Forms of Contract for Construction Work

Forms of Contract for Construction Work 1.0 Introduction The Scenario A leading manufacturer of confectionery in the UK suffered a devastating fire at their factory in Sheffield. Their insurers have authorised an immediate commencement of the rebuilding work and have been paying a sum of approximately  £1 5m. per month to the insured company as â€Å"Business Continuity† insurance to cover both loss of profit and to allow products to be imported from another country for packaging and sale. The factory site has been cleared using an enabling works contract and it has been decided that an experience single contractor, who is capable of undertaking this type of work would be appointed. It is now the responsibility of an experienced project manager to administer the rebuilding of the factory, which currently is thought to be in the region of  £60m worth. The time scale and who the project manager will use to achieve the delivery of the new building and process equipment to enable the manufacture of confectionery to re-start, including any trials, performance tests and commissioning at the earliest possible opportunity is for him/her to decide. On this account, time of completion and quality is the primary concern and cost is secondary, thus, a form of contract with a procurement route or strategy that would facilitate the construction of the rebuilding to start immediately, while all other preparations (e.g Engineering works) towards the building objective are going on, would be the appropriate or desired form of contract†. Chapter 2 2.0 Forms of contract Standard form of contract for the execution of work and the appointment of consultants are basically used in the construction, Engineering and processing industries. These contracts are prepared by one body in isolation or jointly prepared by bodies representing employers, consultants and contractors. Some of the forms of contracts by these bodies are: Joint contract Tribunal (JCT) forms of contract Engineering Contract (NEC 3) forms of contract Institute of Civil Engineers (ICE) forms of contract Association of Consultant Engineers (ACE) forms of contract Association of Consultant Architects (ACA) forms of contract General Condition/works forms of contact 2.1 Criteria for the Selection of Forms of Contract According to the office of building and development in Australia (1996), there are a variety of forms of contract and procurement route that are available for acquiring a new or rebuilding of building, facilities or infrastructure, which are basically determined by a number of criteria, which are: Type of client Level of involvement required by the client The project size and complexity Speed Time available for construction Risk allocation Approach to the design solution Cost certainty and method of financing the project Specialist input Capacity for variations Ability to change scope of work and Contract Administration Separation of design and management 2.2 Contract Types 2.2.1 Traditional Contract Traditional contracts are the type of contracts that separate the design from the construction stages with consultants leading on design and the contractor responsible for the construction execution. In this type of contracts, a consultant (an architect in most cases) acts on behalf of the client/employer as the contract administrator and most risks are passed to the contractors and sub-contractors. Traditional contracts embraced ‘sort it out latter mentality, where time, cost and other related problems are left to the end of the project, which often leads to dispute. Overlapping of design and construction stages in the traditional contract is not encouraged and there is wide criticism that traditional contracts polarise the parties resulting in extreme inefficiencies and encouraging dispute. However, it focuses on the clients main requirements of design control, time and cost certainty. Most of the JCT, ICE and General Conditions/work contract forms adopt the traditional contr act. According to Holt (2010), examples of traditional contracts include: JCT Standard Building Contract with Quantities JCT Intermediate contract JCT Minor Works Contract NEC Engineering and Construction Contract (option A and B fixed price) 2.2.2 Design and Build Contracts Design and Build contract is probably the recent form of procurement and it is available from most of the contract producing bodies (Keown 2010). In a design and build contract, the client employed consultant to prepare documents outlining his requirement in a form of a brief initial designed scheme (Employers Requirements). A single contractor is then appointed to deliver the designed scheme as required (contractors proposals) by employing his or her own design team and then carries out the execution of the work using both the employers requirements and the contractors proposals. The contractor could also engage the original consultant to complete the design through a novation agreement and term or use his own design team for the purpose, which would be verified by the clients design team. Under the design and build method, there is no independent contract administration rather the employer uses ‘employers agent to administer the contract. Examples of Design and Build proposed by Holt (2010) are: JCT Design and Build Contract The NEC Engineering and Construction Contract (ECC) -Target cost contract with Activity schedule or Bill of Quantities (Main option C). 2.2.3 Non-Traditional (Management) Contracts Non-traditional contracts such as management contracts are specialist forms of contract, where a specialist e.g management contractor or project manager manages the construction activities on behalf of the client/employer. It is suitable for large, complex and fast-track projects such as high-rise buildings. Management form of contract tends to solve the problems associated with traditional contracts by a means of collaborative working and trying to unite the various project participants in order to avoid polarisation. It claims to remove traditional contract inefficiencies and increase cost and time certainty. Construction procurement by management contract requires great care and high level of sophistication by employer and contractor. According to Keown (2010), advantages of using management contract include: It is a quick method of procuring a competitive tendered. It facilitates a quick start of construction activities on the site. Flexibility design activities can extend into the construction period. It gives the opportunity for changes in the scope of work. It avoids polarisation of parties by collaborative work. It encourages early contractor input on the programme, buildability and content of work contract packages. The employer/client has an opportunity to stop the project before proceeding to construction, for a set fee to the contractor. Examples of Non-traditional (management) contract proposed by Holt (2010) are: JCT Construction Management Appointment JCT Management Building Contract The NEC ECC, Management Contract main option F JCT Construction Excellence (CE) Chapter 3 3.0 Review of Different Forms of Contract The JCT, NEC3, ICE, and ACA forms of contract are intended to be reviewed for the selection of a suitable form of contract for the rebuilding of the confectionery factory. 3.1 Joint Contract Tribunal (JCT) 2005 JCT form of contract, which was formerly known as RIBA contract until 1977 was the first form of building contract agreed between architects and builders established in 1931 (Chappell, et al. 2001). The JCT now comprises professional bodies, which are: Royal Institute of Chartered Surveyors (RICS) Royal Institute of British Architects Scottish Building Contract Committee British Property Federation Construction Federation Local Government Association National Specialist Contractor Council Limited The JCT forms of contract embraced the traditional procurement philosophy and are very popular in the UK. According to the survey carried out in 2004 by Royal Institute of Chartered Surveyors (RICS 2006), which was tagged RICS contracts in Use Survey 2004, approximately 78% of construction contracts were procured using JCT in the UK. As noted previously that most JCT contracts are basically traditional contract, they required well- developed design before the construction works to commence. It is a form of contract that is fairly complicated and is always criticised for polarising construction team and encouraging claims; this must always be borne in mind when considering selecting JCT forms of contract. However, it also offers collaborating working contracts like Construction Excellence (CE) that has not been tested in the market (Keown 2010). The JCT 2005, which is the current and updated form of contract, has varieties of procurement methods for small and large projects that are basically intended for building/construction work, particularly in the private/commercial sector depending on procurement criteria being considered. According to Keown (2010), most JCT forms of contract do not have any express clauses on ground condition, thus, they are often amended and include terms that exclude liability for ground conditions. So, JCT contracts are not suitable for: Rail or road related works; Civil or earthworks; Mechanical or electrical plant/installations works; Landscape or archaeological works; and Ecological or environmental works The JCT 2005 various forms of contract use to suit the ever changing construction industry are: The Minor Works (MW) Building Contract This form of contract is very popular and suitable for small construction works, which are relatively simple in nature. It is lump-sum form of contract that based on drawings and specifications, but not re-measurement contact and requires an independent contract administrator. According to Keown (2010), it is suitable for construction work that worth  £100,000 (2008 prices). The Minor Works with Contractors Design (MWD) Contract In this form of contract, which is a version of Minor works (MW), the contractor provides design, which is limited to discrete parts of the works. However, it should be noted that it is not a design and build contract. Intermediate Building Contract (IC) This form of contract is another popular form of JCT contract suitable for construction works of a simple content without complex building service installations (BrunswickIS 2007). It is a lump-sum contract based on drawing and specifications, ranging from  £100,000 to  £800,000 (2008 rough financial prices) (Keown 2010). It also requires independent contract administrator and a quantity surveyor. Intermediate Building Contract with Contractors Design (ICD) This form of contract is a version of the intermediate building contract, which the contractor can provide design that is limited to discrete part of the works. It should be noted that it is not a design and build contract. Standard Building Contract (SBC) The SBC is a modern and sophisticated construction contract, which is suitable for larger projects that value  £500,000 upwards (2008 prices) given by Keown (2010). The SBC requires considerable experience to operate and understand it effectively and an independent contract administrator and quantity surveyor are needed. It is unsuitable for projects with substantial substructure work, excavation and earthworks. SBC comes in three formats: Standard Building Contract with Quantities (SBC/Q) Standard Building Contract with Approximate Quantities (SBC/AQ) Standard Building Contract without Quantities (SBC/XQ) The SBC/Q and SBCXQ are lump-sum contracts based on drawings and specification, if there is a bill of quantities, then these rates and prices are for valuing variations. While the SBC/AQ is a re-measurement contract. All these forms of SBC made provision for the contractor to provide design known as ‘contractors Design Portion, which is limited to discrete parts of the works such as the piling, mechanical and engineering works. However, it should be noted that it is not a Design and Build Contract. Design and Build Contract (DB) JCT design and build is a sophisticated contract requiring considerable experience to be used effectively. The employer/client provides the initial design that sets out his requirement in the contract document (Employers Requirement) and the contractor completes the design (contractors Proposals) and commences the construction work. It is a lump-sum contract that requires adequate time and great care to draft the employers requirements as it does not encourage change of scope or variation without incurring an additional cost. Design and build contract does not require an independent contract administrator, rather the employer/client uses an ‘Employers Agent to administer the contract. Major Project Construction Contract (MP) JCT MP Contract is suitable for large projects, which both the client and contractor are sophisticated and experienced construction parties working on large projects that value around  £10m upward (2008 prices) (Keown 2010). It is similar to Design and Build, where the client provides initial design and the contractor completes the design and commences the execution work. Thus, adequate time and great care are required in drafting the employers requirement as there is little scope for change later.. Prime Cost Building Contract The JCT prime cost building contract is a cost reimbursement form in which the contractor is paid by a fixed fee or a percentage fee in addition to the incurred cost. According to Keown (2010), this form of contract is used where the scope of work could not be defined such as refurbishment work or where the works have to start immediately such as emergency work after fire damaged. In this form of contract, cost of the project cannot be ascertained until the completion, and it could be used alternatively to the NEC 3 ECC Main Options E, which is also a cost reimbursement contract.. JCT Management Contracts (MC) The JCT has two forms of management contracts, which are Construction management form and Management contract form. Both forms require great care and a high level sophistication and experience by the employer and the contractor. They are not popular in the UK but sometimes used on large, complex and fast track projects. Construction Management: In this form, the contractor acts on behalf of the client as only a construction manager to manage the construction work by supervising the trade subcontractors employed by the client. Management Contract: In this form, the main contractor acts as construction manager for the works and employs the subcontractor. The main contractor does not carry out any construction works but manages the work carry out by his subcontractor for a fee plus the prime cost. The JCT Construction Excellence (CE) This form of contract is radically different from all other JCT forms of contract because it is a partnering/collaborative contract newly introduced in 2007 to enter the collaborative contract market that is dominated by the NEC and PPC2000 forms. In JCT CE form, the parties are referred to as ‘suppliers and purchasers and it took the form of traditional two party contract used for procurement of construction works and construction services. The contract terms and condition are short and straightforward, and can be priced either by lump sum or by target cost having a guaranteed Maximum cost facility. What is unusual about this form is that the risk associated with the project is identified and then allocated the risks between themselves, particularly respect to time and cost. According to Keown (2010), â€Å"As of 2009, the JCT CE contract appears to be rarely used, thus, it has not been tested in the market†. In my opinion, JCT forms of contract are not the best option for the rebuilding of the confectionery factory because: JCT forms of contract are basically intended for building/construction work, thus, will therefore, be inadequate in addressing the engineering aspect of the factory. It required well- developed design before the construction works to commence, thus, unsuitable for work that would commence immediately. It is always criticised for polarising construction team and encouraging claims, thus, may not encourage a good relationships among parties involved, which is required for the success of the project. So, JCT forms of contract will not be considered for the rebuilding of the confectionery factory†. 3.2 NEW ENGINEERING CONTRACTS (NEC 3) FORMS OF CONTRACT The New Engineering Contracts (NEC 3) is a family of NEC standard contract launched in 1991 that was revised in 2005 to replace NEC 2 suite that promotes a partnering culture, and has been cited has the preferred form of contract in ‘Constructing the team, a report by Sir Michael Latham (Knowles 2001). The New Engineering Contract (NEC 3) suite adopts a different approach to the procurement and execution of construction engineering through a proactive means to construction problems as the work progress. It is a Non- traditional form of contract that embraces early collaboration of all parties involved to avoid polarisation that is claimed to be caused by traditional form, and also, intended to create an equitable balance of risk between the parties to the contract. NEC 3 is applicable to a wide variety of major and minor construction works, which include: Building and Civil engineering works; Mechanical and electrical plant/installations works; Process engineering; and Offshore fabrication. Some of the ways by which NEC 3 stage proactive features include: Early collaboration and involvement of all parties, which include the client, project manager, contractor, subcontractor, etc. The contractor proposes how to solve arising problems. It embraces parallel activities between the design and construction activities. It gives no chance for storing up of claims until after the work is accomplished. It is better suited for a project that must be completed quickly, even if that faster completion makes the project more expensive i.e. timely procedure/response and programmes are primary and cost is secondary. The pro-active approach that embraces collaboration of all parties and more man-hours administration is emphasised in the first core clause of the NEC 3, which states that ‘The Employer, the contractor, the project manager and the supervisor shall act as stated in this contract in the spirit of mutual trust and co-operation (core clause 10). The NEC 3 forms of contract that are currently in use are: NEC 3 Engineering and Construction Contract (ECC) NEC 3 Engineering and Construction Subcontract (ECS) NEC 3 Engineering and Construction Short Contract (ECSC) NEC 3 Engineering and Construction Short Subcontract (ECSS) NEC 3 Tern Service Contract (TSC) NEC 3 Framework Contract NEC3 Professional Services Contract NEC3 Adjudicators Contract. NEC 3 Engineering and Construction Contract (ECC) NEC 3 ECC is the most widely used NEC 3 contract for appointing the main contractor for building, civil and all other engineering works including any level of design responsibilities i.e. it allows the contractor to provide design (Clause 21). However, it should be noted that NEC 3 has no specific design and build contract. The ECC has six (6) main options and twenty-two (22) secondary options to choose from. The main options are: Main Option A: Contract type priced contract with Activity schedule. Pricing Mechanism Lump sum Risk Allocation Contractor Suitability suitable for contract that the client wants maximum cost certainty but the need for a complete design is important. Main Option B: Contract type Priced contract with BoQ Pricing Mechanism Re-measurement Risk Allocation Contractor Suitability suitable for contract where there are grounds works and there is uncertainty on the final quantities of the work. Main Option C: Contract type Target contract with Activity Schedule Pricing Mechanism Cost re-imbursement with pain-gain mechanism Risk Allocation Shared between the client and the contractor Suitability suitable for contract where there is a need for an early start on site or the design is incomplete or inadequate. Main Option D: Contract type Target contract with BoQ Pricing Mechanism Cost re-imbursement with pain-gain mechanism Risk Allocation Shared between the client and the contractor Suitability suitable for contract where there is a need for an early start on site or the design is incomplete or inadequate. Main Option E: Contract type Cost Re-imbursement Contract Pricing Mechanism Cost re-imbursement Risk Allocation Client Suitability suitable for contract where it is difficult or impossible to define the scope of work (e.g. refurbishment work) or where the construction works have to start immediately (e.g. emergency work after fire damaged). Main Option F: Contract type Management Contract Pricing Mechanism Cost re-imbursement Risk Allocation Client Suitability suitable for contract where both the client and contractor have experience in construction work that has to start immediately. Ø NEC 3 Engineering and Construction Subcontract (ECS) The NEC 3 ECS contract is similar to ECC but used to appoint a subcontractor after the main contractor has been appointed through the ECC. Ø NEC 3 Engineering and Construction Short Contract (ECSC) The NEC 3 ECSC contract is used for small and medium sized simple and well-defined projects that worth up to  £500,000 (2008 price), where the sophisticated systems of the ECC are nor appropriate. It does not have main options, but can be a lump sum or re-measurement contract. Ø NEC 3 Engineering and Construction Short Subcontract (ECSS) The NEC 3 ECSS contract is similar to the NEC 3 ECSC contract, but used to appoint subcontractors after the main contractor has been appointed under NEC 3 ECSC. Ø NEC 3 Tern Service Contract (TSC) The NEC 3 TSC is similar to the ECC and is used for projects where regular work is required from a contractor over a period of time such as the appointment of suppliers to manage and provide a service. A plan or scheduled of work to be carried out is agreed upon by the client and contractor, and then payment is made using any of the options A, C or E. Ø NEC 3 Framework Contract (FC) The NEC 3 FC is a simple contract which is meant to be used in conjunction with other NEC 3 forms that will provide the contracts for call off contracts. It is used to appoint suppliers to carry out construction work or to provide design or advisory services on an ‘as-instructed basis. According to Keown (2010), the JCT framework contract is probably a better choice now. In my opinion, NEC 3 ECC with option E form of Contract is the best for the rebuilding of the confectionery factory base on the reasons given in the concluding part†. 3.3 Institute of Civil Engineers (ICE) Forms of Contract The ICE standard form of contract first edition was established in 1945 for mainly civil engineering and sometimes on building work that involved a large amount of earthwork. It is considered to be a traditional contract that requires a well-developed designed before the construction work can commence and contract administration under this form of contract is similar to that of the JCT. Experienced practitioners sometimes claimed that the ICE form of contract is complicated and not easy to understand, and are also frequently criticised for polarising construction team and encouraging claim just like the JCT form. According to Keown (2010), ICE contracts have different version, which include: Measurement Version Contract: it could be re-measurement or lump sum contract suitable for large civil engineering work that worth  £300,000 (2008 rough prices). Minor Work Contract: it is a shortened form of the measured version suitable for simple works with 6 months duration and up to  £300,000 worth (2008 rough prices). Design and Construct Contract: it is similar to the measurement version, but the employer provides the initial design (Employers Requirement), which would be completed by the contractor (Contractors Submission) and then carries out the construction work. Term Version Contract: it is used where there is variety of construction works or works at different locations to be executed over a period of time. It also accommodates emergency call out type work. Archaeological Investigation Contract: it is a simple contract for archaeological investigation. Ground Investigation Contract: it is similar to measured version and suitable where the employer intends to develop a site and required specialist contractor to perform substantial on-site investigation. Target Cost Contract: it is essential for a cost re-imbursement contract. However, a target cost mechanism option is provided to give the contractor incentives to control cost. In my opinion, the ICE form of contract is not the best option for the confectionery factory because†: It is mainly suitable for civil engineering works and building work that involves substantial earthwork, thus, may not be adequate for other engineering works like plant installation that is required. It requires a well-developed design before construction work could start, thus, unsuitable for this confectionery factory rebuilding situation which the work has to start immediately. It tends to polarise the construction team and encourages claim, which may be a threat to the progress of the work. 3.4 Association of Consultant Architects (ACA) Forms of Contract The ACA forms of contract is a non traditional collaborative contracts introduced in 1982. It is the only multi party standard form construction contract in the UK, where parties including the client, key consultants, main contractor and specialist subcontractors sign up the same contract i.e. all the parties are in a contract with each other, owe each other a duty of care and can sue each other for breach of contract and duty of care (Keown 2010). There is no suggested limit on cost or type of contract which this form is best suitable for because of its flexible accommodation of alternative clauses (Clamp, Cox and Lupton 2007). The ACA has different forms, which are: Project Partnering Contract (PPC 2000): it is a sophisticated and complicated partnering contract, which requires great care in setting up and running, particularly when preparing the project partnering Agreement. Specialist Partner Contract (SPC 2000): it embraces the PPC 2000 procedures and philosophy, but focuses on sub-contracting and relationship between main contractor, main sub-contractors and specialist. Term Partnering Contract (TPC 2005): it is suitable for works and services that extend over a period of time or where there is periodic/planned maintenance and can also accommodate to call out work. Extend the multi-party contract philosophy to Project Partnering Contract (PPC). In my opinion, the ACA forms of contract are unsuitable for the rebuilding of the confectionery factory because it does not give options for which someone can choose from†. Conclusion In my opinion, NEC 3 ECC form of contract with Main Option E and probably Secondary Options 5, 6, 7, 12 and 14 would be the best form of the contract options for the rebuilding of the confectionery factory because: It is suitable for engineering and/or construction work, which includes civil engineering, building, mechanical and electrical plant/installations work, process engineering and all allied industries that are adequate for the rebuilding of confectionery factory. It does not require well- developed design before the construction works to commence i.e. it encourages a parallel operation between the design and construction activities, thus, suitable for work that would commence immediately as applied to the confectionery factory. It embodies an efficient management process and stimulates good management of the relationship among all the parties involved, thus, avoid polarisation of parties involved. Its collaborative working across the entire chain optimises the project success. It uses clear and simple language, which is straightforward and easily understood. The NEC 3 ECC forms of contract with option E: cost reimbursement contract among other options of NEC 3 ECC would be considered for the rebuilding of the confectionery factory pursuant to the information given from the project proposal that it has been agreed that a single contractor would be employed to carry out the construction work and time cannot be spared for a well-developed design, since the construction work has to start immediately. 4.1 Confectionery Factory Rebuilding Project Parties and Organogram For the rebuilding of the confectionery factory, the identified parties that are likely to be involved in this project are: Client/Employer Project Manger Architect Structural Engineer Civil Engineer Mechanical Engineer Electrical Engineer Technology Specialist Quantity Surveyor Quality Assurance Officer Cost Manager CDM Regulator Facilities Manager Planning supervisors Lawyer Main Contractor Building works Subcontractor Mechanical Electrical Services Subcontractor Plant Installation Specialist Subcontractor Suppliers A detail organogram that shows these parties and their contractual relationship is attached below. 4.2 Contractual Relationships and Agreement For the NEC 3 ECC, option E: cost reimbursement contract chosen for this project, with a project manager leading and plan for a single contractor to execute the project, the contractual relationship will exist between: Client/Employer and Project Manager