Which building contract?
Understanding basic construction contract structures will enable non-construction lawyers to ensure a fit with the rest of the project's legal framework, explains Chris Holwell
‘We’ll need a building contract,’ '¨is something often said by developers and property lawyers at some point in the early stages of a project. Indeed you will, but what sort of building contract? ‘A JCT, I expect’ – you may well be right, but there are more than 20 different types of Joint Contracts Tribunal building contract, '¨to say nothing of the myriad different forms of building contract published by other bodies, '¨so how do you choose and what are the key differences?
You could leave it to the architect or quantity surveyor but surely a solicitor should have at least some idea of the issues which will be relevant to the decision, if only to ensure the architect or quantity surveyor are properly briefed on the requirements of the legal structure of the project and don’t choose a building contract which is incompatible with it. Ideally of course the client should be advised by a specialist construction lawyer, but this article isn’t aiming to turn every reader into a specialist, just to give a briefing on the main issues to consider.
The traditional building contract obliges the contractor to build what he’s told to build by '¨the ‘employer’s’ designers – the contractor has '¨no design responsibility.
He may be paid on the basis of a list of fixed prices for particular materials or types of work. The list is called a ‘bill of quantities’ and is produced by a quantity surveyor reviewing the designs before the job starts and working out roughly how many bricks, how many metres of plastering, etc., are required. The contractor puts rates and prices against each item in the list and the contract is then signed.
The quantities of materials and work actually used are measured as the project is carried out '¨and the contractor is paid for what is actually used, using the rates and prices in the bill of quantities. Therefore the final price for the job is not known for sure at the outset, but if the quantity surveyor has done his job the final price should be pretty close to the total of the priced bill of quantities.
Alternatively, there may be no bill of quantities, but a fixed price for the job. The contractor '¨will offer his fixed price during the contract negotiations based on his own assessment of what work and materials will be required, but of course he will include a risk allowance for the fact that he is offering a fixed price.
Whether the contractor is paid on the basis of a bill of quantities or a lump sum price is rather like whether a solicitor is paid on the basis of hourly rates against a detailed estimate or a fixed price.
Sometimes the contractor may be asked to take design responsibility for certain discrete parts '¨of the job. The most common area for this is in relation to the mechanical and electrical services such as heating, lighting, etc.
In such cases, the employer’s mechanical and electrical engineer will produce a performance specification (e.g. the heating system must achieve 21 degrees inside when it’s -5 degrees outside) and the contractor will engage a specialist heating sub-contractor to design and install a heating system to comply with this.
Design and build
Sometimes the contractor may be asked to be responsible for the whole design of the building. '¨In such cases the employer simply sets out his ‘employer’s requirements’ for the building, which may be no more than ‘I want a 50,000 square foot warehouse with 5,000 square feet of offices and the chairman’s office must be a corner one with oak panelling’. Bidding contractors then respond with their ‘contractor’s proposals’, showing in general terms what their proposed design for the building will look like.
The employer selects the set of proposals which he likes best and the contract is signed, with the employer’s requirements and contractor’s proposals being the only description of what is to be built, and for a fixed price. The contractor then has to design and build a finished building which complies with the employer’s requirements '¨and contractor’s proposals. The contractor is responsible for everything (except whether the employer’s requirements actually show what the employer wants – if he should have asked for 7,000 square feet of offices not 5,000, then of course that’s the employer’s problem).
Since there is no detailed design or specification, the risk is that the contractor supplies the cheapest version of everything. '¨The chairman’s oak panelling may be very plain and not of the quality he was hoping for.
An advantage of design and build is that if a problem is found, the employer only has the contractor to sue. Under the traditional building contract structure, if a problem arises then the contractor says it was due to bad design by the engineer, the engineer says it was bad workmanship by the contractor or it was the architect’s failure to integrate the engineer’s design properly with the architectural design, and the employer ends up having to sue everyone – a complete mess.
The employer ideally wants the advantage of the traditional approach in terms of being able to specify exactly what is required as to quality for all of the parts of the building which matter to the employer, plus the advantage of design and build in terms of a single point of responsibility for both design and construction. To achieve this, employers sometimes:
Engage the design team themselves, to get the design and specification developed so '¨it includes everything the employer wants '¨in terms of detail and quality;
Include that detailed design and specification in the employer’s requirements;
Appoint the contractor on a design and build basis, but amend the contract to make it '¨clear that the contractor is responsible for '¨all of the detailed design which is now in the employer’s requirements; and
Novate the designers’ appointments to the contractor, so the designers who produced all of the detail in the employer’s requirements are now liable to the contractor for it – this is what enables the contractor to be willing to take responsibility for all of this detailed design.
Standard design and build contracts don’t cater for this novation approach, so lawyers have to amend them to achieve this.
JCT and many other forms of contract have ‘baby’ versions, typically called ‘minor works’, and some have “intermediate” versions too. These are shorter and simpler versions of the main contracts and are suitable for works which are simpler '¨and/or lower value.
Painting the Forth Bridge may be a high-value job, but it’s a simple process so a minor works contract may be entirely suitable for it. '¨A single-storey building to house spent nuclear fuel rods may be a low-value job, but a full contract with all of the ‘bells and whistles’ may be appropriate. It’s normally a case of balancing simplicity of work and value to decide whether to use one of these cut-down contracts.
Plant and machinery
If the contract is simply for installing plant and machinery (whether it’s a production line or just a new air conditioning system), then it is certainly worth considering one of the many ‘process plant’ type contracts which are available.
These typically have structures similar to the building contracts mentioned previously, but also have provisions for testing and commissioning (e.g. factory tests before the item is delivered, tests on delivery to site, tests on installation and handover, and post-handover tests when the machinery is actually in live operation). There may be provisions for liquidated damages for performance which is below target but still acceptable.
These contracts were created as a result of the UK government commissioning reports into why the construction industry seemed to be dysfunctional in some respects. The overall thrust of the reports was that the industry organised itself in the wrong way and should do things in a significantly different manner. NEC3 contracts therefore require the employer, contractor, designers, and project manager to work in significantly differently to how the UK construction industry normally operates.
In other words, they are not just an alternative form of legal contract, but they encapsulate and require a different way of delivering a construction project. Everyone involved in the project needs '¨to be willing to work in this way if one of these contracts is to be used. If a party just works as '¨they would normally, they will find themselves '¨in breach of contract. Using one of these contracts is therefore definitely not a lawyer decision but a construction team decision.
Chris Holwell is a partner at Freeths