New year, new contracts

The JCT has now published 2016 editions of its suite of contracts, including the Minor Works, Intermediate (with and without design), Design and Build and Standard Building Contracts and all associated sub-contracts and collateral warranties. Employers are hesitant to adopt JCT 2016 as its amended provisions are yet to be ‘tested’. But wouldn’t it be great to be ‘industry-leaders’ and take advantage of some key changes introduced in the JCT 2016 suite?

The changes go much further than minor tweaking. Employers regularly ask us to draft amendments to the JCT forms to change the risk profile. We have overhauled our standard amendments to the JCT suite to reflect the revised contracts and ensure you can be comfortable using these going forward.

In addition to making changes to generally reflect updated legislation (e.g. CDM Regulations 2015) and case law, the JCT drafting panel has suggested 3 main aims behind the amendments are to:

1. consolidate provisions to achieve a more ‘user-friendly’, ‘stream-lined’ approach;
2. properly integrate public-sector provisions; and
3. bring contracts closer to market practice.

Some of the key changes introduced include:

A) Payment

At a first glance, it looks like Section 4 has been completely re-written. The majority of amendments are:

• for simplification purposes (for example, the Contract Sum adjustment mechanism and the notice requirements under the Housing Grants, Construction and Regeneration Act 1996);
• to change the ‘logic’ of the contract to flow from interim payment to final account, which reflects the way industry works; and
• to incorporate payment provisions which reflect the government’s Fair Payment Charter.

The four most important changes to payment are:

1. The “Interim Valuation Date”:

 Change: The concept of the “Common Valuation Date” has been incorporated, having been taken from the fair payment principles within the JCT 2011 Supplement. The Interim Valuation Date now applies for both Alternative A and Alternative B methods of payment.

The below diagram illustrates how this works within the JCT Design and Build Contract 2016 payment regime:

Practical point: This date applies throughout the contractual chain, improving the speed at which sub-contractors and sub-sub-contractors get paid (if they are also engaged under the relevant JCT sub-contract). The amendments are also designed to prevent cases where there is a schedule of payment dates and project works over-run the schedule.

2. Monthly payment cycle from practical completion to date of final payment:

Change: Previously, the ‘due date’ provisions between practical completion and the date of final payment allowed 2 months for the Employer to validate their accounts. This has been amended so the interim payment due date provisions (allowing monthly payment cycles) will continue after practical completion and up to the date of final payment.

Practical point:  The aim behind this is to encourage good project account management both before and after practical completion. It is important that whoever is dealing with final accounts knows the dates they are working towards under the revised final account payment timetable.

3. Loss and Expense:

Change: There is a new procedure for promptly assessing ‘loss and expense’. One of the most significant changes is that the Employer is now required to assess claims for loss and expense within 28 days of receipt of the Contractor’s initial assessments of its entitlement, and within 14 days from any subsequent update to the assessment.

Practical point: This places a clear focus on proactive management of loss and expense claims. The intent is to avoid such claims being raised at the end of the project and, generally, speed up the process. Employers will need to consider whether these time-periods can be achieved on a practical, administrative level (and Contract Administrators will need to be organised and know about timeframes) and whether there may be a need for adjustments to cover prompt loss and expense claims (e.g. contingency fund). Contractors should consider what happens if an Employer does not adhere to these timescales.

4. Fluctuations:

Change: Fluctuations Options B and C are no longer included in the JCT contract documents, although they are still available on the JCT website if parties wish to incorporate them.

Practical point:  Arguably, this makes the JCT less ‘user-friendly’. However, it reflects market practice that fluctuations are often entirely deleted from contracts (because low inflation has meant costs have remained either stable or subject to relatively predictable increases). Also, in practice, in rare circumstances where Fluctuations is used, Option A is applied. We suspect the decision to remove Options B and C took place before the Brexit vote, as perhaps the unpredictability of Brexit consequences will see the use of fluctuations re-emerge.

B) Performance bonds and parent company guarantees

Change: The JCT suite now includes operative provisions whereby the Contractor is obliged to provide a performance bond and/or parent company guarantee. However, the parties will need to agree the relevant form of security, and the contract assumes these are agreed prior to the contract being entered into.

Practical point:  Whilst this reflects market practice for security, it does not allow the Employer to withhold payment upon failure by the Contractor to provide the security. Therefore, this will continue to form part of our JCT amendments.

C) Collateral warranties and third party rights

The three key changes relating to collateral warranties and third party rights are:

1. Part 2 of the JCT Contract Particulars:

Change: This has been removed. Instead, the Employer must set out its requirements for collateral warranties and third party rights in a “Rights Particulars” document which must be attached to the Contract. JCT have published a “Model Form of Rights Particulars” which can be downloaded from their website.

Practical point: In our view this makes the contract much less ‘user-friendly’. There is a real risk that Employers (who do not seek legal advice) completely omit incorporation of this part of the contract or do not incorporate it correctly. The consequences of this risk could be, at worst, Employers and third parties do not get their collateral warranties and/or third party rights.

2. Sub-Contractor’s Third Party Rights:

Change: Sub-contractors can now be required to grant third party rights to purchasers/tenants/funders as an alternative to collateral warranties.

Practical point: This does effectively reduce the number of amendments required to the JCT form and reduces the risk of third party rights not being properly incorporated into the sub-contracts.

3. Net Contribution clauses within Third Party Rights Schedule (JCT design and build):

Change: Previously, the JCT Design and Build 2011’s Third Party Rights Schedule did not include a net contribution clause, which made sense given that in a  ‘design and build’ context the contractor is meant to have overarching responsibility for the design and construction of the works. However, the JCT drafting panel acknowledged that this was not consistent with the current standard form drafting whereby the Employer remains responsible for the Employer’s Requirements. They have now incorporated a standard net contribution clause.

Practical point: Net contribution clauses remain strongly resisted by beneficiaries of collateral warranties/third party rights (particularly properly advised funders) and we expect  this new clause will simply be deleted in its entirety to reflect this industry-standard position.

D) Insurance

 Change: Insurance Option C has been amended to allow parties to put in place a “C.1 Replacement Schedule” to suit their specific insurance requirements.

 Practical point: It is a well-known problem in the construction industry that where, for example, a tenant is carrying out works to an existing property which is insured by the landlord, compliance with JCT 2011’s Insurance Option C arrangements (where the Employer must obtain ‘all risks’ insurance of the existing structure in the joint names of the employer and contractor) can be difficult. This will be a welcomed amendment for such circumstances, as parties can amend the contract to provide for alternative insurance arrangements, introducing greater flexibility. When parties use Insurance Option C we strongly advise specialist insurance advice is obtained.

E) Business information modelling (BIM)

Change: The JCT introduces specific contract options for BIM use on construction projects. The Contractor has a contractual obligation to comply with a BIM Protocol which constitutes a “Contract Document”. Note, the Employer will need to select a BIM Protocol.

Practical Point: Incorporation of BIM ties in with the JCT drafting panel’s intention to make the contract more ‘public-sector’ friendly, particularly because from April 2016 all centrally procured UK Government projects are to be procured with BIM Level 2. Issues relating to priority should be considered when the operative BIM provisions are selected. For example, if there is a BIM Protocol, should the Design Submission Procedure in the protocol or in the other Contract Documents take priority? Also, Employers will need to check carefully whether the BIM Protocol obliges them to provide the Contractor information within set time-frames, as such compliance, is now a contractual requirement. Generally, JCT has taken a very ‘light-touch’ approach to incorporating BIM and the contract will need to be read with the BIM Protocol to ensure any conflicts/practical issues are addressed.

F) Public-sector

 Change: The JCT 2016 contracts incorporate the provisions of the JCT 2011 Supplement for the public sector. Additionally, it includes:

• updates to reflect the Public Contract Regulations 2015 (e.g. amendments to termination and payment to ensure public contracts comply with the regulations); and
• a new Supplemental Provision relating to “Transparency” for the public-sector bodies to whom the provisions of the Freedom of Information Act 2000 apply.

Practical point: This will be welcomed by public bodies (e.g. Local Authorities and Registered Providers of Social Housing) utilising the JCT contract but also contractors and sub-contractors acting on public sector projects. No doubt JCT hope their amendments will make the JCT series a more competitive procurement option for public sector projects compared to the UK Government endorsed NEC suite of contracts.

Conclusion

Whilst there are a number of changes in the JCT 2016 suite, it is important to note that the majority of updates do not alter the risk position between the Employer and Contractor. Employers should continue to seek a series of amendments to the JCT forms, as they have always done.

There are still many basic underlying industry-standard requirements of the Employer that are not adequately dealt with such as:

• no option for the Contractor to undertake a true ‘single-point-of-responsibility’ in the JCT D&B 2016 (i.e. in its un-amended form, the Employer remains responsible for any designs contained in the ERs);
• copyright being subject to payment of fees;
• no ability for the Employer to freely assign without Contractor consent;
• no robust provisions relating to specification and use of deleterious materials;
• no provision for works and services carried out before the contract date to form part of and be governed by the contract; and
• no Contractor obligation to comply with third party agreements.

All construction parties will need to familiarise themselves with the procedural changes in the JCT 2016 series, particularly in respect of the amended payment regimes and insurance arrangements. We also recommend that all parties seek training in their use of the new suite of contracts.

For further information and guidance, please contact our Construction team.

Posted: 12 January 2017