Construction Management and Contract Law - Essay Example

Construction Management - 'Contract Law' - I Using Standard Forms Contract Introduction There is a need to have a defined contract with the architect for the deliverables that is expected off him. In order to ensure that either of the parties works in unison and they have understood each other in complete, contracts need to be drawn. Contracts are drawn also to finalise the understanding between the parties under consideration. Every contract has its own complexity in the agenda. The contract under current consideration much more so and has its own complexities. In order to understand and to clearly ensure that either of the parties have understood the complexities involved it is essential that a contract is drawn. However, it might also be noted that most of the issues in the building industry has already been faced by many and need not be learnt by us or that there is no need to foresee the problems and produce a document catering to all the nuances of the business. It is better and easier and many times more accurate to adopt and alter the existing standard construction agreements for our own benefit, if needed. RIBA 2005 is the new set of documents that is available for construction companies and builder to make up contracts with every one of the sub contractors. 2. Construction Contracts and the jobs they cover Construction contracts are more in line with the expectations of the construction industry. Most of the standard forms cater to the complete requirement of the project. This also specifies the forms that get used during the process to ensure that the work is reported back to the main contractor in right earnest. Most of the contract agreements not just specify the terms of the agreement legally, but also specify other formats that become day-to-day reporting formats and for metrics of the project and its progress. There are formats that are looked at as 'one with the contractor's design'. The contractors' design and the execution would go together in the case of the project. This will ensure that there is a single point contract for the owner and the responsibility of execution rests with the contractor for both. This may not be comfortable in our current case since there could be changes in the design and the concepts which the owner might like to modify as the construction progresses. The basic idea of the contract is to ensure that the requirements of 'the Employer' or the client are met in full form. In order to ensure that this happens, the contract would always start with an Employer's requirements or Contractors proposals. This will have all the requirements of the employer or the owner listed in detail and specifies the base purpose of the requirement as well. This will not look at the design specifications or any other material that might be a part of the construction in it. This will only detail the requirements and the complete specifications for the project. This could be the cost of the project or the budget allocation from the client; this should also list the constraints within which the contractor is supposed to work. The limitations could be in terms of time, money, land and in any of the other parameters. The contractor needs to necessarily work within these constraints and meet the requirements that have been raised by the employer. These requirements will form the basis of the contractor's proposals. Based on the requirements document that is given by the employer or the owner, the contractor provides his contractors' proposal. This proposal in our case will be with the architect. Based on the requirements from the employer, the contractor would prepare the proposal so that it should meet the requirements espoused by the employer. However, if the contractors' proposal were to raise any issues or contradictions or clarifications, the same can be further clarified with the contractor and his exact commitment as to the execution of the contract can be laid out. This could lead to an increase in the price or might lead to an extension of time. However, this would result in better control of the employer and a commitment from the contractor on the price and on the quality of execution. These two documents together would maintain an appropriate balance between the two. In the current case, the contractor or the architect needs to execute a design obligation. The design obligation is to execute a standard of skill and care of a professional designer or architect. This obligation would, however, not include any changes that could come up in the project or design or in the requirements. The design obligation of the contractor would also mean within the scope mentioned in the initial papers and in the proposal document. Therefore, the proposal document will necessarily have provision for specifications creep. There could be minor to larger creeps which should be taken into account and the cost of such changes included in the initial document itself to the extent definable. However a creep could also cost the project cost to overshoot where in case of those projects that are 'borderline' commercially viable ones, the project might turn out to be sore. In this case, it is better to define a maximum allowable cost and a guaranteed minimum or maximum price as applicable. Under RIBA 2005, the conditions that have been inserted do allow large fluctuations in the price and the final cost of the project. It is better to band it and ensure that the budgets already drawn for investment are not overshot. This is specifically true in the case of the current project, when the architect could work out pretty elaborate and large SME Industry project or could limit it to an overall value that is in line with the needs of the owner. 3. Contractual Obligations Under contractual obligations, the employer might have to ensure that the intermediate payments as per the terms of the contract are met. The extent of work completed as per the original understanding with regard to the design has to be ensured and payments should be released according to the original contract. This will ensure that the contractor gets his dues on time and the employer also gets his work done on time. At the end of it, both the parties are kept in the light and the entire project is transparent so that neither of them loses touch with the other. The employer should have correct procedures to establish the right value of the work completed. If the correct process is not established then this might lead to making payments in line with the claims of the contractors. Therefore, it is pertinent that a clear methodology for evaluating the extent of work that has been completed is done and is in order. All the RIBA contracts comply with the appropriate laws like the Housing Grants Construction and Regeneration Act 1996, where in any breach of the contract either in terms of the payment or otherwise, the Act is very strict about such defaults. Contractual obligations are to be met with utmost commitment and in line with the needs without any default and cannot be delayed since there are a number of penalties that RIBA contracts specify in them. When the job is 'practically complete', then the rest of the payments due for the contractor is to be released allowing for retaining, normally, two and a half percent of the total order value. Apart from this, the rest of the payments are to be released. However, the phrase 'practically complete' is itself debated in a number of locations and courts. It is better to define the 'practically complete' to suit our situation for the Architect in the current contract by suitably amending it. This would ensure that either of the parties knew what is 'practically complete'. Once this is cleared the employer would know that the building or the buildings are practically complete and he can release the amount but the retained amount. Normal practice is to ensure that the retained amount is further released once the subsequent work is completed which normally is attending to any alterations in the design etc., for a period of 6 to 12 months. 4. Conclusion It is suggested that the company signs up a standard contract form adhering RIBA 2005 norms and ensure that this is fine tuned to the required specifications. The following are the required ones: a. Ensure that the appropriate RIBA contract is selected. b. Fix appropriate maximum amount for the contract and produce an overall list of constraints in addition to the requirements of the project. c. The completion of the work needs to be defined for 'practically complete' clause and the other for the total completion of the project. All this would need to a smooth signing off of the project with respect to the architect. This will also ensure that the battle of the forms is avoided. However, there is no substitute to reading the contract fully. 2. Outline Planning Permission (OPP) When you need to convert a vacant land for sale to a building plot, the Outline Planning permission is necessary. The request for Outline Planning permission has to be submitted along with the location plan showing the plot of land for sale. This should also include the outline of the building in the plot which is proposed. This is not a firm proposal and can go in for minor alterations when making the detailed plan. The submission should take place along with the location plan showing the building plot of land for sale boundaries, an outline of the house and access to the plot of land for sale. This would provide the OPP which would be helpful for the contractor to work out his construction area and thereby, the cost involved for the effort. The proposals received will be firmer and the contract with the building contractor can be firm and without any ambiguities. With the main contractor in the picture from the beginning or immediately after the outline planning approval, the thoughts of the contractor and his perspective of the work would also be known. This will help in understanding and augmenting some of the finer details of the construction work that is to come up later. Additionally, some of the reserved matters could be more comfortably settled if the contractor is also present during the initial discussions with the client. The contractor will be able to commit with clarity on the issues that he might face and there may not subsequent issues in ensuring that the work is done to the satisfaction of the agreements. Therefore, it may be viewed as once the outline planning is approved, the main contractor could be signed up. After the main contractor has been signed up, it is easier to clarify the issues that make up the rest of the work and then work out a final or a detailed approval for this purpose. However, it should also be noted that the contractor if he is involved or selected based on the Outline, it is quite possible that he might lack the strength and the technological acumen to execute the complete project when the details come up. This is a major lacuna which hurt the project or at least the project timelines. Therefore, the choice of the contractor should be carefully done at this stage keeping in mind the entire project and the special requirements of the project if any. 3. Collateral Warranties and third party rights Collateral Warranties are provided by the either of the contracting parties to a third party who is also a stakeholder in the project. The stake holder could be a financing company, could be the final buyer of the property developed or could also be tenant who finally makes use of the developed property. All of these people could take a collateral warranty from any of the contracting firms. In the current case, the warranties have to be given by the architect, who will be responsible for the design of the project, the main contractor and the numerous sub contractors that the main contractor might have. It is not normally taken from the sub contractors whose net worth might be low and who do not have a design interest in the overall project. This would mean that the collateral warranties that is given by the architect and the main contractor will flow to the client and also to the other stake holders in the project, typically, the financing company, the purchaser and the final leaser who will be leasing it out of the purchaser. This warranty will hold them immune to the design inaccuracies and any other construction errors which are not negligent work but negligent design. The collateral warranties are the ones that would enable the beneficiary as if he is the employer for the contractor and his inaccuracies in performance and the contract that the contractor has entered with the original employer will be the terms under which the warranty will be evaluated and executed. Since the entire plan is to develop the estate and sell them off to the purchaser who in turn would let the property on hire to the SMEs, there are a large number of third party end users who are involved in the project. It is important therefore, to take into consideration their requirements as well, from their perspective. As per the Privity of Contract, the contracts can only be enforced by parties to the contract and not by a third party. In this case, this could become a major handicap for the people who are the end users. The recourse would be either to invoke the law of torts which is applicable for the supply of material that forms a part of the project. Every one of the sub contractors and the main contractor will be liable up to the extent of the materials supplied by them under independent design and workmanship warranties; beyond which, they may not be susceptible. This can only be nullified by employing the right kind of Collateral Warranties that would ensure that the parties, the architect and the main contractor are liable for the optimal work performance. The contracts between the architect and the main contractor cannot be enforced by the end user of the developed properties. This cannot be enforced even under the law of torts unless there is clear evidence linking the product with the company that produces it or produced it. In this case, this is valid for the products that were supplied and if they have warranties to that extent. However, it would be safer for the end users if there are collateral warranties. Construction Management - 'Contract Law' - II 1. Using Standard Forms Contract 1. Introduction The architect has to be appropriately informed of the requirements of the client much before the work starts. As a matter of fact, the architect should be given the requirements much ahead of getting a proposal. The agreement with the architect needs to necessarily be worked out on the basis of this proposal given by the architect. In order to ensure that the contracts thus formed is standard and is balanced, it is better to adopt a standard contract which is already available with either the Royal Institute for Building Architects or with Joint Contracts Tribunal 2005 standard forms. These forms define the standard contract terms with the exception that the quantities are not specified. The client and the contractor may specify the quantities and may make alterations in the contract to suit their case. However, making change is not advisable on the contracts since many times the balance in the contracts is lost if it is altered by a specific party. In this case, since the complexities involved are high, the same can only sorted out if there is a clear contract that would ensure that there are no battle-of-forms at the end of the deal and there is no misunderstanding of any of the tenets of the contract. For this purpose, the contracts listed under the JCT 2005 may be used for this purpose. These contracts are drawn with the contracting companies in mind and they are pretty balanced between the either of the parties. 2. Standard forms and conditions The standard forms cater to the requirements of the construction industry and has been framed with them in mind. The standard contracts ensure that the forms in the process of managing the project are also defined and these come back to the client in the form of reports. This also specify the format of the reports that the contractor could make use of to indicate the status of the project back to the client. However, the metrics that are employed for defining the project specifications are to be done ahead of signing off of the project. Many of the projects are expected to be a single point contract which would involve the contractor to take care of not just the design or the architecture of the building but also the complete execution and building of the structure itself. In such cases, it is comfortable for the client since there is only one contact point and the client need not worry about multiple people to contact or sign contracts with. However, the disadvantage is that if the client has a modification to be done in the design or in the project specifications, there is no intermediate point in time which he could possibly use. Whereas, in the case where these are given to two different people, after completion of the design the client may take some time to confirm the design specifications. However, these days such conditions are also inbuilt in single point contracts as well. The employer or the client requirements have to be first produced as a requirement document. Based on these requirements, the contractor or the architect makes his proposals which is then either accepted or rejected or negotiated by the client. On his confirmation of the acceptance of the proposal or its amendment, the same is then made over to the contracts for framing the contract on the standard forms and then signed off. Before signing off, it has to be ensured that the proposal given by the contractor meets all the requirements specified by the client in his requirements document. In this document, he should also be mentioning any constraints if there are. These constraints may be something as simple as budgetary constraints to as complex as the availability of the land and the limitations thereon. It is important that all the constraints are met by the contractor within the specified time limit. Overshooting of any of these constraints would cause damages to the client. Therefore, the requirements document is the basic document for the proposal and this in turn has to be the basic document that would be taken in to consideration in framing the contract. The proposal made by the contractor is then analysed and confirmed whether all the requirements are met. If not or if there are any change in the requirements then accordingly, changes are made in the proposal and the same is then incorporated and any change in the value of the contract is evaluated. This change in the value of the contract is also caused by the change in the contract specifications. This change in the value could be small or large depending upon the nature of creep that has occurred in the project specifications. Most of the contract documents provide for a maximum value of the contract with in which the contractor is expected to contain the cost of the project. This is built into the project and the same is ensured in the contract terms. In the current case it becomes more relevant to ensure that the contract has got a maximum value up to which the contract has to be limited and beyond this, it may not be allowed. The contractor may be limited to move or extend the budget beyond this limit. 3. Execution of The Contract The employer or the client has to ensure that the work is progressing in line with the plans drawn out for the design phase of the project. In addition to this, he needs to ensure that the contractor completes the jobs specified on time. The evaluation of the completion of the project on time would involve both execution of the project within the specified time period and with the right kind of quality. The deliverable quality is pre-defined and the contract should specify the metrics for the quality and the quantity checking of the project at various stages of the contractor's work. In this case, every deliverable of the architect should be monitored and there should be pre-defined measuring methods available and defined in order to ensure that the job is done to the utmost satisfaction of the client. The process of metrics should be established before the job commences and specified ideally in the contract itself so that either of the parties are clear about the conditions stipulated for completion of work. The metrics should be clearly defined, understood and co-signed by either of the parties to the contract. Apart from this, the contractor should also ensure that the said metrics and the project execution is in line with the time and quality specified. In the process of execution of the contract, it is also important that the client ensures that all payments are made in line with the commitments made in the contract. Most often the intermediate payments are committed and these are made in conjunction with the completion status of every one of the work. The work therefore, if it is complete as per the stipulated conditions, it is essential that the payments are made in line with the contract conditions. Failing which, the rules of the law are firm and strict in the payment conditions and delays in payments are penalised. At the end of the contract, most of the contracts provide for a complete payment with holding a certain amount towards retention. This money normally is about two and a half percent of the contract value and the amount is then made out to them once the retention period is complete. This varies from contract to contract and may be about 6 to 12 months in every one of the case. However, it might be noted that the complete payment sans the retention money is paid once the contract is 'practically complete'. The situation of 'practically complete' work should also be defined prior to signing of the contract. Since most of the people fail to define this, it becomes a problem in identifying the payment dates for this purpose. It has to be clearly mentioned as to which forms the practically complete job and what are the left out jobs which can be done in the remaining 6 to 12 months under the warranty. 4. Conclusion The client has to sign a standard JCT 2005 contract which is also in accordance with the norms of RIBA. This may be fine tuned as little as possible to suit our current situation and project. The following points may be considered before signing of the contract: a. Select the appropriate JCT 2005 contract that fits into our current requirement for this project. b. The budget amount for the contract may be fixed and the same may be inlaid in the contract to ensure that the budget is not crossed. Similarly, as a design specification the budget for the entire project may also be fixed and the same may be implemented. c. The completion metrics and the intermediate reporting metrics should both be defined and the same should be adopted while reporting. d. The project completion should be defined and what is the required state should be clear before signing off. This would ensure that the battle of forms does not occur. 2. Outline Planning Permission (OPP) The outline planning permission is an important first step when the vacant land for sale is converted in to a building plot. The Outline Planning Permission is needed if the building has to be constructed in the said location. The request for Outline Planning Permission has to be submitted along with the location plan of the plot of land for sale. This will help in identifying the plot that is getting converted and also help in finding out the amount of free space in the land and the extent to which it is occupied. This would ensure that the right kind of information is passed down to the people for making their decisions. This outline is not a firm proposal and could go in for changes when a detailed plan is submitted for the purpose. The plan should also indicate the access to the plot along with the other details mentioned earlier. With the OPP, the main contractor may be requested to work out his needs and the cost of the effort involved in the construction exercise. This will ensure that the proposals received from contractors are firmer and will include all the requirements that are there in the minds of the client and the architect. Involvement of the main contractor from the very beginning of the project, it is easier to manage and to understand the requirements of the contractor from his view point and to address them at the earliest opportunity. This will also ensure that the project will also have inputs from the contractors and from the architects to ensure that all the issues are taken care of during the design phase itself, there by avoiding costly errors and redo-s later on. There is also a major disadvantage since the complete design and the other features of the project are not fully decided at this stage of work. Therefore, it would become highly impossible for the main contractor to judge his own suitability for the project. Once the complete details of the project are known, it is possible that the main contractor might find himself not in a situation that could possibly cause envy. He might also become unsuitable and a new contractor might have to be chosen if he drops out. 3. Collateral Warranties and third party rights In the project if there are multiple stake holders, then the concept of collateral warranties and third party rights could become a major consideration for the buyer. Collateral warranties are provided by either of the contracting parties to a third party who is also a stake holder in the project under consideration. The stake holder could be any specific company or corporate body who might have an interest in the entire project. AS per the privity of contract, it is true that only two parties who are parties to the contract can come up and ask for a compensation for his work that has been done for so long. In the current case, the warranties have to be given by the architect, who will be responsible for the design of the project, the main contractor and the numerous sub contractors that the main contractor might have. It is not normally taken from the sub contractors whose net worth might be low and who do not have a design interest in the overall project. This would mean that the collateral warranties that is given by the architect and the main contractor will flow to the client and also to the other stake holders in the project, typically, the financing company, the purchaser and the final leaser who will be leasing it out of the purchaser. This warranty will hold them immune to the design inaccuracies and any other construction errors which are not negligent work but negligent design. The collateral warranties are the ones that would enable the beneficiary as if he is the employer for the contractor and his inaccuracies in performance and the contract that the contractor has entered with the original employer will be the terms under which the warranty will be evaluated and executed. Since the entire plan is to develop the estate and sell them off to the purchaser who in turn would hiring out the property to the SMEs, there are a large number of third party end users who are involved in the project. It is important therefore, to take into consideration their requirements as well, from their perspective. As per the Privity of Contract, the contracts can only be enforced by parties to the contract and not by a third party. In this case, this could become a major handicap for the people who are the end users. The recourse would be either to invoke the law of torts which is applicable for the supply of material that forms a part of the project. Every one of the sub contractors and the main contractor will be liable up to the extent of the materials supplied by them under independent design and workmanship warranties; beyond which, they may not be susceptible. This can only be nullified by employing the right kind of Collateral Warranties that would ensure that the parties, the architect and the main contractor are liable for the optimal work performance. The contracts between the architect and the main contractor cannot be enforced by the end user of the developed properties. This cannot be enforced even under the law of torts unless there is clear evidence linking the product with the company that produces it or produced it. In this case, this is valid for the products that were supplied and if they have warranties to that extent. However, it would be safer for the end users if there are collateral warranties. Read More