Contract Practice - FINAL

Question 1

What are the reasons for having a contract?

Answer 1

• Clarity in business relationships, agreements, and rights of parties.
• Avoiding potential contract disputes and litigation.
• Preventing misinterpretation of communications and agreements.
• Protecting intellectual property, real property, and asset values.

Question 2

What are the requirements of a contract?

Answer 2

• Offer by one Party
• Acceptance by the other Party
• Consideration of the Offer
• Intent to form a Contract
• Legality of Contract
• Capacity – Capacity to make agreement

Question 3

What Elements of contract law are you aware of?

Answer 3

Unfair Contract Terms Act 1977
• This limits the extent that a party can avoid liability for breach of duty
Contracts (Rights of Third Parties Act)
It has significantly changed the traditional principle of privity of contract, whereby obligations can only be enforced by the parties to a contract. It allows a third party to enforce terms of a contract in one of two situations: firstly if the third party is specifically mentioned in the contract as someone authorized to do so, and secondly if the contract “purports to confer a benefit” on him.
In construction, may allow employer to have rights to a contract between the contractor and subcontractor. Covered in NEC3 ECC with Secondary Option Clause Y(UK) 3
Housing Grants Construction and Regeneration Act
a) Fairer payment conditions
b) Improve the cashflow of the industry
c) Ban pay when paid and pay if paid clauses
d) Introduce quicker, easier and more efficient method of dispute resolution

Question 4

Advise between collateral warranty or use of the unfair contract rights of third parties act?

Answer 4

Act not as specific as CW but CW more costly, whichever is used should be drafted by legal department

Question 5

What Different standard forms of contract are you aware of?

Answer 5

• JCT 2016 (Joint Contracts Tribunal)
• NEC (New Engineering Contact)
• ECC (Engineering and Construction Contract)
• FIDIC (International Federation of Consulting Engineers)

Question 6

What are the Differences between NEC3 and JCT?

Answer 6

• 6 main options and secondary options (mix and match approach to distribute risks) JCT uses separate contracts e.g. JCT SBC D&B, SBW W/Q, X/Q etc…
• NEC written in laymen terms easy to understand
• No QS mentioned in NEC only Project Manager
• Tries a more collaborative approach to working “Mutual trust and understanding”
• Programme is a contract document (NEC) 25% of monies due can be withheld if the contractor does not submit an accepted programme
• Variation (JCT)= Compensation Event (CE) (NEC)
• Contractor can notify of a CE called (NCE) must do so within 8 weeks of becoming aware of the situation
• Valuation rules, Bill rates are not binding on CEs.
• CEs built up from first principles called Schedule of Cost Components (SCC) People, Plant, Equipment, Design and Manufacture include a % for O/H
• NEC does not have claims NO direct loss and/or expense
• Loss and/or expense is dealt with in CE
• EOT… again prolongation is dealt with in CE.
• Project Manager by accepting a CE is potentially extending the completion date
• Defects: Defects correction period (normally 2-3 weeks) contractor must “make good” in these time periods (better at dealing with defects than JCT)
• Periods of reply (incentivises the parties to respond to each other) however reality is very administration heavy.

Question 7

What are the Differences between NEC3 and NEC4?

Answer 7

• Risk Register’ re-named the ‘Early Warning Register’
• Treated acceptance of the contractor’s programme in situations where the project manager does not respond to submission or notification
• Employer becomes ‘Client’, and ‘Works Information’ becomes ‘Scope’. Partnering becomes collaboration.
• An additional procedure includes the identification of opportunities by either party
• The secondary option X16 for retention now includes the optional provision of a retention bond instead of having money retained.
• When EW notified has to be a risk reduction meeting within 7 days

Question 8

What are delay damages?

Answer 8

• A genuine pre-estimate of the likely loss incurred by the employer should the completion date not be met.
• X7 in NEC3 ECC. Amount defined in Part 1 of Contract Data
• If Contractor does not achieve completion date and X7 selected then delays damages are due from Contractor to Employer

Question 9

What are Advanced Payments?

Answer 9

Covered under clause secondary option clause X14 in NEC ECC

• It allows the contractor to receive lump sum payment in advance
• The payments, values and dates should be set out in the contract particulars
• They may be used where the contractor incurs high costs at the start of a project
• E.g. items with long lead times or the need to purchase specialist plant for manufacturing
• May reduce the incentive of the contractor
• Bad for the employer’s cashflow
• Concerns over why the contractor can’t fund the expenditure – insolvency worries

Question 10

What is Retention?

Answer 10

NEC ECC Secondary Option Clause X16 – Contract data allows for a retention free amount (Can be Nil)
It provides an incentive for the contractor to complete the works promptly
It provides some financial cushion to the employer in the event of contractor default
Retention only taken from Price of Work done to date once retention free amount has passed
Employer acts as trustee for retention and should -
- Place it in a separate bank account
- Label the account as being held in trust
- Provide the contractor with statements showing the payments and amount of money in there
- This should ensure that the money is available to the contractor in event of employer insolvency
- Employer is entitled to interest on retention
Half of the retention is released to the contractor after assessment is made at Completion of the whole of the works or in the next assessment after Employer has taken over the whole of the works if this is before Completion of the whole of the works. Other half released when the Defects Certificate issued.

Question 11

Retention Bond?

Answer 11

• Provided by the contractor in lieu of taking retention from interim payments
• It should be to the same value as the retention deducted would have been
• Requirement should be stated in the contract
• If Contractor does not maintain retention bond the employer can deduct retention from interim payments If the bond is subsequently taken out, the retention deducted must be repaid to the contractor
• If Contract sum increases Retention can either be deducted from interim payments on the additional amount or the value of the retention bond can be increased
• May be used in difficult market conditions to aid the contractor’s cashflow

Question 12

Disadvantages of Retention Bond?

Answer 12

• Employer would have to pay the premium for taking out the bond
• May reduce the contractor’s incentive to complete to standard and promptly
• Harms the employer’s cashflow
• The employer would not get the interest accruing on the amount of the retention bond

Question 13

What are the Dispute Resolution procedures under NEC?

Answer 13

HGCRA - Created a statutory right for the parties of a construction contract to refer any dispute arising under that contract to adjudication.
Covered in clauses W1 and W2 in NEC ECC. W2 covers HGCRA.
If HGCRA applies then use W2, if not use W1 which contains far greater detail regarding adjudication.
Party may refer a dispute to adjudicator at any time, who is appointed under the NEC Adjudicators Contract.
If a party is not satisfied with adjudicators decision can serve notice within four weeks of decision to go to a tribunal which will be stated in Contract Data e.g litigation/arbitration. The adjudicator cannot be called as a witness.

Question 14

What are common NEC Contract documents?

Answer 14

• Main Document (Core Clauses/Main Option/DR/Secondary Option)
• Schedule of Cost Components (BQ/AS)
• Works Information (Contractors Responsibilities, Programme)
• Site Information (Services)
• Contract Schedules (Agreement Form)
• Drawing Register
• Contract Data Part 1 (Supplied by Employer - Client Details, Access dates, Weather measurements for CE, Insurance values if provided by employer, Z Clauses)
• Contract Data Part 2 (Supplied by Contractor - details of key personnel, data for SOCC, Fee %)

Question 15

NEC Early Warning Process?

Answer 15

Both parties must give early warning of anything that may delay the works, or increase costs as soon as they become aware of them.
They should then hold an early warning meeting to discuss how to avoid or mitigate impacts on the project.
If the contractor fails to give early warning of a possible delay to the works, or increase in costs, they will only be compensated for effects that would have remained anyway even if they had given early warning.
If the contractor fails to give early warning of an event that may give rise to a possible delay to the works, or increase in costs, within 8 weeks of becoming aware of the event, they will not be entitled to a change in price, completion date or key date, unless the project manager should have notified the event to the contractor but did not.

Question 16

Notification of Compensation Event?

Answer 16

NEC requires notification of any matter which increases the total of the prices, delays completion, delays the meeting of a key date, or impairs the performance of the works. Notification of Compensation Events is covered under Clause 61

1. Contractor Notifies
2. PM has 1 week to respond and ask for a quote
3. If no response Contractor notifies the PM
4. After a further 2 weeks, deemed as accepted

• Contractor must notify within 8 weeks of event or it is timebarred
• 8 weeks time bar relatively untested in court.
• Can be unfair on contractor and could lead to them raising a large amount of EWNs and NCEs just to cover themselves. Leads to more admin.

Question 17

What is a project managers instruction?

Answer 17

• Instruction by Project Manager to Contractor
• Contractor obliged under clause 27.3 to follow instruction from PM or Supervisor as long as it is in accordance with the contract.
• Usually results in a CE (EG change to works information) but not every time EG instruction to submit a programme, instruction to submit a quote for acceleration.

Question 18

Implementing changes to the target cost under option C?

Answer 18

NEC3 - Compensation Events - Cost of work estimated & agreed up front before work carried out (If actual costs known then included). Contractor should be able to gain on the CE. Only client risks or CE listed in the contract can form a CE. An allowance is made in the target for contractors risks.

Question 19

How does Pain/Gain mechanism work?

Answer 19

No standard %’s in Contract. Contract Data Part 1 for EA projects:
• 85% - 100% of Target Cost, gain would be split 50/50.
• Below 85% of Target Cost, gain is only paid client.
• 100% - 115% of Target Cost, pain would be split 50/50
• Above 115% of Target Cost, pain is only applied to contractor.

Question 20

How would you set a target cost?

Answer 20

• prepare the Tender Documentation & appropriate pricing document (AS or BQ) for issue to the Tenderers, who would return as part of the submission.
• analyse the pricing document & look at the programme durations proposed by the contractor to ensure they were reasonable & the level of resources are appropriate.
• Review quantities & rates.
• Labour - number & efficiency & rates
• Plant - number & output & rates,
• Materials - quantity & rates
• Subcontract - Verify procurement strategy & back to back contracts (competitive quotes recieved / benchmark rates / lowest quote used / subcontract uplift).
• Check rates for project staff & ensure only employed during the appropriate periods in the contract (planner & setting out engineer - 100%).
• Site compound is adequate for level of staff & labour to be provided. Check any unpriced items and determine if & where included.
• Determine where insurances are priced. Site vehicles - May be cheaper to purchase rather that rent. What risks have been priced or included for.
• Check level of Fee & Profit - Target must be set at a realistic level & must be capable of being beaten (Too low - contractor penalised & will look for ways to increase target - Too high - no incentive to innovate & drive down cost) - Pain / Gain Mechanism should be appropriate to allow contractor to make further profit

Question 21

Payments under Option C?

Answer 21

Contractor Paid actual cost up to the value of the target for undertaking the works. PG mechanism then invoked & depending upon arrangement will affect how much the contractor will be reimbursed.
Interim payment assessments – carry out audit of the defined cost which the project manager forecasts would have been paid by the contractor before the next assessment date, plus the fees. The fee is quoted by the contractor and consists of his overheads. Minus retention

Question 22

Advantages and Disadvantages of option C?

Answer 22

Advantages:
o Minimum enquiry definition
o Short bid time / quick start on site
o Conflict minimised / Partnering ethos
o Contractor incentive to manage resources
o Employer shares in savings
o Does not pay full amount for risks that do not materialise
o Early contractor involvement
Disadvantages:
o Employer risk of being financially exposed
o Cost checks & monitoring can be time consuming & expensive
o Bid evaluation difficult
o Reduction in competition”

Question 23

When is retention released?

Answer 23

Half of the retention is released to the contractor after assessment is made at Completion of the whole of the works or in the next assessment after Employer has taken over the whole of the works if this is before Completion of the whole of the works.
Other half released when the Defects Certificate issued

Question 24

NEC3 change procedures & Mechanisms?

Answer 24

• Early Warning Process (time, price, performance of works) notified by either party)
• Risk Reduction Meeting - confirm or close out
• CE - Separate meeting to confirm if EW is a CE
Contracts do not refer to ‘variations’ or ‘loss and expense’. Instead, there are ‘compensation events –
• Compensation events are events which may lead to the payment to the Contractor being changed or the Completion Date being delayed.
• 19 Compensation events are included under clause 60.1
List of common CE’s -
• The Project Manager gives an instruction changing the Works Information.
• the Employer does not allow access to the site on the dates shown in the accepted programme.
• the Employer does not provide information by the dates required in the accepted programme.
• the Employer or others (i.e. third parties) do not carry out works in accordance with the accepted programme, Works Information, etc.
• the Project Manager or Supervisor does not reply to the contractor within the time limits set down by the contract.
• an event occurs which is an Employer’s risk stated in the Contract;

Question 25

Completion & Defects Date/ Defects Certificate under NEC?

Answer 25

‘Completion’ in the ECC is a defined term, Clause 11.1.
Completion is when the Contractor has –
• Done all the works which the works information states he is to do by the Completion date
• Has corrected notified Defects which would have prevented the Employer from using the works and Others from doing their work
• If the work Contractor is to do by completion date is not stated in works information, Completion is when contractor has done all the work needed for Employer to use the work or Others to do their work

Question 26

Assessing a Quotation under NEC3?

Answer 26

Actual Defined Cost
• Work already done prior to the date the project manager instructed, or should have instructed, the contractor to submit a quotation.
• The contractor needs sufficient resources to maintain full and accurate cost records, which includes its own cost and/or subcontractor’s cost.
• It may require amending traditional application payment cycles while implementing an open book arrangement, so that at any point in time the contractor is able to identify the actual cost expended by subcontractors on works already carried out.
Forecasted Defined Cost
• Second is forecasting the defined cost of work not yet done.
• The assessment of these costs requires detailed knowledge of the progress of the individual work or trade packages and a realistic estimated final account for each subcontractor.
• As there is a limited period (the default being 3 weeks) for the contractor to submit its CE quotation, the Contractor has to have a means of forecasting the cost of the change inherent in the CE.

Adjustment of Fee
• The third matter is an adjustment of the fee which, as it is a percentage addition to the defined cost, is simply dependent on ensuring that the defined cost is correctly assessed
Minus disallowed cost which is a cost that –
• Is not justified by the Contractors accounts and record,
• Should not have been paid to a Subcontractor or supplier in accordance with his contract
• Was incurred only because the Contractor did not follow an acceptance or procurement procedure stated in the Works Information or did not give an early warning which contract required him to give
And the cost of –
• Correcting Defects after Completion
• Correction Defects caused by the Contractor not complying with a constraint on how he is to Provide the Works stated in the Works Information
• Plant and Material not used to Provide the Works (after allowing for reasonable wastage) unless resulting from a change to the Works Information
• Resources not used to Provide the Works (after allowing for reasonable availability and utilisation) or not taken away from the Working Areas when the Project Manager requested and
• Preparation for and conduct of an adjudication or proceedings of the tribunal

Question 27

What is the difference in NEC3 Option C balance of risks and costs compared to option E?

Answer 27

Option C Tender information incomplete, higher risks, financial risk shared. Pain/Gain Incentivisation mechanism.

Option E - Cost Reimbursable - Scope of works unknown & TC unable to be developed. Early start required. Majority of risk sits with Employer. Contractor paid actual cost plus fee. No incentive to drive down cost.

Question 28

What is a Project Manager Assessment?

Answer 28

PMA when:
1) Contractor has not submitted a quote
2) PM decides that CE has not been assessed properly by the contractor
3) If no programme submitted with quotation
4) If programme has not been accepted by PM due to contractor fault.
PM lists assumptions. Can only be reopened if PM has made an error. If assumption was incorrect then it is a new Compensation Event.

Question 29

How are Materials on/off site dealt with?

Answer 29

On Site - The materials should be for the works, adequately protected, delivered to programme and in a reasonable quantity
Off Site - Proof that ownership will transfer to the employer on payment (vesting certificate)
• Insurance until materials arrive at 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

Question 30

What is the Schedule of cost components?

Answer 30

“Used only for option C, D & E. Identifies the cost heads under which actual costs incurred under the works should be allocated in order to calculate the defined cost.

1) People - Directly employed by contractor or not directly employed but paid for time such as labour only subcontractors.
2) Equipment
3) Plant and materials
4) Charges - water, gas, electricity in working areas
5) Manufacture and fabrication
6) Design
7) Insurance - deduct from cost the insurance policies and other costs paid to contractors by insurers.”

Question 31

Insurances under NEC contract?

Answer 31

Covered under section 8 - Risks and Insurance
• Contractor provides insurance stated in insurance table and any additional stated in Contract Data unless Employer stated to provide
• In joint names and covers Contractor’s risk events from starting date until defect cert or termination cert issued
• Before start date and on each policy renewal, Contractor submits insurance certificates to PM
• Any amount not received from insurer borne by risk owner (Contractor or Employer)
• Employer can insure a Contractor’s risk, cost borne by the Contractor and vice versa
• PM submits insurance policies and Certificates to be provided by Employer to Contractor for Acceptance.

Question 32

Interim Payments?

Answer 32

HGCRA – Projects longer than 45 days must contain provision for interim payments
Core Clause 50.2, the amount due to the contractor is the total of:
• price for work done to date; plus
• other amounts to be paid to the contractor (such as compensationn events); less
• any amounts to be paid or retained from the Contractor.
Project manager is obliged to certify payment within 1 week of each assessment date.
• The assessment date is normally agreed between the parties.
• If not agreed the assessment date is calculated by reference to the assessment interval following the starting date.
• Payments are made within 3 weeks of the assessment date.
• If a payment is later corrected, interest is paid.

Question 33

What is included in contract documents?

Answer 33

NEC Contract -
• Main Document (Core Clauses/Main Option/DR/Secondary Option)
• Schedule of Cost Components (BQ/AS)
• Works Information (Contractors Responsibilities, Programme)
• Site Information (Services)
• Contract Schedules (Agreement Form)
• Drawing Register
• Contract Data Part 1 (Supplied by Employer - Client Details, Access dates, Weather measurements for CE, Insurance values if provided by employer, Z Clauses)
• Contract Data Part 2 (Supplied by Contractor - details of key personnel, data for SOCC, Fee %)

Question 34

Is there any way the contractor isn’t entitled to an increase in time or money under the CE process?

Answer 34

Yes, if there is no defined cost incurred or changes to any dates in the programme.

Question 35

When pricing a CE, how would you assess the impact on time?

Answer 35

Wouldn’t review programme myself but planner or PM would. If there is extension of programme would likely be reviewing increase in prelim cost.

Question 36

What is the Defects Date?

Answer 36

Last date of the defects period under NEC. Defects period 26 to 52 weeks after completion date. Defects date last day PM can notify defects.

Question 37

Who is liable for the cost of latent defects?

Answer 37

If occurs after the end of the defects period. Employer will have to go through courts. Limitations are 6 years for contracts signed under hand and 12 for signed under deed. Can reduce risk through collateral warranties, guarantees and latent defects insurance.

Question 38

Why did you advise against an Option E? If you had gone Option E, what would have been the difference from an Option C in terms of assessments of payment?

Answer 38

Because all cost risk would have sat with client. Option C would’ve provided incentive for Contractor to reduce costs and balanced cost risk between contractor and client through pain/gain mechanism

Question 39

If the scope was well defined enough, why not Option A?

Answer 39

Wasn’t fully designed enough, too many unknowns. Also Client doesn’t use option A as they believe they are too adversarial, only option C and E

Question 40

If you request a revised quotation for a CE, do the timescales reset?

Answer 40

Essentially yes, Contractor has another 3 weeks to prepare another quote, PM has another 2 weeks once submitted to respond.

Question 41

Are the contracts you work on standard or bespoke? What are the issues with amending standard forms?

Answer 41

Amended using z clauses (additional conditions of contract) EG removing CE’s (Physical conditions of site (12), Confidentiality clauses, specifying payment terms.
Could change the risk balance of the contract, In case of NEC can change meaning of the contract EG adversarial instead of collaborative, bespoke clauses may not have been tested in court so cannot ensure outcome if there is litigation (unfair contract terms act)

Question 42

Types of JCT Contract?

Answer 42

• Standard Building Contract
• Minor works
• Design and Build
• Construction Management

Question 43

What is Assignment?

Answer 43

o Where the rights of one contractual party are transferred to a third party EG assignment of the rights under a collateral warranthy to a different tenant/purchaser
o Assigned using z clauses in NEC3, I’m aware NEC4 contains an assignment core clause
o It is standard to allow assignment of rights twice without consent
o The assignment should be notified in writing to the other party