Date post: | 22-Apr-2015 |
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Which contract should I be using?
Robert Langley
Partner, Construction & Engineering team
Muckle LLP
Collaboration
• “The Act or process of collaborating”
• “Co-laborare” – to work together (latin)
• Do we need to spell it out?
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”
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”
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
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
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
Today’s focus
• IChemE
• JCT
• NEC3
• typical features
• differences
• points to note
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
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
IChemE
• 4 main UK contracts
• The Red Book – lump sum
• The Green Book – reimbursable
• The Burgundy Book – target cost
• The Orange Book – minor works
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
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”
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
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
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
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
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
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
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
Case study
• Firstline Engineering Co v NLP Process Power
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
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
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
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
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
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
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)
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
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
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
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
NEC3 suite
• Engineering and Construction Contract
• most common
• Professional Services Contract
• Engineering and Construction Short Contract
• Term Service Contract
• Framework Contract
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
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’
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
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
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
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
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
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
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
Any questions?
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