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Contract
Contract
The project location is in the Friedrichshain district of Berlin, Germany therefore an international contract is required and UK contracts such as the Joint Contracts Tribunal (JCT) is not suitable. It is recommended Berlin Hallam Developments proceed with a standard form of contract that is suitable for international projects outside of the UK, New Engineering Contract (NEC4). A standard form of contract is widely understood and used amongst construction professionals and can be readily implemented unlike a bespoke contract. A standard form of contract is unlikely to require the assistance of a legal team to outline the conditions and clauses as these are already set in the contract and as the contract has been used on numerous occasions there is previous case law precedence to follow if dispute resolution proceeds to adjudication rather than arbitration. Should a dispute arise there is clarity on dispute resolution procedures and previous cases to compare to. Dispute resolution options are also available for select from.
The NEC suite of contracts enable some form of design for the contractor in all core options A-F. Therefore, the NEC suite of contracts is compatible with the procurement and tendering strategy.
It is advised that the project operates using two NEC4 contracts on the basis that the development includes a redevelopment of an existing building to affordable housing for young families and construction of a new building to create offices, retail, and resident car parking.
The NEC suite of contracts enable some form of design for the contractor in all core options A-F. Therefore, the NEC suite of contracts is compatible with the procurement and tendering strategy.
It is advised that the project operates using two NEC4 contracts on the basis that the development includes a redevelopment of an existing building to affordable housing for young families and construction of a new building to create offices, retail, and resident car parking.
Suggested Contract Options
Suggested Contract Options
NEC4 Option A
NEC4 Option A is a priced contract with activity schedule. This option is selected as it aligns to both the existing redevelopment and new build construction with an outlined schedule of works. This contract is preferable based on these items:
Defined Costs
Price for Work Done to Date – for 100% completion of activities outlined on the activity schedule which are completed without defects
Prices are lump sum prices for each activity on the activity schedule which also includes design-related activities
For materials on site deliveries should be included as an activity so payment can be processed and help aid the main contractor cashflow
The activity schedule has to be approved by the client so provides a level of control over the main contractor and project works
Revisions to the activity schedule are also submitted by the main contractor for approval by the client – allows for effective communication between the client and the main contractor, and retains a level of client control
The contract stipulates how to deal with compensation events for changes to cost or time of works
As this is a priced contract using the design and build procurement route the costs submitted in tender bids are likely to be inflated therefore a contingency percentage of 10% would be advisable to protect the client regarding their financial risk exposure.
In relation to the project site, the ground conditions and structural integrity of the existing building are risks which requiring action to mitigate the risk. For the ground conditions it is advisable to conduct surveys to assess the conditions which may affect the overall design and build of the new building. Equally surveys will be required by a structural engineer to assess the concrete structure, and surveys regarding the fire damage and safe asbestos removal if present. The surveys will form part of the activity schedule as separate activities and will be paid on full completion. As they form part of the activity schedule from the information provided at invitation to tender this will incur an inflated cost with risk passed to the main contractor. Although this incurs an additional cost it does provide a level of certainty of project success as surveys can be completed in advance of planning permission being granted. Where the surveys are returned showing the project is not viable the development can be terminated.
Alternative Suitable Contract Option
An alternative contract option in the NEC suite of contracts could be selected where Berlin Hallam Developments are risk seeking rather than risk adverse. Option C target cost with activity schedule can be selected in place of Option A. As Option C is a target cost contract the main contractor is incentivised to complete the project works with the target cost and share the ‘gain’. These options also have a ‘pain’ share if the project works are completed over the target cost. The percentage split for the pain and gain share can be written in the contract to outline the percentage split between the client and the main contractor e.g., over target cost may be split 30% to the client and 70% to the main contractor and under target cost may be split equally.
Where Option C is selected by the client it is advisable to amend the contingency allowance in the cost plan. Amending the percentage from 10% (Option A contingency allowance) to 7% as this will protect the client in terms of costs.
Secondary Option Clauses
Depending on the Berlin Hallam Developments’ headquarters it may be advisable to select secondary option clauses.
Option X3 Multiple Currencies – this is suggested if Berlin Hallam Developments are a UK-based company rather than Berlin to account for differences in currencies of the contract and payments.
Option X6 Bonus for Early Completion – this is suggested if Berlin Hallam Developments are motivated most by completing the project on time or ahead of schedule. Completion ahead of schedule would mean Berlin Hallam Developments could receive an earlier return on investment through earlier sales and rents of apartments and office/retail space but would need to assess the income against bonus expenditure to assess if this is suitable.
Option X16 Retention – it is suggested that Berlin Hallam Developments include the retention clause as it will protect them financially with a percentage of payment withheld. Retention is released upon completion of the whole works or when the client takes over the buildings. The client can also stipulate whether a retention bond is required within the contract data.
Option X21 Whole Life Cost – this allows the main contractor to propose a change in scope, so costs are reduced for the operation and maintenance of the buildings. A full process is outlined for how the contractor submits their proposal and what to include in their quotation, as well as the process for the client to approve the proposal.
Should the client wish to add any additional conditions of the contract not already listed in Option X and Y clauses these can be added to the contract with the use of Z clauses which are free text clauses. Where possible it is advised the client does not use a Z clause if it can already be covered in an alternative clause.
Kirsty Peach (QS)
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