Contractual Procedures Current Procurement and Contractual Arrangements

Introduction

Commuters in this particular town have complained about heavy vehicular traffic, the solution to address this delicate problem is to build two underground roads that will cross the city in the north-south and east-west directions. This report will give the client the informed advice which is required for him to make a final decision on the go ahead of this project.

Executive summary

This report will advise you of the applicable issues which will need to be considered if you are going to give the project the go-ahead. It will cover various methods of procurements and tendering options as well as my personal opinion on what routes you should take. The nec3 contract you are using has various risks which are important you are aware of, as well as know what methods can be utilized to mitigate these risks. Finally I will discuss legal factors which could hinder both the formation and operation of the contract between you and the client, and conclude the report with an overview on the important points which I have earlier discussed.

3.0

The Lantham report which was produced by Sir Michael Lantham in 1994 had the aim of developing a contract documentation which could be based on a standard set of principles, to benefit both the client and the contractor whilst also introducing new Legislations against unfair contracts. Michael Lanthams title for his report was “constructing the team” and I recommend that whichever procurement option is chosen, that it has similarities and inclusions of the Latham contract, meaning the project can be completed with as little problems as possible and as a team.

The terms of reference were to consider,

“Current procurement and contractual arrangements; and current roles , responsibilities and performance of the participants including the client” The Lantham Report

There are many different procurement options which could be used for this project such as Prime contracting, PFI, Design and build and the traditional approach. Because of the size of the project, there will not be much attraction in the PFI roads market which intern will not give great value for money, a more conventional approach will be much better suited meaning that this procurement option is instantly ruled out.

Traditional Approach

The traditional approach is an option, which evolves the client/engineer doing all of the design work before putting the project out to tender and selecting a contractor, with the project already being designed the client will generally accept the lowest price. Accepting the lowest tender isn’t always the best route to take, with the quotations being predominantly accepted on a bill of quantities basis there will always be disputes and claims as additions and extras can be easily manipulated.

A real disadvantage of using the traditional approach on this particular project is that there will be no input in the design process by the contractor, its inevitable the contractor will disagree with some areas of the initial design but any changes will be severely constrained by the compliance of the engineer.

Design and Build Approach

In a design and build contract, the successful contractor has the responsibility of the design as well as construction of the underpass scheme. There are many advantages; a main advantage to the client would be the contractors design will identify the cheapest solution to any engineering problems and there will be greater certainty of price. This is because the contractor will account for any cost of having to deal with various risks which usually occur buy the client under ICE, all of this accounts to a reduction in claims and variations.

There are a couple of disadvantages which also need to be considered, there may be additional costs to the client if they require alterations to the design or programme, also tenders are more involved for the contractor, taking more time to complete meaning tender periods will be longer.

Prime Contracting

Prime contracting in principle is similar to design and build, as again a single contractor acts as a sole point of responsibility to the client for both the management and delivery of the project. Generally a pre-agreed cost model will be implemented and the client will expect the contractor to not exceed this under any circumstance. There is a downside to prime contracting unfortunately as noted in the NEC3 procurement and contract strategies,

“A distinguishing feature of prime contracting in the United Kingdom from design and build is that often the design requirements are to deliver the performance requirement for which the asset was intended, whereas the level of reasonable skill and care is often the chosen norm under the Design and build variants”

The level of design responsibility can be chosen without much difficulty with which ever NEC contract is used, although the risk profile of these are in reality quite different.

With all of this in consideration the procurement option which I would personally recommend for this project is Design and build, you will save valuable time by only dealing with a single source as opposed to having to deal with numerous amounts of people such as the contractor, engineer, architect, surveyors and sub contractors. All of this means that the contractor will be able to more comprehensively complete the schedule of works a lot more effectively, meaning the project can be scheduled a lot sooner.

4.0

You will need to adopt a method to select the most suitable contractor for delivering the project, this can be done via tendering. The tender has two main Purposes, to firstly obtain a price for the job and secondly to select a suitable contractor. The contractor must decide before quoting the tender whether the price of the contract is of significant importance to the client, what the competitors are charging for a similar service and if there are any legal factors to consider when establishing the price.

There are common methods of tendering for contractors, sub-contractors and supply package contractors, a system of open tendering could be used for this project. This is when any firm wishing to compete is allowed to submit a tender; the danger in this system is that if anyone is allowed to join the competition, it is less likely that they will be of equal standing and reusability. There are unfortunately disadvantages when compared to selective tendering, these are:

More sets of contract documents are required, hence it is more costly to the client

The tendering period is longer, which only delays the start and completion of works and may also increase cost

There is the risk of awarding the contract to a dishonest contractor

A system of called closed or selected tendering is the ideal option for this project, in this system the architect will prepare a list of contractors who will be invited to tender. As a rule the invited firms are known to the architect or the contractor’s quantity surveyors, this brings the following advantages:

The right contractor for a particular type of job is obtained

The lowest tender can be accepted without fear that the contractor is not suitable for the job.

The number of contractors is controlled so that time and expense in preparing tenders as a whole in the industry can be reduced, consequently reducing the level of overheads.

I recommend you use a two stage selective tender option; this will be an extremely efficient method, you can be confident all the tender packages are from reputable companies and include all that is required. You can then go back out to the cheapest three contractors to get their final price for the project, saving you money.

5.0

In general the NEC3 standard form of contract is generally as risk free as contracts can be, with the contract attempting to allocate any risk in the project as fairly as possible whilst managing any risks in the most effective manner possible, minimising any cost implications. The NEC3 encourages the client to pass on the majority of the risks on to the contractor; the client will have to way up the consequences of being as safe and cautious as tender prices will predominantly be higher due to the high risk premiums which are involved.

There is always risk whilst dealing with construction projects, but there are ways to be able to manage these risks safely, you firstly need to identify what the risk is, determine what category the risk will come in, on what scale and most importantly what can be done to mitigate the risk.

With this particular project being the construction of two underground roads, one of the more likely risks to the contract could be via hiring a poor project manager; he has the main impetus on the projects smooth running and on time completion, the wrong employment of a project manager could potentially be financially disastrous to both the client and contractor. The client can mitigate this risk by getting a track record of the project manager before considering hiring him; this is to ensure he has been evolved in similar size projects and has the requirements and capability of successfully seeing the project through. – Clause 60 compensation events

The NEC3 has however included a new Clause in 62.1 which states that the project manager must without hesitation discuss methods of dealing with an event with the contractor before instructing alternative quotations, this serves to increase the level of mutual trust and co-operation between both the project manager and the contractor. This insertion is good for the client, in a sense it will reduce the risk of complications occurring from events being dealt with wrong as the contractor will have there own impetus on the situation.

I recommend the risk allowance in this particular instance to be 10% with an impact cost in the region of £15,000

Risk allowance = 10/100 x 15,000 = £1,500

Another worrying risk to the client could be caused via adverse weather. The Nec3 is a great contract and attempts to split the responsibility evenly between the client and the contractor. In the case of climatic conditions the client will only be at risk for occurrences that have a minimised chance of occurring and that would be unrealistic for the contractor to have allowed for. As a result to qualify for adverse weather it must have only been shown to of happened on average less then once in a ten year frequency, with the client and the contractor taking a predefined risk (the contractor consequently will include such risk in his prices)

“NEC3 compensation Events

The contractor encounters physical conditions which

Are within the site

Are not weather conditions

An experienced contract would have judged at the contract date to have such a small chance of occurring that it would have been unreasonable for him to have allowed for them”

The NEC3 has the potential to cause problems with its approach to weather measurements; for example snow, there is no reference to amount of snow that falls, only the number of days it has fallen for and as we all know there is a major difference between a light sprinkling and the heavy snow we received in February of 2010., which can potentially close the site down for days.

This provision could have the potential to be risky to the client due to it not being impossible for unlikely/adverse weather conditions occur .Weather is a problem which can hinder all construction projects, the potential consequences of this risk needs to be appropriately considered, especially if it takes place within the autumn/winter months where in general more extreme weather conditions take place.

There is a clause in particular that has interest to this risk and is important for this provision; 63.1 the way which events are assessed has always made it apparent that it is the change in the forecast that forms the basis of the assessment, as earlier stated the function of the contract is to allocate the risks between both parties. The compensation mechanism acts to establish what is at the client’s risk

This provision could have the potential to be risky to the client due to it not being impossible for unlikely weather conditions occur .Weather is a problem which can hinder all construction projects, the potential consequences of this risk needs to be appropriately considered, especially if it takes place within the autumn/winter months where in general more extreme weather conditions take place.

I recommend the risk allowance in this particular instance to be 5% with an impact cost in the region of £50,000

Risk allowance = 5/100 x 50,000 = £2,500

6.0

When you, the client has identified a suitable contractor for the project, you need to be aware of certain legal factors which can hinder both the formation and operation of the contract between himself and the contractor. Below are the five necessary points which must be included in the formation of the contract for it to be legitimate

Agreement between Parties

This is the starting point for a contract to be formed, offer and acceptance is a traditional approach in contract law and it is used to decide if an agreement has been formed between the two parties. A contract is formed by agreement, an offer is made by one party the “offeror” which must intern be accepted by another party the “offeree” for the contract to be created. It must be clear, both that the offer is being made and exactly what the offer is, the communication can be by either word of mouth or as I would recommend in writing.

The contract will therefore be formed when the offer is accepted, along with the terms and conditions that have been communicated to the offeror by the offeree. It is important that the details of acceptance are noted such as time of acceptance, location of acceptance and formation of the contract as this will possibly have a bearing on what laws the contract will contain.

Intent to create legal relations

There must be an intention between both parties to form a legally binding contract. If there is a dispute the burden of proving there was no such intention present will be solely of the party who claims that no legal effect was intended. This is a very difficult thing to prove and the party trying to claim this are generally unsuccessful in their attempt.

Certainty

In order for the contract to be official and binding an agreement must be certain and clear, it should not be incomplete or purposely vague

“A contract containing language that is so obscure and so incapable of any definite or precise meaning that the court is unable to attribute to the parties any particular contractual intention will be unenforceable” The uncertainty may relate to on of the pivotal terms of the agreement or may go to the very heart of the agreement – G Scammel and Nephew v HV & JG Ouston –

Capacity

For the contract to be lawful there are laws to protect people from getting conned into agreeing to unjust provisions.

The contract will not be legally binding for:

Minors

People with mental disabilities

People who have unpaired judgement such as, Illness, disability, hypnosis or be under the influence of alcohol or drugs.

Consideration

Consideration can be wrongly interpreted, it is interpreted as “ from which is given in return for something being offered”. Most people assume that only money is a possible consideration, where in fact a promise can constitute as enough consideration for a contract to be formed.

The predicaments which could hinder the operation of the contract are as follows:

Misrepresentation

If an untrue statement is made to the other party which could have been used to entice them into entering into the contract, then the contract can be terminated which can serious hinder the operation of the contract

2.

Damages for misrepresentation.

— (1) Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made the facts represented were true.

(2) Where a person has entered into a contract after a misrepresentation has been made to him otherwise than fraudulently, and he would be entitled, by reason of the misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings arising out of the contract, that the contract ought to be or has been rescinded, the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of opinion that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the other party.

(3) Damages may be awarded against a person under subsection (2) of this section whether or not he is liable to damages under subsection (1) thereof, but where he is so liable any award under the said subsection (2) shall be taken into account in assessing his liability under the said subsection (1). Misrepresentation Act 1967

Mutual Mistake

Mutual mistake could occur if both parties involved in the contract are mistaken about the same piece of material, making the contract voidable. For a mutual mistake to be void, the parties must be mistaken concerning material, when this happens there are two questions which will need to be answered. Who has the contractual risk? Who accepts the risk by custom?

Duress

If you are successful in proving the contract was formed by duress, the contract may then be withdrawn as it will become voidable.

Duress has been defined as “threat of harm made to compel a person to do something against his or her will or judgement;. A wrongful threat made by one person to compel a manifestation of seeming assent by another person to a transaction without real volition” – Blacks Law Dictionary (8th ed.2004)

7.0

Conclusion

To conclude this report I suggest you go forward with the construction of the two underground roads, I recommend you use the design and build procurement with the two stage selective tendering method to employ a suitable contractor. It’s important you consider the risks the nec3 standard form the contract has, as well as the legal factors which could hinder your formation and operation of the contract; I propose you consider my recommendations on how to mitigate them.