Contract Practise Flashcards
1
Q
What if your client tell you the LADs (Liquidated and are to be £100,000 per week?
A
Firstly I would check the Liquidated and ascertained damages figure is based on a genuine pre-estimate of financial loss and explain in the event of LAD’s are to be applied, they would need to substantiate this figure
2
Q
What are liquidated damages?
A
A genuine pre-estimate of the likely loss incurred by the employer should the completion date not be met
3
Q
What are extensions of time?
A
Extensions of time adjust the completion date and relieves the contractor’s liability to pay liquidated damages
4
Q
What must be in place before LDs can be deducted?
A
Employer must issue non completion certificate and a withholding notice
5
Q
What if the employer suffered no loss or damage? (Liquidated damages)
A
It doesn’t matter the damages can still be deducted
6
Q
What are the benefits of being able to grant an extension of time?
A
Advantage to the contractor is that is relieves the contractor’s liability damages for a delay they did not cause
It sets a new completion date with maintain’s the employers ability to deduct LDs if another delay occurs
7
Q
What are the main elements you would include within an interim valuation?
A
Preliminaires
Measured work
Variations
Materials on and off site
Loss and expense
Retention
8
Q
How do you evaluate interim valuations?
A
This will depend on payment mechanism used however for example if lump sum is used, you will go to site and inspect thr works to form a view on the percentage of the works undertaken
You check for materials on site and off site
Value time related and fixed preliminaries items undertaken
Value any agreed variations
This then gets presented a gross valuation less previous payments made and retention then I would make my recommendation to the CA for them to prepare the certificate
9
Q
What is retention?
A
It is a percentage of each interim certificate deducted and retained by the employer from each interim payment to the contractor
10
Q
What is purpose of retention?
A
It provides an incentive for the contractor to rectify any defects within the contract defects liability period
11
Q
When is the retention released to the contractor?
A
Half of the retention is released in the interim certificate after Practical completion
The remaining retention is released in the final certificate after the certificate of making good defects is issued
12
Q
What is a retention bond?
A
This is a bond provided by the contractor instead of taking retention from interim payments. It should be equal to the same value as the retention deducted.
The requirement for the bond should be stated in the contract particulars
13
Q
What happens if the contractor does not maintain the retention bond?
A
The employer can deduct retention from interim payments
14
Q
Why might a retention bond be used?
A
If market conditions are difficult, this can be used to aid the contractor’s cashflow
15
Q
What are the disadvantages of a retention bond?
A
It may reduce the incentive for the contractor’s incentive to complete making good defects.
It reduces the employer’s cashflow.
The employer would not get the interest accruing on the amount of retention bond
16
Q
What is acceleration?
A
Acceleration is reducing the project timeline and therefore completion of work would be carried out in a shorter timeframe than anticipated or this is also used to carry out programme recovery as a result of delay
17
Q
What options may be considered to achieve acceleration?
A
Resequencing works
Increasing the working time by using working longer hours
Increasing resources employed by using larger gangs
Changing the working methods
Increasing the incentives for example offering bonus payments
18
Q
Which are the most and least efficient? (Resequencing works)
A
Resequencing the works can be the most cost effective and efficient
The least efficient would be increasinfg working time and resources employed which usually results in lower productivity
19
Q
What is a fixed price contract?
A
Where the contract sums are limited to changes. It is an agreed price anything missed off by the contractor will be at their risk
20
Q
What is a fluctuating price contract?
A
Where the contract sum is adjusted for changes in the costs of materials, labour
21
Q
What is the date for completion?
A
The date stated in the contract for which the project will be finished by
22
Q
How does this differ from completion date?
A
Completion date is when the project is finished wheres date for completion is the projected date that also considers the EOT
23
Q
What is practical completion?
A
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
24
Q
What is sectional completion
A
The completion and handover of the works to the employer in agreed stages
25
What is partial possession?
Where the employer requests and the contractor consents to the employer taking possession of the works
26
What is the difference between partial and sectional completion?
Sectional completion is a contractual obligation to hand over the section at the stated date, partial possession relies on the contractor’s consent
27
What is the rectification period?
This is the time period where the contractor has a contractual obligation to make good any defects
28
What is a non-completion certificate?
This is issued the employer to certify that the works or work section have not been completed by the relevant completion date
29
What are the consequences of a non-completion certificate?
Employer may apply LDs
30
What are the three ways that benefits can be transferred over under JCT contracts?
Collateral Warranties
Third party rights
Assignment
31
What are collateral warranties?
These create a contractual relationships between the main parties of the contract with an external third party
The contractual relationship would not exist with the third party due to privity of contract
32
Why are Collareral warranties used?
Due to the principle of privity of contract , the rights and obligations under a contract can only be enforced by a party to that contract
Collateral warranties give remedies to external third parties that due to privity of contract would not otherwise have them
33
Who might want a collateral warranty?
Any third party with a financial investment in a project but not a party to the main contract
Key subcontractors
34
What are the common clauses/terms in collateral warranties?
Obligations of the collateral warranties should mirror that of the main agreement
Common terms include:
Limitation of liability
Reasonable skill and care or fitness for purppose
Requirements for PI insurance
Assignment rights
Novation rights
35
What is available to protect clients from sub -contractors failing?
Collateral warranties. In the event the subcontractor fails to carry out their obligations the employer can have a contractual remedy to sue the subcontractor for a breach of contract
A performance bond can also be used
36
What is a bond?
A guarantee from the surety in favour of employer that the contractual obligations will be fulfilled by the main contractor.
The bond if called upon will provide financial compensation up to a stated value if the other party does not fulfil their obligations under the contract.
It does not guarantee the completion of the works
37
What form must a bond be in?
Must be in writing
It will contain a duration, usually until practical completion and a financial limit
38
What is a Retention Bond?
This is an alternative to the normal contractual retention provisions whereby the Employer holds retention money from the Contractor, which does not help the Contractor’s cashflow
39
When would you use a retention bond?
When the client does not wish to hold retention on the contractor but requires some assurance or financial cover for rectifying defects at the end of the contract in the event that the contractor fails to return and correct them himself
40
What is a parent company guarantee?
An arrangement where the contractual performance of one company in a corporate group is underwritten by the the other members of that corporate group
This means that it must complete the works itself if it can or pay financial equivalent
41
What does parent company guarantee do?
Typically provided by banks or insurance companies
They give the employer a guarantee of payment up ti a stated amount should they suffer a loss as result of the contractors breach of his contractual obligations
42
What is the standard value of a performance bond?
10% of the contract value, the premium for taking out a bond is added to the contract sum
43
How can the employer call for payment?
Employer has to prove that the contractor has defaulted in their obligations under the main contract and that loss has been suffered
44
What is the purpose of a tender bond?
This covers the party inviting the tender if the lowest tenderer refuses to enter into contract with them
This can be important if the inviting party is in turn tendering for work on the basis of that tender
45
What is a notional final account
A final account that is prepared when the main contractor is facing insolvency
This will typically be of a greater value than the original forecast final account due to costs incurred by the client to appoint a new contractor
46
What is the purpose of a materials off site bond?
Off site material bond is used to ensure materials are delivered to site. If they fail to deliver the materials employer can then call on the bond
47
Where might bonds be appropriate?
If the contractor is relatively new and unproved
In difficult economics climate
48
What are the pros and cons of Parent Company Guarantees
Cons : They are not as secure as bonds
Pros: They do not need to be paid for, they can be unlimited, and they can make the parent company responsible for performance as well as a financial guarantee
49
What is an ‘on demand’ bond?
Bond that is paid straight away upon the default occurring and request for payment
There is no requirement to satisfy any review or specific conditions to demonstrate the default
Whereas with conditional bonds, the employer must satisfy the surety that the default has occured and the bond must identify what this condition is.
50
What provisions are available for ensuring Contractor carries out works properly?
Parent company guarantee or performance bonds
51
On P Programme you drafted 12 call of contracts, how did you go about doing that?
Within the framework contract there was a template set out to populate the call of contract so I followed that closely to populate various details like project reference, any documents like project spec and drawings.
Once this was done I had my peers carry out a review to ensure no error are made and the procurement department to sign it off.
52
Explain your understanding of a call of contract?
Simply, call off contracts are individual contracts that fall under framework agreements
53
You mentioned payment terms. What Act legislates payment terms in the construction industry?
Housing Grants Construction and Regeneration Act 1996
However Part 8 of the Local Democracy, Economic Development 2009 and Construction Act substantially amends the Construction Act around payment terms.
* to increase clarity and certainty as to payment in construction contracts;
* to introduce a 'fairer' payment regime, and improve rights for contractors to suspend their work in non-payment circumstances; and
* to make adjudication more accessible for the resolution of disputes
54
How did you ensure accuracy of the call of contracts?
By having my peers and the procurement department sign it off prior to issue. It was critical that these contracts were fully accurate and error free as they would become focal points of reference
55
What was the process of drafting the call of contract agreements?
56
On Capital maintenance projects you implemented change control procedures. Talk me through that process.
57
What is a force manure event ?
Force majeure is used to describe an event that occurs which is beyond the control of the parties
58
How did you ensure the changes aligned with project budgets
The CMP projects always had a 15% contingency pot and this was monitored at all times to ensure any budget changes don't go over the authority.
59
How did you assess the changes on the CMP scheme?
I effectively had to assess if the changes were contractually sufficient and this was by understanding if the contractor was liable or was it the client.
60
Under NEC can you contractually issue a change request/compensation event?
Yes, the Compensation Event mechanism is a procedure of initiating a change under the NEC contract and will be typically issued when a matter has occured that has impacted, price, quality or time.
It considers both time and cost
61
What forms of contract are you aware of?
FIDIC, NEC, JCT, ICE
62
What changes were made from Construction Act 1998 to 2009
* Contracts do not have to be in writting they can be partly in writting oh wholly orally.
* Construction contracts will have to require a payment notice to be given for every payment provided for by the contract, not later than five days after the payment due date.
* Improved access to adjuducationIt is no longer allowable to define within a contract who should bear the cost of adjudication, and adjudicators have the right to correct errors in their decisions within 5 days of delivering that decision
63
LDEDCA 2009
Part 8 of the Local Democracy, Economic Development and Construction Act substantially amends the Construction Act
* To increase clarity and certainty as to payment in construction contracts;
* To introduce a 'fairer' payment regime, and improve rights for contractors to suspend their work in non-payment circumstances; and
* To make adjudication more accessible for the resolution of dispute
The first and most significant change to the Construction Act is the abolition of the requirement for construction contracts to be in writing
Under the HGCR Act a construction contract must have an 'adequate mechanism' for determining what payments are due, and when they become payable. The term 'adequate mechanism' was not defined, but the intention was to prevent pay-when-paid provisions
64
The Housing Grants, Construction and Regeneration Act what can you tell me about it
The Housing Grants, Construction and Regeneration Act 1996 (HGCRA 1996) is a UK legislation that significantly impacts the construction industry. Here's a summary of its key provisions and objectives
* The right to be paid in interim, periodic or stage payments.
* The right to be informed of the amount due, or any amounts to be withheld by issuing payment notices
* The right to suspend performance for non-payment.
* The right to adjudication.
* Disallowing pay when paid clauses.
65
Talk me through the process of advising the uplift rate
I advised my client on what the new rates for the contractors should be based on the contractual mechanism stated for rate uplifts within the contract.
66
Besides CPIH, what other indices are you aware of?
TPI,
67
Where would you find the indices for uplifts?
Office for national statistics
BCIS
68
On CMP projects how did you consider the extension of time?
69
What is your understanding of programme acceleration and what clause is it listed under NEC?
Acceleration is effectively a process of completion before compeletion date.
Under NEC this is stated in the core clause 36.
Clause 36.1 states that the PM instructs the contractor to provide a quotation
The contractor has 3 weeks to do so
PM replies to the quotation within 3 weeks
Project Manager cannot assess an acceleration quotation like they can with a CE. No obligation on Contractor to accelerate.
70
What do you need to consider around programme acceleration?
Cost impact that is due to the contractor for acceleration
71
What are benefits of a framework contract?
Familiarity of rates
Speed of getting work into contract
Existing relationships and being familiar with the process
72
How is acceleration dealt with under NEC?
Acceleration is referred to in Core Clause 36. Under clause 36.1 the Project Manager may instruct the Contractor to submit an acceleration quotation. Project Manager cannot assess an acceleration quotation like they can with a CE. No obligation on Contractor to accelerate.
73
What is acceleration?
Either describes the completion of the works in a shorter time than that anticipated at tender or the act of recovery by the contractor if they are in delay
74
What is retention?
It is a percentage of each interim certificate deducted and retained by the employer from each interim payment to the contractor
75
2. What is the purpose of retention?
- 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
76
5. What should employer do with retention if requested by the contractor?
- 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
77
6. Who gets the interest accruing on retention money?
- The employer
78
When is the retention released to the contractor?
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
79
8. What is a retention bond?
- 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
80
9. What happens if the contractor does not maintain the 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
81
What happens to the retention bond if the 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
82
11. Why might a retention bond be used?
- May be used in difficult market conditions to aid the contractor’s cashflow
83
12. What are the disadvantages of a retention bond?
- 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
84
Where is fluctuations dealt with under NEC3?
Secondary Option Clause X1
85
What are the fluctuations options under NEC3?
If Employer decides to accept all this risk then X1 is selected. If not, left to the main option clauses - Option A and B contract is firm price, C and D shared via pain/gain share. E and F Employer carries all risks.
86
What is the completion date?
Fixed date stated in the Contract Data Part 1
87
What is the NEC definition of Completion?
‘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
88
5. What is sectional completion?
- The completion and handover of the works to the employer in agreed stages
89
8. What is the recourse if the contractor disagrees with the PM that the works are not completed?
Adjudication
90
9. What are the consequences of Completion/ sectional completion?
* Half retention released for that section
* Rectification period for that section starts
* Contractor no longer required to insure that section of the works and damages liability ends
* Employer now responsible for damage to works in that section
91
10. What is partial possession?
- Where the employer requests and the contractor consents to the employer taking possession of the works / part of the works before the date for practical / sectional completion
92
11. What is the difference between partial possession and sectional completion?
- Sectional completion is a contractual obligation to hand over the section at the stated date, partial possession relies on the contractor’s consent
93
What is a defect? And how is it defined under NEC?
Part of the works which is not in accordance with the Works Information
Part of the works which contractor has designed and does not conform with the design accepted by project manager.
94
What if Contractor does not rectify defects?
In the event that the contractor failed to rectify any defects the employer may employ another contractor to carry out the works & recover the cost of doing so as a debt by the contractor. Half retention retained & may be used to cover cost.
95
What is a Latent Defect?
defects which are not readily identifiable upon inspection & only come to fruition some time after building completion & may take many years. A claim in contract can only be brought about within the limitation period of the contract (6 or 12 years). Otherwise, a claim may be brought in Tort for negligence providing there has been actual damage & not economic loss.
96
How are Defects dealt with under NEC3 ECC?
Contractor corrects all defects whether or not supervisor notifies him.
Defects period will usually be 12 months from completion and will be stated in the contract data.
Defect Correction Period begins at completion for defects notified before completion and when the defect is notified for other defects.
Defects Certificate is issued by supervisor at the end of the last defects correction period.
The works information can be changed so that a defect does not have to rectified.
If contractor does not correct a defect through no fault of employer, costs of correction will be paid for by contractor.
97
20. What is a non-completion certificate?
- Issued by the architect to certify that the works / section have not been completed by the relevant completion date
98
21. What are the consequences of a non-completion certificate?
- The employer has the right to withhold liquidated damages, as long as a withholding notice has been given
99
2. What are collateral warranties?
- Create contractual relationships between parties where there would otherwise not have been any. They are alongside another agreement
100
3. Why are Collateral Warranties used?
- Due to the principle of privity of contract, the rights and obligations under a contract can only be enforced by a party to that contract
- Collateral warranties give remedies to parties that due to privity of contract would not otherwise have them
101
How are Collateral Warranties Requested under NEC?
In NEC4 contracts, collateral warranties can be made part of the contract using secondary option X8 on undertakings
102
6. What are the common clauses / terms in collateral warranties?
- The obligations of the collateral warranties should mirror that of the main agreement
- Therefore if a party is in breach of the main agreement they would also be in breach of the warranty
a) Limitation of liability (Net Contribution Clause)
b) Reasonable skill and care v fitness for purppse
c) Requirements for PI insurance
d) Assignment rights
e) Novation rights
103
7. Name some standard forms of collateral warranty that may be used
Construction Industry Council -
Collateral Warranty Consultant – Funder (second edition)
Collateral Warranty Consultant – Purchaser/Tenant (second edition)
Collateral Warranty Sub-consultant – Client (first edition)
Collateral Warranty Consultant – Employer (third edition)
104
1. What is the final account?
- Detailed statement of all the adjustments to the contract sum and therefore the total amount that the employer is liable to pay, together with the basis on which it was calculated
The NEC forms of contract do not refer to final accounts as it is assumed that the final account is adjusted as the project proceeds on the basis that the compensation event procedure is followed.
105
10. What are the usual constituents of a final account?
a) Summary
b) Adjustments of prime costs
c) Adjustments of provisional sums
d) Adjustments of approximate quantities
e) Variations
f) Claims
g) Fluctuations
106
1. What is termination?
- Where the contract works are lawfully stopped under the contract
107
2. Where is termination dealt with in NEC3 ECC?
Core Clause 9
108
3. What three types of termination does NEC3 ECC deal with?
a) Termination by the employer
b) Termination by the contractor
c) Termination by either party
109
What are some grounds for which the employer can terminate the contractor’s employment in NEC3?
If the Contractor has -
- Substantially failed to comply with his obligations
- Not provided a bond or guarantee which was required by the contract
- Appointed a subcontractor for substantial work before the PM has accepted the Subcontractor
- Substantially hindered the Employer or others
- Substantially broken a health and safety regulation
110
What are the NEC Terminaton Provisions?
1. Employer may complete the works and may use any plant and material to which he has title
2. Employer may instruct the Contractor to leave the site, remove any Equipment, Plant and Material from the Site and assign the benefit of any subcontract or other contract related to this contract to the Employer
3. Employer may use any equipment to which the Contractor has tittle to complete the works
4. The Contractor leaves the Working Areas and removes the equipment
111
What payments are due under NEC on termination?
Amount due as assessed for normal payments -
• defined cost for plant and materials,
• other defined cost reasonably incurred in expectation of completing the whole of the works,
• any amounts retained by the Employer,
• a deduction of any un-repaid balance of an advanced payment,
• forecast defined cost of removing the equipment
• a deduction of the forecast of the additional cost to the Employer of completing the whole works,
• direct fee percentage
112
1. What is a provisional sum?
- Sum of money included in the contract for work by a statutory authority, work that cannot be fully defined at time of tender or work that it is not sure is required
113
2. What are common NEC contract documents?
* 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 %)
114
4. What are the main suites of construction contract?
* JCT 2016 (Joint Contracts Tribunal)
* NEC (New Engineering Contact)
* ECC (Engineering and Construction Contract)
* FIDIC (International Federation of Consulting Engineers)
* ICE (Institution of Civil Engineers)
115
What are the main parts of the JCT contract?
* Recitals
* Articles
* Contract Particulars
* Schedules
116
What are the NEC ECC Option Contracts?
* Option A – Fixed Price with Activity Schedule
* Option B – Fixed Price with Bill of Quantities
* Option C – Target Cost with Activity Schedule
* Option D – Target Cost with Bill of Quantities
* Option E – Cost Reimbursable
* Option F – Management Contract
* Option G – Term Contract
117
What are the differences between each ECC option?
Option A - Priced Activity Schedule - Contractor prepares & prices AS based on defined scope of works & provides a lump sum figure. Cost certainty provided. (D&B)
Option B - Priced BoQ - Employer provides BQ based on MM & tenderers price. Used when scope clearly defined & can be measured from designers drawings. Cost certainty (Traditional).
Option C&D - Target Cost Activity Schedule/BoQ - 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.
Option F - Management Contract - Contractor only responsible for works within Contract Data. Appointed before construction to plan, procure & advise. Contracts directly with subcontractors & fee increases if value of SC packages increase through CE.
118
What is the structure of the ECC?
```
• Core Clauses:
• 1 - General
• 2 - The Contractors main responsibilities
• 3 - Time
• 4 - Testing and defects
• 5 - Payment
• 6 - Compensation Events
• 7 - Title
• 8 - Risks and insurance
• 9 - Termination
• Main Option Clauses:
• Dispute Resolution Clauses:
• Option W1 - If UK HGCRA applies then not used
• Option W2 - If UK HGCRA applies then used
• Secondary Option Clauses: X1 - X20
Y(UK)1 - project Bank Account
• Y (UK) 2 - HGCRA 1996
• Y (UK) 3 - The Contracts (Rights of Third Parties) Act 1999
• Z - Additional Conditions of Contract
• Schedule of Cost Components
• Contract Data
```
119
What are the ECC Secondary Option Clauses (X Clauses)?
* X1 - Price Adjustment for inflation (used if longer than 2 years)
* X2 - Changes in the law (what constitutes change?)
* X3 - Multiple currencies
* X4 - Parent company guarantee (used with a JV)
* X5 - Sectional completion (different from key dates)
* X6 - Bonus for early completion
* X7 - Delay damages
* X12 - Partnering
* X13 - Performance bond
* X14 - Advanced payment to contractor
* X15 - Limitation of contractors liability for his design to reasonable skill/care
* X16 - Retention
* X17 - Low performance damages
* X18 - Limitation of liability
* X20 - KPI's
120
What are Z clauses?
* Additional Conditions of Contract
* May be various requirements, procedures & further obligations conferred on the Contractor depending on the type of project/client
* Examples include - Additional Conditions of Contract within the Project - Confidentiality Agreement & Amendments/Replacement to existing clauses - Clause 60: additional CE's
121
Who are the named parties under NEC ECC?
* Employer,
* Project Manager,
* Contractor,
* Supervisor
122
What is the role of the Project Manager?
responsible for managing the contract on behalf of the Employer, deals with time, money, and changes to the contract.
123
What is the role of the Supervisor?
The Supervisor’s duty is to ensure that the Contractor Provides the Works in accordance with the contract documents – in particular, the programme and the Works Information (the specifications and drawings).
124
Differences between NEC3 and NEC4?
- 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.
125
Differences between NEC and JCT
- 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.
126
What are the significant elements of the Housing Grants Construction and Regeneration act 1996?
a) Payment
b) Adjudication
c) Set off
d) Suspension
127
Why was the Housing Grants Construction and Regeneration Act introduced?
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
128
Give details of the payment provisions of the HGCRA
- Pay when paid and pay if paid clauses are banned (except in insolvency)
- Contracts over 45 days must contain provisions for interim payments
- Contracts must state a date for final payment
- The amount and basis of each payment must be notified to the contractor after it becomes due
- Withholding notices must be issued before final date for payment
- If these items are not included, the Scheme for Construction Contracts will fill the gaps
129
Give details of the adjudication provisions of the HGCRA
- Created a statutory right for the parties of a construction contract to refer any dispute arising under that contract to adjudication
- Created timescales for adjudication:
- An adjudicator must be appointed within 7 days of referral
- They have a further 28 days to make their decision
- This can be extended by 14 days with the agreement of the referring party and to any other time with the agreement of both parties
- The decision of the adjudicator is legally binding on both parties unless it is subsequently overturned through arbitration or litigation procedures
130
Give details of the set off provisions of the HGCRA
- The employer must issue a withholding notice before the final date for payment stating the amount and reasons for withholding
131
Give details of the suspension provisions of the HGCRA
- The Contractor has the right to suspend carrying out the Works if the Employer fails to pay the sums due in full in accordance with the contract conditions
- The contractor must first issue a written notice stating they intend to suspend
- If payment has not been received in full within 7 days they can suspend
- They contract period should be adjusted for the period of suspension
- The right to suspend ceases with full payment
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What are the key elements of the Local Democracy, Economic Development and Construction Act?
* Removed requirement for contracts to be in writing,
* enables parties to go to adjudication even if Contract not in writing.
* If adjudication does take place, this must still be in writing and the referring party is no longer always liable for the adjudicator’s costs.
* Construction contracts will have to contain a provision enabling the adjudicator to correct such errors arising by accident or omission
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What are the key elements of the 2011 Construction Act Amendment?
- Applies to construction contracts, even if not in writing.
- Adjudication clauses must still be in writing otherwise scheme of construction contracts applies
- no longer allowable to define within a contract who should bear the cost of adjudication
- adjudicators have the right to correct errors in their decisions within 5 days of delivering that decision.
• Dates for Payment must be set out in Contract
• Client must issue a payment notice within five days of the date for payment. Or, if contract allows, contractor makes an application for payment, which is treated as the payment notice.
• Client must issue pay less notice if they intend to pay less than amount set out in payment notice, setting out basis for its calculation.
• If client fails to issue payment notice, contractor may issue default payment notice. Final date for payment is extended by the period between when client should have issued a payment notice and when contractor issued the default payment notice. If client doesn’t issue a pay less notice, must pay amount in default payment notice.
• The notified sum is payable by the final date for payment.
• Pay when certified clauses are no longer allowed, and release of retention cannot be prevented by conditions within another contract.
134
What are the NEC3 ECC Payment Provisions?
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 compensation events); less
• any amounts to be paid or retained from the Contractor.
135
What is the price of work done to date?
depends upon which Main Option Clause is used –
• Option A - the total shown in the prices prepared by the contractor for each of the completed activities. A completed activity is a milestone without any defects which would delay following work.
• Option C - 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.
136
What is Defined Cost?
* payments due to subcontractors
* the schedule of cost components
* less disallowed costs
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What is disallowed Cost?
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
138
What are the NEC ECC Payment terms?
* The 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.
139
What are the Effects of Y(UK) 2 – Housing Grants, Construction & Regeneration Act 1996 on Payment Terms?
* Payment becomes due within 7 days after the assessment date and the Project Manager certifies the payment on the payment due date, such certificate being the notice of payment to the contractor;
* the final date for payment is 14 days from the payment due or such other time stated in the contract data;
140
What is a Pay Less Notice?
* No amount due can be withheld by a party unless a notice of the intention to pay less than the notified sum is given.
* they notify the other party within 7 days of the final date for payment,
* setting out the amount due and the basis upon which it is calculated.
141
How do you deal with materials on site in payment assessments?
• The materials should be for the works, adequately protected, delivered to programme and in a reasonable quantity
142
How do you deal with materials off site in payment assessments?
* 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
143
What is the NEC3 ECC Change Process?
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
144
What are some Common Compensation Events?
* 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;
145
How does Y(UK)2 - Housing Grants, Construction and Regeneration Act 1996 & Construction Act 2011 affect the CE process?
* Contractor exercises their right to suspend performance (for non-payment), it is a Compensation Event.
* This ensures that the Contractor can claim for costs incurred as a result of such suspension.
146
What are Early Warnings?
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.
147
Explain the NEC Contract Risk Register.
* The risk register is maintained throughout the contract period.
* The Employer and Contractor contribute the first entries in the risk register, via Contract Data parts 1 and 2 respectively.
* The Project Manager then adds any further risks newly identified and notified through the Early Warning process to the risk register as the projects proceeds.
* The Project Manager may revise the risk register to record the decisions made at 'risk reduction meetings' and issue the revised risk register to the Contractor.
* If the Works Information needs to be changed as a result the Project Manager will instruct the change at the same time.
* This system can work well and be a powerful tool for increasing the likelihood of all parties getting the project finished in a way which meets their own objective.
* It is an ideal project management process as it is entirely forward looking, collaborative and aimed at meeting the project objectives.
* However, the risk reduction process works best if using the NEC contract goes right along the supply chain.
* There is little point in the employer and contractor trying to use the risk reduction process if none of the suppliers and subcontractors are taking part.
148
Describe the CE process for a PM notified CE?
- PM notifies contractor of CE arising from instruction or change to earlier decision.
- Contractor submits quotation with costs and changes to accepted programme within 3 weeks
- PM replies within 2 weeks either instructing revised quotation or notifying will make own assessment
- If revised quotation needed contractor has 2 weeks and process begins again
- if PM does not reply to quotation within 2 weeks then Contractor gives notice
- If PM does reply for further 2 weeks then the quotation is accepted
- Time Periods can be extended by agreement
149
Describe the CE process for a Contractor notified CE
- Contractor notifies PM with eight weeks of becoming aware of a CE. Unless PM should have given notice but did not then failure to notify by the Contractor will result in no change to the price or completion date
- PM has 1 week to decide if it is a CE, Contractor notifies after 1 week, if no decision made after 2 weeks treated as accepted and quotation instructed.
- If it is a CE then Contractor has 3 weeks to submit a quotation
- PM then has 2 weeks to reply to quotation
- If PM does not make a decision, Contractor gives notices
- IF PM fails to reply within a further 2 weeks the notification is treated as accepted and deemed a CE and the Contractor is automatically instructed to submit a quotation
150
What should a PM consider when assessing a CE?
* The Project Manager has to be reasonably sure that the CE assessment is reasonably accurate.
* Otherwise could be giving the contractor more time and money than would prove to be necessary if reviewed retrospectively.
* CE assessment cannot be revised if a forecast on which the assessment is based is later shown to be wrong.
* It is often the consideration of this risk that delays Project Managers in making decisions regarding CEs.
* The fear is that the cost could be greater and the delay longer than anticipated.
* The tendency to be avoided is to over assess the effect of the CE, which is invariably the Project Manager’s suspicion.
* Suspicion by the Project Manager that the contractor is under-resourced and fails to keep adequate records properly to administer the CE procedure will lead to a failure of the contractual procedure.
* Sorting out the entitlements of the parties once the contractual mechanism has fallen apart can be expensive and is best avoided.
151
How do you assess Cost when assessing a CE?
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
152
What are delay damages?
- 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
153
What is a Bond?
* An arrangement where a contractual duty owed by one party to another is backed up by a third party
* It must be in writing, it is common for it to be a deed
* It will contain a duration and a financial limit
* Provided by bank for a fee
154
What are the types of Bond?
* Performance bond
* Retention bond
* Materials off site bond
* Advance payment bond
155
What is a performance Bond?
* “Contract of Guarantee” whereby one party (the Guarantor) undertakes to pay damages to a second party (the Employer) arising from breach of contract by a third party (the Contractor).
* Standard value is 10% of contract sum
* To call for payment Employer must prove that the contractor has defaulted in their obligations under the main contract and that loss has been suffered
156
Whats is a Parent Company Guarantee?
An arrangement where the contractual performance of one company in a corporate group is underwritten by the other members of that corporate group.
157
How are insurances dealt with under NEC3 ECC?
- 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.
158
How are advanced payments covered under NEC3 ECC?
X14 Advanced Payments
o It allows the contractor to receive lump sum payment in advance
o The payments, values and dates should be set out in the contract particulars
o They may be used where the contractor incurs high costs at the start of a project
o E.g. items with long lead times or the need to purchase specialist plant for manufacturing
159
What are the disadvantages of Advanced Payments?
o May reduce the incentive of the contractor
o Bad for the employer’s cashflow
o Concerns over why the contractor can’t fund the expenditure – insolvency worries
160
What is the dispute resolution procedure under NEC?
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.
161
If Option C is incorporated, how does this amend the core clauses?
States how the application of the pain/gain mechanism shall work.
States information in the activity schedule is not works or site information.
Programme must show how the activities on the AS relates to the operations on the programme.
162
How do you assess & implement changes to the Target Cost?
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.
163
How does a pain gain mechanism work?
The pain / gain mechanism is used on a target cost form of contract, and is included within the tender documents by the client upon issue.
Once the target cost has been set for the project the pain gain mechanism acts as an incentive to beat the target.
If the contractor beats the target he will gain a share in the savings made. If he exceeds the target, more than likely he will be responsible for 100% of the cost.
This will depend on what is contained within the contract documents.
164
How do you set a target cost?
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
165
How is a target cost built up?
Consists of a forecast of the construction costs, allowance for preliminaries, risk allowance, % additions for management fee
166
How is the contractor reimbursed under a target cost?
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.
167
What are the advantages & disadvantages of using a target cost?
Advantages:
1) Minimum enquiry definition
2) Short bid time / quick start on site
3) Conflict minimised / Partnering ethos
4) Contractor incentive to manage resources
5) Employer shares in savings
6) Does not pay full amount for risks that do not materialise
7) Early contractor involvement
Disadvantages:
1) Employer risk of being financially exposed
2) Cost checks & monitoring can be time consuming & expensive
3) Bid evaluation difficult
4) Reduction in competition"
168
What problems may arise when setting a target cost?
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Design / specification insufficient to allow robust target to be set.
Programme not realistic.
No commitment from contractor.
Risks not apportioned fairly.
Lack of trust.
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169
How would you manage costs on a target cost contract?
Carry out monthly audits on the valuations which would be submitted based on actual cost - Check 10% of value.
Staff timesheets & rates.
Material / Plant invoices against returns.
Labour payroll sheets.
Subcontract certificates / invoices.
Duplication of costs between management fee.
Review programme & planned resources to determine actual progress & efficiency.
