Following the recent decision in Graham Leslie v Farrar Construction Ltd  EWCA Civ 1041 we thought it would be useful to recap on the facts of the case and highlight the warning that the decision brings.
So what happened…?
Mr Leslie and Farrar Construction entered into an oral Framework Agreement in which the parties would collaborate in the development of five separate sites.
The Framework Agreement provided that Farrar Construction would be paid its “build costs” (which were not defined) and the parties would split the profit made when each site was sold on the open market.
Throughout the course of the developments; Farrar submitted applications to Mr Leslie for round sums which did not include detailed substantiation. Mr Leslie accepted the sums on the basis they were in line with the agreed budgets.
Following completion, the profits were agreed and shared without any further substantiation being provided.
Over time the relationship deteriorated and Mr Leslie sought to recover what he deemed to be overpayments.
The court of first instance held that an employer could not recover overpayments which it made at the Contractor’s request without further investigation.
The Court of Appeal Decision…
The Court of Appeal upheld the decision.
This case serves as an important warning. Where a payment is made against an application without further enquiry; the Employer will lose the right to challenge the sum later. Consider the application carefully at the time to ensure sums applied are correct.
Following from our previous update in March we can confirm the launch date for NEC4 is June 2017.
So what do you need to know…
We have worked to summarise the key changes that have taken place from NEC3 to NEC4 and how they will affect Contractors and Sub-Contractors across the industry.
The key changes within the Engineering and Construction Contract (ECC) and the Engineering and Construction Subcontract (ECS) are outlined below:
The ECC and ECS will further promote collaboration in the following ways:
Additional new and updated provisions within the ECC and the ECS include:
KJ Taylor Consulting will be delivering a training series following the official launch of NEC4 in June so have your diary at the ready.
In the interim; should you require any further support with NEC4 or any other commercial issues please don’t hesitate to get in touch.
Following the March 2017 announcement by the NEC, it has been confirmed that the future of NEC has been reshaped with the introduction of NEC4.
NEC has listened to the extensive feedback from the industry and made the necessary changes to align commercial intentions with workability and operational delivery. In addition, they have added a number of new contracts to bridge the gaps where necessary.
New Additions A significant change includes the introduction of new forms of contract including the NEC4 Design Build Operate Contract (DB0) and the Alliance Contract (ALC).
The DBO contract will allow users to procure a more integrated delivery solution by linking the various functions (design, construction, operation and maintenance) for a project life cycle solution from a single supplier.
The ALC (currently under consultation) is intended to provide a solution for users who wish to fully integrate the delivery team for large complex projects.
New Features In addition to the new forms of contract; new features have been introduced to the suite including a process for identifying opportunities to improve the outcome of the project (this is about collaboration and efficiency after all!).
The PSC, TSC and SC contracts will now use defined cost in the same way as the ECC; introducing congruence throughout.
New provisions have also been introduced into the ECC to further support the design and build method of delivery.
The NEC4 also introduces a new escalation period for dispute resolution prior to formal proceedings.
These are just a few of the changes which the NEC4 will bring, but are you still getting to grips with NEC3 and the contractual procedures that need to be followed?
If so, we are here to support. Here at KJ Taylor Consulting we provide training, support and advice regarding the delivery of works under the NEC suite of contracts.
Call us on 0115 9336131 for a no obligation free consultation or visit www.kjtaylorconsulting.com.
NEC3 – Option C – Target Cost with Activity Schedule
‘The NEC Option C is a target cost contract with activity schedule where the out-turn financial risks are shared between the client and the contractor in an agreed proportion.’ NEC.
Target cost contracts can be beneficial where the scope of work is not fully defined or where the risks anticipated are greater than usual.
The option C contract allows the financial risks to be shared between the parties (employer and the Contractor) which motivates the contractor to deliver the works in the most cost efficient way.
A ‘target cost’ is agreed between the parties which is made up of the Contractor’s estimate of the ‘Defined Costs’ plus a fee which is to cover the Contractor’s costs, overheads and profit.
Throughout the works the Contractor is reimbursed for his “Defined Costs” plus fee minus any “Disallowed Costs”.
These components together constitute as the ‘Price for Work Done to Date’ (PWDD).
Defined Costs (actual costs) are assessed by the Project Manager during the course of the works by auditing the Contractor’s accounts.
Throughout the works the target cost is adjusted to reflect any compensation events which may arise.
On completion of the works the final Defined Costs and Fee (the final “Price for Work Done to Date”) and the target costs are compared.
If the final PWDD is less than the target cost the Contractor will receive a pre-agreed share of the saving depending on the ratio. If the PWDD, it is greater than the target cost, the Contractor will pay a share of the difference (again at the agreed ratio).
This known as the “pain/gain” mechanism of the contract.
So what are defined costs?
Under Option C, Clause 11.2(23) defined costs are stated as:
“the amount of payments due to Subcontractors for work which subcontracted without taking account of amounts deducted for
Less Disallowed Costs
Therefore, Defined Costs in broad terms are the actual costs incurred by the Contractor for the Works less retention less all costs which would fall within the overheads covered within the Fee. From those are deducted “Disallowed Costs”.
“Disallowed Cost” is defined by Clause 11.2(25) and are costs that the Project Manager has decided are either:
(1) not justified by the Contractor’s accounts and record;
(2) shouldn’t have been paid to a subcontractor in the first place; or
(3) were incurred because the Contractor did not follow the acceptance or procurement procedures laid down in the Works information or didn’t give an early warning notice as required.
The Contractor’s “Defined Costs” will be subject to audits with the level of information required to justify the sum being substantial.
We hope this blog has been a useful insight to the NEC3 Option C with activity schedule contract.
Van Oord UK Ltd & Anr v Allseas UK Ltd
 EWHC 3074 (TCC)
In the case of Van Oord and Allseas the Claimants (OSR) made a number of disruption and prolongation claims against the defendant (AS UK) which arose on a project which included the laying of a gas export pipeline in the Shetland Islands.
The Contract provided that should OSR encounter ground conditions which differ from those described and which ‘an experienced Contractor could not reasonably have been expected to foresee following an examination of those documents and data which substantially modified the scope of work, contract price or completion date then notice should be given’.
Mr Justice Coulson referred to a judgement by Mr Justice Akenhead in which he stated:
“I am wholly satisfied that an experienced contractor at tender stage would not simply limit itself to an analysis of the geotechnical information contained in the pre-contract site investigation report and sampling exercise. In so doing not only do I accept the approach adumbrated by Mr Hall [the defendant’s geotechnical expert] in evidence but also I adopt what seems to me to be simple common sense by any contractor in this field.”
Mr Justice Akenhead therefore refused the approach that stated:
‘if the ground conditions were not expressly identified in the geotechnical information provided pre-contract, then they had a claim for unforeseen ground conditions’.
In the case of Van Oord and Allseas, the claimant presented their case based on the results of a probe survey; specifically, that the ground encountered differed from those presented in the survey.
On review, it was found that the subsurface conditions were, in the most part the same as those described in the Contract documents. The Judge stated:
“Every experienced contractor knows that ground investigations can only be 100% accurate in the precise locations in which they are carried out. It is for an experienced contractor to fill in the gaps and take an informed decision as to what the likely conditions would be overall.”
In addition to the above, the claim had already failed at the first hurdle on the basis they had failed to give proper notice under article 22.
CIS Compliance – The Test
The compliance test for subcontractors to receive payments gross under the construction industry scheme (CIS) has changed in a bid to improve the operation and reduce the compliance burden of the CIS.
Modern Slavery Act 2015
Commercial organisations with turnover of over £36m are required to issue a formal statement each year to comply with the requirements of the Modern Slavery Act 2015.
The Act requires a record to be kept of action taken to ensure their business and supply chains are free from slavery and human trafficking.
National Living Wage
The 1st April 2016 saw the introduction of the National Living Wage which was set at £7.20 per hour for workers aged over 25.
Insurance Act 2015
On the 12th August 2016, the ‘Insurance Act 2015’ came into force. It saw the introduction of a duty of “fair presentation” of risk.
European Single Procurement Document (ESPD)
The intention of the ESPD is to reduce the administrative burden for tenderers.
It allows all businesses to self-declare electronically that they meet the required regulatory criteria or commercial capability requirements.
Only the successful tender will be required to demonstrate compliance.
Health and safety offences
New sentencing guidelines for health and safety offences came into force on 1 February 2016.
Gender Pay Gap
February 2016 saw the publication of draft regulations which intend to address the gender pay gap.
The regulations propose imposing mandatory reporting for employers with a headcount in excess of 250.
Corporate Criminal Liability
The courts approved the first deferred prosecution agreement in relation to the corporate offence of failing to prevent bribery under the Bribery Act 2010 and the Serious Fraud Office brought the first charges against a corporate for the same offence.
In February 2016 Sweett Group was ordered to pay around £2.35m for a breach of the Bribery Act 2010.