A statutory dispute resolution method.
The Construction Act (Part II of the Housing Grants, Construction and Regeneration Act 1996) allows any party to a building contract, subcontract or appointment to refer a dispute to an adjudicator, who must then be appointed within seven days and must reach his decision within a further 28 days. The adjudicator's decision is binding unless and until the dispute is resolved by a judge or arbitrator.
Agreement for lease
An agreement between a landlord and a tenant for the letting of premises. If requiring either party to carry out works, may also require that party to procure collateral warranties or give third party rights in favour of the other party, sometimes as a precondition for completing the lease.
Agreement for sale and purchase
An agreement between a seller and a buyer for the sale and purchase of a property. If requiring the seller to carry out works, may also require him to procure collateral warranties or give third party rights in favour of the buyer, sometimes as a precondition for completing the sale.
The agreements between clients and consultants (including any architect, engineer, quantity surveyor, or CDM co-ordinator). Main provisions relate to the consultant's services, to fees, and where appropriate to the consultant’s duty to provide collateral warranties or third party rights in favour of lenders, buyers and tenants.
Building contracts and subcontracts often require disputes to be referred to arbitration instead of the courts.
The main problem with arbitration is that it can be difficult or impossible to join other parties into the proceedings (e.g. where an employer sues a contractor, the contractor may allege breaches of contract by a designer or subcontractor and wish to join them as co-defendants). For this reason many construction lawyers delete arbitration clauses where possible.
The principal designer. Under traditional contracting the architect acts as contract administrator during the construction period.
The transfer of legal rights under an agreement; for example, where an employer assigns a building contract (or, technically, the benefit of the building contract) to a buyer of the site. Before the assignment can take effect, the buyer must give notice to the contractor.
The effect of the assignment (continuing this example) is that the buyer can now sue the contractor under the building contract. The employer can no longer enforce the building contract; but he remains liable to the contractor because the employer can’t assign his liability without the contractor’s consent (he can only assign his rights or benefit).
Generally, if an agreement contains no prohibition or restriction on assignment, each party may freely assign its benefit in the agreement to whomever it pleases, and assignees may assign further.
Bills of quantities
In traditional contracting, a contract document comprising a list of the materials required for the works and their estimated quantities, produced by the quantity surveyor.
The contractor tenders against this document, stating his price for supplying and installing each of the materials.
The total of the contractor's prices, added to his prices for the various items in the Preliminaries, forms the contract sum.
The contract sum cannot be varied just because the actual quantities differ from those in the bills of quantities, so the contractor must satisfy himself that the quantities shown are at least approximately correct.
A performance bond, which is given by a bank or insurance company as surety or bondsman, is not so much a guarantee of the contractor's performance but is rather an agreement to meet the employer’s additional costs, up to an agreed maximum, if the contractor fails to perform (usually owing to insolvency). The agreed maximum is usually 10% of the contract sum.
When a contractor becomes insolvent before completing the works, the employer does not of course have to continue paying him. However, this saving is likely to be exceeded by the cost of paying a second contractor to complete the works, plus other direct losses, and the agreed maximum is a rough and ready pre-estimate of that extra cost and those losses.
A bond normally expires at practical completion or when defects appearing during the rectification period have been made good.
A document prepared by the employer for consultants, to indicate the client's requirements. May go into appointments, but is usually distinguished by its absence.
The contract for the works between the employer and the contractor. Sometimes called the main contract (as distinct from the subcontracts).
The Construction (Design and Management) Regulations 2007. Health and safety regulations requiring clients to appoint a CDM co-ordinator and a principal contractor, and providing for a pre-construction plan and a health and safety file.
The person commissioning the works, who is called the client in appointments, the employer in building contracts, and the developer in development agreements and funding agreements.
The theoretical reasons for collateral warranties are twofold: (1) the common law doctrine of privity of contract, which prevents a person from suing under a contract to which he is not a party; and (2) rulings of the House of Lords in 1989 and 1990, which prevent the recovery of “economic loss” (i.e. the cost of remedial work) in an action in tort for negligent design or construction.
The collateral warranty was (before construction lawyers began making use of the Contracts (Rights of Third Parties) Act 1999) one of the most important documents in construction. Its main purpose is to provide security for a fund, tenant or buyer ("third party"). It's an agreement under which a consultant, contractor or subcontractor warrants to a third party (essentially) that it has complied (and/or will comply) with its appointment, building contract or subcontract.
It is important that the benefit of the warranty should be freely assignable, usually twice. Unless it can be assigned to a buyer the warranty is valueless to him, so assignability makes the property more marketable.
If a third party can’t take an assignable warranty, it may be reluctant to lend money to the developer, or to buy or take a lease of the property.
The Contracts (Rights of Third Parties) Act 1999 has modified the doctrine of privity of contract. It took some time before such rights were used contractually to replace collateral warranties, but that process in now well under way.
In 1997 the Construction Law Journal published an article by David Lewis about the JCT standard forms of agreement for collateral warranty, which contains a brief history of collateral warranties and can be found in the Articles pages of this website.
Judges sometimes consult articles in learned publications before arriving at their decisions. In this way it is occasionally possible for the writers of such essays to influence the development of the common law or the interpretation of enactments. And, as it happened, in 2000 Lord Goff of Chieveley and Lord Millett mentioned David Lewis’s article in a leading House of Lords case on collateral warranties, Alfred McAlpine Construction Ltd v. Panatown Ltd. Lord Goff said:
“…I have been impressed by the suggestion of Mr. David Lewis … that the real purpose of the [duty of care deed, i.e. collateral warranty] was to provide a contractual remedy in negligence (comparable to that formerly available in tort under Anns v. London Merton Borough Council  A.C. 728 before that case was departed from by your Lordships' House in Murphy v. Brentwood District Council  2 A.C. 398) against McAlpine by subsequent owners of the building.”
Lord Millett said:
“I agree with the Court of Appeal that the [collateral warranty] was primarily designed to cater for subsequent purchasers. This is also the view expressed by Mr. Duncan Wallace Q.C. in "Third Party Damages: No Legal Black Hole?” (1999) 115 L.Q.R. 394 and is confirmed by an article by Mr. David Lewis in (1997) 13 Const. L.J. 305. He notes that the widespread use of collateral warranties … derives from the change in the law of tort which occurred in 1990 when the House decided Murphy v. Brentwood District Council  1 A.C. 398 and departed from Anns v. Merton London Borough Council  A.C. 728.”
Part II of the Housing Grants, Construction and Regeneration Act 1996, which provides for adjudication and also regulates the payment provisions of appointments, building contracts and subcontracts.
Part II of the 1996 Act will be replaced by Part 8 of the Local Democracy, Economic Development and Construction Act 2009 with effect from a date to be decided, probably in or around April 2011.
A procurement system which cuts out the main contractor. The employer enters into trade contracts direct with companies who would normally be subcontractors but who are called trade contractors under construction management.
Often the employer will appoint a construction manager (who may be a contractor’s subsidiary, but is more like a consultant than a contractor) to plan and manage the project, and to invite tenders for and negotiate, and then administer and supervise, the trade contracts. But this function can also be undertaken by the employer in-house or by the quantity surveyor or another consultant with project management ability.
A professional with technical qualifications. Can be a designer (architect, structural engineer, mechanical and electrical services engineer). Can also be a quantity surveyor, project manager, environmental consultant or CDM co-ordinator.
Under traditional contracting, a consultant, or an employee of the employer, whose job it is to issue instructions to the contractor, to certify payments under the building contract, to certify practical completion and completion of making good defects, and to issue the final certificate.
The contract administrator is often the architect.
The equivalent in design and build is the Employer’s Agent (who is likely to be a quantity surveyor or project manager).
The consideration which the employer pays the contractor for the works, and for the completion of any design.
The contract sum is usually stated in the articles of agreement in the building contract. However, it can be changed up or down by variations, ascertained direct loss and/or damage, liquidated and ascertained damages, and other contractually permitted adjustments.
Prime cost forms of contract (such as the management contract) do not state the contract sum in the articles of agreement because it cannot be ascertained when the building contract is signed.
The contract sum is usually payable by monthly instalments. Under traditional contracting the quantity surveyor produces a (usually monthly) “valuation” of the work properly executed to date. By “valuing” the work the quantity surveyor is calculating the proportion of the contract sum which is attributable to the work done. The contract administrator then issues a (usually monthly) interim certificate stating the appropriate payment to the contractor, which is the quantity surveyor’s valuation less (a) sums previously certified and (b) retention.
Contract Sum Analysis
In design and build, a breakdown of the contract sum. Its main purpose is to enable the Employer's Agent to value Changes in the Employer's Requirements (or variations). Usually found at the end of the Contractor's Proposals.
May also be used in traditional forms of contract to assist in valuing variations.
A document prepared by the contractor under design and build procurement, showing how the contractor proposes to meet the Employer's Requirements.
Contracts (Rights of Third Parties) Act 1999
This enactment came fully into force in May 2000.
It enables someone who is not a party to a contract – a third party – to sue either party to the contract where the contract expressly gives him the right to enforce a particular provision or the provision shows an intention to benefit him. The Act also allows a third party to use any defence which the contract makes available to him, e.g. to an action by either party in tort.
The parties can agree in the contract to exclude the Act. Many if not most construction agreements did this between 2000 and 2005, when the JCT first incorporated third party rights into some of its forms of contract.
The Act was originally seen as an instrument for replacing collateral warranties, but warranties seem to be declining as the use of third party rights increases.
Materials or building techniques which are dangerous to health, or which are environmentally unfriendly, or which tend to fail in practice. Often listed in property agreements, appointments and building contracts, where the developer, consultant or contractor is required not to use them.
Design and build
A popular method of procurement under which the contractor completes the design started by the employer’s designers. Flexible, because the initial design can be as little as a performance specification (and sometimes not even that) or a fully developed set of scheme drawings. Cost-effective, because the price is fixed: provided the employer doesn't make Changes to the Employer's Requirements (i.e. variations).
Under design and build, the designers do the initial design; and the contractor completes the design and constructs the works.
A design and build contract comprises articles of agreement and conditions of contract, Employer's Requirements, Contractor's Proposals and a Contract Sum Analysis.
Where the contractor agrees to take responsibility for the Employer's Requirements, it is common for the building contract to provide for him to take over the designers' appointments, stepping into the employer's shoes by way of a deed of novation. The designers may then be required to give a warranty to the employer.
The JCT produces the most widely used design and build contract, called JCT DB.
It also publishes variants of its main traditional-procurement forms of contract, which require the contractor to complete the design of pre-defined elements.
An architect, a structural engineer, a mechanical and electrical services engineer, or other designer of any works. Can include a subcontractor.
Quantity surveyors are called "designers" under the Construction (Design and Management) Regulations 2007 (site safety rules, abbreviated to “CDM”), because they compile specifications to which "real" designers have contributed, but otherwise they will typically reject any design responsibility or any description of their services as including design.
The person commissioning works from consultants and a contractor. Same as the client or employer.
An agreement between a landowner (often a recent or prospective buyer) and a developer, requiring the developer to procure works, usually with a view to producing an income from letting the completed units. The landowner and the developer may share future revenues.
Why doesn't the landowner cut out the developer and commission the works himself? Because the developer may have introduced the site to the landowner on condition of further involvement, and/or may have more expertise in direct developments than the landowner, and/or may have relationships with consultants and contractors which enable him to create a profitable scheme.
Direct loss and/or damage
Damages recoverable by the contractor from the employer under JCT contracts for various happenings which are considered to be the employer's responsibility (such as late instructions). The same events will also entitle the contractor to an extension of time.
The person commissioning the work. Usually so called in a building contract. The same as the developer or the client.
A collateral warranty and/or design agreement between an employer and a subcontractor. Provides security for the employer, either as "insurance" against the contractor becoming insolvent or because the subcontractor may have a design responsibility not shared with the contractor.
The equivalent of a contract administrator under design and build. Usually a quantity surveyor.
In design and build procurement, the primary contract document which describes for the contractor the development which the employer wants him to design and build. The designers contribute to it, and the consultant acting as Employer's Agent usually puts it together.
Extensions of time
Time which is added on to the contractual date for completion of the works, allowing the contractor to complete at a later date without being in breach of the contract or (more significantly) incurring liquidated and ascertained damages.
The contract administrator must give a fair and reasonable extension of time for any "Relevant Event" listed in the contract. These are events which are either the employer's fault or neither party's fault, but a contractor gets no extension of time for events which are his own fault.
Fund or Funder
A bank, insurance company, pension fund or other institution with money to invest in property.
A development agreement with a funder as landowner or mortgagee, under which the funder provides interim finance (or "forward-funding") for the development.
A letter from a consultant to the client, setting out the services which the consultant will perform and his fee for those services.
A certificate issued by the contract administrator following completion of making good defects. It states the outstanding money owed by the employer to the contractor (or, sometimes, by the contractor to the employer).
The final certificate is generally conclusive as to financial matters between the parties, but doesn't under JCT contracts prevent the employer from subsequently suing the contractor for defective work or materials (though it has had that effect in the more distant past).
The equivalent in design and build is the final account and final statement.
A contractor who tenders at a fixed price runs the risk that he may later have to pay more for materials and labour than the prices and wages current at the time of his tender. (Conversely he may benefit if those prices and wages go down.)
Market forces may persuade an employer, especially during times of high inflation, to accept or share this risk by including fluctuation clauses in the contract. JCT contracts include three optional fluctuation clauses under which the contract price is varied up or down according to (a) tax changes, (b) changes in wages and prices, and (c) changes in the relevant building cost indices.
Health and safety file
A document required by CDM. It describes the health and safety features of every completed building and is passed by the client to the next purchaser of the building, and so on. It must also be made available to tenants.
Anyone commissioning future works at the building must appoint a CDM co-ordinator, who must consult the health and safety file as part of the process for minimising risks to future workmen and occupants, and should copy relevant information into the pre-construction plan.
The health and safety file relates to the works when completed.
The JCT Intermediate Building Contract, intended to be used for "works of simple content" and without complex services installations, which are (more or less) fully designed and billed or specified at tender stage.
Joint Contracts Tribunal. Not a tribunal at all. Formerly an association, established in 1931, of representative bodies of developers (including local authorities), main contractors, subcontractors and specialist contractors, and consultants. Now incorporated as The Joint Contracts Tribunal Ltd. Produces, by industry-wide consensus, standard forms of contract and subcontract, and other forms of agreement, for the use of the construction industry.
RIBA Enterprises publishes JCT Digital Contracts, a quirky but indispensable software package which enables users to search all or virtually all the JCT standard forms, and to produce edited agreements from them.
Letter of intent
Business timetables frequently require works to start on site before the parties are in a position to enter into a formal building contract. A letter of intent (from the employer to the contractor) allows this to happen without too much risk to the parties. Terms vary, but usually the employer can terminate the commission at will and must pay the contractor the value of the works completed.
Letters of intent may be limited to specified preliminary work, or to work up to a specified maximum value.
Liquidated and ascertained damages
Also called LADs. Fixed damages stated in the building contract, and usually set as an amount per week (or part of a week), which the contractor must pay the employer (or which the employer may deduct from payments to the contractor) if completion is delayed beyond the contractual date for completion, as adjusted by any extensions of time.
LADs are void as a penalty if they are not a "genuine pre-estimate" of the employer's potential loss, in which case the employer can usually recover normal, unliquidated damages for breach of contract.
Latent defects insurance
Sometimes called latent damage insurance or project insurance. Not often seen, and probably quite difficult to obtain.
Developers would take out this cover in advance of construction of a new building. It indemnifies the current building owner against the cost of remedying defects appearing during a fixed period – typically ten years - after completion of works. An insured building’s owner may transfer the policy to a buyer.
A variant called “whole life insurance” will cover the first 35 years of the building’s life.
Typical premiums are 1.5% to 2% of the building cost, but we have also seen a fixed premium of 0.65% for buildings costing up to £10m. An additional premium will cover other parties (such as the contractor).
Latent defects insurance can be a useful alternative to collateral warranties or third party rights if you want your project to be readily marketable to tenants and buyers.
A "fast-track" procurement method in two stages. In the first stage, the management contractor obtains tenders for each work element from works contractors (who would be subcontractors under traditional procurement). In the second stage the management contractor enters into works contracts (subcontracts) with the works contractors in order to carry out and complete the works. The two stages naturally overlap. The employer pays the management contractor a management fee on top of the "prime cost" of the works.
The main weakness of the system is that if defects occur the employer can recover damages from the management contractor only to the extent that the management contractor can recover damages from the works contractor. Apart from certain legal problems this raises, it means that the risk of a works contractor becoming insolvent is borne by the employer instead of by the contractor.
A building owner who is selling land where building works are in progress can transfer (or “assign”) his rights under the building contract to the buyer. But he can’t assign his liabilities without the contractor’s consent: which is not surprising, since otherwise the contractor might find himself claiming money from an insolvent buyer instead of a cash-rich seller.
If (in my example) the contractor does consent to the building owner assigning his liabilities as well as his rights, then this has to be done by “novation”.
Novation, as its name suggests, is the substitution of a new contract for an existing one. In my example, the building contract between seller and contractor is replaced by a new contract (novation agreement) between buyer and contractor. The seller will be normally be a party to the novation agreement so that he and the contractor can release each other from their respective liabilities.
When does novation take effect? This is a matter for the parties. A novation can have effect ab initio, i.e. as if it had been entered into at the time of the original contract. Or it can take effect from the date of the novation agreement, or indeed some other date.
There are three typical situations in construction when a novation may occur.
• Under design and build contracts, where the appointments of the designers are sometimes novated to the contractor, who steps into the shoes of the client.
• Under warranties to a fund, where the employer defaults and the appointments and building contract are novated to the fund, which steps into the employer’s shoes.
• Where appointments and building contracts have been entered into by a subsidiary company and are novated to the parent company, which steps into the shoes of the subsidiary. (Obviously this can occur vice versa or with numerous variants.)
Parent company guarantee
A guarantee by the contractor's ultimate holding company for securing the contractor's performance of the contract. Unlike a performance bond (which typically expires at practical completion or completion of making good defects) a parent company guarantee usually does not expire until twelve (sometimes six) years after practical completion. Conversely, a contractor may occasionally ask a less than substantial employer to provide its own parent company guarantee for securing the employer’s payment of the contract sum.
Refers to the employer's delivery of the site to the contractor at the start of the construction period, as in clauses 2.4 and 2.5 (JCT 05).
Slightly confusingly, it can also mean the takeover of the site by the employer at practical completion, as in clauses 2.33 to 2.37 (JCT 05).
Completion by the contractor of the whole or a section of the works, as certified by the Architect or stated by the Employer's Agent. “Practical” implies that completion may not be perfect down to the last screw, and in practice, because of business timetables, a certificate may sometimes be issued despite a large number of defects (usually set out in a snagging list), which must then be made good during the rectification period. Great care – and legal advice - must be taken before allowing or instructing a certificate or statement of practical completion (for commercial reasons) in circumstances where substantial work is outstanding or defective; otherwise the client may not be able to require the contractor to return to site to complete or rectify the work.
A document started by the CDM co-ordinator and completed by the principal contractor, containing information and methods of working as part of the process for minimising risks to site workers and occupants of the building.
The pre-construction plan relates to the works as proposed or in progress.
The first part of the main contract document (e.g. Employer's Requirements, specification or bills of quantities), containing a description of the site and the works, information about the employer and consultants, particulars of the building contract and how it will be amended and completed, site safety requirements, and other legal and administrative material. Often abbreviated to "Prelims".
The contractor prices the items in the Preliminaries, to reflect the work and risk involved, as part of the contract sum.
Under CDM - the Construction, Design and Management Regulations - the main contractor or whichever contractor or subcontractor is appointed to complete the health and safety file, and to perform other functions.
Professional indemnity insurance
Also known as “PI” or “PII”. Insurance against negligent design, specification or supervision, which appointments, building contracts and warranties often require architects and other designers and professionals, design and build contractors, and design subcontractors, to maintain, often until twelve (sometimes six) years after completion of work.
Not to be confused with product liability insurance, which does not pay out for economic loss and is no substitute for PI cover.
A consultant appointed by the client. His job is to act as the client's agent in connection with the development, to plan, programme and co-ordinate the project, to chase progress; and generally to promote the goals of meeting the client’s requirements and completing the project on time, within budget, and to the desired standards. (These last three aims form the classical definition of project management; I define it a little differently, as doing what the client would do for himself if he understood the technical side of construction.)
A consultant, and either the author of the bills of quantities (in traditional contracting) or the compiler of the Employer's Requirements (in design and build).
Literally, “how much it’s worth”. This way of calculating consideration arises under “quasi-contract”, where one person lets another person do work for him where there is no actual contract.
A period of usually twelve but sometimes six months following practical completion, during which the employer can require the contractor to return to the site to complete any omissions in the works and to make good any defective work or materials. When all omissions and defects have been made good, the contract administrator or Employer's Agent must issue a certificate or statement of completion of making good.
A sum of money, usually 3% or 5% of the value of work in progress, which is withheld from payments to the contractor as security against the contractor’s failure to complete the works or to rectify defects. Reduces by one half at practical completion, and the remaining half is paid to the contractor on completion of making good defects. Unless the contract provides otherwise, the retention is held on trust by the employer for the contractor, who may require the employer to keep it in a separate bank account.
Sometimes called phased completion. The contract may divide the works into two or more separate sections, each of which forms a mini-contract with its own dates for possession and completion and its own liquidated and ascertained damages.
Has two meanings, depending on context.
When an appointment refers to “services”, it usually means all the services to be performed by the consultant under it.
The second meaning is mechanical and electrical services (M&E).
Another expression for a mechanical and electrical services engineer.
A list of defects and uncompleted items of work. The contract administrator may attach it to the certificate or statement of practical completion (a procedure not catered for by JCT contracts), or (more regularly) he may issue it during the rectification period. Seek legal advice before issuing or allowing the issue of a practical completion certificate with a snagging list.
A contract document, written by a designer, and specifying the works or some element of the works (e.g. electrical services).
Where a fund is forward-funding a development, its security could be jeopardised by defaults of the employer: (a) if any consultant, or the contractor, terminates its appointment or the building contract because of a breach by the employer, or (b) if the employer breaches the funding agreement.
Warranties to funds therefore contain "step-in" provisions which allow the fund in those circumstances to take over the appointment or building contract, standing in the shoes of the client or employer and paying any sums due. Step-in is a form of novation.
The engineer responsible for designing the structural elements.
Where a subcontractor designs structural elements such as piling or structural steelwork, the structural engineer is responsible for designing any interface with the rest of the building (e.g. the structural steelwork connections).
A contract between a main contractor and a subcontractor for particular elements or trades. Principal subcontract "packages" include piling, structural steelwork, cladding (the non-structural part of a building's exterior), windows and glazing, roofworks, electrical services, mechanical services, lifts, and of course many others.
A prospective contractor’s or subcontractor’s offer (in response to the employer’s invitation to tender) to carry out and complete certain works at the price or rates stated in the tender. The invitation to tender may be addressed to a number of companies, and usually encloses forms for the tenderers to complete, as well as setting out the contract conditions which will apply if the tender is accepted.
A letter accepting a tender may well constitute a legally binding contract, unless the parties take steps to avoid this (e.g. by stating in the letter of acceptance that it is “subject to contract”). In either case the parties usually enter into a formal building contract or subcontract.
In construction management, a contract between an employer and a company which would otherwise be a subcontractor, for the design and/or execution of particular elements or trades.
Traditional contracting or procurement
Under traditional forms of contract (such as JCT SBC, and JCT IC), the works are designed by designers appointed by the employer. There is a fixed price contract between the employer and the main contractor, who employers subcontractors.
There is little or no design by the main contractor, except where the contractor is to design particular elements, in which event the “with contractor’s design” variant of JCT contracts is used (not to be confused with the full-blown JCT design and build contract called DB).
Even under traditional contracting the contractor usually designs the temporary works.
Changes to the works required by the employer. The equivalent in design and build is Changes in the Employer's Requirements. They entitle the contractor to an extension of time and to direct loss and/or damage.
See collateral warranty.
The expression for a subcontract under management contracting. The difference may reflect the management contractor's distance from the actual works, which is greater than that of a contractor under traditional procurement who might (in theory at least) carry out some works by direct labour.