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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

Programmes vital for contractors as new FIDIC Yellow Book raises the bar

By Michael Gallucci LLM MRICS MCIArb MAE, Managing Director MPGQS

The year 2018 will be remembered as the one when it became absolutely essential – if it wasn’t already – for contractors to have effective programmes in place when undertaking major construction projects.

The new and much more extensive FIDIC Yellow Book, published on December 5 alongside updated versions of the red and silver books, introduces conditions that make implementing programmes and cost controls even more important on developments where an engineer has been appointed as project manager.

Because of numerous new clauses, programmes will be vital in 2018 if contractors are to protect their interests when claiming for delays or combating counter-claims.

Programmes are necessary for claims because they become yardsticks against which to measure the effects of delays. FIDIC already requires a baseline programme to be produced by the contractor, and the new edition – the first for 18 years – brings in new clauses in critical areas, including early warning, that ramp up the requirement for accurate monitoring and record-keeping.

Contractors need to consider if they have enough of the right personnel in their admin teams to produce, revise and update programmes as well as to keep accurate cost records.

While the new Yellow Book increases the administrative burden on contractors, they may be comforted to know that it also sets out to reset the balance of responsibilities between employers and contractors. For example, employers no longer have an open-ended claims window with the introduction of new deadlines for both parties.

When producing a baseline programme, the contractor should ensure it:

•         Is based upon the works included in the contract at the time that the contract was entered into

•         Shows the intended time and sequence of how the work is intended to progress

•         Shows a clear critical path to completion

•         Shows dates when the employer’s input is required, with links to the critical path

Contractors must revise programmes when the baseline programme no longer complies with the contract, it is no longer consistent with progress or extensions of time have been awarded.

It is also crucial to produce updated programmes at regular intervals to record progress and to predict the completion date. These will be invaluable in any analysis to establish the effect of delays.

Contractors should keep accurate cost records because FIDIC allows for Contractors to claim for incurred costs in certain circumstances. In the case of a breach of contract, the law provides that the other party is entitled to be put back in the position that he would have been had the breach not occurred.

FIDIC defines costs as ‘all expenditure reasonably incurred (or to be incurred) by the Contractor, whether on or off the Site, including overheads and similar charges. In a claim for costs, the contractor must have a way to demonstrate the expenditure incurred, so contractors should record:

•         Resources present on site

•         The cost of those resources

•         Depreciation of capital equipment

•         Head office running costs

•         The cost of guarantees and bonds

•         The cost of financing the project

The Yellow Book is the recommended “design and build document for projects where the employer wishes to protect its interests by appointing an engineer to supervise the overall construction of the works, notwithstanding that the overall responsibility for design lies with the contractor”.

At more than 100 pages, the new edition is much longer than its predecessor. It introduces a provision for early warnings designed to encourage the contractor and the supervising engineer or project manager to work together to tackle the delay rather than apportion blame. While it is unclear what steps they will be required to take, documenting the process and any agreements will be critical if the issue deteriorates so that one party makes a claim against the other.

The claims procedure in the new version of the Yellow Book now runs to three pages, and introduces a 28-day deadline for giving notice of a claim that applies to both contractor and employer. The notice period extends from when the claimant becomes aware of the event or ought to have become aware.  The claim itself has to be submitted within 42 days.

To avoid formal adjudication where possible, the Yellow Book introduces a clause to allow both parties jointly to refer to the Dispute Adjudication / Avoidance Board.

That’s indicative of a general movement in the FIDIC books towards encouraging parties to work together to resolve matters before claims. If the additional conditions mean fewer escalating disputes, everyone should welcome the new Yellow Book.

About the author

Michael Gallucci is the Managing Director of MPG, a UK-based consultancy providing surveying, project management, expert witness and dispute resolution service. He is an experienced MEP quantity surveyor and quantum expert witness with over 25 years’ experience in the construction industry, specialising in mediation, arbitration and dispute resolution. He has an MSc in construction law and arbitration, and is a member of the Society of Construction Law, the Chartered Institute of Arbitrators and the Royal Institution of Chartered Surveyors.

 

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.

Michael Gallucci

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.

Act now on heat network rules to avoid fines

ACT NOW ON HEAT NETWORK RULES TO AVOID FINES

Landlords and developers face unlimited fines because of a lack of awareness of the regulations covering heat networks.

There’s no denying that the regulations create an administrative headache for agents, and an unwelcome cost burden for landlords, but managing the process well could help reduce energy bills and develop more efficient buildings.

Nevertheless, it’s clear across the sector that many individuals and organisations have missed the deadline for notification and are perplexed by the requirements for metering, not helped by shifting deadlines creating a moving target.

Managing agents must ensure their clients comply by reporting information about properties where residents are supplied with heating, cooling or hot water. They may also be required to install meters at occupier level, an obligation that’s set to roll out more widely in 2017, spreading the net of those who can be caught out.

It’s complex but cannot be ignored. Non-compliance with any of the requirements to notify, meter and bill is a criminal offence that can lead to civil and criminal sanctions, including unlimited fines, not to mention damage to reputation.

MPG has been working with clients, providing consultancy advice on heating regulations, to:

  • advise them how they are affected
  • assist with the process of completing the statutory notification
  • prepare to install meters where necessary.

Driven by an EU target to cut greenhouse gas emissions from their 1990 levels by a fifth by 2020 and to raise standards in heat networks, it is hoped giving end users data should encourage them to reduce energy consumption.

Who’s affected?

Under the Heat Network (Metering and Billing) Regulations 2014, a heat supplier is any person or company who supplies and charges for heating, cooling or hot water, through either communal heating or a district heat network. Even a building owner or manager with a small sub-let is classed as a supplier if the tenant is charged for heating, cooling or hot water, whether it’s billed separately or included in the rent.

What’s the requirement for notification?

If you are a supplier of heat, cooling or hot water, you were required to notify the National Measurement and Regulation Office (NMRO) by the end of 2015. So if you haven’t already complied, it’s something that must be done urgently. It means completing either a single or multiple notification template, depending on how many properties you own or manage. That in turn means having accurate records of your heating scheme(s), including meters and consumption data. If bills are not based on accurate metering information, this is a criminal offence, which may result in conviction and potentially includes an unlimited fine, so it’s an opportunity to assess the equipment and systems you have in place.

Required information includes the estimated total, per calendar year, of the installed heating capacity, heat generated and heat supplied; the number and type of buildings supplied by that system; the number of final customers supplied by that system; and the number and type of meters or heat cost allocators installed in the buildings supplied.

NMRO can impose civil sanctions for non-compliance with the notification requirements, including compliance notices or enforcement undertakings and financial penalties.

It’s been reported that around 17,000 networks have gone through the process, but many more are at risk of penalties because they have yet to do so. Even for those that have complied, an updated notification must be submitted every four years.

Where must meters be installed?

In multi-occupancy buildings or developments with more than one building: Meters should already be in place at building level to measure heat, chill or hot water supplied from a district heating network or communal system.

For new buildings or where major renovation has been carried out: Meters must also be installed at the individual occupier level e.g. apartment. Where meters are installed, the heat supplier must ensure that final customer bills and billing information for heating, cooling and hot water is accurate, based on actual consumption, and compliant with the rules.

For existing buildings: The deadline for retrofitting meters at individual occupier level has been put back from December 2016 to late 2017 at the earliest. The cause of the delay is that the NMRO’s “heat metering viability tool” has been found wanting. This was the means by which landlords, agents and consultants were meant to identify where meters would be needed. Frustratingly, its withdrawal means notifications already done (and viability checked using the old software tool) will have to be re-checked with the new tool when it arrives.

Pending revision of the tool, the requirement to retrofit heat meters will not be enforced by the NMRO. It is expected that a public consultation will be held in summer 2017 with a view to releasing the revised tool late 2017, and a new deadline will then be released for retrofitting heat meters.

Where next?

You could face substantial fines if

  • you haven’t already completed the notification
  • you are involved in a new development or a major refurbishment and haven’t installed meters at occupier level
  • you haven’t installed meters at building level on all existing properties you manage or own

Owners, managers and agents of existing buildings could consider complying ahead of deadline by retrofitting meters at occupier level now. This will give you and your professional advisers more time to manage the process and to make arrangements to bill tenants individually, which will be a requirement and is another area where professional advice will be invaluable.

MPG provides help and consultancy advice on responding to the heating regulations and completing the notification process. We can also help you to identify how meter installation and data management could help you to improve building energy efficiency and reduce costs.

Clients whom we have advised on notification and boiler/MEP issues include Sloan Management, Regal Homes, Principia, Fifth Street Management, Westward Rose, HML Hathaways, Countrywide, Rendall & Ritner, Remus Management, JMW Barnard and Canary Wharf Group.

For more information or advice, please email Michael Gallucci michael.gallucci@mpgqs.com or call us on 0203 598 2506

 

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.

Resolving construction sector disputes with arbitration

Arbitration is a proven way to solve disputes in the property and construction sector. Here are four examples of how our services helped clients in the arbitration process.

  • New Town Development – Quantum Expert Reports and Claims Management for Civil Contractor in Abu Dhabi on dispute heard at DIAC. Dubai, disputed sum AED53m
  • New Build Residential Project – Preparation for Arbitration in Dublin on Residential Scheme for MEP Contractor, disputed sum €2m
  • Hospital Scheme – Preparation of claims for prolongation and loss and expense for Hospital Project in Dublin and submission and preparation for Arbitration
  • Specialist Heart and Chest Hospital – Re-drafting of Variation documents for Claim submission and preparation of £250k Insurance Claim

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.

Preparing a claim in a construction dispute

Preparing claims in construction disputes is among the services that we provide to the property sector under the heading of dispute resolution. Here are a dozen times we prepared claims to help clients win their cases.

  1. Defence Dockyard – On behalf of the employer assisting the quantum expert on a dispute with a main contractor associated with a nuclear submarine dry dock, specifically involved with analysing contractor’s alleged delays with a view to determining culpability associated with the engineering services aspect of the works, contractor’s claim for damages approximately £9m
  2. Military Bunker for Trident – On behalf of a mechanical and electrical subcontractor, providing advice and quantum information to the legal team relating to a military bunker, specifically involved with the production of documentation to assist with the valuation of the variation account and analysing the documentation to establish the basis of entitlement relating to prolongation, subcontractor’s claim for damages approximately £5m
  3. Specialist Eye Care Hospital – On behalf of contractor compiling a loss and expense claim including details of causation and quantum, claim value £660k
  4. Academy for Dramatic Arts – Assessing a controls subcontractors account and reporting on the further particulars required relating to the demonstration of the events that caused the delays and quantum particulars, claim value £1m
  5. Hotel Project (5 star) – Assessing a contractor’s account and reporting on the further particulars required in order to enable ascertainment to take place, claim value £1 .2m
  6. Media City – On behalf of an engineering subcontractor, general assistance to demonstrate that they were not culpable for specific delays, i.e. the demonstrating that the dominant cause rests with, for example, variations, delays in builders work activities, claim value £11m
  7. Hotel and Residential Project – Preparing a brief demonstrating causation to form part of a request for an extension of time, a preliminary assessment of the quantum that may flow there from, on behalf of contractor assessed claim value and preparation of final account £18
  8. National Sports Stadium – Drafting an acceleration narrative and quantum and preparation, negotiation and settlement of final account including draft of deeds of agreement, £53m
  9. Airport Terminal – General advice on projects in progress. i.e. when to issue non–completion notices, certificates, valuations, variations under NEC 3 contracts
  10. London Underground – Full Quantity Surveying services including the preparation of Claims amounting to £6m
  11. Residential Project – Independent valuation of variation account and reporting on Quantum. Prolongation and Disruption, totalling £1m
  12. Underground Station Project – Negotiation with LUL representatives, re-drafting variation submissions and checking Quantum for Dispute Team, £11m