Contract Practice - L3 Flashcards
Technical Competency
What is a contract?
A Contract is a legally binding promise (written or oral) by one party to fulfil an obligation to another party in return for consideration
What are the key requirements for a basic binding contract?
- Offer
- Acceptance
- Consideration
- Intent to create legal relations.
Please define ‘express terms’.
- Express tersms are the terms of the agreement which are expressed agreed between the parties.
- Ideally they will be written down in a contract between the parties but where the contract is agreed verbally, they will be the terms discussed and agreed between the parties.
Please define what is meant by ‘implied terms’.
A contractual term that has not been expressly agreed between the parties but has been implied into the contract either by common lay or by statue.
What is tort?
- A tort is a civil wrong.
- Part of the civil law.
- A claim in tort is concerned with loss or harm.
How do statutory provisions and contract provisions differ?
- Statutory provisions are set out by law and must be complied with regardless.
- Contract provisions related to the contract in question and therefore only apply to a specific project.
What is your opinion of oral contracts?
Whilst they are legally binding, the difficulty lies in proving the specific terms and conditions of the agreement. Having a written contract is always the preferred option.
What is a breach of contract?
A breach of contract occurs when one party on a binding agreement fails to deliver according to the terms of the agreement. A breach of contract can happen in both a written and an oral contract.
What is the Local Democracy, Economic Development and Construction Act 2009?
- October 2011 - the Local Democracy, Economic Development and Construction Act 2009 (the ‘2009 Act’) came into force in England and Wales.
- The Act amended the Housing Grants Construction and Regeneration Act 1996 (The Construction Act).
- The Act changed the way construction contracts are entered into and in particular, introduced an amended regime for payment and adjudication.
What are the key provisions under the 2009 Act?
- Contracts
- Payment
- Payment Notices: Contractual Requirements
- Payment Notices: Payee’s Notice in Default of Payer’s notice
-Pay less notice
What are the key provisions under Contracts under the 2009 Act?
The LDEDC Act repeals the requirement for construction contracts to be in writing therefore, contracts that are partly in writing or wholly oral are now covered. This will allow parties to go to adjudication even if their involvement is not formally recognised in writing.
What are the key provisions under Payment under the 2009 Act?
- Under HGCR Act a construction contract must have an ‘adequate mechanism’ for determining what payments are due and when they become payable.
- Pay-when-certified clauses can no longer be used to prevent paying a subcontractor on the basis that a certificate in the main contract is yet to be issued.
What are the key provisions under Payment Notices: Contractual requirements under the 2009 Act?
- The construction contract must specify that either the payer or the payee (but not both) will issue the payment notice.
- This must be issued not later than 5 days after the payment due date and paid before the final date for payment identified by the construction contract (the parties being free to agree how long the period is between the date the sum becomes due and the final date for payment).
- The payment notice must specify the sum the payer/payee considers to be due at the payment due date and the basis on which that sum was calculated. A payment notice must be issued, even if the amount of the payment notice is nil.
What are the key provisions under Payment Notices: Payee’s notice in default of payers notice under the 2009 Act?
- If the payer is required by contract to issue a payment notice and fails to serve that notice in the required form or in the set timeframe, the payee is entitled to issue a default payment notice.
- A default payment notice obliges the payer to pay the amount due and allows the payee their statutory right to suspend performance for non-payment.
What are the key provisions under Pay Less Notices under the 2009 Act?
- Paying parties are required to either pay the notified sum specified in either the payment notice or default payment notice, by the final date for payment or serve an effective pay less notice. This allows the payer to amend the sum due if it is later discovered that work covered, or the amount notified within the payment notice turns out to be unsound.
- To be effective, a pay less notice must specify the sum that the paying party considers to be due on the date the notice is served, the basis on which that sum is calculated and be served no later than the prescribed period prior to the final date for payment.
What are the key provisions under Suspension of performance for non-payment under the 2009 Act?
- The LDEDC Act clarifies the contractor’s right to suspend carrying out the work in the event of non-payment.
- To validly suspend performance of its obligations by reason of non-payment, a default notice must be issued and there must have been failure to pay. The party in default (the party who has not paid) is liable to pay to the payee (contractor stopping work) a reasonable amount by way of costs and expenses incurred by exercising the suspension of all or part of the work.
What is a letter of intent (LOI)?
- Typically used to describe a letter from an employer to a contractor (or from a main contractor to a subcontractor) indicating the employer’s intention to enter into a formal written contract for works described.
- The letter of intent typically asks the contractor to begin those works before the formal contract is executed.
What information is typically included in a letter of intent?
- Detailed description of the work to be completed.
- Contract sum (if agreed).
- Date for possession.
- Date for completion.
- Insurance provisions required.
- Method of payment.
- Expiry date of letter.
- Typically states employers’ right not to award the main contract for whatever reason.
- ADR (Alternative Dispute Resolution) Method.
What are the advantages of a letter of intent?
Allows works to commence (or place orders) before the main contract is agreed/signed.
What are the disadvantages of a letter of intent?
- May lead to complacency and disincentivise both parties from signing the main contract.
- Contractually less robust than the main contract.
- The employer loses incentive in negotiations of the main contract.
Who issues the letter of intent?
The employer
In what circumstances might a letter of intent be used?
- Where the employer needs to commence works before a certain date.
- Where materials have long lead times and early procurement would aid the programme.
- Starting construction works might trigger early founding.
Who usually signs the letter of intent?
Both the employer and the contractor.
What would you say if the client asked you to draft a letter of intent?
It is a legally binding agreement like a contract; therefore, we would NOT draft a letter of intent.
What are the different types of letters of intent?
- Comfort letter.
- Instruction to proceed with consent to spend.
- Recognition of contract
What is a comfort letter?
A comfort letter is a letter expressing a party’s intention to act in a particular way at some point in the future, or at the time of issuing the letter.
What is an Instruction to proceed with consent to spend?
A letter with instructions to proceed and consent to spend is sometimes referred as an “if” contract. This type of letter allows work to proceed up to a certain value while the contract itself is being finalised.
What is a recognition of contract?
This type of letter is also referred to as a letter of acceptance and is used by some forms of contract (such as FIDIC) to formally execute the contract itself. Generally, such a letter will be issued only once the contract has been substantially agreed and usually marks the completion of negotiations between the parties.
Are you aware of any case law relating to letter of intent?
Ampleforth Abbey Trust v Turner & Townsend (2012)
The defendant project managers were retained by the Trust in relation to project to build new accommodation at a school. The defendant’s retainer included obligations ‘facilitating, assisting and being involved in the procurement of the building contractor and the building contract’. The contractor never signed the building contract and the whole of the works (which were completed late) were procured using letters of intent. The effect of this was that the Trust was not able to claim liquidated damages under the building contract for the late completion of the works.
HHJ Keyser QC held that the defendant had been negligent in failing to take the steps reasonably required of a competent project manager for the purpose of finalising the building contract between the Trust and the Contractor.
What is a parent company guarantee?
A parent company guarantee (PCG) is a form of security that may be required by clients to protect them in the event of default on a contract by a contractor that is controlled by a parent company (or holding company). Typically, such a default might be caused by the insolvency of the contractor.
In what circumstances may a parent company guarantee be required?
PCGs can be particularly useful where a small contractor is part of a large, financially stable group of companies. The guarantee is given by the parent company to the client and in the event the contractor defaults on their obligations, the parent company is required to remedy the breach, meeting all the contractor’s obligations under the contract (and / or covering loss and expense incurred by the client).
Are there any Acts which govern third party righrs?
Contracts (Rights of Third Parties) Act 1999./
What is the overarching purpose of the Act?
- The Act allows third parties to enforce terms of contracts that they are not a party to, but which benefit them in some way, or which the contract allows them to enforce.
- It also gives parties access to various remedies if those contract terms are breached.
What are the advantages of third-party rights?
- Time and Cost
- Certainty
- Subcontractors
What are the advantages of Time and Cost under third-party rights?
Since no separate document (i.e collateral warranty) is being entered into, using the Act cuts down on the time and cost associated with warranties being drawn up, signed and circulated.
What are the advantages of Certainty under third-party rights?
Once the rights to be conferred on third parties are negotiated and agreed by all parties, there is limited room to revisit the wording when protection is required as is often the case when new collateral warranties are circulated for signature.
What are the advantages of Subcontractors under third-party rights?
The third-party rights process can also be extended on subcontracts so that (provided the relevant building contract and subcontract are drafted accordingly) an employer can confer third party rights in relation to work done by subcontractors unilaterally. This avoids the need to chase large numbers of individual warranties.
What are the disadvantages of third-party rights?
- Lack of flexibility
- Need for careful drafting
What is the disadvantages of lack of flexibility under third party rights?
Once the schedule of third-party rights being conferred has been agreed, there is limited room for negotiation. While this can be an advantage as it will help to keep costs down, in some circumstances the inflexibility could cause a problem if a specific provision is required for a particular party, such as an incoming tenant or purchaser.
What is the disadvantages of need for careful drafting under third party rights?
Recent cases have shown the importance of drafting provisions relating to the enforcement of third-party rights very clearly to ensure that all the necessary rights are conferred on the third party, for example the right to commence adjudication proceedings if this is required.
Why might third-party rights be used instead of collateral warranties?
- If a lot of collateral warranties are required, it an involve a lot of administration and cost.
- Third Party rights are easier to get in place because there is no separate document required.
What is a collateral warranty?
A collateral warranty is a formal contractual agreement which runs alongside another contractual agreement - its purpose is to create a contractual relationship between two parties (e.g. companies; individuals) where one would not otherwise exist.
Can you provide a working example of how a collateral warranty could be used?
The employer places a contract with a contractor, the contractor then places several subcontracts with its suppliers to actually do the works, the employer has a direct contractual relationship with the contractor by he has no contractual relationship with any of the subcontractors (this is known as ‘privity of contract’).
In these circumstances, the employer may wish to have a direct contractual relationship with the subcontractor so that it can enforce the obligations that the subcontract owes directly, or to create other obligations and rights between them. This might be considered as a security measure if the contractor should become insolvent or if its employment were to be terminated for any reason.
Who might want a collateral warranty?
- Any third party with a financial or inherent interest in the project but is not party to the main contract. E.g. funding institution, future tenants, purchasers, etc.
- The employer may want a collateral warranty with key subcontractors or suppliers, if the contractor were to go into liquidation, otherwise they would have no contractual link with them for redress in case of defective workmanship etc.
What is the difference between a bond and collateral warranty?
- A bond is usually a financial commitment backed up by a third party, a collateral warranty passes on contractual obligations.
- Bonds are contained within the contract.
- Collateral warranties are a side agreement to the contract.
Are there any alternatives to collateral warranties?
An alternative method to confer such rights is provided by the Contracts( Rights of Third Parties) Act 1999 which allows third parties to obtain the benefits from contracts which are entered into by others.
What are the three ways that benefits can be transferred under a building contract?
- Collateral warranties
- Third party rights
- Assignment
Are you aware of any case law relating to warranties?
Parkwood Leisure v Laing O’Rourke
What happened in the case of ‘Parkwood Leisure v Laing O’Rourke’?
In light of the particular wording used in the collateral warranty, there was no doubt that it should be treated as a construction contract under section 104 of the Housing Grants, Construction and Regeneration Act 1996.
There is a high probability that collateral warranties will be needed under a D&B contract, can you explain why?
The design team typically sit below the contractor under a D&B contract; therefore, the employer will need to retain a contractual link with the design team (using a collateral warranty).W
What is assignment?
Assignment is the process whereby the benefit of a contract is transferred from one party to another but the burden of the contract remains with the original party to the contact.
Can you provide a working example to explain how assignment might be applied?
- Assignment can arise where a party to a construction contract, collateral warranty or consultant’s appointment wants to assign the benefit under that contract tot a third party, such as a purchase or a tenant of a building.
-Banks and other funders will also frequently take an assignment of the benefit of a suit of construction documents in respect of a development, as an additional part of the security package for their loan to finance the development. A bank will want to acquire the benefit of such documents to be able to assume the position of the employer under them in the event of the employer defaulting on its financial obligations during the works.
What are some of the typical clauses of 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 a bond?
- Construction bonds are protection for the owner against non-payment, lack of performance, company default and warranty issues.
- An arrangement where a contractual duty owed by one party to another is backed up by a third party.
Can you list five different bonds which might be used a on a project?
- Performance bond
- Retention bond
- Off-site materials bond
- Advance payment bond
- Tender bond
When might the employer want a performance bond?
- If the contractor is new or unapproved
- If there is a concern over the contractor’s finances/commercial standing
- The economy might be heading into recession
- The employer simply wants to protect their commercial exposure
What is a performance bond?
- A performance bond is a form of security provided by a contractor to a developer or employer.
- It consists of an undertaking by a bank or insurance company to make a payment to the employer in circumstances where the contractor has defaulted under the contract.
What is the difference between on-demand and conditional performance bonds?
- On-demand bonds - Money set out in the bond is immediately available on demand without needing to satisfy any preconditions whatsoever (including establishing the contractor’s liability) unless the demand is fraudulent.
- Conditional bonds - Requires the employer to provide evidence that the contractor has not performed their obligations under the contract and that they have suffered a loss consequently.
What is the typical value of performance bond?
Usually, 10% o the contract sum.
What is the typical cost of a performance bond?
The cost largely depends on the financial stability of the contractor and the number of previous claims (if any).
What is the risk of not having a performance bond?
- In the event a contractor goes into insolvency and there is no bond in place, the employer will be liable to pay all costs to deal with the insolvency.
- Costs include sourcing a new contractor to complete the works and any premium that will attract.
- The employer will not be able to pursue the contractor as the company will be in the process of liquidation.
Are there any alternatives to a performance bond?
- If the contractor is a party of a group of companies, then the employer may wish to consider a Parent Company Guarantee (PCG).
- If the smaller company breaches the contract, the parent company is obligated to step in a remedy the breach.
What is a tender bond?
- Requested by the employer when inviting contractors to tender for a contract.
- A tender bond provides security against the risk of the successful bidder failing to enter the contract.
- It should help to prevent idle tendering.
What is an off-site materials bond?
Covers an employer against the risk of paying the contractor for materials being manufactured off-site. If the contractor or subcontractor becomes insolvent, the employer can claim on the bond for goods paid for (in the event they are not delivered to site).
What is a retention bond?
- This is 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 or the bond should be stated in the contract particulars.
- A standard form is provided in the JCT Contract Schedules.
What are the disadvantages of a retention bond?
- The employer will ultimately have to pay the premium for taking out the bond (usually through the contract sum).
- May reduce the contractor’s incentive to complete the works promptly and to the desired standard.
- It reduces the employer’s cashflow.
- The employer would not get the interest accruing on the amount of the retention bond.
Why might a retention bond be used?
May be used in difficult market conditions to aid the contractors cashflow.
What is an advanced payment bond?
- An advanced payment bond is required to protect and support payments to a contractors by the employer in advance of works being done.
- Some contracts require the purchase of materials in advance of a contract commencing, there is always a risk to the employer advancing money to a contractor who may not be well known to them to allow the purchase of goods to enable to the contract to commence.
- An advanced payment bond protects the payment being advanced in exchange for a bond underpinned by a suitable guarantor to give peace of mind to both parties.
What are antiquities?
Items such as:
- Historical artefacts, pottery and coins.
- Bones or fossils.
- Something of historical interest or value.
- Archaeology
What should the contractor do if they discover such objects?
- Cease work and seek advice prior to proceeding.
- Take necessary measures to preserve in existing location and condition.
- Inform the contract administrator or project manager of the discovery and the location.
When objects of interest are discovered, who is liable for the delay and expense incurred?
- This depends on how the risk is allocated within the contract.
- Significant delays and costs can arise - can be a serious event for the employer and/or contractor.
What are defects?
- Broadly defined as a defect in workmanship, design, materials, or systems used. The result is a failure of the building project or structure that causes damages to people or property. This, in turn, leads to financial losses or harm to the owner.
What are patent defects?
- Patent defects are those which can be discovered by reasonable inspection.
- Patent defects would include wall cracks, sagging gutters, broken windows, missing tiles etc.
What are latent defects?
Latent defects are those which cannot be discovered by reasonable inspection, for example, problems with foundations which may not become apparent for several years after completion when settlement causes cracking in the building.
Why is the defect rectification period typically 12 months?
12 months will allow the building to go through all seasons of the year; therefore, most defects (with exception to latent defects) will become apparent within this period.
What is novation?
- Under a design & build contract, novation normally refers to the process by which design consultants are initially contracted to the client, but are then ‘novated’ to the contractor.
- The contractor will then go on to manage the remaining design process with the existing design team, rather than bring their own consultants on board.
Are novation agreements required under traditionally procured projects?
Not usually, this is because the designers are typically retained by the employer.
What are some of the advantages of novation?
- Reduced learning curve - working with the client at an early stage, the design team can gain a strong understanding of the project requirements. If the design team are not novated, this learning is potentially lost and parts of the process will need to be replicated with a new design team.
- Reduced contractual risk for the employer - the process of novation and the transfer of responsibility to the contractor means the employer assumes minimum risk contractually.
What are some disadvantages of novation?
- Following novation of consultants, the employer will generally require collateral warranties.
- The client may need to employ a shadow team for compliance purposes.
- There is potential for conflict-of-interest, particularly in relation to services that remain to be performed.
What is retention?
A percentage of the sums certified for payment under the construction contract (typically 3-5%) is held by the employer during the construction phase.
Are you aware of any guidance issued by RICS associated with retention?
Yes - RICS Guidance Note - Retention
What is the purpose of retention?
It is used as an assurance of a project completion and is intended as a safeguard against subsequent defects that the contractor may fail to remedy.
What can the employer use retention monies for?
- If the contractor does not return to correct the defects, then the retention held may be used to fund the payment of others to correct the defects.
- The project manager / contract administrator will need to check the contract on the ability to do this and the relevant notices that should be given to the contractor prior to appointing others to undertake the works.
How is retention released to the contractor?
Typically, retention monies are released in 2 stages:
- At the time of issuing the completion/practical completion statement, the first half of the retention monies will be certified and released.
- The second half of the retention monies will be certified and released upon expiry of the rectification period and a certificate of making good defects is issued.
Who typically benefits from interest accruing on retention money?
Usually, the employer.
Are there any alternatives to holding retention?
It is possible to procure a retention bond to cover the retention that would otherwise have been deducted.
What is professional negligence?
Professional negligence is when a professional fails to perform their responsibilities to the required standard or breaches a duty of care. This poor conduct subsequently results in a financial loss, physical damage or injury of their client or customer.
How can the employer/client recover a loss if the consultant or contractor is professionally negligent?
Make a claim on their professional indemnity insurance (PII)
What is product liability insurance?
- Manufacturers and/or suppliers of products incorporated in construction works are at risk of claims being made against them for damages if defects in those products result in damage or injury.
- Product liability insurance protects the policy holder against liability resulting in these defects.
What is public liability insurance?
- Public liability insurance protect against liabilities for injury to third parties or their property.
- For example, a member of the public could make a claim if a fallen brick damaged their car, or if a supplier trips over an unsecured cable.
What is employer liability insurance?
Employer’s liability insurance can pay the compensation amount and legal costs if an employee claims compensation for a work-related illness or injury.
What is Contractor Design Portion (CDP)?
Typically used on traditionally procured projects, design responsibility for specific elements of the building is transferred to the contractor.
What is the difference between traditional procurement with CDP and Design & Build?
- Traditional procurement with CDP - the design responsibility lies with the employer except for certain elements that are transferred under the CDP.
- Design & Build - all responsibility for the design rest with the contractor.
How are CDP elements executed?
A performance specification is provided at tender stage which the contractor provides the design proposals in response. These proposals are then reviewed by the design tram and either accepted, commented upon, or rejected.
Can you list typical CDP elements which the employer may wish to transfer?
- Steelwork connections
- Cladding
- Roofing
- Temporary works
- MEP elements
What are ‘domestic subcontractors?’
- Domestic subcontractors are chosen by the contractor to execute a package of works.
- The employers consultants (i.e. architect, PM, QS, etc.) nor the employer themselves influence the appointment or the conditions.
What are ‘named subcontractors’?
- The employer provides a list of named subcontractors which are pre-approved.
- The contractor selects one from the list through the tendering process.
- Once appointed by the contractor, they then become a domestic subcontractor.
What are the advantages of naming subcontractors?
Naming a subcontractor provides the employer with more control to the selection of a subcontractor by the contractor, while still leaving them with the element of choice and responsibility of monitoring their performance.
What are ‘nominated subcontractors?’
- A nominated subcontractor is selected by the employer to carry out an element of the works (still employed by the contractor).
- Nominated subcontractors are usually imposed upon the contractor.
What are the disadvantages of nominated subcontractors?
- As the subcontractor is being imposed on the contractor, the contractor will generally be allowed the right to object under certain conditions (safety reasons for example).
- The contractor and subcontractor may have conflicting procedures, ethics, attitudes etc.
What are the advantages of nominated subcontractors?
On the basis the employer has nominated them in the first instance, their work should be of high quality and acceptable to the employer.
Are you aware of any guidance issued by RICS associated with subcontractors?
Subcontracting Guidance Note - 1st edition, April 2021.
What is insolvency?
Insolvency is concerned with the inability to pay debts.
What can be done at tender stage to identify potential contractor insolvency?
- Thoroughly check financial accounts for stability.
- Check for front loading of the tender submission.
-Bank references - Use credit checking agencies (Dun & Bradshaw report).
- Previous references (from consultants and employees).
- Request a bond and /or parent company guarantee - this will not prevent insolvency but will give the employer comfort in the event of default.
What is termination?
When a contract is terminated, the parties to the contract are no longer obliged to perform their obligations under the contract.
Can the contractor suspend works for non-payment?
- If the notified sum is not paid by the final date for payment, the Construction Act 2009 puts the payee in a stronger position than before. The contractor can no suspend performance of any or all it’s obligations, not just the work.
- The contractor can stop insuring the works, postpone applying for a necessary consent or refuse to implement a variation instruction.
- The payee will be entitled to a ‘reasonable amount’ for its remobilisation costs as well as an extension of time.
What are delay damages / liquidated damages (LDs)?
A genuine pre-estimate of loss suffered by the employer because of the late completion of the works. The damages are inserted into the contract prior to signing by the contracting parties.
What are the key points to LDs?
- LDs should not be a penalty
- Quick remedy to avoid having to prove actual loss due to the breach
- The contractor knows their liability
- The employer should calculate the figure (consultants should not do this on their behalf).
What sort of expenses/costs can the employer include in the damage calculation?
- Loss of rent or other income.
- Additional professional fees.
-Expected costs incurred by other parties. - Cost of not having facility (storage, rent, abortive costs etc).
- Capital salaries.
- Associated legal costs.
- The figure should not be construed as a penalty; thus, the employer needs to be realistic when identifying potential costs.
What if your client tells you the damages are £100,000 per week?
- Exercise due diligence - check they do believe £100,000 per week is genuine pre-estimate of likely loss.
- If there is concern, explain the dangers that the damages might be construed to be a penalty (they may not be enforceable).
Under JCT contracts, what contractual documents should be in place before damages can be deducted?
- A non-completion notice/certificate is in place.
-The contractor is formally notified that the employer intends to levy liquidated damages. - A pay less notice is served.
What is a LD holiday or LD free period?
- This is essentially just a grace period during which the contractor has no commercial liability for delay.
- For example, if the contractor had a two-week LDs holiday, LDs will only begin accruing after the delay has continued for two weeks.
What is the implication of inserting ‘nil’ or £0 against the damage clause?
Placing ‘nil’ or £0 against the clause effectively means there are no liquidated damages. This action may also prevent the employer for pursuing the contractor for unliquidated damages.
What is the implication of leaving the damage cluase blank?
If the clause is left blank, then the employer can pursue the contractor for unliquidated damages if they choose to do so.
What is the difference between liquidated and unliquidated damages?
- Contracting parties might agree to pay a certain amount on breach of the contract. When such provisions are created in the contract, they are known as liquidated damages.
- Unliquidated damages are granted by the courts based on an assessment of the loss or injury caused to the party suffering such a breach of contract.
If the date for completion is adjusted, what effect would this have on delay damages?
Damages cannot be deducted from the original date; damages are levied from the revised practical completion / completion date.
Can the employer levy liquidated damages if they do not actually incur the loss identified in the initial calculation?
In essence yes, provided that:
- The damages levied are not deemed to be a penalty on the contractor.
- The original calculation is a genuine pre-estimate of loss.
What is a pre-construction services agreement (PCSA)?
- A contract between the employer and contractor
for pre-construction services. - The PCSA documents the services that the contractor is to perform before signing the building contract and identifies the terms and conditions under which these services are to be performed.
When might a PCSA be used?
In a two stage tender approach to facilitate early contractor involvement.
How can a PCSA benefit the project?
Early involvement of the contractor should improve the buildability and cost-certainty of the design as well as creating a better integrated project team and reducing the likelihood of disputes.
What sort of activities can the PCSA be used for?
- Contribute to the design process.
- Advise on the buildability, sequencing and construction risk.
- Advise on the selection of specialist subcontractors.
- Help develop the cost plan and construction programme.
- Help develop the method of construction
- Assist with any planning application matters or other approvals.
What should be considered when drafting the PCSA?
- Arrangements do not commit the employer to enter into the building contract. It is important that the employer have means of securing an alternative bud if the second-stage negotiations fails.
- The scope of service for the contractor is clearly define and unambiguous.
- Usual programme and delay damage clauses are carefully drafted by the legal team.
What are the main forms of building contracts?
- JCT (Joint Contracts Tribunal)
- NEC (New Engineering Contract)
- FIDIC (International Federation of Consulting Engineers)
-Bespoke contracts are also used.
What are some of the considerations when selecting the appropriate construction contract?
- Nature of the client.
- Priorities - cost, time, quality and risk allocation.
- Procurement choice
- Value of work.
- Type/nature of work.
- Public or private employer.
- Complexity of work.
- Size and location of work.
What is a bespoke contract?
- Bespoke contracts are contracts that are tailored to fit the specific requirements of a project.
- Bespoke contracts are often used when standard forms are not suitable.
What are the advantages of standard forms over bespoke contracts?
- Written by legal experts.
- Rights and obligations of each party are clearly set out to the required level of detail.
- Parties should be familiar with the provisions in the form - greater consistency in application and fewer unforeseen anomalies.
What are the disadvantages of bespoke contracts?
- Familiarity is decreased as they are rarely used.
- Expensive to draft (legal fees)
- May be poorly drafted and lead to ambiguity.
- Not familiar to the party administering the contract.
- Clauses / provisions might be untested in court.
- This type of contract could be unappealing to the contractor.
When would a bespoke contract be appropriate to use (rather than a standard form)?
When amending a standard contract will not do, the most efficient means of achieving a client’s requirements might be to create a bespoke contract.
Have you amended a standard contract? Can you explain how you did this?
- As consultants, we do not have legal training, so we do not amend the contract ourselves.
- All amendments should be drafted by the legal team.
What are some risks associated with amending a standard contract.
- Amendments can spoil the delicate balance of risk allocation.
- Can create legal uncertainty.
- Can attract a cost premium to tenders.
- Amendments must be reasonable and comply with legislation.
- Courts can strike out amendments if contrary to good faith.
What does JCT stand for?
Joints Contracts Tribunal.
What are some of the contracts in the JCT family?
- Standard Building Contract.
- Intermediate Building Contract.
- Minor Works Building Contract.
- Major Project Construction Contract.
- Design and Build Contract.
- Management Building Contract.
- Construction Management Contract.
- JCT Constructing Excellence Contract.
- Measured Term Contract.
- Repair & Maintenance Contract.
- Homeowner Contract.
What are key project characteristics which influence which JCT contract is used?
- Size, value, and type of project.
- Need for contractor design.
- Certainty on final cost.
- Appetite for risk ownership and risk transfer.
- Employer experience.
- Programme requirements.
When would you use the JCT Minor Works Contract?
The contract is designed for smaller, basic construction projects where the work is of a simple nature.
Minor Works Building Contracts are suitable for projects procured via the traditional method.
What are they key features of the JCT Minor Works Contract?
- The employer is responsible for the design. The employer (through its advisers) will need to provide drawings, a specification, or work schedules to specify the quantity and quality of work at tender stage.
- If the appointed contractor is to be responsible for designing specific parts of the works, then a Minor Works Building Contract with contractor’s design must be used.
- The Minor Works Building Contract is not suitable where the project is complex enough to require bills of quantities, detailed control procedures, or provisions to govern work carried out by named specialists.
- Minor Works Building Contracts are normally administered by the architect or a contract administrator.
When would you use the JCT Intermediate Contract?
- The contract is designed for construction projects involving all the recognised trades and skills of the industry, where fairly detailed contract provisions are needed, but without complex building service installations or other specialist work.
- Intermediate Building Contracts are suitable for projects procured via the traditional method.
When would you use the JCT Standard Building Contract?
- Designed for large or complex construction projects where detailed contract provisions are needed. suitable for projects procured via the traditional method.
- The employer is responsible for the design. However, Standard Building Contracts also have optional provision for a ‘Contractor’s Designed Portion’ if the appointed contractor is to be responsible for the design of specific parts of the works.
- Works can be carried out in sections.
When would you use JCT Major Project Construction Contract?
- Designed for large-scaled construction projects where major works are involved.
- It is used by employers who regularly procure large-scale construction work and the work is carried out by contractors with the experience and ability to take greater risk than would arise under other JCT
- Major Project Construction Contracts are suitable for projects procured via the design & build method.
What are the key features of the JCT Major Project Construction Contract?
- Often in Major Projects, a ‘novation’ agreement is put in place so that the architect or designer who initially worked with the employer continues to complete the design under the responsibility of the
contractor. - The employer usually employs a representative to exercise their powers and functions under the
contract. - Project can be carried out in sections.
- The employer and contractor have their own detailed in-house procedures, so only limited procedures need to be set out in the contract conditions.
- The contractor is responsible for the design, as well as completing the works. The scale of design work to be carried out by the contractor can vary.
When would you use the JCT Design and Build Contract?
The JCT Design & Build Contract is designed for construction projects where the contractor carries out both the design and the construction work. Design & build projects can vary in scale, but the Design & Build Contract is generally suitable where detailed provisions are needed.
What are the key features of the JCT Design and Build Contract?
- The scale of design work needed to be carried out by the contractor can vary greatly on design & build projects.
- Contractor will complete a design based on a concept provided through the employer’s advisers or will be responsible for producing and completing the design right from the outset.
- The design requirements and responsibility of the contractor in design & build projects go beyond that covered in a traditional contract with a contractor’s designed portion.
- The employer normally uses an agent to administer the contract.
- Works can be carried out in sections.
When would you use the JCT Prime Cost Contract?
- Designed for projects that require an early start on site, often for alterations or urgent repair work (such as fire damage).
- Usually, the exact nature and extent of the work is not known until the project is underway, so full design documents are not completed until work has commenced.
- Suitable for projects procured via the traditional method, using a cost reimbursement or cost-plus payment structure.
When would you use the JCT Measured Term Contract?
- Designed for use by employers who have a regular flow of maintenance, minor works and improvements projects that they would like to be carried out by a single contractor over a specified period.
- Measured Term Contracts are suitable for projects procured via the traditional method, using a measurement payment structure.
When would you use the JCT Construction Management Contract?
- For use on construction projects where the employer appoints separate trade contracts to carry out the works and a construction manager to oversee the completion of the works for a fee.
- Construction management contracts are suitable for projects procured via the management method.
What are they key features of the JCT Construction Management Contract?
- Works can be carried out in sections.
- The contract is used where separate contractual responsibility for design, management and construction of the project is desired.
- The employer provides the design and enters into direct separate trade contracts with suppliers to carry out the construction of the works.
- The construction manager is appointed by the employer to manage the project and act as an agent on the employer’s behalf. The construction manager also administers the conditions of the trade contract.
When would you use the JCT Management Building Contract?
- Management Building Contracts are suitable for large, complex projects, where flexibility and an early start on site is required.
- Construction is completed under a series of separate works contracts, which the management contractor appoints and manages for a fee.
- The management contractor employs works contractors to carry out the construction and the works contractors are directly and contractually accountable to the management contractor.
- Works can be completed in sections
- The employer is responsible for the design and this is usually supplied to the management contractor by the architect or design team working on the employer’s behalf.
What are relevant events?
- A relevant event is an event on or off site that causes a delay to the completion date of the works.
- For example, a relevant event could be something that happens during the design and manufacture process to delay things, or a site event that prolongs the installation works.
Can you provide examples of relevant events in the contract?
- Variations and instructions.
- Execution of an approx. 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 undertakers.
- Impediment, prevention, or default by the employer.
- Loss or damages occasioned by a Specified Peril (fire, floor etc).
- Exceptionally adverse weather conditions.
- Strike or lockout.
- Civil commotion or terrorism.
- The exercise of any statutory power after the base date by the UK Government or Local or Public Authority.
- Force majeure.
What if force majeure?
Force majeure events are usually defined as certain acts, events or circumstances beyond the control of the parties. For example, natural disasters or the outbreak of hostilities.
Can you provide some examples of a force majeure event?
- War, hostilities, invasion, act of foreign enemies.
- Rebellion, revolution, insurrection, civil war.
- Contamination by radioactivity.
- Riot, commotion, strikes, go slows, lock outs or disorder.
- Acts or threats of terrorism.
What happens when a relevant event occurs?
- Upon it becoming reasonably apparent that a delay will occur, the contractor notifies the contract administrator in writing, stating the particulars and extent.
- The contractor myst state one of the relevant events and detail of how and why the delay is occurring or likely to occur.
- The contractor should give an estimate of delay in his notice so that the contract admin administrator can form his/her own opinion.
- The contract administrator responds within 12 weeks stating whether a relevant event has or has not occurred.
- If the event has occurred, the contract administrator asses the delay.
- A new completion date is then fixed (extension of time).
Assuming the relevant event has occurred and is accepted by the contract administrator, is the contractor entitled to loss and expense?
- Relevant events entitles the contractor to claim an extension of time only.
- The contractor will need to demonstrate a relevant matter has occurred to claim loss and expense.
What are relevant matters?
- A matter for which the employer is responsible that materially effects the progress of the works.
- This may enable the contractor to claim direct loss and / or expense that has been incurred.
Can you give some examples of relevant matters?
- Failure to give the contractor possession of the site.
- Failure to give the contractor access to and from the site.
- Delays in receiving instructions.
- Disruption caused by work carried out by the employer.
What is the difference between a relevant event and relevant matter?
- Relevant events entitle the contractor to claim additional time.
- Relevant matters entitle the contractor to claim additional costs (loss and expense).
What is a loss and expense claim?
Loss and expense claims are often associated with delays by can be for any event where the Contractor incurs loss due to the failure of the employer (relevant matter).
What is the key thing to remember when assessing loss and expense claims?
- It should be the actual loss incurred by the contractor.
- The prices in the contract bill of quantities, contract schedule of rates or preliminaries should not be used (actual costs may be more or less that these).
What are the common heads of claim in loss and expense?
- Prolongation (extra site overheads i.e preliminaries).
- Thickening of preliminaries (extra site supervision).
- Disruption (causing plant and labour to be underutilised / unproductive).
- Increases in labour and material costs during the period of delay.
- Finance charges (i.e. interest).
What are prolongation costs?
- Prolongation costs are a type of financial claim made by the contractors in respect of late running projects.
- They typically include claims for the cost of time related resources such as site management, site accommodation and key items of plant and materials.
What is partial possession?
- A building contract may allow the employer to take partial possession of part of the works, before they have been formally completed.
- Partial possession often requires the agreement of the contractor but allows the employer to use part of the works for its intended purpose (prior to completion of the whole of the works).
What are the key points of partial possession?
- Not agreed in advance (prior to signing the building contract).
- Usually, completion is deemed to have occurred for that section.
- A voluntary agreement between employer and contractor.
- Contractor must give consent.
What are they typical implications of partial possession (for both the contractor and employer)?
- Half retention is released (proportionate to the area of possession).
- The contractor’s responsibility for insuring the works (for the relevant part) ends.
- The contractor’s liability for liquidated damages ends (proportionate to the area of possession).
- The employer becomes responsible for any damages to the works.
- The defect rectification period commences.
What is sectional completion under a JCT Contract?
- Sectional completion refers to a provision within the building contract which allows different completion dates to be set for different sections of the works.
- Once it is in the contract, the contractor has an obligation to achieve the sectional completion date. Liquidated damages are agreed up front should the section be delivered late.
What are the benefits of sectional completion over partial possession?
- Sectional completion leaves less to chance, because the parties have agreed many of the practical consequences of that completion in advance.
- If something does go wrong (a delay to practical completion for example), it is easier for the contract administrator to deal with delays, changes or even acceleration with sections in place.
What are the main options for insuring the works under a JCT contract?
- Option A
- Option B
- Option C
What is option A for insuring the works under a JCT contract?
The contractor takes out and maintains joint names all risks insurance of the works for new buildings.
What is option B for insuring the works under a JCT contract?
The employer takes out and maintains the joint names all risks insurance of the works for new buildings.
What is option C for insuring the works under a JCT contract?
The only option referring to renovations and involving existing structures. This is where the employer takes out and maintains a joint names all risks insurance of the works and the policy also insures the existing structure and contents against ‘specified perils’.
What is contractor’s ‘all risk’ insurance?
- The essence of the contractor’s ‘all risk’ cover is protection against the physical loss or damage to the works being undertaken.
- Sometimes referred to as ‘CAR insurance’.
- The policy will pay for repair or replacement of the insured works following damage caused by an insured event.
What are specified perils?
Specified perils tend to be significant events that would cause very significant damage to the works, including but not limited to:
- Fire.
- Explosions.
- Earthquakes.
-Flooding, etc.
What is subrogation?
Subrogation is a concept that allows an insurance company that has paid a loss to step into the shoes of its insured to then sue a party that may be responsible for causing the loss.
Provide a working example of subrogation?
If a contractor’s crane drops a steel beam (causing damage), the owner’s builder’s risk insurer pays the loss, the owner’s insurance can step into the shoes of the owner and sue the contractor for the loss it caused.
What is a joint names insurance policy?
- Policy in the names of two or more parties (i.e. contractor and employer).
- Under a joint names policy, the insurer will have no right of subrogation against any of the insured parties, even where an insured party has caused the loss for which the insurer has had to pay out.
What are extensions of time?
Extensions of time adjust the completion date and relieves the contractor’s liability to pay liquidated damages for the period of the extension.
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 deduct 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’.
- 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.
What are the main elements you would include within an interim valuation?
- Preliminaries
- Measured work
- Variations
- Materials on site
- Materials off site
- Loss and Expense
- Retention
What needs to be in place for you in include payments for materials on site?
- The materials should be free for the works.
- They should be adequately protected.
- Delivered to programme.
- In reasonable quantity.
What needs to be in place for you to include payments for materials off site?
- Proof that ownership will transfer to the employer upon 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.
What is a retention of title clause?
- Where the sub-contractor or supplier retains ownership of materials until they are paid for them by the contractor.
- This highlights the importance of vesting certificates as they 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.
How do you evaluate interim valuations?
- Go to site and inspect the works to form a view on the percentage of the works undertaken.
- Check for materials on and off site.
- Value time related and fixed preliminaries items undertaken.
- Value and agreed variations and claims.
- The valuation amount is presented as the gross valuation less previous payment made and retention.
- Finally, send out recommendation to the Architect or Contract Administrator for them to prepare the payment certificate.
How do stage payments work?
- 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 substructure or achieving a water tight structure.
What is the interim certificate conclusive of?
- interim certificates are not conclusive.
- They carry no contractual significance to state that the quality of the materials or workmanship is satisfactory.
- It is only the final certificate that is conclusive.
What is acceleration?
- Acceleration is the completion of works in a shorter time frame than anticipated at tender or the act of programme recovery by the contractor if they are in delay.
What options may be considered to achieve acceleration?
- Re-sequencing the works or making sequential activities parallel.
- Increasing the working time by using working longer hours.
- Increasing the resources employed by using larger gangs.
- Changing the working methods. E.g. using a dehumidifier to dry out the works faster.
- Increasing incentives e.g. offering bonus payments.
Which are the most and least efficient?
- Re-sequencing the works can be the most cost efficient and efficient.
- The least efficient is usually increasing the working time and increasing the resources employed which usually results in lower productivity.
What is a fixed 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.l
What is practical completion?
- When the works are substantially complete with minor defects only.
- The employer is able to gain beneficial occupancy of the development.
- Half 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.
What is sectional completion?
The completion and handover of the works to the employer in agreed stages.
