Contract Administration Flashcards
1
Q
How did you issue the instructions at Hotham’s Court?
A
In writing (Contract Instructions).
2
Q
Can you issue instructions verbally?
A
Yes, but should be followed up with a written instruction.
3
Q
Under JCT Minor Works can an employer issue instructions?
A
No, they must be issued by the CA/Architect.
4
Q
How did you finalise the final account at Hotham’s Court?
A
By reviewing the contract sum and any additional costs incurred through variations, provisional sums, loss and expense…
5
Q
How do you agree final account?
A
Negotiate the costs incurred throughout the project in addition to the contract sum, whilst considering any variations, provisional sums, prime costs, loss and expense.
6
Q
What happens if you cannot agree FA?
A
Refer the matter to ADR.
7
Q
Can you explain the standard payment terms under JCT?
A
- The contractor can make an application for payment any time up to IVD (no later than 7 days prior to the Due Date for IC).
- The Due Date is 7 days after the IVD.
- The payment certificate should be issued no later than 5 days after the due date.
- The Final Date for Payment is 14 days following the Due Date (sometimes adjusted to 21 days).
8
Q
What is the purpose of interim valuations?
A
The valuation provides advice to the certifier (CA) for issuing of payment certificates and interim notices.
9
Q
What happens if the CA doesn’t issue their payment cert in 5 days?
A
The contractor’s payment application becomes a payment notice.
10
Q
What should you do if a contractor does not submit a payment application?
A
The CA should carry out their own assessment of the works and issue a payment certificate on that basis.
11
Q
What is the purpose of a pay less notice?
A
It is a notification from the Employer of the intention to pay less than the amount previously certified.
12
Q
Who can issue a pay less notice?
A
The Employer, or the CA on behalf of the Employer.
13
Q
Can you talk me through the standard JCT Payment terms.
A
Interim Payments
- Contractor submits interim payment application 7 days prior to due date.
- CA required to issue payment certificate within 5 days of the due date.
- Final date for payment is 14 days from the due date.
- Employer (or CA on behalf of) to issue pay less notice no less than 5 days prior to final date for payment.
Final Account
- Contractor to issue documentation for computation of the FA within 6 months of PC (3 month default period for MW).
- Final account to be ascertained within 2/3 months from receiving the documentation, depending on the form of contract.
- IC, SBC (3 months)
- DB (2 months)
- 28 days for MW
14
Q
How do the payment timescales differ between the JCT contracts?
A
- Minor works – payment application can be made on or before the due date.
- Intermediate & SBC – payment application must be submitted no later than 7 days before the due date.
15
Q
When are interim payments required?
A
When the duration of a project is 45 days or more.
16
Q
Do you know where the 45 day timescale for interim payments is stipulated?
A
Housing Grants, Construction and Regeneration Act 1996.
17
Q
What is the purpose of the Housing Grants, Construction and Regeneration Act 1996?
A
- Intention to ensure payments are made promptly throughout the supply chain and that disputes are resolved quickly.
Provisions of the Act include:
- The right to be paid in interim, periodic or stage payments.
- The right to be informed of the amount due, or any amounts to be withheld.
- The right to suspend performance for non-payment.
- The right to adjudication.
- Disallowing pay when paid clauses (payment of sub-contractors when main/principal contractor has been paid).
18
Q
What is the significance of the Local Democracy, Economic Development and Construction Act 2009?
A
- Introduced in 2011 and amends the HGCRA 1996.
- The Act removes the requirement for contracts to be in writing.
- Enables parties to enter adjudication even when a contract has not been formalised in writing.
19
Q
What other methods of payment may be included within a contract?
A
Stage payments – these payments will be due at certain stages of the works, for example, completion of the substructure, construction of external walls, construction of the roof, internal fit-out etc.
20
Q
What is a provisional sum?
A
A sum provided for work which is not completely designed.
21
Q
What is the difference between a defined and undefined provisional sum?
A
Defined Provisional Sum
A defined provisional sum includes information relating to:
- Nature and construction of work.
- How and where the work is to be fixed to a building and what other work is to be fixed thereto.
- A quantity or quantities that indicate the scope and extent of the work.
- Any specific limitations and the like defined.
The contractor is deemed to have made allowance in their tender submissions for pricing/preliminaries, planning and programming.
Undefined Provisional Sum
- A sum provided for work which is not completely designed and less well described than defined provisional sum items.
- The contractor is not deemed to have made any allowance in their tender submissions for pricing/preliminaries, planning and programming.
- The contractor may be entitled to an extension of time and/or the recovery of loss and expense.
22
Q
Can you provide an example of a defined provisional sum item?
A
Replacement of roof tiles, however the exact specification of tiles has not yet been decided upon.
23
Q
Can you provide an example of an undefined provisional sum item?
A
Works below an existing structure.
24
Q
What are the contract implications of defined and undefined provisional sums?
A
- The contract sum is subject to change once a firm cost can be provided by the contactor.
- The contractor may be entitled to an extension of time and/or loss and expense (undefined).
25
You said you advised on the provision of a Pay Less Notice at Sefton Avenue. Can you explain what is the purpose of a pay less notice?
A pay less notice notifies the contractor that the employer intends to pay less than the amount previously certified within the payment certificate.
26
Who can issue a pay less notice?
The employer or the contract administrator on behalf of the employer.
27
Can you issue a pay less notice?
Yes, if asked to do so by the employer.
28
What should a pay less notice contain?
* The revised amount.
* Reasoning behind the reduced payment.
* Any supporting documentation.
29
What constitutes a valid pay less notice?
* It must be issued in time (no later than 5 days before the final date for payment).
* It must provide a basis for the calculation and must show the revised amount to be paid.
30
What constitutes a change under a contract?
Includes any change to the works regarding:
* Quantity
* Quality
* Design
* Working conditions
* Sequencing
* Additions, omissions or substitutions
31
When assessing a variation, what advice should you give to the client?
* The impact upon cost, time and suitability of the proposed works.
* Possible extensions of time (relevant event).
32
What is the final account?
* The conclusion of the contract sum (including all necessary adjustments) and signifies the agreed amount that the employer will pay the contractor.
* Typically include any loss and expense associated with EoT’s and any other claims the contractor believes they are due under the contract.
* Will not typically include liquidated damages, VAT or interest on overdue payments.
33
What should be accounted for when preparing the final account?
* Provisional sums (which can only be expended by issue of a contract instruction)
* Agreeing prime cost sums (where applicable)
* Any loss and expense associated with EoT’s
* Adjustment of provisional/approximate quantities
* Fluctuations
* Any set-off/contra charges (typically a sub-contractor issue)
34
What is the purpose of the final account and who prepares it?
* To enable the final certificate to be produced.
* Prepared by QS (CA for MW).
35
When should FA be ascertained?
* Within 2 months (DB) of information being provided by contractor.
* Within 3 months (SBC) of information being provided by contractor.
36
What must the final certificate state?
* Total adjusted contract sum.
* Total of all additions / deductions.
* Total of all previous interim payments made to the contractor.
* The difference – expressed as a debt due from one party to the other.
37
What is released to the contractor in the final certificate?
Remaining retention.
38
What are the payment timescales for final account under JCT MW?
* Due date is 28 days from the contractor providing documentation to the CA (or later if specified).
* Final certificate to be issued within 5 days of the due date.
* The final date for payment is 14 days from the due date.
39
How long does a party have to commence proceedings (adjudication / arbitration) after issue of the final certificate?
28 days.
40
How long does the contractor have to submit documentation to the CA required for computation of the final payment?
* 6 months after practical completion certified (can be amended in MW, however is typically 3 months).
* Including substantiation to variation figures, subcontractor quotations, daywork sheets, loss and expense claims and build-up to fluctuations.
41
What if the contractor does not submit information for the FA within 6 months?
* CA to issue one month notice to contractor requesting information if not provided.
* If the contractor fails to supply information within one month, CA to produce Final Statement.
42
What happens if you cannot agree FA?
* Consider using ADR.
* Starting with mediation or conciliation (strongly advised by RICS).
* Adjudication will provide a quick turnaround (28 days for binding decision to be made following referral).
43
If variations have not been formally agreed at FA stage, what do you do?
Issue a ‘wrap up’ instruction for the variations not previously instructed.
44
Why may FA's not be agreed?
* Disputes over final account sum.
* Disputes over extent of works instructed to be carried out by the contractor.
45
What should be in a FA statement?
* The final account sum as adjusted.
* The sum of amounts already stated as due in Interim Certificates plus the amount of any advance payment made and (where relevant) any sums paid in respect of any such Payment Notice.
46
At which point would you consider a project to be practically complete under a JCT contract?
* When the works are substantially completed to a point which allows the employer to take beneficial occupation of the works and to use them for their intended purpose.
* PC is subject to a test of reasonableness, known as the de minimis principle.
* PC should not be refused if there are only very minor defects in the works.
47
What is the significance of issuing practical completion?
* Employer takes occupation and control of the building.
* Contractor is no longer liable for delay damages (LAD’s).
* Risk of loss or damage to works passes to the employer (employer to insure the works), which terminates the requirement for the contractor to insure and secure the works.
* Commencement of defects liability period.
* Half of retention is released – remaining released upon issue of certificate of making good defects and final certificate.
* Requirement for an account of the works to be prepared (contractor to issue information within 6 months of PC).
* Obligations under third party agreements.
48
How are defects dealt with during the defects liability period?
* Employer notifies CA of any defects.
* CA assesses them to decide if they are classed as defects (i.e. works that are not in accordance with the contract), or whether they are maintenance issues.
* CA to issue notice to the contractor to make good the defects within a reasonable time.
* At the end of the defects liability period, the contract administrator prepares a schedule of defects, listing those defects that have not yet been rectified, and agrees with the contractor the date by which they will be rectified. The contractor must in any event rectify them within a reasonable time.
* When the contract administrator considers all the items on the schedule of defects have been rectified, they issue a certificate of making good defects. This has the effect of releasing the remainder of any retention and results in the final certificate being issued.
49
What happens if the contractor fails to make good any defects within a reasonable time?
An alternative contractor can make good the defects. The cost of the works would be deducted from any remaining retention.
50
How are defects dealt with after the defects liability period?
* The contractor is not contractually obliged to make good any defects.
* The employer must instead seek redress in an action for damages, for breach of contract, or for negligence. In the case of dwellings there is a statutory remedy provided by the Defective Premises Act 1972.
* The rights of action are time barred (6 years for contracts executed underhand & 12 years for contracts executed as a deed).
51
What is the difference between partial possession and sectional completion?
* Sectional completion allows for different completion dates for different sections of the works, allowing the client to take possession of the completed parts whilst construction continues on others.
* Sectional completion differs from partial possession in that it is pre-planned and defined in the contract documents.
* The contractor is not obliged to allow partial possession (although permission cannot be unreasonably withheld), and may not wish to if, for example, access routes are difficult to achieve, it would disrupt the works, or it would incur additional costs.
52
Can you explain the implications of issuing partial possession?
* Any part for which partial possession is given is deemed to have achieved practical completion.
* Half of the retention for that part must be released.
* The defects liability period begins for that part.
* Liquidated damages reduce proportionally.
* The client is responsible for that part and should insure it.
53
What are the key parts of the construction act?
* The right to be paid in interim, periodic or stage payments.
* The right to be informed of the amount due, or any amounts to be withheld.
* The right to suspend performance for non-payment.
* The right to adjudication.
* Disallowing pay when paid clauses.
54
What does the act say about payment?
Interim, periodic or staged payments must be allowed for in projects lasting at least 45 days.
55
What happens if there aren't any mechanisms for payment in a contract?
The payment mechanisms in the Scheme for Construction Contracts Regulations 1998 apply.
56
At what periods within a project are interim payments normally due?
* The first interim payment should be no later than one month after works commencement date.
* Intervals between interim valuations should be no more than one month.
57
What should be included within an interim payment application?
Total value as at the due date of:
* work properly executed, including the value of any variation and/or provisional sum works that has been properly executed and instructed under a contract administrator’s instruction
* materials and goods that have reasonably and properly been brought on to site for the purpose of the works and are adequately protected against weather and other casualties
Less:
* the total sums stated as due to the contractor in previous interim certificates and
* any sums paid in respect of any payment notice given after the issue of the latest interim certificate.
58
What must you consider before including materials on site within an interim valuation?
Materials and goods must:
* Be delivered to or adjacent to the works.
* Have been reasonably, properly and not prematurely brought to or adjacent to the works.
* Must be adequately protected against weather and other casualties. ‘Other casualties’ includes theft and certain other risks referred in the contract conditions.
59
What must you consider before including materials off-site within an interim valuation?
Materials and goods must:
* Not have a retention of title in the supply contract of the materials or goods.
* Once the materials have been built into the works and cannot be removed without causing damage, the ownership passes to the employer, despite any retention of tile clauses.
* A vesting certificate provided by the supplier or sub-contractor can protect an employer in the event that the contractor becomes insolvent when the materials are still within their possession.
* There is no provision in MW contract for payment of off-site materials.
60
How would you go about certifying an interim valuation where works have not been carried out in accordance with the contract?
* Deduct the cost of works from the interim valuation and request that the contractor redoes or amends the works.
* Alternatively, the defective works may be accepted by the CA and the cost of works is deducted from the payment certificate.
61
What is the purpose of retention?
* Retention provides a financial security for the employer and an incentive for contractors to make good any defects identified within the defects liability period.
* Retention is a sum of money (the retention fund) held by the employer as safeguard against defective or nonconforming work or materials provided by the contractor. It is to safeguard the employer against latent defects (i.e. defects that may subsequently develop during the rectification period, or defects liability period, which were not identified at practical completion) and the contractor’s possible failure to complete the contract.
62
How much retention is held as standard in the various JCT contracts?
* 3% - SBC, DB
* 5% - MW, IBC
63
What is the alternative to retention?
The use of a retention bond.
64
What is a retention bond?
* Used an as alternative to withholding retention from interim payments.
* May be used in difficult market conditions to help contractor’s cash flow.
* Put in place by the employer.
65
How do you assess costs for variations to ensure they are fair and reasonable?
Assess costs using the Valuation Rules:
* Measurable work
* Day work
* Change of conditions for other work
* Additional provisions
* Contractor’s design portion - valuation
66
Who can terminate a contract under JCT?
* The contractor or the employer.
* May be terminated by default where frustration occurs, making it impossible or illegal for the terms of the contract to be fulfilled.
67
Why may an employer terminate the contract?
* Insolvency by the contractor.
* Specified default by the contractor e.g. failure to proceed regularly and diligently with the works, suspension of works without reasonable cause, refuses or neglects to comply with an instruction to remove any work/materials/goods not in accordance with the contract. Breach of CDM.
* Corruption – Contractor commits an offence under the Bribery Act 2010.
68
Can you outline the specified defaults by a contractor?
* Without reasonable cause wholly or substantially suspends carrying out the works.
* Failure to proceed regularly and diligently with the works.
* Refuses or neglects to comply with a notice or instruction to remove any works, materials or goods not in accordance with the contract.
* Assignment without consent.
* Failure to comply with sub-contracting obligations…..
* Failure to comply with CDM.
69
How can a contract be terminated by the employer?
* Notice served by CA specifying the default of the contractor.
* If the contractor continues a specified default for 14 days from receipt of the notice under clause 8·4·1, the Employer may on, or within 21 days from, the expiry of that 14 day period by a further notice to the Contractor terminate the Contractor's employment under this Contract.
70
What happens once an employer terminates a contract?
* The employer can choose to either proceed with the works using another contractor.
* If within the period of 6 months after termination the employer does not proceed with the works, they must notify the contractor.
71
Why may a contractor terminate the contract?
* Insolvency by the employer.
* Specified default by the employer e.g. failure to adhere to payment timescales or the employer obstructs or interferes with the issuing of any certificate due under the contract.
* Failure of employer to comply with CDM.
72
How can a contract be terminated by the contractor?
If a specified default or a specified suspension event continues for 14 days (7 days for MW) from the receipt of notice, the Contractor may on, or within 21 days (10 days for MW) from, the expiry of that 14 day period by a further notice to the Employer terminate the Contractor's employment under this Contract.
73
What is the meaning of frustration in the context of contracts?
* Frustration occurs when any event or circumstances beyond control of both parties changes the contractual obligations or makes it impossible or illegal to fulfil their contractual obligations. The happening of such events automatically discharges contract.
* If a frustration event occurs, the contract automatically ends and the parties are excused from their future obligations, although any accrued liabilities will remain. For example, such liabilities could be defects for the work already undertaken and the remaining defects period remains in place.
* There will be no contractual mechanism for dealing with a frustration event.
74
What is novation?
* Novation is where a new contract transfers the rights and obligations of one contractual party to a new third party.
* This is common on design and build projects where the design team are appointed by a client to carry out initial studies or prepare a concept or detailed design, but then when a contractor is appointed to carry out or complete the design and construct the works, the design team (or part of it) is novated to work for them.
75
What are the advantages of novation?
This can be beneficial to clients as it maintains continuity between pre-tender and post-tender design whilst leaving sole responsibility for designing and building the project with the contractor. Novation effectively over-writes the contractual history to give the impression that the consultant has worked for the contractor throughout the project.
76
What issues may occur following the novation of a design team?
There may be disputes regarding errors made within the design before the design team was novated over to the contractor.
77
How does novation affect the Employer’s rights?
* They lose all contractual relations with the novated party and therefore the right to take action for a breach.
* It is therefore common for there to be a collateral warranty between the employer and novated party.
78
What is assignment?
Assignment is the transfer of contractual rights or contractual benefits only as burdens cannot be assigned.
79
Under what circumstance may assignment take place?
Assignment of the rights under a collateral warranty to a different tenant / purchaser.
80
You said you advised your client at Sefton Avenue of the implications of non-payment and the contractor’s right to suspend performance. Can you please explain the process involved should the contractor wish to suspend performance?
* If the employer fails to make payment to the contractor by the final date for payment, the contractor can then serve notice to the employer of their intention to suspend performance, along with confirmation for grounds for the suspension.
* If payment has not been made by the employer within the 7-day notice period, the contractor may suspend performance of any or all of their contractual obligations until payment is made in full.
* The contractor will be entitled to reasonable cost and expense incurred by them as a result of the suspension.
* Applications for cost and expense should be made to the CA. The amount of which will be included within the next interim certificate.
81
What are the implications of non-payment?
* The payee will be entitled to interest on the amount due for the period from the final date for payment until payment is made.
* Any such amount will be recoverable as a debt.
82
What was the amount of interest due for non-payment?
5% per annum over the official bank rate of the Bank of England is payable by the Employer for the period until payment is made.
83
You said you certified practical completion at Sefton Avenue. Can you please explain the process and what documentation would be required for this?
* I undertook an inspection of the works to ensure they had been completed to the point in which the employer was able to take beneficial occupation and to make use of the works for their intended purpose.
* I ensured that all documentation including gas/electrical test certificates and any warranties/guarantees had been provided by the contractor prior to issuing PC.
* Upon reviewing the works, I issued the certificate of practical completion to the contractor.
84
You say you advised the client on the implication of non-payment, please can you run through those implications?
* Contractor within their contractual right to suspend performance of any / all obligations under the contract if the employer fails to make payment and after the expiry of the 7 day notice period given by the contractor.
* Contractor entitled to reasonable loss and expense.
* Interest will be accrued on the amount due.
* Suspension period ceases once payment is made.
85
What steps should be taken in the event of a contractor becoming insolvent?
- Ensure that the contractor has formally entered into administration before considering terminating the contract.
- Secure the site for H&S reasons and to ensure that no materials can be removed by contractors.
- Inspect the site to ascertain the extent of works undertaken to date.
- Establish any materials offsite which have / haven’t been paid for. Any items paid for and ownership transferred to the Employer should be clearly marked to avoid the administrator assuming the materials belong to the contractor.
- Review any sub contracts, supply contracts, appointments and collateral warranties.
- Establish the sum of payments made to date to the contractor.
- Prepare a notional final account.
86
What other remedies may a contractor consider as a substitute to suspension of performance?
- Commencing an adjudication;
- Claiming contractual interest, or interest under the provisions of the Late Payment of Commercial Debts (Interest Act) 1998 of 8% over Base Rate;
- Issuing a Letter of Claim in compliance with the Practice Direction: Pre-Action Protocols and commence legal proceedings.
87
What should be included within the description of work for a provisional sum item?
- The nature and construction of the work.
- A statement of how and where the work is fixed to the building and what other work is to be fixed thereto.
- A quantity or quantities that indicate the scope and extent of the work.
- Any specific limitations and the like.
88
What should be included within the description of work for a provisional sum item?
- The nature and construction of the work.
- A statement of how and where the work is fixed to the building and what other work is to be fixed thereto.
- A quantity or quantities that indicate the scope and extent of the work.
- Any specific limitations and the like.
89
When agreeing the final account, what should be done if there are any unused provisional sums?
They should be formally omitted by instruction.
90
What are the implications of certifying practical completion?
- the start of the final account process
- release of 50% retention monies
- the client taking possession and control of the building
- commencement of defects liability, rectification or maintenance period
- cessation of any further liability for delay damages, whether liquidated or unliquidated
- risk of loss or damage to the works passing to the client, terminating any further requirement for the contractor to insure and secure the works
- the last milestone payment
- obligations under third-party agreements, such as funding arrangements, bonds, guarantees, leases, sale agreements and so on
- the contract administrator may not instruct the contractor to carry out variations after practical completion.
91
How long would works have to be suspended for before a contractor could terminate a contract under JCT?
- One month
- the contractor must issue a notice specifying the event. If a specified fault or suspension event continues for 7 days from receipt of the notice, the contractor may within 10 days, after the 7 day notice period, terminate the contract by way of a further notice.
