Contract Terms and Conditions Expert Presentation

Contract Terms and Conditions APC - INTERNAL USE ONLY

Contract? ■ an exchange of promises with a specific remedy for breach ■ an agreement with specific terms between two or more persons or entities in which there is a promise to do something in return for a valuable benefit known as consideration. ■ Any legally binding agreement voluntarily entered into by two or more parties that places an obligation on each party to do or not do something for one or more of the other parties and that gives each party the right to demand the performance of whatever is promised to them by the other parties. ■ An agreement between two or more competent parties in which an offer is made and accepted, and each party benefits.

What is a Contract?

“An agreement between two or more parties, that the law will enforce”

■ An exposition of rights and obligations of the parties including: – Express terms • The terms ascertained from the contract documents including the conditions of contract, specifications, drawings and programme – Implied terms ( Common or Civil Law) • Those terms implied by statute • Those terms implied from case law

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Implied Terms - Legislation (UK only) Include: ■ Part II of the Housing Grants Construction and Regeneration Act 1996 ■ Contract (Rights of Third Parties) Act 1999 ■ Sale of Goods Act 1979 ■ Supply of Goods and Services Act 1982 ■ Health and Safety at Work (Etc) Act 1974 ■ Defective Premises Act 1972 ■ Unfair Contract Terms Act 1977 ■ Unfair Terms in Consumer Contract Regulations 1999 ■ Late Payment of Commercial Debts Interest Act 1998 ■ The Public Contracts Regulations 2006 |

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Classification of Contracts ■ Simple – Made by implication orally or in writing (sometimes called ‘parol’) ■ Speciality – Contracts made by deed are called speciality contracts ■ Bilateral – Arises where X makes promise(s) to Y and in return Y makes promise(s) to X (‘a promise in return for a promise’)

■ Unilateral – One party X makes a promise to Y in return for an action to be carried out by Y (but which action Y does not promise X to carry out) (‘a promise in return for an action’) |

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Requirements as to Form ■

Contracts which must be contained in a deed: – Leases for a period exceeding 3 years – Contracts unsupported by consideration

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Contracts which must be made in writing: – Agreements per the Consumer Credit Act 1974 – Transfer of Shares – Contracts for the sale/disposition of an interest in land

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Contracts which must be evidenced in writing: – Contracts of guarantee

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What are the essential requirements?

■ Agreement ■ Intention to be bound ■ Consideration (unless a Deed) ■ Capacity

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Agreement? Offer and matching Acceptance:

■ Two basic principles apply:

1. Agreement is concluded by the unequivocal and unconditional acceptance of a specific offer

1. A counter-offer kills the offer against which it is made.

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Intention to be bound

■ Business and Commercial Agreements – Presumed by courts to be legally binding unless expressly provided otherwise;

■ Social/Domestic/Family Agreements – Presumed by the law not to be legally binding

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Consideration ■ Requirements for Consideration – A promise is only binding if it is given for good consideration, or if it is executed as a deed. The consideration is for the promise not for the contract. Construction contracts may be executed as deeds for other reasons: such as to obtain the 12 years limitation period or to satisfy other formalities required by the Employer. ■ Definition of Consideration – ‘An act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given is enforceable.’ ; or, – ‘The price of the promise’

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Consideration - Rules ■ 1. The consideration must not be past. (Re McArdle (1951) Ch 669)

■ 2. The consideration must be sufficient but need not be adequate. (Chappell v Nestle [1960] AC 87)

■ 3. The consideration must move from the promisee. (Tweddle v Atkinson [1861] EWHC QB J57) ■ 4. An existing public duty will not amount to valid consideration. (Collins v Godefrey (1831) 1 B & Ad 950)

■ 5. An existing contractual duty will not amount to valid consideration. (Stilk v Myrrick [1809] EWHC KB J58)

■ 6. Part payment of a debt is not valid consideration for a promise to forego the balance (Pinnel's case 1602 5 Rep, 117)

How Does this link to Construction (1)?

Invitation:

Employer’s Invitation to tender or an invitation to treat (Scope of Works, Design, Proposed Terms & Conditions)

Offer:

Contractor’s Tender (Proposed amendment to Terms/Agreement Terms)

Acceptance:

Employer’s Acceptance of Tender

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How does this link to Construction (2)?

Intention:

Intention of the parties to create legal relations

Consideration:

“some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment or loss undertaken by the other”

Contractor’s Consideration:

“I the Contractor will provide Construction Services in return for £x”

Employer’s Consideration:

“I the Employer will provide £x , in return for Construction Services”

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Application to Construction

It is important to understand that everything you do on a Contract arises out of these basic principles (The Essential Elements).

The principles of the “Essential Elements” are encapsulated into the terms and conditions of contract during the engrossment of the Contract Documentation.

Once the contract is executed and signed the contract documents govern all obligations & liabilities of all parties. Therefore, the terms and conditions which govern the “Essential Elements” become crystallised. No going back ! THEREFORE THE CONTRACT DOCUMENTS ARE VERY IMPORTANT !!!

Getting the contract documents wrong can have a significant impact !!

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Email from Richard Clare :ECH PENALISED FOR NON COMPLIANCE “The failure of one of our project managers to abide to the timetables for issuing

certificates under a JCT 98 Design and Build Contract resulted in the Contractor successfully bringing an adjudication against the Employer for payment of his valuation in full. This payment significantly exceeded the amount subsequently certified. This error, together with one or two other issues, has cost EC Harris £26,000 in reaching settlement with the Client in order to prevent them from bringing an action against us. This, of course, comes straight off our bottom line. At current margins, we need to earn over £500,000 of fees to replace £26,000 of profit.”

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Purpose of Contract Documents ■ To accurately record the terms of the business arrangement ■ To set down the management and administrative procedures and processes ■ Define the obligations of the parties ■ Allocate risk to the parties ■ To be able to rely on in a court of law ■ Contracts should define: – What is to be built – The method of calculating the final cost – The required quality of the works – The time taken to complete the works

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Contents of Standard forms of Contract ■ Recitals and Articles of Agreement - containing the identity of the parties and details of the agreement ■ Contract particulars containing Commencement, Start and Completion Date, Rate of Liquidated and Ascertained Damages ■ Bills of quantities, activity schedules, schedule of rates ■ Documentation of tender negotiations identifying what is included and excluded (unless an entire contract) ■ Programme requirements ■ Design including drawings, specifications and schedules ■ Supplements (guarantees; bonds etc)

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Procurement of Construction Contracts (1) ■ Type of client ■ Type of project ■ Use of asset ■ Risk allocation ■ Ability to change scope of works

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Procurement of Construction Contracts (2) Key Considerations for a Project: ■ Client Involvement ■ Design Management ■ Capacity for Variations ■ Complexity ■ Speed ■ Clarity of Remedies ■ Default ■ Delay

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Procurement of Construction Contracts (3) Methods: ■ Traditional (Build only – designers separately appointed by client) ■ Design and Build. ■ PFI/PPP (Includes DBO/DBOM and similar hybrids) ■ Management Contracting/Construction Management ■ Collaborative/Partnering.

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What are Standard Forms of Contract (1)? ■ The main families of forms applicable to construction include : – JCT (Joint Contracts Tribunal) – NEC (New Engineering Contract) – FIDIC (International Federation of Consulting Engineers) – IChemE (Institution of Chemical Engineers) ICE and GC/Works (Still in use although NEC generally preferred)

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What are Standard Forms of Contract (2)? ■ JCT (Joint Contracts Tribunal) – Traditional - SBC, IC, MW, MP – Design & Build - DB – Management – CM & MC – Partnering - CE

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JCT 2005 ■ Standard Building Contract (SBC):

– With Quantities – Without Quantities – With Approximate Quantities Characteristics: – Employer’s Design Team responsible for design – Architect/Contract Administrator responsible for managing the contract – Contractor responsible for carrying out the Works in accordance with the contract documents – Possible for discrete parts to be designed by the contractor – Contract documents include Bills of Quantity (if applicable), Drawings, Specifications – Payments issued at intervals not exceeding one month. |

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JCT 2005 ■ JCT Design and Build •

Characteristics: – Provides ‘single point of responsibility’ for design and construction. – The contractor is responsible for completing design and carrying out the construction works – No architect/contract administrator. – There is provision for a named Employer's Agent – There is no clerk of works – Contract documents include Employer's Requirements, Contractor's Proposals and Contract Sum Analysis – There is provision for the obtaining of planning permission and other approvals – Payment can be at monthly intervals or at the end of agreed stages – Alternative provisions for payment – either stage payments or value of work executed |

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JTC 2005 ■ JCT Excellence

Characteristics: – collaborative behaviour between the various parties – active use of risk management techniques – flexibility in use – complete supply chain management

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NEC3 ■ ECC There are 6 Main Options Employer must select 1 of these: A – Priced contract with Activity Schedule B – Priced contract with Bill of Quantities C – Target contract with Activity Schedule D – Target contract with Bill of Quantities E – Cost Reimbursable contract F – Management contract

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FIDIC – The Rainbow Suite ■ Red

- Construction

■ Orange

- Design & Build/Turnkey

■ Yellow

- Design & Build

■ Silver

- EPC Turnkey

■ Gold

- DBO Contract

■ Green

- Minor Works - ‘mini-Red Book’

■ White

- Professional Services Contract

■ Blue

- Dredging and Reclamation

■ Pink

- MDB Harmonised Red Book

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FIDIC Characteristics

■ Recognised worldwide

■ Accepted by international Investment Institutions and Banks

■ Suitable for engineering and construction works

■ Official version in English, but translated into many other languages

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FIDIC – Choice of Form

Risk transfer to Contractor Certainty of outturn price

Silver

Yellow Green Red/

Low value simple works

Pink

0%

Extent of design by Contractor

100% |

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IChemE Options : ■ Red

- Measure/Value

■ Green

- Cost Reimbursable

■ Burgundy

- Target Cost

Characteristics: ■ Used for process plant installations, and associated building work. ■ Separate versions for use in UK and abroad. ■ Detailed requirements for testing and commissioning

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Why do we use standard forms? ■ To save time in drafting contracts ■ As a checklist of items to be agreed ■ A benchmark for negotiating terms ■ Benefit from judicial precedents ■ Readily understood by construction professionals ■ Familiarity with contract terms

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Differences in Key Clauses – Variations vs Compensation Events ■ JCT 05

Normal valuation rules apply

Schedule 2 quotation

■ NEC 3

PM requests quotation with instruction

Contractor notifies PM within 8 weeks of becoming aware of event – PM requests quotation (if necessary)

Priced in accordance with Activity Schedule or Bill of Quantities

Delay to be notified with quotation |

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Differences in Key Clauses – Possession and Completion ■JCT 05

Possession given to Contractor on “Date of Possession”

Employer may defer possession by up to 6 weeks (If appendix states clause 2.5 applies)

Employer not entitled to take possession of any part of site until issue of certificate of Practical Completion

■NEC3

Contractor has access to site – NOT possession

Employer takes over the work no later than 2 weeks after completion

No obligation on Employer to take over if it is stated in Contract Data

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Differences in Key Clauses – Extension of Time (1)

■JCT 05 SBC

Contractor to give written notice to Architect of ANY delay

Relevant Event (Clause 2.29) / Variation

Contractor provide estimate of expected delay Architect to award Extension of Time Architect to reassess Award on issue of instructions since last Award and on completion, but no later than 12 weeks after Practical Completion

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Differences in Key Clauses – Extension of Time (2)

■NEC3

Early warning, unless a Compensation Event

Delay in completion Delay in meeting a key date

Project Manager or Contractor request a meeting to mitigate delay

Compensation Event

Contractor submits quotation for delay Project Manager can revise completion date or key dates

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Contract Amendments Why do we have amendments to Contracts? ■ Risk Allocation (Avoidance, Transfer, Management) ■ Project-specific requirements

Advantages:

a. Can enhance standard contract provisions

Disadvantages:

a. Introduction of unfamiliar clauses b. Increased risk of discrepancies c. Can increase risk of adversarial conduct

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Letters of Intent (1) ■ What are the contractual implications?

A letter of intent ordinarily expresses an intention to enter into a contract at a future date, indicating that no contract is secured by the letter itself. The reality is however that it is not quite as simple as that. As always, it is a question upon the facts of each case, as to whether the issuing of a letter of intent can give rise to any, and if so, what obligations and/or liabilities.

Where the letter of intent can be shown to be a "subject to contract" type of arrangement, there will generally be no contract between the parties with the consequence that the contractor will be obliged to complete such works as it has undertaken within a reasonable time and be paid a reasonable price.

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Letters of Intent(2) What if Contract docs are not executed prior to work starting on site ? ■ Three Scenarios: 1. Statement of Intent:

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2. Instruction with Consent to spend:-

3. Recognition of the Existence of a binding contract:-

No liability to Employer if change of mind

If works are commenced; the Employer reimburses the contractor with reasonable costs if the contract is not entered into. If repudiated the Employer may be exposed to the Contractor’s loss of profit

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Letters of Intent (3) ■ Letters of Intent are between the Employer and Contractor! ■ Employers often ask their Quantity Surveyors to draft letters of intent for them. ■ This can be done however, the text should always be agreed by CS prior to issue. ■ Under No circumstances should a letter of intent be issued on EC Harris paper.

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Remember, EC Harris is not entering into Contract it is the Employer ! Great care must always be taken !!

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Case Study ■ You are brought on to a project halfway through the construction phase. T None of the parties have been following the contractual change procedure. The various designers have been issuing revised drawings to the contractor without going through the administrator of the contract. Both the administrator and the employer have been issuing verbal instructions to the contractor and nobody has kept a record of what has been said. The contractor has now submitted a massive claim for all of the additional work, which includes a request for an extension of time and additional preliminaries. ■ Explain the contractual position of all those involved – employer, contractor, administrator and designers.

Understanding the NEC3 Contract Operational Level Training

Format of the day ■ ■ ■ ■ ■ ■ ■ ■

Interactive training session Questions / debate encouraged Ask questions if unclear Speak your thoughts and share your knowledge Promote your ideas and be open to new ones Everybody contributes and is of equal status No professional intimidation Listen and encourage everyone to offer their opinion

Switch off mobile phones – unless exceptional circumstances apply

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In this session we’ll cover…

■ An overview of the NEC Suite of Contracts – History and philosophy, principles and features ■ How NEC helps us deliver positive outcomes for Clients ■ A summary of matters to look out for ■ Opportunities for BIS with NEC ■ A detailed review of some of the key provisions and obligations

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Further Reading and Handout Material

■ ■ ■ ■ ■ ■ ■

A Copy of the Engineering and Construction Contract A review of the changes from ECC2 to ECC3 NEC ECC Programme Guidance Notes Further Reading: Earned Value Analysis How to make NEC Target Contracts Work Works Information Potential further list of Disallowed Costs to be added by way of Z Clause

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What is NEC3… ■ 3rd Edition of the NEC Suite of Contracts ■ Mainly used in Transportation and Utilities sector ■ Endorsed by OGC for all public projects (and growing) ■ Growing in all sectors such as E&M ■ Also growing in international application

■ Different to other construction contracts – “A clear and simple document” – “Stimulates good project management” – “Used in a variety of situations”

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HISTORY & PHILOSOPHY OF NEC

HISTORY & PHILOSOPHY Evolution: Consultative edition issued January 1991 1st Edition of The New Engineering Contract (NEC) issued 1993 2nd Edition published 1995 renamed Engineering and Construction Contract (ECC) “NEC” retained as a brand name for suite of contracts 3rd Edition of all NEC contracts including the ECC issued 2005 Office of Government Commerce recommends the use of the NEC 3rd Edition

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HISTORY & PHILOSOPHY 1. Flexibility Multi disciplinary – use in engineering and building work Design responsibility can reside in part or whole with either party Choice of pricing options – lump sum, target cost, cost plus Modular contract form – core clauses, main options and bolt on secondary options

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HISTORY & PHILOSOPHY 2. Clarity and Simplicity Written in ordinary language, not construction terminology! Simple clause structure; avoids legalistic terminology Subjective decisions minimised Provision of guidance notes and flow charts

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HISTORY & PHILOSOPHY 3. Provide a stimulus to good management The ECC is a management tool as well as a contract Requires timely and clear decision making process Clear allocation of responsibility Proactive risk management procedures Encourages collaborative working

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What does it look like?

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NEC3 is a suite of contracts and supporting documentation…

…23 documents in all! (including the Engineering and Construction Contract) |

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CONTRACT DOCUMENTS & STRUCTURE Documents within the NEC suite: The Engineering and Construction Contract (ECC) The Engineering and Construction Subcontract (ECS) The Engineering and Construction Short Contract (ECSC) The Engineering and Construction Short Subcontract (ECSS) The Professional Services Contract (PSC) Term Service Contract (TSC) (New to NEC3) Framework Contract (New to NEC3) The Adjudicators Contract Also included are… Guidance Notes Flow Charts Procurement and Contract Strategies Guide

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CONTRACT FORMS TO FOCUS ON TODAY

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Focus on the ECC

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Roles and Responsibilities Contract Structure – Modular Form Main Options Secondary Options “The X Factor” Things to look out for – Key Considerations Other matters to consider Potential amendments

ROLES & RESPONSIBILITIES 15 November 2009

ROLES & RESPONSIBILITIES UNDER THE ECC ECC only identifies roles and responsibilities of the following parties: Employer Project Manager Supervisor Contractor Subcontractor Adjudicator

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PROJECT MANAGER

Appointed by the Employer to “manage the contract for the Employer with the intention of achieving the Employer’s objectives” (ECC Guidance Notes)

Employed for managerial skills; role not additional to a design appointment

ECC assumes the Project Manager has the Employer’s authority

PM is constrained from unreasonable actions and should act as an impartial certifier (Costain v Bechtel)

Can delegate some or all of his actions and is likely to need to… PM responsible for: o Review and acceptance of design o Review and acceptance of programmes o Issuing instructions o Certifying payments o Assessing compensation events and their impact on time and cost o …and more

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KEY ROLE: THE PROJECT MANAGER Assessing Compensation events and their impact on time and cost

Review and Acceptance of Design/Technical Queries

Certifying Payments

Risk Management

Project Manager Management of Early Waring Process Review and Acceptance of Programmes

Issuing Instructions

Dealing with administration of Time Bar

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SUPERVISOR “Checking” role similar to Clerk of Works “To check that the works are constructed in accordance with the contract” (ECC Guidance Notes) Can issue Instructions to search for Defects Responsible for issuing Defects Certificate Can delegate some or all of his actions

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ADJUDICATOR Adjudicators Contract available as part of NEC suite Adjudicator is appointed by both Parties May obtain help from others after notifying the Parties Is paid on a time charge basis Unless otherwise agreed, the Parties pay the Adjudicator costs in equal shares If one Party fails to pay, the other Party pays the Adjudicator and recovers the amount from the defaulting Party Under ECC option C, D and E the Contractor’s costs for preparing for an adjudication or tribunal are a Disallowed Cost; each Party is responsible for its own costs in preparing for a dispute

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CONTRACT STRUCTURE (Using the ECC as an example)… 15 November 2009

ECC and its modular form Works Terms Contract

Mandatory

Core Clauses

Main Option (A)

Main Option (B)

Main Option (C)

Dispute Resolution (W1)

Secondary Option (X1)



Main Option (D)

Main Option (E)

Must select one main option

Main Option (F)

Must Chose 1 Dispute Option

Dispute Resolution (W2)



Secondary Option (Y(UK)2)

All secondary options are optional

Secondary Option (Z)

Incorporated in WPEP

Contract Data Parts 1 & 2 |

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ECC and its modular form

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Core Clauses 1 - General 2 - The Contractor’s main responsibilities 3 - Time 4 - Testing and Defects 5 - Payment 6 - Compensation events 7 - Title 8 - Risks and insurance 9 - Termination

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ECC and its modular form

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There are 6 Main Option clauses (about 1 to 3 pages each) Employer must select 1 of these: A – Priced contract with Activity Schedule B – Priced contract with Bill of Quantities C – Target contract with Activity Schedule D – Target contract with Bill of Quantities E – Cost Reimbursable contract F – Management contract 31 March 2011 | 64

OPTION A Priced contract with Activity Schedule Lump sum contract Project should be well defined at tender and subject to only minimal change Payment based on Activity Schedule defined and priced by the contractor Activity Schedule should align with programme to allow ease of administration Contractor only paid for completed activities Financial risk and therefore, reward largely borne by the contractor Suited to design and construct Risk is included in the activities and paid regardless of whether they occur Greater certainty of price Contractor has an interest in minimising cost

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OPTION B Priced contract with Bill of Quantities Remeasurement contract BoQ produced by the employer, rates priced by contractor Contractor paid for quantity of work completed each month Risk of quantities / errors in BoQ borne by Employer Financial risk of rates largely borne by the Contractor Not suited to design and construct Works should be well defined at tender Risks are included in the BoQ and paid regardless of whether they occur Contractor has an interest in minimising cost

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OPTIONS C & D Target contract with Activity Schedule (C) / Bill of Quantities (D) Target cost contracts Works should be adequately defined to allow target to be set Target Cost set via Activity Schedule or Bill of Quantities Target Cost moves with changes (Compensation Events) Greater flexibility for the employer to develop his design Financial risk shared between the contractor and employer Contractor paid on a cost reimbursable (Defined Cost) basis Gain / pain shared (see illustration) Contractor and Employer both encouraged to control costs

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TARGET COST GAIN – PAIN SHARE Changes

Employers Risk Final actual cost compared to final target cost to determine gain share / pain share

Contractors Risk Fee

Certificate 4 Certificate 3

Base Cost

Certificate 2 Certificate 1

Target Cost

Actual Cost

OPTIONS C & D: Target Cost Illustration

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Proportion of saving / overspend received / paid by contractor is be determined by employer

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Option E Cost Reimbursable contract ■ Limited / no project definition required at tender stage ■ Immediate / earlier start on site ■ Contractor paid on a cost reimbursable basis ■ Employer carries risk of cost increases ■ Employer gets the benefit of all savings ■ Limited financial risk borne by the Contractor (‘disallowed’ cost) ■ Full flexibility available to the Employer ■ Simpler post contract financial management (no contract sum) ■ Potential for claims / disputes virtually eliminated

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Option F Management contract ■ Limited project definition required at tender stage ■ Earlier start on site ■ Employer carries risk of cost increases ■ Suitable for contracts with a high degree of specialist contractors ■ Contractor directly employees subcontractors ■ Contractor responsible for managing the subcontractors to time and quality ■ Works subcontractors paid on prime cost ■ Contractor tenders preliminaries and Fee

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DISPUTE RESOLUTION OPTIONS There are 2 Dispute Resolution option clauses which concern rules and procedures for Adjudication and review by any subsequent tribunal Employer must select 1 of these: W1

Used unless the HGCR Act applies – e.g. For use outside of the UK such as Abu Dhabi

W2

Used where the HGCR Act applies

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ECC : Post Contract Financial Risk / Reward

Employer Risk / Reward

E

Sp ee d

F

to

Sit e

D C B A

Contractor Risk / Reward

Risk/Unavailable Information

ECC – Knowing your Options Outline Proposals 60% Design

Detailed Proposals

Detailed Design - 85% Design

Production Design

Unknown Employer Design

Time

Contractor Risk

£ Option E

Option C/D

Option C/D

Option A Option A

“The X factor” – Contract Tailoring 75

X1 Price adjustment for inflation X2 Changes in the law X3 Multiple currencies X4 Parent company guarantee X5 Sectional completion X6 Bonus for early Completion X7 Delay damages X12 Partnering X13 Performance bond X14 Advanced payment to Contractor X15 Limitation of Contractors liability for design to reasonable skill are care X16 Retention X17 Low performance damages X18 Limitation of liability X20 Key performance indicators r|

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The Secondary Options – Contract Tailoring 76

UK specific Secondary Options: Y(UK)2 HGCR Act Y(UK)3 Contracts (Rights of Third Parties) Act Also, Z clauses… Bespoke amendments

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THINGS TO LOOK OUT FOR… 15 November 2009

Take Care – Key Considerations within NEC Time Bar Accepted Programme Key Dates Early Warnings Contract Documentation Allocation of Risk Reasonable Skill and Care and Rights of 3rd Parties Earned Value Analysis

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TIME BAR & COMPENSATION Potential Issue Entitlement to additional time and money (Compensation Events) are subject to compliance with strict timescales

Impact on Employer

Impact on Contractor

Should factor in additional resource to PM team

Risk of incurring costs by ignoring timescales

Manage compensation contemporaneously or before the change is instructed

Needs to have a clear plan and organisational structure to enable compensation

Greater control over risk and the impact of change

Opportunities for ECH Adopt the Prospective Outlook approach Encourages good project management – actively promote time bar! Encourage use of a web based Contract Admin tools Introduce FCA on reimbursable Contracts

Could be ambushed

Solution Understand, comply and plan for with contractual timescales Commit sufficient resources – Otherwise amend the contract to extend timescales Prevention is better than Cure! Need a clear, quick and accountable decision making process in client organisations Dispatch Emergency Response Team to deal with increased intensity of Compensation Events 31 March 2011 | 79

TIME BAR & COMPENSATION

Section 6, entitled “Compensation Events” brings together in one place the contractual provisions for evaluating the time and cost changes that will occur during construction works which do not arise from the Contractor’s fault The compensation events are defined by the 19 listed events under clause 60.1 and these may be extended by inclusion of further matters in the Contract Data Part One. Clause 60.1 (14) refers to an Employer’s risk event occurs, and this incorporates Section 8 on Risks and Insurances. (There are no equivalent of “neutral events” found in JCT forms whereby the employer bears the risk of time but the contractor bears the risk of costs.)

TIME BAR & COMPENSATION The changes to the Completion Date and the contract Prices consequent upon compensation events occurring are meant to be assessed contemporaneously with the events arising and preferably before the changes are instructed. The intention is that this procedure enables the parties to successfully manage risk and gives the Employer greater choice and control over change management together with greater time and cost certainty. The successful implementation of the detailed compensation event procedures within the strict timetable set down, particularly where time impacts are also to be assessed, requires considerable resources and commitment from both parties. The importance of adhering to these project management processes in order to realise the considerable benefits of greater control of change and risk management cannot be overstated. It facilitates the making of fully informed decisions in the context of a clear understanding of the potential impact of contemplated or unexpected change.

TIME BAR & COMPENSATION Grounds for compensation events are listed in clause 60.1. There are 19 standard compensation events heads with an additional 7 dependent upon which main and secondary options are chosen. Examples of compensation events: (1)

Project Manager gives and instruction to change the Works Information

(2)

Employer does not provide access to and use of a part of the Site

(5)

The Employer or Others do not work within the times shown on the accepted programme, or in accordance with the Works Information

(12) The Contractor encounters “unforeseen” physical conditions (13) A weather measurement is recorded which is shown to occur on average less frequently than once in 10 years (19) Prevention, as event occurs which neither party could foresee, can prevent and stops the Contractor completing the works in time or at all

TIME BAR & COMPENSATION The procedure follows a logical chain as follows:

Notification

8 weeks

Decision on Validity / Instruction to Quote

1 week (+ 2 Weeks)

Quotation

3 weeks

Reply

2 weeks (+2 weeks)

Implementation

TIME BAR & COMPENSATION Notification 61.1 Project Manager notifies 61.2 Project Manager seeks proposals 61.3 Contractor notifies Validity 60.1(1) to 60.1(19) (& contract data) 60.1(1) exceptions 61.3 Contractor notification tests – 8 week time bar 61.4 Project Manager tests whether a valid compensation event 6.1.4 Default acceptance of Compensation Event if no response from the Project Manager within the correct timescales (1 week + 2 weeks)

TIME BAR & COMPENSATION

Quotation 61.1 and 61.4: Project Manager instructs 61.5 Project Manager notifies whether Early Warning given and effect on quotation 61.6 Uncertainty and the use of PM assumptions 62.1 alternative quotes 62.2 Time and Cost package. Programme implications (ECC section 3)

TIME BAR & COMPENSATION Acceptance / Assessment 63.1 method of assessing 63.3 method of change to Completion Date (EoT) 62.2 method of assessing disruption 62.3 Project Manager accepts, rejects (with reasons) and resubmit 62.3 Project Manager not going ahead 62.3 Project Manager will assess 62.6 Default acceptance of quotation if no response from the Project Manger within the correct timescales (2 weeks + 2 weeks) Implementation 65.1 Compensation event implementation 65.2 Finality (unless assumptions to be revised) (beware caveats)

ACCEPTED PROGRAMME Potential Issue Clause 31.2 has extensive programme management requirements - contractors rarely comply with these! ECC doesn’t ask for a Critical Path and Logic Linked Programme

Impact on Employer


Risk to project cost, performance and success

Incorrect cost estimates by under planning resource

Absence of programme detail prevents the Pro-active management of risk and change

Absence of robust compliant programme allows contractor to inflate claims to maximise commercial outcome

Time

Outline Master Programme

Opportunities for ECH Should allocate appropriate resource to deal with programme management & schedule performance Use Contract Solutions to hold workshop Utilise expert Compensation Event response team to assess time and cost

Solution Hold workshop at pre-contract stage to confirm expectation Take a robust but pragmatic approach on compliance with 31.2 dependant on the size of the project Request Critical Path and Logic Linked programmes in the Works Information 31 March 2011 | 87

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TIME

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Starting and Completion

The Contractor does not start work on Site until the first access date (or access dates if detailed in Contract Data Part 1)

Contractor does the work so that Completion is on or before the Completion Date (date stated in Contract Data or as subsequently amended)

The Project Manager decides and certifies the date of Completion (date Completion actually achieved)

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TIME

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The programme

If no programme is identified in the Contract Data then the Contractor submits the first programme within the period stated in the Contract Data

Detailed (and onerous) list of requirements for each programme

Project Manager must accept or reject with reason each programme submitted within 2 weeks

Reasons for non acceptance stated

90

TIME 32

Revising the programme

Items to be shown on each revised programme listed

Revised programme issued within the period for reply after the Project Manager has instructed him to when the Contractor chooses to and, in any case at no longer interval than that stated in the Contract Data

33

Access to and use of the Site

Later of its access date or date for access shown on the Accepted Programme – can be all or parts of the site if detailed in the Contract Data

91

TIME the starting date (Contract Data)

planned Completion The Completion Date – is the – completion date (Contract Data) – unless otherwise changed in accordance with this contract

access date(s) (Contract Data)

*

* *

*

*

date of Completion

*

92

TIME

There are 3 types of float 1)

Time Risk Allowances – (activity ‘float’ )

2)

Terminal Float – (between planned Completion and the Completion Date)

3)

General Float – (activities NOT on the critical path)

93

TIME 34

Instructions to stop or not to start work

35

Take over The Employer need not take over the works before the Completion Date if it is stated in the Contract Data The Employer may use any part of the works before Completion has been certified. If he does he takes over the parts of the works when he begins to use it except if this use is for a reason stated in the WI or to suit the Contractor’s method or working

36

Acceleration

94

TIME

There are 3 types of float 1)

Time Risk Allowances – (activity ‘float’ )

2)

Terminal Float – (between planned Completion and the Completion Date)

3)

General Float – (activities NOT on the critical path)

Who owns the float?

Example

KEY DATES Potential Issue The Employer can fix Key Dates which the Contractor has to include in his programme.

Opportunities for ECH Comprehensive Planning with Key Dates identified

Employer can levy damages as a result of the contractor’s failure to meet a Key Date

Impact on Employer


Incentivise Contractor to reach a particular milestone (eg a funding gateway) or construction interface

Can incur costs if not met, must be aware of dates

Solution Key Dates are effectively used where there is an particular interface with another contractor Don’t use key dates to hand over an area of a building, in such circumstances the option for Sectional Completion should be selected

31 March 2011 | 95

EARLY WARNINGS Potential Issue Contractor or Project Manager can give an Early Warning as soon as they are aware of potential price increase or delay Can instruct the other to attend a risk reduction meeting to find solutions

Impact on Employer


Contractual mechanism provided to enable the effective management of risk

Can agree changes pragmatically with PM

Opportunity establish cost and time impact of change

Opportunities for ECH Pragmatically resolve issues and prevent problems (capture measureable to demonstrate performance) Use risk register to manage actions Incentivisation models can stimulate reward against risk provisions in contract

Solution Early Warnings brings benefits - prevention better than cure Deal with matters while there is still time to positively influence the course of events before blame

31 March 2011 | 96

97

GENERAL 16

Early Warning Contractor or Project Manager gives an early warning as soon as either becomes aware of a matter that may (can be Contractor or Employer risk) increase the total of the Prices delay Completion or delay meeting a key date or impair the performance of the works in use Either the Contractor or the Project Manager may instruct the other to attend a risk reduction meeting At a risk reduction meeting those who attend co-operate in making and considering proposals seeking solutions that will bring advantage to all those effected deciding upon actions and who will take them Project Manager records outputs

GENERAL Early Warning – Benefits

Prevention better than cure Proactive rather than reactive Early rather than late

The focus is on resolving and mitigating issues rather than seeking to allocate blame and liability

While there is still time to positively influence the course of events

98

CONTRACT DOCUMENTATION Potential Issue NEC3 contract forms only provide an outline of the obligations Responsibility for design is to be identified in Works Information Preliminaries, Preambles, Provisional & Prime Cost Sums are not recognised as terms but can be included as part of the Works Information with scope identified.

Impact on Employer


Structure of contract may not be understood

Structure of contract may not be understood

Opportunities for ECH Project Manager must develop robust and compliant Works Information – need to allocate correct resource for this Employ NEC expertise to develop Works Information

Solution Structure contract correctly Consultants must review the NEC (ECC) to identify each clause that refers to Works Information Complete Generic and Product Specific Works information

31 March 2011 | 99

10 0

CONTRACT DOCUMENTATION - WORKS INFORMATION

CONTRACT DOCUMENTATION – FOCUS ON WORKS INFORMATION

Works Information is the most important part of any ECC contract, it will contain drawings and specifications but also a substantial amount of further information

The ECC achieves flexibility through reliance on the Works Information to contain project specific information such as; - Tests, inspections requirements - Contractor design responsibility - Contractual information is required as the NEC (ECC) refers to Works Information throughout the terms.

31 March 2011 | 10 1

CONTRACT DOCUMENTATION – FOCUS ON WORKS INFORMATION • Consultants should review the NEC (ECC) Contract to identify each clause that refers to each section of the Contract. • The Works information could then be structured as both Generic Works information and Project Specific Works Information being identified as subheadings under the following main headings:

31 March 2011 | 10 2

10 3

CONTRACT DATA

CONTRACT DATA The Contract Data is in 2 parts: Part 1: Completed by Employer and issued as part of Tender documentation Part 2: Completed by Contractor and returned as part of Tenderer’s submission

104

CD PART 1 CD Part 1 identifies general information such as: Main and Secondary Options selected Details of Employer, Project Manager, Supervisor, Adjudicator Completion Date (if decided by Employer) Defects Date Payment assessment interval etc Info required in CD Part 1 varies depending on Main & Secondary Options selected, e.g. Retention percentage if Option X16 chosen

105

CD PART 2 CD Part 2 identifies information such as: Contractor’s key people (e.g. Agent, Construction Manager etc) Fee percentages Tender price Completion Date (if tendered by Contractor) Data for use with Schedule of Cost Components etc

106

10 7

SCHEDULE OF COST COMPONENTS

CONTRACT DOCUMENTATION - SCHEDULE OF COST COMPONENTS108 There are two Schedules of Cost Components

Shorter Schedule of Cost Components

used with Options A & B (and if agreed options C-F)

only used to assess compensation events

Schedule of Cost Components

used with C-F only

used to assess compensation events and

recovery of the Contractors actual cost

The schedules are a set of rules to define those components of the Contractors cost which are included in Defined Cost

ALLOCATION OF RISK Potential Issue Risks are shared between the Employer and the Contractor under some options (Target Cost Options)

Opportunities for ECH

Misconceptions that risk is unallocated and the owner is set in agreement of the prices or by the Risk Register

Include Risk Allocation workshop during contract phase.

Impact on Employer


Clear allocation of risk may not be understood or considered

Clear allocation of risk may not be understood or considered

Provide expert advice on risk ownership under different options

Contractors have in the past priced and included Employer risks within pricing

Solution Review the contractual allocation of risk and perhaps negotiate a reallocation, amending the standard contract through Z Clauses Risk transfer in a standard contract is allocated between the parties at Compensation Event clause 60.1 and Employer’s Risk clause 80.1 31 March 2011 | 10 9

REASONABLE SKILL & CARE / 3rd PARTY RIGHTS Opportunities for ECH

Potential Issue A standard Contract infers Fitness for Purpose is the Duty of Care for design and assumes the Rights of 3rd Parties Act applies.

Impact on Employer


Any 3rd party to the Contract could have right against the contract

Contractor could inadvertently sign up to a higher standard of care for which he cannot insure against

Apply expertise with the Contract to protect the Contractor Simple application of knowledge and training to the project team at the outset will prevent such issues from arising

Solution Use Option X15 to lower the Duty of care from Fitness for Purpose to the more typical Reasonable skill and care Use Option Y(UK) 3 to limit 3rd parties from making claims under the Contract

31 March 2011 | 11 0

EARNED VALUE ANALYSIS Potential Issue Programme requirements at Clause 31.2 enable the Employer to define the management information and reporting requirements.

Impact on Employer


Enables the PM to manage Contractors more effectively

The Contractor must break down his activities into the level of resources required for the delivery of each activity

Difficult to achieve on Option A: Lump Sum Contracts

Opportunities for ECH Clause 31.2 is key in providing the level of detail needed for reviewing Contractor quotes for Compensation or Early Warning. Use clause 31.2 to enable EVA with Cost, Time and Resource in a single model

Solution Ensure enough information is provided under 31.2 to assess and challenge contractor quotations for Compensation Event Claim or Early Warnings. Assimilate and report data through EVA to challenge the accuracy of the data provided by the contractor during the delivery of the project. Ensure Works Information identifies information required through regular reporting

|

31 March 2011 | 11 1

EC Harris NEC 3rd Edition Capability Development Programme OTHER MATTERS TO CONSIDER… 15 November 2009

11 3

OTHER MATTERS TO CONSIDER – TESTING AND DEFECTS

TESTING AND DEFECTS 40 Test and Inspections - As required by the WI 42 Searching and Notifying of Defects

The Supervisor may instruct the Contractor to search for Defects

43 Correcting Defects

The Contractor corrects Defects whether or not the Supervisor notifies him of them

The Contractor corrects notified Defects before the end of the defect correction period. This period begins at Completion for Defects notified before Completion and when the Defect is notified for other Defects

Supervisor issues the Defects Certificate

114

TESTING AND DEFECTS

115

TESTING AND DEFECTS 44

Accepting Defect The Contractor or Project Manager may propose that the WI be changed to accept a Defect The Prices are reduced and / or an earlier Completion Date agreed

45

Uncorrected Defects If the Contactor is given access to correct a notified Defect, but does not correct it within its defects correction period the Project Manager assesses the cost of having the Defect corrected by others and the Contractor pays this amount If the Contractor is not given access to correct a notified Defect the Project Manager assesses the cost to the Contractor of correcting the Defect and the Contractor pays this amount

116

11 7

OTHER MATTERS TO CONSIDER - PAYMENT

PAYMENT 50

Assessing the amount due Project Manager assesses the amount due at each assessment date first assessment date decided by the Project Manager to suit the procedures of the Parties later assessments dates occur at the end of each assessment interval until 4 weeks after issue of the Defects Certificate at Completion of the whole of the works No requirement for the Contractor to submit an application Amount due is the Price for Work Done to Date – PWDD ¼ of PWDD withheld until the Contractor has submitted a first programme acceptance showing all information which this contract requires Project Manager must give details of assessment PWDD – differs between Options

PAYMENT Option A

11.2 (27)

The Price for Work Done to Date is the total of the Prices for each group of completed activities and each completed activity which is not in a group A completed activity is one which is without Defects which would either delay or be covered by immediately following work

PAYMENT

Option B

11.2 (28) The Price for Work Done to Date is the total of

the quantity of the work which the Contractor has completed for each item in the Bill of Quantities multiplied by the rate and a proportion of each lump sum which is the proportion of the work covered by the item which the Contractor has completed

Completed work is work without Defects which would either delay or be covered by immediately following work

PAYMENT

Option C, D & E 11.2 (29)

The Price for Work Done to Date is the total Defined Cost which the Project Manager forecasts will have been paid by the Contractor before the next assessment date plus the Fee

PAYMENT Cash Neutral / Positive Contract Payment timescales 1st assessment

2nd assessment

3rd assessment

date

date

date

starting date

Up to 31 days assessment interval,

if monthly cash positive

normally monthly

final date for payment 21 days Amount of Defined Cost paid during

after assessment date

the first assessment interval Amount of Defined Cost forecast to have been paid by the next assessment interval

PAYMENT Option C & D 11.2 (23)

Defined Cost is the amount of payments due to Subcontractors for work which is subcontracted without taking account of amounts deducted for retention payment to the Employer as a result of the Subcontractor failing to meet a Key Date the correction of Defects after Completion payments to Others and the supply of equipment, supplies and services included in the charge for overhead cost within the Working Areas in this contract and the cost of components in the Schedule of Cost Components for other work less any Disallowed Cost

PAYMENT There are two Schedules of Cost Components

Shorter Schedule of Cost Components

used with Options A & B (and if agreed options C-F)

only used to assess compensation events

Schedule of Cost Components

used with C-F only

used to assess compensation events and

recovery of the Contractors actual cost

The Shorter Schedule is in effect a simplified version of the full schedule

PAYMENT

Schedule of Cost Components is split into the following sections

1

People

2

Equipment

3

Plant and Materials

4

Charges

5

Manufacture and fabrication

6

Design

7

Insurance

PAYMENT 11.2 (25) Disallowed Cost – a listing of items which are deducted from Defined Cost, for example amounts not justified by the Contractor’s accounts and records failure to give an early warning Plant & Materials and resources not used to Provide The Works resources not used to Provide The Works correcting Defects after Completion correcting Defects caused by the Contractor not complying with a constraint on how he is to Provide the Works stated within the Works Information

PAYMENT 51

Payment The Project Manager certifies payment within one week of each assessment date Payment can be either from the Employer to the Contractor or vice versa Each certified payment is made within 3 weeks of the assessment date, or a different period if stated in the Contract Data Interest paid on late payment

PAYMENT 52

Defined Cost

All the Contractors cost not included in Defined Cost are deemed to be in the Fee Amounts included in Defined Cost are at open market or competitively tendered prices with deductions for all discounts, rebates and taxes which can be recovered Option C-F – Contractor keeps records of Defined Cost and makes them available for inspection by the Project Manager

EC Harris NEC 3rd Edition Capability Development Programme SUGGESTED AMENDMENTS… 15 November 2009

Suggested Z clauses (Amendments to the Contract) ■

Prevention New grounds for a compensation event called “prevention”, effectively a Force Majeure provision, - entitles the Contractor to claim additional time and money. Common to delete or amend it to be a time only Compensation Event in line with other standard forms.

■

Subcontracting Value for Money Under cost reimbursement options the higher the works cost with Sub-Contractors, the higher the Contractors fee percentage. Some clients introduce the need for competitive tendering, audit rights, visibility of supply chain, limitation on sub-tier subcontracting without acceptance. Michael Spencer |

31 March 2011 | 13 0

Suggested Z clauses (Amendments to the Contract) ■

Proceeding regularly and diligently No such provision in the NEC (ECC) Contract, we advise this Z clause is added to introduce this obligation.

■ Provisional Sums Can be added as a Z clause to revert back to a more traditional approach here (alternatively specify in Works Information)

■ Critical Path and Logic Linked programmes The Contract does not require this, however, given clause 31.2 it is sensible to include this provision (alternatively include in the Works Information)

31 March 2011 | 13 1

Suggested Z clauses (Amendments to the Contract) ■ Extension To Time Bar Timescales In The Contract If suitable resources are unavailable, suitable amendments should be made to the contractual timescales for compensation. ■ Issue – Cash Positive The standard ECC under the cost reimbursable options (C, D and E) is cash positive in terms of interim payments to the Contractor. We recommend that the Employer reviews the payment process to determine if they are happy to pay on a cash positive basis. If not we would recommend that the standard payment clause is amended to a cash neutral situation. ■ Issue – Assessing The Amount Due Project Manager assesses the amount due at each assessment date. There is no requirement for the Contractor to submit an application. We suggest the Employer reviews this issue and if required amends the contract to make the submission of an application a condition precedent for payment.

31 March 2011 | 13 2

Suggested Z clauses (Amendments to the Contract) ■ Issue – Disallowed Cost The standard ECC under the cost reimbursable options (C, D and E) has a defined term Disallowed Cost. These are costs which are not recoverable by the Contractor.

We recommend that the Employer reviews these to ensure they are happy with what they cover. Particular attention is drawn the issue of Defects correction. Under the standard ECC the majority of Defects identified and corrected before Completion will be paid for by the Employer. Employers need to understand this and make sure they are happy to allow this. This does bring some benefit to the Employer in that it encourages all Defects to be corrected prior to Completion.

31 March 2011 | 13 3

Focus on the Professional Services Contract

When should it be used? PSC and ECC Compared Main Options Secondary Options

134

PROFESSIONAL SERVICES CONTRACT

The PSC has been drafted with the same objectives as the NEC and has adopted clauses from the NEC Engineering and Construction Contract (ECC) where they were considered to be appropriate for the appointment of a professional organisation or person

The terms are very similar to the Works Contract with some exceptions as follows…

PROFESSIONAL SERVICES CONTRACT Key Differences between the PSC and the WC

No Contractor, Subcontractor and Project Manager, just Employer and Consultant (NEC3 PSC can appoint an Employer’s Agent option X10, but not used in PST) (use as Z clause?)

The ‘Testing and Defects’ section of the Works Terms is replaced by a section titled ‘Quality’ whereby a Quality Management Plan is introduced

The section on ‘Title’ is replaced by Rights to Drawings, Documents and Models. Intellectual Property Rights are dealt with in the VIP

The following Main Option Clauses are used with the PSC Option A: Price Contract with Activity Schedule Option C: Target Contract with Activity Schedule Option E: Time Based Contract

BAA PROFESSIONAL SERVICES TERMS (PSC) Differences between the PSC and the WC (Pricing)

Option C and Option E

Under the PST the cost for services is valued on a Time Charge basis rather than actual cost (Defined Cost)

PROFESSIONAL SERVICES CONTRACT Key Differences between the PSC and the WC The following Secondary Option Clauses are used with the PSC

Option X1: Price Adjustment for Inflation Option X2: Changes in the law Option X3: Multiple Currencies Option X4: Parent Company Guarantee Option X5: Sectional Completion Option X6: Bonus for early Completion Option X7: Delay Damages Option X8: Collateral Warranty Damages Option X9: Transfer of Rights Option X10: Employer’s Agent Option X11: Termination by the Employer Option X12: Partnering Option X13: Performance Bond Option X18: Limitation of Liability Option X20: Key Performance Indicators Option Z: Additional Conditions of Contract

Focus on the Term Service Contract

When should it be used? Range of use TSC and ECC Compared Main Options Secondary Options

139

When should it be used? ■ Distinctive nature ■ Providing a service over a period of time (“service period”) ■ Examples in construction ■ Other examples

Range of use ■ Very wide range ■ Providing a service – not a project ■ Maintaining existing condition of an asset ■ Not normally improving condition of asset ■ But may include some betterment ■ May include renewal and replacement

TSC and ECC compared ■ TSC

■ ECC

– provides a service

– provides works

– service period (not extended)

– Completion Date (can be extended)

– Service Manager

– Project Manager & Supervisor

– 3 main Options – 13 secondary Options – X19 –Task Order

– 6 main Options – 18 secondary Options – No “call-off” option

TSC and ECC compared ■ TSC

■ ECC

– Contractor’s plan

– Programme

– Defects corrected asap

– Defects corrected in dcp

– Defined Cost in core

– Defined Cost in main Options

– Affected Property – Allows for Employer’s equipment – 14 CE’s + 9 in secondary Options – no unforeseen physical conditions CE – no weather CE

– Site and Working Areas – Equipment always Contractor’s – 19 CE’s + 5 in secondary Options – unforeseen physical conditions CE – weather CE

TSC and PSC Compared ■ TSC

■ PSC

– mainly physical work

– mainly non-physical work

– maintenance-type work

– project work

– normally on Employer’s office and site

– premises or asset

Main Option clauses Main Option clauses are as follows ■ A

Priced contract with price list

■ C

Target contract with price list

■ E

Cost reimbursable contract

Secondary Option clauses ■ X1 - Price adjustment for inflation ■ X2 - Changes in the law ■ X3 - Multiple currencies ■ X4 - Parent company guarantee ■ X12 – Partnering ■ X13 - Performance bond ■ X17 - Low service damages

Secondary Option clauses ■ X18 – Limitation of liability ■ X19 – Task Order ■ X20 – Key Performance Indicators ■ Y(UK)2 – The Housing Grants, Construction and Regeneration Act 1996 ■ Y(UK)3 – The Contracts (Rights of Third Parties) Act 1999 ■ Z - Additional conditions of contract

Questions : Discussion Forum

14 8

JCT 2005

PART 5: EFFECT OF JCT 05 (Part 1) Conditions

Definition and interpretation

Carrying out the works (possession, design, completion, LAD’s, Defects)

Control of the Works (access instructions, CDM)

Payment

Changes

Injury, Damage and insurance

Third Party Rights and Warranties

Termination

Disputes

PART 5: EFFECT OF JCT 05 (Part 2) What are the Key Changes (Are the changes of substance or of form?)

Integration of the Supplements

Third Party Rights (Big Change)

Change in Language, Structure and Terminology

PART 5: EFFECT OF JCT 05 (Part 3)

Brief Summary of DB05 1. Design Responsibilities and Discrepancies – Same as before “Still Vague with regard to priority of ER’s and CP’s!!” 2. PI cover (Now Expressly Required) 3. Design Submission Procedure incorporated into the Standard Form (A, B, C – Approval Structure)

PART 5: EFFECT OF JCT 05 (Part 4)

Brief Summary of DB05 4. Third Party Rights and Warranties

Effect of the Rights of Third Parties Act 1999 - JCT 98 contracted out of the Act - DB05/SBC05 provides for -Third Party Rights Schedule (Purchasers, Tenants and Funders) -CW’s -S/c CW’s

Not available in Minor Works Form! Intermediate Form provides for CW’s and Sub-Contractor Warranties only

PART 5: EFFECT OF JCT 05 (Part 5) Brief Summary of DB05 (cont…) 5.

Insurance provisions for loss of LAD’s (Deleted)

6.

Contractor’s Price Statement for Changes (Deleted)

7. Automatic Determination on Contractor’s Liquidation or Bankruptcy the choice to determine)

(Now provides the other party

8. Right of Contractor to obtain amounts unreasonably withheld by the determination by employer (could have a dramatic effect)

employer following

9.

Provisions for nominated subcontractors (Deleted)

Minor Works and Intermediate Form of Contract Now allows for CDP elements!!

Differences in Key Clauses – Variations vs Compensation Events JCT 05






Delay to be notified with quotation

NEC 3

Differences in Key Clauses – Possession and Completion JCT 05




NEC 3




Differences in Key Clauses – Extension of Time

JCT 05 SBC




Options Available within the Standard Forms JCT Suite of Contracts 2005 •

Standard Building Contract (SBC):

• • •

With Quantities Without Quantities With Approximate Quantities

•

Common Characteristics:

Employer’s Design Team responsible for design Architect/Contract Administrator responsible for managing the contract Contractor responsible for carrying out the Works in accordance with the contract documents Possible for discrete parts to be designed by the contractor Contract documents include Bills of Quantity (if applicable), Drawings, Specifications Payments issued at intervals not exceeding one month.

Options Available within the Standard Forms JCT Suite of Contracts 2005 (cont’d) •

JCT Design and Build

•

Characteristics:

Provides ‘single point of responsibility’ for design and construction. The contractor is responsible for completing design and carrying out the construction works No architect/contract administrator. There is provision for a named Employer's Agent There is no clerk of works Contract documents include Employer's Requirements, Contractor's Proposals and Contract Sum Analysis There is provision for the obtaining of planning permission and other approvals Payment can be at monthly intervals or at the end of agreed stages Alternative provisions for payment – either stage payments or value of work executed

Options Available within the Standard Forms JCT Suite of Contracts 2005 (cont’d) JCT Excellence

•

Characteristics:

collaborative behaviour between the various parties

active use of risk management techniques

flexibility in use

complete supply chain management

PART 5 : DISCREPANCIES JCT SBC 05 The Contract Documents are defined as: “The Contract Drawings, the Contract Bills, the Agreement and these Conditions, together with (where applicable) the Employer’s Requirements, the Contractor’s Proposals and the CDP Analysis” Cl 1.3 “The Agreement and these Conditions are to be read as a whole but nothing contained in the Contract Bills or the CDP Documents shall override or modify the Agreement or these Conditions”

PART 5 : DISCREPANCIES (Cont’d) JCT SBC 05 (With Quantities) Examples of how discrepancies are dealt with are as follows: Cl 2.14 states that errors in the contract bills of quantity should be corrected and treated as a variation unless it concerns complying with Statutory Requirements Cl 2.14 states where there is an error in the Contractor’s Proposals or the CDP analysis, it is corrected with no adjustment to the Contract Sum Cl 2.15 states that if the Contractor finds any such departure, error, omission or inadequacy he should immediately give written notice with appropriate details to the Architect/Contract Administrator who will issue instructions

PART 5 : DISCREPANCIES (Cont’d) JCT DB 05 The Contract Documents are defined as: “The Agreement and these Conditions, together with the Employer’s Requirements, the Contractor’s Proposals and the Contract Sum Analysis” Cl 1.2 states “The Agreement and these conditions are to be read as a whole but nothing contained in the Employer’s Requirements, the Contractor’s Proposals or the Contract Sum Analysis shall override or modify the Agreement or the Conditions

PART 5 : DISCREPANCIES (Cont’d) JCT DB 05 Discrepancies are dealt with as follows: Cl 2.13 states if the Contractor finds any inadequacy in the Employer’s Requirements or discrepancy in the Contractor’s Proposals he shall notify the Employer Cl 2.14 states where the discrepancy is within the Contractor’s Proposal, he shall inform the Employer in writing of his proposed amendment and the Employer shall decide between discrepant items or otherwise accept Contractor’s proposed amendment Cl 2.14.2 states where the discrepancy is within the Employer’s Requirements, the Contractor’s Proposals shall prevail

PART 6 : LETTERS OF INTENT What do you do if Contract Documents are not completed and signed prior to starting on site?

Not unusual to find work on a construction project started before a formal contract is drawn up

Letters of Intent indicate a firm intention to award the contract in question to that Contractor

Letters on Intent are usually used where the issuer wishes to have some work commenced by the Contractor before a formal contract has been agreed and signed up to by the parties

PART 6 : LETTERS OF INTENT Effects of Letters of Intent depend entirely upon their wording

Usually the case that such letters do not give rise to any legal rights or obligations

By stating that there will or may be a contract in the future, the letter may indicate that there is no such contract at present

A Contractor who carries out work on this basis will be entitled to be paid the reasonable value of the work carried out

PART 6 : LETTERS OF INTENT Do’s and Don’ts Do Clearly identify the scope of the works Set out the matters to be resolved for the main contract to be entered into Make it clear the Letter is intended to give rise to an interim agreement Set a limit on the amount to be paid to the Contractor (inc VAT) Make it clear who is to be the party issuing instructions

PART 6 : LETTERS OF INTENT Do’s and Don’ts Don’t See a Letter of Intent as a substitute for a properly drafted contract Have a Letter of Intent which incorporates all the terms of the contract Forget the limitation period for liability for work carried out under a Letter of Intent will be 6 years Forget that whether you are the Contractor or the issuer you are at risk if the Letter of Intent is not cleary drafted

PART 6 : LETTERS OF INTENT Letters of Intent are between the Employer and Contractor A Letter of Intent may come in many forms A non-binding statement of future intention of both parties An ‘if’ contract which creates binding contractual rights A complete contract What Criteria must be met by a Letter of Intent? Certainty as to key terms Must be consideration Both parties must have a mutual intention to enter into a binding legal contract

PART 7 : WARRANTIES The Conditions of Contract may require the Contractor and Subcontractors to provide collateral warranties to: Funders Purchasers/Tenants Purpose To bring remote owners into direct contractual relationship with those against whom they would only be able to claim in the tort of negligence A Warranty is a contractual relationship and if broken does not entitle the other party to terminate, it simply entitles that party to sue for damages

PART 7 : WARRANTIES JCT suite of contracts also include Contracts (Rights of Third Parties) Act 1999 but parties need to be identified in Contract Particulars NEC 3 suite of contracts also include Contracts (Rights of Third Parties) Act 1999 as an option but parties need to be identified in Contract Data Until this act came into force, it was a rule of English Law that only the two parties to a contract had the right to bring an action to enforce its terms – “Privity of Contract” Check amendments

Options Available within the Standard Forms

JCT Suite of Contracts 2005 • • •

With Quantities Without Quantities With Approximate Quantities

•

Common Characteristics:

Design Team responsible for design Architect/Contract Administrator responsible for managing the contract Contractor responsible for completing in accordance with the contract documents Possible for discrete parts to be designed by the contractor Contract documents include Bills of Quantity (if applicable), Drawings, Specifications Payments issued at intervals not exceeding one month intervals

Options Available within the Standard Forms

JCT Suite of Contracts 2005 (cont’d) •

JCT Design and Build

•

Characteristics:

Provides ‘single point of responsibility’ for design and construction. The contractor is responsible for completing design and carrying out the construction works No architect/contract administrator. There is provision for a named Employer's Agent There is no clerk of works Contract documents include Employer's Requirements, Contractor's Proposals and a Contract Sum Analysis There is provision for the obtaining of planning permission and other approvals Payment can be at monthly intervals or at the end of agreed stages Alternative provisions exist for payment – either stage payments or value of work executed

Options Available within the Standard Forms JCT Excellence

•

Characteristics:

collaborative behaviour between the various parties

active use of risk management techniques

flexibility in use

complete supply chain management

Differences in Key Clauses – Variations vs Compensation Events

JCT 05






Delay to be notified with quotation

NEC 3

Differences in Key Clauses – Possession and Completion

JCT 05




NEC 3




Differences in Key Clauses – Extension of Time

JCT 05




Differences in Key Clauses – Extension of Time Cont’d

NEC 3

Early warning, unless a Compensation Event

Delay in completion Delay in meeting a key date

Project Manager or Contractor request a meeting to mitigate delay

Compensation Event

Contractor submits quotation for delay Project Manager can revise completion date or key dates

Choosing a Contract Key Considerations for a Project:

Client Involvement

Design Management

Capacity for Variations

Complexity

Speed

Clarity of Remedies

Default

Delay

Quality Failure

FIDIC – an Introduction

June 2010

“Fédération Internationale des Ingénieurs Conseils”

(International Federation of Consulting Engineers)

FIDIC Forms - the ‘Rainbow’ Suite ■ Red

- Construction

■ Orange

- Design & Build/Turnkey

■ Yellow

- Design & Build

■ Silver

- EPC Turnkey

■ Gold

- DBO Contract

■ Green

- Minor Works - ‘mini-Red Book’

■ White

- Professional Services Contract

■ Blue

- Dredging and Reclamation

■ Pink

- MDB Harmonised Red Book

Choice of Form

Risk transfer to Contractor Certainty of outturn price

Silver

Yellow Green Red/

Low value simple works

Pink

0%

Extent of design by Contractor

100%

Red Book

Red Book, First Edition 1999:

– Supersedes previous editions from 1957 – Based on UK ACE/ICE forms – Construct Only with provision for CDP – Assumes the Contract Administrator is the designer

What does it contain? ■ Contract Agreement ■ General Conditions ■ Particular Conditions ■ Appendix to Tender ■ DAB Agreement ■ Example Proformas ■ Guidance Notes

Principal Parties: ■ Employer

■ Engineer

■ Contractor

Other Parties ■ Designers

■ Supervisor (in certain European Jurisdictions)

■ Dispute Adjudication Board (DAB)

Typical Organisation

Employer

Project Board

PM/Contract Administrator (‘Engineer’)

Cost Admin.

Design

Construction

Supervision

Galleria Riga – Procurement (Deal Map – FIDIC Red) Lenders (Nordea)

M&E Design

Developer SIA Patollo

Tenants (TBC) Construction Supervisor (Jurevics un Partneri)

PM/CA E C Harris LLP

Fit Out Contractors

(Idom) Architect Sarma &Norde

Structural Eng BKB

Contractor (SIA Re & Re)

Subcontractors

Dispute Adjudication Board

KEY Principal document Function Payment

Employer ■ Gives the Contractor possession of the Site ■ Empowers the Engineer ■ Ensures performance of Employers Personnel ■ Assists with Permits ■ Confirms Variation requirements to the Engineer ■ Pays the Contractor per the Engineer’s Certificates

The Engineer Directs and manages the Contractor by:

■ Providing Information ■ Issuing Instructions ■ Approving Quality of the Works ■ Certifying Payments to be made by the Employer ■ Making Determinations where required

The Contractor ■ Carries out and completes the Works in accordance with the Contract and Instructions of the Engineer.

Supervisor ■ Statutory Powers per local legislation ■ No direct contractual relationship with Engineer ■ Able to override Engineer’s authority ■ FIDIC only recognises Engineer

Engineer/Designer Interface 1.9:

Delayed Drawings or Instructions

3.3:

Instructions of the Engineer

4.1:

Design discrepancies advised by Contractor

4.9:

Quality Assurance

7.2:

Samples – Engineer’s consent

13.2:

Value Engineering

Engineer/PQS Interface (where applicable)

12: Measurement and Evaluation

13: Variations and Adjustments

14: Contract Price and Payment

Engineer/Supervisor Interface (if applicable)

4.1: Supervisor’s Instructions

7.4: Testing

9.1: Tests on Completion

Determinations: Sub clause 3.5: “Whenever these Conditions provide that the Engineer shall proceed in accordance with this Sub-Clause 3.5 to agree or determine any matter, the Engineer shall consult with each Party in an endeavour to reach agreement. If agreement is not achieved, the Engineer shall make a fair determination in accordance with the Contract, taking due regard of all relevant circumstances. The Engineer shall give notice to both Parties of each agreement or determination, with supporting particulars. Each Party shall give effect to each agreement or determination unless and until revised under Clause 20 [Claims, Disputes and Arbitration].”

Determinations only apply to Sub-Clauses: 1.9:

Delayed Drawings/Instructions

10.2:

Taking Over of Parts

2.1:

Delayed Access to Site

10.3:

Interference with Tests

2.5:

Employers Claims

11.4:

Failure to remedy defects

4.7:

Setting Out

11.8:

Cost of search for defects

4.12:

Unforseeable Conditions

13.2:

Value Engineering

4.19:

Elect/Water/Gas used

13.7:

Changes in legislation

4.20:

Use of Employer’s Equip’t

15.3:

Valuation at Termination

4.24:

Fossils

16.1:

Post Suspension entitlement

7.4:

Testing

17.4:

Employers Risks

8.9:

Consequences of suspension

19.4:

Force Majeure

9.4:

Test failure

20.1:

Contractors Claims

Management of Differences/Disputes Four levels:

1. Informal

2. Engineers Determination

3. Dispute Adjudication Board (or Statutory Adjudication in UK)

4. Arbitration (default), or Courts

Informal: ■ Negotiation

■ Mini –Trial

■ Conciliation

■ Mediation (first stage of Engineer’s Determination)

Engineer’s Determination ■ Initially acts as mediator…failing which;

■ Engineer receives submissions from both parties;

■ Engineer’s decision valid only by consent – otherwise refer to DAB

Dispute Adjudication Board (DAB) ■ One or three members

■ DAB Decision temporarily binding

Arbitration ■ Final Determination – Tribunal Award is registrable.

■ Can take place in another country

■ One or Three Member Tribunal

■ ICC Rules as default

Challenges when using FIDIC ■ Intended to be a contract for expatriate use – Language? – Applicable law? – Dispute between international participants?

■ Arrangements between Supervisor and Engineer ■ Can the Engineer be impartial when making Determinations? ■ Can ECH fulfil (all of) the duties of Engineer?

Contract Terms and Conditions Expert Presentation

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