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Muckle LLP - Which contract should I be using?


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This was a presentation delivered by Robert Langley, partner and head of the construction and engineering team at Muckle LLP, on Tuesday 7th October. The event was organised and hosted by the APM North East branch and was entitled 'Project contracts and how they support collaborative working'. It was held at the Radisson Blu hotel in Durham.

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Muckle LLP - Which contract should I be using?

  1. 1. Which contract should I be using? Robert Langley Partner, Construction & Engineering team Muckle LLP
  2. 2. Collaboration •“The Act or process of collaborating” •“Co-laborare” – to work together (latin) •Do we need to spell it out?
  3. 3. NEC3 •10.1 “The Employer, the Contractor, the Project Manager and the Supervisor shall act as stated in this Contract and in a spirit of mutual trust and co-operation” •JCT Optional Schedule 8 •the parties must work with each other and the Project Team “in good faith and in a spirit of trust and respect”
  4. 4. Good faith – recent guidance •TSG Building Services v South Anglia Housing •“ACA Term Partnering 2005 •team members shall work together in a spirit of trust fairness and mutual co-operation for the benefit of the Programme” •Mid-Essex NHS Trust v Compass •“the Trust and the Contractor will co-operate with each other in good faith... for the efficient transmission of information... and to enable the Trust to derive the full benefit of the Contract”
  5. 5. Good faith: conclusion from the case law •General statements are of limited use •Detailed provisions are more valuable •e.g. provisions for reasonableness in JCT enabling PM to exercise judgment •clear articulation of functions and controls in NEC3
  6. 6. Various types of standard forms •All generally issued as ‘suites’ •CIOB – Chartered Institute of Building •Complex building and engineering projects •Fidic – Federation Internationale de Ingenieurs Conseils •Engineering, energy and process plant. Usually international •IChemE •Chemical and process engineering industries
  7. 7. Various types of standard forms •GC/Works •primarily for government contracts •ICC - Infrastructure Conditions of Contract •typically civil engineering projects •JCT •most common form, typical on commercial property and development projects •NEC3 – New Engineering Contracts •general application, recommended by government
  8. 8. Today’s focus •IChemE •JCT •NEC3 •typical features •differences •points to note
  9. 9. IChemE •Specifically applicable to chemical and process engineering industries •oil & gas, water & power, food technology, pharmaceuticals •Results / performance based •generally designed for projects that will need to be tested against defined criteria once constructed
  10. 10. IChemE •Balance of risk •generally contain more exclusions of liability in favour of the contractor •due to the nature of process plants – consequential losses as a result of defects can be enormous •IChemE contracts include: •requirement that Purchaser provides construction all risks insurance •overall cap on liability •final Certificate excludes further liability •one year defects liability period
  11. 11. IChemE •4 main UK contracts •The Red Book – lump sum •The Green Book – reimbursable •The Burgundy Book – target cost •The Orange Book – minor works
  12. 12. The Red Book •Turnkey contract •contractor takes responsibility for design •costs of completion at Contractor’s risk •subject to contractual Variations •The relationship between the parties is typically performance based •caution against amending this in negotiations •give careful thought to the schedules •sets out description of the works, purchaser’s own responsibilities, scope of works
  13. 13. The Green Book •Very similar philosophy to Red Book •turnkey contract •contractor takes responsibility for design •Contractor fully reimbursable for actual costs incurred •this includes corrective costs arising from design & construction errors •note – Contractor must use “reasonable skill and care to be expected of a properly qualified and competent Contractor”
  14. 14. Which to use? •Red Book •Where purchaser wants certainty on costs •where full tender process is desired •standard package is required, with a detailed specification and engineering information is available
  15. 15. Which to use? •Green Book •Purchaser wants flexibility and is confident to get involved with the process •more power to Project Manager •where technology is less advanced – perhaps the performance and results of the process are uncertain •if project relies on Purchaser’s specific knowledge or skills
  16. 16. The Burgundy Book •Target Cost contract •attempts to promote co-operation and fairness between the parties through incentives •Typical operation •parties agree Target Cost for the works •contract includes formula that incentivises Contractor to minimise costs overspends •contractor records Actual Costs incurred on the project
  17. 17. Pain share / gain share •Target Cost and Actual Cost is compared •any savings against the Target Cost are shared •Contractor is paid half of the saving •effectively a bonus for coming in under budget •any overruns against the Target Cost are shared •Contractor is only paid half of the overrun between the Target Cost and Actual Cost •effectively a penalty for overrun •Aim is to incentivise parties to achieve lowest Actual Costs possible
  18. 18. Changes to costs •Clause 16 – variations •agreed variations allow an increase to the Target Cost •except where work is necessary for the Plant to comply with the Specification – Contractor not entitled to increase to Target Cost
  19. 19. Changes to costs •Clause 37 – defects •the remediation of defects is at Purchaser’s cost – i.e. Contractor’s Actual Costs is increased •except where defect is due to Contractor’s failure to exercise reasonable skill and care
  20. 20. Key considerations •Detailed and accurate Specification is critical •helps avoid costly variations arguments •Extensive role for Project Manager •important to select a strong and competent character to manage the project •note that PM must act impartially between the parties •Parties must be clear on Target & Actual Costs •full recording procedures and mechanisms must be included in contract Schedules
  21. 21. Case study •Firstline Engineering Co v NLP Process Power
  22. 22. JCT •Most common form of building contract •5 forms: •standard Building contract •design and Build (DB) Building contract •major Project Building contract •Minor works •intermediate
  23. 23. Standard Building Contract •3 contracts in this category •approximate Quantities (measurement) •quantities (lump sum) •Without quantities (lump sum) •Provisions generally similar, main difference concerns way price is determined •lump sum price will be altered where works are varied or delayed, where delay is due to Employer •measurement changes to reflect the actual work carried out
  24. 24. Standard Building Contract •Typically used for larger construction projects •complex engineering unlikely •Architect has contract administration role •supervise the day to day works and manage administration – crucially, notices •Employer retains some responsibility •termination notices for example
  25. 25. Contractor’s Design Portion •If Contractor is to carry out some design, CDP is implemented •records the extent of the Contractor’s responsibility for certain elements of the works •may often use specialist sub-contractors
  26. 26. Design and Build •Used on similar projects as Standard contracts •Contractor assumes responsibility for design and build •Contractor typically given Employer’s Requirements •produces proposals for design on this basis •Often design is produced by professional consultants, then novated to Contractor •Contractor’s design liability can be capped
  27. 27. Differences •Contractor has design responsibility in DB •not in Standard, unless a CDP is used •note that Employer retains responsibility for Employers Requirements in DB – so not accurate that Contractor has ‘entire’ design responsibility wrap in DB •DB does not utilise a Contract Administrator, instead uses an Employer’s Agent
  28. 28. Differences •Both contracts do not expressly deal with ground conditions •assumption is that Contractor retains responsibility •Note in DB – Employer retains responsibility for design within Employer’s Requirements (potentially leads to unexpected results)
  29. 29. Major Building Contract •Intended for the largest of projects •Parties generally experience in large scale procurement •Contractor responsible for design •Shorter than DB contract, so suitable where parties have their own detailed procedures •Can be used where sectional completion is required
  30. 30. Minor works •Two forms •minor Works Building Contract •minor Works Building Contract with Contractor’s design •CPD used where discreet elements of design are required from Contactor
  31. 31. Minor works •Appropriate where works are simple in nature extensions, remodelling •Architect / Contract Administrator is used •Not suitable: •where wholesale design is required from Contractor •where bill of quantities are required •If detailed control / costs procedures required
  32. 32. Intermediate contracts •Sit between Minor Works and Standard •used for reasonably simple projects where the skills and trades involved are conventional •Can utilise a CDP where Contractor is to do some design •not suitable as a full DB contract though
  33. 33. NEC3 suite •Engineering and Construction Contract •most common •Professional Services Contract •Engineering and Construction Short Contract •Term Service Contract •Framework Contract
  34. 34. NEC3 •Completely new drafting philosophy •different terminology used •some concern that the drafting is not tried and tested? •not lawyer friendly •legal precision takes a back seat in favour of promoting proactive management processes •Generally applicable to all types of works •national infrastructure particularly •Crossrail, Heathrow T2, London 2012 •Recommended and endorsed by government
  35. 35. NEC3 philosophy •Intended to be a project management tool •aims to increase proactive risk management •Parties need to adopt and ‘buy into’ the philosophy •the look and feel of the contract is very different to typical forms •intention was to move away from ‘adversarial forms’
  36. 36. Key points and features •Writing style •plain English, written in present tense •each clause stands alone – no cross referencing •the word ‘shall’ on appears once – in clause 10.1 •Clause 10.1 •all parties agree to “act in a spirit of mutual trust and co-operation” •underpins NEC philosophy •concerns over legal interpretation
  37. 37. Key points and features •Project Manager takes extensive role •responsible for championing the NEC values •subject to clause 10.1 •high level of authority is required •must get involved in indentifying and managing risk proactively – risk register under clause 11
  38. 38. Key points and features •Clause 11.2 (14) – risk register •parties must compile a risk register at the start of the project •must be continually updated as the project progresses •register describes risk and lists steps take to mitigate
  39. 39. Key points and features •Clause 16 – early warning events •Contractor and PM are required to give early warning notices “as soon as either becomes aware of any matter which could •increase total of the Prices •delay Completion •delay meeting a Key Date •impair the performance of the works in use” •Wide ranging •Not ‘could’ – designed to encourage early and open disclosure
  40. 40. Key points and features •Clause 60 – compensation events •wide ranging, detailed list •Clause 61.3 - Notification of compensation events •“the Contractor notifies the Project Manager of an event which has happened or which he expects to happen as a Compensation event...” •aimed at encouraging early disclosure so risk can be mitigated
  41. 41. Amending the NEC3? •Innovative approach means there is room for criticism – especially for lawyers! •NEC advocates say this is deliberate – move away from the traditional approach •Wholesale amendment is therefore discouraged
  42. 42. Amending the NEC3? •Some areas do require clarification •specify which documents are Contract Documents and order of precedence •no general obligation to comply with statutes •compensation event procedure is often regarded as overly bureaucratic •transfer of title provisions inadequate – especially where employer has paid for materials stored off site •Matter for parties – but remember philosophy
  43. 43. Any questions?
  44. 44. This presentation was delivered at an APM event To find out more about upcoming events please visit our website