Ten fatal errors to avoid with NEC construction and engineering contracts

Leading construction consultancy MPG has joined forces with award-winning law firm DAC Beachcroft to warn about deadly mistakes that contractors must avoid when using NEC contracts.

NEC contract templates are already widely used in the UK, from small procurement jobs to huge schemes such as the Olympic Park, and new templates in the latest version (NEC4) extend their use to new types of projects.

Their success is built on the efficiency of being able to use a ready-made and proven contract for project management and to define legal relationships. This is both more efficient and less expensive than writing a new contract from scratch.

But there are risks, which are highlighted by Michael Gallucci, managing director of MPG, and Michael Blackburne, a partner at DAC Beachcroft, in a new seminar being offered free to contractors, subcontractors, project managers, employers and other NEC users.

They have compiled this list of the top ten areas to focus on when using NEC contracts to avoid potentially catastrophic failures.

1.    Administrating the NEC

2.    Accepted programme and revisions

3.    Working areas

4.    Notifications

5.    Compensation events and time bars

6.    Early warning

7.    Defined costs, disallowed cost and defects

8.    Design – standard of care

9.    Completion

10. Compulsory adjudication

Michael Gallucci said: “With construction disputes on the rise, it’s obviously vital to have a suitable contract in place before embarking on a project. NEC is an excellent starting point, but it is crucial that contractors understand what they are getting into and manage the process properly.”

The seminar, which is offered free and on site at the contractor’s premises, also covers what it means for contractors to enter into an NEC contract and what they should be doing to ensure it works for them and not against them.

To book a seminar at your premises, email sarah.dexter@mpgqs.com

The seminar offers top tips for employers and project managers as well as covering how contracts should be administered and how to make claims through compensation events and early warning notices.

Key benefits of the new NEC4 contract suite are

  • Streamlined processes and updated definitions
  • Improved contract administration and reduce admin costs
  • Greater clarity and reduced potential for problems
  • Provision for BIM and early contractor involvement
  • Improved Risk Opportunity and Risk Management

There is more information at www.neccontract.com/About-NEC/NEC4-suite-of-contracts

Court ruling set to impact construction disputes

A new court judgement will have a major impact on disputes involving companies in liquidation, says leading construction consultancy MPG.

The decision in the Technology and Construction Court (TCC) means that companies in liquidation will not be allowed to use adjudication to settle financial claims.

Michael Gallucci, MPG’s managing director and an RICS accredited mediator, said: “Companies in liquidation and their advisors have often sought to settle claims through adjudication, even though they have generally been unsuccessful. This judgement will put an end to those kind of claims, saving time and costs for the courts and respondents.”

The case of Michael J Lonsdale (Electrical) Ltd against Bresco Electrical Services Limited (in Liquidation) related to claims and counter-claims between the two companies over a sub-subcontract.

When Bresco began adjudication proceedings to identify its financial entitlement, Lonsdale responded by calling on Bresco to withdraw the proceedings and also requested that the adjudicator, who had already been appointed, should resign, based on an earlier judgement. After Bresco and the adjudicator both refused to withdraw, Lonsdale took the case to the TCC.

Because Bresco was in liquidation, Mr Justice Fraser QC ruled that the claims and cross claims could not be separately enforced. Instead, under the Insolvency Rules, there was a single claim to a net balance once the various claims and counter claims were set off against each other.

This meant that the claim could not be settled by adjudication proceedings because it was not a claim “under the contract” and therefore an adjudicator would not be authorised to rule on it.

The effect of the judgment is that companies in liquidation will not be allowed to use adjudication proceedings to pursue financial claims where there are claims and cross claims between the parties.

The Court also awarded a permanent injunction against Bresco pursuing such an adjudication against Lonsdale.

Mr Gallucci added: “It is likely that any adjudicator appointed in a similar case would now resign if a respondent requested that he or she should do so based on the TCC judgement.”

MPG joins high profile international bid team

MPG already has a track record of providing quantity surveying and other services for big design projects such as stadia, airports and rail stations worldwide. It now hopes to create more opportunities to work on similar large developments as part of the Design International consortium

Construction contracts one year on

Two new standards have been unveiled in the past 12 months with a key objective of cutting the number of disputes and court cases in the construction sector

Don’t litigate, mediate

By Michael Gallucci LLM MRICS MCIArb MAE, Managing Director, MPG construction consultants

We don’t know just how many construction contracts end in dispute, but it’s plain to see the sector is far more prone to legal wrangling than other spheres of business.

The issue was officially recognised with the launch of the Conflict Avoidance Pledge, which aims to change behaviour in the land, property and construction industry by getting firms to look at their working practices and the way they deal with disputes.

I spend much of my time advising clients how to avoid disagreements by understanding their contracts and having proper administration in place, but I also spend a lot of time helping to solve cases that have reached the courts. My own experience reflects the wider picture that many of these arguments could have been settled without formal litigation, and without the associated costs.

It is startling how eager developers, contractors and joint venture partners are to take each other to court, even when there are initiatives designed to encourage them to seek alternative resolutions.

Both parties in a dispute are supposed to at least consider mediation before commencing proceedings, but they can circumvent the Pre-Action Protocol for Construction and Engineering Disputes by mutual agreement and routinely do so.

Often, contracts stipulate that parties should seek mediation in the event of a dispute, but it’s not mandatory and generally the clause gets ignored.

But look at what happens once you head for court. As the aggrieved party, you complete a form and send in a court fee. In the construction sector, we’re used to dealing with big numbers, but even a relatively modest £100,000 claim will usually mean a court fee of £5,000, and it rises proportionately.

Next, you send your claim to the court. The other party responds. The judge tells you both to go to see a mediation service. Given that 90 per cent of cases get settled at mediation, surely it would make sense to circumvent the court process and, for a fraction of the court fee, go to mediation.

Another huge benefit of mediating is the time it takes to resolve a case, usually only one or two days. Compare that with the average length of time it takes a case to get resolved in the UK courts, which according to one report is 12 months. In the UK, we supposedly have a fast track court process, but while it may be swifter than similar systems elsewhere, it is certainly a stretch to describe it as fast.

Why are firms reluctant to mediate? One reason is that one party or another in any dispute may simply hope the problem goes away before it comes to the crunch and they have to face the judge. Another is that mediation may seem unfamiliar.

Yet mediation is not uncommon in the construction industry. As I mentioned earlier, cases that reach the courts routinely wind up in mediation. This is because official guidance states that courts should encourage parties to use alternative dispute resolution, which almost always turns out to be mediation.

Independent mediators are there to get a discussion going so that the parties can resolve their differences. Unlike with the brutal winner and loser scenario of a court judgement, this can enable the business relationship to continue.

I fervently believe that prevention is better than cure, and I would urge contractors to get expert advice on contracts, establishing programmes and setting up proper administration. However, if things do go wrong, I would urge everyone involved in a dispute to consider mediation as the first point of call.

In fact, I am so passionate about the concept that I have just become an RICS Accredited Mediator

Construction law expert qualifies as mediator

An international expert in construction law, Michael Gallucci, has qualified as an RICS mediator.

Mr Gallucci, who runs London-based consultancy MPG, advises clients in the UK and the Gulf on construction law. A regular speaker at global conferences, he firmly believes that more businesses in the real estate sector should mediate to find a resolution to their disagreements.

“The construction sector sees a large number of disputes, often to do with late payment, and eight out of ten times when they do go to court, the parties will be instructed to go away and seek an out of court settlement,” he points out. “So it makes sense to go to mediation first and avoid the costs of a court case.”

As well as advising on legal matters, Mr Gallucci, a qualified RICS surveyor, and his team also act as management consultants on behalf of organisations involved in major construction projects. These have included the $30 billion Business Bay in Dubai where MPG provided contract administration, project management, quantity surveying, cost management and other services, and the £242 million Aquatics Centre for the London Olympics where the company provided contract administration, quantity surveying and cost management services.

He recently completed a successful speaking tour in the Middle East, including as a speaker at Big 5 in Dubai, the region’s largest construction industry event.

Nearer home, Mr Gallucci has joined the Civil Mediation Council, and is volunteering his mediation services to resolve family disputes via a St Albans charity. He is also mentoring two young professionals through their dissertations towards qualification as RICS surveyors.

As an RICS Accredited Mediator, Mr Gallucci’s name will be added to the list of qualified mediators managed by RICS Dispute Resolution Services.

How contractors should respond to the Carillion collapse

Michael Gallucci, managing director of construction consultancy MPG, advises firms affected by the collapse of Carillion how to respond. 

When contracting on construction projects, it’s imperative to have appropriate written agreements and programmes in place. Often, contracts give both parties the right to terminate if one or either becomes insolvent.

That means you can walk away from a project without incurring any further costs but what should you do about the money you are owed for the work you have already completed?  That’s the shadow hanging over around 30,000 businesses collectively owed £1 billion following the collapse of Carillion which has left chains of first tier suppliers and sub contractors in limbo.

The scale of this insolvency is extraordinary but the same common sense responses to a customer in insolvency still apply.    Firstly, it’s worth getting a good sense of how exposed you are. Clearly, if your business depends for its survival on the next payment from Carillion, as is sadly the case for some, it will be your number one priority. However, if your exposure is far from critical, it would be a mistake to spend every working moment on the issue when you have other customers to look after and opportunities to pursue.  Having said that, you still need to take some action urgently.

You may have seen news about banks creating a fund for firms affected by the collapse and of a new government task force to address the issue but don’t take those as an excuse to do nothing and hope for the best. There are plenty of things you can do now to protect your business.  Step one is to look at where you have outstanding contracts and whether these are affected directly or indirectly with Carillion.

This is a list of the companies in liquidation: Carillion plc, Carillion Construction Ltd, Carillion Services Ltd, Planned Maintenance Engineering Ltd, Carillion integrated Services Ltd and Carillion Services 2006 Ltd.  The liquidators, PwC, have set up a website for everyone affected. Go to https://www.pwc.co.uk/carillion and select ‘Suppliers’.  Check your contracts in both directions, firstly to see if you’re entitled to suspend or terminate your contract with your customer and secondly to see what your options are with anyone that you are sub contracting to. If you decide to take action under your contracts, make sure you do this within the terms of the contract.

Your contract with your customer may set out specifically what should happen if one of the parties in the supply chain becomes insolvent. Make sure you understand it and keep track of progress. If the contract doesn’t do this, take steps to retrieve the money owed to you, which may be through legal means or withholding future work on the project until you are paid.   Take steps to protect any physical property or supplies that you have not been paid for, making sure to do so within the law, of course.

I am a strong advocate of effective programmes and record keeping to protect yourself in the event of disputes or situations that lead to potential non-payment such as your customer going into liquidation. If you don’t already have full written records of the work you have carried out on any projects affected by the liquidation of Carillion, prepare them now.

There is much in the media about lessons to be learnt from Carillion. For contractors, the affair should encourage a review, firstly of how they enter into contracts and secondly their effectiveness at managing programmes and record keeping because when things go wrong, these can be the difference between being paid or losing everything.