Construction Contracts

Construction Contracts and Sub-Contract Contract Documents

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Specialist Sub-Contracting can be a complicated business and it’s no surprise that at some point you are going to come across contract documents, sub-contract documents and other contractual documentation that is difficult to understand.You may also be asked to work in accordance with contracts or sub-contract documents that you haven’t heard of or used before.

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What is a Construction Contract?

A variety of factors make a construction contract different from most other types of contracts. These include the length of the project, its complexity, its size and the fact that the price agreed and the amount of work done may change as it proceeds.

The structure may be a new building on virgin ground. It may involve the demolition of an existing building and its full reconstruction. It could involve partial demolition and rebuilding, or the refurbishment and extension of an existing building or structure.

This may be mostly below ground (in which case it is engineering) or above ground (in which case it is building). Building, however, includes foundations and other underground works.

A building contract can consist of activities and services carried out both above and below ground.

In Modern Engineering (Bristol) Ltd  v. Gilbert-Ash Northern [1974] AC 689,Lord Diplock at 717B described a building contract as:

‘an entire contract for the sale of goods and work and labour for a lump sum price payable by instalments as the goods are delivered and the work done. Decisions have to be made from time to time about such essential matters as the making of variation orders, the expenditure of provisional and prime cost sums and extension of time for the carrying out of the work under the contract.’

It is important to realise that Lord Diplock was referring to a contract mad eusing a standard form of building contract. Such contracts usually make provision for interim payments at regular intervals as the work proceeds, whereas acontract that is described as entire is a product of the common law.

It may make provision for stage payments, but in essence, it requires the contractor to complete all its work before any entitlement to payment arises.

A modernexample of such an entire contract is Discain Project Services Ltd v. Opecprime Developments Ltd  [2001] EWHC Technology 450.

The carrying out and completion of this contract (whether made using a standard form contract or entire) differs from other manufacturing processes. HHJ Newey OR in Emson Eastern v. EME Developments (1991) 55 BLR 114 described the differences at p. 125, within the context of practical completion of the work:

‘I think the most important background fact which I should keep in mind is that building construction is not like the manufacture of goods in afactory. The size of the project, site conditions, the use of many materialsand the employment of various kinds of operatives make it virtually impossible to achieve the same degree of perfection that a manufacturer can. It must be a rare new building in which every screw and every brush of paint is absolutely correct.’

There is no special body of rules that applies to such contracts, whether they are described as building, engineering or construction contracts.

Lord Reid said in Modern Engineering that where the parties enter into detailed building contracts there were ‘no overriding rules or principles covering their contractual relationships beyond those which generally apply’.

This principle was supported by LordLloyd of Berwick in  Beaufort Developments (NI) Ltd  v. Gilbert-Ash (NI) Ltd[1998] UKHL [1988] 1 AC 191 where he stated that:

‘Standard forms of building contracts have often been criticised by the courts for being unnecessary obscure and verbose. But in fairness one should add that it is sometimes the courts themselves who have added to the difficulty by treating building contracts as if they were subject to special rules of their own.’

The fact that the ordinary rules of the law of contract apply is subject to an important qualification. Legislation passed following the recommendations of theLatham Report (Constructing the Team, 1996) has treated construction contracts asa special category requiring statutory intervention.

The introduction of HousingGrants Construction and Regeneration Act 1996, part II (hereafter HGCRA 96)has also altered fundamentally the allocation of risks in construction contracts. Allparties before entering into contracts have to consider how they will deal with the legislation. It also provides a much wider definition of what, for the purposes of the legislation, is a construction contract.

Section 104(1) of the HGCRA 96 states that a ‘construction contract’ includes:

• the carrying out of construction operations• arranging for the carrying out of construction operations by others, whetherunder a subcontract to him or otherwise• providing his own labour, or the labour of others, for carrying out construction operations.
• Section 104(2) extends the definition of a construction contract to any agreement to carry out architectural, design or surveying work, or the provision of advice on building, engineering, interior or exterior decoration, or the laying out of landscape.

Note that a contract of employment is specifically excluded from the statutory definition. This definition is much wider than that given by Lord Diplock above.

It includes the carrying out of design activities and the giving of advice, so widening the range of activities covered by the legislation.

Construction operations are further defined by Section 105 as including:

• all normal building and civil engineering works, including operations suchas scaffolding, site clearance and painting and decorating as well ascontracts for repair and maintenance
• consultants agreements on construction operations
• labour-only contracts
• contracts of any value.

Certain contracts are excluded from the operation of the Act: see Section105(2). Whilst the exact reason for this is open to debate it could be argued that they did not suffer from the same ills identified by the Latham Report.

The petrochemical and process industries are excluded, and so are contracts concerning the supply and fixing of plant (including supporting steelwork). These activities are not classified as ‘construction operations’. 
The off-site manufacture of components to be incorporated into the construction work is also excluded, and so are contracts with residential occupiers (see Section 106).

There is however, a substantial body of case law resulting from contracts with residential occupiers. These involve either the use of standard forms of contracts or other contracts that make specific provision for adjudication.

In a number of cases the meaning of construction operations has been considered. Homer Burgess Ltd v. Chirex (Annan) [2000] BLR 124 held that pipework was part of a pharmaceutical plant and not a construction operation.

By contrast, in Palmer Ltd  v. ABB Power Construction (1999) BLR 426 the subcontractor work was held to come into the definition. This was so despite the main contract work being outside the definition. 
Staveley Industries Plc v.Odebrecht Oil & Gas Services (2001) 98 (10) LSG 46 held that structures on the sea bed below low water mark are not part of the United Kingdom for theapplication of the Act.

There was a special requirement s107, (subsequently repealed in 2011)  that the contract had to be in writing, and whether the agreement is in writing has been an issue in many references to adjudication.

In Grovedeck Ltd v. Capital Demolition Ltd [2000] BLR 181 an oral agreement was entered into. The parties went to adjudication under the Scheme for Construction Contracts despite theprotests of one side that the Act did not apply. HHJ Bowsher QC refused to enforce the adjudicator’s award, finding that there was no written contract.

The Court of Appeal in  RJT Consulting Engineers Ltd  v. DM Engineering (Northern Ireland) Ltd (2002) EWCA Civ 270 had to consider the meaning of Section 107. All three judges interpreted the section as requiring the express terms of the agreement to be in writing, not the agreement itself.

Note also that private finance initiative contracts and finance agreements are excluded from the legislation on grounds of policy.

Risk Allocation In Construction Contracts

Like all contracts, construction contracts are about the prior allocation of risk.Windward (1991) draws attention to the construction industry’s need to makea profit on the employment of capital:

‘If risk is an essential ingredient of the system which generates your profit,it is inevitable that there must be a structure for resolving disputes. It bringsthe relationship of the disputants back into balance so that life can resumeits normal course.’

Windward’s reference was primarily to arbitration, the main method of dispute resolution prior to the introduction of adjudication. It is of course a matter of debate whether the introduction of statutory adjudication by the HGCRA 96 achieves that balance between disputing parties. It was conceived by the Latham Report as essentially a ‘quick fix’ in that it was intended to resolve disputes as they arose rather than at the end of the project, this being the usual practice before its introduction.

Standard forms of contract try to allocate risk equitably between the parties. In essence, the payment provisions of the HGCRA 96 can also be described as an attempt to introduce a measure of equity into the contractual relationship between contractor and subcontractor. Risks are varied in construction contracts, and include many factors that can affect the progress of the work.

1 The unforeseen:
(a) unexpected ground conditions(b) unpredicted weather conditions(c) a shortage of material(d) a shortage of skilled labour(e) accidents, whether by fire, flood or carelessness(f) innovative design that does not work or proves impossible to construct.

2 The length of the contract.
Projects vary in the time needed for completion, from days to years. During that time the risk allocation agreed at the time of contracting can change substantially. This is especially so with regard to the availability of materials and its costs. 
A contractor may have ‘bought’ the job because work was scarce at the time and the price of components low.

3 The number of participants, 
The number of participants and parties in the project and the corresponding length of contractual chain cause their own problems. The risk of insolvency increases, the longer the chain.

4 Particular Relationships
The particular relationship (often referred to as a triangular relationship of costs, time and quality) in which conflict is inherent. Contracting parties have different perceptions of how these factors of their relationship interact.

5 Design and Workmanship
The interaction between liability for defective workmanship and for faults in design. The Latham Report in item 3.10 identified the lack of coordination between design and construction as a common source of dispute. Much of the innovation in procurement systems of recent years stems from creating ways of minimising the effect of this clash.

Why use a Standard Form of Construction Contract?

There has been a proliferation of standard forms in the construction industry in recent years, and there are many books available on specific forms of contract. It is not intended to compare those forms here or discuss their similarities or differences. There are, however, many advantages to be gained by using a standard form of contract.

Some advantages are:

1 The standard form is usually negotiated between the different bodies that make up the industry. As a result the risks are spread equitably.

2 Using a standard form avoids the cost and time of individually negotiatedcontracts.3 Tender comparisons are made easier since the risk allocation is same for each tenderer. Parties are assumed to understand that risk allocation and their prices can be accurately compared.

Some disadvantages are:

1 The forms are cumbersome, complex and often difficult to understand.

2 Because the resulting contract is often a compromise, they are resistant tochange. Much-needed changes take a long time to bring into effect.

Participants

A construction contract is best described as a complex web of competing interests. A particular problem in construction contracts is that there is little interest in building long-term relationships. With the growth of partnering it is possible to argue that much has changed. It is argued that contracts such as the New Engineering Contract (NEC), now renamed the NEC Engineering and Construction contract, provide flexibility and simplicity.

The traditional contract is of great importance in understanding the problemsand complexities of construction contracts. Only by analysing the relationshipbetween the employer and the contractor is it possible to understand the problems that other forms of procurement try to resolve. At the heart of the traditional contract lies the conflict between design on the one hand and workmanship on the other.

That conflict is complicated further by the need to allocate rights to third parties.

The Traditional Construction Contract

In such a contract the employer contracts with an architect or engineer to carry outthe design. The architect or engineer, acting as the agent of the employer, supervises the construction of that design. The contractor enters into a contract with the Employer.

There is no guarantee given by the employer to the contractor that the design can be built. 
In carrying out the work, the contractor employs both subcontractors and suppliers of services, goods and equipment.

These may in turn be classified as domestic or nominated. Out of the relationship between these parties arises the issue of privity of contract: the basic rule that only parties to a contract can enforce the contract.

In summary:(a) in the absence of a warranty there is no contractual relationship between theemployer and subcontractors and suppliers(b) third parties have no contractual rights.

The use and spread of collateral warranties has resolved some of the problems caused by the doctrine in providing for the forming of contractual relations with third parties. The passing of the Contracts (Rights of Third Parties) Act 1999 provides an opportunity to simplify this area, but at the moment this piece of legislation has not been widely adopted by the construction industry.

The tendering process

Whatever the method of procurement adopted, the tendering process in the United Kingdom is based on competitive bidding. To ensure transparency in this process the National Joint Consultative Committee (NJCC), an organisation consisting of the major professional bodies involved with construction, has produced codes of procedure.

Open tenders

The first step in this type of tendering is an advertisement in the technical press calling for expressions of interest. Parties can obtain the documents needed from the body placing the advertisement or its agents. The advertisement usually contains a brief description of the location, the type of work being proposed, the scale of the project and the scope of the proposed work. Interested contractors are invited to apply for the details.

The main disadvantage of this type of tendering is that it is indiscriminate in its approach, costly and likely to attract inexperienced tenderers. Local authorities have in the past tended to favour this method of procurement. Its use has been affected by European Directive 71/305/EEC 9 (as amended by directive 89/440/EEC), implemented in the United Kingdom by the Public Works Contracts Regulations 1991 (SI 1991/2680).

These were followed by a number of regulations aimed at opening the European construction market. For more details see Emden (Bartlett, 2001, p. 2009). 
In public procurement this is the main form of selection. The financial thresholds change every two years. Because it applies to all public and local government projects, health authorities, police, education authorities and so on, it is therefore applicable to a wide range of projects.
Single-stage selective tendering

The NJCC code considers that this procedure is suitable for both private and public sector works. This procedure restricts the number of tenderers by preselection from either an approved list or on an ad hoc basis. A limited number (up to six) are selected on the basis of general skill and experience, financial standing, integrity, proven competence with regard to statutory health and safety requirements, and their approach to quality assurance systems.

Thereafter price alone is the criteria, the lowest tender being selected.

Two-stage selective tendering

The NJCC regards this as a suitable method where the early involvement of the main contractor is required before the scheme is fully designed. It enables the design team to make use of the contractor’s expertise. The contractor also becomes involved in the planning of the project at an early stage.

The first stage consists of the selection of the contractor on the basis of a competitively priced tender but with minimal information provided. The submission is on a basis of the layout anddesign of the works, clear pricing documents relating to the preliminary design and specification, and the conditions of contract. In the second stage the employer’s professional team collaborates with the selected contractor in the design and development of production drawings for the whole project.

A bill of quantities (or it may simply be priced on drawings and a specification) is prepared and priced on the basis of the first-stage tender.

If an acceptable sum is produced the contract documents are then prepared. This method is considered to be useful for building works of a large or complex nature, where the brief is unlikely to change. It is recommended for projects where the design and construction phases may overlap and the contractor’s design expertise can be utilised.

Selective tenders

Normally called design and build contracts, these are also called turnkey contracts, which is a wider description of what the employer may expect (i.e. theemployer puts the key into the door of the new factory and starts it up). Thecontractor’s price is to carry out and complete the works in accordance with theconditions of contract.

The tender includes the whole of contractor’s proposalincluding price and design. The NJCC Code of Procedure for selective tenderingfor design and build describes its code as a procurement method that combinesthe design and construction responsibilities.Other modes of selectionNegotiationContracts are seldom entered into on this basis alone.

Parties may negotiate anextension to a contract, additional work outside the scope of the contract may beagreed, or additional work may be carried out elsewhere for the same employer.Joint ventureA joint venture is where two or more companies pool resources for a projectbeyond the resources of the single companies. It may be used on one project orthe agreement may be for a specified period. The co-venturers accept joint andseveral liability for the project.

Other means of procurement

Various types of ‘procurement systems’ have evolved in recent years to deal withthe difficulties perceived within the traditional contract.

(a) Management contracting. Here the employer engages the managementcontractor to partake in the project at an early stage. Normally an experienced builder, the contractor is employed not to undertake the work butto manage the process. All the work is subcontracted to works contractorswho carry it out.

(b)  Construction management. This differs from management contracting inthat the employer enters into a direct contract with each specialist. Theemployer engages the construction manager to act as a ‘consultant’ to coordinate these contractors.

(c)  Project management. The project manager is employed to coordinate all thework needed from design to procurement and construction on behalf of theclient.

(d)  Partnering. The rise of partnering in UK construction can be seen as aresponse to the widely held view that the industry was inherently flawed.After the boom times of the 1980s and subsequent recession of the early1990s it contracted sharply. A culture of conflict persisted in the industry,with employers and contractors operating in a highly adversarial manner,with contractors taking on greater risks in a fiercely competitive market. Inmany cases, in order to secure contracts and survive, contractors had totender at cost (or even under), and recover margins through building claims into the contracting process and withholding payments to subcontractors(Critchlow, 1998).

The essence of any partnering agreement now involves a duty of good faith, mutual cooperation and trust between all partiesinvolved in the construction process.

The Private Finance Initiative (PFI). The aim of the system known as PFI is to involve the private sector in the provision of public services. In essence the PFIcontract is a concession granted by the public sector to the private sector. Theprivate sector company provides the vehicle by which the project companysecures the finance to provide services for running the asset provided.

This maybe a hospital, the provision of information technology projects and services, or the running of the London Underground. The purpose of private and public partnerships is to share the risk of the project, and PFI is at the moment the dominant method.

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There are literally hundreds of different construction and engineering contracts and documents in use in the construction and engineering industries, e.g.

Association of Consulting Architects (ACA) 
Association of Consulting Engineers (ACE) 
BEAMA 
British Property Federation (BPF) 
Building Contracts 
Chartered Institute of Building (CIOB) 
Civil Engineering Contractors Association (CECA) 
Conditions of Engagement 
Confederation of Construction Specialists (CCS) 
Construction Confederation 
Construction Industry Council (CIC) 
Domestic Building Contracts 
FIDIC 
GC Works 
Heating and Ventilation Contractors Association (HVCA) 
Institution of Chemical Engineers (IChemE) 
Institution of Civil Engineers (ICE) 
International Chamber of Commerce (ICC 
JCT 2005 Adjudication Agreements 
JCT 2005 Collateral Warranties 
JCT 2005 Constructing Excellence 
JCT 2005 Construction Management 
JCT 2005 Design and Build Contract (DB) 
JCT 2005 Framework Contracts 
JCT 2005 Intermediate Form of Contract (IC) 
JCT 2005 Major Projects Form 
JCT 2005 Management Contract 
JCT 2005 Measured Term Contract 
JCT 2005 Minor Works (MW) 
JCT 2005 Minor Works Design and Build 
JCT 2005 Partnering Contracts 
JCT 2005 Prime Cost Contract 
JCT 2005 Residential Home Owner Contracts 
JCT 2005 Short Contract 
JCT 2005 Standard Form of Building Contract (SBC)  
MF Contracts 
National Federation of Demolition Contractors (NFDC) 
New Engineering Contract (NEC) 
ORGALIME 
PSPC 
Scottish Building Contract Committee (SBCC)

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