FIS Contractual and Legal Toolkit Q&A

A contract is simply an agreement between two parties that is legally enforceable, however, the contractual nature of construction can seem incredibly complex. 

REMEMBER YOU DON’T HAVE TO SIGN A CONTRACT FOR IT TO BE LEGALLY BINDING

Download the FIS Guide to Execution of Contract

Download the Best Practice Guide: Building Contracts.  This handy guide produced by CICV with the support of FIS gives a great introduction to managing construction contracts

Setting out your contractual arrangements for your projects can be difficult. FIS has developed a set of Standard Terms, but also recommends the use of the Joint Contracts Tribunal (JCT) or New Engineering and Construction Contract (NEC) contracts, depending on your circumstances. 

Since 1931 JCT has produced a range of standard forms of construction contract, guidance notes and other standard forms of documentation.  The driver was to simplify relationships and ensure that risk is shared fairly through the supply chain.  JCT contracts define the roles and responsibilities of the various parts of our industry from design through to specialist.  JCT became a Limited Company in 1998 and the organisation is comprised of seven member bodies who represent the key participants (i.e. signatories) in the contract process.  FIS maintains membership through BuildUK.

NEC contracts were launched in 1993 as an alternative with the publication of the first New Engineering Contract (NEC) by the Institution of Civil Engineers. This emerged from the need to revolutionise procurement and contractual arrangements in the UK construction industry, as emphasised by the 1994 Latham Report titled “Constructing the Team.”  The NEC Engineering and Construction Contract is a commonly used alternative and was established.

There are other Standard Contracts used by various parts of the supply chain, but they are less commonly used in the finishes and interiors sector.

Download the FIS Factsheet:  Which Contract Should I Use?

Unfortunately yes.  Whilst recognising that risk should be shared fairly through the supply chain. This system has been abused and manipulated and now we see contracts that have reams of amendments often larger that the initial contract and invariably designed to squeeze risk down the supply chain.  Amends are often presented as schedules which cross-reference and distort various clauses within the contract, this makes it particularly difficult to understand the consequences.

FIS is dedicating to campaigning for an end to contract amendments with our Responsible No Campaign and supports the recommendation in the Industrial Strategy, Construction Sector Deal  to “Promote the use of un-amended forms of contract on publicly funded projects where this is possible” and ensure that this sustainable approach to improve contractual and payment practices and performance more broadly within the sector.  This has been a common theme in almost all substantive reviews of the construction sector.

The displacement of risk can have serious implications on businesses in the supply chain and amended contracts should always be reviewed carefully prior to signing.  Recently the Construction Leadership Council identified the insurability risk associated with Contract Amendment. 

“The CLC believes that onerous amendments make contracts unviable, reduce competition, increase risk and lead to unnecessary legal costs required to review legal liabilities created by the amendments.

The CLC’s Professional Indemnity Insurance Working Group has identified that too often standard form contract terms are being amended, to include liabilities and obligations that are disproportionately onerous for the nature of the work ….

This means that if a client seeks to claim for loss or damage, it cannot be relied upon that it will be settled by the PII insurers, and the consultant/contractor potentially faces financial ruin, and the client left with a claim that cannot be recovered. This is not in the best interest of any party.”

You can read the full statement made in October 2024 here

On behalf of the Construction Leadership Council, Build UK has published comprehensive guidance to support its recommendation on contract terms. A New Normal in Contractual Practice provides a detailed rationale for why the six contract terms identified within the recommendation should be avoided and how to more effectively manage the underlying issues. The recommendation, which is non‐binding, seeks to form a common ground between clients and the supply chain and ensure a fairer allocation of risk.

Key area of focus include issues and clauses related to Fitness for Purpose, Unquantifiable Risks, Specified Perils, Breach of Contract, Uncapped Liabilities and Performance Securities.

The Construction Leadership Council has committed to working closely with Government, Build UK and other stakeholders to encourage the adoption of these recommendations.

New Normal in Contractual Practice-Unreasonable contract clauses

FIS has gone further, working with the Electrical Contractors Association to produce detailed guidance to support members in identifying and responding to onerous contractual terms. Prepared for specialist contractors, it is a summary of the typical risks and industry recommended compromises to look out and negotiate when engaging in a contract with clients or main contractors.

Access FIS Guidance on Negotiating Onerous Clauses Here

FIS WEBINAR:  How to review a contract – 4 May 2022

FIS Contract Health Check Tool 

The FIS offers members a subsidised Contract Review Service which delivers pro-active expert support to identify onerous contract clauses before work starts, thus seeking to avoid contract issues further down the line.

Access the FIS Contract Review Service here

A variation is a change in obligations or restrictions for the relevant work package.  Variation clauses are incorporated into most standard form contracts and include general conditions such as the addition, omission or substitution of work, material alterations, rework where fault cannot be levelled at the contractor, access issues, working hours etc.

It is always best practice to get a variation in writing from an individual with the right authority and, particularly if this impacts design to ensure that you are not taking design liability (see below).  You should the same time agree valuation and ensure that cost schedules are understood, this simplifies the reconciliation at the end of the contract.  Remember a contractor should be entitled to additional prelims on a variation so long as the work isn’t valued purely based on a day rate and contract allows.  

Fluctuations are effectively variation of price clauses.  Over the past decade construction has tended to evolve to a fixed price tender market with fluctuation clauses routinely struck from contracts, but in the wake of uncertainty that can leat to severe labour and material shortages the question begs whether fixed prices are reasonable in such a volatile market.  Fluctuations allow for costs to be varied in line with movements in core costs such as material, labour, levies and taxes.  There is some evidence that customers are starting to recognise the risk of volatility and members are encouraged to enquire about the potential for fluctuations to be permitted.  A challenge can be agreeing to an index/methodology for fluctuations.

• JCT wording on fluctuations in price of labour, materials and taxes
• RICS guide to fluctuations

FIS has produced a factsheet on managing tenders and pricing in an inflationary climate that includes a number of standard clauses that you should consider including in your estimates –  you can download this guidance on managing contractual positions in an inflationary period here (this includes standard terms to include with your quotations).

Fluctuation clauses have been included in most standard form contracts.  These are often removed in amendments.  Further information on fluctuations is provided below.

FIS has also produced template letter that can be used as a guide for members who find themselves stuck in a fixed price contract and price changes are now impacting on the viability of the project

Template Letter Inflation

FIS Factsheet Quotation Terms and Conditions

As a specialist contractor you may increasingly become involved in not only installation, but also design of the work which you are installing. Significant legal obligations arise from your work as a designer. In many instances you may undertake the same legal liability as an architect or other professional designer – possibly an even greater liability. Therefore, if your installation fails to work because of a fault in your design or an error in its concept, you may find that the client looks to you to rectify the failure.

A vital consideration if taking (or assuming) design liability is how you manage and insure any risks.  FIS recommend referring to the FIS Product Process People (PPP) Quality Framework. 

FIS have worked with our legal advisors to produce a set of guidance on managing design liability and understanding your responsibility. This useful document will help contractors understand the risks of taking on design responsibility.

Download the FIS Guidance Note on Design Liability – How to manage design liability and understand your responsibility

Download the FIS Guidance Note and Standard Wording on Design Liability – How to manage risk of non-compliance

Download the FIS Guidance Note on Design Responsibility – Reasonable Skill and Care or Fitness for Purpose

Download the FIS Guidance Note and Standard Wording to help manage Design Liability and responsibility to meet the Building Regulations

You should also refer to advice on insurance, particularly Professional Indemnity Insurance – remember it is important to ensure that your policy covers you at the time of claim for the duration of any claims liability period.

For more information on Appropriate Business Insurance click here

A collateral warranty gives its beneficiary a direct contractual link to the specialist contractor so that should the specialist contractor be at fault and the beneficiary suffers loss as a direct result of that fault, the beneficiary can sue the specialist contractor directly for breach of the terms of the warranty to recover its loss.  A collateral warranty is therefore a form of security against the risk that any of the party(ies) between the beneficiary and the specialist contractor becomes insolvent.

Download the FIS Guidance Note on Collateral Warranties here

A PCG is an agreement whereby a parent or sibling company guarantees to the employer or main contractor that its subsidiary/sibling will properly perform its contractual obligations.  A PCG is designed to gives the beneficiary additional security for the specialist contractor’s performance.

Download the FIS Factsheet:  Parent Company Guarantees

Depending on the form of contract being used, attendances may or may not be provided under the main contract. Specialist contractors working as sub-contractors need to be aware of those attendances which will be provided to them free of charge and other attendances which they will need to cost into their contract during the tender stage.  For example, within the accompanying Articles (DSC/A) to the JCT Domestic Sub Contract Conditions with Sectional Completion DSC/C/SC 2002, Article 3 provides (in Clause 3.14) for a number of items of attendances which the contractor shall provide free of charge to the subcontractor.

Download the FIS Site Attendances Check List for Interior Fit-Out Contracts

The contract period should be agreed and clear to all at the outset of a project, but programmes will often shift.  Most standard forms of contract recognise this potential and incorporate extension of time clauses to cover instances when the contractor is not culpable and instances where liquidated damages can be applied where blame can be apportioned.

Before signing the contract it is vital to review delay clauses and amendments to understand liabilities for losses or potential for termination that may arise or conversely what you may be entitled to if delays manifest (depending on who is at fault).  You can use the FIS Project Risk Management Tool to assist.

It is sensible to ensure that key dates/timings of notifications are identified, recorded, clearly communicated to all your project team and adhered to.  If sub-contracting elements of the work, where necessary, ensure that liabilities are reflected and cascaded in a manner that will allow you to adhere to dates and timings in your upper contract (i.e. if you get informed at midnight, that may not give you time to inform your client in accordance with your contractual requirements).

This is particularly relevant in a time when material or labour supply may be erratic, or productivity and programme have been impacted by events such as the pandemic.

Template Extension of Time Notices 

Most standard forms of contract provide detail of appropriate notice of delay.  Essentially, they make it a contractual responsibility (regardless of blame and responsibility) to ensure that as soon as it becomes “reasonably apparent” that work is likely to be delayed, notice must be given to the relevant party and an estimate of how long that is likely to last provided.  Further notifications are required to inform the client of changes to circumstance that will impact the timings (either way).  Some template resources to support this have been shared by our colleagues at BESA to support members of FIS.

JCT Extension of Time Notice

NEC Extension of Time Notice

NEC3 early warning notice

As a result of some of the contractual concerns arising from pandemic, in 2020 FIS worked with specialist Quantum Expert Damian James to produce a toolkit, the contents of this toolkit remain relevant and helpful examples to support you in if confronted by delays.

Detailed Claim Template – Document to support the substantiation of a suspension / delay to work due to the COVID-19 Pandemic

Notice of Claim – Document to support the notification of a suspension / delay to work due to the COVID-19 Pandemic

Covid-19 example clause – extensions of time and additional cost

The JCT Standard Contracts allows for retentions with 3% on the main and 5% included in the subcontract.   In terms of management of these retentions, half should be released on issue of the certificate of practical completion and the remainder on final completion (the standard form contracts use different expressions to refer to this; expiration of the Defects Liability Period; the Certificate of Completion of Making Good Defects; the Defects Certificate or the end of the Defects Correction Period). The sub contract should mirror this with the first half released on practical completion of the works and the remainder as defined by the Retention Release Date, which should be written into the contract.

FIS continues to call for retention reform on the basis that they are an out-dated mechanism to manage quality and remain abused by contractors who use retentions to withhold cash and delay or even avoid payment.  In recent years legislation has tried to drive change, for example the Housing Grants Construction Act of 1996 forced the removal of pay when paid clauses. The Construction Act 2011 reinforces this by ensuring that that release of retention to subcontractors could not be linked to an unrelated occurrence within a main contract but must be triggered by something specific to the sub-contract.  In truth this has not had a huge impact on the abuse of retentions.

Read the FIS Position Paper on Retentions

Accounting for Retentions

In their accounts, contractors will generally deal with retentions in one of the following ways:

• include retentions within turnover, provide for the estimated cost of remedial work, and make provision for any debt impairment (see BIM42700 onwards), or
• defer recognition of retentions until their receipt becomes virtually certain.

Each of the above accords with generally accepted accounting practice and should be followed for tax purposes unless an unrealistically conservative view has been taken.

Further details are available here from the HMRC Business Income Manual

If completed work has been identified as being non-compliant by a client, contractor or by a 3rd party specialist via a commissioned report, there are several steps that members should take which are somewhat universal to the type of construction and the nature of the complaint that should be followed.

Dealing with non-compliance issues

Dispute Resolution

From time-to-time contractual disputes will arise.  These can be solved through legal recourse, or more commonly in construction through Alternative Dispute Resolution (ADR) options such as mediation, adjudication or arbitration.  It is vital before you enter into a dispute that you understand your rights and responsibilities.  The mechanism by which a dispute can be resolved is often determined within a contract, but FIS is on-hand to advise members on disputes and to steer you towards the most appropriate option.  We can also offers access to an Independent Advisory Service on problem installations, covering all matters relating to suspended ceilings, partitioning, drylining, plastering and access floors. This covers materials, ancillary equipment, systems, their application and installation.

There are a number of different ADR options:

Mediation: is a procedure in which a third party acts as an intermediary to the dispute to assists the parties in finding a settlement – the mediator may provide suggestions, but the aim is to find a mutually agreeable solutions.  Mediation does not provide a legally binding outcome, but the Courts may advise a dispute is mediated before undertaking a more expensive legal process.

What is Adjudication?

Adjudication is a common method of resolving dispurtes related to construction contracts. It  involves the appointment of an “agreed adjudicator” and follows a formal process where by one party sets out the details of their dispute (“the aggrieved party”) and a response is then provided by the other party.  The adjudicator then reviews before provding a final a decision.  The whole process typically takes around 28 days and the decision is final and binding.

The Construction Industry Council have published an excellent Guide to Adjudication available here.

What is a Smash and Grab Adjudication

A “smash and grab” adjudication is where the contractor typically relies on the employer’s failure to get its paperwork in order to “grab” money quickly through an adjudication. It usually arises when the employer fails to serve a valid pay-less notice in time in accordance with the construction contract.

The Art of Getting Paid (slides from a workshop hosted at FIS Members Conference 2019)

For more details on the FIS Independent Advisory Service click here

RICS Disputes Resolutions Service Launches Summary Adjudication – As the economic effect of the Covid-19 impacts severely on the construction industry, there are many contractors in the smaller end of the market who are struggling to access dispute resolution even under the reduced cost of Low Value Adjudication (LVD MAP) process.  For a limited period initially until the end of July, as a specific response to the needs of the industry, RICS are now offering Summary Adjudication for claims below £20 000.

What is the Low Value Dispute Adjudication process?

RICS have introduced a Low Value Dispute Adjudication process (<£50k) and your dispute should fall in the scope of this.  This offers the opportunity to contain costs.  As an indicative, beyond the £300 “set-up” fee, below gives you an idea for the costs.

There are potentially travel expenses and additional costs if a site visit is required.

The process for initiating an adjudication would be:

1. Write to set out disputes and what is owed
2. Send Notice of Adjudication
3. Go to RICS by completing the Application Form and attach a copy of Notice of Adjudication.

 RICS will then appoint an Adjudicator, who will issue a timetable. You have 7 days from the date of the Notice to send in the Referral so you need to have most of that put together before you do anything else. The Referral is the full detail of your claim.  Under the LVD process there are limitations on the amount of information that can be reviewed.  Should all be wrapped up within 28 days of the adjudication starting.

 The adjudicator can apportion cost, e.g. 50:50.  Any subsequent court proceedings would likely centre on failure to comply with adjudication rather than picking over the bones of the dispute (as I understand it, the alternative is to prove the process wasn’t conducted legally so if using RICS process you should be on fairly safe footing), so significantly cheaper than going to the hearing in court.

 You can use a representative to support, if not a lawyer there are specialist surveyors who can help, contact FIS if you would be interested in a referral.  

 Parties in an adjudication can still settle before the ruling, but you would still be liable for costs.

 More on the Low Value Dispute Adjudication process (<£50k) here

Arbitration: The matter is referred to a suitably qualified arbitrator, with technical knowledge in the field, to decide on a solution.  Arbitration clauses are often incorporated within contracts, and the process runs as a tribunal – decisions are binding.

The cheapest way to manage any dispute is not to have it at all.  Paperwork is everything, well documented, clear presentation and meeting all deadlines set down in the contract may not guarantee the avoidance of disputes.

The FIS Risk Management Toolkit provides a section on contractual management offering a range of best practice tips to help establish a process that helps to avoid disputes.

The Conflict Avoidance Process

CAP is a contractual mechanism, which helps parties to avoid getting embroiled in pro-longed and damaging disputes. Where disagreements begin to develop, CAP enables parties to address and resolve matters early, collaboratively and inexpensively.  The process recommends standard clauses that you can include in tour contract.

Sample CAP Clause – January 2021

Find out more about the RICS Conflict Avoidance Process (supported by FIS and the Construction Leadership Council) here

The Conflict Avoidance Pledge supports the Conflict Avoidance Process by committing signatories to:

• Adopt early intervention techniques throughout the supply chain, to try to avoid, manage and/or resolve issues before they escalate into disputes.
• Embed conflict avoidance mechanisms into projects with the aim of identifying, controlling and managing potential conflict, whilst preventing the need for formal dispute resolution procedures.
• Identify potential disputes early and use conflict avoidance measures in practice.
• Work with the industry to identify, promote and use these mechanisms.
• The Pledge was initiated by several of the UK’s leading professional bodies for construction and engineering. Together they form the Conflict Avoidance Coalition Steering Group.

Find out more about the Pledge here Conflict Avoidance Leaflet – March 2021

FIS has signed the Conflict Avoidance Pledge and are encouraging our members to do the same find out more here.

A Project Bank Account (PBA) is a ring-fenced bank account from which payments are made directly and simultaneously by a client to members of his supply chain. PBAs have trust status
which secures the funds in it and can only be paid to the beneficiaries – the supply chain members named in the account. Payments out of the PBA are made simultaneously to all parties.

The account is held in the names of trustees; likely to be the client and lead contractor (but could also be members of the supply chain). The advantage of trust status is that in the case of insolvency monies in the account due for payment to the supply chain is secure and can only be paid to them.

PBAs are suitable for a very wide range of project values – even for projects as small as £1m or less, depending on the size of the supply chain.

Guide to Project Bank Accounts (Members Only)

Project Bank Accounts in England:

The Construction Playbook, which informs Public Sector Procurement of Construction in England currently recommends:

Project bank accounts. A ring-fenced bank account from which payments are made directly and simultaneously to all members of a supply chain. As per Cabinet Office payment policy, PBAs are not always suitable, but should be used unless there are compelling reasons not to.

The challenge is that “compelling reasons not to” leaves a fair bit of leeway, usage remains limited with no database of “compelling reasons” curated.  

Project Bank Accounts in Scotland:

PBAs were introduced in Scotland after a 2013 procurement review.  It was agreed that PBAs improve subcontractors’ cashflow and ring-fence it from upstream insolvency.  Following the introduction of CPN 1/2019, in Scotland relevant public bodies must include a PBA in tender documents for public works contracts with an estimated value more than or equal to:

• £2,000,000 for building projects
• £5,000,000 for civil engineering projects

Other bodies that can award public contracts, and other organisations providing procurement routes for the construction of public buildings and infrastructure, are asked to:

• implement PBAs
• integrate the associated guidance into their procedures

Project Bank Accounts Scotland – Revised Thresholds and Procedures – CPN 1/2019

Project Bank Accounts Scotland – Availability and accessibility to subcontractors – CPN 7/2020

PBAs in Wales:

The Welsh Government is committed to using procurement as a lever for driving economic, social and environmental benefits and supporting jobs and growth.  This statement summarises their approach:

“Public procurement should help promote Wales as a good place for doing business and should provide mechanisms that allow suppliers of all sizes to flourish, PBAs are a mechanism that supports this ethos”. 

All Welsh Government construction and infrastructure contracts and any other ‘appropriate contracts’ valued at £2m or more which are delivered directly on behalf of Welsh Government Departments that require a PBA be applied unless there are compelling reasons not to do so. Where such compelling reason are identified a decision report detailing those reasons must be completed and filed to allow for audit.

Welsh Government has appointed Lloyds, Barclays and NatWest as its Nominated Service Providers of project bank accounts. 

Following the successful completion of the trial programme recommended by the Review of Scottish Public Sector Procurement in Construction, the Scottish Government has introduced project bank accounts on public work projects to protect subcontractors from insolvency and payment abuse. From 31 October 2016 project bank accounts were made a tender requirement on building projects over £4m and civil engineering projects valued over £10m.  This was reviewed again in March 2019 and the an estimated award value was lowered to at least £2,000,000 for building projects and £5 million on Civil Engineering Projects.

Many contractors or manufacturers have never considered the concept of vesting materials offsite, but shortages and logistical issues and the impact of changes like the Domestic Reverse Charge VAT can lead to decisions around stock levels and have implications on cash flow.  If you are facing the potential of cash tied up in product and materials that is in a factory and can’t be delivered due to delays or logistical issues, a vesting certificate could be a life saver.

FACTSHEET: Vesting Certificates and how they can support Cash Flow

In 2020 FIS ran a webinar with expert QS Anthony Manson that looked at how Vesting Certificates can be used:

WEBINAR:  Vesting Certificates and how they can support Cash Flow

FIS members are entitled to free specialist telephone advice, with access to subject experts covering employment issues, contractual and legal, health and safety and tax and business.  To access this service simply call the FIS office on 0121 707 0077.

UK competition law (specifically Article 101 of the Treaty on the Functioning of the EU and Chapter I of the UK Competition Act 1998) prohibit any agreements, arrangements or concerted practices between undertakings which may affect trade within the EC and/or UK and which have as their object or effect the prevention, restriction or distortion of competition.  Post Brexit, this has been migrated into UK Law.  It places requirements on companies and makes clear Director responsibilities.

To raise the level of awareness within firms about competition law and the rules with which firms have to comply, the CMA has launched a package of materials to help business. This includes:

• a quick guide on how to avoid disqualification
• a checklist on how to comply with competition law
• a #StopCartels campaign page https://stopcartels.campaign.gov.uk/ that houses:
  • an interactive quiz to test knowledge of the law and what is/ isn’t permitted
  • case studies with lessons learnt and information
  • reporting form and info on immunity from fines under our leniency programme

Build UK has also produced guidance on preventing anti‐competitive behaviour in construction. The guidance, which is available to FIS members here, has been written by Wedlake Bell LLP and explains common violations of competition law, such as cartel activities and cover pricing, with the latest CMA decision now included as a case study. It is designed to help businesses and directors comply with their legal obligations by explaining the risks and the steps they should take.

Insolvency describes a situation when a company or individual can’t pay what they owe on time, or when the value of their assets is less than the money they owe. The ICAEW guide provides an excellent guide to insolvency and restructuring. The law (mainly the Insolvency Act 1986) sets out formal legal processes for insolvent companies. Not every business with a debt problem ends up needing a formal solution.  Please note that this Guide was published ahead of the changes announced as part of the new procedures to help businesses cope with the impact of COVID-19.  An outline of this is provided below.  More information will be provided here once available.

ICAEW_Guide_to_Insolvency

Government amends insolvency law to help companies keep trading while they explore options for rescue

Under new plans, the UK’s Insolvency Framework will add new restructuring tools that mirror the USA’s Chapter 11 procedure, a well-established model adopted by countries around the world.  This includes:

• A moratorium for companies giving them breathing space for from creditors enforcing their debts for a period of time whilst they seek a rescue or restructure;

• Protection of their supplies to enable them to continue trading during the moratorium; and;

• A new restructuring plan, binding creditors to that planThe proposals will also include key safeguards for creditors and suppliers to ensure they are paid, while existing laws against fraudulent trading and the threat of director disqualification will continue to act as an effective deterrent against reckless misuse of these new measures.

The Government will also temporarily suspend the wrongful trading provisions to give company directors greater confidence to use their best endeavours to continue to trade during this pandemic emergency, without the threat of personal liability, should the company ultimately fall into insolvency.