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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