RICS Contract Admin & Contract Practice Flashcards
1
Q
How is acceleration dealt with under NEC?
A
Acceleration is referred to in Core Clause 36. Under clause 36.1 the Project Manager may instruct the Contractor to submit an acceleration quotation. Project Manager cannot assess an acceleration quotation like they can with a CE. No obligation on Contractor to accelerate.
2
Q
What is acceleration?
A
Either describes the completion of the works in a shorter time than that anticipated at tender or the act of recovery by the contractor if they are in delay
3
Q
What is retention?
A
It is a percentage of each interim certificate deducted and retained by the employer from each interim payment to the contractor
4
Q
- What is the purpose of retention?
A
- It provides an incentive for the contractor to complete the works promptly
- It provides some financial cushion to the employer in the event of contractor default
5
Q
- What items do not have retention taken on them (Under JCT)?
A
- Loss and/or expense amounts
- Statutory fees and charges
- Some additional insurance premiums
- Opening up and testing costs
- Fluctuations Options A and B
6
Q
- What is the employer’s interest in retention?
A
- As a trustee for the contractor
7
Q
- What should employer do with retention if requested by the contractor?
A
- Place it in a separate bank account
- Label the account as being held in trust
- Provide the contractor with statements showing the payments and amount of money in there
- This should ensure that the money is available to the contractor in event of employer insolvency
8
Q
- Who gets the interest accruing on retention money?
A
- The employer
9
Q
When is the retention released to the contractor?
A
Half of the retention is released to the contractor after assessment is made at Completion of the whole of the works or in the next assessment after Employer has taken over the whole of the works if this is before Completion of the whole of the works.
Other half released when the Defects Certificate issued
10
Q
- What is a retention bond?
A
- Provided by the contractor in lieu of taking retention from interim payments
- It should be to the same value as the retention deducted would have been
- Requirement should be stated in the contract
11
Q
- What happens if the contractor does not maintain the retention bond?
A
The employer can deduct retention from interim payments
If the bond is subsequently taken out, the retention deducted must be repaid to the contractor
12
Q
What happens to the retention bond if the contract sum increases?
A
Retention can either be deducted from interim payments on the additional amount or the value of the retention bond can be increased
13
Q
- Why might a retention bond be used?
A
- May be used in difficult market conditions to aid the contractor’s cashflow
14
Q
- What are the disadvantages of a retention bond?
A
- Employer would have to pay the premium for taking out the bond
- May reduce the contractor’s incentive to complete to standard and promptly
- Harms the employer’s cashflow
- The employer would not get the interest accruing on the amount of the retention bond
15
Q
- What is a firm price contract?
A
- Where adjustments of the contract sum are limited to changes in statutory contributions, taxes and levies
16
Q
- What is a fluctuating price contract?
A
- Where the contract sum is adjusted for changes in the costs of materials and labour as well as statutory contributions, taxes and levies
17
Q
- When is the base date set?
A
- Usually 10 days before the tender return date
18
Q
Where is fluctuations dealt with under NEC3?
A
Secondary Option Clause X1
19
Q
What are the fluctuations options under NEC3?
A
If Employer decides to accept all this risk then X1 is selected. If not, left to the main option clauses - Option A and B contract is firm price, C and D shared via pain/gain share. E and F Employer carries all risks.
20
Q
What is the completion date?
A
Fixed date stated in the Contract Data Part 1
21
Q
- What does it mean when ‘time is at large’?
A
- There is no fixed completion date
- The contractor must only complete the works in a reasonable time
22
Q
What is the NEC definition of Completion?
A
‘Completion’ in the ECC is a defined term, Clause 11.1.
Completion is when the Contractor has –
• Done all the works which the works information states he is to do by the Completion date
• Has corrected notified Defects which would have prevented the Employer from using the works and Others from doing their work
• If the work Contractor is to do by completion date is not stated in works information, Completion is when contractor has done all the work needed for Employer to use the work or Others to do their work
23
Q
- What is sectional completion?
A
- The completion and handover of the works to the employer in agreed stages
24
Q
- Do the works have to be totally completed before practical / sectional completion is achieved?
A
- completion is a vague concept
- It is reliant on the architect’s opinion that the works are complete
- It should not be conditional
- It is common practice for Completion to be granted when the works are substantially complete – i.e. there may be minor defects or omissions BUT nothing that would prevent the employer taking occupation
25
Can the completion certificate be rescinded?
No
26
8. What is the recourse if the contractor disagrees with the PM that the works are not completed?
Adjudication
27
9. What are the consequences of Completion/ sectional completion?
* Half retention released for that section
* Rectification period for that section starts
* Contractor no longer required to insure that section of the works and damages liability ends
* Employer now responsible for damage to works in that section
28
10. What is partial possession?
- Where the employer requests and the contractor consents to the employer taking possession of the works / part of the works before the date for practical / sectional completion
29
11. What is the difference between partial possession and sectional completion?
- Sectional completion is a contractual obligation to hand over the section at the stated date, partial possession relies on the contractor’s consent
30
What is a defect?
Part of the works which is not in accordance with the Works Information
Part of the works which contractor has designed and does not conform with the design accepted by project manager.
31
What if Contractor does not rectify defects?
In the event that the contractor failed to rectify any defects the employer may employ another contractor to carry out the works & recover the cost of doing so as a debt by the contractor. Half retention retained & may be used to cover cost.
32
What is a Latent Defect?
defects which are not readily identifiable upon inspection & only come to fruition some time after building completion & may take many years. A claim in contract can only be brought about within the limitation period of the contract (6 or 12 years). Otherwise, a claim may be brought in Tort for negligence providing there has been actual damage & not economic loss.
33
How are Defects dealt with under NEC3 ECC?
Contractor corrects all defects whether or not supervisor notifies him.
Defects period will usually be 12 months from completion and will be stated in the contract data.
Defect Correction Period begins at completion for defects notified before completion and when the defect is notified for other defects.
Defects Certificate is issued by supervisor at the end of the last defects correction period.
The works information can be changed so that a defect does not have to rectified.
If contractor does not correct a defect through no fault of employer, costs of correction will be paid for by contractor.
34
20. What is a non-completion certificate?
- Issued by the architect to certify that the works / section have not been completed by the relevant completion date
35
21. What are the consequences of a non-completion certificate?
- The employer has the right to withhold liquidated damages, as long as a withholding notice has been given
36
1. What are the three ways that benefits can be transferred?
a) Collateral warranties
b) Third party rights
c) Assignment
37
2. What are collateral warranties?
- Create contractual relationships between parties where there would otherwise not have been any. They are alongside another agreement
38
3. Why are Collateral Warranties used?
- Due to the principle of privity of contract, the rights and obligations under a contract can only be enforced by a party to that contract
- Collateral warranties give remedies to parties that due to privity of contract would not otherwise have them
39
How are Collateral Warranties Requested?
Notified in the tender docs and in NEC stated as a Z clause
40
6. What are the common clauses / terms in collateral warranties?
- The obligations of the collateral warranties should mirror that of the main agreement
- Therefore if a party is in breach of the main agreement they would also be in breach of the warranty
a) Limitation of liability (Net Contribution Clause)
b) Reasonable skill and care v fitness for purppse
c) Requirements for PI insurance
d) Assignment rights
e) Novation rights
41
7. Name some standard forms of collateral warranty that may be used
Construction Industry Council -
Collateral Warranty Consultant – Funder (second edition)
Collateral Warranty Consultant – Purchaser/Tenant (second edition)
Collateral Warranty Sub-consultant – Client (first edition)
Collateral Warranty Consultant – Employer (third edition)
42
8. How has the contract (rights of third parties) act changed the situations regarding rights under contracts?
- It has significantly changed the traditional principle of privity of contract, whereby obligations can only be enforced by the parties to a contract
43
9. What contracts does the rights of third parties act apply to?
- All contracts made after the 11 May 2000
44
11. How can third party rights be included under NEC contracts?
Secondary Option Clause Y(UK)3
45
12. Why might third party rights be used instead of collateral warranties?
- If a lot of warranties are required it involves a lot of administration and cost – easier for third party rights
46
13. What is assignment?
- Where the rights and benefits of one contractual party are transferred to a third party
47
14. Can benefits be assigned under NEC contracts?
NEC3 via Z clauses, NEC4 contains an assignment core clause
48
15. What is the standard commercial position regarding assignment?
- It is standard to allow assignment of rights twice without consent
- The assignment should be notified in writing to the other party
49
16. What is novation and how does this differ from assignment?
- A new contract that transfers the rights and obligations of one contractual party to a new third party – assignment is only rights
50
17. Give a common example of assignment and novation
- Assignment of the rights under a collateral warranty to a different tenant / purchaser
- Novation of the design team under a design and build contract
51
18. What is the key issue after a design team has been novated?
- Whether the new party has the right to take action against the novated party for breaches that occurred before novation
52
19. Novation - If the contractor took full responsibility for the design what would they want?
- They would want the ability to take action against the consultants for breaches before novation
53
20. 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
54
21. What is a limitation clause?
- Clauses that limit a party’s liability for loss
55
Give some examples of limitation?
a) Limitation to a fixed sum
b) Limitation to the extent of PI insurance
c) Exclusion of consequential loss
d) Limitation to loss that can be recovered from a third party
e) Limitation to responsibility – net contribution clause
56
23. What is a net contribution clause?
- Clause that limits a party’s liability to the proportion of loss that they are responsible for
57
24. How can the employer potentially lose out with a net contribution clause?
- They would have to sue each contributing party separately to reclaim their total loss
- If one party is insolvent they lose out on that money
58
25. What act is relevant to a net contribution clause?
- Unfair Contract Terms Act 1977
- This limits the extent that a party can avoid liability for breach of duty
- Cannot avoid liability for death / personal injury
- All other limits have to be ‘reasonable’
59
1. What is reasonable skill and care?
- The ordinary skill and care expected of an ordinary competent man carrying out that particular act
60
2. Is there a higher level than reasonable duty and care expected for professionals?
- Yes
- A specialist or professional would be expected to show the same level of skill and care expected of a similar man with that particular specialism
61
3. What is fitness for purpose?
- The provision of a building that is suitable for the employer’s intended purpose
- It is clearly a more onerous obligation than reasonable skill and care
62
4. How is fitness for purpose dealt with under NEC ECC?
Secondary Option X15 provides that the contractor will not be liable for defects in the design if it can prove that it has used reasonable care and skill to ensure the design complies with the Works Information
63
5. What is the duty to warn?
- It has been held that the contractor has a duty to warn the PM / employer of any defects in the Employer's design that they are aware of
- This does not mean they have a responsibility to examine the design specifically looking for defects
64
1. What is the final account?
- Detailed statement of all the adjustments to the contract sum and therefore the total amount that the employer is liable to pay, together with the basis on which it was calculated
The NEC forms of contract do not refer to final accounts as it is assumed that the final account is adjusted as the project proceeds on the basis that the compensation event procedure is followed.
65
10. What are the usual constituents of a final account?
a) Summary
b) Adjustments of prime costs
c) Adjustments of provisional sums
d) Adjustments of approximate quantities
e) Variations
f) Claims
g) Fluctuations
66
1. What is termination?
- Where the contract works are lawfully stopped under the contract
67
2. Where is termination dealt with in NEC3 ECC?
Core Clause 9
68
3. What three types of termination does NEC3 ECC deal with?
a) Termination by the employer
b) Termination by the contractor
c) Termination by either party
69
What are some grounds for which the employer can terminate the contractor’s employment in NEC3?
If the Contractor has -
- Substantially failed to comply with his obligations
- Not provided a bond or guarantee which was required by the contract
- Appointed a subcontractor for substantial work before the PM has accepted the Subcontractor
- Substantially hindered the Employer or others
- Substantially broken a health and safety regulation
70
What are the NEC Terminaton Provisions?
1. Employer may complete the works and may use any plant and material to which he has title
2. Employer may instruct the Contractor to leave the site, remove any Equipment, Plant and Material from the Site and assign the benefit of any subcontract or other contract related to this contract to the Employer
3. Employer may use any equipment to which the Contractor has tittle to complete the works
4. The Contractor leaves the Working Areas and removes the equipment
71
What payments are due under NEC on termination?
Amount due as assessed for normal payments -
• defined cost for plant and materials,
• other defined cost reasonably incurred in expectation of completing the whole of the works,
• any amounts retained by the Employer,
• a deduction of any un-repaid balance of an advanced payment,
• forecast defined cost of removing the equipment
• a deduction of the forecast of the additional cost to the Employer of completing the whole works,
• direct fee percentage
72
1. What signs might be there that a Contractor had financial difficulty?
- Industry rumours
- Over-valued applications
- Less labour on site
- Slow progress of works
73
2. How might a cashflow show financial problems for the Contractor?
- If monthly payment applications were way above pre-estimated cashflow
74
3. What could have been done to prevent contractor insolvency at tender stage?
- Thoroughly check financial accounts.
| - Check for front loading.
75
4. During your interim valuation, a subcontractor told you that the Contractor is in financial difficulties. What do you do?
- Value the works carefully (as normal).
- Check materials on site are for the job in question.
- Arranging a meeting between and contractor to discuss the situation.
76
5. Contractor has gone into administration receivership, what do you do?
a) Go to site, secure site and materials
b) Get in touch with administrative receiver
c) Withhold any payments
d) Start contacting suppliers and sub-contractors to try and continue works
e) Keep record of all time spent.
77
7. What is insolvency
- Insolvency is concerned with the inability to pay debts.
| - Debenture: A security given to lenders against borrowings.
78
8. What causes insolvency?
- Minimum amount of capital needed to start a contracting business, fragile arrangements created, also boom bust cycle of construction industry.
79
9. What are the consequences of insolvency?
- Cost, quality and duration can all be detrimentally affected.
- Solvency of sub-contract and suppliers can also be damaged
80
10. What Financial checks should be made pre-contract?
- Ensure contractors, S/Cs are financially stable
- Bank refs, credit checking agencies, companies house, annual accounts, previous references.
- Prudent to make formal and informal checks
81
11. What are the different types of insolvency?
1. Liquidation- voluntary and compulsory
2. Administrative Receivership- not used much any more
3. Administrative Order- debenture holders can use
4. Voluntary arrangement
82
12. What is liquidation?
- Winding up of a company because it cannot pay its debts
- Trading ceases, assets are collected and used to offset liabilities
- Two tests: cash flow: cannot pay debts as they become due.
Balance sheet: liabilities are higher than assets.
83
13. Where does the client fall in relation to receiving monies after liquidation?
- Very low on the scale!
1. Fixed charge holders- Bank
2. Liquidator Fees and expenses
3. Preferential creditors: pensions, employees pay
4. Floating charge holders
5. Unsecured creditors: CLIENTS
84
14. What is an administration order?
- Introduced in Insolvency act 1986 and 2000.
- Freezes affairs of company to allow breathing space.
- 3 ways administrator appointed:
1. Appointment by company directors
2. Court appointment
3. Appointment by the holder of a qualifying charge.
Process: 8 weeks after Admin… must submit proposals to creditors and company members
10 weeks after Admin…must hold initial creditors meeting
- 1 year after Admin… this is the time limit although court order or creditors can extend.
85
15. What is the position of the client in liquidation/ administration?
- Unsecured creditor, little if any money left.
- Enterprise act requires funds permitting, liquidator or administrator reserve a portion of realised assets for the benefit of unsecured creditors
86
16. What section deals with insolvency in NEC3 ECC?
9. Termination, clause 91.1
87
What is procedure for termination under NEC if Contractor is insolvent?
Employer notifies the Project Manager and the other party giving details for termination. Project Manager issues a termination certificate to both parties.
88
What happens if Employer goes insolvent?
Same process as if Contractor is insolvent, Contractor notifies PM and PM issues Certificate
89
What happens to retention if Employer goes insolvent?
- In the absence of a separate bank account, case law suggests that the contractor may lose this right.
90
1. What action should be taken on suspicion of contractor insolvency?
- Interim valuations carefully prepared to ensure work is not over valued.
- Materials on site should be carefully checked they are in accordance with the contract documents, properly stored and intended for incorporation into the works and related to the programme.
91
2. What immediate action should be taken upon contractor insolvency?
- 8 steps to take and need to act quickly, following measures need to be discussed with professional team.
1. Advise client of contractor insolvency, contractual position and recommended action
2. Secure the site, change locks, secure all valuable goods equipment and materials.
3. Prepare a detailed valuation of the completed work and an inventory of materials and equipment
4. Stopping the processing of any payment to the contractor
5. Contacting key S/Cs, suppliers and commence discussions about continuation contracts.
6. Check the contract for Bonds, PCG.
7. Contact the administrator or liquidator and client about their views with regard to project completion.
8. Keep a record of the time spent and costs incurred in dealing with and advising on the insolvency. Normal for additional fees to be chargeable in this respect.
92
3. How do you complete the works if Contractor is insolvent?
1. Continuation with original contractor- only practicable if works are nearing completion.
2. Assignment or Novation of the contract.
3. Appointing a new contractor to complete the project. (new contract, PC basis)
93
If Contractor is insolvent would you use assignment or novation to complete the works?
- Administrators or employers generally prefer Novation.
- Form a new agreement with a new contractor to complete the works
- (Transfer rights and obligations to a 3rd party, new contract formed, all parties must agree.)
94
If Contractor is insolvent would you appoint a new Contractor to complete?
- Depends on stage of the project. If contract has just commenced it might be possible to approach 2nd tenderer.
- If near completion and novation is not possible, new contractor may be the only course of action to complete the project.
95
6. What are continuation contracts?
- Contract for completing the works with a new contractor:
- Basis of contract and documentation will be affected by:
1. Time available to prepare docs and agree terms
2. Scope and amount of work required
3. Progress made by original contractor
4. The doc and contractual basis of the original contract
5. The need to obtain competitive tenders.
- If project has only just commenced may be possible to use original tender and contract docs with addendum
- May be possible to negotiate a contract with one of original tenderers.
96
What happens to domestic Sub Contractors when contract is terminated due to insolvency?
- When employer terminates main contract employment of any domestic S/Cs is terminated automatically.
- Decision needs to be taken about continuation agreements on key S/C who are responsible for design.
- Problem: S/Cs may have undertaken work without payment. If client pays them direct then under insolvency laws client cannot reclaim monies. So S/Cs may not be interested in continuing if they are not paid.
97
What is retention of title?
- Condition that ownership of the goods does not pass to the contractor until they have been paid for.
- Claim will fail if material is fixed in place.
- Materials paid for in interim payments are also owned by employer.
- More confusing when talking about materials of S/Cs not incorporated into the works.
- Hence the reason why it is important to secure the site
98
1. What are the three main remedies for breach of contract at common law?
a) Damages
b) Set off and abatement
c) Repudiation
99
2. What can damages be awarded for?
- Any breach of a contract whether serious or minor
100
How are damages assessed?
- To put the innocent party back in the position they would have been in had the breach not occurred
- They are compensatory not punitive
101
4. What conditions have to be met before damages are paid?
- Actual loss has to have been suffered
- This has to stem directly from the breach
- Mitigating measures should have been taken by the innocent party
102
5. What is set off?
- Where the employer refuses to meet a contractor’s claim for payment because they have a cross-claim that would reduce or cancel out the payment
103
6. What is equitable set off?
- Where the claim and counter claim are closely linked e.g. under the same contract
104
7. What is abatement?
- Where the employer asserts that the contractor’s claim is not worth the value they are claiming i.e. due to physical defects to the work
105
8. What is repudiation?
- Termination of a contract at common law
| - Remedy for very serious breaches of contract
106
10. How can the common law right to repudiate arise?
- In two situations:
a) One party indicates that they have no intention of fulfilling their obligations
b) One party commits such a serious breach of contract that they can be deemed to have no intention of fulfilling their obligations
107
11. What employer breaches constitute a serious enough breach to justify repudiation?
a) Refusal to give possession of the site or wrongful ejection
b) Continued refusal to pay sums due
c) Withholding of certificates (depending on seriousness)
d) Hindrance of contractor e.g. not providing necessary drawings (depending on seriousness)
108
12. What contractor breaches constitute a serious enough breach to justify repudiation?
a) Abandonment or unjustified suspension of the works
b) Very serious defects
c) Extreme delay where time is of the essence
109
16. What are the consequences of repudiation?
- Both parties are released from their obligations under the contract
- BUT the contract provisions regarding liability, assessed damages and dispute resolution are still valid
110
17. How does repudiation at common law differ from termination under the contract?
- Termination under the contract only terminates the contractor’s obligation to carry out the works and does not release the parties from any further obligation
- The contract lays out detailed procedures to be followed to terminate AND the consequences of termination
111
18. Can the parties choose which repudiation method to use?
- Case law not entirely clear, but assumed yes
- BUT the innocent party must elect one remedy or the other – cannot combine elements
- AND if they want to use the contractual remedies they MUST follow the specified procedures
- If they don’t they’ll have to rely on the common law rights
- BUT this can only be done if the contractor’s breach is serious enough
112
19. What is ‘frustration’?
- Termination at common law due to neutral events that have made the performance of the contract impossible, illegal or radically different from that which was envisaged, due to the fault of neither party.
- Only applicable where this is not dealt with by the contract
113
1. What are antiquities?
Covers such items as:
a) Historical artefacts, pottery and coins
b) Bones or fossils
c) Old foundations
d) Something of interest or value
114
Where are antiquities dealt with under NEC?
CE Process - 60.1(7)
Core Clause 7 - Title
73.1 Objects and materials within the site.
Contractor has no title to any object of value or historical interest within the site.
Contractor notifies PM if any found, PM instructs contractor on how to proceed
115
3. Who do any fossils, antiquities etc which are found on the site belong to?
- The employer
116
4. What should the contractor do if they discover antiquities?
a) Use best endeavours to avoid disturbing
b) Take necessary measures to preserve in existing location and condition
c) Cease work if it would endanger the object
d) Inform the PM of the discovery and the location and await instruction on how to proceed
117
What should PM do if antiquities are discovered?
- Issue PMI as necessary to instruct the contractor what to do if they are found
- This can include telling them to comply with a third party who is examining / excavating
118
6. Who is liable for the delay and expense incurred if antiquities found?
Employer - CE defined in Contract for this event
119
7. What methods could be employed to reduce or mitigate the impact of finding antiquities?
- Insurance
| - Should pay proper note to site investigations and look at the site’s previous uses
120
Where is testing dealt with under NEC?
Core Clause 4 Testing and Defects
121
2. If the supervisor thinks work is not in accordance what can they do?
Under 42.1 can instruct Contractor to search for a Defect
122
Who bears cost for searching for defects?
Employer if no defect found, Contractor if defect found
123
What are the options if a defect is found?
Contractor is obliged to rectify at own cost. If they do not PM assess the cost of getting others to rectify which the Contractor pays. Alternatively, can Accept the defect, Contractor submits a quotation reducing the prices or changing completion date.
124
1. What is a provisional sum?
- Sum of money included in the contract for work by a statutory authority, work that cannot be fully defined at time of tender or work that it is not sure is required
125
What is a letter of intent?
- Notice of intent to form a contract
• Method of instructing the contractor to proceed with the Works before the contract has been formally executed.
• Used where the employer needs to commence the works before a certain date or where there are materials with long lead in times and it would aid the programme
126
Main elements of letter of intent?
Main elements of Letter of Intent –
• The parties
• Contract sum
• The works
• Procedures applying to key issues (payment, termination etc.)
• Maximum expenditure limit allowed under the letter of intent
127
Types of letter of intent?
* Comfort letter - Expressing a party’s intention to act in a way at some point in the future. E.g. payment terms
* Consent to spend - Work to proceed up to a certain value while the contract itself is being finalised. Superseded once the principal contract is executed.
* Recognition of contract - Letter of acceptance and is used by some forms of contract such as FIDIC to formally execute the contract itself. Generally, letter is issued once the contract has been agreed.
128
What are the advantages of a Letter of Intent?
* Allows work to commence before the contract is finally agreed – programme benefits
* Provides more safeguards than just telling the contractor to start without one
129
What are the disadvantages of a Letter of Intent?
* May lead to complacency and dis-incentivise them to sign the main contract
* Less robust than the main contract
* You would not want the works to continue for very long without getting the contract signed
130
1. What 6 conditions need to be met for a contract to be in place?
* Offer by one Party
* Acceptance by the other Party
* Consideration of the Offer
* Intent to form a Contract
* Legality of Contract
* Capacity – Capacity to make agreement
131
2. What are common NEC contract documents?
* Main Document (Core Clauses/Main Option/DR/Secondary Option)
* Schedule of Cost Components (BQ/AS)
* Works Information (Contractors Responsibilities, Programme)
* Site Information (Services)
* Contract Schedules (Agreement Form)
* Drawing Register
* Contract Data Part 1 (Supplied by Employer - Client Details, Access dates, Weather measurements for CE, Insurance values if provided by employer, Z Clauses)
* Contract Data Part 2 (Supplied by Contractor - details of key personnel, data for SOCC, Fee %)
132
4. What are the main suites of construction contract?
* JCT 2016 (Joint Contracts Tribunal)
* NEC (New Engineering Contact)
* ECC (Engineering and Construction Contract)
* FIDIC (International Federation of Consulting Engineers)
* ICE (Institution of Civil Engineers)
133
What are the main parts of the JCT contract?
* Recitals
* Articles
* Contract Particulars
* Schedules
134
What are the NEC ECC Option Contracts?
* Option A – Fixed Price with Activity Schedule
* Option B – Fixed Price with Bill of Quantities
* Option C – Target Cost with Activity Schedule
* Option D – Target Cost with Bill of Quantities
* Option E – Cost Reimbursable
* Option F – Management Contract
* Option G – Term Contract
135
What are the differences between each ECC option?
Option A - Priced Activity Schedule - Contractor prepares & prices AS based on defined scope of works & provides a lump sum figure. Cost certainty provided. (D&B)
Option B - Priced BoQ - Employer provides BQ based on MM & tenderers price. Used when scope clearly defined & can be measured from designers drawings. Cost certainty (Traditional).
Option C&D - Target Cost Activity Schedule/BoQ - Tender information incomplete, higher risks, financial risk shared. Pain/Gain Incentivisation mechanism.
Option E - Cost Reimbursable - Scope of works unknown & TC unable to be developed. Early start required. Majority of risk sits with Employer. Contractor paid actual cost plus fee. No incentive to drive down cost.
Option F - Management Contract - Contractor only responsible for works within Contract Data. Appointed before construction to plan, procure & advise. Contracts directly with subcontractors & fee increases if value of SC packages increase through CE.
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What is the structure of the ECC?
```
• Core Clauses:
• 1 - General
• 2 - The Contractors main responsibilities
• 3 - Time
• 4 - Testing and defects
• 5 - Payment
• 6 - Compensation Events
• 7 - Title
• 8 - Risks and insurance
• 9 - Termination
• Main Option Clauses:
• Dispute Resolution Clauses:
• Option W1 - If UK HGCRA applies then not used
• Option W2 - If UK HGCRA applies then used
• Secondary Option Clauses: X1 - X20
Y(UK)1 - project Bank Account
• Y (UK) 2 - HGCRA 1996
• Y (UK) 3 - The Contracts (Rights of Third Parties) Act 1999
• Z - Additional Conditions of Contract
• Schedule of Cost Components
• Contract Data
```
137
What are the ECC Secondary Option Clauses (X Clauses)?
* X1 - Price Adjustment for inflation (used if longer than 2 years)
* X2 - Changes in the law (what constitutes change?)
* X3 - Multiple currencies
* X4 - Parent company guarantee (used with a JV)
* X5 - Sectional completion (different from key dates)
* X6 - Bonus for early completion
* X7 - Delay damages
* X12 - Partnering
* X13 - Performance bond
* X14 - Advanced payment to contractor
* X15 - Limitation of contractors liability for his design to reasonable skill/care
* X16 - Retention
* X17 - Low performance damages
* X18 - Limitation of liability
* X20 - KPI's
138
What are Z clauses?
* Additional Conditions of Contract
* May be various requirements, procedures & further obligations conferred on the Contractor depending on the type of project/client
* Examples include - Additional Conditions of Contract within the Project - Confidentiality Agreement & Amendments/Replacement to existing clauses - Clause 60: additional CE's
139
Who are the named parties under NEC ECC?
* Employer,
* Project Manager,
* Contractor,
* Supervisor
140
What is the role of the Project Manager?
responsible for managing the contract on behalf of the Employer, deals with time, money, and changes to the contract.
141
What is the role of the Supervisor?
The Supervisor’s duty is to ensure that the Contractor Provides the Works in accordance with the contract documents – in particular, the programme and the Works Information (the specifications and drawings).
142
What are plant & Equipment in NEC ECC?
NEC Defined Terms, Plant Incorporated into the Work & Equipment provided by Contractor and used to provide the works.
143
Differences between NEC3 and NEC4?
- Risk Register' re-named the 'Early Warning Register'
- Treated acceptance of the contractor's programme in situations where the project manager does not respond to submission or notification
- Employer becomes 'Client', and 'Works Information' becomes 'Scope'. Partnering becomes collaboration.
- An additional procedure includes the identification of opportunities by either party
- The secondary option X16 for retention now includes the optional provision of a retention bond instead of having money retained.
144
Differences between NEC and JCT
- 6 main options and secondary options (mix and match approach to distribute risks) JCT uses separate contracts e.g. JCT SBC D&B, SBW W/Q, X/Q etc…
- NEC written in laymen terms easy to understand
- No QS mentioned in NEC only Project Manager
- Tries a more collaborative approach to working “Mutual trust and understanding”
- Programme is a contract document (NEC) 25% of monies due can be withheld if the contractor does not submit an accepted programme
- Variation (JCT)= Compensation Event (CE) (NEC)
- Contractor can notify of a CE called (NCE) must do so within 8 weeks of becoming aware of the situation
- Valuation rules, Bill rates are not binding on CEs.
- CEs built up from first principles called Schedule of Cost Components (SCC) People, Plant, Equipment, Design and Manufacture include a % for O/H
- NEC does not have claims NO direct loss and/or expense
- Loss and/or expense is dealt with in CE
- EOT… again prolongation is dealt with in CE.
- Project Manager by accepting a CE is potentially extending the completion date
- Defects: Defects correction period (normally 2-3 weeks) contractor must “make good” in these time periods (better at dealing with defects than JCT)
- Periods of reply (incentivises the parties to respond to each other) however reality is very administration heavy.
145
What is a named sub contractor?
- Client supplies a list of names in the preliminaries / specification and the contractor chooses which one they want
- The named sub contractor is then treated the same as a domestic subcontractor
146
2. What is a nominated sub contractor?
- The selection of a specialist sub contractor or supplier for the project by the client
- The client names them specifically in the preliminaries / specification
- They will often have been chosen and provided advice / design etc before the main contractor is selected
- The work to be done is normally the subject of a prime cost or provisional sum
147
3. What are the advantages of nominated sub contractors?
- The work should be of high quality and acceptable to the client
148
4. What are the disadvantages of nominated sub contractors?
- Their performance is the client’s responsibility
- If the nominated sub contractor delays the contractor the contractor can claim EOT and costs
- Depending on contract terms, the contractor is not responsible for their design – split points of responsibility
149
5. Can the contractor object to a nomination?
- They can make a ‘reasonable objection’ e.g. cannot agree on programme
150
What are the significant elements of the Housing Grants Construction and Regeneration act 1996?
a) Payment
b) Adjudication
c) Set off
d) Suspension
151
Why was the Housing Grants Construction and Regeneration Act introduced?
a) Fairer payment conditions
b) Improve the cashflow of the industry
c) Ban pay when paid and pay if paid clauses
d) Introduce quicker, easier and more efficient method of dispute resolution
152
Give details of the payment provisions of the HGCRA
- Pay when paid and pay if paid clauses are banned (except in insolvency)
- Contracts over 45 days must contain provisions for interim payments
- Contracts must state a date for final payment
- The amount and basis of each payment must be notified to the contractor after it becomes due
- Withholding notices must be issued before final date for payment
- If these items are not included, the Scheme for Construction Contracts will fill the gaps
153
Give details of the adjudication provisions of the HGCRA
- Created a statutory right for the parties of a construction contract to refer any dispute arising under that contract to adjudication
- Created timescales for adjudication:
- An adjudicator must be appointed within 7 days of referral
- They have a further 28 days to make their decision
- This can be extended by 14 days with the agreement of the referring party and to any other time with the agreement of both parties
- The decision of the adjudicator is legally binding on both parties unless it is subsequently overturned through arbitration or litigation procedures
154
Give details of the set off provisions of the HGCRA
- The employer must issue a withholding notice before the final date for payment stating the amount and reasons for withholding
155
Give details of the suspension provisions of the HGCRA
- The Contractor has the right to suspend carrying out the Works if the Employer fails to pay the sums due in full in accordance with the contract conditions
- The contractor must first issue a written notice stating they intend to suspend
- If payment has not been received in full within 7 days they can suspend
- They contract period should be adjusted for the period of suspension
- The right to suspend ceases with full payment
156
What are the key elements of the Local Democracy, Economic Development and Construction Act?
* Removed requirement for contracts to be in writing,
* enables parties to go to adjudication even if Contract not in writing.
* If adjudication does take place, this must still be in writing and the referring party is no longer always liable for the adjudicator’s costs.
* Construction contracts will have to contain a provision enabling the adjudicator to correct such errors arising by accident or omission
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What are the key elements of the 2011 Construction Act Amendment?
- Applies to construction contracts, even if not in writing.
- Adjudication clauses must still be in writing otherwise scheme of construction contracts applies
- no longer allowable to define within a contract who should bear the cost of adjudication
- adjudicators have the right to correct errors in their decisions within 5 days of delivering that decision.
• Dates for Payment must be set out in Contract
• Client must issue a payment notice within five days of the date for payment. Or, if contract allows, contractor makes an application for payment, which is treated as the payment notice.
• Client must issue pay less notice if they intend to pay less than amount set out in payment notice, setting out basis for its calculation.
• If client fails to issue payment notice, contractor may issue default payment notice. Final date for payment is extended by the period between when client should have issued a payment notice and when contractor issued the default payment notice. If client doesn’t issue a pay less notice, must pay amount in default payment notice.
• The notified sum is payable by the final date for payment.
• Pay when certified clauses are no longer allowed, and release of retention cannot be prevented by conditions within another contract.
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What are the NEC3 ECC Payment Provisions?
Core Clause 50.2, the amount due to the contractor is the total of:
• price for work done to date; plus
• other amounts to be paid to the contractor (such as compensation events); less
• any amounts to be paid or retained from the Contractor.
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What is the price of work done to date?
depends upon which Main Option Clause is used –
• Option A - the total shown in the prices prepared by the contractor for each of the completed activities. A completed activity is a milestone without any defects which would delay following work.
• Option C - the defined cost which the project manager forecasts would have been paid by the contractor before the next assessment date, plus the fees.
• The fee is quoted by the contractor and consists of his overheads.
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What is Defined Cost?
* payments due to subcontractors
* the schedule of cost components
* less disallowed costs
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What is disallowed Cost?
A cost that -
• Is not justified by the Contractors accounts and record,
• Should not have been paid to a Subcontractor or supplier in accordance with his contract
• Was incurred only because the Contractor did not follow an acceptance or procurement procedure stated in the Works Information or did not give an early warning which contract required him to give
And the cost of –
• Correcting Defects after Completion
• Correction Defects caused by the Contractor not complying with a constraint on how he is to Provide the Works stated in the Works Information
• Plant and Material not used to Provide the Works (after allowing for reasonable wastage) unless resulting from a change to the Works Information
• Resources not used to Provide the Works (after allowing for reasonable availability and utilisation) or not taken away from the Working Areas when the Project Manager requested and
• Preparation for and conduct of an adjudication or proceedings of the tribunal
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What are the NEC ECC Payment terms?
* The project manager is obliged to certify payment within 1 week of each assessment date.
* The assessment date is normally agreed between the parties.
* If not agreed the assessment date is calculated by reference to the assessment interval following the starting date.
* Payments are made within 3 weeks of the assessment date.
* If a payment is later corrected, interest is paid.
163
What are the Effects of Y(UK) 2 – Housing Grants, Construction & Regeneration Act 1996 on Payment Terms?
* Payment becomes due within 7 days after the assessment date and the Project Manager certifies the payment on the payment due date, such certificate being the notice of payment to the contractor;
* the final date for payment is 14 days from the payment due or such other time stated in the contract data;
164
What is a Pay Less Notice?
* No amount due can be withheld by a party unless a notice of the intention to pay less than the notified sum is given.
* they notify the other party within 7 days of the final date for payment,
* setting out the amount due and the basis upon which it is calculated.
165
How do you deal with materials on site in payment assessments?
• The materials should be for the works, adequately protected, delivered to programme and in a reasonable quantity
166
How do you deal with materials off site in payment assessments?
* Proof that ownership will transfer to the employer on payment (vesting certificate)
* Insurance until materials arrive at site
* Materials are clearly labelled as for the site and set apart from other materials
* A materials off site bond has been provided if required
167
What is the NEC3 ECC Change Process?
Contracts do not refer to 'variations' or 'loss and expense'. Instead, there are 'compensation events‘
• Compensation events are events which may lead to the payment to the Contractor being changed or the Completion Date being delayed.
• 19 Compensation events are included under clause 60.1
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What are some Common Compensation Events?
* The Project Manager gives an instruction changing the Works Information.
* the Employer does not allow access to the site on the dates shown in the accepted programme.
* the Employer does not provide information by the dates required in the accepted programme.
* the Employer or others (i.e. third parties) do not carry out works in accordance with the accepted programme, Works Information, etc.
* the Project Manager or Supervisor does not reply to the contractor within the time limits set down by the contract.
* an event occurs which is an Employer's risk stated in the Contract;
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How does Y(UK)2 - Housing Grants, Construction and Regeneration Act 1996 & Construction Act 2011 affect the CE process?
* Contractor exercises their right to suspend performance (for non-payment), it is a Compensation Event.
* This ensures that the Contractor can claim for costs incurred as a result of such suspension.
170
What are Early Warnings?
Both parties must give early warning of anything that may delay the works, or increase costs as soon as they become aware of them.
They should then hold an early warning meeting to discuss how to avoid or mitigate impacts on the project.
171
Explain the NEC Contract Risk Register.
* The risk register is maintained throughout the contract period.
* The Employer and Contractor contribute the first entries in the risk register, via Contract Data parts 1 and 2 respectively.
* The Project Manager then adds any further risks newly identified and notified through the Early Warning process to the risk register as the projects proceeds.
* The Project Manager may revise the risk register to record the decisions made at 'risk reduction meetings' and issue the revised risk register to the Contractor.
* If the Works Information needs to be changed as a result the Project Manager will instruct the change at the same time.
* This system can work well and be a powerful tool for increasing the likelihood of all parties getting the project finished in a way which meets their own objective.
* It is an ideal project management process as it is entirely forward looking, collaborative and aimed at meeting the project objectives.
* However, the risk reduction process works best if using the NEC contract goes right along the supply chain.
* There is little point in the employer and contractor trying to use the risk reduction process if none of the suppliers and subcontractors are taking part.
172
Describe the CE process for a PM notified CE?
- PM notifies contractor of CE arising from instruction or change to earlier decision.
- Contractor submits quotation with costs and changes to accepted programme within 3 weeks
- PM replies within 2 weeks either instructing revised quotation or notifying will make own assessment
- If revised quotation needed contractor has 2 weeks and process begins again
- if PM does not reply to quotation within 2 weeks then Contractor gives notice
- If PM does reply for further 2 weeks then the quotation is accepted
- Time Periods can be extended by agreement
173
Describe the CE process for a Contractor notified CE
- Contractor notifies PM with eight weeks of becoming aware of a CE. Unless PM should have given notice but did not then failure to notify by the Contractor will result in no change to the price or completion date
- PM has 1 week to decide if it is a CE, Contractor notifies after 1 week, if no decision made after 2 weeks treated as accepted and quotation instructed.
- If it is a CE then Contractor has 3 weeks to submit a quotation
- PM then has 2 weeks to reply to quotation
- If PM does not make a decision, Contractor gives notices
- IF PM fails to reply within a further 2 weeks the notification is treated as accepted and deemed a CE and the Contractor is automatically instructed to submit a quotation
174
What should a PM consider when assessing a CE?
* The Project Manager has to be reasonably sure that the CE assessment is reasonably accurate.
* Otherwise could be giving the contractor more time and money than would prove to be necessary if reviewed retrospectively.
* CE assessment cannot be revised if a forecast on which the assessment is based is later shown to be wrong.
* It is often the consideration of this risk that delays Project Managers in making decisions regarding CEs.
* The fear is that the cost could be greater and the delay longer than anticipated.
* The tendency to be avoided is to over assess the effect of the CE, which is invariably the Project Manager’s suspicion.
* Suspicion by the Project Manager that the contractor is under-resourced and fails to keep adequate records properly to administer the CE procedure will lead to a failure of the contractual procedure.
* Sorting out the entitlements of the parties once the contractual mechanism has fallen apart can be expensive and is best avoided.
175
How do you assess Cost when assessing a CE?
Actual Defined Cost
Work already done prior to the date the project manager instructed, or should have instructed, the contractor to submit a quotation.
• The contractor needs sufficient resources to maintain full and accurate cost records, which includes its own cost and/or subcontractor's cost.
• It may require amending traditional application payment cycles while implementing an open book arrangement, so that at any point in time the contractor is able to identify the actual cost expended by subcontractors on works already carried out.
Forecasted Defined Cost
* Second is forecasting the defined cost of work not yet done.
* The assessment of these costs requires detailed knowledge of the progress of the individual work or trade packages and a realistic estimated final account for each subcontractor.
* As there is a limited period (the default being 3 weeks) for the contractor to submit its CE quotation, the Contractor has to have a means of forecasting the cost of the change inherent in the CE.
Adjustment of Fee
• The third matter is an adjustment of the fee which, as it is a percentage addition to the defined cost, is simply dependent on ensuring that the defined cost is correctly assessed
176
How you assess delay to planned completion in a CE?
* This element of assessment is often the area of greatest risk as it involves the forecasting of the effect of individual and aggregated CEs on planned completion prevailing at the time.
* The biggest risk to both parties is not having an up-to-date and accurate programme for the works reflecting the actual progress week on week. This is because the delay is assessed based on the last updated/accepted programme.
177
How do you avoid disputes?
* Good Management – Surveyor Proactively manages project, raising concerns early + collaboratively solving problems. Project Management, Design team management, constructor management
* Client management – understanding clients objectives + approach to risk
* Clear Contract Documentation
* Partnering + alliancing
* Good Payment Practice
* Record Keeping – Record of labour, plant and materials us
* Regular reporting + proactivity – Cost, progress and quality
178
What is Dispute Resolution?
Actions to resolve contractual disagreements between parties.
179
What is Mediation?
ADR form of bringing in separate impartial third party to mediate and guide a decision which optimises the parties’ needs, encrourages coming together and agreeing
180
What is Concilliation?
Dispute resolution similar to mediation
Independent party to aid an agreement
Conciliator has no authority to seek evidence or call witnesses.
Conciliators do not make decisions.
More proactive than mediator because can suggest solutions.
181
What is Negotiation?(as ADR)
Parties may through an informal private or facilitated negotiation process agree to settle the dispute either at a high level or in detail and agree to be bound by this settlement.
182
What is adjudication?
- UK statutory dispute resolution procedure
- Relatively quick process from submission of referral
- Binding until dispute determined by litigation or arbitration
- Seen as simplified arbitration process
183
What is Arbitration?
Procedure for the resolution of disputes which is under the control of the parties.
• Certain conditions must be met: a genuine dispute or difference between the parties & award must be capable of enforcement
• Binding agreement to submit to arbitration in contract.
• Private.
• Three available procedures: Documents only (30 days), short hearing (30 days) and full procedure (long).
• Parties do not pay for court or judge, process can deal with multi-party disputes, civil procedure rules aim for accessibility, speed and efficiency.
184
What is Performance Specified Works?
Items such as lifts or baggage handling systems designed to performance requirements. Describes the result required from particular items and leaves to Contractor to satisfy that requirement.
185
What is the Contractor's Design Portion
Agreement for the contractor to design specific parts of the works.
186
What is determination?
* Ends the Contractor’s Employment under the Contract
| * Does not bring contract to an end and leaves all contracts rights in place meaning the parties can still sue.
187
What are delay damages?
- A genuine pre-estimate of the likely loss incurred by the employer should the completion date not be met.
- X7 in NEC3 ECC. Amount defined in Part 1 of Contract Data
- If Contractor does not achieve completion date and X7 selected then delays damages are due from Contractor to Employer
188
What is a Bond?
* An arrangement where a contractual duty owed by one party to another is backed up by a third party
* It must be in writing, it is common for it to be a deed
* It will contain a duration and a financial limit
* Provided by bank for a fee
189
What are the types of Bond?
* Performance bond
* Retention bond
* Materials off site bond
* Advance payment bond
190
What is a performance Bond?
* “Contract of Guarantee” whereby one party (the Guarantor) undertakes to pay damages to a second party (the Employer) arising from breach of contract by a third party (the Contractor).
* Standard value is 10% of contract sum
* To call for payment Employer must prove that the contractor has defaulted in their obligations under the main contract and that loss has been suffered
191
Whats is a Parent Company Guarantee?
An arrangement where the contractual performance of one company in a corporate group is underwritten by the other members of that corporate group.
192
What are the types of Parent Company Guarantee?
* Contract of Guarantee – is a secondary obligation where the guarantor fulfils the contract’s obligations. The beneficiary of the guarantee (i.e. the Employer) must always deal with primarily with the contract, and only when the contractor does not perform/pay can the beneficiary bring a claim against the guarantor.
* Primary obligation- allows the beneficiary to claim directly against the guarantor without first having to pursue the contractor. This is not likely to be the guarantor’s preferred choice
193
Difference between Parent Company Guarantee & Performance Bond?
* Protection – PB is from a third party while strength of PCG is related to the final covenant of the parent
* Cost/Availability – PCG is free which PB is not – if company does not have a parent
* Cover – PB does not guarantee completion of project, just recovery of loss up to a certain amount whereas a PCG does guarantee continuance but is of little use if the parent is insolvent.
* Duration – PB expires at PC or at the end of rectification period – PCG can be 12 years
* Enforcement – notoriously difficult to get pay-out under a PB – bondsman will require the breach of contract to be upheld in adjudication or court proceedings.
194
How are insurances dealt with under NEC3 ECC?
- Covered under section 8 - Risks and Insurance
• Contractor provides insurance stated in insurance table and any additional stated in Contract Data unless Employer stated to provide
• In joint names and covers Contractor’s risk events from starting date until defect cert or termination cert issued
• Before start date and on each policy renewal, Contractor submits insurance certificates to PM
• Any amount not received from insurer borne by risk owner (Contractor or Employer)
• Employer can insure a Contractor’s risk, cost borne by the Contractor and vice versa
• PM submits insurance policies and Certificates to be provided by Employer to Contractor for Acceptance.
195
Would you advise on Insurance?
Not Qualified to advise on insurance but if project in delay check Client has extended their insurance policy.
196
What are the main types of construction insurance?
* Insurance of the works - covers the cost of any damage to the works during construction (110% of full value)
* Third Party/Public Liability - covers the cost of any damages due to damage, injury or death to members of the public or property during the construction of the Works
* Employers Liability - covers the cost of any damages arising as a result of accident or injury to an employee of the company during the course of the works
* Professional Indemnity - covers the cost of any damages arising as a result of negligent advice / design
197
Why should insurance policies be in joint names?
Avoid subrogation. If can't be done in Joint Names then include a Subrogation Waiver (except for Fraud)
198
What is subrogation?
The insurer can stand in the shoes of the insured (Employer) & sue the negligent party (Contractor) for reimbursement of costs.
If policy is in Joint Names there is no requirement for this as the insurer would be suing themselves, emphasis on rectifying the problem rather than apportioning blame.
199
What is Contractor's all risk insurance?
Covers those excepted risks stated in the contract.
200
What does indemnify mean?
Put the party back into the position they would have been in had the event not occurred.
201
How is insurance to existing buildings covered?
The client insures work within existing buildings mainly due to the presence of an existing policy.
This would be advantageous to the client as it would probably be cheaper & there would be less problems in the event of a claim if damage or subsidence was caused to the existing building
202
How is flood risk covered?
Covered in Insurance of the Works
203
What are some examples of piling insurance?
Existing Structures/Non-Negligent Insurance
204
How are advanced payments covered under NEC3 ECC?
X14 Advanced Payments
o It allows the contractor to receive lump sum payment in advance
o The payments, values and dates should be set out in the contract particulars
o They may be used where the contractor incurs high costs at the start of a project
o E.g. items with long lead times or the need to purchase specialist plant for manufacturing
205
What are the disadvantages of Advanced Payments?
o May reduce the incentive of the contractor
o Bad for the employer’s cashflow
o Concerns over why the contractor can’t fund the expenditure – insolvency worries
206
What is the dispute resolution procedure under NEC?
If HGCRA applies then use W2, if not use W1 which contains far greater detail regarding adjudication.
Party may refer a dispute to adjudicator at any time, who is appointed under the NEC Adjudicators Contract.
If a party is not satisfied with adjudicators decision can serve notice within four weeks of decision to go to a tribunal which will be stated in Contract Data e.g litigation/arbitration. The adjudicator cannot be called as a witness.
207
If Option C is incorporated, how does this amend the core clauses?
States how the application of the pain/gain mechanism shall work.
States information in the activity schedule is not works or site information.
Programme must show how the activities on the AS relates to the operations on the programme.
208
How do you assess & implement changes to the Target Cost?
NEC3 - Compensation Events - Cost of work estimated & agreed up front before work carried out (If actual costs known then included).
Contractor should be able to gain on the CE.
Only client risks or CE listed in the contract can form a CE.
An allowance is made in the target for contractors risks.
209
How does a pain gain mechanism work?
The pain / gain mechanism is used on a target cost form of contract, and is included within the tender documents by the client upon issue.
Once the target cost has been set for the project the pain gain mechanism acts as an incentive to beat the target.
If the contractor beats the target he will gain a share in the savings made. If he exceeds the target, more than likely he will be responsible for 100% of the cost.
This will depend on what is contained within the contract documents.
210
How do you set a target cost?
Prepare the Tender Documentation & appropriate pricing document (AS or BQ) for issue to the Tenderers, who would return as part of the submission.
Analyse the pricing document & look at the programme durations proposed by the contractor to ensure they were reasonable & the level of resources are appropriate.
Review quantities & rates
Labour - number & efficiency & rates,
Plant - number & output & rates,
Materials - quantity & rates.
Subcontract - Verify procurement strategy & back to back contracts (competitive quotes recieved / benchmark rates / lowest quote used / subcontract uplift).
Check rates for project staff & ensure only employed during the appropriate periods in the contract (planner & setting out engineer - 100%).
Site compound is adequate for level of staff & labour to be provided.
Check any unpriced items and determine if & where included.
Determine where insurances are priced.
Site vehicles - May be cheaper to purchase rather that rent.
What risks have been priced or included for.
Check level of Fee & Profit
Target must be set at a realistic level & must be capable of being beaten (Too low - contractor penalised &will look for ways to increase target - Too high - no incentive to innovate &
drive down cost)
Pain / Gain Mechanism should be appropriate to allow contractor to make further profit
211
How is a target cost built up?
Consists of a forecast of the construction costs, allowance for preliminaries, risk allowance, % additions for management fee
212
How is the contractor reimbursed under a target cost?
Paid actual cost up to the value of the target for undertaking the works.
PG mechanism then invoked & depending upon arrangement will affect how much the contractor will be reimbursed.
213
What are the advantages & disadvantages of using a target cost?
Advantages:
1) Minimum enquiry definition
2) Short bid time / quick start on site
3) Conflict minimised / Partnering ethos
4) Contractor incentive to manage resources
5) Employer shares in savings
6) Does not pay full amount for risks that do not materialise
7) Early contractor involvement
Disadvantages:
1) Employer risk of being financially exposed
2) Cost checks & monitoring can be time consuming & expensive
3) Bid evaluation difficult
4) Reduction in competition"
214
What problems may arise when setting a target cost?
```
Design / specification insufficient to allow robust target to be set.
Programme not realistic.
No commitment from contractor.
Risks not apportioned fairly.
Lack of trust.
```
215
How would you manage costs on a target cost contract?
Carry out monthly audits on the valuations which would be submitted based on actual cost - Check 10% of value.
Staff timesheets & rates.
Material / Plant invoices against returns.
Labour payroll sheets.
Subcontract certificates / invoices.
Duplication of costs between management fee.
Review programme & planned resources to determine actual progress & efficiency.
