The Case for Standard Forms of Construction Contract

THE CASE FOR STANDARD
FORMS OF CONSTRUCTION
CONTRACT
The Institution of Surveyors of
Uganda (ISU)
THEME: Construction Law and Standard Forms of Contract
Presented to
the Association of Student Surveyors Kyambogo University, by
Tom Joseph MUKASA BSc, MSc, MRICS, ICIOB, AISU
ISU QS Chapter Chairman 2016,
with reference to Guidance Notes from
Heriot-Watt University,
Institution of Surveyors of Uganda and
Royal Institution of Chartered Surveyors

Learning Outcomes
1. Understand contract principles and the operation of
standard forms of construction contract.
2. Compare and contrast the commonly available suites of
standard forms of construction contracts.
3. Raise awareness of common features of construction
contracts.
4. Understand the basic organisational and personal roles
commonly found in standard form construction contracts.
The Case for Standard Forms of Construction Contract (TJ Mukasa, MRICS, ICIOB, AISU)

Presentation Outline
1. Character of the Construction Industry
2. Reasons for business failure of construction contractors
3. Construction Law
4. What is a contract?
5. Essential elements of a contract
6. Why use contracts in construction?
7. Characteristics of construction contracts
8. Contractual structures under conventional procurement systems
9. Principles of standard forms of construction contract
10. Publishing bodies for standard form construction contracts
11. The JCT suite
12. The NEC3 suite
13. The FIDIC suite
14. Common construction contract provisions
15. Amending a standard form construction contract
16. Final thoughts

1. Character of the Construction Industry
 Unique, complex, fragmented
 An important contributor to the wealth of nations
 Imperfect market – lags behind movements in the broader
economy
 Often client-led, with large number of suppliers &
stakeholders
 Investment-led and often vulnerable to economic influences
 Minority of construction firms carry out the majority of the
work load
 Large number of stakeholders, with challenges in process
control and improvements

2. Reasons for Business Failure of
Construction Contractors
 Low working capital requirement, often negative
 Working capital is the capital available for conducting the day-to-
day operations of an organisation; normally the excess of current
assets over current liabilities.
 Working capital management is the management of all aspects
of both current assets and current liabilities, to minimise the risk
of insolvency while maximising the return on assets.
 The main objective of working capital management is to get the
balance of current assets and current liabilities right.
 Working capital management is a key factor in an organisation's
long-term success.

Construction Contractors – Cont’d
 Contractors are usually paid before paying suppliers and
subcontractors.
 Retention is offset by the retention held against subcontractors.
 Practices such as front-end loading and over-measurement
enable contractors to operate using a very small or even
negative working capital.
 This leads to:

Construction Contractors – Cont’d
 This leads to:
 Difficulties in raising long term capital, which leads to:
 Liquidity problems
 High sensitivity to cash flow fluctuations, and
 Too much reliance on short term credit facilities (e.g., overdrafts).
 Unplanned expansion, which leads to:
 Shortage of management resources
 Shortage of operational resources.
 Ease of entry, which leads to:
 High competition which leads to tendering at low prices and reduction in
the share of the market; and
 Inexperienced management.

Catch-22?!

3. Construction Law
 Construction law refers to many different areas of law as they
apply to the special context of the construction industry. It is
not a discrete area of the law, but an area of legal practice.
 The core of construction law is the law of contracts. The
negotiation and conclusion of construction contracts is a key
component of construction law practice.
 Other areas of importance include:
 Bonds, insurance, guarantees and sureties
 Construction financing and procurement
 Dispute resolution
 Real estate transactions
 Planning legislation and regulations
 Environmental law and regulations

4. What is a Contract?
 “A legally binding agreement made between two or more
parties, by which rights are acquired by one or more to acts or
forbearances on the part of the other or others” Sir William Anson,
in Ashworth, 2006.
 “A legally enforceable agreement which gives rise to various
rights and obligations for the parties to the contract” RICS, 2014.
 It is therefore a promise or set of promises which the law will enforce.
 The normal method of enforcement is an action for damages for breach
of contract, although in some cases the court may order performance by
the party in default.
 Freely entered into on terms that are freely registered.
 It establishes rights and obligations of the parties and procedures for
administration.

5. Essential Elements required to create a contract
 Agreement (offer & acceptance)
 One party makes the offer, another party accepts the offer and both achieve
consensus ad idem (meeting of the minds).
 Consideration
 Both parties must have provided consideration (each side must promise to give or do
something for the other).
 You can’t get something for nothing.
 Capacity
 The parties must be legally capable of entering into a contract.
 Intention to create legal relations
 The parties must have intended their agreement to have legal consequences.
 The law will not concern itself with purely domestic or social agreements.
 Absence of vitiating factors
 Which will invalidate the contract, e.g. duress or undue influence, mistake,
misrepresentation, illegality.

Contract
Capacity Consideration Agreement
Offer
Acceptance
Intention
No vitiating factors
(Duress, Undue influence,
Mistake, Misrepresentation,
Illegality

 Agreement and the Battle of the Forms
 A battle of the forms arises when two parties wish to enter a contract but each tries to
incorporate their own standard terms and conditions.
 More likely to occur in a contractor/ sub-contractor or contractor/ supplier relationship
rather than an employer/ contractor relationship.
 In trying to work out which party’s terms and conditions apply, courts will often look to
see ‘who fired the last shot’, but every case will depend on its particular facts and the
correspondence between the parties.
 For example, company A sends an e-mail to company B requesting the supply of 100
mortise locks and enclose a copy of their standard terms and conditions for the
purchase of the mortise locks. Company B accepts the order and sends back the e-mail
saying “Thank you for your order of 100 mortise locks. We have accepted your order
pursuant to our standard terms and conditions and will deliver in one week.”
 Company A then simply replies with payment of the agreed price and makes no further
reference to terms and conditions.
 In this scenario, it will be company B’s terms and conditions that are incorporated into
the contract.

A little break

6. Why use contracts in construction?
 To describe the scope of work
 To establish the time frame
 To establish cost and payment provisions
 To set forth obligations and relations between parties
 To minimise disputes
 To improve economic return on investment.

7. Characteristics of Construction Contracts
 Construction contracts have unique characteristics, which
distinguish them from other businesses. These
characteristics make the contracting business risky, difficult
to manage and vulnerable to bankruptcy.
 Each contract is large compared to total turnover.
 There is the need to price before production.
 Contracts involve many variations and uncertainty. This can lead to claims,
disputes and litigation.
 It is difficult to measure profit of work in progress.

8. Contractual Structures (conventional procurement systems)
Employer
Architect QS
Structural
Engineer
M & E
Main
Contractor
Sub-
contractors
A. TRADITIONAL (Lump Sum/ Re-measurement)
Characterised by separation of responsibility for design
and the production/ construction of the project.
For this method to be truly effective, full documentation (including the
design) ideally needs to be in place before the contractor can be invited
to tender for carrying out the work.

A. TRADITIONAL (Lump Sum/ Re-measurement)
Advantages Disadvantages
Familiarity among contractors & consultants – roles &
responsibilities are well understood;
To be effective, the scheme should be more fully designed
before tenders are sought – often resulting in in extended
pre-tender period;
Client retains responsibility for and control of design team; The fragmented design and construction process and
responsibility can lead to disputes, e.g. whether
construction defects are design defects or construction
defects;
Direct reporting by the design team to the client ensures
that quality control is maintained;
Potential for over-design and/or over-engineering;
Client has an independent professional in the role of
contract administrator monitoring the project;
The contractor is not involved in the design process and
therefore is not required to ‘buy in’ to the design;
Certainty of price (if the work is fully designed in advance); The client retains responsibility for the design team
performance;
Priced Bills of Quantities provide a basis for variations to
be priced at tendered rates;
A fixed lump sum price is rarely actually achievable;
As all prices are based on the same information:
- there is no need for a contractor to build in a risk
premium; - it is easier to analyse the prices; - the lowest
price is usually (but not always) the best value for money;
and - provisional sums may be used to allow for later
design where some elements are not fully designed.
A contractor may price work to win the job rather than
providing a price that properly reflects the work to be
carried out – encouraging a claims culture if the submitted
price was too low because of market forces.
The use of provisional sums and the power of the
CA/E/PM to issue instructions for additional or varied work
can lead to price escalation.

Employer
D & B
Contractor
Architect
Sub-
consultants
QS
Structural
Engineer
M & E
Sub-
contractors
Employer’s
Agent
B. DESIGN & BUILD
Contractor takes responsibility for both the design and the
production/ construction of a project.

B. DESIGN & BUILD
Speed of delivery from concept to completed building, as
it allows work to begin on site before the design is fully
complete;
Initial price is usually higher as contractors tend to build
‘risk premiums’ in their offers;
Single point responsibility and liability against the
contractor and consequently less likelihood of claims;
Post-contract variations can be more expensive and it is
often more difficult to monitor the additional charges
raised (esp. where works are priced on the basis of
specifications and drawings);
Acceptance (‘buy-in’) of design by the contractor and their
supply chain, therefore design more likely to be buildable;
Client has less control and influence over design matters;
Novation of design, allowing earlier design solutions and
the design team to continue with the contractor;
Inflexibility: there is only limited scope for clients to make
changes to their requirements, otherwise the cost
consequences may be prohibitive. Client may eventually
receive a design he does not want/ did not anticipate.
Cost certainty, provided the client does not continually
change the brief;
Potential for conflict between the client’s requirements and
the contractor’s proposals, unless both documents are
carefully checked;
Lower management and/or consultants’ costs for the
client;
Potential for dual loyalties of a novated design team, and
complex legal issues. Ref. Blyth & Blyth v Carillion –
[2001] CILL 1789 – challenges to secure claims against
novated consultants;
Unless a contract states otherwise, the law implies a duty of fitness for purpose on a D & B contractor. However, the
contractor’s design obligation is often limited to a duty of reasonable skill and care since most professional indemnity
insurance policies do not cover for a fitness for purpose obligation.

Employer
Architect QS
Structural
Engineer
M & E
Construction
Manager
Trade
Contractors
C. CONSTRUCTION MANAGEMENT
Employer engages the design team and a separate construction manager who earns
a fee to manage, programme and co-ordinate the design and construction activities,
and to facilitate collaboration.

C. CONSTRUCTION MANAGEMENT
Client is more in control of the process through
employment of the construction manager and the direct
contracts with the trade contractors – results in better cost
and budgetary control, and higher degree of control due to
separate trade packages;
The project needs to be sufficiently large or complex to be
cost effective;
A fully integrated design and construction process; The process requires the client to have mechanisms for
entering into direct contracts with trade contractors and for
making monthly payments to many individual contractors;
The construction manager acts on the client’s behalf
whereas a traditional contractor primarily acts in its own
interests;
The client needs to have the necessary experience and
internal management ability to operate this procurement
process;
The process is very flexible, therefore changes to suit the
client’s requirements are relatively easy to accommodate;
The client retains the contract risk of non-performance of
the trade contractors;
There is reduced potential for claims. The client retains responsibility for the design team
performance.

Employer
Architect QS
Structural
Engineer
M & E
Management
Contractor
Works
Contractors
D. MANAGEMENT CONTRACTING
Employer engages a management contractor to participate in the project at an early
stage, contribute construction expertise to the design, and manage the construction
of the project.
The management contractor does not carry out any construction work, but manages
the project for a fee paid on top of the construction costs incurred by the
management contractor.

D. MANAGEMENT CONTRACTING
Beneficial for fast-track complex projects where minimal
design information is available at the start of the project;
Low risk strategy for the management contractor as they
have little responsibility for package/ works contractor
defaults, bankruptcy, etc.;
Allows for early ‘buildability’ and programming input from
the management contractor acting as a consultant;
Although guaranteed maximum price can be achieved, the
process is still fundamentally prime cost in its nature –
with no incentive to devise economical solutions;
A single point contractual and payment arrangement for
the client with the management contractor;
Cost increases can be substantial, and there is often a
tendency for the initial cost plan to be adjusted upwards.
Preliminaries and management fee can be fixed, therefore
allowing for a degree of certainty on price;
Quality can be controlled by the design team;
There is great scope for client changes.
Please note that the management contractor is not liable for the consequences of any default by a works contractor so
long as the management contractor has complied with the particular requirements of the management contract.

 Others
 Public Private partnerships (PPP)
 Private Finance Initiatives (PFI)
 Cost plus/ cost reimbursable/ prime cost
 Target cost
 Framework agreements, Term contracts, Call-off orders
 Turnkey
 Alliancing, Partnering
 EPC contracts

9. Principles of standard forms of
construction contract
 The construction industry has an extensive portfolio of standard
contracts to structure the relationships between organisations and
implement the employer’s chosen procurement route.
 These standard contracts have been authored over many years to
incorporate lessons learnt from the industry’s history of litigation so
that problems are not repeated.
 It is therefore common practice for the construction contract
between the employer and the contractor to be based on a
‘standard form construction contract’.
 Standard forms have established appropriate and effective ways to
manage organisational relationships, risk, processes, and
construction documentation.
 Because these matters arise in all construction projects, all contract
forms address the same issues, but do so differently according to
the principles of the employer’s chosen procurement route.

construction contract – Cont’d
 The term “form of contract” refers to a pre-authored standard
contract.
 When considered together, all the standard particulars, clauses,
appendices, and so forth in the standard contract are intended to
create a pre-defined legal relationship between two parties, in
which each other’s rights, responsibilities and liabilities are familiar
and understood beforehand.
 They are called “forms” of contract because everyone knows what
is in them and how they should be used on a project.
 Contractual difficulties can be largely avoided by ensuring that the
correct standard form is used and that it is followed when activity
starts on site.
 Standard contracts are a default solution which is taken “off the
shelf” and applied to the project.

construction contract – Cont’d
 Although it is advisable not to amend standard forms, they are
frequently amended by employers (by deleting certain clauses and
adding new clauses that are designed for specific requirements an
employer may have).

10. Publishing Bodies and Standard Forms
of Contract families/ suites
 The Joint Contracts Tribunal (JCT) – United Kingdom
 The New Engineering Contract (NEC) – Institution of Civil Engineers, UK
 GC/Works – UK Government
 FIDIC – International Federation of Consulting Engineers
 ACA – Association of Consultant Architects
 IChemE – Institution of Chemical Engineers
The suites have generally emerged for historical reasons and tend to
provide contract forms intened for use on a particular type of
construction work or to reflect a particular working philosophy.
All contract forms are continually updated to respond to the evolving
needs of the construction industry.

10. Publishing Bodies and Standard Forms
of Contract families/ suites
This presentation reviews three suites of contracts from which a form
capable of structuring the relationship between the employer and the
main contractor will be studied in each.
 The JCT suite – widely used on building projects in the UK.
 The NEC3 suite – used in the UK and internationally and is growing in popularity
because it represents a new, more collaborative management philosophy.
 The FIDIC suite – widely used internationally and on infrastructure projects.

11. The JCT suite
 Established in 1931
 Members include:
 The Royal Institute of British Architects, RIBA
 The Royal Institution of Chartered Surveyors, RICS
 The Association of Consulting Engineers, ACE
 The British Property Federation, BPF (representing clients)
 The Local Government Association
 The Contractors Legal Group Limited
 The National Specialist Contractors’ Council Limited, and
 The Scottish Building Contract Committee Limited
 In addition, the JCT also currently has five ‘colleges’:
 Employers, clients and local authorities
 Consultants
 Contractors
 Specialists and sub-contractors, and
 The Scottish Building Industry
 It is through these colleges that new forms of contract and
amendments to existing contracts are produced.
 The JCT has a consensus based approach, which means that the views and interests of all these groups
are taken into account when producing and amending contracts.

11. The JCT suite – Cont’d
 Originally based on the premise that trust between collaborating
organisations is low and every aspect of their working relationship
must be prescribed by the contract.
 However, with the growth in genuinely collaborative attitudes and
development of alternative suites in the construction industry (e.g.
NEC3), there have been substantial revisions in the current JCT
forms (2011), with the following goals:
 Substantial simplification of the language used
 Changes in key terminology for simplification: e.g. “liquidated and ascertained damages” became “liquidated
damages”; “defects liability period” became “rectification period”
 Simplification and consistency of the structure of the forms across the suite
 Extensive rationalisation of the quantity of clauses and their numbering system, to aid reference and citation
 Abolition of nominated subcontractors and nominated suppliers
 Creation of listed subcontractors
 JCT contracts are generally regarded as being fair and evenly
balanced between the parties.
 As with all standard forms of contracts, JCT contracts are intended to be read as a whole and amendments
are to be avoided as these can produce unintended results when construed (interpreted) at law (during
litigation or arbitration)

11. The JCT suite – Cont’d
 The Contractual suites produced by the JCT in 2011:
 The Standard Building Contract, SBC
 Regarded as an industry standard against which all others are measured, with 3 versions:
 The Standard Building Contract with Quantities (SBC/Q)
 The Standard Building Contract without Quantities (SBC/XQ); and
 The Standard Building Contract with Approximate Quantities (SBC/AQ)
 The Minor Works Building Contract, MW
 Designed for use with the traditional procurement route on smaller, lower value, more basic
construction projects where the work involved is simple in character.
 The Design and Build Contract, DB – not a focus of this presentation
 Major Project Construction Contract, MP
 For large scale Design & Build procurements, also not a focus of this presentation.
 Management Building contracts – not a focus of this presentation
 Construction Management contracts – not a focus of this presentation
 Measured Term Contract – not a focus of this presentation
 Prime Cost Building Contract – not a focus of this presentation
 Framework Agreement – not a focus of this presentation
 Repair and Maintenance Contract – not a focus of this presentation
 Home Owner contracts – not a focus of this presentation

12. The NEC3 suite
 The NEC is a division of Thomas Telford Limited, a subsidiary of
the Institution of Civil Engineers (ICE), the owner and developer of
the suite of New Engineering Contracts (NEC), intended to:
 Stimulate good management of the relationship between the two parties to the
contract and of the work included in the contract
 E.g. in each NEC contract there is an obligation on the parties to ‘act in a spirit of mutual trust and co-
operation’;
 Be used in wide variety of commercial situations, for a wide variety of types of
work and in any location;
 Be clear and simple documents, using language and a structure which are
straightforward and easily understood;
 Be used for global application and are being adopted for many multi-disciplinary
projects by clients in nearly 20 countries, e.g. Australia, New Zealand and South
Africa.
 The NEC suite of contracts have been endorsed for use in the
public sector in the UK by the Office of Government Commerce
(OGC).

12. The NEC3 suite – cont’d
 1st Edition, 1993; 2nd Edition (NEC2), 1995 & 3rd Edition (NEC3),
2005. Latest version of NEC3, published 2013.
 The style of NEC3 contracts is noticeably different from most other
standard form contracts:
 Relatively short
 Less text, short sentences
 Written in present tense
 No cross referencing between clauses
 The intention is for everybody in the construction industry to be able to
understand and use these contracts, not just lawyers.
 Structured in modular format, with different contract options being selected to
suit the needs of the particular project.
 Each contract contains a set of core clauses that always apply,
supplemented by a series of main options (relating to payment),
dispute resolution options and secondary options (e.g. relating to
delay damages, bonds and guarantees)

 The philosophy of the NEC3 contracts is also quite different from
other mainstream contracts:
 Focus is on good project management
 Emphasis on
 communications,
 programming,
 cooperation between the parties,
 the early identification of matters which may prejudice successful outcomes (Early Warning)
 the early resolution of contractor’s claims (Compensation Events) based on forecast effect rather
than a retrospective examination of what actually happened.
 Dealing with matters on a projected basis means there is no final account type
process of the kind in other forms.
 However, since issues have to be handled and resolved on a real-time basis,
the administration of NEC3 contracts is time-consuming, in particular the
programming and compensation event provisions, which may make NEC3
contracts less appropriate for small projects.

 The contracts contained in the NEC3 2013 suite are as follows:
 Contracts for the procurement of works
 NEC3 Engineering and Construction Contract (ECC)
 NEC3 Engineering and Construction Short Contract (ECSC)
 NEC3 Engineering and Construction Subcontract (ECS)
 NEC3 Engineering and Construction Short Subcontract (ECSS)
 Each with 9 Core Clauses, dealing with the contractor’s main responsibilities, time, the
payment process and Compensation Events;
 6 main option clauses, A-F, which allow the employer different ways of pricing the project and
different ways of paying the contractor;
 Dispute resolution option: W1 or W2
 Secondary option clauses: Y(UK)2 or Y(UK)3
 Customised clauses as needed: Z
 Contracts for the procurement of services – Not for this presentation
 Contracts for the supply of goods and services – Not for this presentation.

COMPONENTS OF A TYPICAL NEC3 WORKS CONTRACT
Core Clauses (All-
in)
1 (General); 2(Contractor’s main responsibilities); 3(Time); 4(Testing and Defects);
5(Payment); 6(Compensation events); 7(Title); 8(Risks and insurance); 9(Termination)
One main option
(for payment)
A(Lump Sum/ Priced contract with activity schedule); B(Re-measurement/ Priced
contract with bills of quantities); C(Target contract based on Lump Sum/ Activity
Schedule); D(Target contract with bills of quantities); E(Cost reimbursable contract); and
F(Management contract)
One dispute
resolution option
W1(used outside the UK); W2(used in the UK, to incorporate the Construction Act)
Secondary options
(as needed)
X1(Price adjustment for inflation); X2(Changes in 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(Advance payment to the Contractor); X15(Limitation of the Contractor’s liability for
his design to reasonable skill and care); X16(Retention); X17(Low performance
damages); X18(Limitation of liability); X20(Key Performance Indicators)
Location-specific
secondary options
Y(UK)2-Incorporating the 2009 Construction Act; Y(UK)3-Incorporating Rights of Third
Parties Act 1999
Customised
clauses (as
needed)
“Z” clauses are additional, customised conditions of contract that can be included if a
particular issue is not addressed by the standard NEC3 ECC clause options, often
authored by the Employer to incorporate project-specific terms into the contract. E.g.
additional Compensation Events

13. The FIDIC suite
 An abbreviation of ‘Federation Internationale des Ingenieurs-
Consils’ (International Federation of Consulting Engineers)
 Federation established in 1913
 Contract Forms first created in 1956
 The most widely used forms of contract internationally, including by
the World Bank for its projects.
 The FIDIC ‘Rainbow Suite’ of New Contracts was published in 1999
and includes:
 The Red Book: Conditions of Contract for Construction for building and
Engineering Works Designed by the Employer
 Suitable for all projects where main responsibility for design lies with the employer (or its
representative, the engineer);
 The works may also include some elements of contractor-designed civil, mechanical, electrical and/or
construction works;
 The work done is measured, and payment is made according to a bill of quantities, although there is
an option for payment on a lump sum basis.

13. The FIDIC suite – cont’d
 The FIDIC ‘Rainbow Suite’ of New Contracts was published in 1999
and includes:
 The Yellow Book: Conditions of Contract for Plant and Design-Build
 Suitable for all types of projects where the main design responsibility lies with the contractor.
 In practice, the contractor’s designs follow the employer’s requirements.
 For that reason, the testing procedures are usually more complicated than those in the Red Book.
 Payment is made on a lump sum basis, usually against a schedule of payments.
 The Silver Book: Conditions of Contract for Engineering, Procurement &
Construction (EPC)/ Turnkey Projects
 The Green Book: Conditions of Short Form of Contract
 The Blue Book: Contract for Dredging and Reclamation Works
 The Pink Book: Conditions of Contract for Construction for Building and
Engineering Works Designed by the Employer (for bank-financed projects only)
 A new version of the FIDIC Red Book called the ‘MDB Harmonised Edition’.
 Originally published in 2005, latest revised edition June 2010.
 To be used on projects funded by participating Multilateral Development Banks (MDB), such as the
World Bank.
 The Gold Book: FIDIC Design, Build and Operate Projects, 2008
 The White Book: Client/ Consultant Model Services Agreement

 The FIDIC “Red Book” Contract:
 Structures the relationship of the client and contractor under the traditional
procurement route.
 The underlying premise is that the employer and contractor have not worked
together before and cannot, therefore, expect any trust to be present between
them.
 Seeks to define exactly what the contractor and employer must do in every
project eventuality.
 Comprised of 20 “General Conditions” which provide the procedures by which
the project will be run.

FIDIC RED BOOK GENERAL CONDITIONS
1 General Provisions Provides all the basic definitions of people, documents, etc. on which all
other clauses rely
2 The Employer Establishes the Employer’s basic rights and responsibilities, key of
which is the fundamental obligation to pay the Contractor for the Works.
3 The Engineer Defines some of the risks to which the Employer is exposed by defining
the Engineer’s (who is appointed by the Employer) responsibilities on
the project.
4 The Contractor Defines all the basic risks to which the Contractor is exposed by
defining all the aspects of the project for which it is responsible.
5 Nominated subcontractors Allows the Employer to oblige the Contractor to employ the Employer’s
choice of subcontractors for some aspects of the Works, making the
Employer, rather than the Contractor, liable for their performance.
6 Staff and Labour Defines the people that the Contractor must have present on the site
and the working conditions that must be created by temporary
accommodation, compliance with local legislation, etc.
7 Plant, Materials and
Workmanship
Allows the Contractor to be paid for certain identified Plant and
Materials during their manufacture off-site, prior to delivery for
installation and commissioning. Also gives the Employer the right to
reject work which has not been done sufficiently well.

8 Commencement, Delays and
Suspension
Places obligations on the Employer to give the site to the Contractor
when agreed. Also allows the Contractor to ask for additional time to
complete the Works if specific situations arise. Furthermore, allows the
Contractor to suspend the Works if it has not been paid.
9 Tests on Completion Defines how the Contractor must prove that the completed Works will
function as required by the contract documents before the Employer will
accept them.
10 Employer’s Taking Over Defines the process the Employer must follow to take possession of the
completed Works, with particular emphasis placed on the transfer of
insurance and other liabilities associated with occupation of the site/
Works.
11 Defects Liability Places obligations on the Contractor to defects that occur during, and
for a short while after, the Works.
12 Measurement and Evaluation Provides ways of determining how much should be paid for the partially
completed Works, taking the extent to which they have been completed,
and any changes that the Employer may have made to their definition,
into account.
13 Variations and Adjustments Provides methods that the Employer can use to change the definition of
the Works to be completed. It also provides methods by which the
Contractor can propose changes that it considered to be better and
methods by which the cost of the changes can be calculated.
14 Contract Price and Payment Structures the interim payment process on which the project relies to
allow the Contractor to be paid for the Works during their construction.

15 Termination by Employer Provides the processes by which the Employer can sack the Contractor
if the Contractor fails to meet its obligations under the contract.
16 Termination and Suspension
by Contractor
Allows the Contractor to temporarily suspend the Works if it is asked to
or has not been paid. It also lets the Contractor end (terminate) its
employment by the Employer if it continues to not be paid.
17 Risk and Responsibility Defines the extent to which the Contractor must protect the Employer
(and its agents) from legal consequences of risks arising out of the
Contractor’s work on the project.
18 Insurance Provides the mechanisms by which the Employer and/or the Contractor
must take out insurance to protect the Works, the public, each other,
etc., as agreed when executing the contract.
19 Force Majeure Obliges the Contractor and Employer to notify each other if either
becomes aware of a “force majeure” event that is hindering the work. It
defines what situations can be defined in this way and how their impact
on time and cost is to be resolved.
20 Claims, Disputes and
Arbitration
Places certain obligations on the Contractor regarding the manner by
which any claims for additional payment have to be documented and
submitted. If these claims can not be agreed and settled amicably, the
clause also establishes the dispute resolution procedures available to
the Contractor and Employer.

A Appendices Provide additional contract administration processes to address specific
aspects of the project, too detailed to be addressed in the main form.
B Particular Conditions Comprise all the project-specific information that (mainly) the Employer
and (sometimes) the Contractor have provided.
They provide the parameters of the contract so that the standard form
can be applied to the project.
They contain factual information that describes the project such as
location, the legal identities of the organisations involved, etc.
They document all of the decisions that the Employer has made prior to
executing the contract, such as retention rate, to be deducted, the rate
of liquidated damages, the dispute resolution methods available, etc.
Usually provided a series of blank spaces with cross-references to the
relevant clauses into which the project parameters are entered.
They should be the only part of the standard form of contract that
should be modified (by providing information and making decisions).
C Annexes The Red book provides several profomas for providing of notices,
issues of certificates, etc. as required by the Conditions, at the rear of
the contract form.

14. Common Construction Contract
Provisions
 The structure of the forms of contract
 There is a trend in the latest versions of most forms of contract towards clear
wording and simpler organisation.
 However, contracts and their associated documents, must be rigorously applied
to ensure the integrity of the intended legal relationship between parties.
 They exhibit essential core features.
 They define a series of roles that must be performed to successfully deliver a
project.
 Although every suite of contract is written in a different style of working, and
therefore the nature of relationships differ, they share common provisions which
are required by the nature of construction site activity.

Provisions – cont’d
ALLOCATION OF PROJECT ROLES IN CONSTRUCTION CONTRACT
SUITES
ROLE NEC3 ECC JCT SBC/Q FIDIC Red Book
1. Design of
the works
Employer’s design
team
Employer’s
design team
Employer’s
design team
2. Payment for
the works
Employer Employer Employer
3. Control of
the works
Project Manager Contract
Administrator
Engineer
4. Controlling
time
Project Manager Contract
Administrator
Engineer
5. Valuation of
works
Project Manager Quantity
Surveyor
Engineer

SUITES – cont’d
6. Change of
the works
Employer requests
change;
Project Manager
instructs changes;
Contractor quotes
for changes;
Project Manager
assesses changes
Employer
requests
Variations;
Contract
Administrator
instructs
Variations;
Quantity
Surveyor
ascertains
Variations
Employer requests
Variations;
Contractor makes
value engineering
proposals;
Engineer instructs
Variations;
Engineer
evaluates
Variations

SUITES – cont’d
7.
Constructing
the works
Contractor +
Subcontractors
Contractor +
Subcontractors
Contractor +
Nominated
Subcontractors +
Subcontractors
8. Quality of
works
Supervisor Clerk of Works Engineer
9. Settlement
of disputes
Adjudicator tribunal Adjudicator or
Arbitrator (if
agreed)
Dispute
Adjudication
Board or Arbitrator

 The contract documents
 Define the subject of the agreement between the parties
 Describe the work to be done
 The nature of the information contained in the documents varies
 JCT Standard Building Contract ‘with Quantities’
 The Articles of Agreement (comprising the Recitals, Articles and Contract Particulars)
 The Conditions of Contract
 The Contract Drawings
 The Contract Bills; and
 (where applicable) the Employer’s Requirements, Contractor’s Proposals and CDP analysis
 NEC3 Engineering & Construction Contract
 The Contract Agreement
 The Contract Data
 The Conditions of Contract
 The Contract Drawings
 The Contract Bills; and
 (where applicable) the Employer’s Requirements, Contractor’s Proposals and CDP analysis

 The contract sum
 A fundamental issue in the procurement of a project is how much a party
contracted to provide it will charge for its construction.
 With lump sum payments method
 A contract sum is defined at the project outset
 Defines how the payment of this sum to the contractor in stages is to be organised
 Defines methods for changing this sum as unforeseen circumstances may arise
 The client’s (employer’s) obligations
 The client accepts certain responsibilities when agreeing a construction
contract.
 To pay the contractor for the work that has been completed
 To compensate the contractor for any additional loss or expense caused by the client’s actions (or
inactions)
 Usually, the client employs a third party to act as their legal agent (i.e. with legal
rights to make decisions on the client’s behalf)
 Title varies between contracts (Architect/CA, PM, Engineer)
 Directs contractor in the completion of the works.
 Ensures contractor is constructing in accordance with the contract documents & takes
action if contractor performs otherwise.

 Contractor’s obligations
 The contractor has a fundamental obligation to construct the work in accordance
with the drawings and specifications, in reasonable time, and with regard to:
 Workmanship
 Quality of materials
 Coordination
 Management of the site; and
 Provision of insurances and bonds.
 Staged payments
 The nature of construction (high costs & long periods to completion), makes it
impractical to pay for buildings or infrastructure only upon completion.
 Instead, construction projects require the Employer to pay the Contractor (who
will then pay its subcontractors and suppliers) regularly as the work progresses
on site.
 Such payments may relate to stages of pre-agreed programme milestones or be
made at regular intervals (typically monthly) to reflect the proportion of the work
completed in each interval.
 The contractor will be paid for the amount of work completed up until that date.

 Duration of the works and extensions of time
 All construction projects tend to encounter inadequacies in their contract
documentation, such as :
 Missing, conflicting or inadequate information
 Tendency to slow the Contractor down or
 Prevent the Contractor from progress altogether
 Work can also be slowed down by unexpected conditions on site, such as:
 Buried antiquities
 Exceptionally inclement weather
 Construction contracts ought to define what should be done by the parties in
such situations.
 If the slow-downs or stops in progression of the works were not the Contractor’s fault,
then it is unreasonable to expect the Contractor to complete by the originally agreed
date.
 Construction contracts therefore define situations in which the time
available to complete the works can be varied.
 And if time can be held to be undefined (i.e. “not of the essence”), the Contractor may
argue that it has a “reasonable” time to complete the works and it will not have to pay
any damages to the Employer to compensate for late delivery.

 Changing the definition of the works
 Most construction clients often change their requirements during the
construction of a project.
 This is expensive to implement
 Redesign and potentially re-work will be required
 The situation often arises as a consequence of a change in the client’s
expectations or business context.
 They can also be initiated by the client’s interactions with the building or
infrastructure as it takes physical form on site.
 Construction contracts accordingly provide processes to communicate, cost,
argue and implement these changes.

 The issuing of certificates
 The construction of buildings and infrastructure is a complex process which is
not well understood by most clients.
 Hence the need for a third party expert (Architect, CA, PM, Engineer) to observe
site activity and make decisions on behalf of the client.
 The amounts of the payments to be paid to the Contractor as works progress
 Whether or not the works are practically complete
 Whether or not defects have been fixed, etc.
 Once made, decisions are documented and communicated to others by issuing
“certificates”.
 Interim Payment Certificates
 Practical Completion Certificates
 Certificated of Making Good Defects, etc.

 Remedies for breach of contract
 Breach of contract occurs where one (or both) of the parties fails to perform its
obligations under the contract, materially or non-materially.
 Remedies available to the innocent party depend upon the materiality of the
breach (i.e. degree of seriousness).
 A breach of contract could have two consequences:
 Payment of damages
 Determination (termination) of the contract.
 Remedies for non-material breach of contract in common law
 Damages by way of compensation
 Withholding delivery of goods and services (Retention and lien)
 Retaining possession of goods belonging to the party in breach (Retention and lien)
 Specific implement (going to the courts to force the party in breach to fulfil their obligations)
 Action for payment through the courts.
 If damages are sought, their amount should reflect the magnitude of the
innocent party’s loss to place them in the same position as if the breach had not
occurred.
 However, to succeed in claiming damages, the affected party must prove that
the loss was actually incurred, and this can be difficult.

 Remedies for breach of contract – Liquidated Damages
 Where the amount of compensation claimed is to be assessed by the courts of
law, the damages claimed are termed ‘un-liquidated’ damages because their
monetary amount is not known prior to judgement.
 Otherwise, pre-determined amounts payable in a construction contract in the
event of a breach are called ‘liquidated’ damages.
 They are paid by the Contractor to the Client if the work is not completed by a
specified time.
 The magnitude of the damages must not be punitive, but should instead
represent a genuine amount of loss incurred by the Client as a consequence of
the late completion.
 The practice of setting liquidated damages at the outset of a delivery date.
 The practice also benefits the contractor as it caps its liability to the amount
stated in the contract.

 Claims and dispute resolution
 Claims often arise in construction projects when one party believes that the
action or inaction of another party has caused it to incur loss or additional
expense.
 The contract must define a process for the parties to follow to resolve any
claims for loss and/or expense and requests for extension of time.
 The goal of this process is to resolve such issues in an equitable manner to
prevent the claim from escalating into a dispute.
 If a dispute does arise, the contract form will describe which dispute resolution
processes must be attempted (e.g. mediation, adjudication, arbitration) and
which third party should be brought in to facilitate the process.

Provisions – recap
CONTRACT
PROVISIONS
Contract
Documents
Contract
sum
Client
obligations
Contractor
obligations
Staged
payments
Duration &
E.O.T
Changes
Certificates
Breach of
Contract
Claims &
Dispute
Resolution

15. Amending a standard form construction
contract
 Standard form construction contracts are generally drafted in
a balanced manner, reflecting the views of different parties to a
construction project.
 The contracts are drafted so that risks are borne by the party
best able to manage those risks.
 As such, it is entirely possible for parties to use standard form
construction contracts on an un-amended basis.
 However, it is common within the construction industry to
amend the terms and conditions of a standard form
construction contract.
 These amendments are generally driven by employers.
 Amendments to standard form construction contracts should
only be drafted by legally qualified professional advisers.

contract – cont’d
 Reasons for amending standard form construction contracts.
 Altering the risk allocation in a contract
 For example, the list of events that entitle the contractor to claim additional time and/or money could
be reduced
 Lengthening the final date for payments of sums due to the contractor
 Placing the risk on the contractor if any adverse site/ ground conditions occur.
 Inserting additional obligations
 For example, requiring a contractor to provide certain bonds, guarantees and collateral warranties at
a particular point in time
 Requiring the contractor to keep the employer more informed about the contractor’s programme for
the works
 Requiring the contractor to comply with any administrative requirements of the employer.
 Removing rights
 For example, if a contractor is claiming an extension of time and/or payment of additional sums, a
contract may be amended so that the contractor loses his right to claim these entitlements if he fails
to provide a notice to the employer within a particular time.
 Reducing the contractor’s entitlement to object to a proposed variation to the works.
 Project-specific requirements
 For example, averting a site contamination risk from a neighbouring site
 Parties may agree that a particular stage of the works cannot proceed until the employer has the
required funding in place.

contract – cont’d
 Therefore, the employer and professional advisers need to carefully review the nature
of the project and consider if any specific amendments are needed to the chosen
contract.
 Legal advice should be sought on the best means of effecting any required project-
specific amendments to a contract.
 Consider both the purpose of a particular amendment and the likely effect that it will
have on the contractor and the overall project.
 For example, increasing the tender prices due to more risks
 How else might the contractors alter their behaviour as a result of taking on more risk?
 Does this represent best value for the employer and the project?
 Appreciate that the contractual provisions within standard form construction
contracts are generally interlinked.
 Although there may not be any specific cross-references that highlight areas of connection, if certain
parts of a contract are amended then this generally has a knock-on effect elsewhere in the contract.
 Therefore there is a need to be aware of these interrelationships so that amendments do not cause
conflict or create uncertainty or ambiguity within a contract.
 The schedule of amendments must take priority over the general terms and
conditions in the underlying contract.

16. FINAL THOUGHTS!
1. Contracts in the Construction Industry:
 A legally binding contract does not have to evidenced in writing, but it is good
practice to ensure that construction contracts are in writing to prevent argument
over the terms of the agreement.
 It is common practice in the construction industry to use standard forms of
contract, although specially written (bespoke) documents are equally binding.
 Professional consultants will primarily concern themselves with two categories
of contract: those under which professional services are provided and those
under which constriction work is carried out. This presentation has focused on
the latter category.

16. FINAL THOUGHTS!
2. Standard Forms of Construction Contract:
 There are many advantages to using a standard form of construction contract.
 It will normally be less expensive and generally more convenient to use.
 Many have detailed and comprehensive relevant guidance, which is in turn
based on authoritative legal opinion, often having been tested in the courts.
 Standard printed forms are readily available.
 They are generally held to be fair and balanced in the interests of the parties.
 Therefore parties are encouraged to use those standard forms without
amendment.
 Bespoke amendments can easily impair the balance of the forms and the
precise meaning of the contract conditions could be a matter of endless
argument between lawyers!

16. FINAL THOUGHTS!
2. Standard Forms of Construction Contract – cont’d:
 If contractors become aware that it is proposed to use special or amended forms
of contract, their reactions may be reflected in higher tenders.
 It is therefore sound advice to resist alterations and amendments wherever
possible.
 However, there may be instances where a non-standard form of construction
contract fits the client’s requirements and a specially drafted (bespoke) agreement
is needed.
 Any such drafting should be entrusted to a lawyer with appropriate specialist
knowledge, and who should always be engaged directly by the client.
 Professionals without legal training and experience in such matters ought not to
attempt even seemingly minor changes to standard wording or drafting of
additional clauses which might make published documents non-standard!
 Standard forms of contract are drafted taking into account a legal background of
common law and statutory rules, which give insight into why many aspects of a
form have been drafted in a particular way, and aid the interpretation of these
forms.

16. FINAL THOUGHTS!
3. Managing Claims:
 Claims resolved using the contract are a routine aspect of construction.
 In principle, the need for a contractor to submit a claim should never arise.
 However, this is highly unlikely across the entirety of a typical construction
project.
 In practical terms, therefore, the management of claims does not mean avoiding
them but merely ensuring that they are justified by the contract (i.e. have
contractual “grounds”), are resolved quickly to minimise their impact on the on-
going works, and that sums paid in their settlement are of an appropriate
amount.
 The mechanisms provided by a construction contract to settle a contractor’s
claim attempt to resolve the situation without disagreement between employer
and contractor.
 If disagreements develop, the claim will escalate into a dispute and a third party
will likely be engaged to analyse the claim to decide how it should be resolved.

16. FINAL THOUGHTS!
3. Managing Claims – cont’d:
 Claims resolved using the contract are a routine aspect of construction.
 In principle, the need for a contractor to submit a claim should never arise.
 However, this is highly unlikely across the entirety of a typical construction
project.
 In practical terms, therefore, the management of claims does not mean avoiding
them but merely ensuring that they are justified by the contract (i.e. have
contractual “grounds”), are resolved quickly to minimise their impact on the on-
going works, and that sums paid in their settlement are of an appropriate
amount.
 The mechanisms provided by a construction contract to settle a contractor’s
claim attempt to resolve the situation without disagreement between employer
and contractor.
 If disagreements develop, the claim will escalate into a dispute and a third party
will likely be engaged to analyse the claim to decide how it should be resolved.

16. FINAL THOUGHTS!
4. NEC3 claims principles:
 The management philosophy supporting the NEC3 suite of construction
contracts is one of collaboration and cooperation.
 The way in which the NEC3 ECC form manages the cost and time
consequences of certain events reflects this philosophy and is centred on the
concept of Compensation Events and the Early Warnings provided of them.
 More traditional construction contracts like the FIDIC red Book do not have this
cooperation approach.
 Instead, they allow events to progress until the Contractor has incurred
unexpected cost (or is being slowed down) before requiring the Contractor to
retrospectively “claim” more payment or request more money to cover their
losses and prevent them becoming liable for liquidated damages respectively.
 NEC3 ECC takes the view that the Contractor and Employer should help each
other avoid such situations by minimising the additional cost and time required
to complete the Works in light of the events that have occurred during
construction.
 It places certain obligations on the Project manager and the Contractor to
collaborate to take mitigating actions to reduce the impact of risks.

16. FINAL THOUGHTS!
4. NEC3 claims principles – cont’d:
 The Employer must be prepared to pay the Contractor additional money to
mitigate the effect of an identified risk (i.e. the Compensation Event) before the
risky event occurs.
 Such money will be considerably less if spent to mitigate the risk rather than
waiting for the risk to occur, it is argued.
 Accordingly, the NEC3 ECC form of contract does not include the retrospective
concept of “claims” found in other construction contracts.
 It requires the Contractor and Project Manager to provide each other with Early
Warnings of possible future Compensation Events which have cost and
payment consequences so that action can be taken to reduce or avoid them.
 The concepts of time and money are considered together and cannot be easily
separated, as compared with say the JCT SBC/Q which clearly differentiates the
concepts of Relevant Events (justifying additional time) and Relevant Matters
(justifying additional payment).
 However, practitioners sometimes consider the notification of a Compensation
Event to be a claim, but this is a hang-over from their traditional reliance on the
claims mechanisms of other contract forms and not how NEC3 contracts should
be considered.

16. FINAL THOUGHTS!
5. If contracts are to be run efficiently, contractual awareness is
essential for all concerned in their management.
“Always thoroughly review and know the contractual
nuances and obligations you are to work under. Know
(and understand) completely what is to be done by
you; what your rights, duties, obligations and authority
are (and their limits); and always function totally within
all these bounds – vigorously, professionally, with
your best effort, every contract day!”
Ralph W. Liebing, 1998, Architect & Author

THE END

Questions?

Contractual Challenge - 1
 A Contractor and an Employer
have been working together on a
project for some time using a
Standard form of construction
contract. They have been acting in
accordance with a new contract
clause they intended to insert into
the standard contract form before
executing it.
 The new clause was intended to
give the Contractor an unusual
right. The Contractor has used this
unusual right several times on the
current project without problem.
 On going to use the right again,
the Contractor has discovered that
the clause granting it was never
inserted into the Contract.
 Advise the Contractor on his
ability to continue to use the
unusual right.

 Identify the basic features required
of all standard forms of
construction contract so that they
can provide an effective tool for
managing the relationship
between Employer and Contractor
throughout its duration.
 Explain why these features of a
construction contract must be
present by making reference to
the contract administration
processes they facilitate.

 If the Contractor is awarded an
extension of time, a claim for loss
and expense will also be awarded.
Discuss.
 A Contractor’s submission of a
claim for loss and expense is often
thought to be the result of a poorly
managed project that has ‘gone
wrong’ in some way.
 Discuss whether or not you agree
with this view, making reference to
the contractual basis on which a
claim for loss and expense may
be submitted under any standard
form of contract you are familiar
with.

 A prospective construction
industry client is proposing to
employ a contractor using a
contract it has written specifically
for the project. Advise the client as
to whether or not they should do
this.
 Support your position with an
analysis of the main risks the
client would be exposed to by
using its own contract rather than
one of the many standard
construction contract forms.

 Assume that a client employs a
contractor using a non-standard
contract written specifically for the
project.
 Also assume that expenditure on
the project has exceeded the
agreed Contract Sum but the work
is not yet complete and the
Contractor is requesting additional
payment.
 The client has discovered that the
contract does not provide a
process for paying the Contractor
extra money.
 Advise the client regarding how it
should respond to the Contractor's
request.

 Using examples, explain the types of
Extra-contractual claims:
 Common law claims
 Quantum meruit claims
 Ex gratia claims

The Case for Standard Forms of Construction Contract

The Case for Standard Forms of Construction Contract

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