RICS Contract Admin & Contract Practice Flashcards
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.
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
What is retention?
It is a percentage of each interim certificate deducted and retained by the employer from each interim payment to the contractor
- 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
- What items do not have retention taken on them (Under JCT)?
- Loss and/or expense amounts
- Statutory fees and charges
- Some additional insurance premiums
- Opening up and testing costs
- Fluctuations Options A and B
- What is the employer’s interest in retention?
- As a trustee for the contractor
- 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
- Who gets the interest accruing on retention money?
- The employer
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
- 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
- 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
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
- Why might a retention bond be used?
- May be used in difficult market conditions to aid the contractor’s cashflow
- 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
- What is a firm 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
- When is the base date set?
- Usually 10 days before the tender return date
Where is fluctuations dealt with under NEC3?
Secondary Option Clause X1
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.
What is the completion date?
Fixed date stated in the Contract Data Part 1
- What does it mean when ‘time is at large’?
- There is no fixed completion date
- The contractor must only complete the works in a reasonable time
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
- What is sectional completion?
- The completion and handover of the works to the employer in agreed stages
- Do the works have to be totally completed before practical / sectional completion is achieved?
- completion is a vague concept
- It is reliant on the architect’s opinion that the works are complete
- It should not be conditional
- It is common practice for Completion to be granted when the works are substantially complete – i.e. there may be minor defects or omissions BUT nothing that would prevent the employer taking occupation
Can the completion certificate be rescinded?
No
- What is the recourse if the contractor disagrees with the PM that the works are not completed?
Adjudication
- 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
- 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
- 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
What is a defect?
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.
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.
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.
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.
- 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
- 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
- What are the three ways that benefits can be transferred?
a) Collateral warranties
b) Third party rights
c) Assignment
- What are collateral warranties?
- Create contractual relationships between parties where there would otherwise not have been any. They are alongside another agreement
- 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
How are Collateral Warranties Requested?
Notified in the tender docs and in NEC stated as a Z clause
- 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
- 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)
- How has the contract (rights of third parties) act changed the situations regarding rights under contracts?
- It has significantly changed the traditional principle of privity of contract, whereby obligations can only be enforced by the parties to a contract
- What contracts does the rights of third parties act apply to?
- All contracts made after the 11 May 2000
- How can third party rights be included under NEC contracts?
Secondary Option Clause Y(UK)3
- Why might third party rights be used instead of collateral warranties?
- If a lot of warranties are required it involves a lot of administration and cost – easier for third party rights
- What is assignment?
- Where the rights and benefits of one contractual party are transferred to a third party
- Can benefits be assigned under NEC contracts?
NEC3 via Z clauses, NEC4 contains an assignment core clause
- What is the standard commercial position regarding 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 novation and how does this differ from assignment?
- A new contract that transfers the rights and obligations of one contractual party to a new third party – assignment is only rights
- Give a common example of assignment and novation
- Assignment of the rights under a collateral warranty to a different tenant / purchaser
- Novation of the design team under a design and build contract
- What is the key issue after a design team has been novated?
- Whether the new party has the right to take action against the novated party for breaches that occurred before novation
- Novation - If the contractor took full responsibility for the design what would they want?
- They would want the ability to take action against the consultants for breaches before novation
- How does novation affect the employer’s rights?
- They lose all contractual relations with the novated party and therefore the right to take action for a breach
- It is therefore common for there to be a collateral warranty between the employer and novated party
- What is a limitation clause?
- Clauses that limit a party’s liability for loss
Give some examples of limitation?
a) Limitation to a fixed sum
b) Limitation to the extent of PI insurance
c) Exclusion of consequential loss
d) Limitation to loss that can be recovered from a third party
e) Limitation to responsibility – net contribution clause
- What is a net contribution clause?
- Clause that limits a party’s liability to the proportion of loss that they are responsible for
- How can the employer potentially lose out with a net contribution clause?
- They would have to sue each contributing party separately to reclaim their total loss
- If one party is insolvent they lose out on that money
- What act is relevant to a net contribution clause?
- Unfair Contract Terms Act 1977
- This limits the extent that a party can avoid liability for breach of duty
- Cannot avoid liability for death / personal injury
- All other limits have to be ‘reasonable’
- What is reasonable skill and care?
- The ordinary skill and care expected of an ordinary competent man carrying out that particular act
- Is there a higher level than reasonable duty and care expected for professionals?
- Yes
- A specialist or professional would be expected to show the same level of skill and care expected of a similar man with that particular specialism
- What is fitness for purpose?
- The provision of a building that is suitable for the employer’s intended purpose
- It is clearly a more onerous obligation than reasonable skill and care
- How is fitness for purpose dealt with under NEC ECC?
Secondary Option X15 provides that the contractor will not be liable for defects in the design if it can prove that it has used reasonable care and skill to ensure the design complies with the Works Information
- What is the duty to warn?
- It has been held that the contractor has a duty to warn the PM / employer of any defects in the Employer’s design that they are aware of
- This does not mean they have a responsibility to examine the design specifically looking for defects
- 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.
- 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
- What is termination?
- Where the contract works are lawfully stopped under the contract
- Where is termination dealt with in NEC3 ECC?
Core Clause 9
- 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
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
What are the NEC Terminaton Provisions?
- Employer may complete the works and may use any plant and material to which he has title
- 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
- Employer may use any equipment to which the Contractor has tittle to complete the works
- The Contractor leaves the Working Areas and removes the equipment
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
- What signs might be there that a Contractor had financial difficulty?
- Industry rumours
- Over-valued applications
- Less labour on site
- Slow progress of works
- How might a cashflow show financial problems for the Contractor?
- If monthly payment applications were way above pre-estimated cashflow
- What could have been done to prevent contractor insolvency at tender stage?
- Thoroughly check financial accounts.
- Check for front loading.
- During your interim valuation, a subcontractor told you that the Contractor is in financial difficulties. What do you do?
- Value the works carefully (as normal).
- Check materials on site are for the job in question.
- Arranging a meeting between and contractor to discuss the situation.
- Contractor has gone into administration receivership, what do you do?
a) Go to site, secure site and materials
b) Get in touch with administrative receiver
c) Withhold any payments
d) Start contacting suppliers and sub-contractors to try and continue works
e) Keep record of all time spent.
- What is insolvency
- Insolvency is concerned with the inability to pay debts.
- Debenture: A security given to lenders against borrowings.
- What causes insolvency?
- Minimum amount of capital needed to start a contracting business, fragile arrangements created, also boom bust cycle of construction industry.
- What are the consequences of insolvency?
- Cost, quality and duration can all be detrimentally affected.
- Solvency of sub-contract and suppliers can also be damaged
- What Financial checks should be made pre-contract?
- Ensure contractors, S/Cs are financially stable
- Bank refs, credit checking agencies, companies house, annual accounts, previous references.
- Prudent to make formal and informal checks
- What are the different types of insolvency?
- Liquidation- voluntary and compulsory
- Administrative Receivership- not used much any more
- Administrative Order- debenture holders can use
- Voluntary arrangement
- What is liquidation?
- Winding up of a company because it cannot pay its debts
- Trading ceases, assets are collected and used to offset liabilities
- Two tests: cash flow: cannot pay debts as they become due.
Balance sheet: liabilities are higher than assets.
- Where does the client fall in relation to receiving monies after liquidation?
- Very low on the scale!
1. Fixed charge holders- Bank
2. Liquidator Fees and expenses
3. Preferential creditors: pensions, employees pay
4. Floating charge holders
5. Unsecured creditors: CLIENTS
- What is an administration order?
- Introduced in Insolvency act 1986 and 2000.
- Freezes affairs of company to allow breathing space.
- 3 ways administrator appointed:
1. Appointment by company directors
2. Court appointment
3. Appointment by the holder of a qualifying charge.
Process: 8 weeks after Admin… must submit proposals to creditors and company members
10 weeks after Admin…must hold initial creditors meeting - 1 year after Admin… this is the time limit although court order or creditors can extend.
- What is the position of the client in liquidation/ administration?
- Unsecured creditor, little if any money left.
- Enterprise act requires funds permitting, liquidator or administrator reserve a portion of realised assets for the benefit of unsecured creditors
- What section deals with insolvency in NEC3 ECC?
- Termination, clause 91.1