An introduction to the standard forms of contract
In the early stages of a construction project, depending on your role and the degree of bargaining power you have, you may need to choose what form of construction contract you will use. This decision needs to be made early. This is because the contract you choose may dictate the processes for procurement, planning and costing of the project. It can also impact the allocation of risk between the various parties working on the project.
It may be tempting to reach for the same trusted contract you have always used. However, every construction project is different. With unique requirements, you will need to weigh up the pros and cons of the various standard forms and decide which works best you.
Amendments and Risks
You will need to understand your risks and obligations under the contract you use. Even using a familiar standard form, things may not be simple. Construction contracts are often heavily amended. These changes could have big implications on your project later. Be sure to keep an eye out for amendments and how they interact with other parts of the contract documentation.
In this article, we look at two common forms of contract: the JCT and NEC. For each, we’ll be comparing the pros and cons.
JCT
JCT contracts are typically designed for building projects. However, they can be amended to suit engineering projects. There is no one ‘JCT contract’. Instead JCT comprises of a suite of ready-to-use contracts, covering projects from small domestic extensions to complex skyscrapers. JCT of one form or another is the contract many of our contracting clients will be more familiar with.
NEC
NEC contracts were originally designed to manage engineering projects. Like the JCT, they are a suite of contracts that can be adopted or amended to suit other types of projects. NEC contracts are also endorsed by government. This means they are often used on high-profile public-sector infrastructure projects.
In more recent years the NEC form has also appeared in commercial and other construction projects, such as schools and public sector buildings as well as famously on the London 2012 Olympics. If working in the public sector, there’s a strong possibility this will be a contract you will encounter.
Bespoke Contracts
Sometimes contracts are created for a project. These are what are referred to as bespoke contracts. They are often used for simple supply agreements, where a standard form might be unnecessarily complicated and administration heavy.
At the other end of the spectrum, when projects are particularly complex it can often make more sense to create a bespoke contract than heavily amend a standard form.
Bespoke contracts come with their own risks and benefits, but for the purpose of this article, we will be focusing on the two common standard forms.
Pros and cons
Familiarity
The JCT is the most commonly used construction contract in the UK. As you might expect most employers and contractors will have a level of familiarity with the suite. However, NEC contracts are also widely used so you can expect a similar level of familiarity, depending on your background.
Whilst it is helpful for the parties to have a level of familiarity with the contract, it is important not to become complacent. You may be using the same version of a standard contract, but some clauses may be very different to versions you’ve used in the past. As noted above, watch out for those pesky amendments! Also be sure that the contract chosen from within the suite of contracts is suitable for the job. So for example, a JCT Minor Works may be suitable for a ‘minor works’ project, but would be unsuitable for a large development.
Ease of amendments / flexibility
In theory, standard forms of contract are drafted for use ‘out of the box’. In reality, these contracts are often heavily amended to deal with specific risks to the project.
NEC contracts tend to lend themselves to amendment. Most contain core clauses, with a range of options available for tailoring. They also allow for bespoke clauses, known as “Z clauses”, to be added. As always there are risks associated with these, so take great care when incorporating or accepting an amended contract.
JCT contracts offer less flexibility. They are not designed for substantial amendment, and the general advice is that amendments should only be made if necessary. However, that doesn’t stop people doing it!
As projects progress, the NEC provides a mechanism to manage risk though an “early warning” process. The philosophy of working “in a spirit of mutual trust and co-operation” promotes a more collaborative approach.
In contrast, the JCT expects all risks to have been addressed at the contract drafting stage. Later flexibility is not as easily achieved.
Language and understanding
It is widely accepted that the NEC is simpler to understand than the JCT. Though lawyers have argued that this ‘simplicity’ has the potential to create less certainty and therefore possibly more disputes.
NEC was written using plain language as an effort to encourage good project management. The JCT contains far more legal terminology and is often seen as a more traditional contract.
Both suites of contracts use their own language to describe certain events. For example, events that cause delays to the works are called ‘compensation events’ under NEC contracts but ‘relevant events’ under JCT. How these issues are addressed and assessed also varies from contract to contract.
Domestic v international
The JCT is designed for use on projects in the UK. It is drafted to comply with English legislation, for example regarding payment. NEC, in contrast, allows for a choice of governing law and language, making it far better suited to international projects.
Dispute management & resolution
Traditionally, the JCT is seen as a more adversarial contract. It provides for several methods for resolving disputes, including: negotiation, mediation, arbitration, adjudication and litigation. The JCT also separates the treatment of time and money, dealing with each individually.
As noted already, the NEC takes a more collaborative approach. In the spirit of mutual trust, it expects parties to partner to adopt a fairer balance of risk. Should disputes arise, the contract has a two-tiered approach to dealing with them. The first step is adjudication, and then, if resolution cannot be found the dispute should progress to arbitration or litigation. NEC deals with the effects of time and cost together.
So which contract is best?
Like so many of these articles, the only conclusion we can draw is, it depends.
Parties should consider the pros and cons with the context of their particular project in mind. The complexities of the project will dictate which standard form, with which amendments, will be right for you and the project.
As always, you should seek advice before entering into a construction contract especially if there is a set of amendments. You may need a solicitor, or a competent consultant may be able to assist. If you are looking for help on where to go, get in touch via our website.
