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The Case for Standard Forms of Construction Contract

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A public lecture presentation on 8 July 2016 by Tom Joseph Mukasa, (sponsored by the Institution of Surveyors of Uganda) at Kyambogo University, Kampala - Uganda.

The Case for Standard Forms of Construction Contract

  1. 1. THE CASE FOR STANDARD FORMS OF CONSTRUCTION CONTRACT The Institution of Surveyors of Uganda (ISU) THEME: Construction Law and Standard Forms of Contract Presented to the Association of Student Surveyors Kyambogo University, by Tom Joseph MUKASA BSc, MSc, MRICS, ICIOB, AISU ISU QS Chapter Chairman 2016, with reference to Guidance Notes from Heriot-Watt University, Institution of Surveyors of Uganda and Royal Institution of Chartered Surveyors
  2. 2. Learning Outcomes 1. Understand contract principles and the operation of standard forms of construction contract. 2. Compare and contrast the commonly available suites of standard forms of construction contracts. 3. Raise awareness of common features of construction contracts. 4. Understand the basic organisational and personal roles commonly found in standard form construction contracts. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  3. 3. Presentation Outline 1. Character of the Construction Industry 2. Reasons for business failure of construction contractors 3. Construction Law 4. What is a contract? 5. Essential elements of a contract 6. Why use contracts in construction? 7. Characteristics of construction contracts 8. Contractual structures under conventional procurement systems 9. Principles of standard forms of construction contract 10. Publishing bodies for standard form construction contracts 11. The JCT suite 12. The NEC3 suite 13. The FIDIC suite 14. Common construction contract provisions 15. Amending a standard form construction contract 16. Final thoughts The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  4. 4. 1. Character of the Construction Industry  Unique, complex, fragmented  An important contributor to the wealth of nations  Imperfect market – lags behind movements in the broader economy  Often client-led, with large number of suppliers & stakeholders  Investment-led and often vulnerable to economic influences  Minority of construction firms carry out the majority of the work load  Large number of stakeholders, with challenges in process control and improvements The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  5. 5. 2. Reasons for Business Failure of Construction Contractors  Low working capital requirement, often negative  Working capital is the capital available for conducting the day-to- day operations of an organisation; normally the excess of current assets over current liabilities.  Working capital management is the management of all aspects of both current assets and current liabilities, to minimise the risk of insolvency while maximising the return on assets.  The main objective of working capital management is to get the balance of current assets and current liabilities right.  Working capital management is a key factor in an organisation's long-term success. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  6. 6. 2. Reasons for Business Failure of Construction Contractors – Cont’d  Low working capital requirement, often negative  Contractors are usually paid before paying suppliers and subcontractors.  Retention is offset by the retention held against subcontractors.  Practices such as front-end loading and over-measurement enable contractors to operate using a very small or even negative working capital.  This leads to: The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  7. 7. 2. Reasons for Business Failure of Construction Contractors – Cont’d  Low working capital requirement, often negative  This leads to:  Difficulties in raising long term capital, which leads to:  Liquidity problems  High sensitivity to cash flow fluctuations, and  Too much reliance on short term credit facilities (e.g., overdrafts).  Unplanned expansion, which leads to:  Shortage of management resources  Shortage of operational resources.  Ease of entry, which leads to:  High competition which leads to tendering at low prices and reduction in the share of the market; and  Inexperienced management. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  8. 8. Catch-22?! The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  9. 9. 3. Construction Law  Construction law refers to many different areas of law as they apply to the special context of the construction industry. It is not a discrete area of the law, but an area of legal practice.  The core of construction law is the law of contracts. The negotiation and conclusion of construction contracts is a key component of construction law practice.  Other areas of importance include:  Bonds, insurance, guarantees and sureties  Construction financing and procurement  Dispute resolution  Real estate transactions  Planning legislation and regulations  Environmental law and regulations The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  10. 10. 4. What is a Contract?  “A legally binding agreement made between two or more parties, by which rights are acquired by one or more to acts or forbearances on the part of the other or others” Sir William Anson, in Ashworth, 2006.  “A legally enforceable agreement which gives rise to various rights and obligations for the parties to the contract” RICS, 2014.  It is therefore a promise or set of promises which the law will enforce.  The normal method of enforcement is an action for damages for breach of contract, although in some cases the court may order performance by the party in default.  Freely entered into on terms that are freely registered.  It establishes rights and obligations of the parties and procedures for administration. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  11. 11. 5. Essential Elements required to create a contract  Agreement (offer & acceptance)  One party makes the offer, another party accepts the offer and both achieve consensus ad idem (meeting of the minds).  Consideration  Both parties must have provided consideration (each side must promise to give or do something for the other).  You can’t get something for nothing.  Capacity  The parties must be legally capable of entering into a contract.  Intention to create legal relations  The parties must have intended their agreement to have legal consequences.  The law will not concern itself with purely domestic or social agreements.  Absence of vitiating factors  Which will invalidate the contract, e.g. duress or undue influence, mistake, misrepresentation, illegality. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  12. 12. 5. Essential Elements required to create a contract Contract Capacity Consideration Agreement Offer Acceptance Intention No vitiating factors (Duress, Undue influence, Mistake, Misrepresentation, Illegality The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  13. 13. 5. Essential Elements required to create a contract  Agreement and the Battle of the Forms  A battle of the forms arises when two parties wish to enter a contract but each tries to incorporate their own standard terms and conditions.  More likely to occur in a contractor/ sub-contractor or contractor/ supplier relationship rather than an employer/ contractor relationship.  In trying to work out which party’s terms and conditions apply, courts will often look to see ‘who fired the last shot’, but every case will depend on its particular facts and the correspondence between the parties.  For example, company A sends an e-mail to company B requesting the supply of 100 mortise locks and enclose a copy of their standard terms and conditions for the purchase of the mortise locks. Company B accepts the order and sends back the e-mail saying “Thank you for your order of 100 mortise locks. We have accepted your order pursuant to our standard terms and conditions and will deliver in one week.”  Company A then simply replies with payment of the agreed price and makes no further reference to terms and conditions.  In this scenario, it will be company B’s terms and conditions that are incorporated into the contract. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  14. 14. A little break The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  15. 15. 6. Why use contracts in construction?  To describe the scope of work  To establish the time frame  To establish cost and payment provisions  To set forth obligations and relations between parties  To minimise disputes  To improve economic return on investment. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  16. 16. 7. Characteristics of Construction Contracts  Construction contracts have unique characteristics, which distinguish them from other businesses. These characteristics make the contracting business risky, difficult to manage and vulnerable to bankruptcy.  Each contract is large compared to total turnover.  There is the need to price before production.  Contracts involve many variations and uncertainty. This can lead to claims, disputes and litigation.  It is difficult to measure profit of work in progress. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  17. 17. 8. Contractual Structures (conventional procurement systems) Employer Architect QS Structural Engineer M & E Main Contractor Sub- contractors The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU) A. TRADITIONAL (Lump Sum/ Re-measurement) Characterised by separation of responsibility for design and the production/ construction of the project. For this method to be truly effective, full documentation (including the design) ideally needs to be in place before the contractor can be invited to tender for carrying out the work.
  18. 18. 8. Contractual Structures (conventional procurement systems) The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU) A. TRADITIONAL (Lump Sum/ Re-measurement) Advantages Disadvantages Familiarity among contractors & consultants – roles & responsibilities are well understood; To be effective, the scheme should be more fully designed before tenders are sought – often resulting in in extended pre-tender period; Client retains responsibility for and control of design team; The fragmented design and construction process and responsibility can lead to disputes, e.g. whether construction defects are design defects or construction defects; Direct reporting by the design team to the client ensures that quality control is maintained; Potential for over-design and/or over-engineering; Client has an independent professional in the role of contract administrator monitoring the project; The contractor is not involved in the design process and therefore is not required to ‘buy in’ to the design; Certainty of price (if the work is fully designed in advance); The client retains responsibility for the design team performance; Priced Bills of Quantities provide a basis for variations to be priced at tendered rates; A fixed lump sum price is rarely actually achievable; As all prices are based on the same information: - there is no need for a contractor to build in a risk premium; - it is easier to analyse the prices; - the lowest price is usually (but not always) the best value for money; and - provisional sums may be used to allow for later design where some elements are not fully designed. A contractor may price work to win the job rather than providing a price that properly reflects the work to be carried out – encouraging a claims culture if the submitted price was too low because of market forces. The use of provisional sums and the power of the CA/E/PM to issue instructions for additional or varied work can lead to price escalation.
  19. 19. 8. Contractual Structures (conventional procurement systems) Employer D & B Contractor Architect Sub- consultants QS Structural Engineer M & E Sub- contractors Employer’s Agent The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU) B. DESIGN & BUILD Contractor takes responsibility for both the design and the production/ construction of a project.
  20. 20. 8. Contractual Structures (conventional procurement systems) The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU) B. DESIGN & BUILD Advantages Disadvantages Speed of delivery from concept to completed building, as it allows work to begin on site before the design is fully complete; Initial price is usually higher as contractors tend to build ‘risk premiums’ in their offers; Single point responsibility and liability against the contractor and consequently less likelihood of claims; Post-contract variations can be more expensive and it is often more difficult to monitor the additional charges raised (esp. where works are priced on the basis of specifications and drawings); Acceptance (‘buy-in’) of design by the contractor and their supply chain, therefore design more likely to be buildable; Client has less control and influence over design matters; Novation of design, allowing earlier design solutions and the design team to continue with the contractor; Inflexibility: there is only limited scope for clients to make changes to their requirements, otherwise the cost consequences may be prohibitive. Client may eventually receive a design he does not want/ did not anticipate. Cost certainty, provided the client does not continually change the brief; Potential for conflict between the client’s requirements and the contractor’s proposals, unless both documents are carefully checked; Lower management and/or consultants’ costs for the client; Potential for dual loyalties of a novated design team, and complex legal issues. Ref. Blyth & Blyth v Carillion – [2001] CILL 1789 – challenges to secure claims against novated consultants; Unless a contract states otherwise, the law implies a duty of fitness for purpose on a D & B contractor. However, the contractor’s design obligation is often limited to a duty of reasonable skill and care since most professional indemnity insurance policies do not cover for a fitness for purpose obligation.
  21. 21. 8. Contractual Structures (conventional procurement systems) Employer Architect QS Structural Engineer M & E Construction Manager Trade Contractors The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU) C. CONSTRUCTION MANAGEMENT Employer engages the design team and a separate construction manager who earns a fee to manage, programme and co-ordinate the design and construction activities, and to facilitate collaboration.
  22. 22. 8. Contractual Structures (conventional procurement systems) The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU) C. CONSTRUCTION MANAGEMENT Advantages Disadvantages Client is more in control of the process through employment of the construction manager and the direct contracts with the trade contractors – results in better cost and budgetary control, and higher degree of control due to separate trade packages; The project needs to be sufficiently large or complex to be cost effective; A fully integrated design and construction process; The process requires the client to have mechanisms for entering into direct contracts with trade contractors and for making monthly payments to many individual contractors; The construction manager acts on the client’s behalf whereas a traditional contractor primarily acts in its own interests; The client needs to have the necessary experience and internal management ability to operate this procurement process; The process is very flexible, therefore changes to suit the client’s requirements are relatively easy to accommodate; The client retains the contract risk of non-performance of the trade contractors; There is reduced potential for claims. The client retains responsibility for the design team performance.
  23. 23. 8. Contractual Structures (conventional procurement systems) Employer Architect QS Structural Engineer M & E Management Contractor Works Contractors The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU) D. MANAGEMENT CONTRACTING Employer engages a management contractor to participate in the project at an early stage, contribute construction expertise to the design, and manage the construction of the project. The management contractor does not carry out any construction work, but manages the project for a fee paid on top of the construction costs incurred by the management contractor.
  24. 24. 8. Contractual Structures (conventional procurement systems) The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU) D. MANAGEMENT CONTRACTING Advantages Disadvantages Beneficial for fast-track complex projects where minimal design information is available at the start of the project; Low risk strategy for the management contractor as they have little responsibility for package/ works contractor defaults, bankruptcy, etc.; Allows for early ‘buildability’ and programming input from the management contractor acting as a consultant; Although guaranteed maximum price can be achieved, the process is still fundamentally prime cost in its nature – with no incentive to devise economical solutions; A single point contractual and payment arrangement for the client with the management contractor; Cost increases can be substantial, and there is often a tendency for the initial cost plan to be adjusted upwards. Preliminaries and management fee can be fixed, therefore allowing for a degree of certainty on price; Quality can be controlled by the design team; There is great scope for client changes. Please note that the management contractor is not liable for the consequences of any default by a works contractor so long as the management contractor has complied with the particular requirements of the management contract.
  25. 25. 8. Contractual Structures (conventional procurement systems)  Others  Public Private partnerships (PPP)  Private Finance Initiatives (PFI)  Cost plus/ cost reimbursable/ prime cost  Target cost  Framework agreements, Term contracts, Call-off orders  Turnkey  Alliancing, Partnering  EPC contracts The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  26. 26. A little break The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  27. 27. 9. Principles of standard forms of construction contract  The construction industry has an extensive portfolio of standard contracts to structure the relationships between organisations and implement the employer’s chosen procurement route.  These standard contracts have been authored over many years to incorporate lessons learnt from the industry’s history of litigation so that problems are not repeated.  It is therefore common practice for the construction contract between the employer and the contractor to be based on a ‘standard form construction contract’.  Standard forms have established appropriate and effective ways to manage organisational relationships, risk, processes, and construction documentation.  Because these matters arise in all construction projects, all contract forms address the same issues, but do so differently according to the principles of the employer’s chosen procurement route. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  28. 28. 9. Principles of standard forms of construction contract – Cont’d  The term “form of contract” refers to a pre-authored standard contract.  When considered together, all the standard particulars, clauses, appendices, and so forth in the standard contract are intended to create a pre-defined legal relationship between two parties, in which each other’s rights, responsibilities and liabilities are familiar and understood beforehand.  They are called “forms” of contract because everyone knows what is in them and how they should be used on a project.  Contractual difficulties can be largely avoided by ensuring that the correct standard form is used and that it is followed when activity starts on site.  Standard contracts are a default solution which is taken “off the shelf” and applied to the project. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  29. 29. 9. Principles of standard forms of construction contract – Cont’d  Although it is advisable not to amend standard forms, they are frequently amended by employers (by deleting certain clauses and adding new clauses that are designed for specific requirements an employer may have). The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  30. 30. A little break The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  31. 31. 10. Publishing Bodies and Standard Forms of Contract families/ suites  The Joint Contracts Tribunal (JCT) – United Kingdom  The New Engineering Contract (NEC) – Institution of Civil Engineers, UK  GC/Works – UK Government  FIDIC – International Federation of Consulting Engineers  ACA – Association of Consultant Architects  IChemE – Institution of Chemical Engineers The suites have generally emerged for historical reasons and tend to provide contract forms intened for use on a particular type of construction work or to reflect a particular working philosophy. All contract forms are continually updated to respond to the evolving needs of the construction industry. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  32. 32. 10. Publishing Bodies and Standard Forms of Contract families/ suites This presentation reviews three suites of contracts from which a form capable of structuring the relationship between the employer and the main contractor will be studied in each.  The JCT suite – widely used on building projects in the UK.  The NEC3 suite – used in the UK and internationally and is growing in popularity because it represents a new, more collaborative management philosophy.  The FIDIC suite – widely used internationally and on infrastructure projects. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  33. 33. 11. The JCT suite  Established in 1931  Members include:  The Royal Institute of British Architects, RIBA  The Royal Institution of Chartered Surveyors, RICS  The Association of Consulting Engineers, ACE  The British Property Federation, BPF (representing clients)  The Local Government Association  The Contractors Legal Group Limited  The National Specialist Contractors’ Council Limited, and  The Scottish Building Contract Committee Limited  In addition, the JCT also currently has five ‘colleges’:  Employers, clients and local authorities  Consultants  Contractors  Specialists and sub-contractors, and  The Scottish Building Industry  It is through these colleges that new forms of contract and amendments to existing contracts are produced.  The JCT has a consensus based approach, which means that the views and interests of all these groups are taken into account when producing and amending contracts. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  34. 34. 11. The JCT suite – Cont’d  Originally based on the premise that trust between collaborating organisations is low and every aspect of their working relationship must be prescribed by the contract.  However, with the growth in genuinely collaborative attitudes and development of alternative suites in the construction industry (e.g. NEC3), there have been substantial revisions in the current JCT forms (2011), with the following goals:  Substantial simplification of the language used  Changes in key terminology for simplification: e.g. “liquidated and ascertained damages” became “liquidated damages”; “defects liability period” became “rectification period”  Simplification and consistency of the structure of the forms across the suite  Extensive rationalisation of the quantity of clauses and their numbering system, to aid reference and citation  Abolition of nominated subcontractors and nominated suppliers  Creation of listed subcontractors  JCT contracts are generally regarded as being fair and evenly balanced between the parties.  As with all standard forms of contracts, JCT contracts are intended to be read as a whole and amendments are to be avoided as these can produce unintended results when construed (interpreted) at law (during litigation or arbitration) The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  35. 35. 11. The JCT suite – Cont’d  The Contractual suites produced by the JCT in 2011:  The Standard Building Contract, SBC  Regarded as an industry standard against which all others are measured, with 3 versions:  The Standard Building Contract with Quantities (SBC/Q)  The Standard Building Contract without Quantities (SBC/XQ); and  The Standard Building Contract with Approximate Quantities (SBC/AQ)  The Minor Works Building Contract, MW  Designed for use with the traditional procurement route on smaller, lower value, more basic construction projects where the work involved is simple in character.  The Design and Build Contract, DB – not a focus of this presentation  Major Project Construction Contract, MP  For large scale Design & Build procurements, also not a focus of this presentation.  Management Building contracts – not a focus of this presentation  Construction Management contracts – not a focus of this presentation  Measured Term Contract – not a focus of this presentation  Prime Cost Building Contract – not a focus of this presentation  Framework Agreement – not a focus of this presentation  Repair and Maintenance Contract – not a focus of this presentation  Home Owner contracts – not a focus of this presentation The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  36. 36. 12. The NEC3 suite  The NEC is a division of Thomas Telford Limited, a subsidiary of the Institution of Civil Engineers (ICE), the owner and developer of the suite of New Engineering Contracts (NEC), intended to:  Stimulate good management of the relationship between the two parties to the contract and of the work included in the contract  E.g. in each NEC contract there is an obligation on the parties to ‘act in a spirit of mutual trust and co- operation’;  Be used in wide variety of commercial situations, for a wide variety of types of work and in any location;  Be clear and simple documents, using language and a structure which are straightforward and easily understood;  Be used for global application and are being adopted for many multi-disciplinary projects by clients in nearly 20 countries, e.g. Australia, New Zealand and South Africa.  The NEC suite of contracts have been endorsed for use in the public sector in the UK by the Office of Government Commerce (OGC). The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  37. 37. 12. The NEC3 suite – cont’d  1st Edition, 1993; 2nd Edition (NEC2), 1995 & 3rd Edition (NEC3), 2005. Latest version of NEC3, published 2013.  The style of NEC3 contracts is noticeably different from most other standard form contracts:  Relatively short  Less text, short sentences  Written in present tense  No cross referencing between clauses  The intention is for everybody in the construction industry to be able to understand and use these contracts, not just lawyers.  Structured in modular format, with different contract options being selected to suit the needs of the particular project.  Each contract contains a set of core clauses that always apply, supplemented by a series of main options (relating to payment), dispute resolution options and secondary options (e.g. relating to delay damages, bonds and guarantees) The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  38. 38. 12. The NEC3 suite – cont’d  The philosophy of the NEC3 contracts is also quite different from other mainstream contracts:  Focus is on good project management  Emphasis on  communications,  programming,  cooperation between the parties,  the early identification of matters which may prejudice successful outcomes (Early Warning)  the early resolution of contractor’s claims (Compensation Events) based on forecast effect rather than a retrospective examination of what actually happened.  Dealing with matters on a projected basis means there is no final account type process of the kind in other forms.  However, since issues have to be handled and resolved on a real-time basis, the administration of NEC3 contracts is time-consuming, in particular the programming and compensation event provisions, which may make NEC3 contracts less appropriate for small projects. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  39. 39. 12. The NEC3 suite – cont’d  The contracts contained in the NEC3 2013 suite are as follows:  Contracts for the procurement of works  NEC3 Engineering and Construction Contract (ECC)  NEC3 Engineering and Construction Short Contract (ECSC)  NEC3 Engineering and Construction Subcontract (ECS)  NEC3 Engineering and Construction Short Subcontract (ECSS)  Each with 9 Core Clauses, dealing with the contractor’s main responsibilities, time, the payment process and Compensation Events;  6 main option clauses, A-F, which allow the employer different ways of pricing the project and different ways of paying the contractor;  Dispute resolution option: W1 or W2  Secondary option clauses: Y(UK)2 or Y(UK)3  Customised clauses as needed: Z  Contracts for the procurement of services – Not for this presentation  Contracts for the supply of goods and services – Not for this presentation. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  40. 40. 12. The NEC3 suite – cont’d The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU) COMPONENTS OF A TYPICAL NEC3 WORKS CONTRACT Core Clauses (All- in) 1 (General); 2(Contractor’s main responsibilities); 3(Time); 4(Testing and Defects); 5(Payment); 6(Compensation events); 7(Title); 8(Risks and insurance); 9(Termination) One main option (for payment) A(Lump Sum/ Priced contract with activity schedule); B(Re-measurement/ Priced contract with bills of quantities); C(Target contract based on Lump Sum/ Activity Schedule); D(Target contract with bills of quantities); E(Cost reimbursable contract); and F(Management contract) One dispute resolution option W1(used outside the UK); W2(used in the UK, to incorporate the Construction Act) Secondary options (as needed) X1(Price adjustment for inflation); X2(Changes in 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(Advance payment to the Contractor); X15(Limitation of the Contractor’s liability for his design to reasonable skill and care); X16(Retention); X17(Low performance damages); X18(Limitation of liability); X20(Key Performance Indicators) Location-specific secondary options Y(UK)2-Incorporating the 2009 Construction Act; Y(UK)3-Incorporating Rights of Third Parties Act 1999 Customised clauses (as needed) “Z” clauses are additional, customised conditions of contract that can be included if a particular issue is not addressed by the standard NEC3 ECC clause options, often authored by the Employer to incorporate project-specific terms into the contract. E.g. additional Compensation Events
  41. 41. 13. The FIDIC suite  An abbreviation of ‘Federation Internationale des Ingenieurs- Consils’ (International Federation of Consulting Engineers)  Federation established in 1913  Contract Forms first created in 1956  The most widely used forms of contract internationally, including by the World Bank for its projects.  The FIDIC ‘Rainbow Suite’ of New Contracts was published in 1999 and includes:  The Red Book: Conditions of Contract for Construction for building and Engineering Works Designed by the Employer  Suitable for all projects where main responsibility for design lies with the employer (or its representative, the engineer);  The works may also include some elements of contractor-designed civil, mechanical, electrical and/or construction works;  The work done is measured, and payment is made according to a bill of quantities, although there is an option for payment on a lump sum basis. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  42. 42. 13. The FIDIC suite – cont’d  The FIDIC ‘Rainbow Suite’ of New Contracts was published in 1999 and includes:  The Yellow Book: Conditions of Contract for Plant and Design-Build  Suitable for all types of projects where the main design responsibility lies with the contractor.  In practice, the contractor’s designs follow the employer’s requirements.  For that reason, the testing procedures are usually more complicated than those in the Red Book.  Payment is made on a lump sum basis, usually against a schedule of payments.  The Silver Book: Conditions of Contract for Engineering, Procurement & Construction (EPC)/ Turnkey Projects  The Green Book: Conditions of Short Form of Contract  The Blue Book: Contract for Dredging and Reclamation Works  The Pink Book: Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer (for bank-financed projects only)  A new version of the FIDIC Red Book called the ‘MDB Harmonised Edition’.  Originally published in 2005, latest revised edition June 2010.  To be used on projects funded by participating Multilateral Development Banks (MDB), such as the World Bank.  The Gold Book: FIDIC Design, Build and Operate Projects, 2008  The White Book: Client/ Consultant Model Services Agreement The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  43. 43. 13. The FIDIC suite – cont’d  The FIDIC “Red Book” Contract:  Structures the relationship of the client and contractor under the traditional procurement route.  The underlying premise is that the employer and contractor have not worked together before and cannot, therefore, expect any trust to be present between them.  Seeks to define exactly what the contractor and employer must do in every project eventuality.  Comprised of 20 “General Conditions” which provide the procedures by which the project will be run. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  44. 44. 13. The FIDIC suite – cont’d The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU) FIDIC RED BOOK GENERAL CONDITIONS 1 General Provisions Provides all the basic definitions of people, documents, etc. on which all other clauses rely 2 The Employer Establishes the Employer’s basic rights and responsibilities, key of which is the fundamental obligation to pay the Contractor for the Works. 3 The Engineer Defines some of the risks to which the Employer is exposed by defining the Engineer’s (who is appointed by the Employer) responsibilities on the project. 4 The Contractor Defines all the basic risks to which the Contractor is exposed by defining all the aspects of the project for which it is responsible. 5 Nominated subcontractors Allows the Employer to oblige the Contractor to employ the Employer’s choice of subcontractors for some aspects of the Works, making the Employer, rather than the Contractor, liable for their performance. 6 Staff and Labour Defines the people that the Contractor must have present on the site and the working conditions that must be created by temporary accommodation, compliance with local legislation, etc. 7 Plant, Materials and Workmanship Allows the Contractor to be paid for certain identified Plant and Materials during their manufacture off-site, prior to delivery for installation and commissioning. Also gives the Employer the right to reject work which has not been done sufficiently well.
  45. 45. 13. The FIDIC suite – cont’d The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU) FIDIC RED BOOK GENERAL CONDITIONS 8 Commencement, Delays and Suspension Places obligations on the Employer to give the site to the Contractor when agreed. Also allows the Contractor to ask for additional time to complete the Works if specific situations arise. Furthermore, allows the Contractor to suspend the Works if it has not been paid. 9 Tests on Completion Defines how the Contractor must prove that the completed Works will function as required by the contract documents before the Employer will accept them. 10 Employer’s Taking Over Defines the process the Employer must follow to take possession of the completed Works, with particular emphasis placed on the transfer of insurance and other liabilities associated with occupation of the site/ Works. 11 Defects Liability Places obligations on the Contractor to defects that occur during, and for a short while after, the Works. 12 Measurement and Evaluation Provides ways of determining how much should be paid for the partially completed Works, taking the extent to which they have been completed, and any changes that the Employer may have made to their definition, into account. 13 Variations and Adjustments Provides methods that the Employer can use to change the definition of the Works to be completed. It also provides methods by which the Contractor can propose changes that it considered to be better and methods by which the cost of the changes can be calculated. 14 Contract Price and Payment Structures the interim payment process on which the project relies to allow the Contractor to be paid for the Works during their construction.
  46. 46. 13. The FIDIC suite – cont’d The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU) FIDIC RED BOOK GENERAL CONDITIONS 15 Termination by Employer Provides the processes by which the Employer can sack the Contractor if the Contractor fails to meet its obligations under the contract. 16 Termination and Suspension by Contractor Allows the Contractor to temporarily suspend the Works if it is asked to or has not been paid. It also lets the Contractor end (terminate) its employment by the Employer if it continues to not be paid. 17 Risk and Responsibility Defines the extent to which the Contractor must protect the Employer (and its agents) from legal consequences of risks arising out of the Contractor’s work on the project. 18 Insurance Provides the mechanisms by which the Employer and/or the Contractor must take out insurance to protect the Works, the public, each other, etc., as agreed when executing the contract. 19 Force Majeure Obliges the Contractor and Employer to notify each other if either becomes aware of a “force majeure” event that is hindering the work. It defines what situations can be defined in this way and how their impact on time and cost is to be resolved. 20 Claims, Disputes and Arbitration Places certain obligations on the Contractor regarding the manner by which any claims for additional payment have to be documented and submitted. If these claims can not be agreed and settled amicably, the clause also establishes the dispute resolution procedures available to the Contractor and Employer.
  47. 47. 13. The FIDIC suite – cont’d The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU) FIDIC RED BOOK GENERAL CONDITIONS A Appendices Provide additional contract administration processes to address specific aspects of the project, too detailed to be addressed in the main form. B Particular Conditions Comprise all the project-specific information that (mainly) the Employer and (sometimes) the Contractor have provided. They provide the parameters of the contract so that the standard form can be applied to the project. They contain factual information that describes the project such as location, the legal identities of the organisations involved, etc. They document all of the decisions that the Employer has made prior to executing the contract, such as retention rate, to be deducted, the rate of liquidated damages, the dispute resolution methods available, etc. Usually provided a series of blank spaces with cross-references to the relevant clauses into which the project parameters are entered. They should be the only part of the standard form of contract that should be modified (by providing information and making decisions). C Annexes The Red book provides several profomas for providing of notices, issues of certificates, etc. as required by the Conditions, at the rear of the contract form.
  48. 48. A little break The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  49. 49. 14. Common Construction Contract Provisions  The structure of the forms of contract  There is a trend in the latest versions of most forms of contract towards clear wording and simpler organisation.  However, contracts and their associated documents, must be rigorously applied to ensure the integrity of the intended legal relationship between parties.  They exhibit essential core features.  They define a series of roles that must be performed to successfully deliver a project.  Although every suite of contract is written in a different style of working, and therefore the nature of relationships differ, they share common provisions which are required by the nature of construction site activity. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  50. 50. 14. Common Construction Contract Provisions – cont’d The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU) ALLOCATION OF PROJECT ROLES IN CONSTRUCTION CONTRACT SUITES ROLE NEC3 ECC JCT SBC/Q FIDIC Red Book 1. Design of the works Employer’s design team Employer’s design team Employer’s design team 2. Payment for the works Employer Employer Employer 3. Control of the works Project Manager Contract Administrator Engineer 4. Controlling time Project Manager Contract Administrator Engineer 5. Valuation of works Project Manager Quantity Surveyor Engineer
  51. 51. 14. Common Construction Contract Provisions – cont’d The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU) ALLOCATION OF PROJECT ROLES IN CONSTRUCTION CONTRACT SUITES – cont’d ROLE NEC3 ECC JCT SBC/Q FIDIC Red Book 6. Change of the works Employer requests change; Project Manager instructs changes; Contractor quotes for changes; Project Manager assesses changes Employer requests Variations; Contract Administrator instructs Variations; Quantity Surveyor ascertains Variations Employer requests Variations; Contractor makes value engineering proposals; Engineer instructs Variations; Engineer evaluates Variations
  52. 52. 14. Common Construction Contract Provisions – cont’d The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU) ALLOCATION OF PROJECT ROLES IN CONSTRUCTION CONTRACT SUITES – cont’d ROLE NEC3 ECC JCT SBC/Q FIDIC Red Book 7. Constructing the works Contractor + Subcontractors Contractor + Subcontractors Contractor + Nominated Subcontractors + Subcontractors 8. Quality of works Supervisor Clerk of Works Engineer 9. Settlement of disputes Adjudicator tribunal Adjudicator or Arbitrator (if agreed) Dispute Adjudication Board or Arbitrator
  53. 53. 14. Common Construction Contract Provisions – cont’d  The contract documents  Define the subject of the agreement between the parties  Describe the work to be done  The nature of the information contained in the documents varies  JCT Standard Building Contract ‘with Quantities’  The Articles of Agreement (comprising the Recitals, Articles and Contract Particulars)  The Conditions of Contract  The Contract Drawings  The Contract Bills; and  (where applicable) the Employer’s Requirements, Contractor’s Proposals and CDP analysis  NEC3 Engineering & Construction Contract  The Contract Agreement  The Contract Data  The Conditions of Contract  The Contract Drawings  The Contract Bills; and  (where applicable) the Employer’s Requirements, Contractor’s Proposals and CDP analysis The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  54. 54. 14. Common Construction Contract Provisions – cont’d  The contract sum  A fundamental issue in the procurement of a project is how much a party contracted to provide it will charge for its construction.  With lump sum payments method  A contract sum is defined at the project outset  Defines how the payment of this sum to the contractor in stages is to be organised  Defines methods for changing this sum as unforeseen circumstances may arise  The client’s (employer’s) obligations  The client accepts certain responsibilities when agreeing a construction contract.  To pay the contractor for the work that has been completed  To compensate the contractor for any additional loss or expense caused by the client’s actions (or inactions)  Usually, the client employs a third party to act as their legal agent (i.e. with legal rights to make decisions on the client’s behalf)  Title varies between contracts (Architect/CA, PM, Engineer)  Directs contractor in the completion of the works.  Ensures contractor is constructing in accordance with the contract documents & takes action if contractor performs otherwise. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  55. 55. 14. Common Construction Contract Provisions – cont’d  Contractor’s obligations  The contractor has a fundamental obligation to construct the work in accordance with the drawings and specifications, in reasonable time, and with regard to:  Workmanship  Quality of materials  Coordination  Management of the site; and  Provision of insurances and bonds.  Staged payments  The nature of construction (high costs & long periods to completion), makes it impractical to pay for buildings or infrastructure only upon completion.  Instead, construction projects require the Employer to pay the Contractor (who will then pay its subcontractors and suppliers) regularly as the work progresses on site.  Such payments may relate to stages of pre-agreed programme milestones or be made at regular intervals (typically monthly) to reflect the proportion of the work completed in each interval.  The contractor will be paid for the amount of work completed up until that date. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  56. 56. 14. Common Construction Contract Provisions – cont’d  Duration of the works and extensions of time  All construction projects tend to encounter inadequacies in their contract documentation, such as :  Missing, conflicting or inadequate information  Tendency to slow the Contractor down or  Prevent the Contractor from progress altogether  Work can also be slowed down by unexpected conditions on site, such as:  Buried antiquities  Exceptionally inclement weather  Construction contracts ought to define what should be done by the parties in such situations.  If the slow-downs or stops in progression of the works were not the Contractor’s fault, then it is unreasonable to expect the Contractor to complete by the originally agreed date.  Construction contracts therefore define situations in which the time available to complete the works can be varied.  And if time can be held to be undefined (i.e. “not of the essence”), the Contractor may argue that it has a “reasonable” time to complete the works and it will not have to pay any damages to the Employer to compensate for late delivery. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  57. 57. 14. Common Construction Contract Provisions – cont’d  Changing the definition of the works  Most construction clients often change their requirements during the construction of a project.  This is expensive to implement  Redesign and potentially re-work will be required  The situation often arises as a consequence of a change in the client’s expectations or business context.  They can also be initiated by the client’s interactions with the building or infrastructure as it takes physical form on site.  Construction contracts accordingly provide processes to communicate, cost, argue and implement these changes. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  58. 58. 14. Common Construction Contract Provisions – cont’d  The issuing of certificates  The construction of buildings and infrastructure is a complex process which is not well understood by most clients.  Hence the need for a third party expert (Architect, CA, PM, Engineer) to observe site activity and make decisions on behalf of the client.  The amounts of the payments to be paid to the Contractor as works progress  Whether or not the works are practically complete  Whether or not defects have been fixed, etc.  Once made, decisions are documented and communicated to others by issuing “certificates”.  Interim Payment Certificates  Practical Completion Certificates  Certificated of Making Good Defects, etc. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  59. 59. 14. Common Construction Contract Provisions – cont’d  Remedies for breach of contract  Breach of contract occurs where one (or both) of the parties fails to perform its obligations under the contract, materially or non-materially.  Remedies available to the innocent party depend upon the materiality of the breach (i.e. degree of seriousness).  A breach of contract could have two consequences:  Payment of damages  Determination (termination) of the contract.  Remedies for non-material breach of contract in common law  Damages by way of compensation  Withholding delivery of goods and services (Retention and lien)  Retaining possession of goods belonging to the party in breach (Retention and lien)  Specific implement (going to the courts to force the party in breach to fulfil their obligations)  Action for payment through the courts.  If damages are sought, their amount should reflect the magnitude of the innocent party’s loss to place them in the same position as if the breach had not occurred.  However, to succeed in claiming damages, the affected party must prove that the loss was actually incurred, and this can be difficult. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  60. 60. 14. Common Construction Contract Provisions – cont’d  Remedies for breach of contract – Liquidated Damages  Where the amount of compensation claimed is to be assessed by the courts of law, the damages claimed are termed ‘un-liquidated’ damages because their monetary amount is not known prior to judgement.  Otherwise, pre-determined amounts payable in a construction contract in the event of a breach are called ‘liquidated’ damages.  They are paid by the Contractor to the Client if the work is not completed by a specified time.  The magnitude of the damages must not be punitive, but should instead represent a genuine amount of loss incurred by the Client as a consequence of the late completion.  The practice of setting liquidated damages at the outset of a delivery date.  The practice also benefits the contractor as it caps its liability to the amount stated in the contract. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  61. 61. 14. Common Construction Contract Provisions – cont’d  Claims and dispute resolution  Claims often arise in construction projects when one party believes that the action or inaction of another party has caused it to incur loss or additional expense.  The contract must define a process for the parties to follow to resolve any claims for loss and/or expense and requests for extension of time.  The goal of this process is to resolve such issues in an equitable manner to prevent the claim from escalating into a dispute.  If a dispute does arise, the contract form will describe which dispute resolution processes must be attempted (e.g. mediation, adjudication, arbitration) and which third party should be brought in to facilitate the process. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  62. 62. 14. Common Construction Contract Provisions – recap The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU) CONTRACT PROVISIONS Contract Documents Contract sum Client obligations Contractor obligations Staged payments Duration & E.O.T Changes Certificates Breach of Contract Claims & Dispute Resolution
  63. 63. A little break The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  64. 64. 15. Amending a standard form construction contract  Standard form construction contracts are generally drafted in a balanced manner, reflecting the views of different parties to a construction project.  The contracts are drafted so that risks are borne by the party best able to manage those risks.  As such, it is entirely possible for parties to use standard form construction contracts on an un-amended basis.  However, it is common within the construction industry to amend the terms and conditions of a standard form construction contract.  These amendments are generally driven by employers.  Amendments to standard form construction contracts should only be drafted by legally qualified professional advisers. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  65. 65. 15. Amending a standard form construction contract – cont’d  Reasons for amending standard form construction contracts.  Altering the risk allocation in a contract  For example, the list of events that entitle the contractor to claim additional time and/or money could be reduced  Lengthening the final date for payments of sums due to the contractor  Placing the risk on the contractor if any adverse site/ ground conditions occur.  Inserting additional obligations  For example, requiring a contractor to provide certain bonds, guarantees and collateral warranties at a particular point in time  Requiring the contractor to keep the employer more informed about the contractor’s programme for the works  Requiring the contractor to comply with any administrative requirements of the employer.  Removing rights  For example, if a contractor is claiming an extension of time and/or payment of additional sums, a contract may be amended so that the contractor loses his right to claim these entitlements if he fails to provide a notice to the employer within a particular time.  Reducing the contractor’s entitlement to object to a proposed variation to the works.  Project-specific requirements  For example, averting a site contamination risk from a neighbouring site  Parties may agree that a particular stage of the works cannot proceed until the employer has the required funding in place. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  66. 66. 15. Amending a standard form construction contract – cont’d  Therefore, the employer and professional advisers need to carefully review the nature of the project and consider if any specific amendments are needed to the chosen contract.  Legal advice should be sought on the best means of effecting any required project- specific amendments to a contract.  Consider both the purpose of a particular amendment and the likely effect that it will have on the contractor and the overall project.  For example, increasing the tender prices due to more risks  How else might the contractors alter their behaviour as a result of taking on more risk?  Does this represent best value for the employer and the project?  Appreciate that the contractual provisions within standard form construction contracts are generally interlinked.  Although there may not be any specific cross-references that highlight areas of connection, if certain parts of a contract are amended then this generally has a knock-on effect elsewhere in the contract.  Therefore there is a need to be aware of these interrelationships so that amendments do not cause conflict or create uncertainty or ambiguity within a contract.  The schedule of amendments must take priority over the general terms and conditions in the underlying contract. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  67. 67. A little break The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  68. 68. 16. FINAL THOUGHTS! 1. Contracts in the Construction Industry:  A legally binding contract does not have to evidenced in writing, but it is good practice to ensure that construction contracts are in writing to prevent argument over the terms of the agreement.  It is common practice in the construction industry to use standard forms of contract, although specially written (bespoke) documents are equally binding.  Professional consultants will primarily concern themselves with two categories of contract: those under which professional services are provided and those under which constriction work is carried out. This presentation has focused on the latter category. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  69. 69. 16. FINAL THOUGHTS! 2. Standard Forms of Construction Contract:  There are many advantages to using a standard form of construction contract.  It will normally be less expensive and generally more convenient to use.  Many have detailed and comprehensive relevant guidance, which is in turn based on authoritative legal opinion, often having been tested in the courts.  Standard printed forms are readily available.  They are generally held to be fair and balanced in the interests of the parties.  Therefore parties are encouraged to use those standard forms without amendment.  Bespoke amendments can easily impair the balance of the forms and the precise meaning of the contract conditions could be a matter of endless argument between lawyers! The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  70. 70. 16. FINAL THOUGHTS! 2. Standard Forms of Construction Contract – cont’d:  If contractors become aware that it is proposed to use special or amended forms of contract, their reactions may be reflected in higher tenders.  It is therefore sound advice to resist alterations and amendments wherever possible.  However, there may be instances where a non-standard form of construction contract fits the client’s requirements and a specially drafted (bespoke) agreement is needed.  Any such drafting should be entrusted to a lawyer with appropriate specialist knowledge, and who should always be engaged directly by the client.  Professionals without legal training and experience in such matters ought not to attempt even seemingly minor changes to standard wording or drafting of additional clauses which might make published documents non-standard!  Standard forms of contract are drafted taking into account a legal background of common law and statutory rules, which give insight into why many aspects of a form have been drafted in a particular way, and aid the interpretation of these forms. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  71. 71. 16. FINAL THOUGHTS! 3. Managing Claims:  Claims resolved using the contract are a routine aspect of construction.  In principle, the need for a contractor to submit a claim should never arise.  However, this is highly unlikely across the entirety of a typical construction project.  In practical terms, therefore, the management of claims does not mean avoiding them but merely ensuring that they are justified by the contract (i.e. have contractual “grounds”), are resolved quickly to minimise their impact on the on- going works, and that sums paid in their settlement are of an appropriate amount.  The mechanisms provided by a construction contract to settle a contractor’s claim attempt to resolve the situation without disagreement between employer and contractor.  If disagreements develop, the claim will escalate into a dispute and a third party will likely be engaged to analyse the claim to decide how it should be resolved. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  72. 72. 16. FINAL THOUGHTS! 3. Managing Claims – cont’d:  Claims resolved using the contract are a routine aspect of construction.  In principle, the need for a contractor to submit a claim should never arise.  However, this is highly unlikely across the entirety of a typical construction project.  In practical terms, therefore, the management of claims does not mean avoiding them but merely ensuring that they are justified by the contract (i.e. have contractual “grounds”), are resolved quickly to minimise their impact on the on- going works, and that sums paid in their settlement are of an appropriate amount.  The mechanisms provided by a construction contract to settle a contractor’s claim attempt to resolve the situation without disagreement between employer and contractor.  If disagreements develop, the claim will escalate into a dispute and a third party will likely be engaged to analyse the claim to decide how it should be resolved. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  73. 73. 16. FINAL THOUGHTS! 4. NEC3 claims principles:  The management philosophy supporting the NEC3 suite of construction contracts is one of collaboration and cooperation.  The way in which the NEC3 ECC form manages the cost and time consequences of certain events reflects this philosophy and is centred on the concept of Compensation Events and the Early Warnings provided of them.  More traditional construction contracts like the FIDIC red Book do not have this cooperation approach.  Instead, they allow events to progress until the Contractor has incurred unexpected cost (or is being slowed down) before requiring the Contractor to retrospectively “claim” more payment or request more money to cover their losses and prevent them becoming liable for liquidated damages respectively.  NEC3 ECC takes the view that the Contractor and Employer should help each other avoid such situations by minimising the additional cost and time required to complete the Works in light of the events that have occurred during construction.  It places certain obligations on the Project manager and the Contractor to collaborate to take mitigating actions to reduce the impact of risks. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  74. 74. 16. FINAL THOUGHTS! 4. NEC3 claims principles – cont’d:  The Employer must be prepared to pay the Contractor additional money to mitigate the effect of an identified risk (i.e. the Compensation Event) before the risky event occurs.  Such money will be considerably less if spent to mitigate the risk rather than waiting for the risk to occur, it is argued.  Accordingly, the NEC3 ECC form of contract does not include the retrospective concept of “claims” found in other construction contracts.  It requires the Contractor and Project Manager to provide each other with Early Warnings of possible future Compensation Events which have cost and payment consequences so that action can be taken to reduce or avoid them.  The concepts of time and money are considered together and cannot be easily separated, as compared with say the JCT SBC/Q which clearly differentiates the concepts of Relevant Events (justifying additional time) and Relevant Matters (justifying additional payment).  However, practitioners sometimes consider the notification of a Compensation Event to be a claim, but this is a hang-over from their traditional reliance on the claims mechanisms of other contract forms and not how NEC3 contracts should be considered. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  75. 75. 16. FINAL THOUGHTS! 5. If contracts are to be run efficiently, contractual awareness is essential for all concerned in their management. “Always thoroughly review and know the contractual nuances and obligations you are to work under. Know (and understand) completely what is to be done by you; what your rights, duties, obligations and authority are (and their limits); and always function totally within all these bounds – vigorously, professionally, with your best effort, every contract day!” Ralph W. Liebing, 1998, Architect & Author The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  76. 76. THE END The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  77. 77. Questions? The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)
  78. 78. Contractual Challenge - 1  A Contractor and an Employer have been working together on a project for some time using a Standard form of construction contract. They have been acting in accordance with a new contract clause they intended to insert into the standard contract form before executing it.  The new clause was intended to give the Contractor an unusual right. The Contractor has used this unusual right several times on the current project without problem. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)  On going to use the right again, the Contractor has discovered that the clause granting it was never inserted into the Contract.  Advise the Contractor on his ability to continue to use the unusual right.
  79. 79. Contractual Challenge - 2  Identify the basic features required of all standard forms of construction contract so that they can provide an effective tool for managing the relationship between Employer and Contractor throughout its duration. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)  Explain why these features of a construction contract must be present by making reference to the contract administration processes they facilitate.
  80. 80. Contractual Challenge - 3  If the Contractor is awarded an extension of time, a claim for loss and expense will also be awarded. Discuss. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)  A Contractor’s submission of a claim for loss and expense is often thought to be the result of a poorly managed project that has ‘gone wrong’ in some way.  Discuss whether or not you agree with this view, making reference to the contractual basis on which a claim for loss and expense may be submitted under any standard form of contract you are familiar with.
  81. 81. Contractual Challenge - 4  A prospective construction industry client is proposing to employ a contractor using a contract it has written specifically for the project. Advise the client as to whether or not they should do this. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)  Support your position with an analysis of the main risks the client would be exposed to by using its own contract rather than one of the many standard construction contract forms.
  82. 82. Contractual Challenge - 5  Assume that a client employs a contractor using a non-standard contract written specifically for the project.  Also assume that expenditure on the project has exceeded the agreed Contract Sum but the work is not yet complete and the Contractor is requesting additional payment. The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)  The client has discovered that the contract does not provide a process for paying the Contractor extra money.  Advise the client regarding how it should respond to the Contractor's request.
  83. 83. Contractual Challenge - 6  Using examples, explain the types of Extra-contractual claims:  Common law claims  Quantum meruit claims  Ex gratia claims The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)

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