Most Suitable Contract When Constructing a Library

The Joint Contracts Tribunal produces various contracts that are applied for use in the majority of construction projects carried out in the UK; this statistic is reinforced by the surveys conducted by the RICS. This report seeks to explicate and clarify the most suitable contract between the JCT Design & Build (DB) and JCT Constructing Excellence (CE) when constructing a library.

The report will introduce these different contracts and highlight some of the key benefits of each contract which will in turn discern which contract is better. Further recommendation will be established from the information complied and from my professional judgement.

INTRODUCTION

It is normal for contracts to be used as a basis for an agreement between a client and a contractor. The case study conducted by construction’s leading web magazine (building.co.uk) showed that the use of the right contract often leads to more cost effective and efficient procurement for any company.

In addition to this using the appropriate contract such as JCT or NEC enhances long term benefits of the company and allows for a collective approach to procurement methods; choices of contract and dealing with disputes within construction, resulting in significant contribution to process of acquiring and or projects.

WHAT IS JCT DESIGN AND BUILD and JCT CONSTRUCTING EXCELLENCE

Hemsley (2006) described the CE as “a radical, brave…brainchild of the JCT…and a partnering contract with a difference”. This contract is split into two sections. The first part is the contract itself, which is a single contract that is used for all relationships on a project. It applies to clients, main suppliers, sub suppliers and consultants.

The second part of this CE contract is centred on the functions of the project team agreement. This is an optional multiparty contract for the core project team that is an addition to the CE contracts. This means that the contract allows for partnering. This occurs when the client, the supplier and supply chain, commit to work together with greater communication and a shred consensus.

DB contracts on the other hand are standard terms for a number of procurement strategies where the supplier both designs and carries out the works. Ramus (2006) states the DB contract is one intended for use where the supplier is responsible for the design and construction of a project offering similar content and complexity as that of the other JCT Standard Building Contracts.

The contract is quite flexible as it accommodates the needs of both private and government clients, moreover it allows for a client input in regard to design up to the tender stages of a project. Many Design and Build contracts in essence still use similar blueprints to that of the traditional procurement route rather than actual DB procurement methods. Novation is common with the design and build contract, this whereby the employer relinquishes some control over design. The employer will rarely use design and build in its purest form and will instead specify his needs in considerable detail in the employer’s requirements.

To assist with the preparation of employer’s requirements, the employer will appoint a design team prior to the appointment of the contractor. The illustration below identifies the contractual arrangements between a typical traditional arrangement and the new JCT CE contract.

Novation

COMPARISON BETWEEN JCT DB and JCT CE

Payment Options

Both the JCT CE and DB use the contract sum or lump sum payment option, it comprises of payments being made when agreed targets are achieved throughout the duration of the project. In this case using a lump sum contract would be ideal because it is suitable for use where the scope and schedule of the project are sufficiently defined.

The contract sum option enables all the parties to the contract to have a clear picture of what their particular obligations are. The clauses relating to the contract sum option in the JCT CE are 7.16 to 7.29. In JCT DB contract sums are dealt with in clause 4.1. The main benefits of this type of payment option are that it will give the supplier motivation to finish each stage on time otherwise he will not receive the full payment.

A further benefit of lump sum contracts is that in the eyes on the client the contractor assumes all cost risks. If the contractor had the choice of using the contract sum option the contractor will want to complete the project on time.

There is another payment option available for JCT CE contract and it is target cost. This type of payment options involves monthly payments; it is designed to keep the project on budget. Applying such a payment option in my opinion will be suitable where projects have short term contract. Two major weaknesses of target contracts are the lack of knowledge of financial commitment by the Employer and lack of incentive for the Supplier to control costs

Risk

The approach to risk management differs extensively between the two contracts; this is because in the JCT DB the procedures of managing risk are determined by provisions within the contract such as collateral warranties and variations. Alternatively the JCT CE contract has a unique way of dealing with risks. The main purchaser of the project must ensure that each project-specific risk is identified and recorded in a risk register. Furthermore the purchaser should asses the risks included in the initial contract sum and any external risks that will impact on that contract sum.

The contract must state who is responsible for managing such risks likewise stating how the financial and time penalties are sanctioned. Any such provisions should be agreed between the purchaser and supplier and stated in risk allocation schedule. The illustration below is an example of a risk allocation schedule.

HOWE (2008)

There are two types of risk allocation schedules in the JCT CE, schedule A identifies the risks individually and as a consequence of this, these risks are dealt in a similar fashion. Schedule B identifies each risk but the allocation of costs is not treated as an individual case but as a total. In schedule A the percentage allocation between the purchaser and supplier varies depending on the scope of the risk as opposed to risk schedule B whereby the percentage will always remain constant regardless of extent of risk identified.

In order to have a comprehensive risk allocation schedule all risks must be logged into the risk register and include the agreed amount of remuneration for each risk as well as that there should be a provision for the days the supplier is liable for as a consequence of any penalties incurred. If the costs of risks do not exceed the amount included in the contract sum then the contract sum will be adjusted accordingly.

The main benefit of a having a risk schedule is that it gives clear indication of responsibility in relation to the cost and time consequences for parties to the contract. For instance in the event of a sub-supplier goes into liquidation, the main supplier will be liable because the contractual relationship is between them and the sub-supplier least the client.

Another instance where responsibility can be inferred as the responsibility of the other party is when for example the purchaser changes design specifications of the project. However there a circumstances where the risk responsibility can be not be attributed to any of the parties in the contract such occasions include floods, heavy snow and vandalism.

Where a risk is not included in the risk allocation schedule, it will be classed as a ‘relief event’. This will mean that its time and financial consequences will be shared evenly between the purchaser and the supplier unless the contract state otherwise. Some of the relief events are listed below;

variations

breaches

risks referred to under the risk allocation schedule not allocated to

risks which were not foreseen, and beyond the reasonable control of

Retention vs. Partnering

Retention is a common contractual practice within the construction industry, it usually involves to withholding a small proportion of payments to a contractor until the work has been completed satisfactorily. Most JCT standard forms of contract in the construction industry have some arrangement for the provision of retention.

As with all issues like this, the starting point is to look at the contract and find out what it actually says. Chappell, Smith (2007) states JCT DB clause 30.2A.1 to 30.2A.4 expressly specifies the amounts subject to retention, as well as those not subject to retention. Moreover these clauses also elaborate on amounts to be deducted from retention due. These amounts are usually deducted from each interim certificate and the default figure is 3% or 5% respectively. The retention fund is available to the employer for the purposes of reinforcing committed performances from contractors, in particular rectification of any defects in the works appearing during the defects liability period.

In contrast to this retention does not exist under JCT CE this might be a potential problem however partnering is used as an alternative. It is used because according to the CE partnering “promotes improved performance through collaborative business relationships based on best value rather than lowest cost”. Partnering can either be project specific, where the arrangement is for the duration of an individual project or long-term partnering over a specified period of time, normally covering a numerous projects. Long-term partnering usually provides greater opportunity for improvement in relationships and trust.

The partnering arrangement requires very careful planning at the contract formation stage before the parties undertake the partnering exercise. Such a relationship is somewhat innovative in construction because it diverts from competitive tendering to a more cohesive arrangement. Partnering is only appropriate if the parties who enter into the contract are trustworthy.

Comparison of Level of Detail and Ease of Use

Many JCT contracts need to be understood from the point of view of contractor, contract administrator, and client. Differing levels of sophistication and details are evident and need to be understood before selecting a contract. When comparing the two contracts it is clear that JCT DB offers a more detail in terms of legal precedence, uses and dispute resolution mechanisms. A good example is in the case of Henry Boot v Co-op (2003), because the ruling showed that the contractor’s responsibility was not limited to completing the design but extended to overall responsibility for prior design work.

The main question that arises from this ruling was whether it is fair to impose such terms on the contractor. It is because of this that changes were implemented to contractor responsibility. New amendments to JCT DB mean that a contractor is no longer responsible for early design errors before he became involved.  With that one change the whole concept of single point responsibility becomes irrelevant. Furthermore there have been revisions to the JCT DB in three core areas of the contract and these changes are highly significant. It is because these changes influence the politics and the operation of the contract.

Even though JCT CE has no judicial precedent as it is fairly new to construction it has within it mechanism to deal with any problems that arise. For example the Overriding Principle allows for the purchaser and supplier to work together with other project participants in a co-operative and collaborative manner in good faith and in the spirit of mutual trust and respect. There is an understanding within this Overriding Principle, which heralds it above all the other contractual requirements. In the event of a dispute, any court or adjudicator to which the disagreement is conferred shall take into account this understanding and the parties’ commitment to the agreement when making any award.

BENEFITS AND LIMITATIONS OF JCT CONTRACTS

JCT DB

Disadvantages

Employer will have less control than traditional system

Lack of flexibility because any changes in the employer requirements, results in claims for extensions of time and direct loss and or expense.

Any requirements stated by the employer have to be very accurate because badly assembled Requirements will result in Contractor`s Proposals which do not satisfy the employer

The quality of design may not be as good as a building produced in the traditional fashion.

Advantages

Procurement time is significantly reduced compared to traditional methods

The client can refer to a single point responsibility throughout the procurement process and after construction is complete if there are any underlying problems.

The contractor undertakes that the finished building will be fit for its purpose.

The extent to which design of a building simplifies construction, and time taken to realise the general provisions for the completed building are realised quicker.

There are likely to be fewer claims, since the main causes claims are mainly under the control of the contractor.

Disadvantages

Risk of increased administration as a consequence of unequal amount of time spent in consultations.

May prevent a client from considering other opportunities.

Clients also need to ensure that contractual documentation is comprehensive and consistent.

Advantages

The JCT CE is simple and easy to understand and use.

Improves cash flow with greater efficiency and cost effectiveness.

An increased opportunity for innovation, continuous improvement of quality services, reduced delivery time and increased safety.

Eliminate disputes and lead to stronger relationships with key s, resulting in the opportunity for future work.JCT CE

CONCLUSION AND RECOMMENDATIONS

I would recommend that for this project it would be in the client’s best interests to use the JCT CE contract. Primarily I will elaborate on why I would not choose JCT DB for this project. The JCT DB follows a collective blueprint within most of the JCT contract series; as a consequence of this it does not offer any dynamic approaches to construction procurement. This means that modern day clients and project teams have to revert to traditional methods of procurement which are not favourable in an industry that demands innovation and forward thinking. As well as that the JCT DB is still very complex, and consequently due to this complex nature, simplicity is absent resulting in excess demand on all stakeholders to projects.

The JCT CE was described by Hemsley (2006) as ‘a granny turning up to party sporting an eyebrow piercing, dreadlocks and a spliff ’, there is no doubt that in that instance the writer imagined JCT CE as a document that was brought in to transform an already ancient contractual system. On the face of it, that seems excessively radical, but the JCT CE asserts itself to being JCT’s first specially drafted “partnering” contract, which sets it apart from the others in the family. Additionally the contract is written in plain simple English which eliminates the unnecessary jargon of contracts, resulting in simplified application and use of the contract.

The contract also introduces the concept of a “project team”. This team will typically comprise the Purchaser, lead designer, lead supplier, therefore this allows for committed and robust project management to maximise efficiency. Moreover any other suppliers considered to be of importance to the project will be working together with a trusted partner, collaboratively in order to deliver successful projects.

Regardless of JCT CE suitability for every project, I am satisfied that it is appropriate for this individual project. It offers an alternative arrangement that will meet the project needs furthermore birthing potential long-term relationships. In summary, the following are the most important benefits of the JCT CE

Encourages collaborative behaviour

Usable throughout the supply chain

Utilises a risk register and risk allocation schedules

Meets the needs of clients who wish to partner with suppliers

Alternative payment regimes i.e. target cost and lump sum