Standard Forms of Construction Contracts

Construction contracts are of a complex nature and are included among the few types of contracts which have to be in writing. According to section 104 of Housing Grants, Construction and Regeneration Act 1996 (HGCRA 1996), a construction contract is an agreement with a person to carry out or arrange for carrying out of construction operation, or providing for his own labour. Agreements to do architectural, design or surveying works and agreements to provide consultancy in construction related fields are also included under construction contracts (Construction Law, 1999). Traditionally contracts are negotiated between the parties to carry out each project separately. But to make the industry more efficient, standard form of contracts were introduced. Some of the standard form of contracts includes the contracts by Joint Contracts Tribunal (JCT contracts) and the contracts by Institute of Civil Engineers (ICE contracts). But New Engineering Contracts (NEC contracts) were introduced later and this form of standard contracts are more commonly being used now.

Traditionally a separate contract is formed between the designer and client and the constructor and client, making it difficult for the designer to alter the design, even if the need for it arises during construction period. An alteration would be possible only by changing the contract between client and the contractor (Construction UK – Introduction to the Industry, 2008). This is dealt with in standard form of contracts by providing for variations in the contract (Construction Law, 1999). Nowadays standard construction contracts are more often used which applies procurement method to resolve such conflict between design and workmanship (Construction Contract Law, 2007). This also saves drafting time and negotiating time for both parties and makes tender comparisons easier, as the risk allocation is same for each tenderer (JCT Standard building contract with quantities 2005). In standard form of contracts, risks are distributed equitably. This is not the case with most of the individually negotiated contracts, where there is the risk of one party being more exposed to the risks compared to the other(s). There is also the possibility of a third party, which do not have any direct contract with the client, being exposed to risks due to unreasonable clauses in contract as in the case of Smith v Eric S Bush [1990] 1 AC 831 (Wikipedia (a)). There was no contract between Mrs. Smith and Mr. Eric S Bush. In addition to this, the contract between Mrs. Smith and the mortgage company has a clause excluding the surveyor (Mr. Eric S Bush) from liability. But the House of Lords held Mr. Eric S Bush liable for professional negligence on the basis that the clause was unreasonable under “Unfair Contract Terms Act 1977″ (e-lawresources website).

Another advantage of standard form of contracts is that they seek to ensure certainty for clients in terms of time and cost. This could prevent the client from unexpected financial losses. One such loss is illustrated by Holyrood construction project in Scotland where the initial estimated cost was £40million. But the cost at the end of the project was £431million and the project was delayed by more than two years (Tony Bingham’s website). Lord Peter Fraser, in his inquiry report about this matter had concluded that “The selection of Construction Management was the single factor to which most of the misfortunes that have befallen the Project can be attributed.” This method of contracting was chosen to speed up the project, but as can be clearly seen this objective was not achieved. Lord Peter Fraser was of the opinion that a better procurement method with fewer risks should have been used in this project (Holyrood inquiry website). NEC and ICE contracts seek to avoid such risks to the clients.

Unlike most of the traditional form of contracts, NEC and ICE contracts provide the client with certainty in time and cost. To encourage the contractors to deliver project on time, ICE states that a contractor’s programme should be submitted to the employer and to provide the client with certainty in cost, ICE contract payments are made on lump sum basis where the pricing is determined by engineer, based on tender pricing structure in contract. Any change in payment due to delay would be dealt with as a separate issue. In addition, the 7th edition of ICE contracts includes a provision for engineer to request an all inclusive quotation from the contractor before the work is ordered. NEC contracts offer six different payment options, each with their own financial risks considerations and incentives. The priced contract with activity schedule encourages the contractor to finish the project on time while the priced contract with bill of quantities encourages the contractor to keep within the tendered prices. Target contract with activity schedule and target contract with bill of quantities encourage co-operation between contractor and employer, to minimise the cost of the project. However the cost at the end of the project is uncertain in both cost reimbursable contract and management contract (NEC Compared and Contrasted: Chapter2). But if used with proper procurement procedures, there is little risk of the cost at the end of the projects, being very much higher than estimated cost at the beginning. All these procedures in NEC and ICE contracts help to provide the client with certainty in time and cost.

Even though NEC and ICE contracts have introduced procedures to encourage the contractors to deliver projects on time, delays are unavoidable due to the nature of the industry. Therefore clauses are included in both types of contracts to deal with delay and payment due to delay. NEC has early warning procedure to deal with any delay in completion and any increase in prices due to a compensation event. If the contractor calls for a meeting regarding such a matter, client would be obliged to attend and discuss it to find a solution together (NEC Compared and Contrasted: Chapter 2). However, if the contractor did not notify of the compensation development within eight weeks of becoming aware of it, he is not entitled to a change in the prices, the completion date or a key date. The only exception is when the project manager fails to notify such an event to the contractor when he should have done so (NEC3 Engineering and Construction Contract). ICE contracts require updating of contractor’s programme if it becomes unrepresentative of the actual progress. If the issue of additional payment due to delays caused by adverse physical conditions or artificial obstructions arises, the contractor should inform the client’s representative in writing, specifying the condition or obstruction related to the claim. If the delay and additional payment is reasonable, the contractor is entitled to the payment and extension of time (ICE Design and Construct Conditions of Contract – 1st and 2nd editions compared: clause 12).

A good construction contract should have dispute resolution procedures set out in the contract. In the report, “Constructing the Team”, (Latham’s report 1994), prepared by Sir Michael Latham, to improve the efficiency of construction industry, he has stated that adjudication should be the normal procedure of dispute resolution (Wikipedia online (b)). The section 108 of HGCRA 1996 also provides adjudication as the first step of dispute resolution procedure. Therefore an adjudicator is appointed in NEC contracts at the beginning. If a dispute arises, it is referred to the adjudicator. If one party is dissatisfied with adjudicator’s decision, they should notify the other party of their intention to refer the dispute to tribunal where the dispute would be solved by arbitration. If the dissatisfied party does not notify the other party of its intention to refer the dispute to tribunal within four weeks of receiving adjudicator’s decision, they no longer can refer it to tribunal and hence would be obliged to act according to adjudicator’s decision (Disputes and Termination clause of NEC3 Engineering and Construction Contract). Under ICE contracts, if a dispute arises seek the agreement of other party to consider the dispute under “The Institution of Civil Engineers’ Conciliation procedure 1999″ and thus resolve it. If the parties were unable to resolve the dispute in this way, a notice to refer the dispute to adjudicator or arbitrator has to be served within a month after the receipt of the recommendation by dissenting party. The adjudicator should make a decision within 28 days unless both parties agree to an extension up to 14 days to this period. The adjudicator’s decision becomes enforceable unless one of the parties decides to refer it to arbitration. If so the other party must be served the notice within three months of adjudicator’s decision. If the party fails to do so, the adjudicator’s decision becomes the final decision; otherwise the arbitrator’s decision is deemed to be the final decision (Clause 66 of ICE contract).

Even though NEC contracts are introduced much later than ICE contracts, NEC contracts have several advantages over ICE contracts. Some of these advantages include flexibility, clarity and stimulus to good management (Engineering Project Management Forum website). Moreover NEC contracts offer different payment options with different risk considerations unlike ICE contracts. Furthermore NEC contracts are more of a partnering contract and delays, and increase in cost due to delays can be dealt by discussing the issue between the parties. However, in ICE, contractor’s schedule has to be changed if the work does not go according to the schedule. This sometime leads to delay and justification for extension of completion time (NEC Compared and Contrasted: Chapter 2). In addition to these advantages in NEC contracts, dispute resolution procedure is shorter and also quicker compared to ICE contracts. For these reasons, NEC contracts are more recommendable than ICE contracts, to carry out construction work.

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