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Know your construction documents – a development team’s guide

3 October 2018 • Mike Hall

Busy development officers will often be presented with, or be expected to be familiar with, a raft of “standard” construction documents, either bespoke to your organisation or offered up by the contractor or employers agent. Either way, you should know what they are, when and why they are required, and what to watch out for.

It’s very unlikely that you will be asked to negotiate these documents, but having a working knowledge of the issues and any traps for the unwary is essential. Below is a brief guide to some of the more common documents and some key things to be mindful of.

JCT Design & Build Contact

The Joint Contractors Tribunal - or JCT - publish a suit of contracts for use on construction projects including new build and refurbishments.

The JCT Design and Build Contract is designed for construction projects where the contractor carries out both the design and the construction work. The contractor is responsible for completing the design, as well as carrying out the works, and the employer must provide detailed documents to outline their requirements.

This is an industry standard document, so, in theory, should be happily pulled off the shelf every time without requiring amendment. This is unfortunately not the case, as each party usually looks to rebalance the risk in the contract which, if un-amended, places the risk squarely on the shoulders of the employer. Your organisation should have a full set of legally drafted standard amendments to counter this.

Professional Appointments

Common examples of professional consultants would be architects, environmental consultants, employers agents and structural engineers, and a typical Professional Appointment consists of a set of terms and conditions setting out the scope of the services to be provided and the obligations of the parties.

The duty of care owed by a consultant to the employer is key, and professional appointments will set the standard required from the consultant. The basic standard of care is that the consultant will use 'reasonable skill and care' in performing its services. This however is not considered to be the 'highest possible' degree of skill and care, as the consultant will be judged against an average consultant in the same profession. It is usual to look to strengthen the standard of care by, for example, referring to a consultant having the appropriate qualifications for a particular industry and/or having experience on projects of a similar scale and scope to the project in question, ensuring the consultant is tied to quantifiable standards.

To illustrate, if an architect who designs a hospital that can’t ultimately be used as a hospital once constructed will not be held liable if they were only contractually obliged to use "reasonable skill and care" (and can prove they did so), regardless of the hospital not being fit for purpose. However if the design standard they were held to is "fitness for purpose", then even if the architect can prove that they used reasonable skill and care in its design, they will be liable for the hospital not being fit for purpose.

Having a standard form of appointment will make the process of engaging a consultant much easier as it removes the need to negotiate the terms of the appointment, therefore simplifying the process.

Professional indemnity insurance

PI insurance insures the consultant against claims for professional negligence, such as design defects, and is often required by professional bodies as a condition of membership. Things to watch out for in terms of PI insurance include:

  • the level of cover required and the excess (deductible)
  • whether cover relates to an (annual) aggregate amount or to each individual claim
  • whether a particular or 'reputable' insurer is required. Appointments usually contain obligations relating to insurers with a good reputation and those based in a particular location, such as the UK/EU
  • exclusions from the policy, such as claims relating to asbestos
  • an obligation to maintain insurance to cover the period when claims relating to the appointment can be made (this is generally tied in to six or twelve years after practical completion)

Collateral Warranties

A collateral warranty is a contract under which a construction professional, contractor or sub-contractor promises to a third party that it has complied with the requirements of its professional appointment, contract or sub-contract. A beneficiary can be the employer a funder or a tenant. Under English law a person who is not a party to a contract cannot enforce the obligations under that contract unless specifically afforded that right. This is where the collateral warranty comes in.

The sub-contractor provides the beneficiary with a collateral warranty, producing a direct contractual relationship, or link, between the beneficiary and the sub-contractor. The JCT suite of contracts has a set of standard form warranties and these may or may not be appropriate to each particular project. More than likely your organisation will have its preferred form of warranty, but the subcontractor or its insurers may be reluctant to accept these as they will want to try and limit their liability under the collateral warranty.

Novation

This is a means of transferring a party’s rights and obligations under a three-way contract to a third party. This extinguishes the existing rights under the existing professional appointment and replaces it with another, under which a third party takes up the rights and obligations duplicating those of one of the parties of the original professional appointment. It is important to distinguish between novation, which is the transfer of both the benefit and the burden under a contract, whereas assignment is the transfer of the benefit only.

Sub-Contract

From a contractor’s point of view it is important that the terms in the main building contract are reflected in any sub-contract. This will allow for a remedy by the contractor to the sub-contractor should the employer claim for breach, as it will avoid any gaps that could result in liability sitting solely with the contractor.

Contractors will tend to use their standard form of sub-contract. The employer is unlikely to have any input into this arrangement, other than approval of the collateral warranties being offered by the sub-contractor and possibly being able to choose from a list of approved sub-contractor provided by the contractor.

Parent Company Guarantee (PCG)

A PCG is a form of security to protect the employer in the event of default on a contract by a contractor that is controlled by a parent company, usually caused by the insolvency of the contractor. The parent company gives a guarantee to the employer that in the event of breach, the parent company will be liable to the client for any obligations the contractor has under the contract and to remedy any breach.

PCGs are useful where the contractor is a small subsidiary of a larger more stable parent company. However it is important to be aware of the risk that the contractor may be insolvent because the parent company is insolvent – employers should undertake proper due diligence against the contractor and/or parent company or group.

Time well spent

Construction documents are complex, and getting them wrong can be very costly to your organisation. Getting to know your way around them can seem daunting, but it will be time well spent in the long run.

 

Croftons’ team includes experts in development and construction with years of experience in the housing sector. If you would like any further advice in relations to common construction documents please get in touch with Mike Hall on 0161 214 6181 / mike.hall@croftons.co.uk


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