27 NOVEMBER 2009

FIXED SUMS AND PROMPT PAYERS WIN IN RECESSION

"Restructuring and refocusing" foremost for construction

Lump sum fixed price contracts will be favoured in the current recession, with payment and cashflow becoming king, according to Professor Peter Hibberd, chairman of the Joint Contracts Tribunal (JCT), speaking at the Scottish Building Contracts Committee (SBCC) Annual Update Seminar (November 19) at the Royal College of Physicians in Edinburgh.

"The current recession is one of the worst that business has seen, and will result in restructuring and refocusing in a number of industries," said Professor Hibberd. "In construction, both purchasers and suppliers will want to reduce risk and exert greater control. Purchasers will do this by reviewing procurement practices, favouring lump sum fixed price contracts. Suppliers will squeeze the supply chains. Payment and cash flow will become the only thing that matters for most.

"The use of construction management, partnering, collaboration and possibly sustainable construction will lessen.

"Doing things in novel ways will become less attractive because this initially requires greater resources and implies greater risk. Consequently, regression to tried and tested approaches is often witnessed in such situations even though innovation is essential to the future of the industry."

Professor Hibberd went on to say that the contribution construction makes is often understated: it has a major impact on the way people live, their quality of life, is one of the largest sectors in the economy, and is a major player in terms of sustainability.
It is not widely understood that the UK economy actually runs on small businesses: over 90 per cent of companies are small (less than 10 staff). The construction industry is the same: it is dominated by small sub-contractors, some specialist, others doing general construction work. It follows that in the current recession, the vast majority of firms failing will be small firms.

Whatever the size of the construction market, it will remain a marketplace for small specialist firms.

Employing specialists

Professor Hibberd outlined how building contracts have sought to address the various issues arising from the specification of specialists because there is widespread acceptance that the ability to identify them is worthwhile. The main determining factors which govern the specification of specialists are the type of principal contractual arrangement i.e. traditional, design & build, and whether the specialist is to design. Most specialist work involves an element of design and consequently there is the matter of design liability. If the main contract does not provide for the contractor to have design liability then the introduction of a specialist who is designing raises some complex issues.
It is also clear from the use of nomination and the different approaches to naming that opinions as to what is the best way to deal with specialists within contracts has changed and no doubt will continue to change.

Clients are looking for a tidier way of handling these specialists within the building contract: one that precisely passes the risk to the contractor but as contractors have a different viewpoint there is no easy solution. The general position upon which a solution might be found is likely to involve certain principles:

? Once the contractor has executed the main contract, the named specialist is the contractor?s responsibility in all respects but he can secure relief from liquidated and ascertained damages in the event of insolvency of the named specialist.

? If a named specialist sub-contract cannot be entered into for a bona fide reason or, where one is entered into, the named specialist fails to complete through default or insolvency, the contractor shall secure a substitute sub-contractor to complete the work or complete it himself.

? The contractor shall not terminate a named specialist sub-contract without giving prior notice to the employer.

? The named specialist may either execute work with or without design.

? Post-contract naming is permissible through the use of provisional sums ? the definition of provisional sum is clarified to expressly cover named specialists; a reasonable right of objection is given to the Contractor regarding a specialist named under a provisional sum.

Professor Hibberd continued: "Specialists are essential to the construction industry and it is necessary on the majority of projects to identify them early in the design process. Where naming provisions exist in contracts they are not always consistent and the withdrawal of nomination has reduced users? flexibility. The non-existence of naming provisions in a standard contract does not prevent the naming of a specialist in the contract documents and whether one introduces express provisions governing their existence is a matter of choice.

"JCT recognises that the current position on naming has arisen over many years, which, in an attempt to meet different needs and changing views, may not be perfect. Consequently it is reviewing the position. It would be ideal if a standard approach could be achieved but one should not underestimate the difficulty of reconciling some disparate requirements."

JCT contracts are used on four out of five of all building projects in the UK. Changes to JCT?s standard contract forms have a fundamental impact upon the way the industry operates. As the only consensual contract drafting body, it ensures that the industry through its council formulates and agrees changes, so that when they are implemented in practice they already have the broad agreement of the industry.

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Note to editors:

Various spokespersons at JCT are prepared to comment upon general news and issues relating to contracts and contractual relationships. However, it may not be possible to comment upon specific disputes and contracts. Please contact Michael Hardware below.

For further information, please contact:

Michael Hardware, Chelgate PR
020 7939 7989 or 07775 925 274 or
meh@chelgate.com

About JCT

The Joint Contracts Tribunal was established in 1931 and has for 78 years produced standard forms of contracts, guidance notes and other standard documentation for use in the construction industry.

The Joint Contracts Tribunal is an independent organisation representing all parts of the construction industry and is the leading provider of standard forms of building contract.  The following are Members of JCT:

British Property Federation Limited
Construction Confederation
Local Government Association
National Specialist Contractors Council Limited
Royal Institute of British Architects
The Royal Institution of Chartered Surveyors
Scottish Building Contract Committee Limited

and JCT Council is comprised of five Colleges representing:

employers/clients (including local authorities)
consultants
contractors
specialists and sub-contractors
Scottish building industry interests