Unit 2: Standard Form of Construction Contracts

Lecture by:

Mr. Tee

The construction industry uses standard forms of contract to:

???

The construction industry uses standard forms of contract to:

save time in writing new contracts

provide a check list of issues to agree

incorporate previous judicial decisions

promote familiarity

Forms of Contract Categorized into :- - Standard form or bespoke contract - Lump sum contracts (fixed or firm priced contracts); 2 variants - (1) Lump sum with plans and specifications (2) Lump sum with bills of quantities - Measurement contracts; 2 common types (1) Approximate quantities (2) Schedule of rates - Cost reimbursement contracts, comprising (1) Cost plus fixed fee (2) Cost plus percentage fee (3) Cost plus fluctuating fee (4) Target cost (5) value cost

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Families of standard forms of contract include: JCT (and SBCC)

NEC

ICE

FIDIC

GC/Works

ACA

IChemE

JCT (Joint Contracts Tribunal)

A comprehensive family of standard contracts

Contains contracts to structure every procurement route relationship, and more

SBCC translates JCT contracts for Scots Law

JCT contracts are the most widely used in construction

Examples of JCT are studied in later Units

FIDIC

Fédération Internationale des Ingénieurs-Conseils (International Federation of Consulting Engineers)

Used internationally, well regarded

Predominately infrastructure projects

Publishes four forms of contract: CONS – Conditions of Contract for Construction

P&DB – Conditions of Contract for Design and Build

EPCT – Conditions of Contract for EPC/Turnkey Projects

Short Form of Contract

GC/Works Used by UK Central Government

Becoming less prominent

Nine forms of contract; most notably: GC/Works/1 :

GC/Works/1 With Quantities (1998)

GC/Works/1 Without Quantities (1998)

GC/Works/1 Single Stage Design and Build (1998)

GC/Works/1 Two-stage Design and Build Version (1999)

GC/Works/1 Construction Management Trade Contract (1999)

GC/Works GC/Works/5

General Conditions for the Appointment of Consultants: Framework Agreement (1999)

GC/Works/7 General Conditions for the Measured Term Contracts (1999)

ICE Ten forms of contract for civil engineering

works

NEC3

The New Engineering Contract, third revision

Endorsed by the Office of Government Commerce

NEC3 aims:

stimulate good management of relationships

be used widely

be clear and simple

NEC3 can structure many procurement routes

A customised NEC3 contract is assembled for every project

NEC3 Core Clauses

Structure the procurement route:

ECC Engineering and Construction Contract

ECS Engineering and Construction Subcontract

ECSC Engineering and Construction Short Contract

ECSS Engineering and Construction Short Subcontract

TSC Term Service Contract

PSC Professional Services Contract

FC Framework Contract

AC Adjudicator’s Contract

NEC3 Main Options Refine the procurement route to allocate cost

risk

Main options are not compatible with all core clauses

Core clauses for the NEC Engineering and Construction Contract (EEC): Options A & B: Priced contracts

Options C & D: Target cost contracts

Options E & F: Cost reimbursable

NEC3 Secondary Options Add desired features into the contract

Examples include: Option X1: Price adjustment for inflation

Option X6: Bonus for early completion

Option X12: Partnering

Option X13: Performance bond

Option X20: Key performance indicators

Option Y(UK)2: The Housing Grants, Construction and Regeneration Act 1996

Three prominent options:

ACA PPC 2000 (2004 revision)

NEC X12 Option

JCT/Be Constructing Excellence

These contracts will be reviewed in Unit 5

JCT Standard Building Contract (SBC/Q) 05:

Example Client rights:

to refer a dispute to arbitration

to own materials not yet attached to the building

Example Client duties:

to pay the contract sum

to give the contractor possession of the site

Example Client liabilities:

arising from omissions in information provided

arising from inadequate descriptions of requirements

JCT Standard Building Contract (SBC/Q) 05:

Example Contractor rights:

to be provided with documents stating the client’s requirements

to claim for a loss or expense if a relevant matter arises

Example Contractor duties:

to complete the project

to keep a set of contract documents on site for reference by other parties

Example Contractor liabilities:

arising from non-completion of any part of the work

Families of standard forms of contract include:

JCT (and SBCC)

NEC

ICE

FIDIC

Public Sector Standard Conditions of Contract (PSSCOC)

JCT (and SBCC) The Joint Contracts Tribunal, also known as the JCT, produces standard forms of

contract for construction, guidance notes and other standard documentation for use in the construction industry. From its establishment in 1931, JCT has expanded the number of contributing organisations.

Following recommendations in the 1994 Latham Report, the current operational structure comprises 8 members who approve and authorise publications. They are the Association of Consulting Engineers, the British Property Federation, the Construction Confederation, the Local Government Association, the National Specialist Contractors Council, the Royal Institute of British Architects, the Royal Institution of Chartered Surveyors and the Scottish Building Contract Committee.

New Engineering Contract NEC3 is the third iteration of the Institution of Civil Engineers’ suite of

contract forms,

published in June 2005. NEC3 aims to:

• stimulate good management of the relationship between the two parties to the

contract and, hence, of the work included in the contract;

• be applied in a wide variety of commercial situations, for a wide variety of types of

work and in any location; and

• be a clear and simple document – using language and a structure which are

straightforward and easily understood.

FIDIC (Fédération Internationale des Ingénieurs-Conseils) is a well regarded industry body

which provides standard forms of contract for use between clients and contractors. At

first, these contracts were intended for use on international projects where the client and

contractor were legally entities based in different countries, but the suite is now also used

when the client and contractor are from the same nation. The form is used widely in

developing nations as it is the favoured form of the World Bank, which finances many

projects in these nations.

The FIDIC suite comprises several books, each capable of structuring the relationship

between two different types of organisation under differing procurement routes. Among

many other procurement route relationships, it can structure the relationship between

client and contractor under the traditional procurement route (using the FIDIC Red Book);

under design and build (Yellow Book); EPC projects (Silver Book); and, uniquely, PPP

schemes (the Gold Book). The most recent revisions of FIDIC forms adopt a standardised

clause numbering system across the suite, increasing familiarity and ease of use.

Some countries, however, only maintained provisional links during the first few years, so the real founders of FIDIC were Belgium, France and Switzerland. FIDIC lead a difficult life until the late-1940s with a changing number of members, and all members based in Europe. In 1959 they were joined by Australia, Canada, South Africa and USA to make FIDIC truly international.

The contract can incorporate several documents

Under traditional procurement, these are:

Contract drawings

Contract bills of quantities and specifications Articles of agreement

Conditions of contract

JCT (Joint Contracts Tribunal)

A comprehensive family of standard contracts

Contains contracts to structure every procurement route relationship, and more

SBCC translates JCT contracts for Scots Law

JCT contracts are the most widely used in construction

Examples of JCT are studied in further units

Widely used in Singapore and other countries

FIDIC Fédération Internationale des Ingénieurs-Conseils

(International Federation of Consulting Engineers)

Used internationally, well regarded

Predominately infrastructure projects

Publishes four forms of contract:

CONS – Conditions of Contract for Construction P&DB – Conditions of Contract for Design and Build

EPCT – Conditions of Contract for EPC/Turnkey Projects

Short Form of Contract

Widely used in the Europe , Few Asian countries such as India,

GC/Works Used by UK Central Government

Becoming less prominent

Nine forms of contract; most notably: GC/Works/1 :

GC/Works/1 With Quantities (1998)

GC/Works/1 Without Quantities (1998)

GC/Works/1 Single Stage Design and Build (1998)

GC/Works/1 Two-stage Design and Build Version (1999)

GC/Works/1 Construction Management Trade Contract (1999)

GC/Works GC/Works/5

General Conditions for the Appointment of Consultants: Framework Agreement (1999)

GC/Works/7 General Conditions for the Measured Term Contracts (1999)

ICE Ten forms of contract for civil engineering

works

NEC3

The New Engineering Contract, third revision

Endorsed by the Office of Government Commerce

NEC3 aims:

stimulate good management of relationships

be used widely

be clear and simple

NEC3 can structure many procurement routes

A customised NEC3 contract is assembled for every project

NEC3 Core Clauses

Structure the procurement route:

ECC Engineering and Construction Contract

ECS Engineering and Construction Subcontract

ECSC Engineering and Construction Short Contract

ECSS Engineering and Construction Short Subcontract

TSC Term Service Contract

PSC Professional Services Contract

FC Framework Contract

AC Adjudicator’s Contract

NEC3 Main Options Refine the procurement route to allocate cost

risk

Main options are not compatible with all core clauses

Core clauses for the NEC Engineering and Construction Contract (EEC): Options A & B: Priced contracts

Options C & D: Target cost contracts

Options E & F: Cost reimbursable

NEC3 Secondary Options Add desired features into the contract

Examples include: Option X1: Price adjustment for inflation

Option X6: Bonus for early completion

Option X12: Partnering

Option X13: Performance bond

Option X20: Key performance indicators

Option Y(UK)2: The Housing Grants, Construction and Regeneration Act 1996

Three prominent options:

ACA PPC 2000 (2004 revision)

NEC X12 Option

JCT/Be Constructing Excellence

These contracts will be reviewed in Unit 5

JCT Standard Building Contract (SBC/Q) 05:

Example Client rights:

to refer a dispute to arbitration

to own materials not yet attached to the building

Example Client duties:

to pay the contract sum

to give the contractor possession of the site

Example Client liabilities:

arising from omissions in information provided

arising from inadequate descriptions of requirements

JCT Standard Building Contract (SBC/Q) 05:

Example Contractor rights:

to be provided with documents stating the client’s requirements

to claim for a loss or expense if a relevant matter arises

Example Contractor duties:

to complete the project

to keep a set of contract documents on site for reference by other parties

Example Contractor liabilities:

arising from non-completion of any part of the work

UK Standard Forms of Contract

The JCT standard forms for various procurement paths have many various commonly used forms such as:

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JCT Forms of Contract JCT98 Standard Form with Quantities ) Traditional

JCT98 Standard Form with Approximate Quantities ) procurement

JCT98 Standard Form without Quantities ) method

JCT98 Standard Form of Building Contract with Contractors Design 1998 JCT Standard Form of Management Contract 1998 Edition JCT Standard Form of Construction Management Agreement JCT Standard Form of measured term contract 1998

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JCT Forms of Contract

JCT98 Standard Form with Quantities - this is the base form from which all other JCT forms of contract have been

derived - the 1998 edition is the latest revision of the published version of the JCT80

with 17 amendments comprising : - the conditions - agreements, - the contractor’s firm priced offer based on full and accurate bills of

quantities - complete set of working drawings - if there is no fluctuation, no variations or no disruption of the contractor’s

works, the contractor’s offer or the contract sum, will be paid - this form is used where a traditional procurement method is used

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JCT Forms of Contract JCT98 Standard Form with Approximate Quantities - Essentially same as the Standard Form with Quantities - Main difference - A variation to the quantity of work is not a variation

to the contract - the conditions presume that sufficient information was available at

the time of tender for a bill of quantities to be prepared accurately as regards the description of the works only

- ie where there is insufficient information to calculate accurate quantities

- usually is useful in cases where the contract involves considerable work in the ground, like a pumping station

- also useful where the tender is required urgently for a proposed building that is the same as a previous building, except in size

- also used for certain types of refurbishment where the items of work are known, but their extent is not

- used where a traditional procurement method os required

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JCT Forms of Contract JCT98 Standard Form without Quantities - Essentially same as the Standard Form with Quantities - Main difference - Contract sum is based on drawings and

specifications only - the contract sum is fixed - contractor is required to provide a schedule of rates for the

purpose of calculating valuations and variations - no breakdown of the tender is available

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JCT Forms of Contract JCT98 Standard Form of Building Contract with Contractors Design 1998 - latest edition was published in 1998 - commonly known as JCT81 or WCD’98 - consists of several amendments - intended for use where a design and construct method of procurement

method is required - modifications required if used as a form of design, novate and construct

contract - an option to incorporate modifications where the works required to be

completed in sections - presumed that the employer will appoint an agent to assist with the

formulation of the employer’s requirements and to administer the contract, and a design team

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JCT Forms of Contract JCT98 Standard Form of Management Contract 1998 Edition - was launched and first published in 1987 - intended for use where the requirements of employers to procure a complex building quickly

where time is important or more important than cost - The management contractor tenders a fee to carry out work in the pre-contract and construction

periods of a project based on an estimate of the cost as detailed in the cost plan (prime cost) - if the total construction cost exceeds the cost plan total at any time, the fee is adjusted in

accordance with the formula contained in the conditions - the prime cost is defined in the conditions to be the cost of the permanent work plus certain on-

site costs, eg. On-site staff, consumable stores and services - the management contractor’s task is to coordinate and supervise the work of various works

contractor engaged in the construction of the permanent works - the management contractor does not carry out any of the actual construction work - works are carried out by works contractors, who are effectively sub-contractors directly

employed by the management contractors for a package of work - By carrying out the design and the construction works in parallel, significant time saving can be

achieved - Disadvantage is that the employer would not know the actual total cost of the project until the

final works contractor has completed

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JCT Forms of Contract JCT98 Standard Form of Construction Management Agreement - was published in 2002 along with a Standard Form of Construction

Management Trade Contract - intended for use where a construction management method of

procurement is used - This is popular in the USA - Very close to the philosophy of the management contract, major different

is that the employer appoints a professional construction manager on a fee basis under terms of professional appointment

- the works contractors sign a contract with the employer on the recommendation of the construction manager

- the construction manager is in an equivalent position to the architect on a traditional project

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SBCC CONTRACTS

Published by the Scottish Building Contract Committee (SBCC) to enable the JCT Standard Form of Contracts with English law to be amended to be used in Scotland under the Scots Law

The SBCC is to publish a contract for signing by the parties that incorporates supplementary documents called “supplements” that contains necessary clauses to incorporate the appropriate JCT form together with amendments to comply with Scots Law

The Practice Services Division of the Royal Incorporation of Architects in Scotland provides a subscription update service through their Scottish FOCUS Service

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JCT Forms of Contract JCT98 standard form of measured term contract 1998 - intended for use by employers who need regular maintenance and minor

works, including improvement works, to be carried out in their properties within a defined area

- common form of contract used for facilities management projects (Facilities Management Contracts)

- The contract presumes a tender by one contractor to carry out these works for a specified period of time on receipt of individual orders

- the employer has to detail the properties to be covered by the contract and the type of works anticipated

- Orders are issued to the contractor from time to time to carry out works as required

- the contractor is paid on the basis of the quantities of work carried out base on the schedule of rates

- the schedule of rates is selected or prepared by the employer - the contractor’s tender is a percentage above or below the schedule of

rates

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Other Forms of Contract The Institute of Civil Engineers (ICE) Contracts Produced by the Institute of Civil Engineers in UK SBCC amended the ICE contracts condition for use in Scotland The ICE Contracts contains a provision which states that if

the works are situated in Scotland, then the contract shall operate as a Scottish contract and shall be interpreted in accordance with the Scots Law

When used in Scotland it is necessary to make amendments in order for them to operate properly in Scotland

There is no Scottish version or editions of the ICE contracts

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Other Forms of Contract The principle contracts produced by the Institute of Civil

Engineers (ICE) are:- ICE Conditions of Contract (7th Edition) – intended for used

where a traditional procurement method is required ICE Design and Construct Conditions of Contract (2nd Edition)

– intended for use where a design and construct procurement method is required

ICE Conditions of Contract for Minor Works (3rd Edition)- intended for use where a traditional procurement method is required. – recommended for use in civil engineering works, where contract value does not exceed Sterling pound 250,000 (1995 prices), construction period does not exceed 6 months – work is of straightforward nature, design complete before tender is called

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Other Forms of Contract

Electrical & Mechanical engineering contracts

Standard forms of contracts are issued by the Institute of Electrical Engineers and the Institute of Mechanical Engineers, for the construction of mechanical, electrical and electronic plants

Institute of Chemical Engineers produced standard forms of contract for process plant

There are no Scottish versions or editions of these forms of contracts

If Scots Law is to apply, it must be inserted as a special condition and amendments for these forms to be operate properly in Scotland

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Other Forms of Contract

International Engineering and Construction Contracts

The Federation Internationale Des Ingenieurs-Conseils (FIDIC) – An International Federation of National Associations of Consulting Engineers- produces standard forms of contract for use in relation to international engineering and construction projects.

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FIDIC Produced by the International Federation of

National Associations of Consulting Engineers 4th edition was issued in 1987, containing the Red

Book, the Yellow Book , and the Orange Book Red Book – a contract for civil engineering works Yellow Book – a contract for mechanical and

electrical works Orange Book – a contract for turnkey

construction

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FIDIC The principle contracts are generally based on ICE conditions FIDIC has recently issued a set of contracts :- - The Construction Contract – a contract used for building and

engineering works – designed by the employer , based on the Red Book

- The Plant Contract – a contract used for plant and design build for electrical or mechanical plant; and also used for building and engineering works designed by the contractor

- The EPC Contract – a contract used where one entity takes responsibility for engineering procurement and construction works

- The Short Form of Contract – used for simple and low value contracts

. The DIDIC forms of contract allows the incorporation of special

conditions to include issues governing the peculiarities of law of the country selected

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A Modern Form of Contract

A revised NEC contract has been issued

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A Modern Form of Contract

The NEC Engineering Construction Contract (ECC) , previously known as the New Engineering Contract (NEC)

The NEC Engineering Construction Contract has been developed to meet the current and future needs for a form of contract to be used in engineering and construction

It is an improvement on existing standard contracts

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A Modern Form of Contract

The NEC Engineering Construction Contract (ECC) , previously known as the New Engineering Contract (NEC)

The objectives are to make improvements under 3 main headings:-

Flexibility

Clarity and simplicity

Stimulus to good management

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The ECC is intended to be used :- For engineering and construction work

containing any or all of the traditional disciplines eg civil, electrical, mechanical and building work

Whether the contractor has some design responsibility, full design responsibility or no design responsibility

To provide all normal current options for types of contract such as competitive tender, target contracts, cost reimbursable contracts and management contracts

In the UK and other countries

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The ECC Contract 1. Clarity and simplicity - ECC is written in ordinary language - The document is structured to help user to gain familiarity with its

contents - The actions by the parties using the ECC are precisely defined to

avoid disputes as to who is to do what and how - The quantity of text is much reduced as compared to other contract

forms - Clause numbers and the amount of text are less - The main objective is to minimise the incidence of disputes, eg

where the project manager is required to make a decision, the basis of his decision is stated in the contract. This will significantly reduce uncertainty about the outcome of the contract. This benefits the contractor without constraining the freedom of action of the project manager acting on behalf of the employer

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The ECC Contract

2. Stimulus to good management

- This is the most important characteristic of the ECC

- Every procedure has been designed to the effectiveness of management of the works

- The ECC is intended to provide a modern method for employers, designers, contractors and project managers to work collaboratively.

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The ECC Contract 2. Stimulus to good management Foresight applied collaboratively mitigates

problems and reduce risks Clear division of function and responsibility

helps accountability Motivates people to play their part The project manager acting on behalf of the

employer and in communication with him should be presented with the options for dealing with any problems that occur, directed by the interests of the employer, the contractor should be unaffected by the choice made

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Partnering Contracts and agreements

Based on the concept that parties operate their relationships with each other

Partnering agreements can be combined in the construction contracts

Partnering agreements/contracts includes explicitly the concept of good faith and fair dealings

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Partnering Contracts and agreements

Good faith obligations and fair play are not recognised by the laws of Scotland and England even though they may be recognised by some European legal systems.

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Partnering Contracts and agreements

HM Treasury has stated in its Procurement Guidance Note No. 4 that:-

“ The partnering arrangement and charter should not create a contract or a legal partnership and should contain an express provision making it clear that it is not intended to be legally enforceable. The charter normally includes a statement to the effect that the arrangement only remains operative as long as all the parties to it wish it to remain in place.”

-

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Adjudication Any party to a construction contract may refer a

dispute to an adjudicator The contractual adjudication must be impartial

and rapid The adjudicator must be allowed to operate in an

informal manner The adjudicator must be given immunity against

legal proceedings The adjudicator’s decision is binding only until

agreement, arbitration or litigation finally determines the disputes

Parties may accepts the adjudicator’s decisions as final

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Adjudication If there is no contractual adjudication agreement, or if it does not

comply with the criteria of the Act, the Scheme for Construction Contracts shall apply

In Scotland the Lord Advocate can exercise the powers conferred on him by Sections 108(6), 114 and 146 of the Housing Grants Construction Regeneration Act 1996(A) and has introduced regulations governing the Scheme for Construction Contracts (Scotland) Regulations 1998

These sets out the procedures to be undertaken in the process of adjudication being carried out under the Scheme

The Scheme covers matters like Notice of intention to seek adjudication, the nomination of an adjudicator, the powers of the adjudicator and the adjudicator’s decision, requirements in relation to payments

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Arbitration

The Arbitration ACT 1996 – Introduces a new code of conduct for arbitrators and the parties; duties and responsibilities – with the intention to make arbitration cost and time effective

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Arbitration

Arbitrators can rule on their own jurisdiction

Arbitrators have increased powers eg ordering security for costs and making peremptory orders

Arbitrators have discretion to order the payment of compound interest

Arbitrators can put a capon costs recoverable by the parties

There are even more restrictions on appeals to the court

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Arbitration

The arbitrators are obliged to

- adopt procedures suitable to the circumstances of a particular case

- avoiding unnecessary delay or expense

- to provide a fair means for the resolution of the dispute

If this is not done, then this can be a ground for the removal of the arbitrator by the court

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Arbitration The arbitrators can adopt an informal inquisitorial approach

to the dispute free from High Court rules of evidence The arbitrator is free (with the parties’ agreement) to set

aside the law altogether and decide the dispute on equitable or “non legal grounds”

The arbitrator has wide powers to prevent non co-operation by one party sabotaging the proceedings, and can dismiss the offending party’s case, in some circumstances

Unless otherwise agreed, the arbitrator can award compound interest and set a limit to the recoverable costs of the arbitration, as along as this is done in good time to allow the parties to adapt their case and preparation accordingly

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Arbitration

The operations and practice of the arbitration are dependent on the agreement of the parties under the Act

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End of Unit 2