Property Entrepreneurs

FAQs - Construction projects for employers – getting started

Building contracts

What form of building contract should I use?

A contract between you, as the employer, and your building contractor does not need to be in writing and signed in order to be binding. If you have a dispute with your building contractor, your contract will determine your position so it is prudent to have your agreed terms clearly set out and evidenced in writing.

In the UK, the most commonly used standard form contracts are those produced by the Joint Contractors Tribunal (JCT).  The JCT’s latest suite of contracts was produced in 2011 to coincide with the introduction of changes to key construction legislation.  The earlier forms of JCT contracts are no longer compliant with legislation and should not be used.

The two main forms in use (both published by the JCT) are the “standard” form, where design is provided by the architect and the design and build (D&B) form where the design is provided by the contractor. The most suitable JCT contract for your project will depend on the value and nature of the works being undertaken.

Standard form contracts generally cover conventional situations.  If different commercial conditions apply, for example, if you want to achieve a single point design responsibility (see below) you may want to consider using a schedule of amendments to modify the terms and ensure that risk is properly allocated.

Does it matter how I execute a building contract?

Yes.  A contract can be executed either under hand or as a deed.  There are advantages to executing a contract as a deed, most notably, that the limitation period for starting legal proceedings for a breach of contract will be 12 years instead of six years.

Can I create a single point of responsibility for the design and construction of the works?

In any project, it is common for employers to first engage a design team, normally an architect, structural engineer, and mechanical and electrical engineer.  In a design and build project, the design team will create a brief known as the employer’s requirements before the employer goes out to tender to find a suitable building contractor.

Once the contractor has been selected, the employer will by agreement novate its rights and responsibilities under the design team appointments to the building contractor.  This is achieved by using a deed of novation and will, in effect, create a single point of responsibility because the contractor will have recourse to the design team for design errors which the contractor is liable for under the design and build contract.

If this approach is to be used, certain amendments need to be made to the standard JCT forms of building contract and also to the design team’s appointments.

Will there be any consequences if I make changes to the design and/or works during a project?

Depending of the form of building contract used, variations made by you, as the employer, to the scope of work are likely to attract certain cost and time consequences.

What can I do if the contractor is late in completing the works?

You should include a provision in your standard building contracts which entitles you to liquidated and ascertained damages (LADs) in the event of a contractor delay.  LADs are a sum of money stated to be payable, without proof of loss, in the event that the contractor fails to complete the works by the specified completion date.  They are usually specified as a daily or weekly rate and should be a genuine pre-estimate of the losses you will suffer as a consequence of the delay.

Some contracts also entitle you to terminate the building contract if the contractor fails to proceed regularly and diligently with the works although this can be difficult to establish.

Professional team

Who are the professional team?

If you are undertaking a construction project, it is very likely that either you or your contractor will want to appoint some professional advisors/consultants.  These consultants may include an architect, structural engineer, mechanical and electrical engineer, project manager, quantity surveyor and/or CDM co-ordinator to advise on health and safety issues but the team will vary depending on the nature of the project.

What form of contract should I use for a member of the professional team?

We often use bespoke forms of professional appointment as the standard industry forms available (RIBA, RICS) are consultant-friendly and contain various limitations on liability which we would advise against.

Collateral warranties

What is a collateral warranty?

This is an agreement conferring direct rights in respect of duties owed by a contractor or consultant to his client under the building contract or appointment between them on a third party such as a funder, purchaser or tenant.  In addition to an undertaking to carry out their services/works with reasonable skill and care, collateral warranties also commonly include other matters such as copyright licence provisions, insurance obligations and so on.  Collateral warranties to funders and purchaser may include step-in rights to enable the third party to take over the building contract or appointment in the event of the client’s default.

Why are collateral warranties needed?

If a funder, purchaser or tenant suffers a loss caused by one of the project team -  normally resulting from defects in the works - a collateral warranty will allow that party (the beneficiary) to make a contractual claim against the responsible party.  Without collateral warranties those third parties are unlikely to be able to recover their losses.

Who should provide collateral warranties to these third parties?

Usually the building contractor, consultants and any design sub-contractors will provide the collateral warranty although the precise requirements will vary from party to party.

How can I ensure my contractor and consultants provide collateral warranties?

You should ensure that the parties involved in your project have contracts or appointments which include an obligation to provide collateral warranties to the third parties that require or may require them.  Collateral warranties should be signed by the contractor or consultant when their contract is signed and before any payment under that contract is made, unless the beneficiary is not known at that time.

Insurances

What is all risks insurance?

This is insurance against the risk of loss or damage to work and materials during construction.  It is usually maintained by the contractor in the case of new buildings and the employer in respect of works to existing buildings.  There is an increasing trend for all risks cover to be taken out by the employer.

What is latent defects insurance?

This insurance protects building owners and tenants against the risk of damage to the structure and weathershield envelope of a building.  The insurance will usually commence at practical completion and remain in place for 10 years.  Such insurance is intended to provide cover for the cost of repairing specified defects without the need to prove fault.  Well known latent defects policy providers including NHBC, Premier Guarantee and Zurich.

What is professional indemnity insurance?

This insurance covers the risk of negligence in the performance of professional activities such as the design and management of the construction process.  It will generally only respond where the relevant party has failed to exercise reasonable skill and care, i.e. has been negligent.

Contracts and collateral warranties usually contain obligations for professional indemnity insurance to be held from commencement of the works/services until 12 years after practical completion.

Professional indemnity insurance is usually required from the professional consultants, a building contractor with design responsibility and any sub-contractor who is carrying out design.

What is public liability insurance?

Your building contract should require your contractor to hold public liability insurance for the duration of the works.  It covers liability arising from the death or personal injury to third parties other than the insured’s own employees, and from damage to property, other than the works, caused by the contractor.

What is employer’s liability insurance?

Your contractor should hold employer’s liability insurance for the duration of the works as it is a statutory requirement to do so.  It covers liability for injury or disease to employees which arises as a result of their employment.

Funder requirements

If you are obtaining third party funding for your project, it is likely that you will have to provide construction security documentation prior to draw down. 

What do funders usually expect?

  • To approve the draft building contract, professional appointments and design sub-contracts and to be provided with certified copies of the same once executed
  • to approve the form of any performance bond (and any proposed surety) and be provided with a certified copy following execution
  • to be provided with collateral warranties, in an approved form, from the consultants, building contractor and any sub-contractors with design responsibility
  • to take a security assignment of the building contract and any performance bond
  • to be provided with evidence that all of the relevant insurances are in place.

Key legislation

What are the Construction (Design and Management) Regulations 2007?

These are commonly known as the CDM Regulations and were introduced to improve the management of health and safety on construction projects and to ensure the parties to the process have regard to potential health and safety risks arising out of their design.

Where a project is notifiable, the CDM Regulations oblige the client, amongst other things, to appoint a CDM Co-ordinator and Principal Contractor and to prepare a construction phase plan (health and safety file) in respect of each project. There are criminal sanctions for breach of the CDM Regulations.

Do the CDM Regulations apply to all projects?

Yes, and there are additional duties if the project is notifiable.  A project is notifiable if it involves more than 30 days or 500 man days of construction work.

What is the Construction Act?

This is the short reference to Part II of the Housing Grants, Construction and Regeneration Act 1996. It contains statutory provisions about payment and adjudication which, if not written into a construction contract, will be implied into the contract in the form set out in the Scheme for Construction Contracts.

Disputes

What are the main methods of resolving construction disputes?

Construction disputes are usually resolved through litigation in the courts, arbitration or adjudication.

What is arbitration?

Arbitration is a form of dispute resolution which is available to the parties if there is an arbitration clause in their contract or if the parties subsequently agree to it.  The parties have more scope to agree the arbitrator, where the dispute is heard, and the rules which govern the process but the decision made by the arbitrator is still final and binding.  One of the main benefits of arbitration is that the decision is confidential.  Arbitration can be just as lengthy and costly as litigation.

What is adjudication?

This is an interim process usually lasting 28 days from start to finish which is intended to provide a rapid resolution of disputes arising at any time during the construction process. The Construction Act introduced the statutory right for construction-related disputes to be referred to adjudication.  Decisions are enforceable but non-binding as they can be overturned by a decision in the courts.

Penningtons Manches Cooper LLP

Penningtons Manches Cooper LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority.

Penningtons Manches Cooper LLP