Comparing and Evaluating the Contractual Provisions of Two Analogous Construction Contracts

COMPARING AND EVALUATING THE CONTRACTUAL PROVISIONS OF TWO ANALOGOUS CONSTRUCTION CONTRACTS FOR THE MANAGEMENT OF COST.

Tim McLernon1 and Sharon McClements1.

1 School of the Built Environment, University of Ulster, Jordanstown Campus, Newtownabbey, Co. Antrim, BT37 0QB, UK

ABSTRACT

The Royal Institution of Chartered Surveyors, on its website, defines cost management as being ‘concerned with delivering best value in building and infrastructure’. The contract used between the parties for the construction project has a significant influence on the management techniques and procedures used for post-contract cost control and management. Standard forms of construction contract dictate in detail, expressly and impliedly, the management techniques and procedures to be used for post-contract cost control and management. The aims of this study are to compare the cost management provisions of comparable JCT and NEC3 contracts and to evaluate the different contributions made by the two construction contracts to the management of cost of a construction project. This study will use a desk-based approach to analyse the respective provisions of the two contracts to be compared and evaluated. In so doing, the study will take account of case law that impacts on the legal matters associated with the management of cost on construction projects. The findings will offer a framework that may be used for the evaluation and comparison of the provisions for the management of cost amongst construction contracts and which may be used for practical evaluation and comparison of the same.

Keywords: Evaluation, comparison, cost provisions, management, construction contracts.

INTRODUCTION

Whilst freedom to contract on whatever terms are most favourable to the contracting parties, the nature of construction lends itself to contractual arrangements that assure effective and efficient commercial administrative management. Standardisation of arrangements, whilst impinging on the concept of freedom of contract, continues to be an accepted method of contracting across the construction industry. Two consequences of using standardised arrangements are that procedures follow the standard patterns dictated by the contractual arrangement and terminology is owned by that contractual arrangement. Having different contractual arrangements may create some misunderstandings or misinterpretations associated with construction management practices. For example, the term ‘final account’ is commonly used across the UK construction industry to describe the final balance ascertained as being owed to, whilst ‘Variations’, has different connotations across the industry. The contract is the key management tool; construction managers should be fully familiar with the contractual language and procedures in order to manage effectively and to avoid disputes. Research conducted by EC Harris found the two top causes of dispute in UK construction projects to be: 1. Failure to properly administer the contract; and 2. Failure to understand and / or comply with its contractual obligations. Standard form contracts tend to mitigate disputes and misunderstandings although it could be argued that, in circumstances where one party, normally the Employer, dictates the use of a particular standard form contract, the contra proferentem rule would apply. This rule states, broadly, that where there is doubt about the meaning of a word or a phrase in a contract, the word or phrases will be construed against the person who put them forward. So, for example: Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd(1970) 1 B.L.R. 111 considered an issue involving unclear contract provisions for liquidated damages and extension of time. Having disposed of the issue, the Court gave an observation. Salmon LJ said (at page 121):

The liquidated damages and extension of time clauses in printed forms of contract must be construed strictly contra proferentem. If the employer wishes to recover liquidated damages for failure by the contractors to complete on time in spite of the fact that some of the delay is due to the employers' own fault or breach of contract, then the extension of time clause should provide, expressly or by necessary inference, for an extension on account of such fault or breach on the part of the employer. I am unable to spell any such provision out of clause 23 of the contract in the present case…The problem is solved by a suitable worded extension of time clause.

It should be said that authorities on construction law such as Keating (2013) and Hudson (2014) place doubt on this argument. The two tested, proven and most significantly promoted contractual arrangements used in the UK construction industry derive from the Joint Contracts Tribunal (JCT) suite of contracts, and the New Engineering Contract (NEC3) suite of contracts.

THE STUDY

This paper compares and evaluates provisions affecting cost management in these two standard form contracts: the JCT Standard Building Contract With Quantities and the New Engineering Contract (NEC3) Engineering and Construction Contract, Option B: Priced contract with bill of quantities. The paper begins by examining the provisions in legislation relating to payment. It continues with an examination of the provisions of the two contracts that relate to payment and concludes with a commentary. The aims of this study are to theoretically compare, contrast and make commentary on the different contributions made by two selected, main-line construction contracts to the management of cost of a construction project in relation to payment with a view to opening a conversation on the contractual management of cost. This study used a desk-based approach to analyse the respective provisions of the two contracts to be compared and evaluated. In so doing, the study took account of decided case law and legislation that impacts on the legal matters associated with the management of cost on construction projects.

THE LEGISLATION

The Housing Grants, Construction and Regeneration Act 1996 (HGCRA), commonly referred to as the Construction Act includes provisions to ensure that contractual payments in construction contracts are made promptly and on time throughout the supply chain. These provisions were amended by Part 8 of the Local Democracy, Economic Development and Construction Act 2009. The Act (2009) deals with making periodic payments, making the date a payment becomes due dependent upon the giving of a notice by the payer of the sum the payer proposes to pay. It also amends the original provisions of the HGCRA that provided that a contractor had a right to stop working when the contractor has not been paid. These revised provisions are designed to ensure that payments are made promptly and on time throughout the supply chain.

THE JCT STANDARD BUILDING CONTRACT (SBC 2011)

This title actually refers to three different contracts that can be used by an Employer (client) and a Contractor, each designed for a traditional procurement route and lump sum pricing. This study will use one of these, viz., the JCT Standard Building Contract With Quantities (SBC/Q 2011) for the comparison and evaluation.

Terms and provisions for the management of cost.

Article 2 of SBC/Q2011 sets out the contract sum, normally the accepted tender, with the provision that “[T]he Employer shall pay the Contractor at the times and in the manner specified in the Conditions the VAT-exclusive sum of (the Contract Sum, £x) or such other sum as shall become payable under this contract. The Bill of Quantities is the basis on which the accepted tender, which is the Contract Sum, was computed and is the key cost management tool. This Contract Sum may be adjusted in accordance with express provisions of the contract as provided in Clause 4.2; the items included in adjustments are expressly laid out in Clause 4.3. In order to assist cash flow and good cost management, Clause 4.4 provides that as soon as the amount of an adjustment is ascertained, in whole or in part, the ascertained amount shall be taken into account in the next Interim Certificate. Clause 4.5 provides a rigorous timeframe and process for the final adjustment of the Contract Sum with the aim of preventing delays in final payment and resulting disputes. The consequence of the final adjustment of the Contract Sum is that the finally paid amount culminating in the Final Certificate is never the same as the Contract Sum. The major adjustments to the Contract Sum are by way of Variations, Fluctuations and Loss and Expense claims. The term ‘Variation’, with an uppercase ‘V’ has a particular contractual meaning which includes the alteration or modification of the design, quality or quantity of the Works … (Clause 5.1.1). It also means the imposition by the Employer of any obligations or restrictions in regard to: … access to the site or use of any specific parts of the site, limitations of working space, limitations of working hours, or the execution or completion of the work in any specific order. This contract is a fluctuating price contract which means that the Contract Sum represents costs at the time of pricing and the effects of inflation and deflation on rates and prices are accounted for by adjusting the Contract Sum accordingly. There are three options for fluctuations: options A, B, and C. Options B and C both provide for price fluctuations in labour and materials cost and tax fluctuations but differ in the method of calculation. Option A, however, provides only for contribution, levy and tax fluctuations; a relatively minor cost. Consequently a contract incorporating Option A is, arguably, a firm price contract. Clause 4.23 states that if in the execution of this contract the Contractor incurs or is likely to incur direct loss and/or expense for which he would not be reimbursed by a payment under any other provisions in these conditions due to deferment of giving possession of the site … or because the regular progress of the Works or any part of them has been or is likely to be materially affected by any of five Relevant Matters which are specified in Clause 4.24, the Contractor may make an application to be paid that loss and expense. A strict timeframe and procedures for making the application are laid out. Complying with these provisions by the Contractor is probably condition precedent to the Contractor’s claim being valid. Strict adherence by all parties to the procedures and timeframes is vital for effective cost management. Clause 2.9.1 obliges the Contractor to provide the CA with his master programme. However, clause 2.9.3 provides that this programme shall not impose any obligation beyond those imposed by the Contract Documents. The programme in the SBC/Q11 therefore has less impact on managing costs than that of the ECCB.

Interim Payments

The provisions for payment follow and comply with the legislation. The first Due Date for interim payments is specified in the Contract Particulars and payments thereafter are on the same date each month or the nearest business day in that month up to either the date of practical completion or the specified date one month thereafter (Clause 4.9.1). If no Due Date is stated, the first due date is deemed to be one month after the date of possession. The Contract Administrator (CA) takes the dominant role in the payment procedure. Clause 4.10.1 obliges the CA not later than 5 days after each due date to issue an Interim Certificate stating the sum that he considers to be or have been due at the due date to the Contractor in respect of the interim payment. Interim valuations must be made by the Quantity Surveyor (QS) whenever the CA considers them necessary for ascertaining the amount to be stated as due in an Interim Certificate (Clause 4.10.2). The final date for payment of an interim payment shall be 14 days from its due date (Clause 4.12.2). If the Employer fails to pay the Contractor the sum payable in accordance with clause 4.12 … by the final date for payment and the failure continues for 7 days after the Contractor has given notice to the Employer with a copy to the CA of his intention to suspend the performance of his obligations under the contract … the Contractor may suspend performance … until payment is made in full (Clause 4.14.1). This contract recognises the practice of Contractors preparing the interim valuation and Clause 4.11.1 makes provision for the Contractor to make an application (an Interim Application) to the QS stating the sum that the Contractor considers will become due to him at the relevant due date. These provisions cover ‘normal’ procedures. Clause 4.11.2 makes provision for circumstances where an Interim Certificate is not issued in accordance with these procedures. Clause 4.12 makes extensive provision for ensuring that the Contractor receives the amount due within a strict timescale. Clause 4.13 ensures through its provisions that if less than the amount due is to be paid that a Pay Less Notice is issued appropriately. The procedures laid down in respect of interim payments are detailed with specific rights and duties assigned to the parties. It is probably the case that these procedures are conditions-precedent to the intended outcome and therefore it is vitally important that they are followed to ensure smooth cost management and the avoidance of disputes. The case of Sutcliffe v Thackrah [1974] AC 727 additionally established a liability in Tort, deciding that a Contract Administrator owes a duty of care to the Employer and the Contractor in the performance of all duties, particularly, certification. Retention continues to be a controversial topic in the construction industry. Retention is a contractual provision that allows the Employer to retain a percentage of the amount due to the Contractor in interim certificates. The purpose of retention is to provide a fund for the Employer to draw upon for the rectification of any defects. The default retention percentage is 3 percent unless a different rate is stated. The SBC/Q also allows for no retention. The retention is taken on interim payments up to the date of issue of the Practical Completion Certificate. At this point one half of any retention fund is released to the Contractor. The remaining half of the retention fund is released to the Contractor upon the issue of the Certificate of Making Good. Once more there is a strict contractual timeframe and process.