Wednesday, October 9, 2013

"Management contracting – the JCT Management Contract: a review"

Management contracting – the JCT Management Contract: a review

One of the least used forms of contract, produced by the JCT, is the JCT Management Building Contract, related Works Contract and other related documents. Management contracting is perceived in the industry as a complex form of contract sitting partway between the more traditional forms such as the JCT Private with Quantities and the most popular JCT form, the Design and Build form. Richard Bailey provides an overview of management contracting and some of the potential problems presented by the slightly unusual contractual matrix of management contracting.

Management contracting is described by the RICS as:

“… appropriate where the Management Contractor undertakes to manage the carrying out of the work through work contractors, and those work contractors are contractually accountable to the Management Contractor. The client normally engages the Management Contractor to take an active role in the project at an early stage, and because of this the Management Contractor is normally an experienced contractor.

…the Management Contractor is responsible for the administration operation of the Works Contractors. However, the Management Contractor is not liable for the consequences of any default by a Works Contractor so long as the Management Contractor has complied with the particular requirements of the management contract.”

An alternative view of management contracting is that it is an effective method for the client to retain control of the design whilst drawing on the experience of a construction specialist as part of the professional team. Management contracting is popular in some areas and is becoming increasingly popular when constructing major projects.

Overview

Rather than trying to explain the contractual relationships in a management contracting scenario we produce below a diagram that shows the layers of professional contractor involvement and how the team that will build the project will be constructed. As can be seen from my review this diagram is a somewhat flatter process than the normal contractor matrices either under a design and build form or a traditional form of contracting.

Contractual relationships

 

In this article we are solely interested in the Employer/Management Contractor relationship and the Works Contractor relationship.

As in a traditional construction project, the Employer retains responsibility for the professional team and for the design of the works. This does create risks for the Employer which do not appear in a design and build contract but does allow the Employer to keep far greater control of the works and of the design in the same way as the Employer did under the traditional form of contract.

The main difference with management contracting is that the Management Contractor, normally a fairly experienced contractor, becomes involved far earlier in the process and will take responsibility, in conjunction with the professional team, for the splitting of the works into appropriate works packages and for letting those packages. The JCT has drafted both the Management Building Contract and the Management Works Contract specifically to make them back to back.

There are two key issues where management contracting is different and can create problems both for the Management Contractor and the Works Contractor, extensions of time and loss and expense.

Extensions of time

Clause 2.18 provides that the Management Contractor is to consult with the Architect/Contract Administrator before granting an extension of time, showing a direct relationship with the Architect/Contract Administrator, who has no role under the works contract, in the granting of an extension of time.

Clause 2.18.2 provides that the Management Contractor only has to grant an extension of time within 16 weeks of receipt of the required particulars. The same clause in the Management Building Contract provides that the Architect/Contract Administrator has 12 weeks to grant an extension of time following receipt of the same particulars. This gives the Management Contractor 4 weeks to submit/pass on a claim up the line, receive a response and communicate that response back to the Works Contractor. Of course on a strict reading of the terms there is no relationship between the granting of an extension of time under the two contracts; however, clearly the intention was to link the two.

The greatest potential danger for the Managing Contractor, and in many ways a risk for the Works Contractor as well, is clause 2.19.9 which provides for “any impediment, prevention or default, whether by act or omission by either Management Contractor or any of the Management Contractor’s Persons…”. Within the definition of Management Contractor’s persons there is no provision excluding other works contractors employed on other parts of the project. Therefore the Management Contractor may be required to grant an extension of time to a Works Contractor due to delays caused by another Works Contractor.

Under the Management Building Contract, the Relevant Project Matters include Relevant Works Contract Events therefore in theory the Management Contractor will simply be able to obtain an extension of time up the line for any delays by a Works Contractor. However, clause 2.19 of the Management Building Contract contains the following caveat:

“Provided that no such cause of Relevant Works Contract Event shall be considered to be a relevant project event to the extent cause or contributed to by any default, whether by act or omission, of the Management Contractor or any other Management Contractors person.”

If a delay is caused to a Works Contractor by a default of the Management Contractor, the Management Contractor who is only receiving a fee for their services must grant the Works Contractor an extension while not receiving one itself.

Payment terms

Since the introduction of the 2011 Amendments to the Housing Grants, Construction and Regeneration Act, a party to a contract cannot tie a payment under one contract to the issuing of a certificate under another contract. How then does this work when the Management Contractor is only taking a fee for administering the works and passing all claims through?

The method is as follows:

Management Works Contract

Clause 4.9.2 Application not less that 7 days before the due date for an interim application

Clause 4.10.1 Final date for payment 21 days after the due date

Therefore the period between application and payment is at least 28 days

Management Building Contract

Clause 4.9.1 Sum due to be calculated at a date not more than 7 days before the due date for payment

Clause 4.11.1 The final date for payment is 14 days after the due date
Therefore the period between application and payment is no more than 21 days, thus creating a minimum of a 7-day gap.

Loss and expense

Clearly a link has been established between payments under the Management Building Contract and the Management Works Contract. How do the contracts deal with loss and expense? One can assume that there is a risk that an agent of the employer when valuing the works and seeing in an application for payments sums that relate to what one might call domestic issues, will be reluctant to value those and have the employer pay for them. The Management Building Contract has a way round these issues. The Management Building Contract has a new section, section 5, entitled Works Contracts. This section is expressly intended to deal with breaches of the works contract by the Works Contractor and has a section on alleged breach by the Management Contractor. The provisions are set out in clauses 4.3 and 5.4 of the Management Building Contract and in summary provide as follows.

When a claim is made by a Works Contractor for an alleged breach by the Management Contractor, the Management Contractor is required to immediately inform the Architect/Contract Administrator and if authorised or directed by the Employer take action to either settle the claim or to defend it in proceedings and pay the amount of any settlement, including any costs agreed to be paid by the Management Contractor or awarded against him. This clause gives the Employer power to force a Management Contractor to fight a claim and incur potentially many tens of thousands of pounds in legal expenses, consultant fees and the costs of the tribunals.

Under clause 5.4, the Employer is not required to reimburse the Management Contractor for their costs if those costs arise as a result of a breach of contract or negligence on the part of the Management Contractor. This is almost certainly going to be the case when the Works Contractor makes a claim against the Management Contractor.

The provisions within the contract are clearly unsatisfactory, especially for a Management Contractor, and do create a very serious risk both for the Works Contractor and the Management Contractor, whereby the latter may try to avoid a claim and avoid notifying the Employer of the claim in order to avoid being given an instruction to defend a claim the Management Contractor knows it will lose.

Conclusion

Management contracting is, as the JCT says, for large-scale projects requiring an early start on site and where full design information cannot be prepared before works commence. In the right circumstances, it is a contract which has benefits for both employer and contractor. However, for the reasons described above, it is a contract form that should be used with great care.

Back to the previous page | Next article