Construction update

Property lawyers, commercial lawyers and others sometimes look at issues relating to building contracts. You don’t need to fully understand or advise on them if you’re not a construction lawyer, but a bit of background understanding and a few definitions will help.

Adjudication: a quick (28-day) dispute resolution procedure imposed on a variety of construction related contracts by the Construction Act. Decisions are binding and can be enforced immediately but can be overturned later if the dispute is taken to court or to arbitration.

Bill of quantities: a list of the materials and types of labour and the quantities of them that are expected to be used in constructing a building.
The contractor will put prices against each item. If the building design changes, it can be used to calculate the correct adjustment to the price. Also forms the basis of remeasured contracts.

CDM regulations: ensure that building designs and the construction process take account of health and safety issues. They require a CDM coordinator to manage health and safety issues, and produce a health and safety file for the building, containing information to help others working on the building in the future do so safely.

Collateral warranty: direct contract between people who would not otherwise be in contract,
so one can sue the other for defective or negligent work. For example, between an employer and
a sub-contractor.

Construction Act: The Housing Grants, Construction and Regeneration Act 1996,
which requires construction-related contracts (including consultant appointments) to contain particular obligations and mechanisms relating
to payment and a right to adjudication. The Act implies such things into contracts that do not contain them expressly.

Contractor’s designed portion: where the contractor is responsible for a small portion of the design of a building (for example, the air conditioning) but is not responsible for the rest.

The building contract will contain a number
of clauses imposing design duties on the contractor, which relate only to the contractor’s designed portion.

Design and build (D&B) contract: under which the contractor is responsible for designing the building as well as building it. The contractor usually appoints an architect, engineer, etc to do design but some can do it in-house. The JCT (Joint Contracts Tribunal) D&B contract is the one you are most likely to come across.

Usually, brief employer’s requirements explain roughly what they are after. The contractor then produces their more detailed contractor’s proposals saying how they propose to meet
those requirements.

The contractor starts on site and the detailed design is completed as the building is being built, but has to comply with the original employer’s requirements and contractor’s proposals.

Sometimes designers originally appointed by the employer produce very detailed employer’s requirements and are then novated to work for
the contractor, so that the contractor can take responsibility for the design work in the
employer’s requirements and have total design responsibility (in these cases, standard contracts are heavily amended).

Extension of time: if events happen that delay building work, whether the fault of the employer
or nobody, the contractor will be given an extension of time for completion. Standard building contracts list the relevant events but employers often delete some of them to transfer the risk of them to
the contractor.

Liquidated damages: the sum payable by the contractor if the building is not practically complete on the date it should have been. Usually expressed as an amount per week, but of course must not
be a penalty.

Loss and expense: if the building works are delayed or disrupted in some way that is not the contractor’s fault, they will have staff, plant and equipment on site for longer and may suffer other losses and expenses.

Standard building contracts entitle them to claim these amounts from the employer under the heading ‘loss and expense’. The list of events entitling the contractor to claim this is usually shorter than the list of events entitling them to
an extension of time.

Making good: a certificate or statement given at the end of the rectification period to confirm that the contractor has rectified all defects notified to them. Once issued, the contractor is not obliged to rectify any fresh defects that may appear (but they can still be sued for damages in relation
to them).

NEC3: a form of contract produced in response
to government reports, with the intention of providing an alternative to the normal methods
of procuring construction in the UK. It requires
the construction project to be run and resourced in a different way from the norm; it is not just an alternative form of legal contract.

It contains core clauses then a huge variety of optional clauses to make it design and build or traditional, a target cost contract, a cost-plus contract, a lump-sum contract, etc. Its use is increasing but it is still not common.

Partial possession: where the employer takes over part of the building before the whole of the works have been finished, notwithstanding that the contract does not provide for that part to be treated as a separate section.

This can usually only be done with the contractor’s consent. The rectification period begins to run in respect of the part taken into the employer’s possession from the date that possession is taken.

‘Pay less’ notice: the Construction Act requires this to be served within a given period if any right of withholding, set-off or counterclaim is to be exercised in respect of a payment due under a construction-related contract. If not served in time, the payment must be made gross and the payer must then sue the payee to recover the disputed sum.

Practical completion (PC): the point at which a building is finished for all practical purposes. There may be minor defects but the employer can start to use the building and the minor defects will be sorted out during the rectification period. The term is not usually clearly defined in building contracts – it is left to the surveyor or architect administering the contract to decide when this point has been reached. When reached, a certificate or statement is issued accordingly (the term ‘certificate’ is usually used in traditional contracts and ‘statement’ in D&B contracts).

Rectification period: a period after practical completion, usually 12 months. If any defects
are found in the building during this period, the contractor is obliged (and entitled) to return to rectify them.

Remeasured contract: a traditional contract that includes a bill of quantities and provides that at the end of the job, the amount of work and materials actually used is measured, compared with what the bill of quantities assumed would be used, and the price is adjusted accordingly.

Retention: a percentage (usually 3 or 5 per cent) held back from monies otherwise due to the contractor as building work progresses. Half is released to the contractor on practical completion and the other half on completion of making good. The employer can use it to pay for remedying minor defects if the contractor fails to do so.

Sectional completion: building works can be divided, at the outset, into ‘sections’, which are described in the contract. Separate starting and completion dates can be given for each section. The rectification period begins to run in relation to each section as soon as it is practically complete, notwithstanding that the contractor is still on site building other sections.

Snagging list: a list of minor defects to be rectified by the contractor during the rectification period. It may be attached to the practical completion certificate or statement and will be updated as minor defects come to light.

Traditional contract: a building contract under which the contractor is not responsible for design. The employer’s architect and other designers produce designs that the contractor prices and builds. If there are any grey areas, the employer’s architect tells the contractor what to do. The JCT traditional contracts often contain optional clauses allowing for a contractor’s designed portion. Traditional contracts may be fixed price or remeasured or a mixture of both. SJ

Chris Holwell is a construction and engineering partner at Freeth Cartwright