria
5) Accountability is increased
6) Alternative solutions are always sought and considered
7) Business decisions are made with greater confidence
8) Potential for increasing value for money
9) Communication, understanding and teamwork can be improved and disseminated throughout the organisation.
10) Participation by all key stakeholders increases the likelihood of satisfaction with the end product.
11) Opportunities for long term profitability and continuous improvement are enhanced.
What are extensions of time? What are the relevant clauses in JCT DB 16?
Adjusts the completion date and relieves the contractor’s liability to pay liquidated damages for the period of the extension
Clause 2.23
What are liquidated damages? What is the relevant clause in JCT DB 11?
A genuine pre–estimate of the likely loss incurred by the employer should the completion date not be met
Clause 2.29
What must be in place before LDs can be deducted?
A non completion certificate
A withholding notice
What if the client tells you the LDs are to be £100,000 per week?
Check that they do believe that they are a genuine pre–estimate of likely loss
Explain the dangers that they might be construed to be a penalty
What if the liquidated damages are construed to be a penalty?
They will be unenforceable
The employer will have to sue for any actual direct loss that can be proved
What are the benefits of liquidated damages to the contractor?
The contractor knows the consequences of delay from the outset.
What if the employer actually suffered no loss / damage?
It doesn’t matter
They can still deduct the liquidated damages stated in the contract
What are the benefits of being able to grant an extension of time?
It relieves the contractor’s liability for liquidated damages for a delay that they did not cause
It enables another completion date to be set, which maintains the employer’s ability to take liquidated damages if another delay occurs
What happens when ‘time is at large’?
There is no set completion date
The contractor only has the obligation to complete the works in a ‘reasonable time’
No liquidated damages – cannot be claimed because no date to take them from
The employer has to prove that the contractor had not completed in a reasonable time
What is the procedure for claiming an extension of time?
As soon as it is reasonable apparent that a delay is or is likely to occur they should write to the architect to notify them
This should identify the cause of the delay and if any of the causes are a Relevant Event, and give an indication of the extent of the likely delay
They should give any other further information requested by the architect
The architect must notify the contractor in writing of their decision
What are the time periods related to granting extensions of time?
The architect has 12 weeks from notification to decide on an extension of time
If there is less than 12 weeks to PC, they should endeavour to decide before PC
The architect has up to 12 weeks after PC to review any previous EOTs previously given or to award further EOTs
What are Relevant Events, how many are there?
13 events that entitle the contractor to an extension of time
What are the relevant events?
In DB2011 they are set out in Clause 2.26
1) Variations
2) Instructions
3) Execution of an approx quantity that is not a reasonably accurate forecast
4) Deferment of possession of the site
5) Suspension by the contractor for non–payment
6) The carrying out of work by statutory authorities
7) Impediment, prevention or default by the employer
8) Loss or damages occasioned by the Specified Perils (fire, flood etc)
9) Exceptionally adverse weather conditions
10) Strike or lock out
11) Civil commotion or terrorism
12) The exercise of any statutory power after the base date by the UK gov
13) Force majeure
What happens if there are several ‘competing’ cayuses of delay?
If work is delayed due to two or more competing causes of delay, one the fault of the contractor and one the fault of the employer, is there an entitlement to an EOT/loss and expense?
No clear rule on which delay takes precedence where a number of delays occur
Each case has to be judged on its merits
Have to make efforts to identify all causes and effects
Who owns programme float?
No clear rule – generally it belongs to the contractor
The contractor normally includes float in his programme to accommodate his risk items and also provide time for correcting mistakes
THEREFORE the actual impact of the delay should be considered
When there is a delay at the middle of the project, would you consider the actual delay or the delay for the whole period?
The actual delay caused by the item in question.
It is not fair to offset against any float time the contractor may have built up through good progress.
What is a pre–construction services agreement?
Documents services and T&C’s that contractor is to perform before entering into the building contract.
When are they usually used?
Two stage tendering, signed after first stage and cover up to end of second stage.
Often on D&B.
Why are they used?
Develops a lump sum price, enables it to be determined and the main contract entered into
What happens in Stage One?
Employer issues outline information (including scope of services in preliminaries) to potential contractors.
What do the contractors include in their tender returns?
Profit, overheads, preliminaries, proposals on how they intend to execute the project, fee for second stage services
What tasks might the Contractor be asked to perform in the second stage?
Finalise the design
Advise on methods of construction
Obtain subby prices for packages (open book basis)
Evaluate tender returns and agree selection with the employer
What are the advantages of this two stage approach?
Contractor advice to the employer
Early input should reduce the disputes and problems arising during construction
Design and tendering of packages overlaps – quicker
The contractor also benefits from getting paid earlier and becoming part of the DT
What are the disadvantages?
Contractor no longer in competition – costs rise
Longer involvement without the main contract signed, weaker contractor’s bargaining position
Contractor integration means employer becomes reluctant to dismiss them if fails to perform or negotiate on price/programme
Subbies tend to be bigger and more prominent = more expensive (diff. under single stage)
Generally only 80–85% fixed pricing at contract execution, prov. sums = less price certainty than under single stage
What should be taken into account in the wording of a PCSA?
Does NOT commit to the building contract
Ensure obliged to pay for documented services only and nothing else
State employers discretion to appoint the contractor at the end of the second stage or not
State that if they do not appoint the contractor, the employer has no liability for any loss of project, contract or other opportunity
What might the pitfalls be?
It is not uncommon for the pre–construction services to include enabling works and surveyors etc
More work carried out before the building contract T&Cs are executed the weaker the employer’s negotiating position becomes
If the contractor is not selected to go further, any new contractor will be reluctant to adopt responsibility for the previous contractor’s work – split liabilities
Where would you recommend the use of a pre–construction services agreement?
Long pre–construction period
If the contractor integration into the design team, and providing advice is needed
What do you need to be careful about?
Explicit agreement on what services to be provided and how paid
How to disengage if not satisfied (procedures)
Careful not to encourage a lot of work to commence before the building contract is signed (dis–incentivises) (over–commits)
What other forms of procurement could be used that may safeguard the employer better?
Early start before final design – consider construction management rather than trying to shoehorn a traditional or D&B contract into a programme where it does not fit
Is there a standard form PCSA that you might recommend the use of?
Traditionally, no contractor involvement ahead of contract execution and start on site
Traditionally bespoke documents – drafted by lawyers for the Employer
Now JCT Pre–Construction Services Agreement: General Contractor 2011: (PCSA)
What are the three ways that benefits can be transferred under JCT contracts?
1) Collateral warranties
2) Third party rights
3) Assignment
What are collateral warranties?
Create contractual relationships between parties where there would otherwise not have been any. They are alongside another agreement
Why are they used?
Privity of contract means the rights and obligations under a contract can only be enforced by a party to that contract, therefore
collateral warranties give remedies to parties that otherwise would not have them.
Who might want a collateral warranty?
Any third party with a financial stake in a project but not party to the main contract
E.g. funding institution, house buyers
Employer may want a collateral warranty with key subbies (M&E) or suppliers, else if main contractor goes bust no contractual link for redress in case of defective workmanship etc
How are they requested?
They should be notified to the tenderers at the time of tender
Part 2 7C and D is where the number and nature of the collateral warranties should be stated
What are the common clauses / terms in collateral warranties?
Obligations should mirror main agreement – therefore a breach of the main agreement would also be in breach of the warranty
Limitation of liability
Reasonable skill and care v fitness for purpose
Requirements for PI insurance
Assignment rights
Novation rights
Name some standard forms of collateral warranty that may be used?
CWa/F – JCT standard form of collateral warranty for a funder
CWa/P&T – JCT standard form of collateral warranty for a future purchaser or tenant
How has the contract (rights of third parties) act changed the situations regarding rights under contracts?
It has significantly changed the traditional principle of privity of contract, whereby obligations can only be enforced by the parties to a contract
What contracts does the act apply to?
All contracts made after the 11 May 2000
What has been the impact of the Act?
Initially the response was suspicion – new – not much case law – not tried and tested etc
BUT JCT now includes provisions to allow third party rights to be granted
Evidence that they are starting to be used in the industry
How can third party rights be included under JCT contracts? (DOUBLE CHECK THIS DETAIL)
Fill in Part 2 of the contract particulars – sections 7A and 7B
The individual / group that has a right to enforce has to be ‘expressly’ named or described
The terms that they can enforce should also be listed
The third party identified can use any raise any defence or set off that the contracting party could
Why might third party rights be used instead of collateral warranties?
If a lot of warranties are required it involves a lot of administration and cost – easier for third party rights
What is assignment?
Where the rights and benefits of one contractual party are transferred to a third party
Can benefits be assigned under JCT contracts?
The standard position (clause 7.1) is that assignment of rights under the contract is totally excluded
BUT optional clause 7.2 enables assignment to be permitted
What is the standard commercial position regarding assignment?
It is standard to allow assignment of rights twice without consent
The assignment should be notified in writing to the other party
What is novation and how does this differ from assignment?
A new contract that transfers the rights and obligations of one contractual party to a new third party – assignment is only rights
Give a common example of assignment and novation
Assignment of the rights under a collateral warranty to a different tenant / purchaser
Novation of the design team under a design and build contract
What is the key issue after a design team has been novated?
Whether the new party has the right to take action against the novated party for breaches that occurred before novation
If the contractor took full responsibility for the design what would they want?
They would want the ability to take action against the consultants for breaches before novation
How does novation affect the employer’s rights?
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 novated party
What is a limitation clause, give some examples?
Clauses that limit a party’s liability for loss.
Eg’s:
Limitation to a fixed sum
Limitation to the extent of PI insurance
Exclusion of consequential loss
Limitation to loss recoverable from a third party
Limitation to responsibility – net contribution clause
What is a net contribution clause?
Clause that limits a party’s liability to the proportion of loss that they are responsible for
How can the employer potentially lose out?
They would have to sue each contributing party separately to reclaim their total loss
If one party is insolvent they lose out on that money
What act is relevant?
Unfair Contract Terms Act 1977
This limits the extent that a party can avoid liability for breach of duty
Cannot avoid liability for death / personal injury
All other limits have to be ‘reasonable’
What is the date for completion?
The date fixed and stated in the contract particulars
How does this differ from the completion date?
This is the date for completion or any other date that is subsequently fixed (i.e. after an EOT)
What does it mean when ‘time is at large’?
There is no fixed completion date
The contractor must only complete the works in a reasonable time
What is practical completion?
When the employer takes back possession of the works
What is sectional completion?
The completion and handover of the works to the employer in agreed stages
Do the works have to be totally completed before practical / sectional completion is achieved?
Practical completion is a vague concept
It is not defined in JCT
It is reliant on the architect’s 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 – i.e. there may be minor defects or omissions BUT nothing that would prevent the employer taking occupation
Can the PC certificate be rescinded once issued?
No
What is the recourse if the contractor disagrees with the architect that the works are not completed?
Adjudication
What are the consequences of practical / sectional completion?
Half of the retention is released
The Rectification Period begins
The contractor’s responsibility for insuring the works (if applicable) ends
Contractor’s liability for liquidated damages ends
The employer is now responsible for any damages to the works
What is partial possession?
Where the employer requests and the contractor consents to the employer taking possession of the works / part of the works before the date for practical / sectional completion?
What is the difference between partial possession and sectional completion?
Sectional completion is a contractual obligation to hand over the section at the stated date, partial possession relies on the contractor’s consent
What does the architect have to do at partial possession?
Issue to a written statement to the contractor showing the relevant part and stating relevant date
What are the consequences of partial possession?
For the relevant part practical completion is deemed to have occurred on the relevant date
Therefore the same consequences follow
In addition, the liquidated damages for the works / that section are reduced by the proportion that the value of the relevant part relates to the contract / section sum
What is the rectification period?
The contractor has an obligation to make good any defects, shrinkages or other faults that arise during this period of time
How long is it?
The default position is 6 months
BUT it is common to amend this to 12 months – so the building is observed in all seasons
How can the architect get the contractor to fix the defects that arise during this period?
No later than 14 days after the end of the Rectification Period the architect must issue a written statement to the contractor detailed all of the defects that have arisen and need to be made good
How quickly does the contractor have to fix the defects?
Within a reasonable time
Can the architect get the contractor to fix defects faster or within the Rectification Period?
Yes, they can issue an AI to get them to fix ‘forthwith’ e.g. if serious defect – leaking pipe etc that cannot be left until the end of the Rectification Period
What is the certificate of making good?
Issued by the architect to certify that all of the defects that have been required to be made good by the contractor have been so
What are the consequences of the issue of the certificate of making good?
The remaining retention is released
What is a non–completion certificate?
Issued by the architect to certify that the works / section have not been completed by the relevant completion date
What are the consequences of a non–completion certificate?
The employer has the right to withhold liquidated damages, as long as a withholding notice has been given
What are the consequences of a non–completion certificate?
Interim certificate Practical completion / sectional completion certificate Non completion certificate Certification of Making Good Final Certificate
What is a firm price contract?
Where adjustments of the contract sum are limited to changes in statutory contributions, taxes and levies
What is a fluctuating price contract?
Where the contract sum is adjusted for changes in the costs of materials and labour as well as statutory contributions, taxes and levies
When is the base date set?
Usually 10 days before the tender return date
Where is fluctuations dealt with under JCT 05?
Clauses 4.21 and 4.22 and Schedule 7
What are the fluctuations options under JCT 05?
Option A: adjustment for changes in statutory contributions, levies and taxes (e.g. Nat Ins)
Option B: adjustment for changes in labour, materials and statutory costs
Option C: adjustment for changes in labour, materials and statutory costs determined by formula
What is excluded from labour fluctuations under Option B?
Non productive overtime
Wage costs that the contractor pays above nationally negotiated wage rates
Are fluctuations after the date of completion recoverable?
Yes, but the level of materials / labour / statutory costs is frozen at the date completion should have occurred
What is the procedure for claiming and paying fluctuations?
The contractor should notify the architect in writing when they feel fluctuations are due
Should provide information and calculations if requested by the architect
Once ascertained the amounts should be added to the next interim certificate
What is excluded from fluctuations? Why?
Dayworks
Schedule 2 quotations
Loss and expense
They are all based on current rates and prices
How does the formula option work?
It does NOT assess actual change – designed to compensate parties for losses incurred
‘Formula Rates’ are set out in the contract and applied by use of published indices
Indices measure changes in costs of building work in 60 different work categories
An index for the balance of adjustable work – doesn’t fit in a category – e.g. prelims
Another index for specialist work
How is retention applied to amounts calculated from the fluctuations options?
Amounts ascertained under Option A and B are NOT subject to retention
Amounts under Option C ARE subject to retention
When would you advise fluctuations options B and C to be used?
Long contract period, contractor cannot accurately forecast changes at time of tender
It benefits the employer by preventing the contractor pricing in a lot of risk
AND should reduce the chance of the contractor going insolvent if prices rise a lot
Also used if there is expectations that the market will deteriorate and prices will fall
What is termination?
Where the contract works are lawfully stopped under the contract
Where is this dealt with in JCT SBC 05?
Section 8
What three types of termination does it deal with?
1) Termination by the employer
2) Termination by the contractor
3) Termination by either party
What clauses deal with termination by the employer?
Clauses 8.4 to 8.8
What are the 7 grounds for which the employer can terminate the contractor’s employment?
1) Suspending work without reasonable cause
2) Fails to proceed regularly and diligently
3) Fails to comply with written instr. for rem. of work, goods, mats. not in accordance
4) Unauthorised assignment or subcontracting
5) Failure to comply with CDM regulations
6) Guilty of corrupt practices in contracts
7) Insolvency
What does ‘regularly and diligently’ mean in practice?
Contractor should plan the work, lead and manage the workforce, provide sufficient and proper material and labour resources, employ competent tradesmen so that the works and obligations are carried out to an acceptable standard
What must procedures must be followed?
1) For items 1 to 5 a written notice must be given to the contractor, specifying the default(s)
2a) Contractor has 14 days to stop the default
2b) If not, employer has 10 more days to issue a second notice terminating their employment
3) For corruption and insolvency only final notice has to be issued – not the warning one
How must the notices be delivered?
Hand delivery, registered post or recorded delivery
What if they do not terminate this time, but the contractor subsequently repeats a default?
No warning notice needs to be given to terminate, just the second written notice
What are the consequences of a repeated default by the contractor?
1) Payment provisions inc. retention release, end
2) Others to complete and use contractor’s temp. buildings, plant, materials etc
3) Contractor removes all equipment (if req.)
4) Contractor provides 2x CDP documents
5) Contractor assigns sub & supply contracts FOC within 14 days of termination
6) The statement or account is issued
When should the statement be issued?
Within a reasonable time from the completion of the works and the completion of making good
What does the account set out?
The expense incurred by the employer in completing the works, inc direct loss or damage
The total the contractor would have earned had they completed the works
The total of any previous payments to the contractor in interim certificates
The difference is a debt payable
What if, 6 months after the date of termination, the employer has decided not to have the works completed?
Inform the contractor in writing
In a reasonable time a statement should be issued which states:
The total value of work executed at the date of termination
The expense incurred by the employer due to termination, inc direct loss or damage
The total amounts paid to the contractor
The difference is a debt payable
Therefore, if the employer terminates, what is the contractor entitled to?
The difference if any, between what the contractor would have earned had they completed the contract and what it cost the employer to complete the works
What clauses deal with termination by the contractor?
Clauses 8.9 and 8.10
What are the 6 grounds for which the contractor can terminate their employment?
1) Failure to pay properly within the time periods
2) Interference by emp. in the issue of any cert.
3) Suspension of works for a continuous period due to prevention or default by the employer
4) Unauthorised assignment by the employer
5) Failure of emp. to comply with CDM regs
6) Insolvency of the employer
What is the default continuous period of suspension and where is this stated?
The default is two months, it is stated in the contract particulars
What procedures must be followed?
Contractor issues a written notice stating the default (except insolvency)
Emp. has 14 days to remedy, if not cont. has 10 days to issue 2nd written termination notice
If termination does not occur this time, any repetition of default enables the contractor to terminate immediately with a written notice
For insolvency, one written termination notice
What are the consequences of this?
The contractor has to:
Remove all equipment from the site
Give the employer 2 copies of any CDP documents
Prepare a statement or account
How soon should this account be prepared by the contractor?
As soon as is reasonably practicable after termination
What items does the account contain?
Value of the work properly executed at the time of termination
Any loss or expense due to the contractor under the contract
The cost of removal from site
The cost of any materials already ordered that the contractor is obliged to pay for
Any loss or damage suffered by the contractor due to termination
The amount of previous payments paid under interim certificates
The difference is a debt payable
How soon does the difference have to be paid by the employer?
Within 28 days and it is NOT subject to retention
What clauses deal with termination by either party?
Clause 8.11
When does this clause apply?
When the whole or the substantial part of the works is suspended for the continuous period stated in the contract particulars due to one of the relevant circumstances
What are the relevant circumstances?
Force majeure
AIs relating to the default or negligence of statutory undertakers
Civil commotion or terrorism
Loss or damage caused by the Specified Perils (where the contractor is not negligent)
The exercise of a statutory power by the UK gov directly affecting the works
What procedures must be followed?
At the expiry of the stated continuous period, either party may issue a written notice to the other party stating that they intend to terminate in 7 days
If the suspension is still occurring after 7 days, they should issue a further written notice to terminate
What are the consequences of this?
The contractor has to remove all materials and equipment from the site and
Give the employer 2 copies of any CDP documents
An account must be prepared
Who prepares the account?
The employer chooses
Either the contractor can be asked to prepare the account
Or, the employer can require the contractor to provide all necessary information to enable them to prepare the account within 2 months of the date of termination
How long does the employer have if they choose to prepare it?
The employer must prepare it with ‘reasonable dispatch’ and within 3 months from the date that the contractor provided the information
i.e. the account must be prepared by the employer within 5 months of the date of termination
