Build UK highlights key contract terms that may jeopardise construction projects by unfairly transferring risks.
- Industry-standard contracts like JCT and NEC often face amendments that complicate and double their length, leading to risk misallocation.
- Avoiding ‘fitness for purpose’ in design contracts helps prevent disputes and aligns with insurable standards.
- Managing unquantifiable risks through early contractor involvement rather than passing onto contractors promotes efficiency.
- Performance securities need careful structuring to balance security for clients and fairness for contractors.
Build UK has published an important document emphasising the need for fair risk allocation in construction contracts. The document critiques frequent amendments to standard contracts such as JCT and NEC, which can inadvertently shift risks down the supply chain. This can lead to inefficiencies, increased costs, and inadequate insurance coverage for parties less equipped to handle these risks.
To avoid creating unrealistic expectations in design contracts, the document advises against including a ‘fitness for purpose’ standard of care, except in the process sector. This standard imposes high liability burdens often not covered by professional indemnity insurance. Contracts should specify liability to reasonable skill and care to align with industry norms and insurance capabilities.
The document also discusses unquantifiable risks such as asbestos and antiquities. It argues these should not burden contractors since they can severely impact project timelines and costs. Instead, a risk management approach with early contractor involvement is recommended. This would include setting up a risk register to manage these eventualities effectively.
Specified Perils like fire and flood should allow contractors to claim time extensions even if at fault. The standard JCT position supports this by granting time extensions without covering losses, thus balancing risk between parties. Failing to do so could lead to contractors facing unsustainable liabilities.
A blanket indemnity for breach of contract can expose one party to unlimited risks, which are often uninsurable. Instead, limiting indemnity to specific, fault-based categories such as tax liabilities protects without imposing unreasonable burdens. Standard legal remedies should address breaches to keep risks manageable.
Contracts should not impose uncapped liability on contractors, especially on large projects, as this could lead to catastrophic financial losses. Instead, liabilities should be capped according to contract value and insurance coverage. This strategy helps maintain project viability and safeguard contractors. Carve-outs for serious offenses remain accepted, ensuring comprehensive yet fair risk management.
Finally, performance securities such as bonds, guarantees, and warranties should include protective clauses like ‘no greater liability’. Performance bonds are specifically singled out; on-demand bonds unfairly strain contractors financially by being treated as loans by banks, reducing working capital. Opting for default bonds is recommended over pure on-demand bonds.
Adopting these contractual recommendations could significantly improve fair risk allocation and project outcomes in construction.
