Contract Practice Level 1

Question 1

What is a contract?

Answer 1

A contract is a legally binding promise by one party to fulfil an obligation to another party in return for consideration

Question 2

What are the components of a legally binding contract?

Answer 2

Offer

Acceptance

Consideration - the promise made by both sides to do something e.g. providing a building in return for money

Intent - the intent to create legal relation, could be in the form of a letter of intent

Question 3

What are ‘express terms’?

Answer 3

Terms which are expressly stated and agreed within a contract

Question 4

What are ‘implied terms’?

Answer 4

A contractual term which is not expressly stated or agreed within the contract but has been implied into the contract by common law or statute

Question 5

What is the difference between statutory provisions and contract provisions?

Answer 5

Statutory provisions are set out by the law and must be complied with regardless

Contract provisions relate to the specific contract and only apply to the project at hand

Question 6

What are the different types of subcontractors?

Answer 6

Domestic - selected by the main contractor to carry out a package of works designed by somebody else

Named - the employer provides a list of pre-approved and named subcontractors, the main contract then selects one from this list through the tendering process

Nominated - selected by the employer to carry out an element of works, employed by the main contractor. Usually imposed upon the main contractor

Question 7

Why do main contractors sublet works?

Answer 7

Complexity and specialisation

avoids need to maintain directly employed operatives

reduces supervision and admin costs

flexibility as large volumes of work can be carried out

Question 8

What is the overarching purpose of the Contracts (Rights of Third Parties) Act 1999?

Answer 8

Allows third parties to enforce terms of a contract that they are not party to, but which benefits them in some way, or which the contract allows them to enforce

Gives them access to various remedies if those contract terms are breach

Those who are not party to the principle contract has access to the same contractual remedies as those who do

Question 9

What are the advantages of third party rights?

Answer 9

time and cost - the Contract (Rights of 3rd Parties) Act 1999 cuts down on the time and cost associated with warranties being signed up / drawn or circulated

Certainty - limited room to revisit wording once agreed

Subcontractors - 3rd party rights can be extended to subcontractors so eradicates the need to chase large numbers of individual warranties

Question 10

Why are third party rights used instead of collateral warranties?

Answer 10

CW can involve a lot of admin and cost

Easier to get in place as no separate document is required

Question 11

What are collateral warranties?

Answer 11

A formal contractual agreement which runs alongside another contractual agreement, creating a contractual relationship between two parties which otherwise would not exist

Typically used as protection for the client in the event a 3rd party fails to perform their obligations

Often used between clients and sub-contractors / sub-consultants through the main contractor

Question 12

What are JCT contracts?

Answer 12

JCT is a standard form of contract; Joint Contracts Tribunal

There are 12 contracts within the JCT family, examples include:
Standard Building Contract 
Intermediate Building Contract
Minor Works Building Contract 
Design & Build Contract

Question 13

What are the key project characteristics which influence which JCT contract is used?

Answer 13

size, value & type of project 
need for contractor design
certainty on final cost 
attitude towards client risk ownership and risk transfer
client experience 
programme requirements

Question 14

When would you use a JCT Minor Works Contract?

Answer 14

smaller, basic construction projects where works are of a simple nature

where the procurement route is traditional

where the client is responsible for design, however if the contractor is responsible for designing elements of the works then MWBC with contractor’s design should be used

Question 15

When would you use the JCT Standard Building Contract?

Answer 15

Designed for large or complex projects where detailed contractual provisions are required

where projects are procured via the traditional procurement route

where the employer is carrying out the design, however there are provisions for ‘Contractors Designed Portion’

Works being carried out in sections

Question 16

When would you use the JCT Intermediate Contract?

Answer 16

Construction projects involving all recognised industry trades and skills

Detailed contractual provisions are required but without complex building services or specialist work

Suitable for projects following the traditional procurement route

Question 17

When would you use JCT Design & Build Contracts?

Answer 17

For projects where the contractor carries out the design and construction works

Where contractor’s design requirements go beyond that of a traditional contract with a ‘Contractors Designed Portion’

Question 18

What is the difference between a relevant event and a relevant matter?

Answer 18

Relevant event - An event on or off site that causes delay to the completion of works, entitles the contractor to claim additional time

Relevant matter - a matter for which the client is responsible that materially effects the progress of the works, entitles the contractor to claim additional costs (loss and expense)

Question 19

What are liquidated damages?

Answer 19

A genuine pre-estimate of loss suffered by the employer because of late completion of the works

not a penalty

can be based on loss of rent or income, additional professional fees, etc

Question 20

Under JCT, what contractual documents must be in place before damages can be deducted?

Answer 20

A non-completion notice / certificate

the contractor should be notified that the employer may require they payment of / deduction of LD’s

A pay less notice should be served

Question 21

What is an extension of time?

Answer 21

A contractor’s entitlement whereby the completion date can be deferred due to a relevant event

Question 22

What is an Instruction?

Answer 22

An instruction is a command, request or order from one party to another.

If a valid instruction alters / modifies the design then it is a variation

If not, it is not a variation and the contractor must comply within the agreed timeframe

Following the instruction, if after 7 days after receipt of the notice of instruction the contractor does not comply, the client may employ and pay other persons to execute the works and the contractor will be liable for all additional costs incurred

Question 23

What is a Variation?

Answer 23

A variation is the alteration / modification to design, quality or quantity of works

Includes both additions, omissions and substitutions

Under JCT this is known as a Change

the contractor must notify the employer whether in his capacity he has an objection to the change ‘within reasonable time’

Question 24

What are NEC ECC contracts?

Answer 24

New Engineering Contracts - Engineering and Construction Contract

suitable for any construction based contract between employer and contractor

intended to be suitable to any sector within the industry

PM assumes full responsibility on behalf of the employer and controls time and cost as an administrative function

Programme is a key contract document

Based on mutual trust and co-operation

Focuses on pro-active risk management

Question 25

What are the 6 main options of NEC ECC?

Answer 25

A - Priced contract with activity schedule
B - priced contract with BOQ
C - target contract with activity schedule
D - target contract with BOQ
E - cost-reimbursable contract
F - Management Contract

Question 26

Please provide an overview of NEC Option A.

Answer 26

Lump sum contract

payments are made against completion of activities on the activity schedule

suitable for traditional & D&B procurement routes

risk of carrying out the work at the agreed prices is with the contractor

Question 27

Please provide an overview of Option B within NEC ECC?

Answer 27

Priced contract with a bill of quantities

Contractor is entitled to payment via interim payments on a % of each BOQ line with the contract payment schedule

Risk of carrying out work at the agreed price is with the contractpr

Question 28

Please provide an overview of Option C within NEC ECC?

Answer 28

target cost contract with an activity schedule

financial risk is shared between client and contractor by an agreed proportion

motivates contractor to deliver works in the most cost-efficient way

Question 29

Please provide an overview of Option D within NEC ECC?

Answer 29

Target cost set by BOQ

Financial risks are shared at an agreed proportion between client and contractor

Question 30

Please provide an overview of Option E within NEC ECC?

Answer 30

Reimbursable contract, often referred to as cost plus

Employer largely takes on the financial risk as the contractor is reimbursed their actual costs plus an agreed OH&P %

Might be used where the scope of works cannot be defined at the outset such as emergency work

Question 31

Please provide an overview of Option F within NEC ECC?

Answer 31

Cost reimbursable / cost plus contract

Suited to the MC procurement route so the works are designed and constructed by multiple subcontractors who are contracted to the management contractor

MC is responsible for the work and paid a fee

Risk is largely taken by the client

Question 32

Which NEC ECC option carried the most and least financial risk for the employer?

Answer 32

Least - Option A as it is a fixed price contract

Most - Option E as the contractor is reimbursed for actual costs they incur plus an additional fee

Question 33

What are Secondary Option Clauses under NEC ECC?

Answer 33

Optional bolt on clauses which can be implemented into the contract to suit the project at hand

Question 34

What are Z clauses under NEC?

Answer 34

used to amend standard form NEC contracts

can be inserted into NEC contracts as a means of adding conditions or amending wording

Question 35

What are the key difference between JCT and NEC contracts?

Answer 35

NEC attempts to eliminate legal terms and is said to be written in plain english and explains terms in their natural meaning

NEC operates ‘early warnings’ where both the PM and contractpr are responsible for highlighting any event which can impact time, cost or quality

JCT deals with time and cost separately, whereas NEC deals with the effects of time and cost together

JCT uses variations - NEC uses compensation events

JCT uses contract administration - NEC uses project manager

NEC does not contain provisional sums

Question 36

What is the difference between damages and liquidated damages?

Answer 36

Damages - amounts awarded by a court as compensation for loss or injury suffered by one party due to a breach of contract or breach of duty by another party

Liquidated damages - amounts for damages that are ascertained and fixed in advance

Question 37

How are contractors delay costs referred to within JCT and NEC contracts?

Answer 37

JCT - ‘loss and expense’

NEC - ‘compensation events’

Question 38

What is an example of a relevant event / compensation event?

Answer 38

Variations

Instructions

Late possession of site

Adverse weather

Any prevention or default by the employer

Question 39

How is an extension of time dealt with under JCT?

Answer 39

EOT can only be granted following a relevant event

The contractor must issue a delay notice whenever it becomes reasonably apparent that progress is or is likely to be delayed, along with the impact of delay on completion date

A written notice of the decision must be issued as soon as reasonably practicable but within 12 weeks maximum

Question 40

How is an extension of time dealt with under NEC?

Answer 40

Any change to time, price or quality is dealt with under Clause ‘compensation events’

Adjustment to time can only be made if a compensation event occurs

The contractor or project manager should provide an early warning notice within 8 weeks of becoming aware, if not then the entitlement of EOT is waived

The PM has a week to notify the contractor of their decision as to whether this is a compensation event

Question 41

What are the key aspects of contract documentation?

Answer 41

BOQ (or employers requirements and contractors proposals under D&B Procurement)

The contract (agreement / conditions, name of parties and contract sum)

Drawings

Specifications

Appendices