JCT contract selection considerations

The risk of employer and contractor insolvency should always be a concern, but particularly during a recession. Consider this matter and the risks thoroughly both during the tender and construction stage.

Tender considerations include:

• Pre-qualify contractors so that only those with a healthy balance sheet are on tender lists.
• Perform due diligence screening (particularly credit checks) of all parties to a project.
• Put in place additional protection, such as parent company guarantees or performance bonds; obtain references and legal opinions on foreign companies when they execute a contract to ensure it is binding.
• Review retention and payment periods within the proposed contract. Note that large retentions and extended payment periods may be advantageous to the client but can put considerable pressure on contractors and result in finance charges being included in the contractor’s price.
• Set up a project bank account to enhance project cash flow and prevent project funds becoming ‘trapped’ if the main contractor becomes insolvent. Most high street banks offer project bank accounts although they are not used often in practice.
• Purchase building materials in advance to help with contractor cash flow. This matter must be handled carefully with the appropriate protection in place, which would include bonds, insurance, escrow agreements, indemnity agreements and pre-purchase agreements.

Post-contract considerations include:

• Supervise the financial situation of all contractors and subcontractors. If there are problems then prompt action is required and advice from a legal professional will probably be required.
• Ensure that all project security documents are put in place promptly and are checked to ensure they are prepared correctly and binding. This will include project insurances, performance bonds, collateral warranties, indemnity documents (particularly with regards to off-site and pre-purchased material) and escrow agreements (particularly for software contracts and where money is held on trust for third parties).
• Supervise materials on site, particularly with regards to ownership issues. If the contractor or subcontractor becomes insolvent then ownership of these materials can become very unclear and the subject of dispute.
• Take care if payment is made direct to subcontractors and suppliers because of problems with the main contractor. Advice should be taken from a legal professional.
• Understand the termination and suspension provisions in the JCT contract. Using these provisions requires careful consideration and good legal advice as they can often result in awkward legal situations that inevitably lead to dispute. Seek legal advice when termination or suspension is being considered.

Project bank accounts

Although currently not used on many projects (particularly in the private sector), there has been considerable interest in the use of project bank accounts. Project bank accounts are usually set up and run by the contractor and the client pays the monthly progress payment into this account. The contractor takes his or her payment from this account and payment is made directly to major suppliers and subcontractors. This system can result in increased transparency on projects and faster/more secure payment to the supply chain. In this respect, they can be considered part of the collaborative work ethos that many parties are trying to instil in the construction industry.

The JCT has, therefore, provided guidance on setting up a project bank account under JCT contracts with the issue of project bank account documentation. This is called the Project Bank Account Documentation (PBA) 2016.