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In law, a contract is a binding legal agreement that is enforceable in a court of law or by binding arbitration. That is to say, a contract is an exchange of promises with a specific remedy for breach. The contract is an agreement creating and defining the obligations between two or more parties (1"Sullivan, et al, 2003)
Building construction today often entails complex, and intensive site operations, with huge sums of money locked into development programmes. Contractors may have partial of total design responsibilities, and in addition may undertake demanding management and coordinating roles; patterns of working have never been so diverse. This change of emphasis, together with the increasing range and scale of work, has inevitably led to proliferation of alternative forms of building contract both standard and purpose drafted.
Recently, one of the controversial issues is construction damages. There are a many of scenarios of construction damages that require a plenty of issues from its insurance, therefore, one of this scenarios is:
My client is a leading manufacturer of confectionery in the United Kingdom. They have suffered a devastating fire at their Sheffield factory.
my client's Insurers have authorised that rebuilding work should commence immediately and have now started to pay your Client "Business Continuity" insurance that is worth approximately £1.5 million per month to cover both loss of profit and to allow products to be imported from another country for packaging and sale.
The site has already been cleared using an enabling works contract. It has now been decided that a single contractor will be appointed who is experienced and capable of undertaking this type of work. As an experienced Project Manager, my task to administer the rebuilding of factory rebuilding which currently is thought to be in the region £60 millions. The time scale and who you will use to achieve the delivery of the new building and process equipment to enable the manufacture of confectionery to re-start, including any trials, performance tests and commissioning at the earliest possible opportunity is for you to decide.
This paper will examine suitable form of contract that is appropriate and will allow the delivery of the new factory as early as possible. First, , investigate form contract chosen. Also, examine the number of contract and discount those that are inappropriate the reasons why. Secondly, identify at least 15 of the parties who are likely to be involved in project of this type, and present a detailed organogram that shows who parties could be, and identify the contractual relationships that might exist between them and suggest suitable types of agreement that reflect the size, type , nature and issues that might affect the parties involved. Finally, presentation the final contract and the relationships.
These papers will focus on the requirements of three main elements involved in this case. These are time, cost and quality.
Time is the main consideration due to the factory has to re-start as early as possible. The price is fixed and there should be trials and performance test after the completion
Types of procurement methods
In this method the Contractor builds to a defined scope of works for a fixed price lump sum. The client retains the responsibility for the design and the project team. The contractor will be appointed normally following a tender process or negotiation and will sign up to a contract for the works. There are a number of standard forms of building contract available for this purpose. Which they are:
Lump sum contracts
Cost reimbursement contract
Design and Build Procurement
The Client appoints a building contractor, as before standard forms of contract are available for this purpose to provide a completed building to an agreed cost and programme. The Contractor is responsible for design and construction. The Contractor can be chosen through a tender process or through negotiation. The Client can appoint a consultant to oversee the works. Maximum risk is transferred following this method of procurement, although a commercial response to design in order to address contract conditions can result.
An alternative is to appoint a contractor when designs have been developed in order to retain control of the important elements of design and specification. The Design Team can then transfer their contractual obligations to the contractor and complete the designs on behalf of the Contractor.
For design and build procurement there are three main types of contract:
Package deal or turnkey contract
Design and build contracts
Contractor's design for specific elements only Management Contracting
Basically such contracts concentrate primarily on the management expertise of the contractor and are particularly suitable for fairly large projects with complex requirements. There are many variants, ranging from the procurement of a building designed by the client's professional team on the one hand, to in addition playing a major design role, to also accepting a wider facilities management obligation to fit out and maintain the operation of a building for some specific period, and even perhaps playing a substantial role in the immediate funding of the project. Clearly in the majority of such cases, developers will have to look to forms of contract specially drafted to suit their requirements.
There are some standard forms available for use with the main management
Procurement options, as follows:
The client appoints an independent professional team, and also a management contractor. The contractor's involvement at pre-construction stages will be as an adviser to the team, and during construction it will be responsible for executing the Works using direct works contractors. With this type of contract it is possible to make an early start on site and achieve early completion. Because of its flexibility, it allows the client to develop the design during construction, because drawings and matters of detail can be adjusted and finalised as the work proceeds. For a management contract to be successful there must be trust and good teamwork on the part of the client, the professionals and the management contractor. The latter should preferably be appointed no later than the outline design stage. The contractor can advise on the design programme, tender action, delivery of materials and goods, and construction programmes. The management contractor will normally make a written submission which includes a proposed management fee, and will be appointed after interviews with the client and the professional team. The fee will include for the total management service, expressed as a percentage of the total project cost, and for a service to cover preconstruction stages should the project not proceed to site.
The management contractor undertakes the work on the basis of a contract cost plan prepared by the quantity surveyor, project drawings, and a project specification. The client accepts most of the risk because there is no certainty about costs or programme. Competitive tenders for the Works packages follow later, and they will usually, though not always, be lump sum contracts based on bills of quantities. There is a Standard Form of Management Contract issued by the JCT, together with the Standard Works Contracts and an Agreement for use between the client and each works contractor.
Again, the construction manager is appointed after a careful selection process and is paid a management fee. One basic difference from a management contract is that the trade's contracts, although arranged and administered by the construction manager, are direct between the client and the trade contractors. Although in a sense this gives the client a greater measure of control, it also means that he or she accepts virtually all of the risk. The construction manager is a coordinator, and usually cannot guarantee that the project will be finished to time or cost. The client directs the project and the client is also likely to carry the greatest burden of the speculative risk. Obviously in-house expertise is essential. Construction management seems to have increased in popularity over management contracts, but much work by this procurement method has been undertaken by experienced commercial clients using bespoke agreements. There are now also a few standard forms available for construction management.
Design, manage, construct and in some instances maintain
This variant is a more recent development of the management approach, offering a total integrated service from a single source. It can be led by the contractor, or by some other professional. The latter is only likely when the design aspects of the project are a high priority. There are no standard forms available as yet, and developers or contracting organisations mostly use specially drafted forms. Architects involved in this kind of work should engage a specialist lawyer to check forms, and advise on the terms.
Maintenance is normally outside the scope of building contracts, and is the subject of facilities management or other special agreements. Contracts where the Architect administers a series of separate trade contracts where there is no main or general contractor, may also fall into this category. As well as being the designer, the Architect assumes the managing and coordinating roles for the project. This arrangement sometimes occurs with fairly small projects and is a quite traditional way of working. Trades contracts will ordinarily be direct between the client and the firms concerned.
The Matters which might influence choice
The choice of an appropriate procurement method and type of contract might be greatly influenced by external factors. Choice should never be made on some arbitrary basis but always after a careful analysis of the situation, and taking into account considerations such as the following:
The nature of the project.
The scope of the works.
Measure of control by the client.
Appointment of a contractor.
Certainty of final cost.
Start and completion times
Changes during construction
Assessment of risks.
Building relationships with the supply chain
Comparison of Procurement method
The Previous part covered the types of procurements to archive the appropriate procurement for the client scenario. As result and as can be seen from the table above, the suitable procurement is management procurement since benefits in time and quality, due to requirement of suitable form of contract that will allow the delivery of the new factory as early as possible.
Suitable standard contract
The standard contract form which suitable with client requirement is contract management due to achieve the main aspect for the client scenario that is early completion than the other forms.
Management contract Forms:
IChemE Green Book (ICE)
IChemE publishes two sets of forms of contracts for use in the process industries:
Forms for use in the UK
Forms for international use
Both sets have been drafted by a team of highly experienced professionals who are well familiar with process plant contracts. Each form of contract handbook contains a model form of Agreement and General Conditions, together with detailed guide notes to assist the user in preparing a contract.
IChemE provides both public and in-company training courses in the forms of contract, and in basic contract law. The IChemE Green Book provides a flexible mechanism for contracting in uncertain conditions. As a cost reimbursable contract the risk of all costs associated with the construction activities lies with the purchaser, and he is well advised to consider employing one of the various cost-targeting methods available in order to limit his liability. In itself the IChemE Green Book does not allow for such a provision and thus could be seen as somewhat 'open-ended'. Collaborative relations between the purchaser and contractor are advised (especially given the purchaser's exposure to costs), but there is no guidance how such relations should be established or maintained.
â€¢ Purchaser/Contractor interests are more divergent than in other forms of contract.
â€¢ Lengthy enquiry preparation time to prepare clear and complete specification and bid documentation.
â€¢ Cost to Purchaser may be unnecessarily high due to contingencies for risk and escalation. .
â€¢ Contractor has no monetary incentive to minimise cost to Purchaser.
â€¢ Purchaser has no assurance of final cost.
â€¢ Purchaser has to check and verify Contractor's manhour and expense records.
â€¢ Bid evaluation may be difficult.
â€¢ Purchaser knows his expenditure commitment.
â€¢ Clarity of contractual risk and project management.
â€¢ Allows fullest competition between potential contractors.
â€¢ Bid evaluation is more straightforward.
â€¢ Complete flexibility - design development and Purchaser participation practicable.
â€¢ Purchaser/Contractor conflict of interest is minimised.
â€¢ Purchaser has control over costs incurred.
The Joint Contracts Tribunal Ltd (JCT)
The original agreed standards form was published in 1909 and was known as the RIBA Form. In many respect JCT is a direct descendant through a series of editions published in 1931, 1932, 1963 and 1980, although now publication is the responsibility of the Joint Contracts Tribunal Limited (JCT).
To be considered with great care. For example, the Appendix requires very careful consideration of whether certain clauses include into the applies/dos not apply category. The form lacks a logical structure, because it has evolved over many decades in rather ad hoc manager.
The JCT MC provides the construction industry with a management contract suitable for the procurement of large multi disciplinary projects, where time to completion is important and the client is looking for a party to co-ordinate all activities to deliver the completed works. One particular advantage is that Management Contractor can package and resource the works, utilising his own expertise, by overlapping activities and thus expedite the completion date.
However, from the client's point of view, there have been several disadvantages with the JCT MC which they are: management contracting can be more expensive than other forms of procurement because the management contractor has no incentive to keep the costs down. The management contractor has little or no responsibility for the costs of the works. The risk of increased costs has been removed from him and is carried by the client.
â€¢ Management contracting can be more expensive than other forms of procurement.
â€¢ The management contractor has little or no responsibility for the costs of the works.
â€¢ The risk of increased costs has been removed from him and is carried by the client.
â€¢ The management contractor has no incentive to minimise the projects costs.
â€¢ Management Contractor can package and resource the works, utilising his own expertise, by overlapping activities and thus expedite the completion date.
The New Engineering Contract (NEC)
The New Engineering Contract (NEC) was developed by a team headed by the Martin Barnes under the auspices of the Institution of Civil Engineers in the UK. It was published for general use in 1993. Since then it has become very widely used in the UK and also in more than twenty countries around the world. It breaks away entirely from traditional construction and engineering contracts
NEC3 is the result of feedback from industry on many years of successful use and is the first time that the complete integrated set of NEC documents have been launched at the same time. The family has been expanded to provide a Term Service Contract and Framework Contract, both complemented with the standard NEC approach of including guidance notes and flow charts.
The third edition (NEC3) was launched in July 2005. Points:
NEC3 stands as a 'Suite' of construction contracts designed to meet the needs of a variety of projects.
Included in the Suite are three forms of Engineering and Construction Subcontract, a 2.thefreedictionary.com/professional+services"Professional Services Contract, a Team Service Contract and a Framework Contract.
The NEC was an attempt to offer:
Flexibility: by making one all purpose document suitable for traditional procurement, design and build, or management contracts. It was further claimed that it could be suitably adapted for most types of civil engineering and building work, from large scale projects down to domestic- scale work. Although drafted as a head contract, it was originally thought that it could also been used as a sub-contract, thus providing the ultimate in back to back compatibility. The language of the form was such that it was thought suitable for use under UK law and also overseas.
Clarity: sufficient for the form to be exportable, understandable, and therefore likely to lead to fewer disputes. It was also drafted with plain language and relatively short clauses kept in mind. The precise meaning of some the more unfamiliar terminology, however, has yet to be defined by case low.
Good management on the part of all parties: it was felt that there should be an end to adversarial posturing by bringing into the contract with an obligation for frank and open discussion of problems as they arose, thereby minimising the risk of disputes escalating to the point where time and costly overruns became inevitable. It was further thought desirable to introduce incentives for good performance and early completion.
â€¢ Few legal precedents.
â€¢ Must be pro-actively managed problems must be addressed as they arise.
â€¢ Different approach in contract administration required.
â€¢ Needs a different mindset.
â€¢ Flexibility, clarity &simplicity - a stimulus to good management.
â€¢ Teamwork, single point responsibility and awareness of risk.
â€¢ Provides appropriate contract strategy and risk placement.
â€¢ PM presented with options for dealing with problems.
â€¢ Price changes based on quotations - no surprises.
â€¢ Up-to-date realistic programme used in joint decision making.
â€¢ Increased likelihood of mutually satisfactory project.
â€¢ Improved cost certainty for the parties.
As result for the analyse the different types of forms contract, the suitable forms is NEC which achieve the client requirement that is the time. Furthermore , NEC has three basic objectives that support client scenario which are, clarity, simplicity and stimulus to good management.
The contracts consist of main option clauses in NEC, which they are:
Option A: Priced contract with activity schedule.
Option B: Priced contract with bill of quantities.
Option C: Target contract with activity schedule.
Option D: Target contract with bill of quantities.
Option E: Cost reimbursable contract.
Option F: Management contract.
Option F has the best match with selection criteria of the given project scenario, due to under option F client and insurance company can appoint consultant for the designing and supervising contractor work, and the program manager can take care of the things with consultant and contractor to report to client and insurer, with this the three aspects of time, quality and cost can be managed.
Option F: Management contract.
Management type contracts include management contracting and construction management; both are catered for in NEC. In reality a management contract structure is similar to a traditional contract, where the main Contractor subcontracts works out.
He can carry out as much design and/or construction of the works as he desires, but this should be listed in Contract Data part two as a lump sum total. This stated total, together with the package Contractor's costs, are added together and the management Contractor's Fee is applied to this amount. This total is the Price that the Client pays. Figure 1 illustrates this management contracting relationship.
Figure (1) Typical Management contracting relationship.
This is suitable:
Fast track projects
A developing brief
However, it is less suitable for:
Cost certainty before starting construction
Clients wanting to pass risk to the contractor
The client appoints designers and a contractor (management contractor) separately and pays the contractor a fee for managing the construction works.
A feature is the early appointment of the contractor to work alongside the design team to develop a programme for construction and contribute to the design and costing of the works. The works are let competitively by the management contractor to subcontractors and specialists in appropriate works packages. This approach often means that design and start on site overlap, with the design and tender packages becoming available just in time to suit the construction programme.
The management contractor will not carry out construction work. This preserves the management contractor's independence and reinforces a consultancy relationship with the client. Payment is made to the management contractor on the basis of the cost of the works packages plus the agreed fee.
Much of the success of this approach depends on the contractor's team. Unless the team is drawn from companies which are experienced in this kind of team working, the benefits are not always realized.
There are fewer prices certainly at the outset, because construction tends to start ahead of completion of all design dates and a point when many of the work packages have yet to be tendered. This often means adjustments are made to the design and specification of works packages later in the programme to keep the project within budget. However, the overall process of design and construction tends to be shorter than in either design- bid- or design and build situations.
An organizational chart of a company usually shows the managers and sub-workers who make up an organization. It also shows the relationships between the organization's staff members which can be one of the following:
Line - direct relationship between superior and subordinate.
Lateral - relationship between different departments on the same hierarchical level.
Staff - relationship between a managerial assistant and other areas. The assistant will be able to offer advice to a line manager. However, they have no authority over the line manager actions.
Functional relationships between specialist positions and other areas. The specialist will normally have authority to insist that a line manager implements any of their instructions.
board of directorsÂ : managing director chief executive officer: various departments... In many large companies the organization chart can be large and incredibly complicated and is therefore sometimes dissected into smaller charts for each individual department within the organization.
There are three different types of organization charts:
Flat (also known as Horizontal)
It is essential that to know the relegation ship between different parties that will show in this part of organ gram. The organisation chart for the given scenario will be
In conclusion, this paper has compared the types of contract and which contract will be better for the scenario.
After the examination of three forms of contract within management procurement: IChemE, JCT, and NEC, the NEC has been chosen due to several things: the NEC was designed from a clean sheet of paper, as a means of managing the interfaces in a complex project. The use of simple language, and the present tense throughout; The emphasis on good project management by the Contractor and the Project Manager.It has been stated that the New Engineering Contract is being used for over ninety percent of infrastructure projects in the UK.
It is very clear that site relationships are very much better when NEC is used than when management contracts are used. Real partnerships develop and the certainty of outcome in terms of cost, time and performance of the completed projects and profit for the contractors and subcontractors is significantly improved.
The NEC is summarised in its three basic objectives. They are - clarity, simplicity and stimulus to good management.
These papers have examined suitable form of contract that is appropriate and will allow the delivery of the new factory as early as possible.