35 Questions and Answers on Contract Law (Part 4)

96. WHAT IS CONTRACT PROCUREMENT?

Contract procurement refers to the process of selecting and securing a contractor for a project, encompassing activities from tendering to finalizing the contract. It aims to ensure fair competition, select qualified contractors, and establish clear project expectations. In Harmon CFEM Facades (UK) Ltd v The Corporate Officer of the House of Commons (1999), the court emphasized the importance of a structured procurement process for fairness and transparency.

97. WHAT ARE THE TYPES OF PROCUREMENT METHODS AVAILABLE?

Key procurement methods include:

• Traditional Procurement: Separate contracts for design and construction.
• Design and Build: A single contractor handles both design and construction.
• Management Contracting: The client contracts multiple trades under a management contractor.
• Construction Management: The client directly contracts each trade.

Each method serves different project needs and risks, as illustrated in J & J Fee Ltd v The Secretary of State for Scotland (1981), which highlighted the need to match procurement methods to project complexity and client involvement.

98. WHAT IS TRADITIONAL METHOD?

In the traditional method, design and construction are contracted separately, with an architect/engineer preparing the design before the contractor’s involvement. This approach is well-suited for projects where the client wants control over design quality. In Merton London Borough Council v Stanley Hugh Leach Ltd (1985), the court highlighted that separating design from construction ensures design quality but may lead to longer project timelines.

99. WHAT IS THE SEQUENTIAL METHOD TRADITIONAL PROCUREMENT PATH?

The sequential method follows a linear approach, completing the design phase before the construction phase begins. It reduces design changes during construction but can extend the project timeline. Lymington Marina Ltd v MacNamara (2007) highlighted that this method reduces risks of conflicts between design and construction but may not be ideal for projects requiring flexibility.

100. WHAT IS THE ACCELERATED METHOD TRADITIONAL PROCUREMENT PATH?

In the accelerated method, design and construction phases overlap to expedite project delivery. While faster, it may increase coordination challenges and require frequent design adjustments. The Great Eastern Hotel Co Ltd v John Laing Construction Ltd (2005) case emphasized that while accelerated methods can save time, they demand strong project management to handle overlapping phases effectively.

101. WHAT ARE THE ADVANTAGES OF THE TRADITIONAL PATH?

Advantages include:

• Design Control: The client has direct input on design.
• Cost Certainty: Tenders are based on completed designs.
• Lower Risk of Variation Orders: Reduces design changes during construction.

In Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd (1970), the traditional method’s benefits of clear roles and responsibilities were noted, particularly for projects where design quality is paramount.

102. WHAT ARE THE DISADVANTAGES OF THE TRADITIONAL PATH?

Disadvantages include:

• Longer Project Duration: Sequential phases extend timelines.
• Higher Potential for Disputes: Separate contracts can lead to blame-shifting.
• Limited Flexibility: Design changes are costly once construction starts.

In Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp (1979), it was highlighted that the traditional method’s division of responsibilities can lead to disputes, particularly when delays arise.

103. HOW DO YOU CATEGORIZE THE CONTRACT BASED ON THE PAYMENT METHODS?

Contracts can be categorized by payment methods as:

• Lump Sum: Fixed price for the entire project scope.
• Re-measurement: Based on actual quantities used.
• Cost-Reimbursement: The client reimburses actual costs plus a fee.

Each category has implications for risk allocation and project control, as discussed in Amec Civil Engineering Ltd v Secretary of State for Transport (2004), where the court noted that payment methods should align with project risk profiles.

104. WHAT IS A LUMP SUM CONTRACT?

A lump sum contract sets a fixed price for a defined scope, transferring the risk of cost overruns to the contractor. It is well-suited for projects with well-defined specifications. In London Borough of Merton v Stanley Hugh Leach Ltd (1985), the court underscored that lump sum contracts incentivize contractors to control costs within the agreed price.

105. WHAT IS REMEASUREMENT CONTRACT?

In a remeasurement contract, payments are based on actual quantities used, allowing flexibility for scope changes. This type is common in projects with variable quantities, such as earthworks. The court in McAlpine Humberoak Ltd v McDermott International Inc (1992) recognized that remeasurement contracts can mitigate client risk in projects with unpredictable scope.

106. COMPARE LUMP SUM CONTRACT AND REMEASUREMENT CONTRACT

Lump sum contracts offer cost certainty but limit flexibility, while remeasurement contracts provide adaptability for variable scope. In Costain Ltd v Bechtel Ltd (2005), it was noted that lump sum contracts suit well-defined projects, while remeasurement contracts are preferred for projects with variable quantities, like infrastructure developments.

107. WHAT IS COST REIMBURSEMENT CONTRACT?

In a cost reimbursement contract, the client reimburses the contractor for actual costs plus a fee, transferring cost risk to the client. This type is used when project scope is uncertain. Blue Circle Industries Plc v Holland Dredging Company (UK) Ltd (1987) highlighted that cost reimbursement is beneficial for projects where scope may evolve, as it ensures contractor compensation for incurred costs.

108. WHAT IS PRIME COST?

Prime cost refers to the direct costs of labor, materials, and subcontracts required for project completion. These costs form the basis for remeasurement and cost-plus contracts. Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda (1905) emphasized that prime costs exclude overheads and profits, which are often added separately in cost-plus contracts.

109. WHAT ARE THE SUBCATEGORIES OF COST-REIMBURSEMENT CONTRACTS?

Cost-reimbursement contracts can include:

• Cost-Plus Fixed Fee: The client reimburses costs plus a fixed fee.
• Cost-Plus Percentage Fee: A percentage fee is added to costs.
• Cost-Plus Fluctuating Fee: The fee adjusts based on performance or savings.

In Avery v Bowden (1855), it was highlighted that the fee structure in cost-reimbursement contracts impacts contractor incentives and risk allocation.

110. WHAT IS A COST-PLUS FIXED FEE CONTRACT?

In a cost-plus fixed fee contract, the client pays actual costs plus a fixed fee, regardless of final costs. This approach provides predictability for the contractor’s profit. In Tharsis Sulphur & Copper Co v McElroy (1878), the court recognized that fixed-fee contracts motivate contractors to control costs, as their profit remains unchanged by total expenses.

111. WHAT IS A COST-PLUS PERCENTAGE FEE CONTRACT?

A cost-plus percentage fee contract adds a percentage-based fee to actual costs, incentivizing contractors to increase costs for higher profit. While straightforward, it may lead to higher final costs. Robinson v Harman (1848) noted the potential for inflated costs in percentage-based contracts, as contractors have no incentive to minimize expenses.

112. WHAT IS THE ADVANTAGE OF THE COST-PLUS PERCENTAGE FEE TYPE CONTRACT COMPARED WITH THE COST-PLUS FIXED FEE CONTRACT?

The main advantage is that the contractor’s profit increases with project costs, allowing for flexible project scope. This approach suits projects with undefined requirements, but may lack cost control incentives, as illustrated in Williams Brothers Ltd v J & JA Sykes (1922).

113. WHAT IS THE DISADVANTAGE OF THE COST-PLUS PERCENTAGE FEE TYPE CONTRACT?

A significant disadvantage is the lack of incentive to control costs, potentially leading to inflated expenses. In Nutt v Read (1922), the court noted that percentage-based contracts may result in higher costs due to the contractor’s profit reliance on total expenses.

114. WHY COST-PLUS FIXED FEE CONTRACT IS NOT PREFERABLE?

Fixed-fee contracts limit the contractor’s flexibility to adjust to cost changes, which may be restrictive in volatile markets. In Bolton v Mahadeva (1972), the court noted that fixed fees may discourage contractors from accommodating unforeseen changes if they risk incurring losses.

115. WHAT IS A COST-PLUS FLUCTUATING FEE?

A cost-plus fluctuating fee contract allows the fee to adjust based on predetermined performance or cost-saving measures. This model encourages cost efficiency. Swan Hill Developments v Brady Construction (2005) noted that fluctuating fees can incentivize contractors to pursue savings, aligning their interests with the client’s.

116. WHAT IS THE ADVANTAGE OF COST-PLUS FLUCTUATING FEE?

The advantage of a cost-plus fluctuating fee contract is that it provides flexibility for the client and contractor to share cost savings if actual costs are lower than estimated, while also adjusting for performance or productivity. This approach incentivizes contractors to manage resources efficiently. In Swan Hill Developments v Brady Construction (2005), the court noted that fluctuating fees can encourage cost control and align the contractor’s financial interests with project performance.

117. WHAT IS A GUARANTEED MAXIMUM PRICE CONTRACT?

A Guaranteed Maximum Price (GMP) contract sets a ceiling price, ensuring that the client does not pay more than an agreed maximum amount, even if costs exceed expectations. This shifts the risk of overruns to the contractor but also allows for cost savings to be shared or returned to the client. In Walter Lilly & Co Ltd v Mackay (2012), the GMP model was highlighted as a useful tool for clients seeking budget certainty, especially in projects with a defined scope.

118. WHAT ARE THE PRACTICAL ISSUES WITH THE GUARANTEED MAXIMUM PRICE CONTRACTS?

Practical issues with GMP contracts include:

• Scope Changes: Unclear scope can lead to disputes over what constitutes additional work.
• Quality Concerns: Contractors may reduce quality to stay within the GMP.
• Complex Management: Requires diligent project management to monitor cost tracking. In Henry Boot Construction v Alstom Combined Cycles Ltd (2005), the court emphasized that careful scope definition and quality control are crucial in GMP contracts to avoid cost-cutting at the expense of standards.

119. WHAT IS DESIGN & BUILD PROCUREMENT PATH?

The Design & Build (D&B) procurement path combines design and construction responsibilities under a single contractor, allowing for streamlined coordination and reducing the client’s involvement in technical details. In Royal Brompton Hospital NHS Trust v Hammond and Others (2001), the D&B path was recognized as efficient for clients seeking simplified project management and a single point of accountability.

120. WHAT ARE THE KEY DOCUMENTS TO BE INCLUDED IN THE DESIGN & BUILD CONTRACT TO DEFINE THE PROJECT SCOPE?

Key documents in a D&B contract include:

• Employer’s Requirements: Outline the client’s needs.
• Contractor’s Proposals: Describe how the contractor plans to meet the requirements.
• Specifications and Drawings: Provide detailed design information.
• Bill of Quantities: Quantitative cost breakdown. In University of Westminster v J Jarvis & Sons Ltd (2003), the court highlighted that these documents collectively define scope, aiding in performance assessment and accountability.

121. WHAT ARE THE ADVANTAGES OF THE DESIGN & BUILD PROCUREMENT PATH?

Advantages include:

• Single Responsibility: One contractor handles both design and build.
• Time Savings: Overlapping design and construction stages can shorten the timeline.
• Cost Control: A lump-sum approach reduces cost uncertainty. The Merton London Borough Council v Stanley Hugh Leach Ltd (1985) case emphasized the D&B path’s effectiveness in risk mitigation and time management.

122. WHY IS REMEASUREMENT PAYMENT TYPE NOT ADVISABLE FOR DESIGN & BUILD CONTRACT?

Remeasurement is not advisable for D&B contracts because D&B relies on a fixed price based on agreed specifications. Remeasurement introduces uncertainty and undermines cost control, which is contrary to the D&B model’s objective of providing budget certainty. In G Percy Trentham Ltd v Archital Luxfer Ltd (1993), it was observed that fixed costs in D&B contracts support streamlined project delivery and financial predictability.

123. WHAT ARE THE DISADVANTAGES OF THE DESIGN & BUILD PROCUREMENT PATH?

Disadvantages include:

• Limited Client Control: Less influence over design details.
• Potential for Quality Compromises: Contractor may prioritize cost over quality.
• Scope Creep Risks: Changes can be costly post-contract. In Bramall & Ogden v Sheffield City Council (1985), the court highlighted that D&B contracts require careful oversight, as the contractor’s cost-focus can sometimes lead to quality compromises.

124. WHAT IS MANAGEMENT CONTRACTING PROCUREMENT PATH?

Management contracting involves the client hiring a management contractor who oversees multiple subcontractors, rather than directly engaging with each trade. This approach offers flexibility and allows for fast-tracking of construction stages. In Skaid v Regalmoor Ltd (2003), the court emphasized the benefits of flexibility in management contracting, particularly in complex, multi-phased projects.

125. WHAT ARE THE KEY FEATURES OF THE MANAGEMENT CONTRACTING?

Key features include:

• Direct Subcontracting by Management Contractor: Allows specialization and flexibility.
• Client Engagement in Decision-Making: Client remains closely involved.
• Adaptability: The structure can adjust to changing project needs. In Panatown Ltd v Alfred McAlpine Construction Ltd (2001), the court noted that management contracting allows for continuous oversight and adjustments, which are essential in dynamic projects.

126. WHAT IS THE MAIN DRAWBACK OF THE MANAGEMENT CONTRACTING APPROACH?

The main drawback is the potential for cost escalation, as each trade contract is priced separately and often lacks a fixed sum. Additionally, overlapping responsibilities can lead to delays and coordination challenges. In Leander Construction Ltd v Mulalley & Co Ltd (2011), the court acknowledged that management contracting’s flexible nature requires strong project management to control costs and timelines effectively.

127. WHAT IS CONSTRUCTION MANAGEMENT PROCUREMENT PATH?

Construction management is a collaborative approach where the client hires a construction manager to oversee the construction but holds direct contracts with individual trade contractors. This method provides the client with control and flexibility but also places them at risk for delays or cost overruns. In Trollope & Colls Ltd v Atomic Power Constructions Ltd (1962), the court recognized the effectiveness of construction management in complex projects but noted that it requires experienced project oversight.

128. WHAT ARE THE DISADVANTAGES OF CONSTRUCTION MANAGEMENT PROCUREMENT PATH COMPARED WITH CONTRACTING MANAGEMENT?

Disadvantages include:

• Higher Client Risk: Client holds direct responsibility for each trade.
• Increased Administrative Burden: More contracts to manage.
• Potential for Cost Overruns: No guaranteed maximum price. The court in Amec Building Ltd v Cadogan Square Ltd (1997) noted that clients using construction management must be prepared for the higher administrative and financial demands compared to management contracting.

129. WHAT IS DESIGN AND MANAGE PATH?

The design and manage path involves hiring a single consultant to design, manage, and coordinate all phases of the project, from inception to completion. This approach minimizes the client’s direct involvement but requires high trust in the consultant’s capability. In Carter v Boehm (1766), it was emphasized that a duty of care exists when a party assumes broad responsibilities on behalf of another, which is relevant in design and manage arrangements.

130. WHAT IS PUBLIC PRIVATE PARTNERSHIP?

A Public-Private Partnership (PPP) is a collaborative agreement where the public and private sectors share resources, risks, and rewards in delivering public services or infrastructure. PPPs are often long-term and involve financing, design, construction, and maintenance phases. In R v Secretary of State for the Environment, Transport and the Regions, ex p Spath Holme Ltd (2001), the court discussed the importance of structured risk-sharing and public benefit in PPPs, which are crucial to successful partnership outcomes.