Contributed By Hawkins Hatton Corporate Lawyers Ltd
Lump-sum or fixed-price contracts comprise a total fixed price for all construction-work. They are the most commonly used form of contract.
Cost-plus contracts comprise payment of the actual costs, consumptions or other expenses relating directly to the construction works.
Measured contracts will define the buildings that will be covered by the works, the period over which works may be required and an estimate of the likely total value of the works.
The 'traditional' procurement method, often referred to as 'design bid build' is the most commonly used method of procuring construction works. This is where design consultants are appointed to design the project in detail and the contractors are invited to tender for the construction of the designed project. The design consultants are responsible for design and the contactor responsible for the construction works.
The 'design and build' procurement method, as its name suggests, is where the contractor is appointed to design and construct, as opposed to a traditional contract according to which the client appoints design consultants to design the development and then a contractor is appointed to construct the works.
This is where a percentage (often 5%) of the amount certified as due to the contractor on an interim certificate is deducted from the amount due and retained by the client. The reason for the retention is to encourage the contractor to fully discharge its duties under the contract.
Limitations and Exclusion of Liability
The three most common forms of limiting liability are:
Collateral warranties are agreements which are related with another 'primary' contract. They extend the duty of care by one of the contracting parties to a third party who is not party to the primary contract. By way of example an architect of a new development owes a duty of care to an occupier of the development despite the fact there is no contractual relationship between the architect and subsequent occupier.
Schedule-related risk is the risk that the construction takes longer than scheduled. Delay can lead to cost risk, hence this is usually managed by the contract including a clause for liquidated and ascertained damages (LADs) to the client in the event that the contract is delayed. LADs are not penalties, they are pre-determined damages at the outset of the contract based on a genuine calculation of the actual loss the client is likely to incur if the completion date is delayed.
A performance bond is used in relation to construction projects as a means of insuring a client against the risk of a contractor defaulting on the contract obligations. A performance bond is provided by a third party up to an agreed amount.
A parent company guarantee (PCG) is also a form of security that can protect in the event of default on a contract by a contractor that is controlled by a parent company (or holding company). These are particularly helpful when a small contactor is retained who is part of a more financially viable parent company.
Escrow accounts are also used as holding accounts for construction project funds. They are usually set up by a solicitor acting on behalf of one of the parties. The terms of the agreement will specify that the payments must be protected, so as to provide security if payment is defaulted upon.
Contractors and/or designers are permitted subject to an express agreement to exercise a lien or otherwise encumber a property in the event of non-payment and this can only be removed upon payment of the fees outstanding.
At the commencement of the construction project a number of consents and approvals would have been required whether in relation to planning or building regulations. During the course of the works various inspections are undertaken to ensure compliance with the requisite consents/approvals prior to obtaining a completion certificate from the Local Authority and also in relation to health and safety pursuant to the Construction (Design and Management) Regulations (CDM) 2015. The requisite insurance policies must also be in place prior to inhabitation.