Contract Practice & Contract Administration Flashcards
1
Q
What is a contract?
A
A legally binding promise (written or oral) by one party to fulfil an obligation to another party in return for consideration.
2
Q
What elements are needed to form a contract?
A
Offer, Consideration, Acceptance, Intention to create legal relationships, Capacity.
3
Q
What does Offer mean?
A
An expression of willingness to contract on specified terms. With the intention that it is to be binding once accepted.
4
Q
What does Consideration mean?
A
The price given in exchange for goods or service or a promise to do (or not to do) something in return. The price is usually money but can be anything that has value.
5
Q
What does Acceptance mean?
A
The meeting of the minds of the parties. Nothing left to be negotiated and it must mirror the offer.
6
Q
What does intention to create legal relationships mean?
A
Both parties must have a clear, mutual understanding that they intend their agreement to be legally enforceable.
7
Q
What does capacity mean?
A
Whether the person is in the right mental state and has the legal competence to commit to a legally binding document.
8
Q
Please fine express terms?
A
Express terms are the terms in the agreement which are expressly agreed between the parties. Ideally, they will be written down in a contract, but if a verbal contract they will be the terms discussed and agreed between the parties.
9
Q
Please define what is meant by implied terms?
A
A contractual term that has not been expressly agreed between the parties but has been implied into the contract either by common law or by statue. An example is the Sale and Supply of Goods and Services Act (1994), where a Fitness for Purpose obligation is implied on a Design & Build contract.
10
Q
What is tort?
A
A tort is a civil wrong that causes a claimant to suffer loss or harm, resulting in legal liability for the person who commits the tortious act.
11
Q
How do statutory provisions and contract provisions differ?
A
Statutory provisions are set out by law and must be complied with. Contract provisions relate to the contract in question and therefore only apply to a specific project.
12
Q
What is your opinion of oral contracts?
A
While they are legally binding, the difficulty lies in proving the specific terms and conditions of the agreement. A written contract is always preferred.
13
Q
What is a breach of contract?
A
A breach of contract occurs when one party in a binding agreement fails to deliver according to the terms of the agreement. A breach of contract can happen in both written and oral contracts.
14
Q
What is the Local Democracy, Economic Development and Construction Act 2009?
A
It is an act which amended the Housing Grants Construction Regeneration Act 1996. The act changed the way construction contracts are entered into and introduced an amended regime for payment and adjudication.
15
Q
What are the key provisions under the Act?
A
Contracts
- The LDEDC changed the requirement for construction contracts to be in writing; therefore, contracts that are in writing or oral are now covered. This will allow parties to go to adjudication even if their involvement is not formally recognised in writing.
Payments
- Under the HGCRA a construction contract must have an ‘adequate mechanism’ for determining what payments are due and when they become payable.
- Pay-when-certified clauses can no longer be used to prevent paying a subcontractor on the basis that a certificate in the main contract is yet to be issued.
Payment notices: contractual requirements
- The construction contract must specify the payer or the payee.
- Payment notice to be issued not later than 5 days after the due date and paid before the final date for payment.
- Payment must specify the sum the payer or payee considers to be due at the payment due date and the basis on which the sum was calculated. A payment notice must be issued, even if the amount of the payment is nil.
Payment notices: payee’s notice in default of payer’s notice
- If the payer is required by contract to issue a payment notice and fails to serve that notice in the required form or within the set timeframe, the payee is entitled to issue a default payment notice.
- A default payment notice obliges the payer to pay the amount due and allows the payee their statutory right to suspend performance for non-payment.
Suspension of performance for non-payment
- The LDEDC Act clarifies the contractor’s right to suspend carrying out the work in the event of non-payment.
o To validly suspend performance of its obligations by reason of non-payment, a default payment notice must be issued and there must have been a failure to pay. The party in default is liable to pay to the payee a reasonable amount by way of costs and expenses incurred by exercising the suspension of all or part of the work.
16
Q
What is a letter of intent?
A
It is a general term for a document that expresses an intention to enter into a formal contract with a Contractor at a later date. It typically asks the contractor to commence works before the written contract for the works is executed.
17
Q
What are the advantages of a letter of intent?
A
Allows work to commence before the main contract is agreed and signed.
18
Q
What are the disadvantages of letters of intent?
A
May lead to complacency and deincentivises both parties from signing the main contract. A letter of intent is usually less robust than the main contract. The client’s negotiation strength is usually reduced.
19
Q
What is contained within a letter of intent?
A
Detailed confirmation of the work to be completed.
Contract sum (if agreed).
Date for possession.
Date for completion.
Insurance provisions if required.
Method of payment.
Expiration date of the letter.
ADR method for dispute resolution.
20
Q
Who issues the letter of intent?
A
The client
21
Q
In what circumstances might a letter of intent be used?
A
Where the client needs to commence work before a certain date. Where materials have long lead times and early procurement would aid the programme.
22
Q
Who usually signs the letter of intent?
A
Both the client and the contractor.
23
Q
What would you say if the client asked you to draft a letter of intent?
A
It is a legally binding agreement like a contract, therefore, the document should be drafted by a legal or contract professional.
24
Q
Are you aware of any case law relating to letters of intent?
A
Ampleforth Abbey Trust v Turner & Townsend 2012
The Project Manager issued an excessive amount of letters of intent, avoiding both parties to enter into a signed, written formal contract. The Contractor ended up completing significantly late, however due to the Contractor not signing a contract the client couldn’t claim liquidated damages. The client later sued the Project Manager for professional negligence.
25
What is a parent company guarantee?
A parent company guarantee is a form of security that may be required by clients to protect them in the event of a default on a contract by a contractor that is controlled by a parent company. Typically, such a default might be caused by insolvency of the contractor.
26
In what circumstances may a PCG be required?
Can be useful where a small contractor is part of a large, financially stable group of companies. The guarantee is given by the parent company to the client and in the event the contractor defaults on their obligations, the parent company is required to remedy the breach, meeting all the contractor’s obligations.
27
Are there any acts that govern third party rights?
Contracts Right of Third Party Act 1999
28
What is the overarching purpose of the Act?
The Act allows third parties to enforce terms on the contracts that they are not party to, but that benefit them in some way, or which the contract allows them to enforce. It also gives parties access to various remedies if those contract terms are breached.
29
What are the advantages of third-party rights?
Time - since no separate document (i.e. collateral warranty) is being entered, using the Act cuts down on the time and cost associated with warranties being drawn up, signed and circulated.
The rights being conferred by a third party rights notice can be narrowed to specify exactly which rights and/or contract terms are to be transferred
30
What are the disadvantages of third-party rights?
Needs careful drafting. Recent cases have shown the importance of drafting provisions which very clearly to ensure that all necessary rights are conferred on the third party.
There is limited case law on third-party rights and a lot of funders are fearful of the step-in rights ability. In contrast to collateral warranties.
31
Why might third-party rights be used instead of collateral warranties?
If a lot of collateral warranties are required, it can involved a lot of administration and cost. Third-party rights are easier to get in place because there is no separate document required.
32
What is a collateral warranty?
A collateral warranty is a formal contractual agreement which runs alongside another contractual agreement; its purpose is to create a contractual relationship between two parties where one would not otherwise exist.
33
Can you provide a working example of how a collateral warranty could be used?
The client places a contract with a contractor, the contractor then places several subcontracts with its suppliers to undertake the work. The client has a direct contractual relationship with the contractor, but he has no contractual relationship with any of the subcontractors.
Here the client may wish to have a direct contractual relationship with the subcontractor so that it can enforce the obligations that the subcontractor owes directly, or to create other obligations and rights between them.
34
What is the difference between a bond and a collateral warranty?
Bonds are contained within the contract, whereas a collateral warranty sits outside the contract as a side agreement. A bond is usually a financial commitment backed up by a third party, whereas a collateral warranty passes on contractual obligations.
35
Are there any alternatives to collateral warranties?
An alternative method to confer such rights is provided by the Contracts (Rights of Third Parties) Act 1999 which allows third parties to obtain benefits from contracts, which are entered into by others.
36
What are three ways that benefits can be transferred under a building contract?
Collateral warranties, Third party rights, Assignment.
37
Are you aware of any case law relating to collateral warranties?
Parkwood Leisure v Laing O’Rourke.
In light of the particular wording used in the collateral warranty, there was no doubt that it should be treated as a construction contract under Section 104 of the Housing Grants, Construction and Regeneration Act 1996.
38
What is assignment?
Assignment is the process where the benefit of a contract is transferred from one party to another, but the burden of the contract remains with the original party to the contract.
39
What is a bond?
Construction bonds are used for protection in circumstances such as non-payment, lack of performance, company default. An arrangement where a contractual duty is owed by one party to another is backed up by a third party.
40
Can you list five different bonds that might be used on a project?
Under NEC4 you can select x13 Performance Bond, X14 Advance Payment Bond, X16 Retention Bond. You also have Off-site material bond and Tender Bond.
41
What is a performance bond?
A performance bond is a form of security provided by a contractor to a client. It consists of an undertaking by a bank or insurance company to make payment to the client in circumstances where the contractor has defaulted under the contract.
42
When might a client want a performance bond?
If the contractor is new or unapproved, if there is concern over the contractor’s finances/commercial standing, the economy might be heading into a recession, the client simply wants to protect their commercial exposure.
43
What is the difference between on-demand and conditional performance bonds?
On-demand bonds – money set out in the bond is immediately available on demand without needing to satisfy any preconditions whatsoever (including establishing the contractor’s liability), unless the demand is fraudulent.
Conditional bonds – require the client to provide evidence that a contractor has not performed their obligations under the contract and that they have suffered a loss consequently.
44
What is the typical value of a performance bond?
Usually, 10% of the contract sum.
45
What is the typical cost of a performance bond?
The cost largely depends on the financial stability of the contractor and the number of previous claims (if any).
46
What is the risk of not having a performance bond?
In the event a contractor goes into insolvency and there is not bond in place, the client will be liable to pay all costs to deal with the insolvency. Costs include sourcing a new contractor to complete the works and any premium that will attract. The client will not be able to pursue the contractor as the company will be in the process of liquidation.
47
Are there any alternatives to a performance bond?
If the contractor is part of a group of companies, then the employer may wish to consider a parent company guarantee. If the smaller company breaches the contract, the parent company is obligated to step in and remedy. This is via NEC4 X4 Ultimate Holding Company Guarantee, previously named Parent Company Guarantee under NEC3.
48
What is a tender bond?
Requested by the client when inviting contractors to tender for a contract. A tender bond provides security against the risk of the successful bidder failing to enter the contract. It should help prevent idle tendering.
49
What is an off-site material bond?
Covers a client against the risk of paying the contractor for materials being manufactured off-site. If the contractor or subcontractor becomes insolvent, the client can claim on the bond for goods paid for (in the event they are not delivered to site).
50
What is a retention bond?
A retention bond is a type of performance bond. In the bond agreement the surety will act as a guarantor between the Contractor and Client. The surety will pay the client up to the full amount (like they would in place of cash retention) if the contractor fails to perform the obligations or remedy the defects immediately after contract completion.
51
What are the disadvantages of retention bonds?
The client will have to pay a premium for taking out the bond (usually through the contract sum). May reduce the contractor’s incentive to complete the work promptly and to the desired standard. Can we included via x16.
52
Why might a retention bond be used?
May be used in difficult market conditions to aid the contractor’s cash flow.
53
What is an advanced payment bond?
An advanced payment bond is required to protect and support payments to contractors by the client in advance of works being done. Some contracts require the purchase of materials in advance of the contract commencing. Lifts typically require advanced payments as the main bulk of the cost is front loaded. The installation on site is minimal cost.
54
What are Antiquities?
Items such as historical artefacts, pottery, coins, bones, fossils, archaeology.
55
What should the contractor do if they discover such objects?
Cease work and seek advice prior to proceeding. Take the necessary measures to preserve in the existing location and conditions. Inform the Project Manager.
56
When objects of interest are discovered, who is liable to pay for the delay and expense incurred?
This depends on how the risk is allocated within the contract. i.e. the Client may have added an additional client liability in the Contract Data. Significant delays and costs can rise, which can be a serious event for the client/and or contractor. NEC4 clause 34 allows the PM to instruct the Contractor to stop. Clause 60.1(4) is a CE if the PM gives an instruct to stop work.
57
What are defects?
A part of the work not in accordance with the scope.
58
What are patent defects?
Patent defects are those which can be discovered by reasonable inspection. Includes wall cracks, sagging gutters, broken windows, missing tiles etc.
59
What are latent defects?
Latent defects are those which cannot be discovered by reasonable inspection, for example, problems with foundations may not become apparent for several years after completion when settlement causes cracking in the period.
60
Why is the defect correction period typically 52 weeks?
It will allow the building / product to go through all seasons of the year, therefore, most defects (with exception of latent defects) will become apparent within this period.
61
What is a limitation period?
The period of time within which a party to a contract must bring a claim. The Limitation Act 1980 allows actions for breach contract and tort, such as negligence, to be brought within a period of six years under a simple contract and twelve years if the contract is executed as a more formal deed.
62
How does the Limitation Act 1980 link with Latent Defects?
Assuming an entire agreement clause has not be executed, the Limitation Act 1980 allows a claim to be brought either 6 years from the date on which the cause of action accrued or 3 years from the date on which the Claimant had knowledge of the damages.
63
What is a deed?
A deed is a contract or document executed with higher formalities than a single signature. For example, a deed must be signed by two directors on behalf of a company.
64
What is novation?
Under a design & build contract, novation refers to the process by which design consultants are initially contracted to the client, but are then novated to the contractor.
65
Are novation agreements required under traditionally procured projects?
Not usually; this is because the designers are typically retained by the client.
66
What are some of the advantages of novation?
Reduced learning curve – by working with the client at the early design stage, the design team can gain a strong understanding of the project requirements. If the design team are not novated, this learning is potentially lost.
Reduced contractual risk for the client – the process of novation and the transfer of responsibility to the contractor means the client assumes minimum risk contractually.
67
What are some of the disadvantages of novation?
Following novation of consultants, the client will generally require collateral warranties. The client may need to employ a shadow team for compliance purposes. There is a potential for conflict-of-interest, particularly in relation to services that remain to be performed.
68
What is retention?
A percentage of the sums certified for payment under the construction contract, typically 3-5%, are held by the employer during the construction phase.
69
Are you aware of any guidance issued by the RICS associated with retention?
Retention – 1st edition 2012.
70
What is the purpose of retention?
It is used an assurance of project completion and is intended as a safeguard against subsequent defects that the contractor may fail to remedy.
71
What can the client use the retention monies for?
If the contractor does not return to correct the defects, then the retention may be used to fund the payment of others to correct the defects. The project manager / contract administrator will need to check the contract for the ability to do this and the relevant notices that should be given to the contractor prior to approaching others to undertake the works.
72
How is retention released to the contractor?
Typically, retention monies are released in 2 stages. At the time of completion/practical completion statement, the first half of the retention monies will be certified and released. The second half of the retention monies will be certified and released upon the expiration of the rectification period.
73
Who typically benefits from interest accruing on retention money?
The client
74
Are there any alternatives to holding retention?
It is possible to procure a retention bond to cover the retention that would otherwise have been deducted.
75
What is professional negligence?
Professional negligence occurs when a professional fails to perform their responsibilities to the required standard or breaches duty of care. A test for this is the Bolam Test in the Bolam v Friern Hospital case law.
76
How can the client recover a loss if the consultant or contractor is professionally negligent?
Make a claim on their professional indemnity insurance.
77
Name the 4 types of insurance?
Product liability insurance, Public liability insurance, Employer liability insurance, Professional indemnity insurance.
78
What is product liability insurance?
Manufacturers and/or suppliers of products incorporated in construction work are at risk of claims being made against them for damages if defects in those products result in damage or injury. Product liability insurance protects the policyholder against liability resulting from these defects.
79
What is public liability insurance?
Public liability insurance protects against liabilities for injury to third parties or their property. For example, a member of the public could make a claim if a fallen brick damaged their car or if a supplier tripped over an unsecured cable.
80
What is employer liability insurance?
Employer’s liability insurance can pay the compensation amount and legal costs if an employee claims compensation for a work-related illness or injury.
81
What is Contractor Design Portion (CDP)?
Typically used on traditionally procured projects, design responsibly for specific elements of the building is transferred to the contractor.
82
What is the difference between traditional procurement with CDP and design & build?
Traditional procurement with CDP – the design responsibility lies with the client except for certain elements transferred under CDP.
Design & Build – all responsibility for the design rests with the contractor.
83
How are CDP elements executed?
A performance specification is provided at tender stage, the contractor then provides design proposals in response. These proposals are then reviewed by the design team and either accepted, commented upon, or rejected. NEC4 clause 21 refers to this.
84
Can you list typical CDP elements which the employer may wish to transfer?
Steelwork connections, Cladding, Roofing, Temporary works, MEP elements.
85
What are domestic subcontractors?
Domestic subcontractors are chosen by the contractor to execute a package of work. Neither the employer’s consultants (e.g. architect, PM, QS) nor the employer themselves influence the appointment of the conditions.
86
What are named subcontractors?
The employer provides a list of named subcontractors that are pre-approved. The contractor selects one from the list through the tendering process. Once appointed by the contractor, they then become a domestic subcontractor.
87
What are the advantages of naming subcontractors?
Naming a subcontractor provides the employer with more control to the selection of a subcontractor by the contractor, while still leaving them with the element of choice and the responsibility of monitoring their performance.
88
What are the ‘nominated subcontractors’?
A nominated subcontractor is selected by the employer to carry out an element of work (still employed by the contractor). Nominated subcontractors are usually imposed on the contractor.
89
What are disadvantages of nominated subcontractors?
As the subcontractor is being imposed on the contractor, the contractor will generally be allowed the right to object under certain conditions (safety reasons, for example). The contractor and subcontractor may have conflicting procedures, ethics, attitudes, etc.
90
What are the advantages of nominated subcontractors?
On the basis that the employer has nominated them in the first instance, their work should be high quality and acceptable to the employer.
91
Are you aware of any guidance issued by the RICS associated with subcontracting?
Subcontracting, 1st Edition, April 2021.
92
What is insolvency?
Insolvency is concerned with the inability to pay debts.
93
What can be done at tender stage to identify potential contractor insolvency?
Thoroughly check financial accounts for stability. Check for front loading of the tender submission. Bank references. Use credit checking agencies (Dun & Bradstreet report). Previous references (from consultants and employers). Request a bond and/or parent company guarantee – this will not prevent insolvency but will give the employer comfort in the event of default.
94
What is termination?
When a contract is terminated, the parties are no longer obliged to perform their obligations under the contract.
95
Can the contractor suspend work for non-payment?
If the notified sum is not paid by the final date for payment, the Construction Act 2009 puts the payee in a stronger position than before. The contractor can now suspend the performance of any or all of its obligations, not just the work.
96
What are delay damages?
Also known as Liquidated Damages under the JCT contract, Delay Damages are a genuine pre-estimate of financial loss suffered by the employer because of late completion of the works. The damages are inserted into the contract prior to signing by the parties.
97
What sort of expenses/costs can the employer include in the damage calculation?
Loss of rent or other income, additional professional fees, costs of not having a facility (storage, rent, abortive costs). Ultimately, it should not be a penalty
98
What if your client tells you damages are £100,000 per week?
Exercise due diligence. Check that they do believe £100,000 is a genuine pre-estimate of likely loss. If there is concern, then explain the dangers that the damages might be construed as a penalty and may not be enforceable.
99
Under JCT Contracts, what contractual documents should be in place before damages can be deducted?
Non-completion certificate, pay-less notice, the contractor is formally notified that the employer intends to levy liquidated damages.
100
What is a LD holiday or LD free period?
This is essentially a grace period during which the contractor has no commercial liability for delay
101
What is the implication of writing ‘Nil’ or £0 against the damage clause?
Effectively means there is no liquidated damages. This may also prevent the employer from pursuing the contractor for unliquidated damages.
102
What is the implication of leaving the damage clause blank?
If the clause is left blank, then the employer can pursue the contractor for unliquidated damages if they choose to do so.
103
What is the difference between liquidated and unliquidated damages?
Contracting parties might agree to pay a certain amount on breach of contract of the contract (usually due to a completion delay). Unliquidated damages are granted by the courts based on assessment of the loss or injury caused to the party suffering a breach of contract.
104
If the date for completion is adjusted, what effect would this have on delay damages?
Damages are to be deducted from the revised completion date.
105
Can the employer levy liquidated damages if they do not actually incur the loss identified in the initial calculation?
Yes, as long as the liquidated damages are a genuine pre-estimate of financial loss and are not a penalty
106
What is a pre-construction services agreement?
A contract between the Employer and Contractor for pre-construction services. The PCSA documents the services that the Contractor is to perform before signing the building contract and identifies the terms and conditions under which these services are to be performed.
107
When might a PCSA be used?
In a two-stage tender approach to facilitate early contractor involvement.
108
How can a PCSA benefit the project?
Early involvement of the contractor should improve the buildability and cost certainty of the design, as well as creating a better integrated project team and reducing the likelihood of disputes.
109
What sort of activities can the PCSA be used for?
Contribute to the design process, advise on buildability, sequencing and construction risk, advise on the selection of specialist subcontractor’s, develop the method of construction.
110
What should be considered when drafting the PCSA?
Arrangements do not commit the employer to entering into the building contract. Scope of service is clearly defined. The usual programme and delay damages clauses are carefully drafted by a legal team.
111
What are the main forms of building contracts?
Joint Contracts Tribunal (JCT), New Engineering Contract (NEC), FDIC
112
What are some of the considerations when selecting the appropriate building contract?
Nature of the client, Priorities to time cost quality and risk, procurement choice, value of work, nature of the work, public or private employer.
113
What is a bespoke contract?
Bespoke contracts are contracts that are tailored to fit the specific requirements of a project.
114
What are the advantages of standard forms of contract over bespoke contracts?
Written by legal experts, the rights and obligations of each party are clearly set out, parties should be familiar with the terms.
115
What are the disadvantages of bespoke contracts?
Familiarity decreases as they are rarely used, expensive to draft, may be poorly drafted and some clauses are ambiguous, clauses or provisions untested in court, type of contract might be unappealing to the contractor.
116
When would a bespoke contract be appropriate to use over a bespoke contract?
When amending a standard contract will not do.
117
Have you amended a standard contract? Can you explain how you did this?
I have worked on an amended standard contract, however never carried out the amendments myself. I would also let legal professionals do this.
118
What are some of the risks associated with amending a standard contract?
Amendments can spoil the delicate balance of risk allocation, can create legal uncertainty, can attract a cost premium to tenders, courts can strike out amendments if they are contrary to good faith.
119
What are some of the contracts in the JCT family?
Standard Building Contract, Intermediate Building Contract, Minor Works Building Contract, Design & Build Contract.
120
What are the key updates from NEC3 to NEC4?
NEC4 introduced two new contracts. Design Build and Operate and Alliance Contract.
The ‘Risk Register’ is now the ‘Early Warning Register’. ‘Employer’ is now the ‘Client’. ‘Works Information’ is now the ‘Scope’. Gender neutral.
121
Please can you give me an overview of the NEC4 ECC contract?
It is suitable for any sector of the industry including civil, building, nuclear, oil and gas. The NEC ECC contract aims to promote cooperation, clarity, and fair risk allocation. Six Main Options A-F.
122
What are some of perceived advantages of using the NEC4 ECC contract?
Clarity and simplicity: NEC4 contains clear and straightforward language.
Collaboration and communication: NEC4 ECC promotes collaborative working relationships between the parties involved in a construction project.
Risk allocation and management: NEC4 ECC places a strong emphasis on risk management and risk allocation. It provides mechanisms for identifying, assessing, and managing risks throughout the project lifecycle.
Dispute avoidance and resolution: Incorporates mechanisms for dispute avoidance
123
What are the 6 main options under the NEC4 ECC contract?
Option A: Priced contract with activity schedule
Option B: Priced contract with bill of quantities
Option C: Target contract with activity schedule
Option D: Target contract with bill of quantities
Option E: Cost-reimbursable contract
Option F: Management contract
124
Can you provide an overview of Option A?
Option A requires the contractor to submit a priced activity schedule. The activity schedule includes a list of activities or work items required for the project, along with their corresponding and quantities.
Payments are based on completed activities as specified in the activity schedule, the contractor is paid for the completed activities at the agreed prices.
Risk and responsibility. The Contractor takes on the risk and responsibility for delivering the completed activities at the agreed prices.
Suitability. When the scope is well-defined and where it is possible to accurately estimate the quantities and prices for the activities involved.
125
Can you provide an overview of Option B?
Option B uses a bill of quantities, which quantifies the different items of work with specified quantities and prices. The contractor is paid for the completed quantities at the agreed prices. Option B is suitable where the project scope can be accurately quantified and when a detailed specific pricing structure is desired. It may be preferable for projects with well-defined and stable requirements.
126
Can you provide an overview of Option C?
The Option C contract is a target cost contract with an activity schedule. It can include any level of design and is ideal for more complex and larger projects. It allows the financial risks to be shared between the parties. The target cost is agreed between the parties and it is made up of the contractor’s estimate of the Defined Cost plus a fee which is to cover the contractor’s overheads and profit. Once the work is complete, the final ‘Defined Cost’ plus fee and the Target Cost are compared using the pain/gain mechanism.
127
Can you provide an overview of Option D?
Option D is a target cost contract with a bill of quantities. The contract operates in a similar way to Option C, however bills of quantities are used instead of an activity schedule. The choice between C and D depends on the level of pricing detail required, the complexity of the project, and the risk allocation preferences.
128
Can you provide an overview of Option E?
Option E is a cost-reimbursable contract, which can include any level of design. It is ideal for projects where the scope cannot be properly defined at the outset, such as emergency work. The contractor is paid on actual costs it incurs plus an agreed fee.
129
Can you provide an overview of Option F?
Cost-reimbursable management contract, which can include any level of design. It is intended for projects where the contractor acts as a management contractor, and the works are entirely delivered by various suppliers engaged by the contractor. The financial risk is taken largely by the client, which pays the contractor the actual amounts paid to its suppliers plus an agreed fee.
130
Which NEC4 ECC main option carries the least financial risk for the client?
Option A, this is because it is a fixed price contract.
131
What NEC4 ECC main option carries the most financial risk for the client?
Option E, this is because the contractor is reimbursed for the actual cost they incur in carrying out the work, plus an additional fee.
132
What are the secondary options under NEC4 ECC?
X and Y are a selection of pre-written clauses. Z clauses are completely bespoke amendments.
133
What are the X clauses under the NEC4 ECC contract?
X1 – Price adjustment for inflation (used only with option A, B, C & D)
X2 – Changes in law (allowance for a CE, should a change in law occur)
X3 – Multiple currencies (A & B only)
X4 – Ultimate holding company guarantee (used a guarantee to the Client of the Contractor’s performance)
X5 – Section completion (used when completion of the works may mean a section of works, rather than the whole of the works)
X6 – Bonus for early completion (monetary incentive)
X7 – Delay damages
X8 – Undertakings to the client or others (collateral warranty)
X9 – Transfer of rights (when the client owns the Contractor’s rights over material prepared for the design of the works)
X10 – Information Modelling
X11 – Termination by the client
X12 – Multiparty cooperation
X13 – Performance bond
X14 – Advanced payment bon
X15 – The contractor’s design
X16 – Retention
X17 – Low performance damages (if a defect is linked to low performance, the Contractor pays the amount of low performance damages stated in the contract data)
X18 – Limitation of liability (clause gives grounds for the limitation of the Contractor’s liability to the Client for certain events).
X20 – Key performance indicators (used as incentives for the Contractor to meet a certain level of performance stated in the incentive schedule)
X21 – Whole life cost (when Client’s want Contractor’s to propose revision to the scope in order to reduce the cost of operating and maintaining an asset)
X22 – Early contractor involvement (Option C and E. Allows a contractor involvement in a project before a full design or price has been established, enabling the contractor to take part in design development).
X29 – Climate change
134
Can you explain what total float is?
The time an activity can be delayed without delaying planned completion (critical path). Available to the client or contractor on first-come, first-serve basis.
135
Can you explain what time risk allowance is?
This is the float added to activities to allow for the risk of delays arising or non-productive time. It is ‘owned’ by the contractor and cannot be used to mitigate the effect of a compensation event.
136
Can you explain what terminal float is?
The duration between the planned completion and the contractual completion date. This is also owned by the contractor and cannot be used to mitigate the effect of a Compensation Event.
137
How can the completion date be changed?
By a Compensation Event or Acceleration
138
How can the planned completion be changed?
Anything can change it. The contractor could be delayed in completing activities, or the works could be going faster than originally anticipated.
139
With reference to the contractor’s programme, how does NEC differ from JCT?
The programme is not a contract document under JCT, under NEC it is. The programme plays a significant role in the NEC contract; one of its main functions is to assist with the Compensation Event process.
140
What is ‘Scope’ under NEC4 ECC Contracts?
The term ‘scope’ refers to the extent and boundaries of the works that is required to be performed under the contract. It defines specific activities, deliverables, and requirements that the contractor is responsible for. The scope is likely to include drawings, specifications, reports etc.
141
Which of the NEC ECC contracts are design & build contracts?
The NEC ECC is intended to be suitable for whether the Contractor has no design responsibility, responsibility for the whole design, or design responsibility in part. Design responsibility will be set out in the ‘Scope’, therefore if design & build is required, the scope should state that all works are to be designed by the Contractor.
142
What is ‘site information’ under NEC4 ECC Contracts?
‘Site information’ describes the past and present conditions of the site, and may include information such as: Subsoil investigation, borehole records and test results, survey information, information about pipes, services.
143
What are Compensation Events?
Compensation Events are events which are usually not the fault of the contractor and change the cost of the work, or the time needed to complete it. As a result, the prices, key dates, or the completion date may be reassessed, and the contractor will be entitled to more time, money, or both.
144
Give some examples of CE’s under clause 60.1?
The PM gives instruction to change the scope, the client does not allow access to the site, the PM or Supervisor does not reply to a communication from the contractor within the period required by the contract.
145
What happens if the contractor notifies a compensation event 12 weeks after becoming aware of the event?
The contractor may not be entitled to a Compensation Event depending on whether the event arises from the Project Manager or Supervisor giving an instruction or notification. The Contractor may be time-barred following clause 61.3.
146
What are early warning notices?
The early warning process is a mechanism for both parties to identify potential matters which can increase the total of the prices, delay completion, delay meeting a key date, impair the performance of the works in use. This can be found via clause 15.
147
How is completion defined under NEC ECC contracts?
* Done all the work which the Scope states is to be done by the Completion Date
* Corrected notified Defects which would have prevented the Client from using the works or Others from doing their work.
