Episode 104 - JCT Management Contract

This week we will be talking about the JCT Management Contract. This episode content meets PC5 - Building Procurement of the Part 3 Criteria.

Resources from today's episode:

 Website:

• https://www.jctltd.co.uk/product/management-building-contract

Thank you for listening! Please follow me on Instagram @part3withme for weekly content and updates. 

Join me next week for more Part3 With Me time.

If you liked this episode please give it a rating to help reach more fellow Part3er's!

Transcript

Episode 104:

Hello and Welcome to the Part3 with me podcast. 

The show that helps part 3 students jump-start into their careers as qualified architects and also provides refresher episodes for practicing architects. I am your host Maria Skoutari and this week we will talking about the JCT Management Building Contract. Today’s episode meets PC5 of the Part 3 Criteria.

The JCT management contract is generally appropriate for use on large-scale projects that require an early start on site, where it’s not possible to prepare full design information before construction and the general design that describes the scope of works has been prepared by a consultant, usually an architect, on behalf of the employer. The contract, also provides allowance for where detailed design is still required for proprietary systems or components, to be able to bring a specialist on board to design it. 

The main parties to the contract are the Employer and the Management Contractor. In terms of other consultants, there is also the Works Contractors who are contracted and managed by the management contractor, a QS and a Contract Administrator. The CA doesn’t have the same duties, however, as other JCT contracts, its more limited, under the management contract, the management contractor will administer the conditions. So under the management building contract, the management contractor is appointed by the employer early in the design process so that their experience can be used to improve the cost and buildability of proposals and to advise on packaging the works. 

The contract form itself covers both the pre-construction phase and the construction phase. The pre-construction phase includes the design which is intended to be developed by the consultant team in conjunction with the Management Contractor and with specialists as required to develop the design up to the point where it is practicable to commence construction. Once that phase is complete and the Employer provides the Notice to proceed, the construction phase can commence as soon as the necessary additional contractual details have been agreed. Throughout the duration of the project, the employer retains the right to terminate at will, subject to any direct loss and damage if the termination takes place during the construction phase. 

So once the notice to proceed has been given, the works contracts are then let and the management contractor is responsible for each works contractor in relation to both the employer and other works contractors that their work has been affected. If one of the works contractors defaults, the management contractor is entitled to be reimbursed for costs as a result of the default and also to amounts payable to other works contractor affected by the default from the employer.  

The management contract can be paid under two methods, prime cost plus a management fee for the management contractor to manage the Works Contractors. Prime Cost, which, in addition to the contract sums payable under the Works Contracts, includes the Management Contractor’s site costs, consisting principally of staff, labour, facilities and consumables. Then the management fee is divided into the Pre-construction fee and the Construction period fee and is intended to cover not only the management contractors overheads but also all off site activities involved in the management of the project. 

So the contract form consists of:

1. The Recitals
2. Articles
3. Contract Particulars
4. Attestation 
5. Conditions 
6. Control of the Project
7. Payment 
8. Works Contracts 
9. Injury, damage and insurance 
10. Assignment, performance bonds and guarantees, third party rights and collateral warranties 
11. Termination
12. Settlement of disputes 
13. And the Schedules

1. Starting with the Recitals:

In the first recital, the overall description of the project is to be inserted, then in the second and fourth recitals record the basic structure of the arrangements which include that the design is being undertaken by the consultant team and the construction work is to be carried out by the works contractors, that the management contractor is to provide site facilities and management services and also notes that the management contractor is a two-stage agreement. 

2. Then within the Articles, they set out the principal obligations of the management contractor in relation to the pre-construction and construction periods and the employer’s payment obligation. They also set out the intended completion by the consultant team of the project drawings and specification in the pre-construction period and the preparation of the project cost plan based on them. Then later articles refer to the need for the preparation of further drawings, specifications and/or bills of quantities required to enable the Works Contracts to be entered into as soon as necessary after the Notice to Proceed is given. They also refer to the requirement thereafter to give Works Contractor the further documents necessary to ensure practical completion by the agreed date. 

3. Then we have the Contract Particulars which are outlined in two parts which include details for the two phases, the pre-construction and construction. Both Part 1 & 2 refer to prime cost, if used, to provide lists attached to the form setting out any lump sums agreed in lieu of particular Prime Cost items including fixed rates and/or maximum rates and amounts. In terms of both lump sums and fee adjustment, the form allows authorisation to issue instructions for project changes, such as changes which alter or modify the scope of the project as a whole. While the normal JCT Valuation Rules will apply with respect to the variation of Works Contractors’ work, there is no provision for Management Contractor’s loss and/or expense, beyond the reimbursement of additional site costs as Prime Cost and, to cover overheads in respect of a fixed fee. 

4. Next looking at Attestation, there are separate forms for execution under hand or as a deed. The primary factor governing the decision to execute the contract under hand or as a deed is whether the limitation period for instituting proceedings in contract is to be 6 years, as in the case of execution under hand, or 12 years, where the Contract is executed as a deed.

5. Now lets look at the Conditions of the contract form:

Under the contract, the management contractor sets out their primary obligations during the pre-construction period and lists matters under which definitive agreement between the parties is likely to be required before the CA can report to the employer that its reasonably practicable to commence construction work. Following this, the CA, on behalf of the employer, can the issue the notice to proceed signifying the commencement of the construction period. A failure to notify if the second stage negotiations overrun the Review Date without the Architect/Contract Administrator’s notification or if, following that notification, the Employer does not give the Notice to Proceed, the Management Contractor’s employment may in default terminate, but only after they have given a 14-day warning notice to the Employer and Contract Administrator.

6. Now, in terms of Control of the Project and the Contractors Obligations, once the Notice to Proceed has been given, some of the management contractors’ obligation include:

• Securing the carrying out of the project 
• The requirement for the management contractor to supervise and manage the Works Contractors Design Submission Procedure
• The management contractor is also fully responsible for the works contractors 
• The requirement to consult the CA for any extensions of time requested by the works contractors and their achievement of practical completion
• They are also expected to pay liquidated damages and will not be subject to personal liability where the delay was not due to their own default 
• They are also expected to also provide access and make available all documentation relating to the project to the CA and QS as and when required 

Under the management contract, the Management Contractor is to consult with the Architect/Contract Administrator before granting an extension of time, showing a direct relationship with the Architect/Contract Administrator, who has no role under the works contract, in the granting of an extension of time. And the Management Contractor has to grant an extension of time within 16 weeks of receipt of the required particulars. If a delay is caused to a Works Contractor by a default of the Management Contractor, the Management Contractor who is only receiving a fee for their services must grant the Works Contractor an extension while not receiving one themselves.

In terms of the selection of the Works Contractors, the management contractor requires the agreement and confirmation with the CA to proceed with instructions whether the work is comprised in the project cost plan or instructed later. It is also subject to the conditions that, unless the Parties agree otherwise, each Works Contractor will contract on the basis of the JCT Works Contract, will enter into a Works Contractor/Employer Agreement and will fulfil the requisite obligations with respect to Third Party Rights/Collateral Warranties. In terms of the sub-contracting of services, as opposed to construction work, the requirement for consent applies only to management services, i.e. the Pre-Construction Services and the Construction Period Services.

Now, where the client is a local or public authority, there is an obligation on the contracting authority to require the main contractor to provide basic information on their sub-contractors and the local/public authority can insist on the removal of a sub-contractor where there are grounds for exclusion of that sub-contractor. 

Next looking at the CA’s duties and powers:

• The CA has a duty to issue instructions (which in most cases involve works contractors variations), whereby the works contractors are expected to comply with 
• The CA also has the power to instruct changes in the scope of the project 
• And they also have the power to put into operation the acceleration quotation procedure 

7. Now lets move on to Payment:

Unless entered into the contract on a remeasurement basis, the works contracts will be based on a fixed price and the respective due dates for payment are to be calculated by reference to the Interim Valuation Dates. The due dates are then 7 days after the relevant Valuation Date. During the Construction Period and up to the due date for the final payment, the monthly due dates for interim payments are in each case 7 days after the relevant Interim Valuation Date. The first Interim Valuation Date must be specified in the entry in the Contract Particulars and should not be more than one month after the Date of Possession and then the subsequent interim valuation date are the same date each month. It should be noted that the monthly cycle of due dates applicable during the Construction Period to payments up to practical completion continue to apply even after practical completion, up to the due date for the final payment. 

Interim Certificates are, therefore, required to be issued within 5 days of the date and then by the general provision governing the Management Contractors Payment Applications. Then the final date for payment is 14 days from the due date. In the case of absence of an Interim Certificate not issued by the CA on time then the Management Contractors application will take precedence. If the Works Contractors wish to submit an application they must do so 4 days before the interim valuation date. 

In terms of the retention percentage, under the management contract there is a dual Management Contractor’s/Works Contractor’s Retention system, whereby the relevant Contract Particulars provide a default retention rate of 3% for the period to practical completion and under the works contracts. There is no provision enabling the Management Contractor to make any additional retention for their own purpose. 

Now if for any reason the Works Contractor fails to comply with their work contract, the management contractor will be able to claim for reimbursement of costs incurred. If the issue resorts to litigation or other proceedings under the Works Contract by the Management Contractor authorisation or direction by or on behalf of the employer will be required to confirm proceeding with the claim in litigation. In the case where the Employer, while recording the amount of liquidated damages arising from a Works Contractor’s default, agrees to limit their recovery to amounts actually recovered from the Works Contractor. In that situation, there are of course questions of causation and as to the appropriate methods of measuring resultant delay, this is where full record-keeping and close liaison between the Parties and Architect/Contract Administrator are essential.

Now what if the Works Contractor claims of default or gives rise to a claim or counterclaim against the management contractor. In such a scenario, if the Management Contractor is not in breach of the Works Contract, the Employer will reimburse them of their costs and expenses in defending and settling Works Contractors’ claims provided that they immediately inform the Contract Administrator of the claim or counterclaim and acts in accordance with the Employer’s directions. If any part of the claim or counterclaim is the result of a default by the Management Contractor, the latter, if minded or advised to settle on a “global” basis, will before doing so need first to agree with the Employer (or Contract Administrator on their behalf) not only the overall level of settlement, but also the amount to be apportioned to the Management Contractor’s default.

Under the management contract, Works Contractors are also entitled to make applications for loss and expense, which are to be value by the CA or QS in collaboration with the management contractor. The Management Contractor will then need to supply information to the Contract Administrator in cases of a Works Contractors default or insolvency, which empowers the Contract Administrator to direct the Management Contractor to terminate the Works Contractor’s employment in cases of corruption and, also requiring the Employer’s consent to termination. 

8. Now lets look at the next section, Injury, damage and insurance:

There are five elements to consider under this section, Personal Injury and Property Damage, Insurance against Personal Injury and Property Damage, Insurance of the Project and Existing Structures, Professional Indemnity Insurance and Joint Fire Code. 

Under personal liability and property damage, the contracts sets out the management contractors liability to take out the necessary insurance to provide cover for such matters including their indemnity to the Employer. If the Contract Particulars state the insurance that may be required and the Contract Administrator requests it, the Management Contractor is required to take out insurance in the joint names of the Employer and the Management Contractor in respect of claims against the Employer as a result of damage to property due to subsidence, weakening or removal of support, vibration or the like arising out of the carrying out of the Project. The cover to be obtained will be for an amount stated in the Contract Particulars and subject to the list of exclusions set out in the contract. This insurance is sometimes referred to as “non-negligent loss insurance”, reflecting the Employer’s strict liability in respect of damage to neighbouring properties, irrespective of whether or not there has been negligence or breach of duty on the part of either the Employer or the Management Contractor. Where that insurance is required, the cost forms part of the Prime Cost.

In terms of Project and existing structures insurance, there are three Insurance Options (A, B and C). 

Option A is intended for new buildings and requires the management contractor to take out a Joint Names Policy for all risks insurance for the full reinstatement value of the project including site materials plus professional fees. Where this insurance option applies, the cost is treated as Prime Cost.

Option B is intended for new buildings and required the employer to take out a joint names policy for all risks insurance for the full reinstatement value of the project, including site materials plus professional fees. 

Option C is relevant where existing structires are involved. Unless the Parties agree to replace it with a C.1 Replacement Schedule, an option provided for in MC 2016, which requires the Employer to take out both a Joint Names Policy for the full reinstatement cost in respect of damage to the existing structures and their contents by Specified Perils, or C.2 can be chosen and requires a Joint Names Policy for All Risks Insurance on the same basis as under Option B. Under Option C the Employer maintains insurance of the existing structures and contents.

The Joint Names policy (or extension of a subsisting structure and contents policy) required by C.1 may not be readily available for refurbishment projects, extensions or alterations by tenant Employers where Existing Structures insurance is the landlord’s responsibility. In such cases C.1 introduces the Replacement Schedule option.

In the case of projects for a tenant Employer of a building in multiple occupancy, the overall value of the structures and other tenants’ contents may be well beyond the Management Contractor’s Public Liability cover level. In such cases more complex insurance arrangements, involving several layers of different covers and/or risks may be necessary, e.g. Management Contractor’s Public Liability to respond up to a certain level, special structures insurance effected by the Employer to another level and landlord’s insurance to respond above or below that, albeit for a premium to be paid by the Employer. In certain high-value cases the Employer and landlord may agree that a level of cover below full reinstatement/replacement cost is adequate for their purposes. So where potential liabilities exceed any agreed level, the Management Contractor and their insurance advisers should, ensure that the Contractor’s liability is limited to realistic levels by the C.1 Replacement Schedule and, since the Management Contractor may be exposed to third party claims, that they also obtain a suitable indemnity from the Employer in respect of any excess claims.

In terms of professional indemnity insurance, although the Management Contractor does not undertake design work, the requirement for them to provide other professional services is such that an optional provision to take out and maintain PI is included in the Management Contract. In cases where there are Works Contractor’s Designed Works, Works Contractors also may be required under the terms of their Works Contracts to maintain such insurance.

9. So that covers insurance, now lets move on to Assignment, performance bonds and guarantees, third party rights and Collateral Warranties:

Under this section, the restrictions on assignment, parent company guarantees and performance bonds, rights of third parties and collateral warranties are outlined.   

Employers will generally require the works contractors to enter into a works contractor/employer agreement, meaning there is not requirement for collateral warranties. 

In relation to third party rights or collateral warranties, failure to specify whether rights are to be granted as third party rights or by collateral warranty, rests with the Management Contractor to decide.

10. Next we have Termination:

Under the management contract regulation 73 of the Public Contracts regulations applies, which requires a contracting authority to have the right to terminate the contract where:

• it provides the right for the Employer to terminate the contract where there has been a substantial modification to the contract which would have required a new procurement procedure
• Or where at the time of the contract award one of the mandatory grounds for exclusion applied and the contractor should have been excluded from the procurement procedure 
• Or where the contract should not have been awarded to the contractor in view of a serious infringement of the obligations under the Treaties and the Public Contracts Directive 

These termination rights will be implied into the Contract where the relevant regulations apply and are not expressly provided for, but the JCT has chosen to deal with them in the Contract itself to provide greater legal clarity and to allow for the consequences of termination to be specified.

Under the management contract, the employer has the right to terminate the Management Contractor’s employment at will at any time and also for corruption. Key item to highlight is that only the Management Contractor’s employment under the contract is terminated not the contract itself, which remains in force to deal with the consequences of the termination. 

Each Party also has the right to terminate that employment either for default or insolvency on the part of the other or where substantially the whole of the Project is suspended for the period stated in the Contract Particulars by virtue of a range of events outside the control of either Party. In such instances, there is a requirement for a warning notice of the default to be given prior to termination, giving an opportunity for the default to be remedied. If it’s not remedied within 14 days of the notice there is a 21-day period for giving notice of termination where, after a notice of default, a notice of termination is not issued within that period but the default is repeated, the Party not in default again becomes entitled to give notice of termination within a reasonable time.

Where either Party is insolvent or the Management Contractor commits a corrupt act, the other Party may terminate without a warning notice but, where termination is due to prolonged suspension of the Works, a warning notice is required. Where any sums are due but unpaid, a Pay Less Notice should be given by the payer where that is still practicable; without such a notice, a sum already due may only be withheld if termination is on the grounds of insolvency and the insolvency has occurred after the period for giving a Pay Less Notice has expired.

11. And lastly, we have the Settlement of Disputes:

The Management Contract refers to 4 methods of dispute resolution, mediation, adjudication, arbitration and legal proceedings/litigation. Adjudication is a statutory right so if one party wishes to use this method, the other must agree. Mediation is a voluntary process and depends on the cooperation of the parties. If neither of these three processes satisfy either party, then the dispute will have to be resolved by arbitration or litigation.

If mediation is pursued, a mediator will be appointed jointly by the parties and will meet the parties together and separately to resolve their differences. The outcome is often in the form of a recommendation and if accepted is signed as a legally binding agreement and it would then as result be enforced. However if its not accepted, it can’t be imposed by law and the parties will need to seek alternatives processes. Unlike adjudication, arbitration or litigation, mediation is a non-advesarial process and tends to forge good relationships between parties. 

In the case of adjudication, the adjudicator may be named in the Contract Particulars and/or a nominating body identified there. Where the Employer is a residential occupier there is no statutory requirement for the contract to contain an adjudication provision, and the Employer’s advisers should consider with their client whether an adjudication provision is desirable. The costs of adjudication are generally less than those of litigation or arbitration, but they are not inconsiderable. If a dispute arises, the Parties should consider whether to allow a reasonable period for negotiation before recourse to adjudication or other external means of resolving the dispute.

If that fails then, Arbitration may be used, whereby an arbitrator is appointed and has power derived from a written agreement between the parties to a contract and is subject to the Arbitration Act 1996. Arbitration awards are enforceable by law and can be subject to appeal on limited grounds. The party wishing to refer the dispute to arbitration must give notice identifying briefly the dispute and requiring the party to agree to the appointment of an arbitrator. If they fail to agree either party may then apply to the ‘appointor’ selected in the contract particulars. The arbitrator has the right and duty to decide all procedural matters, subject the parties right to agree any matter. Within 14 days of appointment, the parties must each send the arbitrator and each other a note indicating the nature of the dispute and amounts in issue, the estimated length of the hearing and the procedures to be followed. The arbitrator must hold a preliminary meeting within 21 days of appointment to discuss the matters at hand and the first decision is wether a short hearing, documents only or a full procedure is to apply. Under the documents process, the arbitrator makes the award based on the documentary evidence only, under the full procedure process the arbitrator will hold a hearing where the parties or their representatives can put forward further arguments and evidence. Under the hearing process, a hearing is held within 21 days of the date when the process is chosen and the parties must exchange documents not later than 7 days prior to the hearing. And then the arbitrator publishes the award within 1 month of the hearing. Costs normally are based on whoever wins, the losing party pays and the proceedings are kept private, unlike litigation. 

There is also an option for disputes to be referred to litigation. Litigation cases are heard in the High Court and construction cases are usually heard in the Technology and Construction Court. Under this process, the timetable and other detailed arrangements are determined by the court. A judge will hear the case and the court has the power to order that actions regarding related matters are joined, e.g between employer and contractor and contractor with sub-contractor on same issues. Litigation makes the case public and is a much lengthier process than the others.  

To sum up what I discussed today:

• The JCT management contract is generally appropriate for use on large-scale projects that require an early start on site and where it’s not possible to prepare full design information before construction
• The main parties to the contract are the Employer and the Management Contractor, with the Works Contractors contracted and managed by the management contractor
• The contract form itself covers both the pre-construction phase and the construction phase a Notice to proceed must be given by the employer in order for the construction phase to commence
• The management contract can be paid under two methods, prime cost plus a management fee for the management contractor to manage the Works Contractors
• The Contract Documents include the Recitals, Articles, Contract Particulars, Attestation, Conditions, Control of the Project, Payment, Works Contracts, Injury, Damage and Insurance, Assignment, Performance Bonds and Guarantees, Third Party Rights and Collateral Warranties, Termination, Settlement of Disputes and the Schedules
• The management contractor requires the agreement and confirmation by the CA to proceed with instructions of the Works Contractors
• Unless entered into the contract on a remeasurement basis, the works contracts will be based on a fixed price and the respective due dates for payment are to be calculated by reference to the Interim Valuation Dates.
• There are three Insurance Options under the management contract relating to new structures and/or existing structures
• Under the management contract, the employer has the right to terminate the Management Contractor’s employment and vice versa, and each Party also has the right to terminate the  employment of the other, either for default or insolvency on the part of the other
• The Management Contract refers to 4 methods of dispute resolution, mediation, adjudication, arbitration and legal proceedings/litigation.