What is a building or construction work contract?
Building contracts are normally entered into between the homeowner and the contractor. It sets out the legal terms agreed between the parties but also includes all the technical documents, including specifications and drawings.
A building contract can be based on bespoke terms, but it is common practice for the parties to enter a standard form of contract. These standard forms set out the key legal terms required to govern the relationship between the homeowner and contractors such as the standard of works required, insurance to be held, how payments will be made, variations to the works, and termination (and many more).
The most widely used standard forms on UK projects are the JCT (Joint Contracts Tribunal) suites of contracts and the contracts published by the JCT are grouped by the employer method of procurement.
In the UK construction industry, there are three main types of procurements: Traditional, Design and Build, and Management.
The employer will choose the form of contract based on the type of works it wants to be carried out (for example, concerning residential works, you could use the Minor Works form where the works to be carried out are simple and low value).
The current version of JCT being used is the JCT 2016 which reflects the changes in legislation and market practice. The 2016 version supersedes the JCT 2011 suite.
Note that where a standard form contract is used, it is very common for the parties to seek to vary the standard terms to make changes to the rights and obligations of both parties, or to introduce other terms where the standard form does not cover the particular scenario. The document which sets out these changes is usually referred to as a schedule of amendments. It is crucial to check the terms of any schedule of amendments included in a building contract, as well as the standard terms when reviewing a building contract.
Best standard contract form for Residential building works
As state above this decision is based on the type of work needed to be carried out and the method of procurement, however for residential building works it is advised to utilise:
- JCT’s Building Contract for a Home Owner/Occupier who has not appointed a Consultant to oversee work (JCT HO/B 2015) and Building Contract and Consultancy Agreement for a Home Owner/Occupier (JCT HO/C 2015 and JCT HO/CA 2015).
- The JCT Minor Works suite of contracts, which comprises the:
- JCT Minor Works Building Contract, 2016 Edition (MW 2016); and
- JCT Minor Works Building Contract with contractor’s design, 2016 Edition (MWD 2016).
- The JCT Intermediate suite of contracts, which is suitable for higher-value works than the Minor Works, and comprises the:
- Royal Institute of British Architects’ (RIBA) Concise Building Contract 2018 and Domestic Building Contract 2018 (the first editions were issued in 2014) (see Practice notes, RIBA building contracts 2014 and RIBA building contracts 2018).
All parties involved in a domestic building project need to be aware of several key pieces of legislation. These include the Housing Grants, Construction and Regeneration Act 1996, the Consumer Rights Act 2015, the Alternative Dispute Resolution for Consumer Disputes (Competent Authorities and Information) Regulations 2015 (SI 2015/1392) (as amended), the Building Regulations 2010 (SI 2010/2214), the Party Wall Act 1996 and the Construction (Design and Management) Regulations 2015 (SI 2015/51) (CDM 2015).
CDM regulations 2015 deal with health and safety on constructions projects and aims to make them fundamental and routine considerations in the planning and management of construction projects.
It is important to state that the Consumer Rights Act 2015 (CRA 2015) applies to business-to-consumer contracts and provides that pre-contract information given by a trader to a consumer in accordance with regulation 9, 10 or 13 of the Consumer Contract Regulations will be treated as a term of the contract.
The CRA 2015 will apply to the homeowner building contracts where the customer is a consumer although the current versions do not include an express term to this effect. Hence, if work is conducted in residential property and the employer is a consumer (and not a company), the contract between the employer and the contractor it is excluded from the provisions of the Construction Act.
Major clauses under the JCT Minor Building Works 2016:
The Agreement prescribes some important conditions such as the methods of execution, to that regard it is advised the contract be executed underhand rather than as a deed as it is intended to be for simple/ low risk works. However, this means that the Contractor’s liability under it will be six years. Notwithstanding, you can decide for it to be executed as a deed (if so, the Contractor’s liability will be extended to 12 years)
Section One – Definitions and Interpretation – here the parties must read and understand the default definitions of specific terms that are in the contract thus, section one is an integral part of the standard contract as if defines in plain English complicated terms.
Section Two – Carrying Out the Work
In this section each party must set out their obligations for example, the contractor’s obligations, commencement, and completion, who will acquire the working materials like, goods and workmanship.
S 2.1 to 2.1.4 sets out the contractor’s obligations, i.e. that the contractor must carry out the work using reasonable skills, care, and diligence. If the contractor is the one in charge of the design, he must also under reg 8 to 10 of the CDM Regulations he must provide a simplified copy of the drawings or details, specifications of materials etc. to Architect/ Contract Administrator, free of charge.
S 2.3 states when works should commence and complete.
S 2.5 allows the parties to correct any inconsistencies in or between the contract drawings or documents prepared by the contractor.
This section also provides for Extension of time (s2.8), fees or charges legally demandable (s2.7), Damages for not compliance (s 2.9)
Section Three – Control of the work – here the assignments are clearly stated and the person in charge, here I will be also expressed if there are any sub-contractors, variations, any provisional sums, CDM regulations and also it will be listed any exclusion from the work.
For a minor building contract its paramount to insert a clause setting out a ‘defects rectification period’, it is customary to set it for 12 months but, you may agree, given the nature of the work involved, six months (or even less) is sufficient for the project. The appropriate period will depend upon the nature and value of the work to be undertaken.
Section Four – Payment
The clauses in this section sets out the rules surrounding payment under the contract. It also sets out rules regarding ‘pay when paid’ clauses, and withholding money that is otherwise due. It guides as to how the contract price is calculated and how it may be adjusted. It also provides guidance on the process for determining interim payments and the final payment. When VAT applies (4.1) and when is not necessary to pay VAT.
Note that under the Minor Works Building Contract (MW) it is reasonable to assume that if you are commissioning a small residential building work most common form of the pricing structure for construction projects are ‘lump sum contracts’, under which the contract sum is agreed before the work commences, and this can be paid in more or less than two instalments.
Section Five – Injury, Damage, and insurance
The insurance clause is important for it sets out to protect both the employer and the contractors in case of any issue. The MW 2016 requires three main types of insurance:
- Public liability insurance (clauses 5.1 to 5.3).
- Employers’ liability insurance (clause 5.3.1).
- Insurance of the works and insurance of existing structures (clauses 5.4A, 5.4B and 5.4C)
Under Public liability insurance (for contractors) Clauses 5.1, 5.2 and 5.3 relate to insurance against personal injury and property damage, under which the contractor must maintain insurance covering the contractor’s liabilities under the indemnities. Clause 5.1 provides that the contractor indemnifies the employer against any liability arising from the death or personal injury of any person caused by the carrying out of the works, except to the extent that the liability is due to any act or neglect of the employer, any person acting on the employer’s behalf or any statutory undertaker.
Clause 5.2 provides that the contractor indemnifies the employer against any damage to property (other than the on-going works and any site materials) if it arising out of or in the course of carrying out the works and/or it Is due to the contractor’s negligence, omission, breach of statutory duty or default.
So before commencing any work (if you are the employer) make sure the insurance policies are sufficient to cover the contractor’s liabilities to the employer and request documentary evidence of both insurance policies before the contract is signed and also regularly throughout the currency of the project, in accordance with clause 5.5.
Clauses 5.4A, 5.4B and 5.4C relate to insurance of the works and existing structures. The parties must show in the contract which option or options are applicable. Under clause:
5.4A, the contractor insures the works in joint names.
5.4B, the employer insures the works and existing structures in joint names.
5.4C, the works and existing structures are insured on an alternative basis. Unlike other JCT forms, there is no option for the employer to insure entirely new works.
Section Six – Termination
It sets out the method and reasons of termination either by the Employer or by the Contractor it also tackles situations in which either party may terminate, along with the consequences of termination under the JCT contracts.
Under the JCT contracts, it is the Contractor’s employment that is terminated, rather than the contract itself. This distinction is designed to ensure that the post-termination provisions contained in the contract survive termination.
The Employer may terminate the Contractor’s employment on the following grounds:
- Contractor default: e.g. without reasonable cause wholly or substantially suspends the carrying out of the works; fails to proceed regularly and diligently with the works; refuses or neglects to comply with a notice or instruction from the Architect/Contract Administrator requiring it to remove work, materials or goods not in accordance with the contract and, by such refusal or neglect, the works are materially affected; fails to comply with certain requirements of the Construction (Design and Management) Regulations 2015, SI 2015/51, sub-contracts the whole or part of the works without the Employer’s consent
- Contractor insolvency: e.g. The Employer may terminate where the Contractor has become ‘Insolvent’ (s 6.1 – 6.1.4)
- By giving reasonable notice (s 6.2)
Likewise, the Contractor may terminate its employment on the following grounds:
- Employer default: for example, if the employer does not pay by the final date for payment the amount properly due to the Contractor under the terms of the contract, or any VAT properly chargeable on that amount. Or interferes or obstructs the issue of any certificate under the contract, i.e. by refusing to allow the Architect/Contract Administrator to carry out its duties, assigns the contract or any rights thereunder to a third party without the Contractor’s consent
Fails to comply with its obligations under the SI 2015/51
- Employer insolvency
Clauses like 6.4 to 6.6 (for the contractor) and 6.8 to 6.10 (for the Employer) sets out the consequences of termination, e.g. final payments, damages etc.
Section Seven – Settlement of Disputes – This section invites the parties to a dispute, that cannot reach an agreement to seriously consider settling any dispute via Mediation, Adjudication, Arbitration. Schedules 1 further defines the conducts of the parties that intend to utilise Arbitration as a means of ADR (Alternative Dispute Resolution).
Summarising, if you are instructing a low risk/ low value work a simple building contract will suffice.