Contracting For Engineering and Construction Projects 256

Nature release
Contracting for Engineering and Construction

Projects
Contracting for
Engineering and
Construction
Projects
Fifth Edition
PETER MARSH
Gower
O Peter Marsh 1969,1981,1988,1995,2000
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or
transmitted in any form or by any means, electronic, mechanical, photocopying, recording or other-
wise, without the permission of the publisher.
No responsibilityfor any loss whatsoever occasioned to any person acting or refrainingfrom action as
a result of the material contained in this publication can be accepted bythe author or publisher.
First published 1969

Second edition 1981
Third edition 1988
Fourth edition 1995
This edition published by
Gower PublishingLimited
Gower House
Croft Road
Aldershot
Hampshire G u l l 3HR
England
Gower PublishingCompany
131 Main Street
Burlington, VT 05401-5600 USA
P.D.V. Marsh has asserted his right under the Copyright, Designs and PatentsAct 1988 to be identified
as the author of this work.
British Library Cataloguingin Publication Data

Marsh, P. D.V. (Peter DavidVictor),1926-
Contracting for engineering and construction projects. -
5th ed.
1. Construction contracts
I. Title
624l.068
ISBN 0 566 08282 9
Library of Congress Cataloging-in-PublicationData

Marsh P. D. V.
Contracting for engineering and construction projects1P.D.V. Marsh. - 5th ed.
p. cm.
ISBN 0-566-08282-9 (hardback)
1. Engineering contracts. 2. Construction contracts. I. Title.
Typeset in Great Britain by IML Typographers,Birkenhead and printed in Great Britain by

MPG Books Ltd, Bodmin.
Contents
List of illustrations xi
Preface xiii
Table of cases xu
PART ONE CONTRACT PLANNING 1

1 Planningprocess 3
Procurement of works or services 3
Business case 3
Client's objective 4
Method and responsibility 6
2 Thecontractplan 7
Procurement routes 7
Advantagesand disadvantages of different methods of
contracting 11
Decision criteria 15
Summary and conclusions- conventional methods 16
Private finance initiative schemes (PFIs) 16
3 Legal issues arising from the contract plan 19

Persons against whom the employer has a right of action;
and who owe the employer a duty of care 19
The measure of damages 24
Nature and extent of the employer's liabilities 26
Pre-contractual discussions 30
Conclusions 31
PARTTWO TENDERING AND PLACING THE

CONTRACT 35
4 Competitive tendering 37
Open competitive tendering 37
Selected list 38
vi CONTENTS
5 Single tender negotiation 45

Methods of price negotiation 45
Discussion of costs and prices 47
Head office charges 48
Terms of payment 49
Equality of information 49
Proprietary equipment 50
6 Planning the tender 51

Study of the inquiry documents 51
Planning the tender 53
Tender price level 54
7 Joint ventures and consortia ,56

Approval by the purchaser to the joint venture bid 56
Jointventure characteristics 56
Special considerations applying to local partners 58
8 Tender preparation 60
Tender documents 61
9 Tender appraisal 67
Organization of tender appraisal 67
Award criteria 68
Methodology 70
10 Placingthecontract 77
Contract work 80
Purchaser's obligations 81
Contract price 82
ProgrammeITimefor completion 82
Performance guarantees 83
Conditions of contract 83
Appointment of engineer or architect 83
I CONTENTS
PARTTHREE TERMS AND CONDITIONS OF

I
CONTRACT 85
11 Standard terms of contract: I 87
Interrelationship of conditions of contract 87
General forms of contract 87
I
New Engineering Contract (NEC) 94
1 12 Standard terms of contract: I1 97
13 Contract price 113

Lump sum 113
Schedule of rates or bill of approximate quantities 115
Cost reimbursement 116
Management overheads and profit 118
Price to be agreed 119
14 Terms of payment 120

Policy considerations 120
Contractual safeguards 124
Retention money 126
Set-off 127
15 Time for completion 128

Contract as means of communication 128
Limit to value of undertaking 131
Critical path analysis 133
Contract as means of providing an incentive 133
Method or terms of payment 133
Bonus and penalty 134
Liquidated damages for delay 135
16 Sub-contracting 139
Employer's right to restrict sub-contracting 139
Safeguards for employers 140
Responsibilities of main contractor for sub-contractors 140
Nominated sub-contractors 144
Review 148
viii CONTENTS
17 Delivery 150
Responsibility during installation 150
Access to site 151
Responsibility during storage and defects liability
period 152
18 Defects: guarantees and remedies 156

Guaranteesfor materials,workmanship and design 156
Remedies available 160
Unfair Contract Terms Act 1977 163
Performance guarantees 167
19 Insurance and indemnity 170

Defects in plant and equipment supplied or work
executed 170
Injury or damage arising out of work executed on the
purchaser's site 171
20 Functions of architectlengineerlproject manager

and the purchaser 178
Duties of architect/ engineer 178
Position of employer/purchaser 182
Project managers 183
21 Variations in price and time 185
22 Claims and their negotiation 193

Types of claim 193
Claims presentation and management 198
23 Dispute resolution 199
24 Particular forms of contract 206

Contracts for computer systems 206
Facilities management contracts 211
CONTENTS ix
APPENDICES 217
Appendix1 Draft instructions to tenderers for a plant
contract 219
Appendix 2 Bid desirability questionnaire 222
Appendix 3 Questionnaire for site visits 223
Index 229
List of Illustrations
TABLES
9.1 Adjusted assessment of tenders for design, supply, installation,
commissioning and testing of plantlequipment or process
plant 70
9.2 Example of scoring of quality and price for tenderers 74
10.1 Form of agreement 80
14.1 Example of stage payment schedule 123
15.1 Cost table showing bonuslpenalty 134
18.1 Costs and expenses in which purchaser may be involved 161
21.1 Financial balance between item originally included and
that ordered as a variation 186
FIGURES
2.1 Management contracting forms of responsibility 12
11.1 Network analysis 88
13.1 How the final contract price is arrived at 116
Preface
Since the last edition was published in 1995 both Important rulings of the courts have
the legislature and the courts have been busy included the Trafalgar House decisions in the
making changes to the law affecting the con- House of Lords which not surprisingly over-
struction industry. The main change has been turned the ruling in the Court of Appeal on the
the passing of the Housing Grants, Construction enforcement of a performance bond in the tradi-
and Regeneration Act 1996, usually referred to as tional form. While this has caused the wording of
the Construction Act, and the Statutory Scheme conditional bonds to be modernized and simpli-
which followed it. This Act and the Scheme fied it also means that such a bond is of little use
implemented three of the reforms recom- to an employer when he most needs it, that is
mended by Sir Michael Latham in his report when the contractor becomes insolvent. Other
'Constructing the Team': the introduction of a decisions of the Court of Appeal have clarified
method of compulsory adjudicationinto all con- the meaning of 'consequential damages' and
struction contracts other than those for the confirmed the validity of the entire agreement
building of a residential property; the require- clause in the MFI 1 conditions of contract.
ment in all construction contracts other than In the public sector field the Government has
those lasting less than 45 days for periodic pay- issued new guidance notes on the procurement
ments according to a defined timetable; and the of construction works and radically changed its
outlawing of the notorious pay-when-paid pro- mind on the preferred method of contracting,
visions other than where the third-party payer is which is now design and construct or prime con-
insolvent. tracting. Arecent High Court decision, Harmon v
Other legislation affecting contracting has The Corporate Oficer of the House of Commons,
been the new Arbitration Act 1996, the Late has emphasized the need to follow strictly the
Payment of Commercial Debts (Interest) Act rules of the Public Works Regulations and to
1998 and the Contracts (Rights of Third Parties) treat all tenderers fairly when awarding con-
Act 1999. tracts or face the consequences of having to pay
The most significant of these has been the substantial damages.
introduction of a right for either party to a con- In revising the text to cover these changes the
tract to refer a dispute to adjudication. After a opportunity has been taken to widen the cover-
slow start adjudication has taken off and it is age to deal more extensively with contracts
reported that in the period April to August 1999 placed on the New Engineering Contract and the
the number of adjudications taking place Red Book of the Institute of Chemical Engineers
totalled 259. The courts have shown strong sup- and also to look briefly at contracts for facilities
port for adjudication and have adopted a purpo- management and for computer systems. As a
sive approach to the interpretation of the consequence some parts of the earlier text have
legislation especially in the area of the enforce- been reduced and the chapter on fixed prices
ment of adjudicator's awards where it is at its and price escalation has been deleted.
weakest. So far the legislation is clearly working It is hoped that with these changes the book
and the industry is becoming more confident in will continue to provide a basic guide to the
the use of adjudication as the method of resolv- main commercial issues as they currently affect
ing disputes. the construction industry.
xiii
Table of Cases
lOOF Australian Trustees v SEAS Sapfor Forests Chester Grosvenor Hotel Co. Ltd v Alfred
(1995),202 McAlpine Management Ltd (1991 56 BLR
Alfred McAlpine Construction Ltd v Unex 115),166
Corporation Ltd (1994),107 Clonard Developments Ltd v Humberts (19991,
Amec Building Ltd v Cadmus Investment Co. Ltd 205
(1996),198 CMTC Toolks vYuesa Warwick Machinery,197
Aughton vMFKent (199157 BLR l),203 Concorde vColgan (1984 Hong Kong),127
B & S Contracts & Design v Victor Green Publi- Conway v Crowe Kelsey and Partners (1994 39
cations (1984),138 CON LR l),33
Bacal Construction (Midlands) Ltd v North- Courtney & Fairbairn Ltd v Talaini Brothers
ampton Development Corporation (1975 8 (Hotels)Ltd (19752 BLR 97),119
BLR 88),27 Croudace Construction Ltd vCawoods Concrete
Balfour Beatty Civil Engineering v Docklands Products Ltd (19788 BLR 20),29
Light Railway (1996))183 Crown Estates Commissioners vJohn Mowlem &
Barclays Bank plc v Fairclough Building Ltd (The Co. Ltd (19941,159
Times11 May 1994),25 Cynat Products Ltd vLandbuild (Investmentand
Beaufort Developments (NI) Ltd v Gilbert Ash Property) Ltd (1984 3AER 513),172
(NI)Ltd (1998AUER 778),204,205 D & F Estates Ltd v Church Commissioners for
Belcher Foods Ltd v Miller and Black and Others England (1989AC 177),22,24,31,173
(1998),159 Davis Contractors Ltd v Fareham UDC (1956AC
Bellefield Computer Services Ltd and Unigate v 696),62
Turner and Sons Ltd (2 July 1999) (BLISS Deepak Fertilisers and Petrochemicals v Davy
Construction Law Digest 2000, page 127),22 McKee (London) Ltd and Another (1998 2
Black Country Development Corporation v Kier Lloyds Rep 139),99
Construction Ltd (1996),203,204 Dunlop Pneumatic Tyre Co. Ltd v New Garage
Bouyges UK Ltd v Dahl JensenUK Ltd (1999),202 Motor Co. Ltd (1915AC79),135
British Steel Corporation v Cleveland Bridge and Edgeworth Construction v ND Lea & Associates
EngineeringCo. Ltd (19841 All ER 504),31 and Others (199366 BLR),27
British Sugar plc v NEI Power Plant Projects Ltd Edmund Murray Ltd v BSP International
(199887 BLR 42),29 Foundations Ltd (1992),162,164
Bryant & Son Ltd v Birmingham Hospital Ens vDerwent (19981,107
Saturday Fund (1938AllER503 21),28 Esso Petroleum Co. vMardon (1976 QB 801),31
Burden v Swansea Corporation (1957 3 All ER F.G. Minter Ltd v Welsh Health Authority
243),180 Technical Services Organisation (1980 13
Butler Machine Tool Co. Ltd v Ex-Cell-0- BLR, 1981 13 BLR I),28,198
Corporation (England) Ltd (1979 1 All ER Fairclough Building Ltd v Rhuddland Borough
965),79 Council (5Oct 1983),144,147
Caparo Industries plc v Dickrnan and Others Ferguson v Welsh and Others (1987 3 AER 7771,
(19902AC 605),22 172
Carr v J.A. Berrirnan Property Ltd (1953 ALJR GLC v Cleveland Bridge and Engineering Co. Ltd
273),196 (19868 CON LR 30),103
Centro-Provincial Estate v Merchants Investors GMTC Tools v Yuasa Warwick Machinery (The
Assurance Co. (1983CA),80 Times3 Jan19951,197
xvi TABLE OF CASES
General Building and Maintenance v Greenwich Junior Books vVeitchi (1983AC 520),21,22
Borough Council (The Times 3 March 1993), Koufos v C. Czarnikow (The Heron 11) (1969 AC
38,39 350),25
George Hawkins v Chrysler and Bume (1986 38 Linden Gardens Trust Ltd v Lenesta Sludge
BLR 36),24 Disposals Ltd (1994 1 AC 85),90
Glenlion Construction Ltd v The Guinness Trust Lubenham Fidelities v South Pembrokeshire DC
(198711 CONLR 127),103 (1986 6 CON LR 85),30,180
Gloucester CC ~Richardson(1969 1 AC 480),20 Macob Civil Engineering v Morrison Con-
Greater London Council v Ryarsh Brick Co. (1985 struction Ltd (199964 CON LR I), 202
4 CON LR 85),20 Mathew Hall Ortech Ltd vTarmac Roadstone Ltd
Greater Nottingham Co-operative Society v (199887 BLR96),159
Cementation Piling and Foundations Ltd MiIlar's Machinery Co. Ltd v David Way & Son
(1989 QB 71),23 (1934),29
Greaves v Baynharn Meikle (19753 All ER 99),24 Mitsui Construction Co. Ltd v AG of Hong Kong
Grinakar vTransvaal Authority (1982SACA),195 (198610 CON LR 1).115,195
Hadley vBaxendale (18549 Exch341), 29,194 Muirhead v Industrial Tank Specialities (1986 3
Halki Shipping Corpn v Sopex Oils Ltd (19982 All All ER 705),80
ER 23),204 Murphy v Brentwood District Council (19911AC
Harmon CFEM Facades (UK) Ltd v The 378),21,22,24,31
Corporate Officer of the House of Commons National Coal Board v William Neil & Son (1984 1
(28 Oct 1999),xiii, 39,67 All ER 555),99
Hedley Byrne & Co. vHeller and Partners (1963 2 North West Metropolitan Hospital Board v
All ER), 22,27,33,113,175 TA. Bickerton & Son Ltd (1970 1 WLR 607),
Henderson vMerrett Syndicates Ltd (1994 3 WLR 147
761),22,29,163 Norwich Union Life Insurance Society v P&O
Henry Boot Construction v Alsthom Combined Properties Holding Ltd and Others (1993 EG
Cycles Ltd (199964 CON LR 32),188 108),202
Hickman vRoberts (1913AC229),181 Outwing Construction Ltd v Randell & Son Ltd
Hoenig v Isaacs (1952CA 2 All ER 176),113 (1999 TCC loo), 202
Howard Marine & Dredging Co. v A Ogden & Oval (717) Ltd v Aegon Insurance Co. (UK) Ltd
Sons (Excavations)Ltd (19779 BLR34),27 (199654 CON LR 74),106
IBA vBICC (198014 BLR l),31 Pacific Associates v Baxter (1990 1 QB 993). 30,
IBA v EM1 Electronics Ltd & BICC (1978 11 BLR 178
29),24 Paddington Churches Housing Association v
ICI vBovis Construction Ltd and Others (1992 32 Technical and General Guarantee Company
CON LR90),196 Co. Ltd (1999 BLR244),104
Interfoto Picture Library v Stiletto Visual Peak Construction (Liverpool) Ltd v McKinney
Programmes Ltd (The Times 14 Nov Foundations Ltd (19701 BLR 11 I), 28
1987),42 Pearson Ltd v Dublin Corporation (1907 AC 351),
J. Crosby & Sons Ltd v Portland UDC (19675 BLR 27,99
121),196 Percy Bilton vGLC (1982 20 BLR I),138
JMJContractors Ltd v Marples Ridgway (1985 31 Perini Corporation v Commonwealth of Australia
BLR loo), 110,111 (1969 12 BLR 82),180
Jacobs v Morton and Partners (1994 72 BLR 92), Phillips Hong Kong Ltd v Attorney General of
22 Hong Kong (199361 BLR 41),136
John Jarvis v Rockdale Housing Association Rees and Kirby v Swansea City Council (1985
(1986 10 CON LR 51),194 CILL 188 56,5 CON LR 34), 29,30,198
Jones vsherwood Computer Services plc (1992 1 Ruxley Electronics v Forsyth (1996 1 AC 344), 25,
WLR 277),202 160
TABLE OF CASES xvii
Saphena Computing Ltd v Allied Collection Themehelp Ltd vWest and Others (1995 4 All ER
Agencies (3May 1989),215 215),107
Scott Lithgow vSecretary of Defence (1989),143, Thomas Bates v Thurrock Borough Council (CA
144 22 Oct 1975),26
Shanklin Pier Ltd vDetel Products Ltd (19512 All Trafalgar House Construction (Regions) Ltd v
ER 471),20,22 General Surety and Guarantee Co. (1995),xiii,
Simaan General Contracting Co. v Pilkington 104
Glass Ltd (19881 QB 758),23 Turiff Construction Ltd and Turiff Ltd v Regalia
Sir Lindsay Parkinson & Co. Ltd vCommissioner Knitting Mills Ltd (19719 BLR20),31
of Works (1950AUER208),196 United Trading Corporation and Others v Allied
Southern Water Authority v Lewis & Duvivier Arab Bank Ltd and Others (FT Commercial
and Others (19841 CON LR 40),164 Law Reports 17 July 1984),106
St Albans City and District Council v ICL (1996), Victoria Laundries v Newman (1949),29
169,210,215 Viking Grain Storage Ltd v T.H. White
Steel Company of Canada Ltd v Willand Installations (19853 CON LR 52),24
Management Ltd (1966Canadian case),81 Walford and Others v Miles and Another (The
Strachan and Henshaw v Stein Industrie (UK) Times 27 Jan 1992),119
Ltd and GEC Alsthom Ltd (December 1997 West Faulkner Associates v Newharn London
CAI, 80,98,99,185 Borough Council (The Times 18 Nov 1994),
Sutcliffe vThakrah and Others (1974AC727),178 103
Tate & Lyle Food & Distribution Ltd v GLC (1982 Wharf Properties Ltd and Another v Eric
1 WLR 149),28,197 Cummins and Associates (1991),196,197
The Heron I1 (1969 AC 350 - Koufos v C. Wimpey Construction UK Ltd vPoole (The Times
Czarnikow Ltd),25 3 May 1984),24
The Queen in Right of Canada v Walter Cabott Wraight Ltd v P.H. & T. (Holdings) Ltd (1968 13
Construction Co. (197521 BLR 42),107 BLR 26),28
The Salvage Association v CAP Financial Services Young & Marten Ltd v McManus Childs Ltd
Ltd (1995FSR 654),166,209 (19699 BLR 77),146
PART ONE
CONTRACT PLANNING
CHAPTER ONE
Planning process
PROCUREMENT OF WORKS OR ization should an outside consultant be engaged
SERVICES and then his engagement should be strictly
limited to the planning stage with no ongoing
With any project the client's first step should be commitment. Every precaution should be taken
the development of a procurement strategy to ensure that the persons providing advice to
which will best satisfy that client's business the project sponsor, whether from in-house or
objective. This strategy need not necessarily an outside consultant, do not have a vested
involve the client in undertaking construction. interest in which option is selected. A person
On examining the alternatives open to the client hoping to obtain design work if the construction
it may be found that selecting a construction option is chosen may not be the best person to
project is not the optimum way of meeting the act as an unbiased adviser.
aims of the business and obtaining best value for
money. Rather than constructinga new facility it
may be more cost effective to contract out the BUSINESS CASE
services which the facility was intended to pro- If after appraisal of the alternatives the construc-
vide. In some circumstances the provision of tion procurement route is selected as the pre-
those services by the service provider may ferred option then the client can proceed with
necessitate the construction of particular works. the next stage of planning the project. This is
But the contract which is then entered into by where any mistakes made will be difficult to cor-
the client is essentially one for the supply of the rect later and where time and money can most
services and not for the design and construction easily be lost or saved. Plan before you construct
of those works; that then becomes the responsi- -the first law of contracting.
bility of the service provider. This is an import- The planning should be undertaken by a
ant issue when entering into public private team under the leadership of the project spon-
partnerships, particularly private finance sor. The team will include representatives of the
initiative schemes (PFIs),which are considered user, technical, commercial and financial func-
further in Chapter 2 (seep. 17). tions with any professional adviser who has
Before therefore the firm or authority decide already been appointed. The initial task of the
to procure construction works on their own team is the preparation of a business case in con-
account they should satisfy themselves that firmation of the decision to proceed with con-
doing so is the most efficient and cost effective struction procurement and to provide the basis
means of fulfilling the business aims over the for the development of the project's strategic
projected life of the facility concerned. In order plan. The following information should be
to do this the client needs to appoint a senior included in the business case, much of which
person within its own organization to take over- should already be available from the work done
all charge of the project - sometimes referred to by the team in making the comparison between
as 'the project sponsor'. The project sponsor will the alternative procurement strategies:
require professional advice regarding the
options open to the client and their associated the outline capital and operating budgets for
costs, benefits and risk. Preferably this advice the project over its expected lifetime
should be obtained in-house from the client's the quantified benefits to the client which the
functional departments. Only if there are no project is expected to deliver
appropriate skills available in the client's organ- how the project is to be financed
4 CONTRACT PLANNING
a risk assessment in terms of cost, time and importance to the transaction in question.
performancegiving the extent of the risks and Sometimes from even a cursory examination
the probability of their occurring-this should one factor will stand out as of vital significance. It
also show how the risk is to be managed and may be time of delivery. Once this has been
the extent to which these risks are to be sup- established, then all subsequent actions will
ported by contractors and consultants or need to be subordinated to its achievement: the
covered by insurance and those which will be selection of the supplier, the formulation of the
left to be borne by the client specification, the placing and wording of the
the outline programme for the project contract, the action on progressing; all must be
the procurement system to be used compatible with the defined objective.
the resources which the client will require for More often no single factor stands out so
the management of the project and how these clearly that others can be ignored. Certainly
are to be provided either in-house or by the delivery on time may be important, but so too
engagement of consultants. may be quality and price. Some sacrifice
may be necessary in the interest of speed, but
Many of these issues are inter-related. The there are limits beyond which the pursuit of
apportionment of risk as between the client and speed may become largely a self-defeating exer-
others will depend upon the procurement sys- cise.
tem to be used as will the management The list below sets out the main factors which
resources. The budget and the programme are are commonly comprised within the client's
inter-related with the benefits which the client is objective:
expecting the project to produce. The issues
need therefore to be considered as a whole to Time How soon must the project be com-
ensure their consistency and trade-offs will have pleted? How valuable to the client is each
to be made as necessary between one issue and week by which completion is earlier and what
another. financialdetriment would the client suffer for
each week of delay?
Cost How serious would a cost over-run be?
CLIENT'S OBJECTIVE
How important is it to the client to know the
Any purchase is almost of necessity a compro- final cost at the time of placing the contract(s1
mise. There are few occasions when any for the project?
employer can afford to have the best of every- Performance What guaranteed level of per-
thing, even if this were obtainable. Shorter deliv- formance must the project achieve?What are
ery may only be achieved at the expense of the consequences to the client if this level is
higher prices. What one can afford may deter- not achieved?
mine the quality of what one can buy. Shortage Quality What level of quality is required?
of capital may cause the purchase of equipment What is the required life of the project?
with high maintenance costs. Shortage of labour, Technical complexityIState of the art How
or the need to reduce dependence on labour, complex is the project required to be and how
may necessitatethe purchase of equipment with near to the state of the art? Has a project
a substantial degree of built-in automation. The already been successfully completed to the
absolute need from the safety angle to ensure same or similar specification?
complete reliability and conformity with rigor- nexibility Does the client expect to have to
ous specifications may limit the choice of sup- make significant changes to the project dur-
pliers to those possessing the highest standards ing construction in order to meet the business
of quality control. objectives? Should the project be capable of
The process of defining the objective starts expansion to meet a future increase in
therefore with the selection of those factors demand?
which are regarded as being of the maximum Risk What are the main risks to which the
PLANNING PROCESS 5
project is exposed?To what extent is the client EXAMPLE

personallywilling and able to bear these risks? An example of a set of objectives for the design
Involvement To what extent does the client and construction of a processing plant is set out
wish and have the capability to be involved in below
the design and management of the project?
The capital budget for the project is E5 million
These factors are also significantly inter-related. which includes a 10 per cent contingency.The
If the project is required to be of a high quality, to annual operating budget covering staff,
meet stringent guarantees and is complex then labour, consumablesand spares is El million.
there are technical risks which may impact on The project is required to be in commercial
the achievement of the completion date. To the operation within 24 months of the decision to
extent that the client foresees the need to make go ahead.
modifications then both the completion date The profitability of the project is sensitive to
and the final cost will be affected. A client who an increase in the capital costs over 10 per
wishes to be involved closely in the design of the cent or the operating costs over 15 per cent.
project must accept the responsibility which Any delay in completion would cost the com-
goes with that involvement and the risk again to pany around £40 000 a week in lost income.
both the programme and cost. On the other The company is only interested in a proven
hand if the client is willing to stand back from the process which is already in use elsewhere. Any
design and management then those risks may be contractor would have to demonstrate a refer-
passed wholly on to the contractor. However this ence plant for which he was responsible for
will be reflected in the contract price and the the design and construction and which had
client will need to ensure that the contractor is been in successful operation for a minimum
capable of absorbing the risks. of 12 months.
Time, cost and capacity, using that term to The plant is to be of high qualitywith an oper-
refer not just to the size but also to the design ating life of 25 years. The plant will operate
and technical qualities of the project, have continuously other than for a two-week
largely a fixed relationship. If one has a certain annual shut-down. Key items of the plant (to
value then so do the other two; alter one and be identified) must be guaranteed for ten
you alter at least one of the others. This may years against any defect which would cause a
be described as the second law of contracting. If, plant stoppage.
for example, it is once established that the logic The plant must be capable of processing 50
of a situation is that the capacity required cannot tons per hour of raw material. The processed
be met within the price limit set by manage- material should have a purity level of at least
ment, or only if the time is extended, then man- 97 per cent with a yield of 90 per cent. At any
agement must be informed at the earliest purity level below 95 per cent or a yield of less
possible moment so that they have the oppor- than 80 per cent the plant would not be com-
tunity to reconsider and, as necessary, redefine mercially viable.
the objective. It is no use hoping that somehow The client will personallyfinance the project.
the price will come out all right on the day or that The chosen site is within an industrial com-
savings in time can be achieved by shutting plex owned by the company. The main risk is
one's eyes to reality. It just does not work that the non-achievement of the purity and yield
way. levels which is to be solely the contractor's.
The project sponsor is responsible for distill- The client will accept no responsibilityfor the
ing the answers to these questions into a set of design of the plant.
objectives which will be used to decide on the The plant is to be designed so that an
procurement system to be used and will form the additional production line capable of
basis of the criteria upon which tenders will later handling 25 tons of material an hour could be
be assessed. installed with the minimum of interruption to
6 CONTRACT PLANNING
production. Provision is to be made for this is never sufficient to say that certain goods are to
addition in the sizing of the power and other be supplied, plant manufactured or works con-
supplies to the plant and any common facili- structed by a defined date without at the same
time thinking of what might be called 'the three
, ties- Ws'. This then is the third law of contracting:
'that for each contractlproject there must be
METHOD A N D RESPONSIBILITY
stated: what - by whom - and by when'.
From the definition of the objective in time The most commonly used systems of
and a study of the resources both available procurement, the allocation of responsibilities
and required the team can proceed to the plan- within each, their respective advantages and
ning of the method to be used and the responsi- disadvantages and the key decision criteria are
bilities to be allocated to achieve the objective. It examined in the next chapter.
CHAPTER TWO
The contract plan

Following the decision to procure a construction dations by the Government, the emphasis in
project a contract plan needs to be prepared for planning has been placed firmly on two areas:
the total project, not just for the letting of the
the integration of the key players in the con-
principal contracts, but for every activity which
struction supply chain, particularly the
has to be carried out to bring the project to its
designers and main contractors,and
conclusion, including those which are to be per-
the selection of a procurement method which
formed by the employer himself. Nor in its total-
will provide overall value for money over the
ity is it concerned solely with engineering and
whole life of the facility being constructed.
construction. It should cover the provision of
funding and all those associated activities such
as purchase of land, obtaining of wayleaves, PROCUREMENT ROUTES
planning permissions and the like and even
recruitment of staffllabourand agreements with Four main procurement routes can be followed
the unions for working at new locations or with in addition to PFIs, which were referred to in
different operating procedures. With a new Chapter 1 and which are considered in more
process plant or other production facility it may detail at the end of this chapter. These are:
need to cover the conclusion of offtake agree- full turnkey
ments with future purchasers of the product partial turnkey
since these may be a vital part of the financing traditional client co-ordinated
arrangements for the construction works. management contracting.
Indeed with a project which is to be financed
primarily on the security of the profits to be These are not terins of art and within each
expected from its operation, such as a new gas- method there are, in practice, variations. The
field, the Channel Tunnel or new motonvay methods will now be briefly described and the
construction, the lenders will be concerned with advantages and disadvantages of each dis-
ensuring that every item which can possibly cussed. Some decision criteria will then guide
affect the level of profitability has been taken the client as to which to adopt.
into account in the planning process. The same
approach should be adopted by any employer FULL TURNKEY
concerned with a new project, large or small, The term 'turnkey' is used in its original sense to
since too many projects have failed to produce mean a contract where the contractor under-
their intended benefits because of a failure to takes the total responsibility for the design,
anticipate, plan for and implement those associ- engineering, procurement, construction, com-
ated activities. missioning and testing of the works and training
Having drawn attention to that issue it is of the client's staff. That is, everything which
intended within the scope of this work to con- necessary for the client who only has to 'turn tk
centrate on just those actions which are related key' in order to commence production or othc
directly to engineering and constructionworks. use of the facility. The client's responsibilitit
The contract plan selects the procurement are limited to the definition of the!ir requirc
route to be used for the execution of the project. ments, making the site available, I monitorir
Since the publication of the Construction Task progress of the work, payment and'taking over
Force Report Rethinking Construction in July the project when it has passed its guarantee
1998 and the adoption of many of its recommen- tests. All other obligations relating directly to the
8 C O N T RA C T PLANNING
design and execution of the project are under the accordance with the Contract and fit for the pur-
sole responsibility of the turnkey contractor and pose for which they are intended as defined in
without interference or approval by the client. the Contract'. The NEC form is intended to
It follows that the terms of contract must be impose the liability upon the contractor to
substantially more onerous on the contractor design strictly in compliance with the works
than those normally found in most standard information, unless Option M, which provides
forms of contract. For example: that the contractor's liability is limited to the use
of reasonable skill and care, is included in the
the design obligation of the contractor is
contract. However, even the FIDIC form has its
strict, that is that the project is fit for the pur-
limitations. For example, the defects liability
pose as defined in the client's requirements
period is 12 months and there is provision for
a restricted list of named events entitling the
tests after completion.
contractor to an extension of time
The points are not academic. If the project is
take over of the project by the client only after
being financed on a project finance basis then it
the guarantee tests have been passed or liqui-
is very probable that the lenders to the project
dated damages paid for low performance
will require the contractor to accept a turnkey
extended defects liability period - minimum
form which imposes strict liability on design,
five years - with liquidated damages for any
despite the difficulty which the contractor may
period the project is out of operation due to
have in obtaining professional indemnity insur-
defects
ance on this basis (seefurther Chapter19, p. 175)
on-demand performance bond and, if appro-
and also the other onerous obligations referred
priate, parent company guarantee on an on-
to earlier.
demand basis.
There can be added to the contract obliga-
There are certain industry forms under which the tions on the contractor to maintain and even
contractor has a design responsibility but which, operate the facility after its construction. It has
unless heavily modified, are not 'turnkey' con- been suggested by the Government - Pro-
tracts. ICE and JCT forms for design and con- curement Strategyno. 5-that adding this option
struct or design and build contracts do not place will provide the contractor with an increased
the whole design responsibility on the contractor. opportunity for adopting innovative solutions
The design is often undertaken by the contractor that provide better value for money. Certainly if
on the basis of a design concept prepared by the contractor is to be responsible for future
designers engaged by the client. Furthermore the maintenance on a firm price basis then it will be
contractor's design obligation is frequentlystated in the contractor's interest to ensure that the
in such contracts to be only one of exercising facility is designed with the objective of reduced
reasonable skill and care and not that the works maintenance costs and ease of carrying out
as constructed will be fit for the purpose laid maintenance work.
down in the client's statement of requirements Prime contracting referred to in Pro-
upon which the contractor'stender was based. curement Strategy no. 5 is another form of
Similarly for plant contracts the contractor's turnkey, yet to be proven in practice, in which
design obligation in form MFI1 is not a strict the prime contractor is responsible for bringing
obligation of fitness for purpose. Moreover none together all the parties in the supply chain and
of these standard forms includes the more oner- providing the client with a single point of
ous obligations referred to above as being neces- responsibility over the life of the project. It will
sarywith a true turnkey contract. include therefore facilities management.
The only standard form to state the more
onerous design obligation clearly is the FIDIC PARTIAL TURNKEY
Conditions of Contract for Design and Build - With any form of partial turnkey contracting the
Turnkey, which provides that 'The Works as division of work and responsibilities as between
complete by the Contractor shall be wholly in the employer, the consultants and the turnkey
THE C O N TRACT PLAN 9
contractor is necessarily less clearcut and sub- the Government and the major public utilities.
ject to variations to suit the wishes of the parties. Now the Government has changed its mind and
To the extent that the employer now undertakes its Procurement Strategy Document no. 5 has
certain work either directly or through consul- come out strongly in favour of
tants or other contractors independently of the
public private partnerships
turnkey contractor, the employer's level of
design and construction with, where appro-
responsibility will increase, both for the work
priate, maintain and operate
itself and the co-ordination of that work with
prime contracting (referred to above)
that for which the turnkey contractor remains
framework agreements.
responsible. Perhaps the most common form of
arrangement is that in which the turnkey con- The document goes on to state that traditional
tractor undertakes responsibilityfor work within forms of construction procurement, where the
what is often referred to as 'battery limits', i.e. detailed design is largely completed before the
the main process or production plant itself, main contractor, sub-contractors and specialist
whilst the employer contracts separately for the suppliers become involved, limit the opportuni-
supporting facilities. The employer may also ties for eliminating wasteful activities and
wish to have a close involvementin the design of, achieving value for money. They should only be
and supply of equipment for, the production used where there is a very clear case that they
plant. But in so doing he must balance whatever will deliver better value for money than other
advantage he believes he gains, against the procurement routes in terms of whole life costs
resultant diminution in the turnkey contractor's and overall performance.
contractual responsibilities. What he cannot Since they became privatized and discarded
do - although many make the attempt - is to their in-house technical capabilities, the major
dictate to the turnkey contractor how he should utilities, especially in the power industry, also
perform the work, whilst seeking to hold him now favour turnkey contracting. A recent esti-
wholly responsible for the results. In my view mate in the European Construction Institute's
the only sensible division of activities, and ECI News is that over 50 per cent of the world
therefore of responsibilities, as between the market for power plants is turnkey and the trend
employer and the turnkey contractor is that is upward.
the employer's involvement is limited to those It is too early to assess the full impact of the
activities which do not impact directly on the Government's change of approach to public pro-
production plant, for example, a separate curement and to knowwhether or not this will be
contract for the landscaping, the perimeter fenc- followed by local authorities. What is clear is the
ing and lighting, the office block and the gate- Government's intention to focus on the total
house. process of design, construction, operation and
maintenance over the life of the facility and that
TRADITIONAL CLIENT CO-ORDINATED specifications should be outcome based and not
With this method design is the responsibility of prescriptive of the details of how the outcome is
the client, usually through the engagement of a to be achieved.
consulting engineer or architect, and the main
contractor's responsibilityis limited to construc- MANAGEMENT CONTRACTING
tion in accordancewith the design and specifica- The management of a project, both as a whole
tions produced by the engineerlarchitect. and its component activities, such as design and
Further the project may be divided into separate construction, has long been recognized in the
packages with one contractor being responsible US as a separate discipline, and this concept has
for each and the client, again through the now become widely accepted within the UK. The
engineerlarchitect, being responsible for the issue is then how the project should be managed
co-ordination of the separate contracts. for the benefit of the employer and three differ-
Traditionally this method has been used by ing approaches can be distinguished:
CONTRACT PLANNING
1 Project management. The employer appoints concept of construction management. It was the
a professional project manager to act on his construction manager who was supposed to
behalf in the management of the project. manage both design and construction and be
2 Construction management. Under this form responsible for the design programme, monitor-
the construction manager enters into a direct ing the design progress and for the buildabilityof
contract with the employer for the manage- the design. In the US, where the concept origi-
ment of the construction of the project and nated, the construction manager is the leader of
may undertake a responsibility in relation to the team both for the management of the design
time and cost. All other consultants and con- and for construction. This is not the usual
tractors also enter into direct contracts with position in the UK where the leader appears to
the employer. be the employer.
3 Management contracting. Generally under Two other issues arise. First, that of the liabil-
this form the employer appoints one contrac- ity of the construction manager for the work of
tor who cames out none of the work himself the various trades contractors. It can be argued
but sub-contracts all of it to works contractors that the construction manager should have a lia-
responsible directly to himself but under the bility for them, since otherwise the employer, by
control of the employer, through his project having a multitude of separate contractors each
manager. The design and other consultants working to him and each likely to blame the
are appointed by, and responsible to, the others if anything goes wrong, would be left in
employer. practice without an effective remedy. (Elizabeth
Jones in the International Construction Law
The appointment of professional project man- Review 1993, at p. 353, argues this way.) Against
agers has become much more widespread in UK this it is suggested that making the construction
practice and is specifically provided for in the manager responsible for the trades contractors
New Engineering Contract (see p. 94). The main removes him from being a part of the employer's
problem with such appointments lies in the team and recreates the climate of adversarialism
degree of responsibility which the project man- a reduction in which it was intended that this
ager owes to the employer and possibly also to method of contractingshould achieve.
the contractors. This issue is discussed further The second issue is that of the liability of the
later (see next column). Their contract does not construction manager himself. He will clearly
affect the contractual relationship between the be responsible to the employer for exercising
employer and others and so will not be discussed reasonable skill and care in the performance of
further. his duties and may, depending on the definition
Construction management in its usual form of his scope of responsibility, be under a greater
does, however, affect the employer's contractual duty (see p. 184).
relationships with others. The employer is Further it is considered that the contractual
placed in direct contract with the various trades duty of the construction manager to the
contractors who may well include some whom employer to supenrise the work of construction
under the traditional client co-ordinated or installation would include the responsibility
method would have been nominated sub-con- of being familiar with any particular methods of
tractors to the main contractor. The employer work to be employed and knowledge of any
also being in direct contract with the other pro- manufacturer's instructions to be applied. In
fessionals, such as the architect and structural this respect and depending on the terms of the
engineer, may find himself faced with significant particular contract it seems that the construc-
tasks of co-ordination and administration which tion manager's responsibilities for s u p e ~ s i o n
may necessitatethe appointment additionally of could be greater than those of an architect or
a project manager unless his contract with the consulting engineer.
construction manager is extended to encompass The third method, management contracting,
those tasks. This is quite contrary to the original has lost something of its one-time appeal. Under
THE CONTRACT PLAN 11
this method it is normal for the management little part and most contracts are developed by
contractor to be responsible to the employer for individual clients or contractors. In practice
the work of the works contractors with whom he therefore the responsibilities may vary from one
is now in direct contractual relationship, but contract to another.
ultimately his liability for a breach of contract by
a works contractor is generally limited to thk
ADVANTAGES AND DISADVANTAGES
amounts which he is able to recover from that
OF DIFFERENT METHODS OF
works contractor in arbitrationllitigation.In the
CONTRACTING
absence of such a limitation his liability would
hardly be different from that of a normal main The sum of the risks and responsibilities
contractor. That his liability should extend to involved in the execution of the planned project
being fully responsible for failures in time, price do not change because of the method of con-
or standards of work of his sub-contractors is a tracting which is adopted. They are a function of
view which has often been expressed by tradi- the nature of the project itself and its location
tionally minded quantity surveyors. Such a view related to the technologyto be employed and the
retains the time-honoured adversarial relation- physical and political conditions under which
ship and with it the role of the professionalquan- the work is to be executed. What the particular
tity surveyor acting for his client in opposition to method of contracting chosen will do is to allo-
the contractor, and negates the very purpose of cate the risks as between the parties involved
the management contractingsystem. and in so doing affect the likely outcome of the
The difficulty with management contracting project in terms of cost, time and performance.
is that it does not place the management con- Considering the four methods which have
tractor firmly on either the employer's or the been discussed the advantages and disadvan-
contractor's side of the table and bitter experi- tages of each are now summarized:
ence has taught the author that you cannot sit on
both. The greater the degree of responsibility FULL TURNKEY
which the employer seeks to place on the man- Advantages
agement contractor in terms of completion to
time and to a predetermined cost, the more 1 Places maximum responsibilityfor the project
closely his role resembles that of a conventional in the hands of one organization and mini-
main contractor and the more strongly is re- mizes the need for the employer to employ his
created the adversarial contractual relationship own resources or engage consultants. It has
between employer and contractor which it been the experience of the Department of
was one of the objectives of the management Transport that the use of design and build
contracting system to remove. Again the contracts for roads has substantially reduced
management contractor under a standard form the staff on site, especially from the consult-
such as that produced by the JCT, although ants, with resultant economies in cost. (See
required to co-operate with the employer's pro- the paper given by Tony Holland of the
fessional team responsible for the design, is not Department at the Conference on the ICE
himself responsible for the management of the Conditions of Contract Design and Construct
design process. This is clearly a great weakness organized by IBC Legal Studies and S e ~ c e s
in that it dilutes his responsibility for the pro- Ltd held on 7 December 1992.)
gramme. 2 It should bring about the completion of the
The respective responsibilities of the project project within the shortest possible period of
manager, construction manager and manage- time.
ment contractor as they are commonly found in 3 By making the design part of the competitive
contracts in current use are illustrated in the tender it encourages innovation and econv-
charts in Figure 2.1 but it must be remembered mies and should result in lower projel
that this is an area in which standard forms play costs.
CONTRACT PLANNING
1 PROJECT MANAGER
Employer
Project -----------------,
------------- manager
I I
I I
I
I I
I I
I I
v I
I
I
Designers Contractors
2 CONSTRUCTION MANAGER
Employer
I --- -------
v --------
A I
I Contractors
Designers r _ _ _ _ - - - _
3 MANAGEMENT CONTRACTOR
I-----------
Employer 1
C
Designers Management
----------- contractor
Works sub-contractors
Figure 2.1 Management contracting forms of responsibility

THE CON TRACT PLAN 13
4 It should enable economies of cost to be choice of firm concerned. Accordingly the

secured by the synchronization of design, contract must contain stringent guarantees
procurement and construction so avoiding and penaltiesand the employer must be satis-
the delays and diseconomies inherent when fied that he has sufficient financial security
designers, purchasing agencies and construc- from the turnkey contractor to enforce these
tion contractors belong to different organiza- should the need arise. Such guarantees must
tions. cover fitness for purpose, without the need for
5 It should reduce to a minimum claims against the employer to establish negligence, and run
the employer for extras since it is up to the for a period long enough to establish that this
turnkey contractor to deal with claims arising requirement has been satisfied - a minimum
from the delay or bad performance of one of five years from completion.
sub-contractor on the work of another. This 2 Depending on the size and complexity of the
means that the out-turn costs should be very project the employer may find that his choice
close to the original contract price. However of firms to compete for the work is very
these advantages will only be secured if the limited due to the increased costs of tendering
employer: and the scale of engineering, managerial and
financial resources needed.
Has selected the right turnkey contractor in 3 The contract price is bound to reflect the scale
the first instance and 'right' here is usually of the risks which the turnkey contractor is
not the apparent cheapest. The technical, accepting, of the resources which he is
managerial and financial resources which required to employ and the relative lack of
the turnkey contractor possesses and is competition.
both able and willing to devote to the con- 4 Against the advantages of the 'turnkey' form
tract are of greater importance than the ini- there is the undoubted risk that the contractor
tial price. will be influenced in his decisions on detailed
Was able at the time of tendering to define design, selection of vendors and construction
his requirements in sufficient detail to methods primarily by commercial factors and
enable the turnkey contractor to give a firm that the eventual project, while meeting
price. specification, will not incorporate factors of
After contract award does not make sub- safety or of long-term life of the type upon
stantial and/or recurring changes in his which a professional consulting engineer
requirements and leaves the turnkey con- would probably insist. This risk will be
tractor to get on with the work without reduced to the extent that the contractor's
interference either from his own staff or obligations cover the maintenance and where
consultants. Of course the employer would appropriate the operation of the facility so
be rightly concerned to see that the project that the contractor has a long-term interest in
is monitored to ensure that the work is the quality, safety and reliability of the facility,
being carried out in accordance with the including its impact on the environment and
contract terms, but he must not start trying on the health of those working there. The con-
to 'second guess' the contractor in terms of tractor should then be motivated to build
design, procurement or construction. This these factors into the design of the facility in
is a temptation which it is often hard for the first instance. If it is not practical to give
either the employer's own engineers or the contractor these additional obligations
consultants to resist. then the employer must require the con-
Disadvantages tractor as part of the tender to demonstrate
how the contractor's design will take these
1 Once the selection of the turnkey contractor factors into account over the life of the facility
has been made there is little opportunity for and make this an essential element in the
the employer to correct any mistake in the tender assessment.
I 14 C O N T R A C T PLAN N I N G
Design and build 2 Each work-package will be tendered for on a

Although as indicated above design and build is basis which will ensure the most competitive
not strictly a turnkey contract it does have certain prices. If the work can be executed under a
of the advantagesfor the employer which turnkey single main contract the co-ordination is lim-
contracting possesses. It should reduce the time ited to that between design and construction
for completion and produce economies in cost and between the contract work and any other
through the involvement of the contractor in the associated activities.
design and the inclusion of at least the detailed 3 The employer through his consultant or own
design within the competitivetendering process. engineering department retains control over
the project and changes can be accommo-
PARTIAL TURNKEY
~
dated within the contractual procedures.
Advantages Disadvantages
1 For the work which is the responsibility of the 1 There is no competition for the design.
turnkey contractor then the same advantages 2 The design will not be complete at tender
apply as for total turnkey. stage because design input is required from
2 The employer is given the opportunity of con- specialist sub-contractors who will only be
tracting separately and probably more appointed at a later date under the nomina-
cheaply for the ancillary work, which is out tion system (seep. 144).
with the scope of the turnkey contract. This 3 The design will not incorporate any construc-
can allow him the chance to give work to tion 'know-how' from contractors.
smaller local firms.
~
4 Assuming the use of a traditional form of
contract the stage will be set for a display of
Disadvantage
adversarialism.
1 The employer must resist the temptation to 5 The contractor will build as instructed but in
undertake ancillary works which are neces- no sense will own the design or feel any
sary for the proper functioning of the works responsibility for it or be concerned as to
being undertaken by the turnkey contractor. whether or not it meets the client's require-
If he fails to do this, or is prevented from so ments, even if aware of these.
doing by local regulations or the method of 6 There is a discontinuityin the supply chain.
financing, and the ancillary work is late, then 7 If there are two or more main contractors
the employer will have paid in the turnkey involved in the project who are dependent
'
contract price for the speed of construction of upon one another for information, it must all
that element but without achieving any over- be channelled through the employer or the
all economic advantages. A typical situation employer's consultant thus causing delays
in which this occurs is where the turnkey con- and claims.
tract is financed by bank finance but the ancil-
lary works have to be paid for out of the MANAGEMENT CONTRACTING
employer's own budget and either the money Advantages
is not available when required or the bureau-
cratic procedures involved are such that con- Savings in time can be achieved in compari-
tracts cannot be awarded at the right time. son with the client co-ordinated method
without the employer having to commit
TRADITIONAL CLIENT CO-ORDINATED himself to a turnkey contractor. This can be
especially valuable where time is short and it
Advantages
is necessary to start construction on one
1 The employer obtains the benefit of indepen- work-package prior to the completion of
dent professional design and supervision of design on others and 'leap-frog' design and
the construction of the works. construction while handling the changes
which this will necessarily involve - what is scale relative to the client's resources then
often referred to as 'fast-tracking'. there may be an argument in favour of the tra-
2 With construction management there can be ditional client co-ordinated method. There
savings in cost to the employer because of the will be less scope for innovative design, a
'hard-nosed' commercial attitude which the lesser advantage to be obtained from design
construction manager will bring to the and construction integration and the turnkey
engagement and control of the works con- option would be likely to be more expensive.
tractors. This will be accentuated if the con- Against this, however, if there are substantial
struction manager is on a bonus for bringing savings to be made from earlier completion
in the project under budget. then these may outweigh the other factors
Disadvantages and show that the best overall advantage is to
be obtained either by turnkey or possibly
1 In the same way as in the client co-ordinated some form of management contracting.
method the employer has to accept the risk of 2 In the opposite case, where the project is large
claims from one contractor by reason of the and/or complex relative to the client's
default of any of the others. His hope is that resources, the turnkey method will almost
the management contractor will have acted to certainly be the most advantageous.
minimize the impact of these.
2 The employer will not know the out-turn cost TIME FOR COMPLETION
of the project at the start, although he will
expect that the budget from the management 1 With revenue or cost-saving projects the extra
contractor should be reasonably accurate. value to be obtained from early completion
will favour the use of the turnkey or manage-
ment contracting method since either is likely
DECISION CRITERIA to lead to a more rapid completion than the
This section sets out the factors which can be client co-ordinated.
relevant to the employer's decision as to which 2 Consideration must be given, however, to the
method of contractingto adopt. time taken in the pre-qualification of bidders
and the analysis of tenders which will be likely
METHOD OF FUNDING to take longer with the use of the turnkey
1 If the client is able to fund the project from his method.
own resources then, unless otherwise
ECONOMY OF DESIGN AND
restrained, he is free to adopt whichever
MAINTENANCE1OPERATING COSTS
method he considers is best suited to provide
him with value for money over the whole life 1 The Government appears from Procurement
of the facility. Strategy no. 5 to have made up its mind that
2 If the client wishes to obtain finance against design and construct together with, where
the security of the project itself and the profits appropriate, maintain and operate should be
which it is expected to generate, then the the norm for competitive tendering as this will
lenders are likely to insist that it is executed result in the client getting better value for
under a turnkey form of contract. This will money over the life of the facility. Com-
provide them with the best form of security petition in design on its own, without operat-
and can be expected to ensure that the project ing and maintenance costs being taken into
is completed to time, specification and account in tender assessment, would not
budget. seem likely to achieve the Government's
objective. The contractors when bidding will
PROJECT SIZE, COMPLEXITY AND CLIENT simply design down to the lowest initial
RESOURCES capital cost which will have an adverse effect
1 If the project is basically simple andlor small- on future operatingand maintenance costs.
16 CONTRACT PLAN N I N G
2 If this is to be avoided realistic steps must be equally he loses the price benefit of competi-
taken at the time when tenders are invited to tive bidding from main contractors.
make it clear to the tenderers that operating
and maintenance costs over the project's life
will be assessed and taken into consideration
SUMMARY AND CONCLUSIONS -
CONVENTIONAL METHODS
when making the appraisal. Sadly firms are
only likely to believe this when they see it 1 The preparation of a contract plan is an essen-
being done in practice. This is permitted tial step in the execution of any project no
under the Public Procurement and Utilities matter how simple.
Directives provided that in the tender notice 2 There is no single or perfect answer. Each plan
in the Official Journal it is stated that the represents a trade-off between conflicting
award will be made to the most economically interests: shorter time against lower capital
advantageous offer and the criteria for assess- cost; unified responsibility resting with the
ment are stated in the notice or in the invita- contractor against retention of control by the
tion to tender. employer; design competition against Rolls
Royce standards; employment of local
CERTAINTY OF OUT-TURN COSTS resources against optimum costlcompletion
1 Provided that the client has made a decision time.
and does not change it later on a lump sum 3 The preparation of the plan, because of the
turnkey contract is the best method of avoid- trade-offs involved, cannot be the work of one
ing additional costs. It provides the least department or function. Each must be repre-
opportunity for the making of variations or for sented on the planning team and manage-
interference by the client or the client's con- ment are only interested ultimately in the
sultants with the contractor's work. whole; they are not concerned with the bits or
2 With any other method, particularly manage- who does them. Unfortunately over the years
ment contracting, changes are relatively easy the professions associated with construction
to handle and costs have an alarming ten- would seem at times to have forgotten this, so
dency to escalate over original budgets. A that not only have activities been portioned
management contract which utilizes 'fast- out between different people when more
tracking' is likely to save time but the cost can properly they belonged together, but each
be high and if the client's budget is limited portion has acquired merit for its individual
and additional funds would be hard to find, worth and not necessarily for its contribution
then the price needs to be definitively settled to the whole.
in advance of construction and severe restric- 4 However much he may delegate to his consul-
tions placed on the making of changes. This tants or turnkey contractor the ultimate
means of course that the design must be responsibilityfor the project always rests with
settled and frozen at the outset. the employer. It is essential therefore that he
There are management contracting appoints at the commencement of the plan-
methods in which the price and design are ning process and retains throughout the pro-
refined in an iterative process of negotiations ject an individual to act as the project sponsor
between the employer and the management who has the authority to represent him with
contractor and a maximum price established all external organizations and to co-ordinate
before construction starts, but it is difficult to the activitiesof his own internal departments.
see - other than perhaps quality - what
advantage they offer over conventional meth-
PRIVATE FINANCE INITIATIVE
ods. Certainly it cannot be time and if it is
SCHEMES (PFls)
claimed that the employer gains in terms of
cost from the collaboration between his archi- In addition to the four methods referred to above
tects and the management contractor then there is also public private partnerships includ-
ing PFIs which were referred to earlier. To the to the extent to which the service is available
extent that the provision of the services necessi- and conforms to the authority's requirements
tates the construction of works, the service as specified in the contract. Payment will usu-
provider will finance, design, construct, operate ally be in proportion to the number of units or
and maintain the works over the period of the places which are available. Payment will only
contract. The fee for this service is intended to commence when the service is available.
recoup total costs including those of financing Alternatively payment may be linked to the
and earn the provider a profit. Such schemes are usage or volume but only in cases where the
similar to those known as BOOT (build, own, usage or volume can be predicted by the con-
operate and transfer) under which a concession- tractor.
aire is granted a concession, say for a highway, The contract must contain a clear definition
which he finances, constructs, owns and oper- of what is meant by availability because this is
ates and at the end of the concession period critical to payment. There must be key objec-
transfers the facility back to the principal who tive criteria for determining non-availability
granted the concession. During the concession and the period involved, for example for an
period the revenues are collected from the facil- accommodation building a failure in the
ity in order to repay investment and main- power supply lasting more than half a day.
tenance costs and earn a profit. The authority should define the performance
Some of the most significant points to be which it requires from the contractor through
considered in respect of such schemes and the output requirements and not in terms of how
ways in which they differ from conventional pro- the output is to be achieved, which should
curement routes are as follows: be left to the initiative of the contractor.
There has to be provision for the authority to
The party who is contracting with the public monitor the contractor's performance,
sector is a special purpose organization with although most of the monitoring should be
sub-contractors undertaking the actual per- done by the contractor with the authority
formance of the necessaryworks and services. auditing and periodically checking the con-
The project involves a development or contractor's performance.
struction phase after which the services will Any failure by the contractor to meet the ser-
be provided. vice commencement date can be dealt with
The project is wholly or partly financed by through the payment mechanism; there is
limited recourse debt. usually no need for liquidated damages.
The design, construction, testing, commis- Prior to the service commencement date
sioning, operation, maintenance and perfor- there must be the appropriate tests and
mance of any asset required for the provision inspections, details of which, and who is to
of the service is the responsibility of the con- assess whether or not the tests have been sat-
tractor. The authority's role prior to contract isfactory, must be included in the contract.
signature is limited to defining the output There will be provisions for extensions of time
requirements,reviewing the contractor's final for the service commencement date which
proposals and negotiating the contract terms. are due to the default of the authority. For
After contract signature and prior to service other events often included in the extension
commencement the authority's role is of time clause in conventional contracts, for
reviewing and commenting upon the con- example strikes, there will be no extension of
tractor's design and maintenancelopera- time or additionalcost payable to the contrac-
tional procedures, observing tests and tor, but he will be relieved from the exercise by
administering the contract. Specifically the the authority of its right to terminate for the
authority does not approve or accept designs. delay in the service commencement date. The
The contractor is remunerated by a unitary risk of such events is otherwise that of the
charge for the service which is paid according contractor to manage it or insure against it.
18 CO N TRACT PLANNING
Force majeure events are limited to those of a which event the authority pays to the contrac-
catastrophic nature, for example war. There is tor an assessed value of the amount it would
a provision for compensation to be payable to have received from re-tendering. Third where
the contractor if the contract is terminated for the senior lenders to the project exercise their
force majeure. rights to 'step in' and take over the contract
At the end of the service period the contract from the contractor. If this can be achieved it
must deal with the issue of the transfer of the is often the best solution for the authority. The
assets. These will often have no alternative rights of the senior lenders will be covered in a
use, for example a prison. The contractor direct agreement between them and the
will not therefore accept any residual value authority.
risk. The authority may wish simply to take In addition to the points specifically
over the assets or to re-tender the service. referred to above there will be a number of
The contract must then provide for the other terms of a type normally to be found in
authority's rights in relation to the condition large procurement contracts but with modifi-
of the assets. cations necessary to retain the general prin-
The issue of compensation to the contractor if ciple that it is the contractor's responsibility
the authority terminates the contract for con- to manage and operate the contract and the
tractor default. This is necessary with a PFI authorityshould not interfere with this.
contract as opposed to a normal service
contract otherwise the authority could be The above is necessarily a brief summary of
acquiring a valuable asset for nothing. The some of the more significant issues in what is
contractual provisions are complex Broadly a complex form of contract involving the
they distinguish between three cases. First authority, the contractor and the senior lenders.
where the authority re-tenders the contract For further detailed information see HM
and pays to the contractor the proceeds of Treasury publication entitled Standardisation of
sale less the authority's costs. Second where PFI Contracts 1999 available from Butterworths,
the authority chooses not to re-tender, in 35 Chancery Lane, London WC2A 1EL.
CHAPTER THREE
Legal issues arisingfrorn the

contract plan
The legal consequences which arise from the contractual relationships as between employer -
contract plan can be considered under four main contractor - sub-contractor may act so as
broad headings: to create a duty of care on the part of the sub-
contractor towards the employer in negligence,
1 The establishment of the persons (a) against
or to provide the sub-contractor with a defence
whom the employer has a right of action in
against a claim by the employer in negligence,
contract and (b) who owe to the employer a
but contractually the obligations of the sub-
duty of care.
contractor are owed to the main contractor and
2 The measure of damages which the employer
not to the employer. By his action therefore in
may be able to recover against them either in
deciding to place a single main contract the
contract or negligence.
employer has made his choice as to the party
3 The nature and extent of the liabilities which
against whom he will have contractual rights.
the employer may have to other persons
However, in practice such rights may well
either in contract or negligence and the mea-
prove to be illusory at the time when the
sure of damages for which he may be liable.
employer wishes to enforce them since by then
4 The effect of pre-contractualdiscussions.
the main contractor may have gone out of busi-
ness. Further, the obligations of the main con-
PERSONS AGAINST WHOM THE tractor to the employer may not be such as to
EMPLOYER HAS A RIGHT OF ACTION; cover the issue in question. The general rule is
AND WHO OWE THE EMPLOYER A clear that a main contractor is liable to the
DUTY OF CARE employer for the materials supplied and
workmanship performed by a sub-contractor,
MA'N CoNTRACToWSUB-CoNTRACToR whether nominated or not, unless such liability
The general and historic rule of English law is is expressly limited by the terms of the main con-
that a contract only creates rights and obliga- tract itself. The principle behind the rule is that
tions enforceable by the contracting parties as only through his contract with the main contrac-
against each other. This is now subject to the tor can the employer have a contractual remedy
provisions of the Contracts (Rights of Third for the deficiencies in the sub-contractor's work
Parties) Act 1999 which will be considered in or materials and it is for the main contractor to
more detail later. It is important to note here protect himself in the warranties he obtains from
however that the new law giving third parties the sub-contractor or supplier. However where
rights is permissive, in that it allows the parties to the employer has taken it upon himself to inves-
give them rights but also allows the parties not to tigate the suitability for his particular purposes
do so. For this reason it is still important to know of a specialist material - which under its trade
the old law. The old rule has given rise to a num- name and from a specific supplier he then
ber of difficulties in sub-contracting, especially requires the contractor to incorporate into the
in relation to nominated sub-contractors and works, without the contractor having any right to
suppliers. The employer, having on the advice of object - then the main contractor will not be
his architect or engineer, selected a particular liable if that material proves to be unsuitable for
sub-contractor or supplier, is nevertheless not a its purpose. As to whether or not the main con-
party to the sub-contract between them. The tractor would be liable if the materials supplied
20 CONTRACT PLANNING
were not of a merchantable quality would seem use them in his design. As a result Ryarsh were
to depend on what limitations, if any, were held not to be liable to the GLC. The case illus-
imposed on the main contractor as to the extent trates the degree of precision and reliance which
of his ability to protect himself against the must be proved by the employer to exist in order
default of the nominated supplier. If not only the for a claim on a collateralcontract to succeed.
choice of supplier, but also the terms and con- The Contracts (Rights of Third Parties) Act
ditions of supply were established by the has now provided the means, if the parties to the
employer, and these were restrictive of what contract so wish, to provide the benefit to a third
otherwise would have been the main con- party to take advantage of obligations expressed
tractor's freedom of commercial action, then it in the contract as being owed either to the
could well be held that any liability on the main employer or the main contractor. The Act has
contractor for quality was excluded - see the five main provisions:
House of Lords decision in Gloucester County
l(1)provides that a third party may in his own
Council v Richardson [I96911 AC 480.
right enforce a term of the contract if the con-
The way in which the employer may be pro-
tract expressly provides that he may do so
tected contractually in the above circumstances
l(2) provides that the third party may also
is if there is a collateral contract between himself
enforce a term in his own right if the term
and the supplier. Such a contract may be estab-
purports to confer a benefit on him
lished expressly in the manner provided for in
l(3) states that the third party must be
the JCT 80 Building Contract procedures by the
expressly identified by name, as a member of
architect obtaining from the nominated supplier
a class or as answering to a particular descrip-
the direct warranty under Tender Form TNSl2 in
tion but need not be in existence when the
favour of the employer. Alternatively where a
contract is formed
supplier makes specific statements to a prospec-
l(6) provides that the third party can take
tive purchaser about the quality and suitability
advantage of any exclusion or limitation
of his goods, and in reliance on these statements
clause in the contract as if he were enforcing a
the purchaser instructs the contractor to buy
right
them, then a collateral contract may arise
2 protects the right of the third party once the
between the supplier and the purchaser. Should
third party has accepted the benefit or can be
the goods then prove to be unsuitable the pur-
shown to have relied upon it.
chaser may be entitled to sue the supplier
directly in contract. See Shanklin Pier Ltd ~ e t e l It is also clear from the Act that the parties to the
Products Ltd [I9511 2 All ER 471, where the contract can expressly provide in the contract
employer asked a paint manufacturer whether that the third party shall obtain no rights under
his paint was suitable below water level and in the contract. This has been done in the 7th
reliance on his statement that it was, specified it edition of the ICE Conditions of Contract and
to the main contractor. In fact the paint was not although the JCT has appointed a working party
suitable and it was held that the paint supplier in to consider the matter it has agreed in the mean-
considerationof his product being specified had time that all its forms should contract out of the
guaranteed its suitability for the job and was Act.
therefore liable under this collateral contract It clearly would be possible to provide in
with the employer in damages for its breach. many contracts, such as those with the builder,
This case was cited with approval in Greater nominated sub-contractors or architects, that
London Council v Ryarsh Brick Co. 119851 CON third parties such as future tenants of buildings
LR 85, but in that case the evidence was such as or financiers to the development would be en-
to show that the GLC did not rely on any specific titled to the benefit of the obligations into which
statements made by the supplier as to the suit- such parties have entered. This would avoid the
ability for the use of his particular bricks in the necessity for a raft of collateral warranties. It
manner in which the GLC architect intended to remains to be seen whether or not the building
LEGAL ISSUES ARISING FROM THE CONTRACT PLAN 21
industrywill be willing to do this and at present it contractor to the main contractor, for his defec-
appears somewhat doubtful. tive work according to the terms of his contract.
It is however to be expected that third par- He is, however, only liable to a third party, for
ties, such as sub-contractors, will be interested example a sub-contractor to the employer,in the
in using the Act as a defence to a claim against tort of negligence for injury to persons or dam-
them when the main contract purports to extend age to other property of the employer. He is not
to them the protection which it affords to the liable to the employer for the defects in his work
main contractor. A typical clause of this type is itself, no matter the seriousness of such defects.
clause 36 of MFll which restricts the right of the Defective work which causes the building to be
purchaser to claim damages attributable to worth less than it would be otherwise is classified
defects and purports to extend that protection to as economic loss which is only exceptionally
sub-contractors. Under the Act there can now be recoverablein tort.
no doubt as to the effectiveness of that protec- The liability in negligence for injury to per-
tion assuming always the validity of the clause sons from defective work is reasonably clear. It
under the Unfair Contract Terms Act 1977. will extend to cover those persons whom the
It also seems clear that in the ordinary case of builder should have had in contemplation as
an employer, main contractor and domestic being likely to suffer injury if he does not take
sub-contracto'r or supplier, the employer would proper care in the performance of his work.
not be able to enforce against the sub-contractor Liability for damage to 'other property' is
or supplier any of the obligations which that firm more difficult. First, in this context what consti-
owes to the main contractor unless, which seems tutes 'other property'? It seems clear that it
most unlikely, there was something expressly would cover items such as computers which the
written into the contract. The mere fact that the employer has installed in the building under a
employer would gain from the sub-contractor's separate contract and which are damaged, say
or supplier's work would not be sufficient to pur- by the fall of a defective ceiling constructed by a
port to confer a benefit upon the employer. In sub-contractor. However, consider the case of a
the same way a sub-contractor would have no boiler installed by a sub-contractor which
right against the employer to obtain payment explodes and damages other parts of the build-
in the event of the main contractor going into ing. The cost of the replacement of the defective
liquidation. boiler itself is a loss recoverable only in contract
So far the discussion has been limited to the and therefore only from the main contractor. If,
position of those involved in the construction therefore, the main contractor is not available to
operations as it arises in contract. At the time of be sued, the employer, or his insurance com-
writing the third edition of this book it was pany, will be left without a remedy. But in those
generally recognized, following the House of circumstancescan the employer recover at least
Lords decision in Junior Books v Veitchi [1983] the damage caused by the explosion of the boiler
AC 520, that under certain circumstances an to the remainder of the building from the boiler
employer could have a remedy in negligence manufacturer in tort as being damage to 'other
against a nominated sub-contractor. Although property'? In Murphy's case it was suggested in
that decision has not been formally over-ruled judgements given by three of the Law Lords that
effectively, it can no longer be regarded as good he could do so provided he could prove that the
law after the landmark decision of the House of explosion was indeed due to the negligence of
Lords in Murphy v Brentwood District Council the boiler manufacturer.
[1991] 1 AC 378. The difficulty with this approach, what is
In essence Murphy's case decided that as known as 'the complex structures theory', is how
regards defective goods and buildings there was far it should be taken. For the purpose of defining
a clear distinction between liability in contract 'damage to other property' the structure will nor-
and liability in the tort of negligence. In contract mally be regarded as one unit. So defects in the
a builder is liable to the employer, or the sub- work of a structural steel sub-contractor which
22 CONTRACT PLANNING
weaken the frame of the buildingand cause dam- The only possible exception to the rule, that
age to the floors or walls constructed by the main an employer cannot bring an action in negli-
contractor or other sub-contractors will not be gence against a sub-contractor for economic
regarded as causing damage to 'other property'. loss, would be if the employer could rely on a
The loss occasioned by all such defects is negligent misstatement by the sub-contractor
classified in law as 'economic loss', i.e. the build- under the rule established by the House of Lords
ing is simply worth less than it would have been in the case of Hedley Byrne & Co. v Heller and
had it been properly constructed, and economic Partners 1963 and their later decision in Caparo
loss is only exceptionally recoverablein tort. Industriesplc v Dickman and Others 1990.
What would be damage to other property has In order to bring such an action the employer
been much debated. It would appear that an would have to show that there was 'a special
electrical sub-contractor whose defective work relationship of proximity' between himself and
positively malfunctioned and caused a fire the sub-contractor; that the sub-contractor
which damaged other parts of the building could knew that his advice was likely to be relied and
be held liable in negligence for such damage. acted upon by the employer without indepen-
There are differing decisions on the applica- dent enquiry and it was so acted upon by the
tion of the complexstructures theory. In Jacobs v employer to his detriment. The factual basis
Morton and Partners [I9941 72 BLR 92, it was upon which a nominated sub-contractor or sup-
decided that if the part: plier is appointed will not normallysupport such
a finding. The position was stated clearly by Lord
had been constructed by a separate contrac-
Goff in Henderson v Merrett Syndicates Ltd in the
tor from the main contractor
following terms:
had retained its separate identity, for example
a boiler, and If the sub-contracted work or materials
had positively malfunctioned inflicting the do not in the result conform to the
damage, for example the boiler had exploded, required standard it will not ordinarily
be open to the building owner tosue the
then the theory could apply. On the other hand
sub-contractor or supplier direct under
in Bellefield Computer Services Ltd and Unigate v
the Hedley Byrne principle claiming
Turner and Sons Ltd [2 July 19991 - see BLISS
damagesfrom him on the basis that he
Construction Law Digest 2000, page 127 - the
has been negligent in relation to the
correctness of the attempt in the Jacobs case to
keep the theory alive was doubted. There a fire
pelfonnance of his functions. For there
is generally no assumption of responsi-
stop which had been improperly constructed
bility by the sub-contractor or supplier
when the building had been built 12 years previ-
direct to the building owner, the parties
ously failed and the dairy was damaged by fire.
having so structured their relationship
There was no contractual or special relationship
that it is inconsistent with any such
of proximity between the parties. The claim in
assumption of responsibility.
negligence was allowed only for items of plant,
office equipment and stocks but not for the It is indeed more likely that, if the nominated
buildingitself or for loss of profits. sub-contractor in order to secure his nomina-
Effectively, however, the decisions in D & F tion has made express representations about the
Estates (see p. 173) and Murphy have largely put quality or performance of the product that he is
an end to the expansion of the scope of the law of supplying, which might possibly justify a Hedley
negligence as regards the ability of employers to Byrne liability in negligence, the same facts
claim damages from sub-contractorsfor the con- would support a claim in contract for breach of
sequences of their defective work. If not formally an implied collateral warranty on the principle
over-ruled, the decision in Junior Books is no of the Shanklin Pier case, which would be easier
longer an authority on which any reliance can be to establish. The obvious solution in practice is
placed. for the employer to obtain from a nominated
sub-contractor or supplier an express collateral the sub-contractor, certainly for economic

warranty (see further p. 31). loss, beyond that which he had expressly under-
English law proceeds on the basis of a chain taken.
of contracts running from the employer to the In Simaan General Contracting Co. v
main contractor, from the main contractor to a Pilkington Glass Ltd [I98811 Q B 758,specialist
sub-contractor and on again to sub-sub- glass window units had been supplied by
contractors or suppliers. It is assumed that each Pilkingtons to the installation contractor Fed
in the chain will be able to recover for the eco- who were sub-contractors to the main contrac-
nomic loss suffered by his co-contractant so that tors Simaan Contracting for a new building in
this loss will ultimately fall on the genuinely Abu Dhabi. The colouring of the units was defec-
defaulting party. So in the Young and Marten tive and ultimately they were rejected. Simaan
case it was said that 'If the employer can recover then brought an action in negligence against
damages the contractor will generally not have Pilkingtons instead of suing the sub-contractors
to bear the loss since he will have bought from a Fed for breach of contract. The Court of Appeal,
seller who will be liable ... and if that seller had in rejecting the claim, took the view that the par-
in turn bought from someone else there will ties having deliberately formed a chain of con-
again be a liability so that there will be a chain of tracts, main contractor with the installation
liability from the employer who suffers the contractor and installation contractor with sup-
damage back to the author of the defect'. plier, must be assumed to have contemplated
Unfortunately life in the real world is not so that any claims would be made down the con-
simple. It is often the case that the chain has a tractual chain and not short-circuited by an
weak link - the overseas firm with no assets action in tort. There was no evidence that
within the court's jurisdiction or the contrac- Pilkingtonshad ever assumed any direct respon-
torlsub-contractor with no funds. As a result of sibility towards Simaan.
the recent reversal of the trend of allowing It follows from these cases that in establish-
actions in negligence for the recovery of eco- ing his contractual arrangements the employer,
nomic loss where proximity and reliance could if he wishes to have any rights to recover for eco-
be established, a break in the chain will normally nomic loss against a party with whom he would
mean that the party suffering the loss will not normally have any contractual relationship,
have no opportunity of recovering it from for example a sub-contractor, must do so
the true defaulter, unless he has protected expressly in contract. He may do this either by
himself by an appropriately drafted collateral requiring that the sub-contract expressly entitles
warranty. him to do so under the Contracts (Rightof Third
This is even more the case when the parties Parties) Act or by way of a collateral warrantyand
have constructed their contractual relationships that he must ensure that the terms of the collat-
in such a way as to show their exclusive reliance eral warranty cover all the obligations of the
on contractual remedies. In Greater Nottingham party concerned.
Co-operative Society v Cementation Piling and
Foundations Ltd [I9891Q B 71,it was decided by PROFESSIONAL ADVISERS
the Court of Appeal that where the employer had English law has long drawn a distinction
taken a collateral warranty from a sub-contrac- between the obligations in contract of a contrac-
tor which was limited to design and selection of tor or supplier and the obligations of a profes-
materials, but did not extend to workmanship, sional man. In general the obligations of a
the employer could not recover financial losses contractor or supplier are strict; that is to say
which were due to the way in which the sub-con- they are not based on fault and it is no defence
tractor had negligently executed the works. The that all reasonable care was taken. If in a con-
direct contract in the form of the collateral struction contract the contractor is responsible
warranty was considered as being inconsistent for design then, unless the contract provides
with any assumption of responsibility by otherwise, the contractor is strictly liable for
24 CON TRA CT PLANNI NG
design and the works must be fit for the purpose the employer with an entire installation capable
for which they were intended. The obligations of of achieving a specified result, the liability for
the professional man however, in the absence of design will be based on fitness for purpose
any express term in the contract to the contrary, regardless of negligence or fault and if such a
or a warranty which the courts are prepared to term is not expressly included within the con-
imply as a matter of fact, are only to 'carry out the tract it will be implied (see Viking Grain Storage
service with reasonable skill and care' (s. 13 of Ltd v T.H. White Installations 3 CON LR 52, fol-
the Supply of Goods and S e ~ c eAct s 1982) or as lowing the decision of the Court of Appeal in IBA
it has been described in the courts to bring to the v EMI Electronics Ltd & BICC [I9781 11 BLR 29).
task 'the standard of the ordinary skilled man While the House of Lords did not expressly
exercising and professing to have that special decide the point when that case came before
skill'. The question whether reasonable skill has them, since reversing the Court of Appeal they
been exercised or not is a question of fact which found the design to have been negligent, their
in practice largely rests upon whether or not speeches indicate general agreement with the
other people in the same profession being per- Court of Appeal on that issue. As regards the
sons of skill and experience would have behaved position of a consulting engineer employed by
in the same way or not having regard to the state the main contractor in such a case to perform
of knowledge existing at the time. This is not, the design, if he is provided with all necessary
however, in any way a rule and if, exceptionally, information as to the purpose for which the
what is common practice in the profession is installation is required, then in the absence of
judged to be negligent then the professional will any express provision to the contrary a term may
as it has been put 'pay for the sins of his profes- be implied in fact in the contract between the
sion'. package deal contractor and the consultant, that
The normal obligation then of a professional the consultant's design will similarly be fit for the
man does not extend to guaranteeing a result. If purpose intended without proof of negligence
there is to be such a guarantee then there has to (see Greaves v Baynham Meikle [I9751 3 All ER
be an express term in the contract to that effect, 99). It is to be noted that in the Greaves case the
or the court must find on the evidence that the term was implied in fact based on the evidence
contract includes a term implied as a matter of the intention of the parties.
of fact that the professional man is responsible
that the works are fit for the purpose intended.
Such a term will not be implied as a matter of law THE MEASURE OF DAMAGES
where the contracting party is a professional The measure of damages which the employer
man providing only advice or designs, i.e. with- may be able to recover from the defaulting
out supplying any product (George Hawkins v party will differ according to whether the claim
Chrysler and Burne [I9861 38 BLR 36). Nor, is against the main contractor in contract or
somewhat more strangely, does it appear that against the sub-contractor in negligence, to
even if the professional person in question the extent that the employer is still entitled to
actually possesses a higher than normal degree make any such a claim having regard to the
of skill is he to be judged by that higher standard. decisions in Murphy and D & FEstates referred to
There is apparently no stricter liability than earlier.
that of 'ordinary' negligence (see Wimpey
Construction UK Ltd v Poole, The Times 3 May DAMAGES IN CONTRACT
1984). The basic principles may be stated as follows:
However where the design is linked to con-
struction, as in a packaged deal contract, the 1 Damages are compensatoryand the objective
obligations as to design and construction will be is to put the injured party, so far as money
considered as an integral whole and since the can, in the same position as if the contract had
object of such a contract is normally to provide been performed. It follows from this that
damages can be recovered for the loss of what the defendant must be presumed as a
expectations arising out of or created by the reasonable man to have known at the time
contract. It is on this basis that an employer of entering into the contract. In making
can - in principle and provided they are not that assessment it is appropriate to take
too remote - recover damages for his loss of into account the capacity in which the
profits arising from works which do not per- defendant contracted. So an experienced
form according to specification and not contractor erecting a block of flats for a
merely for the costs of putting them right. property developer must be presumed to
2 There are two alternative bases of assessment know that the employer intended to let
which may be applied in contracts for engi- them at a profit. Accordingly, if he is late in
neering works. The one has been referred to completion he would be liable to compen-
as the 'difference in value' and the other 'the sate the developer for such loss of profits as
cost of cure'. In general it would appear that in were reasonablyforeseeable.
the event of the contractor failing to perform .anyactual knowledge which the defendant
the work correctly in accordance with the possessed at the time of entering into the
specification the assessment will be on the contract and on the basis of which he must
basis of 'the cost of cure' and this may still be be presumed to have contracted. This is
so even if it results in the employer eventually obviously reasonable in that such know-
being placed in a better position than he ledge would have allowed him the opportu-
would have been had the original contract nity of protecting himself against the risk
been properly performed. So when a factory by, say, taking special measures to ensure
was burnt down because of the breach of con- completion on time, or covering himself by
tract by the contractor the employer recov- insurance against the consequences of
ered the full costs of rebuilding even though defective design. So if the contractor in the
that gave him a new factory. However if the example above was specifically advised by
loss sustained does not extend to the need to the developer at the time of tendering that
reinstate then it would be unreasonable to the building was for occupation by, for
award the costs of reinstatement since the example, foreign embassy staff who would
award of damages is to compensate for the be paying exceptionally high rents, then he
loss. This was decided by the House of Lords would be liable to pay damages based on
in RuxleyElectronics vForsyth [I9961 1 AC 344, those rents were he to fail to have the flats
where a swimming pool had been con- ready for occupation by the contractual
structed with a maximum depth less than date.
specified. The cost of rebuilding was esti-
mated at £21 650. There was however no need 4 Contributory is a defence to a
to reinstate. It was a perfectly serviceable pool for damages founded On a breach of a
into which it was safe to dive, although its strict contractual obligation. So where a con-
depth was not according to specification. tractor had amongst other obligations under-
taken that Itheirmaterials and workmanship
Held, that the award of damages should be
based on the loss of amenity which the would be the best of their respective kinds' the
judge had decided was £2500. damages suffered by the employer could not
3 The damages must not be 'too remote'. Since be reduced because of alleged
the decision of the House of Lords in The the employer to disregard his own interests
H~~~~ 11 [1969] AC 350 (under the name (Barclays Bank plc v Fairclough Building Ltd,
Koufos v C. Czarnikow Ltd), the loss must be a The Times l 1May lgg4).
'serious possibility', and it is on that basis that
in contract the words 'reasonably foreseeable' DAMAGES IN NEGLIGENCE
must be interpreted. What is a 'serious possi- The general rules may be stated briefly as fol-
bility' will depend upon: lows:
26 CON TRA CT PLANNI NG
1 Once negligence has been established then the damages would be based on what the posi-
the person responsible will be liable for the tion would have been had the misrepresenta-
damages which are of a type which were rea- tion not been made. In an action in contract
sonably foreseeable or a probable con- for misrepresentation the damages would be
sequence of his act. It is not necessary that the based on what the position would have been
actual detailed circumstances should have had the misrepresentation been true.
been reasonably foreseeable provided that
the general categorywas so.
2 Provided the damages were of a type which NATURE AND EXTENT OF THE
was reasonably foreseeable then it is irrele- EMPLOYER'S LIABILITIES
vant that the actual extent of the damage or
The obligations of the employer in contract will
loss which occurred was reasonably foresee-
in general be set out expressly in the terms of the
able. Compensation is payable in respect of
particular contracts into which he enters.
the harm which was actuallysuffered.
However there are certain obligations which as a
3 In principle the person who has suffered as a
matter of law will be implied and are of particu-
result of the negligent action is entitled to be
lar significance to the state of contract planning.
put into the same position - so far as an award
These are:
of damages can - as he would have been had
the negligent act not occurred. 1 It is an implied term of any construction con-
tract that if the performance of the contract
DISTINCTION BETWEEN CONTRACT AND requires the co-operation or action of the
NEGLIGENCE employer then the necessary degree of co-
The main points of distinctionare: operation or action will be forthcoming. It
seems doubtful if this particular implication
1 The 'foreseeability' test in contract is stricter can be negated by the express terms of the
than it is in negligence. In contract it is not a contract.
question of 'reasonable foreseeability' as it is 2 Following on from (1) if the employer under-
in negligence but as 'not unlikely' or 'serious takes to supply drawings, instructions or
possibility' in the contemplation of the par- approvals then there is an implied obligation
ties. It is the subjective element of the con- that such will be given in a reasonable time
templation of the parties in contract which and so as to enable the contractor to comply
makes the difference. The stricter test in con- with his contractual obligations.
tract is justified because it is always open to 3 Again following on from (1) if the employer
the one party to bring to the attention of the undertakes to supply components to a con-
other at the time when the contract is made tractor for incorporation into the works there
the special risk against which he wishes to be is an implied obligation they will be supplied
protected. No such opportunity occurs in in time to avoid disruption and delay (Thomas
negligence. Bates v Thurrock Borough Council Court of
2 Contributory negligence can operate as at Appeal 22 October 1975). It was admitted in
least a partial defence where the cause of this by the Council that there was additionally
action is founded in negligence or could be. an implied term that the components would
3 In contract the award of damages is intended be of good quality and fit for their intended
to put the party in the same position, so far as purpose.
it can, and within the rules as to remoteness, 4 There is normally no implied warranty by the
as if the contract had been performed. The employer as to the accuracy of the documents
award of damages in negligence is intended forming part of the invitation to tender or
to put the injured party in the same position as even as to the feasibility of constructing the
if the negligent act had not happened. So works as designed. The facts of the case may
in an action for negligent misrepresentation show, however, that instructions by an
LEGAL ISSUES ARISING FR O M THE CONTRACT PLAN
employer to design the works on a certain English court reached the same con-
hypothesis amounted to a warranty that such clusion on the existence of a duty of care,
hypothesis accorded with the actual ground then it seems unlikely that they would
conditions (Bacal Construction (Midlands) uphold the validity of any such disclaimer
Ltd v Northampton Development Corporation under the Unfair Contract Terms Act.
[I97518 BLR 88). If the misrepresentation is made fraudu-
The attempt is very often made by lently, which means either (a) knowing it to
employers,and indeed by main contractorsin be false, or (b) without belief in its truth, or
dealing with sub-contractors, to limit the (c)recklessly not caringwhether it is true or
I scope of application of any such implied false, then no disclaimer clause will act to
~ obligation by providing that any information
given is not guaranteed and it is the responsi-
protect the person making the misrepre-
sentation and this applies whether the mis-
bility of the recipient to check it for himself. representation was made by the employer
The following comments are made as to the or his agent. For this purpose the House of
legal effects of such attempts: Lords have said principal and agent are one
(Pearson Ltd v Dublin Corporation [I9071
If the facts of the case show that the ten- AC351).
derer~were intended to rely on the infor- If the information given amounts to a mis-
mation provided as regards the soil representation then under the Mis-
conditions, and did so rely and thereby representation Act 1967, as amended by
suffered loss because the information had the Unfair Contract Terms Act 1977, the
been negligently prepared, then the con- employer will be liable to the contractor
sulting engineers who prepared such data in damages unless he can show that 'he had
may be liable to the contractor under the reasonable grounds to believe and did
principle established by the Hedley Byme believe up to the time that the contract was
case. This may be so even if there is a dis- made that the facts represented were true',
claimer in the bidding documents which and further that the disclaimer clause in
protects the employer but not specifically the contract satisfies the requirements of
the consultants, i.e. any disclaimer clause reasonableness as stated under s. ll(1) of
will be construed strictly against the party the Unfair Contract Terms Act. The
imposing it. In deciding upon whether or important point is that in each instance
not it would be reasonable to impose such the burden of proof is on the employer
~
a duty in tort, the court may take into both as regards establishing his belief in the
account the practicalities of the tenderer's factors and showing that the clause was
ability to undertake any investigations reasonable.
for himself. In the Canadian case of
I Edgeworth Construction v ND Lea & The employer will be held liable under the Act for
Associates and Others [I9931 66 BLR, the a misrepresentation made by his agent, which
Canadian Supreme Court took into would cover the case where it was made by his
account, in finding that a duty of care consultants. It would not therefore appear to be
existed on the part of the consultants, the a defence for the employer to argue that he had
fact that the bidders had about two weeks employed and relied on professionaladvice. Nor
in which to file their tenders and the con- would it be a defence for him to argue that it
sultants had spent two years on the prepa- would have cost too much time and money to
ration of the engineering design and establish the truth (Court of Appeal in Howard
information. Marine and Dredging Co. v A Ogden & Sons
Although there was no disclaimer pro- (Excavations)Ltd [I97719 BLR 34): 'In the course
tecting the consultants in that case it is of negotiations leading to a contract the statute
thought that, if on the same facts an imposes an absolute obligation not to state facts
CONTRACT PLANNING
which the representor cannot prove he had clause 28.2, then this will be interpreted as
reasonablegrounds to believe.' equivalent to the damages which would fol-
As regards establishing that the disclaimer low directly from a breach of contract and
clause is reasonable then it is considered that the would include therefore the contractor's loss
court would take into account the complexity, of profit Wraight Ltd v P. H. & T. (Holdings)
time and cost of investigating and verifying the Ltd 13 BLR 26). The court in fact allowed 10
data provided, within the period allowed for ten- per cent for establishment charges and profit
dering, together with the significance of the data which the contractor would have earned on
to the tenderer and would be likely to hold that, the contract had it not been determined and
unless the investigations needed were of the 12%per cent for a proportion of his overhead
simplest, a clause seeking to establish a total dis- costs attributable to the contract.
claimer did not satisfy the test. Thus on a case 2 Head office overheads in terms of additional
decided before the Act it was held to be managerial expenses required in attending
unreasonable to require a tenderer who had to the problems caused by the employer's
seen two trial holes to search an overgrown site default can be recovered in a claim for
to find three others of which they were not damages provided they are properly quanti-
aware! (Bryant & Son Ltd v Birmingham Hospital fied. It is not sufficient merely to add a
Saturday Fund [I93811 All ER 503 at p. 21). percentage to the direct costs gate & Lyle
It is recognized that a contractor who has Food & Distribution Ltd v GLC [I9821 1 WLR
under-priced a job for reasons unconnected 149).
with the data supplied may nevertheless seek to 3 If under the terms of the contract, for example
use any inaccuracy in such data as a means upon JCT 80 clause 26, as a result of the actions of
which to found a claim. However the fact that the employer the contractor is prevented
such a possibility exists provides in the author's from utilizing his resources on other work,
view no justification for seeking to impose upon and can prove that he could have done so,
tenderers obligations with which in practice they then the anticipated loss of profit on such
clearly cannot comply. Further it must be to the other work is recoverable for the period when
employer's advantage that the contract starts off he was so prevented (Peak Construction
with the contract price based as securely as pos- Iliverpool) Ltd v McKinney Foundations Ltd
sible upon the conditions which will actually be [I9701 1 BLR 111). Under the 6th and 7th
met when the work is performed. Whilst it is in editions of the ICE conditions the term 'costs'
the nature of soils investigation work that there is defined as 'all expenditure properly
can be no guarantee that this will be the case incurred or to be incurred whether on or off
there is surely everything to be said for such work the Site including overhead finance and other
being carried out with the maximum of care and charges properly allocable thereto but does
to an extent sufficient to reduce so far as prac- not include any allowance for profit'.
ticable the possibility of unpleasant and expen- However under a change from the 5th edition
sive surprises. the contractor under clause 42 (delay by the
employer in giving possession of the site) is
EMPLOYER'S LIABILITY FOR DAMAGES entitled to his additional costs together with
an 'addition for profit'.
The general issues relating to damages discussed
4 The term 'direct loss and/or expense' under
earlier in respect of the contractor apply with
the JCT form of contract includes interest or
equal effect to the employer but there are certain
financing charges and these will be assessed
specific issues which may arise out of a breach of
on the same basis as the bank assessed such
contract by the employer which need noting.
charges on the contractor, i.e. with periodical
These are:
'rests' at which point the interest outstanding
1 Where the contract uses the term 'direct loss/ was added to the principal (F.G.Minter Ltd v
expense' or 'direct lossldamage' as in JCT 80 Welsh Health Authority Technical Services
LEGAL ISSUES ARI SIN G F R O M THE CON TRACT PLAN 29
Organisation [19801 13 BLR: Rees and Kirby v stated by Lord Goff in Henderson v Merrett
Swansea City Council [I9851 CILL 188). Syndicates Ltd that an assumption of responsi-
5 The use of the expression 'consequential loss' bility coupled with the concomitant reliance
in a clause seeking to limit liability will not may give rise to a duty of care in tort, so that the
prevent the recovery of those damages which claimant may choose that remedy which is most
flow directly and naturally from the breach advantageous to him, it seems that the duty of
and these will include loss of profit (Millar's care in tort will not be greater than that under-
Machinery Co. Ltd v David Way & Son [I9341 taken contractually. The only advantage there-
confirmed by the Court of Appeal in Croudace fore to the claimant by bringing an action in tort
Construction Ltd v CawoodsConcrete Products is to take advantage of the longer limitation
Ltd [I9781 8 BLR 20). The term 'consequential' period which may apply in tort as opposed to
means 'merely consequential' and 'some- contract.' In so far as the parties have set out in
thing not the direct and natural result of the some detail their respective rights and obliga-
breach'. The meaning of 'consequential loss' tions within the contract between them then it is
was further considered by the Court of Appeal to the contractual terms that reference should be
in British Sugar plc v NEZPower Plant Projects made when any dispute arises.
Ltd [I9981 87 BLR 42. There the contract It would seem that an employer would not be
included the words 'the seller's liability for liable in tort for the acts of his architect or engi-
consequential loss is limited to the value of neer if, as a professional man, he was acting as an
the contracts'. It was held by the court that independent consultant. He would then be in
following the two cases mentioned above the the same position as any independent contrac-
term does not apply to damages which flowed tor. However in an action under the Mis-
naturally and directly from the breach of representation Act 1967 it is thought that an
contract. What it did refer to were damages employer would be liable if the independent
which would flow from special circumstances architect or engineer lacked reasonable grounds
known to both parties and would come there- for his belief. He would also be liable at common
fore within the second limb of Hadley v law for fraudulent misrepresentation by the
Baxendale.The distinctionis shown clearly by independent professional. In many instances
Victoria Laundries v Newman 1949 where it architectsor engineersare not independent con-
was held that the contractors who were late sultants but employees of the employer and in
must be taken to have known that in the these circumstances the employer could be
ordinary course of events some loss of normal vicariously liable for their negligence. Further,
profits would follow from their late delivery of even when the architect or engineer is an in-
a boiler required for production purposes and dependent consultant, the influence increas-
so were liable for that loss. However they were ingly exercised by administrative and financial
not liable for an exceptionalloss of profits suf- departments in the employer's organization
fered by the laundry as a result of their not may result in it happening that:
securing certain extremely lucrative contracts
because of the delay,since they had no knowl- the exercise (by the architectlengi-
edge of these contracts. The normal loss of neer) of his professional duties is suf-
profits were assessed by the laundry at £16 a ficiently linked to the conduct and
week and the exceptional profits at £262 per attitude of the employer that he
week. becomes the agent of the employersso
as to make them liable for his default.
LIABILITY OF THE EMPLOYER IN In the instant case the employers
NEGLIGENCE through the behaviour of the council
As between the employer and the main contrac- and the advice and intervention of the
tor the question of liability in negligence is not town clerk were to all intents control-
one which should often arise. Although it was ling the architect's exercise of what
30 CONTRACT PLANNI NG
should have been his purely profes- representation is any statement of fact made by
sional duty. In my judgement this was one party to the other before the contract is
the clearest possible instance of made and which induces the person to whom it
responsibility for the breach attaching is made to enter into the contract. The represen-
to the employers. tation must be as to a matter of fact and not just
(Reesand Kirby v Swansea City Council an assertion of opinion. However if the opinion
in the High Court) is expressed by someone having or claiming
special knowledge or skill in relation to the mat-
Although at one time it was thought that an
ter in question, or if by implication it is founded
architect or engineer owed a duty of care to a
on facts, then it will still be treated as a represen-
contractor who would be affected if the archi-
tation. In practice therefore, when inviting ten-
tectlengineer were negligently to under-certify
ders an employer should be extremely careful as
the value of his work, this now seems doubtful
to the data which he provides to the tenderers.
following the decision of the Court of Appeal in
Unless the matters are ones which it is impracti-
Pacijic Associates v Baxter [1990] Q B 993. The
cal to expect the tenderers to find out for them-
contract in that case contained an arbitration
selves, it is far better simply to make it clear
clause and a disclaimer of the defendant's liabil-
that it is their business to find out the infor-
ity. In essence the decision seems to have turned
mation they require in order to bid. It is also a
on the structure of the contractual relationships
point which needs watching when conducting
between the parties and the fact that the con-
bidders' conferences, or answering bidders'
tractor could claim against the employer in arbi-
questions.
tration.
The general position as to liability for misrep-
Assuming the contract contains an arbitra-
resentation can be summarized briefly as fol-
tion clause, then it would seem that a claim by
lows:
the contractor against the architectlengineer for
under-certification would only be likely to suc-
If the representation is fraudulent (for the
ceed if the architectlengineer were to have acted
meaning of this see p. 27), then the remedy is
deliberately in contravention of the contract
damages and recission.
with the intent to deprive the contractor of
If the representation is made negligently, i.e.
money to which he knew that the contractor was
I carelessly and in breach of a duty of care, then
entitled. This was the view of the Court of Appeal
the remedy is damages. If the employer, or his
in Lubenham Fidelities v South Pembrokeshire
architectlengineer, professes to have special
DC (see6 Con LR at page 114).
knowledge or to have made particular en-
quiries, say about the soil conditions, and
PRE-CONTRACTUAL DISCUSSIONS from the wording of the enquiry it is clear that
the contractor was intended to rely on such
These may affect the relationships between the
information and does so rely, and it proves to
parties because of:
be inaccurate so that the contractor suffers
1 Representations. damage, then the contractor may have a rem-
2 Collateral warranties. edy for negligent misrepresentation.This lia-
3 The issue of Letters of Intent. bility may be negated by wording in the
enquiry to the effect that the contractor is not
REPRESENTATION to rely on any information given for which no
The problem of misrepresentation has already liability is accepted but is to make his own
been discussed in relation to one of the areas in enquiries as to the site conditions. It is
which it is most likely to arise, namely the giving thought unlikely in commercial contracts that
of data relating to site and soil conditions, and such a clause would be regarded as unreason-
the principles set out there are of general appli- able under the Unfair Contract Terms Act
cation. However it is worth emphasizing that a 1977. It may, however, arise out of a commer-
LEGA L ISSUES ARISING FROM THE CONTRACT PLAN 31
cial relationship if one party acts on the LETTERS OF INTENT

special knowledge and expertise of the other The best advice which can be given to any
and it should have been foreseen that he employer contemplating the issue of a Letter of
would do so. Thus when a sales manager on Intent is 'don't, or if there are compelling com-
his employer's behalf provided a tenant of a mercial reasons then exercise the greatest of
petrol station with a statement as to potential care'. In so far as the Letter merely expresses an
turnover on which the tenant relied, it was intention to award a contract and nothing more
held that the company owed the tenant a duty is either said, written or done, then since the
of care (Esso Petroleum Co. v Mardon [I9761 Letter on its own creates no contractual obliga-
QB 801). tions on either party, and is of no binding effect,
3 The statutory liability as already discussed it can be argued that the employer had done
under the Misrepresentation Act 1967. himself no harm except to weaken his negotiat-
ing position when it comes to the contract.
COLLATERAL WARRANTIES
However, the purpose of issuing the Letter of
A collateral warranty normally arises when an Intent is almost always that something is to be
undertakingis given during contractual negotia- done for which the contractor wants the assur-
tions as to some matter, which is intended to ance of payment and once the Letter has been
have contractual effect, but which is not written further actions and correspondence will
included within the contract terms, and indeed follow. Where this is the case and the contractor
may even be in contradiction to them. In the actually performs preliminary work for the
usual course of negotiations between the parties employer then the employer will be liable to pay
statements will be made and requests for infor- for it even if the project never actually proceeds
mation answered and it is a matter of fact to be (Turiff Construction Ltd and Turiff Ltd v Regalia
determined in each case, whether or not looked KnittingMilk Ltd [I97119 BLR20).
at objectively there was a clear intention on the The alternative situation can, from the
part of the parties that such statements or employer's viewpoint, be even worse: where at
responses should constitute contractual obliga- the employer's request work is started and com-
tions. The attitude of the courts in general is that pleted on the basis only of a Letter of Intent
the existence of a collateral warranty is to be because the parties never finally agreed a con-
the subject of strict proof (see the comments tract. The contract work having been performed
of Viscount Dilhorne in IBA v BICC [I9801 14 at his request the employer is bound to pay for it
BLR 1). on a quantum meruit basis but no contract ever
In the Esso Petroleum v Mardon case the having been concluded the contractor is under
Court of Appeal also held that there was a breach none of the normal obligations for quality of
of a contractual collateral warranty that the esti- work, delivery on time and so on, which would
mate of turnover had been prepared with due either be implied by law or form part of the
care. express contract terms (British Steel Corporation
Following the Murphy and D & F Estates de- v Cleveland Bridge and Engineering Co. Ltd
cisions, collateral warranties have now assumed [I9841 1 All ER 504).
a far greater importance. Since effectively the
employer has no remedy in tort against a
defaulting sub-contractor for defective work, the CONCLUSIONS
only way in which he can protect himself is
From this brief survey of certain legal issues the
either to obtain from the sub-contractor a collat-
following conclusions relevant to the subject of
eral warranty or to ensure that he obtains the
contract planning can be drawn:
benefit of the warranties given by the sub-con-
tractor to the main contractor under the 1 The employer is in the best legal position as
Contracts (Rights of Third Parties) Act 1999 (see regards minimizing his own risks and placing
Chapter 16, pp. 144-1481. the maximum liabilities on the contractor by
32 CON TRACT PLANNING
the placing of a turnkey contract. However he for instance soil investigation reports when
must be sure that the turnkey contractor has inviting competitive tenders for construction,
the necessary financial resources to support but supply of free-issue items rarely is - and
the responsibilities he is accepting; that he is should be avoided.
worth 'powder and shot' if it should ever 5 It is to the employer's legal advantage to place
come to legal action or even the threat of it. the responsibility for sub-contractorsfirmly in
2 That if the employer wishes to separate out the hands of the main contractor and to play
design from construction or manufacture, no part in their selection or to know of the
then he should seek from the designers guar- terms on which they have been employed. It is
antees that their designs will produce the recognized that with the complexity of mod-
results intended, if constructionlmanufac- em contracts, and the extent of sub-contract-
ture is properly executed, and give to the ing which takes place, there may be technical
designer the responsibility for supervision of or commercial reasons why the employer does
constructionlrnanufacture.He should not be wish to get involved, but he must be very care-
content to rely on the traditional obligation of ful not to dilute the responsibilitiesof the main
the consultant to use reasonable skill and contractor while at the same time ensuring
care. that he has an effective remedy against an
3 The methods of contracting referred to in important sub-contractorthrough the use of a
Chapter 2 as 'client co-ordinate# and 'man- collateral warranty or the use of the Contracts
agement contracting' impose on the (Rightsof Third Parties) Act 1999.
employer the liability towards each contrac- 6 If for commercial reasons the employer
tor of the consequences of the default of any wishes to make use of the nominated sub-
other. In separating out the contracts the contractorlsupplier system then he should
employer should seek to minimize the num- ensure that he has direct contractual rights
ber into which the project is divided and against the nominated firm in the event of
should consider carefully the extent to which their failure to perform, and not rely on the
he can obtain indemnities enforceable in possibility of being able to prove either negli-
practice, at least from firms responsible for gence or breach of an implied collateral war-
key areas of the work. ranty. The JCT have to their credit recognized
I
4 If the employer either directly or through and sought to tackle most of the problems of
another designerlcontractorlsupplier has nomination (except re-nomination see post
accepted the responsibility for the supply of p. 145) but a study of their recommended pro-
drawings, data, components or other ser- cedures and forms shows the complexities
viceslfacilities, then he should select either into which the supposed advantages of nomi-
the company supplying the itemlservice in nation lead. Again the employer should satisfy
question or the one receiving it, to be respon- himself on the financial resources of the firm
sible for its suitability, quality and delivery to in question and if necessary insist on the pro-
time. Clearly if the employer is supplying the vision of a bond.
itemlservice directly himself then, if at all 7 The employer must be conscious of the liabili-
practicable, he should place that responsibil- ties which he is accepting towards his con-
itywith the recipient. tractors either in contract or negligence and
The employer must identify and place whether due to his own default or that of his
responsibility for positively managing the consultants. While as suggested above he
interface on the firm most appropriate for the should seek to lay these off as far as he can on
task and be sure again they have the financial others who possess the requisite financial
backing should things go wrong. However it is resources, he should assess the residual risks
to the employer's legal advantage to seek to and liabilities which remain with him, and
reduce to a minimum the provision of such what provision he needs to make in his
itemslservices. Some will be unavoidable, as financing to cover them.
8 The contract plan should be formulated as a in negligence cases, where damage is an

whole in a waywhich will be clear and definite essential ingredient of the action, is when the
and avoid the need for extensive pre-contract damage occurs. In the case of latent damage
debates at which it is only too easy for not involving personal injuries the period is
potentially damaging representations to be either six years from when the cause of action
made, and also the uncontrolled issue of accrued or three years from when the
Letters of Intent. If these have to be used on claimant either knew or ought to have known
occasions some suggested wording is given of the damage. This provision applies to any
on pp. 77-78. action for damages for negligence and so
would cover an action for economic loss
NOTE caused by acting on careless professional
1 The limitation periods in contract are six advice which is recoverable under the doc-
years for a contract under hand and twelve for trine established in Hedley Byrne v Heller and
a contract executed as a deed, the periods Partners. See Conway v Crowe Kelsey and
running from the practical completion of the Partners [I9941 39 Con LR 1, where consulting
works. Although the general period in tort is engineers were held liable in tort for their neg-
also six years this only starts to run from the ligence although the contractual period of
date when the cause of action accrues, which limitation of liability had expired.
PART TWO
TENDERING AND PLACING THE

CONTRACT
CHAPTER FOUR
Competitive tendering
One of the matters to be dealt with in the con- disposal plant was apparently considered as
tract planning exercise is the method by which subject to the Works Directive- see Case 199185
the contractors for the project are to be chosen. quoted byArrowsmith.
The methods most commonly used are set out The importance of the distinction is twofold.
below: First there are different threshold values for
1 'Open' competitive tendering for the whole the application of the respective Directives.
contract price by advertisement. Secondly the provisionsof the Supplies Directive
2 Competitive tendering for the whole contract relating to technical competence - see further
price from a selected list - selective tendering. below - are totally inadequate to deal with engi-
3 Selection of single contractor with whom to neering contracts where the contractor is
negotiate. responsible for the design, supply, installation
and commissioningof a complete plant.
To some extent the EU Works and Supplies
OPEN COMPETITIVE TENDERING
Directives have sought to overcome one of the
This is one of the methods for public works con- main objections to the use of the open method,
tracts which is prescribed by the European which is that the purchaser having received bids
Directive on Public Works Contracts which was from a wide range of contractors of differing
issued in its consolidated form as Council skills, abilities and financial resources is placed
Directive 93/37 of 14 June 1993 and in the Public in an extremely difficult position when it comes
Supplies Directive 93/36 of 14 June 1993. It is to awarding the contract. The purchaser is
also referred to in the Utilities Directive of 14 allowed to exclude firms if they fail to meet the
June 1993. Its use in the UK appears to be very criteria established in the Directives relating to
limited. According to figures published by Euro- general suitability, financial and economic
Bid Watch in 1993 only 2 per cent of tenders for standing and technical competence (Arts 24-27
public works contracts in the UK were open. of the Works Directive and Arts 22 and 23 of the
While it is clear that the Works Directive Supplies Directive).
applies generally to building and civil engineer- For details as to these rights of exclusion see
ing work there is a difficulty with contracts on a in particular The Law of Public and Utilities
turnkey basis for the design, supply and installa- Procurement, Professor Sue Arrowsmith, Sweet
tion of plant and equipment including foun- and Maxwell 1996. It is sufficient to note here
dations and supporting steelwork. Such that the Directives provide lists of the evidence
contracts in normal English practice would be by means of which the purchaser is to establish
treated as works contracts but not so apparently whether or not the contractor does meet the cri-
under the Directives. It would appear that with teria. It seems that while these lists are not
mixed contracts for supply and installation exhaustive in relation to economic and financial
whether the contract is to be treated as a works standing, they are so in regard to general suit-
contract or a supply contract depends on the ability and technical competence. So in a case to
respective values of the supply portion and the which Arrowsmith refers the Belgian authority
erection work. If, as would usually be the case, rejected the lowest tender in favour of the next
the value of the supply exceeds that of the instal- lowest on the grounds that the workload of the
lation, the contract would be subject to the lowest bidder was in excess of the level laid down
Supplies Directive and not the Works Directive. by Belgian rules. The court ruled that this value
Nevertheless it is to be noted that an urban waste of work rule was a useful measure in determin-
38 T EN D ERIN G AND PLACING THE CON TRACT
ing the contractor's ability to undertake further carried out thoroughly and competentlythe pur-
work and was not contrary to any EU rules. chaser will end up accepting a low-price tender
For the important issue of technical com- from a firm which is not suited to carrying it out,
petence it appears that the five references set out and while the initial price may be low, the final
in Art. 27 of the Works Directive and Art. 23 of the cost (including the cost of delays, claims and
Supplies Directive are exhaustive and are making good) is likely to be substantially higher.
intended not just as references but to establish
the only criteria upon which technical com-
SELECTED LIST
petence can be judged. While, as Arrowsmith
points out, a purchaser can set the level of com- Here the purchaser initially selects a short list of
petence required, he cannot require standards firms whom technically and commercially he
other than those contemplated by the references considers suitable to undertake the work in
in the Directives. While the criteria are reason- question. Normally it can be expected that the
able for the Works Directive they are not suitable purchaser either from the experience of his own
for design, supply, install and commission con- commercial and engineering departments or
tracts and this could create problems for the pur- with advice from his consultants will be able to
chaser. select the firms on his own initiative. On interna-
In the only case to come before the UK courts tional tendering, however, it is common for a
so far a housing authoritywas held to be entitled public invitation to be issued for firms to pre-
to take into account criteria relating to com- qualify. This means that firms interested in bid-
pliance with health and safety matters, on the ding for the project can inspect the bidding
grounds that technical capacity to carry out documents and submit details of their com-
works competently includes the ability to carry petence and experience to undertake the work
them out with due regard to the health and involved. They will be required to complete a
safety of those the contractor employs and the questionnaire detailing similar work previously
general public. The decision seems eminently carried out, numbers and qualifications of their
sensible. In fact the authority did have evidence professional staff, a statement of their financial
available to it as to the contractor's safety record assets with a copy of their latest balance sheet,
on other contracts (General Building and particulars of their manufacturing facilities,
Maintenance v Greenwich Borough Council, The and so on. A useful guide to the preparation of
Times 3 March 1993). pre-qualification forms is the Standard Pre-
Even with the provisions in the Directive Qualification Form for Contractors issued by the
allowing for a certain exercise of judgement by International Federation of Consulting Engineers
the purchaser as to the contractor's competence, (FIDIC),PO Box 86,1000 Lausanne, Switzerland.
this still does not remove the other objections to For manufacturing work this will need to be sup-
open tendering. First, knowing that there will be plemented by requests for information relating to
a large number of firms submitting tenders, relevant manufacturing capacity and proportion
some of whom will be willing to take chances already booked and quality assurance and quality
and submit 'cut price offers', the more com- control procedures.
petent contractors are likely to be deterred from As the replies are received they should be
putting the necessary time and effort (which recorded in a register.
both cost money) into the preparation of their Where the contract falls within the scope of
own tenders and may limit themselves, not the Public Works Directive, the Supplies
unreasonably, to 'cover' prices. They may even Directive or the Utilities Directive of 14 June
decide not to tender at all. Second, the process of 1993, then this method which is referred to there
screening all the offers received, taking up refer- as the 'restricted procedure' may be used as an
ences and checking the tenderer's financial alternative to the open procedure and there is no
resources and technical ability is an extremely restraint on the purchaser as to which he
costly and time-consuming process. Unless it is chooses. It is not proposed to go through the
COMPETITIVE TENDERING 39
procedures- for details see Arrowsmith or other Commission have stated that with either the
standard texts. They necessarilyinvolve the issue open or restricted procedures negotiations with
in the OfJicialGazette of the EU of a notice asking tenderers are ruled out on fundamental matters
for requests to participate and giving particulars relating to their tender which would distort com-
of the works and the intended contract. petition such as price.
For public works and supplies contracts the One very important point to note in relation
purchaser may, when using the restricted pro- to the operation of the procedures is that,
cedure, exclude any firm from the list of those assuming the purchaser wishes to make his
invited to tender by reference to the criteria award on the basis of the 'most economically
referred to above under the open procedure. advantageous offer', as opposed to the lowest
Indeed the case of GBM v Greenwich Council price, he must set out in the notice appearing in
referred to above was under the restricted proce- the Official Journalof the EU details of the objec-
dure. The actual selection of those to be invited tive criteria which he intends to take into
to tender is then to be made on the basis of their account when making his award. These criteria
past performance and the other information must not be such as to discriminate against any
obtained relating to the criteria for qualification, tenderer from a third country, for example one
without any discrimination between firms in which referred to an obligatory requirement to
different member states. use a percentage of local labour. The Directives
The Utilities Directive is more relaxed. The give as some examples:
utility can select according to 'objective criteria
and rules which they lay down and which they price
make available to interested contractors'. Again delivery or completion date
of course there must be no discrimination on running costs
grounds of nationality. cost effectiveness
In addition to the restricted procedure there profitability
is also under all the Directives the negotiated aesthetic and functionalcharacteristics
procedure under which 'the purchaser consults technical merit
contractors of his choice and negotiates the quality
terms of the contract with one or more of them'. after-sales service
The purchaser must state in his notice in the spares.
Official Journal which he intends to use. In prac-
tice for public works or supplies contracts the They are indeed the type of criteria which a com-
purchaser's ability to use the negotiated pro- petent purchasing organization would use
cedure is extremely limited. For details see Art.7 whether in the public sector or not.
of the Works Directive and Art.6 of the Supplies The disastrous consequences to the pur-
Directive. chaser of not following the rule of making it clear
The Utilities Directive, however, gives the in the notice or the enquiry that he intends to
, purchaser an unrestricted choice as to which award the contract on the basis of the most eco-
1 procedure to use provided only that there is a nomically advantageous offer is illustrated by
call for competition. Exceptionally the negoti- the recent case of Harmon CFEM Facades ( U K )
ated procedure may be used without a prior call Ltd v The Corporate OfJicer of the House of
for competition-for details see Art. 20(2). Commons 28 October 1999. There the House of
The advantage which the utility certainly Commons had specified '(other than price):
appears to obtain by the use of the negotiated overall value for money' but had not set out any
procedure in competition is that they can then criteria or standards by which the 'overall value
enter into post-tender negotiations and elimi- for money was to be determined'. They had then
nate progressively those firms whose bids are awarded the contract to other than the lowest
not acceptable. Under the restricted procedure bidder. It was held that, as the House of
this would not appear to be possible since the Commons had failed to set out the criteria for
40 T EN D ERIN G AND PLACI N G THE CONTRACI
award of the contract as required by the Public Directive and Art. 19(2)).The author would
Works Directive in descending order of import- entirely agree with the last sentiment but not
ance, they were bound to award the contract on with the idea that there could be as many as 20
basis of the lowest price which manifestly they bidders. It would be more realistic to think of
had not done since Harmon's was the lowest bid. 5 to 8. For utilities there is no such restriction.
Harmon were therefore entitled to damages They need only base the number 'on the
which covered not only their tendering costs but objective need to reduce the number of firms
also their potential loss of profit. to a level which is justified by the need to bal-
From an analysis of the particulars thus sub- ance the particular characteristics of the con-
mitted the purchaser and his advisers are able to tract award procedure and the resources
select the short list from whom tenders will be required to complete it' (Art. 31(3)).This is a
invited. welcome confirmation that tendering costs
In the exercise of selecting the short list four time and money both to the firms involved
points in particular need stressing: and to the purchaser in his task of evaluation.
Again there is reference to the need for ensur-
1 The selection needs to be done positively, not ing competition.
through the time-honoured principle of 4 The selection should be done objectively by a
'Buggins' turn'. On a large job the prospective two-stage process the details of which should
bidders should be interviewed to assess their be established in advance of the issue of the
interest and suitability for the particular job at call of pre-qualification. The first stage of the
the time in question. process is that in which firms are eliminated
2 Like must be matched against like. It is no use from further consideration because they fail
putting the local builder in competitionwith a to meet certain minimum criteria. Typically
major national contractor, nor asking such criteria could be:
Harrods to tender against Woolworths. The
list should be related both to the size of the job Lack of recent technical experience of simi-
and to the quality which the purchaser wants lar-class work. It is for that reason vital to
and, equally important, is prepared to pay for. obtain particulars of work of the type in
It is considered that this would not offend question executed within the last, say, five
against either the restricted or the negotiated years.
procedures, provided it was clear that the Inadequate financial resources to support
actual selection was made objectively and the project. This could be judged by refer-
without discrimination. ence to turnover, profitability, level of
3 The operative word in describing the list is issued capital and willingness of banks to
'short'. Long tender lists are a menace. The supply necessary level of credit and bond
tenderers get to know the list is long and support.
some, perhaps the best, will lose interest. The Lack of management resources which
purchaser's task in tender appraisal is made could be made available from within the
more arduous. Worst of all is the waste of time company.
and money in the contractors' tendering On projects overseas, lack of suitable joint
offices, or the pernicious practice, which long venture partner or inexperience of working
tender lists serve only to encourage, of 'cover' in the country concerned.
prices. In the restricted procedure under both On a project involving design and manufac-
the Works and Supplies Directives it refers to ture, lack of design and/or manufacturing
the number 'being determined in the light of facilities of the type required and/or of com-
the nature of the work to be carried out. The plyingwith the necessaryqualitystandards.
number must be at least 5 firms and up to 20.
In any event there must be enough to ensure As referred to above the establishment of objec-
genuine competition' (Art. 22(2)of the Works tive criteria in advance and their inclusion in the
C O M P E T ~ T ~ VT EE N D E R I N G 41
notice in the journal are mandatory when ten- centages of contract price payable on
dering under the public procurement or utilities interim certificates and to be held as reten-
rules. tion money; amount of liquidated damages
Once the list has been selected the procedure for delay and maximum defects liability
within the purchaser's office concerned com- period if none stated in the general con-
mercially with inviting tenders should be as fol- ditions. Many conditions of contract, for
lows: example ICE 6th and 7th editions, have an
appendix Part I of which is to be completed
1 It should be established that all the firms
prior to invitation of tenders.
selected are interested and willing to tender.
where it is intended to nominate any sub-
2 A realistic period should be assessed for ten-
contractors and suppliers, whether the
dering; within reason, the longer the better.
employer wishes to obtain from such sub-
All of the Directives establish minimum time
contractors and suppliers a direct warranty
limits for the period for tendering, which for
-seep. 147.
works contracts are to be extended if visits to
site are required or there is voluminous docu-
The specification should be examined to
mentation to be studied. In general terms
ensure first that it is in a form which is appro-
under the restricted or negotiated procedures
priate for the procurement method which has
for public works the minimum is 40 days (26 if
been chosen. If the intention is that the con-
a prior information notice has been pub-
tractor should be wholly responsible for the
lished) and for utilities 3 weeks, unless there is
design of the works then the specification pre-
an agreement between the utility and the bid-
pared by the purchaser should be limited to a
ders otherwise in which case the period must
statement of the purchaser's requirements
be the same for everyone. In practice since
with no detail as to how these are to be met.
site visits and voluminous documentation are
Alternatively if the purchaser is responsible
the rule and not the exception these limits
for the design then the specification will be a
ought to be increased.
detailed description of the work which the
3 A check should be made to ensure that by the
contractor is required to perform. In either
date for issue of tenders all the information
event it should be checked that the specifica-
required will in fact be available. It is no use,
tion does not contain anything which is
for example, finding out at the last minute
contradictory to the other documents, in par-
that a soil survey is needed. If one is required
ticular the general and special conditions of
it should be put in hand straight away.
contract. Duplication is to be avoided, as is
4 The appropriate general conditions of con-
the practice of including in the specification
tract should be selected and consideration
items such as individual warranties on pieces
given to the following points:
of equipment which should be in the special
whether any modifications are required - conditions and comprehensivelydrafted to fit
for example, is the purchaser willing to in with the remainderof the conditions.
accept the extensive limitations on the 6 The form of tender has to be prepared. This
contractor's liabilities under the MFll may be quite simple on a standard building or
conditions (seefurther p. 164)? civil contract. With a building contract there
if any special conditions are required - for will be a lump sum for the works. For a civil
example, the contractor to comply with contract subject to remeasurement there will
works safety rules; prohibition against be no tender price but the rates and prices will
'poaching' of the purchaser's own labour; be given in the bills of quantity. On contracts
the long-term availability of spares for key for the design and supply of plant and equip-
items of equipment. ment or process plants, however, a more
any blanks in the conditions which it is detailed form is required which might contain
necessary to complete - for example, per- sectionsas follows:
42 TEN D ERI N G AND PLACING THE CON TRACT
Section which should contain clear and detailed

I Tender declaration. instructions as to what work the contractor
I1 Schedule of prices. will have to carry out and how the tender is to
111 Specification. If the purchaser is buying be completed. The tenderer's attention should
on a performance specification this will be drawn to any unusual and vital points, and
be the firm's detailed specification as to the rules on which the invitation is issued
what it is offering. It will be convenient must be made clear. Where the employer is
with many electricallmechanical plants inviting tenders on his own conditions of con-
and process plants for the bidders to be tract or has modified one of the well-known
provided with blank schedules to com- standard forms, and either his own conditions
plete with instructionsas to how they are or the modifications contain some clause
to be completed, for example for electric which is unusually onerous on the contractor,
motors, pumps, valves, so that their tech- then it is important that the tenderers' atten-
nical standards and performance can be tion is drawn specificallyto that clause. Failure
compared. Similarly it may be useful to by the employer to do so could result in the
have schedules for the comparison of clause not being considered by the courts as
energy consumption, gas, water and so forming part of the contract according to the
on. Whatever the form of specification judgement of the Court of Appeal in Znte?foto
issued by the purchaser the bidders Picture Library v Stiletto Visual Programmes
should be required to complete a sched- Ltd reported in The Times on 14 November
ule confirming that their bid is in accor- 1987. The better the instructions to tenderers
dance with the purchaser's specification and the clearer the form of tender are, the less
other than in the following respects. They time contractors will have to spend on their
should list any disconformance with par- interpretation, the more time they will be able
ticulars of where it can be found in their to give to their bid, and the better the offer
tender documentationand give reasons. which the purchaserwill receive.
IV General and Special Conditions.
Similarlythe tenderer should be required One or two points on the form of tender need
to confirm that his bid is submitted amplification as follows:
strictly in accordance with the condi-
tions, including any annexes, except for Schedule ofprices The extent to which itemized
items listed in a schedule which must prices are called for needs watching. It is easy to
identify the exceptions and state reasons. be over-enthusiasticon this point, but it is sug-
V The Programme. This is the tenderer's gested that a bill-of-quantity approach to plant
programme. Again if it departs from any contracting is quite out of place and may be
information as to programme require- positivelymisleading. It also involves the tender-
ments stated by the purchaser in his ers in a great deal of unnecessaryexpense.
enquiry the tenderer should be required
to identifythis. Programme The purchaser should state clearly
VI List of principal sub-contractors and what he wants, and this should definitely not be
suppliers. 'as soon as possible'. The tenderer should be
VII Management chart showing head office asked to give his own more detailed programme
and site supervision proposed. and be instructed to indicate on this any periods
VIII Other Documentation. The tenderer which the purchaser considers critical - for
here should be required to provide any example availability of foundation loads. On
other documentation requested by the contracts of any substance it is suggested that
purchaser- see list on p. 43. the purchaser should call for a preliminary criti-
cal path network to be submitted as part of the
7 Instructions to tenderers must be prepared, tender.
COMPETITIVE TENDERING 43
Conditions of contract This should contain the be named and their experience and qualifica-
amendments to general conditions, special con- tions listed.
ditions and the particulars to be included in
order to complete blanks left in the conditions. Other documents Dependent upon the nature
These will include: of the contract it may be appropriate to include
the following additional documents or require
with process plant or mechanical/electrical
the tenderers to provide them:
plant the terms of -payment
.
liquidated damages for delay expressed

Quality assurance procedure. The purchaser
preferably as sums of money rather than per-
may have a procedure which requires firms to
centages of the contract price
comply or may ask them to provide their own
liquidated damages for performance ex-
procedure as part of their tender.
pressed similarly
Site safety procedure. The purchaser should
time or period for completion
have a procedure which will include any
rate and limit of retention money
induction period for the contractor's labour.
form of performance bond required
This should be supplied to the tenderers.
form of parent companyguarantee required
Site labour relations. With a 'green-field' site
name of planning s u p e ~ s o and
r principal
on which only the contractor is to work this
contractor if the contract is subject to the
may not be a problem. However there will be
CDM Regulations
circumstances in which the works are to be
any other blanks needing to be fdled in
constructed on either an existing site or one
depending upon the form of contract being
on which either the purchaser or other con-
used. If the NEC form is being used each of
tractors are working. It may then be necessary
the secondary options needs to be considered
for the purchaser to set down a labour rela-
and where appropriate included - see later
tions policy for the site.
pp.94-5.
Drawing procedure. The purchaser may have
If the tenderer wishes to qualify his acceptance requirements for the format and numbering
of any of these he must do so in the same way as of drawings.
for the conditions themselves. This should be Manuals and as-built drawings. If not set out
stated specifically either in the form of tender or in the specification the purchaser's require-
in the instructions to tenderers. ments for these need to be defined in a pro-
cedure. It should specify numbers for each,
List of principal sub-contractors and suppliers the format for the handbooks, which should
See Chapter 16 on sub-contracting. be common throughout, the timing of their
submission and any requirements for micro-
Managementchart Successful execution of the filming or use of electronic medium.
contract depends upon the degree of concerted Specifically the handbooks should not be a
effort put into it by the contractor. This in turn diverse collection of documentation from
depends directly on the extent of management sub-contractors and suppliers with each pre-
resources allocated. If the contract manager or pared in its own form.
engineer is trying to do this contract and many For a process plant the procedure to be fol-
others, the proper concentration of effort cannot lowed in the taking over of the plant. It is sug-
be forthcoming. The purchaser wants to know gested that the tenderer should be required to
therefore, in appraising the tenderer's offer, what submit a proposal for this procedure as part of
he is getting not only in design and materials, but the tender.
also in management resources, and how much For a process plant the procedure for the
in full-time and how much in part-time. On a carrying out of the performance tests and par-
major contract the purchaser should ask for the ticulars of the tests and guarantees. It is sug-
contractor's senior staff, who will be full-time,to gested that the tests themselves and the
44 TENDERING AND PLACING THE CONTRACT
guarantees should be put forward by the pur- other work necessaryfor the completion of the
chaser and that the tenderer should be contract is the responsibility of the contractor.
required to submit with the tender proposals The purchaser's requirements in relation to
for the procedure to be followed. This would spares and the system for the numbering of
include methods of measurement and analy- spares. It is important that the system should
sis and allowable tolerances. be such that the unique number for each
The training to be provided as part of the con- spare is used consistently in the handbook,
tract. The purchaser could specify the num- on the as-built drawing and in the stores
bers of his operating and maintenance staff to inventory.
be trained and ask the tenderers for their pro- The co-ordination procedure covering how
posals. The conditions of contract should the parties communicate with each other,
make it clear whose staff are to operate and method of progress reporting and progress
maintain the plant during the tests on take meeting. This could be left until the 'kick-off
over and the performance tests. Usually it will meeting at the beginning of the contract, but
be the purchaser's staff who have been if the purchaser has any special requirements
trained by the contractor acting under the which may have a financial impact these
supervision of the contractor. should be made known to the tenderers
Schedule of items to be supplied by or work to before bid submission.
be performed by the purchaser. Rather than
have the purchaser's obligations scattered The ideal at which the purchaser should aim is
round the contract it is convenient to have that the tenderers are either provided with all
them grouped all together in a schedule even if information related to the management and
this consists partially of references to where running of the contract which may have an
they may be found in more detail. It must be impact on their pricing, or asked to put forward
clarified elsewhere in the contract that all their proposals as part of their bid.
CHAPTER FIVE
Single tender negotiation

For various reasons it may be necessary at times tor's and the purchaser's engineerslconsul-
to negotiate with a single contractor. This may tants. Commercial negotiations on price
be due to the need for speed, because the firm is should follow technical agreement so that
sole licensee for the equipment or process one is not trying to deal with the two vari-
desired, and so on. It is suggested that the pre- ables at the same time. If during the course
ferred method of handling such negotiations, for of the price negotiations it appears that the
other than items of proprietary equipment, price is excessive for some technical reason
would be as follows: then the issue can always be referred back
to the engineers for further consideration
1 Advise the firm with whom it is proposed to
and ultimately to the purchaser's manage-
negotiate that it is the intention to proceed on
ment for an overall decision.
a single-tender basis with them if they are
The contractor should be instructed to pre-
willing to co-operate. Under no circum-
pare his estimates according to his normal
stances should an attempt be made, by send-
method of estimating. When the estimates
ing out a formal invitation to tender, to
are complete (or largely so as it is not desir-
deceive the contractor into believinghe is ten-
able to wait until the last few per cent if this
dering in competition. To do this would
will significantly delay agreeing firm prices
destroy at once any confidence or good faith
on the remainder) then these should be
as between purchaser and contractor and
gone through in detail and agreed with the
seriouslyprejudice the purchaser's chances of
purchaser. The methods of doing this are
future successful negotiations.
discussed in detail below.
2 Agree with the contractor on the basis of
Once the estimates have been gone through
negotiation.
and agreed the contractor should submit a
3 Confirm the agreed basis of negotiation in a
normal firm price tender.
letter to the firm with instructions to them to
After acceptance of the contractor's tender
prepare their specifications and their firm
the contract should be treated in all
prices. State in the letter that if the negotia-
respects as if it had resulted from a compet-
tions fail or the work is not proceeded with,
itive bid, that is the contractor may gain or
then the contractor will be reimbursed his
lose depending on how the job turns out
reasonable costs up to that date.
and whether his assumptions and esti-
4 Basisofnegotiation
mates were correct or not. There should be
Agree a programme from the issue of the no reopening of the estimates, whichever
letter authorizing design and estimation, way it may go for that particular contract.
through the negotiation stage to the con- The purchaser may, however, wish to do so
tract and on to completion of the job. for repeat business. This is dealt with in
Agree the general and special conditions to more detail below.
apply and any variables which affect the
contractor's assessment of risk, for example
METHODS OF PRICE NEGOTIATION
substantial liquidated damages.
Designs and specifications to be agreed to There are basically two methods which can be
the maximum extent practicable, given the used by the purchaser to negotiate the price.
desirability of the earliest possible agree- They are not necessarily mutually exclusive and
ment on firm prices, between the contrac- indeed on a major project both should be used.
46 TEN D ERI N G AND PLACING THE CON TRACT
The first method is to compare the contrac- contract, and it can therefore make sense to
tor's estimate for an item or section of the works do such comparisons at least for work above
with other prices already known to the pur- ground. Deep foundations, tunnelling or shaft
chaser or his consultant and which were sinking are another matter because of the
obtained in competition for similar classes of great influence exerted on the pricing by the
work. At its simplest this method could involve nature of the ground, particularly the ingress
comparing the square metre price proposed for of water and the presence of salts and acids.
a basic buildingwitha price obtained recently by Overseas it is considered almost impossi-
the purchaser's quantity surveyor on a competi- ble to make comparisons which have real
tive basis. validity, particularly between work executed
The main difficulty with this method is the in one country and another.
obvious one of ensuring that one is comparing
The alternative method is to require the tenderer
like with like and clearly the further the adjust-
to separate out his commercial overheads and
ments which require to be made to allow for dif-
profit and to break his unit costs and quantities
ferences the more spurious the comparison
for each item of work into its component ele-
becomes. In the building example what services,
ments.
water, drainage and so on were included, what
On a building or civil engineering contract
are the standards of finish and fittings, are the
such a breakdown could consist of:
construction conditions the same, and so on. As
the items being compared become more com- 1 Indirect preliminaries This would be one
plex or the conditions of construction more sum for the contract covering general super-
divergent these difficulties increase. vision, offices, camp costs, stores and plant
On complex equipment, problems can arise yard common to the entire contract.
on differing standards of design and specifica- 2 Direct preliminaries These would be
tion, anticipated product life, environmental associated with each section of a major
conditions under which the equipment is to contract covering the supervision up to fore-
work, degree of automation and so on, all of man or sub-agent level for the section and
which make useful comparisons extremely diffi- any general facilities required for that
cult. section.
The comparison method can only be used 3 Measured work The labour, materials and
with any degree of confidence iE plant utilized in the various operations, the
quantities, times and rates of each being
1 On mechanical, electrical and process plant stated.
the equipment specification and conditions 4 Major materials and sub-contracts There
under which the plant is to be installed and would be shown the prices to be paid and
used are virtually identical. Even then it would evidence that these were obtained competi-
be necessary to identify all the factors of com- tively.
mercial risk such as terms of payment, bond- 5 Attendances and builders' work in connection
ing arrangements and penalty clauses which These would cover services provided by the
would have to be stripped out before prices main contractor to the sub-contractor,allow-
could be compared. There would also need to ance for use by the sub-contractorof the main
be an adjustment for escalation to take contractor's facilities and so on together with
account of any difference in the base dates. work by the main contractor in, for example,
2 On building and civil engineering work the making good after the installation by the
scope of work, specification construction con- heating and ventilating sub-contractor of his
ditions including programme and commercial pipework.
terms are extremely similar. Within the UK 6 Miscellaneous items There are always a
this can be the case with UK standards and number of minor items included within any
codes of practice and standard conditions of bill of quantities.
SINGLE TENDER NEGOTIATION 4
7 Temporary works The extent of these will LABOUR COSTS IN WORKS

vary considerably with the nature of the Wage rates and allowances should be checked
works in question. One important factor to against costing records. Overheads should be
note is the extent to which an item such as examined to ensure that appropriate rates for
shuttering can be used a number of times. the contract in question have been used. For
8 Design If the contractor is responsible for example, if a single works overhead is normally
design of the permanent works then this applied by the firm this may only be appropriate
should be identified as a separate item. if the contract includes provision for a balanced
9 Contingency This should again be sepa- workload of machining and assembly. If on the
rately identified and not hidden in the rates. contract being negotiated machining is being
10 Head ofice overheads. sub-contracted and the contractor is carrying
11 Propt. out assembly only, the overhead may require
For mechanical, electrical and process plant an adjustment. If cost centres are used for recovery
appropriate breakdown could be: of overheads, a check should be made to ensure
that the ones appropriate to the class of work
1 Materials including transport and insurance. involved have been selected. Times for opera-
2 Field office including salaries, buildings, tions should be checked as far as practicable
vehicles and consumable site services, stores from the contractor's own records of past
and canteen corresponding to the indirect times for work of similar class utilizing similar
preliminariesfor buildingwork. methods of production. If the contract involves
3 Field labour, wages and other payroll costs substantial repetitive work, allowance should be
such as national insurance and training. made for the degree of 'learning' which will take
4 Field commissioning covering all payroll place duringthe course of the contract.
costs, commissioning spares and any con-
sumable materials for commissioning. DESIGN
5 Construction equipment and tools including The wage rates and overheads should be ex-
movement to site, repairs and replacements, amined and a note should be made of the extent
fueland insurance. to which head office on-costs are being recov-
6 Design including computer and repro- ered through the drawing office. The best checks
graphic services. on design are to take the total man-hour quanti-
7 Contingencies. ties involved and see how these tie in with the
8 Head office overheads. programme, and secondly to compare the total
9 Profit. allowance for design costs with the contract
price as a whole. Experience will suggest to the
DISCUSSION OF COSTS AND PRICES negotiator the proportions of the contract price
which should be represented by design. Another
Particular points which may arise in the price useful check is to take the quantity of drawings
negotiations will include those described in the either produced or to be produced and arrive at a
following paragraphs. cost per drawing.
BOUGHT-IN ITEMS AND MATERIALS METHOD STATEMENTS
The price of each should be checked against An important issue particularly on building and
quotations or current estimates. It should be civil engineering contracts is the statement of
noted whether the prices quoted are fixed or the method by which the contractor intends to
variable, whether ex-works or delivered to site, do the work - the combination of particular
and whether trade discounts have been types of plant and labour. It is here that the
deducted. Quantities should be checked to see contractor expects to make money from the use
that excessive allowances have not been made of his skill and initiative, but it is up to the
for wastage or contingencies. negotiator to ensure that the method on which
48 T EN D ERI N G AND PLACI NG THE CO N TRACT
the costs are agreed is realistic and appropriate Charges for supervisory staff will normally
for the work in question. If later on during the include their benefits, such as company cars and
execution of the contract the contractor can so on. It should be checked that these are not
improve on it then that is his good fortune. recovered elsewhere in the firm's overhead
structure.
MATERIALS ON SITE
The quantities of materials to be used will be PLANT
checked by confirming the 'take-off from the Plant costs are of increasing importance and the
drawings with due allowance for wastage. Prices negotiator needs to be assured that the basis on
should be checked to see that they are competi- which plant has been charged is reasonable. In
tive in relation to the quantities being used, and particularthe following points arise:
that discounts have been disclosed.
1 On a large project, particularly overseas, cer-
AVOIDANCE OF OVERLAPS tain plant should be capitalized.
2 The contractor will normally charge for plant
Particularly on large contracts, in which each
which he owns at his own internal hire rates.
section with its own supervision is estimated
It should be checked as to what elements (if
separately, the sum of that supervision and its
any) included in these rates, for example
related facilities will always be in excess of the
profit, spares, servicing and so on, are covered
total which the contractor will have on site. An
elsewhere either in his allowance for profit or
estimator does not divide a man into two or even
in the preliminaries.
three, yet in practice one man will be found to be
3 Is the plant being charged for the minimum
doing more than one job. Overlaps should
time necessary? Negotiated contracts can
always be looked for therefore as between sec-
often become the dumping ground for the
tions and as between measured work and pre-
contractor's own plant surplus to his immedi-
liminaries.
ate requirements.
LABOUR 4 Has the plant which is the most economic for
the job been selected?This comes back to the
There are two elements to the basic labour cost:
method statement. One does not wish to find
the rate paid per man and the man's productiv-
an expensive item necessarily used for a short
ity. Labour rates and associated benefits can be
period of time for a particular operation
confirmed from the contractor's build-up of
which then continues to be used on other
rates. Labour productivity is more difficult to
operations for a much longer period of
assess except from experience of the particular
time, with intervals when it is standing,
work in question. One guide, particularly on
simply because it is then on site, when a
plant installation work, is to look at the pro-
much cheaper item could be used for those
gramme and the number of man-hours to be
tasks.
spent on site and see how these compare
with the contractor's overall anticipated labour
force. Again it is important to look at the picture
HEAD OFFICE CHARGES
overall to avoid the problem of overlaps and
to see whether the picture as a whole makes It is normal, and indeed desirable, that the firm
sense. should separate out its charges for commercial
Overtime payments to labour should be or head office overheads from the remainder of
identified and if the contractor is making any its costing structure. These overheads normally
percentage charge on top of his labour costs for cover items such as the directors, company
any elements of overhead recovery these should secretariat, research and development, legal
be related to basic costs only. It is preferable for department, central finance and so on.
overheads of preliminary costs to be assessed as The list of items covered by the commercial
items rather than percentages. or head office overheads should be examined to
SINGLE TENDER NEGOTIATION 49
ensure that there is no duplication between ined as a whole and considered in relation to the
these and any items which have been charged risks associated with the work and the profit
for in direct costs. which is being allowed.
Two further points may arise in connection
with the treatment of overheads. It is sometimes
TERMS OF PAYMENT
argued that if the contractor includes within his
overhead build-up some item or service which is An element of the contractor's pricing for the
not required in connection with the particular work will consist of his assessment of whether he
contract under negotiation, such as expenses will have a cash flowwhich is positive, neutral or
connected with export sales, then these should negative. Accordingto the nature of the business
be deducted and the overheads adjusted in which they are involved most firms will
accordingly. In principle this would seem quite have included in their head office charges for
wrong. In deciding to negotiate with a particular the financing of the contract according to the
contractor, the purchaser is surely dealing normal terms of payment to which they are
with that contractor as a whole. He cannot select accustomed. Generally, even with building
particular bits and pieces of the contractor's and civil engineering when payments are
organization which have no separate commer- made monthly according to progress, this will
cial existence. Moreover, in fixing the overhead involve some financing costs. With manufactur-
recovery rate the contractor will have taken ing, where payment is often delayed until
into account the business which is generated delivery, there will be a more significant over-
by, for example, his export side and the contri- head charge.
bution which that makes towards the general The purchaser should establish the terms of
expenses of the business. The buyer cannot payment which he proposes for the contract and
expect on the one hand to take credit for the then require the contractor to produce his esti-
turnover and on the other to refuse to contribute mated cash flow which is checked. Particular
towards the costs which have made that care needs to be taken over when the contractor
turnover possible. The same reasoning applies is going to pay for materials and sub-contract
to other s e ~ c e which
s the contractor main- work. A comparison between the terms of pay-
tains. ment and the accepted cash flow will show the
The second point relates to the question of need, if any, to adjust the contractor's over-
contingencies. Practice varies as between firms, heads.
but the most sensible way of dealingwith contin-
gencies would seem to be for the estimator to
EQUALITY OF INFORMATION
prepare his estimates as accurately as he can on
the information available to him, and for the Where the contract is for an item which has been
contingencies to be added as a whole to the total purchased previously, or the contract now being
estimate by the sales manager or director negotiated is for an item or service which will be
responsible for deciding the final price level. If wanted again, then from the purchaser's point of
contingencies creep into the body of the esti- view it is desirable to establish if possible the
mate itself, as estimator's perks, then there is the principle of 'equality of information'.
danger of a double contingency being applied. It All this means is that the purchaser is given
is not in the purchaser's interests to seek to reasonable access on a confidential basis to the
reduce the final contingency below a sensible contractor's manufacturing or other cost
level. Any job carries unforeseen contingencies. records, which are of course available to the
If these are not allowed for initially they will form firm's own estimators, so that both sets of
the subject of claims later on, and the lack of negotiators start from the same point. There
financial room within which to move may easily may well be reluctance on the contractor's
lead to delays on the job while extras are negoti- part to supply this information, but without it
ated. The contingency must, however, be exam- the buyer is obviously at a disadvantage. If
50 TEN DERI N G AN D PLACI N G TH E CO N TRACT
the buyer knows in advance that he is likely to be equipment manufactured by the contractor, the
purchasingthe item again on a negotiated basis, procedures outlined above for price negotia-
then he should seek to establish the position that tions are hardly appropriate and in any event
he will be given 'equality of information' for the would normally be unacceptable to the contrac-
second negotiation, when he settles the terms tor. In this situation the fairest way of proceeding
for the first contract. It should be made clear that would be to require the contractor to satisfy the
the information so provided for the second or purchaser that the equipment being offered is
subsequent negotiations will not be used to competitive with that produced by other com-
reopen the bargain for the earlier contract, even panies. Care must be taken to compare like with
though it may show that the contractor has like and to make necessary allowances for differ-
made a substantially higher or lower profit ences in specification, performance and capabil-
than was envisaged when the contract was ity. Also, if comparing list prices of equipment
negotiated. with prices included within a total contract,
allowance must be made for commercial factors
included in the latter for such items as overall
PROPRIETARY EQUIPMENT
management, penalty risks, financing terms,
Where the contract includes proprietary items of and so on.
CHAPTER SIX
Planning the tender

Since it is the purchaser who initiates the plan his tender in the same way as a purchaser
demand to which the contractor responds, the must plan his project.
business of contracting has been looked at so far
largely from the point of view of the purchaser.
STUDY OF THE INQUIRY DOCUMENTS
Having followed through from the planning of
the project to the conversion of the plan into The type and character of inquiry documents
action by the issue of inquiries, it is now time to vary tremendously. On the one hand there is the
consider from the contractor's viewpoint the simple letter asking for a quotation to be submit-
work and problems involved in tendering. ted; on the other the massive commercialltech-
A tender is the most important piece of nical documents issued by large customers and
'advertising copy' which a firm ever issues. consulting engineers, often with specific tender
Unlike most advertising material, it can be guar- forms which the tenderers are required to com-
anteed that it will be read, and usually by the plete. Certain problems are common to both and
people who matter most. Not only, therefore, is it to the wide range of documentation in between.
an important step in the chain of turning plans A checklist of commercial questions, including
into physical action; it is also, for the contractor, those which would be relevant if the works are
a vital opportunity to project himself and his overseas, which should be answered before the
products, not just for the particular job in ques- decision is taken to bid is given below:
tion but for the future as well.
For what work is the contractor to be respon-
There is much more, therefore, to tendering
sible? Are the terminal points clearly
than the mere setting down of the specification,
defined?
prices and terms on which the offer is made.
Is it clear what the employer is going to pro-
There is the psychology to be studied of the
vide or do and by when? Who is responsible
buyer who will receive the bid; the importance to
for the interface between the contractor's
be examined of this tender in relation to the
and the employer's work?Are the employer's
market as a whole and to the totality of the
obligations stated in such a way that they are
contractor's business with the customer con-
contractually binding on him? What is the
cerned; the likely actions of competitors to be
risk of his defaulting on these?
considered,and so on (seethe author's TheArt of
Does any part of the work involve:
Tendering, Gower 1987).
Before putting a tender together, therefore, adaptive engineering
the contractor will normally take the following development
action: use of non-proven components or tech-
niques?
1 Make a careful study of the inquiry docu-
If so what is the extent, how near is it to the
ments.
'state of the art' and what would be the con-
2 Based on that study and on the information
sequences of failure?
gained through normal commercial intelli-
4 Does the contract clearly define in relation
gence channels, and taking into account
both to factory testing and site testing:
his existing and projected workload, decide
whether to treat the inquiry seriouslyor not. the type and specification of tests to be
3 If the decision is to take it seriously, then pre- carried out
pare a tender plan, since a contractor must test limits
52 TENDERING AND PLACING THE CON TRACT
objectivestandard for visual tests there liquidated damages or penalties for

procedurefor repeat tests delay and if so at what rate are these, is there
when and within what period tests are to a maximum and what are the contractor's
be carried out liabilities if the maximum time limit is
that no additional tests can be added by reached? Can the employer terminate for
the employer beyond those specified in delay or claim consequentialdamages?
the contract 8 What are the general conditions of contract?
whether the employer will repeat tests or Are there special conditions added and if so
observe the contractor's tests? what are these?Do the conditions of contract
and the specification contradict each other?
5 Are there guarantees for performance and Do the conditions impose any special risks in
penalties for failure to meet these? relation to the nature of the work to be car-
If so then: ried out?
when will the guarantee tests be carried 9 What are the terms of payment proposed
out? and would these produce a negative or posi-
who will operate the plant during the tive cash flow? What bonds is the contractor
guarantee tests? required to provide and are these cashable
who will provide the necessary facilities on first demand? If a bond is cashed must it
for the carrying out of the tests? be replaced? Is there any requirement for
who provides the test equipment? credit finance? In what currency and where
are the limits, tolerancesand test methods will payment be made? Is there a risk on
specified? exchange rates?
what happens if the employer is unable to 10 What are the contractor's responsibilities in
have the tests carried out when the con- relation to insurance? Is he required to
tractor is ready? Is the contractor then insure with an overseas insurance company
entitled to have the plant taken over? Does and if so in what currency will payment be
the contractor have to carrv out the mar- made and what is that company's record on
antee tests then during the defects liability 'Iaims payment?
period? 11 What are the contractor's liabilities in re-
is there provision for a reliabilityrun?If so, lation to defects? Is the defects liability
when does this place, what are the period revolving? Is there any liability for
conditions for the turn and in particular consequentialdmages?
what are the permitted outages? 12 Does the contract allow for extensions of
time and if so for what reasons? What is the
6 To whom will the contractor be responsible - procedure for claiming extensions and how
directly to the employer or to another con- are these assessed?
tractor?What is the financial standing of the 13 Are there any nominated sub-contractors
employer or main contractor? Will there be proposed? If so are they commercially
an engineer under the terms of the contract acceptable and is it necessary to contract out
and if so who will exercise his powers? of any risks in relation to them?
7 What are the contractor's obligations in 14 Under what legal system will the contract be
relation to time for completion? Is the con- governed and how will disputes be decided?
tract programme a contractual document so In what country are the assets of the
as to make the contractor contractually liable employerlmaincontractor situated?
for meeting intermediate dates? Is com- 15 What are the employer's rights to terminate
pletion itself clearly defined and is it before and what are the consequences of termina-
or after the performance guarantee tests or tion?
the reliability run? Is there an escape clause if 16 How much time is available for tendering?
the works are substantially completed? Are Are there any special formalities attached to
P L A N N I N G 'I' H E TENDER 53
tendering such as submission in a foreign tive to the customer to guarantee a twelve-

language or notarized copies of the tender? month delivery when one's competitors are only
17 By whom may the tender be submitted?Are willing to offer eighteen months, but if the dam-
there any rules governing the employment of ages for delay are 0.5 per cent of the contract
agents? price per day, the tenderer must be very certain
18 What is the contractor's liability for the pay- of his ability to complete on time for the risk
ment of overseas taxes either in respect of involved to be commercially acceptable.
profits or on the salaries of his staff?Is there Thus tendering,like purchasing, is a compro-
any double taxation relief between the UK mise. Moreover, it is a compromise which nor-
and the country where the contract is to be mally has to be worked out against a tight
performed? Are there any special require- time-scale and, unlike purchasing, has to take
ments on import permits, visas or work per- into account the activities of the firm's competi-
mits? Are there any special fees or taxes tors. It also costs time and money and is a com-
payable on imported materials and plant? mitment on a company's resources. Planning
Are there stamp duties payable on the con- may, therefore, be considered in two stages: first
tract and if so by whom? the decision whether to tender at all, and second,
19 Is the contract fixed price or subject to esca- if the decision is to go ahead, the planning of
lation? If the latter, how is escalation to be the tender itself. There are two aspects to the
calculated? Are there reliable statistics or decision as to whether to tender or not: bid
indices available in the overseas territory? desirability and success probability. It is sug-
20 Is the final certificate issued at the end of the gested that the firm should first analyse the
defects liability period conclusive evidence invitation to tender using for this purpose the
of the sufficiency of the works, or does the questionnaire set out in Appendix 2. There is no
contractor have a continuing liability? If so, marking scheme for the answers to this ques-
for how long? tionnaire but it is obviously a question of com-
paring the factors which may favour the
It is to be hoped that the answers to the more submission of a bid, such as the need to obtain
general of the above questions, such as those business or the development of a particular mar-
relating to law and taxation, and indeed to those ket, against those which are negative, such as
relating to the employer, are already known to contractual or financial risk. It is important that
the contractor from his previous investigations this comparison is presented to a director and
of the market. If they are not, and he is starting in signed off as authority either to proceed or not.
a new territory from scratch, then, as suggested If it is apparent that any factor which cannot
in The Art of Tendering, p. 38, the contractor is be changed is strongly negative - such as a
almost certainly wasting his time and money in mandatory requirement to accept payment in a
preparinga bid. non-freely convertible foreign currency - then
the decision should be no bid and this is so
regardless of success probability. It is important
PLANNING THE TENDER
at this stage to be totally realistic in recognizing
The tenderer's objective is the submission of an those factors which are mandatory and will not
offer which: be changed by the employer, otherwise a bid
may be submitted with qualifications and bid
is the most attractive to the customer which
bond lodged, and then the firm be advised that it
can reasonably be presented
has been awarded the contract and instructed to
minimizes the contractor's risks and potential
come and sign the contract on the employer's
liabilities and ensures the contractor a rea-
terms and with the contractor's qualifications
sonable profit return.
deleted. It will be useless at this stage to protest
Clearly these two objectives will at times be in or prevaricate.The firm will have only the option
conflict with each other. Thus it may be attrac- of signing on the employer's terms, with all the
risks these involve, or of forfeitingtheir bid bond 1 The buying policy of the purchaser. Does he
and suffering the financial loss. negotiate with the low bidder or the lowest
Assuming that the decision is to bid then the two in order to secure reductions in the ten-
firm should take the following actions in order dered prices or not? If he does then the firm
both to maximize its chances of success and to must allow a margin above their minimum
minimize the risks should it be successful: price level in order to be able to satisfy the
1 Appoint a tendering team with a tender man- purchaser's requirements.If the firm is uncer-
ager. tain as to the purchaser's policies then for his
2 Establish a tendering programme making due own security he should assume that the pur-
allowance for internal approvals and trans- chaser will negotiate.
mission of the bid to the purchaser if it is over- 2 The worth at any given price level which the
seas. Within the programme set dates for bid would possess for the purchaser. This
internal review meetings. brings into account the non-price factors
3 Ensure that it has the appropriate 'political' such as delivery, technical merit, proven
representation necessary to support its inter- record of performance, and so on.
ests. Again this should already be in place if 3 The anticipated bidding strategy of the firm's
the firm is to have a real chance of winning - competitors.
see further Chapter 8, The Art of Tendering. 4 The worth to the firm of a bid at any given
Now is the time to ensure that that represen- price level. This brings into account the state
tation is actively at work. of the firm's order book, current level of activ-
4 Visit the site armed with a questionnaire to ity, future marketing policy, contractual risks
complete-see Appendix3 for a specimen. associated with the contract, financial consid-
5 Identify from the bid desirability table in erations such as cash flow, bonding require-
Appendix 2 any particular actions which can ments, and so on.
be taken to minimize risk or improve success Based on these factors it is proposed that the
probability, allocate responsibilities for these firm's decision rules on bidding can be summa-
to individuals, and follow up and assess the rized as follows:
results achieved.
6 Seek clarification from the purchaser even if 1 Competitive bid - purchaser not expected to
only informally on any ambiguities in the ten- negotiate on price. Bid at the level which will
dering documents which unless resolved maximize the bid's subjective expected value
would make it necessary to include reserva- to the bidder, i.e. the product of the success
tions in the tender. probability of a bid at that level and its worth
7 Obtain specific local advice on any matters of at that level to the bidder.
law, taxation, import regulations and so on 2 Competitive bid - purchaser expected to
which could affect either risk or price or both. negotiate on price or bidder uncertain as to
8 Establish whether or not the purchaser would purchaser's intentions. Bid at the level which
be receptive to any alternative, either tech- maximizes the bid's value to the firm after
nical or commercial, which would increase taking into account:
the firm's success probability. Further the concessions which the firm believes it
whether he would be prepared to award the will have to make to the customer in order
contract on the basis of an alternative, either to obtain that price, and
without giving the other bidders an oppor- if the negotiations are expected to be pro-
tunityto re-tender, or only a nominal one. longed, also taking into account the costs of
negotiation and discounting the value of
TENDER PRICE LEVEL the bid back to the date of submission.
The firm's tender price level will be a function of For a more detailed treatment of the above
the following factors: together with worked mathematicalexamples
PLANNING THE TENDER 55
see Chaper 14 and Appendix 3 of the author's not doing so, adjusted to take account of the
Handbook of Contract Negotiation, 3rd edi- time-costs associated with achieving agree-
tion, Gower 2000. ment having started the negotiations at that
3 Non-competitive bid. Bid at the level at which level, provided again that this level is above
it is believed that the purchaser would just be that which would be the minimum acceptable
indifferent between placing the contract and to the bidder.
CHAPTER SEVEN
Joint ventures and consortia

Joint ventures may be entered into for a variety carefully consider any requirements on this
of reasons some of which may be termed aggres- included in the purchaser's instructions to
sive in that they seek to bring together a combi- tenderers. It will usually be found that they
nation of skills which are best able to undertake require the purchaser's permission and that
the work on a turnkey or main contractor basis. the purchaser must be notified of their inten-
Others are defensive of which the most common tions within a certain period before the date
is quite simply to reduce the competition. Or the for submission of tenders. This is in order to
joint venture may be a 'shot-gun marriage' in allow the purchaser the option to bring in
that in many territories today - unless the job is another firm to make up the competition.
being funded by an international lending agency Assuming there are two firms involved and
-there is simply no way in which a foreign con- one of them has pre-qualified in its own right
tractor can be awarded a government contract but not the other one, the purchaser would be
up at least to a certain value unless he has a joint entitled to refuse the request to joint venture.
venture with a local partner. More probably the purchaser would insist on
All joint ventures for whatever reason they the non-pre-qualified firm going through the
are undertaken share certain characteristics and pre-qualification process and only if he
have certain problems which must be solved at passed this would he allow the joint venture to
the outset or else the relationship has a high bid. Again the firms must notify the
probability of ending in disaster. Joint ventures purchaser at the earliest possible date of their
with local partners overseas additionally present intentions so that there is time for the pre-
certain difficulties of their own which are dis- qualification process to be completed.
cussed later in the chapter.
JOINT VENTURE CHARACTERISTICS

APPROVAL BY THE PURCHASER TO THE
The terms joint venture and consortium are
JOINT VENTURE BID
often used loosely without proper definition.
Here joint venture will be used to describe a
If the purchaser is operating a pre-qualification
relationship in which the parties have agreed to
system then one of three alternatives may apply:
undertake the contract on an integrated basis in
The joint venture may have pre-qualified which each provides staff and resources which
initially as a joint venture. In that event there are combined together,and no one party is sepa-
is no problem about pre-qualification. The rately responsible for any individual section. In a
joint venture will, however, normally be consortium in contrast each party is wholly
required to submit a copy of their joint ven- responsible within the consortium for the pric-
ture agreement. For this purpose they should ing and execution of a particular section of the
prepare only a summary joint venture agree- work. The internal arrangements do not nor-
ment which must confirm that each party mally affect the employer since he will insist that
accepts the obligation of joint and several the parties- whether it is a joint venture or a con-
liability. sortium - are jointly and severally liable to him
The parties have each pre-qualified in its own for the performance of the contract as a whole.
right but then decide during the tendering The distinction has an important impact on
period that rather than submit separate bids the internal structuring. If it is a consortium and
they would like to joint venture. They need to not a joint venture then there will be a need for
JOINT VENTURES AND CONSORTIA 57
cross-indemnities between the parties so that if The objective. Is it pre-bid only, to bid for a
one party fails to perform and the others have to particular project or is a longer-term rela-
fulfil his obligations, then they are protected tionship envisaged?
against the consequences. This is, in practice, The duration.
easier said than done since what is required to The law of the agreement.
be assured is the financial worth of the party in Procedure for settlement of disputes.
relation to the obligations he has undertaken to How is the agreement to be managed?There
perform. This may need the support of on- are several issues here which require to be
demand bank guarantees which, if they are not considered:
forthcoming, are a fair indication of the value to
Is one company going to act as the
be placed on the indemnities. Also if the work
sponsor? If so the responsibilities of the
performed by the member who has defaulted is
sponsor need careful definition, particu-
of a highly specialized nature it may be difficult
larly as to the limits to which he is entitled
to find a replacement.
to commit other parties. The sponsor's fee
The sharing of profits or losses as between
must also be settled. The advantage of a
the parties is also significantly affected by the
sponsor, particularly operating overseas,
decision on the form of co-operation. If it is a
is that it enables the overall management
joint venture then this will normally be pro rata to
to be handled through an existing organ-
the value of participation and profit will usually
ization and one which has already estab-
only be taken at the joint venture level. If, how-
lished links with the agent.
ever, it is a consortium then each party will take
A management board needs to be estab-
the profit or loss on his own work and it is then
lished which is comprised of senior mem-
necessary to decide how to handle the consor-
bers of the parties who have sufficient
tium costs. Often the decision will depend on the
time and a sufficient degree of availability
local rules as to taxation and tax advice on this
to attend to the business. Again when
issue should always be obtained before any de-
operating overseas the question of avail-
cision is made. What must be avoided is so-called
ability is extremely important. It's no use
'cascade taxation' in which profits - or what is
appointing people who are unable to
worse, deemed profits - are taxed at both levels.
attend meetings because of other com-
Another issue to be determined is as to
mitments. The terms of reference of the
whether the joint venture or consortium should
board must be defined. This raises the
be incorporated or not. Incorporation often has
issue of what constitutes a quorum and
advantages structurally and may in certain terri-
voting rights, which may appear matters
tories be a political, if not a legal, requirement.
of detail but can become extremely
However it can have distinct tax disadvantages,
important when there are issues of great
one of which is that assuming the company is
financial importance on the agenda.
being incorporated overseas, the UK parents will
A project director has to be appointed to
not be able to claim tax relief on their marketing
exercise day-to-day managerial control
expenses. Again tax advice both at home and
reporting to the management board. This
abroad must be obtained before any decision is
is a key role the essence of which is man-
taken.
agement. If the project is overseas he must
Note that under the Public Procurement
have a good up-to-date knowledge of the
Directives the authority has the right to require
territory and how business is conducted
that either the joint venture or the consortium
there and be personally acceptable to all
form a legal entity before entering into the con-
locals who may be involved.
tract or as a term of the contract.
The key issues which should be covered in 6 How is the tender price to be built up? Is the
the joint venture agreement, apart from those pricing of particular types or sections of the
already discussed, are as follows: work to be done by one party or by two sepa-
rately and then estimates compared?Policies integrated basis. Alternatively a bank

must be agreed upon for the handling of risk appointed by the joint venture can be
and contingencies. asked to package and charge each mem-
7 The approach to the tender conditions and ber company on a joint and several basis.
qualificationsmust be settled. Usually it pays This will mean a higher charge for some
to appointthe party having the best experi- than others because the bank will proba-
ence of dealing with the particular client to bly not assess each firm on the same basis
handle this issue and prepare proposals for but can produce overall savings.
ratification by the management board. If a financing offer is required then a
8 The procedure for contract negotiation with financial adviser, usually a merchant
the employer needs to be determined. How bank, will need to be appointed.
is the negotiating team to be constituted and The accounting arrangements covering
what authority will they possess? Do all pos- the receipt of funds from the employer,
sible changes to the tender have to be their employment and their distribution
referred back for unanimous agreement? must be defined in some detail. If at least
This may be desirable but is it realistic? If not, part of the payments are in a foreign cur-
how is the problem to be handled? rency then management of the exchange
9 Confidentiality of information provided by riskwill be important.
one party to the others must be covered. Also
non-disclosure outside the joint venture 12 The retirement or possible expulsion of one
other than for the purposes of the joint party from the joint venture should be
venture. covered, together with his continuing
10 It is usual for the parties to agree to partici- obligations on confidentiality and non-
pate on an exclusive basis and this can be competition. It is usual to provide that a
very important where one party may be party can withdraw up to the time of submis-
approached by a competitor to act as a sub- sion of the tender but not thereafter unless
contractor. all other parties agree. With a consortium as
11 Financial considerations will include the opposed to a joint venture the retirement of
following: one party may make completion of the con-
tract work difficult. Account must also be
The establishmentof a budget for the ten- taken of the provision on this point in the
der and the apportionment of tendering contract with the employer.
costs. Alternatives are that each party
pays his own costs for the services which
he contributes and then certain common SPECIAL CONSIDERATIONS APPLYING
costs are shared pro rata to participation, TO LOCAL PARTNERS
or that all costs are pooled on an agreed The first point to establish is why a local partner
basis and then paid pro rata. In this is being included. Possible reasons are:
latter event there must be provision for
independent auditing. because it is required by local law or practice
How are the parties going to share in the to gain a political advantage because of his
provision of the bonds required by connections with the employer or others
the tender? Although the bonds for the involved in the contract award
benefit of the employer will have to be because of his knowledge of local working
joint and several it can be possible to conditions and ways of doing business
arrange the recourse to the bank issuing to reduce the tender price
the bonds on a several basis pro rata to to allow part of the price to be tendered
each party's portion of the work where in local currency where this is not freely con-
the work is being executed not on an vertible.
JOINT VENTURES AND CONSORTIA 59
In practice, more than one of these reasons may project risks, performance and rewards or losses
apply but the essential point is to distinguish so far as he is able financially to do so. The pro-
between a local partner who is essentially viso is important since many potential local
included for his connections, and one who is partners overseas are undercapitalized and with
intended to participate actively in the execution a very thin layer of competent management. The
of the contract work. In the former case the local other point to appreciate in advance is that their
will have to be 'carried' by the foreign partners methods of estimating and work management1
and it will not be practical to expect him to execution and attitudes towards contract condi-
assume genuine responsibilities for work tions and risk may differ significantly from those
performance, the provision of bonds and so on. to which the foreign partners are accustomed.
Equally he cannot expect to have any genuine say These issues need to be discussed frankly but
in the way in which the contract is managed and sympathetically and without the degree of arro-
performed and he will have to be content with a gance which only too often foreign partners dis-
reduced level of profit or even simply a fee. play on these occasions. Their resolution must
In the latter case he has to take a share in the not be left to the stage of tender finalization.
CHAPTER EIGHT
Tender preparation
In the actual draftingof the tender the contractor well consider that a 'sloppy' tender is evi-
has to satisfy as far as he can two conflicting dence that the job will be carried out in the
objectives. On the one hand the primary func- same way. Therefore, within the limits set
tion of a tender is to act as an aid to selling. by item 1 above, the tender should be well
Through its medium the contractor is seeking to presented, clearly readable, indexed, if of any
persuade the buyer that he, rather than any length, and should hang together as a whole.
other, should be selected for the award of the It should not, for example, contain copies of
contract. Its preparation should therefore be sub-contractors' quotations with their terms
attractive and positive. At the same time the ten- of sale attached, which are nothing to do with
der is the contractor's opportunity, often his the purchaser.
only opportunity, of seeking to protect himself 4 Bringing to the purchaser's attention those
against provisions in the inquiry which he con- points which, judging from the inquiry, are
siders are unreasonable. At the least, if there are those in which the purchaser is most inter-
any such provisions, he must make certain his ested and where the tenderer can stress the
tender is so worded that it cannot be accepted technical or other advantages which he
without his having the right of discussing these believes his offer has over those of his com-
with the buyer. petitors. It is no use expecting the buyer to
Regarded as a 'selling' document, the most guess at these, and it is equally dangerous to
important points to be consideredin drafting the assume that he will delve deeply enough in his
tender are: tender appraisal to establish the true value of
one offer as against another. He may, if he has
1 Meeting the purchaser's essential require- the time and the ability. Far better to present
ments. If, for example, the purchaser's prime the information to him in such a way that he
interest is in having a price within a week, cannot overlook it. It is rather as if the buyer
then he must be given the price within a week were an examiner and the tenderer the pupil.
if this is humanly possible, if necessary by The buyer is no more entitled to make
facsimile or even e-mail. The technical and assumptions than the examiner is entitled to
commercial details can follow. guess at his pupil's knowledge of the subject.
2 Ensuring that the tender is prepared strictly in Both can judge only on the data presented to
accordance with the instructions which the them.
purchaser has laid down in his instructions to
Looked at the other way round, as a 'protection'
tenderers. This applies to the formalities as
document:
well as to substantive issues. It is not up to the
tenderer to make judgements on the sense or 1 If there is any item over which a doubt could
otherwise of that for which the purchaser has arise as to whether it is included or not, then
asked but to follow to the letter the instruc- the tender should make this clear. If, for
tions which the purchaser has issued. If the example, in an installation contract the
tender has to be accompanied by other docu- tenderer is not including an allowance for lift-
ments, for example a bid bond or signed copy ing tackle for off-loading purposes, then he
of the joint venture agreement, make sure should state this specifically. There must
these are included in the tender package. always be a statement defining the limit of
3 Demonstrating to the purchaser the skill and supply and a schedule of specific exclusions.
efficiency of the contractor. A purchaser may 2 If the inquiry includes terms and conditions
TENDER PREPARATION 61
which the tenderer considersunreasonable, it and installation of plant and equipment, the
is often difficult for him to decide what com- form should be on the following lines:
ments to include in his offer. Some forms of
the covering letter
inquiry either include statements to the effect
the specification
that any qualifications made by the tenderer
list of exclusions and schedule of services to
may lead to his being disqualified, or require
be provided by the purchaser
that the tenderer should give specific confir-
terms and conditions of sale
mation in his tender that he accepts the terms
the quotation.
and conditions offered. In any event, a long-
list of suggested modifications to his pro- One other document which the tenderer may
posed conditions of contract may lead to the wish to prepare in particular circumstancesis an
buyer becoming suspicious or impatient with executive summary of his tender. The decision-
the tenderer, and so to the latter losing the making process for large engineering works will
order. On the other hand, terms which could usually involve those at the very top of the pur-
easily involve the supplier in heavy additional chaser's organization and at times, especially
expense may create risks which the contractor overseas, those who have a political interest in
considers are unacceptable, having regard to the project, extending occasionally to the Prime
the price level of the contract. In those cir- Minister of the country itself - see Chapter 8 of
cumstances he must as a minimum make TheArt of Tendering.
clear in his bid that he has certain objections In this type of situation the tenderer either
to the terms proposed and would wish to dis- through his own contacts, or more likely over-
cuss these if his offer is otherwise of interest. seas, his agent, should take steps to bring the key
This at least establishes his right to negotiate. features of his proposal to the attention of those
If the purchaser's terms are inappropriate- if, with political power over the decision and whom
for example, they are 'supply-only' conditions he believes can be influenced in his favour. Such
for a job including erection and commission- people are far too busy, apart from not being
ing - then the tenderer could state he has no appropriatelyqualified, to read pages of detail. If
objection to the purchaser's terms as such, the tenderer does not take the initiative himself
but would propose Form.. . which he consid- his agent - if he is any good - is sure to ask for an
ers more suitable for this particular contract executive summary and the experienced ten-
and on which he has based his tender. He derer should have one ready.
would be happy to discuss and agree with the What the summary should contain will
purchaser on the conditions to apply to the obviously vary from case to case but as a guide
order. the following points should be covered in an
overseas situation and many of them with
perhaps a slight difference of emphasis will
TENDER DOCUMENTS
apply domestically:
In many cases the purchaser will have issued his
1 The basic contract price. Optional extras such
own form for the tenderer to complete. If so the
as training and spares should be omitted.
firm should ensure that they complete it in the
2 The completion period.
manner instructed. It is unlikely in the UK that a
3 The main financing terms presented in as
firm's tender would be rejected if they failed to
positive a manner as possible.
do so, but this can happen in some overseas
4 Benefits which acceptance of the offer
countries when the first clerical check made on
will provide to the country with emphasis if
the tenders is to see whether or not they comply
possible on the part of the country in which
with the tendering instructions and if not they
the politician is known to have a particular
are summarily rejected.
interest. Such benefits would include:
If the purchaser has not issued his own form,
it is suggested that in tendering for the supply transfer of technology
use of local manpower and material der which did contain reservations on his
resources including local consultantslsup- absolute responsibilitiesfor the supply of labour
pliers. Any firm in which the politician is and materials was not referred to when the con-
known to be personally interested should tract was placed and so did not become part of
certainly be mentioned. the contract. As a result the contractor was held
savings on foreign exchange due to the liable to complete his contract without any right
ability to take payment in local currency. to claim any extension of time for delays due to
labour shortages.
5 If it can be said (seeagain Chapter 8 of TheArt
An example of a covering letter for a tender
of Tendering) that there is British Government
for major plant and equipment might be:
support for the bid. A letter confirming this
from the local ambassador is always useful.
With reference to your inquiry number
6 The long-term interest in, and commitment
4563168 dated 30 June 1995, we have
of the tenderer to, the country concerned as
pleasure in enclosing our tender in two
evidenced by the formation (if this is the case)
volumes, lettered A and B, together
of a joint venture company with a local part-
with a separate folder of drawings.
ner, or at least his having established a perma-
Volume A contains our offer together
nent presence there.
with a general
- description of the plant.
COVERING LElTER Volume B contains our detailed speci-
The aim should be to keep this as short as poss- fication.
ible. Ideally a covering letter should do no more We have put forward an alternative
than: layout for the coal handling section of
the plant which we believe will provide
introduce the tender and identify the docu- substantial economies both in capital
ments of which it is comprised and operating costs. Full technical
state if any alternative scheme or proposal is details of this alternative are given in
being submitted and where this can be found volume B section 2, and the price
in the tender reduction we are able to offer is shown
refer briefly to any particularly important in page 21 of volumeA.
aspect of the offer and whereabouts this is set In view of your interest in the plant
out in more detail being operated with the minimum of
if there are any major reservations on the manpower we would draw your atten-
terms of the inquiry, refer to these. tion to the comprehensive remote
One reason for avoiding detail in the covering monitoring and control scheme de-
letter is that after initial study it may become scribed in section 1 of volumeA and to
detached from the tender itself and be placed on our substantial experience in this field,
a correspondence file, and so not be referred to full particulars of which we have set
subsequentlyduring the tender appraisal. Nor is out in that section.
there any point in duplicating in the covering We have carefully considered the
letter information which is already contained in Terms and Conditions subject to
the tender. Further, because there may be doubt which your inquiry was issued. In gen-
as to whether the covering letter forms part of eral we think these to be very fair and
the contractor's offer in the contractual sense, reasonable, but there are just one or
the covering letter should not be relied upon to two reservations to which we have
establish contractual rights. These should referred in section 4 of volume A,
always be set out in the body of the tender itself. which we would like to discuss with
For an example see the celebrated case of Davis you in the event of our tender being of
Contractors Ltd v Fareham UDC 119561 AC 696. interest.
Here the contractor's covering letter to his ten- We hope that you will find our pro-
TENDER PREPARATION 63
posals satisfactory and we shall be chaser's enquiry but if not the tenderer must
pleased to give you any information cover them in the offer although preferably in
which you may require. the commercial terms and not up front in the
first part of the specification.
SPECIFICATION This part of the specification can conve-
This really falls into two parts: first, the general niently contain a summary of the main equip-
description of the plant being offered, and sec- ment offered together with a list of the terminal
ond, the detailed technical data and a statement points and exclusions. This will be extremely
of the performance of which the plant is capable. useful for the customer's purchasing and man-
In terms of layout it is suggested that the ten- agerial staff in comparing the broad extent of
der should start with a general description of the supply of one tenderer against another.
plant written in such a way that it is interesting to The preparation of the detailed technical
read and can be understood by the customer's specification will obviously vary tremendously
senior management. This is the tenderer's 'shop with the type of plant being offered, but some
window'. This, plus the actual offer, is probably suggested points for consideration are as fol-
the only part which the customer's senior man- lows:
agement will read. It should therefore be made
comprehensive and stress all the main technical 1 Make it easy to read and follow. Remember
features and advantages which the tender con- that the customer's engineers have only a
tains, but without obvious sales 'padding' and limited time in which to study the offers.
avoiding the use of sales jargon. It is also the place 2 If the customer has not indicated how he
where the tenderer can stress his previous experi- wants the specification sectionalized then
ence in the field to which the tender relates. It is there are usually two possibilities. In the
only too easy for a firm to assume that the cus- first case the tenderer should give complete
tomer, because he has put him on the tender list, physical sections of the plant including all
is aware of the work which he has done. In fact types of equipment within the section. This
this is often not so, and it is always worth while for can often be conveniently related to the sec-
a firm to educate the buyer in this respect. tional breakdown of prices called for in the
The specification should then go on to state price schedule. Alternativelythe tenderer can
the performance of which the plant is capable. It specify type of equipment or processing unit.
is likely that at least the purchaser's enquiry will Thus all the mechanical equipment might be
have indicated the essential performance in one section, the electrical equipment in
requirementswith which the plant must comply. another, and the civils and structures in a
The tenderer should then confirm that the plant third. This can be convenient in that the cus-
on offer can satisfy each of these or if not then tomer's engineers need only then read that
state the best performance which can be offered. section which concerns them. Whichever way
In so doing the tenderer needs to be clear as to it is done a comprehensive index is required.
whether that which is on offer is guaranteed so 3 If the customer has provided schedulesfor the
that should the offer be accepted it will become a tenderers to fill in, these should be completed
firm contractual obligation, or if it is only a in accordance with the customer's instruc-
design objective and the guaranteed level is tions. The tenderer should never attempt to
somewhat less. In any event the tenderer needs know better than the customer how he wants
to ensure that for whatever he is guaranteering the bid presented.
there are included within the tender tests for 4 Ensure that information obtained from
determining whether the guarantees have been sub-contractors and suppliers is properly
met or not and also the financial liabilities, usu- integrated into the tender. Cut out from their
ally in the form of liquidated damages with a quotations material which is irrelevant as far
limit of liability, if they are not met. These later as the customer is concerned, and make sure
points may have been included in the pur- that the whole document reads as one.
64 T EN D ERIN G AND PLACING THE CONTRACT
5 Use common item numbers throughout the ment of how his bid stands in relation to those of
specification and drawings for easy identifica- his competitors. These can be legitimate tender-
tion. ing tactics, but there is clearly the risk of being
6 Make the maximum use of schedules for caught and of either having to provide more ser-
giving technical data and characteristics of vices to the purchaser or receive less from him
equipment being offered, for example motor than was envisaged when the tender prices were
and pump schedules as opposed to pages of prepared.
descriptionwhich are tedious to read.
TERMS AND CONDITIONS OF SALE
ALTERNATIVES If the purchaser has not stated any terms or con-
One point which sometimes arises is whether or ditions of contract in his inquiry, then it is open
not to include an alternative design which may to the contractor to submit his offer subject
be cheaper or possess some technical advantage either to his own individual terms or in accord-
over that on which the customer has required ance with one of the standard sets of conditions
that the main offer be based. The problem in dis- of contract published by the engineering insti-
closing the alternative at tender stage is that, tutes or the contractor's own trade association.
once it has been submitted, the buyer may take Generallyit is in the tenderer's interests to satisfy
the view either that he must obtain competitive the purchaser that he has taken an objective atti-
quotations for the alternative from other tender- tude in respect of terms of contract, and from
ers, or that at least he should give the other ten- this point of view it is easier for him to do this by
derer~the opportunity of submitting their own using a standard institute form than by using
alternative proposals. In either event the firm one which he has prepared himself. The latter is
may lose the commercial reward which their bound to be looked at by the purchaser with
ingenuity should have earned for them. Much some suspicion. Moreover, the purchaser's staff
depends on the tenderer's view of the action will probably be familiar with the institute form,
which he considers the buyer is likely to take. If and thus the tenderer will again earn favourable
he can be reasonably confident of getting a fair marks by having simplified and reduced the
deal, then he is probably best advised to disclose work of tender appraisal. If the tenderer is
the alternative in his tender, so as to be sure that putting forward one of the institute forms, for
it is taken into account when the tender com- example form MF/1 of the Institutes of Electrical
parison is made. and Mechanical Engineers, there are a series of
blanks which require to be completed covering
EXCLUSIONS AND SERVICES TO BE terms of payment, liquidated damages and so
PROVIDED BY THE PURCHASER on. It is to the tenderer's advantage to put for-
Ideally this schedule needs to be sufficiently ward proposals for these being completed which
comprehensive to prevent any doubts arising should be the most favourable to himself that
later as to whether a particular item was reasonably he can expect the purchaser to
included in the offer or not, or as to the extent of accept. In practice they will be the subject of
the sewices which the purchaser is required to negotiation, but at least this will allowthe firm to
perform. There should be a clear statement of maintain that those are the terms upon which
the contractor's physical limits of supply and if their price is based.
the contractor's supply connects to that of the The same situation arises in reverse when the
purchaser or another contractor of the pur- purchaser states the terms and conditions in his
chaser's who is responsible for managing the inquiry. If these are one of the institute forms,
interface. In the initial stage of submitting his perhaps with minor modifications to suit the
tender, however, the tenderer may decide to purchaser's particular circumstances, then the
leave himself room to negotiate and not be contractor can normally accept these without
entirely specific, so that, when called to discuss any difficulty. If, however, the purchaser has pre-
his offer, he can play it according to his judge- pared his own conditions, then the contractor is
TENDER PREPA RATIO N 65
bound to regard these as being subjective in which is almost always unpopular. Here it
their approach and to submit them to a critical may be possible for the tenderer in negotia-
examination. If the result of such examination is tion to achieve the desired result in some
that the contractor considers the conditions are other way, for example by a side letter to the
more onerous than he is prepared to accept, he contract. In his tender, therefore, all he
, is often in something of a dilemma as to the would be advised to do would be to establish a
extent to which he should make his objections negotiating position.
known in his tender. On the one hand he does
not wish to offend the purchaser or in an QUOTATION
extreme case disqualify his bid from being con- There can obviously be no standard form for
sidered; on the other hand, unless he makes this, but there are a number of points which nor-
some reservations at tender stage he may be mally require to be considered as follows:
taken to have accepted the conditions without
The validity of the offer. Although a promise
qualification.
to keep an offer open for a certain period is
If the contractor does consider the terms
not legally binding, unless the purchaser has
offered unacceptable, then as a minimum he
given consideration for the promise, it is
must make it clear that there are certain points
important commercially for the tenderer to
which he would wish to discuss in the event of his
make clear the validity period of his offer.
tender being otherwise acceptable. How much
This gives him the opportunity of revising his
further he goes in being specific as to his objec-
offer once its validity has expired without
tions or in putting forward altemative conditions
being accused of acting in bad faith.
of contract must depend on the circumstances of
Whether prices are fixed or subject to price
the particular inquiry, and the view which the
escalation. If the latter, the basis on which
tenderer takes as to the purchaser's likely reac-
price escalation is to be calculated.
tions. In making his decision the contractor
Whether the individual prices in a schedule
should take into account the following points:
of prices constitute separate offers, or
whether the only price which is open for
1 If the terms offered are wholly or largely unac-
acceptance is the total for the schedule.
ceptable, then the tenderer must put forward
If fees are quoted as a percentage it must be
an altemative basis, and this should be as
made absolutely clear what is the base to
objective as possible.
which the percentage is to be applied.
2 If the purchaser is likely to place the order
If a rebate or discount is payable above a cer-
without post-tender negotiation, then again
tain minimum figure, whether this is calcu-
the tenderer needs to submit his offer in a
lated on the whole of the sum or only on that
form in which it could be accepted; that is, if
part which is in excess of the minimum. An
there are particular clauses to which he
example may make this clear. On a tender for
objects he should propose alternative draft-
the hire of constructional plant the tenderer
ing.
offers a deferred rebate according to the
3 If on the other hand there is likely to be room
value of plant hired from him during the year
for negotiation, then the tenderer may be in a
according to the following scale:
better position if he merely indicates his
objectionsin principle but without drafting. Over £100 000 2%%
4 The character of the purchaser's staff and Over £150 000 5%
their degree of sophistication in commercial Over £200 000 7%%
matters.
If the total value of plant hired is £230 000,
5 Any known rules or procedures established
this is capable of two interpretations:
within the purchaser's organization, for
instance that modifications to standard con- • that the whole £230 000 is subject to a dis-
ditions have to be submitted to head office, count of 7%per cent, that is £17 250
66 TEN DERI N G AND PLACI N G THE CON TRACT
that only the excess at each stage is subject services provided, that again the mechanism
to the appropriate rate of discount, that is: for doing this is clearly established. If a bud-
get estimate for such items is given it must be
E50000at2%% = El250 clear whether this sets a contractual ceiling
E50000 at 5% = E2500 or not.
E30000 at 7%% = £2250 8 If any work is to be executed on a daywork
basis, then the items included within the
Total f6000 percentage on-cost, the base to which the
on-cost is to be applied and the hours for
It hardly needs to be stressed how important which payment is to be made need to be
it is that the offer is written in such a way that clearly set out. For example, is the percent-
there is no ambiguityas to what is intended. age applied to the actual wages paid, includ-
6 If any item is described as provisional, but is ing bonus andlor overtime? What grade of
later to be converted to a firm price, that s u p e ~ s i o nis within the on-cost percent-
there is included somewhere within the age? Is travelling time to be paid for by the
terms of contract a statement as to how this purchaser?
is to be done and what factors are to be taken 9 Is all overtime included within the contract
into account. Is the contractor, for example, price, or is overtime over a certain limit to be
entitled to make adjustments in his basis of paid for, and if so on what basis?
pricing because of events which have hap- 10 In respect of imported items, are freight,
pened or knowledge which he has gained import duty and the like included, and who is
subsequently as to the conditions under responsible for fluctuations in the rate of
which the work will be executed? exchange if any payments are to be made in
7 If the value of any item is to be determined foreign currency? See also 'Sufficiency of
according to the quantity of work done or tender' on p. 108.
CHAPTER NINE
Tender appraisal
The tenders having been prepared and submit- being made on the basis only of the lowest pric
ted, the purchaser now has the task of tender It may well be that the firm submitting the low1
analysis. There will be considered first the tender wins the day, but this should mean thar
appraisal of tenders for plant and equipment or on a balanced assessment of price and other rel-
process plant and then tenders for civil and evant factors that provides the best value for
building works. The appraisal of offers submit- money.
ted by competing tenderers for plant and equip- It is suggested that in making that assess-
ment or process plant is not easy; nor is it ment it is worth while to systematize the
something which can be carried out wholly by approach, both to establish uniformity and to
any one section or department in the pur- reduce any bias which there may be towards or
chaser's organization. It must be treated as a against any particular tenderer. The aim should
joint technical and commercial exercise, and be to make the appraisal as objective as possible.
on the technical side must embrace all the tech- This is a necessary requirement for good con-
nical functions involved in the work concerned. tracting practice and mandatory under the
Nor is it simply a matter of assessing capital Public Procurement and Utilities Directives. It is
costs; operating and maintenance charges also necessary under the Directives for an audit
must also be considered. Further, the effect of trail to be established so that, if challenged, the
financial factors such as terms of payment, the purchaser can demonstrate objectivity and com-
financial consequences of earlier or late compliance with the chosen award procedure in his
pletion, and the effect on the purchaser's cash selection process.
flow position of paying increases in capital costs
to secure reductions in operating and main- ORGANIZATION OF TENDER
tenance cost, may need to be assessed by the APPRAISAL
accountants. In order for the above objective to be achieved
The purchaser's overall objective should be the followingguidelines are proposed:
to select that offer which he considers will prove
to be the most economic when assessed over a 1 Aformalized procedure should be established
reasonable pay-off period, provided always that and included in the organization's manual of
the capital costs of this offer are such that they procedures. It is the thiswork
can currently be afforded.This assumes that the to detail such a procedure but it would need
purchaser, if he is subject to the Public Pro- toinclude:
curement or Utilities Directive, has stated in his the receipt and administration of the ten-
notice in the journal that he intends to award der documents
the contract to the firm submitting the most eco- the responsibilities of the departments
nomically advantageous offer and has included involved
either in the notice or the inquiry the criteria on the setting of objective award criteria
which he will make his decision. As was pointed the formation of teams for tender appraisal
out in the Hannon case it is only the criteria the format of reporting on the appraisal of
which make the expression 'most economically tenders
advantageous offer' meaningful. It is not consid- the establishment, functions and authority
ered that with tenders for other than perhaps the of a tender review board
most simplest of works there is ever any justifica- authorityfor the award of contracts
tion for the selection of the successful tenderer authorized signatories for contracts.
68 TENDERING AND PLACI NG THE CONTRA CT
2 For each contract a team should be estab- results of the appraisal and give the authority
lished to carry out the appraisal. For tenders either for the award of the contract or for the car-
of any magnitude it is suggested that this rying out of final negotiations assuming that
should comprise much the same team who such negotiations are permitted. If the contract
originally carried out the planning of the pro- is subject to the Open or Restricted procedures
ject (see p. 3) and prepared the enquiry. The of the Public Procurement Regulations then the
team will therefore comprise: authority is only entitled to see clarification of
the tender and not to negotiate on fundamental
the project manager as leader
aspects of the tender, which rules out post, ten-
the project engineer responsible for the
der negotiations. It also follows that in the
technical aspects of the tender - with a
restricted or open procedures under the Public
multidisciplinary project his task will be to
Procurement Regulations the authority cannot
co-ordinate the specialist engineers each of
accept a tender which is non-compliant, at least
whom will examine that part of the tender
in any fundamental aspects which affect com-
relating to their speciality
petition. In order to be accepted the bid must
a purchasing or contract officer who will
comply with the conditions established by the
undertake the assessment of the contrac-
invitation to tender documents. See further
tual aspects of the tenders, and
Arrowsmith, pp. 232 and 248.
a representative of the finance department
to examine the financial details such as the
terms of payment and the effect of escala- AWARD CRITERIA
tion formulae. With lower-value contracts
If the purchaser has issued a detailed specifica-
or where the purchasinglcontracts depart-
tion which sets out not just the requirements but
ment has the necessary expertise this could
also how these are to be achieved, that is it is
be made the function of that department.
totally prescriptive,the award criteria are:
Prior to the return of tenders the project
Conformity with the purchaser's specifica-
manager should have established the plan for
tion.
the tender appraisalwhich will comprise:
Conformity with the purchaser's terms and
1 The detailed programme for the appraisal of conditions of contract assuming again that
the tenders, the negotiation with one or more these are totally prescriptive,for example they
tenderers and the placing of the contract. lay down the terms of payment, liquidated
2 The availability of the team members. damages for delay, bonding requirements.
3 The establishment in detail of the award Price.
criteria. If the contract is subject to either the Any other qualitative factors of importance to
Public Procurement or the Utilities Directives the purchaser which could be, for example,
these will have been given in outline in the proposals for management, QAlQC pro-
notice in the journal. cedures, quality of project management staff,
4 Seeing that all administrative arrangements approach to Construction Design and Man-
have been put in place for handlingthe receipt agement Regulations, and degree of sub-
of tenders, ensuring their secure custody and contractingproposed.
limited distribution, and accommodation for These should have already been decided
their secure appraisal in accordance with the prior to the receipt of tenders (and if the con-
appropriate manual of procedure. tract is subject to the Public Procurement
Regulations published in the notice in the OJ
As recommended in the list of points for inclu-
or listed in the invitation to tender).
sion within the organization's manual of pro-
cedure, it is suggested that a tender review board If, as is more commonly the case today, the pur-
should be constituted which would receive the chaser has only listed his requirements in the
formal report from the project manager on the form of a performance specification and it has
TENDER APPRAI SAL 69
been left to the tenderers to propose the meth- offered 85 per cent should be rejected regardless
ods and designs they would use to satisfy those ofprice.
requirements, then the tenderer's specification It is sometimes advocated that a two-
must be examined in order to: envelope system should be adopted in order to
ease the application of this rule. One envelope
assess whether or not it appears likely that it
contains the price and the other the technical
will meet the requirements, that is the degree
and commercial proposals. The price envelope
of confidence that the purchaser can have in
is only opened if the bid is technically and com-
the tenderer's proposals
mercially compliant.
assess the risks associated with the tenderer's
There are in practice difficulties with the
proposals and how the tenderer proposes to
operation of any system which calls for the rejec-
manage these
tion of bids which are either technically or com-
review the tenderer's experience with this
mercially non-compliant in some respect, which
particular type of work and consider any
although material is not fundamental as in the
reference plants which the firm can identifyas
above example of availability, although it is the
having been designed and constructed by
system which applies strictly under the Public
them
Procurement Directives. Especially commer-
ensure that the guarantees put forward by the
cially firms will often offer less initially than they
tenderer as to plant performance, main-
are willing under pressure to accept. Levels of
tenance and operating costs, and any other
liquidated damages, guarantees, periods of
key performance criteria, meet the levels pro-
defects liability, overall limits of liability are all
posed by the purchaser in his performance
examples of points on which the firm may be
specification
prepared to negotiate. Leaving aside public pro-
review the degree of flexibility in the ten-
curement rules, is it appropriate to rule out of
derer's proposals to allow for future changes
consideration a bid which is commercially non-
of use or increase in capacity
compliant on one or more of such issues? It is
examine the tenderer's programme for the
suggested that the answer is surely 'no'. To some
design, procurement, construction and com-
extent the purchaser often does not know what
missioning of the plant to ensure that it meets
the market place will accept. He would like a
the purchaser's requirements and appears
three-year defects period instead of the usual
realistic.
twelve months. He asks for it in his enquiry and
As regards the commercial proposals where the the best response which he receives is two years.
purchaser has laid down mandatory require- In negotiation he might obtain thirty months as
ments these must be checked to see that the firm part of an overall commercial bargain. It would
has complied with them. If the purchaser has surely only be sensible to give himself that
left it to the tenderers to come forward with opportunity.
their own proposals, for example on terms of There are two other problems which the pur-
payment, these need to be examined to see chaser faces in tender assessment. First, where
what benefits or otherwise they offer to the he has issued a performance specification differ-
purchaser. ent firms will have offered different solutions
Again as suggested above there will be quali- each of which will impact on their price. Energy
tative factors which need to be taken into consumption say per tonne of product, training
account. schemes, facilities required from the purchaser,
Where it is feasible there should have been are but a few examples. How is the purchaser
established in advance, for any factor regarded then to compare the bids? This may be termed
as fundamental, minima below which the bid the quantitative problem. The second problem,
becomes unacceptable.If, for example, the plant the qualitative one, is combining the qualitative
is required as a minimum to have a 90 per cent issues referred to above with the quantitative
guaranteed availability then a bid which only one of price.
METHODOLOGY 3 Have the relevant parts of each tender exam-

ined by the team members in accordance
A possible system could be on the following with predetermined checklists. An example of
lines:
such lists for each of the three functions -
1 Check the arithmetical accuracy of all ten- technical, commercial and financial - is given
ders. With a plant contract on a lump sum below. Eliminate any tenders which do not
basis the effect of any arithmetical errors will comply with requirements which have previ-
be that the total lump sum does not equal the ously been established as essential. Adjust
total of the sectionalized or itemized prices. each bid by a financial penalty or bonus
The often-stated strict rule is that the tenderer according to whether or not it would involve
should be given the opportunity either to: the purchaser in additional costs or provide
(a) withdraw his tender, or him with extra benefits below or above the
(b) confirm his total lump sum and indicate previously established norms. In instances
the adjustment which he wishes to make where a quantified assessment cannot be
to the sectionalized/itemized prices to made then a qualitative comment should be
maintain the arithmetical balance. made.
It is for the purchaser, probably through the A simplified example is given in Table
project manager, to decide whether in any 9.1.
given instance to apply this rule or where there 4 If the contract is a long-term one for a major
is clear evidence, say that the section price is project extending over five years with sub-
correct and the lump sum total wrong, to allow stantial payments in the later years and vary-
the tenderer to correct the total. Where this ing terms of payment submitted by the
would be to the purchaser's advantage in that tenderers, the further step should be taken of
it would be unreasonable to expect the ten- discounting the payments back to today's
derer to stand by the lump sum total, the cor- date and so arriving at the nett present value
rected price would still be the lowest and the of the tender. Tables of discount values are
purchaser is satisfied that the error was gen- available for this purpose.
uine, then it would seem commercially sensi- 5 If any tender does not comply with a funda-
ble to allow the tenderer to amend. mental mandatory requirement then the pro-
2 Consider the total lump sum prices as submit- ject manager is to be notified and that tender
ted and establish that each firm has quoted is then rejected. The price as adjusted of the
for the same scope of supply. Eliminate from two or at the most three most favourable ten-
further consideration any offer of, say, more ders would then be combined with the quali-
than 20 per cent above the average of the low- tative assessment as described in the next
est two bids. section.
Table 9.1 Adjusted assessment of tenders for design, supply, installation, commissioning and testing of planWequip-
mentor process plant
Simplified example
TECHNICAL APPRAISAL TENDER PRICE

ADD DEDUCT
1.1 Tender complies with essential mandatory requirements of the specification?
If no, the tender should be rejected. yeslno
1.2 Tender is below required standards in non-essentialmandatory requirementsof the
specification and assessed amount to bring it up to required standards is f ........
1.3 Tender is above required standards in the following respects and assessed value of
reductions which could be made is f ........
T EN D ER APPRAISAL 71
1.4 Penalties to be applied due to failure of tender to offer performance guarantees in

accordance with the specification but which are still acceptable, or bonuses t o be
applied because tender offers performanceguarantees above those specified.
DESIGN, SUPPLY, ERECTION, TEST AND COMMISSION AND TEST TENDER PRICE
ADD DEDUCT
1.5 Effect on contract price of alternatives offered, adjusted as
necessary for alterationsto programme.
(a) [Inserthere the items which would be
(b) affected- for example, foundations, struc-
(c) tural steelwork.]
1.6 Effect of the design offered on the cost of the work to be carried out by the employer.
1.7 Effect on the purchaser's costs abovelbelow those anticipated due to:
tenderer's proposed site utilization
tenderer's proposed programme of site works
tenderer's requirements for the use of common facilities with other contractors.
1.8 Assessment of costs which will be incurred by the purchaser due to:
items excluded by the tenderer from his scope of work
demands made by the tenderer on the purchaser for the provision of extra facilities for testing and so on
location of contractor's works causing extra costs for contract administration, visits to
inspection and so on
delays in tenderer's response time to the remedying of defects due to his remote location
tenderer's spares recommendations being above the anticipated level
consumption of consumables being above the anticipated level.
1.9 Capitalized effect of additions to, or deductions from, the stated norm for operating labour.
Effect to be assessed over, say, ten years.
1.10 Capitalized effect of any additions to, or deductions from, the norm of maintenance costs
due to equipment or other work standard offered by the tenderer as part of his specification -
for example, use of pumps with low initial but high operating costs, painting of steelwork to
reduced standards. The effect to be assessed over, say, ten years.
1.1 1 Does the tender meet the minimum performance standards specified by the employer in
his enquiry? yeslno
1.1 2 If yes, does the tender guarantee any financial benefit to the employer over the minimum
standard specified? yeslno
If yes, state the assessed benefit capitalized over, say, ten years, taking into account any
additional expense to which the employer would be put to earn such benefit.
1. I 3 Has the tenderer accepted the liquidated damages specified for failure to meet guaranteed
performance? yeslno
1.14 If no, state the capitalized detriment the employer would suffer by acceptance of the tenderer's
proposals for a given loss in efficiency.
COMMERCIAL TENDER PRICE

ADD DEDUCT
2.0 Has the tenderer made any qualificationsto the proposed contract conditions?If so,
assess the additional risk/cost to the purchaser if these were accepted. Examples could be:
inclusion of overall limit of liability
reduced defects liability period
exclusion of liability for defects after
expiry of defects liability period
72 TENDERING AND PLACING THE CO N TRA CT
addition of extra events allowing the tenderer an extension of time for completion
reduction in rate of liquidated damages or lower limit of liability
exclusion of liability for delay after maximum limit of liquidated damages reached
reduction in liquidated damages for failure of plant to meet performance requirements
limitations on purchaser's right to reject if plant performance is below a level at which
maximum damages are reached.
2.1 Has the tenderer agreed to satisfy the requirementsin the invitation to tender regarding
the submission of bonds and parent company guarantees?If not, are any modifications
proposed acceptable? yeslno
2.2 If the tenderer is a consortium or joint venture, is it clear that all members accept joint
and several liability? yeslno
Note. If the answer to either 2.1 or 2.2 is no, the tenderer must be required to amend.
2.3 If the tenderer is an overseas firm, has he quoted on a totally inclusive basis for all costs
involved in delivering material to site and bringing in of any foreign labour or
supervision?If not, any extra costs must be assessed and added.
FINANCIAL TENDER PRICE

ADD DEDUCT
3.0 Has the tenderer quoted in the required currency, normally sterling, without reference
to an exchange rate? yeslno
Note. If no, it is suggested that the tenderer should be required to agree to his tender
being converted at the exchange rate ruling at the date of tender submission and
thereafter to remain fixed, or to withdraw his tender, unless the purchaser is willing to
accept the exchange risk. In the latter event the purchaser must make an assessment of
his additional risk and add it to the tender price.
3.1 Has the tenderer quoted on a fixed price basis or, if the enquiry allowed for escalation,
in accordance with the formula proposed by the purchaser? yeslno
If no, it is suggested again that the tenderer should be required t o conform to the terms
of the enquiry or withdraw unless the purchaser is willing to accept the additional costs,
in which event he must make an assessment and add it to the tender price.
3.2 Has the tenderer accepted the proposed terms of payment? yeslno
If no, again it is suggested that the purchaser should proceed as in 3.1 above.
If tenderers have been asked to put forward their own proposals on terms of payment,
the purchaser must bring these to a common basis for appraisal purposes by selecting
the one which is the most favourable to him and adjusting the others.
The above table should be completed for each himself. The risk in proceeding in that manner is
tenderer in a standarized format. Although the that it encourages the tenderer to put in the
heading is 'Technical appraisal' the adjustments qualification so as to give himself the chance of
to be made to the price should be the joint either adjusting his price or not after the bids
decision of the engineering and commercial staff have been opened, and when he can be assumed
engaged in the appraisal. to have a reasonably good idea of where he
The above notes suggested that the adjust- stands in the order of bids. For this reason it is
ments where necessary to the tenderer's price considered that the purchaser should make the
should be made by the purchaser. It is recog- adjustments himself in an objective manner
nized that some organizations proceed in the which is capable, if necessary, of being justified
alternative manner of asking the tenderer to as fair to the tenderer.
price out the qualification which he has made
TENDER APPRAISAL 73
METHOD OF COMBINING PRICE AND The Government guide suggests that this
QUALITATIVE FACTORS method should not be applied mechanicallyand
At the time of invitingtenders the following need that in the end there is an element of judgement
to be established: to be applied. This would seem to be more so if
the figures came out very close to one another. If
qualityiprice ratio the gap was significant then the method would
quality threshold provide a very persuasive argument in favour of
qualityfactors awarding the contract to the firm who scored the
weightings to be given to each quality factor. best overall assessment. Ideally the quality scor-
ing should be done in ignorance of the prices but
The qualityiprice ratio gives the proportion of this may not be practical. A worked example is
the total overall score for the tender to be given on the following page.
allocated to price and the total to quality.
The quality threshold is the minimum qual- The use for construction works as much as for
ity mark which is acceptable. If any bid falls plant contracts of a points system for combin-
below the quality threshold then it is eliminated ing the qualitative features of the tenders with
regardless of price. the price as submitted. The actual factors to
The quality factors should be assessed for be used may differ according to the nature of
each project depending on their significance. the contract and in particular the extent to
Some suggestions are: the tenderer's QAiQC sys- which, if at all, the contractor is responsible
tem; their project management system; the qual- for design. Many of the factors will be much
ity of their senior staff and experience of similar the same, however, as will be the principles of
contracts; their approach to safety in particular application.
the CDM regulations; overall technical merit
of their proposals including any innovative BUILDING AND CIVIL ENGINEERING
solutions; identification of specific risks and In the case of building and civil engineering con-
proposals for managing them. If partnering was tracts the procedure will differ in that the work of
proposed it could include their understanding of tender appraisal will normally be largely the
partnering, experience in partnering and top- responsibility of either the employer's own civil
level commitment to it down the supply chain. engineers or quantity surveyors or consultants
The weightings for each factor will again be employed on his behalf. However the following
project specific but they must add up to 100. points do require attention on the commercial
There are various ways in which the price side:
can be scored. The Government in their 1 A civil engineering contract under the stan-
Procurement Guide no. 3 Selection of Con-
' sultants and Contractors have suggested the

following:
dard ICE conditions is a remeasurement con-
tract; there is no initial lump sum price. If
therefore there is an error in extension this
has no effect on the final price paid by the
the mean of the three lowest tenders above
the qualitythreshold is allocated 50 points employer. It is accordingly necessary for the
1 point is then deducted from the score of individual rates to be checked. This is also a
each tenderer for each percentage point safeguard against the submission by a ten-
above the mean derer of an unbalanced bid in which he has
1 point is added to the score of each tenderer priced some work high, and other work low, in
for each percentage point belowthe mean. the belief that there will be a substantial
increase in the quantity of some and a
The total quality score for each tenderer is multi- decrease in the quantity of others. Any such
plied by the qualityweightingand the price score bid should be rejected.
by the price weighting. The two are then com- 2 On lump sum contracts if an error in rates,
bined. extensions or totals is not discovered by the
Project quality weighting 60

Project price weighting 40
Table 9.2 Example of scoring of quality and price for tenderers
Quality threshold55
Firm A Firm B Firm C
Quality Criteria Score Weighted Score Weighted Score Weighted
criteria weight score score score
Risk management
CDM awareness
QA/Qc
Qualification of staff
Maintainability
Programme
Total
Price Em.
Price score
Quality weighted score
Price weighted score
Total
Position
employer or the engineer before a contract is It is important that the contracts or pur-
awarded the contractor is bound to cany out chasing officer as representing the employer
the original work at the tendered sum. If, how- should be aware of, and involved in, these
ever, the employer or engineer does discover issues, since the engineer has normally no
the error through reading the bills of quantity authority on the employer's behalf to make
(which in this case are only to be used for the decisions relative to mistakes at the tendering
purpose of pricing variations), the courts stage.
would order rectification of the error, so the 3 By virtue of the risks involved in the design
tenderer ought to be allowed the opportunity and execution of civil engineering works, and
to correct the mistake. This means that on a of the way in which through the conditions of
lump sum building contract at least the bills contract these are apportioned as between
of quantity of the lowest two tenderers ought the employer and the contractor, there is a
to be checked, particularly if these are close strong tendency for such contracts to become
together in price, in order to ensure which of a battlefield for claims rather than a coopera-
them is the lowest. tive effort between the parties to achieve their
This assumes that the error is genuine and common objective of completing the works to
not a deliberate mistake by the firm so it can the employer's satisfaction and of the con-
have the opportunity either to correct it or tractor being fairly rewarded for his efforts.
not, once it knows the prices of the other bid- Much can be done at the stage of inviting
ders. If that is suspected, the firm should tenders and of tender analysis to improve this
be told either to stand by their tender or situation, first by the careful selection of firms
withdraw - see the Code of Procedure for to be invited to tender and then by:
Selective Tendering published by the National
Joint Consultative Committee of Architects, ensuring that the tenderers have made
Quantity Surveyorsand Builders. available to them all information necessary
TENDER APPRAISAL 75
relating to the physical conditions likely to content of their tenders or the require-
be encountered and the requirements of ments of the contracting authority
the employer and the engineer relative to provided this does not involve dis-
the design and execution of the works; and crimination.
examiningthe initial low bidder sufficiently
in respect of his construction methods, With contracts subject to the Public Pro-
sources of materials and labour, plant curement Directives therefore placed under the
availability, construction programme, restricted procedure, it would appear that the
intended site management and his design purchaser must accept the most economic offer
proposals for temporary works, so as to provided that it meets his mandatory require-
minimize his opportunities for the submis- ments as specified in the invitation to tender,
sion of claims and satisfy the employer and even if he believes that he could obtain a better
his engineer that the contract is likely to be 1 bargain by post-tender negotiation. In particular
properly and efficiently implemented. it is suggested that he cannot seek by such nego-
tiation to obtain a reduction in the tender price.
Blind acceptance of the apparently lowest offer Although there are provisions in those directives
is only likely to result in an over-run of the cost under which, exceptionally, tenders may be
budget, delays in completion and endless hours invited according to the negotiated procedure,
spent in wrangling. they are only of very limited application - for
details see Arrowsmith p. 256 et seq. For present
POST-TENDER NEGOTIATION
purposes they will be ignored.
When the final steps of the analysis procedure However the Utilities Directive does allow
have been taken there are three possibilities: the purchaser an absolute freedom to choose the
(a) there is one bid which is in conformity with negotiated procedure. In this instance therefore
the purchaser's requirements and which he it does not appear that there are any restrictions
is prepared to accept without further negoti- on the purchaser's right to negotiate, provided
ation, or that he does not offend against the basic rules of
(b) there is one bid which the purchaser prefers objectivity and equality of treatment. With con-
significantly to any other but which does not tracts not covered by any of the directives the
wholly meet his preferred requirements,or purchaser is totally unrestricted in his entitle-
(c) there are two or more bids which are close ment to negotiate.
enough to each other that the purchaser Therefore under the Utilities Directive or
would prefer not to make a decision until with contracts not covered by any directive it is
after further negotiation. suggested that the purchaser in cases (b) and (c)
above should proceed to negotiate. Only in the
Where the purchaser is subject to the Public very limited circumstances that the purchaser is
Procurement Directive,even if he has chosen the regularly in the market for the work in question,
restricted procedure, it would appear that it is the number of fmns with whom he deals for that
not open to him to undertake post-tender nego- work is limited and they are all confident that the
tiation. It has been stated by the Council and the purchaser never engages in post-tender negotia-
Commission that: tions, will the tenderers have followed the rule of
in open and restricted procedures all 'final offer first'. In any other case the tenderers
negotiations with tenderers on funda- in order to protect themselves will have included
mental aspects of contracts, variations items of 'fat' in their bids in order to have some-
of which are likely to distort com- thing to give away, if necessary, in negotiations.
petition and in particular on prices The implications of this to the purchaser are
shall be ruled out; however discus- clear. Unless he can be totally confident that he
sions with tenderers may be held only is in the one case above described, when he will
for clarifying or supplementing the have received the firm's best offers the first time
76 T EN D ERIN G AND PLACING THE CO N T RACT
round, then he should negotiate - and he should The whole operation becomes a continuous
do so in case (c) above with both tenderers who cycle. It is of course necessary also to try to avoid
should each be aware of the negotiations taking making it a closed shop of a slowly diminishing
place with the other. number of firms. Assuming that the level of
Obviously a careful record must be kept by demand for the particular types of work involved
the purchaser of any negotiations held and of remains at least partly static, the employer must
price reductions or other amendments agreed ensure that he is continually testing the levels of
by the tenderer to his tender. After the conclu- price, delivery and quality by inviting new firms
sion of the negotiations, unless prior approval that he considers capable of meeting his stan-
has been obtained, the project manager as dards.
leader of the negotiations should refer back to Second, if the firms that are unsuccessful are
the tender board for authority to award the con- to be given the chance to improve their perfor-
tract. There are then still two important steps to mance, they must be told where they went
be taken. wrong. Once, therefore, the contract has been
First, a permanent record must be made of placed, each of the firms that were included in
the contractor's success or otherwise in bidding the final shortlist should be given the opportunity
for that particular contract. This should record to come and discuss their bid, and the points
the salient features brought out by the tender where it was considered to be unfavourable
appraisal, that is: should be brought out in these discussions. It
must be made clear that the purpose of the meet-
1 Price at which the contract is placed, or would
ing is to permit the firm to improve its
have been placed if the tender had been
performance on the next occasion, and there
accepted.
must be no question of jobbing backwards, nor
2 Completion period promised related to that
should the discussion be allowed to become the
price. occasion for a criticism of the buyer's decision.
3 If applicable, the performance guaranteed.
On the tender analysis the next time the ten-
Ideally these items should be recorded in such a ders would of course be judged on their merits as
way that they can at a later date be compared in then presented, plus the buyer's assessment of
the case of the successful tenderer with the same the firm's current performance level. He should
data derived from the contract completion not take into account the old faults, which by
report. In this way an assessment can be built up putting them on the current tender list he is
of what was achieved against what was promised accepting have been put right. 'Give a dog a bad
at tender stage. This information, together with name' is too common a failing in the contracting
the data on those firms who were unsuccessful, industry, and firms continue to be penalized for
can then in turn be used to build up the vendor errors made years ago under different condi-
rating assessment for use in the selection of tions, and often under different management,
firms to go on future tender lists and in the which should long since have been treated as
appraisal of offers when submitted. wiped out.
CHAPTER TEN
Placing the contract

Previous chapters have dealt with the planning 4 Do not try to obtain the ultimate in the com-
of the contract, the invitation and submission of pleteness or comprehensiveness of the con-
tenders and the appraisal of competing offers. tract document at the expense of never
Once the selection of the successful tender has finalizing the draft. To wait until there are no
been made and authority given by management changes pending to the specification may
to go ahead with the contract, there will be mean waiting until after the plant has been
strong pressure for instructions to be given to the built.
contractor for work to be started immediately
and in advance of any formal contract documen- It may be suggested to the contracts officer
tation. The contracts officer faced with such that his problem could be solved by issuing the
pressure is often in a difficult position. On the contractor with a letter of intent. The difficulty
one hand he knows that to delay starting work with letters of intent is to ensure that both par-
for the sake of 'getting the paper straight' can ties know and understand precisely what they
cause a genuine delay to the project and mean. It is fundamental to English contract law
increased expenditure. On the other hand he is that there can be no lesser legal obligation than
also aware of the dangers of allowing the con- one which is contractually binding. Either,
tractor to proceed without having the loose ends therefore, the letter of intent constitutes a con-
tied up, and the weakness of his own negotiating tractual commitment, for the breach of which
position relative to the contractor once the latter an action for damages would lie, or it is merely
has been authorized to start work. an expression of intention which is legally
By taking preventive action in advance there unenforceable - remember the discussion on
is much the contracts officer can do to avoid or p. 31. If it is the latter then there is no point in
minimize the risk of getting caught in this situ- issuing the letter. By indicating to the firm your
ation. Some suggestions are as follows: intentions to place the contract with them, or
telling them that they are the preferred bidder,
1 Wherever possible, issue the inquiry in such a you are gaining nothing and losing your negoti-
form that the tenders when submitted are ating advantage. In the preparation of a letter of
likely to be complete and constitute an offer intent, therefore, one needs to be absolutely
capable of being accepted with the minimum clear what is meant. It may well be, for instance,
of amendment. that the intention is to give an indication to
2 If the tender is not wholly acceptable, com- the contractor of one's intention to proceed with
mence the negotiations as soon as the project the whole job, but with no contractual commit-
manager has agreed to negotiations proceed- ment to do so, whilst at the same time authoriz-
ing with that firm and in advance of formal ing him to incur certain specific preliminary
authorityfrom the tender board if the meeting expenses which would constitute a definite com-
of the board is likely to be delayed. Of mitment.
course no indication would be given that the Such a letter is more correctly called an
firm was the preferred tenderer and indeed it instruction to proceed (ITP) but in general com-
might be necessary to start negotiations with mercial practice is still often referred to as a letter
two firms. of intent.
3 Do not invest the placing of the order or con- An example of an ITP or letter of intent which
tract with undue solemnity. It should not, for is intended to have a limited contractual effect
instance, require more than one signature. might read as follows:
I am writing to confirm that it is our company's inten- 1 If the tender as received is suitable for accept-
tion, subject to the satisfactory conclusion of negotia- ance with no qualifications, the contract can
tions between us, to place a contract with your be placed by a simple letter of acceptance.
company for the design, supply, construction, and 2 If the tender as received cannot be accepted
commissioning of. ........................[for the without amendment, either:
sum of E ................ (insert if already agreed)].The
(a) if there are only a few amendments, they
contract willbe generallyin accordance with the terms
set out in your tender dated.. ........... other than for
can be set out in the letter of acceptance
the clauses set out in Annexe I hereto which still and the tenderer can be asked to confirm
remain to be agreed between us. The programme for his acceptance of these, or
finalizingall outstanding issues between us is set out in (b) if the amendments are more extensive,
Annexe 11. the tenderer can be asked to resubmit his
Pendingthe conclusionof our negotiationsyou are tender so that the procedure in (a) above
hereby authorized to proceed with preliminarydesign can be followed.
work for the contract in accordance with such instruc-
tions as you may receive from.. ..............our Chief If the inquiry was not complete or if very sub-
Engineer, up to a total value not exceeding f ........... stantial changes are required as a result of post-
priced at the hourly rates for design staff set out in your
tender negotiations, it will usually be more
Tender.
You are also authorized to purchase the long-lead
convenient for these to be incorporated into a
items listed in Annexe 111 hereto at the prices stated single contract document.
therein. One trap to be avoided is that of attempting
On the placing of the contract with you all work to incorporate within the contract post-tender
carried out by you under this letter of intent will be agreements reached between the parties, by
deemed to have been carried out by you under the either annexing to the letter of acceptance
terms and conditions of the contract. copies of correspondence or minutes of meet-
If we are unable to reach agreement with you on ings or identifying them in a schedule. Invariably
the outstanding issues between us within a period of such correspondence andlor minutes will be
..............weeks from the date hereof we shall have partially contradictory and contain matters
the right to terminate this letter of intent by notice in
which were never considered at the time by the
writing. In that event:
(a) we would reimburse you for the design work car-
parties as contractual obligations. The task then
ried out by you under the terms of this letter up to of interpreting objectively from a study of such
the date of termination to a limit of E ............... documents just what it is that the parties must
together with the cancellation costs reasonably have intended to be their respective obligations
incurred by you in respect of the orders for the is often a matter of great difficulty. At the very
long-lead items. Alternatively we would have worst it could lead a court to conclude that since
the right to take over such orders from you, and they cannot decide just what the bargain was
all orders placed by you shall include such pro- that the parties believed they had made, in fact
visions. they never made one at all, and there is no con-
(b) the property in all drawings and other documenta- tract.
tion prepared by you under the terms of this letter
There is no particular merit or legal signifi-
and any materialsmanufactured wouldvest in us.
Please acknowledge your acceptance of this
cance in the form which the contract takes,
letter and confirm that you will be starting work imme- unless it is desired by the purchaser to have the
diately. contract executed as a deed and so obtain the
benefit of the 12-year prescription period for
The actual form of the contract documents as breach of contract rather than the 6-year period
such will depend largely on how the tendering which applies to contracts executed under hand.
has been carried out and whether the tender as This is really the only benefit which is gained by
received is suitable for acceptance. the use of a formal agreement and the only justi-
If a formal inquiry was issued, complete with fication for having one prepared, unless of
terms and conditions,then: course it is required by the standing orders of the
PLACING THE CONTRACT 79
authority. In any other instance there seems 3 Reduction of the period for completion from thirty-
absolutely no advantage to be gained in accept- six to thirty-two weeks.
ing a tender by letter and then having a formal
document prepared. This is really a complete The engineer appointed for this contract is
waste of time and effort. The aim should be at all ..........., the Company's Chief Mechanical Engineer.
You should contact him immediately for instructions
times to keep the contract documentation as
to start work. You should forward immediately to the
short and simple as possible consistent with Engineer the following documents all as specified in
clarity of meaning. the contract conditions:
An example of a simple letter of acceptance
would be: the insurance policies
the parent company guarantee
I am pleased to inform you that the ........... the performancebond.
Company Limited hereby accept your tender
dated.. ........ for the design, supply, construction, Please confirm your acceptance of the above.
and commissioning of a ........... plant for the fixed
lump sum of E ........... Note that in this case the contractor is asked to
The engineer appointed for this contract is confirm his acceptance since his offer is not
..........., the Company's Chief Mechanical Engineer. being 'accepted' entirely in the terms in which it
You should contact him immediately for instructions
to start work. You should forward immediately to the was made. The contract will only be formed,
Engineer the following documents all as specified in therefore, when the contractor sends his uncon-
the contract conditions: ditional acceptance of the above. It may be con-
venient to issue this letter in duplicate with a
the insurance policies space for the contractor to sign and return the
the parent company guarantee duplicate as agreed, provided the amendments
the performancebond. have already been informally agreed with him.
Please acknowledgereceipt. This avoids the possibility that he may when
replying use a standard form which refers to con-
If desired, any particular instructions on invoic- ditions different from those which apply to this
ing could be added as an additional paragraph, contract.
but are probably best dealt with in a separate let- If he were to do this, it would be a question of
ter or in general notes on administration. having to decide whether the accompanying let-
Note that the contractor is only being asked ter amounted to a counter-offer or not. Just two
to acknowledge receipt, not to 'accept' the letter, of the main cases on what is often referred to as
since, assuming that the letter is issued during 'the battle of the forms' will be mentioned in
the tender validity period, the contract is created order to illustrate the perils involved. In the first
as soon as the letter is posted. (Butler Machine Tool Co. Ltd v Ex-Cell-0-
If there are one or two modifications or Corporation (England) Ltd [I9791 1 All ER 965)
amendments to the tender, the letter might read: the seller returned to the buyer the tear-off
printed acknowledgementslip which was part of
I am pleased to inform you that the ........... the order and read 'We accept your order on the
Company Limited hereby accept your tender dated terms and conditions stated thereon.' However,
........... for the design, supply, construction, and he did so with a covering letter which stated that
commissioning of a ........... plant, subject to the the order was 'being entered in accordance with
following: our revised quotation of 23 May'. Not surpris-
1 Inclusion of AlternativeA on page 5 of your Tender. ingly the terms of that quotation differed sub-
This means that the contract price will now be the stantially from those of the buyer. The Court of
fixed lump sum of E ........... Appeal held that the buyer's order was a
2 Deletion of the price escalationclause. The contract counter-offer which the seller accepted by
price is fixed against any changes in costs. returning the acknowledgement slip. The
accompanying letter was held to be irrelevant; it Appeal in Strachan and Henshaw v Stein
merely referred to the identity and delivery Industrie (UZQ Ltd and GECAlsthom Ltd 1997.
period for the goods. S&H1scase was that they had been told pre-con-
By contrast in Muirhead v Industrial Tank tract that they could put the cabins for their
Specialities [I9861 3 All ER 705, the seller used his workforce where they had clock-on and -off
own acknowledgement slip which itself stated adjacent to their work site. Later when they came
that 'We thank you for your order which will be to perform the contract they were instructed to
executed in accordance with our general con- put them in the contractor's compound which
ditions of sale (see over)'. The court held that the was about half a mile away. S&Halleged this cost
acknowledgement slip constituted a counter- them some £1.6 million. It was held by the Court
offer which was accepted in due course by deliv- of Appeal that the representations made to S&H
ery being taken of the goods. Accordingly the pre-contract were statements as to the then
contract was on the seller's terms which from current intentions of Stein and GECA and not
reports of the pre-contract discussions between representations of fact. For this reason, and
the parties and indeed the way in which the others, S&H'sclaim failed.
order had been prepared was probably not at If for the reasons indicated above it is neces-
all what, subjectively at the time, had been sary to have a formal contract, this should still be
intended. However as must be stressed, because as short and simple as possible. Ideally the con-
the point is often missed, the position under tract document should consist of about seven
English law is that 'an offer falls to be interpreted clauses defining the basic obligations of the par-
not subjectively by reference to what has actu- ties with everything else contained in schedules.
ally passed through the mind of the offeree, but Asuitable layout would be as in Table 10.1.
objectively by reference to the interpretation
which a reasonable man in the shoes of the Table 10.1 Form of agreement
offeree would place on the offer' per the Court of
Appeal in Centro-Provincial Estate v Merchants CLAUSE
Investors Assurance Company [19831. Evidence 1 Description of contract work.
of the party's subjective intentions in the matter 2 Work to be done and services to be provided by the
of formation and indeed of contract interpreta- purchaser.
tion generally is therefore irrelevant. 3 Contract price.
Remember that normally the instructions to 4 Programmeltimefor completion.
tenderers is not a contractual document and that 5 Performance guarantees.
the contract will be formed by the contractor's 6 Appointment of engineer.
tender and your letter of acceptance. If there are
any matters in the instructions which are of con- SCHEDULE
tractual significance, for example information A Purchaser's performancerequirements.
relating to site access, which will have an effect B Special conditions of contract (if any).
on the contract price care should be taken to C General conditions of contract and annexes.
ensure that this information is contained else- D Performance guarantees.
where in the contract documents. The same E Schedule of prices.
applies to any information which may have been F Contract programme of key dates.
given to the contractor on a site visit and later G Contractor's technical proposals including the draw-
confirmed to him by a notice in writing. Such ings.
information may amount to a representation
only if it was a statement of fact and not a state-
ment of future intentions. If it was merely the lat- CONTRACT WORK
ter and subsequently the intention was changed
then there would be no liability for misrepresen- Asuitable draft paragraph for a substantial plant
tation. This was confirmed by the Court of contract might be:
PLACI NG THE CONTRACT 81
The work the subject of the Contract comprises the until completion. When this happens, and the
design, supply, erection, testing, commissioning and defect is discovered on testing the conveyor on
making good of defects o f . .......... with all ancillary site, the purchaser wants to be in a position to
equipment and facilities necessary to meet the pur- reject the plant until the defect is remedied. To
chaser's performance requirements set out in
be certain on this point, it would be advisablefor
Schedule A and as described in the contractor's tech-
the purchaser to add to the clause in the previous
nical proposalsand drawings (ScheduleG).
column the following words:
Note the additional wording which it may be provided always, and this is an essential condition of
advisable to add given in the next column. the contract upon which the purchaser is relying
One problem which may arise in defining the wholly on the contractor's skill and judgement, that
contract work is where the purchaser has issued the works as described in the contractor's technical
a specification with the inquiry which defines proposals satisfy in all respects the purchaser's re-
quirements as set out in Schedule A.
the performance required of the plant and the
standards to which it is to be designed and built,
This would then clearly bring the contractor's
and the contractor in tendering has put forward
obligations within the scope of the words from
a detailed specification of what he is offering to
Hudson's Building and Engineering Contracts
meet these requirements. There are, therefore,
(1959),8th edn, p. 147, summarizing a long line
two specifications. It is important first to check
that there are no discrepancies between the two of English cases which were quoted with
specifications, for example different terminal approval in the decision of the Supreme Court of
points, reference by the bidder to his assuming Canada in Steel Company of Canada Ltd v
the purchaser will supply storage accommoda- Willand Management Ltd [19661.
Sometimes again a contractor expressly
tion, whereas the purchaser has only stated he
undertakes to carry out work which will perform
will allocate storage space, and so on.
Frequently there will be technical discus- a certain duty or function in conformity with
sions between the purchaser's and contractor's plans and specifications and it turns out that
work constructed in accordance with the plans
engineers to remove minor discrepancies and
and specifications will not perform that duty or
incorporate any late changes in thinking, or pos-
function. It would appear that generally the
sibly make savings to bring the contract price
below budget. These changes to the specifica- express obligation to construct a work capable of
tion will usually have been recorded in letters or carrying out the duty in question overrides
the obligation to comply with the plans and
notes of meetings. As referred to earlier the only
safe way of incorporating them into the contract specifications and the contractor will be liable
is to make the amendments to the specification for the failure of the work notwithstandingthat it
itself. Indeed just doing this will frequently is carried out in accordance with the plans and
reveal other necessary consequential changes specifications.'
and also show up any ambiguities in the drafting.
Second, it is important that in accepting the PURCHASER'S OBLIGATIONS
contractor's tender the purchasershould make it
A suitable clause defining the purchaser's
clear that he is not taking any responsibility that
what the contractor is offering- will in fact meet obligations might be:
the purchaser's requirements. For example,
The purchaser is responsible for carrying out the work
the purchaser may have 'pecified a conveyor and the set out inAppendix ..... to
capab1e of performing a The ten- the purchaser's performance requirement, and for
derer may include in his offer a description or ensuring that these are c-ed out,provided at the
drawing of a certain design feature the inclusion times stated in the programme or, where no times are
of which in fact makes it impossible to achieve so stated, at such times as will enable the contractor to
that duty, although this may not be discovered comply with his obligations under the contract.
Even in the absence of these words there is an more difficult. The important points which have
implied obligation on the part of the purchaser to be covered are set out in detail in Chapter 13,
that the services have to be provided by him at a pp. 117-18.
reasonable time (seep. 26).
It is convenient to bring together all the pur-
PROGRAMMUTIME FOR COMPLETION
chaser's obligations as regards work and services
in one schedule so that this forms a checklist for This must tie up with the rest of the contract so
the contracts officer and engineer administering that there is no ambiguity as to what is meant by
the contract. It should ensure that arrangements 'completion'. On a plant contract there are two
are made well in advance for these items to be alternative approaches which can be adopted.
provided. The time factor is almost as important The first is that the tests on completion are actu-
as the service itself. It is not much use making ally included within the definition of completion
ground available for storing steel sections after as in MF/1 where there are two separate obliga-
I the steel has been delivered and the contractor tions: to complete the works according to the
has had to find room for it somehow within the contract and to carryout the tests on completion
working area. The purchaser who does this has by the time fixed for completion - see clause 29.
only himself to blame when he gets a claim for The alternative is to provide, as is often found in
double handling and loss of productivity. process plant conditions, that the obligation is
'to complete the works ready for the carrying out
of the take-over tests' by the time fixed for com-
CONTRACT PRICE
pletion. Obviously there is a very significant
The definition of the contract price will depend difference between the two and the agreement
on how the price is to be determined. The meth- must set out whichever is intended. An example
ods of doing this are discussed in detail in mightbe:
Chapter13.
contract price is a lump sum, the The contractor shall complete the construction and
testing of the works so as to be entitled to apply to
can be very simple, for example:
the Engineer for a Taking Over Certificate under
clause.. ......... of the General Conditionsof Contract
The purchaser shall pay the contractor the lump sum
not later than ........... ('the date for completion') or
of E ........... ('the contract price') plus or minus such
any extension of that date to which the contractor may
other sums (if any) as under the contract are to be
be entitled under the contract.
taken into account in ascertainingthe contract price.
There may with certain works be a requirement
If the contract price is to be determined accord- for them to be finished in a certain order or
ing to the value of work done, using a bill of even for sections to be completed and taken over
quantities or schedule of rates, the clause might in advance of the plant as a whole. There may
read: also be a requirement for the contractor to pro-
vide drawings or information or access to
The purchaser shall pay the contractor the value of the
defined areas of the plant to the purchaser to
contract work executed in accordance with the con-
tract ('the contract price') as determined by the engi-
enable him to proceed with other works. If so
neerlarchitect by measurement of the work done and then any such obligations should be incorpo-
valuation of the same at the rates and prices set out in rated into the programme. However this pro-
the contract plus or minus such other sums (if any) as gramme should only be limited to those events
under the contract are to be taken into account in which are contractually binding between the
ascertainingthe contract price. parties and these should be kept to a minimum.
Other activities will be recorded on the working
If the contract is wholly or partially on a cost programme for the contract which will be pro-
reimbursement basis or target cost, the assess- vided by the contractor after the award of
ment of the contract price becomes that much contract.
PLACING THE CONTRA CT 83
PERFORMANCE GUARANTEES the references to the clause numbers already

included so that nothing is overlooked.
This need be no than a statement Special conditions must of be jet
that the contractor guarantees that the plant in the schedule in full. Care should be taken to
meet the guarantees. see that they are consistent with the general con-
wording would be as follows: ditions, that is, that words are given the same
meaning and the same words are used to
The contractorundertakes that the works will meet the
guarantees set out in the purchaser's performance
describe the same item or activity. For example,
requirements when tested in accordance with the test if the general conditions use the expression 'take
procedures set out in the Contract. over' when referring to the point at which the
purchaser assumes responsibility for the plant,
The test procedures and methods should always then the special conditions should likewise use
be set out in the contract and never left 'to be 'take over' and not 'acceptance'. It is a rule of
agreed' between the parties. If they were so left it construction that if a draftsman has used two
would mean that in the absence of agreement different words he will be assumed to have done
there was no enforceable obligation to apply any so deliberately, and that therefore they have dif-
particulartest procedures. ferent meanings.
With the NEC form of contract the various
options should all be detailed in the contract
CONDITIONS OF CONTRACT
data which is issued by the employer as part of
Conditions of contract are often conveniently the invitation to tender. The contract data part 2
described as being either 'general' or 'special'. is prepared by the contractor as part of his ten-
General conditions are those which are set out in der. There is a very simple form of agreement
standard forms prepared either by one of the included in the NEC guidance notes but, since it
engineering institutions, for example ICE refers to the contractor's tender and the
conditions of the Institute of Civil Engineers, or employer's letter of acceptance as being con-
the form MFll of the Institutions of Electrical tract documents, the only use of the form is to
and Mechanical Engineers. Special conditions provide a means of making the contract by deed
may be required, either because of some issue and so gaining the 12-year limitation period. In
not dealt with in the general conditions or practice if there are amendments to the contract
because the purchaser wishes to have the gen- data as a result of negotiations between the par-
eral conditions modified in certain respects. ties then the contract data must be amended to
An example of the first would be modifica- take account of these, since it is the contract data
tions to clause 35 of the MF/1 conditions if on as they exist at the date of the contract to which
the particular project the performance tests were the clauses of the NEC refer.
to be camed out prior to take over. An example
of the latter would be clauses relating to the
APPOINTMENT OF ENGINEER OR
provision by the contractor, if a subsidiary com-
ARCHITECT
pany, of a parent company guarantee.
W~thgeneral conditions, it is normally only It is usual in UK-based contracts, or where a UK
necessary to refer to them in the schedule. All the consultant is employed, to appoint an engineer
standard forms now contain a schedule or or architect on a building contract to represent
appendixlistingsuch items which must be com- the purchaser. His functions and powers are
pleted by the purchaser, otherwise it will described in Chapter 20. Note, however, that
become impossible to give effect to the contract there is no appointment of an engineer or archi-
conditions to which such items relate. If a pur- tect in the NEC form, the purchaser being rep-
chaser is habitually placing contracts incorpo- resented by the project manager. Similarly the
rating a certain set of general conditions, it is new GC/Works/l Contract Conditions provide
advisable to have the schedule pre-printed with only for the appointment of a project manager to
represent the employer. This can be done quite are carried outlprovided at the time stated in the pro-
simply by stating that: gramme schedule F or where no times are stated at
such times as will enable the contractor to comply with
The engineerlarchitect appointed by the purchaser for his obligations under the contract.
this contract is.. ......... or the person whom the pur-
chaser may subsequently notify to the Contractor in CONTRACT PRICE
writing. The purchaser shall pay the contractor the fixed lump
sum price of E.. ......... ('the contract price') plus or
The full draft of the contract document might minus such sums (if any) as under the contract are to be
then be as follows: taken into account in ascertainingthe contract price.
PROGRAMMEKIMEFOR COMPLETION
This agreement is made the. .......... day of. ..........
19.. ......... between.. ......... (the purchaser) of the The contractor shall complete the construction and
one part and ........... (the contractor) of the other testing of the works so as to be entitled to apply to the
part. Wherebyit is agreed as follows: engineer for a Taking Over Certificate under clause
........... of the general conditions of contract not
THE CONTRACT WORK later than.. ......... ('the date for completion') or any
extension of that date to which the contractor may be
The work the subject of the contract comprises the
entitled under the contract.
design, supply, erection, testing, commissioning and
making good of defects ........... with all ancillary
PERFORMANCE GUARANTEES
equipment and facilities necessary to meet the pur-
chaser's performance requirements set out in sched- The contractor guarantees that the works will meet the
ule A and as described in the contractor's Technical guarantees set out in the purchaser's Performance
Proposals and Drawings schedule G provided always, Requirements Schedule A when tested in accordance
and this is an essential condition upon which the pur- with the test procedures set out in the contract.
chaser is relying wholly on the contractor's skill and
judgement, that the works as described in the contrac- CONDITIONS OF CONTRACT
tor's Technical Proposal satisfy in all respects the pur- The Contract shall be carried out in accordance with
chaser's requirements as set out in ScheduleA. the special conditions of contract stated in schedule B
and the general conditions of contract referred to in
WORK TO BE DONE AND SERVICES TO BE schedule C.
PROVIDED BY THE PURCHASER
The purchaser is responsible for carrying out the ENGINEER
work and providing the s e ~ c e sset out in The engineer appointed by the purchaser for this con-
Appendix ........... to the Purchaser's Performance tract is ........... or the person whom the purchaser
Requirements schedule A and for ensuring that these may subsequently notifyto the contractor in writing.
PART THREE
TERMS AND CONDITIONS OF

CONTRACT
CHAPTER ELEVEN
Standard terms of contract: I

lNT€RRELATlONSHlPOF CONDITIONS application of any liquidated damages for
OF CONTRACT delay
unless property has passed before, property
Conditions of contract are included within the
passes to the purchaser and risk in the works
contract to express the relationship between
passes to the purchaser.
employer and contractor and to define explicitly
what is to happen should that relationship be It is essential that this interdependence is borne
disturbed by the failure of either party to fulfil in mind at all times when negotiating, drafting or
their obligations. To this extent they are a reflec- modifying forms of contract. It is so easy to alter
tion of the practicalities of the contract work. or omit one clause without taking into account
When, for example, reference is made in them to the consequentialeffects.
'completion' this is not some abstract legal
concept but the very fact of the 'topping-out'
GENERAL FORMS OF CONTRACT
ceremony on a building or of the anxieties of the
moment when a process plant first goes on For engineering contracts within the UK and
stream. The legal requirement should always be apart from the terms and conditionsprepared by
a reflection of the practical possibilities. Escape certain trade associations and major purchasers,
from that and the contract conditions become at the most widely used conditions of contract are:
best a sterile exercise in drafting and at worst an
infliction of penalties upon the innocent and CIVIL ENGINEERING
unwary. General conditions issued jointly by the Institute
No matter what the subject matter all of Civil Engineers, the Association of Consulting
engineering contracts have the same basic Engineers and the Federation of Civil Engineer-
framework, no part of which can be altered or ing Contractors, commonly known as the ICE
omitted without it affecting at least one other Conditions. Current edition is the 7th. There is
part. The basic framework is illustrated in Figure also a form with Contractor's Design.
11.1, which is in the form of a network analysis.
Solid lines indicate that two events will BUILDING
always be interdependent - for example, final Standard forms of Building Contract Sub-
acceptance and end of defects liability period. Contract and Collateral Warranties prepared by
Broken lines indicate two events may have a the Joint Contracts Tribunal. The forms are
relationship- for example, a variation order may known as JCT 98, IFC 84 for contracts of a lesser
affect time for completion or price or guarantees value and the Minor Works form. The JCT 98
for performance. edition is essentially a consolidation of JCT 80
What can be quickly seen is the extent to with the inclusion of amendments 1-8 together
which the sectors are interrelated. Thus take with various corrections. There is also a form for
over is significant in connection with: Design and Build.
passing of guarantee tests
reduction of liability for accidents, damage, SUPPLY AND INSTALLATION OF
and insurance MECHANICAL AND ELECTRICAL PLANT
release of part of the retention money Form MFll which replaced the old Model Form
possible commencement of the defects A and for which a new edition was issued in 1995
liability period known as MFI 1Rev. 3.
ST A N D ARD TERMS OF CONTRACT: I 89
DESIGN, SUPPLY AND CONSTRUCTION OF government departments and public authorities

PROCESS PLANT are required to do so by law. They may also be
Model Forms of Conditions of Contract for required by law to adopt certain standard ten-
Process Plants issued by the Institution of dering procedures.
Chemical Engineers. There are three such forms: In general these individual forms are tied in
the Red Book for lump sum contracts, the Green with the laws and legal system of the country
Book for cost reimbursement contracts and the concerned and impose upon the contractor a
Orange Book for minor works. much greater share of the risks and responsibili-
The new 'family' of Government Contract ties involved in the design and execution of the
forms GCIWorksll (1998) produced by the works. They are not intended to be fair or create
Property Advisers to the Civil Estates (PACE) a reasonable balance between employer and
which is a vast improvement on the old GCI contractor, but rather to protect the employer's
Works11form. interests without much regard for those of the
contractor. Further, although such forms may
NEW ENGINEERING CONTRACT (NEC) refer to an 'engineer' it must not be assumed that
A new form of contract, which is in essence a set his position is analogous to that of an engineer1
of core clauses to which can be added additional architect under the terms of a UK contract,
clauses for specific types of contract, has been which have been defined judiciallyin the follow-
developed under the aegis of the ICE. ing terms:
It is intended for use on either civil, building the building owner and the contractor
or plant contracts and represents an important make their contract on the under-
change from traditionalforms. standing that in all matters requiring
professional skill the architect will act
In the international field the three standard
in a fair and unbiased manner and it
forms most commonly used are those issued by
must therefore be implicit in the
the Federation Internationale des Ingenieurs
owner's contract with the architect
Conseils (FIDIC):one for civil engineering work,
that he shall not only exercise due skill
one for electrical and mechanical works and one
and care but also reach such decisions
for turnkey contracts.
fairly holding the balance between his
All the above-named forms are based on the
client and the contractor.
principle of even-handedness and attempt to
maintain a balance between the employe; and It must rather be accepted that he will consider
contractor in the allocation of risks and respon- his function to be that of protecting the
sibilities. They are, however, often modified by employer's (and often his own) interests without
the side with the greater commercial negotiating any consideration for what is fair and reason-
power, usually the employer in his own favour, able. This point of differenceis of crucial import-
more particularly when the employer is a main ance to the contractor when considering the
contractor placinga sub-contract. reasonableness or otherwise of clauses such as
One difference of some importance is that those dealing with certification of payments,
the IChemE forms, GCIWorksll and the FIDIC granting of extensions of time and determina-
turnkey form (and the NEC) do not refer to tion ofwhether or not work is defective.
an 'engineer' but to a person variously named Examination of these forms shows that with
as the project manager or the employer's certain variations one to another they all contain
representative. The significance of this will be clauses dealing with the following points and
examined later (see p. 98). generally in much the same way although cer-
However, in international contracting there tain clauses only appear in the export con-
is a far stronger tendency for individual employ- ditions. (This is not so true of the NEC and this
ers to prepare and insist upon the use of their form is the subject of a brief commentary on its
own forms of contract and in certain countries own - see pp. 94-6.)
90 TERM S A ND C O N D IT IO N S OF CO NTRACT
Assignment and sub-contracting. other. This is implied by law and expressly pro-
Bankruptcy. vided for generally in the standard forms. As
Certificates of engineerlarchitect. regards the benefit of the contract it is quite
Completion. usual for the contractor to assign the right to
Contract price and terms of payment. receive payment so as to obtain funding for the
Contractor's default. contract, but generally under the standard con-
Contractor's equipment, vesting of. ditions the consent of the purchaser must be
Contractor's representatives and workmen. obtained. Whether or not the purchaser can
Damage to property and injury to persons. assign the benefit depends on the terms of the
Defects liability. contract and, in the current editions of the JCT
Delivery of materials and passing of property. and ICE forms, the consent of the contractor. If
Dispute resolution. such consent is not obtained, any purported
Drawings. assignment would be void, as regards both
Engineerlarchitect, appointment of, de- breaches of contract which had occurred before
cisions of, representative of, or the project the attempted assignment and those which
manager or employer's representative. arose afterwards (Linden Gardens Trust Ltd v
Exclusive remedies. Lenesta Sludge Disposals Ltd [I99411 AC 85).
Execution of the work.
Faulty work. BANKRUPTCY AND LIQUIDATION OF THE
Health and safety. CONTRACTOR
Information. Under the circumstancesthe employer normally
Inspection and testing. wants the option either to terminate the contract
Insurance. immediately or to give the receiver or liquidator
Language of the contract. the opportunity to complete the contract, sub-
Law of the contract. ject to his giving appropriate guarantees. If there
Patent rights. is any reasonable chance of the contractor
Programme of work. being able to complete the contract the latter is
Provisional and prime cost sums. normally the preferred step to take, since other-
Security for performance. wise the employer faces all the delays and
Site, possession of. troubles involved in changing contractors, with-
Statutory and other regulations. out much hope of recovering his increased costs.
Sufficiency of tender.
Suspension. CERTIFICATES
Termination. The contract will usually provide for certificates
Variations. to be issued by the engineer or other supervising
official in two different circumstances:
In the commentary on these clauses which fol-
lows they are examined objectively from both 1 To record the date when some particular
the contractor's and the employer's viewpoints. event occurred which is of contractual signifi-
Where the clause is discussed at length in cance and to authorize the release of any
another chapter only brief reference is made. retention moneys due at the point.
2 Only to authorize payment to be made to the
ASSIGNMENT AND SUB-CONTRACTING contractor of the amount certified in the
A distinction must be drawn both in the case of certificateas being then due.
the purchaser and the contractor between the
assignment of the benefit and that of the burden Certificates falling under 1 are:
of the contract. In essence neither party can
assign the burden of the contract, i.e. his per- Certificate of substantial or practical completion
formance obligations,without the consent of the Issued normally under building or civil engi-
STANDARD TERMS OF CONTRACT:I 91
neering contracts to record the date when work 1 The circumstances in which the employer's
is substantially completed (seep. 129). right to exercise this power arises.
2 The remedies which the employer has against
Certijicateof completion of construction the contractor on the exercise of such right.
Taking over cemjicate Issued normally under No one can ever foresee all eventualities, so it is
plant contracts to record when the plant wise not to try to produce a comprehensive list of
has passed its tests on completion (see further events entitling the employer to terminate, but
p. 129). rather to provide generally that he can do so
should the contractor be in serious breach of
Acceptance certificate Used in process plant contract and have failed to take any steps effec-
contracts to record the passing by the contractor tively to remedy the breach. The important safe-
of the performance tests. guard here from the contractor's point of view is
that the employer must first give notice of the
Final or maintenance certificate Issued at the breach complained of, and the period of such
end of the defects liability period to record the notice must be adequate to enable the contrac-
end of that period. It may also, depending on its tor to take remedial action.
working, operate as a limitation on the contrac- If the employer does take the work out of the
tor's liabilities under the contract - see Chapter contractor's hands, then the remedies which he
18. has are normallythe following:
Points to be noted in regard to the clauses
providingfor their issue are as follows: 1 To make use of all plant, material and so on on
site for the purpose of completing the con-
1 The event giving rise to the right to claim the tract.
issue of the certificate should be clearly 2 To retain any payments then due and not to
defined. make any further payments until the work is
2 The certificate to record the date on which the completed.
contractor was entitled to claim its issue. 3 To apply any outstanding payments due to
3 The certificate to be issued within a stated the contractor, and any outstanding portion
period of the date on which an application is of the contract price, to the cost of completing
made which the contractor was entitled to the work.
make. 4 Where'thecontractor is responsiblefor design,
Certificates falling under 2 are usually referred to be provided with and entitled to use for
as interim or progress certificates. As they have completion of the plant all information and
no function other than to certify a sum of money documentsldrawings, whether confidential or
for payment to the contractor, they have no con- not, in the contractor's possession relating to
tractual significance except for that purpose. the plant and all documentation prepared by
Thus it is usually expressly stated that no interim the contractor for the purposes of the contract.
certificate can be relied upon as conclusive W~thoutsuch documentation the purchaser
evidence of any matter recorded in it and that may have difficulty in completingthe plant.
the engineer can correct or modify anything in 5 To require the contractor to assign to him the
the certificate in any subsequent certificate. benefit of all sub-contracts. If the purchaser
wishes to have this right then he should
CONTRACTOR'S DEFAULT require the contractor to have the ability to
As a weapon of last resort the employer must assign the sub-contract without having to
have the right to terminate the contract or take obtain the sub-contractor's consent and this
the work out of the contractor's hands, and should be a condition of any consent by the
either finish it himself or employ someone else purchaser to sub-contracting. This latter
to do so. In preparing this clause the draftsman point is not covered in the IChemE conditions
must define: although they include this sub-paragraph in
92 TERMS AND C O N D ~ T I O N SO F CO N T RACT
clause 41.3 on the purchaser's rights on the CONTRACTOR'S EQUIPMENT, VESTING OF

contractor's default. In order to provide the employer with additional
6 If the costs of completingthe work are greater security for interim payments which he makes
than the balance of the contract price out- during the course of the contract, it is usual to
standing, then to recover the excess from the provide that the property in any constructional
contractor. plant brought by the contractor on to the site
7 Recover from the contractor the damages vests in the employer until the contract is com-
which the purchaser has suffered by reason of pleted. The employer is then given the right to
the contractor's default. sell such plant should he be unable to obtain
payment of any sums due to him.
Sometimes a purchaser may in addition seek the It is important in drafting the clause to state
right to recover from the contractor the money expressly that the plant remains at the sole risk of
which he has paid the contractor for the part of the contractor who is responsible for any loss or
the contract work already completed. A distinc- damage to the plant in whatever way this is
tion must be drawn here between a default of the caused, other than through the fault of the
contractor which leaves the purchaser in posses- employer.
sion of works or a plant of which he can make One problem is that the plant may easily not
use after further work, i.e. have completed by be the property of the contractor but only hired,
another contractor, and a situation in which the and in this case the clause would be inoperative
works are useless to the purchaser, for example as the contractor cannot pass to the employer
because the performance tests have shown them the property in plant which he does not himself
incapable, even after modification, of meeting own, and the plant hirer is not of course a party
the upper limit of the liquidated damages - see to the contract.
further, pp. 168-9. In the former case it is reason-
able that the contractor should retain the pay- CONTRACTOR'S REPRESENTATIVES AND
ments already made, subject to the purchaser's WORKMEN
rights to damages. In the latter the purchaser has
been deprived of the whole of the benefit of The employer is concerned to ensure that:
the contract. Effectively the only value which 1 The contractor has a competent representa-
the works possess is as scrap material after tive on site during the time work is proceed-
the costs have been met of dismantling and ing.
reinstatement of the site. Under those circum- 2 He can require the contractor to remove from
stances the purchaser should have the right to any site any person to whom the employer
reject and recover the interim payments already objects on the grounds of negligence, incom-
made. petence or undesirable conduct.
Unfortunately the various standard forms of 3 The contractor does not recruit his labour
plant contract do not make it clear exactly what from the employer's own workpeoplewithout
the purchaser's rights are in the event of a total the employer's consent.
failure. For example the Red Book states, clause 4 The contractor provides all necessary facili-
35.10(b):'reject the Plant and proceed in accord- ties - for example canteen, first-aid - unless
ance with clause 41'. However when one turns to the employer is prepared to allow use to be
clause 41, Termination for Default, the only made of his own facilities.
detail in the clause covers the position when the 5 The contractor complies with all relevant
purchaser is wanting to go on and complete the laws, regulations and customs as they affect
works. What is needed are express rights to his workpeople.
recover all payments previously made and have 6 On overseas contracts the contractor will also
the plant dismantled and the ground reinstated be concerned with the right to bring in labour,
together with a right to recover damages - see the issue of work permits and visas and the
further p. 168. time when these will be made available.
STANDARD TERMS OF CONTRACT: I 93
Security clearances may need to be obtained fails to comply with the employer's require-
and these usually involve the employer in ments and it could be argued that this is a case in
sponsoring the employee. Although the which prevention is better than cure and the
employer cannot be expected to undertake right place to rectify designs is on the drawing
that work permits and so on will be issued, board and not on site. However while some
since this is not his responsibility,the contract issues may be so clear there is no room for
should at least provide that the employer will debate, in other instances it may well be a matter
use his best endeavours and provide every of opinion as to whether a design is acceptable or
assistance. not. Certainly anything giving the purchaser any
wider rights than the FIDIC wording would be
CONTRACT PRICE AND TERMS OF incompatible with a turnkey contract. On com-
PAYMENT pletion of the contract the contractor will be
The methods of determining the contract price required to provide a set of the drawings neces-
are described in Chapter 10, and the definition of sary for the operation and maintenance of the
the price should be included in the letter of works for the purchaser's use. Points to be noted
acceptance or contract agreement (seep. 82). in connection with these requirementsare:
Terms of payment are dealt with in Chapter
14. 1 Approval
-. of the drawings. There should be a
specified time limit for approval, and if no
DAMAGE TO PROPERTY AND INJURY TO comments are received within so many days
PERSONS then the drawings should be deemed to be
For the detail on this, including the different approved. Delay in the approval of drawings
approach adopted by each of three sets of is a frequent cause of delay in the completion
standard conditions referred to on p. 173, see of the contract. The suggestion in the notes to
Chapter 19. the IChemE form that there should be pre-
contract discussions as to essential documen-
DEFECTS LIABILITY tation and that this should be incorporated
See Chapter 18. into the specification so as to minimize post-
contract documentation approval seems an
DELIVERY OF MATERIALS AND PASSING excellent idea.
OF PROPERTY 2 Drawings to be submitted should not include
See Chapter 17. shop or fabrication drawings, as these are
rightly regarded as confidential to the con-
DISPUTE RESOLUTION tractor.
See Chapter 23. 3 The as-built drawings of the works which are
supplied to the purchaser for the purpose of
DRAWINGS operation and maintenance of the works
If the contractor is responsible for design, the should remain the property of the contractor
contract will usually require him to submit draw- and not be used by the purchaser for any
ings of the works for the approval of the pur- other purpose. By buying the plant the pur-
chaser or his engineer. It has been doubted even chaser does not buy with it the designs or
whether this wording is correct in a turnkey con- drawings so as to enable him to use these for
tract as despite what the contract says it is diffi- other purposes, for example extending the
cult for the purchaser not to take some works or pirating spares the design ofwhich is
responsibility for the design if the contractor is the copyright of the contractor.
obliged to correct the design following the The Red Book deals with the sometimes
purchaser's review. In the FIDIC turnkey form vexed question of the use which the purchaser
the purchaser or his representative is only can make of documentation provided by the
entitled to require rectification of a design if it contractor for purposes other than the opera-
94 TERMS AND CONDITIONS OF CONTRACT
tion and maintenance of the plant. The pur- Contract (the NEC) has been retained although it
chaser is given the right after the expiry of is now entitled 'The Engineering and Con-
seven years from the commencement of the struction Contract'. Informally at least it seems
works to have a licence free of charge to use always to be referred to as the NEC. The inten-
the documentation for the purpose of tion was to make improvements under three
improving and enlarging the plant provided main headings:
that the total improvement Or a flexibility, so that it can be used for any or all
does not exceed the production capacity of of the traditional disciplines
the plant than 25 per cent Over the clarity simplicity, so that it is written in
original capacity. plain English and not legal language
If the p
urchaser wants the ownership of
a to act as a stimulus to good management.
the drawings- then this should be the subject
of separate arrangement, if in a particular The NEC exists in nine sections:
case the contractor is prepared to agree to 1 General.
this. Normally he would only do so under a 2 The contractor's main responsibilities.
form of licence agreement which would pro- 3 Time.
vide for further payments to be made, either 4 Testing and defects.
in the form of a once-and-for-all lump sum or 5 Payment.
more likely proportionate to the further use 6 Compensation events.
made by the purchaser of the design rights. 7 Title.
The selling price would then reflect the con- 8 Risks and insurance.
tractor's accumulated know-how and design 9 Disputes and termination.
effort which has gone into the development of
the designs. Within each section there are the core clauses,
4 In the same way the contractor must keep which will remain unchanged irrespective of
confidential and not make use of or disclose which price option is selected as described
drawings and information supplied by the below.
purchaser except in so far as it is necessary for For each section there are then the main
him to do so for the purpose of carrying out option clauses. These offer the choice of a differ-
the contract. ent basic allocation of risk between the employer
5 The as-built drawings will be required by the and the contractor according to the method of
employer at the time when he starts to train pricing used:
his personnel to operate the plant and takes
Options A and B are price contracts,A with an
over responsibility for maintenance. The
activity schedule and B using bill of quanti-
contract should provide therefore:
ties.
the numbers of copies, and form of the a Options C and D are target contracts in which
reproducibles, velographsor micro-films the financial risks are shared by the employer
the programme for their handing over to and contractor in agreed proportions.
the employer, recognizing that provisional a Options E and F; E is a form of cost re-
copies only may be available initially and imbursable contract and F a form of manage-
that final copies will have to follow after ment contract.
hand over of the plant.
There are then secondary options which may,
apart from a few instances, be used with any of
NEW ENGINEERING CONTRACT (NEC) the main options, covering:
The New Engineering Contract (the NEC) is a a performance bond

fundamental departure from the traditional parent company guarantee
forms of contract. The term New Engineering a advanced payment to the contractor
STANDARD TERMS OF CONTRACT: I 95
multiple currencies (OptionsAand B only) Clause 40.1 states that the contractor and
sectional completion the employer carry out the tests as stated in
limitation of the contractor's liability for their the works information. Option S says that if
design to reasonable skill and care a defect included in the defects certificate
price adjustment for inflation (not used with E shows low performance with respect to a
and F) level stated in the contract data the con-
retention (not used with F) tractor pays the amount of the low perfor-
bonus for early completion mance damages stated in the contract data.
delay damages
low performance damages In the first example the works information
changes in the law must contain the form of the performance
special conditions of contract (onlyto be used bond, which needs expert drafting. In the sec-
exceptionally). ond example the works information must give
details of the performance tests, when they
are to be carried out and by whom, the right to
An NEC contract therefore comprises:
have re-tests if they fail and all the usual pro-
cedures to be found in the contract conditions
the core clauses
for a process plant contract. Then the scale of
the main option classes applicable to the
low performance damages must be included
method of procurement chosen, and
in Option Sin the contract data.
the secondary options selected by the pur-
Other than in the simplest case there is
chaser.
therefore a significant amount of contract
drafting to be-done additional to that con-
Note that the contract is not related specifically tained in the NEC and which will inevitably
to the type of work. The same form can be used have to be based upon that which already
for building, civil engineering or plant design exists in other forms. It should, however, be
and construction. It is also the only form which consistent with the rest of the document and
can be used for multidisciplinarycontracts. be put into basic English in the present tense.
The following lists some of the main features 2 The traditional role of the engineerlarchitect
of the NEC and the way in which it operates: is divided into four:
1 Essential to the NEC are the contract data and project manager
the works information. The contract data is in designer
two parts. Part 1 is completed by the employer supervisor of construction
when inviting tenders using the format which adjudicatorof disputes.
is at the end of the NEC form. Part 2 of the
contract data is submitted by the contractor The first three functions are carried out on
as part of his tender. The contract data Part 1 behalf of the employer. The fourth is carried
and the works information are a mixture of out independently. It follows that while it
items which would normally be included in would be possible for the first three roles to be
the instructions to tenderers, the specifica- performed by the same person, although this
tion and the conditions of contract. They are is not recommended,the adjudicator must be
therefore both technical and commercial a different person.
documents and parts of them require careful Amendments have now been made to the
contractual drafting. For example: NEC to comply with the mandatory require-
ments of the Construction Act 1998 on adjudi-
Option G requires the contractor to provide cation. The NEC form as amended has a
a performance bond for the amount stated three-stage process of dispute resolution.
in the contract data and in the form set out First negotiation, then adjudication and
in the works information. finally either litigation or arbitration. The
96 TERM S AND c o N D ~ T t o N sO F CONTRACT
intention is that, rather as the ICE has done, programming of the work monitored by the
adjudication should not be initiated until project manager.
negotiation has failed and the dispute cannot 7 The use of a system of identified compensa-
be referred to the tribunal before adjudication tion events which cover situations in which
has been completed. Only when the contrac- the contractor would expect remedies in
tor has given notice to the project manager of terms of cost or time, for example variations,
his dissatisfaction with an action or failure of late instructions and so on. The contractor is
the project manager to act, and there has been required to give a quotation showing the
a meeting and no resolution achieved, is there effect of the event which is assessed by the
a dispute. Whether this satisfies the Con- project manager. For compensating events
struction Act that either party may refer any entitling additional payment the assessments
dispute or disagreement at any time seems are based on actual costs incurred not the
doubtful. rates and prices in the contract and when
The other strange point is that only the assessing time extensions no account is to be
contractor can take issue with an action or taken of the contractor's float.
failure of the project manager to act. On the
face of it that seems to mean that the employer The use of the NEC is growing and the first
could not refer a dispute between himself and experiences have been favourable. However, it is
the project manager regarding,say, a decision emphasized that this is not just a new set of con-
on a compensation event to pay money to the ditions but a new way of thinking about con-
contractor. It has been commented that this struction contracts. The thrust of the NEC is
seems a deliberate omission but one which in towards better management and a dramatic
the interests of the employer should be reduction in the adversarialism which has
changed by amending clause 90.2 to provide plagued UK constructionsites for years. To apply
that either the employer or the contractor can the NEC successfully needs therefore a radical
notify dissatisfaction to an action or a failure change of approach by all involved. Before
to act by the project manager. therefore using the NEC with contractors who
3 The intention is to reduce to a minimum the have not been previously involved with it the
amount of design work to be done post con- purchaser is recommended to hold an initial
tract. Where the option of a firm price is meeting with the tenderers to explain the prin-
chosen the information provided at time of ciples on which it is based. Then when the
tender is required to be sufficient to enable contractor has been selected it is recommended
the works to be constructed without further to hold a workshop with the contractor, the pro-
instruction. ject manager and the supervisor all involved to
4 There is no provision for nominated sub-con- go through the working of the contract in more
tractors/suppliers. detail.
5 The contract provisions are designed to allo- Sir Michael Latham in his report recom-
cate risks sensibly between the parties and in mended certain amendments to the NEC which
a way which is intended to encourage good have now been made but also strongly recom-
management. mended its adoption as amended in both the
6 Emphasis is placed on the planning and public and private sectors.
CHAPTER TWELVE
Standard terms of contract: II

The position and authority of the architect1 tions the architectlengineer may issue, he
engineer under certain forms of contract devel- could find himself in some difficulty if the
oped within the UK are dealt with in Chapter 20. architectlengineer concerned was being
The relationship between the engineer and the awkward.
purchaser and the contractor as described in 2 That after acceptance of the tender decisions
that chapter is, however, largely unique to those and instructions will be given only by the
forms of contract and to international forms, engineer.
such as those prepared by the Federation of
International Consulting Engineers, which are By the inclusion of this second provision in the
largely based on UK practice. It is important, contract conditions the employer has disquali-
when preparing contract conditions, to be clear fied himself, vis-h-vis the contractor, from inter-
as to whether the person or body exercising fering in the administration or control of the
supenrising powers on the purchaser's behalf contract, although, as explained on p. 178, this
will be acting in that role or not. If they are, then does not prevent him from giving instructions to
it may be appropriate to invest them with wide the engineer, provided that these do not improp-
discretionary powers, for instance in the pricing erly restrict the exercise by the engineer of his
of variations or the granting of extensions of discretionary function. The contractor for his
time. If, however, it is known that they are merely part has accepted that he must take instructions
acting as agents on the purchaser's behalf and only from the architectlengineer.
have no capability for the exercise of indepen- If the engineer is an outside consultant it
dent professional judgement, then the contract requires the exercise of great discipline and self-
should be drafted so as either to leave matters to restraint on the part of the employer, particularly
be agreed between purchaser and contractor an employer who has engineering and contracts
(pricing of variations) or to give the party con- departments of his own, to make these particular
cerned an absolute contractual right in certain provisions operate successfully. Too often the
events which is not dependent upon dis- employer's own staff will start giving instruc-
cretionary judgement (extensionsof time). tions to the contractor direct. Unfortunately also
from the contractor's point of view, if a dispute
ARCHITECTIENGINEER- DECISIONS AND does arise later on, for example as to whether he
INSTRUCTIONS is entitled to be paid for some extra work done on
Where the architectlengineer is acting in his the verbal authority of someone other than the
independent professional role then the contract engineer, then the contractor may well find the
will normally provide: terms of the contract quoted against him and his
claim disallowed. This of course applies only in
1 That the contractor must comply with all so far as the engineer has authority under the
decisions of the architectlengineer, subject contract; it would not apply to a change in the
only to the contractor's right to challenge contract conditions since the engineer has no
such decisions at adjudication or arbitration. authority to make such changes.
This proviso is important, as there would The moral is again that the terms of the con-
appear to be no implied obligation on the part tract must be related to practicalities. If the
of the architectlengineeronly to issue reason- employer wants his own engineering depart-
able instructions and, if the contractor has ment or project manager to have the last word
bound himself to comply with any instruc- and be able to deal with the contractor direct,
98 TERMS A ND C O N D IT IO N S OF CO NTRACT
then he should never have appointed the con- not matter, but if he were not doing so, and the
sultant as engineer under the contract. If in order project manager was entitled to take his instruc-
to maintain progress, or because of the isolation tions, then the contractor has lost the benefit
of the site, it is necessary for people other than of the protection afforded by an impartial
'the engineer' to give instructions for extra work, engineer.
say up to a certain financial limit, then this should The IChemE form (the Red Book) also has a
be provided for specifically in administration project manager acting for the employer. His
procedures issued by 'the engineer' and circu- powers and duties are set out in clause 11, and
lated to all concerned, includingthe contractor. clause 11.1 seems to state the position of the
Several forms of contract today no longer project manager admirably:
provide for the appointment of an 'engineer'
but provide for the appointment of a project in all matters where the Project
manager. The NEC is one of these and so is the Manager is required to or authorised
new Government form GCIWorksll. In both under the Contract to exercise his dis-
these forms the project manager has wide pow- cretion or make a judgement or form
ers of decision making, for example in relation to an opinion, he shall do so to the best of
compensation events under the NEC or the his skill and judgement as a profes-
pricing of variations or the granting of exten- sional engineer and shall be impartial
sions of time under GCIWorksll. Both forms as between the Purchaser and the
provide in different wording how the project Contractor.
manager is to act. In the NEC it is provided in
clause 10.1 that 'The Employer, the Contractor, EXCLUSIVE REMEDIES
the Project Manager and the Supervisor shall act In some forms of contract, MF11 (clause 44.4),
... in a spirit of mutual trust and co-operation.' the Red Book (clauses 2 and 3 of the Form of
GCIWorksll states that the 'Employer and Agreement),and in various forms of IT contract,
Contractor shall act fairly, in good faith and in provisions are included which seek to limit the
mutual co-operation' and that 'Both parties rights and liabilitiesof the parties to those which
accept that a co-operative and open relationship are expressly provided for, either in the contract
is needed for success and that teamwork will or, as in MF11, to those in the conditions of
achieve this. The team shall include the Project contract. Such clauses may be referred to either
Manager, the Contractor'sAgent.. .' as exclusive remedy or entire agreement clauses.
The standard form for the appointment of a The intended effect is that any pre-contractual
project manager issued by the Association of representations or warranties made by either
Project Managers echoes the same thoughts by party are excluded from the contract and neither
referring to the project manager acting 'to party will be entitled to rely on any such in any
endeavour to engender a culture of confidence, action for damages. The comprehensive clause
trust, safe working and mutual respect between 44.4 of MF11 was considered by the Court of
members of the Project Team'. Appeal in Strachan and Henshaw v Stein
In their different ways, therefore, all three of Industrie (forthe facts of the case see p. 80) and it
these forms seek to ensure that the project was concluded that the clause was a bar to an
manager does not act in an adversarial manner, action in misrepresentationand that if two large
but the question remains whether or not this is commercial organizations decided that they
the same as the requirement on the engineer to wanted to exclude all liabilities in misrepresen-
act 'impartially' under clause 2(6)of the ICE con- tation in this way then the court should respect
ditions. In reaching their decisions under either their choice.
the NEC or GCIWorksll forms, is the project An entire agreement clause in a non-
manager entitled to take instructions from the standard form was held effective to bar all claims
employer as to how he is to act? If, of course, the against the contractor for alleged breach of
employer were acting as he should act this might collateral warranties, but not on its wording for
STANDARD TERMS OF CONTRACT: II
misrepresentation, in Deepak Fertilisers and required to act in a reasonable manner, and to

Petrochemicals v Day McKee (London) Ltd and ensure that the contractor has the right to chal-
Another [1998]2 Lloyds Rep 139. lenge the decision of the engineer at arbitration
Exclusive remedy or entire agreement if he considers that the engineer has acted
clauses in contracts as between commercial unreasonably. It is prudent to couple this with
organizations of equal bargaining power will, wording in the arbitration clause which empha-
therefore, if worded sufficiently comprehen- sizes the point.
sively, be upheld by the courts. If, therefore, the It is important to note that where the con-
contract contains such a clause it is up to the tract provides that work is to be performed in
party concerned to ensure that the statement is accordance with the specification and to the
incorporated into the contract either in the form reasonable satisfaction of the engineer these
of agreement or by way of a special condition of words are likely to be treated as creating two
contract. Careful attention when doing this separate obligations. Accordingly it follows that
needs to be paid to any clause in the contract a certificate issued by the engineer is not neces-
listing the precedence of documents. It may be sarily conclusive that work has been executed in
no use, for example, to include a pre-contractual accordancewith the contract- see National Coal
undertaking in the specification if the conditions Board v William Neil & Son [I98411 A11 ER 555,
of contract, as MFI1, give precedenceto the con- where a decision to that effect was reached on
ditions of contract, and those conditions contain the wording of the BEAMA Standard Conditions
an exclusive remedy clause. RC version, January1956 edition. It is important
It is considered that, in most instances, to note, however, that each such case will be
although admittedly not in the Strachan and decided in accordance with the wording of the
Henshaw case, an entire agreement clause is particular clause and the facts of the individual
likely to favour the contractor since it is more case and that there are authoritieswhich point in
probable that the contractor, in an effort to the other direction.
secure the contract, will have made representa-
tions or made statements capable of being FAULTY WORK
construed as collateral warranties, than the pur- If during the course of the contract the engineer
chaser will have done. It is suggested, therefore, decides that any work carried out by the contrac-
that a purchaser should consider very carefully tor is defective or does not comply with the con-
whether it is to his advantage or not to include tract, then it is usual to provide that he can
such a clause in the contract. require the contractor to correct this and, if
An exclusive remedy or entire agreement necessary, re-execute the work or take away the
clause would not, it is thought, protect a party if defective items and replace them with ones
the alleged misrepresentation was made fraud- which do comply with the contract.
ulently. As was said by Lord Lorebum in the This should be sufficient protection for the
House of Lords in Pearson v Dublin Corporation employer, but just in case the contractor fails to
'no one can escape liabilityfor his own fraudulent replace defective work, MFI1 goes on to give the
statements by inserting in a contract a clause that employer the right to do the work himself and
the other party should not rely upon them'. charge the contractor with the additional costs
incurred, provided that these are reasonable (see
EXECUTION OF THE WORK clause 26). It also expressly provides that any
The contract will normally provide that all work action taken by the employer under that clause
must be executed in accordance with the man- will not affect the employer's right to claim dam-
ner set out in the specification, or where not so ages for delay, so that not only must the contrac-
set out to the reasonablesatisfaction of the engi- tor pay the costs of putting the work right, but he
neer. From the contractor's viewpoint it is also almost certainly faces the prospect of paying
important that the word 'reasonable' is included liquidated damages when the works are finally
in the clause to make it clear that the engineer is completed.
Similar provisions are contained within be carrying out as part of a project - for example,
other forms of contract, for example ICE clause plant positions and loads which the purchaser
39(2). That clause specifically entitles the requires for foundation design - the contract
employer to deduct any costs incurred as a result usually states that the party providing such
of the contractor's default in carrying out the information is responsible for any errors which it
engineer's instructions. Note that it is for contains, and for meeting the additional costs
the employer to make the deduction from caused by such errors. On the face of it this is a
the amount certified by the engineer. This reasonable provision, but if applied too rigidly in
follows the general principle in the ICE con- practice it can cause difficulties.
ditions that the engineer certifiesthe full amount Both parties are usually pressing the other for
due to the contractor and that the employer drawings and information. The earlier these are
deducts amounts due to him under the right of released the greater the probability that they will
set-off. contain errors, or at least that the party supply-
ing them will want to make changes to them as
HEALTH AND SAFETY his own design develops. It may be reasonable,
As a result of the passing of the Construction therefore, initially to release data or drawings
(Designand Management) Regulations 1994 the which are marked 'provisional' and for which
employer has now had placed on him certain contractual responsibilityis not accepted, and to
specific duties in relation to construction con- follow these up at a later date with final issues to
tracts to which the regulations relate. These which the provisions of the clause would apply.
cover broadly the appointment by the employer In the clause in MFI1 it appears arguable that
of a competent planning supervisor and a prin- the contractor's liability is limited to the cost of
cipal contractor, ensuring so far as is reasonably alterations or remedial work to his own work due
practicable that construction does not start until to the errors in the drawings. But the costs which
a health and safety plan complying with the reg- the purchaser is most likely to suffer are the
ulations has been prepared, including the pro- additional costs he will have to pay to others, for
vision of necessary information to the planning example the civil contractor who has now to re-
supervisor to enable him to perform his duties execute his foundations. The wording in the
and ensuring that a health and safety file is avail- equivalent clause number 21 in the IChemE Red
able for inspection. The contract conditions Book makes the position clear. After having
need to provide for the contractor, if so stated in sub-clauses 21.1 and 21.2 the liability of
appointed by the employer, to comply with the the contractor to correct his errors at his own
obligations of a principal contractor and to liaise cost sub-clause 21.3 states that 'The Contractor
with the planning supervisor, and ensure such shall reimburse to the Purchaser any cost of
liaison by his sub-contractors and other contrac- abortive activity which the Purchaser may have
tors, so as to enable the planning supervisor to incurred in reliance on any document which
carry out his obligations. under sub-clauses 1 and 2 the contractor is to
It is important that the employer in the plan- correct at his own cost.' The liability of the con-
ning stages of the project informs himself of the tractor is, however, limited under this sub-clause
relevant duties of all parties under the Regu- to 1 per cent of the contract price. This may be
lations and it is recommended that he fam- adequate on a multimillion pound chemical
iliarizes himself with the Code of Practice, plant but could be restrictive on a lower-value
'Managing Construction for Health and Safety', contract.
published by the Health and Safety Executive.
INSPECTION AND TESTING
MISTAKES IN INFORMATION No contractor can reasonably object to the pur-
Where information is to be provided by one chaser or someone on his behalf having the right
party to the other for use in connection with the to inspect and test work which is in progress or
contract, or other work which the purchaser may which has been completed in the contractor's
STANDARD TERMS OF CONTRACT: II 101
works or in the works of his major sub-con- regards costs. Unless the additional test is
tractors. But inspecting and testing provisions normally conducted as part of the practice of
should be fair to the parties and practical in the place where the work is being done or
relation to the circumstances of the particular materials manufactured the additional costs
contract, and the following points need particu- are to be paid for as a variation. Since clause
lar consideration: 14 on extensions of time specifically allows
variations ordered by the project manager as
1 The extent to which the inspecting authority reasons entitling the contractor to an exten-
is given the right arbitrarily to reject. If an sion of time the contractor's position as
inspector rejects work, he should be required regards time is also protected. In practice it
to state the reasons for such rejection in writ- would be expected that the project manager,
ing and his decision should be subject to chal- knowing that an additional non-normal test
lenge at arbitration. The inspector's decision would cost the purchaser both money and
should never be final and binding. time, would be deterred from ordering such a
2 Most companies have their own internal test and would only do so under exceptional
inspection and testing procedures, the costs circumstances.
of complying with which are allowed for as 3 Inspection and testing takes time, and if the
part of normal selling costs. If the employer purchaser is calling on the one hand for an
wishes to impose special testing procedures, extremely tight delivery schedule he cannot
these should be clearly defined in the specifi- on the other hand expect to be able to insert
cation, so that the contractor has the oppor- into the manufacturing programme his own
tunity of allowing for the costs of these when special inspection and testing requirements.
tendering, and possibly of indicating to the This is particularly the case if to comply with
purchaser the reduction in costs which would these will mean putting a hold on the manu-
be possible were he to dispense with these facturingprogramme at varying intervals dur-
procedures. ing its execution. One essential proviso in any
One particular provision of which the con- event is that if at the time appointed for carry-
tractor must be especially wary is that which ing out tests, or if after reasonable notice has
allows the employer or the engineer to add been given, the inspector fails to attend the
tests additional to those included within the tests, the contractor can proceed in his
specification. Such a provision has in the absence.
author's experience been used deliberately by 4 If the plant fails to pass the tests, any repeat
an overseas purchaser to force a contractor tests must be carried out at the contractor's
into delay so that the purchaser would exact a expense.
penalty! Admittedly this is an extreme case
but even without such intent the use of such a INSURANCE
provision can have disastrous effects on both See Chapter19.
a contractor's costs and programme and its
inclusion should be strongly resisted. If the PATENT RIGHTS
right to add additional tests must be con- A patentee who believes his rights have been
ceded, they should be limited to those of a infringed would in most instances proceed
similar nature to the ones specified in the against the person who he claims is making use
contract, for example exclude 'type' testing, of his patent rights rather than against the con-
and there should be equally a right for the tractor who built or supplied the plant con-
contractor to an extension of time and the cerned. The purchaser wants to be certain,
payment of additional costs. therefore,that his use of the works is not going to
The IChemE Red Book in clause 22 on off- be interfered with in the future by someone
site tests does cover the position of additional claiming that it is an infringement of his patent
tests ordered by the project manager as rights, or that, if this does happen, he has the
102 TERMS AND C O N D l T lI O N S O F CONTRACT
right of indemnity against the contractor. This is the programme and suggests that if the project
reasonable provided that: manager agrees to the amendment it will then
relieve the contractor of liability to the employer
1 The infringement is not due to the contractor
under clause 3 l(1). Otherwise it is said that the
having followed a design or instruction given
contractor if he is late will be liable to the
by the purchaser.
employer for loss or damage resulting from the
2 The purchaser is not making use of the plant
breach. What is not made clear is whether this
in some way which is different from that indi-
reference to the contractor being so liable
cated to the contractor or reasonably to be
applies only to the completion date or to any
inferred by the contractor at the time of enter-
other dates contained within the programme.
ing into the contract. This would apply partic-
What is made clear is that an amendment to the
ularly to process plant where a patent may
programme does not constitute the granting of
relate to particular temperature or pressure
an extension of time which is dealt with sepa-
conditions or operation in a particular man-
rately under clause 36. Presumably, however, it
ner.
does work the other way around, that is to say
Equally the contractor for his part wants an that an extension of time given by the project
indemnity against his infringing any patent manager under clause 36 would constitute
rights through following designs or instructions an amendment to the programme, so that if
which he is given by the purchaser. the contractor completed according to the
programme as amended by the extension of
PROGRAMME OF WORK time, he could not then be liable under clause
AU construction contracts require the contractor 31(1).
to produce a programme showing the order in The position with the NEC is also not easy to
which he proposes to carry out the works. A pre- determine. The programme is to be supplied by
liminary outline of such a programme is usually the contractor as part of the Contract Data Part 2
included with the tender. On simple projects this or within the period stated in the Contract Data
will be in the form of a bar chart; on more com- Part 2. The Model Form of Agreement in
plex projects it will be in the form of a network Appendix 3 in the NEC Guidance Notes makes
analysis. the Contract Data Part 2 one of the documents
The main issue which arises is the contrac- forming part of the Agreement. It is therefore
tual status of such a programme. Is it part of the arguable that the programme is a contract docu-
contract so that the contractor is contractually ment. However clause 32 of the NEC allows the
bound to complete the various operations contractor to submit a revised programme for
shown on the programme by the stated dates acceptance by the project manager and it would
and (with the exception of GC/WorksIl and pos- appear that in such revised programme the
sibly the NEC) equally is the employer contrac- contractor is entitled to make any changes which
tually bound to allow him the facilities to do so? he wishes although these would not necessarily
GCIWorksll makes it absolutely clear that the be accepted by the project manager.
programme is a contract document. It is On balance it is thought that, although the
included in the list of documents forming the programme is important for administration of
contract contained in the definitions clause l(1) the contract and for the determination of the
and clause 31(1) states that the contractor is to effect of compensation events, it is not a contract
carry out the work in accordance with the pro- document in the sense that failure by the
gramme. In the guidance notes to the form when contractor to comply with one of its provisions
reviewing clause 33, 'Programme', it is said that (other than to complete by the completion date
'the Programme is contractually binding on the or sectionalized completion dates) would be a
Contractor'. However, the same guidance note breach of contract. However the wording cannot
goes on to point out that the contractor can pro- be considered satisfactory. Alternatively is the
pose to the project manager an amendment to programme only a representation of the manner
STAN DARD TERMS OF CON TRACT: 11 103
in which the contractor intends to proceed so Council, reported in The Times 18 November
that provided he meets the contractual date for 1994. In summary the contractor's obligations
completion there can be no claim against him by were said by the court to be 'to proceed continu-
the employer if certain of the intermediate dates ously, industriously and efficiently with appro-
given on the programme are not achieved? priate physical resources so as to progress the
Under those circumstances the contractor would works steadily towards completion substantially
only be in breach of contract if completion of the in accordance with the contractual require-
operation by that date had been specifically ments as to time, sequence and quality of work'.
made a contractual obligation, for example the In that case it was clear that the contractors were
date was a sectional completion date. proceeding regularly (in the sense that they had
Unless the contract specifically provides sufficient men, materials and plant on site) but
otherwise (and only GCIworksll of the standard not diligently, in that the resources were not
forms referred to on pp. 88 and 89 does), it is being managed and applied industriously and
considered that the programme is not a contrac- effectively. One was no use without the other.
tual document in the sense that the contractor As regards the position where the pro-
would be in breach of contract if he failed to gramme shows a completion date earlier than
meet one of the intermediate dates for comple- that contained in the contract, it has been
tion of a particular operation. decided in a case on the JCT63 form clause 21(1)
If the contractor were to fail significantly in that:
meeting an intermediate date on the critical
path or it was evident that he would do so unless the contractor was entitled to cany out his
corrective measures were taken, then this would work in accordance with the accelerated pro-
gramme, but
in the author's view be grounds for action by the
employerlengineer under, for example, clause the employer and his agents only have a duty
46 of the ICE conditions or its equivalent. It to do that which is reasonably necessary to
could also, depending upon the seriousness of enable the contractor to comply with his
obligations. Since the contractor had the
the delay, constitute an anticipatory breach of
contract. right, but not the obligation, to finish early,
the employer and his agents accordingly had
However it is to be noted that clauses such as
that do not impose a positive obligation on the no duty to provide him with instructions at
contractor to proceed to execute the works with such times as were necessary to enable him to
due diligence and expedition, but provide a achieve the earlier completion (Glenlion
remedy should he fail to do so -per Staughton J Construction Ltd v The Guinness Trust [I9871
in GLC v Cleveland Bridge & Engineering Co. Ltd 11 CONLR).
[1986]8 CON LR 30. In any event the meaning of Both for the purpose of good contract admini-
the words 'due diligence and expedition' must stration and in order to safeguard his interests
be interpreted in the light of the contractor's the contractor should supplement the pro-
other obligations as to time under the contract gramme with an appropriate procedure and
and their true meaning is 'with such diligence notices to the engineer of his requirements for
and expedition as were reasonably required to drawings and information as the programme on
meet the completion date in the contract' per its own may not be sufficiently detailed.
Staughton J in the same case and confirmed on It equally follows that if the employer were
appeal- 8 CON LR p. 30. similarly to fail to provide facilities which con-
Similar wording in clause 21(1) of the JCT tractually are his responsibility by the pro-
1963 conditions (repeatedin 23.1 of JCT80) does gramme date or it appears evident that he will do
require that the contractor should proceed 'reg- so, then the contractor could require the
ularly and diligently' with the works and that was employer to take appropriate measures to speed
considered by the Court of Appeal in West up the work in question or provide the contrac-
Faulkner Associates v Newham London Borough tor with compensation.The programme in effect
104 T ERM S AND c O N D ~ T ~ O N OSF CONTRACT
puts the employer on notice as to the contrac- the decision of the House of Lords in Trafalgar
tor's requirements if the contractor is to satisfy House Construction (Regions) Ltd v General
the completion date, and the employer is then Surety and Guarantee. Co. 1995 and have
bound to meet these or he must both grant attempted to produce bonds in a form which is
the contractor an extension of time and meet both understandable and responsive to the
the additional costs directly and necessarily needs of industry. The House of Lords in that
incurred as a result of his default. case, overturning the controversial decision of
If therefore the employer wants to make the Court of Appeal noted in the last edition of
intermediate dates, for example for the supply of this work, restored the orthodox view that until
drawings or access to buildings, contractual, so the final account and all counter-claimsor rights
that he can claim damages against the contrac- of set-off had been settled between the parties,
tor for failing to meet these, then he must say so the employer could not establish the damages to
specifically in the invitation to tender or at the which he was entitled and the bondsman had no
stage of contract negotiation since it will affect liability to make payment.
both the contractor's assessment of his risks and Unfortunately, therefore, the major problem
also possibly the order and method in which he with such bonds remains and that is the timing
intended to carry out the works. Certainly it will of the recovery by the employer of the money
restrict the contractor's flexibility of operations which he wishes to claim. The most frequent
which could have a major cost impact. cause of the calling of a bond is that the contrac-
On large, complex, multidisciplinary plants tor has gone into liquidation. The employer then
there is an argument for the employer making needs to appoint an alternative contractor to
intermediate dates contractual but he must rec- complete the works. This will involve him in
ognize that it will increase the price, lead to a immediate additional costs and he wants a
rigidity of attitudes and lack of give-and-take in speedy and secure source of funds to meet those
site working and to an increase in the unpro- costs. But the default bond does not provide this.
ductive paper war of claims and counter-claims In a recent case, Paddington Churches Housing
(seeChapter 15). Association v Technical and General Guarantee
Company Ltd [I9991 BLR 244, the wording of the
PROVISIONAL AND PRIME COST SUMS bond stated that the bondsman would satisfy
See Chapter 14. the 'nett established and ascertained damages
sustained by the employer'.
SECURITY FOR PERFORMANCE Under the terms of the JCT 80 form of con-
There are three types of bond or bank guarantee tract on termination for insolvency the determi-
which the contractor may be required to pro- nation of the nett established and ascertained
vide: damages would only take place when the con-
tract had been completed and the additional
advance payment bond
costs to the employer of engaging another con-
contract performance bond
tractor had been determined. It was not until
maintenance or retention bond.
then that there was any liability on the bonds-
Each of these may take one of two forms. The man to make payment. That is the position
first is termed a conditional or default bond. The under any of the standard forms of bond such as
employer is only entitled to make a claim under that issued by the Association of British Insurers.
the bond once he has proved that there has been It would also be the same situation under other
default and the amount of the damages to which forms of contract. For instance the ICE clause
he is entitled. In the past the wording of such 65(5)provides that once the employer, due to the
bonds has been archaic in the extreme and sub- contractor's default, including insolvency, has
ject to severe and justified criticism by the expelled the contractor from the site the
courts. Finally those responsible for the pro- engineer will certify the difference between the
duction of such bonds have woken up following money which would have been due to the con-
STANDARD TERMS OF CONTRACT: II
tractor if he had completed the works and the the bond Oval was not entitled to make a call on
costs incurred by the employer in having the the bond if, as they had done, Aegon chose to
works completed by another and the employer's raise the issue of non-compliance with the con-
damages for delay and other expenses. However, dition precedent as to the giving of notice. Any
the engineer clearly cannot do that until he purchaser offered a form of default bond should
knows the new costs of completion,although he therefore:
can issue an interim certificate if he is satisfied
that the sum due to the employer will exceed any 1 Ensure that the bond contains the standard
money due to the contractor even though the wording that the liability of the surety is not to
works have not yet been completed. It is only be discharged by any changes to the construc-
when the engineer has so certified that the ICE tion contract or any forbearance by the
form of default bond operates so as to enable the employer. This wording was not included in
employer to get his money from the surety. the bond in the Oval case referred to above.
Although the new provisionsfor adjudication 2 Object and try to have removed from the bond
provide a much quicker method of establishing any conditions precedent such as those con-
the damages whichare due to the employer, they tained in the bond in the Oval case. No such
are not effective in solving this problem since provisions are contained in the standard form
there is no dispute which can be referred to of bond issued by the ICE.
adjudication until, under the JCT form the works 3 Ensure that if there are any conditions pre-
have been completed, or under the ICE form the cedent which could affect the ability to call
engineer has issued his certificate, which in the bond these are notified to those responsi-
most cases will again not be until completion. ble for the administration of the contract with
Until then the employer stands out of his money. strict instructions as to the need for compli-
It is only if the employer calls the bond for con- ance with them.
tractor default other than insolvency and does The alternative form of bond is usually referred
not take the work out of the contractor's hands, to as a 'cash' or 'on-demand' bond. As its name
that adjudication will be of assistance to the implies the bond can be called by the employer
employer in recovering his money earlier, but in on first demand and without having to prove any
practice this would be unusual. default on the part of the contractor. If such a
Another problem which arises with default bond is called by the employer then in so far as it
bonds is the practice of surety companies offering is unconditionalthe bank must pay and will then
to provide such bonds of requiring the employer look to the contractor for reimbursement of the
to comply with numerous conditions precedent money under the terms of the agreement under
before being able to call the bond. In Oval 1717) which it provided the bond. At one time such
Ltd vAegon Insurance Co. (UK) Ltd [1997154CON bonds only tended to be required by overseas
LR 74 the bond contained a condition precedent purchasers, especially in the Middle East. Today
amongst others requiring notice to be given to the position has changed and many UK and con-
Aegon in writing one month after the employer or tinental purchasers insist on bonds being essen-
1 those supervising the contract became aware of tially in an 'on-demand' form.
1 'any non-performanceor non-observance on the
part of the contractor of any of the stipulations or
The position of a UK bank which gives an
unconditionalon-demand bond has been stated
provisions contained in the terms of [the by Lord Denning in these words:
construction contract]'. The contractor failed to
complete the works by the extended date for A bank which gives a performance
completion and then an administrative receiver guarantee must honour that guarantee
was appointed. Oval did not give the required according to its terms. It is not con-
notice of the failure by the contractor to complete cerned in the least with the relations
the works by the extended date. between the supplier and the customer;
It was held that on the true construction of nor with the question whether the
106 TERM S A N D C O N D I T ~ O N SO F C O N T R A C T
supplier has performed his contracted whether or not the contractor has sufficient
obligations or not; nor with the ques- funds with which to meet his counter-indemnity
tion whether the supplier is in default or to the bank. For this reason banks exercise con-
not. The bank must pay according to its siderable caution in giving such bonds and take
guarantee on demand, if so stipulated their amount into account when deciding on the
without proof or conditions. The only level of the contractor's borrowing facilities.
exception is when there is clear fraud of For these reasons, and because banks charge
which the bank has notice. more for on-demand bonds, there is a reluctance
on the part of some purchasers to ask for them
The question of fraud was considered in United and for contractors to provide them, at least
Trading Corporation and Others v Allied Arab when it is a matter of a performance bond. Their
Bank Ltd and Others, FT Commercial Law use is, however, common when it is a bond
Reports 17 July 1984. There the Court of Appeal covering an advance payment or a bond in lieu
stated that the sellers could obtain an injunction of the purchaser holding retention money. In
restraining a bank from paying out on an on- fact if a purchaser wants to be reasonably certain
demand performance bond but that there must of immediate access to funds if there is a major
be clear evidence of the fraud of which the bank default by the contractor, especially if he has
had knowledge. It was stated that 'if the court become insolvent, there is no real alternative to
considered that on the material before it the only the on-demand bond.
realistic inference to be drawn was that of fraud Despite this the Government appear to have
then the seller would have made out a sufficient retained their opposition to the use of on-
case of fraud'. Unfortunately for the seller the demand bonds for performance although they
foreign buyer, an Iraqi state organization, are prepared to use them for advance payments
refused to submit to UK jurisdiction, which the or release of retention money - see the
court held to be reasonable in all the circum- Commentary and forms for use with GCI
stances, and there was therefore no opportunity Works11.
for the seller to inquire into the honesty or other- The law has traditionally acted to protect the
wise of the buyer's belief in the validity of his surety giving the bond against changes in cir-
claim to call the bond. cumstances which could be to his prejudice. For
It is obvious therefore that in the hands of an this reason the bond, whether default or on-
unscrupulous employer, especially if the con- demand, should state in its terms that the surety
tract is subject to the jurisdiction of a territory will not be discharged or released or his liability
whose legal system provides the English con- affected by any alteration, waiver or variation to
tractor with no effective remedy, the use of 'on- the terms of the contract or in the extent or
demand' bonds can be abused. In the UK and nature of the works or any allowance of time
the continent there is the protection that the given by the employer to the contractor.
contractor, if he considered the call on the bond The employer must also be careful when
to be unjustified, could proceed against the making a call on an on-demand bond that he
employer with the expectation of securing the does so strictly in accordance with the terms of
repayment of any sums which he was not liable the bond. If, as would be usual, the bond states
to pay under the terms of the construction con- that any demand is to be accompanied by a
tract, although this could be a lengthy process. statement that the contractor is in default and
At the same time 'on-demand' bonds do that he is due the sum demanded, then he must
have distinct advantages to both the purchaser present these documents with his demand. They
and the bank. The purchaser does not have to may also require to be signed by a director or the
establish loss or breach of contract before he can company secretary and their signature to be
obtain his money. The bank is not involved in verified. These formalities also must be
any disputes as between the contractor and the observed. Although the bank will not go behind
employer. The bank is only concerned with these documents they will insist on strict com-
STANDARD TERMS OF CONTRACT: II I[
pliance with the terms of the bond as they would 4 If the guarantee is held to be a contract of
with a letter of credit. indemnity, then the guarantor can insist on
Is there anything which the contractor can his liability being proved against him and
do if he feels that the call is unfair?As regards the would not be bound even by a decision of
bank he will not obtain an injunction on these an arbitration tribunal as between the em-
grounds since the on-demand bond and the ployer and the subsidiary (Alfred Mullpine
construction contract are treated as quite sepa- Construction Ltd v Unex Corporation Ltd
rate. Could he, however, stop the employer mak- 1994) unless there are very express words to
ing the call? The answer seems to be that it may the contraryin the guarantee. If, therefore, the
be possible for the contractor to obtain an guarantee is not to be on first demand then
injunction restraining the employer if the con- such express words making a decision of an
tractor has a strongly arguable case that the call arbitration tribunal or the court as between
is fraudulent pending the outcome of the case the subsidiary and the employer binding on
for fraud (Themehelp Ltd v West and Others the guarantor need to be included.
[I99514AllER215). 5 Restrictions on the guarantor's liability in
If, of course, payment is made against a terms of time or amount should be avoided.
demand accompanied by a certificate that the
amount is due because of the contractor's POSSESSION OF SITE
default and the contractor is not liable under the The contractor must obviously be given posses-
terms of the contract, then the contractor would sion of the site to enable him to perform his
have a right of action to recover the money contract; indeed this term is implied by law. But
wrongly paid (Ens v Dement October 1998). such possession is not normally exclusive. The
employer will want access; so may other contrac-
PARENT COMPANY GUARANTEE tors. If, however, there are any serious restrictions
Where the contractor is a subsidiary of a larger on the availability of the site or the operations of
firm or of a group it is essential in the purchaser's several contractors have to be dovetailed together
interests that he obtains a guarantee from the in a limited space, this should be set out expressly
parent company of the performance by the sub- in the invitation to tender. This applies PC--
sidiary of its obligations. The subsidiary is ticularly to contracts for repairs or extensions
unlikely itself to own any assets and in the existing buildings which must continue in u
absence of such a guarantee the parent would while the work is being carried out.
not be liable for the subsidiary's default. The This latter point is significant in avoiding
guarantee should be unlimited in amount and claims since in the absence of any specific pro-
should require the parent to perform or have visions in the contract to the contrary it will be
performed the subsidiary's obligations. There held that there is an implied term in any con-
are, however, several points which need watch- struction contract that the contractor will be
ingin relation to such guarantees: given sufficient, uninterrupted and exclusive
possession of the site as will enable him to carry
1 Ensure that the parent is really the owner of out his work unimpeded and in the manner of
the assets. Some apparent parents are in his choice. A general clause providing that no
reality only intermediaries in the chain. implied obligations were to be included in the
2 Make sure the parent is resident in the UK or, contract would not be sufficient (see The Queen
if it is not, get local legal advice as to your in Right of Canada v Walter Cabott Construction
powers to enforce the guarantee. Co. [1975121BLR 42).
3 Unless the guarantee is on-demand remem-
ber that the guarantor will have the same STATUTORY AND OTHER REGULATIONS
rights of defence, set-off or counter-claim as The contract should be carried out in compli-
the subsidiary. If possible the guarantee ance with the laws and regulations applicable to
should be on-demand and not on default. the works. If these restrict the methods of work-
108 TERMS AND CoNDlTloNs OF C O N T R A C T
ing or the use of certain materials, or prescribe (3) For the purpose of the above sub-clauses the term
the way in which plant has to be designed, then 'legislation' shall be construed in its widest sense
they are all factors the contractor must take into and Shall include any enactment or decree or any
account in pricing his tender. It is his duty to do form of s u b s i d i ~regulation or legislation duly
enacted by a competent authority.
this irrespective of whether the employer has
expressly drawn his attention to these require-
A further point which arises is in relation to
ments or not, provided:
codes of practice or recommendations of such
1 The regulations are not purely internal safety bodies as the CCI'IT in the international
rules of the employer of which the contractor telecommunicationsindustry. It is essential that
was unaware. the contractor's tender and the contract are tied
2 Where the regulation is only broken by the use to such codes of practice or recommendations
of the item in a particular manner or place, if so far as they have been published at the date of
the contractor was either expressly or by his tender. They should therefore be unambigu-
implication made aware of the use to which ously identified in the contract documents. If
the item was to be put. this is not done then the employer may seek to
What, however, if the regulations are changed argue that it is the latest codes or recommenda-
part way through the contract? Obviously the tions in force at the time of completion which
contractor must still comply, but if doing so should apply. This is not theoretical; the author
costs him extra money he ought to be entitled to has personal experience of such a claim being
recover these costs from the employer (see, for advanced.
example, ME11, clause 6.1).
Although when operating overseas the con- SUFFICIENCY OF TENDER
tractor must again comply with all local laws, It is usual to include in the contract conditions a
statutory instruments and regulations as they provision that in tendering the contractor has
affect the carrying out of the contract, it is essen- taken all risks and eventualities into account
tial for him to include specific provisions which which may affect his tender price, so that he can-
entitle him to additional costs should these be not afterwards put forward a claim based on lack
changed during the course of the contract, for of knowledge as regards the site, conditions
example an increase in national insurance under which the work is to be carried out, and so
charges or the requirement that charges of this on (see, for instance, clause 11(2)of the ICE con-
type be applied to ex-patriate as well as local ditions). Particularly, however, with civil engi-
employees.An example of such a clause is set out neering work, it would be unreasonable to make
below. this an absolute obligation, since one can never
rule out the possibility that the information
If after the date of Tender any of the events listed in
available at tender stage may give the wrong pic-
sub-clause (2) below shall occur and such event results
in an increase or decrease in the cost to the contractor ture of the conditions which will be encountered
or any sub-contractor to the contractor of the carrying - for example boreholes which happen to miss
out of the Works, then the amount of such increase or large boulders in otherwise soft ground. Indeed
decrease shall be added to or deducted from the con- in clause ll(2) it is stated that the contractor
tract price. shall be deemed to have satisfied himself 'so far
as is practicable and reasonable'.
(2) The events referred to in sub-clause (2)above are: Normally, therefore, the contract also pro-
(a) the introduction of any new ........[insert
vides that if the contractor encounters physical
name of the territory]legislation
conditions or artificial obstructions which could
(b) the amendment of any existing........legisla-
tion not reasonably have been foreseen by an experi-
(c) any change by the appropriate .............. enced contractor, then the contractor is entitled
authorities in their interpretation of any exist- to the reasonableadditionalcosts of dealing with
ing.................legislation these conditions (see clause 12(6) of the ICE
STANDARD T ERM S OF CO N T RACT : II 109
conditions). This particular clause has been the SUSPENSION

subject of frequent and costly disputes between If circumstances require it, the purchaser, or the
the parties. In practical terms tendering periods engineer on his behalf, must have the power to
do not allow the contractor any opportunity to order the suspension of the works. The contrac-
do other than inspect the surface of the site and tor should, however, have the right to claim from
examine the data provided by the employer. If the purchaserfor the additional costs which he is
this is inadequate, as is frequently the case, caused by the suspension (as to what these are
claims by the contractor under clause 12 are see Chapter 21, p. 191). This right is provided for
almost bound to arise. Since, if such a claim suc- under MFll conditions (see clause 25) but the
ceeds, the contractor is paid the reasonablecosts equivalent provision in ICE conditions, clause
which he incurs in overcomingthe problem plus 40, does contain rather curious limitations as to
an allowance for profit, it is not surprising that weather and the safety of the works which seem
contractors frequently view this clause as pro- difficult to justify.
viding a means of increasing their margin on the
contract. VARIATIONS
One solution to this problem would appear See Chapter 21.
to be for the employer to carry out a much more
detailed site and sub-soil investigation pre- TERMINATION
tender, for this information to be made fully There are three possible situations in which
available to the tenderers, for the tenderers to be termination of the contract can occur: major
required to take the risk of ground conditions default by the employer, major default by the
and to be allowed to price this risk into the con- contractor or frustration of the contract.
tract price. This would only seem to be feasible, Since there is often considerable doubt at law
however, if the contract were on a design and as to whether or not a breach of contract is suf-
construct basis. ficiently serious to justify the injured party in
A modification to this would be to require the determining the contract as opposed to the
tenderers to undertake the ground investigation usual remedy in damages, it is normal to include
themselves and to be allowed to employ a single in the contract conditions a specific right for
consultant for this purpose on a 'pooled' basis. either the contractor or the employer to ter-
This approach has been used by the Scottish minate for certain specified breaches if these are
Office Roads Directorate - see para. 6.1 of the not remedied within a stated period of notice.
Latham Report, HMSO, July1994. From the contractor's viewpoint this remedy is
Apart from this, however, if the contractor of the greatest importance if the employer fails to
considers that there are any special risks pay and it is strange that the ICE conditions do
attached to the job which he cannot evaluate or not give the contractor an express right to ter-
are too great for him to accept, then he must minate on these grounds. The extent of the con-
make clear in his tender the basis on which he is tractor's rights to terminate as a matter of law for
putting forward his offer. Thus weather may be a non-payment by the employer are uncertain.
particular hazard in the locality of the works, the Such a right depends on the breach by the
stability of the rate of exchange of the currency in employer amounting to a repudiation of the
which payment is to be made may be doubtful, contract so entitling the contractor to decline to
or transport to site may be totally dependent on complete his own unfulfilled obligations. Failure
the availability in time of certain facilities. There to pay against one interim certificate would
needs to be in the tender, preferably in or refer- almost certainly not be sufficient to amount to
ring to the schedule of prices, a clear statement repudiation, unless it was accompanied by other
as to the assumptions on which the tender price evidence which showed that the employer did
is based, so that these can be taken into account not intend to make any further payments. The
by the purchaser at the tender appraisal stage contractor's rights in this respect are properly
and subsequent disputes avoided. covered in MFI1, clause 51.1, GCIWorksll,
clause 58 and in both the FIDIC conditions for contractor's organization may be, they will virtu-
electrical and mechanical works (clause 46.1) ally never have the necessary expertise to recog-
and the civil works (clause 69). However their nize the subtleties of the phrases being used.
exercise in practice is often difficult overseas
where the contractor has large sums of money LAW OF THE CONTRACT
tied up in constructional plant in the territory It is of the utmost importance that the law of the
concerned and staff who may be refused exit contract should be stated in the contract so that
visas. the parties are aware of which legal system will
Although frustration of a contract under the govern their obligations and by which the con-
English legal system is an unlikely event due to tract will be interpreted. When contractors enter
the strict requirements of English law regarding into main contracts with overseas clients this
the fulfilment of contracts, and problems relat- requirement for the express inclusion of the
ing to war so far as UK contracts are concerned proper or governing law of the contract is only
can be treated as largely academic, this is not the rarely omitted. But it can be forgotten with sub-
case overseas. There it is necessary to cover the contracts where both firms are English as hap-
situation in which performance of the contract pened in the case of JMJ Contractors Ltd v
may be rendered either more difficult or eventu- Marples Ridgway [I9851 31 BLR 100. The work,
ally impractical by reason of war, riot or similar which involved land reclamation, was to be per-
events. The relevant clauses in FIDIC are not formed in Iraq and the court decided that (1)
unreasonable except that it is difficult to see the because of the clear understanding between the
justification for requiring the contractor to con- parties that the sub-contract was to be back-to-
tinue with the contract when his personnel may back with the main contract and (2) because the
be exposed to the risk of death or injury from contract had its most substantial connection
enemy action. The observation by Duncan with Iraq as the place of performance, the proper
Wallace in his commentary on the FIDIC form law of the contract was Iraqi. This was so even
that it is unnecessary to give the contractor a although arbitration was to be English.
right to terminate because of the financial pro- Since the Marples Ridgway case was decided
tection afforded to him by the remainder of the the Contracts (Applicable Law) Act 1990 has
clause seems to ignore the practical realities of a been passed to give effect in English law to the
construction site on which there are men, EC Rome Convention. The rule has been
women and children exposed to such risks. It is retained that in general the parties are free to
strongly suggested that the right should be select the law to govern their contract. However,
mutual. in the absence of an express choice the Act states
that the contract is to be governed by the law of
LANGUAGE OF THE CONTRACT the country with which the contract is most
On overseas contracts, or contracts with over- closely connected. This appears at first sight to
seas contractors to be carried out within the UK, be the same test as previously applied by the
it is essential that the language of the contract is English courts, but the Act then goes on to pro-
specified. It may be that the form of agreement vide a series of rebuttable presumptions. The
including all the commercial conditions of con- most important of these is that the law which is
tract are required to be in one language, usually to be applied is that of the country in which the
that of the purchasingcountry, while the techni- party who is to effect the performance character-
cal specifications can be in English. The lan- istic of the contract has his place of business.
guage requirement needs to be established For an engineering or construction contract
before the tender is submitted so that the costs of the party effecting the performance character-
translation can be allowed for and arrangements istic of the contract is the contractor, in the same
made for the services of a competent and experi- way as under a contract for the sale of goods it is
enced local lawyer. However fluent in the local the seller. Although for contracts where the sub-
language - say Spanish - professionalstaff in the ject matter is a right in immovable property the
STANDARD TERMS OF CONTRACT: II 111
presumption is that the contract is most closely tries for guidance when setting up their legal
connected with the country where the property systems. Such systems originally allowed only
is situate, it is clear from the commentary in the a minor role to case law but today, although
Official Journalof the European Communitythat formally still not recognizing the doctrine of
this does not apply to construction contracts, judicial precedent, decisions of the courts are
since then it is the construction which is the of increasing importance in defining the
subject of the contract and not the immovable meaning to be attached to the articles of the
property itself. code. Further, in the French code civil and
Would it have made any difference in the related systems there are detailed statutory
MarplesRidgway case if the Act had been in force provisions dealing with the contractor's
at the time? The Act does allow for the presump- responsibilities for defects in civil and build-
tion stated above not to apply if 'it appears from ing work.
the circumstancesas a whole that the contract is 3 Those which are largely undeveloped as
more closely connected with another country'. regards complex contractual and commercial
The critical factor in the court's judgement had matters but have concentrated on the law of
been the linkage between the main contract, the family, on inheritance and land.
which was under Iraqi law, and the sub-contract.
Given the independence of the judiciary, which
Given the importance attached by the court to
in certain territories would be making a large
this linkage it seems probable that the result
assumption, neither categories 1 nor 2 present
would have been the same, but clearly the pre-
any real problem. The law in category 2 may dif-
sumption under the Act would have strength-
fer from our own but it is available and capable
ened the sub-contractor's case for English law.
of definition so the employment of a skilled local
With a contract involving the performance of
lawyer should enable the contractor at least to
work in an overseas territory it is unlikely that the
understand the liabilities which he is assuming
employer, especially if a government department
and the rights which he will possess. Category 3
or other public body, will agree to any but his own
is, however, wholly different. Not only is the law
law and legal system governing the contract.
difficult to determine but its application in the
Broadly, systems of law outside communist
case of a foreign contractor is likely to be influ-
territories can be divided into three categories:
enced by factors of a non-legal nature. Moreover
since such territories are in general governed in
1 Those which are based on the English com-
an autocratic manner the law can change rapidly
mon law even though this may to a degree
according to the will of the ruler.
have been codified. This is the type of system
If compelled to contract under such a system
found in North America and much of what
the contractor must understand that he has
was once the British Empire.
none of the protection which would normally be
2 Civil law systems based on one or other of the
afforded to him by the legal system of the UK and
great codes originally issued in Western
that he must rely on political influence rather
Europe during the 19th century of which the
than law in order to obtain justice.
most influential has been the Code NapolCon.
Such systems originally allowed only a minor TAXATION
role to the doctrine of judicial precedent,
On contracts to be performed even partially
which forms so important a part of the English
overseas the contractor must be aware of the
common law, although this has changed, and
local laws relating to taxation. Only an outline
generally place a greater emphasis on formal-
can be given here of the problems which may be
ity and the correct following of procedures
encountered and expert taxation advice is neces-
than does English law. They are found in Latin
sary in each case. Points to be consideredare:
America and territories which once formed
part of the French Empire or which turned to 1 How does the liability to local tax arise and is it
France or other continental European coun- possible to construct the contract(s)in such a
TERMS AND CONDITIONS OF CONTRACT
manner that it can be avoided?Liability to tax tor must from the outset set up his operation
may arise simply from having a local project and maintain the appropriate books of
office or employing local sub-contractors and account and so on in conformity with local
if it does then the firm may find that it is taxed practice and employ as his auditor a firm
on the whole of the deemed profits of the con- acceptableto the tax office.
tract and not just those relating to the opera- 6 Is tax payable on actual profits earned or on
tions performed in the country concerned. It deemed profits and if so how are the latter cal-
may be possible to minimize this problem by culated? Can charges made by the UK com-
having two separate contracts, one off-shore pany to its local offspring, say for technical
and one on-shore, so that local tax only services, be set against local tax? Many coun-
applies to the on-shore work the value of tries have now become wise to this and any
which is kept to a minimum. Alternatively if allowance for such charges is often minimal.
the contractor already operates a local com- 7 Is it possible to obtain tax exemption for the
pany they may be used to place local sub-con- contract on the basis that it is being carried
tracts for local work and no project office of out for the government?The contractor needs
the parent companyis established. to be very careful about accepting any
2 Is it better to establish for a large project a promises as to tax exemption. Often the min-
branch of the UK company or set up a local istry or authority concerned has no right to
company?The advantage of the latter is that it grant such exemption although it will be
may be possible to set up the shareholding in tempted to say that it has in order to obtain a
such a way as to take advantage of favourable lower price. The contractor will then later dis-
taxation agreements between the local coun- cover that the finance ministry will claim the
try and another country other than the UK. tax they consider due and refuse to take note
3 Is there a double taxation agreement between ofwhat is written in the contract. Nor is it wise
the UK and the local country and if so what to rely on an indemnity from the purchasing
are its terms? ministry or authority against the tax due since
4 Are there any local taxation incentives for when the time comes to pay they are unlikely
participating in particular forms of activity or to have the funds.
in particular locations? There are only two safe ways of dealing
5 Is the remittance of funds back to the UK, in with this problem. One is to obtain a tax
particular the final retention money, subject exemption certificate from the finance min-
to having received a tax clearance certificate istry. The other is to include an allowance for
from the local country? This can be a major the tax in the contract price as a provisional
source of delay in the receipt of cash in a sum with an undertaking to repay any bal-
usable form. If this is the law then the contrac- ance.
CHAPTER THIRTEEN
Contract price
There are broadly three ways in which the con- mum the amount of administrative work
tract price may be expressed or calculated: involved after the contract has been let.
Under a pure lump sum contract the con-
@ lump sum
tractor will not be entitled to any additional
schedule of rates or bill of approximate quan-
payment if work indispensably necessary to
tities
complete the contract is omitted from the speci-
cost reimbursement.
fication. Further in cases largely decided in the
These different ways are not necessarily mutu- last century it was held on a number of occasions
ally exclusive. Thus the above-ground element that under such a contract the contractor was
of a building contract may be on a lump sum not entitled to additional payment if additional
basis whilst the foundations are subject to expense was incurred in order to fulfil the con-
remeasurement; the supply portion of a plant tract because of errors in the plans, specifica-
contract may be a lump sum, whilst the instal- tions or information provided by the employer at
lation of the plant is on cost reimbursement; time of tender. However the validity of such
a contract for a complex chemical plant may decisions today must be doubtful in the light of
be on cost reimbursement but with the over- cases such as Hedley Byrne v Heller and Partners
heads and profit margin compounded as a lump [I9631 2 All ER and others on the liability of
sum. employers for negligence in the provision of
The choice of which way to ask the contrac- information and the Misrepresentation Act 1967
tor to price the work will depend very largely on as discussed in Chapter 3.
the amount of information regarding the job, The benefits referred to above will accord-
and the conditions under which it will be carried ingly only be obtained if it has been possible for
out, which the buyer can provide to the contrac- the employer to provide the tenderers with
tor in the time available for tendering. appropriate and accurate information on which
to base their tenders and as regards other in-
formation which the tenderers must obtain for
LUMP SUM
themselves if it has been possible for them to
The nature of a lump sum contract has come obtain it in the time available.
before the courts a number of times on the issue Further it is essential in a lump sum form of
as to whether or not entire performance of the contract for the employer already to have made
contract was a condition precedent to payment. up his mind what he wants and for subsequent
In general, the courts have leaned towards the variations to be minimal since the contract itself
construction that, provided the contract has may provide no mechanism for the pricing of
been substantially performed, even if imper- variations- see further Chapter 21.
fectly, then the contractor will be entitled to pay- A checklist of the general questions to which
ment of the contract price less an amount for the a tenderer requires answers when bidding has
remedying of defects (Hoenig v Isaacs in the already been given (see pp. 5113). In order to be
Court ofAppeal [I9521 2 All ER 176). able to tender on a lump sum basis the estimator
From the purchaser's point of view the firm must have answers to the following either from
lump sum is ideal. It establishes the amount of the employer or his own company:
his commitment in advance, it provides the
maximum incentive to the contractor to com- 1 Assuming the contractor is responsible for
plete the work on time, and it reduces to a mini- design:
114 TERM S AND CONDITIONS OF CO N TRA CT
design standards and codes of practice to fresh water, general local facilities, supply of
which the works are to be designed clean aggregates.
design life of critical items 13 Local material availability, for example
performance of which the works are to be cement in proper condition and in the right
capable related to the designated input quantities to meet programme, port offload-
materials ing and transport facilities including any
capacity of the works heavy load restrictions on roads or bridges.
effluents with permitted discharges 14 General local amenities and workshop facili-
batterylimits ties.
guarantees and tests including test 15 Safety rules and statutory requirements.
methodology, supply of test equipment, 16 Project management and quality control
operating and maintenance responsibili- procedures.
ties
requirements for manuals, as-built draw- This is a formidable list. It confirms the need for
ings, supply of spares and training the purchaser to be able to give complete and
procedures and responsibilities for start- accurate information before a firm lump sum
up of the plant. price can be tendered. It also indicates the time
2 Material quantities and specifications.These and cost in which the contractor is involved in
may be in the form of drawings from which lump sum tendering. What must be remem-
the estimator can himself take off quantities. bered is that every time a tenderer guesses, he
3 Tolerances permitted and any special fin- may guess wrong, and every wrong guess costs
ishes required. someone money. Moreover that someone, if the
4 Labour hours and trades both for shop pro- tenderer is to stay in business, can in the long
duction and on site. This means that run only be the employer whether on that par-
decisions on methods of production/con- ticular contract or another.
struction affecting labour quantities and Just as the contractor's problem on lump
skills must have been made. sum tendering is to assess the risks involved, so
5 Description and quantities of bought-out the employer's problem is the time which it will
items. This requires decisions to have been take him to give the information necessary to
taken on, for example, sizes, capacities and reduce those risks to reasonable proportions.
horsepowers. Some element of risk there will always be; that is
6 Types of production or constructional plant in the very nature of contractingitself.
which will be utilized both in the shops and Although today, even with building and civil
on site, and the times or periods involved. works, there is a move towards only writing per-
7 Where design is significant, and is not formance-based specifications, so leaving at
included as an overhead, the amount of least the detailed design with the contractor, the
design work involved. employer must be able to specify his require-
8 The site organization which will be needed ments and the standards to which he requires
and for what period. the works to be constructed. He must also for
9 Overtime to be worked in shops and on site. any civil or building work be able to specify with
10 Time when the work is to be camed out. a reasonable degree of accuracy the ground and
11 Factors which will affect labour productivity sub-soil conditions. This takes time, especially
on site - climatic conditions, religious holi- with major civil works, and even when the inves-
days, nationality of labour to be employed. tigatory work has been done carefully there will
12 Geographical and climatic factors as they still remain the real possibility of meeting
affect civil, building or mechanical and elec- unforeseen conditions. For this type of work
trical site work. These would include rainfall, then lump sum prices are often just not prac-
presence of corrosive salts liable to attack ticable; they would be a total gamble.
steelwork, humidity, dust, availability of It is not necessary that there should be a
CON TRACT PRI CE 115
single lump sum price for the whole contract. vided in the 5th edition of the ICE conditionsand
The NEC has an option for a lump sum contract the provision retained in the 6th and 7th editions
where there is a series of lump sums for each that the contractor is entitled to an adjustment
activity or group of activities identified in the of the rate if there is a change in quantities which
activity schedule. As examples they suggest that make the rate 'unreasonable or inapplicable',
for a building contract the activities could be and there is no minimum percentage change
grouped under headings such as site prepara- required. In Mitsui Construction Co. Ltd v
tion, excavation, piling, structural frame by Attorney General of Hong Kong [I9861 10 CON
floors, cladding, roof, finishes. For plant con- LR 1, it was decided by the Privy Council, on
tracts the activity schedule could comprise wordingsimilar to that of clause 56(2),that it was
acceptance of design, stages in shop assembly, immaterial whether the change in quantities
delivery to site, completion of installation, arose from a variation order or not. All that was
acceptance of tests on completionand so on. necessary to give the engineer a discretion to
agree or fix new rates was that there was a
sufficient discrepancy between the billed and
SCHEDULE OF RATES OR BILL OF
measured quantities which on the facts of that
APPROXIMATE QUANTITIES
dispute was demonstrably the case. It also held
For civil engineering work therefore the method that the sufficiency of tender clause, which was
of pricing normally adopted is that of a bill of in similar wording to the ICE clause, did not put
quantities and remeasurement. A bill of quanti- the risk of adverse ground conditions on the
ties is prepared by the employer and details each contractor, so as to prevent the engineer from
of the items of work which it is considered may exercising his powers under the equivalent of
be required,for example excavation, concreting, ICE clause 56(2).
brickwork and so on and an estimated quantity In pricing a contract in this way a contractor
is put against each. The firms then price the bills has to estimate the quantity and cost of the
and the successful contractor is paid for the labour, materials and plant which will be
quantity of work as measured irrespective of the required to execute the given quantity of work.
quantity shown against the item in the bill. For Since the major elements are labour and plant,
this reason there is no tender sum. The contrac- the assessment of productivity is a vital part of
tor undertakes to carry out the works specified in the estimating process. This in turn is closely
the specification, conditions of contract, draw- related to the physical conditions under which
ings and bills of quantity for such sum as may be the work will be carried out - for example the
ascertained in accordancewith the conditions of time of year - and to the possibility of carrying
contract. out the work in a planned way with a reasonable
This method must be distinguished from that degree of continuity - for example drawings
used in the standard form of building contract arriving on site well in advance of the com-
where they may also be bills of quantity. But mencement of construction of the work to which
these bills, with the exception of any items they relate. The importance of these points will
marked approximate, are an accurate represen- be referred to again when discussing variations
tation of the work to be performed. The contract and claims.
is therefore a lump sum with the bills only used As regards specialist sub-contractors' work,
for the measurement of approximate items and these items are made the subject of prime cost or
for variations. There is no remeasurement of the provisional sums. An amount is included by the
whole works. The problem has however always employer in the bill which represents his best
existed in civil engineering contracts of where estimate of the cost of the item. When the sub-
the change in the quantity from the estimated to contract is placed (after the main contract has
the actual is such that it affects the contractor's been let) that sum is deleted and replaced by the
method of working, for example a change to amount of the sub-contract. When tendering
machine from hand work. It was expressly pro- himself, the main contractor is only required to
116 TERM S AND C O N D I T ~ O NO~F C O N T R A C T
tender the margin he wants for handlingthe sub- ties, against which the work can be re-
contractor, usually expressed as a percentage measured.
plus any sum he wants for attendance on 3 The recording of the actual costs incurred and
the sub-contractor, like providing scaffolding, their comparison with the final target cost.
storage, and so on. This is the original target cost adjusted to take
account of authorized variations.
4 The sharing between employer and con-
COST REIMBURSEMENT tractor of the difference between 2 and 3.
With many industrial projects today, speed in 5 The payment of a lump sum in addition to
getting work carried out is regarded as more costs which will cover at least the contractor's
vital than lowest initial capital cost. Moreover, head office overheads and profit. Additionally
apparent cost advantages at tenderingstage may there could be included other items such as
be lost by the time final settlement is reached on design charges, procurement charges and
the payment of claims. On the other hand, even site project management if there was
simple cost reimbursement provides no incen- sufficient information available for these to be
tive to the contractor to minimize costs, nor any estimated on a lump sum basis.
penalty should he fail. Indeed the reverse is true.
Most contractors in fact dislike straight cost plus How the final contract price is arrived at under
because of the inefficiencies which it may breed the conventional, and the target or incentive
within their own company. Costs can so easily be form of contract, can best be illustrated by
charged to cost-plus jobs if no other home can Figure 13.1.
be found for them! Two points need particular attention at the
Various types of incentive, target cost or co- negotiating stage. First, the division between the
operative forms of contract have been devised, employer and contractor of the difference
therefore, as a means of combiningthe flexibility between the target cost and the actual cost
and speed associated with cost reimbursement which may be either a saving or an over-run. In
with a strong measure of cost discipline and an its simplest form there is a single percentage split
incentive to efficiencyand economy. for the over-run and another for the savings.
All these forms of contract have certain Alternativelythe percentages can be adjusted on
features in common: a scale according to the amounts above or below
target. Preferably with this latter scheme the
1 The principle of design and construction in contractor should be required to accept 100 per
parallel as opposed to in series. cent of the cost over-run above a certain limit,
2 The early establishment of a target estimate but this will only be feasible if the contractor can
either as a definite sum or on civil or building make a reasonable assessment of the risks
work as rates in an approximate bill of quanti- involved. Cost and time for completion can also
Conventional +Variations + Chains

contract Tender price authorized allowed
Final contract =
+ Management Savings
Target cost (after adjustment fee - x % of (final
contract for variations and target cost -
claims) actual cost)
Figure 13.1 How the final contract price is arrived at

C O N T R A C T PRI CE 117
be integrated as described on p. 134. This ceiling DESIGN

may be the target itself or more likely the target This is usually paid for on a man-time basis, the
plus a certain margin, the extent of which will unit of time - hour, day, week, month, or even
reflect the unknowns inherent in the contract. year - being selected to suit the individual con-
Second, in the assessment of the target cost it is tract. Rather than be concerned with the actual
essential that the target should be built up from salary of the individual draughtsman or engineer,
the component elements of labour materials, it is often convenient to establish an average
plant and so on, which the contractor can be salary for a particular grade. The following points
expected to use on the job, and has regard to the need watching when considering these rates:
construction or manufacturing methods which
it is anticipated that the contractor will adopt. It 1 In respect of which classes of staff are they
is not just a question of selecting 'average' com- payable?This may be only actual engineers or
petitive rates, but of seeing that they are tailored draughtsmen or may extend through bills of
to the job in question and reflect its particular material clerks to clerks, typists, and the like.
circumstances. The target must, however, con- Obviously this alters substantially the
tain a contingency margin which is sufficient to allowance for overheads; the smaller the
ensure that, provided the contractor uses proper chargeable base the higher the overhead.
efficiency, the target remains at all times credi- 2 Are the overheads included in the rates, the
ble to beat. The aim should be to set a target whole of the company's overheads, or only
which ought to be beaten by a low margin, say 10 those related to design?Practice differs on this
per cent. according to whether the firm's normal sell-
Target cost contracts are notoriously difficult ing unit is design time or not. If it is, then nor-
and expensive to manage and administer. mally all overheads (other than possibly those
Variations are bound to occur and so are the relating purely to construction or procure-
arguments as to whether something is a change ment) will be charged against design.
or not. Each variation will mean negotiating a 3 The above two points have a tremendous
change to the target and possibly the manage- effect on the overhead as a percentage. The
ment fee. Costs must be recorded and audited swing can be as much as from 75 to 300 per
and deductions made for re-work which is due cent.
to the contractor's default. With the emphasis 4 Do the rates include:
placed on speed it is only too easy for the a overtime
administration and control to suffer so that the travellingand subsistence
commercial side lags far behind the execution of telex, cables and telephone calls
the works. If this happens the whole benefit of a printing and reproduction costs
the target cost mechanism as providing an
or are these chargeable at net cost?
incentive will be lost and claims will be
5 Do the same rates apply to sub-contract
inevitable.
design?
In certain instances it may be preferable,
rather than using a target cost form of contract, Obviously from the employer's point of view the
to negotiate a basis for cost reimbursement with more elements which can be properly made the
the intention that this should apply until the subject of lump sums the better; particularly if
point is reached in the definition of the project at the job is going out to competition. It is
which it is possible to negotiate a lump sum extremely difficult to compare either percent-
price. A suggested way in which the various ele- ages or hourly rates; percentages because these
ments of the contract price should be dealt with have no validity by themselves but only when
in establishingthe basis on which costs are to be related to a base, and it cannot be assumed that
recovered is set out below. The comments made the base will be the same for all firms; hourly
may also be appropriate to the negotiation of rates because these have no validity unless one is
target cost contracts. in a position to assess the real value to be placed
on the work which will be turned out in an hour, 3 Office running costs including provision for
and quite simply one is not. computers.
Thus firm A may offer design at £27.50 an 4 General site transport.
hour, firm Bat £29.50 an hour. But by themselves 5 Consumables.
these figures mean nothing. Firm A may take 6 Canteen.
50000 man-hours and produce a design which
costs E l 250 000 to build. Firm B may take only ERECTION LABOUR
35 000 man-hours and their scheme results in a Charges for erection labour on a per hour basis
final price of £1150 000. The same sort of reason- will normallyinclude:
ing applies to labour rates for construction or
erection work. 1 Wages and allowance - for example subsis-
tence and radius allowance, condition
PROCUREMENT money, and so on.
This is usually paid for as a percentage of the 2 Bonus.
value of materials purchased after deduction of 3 National insurance, holiday with pay, redun-
trade but not cash discounts. It includes pur- dancy fund payment, and so on.
chasing, expediting and inspection. Again one 4 Common law insurance.
needs to check that travel and subsistence, 5 Hand tools.
which may be high, are included. Care needs to be taken in dealing with the non-
productive element of overtime. This will affect
MATERIALS
only a small proportion of the overhead charges
Net price after deduction of trade but not cash related to wages.
discounts. The total value of discounts can be
very substantial, particularly on items such as CONSTRUCTIONAL PLANT
motors, valves, pipework, and so on and should There will normally be a schedule of weekly hire
not be regarded as the estimator's contingency. rates. The following points need covering:
SITE SUPERVISION 1 Do the rates include any element of profit?
This may be negotiated as a lump sum, or a 2 Are they tied to a number of hours?
weekly rate. It will include: 3 Do they include charges for driver?
4 Do they include fuel, lubricants, spares, main-
1 Salaries and allowances for staff which will tenance?There is a danger of paying twice.
include: 5 Do they include charges for transport to and
salary from site?These are often too heavy.
site allowance 6 Where the plant belongs to the contractor,
national insurance what allowance has been made for de-
pension contribution preciation and what residual value has been
company car (where this is provided) assumed?
medical insurance
employer's liability insurance
CITB levy (whereapplicable)
MANAGEMENT OVERHEADS AND
expenses (for senior staff)
PROFIT
periodic fares.
Again it is normal, rather than dealing in indi- Preferably a lump sum which can be made the
vidual salaries, for rates to be established for subject of competitive tender. Sometimes,
various categories of staff expected to be depending on the information available, it may
employed. be possible to include in this lump sum the
2 Offices and stores either on a rental or build design element and even perhaps the site super-
basis. vision, leaving only the direct materials,sub-con-
CONTRACT PRICE
tract and labour costs to be either reimbursable and Others v Miles and Another, The Times 27
or negotiated during the contract period. January 1992). Price in a constructionalcontract
is so essential that in order for a contract to exist
there must either be a price agreed or there must
PRICE TO BE AGREED
be an agreed method of ascertaining it otherwise
Each of the methods of pricing referred to above than by negotiation between the parties. In
has the merit that, although the final price may order to overcome this difficulty it is suggested
not be established when the contract is let, at that a letter of intent along the lines of that sug-
least the mechanics for doing so and the prin- gested on p. 78 should be issued together with
ciples to be followed have been settled. the programme for the negotiations for the com-
There are, however, occasions on which the pletion of the contract.
contracts officer finds himself urged, in order As an alternative, if the parties are willing to
that work can get started, to place the order or agree then following a suggestion made by Lord
contract simply on the basis of 'price to be Denning when giving judgement in the above
agreed'. case, a third party, say an independent quantity
The problem with this type of arrangement is surveyor, could be given authority within a fixed
that there cannot be a 'contract to agree' any- period when it was considered that sufficient
more than there can be a 'contract to negotiate' data would become available, to settle prices
(Courtney & Fairbairn Ltd v Talaini Brothers which he considered were fair and reasonable,
(Hotels) Ltd [I9751 2 BLR 97, now confirmed by perhaps with specific instruction on the level to
the decision of the House of Lords in Walford be allowed for profit.
CHAPTER FOURTEEN
Terms of payment
POLICY CONSIDERATIONS ject is earning money, and make the payments
wholly out of revenue. With very large contracts
Terms of payment are a matter on which the of this type overseas, particularly in the under-
commercialltechnicaland financial sides of the developed countries, buying on credit in this
employer's business may find themselves way is not a matter of choice but of necessity.
pulling in opposite directions. The employer The authorities or companies concerned are not
may attain the best commercial and technical in a position to do anything else. As usual, how-
result if he offers to the tenderers terms of pay- ever, the price which a customer pays for credit
ment which, while providing the employer with is high. Even with preferentially low interest
reasonable contractual safeguards, impose the rates for exports the cost to the purchaser of the
minimum strain on the contractor's financial financing charges on a long-term credit contract
resources. By so doing the employer will: may easily amount to a third of the 'cash' selling
price.
1 Avoid having to restrict the tender list to large
The statutory provisions of the Construction
firms possessing the resources to finance the
Act must now be taken into account when con-
contract, whose overheads and prices will be
sidering payment terms for construction con-
higher than those of smaller companies. (This
tracts as defined in the Act. These provisions
assumes of course that such smaller com-
cover:
panies are otherwise technically and com-
merciallycompetent to carry out the work.) the fact that the contract should provide an
2 Ensure that the tenderers do not have to adequate mechanism for determining what
inflate their tender prices by financing payments become due under the contract
charges. In many instances the rate of interest the right to payment by instalments or stages
which the contractor has to pay when borrow- or other periodic payments unless the con-
ing will be higher than that paid by the tract duration is less than 45 days
employer. the requirement for the contract to state for
3 Give encouragement to, and be able to take each payment a final date by which the pay-
advantage of, firms possessing technical ment is to be made
initiative who would otherwise be held back that the contract should provide for the giving
from expanding by lack of liquid cash. of notice by a party within five days of the due
4 Minimize the risk of being saddled with a con- payment date of a notice specifying the
tractor who has insufficient cash with which amount of the payment to be made and the
to carry out the contract and of having, there- basis of its calculation
fore, either to support the contractor finan- a statutory bar on the withholding of pay-
cially or terminate the contract. ments due after the final date for payment
unless an effective notice of intention to with-
On the other hand, to offer such terms means hold such payment has been given
that the employer has to finance the work in a statutory right for a person who has not paid
progress and tie up his own capital in advance of in full by the final date for payment, and to
obtaining any return on his investment. whom no effective notice to withhold pay-
Particularly with a project such as a new factory ment has been given, to suspend perform-
or power plant, it would impose the least strain ance of his obligations under the contract
on the employer's financial resources if he could that provisions making payment conditional
avoid having to pay anything at all until the pro- on the payer receiving funds from a third
TERMS OF PAYMENT 121
party are ineffective unless that third person is main contractor, that which is undertaken by
insolvent. domestic sub-contractors and that which is per-
formed by nominated sub-contractors. Today in
In addition to the rights provided for by the most larger contracts there is little if any work
Construction Act there may also now be the actually performed by the main contractor uti-
statutory right to be paid interest on late pay- lizing his own labour. The functions performed
ments under the Late Payment of Commercial by the main contractor are limited to design of
Debt (Interest)Act 1998. the temporary works, provision of perhaps
In general the provisions have been properly certain site facilities and the planning, co-ordi-
incorporated into standard conditions of con- nation, management, supervision and admini-
tract for construction contracts, as defined by stration of the contract, with the work being
the Act, as between employers and main con- carried out by domestic sub-contractorsand to a
tractors. Perhaps not surprisingly, given the lesser extent by nominated sub-contractors.
nature of the construction industry, it would Even constructionalplant will normally be hired.
appear that main contractors have sought to As a result the main contractor is in a
dilute the impact of the statutory clauses when position markedly to improve his cash flow by
preparing their own sub-contracts. The period delaying payments to his sub-contractors. In
between the due date and the final date for pay- times of recession and intense competition with
ment has been extended to the point at which low, if any, profit margins built into the tender
the provision almost becomes ineffective, some- price, conditions which at the time of writing
times over 40 days. Attempts have been made to have prevailed for some time in the industry, the
get around the elimination of 'pay-when-paid' main contractor has often had to depend on
clauses by making the condition for payment the interest earned from delayed payments to sub-
issue of a certificate. This is obviously against contractors, together with claims, for making a
the spirit or intent of the Act if not of its strict profit. For many firms the temptation to delay
interpretation. Perhaps adjudicators will decide payments in this way has been irresistible.
that it does not conform to the requirement of Of course one of the intentions of the
the Act that there should be an adequate mech- Construction Act was to improve the position of
anism for payment since, as has been pointed sub-contractors as regards payments being
out, main contractor's certificates do not iden- made on time. Unfortunately the Act while it
tify the amount due to a domestic sub-contrac- makes some improvements does not go far
tor (see article by Rudy Klein in Construction enough in this direction. Perhaps this is some-
Law,vol. 10, no. 2, March 1999). In the same arti- thing which cannot be achieved by legislation
cle Klein also mentions attempts to restrict the and which must be left to the parties but clearly
sub-contractors' right to suspend by extending the conditions of contract could help. It is inter-
the seven-day period for notice to be given to the esting that the Government's own conditions
party in default. Again the question arises as to GC/Worksll do make three provisions which
the legality of this action. could be helpful in this direction.
On civil engineering and building contracts First, in clause l(1) the main contractor is
carried out in the UK either under the ICE or JCT required to deal fairly, in good faith and mutual
forms or some major customer's adaptation of co-operation with all his sub-contractors and
these, the contractor is paid monthly for the suppliers. Second, in l(2) the project team which
value of work done and materials delivered to is to meet regularly under the project manager is
site for incorporation into the permanent works to include the major sub-contractors and sup-
in the preceding month, less a percentage for pliers so giving them the opportunity to raise
retention money. The relationship of the main problems. Third, clause 48(4)Paymentallows the
contractor's cash expended to payment received project manager to require the main contractor
will be determined largely by the relationship before the payment is made to him of any
between the work which is carried out by the interim or final payment to demonstrate that he
TERMS AND CONDITIONS OF CONTRACT
has paid any amount due to a sub-contractor or margin. Because material suppliers usually
supplier covered by a previous payment. require payment within limited credit terms
Interestingly this is one of the recommendations and specialist firms at least are in a position to
made by the CIPS assessor to the review by Sir enforce these, this forces specialist sub-con-
Michael Latham of the procurement and contractors to finance their work.
tractual arrangements within the construction 4 It is time-consuming and expensive and a
industry. source of much conflict between the parties
The Construction Act does not help the sub- because of the subjectivityof the assessments
contractor here as regards the timing and made as to the percentage complete of the
amounts of the payments since these are left to items of work involved.
be settled between the parties. If, however, the 5 If the main contractor goes into liquidation
main contractor delays payment he may then during the course of the contract, the
become liable to pay interest under the Late employer having effectively paid out money
Payment of Commercial Debt (Interest) Act. in advance against completion is unlikely to
Currently the Act only applies as between be able to recover the additional costs he
small companies (those employing less than 50 incurs in having the work completed, unless
people) and large companies (those employing he has the security of an adequate on-
more than 50 people) and public authorities demand performance bond.
although it will be extended ultimately to all
businesses. The statutory rate of interest is 8 per The Latham Report goes so far as to recommend
cent above bank rate but a different rate can be the phasing out of the system of monthly valua-
provided for in the contract provided it gives the tions (recommendation8, para. 5.18).
sub-contractor a 'substantial' remedy. It is not Two alternatives have been suggested to the
thought that a rate much below the statutory system of monthly valuations and both are
rate would be regarded as 'substantial'; probably included in the GCIWorksll so with that form
6 per cent is about the lowest which it would be the purchaser has three options from which to
safe to include. choose: the old measurement system, stage pay-
Considerable dissatisfaction has been ments and milestones.
expressed recently in the construction industry, With stage payments the contractor is
especially by employers, with the traditional required to submit his proposals with his tender.
method of monthly valuation of work done and His proposals must include the percentages
materials delivered to site. This is for the follow- payable not only for the contract period as shown
ing reasons: on the contract programme but also the percent-
ages which would apply if the contract period
1 It offers little incentive to the contractor to were extended. So that, for example, the chart
progress the works or meet interim dates would show for each week the proportion of the
which are of critical importance to the contract price which would be payable for that
employer. period based on the duration of the contract as
2 It largely transfers the burden of financing the per the contract programmeor any revision of the
work from the contractor to the employer and programmeaccepted by the project manager.
so allows for firms to establish themselves as For a civil contract the sum to be taken into
contractors with very little in the way of account would exclude prime cost items, day-
capital and therefore unable to fund expenses work and provisionalsums but would include all
such as training or to meet their commit- work to be carried out by domestic sub-contrac-
ments for defective work. tors; nominated sub-contractors would have
3 The main contractor has an incentive to their own separate tables. The amount so deter-
retain the interim payments made to him in mined, which would again be submitted as part
respect of the work of sub-contractors for as of the tender, would affect the monthly percent-
long as possible in order to improve his profit ages within certain price ranges. So there would
TERM S OF PAYM EN T 123
therefore be a different set of percentages for a milestones which are of particular importance to
£500000 contract than for one for between the employer. The alternative therefore is a chart
£500000 and £2 million. of milestones against the achievement of each of
If the contractor is on programme then the which a specified proportion of the contract
project manager would simply look up the price is payable which should be subject to aIl
applicable figure from the vertical column for a the previous milestones having been achieved. If
contract of that duration. If the contractor was a milestone is not achieved, or a previous mile-
late or early then again the project manager stone has not been met, the payment is simply
would read from the vertical column the per- delayed until achievement.
centage for the appropriate week. If, say, the The stage payment method is probably best
contract was on week 30 but the project manager suited to civil and building contracts where it is
certified a two-week delay he would use the per- often more difficult to identify a sufficiency
centage for week 28. of milestones to provide the contractor with a
If, however, the contractor's original pro- reasonably balanced cash flow. The milestone
gramme showed a 70-week duration but he had method is better for mechanicallelectrical or
now re-programmed to 74 weeks which the pro- process plants where it is easy to identify the
ject manager had accepted, then he would move production of particular drawings, the placing of
horizontallyand use the table for a 74-week con- major orders, the delivery of items to site and
tract. their installation.
Although the payment chart is in weeks the In neither of the two standard forms dealing
payment intervals would remain monthly. with plant contracts are the terms of payment
An abbreviated example of a stage payment specified but they are left to the purchaser to
table is shown in Table 14.1 propose for the particular contract although
some suggestions are made. For mechanical1
Tablel4.l Example of stage payment schedule electrical plant Form MFI1 suggests a 10 per cent
down payment against presentation of a suitable
Contract value less than f500 000 guarantee, monthly payments of 85 per cent of
the value of plant shipped or delivered to site
Weeks 9 10 11 and 85 per cent of the value of work done on site,
1 7.1 6.7 5.8 2%per cent on take over and 2% per cent on the
2 17.7 16.7 14.2 issue of the final certificate at the end of the
3 30.1 27.4 24.8 defects liability period.
4 44.2 42.1 36.7 Since the initial 10 per cent probably rep-
5 59.3 57.2 49.2 resents design costs, this means that the con-
6 77.5 70.1 61.7 tractor, or more likely his sub-contractors,
7 89.6 83.2 73.5 would have to finance the manufacture of major
8 97.2 93.1 83.9 plant items until shipment or delivery. From the
9 100 98.2 92.3 purchaser's viewpoint the ideal is payment only
10 100 97.6 against actual delivery to site so that as title
11 100 passes on payment the purchaser has the pro-
tection of owning that for which he has paid. On
the other hand this does mean that the contract
This method provides the means for auto- price will probably be inflated by interest
matically adjusting the amount due to the con- charges. To reduce the financing burden the
tractor for each month according to progress purchaser could agree to pay a proportion of the
achieved in accordance with the contract pro- price for major bought-out items on the orders
gramme without the need for any measurement for such items being placed. Further progress
and valuation. However it does not specifically payments during manufacture and before deliv-
link payment to the achievement of designated ery to site should only be made, like the down
TERMS AND C O N D l T Il O N S OF CONTRACT
payment, against the security of on-demand 1 Define precisely the events against which
bonds. While this will cost the contractor the payment becomes due.
charges for such bonds it will probably be to his 2 Relate those events to the achievement of
and his sub-contractors' overall financial advan- some particular objective.
tage. As a further security, the title in plant for 3 State the amount due at each stage or provide
which a progress payment has been made a mechanism by which such amount can be
should pass to the purchaser, such plant should determined.
be separated from other plant in the manufac- 4 Establish a time limit within which payment
turer's works and should be marked as being the must be made.
purchaser's property-see clause 37 of MFI1. 5 Provide the contractor with an effective rem-
The process plant conditions, the Red Book, edy should the employer default in payment.
similarly are not specific on the events which 6 Provide the employerwith means by which he
trigger payment but there are suggestions in the can obtain or recover the value of payments
guidance notes. Again reference is made to made before completion should the contrac-
either the stage payment or milestone method. It tor default and be unable to complete.
is thought that the milestone method is prefer-
able as this clearly links payment to progress DEFINITION OF EVENTS (1 AND 2)
without the need to make adjustments depend- Where the contract includes for the issue by the
ing on the rate of progress achieved. In broad nominated engineer of certificates, then pro-
terms one would expect to see that the mile- vided the criteria for these have been properly
stones would comprise: established no problem should arise unless for
any reason, other than the contractor's default,
issue of identified drawings which could
the issue of a certificate is delayed. To cover this
include P & I drawings, overall plant layout
possibility two provisionsare required:
and process data sheets
placement of specified major equipment 1 The certificate must be issued within a stated
orders time of an application which the contractor
completion of site preparation and piling was entitled to make.
finalization of HP and LP pipework details 2 If issue of the certificate is delayed because
finalization of electrical and instrumentation the event itself is delayed, that is guarantee
details tests cannot be held because the employer's
delivery of structural steelwork other work is not ready, then after a suitable
delivery to site of specified items of major time the contractor must become entitled to
equipment complete the payment. The same applies in relation to
completion of steelwork erection delayed delivery because of non-readiness of
completion of pipework installation the employer to receive the goods.
completion of equipment installation
If, however, entitlement to payment is to be
completion of electrics, instrumentation and
determined solely by reference to an event, for
control system installation
example delivery of the goods f.o.b., together
completion of pressure testing of a major
with relevant shipping documents, then it is
plant item.
important if misunderstandings are to be
The list would continue with appropriate mile- avoided to ensure that the event is clearly
stones covering the completion of construction described and that it is kept simple.
and then plant start-up. It is desirable to avoid multiple requirements
wherever possible, since it will often be found in
practice that one of them takes much longer to
CONTRACTUAL SAFEGUARDS
comply with than the others.
In order to safeguard the interests of both parties A problem which can arise on the sums due
the contract should: on commercial operation or take over is that
TERMS OF PAYMENT
often the contractor has carried out all but a without any down payment and that the down
small amount of the work involved but, because payment is recovered therefore only against the
there is still some work outstanding, the engin- original value of the contract. Retention money,
eer is unwilling to issue his certificate, so that however, would normally be deducted from the
retention money to the value of very many times value of the variations executed.
the outstanding work continues to be withheld.
Provided what has still to be done does not sig- Escalation
nificantly affect the operation of the works, there If the contract is subject to contract price adjust-
is no reason why the engineer should not issue ment then it is essential to establish the data
the certificate with an appropriate endorsement necessary for the calculation of the amount of
and release the retention money, apart from escalation due on the variation unless for sim-
whatever he considers appropriate to retain in plicity the price for the variation can be settled
order to ensure satisfactory completion of the on a fixed price basis. Payment for escalation, it
outstanding work. This is specifically provided is proposed, should be made with each monthly
for in 40.1 (3)Terms of Payment of MFI1). certificate at 100 per cent of the value properly
claimed. There seems no justification for involv-
DETERMINATION OF AMOUNT DUE (3) ing escalation payments with either the recovery
Only rarely will the contract state a definite sum of any down payment or percentage deductions
to be paid at the various stages of completion; for retention.
usually it will refer only to percentages, for Care, however, needs to be taken in the con-
example: tract drafting particularly in respect of the use of
the term 'contract price'. If the contract price is
10%with order defined as 'the sum named in the contractsubject
80%on delivery to such additions thereto or deductions there-
5%on take over from as may be made under any provisions of the
5%on final acceptance. contract' and the term contract price is then used
As with any percentage, it is important that no in the payments clause without qualification it
ambiguity should arise as to the base to which it could be argued that both down payment and
relates. On supply and erection contracts there retention provisions apply to variationsand esca-
are broadlvtwo possibilities: lation alike. It is preferable to set out separately
1 All percentages relate to the contract price as the payment terms for both these items so that no
a whole. ambiguity can arise. In fact under the ICE and
JCT conditions retention is withheld from pay-
2 The percentages due on delivery are calcu-
lated on the contract value of the materials ments made for escalation and the argument for
delivered (excluding therefore the erection doing this in relation to the ICE conditions is that
and commissioningelement of the price), and the contractual entitlement to any payment for
those elements are paid for separately as the escalation is derived from the payments clause
work is carried out. In that event the 80 per 60(2) and the amounts certified by the engineer
under this clause are subject to retention.
cent payment might be expressed in the con-
tract as 80 per cent of the value of materials
TIME LIMIT FOR PAYMENT (4 AND 5)
delivered to and work executed on site (see,
for example, condition 40.l(b) Terms of No one likes paying bills before they are obliged
Payment of MFI1). to do so. The accountantsfor big companies have
been quick to see the money which can be saved
The 'Ontract also the by not paying their creditors until the last day for
method of payment for variations and price
payment (unless a discount for cash has been
escalation.
offered).The short-term investment of daily cash
Variations balances can make a useful contribution to com-
It is suggested that variations should be paid pany profits. The administrative procedures of
126 TERM S AND CONDI TION S OF CON TRACT
large organizations, both public and private, can 1 A bond to be lodged for not less than the
of themselves impose substantial delays in the amount of the down payment. The making of
money actually being paid. Main contractors, to the payment and the lodging of the bond
protect their own position, had developed the should take place at the same time, and the
habit of only paying sub-contractors on 'as and contractor should check that the time limits
when' terms, that is when they themselves had for doing both are the same. Cases have been
been paid by the employer. Now this practice has known in which the time for lodging the bond
been outlawed by the Construction Act 1996 ran from acceptance of the contractor's
unless the third party, payment by whom is a tender, while the time for making the down
condition of payment, is insolvent. payment ran from the signature of the formal
All this emphasizes the need for the contract contract.
conditions to lay down a clear time limit within 2 That where progress payments are made dur-
which payment should be made, which is prac- ing manufacture:
tical in the circumstances of the contract. It is bet-
ter to lay down a rather longer time initially, plant to the value of the payment made is
which stands a reasonable chance of being kept, identified, becomes the property of the
than to include the standard 28-day clause know- purchaser and is marked as such
ing that it is unlikely to be honoured and to be such plant remains, however, at the sole
faced with the inevitable bickeringwhich follows. risk of the contractor and is insured by
Should payment not be made within the pre- them accordingly.
scribed time, the contractor's normal remedy See, for example, condition 40.1 and Special
should be the right to claim interest at, say, at Condition 40.1 Progress Certificates of Pay-
least 6 per cent above bank rate (see condition ment in MFI 1.
40.2 of MFI1). The Red Book provides that the
interest rate starts at 2 per cent above LIBOR and
then increases monthly by 1 per cent for each
RETENTION MONEY
month of default in payment up to 10 per cent if
the delay exceeds six months. There is also a right Reference has already been made to the prin-
to suspend if the delay exceeds 28 days after ciple that retention moneys should be con-
notice and to terminate after the suspension has sidered by the employer as a contractual
lasted 120 days. This seems far too long since it safeguard, not as a cheap form of finance. The
would mean no right to terminate for some five fixing of the level of retention money should take
months. If payment is not made within a reason- this into account so that no higher amount is
able period, say two-three months, then it is retained than is reasonably necessary. Where the
probable that it is not going to be made at all. It is works are completed and taken over in sections
suggested therefore that a better combination of these retention moneys should be released on a
remedies is a higher rate, say at least 6 per cent sectional basis.
above the bank rate, from the beginning of delay, The higher cost to the contractor of retention
with the right for the contractor to suspend if the moneys on many plant contracts lies in the 5 or
delay exceeds, say, 30 days, and terminate if the 10 per cent retained during the defects liability
delay exceeds 90 days and recover all costs and period.
expenses incurred. A prolonged failure by the It is to the contractor's advantage, therefore,
employer to pay should entitle the contractor to to press strongly for the release of the final reten-
stop work-see condition 40.3 of MFI1. tion after take over against a bank guarantee.
Nor is it considered that the employer's contrac-
RECOVERY OF PAYMENTS MADE (6) tual interests would be harmed by such action.
Where payments are made in advance of deliv- GCIWorksll goes one step further in provid-
ery to site the two rights which an employer will ing that if the contractor submits an on-demand
usually seek to have included are: retention bond for the amount of the retention
TERMS OF PAYM EN T 127
payment within 28 days of contract then the equitableset-off

employer will make the payments due during the contractual set-off
course of the contract without deduction of abatement.
retention money. Given that the bond is gen-
Common law set-off only applies if the claims
uinely on-demand there seems no objection to
are liquidated or can be ascertained without dif-
this from the purchaser's viewpoint. Indeed
ficulty. Equitable set-off applies if the claims are
there could be an advantage if the bond is prop-
closely linked one with another. There is there-
erly worded in that the purchaser has security in
fore no right of set-off in law or in equity if the
the form of the bond available to him from the
debts are both unliquidated and unconnected.
start of the contract while the process of deduc-
However the right of set-off can be extended
tion of retention money only builds up the reten-
by the express words of the contract. So it is
tion fund slowly over the contract period.
possible by the wording of the contract to extend
Aparticular problem has arisen with the pro-
the employer's right to set off, against the con-
visions in the JCTform of contract relating to the
tractor's claims on that contract, claims arising
setting up by the employer of a trust fund into
under another unconnected contract, between
which retention money is paid (clause 30.5.1).
the same parties. This provision is written
The objective is clear that the retention money is
into GCIWorksll clause 51. Abatement arises
held by the employer as trustee for the contrac-
where the purchaser claims that the work
tor in a separate account and does not therefore
done by the contractor or supplier is worth
on the liquidation of the employer belong to the
less than the amount due under the contract
liquidator. The problem in practice is that some
because the work is defective or has not been
employers delete the clause, others just do not
performed.
set up the trust fund, while others seek to resist
The right of set-off is often claimed by main
setting up the fund because they allege they have
contractors seeking to avoid making payments
rights of set-off in excess of what would be the
to sub-contractors, especially nominated sub-
value of the fund.
contractors. The courts have always required
While the contractor has the right to enforce
something more from the main contractor
the setting up of the fund, if necessary by
when seeking to defend himself against a claim
mandatory injunction, this right is lost once the
by the nominated firm for summary judgement
employer is actually in receivership or liqui-
than a mere allegation of defects and delays.
dation. As regards the employer's rights to refuse
However the amount of detail has been a matter
to set up the fund for, say, a right of set-off which
for the court's discretion. Now the claim by
he alleges to exist, the better opinion seems to be
the sub-contractor will in the first instance pro-
that the mere allegation of such a right would not
ceed to adjudication and it is thought that the
be sufficient (Concorde v Colgan [I9841 in the
adjudicator will be no less astute than the
High Court in Hong Kong).
courts have been in the past to distinguish
between a genuine defence and spurious
SET-OFF arguments which allow a main contractor
to retain money in his own hands which
There are four different bases by which in a con-
properly belongs to the sub-contractor. The JCT
tract for work and materials or for the sale of
form of nominated sub-contract NSClC has
goods a party who is sued can seek to defend
attempted to mitigate the position of the sub-
himself byashowingthat he has a claim against
contractor by placing restrictions on the right of
the other:
set-off by the main contractor - see clauses 4.26
common law right of set-off to 4.29.
CHAPTER FIFTEEN
Time for completion

Completion on time is not something which just part by the method of contracting which the
happens. It has to be planned and worked for, employer has selected. Thus, if the employer
and this process starts from the initial definition decides to undertake for himself the actual
of the employer's objective in relation to the con- importation of goods, he can hardly expect the
tract. In the achievement of completion on time, contractor to be responsible for the date of their
the contract has three functions to perform: arrival in the UK. Equally if the contractor is only
responsible for 'technical' supervision of erec-
to act as a means of communication between
tion he cannot be expected to guarantee the
employer and contractor
productivityof the employer's labour, or that the
to provide an incentive to the contractor to
works are completed on time. It would be rea-
complete on time
sonable in such a case to require delivery of
to give the employer an effective remedy
materials to be completed according to a defined
against the contractor should delivery be
programme with damages for delay attached to
delayed.
all key deliveries, and for the contractor to be
responsible for any delays to the target date for
completion of the plant as a whole which were
CONTRACT AS MEANS OF
caused by the negligence, incompetence or mis-
COMMUNICATION
conduct of his supervisors.
Proper communication between employer and Where there is a contractual obligation in
contractor is one of the essential factors in suc- relation to delivery it is important to distinguish
cessful contracting. But before the employer can between actual delivery and readiness for ship-
communicate his requirements to the contrac- ment, particularlywhere the employer is arrang-
tor he must have defined them for himself. Step ing shipment, for example the delivery terms are
number one, therefore, is for the employer to be f.0.b. From the contractor's viewpoint the con-
quite clear in his own mind by what date he trol of the delivery operation up to the point at
requires completion of the contract and what, which the goods are ready for shipment lies
for this purpose, completion means. According within his own hands. After that, however, he is
to the nature of the contract and the employer's dependent upon shipping action being taken by
purpose, completion may have one of a number the employer. Following the basic principles that
of meanings, the most common of which are as one only accepts contractual responsibility
follows: for matters over which one has control, it is
obviously preferable from the contractor's view-
goods either ready for shipment or actually
point, and indeed reasonable, for his obligation
shipped on f.o.b., c.i.f. or other terms
to relate to readiness for shipment.
delivery of goods to the purchaser's store or
One of the most common sources of misun-
construction site
derstanding relating to the meaning of com-
physical completion of the construction of the
pletion is in relation to electrical/mechanicalor
works on site
process plants. Because there are certain differ-
plant and equipment commissioned and
ences between the two it will be convenient to
proved ready for commercial operation
treat them separately.
process plant passed its performance tests.
The choice of which definition to adopt will in MECHANICAUELECTRKAL PLANT
part be determined by the type of contract and in With such plants there will be at least two stages
T I M E FOR COMPLETION
and possibly a third stage. First, there is the contractor's liability for liquidated damages for
struction stage leading up to the contractor delay is assessed. Certainly the Red Book favours
advising the engineer that the works are ready the completion of construction as being the defi-
for the tests on completion. Second, phase 2, is nition of completion for the purpose of liqui-
the carrying out by the contractor of the tests on dated damages for delay on two grounds. First,
completion. If these are successful the engineer up to that point the contractor has been largely
issues the taking over certificate. It would appear in control of operations and therefore should not
that the purpose of the tests on completion is to have been impeded by actions or failures of the
establish that the works have been completed in purchaser so as to entitle him to claim exten-
accordance with the contract and that they are sions of time. Second, preparing for the starting
capable of being used for the purpose for which up of the plant begins the series of operations in
they were intended. The time for completion which safety is critical and if procedures are
under the contract and therefore the point at rushed in order to avoid paying damages for
which any liquidated damages for delay are to be delay this could have serious consequences.
assessed is when the works have passed the tests There is obviously some truth in these argu-
on completion. ments, particularly the one on safety when the
After the issue of the taking over certificate process is not yet fully established. With a well-
the responsibility for the works and the risk in established process it is thought that the pur-
them passes to the purchaser and the contrac- chaser would want the contractor to be under a
tor's sole obligation is the correction of defects contractualliability for delay until a later stage.
during the defects liabilityperiod unless the con- The second stage is that between the com-
tract includes for performance tests. pletion of construction and the preparations for
There is an optional provision in MFll for the starting up of the plant. During this phase the
performance tests which, if included, brings in contractor is still responsible for the plant, which
the third phase. These tests, if incorporated in remains at his risk, and carries out all the pro-
the contract, are carried out by the purchaser cedures and tests as laid down in the contract
under the supervision of the contractor within a which are necessary to establish that the plant is
reasonable time after take over. Importantly ready to be started up. Once the project manager
therefore they are not required to be passed in is satisfied that all these tests and procedures,
order for the taking over certificate to be issued, including those relating to safety, have been
they do not form part of the definition of com- satisfactorily completed he then issues the
pletion and, if delayed, do not give rise to any taking over certificate at which point the respon-
liquidated damages for delay. If they are failed sibility for and risk in the plant passes to the pur-
they may, of course, make the contractor liable chaser. This is obviously another clearly defined
to liquidated damages for performance or in an point at which liquidated damages for delay
extreme case enable the purchaser to reject the could be assessed and could constitute the
plant even although he has taken it over, see definition of completion.
further pp. 167-168. The third stage is that in which, following
take over, the purchaser starts up and operates
PROCESS PLANT the plant and prepares for the carrying out of the
The process plant conditions envisage that there performance tests. These tests are carried out by
will usually be three stages. the purchaser using personnel trained by the
The first stage, construction, ends with the contractor, in accordance with the operating
project manager issuing a certificate of com- manuals provided by the contractor and under
pletion of construction. This is an important the technicalsupervision of the contractor.
point which marks the transition from construc- Although both MFI1 and the Red Book envis-
tion to the beginning of the procedures for the age therefore the performance tests being car-
start-up of the plant. Depending upon the nature ried out after take over it would be possible so to
of the plant it can be the point at which the con- draft the conditions that they were carried out
130 TERM S AND C O N D ~ T I O N SO F CONTRACT
before take over. It would mean that the respon- tract is being financed on a project finance basis
sibility for the operation and maintenance of the where the only security for the loans is the
plant during the start-up period, and the risk in profitabilityof the plant.
the plant, would remain with the contractor It is assumed here that the process either
until the performance tests had been passed, belongs to or has been licensed to the contrac-
although it would be desirable that the contractor. If the process and its design are the responsi-
tor was required to operate the plant with the bility of the purchaser then, of course, the
purchaser's staff and labour which he had contractor cannot be held liable for the achieve-
trained. Responsibility for the plant would only ment of performance guarantees, but only for
then pass to the purchaser once the per- the construction of the plant to the required
formance tests had been passed which would be specification. Completion would then properly
the point at which the take over certificate would be the completion of construction.
be issued. If this were done then the liquidated It is essential, particularly where large sums
damages for delay would apply at that point and of money may depend upon whether the plant
the performance tests would be in the contract was 'completed' on a certain day or not, for the
period, which would need to be extended to criteria and mechanism for deciding this issue to
include the running up of the plant, and the be set out in the contract. The draft contract doc-
commencement of the defectsperiod would cor- ument at p. 84 does this by relating 'completion'
respondinglybe delayed. to the contractor's right to apply for a taking over
If the guarantees on performanceare of vital certificate and there must be a test procedurefor
importance to the purchaser, and the process is obtaining this certificate laid down elsewhere in
well established, it is suggested that the con- the contract, probably in the specification. It
ditions should be amended to provide for the must of course also be practical for the employer
performance tests being within the definition of to have provided by that date facilities for the
completion so that the purchaser does not take necessary testing to be carried out.
over the plant until they have been passed. It is Another important factor to be considered is
recognized that this will mean extending the the relationship of the definition of completion
period for completion, providing specific obli- to (1) the take over of the plant by the employer,
gations on the purchaser to provide the feed- that is in his assuming responsibility for acci-
stock and other facilities for the carrying out of dents or damage to the plant and responsibility
the tests to meet the programme and ensuring for its maintenance and security; and (2) pay-
that the contractor exercises proper care for ment by the employer of the whole or part of
safety. It is also suggested that there should be a retention moneys.
grace period allowed before liquidated damages With building and civil engineering contracts
for delay are applied to give the contractor time the problem is often that the purchaser is con-
safely to make the necessary adjustments to the cerned with access to the whole or sections of the
plant and carry out a re-test if one of the per- works before the final completion itself. Thus if
formance tests is failed for the first time. final completion is made the only contractual
There is a definite benefit to the purchaser, obligation, the contractor could comply with
however, in not accepting responsibility for the this and yet, if late on the prior access dates,
plant before it has been shown to perform in could cause the employer considerable financial
accordance with the performance guarantees. loss. It is essential with this type of contract
The undertaking to meet these would have been therefore to decide on the date or dates by which
a vital element in the selection of the firm as the access is required, to make these firm contrac-
contractor in the first instance. In reality he has tual obligations, and to attach damages for delay
not performed his contract until he has demon- to each.
strated he has met those guarantees. This will The same principle applies generally to
almost certainly be the line which will be mechanical/electricalplant, say a set of turbines
adopted by the lenders to the project if the con- which are to be brought into operation sequen-
TIME FOR COMPLETION
tially and a process plant which is to be brought what methods they would use in order to
into operation by sections and each section is obtain the improved delivery and any qualifi-
self-contained and can be used commercially on cations or understandings on which the
its own. This last point is important since it will improved deliveryis based
often be found either that the sections are not what guarantees they would be prepared to
wholly self-contained, because there is some offer in respect of the improved delivery.
common feature, or that there is no commercial
Adoption of this suggested approach would
use for one section until at least one other has
ensure, first, that all offers were obtained on the
been completed. This may not be a problem if
same basis and could therefore easily be com-
completion is defined as the completion of con-
pared and, second, that the employer has had all
struction but obviously would be if completion
the information necessary to see whether it was
were related to readiness for commercial opera-
practical to buy time and, if so, how much this
tion, that is having passed the performance tests.
would cost.
Having settled on the definition of, and date
Having obtained a delivery promise in a
or period for, completion the employer's next
tender which suits the programme, the pur-
step must be to communicate that information
chaser is often inclined to think that such a
to the contractor. This communication should
promise holds good no matter how long the
be regarded as one of the essential items to be
placing of the orderlcontract is delayed. This
included in the inquiry or invitation to tender, or
cannot normally be so. Any delivery promise
supplied as part of the data on which negotia-
is contingent upon the contractor's own work
tions are to proceed in those cases where the
programme and the delivery periods being
contract is on a negotiated basis.
currently quoted for materials and bought-out
It is sometimes suggested that the delivery
components. These can all be subject to rapid
period should itself be made the subject of com-
change.
petition and the tenderers asked to quote their
best offer. This can cause difficulties. Delivery is
normally related closely to both specification
LIMIT TO VALUE OF UNDERTAKING
and price. Decision on one will affect the other.
Shorter delivery can be achieved in a variety of Ideally, it is suggested that the tender should be
ways: by overtime and weekend working, by accepted or the contract should be placedwithin
selecting those bought-in components which 30 days, or in the case of very major contracts up
are themselves on shortest delivery, or by lower- to three months. If this cannot be achieved,
ing standards in construction work on site. How then it is no use just sending off the letter of
is the tenderer to read the purchaser's mind? acceptance quoting the original delivery
How is he to judge what price the purchaser is promise and hoping for the best. It is often
willing to pay for time? tempting for the contracts officer at this point,
If the employer really is interested in obtain- with the order in one hand, to press the contrac-
ing competitive offers on time, then it is sug- tor to undertake still to maintain his original
gested that he can do this in the following way. promise to complete by a certain date despite
The basic inquiry against which all tenderers the delays which have arisen since his tender
must quote includes a fixed date or period for was submitted. The contractor for his part, in his
completion. The tenderers, however, are also anxiety to secure the business, may easily be
invited to quote as an alternative for an im- weak enough to give way to such pressures, only
proved delivery and to give the following infor- to regret it later when it becomes apparent that
mation regarding their offer: delays are inevitable. Any such temptation
should be resisted. Not only is the practical value
period by which they could shorten delivery of an undertakingobtained in this way extremely
additional cost for improved delivery per limited but, worse, the contracts officer has
week or month as appropriate allowed himself to be deluded into thinking that
132 TERM S AND CONDITION S OF CONTRACT
he has negotiated a favourable bargain. The dates or periods for the provision by the con-
planning of the contract and any associated tractor of defined drawings or data.
work will proceed on the basis that the com-
pletion will be as promised when it almost Few contracts involving work on site can pro-
certainly will not. ceed independently of the employer or other
There is only one delivery promise worth contractors of the employer. Nor is it possible
having, and that is one which is as factual as it to make the best use of time and resources if
can be made and has reasonably taken into the planning of the order and sequence of
account the known sources of probable delay. operations is left to one party. The employer may
For this reason, if the contract cannot be placed want certain sections completed before others;
quickly, then the contractor should be given a he may require from a plant contractor loading
reasonable opportunity to confirm the original data and drawings for foundations design by a
promise. If it is a large contract, then it is often particular date. The civil contractor has to
advisable at this point to discuss the programme balance the most effective utilization of plant
with the contractor in order to make sure that and labour and the relation of the workload of
nothing has been overlooked and that delivery certain trades to anticipated programme and
terms from major sub-contractors or suppliers weather conditions. Plant contractors may
have been rechecked. It is helpful for any such require access to parts of a building in a certain
discussions regarding confirmation of delivery sequence. Inevitably, all these interests will at
promises to be held not merely with the contrac- some time conflict; also they may have a major
tor's sales staff but also with their planning, con- effect on the contract price. This is why it is so
struction or works people present. The normal important that the planning and co-ordination
pessimism of one is a good antidote to the over- involved are to some extent worked out before,
optimism of the other. not after, the tendering stage and key points
In order to ensure that delivery promises established and made clear in the tender docu-
included within a tender are realistic, the more ments.
information that can be given to the tenderers on Two objections may be raised to this sugges-
the factors affecting delivery the better. Such tion. First, that it restricts both the contractor's
information should include (depending on the initiative and that of the client's engineer.
nature of the contract): Second, that by making these times and periods
part of the contract, if the employer should
date or period after contract for access to site default on his obligations then he is laying
dates or periods for the supply by the himself open to a claim.
employer of drawings or information As to the first, the time has long since passed
dates or periods for completion by the when either a single contractor or the employer
employer or other contractors of work inter- himself can act independently. Projects are
related with the contract work growing in complexity all the time, and this
restrictions on availability of site or working complexity in turn has led to the growth of
hours the number of specialist suppliers and sub-
special inspection or approval procedures or contractors whose work is closely related
qualitystandards demanded one with another and with that of the main
use of the site or common facilities by the contractor.
employer or other contractors of the em- Regarding the second, it must be accepted
ployer that once one introduces planning into a project
restrictions on spending of money within the employer, no less than the contractor,
defined periods becomes bound by the times and periods set out
requirements as to completion of the work in the plan. If these have to be altered, then the
in a certain sequence and any dates for com- person responsible for the alteration must bear
pletion of sections of the contract some liability for the consequences.
T I M EF O R CO M PLETI O N 133
CRITICAL PATH ANALYSIS it is inevitable that it should be expanded. If,

however, a project manager asks an engineer
Any detailed discussion on the use of network whether it will be safe to increase the load on a
analysiswould be outside the scope and purpose particular foundation he wants the answer,
of this book. The principles behind the tech- not a mass of calculations. The same thing is
nique are by now fairly well known, and those true of the network. He wants to know if the
wishing to gain further knowledge of it are project is on time -if not, why not - and what
advised to consult one of the numerous special- can be done about it. If it is on time, then what
ist books on the subject. What is perhaps, how- is it essential to be doing next to ensure that it
ever, not so well known or brought out by the remains on time? These are simple questions
books dealing with the technique are those fac- which demand simple answers in plain
tors which may limit its effective application and English.
which need watching if it is to be of maximum
benefit. These may be summarized briefly as fol-
lows: CONTRACT AS MEANS OF PROVIDING
AN INCENTIVE
1 The technique cannot of itself improve the
nature of the data used. If this is inaccurate, The contract may provide an incentive to a sup-
then so will be the answer. The danger is that plierlcontractor to achieve completion either on
because the answer has been obtained from a or in advance of time in broadly one of three
network, perhaps with the aid of a computer, ways:
it will be assumed to possess a significance far by the method of payment of the contract
greater than an answer obtained by simple, price being such that any delay will cause the
old-fashioned methods. contractor additional expense, and cor-
2 Because as a techniqueit is interesting and has
respondingly that earlier completionwill save
attracted its own devotees, it is easy for it to be expense
treated as something which has a justification by offering a bonus for earlier completion
to exist in its own right. It has not. It must prove with a corresponding 'penalty' for late com-
itself to management by providing a quicker pletion
and more accurate answer to the problems by a profit-sharing arrangement under which
affecting the control of a project than any the combined effect of savings in cost and
other method, thereby enabling significant time are shared between the purchaser and
economies to be made, if it is to survive. It the contractor.
remains at all times a tool of management and
under management's control. Most definitely
it must not be allowed to become the preserve METHOD OR TERMS OF PAYMENT
of the analyst or programmer. There are several ways in which the method or
3 Following on from note 2 above, it is for man-
terms of payment can give the contractor an
agement to lay down the manner in which it incentive to early completion:
wants the output data presented and how this
data is to be translated into effective instruc- 1 Where the contract is on a lump sum basis for
tions to the company's executives and site the carrying out of site work, the contractor's
staff. It is very easy for this essential step to be overheads will have been estimated on the
overlooked. If it is, then it may be found that, assumption of the site work lasting so long.
instead of the network being used as a prac- Any extension of that time will cost the con-
tical working aid, it is ignored by the very tractor money.
people, the project engineers and resident site 2 Where payment of the contract price is at
staff, whom it was intended to benefit. defined rates for units of completed work - for
4 The other enemy of the network is detail. example a yard of advance tunnelling - then
Because a network is easy to expand perhaps unless progress is achieved to programme, the
134 TERM S AND CONDI TI ONS OF CON TRA CT
contractor will still have to pay out the costs used then any such negotiations would have to
for hire of plant, overheads and wages of direct follow the contract award. Assuming that the
labour, but will not be recovering for these on procedure referred to earlier, of inviting tender-
the basis on which he prepared the estimate. ers to put forward alternative offers on time, has
3 If the contract price or a proportion of it is been followed, it may be found that the lowest
withheld until completion is effected, then tenderer has offered to complete a month earlier
any delay will cost the contractor interest for a £50000 increase in the contract price. If a
charges and lose him working capital. month is worth more than £50000 to the
employer it might be reasonable to negotiate on
the basis that for completion in a month earlier
BONUS AND PENALTY
one would pay a bonus of E50000, for com-
The incentivesto the contractor referred to above pletion on time no bonus or penalty and, for late
are in the negative form, in that failure will result completion, then damages at least equal to the
in a loss. While this is of some effect, the carrot is amount of the bonus.
often more effective than the stick. A positive Particular care has to be taken when negoti-
inducement may therefore produce better results ating a bonus and penalty clause on a cost-
than the threat of being penalized. The difficulty reimbursement type of contract. The danger is
is to make certain that the bonus really is effective that, to earn the bonus, the contractor will spend
in producing a greater than normal effort. Before the employer's money to an unreasonable
offering a bonus, therefore, it is necessary to extent. It is necessary, therefore, to establish that
establish the norm both in time and price. the bonus and penalty are related not only to
It follows that a bonus is something to time but also to the excess of the actual costs
negotiate after tenders have been received, not over target. Thus a table (see Table 15.1) might
something to be mentioned when tenders are be included in the contract on the following
invited. There could be a difficulty under the lines, with the bonuslpenalty applied only to the
Public Procurement and Utilities Directives in contractor's fixed margin. The purchaser would
doing this unless the employer was entitled to, continue to pay actual costs although, as stated
and did, use the negotiated procedure. It is con- earlier, depending on the degree of uncertainty,
sidered that if the restricted procedure has been he might put a total limit on his liability.
Table 15.1 Cost table showing bonus/penalty
COMPLETION EARLY COMPLETION COMPLETION LATE

WEEKS ON TIME WEEKS
4 3 2 1 1 2 3 4
Costs +400000 M -5 -10 -15 -20 -25 -30 -35 -40
above +300000 +5 M -5 -10 -1 5 -20 -25 -30 -35
target +200000 +10 +5 M -5 -1 0 -15 -20 -25 -30
+I00000 +15 +10 +5 M -5 -10 -15 -20 -25
Costs equal
to target
Costs -1 00000 +25 +20 +15 +10 +5 M -5 -10 -15

below -200000 +30 +25 +20 +15 +10 +5 M -5 -10
target -300000 +35 +30 +25 +20 +15 +10 +5 M -5
-400 000 +40 +35 +30 +25 +20 +15 +10 +5 M
All figures percentages to be added t o or subtracted from the fixed margin Mas the signs indicate.
TIME FOR COM PLETI ON 135
It will be noted that Table 15.1 is worked out delay and potential loss. Provided that the dam-
on the basis that: ages
- are less than the estimated amount of the
loss, this legally does not matter, but what must
savings or increases of f100000 on cost are
be understood is that, having taken his remedy
worth 5 per cent of fixed margin
by way of liquidated damages, the buyer cannot,
one week of time is equal to 5 per cent of the
because the actual losses exceed the estimat
fixed margin
seek to recover the difference.
savings or losses in time or money are not
This point is illustrated in an extreme way
expected to exceed f400 000 or 4 weeks.
a recent case under the JCT form of contract
While in terms of damages it is reasonable to where the employer had included in the
grant extensions of time for delays outside the Appendix under the heading 'liquidated and
contractor's control, since to do otherwise ascertained damages nil'. When the contractor
would be both unfair and put up the price, the was late in completion the employer sought to
same considerations do not apply to the bonus. argue that the intention had been to delete
The employer is only interested in paying the clause 24 (the liquidated damages clause) from
bonus for results. It is suggested, therefore, that the contract and he was therefore entitled to
extensions of time in a bonus clause should only claim damages at large. The court ruled that the
be allowed for delays due to acts or defaults of parties were free to include within their contract
the employer. These must be allowed since, once whatever figure they chose subject to it not being
having undertaken to pay the contractor a sum a penalty. Having agreed that the liquidated
in a certain event, the employer must not act in damages were nil that is exactly what they were
such a manner as to deny the contractor the to be; further having left the liquidated damages
opportunity of so doing. clause in the contract this excluded any right of
the employer to claim damages at large.
Reference is made above to the term
LIQUIDATED DAMAGES FOR DELAY
'penalty'. The distinction between liquidated
The principle behind liquidated damages for damages and a penalty is peculiar to English law.
delay is that they should be an accurate pre- The differencewas well stated by Lord Dunedin
estimate of the losses which, at the time of enter- in the classic case of Dunlop Pneumatic Tyre Co.
ing into the contract, it is estimated the Ltd v New Garage Motor Co. Ltd in the House of
employer would be likely to suffer were com- Lords in 1915AC79.
pletion to be delayed, and which would arise
The essence of a penalty is a payment
directly out of such delay. The amount of such
of money stipulated as in terrorem
loss, and therefore of the damages, may and very
of the offending party; the essence of
often does bear no relationship at all to the value
liquidated damages is a genuine cov-
of the contract. Yet in commercial practice it is
enanted pre-estimate of damage ... it
almost universal for such damages to be
will be held to be a penalty if the sum
expressed as a percentage of the contract price.
stipulated for is extravagant and
The reason the damages are really there is not so
unconscionable in amount in com-
much to provide the employer with an effective
parison with the greatest loss which
remedy, but to protect the contractor by estab-
could conceivably be proved to have
lishing a limit to his liability.
followed from the breach.
Commercially, in fact, this must be so. No
contractor can afford to be liable for a risk It follows from this that if a single amount is
against which it is difficult to insure and which is payable under different circumstances in one of
out of all proportion to the value of the contract which only it might be reasonable pre-estimate of
and to his anticipated profit. It is only, therefore, loss but in the other it could not possibly be that,
in a limited number of cases that there will be the payment will be held to be a penalty. In prac-
any direct relationship between damages for tice, this means that if the employer wishes to
136 TERMS AND CoNDlTloNs OF CONTRACT
claim liquidated damages for, say, failure to com- Other points which arise on the drafting of
plete the works on time and also for failure to pro- the delay in completion clause are as described
vide handbooks and as-built drawings then he below.
cannot seek to claim the same amount for both.
Definition of the amount on which the
However, in other situations the courts have
damages are payable
shown recently awelcomecommercialapproach
This may be the contract price as a whole, the
towards the distinction between a penalty and
contract price of a section, if there are damages
liquidated damages. In Phillips Hong Kong Ltd v
attached to the completion of sections of the
Attorney General of Hong Kong [I9931 61 BLR 41
work, or the contractor may suggest that dam-
the Privy Council held the fact that a clause could
ages be calculated only on that part of the plant
in various hypothetical situations, none of which
which cannot in consequence of the delay be put
had actually happened, result in a larger sum
to the use intended.
being recovered than the actual loss suffered by
If in fact the employer can make use of a
the employer did not make the clause a penalty.
plant or building for the purpose for which it was
The Privy Council also emphasized that when
intended even if a particular section is late, or
parties are of equal bargaining power then the
there is late delivery of handbooks or spares,
court should be not too ready to find the requi-
then it is considered that if the contract were to
site degree of disproportion.
provide for damages to be payable on the
If the clause is held to be a penalty then the
whole of the works even though that section
result is that it is unenforceable at law but of
or item were late then this would be construed as
course the contractor still remains in breach of
a penalty and as such unenforceable at law.
contract for being late. The employer's remedy is
The same ar&ment would apply if a plant
then to claim damages at large but these have, of
were divided into, say, three sections which
course, to be proven, and what, from the
could be utilized independently and only one
employer's viewpoint, is even worse is that, as
was late. This is because the employer would
they are not liquidated, they cannot be deducted
have taken the same remedy in damages for
from the balance of the contract price.
the happening of two different events - delay of
Although the total value of the liquidated
the whole and delay of the section or item -
damages is unlikely, therefore, on any major
which must have a different effect on the loss
contract to be equal to the employer's potential
which he would suffer which is the basis of the
loss, the employer, by adjusting the rate at which
liquidated damages assessment (at least in legal
damages are recovered, may be able to correct
theory).
this under-recoveryovera short period. Thus if 5
per cent of the contract price per week rep- The rate at which the damages accrue
resents a fair pre-estimate of the loss, then It makes a great deal of difference whether the
instead of damages at the rate of 1 per cent to a damages are expressed to be payable E ...... .
maximum of 15 per cent as often applies in the per each full week of delay' or 'at the rate of
case of electrical or mechanical plant contracts, ....... per week'. In the first case the contractor
the damages could be expressed as 5 per cent per is granted six days' grace before any damages are
week to a maximum of 10 per cent. The employer payable at all; in the second case he must pay
is here exchanging the high maximum for a damages at one-seventh of the weekly rate from
recovery rate over a short period in line with his the first day.
anticipated rate of loss. He may, however, find The damages are often expressed to be in full
the contractor unwilling to accept such a rate satisfaction of the contractor's liability for delay.
unless he is allowed a 'grace' period before the The first point to note on this provision is that in
damages start. Nevertheless the rate at which respect of contracts which are subject to the
damages are to be recovered is something which Unfair Contract Terms Act its enforceability is
needs to be kept completely flexible and tailored subject to the court being satisfied that it is
to suit each individual contract. 'reasonable' (seep. 163 et seq.).
TIME FOR COM PLETI ON 137
Second, although the provision is included in ples applicable to the concept of liquidated
most standard forms of contract and also in con- damages the employer cannot recover more for
tracts which are individually drafted, the ques- each week of delay than the percentage stated. In
tion arises as to just what it means and what is its the absence of such explicit statement as that
legal effect. Assume that the clause states that referred to above the opinion is preferred that
the damages are to be at the rate of 1 per cent per the maximum limits the right of the employer to
week to a maximum of 10 per cent. Does this the recovery of liquidated damages but does not
mean that the liability of the contractor for a ten- prevent him from exercising any other right
week delay is limited to 10 per cent, or that the which he has under the contract or otherwise.
contractor's liability for damages is limited to 10 He could, therefore, after the maximum period
per cent irrespective of the period of delay? The has expired, give notice to the contractor either
problem is discussed fully in Electrical and terminating the contract or requiring it to be
Mechanical Engineering Contracts by K F A completed within a reasonable period of time. If
Johnston (Gower,1971). the contractor were then to fail so to complete
The author's view is that subject to the Unfair the employer could exercise both his right of
Contract Terms Act there is no reason why the termination and claim damages at common law
parties should not agree to limit the contractor's for the period of the delay after the end of that to
liability for delay to, say, 10 per cent regardlessof which the liquidateddamages relate.
the actual length of the delay involved, but that it The MFll conditions follow this principle,
would require very explicit wording to persuade although they do require that the contractor be
an arbitrator or judge that such were in fact the given notice to complete within a reasonable
parties' intentions. Further it would need to be time once the maximum has been reached
specifically stated that such a limit was still to (clause 34.2). After the exphy of this notice the
apply if the employer were to exercise his right of employer has the right either again to require the
termination once the period related to the maxi- contractor to complete, or to terminate, and in
mum of the liquidated damages had expired. In either event to recover his losses up to the limit
this respect the wording in IChemE conditions is of liability expressed in the contract, or if no limit
interesting. Clause 15 provides after referring to is expressed the contract price of those parts of
the payment of liquidated damages for delay the works that cannot be put to the use intended
that 'In the event of such failure the contractor by reason of the contractor's failure.
shall have no liability to pay damages for delay in The following additional points relative to
excess of the maximum liquidated damages the subject of liquidated damages are worth
stated in Schedule 9'. If this is to be read as if the noting. There is no truth in the old tale still
word 'any' were inserted before 'damages' then sometimes told that a liquidated damages clause
it is clearly an attempt to make the maximum cannot be enforced unless a bonus is also
apply irrespective of the period of delay. This is agreed. The clause can also be enforced even
supported by the guidance note to the clause if the actual loss suffered by the employer is
which provides 'the contractor has no liability to less than the amount included in the contract;
pay further damages once the upper limit has it is sufficient if the employer can show that it
been reached'. was reasonably foreseeable at the time of
It is suggested that once the maximum has entering into the contract that he would suffer
been reached it would be inequitable to leave the damages at least equal to those included in the
purchaser without any remedy and that the pur- contract.
chaser would be entitled to give notice of default The liquidated damages can even be re-
under clause 41 and if this was not complied covered if, in the event, the employer has suffered
with then to terminate and apply the provisions no loss at all provided, as always, that it can be
of that clause. It can certainly be argued that established that at the time of entering into the
some meaning must be given to the phrase 'up to contract the level of damages agreed did not rep-
a maximum of x per cent' since under the princi- resent a penalty in the terms as described above.
138 TERM S AND C O N D ~ T ~ O N OS F CONTRACT
The contractor to be entitled in certain tionate sum of money, it was not within his rea-
circumstances to an extension of time sonable control, as the use of the word 'reason-
Sometimes an attempt is made to list the cir- able' implies that financial considerations can
cumstances (see for example the condition in be taken into account.
the JCT Form of Contract no. 25.4). More nor- Some support is given to this contention by
mally in UK contracts the phrase used is 'act or the case of B & S Contracts & Design v Victor
omission of the purchaser or the engineer or any Green Publications which was decided in the
industrial dispute or any cause beyond the con- High Court in 1984. There it was held that an
tractor's reasonable control'. It is necessary to employer who acted 'unreasonably' in not pay-
include industrial disputes separately, as other- ing money to prevent a strike of his workforce in
wise it might be argued that an industrialdispute circumstances in which he must have known
was within a contractor's reasonable control. A that non-payment was likely to result in their
further point of significance in relation to the going on strike and their demands were not
recovery of liquidated damages and clauses for exceptional was not protected by a force
extension of time is that where the employer is majeure clause in the contract. Presumablyif the
wholly or partially responsible for the contrac- circumstances had been different and the pay-
tor's failure to complete on time, the employer ments required by the workforce had been out of
cannot recover liquidated damages unless the all proportion to what was in the circumstances
contract expressly provides otherwise. It is 'reasonable', then he could have claimed the
important to note that a general clause refemng benefit of the clause. It also implies that practical
to 'force majeure or other unavoidable circum- factors can be taken into account (see further on
stances beyond the contractor's control' will not this point, extensions of time for delays due to
suffice to cover the employer's default. The sub-contractors,on p. 144).
result will then be that liquidated damages can- It is also interesting to note the High
not be deducted and the contractor's obligations Court decision (Times Law Report, 25 May
as regards completion will be to complete within 1994) that the expression 'reasonably practical'
a reasonable time (Percy Bilton v GLC [1982] 20 goes beyond what is physically feasible to
BLR 1). Any extension of time clause whether include financial considerations. While the
expressed in general or extensive terms should case was not concerned with the implementa-
therefore always include specifically 'any act or tion of a contract but of a court order it
omission of the employer or the engineer'. again supports the contention given in the text
One term which should not be used in an above.
English contract unless its meaning is defined Legal systems other than those based on
and it is only 'shorthand' for that meaning is English law do not recognize the distinction
'force majeure'. The term is derived from French between liquidated damages and penalties. In
law and has no legally defined meaning in French law, for example, a penalty is enforceable
English law. Its use, unless its meaning is defined and it is recognized that one of the purposes of
in the contract, can only lead to confusion. the penalty clause is to encourage the contractor
Contracts with overseas purchasers also often to complete on time. But the penalty represents
refer to the term 'force majeure' and careful the maximum of the amount for which the con-
check should be made as to the meaning which tractor is liable unless the court decides that it is
this has in the foreign legal system, since it can derisory. However, in other systems such as
varywidely. German the contractor may also, if the pur-
It is also advisable from the contractor's chaser can prove that he has suffered a greater
viewpoint that the word 'reasonable' should be loss, be responsible for the extra, i.e. the liqui-
included, as it is believed that this would enable dated damages clause does not necessarily con-
the contractor to argue, for instance, that stitute a limit. If therefore the contractor is
whereas it was within his control to overcome working under a foreign legal system the posi-
some difficulty if he spent a large and disproportion needs to be carefully checked.
CHAPTER SIXTEEN
Sub-contracting
Modern industrial activity is based on specializa- main contractorlsupplier from sub-contracting
tion and the combining of specialistskills to form parts of the contract work, unless the contractor
an integrated whole. Where this integration func- has been selected and the contract placed on the
tion is the responsibility of the contractorlmanu- basis, either express or implied, that the work is
facturer, it follows that a substantial proportion to be performed by the contractor himself. It is
of the actual work will be sub-contracted or com- rare to find such aprovision written into the con-
prise bought-out items. On an industrial building tract expressly, and normally the only circum-
contract, the actual work to be carried out by the stances in which it will be implied is where the
builder's own labour may represent only a very contract by its nature is one for the provision of
small proportion of the total contract price. The personal services - for example employment of a
remainder will be sub-contract trades - for particular consultant because of his special
example, plasterer, tiler, asphalter, and bought- expertise.
in items of equipment and sub-contract work. It For all practical purposes, therefore, a con-
is clear, therefore, that in preparing the contract tractorlsupplier is free to sub-contract any part
very careful consideration must be given both to of the contract work subject only to the express
the control which the employer has over sub- terms of the contract.
contractors and to the responsibility which the One question which may be asked at this
main contractor bears for them. stage is why the employer should wish to exer-
Normally the contract between the employer cise control over the employment of sub-
and the main contractor does not create any contractors. The reasons would seem to be as
contractual rights or obligations as between the follows:
employer and the sub-contractor. If the goods
which the sub-contractor supplies or the work 1 The employer knows and presumably
he carries out prove defective, then the em- approves of the standards of workrnanship of
ployer's remedy is against the main contractor. If the main contractor/supplier. He does not in
on the other hand the main contractor fails to all probability have the same knowledge of
pay the sub-contractor for work done or goods the sub-contractor, and although the contract
supplied, then again, unless the contract would normally entitle him to have any
specifically provides otherwise, the sub-contrac- defects remedied, this would inevitably
tor has no recourse against the employer. involve the employer in trouble and expenses
If, however, a supplier of material guarantees for which he would probably be unable to
to the employer that his product will be suitable recover in full. Prevention is better than cure.
for use on a particular contract,and the employer 2 Extensive employment of sub-contractors
as a result specifies their use, then, as described increases the difficulties of the main contrac-
on p. 20, the courts may decide that there is a col- tor in co-ordinating the work and may be
lateral contract between the employer and the evidence that he has over-reached his
material supplier under which, in consideration capacity in taking on the contract.
of having his materials specified, the supplier 3 Where site work is involved, the employer
guarantees their suitability. may have reservations about the sub-contrac-
tor concerned entering on to his premises.
EMPLOYER'S RIGHT TO RESTRICT Again a multiplicity of sub-contractors can
SUB-CONTRACTING cause labour difficulties.
The employer has no authority to prevent the These are all valid reasons, and no employer can
140 TERM S AND CONDI TI ONS O F CON TRACT
afford to allow a main contractor unlimited free- schedule for completion by the tenderers of
dom to sub-contract. At the same time, the exer- the work which they propose to sub-contract
cise by the employer of this control does raise and the names of the sub-contractors whom
certain problems as follows: they would intend to employ.
At the outset of the contract, the main con-
1 Any control can be irksome and create delays
tractor should be required to confirm his sub-
unless exercised with flexibility and under-
contracting arrangements and to obtain the
standing.
consent of the employer or his engineer to the
2 While exercising his rights to object to a sub-
employment of any sub-contractor not
contractor whom he considers to be unsatis-
named in the tender.
factory, the employer
- - will normally wish to
avoid getting into the position of accepting The object behind requiring the main contractor
responsibility for the choice of sub-contrac- to list the principal sub-contractors proposed in
tors. his tender and to put forward the names of the
3 The establishment of any direct relationship remainder at the outset of the contract is to
between the employer and a sub-contractor remove any source of disagreement between the
will lead to a weakening of the main contrac- employer and the main contractor, if possible
tor's own position as the 'employer' of the before the contract is awarded and at the least
sub-contractor and could lead to the while there is still time for negotiation. If this is
employer being regarded as having a respon- not done, and the employer does object to a par-
sibility towards the sub-contractor. ticular sub-contractor, the main contractor may
seek to argue that to alter the choice now will
delay the contract and cause additional expense
SAFEGUARDS FOR EMPLOYERS
for which he has made no allowancein his price.
In order to provide the employer with reason-
able safeguards and at the same time minimize
these problems it is suggested that the following RESPONSIBILITIES OF M A I N
steps should be taken during the course of the CONTRACTOR FOR SUB-CONTRACTORS
contract negotiations: Ideally, from the buyer's point of view, the
1 The contract conditionsshould contain a pro- responsibility of the main contractor for all that
hibition against sub-contracting without the his sub-contractors do or fail to do should be no
employer's or his engineer's consent other different from that which the main contractor
than for the supply of materials or for minor accepts in relation to work which he carries out
items. According to the nature of the contract directly with his own labour. The practice has,
it may be worthwhile defining in more detail however, grown up in certain fields of contract-
either any particular item about which ing for the liability of the main contractor to be
the employer wants to be consulted - for restricted and either:
example the supplier of an unusual or difficult be no greater than the main contractor can
casting on which there have been previous himself impose on his sub-contractor or sup-
problems - or those where the employer is plier, or
prepared to leave it to the main contractor, be such that contractually the main contrac-
perhaps all below a certain financial level. tor has no direct liability himself, but simply
2 The contract conditions should state passes on to the employer the benefit of any
expressly that the employer's consent to or warranties or guarantees offered by the sub-
approval of a sub-contractor does not relieve contractor.
the main contractor of any of his obligation,
and he remains fully responsible for the acts In general this practice is inconsistent with the
and defaults of the sub-contractors. concept of a main contractor and denies to the
3 The invitation to tender should contain a employer one of the principal advantages of
SUB-CONTRACTING 141
employinga main contractor, that of having only default - for example supply of incorrect data
one firm responsible for the contract. As such it or error in installation
is clearly against the employer's interests. At the the passing on to the employer of the best
same time, it must be admitted that this practice warranty terms which the main contractor
has developed at least in part out of policies pur- can obtain from the supplier.
sued by employers themselves. First, the more
the employer seeks to control the selection of the Much the same arguments apply to payment.
sub-contractor, the less is a main contractor The old saying 'he who pays the piper calls the
going to accept liability for the acts or defaults of tune' is as true as ever. The employer would be
the employer's nominee. Second, since accept- most unwise to pay the sub-contractors direct.
ance of responsibility involves risks which must The employer indeed has no authority to do so
be allowed for by the main contractor when pric- unless expressly authorized by the contract.
ing the job, he is not likely to willingly accept Further as the law now stands if the main con-
such responsibilities unless the opportunity tractor were in liquidation the employer would
exists for him to include such 'cover' in his run the risk of double payments, once to the sub-
price. If, however, the buying policies of the contractor and once to the liquidator.
employer are such that he insists that the main With that background the contractual
contractor only receives a small handling or responsibilities of the main contractor for his
procurement fee on sub-contracts, then the sub-contractors may be considered under two
main contractor is denied that opportunity broad headings: liability of sub-contractors for
and accordingly is bound to seek to contract defects;and time.
out of direct responsibilityfor such sub-contrac-
tors. LIABILITY OF SUB-CONTRACTORS FOR
The employer may argue in reply that he is DEFECTS
better off paying a low procurement fee and rely- The main contractor should normally be fully
ing on the commercial pressure he can bring to responsible for defects caused by his sub-con-
bear on the sub-contractors, through the threat tractors and suppliers over the same guarantee
of their future business should they misbehave, or defects liability period as for his own work.
than he is in having contractual rights against The question which then arises is that of the lia-
the main contractor and paying higher fees. bility of the sub-contractor to the main contrac-
Within a limited field where there are only a few tor. There are three issues here. First, is the
companies placing business and these operate sub-contractor to be liable for making good
internationally- for example the oil and petro- defects in the sub-contract works for the same
chemicals industry- there may be something in period as that for which the main contractor is
this argument, but it is clearly not of general liable or, assuming the sub-contract works are
validity. finished earlier, does his defects period run from
There are certain occasions on which to seek the date of the completion of his own works?
to apply the principle of total liability of the main Second, does the sub-contractor's statutory
contractor would be unreasonable. Take the period of limitation run from the completion of
case where the contract includes a special item the main contract or the completion of the sub-
designed and manufactured only by one sup- contract?
plier. The main contractor cannot be expected to Third, does the sub-contractor have the
be an expert in the design of that item, and the obligation to indemnify the main contractor for
risks involved may be out of all proportion to the loss or damage which the main contractor suf-
sub-contract price. In this sort of example it fers under his contract with the employer, to the
would seem fair to make the main contractor's extent that this is due to the default of the sub-
liabilities in respect of that item extend only to: contractor?
The last issue can be dealt with easily. All the
the main contractor's own negligence or standard forms of sub-contract in the construc-
142 T ERM S AND C O N D ~ T ~ O N OSF CON TRACT
tion industry, including the form for use Tribunal. It seems, however, that they are
with MF11, contain wide-ranging indemnities unlikely to be resolved in the near future.
in favour of the main contractor. These can In the meantime, to judge from the evidence
be extremely onerous on the sub-contractor collected in the Latham Inquiry, there is clearly a
especially since the period of limitation only wide level of dissatisfaction felt by sub-contrac-
begins to run from the time when the loss is tors in their relationships with main contractors
established or incurred. It seems indeed doubtful especially in the areas of contract conditions and
if the full impact of these indemnity provisions is finance.
properly understood by many sub-contractors. That this is the case is not altogether sur-
Practice as regards the first issue varies. The prising. While it may be prudent from the main
MFI1 sub-contract form clearly specifiesthat the contractor's viewpoint to seek extensive indem-
sub-contractor's defects liability period is the nities, and to operate on what is largely a 'back-
same as that of the main contractor. Other to-back' basis with their sub-contractors, this
forms, such as the nominated form NSCIC for ignores the commercial reality that the main
use with JCT 80, provide that the sub-contrac- contractor is paid to take the overall risks of the
tor's period of defects liability runs from the project and to supervise the work of his sub-
practical completion of his own work. contractors. One can draw the conclusion that if
As regards the second issue, at the time of main contractors paid more attention to these
writing the position is that generally the period aspects of their work, and less to trying to pro-
runs from the completion of the sub-contrac- tect themselves against their sub-contractor's
tor's work. But this solution is controversial and default, then perhaps there would be less dis-
there are proposals supported broadly by satisfaction in the industry.
clients, designers and main contractors that It is also important from the employer's
there should be a single period of limitation of viewpoint that he does nothing which would
liability running from the completion of the undermine the main contractor's position in his
main contract - that is, the limitation period relations with the sub-contractor.
should be project-based. This is objected to by In negotiations where the employer is claim-
sub-contractors, who consider that the present ing against the main contractor, due to a defect
position that there are separate limitation in a specialist sub-contract item, it may often
periods for each sub-contract should be main- appear that the main contractor is acting as no
tained. In practice, having regard to the sub-con- more than a post office and the employer may be
tract indemnity clauses, it is difficult to see what tempted to take matters into his own hands and
real advantage the sub-contractors gain from deal with the sub-contractor or supplier of the
their opposition. specialist item direct. This is a temptation which
One problem which sub-contractors gen- the employer in his own interests should resist.
uinely have, especially those who are specialist Once an employer has direct contact with the
firms, is that as a purchaser of materials for sub-contractor he not only makes the main con-
incorporation in their work they could well find tractor's position impossible, but may easily
their suppliers declining to accept any liability at prejudice any contractual rights which he has
all beyond a six-month period for proven against the main contractor.
defects. Assuming the parties to be of equivalent
bargaining strength such clauses might well sur- TIME FOR COMPLETION
vive an attack under the Unfair Contract Terms In the negotiations of fixed completion periods
Act 1977. and so-called 'penalty' clauses, two of the prin-
These issues are widely discussed in the cipal objections put forward by contractors
Latham Report and in Product Liability in against the acceptance of such contractual
the Construction Industry by N. Palmer and E. obligations are, first, that they cannot impose
McKendrick, Lloyds of London Press, 1993, like terms on their suppliers and sub-contractors
published in association with the Joint Contracts and, second, that they may be delayed in the
SUB- CONTRACTING
completion of the contract by the failure of the selection of reliable sub-contractor and
sub-contractor in circumstancesin which it was obtaining the employer's consent to their
impossible for them to compel the sub-contrac- employment as required by the contract
tor to complete on time. placing of the sub-contract at the appropriate
As to the first objection, it is again part of the time to fit the overall project programme,
main contractor's job to organize his sub-con- having obtained a realistic completi
tracting in the most effective manner possible promise from the sub-contractor which J
and to place his sub-contracts on the most the programme
favourable terms he can. Even, however, if the placing on the sub-contractor of contractua
sub-contractor does accept a fixed completion terms providing the maximum protection
period and damages for delay, the level of those for the main contractor which he could com-
damages will almost always be related to the mercially obtain
sub-contract price, thus leaving a gap between actively progressing the sub-contract from its
the main contractor's liability to the employer commencement
and what he can recover from the sub-contrac- advising the employer at the time it occurs of
tor (see,for example, clause 7.1 of the MF / 1 form any delay which is likely to affect the overall
of sub-contract). There is really no wholly satis- programme and taking all reasonable steps to
factory answer to this problem; it is part of the overcome that delay.
main contractor's risk for which he earns his
margin on the sub-contractor's price. WHEN EXTENSION OF TIME IS ALLOWED
One partial solution which has been tried is If notwithstandingthe above the job is still late,
to insist that the sub-contractor in default bears due solely to the sub-contractor's default, then
the whole damages payable up to the limit con- provided the contract contemplated that
tained in his sub-contract. An example may work being sub-contracted, that is, that it was
make this clear: work included in the contract but of a type not
normally carried out by the main contractor
value of the main contract: E l 000 000
himself, it is thought that the main contractor
value of the sub-contract: E100000
ought to be entitled to an extension of time.
damages under the main contract: Lh per cent
Support for this proposition is to be found in the
per week to a limit of 5 per cent
House of Lords' decision in Scott Lithgow v
damages under the sub-contract: 5 per cent
Secretary of Defence 1989. There the contract for
per week to a maximum of 10 per cent
two submarines contained the words 'In the
the contract was four weeks late due to the
event of exceptional dislocation and delay
sub-contractor's default.
arising from ... any other cause beyond the con-
The main contractor would be liable therefore to tractor's control' and went on to provide for the
a total of damages of £5000 x 4 = £20 000. Of this effect being assessed by the parties or for the
the sub-contractor would indemnify him to a Ministry to pay for the vessel on an 'actual cost
total of 10 per cent of El00000 = £10 000, leaving basis'.
the main contractor to find the other £10000. If, Delays were caused because of manufactur-
however, the delay was only two weeks, then the ing defects in the special cables supplied by
sub-contractor would be liable for the whole of BICC. In holding that the contractors were en-
the damages. titled to the benefit of the clause Lord Keith
The second objection has more validity, and stated
it is suggested that the commercial basis for the
recovery of damages should be not only that the Prima facie it is not within the power of
main contractor is late, but also that he has in a contractor to prevent quality
some way defaulted in his own obligations. breaches of contract on the part of a
These may be expressed in relation to sub-con- supplier or sub-contractorsuch as lead
tracting as follows: to delay. The contractor has no means
144 TERM S AND CONDI TI ONS OF CONTRACT
in the ordinary case of supervising the main contractor having the widest choice of
the manufacturing procedures of his sub-contractor possible, consistent with the
supplier. He specifies his requirements employer retaining technical and commercial
but has no means of ensuring that they control of the contract. There is, however, a
are met. .. practice which is particularly prevalent in build-
ing and civil engineering contracts, under which
However, MFll clause 33.2 provides that a delay sub-contractors and suppliers are nominated by
by a sub-contractor which prevents the contrac- the architectlengineer. Very briefly, the system
tor from completing on time will entitle the con- is that at the tender stage a prime cost or pro-
tractor to an extension of time, provided that the visional sum, representing the estimated value
delay is due to a cause for which the contractor of the work, is inserted by the architectlengineer
himself would have been entitled to an exten- in the bill of quantities, and when a sub-contrac-
sion. This appears to imply that in any other cir- tor has been selected by the engineerlarchitect
cumstance, i.e. if the sub-contractor is simply in the main contractor is told to place his sub-con-
default despite the main contractor's best tract with that firm. In practice, certain nomi-
efforts, then the main contractor is liable to the nated sub-contractors may be selected before a
employer for the resultant delay and is left to decision is taken on the main contract. The esti-
whatever remedy he has against the sub-con- mated amount in the bill is then replaced by the
tractor. Support for this proposition is provided actual sub-contract price. The main contractor,
by the case of Fairclough Building Ltd v for his services, is paid a fee on the sub-contract
Rhuddland Borough Council, 5 October 1983 price for profit and attendance.
where the standard JCT contract had been The system is convenient as regards fittings,
amended to state that Fairclough were entitled for example locks, doors, sanitary ware, and so
to an extension of time for delay by a nominated on, in that it saves the architect having to specify
sub-contractor 'which they had taken all avoid- these in detail at the tender stage and allows him
able steps to delay or reduce but such delay will time to choose those he considers most appro-
be only considered for the reasons for which the priate. Applied, however, to large sub-contracts
main contractor (Fairclough) could obtain an for building work such as structural steel, heat-
extension of time under this contract'. Since on ing and ventilating or electrical work, it has
the facts the sub-contractor's delay was due many disadvantages as follows:
simply to their own default Fairclough were not
entitled to any extension of time under their 1 It removes these sections of work from the
contract although equally there was no evidence competitionfor the main contract.
of any default by Fairclough themselves. 2 No matter what the contract says, the main
If there are no specific provisions in the con- contractor never feels the same degree of
tract conditions to the contrary then it is consid- responsibilityfor a nominated sub-contractor
ered on the strength of the Scott Lithgow as for one of his own choice.
decision that a main contractor could claim an 3 The employer has to assume responsibilityfor
extension of time if he could establish that the the integration of the programmes of the
default of the sub-contractor was in practical nominated sub-contractors with the main
terms beyond his control. This would obviously building programme. It follows that very often
not apply if it was work which the main contrac- no really firm programme can be established
tor could reasonably have been expected directly when the main building contract is placed.
to supervise, but perhaps only to specialist man- 4 The system has worked against the growth of
ufacturing work in the sub-contractor's works. medium-sized construction firms who are
capable of tendering for and handling
integrated contracts for a complete project
NOMINATED SUB-CONTRACTORS
inclusive of steelwork, mechanical and elec-
Stress has so far been laid on the desirability of trical services.
SUB- CON
5 Under the procedures for nomination in both latest edition of the ICE conditions is the
the JCT and ICE contract forms the courts problem of where the works to be performed
have effectively placed the risk on the by the nominated sub-contractor include
employer of repudiation by a nominated sub- design whilst design is not under the ICE form
contractor or justified forfeiture of the sub- part of the main contractor's responsibility. It
contract by the main contractor for the is now provided that if the design require-
sub-contractor's default. ment is specifically included both in the main
6 Since in general the employer's rights in and nominated sub-contract then the con-
respect of defective work by the nominated tractor is liable to the employer for such
sub-contractor can be exercised only through requirement (clause 58(3)). However, under
the main contractor, who will normally have clause 59(1)the main contractor can object to
played no part in the selection of the nomi- the employment of a nominated sub-contrac-
nated sub-contractor or in the writing of the tor who declines to enter into a sub-contract
terms upon which the nominated sub- under which he accepts towards the main
contractor tendered, it is necessary in the contractor like obligations and liabilities to
main contract conditions to cover in some those which the main contractor accepts
detail both how the rights of the employer are towards the employer. Since it may fairly be
to be preserved and how the main contractor said that the ICE conditions are not really
is himself to be protected. Suppose for exam- designed for contracts under which the con-
ple that the nominated sub-contractor insists tractor assumes a design liability, it is likely
on contracting only on the MF/l conditions that any commercially prudent nominated
which as is noted in many instances - for sub-contractor for M&E work would so
example limitation on liquidated damages, decline and insist on the use of MFI1 or a like
responsibility for making good defects, liabil- set of conditions. The engineer will then be
ity for accidents and damage - are substan- obliged to proceed under clause 59(2) and
tially more favourable to the contractor than either nominate another sub-contractor or,
the ICE conditions. Is the main contractor to which is more likely, omit the works from the
be obliged to accept the additional liabilities contract. There is no longer any provision
which he cannot pass on, or are the allowing the engineer to nominate on terms
employer's rights as regards the work covered not complying with clause 59(1).
by the nominated sub-contract to be limited
to those which the nominated sub-contractor An important change was introduced in the 6th
is willing to accept? This problem and others edition of the ICE conditions to the effect that
are dealt with in some detail in clause 59 of the the main contractor is as fully liable for a nomi-
ICE conditions and generally in a manner nated sub-contractor as for a domestic one,
which seems fair to both parties, but neces- unless the default of the sub-contractor gives the
sarily the provisions are complex and much main contractor the right to terminate the sub-
care is needed in carrying out the procedures contract. In those circumstances the main con-
involved if the intent of the various sub- tractor is indemnified by the employer for his
sections of the clause is to be realized. So losses and expenses which he cannot recover
much is this so that one wonders if the alleged from the defaulting sub-contractor.
benefits of nomination are worth the effort There is also a new provision 59(l)(d)that a
involved and the risk, if any of the procedures ground of objection to a nominated sub-con-
are not properly followed, of a break in the tractor is that he will not provide the main con-
contractual chain which leaves the employer tractor with security for the proper performance
without adequate remedy or of the contractor of his contract. It is not clear whether this refers
being saddled with responsibilities without to an 'on-demand' bond or not, or what level of
the possibility of enforcing them. security the main contractor can require, but
One issue which has been tackled in the presumably he could insist at least on the same
146 TERM S AND CONDITIONS OF CONTRACT
type and level of bond as he has been required to materials which are specified by the employer
provide himself. or his architect.
The position is even more complexunder the 2 The main contractor is responsible to the
JCT conditions of which a significant part is employer for the nominated sub-contractor's
solely concerned with issues relating to nomi- and supplier's workmanship and quality of
nated sub-contractors. Within the scope of this the materials which are supplied. This was
work only three will be considered: those re- again established in the Young & Marten case.
lating to delay in completion,defects in the work Accordingly he has the normal obligations of
and that of re-nomination. For a more detailed inspection and a liability for defects which
commentary on the forms the reader is referred such examination should have revealed. This
to Keating on Building Contracts, Sweet & obligation, subject to what is said below
Maxwell,1995. regarding restrictions in the sub-contract
terms, means that the main contractor is also
DELAY IN COMPLETION liable for latent defects in the materials or
Under the main contract JCT80 clause 25.4, the workmanship in the same way as he is for the
main contractor is entitled to an extension of remainder of the works.
time if he is delayed in completion of the works 3 If the sub-contract contains provisions limit-
by reason of 'delay on the part of nominated sub- ing the liability of any sub-sub-contractor or
contractors or nominated suppliers which the supplier with whom the sub-contractor is
contractor has taken all practicable steps to required to contract which are approved in
avoid or reduce'. This extension of time is not writing by the main contractor and the archi-
dependent upon the cause for which the nomi- tect, then the liability of the sub-contractor to
nated sub-contractorlsupplier is delayed and the main contractor and of the main contrac-
extends even to default by him in the carrying tor to the employer is similarly limited in
out of his work. respect of the sub-contract works (clause
The employer's remedy is through the direct 35.22).
warranty which he should obtain by using form 4 If the terms of contract determined by the
TNSll for nominated suppliers and NSC/W for architect with the supplier do not contain any
nominated sub-contractors. provisions which limit the supplier's liability,
the main contractor will be liable for latent
DEFECTS IN THE WORK defects in the materials supplied. If such
terms do contain limitations on the supplier's
Whiie a nominated sub-contractor or supplier is
liability, the main contractor's liability to the
still a sub-contractor or supplier of the main
employer will be similarly limited provided
contractor the latter's responsibilities which
that the main contractor has obtained the
would otherwise exist for the sub-contract or
approval of the architectlcontract administra-
supplier's work are substantially reduced by the
tor in writing to those restrictions (clause36.5).
express terms of the JCT80198 contract. In sum-
From the contractor's viewpoint therefore
mary the position is:
it is essential that he notifies the architect of
1 The main contractor is under no liability for any term excluding or limiting the supplier's
the sub-contractor's or supplier's design, any liability and obtains his approval before plac-
performance specification forming part of the ing his order. Failure by the architect to give
sub-contract or the suitability for purpose of approval would entitle the contractor to reject
materials which the sub-contractor or sup- the nomination.
plier supplies (clause35.21 and clause 36).See
also Young & Marten Ltd v McManus Childs What appears not yet to have come before the
Ltd [I96919 BLR 77, which had already estab- courts is what the position would be if the
lished the general position that a contractor is restrictions on liability insisted upon by the
not responsible for the fitness for purpose of nominated supplier were held not to satisfy the
SUB-CONTRACTING 147
test of reasonablenessunder the Unfair Contract There are further circumstances where other
Terms Act (see p. 163). Could the question be parties such as financiers and future purchasers
raised in an action by the employer against the of a development may require collateral war-
main contractor? In principle there seems to be ranties but these are outside the scope of this
no reason why it should not be since the effect of book. For details of these reference may usefully
clause 36.5.1 is to incorporate the supplier's be made to Collateral Warranties, Frances A.
terms into the main contract. Patterson, RIBA Publications Ltd 1991, with
January1993 Supplement.
COLLATERAL WARRANTIES
Reference was made earlier (see p. 20) to the RE-NOMINATION
need for the employer to obtain collateral In the leading case of North West Metropolitan
warranties in order to give him a direct right in Hospital Board v T.A. Bickerton & Son Ltd [I9701
contract against a defaulting sub-contractor. A 1 WLR 607 it was held that if a nominated sub-
collateral warranty is simply an agreement made contractor fails to complete his work then the
between the sub-contractor and the employer in employer is under a duty to re-nominate and it is
which the sub-contractor undertakes to the the employer who must bear the increased costs
employer that he will perform all obligations of completion by the new sub-contractor and
contained in his sub-contract with the contrac- some part of the main contractor's losses caused
tor. Further, to the extent that the sub-contractor by the delay. The primary reason behind the
is responsible for design, that his design will be decision was that the main contractor was
fit for the purposes required by the employer. It barred under the terms of the contract from
is recommended that the warranty should be carrying out the work himself and therefore it
phrased in this way so that the sub-contractor's must be implied that there had to be a re-nomi-
liability for his design is strict and not limited to nation. This position has more recently been
the exercise by the sub-contractor of reasonable confirmed by the Court of Appeal in Fairclough
skill and care. Ltd v Rhuddlan Borough Council where it was
The consideration for the collateral warranty additionally made clear that the re-nomination
is usually expressed as a nominal amount of had to cover not only uncompleted work but also
money, although if the collateral warranty is work which the original nominated sub-contrac-
executed as a deed then strictly consideration is tor had done imperfectly,from which it followed
not required. also that the employer was responsible for the
The circumstances in which a collateral war- costs of remedying the work done improperly.
ranty should be obtained can be summarized as: Further, in order to be valid the nomination had
to provide for the work to be done and to be per-
on any contract where the sub-contractor is formed within the original overall contract com-
undertaking specialist work which is critical pletion period, or the main contractor given an
to the functioningof the works appropriate extension of time, objection having
where a nominated sub-contractor is respon- been made by the main contractor to the pro-
sible for the design of any part of the works posed re-nomination on the grounds that the
on any management contract where the sub-contractor's completion date was beyond
design liability of the contractor is limited to that of the main contract (see Building Law
the damages which he can recover from the Monthly,October1985).
defaulting sub-contractor. In this instance it
may be necessary to bond the sub-contrac- CONTRACTS (RIGHTS OF THIRD PARTIES)
tor's liability under the collateral warranty, ACT
since the most likely reason for the inability of As referred to earlier (see p, 20) it is now
the management contractor to recover dam- possible for the parties to a contract to provide
ages is that the sub-contractor is in receiver- that a third party can enforce a term of the con-
ship. tract if the contract expressly states that he can
148 TERM S AND CONDI TI ONS O F CONTRA CT
do so. One obvious situation in which the Act JCTIntermediate and Minor BuildingWork con-
could be utilized is to provide in the nominated tract forms is becoming more widespread and
sub-contract that the obligations as to the being applied to a higher value of work than was
quality, fitness for purpose and time for com- ever originally intended.
pletion of the sub-contract works were all to be There is an argument that the system results
for the benefit of the employer and, if appro- in lower prices than would be the case if the
priate, for the benefit of those financing the con- main contractor had to accept the entirety of the
tract. This could be a great deal simpler than risks involved. This is probably true to the extent
seeking collateral warranties and avoid the prac- that through the nominated system the
tice of seeking to make the terms of such employer has taken away from the main con-
warranties more onerous than those of the sub- tractor his power of choice, but it is also likely
contract itself. that the out-turn costs will be higher because of
It is too early yet to say whether this will hap- problems of co-ordination, especially in the
pen or not but in view of the innate conservatism engineering design.
of those advising employers and financiers, and There are a number of alternative routes that
the vocal opposition in the construction indus- can be taken in lieu of the present nominated
try to the Act there must be an element of doubt, system:
at least in the short term.
1 The employer could seek to utilize the rather
simplistic mechanism of the Government
REVIEW
conditions of contract, GCIWorksll, 1998
It is evident now that the way in which the nomi- edition (see clauses 63 and 63A). Effectively
nated sub-contractor system has developed, these make the main contractor liable for the
under the standard building and civil engineer- nominated sub-contractor as if he were a
ing forms in particular, is that the main contrac- domestic sub-contractor, although the main
tor has become substantially a co-ordinator and contractor is given a right to object to the
that the employer as regards his rights for defec- nominated firm. There is also a provision that
tive design and lack of suitability for purpose of if the nominated firm goes into liquidation
materials is largely looking to the separate agree- the employer will pay the extra costs the main
ments and warranties concluded between him- contractor incurs in completing the works.
self and the sub-contractorlsupplier. Especially However the guidance notes clearly point out
on building work under the JCT forms there is that this does not relieve the main contractor
not one main contract but a complex series of from other costs such as liability to the
inter-locking agreements between the employer employer for delay, defects in the insolvent
and the several nominated sub-contractors and firm's work or prolongation or disruption
suppliers. The system, given its obvious difficul- costs. The risk of all these remains with the
ties and the substantial burden of administra- main contractor.
tion work which it imposes, is now increasingly 2 The architect, in conjunction with other
lacking in support. The CIPS in their submission specialist designers, could provide perfor-
to Latham described it as 'a contradiction in mance specifications for work such as
terms' and recommended its abolition. It is mechanical and electrical services against
reported that only 11 per cent of specialist engi- which the main contractor would bid as part
neering contractors are nominated under JCT of his tender, selecting his own domestic sub-
80198. Latham himself did not recommend that contractor from a short list given in the
it should be followed as a normal procedure. It is enquiry documents. The sub-contractor
hoped that the days of the system are numbered would undertake the necessary detailed
and it has been abandoned in the NEC. But there design work for tendering purposes and the
is also evidence to suggest that in protest against main contractor would be required to state in
this complexity the use of the somewhat simpler his tender the sub-contractor he had chosen
SUB- CONTRACTING
and with whom he would be required to sub- any firm pursuant to directions given by the
contract the design and execution of the elec- engineer unless the contractor shall have
trical and mechanical works. In this way approved that firm and the plant if any to be sup-
continuity of design and installation would be plied. It is not a question therefore of the con-
maintained. Any time lost in the tendering tractor having the right to object, he must
process as compared to the nomination sys- actually approve both thefirm and what they are
tem would be recovered post-contract. going to supply. The engineer should therefore
3 The employer could place separate contracts take steps to obtain this approval in writing.
for the main elements of work which would The Red Book in clause 10 allows the contrac-
normally be undertaken by nominated sub- tor to object to any nomination on the grounds
contractors and through - the construction that:
management system would co-ordinate
the nominated firm is unwilling to enter into a
these. Each contractor would be directly
sub-contract in terms which are compatible
responsible to the employer.
with those of the main contract
4 The employer could appoint a specialist firm
the nominated firm is unlikely to be reliable or
as main contractor and allow him to select his
competent in the performance of the sub-
own civil or building contractor as a sub-con-
contract
tractor. This is only feasible if the specialist
the nomination would prevent or hinder the
firm has the capability of acting as main con-
contractor in the performance of the con-
tractor and exercising effective control over
tract.
the civil or building firm.
If the contractor does not object he cannot later
Whichever method is adopted two objectives complain of any of the above. However under
need to be achieved. There must be a clear clause 10.7 the purchaser indemnifies the con-
responsibility for design and for the integration tractor in respect of any losses, liabilities,claims
of the design of the various sub-systems and the or costs incurred by the contractor as a result of
building work. The employer must have clear the failure by any nominated sub-contractor to
and simply expressed contractual rights in perform his obligations under the relevant sub-
respect of any default by a specialist firm either contract. This sweeping indemnity appears to
through the main contractor or directly against apply regardless of the main contractor not
the specialist firm itself without the need for a having objected to the nomination in the first
proliferation of collateral warranties. instance. It would also on the face of the wording
cover any breach of contract by the nominated
NOMINATED SUB-CONTRACTOR'S PLANT firm or their going into liquidation or receiver-
CONTRACT ship regardless of the remedies which the main
The discussion so far has centred on building contractor has against the nominated firm. The
and civil engineering contracts since these are indemnity would apply therefore to any breach
the primary forms where this practice is used. by the sub-contractor of his obligations irrespec-
However both form MF/ 1 and the Red Book do tive of any limits of liability contained in the sub-
contain brief provisions on the use of nomina- contract. With an indemnity in these terms the
tion which are worth examining. purchaser or his project manager would need to
MF/1 limits itself, in clause 5.6, to the brief be very careful before nominating any sub-con-
statement that the contractor shall have no tractor; in fact it's a strong deterrent against
responsibilityfor work done or plant supplied by doing so.
CHAPTER SEVENTEEN
Delivery
Under a simple order for the supply of goods, the the plant but with the whole, assembled, tested
supplier's total liability for the goods will nor- and in proper working order. It might be sug-
mally terminate when they leave his factory. gested therefore that the contractor in such
After that the extent of his contractual responsi- event should retain the ownership of the goods
bility will vary according to the specific terms of and the absolute liability for them, until the
the contract. If he is responsible for making point has been reached when the plant is taken
delivery to the buyer's store, then he must over by the purchaser, when the property and
arrange carriage of the goods either in his own risk should pass. This would indeed be a simple
transport or under a proper contract of carriage solution, but it is not in many instances a prac-
with a third party; and, unless he obtains the tical one for the followingreasons:
buyer's specific consent, such contract should
The contractor will usually want to be paid a
not be at owner's risk. In so far, however, as it is
substantial percentage - say 90 per cent - of
the purchaser who has the duty of taking delivery
the value of the goods when they are de-
of goods and inspectingthem on arrival, the sup-
livered. Having paid all but the retention
plier will insist that, if he is to be liable for any
money for the goods, the purchaser will natu-
loss or damage duringtransit, that notice is given
rally want them then to become his property,
by the purchaser in time for the supplier to com-
so that he has securityfor the money paid.
ply with the carrier's terms of contract. Whether
In very many cases it would be uneconomic to
or not he is to be so liable will depend on the
require the contractor physically to take deliv-
terms of the individual order, but, from the
ery of, and arrange storage for, the various
buyer's point of view, the only safe course to
units of the plant as they are delivered to the
adopt is to assume that if it is desired to make the
construction site or the buyer's premises. It
supplier take the risk of the goods in transit, then
would mean the establishment by the con-
this should be expressly written into the con-
tractor of a site organization which at least in
tract. To rely in this instance on implied terms is
the early stages of the contract would only
to tread on dangerousground.
be employed part-time. It is commonly
arranged, therefore, as part of the s e ~ c e s
RESPONSIBILITY DURING which the purchaser is to provide under the
INSTALLATION contract, that the purchaser will be responsi-
ble for taking delivery and storing the parts of
These arrangements are reasonable enough
the plant until they are needed. In so far, how-
where the contract is completed (other than for
ever, as the purchaser performs these tasks he
the provisions of the defects liability clause)
cannot at the time expect the contractor to
when goods complying with terms of the order
take the legal responsibilityif anything should
and specification have passed into the buyer's
happen to the goods whilst under the pur-
physical possession. The position is rather dif-
chaser's physical control. If it is intended that
ferent, however, when one is concerned with
the purchaser should be responsible for
plant which has to be assembled or installed on
reception and unloading of the plant and its
the buyer's premises or construction site, and
storage, condition 24.1 of MFI1 would need to
then commissioned by the supplier before he
be amended accordingly.
can be said to have fulfilled his contractual obli-
gations. In this case the purchaser is not really It is normal, therefore, for conditions of contract
concerned with the individual units making up governing the supply and installation of plant to
D ELIV ERY 151
provide that the items of plant making up the vided and methods of storage? Is it necessary
works become the property of the purchaser for the supplier to advise on any special
when either they are delivered to site, or the con- requirements - for example for electronic
tractor becomes entitled to require their value to equipment?
be included within an application for a certifi-
cate for payment. For a typical example of such a
ACCESS TO SITE
clause see condition 37 of MF / 1.
While, however, the purchaser is happy to A further point to be considered is that of access
become the legal owner of the plant, he is not so to the site. Unless the contract states otherwise,
anxious to assume complete responsibility for it is the responsibilityof the purchaser to provide
any loss or damage to it which may occur at any access to the site of the nature which will permit
time up to the plant being taken over. It is usual the proper execution of the contract in the man-
again, therefore, to provide that, except for any ner contemplated. MF/1 accordingly provides
period when the purchaser is actually handling that:
or storing the plant, it remains at the risk of
the contractor. This must, however, be said The Purchaser shall provide such
expressly, since otherwise the purchaser, as the roads and other means of access to the
legal owner of the plant, may well find himself Site as may be stated in the
treated as the person upon whom the liability for Specification subject to such limi-
any loss or damage may fall under the old com- tations as to use as may be imposed
mon law concept that risk and property in the (clause11.1)
goods go together. ... approaches ... to be provided by
It is particularly important that if the pur- the Purchaser shall be provided within
chaser is providing any services - for example the time specified in the Contract or in
the use of a crane for unloading, storage accom- the Programme, shall be of the quality
modation and the like -the respective responsi- specified and in a condition suitable
bilities of the parties in this regard are made for the efficient transport, reception.. .
absolutely clear at the tender stage, and in this of the Works (clause11.4).
connection the following checklist may be found
useful: The Red Book similarlycovers access to the site in
clause 23 although in somewhat less specific
1 Is the purchaser or supplier to take delivery? terms. The obligations of the purchaser could
2 Who is providing labour and tackle for conveniently be dealt with in more detail in
unloading? Schedule 2 list of the purchaser's responsibilities.
3 If the purchaser is providing tackle, who is in If, therefore, there are any peculiarities
charge of the operation and who accepts the regarding the site or restrictions on access which
risk if any accident occurs? would interfere with normal delivery or make it
4 Is the purchaser providing storage accommo- more difficult - for example a bridge capable of
dation or merely storage space for the con- only carrying a limited load - the purchaser, to
tractor to put up his own store? protect himself against misunderstandings and
5 If the purchaser is providing storage accom- ultimately a claim for extra payment, must set
modation, does he accept responsibility for out the position expressly in the specification
superficial examination of packages and the accompanying the invitation to tender.
like on delivery and for giving notification of The delivery of materials to site in order to
any apparent damage or shortfall? ensure that they are not there prematurely also
6 If the purchaser is providing storage accom- requires attention. Many sites are congested;
modation, does he also accept responsibility storage space is limited, and there are often a
for safe custody of the goods and for the suit- number of contractors each wanting their allo-
ability of the storage accommodation pro- cation of the room available. Moreover, the risk
152 TERM S AND CONDI TI ONS OF CON TRACT
of loss or damage, particularly to expensive or Second, payment on plant contract should

delicate items, is obviously far greater on a con- not be tied wholly to deliveries made to or work
struction site than in the manufacturer's works, done on site, but should be related to progress
and while contractually the supplier may be made against the contract programme. This
liable to replace or repair the damaged items, the point has already been referred to earlier under
time taken to do so may have a serious effect on 'terms of payment' (seeChapter 14).
the programme for the project as a whole.
Unfortunately, two factors combine to provide
RESPONSIBILITY DURING STORAGE
the contractor with a substantial incentive to
AND DEFECTS LIABILITY PERIOD
make, or press his vendors to make, early de-
livery of materials to site. Despite all efforts to the contrary it not infre-
The first is the fear of erectionlinstallation quently happens that the purchaser is not ready
work being held up by material shortages. The either for delivery of plant to be made or for its
combination of repeated late deliveries from erection or installation to proceed. His own pro-
vendors and escalating costs of site labour has gramme may be behind; related building or civil
made this into avery real fear. Second, under the engineering work may be late. Arrangements
system of payment included within most stand- must be made therefore for the items of plant to
ard forms of contract, under which the contrac- be stored and for the contract to be adjusted in
tor is expected to finance the job in the early such a way that, while the plant contractor is not
stages and is only paid for materials delivered to penalized for something which is not his fault,
or work done on site, the contract itself provides the employer's interests also are safeguarded.
the contractor with a built-in incentive to deliver The following points accordinglyarise:
and ensure that his suppliers deliver early, so as
responsibilityand payment for storage
to get paid early.
liability for the plant while it is in store
Two suggestions are made which it is
payment for the plant while it is in store
thought might help to alleviate these problems.
effect of delay on the price for erectionlinstal-
First, the main contractor should carry out more
lation
intensive programming of deliveries and ex-
carrying out of delayed acceptance tests
pediting of vendors, including the expediting of
adjustment of the defects liability period.
the major supplier's sub-vendors. This latter
point is known to be controversial, but some The responsibility for either storing the plant or
large contractors do it because they find that arranging its storage should be placed firmly
they cannot rely on their suppliers to carry out with the contractor, unless it has already been
expediting of their own sub-vendors effectively. delivered to site, when this may no longer be
It is the old problem of the one specialist item practical. In that event the employer will have to
holding up work to the value of many thousands accept the storage responsibility, for it is sug-
of pounds, and only by the most intensive and gested that he would be wise to insist on the con-
integrated action can this be prevented or the tractor preparing the plant for storage,
effect of it minimized. In terms of pure contrac- inspecting it periodically during storage and
tual procedure, such action by the main contrac- advising on any special method of storage which
tor may be wrong, and it is agreed that it could may be needed. For any of these services the
lead to a blurring of responsibilities as between contractor will of course be entitled to additional
the main contractor and his suppliers. But the payment. The contractor himself cannot, how-
fact remains that suppliers will not accept, and ever, reasonably be expected to accept the obli-
indeed cannot reasonably be expected to accept, gation to store indefinitely. MFll now provides a
responsibilityfor the effect which their delay has more elaborate procedure than the old Model
on the whole contract. So the main contractor Form A for dealing with delayed deliverywhichis
must look after his own interest, and in any event the purchaser's fault, in that the effect of such
prevention is better than cure. delay is to suspend the progress of the works to
DELIVERY
the extent that progress is dependent upon the ment for plant as it is delivered on site, it would
delivery of the plant delayed. However, the prin- clearly be most unfair if payment were to be
ciples remain that it is for the contractor to store withheld until the employer was ready for actual
the delayed plant and that after a time period, delivery to be made. The normal arrangement,
now reduced to 90 days, the contractor has the therefore, is that on the plant going into store the
right to require an instruction to proceed. If this contractor is entitled to be paid the same per-
is not received, he is entitled either to require a centage of the contract price as he would have
variation order to omit the work in question, to been entitled to receive on delivery being made
terminate (if the suspension affects the whole of to site. If the plant continues in store for a sub-
the works) or to be paid the contract value of the stantial period (under M F l l conditions 120
plant affected by the suspension. days), the contractor is entitled to be paid such
The effect of these provisions is to put con- further proportion of the contract price as he
siderable pressure on the purchaser to ensure would have been entitled to be paid on the issue
that the other work which is necessary to allow of the taking over certificate. But, and this is
either for delivery to be made or erection to pro- most important, the taking over certificate itself
ceed is completed on time. Also these provisions is not issued.
must be borne in mind by the purchaser when It is always preferable under a contract for
tendering and negotiating for contracts for the the supply and installation of plant for the erec-
other works on which progress is dependent to tion or installation price to be shown separately
ensure that the programmes are properly co- in the contract. It is particularly useful when
ordinated and that he is protected if the delay is delivery has to be delayed, since clearly(a) this
due to the default of the other contractor(s). part of the price does not become payable until
If the plant is to be stored personally by the the work is actually carried out, and (b) if the
contractor, then he should be prepared to accept delay is of any significance the contractor is
complete liability for any loss or damage which bound to require such part of the price to be
may occur in storage (other than any caused by adjusted to take account of increases in wages or
an uninsurable risk), and he should be required other costs which have occurred. This will be so
to insure accordingly. The costs of such insur- even though the contract was originally on a
ance would be payable by the employer. If on the fixed price basis, since such fixed price can only
other hand the contractor has no facilities to relate to the period of the contract as originally
store the plant and must arrange storage with a envisaged, and owing to the delay this may well
third party, he is unlikely to be able to do so on mean that the impact of wage awards or govern-
terms under which the third party accepts such ment regulations on the erection price will be
full liability. In that case it would seem reason- quite different from that estimated at the tender
able for the contractor's own liability to the stage. There is the further point that, as a result
employer to be limited to whatever terms the of the plant having gone into store, some
contractor can obtain from the third party. There additional work may be necessary to put it into a
remains only the question of natural deterio- condition to be installed. If so, then provided
ration of goods during storage, which applies that this was not due to the contractor's default
particularly to such items as certain electronic in any way, the additional costs should be added
equipment. Obviously unavoidable natural to the contract price.
deterioration is a risk which the employer must It is most important to the purchaser to try to
accept; other deterioration may be avoidable if ensure that, despite the delay, his rights and
expensive precautions are taken. Here it is for remedies against the contractor in the event of
the employer to decide how much he is prepared the plant not being satisfactory are not unduly
to pay for, and for risks to be shared between prejudiced. For this purpose two points must be
contractor and employer accordingly. covered: first, that the defects liability period
Assuming that the terms of contract are such does not start to run until the installation has
that the contractor only becomes entitled to pay- been completed and the plant is actually taken
154 TERM S AND C O N D ~ T ~ O NOSF CON TRACT
over, and, second, that the contractor is still 1 Definition of the terms used such as f.0.b. or
obliged to carry out the acceptance tests. c.i.f. It is suggested that this is done by refer-
The contractor on the other hand cannot be ence to the current edition of Incoterms, pub-
expected to continue his obligations under the lished by the International Chamber of
contract indefinitely. The solution contained in Commerce.
MFll would seem to be fair. This is as follows: 2 Issue of the export licence if one is required -
normallythe responsibilityof the contractor.
1 The defects liability period does not start to
3 Issue of an import licence. The obligation
run until the take over certificate is issued.
should be that of the purchaser but he will
2 The take over certificate is not in fact issued
require data normally in the form of pro-
until the works have actually been completed.
forma invoices from the contractor before he
3 The contractor is obliged to cany out the
can act. Atimetablefor these events should be
acceptance tests at any time during the
set out in the contract and preferably the con-
defects liability period.
tract should not come into force until the
4 If delivery or installation of plant becomes
import licence has been issued.
delayed due to the actions of the employer or
4 Customs clearance. If the purchaser is a for-
a person for whom the employer is respon-
eign government or quasi-government body
sible so that clause 25.6 applies, and the con-
then preferably this should be made his
tractor is obliged to carry out his obligations
responsibility and he should be given a spe-
under the defects liability clause more than
cific time within which to achieve it. Again
three years after the normal delivery date for
however, the contractor will be responsible
such plant, any additional costs incurred by
for supplying the correct documentation in
the contractor shall be added to the contract
the required language and the requirements
price.
in this respect should be stated within the
The Red Book does not contain detailed pro- contract documentation.
visions relating to delayed plant in the same way 5 Port delays. If port delays are anticipated the
as MFI1 although there is the right for the project contract should provide that the completion
manager to suspend the works either in whole or date is based on a period of so many days
in part. This may be all right where the contrac- between notification of a vessel's arrival and
tor is responsible for a total plant including the its ability to discharge cargo and any delays
foundations and therefore any delays are his beyond this entitles the contractor to claim an
responsibility. However if the purchaser is pro- extension of time.
viding the foundations through another contrac- 6 Payment of duty. Government or quasi-gov-
tor or doing any other part of the work himself or ernment contracts abroad are often duty-free
by others, it is considered that provisionssimilar but only if the goods are correctly consigned
to those contained in MFI1 should be added as a to the purchaser and the cases carry the
special condition of contract. appropriate markings. This again needs to be
The issues discussed in this chapter apply specified in detail within the contract.
with even greater force when the contract is 7 Method of transport. This may be dictated by
being performed overseas. Replacement of the purchaser who requires the use of his own
goods lost or damaged takes longer and is more or a specified shippinglair line and often the
costly and the overall effect on programme and use of particular agents. In this event the con-
project costs is therefore that much worse. Thus tract must provide a shipping period which if
it is even more important that the contract is exceeded will allow the contractor to claim for
clear as to where the responsibility lies for the delays. The procedure of any purchaser-
performance of delivery in all its aspects. appointed agents should be checked to
Additionally there are the following items ensure that they can be complied with within
peculiar to export contracts which need covering the proposed contract programme.
expressly within the contract: If the contractor is allowed the choice,
DELIVERY
then, assuming all three methods are available, consignment by air in order to save time
land, sea or air, the primary factors to be taken unless parallel arrangements are made to
into account contractually are: have the licence at the airport.
Clearance as duty-free because it is a
Safety and security of the goods. Air or a government contract may only be effected
containerized load by truck or sea have a at certain entry points and these need to be
definite advantage on this account if cir- identified.
cumstances allow. Restrictions on internal transport. Checks
Availability of import control and customs should be made on the size and weight
clearance facilities. Many countries oper- of proposed loads against local roads,
ate on the basis that the goods can only be bridges and tunnels. Also, if internal air
cleared through the place where the import transport is restricted to the local air line,
licence is physically held. It will be no use the capacity of its transport planes should
therefore deciding to transport a particular be checked.
CHAPTER EIGHTEEN
Defects: guarantees and remedies

Every purchaser would like the goods which he This is the buyer's decision. He will often
purchases whether commercially or privately to want advice from the contractor on the time-
be perfect. But perfection is not something scales and costs involved and the results which
which just happens; it has to be worked for and the contractor is prepared to guarantee as com-
paid for, often in terms of both cash and time. paredwith those for which he will accept no con-
The higher the quality which is required, in gen- tractual liability. What is vital is that the buyer
eral the greater will be the initial cost and the recognizes the need for him to take this decision,
longer the delivery period. All this may seem and that he should frame his contract in accord-
axiomatic, but it is highly relevant to the meth- ance with the decision reached.
ods of purchasingto be employed and the reme- In addition to considering the above, the
dies which it is reasonable for purchasers to purchaser must also ensure that the contract
seek, against contractors who have apparently correctly reflects the precise nature and quality
defaulted in their contractual obligations. of what he really needs. Over- or under-design
With every additional complex part which is can be equally expensive. There is no point in
added to any item and each extra processing purchasing a high-quality article if, for the usage
operation which is included within the process to which it will be subject, that quality is unnec-
of manufacture or plant operation, the probabil- essarily high. The same holds good the other way
ity of error arising is multiplied. It may be desir- round. But the purchaser cannot have it both
able, in the interests of advancing technical ways. Having accepted that the lower-quality or
knowledge generally, to keep on with experi- lower-performance, and therefore lower-priced,
mentation and to push even further forward article or plant is suitable to his needs, he cannot
with the development of new ideas. But there is a then expect the same guarantees as if he had
very distinct danger that the 'best can become purchased the more expensive. If a processing
the enemy of the good'. To set a time-scale on plant has been designed to handle 100 tons of
development is never easy; to utilize what is material an hour and is guaranteed at that figure,
existing and available may seem dull compared it is no use the purchaser complaining, after he
with the excitement of further potential develop- has overloaded the plant by 25 per cent, that it
ments. But the balance must be kept between, has been inadequately designed. If he wanted a
on the one hand, falling behind technically and 25 per cent overload factor to be incorporated in
failing to take advantage of what can be achieved the design, he should have said so expressly.
by bold experimentation and applying modem
technology, and on the other hand, never quite GUARANTEES FOR MATERIALS,
completing any development and achieving WORKMANSHIP AND DESIGN
commercial success with it, before that develop-
ment itself becomes outdated. GUARANTEE PERIOD
The buyer in his approach, in the specifica- The contractor usually wants to know that his
tion he establishes and the guarantees he contractual liabilitiesare clearly limited in terms
demands, sets the stage on which the contractor of time and that this time is relatively short. In so
must perform. It is the buyer who fixes the priori- far as materials and workmanship are concerned
ties. Is it time that is vital, so that existing ideas this is perfectly reasonable. With proper inspec-
and methods only can be incorporated? Is it a tion, and after the plant has been in use for even
high degree of reliability, thus limiting again a limited time, any defects due to defective
both design and production methods? materials or workmanship should have been
DEFECTS: GUARANTEES AND REMEDIES
revealed. Also, to the extent that the contractor cover this by giving the purchaser the right to
has no control over the plant or the manner of its advise the contractor that the goods will be going
use once it has passed into the purchaser's pos- into store or not being used, and that in such
session, if the defects liability period were pro- event the period does not run until the goods are
longed innumerable disputes could arise as to in fact put into use, depending on the nature of
whether the failure was due to a defect in the the goods. It should also be provided that the
goods when they were purchased, or whether it supplier should advise on any special methods of
was due to subsequent mal-use or mis-operation. storage or protection required, and have the
The period which has been commonly opportunity of inspecting the goods both during
accepted within the construction industry has storage and when they are finally taken out; the
been 12 months, but it is doubtful whether this contractor to make good the effects of any de-
period is any longer appropriate. It has been esti- terioration in the goods due to long storage or
mated that between 75 and 80 per cent of defects non-use, but at the purchaser's expense.
become apparent in construction work generally The position is more difficult when the plant
within the first five years from completion. It can concerned is not being stored but, after being
reasonably be assumed therefore that a substan- installed, cannot be put into use for some con-
tial proportion of defects only become apparent siderable time due to other equipment not being
after the first year. Reasons why defects in the ready, so that in its installed position the plant
contractor's work can arise after the expiry of 12 may be exposed to damage or contamination by
months from completion include: dirt. An example would be plant installed in a
ship's engine-room,which cannot be operation-
1 The technical complexity and novelty of the
ally run until the ship as a whole is ready for
processes and materials now being used in
commissioning trials. In this instance, despite all
construction and of the installed equipment.
precautions which may be taken on the contrac-
2 The increasing extent to which the contractor
tor's advice and his inspection prior to the trials
who, although under a civil or building con-
being held, if the contractor agrees to an
tract may not be responsible as such for
extended guarantee period he is increasing his
design, is involved in practice in the 'design'
risk. He must be expected, therefore, to want a
of the works through the choice of materials
provision in his contract price additional to his
and methods of construction. The dividing
normal allowance for defects liability.
line between design proper and workmanship
With building or civil engineering work the
is often not easy to draw.
period starts from the date of practical com-
A significantlylonger period than 12 months may pletion or substantial completion. Difficulties
now be required for many contracts and this is a have arisen with the term 'practical completion'
point which should always be considered by the in building contracts. As the JCT 80 contract is
purchaser when inviting tenders. Three further written it would appear that the architect should
problems arise. First, from when does the period not issue the certificate if there are any patent
start? With plant purchased and taken into the defects in the works unless these are very minor.
purchaser's store, normally from the date of In practice when employers are anxious to take
delivery with electrical/mechanical or process possession this strict rule is not followed and the
plants from the date when the plant is taken over certificate is issued with a long 'snagging'
by the purchaser. In either case, if for any reason list. However, when for financial reasons a com-
there is a long delay in putting the plant into use, mercial developer does not wish to take the
this can mean that the major portion of the building over the rule is strictly applied.
defects liability period will have expired before This lack of clear definition and variations in
there has been an opportunity of putting it to the practice according to the employer's circum-
test. In the same way as was suggested therefore stances is clearly unsatisfactory given the
in the previous chapter when dealing with delays importance which attaches to the issue of the
in installation, the defects liability clause should certificate of practical completion.
158 TERM S AND CONDI TIONS OF CON TRACT
The second point is where a defect has been a defect for which the supplierlcontractor is
remedied within the defects liability period responsible. In both cases the contractor would
by the replacement of some part, as to what the probably insist on a final maximum time limit
liability period should be in respect of the part so from when the plant was put into operation so as
replaced. Is it a further twelve months, or merely not to leave his liability completely open-ended;
the balance then unexpired of the original twelve and this would seem fair.
months? Many standard conditions of contract The other problem relating to design and the
do provide for the former, and this is obviously period for defects liability is that during only
to be preferred from the buyer's point of twelve months' operation even with normal
view, but equally in fairness to the contractor, usage a defect may well remain undetected, only
there must be a long-stop, say perhaps twice the to become noticeable some time later. This
original defects period. Additionally in some can happen also with civil engineering work
conditions of contract the defects period for the such as foundations or dams; adverse conditions
section of plant affected is extended by the time against which the design was supposed to have
during which that section has been out of oper- provided may not arise until after the twelve
ation due to the defect. If the whole plant is put months' period has expired. Is the buyer in this
out of operation the period for the whole plant is sort of case to be left without any contractual
extended. remedy?
Neither of these provisions is unreasonable, The answer should be 'no', provided that it
provided that there is a final limit to the defects can be established that the loss or damage con-
liability period. No contractor should be cerned is due to a breach by the contractor of his
expected to continue under a contractual re- warranty that the works as designed by him
sponsibility indefinitely. would be fit for the purpose intended. But the
While, however, a fixed period of, say, 12 or longer the time gap, the more difficult this is
more probably 24 months may be reasonable going to be; the use may have changed, unfore-
in relation to defects in workmanship and seeable circumstances may have arisen, and it
materials, it is doubtful if in certain circum- must be remembered that the technical stan-
stances this is satisfactory to the buyer in terms dards against which the design is to be judged
of design or specification where these are the are those which were prevailing at the time when
responsibility of the contractor. The difficulty the design was made.
arises in this way. It frequently happens that a Nevertheless, as was stated recently in the
plant or item of equipment with a specific House of Lords by Lord Edmund Davies in a case
designed performance is not in fact operated involving a contractor's liability for a design fail-
continuously to that level of performance for ure: 'justice requires that we put ourselves in
some substantial time after it has been pur- the position of [the contractor] when first
chased or first put into operation. It may be run confronted by their daunting task, lacking all
intermittently or with a much lighter load. The empirical knowledge and adequate expert
parts are not subject therefore to continuous advice in dealing with the many problems await-
running at the specified duty, and so defects in ing solution. But those very handicaps created a
design which might otherwise have manifested clear duty to think through such problems so
themselves will remain hidden. Sometimes this that the dimensions of venturing into the
problem can be overcome by making the guar- unknown could be adequately assessed.' In
antee in terms of design related to a specified other words, the nearer the design is to the then
number of hours' full load running. Alternatively 'state of the art' the greater the responsibility of
the guarantee may be framed as y months from the designer, more particularly if any failure
the time when the plant starts continuous com- would result in the likelihood of personal injury.
mercial operation at not less than xper cent of its As his Lordship further stated in the same case
designed capacity, with an extension for any 'the law requires even pioneers to be prudent'.
period during which it is out of operation due to As to what is a reasonable period after
DEFECTS: GU ARAN TEES AND REM EDI ES 159
takeover to bring the contractor's contractual Ortech Ltd v Tarmac RoadstoneLtd [I998187 BLR
liability to make good defects due to a design 96 where it was concluded that the final
fault to an end it is suggested that between certificate was conclusive evidence that:
three and five years could be appropriate
all the plant supplied and tests, preparations
depending on the nature of the works con-
and other work performed by the contractor
cerned. The position as regards the continuing
all conform to the requirements of the con-
liability of the contractor to pay damages as
tract, and
opposed to remedying the defect is considered
all defects including defects not attributable
later (see p. 160).
to any breach of contract have been made
The third point which arises is whether or not
good such that the making good requirements
any certificate issued by the architectlengineer
of the contract have been complied with.
at the end of the defects liability- -period operates
as conclusive evidence that the works have been It was also stated that there was commercial
carried out in accordance with the contract and justification for the contract to provide a defined
operates as a bar to any future legal proceedings cut-off point once the plant had been con-
in respect of latent defects. structed, tested, provided and made good in all
The Red Book makes it clear, clause 38.4, that respects in accordance with the contract.
the issue of the final certificate constitutes con- As a result the final certificate was held to
clusive evidence that the contractor has com- be an evidential bar to Tarmac's claim against
pleted the works and made good all defects, Mathew Hall for alleged design and construction
again except if the certificate was issued in deficiencies which were never notified to
reliance on any fraudulent misrepresentation or Mathew Hall during the defects liability
fraudulent concealment. There is also a rather period.
strange provision in the defects clause, 36.10, Practice differs as between the plant indus-
that liability of the contractor to bear the cost of try, building and civil engineering. Broadly with
making good defects after the date of any accept- mechanical, electrical and process plant the
ance certificate is to be the sum stated in the final certificate does operate as a bar except in
agreement. This does not alter the obligation of the cases of fraud and now under MFll 36 ln
the contractor to make good the defect, but if the except for latent defects due to the contractc
total cost of making good defects exceeds the gross misconduct appearing within three yc
stated amount then the excess is borne by the after take over.
employer and the project manager issues a vari- In building contracts the Court of Appeal in
ation order. However this only applies to defects Crown Estates Commissioners v John Mowlem &
made good after the issue of the acceptance cer- Co. Ltd 1994 had held that the conclusive evi-
tificate which is issued after the works have dence provisions of the final certificate in JCT80
passed their performance tests part way through covered all work on which the architect is to
the defects period, unless exceptionally there are form an opinion under the contract as to the
no performance tests, when the taking over cer- quality of materials and standards of workrn an-
tificate is deemed to be an acceptance certifi- ship. This is the wide interpretation of the )ro-
cate. The reasons for this provision are obscure. visions. The narrower interpretation, which was
That there may be a significant number of previously thought to be correct, is that the pro-
defects or if making them good is expensive visions only cover work which is expressly stated
seem to be no good reasons for the cost being in the specification to be to the reasonable
paid by the employer. They can only be evidence satisfaction of the architect. It is this narrower
that the plant is seriously defective which is interpretation which was preferred by the
surely all the more reason why the costs of mak- Scottish Outer House in Belcher Foods Ltd v
ing good should be borne by the contractor. Miller and Black and Others 1998.
The conclusive nature of the Red Book final The JCT have now issued arnendmlent
certificate was considered in Mathew Hall number 14 which restores the position to what it
160 TERMS AND COND~TIONSOF CONTRACT
was previously thought to be and follows the for E & M Works, 3rd edition, FIDIC 1988. What is
decision of the Scottish Outer House. strange and difficult to understand is the distinc-
Under the ICE conditions, however, the tion in English law between building and civil
situation is the reverse. Clause 61(2) provides contracts.
expressly that the issue of the defects correction
certificate at the end of the defects liability
REMEDIES AVAILABLE
period has no effect on the rights of the parties in
relation to the performance of the contract. When a plant or unit of plant breaks down the
Under the ICE form, and the JCTforms if they purchaser inevitably suffers losses. These may
are amended to remove any effect of the final cer- be broadlvlistedas follows:
tificate, the employer will have therefore a right
cost of replacement parts
to recover damages in respect of latent defects
cost of stripping down and reassembly of
manifesting themselves during the limitation
replacement parts
period, either six or twelve years depending upon
cost of repairing damage to other parts or
whether the contract is under hand or under seal.
units of the equipment or other property of
The issue then arises as to the basis upon which
the purchaser which may have been damaged
such damages will be assessed: is it the cost of
damages payable to persons injured or own-
reinstatement, diminution of value or loss of
ers of other property damaged as a direct
amenity as in the Ruxley Electronics case referred
result of the breakdown
to on p. 25. In the Ruxley case it was emphasized
costs incurred in making temporary arrange-
that the correct test to apply as to whether the
ments to overcome the effects of the break-
measure of damages should be the usual one of
down
the cost of reinstatement or some other is that of
loss of profits or increased overhead costs
reasonableness. However what is reasonable or
which are due directly to the breakdown
not is always a matter of some debate, and the
damages which may be payable to a third
employer, as regards the corrections of defective
party for breach of contract arising out of the
work, is looking for certainty of the outcome. It
breakdown.
has been suggested therefore that the contract
should expressly that the employer Provided that the costs involved arise directly out
should in all circumstances be entitled in respect of the defect and were reasonablyforeseeable by
of latent defects to damages determined on the the contractor at the time the contract was made,
basis of reinstatement, irrespective of whether then in the absence of any express provision in
this was reasonable or not. the contract to the contrary all these items could
It is not, however, at all clear that a court form the subject of a claim by the buyer for
would accept the validity of such a clause in breach of contract. But how far in commercial
circumstances where they considered reinstate- practice can the buyer reasonably expect to
ment was not reasonable because, for example, recover all or any of these costs from the supplier?
the expenditure to be incurred would be out of Before this question can be answered the factors
all proportion to the benefit to be obtained. which may affect the contractor's attitude need
None of the standard institute forms contains to be stated. First, the contractorwill broadly only
such a provision. accept a liability which bears some reasonable
A distinction between plant and building1 relationship to the degree of profit which he can
civil contracts is perhaps understandable expect to make out of the transaction. Second,
because of the extent of liability to which the the contractor has to take into account not just
plant contractor could otherwise be exposed. the risks on any one contract, but the sum of the
The limitations in this clause and elsewhere on risks on all the contracts of a similar nature into
the plant contractor's liabilities have been vigor- which he has entered and under which he has at
ously defended - see for example the comments any one time a potential liability. This is par-
in the Guide to the Use of the FIDIC Conditions ticularly relevant in the case of mass-produced
D EFECT S: GUARANTEES AND REM EDI ES 161
articles, where the losses in which the contractor What is open to argument is how far the con-
could be involved due to the failure of a single tractor's liability should extend over and above
component could be astronomical. Third, the putting the defect right. Many firms take the
contractor is bound to consider on a swings-and- view that anything beyond that is what they term
roundabouts basis the general level of his busi- 'consequential liability' and as such unaccept-
ness with the particular customer. If he can able. Apart from the two points already men-
assume £100000 worth of business in any one tioned, of the relationship of risk to profit and
year, then he may on a particular contract for the extent of total risk on annual turnover, con-
£10 000 be prepared to take risks which are out of tractors have other fears. First, they are afraid of
proportionto the value of that one contract. claims being made which will occupy a dispro-
Returning to the list of costs and expenses in portionate amount of their executives' time, and
which the purchaser may be involved, these may which it may be difficult to resist in the end due
be divided into three categories (seeTable 18.1). to commercial pressures. Perhaps even more
Some conditions of contract prepared by important, they fear that they would have to dis-
suppliers or their trade associations exclude the pute liability in many cases where, if it were sim-
supplier from liability for item 2, the labour ply a question of 'putting something right', they
charges involved in stripping down and reassem- would concede and get on with the job, and that
bly. This would seem unreasonable. The same is this could operate to the prejudice, therefore, of
true of carriage charges for the return of the normal buyerlsellerrelationships.
defective part. If the machine is defective it For these reasons the problem of consequen-
should be the duty of the contractor to put that tial liabilities needs to be broken down so as to
defect right, and he should be responsible for arrive at a sensible sharing of risks between con-
meeting all labour, material and carriage charges tractor and purchaser under arrangements
involved. which will:
Table 18.1 Costs and expenses in which purchaser may be involved
1 Cost of providing Costs of repairing damage to other Loss of profits or contribution

replacement parts. property belonging to the buyer t o overheads arising out
caused by the defect. of the defect.
2 Cost of stripping Damages payable to persons Damages which may be

down and injured as a result of a defect. payable by the purchaser
reassembly. t o third parties for breach
Damage to property belonging to of contract as a result of
a person other than the purchaser. the defect.
3 Cost of repairing damage caused

to other parts of the machine or
plant which the supplier has
supplied or installed as part of
his contract.
Costs incurred by the purchaser
in making temporary
arrangements t o continue
operations in order to overcome
the effect of the defect.
162 TERM S AND CONDITIONS OF CON TRACT
provide the purchaser with reasonable pro- 1 If during the defects liability period the plant
tection is out of operation for more than x days con-
avoid the contractor inflating his price to tinuously due to a defect, the contractor pays
cover against the risks or buying expensive a fixed sum per day of plant outage.
insurance at the purchaser's expense 2 If during the defects liability period the plant
minimize the chance of protracted disputes is out of operation for more than x hours of
on liability which are only likely to profit both operation, the contractor pays a fixed sum an
companies' professionaladvisers. hour of outage.
It is suggested, therefore, that in the first The employer can make out quite a reasonable
instance a distinction should be drawn between case for this type of guarantee. He has spent a lot
before and after take over. Up to take over the of money in the expectation of achieving a cer-
contractor can reasonably assume the risks in tain output and therefore a certain level of
the second column. After take over, when the profitability. Repeated or extended shut-downs
plant will normally be insured by the employer will seriously affect this. But there are practical
and under his operation and control, it is prefer- difficulties involved.
able that they should be borne by the employer First, there is seldom a single simple cause
with the exception of the liability for death or
why a plant is out of operation. More often it is a
injury to persons due to the contractor's negli- combination of causes, some due to defects,
gence where the contract is one to which the some due to mal-operation or lack of main-
Unfair Contract Terms Act applies. tenance. Pressure to keep a plant running, for
If in a specific case the employer feels he instance, may lead to minor troubles being made
must insist on these risks being taken by the con- substantially worse before corrective action is
tractor, perhaps due to political or trade union taken. While it is easy to write in to the contract
pressures, then the contract should: that the contractor is not liable if the outage is
expressly define the liabilities to be covered due to the employer's fault, it is much more diffi-
include a clearly stated financial limit of liabil- cult to apply this in practice.
ity, with a cross-indemnity by the employer If the employer is going to insist on this type
for amounts in excess of that liability of provision, then the only real answer seems to
require the contractor to insure the risks up to be to let the contractor operate the plant. If this is
the limits of liability and permit him to charge impracticable, then at least the contractor
the premium in his price. should be made part of the operating team, say
by being allowed to have an operating engineer
This, of course, still does not cover the items on each shift, paid for by the employer, whose
listed in the third column which from a com- advice the employer is required to seek if diffi-
mercial or indeed insurance viewpoint may be culties arise.
regarded as truly 'consequential' losses. No con- Another problem is from what moment the
tractor is normally willing to accept these risks at period for outage liability starts. Statistics for
all. They are too indefinite in amount and could many types of plant show a high incidence of
be financially crippling. Indeed it was accepted minor troubles in the first few weeks, or hun-
by the Court of Appeal in Edmund Murray Ltd v dreds of hours of operation. There must, there-
BSP International Foundations Ltd 1992 that the fore, be a sensible running-in period before the
exclusion of consequential damages when the guarantee applies.
parties had negotiated at arm's length would Finally, the extent of development included
appear to be fair and reasonable under the within the plant must be taken into account.
Unfair Contract Terms Act. An outage guarantee can only feasibly be
What is sometimes attempted is to include in given when the plant or design has already
the contract what is referred to as an 'outage' been substantially proven in commercial oper-
guarantee. This can take one of two forms: ation.
DEFECTS: GUARANTEES AND REM ED I ES 163
CIVIL AND BUILDING WORKS having so structured their relationship that is

Attention has been focused so far on mechanical, inconsistent with any such assumption of
electrical and process plant contracting where responsibility' (per Lord Goff in Henderson v
the issues involved are generally more complex Merrett Syndicates Ltd [I9941 3 WLR 761). The
However especially with commercial buildings position may also be affected by the Contracts
the employerwillbe likely to suffer so-called con- (Rights of Third Parties) Act 1999. Section l(6)
sequential damages if the defects in the building provides that a third party, sub-contractor or
are such that it cannot for a period be put to the supplier, will be able to take the benefit of a
use for which it was intended. In the same limitation or exclusion of liability clause con-
way serious defects in civil works may mean a tained in the main contract which expressly
loss of revenue where these are related to a profit- states that it is for his benefit or purports to con-
earning project,for example a toll bridge. fer a benefit on him. Such a clause is 36.9 of MFll
It has never been the practice in civil or which expresslystates that the contractor's oblig-
building contracts for the standard conditions to ations to remedy defects are to the exclusion of
exclude the contractor from liabilities of this any other liabilities and that neither they nor any
nature, so that in principle he could be liable to sub-contractor are to be liable in damages attrib-
the employer under the normal rules relating to utable to defects (except for their liability for
the recovery of damages for breach of contract death or personal injury due to their negligence).
(seeearlier p. 24). It is also clear under these con-
ditions that the contractor's liability to make UNFAIR CONTRACT TERMS ACT 1977
good defects does not replace his common law
liability to pay so-called consequential damages This Act made three important changes in the law
subject to the tests referred to earlier of foresee- so far as engineering-type contracts are con-
ability and remoteness. It must be remembered cerned. First, it provides that a person cannot by
that what people refer to commercially as 'con- reference to any contract terms exclude his liabil-
sequential damages' are often in law 'direct ity for death or personal injury by negligence.
damages' which would not be covered by a Second, it provides that in respect of any other
clause which restricted the purchaser's rights to loss or damage aperson cannot exclude his liabil-
recover 'consequential damages'. So a normal ity for loss or damage due to negligence except in
loss of profits would be direct and not con- so far as he can show that the contract term satis-
sequential damages - see Chapter 3, pp. 28-9. fies the test of reasonableness. Third, it provides
that where a person is dealing'on his own written
standard terms of business' he cannot claim to
LIMITATION AND EXCLUSION OF render a contractual performance substantially
LIABILITY different from that which was expected of him.
Although the express terms of a contract may By seeking to restrict the contractor's liability
seek to limit or exclude the liability of a contrac- to the express provisions of the defects liability
tor in respect of defects in the works, these terms clause the contractor is seeking to limit the pur-
may be subject to the provisions of the Unfair chaser's right to claim against him in two
Contract Terms Act 1977. At one time it was also respects:
necessary to consider the extent to which such a
the type of claim which can be made, and
clause could protect a sub-contractoror supplier
the period during which a claim can be made.
if the employer were to bring an action against
him in tort. It now appears that such an action Although there have now been a number of cases
would be most unlikely to succeed, first because under the Act before the courts they are all in
it would be for economic loss (see pp. 21-2) and reality exercises in judicial discretion based on
second because 'there is generally no assurnp- the particular facts relating to the case in ques-
tion of responsibility by the sub-contractor or tion. For that reason it is difficult to be precise
supplier direct to the building owner, the parties about what type of provision is likely to pass the
test and what is not. All that can be done is to indi- There is again a difference between civil
cate some broad general guidelines as follows: engineering and electricallmechanical engi-
neering conditions of contract in respect of the
1 A clause which limits liability is more likely purchaser's right to the recovery of damages for
to be held reasonable than one under which defective work where the purchaser suffers loss
liability is excluded. or damage additional to the costs of remedying
2 If claims have been regularly settled by the the defect. It would appear to be strongly
contractor on a basis more favourable than arguable that the purchaser's right to recover
that provided by the clause then this will be such damages, which would include the loss suf-
evidence that the clause is unreasonable. fered by the purchaser of not being able to make
3 The relative bargaining position of the parties. use of the works during the time taken to remedy
The stronger the bargaining position of the the defect, is not removed because of the inclu-
party seeking to invoke the clause the more sion in the contract of the maintenance clause
likely it is to be held unreasonable. (clause 49 of the ICE conditions). In MF/1 how-
4 The language in which the clause is framed ever, clause 36.9, it is clear that all liability for any
and the size of the print used! The more damage or loss attributable to the defect is
obscure the clause the less likely it is to be excluded, although it seems that if the defect
upheld. when it occurs causes damage to other parts of
5 Which of the two parties it was more reason- the works, the making good of that damage is the
able to expect to insure against the risk. liability of the contractor. The question arises
6 Whether there were any other options open to then as to whether such exclusion under the
the purchaser, for example to contract on, to MFI1 conditions would satisfy the requirements
him, a more favourable basis at a higher price, of 'reasonableness'.
to go elsewhere for an alternative source of The MFI1 conditions, together with their
supply on different terms. predecessor Model Form A conditions, unlike
7 As between commercial entities of equal bar- those of a trade association, are drafted under
gaining power, that the clause was intended to the aegis of professional bodies in an attempt to
be an agreed division of riskthe significance of strike a fair balance between the interests of con-
which was well understood by the parties who tractor and purchaser. Although in a particular
could be expected to be properly advised. instance the exclusion of the purchaser's right to
8 A clause purporting to exclude the contrac- the recovery of damages might appear to be
tor's liability for failing to comply with the harsh, as it did to His Honour JudgeDavid Smout
express provisions of the contract relating to QC in the case of Southern Water Authority v
the performance of the works is unlikely to be Lewis & Duvivier and Others [I98411 CON LR 40,
regarded as reasonable, but it may be reason- this must be balanced against the benefits which
able for the contractor to exclude consequen- he otherwise derived from the conditions as a
tial damages. whole. The conditions in approximately their
present form have been in use since 1948 and in
TYPE OF CLAIM respect of these exclusion clauses have never to
Applying the above guidelines then in general it the author's knowledge been subject to judicial
is suggested that it would be considered un- criticism, except as mentioned above in the
reasonable to attempt to exclude any items listed Southern Water case where it was stated by the
in either the first or second columns in Table learned judge that if literally interpreted clause
18.1. It is likely that a court would regard the 30(vii)of Model Form A 'exceeded the bounds of
exclusion of consequential damages as reason- commonsense'. The FIDIC conditions, which
able and this would extend to the loss of profits are largely the same as MF/1, have been the sub-
generally and not the strict legal meaning of the ject of academic criticism - see the article by
term 'consequential damages' - see the Edmund Andrew Pike in the October 1991 issue of the
Murraycase referred to earlier. International Construction Law Review. He was
DEFECTS: GU ARAN TEES AND REM ED I ES 165
strongly supported in his criticisms by Duncan issued at the end of the defects liability period is
Wallace QC in a letter to the editor of that review conclusive, whereas the reverse is the case under
in the July 1993 issue. In the course of that criti- the ICE conditions, which provide in clause 61 (2)
cism Mr Duncan Wallace did raise the question that the maintenancecertificateis not to be taken
as to whether or not in a domestic contract the as relieving either party from any liability towards
provisions of clause 36 and others relating to the other arising out of the performance of their
limitation or exclusion of liability after take over respective obligations under the contract.
would survive an attack under the Unfair So far therefore as civil engineering contracts
ContractTerms Act. 'are concerned, since the time limits within
The principle behind MFI1, FDIC and the which actions for damages can be brought are
standard conditions of contract for process those established by law, there would appear to
plants is the same. After take over the contractor be no room for the application of the Act.
is responsible for remedying defects during the However with electrical and mechanical engi-
defects liability period to the exclusion of any neering and process plant contracts if the
other liability for defects and once he has done attempt is made to limit the contractor's liability
this and the defects liability period has ended, in to 12 months it would appear by no means
the absence of fraud, the contractor is free of certain that the courts would accept that such a
liability. That principle has been widely accepted provision was reasonable, at least in relation to
on both sides of industry for some fifty years as defects of the type which are unlikely to manifest
creatinga sensible balance between the interests themselves during this period, for example
of the contractor and of the purchaser, taking design defects or defects related to a number of
into account that it is the purchaser who is better hours of plant operation under full load condi-
placed to insure the risks arising after take over tions which is not always feasible to achieve dur-
than the contractor. ing the first 12 months of the plant's working life.
Despite, therefore, the views of Mr Duncan While MFll at least allows for the special condi-
Wallace, it is the author's contention that the tions to state the defects liability period and 12
MFl 1 provisions and the similar ones in the Red months is only a fall back if no period is stated,
Book in principle would be considered as fair the Red Book clearly states the period is 365 days
and reasonable were they to be attacked under and the guidance notes refer to this period only
the Unfair Contract Terms Act, subject to the being longer 'if there are very good reasons'. As
length of the defects liability period being fair already explained it is considered that a period of
and reasonable. However that criticism apart the only one year is not sufficient where the contrac-
fact that both sides of industry, including on the tor is responsible for design including the
purchasing side many public authorities with process design. It may take much longer for a
substantial bargaining power, have willingly latent defect to manifest itself. When this rela-
been prepared over a large number of years to tively short period is coupled with the final cer-
contract on these terms knowing their effect tificate being conclusive evidence of the plant
would appear to be a strong argument for saying having been completed in accordance with the
that they are fair and reasonable. contract, so that it operates as an evidential bar
to any future claims, then it is considered that
PERIOD IN WHICH CLAIM CAN BE MADE this does not provide the purchaser with suffi-
It has been noted already that there is a marked cient protection. It is agreed that there must be a
difference in contracting practice between final cut-off date for the contractor's liability, but
mechanical and electrical engineering and it should not be less than 3 years and if the pro-
process plant contracts as to the contractor's ject is to be project financed would need to be
position at the end of the defects liability period. much longer. The purchaser could take out
MFI 1clauses 36.9 and 39.12 and their equivalent insurance against the risk of a latent defect but
in the Red Book clause 38.4, make it clear that only at a substantial cost and probably with a sig-
except in the case of fraud the final certificate nificant excess. Why, however, should the pur-
chaser pay once for the project to be correctly standard terms of business'. It is easy to see
designed and constructed and then again for when dealing with a seller who habitually issues
insurance cover against the risk that the contrac- quotations with his standard terms printed on
tor has not carried out his obligations properly? the back and receives orders accepting his quo-
Note that the employer's remedy after the tation. But with large construction contracts
expiry of the defects liability period is a remedy in these are usually either let on an industry stan-
damages and not to have the works made good. dard, such as the ICE 7th, MF11 and the IChemE
This remedy under the existing law will continue conditions, or on a contractor's or employer's
in contract for 6 years from the date of com- home-made form from which for commercial
pletion for contracts under hand and 12 years for reasons he will quite frequently depart.
contracts under seal. This distinction today is It is generally considered that dealing on an
totally anomalous and should be abolished. industry standard form such as those referred to
There is clear industry support for a single period above would not come within s. 3 of the Act, but
of liability in both contract and the tort of negli- what about the home-made form from which
gence which it has been suggested should be for from time to time the contractor departs?Two of
10 years (seepara. 11.9(2)of the Lathan Report). the very few cases which have come before the
Finally, from the purchaser's viewpoint if he courts on this issue have been Chester Grosvenor
wishes to be able to claim at a later date that the Hotel Co. Ltd vAlfred Mdlpine Management Ltd
contract clause restricting the contractor's liabil- [1991]56 BLR 115, and The SalvageAssociation v
ity is not reasonable, then he must put forward CAP Financial Services Ltd [1995]FSR 654. In the
his contentions strongly during the negotiations first case Judge Stannardstated that:
and retain his negotiation file papers to show
that these were rejected by the contractor and he What is required for terms to be stan-
had no alternative but to contract on those dard is that they should be regarded by
terms. Even if the purchaser knows that his pro- the party who advances them as its
posalswill be rejected he should still make them, standard terms and that it should
so compelling the contractor's rejection of them habitually contract on those terms. If it
as a means of establishing both that the contrac- contracts also in other terms it must be
tor was being unreasonable and that he was determined in any given case and as a
compelled to contract on the latter's terms. matter of fact, whether this has
occurred so frequently that the terms
DEALING ON STANDARD TERMS OF in question cannot be regarded as stan-
BUSINESS dard, and if on occasion a party has
Where one party deals on the other's standard substantially modified its prepared
terms of business, that other party cannot by terms, it is a question of fact whether
reference to any contract term: those terms have been so altered that
they must be regarded as not having
exclude or restrict any liability of his for been employed on that occasion.
breach of contract, or
claim to be entitled to render a performance The evidence before the judge was that within a
substantially different from that which was 34-month period McAlpine had contracted
reasonably expected of him, or seven times on the form at issue in the case, each
in respect of the whole or any part of his con- time with some modifications, but all derived
tractual obligations render no performance at from a common base, and that over the same
all, period they had contracted six times on their
except in so far as the contract term satisfies the employer's form. On those facts he held that
requirement of reasonableness (s.3of the Act). McAlpine had contracted on their standard form
The primary issue here is what is meant in and therefore the relevant provisions had to pass
the construction industry by a party's 'written the test of reasonableness which in fact they did.
DEFECTS: GU A RA N T EES AND REM ED I ES 167
In the CAP case there were two contracts in 2 It must be possible to determine whether or
question. The first contract was clearly on CAP'S not the guarantee is being achieved. With
standard terms since these had been accepted certain types of operation this may be difficult
by the purchaser without alteration to their without at least very complexinstrumentation.
predetermined form. The second contract, how- 3 The guarantee is normally related to a certain
ever, had been subject to significant negotia- feed stock. If this is likely to vary, means must
tions in which CAP had accepted a number of be established within the guarantee to adjust
modifications and additions proposed by the for this.
purchaser and was not therefore on standard 4 With some process plants the environmental
terms. The judge referred to important factors conditions may affect the guaranteed per-
being the extent and nature of the changes formance, for example a change in ambient
made, the duration of the negotiations and the temperature. In that event there must be pro-
willingness of the seller to enter into meaningful visions for correcting the guarantees to take
negotiations. Although not specifically stated it account of the environmental conditions; see
is thought it must followthat negotiations on the guidance note Vin the Red Book.
important terms of the contract such as warranty 5 The method of testing must be clearly laid
and limitation of liability would be given more down; this is vital since different methods can
weight than those on, say, 'boiler-plate' terms. easily produce different answers.
6 Details of who provides and at whose cost the
labour, materials and instrumentation for the
PERFORMANCE GUARANTEES test must be shown. The latter is particularly
So far the question of defects has been consid- important since it may be very expensive. Also
ered in relation to the normal defects liability who is to control the plant during testing; this
clause. But on contracts for important mech- will normally be the contractor.
anical, electrical or process plants there is 7 The procedure under the contract for
also usually a provision that the plant must be deciding when the plant is ready for test, for
capable of a required or guaranteed level of per- testing and for repeating the tests if the plant
formance,which carries with it an acceptance by has failed. Normally the costs of repeated
the contractor of financial liability should the tests are payable by the contractor.
terms of the guarantee not be fulfilled. If this Finally, if the plant fails its repeat tests, it is usual
occurs, then in order to avoid long arguments in at that point to provide for the contractor to be
reaching a final settlement, and to protect the released on payment of liquidated damages
contractor by fixing the total liability in advance, according to an agreed scale. While these dam-
so that he knows this when he tenders, such a ages are required to be calculated initially on the
contract will normally include liquidated dam- basis of the losses including loss of profits which
ages for failure in performance. it is reasonable to anticipate the employer would
In the negotiation of such provisions the fol- suffer, in practice it will usually be found that
lowing points are important to bear in mind: such losses are greatly in excess of what it would
1 The guaranteed standard of performance
be reasonable to seek to impose on the contrac-
tor. They have therefore to be scaled down, and
must be clearly stated with a defined base
which must be attained before the plant can the process of scaling down and establishing a
reasonable scale of damages for the contract
be tested. Thus if the guarantee is a qualitative
might be taken in the following steps:
one, the plant must have achieved the quanti-
tative standard before testing can start. 1 Fix the maximum damages which it is consid-
Alternatively,one may operate the plant so as ered that the contractor could be asked to pay.
to get the quality of product required and 2 Decide on the steps of gradations in the
express the guarantee in terms of through-put scale - for example each 1 per cent loss in
at that standard. efficiency. The steps must, of course, be
measurable, as substantial sums may depend efficiency, after that he is free to reject the plant.
upon whether the efficiency lies between one Again if the purchaser wants this right, then it
set of figures or another. would be wise for him to say so expressly in his
3 Establish the loss which it is reasonably esti- conditions of contract, since, if a damages for
mated that the employer would suffer for each performance clause is included with a maxi-
such gradation. mum, and no express right of rejection is
4 Decide on the allocation of the damages over reserved should the maximum be exceeded, it is
the scale. Here the employer's and the con- doubtful whether any right of rejection would be
tractor's interests are diametrically opposed. implied, or, if it was, at what point this would be.
The employer wants to recover the maximum MFI1 does now include provisions relating to
as quickly as possible, the contractor to performance tests (clause 35) and does refer in
spread it out over as long a scale as possible. 35.8(c) to the purchaser having the right to reject
'where such failure of the Works would deprive
EXAMPLE the purchaser of substantially the whole of the
benefit thereof. However it is clear from the
Maximum damages £50000. Steps 1 per cent loss in
efficiency. Employer'sloss £30 000 for each 1 per cent. remainder of the clause that this is not the same
The employer's proposal might be £20 000 for the first as the results actually achieved in the tests being
1 per cent, £15 000 for the second and third. The con- outside the limits of acceptability. It is presum-
tractor would probably suggest a straight £10000 per 1 ably something worse; perhaps, say, that the
per cent up to the maximum. plant can only be run at a loss.
The other difficulty with the clause is that it
When asked to accept damages for loss of perfor- does not spell out the consequences of rejection
mance, the contractor will often ask for a bonus. other than to say that the purchaser can proceed
It is more difficult for the buyer to justify the in accordance with clause 49 (contractor's
acceptance of a bonus in the case of per- default). The application of that clause to a situ-
formance than with time for completion. In ation of rejection is, however, quite unclear. In
designing the plant to satisfy the capacity or the normal sense of the term, rejection would
performance which he is prepared to guarantee, mean that the property and risk in the works
the contractor will usually seek to provide him- reverted to the contractor and the employer
self with a margin of safety, so the guarantee would be entitled to recover all payments made
level is normally below the indicative design fig- together with the costs of dismantling the plant
ures on which the employer has calculated his and clearing the site (comparison can be made
profitability. To support payment of a bonus, with clause 30.5(c) of FIDIC). It does not, how-
therefore, the contractor would have to beat the ever, seem from the commentary on MFll that
design figures indicated by him in his tender. this is intended, since this refers to the possibil-
Another point to bear in mind when negotiat- ity of the purchaser employing another contrac-
ing process plant guarantees is that, if the con- tor to complete the works which is hardly
tractor is taking a licence on the process he is compatible with their having been rejected!
offering, then he will almost certainly be indem- A similar difficulty arises with the Red Book.
nified by his process licensor against liquidated There is no specific provision in clause 37 as to
damages up to at least 50 per cent of the process what is to happen if the performance of the plant
royalty he will have included in his contract price. is below the level at which the maximum liqui-
Reference was made, when discussing liquidated damages are payable. In fact the guidance
dated damages for delay, to the significance note on the completion of Schedule 10, liqui-
of the maximum. The same point can apply to dated damages for failure to pass the perfor-
liquidated damages for performance. It may be mance tests, does not refer to a maximum
argued by the purchaser that while he is pre- although in practice it is thought that both parties
pared to accept liquidated damages as his would want a maximum since at some point the
remedy if a plant is, say, up to 5 per cent below plant would become commercially non-viable. It
DEFECTS: GUARANTEES AND REM EDI ES 169
is, however, referred to in guidance note X on the 'Resources' in this connection presumably
liquidated damages for performance. An express means the resources available to the company as
right to reject the plant is given in clause 35.10 but a whole and not just those being derived in profit
the reference to clause 41 is not really appro- from the contract. Also it seems likely that in the
priate. That clause essentially deals with the situ- case of wholly owned subsidiaries of a group the
ation where the purchaser is wanting to have the court would take into account the financial
plant completed by others, not with where he is strength of the group as a whole, although how
wanting to reject it, have it taken away, the site far this principle would be extended to a multi-
restored and recover all his payments already national corporation is uncertain. But how much
made together with damages. The application of of such resources is it reasonable for a company
clause 44, the limitation of contractor's liability, to be expected to put at risk on a single contract?
in the case of rejection is also not clear. It is Would the court take into account the whole
thought that there is a gap in the contract here in trading situation of the group including their
terms of the purchaser's remedies on rejection potential liabilities under other contracts? The
which should be provided for expressly. only guidance which can be given on these issues
Finally, again as in the liquidated damages for is to be derived from the Court of Appeal decision
delay clauses, the Unfair Contract Terms Act may in StAlbans City and District Council v ICL, 1996.
come into play. It would seem that it can do so in There ICL, on a substantial contract for the sup-
two ways. First, under s.3(1) of the Act as dis- ply of a computer system, had limited their liabil-
cussed above, where the purchaser is dealing on ity for breach of contract to £100 000. As a result
the contractor's written standard terms of busi- of ICL's default in the performance of their con-
ness. Second, the loss suffered by the purchaser tract St Albans suffered a loss of over f1.3m in
may have arisen as a result of the contractor's under-recovery of the community charge. In
failure to exercise reasonable care, for example holding that the limitation of liability clause was
by having made an error in his design calcula- unreasonable,the judge emphasized that:
tions which ought to have been discovered if they
ICL was a very substantial company with
had been properly checked, so that his action
ample resources and was a wholly owned sub-
would amount to 'negligence' within the mean-
sidiary of STC plc, a company with record
ing of the Act and therefore bring into operation
profits for the first half of 1988 of over ElOOm
clause 2.
The difficulty with standard terms of busi- on a turnover off 1 109m
that at the time of contract ICL had a world-
ness is that while the standard form will usually
wide product liability insurance cover of
set out the provisions covering the limitation of
f50m, and
liability they are unlikely to state the actual sum
that the limit off 100000 was small in relation
or percentage of the contract price which consti-
tutes the limit but leave this to be negotiated in to the risk and potential loss.
each individual case. The position may be One point which is of obvious concern to the
reached therefore that the court would decide contractor is what happens if the court does find
that to impose a limit on the basis set out in the that the provisions are unreasonable. The Act
contract itself is not unreasonable but that the does not give the court power to amend the con-
actual limit is. In considering whether a restric- tract and the provision will therefore be void and
tion of liability to a particular sum is reasonable unenforceable. This means that the supplier or
or not section 24(3) of the Act provides that contractor will have whatever liability he has
regard shall be had in particular to: (a) the under the contract without the benefit of the
resources which the party seeking to rely on that limitation or exclusion of liability clause. It is in
term could expect to be available to him for the the supplier's interests therefore to draft the lim-
purpose of meeting the liability should it arise itation clause in such a way that he accepts a
and (b)how far it was open to that party to cover level of liability which bears a reasonable rela-
himself by insurance. tionship to the assets which are available to him.
CHAPTER NINETEEN
Insurance and indemnity

The problems relating to indemnities and insur- many times this amount, or the expenses of
ance in respect of contracts for the purchase of defending a law suit or both. His reluctance is
plant and equipment or the carrying out of con- increased by the fact that the risk is multiplied by
structional work fall to be considered under two the number of products he supplies, and must
headings. First, those which arise out of defects be measured, therefore, against his annual
in the plant supplied or work done, and second turnover.
those which arise out of the employment on the Unless, therefore, some sensible middle
purchaser's site of the contractor and his sub- course is adopted, the situation can develop into
contractors. a contractual tug of war between the purchaser
and contractor, which benefits nobody and
wastes a great deal of time.
DEFECTS I N PLANT AND EQUIPMENT
If it is agreed between employer and contrac-
SUPPLIED OR WORK EXECUTED
tor that it is reasonable on a particular contract
The use by the purchaser of machinery which for the contractor to accept the liabilities men-
has been supplied in a defective condition, or tioned earlier, it is suggested that negotiations
which develops defects when used, may cause could proceed on the followinglines:
damage to other property of the purchaser or
injury to persons - for example the purchaser's 1 The liability of the contractor to be limited to
staff employed to operate the machinery. Apart, cases where the injury or damage arises out of
therefore, from the costs involved in repairing the contractor's negligence or breach of statu-
both the machinery and other property of the tory duty, or a defect in the plant for which
purchaser which has suffered damage, the pur- contractually the contractor is responsible.
chaser may find himself faced with claims for 2 The period of liability to be the same period as
damages from persons who have suffered injury. that which governs liability to make good
The question arises how far it is either reason- defects in the plant itself. Once this has
able or practical for the purchaser to seek to expired, then the contractor is under no fur-
recover such costs or damages from the supplier ther liability to the purchaser direct and, as
or contractor. regards claims from third parties, the pur-
Contracts for the purchase of large items of chaser gives to the contractor a cross-
equipment are almost invariably governed by indemnity against these. However as regards
express terms and conditions which may have personal injury or death due to the negligence
originated from either the purchaser or the con- of the contractor, his liability must remain
tractor. Not surprisingly most purchasers, when unrestricted under the Unfair Contract Terms
faced with damage to their property or a claim Act in respect of contracts to which that Act
for damages from an injured workman, which in applies.
their view is due to some defect in the plant 3 The liability to extend only to the cost of
which the manufacturer has supplied, consider making good the damage caused to the prop-
that they should have a contractual remedy erty or the purchaser or a third party or to
against the manufacturer concerned. Equally meeting claims for personal injuries. Liability
the manufacturer selling an item on which he for loss of profits to be excluded.
can reasonably expect a profit of, say, £2000 is 4 The contractor's total liability to be limited to
reluctant to accept a contractual risk which a sum of money for any one incident, except
could involve him in the payment of damages of as regards personal injury or death as stated in
I NSURAN CE A N D I N D EM NI TY 171
2 above. Again as regards third parties the While the above list has been set out in relation
purchaser must give to the contractor a cross- to a contract for the supply and installation of
indemnity in respect of any claim made by a plant and equipment, the same risks and much
third party, for instance an owner of adjoining the same principles apply in the case of contracts
buildings for damage to his property, which is for the carrying out of civil engineering works or
in excess of that figure. This cross-indemnity, the construction of buildings.
in the same way as that under paragraph 2 Damage arising under numbers1and 2 above
above, is necessary because the property may be dealt with relatively simply, in that
owner, not being a party to the contract, can- only the parties to the contract are concerned.
not be bound by its terms. Taking number 1 risk first, it must be appreci-
5 The contractor to be free from liability if the ated that under most forms of contract the
plant has not been properly operated and property in the plant will have passed to the
maintained in accordance with his instmc- employer on delivery so that, in the absence of
tions. anything to the contrary in the contract, the
6 The contractor to be required to insure his lia- risk of damage to the plant will also have passed
bilities. The sums which can be involved in to the employer. It follows that whatever risk
meeting claims for injuries can be substantial, the employer wants to pass back to the con-
and there is no value in having an indemnity tractor during the course of carrying out the con-
from someone who does not possess the tract must be set out specifically, and any risks
resources to meet the claim. not so set out are likely to be regarded (negli-
gence apart) as remaining vested in the
If the above is adhered to and the outcome is
freely negotiated between the parties then it is employer.
considered that the contract terms would pass Clauses defining the respectiveobligationsof
the test of reasonableness under the Unfair the parties for such damage are normallydrafted
in one of two ways:
Contract Terms Act.
1 The contractor is made responsible for
making good, at his own cost, any damage to
INJURY OR DAMAGE ARISING OUT OF
the works which is due to the negligence
WORK EXECUTED O N THE
himself, his servants, agents and sub-contrz
PURCHASER'S SITE
tors. Damage arising from any other cau
Where the contractor is employed not merely to must also be made good by him, but at the
manufacture and deliver but also to carry out employer's expense.
work on the employer's site in erecting, installing 2 Alternatively, the contractor is made respon-
or commissioning equipment, additional con- sible for making good, at his own cost, any
siderations arise and it is necessary to examine damage to the works, howsoever caused,
the question of indemnities and insurance in except to the extent that it arises from one of
relation in the following risks: the 'excepted risks'. These are normal1.r
defined as the negligence of the emploj
1 Damages caused to the plant itself during
and those risks which are uninsurable - i
erection, installation or commissioning work.
example war, riot, and so on.
2 Damages caused to other property of the
employer. The 7th edition of the ICE conditions makes it
3 Damage caused to the property of third par- clear that to the extent that damage is caused by
ties. an excepted risk, most likely the negligence of
4 The contractor's operations causing a the employer, although the contractor is still
nuisance. obliged to make it good, the costs would be at the
5 Injuries to the contractor's own workpeople. expense of the employer.
6 Injuries to other persons not a party to the There are two very important distinctions
contract. between these two clauses:
172 TERMS AND CoNDlTloNs OF CON TRACT
1 Under the first clause it is up to the employer to which see paragraph 3 below), an employer
to show that the contractor has been negli- is not liable for the acts or default of an
gent. As the lawyers would put it 'the burden independent contractor provided that he has
of proof rests on the employer'. Under the appointed an apparently competent contrac-
second clause it is the other way round, and it tor to undertake the work. The more difficult
is the contractor who has to show that the question is what duty the employer has, if any,
employer has been negligent in order to to supervise the work of the independent con-
escape liability. tractor.
2 If the damage or loss is truly accidental and If the case falls under the Occupiers
cannot be shown to be due to the negligence Liability Act 1957, the employer (as occupier)
of either party, then under the first clause it is must be able to show that 'he has taken such
the employer who pays, whilst under the sec- steps (if any) as he reasonably ought in order
ond clause it is the contractor. to satisfy himself that the contractor was com-
petent and the work had been properly done',
Much the same applies to the second risk listed
and this latter expression has been said in the
above - that of damage to property of the
House of Lords to include work in progress
employer other than the works. The employer is
(per Lord Keith in Ferguson v Welsh & Others
obviously concerned that he is not called upon
[I98713 AER 777). In that case it was held that
to pay for making good damage to his own prop-
there was no general obligation to supervise
erty which has arisen out of the carrying out of
but that if the employer suspects that an
the contract work. At the same time, to prove
unsafe method of working is being used then
neghgence can be difficult and cost- and time-
it may be his duty to instruct the contractor to
consuming in itself, so from the employer's
change the method to one which is safe. That
point of view it is suggested that here again he
case concerned the demolition of a building
should seek to make the contractor liable for
and it is interesting to note that 'demolition'
making good any such damage, howsoever it
work was held to be within the scope of
occurs, unless it is due to one of the 'excepted
s.2(4)(b) of the Act. However, it is considered
risks'.
that in a case of large constructionalworks the
The remaining risks referred to above are all
employer (occupier) would probably only
cases where the employer's interest is to ensure
satisfy his obligations under the Act if he had
that he is not called upon to pay damages to a
appointed professional advisers to supervise
third party arising out of the execution of the
the work on his behalf.
contract.
As regards cases not falling under the Act,
It might be expected that, where an employer
then towards persons with whom he has a
places a contract with a contractor, the liability
relationship of proximity sufficiently close to
for any accident or injury arising out of the
establish a duty of care, the employer may in
execution of that contract, in the absence of any-
particular circumstances owe a duty to take
thing in the contract to the contrary, would rest
reasonable care to supervise the work of an
with the contractor. This is not, however, always
independent contractor. Thus property
the case and the present position under English
developers entering into a contract for the
law may be summarized as follows:
construction of factory premises and entrust-
1 The duty of the employer towards third paring the work to an associate company were
ties to the contract may fall into one of two held liable in negligence to the person for
categories: whom the factory was being constructed for
their total failure to do anything to supervise
a duty to take reasonablecare himself
the construction work (Cynat Products Ltd v
a duty to see that care is taken for
Landbuild flnvestment and properg,) ,Ttd
whom he has a responsibility.
[I9841 3 AER 513). However, although the
2 Generally (other than in cases of nuisance as practice is now widespread in the construc-
INSURANCE AND INDEMNITY
tion industryof employingsmall sub-contrac- operation cannot by any skill or care be pre-
tors, or sub-sub-contractorsoften on a labour- vented from causing harm then it cannot law-
only basis who have few assets, in general fully be undertaken at all except by the
there is no legal restriction on the main con- consent of those affected or by the authority
tractor from doing so and no liability will be of statute.'
attached to the main contractor towards a The employer is concerned, therefore, to
third party in negligence if the sub-contractor ensure that, where any damage or injury
is in breach of his statutory or common-law arises out of the contractor's default, it is the
duties. Only exceptionally, if the main con- contractor and not the employer who has to
tractor was aware that the sub-contractor was meet the claim by the third party. Accordingly
performing his work defectively and in afore- the employer's first step is to obtain an
seeably dangerous way, could the main con- indemnity in the contract from the contractor
tractor be potentially liable as a joint under which the contractor undertakes to
tortfeasor with the sub-contractor (D & F indemnify the employer against any claims
Estates v Church Commissioners for England made against the employer by third parties
in the House of Lords [I9891AC 177). and any costs, damages or expenses which the
It must be stressed, however, that in all employer may be called upon to pay.
these cases if the employer is liable it is only In the drafting of the provisions relating to
because he has broken his primary duty of care indemnity the same point arises again as has
towards the injured party and it must first be been discussed above. Is the contractor to be
established that he owes such a duty of care. liable only for the consequences of his negli-
He is not vicariously liable for the negligenceof gence or breach of statutory duty, or does his
the independent contractor in the way in liability extend to cover any claim for damage
which he would be for one of his employees. or injury arising out of the carrying out of the
3 If the duty is to see that care is taken then the contract work unless this is due to one of
employer cannot delegate his responsibilities certain specified 'excepted risks'?
by employing an independent contractor. It is interesting to note that the current
The most common situation in which this editions of four forms of contract prepared
duty occurs is when an absolute obligation is and issued by professional associations each
placed upon the employer by statute, for solve this problem in a different way, as
example the obligation to fence dangerous follows:
machinery under the Factories Act. Another
rather less common situation is that of nui- 1 INSTITUTION OF CIVIL ENGINEERS (ICE
sance which is essentially an act or omission CONDITIONS OF CONTRACT)
by which an occupier of land is disturbed in The contractor is liable to indemnify the
his enjoyment of it. This can take the form of employer against any damage to the property of
actual damage to the land but is more often a third parties or injuries to persons arising out of
matter of causing a loss of comfort or conve- the execution of the contract, except to the extent
nience, for example through the escape of that such damage or injury is caused by the negli-
smells, noise or dirt, and is usually the result gence of the employer or is due to one of certain
of activities of a neighbour or those for whom other stated 'excepted risks'. The burden is
he is responsible which may include indepen- therefore placed wholly on the contractor unless
dent contractors. The distinguishing feature he can bring himself within the exception pro-
of nuisance is that once the facts of the nui- visions, and the onus of proof is on him to do so.
sance have been established, i.e. the level of
damage or discomfort is not one which the 2 JOINT CONTRACTS TRIBUNAL (JCT FORM
person affected should be expected to put up OF CONTRACT)
with, then it is no defence that all possible skill The conditions provide that the contractor is
and care have been taken to prevent it. 'If the absolutely liable for injury to persons except to
1 74 TERMS AND CONDITIONS OF CONTRACT
the extent that such injury arose from an act or strange in limiting the indemnity to such
default of the employer. In the case of damage to employees.
property, however, the emphasis is the other
way round, and the contractor is only required to It must be stressed that the fact of the employer
indemnify the employer where it can be shown having obtained an indemnity from the contrac-
that the damage arose out of the contractor's tor does not in any way lessen the employer's
negligence. own legal liability, and the third party is perfectly
free, if he can establish a valid claim, to proceed
against the employer. It is of the utmost import-
In essence before take over the contractor ance, therefore, to the employer that the con-
indemnifies the purchaser against any third tractor has adequate resources available to
party claims which arise out of the execution of implement the terms of the indemnity, and it is
the works unless these are due to the negligence suggested, therefore, that having as a first step
of the purchaser. This liability does not require obtained an indemnity, the employer must, for
proof of negligence. After take over the contrac- his own protection, take two further steps:
tor gives the purchaser an indemnity against
require the contractor to take out the neces-
such claims to the extent they are due to his
sary insurances
negligence.
check that the contractor has in fact done so
4 ICHEME (THE RED BOOK) and that the policies concerned properly
cover the risks against which the contractor
The liability of the contractor is split between
is required under the contract to give the
damage to the property of the purchaser and his
indemnity.
affiliates and damage to the property of third
parties or employees of third parties. For the As to the first, the contract should require specif-
property damage the contractor is liable to ically that the contractor does take out insurance
indemnify the purchaser for damage arising against all the risks which he is assuming and
from any cause whatsoever arising out of the not, as is the case in certain standard forms,
performance of the works up to a maximum limit merely against damage to the works through fire.
stated in the contract, or if no sum is stated It is normal, when requiring a contractor to take
£5 million. The reference to property of the pur- out an insurance against third party claims, to
chaser would presumably cover the works, but indicate the minimum value for which the policy
clause 31.8 is stated to be subject to clause 31.2 is to be taken out. Most forms of contract which
which applies to damage to the works which is do this state that such minimum value is for
stated only to apply up to take over, and clause insurance purposes only and does not represent
31.3 which refers to loss or damage resulting a limit of liability. It is clearly correct to do this,
from testing within 90 days of take over or oper- particularly as with large companies carrying
ations carried out by the contractor to comply 'blanket' insurance policies the limit of liability
with his obligations under the contract. This is specified in the contract may well be much lower
not a very elegant way of drafting and it would be than that included in the policy. It is, however, as
better to separate out completely responsibility well to recognize that in practice the limit for
for the works and damage to other property. For which the contractor has insured is the most
damage to the property of third parties and which the employer is likely to recover, at least
death or injury to their employees the contractor without putting the contractor into liquidation.
is responsible to indemnify the purchaser to The second problem is more difficult. How is
the extent that the loss or damage arises from the employer to be sure that the contractor has
the wrongful or negligent act or omission of the carried out his contractual duties properly and
contractor. Unlikely though it may be that that there are not exceptions or exclusions
there could be injury to persons who were not within the policy which are inconsistent with the
employees of a third party the wording is slightly contractor's obligations?
INSURANCE AND INDEM NITY 175
Most of the professional institute forms of under the standard forms of contract it is worth
contract provide for the contractor to produce the employer considering on larger projects tak-
his policies and the current premium receipts ing out insurance cover himself, both in respect
therefore to the employer for his inspection. It is of the works and of public liability for the benefit
doubted, first, how far this is carried out in prac- of all engaged in the project. The insurance
tice and, second, whether the employer gains would cover therefore the contractors,sub-con-
any great benefit from such inspection in those tractors, suppliers and consultants on a non-
cases where it is done. Insurance policies are recourse basis, but with significant deductible~
technical documents, often of considerable and with certain limited risks, for example for
complexity, and it requires an expert in insur- motor vehicles left with the contractor.
ance to check that the policy is in fact in con- This gives the employer control of the insur-
formity with the terms of the contract. It could, ance position, knowing that proper cover has
moreover, be most embarrassing if subsequent been taken out and maintained. For this reason
events were to show that the policy did not in it is usually required where the project is being
fact fully cover the contractor's liabilities. There financed on a project finance basis. It may also
is a further practical objection to the inspection reduce the overall insurance costs.
of policies, which is that many companies have
'blanket' policies and do not insure each con- PROFESSIONAL INDEMNITY INSURANCE
tract separately. Obviously in such circum- The normal contract works policy may well not
stances they would not wish such a policy to be cover design liability at all and in any event
continually sent for inspection to various clients. will not cover liability in respect of the cost of
Bearing in mind that what the employer remedying a defect but only the damage caused
really wants to know is simply (a) the contractor to the works as a result of the defect. Further it
does have a policy covering the contract, and (b) will usually terminate when the works are taken
that there are no endorsements or qualifications over, except for providing cover while the con-
on the policy which affect the risks involved on tractor is on site to remedy defects during the
the contract, it is suggested that the contractor defects liability period. If therefore the contrac-
should merely be required to supply a certificate tor is to be responsible for design the employer
to the employer from his insurance company or needs to ensure that he has appropriate insur-
broker to the effect that the contractor is insured ance cover against his design liability.
against the risks detailed in the contract and list- In practice it is unlikely that the contractor
ing any exclusions or qualifications to the insur- will be able to obtain cover other than for his
ance cover. It is recognized that a system of this negligence, that is, he will not be able to obtain
sort is not foolproof, and that if the broker or cover for strict liability. Qpical wording for the
insurance company made a mistake in the cer- policy might be 'We ... agree to indemnify the
tificate, then his only remedywould be a claim in assured for any sums which the assured may
negligence under the principles established in become legally liable to pay.. . as a direct result
Hedley Byrne & Co. v Heller & Partners Ltd. On of negligence on the part of the assured in the
the other hand it has the merit of simplicity, it conduct and execution of the professionalactivi-
can be operated in general by staff not possess- ties and duties herein defined'. The definition
ing expert knowledge on insurance matters, and needs to be checked carefully against the con-
it is, accordingly, that much more likely in fact to tract wording.
be carried out in practice. This is the vital factor. It should be noted that PI insurance is for a
It is not the slightest use having a foolproof sys- period of one year and is on the basis of claims
tem if nobody operates it. notified during that period. The insurance must
therefore be renewed annually.
OWNER-CONTROLLEDOR PROJECT
INSURANCE INDEMNITIES
As an alternative to the insurance provisions The term indemnity is properly used to describe
176 TERMS AND CONDIT~ONS OF CON TRACT
an obligation to indemnify one party to the con- future new retail and commercial buildings (see
tract against a claim which may be made against Chapter 11and recommendation 11.24).
him by a third party. So a sub-contractor will be
obliged to indemnify the main contractor The same problems relating to the need for
against a claim which may be made against the indemnities and insurance as referred to above
main contractor by the employer which arises arise on overseas contracts but two additional
out of the default by the sub-contractor in the difficulties may be present. First, as regards any
performanceof his sub-contract.Where, as usual, cross-indemnity obtained from the purchaser,
this is an obligation to indemnify against some its value in practical terms will depend on its
loss the period of limitation does not start to run enforceabilityin the territory in question - often
until the loss has been established which may be a matter of considerable doubt. Despite there-
much longer than the usual limitation period. fore having obtained the indemnity the contrac-
Further in such an action on an indemnity tor may need to consider arranging his
the injured party is not limited as to the damages insurance cover as if no such cross-indemnity
which he can claim to the normal rule that such had been given.
damages are either those which flow directly and Second, if the purchaser is a foreign govern-
naturally from the breach, or were within the ment or quasi-governmental agency, it is likely
contemplation of the parties at the time of enter- that they may require the contractor to insure his
ing into the contract. Nor is the injured party risks through a national insurance company, if
obliged to mitigate his loss. one exists, or if not through one which is a locally
Indemnities are therefore onerous obliga- owned company. Such a company may be rather
tions which should not be entered into lightly more adept at receiving premiums than paying
and it should always be checked that the liability out claims and will also only pay out claims
under the indemnity is covered by the wording when it does do so in local currency which may
of the relevant insurance policy. either be non-convertible or at least subject to
exchange control. Assuming the requirement to
LATENT DEFECTS INSURANCE insure with the national company is a statutory
In relation to the contract works there are two one there are two possible solutions to the prob-
main deficiencies in the current insurance pro- lem. The first is to take out additional insurance
visions. First, in general the contractor's insur- in the form of a difference in conditions policy
ance will not cover the cost of making good the with a UK company under which the UK com-
actual defects themselves. Second, once the pany will pay the claim in the UK and the con-
works have been taken over the contractor's tractor pays the company any moneys which it
insurance will only cover for damage which he does manage to recover from the national com-
causes carrying out remedial work or which pany of the territory in question. Beware of a
arises from a cause originating prior to the com- policy written the other way round under which
mencement of the defects liability period. the UK company only makes up the non-recov-
It has therefore been proposed - see the ered balance, since this may take years to estab-
Build Report published by NED0 in October lish. With this solution there can be a practical
1988 -that there should be latent defects insur- problem in obtaining access for the UK com-
ance cover for building foundations and struc- pany's loss assessors to inspect the damage and
tures which would run for a period of 10 years certain subterfuges may need to be adopted.
from practical completion. It would be with the Second, since the national insurance com-
waiver of subrogation rights against all those pany or one locally owned will almost certainly
involved in producing the building, but with have reinsured all but a small proportion of the
realistic deductibles to ensure discipline. risk either in the UK or Europe it may be possible
This proposal was supported in the Latham to obtain a 'cut-through' agreement with the
Report with the recommendation that such lead reinsurance underwriter so that the con-
insurance should become compulsory for all tractor can deal with him direct. This is more
IN SU RAN CE AND INDEMNITY 177
likely to be practical if the requirement is to work, then this sort of problem can only be
insure with a local company which is itself per- solved by cooperation between employer and
haps partially owned or associated with a UK or contractor with each assuming his fair share of
European insurer. the risks involved, rather than by simply seeking
One final point: as in other matters, whatever to pass the problem over to the contractor. For
risk the employer transfers from himself to the this reason the employer on any large project
contractor has a price attached to it, and the should certainly consider the alternative, as
employer is going to be called upon to pay that regards the insurance of the works, of there
price. It is sometimes suggested that all prob- being one policy, taken out by himself, and
lems can be solved by making the contractor expressed to be in the joint names of the
liable, but this is nonsense. If there are special employer, the main contractor and all sub-con-
risks involved in the execution of particular tractors and sub-suppliers.
CHAPTER TWENTY
Functions of architectlengineerl
project manager and the purchaser
One of the distinguishing features of the forms of It is this second function which may be con-
contract developed by the professional insti- fusingwhen one is introduced to contracts of the
tutions in the UK for the carrying out of building above nature for the first time. The view
or civil engineering works and the supply and expressed in the previous edition of this book,
installation of mechanical and electrical plant is that the engineer could be held liable to the con-
the role given to the architectlengineer. From tractor for negligent certification, is now subject
even a cursory look at the sets of contract con- to considerable doubt following the decision in
ditions, it is apparent that in some ways the Pacific Associates v Baxter [1990] QB 993 (CAI.
architectlengineer is, in a sense, an additional The difficulty is that the structure of the contrac-
party to the contract along with the employer tual relationships and the existence of a wide
and the contractor. In other forms of contract a arbitration clause provide the contractor with a
project manager is appointed who may be either remedy against the employer in contract for the
an individual or a company but who again is in default of his agent. Is it then reasonable to pro-
some senses a third party to the contract with vide the contractor with a separate remedy
authority to issue instructions and certificates against the engineer in tort? Generally it is con-
which are binding upon the employer unless sidered, following the Baxter case, that the
challenged at adjudicationlarbitration or in answer must be 'no', but not possibly in all cases.
litigation. In the first instance attention will be' An engineer might know that any remedy in
focused upon the architectlengineer and the arbitration was in practical terms an illusion and
position of the project manager will be examined that the contractor had entered into the contract
later. Why is there need for an appointment of an relying wholly on the skill and probity of the
architectlengineer, what is its contractual sig- engineer. (Seethe article by Duncan Miller in the
nificance,and how in practice does it work? International Construction Law Journal 1993,
To answer these questions it is necessary to Lloyds of London Press, at p.172.)
examine the duties which the architectlengineer Before considering the powers and responsi-
is required by the terms of the contract to per- bilities of the architectlengineer in this connec-
form and to divide these into two groups: first, tion in more detail, the following table dividing
those which are basically administrative, where his duties under the contract into the two groups
he is subject to the instructions of the employer; referred to above may be helpful.
second, those functions which require the
engineer to make decisions where he is required DUTIES OF ARCHlTECTlENGlNEER
to form and act on his opinion, in which he is
UNDER CLIENT'S INSTRUCTION
expected to act within the terms of the contract
impartially, honestly and with professional 1 Furnishing the contractor with drawings and
integrity towards both parties. Following the information.
decision of the House of Lords in Sutcliffe v 2 Issue of variation orders altering extent,
Thakrah and Others 1974 the engineer does not nature or quantity of the works.
act as a quasi-arbitrator, but that does not alter 3 Suspension of the works.
the engineer's responsibility to act in an un- 4 Nomination of sub-contractors and sup-
biased manner. This function may now be pliers.
referred to as the engineer's 'independent role'. 5 Approval of the work and inspection.
INDEPENDENT ROLE eminent they may be in the employer's organ-
6 Pricing of variation orders where new rates
ization, without getting such instructions con-
or prices must be established. firmed by the architectlengineer in writing in the
7 Pricing of additional sums which may be due
manner prescribed by the contract.
to the contractor for suspension, unforeseen ISSUEOF VARIATION ORDERS
circumstances,and so on.
8 Adjudicating on the validity of claims pre- The same principles apply to the issue of vari-
sented by the contract. ation orders. The employer will no doubt wish to
9 Granting of extensions of time.
limit the extent to which the architectlengineer
10 Issue of certificates. is entitled to vary the contract without prior con-
sultation. Such limitations may be expressed
Let us consider first those duties which the archi- either by reference to the type of variation, or by
tectlengineer performs acting under his client's imposing a financial limit both on the value of
instructions. the individual variation order and on the total
sum which may be expended by the architect1
FURNISHING TO THE CONTRACTOR OF engineer on variations. But again, none of this is
DRAWINGS AND INFORMATION of any concern to the contractor, who is entitled
A main function of the architectlengineer is to to act on the basis that any instructionsissued by
act as the focal point for communication the architectlengineer under his powers, as
between the employer and the contractor. To expressed in the contract, are binding on the
ensure a single line of official communications employer. Under clause 2(l)(b) of the ICE con-
between the parties is an absolute 'must', so on ditions, 7th edition, any restrictions on the
the one side we have the architectlengineer and engineer's authority are required to be set out in
on the other the contractor's contract manager the appendix to the form of tender.
or engineer. If duplicate lines of communication
are allowed the only likely result will be mis- APPROVAL OF WORK AND INSPECTION
understanding, contradictions, conflicting in- The role of the architectlengineer in relation to
structions, and ultimately an administrative the inspection of work and materials and to the
nightmare. This is not to say, of course, that the approval of work as finished is a difficult one to
architectlengineer is permitted to act entirely on define. He may in fact, under the same contract,
his own initiative in the exercise of this function. be acting in these respects both under his
In so far as he is acting under his client's instruc- client's instructions and also in his independent
tions, it is for the employer to establish such role. This may come about in the following way.
internal procedures and disciplines as he may When exercising the powers which are given to
consider necessary to ensure that the him by the normal clauses in the contract con-
architectlengineer consults with the specialist ditions on inspection during the course of
functions in the employer's organization in manufacture or examination of work on site, the
other fields on those matters which are their architectlengineer would be acting simply on
concern. But with one exception to which refer- behalf of the employer. Thus, although he
ence will be made later, none of these people should act reasonably as a professional man, his
should be allowed to communicate directly with duty at that stage would be to the employer, to
the contractor, nor is the contractor concerned protect the employer's interests, and he would
whether the architectlengineer has in fact com- have no duty to the contractor to act impartially.
plied with the employer's internal procedures. He would be entitled to accept instructions from
All that the contractor has to ensure (and this can the employer as to the manner in which he was
on occasions be difficult enough) is that, on to exercise his powers.
those matters which are reserved by the contract In the event, however, of the contractor dis-
to the architectlengineer, the contractor acts on puting the architectlengineer's decision, or at a
the instructions of no one else, no matter how later stage of submitting a claim that by reason of
180 T ERM S AND CONDITIONS OF CONTRACT
such decision he had been put to extra expense implied that government will not interfere with
over and above that which he had reasonably the duties their employee, as certifier, has and
contemplated when entering into the contract, will ensure that he does in fact perform his duty
or had been delayed in the execution of the con- as such (Perini Corporation v Commonwealth of
tract, then the architectlengineer, now acting in Australia [I969112 BLR 82). Acts of the employer
an independent capacity, must decide on the which would amount to obstruction or interfer-
merits of the contractor's claim, and in so doing ence with the conduct of an architect when act-
must act fairly and impartially between the ing within the sphere of his independent duty
parties. For example, the engineer, as the would include directing him as to the amount for
employer's agent, may decide that the finish on which he is to give his certificate (Burden v
certain concrete does not accord with the high Swansea Corporation in the House of Lords
standard which he knows that the employer [I95713AUER).
wants, and may reject certain work and require The contractor is entitled to receive and
other work to be proceeded with by methods of indeed has to be able to rely upon that which he
working which are slower and hence more costly contracted to receive, the fair decision of the
than the contractor had estimated on. At the architectlengineer - who must not deliberately
time the contractor may accept such a decision, misapply the provisions of the contract with the
but may subsequently put forward a claim for intention of depriving the contractor of sums to
an extension of time and increased costs. In con- which he is entitled (Court of Appeal in
sidering such claims the engineer must act upon Lubenham Fidelities v South Pembrokeshire DC
a fair and proper interpretation of the contract as [I98616 CON LR 85).At the same time it has been
an independent observer. recognized judicially that notice must be taken
So much for the duties which the architect1 of the interests of the architectlengineer as they
engineer performs under his client's instruc- will be presumed to have been known to both
tions. We must now consider those functions contractor and employer at the time of entering
which he performs in his independent role in into the contract. These are:
which he acts according to his own judgement
and opinion as a professional man. 1 The architectlengineer is an agent and in
some cases a salaried servant of the employer
PRICING OF VARIATION ORDERS AND and in consequence owes a duty to the
ISSUE OF CERTIFICATES employer for reward.
It will be convenient to consider together those 2 It is usual for the architectlengineer, before
duties which involve the architectlengineer in the contract is placed, to have made for the
certifying to the contractor the sums which he is employer an estimate of the cost of the works.
entitled to be paid under the contract. The archi- This gives him a certain interest in that esti-
tectlengineer's duty here is clear: he must give mate not being exceeded. Normally that
the certificate on his own judgement and with- interest will not extend to the point that,
out any improper interference from the should the estimate be exceeded, then the
employer. In view of the extent to which even in fees of the architectlengineer will be affected.
the UK it has become increasingly common in If it did, then it would seem arguable that the
recent years for employers to seek to influence or architectlengineer has been put in a position
even direct architectslengineers as to the man- in which it is not possible for him to act in the
ner of the performance of their independent independent manner which would normally
duties it is appropriate to re-state the position of be expected of him, and that the contractor's
both the employer and the architectlengineer. attention should be drawn to the position at
In the absence of any express term in the the time when tenders are invited.
contract, where a government servant is 3 The architectlengineer is under an obligation
required to act as a certifier (in the case in ques- to his employer and has an inducement out of
tion of extensions of time), then terms will be regard for his own reputation not to allow
unnecessary extras, and to keep the cost of having given the employer initially an estimate
extras down to a reasonablelevel. of the time which it will take to complete the
4 In the exercise of his duties as agent, the contract, has an interest in seeing that such esti-
architectlengineer is in frequent communi- mate is not exceeded, and that he will therefore
cation with the employer and with the be expected to examine carefully any requests
contractor. As agent for the employer he may for an extension of time.
be called upon to give the employer advice There will be many instanceswhere the com-
which as regards the contractor is of a con- pletion of one contract to time is vital to the suc-
fidential nature and not to be disclosed to cessful completion of the entire project. If such a
the contractor.When, however, he is acting in contract starts to run late and the architect1
an independent role, the architectlengineer engineer advises the employer that the cause of
must endeavour not to communicate to one this is one which under the contract entitles the
party that which he does not communicate to contractor to an extension of the time for com-
the other in relation to the subject matter of pletion, the employer is entitled to reply in these
his duties. Thus, if an engineer prepares a terms:
report on the facts relating to a disputed item
in an application for a certificate, such report Very well, I accept your decision as an independent
should be made available both to the observer that the contractor is entitled to a six weeks'
employer and to the contractor. extension of time. I am sorry, however, but my overall
programme for the project is such that I cannot afford
EXTENSIONS OF TIME FOR COMPLETION it. You now, as my agent, must negotiate with the con-
tractor a revised bargain which wiU ensure that the lost
When the contractor is delayed due to a cause time is recovered, and I am willing to spend up to fxfor
which he considers entitles him to an extension this purpose.
of time under the terms of the particular con-
tract, then he is normally entitled to be granted Further it is not open to the employer to give,
such extension of the time for completion as the or for the architect to accept, instructions from
architectlengineer may consider reasonable. In the employer which deprive him of his indepen-
deciding whether the cause of the delay was such dence when certifying sums due to the contrac-
as to entitle the contractor to an extension of tor. So in one case an architect who had failed to
time and, if so, on the period of extension to be issue a certificate when he should have done
granted, the architectlengineer is again acting in wrote to the contractor saying 'in the face of their
an independent role. It would, for instance, be [his client's] instructions to me I cannot issue a
completely wrong if, knowing that completion certificate whatever my private opinion may be'.
on time was vital to the employer, he were to It was held that the architect was disqualified
refuse to grant an extension of the time of com- and that the contractor was entitled to sue for
pletion to which he knew the contractor was the amount which should have been certified
entitled under the terms of the contract. It would despite the non-existence of the certificate, so
be equally wrong if the employer were to give the decided in Hickman v Roberts in the House of
architectlengineer instructions that under no Lords [I9131AC 229.
circumstances were extensions of time to be So far in this chapter reference has been
granted. In both cases any decision of the archi- made to the position of the architectlengineer
tectlengineer on an application by the contrac- under an English form of contract administered
tor for an extension would in law be a nullity, and within the UK. However the independent role of
the architectlengineer would be disqualified the architectlengineer is virtually unknown out-
from so acting in this respect for the remainder side the UK despite the efforts of UK architects
of the contract. and consulting engineers. There is great danger
It would of course, however, be recognized, therefore in the contractor assuming that he will
as in the case of claims by the contractor for be protected in the same manner overseas as he
additional costs, that the architectlengineer, would be in the UK even when a UK consultant is
182 TERM S AND CONDI TI ONS O F CON TRA CT
employed. If a local firm of consultants or worse that the engineer is unlikely today to have a free
still a member of the employer's staff is nomi- hand in the control and administration of the
nated to exercise the powers of the architect1 contract.
engineer, then the contractor can expect only
that they will do so looking merely to the inter-
POSITION OF EMPLOYERIPURCHASER
ests of the employer. Impartiality as between the
parties is not a word they are likely to under- It is obvious from the description of the archi-
stand. Expressions such as 'in the opinion of the tectlengineer's duties given above that he is put
engineer' become a synonym for 'what does my in a position of great power and authority as
employer want me to do'. regards both the contractor and the employer.
It must also be recognized that in the UK What has to be recognized, however, is that the
matters have changed with the Construction Act works are being built for the benefit of the
and the entitlement of either party at any time to employer, not that of the architect or engineer,
refer any dispute to adjudication. As mentioned and they are being built with the employer's
earlier the ICE have attempted to retain the engi- money. Apart, therefore, from the specific pow-
neer as the first person to whom a disagreement ers which are normally reserved to him under
is referred - see p. 95 - but the validity of this the contract - for example termination for
seems doubtful and in any event the appoint- default - the employer has a vital interest in the
ment of an independent adjudicator to decide proper administration of the contract. For his
on disputes must have the effect of diminishing own benefit, therefore, the employer should
the engineer's powers. For the contractor it ensure that a proper system is laid down for the
means that a decision of the engineer can be management and control of the contract, both
quickly and at no great expense challenged at technically and financially, and that is adhered
adjudication instead of having to go through the to in practice.
tiresome and far more expensive procedure of The essential features of this system should
arbitration and perhaps, depending on the be set out in the contract or terms of appoint-
wording of the contract, having to wait to do so ment of the architectlengineer on the following
until the works have been completed. lines:
The Act does not of course reduce the need
Manager. The person appointed to act as the
for the architectlengineer when acting in his
employer's project manager should be named
independent role to remain independent, but it
as the channel of communication between
is some recognition that this independence is
the employer and the architectlengineer.
itself under threat from two directions. First,
Designs. The architectlengineer should be
there is the increasein the appointment as archi-
tect or engineer under the contract of those who instructed as to any specific designs which the
employer requires to approve in detail.
are not independent consultants but are full-
Procedures. Procedures for tendering for
time employees of the employer. Second, there
is pressure from other departments of the nominated sub-contracts or supply items
should be agreed, with particular reference to
employer's organization, in particular finance
any requirements of the employer's pur-
and contracts departments, that they should
chasing department as to, for example,
have an involvement in decisions relating to
standards, preferred suppliers, or bulk supply
payments, pricing of variations and the granting
agreements.
of extensions of time. The provisions in the ICE
introduced by the 6th edition that if the engineer Restrictions. Restrictions on the architect1
engineer's power to issue variations without
is required to obtain the specific approval of the
employer before exercising any authority, then prior approval of the project manager.
Restrictionsshould be defined in relation to:
particulars of that requirement are to be set out
in the appendix to thiform of tender, while of no (a) value of the individualvariation
great practical significance, are a recognition (b) aggregate value of all variations
(c) extension of time for completion approve payment of the contractor's invoice
(d) effect on design of the works operating when received. The architectlengineer
costs, and any other specific matters should consult with the project manager
which are particularly significant to the before the issue of the completion or taking
employer. over certificate and again before the issue of
the final certificate, so that, for example, the
5 Programme. The employer should be kept views of those departments in the employer's
informed of the physical progress of the work organization which will be concerned with
and should be consulted about any significant using the works can be made known to the
change in the programme and before any architectlengineer before the employer is
extension of time is granted to the contractor. committed by the certificate being issued to
When the architectlengineer proposes any the contractor.
variation to the works he should be required 8 Claims. The architectlengineer should advise
to declare whether it will have any effect on the employer of any claims submitted by the
the programme or not. contractor and of his proposals for the settle-
6 Cost reviews. The architectlengineer should ment of these.
provide the employer with a regular report
(monthlymay be convenient) which shows:
PROJECT MANAGERS
(a) original contract price
Under some forms of contract the control
(b) value of variations authorized
and administration of the contract on behalf
(c) total current contract value
of the purchaser is given to an individual or
(dl value of work completed to date
firm named the project manager. The NEC,
(el value of payments made to contractor
GCIWorksIland the IChemE conditionsall have
(0 estimated value of contract to complete a project manager. Each of the three forms
(g) under- or over-run on contract budget.
referred to above states in one way or another
Item (0 in the above list is most important. that the project manager is to act 'in a spirit of
It can quite easily happen, for example, on a trust' or 'impartially' as between the parties.
project with separate civil engineering and Even if this is not stated it is considered that a
plant contracts, that a variation on one affects project manager or any other representative of
another, but the value of the consequential the employer who has decision-making powers
variation cannot be assessed until a later date. under the contract has an implied obligation to
Similarly, if the civil contractor is being paid act 'honestly and fairly and reasonably'. This was
on remeasurement and for any reason the conceded by the employer in a case where the
quantities of work to be executed are likely to employer himself had decision-making powers
exceed the quantitiesshown in the bill, but the through his representative and the arbitration
additional quantitiesare due not to a variation clause in the contract had been deleted, Balfour
but to a change in ground conditions from Beatty Civil Engineering v Docklands Light
those anticipated, this again may be known Railway 1996. The actual decision in the case has
some time before the extra costs are incurred. been subsequently over-ruled by the House of
The employer must have early warning of Lords since it was based on the now discredited
events of this sort, and he gets it through the doctrine that only an arbitrator had the power to
estimate ofwhat it is going to cost to complete. open up, review and revise a certificate of an
Also, if the architectlengineer has knowledge architectlengineer.The House of Lords has now
of a pending claim, which he knows is in part held that such a power may also be exercised by
justified,it should be shown here. the courts unless the certificate is final and
7 Certificates. The architectlengineer should binding. However the fact that the decision
provide the employer with copies of the cer- can be challenged either in arbitration or before
tificates as they are issued so that he can the courts does not seem to alter the implied
184 TERM S AND CON DI TION S OF CONTRACT
obligationsof the decision maker to act honestly, duced a standard form of agreement covering
fairly and reasonably. the provision of such services to which reference
The term project manager in each of the should be made for details. One important issue
above mentioned standard forms refers to the with which the standard form deals is that of
person or firm who is managing the individual establishing the degree of responsibility of the
contract on behalf of the client. There is a much project manager for management of the project.
wider use of the term project manager to refer to This is the obligation to use the skill, care and
the firm who, acting as a consultant, provides a diligence reasonably to be expected of a project
professional management service to the client in manager holding him- or herself out as being able
all stages of the project from the concept stage to perform the relevant services in connection
through feasibility, design, procurement, con- with the particular project. The project manage-
struction to the final stages of training, hand- ment firm is not responsible therefore if the pro-
over and correction of defects. The project ject exceeds the programme or the budget unless
manager would then be responsible, as leader of they have failed to exercise that level of skill, care
the client's team, for the monitoring of the per- or diligence. The project manager under this
formance of all other consultants involved and form does not have a strict obligation that the
initiating corrective action in agreement with project will meet its targets, which is probably
the client. appropriate since it would be difficult for him to
The Association of Project Managers has pro- obtain insurance cover against that risk.
CHAPTER TWENTY-ONE
Variations in price and time

In this chapter the term 'variation' means a vari- labour, which can hardly be described as 'tem-
ation ordered by the purchaser, or the engineer porary works'. Nor is it considered they would be
or contract administrator on his behalf, which, covered by the expression 'method of working'.
under the terms of the particular contract, In such circumstances a contractor can only
entitles the contractor to a change either in the protect himself by making an express reserva-
contract price, the contract programme or other tion in his tender, making it clear that his price is
of the contractor's obligations under the con- based upon the facts of the particular issue in
tract or in some instances to all three. Whether or question and that any change ordered by the
not an order from the engineer or other person purchaser would necessarily constitute a vari-
nominated to administer the contract does ation. He would then need to ensure that the
entitle the contractor to a variation is a question reservation was incorporated into the contract.
to be answered first before considering the Variations may not unfairly be described as
extent, if any, of the contractor's entitlement to the cancer of contracting. In quantity their
compensationor adjustment to the contract. cumulative effect can operate to destroy the best
In order to answer this question it is neces- of contracts: the habit of ordering them is in itself
sary to examine carefully the definitions in the a disease. What causes this disease? The causes
contract as to what constitutes a variation. This are many but the principal ones may be summa-
was an issue which arose in the Strachan rized as follows:
and Henshaw case to which reference was made
earlier. The contractor sought to claim that the 1 Inadequate allowance for thinking time. It is
change ordered to the positioning of his tea distressing but true that many managements
cabins and clocking-in huts constituted a vari- are still not convinced that progress is being
ation. However, the Court of Appeal dismissed made unless holes are being dug on site or
this argument, pointingout that under the MF/1 plant manufactured.
conditions avariation means an alteration to the 2 Inadequate specifications. One finds a great
works whether by way of addition, alteration or reluctance amongst people to be completely
omission, and the works were defined as the specific as to what they require, as to the ser-
plant to be provided and work to be done by the vices which the employer will himself provide
contractor under the contract. The arrange- or the actual conditions under which the work
ments for getting the contractor's workforce to will be carried out.
the site were not covered by this definition. 3 Insufficient attention paid as to whether what
The Red Book is slightly more generousto the the tenderer is offering is in fact precisely
contractor in that a variation is defined in clause what the purchaser wants to buy. The ten-
16.1 as 'any alteration to the Plant, method of dency to say 'That's a matter of detail we can
working, programme of work or to the type or sort out later'.
extent of the Works'. Further the Works are 4 Lack of discipline. In the matter of variations
defined as 'including but not limited to, the pro- it is often far easier to say 'Yes, while we are
vision and construction of the Plant and any about it we might as well have that done' than
temporary works, and any other work to be car- to say firmly 'No, it's not necessary'.
ried out by the contractor in accordancewith the 5 Improvements to avoid obsolescence. With
contract'. However, even this definition would the rapid rate of technical change taking place
not seem to cover the positioning of the contrac- today any major plant is likely to be out of date
tor's tea cabin and clocking-in station for his in some respects long before it is completed.
186 TERMS AND CONDI TI ONS O F C O N T RA C T
There is always the temptation to try to avoid 7 Rephasing of site works or concentration of
this by incorporating improvements in the work into a shorter period with consequent
design. additional overtime costs and loss of pro-
6 Genuinely unforeseeable circumstances. It ductivity.
would be idle to pretend that no variation is 8 Extending the period to the contract.
ever justified. There will be times when condi-
tions do arise when it is essential to vary the It follows from the above list that unless the vari-
works - for instance the existence of unsus- ation is ordered very early in the contract indeed,
pected drains or cables which have to be the assessment of the effect of the variation
diverted. either in terms of cost or time is not easy.
Consider first the question of the assessment of
What is often not fully appreciated is the effect
the change in the contract price for a plant due,
which even quite a simple change of speci-
say, to the deletion from the specification of one
fication can have on a contractor. This may
item and the substitution of another.
involve him in:
Table 21.1 represents the direct financial bal-
1 Design work which because of the change is ance between the item originally included and
now abortive. that now ordered as a variation. It takes no
2 Additional design work including studying account of the factor of time. Taken in isolation
the consequential effect of the variation on a this is correct, unless the single variation itself is
number of drawings. so great that it does have an immediate effect on
3 Cancellation of, or modification to, orders the overall programme. It also takes no account
already placed on his own works or on outside of the double administrative cost effect on the
suppliers. contractor of having to go through the same
4 The placing of new orders. operation twice. The contractor's staff, whose
5 Delay and/or rephasing of the manufacturing servicesare recoveredfor under the estimate as a
programme to accommodate the variation. percentage of prime cost, will have been
6 Delay in delivery of material to site due to involved to some extent on the item already in
action under 3 above. estimating and procurement, but under this list-
Table 21.1 Financial balance between item originally included and that ordered as a variation
ADDITIONS DEDUCTIONS
Works or bought-out cost of the new item. Works or bought-out cost of the item to be replaced.
Percentage for overheads and profit related to works or Percentage for overheads and profit related to works or
bought-out costs. bought-out costs.
Man-hour costs for installation of new item. Man-hour costs for installation of the item to be replaced.
Percentage overheads and profit related to installation Percentage overheads and profit related to the installation
costs. costs.
Charges for additional design work including overheads Charges for any detailed design work which will no longer
and profit necessary t o incorporate new item. be required including related overheads and profit.
Design, labour, and material costs and related overheads
and profit on any consequential modifications or alter-
ations to the remainder of the plant, including study of
drawings to determine whether any such are necessary.
Cancellation charges payable to outside supplier or costs
or any work actually carried out in contractor's works.
VARIATIONS IN PRICE AND TIME
ing the contractor would recover for such ser- specially brought to site. For this reason, and
vices only once for the new item. Again, if it is also because it is difficult to take rates for the
only one item, few contractors would seriously purpose only of pricing variations into account
quarrel with this, accepting it as one of the in deciding on the award of the contract, the ten-
hazards of contracting. The trouble starts when derer~have every incentive to assume the worst
it is not one variation but a series of variations, conditions and price accordingly.
when the programme is affected, and when the In general therefore it would seem preferable
time spent by the contractor's head office starts from the purchaser's point of view, despite the
to become totally disproportionate to the value difficulties involved, to negotiate when the occa-
of the contract. Under these circumstances the sion arises and on the facts of the particularvari-
employer must expect that the contractor will ation without being tied in advance. The
seek to recover additionallyfor: contractor may, however, press, for quite a dif-
ferent reason, for at least the overhead percent-
abortive time spent by head office staff not
ages and margins to be fixed and stated in the
otherwise directlycharged to the contract
contract.
prolongation of the contract period on site -
It is often assumed that contractorswelcome
for example hire of huts, supervisors' salaries
variations in that they can use them to recoup
loss of productivityand overtime working due
any losses they may have made on the main con-
to changes in the programme.
tract or at least improve their overall rate of
It is easy enough to set down the basis on which recovery on the job. While, as explained above,
single variations should be priced in the manner the contractor may be placed in a favourable
which has been done above. It is often, however, negotiating position when it comes to settling a
another matter actually to negotiate the alter- price for the variation, it has also been pointed
ation in price. The purchaser will be thinking the out that the cumulativeeffect of a number of vari-
contractor is trying to take him for a ride, but ations on his main contract programme can be
may additionally be genuinely unappreciativeof extremely serious and result in disruptions of
what trouble and cost his simple instruction has work, loss of productivity and so on. These losses,
caused. He will also be acutely aware that he while real, may often be difficult for him to quan-
cannot get competitive quotations. The contrac- tify or to claim from the employer. In any event
tor may be anxious to recover some of the he is likely to be involved in protracted claims
ground he lost in post-tender negotiations. negotiations which are both time- and cost-
Neither side is likely to be in the mood for con- consuming in themselves and may well be detri-
cessions, but the purchaser will probably be in mental to his chances of obtaining further busi-
the weaker bargaining position. ness from the employer concerned.
Partially for this reason attempts are some- For this reason some contractors seek to put
times made to establish in advance the main forward as part of their tender, rates or percent-
tender rates on which variations can be calcu- age charges for different classes of work which
lated. It is possible to do this for civil engineering may be involved in handling variations - for
or building work or for structural steel or example - design which are deliberately so high
pipework, although the value of doing so seems as to be penal. In this way the contractor seeks to
questionable. This is because in putting forward utilize the contract as a means of discipliningthe
his rates the contractor must make certain employer's engineers.
assumptions regarding the quantity and com- While obviously such an arrangement can be
plexity of work which will be involved, the plant open to abuse, there does seem considerable
required, and so on, and as to whether it will be merit in any system of pricing which will bring
convenient to do the work in parallel with or as home to those responsible for administering
an extension of existing work of the same nature; contracts the real cost involved in having fre-
or whether it will be something quite separate for quent changes of mind. Accordingly a system of
which perhaps plant and a gang of men must be differential pricing for work as a variation as
compared with the same work under the main inappropriate to apply a rate derived from the
contract seems justified. If as a result variations price to work in other areas since this would
become a luxury which can be afforded but result in a windfall gain to Boot. This argument
rarely, then so much the better. It might also found favour with the arbitrator but was rejected
help to avoid the other practice, of including an by the court who held that as a matter of law the
allowance within the original tender for the other work had to be valued under clause
'messing about' which, from past and often bit- 52(l)(b).The contract rates and prices were the
ter experience, the contractor knows that he is basis for the pricing of variations regardless of
likely with certain clients to receive. whether they were too 'high' or too 'low'. The
decision has subsequently been confirmed by
CONTRACTS ON BILLS OF QUANTITY TO the Court of Appeal,April 2000.
BE REMEASURED This case once again illustrates the import-
Under the ICE conditions the basic rule is that ance in an ICE contract of the rates and prices
where the varied work is of a similar character contained in the bills and of the need for the
and to be executed under similar conditions to client to be satisfied before contract that such
work priced in the bill of quantities, the varied rates and prices are correct. It is too late after-
work is to be valued at the rates and prices con- wards to complain.
tained in the bill of quantities (clause 56(l)(a)).It The Red Book provides in clause 18 that the
is only where the work is not of a similar valuation of variations shall be 'the amount
character or is not to be executed under similar including profit as shall in all the circumstances
conditions that the engineer is to use the rates be reasonable' and that the contractor's estimate
and prices in the bills as a basis for a valuation so for the work shall be based on the rates and
far as may be reasonable, failing which they are charges in Schedule 11 if applicable. Schedule 11
to make a fair valuation (clause56(l)b)).The fact then sets out rates per man-hour for home office
that the rate or price contained in the bill of and field personnel, travelling and subsistence
quantities may appear to be too 'high' or too allowances, procurement fees and then profit
'low' is irrelevant. The fundamental principle of and overheads. This provides some basis for the
the ICE conditions is that the rates and prices in pricing of the new work to be done under the
the bills of quantity are sacrosanct, subject only variation but, unless these rates and prices are in
to the provisions of clause 56(2)that an increase some way, say by applying to them provisional
or decrease in the quantities of work may of itself quantities, taken into account in the tender
justify an increase or decrease in the rates if evaluation the contractor has every incentive to
these are rendered inapplicable or inappropriate price these high to allow for disruption.Of course
in consequence of such change in quantities. on their own they take no account of productiv-
Both the contractor and the employer are other- ity. Perhaps more seriously they are not appro-
wise stuck with the rates and prices contained in priate to the pricing of the work which has, as a
the bills of quantity. result of the variation, been rendered abortive or
This was confirmed recently in the case of will no longer be required. This should be priced
Henry Boot Construction v Alsthom Combined on the same basis as the original tender which
Cycles Ltd [I999164 CON LR 32. There Boot had could well be significantlydifferent.
quoted a price for a variation to the sheet piling Somewhat optimistically the guidance notes
work in the turbine hall of £250 880 which had in the Red Book state that variations should
been accepted. They sought to derive from this form only a very small part of the final price.
price a rate of £88.03 per m2 based on the quan- Ideally that should be so and, if the purchaser
tity of 2821 m2 of sheet piling and to apply this to has properly specified his requirement, and
work in other areas. There was evidence that the refrained from changing his mind, it will be so.
sum of £250 880 for the turbine hall alone was a Unfortunately this is not always the case and one
mistake. Although the price was contractually needs therefore to be prepared.
binding it was considered by Alsthom that it was The NEC adopts a different approach in that
VARIATIONSIN PRI CE AND TIME 189
it requires firms as part of their tenders to submit ation, then he negotiates amendments to
a schedule of cost components - labour rates, price, time for completion and specification.
plant rates, design charges, overhead percent- 6 Purchaser issues formal variation order in
ages together with a percentage fee. The writing, using a standard serially numbered
employer includes in his enquiry provisional form.
amounts for each of these and the sum total is 7 Contractor proceeds with the work.
taken into account in the tender comparison.
These rates and percentages are then used in the This seems a long series of steps; the temptation
assessment of compensation events which is there to go straight ahead and tell the contrac-
includes variations. tor to start work. Indeed there will be genuine
Of course these rates and percentages are emergencies when it is necessary to do just that
onIy half the story since there still remains the and tidy up the paperwork afterwards. But in
issue of the quantities to which they are to be doing so not only is any possible negotiating
applied and the productivity factors involved. advantage lost, but also any curb on the en-
However, with the NEC it is important to thusiasm of the purchaser's staff to make
note the principle that compensation events are variations is removed and financial control of
priced on the basis of the actual or estimated the contract is made impossible. Except in the
change in cost incurred by the contractor, in the case of a real emergency it should be made diffi-
latter event using the schedule of cost com- cult to make variations.
ponents and fee percentage, and not by using The procedure referred to above is essen-
the rates and prices for work in the contract from tiallythat which has been adopted in the NEC.
which the original contract price was derived. However, while it may be possible at the time
The same remarks apply here as to the Red to assess the direct effect of the individual vari-
Book. These rates may be appropriate for the ation on the contract price and time for com-
additionalwork but for that which has now been pletion, it is much more difficult to assess the
rendered abortive or has been deleted the rates indirect or consequential effect. This with one
used should be those for the tender, variation may be small, but as the number of
Avital factor in the successful control of vari- variation orders grows so do the consequential
ations is the timing of price negotiations. Only effects increase, often at a much faster rate.
too often, because of the pressure for physical While therefore, ideally, one should treat
progress with the work and the complexities in each variation order separately and assess finally
assessing the price change, instructions are its effect on the contract price and time before it
given to the contractor to make the change, with is issued, there are occasions when it is just not
the alteration in price to be negotiated later. practicable to do this. In order to retain as much
Ideally the sequence of events should be: control as possible in these circumstances it may
be necessary to divide the negotiation of vari-
1 Purchaser decides that a particular variation ations into two stages:
would be desirable. 1 The assessment of the direct effect of the vari-
2 Contractor is instructed to assess the effect of
ation.
the proposed variation in terms of 2 The assessment of the consequential effect of
price the variation on the contract price and the
time overall time of completion.
performance.
Stage 1 should be completed for each variation
3 Contractor submits his proposals under the order before it is issued. Stage 2 cannot be com-
above three headings. pleted until the design has been finallyfrozen. At
4 Purchaser decides whether he can afford the that point the cumulative effect of the variation
variation taking all factors into account. orders can be reassessed and any necessary
5 If purchaser decides to proceed with the vari- adjustments to the contract price and pro-
190 TERM S AND CONDITI ONS OF CONTRACT
gramme made. Obviously the earlier the design- 4 Subsistence allowance for men lodging away
freeze date, and so the final contract value and from home or radius allowance for those
programme, can be established the better for living within a certain distance from the site.
both parties. What is vital, however, to do at the 5 Travellingtime.
time is to record and agree with the contractor 6 Allowance for overtime. It is virtually imposs-
the facts on which the stage 2 negotiations will ible today to obtain site labour without a
be based. There is no excuse for there not being guarantee of a certain number of hours over-
accurate records of, for example, the time plant time a week.
was on site and the periods during which it could 7 National insurance, holidays with pay and
not be fully utilized. common law insurance, all of which bear a
Not all variations relate to the physical con- direct relationship to wages costs.
tent of the works. The employer may wish either
to speed up completion or to slow it down, or To these the contractor will add his charges for
possibly to put the contract into suspense. Any supervision, small tools and consumables and
such actions are bound to have a serious effect other erection on-costs including normally a
on the contract price. margin to cover his head office erection depart-
The simplest case is probably trying to speed ment.
up completion. Time may be bought by: One important point to ensure, when negoti-
ating an addition to cover for extra overtime, is
working additional overtime or at weekends that where such an addition is to be charged on a
putting on an additionalshift percentage basis, such percentage is charged
offering suppliers or sub-contractors a bonus only on those costs which are directly propor-
to deliver or finish earlier. tional to wages, or alternativelythat the percent-
age is adjusted to take account of non-variable
By such methods small improvements can be items. Item 4 in the above list, for example, is a
obtained fairly easily. But above quite a low level flat weekly charge which will not alter.
the law of diminishing returns starts to operate Slowing down a job is rather more difficult, in
and it becomes more and more expensive to pur- that it will involve the contractor being engaged
chase smaller and smaller improvements. Once for a longer time on the contract and will there-
a certain level has been passed the productivity fore tie up his resources for a longer period, so
value starts to drop rapidly, and on double shift- reducing his potential earning capacity over that
ing the productive effort may be 25 per cent period. For this reason the contractor may rea-
or more below normal. Moreover, the longer one sonably claim under the followingheadings:
tries to continue with excessive overtime or
double shifting, the lower the return one obtains 1 Charges for plant, huts, and so on retained on
for the increased expenditure. site for an extended time.
As regards pricing, provided the make-up of 2 Salaries and overheads of supervisory staff so
the labour charges already included within the retained.
contract is known, this presents no real diffi- 3 Some additionalcharge for wages costs due to
culty. For site work the make-up will normally less productive work.
comprise: 4 Additional costs for any work which is now
to be carried out under different and more
1 Basic wage which may in these days bear no arduous conditions, for example excavation
relation at all to the so-called basic wage to be carried out in the winter instead of the
agreed nationally between the union and the summer.
employer's federation concerned. 5 If the contract is on a fixed price basis an
2 Bonus often related to productivity. addition to cover:
3 Condition money which may cover such
things as working in dirty conditions,wearing any increase likely to be met in the
rubber boots, and so on. extended period
VARIATIONS IN PRIC E A N D T IM E 191
the proportionately more serious effect already executed not later than the date by
which increases occurring earlier in the which they would originally have been
contract period will have, over the released. This is reasonable,and certain stan-
allowance made for these when the esti- dard conditions of contract do make pro-
mate was prepared. For example, 40 per vision for this. It is also reasonable to make
cent of the contract work may now be payments on account of work partially com-
carried out after the date when a wages pleted in the contractor's shops but not yet
award will take effect, instead of the 25 per delivered or ready for delivery, provided that
cent on which the estimate was based. it has been identified as the purchaser's prop-
erty. The buyer will want to make sure that
6 Additional interest charges due to retention such parts are correctly marked and so on,
moneys being outstanding for a longer and that they are covered by all-risks insur-
period. ance.
Where the contract is put into suspension, con- 5 From the buyer's point of view it also seems
sideration will need to be given by the buyer to reasonablethat he should not as a result of the
the following points: suspension lose the rights he may have in
respect of any defects which may occur in the
1 Should the contractor's site organization works after they have been finally completed.
plant, huts, and so on be removed from the In other words, payment of retention moneys
site? Obviously, if all or any part of it remains, in respect of the partiallycompleted job must
the contractor is going to want to be paid for be without prejudice to the defects liability
it. On the other hand the costs of taking it period, which should only start to run after
away and then re-establishing it may also be the actual completion of the job. Where, of
heavy. The buyer must weigh up the advan- course, equipment which suffers natural
tages of each course, taking into account the deterioration no matter what care is taken is
likely period for the suspension. stored for any period, this must be subject to
2 Work partially completed on site must be the contractor's right to inspect and make
properly protected; loose items not yet incor- good the results of any such deterioration.
porated or built into the works must be identi-
fied, labelled or marked, and properly stored. LIMITATIONS ON THE RIGHT OF THE
If the contractor's organization is being PURCHASER TO ORDER VARIATIONS
removed from the site then the responsibility In certain forms of contract there are express
for such storage and safe custody will vest in restrictions on the power of the engineer or pro-
the purchaser. ject manager to order variations. For instance in
3 Items in course of manufacture or not yet MFI1 it is stated that, unless the purchaser and
despatched must be similarly treated. In this the contractor consent in writing, no variation
case, however, they should remain at the risk shall be ordered by the engineer which involves,
of the contractor; this needs making clear with the variations already ordered, a net
explicitly; also the buyer will want to make addition to or deduction from the contract price
sure that the contractor has insured the items of more than 15 per cent of the contract price.
against all insurable risks. There is no limitation on the power of the con-
4 The contractor will seek to ensure that he is tractor to withhold his consent and, although it is
not prejudiced by the suspension as regards doubted whether in practice a contractor would
the time when payments under the contract be deliberately awkward about giving consent, it
should be made. Thus if the contract provides does effectively give him the power to block a
for retention money to be released on com- variation which the purchaser considers essen-
pletion, and completion is delayed as a result tial unless he is paid an extravagant price for car-
of the works being suspended, he will want to rying it out. Further it is not considered that the
be paid the retention moneys relating to work purchaser's agreement to pay an excessive sum
192 TERM S AND CONDITI ONS OF CO N TRA CT
for the variation in those circumstances would others already ordered increases or decreases the
be vitiated by economic duress, since the con- contract price by more than 25 per cent. He can
tractor was only exercising his rights under the also advise the project manager if he considers
contract. Note that it is the purchaser who must the variation will prevent or hinder him in
consent. The engineer has no power to do so. fulfilling any of his contractual obligations. If the
The contractoralso has the right to advise the project manager then confirms the variation the
engineer when the variation is ordered of the obligations are modified as the contractor and
extent to which it may in his opinion prejudice the project manager may agree. This gives the
him in fulfilling any of his obligations under the project manager the express right to agree to a
contract. If having received such a notice the modification of the contractor's obligations,
engineer confirms the variation the contractor's although it would be expected that in practice the
obligations are then modified to the extent justi- project manager would first consult with the pur-
fied. This would obviously cover changes to the chaser before giving his agreement.
programme and date for completion as well as The contractor can also object to a variation
possibly the test results to be obtained on com- if it would require him to exercise skillswhich are
pletion and any performance obligations. While not of the kind which the contractor undertakes
the engineer has power to vary the works he does in the ordinary course of his business. This is
not have the express or implied power to vary the obviously sensible.
contract. If therefore the contractor has pro- Any disputes between the project manager
posed modifications to the contact specification and the contractor regarding the ordering of
or testslguarantees then it is considered that modifications, their pricing or modification to
before agreeing to these the engineer must the contractor's obligations are to be referred to
obtain the purchaser's agreement. the decision of an expert appointed under clause
Restrictions on the same lines are also con- 45 which is made, by that clause, final and bind-
tained in the Red Book. The contractor can object ing on the parties. This provides a quick and
to any variation which when combined with all simple method of resolving such disputes.
CHAPTER TWENTY-TWO
Claims and their negotiation

It may well be asked by someone coming new to cerned buildings such as hospitals, the design
contracts for construction works why it is of which has clearly been subject to substan-
that the subject of claims, and what is often tial post-contract alteration as a result of
referred to as 'claimsmanship' by contractors, changes in operational requirements. This is
should occupy such a prominent place both in due, one suspects, to a failure at the planning
the literature on standard forms and their prac- stage properly to involve those who would
tical administration.The main reasons are: ultimately have the task of using the building
for their professional purposes.
1 The very nature of constructional contracts 7 The intense, some would call it insane, com-
carried out, as they largely are, on open sites petition which prevails in some parts of the
and with the uncertainties necessarily construction industry, resulting in tenders
attached to works involving excavation below being submitted at or below cost, coupled
ground. with the awarding of contracts to the firm who
2 The division of responsibilities between the submitted the lowest-priced tender often
engineerlarchitect and the contractor under without regard to their technical, managerial
the traditional methods of contracting as and financial competency to undertake the
described in Chapter 2. work. The attempt is then made by the firm to
3 Failure of pre-contract planning both by the exploit every opportunity provided by the fac-
employer with the advice of his engineer1 tors listed in 1-6 above, whether real or imagi-
architect and by the contractor in the prep- nary, to submit extensive claims which, if only
aration of his tender. This is due largely to an partially successful, will largely restore the
unwillingness to spend the time and money contractor's margin to an acceptablelevel.
necessary for proper investigation of site con-
ditions and construction methods, to provide TYPES OF CLAIM
the firms tendering with the fullest infor-
mation on the engineer'slarchitect's inten- Claims can be divided into four categories:
tions regarding design and allow an adequate claims for the payment of damages due to the
time for tendering. employer's breach of contract
4 Failure on the part of the engineerlarchitect claims for additional payments under specific
to obtain adequate information at the time of provisions of the contract
tendering as to the contractor's proposed claims arising out of variations
methods of construction and programme for claims for disruption and delay.
the carrying out of the works and to compare
this with his own intentions so as to satisfy CLAIMS FOR THE PAYMENT OF DAMAGES
himself about their compatibility The basic principle upon which any such claim
5 Inadequate attention paid to the pre-qualifi- must be founded is the same as that which
cation and selection of firms to be invited to applies to any other claim for damages, namely
tender and to the analysis of their bids, not that the claimant is entitled, once the breach has
just in relation to the overall price but to all been proved, 'to be placed, so far as money can
other data required to be submitted. do it, in the same position as he would have been
6 Extensive variations ordered during the con- had the contract been performed'.
tract period. It is interestingto note that many It follows from this that if the contractor can
of the cases arising on this issue have con- establish that, as a result of some failure by the
I 1 94 TERMS AND C O N D I T I O N S OF CONTRACT
employer to comply with his obligations, the addition in respect of profit'. See, for example,
contractor has suffered additional costs then he clause 12(6)dealing with additional costs due to
is entitled to recover these. Further, if the adverse physical conditions and artificial
employer's failure is such that the contractor has obstructions;clause 42(3),delay by the employer
been compelled to carry out work additional to in giving possession of the site; but only
that which he had undertaken to do under the additional cost is to be paid under clause 7(4),
contract, in order to enable him to comply with delay by the engineerin the issue of drawings.
his contract, then he would be entitled to claim In this respect one can contrast JCT80 clause
for additional profit on such extra work. It is not, 26b which expressly provides that the provisions
however, the case where the contract is continu- of clause 26, dealing with the contractor's right
ing that a claim for loss of profit can be made to the recovery of loss and expense caused by
merely because some additional expense has matters materially affecting the regular progress
been incurred as a result, say, of the contractor of the works, is 'without prejudice to any other
being delayed in the performanceof the work as rights and remedies which the contractor may
a result of the employer's default. For such a possess' and so leaves open the contractor's
claim to succeed it could only be on the basis rights to a claim in damages for breach of con-
that the delay had been so prolonged, and the tract. In practice, it may not often be necessary
contract so substantial a part of the contractor's for the contractor to invoke such a right. The
business, that it had tied up his resources to the expression 'direct loss and expense' has been
point at which he had lost the opportunity of interpreted by the courts as meaning the loss or
tendering for other potentially profitable busi- expense which arises naturally and in the ordi-
ness. This point will be considered further in the nary course of events, i.e. the damages recover-
section on claims for disruption and delay. able under the first limb of Hadley v Baxendale.
The situation is, however, different where the
contractor's claim arises on the contract being CLAIMS FOR PAYMENT FOR
terminated. In the case of JohnJarvis v Rockdale COMPENSATION UNDER EXPRESS TERMS
HousingAssociation 10 CON LR 51 the contractor As already indicated, most standard forms of
terminated under clause 28.1.3.4 of JCT 80 and contract do provide that in particular circum-
clause 28.2.2.6 provides that upon such termi- stances the contractor is entitled to submit a
nation the contractor shall be paid inter alia 'any claim for compensation. The most obvious ones
direct loss or damage caused to the contractor as are where there has been a delay by the
a result of the termination'. In the course of giv- employer, or more likely the engineerlarchitect
ing the judgement of the Court of Appeal Lord acting on his behalf, in carrying out their respec-
Justice Bingham said: 'The learned judge was tive obligations. The basis upon which such
content to assume that this clause gave the con- claimsshould be made is by way of a comparison
tractor the right to be paid all the profit that he between the costs which the contractor reason-
would have made if he had completed the works ably expected to incur and the increases which
in accordance with the contract and before us he did in fact incur arising out of the delay. The
neither party challenged that assumption'. practical difficulty with making any such com-
The rights of the contractor to claim dam- parison is that only too often the evidence avail-
ages, and in particular to claim for loss of profit, able is not convincing. Even if the contractor
may be affected by the express wording of the uses a sophisticated computer-based program-
contract. In this respect the 6th (now the 7th) ming system, it is unlikely that any such system
edition of the ICE conditions made a number of will, unless specially set up for the purpose, dis-
changes from the 5th edition. The term cost is tinguish between those delays which are due to
still defined in the same manner as before to the default of the engineer and delays which
exclude profit. However, in a number of clauses arise due to other causes. However, there is no
it is specificallystated that there is to be added to doubt that the better the programming methods
the additional costs 'a reasonable percentage employed and actually applied in practice, with
C L A I M S AND THEIR NEGOTIATION 195
regular updating and identification at the time of of variations which create the problems of pro-
'holds' which have occurred and corrective longation and delay will be dealt with in the next
action being taken, the better the chances are of section. Here it is proposed to consider two
a reasonably negotiated solution without the points:
expense of protracted legal proceedings. First, the pricing under a remeasurement
Unfortunately only too often both sides see it as type contract of changes in quantities which are
being in their best interest 'to play their cards not covered specifically by variation orders. The
close to their chests'. Even when the contract point arises in the following way. According to
provides for the submission of regular pro- the conditions of contract in general use in civil
grammes to the employer those supplied are engineering (the ICE Conditions 7th edition and
more likely than not 'political' programmes pro- FIDIC 4th edition) the amounts to be paid to the
duced for the purpose of either keeping the contractor are to be determined in accordance
employer happy or providing the grounds for a with the admeasurement of the quantities of
subsequent claim, rather than being the true work actually executed and the quantities stated
programmes to which the contractor is working. in the bills on which tenders were invited are
Contractors may not keep two sets of books for only estimates. It can, and quite often does,
the purpose of defrauding the Inland Revenue happen that the actual quantities in respect
but they most certainly on many projects keep especially of items involving excavation exceed
two sets of programmes. Indeed it is not by a substantial margin the quantities stated in
unknown for there to be three; one for the client, the bills. In those circumstances the contractor
one for head office and one for site! will consider, not unreasonably, that the bill rate
If the contractor is going to rely on being able should no longer apply since the time to carry
to base a claim on an express term of the con- out the work and even the methods of construc-
tract then it is essential for him to have complied tion involved may vary substantially from those
with any procedure which is established in the which he contemplated when he planned his
contract for the giving of notices within the time- tender. Accordingly, as referred to earlier, the
scales prescribed. This is an area in which con- ICE conditions now provide specifically that, if
tractors are notoriously lax. Partially, this is the engineer so considers that the change in
simply poor administration by people more con- quantifies warrants it, he shall after consultation
cerned with the immediate problems involved of with the contractor establish a new rate. At one
gettingthings built, and partiallyit is due to a not time it was considered - see I.M. Duncan
entirely unjustified fear of upsetting those on the Wallace, Construction Contracts, 1986, Sweet &
employer's side, particularly at site level, upon Maxwell, p. 113 - that the matter had been con-
whose co-operation the contractor is dependent clusively decided, as regards the FIDIC con-
for achieving results. It must always be remem- ditions, the other way round, as a result of the
bered that any claim which is based on an alle- decision by the Court ofAppeal in South Africa in
gation of employer default can and often will be Grinakar v Transvaul Authority. Fortunately in
looked upon by the recipient as a personal criti- my view this position has now been reversed as a
cism. But no relationships however good which result of the Privy Council decision in Mitsui
have been established locally during the course Construction Co. Ltd v Attorney General of Hong
of the contract will prevent the lawyers or other Kong [I986110 CON LR 1, where it was decided
professional advisers acting for the employer in that the engineer did have jurisdiction to fix a
dealing with the claim from taking the point, if new rate for any billed item where he was of the
such is the case, that notices were not given in opinion that the differences between the billed
due time and this could well be fatal to the suc- and measured quantities of work made the billed
cess of the claim. whatever its other merits. rates unreasonableor inapplicable, regardless of
whether there had been a formal variation order,
CLAIMS ARISING OUT OF VARIATIONS an engineer's instruction in relation to the speci-
The question of claims arising out of a multitude fication of work to be executed or simply a sub-
196 TERMS AND CONDITIONS OF CON TRACT
stantial difference between the billed and architectlengineerandlor the delays in the issue
measured quantities. by the architectlengineer of the drawings and
Second, the extent to which a contractor can other information necessary to enable the con-
claim in respect of a variation ordered by the tractor to proceed, are such that it is impossible
engineerlarchitectthat it is outside the scope of to determine the effect of any one particular loss
his authority. That position could arise in the fol- and that therefore the claim should be dealt with
lowing circumstances: on the basis of the contractor's total loss on the
contract. The obvious advantage to the contrac-
if the engineerlarchitect were to order that tor if he can bring himself within this ambit is
work intended by the contract to be per- that he does not have to prove details of each
formed by the contractor were to be awarded individual loss. He can apply a 'broadbrush' to
to another party. Even the words 'that the the calculations and is unlikely, especially at
architect has the power to give written direc- arbitration,to come out with less than around 25
tions as to the omission of any work' have been per cent of his original claim.
held in Australia not to entitle the architect to Equally the obvious disadvantage to the
take away from the contractor and award it to employer is that he does not have precise partic-
a third party (Can VIA.Bemman Property Ltd ulars of the sums being claimed nor of the basis
[I9531 M J R 273). It is arguable that the power upon which, in each instance, it is alleged that
to omit work applies only if the work is not to he, rather than the contractor himself or some
be done at all - see Max Abrahamson, external cause, is responsible for the loss in
Engineering Law Applied Science, 1985 and question. His ability to challenge the contrac-
the ICE Contract 4th edition at p. 172 and the tor's allegations is accordingly that much
Irish authorities there stated. reduced.
if the variation ordered was of a kind which So far as English law and practice is con-
significantly changed the nature of the works cerned there is authority for a 'total loss' claim
or required the contractor to undertake work being allowed where it is wholly impractical,
of a significantly different type from that con- because of the complex nature of the interacting
templated by the contract. The argument here elements of the claim, to consider these in iso-
is based on the premise that the power to lation one from another: 1.Crosby & Sons Ltd v
order variations is based on these being nec- Portland UDC [I9671 5 BLR 121. Since that de-
essary or desirable in relation to the contract cision there have been other cases in which the
works. The variation clause is not as it were 'a validity of a total loss or global claims has been
blank cheque' under which the employer can doubted. In Wharf Properties Ltd and Another v
elect to have carried out under the terms of Eric Cummins and Associates 1991, the plaintiffs
the contract other work which he would like argued that it was impossible to isolate specific
to have done but which has no real relation- areas of delay due to the complexity of the pro-
ship to that contemplated when the original ject. However, the Privy Council held that the
contract was placed. claim put forward, in which no attempt had been
when the payment basis of the contract is made to link cause with effect, could not be
such that to require the contractor to perform allowed to stand. It was said 'The failure even to
variationswithout limit would place upon the attempt to specify any discernible nexus
contractor an intolerable burden and place between the wrong alleged and the consequent
him in effect entirely at the employer's mercy delay provides "no agenda" for the trial.' In ICI v
- Sir Lindsay Parkinson & Co. Ltd v Bovis Construction Ltd and Others I19921 CON
Commissioner of Works [I9501AU ER 208. LR 90 again there was a failure to link the alleged
financial consequences with each breach. The
CLAIMS FOR DISRUPTION AND DELAY court did not reject the claim but required that
One of the most common claims by contractors ICI should prepare their claim in more detail,
is that the number of variations ordered by the giving particulars of which clause of the contract
CLAIMS AND THEIR NEGOTIATION 197
had been breached and the alleged factual con- overheads and loss of profit. There are in fact two
sequences of that breach. possible bases of claim and it would appear that
A Court of Appeal decision which followed they are easily confused. First, there is a claim for
the Wharfcase showed more sympathy with the overheads only which is based on the additional
difficulties that the claimant may have in partic- managerial time and expense which is required
ularizing the undoubted loss which he has to deal with the problems which created the
suffered. A computer-controlled precision lathe claim in the first place and seek their solution. It
failed to work as it had been designed to do was to this which Mr Justice Forbes was referring
from August 1985 to May 1988 and did not oper- in Tate & Lyle v GLC [I98211 WLR 149 when he
ate at all from June 1987 until January 1988. said that to establish such a claim there must be
Subsequently it had operated correctly. The sup- evidence of the actual additional managerial
pliers were clearly liable for the cost of repairs time expended and he was not content to apply
but also for damages arising from the failure of an arbitrary percentage. Second, there is the
the machine to operate correctly or at all. At first claim for both head office overheads and profit
instance the judge directed that the claimant which is related to the fact that by virtue of the
should link each specific period of downtime to a contract period being extended the contractor
specific proposed production by means of a will be deprived over that period of the oppor-
Scott Schedule. The claimants found themselves tunity of earning a contribution to his fixed costs
unable to do this to the judge's satisfaction and and of profits. It has become customary in the
they appealed. The Court of Appeal held that the building industry to calculate such loss by
judge had been wrong in his direction and it was means of a formula in order to avoid the need for
for the claimant to prove the necessary link detailed calculation and the ones most com-
between causation and loss by whatever means monly used are the so-called Hudson formula
he chose, taking account in this particular and the Emden formula named after the respect-
instance of the commercial realities of their ive authors of the legal textbooks concerned.
manufacturing process (GMTC Tools v Yuasa Both formulae have the same objective of deter-
Wanuick Machinery,TheTimes 3 January1995). mining the overhead and profit percentage
It appears therefore that the position today is applicable during the delayed period. The
that the contractor must be able to show that he Emden formula, probably the more appropriate
has made every effort practicable to itemize of the two, takes a fair annual average of the con-
causes of delay and their individual effects. Only tractor's overheads and profit percentage over
where because of the complexity of the inter- the years including the period of delay, multi-
relationship between a number of causes is such plied by the contract sum and the period of delay
that this is impractical is it likely that a court or in weeks, divided by the contract period.
arbitrator will accept a global claim. The use, however, of a formula is a somewhat
In this connection it is now possible by the crude means of calculating loss after it has first
use of modem software to use the technique of been proved that the claimant has actually suf-
'impact analysis'. This establishes the impact of fered a loss. It is not a method of proving that a
individual causes on a series of logically linked loss has been incurred. There is a habit amongst
events within the network. However, the prac- those who prepare claims of jumping from the
tical application of the technique requires the fact of a delay for which the employer is respon-
knowledge of how the work was programmed, sible to a claim calculated in accordance with
how it progressed, when the delaying events one of the formulae, missing out the vital step of
occurred and the interaction between one delay showing that the contractor has actuallysuffered
and another. This again emphasizes the need for any loss for which the employer has any liability.
genuine contemporarydata. It may well be that the contractor did not, and
One of the many difficulties which are to be could not, have obtained further work during the
found in the calculation of claims for pro- period of delay, certainly not work which would
longation and disruption is that of head office have made a contribution to overheads and
198 TERM S AND CONDITIONS OF CONTRACT
profit, but that could have been due to a shortage 6 In presentingthe claim, make sure that it con-
of tenderingopportunitiesduringa time of reces- tains:
sion in the industry and nothing to do with the a short executive summary
delay. In principle the calculation of loss by clear references to the terms of contract on
means of a formula may be justified, but as was which the claim is based
said by Mr Recorder Kallipetis in Amec Building all essential data required in order to
Ltd v Cadmus Investment Co. Ltd: 'It is important understand the claim, for example critical
in my view that the plaintiff places some evi- dates, extensions of time applied for and
dence before the court that there was other work granted, variation orders issued,and so on.
available which but for the delay he would have copies of the programme, minutes and
secured but which in fact he did not secure other documents supportiveof the claim.
because of the delay. Thus he is able to demon-
strate that he would have recouped his overheads Perhaps the most difficult problem which the
from those other contracts and thus is entitled to contractor faces in the negotiation of claims is
an extra payment in respect of any delay awarded the time which it takes. The employer has the
in the instant contract'(5 June 1996). contract works, the money and little inclination
Arnec's records were not adequate to sub- or incentive to part with them. Until recently
stantiate that there was sufficient other work employerswere supported in this attitude by the
available that they would have been able to have ancient and much criticized rule of English law
obtained some had it not been for the delay. established by the House of Lords that financial
Records and more records are the essential basis damages in the form of interest for late payment
for claims. were not allowable. That position has been par-
tially rectified by statute in that the courts may
CLAIMS PRESENTATION AND now award simple interest under clause 5.35 of
MANAGEMENT the Supreme Court Act 1981 where payment is
not made before proceedings are commenced.
There are a few basic be in More importantly, as regards contracts which
preparingfor and presentingclaims. These are:
contain such words as 'direct loss or expense' to
1 Consider the possible areas for claims from describe the sums payable to a contractor in
the start of the contract and plan accordingly. respect of the employer's default - see JCT 80
Don't wait until they happen. clause 26 - the Court of Appeal has held that
2 Keep accurate records from the start of the such words cover the interest charges which the
contract - in particular a good, factual site contractor has had to pay by being out-of-
diary. pocket. Such interest charges will run until the
3 Where it is considered that a claim may arise date of the last application before the issue of the
in respect of design work, ensure that the certificate which relates to the primary loss con-
records are such that it is possible to trace the cerned. Further, since such charges are truly in a
number of man-hours spent on revisions to contractual sense a loss suffered and not 'inter-
each drawing and the particular reasons why est' they will be calculated on the basis charged
such revisions became necessary. by the contractors' bank, i.e. on compound
4 Make a record of the requirementsfor the giv- interest with rests.
ing of notices and ensure all staff concerned However, if a contractor is to succeed in
are made aware of these. claiming interest as part of the loss/expense
5 Ensure that all correspondencewith and from incurred there must be some reference to that
the employer which could have an impact on effect in the notice which he is required to give
claims is reviewed, as are all minutes of meet- the architect under the terms of the contract:
ings. Aim to answer allegations factually and F.G. Minter v Welsh Health Authority Technical
as far as possible always 'put the ball into his Services Organisation [I981113 BLR 1 and Rees
court'. and Kirby v Swansea City Council 5 CON LR 34.
CHAPTER TWENTY-THREE
Dispute resolution
There are six ways in which a dispute under a should be planned for and carried out profes-
construction contract, as defined by the Con- sionally with clearly defined objectives and the
struction Industry Act, can be resolved: will on both sides to reach agreement.
negotiation ALTERNATIVE DISPUTE RESOLUTION
alternative dispute resolution Alternative dispute resolution is a form of struc-
adjudication tured negotiation in which the parties are facili-
expert determination tated in resolving their dispute themselves
arbitration through the employment of a conciliator or
litigation. mediator. The essential difference between ADR
and other forms of dispute resolution is that
NEGOTIATION there is no judgement, decision or award
Often overlooked but in many ways the cheap- imposed on the parties. If they reach an agree-
est, quickest and simplest method of resolving ment then it is their agreement which they have
disputes is direct negotiation between the par- entered into voluntarily.
ties. They can bring into the negotiations what- In its usual form within the UK the parties
ever factors they choose and are not bound by agree on a choice of a mediatorlconciliatoror in
any particular format. The problem with such default of agreement the contract will provide
negotiations is if they are held at the same level for the appointment of one by an independent
as that at which the administration of the con- body such as the Centre for Dispute Resolution.
tract has been conducted. The representatives The mediator is sent a brief by each of the parties
have probably already dug themselves into which summarizes their case together with
entrenched positionsfrom which they will find it copies of the relevant documents. In practice the
difficult to move. The dispute has not only mediator will call the parties together on his
become personal but the way in which they appointment and give directions as to the docu-
define it is in the narrow terms of the particular ments which he wishes to see and the form
problem which faces them. To continue the which the mediation is to take. There will be an
military analogy, they cannot lift their heads initial meeting of the parties together with the
above the parapet. mediator at which each will have the oppor-
For this reason some commercial contracts tunity of presenting his case. The parties will
provide that as a first step the negotiations are then retire to separate rooms and the mediator
raised to an appropriate senior management will discuss their case with each individually and
level, say to a partner or director, who is aware of seek to find some common ground upon which a
the contract but who has not been involved in settlement could be based.
the day-to-day management. It is hoped in this In so acting the mediator is not trying to solve
way to put on one side the mutual suspicion and the dispute in the sense of determining the
antagonism which are preventing sensible party's rights but trying to find a way forward to
debate and to take a much broader and rational resolve their differences. It is often the case,
look at the issues which are dividing the parties especially when the parties contemplate a con-
with the genuine intention of arriving at a tinuing business relationship, that one of the
solution and not just repeating the same old parties or the mediator will suggest commercial
arguments. steps which could be taken but which do not
In order to be effective the negotiations directly relate to the dispute, for example to
improve one party's cash flow or the award of a local authority wants legal justification
new business. to support a decision to pay a contractor's
There has been a significant increase in claim
recent years in the use of ADR in the UK in com- when at least one party is determined to make
mercial disputes and in the construction indus- use of points of legal or contractual technical-
try, and its use has been encouraged by the ity which are devoid of merit, unless the
courts, especially since the Woolf reforms of the mediator can induce a change of mind.
civil justice system. Parties can now be required
before action to consider using ADR as a means It is suggested that in a modem form of contract
of resolving their dispute. whether for construction work or otherwise there
The advantages ofADR are: should be included an ADR provision with tight
time limits as a first step in the dispute resolution
it is quicker than either arbitration or liti- procedure. Obviouslyneither party to a construe-
gation tion contract can be denied the right at any time
the costs are a fraction of what it would cost to to go to adjudication but there is nothing to pre-
go to arbitration or law vent them from agreeing to try ADR first. The ICE
it does not tie up for as long the time of the conditions do this in clause 6(5),which provides
executives of the companies that before any reference to arbitration either
because it does not result in a decision, but in party may seek the agreement of the other for the
a mutually acceptable agreement between dispute to be considered under the Institute of
the parties, it does not prejudice their future Civil EngineersConciliation Procedure.
business relationship - no one has 'won' or ADR is of course voluntary. A party cannot be
'lost' - which makes it an ideal method compelled to engage in ADR against their will
for resolving disputes in the context of and therefore if ADR is included in the contract
parmering-typeagreements there should be some clause providing for the
unlike litigation, it is private dispute to be determined by some other means,
costs are borne by each party and they share either arbitration or litigation.
the costs of the mediator equally. Assuming that the ADR process is successful
There are disadvantages, but only if one party it is recommended that the settlement terms
abuses the ADR process and is not interested in should immediately, and ideally before the par-
coming to agreement. If that party is so inclined ties disperse, be converted into a legally binding
he can use the ADR process as a delaying tactic agreement which can then be enforced by an
and also as a means of assessing the strength or action for breach of contract.
otherwise of the other party's case. The ideal If, however, the dispute is not resolved within
situation for the use of ADR is when the time the time period allowed in the ADR agreement,
and the costs which would be involved in either usually no more than two days, it may be advan-
arbitration or litigation are excessive in relation tageous to ask the mediator for a written report
to the sums of money in dispute, and the parties setting out his views on what he would consider
want to negotiate a settlement and go on doing to be an appropriate settlement, or at least a
business with each other. range of settlement terms, within which the par-
Equally there are a few situations which are ties can continue direct negotiations. In the
not suitable for the use ofADR: author's experience this can lead to a rapid con-
when the issue which divides the parties is clusion of the dispute by providing a focal point
genuinely one of principle and neither is pre- on which the parties can then co-ordinate.
pared to settle the dispute on a pragmatic
basis and forget the principle ADJUDICATION
when one party at least wants a decision on The Latham Report into the construction indus-
a matter of law, that is the interpretation of a try identified a major problem in the industry as
particular contractual clause - for example, being the lack of a rapid procedure for the settle-
DISPUTE RESOLUTION
ment of disputes, particularly those involving the engineer in his traditional role of being the
the payment of sums of money with the result first person to whom a matter on which there is
that cash does not flow speedily. The report rec- dissatisfaction is referred. It is then stated that
ommended therefore that a system of adjudica- no matter shall constitute a 'dispute' until the
tion should be introduced into all construction engineer has either given his decision on it or the
contracts, underpinned by legislation; the award time for him to do so has expired. Whether this
of the adjudicator to be implemented immedi- trick will work or not remains to be seen. Many,
ately. including the author, doubt that the parties can
That recommendation was accepted and in this way prevent the operation of the Act
incorporated into the Construction Act 1996 and which clearly states that a party has the right at
the Scheme for Construction Contracts S.I. 1998, any time to refer a dispute to adjudication and
no. 649. dispute includes any difference. If these doubts
Briefly the Act provides that: are correct then the ICE scheme is non-com-
pliant. At the time of writing the matter has not
a party to a construction contract (as defined
by the Act) has a right at any time to refer a yet come before the courts.
dispute arising under the contract to adjudi- The NEC when it was first issued contained
cation provisions for adjudication with the intent that
the contract shall provide for the appoint- there would be someone genuinely independent
ment of the adjudicator within 7 days of a of the parties who would decide disputes.
notice of referral of a dispute to him Following the passing of the Construction Act
the adjudicator shall reach a decision within these provisions were not wholly compliant and
28 days of a referral of the dispute to him it has been necessary to introduce amendments
the adjudicator shall act impartially and can to bring the NEC into line.
take the initiative in ascertaining the facts or Unfortunately in two respects the amend-
the law ments do not seem to be compliant with the Act.
the adjudicator's decision is binding on the First, any disagreement by the employer with an
parties until the dispute is finally determined action or the failure to take action of the project
manager is excluded from the meaning of a dis-
by legal proceedings, arbitration or by agree-
ment between the parties pute referable to adjudication. An employer
should certainly amend clause 90(2) so that it
the adjudicator is not to be liable for anything
done or omitted in the discharge of his func- applies to a dissatisfaction either of the contrac-
tion as an adjudicator unless done in bad tor or the employer.
faith. Second, the authors of the amendment have
sought, in the same way as those of the amend-
If the contract does not comply with the pro- ments to the ICE conditions, to impose a pre-
visions of the Act summarized above the Scheme liminary step before a matter of dissatisfaction
for Construction Contracts relating to adjudi- becomes a dispute. A four-week period must
cation shall apply. The scheme details the pro- elapse after notice of dissatisfaction has been
cedure for the appointment of the adjudicator, issued, presumably to allow negotiations be-
his powers and the effects of his decision. He tween the parties and the project manager,
must be a neutral person acting in his personal before either party can refer the dispute to
capacity and must not be an employee of any of adjudication. Strictly this means that the NEC
the parties. does not comply with the Act in that a party can-
In order to avoid reference to the scheme the not refer a dispute 'at any time'. The distinction
main institutes in the construction industry, the between dissatisfaction and a dispute seems
ICE and JCT, introduced amendments to their meaningless. Rudi Klein in an article in
standard forms covering adjudication. The JCT Construction Law in March 1999 drew attention
provisions are clearly compliant with the Act. to a case in Australia in which the Supreme Court
The ICE amendments, however, seek to retain of South Australia decided that an expression of
202 TERMS AND C O N D I T I O N S OF CONTRACT
dissatisfaction would indicate that a dispute had that if its validity is challenged it cannot be a
arisen (100F Australian Trustees v SEAS Sapfor decision which is binding and enforceable. That
Forests1995). argument was decisively rejected by Mr Justice
One particular problem which was foreseen Dyson in Macob Civil Engineering v Morrison
by many commentators on the Act and the Construction Ltd [I9991 64 CON LR 1, who
scheme at the time when they were introduced applied what he said was the 'plain and ordinary'
was that of enforcement. The Act does not refer meaning of the word so that a decision was
to the issue and the scheme rather strangely still a decision even if it was wrong. He was
refers to s. 42 of the Arbitration Act 1996 as clearly strongly influenced in his judgement by
applying to the scheme with some minor conse- the fact that acceptance of the argument would,
quential amendments. Section 42 refers to the as he put it, 'drive a coach and horses through
power of the court to make an order requiring a the Act'.
party to comply with a peremptory order made The nature of the adjudicator's decision was
by the tribunal (for which substitute the adjudi- further considered in Bouyges UK Ltd v Dahl
cator). Jensen UKLtd November 1999, where it was held
The usual method, it was thought, would be that if an adjudicator decides a dispute that was
by way of an application to the court for sum- referred to him, but his decision was mistaken,
mary judgement to enforce the adjudicator's then it was and remains a valid and binding de-
decision, but it was not clear what the attitude of cision even if the mistake was of fundamental
the court would be to such an application. There importance.
was also thought to be a problem if the contract Adjudication has come of age and so far at
contained an arbitration clause in the usual least the fears of the legal commentators have
form, since the court would be obliged to stay the not materialized. Of course one would like to see
application to arbitration because s. 9(1) of the one or more decisions of the appellate courts
Arbitration Act gives the court no discretion in before concluding that adjudication will remain
the matter. an effective means of obtaining the rapid, even if
For this reason in their amendments to give sometimes rather rough, justice that it has so far
effect to the Construction Act both the ICE and proved to be.
JCT have removed from the scope of the arbi-
tration clause any dispute or difference relating EXPERT DETERMINATION
to the enforcement of any decision of the adjudi- Certain forms of contract, in particular the Red
cator. Book, provide for specified issues to be decided
In the cases which have come before the by a person acting as an expert and not as an
Technology and Construction Court the arbitrator, what is referred to as expert determi-
approach of that court so far has been robust in nation. In many ways there is a similarity
the enforcement of the adjudicator's decision. between adjudicationand expert determination.
The court has interpreted the Act and the The main distinction is that invariably the de-
scheme purposively in order to give effect to cision of the expert is expressed to be final and
what the court has perceived to be Parliament's binding on the parties and there is therefore no
intentions, that is 'that disputes are to go to appeal from it to a court. As it has been expressed
adjudication and the decision of the adjudicator a court will only interfere if the expert has asked
has to be complied with pending final deter- himself the wrong question, for example one
..
mination . and that if not complied with were outside his terms of reference, but not if he asked
to be enforced without delay' (from the judge- himself the right question in accordancewith his
ment of the court in Outwing Construction Ltd v instructions but has given the wrong answer
Randell& Son Ltd [I9991TCC 100).The court has (Jonesv Shenuood Computer Services plc [I99211
further shown that it has no time for legal techni- WLR 277 and Norwich Union Life Insurance
calities such as whether the meaning of 'de- Society v P&O PropemmesHolding Ltd and Others
cision' is that it is a lawful and valid decision so 11993) EG 108). The parties having chosen the
DISPUTE R ESOLUTION 2C
i
I
expert and agreed to abide by his decision are torial or not, as well as the rules to apply to dis-
bound by it.
Expert determination is a usefill way in
covery, the admissibility of evidence and
whether and to what extent there should be oral
I
which to obtain a rapid and final decision on or written evidence or submissions. If the par- ,
matters of a technical or semi-technical nature ties, on the advice of their lawyers, were to insist
I
but there is no restriction in law as to the matters on the use of full-blown procedures on the same
with which the expert can deal. It is up to the par- lines as those used in court proceedings, against
ties to decide his scope of work In the Red Book, the wishes of the arbitration tribunal, it seems
for example, it is provided that disputes relating arguable that the tribunal would have the power
to variations or the pricing of variations and to penalize the parties under s. 63 of the Act
about certificates of completion of construction when it came to an award of costs.
are to be referred to the expert and are removed Another interesting development is that
thereforefrom the scope of the arbitration provi- s.46(b) of the Act now allows the arbitrator, if
sions. the parties so agree, to decide the dispute not
in accordance with a specific law but ex aequo
ARBITRATION et bono or by the tribunal acting as an amiable
In 1984 arbitration was famously described as compositeur. This has long been the practice in
'no more and no less than litigation in the private continental Europe, especially in cross-border
sector'. While both the ICE and JCT had made commercial disputes, and should improve the
valiant efforts in their respective sectors of attractivenessof London as an arbitration centre
interest to introduce arbitration rules with the although it is doubted if it will be much used in
intention of introducing flexibility into the pro- the construction industry.
ceedings and reducing time and costs it was Three particular problems have arisen with
clear that there was the need for a general regard to arbitration in the construction indus-
Arbitration Act which would rehabilitate arbi- try:
tration as the preferred method of dispute reso-
What constitutes an arbitration agreement?
lution. In general commercial practice outside
The right of appeal to the courts.
the field of construction London was in danger
Staying actions for summary judgement to
of losing its place as the choice of venue for inter-
arbitration.
national arbitrations.
The 1996 Arbitration Act is a significant step On the first point the Court of Appeal have held
forward in giving autonomy to the parties or, in that in order for an arbitration clause to be incor-
default of their agreement, to the arbitration tri- porated into the contract the clause must be
bunal, to decide their own procedural and evi- expressly referred to in the document which is
dential matters. There is no longer any need for relied upon as the incorporating writing
the tribunal to follow slavishly court procedures, (Aughton v MF Kent (1991) 57 BLR 1). This was
to engage in what has been termed 'wigless liti- not followed in Black Country Development
gation'. Now the tribunal is required to 'adopt Corporation v Kier Construction Ltd July 1996,
procedures suitable to the circumstances of the where the Official Referee held that it was
particular case, avoiding unnecessary delay or sufficient if the document containing the
expense so as to provide a fair means for the arbitration provision, the ICE 5th edition con-
resolution of the matters to be determined'. ditions, had been incorporated into the executed
One particular issue is the ability of the tri- agreement as this gave effect to the intentions of
bunal to adopt an inquisitorial procedure, that is the parties.
ascertaining the facts or the law for itself. It is Now the 1996 Act says that the reference in
now clear that in the absence of agreement by an agreement to a written form of arbitration
the parties, which always takes precedence, it is clause or to a document containing an arbi-
for the tribunal to decide the procedures to be tration clause constitutes an arbitration agree-
used including whether these are to be inquisi- ment if the reference is such as to make that
204 TERM S AND CONDITIONS OF CO N TRACT
clause part of the agreement. This seems to sup- and litigation and despite some comments
port the Black Country interpretation but the suggesting construction lawyers will advise their
matter is still not free from doubt and problems clients that litigation is the preferred choice, it is
seem likely to continue, especially with sub- thought that the construction industry in
contracts, because of the casual way in which the general will continue to favour arbitration.
construction industryforms its contracts. However one advantage which it was
On the second issue, there is now a very lim- thought previously that arbitration possessed
ited right of appeal to the court on a point of law. over litigation, that an arbitrator could open up,
The parties may in their contract exclude the review and revise an interim certificate, but a
right of appeal. If they do not an appeal can only court could not do so, has been removed by the
be made either if all parties agree or the court decision of the House of Lords in Beaufort
grants leave to appeal. It will only do that if the Developments (M) Ltd v Gilbert Ash (NZ) Ltd
court is satisfied that: [I99812All ER 778 which over-ruled the decision
in Crouch. It has now been made clear that the
the question substantiallyaffects the rights of
court possesses an inherent jurisdiction to open
one or more of the parties
up and review interim certificatesand there is no
the decision of the tribunal is either obviously
need for the contract to say so.
wrong, or the question is one of general public
importance and the decision of the tribunal is L~T~GAT~ON
at least open to serious doubt, and it is just
The new civil procedure rules were introduced in
and proper in all the circumstances for the
April 1999.They have perhaps two main thrusts.
court to determine the question.
First, not only should cases only ever go to trial
The third issue which has worried the construc- when it is absolutely necessary but they should
tion industry, and which was referred to earlier, never actually be started unless it is necessary
is that if the contract contains an arbitration for them to do so. Litigants will be encouraged
clause then the court has now, under the 1996 positively by judges to consider settlement of
Act, no discretion as to whether or not to stay to their dispute either by direct negotiation or by
arbitration any legal proceedings brought by the use of ADR and, if appropriate, proceedings
either party which under the agreement is to be will be adjourned for a time to allow for this. The
referred to arbitration. Unless for some reason aim of the new rules is that litigation should be
the arbitration provisions are null and void, an act of last resort. Second, and this relates to
inoperative or incapable of being performed the the first, it is the court and not the litigants who
court must stay the legal proceedings to arbi- should manage the process so that cases are
tration. Legal proceedings would include any dealt with justly. This requires, for instance, that
application for summary judgement for money proceduresand costs should be proportionate to
due under a certificate issued by the architect or the nature and complexity of the issues involved
engineer for which there was no really arguable and that cases are dealt with in a reasonably
defence. Despite the absence of an arguable speedy manner.
defence there would still be a dispute within the The new rules do not of course change the
meaning of a standard arbitration clause under essential sequence of the litigation process:
the decision in Halki Shipping Corpn v Sopex
submission of the initial claim
Oils Ltd [I99812 All ER 23. It was held that there
issue of the defence
was a dispute in relation to a claim for a sum of
mutual disclosure of all documents on which
money if the defendant does not admit the
a party relies as well as all which could
claim or pay the sum demanded regardless of
adversely affect his case
the strength or otherwise of his defence to the
exchange of witness statements
claim.
the trial itself.
Although the JCT have amended their form
to allow a choice to be made between arbitration What they seek to do is to ensure that the state-
DISPUTE RESO LU T I O N 205
ment of claim and the defence properly identify him or, worse, he appears to be acting as advo-
as precisely as possible the true nature of the cate for the cause for which he has been
case and the issues involved. instructed, the court will downgrade or even dis-
One issue of particular significance in miss such evidence and the party calling that
construction cases relates to the use of expert witness will be penalized in cost (Civil Procedure
witnesses. Expert evidence may now only be Rule 35 and the decision of the Court of Appeal
called with the court's permission and in giving in Clonard Developments Ltd v Humberts 15
permission the court will consider the com- January 1999).
plexity and size of the case and the costs Given the obvious determination of the
involved. The fees of expert witnesses have judges to make the new rules work there is
been a major source of the excessive costs in no doubt that they will do so and litigation
some construction cases. The courts also con- as a means of deciding significant disputes
tinue to stress the duty of the expert to help the will be substantially improved as a result. It
court, to present evidence which is his own will, of course, also be assisted by the Beaufort
objective and unbiased opinion independently Developments cases referred to earlier, which
produced. If the evidence is perceived to be established that the court has the full power to
biased in favour of the party who is calling open up, review and revise interim certificates.
CHAPTER TWENTY-FOUR
Particular forms of contract

Previous chapters have been concerned with the a maintenance and program support contract
common forms of contract and methods of con- an escrow agreement covering the deposit of
tracting for construction works and for the the source code for the already developed
design, supply and installation of electrical1 software and provisions for the purchaser to
mechanical equipment and process plants. be entitled to access the source code.
There are, however, other contractual situations
There are at present no suitable standard forms
for what can broadly be called engineering work
for such contracts, other than the escrow agree-
which, while they pose certain of the same prob-
ment, which are generally accepted by suppliers
lems, have particular features of their own. Both
and purchasers. The standard forms from sup-
have become of significant importance in recent
pliers should not be accepted without funda-
years and their main characteristics are briefly
mental modifications.The Chartered Institute of
examined in this last chapter. These two forms
Purchasing and Supply is currently engaged in
are:
substantially modifying its so-called turnkey
contracts for the design, supply, installation form which it is hoped will fill the gap. In these
and commissioning of computerized systems circumstances there is set out below a checklist
facilities management contracts. from the purchaser's viewpoint of the major
points which require to be covered in the con-
tract documentation, concentrating on those
CoMPUIER provisions which are of particular relevance to
It is most unwise for the purchaser to consider computer system contracts- Many other clauses
the use of either his own standard terms for the of a more standard nature* for example con-
purchase of goods or the supplier's standard fidentiality, and dispute resolution have already
terms of sale or licence in contracts for computer been dkcussed earlier in the book and do not
systems. The purchaser's standard terms will require further comment.
almost certainly not cover many of the essential
DEFINITION OF THE SYSTEM
points, while the supplier's terms will be strongly
biased in his favour and include wide-ranging Thiswill
exclusions of liability. While these may be open 1 Standard software which has already been
to challenge under the Unfair Contract Terms developed by the supplier.
Act 1977 the purchaser is not in the business of 2 Bespoke software which is developed under
buying a legal dispute which will quite likely go the terms of the contract.
to the Court ofAppeal. 3 Hardware provided either by the supplier or
In any computer systems project there will third parties.
normally be not one but several inter-linked
contracts for the purchase of the system which In addition there may be software already de-
will include: veloped by a third party or by the purchaser him-
self.
the contract for the development of the sys-
tem OBLIGATIONS OF THE SUPPLIER
a licence by the supplier covering the use of 1 Provide the system in accordance with the
his already developed software purchaser's statement of requirements. This
licences(s) from third parties whose software is an essential document for the purchaser to
is to be integrated into the system produce. It must be tied in with the criteria to
PARTICULAR FORMS OF CONTRACT 207
be established for acceptance testing. NOTE 9 Co-operate with the purchaser and all others
This is a strict obligation and not one to use involved in the contract. There will be the
'best endeavours' or 'seek to ensure'. There need for interchange of information between
may well be arguments from the supplier that all involved.
he cannot guarantee the software to be 'error
free'. This is understandable when it is first OBLIGATIONS OF THE PURCHASER
supplied but not at the stage of acceptance 1 Provide suitable premisesfor the installation
testing. At the least the statement of require- 2 Co-operate with the supplier.
ments should cover: 3 Provide necessaryinformation.
statement of the functional requirements 4 Provide necessary staff for trainingloper-
which the system must achieve ation.
number of terminals at which data is to be MANAGEMENT
accessed
efficiencyin continuous operation 1 Appointment and powers of purchaser's pro-
speed at which the system is to operate and ject manager.
its capability to meet peakload conditions 2 Appointment and powers of supplier's con-
robustness of the system to continue to tract manager.
operate efficientlyover its foreseeable life 3 Submission of progress reports and their for-
flexibilityof the system so that it is capable mat.
of modification to cover future changes or 4 Progress meetings: how oftentwho attends.
expansion in use 5 Key supplier's staffand restrictions on right to
ease of maintenance. change.
2 Carry out the work under the contract with SOFTWARE OWNERSHIP OF RIGHTS AND
the skill, care and diligenceto be expected of a LICENCE
competent contractor in the particularfield of The ownership of the rights in the software
so-ftware which the 'Ontract being developed under the contract should
relates. belo& to the purchaser. The purchaser
Design,
bespoke software.
and the -
should consider whether or not to mant the
supplier a non-exclusive licence with power
4 License the purchaser to use the developed to sub-license other customers.
software on the terms of the licence specified 2 The in the already developed soft-
in the contract. ware will remain with the supplier who will
License the purchaser any third grant the purchaser a non-exclusive licence.
party On the terms Vecified in the
Particular points to be covered in the licence
contract. NOTE The purchaser must obtain wouldbe:
confirmation of the powers of the supplier to
sub-license. extent of permitted use. This should allow
6 Supply, deliver and install the hardware. for networking and home use. It may be
7 Cany out testing in accordance with the test- necessary also to consider use by others to
ing plan. To the maximum extent practicable whom the purchaser has outsourced work
this plan should be agreed pre-contract and or engaged for purposes of facilities man-
included in the contract documentation, par- agement or may do so in the future
ticularly the acceptance testing with details of number of copies which the purchaser is
test methodo1ogy.l entitled to make
8 Perform the contract in accordance with the whether the purchaser is entitled to decom-
key datesspecified in the contract programme. pile or reverse-engineer the software to
Again these must be defined pre-contract and enable it to inter-operate with any other
tied in with the terms of payment. independentlyproduced software or to cor-
208 TERMS AND CoNDlTloNs OF CO NTRACT
rect any error. The purchaser is given PRICE AND TERMS OF PAYMENT
limited rights to do this under the Copyright 1 The price should preferably be a lump sum
(Computer Programs) Regulations 1992, which can be broken down into elements, for
which amend certain sections of the example the various stages of bespoke soft-
Copyright, Designs and Patents Act 1988, ware development, the price for the licence
but it is useful to state the rights expressly for the developed software, the prices for the
the royalty sum or fees payable. If a lump units of hardware, price for installation and
sum, which is quite usual, then the terms of another for testing. If the extent of the devel-
payment should provide for a substantial opment work is such that no supplier is will-
proportion only to be payable after the ing to quote a meaningful lump sum price
passing of the acceptance tests then there is no alternative but some form of
a warranty that the software will meet the cost reimbursement. The purchaser should,
performance requirements and be free however, at least negotiate the supplier's
from defects during the period set out in overheads and profit as a lump sum which
the contract. does not change if the reimbursable costs
3 On the assumption that the purchaser is not increase otherwise than as a result of a formal
to be provided with the source code in respect change order. Very close monitoring of
of the already developed software it should be costs incurred against progress achieved and
provided that the supplier should deposit the estimated costs to complete is obviously
source code with an independent escrow required.
agent together with all necessary documenta- 2 While recognizing that the supplier will
tion and instructions for its use. The pur- need to maintain his cash flow a substantial
chaser should then have the right to access element should be retained until after the sys-
the source code if the supplier goes out of tem has been tested and accepted. A higher
business or ceases to maintain the software. amount should be retained than would be the
4 Other terms which would normally be found case with a normal construction contract
in the licence agreement regarding ter- because of the risk element.
mination and limitation of liability could 3 Payment should be set out in a schedule and
more appropriately be included in the overall tied to the achievement of the various stages
contract. which must themselves be carefullydefined.
4 Actual payment should be within 30 days of
ACCESS certification of achievement of a stage. Pro-
1 The supplier will need access to the pur- vision should be included for interest on
chaser's premises as well as to any existing delayed payments at 6 4 per cent above bank
system with which the new system must inter- rate.
face, and also to the purchaser's personnel.
TIME FOR COMPLETION
CHANGE CONTROL PROCEDURE 1 The need has already been identified for a
1 Modifications are almost inevitable and there programme with key dates for the completion
should be a procedure covering: of activities and the relating of these to the
entitlement to payment. The issue is whether
who is entitled to initiate them or not it is sensible to go further and provide
the modification only to be proceeded with for the payment of liquidated damages for late
after agreement on its effect on price, time completion and, if so, what should be the
and performance requirements. In default definition of 'completion'. The point was con-
of agreement the issue to be settled by an sidered previously in relation to process
independent expert, a clause for whose plants. There one answer was to define 'com-
appointment and so on should be included pletion' as the 'completion of construction'.
in the contract. Not only was construction almost wholly the
PARTICULAR F O R 1U S O F CONTRACT
responsibility of the contractor but it was a defects corrected and re-testing as necessary
straightforward activity for which a firm date completed. Failure to allow adequate time for
could reasonably be given - force majeure testing and defects correction is a frequent
excepted. When it came to later stages of test- cause of contracts r~nninglate.~
ing, however, which might involve 'tweaking' 3 Perhaps rather strangely in The Salvage
the plant to achieve the required results, it Association v CAP Financial Services Ltd case
became more difficult, especially with an (see p. 166) it was held that there was an
untried process. Much the same problem implied term that time was of the essence. It is
exists with software development. Even the recognized that time is usually regarded as
courts have recognized that original software being of the essence in contractsfor the sale of
will require de-bugging and that one cannot goods but not so in contracts for services. It is
expect it to be of satisfactoryquality when it is suggested that if the contract includes a firm
first delivered. It has been said by the Court of date for delivery but no liquidated damages
Appeal that 'software is not necessarily a there should be included an express right to
commodity which is delivered once and for terminate if the date is not met or progress is
all. It may have to be tested and modified as not in accordance with the programme and
necessary. It would not be a breach of con- does not improve after notice to the supplier
tract at all to deliver software in the first of his default. If liquidated damages are
instance with a defect in it. No buyer should included there should be an express right to
expect a supplier to get his programme right terminate after notice once the maximum
first time.'2 liquidated damages have been paid or again if
2 Given this background, while it makes sense the contractor is in default in not complying
to have a programme, relate payment to the with the programme and does not remedy the
achievement of key dates within the pro- default.
gramme and monitor the programme closely,
does it make sense to go further and include a ACCEPTANCE TESTS AND TAKE OVER
clause for liquidated damages for delay? If so, 1 The acceptance tests are at the heart of the
what should constitute the date against which contract. The importance has already been
delay is to be measured? It is suggested that referred to above of their being set out in the
there is no single answer. If the development contract together with the test methodology.
work involved for which the supplier is willing There should also be included any responsi-
to quote a firm lump sum price is relatively bilities of the purchaser. Assuming that the
limited, then it is suggested that it may be system passes the acceptance tests, and it
appropriate to include liquidated damages for should do so if earlier testing has been prop-
delay, and the point at which it is to be deter- erly conducted, the purchaser takes over the
mined whether the supplier has completed on system which then becomes in the usual way
time or not should be when both hardware his responsibility other than for the defects
and software are ready to be tested as an in- liability obligationsof the supplier.
tegrated system. This assumes that there have 2 If the system fails the tests they would nor-
already been tests carried out satisfactorilyor mally be repeated by the supplier. The pur-
defects corrected at the unit and subsystem chaser's remedy if the system fails one or
stage^.^ Of course the purchaser would like more of the repeat acceptance tests should be
the completion date to be when the system considered. It may be that the purchaser,
passed its acceptance tests, but this is only rather than allowing the supplier to continue
likely to be feasible if the amount of the devel- to try and rectify the system, would be willing
opment work is very limited.4 In any event to accept the system even with reduced per-
whichever definition for completion is chosen formance against a reduction in the contract
the programme should allow for the full range price. If this possibility is foreseen it should be
of testing involved to have been completed, provided for specifically and provision made
210 TERMS AND C O N D I T I O N S OF CONTRACT
for expert determination of the reduction in covered the failure of the system in any
price if the parties fail to agree. respect to conform to the purchaser's
3 Once the reduction in price is paid the pur- requirements stated in the contract or
chaser takes over the system and the contract other provisionsof the specification
continues. provided an adequate remedy in terms of
making good the defect within the time lim-
WARRANTIES AND DEFECTS LIABILITY its established in the contract. There should
1 Implied liabilities: always be time limits stated which should
be related to the consequences of failure.
software which is provided on a disk or any
For a defect causing the system to be
other physical medium will be considered
totally non-operational this would be a few
as goods for the purpose of the Sale of
hours
Goods Act. Accordingly its supply will be
was for a reasonable period of time - say 12
subject to the implied conditions of the Act
months. It is doubted whether the 90 days
and to the provisions of the Unfair
often seen in IT contracts would be consid-
Contracts Terms Act as to the extent to
ered reasonable
which such conditions can be excluded. If
does not give the supplier the sole option as
the software is supplied by copying
to how the defect is to be remedied.
from the supplier's media onto the pur-
chaser's media or via a telephone it is not 3 Liability for damages other than for making
'goods' but will be subject to an implied gooddefects:
obligation at common law that it is 'reason-
almost all IT contracts will seek to exclude
ably capable of achieving its intended pur-
the supplier's liability for damages, in
pose'
addition to making good defects, or at least
although the implied conditions in the
to limit the supplier's liability for such
SGA as to description, satisfactory quality
damages to a specific sum
and fitness for purpose can be excluded
while it is probably acceptable under the
in a contract between two businesses, sub-
UCTA to exclude the purchaser's right to
ject to the test of reasonableness under the
claim truly consequential damages as
UCTA, the implied conditions as to the pur-
defined by the Court of Appeal in British
chaser's quiet possession cannot be
Sugar plc v NEI Power Plant Projects Ltd
excluded. This provision would almost cer-
(see p. 29),it would probably be considered
tainly be breached if a third party could
unreasonable to exclude direct damages.
establish that its intellectual property rights
For the difference see the discussion on
had been infringed. There cannot also be
pp. 28-9.
excluded death or personal injury caused
as to a financial limit on damages it would
by the supplier's negligence.
probably be considered reasonable to limit
2 Express liabilities. It is common in IT the damages to a sum which bore a sensible
contracts to exclude the implied conditions relationship to the supplier's, or the group
of the SGA as to quality and fitness for pur- of which the supplier was a member, insur-
pose and to substitute limited express ance cover. Whether or not a limitation to
warranties. Provided that the express war- the contract price would be considered rea-
ranties are not unreasonablylimited either in sonable would, it is believed, depend upon
scope or time they would probably be con- the relationship between the anticipated
sidered as reasonable under the UCTA in a loss and the contract price. If the contract
contract between two commercial parties of price was significant, as in the StAlbanscase
roughly equal bargaining strength. A reason- referred to earlier (see p. 169),then such a
able express warranty would probably be one limitation would probably be considered
that: reasonable and the clause upheld, espe-
PARTICULAR FORMS OF CONTRACT 211
cially if the supplier's insurance company any upgrades, modifications or enhancements

had required such a limitation clause as a introduced by the supplier to that software.
condition of providing cover. If, however,
the contract price was low the limit would SUMMARY
probably not be considered reasonable The essence of system software contracts com-
The supplier is likely to press for the inclu- prises:
sion of an entire agreement clause which it the statement of the purchaser's require-
is usually in the interests of the purchaser ments which should be both comprehensive
to exclude so that, if necessary, he can rely and in an objectiveand measurable form
on any representations made by the sup- the testing procedures to apply throughout
plier which have not been incorporated in the contract and in particular the acceptance
the contract tests
TRAINING
the remedies of the purchaser if the system
does not conform to any of the purchaser's
1 The contract should include for the supplier requirements or subsequently becomes
to provide a stated level of training for the defective
purchaser's staff who are intended to operate the provisions relating to the ongoing mainte-
the system and this should be included within nance and support for the system.
the contract price.
2 It may be that other more detailed training is
required by the purchaser's staff who are FACILITIES MANAGEMENT CONTRACTS
required to maintain the system. The extent of A facilities management contract may include
this will depend upon whether or not the pur- provision for some supply of goods and it is
chaser intends to enter into a separate main- essential that the contract details the services.
tenance contract for the system either with These are usually categorized into 'hard' services
the supplier or a third party. The details of this which cover the maintenance of plant and build-
training, if any, may not be clear at contract ings and 'soft' services which cover cleaning or
stage so it would have to be dealt with by a security. Some contracts may include both. The
change order. vital factor is that all the services which the pur-
chaser envisages he will require should be
ONGOING MAINTENANCE AND SUPPORT
detailed in the schedule of services to be pro-
The purchaser, unless having the technical vided. There is very little room for the implication
capability to undertake the ongoing main- that services not so specified are to be supplied.
tenance of the system which in most instances is Because the contract is primarily for services
unlikely, will need to enter into a maintenance there is little in the way of statutory support.
and support agreement either with the original Part 2 of the Supply of Goods and Services Act
seller or with a third party. In either event there applies but the only implied obligationsare that:
should be no 'gap' between the expiry of the sup-
plier's warranty obligations and the commence- the services will be provided with reasonable
ment of the maintenance and support contract. ski1and care
It is generally considered advantageousto the if no time is specified in the contract for the
purchaser to place the maintenance and support carrying out of the servicesthey will be carried
contract with the originalsupplier. There will then out within a reasonabletime
be no gap or overlap between the two obligations, where no contract price has been included in
particularly those contained in the licence agree- the contract the purchaser will pay a reason-
ment for the developed software. In addition to able price.
the usual provision of maintenance services and Whiie the above may be helpful in the case of the
the correction of defects, the purchaser will want engagement of an individual worker, particularly
to place obligations on the supplier to provide in a domestic situation, it would be most unwise
to rely upon them in a commercial contract for known so that it is not allowed to become a
facilities management. serious matter of dispute. It would also be wise
There are some important points which are to include reference to an independent expert if
specific to the tendering and preparation of con- the parties cannot agree.
tracts for facilities management.
VARIATIONS AND INSTRUCTIONS
DEFINITION OF SERVICES Despite the best efforts of both sides the speci-
The definition of the services to be performed fication of the work to be done by the facilities
should be as comprehensive as sensibly poss- management contractor is unlikely to cover
ible. Remember that if the service is not specified every eventuality. Moreover the client's require-
the contractorwillalmost certainly not provide it ments may change over the contract period. A
without extra payment. It may be necessary to clear change control procedure should be incor-
specify not only what has to be done where, but porated. While the client should have the
also the times when the service has to be pro- absolute right to instruct changes to the speci-
vided, for example cleaning of the offices fication the performance of which is within the
between 2000 and 2400 hours. contractor's field of expertise it cannot be a
'blank cheque' to order any change whatsoever.
SERVICE LEVEL AGREEMENT The change should be within the general scope
The service level agreement forms part of the of work originally envisaged. Before confirming
contract and sets out the standards at which the the issue of a variation instruction any changes
work is required to be performed. Since perfor- to the contract in respect of payment and the
mance will often be related to payment it is contractor's obligations should be agreed
important that these standards are as far as poss- between the parties. Again it will be useful,
ible specified objectively. Instead of requiring where the parties are unable to agree, to refer the
calls to an emergency help desk to be answered disagreement to an independent expert.
'as quickly as possible' the requirement should
be specified within a stated number of rings. The REGULAR REPORTING
uniform which security staff are required to wear It is important that the parties communicate
likewise should be specified in detail and not left regularly so that points of difficulty can be dealt
to the imagination of the contractor. Cleaning with virtually as they arise. A weekly meeting
services, however, are not easy to specify objec- between the respective project managers and
tively - one person's idea of 'clean' may well dif- the submission by the contractor of a monthly
fer from another's. The service level should not written report are probably the ideal.
be specified so high that the provision of the ser-
vice is uneconomic to the client, for example an CONTRACTOR'S GENERAL OBLIGATIONS
obligation to clean on a daily basis 'so as to As stated earlier the implied standard in the
remove all dust' in an open plan office area. But Supply of Goods and Services Act is to use
in circumstances where food is being prepared reasonable skill and care. This could be strength-
and where absolute hygiene is required then ened by the addition of 'to be expected of a facili-
strict provisions as to the removal of dust and ties management contractor experienced and
grease, the scrubbing down of working surfaces competent in the field of such obligations'. The
and so on are necessary. alternative is to require simply that the contrac-
It is useful to include provisions for frequent tor is to perform the services in accordance with
meetings between the respective project man- the contract, which would impose an absolute
agers for the client and the contractor to discuss duty. Clearly obligations as to health and safety
and agree upon the interpretation to be applied and compliance generally with statutory obli-
to services where complete objective speci- gations should be expressed as being absolute
fication of standards is difficult. Such meetings and it is unlikely that the contractor will object to
should be held immediately a problem becomes this. However, the contractor may object
PART ICU LAR FORM S OF CON TRACT 213
strongly to other obligations being absolute and may be changes. If there are changes which an
wording such as that given above, which experienced contractor could not reasonably
strengthens the obligation of 'reasonable skill have foreseen at the time of tender which cause
and care', may be the best which the client will the contractor additional costs then it is better
be able to negotiate. for the client to pay the nett additional costs of
If the facilities manager is supplying mat- the contractor rather than expect the contractor
erials they should be to the standards set out in to take the risk.
the specification, and where the standard is not If the contract work involves the repair or
so set out the obligations should be equivalent to maintenance of a building fabric or electricall
those in Part 1 of the Supply of Goods and mechanical plant the Construction Design and
Services Act, ss 2-5, which largely mirror ss 12-15 Management Regulations will apply to both the
of the Sale of Goods Act. The client should con- client and the contractor. In particular the client
sider whether it is necessary to clarify in the must appoint a competent planning supervisor
specification any particular purpose for which and also a competent principal contractor. It is
the goods are required. These are of course strict usually sensible for the client to appoint the
obligations. It is often provided that where the facilities management contractor to fulfil both
standard of the materials is not specified they functions, in which case this must be made clear
should be 'of the highest quality' or some such in the enquiry documents so that the contractor
similar phrase. This is likely to be objected to by is aware of his obligations and can price them
the contractor as being too vague and in practice into his tender. The contract should then spell
it does not seem to add very much to the statu- out the particulars of the contractor's duties.
tory requirements of s.4 of the Supply of Goods
and Services Act. The statutory requirements in INSURANCE AND INDEMNITIES
s.4 do refer to the materials being reasonably fit The contract should require the contractor to
for the purpose provided that the purpose has take out and maintain the followinginsurances:
been made known to the contractor. The con-
employer's liability against the risk of injury
tractor may object to this on the grounds that the
or death to the contractor's own employees
risk would not be covered by his PI insurance.
public liability against the risk of death
However, it is considered that it is a risk which
or injury to persons or damage to property
the contractor should be willing to accept since it
caused by the contractor's employees to third
is one accepted by sellers in the normal course of
parties
business.
if undertaking professional services, say in
STATUTORY REQUIREMENTS relation to a building, professional indemnity
against loss incurred arising out of the con-
In all contracts which involve a firm doing work
tractor's negligent performance of duties
on the client's premises there is usually a term
either in contract or tort.
that the contractor must comply with all relevant
statutory requirements. These should not be The contract should state the minimum amount
spelt out but stated in broad terms. Additionally of insurance cover required and that the con-
the contractor may be required to comply with tractor should provide evidence that the insur-
the client firm's requirements as to safety and ance has been taken out, and continues to be
securityrules and regulations. These are not part maintained, to at least that value.
of the law and should therefore be detailed in As regards the building in or on which the
some document which is referred to in the con- facilities management contractor is working this
tract. It should be made clear that the contractor will normally be covered by the client's own
must comply with the statutory requirements insurances. The insurer would have subrogation
and the client's rules as they apply over the rights against the contractor, however, if fire or
period of the contract, since as the facilities other damage was caused to the building by the
management is often a long-term contract there contractor's negligence. Either therefore the
214 TERM S AND CONDITIONS OF CO N T RACT
contractor must take out insurance to cover his which in practice may well be the limit of the
own interests in the building or the insurer must contractor's insurance cover. However there
waive subrogation rights. may need to be exceptions in the contract which
The client may also have a business interrup- tie in with those under the insurance policy
tion policy to cover loss of earnings during the (other than those for the excess under the policy
period that the building cannot be used. Again a which should be at the contractor's risk).
waiver of subrogation rights is needed. Alternatively the contract can provide that the
There are four kinds of potential damages contractor is to have no liability for any damages
against which the client will want an indemnity for loss of profit, whether direct or indirect. The
from the contractor: exclusion clause needs very careful drafting to
ensure that it is comprehensive. Remember that
death or injury to persons due to the contrac-
the Court of Appeal has interpreted the expres-
tor's negligence or breach of contract or statu-
sion 'consequential damages' as only covering
tory duty, which should be no problem
damages not arising directly and naturally from
physical damage to the property of others -
the breach (see p. 29) and that therefore an
again not a problem
ordinary loss of profits would be direct and not
physical damage to the building caused by the
consequential damages. For an example of the
contractor's negligence or breach of contract.
type of comprehensive drafting required for
The client will only need an indemnity for this
such a clause see clause 36.9 of the MF/l con-
if the contractor is taking the risk, that is, the
ditions.
contractor is to insure rather than there be a
waiver of the client's insurer's rights of subro- PAYMENT
gation. It is important that the indemnities
As with other forms of construction-type con-
and insurance policies are in line with one
tracts there are three possible methods of pay-
another
ment:
economic loss suffered by the client as a result
of the contractor's negligence or breach of lump sum
contract. This is likely to be resisted by the cost reimbursementwith a fixed fee
contractor on the grounds of inability to unit rates where the number of units is uncer-
obtain insurance cover or only to a limited tain, for example hot meals to be served in a
amount. It may be appropriate to limit liabil- canteen.
ity to the sum for which the contractor can
The same principles apply as were discussed
obtain insurance cover.
earlier in relation to payment (see pp. 113-18).
LIMITATION OF LIABILITY Note that with cost reimbursement the fee
should be a fixed lump sum which is only varied
While the contractor should accept unlimited if the scope of work is varied by the client.
liability as regards: The payment mechanism can be used to
injury or death to persons, and penalize the contractor for below standard per-
costs of repair and replacement of anything formance, or to reward if the performance is
which has been damaged or made defective above standard. Under this system the contrac-
as a result of negligence or breach of contract, tor accrues points during the month for each ser-
vice which is below or above standard. The
it is most unlikely that he will do so as regards number of points for each activity below or
losses which the client could incur arising out of above standard is weighted according to its sig-
such damage or defect. Non-availability of ser- nificance. A room not properly cleaned once
vices upon which the client relies for the conduct might be only two points. A lapse in the security
of business could result in enormous losses. This system allowing access to the building to an
can be dealt with essentially in one of two ways. unauthorized person might be fifteen points.
It can be capped in some way to a specific sum The points are aggregated at the end of the
PARTI CU LAR FORM S OF CON TRACT 215
month and the contractor penalized or rewarded sub-contractor to whom the client takes objec-
according to a scale laid down in the contract. tion. If the contractor is being employed on a
There must be some doubt whether or not cost-plus basis then the client should be
such clauses are legally valid. If the clause only involved in the selection of sub-contractors and
penalizes and does not reward the contractor for the terms upon which they are employed.
above standard performance, it is more likely
that it may be considered a penalty clause and There are many other clauses such as period of
therefore unenforceable. The problem is that the the contract, rights of termination and dispute
client will often be unable to show any genuine resolution which should be included but the
loss suffered as a result of the below standard above represents most of the main points which
performance, for example the uncleaned room. are particular to contracts for facilities manage-
As yet the subject has not come before the ment. One main point which has been omitted is
courts. that of the application of TUPE to the contract.
There is also the issue as to whether or not In many instances TUPE will apply and con-
the points system represents the sole liability of sideration must be given as to how the risk is to
the contractor for poor performance, or whether be allocated. However TUPE is a complex matter
as an alternative the client could bring an action which is beyond the scope of this work and fur-
for damages should the below standard perfor- thermore is constantly changing. The client and
mance be sufficiently serious that the deduction contractor concerned should therefore take
from the payment would not be sufficient to specialist advice on TUPE at the time of tender-
cover the loss suffered by the client. There is no ing for the contract.
reason why the points system should not be the
sole liability of the contractor for the below NOTES
standard performance but there would have to 1 A suggested list of items to be included in
be very clear and express wording to deprive the most test plans is given on p. 319 of Project
client of its remedy in damages. It is not an Management by Field and Keller, The Open
analogous situation to liquidated damages for University, 1998,as follows:
delay since there is no presumption that the
points deducted represent a genuine pre- the objectivesof each kind of test
estimate of the client's loss. the criteria determining when a particular
testing phase is complete
STAFF AND SUB-CONTRACTORS the test schedule
One problem which is common to all types of individual responsibilities
service contract where the contractor is to carry resources required, for example support
out work on the client's premises is the quality, software, personnel
conduct and security considerations relating to testing strategy including procedures for
the proposed staff or the sub-contractors. test cases
In addition to the normal right to have documentation to be produced
removed from site any person to whom he test procedures.
. -
objects the client may want the right to vet staff Per Lord Justice staughton in saphem
in advance. This apply certainly to Computing Ltd v Allied Collection Agencies, 3
security guards and possibly staff May 1989,and referredto with approval in the
who have access to offices when they are unoc- Court ofAppeal in s t ~ l b a n city
s and *istrict
cupied. It should be made clear that any such CouncilvlCL.
vetting does not reduce the facilities manage- In Project l d ~ ~ la l ~ ~
~ i ~ and
ment contractor's liabilities under the contract. suggested list of tests is proposed as follows:
It is recognized that the contractor may wish
to sub-contract certain parts of the work but unittesting
there should be an absolute embargo on any integrationtesting
216 TERM S AND CONDITIONS OF CON T RA CT
subsystem testing nificant proportion of the contract price is

regression testing only payable when the system passes its
alpha testing acceptance tests and is taken over.
beta testing 5 It is to be noted that the implied obligation is
acceptance testing. one which arises at common law. It would
not be affected by an exclusion clause which
4 The difficulty is that if the development work covered only statutory conditions. Equally it
is of any significance,then even at the stage of is arguable that, provided that the contract
the beta testing, when the system is being was not on the seller's standard terms, it
tested by users for the first time in an would not be an obligation to which the
exploratory way, teething problems are likely Unfair Contract Terms Act applied, and so
to be encountered which will require time to would not be subject to the statutory test of
resolve. To incorporate this testing within the reasonableness. It is, however, only to be
completion period would therefore be inap- expected that the courts would be hostile to
propriate,since a delay due to the resolving of any such interpretation and as a supplier it
such problems would not in all probability be would be unwise to rely upon it. Although
one which was within the contractor's con- there are minor differences in wording, the
trol. The threat of paying liquidated damages common law obligation seems to be broadly
would only inhibit the proper carrying out of the equivalent of the Sale of Goods obli-
the necessary corrective work and could be gations under sections 14(2),and also 14(3),
counter-productiveif it resulted in such work on the basis that the intended purpose must
being skimped. The purchaser should have be one which had been made known to the
sufficient protection by ensuring that a sig- seller.
APPENDICES
APPENDIX ONE
Draft instructions to tenderers for a

plant contract
1 (a) You are invited to tender for the [insert submission of an alternative or other
description of work] at ...................... in variation, submit a tender based on the
accordance with the attached Form of specification attached.
Tender. (d) If a tenderer wishes to submit a tender in
(b) The closing time for the receipt of tender joint venture with another firm he must
will be 12 noon on .......................... apply to the purchaser for permission to
(c) You are required to submit ............copies do so not later than ..........days prior to
of your tender. the date for the return of tenders and
(d) The tenderer is to acknowledge receipt of provide to the purchaser such full details
this invitation to tender to the pur- of that other firm as the purchaser may
chaser's representative by fax immedi- require. Any consent given by the pur-
ately upon receipt and similarly to chaser will be conditional upon the firms
confirm within 7 days of receipt that he comprising the joint venture under-
will be submitting a tender. taking joint and several liability to the
(e) All requests for clarification must be sub- purchaser for the performance of the
mitted by fax or letter to the purchaser's contract and upon the inclusion by the
representative and received by the pur- firms with their tender of a signed copy of
chaser no later than 15 days before the their joint venture agreement. [This
tender return date. Responses to clari- assumes that thefirms have not been pre-
fication may be circulated in the form of qualified as a joint venture.]
an inquiry addendum. 3 Your tender is to be submitted in accordance
(fl The purchaser's representative for this with the conditions of contract entitled
inquiry is ..........to whom all correspond- .........
............ dated [copy attached]. If you
ence should be addressed. wish the purchaser to consider any modifi-
2 (a) You are invited to tender on the basis that cation to these conditions you must give full
you will be responsible for the [insert details of this in your tender. No undertaking
summary of contractors' responsibilities] is given by the purchaser that any modifi-
of the whole works defined as such in cation requested by you will be accepted.
specification number ........dated........... 4 (a) Your tender is to be submitted duly
(b) A general description of the works is signed in accordance with the attached
given in the attached specification which Form of Tender. Note that all blanks in
includes a statement of the duty which the Annexe to the Form of Tender must
the plant is required to perform. be completed. Your attention is drawn to
(c) If you should wish to submit for consid- the requirements specified in clause .......
eration an alternative or other variation, of the Annexe for the provision by your-
you must first obtain the purchaser's selves of an on-demand performance
permission in accordance with para- bond in the form attached. [Ifthere are
graph 11. A statement of the salient fea- any other items in the Annexe to the Form
tures must be submitted with the tender of Tender to which the Purchaser consid-
for the alternative or other variation pro- ers it to be appropriate to draw the ten-
posed. You shall, notwithstanding the derer's attention such as a Parent
APPENDICES
Company Guarantee they should be listed 9 No tender shall be deemed to have been
here.] accepted unless such acceptance shall have
(b) Your tender should be accompanied by a been notified to the tenderer in writing by or
detailed specification and drawings suf- on behalf of the [insertoflcial authorized to
ficient to describe fully your offer. This accept the tender].
should be set out so as to fit in with the 10 The purchaser does not bind himself to
sections into which your price is to be accept the lowest or any tender. On accept-
broken down as given in Part 2 of the ance of a tender by the purchaser, the suc-
Form of Tender. You are required to cessful tenderer may be required to enter
complete the relevant section of the into a formal agreement for the proper fulfil-
schedulesto specification number.......... ment of the contract.
(c) Your attention is drawn to schedule........ 11 The purchaser will not be responsible or pay
to the specification in which you are for any expenses or losses which may be
required to enter the minimum numbers incurred by you in the preparation of your
and categories of personnel which you tender.
consider would be required to operate 12 The tender and accompanying documents
and maintain the works efficiently. filled in as directed must be sent under
5 You must provide with your tender [herelist cover of the 'tender' label accompanying this
anydocuments, drawings or other data which invitation to [insert name of oflcial con-
the tenderer is required to provide]. cerned].
6 (a) You are required to submit your tender 13 Requests for permission to visit the site
on the basis of [inserthere whether tender should be made to [insert name of local
is to be with or without price escalation;if oflcial concerned.
with price escalation, the basis on which 14 No alterationsshould be made to the Form of
this is to be allowed should be stated in Tender all the blanks on which must be filled
Part4 of the Fonn of Tender]. in.
(b) Your tender must remain valid for a 15 (a) The purchaser requires that the works
period of ............ months from the date should be completed not later than .........
on which it is due to be retumed to the (b) You are required to state in Part 1 of your
purchaser. tender the date by which you are pre-
7 Evaluation of the tenders will be camed out pared to undertake that the works will be
by the purchaser using the following criteria: completed ready to be put into com-
[Herelist the criteria preferably in descending mercial operation.
order or priority. This is an essential require- 16 [This paragraph to be included if nominated
ment if the contract is subject to the EU sub-contracts are involved.]
Procurement or the Utilities Directives and You are required to quote in sub-section B of
the selection is to be made on the basis of Part 2 of the Form of Tender your handling
the most economically advantageous ofer. fee expressed as a percentage of each of the
However it is a good practice to adopt in all sums shown therein. The items shown will
cases.] be the subject of nominated sub-contracts
8 Whether your tender is accepted or not, you for which the purchaser will invite tenders
shall treat details of the specification and the from a list of contractors to be agreed with
documents attached hereto as private and the successful plant contractor in accord-
confidential and in the event of a tender not ance with condition .......... of the conditions
being submitted the specification and draw- of contract. The successful plant contractor
ings shall be returned. Any drawings issued will also be responsible for preparing in con-
to you are intended to be typical of the works junction with the purchaser's engineer the
to be executed and shall not be used as work- specification for sub-contracts listed in sec-
ing drawings. tion B of Part 2 of the Form of Tender.
APPENDICES 221
17 The following drawings and diagrams are further written clarificationfrom the ten-
enclosed to illustrate the requirements set derer on any matter related to the tender.
out in the specification attached: (b) Requestsfor clarificationwill be issued to
the tenderer in writing, they are to be
TITLE DRAWINGAND DLAGRAM NUMBER
signed and returned by the tenderer and
18 Your attention is drawn to the following such clarification will be considered as
[inserthere details of any particular require- part of the tender.
ments on safety - for example, compliance (c) The purchaser also reserves the right to
with works safety rules, prohibition on use of discuss the optimization of the preferred
flamecuttingapparatus, etc.] tenderer's proposals. The conclusion of
19 [Includeifnecessary1 such discussions will be treated in the
Tenderers are asked to note particularly that same way as clarifications.
they should include in their tender for any [This paragraph assumes in tenders sub-
overtimelweekend working caused by the ject to the EU Procurement and the Utilities
need for breaking into existing structures, Directives that the purchaser has selected
joining up to existing circuits, and so on. the negotiated procedure. If the purchaser
20 (a) Notwithstanding the purchaser's right to has selected the restricted procedure then
reject any tender that is non-compliant, only sub-paragraphs (a) and (b) could be
the purchaser reserves the right to seek included.]
APPENDIX 2
Bid desirability questionnaire

A Marketing (b) unrecovered overheads or adverse shop
variances?
1 Does the tender fall within the mainstream
of the company's activities or is it only 9 Has the product been manufactured before?
peripheral? If so, is it responsive to the customer's speci-
2 How does the tender fit in with the com- fication or are there risks in meeting man-
pany's plans for market development or datory requirements? If not, what degree of
retention in relation to the followingfactors: confidence exists in the ability of the product
to meet such requirements?
(a) territory
(b) the particular customer
C Financial
(c) the product(s)to be offered
(d) the company's competitors? 10 Is the anticipated cash flow positive or nega-
tive?
3 What is the company's existing order book
11 Are there any risks foreseen in relation to:
for the product(s) concerned and what per-
centage of the sales budget is covered by firm (a) cost escalation
orders? (b) currencyexchange rates
4 What alternative opportunities exist now or (c) customer's financial stability?
will do so within the period covered by the 12 Is the anticipated profit contribution as a
tender for the use of the same capacity? minimum in line with the unit's planned
5 Of the balance of the sales budget uncovered target either overall or for that product
by firm order what are the chances of obtain- linelmarket?
ing other business on no less favourable
terms? D Contractual
B Production 13 Will any contract be based on the company's
or customer's terms?
6 Would the contract if secured require any 14 Are there any contractual risks foreseen in
special facilities, e.g. special tooling, or relation to:
involve the production of special parts or the
use of non-standard components? (a) penalty for delay
7 Would securing the contract impose any (b) warranty
significant strain on production resources in (c) consequentialdamages
terms of machines, labour inspection and (d) inspection and testing requirements
test facilities, etc? (e) inability to obtain truly independent
8 What would be the effectof not securing the decisions on any disputes
contract on: (0 termination either for default or cus-
tomer convenience
(a) retention of staffllabour (g) performance guarantees?
APPENDIX 3
Questionnairefor site visits

1.0 Proposed location of works
1.1 (a) Country .......................................................... State or Province ....................................................

(b) City or town nearest proposed site ................................................................................................
(C) Distance of site from city or town ........................................ (includelocation map if available)
(dl If site owned or chosen give shape as:
Length ........................................................... Width .......................................................................
Total acreage ...................................................................................................................................
Additional adjacent area available ................................................................................................
Is there adjacent area available?.....................................................................................................
State size ...........................................................................................................................................
Topography of site (level, rolling, steep etc.) .................................................................................
Drainage (describe) ........................................................................................................................
Are there any local codes governing construction? If so, a copy of the code should be
obtained.
1.2 Foundations
Soil characteristics
Test results
Boring samples
Site geology
Access road soil bearing capacity
Soil analysis
Depth to water table (average)
Depth to rock (average)
Vegetation (typeand density)
Obstructions above or below ground
1.3 Geographicalconsiderations
Access to site
Nearest national airport
Nearest internationalairport
Nearest rail head Max lift wt.
Nearest ports Max lift wt.
Nearest main roads
Condition Width TonneslAxlellimit
Weight limitation Site to port Width tonneslAxle
Site to rail head Width tonneslAxle
Site to airport
(national)
Site to airport
(international)
APPENDICES
Bridge limitations:
Site to ports
Site to rail heads
Railway limitations: (truckcapacity)
Accessible port with heaviest lift Max lift wt.
Site map
Distance from switchyard intended
site to nearest habitation Metres
Telephone and telex communication
facilities available at site
1.4 Atmospheric conditions

Altitude above sea level:
Annual temperature: Maxima:

Minima:
Average (design)
Monthly Maxima: Daily max.
Minima: Daily min.
Averages (design)
Relative humidities:
Yearly Maxima:
Minima:
Averages (design)
Monthly Maxima:
Minima
Averages (design)
Barometric pressure Max.

Min.
Average (design)
Percentagesunshine dayslaverage (design)
Annum- Average
Wind velocities- Max vel: Direction
Min vel: Direction
Averagevel: Direction
Predominant direction of wind
Dust content
Unusual conditions, tornadoes,cyclones, flood, earthquakes etc.
2.0 Watersupply
(a) Available quantity ................................................................ if limited state min ..........................
(b) Source (as rivers, lakes, reservoirs, wells etc.) ................................................................................
(c) Distancefrom intake to plant site ..................................................................................................
(dl Is there sufficient head for gravity flow of water to works or must a pumping station be pro-
vided? ...............................................................................................................................................
(el Would supply be constant the year round? ...................................................................................
(f) If seasonal, state quantity fluctuations ....................................Min. .................................... Max.
(g) Temperature at intake .............................................................. Min. .................................... Max.
APPENDICES
01) General quality (as clear, cloudy, seasonably discoloured etc.) ...................................................
(i) Would entire quantityof process water require filtration or treatment?.....................................
(j) Or quenchingquantity? .............................................. boiler feed water? .....................................
I (k) Obtain water analysis if available, or send samples for analysis..................................................
1 3.0 Power supply
3.1 What is the power requirement: KWH Max. KW

During construction?
During start-up?
For full production?
3.2 Is purchase power available at proposed site? .......................................................................................

(a) Would it be available permanently?...............................................................................................
(b) Is it a dependablesource? ...............................................................................................................
(c) Can a long-term contract be obtained?.........................................................................................
(dl What would be delivered current characteristics?........................................................................
(el Would transformers and sub-station need to be supplied? .........................................................
(f) What losses would need to be allowed for? ....................................................................................
(g) Would there be power factor penalties? ........................................................................................
(h) What minimum charge for non-use?..;.........................................................................................
(i) On what basis purchased, i.e. per H.P. year, per KWH etc. ...........................................................
distance of delivery point ...............................................................................................................
voltage at delivery point? ................................................................................................................
(j) What agency is responsible?...........................................................................................................
Source of supply
Distance of delivery point
Calorific value
Analysis
What agency is responsible?
5.0 Sewer ejgluents
5.1 Foul sewer
(a) Location and size of main

(b) Invert elevations
(c) Owning agency
(d) Capacity of disposal plant
(e) Charges
1 5.2 Storm sewer
(a) Location and size of main

(b) Invert elevations
(c) Owning agency
(d) Outfall description
(e) Charges
APPENDICES
5.3 Industrialeffluent (liquid)
(a) Analysis of effluent

(b) Governing agency
(c) Schedule of requirements
(d) Treatment required
5.4 Industrialeffluent (gaseous)
(a) Analysis
(b) Governing agency
(c) Schedule of requirements
(dl Treatment required
(el Fume scrubbing
6.0 Communitydata
(a) Does a good, fair or poor labour market exist?

(b) How far removed from proposed plant site?
(c) Type of transportation facilities to plant site?
(dl Is housing available for additional personnel?
(el Redominant nationalities(or races) of communityand percentageof each
(0 School facilities Universities
(g) Churchesand denominations
(h) Hospitals (qualifyas 'good' or 'fair')
(i) Health and recreational facilities
(j) Form of central and local government (statestability)
Give names of prominent local officials
(k) What is judicial system?
Obtain copy of relevant codes
7.0 Shipping and transport
7.1 Landing costs

Harbour charges
Dockers charges
Duty (specifydetails if categorysubdivided)
Customs brokerage charges
Stamps and other duties
Customers brokerage (min.charges per consignment)
7.2 Transport to site charges
Parcelslboxeslcratesless than lOOOkgs per KG from harbour to site

As above but lessthan 10 000 KGS
As above but more than 10 000 KGS and less than 100 000 KGS
As above but over 100 000 KGS (to max. carrying capacity)
Are local trucking facilities available?
APPENDICES
8.0 Constructionrequirements
8.1 Is there a good labour market available? ................................................................................................

8.2 (a) If not, where is closest labour available?........................................................................................
(b) Would transportation have to be paid for? ....................................................................................
How best arranged
Living cost .......................................................................................................................................
8.3 (a) Are living quarters for construction crew available? .....................................................................
(b) Would temporary construction camps be required?....................................................................
If so, is site available?.......................................Facilities needed and available
(c) Feeding facilities .............................................Supply stores? ......................................................
8.4 (a) What construction equipment is available (cranes, hoisting engines, concrete mixers, exca-
vators, small tools etc)?State whether rental or sales basis .........................................................
8.5 Are there competent local construction contractors who could undertake part or all of the work?
Under what forms of contract do they normally operate? ....................................................................
Are they willing to put up bonds?
Prevailingrates of pay
(a) Carpenters .................................................(b) Bricklayers............................................................
(c) Masons .............................................................................................................................................
(dl Steelworkers ..............................................(e) Riggers ...................................................................
(j7 Mechanics ........................................................................................................................................
(g) Foremen ....................................................(h) Skilled labour ........................................................
(i) Unskilled ..........................................................................................................................................
8.6 If labour unions are strongly organized, obtain current labour and trades schedule. Give particu-
lars of union organizationand with whom negotiationswould need to be undertaken.
8.7 Obtain delivered to site prices, and location of sources available on:
(a) Cement ..............................................(b Sand ...........................................................................
(c) Gravel ................................................(d) Lime ...........................................................................
(e) Brick or buildingtile ........................................................................................................................
(0 Lumber (allsizes) rough ..............................................dressed .....................................................
(g) Millwork (assash, doors etc.)
(h) Reinforcing steel .............................................................................................................................
Structural steel ................................................................................................................................
9.0 Legallcommercial factors

Normal working week Hours
Annual holidays Days
Normal working day am to Pm
Normal lunch interval to hrs
Union or accepted standard skilled worker per hour
(local currency)
Semi-skilled per hour
Unskilled per hour
APPENDICES
Bilingual secretary (local) per hour

Social security contributions
Health insurance % of above
Length of service indemnity
13th month salary
Holiday pay
Termination
Undue cause redundancy
Other on-costs (pleasespecify)
Index
Adjudication 200-202 Traditional Client Co-ordinated 9
Alternative Dispute Resolution 199-200 Contract Price
Arbitration 203-204 Bill of Quantities 115
Architect see functions ofArchitectlengineer Cost reimbursement 116
and purchaser Lump sum 113-15
Art of Tendering P.D.V.Marsh (pub. Gower)53, Negotiated price 117-19
61,62 Price to be agreed 119
Target Cost 116-17
Bid Desirability Questionnaire 222 Contracts (ApplicableLaw) Act 1990 110
Bonds 104-7 Contracts (Rights of Third Parties)Act 1999
Bonus and Penalty mechanism 134-5 19-21,147
Business Case, preparation of 3 Contributory Negligence 25-6
Covering letter to the tender 62
Certificates 90-91 Critical path analysis 133
Claims negotiation
presentation and management 198 Damages, measure of
total loss claim 196-7 In contract 24
types of claim 193 In tort 26
Use of a formula 197 Delivery
Client Co-ordinated method of contracting9 Access to Site 151
Collateral warranties 20,31,147 Delayed deliveryfault of the Purchaser 152-3
Competitivetendering Overseas 154-5
Open tendering 37 Responsibilityfor 150
Public Works Directive Department of Transport
Negotiated Procedure under 39 Paper by Tony Holland on design and
Restricted Procedure under 38-40 construct 11
Selected List 38-44 Direct loss and expense, meaning of 28
Utilities Directive under 39
Completion see Time for Completion Employer, obligations of 26
Complex structures theory 21-2
Computer Systems Contracts Facilities Management Contracts
Acceptance Tests and Take Over 209-10 Application of Supplyof Goods and Services
Change Control Procedure 208 Act 211
Obligations of the Purchaser 207 Insuranceand Indemnities 213-4
Obligations of the Supplier 206-7 Limitation of liability 214
Price and terms of Payment 208-9 Payment 214
Software ownership and licences 208 Service Level Agreement 212
Warranties and maintenance 210-11 Staff and the applicationof TUPE 215
Consequential Loss, meaning of 29 Statutory Requirements 213
Consortia 56 Fast Tracking 15
Construction Design and Management Federation Internationaledes ingenieurs
Regulations 100 conseils (FIDIC) 8,89
Contract Plan Turnkey form of contract-designobligation
generally 7-18 8
Procurement Routes Foreign legal systems 111
Management Contracting 9-1 1 Form ofAgreement,draft of 8 1 4
Partial Turnkey 8-9 Functions of Architect, Engineer, Project
PFI Contracts 16-18 Manager and Purchaser 178-84
Summary and decision criteria 15-16
The advantages and disadvantages of GClWorks1 form of contract
Different methods 11-15 Fairness obligation 98
Total Turnkey 7-8 Methods of payment under 122-3
INDEX
Nominated sub-contractors, responsibilityof Keating Buikting Contracts (pub. Sweet and

main contractor for 148 Maxwell 1995) 146
Payment to sub-contractors 121-2
Programme is a contract document 102 Late Payment of Commercial Debt (Interest)Act
Retention money release in exchange for 1997 121
bond 127 Latham Report
Set-off, right to 127 Recommendations 122,148
Termination for default in payment 109 Use of single consultant to undertake ground
Government Procurement Strategies 8,15 investigationsat tender stage 109
Law ofpublic and Utilities Procurement
Housing Grants, Construction and Regeneration Professor Sue Arrowsmith,Sweet and
Act 1996 and Scheme for Construction Maxwell 1996 37
Contracts 120 Letter ofAcceptance 79
Letters of Intent 31,774
ICE form of contract Liquidated damages for delay and extensions of
Adjudication clause may not comply with Act time 135-9
201
Arbitrationdoes not cover disputes on MFll Conditions of Contract for Design
enforcement of adjudicator'sdecision 202 Supply and Installation of Electricaland
Claims for unforeseen ground conditions Mechanical Plant
108 Completion, stages of 128-9
conciliation procedure 200 Conclusiveness of final certificate 159,164
Contractor's default 100 Correction of defective work 99
Final certificate not conclusiveevidence 160, Defects period of sub-contractor 142
165 Delayed delivery, purchaser not ready 152-3
Liability for injury to persons and damage to Exclusions of liability 164
property 172,173 Exclusive remedies or entire agreement clause
Nominated sub-contractors under 145 98
Programme not contract document 103 Extensions of time and sub-contractors 144
Rates in bills Engineer's authority to adjust Failure by purchaser to pay 126
for quantity change not avariation 115,195 Injury to persons and damage to property 174
Remeasurement contract-no tender sum Interest on late payment 126
73 Limit on engineer's power to order variations
Third party obtaining no rights under 20 191
Variations, pricing of by use of bills 188 Mistakes in information 100
Nominated sub-contractors 149
JCTforms of contract Performance tests and guarantees 130,168
Arbitrationdoes not cover disputes on Progress payments 124
enforcement of adjudicator's decision 202 Reception, unloading and storage 150
Conclusive nature of final certificate 159-60 Site access 151
Contractor to proceed regularly and diligently Take Over 129
103 Termination for default in payment 109
Direct loss and expense, meaning of 194 Terms of payment 123
Extensions of time 138 Methods of Contracting compared 11-15
Liability for injury to persons and damage to Decision criteria for choice of method 15-16
property 173 Misrepresentation, generally 30
Nominated sub-contractor's defects period Fraudulent 27,99
142 Negligent 27
Nominated sub-contractors under 146 Under MisrepresentationAct 1967 27
Practical Completion, definition of
157 Negligence and Economic loss 22
Retention moneyand trust funds 127 New Engineering Contract
Set-off right to 127 Adjudication provisions may not be legally
Third party obtaining no rights under 20 compliant 95-6,201
Jointventures and consortia 56 Form of 89,944
Jointventure agreement 57-8 Programme contractually binding 102
Locd partners overseas58 Project Manager 98
Jones,ElizabethInternational ConstructionLaw Variations, pricing of 189
Review 10 Nominated sub-contractingsystem 144-9
INDEX
Objective, client of 4-6 Bankruptcy and liquidation of contractor

Occupiers LiabilityAct 1957 172 90
Certificates 90
Parent CompanyGuarantee 107 Contractor's default 91
Patterson,CollateralWarranties (pub. RIBA) Contractor's representative and workmen
1991 147 92
Pay-when-paid clauses 121 Drawings 93
Penalties Exclusive remedies 98
Distinction between and liquidateddamages Execution of the Work 99
134 Faulty Work 99
Effect of 136 Health and Safety 100
Validity of under French and German law Inspection and testing 100-101
138 Language of the Contract 110
Pike A (InternationalConstructionLaw Review Law of the Contract 110-11
1991) 164 Mistakes in Information 100
Private Finance Initiative (PFI) Parent CompanyGuarantee 107
contracts 16-18 Patent Rights 101-102
Standardisation ofPFIcontractsHM Treasury Possession of Site 107
Guide to (Buttenvorths,1999) 18 Programme of Work 102-4
Process Plant Conditions of Contract (The Red Project Manager 98
Book) Security for Performances 104-7
Completion, stages of 129 Sufficiency of Tender 108-9
Defects Liability period limited to 365 days Suspension 109
165 Taxation 11 1-12
Delayed delivery and storage 154 Termination 109-10
Drawings, use by Purchaser 93-4 Standard pre-qualification form 38
Expert Determination 202-3 Sub-contracting
Final certificate conclusive 159 Employer's right to restrict 139
Injury to persons and damage to property Liability of sub-contractorsfor completion
I
174 142
Interest on late payment 126 Liability of sub-contractorsfor defects
Limitationson liability 164,165 141
Liquidated damages and completion Main contractor's right to an extension of
129-30 time 143
Nominated sub-contractors 149 Nominated sub-contractors 144-8
Performance tests and guarantees 130,168 Responsibilities for main contractor for
Pricing of variations 188 sub-contractors 140
Restriction on the right to order variations Supply of Goods and Services Act 1982 24
192
Right of rejection 92,168 Taxation on overseas contracts 111
Site access 151 Tender Appraisal
Terms of payment 124 Criteria for award 68-9
Testing 101 Method of combiningprice and qualitative
Procurement Directives 75 factors 73-5
Product Liability in the Construction Industry Methodologyfor assessment70-73
Palmer and McKendrick (Lloydsof London Organization of 67
Press) 142 Post-Tender Negotiation 75-6
Professional advisers,liability of 24 Tender preparation
Action plan for, 54
Scottish Office, form of contract Checklist of questions to be answered before
Single tender negotiations, generally 45-50 decision to bid 51-3
Methods of 45-6 Decision rules on tender price 54-5
Points for price negotiations 47-50 Documents forming tender 61-2
Standard Conditions of Contract Offering alternatives 64
FoN~~s of 87 Services to be provided by purchaser and
Inter-relationshipof conditions 87-8 exclusions 64
Terms of Specification 63
Architect and Engineer 92 Terms and conditions of sale 64
Assignment and sub-contracting90 The quotation 65-6
INDEX
Terms of Payment Liquidated damages for delay 135-8

Alternatives of stage and milestone payments Realistic delivery promises 131-2
122-4 Stages of completion M & E Plant 128-9
Construction Act provisions 120 Stages of completionProcess Plant 129-30
GCIWorksll and 121 Use of contract to provide an incentive 133
Monthly valuations, dissatisfactionwith Turnkey, full 7-8
system of 122 Partial 8-9
Policy considerations120-24
Recovery of payments made in advance 126 Unfair Contract Terms Act 1977
Retention money 126-7 Dealing on standard terms of business 166
Set-off 127 Effect of on exclusion and limitation of
Time limit for payment 125 liability Clauses 164
Time for Completion Meaning of 'resources' 169
Bonus and penalty clauses 134-5 Utilities Directive
Critical path analysis 133 Use of negotiated procedure allowed 39
Advanced Project Management
A Structured Approach
Third Edition
F L Harrison
When this book Grst appeared in 1981 it quickly acquired a reputation for
excellence on both sides of the Atlantic. For this third edition the text has been
radically revised and the author presents a new approach designed to be used as
a framework for the total integration of project management work. According
to Mr Harrison, the elements that determine the success or failure or a
project are:
The structure of the project organization

The methodology used for planning and control
How human relations problems and conflicts are handled
The effectiveness of integration.
The author deals in depth with all these topics.
This is a book that successhly brldges the gap between introductory texts on
project management and specialist works on professional practice. Its aim is
twofold: to provide both a guide for managers, engineers, accountants and
others involved in project work and a textbook for advanced students of project
and construction management.
Gower
A Concise Business Guide to
Contract L a w
Charles Boundy
All managers handle contracts, but how many have even rudimentary
awareness of contract law?
Here at last is a book written specifically for them, by a practising commercial
lawyer. Charles Boundy introduces the principles you need to know, and shows
how they apply to key elements of business such as sales of goods and services,
product safety, confidentiality,competition, agency and distribution,
employment and Ilcensing. He also deals with planning contracts, using
standard forms, the implicationsof new technology, the international
dimension and what to do when things go wrong. A useful glossary of legal
terms is included.
With its no-nonsense style, real-We examples, summaries and checklists, A
Concise Business Guide to Contract Law will appeal to anyone in business dealing
with contracts on a regular basis.
Gower
Getting out of a Contract -
A Practical Guide for Business
Adam Rose, David Leibowitz and Adrian Magnus
This book is written by three commercial lawyers. Their clients as often ask
them for help in getting out of a contract as in getting them into one in the first
place. Built around two business case studies, the book highlights the various
legal issues that a business must address when faced with a contract it wants to
walk away from. In the first instance the business needs to discover whether it is
as shackled by a contract as it thinks it is. In many cases a contract is not as
-
binding as it might initially appear Getting Out of a Contract explains the
circumstances in which this applies. It then goes on to explore how to minimise
the damage should the agreement be inescapable and helps the reader to
understand what the consequences of any actions might be.
Wcitfng in plain English, the authors manage to demystify complicated aspects

of English law for the non-lawyer. This book will help managers:
address how they make contracts

avoid making wrong decisions because they fail to appreciate what contracts
they actually have or how to get round them
become more attuned to the legal ins and outs of contracts, enabling them to
use lawyers more cost-effectively
Company secretaries, finance directors and managers at a11 levels will find
Getting Out ofa Contract accessible and an invaluable business planning tool.
Gower
The Gower Handbook of
Management
Fourth Edition
Edited by Dennis Lock
'If you have only one management book on your she& this must be the one. '
Dennis Lock recalls launching the first edition in 1983 with this aim in mind. It
has remained the guiding principle behind subsequent editions, and today The
Gower Handbook ojManagement is widely regarded as a manager's bible: an
authoritative, gimmick-free and practical guide to best practice in management.
By covering the broadest possible range of subjects, this Handbook replicates in
book form a forum in which managers can meet experts from a range of
professional disciplines.
The new edition features:

65 expert contributors - many of them practising managers and all of them
recognized authorities in their field;
many new contributors: over one-third are new to this edition;
72 chapters, of which haIf are completely new;
20 chapters on subjects new to this edition; and
a brand new design and larger format.
The Gower Handbook ofManagement has received many plaudits during its
distinguished career, summed up in the following review from Director:
'... packed with information which can be used either as a reference work on a specific
problem or as a guide to an entire operation. In a short review one can touch only
lightlg on the richness and excellence ojthis book, which well deserves aplace on any
executive bookshelf.'
Gower
Project Management
Seventh Edition
Dennis Lock
Den& Lock's masterly exposition of the principles and practice of project

management has been pre-eminent tn its field for three decades. It examines the
entire process in detall, from initial appraisal to flnal closedown, demonstrating
techniques that range from the simplest of manual charts to sophisticated
computer systems. The text is reinforced throughout by examples
and diagrams.
For this latest edition the text has once again been thoroughly revised and
updated. There are many new case studies, and a particular effort has been
made to improve the clarity of the illustrations. The result will undoubtedly
maintain the book's status as the standard work for managers and
students alike.
Gower

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Contracting for Engineering and Construction

First published 1969

British Library Cataloguingin Publication Data

ISBN 0 566 08282 9

Library of Congress Cataloging-in-PublicationData

Typeset in Great Britain by IML Typographers,Birkenhead and printed in Great Britain by

PART ONE CONTRACT PLANNING 1

3 Legal issues arising from the contract plan 19

PARTTWO TENDERING AND PLACING THE

5 Single tender negotiation 45

6 Planning the tender 51

7 Joint ventures and consortia ,56

PARTTHREE TERMS AND CONDITIONS OF

1 12 Standard terms of contract: I1 97

13 Contract price 113

14 Terms of payment 120

15 Time for completion 128

18 Defects: guarantees and remedies 156

19 Insurance and indemnity 170

20 Functions of architectlengineerlproject manager

21 Variations in price and time 185

22 Claims and their negotiation 193

23 Dispute resolution 199

24 Particular forms of contract 206

project is exposed?To what extent is the client EXAMPLE

The contract plan

Figure 2.1 Management contracting forms of responsibility

4 It should enable economies of cost to be choice of firm concerned. Accordingly the

Design and build 2 Each work-package will be tendered for on a

Legal issues arisingfrorn the

sub-contractor or supplier an express collateral the sub-contractor, certainly for economic

cial relationship if one party acts on the LETTERS OF INTENT

8 The contract plan should be formulated as a in negligence cases, where damage is an

TENDERING AND PLACING THE

Section which should contain clear and detailed

liquidated damages for delay expressed

Single tender negotiation

7 Temporary works The extent of these will LABOUR COSTS IN WORKS

Planning the tender

objectivestandard for visual tests there liquidated damages or penalties for

tendering such as submission in a foreign tive to the customer to guarantee a twelve-

Joint ventures and consortia

JOINT VENTURE CHARACTERISTICS

rately and then estimates compared?Policies integrated basis. Alternatively a bank

METHODOLOGY 3 Have the relevant parts of each tender exam-

TECHNICAL APPRAISAL TENDER PRICE

1.4 Penalties to be applied due to failure of tender to offer performance guarantees in

COMMERCIAL TENDER PRICE

FINANCIAL TENDER PRICE

' sultants and Contractors have suggested the

Project quality weighting 60

Table 9.2 Example of scoring of quality and price for tenderers

Placing the contract

PERFORMANCE GUARANTEES the references to the clause numbers already

TERMS AND CONDITIONS OF

Standard terms of contract: I