Episode 88 - RIBA Building Contracts (Part 2)

This week is Part 12of the RIBA Domestic & Concise Building Contracts covering payment and certification, practical completion, insurance, termination and dispute handling. This episode content meets PC5 - Building Procurement of the Part 3 Criteria.

Resources from today's episode:

Websites:
https://www.architecture.com/digital-practice-tools/riba-contracts/riba-domestic-building-contract

https://www.architecture.com/digital-practice-tools/riba-contracts/riba-concise-building-contract

Book:
Guide to RIBA Domestic and Concise Building Contracts 2018 by Sarah Lupton

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Transcript

Episode 88:

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 RIBA Domestic & Concise Building Contracts. Todays episode meets PC5 of the Part 3 Criteria.

Last week we covered how the contract is formed, the different roles involved in the contracts, project progress and control of the works. Today, we will cover payment and certification, practical completion, insurance, termination and dispute handling.

5. Lets start with Payment and certification:

The RIBA Building Contracts contain detailed provisions for the appropriate amounts due to the contractor, how and when these amounts are to be assessed, when they become due and the procedures for payment. Both contracts offer a choice between monthly certification based on the value of work completed, a single interim payment following practical completion, or milestone payments. In addition, the Concise contract offers the option of making an advance payment. 

So the overall Contract Price is defined in both contracts as the amount that the Client shall pay the Contractor for carrying out and completing the Works. The sum entered into the Contract Details can either be a lump sum or an amount calculated in accordance with the ‘Pricing Document’. Something to note for both occasions is that the Contract Price may increase or decrease as a result of instructions given by the CA.

Adjustments to the Contract Price may be due to:

• The Contractor proposing changes that will improve quality and/or reduce the contract price - the decision of this sits with the CA but they should of course consult with the client first before accepting any proposal and any cost saving should be divided equally between the parties
• Costs resulting from instructions regarding tests, etc. being added to the contract price - The costs would include not only those of the uncovering and the tests themselves, but also for reinstating the work, making good any damage and disruption to general progress. If these are likely to be significant, the CA could ask the contractor for an assessment of costs before issuing the instruction, in order to fully inform the client regarding the risks and benefits of the instruction prior to proceeding. And then if they wish to go ahead with it the CA will need to issue a changes to work instruction. 
• Adjustments due to change to works instructions - here the CA and Contractor should aim to agree on any Revision of Time and/or additional payment implications promptly
• An event attributable to the Client or their agents’ adding costs and expenses to the works, entitling the contractor to apply for an adjustment.

Key item to highlight is that there is no ‘fluctuations’ clauses in either of the RIBA Building Contracts therefore  if the price of materials or labour may have changed since the contractor tendered would not be reason for the contract price to change.

Once the costs have been determined, then certification for payment should be made, which under both building contracts involves either making payments monthly or through the use of an optional clause within the contract to provide milestone payments or for a single payment on practical completion. With the milestone payments this will normally be at identifiable points in the completion of the project, for example completion of: (1) foundations and groundworks, (2) ground floor slab and walls up to the damp-proof course, (3) external walls, (4) roof, etc. and linking payment to milestones introduces an incentive to the contractor to maintain steady progress throughout the project. The practical completion payment option should only be selected when the contract period is very short, and no longer than 45 days.

All procedures for payment in the Concise contract is intended to comply with those set out in the Housing Grants, Construction and Regeneration Act 1996. The Concise contract also has an optional clause for advance payment for the client to make payment in advance of the start date and also providing an option for requiring an advance payment security which would normally be in the form of a bond, and the client is not liable for any advance payment until ‘the Contractor has met the stated requirements for the advanced payment bond’.

If the optional clause is not used then the interim payments will be made monthly on the same calendar date each month not four weekly. The contractor is entitled to submit an application for payment at least 7 days before the relevant interim payment date for consideration by the CA which has then has 5 days to issue a payment certificate after the interim payment date and if the client wishes to issue a pay less notice it must be done no later than 5 days before the final date for payment stating the amount considered to be due and how it was calculated. The interim payments to be made every month should only be for work that is in accordance with the contract and shouldn’t include for materials and goods that are stored on or off site but not yet incorporated in the works. The materials become the property of the client once they have been fixed to the construction and can’t be removed by the contractor or subcontractor. The CA should only certify after having carried out an inspection to a reasonably diligent standard, and should not include any work that appears not to have been properly executed, whether or not it is about to be remedied, and even if the retention is adequate to cover any anticipated remedial work. Then the final date for payment of an interim and final payment shall be 14 days after the relevant/interim payment due date. 

If work has been included in a payment certificate which subsequently proves to be defective, the value can be omitted from the next certificate. The RIBA Building Contracts also require the CA to certify amounts of any adjustments required in accordance with the contract covering amounts due to the contractor that are not related to the value of the works, such as: 

• failure to make good defective work making the contractor responsible for all costs incurred
• Failure to take out insurance meaning the contract price will be adjusted if either party fails to take out the required insurance
• Liquidates damages if the contractor fails to complete by the relevant date for completion

In the case of the first item for defective work, the CA can simply omit the work, and for the client to deduct the net additional costs from the certified amount. For the second item, the contract specifically states that failure to take out insurance requires an adjustment to the contract price, and therefore this cost should be accounted for in the Certificate. With the third item in terms of liquidated damages, it is sensible for the client to make a deduction through a pay less notice and the CA can include it on the certificate but for clarity the CA could note on the certificate what client deductions have been made from earlier certified amounts.

If the optional clause within the Concise Contract is used for advance payment, the parties should set out a schedule of repayment instalments and the client should deduct the repayments from the payment certificates so the contract states there is no need for the deduction to be included within the certificate. 

In terms of the retention amount, this is set to 5 percent up until practical completion and 2.5 percent during the defects fixing period. The wording in the contracts doesn’t make it clear exactly what the percentage is deducted from, but normal practice would be to deduct it from the value of work properly carried out, before the other deductions are made. 

Now, what happens if the client fails to pay an amount that is due by the final date for payment, then interest will be applied to the unpaid amount the rate of which can be set by the parties, in the case, however, that no rate is stated then the rate applied is the statutory interest under the Late Payment of Commercial Debts Interest Act 1998 and these provisions apply to both the final payment certificate and the interim certificates. 

If the client still doesn’t pay the contractor by the required time limit, the contractor then is given the right to suspend performance of some or all of their obligations under the contract. If a valid pay less notice, however, has been issued then the contractor can’t suspend work and they must give the client 7 days written notice of their intention to suspend work and also state the grounds for the suspension. If payment is made within the required time limits then the contractor must resume work but they will have the right to a revision of time as well as to costs and expenses arising due to the suspension. The contractor also has the right to terminate their employment if the client doesn’t pay the amounts due and give a 14-day notice of their intention specifying the default and referring to the relevant clause within the contract.

6. Now lets move onto Practical Completion:

The decision to certify practical completion is one of the most important that the CA makes during the whole project as it triggers many contractual consequences that are important to both the client and the contractor. 

For Practical Completion to have occurred a number items need to be singed off, which includes:

• Any requirements stated in the Contract Documents to have been satisfied
• No aspect of the works or section of works to be outstanding including aspects of quality and quantity
• The works to be uncluttered and safe

And if the optional clause in the Concise contract is the selected, then the contractor is also required to provide copies of all collateral warranties/third party right agreements.

Generally, the contractor is required to notify the CA when they believe that practical completion of the works or section has been achieved and if the CA agrees then they will issue a Certificate of practical completion of the works or section. If the CA, however, doesn’t agree, they’re not required under the building contracts to inform the contractor of this, although it is sensible to do so on what is outstanding. 

The consequences of practical completion include:

• half the withheld retention being released
• liquidated damages will cease
• the defects fixing period commences 
• the contractor remedies defects notified during the defects fixing period

If the works have not reached practical completion, but the client wishes to use them, the contracts contain a provision that allows the client to request to ‘take over’ any part or parts of the works or a section of the works before the CA certifies practical completion and the contractor must grant permission but only if it doesn’t interfere with the carrying out of the works. The CA must issue a notice ‘clearly identifying the part(s) taken over and the date of takeover, as well as any outstanding work and arrangements for access by the Contractor’. And as a consequence:

• Practical Completion will be deemed to have taken place on the date of takeover for the relevant part(s)
• the Defects Fixing Period for that part(s) shall start from that date
• in respect of the Contract Price for that part of the Works, the Contractor is entitled to half the amount currently retained

If practical completion hasn’t been achieved but the client still seeks to occupy a section, a properly drafted separate agreement can be made between the client and contractor stating that the client agrees not to claim liquidated damages during the period of occupation. Practical completion obviously will not be certified, and the defects fixing period will not commence, nor will there be any release of retention money, until the work is complete. Health and safety will need to be given careful consideration, and matters of insuring the works will need to be settled with the insurers. It may be sensible to agree that if the contractor fails to complete by the agreed period then liquidated damages would begin to apply again, but possible at a reduced rate. 

In terms of the defects period, this begins at practical completion and lasts the length of time stated in the Contract Details which can be a minimum of 3 months although 12 months seems to be the most commonly used timeframe.

Then when the final payment is to be made, the contracts requires the contractor to submit their calculation, along with the relevant supporting documentation, to the contract administrator within 90 days of practical completion and then CA and the contractor are to endeavour to reach agreement on the final amount within 30 days of the submission. If they are unable to reach agreement, or the contractor fails to submit a calculation, the contract administrator is required to calculate the ‘final Contract Price’ and notify it to the contractor not later than ‘14 days after the 30 day period. The final contract price is of course subject to resolution of any defects arising during the Defects Fixing Period. Unlike in other contracts, it should be noted that no payment certificates are stated to be conclusive evidence that any matters or duties under the contract have been finally discharged, which means that even after the final payment certificate is issued, it is possible for either party to raise a claim for breach of contract.

7. That covers practical completion, now lets look at Insurance: 

The same insurance requirements are stated within both RIBA building contracts. It allocates liability for insurable risks for both the client and contractor.

The clients liability includes damage to existing structures and fixtures as well as damage to neighbouring property caused by the carrying out of the works. Now when it comes to the contractors liability, it includes loss of or damage to the works, loss of or damage to the property, loss of or damage to products and equipment, death of or bodily harm to any person working for the Contractor, arising in connection with the Works during the course of their employment, death of or bodily harm to a third party caused by the carrying out of the Works and liability for any other loss or damage that is not the liability of the Client.

Under the RIBA Building contracts there is no requirement for the contractor to indemnify the client against claims. So, if the client is sued by a party for losses caused by a matter that is the contractor’s liability, they may have to settle the claim and then pursue the contractor for compensation. The contracts state that ‘each Party is responsible for arranging insurance that is stated to be their responsibility for the amounts stated and for keeping it in place until Practical Completion. It is important to note that the parties are not required to arrange insurance to cover their liabilities and there is no link between the liability clauses and insurance clauses. So the insurance clauses outlined in the Contract Details requires the ‘type’, and ‘amount’ of insurance to be inserted, and indicates that insurance for damage to the works and to existing structures should be all risks and in joint names. It is suggested that, in addition, full information about the type of losses to be covered, exclusions, subrogation, etc. should also be given

The contractors liability for injury and death of employees is met by the employers liability insurance which is compulsory under the Employers Liability Compulsory Insurance Act 1969. The Building Contracts state that this is insurance to be taken out by the contractor and the amount of cover inserted. In terms of the contractors liability in respect of third parties is met by their public liability policy and the amount for this should also be stated in the contract. 

In terms of the works themselves, if the project is a new build, the contractor may be required to take out a joint names policy to cover any damage to the project. If the project is for existing buildings, the contractor is required to insure the works and the clients existing structure. For any joint names policy, it should be made clear that the insurer does not have a right of subrogation to recover any of the monies from either of the names parties. It is essential that all insurance matters are sorted before the project starts on site.  And if the contractor is undertaking design work, they also need to ensure that there is adequate professional indemnity insurance to cover this. 

8. Now lets move on to the next section regarding Termination:

Termination can be initiated by either party and the processes and clauses are identical in both contracts. In the case of the client, they may terminate the contractors employment if they:

• Abandon the works for a significant period of time without warning
• Fail to proceed regularly and diligently
• Fail to comply with instructions
• Breach the contract by either refusing to comply with instructions, refusing to remove or correct defective work, failing to engage sufficient labour, removal of essential plant from the site, failing to comply statutory obligations and if carrying out a criminal act or evidence of corruption. 

The process for termination follows a two-stage process, firstly the CA must issue the contractor with a notice of intention to terminate together with the reason for doing to and the second is that the CA may issue a notice of termination. Before the notice can be issued, the contractor must have failed to remedy the default within 14 days of receiving the initial notice of intention to terminate.

Now when it comes to the contractor initiating the termination, this can be done on the grounds if the client is in material breach of the contract and the contractor must then provide them with a 14-day notice of their intention to terminate. Material breach can be considered whereby the client refuses to allow access to the site or parts of the site, failure to comply with statutory obligations, failure to supply information essential for completion of the works, employing others to carry out the works or seeking to terminate the contractors employment on grounds not allowed under the contract. The process for termination follows a similar two-step process, whereby  first the contractor issues a 14-day notice then, if the situation is not resolved, they may terminate its employment by means of a further notice.

Either party can terminate the contractors employment due to insolvency, bankruptcy or frustration. In terms of the process for payment when it comes to termination, the contracts explain how the balance due is to be calculated in situations where the client has terminated the contractor’s employment, and in situations where the contractor initiated the termination. If the client terminates the contractor’s employment, the client is entitled to the costs for completing the work with another contractor, and any other reasonable costs consequent upon the termination, then the balance is not due until all the work has been completed. If the contractor initiated the termination they are entitled to all costs and losses incurred. The balance is due within 14 days of the contractor submitting an application for payment, or of the contract administrator issuing a payment certificate, whichever occurs first. 

9. So that covers termination, now lets look at the last section of the contracts, Dispute handling and Resolution:

If a dispute breaks out it should initially be handled informally, through negotiation, correspondence or, at a specially called meeting. The advance warning notices required under the contract, and any related meetings, will also help to avert or resolve many matters. In some cases there will be a need for a more formal method of dispute resolution, for such situations, the RIBA Building Contracts offer several options including: mediation, adjudication, arbitration and litigation and the parties are required to decide on the methods to be used before entering the contract and stated within the Contract Details.

In the Domestic contract, mediation, adjudication and arbitration can be selected, litigation will apply by default as the final method of dispute resolution if arbitration is not selected. In the Concise contract, adjudication is preselected and all other items also apply as the domestic contract. The parties are invited to name the arbitrator, adjudicator or mediator of their choice, but if none is named, the selection can be made by the Royal Institute of British Architects.

If mediation is selected, it would happen before any other steps are taken. The RIBA offers a mediation scheme, whereby the mediator will be appointed to work with the parties, and is normally paid on a daily rate. At the end of the mediation, if an agreement is reached, the parties will sign a binding agreement, which is enforceable in the same way that any contract between the parties would be. If the parties are still not in agreement they can ask the mediator to propose a solution, but of course they do not have to accept it.

Then we have adjudication which is a statutory right of any party to a construction contract that falls under the definition in the Housing Grants Act. In the case of the Domestic contract adjudication doesn’t apply by default so if required it should be selected in the contract details. Under the statutory Scheme, the party wishing to refer a dispute to adjudication must first give notice to the other party identifying briefly the dispute or difference, giving details of where and when it has arisen and setting out the nature of the redress sought. The appointed adjudicator must then act impartially and reach a decision within 28 days of the referral. Under the statutory Scheme the parties must meet their own costs of the adjudication, unless they have agreed that the adjudicator shall have the power to award costs, which they may only do after the dispute has arisen. The Scheme states that the adjudicator’s decision will be final and binding on the parties ‘until the dispute is finally determined by legal proceedings, by arbitration or by agreement between the parties. If either party refuses to comply with the decision, the other may seek to enforce it through the courts. 

If that fails, then arbitration can be used if selected, if arbitration is not selected, the default process for the ultimate resolution of disputes will be the courts. If it is selected, either party has the right to require that any dispute is taken to arbitration. Arbitration is a private process and flexible, as the parties can agree the timetable and venue; failing agreement, the arbitrator has authority to direct these matters. Under the Arbitration Act the arbitrator has the power to award costs, unless the parties agree otherwise.

So to sum up what I discussed today:

• Both Building Contracts contain detailed provisions regarding procedures for payment and offer a choice between monthly certification based on the value of work completed, a single interim payment following practical completion, or milestone payments
• The Concise contract offers the option of making an advance payment
• All procedures for payment in the Concise contract is intended to comply with the Housing Grants, Construction and Regeneration Act 1996.
• Practical Completion is to certified by the CA once all items required have been made available
• If the works have not reached practical completion, but the client wishes to use them, the contracts contain a provision that allows the client to request to ‘take over’ any part or parts of the works or a section of the works 
• The CA must then issue a notice ‘clearly identifying the part(s) taken over and the date of takeover, as well as any outstanding work and arrangements for access by the Contractor’
• The defects period begins at practical completion and the final payment is to be made
• The same insurance requirements are stated within both RIBA building contracts. It allocates liability for insurable risks for both the client and contractor.
• Termination can be initiated by either party and the processes and clauses are identical in both contracts.
• If a dispute arise it should initially be handled informally, through negotiation, correspondence or, at a specially called meeting. 
• In some cases there will be a need for a more formal method of dispute resolution, for such situations, the RIBA Building Contracts offer several options including: mediation, adjudication, arbitration and litigation