1. Contracts

Lump Sum

In this instance the contractor agrees a fixed price to execute certain defined building works. Payment is received when the contractor has substantially completed the items. The figure is usually calculated based on a bill of quantities and is agreed at the time of contract formulation when the work starts.

Cost Contracts

This contract is not based on a pre agreed sum. The contractor is paid for the works that are costed together with an additional payment called a fee to cover profit and overheads.

Remeasurement Contracts

These are a combination of lump sum and cost contracts. The parties agree the rates of remuneration but not the price of the work as a whole.

2. Types and forms of building contract

Building Contracts are produced by a number of bodies including the Joint Contracts Tribunal (JCT). They are widely used and can be supplemented by standard and varying amendments adapted subject to the needs of each of the parties.

Family of Building Contracts

Some of the standard forms are prepared for the market by bodies and institutions representing those performing a number of different roles on construction projects. JCT is one of the most popular. It recognises the different procurement methods available on the market which are outlined below.

3. Methods of procurement

The four most popular methods of procurement are:

Traditional contract - Standard Form

Traditionally the building contractor is required to construct and complete works designed for the employer using a separate professional team including an architect, engineers and a number of other specialists.

Design and Build Contract

JCT 1998 (with Contractor’s Design) and ICE Design and Construct Conditions of Contract (2nd Edition 2001) are the most common form. The contractor is usually responsible for work and materials and the design of the project. The basis of a design and build contract is the description by the developer or employer of their intentions regarding the use of the building and its characteristic (dimension, area, materials to be used, site description on services). This is called the Employer’s Requirements.

Construction Management Contracts

The most popular form of standard form agreement is JCT 1987 (1998). Management contracting is a fast track procurement method developed for common use in building projects in the early 1980’s. The design is carried out in parallel with construction of the work and designed to be a fast track method.

In addition to the main contracts there are usually standard sets of underlying contracts for sub contractors accompanying each of the main categories of documents.

Nominated and Domestic Sub Contracts

Under these two forms of contract, the sub contractor enters into a contract with the main contractor.

Under a nominated sub contract the contractor allows the architect, as the employer’s agent, to specify a specialist sub contractor to be appointed by the main contractor.

A domestic sub contractor is any person and / or firm, other than a nominated sub contractor, to whom the main contractor sublets a portion of the work. often the sub contractor’s work is essentially that of the main contractor in the main contract.

4. Families of civil engineering contracts

Various standard form contracts are used in the domestic and international market for infrastructure and civil engineering projects. Civil engineering contracts can be classified into the following groups:

• Add measurement contracts including bills of quantities or schedules of rates.

• Lump sum contracts (such as ICE 6).

• Cost reimbursable contract e.g. cost plus percentage fee or cost plus fixed fee or cost plus fluctuating fee.

• Design and Construct Contracts such as ICE (Design and Construct), First Edition.

• Turnkey Contracts.

• Management contracts.

Naturally, each of these contracts has a different risk profile and as mentioned above regarding building contracts, can be supplemented by standard and varying amendments adapted subject to the needs of each of the parties.

Project Management Agreements and Project Managers

Project Management / Co ordination Agreements and / or Project Monitoring Agreements often govern the role of the project manager providing that the project manager or coordinator act as a consultant carrying out:

• Project responsibilities.

• Liasing and communication with the other consultants and the building contractor.

• Reporting back to the developer with overall charge for the development.

The role is similar to a technical adviser to a bank providing monitoring services and reporting on the project.

5. Collateral warranties

Funders or those with an interest in a development (purchasers of the original owner’s or developer’s interest or tenants) will often be exposed to financial risk if there is a defect in the performance of a party involved in the design or construction of the building.

The employer’s funders will require that if the developer fails to comply with the terms of draw down (as set out in the facility letter), then in certain circumstances the funder will be able to realise its security in a number of ways. In practical terms, the funder may in effect step in the shoes of the employer and run the contract. Additionally, they will require a right to make contractual claims against consultants, the contractors and any sub contractors for any defective performance. Such rights and any remedies should be expressly provided for in the contract. To protect the lenders, purchasers and tenants, collateral warranties are now given for their benefit.

6. Contract insurance

The contract sets out the responsibilities and liabilities of the parties for personal injuries and property damage arising out of and in the course of carrying out the works. Insurance is also taken out in respect of damage to the works, third party liabilities and Employer’s negligence. The contract will govern which insurances will be taken out by the parties and for whose benefit.

There are three main areas of liability cover:

Public liability insurance

This is taken out by the contractor for:

a) Third party claims - under the contract the contractor is usually required to indemnify the employer for any expense, loss, liability, claim or proceedings under statute or common law in respect of which personal injury or death is caused by the carrying out of the works other than that caused by the act or neglect of the employer. Additionally, the contractor is usually required to insure his obligation to indemnify the employer for any damage to property to the extent that it is due to negligence of the contractor.

b) Legal costs.

The public liability policy needs to cover legal costs incurred in defending a claim in addition to providing protection against claims made by third parties.

c) Product liability.

Product liability is usually included in the public liability cover.

Employers’ Liability (Compulsory Insurance) Act 1969

This Act requires employers to insure against liability for bodily injury or disease sustained by employees arising from the course of their employment.

Professional Indemnity Insurance (PI Insurance)

Consultants arrange insurance to cover their liability for damages and costs due to breaches of their professional duty caused by neglect, error or omission. It also covers costs of liability and their defence arising out of dishonest or fraudulent acts. Insurers usually reserve their right to take all reasonable steps of recovery against any party. Contractors with a design responsibility will also be required to obtain such insurance.

7. Statutes and directives

Contracts (Rights of Third Parties) Act 1999

This allows for contracts to confer rights which are directly enforceable by third parties. Under Section 1 of the Act, a person who is not a party to the contract may enforce a term of the contract if the:

a) Contract expressly provides that it may, or

b) A term purports to confer a benefit on the person unless on a proper construction of the contract the parties did not intend the term to be enforceable by the third person.

There is a presumption that if a contractual term purports to confer a benefit on a person then it is intended that he has a right to enforce the benefit directly. The Act can be used to give rights directly to specified lenders, purchasers and tenants without the need for collateral warranties being executed. Since the introduction of the Act, common practice has been to exclude the Act if possible. However, mainly due to changes in the market and for practical reasons, parties have started to seek to rely on the terms of the Act rather than exclude it.

The Housing Grants Construction and Regeneration Act 1996

Part II of the Act regulates construction contracts entered into after 1 May 1998 in England, Scotland and Wales. The Act is intended to reform construction industry practice by introducing statutory requirements regarding dispute resolutions and payment provisions in construction contracts.

Health and Safety at Work, etc. Act 1974

This Act places duties on Employers and other persons who control a work site to take measures that are necessary to protect the health and safety of all persons on the site. Penalties for failing to do so are escalating and ultimately individuals can be imprisoned for up to two years for breach of duties under the Act.

Construction (Design and Management) Regulations 1994 (CDM Regulations)

The CDM Regulations address health and safety issues in the context of design and construction projects. The Regulations introduce health and safety standards that must be considered throughout the construction period. Key players are obliged to perform their roles taking into account the Regulations. Unnecessary dangers to persons during the stages of the project must be avoided until after construction works are complete. Persons with specific roles must be nominated for the project.

8. Alternative dispute resolution

Building disputes of a value above a defined threshold should be commenced in the TCC in circumstances where the High Court or Supreme Court are identified in the contract as being applicable or in the absence of other dispute resolution methods.

Adjudication

Adjudication differs from expert determination and arbitration in a procedural and legal way. Adjudication requires a resolution of a dispute by a decision on that dispute of temporary binding effect until that can be overturned by a Court or arbitration proceedings which is proving rather difficult.

Disclaimer

The content of this article does not constitute legal advice. You should always consult a suitably qualified lawyer for professional advice about any specific legal matter of concern to you. George Davies Solicitors, its partners and staff do not assume any responsibility for information contained within this document and disclaim all liability relating to such information.

It’s a risky business!

Do you have any employment issues you need help with?

Do you know how to identify health & safety risks? Do you know what to do when have identified them? Do you have a reliable system in place that will protect your business form significant liability if things go wrong? Do you know how to take appropriate steps to protect your directors from personal liability for H & S claims?

If you are concerned about any of the above issues, then you want to join others to see specialists from George Davies Solicitors and PNC Group at our FREE seminar on Tuesday 17th October 2006. The seminar will be held at Lancashire County Cricket Club and starts at 8:00 am. Breakfast will be provided to help set you up for the day. The seminar will last until 10 30am and will involve a question and answer session, giving you plenty of opportunity to discuss your specific problems or queries.

If would like to attend, please e-mail Lisa Heyes: lisaheyes@georgedavies.co.uk or telephone her on 0161 234 885

About George Davies Solicitors

George Davies was highly rated, in the North West, in nine different categories of the 2005 Legal 500 review and in Chambers and Partners UK Directory. They specialise in all aspects of commercial law and boast a substantial Property Department within which sits a niche Construction team with experience in a full spectrum of construction law services. The firm was commended in the Legal 500 for their strong movements forward in a variety of property and construction deals and Chambers specifically mention its achievements in Construction. The Head of Construction, Catherine Kay can be contacted on 0161 234 8861 or emailed at catherinekay@georgedavies.co.uk

Printer friendly version

Email this article to a friend