Key Issue 2 - Case Study

Question 1

How would you deal with calling upon a materials off-site bond?

Answer 1

• Notifying the bondsman
• Notifying Skanska legal team
• If it were a matter of insolvency, Skanska would make contact with the administrators.

Question 2

What were the risks with each option considered and what did you advice?

Answer 2

• Option 1 = Increased risk of Sub-Contractor failure, this was not a good way to manage them.
• Option 2 = Passed on the cash flow issue onto us, this was not ideal and was bad management of project finances
• Option 3 = We did increase the risk of on-site damage, however we felt we could manage this efficiently.

Question 3

What is the JCT definition of materials?

Answer 3

• …all unfixed materials and goods delivered to and placed on or adjacent to the Works which are intended for incorporation therein’,
• Off site materials are called ‘listed items’

Question 4

What is a vesting certificate?

Answer 4

• It’s a tripartite agreement between the sub-contractor, contractor and employer in which the sub-contractor is require to specify that the materials pass to the employer as soon as payment is received from the contractor.

Question 5

Who owns the materials?

Answer 5

• In this scenario, clause 2.15.3, Unfixed materials and Goods. The materials will be owned by the Contractor if paid in an interim valuation, if they are then paid by the Employer, they would be their possession.
• However, under the sub-contract we state that the Sub-Contractors must continue to insure the works until fixed in there final position.
• Our all risks insurances would also cover any materials on site as additional protection.

Question 6

What would on site materials be owned by if Skanska went bust?

Answer 6

• Transfer of materials to the Employer when paid in interim valuation.
• Clause 2.21 “Materials and goods - on site”. Amendment to the main contract: deleting second paragraph of cl. 2.21. Employers’ property. However, on default or termination of the Contractor materials become Employer’s property if paid, or to be included on the final valuation

Question 7

Was the Sub-Contractor not just administrating their Sub-Contract by asking for materials off-site?

Answer 7

• The contractor has entire discretion on payment for materials off site based on the provisions in the main contract.

Question 8

How does a bond provide Skanska protection?

Answer 8

• In the event materials are not delivered the bond will provide financial cover to the value of the materials.

Question 9

What clause in the JCT D&B Sub-Contract relates to Listed items?

Answer 9

• 4.11 ‘Listed Items’ – (Section 4 Payments)

Question 10

Where in the JCT Sub-Contract does it state that a bond is required for any listed items?

Answer 10

• Sub-Contract particulars, item 10.

Question 11

What requirements are there under the sub-contract to incorporate materials as a listed item?

Answer 11

• The item must be in accordance with the Sub-Contract
• The listed item is insured for any loss or damage for its full value protecting the interests of the employer, until delivered too or adjacent the main contract works.

At the premises the listed items require clear identification of:
• The contractor and the employer
• The main contract works as its destination
• Each item must be clearly set apart and viably marked, individually.

If the Sub-contract particulars (Item 10) state a bond is required, the sub-contractor must provide a bond in favour of the contractor or employer from a suitable approved bondsman.

• They must allow for the value of the works as well as the terms set out in part 1 of schedule 3.

Question 12

Where are ‘listed items referenced within the Sub-Contract?

Answer 12

• In the Sub-Contract Particulars No.10 (In the Sub-Con Agreement) OR:
• Subject to clause 4.11 of the Sub-Contract (Listed Items).

Question 13

Where would you find standard wording as a schedule to the material off site bond?

Answer 13

• Schedule 3 of the JCT D&B Sub-Contract.

Question 14

How is a material off site bond underwritten?

Answer 14

• As a deed

Question 15

Why would they be required to update their insurances??

Answer 15

• It is prudent to have the sub-contractor name the employer on the policy in respect of their materials, or, have some form of ‘step in clauses’. A vesting certificate may give some form of rights, but I would consult a legal expert.

Question 16

What is a bond?

Answer 16

• An arrangement where a contractual duty is backed up by a third party, usually financial institution, or bank.

Question 17

What is the different between on-demand bonds and condition bonds?

Answer 17

• A bondsman can only refuse make payment on a regular demand for payment if the demand is clearly made fraudulently or dishonestly.
• A “conditional” bond the bondsman is only required to pay out if the contractor is in default under the underlying construction contract.

Question 18

What other bonds could you consider?

Answer 18

• Advanced payment bond

Question 19

Is it a risk that you have materials off site in your sub-contract but not in your main contract?

Answer 19

• Not necessarily, the sub-contract materials off site provision is at the Contractor discretion.
• As a last resort we would still use this but would have to absorb the cost impact on ourselves (which isn’t ideal).

Question 20

Whose risk is material delays and shortages?

Answer 20

• The sub-contractors, and/ or Skanska. We have a relevant event in place if issues are because of Brexit and can be proven to be.

Question 21

What must a bond be?

Answer 21

• In writing, common to be a deed
• Contains a duration and financial limit
Names of the protected parties

Question 22

What is a listed item in the JCT?

Answer 22

• Materials, goods and or items prefabricated for the inclusion in the works.

Question 23

What does the listed items clause in the JCT Main-Contract say?

Answer 23

• Listed items clause 4.15 (Payment).

* Listed items are scheduled out and annexed to the employers requirements (in the main contract!)

Question 24

Do you hold retention on the listed items?

Answer 24

• Yes retention is held on listed items.

Question 25

Who owns the materials off-site?

Answer 25

• The Employer if it’s been paid for. Contract will detail who under possession.

Question 26

What would you do if you had paid materials off site and the sub-contractor went insolvent?

Answer 26

• Inform bondsman
• Inform insurance companies if applicable
• Inform client
• Serve notice to the Sub-Contractor
• Arrange collection of materials

Question 27

Whose risk is material damage on site?

Answer 27

• Damages and security of materials on site remain a Sub-Contractors risk.
• Sub-Contractors required to insure all works, including any listed items paid for by the Contractor.

Question 28

What would you do if the materials got damaged on site?

Answer 28

• Take images and record damage
• Inform sub-Contractor of damaged materials.
• Inform Insurance company
• Complete a claims form online through Skanska internal processes

Question 29

What Insurance option do you have In the JCT at Norwood?

Answer 29

• Option A – All Risks insurance by the Contractor.

Question 30

How does the JCT Sub-Contract deal with material price increases and fluctuations?

Answer 30

• Fluctuations are item (8) in the contract particulars (if it applied).
• The JCT has fluctuation options detailed in the Schedules.
• In our contract, fluctuations do not apply. (Placed on a fixed price lump sum).

Question 31

Where in the Sub-Contract does it state the contractual start on-site date?

Answer 31

• The periods for commencement are contained within the Sub-Contract particulars specifically (Item 5).
• Notices to commence are in section 2 ‘Carrying out the Sub-Contract works’. - CLAUSE 2.3

Question 32

How much do bonds cost?

Answer 32

• There is usually a typical flat fee and a % between 1-8% of the bond value.
• Depends on contractors’ financial stability, risk etc.

Question 33

What insurance do you have in place at Norwood to protect the materials?

Answer 33

• (Schedule 3) Insurance option A – New Buildings All Risk Insurance of the Works by the Contractor.
• A joint policy in both names for all risks
• There is a clause (6.8) in the Contract which defines the related definitions.
• A % for professional fees (15%).

Question 34

If the start on site date was outside of the contract, would be liable for any costs?

Answer 34

• Yes, the Sub-Contractor could apply for the direct loss and or expense occurred by postponement of the works being executed.

Question 35

What are the fluctuation options in the JCT?

Answer 35

Option A - tax, levies and contributions that a Contractor has to pay in respect of their employees.

Option B - allows for the adjustment of the contract sum in respect of changes in the price of labour, material cost and, tax fluctuations. (If materials fall the cost is reimbursed)

Option C - Formula adjustment (based on specific set of costs in the contract), will include a formula for calculating fees.

Question 36

How does the contract deal with insurances of the listed item on site?

Answer 36

Sub-Contractor who would provide insurances with the Employer as a named person. On site All risks insurance by the Sub_Contractor, but Skanska also have cover.

Insurance of works through all risk cover in section 6 of the sub-contract

Question 37

What is the Sub-Contractors level of All-risks insurance?

Answer 37

£3.5m

Question 38

What is Skanska’s main all risks insurance policy and level of cover?

Answer 38

Skanska have £50m all risks cover
Used Skanska annual policy with the Employer named for this specific project.
15% to cover professional fees

Question 39

If you wanted to call upon a materials offsite bond what would you do? And what are the steps you would take?

Answer 39

Serve a notice of demand

Request the demanded sum to be paid within 5 days

Question 40

What clause is insolvency termination under the sub-contract?

Answer 40

Insolvency of a sub contractor = 7.5