An overview of effective construction project structures

At the outset of a construction project, negotiating and putting in place the relevant documentation may seem like a potentially time-consuming exercise, particularly when you are keen to just get started on site.  It is important for developers to have an effective construction project structure in place that is suitable for that particular individual project, to minimise any potential problems along the line.

It is essential that the parties in the project ensure that the relevant construction contracts and appointments are properly set up from the start, particularly as construction projects are a fertile ground for disputes to arise.

In this article, we will explore what documentation is needed to ensure an effective construction project structure.

Construction project structures and documentation

There are several different contractual routes that a client may choose to take when starting a construction project. The chosen procurement route will be reflected in the contract documentation and will determine which party is responsible for carrying out the works and their design, and which party will be responsible for engaging the various consultants who will be needed. The client’s decision will be based on a number of factors such as time, cost and quality control.

Construction contracts can be voluminous and comprise various technical and commercial schedules, as well as a lengthy main body of conditions and contract particulars to set out when, where and how the works are to be carried out, designed, managed and completed. The documents which are required to encompass the overall project will be influenced by a number of factors including (but not limited to):

• The type of procurement route required – for example: (i) traditional construction (where the building contractor constructs what the designers have designed but has no design input or responsibility), (ii) design and build (where the building contractor not only constructs but also completes the design of the building and carries responsibility for that design), or (iii) ‘hybrid’ (where the building contractor is responsible for discreet aspects of design either through its in-house designers or via sub-contractors who carry out that element of design, but is not responsible for the whole design);
• Whether the parties are using a standard form (with or without bespoke amendments) or a bespoke form of contract; and
• The size, nature, complexity and cost of the project in question.

Key construction documents

Although the building contract is very important in terms of setting the project structure,  there are a number of other key documents which feature.  Construction contract documents usually include, but are not limited to, the following:

1.Building contract

This is entered into between the client (as ‘employer’) and the contractor and will set out the legal terms under which the actual building will be constructed. Over the years, various construction industry bodies have developed suites of standard forms of building contracts with which most contractors and employers are familiar. These include the JCT, NEC, FIDIC standard forms of contract.

The range  of industry standard forms is extensive and different forms will be better suited for one project over others. The key points to consider when choosing which standard form to incorporate will be the size and value of the project, the most appropriate procurement route and the particular type of works being carried out.

The industry standard forms have gone through several editions and have been amended and updated over the years.  It is therefore essential that clients check that they are using the correct form of standard form, edition and whether that version or type proposed is the one best suited for their project.

Every construction project is likely to be different to a greater or lesser degree and it is not a case of ”one size will fit all”. Whilst these industry standard forms are a good starting point for parties to begin with, they will often need to be adapted and amended to suit each individual project, achieved by negotiating and agreeing a schedule of amendments to the particular standard form to be used. One reason may be that a third-party funder will be financing the project and has its own requirements under the financing agreement with the client so that the documentation will provide it with the appropriate degree of security for its investment (among other things, by way of the provision of collateral warranties in its favour from various parties involved in the project).

Building contracts can be complex and lengthy, and it is recommended that clients seek advice to understand the full extent of all the terms and conditions.  In particular, care should be taken to ensure that the contract covers what the client needs it to and that the client is not exposed to any unnecessary risks.

2. Sub-contracts

Sub-contracts will be needed between the contractor and the sub-contractors for those elements of the construction works that the contractor is not able to carry out itself.  The contractor will want to pass down to its sub-contractors the obligations it has to the employer under the building contract so far as legally possible.

The employer does not have any direct contractual rights against the sub-contractors under the sub-contract but may receive a collateral warranty or be granted third-party rights which confer certain rights upon the employer as a third-party beneficiary. Certainly, where the sub-contractor has a substantive design liability for any element of the build, the client as employer is well-advised to insist on a collateral warranty which will provide a direct right of recovery for any damage or loss sustained through defective design on the part of the sub-contractor.

3. Letters of intent

Often, it will not be possible to agree the entire building contract terms before the project needs to commence. In this case, the parties could agree to enter into a letter of intent to enable a start to be made. This sets out the parties’ intention to enter into a building contract at a later date but in the meantime, it sets out the scope of a number of activities that the contractor will carry out under that letter (subject to an agreed financial limit), describes any granted access arrangements and gives the contractor permission to carry out works whilst the building contract is still being finalised. The benefit for the contractor is that it provides comfort to the contractor that it is not working ‘at risk’ whilst the contract is finalised. For the client/employer the benefit is that works can begin without jeopardising the programme but if a contract is not concluded for any reason, the client can halt the project and is only liable for any works carried out under the letter of intent but has no further liability.

Letters of intent, though quite common in the market, do not present a watertight legal solution and really should be a last resort if at all possible. Advice from a construction practitioner should always be sought if the client is considering using them, to ensure that they are carefully drafted so that the appropriate benefits and protections are covered.

4. Consultants’ appointments

The key consultants that the client might expect to see on a construction project include but are not limited to: architects, structural and civil engineers, mechanical and electrical engineer, principal designer (who deals with health & safety, building safety and building regulatory matters but, confusingly, may not design anything), project manager, or contract administrator/employer’s agent.

As with building contracts, over the years a number of standard forms of appointments have been published by various industry bodies (e.g. RIBA, ACE). These are, again, usually a good starting point but are usually amended and adapted to suit the individual consultants / project and to allocate risks, as appropriate. Alternatively, very often bespoke forms of appointment will be used.

It is therefore recommended that care is taken when drafting or reviewing these to ensure that the client is not exposed to any unnecessary risks.

5. Collateral warranties

A collateral warranty is a contract that sits alongside any underlying contract or appointment. Collateral warranties are an essential part of construction project documentation as this creates a direct contractual link, where there otherwise would not be one, to a third party. For instance, it will provide a third-party funder with the ability to pursue directly a contractor, design sub-contractor or consultant for any damage or loss it suffers if, say, the client has become insolvent. The client/employer will be able to pursue any claims for damage or loss created by a sub-contractor or sub-consultant if the contractor has become insolvent and in some cases, enables the beneficiary to step in to the shows of the client/employer under the underlying contract or appointment.

6. Other security documents

Other security documents that might be sought are performance bonds or parent company guarantees.

Performance bond

A performance bond is a surety bond which is usually issued by a bank or an insurance company by which the guarantor (or surety) guarantees the satisfactory completion of a project by a contractor under the building contract. The bond underwrites the performance of the contract up to a maximum value (normally 10% of the contract sum) and will pay out in the event that the contractor is in breach of its obligations under the building contract or becomes insolvent.

If the contractor is required to provide a performance bond, it is normal to factor the cost of taking out the bond into the price for carrying out the works, so the employer will need to consider whether the additional cost is justified given the particular circumstances.

Parent company guarantee

A parent company guarantee is a contract between a parent company and a beneficiary, by which the contractor’s parent company guarantees its subsidiary’s performance under the building contract between the subsidiary (the contractor) and the beneficiary (the employer).

Conclusion

Construction documentation can be lengthy and complex but the proper drafting and review of the same is an invaluable exercise that should be undertaken before works are carried out on a project. This is to ensure that there is certainty of rights and obligations, and all parties are working off the same page. Whilst one can never guarantee a project will go 100 percent to plan, with the support of an effective documentary structure in place this will go some way to ensure that projects can run as smoothly as they can do, in the circumstances.

If you have any questions about the topics raised in this article, please get in touch.