COMPARING AND EVALUATING THE CONTRACTUAL PROVISIONS OF
TWO ANALOGOUS CONSTRUCTION CONTRACTS FOR THE
MANAGEMENT OF COST.
Tim McLernon1 and Sharon McClements1.
1
School of the Built Environment, University of Ulster, Jordanstown Campus, Newtownabbey, Co.
Antrim, BT37 0QB, UK
ABSTRACT
The Royal Institution of Chartered Surveyors, on its website, defines cost management
as being ‘concerned with delivering best value in building and infrastructure’. The
contract used between the parties for the construction project has a significant influence
on the management techniques and procedures used for post-contract cost control and
management. Standard forms of construction contract dictate in detail, expressly and
impliedly, the management techniques and procedures to be used for post-contract cost
control and management. The aims of this study are to compare the cost management
provisions of comparable JCT and NEC3 contracts and to evaluate the different
contributions made by the two construction contracts to the management of cost of a
construction project. This study will use a desk-based approach to analyse the respective
provisions of the two contracts to be compared and evaluated. In so doing, the study
will take account of case law that impacts on the legal matters associated with the
management of cost on construction projects. The findings will offer a framework that
may be used for the evaluation and comparison of the provisions for the management
of cost amongst construction contracts and which may be used for practical evaluation
and comparison of the same.
Keywords: Evaluation, comparison, cost provisions, management, construction
contracts.
INTRODUCTION
Whilst freedom to contract on whatever terms are most favourable to the contracting
parties, the nature of construction lends itself to contractual arrangements that assure
effective and efficient commercial administrative management. Standardisation of
arrangements, whilst impinging on the concept of freedom of contract, continues to be
an accepted method of contracting across the construction industry. Two consequences
of using standardised arrangements are that procedures follow the standard patterns
dictated by the contractual arrangement and terminology is owned by that contractual
arrangement. Having different contractual arrangements may create some
misunderstandings or misinterpretations associated with construction management
practices. For example, the term ‘final account’ is commonly used across the UK
construction industry to describe the final balance ascertained as being owed to, whilst
‘Variations’, has different connotations across the industry. The contract is the key
management tool; construction managers should be fully familiar with the contractual
language and procedures in order to manage effectively and to avoid disputes. Research
conducted by EC Harris found the two top causes of dispute in UK construction projects
to be: 1. Failure to properly administer the contract; and 2. Failure to understand and /
or comply with its contractual obligations. Standard form contracts tend to mitigate
disputes and misunderstandings although it could be argued that, in circumstances
where one party, normally the Employer, dictates the use of a particular standard form
contract, the contra proferentem rule would apply. This rule states, broadly, that where
1
there is doubt about the meaning of a word or a phrase in a contract, the word or phrases
will be construed against the person who put them forward. So, for example: Peak
Construction (Liverpool) Ltd v McKinney Foundations Ltd (1970) 1 B.L.R. 111
considered an issue involving unclear contract provisions for liquidated damages and
extension of time. Having disposed of the issue, the Court gave an observation. Salmon
LJ said (at page 121):
The liquidated damages and extension of time clauses in printed forms of
contract must be construed strictly contra proferentem. If the employer wishes
to recover liquidated damages for failure by the contractors to complete on time
in spite of the fact that some of the delay is due to the employers' own fault or
breach of contract, then the extension of time clause should provide, expressly
or by necessary inference, for an extension on account of such fault or breach on
the part of the employer. I am unable to spell any such provision out of clause
23 of the contract in the present case…The problem is solved by a suitable
worded extension of time clause.
It should be said that authorities on construction law such as Keating (2013) and Hudson
(2014) place doubt on this argument. The two tested, proven and most significantly
promoted contractual arrangements used in the UK construction industry derive from
the Joint Contracts Tribunal (JCT) suite of contracts, and the New Engineering Contract
(NEC3) suite of contracts.
THE STUDY
This paper compares and evaluates provisions affecting cost management in these two
standard form contracts: the JCT Standard Building Contract With Quantities and the
New Engineering Contract (NEC3) Engineering and Construction Contract, Option B:
Priced contract with bill of quantities. The paper begins by examining the provisions in
legislation relating to payment. It continues with an examination of the provisions of the
two contracts that relate to payment and concludes with a commentary. The aims of this
study are to theoretically compare, contrast and make commentary on the different
contributions made by two selected, main-line construction contracts to the management
of cost of a construction project in relation to payment with a view to opening a
conversation on the contractual management of cost. This study used a desk-based
approach to analyse the respective provisions of the two contracts to be compared and
evaluated. In so doing, the study took account of decided case law and legislation that
impacts on the legal matters associated with the management of cost on construction
projects.
THE LEGISLATION
The Housing Grants, Construction and Regeneration Act 1996 (HGCRA), commonly
referred to as the Construction Act includes provisions to ensure that contractual
payments in construction contracts are made promptly and on time throughout the
supply chain. These provisions were amended by Part 8 of the Local Democracy,
Economic Development and Construction Act 2009. The Act (2009) deals with making
periodic payments, making the date a payment becomes due dependent upon the giving
of a notice by the payer of the sum the payer proposes to pay. It also amends the original
provisions of the HGCRA that provided that a contractor had a right to stop working
when the contractor has not been paid. These revised provisions are designed to ensure
that payments are made promptly and on time throughout the supply chain.
THE JCT STANDARD BUILDING CONTRACT (SBC 2011)
This title actually refers to three different contracts that can be used by an Employer
(client) and a Contractor, each designed for a traditional procurement route and lump
sum pricing. This study will use one of these, viz., the JCT Standard Building Contract
With Quantities (SBC/Q 2011) for the comparison and evaluation.
Terms and provisions for the management of cost.
Article 2 of SBC/Q2011 sets out the contract sum, normally the accepted tender, with
the provision that “[T]he Employer shall pay the Contractor at the times and in the
manner specified in the Conditions the VAT-exclusive sum of (the Contract Sum, £x)
or such other sum as shall become payable under this contract. The Bill of Quantities is
the basis on which the accepted tender, which is the Contract Sum, was computed and
is the key cost management tool. This Contract Sum may be adjusted in accordance with
express provisions of the contract as provided in Clause 4.2; the items included in
adjustments are expressly laid out in Clause 4.3. In order to assist cash flow and good
cost management, Clause 4.4 provides that as soon as the amount of an adjustment is
ascertained, in whole or in part, the ascertained amount shall be taken into account in
the next Interim Certificate. Clause 4.5 provides a rigorous timeframe and process for
the final adjustment of the Contract Sum with the aim of preventing delays in final
payment and resulting disputes. The consequence of the final adjustment of the Contract
Sum is that the finally paid amount culminating in the Final Certificate is never the same
as the Contract Sum. The major adjustments to the Contract Sum are by way of
Variations, Fluctuations and Loss and Expense claims. The term ‘Variation’, with an
uppercase ‘V’ has a particular contractual meaning which includes the alteration or
modification of the design, quality or quantity of the Works … (Clause 5.1.1). It also
means the imposition by the Employer of any obligations or restrictions in regard to: …
access to the site or use of any specific parts of the site, limitations of working space,
limitations of working hours, or the execution or completion of the work in any specific
order. This contract is a fluctuating price contract which means that the Contract Sum
represents costs at the time of pricing and the effects of inflation and deflation on rates
and prices are accounted for by adjusting the Contract Sum accordingly. There are three
options for fluctuations: options A, B, and C. Options B and C both provide for price
fluctuations in labour and materials cost and tax fluctuations but differ in the method of
calculation. Option A, however, provides only for contribution, levy and tax
fluctuations; a relatively minor cost. Consequently a contract incorporating Option A is,
arguably, a firm price contract. Clause 4.23 states that if in the execution of this contract
the Contractor incurs or is likely to incur direct loss and/or expense for which he would
not be reimbursed by a payment under any other provisions in these conditions due to
deferment of giving possession of the site … or because the regular progress of the
Works or any part of them has been or is likely to be materially affected by any of five
Relevant Matters which are specified in Clause 4.24, the Contractor may make an
application to be paid that loss and expense. A strict timeframe and procedures for
making the application are laid out. Complying with these provisions by the Contractor
is probably condition precedent to the Contractor’s claim being valid. Strict adherence
by all parties to the procedures and timeframes is vital for effective cost management.
Clause 2.9.1 obliges the Contractor to provide the CA with his master programme.
However, clause 2.9.3 provides that this programme shall not impose any obligation
beyond those imposed by the Contract Documents. The programme in the SBC/Q11
therefore has less impact on managing costs than that of the ECCB.
Interim Payments
The provisions for payment follow and comply with the legislation. The first Due Date
for interim payments is specified in the Contract Particulars and payments thereafter are
on the same date each month or the nearest business day in that month up to either the
date of practical completion or the specified date one month thereafter (Clause 4.9.1).
If no Due Date is stated, the first due date is deemed to be one month after the date of
possession. The Contract Administrator (CA) takes the dominant role in the payment
procedure. Clause 4.10.1 obliges the CA not later than 5 days after each due date to
issue an Interim Certificate stating the sum that he considers to be or have been due at
the due date to the Contractor in respect of the interim payment. Interim valuations must
be made by the Quantity Surveyor (QS) whenever the CA considers them necessary for
ascertaining the amount to be stated as due in an Interim Certificate (Clause 4.10.2).
The final date for payment of an interim payment shall be 14 days from its due date
(Clause 4.12.2). If the Employer fails to pay the Contractor the sum payable in
accordance with clause 4.12 … by the final date for payment and the failure continues
for 7 days after the Contractor has given notice to the Employer with a copy to the CA
of his intention to suspend the performance of his obligations under the contract … the
Contractor may suspend performance … until payment is made in full (Clause 4.14.1).
This contract recognises the practice of Contractors preparing the interim valuation and
Clause 4.11.1 makes provision for the Contractor to make an application (an Interim
Application) to the QS stating the sum that the Contractor considers will become due to
him at the relevant due date. These provisions cover ‘normal’ procedures. Clause 4.11.2
makes provision for circumstances where an Interim Certificate is not issued in
accordance with these procedures. Clause 4.12 makes extensive provision for ensuring
that the Contractor receives the amount due within a strict timescale. Clause 4.13
ensures through its provisions that if less than the amount due is to be paid that a Pay
Less Notice is issued appropriately. The procedures laid down in respect of interim
payments are detailed with specific rights and duties assigned to the parties. It is
probably the case that these procedures are conditions-precedent to the intended
outcome and therefore it is vitally important that they are followed to ensure smooth
cost management and the avoidance of disputes. The case of Sutcliffe v Thackrah [1974]
AC 727 additionally established a liability in Tort, deciding that a Contract
Administrator owes a duty of care to the Employer and the Contractor in the
performance of all duties, particularly, certification. Retention continues to be a
controversial topic in the construction industry. Retention is a contractual provision that
allows the Employer to retain a percentage of the amount due to the Contractor in
interim certificates. The purpose of retention is to provide a fund for the Employer to
draw upon for the rectification of any defects. The default retention percentage is 3
percent unless a different rate is stated. The SBC/Q also allows for no retention. The
retention is taken on interim payments up to the date of issue of the Practical Completion
Certificate. At this point one half of any retention fund is released to the Contractor. The
remaining half of the retention fund is released to the Contractor upon the issue of the
Certificate of Making Good. Once more there is a strict contractual timeframe and
process.
THE NEW ENGINEERING AND CONSTRUCTION CONTRACT (NEC3)
The NBS National Construction and Law survey (2013) found that despite the
dominance of the JCT suite of standard building contracts, the NEC3 is the second most
used contract in the UK construction industry. The results from the survey identified
an increase in the adoption of the NEC3, with usage increasing from 16% (2011) to 22%
(2012). The survey also found that users of the NEC used the contract mostly ‘for
medium to large projects’. It now seems certain that the simple and collaborative
management structure of the NEC3 has become successful. This paper proposes to
examine the cost management provisions within this contract which has created new
ways to manage costs in construction contracts. The two agreeing parties (Employer and
Contractor), are facilitated in their contract duties by a project manager and supervisor.
The project manager’s duties include ‘instructing, certifying, submitting, proposing,
recording, accepting, notifying, and replying’, while the role of the supervisor resides
in ‘testing and defects’ (NEC3). To enhance the parties’ ability to adhere to their duty
to collaborate the NEC3 clauses are structured around three guiding principles of ‘(1)
flexibility, (2) clarity and simplicity and (3) stimulus to good management’, (NEC3). In
relation to the management of costs the guiding principles are enabled by six main
pricing options. This study will use the NEC3 Engineering and Construction Contract
(ECC) with Option B, Priced Contract with Bill of Quantities, using the abbreviation
ECCB for the comparison and evaluation. The ECCB is a remeasurable contract and
thus lacks cost certainty insofar as the ‘accuracy of billed quantities and the
consequences of re-measure’ (Broome, 2012) is a financial risk largely borne by the
employer.
Terms and provisions for the management of cost.
The management of costs in the ECCB is made up from a combination of core clauses,
core clauses relevant for the selected main option and any applicable secondary clause
options. The management of cost in the ECCB is provided by detailed procedures and
defined timescales. The procedures are contained in the core clauses (50 - payment)
and (60 – compensation events). The ECCB is further enhanced with secondary optional
clauses that incentives the contractor for exceptional performance, facilitates advance
mobilisation payments and includes provisions for project bank accounts but all of these
optional clauses are at the employers discretion. In the contract data (part one) the
Employer further provides key information pertaining to the management of costs in
respect to; the currency of the contract, the assessment interval, the interest rate and the
payment period.
Payment
The payment period and procedures, (both interim and final), differ for each of the
options. In the ECCB the relevant core clauses are clause 11.2(21) bill of quantities;
clause 11.2(22); definition of defined cost; clause 11.2(28); definition of the price for
work done to date; clause 11.2(31); definition of the prices. The ECCB states that
interim payments relate to the quantities of completed work at bill of quantity rates and
proportions of any lump sums; whilst the final amount is considered the remeasured
value of the work in accordance with the bill of quantities. The defined costs (clause
11.2(28) relate to additional costs and are determined by ‘the cost of components in the
shorter schedule of cost components, whether subcontracted or not; excluding the cost
of preparing quotations for compensation event’. It is evident that the contractor’s
recovery for payment is not dependent on the subcontractors request for payment but on
the cost of the works as allocated in the cost component. Controversially there is no
recovery for payment pertaining to the cost of preparing a quotation, often resulting
from a change to the scope of the works. The cost of preparing a quotation is considered
further in this paper, in managing additional costs. The payment (Clause. 50.2) includes
as standard 'work done to date, plus other amounts due to the contract, less amount paid
or to be retained’. This provision is further enhanced in clause 11.2(28), that states that
the work is to be ‘completed without defects’. Specifically core clause 50 and additional
secondary optional clauses provide for a number of payment methods other than
monthly valuation i.e. milestones, activity schedules or payment schedules, thus
providing the employer and the contractor with flexible payment procedure for
managing costs. Despite differences in payment processes of the six main options, core
clause 50, provides common and fundamental payment characteristics which include
that assessments of amounts due are made at not more than five week intervals (contract
data), certification is within one week of each assessment date (clause 51.1) and as
standard payment is due within three weeks of each assessment date, unless stated
otherwise (clause 51.2)
The responsibility for assessing amounts due resides with the project manager. The
payment is assessed at each assessment date and the project manager is allowed one
week to make his assessment (clause 51.1). Assessment dates, can be no later than 5
weeks intervals, are determined by the project manager and stated in the contract data.
However the default payment assessment date in the contract is 3 weeks. The payment
process is driven by the assessment date, (in this case the default 3 weeks). This payment
process removes the liability of assessment for payment from the contractor who is
under ‘no obligation’ to submit an application for payment. However Clause 50.4 allows
the contractor the make an application for payment ‘on or before the assessment date’.
Nevertheless it is the project manager who is responsible for considering the application
and is further required to provide the contractor details of how the amount due has been
assessed. Clause Y (UK) 2 Housing Grants, Construction and Regeneration (HGCR)
Act 1996 is an optional clause that supplements the core payment provisions in the
ECCB. Clause Y (UK) 2 introduces two additional standards, namely ‘date on which
payment becomes due’ and ‘the final date for payment’. Payment can either be linked
to the assessment date (Clause 51.2) or when payment becomes due, (clause Y (UK) 2).
Payments to be withheld from the contractor are also covered by this optional clause.
The Employer is required to inform the contractor if a payment is to be withheld, not
later than 7 days before the final date of payment. The Contractor may suspend
performance if the Employer does not issue a notice of withholding and payment is not
made in full by the final date for payment. Errors in assessing amounts are also provided
insofar as the project manager can correct an error in a later payment, but not necessarily
the next payment. Additionally the ECCB provides (clause 51.3) for interest on late
payments, which ‘is not less than 2% over a specified bank rate’. The payment
procedures for managing costs pertaining to payments rely on the diligence of the
project manager adhering to the timescale and burdensome duties that are not
collaborative. The withholding of retention is not automatic in this contract, which only
applies only when secondary option X16 (Retention) is included. However interim
payments are subject to a 25% reduction until a first programme is submitted for
acceptance (clause 50.3). This stipulation has been designed to remove future
difficulties in assessing and managing additional costs, arising out of changes to the
works information, and the resultant impact on programme. Retention is a standard
clause in other forms of building contracts, therefore employers need to be aware that if
they wish to apply retention charges they must ensure that they have selected X16
(Retention) secondary option.
Managing additional costs arising from unforeseen problems and work changes.
The most significant aspect of managing costs on a construction project is managing
costs that arise when unforeseen problems and/ or the scope of the work changes. In
ECCB changes in the amount that the contractor is paid is based on his quotation. The
contractor then carries the potential risk or reward inherent in a quotation, whilst the
employer has a firm cost commitment. In the ECCB clauses 60 and 61 provide simple
management procedures for ascertaining additional unforeseen costs. These procedures
are known as compensation events. The compensation event clauses detail the
mechanism to reimburse the contractor for extra time and money. Managing costs in
compensation events requires the parties to adhere to the express contractual provisions
detailed in Clauses 60 and 61. Clause 60 identifies nineteen compensation events (CE)
listed in the core clauses that can be applied to all the main options. Additionally further
events can be found under ECCB secondary option clauses. The compensation event
procedure requires a proactive and collaborative approach to the recovery of damages.
Even before a compensation event actually occurs, the contractor is required under
clause 16.1 to issue ‘as soon as’ an ‘early warning’ that costs may increase. The early
warning is then required to be entered onto the ‘risk register’. This proactive approach
to risk is further reinforced in clause 63.5 ’failure to give an early warning’ which can
result in the project manager assessing compensation assessment as if an early warning
had been issued and that measures had been taken to mitigate the risk. In the event that
the contractor has failed to issue and early warning, the process of compensation as
defined under Clause 61 specifically establishes a simple four stage process of
‘notification, quotation, assessment and implementation’. Fundamentally it places a
precedent to the recovery of damages on the notification stage. There is a responsibility
on either the project manager (to do so with the issue of an instruction) or the contractor,
(no later than 8 weeks of becoming aware of the event), to notify the other party of a
potential compensation event. This requirement tested and upheld in a recent Court of
Appeal hearing (Northern Ireland Housing Executive v Healthy Buildings (Ireland)
limited (2014) which held that notification must be given, without which the claim was
not time barred. At the heart of this condition is the issue of unforeseen cost, added
during the final stages of a construction project thus promoting a proactive approach to
the management of additional costs. The quotation stage requires the contractor to
submit a quotation ‘no later than 3 weeks after being instructed to do so’. The project
manager will either accept the costs or ask for a revised quotation of make his own
assessment (if the contractor fails to submit a quotation). The assessment of additional
costs are ascertained in accordance with clause 63.1 which states that change to prices
are assessed by ‘the actual defined cost of work already done, the forecast defined cost
of work not yet done and the resulting fee’. As mentioned earlier the ECCB provides
that the bills of quantities can be used to ascertain the defined costs - if the project
manager and contractor agree. Despite the collaborative approach to managing
unforeseen costs the management of the compensation event creates an extensive
administrative burden due to the requirement of detailed calculations supported with
programmes of forecast effects. For example Clause 63.6, 63.7 and 64.1 stipulate that
the contractor must ‘demonstrate the risks of cost’ and ‘react competently and
promptly’, ‘additional costs are reasonable’ and ‘submit the programme effects within
his quotation’. Additionally there is no ‘reduced’ provision for dealing with a
compensation event of a smaller value/minor nature, which undermines the ‘flexibility’
of this contract insofar as the compensation event procedure is not flexible. Often an
element of additional costs is the cost of delay, yet all the Core clauses of the ECCB are
silent about delay damages. Provision has therefore been made within the secondary
optional clauses (X7) that states that the ‘contractor pays delay damages at the rate
stated in the contract data or from the completion date’, and ‘delay damages may repaid
by the employer’ from the contractors payment.
DISCUSSION AND CONCLUSION
These following discussion and conclusions are not empirically based but, rather
informed but subjective views set out to provoke argument in this conference.
Both standard forms provide terms and procedures for robust cost practical
management. Table 1 and Table 2, below, offer a framework that may be used
for evaluation and comparison of the provisions pertaining to management of
costs of the two contracts. The long-standing nature of the JCT contract makes
it a document that uses readily recognised terminology and processes that are,
arguably, more familiar to the building fraternity.The ECCB aspires to be a
successfully collaborative contract that manages costs through the adoption of
simple and flexible procedure. The detailed procedures and defined timescales
provide an effective means for construction managers to effectively manage
costs, improve project performance and ultimately client satisfaction. This
requires construction managers to innately understand the requirement of the
contracts and the philosophy behind the cost management clauses. Key points in
time dictated by the contract at which actions of the parties have to happen,
should be on a time chart or attached to the project programme with details of
the administrative processes to be followed and documents to be used at various
times.
Table 1 Practical evaluation and comparison of the management of payments in
JCT and ECCB
Man.
Cost
Adjust
Lump
sum
Fluct
Com.
with
Const.
Act
Payment
linked to
prog.
Retention
Flexible
Re
measure
JCT


X

x
x

ECCB

optio
n
optio
n
Option
1st pay
Option


Option
Adjust
for
error
Table 2 Practical evaluation and comparison of the management of additional costs
in JCT and ECCB
Manage
Costs
JCT
ECCB
BQ basis for
pricing
changes

If agreed
Time bar for
additional
cost


Quote
basis for
additional
cost


Early
warning of
extra costs


Cost
of
delay

optional
Having made these points, these contracts all place significant obligations on
both parties to employ a bureaucratic system to ensure that the terms of the
contract are complied with. Failing to comply with the contractual procedures
can lead to financial burden that can amount to a significant proportion of the
contract sum. However the challenge for construction managers will be ensuring
that the spirit of collaboration is adopted within these contractual frameworks,
thereby complying with the imminent requirements of collaborative
multidisciplinary working underpinned by the technical requirement (Level 2)
Building Information Modelling.
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at
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