Building contracts and tenders

There is no doubt that a good contract should be in proportion to the size of the works.

A thick specification, contract and tender document for a simple repair such as a re-roof is likely to have an effect on the contractor’s tender price if they have had to wade through pages of (probably superfluous) material to get to the point.

That does not mean that the detail can be omitted. Even a simple letter-style contract should state what plans or specifications are part of the contract (pro forma contracts will normally prompt you to do this anyway).

So, whether it's a simple letter, or a pro forma industry-standard contract (e.g. one of the JCT suite), it should clearly state:

• the parties and their roles;
• the intended start date and the contract term (the finish date);
• insurance provisions;
• pre-possession licences
• methods of certifying progress and valuation/ payment periods;
• penalties for non-compliance;
• liquidated damages;
• defects liability periods/rectification period;
• retentions;
• CDM confirmation;
• drawings and specifications (i.e. what the works comprise precisely);
• contractual method of dispute resolution;
• the contract price; and
• changes to contract terms (in a standard form of contract pro forma).

1. The parties and their roles

This should be a simple matter of listing:

• the client;
• the contractor (one selected);
• the client’s agent and their role as either contract administrator, clerk of works or project manager, and so on.

Clarify exactly what the contract will require of the surveyor/client’s agent.

As contract administrator (CA) the surveyor has a duty to do exactly that – administer the contract. This means that the surveyor has a duty to treat the contractor fairly (which may, very occasionally, mean acting contrary to the client’s wishes), to ensure that valuations of the works are prepared on time, and to ensure that they are sent to the client to authorise stage payments and so on.

The CA certainly has to be satisfied that works are progressing properly and to a suitable overall standard of workmanship, but should not act as a clerk of works.

The clerk of works superintends the job and acts as a quality controller or site agent by watching over the works on behalf of the client.

This is a distinction that needs to be emphasised to the client, and is frequently misunderstood. Even some surveyors faild to realise this - to their cost.

2. The intended start-on-site date and the contract term (the finish date)

Start dates and the contract term need to be fixed with certainty (but note that they may be listed in very different parts of the pro forma contract), because any requests for extensions of time from the contractor need to be established with certainty. The cost implications that follow from this cannot be identified without fixed start/finish points.

For anything but the smallest project, you should clearly state the practical completion (PC) date. In particular, include the PC on any contract for works where possession of the building is critical to the client (new works or a refurbishment, for example).

Avoid sloppy working There is a frightening tendency in the UK to complete the contract document once the contractor is in possession of the site and works are underway. This is sloppy, and probably accounts for a good proportion of contract claims which subsequently arise. On a small job there should be no reason for this to happen.

3. Insurance

It is essential to make sure that all parties are clear about:

• who is insuring any existing buildings;
• who is insuring the works before they are handed over; and
• who is organising any ‘other’ insurance to cover any special risks to the project.

4. Pre-possession licences

If the contractor needs to enter the site for preparatory works before the contract commences, the contract may need to mention pre-possession licences, which are, in effect, part of the contract and so may need to be calculated as part of the main contract price. These licences are usually drafted by the CA as part of – but ahead of – the main contract document.

5. Methods of certifying progress and valuation/payment periods

If a bank is funding the work by way of a loan to the client, the contractor should be made aware of the process to avoid potential delays caused by extra administration. Sometimes this may involve a separate inspection by the bank’s own appointed surveyor or valuer. It is much simpler if the bank will agree to accept the CA valuation certificate, which they sometimes will. (If the bank delays in forwarding funds for any stage, this will have a significant effect on the overall programme.)

Everyone involved on the project needs to be clear at the outset how and when they will get paid; and then stick to it.

Watch out for mistreatment of subbies On larger jobs with subcontractors, often the first and only indication you will get of the main contractor’s first wobble before going into receivership is lack of adherence to the payment regime. Sadly some contractors treat all their subcontractors that way all the time. Avoid them if you can. It usually shows in the long run.

6. Penalties for non-compliance

Penalty clauses are probably not really appropriate in smaller contracts.

However, you need to be aware of them, and so does your client, because they are often confused with liquidated damages (see below). Clients have a habit of insisting on the application of ‘the penalty clause’ when they actually mean the 'liquidated damages'.

LADs and penalties Liquidated and ascertained damages (LADs) are the estimated cost to the client of not having possession of the building when planned. A 'penalty' payment would have to be agreed as an additional and strictly punitive cost to the contractor for failing to complete on time. In both cases, clauses tend to be reflected on a higher overall contract sum - and higher risk to the contractor.

7. Liquidated and ascertained damages (LADs)

You will need to explain the difference between LADs and penalties to most clients. If the project over-runs for a 'reasonable' reason then even liquidated damages cannot be applied. Otherwise the client is entitled to LADs reflecting a reasonable loss (i.e. identified beforehand within the contract as a realistic pre-estimate of what that figure will be). It is not a penalty but should reimburse the client for loss of benefit where the building cannot be used due to delay.

You would need to show that your pre-estimate of the LAD shown in the contract was reasonable – otherwise a contractor might well look to have it set aside by an adjudicator as a penalty being misapplied, or simply an unrealistic estimate of the cost to the client.

8. Defects liability/rectification periods

The revised form of JCT contracts (2007) uses the (less-confrontational) term ‘rectification period’ where once we would have talked of ‘defects liability period’. This paragraph will simply state the length of the rectification period (e.g. 2 years after practical completion).

9. Retentions

Depending on the size of the job it is usual to have a 'retained sum' – a figure held back from the agreed contract sum until the defects liability period has expired and the contractor has made good. A 'Certificate of Making Good Defects' is then issued on formal contracts, prior to a final certificate releasing the balance of any retention monies. Typically 5% of the contract sum is retained until practical completion, reducing to 2.5% after practical completion.

If the job is very small a retention is unlikely to be appropriate, simply because the contractor is unlikely to agree to it. (The principle is good, but it doesn’t always apply in practice.)

Some of the smaller standard contract forms do not require a formal PC certificate (e.g. the JCT 'Minor Works' Building Contract). But there is something reassuring to the client about a ‘proper’ piece of paper rather than a note on the practice letterhead.

By issuing a PC certificate you are confirming to the client and contractor that the works are reasonably capable of occupation or beneficial use, and that the contractor is due the contract sum less the appropriate percentage of the retention (or less any agreed snagging or finishing off works if these have been excluded under issue of a partial practical completion certificate or where a project is completed in pre-agreed sections).

10. CDM confirmation

Many projects within the scope of this section will fall outside the main provisions of the Construction (Design and Management) Regulations 2007. However, you need to know about them, and decide if the Regulations apply and if so whether a Health and Safety Plan (and ‘F10’ notification) will be needed (see CDM and health and safety).

Note: even if the main thrust of the CDM Regulations does not apply, it is still appropriate to apply a robust health and safety process to any project – as a matter of moral responsibility and for the sake of your own reputation.

11. Drawings and specifications

Unless the job is of the very simplest nature, there will be some form of specification, possibly also designs/working drawings and so on. These need to form part of the contract.

It is important that the contract both refers to them and states that they are part of the contract.

The best plan is to attach a copy of any drawings or specifications (signed and dated by all parties) to the contract document. Then there can be no doubt (or less doubt if poorly drafted) just what works have been agreed within the contract price.

Any design changes later can be more easily identified, in which event the contractor will probably be entitled to additional sums for extra work, and any omitted items can be more readily established too, and then deducted from the valuation figure.

12. Contractual methods of dispute resolution

Dispute resolution is a ticklish subject and can be made as easy or complicated as you like.

If you do not include a mechanism for dispute resolution within the contract, then the 'Construction Act' – the Housing Grants, Construction and Regeneration Act 1996, section 108 may apply.

However, the Construction Act does not apply if the contract is with a ‘residential occupier ... which principally relates to operations on a dwelling which one of the parties to the contract occupies, or intends to occupy, as his residence’. (These disputes will usually be dealt with in the Small Claims Court.)

By drafting a reference to dispute resolution in the contract you can decide issues such as who will be the appointing body for adjudication in the event of a dispute, and what route the dispute should take if the adjudication is not accepted by one or either of the parties.

If the Construction Act does apply, and you do not set out an alternative second stage process in the event that adjudication fails, then you might find yourself in court, and the client liable for both parties' fees if the judge takes the view that you had been unreasonable and the 'other' side had protected their position with a Part 36 offer under the Civil Litigation Protocol.

(This used to be called a 'Calderbank' offer, after the case of the same name – where an offer considered reasonable by the party making the case is put forward. If the judge agrees, then the 'other side' are, by implication, not reasonable if they refuse it, and a liability for costs can accrue against them.)

Reference to arbitration as the contractual requirement for the second stage, and with each party bearing its own costs, might be more usual, but you would need to consider this in the light of your client’s requirements and their instructions before completing the contract.

13. The contract price

The contract sum – the price – covers not just the 'headline figure' but identifies any sums which are provisional or contingent and so on.

A little client education is well worth while here. Clients – particularly on domestic projects – expect the job to cost what they agreed at the beginning. Perhaps this is not unreasonable, given our experience of buying even complex items such as cars for a fixed figure, and with a guarantee.

Unfortunately buildings aren’t always so obliging – especially old ones that need repairs or alterations. Generally on the day you start on site you can expect someone with a large hammer to find something unexpected (and possibly expensive).

Good pre-contract investigation work will minimise the risk, but it cannot be avoided. Generally the older the building the worse the risk.

Thinking ‘outside the box' You can insure against digging up an Anglo-Saxon settlement under the proposed new office/conservatory or the like ... but many clients don't bother. There are also little factors that can be missed on the site inspection, desk-top study, geo-tech soil survey and land survey. This author had an ammunition dump materialise from under an old garage block! It was only when one of the older local residents explained away the remains of the concrete floor slab and Nissen hut walls about one metre under the existing ground level that we knew what it was. Luckily we didn't find any souvenirs that time, but c20 years previously builders working next to the author's office pulled out a ten-thousand-pounder (now in the local city museum) following an extended lunch break from everyone within a mile or so radius. It happens; clients need to understand this. They rarely budget for everything even when you have explained the risks beforehand. But at least cover yourself, and give them the option.

14. Changes to contract terms

If the project is simple or has been very carefully planned, the contract will be fulfilled to the letter, and to price. Sometimes things go wrong for nobody’s fault; or the client changes their mind; or legislation changes mid-project. For whatever reason, the contract may need to be modified as work progresses.

Contract sums can be adjusted for a variety of reasons including any delays classified as 'reasonable' and which therefore warrant issue of an Extension of Time Certificate where the contractor has requested it. Examples include exceptionally bad weather perhaps (not seasonal frost or rain), or where the client cannot give the contractor full possession of the site because they have not been organised enough to vacate it yet (or frequently because they do not yet own it, or have not clarified the boundaries).