Deciphering Construction Contracts
Posted by Richard Poulter, Construction Recruitment Director, Hong Kong on Wednesday, September 21, 2022
The three principal components of a contract between two or more parties; “Offer”, “Acceptance” and “Consideration”, are as valid today as they were at the beginning of time. However, bringing these components together often creates complexity, ambiguity and mystery for the stakeholders involved! The construction industry has regularly sought to standardize forms of contract for construction and engineering projects with the intention of providing a “level playing field” for Quantity Surveyors, Commercial Managers and Project Managers who may be tasked with administering construction contracts.
Below, we discuss three such forms of contract – JCT, NEC and FIDIC which are used in construction industry sectors across the world.
The Joint Contracts Tribunal, JCT, was established in 1931 to provide standard procurement processes and forms of contract for quantity surveyors and civil engineering contractors in UK.
JCT is the most widely used form of construction related contract in UK, most recently updated in 2017 and provides three main procurement processes; “Traditional”, “Design and Build” and “Management”. Over a number of years, the organisation has sought to identify and address all of the issues prevalent in a typical contract between an owner or end user and the builder or civil engineering contractor so that each stakeholder understands its roles and responsibilities under the contract with regard to safety, cost, time and quality.
Traditional – where the design and construction elements are organised sequentially and separately with a fully documented design being required before the contractor can prepare a bid. Traditional contracts are usually ‘lump sum’ where contractors are invited to bid for the construction of the project on a single stage competitive basis.
Design and Build – these have a single main contractor responsible for the whole project, the design, planning, organisation, construction and deliver of the works to the clients’ requirements.
Management – The main contractor is paid a fee for defining and managing the construction process. This involves issuing instructions, preparing certification, and administering the contracts.
Overall, there are eight significant JCT forms of contracts; Lump Sum, Measurement, Cost reimbursement, Design and Build, Managing Contract, Partnering Contract, Pre- Construction services and Consultancy agreements.
The ‘New Engineering Contract’ NEC, originally formed in 1993 is often considered the most ‘progressive’ form of contract with frequent updates.
The NEC suites of contracts are based on solid project management principles and practices and attempt to provide a platform for mutual trust and collaboration amongst the stakeholders of a construction or engineering contract rather than facilitate an “us and them” adversarial approach.
There have been four iterations of the NEC suites of contract: NEC 1 released in 1993, NEC 2 published in 1995, NEC 3 published in 2005 and NEC 4 published in 2017.
The most recent NEC4 contracts are written in plain English with easy to understand language, can be used in a variety of different contract situations and types of work and can be used globally. They encourage good relationship management between the two parties to a contract.
Of hyper importance is the early warning process requiring either party to notify the other of any issue which may affect cost, time, quality. This would include changes to scope of work called “compensations events” and the contract sets out the process to determine the cost and time effects of such a CE. The program and budget are continually updated to reflect these events so there should be no surprises towards the end of a project thus mitigating the need for either party to enter into the costly world of construction dispute recruitment.
Notable projects successfully completed under NEC contracts include the 2012 London Olympics and Paralympic Games and NEC is now being used by the Hong Kong government after a successful pilot.
FIDIC stands for: The 'Fédération Internationale des Ingénieurs – Conseils’ or The International Federation of Consulting Engineers.
It is the oldest of the three most recognised forms of contract having been founded in 1913 and currently represents over one million engineering professionals and construction consultants in 40,000 firms across 100 countries globally.
FIDIC is distinguished by its books and in 1957 issued its famous ‘red book’ – “The Form for Works for Civil Engineering Construction’ aimed at Civil Engineering however subsequent books which became known by their colour, represented different aspects of construction; the Red Book, Yellow Book, Silver Book, Pink Book and most recently the Golden Book, launched in 2008.
There are two general features of a F.I.D.I.C. contract.
Part One – General conditions which sets out the rights and obligation of each party, procedure for payment, variation, certification, and dispute resolution. These are all key elements important to a QS or Commercial Manager tasked with administering a contract.
Part Two – Contract of Application, project specific clauses concerning the language of contract, the choice of law and the name of representatives.
As F.I.D.I.C was developed and refined over fifty years by industry experts, FIDIC contracts provide an internationally recognised foundation for any engineering or construction project, streamlining the contract management process and making it easier to work across borders and across language barriers often facilitating expatriates to take up international construction jobs.