Contract Terms and Conditions

APC - INTERNAL USE ONLY

Contract?

■ an exchange of promises with a specific remedy for breach

■ an agreement with specific terms between two or more persons or entities
in which there is a promise to do something in return for a valuable benefit
known as consideration.
■ Any legally binding agreement voluntarily entered into by two or more
parties that places an obligation on each party to do or not do something for
one or more of the other parties and that gives each party the right to
demand the performance of whatever is promised to them by the other
parties.
■ An agreement between two or more competent parties in which an offer is
made and accepted, and each party benefits.
What is a Contract?

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

■ An exposition of rights and obligations of the parties including:

– Express terms
• The terms ascertained from the contract documents including the
conditions of contract, specifications, drawings and programme
– Implied terms ( Common or Civil Law)
• Those terms implied by statute
• Those terms implied from case law

| March 31, 2011| 3

Implied Terms - Legislation (UK only)
Include:
■ Part II of the Housing Grants Construction and Regeneration Act 1996
■ Contract (Rights of Third Parties) Act 1999
■ Sale of Goods Act 1979
■ Supply of Goods and Services Act 1982
■ Health and Safety at Work (Etc) Act 1974
■ Defective Premises Act 1972
■ Unfair Contract Terms Act 1977
■ Unfair Terms in Consumer Contract Regulations 1999
■ Late Payment of Commercial Debts Interest Act 1998
■ The Public Contracts Regulations 2006

| March 31, 2011| 4

Classification of Contracts

■ Simple
– Made by implication orally or in writing (sometimes called ‘parol’)
■ Speciality
– Contracts made by deed are called speciality contracts
■ Bilateral
– Arises where X makes promise(s) to Y and in return Y makes promise(s) to X
(‘a promise in return for a promise’)

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

| March 31, 2011| 5

Requirements as to Form

■ Contracts which must be contained in a deed:

– Leases for a period exceeding 3 years

– Contracts unsupported by consideration

■ Contracts which must be made in writing:

– Agreements per the Consumer Credit Act 1974

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

■ Contracts which must be evidenced in writing:

– Contracts of guarantee

| March 31, 2011| 6

What are the essential requirements?

■ Agreement

■ Intention to be bound

■ Consideration (unless a Deed)

■ Capacity

| March 31, 2011| 7

Agreement?

Offer and matching Acceptance:

■ Two basic principles apply:

1. Agreement is concluded by the unequivocal and unconditional acceptance

of a specific offer

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

| March 31, 2011| 8

Intention to be bound

■ Business and Commercial Agreements

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

■ Social/Domestic/Family Agreements
– Presumed by the law not to be legally binding

| March 31, 2011| 9

Consideration

■ Requirements for Consideration

– A promise is only binding if it is given for good consideration, or if it is
executed as a deed. The consideration is for the promise not for the
contract. Construction contracts may be executed as deeds for other
reasons: such as to obtain the 12 years limitation period or to satisfy other
formalities required by the Employer.
■ Definition of Consideration
– ‘An act or forbearance of one party, or the promise thereof, is the price for
which the promise of the other is bought, and the promise thus given is
enforceable.’ ; or,
– ‘The price of the promise’

| March 31, 2011| 10

Consideration - Rules

■ 1. The consideration must not be past.

(Re McArdle (1951) Ch 669)

■ 2. The consideration must be sufficient but need not be adequate.

(Chappell v Nestle [1960] AC 87)

■ 3. The consideration must move from the promisee.

(Tweddle v Atkinson [1861] EWHC QB J57)
■ 4. An existing public duty will not amount to valid consideration.
(Collins v Godefrey (1831) 1 B & Ad 950)

■ 5. An existing contractual duty will not amount to valid consideration.

(Stilk v Myrrick [1809] EWHC KB J58)

■ 6. Part payment of a debt is not valid consideration for a promise to forego

the balance (Pinnel's case 1602 5 Rep, 117)
How Does this link to Construction (1)?

Invitation: Employer’s Invitation to tender or an invitation to treat

(Scope of Works, Design, Proposed Terms &
Conditions)

Offer: Contractor’s Tender

(Proposed amendment to Terms/Agreement Terms)

Acceptance: Employer’s Acceptance of Tender

| March 31, 2011| 12

How does this link to Construction (2)?

Intention: Intention of the parties to create legal relations

Consideration: “some right, interest, profit or benefit accruing

to the one party, or some forbearance,
detriment or loss undertaken by the other”

Contractor’s Consideration: “I the Contractor will provide

Construction Services in return for £x”

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

Construction Services”

| March 31, 2011| 13

Application to Construction

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

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

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

THEREFORE THE CONTRACT DOCUMENTS ARE VERY IMPORTANT !!!

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

| March 31, 2011| 14

Email from Richard Clare :-

ECH PENALISED FOR NON COMPLIANCE

“The failure of one of our project managers to abide to the timetables for issuing
certificates under a JCT 98 Design and Build Contract resulted in the Contractor
successfully bringing an adjudication against the Employer for payment of his
valuation in full.
This payment significantly exceeded the amount subsequently certified. This error,
together with one or two other issues, has cost EC Harris £26,000 in reaching
settlement with the Client in order to prevent them from bringing an action against
us.
This, of course, comes straight off our bottom line. At current margins, we need to
earn over £500,000 of fees to replace £26,000 of profit.”

| March 31, 2011| 15

Purpose of Contract Documents

■ To accurately record the terms of the business arrangement

■ To set down the management and administrative procedures and processes
■ Define the obligations of the parties
■ Allocate risk to the parties
■ To be able to rely on in a court of law
■ Contracts should define:
– What is to be built
– The method of calculating the final cost
– The required quality of the works
– The time taken to complete the works

| March 31, 2011| 16

Contents of Standard forms of Contract

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

and details of the agreement
■ Contract particulars containing Commencement, Start and Completion
Date, Rate of Liquidated and Ascertained Damages
■ Bills of quantities, activity schedules, schedule of rates
■ Documentation of tender negotiations identifying what is included and
excluded (unless an entire contract)
■ Programme requirements
■ Design including drawings, specifications and schedules
■ Supplements (guarantees; bonds etc)

| March 31, 2011| 17

Procurement of Construction Contracts (1)

■ Type of client
■ Type of project
■ Use of asset
■ Risk allocation
■ Ability to change scope of works

| March 31, 2011| 18

Procurement of Construction Contracts (2)
Key Considerations for a Project:

■ Client Involvement
■ Design Management
■ Capacity for Variations
■ Complexity
■ Speed
■ Clarity of Remedies
■ Default
■ Delay

| March 31, 2011| 19

Procurement of Construction Contracts (3)

Methods:
■ Traditional (Build only – designers separately appointed by client)
■ Design and Build.
■ PFI/PPP (Includes DBO/DBOM and similar hybrids)
■ Management Contracting/Construction Management
■ Collaborative/Partnering.

| March 31, 2011| 20

What are Standard Forms of Contract (1)?

■ The main families of forms applicable to construction include :

– JCT (Joint Contracts Tribunal)
– NEC (New Engineering Contract)
– FIDIC (International Federation of Consulting Engineers)
– IChemE (Institution of Chemical Engineers)

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

| March 31, 2011| 21

What are Standard Forms of Contract (2)?

■ JCT (Joint Contracts Tribunal)

– Traditional - SBC, IC, MW, MP
– Design & Build - DB
– Management – CM & MC
– Partnering - CE

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JCT 2005
■ Standard Building Contract (SBC):
– With Quantities
– Without Quantities
– With Approximate Quantities
Characteristics:
– Employer’s Design Team responsible for design
– Architect/Contract Administrator responsible for managing the
contract
– Contractor responsible for carrying out the Works in accordance with
the contract documents
– Possible for discrete parts to be designed by the contractor
– Contract documents include Bills of Quantity (if applicable), Drawings,
Specifications
– Payments issued at intervals not exceeding one month.
| March 31, 2011| 23
JCT 2005
■ JCT Design and Build
• Characteristics:
– Provides ‘single point of responsibility’ for design and construction.
– The contractor is responsible for completing design and carrying out the
construction works
– No architect/contract administrator.
– There is provision for a named Employer's Agent
– There is no clerk of works
– Contract documents include Employer's Requirements, Contractor's
Proposals and Contract Sum Analysis
– There is provision for the obtaining of planning permission and other
approvals
– Payment can be at monthly intervals or at the end of agreed stages
– Alternative provisions for payment – either stage payments or value of work
executed
| March 31, 2011| 24
JTC 2005

■ JCT Excellence

Characteristics:

– collaborative behaviour between the various parties

– active use of risk management techniques
– flexibility in use
– complete supply chain management

| March 31, 2011| 25

NEC3
■ ECC

There are 6 Main Options

Employer must select 1 of these:

A – Priced contract with Activity Schedule

B – Priced contract with Bill of Quantities

C – Target contract with Activity Schedule

D – Target contract with Bill of Quantities

E – Cost Reimbursable contract

F – Management contract

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FIDIC – The Rainbow Suite
■ Red - Construction

■ Orange - Design & Build/Turnkey

■ Yellow - Design & Build

■ Silver - EPC Turnkey

■ Gold - DBO Contract

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

■ White - Professional Services Contract

■ Blue - Dredging and Reclamation

■ Pink - MDB Harmonised Red Book

| March 31, 2011| 27

FIDIC Characteristics

■ Recognised worldwide

■ Accepted by international Investment Institutions and Banks

■ Suitable for engineering and construction works

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

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FIDIC – Choice of Form

Silver
Risk transfer to Contractor
Certainty of outturn price

Yellow

Green
Low value
Red/ simple works

Pink

Extent of design by Contractor

0% 100%
| March 31, 2011| 29
IChemE
Options :
■ Red - Measure/Value

■ Green - Cost Reimbursable

■ Burgundy - Target Cost

Characteristics:
■ Used for process plant installations, and associated building work.
■ Separate versions for use in UK and abroad.
■ Detailed requirements for testing and commissioning

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Why do we use standard forms?

■ To save time in drafting contracts

■ As a checklist of items to be agreed
■ A benchmark for negotiating terms
■ Benefit from judicial precedents
■ Readily understood by construction professionals
■ Familiarity with contract terms

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 Differences in Key Clauses – Variations vs
Compensation Events
■ JCT 05

Normal valuation rules apply

Schedule 2 quotation

■ NEC 3

PM requests quotation with instruction

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

Priced in accordance with Activity Schedule or Bill of Quantities

Delay to be notified with quotation

| March 31, 2011| 32

Differences in Key Clauses – Possession and
Completion
■JCT 05

Possession given to Contractor on “Date of Possession”

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

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

■NEC3

Contractor has access to site – NOT possession

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

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

| March 31, 2011| 33

Differences in Key Clauses – Extension of Time (1)

■JCT 05 SBC

Contractor to give written notice to Architect of ANY delay

Relevant Event (Clause 2.29) / Variation

Contractor provide estimate of expected delay

Architect to award Extension of Time

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

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Differences in Key Clauses – Extension of Time (2)

■NEC3

Early warning, unless a Compensation Event

Delay in completion

Delay in meeting a key date

Project Manager or Contractor request a meeting to mitigate delay

Compensation Event

Contractor submits quotation for delay

Project Manager can revise completion date or key dates

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Contract Amendments

Why do we have amendments to Contracts?

■ Risk Allocation (Avoidance, Transfer, Management)

■ Project-specific requirements

Advantages: a. Can enhance standard contract provisions

Disadvantages: a. Introduction of unfamiliar clauses

b. Increased risk of discrepancies
c. Can increase risk of adversarial conduct

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Letters of Intent (1)

■ What are the contractual implications?

A letter of intent ordinarily expresses an intention to enter into a contract at

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

Where the letter of intent can be shown to be a "subject to contract" type of

arrangement, there will generally be no contract between the parties with
the consequence that the contractor will be obliged to complete such works
as it has undertaken within a reasonable time and be paid a reasonable
price.

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Letters of Intent(2)
What if Contract docs are not executed prior to work starting on site ?

■ Three Scenarios:

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

2. Instruction with Consent

to spend:- If works are commenced; the Employer
reimburses the contractor with reasonable
costs if the contract is not entered into.

3. Recognition of the
If repudiated the Employer may be exposed
Existence of a binding
to the Contractor’s loss of profit
contract:-

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Letters of Intent (3)

■ Letters of Intent are between the Employer and Contractor!

■ Employers often ask their Quantity Surveyors to draft letters of intent
for them.
■ This can be done however, the text should always be agreed by CS
prior to issue.
■ Under No circumstances should a letter of intent be issued on EC
Harris paper.

• Remember, EC Harris is not entering into Contract it is the Employer ! Great

care must always be taken !!

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Case Study

■ You are brought on to a project halfway through the construction phase. T

None of the parties have been following the contractual change procedure.
The various designers have been issuing revised drawings to the contractor
without going through the administrator of the contract. Both the
administrator and the employer have been issuing verbal instructions to the
contractor and nobody has kept a record of what has been said. The
contractor has now submitted a massive claim for all of the additional work,
which includes a request for an extension of time and additional
preliminaries.
■ Explain the contractual position of all those involved – employer, contractor,
administrator and designers.
Understanding the NEC3 Contract

Operational Level Training

Format of the day 42

■ Interactive training session

■ Questions / debate encouraged
■ Ask questions if unclear
■ Speak your thoughts and share your knowledge
■ Promote your ideas and be open to new ones
■ Everybody contributes and is of equal status
■ No professional intimidation
■ Listen and encourage everyone to offer their opinion

Switch off mobile phones – unless exceptional circumstances apply

In this session we’ll cover…

■ An overview of the NEC Suite of Contracts – History and

philosophy, principles and features
■ How NEC helps us deliver positive outcomes for Clients
■ A summary of matters to look out for
■ Opportunities for BIS with NEC
■ A detailed review of some of the key provisions and
obligations

| 43
Further Reading and Handout Material

■ A Copy of the Engineering and Construction Contract

■ A review of the changes from ECC2 to ECC3
■ NEC ECC Programme Guidance Notes
■ Further Reading: Earned Value Analysis
■ How to make NEC Target Contracts Work
■ Works Information
■ Potential further list of Disallowed Costs to be added by
way of Z Clause

| 44
What is NEC3…
■ 3rd Edition of the NEC Suite of Contracts
■ Mainly used in Transportation and Utilities sector
■ Endorsed by OGC for all public projects
(and growing)
■ Growing in all sectors such as E&M
■ Also growing in international application

■ Different to other construction contracts

– “A clear and simple document”
– “Stimulates good project management”
– “Used in a variety of situations”

| 45
 46

HISTORY & PHILOSOPHY OF NEC

HISTORY & PHILOSOPHY 47

Evolution:

 Consultative edition issued January 1991

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

 2nd Edition published 1995 renamed Engineering and

Construction Contract (ECC)

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

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

 Office of Government Commerce recommends the use of the

NEC 3rd Edition
HISTORY & PHILOSOPHY 48

1. Flexibility

 Multi disciplinary – use in engineering and building work

 Design responsibility can reside in part or whole with either party

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

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

secondary options
HISTORY & PHILOSOPHY 49

2. Clarity and Simplicity

 Written in ordinary language, not construction terminology!

 Simple clause structure; avoids legalistic terminology

 Subjective decisions minimised

 Provision of guidance notes and flow charts

HISTORY & PHILOSOPHY 50

3. Provide a stimulus to good management

 The ECC is a management tool as well as a contract

 Requires timely and clear decision making process

 Clear allocation of responsibility

 Proactive risk management procedures

 Encourages collaborative working

What does it look like? 51

NEC3 is a suite of contracts and supporting documentation…

…23 documents in all!

(including the Engineering and Construction Contract)
| | 51
CONTRACT DOCUMENTS & STRUCTURE 52
Documents within the NEC suite:
 The Engineering and Construction Contract (ECC)
 The Engineering and Construction Subcontract (ECS)
 The Engineering and Construction Short Contract (ECSC)
 The Engineering and Construction Short Subcontract (ECSS)
 The Professional Services Contract (PSC)
 Term Service Contract (TSC) (New to NEC3)
 Framework Contract (New to NEC3)
 The Adjudicators Contract
Also included are…
 Guidance Notes
 Flow Charts
 Procurement and Contract Strategies Guide
CONTRACT FORMS TO FOCUS ON TODAY 53
Focus on the ECC 54

 Roles and Responsibilities

 Contract Structure – Modular Form
 Main Options
 Secondary Options “The X Factor”
 Things to look out for – Key Considerations
 Other matters to consider
 Potential amendments
 ROLES & RESPONSIBILITIES
15 November 2009
 56
ROLES & RESPONSIBILITIES UNDER THE ECC
ECC only identifies roles and responsibilities of the following parties:
 Employer
 Project Manager
 Supervisor
 Contractor
 Subcontractor
 Adjudicator
 57
PROJECT MANAGER
 Appointed by the Employer to “manage the contract for the Employer
with the intention of achieving the Employer’s objectives” (ECC
Guidance Notes)
 Employed for managerial skills; role not additional to a design
appointment
 ECC assumes the Project Manager has the Employer’s authority
 PM is constrained from unreasonable actions and should act as an
impartial certifier (Costain v Bechtel)
 Can delegate some or all of his actions and is likely to need to…
PM responsible for:
o Review and acceptance of design
o Review and acceptance of programmes
o Issuing instructions
o Certifying payments
o Assessing compensation events and their impact on time and cost
o …and more
KEY ROLE: THE PROJECT MANAGER
Assessing
Compensation
events and their
impact on time and
Review and Acceptance of
cost
Design/Technical Queries

Certifying Payments

Risk Management

Project Manager
Management of Early
Waring Process

Review and
Acceptance
of Programmes

Issuing Instructions Dealing with

administration of
Time Bar

| 58
 59
SUPERVISOR
 “Checking” role similar to Clerk of Works
 “To check that the works are constructed in accordance with the
contract” (ECC Guidance Notes)
 Can issue Instructions to search for Defects
 Responsible for issuing Defects Certificate
 Can delegate some or all of his actions
 60
ADJUDICATOR

 Adjudicators Contract available as part of NEC suite

 Adjudicator is appointed by both Parties
 May obtain help from others after notifying the Parties
 Is paid on a time charge basis
 Unless otherwise agreed, the Parties pay the Adjudicator costs in equal
shares
 If one Party fails to pay, the other Party pays the Adjudicator and recovers
the amount from the defaulting Party
 Under ECC option C, D and E the Contractor’s costs for preparing for an
adjudication or tribunal are a Disallowed Cost; each Party is responsible for
its own costs in preparing for a dispute
 CONTRACT STRUCTURE (Using
the ECC as an example)…
15 November 2009
ECC and its modular form
Works Terms Contract

Mandatory
Core Clauses

Main Option Main Option Main Option Main Option Main Option Main Option Must select
(A) (B) (C) (D) (E) (F) one main
option

Dispute Resolution Dispute Resolution Must Chose

(W1) 1 Dispute
(W2)
Option

All secondary
Secondary Secondary Secondary Secondary Secondary Secondary Secondary
options are
Option Option Option Option Option Option Option
optional
(X1) (X2) (X3) (X15) (X18) (Y(UK)2) (Z)

Incorporated
Contract Data Parts 1 & 2 in WPEP

| | 62
ECC and its modular form 63

Core Clauses
1 - General
2 - The Contractor’s main responsibilities
3 - Time
4 - Testing and Defects
5 - Payment
6 - Compensation events
7 - Title
8 - Risks and insurance
9 - Termination

r| | 63
ECC and its modular form 64

There are 6 Main Option clauses

(about 1 to 3 pages each)

Employer must select 1 of these:

A – Priced contract with Activity Schedule

B – Priced contract with Bill of Quantities

C – Target contract with Activity Schedule

D – Target contract with Bill of Quantities

E – Cost Reimbursable contract

F – Management contract

31 March 2011 | 64
OPTION A 65

Priced contract with Activity Schedule

 Lump sum contract

 Project should be well defined at tender and subject to only minimal change
 Payment based on Activity Schedule defined and priced by the contractor
 Activity Schedule should align with programme to allow ease of administration
 Contractor only paid for completed activities
 Financial risk and therefore, reward largely borne by the contractor
 Suited to design and construct
 Risk is included in the activities and paid regardless of whether they occur
 Greater certainty of price
 Contractor has an interest in minimising cost
OPTION B 66

Priced contract with Bill of Quantities

 Remeasurement contract
 BoQ produced by the employer, rates priced by contractor
 Contractor paid for quantity of work completed each month
 Risk of quantities / errors in BoQ borne by Employer
 Financial risk of rates largely borne by the Contractor
 Not suited to design and construct
 Works should be well defined at tender
 Risks are included in the BoQ and paid regardless of whether they occur
 Contractor has an interest in minimising cost
OPTIONS C & D 67

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

 Target cost contracts

 Works should be adequately defined to allow target to be set
 Target Cost set via Activity Schedule or Bill of Quantities
 Target Cost moves with changes (Compensation Events)
 Greater flexibility for the employer to develop his design
 Financial risk shared between the contractor and employer
 Contractor paid on a cost reimbursable (Defined Cost) basis
 Gain / pain shared (see illustration)
 Contractor and Employer both encouraged to control costs
TARGET COST GAIN – PAIN SHARE

Changes Employers Risk

Final actual cost
compared to final target
cost to determine gain
share / pain share
Contractors Risk
Fee
Certificate 4

Certificate 3

Base Certificate 2
Cost

Certificate 1

Target Cost Actual Cost

OPTIONS C & D: Target Cost Illustration 69

• Proportion of saving / overspend received / paid by contractor

is be determined by employer
 70
Option E

Cost Reimbursable contract

■ Limited / no project definition required at tender stage
■ Immediate / earlier start on site
■ Contractor paid on a cost reimbursable basis
■ Employer carries risk of cost increases
■ Employer gets the benefit of all savings
■ Limited financial risk borne by the Contractor (‘disallowed’ cost)
■ Full flexibility available to the Employer
■ Simpler post contract financial management (no contract sum)
■ Potential for claims / disputes virtually eliminated
 71
Option F

Management contract
■ Limited project definition required at tender stage
■ Earlier start on site
■ Employer carries risk of cost increases
■ Suitable for contracts with a high degree of specialist contractors
■ Contractor directly employees subcontractors
■ Contractor responsible for managing the subcontractors to time and quality
■ Works subcontractors paid on prime cost
■ Contractor tenders preliminaries and Fee
DISPUTE RESOLUTION OPTIONS 72

There are 2 Dispute Resolution option clauses which concern rules and
procedures for Adjudication and review by any subsequent tribunal
Employer must select 1 of these:

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

W2 Used where the HGCR Act applies

ECC : Post Contract Financial Risk / Reward

E Sp
ee
Employer Risk / Reward

d
F to
Sit
e
D
C
B
A

Contractor Risk / Reward

ECC – Knowing your Options
Outline Detailed Detailed Production
Proposals Proposals Design - 85% Design
60% Design Design
Risk/Unavailable
Information

Unknown
Employer Design

Time

Contractor Risk

£
Option E Option Option Option A Option A
C/D C/D
“The X factor” – Contract Tailoring
75
X1 Price adjustment for inflation
X2 Changes in the law
X3 Multiple currencies
X4 Parent company guarantee
X5 Sectional completion
X6 Bonus for early Completion
X7 Delay damages
X12 Partnering
X13 Performance bond
X14 Advanced payment to Contractor
X15 Limitation of Contractors liability for design to reasonable skill are care
X16 Retention
X17 Low performance damages
X18 Limitation of liability
X20 Key performance indicators

r| 31 March 2011 | 75
The Secondary Options – Contract Tailoring
76

UK specific Secondary Options:

Y(UK)2 HGCR Act

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

Also, Z clauses…

Bespoke amendments

31 March 2011 | 76
 THINGS TO LOOK OUT FOR…
15 November 2009
Take Care – Key Considerations within NEC
Time Bar
Accepted Programme
Key Dates
Early Warnings

Contract Documentation
Allocation of Risk
Reasonable Skill and Care and Rights of 3rd Parties
Earned Value Analysis

31 March 2011 | 78
TIME BAR & COMPENSATION
Potential Issue Opportunities for
Entitlement to additional time and money (Compensation Events) ECH
are subject to compliance with strict timescales Adopt the Prospective
Outlook approach
Impact on Employer Impact on Contractor
Should factor in additional Risk of incurring costs by Encourages good project
resource to PM team ignoring timescales management – actively
promote time bar!
Manage compensation Needs to have a clear plan
contemporaneously or before and organisational structure Encourage use of a web
the change is instructed to enable compensation based Contract Admin
tools
Greater control over risk and
the impact of change Introduce FCA on
reimbursable Contracts
Could be ambushed

Solution
Understand, comply and plan for with contractual timescales
Commit sufficient resources – Otherwise amend the contract to extend timescales
Prevention is better than Cure!
Need a clear, quick and accountable decision making process in client organisations
Dispatch Emergency Response Team to deal with increased intensity of Compensation Events

31 March 2011 | 79
TIME BAR & COMPENSATION

Section 6, entitled “Compensation Events” brings together in one place the

contractual provisions for evaluating the time and cost changes that will occur
during construction works which do not arise from the Contractor’s fault

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

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

(There are no equivalent of “neutral events” found in JCT forms whereby the
employer bears the risk of time but the contractor bears the risk of costs.)
TIME BAR & COMPENSATION
The changes to the Completion Date and the contract Prices consequent
upon compensation events occurring are meant to be assessed
contemporaneously with the events arising and preferably before the
changes are instructed.

The intention is that this procedure enables the parties to successfully

manage risk and gives the Employer greater choice and control over
change management together with greater time and cost certainty.

The successful implementation of the detailed compensation event

procedures within the strict timetable set down, particularly where time
impacts are also to be assessed, requires considerable resources and
commitment from both parties.

The importance of adhering to these project management processes in

order to realise the considerable benefits of greater control of change and
risk management cannot be overstated. It facilitates the making of fully
informed decisions in the context of a clear understanding of the potential
impact of contemplated or unexpected change.
TIME BAR & COMPENSATION

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

(1) Project Manager gives and instruction to change the Works Information
(2) Employer does not provide access to and use of a part of the Site

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

(12) The Contractor encounters “unforeseen” physical conditions

(13) A weather measurement is recorded which is shown to occur on average

less frequently than once in 10 years

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

The procedure follows a logical chain as follows:

 Notification 8 weeks

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

 Quotation 3 weeks

 Reply 2 weeks (+2 weeks)

 Implementation
TIME BAR & COMPENSATION

Notification

61.1 Project Manager notifies

61.2 Project Manager seeks proposals

61.3 Contractor notifies

Validity

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

60.1(1) exceptions

61.3 Contractor notification tests – 8 week time bar

61.4 Project Manager tests whether a valid compensation event

6.1.4 Default acceptance of Compensation Event if no response

from the Project Manager within the correct timescales
(1 week + 2 weeks)
TIME BAR & COMPENSATION

Quotation

61.1 and 61.4: Project Manager instructs

61.5 Project Manager notifies whether Early Warning given and

effect on quotation

61.6 Uncertainty and the use of PM assumptions

62.1 alternative quotes

62.2 Time and Cost package. Programme implications (ECC

section 3)
TIME BAR & COMPENSATION

Acceptance / Assessment
63.1 method of assessing
63.3 method of change to Completion Date (EoT)
62.2 method of assessing disruption
62.3 Project Manager accepts, rejects (with reasons) and
resubmit
62.3 Project Manager not going ahead
62.3 Project Manager will assess
62.6 Default acceptance of quotation if no response from the Project
Manger within the correct timescales (2 weeks + 2 weeks)
Implementation
65.1 Compensation event implementation
65.2 Finality (unless assumptions to be revised) (beware caveats)
 Time Outline Master
ACCEPTED PROGRAMME Programme

Potential Issue Opportunities for

Clause 31.2 has extensive programme management ECH
requirements - contractors rarely comply with these! Should allocate
appropriate resource to
ECC doesn’t ask for a Critical Path and Logic Linked Programme deal with programme
management & schedule
Impact on Employer Impact on Contractor performance
Risk to project cost, Incorrect cost estimates by
performance and success under planning resource Use Contract Solutions to
hold workshop
Absence of programme detail Absence of robust compliant
prevents the Pro-active programme allows contractor Utilise expert
management of risk and to inflate claims to maximise Compensation Event
change commercial outcome response team to assess
time and cost

Solution
Hold workshop at pre-contract stage to confirm expectation

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

Request Critical Path and Logic Linked programmes in the Works Information

31 March 2011 | 87
TIME 88

30 Starting and Completion

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

 Contractor does the work so that Completion is on or

before the Completion Date (date stated in Contract
Data or as subsequently amended)

 The Project Manager decides and certifies the date of

Completion (date Completion actually achieved)
TIME 89

31 The programme

 If no programme is identified in the Contract Data then

the Contractor submits the first programme within the
period stated in the Contract Data

 Detailed (and onerous) list of requirements for each

programme

 Project Manager must accept or reject with reason

each programme submitted within 2 weeks

 Reasons for non acceptance stated

TIME 90

32 Revising the programme

 Items to be shown on each revised programme listed

 Revised programme issued

 within the period for reply after the Project Manager has
instructed him to
 when the Contractor chooses to and, in any case
 at no longer interval than that stated in the Contract Data

33 Access to and use of the Site

 Later of its access date or date for access shown on

the Accepted Programme – can be all or parts of the site if
detailed in the Contract Data
 TIME 91

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

* * * * * *

date of Completion
TIME 92

 There are 3 types of float

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

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

Date)

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

TIME 93

34 Instructions to stop or not to start work

35 Take over

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

 The Employer may use any part of the works before

Completion has been certified. If he does he takes over
the parts of the works when he begins to use it except if
this use is

 for a reason stated in the WI or

 to suit the Contractor’s method or working

36 Acceleration
TIME 94

 There are 3 types of float

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

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

Date)

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

 Who owns the float?

 Example
KEY DATES
Potential Issue Opportunities for
The Employer can fix Key Dates which the Contractor has to ECH
include in his programme. Comprehensive Planning
with Key Dates identified
Employer can levy damages as a result of the contractor’s failure
to meet a Key Date

Impact on Employer Impact on Contractor

Incentivise Contractor to Can incur costs if not met,
reach a particular milestone must be aware of dates
(eg a funding gateway) or
construction interface

Solution
Key Dates are effectively used where there is an particular interface with another contractor

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

31 March 2011 | 95
EARLY WARNINGS
Potential Issue Opportunities for
Contractor or Project Manager can give an Early Warning as ECH
soon as they are aware of potential price increase or delay
Pragmatically resolve
Can instruct the other to attend a risk reduction meeting to find issues and prevent
solutions problems (capture
measureable to
Impact on Employer Impact on Contractor demonstrate performance)
Contractual mechanism Can agree changes
provided to enable the pragmatically with PM Use risk register to
effective management of risk manage actions

Opportunity establish cost Incentivisation models can

and time impact of change stimulate reward against
risk provisions in contract

Solution
Early Warnings brings benefits - prevention better than cure

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

31 March 2011 | 96
GENERAL 97

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

 increase the total of the Prices

 delay Completion or delay meeting a key date or
 impair the performance of the works in use

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

 making and considering proposals

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

Project Manager records outputs

GENERAL 98

Early Warning – Benefits

 Prevention better than cure

 Proactive rather than reactive
 Early rather than late

The focus is on resolving and mitigating issues rather

than seeking to allocate blame and liability

While there is still time to positively influence the course

of events
CONTRACT DOCUMENTATION
Potential Issue Opportunities for
NEC3 contract forms only provide an outline of the obligations ECH
Responsibility for design is to be identified in Works Information Project Manager must
develop robust and
Preliminaries, Preambles, Provisional & Prime Cost Sums are compliant Works
not recognised as terms but can be included as part of the Information – need to
Works Information with scope identified. allocate correct resource
for this
Impact on Employer Impact on Contractor
Structure of contract may not Structure of contract may not Employ NEC expertise to
be understood be understood develop Works Information

Solution
Structure contract correctly

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

Complete Generic and Product Specific Works information

31 March 2011 | 99
 10
0

CONTRACT DOCUMENTATION - WORKS INFORMATION

CONTRACT DOCUMENTATION – FOCUS ON WORKS INFORMATION

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

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

- Tests, inspections requirements

- Contractor design responsibility
- Contractual information is required as the NEC (ECC) refers
to Works Information throughout the terms.

31 March 2011 | 10
1
CONTRACT DOCUMENTATION – FOCUS ON WORKS INFORMATION

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

• The Works information could then be structured as both Generic Works

information and Project Specific Works Information being identified as sub-
headings under the following main headings:

31 March 2011 | 10
2
 10
3

CONTRACT DATA
CONTRACT DATA 104

The Contract Data is in 2 parts:

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

documentation

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

submission
CD PART 1 105

CD Part 1 identifies general information such as:

 Main and Secondary Options selected

 Details of Employer, Project Manager, Supervisor, Adjudicator

 Completion Date (if decided by Employer)

 Defects Date

 Payment assessment interval

 etc

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

selected, e.g. Retention percentage if Option X16 chosen
CD PART 2 106

CD Part 2 identifies information such as:

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

 Fee percentages

 Tender price

 Completion Date (if tendered by Contractor)

 Data for use with Schedule of Cost Components

 etc
 10
7

SCHEDULE OF COST COMPONENTS

CONTRACT DOCUMENTATION - SCHEDULE OF COST COMPONENTS108

There are two Schedules of Cost Components

 Shorter Schedule of Cost Components

 used with Options A & B (and if agreed options C-F)
 only used to assess compensation events

 Schedule of Cost Components

 used with C-F only
 used to assess compensation events and
 recovery of the Contractors actual cost

The schedules are a set of rules to define those components of the

Contractors cost which are included in Defined Cost
ALLOCATION OF RISK
Potential Issue Opportunities for
Risks are shared between the Employer and the Contractor ECH
under some options (Target Cost Options)
Include Risk Allocation
Misconceptions that risk is unallocated and the owner is set in workshop during contract
agreement of the prices or by the Risk Register phase.

Provide expert advice on

Impact on Employer Impact on Contractor risk ownership under
Clear allocation of risk may Clear allocation of risk may different options
not be understood or not be understood or
considered considered

Contractors have in the past

priced and included Employer
risks within pricing

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

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

31 March 2011 | 10
9
REASONABLE SKILL & CARE / 3rd PARTY RIGHTS
Potential Issue Opportunities for
ECH
A standard Contract infers Fitness for Purpose is the Duty of
Care for design and assumes the Rights of 3rd Parties Act Apply expertise with the
applies. Contract to protect the
Contractor

Impact on Employer
Any 3rd party to the Contract
could have right against the
contract
Impact on Contractor
Contractor could
inadvertently sign up to a
higher standard of care for
which he cannot insure
against
Simple application of
knowledge and training to
the project team at the
outset will prevent such
issues from arising

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

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

31 March 2011 | 11
0
EARNED VALUE ANALYSIS
Potential Issue Opportunities for
Programme requirements at Clause 31.2 enable the Employer to ECH
define the management information and reporting requirements.
Clause 31.2 is key in
providing the level of detail
needed for reviewing
Impact on Employer Impact on Contractor Contractor quotes for
Enables the PM to manage The Contractor must break Compensation or Early
Contractors more effectively down his activities into the Warning.
level of resources required for
Difficult to achieve on Option the delivery of each activity Use clause 31.2 to enable
A: Lump Sum Contracts EVA with Cost, Time and
Resource in a single model

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

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

Ensure Works Information identifies information required through regular reporting

| 31 March 2011 | 11
1
EC Harris NEC 3rd Edition

Capability Development Programme

OTHER MATTERS TO CONSIDER…

15 November 2009
 11
3

OTHER MATTERS TO CONSIDER –

TESTING AND DEFECTS
TESTING AND DEFECTS 114

40 Test and Inspections - As required by the WI

42 Searching and Notifying of Defects

 The Supervisor may instruct the Contractor to search for Defects

43 Correcting Defects
 The Contractor corrects Defects whether or not the Supervisor
notifies him of them
 The Contractor corrects notified Defects before the end of the
defect correction period. This period begins at Completion for
Defects notified before Completion and when the Defect is notified
for other Defects
 Supervisor issues the Defects Certificate
TESTING AND DEFECTS 115
TESTING AND DEFECTS 116

44 Accepting Defect
 The Contractor or Project Manager may propose that the WI
be changed to accept a Defect
 The Prices are reduced and / or an earlier Completion Date
agreed

45 Uncorrected Defects
 If the Contactor is given access to correct a notified Defect,
but does not correct it within its defects correction period the
Project Manager assesses the cost of having the Defect
corrected by others and the Contractor pays this amount
 If the Contractor is not given access to correct a notified
Defect the Project Manager assesses the cost to the
Contractor of correcting the Defect and the Contractor pays
this amount
 11
7

OTHER MATTERS TO CONSIDER - PAYMENT

PAYMENT
50 Assessing the amount due
 Project Manager assesses the amount due at each assessment
date
 first assessment date decided by the Project Manager to
suit the procedures of the Parties
 later assessments dates occur
 at the end of each assessment interval until 4 weeks
after issue of the Defects Certificate
 at Completion of the whole of the works
 No requirement for the Contractor to submit an application
 Amount due is the Price for Work Done to Date – PWDD
 ¼ of PWDD withheld until the Contractor has submitted a first
programme acceptance showing all information which this
contract requires
 Project Manager must give details of assessment
PWDD – differs between Options
PAYMENT

Option A

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

 each group of completed activities and

 each completed activity which is not in a group

A completed activity is one which is without Defects which would

either delay or be covered by immediately following work
PAYMENT

Option B

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

 the quantity of the work which the Contractor has

completed for each item in the Bill of Quantities
multiplied by the rate and
 a proportion of each lump sum which is the proportion of
the work covered by the item which the Contractor has
completed

Completed work is work without Defects which would either delay

or be covered by immediately following work
PAYMENT

Option C, D & E

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

Cash Neutral / Positive Contract

Payment timescales
1st assessment 2nd assessment 3rd assessment
starting date date date date
Up to 31 days
assessment interval, if monthly
cash positive
normally monthly

final date for payment 21 days

Amount of Defined Cost paid during
after assessment date
the first assessment interval

Amount of Defined Cost forecast to have

been paid by the next assessment interval
PAYMENT
Option C & D

11.2 (23) Defined Cost is

 the amount of payments due to Subcontractors for work which is
subcontracted without taking account of amounts deducted for
 retention
 payment to the Employer as a result of the Subcontractor
failing to meet a Key Date
 the correction of Defects after Completion
 payments to Others and
 the supply of equipment, supplies and services included in
the charge for overhead cost within the Working Areas in
this contract
and
 the cost of components in the Schedule of Cost
Components for other work

less any Disallowed Cost

PAYMENT

There are two Schedules of Cost Components

 Shorter Schedule of Cost Components

 used with Options A & B (and if agreed options C-F)
 only used to assess compensation events

 Schedule of Cost Components

 used with C-F only
 used to assess compensation events and
 recovery of the Contractors actual cost

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

PAYMENT

Schedule of Cost Components is split into the following sections

1 People
2 Equipment
3 Plant and Materials
4 Charges
5 Manufacture and fabrication
6 Design
7 Insurance
PAYMENT

11.2 (25) Disallowed Cost – a listing of items which are

deducted from Defined Cost, for example
 amounts not justified by the Contractor’s accounts and
records
 failure to give an early warning
 Plant & Materials and resources not used to Provide
The Works
 resources not used to Provide The Works
 correcting Defects after Completion
 correcting Defects caused by the Contractor not
complying with a constraint on how he is to Provide the
Works stated within the Works Information
PAYMENT

51 Payment

 The Project Manager certifies payment within one week of

each assessment date

 Payment can be either from the Employer to the

Contractor or vice versa

 Each certified payment is made within 3 weeks of the

assessment date, or a different period if stated in the
Contract Data

 Interest paid on late payment

PAYMENT

52 Defined Cost

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

 Amounts included in Defined Cost are at open market or

competitively tendered prices with deductions for all discounts,
rebates and taxes which can be recovered

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

them available for inspection by the Project Manager
EC Harris NEC 3rd Edition

Capability Development Programme

SUGGESTED AMENDMENTS…
15 November 2009
Suggested Z clauses (Amendments to the Contract)
■ Prevention
New grounds for a compensation event called “prevention”, effectively
a Force Majeure provision, - entitles the Contractor to claim additional
time and money.
Common to delete or amend it to be a time only Compensation Event in
line with other standard forms.

■ Subcontracting Value for Money

Under cost reimbursement options the higher the works cost with
Sub-Contractors, the higher the Contractors fee percentage.
Some clients introduce the need for competitive tendering, audit rights,
visibility of supply chain, limitation on sub-tier subcontracting without
acceptance.

Michael Spencer | 31 March 2011 | 13

0
Suggested Z clauses (Amendments to the Contract)
■ Proceeding regularly and diligently
No such provision in the NEC (ECC) Contract, we advise this Z
clause is added to introduce this obligation.

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

■ Critical Path and Logic Linked programmes

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

31 March 2011 | 13
1
Suggested Z clauses (Amendments to the Contract)
■ Extension To Time Bar Timescales In The Contract
If suitable resources are unavailable, suitable amendments should be made
to the contractual timescales for compensation.
■ Issue – Cash Positive
The standard ECC under the cost reimbursable options (C, D and E) is cash
positive in terms of interim payments to the Contractor. We recommend that
the Employer reviews the payment process to determine if they are happy to
pay on a cash positive basis. If not we would recommend that the standard
payment clause is amended to a cash neutral situation.
■ Issue – Assessing The Amount Due
Project Manager assesses the amount due at each assessment date. There
is no requirement for the Contractor to submit an application. We suggest
the Employer reviews this issue and if required amends the contract to make
the submission of an application a condition precedent for payment.

31 March 2011 | 13
2
Suggested Z clauses (Amendments to the Contract)
■ Issue – Disallowed Cost
The standard ECC under the cost reimbursable options (C, D and E) has a
defined term Disallowed Cost. These are costs which are not recoverable
by the Contractor.

We recommend that the Employer reviews these to ensure they are happy
with what they cover. Particular attention is drawn the issue of Defects
correction.
Under the standard ECC the majority of Defects identified and corrected
before Completion will be paid for by the Employer. Employers need to
understand this and make sure they are happy to allow this. This does bring
some benefit to the Employer in that it encourages all Defects to be
corrected prior to Completion.

31 March 2011 | 13
3
Focus on the Professional Services Contract 134

 When should it be used?

 PSC and ECC Compared
 Main Options
 Secondary Options
PROFESSIONAL SERVICES CONTRACT

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

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

Key Differences between the PSC and the WC

 No Contractor, Subcontractor and Project Manager, just Employer and

Consultant (NEC3 PSC can appoint an Employer’s Agent option X10, but
not used in PST) (use as Z clause?)

 The ‘Testing and Defects’ section of the Works Terms is replaced by a

section titled ‘Quality’ whereby a Quality Management Plan is introduced

 The section on ‘Title’ is replaced by Rights to Drawings, Documents and

Models. Intellectual Property Rights are dealt with in the VIP

 The following Main Option Clauses are used with the PSC
 Option A: Price Contract with Activity Schedule
 Option C: Target Contract with Activity Schedule
 Option E: Time Based Contract
BAA PROFESSIONAL SERVICES TERMS (PSC)

Differences between the PSC and the WC (Pricing)

 Option C and Option E

 Under the PST the cost for services is valued on a Time Charge basis
rather than actual cost (Defined Cost)
PROFESSIONAL SERVICES CONTRACT
Key Differences between the PSC and the WC

The following Secondary Option Clauses are used with the PSC

 Option X1: Price Adjustment for Inflation

 Option X2: Changes in the law
 Option X3: Multiple Currencies
 Option X4: Parent Company Guarantee
 Option X5: Sectional Completion
 Option X6: Bonus for early Completion
 Option X7: Delay Damages
 Option X8: Collateral Warranty Damages
 Option X9: Transfer of Rights
 Option X10: Employer’s Agent
 Option X11: Termination by the Employer
 Option X12: Partnering
 Option X13: Performance Bond
 Option X18: Limitation of Liability
 Option X20: Key Performance Indicators
 Option Z: Additional Conditions of Contract
Focus on the Term Service Contract 139

 When should it be used?

 Range of use
 TSC and ECC Compared
 Main Options
 Secondary Options
When should it be used?

■ Distinctive nature
■ Providing a service over a period of time (“service period”)
■ Examples in construction
■ Other examples
Range of use

■ Very wide range

■ Providing a service – not a project
■ Maintaining existing condition of an asset
■ Not normally improving condition of asset
■ But may include some betterment
■ May include renewal and replacement
TSC and ECC compared

■ TSC ■ ECC
– provides a service – provides works
– service period (not – Completion Date (can be
extended) extended)
– Service Manager – Project Manager &
Supervisor
– 6 main Options
– 3 main Options
– 18 secondary Options
– 13 secondary Options
– No “call-off” option
– X19 –Task Order
TSC and ECC compared
■ TSC ■ ECC
– Contractor’s plan
– Defects corrected asap
– Defined Cost in core
– Affected Property
– Allows for Employer’s
equipment
– 14 CE’s + 9 in secondary
Options
– no unforeseen physical
conditions CE
– no weather CE
– Programme
– Defects corrected in dcp
– Defined Cost in main
Options
– Site and Working Areas
– Equipment always
Contractor’s
– 19 CE’s + 5 in secondary
Options
– unforeseen physical
conditions CE
– weather CE
TSC and PSC Compared

■ TSC ■ PSC
– mainly physical work – mainly non-physical work
– maintenance-type work – project work
– normally on Employer’s – premises or asset
office and site
Main Option clauses
Main Option clauses are as follows
■ A Priced contract with price list
■ C Target contract with price list
■ E Cost reimbursable contract
Secondary Option clauses
■ X1 - Price adjustment for inflation
■ X2 - Changes in the law
■ X3 - Multiple currencies
■ X4 - Parent company guarantee
■ X12 – Partnering
■ X13 - Performance bond
■ X17 - Low service damages
Secondary Option clauses
■ X18 – Limitation of liability
■ X19 – Task Order
■ X20 – Key Performance Indicators
■ Y(UK)2 – The Housing Grants, Construction and Regeneration Act
1996
■ Y(UK)3 – The Contracts (Rights of Third Parties) Act 1999
■ Z - Additional conditions of contract
Questions : Discussion Forum 14
8
JCT 2005
PART 5: EFFECT OF JCT 05 (Part 1)

Conditions

 Definition and interpretation

 Carrying out the works (possession, design, completion, LAD’s, Defects)
 Control of the Works (access instructions, CDM)
 Payment
 Changes
 Injury, Damage and insurance
 Third Party Rights and Warranties
 Termination
 Disputes
PART 5: EFFECT OF JCT 05 (Part 2)

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

 Integration of the Supplements

 Third Party Rights (Big Change)

 Change in Language, Structure and Terminology

PART 5: EFFECT OF JCT 05 (Part 3)

Brief Summary of DB05

1. Design Responsibilities and Discrepancies – Same as before

“Still Vague with regard to priority of ER’s and CP’s!!”

2. PI cover (Now Expressly Required)

3. Design Submission Procedure incorporated into the Standard

Form (A, B, C – Approval Structure)
PART 5: EFFECT OF JCT 05 (Part 4)

Brief Summary of DB05

4. Third Party Rights and Warranties
 Effect of the Rights of Third Parties Act 1999

- JCT 98 contracted out of the Act

- DB05/SBC05 provides for

-Third Party Rights Schedule (Purchasers, Tenants
and Funders)
-CW’s
-S/c CW’s
Not available in Minor Works Form!
Intermediate Form provides for CW’s and Sub-Contractor Warranties only
PART 5: EFFECT OF JCT 05 (Part 5)

Brief Summary of DB05 (cont…)

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

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

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

8. Right of Contractor to obtain amounts unreasonably withheld by the employer following

determination by employer (could have a dramatic effect)

9. Provisions for nominated subcontractors (Deleted)

Minor Works and Intermediate Form of Contract Now allows for CDP elements!!
 Differences in Key Clauses – Variations vs
Compensation Events
JCT 05

 Normal valuation rules apply

 Schedule 2 quotation

NEC 3

 PM requests quotation with instruction

 Contractor notifies PM within 8 weeks of becoming aware of event – PM
requests quotation (if necessary)
 Priced in accordance with Activity Schedule or Bill of Quantities
 Delay to be notified with quotation
Differences in Key Clauses – Possession and
Completion
JCT 05

 Possession given to Contractor on “Date of Possession”

 Employer may defer possession by up to 6 weeks (If appendix states clause 2.5
applies)
 Employer not entitled to take possession of any part of site until issue of
certificate of Practical Completion

NEC 3

 Contractor has access to site – NOT possession

 Employer takes over the work no later than 2 weeks after completion
 No obligation on Employer to take over if it is stated in Contract Data
Differences in Key Clauses – Extension of Time

JCT 05 SBC

 Contractor to give written notice to Architect of ANY delay

 Relevant Event (Clause 2.29) / Variation

Contractor provide estimate of expected delay

Architect to award Extension of Time

Architect to reassess Award on issue of instructions since last
Award and on completion, but no later than 12 weeks after
Practical Completion
Options Available within the Standard Forms

JCT Suite of Contracts 2005

• Standard Building Contract (SBC):

• With Quantities
• Without Quantities
• With Approximate Quantities

• Common Characteristics:

 Employer’s Design Team responsible for design

 Architect/Contract Administrator responsible for managing the contract
 Contractor responsible for carrying out the Works in accordance with the
contract documents
 Possible for discrete parts to be designed by the contractor
 Contract documents include Bills of Quantity (if applicable), Drawings,
Specifications
 Payments issued at intervals not exceeding one month.
Options Available within the Standard Forms

JCT Suite of Contracts 2005 (cont’d)

• JCT Design and Build

• Characteristics:

 Provides ‘single point of responsibility’ for design and construction.

 The contractor is responsible for completing design and carrying out the
construction works
 No architect/contract administrator.
 There is provision for a named Employer's Agent
 There is no clerk of works
 Contract documents include Employer's Requirements, Contractor's
Proposals and Contract Sum Analysis
 There is provision for the obtaining of planning permission and other
approvals
 Payment can be at monthly intervals or at the end of agreed stages
 Alternative provisions for payment – either stage payments or value of
work executed
Options Available within the Standard Forms
JCT Suite of Contracts 2005 (cont’d)

JCT Excellence

• Characteristics:

 collaborative behaviour between the various parties

 active use of risk management techniques

 flexibility in use

 complete supply chain management

 PART 5 : DISCREPANCIES

 JCT SBC 05
The Contract Documents are defined as:
“The Contract Drawings, the Contract Bills, the Agreement and
these Conditions, together with (where applicable) the
Employer’s Requirements, the Contractor’s Proposals and the
CDP Analysis”
Cl 1.3 “The Agreement and these Conditions are to be read as
a whole but nothing contained in the Contract Bills or the CDP
Documents shall override or modify the Agreement or these
Conditions”
 PART 5 : DISCREPANCIES (Cont’d)

 JCT SBC 05 (With Quantities)

Examples of how discrepancies are dealt with are as follows:
Cl 2.14 states that errors in the contract bills of quantity should
be corrected and treated as a variation unless it concerns
complying with Statutory Requirements
Cl 2.14 states where there is an error in the Contractor’s
Proposals or the CDP analysis, it is corrected with no adjustment
to the Contract Sum
Cl 2.15 states that if the Contractor finds any such departure,
error, omission or inadequacy he should immediately give written
notice with appropriate details to the Architect/Contract
Administrator who will issue instructions
 PART 5 : DISCREPANCIES (Cont’d)

 JCT DB 05
The Contract Documents are defined as:
“The Agreement and these Conditions, together with the
Employer’s Requirements, the Contractor’s Proposals and the
Contract Sum Analysis”
Cl 1.2 states “The Agreement and these conditions are to be
read as a whole but nothing contained in the Employer’s
Requirements, the Contractor’s Proposals or the Contract Sum
Analysis shall override or modify the Agreement or the
Conditions
 PART 5 : DISCREPANCIES (Cont’d)

 JCT DB 05
Discrepancies are dealt with as follows:
Cl 2.13 states if the Contractor finds any inadequacy in the
Employer’s Requirements or discrepancy in the Contractor’s
Proposals he shall notify the Employer
Cl 2.14 states where the discrepancy is within the Contractor’s
Proposal, he shall inform the Employer in writing of his proposed
amendment and the Employer shall decide between discrepant
items or otherwise accept Contractor’s proposed amendment
Cl 2.14.2 states where the discrepancy is within the Employer’s
Requirements, the Contractor’s Proposals shall prevail
 PART 6 : LETTERS OF INTENT

 What do you do if Contract Documents are not completed and

signed prior to starting on site?

 Not unusual to find work on a construction project started before a

formal contract is drawn up

 Letters of Intent indicate a firm intention to award the contract in

question to that Contractor

 Letters on Intent are usually used where the issuer wishes to have
some work commenced by the Contractor before a formal contract
has been agreed and signed up to by the parties
 PART 6 : LETTERS OF INTENT

 Effects of Letters of Intent depend entirely upon their wording

 Usually the case that such letters do not give rise to any legal
rights or obligations

 By stating that there will or may be a contract in the future, the

letter may indicate that there is no such contract at present

 A Contractor who carries out work on this basis will be entitled to

be paid the reasonable value of the work carried out
 PART 6 : LETTERS OF INTENT

 Do’s and Don’ts

Do
Clearly identify the scope of the works
Set out the matters to be resolved for the main contract to
be entered into
Make it clear the Letter is intended to give rise to an interim
agreement
Set a limit on the amount to be paid to the Contractor (inc
VAT)
Make it clear who is to be the party issuing instructions
 PART 6 : LETTERS OF INTENT

 Do’s and Don’ts

Don’t
See a Letter of Intent as a substitute for a properly drafted
contract
Have a Letter of Intent which incorporates all the terms of
the contract
Forget the limitation period for liability for work carried out
under a Letter of Intent will be 6 years
Forget that whether you are the Contractor or the issuer
you are at risk if the Letter of Intent is not cleary drafted
 PART 6 : LETTERS OF INTENT

 Letters of Intent are between the Employer and Contractor

 A Letter of Intent may come in many forms
A non-binding statement of future intention of both parties
An ‘if’ contract which creates binding contractual rights
A complete contract
 What Criteria must be met by a Letter of Intent?
Certainty as to key terms
Must be consideration
Both parties must have a mutual intention to enter into a
binding legal contract
 PART 7 : WARRANTIES

 The Conditions of Contract may require the Contractor and

Subcontractors to provide collateral warranties to:
Funders
Purchasers/Tenants
 Purpose
To bring remote owners into direct contractual relationship with
those against whom they would only be able to claim in the tort
of negligence
A Warranty is a contractual relationship and if broken does not
entitle the other party to terminate, it simply entitles that party to
sue for damages
 PART 7 : WARRANTIES

 JCT suite of contracts also include Contracts (Rights of Third

Parties) Act 1999 but parties need to be identified in Contract
Particulars
 NEC 3 suite of contracts also include Contracts (Rights of Third
Parties) Act 1999 as an option but parties need to be identified in
Contract Data
 Until this act came into force, it was a rule of English Law that only
the two parties to a contract had the right to bring an action to
enforce its terms – “Privity of Contract”
 Check amendments
Options Available within the Standard Forms

JCT Suite of Contracts 2005

• With Quantities
• Without Quantities
• With Approximate Quantities

• Common Characteristics:

 Design Team responsible for design

 Architect/Contract Administrator responsible for managing the contract
 Contractor responsible for completing in accordance with the contract
documents
 Possible for discrete parts to be designed by the contractor
 Contract documents include Bills of Quantity (if applicable), Drawings,
Specifications
 Payments issued at intervals not exceeding one month intervals
Options Available within the Standard Forms

JCT Suite of Contracts 2005 (cont’d)

• JCT Design and Build

• Characteristics:

 Provides ‘single point of responsibility’ for design and construction.

 The contractor is responsible for completing design and carrying out the
construction works
 No architect/contract administrator.
 There is provision for a named Employer's Agent
 There is no clerk of works
 Contract documents include Employer's Requirements, Contractor's
Proposals and a Contract Sum Analysis
 There is provision for the obtaining of planning permission and other
approvals
 Payment can be at monthly intervals or at the end of agreed stages
 Alternative provisions exist for payment – either stage payments or value
of work executed
Options Available within the Standard Forms

JCT Excellence

• Characteristics:

 collaborative behaviour between the various parties

 active use of risk management techniques

 flexibility in use

 complete supply chain management

 Differences in Key Clauses – Variations vs Compensation Events

JCT 05

 Normal valuation rules apply

 Schedule 2 quotation

NEC 3

 PM requests quotation with instruction

 Contractor notifies PM within 8 weeks of becoming aware of event – PM
requests quotation (if necessary)
 Priced in accordance with Activity Schedule or Bill of Quantities
 Delay to be notified with quotation
Differences in Key Clauses – Possession and Completion

JCT 05

 Possession given to Contractor on “Date of Possession”

 Employer may defer possession by up to 6 weeks (If appendix states clause 2.5
applies)
 Employer not entitled to take possession of any part of site until issue of
certificate of Practical Completion

NEC 3

 Contractor has access to site – NOT possession

 Employer takes over the work no later than 2 weeks after completion
 No obligation on Employer to take over if it is stated in Contract Data
Differences in Key Clauses – Extension of Time

JCT 05

 Contractor to give written notice to Architect of ANY delay

 Relevant Event (Clause 2.29) / Variation

Contractor provide estimate of expected delay

Architect to award Extension of Time

Architect to reassess Award on issue of instructions since last
Award and on completion, but no later than 12 weeks after
Practical Completion
Differences in Key Clauses – Extension of Time Cont’d

NEC 3

 Early warning, unless a Compensation Event

Delay in completion

Delay in meeting a key date
 Project Manager or Contractor request a meeting to mitigate delay
 Compensation Event

Contractor submits quotation for delay

Project Manager can revise completion date or key dates
Choosing a Contract

Key Considerations for a Project:

Client Involvement

Design Management

Capacity for Variations

Complexity

Speed

Clarity of Remedies

Default

Delay

Quality Failure
FIDIC – an Introduction

June 2010
“Fédération Internationale des Ingénieurs Conseils”

(International Federation of Consulting Engineers)

FIDIC Forms - the ‘Rainbow’ Suite

■ Red - Construction
■ Orange - Design & Build/Turnkey
■ Yellow - Design & Build
■ Silver - EPC Turnkey
■ Gold - DBO Contract
■ Green - Minor Works - ‘mini-Red Book’
■ White - Professional Services Contract
■ Blue - Dredging and Reclamation
■ Pink - MDB Harmonised Red Book
Choice of Form

Silver
Risk transfer to Contractor
Certainty of outturn price

Yellow

Green
Low value
Red/ simple works

Pink

Extent of design by Contractor

0% 100%
Red Book

Red Book, First Edition 1999:

– Supersedes previous editions from 1957

– Based on UK ACE/ICE forms
– Construct Only with provision for CDP
– Assumes the Contract Administrator is the designer
What does it contain?

■ Contract Agreement
■ General Conditions
■ Particular Conditions
■ Appendix to Tender
■ DAB Agreement
■ Example Proformas
■ Guidance Notes
Principal Parties:

■ Employer

■ Engineer

■ Contractor
Other Parties

■ Designers

■ Supervisor (in certain European Jurisdictions)

■ Dispute Adjudication Board (DAB)

Typical Organisation

Employer

Project Board

PM/Contract
Administrator
(‘Engineer’)

Cost Admin. Design Construction Supervision

 Galleria Riga – Procurement (Deal Map – FIDIC Red)
Tenants
Lenders Developer (TBC)
(Nordea) SIA Patollo
Construction Supervisor
(Jurevics un Partneri)

PM/CA
M&E Design E C Harris LLP Fit Out
Contractors
(Idom)

Architect Contractor
Sarma &Norde Dispute Adjudication
(SIA Re & Re)
Board

KEY
Subcontractors Principal document
Structural Eng
BKB Function
Payment
Employer

■ Gives the Contractor possession of the Site

■ Empowers the Engineer
■ Ensures performance of Employers Personnel
■ Assists with Permits
■ Confirms Variation requirements to the Engineer
■ Pays the Contractor per the Engineer’s Certificates
The Engineer

Directs and manages the Contractor by:

■ Providing Information
■ Issuing Instructions
■ Approving Quality of the Works
■ Certifying Payments to be made by the Employer
■ Making Determinations where required
The Contractor

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

■ Statutory Powers per local legislation

■ No direct contractual relationship with Engineer

■ Able to override Engineer’s authority

■ FIDIC only recognises Engineer

Engineer/Designer Interface

1.9: Delayed Drawings or Instructions

3.3: Instructions of the Engineer
4.1: Design discrepancies advised by Contractor
4.9: Quality Assurance
7.2: Samples – Engineer’s consent
13.2: Value Engineering
Engineer/PQS Interface (where applicable)

12: Measurement and Evaluation

13: Variations and Adjustments

14: Contract Price and Payment

Engineer/Supervisor Interface (if applicable)

4.1: Supervisor’s Instructions

7.4: Testing

9.1: Tests on Completion

Determinations:

Sub clause 3.5:

“Whenever these Conditions provide that the Engineer shall proceed in accordance
with this Sub-Clause 3.5 to agree or determine any matter, the Engineer shall consult
with each Party in an endeavour to reach agreement. If agreement is not achieved,
the Engineer shall make a fair determination in accordance with the Contract, taking
due regard of all relevant circumstances.
The Engineer shall give notice to both Parties of each agreement or determination,
with supporting particulars. Each Party shall give effect to each agreement or
determination unless and until revised under Clause 20 [Claims, Disputes and
Arbitration].”
Determinations only apply to Sub-Clauses:

1.9: Delayed Drawings/Instructions 10.2: Taking Over of Parts

2.1: Delayed Access to Site 10.3: Interference with Tests

2.5: Employers Claims 11.4: Failure to remedy defects

4.7: Setting Out 11.8: Cost of search for defects

4.12: Unforseeable Conditions 13.2: Value Engineering

4.19: Elect/Water/Gas used 13.7: Changes in legislation

4.20: Use of Employer’s Equip’t 15.3: Valuation at Termination

4.24: Fossils 16.1: Post Suspension entitlement

7.4: Testing 17.4: Employers Risks

8.9: Consequences of suspension 19.4: Force Majeure

9.4: Test failure 20.1: Contractors Claims

Management of Differences/Disputes

Four levels:

1. Informal

2. Engineers Determination

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

4. Arbitration (default), or Courts

Informal:

■ Negotiation

■ Mini –Trial

■ Conciliation

■ Mediation (first stage of Engineer’s Determination)

Engineer’s Determination

■ Initially acts as mediator…failing which;

■ Engineer receives submissions from both parties;

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

Dispute Adjudication Board (DAB)

■ One or three members

■ DAB Decision temporarily binding

Arbitration

■ Final Determination – Tribunal Award is registrable.

■ Can take place in another country

■ One or Three Member Tribunal

■ ICC Rules as default

Challenges when using FIDIC

■ Intended to be a contract for expatriate use

– Language?
– Applicable law?
– Dispute between international participants?

■ Arrangements between Supervisor and Engineer

■ Can the Engineer be impartial when making Determinations?
■ Can ECH fulfil (all of) the duties of Engineer?