Contract practice

Question 1

What is the difference between SBCC DB 2011 and 2016?

Answer 1

The default dispute resolution forum has changed from litigation to arbitration.
The payment provisions have been overhauled.
Loss and expense. If a contractor is making a loss and expense claim, it will now have to also inform the employer of any further amounts likely to be incurred.
Not only that, the contractor will need to update that assessment and vouching at monthly intervals until all information required to assess the total amount
of loss and expense has been supplied.
This change is accompanied by a requirement on the employer to notify the contractor of the ascertained amount within
28 days of the initial assessment and every 14 days following an update - so a quick process if unamended.
Performance bonds and guarantees. The 2016 edition contains provisions which allow for a performance bond or parent company guarantee (or both!) to be provided to the employer.

Question 2

Have you ever had to advise a client on the guarantees and bonds they may want to implement on their project?

Answer 2

During a contracts workshop with my client I advised on the advantages and disadvantages of performance bonds and parent company guarantees
I explained that both can be used as a means of protection in the event of contractor insolvency
Performance bonds typically cover 10% of the Contract Sum and usually cost circa 1% of the Contract Sum
- on demand bond or conditional
Parent company guarantees are free and cover the Full Contract
- however theses are reliant on the parent company stepping in if the sister company becomes insolvent
- need to consider the financial standing of the parent company

Question 3

I am a client who is procuring their project via a D&B contract, however, I’m not sure whether I want to introduce a schedule of amendments. How would you advise?

Answer 3

Schedules of amendments must drafted by a Legal advisor, however I would provide examples of amendments used on similar projects

Question 4

What factors would you consider before advising a client what contract to use?

Answer 4

the scope of works, complexity of the design, how much control they want to have over the design, the clients
budget, how much cost certainty they need, the timescales, how quickly they need to get to site, risk, market conditions

Question 5

Who would you typically expect to obtain collateral warranties from on a project?

Answer 5

Third party specialist design responsibility.
Collateral Warranties provide a contractual link where there would otherwise be none. For example where a party should suffer a loss, or a contractor should go bust.
privity of contract

Question 6

How is a contract executed?

Answer 6

A contract is executed under hand or under deed.
Under hand is a simple contract where it is signed and limitation periods are 6 years.
Under deed is where it is signed and witnessed and stated that it is under deed with limitation periods of 12 years.

Question 7

What is the difference between Construction Management and Management Contracting?

Answer 7

Construction Management is when the client employs a construction manager to manage the work however the client retains the contractual link with the CM and works contractors.
Management contracting is when the client employs a management contractor who has the contractual link with the works contractors.

Question 8

What types of bonds are you aware of?

Answer 8

Performance Bonds (on demand, default) retention bond, road bond, materials off-site bond

Question 9

Nominated / Named sub-contractors?

Answer 9

Nominated sub-contractors were removed from JCT/SBCC 2011, however the client could get round this by nominating them in the specification.
Named sub-contractors the client must provide a minimum of 3 options.

Question 10

What are the different types of insurances required for a new build or a refurbishment?

Answer 10

Option A – Contractor takes out insurance for new build
Option B – employers takes out insurance for new build
Option C – employer takes out insurance for refurb

Question 11

What other insurances would the parties to the contract be required to have?

Answer 11

"Design Liability - Limit of Contractor’s
liability for loss of use etc. (if any)"
"Insurance - Personal Injury and Property
Damage"
"Contractor's Insurance – Liability of
Employer"
"Insurance of the Works and Existing
Structures"
Professional Indemnity Insurance
"Cover for pollution/ contamination
claims"
Collateral Warranties

Question 12

What is included in a letter of intent?

Answer 12

Scope of Works, Contract sum, Contract Period, method of dispute resolution, what should happen should the contract not be executed

Question 13

What is Assignment?

Answer 13

Assignment is the right to transfer ‘choses in action’ defined as ‘all personal rights of property which can only be claimed or enforced by action and not by taking physical possession’.
This definition includes benefits arising under a construction contract such as right to payment, but not burdens such as the obligation to pay.

Question 14

What is Novation?

Answer 14

Novation is a process by which contractual rights and obligations are transferred from one party to another. Whilst the benefits of a contract can be transferred by assignment, if the parties wish to transfer both the benefits and the burdens then this must be done by a novation agreement.
This is common on design and build projects where the design team are appointed by a client to carry out initial studies or prepare a concept or detailed design, but then when a contractor is appointed to carry out or complete the design and construct the works, the design team (or part of it) is novated to work for them, as happened on Inverclyde.
This can be beneficial to clients as it maintains continuity between pre-tender and post-tender design whilst leaving sole responsibility for designing and building the project with the contractor.

Question 15

How would your client appoint a design team

Answer 15

Whatever the process of selecting potential consultants, agreeing the scope of services and fee for the appointment will generally require that the client prepares some form of ‘request for proposals’.
Standard form of appointment include:
- JCT PCSA
- JCT Consultancy Agreement
- NEC PCSA
- RIBA Standard form of Appointment for an Architect

Question 16

What are 3rd party rights?

Answer 16

The doctrine of privity of contract states that only the parties to a contract can sue on that contract. This has always caused problems when a contract has been entered into for the benefit of a third party.
The Contracts (Right of Third Parties) Act, states that a person who is not a party to a contract (a third party) may in his own right enforce a term of the contract if the contract states that he may.
The act states that a third party must be expressly identified:
- In the contract by name;
- As a member of a class; or
- As answering a particular description
The wide ranging category of beneficiaries is a factor in a tendency in the construction field to exclude third party rights by an express term of the contract.

Question 17

What are fluctuations

Answer 17

Fluctuations provisions in construction contracts provide a mechanism for dealing with the effects of inflation, which on large projects lasting several years can be very significant.
On smaller projects, the contractor will be expected to take inflation into account when calculating their price (a firm price).
On larger projects, the contractor may be asked to tender based on current prices (prices at an agreed base date) and then the contract makes provisions for the contractor to be reimbursed for price changes to specified items over the duration of the project (a fluctuating price).

Question 18

What are nominated subcontractors?

Answer 18

A nominated sub-contractor is one that is selected by the client to carry out an element of the works. Nominated sub-contractors are imposed on the main contractor after the main contractor has been appointed.
The mechanism for nominating is an instruction in relation to a prime cost sum to which the main contractor is entitled to add mark up and attendance costs.
To name sub-contractors for a particular package, the client first identifies a list of potential sub-contractors.
The client then names a short-list of acceptable sub-contractors in the tender documents for the main construction contract.
Naming sub-contractors allows the client to influence the main contractor’s selection of sub-contractors, whilst leaving responsibility for their performance with the main contractor. It can be seen as an alternative to nominating sub-contractors as the contractual relationship is less complicated, and indeed, some forms of contract (such as Joint Contracts Tribunal (JCT) contracts) no longer include provision for the nomination of sub-contractors.

Question 19

How do you determine what contract to use on a building project?

Answer 19

There are 5 major factors in the selection of contract:

1. Procurement Route
2. Types of works required and sector
3. Size, value and complexity of the project
4. balance of risk/ risk allocation
5. design responsibility

Question 20

What are the main differences between NEC3 and JCT contracts?

Answer 20

Firstly, JCT has for many years been seen as the standard building contract for use in the UK, not intentionally, JCT contracts are intended for domestic use i.e. the UK.
The NEC has been designed for international use with the choice of governing law and language.
NEC is drafted in plain English to provide for clarity, while JCT focuses on liabilities and risk in the manner of traditional contracts.
Both Contracts provide for a person to act on behalf of the employer, the PM under the NEC, the CA in JCT.
Time
Both contracts provide for an employer to state a starting date, completion date, access dates and any sectional completion if appropriate.
Both allow for damages to be included for late completion by the contractor.
The JCT requires the contractor to submit a programme as soon as possible after the contract is executed, there are no details as to what the programme should show, or requirements to submit revisions of this programme from time to time or if the programme becomes inconsistent with actual progress on site.
The NEC demands a more detailed set of documents that make up the programme to be submitted at the regular basis stated by the employer. The programme under NEC becomes a tool by which the PM asses change, monitors progress and assists the management of EWs and CEs. Such is the importance of the programme, there are deductions from payments to the contractor for failure to submit the first programme and sanctions thereafter.
NEC provides for key dates to be provided in the event it is necessary to have stated deliverables or outcomes by stated dates. NEC provides further incentives for the contractor to finish early through an option for a bonus for early completion provision.
NEC includes the early warning process where both the PM and contractor are required to notify each other of any matter that could affect time, cost and quality.
This can be compared with the JCT approach which only obliges the contractor to claim for more time and money after the risk event has occurred.
NEC identifies a state at which completion which is defined in the works information, unlike JCT which relies upon a subjective judgement of practical completion.
Cost
Both contracts provide for the price payable to the contractor to be based on BoQs. While other options do contain the option for lump sum or other arrangements.
Both contracts provide for change control, variations/ claims under JCT, compensation events in NEC:
- JCT splits up the components of time and cost, dealing with them independently at various stages after the change arises.
- NEC deals with effects of time and cost together, providing for a quotation to be prepared by the contractor and accepted by the PM in a timely manner. This allows the PM the ability to control the balance of time and cost more efficiently.
-JCT generally values after event
-NEC can be valued before/ during or after
- JCT few predetermined time limits and no defaults
- NEC all time limited with defaults

Question 21

Main Updates in NEC4?

Answer 21

NEC4, likely JCT 2016, is widely seen as an evolution rather than a revolution.
Terminology
The NEC4 introduces a number of changes in terminology with a view to ensuring consistency across all contracts in the suite, for example:
- NEC4 is gender neutral
- Reference to Employer had been changed to Client
- Early Warning Register replaces Risk Register
- Scope replaces Work Information
Legislative Demands and Industry Developments
New Core clauses and secondary options have been introduced to address the following key areas:
- BIM - incorporates a new secondary option for “information modelling” dealing with issues relating to ownership of information and liabilities of the parties
- Contractor Proposals - A new core clause has been introduced for value engineering.
- Acceleration - The Contractor now has the option to propose acceleration to achieve Completion before the Completion Date
Requirements of Users
The following changes have been introduced in an attempt to reduce the number of “Z” Clause amendments that users commonly make to the core NEC clauses:
- Deemed Acceptance of Programme - If the Project Manager fails to respond to a programme issued for acceptance by the Contractor within the specified timeframe, the programme is deemed accepted
- Compensation Events - A new compensation event has been introduced entitling the Contractor to claim its costs of preparing quotations for proposed instructions which are not accepted by the Project Manager. There is also provision for additional compensation events to be listed in the Contract Data Part 1.
- Final Accounts - NEC4 introduces new procedures for agreeing final amounts due.
- Collateral Warranties - A substantially new secondary option has been introduced dealing with the provision of collateral warranties.
In addition to the above amendments the NEC4 suite of documents also introduces new contracts
- The Professional Service Subcontract and Term Service Sub-Contract, the
- Design, Build and Operate (DBO) contract, and the Alliance Contract (ALC).

Question 22

How do you let a contract quickly?

Answer 22

A letter of intent is one method of doing so.
Two stage tendering another option, is often used when time is constrained as it enables design and tendering to overlap.
Design and Build procurement allows the a contract to be let before design is finalised.
Another method of doing so would be accelerated traditional procurement, this can be achieved by letting a separate, advance works contract (for example for site clearance, or foundations) for works to proceed to construction once planning permission has been granted, and while the rest of the design is being completed.

Question 23

What are the limitations of LoI’s?

Answer 23

A letter of intent is a document expressing an intention to enter into a contract at a future date but creates no contractual relationship.
Letter of intent are most commonly sent at a time when it is anticipated that the recipient will be incurring costs and overheads. They can be used as an interim arrangement to mobilise construction prior to a formal contract being executed.
The limitations are:
- Transfer of significant negotiation risk in favour of the contractor who knows it will likely construct the project and so will likely play a tougher line in negotiations on the detailed terms and conditions of the contract resulting in more time commitment to finalising the final contract;
- Limits to the scope of what any contractor will perform under a LOI
- Can be an administrative burden

Question 24

How are LADs calculated and when are they applicable?

Answer 24

A “genuine pre-estimate of loss”.
They are calculated bases on the actual loss the client is likely to incur if the contractor fails to meet the completion date.
An example of this is rent for a hotel.
LADs usually relate to the contractor failing to achieve completion by the completion date set out in the contract, through no fault of the Employer.

Question 25

How would you advise your client if they wanted to reduce their risk?

Answer 25

There is several ways for a client to reduce risk.
Procurement Route
By selecting D&B you are reducing the risk on the client, the contractor will bear the risk for the design and construction.
In other procurement routes, the client bears the risk for his professional consultants design information.
Amending the contract
A standard form of contract will general include a list of events that entitle the contractor to claim additional time and/ or money for carrying out the works (i.e. CEs under NEC, Relevant Events/ Matters JCT)
A employer may want to move the risk away from himself towards the contractor, this can be done in a number of ways, for e.g. the list of events that entitle the contractor to claim time and/ or money could be reduce. This would result in the contractor bearing the risk of any delays to the project cost over runs should the deleted events arose.
Another common amendment is to place the risk of adverse site/ ground conditions on the contractor.
Under D&B Contracts, a common amendment is to make the contractor responsible for the design of the entirety of the project, including design carried out by the employer’s design team.

Question 26

What is a performance spec?

Answer 26

Specifications are written documents that describe the materials and worksmanship required for a development.
Performance specifications require further design by a contractor, while Prescriptive specifications are where the design is already complete when the project is tendered.

Question 27

What other methods of redress does the client have for remedying defects after PC?

Answer 27

The Rectification Period (previous called the defects liability period) begins upon certifications of PC and typically lasts 12 months.
During this period, the client reports any defects that arise to the contract administrator who decides whether they are defects (i.e. works that are not in accordance with the contract), or whether they are in fact maintenance issues. If the contract administrator considers they are defects, then they may issue instructions to the contractor to make them good within a reasonable time.

Question 28

What was the contractual mechanism to remedy the defect in the garden?

Answer 28

I issued a contract instruction to the contractor to carry out the remedial works. When the contractor refused to take responsibility for the defect and carry out the works, I advised the client to appoint third partial engineer to carry out an investigation at the affected plots. The results determined that the gardens were not properly prepared prior to laying the grass turf. The contractor still refused to carry out the remedial works and I advised that the client would appoint a third party landscaper to carry out the works. I market tested the works and the client appointed the landscaper. I issued a contract instruction to omit the value of the remedial works from the contractor’s final account.

Question 29

What advice did you give on extending the payment terms on the fit out project? How was this incorporated into the contract? Did you give legal advice?

Answer 29

I advised the client that the contract could be amended to extend the final date of payment from the default 14 days to 21 days from the due date. This was incorporated into the contract via a schedule of amendments which was drafted by the client’s legal advisor.

Question 30

Did the extension to the payment terms impact on the Housing Act provisions? What are the provisions and how did you ensure that these were still met even though the date for payment was extended?

Answer 30

Th act stipulates that adequate mechanisms must be in place to ensure that periodic payments are made to the contractor, however parties are free to decide the period between the due date and the final date of payment.