Disclaimer
These questions and answers are for general information and
guidance only. They should not be relied on in particular situations
without contacting Quigg Golden and receiving detailed advice.
How can we incorporate our terms and conditions, and how can we
rely on them?
Benefits of own terms and conditions of contract
Before discussing how you incorporate your terms and conditions
it is worth asking why you would want to. The answer is usually
simple. You have a better chance of being paid promptly and in full.
Also, perhaps there will be greatly reduced management and administration
costs trying to get your money.
Usually unamended standard forms of contract are perfectly adequate.
However, often changes are made which can be detrimental to you.
Also, often you can be faced with terms that are not well drafted
or dramatically favour the other side. In these circumstances, having
a proper and balanced set of terms in place can benefit everyone.
You must have a contract in writing before it means that you can
use the Construction Act (in UK).
So how do you incorporate your terms and conditions?
It may see obvious, but in order to incorporate your terms and
conditions, you need to have a set of properly drafted terms and
conditions to suit you. You will need to take time preparing this
and it will probably have to be of general application as hopefully
your terms will apply to many jobs. It is feasible to have several
“general” contracts for different roles. The first thing
to note is that when we refer to a “contract” we are
not referring solely to a set of standard terms and conditions but
are referring to the overall deal you strike. This could include
all the documents that you have exchanged. This could include for
each contract but may include:
• the articles of agreement;
• the priced bill of quantities;
• specification;
• letter of acceptance;
• tender drawings;
• standard for of contract;
• method of measurement;
• programme;
• site investigation report;
• correspondence;
• minutes of pre-contract meetings;
• telephone notes;
• details of the main contract;
• terms and conditions on the back of an order or tender.
Terms and conditions can be found in all of the above. It is extremely
important therefore to make sure that there is no conflict. This
will save you arguments later on. Decide which documents need including,
and include them. For agreements to do construction wok there are
no formal requirements for a contract to be in writing, nor for
it to be signed by both parties. (Although in the UK, failure to
have a written contract can mean you will not have a right to statutory
adjudication).
The copy of the contract must be put together at the time the contract
is formed because trying to recreate it at a later stage can lead
to serious difficulties. We have had an arbitration for several
hundred thousand pounds which turned on which revision of a drawing
was included in a contract, and apart from memory there was no way
of ascertaining which version was actually incorporated. It will
also save arguments later as to which terms are included, and which
are not. You may have negotiated some terms. Don’t lose the
advantage of these if the other parties change their minds.
One of the most professional ways of putting the contract together
is to put together all the correspondence and documents which you
feel make up the contract and send a copy to the other side stating
that this is the contract and no other documentation or representation
forms part of the contract before wok commences on site. Include
the terms and conditions that you want. If the other side do not
write back querying its contents then it will provide very strong
evidence in a later dispute as to the terms of the contract. There
is absolutely no doubt that those who take the time to do this are
in a much stronger commercial position, not only to take the matter
to adjudication, arbitration or litigation but to also achieve a
higher settlement than would have been possible had they not taken
this action.
It is the contract that sets out the rights and obligations of
the parties to it. Your terms and conditions should always include:
• how much should be paid;
• when it should be paid;
• who values variations;
• are extensions of time due;
• who is liable for design;
• are notices required, etc;
• mechanism for dispute resolution.
Lastly, make sure that there are mechanisms within the contract
to take action! Mark relevant dates on a calendar and use them.
In the UK, you will be able to go to adjudication under the Scheme,
but if you have preferred way of resolving dispute include it. This
way in the unfortunate event that there is a argument over terms
and condition sit may be resolved quickly.
What is the significance of having a record of when we started
and finished?
Accurate and objective records on when work started and stopped
are of great benefit for everyone. This sort of basic but fundamental
record is often surprisingly badly kept. Don’t let this happen!
To recover money at the claims stage! The contract price will almost
definitely be based in part on how long it is intended that the
job will take. This is on the premise that if the job takes longer
it will cost more. A record of when you started and finished will
be invaluable when formatting a claim for disruption/delay/prolongation
or loss and expense. In order to prove how effectively you carried
out the work, you will also need records of when you started and
finished each part of the contract. One essential record for both
the offensive and defensive action is a programme.
How important is a programme?
Apart from being an essential planning tool for any construction
project, programmes can have a specific contractual meaning. The
most important programme, but also one of the most unusual, is a
programme which actually forms part of the contract. This is a two
edged weapon, since if any dates shown on a contract programme are
not achieved then the contractor is automatically in breach of contract.
One important programming item which is almost always included in
the contract is a completion date. This is described in clause 23
of JCT 98; and in clause 43 of the ICE 6th Edition.
During the tender process it is good practice for the contractor
to draw up a tender programme. This does not form part of the contract
but is usually used by the contractor to estimate the contract duration
and the critical elements and sequence for the Works. If the programme
is detailed with reference to each part of the contract, it becomes
of tremendous importance whenever the job begins to change as a
result of changes by the Client, actions of the others on site,
or unforeseen weather or ground conditions. This tender programme
is commonly used by contractors to show how they had originally
intended to do the work and consequently, when compared with an
as-built programme or progress programmes, shows how much they have
been prevented in using the method of work they had intended to
complete the works as planned. This is a very important tool in
establishing a claim for loss and expense because of disruption
to the works or for attempting to prove an extension of time or
acceleration claim. How accurate this tender programme is, very
much depends on the priority allocated to it at tender stage, the
skill of a contractor’s estimator and the ability to accurately
reflect the elements of the work on paper. Whilst this will cost
money for preparation, management or administration without careful
preparation these costs will be subsumed by the cost of preparing
a claim and the undoubtedly lesser amount that will be recovered.
After all, the side with the better record wins.
The contractor must base his rates and contract sum on something.
It, therefore, should not come as a surprise to clients or their
professionals that whenever changes occur in the progress of the
works, it costs the contractor money or has a cost implication.
These are costs that clients must be prepared to pay. Most contracts
have a mechanism for allowing the contractor to recover losses incurred
in this way.
It is therefore vitally important that tender and successive programmes
are carefully maintained and inter-related as the work progresses.
The importance of these is often lost in the thick of battle during
the contract.
What records do we need to have and why?
The importance of having records has already been discussed. The
simple purpose of all records is to clearly present proof of what
actually occurred during a contract. A claim is only as good as
the documentation proving the Facts and assertions. Any weak or
loose link in the facts or documentation will hinder and devalue
the claim.
THE SIDE WITH THE BEST RECORDS WINS!
The type of records which are important include:
• records of instructions including verbal instructions,
site instructions, instructions through minutes of meeting, daywork
sheets, etc;
• requests for information (or Technical Queries or Information
Requests) and similar information;
• records of progress (again including photographs or video
footage, site diaries, progress reports, minutes of meetings, programmes
etc);
• records of plant and personnel on site. These will include
labour returns, daily allocation sheets, site diaries, plant returns,
plant hire records, sub-contractor's returns, etc;
• weather records;
• records of ground conditions (including photographs and
levels).
It is extremely important that records are accurate and verifiable.
You should try to incorporate the terminology of the contract and
programme when writing records. It is common to have the clerk of
works or engineer’s representative to sign records or allocation
sheets for "record purposes only".
These records can be used in a host of circumstances. The most
important examples are to prove claims for acceleration, delay and
disruption. It is often easier to motivate personnel on site to
keep good records if they understand the importance of records and
the practical importance in keeping them. Again this will take time
and cost money, but the commercial advantage that good records will
give you as regards increased cashflow and profitability, should
make the initial expenditure well worth it.
Good records help with claims for money and for extensions of time.
From whom should we take instructions?
You must take instructions from the correct people, as this has
an impact on profitability. If you are operating under a standard
form of contract there will be provisions within this for whom you
should take instructions from. For example with the GC Works 1 Contract,
instructions could be given by the project manager and would be
valued by the quantity surveyor. The project manager and quantity
surveyor would largely be the equivalent of an engineer or architect
under other forms of standard contract. It is important that you
check the contract. If you take instructions from the wrong people,
you may not get paid.
Once it has been established from whom you should take instructions,
you need to ascertain that the instructions are genuine instructions
and that you can get paid for them. It is sound practise to ensure
that all instructions are in writing.
In the JCT Contracts, it is necessary to consider what constitutes
an instruction and to distinguish between the different types of
instructions the architect may issue, because whether an instruction
exists is contractually significant, as is the type and form of
the instruction. In many projects instructions greatly impact on
a company's cashflow and profitability.
The architect is frequently given the express right to issue certain
particulars. For example, clause 5.3.1 of JCT 98 provides:
"So soon as is possible after the execution of the contract:
the Architect. . . shall provide . . . descriptive schedules or
other like documents necessary for use in carrying out the Works.
. ."
These “descriptive schedules” may be more explanation
or they could well be variations.
Is it an instruction or direction?
It should be noted that not all directions are considered to be
instructions - see clause 10 and 12 of JCT 1998, for instance, where
the clerk of works is empowered to issue certain directions.
Compliance with a direction which the issuer is not empowered to
give may result in:
• not being entitled to payment; or
• not being entitled to payment and having to return the situation
to the state which existed before the direction was given; or
• the employer/contractor may not be liable to reimburse you.
It is vital to understand the limits of the powers of those issuing
instruction or directions and have effective procedures in place
to ensure payment is received properly and quickly where appropriate.
Oral and written instructions?
Whenever instructions are issued they should, as a general rule,
be given in writing because this is a simple and straightforward
way of ensuring that there is a record. The majority of standard
forms of building contract adopt this position. Most also have a
mechanism for confirming in writing verbal instructions. An exception
is the NEC Contract.
JCT 98 requires that all instructions issued by the architect shall
be issued in writing, and where they are not they shall be of no
immediate effect. The intention is quite clear; all instructions
should be in writing.
This confronts the contractor with a commercial problem. Should
he carry out the works immediately or wait for a written instruction
with all of its resulting consequences? Commercially, it may be
better to wait for a written instruction before executing the works.
But in practice this may not be the most desirable action to take.
It is always essential to bear in mind what is your main aim for
being on the project, i.e. to carry out the works and to get paid
for the work carried out.
What is an instruction issued in writing?
Some contracts are very specific about the requirement for instructions
to be in writing; especially JCT, ICE, RIAI, IEI and GCCC Contracts.
An instruction issued by the architect in writing, regardless of
whether it is on an official instruction form, or a non-standard
form or letter in a duplicate notebook fulfils the requirement of
the JCT 98, clause 4.3.1. If an architect gives an instruction otherwise
than in writing it can become effective by the forthcoming procedure:
• the architect confirms instruction in writing within 7
days.
• the contractor confirms the instruction in writing within
seven days and the architect does not dissent from it in writing
within 7 days of receipt of the contractor's confirmation.
It can be seen that in both cases the instruction relies upon the
architect and takes effect either from his own confirmation or at
the end of the period in which he can dissent from the contractor's
confirmation. A contractor should write for confirmation within
7 days, as this minimises the contractor's risk if a dispute arises.
Not doing so increases the risk of having to establish liability
and not getting reimbursed sufficiently or at all.
If an instruction only becomes effective in this way, can a contractor
rely upon compliance with an instruction issued otherwise than in
writing? The answer to this question is, clearly no. In summary,
all instructions should be confirmed in writing before commencement
of the work. It is difficult to envisage situations where an architect
would be unable to issue a valid instruction in writing immediately,
and certainly the contractor should be wary of any supervising officer
who declines to do so. In such circumstances contractors should
consider what the intension is behind the non-issue of an instruction
and how this might affect right to payment.
Can we avoid doing variations?
Presumably, the only reason you will want to try and avoid doing
variations is that you are worried about not getting paid. So can
you avoid doing them?
The usual answer to this is no.
Strictly a contractor is not bound to execute more than the contract
work unless there are express provisions allowing this. This is
why the standard forms of contract do provide that the employer
or his agent may require alterations additions or omissions to the
contract work (i.e. variations) which you will be bound to carry
out. Examples include Clause 13 of the JCT 98 Form of Contract,
Clause 51 of the ICE or Clause 27.3 of NEC.
These contracts also provide for payment to be made in respect
of variations (For example clause 13.2.3 of JCT '98). Make sure
that you identify the clauses within the contract for payment and
valuation and that the right ones are used. DO NOT agree to any
terms of a party that do not provide for the valuation of variations.
There are limited exceptions to the compulsion to perform a variation
which would come under two heads:
• are the variations necessary for the completion of the
Works?
• is the variation so far beyond the scope of what was contemplated
that you can refuse to perform it?
The first question is relatively easy to answer. There is one circumstance
where contractors/sub-contractors will not be compelled to perform
a variation and that is where the employer/main contractor attempts
to incorporate variations into the defect list when requiring the
rectification of defects and refuses to acknowledge that they ARE
variations by disguising them as defects. It is advisable to undertake
such variations, once payment terms have been resolved, but not
to undertake them, if the employer/contractor persists in stating
that they are defects.
The second question is considerably more difficult to answer. Some
assistance may be derived from clause 13.2.2 of the JCT 98 form
of contract which holds that any instruction under clause 13.2.1
(for variations):
"…shall be subject to the Contractor’s right of
reasonable objections set out in clause 4.7.7".
Clause 4.1.1 allows the Contractor to make reasonable objection
in writing to compliance with a variation. Unfortunately JCT 98
gives us absolutely no guidance as to what is "reasonable".
In the case of Thorn -v- London Corporation (1876) 1 App.Cas.120
the Lord Chancellor said of variations:-
"If, on the other hand, it was additional or varied work,
so peculiar, so unexpected, and so different from what any person
reckoned or calculated upon, that it is not within the Contract
at all; then, it appears to me, one of two courses might have been
open to him; he might have said: I entirely refuse to go on with
the Contract - non haec in foedera veni: I never intended to construct
this work upon this new and unexpected footing. Or he might have
said, I will go on with this, but this is not the kind of extra
work contemplated by the Contract, and if I do it, I must be paid
a quantum meruit for it."
Quantum meruit would be a reasonable price. Given that there is
a possible option to recover financially for "unreasonable
variations" it is suggested that in order to avoid a fight
later on, it would make sound commercial sense to undertake all
variations, and take steps to recover money for them.
What rates and prices can we use to price variations?
The “normal” way to value variations is to use bill
of quantities rates. The usual rules are:
• where the varied work is of similar character to, is executed
under similar conditions as, and has not significantly changed the
quantity of, works set out in the contract rates and prices for
the work the rates are to be used.
• where the varied work is not then the rates and prices for
the work shall be the basis for determining the valuation; or
• where the varied work is not of similar character, it shall
be valued at fair rates and prices.
Helpful guidance on the valuation of variations under an ICE contract
has been given in the case of Weldon Plant Limited - and - Commission
for New Towns.
Two questions beg to be asked:
• When is it reasonable to apply Bill Rates? Where a Contractor
has a particularly good set of rates and the work has not substantially
changed he can rely on these for valuations of variations. The corollary
being that if the Contractor has under priced a rate item he is
also stuck with this regardless of whether it is advantageous the
Employer. The rules are contract specific.
• What is a fair valuation?
In answering the first of these questions it has been said:
"So too is an Employer stuck with rates and prices which have
been accepted by him as part of the Contract. Unless the Contract
permits, he cannot extricate himself from the bargain that has been
made."
Change valuation under the NEC Contracts is different.
How can we get our dayworks paid?
The use of dayworks to value variations is often resisted by quantity
surveyors and architects as they believe it provides the contractor
with greater reimbursement than he might otherwise secure.
Dayworks are only dayworks and will only be paid when you are executing
a variation and when the variation cannot be valued under the contract
by measurement, reference to the bill, tender breakdown or similar.
Daywork sheets are often more than records of men, materials and
machinery engaged in certain activities for certain lengths of time.
It is generally easy to calculate the amount each daywork sheet
represents. That does not extend to an entitlement to payment for
that daywork sheet. There is a multi-step process to be gone through
to establish entitlement. This is:
• Is the work on the Daywork Sheet that for which the contractor
is entitled to be paid, or is it work which is to rectify defects?
• Is the work to be paid for on daywork, or is it work which
is covered by items in the bill of quantities? If it is covered
in the bill of quantities, and the evaluation mechanisms in the
contract apply, then the contractor is not entitled to be paid on
a daywork basis. Equally, if the daywork price is less than the
rate in the bill, the employer is not entitled to pay only the daywork
rate.
• If the proper way for payment is on Daywork Sheet then,
and only then, are the sheets themselves of importance. The starting
point is that the sheets must be accurate and honest. One of the
biggest problems in relation to dayworks is the fact that there
is a general perception that daywork sheets are neither accurate
nor honest.
Many architects and engineers will resist dayworks. There must
be a clear instruction and proper records every time to prove an
entitlement.
What can we do about work omitted from our package?
Omissions are worrying as they will instantly mean "loss of
profit".
If a contract has a variation clause, this allows for omissions
seemingly without restriction. How you deal with omissions will
depend on what is omitted, why it is omitted and how the character
of your work changes as a result.
Usually work cannot be omitted from your package and given to someone
else, this is a breach of contract and you are entitled to exercise
your options. Depending on the contract, the options include claiming
payment for the work which you would have originally have undertaken
under the Contract, the right to terminate performance of the Contract
and the right to prevent the party in breach from enforcing the
Contract.
Usually the valuation of omissions at bill rates means an under
recovery of profit and this consequential loss may be recoverable
under the contract or may not. The exact terms of the contract must
be considered.
How do I recover money by claims?
The first step, is to claim everything that is due to you. In practice,
the amount that you will recover will depend not only on when you
submit a claim, but also on your evidence. This highlights the importance
of good record keeping. Often you will have a claim for something
without realising it. Potential heads are:
• variations;
• unforeseen events;
• delay caused by design team;
• error in documentation;
• tendering process;
• sub-Contractors;
• others.
A well thought out and well prepared claim, can include any or
all of these heads and bring in substantial rewards. In a claim
you may recover:
• straight forward monetary loss i.e. full recovery for any
measured work or variations;
• retention;
• wrongfully deducted discounts;
• damages for breach of contract;
• interest;
• the costs of the claim;
• an extension of time is also a valid head of claim and will
not only be the foundation for claims where there has been a time
element, but will also help to protect you against any claims against
you for ascertained or general damages.
None of the above will be recovered unless you take action, and
take it promptly.
What do we need to do to submit a claim?
There are three things that you need to do in order to submit a
claim.
1. Use the Contract
Many of the standard forms will expressly provide for the recovery
of loss and expense.
There are two key points to remember whenever dealing with a loss
and expense claim under any contract:
• the contract itself will usually set out a number of procedural
steps which need to be followed closely in handling all such claims;
• the contract itself will state the different basis upon
which a claim for loss and expense may be brought.
For example JCT 98 at clause 26.2 states the basis upon which a
claim for loss and expense may be brought.
2. Submit it early
What happens if no claim is submitted until after the job is finished?
The first result if no claim is submitted until after the job is
finished is that the Contractor is unlikely to be paid any money
on the claim until after the job is finished too i.e. Practical
Completion. This does not assist the cashflow for the contractor,
but is of great benefit to the employer. Under most forms of contract,
it does not mean that the claim is barred absolutely. It may mean
that the value of the claim is reduced because the provisions of
the contract have not been complied with. Thus by implication this
would reduce contractors cashflow and profitability. There may be
arguments from the employer in that:
• interest is not payable on sums claimed;
• if the employer had the claim at an earlier stage, other
actions would have been taken which would have reduced the amount
of the claim payable and that, the contractor is not entitled to
as much money as is being claimed. Simply stated the employer was
not given the opportunity to mitigate his losses.
One of the certain effects is that the memories of the people involved
will start to fade and there will be none of the freshness which
you would get with a claim which is put in as the work progresses.
At worst the people involved may have left the company taking with
them your best source of evidence to prove your claim.
Contractors should submit claims as promptly as possible, even
if the employer/contractor denies responsibility. Immediate action
may pressure the employer/contractor to resolve an ongoing problem
and stop the future consequences.
3. Have good records
The better your records are, the more likely you are to be successful
in a dispute. You need to spend time and ultimately money making
sure that you have the right number of staff to produce good records.
This will invariably assist in claims. You need to make a decision
as to whether it is more commercially viable to hire more staff
or to possibly lose money later, on jobs.
What will submitting a claim cost?
Obviously it is going to cost you money initially to submit a claim,
both your own management costs and those of any advisors you have
retained, but the important thing to remember is that on a good
claim the costs of submitting it are small compared to what you
will recover. If you have a good claim the initial outlay is well
worth it.
How can we reduce the effects of deductions from our account for
discount and retention?
All too often we see cases where discount and retention have been
wrongly deducted from contract sums. In fact, it is so universally
accepted it seems like the industry norm. This shouldn't be the
case! Contractors should avoid offering discounts and negotiate
low rates for retention from the outset, as both impact severely
on cashflow and profitability. We will take discount and retention
in turn.
What is a contractual discount?
Some contractors/sub-contracts provide for the employer/contractor
to be entitled to a discount upon certain conditions being fulfilled.
This provides a classic example of the importance of reading the
Contract.
To take DOM/1 As an example, Amendment 10 changed the rules regarding
discounts and was issued in 1998.
Before Amendment 10, the mechanism for payment under DOM/1 was
detailed at Clause 21. Clause 21.3.2 provides expressly that the
discount can only be made if the contractor complies with the payment
obligations; in that payments are made within 17 days of the date
due. If the contractor does not comply with the provisions of the
sub-contract in respect of the payment dates, then discount cannot
be deducted which would entitle the discount to be claimed back
together with interest.
In not allowing the deduction of discount, a sub-contractor minimises
his exposure to making a loss. Furthermore, it reduces his break
even point on the project, increasing the opportunity to make money
and become profitable.
A much more difficult question is whether the contractor has to
comply with the obligation every month before he can deduct the
discount from the total. If a payment in one month is made late,
is it simply the percentage reduction in relation to that month
that can not be made or does the contractor lose his right to deduct
any discount at all? In any event, it is essential to track times
of payment in discount circumstances.
The percentage of discount identified in the Articles of Agreement
Part 7 is 21/2%, unless a different percentage is inserted. A lower
rate should always be negotiated because why is a discount being
given? It should not be because of habit or custom.
The edition of DOM/1 which incorporates Amendment 10, however,
is totally different It does not provide for payment terms to be
met for the discount. Therefore unless this has been specifically
amended, the Contractor is always entitled to deduct discount.
It is therefore vital to not only know which standard provisions,
if any, is incorporated into the sub-contract but also which edition
and which amendments are incorporated.
The right to deduct discount applies to all payments whenever made
and may be lost by late payment, but this would depend on the specific
terms of the contract/sub-contract.
If the discount is related to prompt payment, then is each payment
considered in isolation, or if one payment is late is no discount
allowed whatsoever? Once again, need effective procedures are needed
to monitor when payments are due, and to check whether or not the
contractor/employer should be deducting any discount at all. Also
ensure you have a standard letter to send out if discounts are deducted
although payments are made late.
When discounts are taken ensure that they are not deducted before
retention is deducted. If the opposite is carried out it would equate
to giving the employer/contractor a large figure for discount -
not a good idea if you are trying to improve your cashflow or profitability.
How do we deal with retention?
Every standard form of contract in the construction industry has
some form of provision for retention or reserve. As with all issues
like this, the starting point is to look at the contract and find
out what it actually says.
DOM/1 is a typical contract, the provision for dealing with retention
is at Clause 21.5 which provides:
• up until Practical Completion, the Contractor can deduct
the percentage which is stated in the Articles of Agreement. The
Articles of Agreement provide that if no percentage is inserted
it will be 5%. In many instances this rate may be negotiated to
3%. It is worthwhile providing evidence that a percentage of 5%
is not required from previous projects completed within a 6 year
period.
• although the reduction in the retention percentage may appear
minimal, it may have a disproportionate impact on a contractor's
profitability. When you consider 2% of £X thousands of pounds
retained by the employer/contractor over the period of the contract
and 12 months after Practical Completion of the works. Example contract
sum £300,000.00, retention at 5% and 3% will be £15,000.00
and £9,000.00 respectively, a difference of £6,000.00
over a possible period of 2 years. Thus, a 2% reduction would make
available to a contractor an extra £6,000.00, which should
be working for him.
• upon practical completion but before a Certificate of Completion
of Making Good Defects is issued, only one half of the percentage
of retention can be deducted. Ensure you have a calendar marked
with dates on which retention should be requested and take action
on those dates as they occur.
• upon the issue of a Certificate of Completion of Making
Good Defects, all retention monies are to be released, by way of
an interim payment, to the contractor. Again this date should be
marked on your calendar as two dates, when to request the release
and when to receive payment.
Remember that if a contract or sub-contract does not make specific
provision for retention then the employer/contractor has absolutely
no right to withhold retention. If retention is provided for, the
percentage and release dates may vary accordingly. First check if
the contract allows for the taking of retention, and secondly check
the rate of percentage. Negotiate a lower rate where possible. Lower
rates add substantially to the profitability of a contractor.
In some instances a contractor/sub-contractor can wait for the
release of retention for long periods after the works have been
completed. Use effective procedures to chase these monies on a regular
basis. It may only take a few letters and threats of adjudication
or arbitration. These actions may only be minor but accumulatively
they add substantially to the profitability of a company and its
cashflow.
It is our experience that retention and percentages of retention
are accepted as standard issues in most contracts. This general
acceptance should not be the norm and should be challenged whenever
the issue arises. It is particularly unfair to groundwork sub-contractors
or structural steel sub-contractors who may complete their works
long before practical completion of the main contract. If they have
to wait a very long time for release of retention on large sums,
this may have a disastrous impact on cashflow and profitability.
In such circumstances, it is definitely worthwhile negotiating for
a lower rate or zero retention where possible. In some instances
the monies involved in retention equate to the profit on the project.
It has recently be described as unfair in the in the UK by the
House of Commons Report “Construction Matters” printed
on 8 July 2008.
How can we ensure that we get the final payment once we have finished
our works?
In order to remain profitable and improve cashflow, contractors
should make prompt and comprehensive applications for payment as
soon as the first payment becomes due and make sure that all dates
for subsequent applications are met! Therefore it is good practice
to ensure that the final payment is treated in the same way as all
previous payments should be and apply promptly for the outstanding
payment due.
The main difficulty with final accounts is not lack of understanding
of the contractual provisions, as these are relatively straight
forward. The real problems are as follows:
• since the work has already been carried out there is no
incentive for payment to be made.
• Unlike interim payments contractors/sub-contractors do not
have the commercial weapon of threatening to walk off site unless
payment is made.
• too often, the final account is successfully fudged off
for many months, even years. Staff come and go, and the contractor/sub-contractor
soon finds himself chasing payment for work which was carried out
many years ago.
• the final account should be put together or built up from
day one, on and off site. It is important to have effective procedures
in place to put together all the relevant information and documentation
to substantiate the monies you assess as being due to you.
Final payment needs to be applied for as soon as it is allowed
under the Contract. Why have the money sitting in someone else's
bank account gaining interest, when it could be sitting in yours?
The date for application is likely to be regulated by the construction
contract. For example the DOM/1 form of Sub-Contract provides that
the sub-contractor is to send to the contractor all documents necessary
for the adjustment of the sub-contract sum (final payment) within
4 months of practical completion of the sub-contract works (sub-contract).
The final payment is then due within 7 days of the issue of the
final certificate by the architect under the Main Contract. Before
the date for final payment the contractor must send the sub-contractor
a notice informing him of the amount of payment which the contractor
believes is due to the sub-contractor. If the sub-contractor does
not agree with the amount, he must write and put his position forcibly
giving reasons. Such reasons would include alternative calculations
for the monies due, correspondence detailing the claim and any action
proposed to be taken. Like DOM/1 every standard form construction
contract will:
• provide a date for final payment;
• require the payee to issue a notice indicating that payment
is intended to be withheld if this is the case.
Final Payment
Where the Scheme for Construction Contracts applies, the date for
final payment is taken from this. It is well worth calculating this
date as early as possible in order that a prompt application might
be made. The final payment will become due according to paragraph
5 of the payment provisions in the Scheme, namely on the expiry
of 30 days following completion of the works or on the making of
a claim by the payee whichever is the latest.
How do we deal with a withholding notice?
If you are on the receiving end of a withholding notice and you
do not agree with what is being withheld, object! It will help your
case later. If no withholding notice is issued, this is contrary
to the Order.
Make sure that you have all of your documents together to make
a claim promptly after completion. The earlier your claim is in
the mind of the payer the more quickly you may resolve difficulties.
It is a good idea to keep all relevant records from day 1 in order
that you can fully substantiate the monies due to you at an early
stage. We will be discussing records and emphasising the importance
of keeping them throughout this seminar.
Of course it bears repeating, that as initially stated, you will
find it more difficult to get your final payment, and will not help
your cashflow and profitability overall if you do not take a no-nonsense
approach to all money due to you. Interim payments should be applied
for promptly under the Contract and followed up if they are not
received. There are provisions in the standard form or contracts
for application for these just as there are for final payment. These
may be found at clause 21 of DOM/1, clause 30.1 of JCT’98
and paragraph 4 of the Scheme.
What practical steps can I take to get your retention released?
There are a number of steps that you can take to make sure that
your retention is released as soon as it is due to you:
• apply early;
• mark dates on a calendar as to when retention should be
released for example the time of the issue of the certificate of
completion of making good defects. Mark when to request the release
and when to receive payment;
• keep asking;
• take action!
When is the first half of the retention money released?
Most people expect the answer to be very simple as it is either
released on Practical Completion for JCT Contracts or at Substantial
Completion for ICE Contracts. This, of course, is true but it ignores
the fact that many contracts are not in those forms or that there
may be no provision for the deduction of retention monies at all.
The position is much more complicated with sub-contracts. Many
sub-contracts do not provide for retention and material suppliers
will rarely allow for retention in their standard terms and conditions.
Those sub-contracts which do provide for retention may either provide
that the first half is released at practical completion of the main
contract works, or is released when the sub-contract works are substantially
complete. There can be a long time between those two dates. When
negotiating at the tender stage, where possible express a release
of retention when the sub-contract works are substantially complete
and not on practical completion of the main contract works. These
are strategies to improve cashflow and profitability. Individually
these steps may appear small, but cumulatively over many contracts
they may have substantial impact on getting paid, cashflow and profitability.
Thus, the terms of the contract will decide what event triggers
the release. The most common event is practical completion but that
in turn introduces a level of uncertainty because practical completion
is often not clearly defined.
What is completion?
When a building is practically complete varies, not only between
Architect and Contractor, which you would
expect, but also varies between Architects.
The key tests to decide whether or not a building is practically
complete must include:
• does everything work in the manner it is intended to, subject
to minor adjustment?
• does the building serve its intended function?
• will any further work necessary not cause undue disruption
to the occupants of the building?
If the answer to these questions is "Yes", then the building
is probably practically complete.
When is the final release of all retention monies?
The only money which the Employer is entitled to hold after Practical
Completion is the retention money. If the Certificate of Completion
of Making Good Defects has been issued under a JCT form, then the
second half of the retention must be released.
If there are defects apparent at any stage up to the issue of the
Certificate of Practical Completion, then either the employer does
not pay for that part of the work which is not done properly, or
the Certificate of Completion of Making Good Defects is not issued.
If there is a suspicion of latent defects, it would be very prudent
to have an investigation done prior to the end of the defects liability
period.
Where there are no suspicions of latent defects and withholding
retention is merely an insurance in case of latent defects, then
the Employer does not have authority to do this. If Employers wished
to amend the JCT Contract to protect against such situations, it
would be quite easy to do so. For example the retention could be
released at the end of six years. Contractors should resist such
a move vigorously, as it does not make good commercial sense and
definitely does not assist in the profitability or the company's
cashflow.
If an Employer felt that the retention was not a sufficient amount
of money, then the sum being held could be increased by amending
the contract to 10% as is very common overseas. This might have
an effect on tender prices in that tenders would be higher and have
a higher percentage for profit and overheads to reflect the greater
liability being undertaken by Contractors.
Can they set-off monies due on one job from monies outstanding
on other jobs?
Sir Michael Latham recommended in his famous report "Constructing
the Team" that one unfair contract clause which needed to be
outlawed was that which purported to set-off in respect of any contract
other than the one in progress. Unfortunately this is still done.
In the absence of an express contractual term, Contractors and Employers
cannot set-off monies from another job other than the one that you
are undertaking. This is because the two different jobs will presumably
be covered by two separate contracts. The right to set-off arises
under the Contract. However, Contractors/Employers are getting around
this by inserting terms into the Contract allowing set-off from
other jobs. If you have agreed to this you cannot object! The moral
is not to agree to such a term when negotiating. After all, whose
benefit is this term for?
Any set-off is subject to the Notice of Intention to Withhold that
we have discussed. Regardless of what is in the Contract, if you
do not agree with what is being set-off you must object in writing.
Once monies have been set-off it is difficult to get them back.
Whilst it may be commercially difficult, pursue it.
How do we deal with deducting monies for contra charges?
Contra Charges & Set-Off
Set-off is the single biggest source of dispute between Employers,
Contractors and Sub-Contractors. This is because contractors/sub-contractors
claim that employers/contractors deduct money for insufficient reason
or for no reason at all. The effect in many instances making a profitable
project break even or even worse making a project at final account
stage into a loss making project. If Employers/Contractors are deducting
money, you need to be sure at the outset that they are following
the correct procedures. If they are not, they can't deduct money
from your account!
What procedures need to be followed before money can be set-off?
Different contracts have different procedures. Some such as the
NEC are very simple, others such as JCT Sub-Contracts in the UK
or RIAI Sub-Contracts in Ireland are complex. Invariably there must
be adequate notice and sufficient detail before the set-off is valid.
The importance of serving a withholding notice on time and making
it a valid notice cannot be emphasised enough. If this is not done
then the right to set-off may be lost.
How does the Construction Act 1996 or Construction Contracts (Northern
Ireland) Order 1997 affect us?
The Order provides certain rights to parties to a construction
contract in respect of payment. If you keep an eye on these, you
will improve your cashflow. These are:
• For payment by instalments or stage payments for contracts
over 45 days duration;
The Order now regulates the provisions which must be found in construction
contracts both standard form and those that you have drafted yourselves.
Article 8 of the Order states that unless the duration of the works
are to be for less than 45 days contracts must provide for stage
or other periodic payments.
• To be informed of the amount to be paid in any instalment
and when it is due for payment and the basis on which any amount
is calculated;
The Contract must provide a mechanism for determining what payments
become due, when these are due and what the final date for payment
is. Article 9 of the Order means that the payee must now specify
the amount of the payment to be made or proposed to be made within
5 days of the date on which a payment becomes due.
• To be given notice if it is intended that any payment be
withheld;
Article 10 of the Order provides that payment may not be withheld
after the final date for payment unless the payee has given a Notice
of Intention to Withhold Payment.
• The right to suspend performance if payment is not made
within a specified period; and
Article 11 of the Order gives a right to suspend performance for
non-payment if monies due under the Construction Contract are not
paid in full by the final date for payment and no Notice to Withhold
has been given.
• The outlawing of pay when paid clauses
Article 12 of the Order prohibits pay when paid clauses except
where a person from whom the payer is receiving payment is insolvent.
If your contract does not comply with the Order then the Scheme
for Construction Contracts Part 2 applies. By way of the Scheme
for Construction Contracts the Order makes provision for the referral
of a dispute arising under a construction contract to adjudication.
How to use the Construction Order to help, and what is needed?
The Construction Order is supposed to help you by making bills
more certain to be paid and making disputes easier to settle. The
measures that were introduced to ensure this were:
• new rules to make payment fairer;
• the right to suspend work for non-payment;
• the introduction of Adjudication.
If your Contract doesn't allow for these then the Scheme for Construction
Contracts will kick in.
In order to get the Construction Order to help you, you need to
exercise your rights under points 1, 2 and 3. We will deal with
them individually.
New rules to make payment fairer
Under Article 12 of the Order pay when paid clauses are now banned
unless the third party is insolvent. Your money cannot be withheld
due to a pay when paid clause. This is illegal and you must take
action if the payee attempts to do this. As we indicated at the
previous section, main contractors may try and get around this by
including pay when certified clauses in the Contract, such a clause
should not be agreed, when entering the contract initially.
Under Article 9 (2) of the Order the payer must now issue a notice
within 5 days of the due date, identifying what will be paid, what
the payment relates to, and on what basis it has been calculated.
If you do not agree with the calculations you must write and give
your reasons.
Construction contracts must now provide a final date by which each
interim payment has to be made. The Scheme specifies 17 days from
the due date. There are two main points here. Firstly, you should
mark on a calendar when you are due payment and follow it up. Secondly,
object strongly when formulating a contract if the contract contains
a period longer than 17 days from the due date when a payment must
be made or if it tries to alter the due date disadvantageously.
Under Article 10 of the Order parties intending to withhold payment
must give notice that they intend to do this and reasons for their
actions. The notice period may be a period specified within the
contract, otherwise it will be 7 days under the Scheme. If no notice
is received, payment cannot be withheld. Take action!
The right to suspend work for non-payment
Under Article 11 of the Order you now have the right to suspend
work if payment has not been met by the final date for payment and
no withholding notice has been issued. 7 days notice of intention
to suspend must be given. Think about exercising these rights as
long as you are satisfied that you are exercising them within the
Contract. Object to entering into a contract where the other party
wishes to extend the notice period beyond the 7 days given under
the Scheme.
The introduction of adjudication
Any construction contract under the Order, with very few exceptions,
may go to adjudication. If you are not paid on time and paid in
full, use it! Adjudication is a faster and cheaper dispute resolution
method that arbitration or litigation. Make sure that you have a
dispute or difference and give notice of your intention to refer
a dispute to adjudication under Article 7 of the Order. This right
may be exercised at any time. When forming the Contract, it is worth
thinking about naming a "good adjudicator". This will
satisfy you that you have somebody capable at the helm if a dispute
does get this far.
What to do about pay when paid clauses?
Pay when paid clauses
In the UK, if the Construction Act or Order applies, then it has
rendered pay when paid clauses ineffective.
Article 12 (1) states as follows:
"A provision making payment under a construction contract
conditional on the payer receiving payment from a third person is
ineffective, unless that third person, or any other person payment
by whom is under the contract (directly or indirectly) a condition
of payment by that third person, is insolvent."
The exceptional protection main contractors have from having to
pay sub-contractors is if the employer becomes insolvent. The same
is true for sub-sub-contractors and so on down the chain. The policy
reason must be to spread the risk associated with insolvency as
widely as possible. In relation to pay when paid clauses, the Scheme
only applies where there is a pay when paid clause in the contract
and the parties have agreed no other conditions. In that case all
the provisions of the Scheme, payment by instalments, valuation
of instalments, due date for payment and the final date for payment
detailed above will apply. Some main contractors try to circumvent
the "pay when paid" rules by inserting "pay when
certified" clauses into the contract. There is little or nothing
that can be done about these. They need to be forcibly objected
to before a contract is agreed.
What is adjudication?
Adjudication has certainly come to the aid of the sub-contractor,
putting pressure on main contractors who suddenly have to deal with
applications before they may have got their own money. The saving
in time can prevent major disputes. In arbitration or litigation,
parties argue about various unimportant side issues and delays and
costs escalate. The speed of adjudication will make sure that this
almost never happens.
Adjudication is a very quick process. Under the Scheme for Construction
Contracts a decision will be made by the adjudicator in 28 days
subject to agreed extensions. Adjudication certainly works in this
way as the short response period for the respondent means that settlements
are often reached quickly. There are obvious correlating problems.
As the Adjudicator has only 28 days within which to make a decision,
mistakes can easily be made. Adjudication is clearly unsuitable
for very complex disputes. Courts are now enforcing awards given
under adjudication. Even to the degree where following the case
of Bouygues - v- Dahl Jensen courts are enforcing decisions in which
a mistake has been made. Adjudication will certainly help you to
get a final or an interim settlement even if this subsequently goes
to arbitration or litigation.
Will you get money out of adjudication?
The consensus is that 95% of adjudications result in payment to
the claiming party. What is essential is taking the first step towards
adjudication. In all the cases that we have been involved with,
there was no other effective way of getting the money. There might
be some problems in actually getting the payment from the loser,
but it is still worth pursuing your claim through adjudication.
There is a good chance of getting some money and there is no other
way which is as fast.
What is arbitration?
Arbitration is a much longer process than adjudication. Parties
are therefore able to submit much more considered arguments and
much more evidence. Arbitration has been shown to work in more complex
disputes. There is more likely to be a hearing in arbitration. This
will be useful if the majority of your evidence is oral evidence
as you may introduce and cross examine witnesses. This is not the
case with adjudication.
Does arbitration Work?
Arbitration certainly produces results in more complex cases. As
more time and preparation goes into arbitration, it has not received
the level criticism that adjudication has. It has further benefit
in that it provides more finality.
When should we use adjudication or arbitration?
Adjudication is useful for non-complex issues that require a quick
decision. If an adjudication is issued against you, you have no
choice but to defend it. If you are initiating proceedings yourself
adjudication is extremely valuable if you have a well prepared claim
and a non-complex case. You should particularly consider using it
if you need speedy payment as it can be enforced as an interim measure
even if it is not a final end to the dispute. Adjudications may
also be commenced once other proceedings have been started, be they
Court or arbitration. Again this is worth considering if you think
you will need an interim payment. Both adjudication and arbitration
have the benefit of speed and privacy.
So what is the meaning of "dispute"?
The term "dispute arising under the contract" effectively
means that disputes as to whether there is a contract in existence
or a right to sue for misrepresentation relating to the Contract
are outside the jurisdiction of an adjudicator appointed under Article
7 (1) of the Order.
How do we suspend works for non-payment?
In the worst case scenario despite having followed all the steps
mentioned previously it may be the case that the Employer or Contractor
refuses to pay the full amount due to you or at all.
Q Can you suspend your Works to force payment?
A Yes, if the Contract or the Construction Order allows.
For those contracts that fall under the Construction Act, the Act
does make provision for suspension if payment in full is not made
by the final date for payment and no effective Article 10 withholding
notice is issued. If the money claimed is indeed due, Article 11
allows a Contractor to suspend works until final payment is made
providing that 7 days notice in writing is given to the person from
whom payment is due stating the ground upon which it is proposed
that suspension be made. If suspension is exercised in the proper
manner, the period during which parties have suspended is disregarded
when calculating the time limits of the contract.
But great caution is necessary. If you suspend improperly you could
be said to have committed a repudiatory breach of contract and so
could be prevented from completing the contract and fined to pay
considerable damages.
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