Episode 64:

Hello and Welcome to the Part3 with me podcast, 

The show that helps part 3 students jump start into their careers as qualified architects and also to provide refresher episodes for practicing architects. I am your host Maria Skoutari and this week is Part 2 of the Design & Build Contract. Todays episode meets PC5 of the Part 3 Criteria.

So last week, we covered the Contract Documents, Obligations of the Contractor, and Possession and Completion. This week we will be covering Control of the works, Sums properly due, Payment, Indemnity & Insurance, Default & Termination and Dispute Resolution. As mentioned, make sure to listen to both episodes to get the overall understanding of the form and how it operates.

So that covers the Contractors Obligations, now lets look into the Control of the Works:

Under D&B many aspects of the execution of the works and administration of the contract lie in the hands of the contractor. The intention of design and build procurement is for the employer to have less involvement with day to day aspects of the contract as opposed to traditional procurement, and under D&B the contractor will have greater responsibility for the overall coordination of the project. 

So under D&B there is no CA but the employer is entitled to appoint a person to act as their agent, if one is appointed and named in the contract, the contractor will be obliged and entitled to treat them as the employer for all purposes of the contract. The contractor is required to allow access to the site and workshops to the employers agent and any person authorised by the employer.   

Now from contractor side, the contractor is required to keep a competent ‘person-in-charge’ on the site at all times, although not a requirement to name this person in the contract it is good practice to establish the identity of the person-in-charge in a pre-contract meeting and make sure this is recorded in writing. Alternatively, instead of a person-in-charge, the contractor is required to appoint a site manager and the employer must give written approval of the specific person prior to their appointment and contractor can’t remove or replace the site manager without the written consent of the employer. The Site manager is to act as full-time representative of the contractor on site in charge of the works and must attend meetings arranged by the employer when reasonable requested. 

Now when it comes to key responsibilities of the contractor, employer and the architect role: 

Starting with the employers responsibilities, some of these typically involve: 

Failure from the employer to provide any necessary instruction, decisions, information or consent may constitute a default by the employer providing grounds for an extension of time to be granted to the contractor and giving rise to a direct loss and/or expense claim where disruption to the works has been caused. It can also be grounds for termination if the failure causes a suspension in the works for a greater period from that stated in the contract particulars.  

Now looking at the contractors responsibilities, these tend to involve:

Now looking at the architect, they can be involved in the design and build process in a number of different ways, such as:

A key item for architects to be wary of under design and building is not to take on a ‘fitness for purpose’ obligation as it is unlikely that any PI insurance policy will cover it - the clause must always be to ‘ reasonable skill and care’. The contractors liability in D&B is also limited to that of an architect to the use of reasonable skill and care, meaning that in order for the employer to prove the contractor had been in breach they need to prove they have been negligent. 

So looking at the design element of D&B to be developed by the contractor, the contractor is expected to provide the employer with copies of the ‘Contractors Design Documents’, these are defined as the drawings, details and specifications of materials, goods and workmanship and other documents prepared by or for the Contractor in relation to the design of the Works. Upon receipt, the employer is entitled to take three alternative actions, they can either accept the design document and return it marked as ‘A’, or they can accept it but subject to certain comments being incorporated and return it marked as ‘B’, or the third action is to make comments and require the contractor to resubmit the document with the comments incorporated for further approval and return them marked as ‘C’. In the cases of the documents being marked as ‘B’ or ‘C’, the employer must state why the document doesn’t comply with the contract. Key item to note here, if the employer doesn’t respond within a specified period, its deemed to have accepted the document. If the contractor disagrees with a comment, they must inform the employer within a specified period stating that compliance with the comment would give rise to a change and the employer must then either confirm or withdraw the comment. 

Now looking at the Employers power to Instruct, under D&B, the employer can issue instructions regarding:

In terms of the items I just mentioned, only the employer or the employers agent have the power to issue instructions and all such instructions must be in writing. If the contractor doesn’t comply with a written instruction, the employer may employe and pay other to carry out the work and must give written notice to the contractor requiring compliance with the instruction. The employer then is entitled to recover any additional costs from the contractor and can include the carrying out of the instructed work and any special provisions that need to be made, e.g regarding health and safety. 

Now when it comes to changes, the employer may decide to vary the requirements after the contract has been signed. Under D&B, the employe can order specific ‘changes’ including alterations to the design, quality and quantity of the works and to operational restrictions, e.g. access to the site. Such changes will not invalidate or change the nature of the contract nor can the employer make changes after practical completion. Key item to bear in mind is that such changes may result in the adjustment of the contract sum and give rise to a claim for an extension of time or direct loss and/or expense. So the employer can add, omit, substitute one type of work for another or remove work already carried out, if these alter the design, then the employer will require the contractors consent. 

Some typical items that can be treated as a ‘Change’ includes:

Now, if the contractor wishes to sub-contract work, they can only do so with the written consent of the employer. D&B includes provisions for naming sub-contractors which can be beneficial to the employer if they wish to involve particular firms. If the named sub-contractors employment is terminated by the contractor, the contractor will be required to carry out any outstanding work, which can be sub-contracted with the consent of the employer.

Now when it comes to defective work, if work is found to be defective, the employer has the power to issue an instruction for the removal of the work, materials or goods from the site and the employer can issue an instruction requiring a change as a consequence of an instruction with regards to defective work. If the employer has also issued an instruction for further tests to be carried out due to defective work, the costs would be taken on by the contractor, whether or not the additional tests proved work was defective, the contractor, however, would have the right to an extension of time if the tests showed the work was satisfactory and therefore caused delay.

The contractor is required to make good any defects, shrinkages or other faults which appear and are notified by the employer to the contractor. The notification should take the form of a schedule and be issued to the contractor after the end of the rectification period and the defects noted should be limited to latent defects that appeared after practical completion. If the employer decides to accept any defective work, this should be confirmed in writing given the employer has carefully established the full extent of the defect and an appropriate deduction from the contract sum is agreed. Once satisfied that all notified defects have been made good, the employer must issue a Notice of Completion of Making Good. 

Now lets move onto the next section of Sums Properly Due:

D&B is a lump sum contract, meaning all the work described in the contract documents including completion of the design to meet the employers requirements is to be carried out for the agreed sum. In D&B, the contract sum is very rarely fixed and typically the final amount payable may differ from the contract sum. D&B contains fluctuations provisions allowing for adjustments in the event of changes. There are a number of Supplemental Provisions within the contract allowing for certain elements to be added to sum. One covers the contractors estimates, whereby the contractor, upon receiving and instruction requiring a change, submits an estimate to the employer consisting of the value of the changes, additional resources required to comply, a method statement for compliance, length of extension of time required and any loss and/or expense required. Once that has been submitted to the employer, both parties must take all reasonable steps to agree those estimates. Another Supplemental Provision covers cost savings and value improvement whereby the contractor is encouraged to propose cost saving and value improvement measures relating to the design and specification and/or to the programme and should result in an immediate saving or saving in the life-cycle costs of the project. Once prepared and submitted, the parties are required to negotiate and agree on the value. That’s just some of the Supplemental Provisions available within D&B. 

Now when it comes to reimbursement of direct loss and/or expense, the contractor can be reimbursed for direct loss and/or expense suffered due to a delay or disruption or due to general damages for breach of contract. The contractor can be reimbursed as a result of any occurrence of a ‘Relevant Matter’, which are stated within the Contract Form or through deferment of possession. Other losses are irrecoverable under the contract, although dispute claims can be raised through dispute resolution procedures. The contractor should be able to demonstrate they have taken reasonable steps to mitigate loss and the losses have been reasonably foreseeable as a result from a ‘relevant matter’.  

Now in some projects, it may be advantageous to insist on a ‘fixed’ or ‘guaranteed’ price, whereby the contractor accepts the risk of all changes in the cost of the works due to statutory revisions and market price fluctuations. This approach of course will result in higher tender figures, so contractors tend to allow for some fluctuations and the employer accepts some of the risk as well. 

So that covers Sums Properly Due, now lets move on to the Payment section of the contract:

Under D&B, the contractor is required to make interim applications, either at completion of stages under Alternative A within the contract form or at regular intervals under Alternative B, the preferred method is entered in the contract particulars. With stage payments, allowance should be made for design work that was completed by that stage, for periodic payments, provision is to be made for valuation of the design work. So interim payments are calculated as the total amount, depending on the payment method chosen, less the retention and any amounts of advance due for reimbursement. In both payment options, the employer should be careful to not pay for any work that hasn’t been properly executed. If defective work is discovered, the value can be omitted from the next payment. 

So the contractor is paid either at the end of agreed stages or at monthly intervals following applications made by the contractor. The payment will reflect the amount of work that has been properly completed as per the agreed terms of the contract up to the point of payment plus the amount of design work that has been carried out.

So before reaching the total gross valuation, allowance fro deductions should be made including for any defects or costs incurred by the employer due to unfollowed instructions or for any amount allowable by the contractor in respect of terrorism cover or fluctuations - these are applicable under both payment options. Under Alternative B, the payment should include materials delivered on site but not yet used in the works. A few implications arise when it comes to unfixed materials and goods, firstly such materials that have been delivered to site and intended for the works may not be removed without the written consent of the employer, removal would be a breach of contract and the employer could claim losses suffered from the contractor through unauthorised removal. Secondly, unfixed materials and goods either on or off site that have been included in an interim payment will become the property of the employer and the contractor will be prevented from disputing ownership. Sub-contracts are also required to include a clause stating that once materials and goods have been certified and paid for under the main contract, they become the property of the employer. 

Now looking at ‘listed items’, both alternatives make provision for them and allow for the contractor to be paid for materials or good prior to their delivery to site which are listed within the employers requirements and their value included in an interim payment prior to delivery to site provided the contractor has provided reasonable proof the property is vested in it, if the item is not uniquely identified or required in the contract particulars the contractor has provided a bond, that the listed items are in accordance to the contract, the listed items are ‘set apart’ or clearly marked and that the contractor provides proof the items are insured against specified perils until delivery on site. In terms of payment, the employer has no obligation to pay for any off-site items other than those listed. 

Now lets look at the payment procedure, the due date for final date for payment is after the employer the receives the contractors application for payment or the date of the completion of the stage under Alternative A or at the monthly date specified under the contract particulars under Alternative B. The application can be made before, on, or after the stage completion date or specified date. The employer must give the contractor a Payment Notice stating how much they intend to pay or deduct from the amount applied for. If the employer wishes to withhold any amount from the sum stated in the payment notice they must give a written notice of their intention before the final date for payment by issuing a Pay Less Notice which is to state the sum considered to be due and the basis which the sum has been calculated. The contract gives the employer the right to make certain deductions from any amount due to the contractor or to reclaim the amounts as debt but in any case the employer is required to pay the amount due by the final payment date. The amount paid shouldn’t be less than the amount set out in any pay less notice, if no pay less notice has been given, it will be the amount stated in the employers payment notice or in the amount from the contractors application.

Now in instances of non payment, D&B includes several provisions that protect the contractor if the employer fails to pay the contractor, such as applying an interest to late payments based on the base rate of the Bank of England. The interest accrues from the final date for payment until the amount is paid. If the employer, however, makes a valid deduction following a notice, then the interest wouldn’t be due on the specific amount. The contractor is also given a right of suspension if the employer fails to pay by the final date for payment, if however a pay less notice was given by the employer and they paid the amount set out in the notice, then the contractor can’t suspend work. But to be able to suspend their obligations, the contractor must give the employer written notice of their intention to do so and the reasons why. If payment is made, then the contractor must resume work and any delay caused by the suspension could be a relevant event making the contractor entitled to be paid for costs and expenses incurred. 

So following practical completion, the contractor is required to send a final statement to the employer for agreement, the final statement will set out the adjustments to the contract sum already made, the sum of amounts already paid, the balance resulting from the two and the basis which the amount has been calculated. The adjustments will include amounts relating to provisional sums, corrections of divergences, changes in statutory requirements, employers instruction effecting a change, insurance, loss and/or expense, fluctuations and any costs and expenses due to suspension. The final statement can even be a negative amount, meaning that payment is due from the contractor to the employer. The final statement becomes conclusive as to the balance due from the due date for the final payment and is also conclusive with respect to the extensions of time awarded and loss and/or expense ascertained and the contractor is prevented from seeking to raise any further claims regarding these matters. Similarly with the SBC, if a dispute arises, the statement doesn’t become conclusive until the dispute resolution proceedings are concluded. 

Now lets move on to Indemnity and Insurance, the next section of the contract:

Under D&B, the contractor is liable for and required indemnification of the employer against claims for injury to or death of persons, or damage to neighbouring property caused by the contractors negligence, therefore, the indemnity protects the employer in that if a party brings action against the employer, the contractor will bear the consequences of the claim and is therefore required to carry insurance cover to indemnities required by the contract. The contractors liability in respect of personal injury or death of employees is met by an employers liability policy made compulsory from the Employers Liability Act 1969. Now when it comes to damage to property, the contractor is only liable to the extent that the damage is caused by negligence or breach of statutory duty or other default of the Contractor or any of the Contractor’s Persons, so the contractor is liable only for losses caused by their own negligence. D&B makes provision for the contractor to take out insurance for damage to adjoining buildings where there has been no negligence, if required this will need to be specified within the employers requirements and the amount of cover to be entered in the contract particulars. 

D&B makes provision for three different types of insurance clauses, all of which are to be in joint names and cover is to be maintained until practical completion of the works or termination. Option A is for new building works and require ‘all risks’ to be covered under a joint names policy, this option it to be taken out by the contractor and is for the full reinstatement value of the works and the contractor is responsible for keeping the works fully covered. Under Option Bm also for new building work requiring ‘all risks’ to be covered under a joint names policy, this policy is to be taken out by the employer and must be for the full reinstatement value of the works and the employer is responsible for keeping the works fully covered. And Option C is applicable for works carried out to existing buildings and it includes two insurances both to be taken out by the employer insuring the existing structure and contents against ‘specified perils’. The process for claiming is similar under all three options, whereby the contractor must notify the employer in writing of the details of the damage as soon as possible, then once inspections have been carried out, the contractor is obliged to make good the damage and continue with the works, under all 3 clauses, the contractor authorises the payment for all monies due under the insurance to be made directly to the employer. 

There is also the optional Joint Fire Code to reduce the incidence of fire on construction sites, if required both parties will have to comply with the code and ensure that those employed by them also comply. 

Then, under Option A for the contractor or Option B&C for the employer, they are required to take out terrorism cover. This can be done either as an extension to the joint names policy or as a separate joint names policy and taken out in the same amount and period as the joint names policy. Terrorism Cover is to protect against loss or damage to work executed and site materials caused by or resulting from terrorism. Parties may choose to withdraw this cover and they must notify each other that the terrorism cover has ceased and the employer must then decide whether or not to continue with the works or to terminate the contractors employment. Otherwise if any damage is caused due to terrorism, the contractor will be required to make good the damage and the related work is treated as a change. 

Under D&B the contractor is also required to carry professional indemnity insurance, the level and amount to be entered in the contract particulars. The insurance must be taken out immediately following the execution of the contract and maintained until the end of the stipulated expiry period. 

So that covers Indemnity & Insurance, lets move onto Default and Termination:

Under D&B, where its impossible to expect further performance from a party, the injured party may then claim that the contract has been repudiated. Repudiation occurs when one party makes it clear that they no longer intend to be bound by the provisions of the contract. The provisions in D&B for termination are relatively similar to this in SBC whereby termination is only for the contractors employment and not termination of the contract itself. 

Now if repudiation occurs, the injured party can accept it and bring the contract to an end. So the employer can initiate termination in the event of specified defaults by the contractor, such as suspending work, insolvency, and so on, or termination can be initiated by the contractor in the event of specified defaults by the employer, such as failure to pay any amount due, insolvency and so on. In the event of neutral causes, the right of termination can be exercised by either party. 

So in the event of insolvency or liquidation by the contractor, under D&B, the contractor must notify the employer in writing and the contract allows the contractor with time to come up with a rescue package. There are 3 options for the works to be completed following such notice from the contractor, the first allows arrangements to be made so the contractor may continue and complete the works, under the second option another contractor may be novated to complete the works through a true novation whereby the new contractor takes on all the original obligations and benefits of the original contractor or under the third option whereby the new contractors is notated through a conditional novation whereby the new contractor renegotiates the terms and is not liable for the works carried out by the original contractor. 

If the employer chooses to simply terminate, then completion will only be achieved through the appointment of a new contractor of the employers choice and may require the original contractor to remove from site any temporary buildings, plant, etc owned by the contractor, to provide the employer with copies of all the contractor’s design documents and the original contractor will be required to assign the benefit of any sub-contracts to the employer.  

Under D&B, the contractor also has the right in return to terminate their own employment in the event of specified defaults of the employer or specified suspension events or insolvency of the employer. The specified events must have resulted in the suspension of the whole of the uncompleted works for a continuous period stated in the contract particulars. Now when it comes to failure for payment, the contractor should be carefully that they terminated based on the fact that the employer has failed to pay an amount properly due and not simply the amount which the contractor might have applied. If the contractor attempts to terminate the contract on this basis without justification it would amount to repudiation with serious consequences for the contractor. 

Now as mentioned, D&B also makes provisions for either party to terminate the contract if the carrying out of the whole of the works is suspended for the period inserted in the contract particulars due to force majeure, loss or damage to the works caused by specified perils, civil commotion, or delay in receipt of statutory approvals or permissions. In such instances either party may give notice and the employment of the contractor will be terminated.

In terms of termination of employment of sub-contractors, this can only be done with prior consent from the employer and the contractor must complete any outstanding work and this will be treated as a change.

And last but not least, lets look at the Dispute Resolution processes under D&B:  

Similarly with SBC, D&B refers to five methods of dispute resolution, negotiation, mediation, adjudication, arbitration and legal proceedings. Adjudication is a statutory right and negotiation is an optional provision. D&B requires parties to decide in advance wether arbitration or litigation will be used and entered in the contract. Starting with Negotiation, if this method is chosen the parties are obliged to notify the other of any matter that may give rise to a dispute and the senior executives nominated in the contract must meet and try to resolve the matter. If negotiation fails then parties may wish to proceed with mediation whereby a mediator is usually appointed jointly by the parties and will meet the parties separately and together in an attempt to resolve the differences. The outcome from mediation is in the form of a recommendation and if accepted can be signed as a legally binding agreement. Mediation is the best process to keep relationships in-tacked.

Now if mediation fails, parties can refer the matter to adjudication which under the Housing Grants, Construction and Regeneration Act 1996 requires parties to construction contracts that fall within the definition set out in the Act to be able to refer any dispute arising under the contract to adjudication. Under D&B an adjudicator can be named in the contract particulars or nominated by the nominating body identified in the contract particulars. If no adjudicator is named the parties can either agree on someone or either party can apply to a nominating body. The adjudicator should be a natural person acting in their own personal capacity and should not be an employee of either part. So the party referring the matter to adjudication will have to give notice to the other party identifying the dispute or difference, the selected adjudicator will then set out the procedure to be followed and reach a decision giving reasons for it if requested by the parties to do so. Their fees can be paid between the parties, unless it has been agreed that the adjudicator will have the power to award costs. The adjudicators decision will be final and binding on the parties unless referred further to arbitration or litigation.

If the matter is then escalated to arbitration, with arbitration awards being enforceable by law. If arbitration is selected over litigation, this should be stated within the contract particulars. The party that wished to refer the dispute to arbitration must give notice to the other briefly identifying the dispute and requiring the party to agree to the appointment of an arbitrator. Upon appointment if the arbitrator, the parties must send them and to each other a note indicating the nature of the dispute and amounts in issue, the estimated length of the hearing if required and the procedures to be followed. The decision will depend on the scale and type of dispute. Key item to highlight is that any dispute referred to an adjudicator may be referred to arbitration if this is required by either party.     

Now when it comes to litigation, it should be set out in the beginning whether arbitration or litigation is to be used in the case of dispute and the preferred process should be stated within the contract before tender documents are sent out. Both processes give rise to binding and enforceable decisions and tend to be lengthy and expensive. Litigation cases in construction are usually heard in the Technology and Construction court whereby a judge will hear the case and issue a decision. The advantage of using arbitration over litigation is that the proceedings are kept private under arbitration and the process is chosen by both parties consensually and they are free to agree in timing, place, representation and the arbitrator. Whereas with litigation parties have to wait their turn at the High Court. 

So that concludes the full extents of the D&B Contract Form. 

So to sum up what I discussed today: