Contract Terms and Conditions Expert Presentation

Contract Terms and Conditions

APC - INTERNAL USE ONLY

Contract?

■ an exchange of promises with a specific remedy for breach

■ an agreement with specific terms between two or more persons or entities in which there is a promise to do something in return for a valuable benefit known as consideration.

■ Any legally binding agreement voluntarily entered into by two or more parties that places an obligation on each party to do or not do something for one or more of the other parties and that gives each party the right to demand the performance of whatever is promised to them by the other parties.

■ An agreement between two or more competent parties in which an offer is made and accepted, and each party benefits.

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What is a Contract?

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

■ An exposition of rights and obligations of the part ies including:

– Express terms

• The terms ascertained from the contract documents including the conditions of contract, specifications, drawings and programme

– Implied terms ( Common or Civil Law)

• Those terms implied by statute

• Those terms implied from case law

Implied Terms - Legislation (UK only)

Include:

■ Part II of the Housing Grants Construction and Regeneration Act 1996

■ Contract (Rights of Third Parties) Act 1999

■ Sale of Goods Act 1979

■ Supply of Goods and Services Act 1982

■ Health and Safety at Work (Etc) Act 1974

■ Defective Premises Act 1972

■ Unfair Contract Terms Act 1977

■ Unfair Terms in Consumer Contract Regulations 1999

■ Late Payment of Commercial Debts Interest Act 1998

■ The Public Contracts Regulations 2006

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Classification of Contracts

■ Simple

– Made by implication orally or in writing (sometimes called ‘parol’)

■ Speciality

– Contracts made by deed are called speciality contracts

■ Bilateral

– Arises where X makes promise(s) to Y and in return Y makes promise(s) to X

(‘a promise in return for a promise’)

■ Unilateral

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

(‘a promise in return for an action’)

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Requirements as to Form

■ Contracts which must be contained in a deed :

– Leases for a period exceeding 3 years

– Contracts unsupported by consideration

■ Contracts which must be made in writing:

– Agreements per the Consumer Credit Act 1974

– Transfer of Shares

– Contracts for the sale/disposition of an interest in land

■ Contracts which must be evidenced in writing:

– Contracts of guarantee

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What are the essential requirements?

■ Agreement

■ Intention to be bound

■ Consideration (unless a Deed)

■ Capacity

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Agreement?

Offer and matching Acceptance:

■ Two basic principles apply :

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

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

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Intention to be bound

■ Business and Commercial Agreements

– Presumed by courts to be legally binding unless expressly provided otherwise;

■ Social/Domestic/Family Agreements

– Presumed by the law not to be legally binding

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Consideration

■ Requirements for Consideration

– A promise is only binding if it is given for good consideration, or if it is executed as a deed. The consideration is for the promise not for the contract. Construction contracts may be executed as deeds for other reasons: such as to obtain the 12 years limitation period or to satisfy other formalities required by the Employer.

■ Definition of Consideration

– ‘An act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given is enforceable.’ ; or,

– ‘The price of the promise’

Consideration - Rules

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

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

■ 3. The consideration must move from the promisee. (Tweddle v Atkinson [1861] EWHC QB J57)

■ 4. An existing public duty will not amount to valid consideration. (Collins v Godefrey (1831) 1 B & Ad 950)

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

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

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How Does this link to Construction (1)?

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

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

� Acceptance: Employer’s Acceptance of Tender

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How does this link to Construction (2)?

� Intention: Intention of the parties to create legal relations

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

Contractor’s Consideration: “I the Contractor will provide Construction Services in return for £x”

Employer’s Consideration: “I the Employer will provide £x , in return for Construction Services”

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Application to Construction

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

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

� Once the contract is executed and signed the contract documents govern all obligations & liabilities of all parties. Therefore, the terms and conditions which govern the “Essential Elements” become crystallised. No going back !

THEREFORE THE CONTRACT DOCUMENTS ARE VERY IMPORTANT !!!

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

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Email from Richard Clare :-

ECH PENALISED FOR NON COMPLIANCE

“The failure of one of our project managers to abide to the timetables for issuing certificates under a JCT 98 Design and Build Contract resulted in the Contractor successfully bringing an adjudication against the Employer for payment of his valuation in full.

This payment significantly exceeded the amount subsequently certified. This error, together with one or two other issues, has cost EC Harris £26,000 in reaching settlement with the Client in order to prevent them from bringing an action against us.

This, of course, comes straight off our bottom line. At current margins, we need to earn over £500,000 of fees to replace £26,000 of profit.”

Purpose of Contract Documents

■ To accurately record the terms of the business arrangement

■ To set down the management and administrative procedures and processes

■ Define the obligations of the parties

■ Allocate risk to the parties

■ To be able to rely on in a court of law

■ Contracts should define:

– What is to be built

– The method of calculating the final cost

– The required quality of the works

– The time taken to complete the works

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Contents of Standard forms of Contract

■ Recitals and Articles of Agreement - containing the identity of the parties and details of the agreement

■ Contract particulars containing Commencement, Start and Completion Date, Rate of Liquidated and Ascertained Damages

■ Bills of quantities, activity schedules, schedule of rates

■ Documentation of tender negotiations identifying what is included and excluded (unless an entire contract)

■ Programme requirements

■ Design including drawings, specifications and schedules

■ Supplements (guarantees; bonds etc)

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Procurement of Construction Contracts (1)

■ Type of client

■ Type of project

■ Use of asset

■ Risk allocation

■ Ability to change scope of works

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Key Considerations for a Project:

■ Client Involvement

■ Design Management

■ Capacity for Variations

■ Complexity

■ Speed

■ Clarity of Remedies

■ Default

■ Delay

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Methods:

■ Traditional (Build only – designers separately appointed by client)

■ Design and Build.

■ PFI/PPP (Includes DBO/DBOM and similar hybrids)

■ Management Contracting/Construction Management

■ Collaborative/Partnering.

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What are Standard Forms of Contract (1)?

■ The main families of forms applicable to construction include :

– JCT (Joint Contracts Tribunal)

– NEC (New Engineering Contract)

– FIDIC (International Federation of Consulting Engineers)

– IChemE (Institution of Chemical Engineers)

� ICE and GC/Works (Still in use although NEC generally preferred)

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What are Standard Forms of Contract (2)?

■ JCT (Joint Contracts Tribunal)

– Traditional - SBC, IC, MW, MP

– Design & Build - DB

– Management – CM & MC

– Partnering - CE

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JCT 2005■ Standard Building Contract (SBC):

– With Quantities

– Without Quantities

– With Approximate Quantities

Characteristics:– Employer’s Design Team responsible for design

– Architect/Contract Administrator responsible for managing the contract

– Contractor responsible for carrying out the Works in accordance with the contract documents

– Possible for discrete parts to be designed by the contractor

– Contract documents include Bills of Quantity (if applicable), Drawings, Specifications

– Payments issued at intervals not exceeding one month.

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■ JCT Design and Build

• Characteristics:– Provides ‘single point of responsibility’ for design and construction.

– The contractor is responsible for completing design and carrying out the construction works

– No architect/contract administrator.

– There is provision for a named Employer's Agent

– There is no clerk of works

– Contract documents include Employer's Requirements, Contractor'sProposals and Contract Sum Analysis

– There is provision for the obtaining of planning permission and other approvals

– Payment can be at monthly intervals or at the end of agreed stages

– Alternative provisions for payment – either stage payments or value of work executed

JCT 2005

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■ JCT Excellence

Characteristics:

– collaborative behaviour between the various parties

– active use of risk management techniques

– flexibility in use

– complete supply chain management

JTC 2005

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NEC3

■ ECC

There are 6 Main Options

Employer must select 1 of these:

� A – Priced contract with Activity Schedule

� B – Priced contract with Bill of Quantities

� C – Target contract with Activity Schedule

� D – Target contract with Bill of Quantities

� E – Cost Reimbursable contract

� F – Management contract

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FIDIC – The Rainbow Suite■ Red - Construction

■ Orange - Design & Build/Turnkey

■ Yellow - Design & Build

■ Silver - EPC Turnkey

■ Gold - DBO Contract

■ Green - Minor Works - ‘mini-Red Book’

■ White - Professional Services Contract

■ Blue - Dredging and Reclamation

■ Pink - MDB Harmonised Red Book

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FIDIC Characteristics

■ Recognised worldwide

■ Accepted by international Investment Institutions and Banks

■ Suitable for engineering and construction works

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

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FIDIC – Choice of Form

100%0% Extent of design by Contractor

Ris

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Cer

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Red/

Pink

Yellow

Silver

GreenLow value

simple works

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IChemEOptions :

■ Red - Measure/Value

■ Green - Cost Reimbursable

■ Burgundy - Target Cost

Characteristics:

■ Used for process plant installations, and associated building work.

■ Separate versions for use in UK and abroad.

■ Detailed requirements for testing and commissioning

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Why do we use standard forms?

■ To save time in drafting contracts

■ As a checklist of items to be agreed

■ A benchmark for negotiating terms

■ Benefit from judicial precedents

■ Readily understood by construction professionals

■ Familiarity with contract terms

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Differences in Key Clauses – Variations vsCompensation Events

■ JCT 05

� Normal valuation rules apply

� Schedule 2 quotation

■ NEC 3

� PM requests quotation with instruction

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

� Priced in accordance with Activity Schedule or Bill of Quantities

� Delay to be notified with quotation

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Differences in Key Clauses – Possession and Completion

■JCT 05

� Possession given to Contractor on “Date of Possession”

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

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

■NEC3

� Contractor has access to site – NOT possession

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

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

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Differences in Key Clauses – Extension of Time (1)

■JCT 05 SBC

� Contractor to give written notice to Architect of ANY delay

� Relevant Event (Clause 2.29) / Variation

� Contractor provide estimate of expected delay

� Architect to award Extension of Time

� Architect to reassess Award on issue of instructions since last Award and on completion, but no later than 12 weeks after Practical Completion

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■NEC3

� Early warning, unless a Compensation Event

� Delay in completion

� Delay in meeting a key date

� Project Manager or Contractor request a meeting to mitigate delay

� Compensation Event

� Contractor submits quotation for delay

� Project Manager can revise completion date or key dates

Differences in Key Clauses – Extension of Time (2)

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Contract Amendments

Why do we have amendments to Contracts?

■ Risk Allocation (Avoidance, Transfer, Management)

■ Project-specific requirements

� Advantages: a. Can enhance standard contract provisions

� Disadvantages: a. Introduction of unfamiliar clausesb. Increased risk of discrepanciesc. Can increase risk of adversarial conduct

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Letters of Intent (1)

■ What are the contractual implications?

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

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

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Letters of Intent(2)

What if Contract docs are not executed prior to work starting on site ?

■ Three Scenarios:

1. Statement of Intent: - No liability to Employer if change of mind

2. Instruction with Consentto spend:- If works are commenced; the Employer

reimburses the contractor with reasonablecosts if the contract is not entered into.

3. Recognition of the Existence of a bindingcontract:-

If repudiated the Employer may be exposed to the Contractor’s loss of profit

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Letters of Intent (3)

■ Letters of Intent are between the Employer and Contractor!

■ Employers often ask their Quantity Surveyors to draft letters of intent for them.

■ This can be done however, the text should always be agreed by CSprior to issue.

■ Under No circumstances should a letter of intent be issued on EC Harris paper.

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

Case Study

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

■ Explain the contractual position of all those involved – employer, contractor, administrator and designers.

Understanding the NEC3 Contract

Operational Level Training

Format of the day

■ Interactive training session

■ Questions / debate encouraged

■ Ask questions if unclear

■ Speak your thoughts and share your knowledge

■ Promote your ideas and be open to new ones

■ Everybody contributes and is of equal status

■ No professional intimidation

■ Listen and encourage everyone to offer their opinio n

Switch off mobile phones – unless exceptional circumstances apply

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In this session we’ll cover…

■ An overview of the NEC Suite of Contracts – History and philosophy, principles and features

■ How NEC helps us deliver positive outcomes for Clie nts

■ A summary of matters to look out for

■ Opportunities for BIS with NEC

■ A detailed review of some of the key provisions and obligations

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Further Reading and Handout Material

■ A Copy of the Engineering and Construction Contract

■ A review of the changes from ECC2 to ECC3

■ NEC ECC Programme Guidance Notes

■ Further Reading: Earned Value Analysis

■ How to make NEC Target Contracts Work

■ Works Information

■ Potential further list of Disallowed Costs to be ad ded by way of Z Clause

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■ 3rd Edition of the NEC Suite of Contracts

■ Mainly used in Transportation and Utilities sector

■ Endorsed by OGC for all public projects(and growing)

■ Growing in all sectors such as E&M

■ Also growing in international application

What is NEC3…

■ Different to other construction contracts

– “A clear and simple document”

– “Stimulates good project management”

– “Used in a variety of situations”

HISTORY & PHILOSOPHY OF NEC

46

Evolution:

� Consultative edition issued January 1991

� 1st Edition of The New Engineering Contract (NEC) issued 1993

� 2nd Edition published 1995 renamed Engineering and Construction Contract (ECC)

� “NEC” retained as a brand name for suite of contracts

� 3rd Edition of all NEC contracts including the ECC issued 2005

� Office of Government Commerce recommends the use of the NEC 3rd Edition

HISTORY & PHILOSOPHY 47

1. Flexibility

� Multi disciplinary – use in engineering and building work

� Design responsibility can reside in part or whole with either party

� Choice of pricing options – lump sum, target cost, cost plus

� Modular contract form – core clauses, main options and bolt on secondary options


2. Clarity and Simplicity

� Written in ordinary language, not construction terminology!

� Simple clause structure; avoids legalistic terminology

� Subjective decisions minimised

� Provision of guidance notes and flow charts


3. Provide a stimulus to good management

� The ECC is a management tool as well as a contract

� Requires timely and clear decision making process

� Clear allocation of responsibility

� Proactive risk management procedures

� Encourages collaborative working


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NEC3 is a suite of contracts and supporting documentation…

What does it look like?

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

51

Documents within the NEC suite:

� The Engineering and Construction Contract (ECC)

� The Engineering and Construction Subcontract (ECS)

� The Engineering and Construction Short Contract (ECSC)

� The Engineering and Construction Short Subcontract (ECSS)

� The Professional Services Contract (PSC)

� Term Service Contract (TSC) (New to NEC3)

� Framework Contract (New to NEC3)

� The Adjudicators Contract

Also included are…

� Guidance Notes

� Flow Charts

� Procurement and Contract Strategies Guide

CONTRACT DOCUMENTS & STRUCTURE52

CONTRACT FORMS TO FOCUS ON TODAY53

Focus on the ECC54

� Roles and Responsibilities

� Contract Structure – Modular Form

� Main Options

� Secondary Options “The X Factor”

� Things to look out for – Key Considerations

� Other matters to consider

� Potential amendments

15 November 2009

ROLES & RESPONSIBILITIES

ECC only identifies roles and responsibilities of the following parties:

� Employer

� Project Manager

� Supervisor

� Contractor

� Subcontractor

� Adjudicator

ROLES & RESPONSIBILITIES UNDER THE ECC 56

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

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

� ECC assumes the Project Manager has the Employer’s authority

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

� Can delegate some or all of his actions and is likely to need to…PM responsible for:

PROJECT MANAGER 57

o Review and acceptance of design

o Review and acceptance of programmes

o Issuing instructions

o Certifying payments

o Assessing compensation events and their impact on time and cost

o …and more

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KEY ROLE: THE PROJECT MANAGER

Project Manager

Assessing Compensation

events and their impact on time and

costReview and Acceptance of Design/Technical Queries

Risk Management

Review and Acceptance

of Programmes

Dealing with administration of

Time Bar

Issuing Instructions

Management of Early Waring Process

Certifying Payments

� “Checking” role similar to Clerk of Works

� “To check that the works are constructed in accordance with the contract” (ECC Guidance Notes)

� Can issue Instructions to search for Defects

� Responsible for issuing Defects Certificate

� Can delegate some or all of his actions

SUPERVISOR 59

� Adjudicators Contract available as part of NEC suite

� Adjudicator is appointed by both Parties

� May obtain help from others after notifying the Parties

� Is paid on a time charge basis

� Unless otherwise agreed, the Parties pay the Adjudicator costs in equal shares

� If one Party fails to pay, the other Party pays the Adjudicator and recovers the amount from the defaulting Party

� Under ECC option C, D and E the Contractor’s costs for preparing for an adjudication or tribunal are a Disallowed Cost; each Party is responsible for its own costs in preparing for a dispute

60ADJUDICATOR

15 November 2009

CONTRACT STRUCTURE (Using the ECC as an example)…

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ECC and its modular form

Main Option(A)

SecondaryOption

(X1)

SecondaryOption

(X2)

SecondaryOption

(X3)

SecondaryOption(X15)

SecondaryOption(X18)

SecondaryOption

(Y(UK)2)

Contract Data Parts 1 & 2

Main Option(B)

Main Option(C)

Main Option(D)

Main Option(E)

Works Terms Contract

SecondaryOption

(Z)

Core Clauses Mandatory

Must select one main option

All secondary options are optional

Incorporated in WPEP

Main Option(F)

Dispute Resolution(W1)

Dispute Resolution(W2)

Must Chose 1 Dispute Option

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Core Clauses

1 - General2 - The Contractor’s main responsibilities3 - Time4 - Testing and Defects5 - Payment6 - Compensation events7 - Title8 - Risks and insurance9 - Termination

63ECC and its modular form

31 March 2011 | 64

There are 6 Main Option clauses (about 1 to 3 pages each)


A – Priced contract with Activity Schedule

B – Priced contract with Bill of Quantities

C – Target contract with Activity Schedule

D – Target contract with Bill of Quantities

E – Cost Reimbursable contract

F – Management contract

64ECC and its modular form

Priced contract with Activity Schedule

� Lump sum contract

� Project should be well defined at tender and subject to only minimal change

� Payment based on Activity Schedule defined and priced by the contractor

� Activity Schedule should align with programme to allow ease of administration

� Contractor only paid for completed activities

� Financial risk and therefore, reward largely borne by the contractor

� Suited to design and construct

� Risk is included in the activities and paid regardless of whether they occur

� Greater certainty of price

� Contractor has an interest in minimising cost

OPTION A 65

Priced contract with Bill of Quantities

� Remeasurement contract

� BoQ produced by the employer, rates priced by contractor

� Contractor paid for quantity of work completed each month

� Risk of quantities / errors in BoQ borne by Employer

� Financial risk of rates largely borne by the Contractor

� Not suited to design and construct

� Works should be well defined at tender

� Risks are included in the BoQ and paid regardless of whether they occur

� Contractor has an interest in minimising cost

OPTION B 66

Target contract with Activity Schedule (C) / Bill o f Quantities (D)

� Target cost contracts

� Works should be adequately defined to allow target to be set

� Target Cost set via Activity Schedule or Bill of Quantities

� Target Cost moves with changes (Compensation Events)

� Greater flexibility for the employer to develop his design

� Financial risk shared between the contractor and employer

� Contractor paid on a cost reimbursable (Defined Cost) basis

� Gain / pain shared (see illustration)

� Contractor and Employer both encouraged to control costs

OPTIONS C & D 67

TARGET COST GAIN – PAIN SHARE

Target Cost Actual Cost

Base Cost

Certificate 1

Changes

Contractors RiskFee

Employers Risk

Certificate 4

Certificate 2

Certificate 3

Final actual cost compared to final target cost to determine gain

share / pain share

OPTIONS C & D: Target Cost Illustration69

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

70

Cost Reimbursable contract

■ Limited / no project definition required at tender stage

■ Immediate / earlier start on site

■ Contractor paid on a cost reimbursable basis

■ Employer carries risk of cost increases

■ Employer gets the benefit of all savings

■ Limited financial risk borne by the Contractor (‘disallowed’ cost)

■ Full flexibility available to the Employer

■ Simpler post contract financial management (no contract sum)

■ Potential for claims / disputes virtually eliminated

Option E

71

Management contract

■ Limited project definition required at tender stage

■ Earlier start on site

■ Employer carries risk of cost increases

■ Suitable for contracts with a high degree of specialist contractors

■ Contractor directly employees subcontractors

■ Contractor responsible for managing the subcontractors to time and quality

■ Works subcontractors paid on prime cost

■ Contractor tenders preliminaries and Fee

Option F

DISPUTE RESOLUTION OPTIONS

There are 2 Dispute Resolution option clauses which concern rules and procedures for Adjudication and review by any subsequent tribunal


W1 Used unless the HGCR Act applies – e.g. For use outside of the UK such as Abu Dhabi

W2 Used where the HGCR Act applies

72

Employer Risk / Reward

Contractor Risk / Reward

F

C

D

B

A

E

ECC : Post Contract Financial Risk / Reward

Speed to Site

Outline Proposals

60% Design

Detailed Proposals

Detailed Design - 85%

Design

ProductionDesign

Unknown

Employer Design

Contractor Risk

Time

Ris

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Option E Option C/D

Option C/D

Option AOption A

ECC – Knowing your Options

31 March 2011 |r | 75

“The X factor” – Contract TailoringX1 Price adjustment for inflation

X2 Changes in the law

X3 Multiple currencies

X4 Parent company guarantee

X5 Sectional completion

X6 Bonus for early Completion

X7 Delay damages

X12 Partnering

X13 Performance bond

X14 Advanced payment to Contractor

X15 Limitation of Contractors liability for design to reasonable skill are care

X16 Retention

X17 Low performance damages

X18 Limitation of liability

X20 Key performance indicators

75

31 March 2011 | 76

UK specific Secondary Options:

� Y(UK)2 HGCR Act

� Y(UK)3 Contracts (Rights of Third Parties) Act

Also, Z clauses…

� Bespoke amendments

76The Secondary Options – Contract Tailoring

15 November 2009

THINGS TO LOOK OUT FOR…

31 March 2011 | 78

Take Care – Key Considerations within NEC

Time Bar

Accepted Programme

Key Dates

Early Warnings

Contract Documentation

Allocation of Risk

Reasonable Skill and Care and Rights of 3rd Parties

Earned Value Analysis

31 March 2011 | 79

TIME BAR & COMPENSATION

SolutionUnderstand, comply and plan for with contractual ti mescales

Commit sufficient resources – Otherwise amend the co ntract to extend timescales

Prevention is better than Cure!

Need a clear, quick and accountable decision making process in client organisations

Dispatch Emergency Response Team to deal with incre ased intensity of Compensation Events

Impact on EmployerShould factor in additional resource to PM team

Manage compensation contemporaneously or before the change is instructed

Greater control over risk and the impact of change

Could be ambushed

Opportunities for ECHAdopt the Prospective Outlook approach

Encourages good project management – actively promote time bar!

Encourage use of a web based Contract Admin tools

Introduce FCA on reimbursable Contracts

Impact on ContractorRisk of incurring costs by ignoring timescales

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

Potential IssueEntitlement to additional time and money (Compensat ion Events) are subject to compliance with strict timescales

Section 6, entitled “Compensation Events” brings together in one place the contractual provisions for evaluating the time and cost changes that will occur during construction works which do not arise from the Contractor’s fault

The compensation events are defined by the 19 listed events under clause 60.1 and these may be extended by inclusion of further matters in the Contract Data Part One.

Clause 60.1 (14) refers to an Employer’s risk event occurs, and this incorporates Section 8 on Risks and Insurances.

(There are no equivalent of “neutral events” found in JCT forms whereby the employer bears the risk of time but the contractor bears the risk of costs.)


The changes to the Completion Date and the contract Prices consequent upon compensation events occurring are meant to be assessed contemporaneously with the events arising and preferably before the changes are instructed.

The intention is that this procedure enables the parties to successfully manage risk and gives the Employer greater choice and control over change management together with greater time and cost certainty.

The successful implementation of the detailed compensation eventprocedures within the strict timetable set down, particularly where time impacts are also to be assessed, requires considerable resources and commitment from both parties.

The importance of adhering to these project management processes in order to realise the considerable benefits of greater control of change and risk management cannot be overstated. It facilitates the making of fully informed decisions in the context of a clear understanding of the potential impact of contemplated or unexpected change.


Grounds for compensation events are listed in clause 60.1. There are 19 standard compensation events heads with an additional 7 dependent upon which main and secondary options are chosen. Examples of compensation events: -

(1) Project Manager gives and instruction to change the Works Information

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

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

(12) The Contractor encounters “unforeseen” physical conditions

(13) A weather measurement is recorded which is shown to occur on average less frequently than once in 10 years

(19) Prevention, as event occurs which neither party could foresee, can prevent and stops the Contractor completing the works in time or at all


The procedure follows a logical chain as follows:

� Notification 8 weeks

� Decision on Validity / Instruction to Quote 1 week ( + 2 Weeks)

� Quotation 3 weeks

� Reply 2 weeks (+2 weeks)

� Implementation


Notification

61.1 Project Manager notifies

61.2 Project Manager seeks proposals

61.3 Contractor notifies

Validity

60.1(1) to 60.1(19) (& contract data)

60.1(1) exceptions

61.3 Contractor notification tests – 8 week time bar

61.4 Project Manager tests whether a valid compensation event

6.1.4 Default acceptance of Compensation Event if no response from the Project Manager within the correct timescales (1 week + 2 weeks)


Quotation

61.1 and 61.4: Project Manager instructs

61.5 Project Manager notifies whether Early Warning given and effect on quotation

61.6 Uncertainty and the use of PM assumptions

62.1 alternative quotes

62.2 Time and Cost package. Programme implications (ECC section 3)


Acceptance / Assessment

63.1 method of assessing

63.3 method of change to Completion Date (EoT)

62.2 method of assessing disruption

62.3 Project Manager accepts, rejects (with reasons) and

resubmit

62.3 Project Manager not going ahead

62.3 Project Manager will assess

62.6 Default acceptance of quotation if no response from the Project

Manger within the correct timescales (2 weeks + 2 weeks)

Implementation

65.1 Compensation event implementation

65.2 Finality (unless assumptions to be revised) (beware caveats)


31 March 2011 | 87

Potential IssueClause 31.2 has extensive programme management requirements - contractors rarely comply with these!

ECC doesn’t ask for a Critical Path and Logic Linke d Programme

ACCEPTED PROGRAMME

Solution

Hold workshop at pre-contract stage to confirm expe ctation

Take a robust but pragmatic approach on compliance with 31.2 dependant on the size of the project

Request Critical Path and Logic Linked programmes i n the Works Information

Impact on EmployerRisk to project cost, performance and success

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

Opportunities for ECHShould allocate appropriate resource to deal with programme management & schedule performance

Use Contract Solutions to hold workshop

Utilise expert Compensation Event response team to assess time and cost

Impact on ContractorIncorrect cost estimates by under planning resource

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

Time Outline MasterProgramme

30 Starting and Completion

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

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

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

TIME 88

31 The programme

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

� Detailed (and onerous) list of requirements for each programme

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

� Reasons for non acceptance stated

TIME 89

32 Revising the programme

� Items to be shown on each revised programme listed

� Revised programme issued

� within the period for reply after the Project Manager has instructed him to

� when the Contractor chooses to and, in any case

� at no longer interval than that stated in the Contract Data

33 Access to and use of the Site

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

TIME 90

the starting date (Contract Data)

access date(s) (Contract Data)

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

date of Completion

******

TIME 91

� There are 3 types of float

� 1) Time Risk Allowances – (activity ‘float’ )

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

� 3) General Float – (activities NOT on the critical path)

TIME 92

34 Instructions to stop or not to start work

35 Take over

� The Employer need not take over the works before the Completion Date if it is stated in the Contract Data

� The Employer may use any part of the works before Completion has been certified. If he does he takes over the parts of the works when he begins to use it except if this use is

� for a reason stated in the WI or

� to suit the Contractor’s method or working

36 Acceleration

TIME 93

� There are 3 types of float

� 1) Time Risk Allowances – (activity ‘float’ )

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

� 3) General Float – (activities NOT on the critical path)

� Who owns the float?

TIME 94

31 March 2011 | 95

Potential IssueThe Employer can fix Key Dates which the Contractor has to include in his programme.

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

KEY DATES

Solution

Key Dates are effectively used where there is an pa rticular interface with another contractor

Don’t use key dates to hand over an area of a build ing, in such circumstances the option for Sectional Completion should be selected

Impact on EmployerIncentivise Contractor to reach a particular milestone (eg a funding gateway) or construction interface

Opportunities for ECHComprehensive Planning with Key Dates identified

Impact on ContractorCan incur costs if not met, must be aware of dates

Example

31 March 2011 | 96

Potential IssueContractor or Project Manager can give an Early War ning as soon as they are aware of potential price increase or delay

Can instruct the other to attend a risk reduction m eeting to find solutions

EARLY WARNINGS

Solution

Early Warnings brings benefits - prevention better t han cure

Deal with matters while there is still time to posi tively influence the course of events before blame

Impact on EmployerContractual mechanism provided to enable the effective management of risk

Opportunity establish cost and time impact of change

Opportunities for ECH

Pragmatically resolve issues and prevent problems (capture measureable to demonstrate performance)

Use risk register to manage actions

Incentivisation models can stimulate reward against risk provisions in contract

Impact on ContractorCan agree changes pragmatically with PM

16 Early Warning

Contractor or Project Manager gives an early warning as soon as either becomes aware of a matter that may (can be Contractoror Employer risk)

� increase the total of the Prices� delay Completion or delay meeting a key date or� impair the performance of the works in use

Either the Contractor or the Project Manager may instruct the other to attend a risk reduction meeting At a risk reduction meeting those who attend co-operate in

� making and considering proposals� seeking solutions that will bring advantage to all those effected� deciding upon actions and who will take them

Project Manager records outputs

GENERAL 97

Early Warning – Benefits

� Prevention better than cure

� Proactive rather than reactive

� Early rather than late

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

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

GENERAL 98

31 March 2011 | 99

Potential IssueNEC3 contract forms only provide an outline of the obligations

Responsibility for design is to be identified in Wo rks Information

Preliminaries, Preambles, Provisional & Prime Cost Sums are not recognised as terms but can be included as part of the Works Information with scope identified.

CONTRACT DOCUMENTATION

Solution

Structure contract correctly

Consultants must review the NEC (ECC) to identify e ach clause that refers to Works Information

Complete Generic and Product Specific Works informa tion

Impact on EmployerStructure of contract may not be understood


Project Manager must develop robust and compliant Works Information – need to allocate correct resource for this

Employ NEC expertise to develop Works Information

Impact on ContractorStructure of contract may not be understood

CONTRACT DOCUMENTATION - WORKS INFORMATION

100

31 March 2011 | 101

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

�The ECC achieves flexibility through reliance on th e Works Information to contain project specific information such as;

- Tests, inspections requirements- Contractor design responsibility- Contractual information is required as the NEC (EC C) refers

to Works Information throughout the terms.

CONTRACT DOCUMENTATION – FOCUS ON WORKS INFORMATION

• Consultants should review the NEC (ECC) Contract to identify each clause that refers to each section of the Contract.

• The Works information could then be structured as b oth Generic Works information and Project Specific Works Information being identified as sub-headings under the following main headings:

31 March 2011 | 102

CONTRACT DOCUMENTATION – FOCUS ON WORKS INFORMATION

CONTRACT DATA

103

The Contract Data is in 2 parts:

� Part 1: Completed by Employer and issued as part of Tender

documentation

� Part 2: Completed by Contractor and returned as part of Tenderer’s

submission

CONTRACT DATA 104

CD Part 1 identifies general information such as:

� Main and Secondary Options selected

� Details of Employer, Project Manager, Supervisor, Adjudicator

� Completion Date (if decided by Employer)

� Defects Date

� Payment assessment interval

� etc

CD PART 1

Info required in CD Part 1 varies depending on Main & Secondary Options

selected, e.g. Retention percentage if Option X16 chosen

105

CD Part 2 identifies information such as:

� Contractor’s key people (e.g. Agent, Construction Manager etc)

� Fee percentages

� Tender price

� Completion Date (if tendered by Contractor)

� Data for use with Schedule of Cost Components

� etc

CD PART 2 106

SCHEDULE OF COST COMPONENTS

107

There are two Schedules of Cost Components

� Shorter Schedule of Cost Components

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

� only used to assess compensation events

� Schedule of Cost Components

� used with C-F only

� used to assess compensation events and

� recovery of the Contractors actual cost

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

CONTRACT DOCUMENTATION - SCHEDULE OF COST COMPONENTS108

31 March 2011 | 109

Potential IssueRisks are shared between the Employer and the Contr actor under some options (Target Cost Options)

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

ALLOCATION OF RISK

Solution

Review the contractual allocation of risk and perha ps negotiate a reallocation, amending the standard contract through Z Clauses

Risk transfer in a standard contract is allocated b etween the parties at Compensation Event clause 60.1 and Employer’s Risk clause 80.1

Impact on EmployerClear allocation of risk may not be understood or considered

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


Include Risk Allocation workshop during contract phase.

Provide expert advice on risk ownership under different options

Impact on ContractorClear allocation of risk may not be understood or considered

31 March 2011 | 110

Potential Issue

A standard Contract infers Fitness for Purpose is t he Duty of Care for design and assumes the Rights of 3rd Parti es Act applies.

REASONABLE SKILL & CARE / 3 rd PARTY RIGHTS

Solution

Use Option X15 to lower the Duty of care from Fitne ss for Purpose to the more typical Reasonable skill and care

Use Option Y(UK) 3 to limit 3rd parties from making claims under the Contract

Impact on EmployerAny 3rd party to the Contract could have right against the contract


Apply expertise with the Contract to protect the Contractor

Simple application of knowledge and training to the project team at the outset will prevent such issues from arising

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

31 March 2011 || 111

Potential IssueProgramme requirements at Clause 31.2 enable the Em ployer to define the management information and reporting req uirements.

EARNED VALUE ANALYSIS

Solution

Ensure enough information is provided under 31.2 to assess and challenge contractor quotations for Compensation Event Claim or Early Wa rnings.

Assimilate and report data through EVA to challenge the accuracy of the data provided by the contractor during the delivery of the project.

Ensure Works Information identifies information req uired through regular reporting

Impact on EmployerEnables the PM to manage Contractors more effectively

Difficult to achieve on Option A: Lump Sum Contracts


Clause 31.2 is key in providing the level of detail needed for reviewing Contractor quotes for Compensation or Early Warning.

Use clause 31.2 to enable EVA with Cost, Time and Resource in a single model

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

EC Harris NEC 3 rd Edition

Capability Development Programme

15 November 2009

OTHER MATTERS TO CONSIDER…

OTHER MATTERS TO CONSIDER –TESTING AND DEFECTS

113

40 Test and Inspections - As required by the WI

42 Searching and Notifying of Defects

� The Supervisor may instruct the Contractor to search for Defects

43 Correcting Defects

� The Contractor corrects Defects whether or not the Supervisor

notifies him of them

� The Contractor corrects notified Defects before the end of the

defect correction period. This period begins at Completion for

Defects notified before Completion and when the Defect is notified

for other Defects

� Supervisor issues the Defects Certificate

TESTING AND DEFECTS 114

44 Accepting Defect

� The Contractor or Project Manager may propose that the WI be changed to accept a Defect

� The Prices are reduced and / or an earlier Completion Date agreed

45 Uncorrected Defects

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

� If the Contractor is not given access to correct a notified Defect the Project Manager assesses the cost to the Contractor of correcting the Defect and the Contractor pays this amount


OTHER MATTERS TO CONSIDER - PAYMENT

117

50 Assessing the amount due

� Project Manager assesses the amount due at each assessment date

� first assessment date decided by the Project Manager to suit the procedures of the Parties

� later assessments dates occur

� at the end of each assessment interval until 4 weeks after issue of the Defects Certificate

� at Completion of the whole of the works

� No requirement for the Contractor to submit an application

� Amount due is the Price for Work Done to Date – PWDD

� ¼ of PWDD withheld until the Contractor has submitted a first programme acceptance showing all information which this contract requires

� Project Manager must give details of assessment

PWDD – differs between Options

PAYMENT

Option A

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

� each group of completed activities and

� each completed activity which is not in a group

A completed activity is one which is without Defects which wouldeither delay or be covered by immediately following work

PAYMENT

Option B

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

� the quantity of the work which the Contractor has completed for each item in the Bill of Quantitiesmultiplied by the rate and

� a proportion of each lump sum which is the proportion of the work covered by the item which the Contractor has completed

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

PAYMENT

Option C, D & E

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

PAYMENT

PAYMENT

Cash Neutral / Positive Contract

Payment timescales

starting date

1st assessment

date

2nd assessment

date

3rd assessment

date

assessment interval,

normally monthly

Amount of Defined Cost paid during

the first assessment interval

Amount of Defined Cost forecast to have

been paid by the next assessment interval

Up to 31 days

if monthly

final date for payment 21 days

after assessment date

cash positive

Option C & D

11.2 (23) Defined Cost is � the amount of payments due to Subcontractors for work which is

subcontracted without taking account of amounts deducted for � retention� payment to the Employer as a result of the Subcontractor

failing to meet a Key Date� the correction of Defects after Completion� payments to Others and� the supply of equipment, supplies and services included in

the charge for overhead cost within the Working Areas in this contract

and� the cost of components in the Schedule of Cost

Components for other work

less any Disallowed Cost

PAYMENT

There are two Schedules of Cost Components

� Shorter Schedule of Cost Components

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

� only used to assess compensation events

� Schedule of Cost Components

� used with C-F only

� used to assess compensation events and

� recovery of the Contractors actual cost

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

PAYMENT

Schedule of Cost Components is split into the following sections

1 People

2 Equipment

3 Plant and Materials

4 Charges

5 Manufacture and fabrication

6 Design

7 Insurance

PAYMENT

11.2 (25) Disallowed Cost – a listing of items which are deducted from Defined Cost, for example

� amounts not justified by the Contractor’s accounts and records

� failure to give an early warning

� Plant & Materials and resources not used to Provide The Works

� resources not used to Provide The Works

� correcting Defects after Completion

� correcting Defects caused by the Contractor not complying with a constraint on how he is to Provide the Works stated within the Works Information

PAYMENT

51 Payment

� The Project Manager certifies payment within one week of each assessment date

� Payment can be either from the Employer to the Contractor or vice versa

� Each certified payment is made within 3 weeks of the assessment date, or a different period if stated in the Contract Data

� Interest paid on late payment

PAYMENT

52 Defined Cost

� All the Contractors cost not included in Defined Cost are deemed to

be in the Fee

� Amounts included in Defined Cost are at open market or

competitively tendered prices with deductions for all discounts,

rebates and taxes which can be recovered

� Option C-F – Contractor keeps records of Defined Cost and makes

them available for inspection by the Project Manager

PAYMENT

EC Harris NEC 3 rd Edition

Capability Development Programme

15 November 2009

SUGGESTED AMENDMENTS…

31 March 2011 |Michael Spencer | 130

Suggested Z clauses (Amendments to the Contract)

■ Prevention

New grounds for a compensation event called “prevention”, effectively a Force Majeure provision, - entitles the Contractor to claim additional time and money.

Common to delete or amend it to be a time only Compensation Event in line with other standard forms.

■ Subcontracting Value for Money

Under cost reimbursement options the higher the works cost with Sub-Contractors, the higher the Contractors fee percentage.

Some clients introduce the need for competitive tendering, audit rights, visibility of supply chain, limitation on sub-tier subcontracting without acceptance.

31 March 2011 | 131


■ Proceeding regularly and diligently

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

■ Provisional Sums

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

■ Critical Path and Logic Linked programmes

The Contract does not require this, however, given clause 31.2 it is sensible to include this provision (alternatively include in the Works Information)

31 March 2011 | 132


■ Extension To Time Bar Timescales In The Contract

If suitable resources are unavailable, suitable amendments should be made to the contractual timescales for compensation.

■ Issue – Cash Positive

The standard ECC under the cost reimbursable options (C, D and E) is cash positive in terms of interim payments to the Contractor. We recommend that the Employer reviews the payment process to determine if they are happy to pay on a cash positive basis. If not we would recommend that the standard payment clause is amended to a cash neutral situation.

■ Issue – Assessing The Amount Due

Project Manager assesses the amount due at each assessment date. There is no requirement for the Contractor to submit an application. We suggest the Employer reviews this issue and if required amends the contract to make the submission of an application a condition precedent for payment.

31 March 2011 | 133


■ Issue – Disallowed Cost

The standard ECC under the cost reimbursable options (C, D and E) has a defined term Disallowed Cost. These are costs which are not recoverable by the Contractor.

We recommend that the Employer reviews these to ensure they are happywith what they cover. Particular attention is drawn the issue of Defects correction.

Under the standard ECC the majority of Defects identified and corrected before Completion will be paid for by the Employer. Employers need to understand this and make sure they are happy to allow this. This does bring some benefit to the Employer in that it encourages all Defects to be corrected prior to Completion.

Focus on the Professional Services Contract134

� When should it be used?

� PSC and ECC Compared

� Main Options

� Secondary Options

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

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

PROFESSIONAL SERVICES CONTRACT

Key Differences between the PSC and the WC

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

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

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

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


Differences between the PSC and the WC (Pricing)

� Option C and Option E

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

BAA PROFESSIONAL SERVICES TERMS (PSC)

Key Differences between the PSC and the WC

The following Secondary Option Clauses are used with the PSC

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


Focus on the Term Service Contract139

� When should it be used?

� Range of use

� TSC and ECC Compared

� Main Options

� Secondary Options

When should it be used?

■ Distinctive nature

■ Providing a service over a period of time (“service period”)

■ Examples in construction

■ Other examples

Range of use

■ Very wide range

■ Providing a service – not a project

■ Maintaining existing condition of an asset

■ Not normally improving condition of asset

■ But may include some betterment

■ May include renewal and replacement

TSC and ECC compared

■ TSC

– provides a service

– service period (not extended)

– Service Manager

– 3 main Options

– 13 secondary Options

– X19 –Task Order

■ ECC

– provides works

– Completion Date (can be extended)

– Project Manager & Supervisor

– 6 main Options

– 18 secondary Options

– No “call-off” option

TSC and ECC compared

■ TSC

– Contractor’s plan

– Defects corrected asap

– Defined Cost in core

– Affected Property

– Allows for Employer’s equipment

– 14 CE’s + 9 in secondary Options

– no unforeseen physical conditions CE

– no weather CE

■ ECC

– Programme

– Defects corrected in dcp

– Defined Cost in main Options

– Site and Working Areas

– Equipment always Contractor’s

– 19 CE’s + 5 in secondary Options

– unforeseen physical conditions CE

– weather CE

TSC and PSC Compared

■ TSC

– mainly physical work

– maintenance-type work

– normally on Employer’s office and site

■ PSC

– mainly non-physical work

– project work

– premises or asset

Main Option clauses

Main Option clauses are as follows

■ A Priced contract with price list

■ C Target contract with price list

■ E Cost reimbursable contract

Secondary Option clauses

■ X1 - Price adjustment for inflation

■ X2 - Changes in the law

■ X3 - Multiple currencies

■ X4 - Parent company guarantee

■ X12 – Partnering

■ X13 - Performance bond

■ X17 - Low service damages

Secondary Option clauses

■ X18 – Limitation of liability

■ X19 – Task Order

■ X20 – Key Performance Indicators

■ Y(UK)2 – The Housing Grants, Construction and Regeneration Act 1996

■ Y(UK)3 – The Contracts (Rights of Third Parties) Act 1999

■ Z - Additional conditions of contract

Questions : Discussion Forum 148

JCT 2005

PART 5: EFFECT OF JCT 05 (Part 1)

Conditions

� Definition and interpretation

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

� Control of the Works (access instructions, CDM)

� Payment

� Changes

� Injury, Damage and insurance

� Third Party Rights and Warranties

� Termination

� Disputes


What are the Key Changes (Are the changes of substance or of form?)

� Integration of the Supplements

� Third Party Rights (Big Change)

� Change in Language, Structure and Terminology


1. Design Responsibilities and Discrepancies – Same as before “Still Vague with regard to priority of ER’s and CP’s!!”

2. PI cover (Now Expressly Required)

3. Design Submission Procedure incorporated into the Standard Form (A, B, C – Approval Structure)

Brief Summary of DB05


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

4. Third Party Rights and Warranties

� Effect of the Rights of Third Parties Act 1999

- JCT 98 contracted out of the Act

- DB05/SBC05 provides for-Third Party Rights Schedule (Purchasers, Tenants and Funders)-CW’s-S/c CW’s

Brief Summary of DB05


Brief Summary of DB05 (cont…)

5. Insurance provisions for loss of LAD’s (Deleted)

6. Contractor’s Price Statement for Changes (Deleted)

7. Automatic Determination on Contractor’s Liquidation or Bankruptcy (Now provides the other party the choice to determine)

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

9. Provisions for nominated subcontractors (Deleted)

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

Differences in Key Clauses – Variations vsCompensation Events

JCT 05



NEC 3






JCT 05




NEC 3




Differences in Key Clauses – Extension of Time

JCT 05 SBC






Options Available within the Standard Forms

JCT Suite of Contracts 2005

• Standard Building Contract (SBC):

• With Quantities • Without Quantities• With Approximate Quantities

• Common Characteristics:

� Employer’s Design Team responsible for design� Architect/Contract Administrator responsible for managing the contract� Contractor responsible for carrying out the Works in accordance with the

contract documents� Possible for discrete parts to be designed by the contractor� Contract documents include Bills of Quantity (if applicable), Drawings,

Specifications� Payments issued at intervals not exceeding one month.

JCT Suite of Contracts 2005 (cont’d)

• JCT Design and Build

• Characteristics:

� Provides ‘single point of responsibility’ for design and construction.� The contractor is responsible for completing design and carrying out the

construction works� No architect/contract administrator. � There is provision for a named Employer's Agent� There is no clerk of works� Contract documents include Employer's Requirements, Contractor's

Proposals and Contract Sum Analysis � There is provision for the obtaining of planning permission and other

approvals� Payment can be at monthly intervals or at the end of agreed stages� Alternative provisions for payment – either stage payments or value of

work executed



JCT Excellence


� collaborative behaviour between the various parties

� active use of risk management techniques

� flexibility in use

� complete supply chain management


PART 5 : DISCREPANCIES

� JCT SBC 05

�The Contract Documents are defined as:

�“The Contract Drawings, the Contract Bills, the Agreement and these Conditions, together with (where applicable) the Employer’s Requirements, the Contractor’s Proposals and the CDP Analysis”

�Cl 1.3 “The Agreement and these Conditions are to be read as a whole but nothing contained in the Contract Bills or the CDP Documents shall override or modify the Agreement or these Conditions”

� JCT SBC 05 (With Quantities)

�Examples of how discrepancies are dealt with are as follows:

�Cl 2.14 states that errors in the contract bills of quantity should be corrected and treated as a variation unless it concerns complying with Statutory Requirements

�Cl 2.14 states where there is an error in the Contractor’s Proposals or the CDP analysis, it is corrected with no adjustment to the Contract Sum

�Cl 2.15 states that if the Contractor finds any such departure, error, omission or inadequacy he should immediately give writtennotice with appropriate details to the Architect/Contract Administrator who will issue instructions

PART 5 : DISCREPANCIES (Cont’d)


� JCT DB 05

�The Contract Documents are defined as:

�“The Agreement and these Conditions, together with the Employer’s Requirements, the Contractor’s Proposals and the Contract Sum Analysis”

�Cl 1.2 states “The Agreement and these conditions are to be read as a whole but nothing contained in the Employer’s Requirements, the Contractor’s Proposals or the Contract Sum Analysis shall override or modify the Agreement or the Conditions


� JCT DB 05

�Discrepancies are dealt with as follows:

�Cl 2.13 states if the Contractor finds any inadequacy in the Employer’s Requirements or discrepancy in the Contractor’s Proposals he shall notify the Employer

�Cl 2.14 states where the discrepancy is within the Contractor’s Proposal, he shall inform the Employer in writing of his proposed amendment and the Employer shall decide between discrepant items or otherwise accept Contractor’s proposed amendment

�Cl 2.14.2 states where the discrepancy is within the Employer’s Requirements, the Contractor’s Proposals shall prevail

PART 6 : LETTERS OF INTENT

� What do you do if Contract Documents are not completed and signed prior to starting on site?

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

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

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


� Effects of Letters of Intent depend entirely upon their wording

� Usually the case that such letters do not give rise to any legalrights or obligations

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

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


� Do’s and Don’ts

�Do

�Clearly identify the scope of the works

�Set out the matters to be resolved for the main contract to be entered into

�Make it clear the Letter is intended to give rise to an interim agreement

�Set a limit on the amount to be paid to the Contractor (inc VAT)

�Make it clear who is to be the party issuing instructions


� Do’s and Don’ts

�Don’t

�See a Letter of Intent as a substitute for a properly drafted contract

�Have a Letter of Intent which incorporates all the terms of the contract

�Forget the limitation period for liability for work carried out under a Letter of Intent will be 6 years

�Forget that whether you are the Contractor or the issuer you are at risk if the Letter of Intent is not cleary drafted


� Letters of Intent are between the Employer and Contractor

� A Letter of Intent may come in many forms

�A non-binding statement of future intention of both parties

�An ‘if’ contract which creates binding contractual rights

�A complete contract

� What Criteria must be met by a Letter of Intent?

�Certainty as to key terms

�Must be consideration

�Both parties must have a mutual intention to enter into a binding legal contract

PART 7 : WARRANTIES

� The Conditions of Contract may require the Contractor and Subcontractors to provide collateral warranties to:

�Funders

�Purchasers/Tenants

� Purpose

�To bring remote owners into direct contractual relationship withthose against whom they would only be able to claim in the tort of negligence

�A Warranty is a contractual relationship and if broken does not entitle the other party to terminate, it simply entitles that party to sue for damages

PART 7 : WARRANTIES

� JCT suite of contracts also include Contracts (Rights of Third Parties) Act 1999 but parties need to be identified in Contract Particulars

� NEC 3 suite of contracts also include Contracts (Rights of ThirdParties) Act 1999 as an option but parties need to be identified in Contract Data

� Until this act came into force, it was a rule of English Law that only the two parties to a contract had the right to bring an action to

enforce its terms – “Privity of Contract”� Check amendments


JCT Suite of Contracts 2005

• With Quantities • Without Quantities• With Approximate Quantities

• Common Characteristics:

� Design Team responsible for design� Architect/Contract Administrator responsible for managing the contract� Contractor responsible for completing in accordance with the contract

documents� Possible for discrete parts to be designed by the contractor� Contract documents include Bills of Quantity (if applicable), Drawings,

Specifications� Payments issued at intervals not exceeding one month intervals


• JCT Design and Build


� Provides ‘single point of responsibility’ for design and construction.� The contractor is responsible for completing design and carrying out the

construction works� No architect/contract administrator. � There is provision for a named Employer's Agent� There is no clerk of works� Contract documents include Employer's Requirements, Contractor's

Proposals and a Contract Sum Analysis � There is provision for the obtaining of planning permission and other

approvals� Payment can be at monthly intervals or at the end of agreed stages� Alternative provisions exist for payment – either stage payments or value

of work executed


JCT Excellence


� collaborative behaviour between the various parties

� active use of risk management techniques

� flexibility in use

� complete supply chain management


Differences in Key Clauses – Variations vs Compensation Events

JCT 05



NEC 3






JCT 05




NEC 3




Differences in Key Clauses – Extension of Time

JCT 05






NEC 3

� Early warning, unless a Compensation Event

� Delay in completion

� Delay in meeting a key date

� Project Manager or Contractor request a meeting to mitigate delay

� Compensation Event

� Contractor submits quotation for delay

� Project Manager can revise completion date or key dates

Differences in Key Clauses – Extension of Time Cont’d

Choosing a Contract

Key Considerations for a Project:

� Client Involvement

� Design Management

� Capacity for Variations

� Complexity

� Speed

� Clarity of Remedies

� Default

� Delay

� Quality Failure

FIDIC – an Introduction

June 2010

“Fédération Internationale des Ingénieurs Conseils”

(International Federation of Consulting Engineers)

FIDIC Forms - the ‘Rainbow’ Suite

■ Red - Construction

■ Orange - Design & Build/Turnkey

■ Yellow - Design & Build

■ Silver - EPC Turnkey

■ Gold - DBO Contract

■ Green - Minor Works - ‘mini-Red Book’

■ White - Professional Services Contract

■ Blue - Dredging and Reclamation

■ Pink - MDB Harmonised Red Book

Choice of Form

100%0% Extent of design by Contractor

Ris

k tr

ansf

er to

Con

trac

tor

Cer

tain

ty o

f out

turn

pric

e

Red/

Pink

Yellow

Silver

GreenLow value

simple works

Red Book

Red Book, First Edition 1999:

– Supersedes previous editions from 1957

– Based on UK ACE/ICE forms

– Construct Only with provision for CDP

– Assumes the Contract Administrator is the designer

What does it contain?

■ Contract Agreement

■ General Conditions

■ Particular Conditions

■ Appendix to Tender

■ DAB Agreement

■ Example Proformas

■ Guidance Notes

Principal Parties:

■ Employer

■ Engineer

■ Contractor

Other Parties

■ Designers

■ Supervisor (in certain European Jurisdictions)

■ Dispute Adjudication Board (DAB)

Typical Organisation

Employer

Project Board

PM/Contract Administrator(‘Engineer’)

ConstructionDesign SupervisionCost Admin.

Galleria Riga – Procurement (Deal Map – FIDIC Red)

DeveloperSIA Patollo

Subcontractors

Contractor (SIA Re & Re)

PM/CAE C Harris LLP

Construction Supervisor(Jurevics un Partneri)

KEYPrincipal documentFunctionPayment

Lenders(Nordea)

ArchitectSarma &Norde

Structural EngBKB

M&E Design

(Idom)

Tenants(TBC)

Fit Out Contractors

Dispute AdjudicationBoard

Employer

■ Gives the Contractor possession of the Site

■ Empowers the Engineer

■ Ensures performance of Employers Personnel

■ Assists with Permits

■ Confirms Variation requirements to the Engineer

■ Pays the Contractor per the Engineer’s Certificates

The Engineer

Directs and manages the Contractor by:

■ Providing Information

■ Issuing Instructions

■ Approving Quality of the Works

■ Certifying Payments to be made by the Employer

■ Making Determinations where required

The Contractor

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

Supervisor

■ Statutory Powers per local legislation

■ No direct contractual relationship with Engineer

■ Able to override Engineer’s authority

■ FIDIC only recognises Engineer

Engineer/Designer Interface

1.9: Delayed Drawings or Instructions

3.3: Instructions of the Engineer

4.1: Design discrepancies advised by Contractor

4.9: Quality Assurance

7.2: Samples – Engineer’s consent

13.2: Value Engineering

Engineer/PQS Interface (where applicable)

12: Measurement and Evaluation

13: Variations and Adjustments

14: Contract Price and Payment

Engineer/Supervisor Interface (if applicable)

4.1: Supervisor’s Instructions

7.4: Testing

9.1: Tests on Completion

Determinations:

Sub clause 3.5:

“Whenever these Conditions provide that the Engineer shall proceed in accordance with this Sub-Clause 3.5 to agree or determine any matter, the Engineer shall consult with each Party in an endeavour to reach agreement. If agreement is not achieved, the Engineer shall make a fair determination in accordance with the Contract, taking due regard of all relevant circumstances.

The Engineer shall give notice to both Parties of each agreement or determination, with supporting particulars. Each Party shall give effect to each agreement or determination unless and until revised under Clause 20 [Claims, Disputes and Arbitration].”

Determinations only apply to Sub-Clauses:

1.9: Delayed Drawings/Instructions

2.1: Delayed Access to Site

2.5: Employers Claims

4.7: Setting Out

4.12: Unforseeable Conditions

4.19: Elect/Water/Gas used

4.20: Use of Employer’s Equip’t

4.24: Fossils

7.4: Testing

8.9: Consequences of suspension

9.4: Test failure

10.2: Taking Over of Parts

10.3: Interference with Tests

11.4: Failure to remedy defects

11.8: Cost of search for defects

13.2: Value Engineering

13.7: Changes in legislation

15.3: Valuation at Termination

16.1: Post Suspension entitlement

17.4: Employers Risks

19.4: Force Majeure

20.1: Contractors Claims

Management of Differences/Disputes

Four levels:

1. Informal

2. Engineers Determination

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

4. Arbitration (default), or Courts

Informal:

■ Negotiation

■ Mini –Trial

■ Conciliation

■ Mediation (first stage of Engineer’s Determination)

Engineer’s Determination

■ Initially acts as mediator…failing which;

■ Engineer receives submissions from both parties;

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

Dispute Adjudication Board (DAB)

■ One or three members

■ DAB Decision temporarily binding

Arbitration

■ Final Determination – Tribunal Award is registrable.

■ Can take place in another country

■ One or Three Member Tribunal

■ ICC Rules as default

Challenges when using FIDIC

■ Intended to be a contract for expatriate use

– Language?

– Applicable law?

– Dispute between international participants?

■ Arrangements between Supervisor and Engineer

■ Can the Engineer be impartial when making Determinations?

■ Can ECH fulfil (all of) the duties of Engineer?

Contract Terms and Conditions Expert Presentation

Documents

Transcript of Contract Terms and Conditions Expert Presentation