Unamended standard form contracts such as JCT are regarded as providing a balance of risk as between the parties to them, whether employer and main contractor or main contractor and subcontractor. However, the standard forms are often amended along with ancillary legal documents, to shift more of the risk onto the contractor or subcontractor, as the case may be. The extent to which any change in risk is accepted is usually a matter of negotiation and consideration of the commercial terms, including price and insurance. Below we set out some key issues which need to be addressed for any new build or refurbishment development.
Price
Increased risk for contractors and specialist subcontractors often means an increased price to cover that risk and increased management and administration obviously has a similar effect. Are developers and/or their funders going to be prepared to agree any additional costs to cover the BSA requirements. If not, are developers prepared to take on more of the risk to avoid such cost increases?
Institutionally acceptable
Over the years what some call ‘institutionally acceptable’ amendments to standard form documents have developed and have become commonly used in the industry. A good example is that a contractor being engaged under the JCT Design and Build form is often expected to take single point design responsibility thereby, in theory at least, giving the employer one party that is liable if there is any design problem with the building.
Future BSA regulations
We are currently having discussions with many of our clients about how their bespoke schedules of amendments to standard forms should be updated to take account of the provisions of the BSA and its regulations. The relevant regulations may be in force by the time the building contract is entered into, and work starts on site, but are not now in force. The majority of those regulations should be in force by October 2023. Consideration should be given to ‘invitations to tender’ currently being compiled. Should regulations which are still subject to consultation and/or passage through parliament be taken into account too? No doubt this will depend, in part, on the type of building to be constructed and the extent to which the BSA applies to it.
Insurance
A key element in the risk equation will be how the BSA is going to affect the terms of insurance policies and related premiums for key insurances such as Contractor’s All Risks and professional indemnity. Will there be construction activities that will no longer be covered from the outset or will cover be denied if a party to a construction contract falls foul of the BSA or a term of the contract relating to it? How will insurance work between practical completion and completion of gateway 3?
Programme
One of the biggest issues for a building under construction is how compliance with the “golden thread” of information and the various statutory gateways under the BSA may affect the programme for the works. There is a concern about the new regulator being able to resource and train the necessary labour force to deal with gateway applications and approvals in the time prescribed by the BSA. This begs the question of who should bear the time and money risk of delay caused by these functions being inadequately resourced? Logically such delays should be treated as a neutral event, as is currently the case in standard form contracts for statutory requirements, but what if the contractor has provided what it and the employer’s professional team reasonably consider is sufficient information to the regulator, but the regulator leaves it to the last minute to ask for more or different information?
Similar considerations arise in relation to practical completion (“PC“) The building may have reached PC but if the building will have to pass through Gateway 3 and be approved by the regulator before it can be occupied, what happens if the regulator’s approval is not given or is delayed? What if it doesn’t pass first time or until all remedial works have been carried out? Under current standard forms, liquidated damages come to an end on PC. Should they now be extended until the building can be occupied, or should general damages apply after PC? How will all these matters be treated in related third-party agreements such as sale agreements, agreements for lease and finance agreements?
Summary
All the above points (and more) are no doubt exercising the minds of those in every construction tier and their advisors. The industry will find a way through which works for both sides of a contract – it always does, but there may have to be some creative thinking along the way!
Key points
- The Building Safety Act will introduce new considerations for the drafting of building contracts and will also cause us to rethink standard or usual contractual provisions as they may no longer work as intended in light of the BSA liabilities.
- The extent to which any change in risk is accepted is usually a matter of negotiation and consideration of the commercial terms.