Contract Admin

Question 1

What changes did the HGCRA 1996 change to Building Contracts?

Answer 1

This implies two important procedures into certain defined construction contracts (which will cover most general building and civil engineering works):

the right to adjudication at any time, and
certain minimum requirements on payment terms.
Note that this Act was amended with the Local Democracy, Economic Development and Construction Act 2009, which was effective for contracts created after 1 October 2011.

Question 2

What changes did the Local Democracy, Economic Development and Construction Act 2009 change to Building Contracts?

Answer 2

This provides:

a revised definition of insolvency in section 6, Termination
revised payment guidance, including pay less notices for reduced payment, and pay when certified clauses have been outlawed. It is no longer permitted to make payment conditional on performance of obligations under another contract.

Question 3

What changes did the Contracts (Rights of Third Parties) Act 1999 change to Building Contracts?

Answer 3

This allows third parties to have the benefit of a contract. It normally requires an express term in the contract. This Act is rarely used in practice in construction. The 2016 JCT revision inserts an option to use third-party rights.

Question 4

What is a collateral warranty?

Answer 4

A collateral warranty is a contract which is ancillary or ‘collateral’ to a principal contract, such as a building contract, a subcontract or a consultant appointment. It is entered into between the person employed under the principal contract (for example, a contractor) and a third party (known as the ‘beneficiary’) having or acquiring an interest in the development, such as a funder, a purchaser, a tenant or a management company. In a collateral warranty, the person employed under the principal contract (‘the Warrantor’) generally warrants to the third party that it has complied with its obligations under the principal contract.

Question 5

What is privity of contract?

Answer 5

As a general rule, the doctrine of privity of contract states that only a party to a contract has the benefit of that contract or is subject to the obligations contained in it. Put simply, only a party to a contract can enforce the terms of that contract. Despite the existence of the Contracts (Rights of Third Parties) Act 1999 a collateral warranty remains the industry’s preferred way to overcome the restrictions on remedies for third parties, created by the doctrine of privity of contract.

Question 6

What are the key clauses included in a collateral warranty?

Answer 6

The key clauses found in a collateral warranty, whether they are industry standard forms or bespoke forms, are:

Scope of services and associated fees
duty of care;
copyright;
prohibited materials;
professional indemnity insurance;
assignment; and
step-in rights.

Question 7

Timeframes for settling the Final Account

Answer 7

The Contractor must provide the CA all documents reasonably required for the adjustment of the contract sum within 6 months after PC of the works.

No later than 3 months after receipt of this information, the CA must prepare a final account statement and all computations must be sent to the contractor for agreement.

This means that within 9 months after PC the final account should be agreed.

Question 8

Difference between uniquely and not uniquely identified items

Answer 8

Uniquely identified items are those materials or goods which are easy to recognise, such as heating boilers or sanitary fittings or the like. Items not uniquely identified cover such items as bricks, sand, tiles,
timber and anything which it would be difficult to recognise as belonging to a particular site.

Question 9

What is the definition of a variation?

Answer 9

Variations are defined in these contracts, in clause 5.1 in each case, as the alteration or modification of the design or the quality or quantity of the Works from that shown in the contract documents. They include: additions, omissions and substitutions; alterations of kinds or standards of materials; or the removal from site of materials delivered for the Works, unless the removal is because the materials are defective.

Question 10

What is the difference in varations between traditional and D&B contracts?

Answer 10

In D&B they are referred to as ‘Change instructions’, because the employer may only instruct a change in the Employer’s Requirements which may, in turn, require an alteration in the design, quality or quantity of the Works. Indeed, the contractor has the right to refuse to put a change instruction into effect if it has sufficient reason such as its affect upon the design.

Question 11

What is the general procedure for valuing variations?

Answer 11

Additions and substitutions which are similar in character and executed under similar conditions and without significant change in quantity to work in the bills are to be priced using those rates. If there are changes in the conditions and quantity,
valuations are to use the bill rates as a basis. If the work is not of a similar character or involves other than additions, omissions or substitutions or if it is not reasonable to value it using bill rates as a basis, then a fair valuation must be made. Rules are set out for the valuation of work on a daywork basis if it cannot properly be measured.

Question 12

Outline the roles and responsibilities of the contract administrator?

Answer 12

• The overall role is to administer the contract between the employer and the contractor.
• Key tasks include:

o Chairing meetings.
o Periodically inspecting the works.
o Issuing instructions relating to variations.
o Authorising interim payments to the contractor.
o Determining applications for extensions of time.
o Certifying practical completion.

Question 13

What are the key qualities required of a contract administrator?

Answer 13

• Knowledge of relevant contract provisions.
• Knowledge of construction in order to assess changes and the impact of changes.
• Ability to act in an independent and impartial manner when making decisions.
• Be able to maintain accurate records.

Question 14

What is the difference between a contract administrator and an employer’s agent?

Answer 14

• Contract administrator is identified within traditional forms of contract and is responsible for administering the terms of the contract between the parties. The decision-making function is impartial meaning either party can challenge the decision of the contract administrator.
• Employer’s agent is identified within the design and build contract and acts on behalf of the employer on all matters. The employer is not normally able to challenge the decision of the employer’s agent.

Question 15

What is an extension of time?

Answer 15

• An extension of time formally alters the contract completion date and may be issued if there is a delay to the contract completion date caused by the client or a neutral event.

Question 16

Why did you issue an extension of time on this project?

Answer 16

• An extension of time may be issued to the contractor if there is a delay to the contract completion date caused by the client or by a neutral event.
• Such events are listed as ‘relevant event’s under the JCT Standard Building Contract 2016.
• A ‘relevant event’ can include:
• variations
• instructions
• deferment of possession of the site
• suspension
• works by statutory undertakers
• exceptionally adverse weather
• civil commotion
• terrorism and strikes; and
• ‘any impediment, prevention or default … by the Employer’.

Question 17

How did you determine an extension of time should be issued on this project?

Answer 17

• Referred to the JCT contract to review procedures relating to extensions of time.
• Request written notice from the Contractor detailing the request and reasons for the request.
• Review the written notice to determine if there is a connection between the delay and relevant event.
• Report the delay and causes to the employer.
• Issue an extension of time certificate to formally alter the contract completion date.

Question 18

The JCT MW 2011/2016 Contract does not make reference to ‘relevant events’ and so how would you determine if an extension of time should be issued?

Answer 18

• Firstly, the JCT MW 2016 contracts detail that an extension of time should be issued whereby a delay is beyond the control of the contractor.
• For guidance on events deemed beyond the control of the contractor, I would review events listed as ‘relevant events’ under the Standard Building Control 2011/2016.

Question 19

What is a relevant event?

Answer 19

• Relevant event causes a delay to the contract completion date and is caused by the client or a neutral event.
• Relevant event entitles the contractor to claim an extension of time.
• Relevant event does not necessarily entitle the contractor to claim direct loss and expense.
• Examples include specified perils, exceptionally adverse weather, variations, failure to give contractor possession of site.

Question 20

What are concurrent delays and why might such concurrent delays cause issues when assessing extensions of time?

Answer 20

• Concurrent delays refers to two or more delaying events occurring simultaneously.
• If concurrent delays comprise of a delay caused by the client and a delay caused by the contractor, there can may be difficulty in determining how long the extension of time should cover.
• Case law suggests an extension of time should be given for the full length of the delay caused by the employer, as opposed to ‘splitting the difference’ on the extension of time.

Question 21

What is the process for issuing an extension of time?

Answer 21

• The contractor needs to give notice to the employer when it becomes reasonably apparent that progress of the works will be delayed, including the cause of the delay and effect on the completion date.
• The contract administrator needs to assess the notice and determine if there is a clear link between the relevant event and the delay to the completion date.

Question 22

Are extensions of time for the benefit of the employer, the contractor or both?

Answer 22

• Extensions of time can be beneficial to both the employer and the contractor.
• An extension of time will benefit the contractor as they will not liable for liquidated damages for the contract delay in question.
• An extension of time will benefit the employer as failure to issue the extension of time means the contractor has to complete the works within a ‘reasonable time’ and the employer loses the ability to claim liquidated damages.

Question 23

What is loss and expense and would a contractor be entitled to loss and expense if an extension of time is given?

Answer 23

• Loss and expense refers to additional costs incurred by the contractor as a result of work progress being materially affected.
• Such costs may include site offices, welfare facilities, plant hire, insurances or site security.
• The contractor may be entitled to loss and expense if the delay to the contract completion date was caused by the client as opposed to a neutral event.
• The contractor needs to give notice to the employer when it becomes reasonably apparent that he is likely to suffer loss and expense.
• The contract administrator needs to assess if there is a clear link between the delay and the loss and expense costs.

Question 24

What is a relevant matter?

Answer 24

• Relevant matters materially affects progress of works but do not necessarily cause a delay to the completion date and are caused by the client.
• Relevant matter may entitle the contractor to claim direct loss and expense that has occurred.
• Failure to give contractor possession of site, variations, delay in giving contractor instructions.

Question 25

What are specified perils?

Answer 25

- Specified perils are significant events that would cause significant damage such as fire, earthquakes, flooding, riot and civil commotion.

Question 26

What remedies are available for a contractor if a client causes a disruption or delay?

Answer 26

The contractor is entitled to claim for loss and expense is there is disruption to the works or a delay to the completion date is caused by the client. The contractor must provide a written application (with sufficient information) to the contract administrator as soon as it becomes apparent they have or are likely to incur a direct loss.

Question 27

What remedies are available for a client if the contractor causes a delay to the completion date?

Answer 27

The client is entitled to claim for liquidated damages which are detailed within the construction contract.

Question 28

What are liquidated damages and how are they calculated?

Answer 28

Liquidated damages pre-agreed in the contract and are a genuine pre-estimate of the client’s loss. If the damages are not a genuine pre-estimate, they be considered a penalty by the courts and will be unenforceable. Various factors are considered when calculating liquidated damages including: - Loss of rent. - Loss of income. - Storage costs. - Rental costs.

Question 29

What is the procedure for claiming liquidated damages?

Answer 29

- Contract administrator to issue a certificate of non-completion. - Contract administrator to issue a notice (prior to the due date of the final payment) that the employer may require payment of or deduct liquidated damages. - Contract administrator to issue notice (no later than 5 days prior to final date of payment for the final amount demanding payment) demanding payment or deducting liquidated damages.

Question 30

What are unliquidated damages?

Answer 30

Unliquidated damages are damages that are payable for a breach of contract, the exact amount of which has not been pre-agreed.

Question 31

What is the risk of inserting ‘nil’, ‘n/a’ or ‘none’ for the rate of liquidated damages in the contract?

Answer 31

This may be interpreted as specifying liquidated damages at zero meaning the employer is not entitled to claim unliquidated damages. Employers should specify ‘unliquidated damages are to apply’ or delete the liquidated damages clause completely.

Question 32

What are the key changes made to the Housing Grants, Construction and Regeneration Act by the Local Democracy, Economic Development and Construction Act 2009?

Answer 32

- The act now applies to all construction contracts including oral contracts (although adjudication provisions must still be in writing). - ‘Pay when certified’ clauses are no longer permitted. - Details of procedures and timescales relating to payment notices, applications for payments and pay less notices. - The parties can only agree the allocation of adjudication costs after service of the ‘notice of adjudication’. - Contractor is able to claim reasonable costs and an extension of time for costs and delays resulting from suspension of performance. - The adjudicator is able correct typographical errors within 5 days of the adjudication decision.

Question 33

What are the key changes made to adjudication by the Local Democracy, Economic Development and Construction Act 2009?

Answer 33

- The act now applies to all construction contracts including oral contracts (although adjudication provisions must still be in writing). - The adjudicator is able to correct typographical errors within 5 days of the adjudication decision.

Question 34

What are the key changes made to payment provisions by the Local Democracy, Economic Development and Construction Act 2009?

Answer 34

- ‘Pay when certified’ clauses are no longer permitted. - Client must issue payment notice within 5 days of the due date even if no amount is due. - If no payment notice is issued, the contractor’s application for payment becomes the payment notice. - If no payment notice or contractor’s application for payment is issued, the contractor can issue a default payment notice. - Client cannot withhold payment unless valid pay less notice is served.

Question 35

Outline the process relating to a contractor suspending performance for non-payment?

Answer 35

- The contractor is able to suspend performance (including all contractual obligations such as insurance) for non-payment by the final date by payment. - The contractor must give seven days notice of the intention to suspend performance. - The right to suspend performance ceases when the relevant payment is made. - The contract completion date is automatically extended by the number of days of suspension.

Question 36

What happens if a construction contract does not comply with the Housing Grants, Construction and Regeneration Act 1996?

Answer 36

- If a construction contract does not comply the Housing Grants, Construction and Regeneration Act 1996, the Scheme for Construction Contracts Regulations applies. - Part 1 of the scheme details adjudication procedures if the contract does not comply with the adjudication procedures. - Part 2 of the scheme details payment procedures if the contract does not comply with the payment procedures.

Question 37

What is the Latham Report?

Answer 37

- The Latham Report ‘Construction the Team’ was produced in 1994. - Commissioned by the UK government to investigate problems which caused the construction industry to be adversarial, ineffective and fragmented.

Question 38

What were the key recommendations within the Latham Report?

Answer 38

- NEC should be adopted more widely as a less adversarial form of contract. - Legislation to prevent ‘set-off’. - Establishment of public sector registers for approved contractors, sub-contractors and consultants. - Implementation of speedy dispute resolution and adjudication.

Question 39

What are the key changes which happened as a result of the Latham Report?

Answer 39

Key recommendations within the Latham Report were implemented by The Housing Grants, Construction and Regeneration Act 1996 as amended by the Local Democracy, Economic Development and Construction Act 2009: - Right to refer dispute to adjudication. - Regulation of ‘set-off’ by pay less notices. - Fair payment practices such as rights to interim payments.

Question 40

What is a parent company guarantee?

Answer 40

- A parent company guarantee is a guarantee given by a contractor’s parent company whereby in the event of breach of contract by the contractor, the parent company will be required to remedy the breach and meet all the contractor’s obligations under the contract. - May be required if there are reservations over the financial security of the contractor.

Question 41

What is a bond?

Answer 41

- A bond is a guarantee by a bondsman, bank or insurance company to make payment to the client in the event of breach of contract by the contractor. - Bonds can be on demand (meaning the bond is paid on request) or on default (meaning the client must provide evidence of the breach of contract by the contractor).

Question 42

What are the different types of construction bond?

Answer 42

- Performance bonds insure the employer against non-performance by the contractor and are typically set at 10% of the contract value. - Advance payment bonds insure the employer against default by the contractor where the client issues an advance payment to the contractor. - Off-site materials bonds insure the employer against default by the contractor where the client issues payment for ‘off-site’ materials. - Retention bonds are an alternative to traditional retention and insure the employer (for a certain percentage of the contract sum) against failure of the contractor to rectify defects, which are identified within a certain time period after practical completion. - Defects liability bonds insure the employer against failure of the contractor to rectify defects, which are identified within a certain time period after practical completion.

Question 43

Why might you use a retention bond instead of traditional retention?

Answer 43

- Contractors may request a retention bond instead of traditional retention as it (a) improves cash flow by releasing 100% of the money on practical completion and (b) means the contractor does not have continually chase for retentions to be released on completion of rectification period. - Those benefits often outweigh the premium paid by the contractor to provide the retention bond.

Question 44

Why might you request both performance bond and a parent company guarantee?

Answer 44

- Performance bond offers financial guarantee in the event of insolvency by both the contractor and the parent company. - Parent company guarantee requires parent company to meet all obligations under the contract (for 6 or 12 years post practical completion) and ensures the client is not left with incomplete works.

Question 45

How did you undertake the interim valuations and ensure an accurate valuation?

Answer 45

- I received the contractor’s applications for payment and undertook an initial check to ensure there was sufficient detail to allow an accurate assessment of the application. This included ensuring a breakdown of costs was provided for all items including preliminaries, schedule of works, mechanical and electrical works and variations. - I undertook a detailed site inspection during which I could inspect the works and assess each aspect of the valuation in detail. - I issued queries to the contractor if further clarification was required on any costs, including requests for receipts, invoices or sub-contractor quotes where appropriate. - If appropriate, I produced a marked-up copy of the contractor’s interim application to show all adjustments and reasons for such adjustments. - Following agreement with the contractor, I then issued the interim certificate within five days of the due date.

Question 46

Outline the payment timeline under the JCT MW / IC 2016 contract?

Answer 46

- Contractor to issue interim application any time before the common valuation date. - Due date is set as seven calendar days after the common valuation date. - Contract administrator to issue interim certificate within five calendar days after the due date. - Final date for payment set as fourteen calendar days after due date. - Contract administrator to issue pay less notice no later than five calendar days before the final date for payment.

Question 47

What is included on an interim certificate?

Answer 47

- The contract sum. - Gross valuation. - Gross valuation less the retention. - Gross valuation less the retention and amount previously certified. - Net amount due to the contractor in figures and words. - Final date for payment in relation to due date. - Signature of the chartered contract administrator.

Question 48

What happens if the contract administrator does not submit the interim certificate by the required date?

Answer 48

- The contractor’s interim application automatically becomes an interim payment notice if it was issued by the common valuation date. - If the contractor does not submit an interim application by the common valuation date and the contract administrator does not submit an interim certificate, the contractor can issue a default payment notice. - The employer will then have to pay the contractor the sum detailed on interim payment notice or default payment notice unless the contract administrator submits a pay less notice no later than five days before the final date for payment.

Question 49

What mechanisms are you aware of which can confer third party rights for construction contracts?

Answer 49

- Collateral warranties. - The Contracts (Rights of Third Parties) Act 1999.

Question 50

Why are third party rights important in the construction industry?

Answer 50

- Third parties with an interest within a construction project (such as funders, future purchasers or future tenants) may suffer from defective design or workmanship from a contractor or consultant. - Third parties do not have a contractual link to the contractor or consultant, and as such, are not able to enforce the conditions of a contract or sue the responsible party due the doctrine of privity of contract. - Claims for tort of negligence for the cost or repairing / reinstating defective building works are likely to be unsuccessful as it is ‘pure economic loss’. - Therefore, third party rights offer security to third parties that they can enforce the conditions of contract in relation to building works in which they have an interest.

Question 51

What is meant by privity of contract?

Answer 51

- The doctrine of privity of contract means a party can only enforce a contract if he is party to it meaning third parties cannot enforce the terms of a contract.

Question 52

What is a collateral warranty?

Answer 52

- A collateral warranty is a contract between a party employed under a principal contract called the warrantor (such as a contractor or a consultant) and a third party called the beneficiary (such as purchaser or tenant). - The warrantor warrants to the beneficiary that it has fulfilled it’s professional obligations under the principal contract.

Question 53

Outline your understanding of the Contracts (Rights of Third Parties) Act 1999?

Answer 53

- The Contracts (Rights of Third Parties) Act 1999 allows third parties to enforce a specific term of the contract if: o The contract expressly states that he may, or; o The contract purports to confer a benefit on him. o The third party is identified in the contract by name or as answering to a certain description (such as tenant or purchaser).

Question 54

What is the difference between collateral warranties and third party rights?

Answer 54

- Collateral warranties are a separate contract which is associated with a principal contract. - In contrast, third party rights are recorded within the principal contract.

Question 55

What is set-off?

Answer 55

* Set off are any monies owed to the employer by the contractor which are deducted against any payments due to the contractor.

Question 56

If after issuing a Payment Certificate, the Client advises you that they dont have sufficient funds, what would you do?

Answer 56

* Once the certificate has been issued to the contractor, the client is contractually obliged to honour payment of the certificate and cannot withhold money without a valid reason. * If this were the case, I would contact the client and contractor ASAP to arrange some form of payment. It may be the case that the client has insufficient funds available in time for the final date for payment and it may be possible to defer payment by 1-2 days. * Failing this or if the contractor is unwilling to delay the payment, the client would need to find finance the payment through other funds to honour the certificate.

Question 57

If an instruction was issued during a contract which involved the fabrication of a substantial amount of materials off site would you pay them as off site materials within the valuation?

Answer 57

* There is no obligation on the client to pay for materials off site if this is not identified in the contract. * However in the scenario where the client wishes to pay for them, I would ultimately check with the client before paying or rejecting them.

Question 58

What is frustration?

Answer 58

* Frustration occurs when any event or circumstances beyond control of both parties changes the contractual obligations or makes it impossible or illegal to fulfil their contractual obligations. The happening of such events automatically discharges contract.

Question 59

What if the actual works does not accurately resemble the defined provisional sum?

Answer 59

* If the description is not accurate it has to be amended. * This will be treated as a variation. * This will entitle the contractor to an extension of time and extra preliminaries if appropriate.

Question 60

What should the Contractor allow for with an undefined provisional sum?

Answer 60

* They are not deemed to have allowed for anything. * Expenditure of the undefined provisional sum may carry additional costs for programme or preliminaries as a result of carrying out the works.

Question 61

What are the 9 sections of the JCT contract?

Answer 61

* Recitals. * Articles. * Contract Particulars. * Attestation. * Conditions divided into 9 sections (7 for minor works). * Schedules. Conditions: * Definition and interpretation. * Carrying out the works. * Control of the works. * Payment. * Variations. * Injury, damage and insurance. * Assignment, Third Party Rights and collateral Warranties. * Termination. * Settlement of disputes.

Question 62

What are the key differences between JCT MW, IC and D&B?

Answer 62

* The minor works only has 7 sections of conditions instead of 9. Variations are included within the Control of the Works section and there is no ‘assignment and collateral warranties provision’. * There is no mention of the QS in minor works and D&B however there is in the Intermediate Form. * In Minor Works there is no provision for named sub-contractors, no provision for bonds and collateral warranties and no advance payment provision. * Minor works also has no provision for sectional completion or partial possession. * In Minor Works there are no relevant events listed for extension of time, instead it is referred to as ‘anything outside the contractor’s control’. * The standard rectification period is 3 months for minor works and 6 months for D&B and Intermediate. * The standard retention is 5% for Minor Works and Intermediate and 3% for D&B. * D&B is administered by an Employer’s Agent rather than a Contract Administrator. * In Minor Works and the Intermediate Form, the Contractor may be responsible for completing discrete part of the design whereas in D&B, he is responsible for completing the overall design. * In D&B, the EA may request a quotation prior to instructing a change. * There is no fluctuation mechanism for labour and materials costs in Minor Works and Intermediate Forms. * Payments are made at regular intervals in Minor Works and Intermediate Forms whereas D&B gives the option of stage payments. * In Minor Works, there is no option for the employer to take out a joint name all risk policy, only options A and C. * There is no provision for third party rights in Minor Works or Intermediate Forms.

Question 63

What are interim certificates conclusive of?

Answer 63

* Interim certificates are not conclusive. * They carry no contractual significance to state that the quality of materials or workmanship is satisfactory. * It is only the final certificate that is conclusive.

Question 64

What are the common clauses / terms in collateral warranties?

Answer 64

* 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. * Common terms include:- o Limitation of liability. o Reasonable skill and care or fitness for purpose. o Requirements for PI insurance. o Assignment rights. o Novation rights. * CWa/F – JCT standard form of collateral warranty for a funder. * CWa/P&T – JCT standard form of collateral warranty for a future purchaser or tenant.

Question 65

How does novation affect the employer's rights?

Answer 65

* 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.

Question 66

What is reasonable skill and care?

Answer 66

* The ordinary skill and care expected of an ordinary competent man carrying out the particular service

Question 67

What is fitness for purpose?

Answer 67

* The provision of a service that is suitable for the employer’s intended purpose. * It is clearly a more onerous obligation than reasonable skill and care.