Chapter 3

PROJECT PROCUREMENT
INTRODUCTION
When a man is buying a basket of strawberries it can profit him to know that the bottom
half of it is rotten.1
3.1Although the technical standards which affect the quality, function, fitness for
purpose, and safety or environmental protection of a construction project may remain
unaltered, the method of procurement of the works will have a significant effect on the
construction cost and time, and the quality of the finished project. Procurement method
is thus inextricably linked to the other sources of risk.
3.2One of the principal aspects of risk management in construction is the
appropriateness or otherwise of the choice of construction contract. The specification,
the type of project and the intended relationship between the parties should influence this
choice2but perhaps the most important aspect of procurement is the degree to which D
can manage its own risks under the chosen construction contract.
3.3In a world where economic climate changes rapidly and interest rates are high,
developers tend to seek shorter and shorter durations for the execution of their
construction contracts. The growing emphasis on design and build, fast track
construction management and management contracts is a manifestation of this desire for
short contract times. Accurate forecasting of time allowances and monitoring of progress
is thus vital if progress is to be effectively maintained and time loss minimised.
3.4A survey of building contracts in use during 1995 published by the RICS in July
19963noted that the dramatic increase of the use of design and build forms between 1991
and 1993 had steadied, but that that method of procurement still represented about a
third by number of all contracts let. Between 1991 and 1993 the use of these forms had
increased from 14.78% to 35.7% by value and from 9.15% to 16.2% by number. The
latest report4reveals that, in construction contracts let during 2001, design and build was
used in relation to 13.9% of contracts by number and 42.7% by value.
3.5On the other hand, between 1991 and 1993 there appeared to have been a fall in the
use of the construction management contract which had risen from 6.9% in value in
1989 to 19.4% in 1991, but had sunk to 3.9% in 1993. By 1995 the use of management
contracting had increased to about 11% of all contracts in use but by 2001 was found to

Figure 3.1A comparison of contracts in use in the UK building industry

have fallen back to 9.6%. The use of lump sum contracts based on bills of quantities,
which seemed here to have shown a slight decline at around 42% by value of all the
contracts let between 1991 and 1993, was reported to have increased to about 44%
of all contracts let by 1995. However, by 2001 the figure had fallen to only 20.3%.
This trend is illustrated in Figure 3.1.5
3.6 Whereas under design and build contracts C is responsible for its own supply of
information and is therefore required to exercise a fair degree of foresight, anticipation

and creativity in its choice of method, when operating under a build only contract,
such as JCT98, IFC98 and IFC 2005, ICE6 and ICE7, GC/Works/1/98, HKRICS86,
HKBC05, SIA80, AS4000 and so on, the forms are written in such a way that C is
entitled to ask for any further information it requires sufficiently in advance of the time
that it needs it and, under JCT98, to be entitled to the information it needs, whether or
not it is asked for.6In this type of contract, whenever there is a less than perfect flow of
design information, there will be an enhanced risk of D being liable for the effects of
delay and disruption over that for which D can be expected to be liable for under design
and build methodology.
3.7Under the construction management and management contracting systems, the
strategy is for all the work to be let out, often in numerous, relatively small packages.
This often enables design to continue in parallel with construction without the attendant
risk inherent in the use of the build only forms. Management contracting and
construction management thus tend to lead to faster construction times and have been
used in some of the fastest projects.7Just how successful that can be when D takes the
management of its risks seriously has been demonstrated by the construction of a new
European car plant at Swindon for Honda of the UK (Manufacturing) Ltd.8On the other
hand, when D does not involve itself in the management of its own risks, management
contracting has alsoresulted in some spectacular failures.9In the recent case concerning
the Great Eastern Hotel,10the Technology and Construction Court stated that a
construction management agreement requires the construction manager to manage the
construction of the project without accepting the principal risks of time and cost, which
remain with D. However, the construction manager was obliged to plan, programme and
organise so that risks in relation to time and money were minimised. The court found
that although the contract did not impose absolute obligations on the construction
manager, it obliged the construction manager to perform its duties to the standard of a
professional man performing professional services.
3.8In this case the court stated that, if the construction manager did not put safeguards in
place to minimise the risks to D under the trade contracts, the construction manager
might be more vulnerable to an allegation of breach of contract. In this case, the
construction manager had breached its obligations under the contract by failing to
manage, administer, plan and coordinate adequately the work of the trade contractors
and was held responsible for periods of delay to the completion of the works.
FORMS OF PROCUREMENT
Traditional build only procurement
3.9The traditional process, illustrated at Figure 3.2, involves D in separate relationships
with each of its consultants whose job it is to prepare the design and specification or bill
of quantities. Cs job is then to carry out the designed work under the direction of the
CA.
3.10Thus, the essential features of what has sometimes been called general contracting
are the existence of D, C, and possibly subcontractors and the separation of the design
elements of the process from the construction elements. In this form of procurement C

and the designers (and sometimes a project manager) are employed

Figure 3.2Traditional build only procurement. Abbreviations: QS = quantity surveyor;

Eng = engineer; NS = nominated subcontractor; SC = subcontractor.

Figure 3.3Traditional build only procurement with project management. Abbreviations:

PM project manager; QS = quantity surveyor; Eng = engineer; NS = nominated
subcontractor; SC = subcontractor.

directly by D, but under separate contracts. This is usually characterised by the

appointment of a CA who is Ds agent but who has an obligation to act fairly in
certifying extensions of time for delay.11
3.11Where in fact D comprises a multiplicity of end users, communications can be
improved by the appointment of a project manager to act as an interface between D and
the design team. The project manager then acts as a useful single point of focus for
information exchange between the design team and D. (See Figure 3.3.) Unfortunately,
in practice, unless the project manager is as adept at the design team functions as he is
knowledgeable about Ds requirements, the insertion between D and the design team of
a project manager tends to cause a breakdown of communications instead of an
improvement in them.12
3.12This method offers the advantage of independent professional advice, and hence
controls of quality of the building process and also makes the introduction of variations
as the work proceeds relatively easy and controllable. Variations can be priced directly
on the basis of rates quoted for the various categories of labour and materials in the
contract bills, or priced independently of the bill rates.13Variations of the traditional
process are commonly used whereby tenders are detailed on the basis of approximate
quantities, or on a specification and drawings only basis without bills where C has to
take off its own quantities. This sometimes enables parts of the pre-construction
activities to be run in parallel with contracts offering potential savings on pre-contract
time, but with this method the attendant risk of voluntary change during the construction
period is enhanced.
3.13The traditional build only method of procurement is intended to be a linear
approach to the various processes in producing a building. Savings in time over the
linear approach can be made by parallel processing of the design and construction
process, but at a risk. All parallel processing carries with it a degree of risk proportionate

to the degree of overlap, but is often easier to achieve and at less risk than in other
methods of procurement.
3.14The time-shortening process of producing the bills of quantity, whilst the architect
or engineer produces the design, so that the essentially linear process of the production
information is concatenated, can be a recipe for inconsistencies, change, delay and
enhanced costs. Although the view has been expressed14that drawings and bills of
quantities, which together contain design and specification, can be proceeded with
largely in parallel if architect and quantity surveyor work effectively together, in the
authors experience, whilst possible, it is not a risk-free process and only seems to
enhance the likely risk of implied change arising out of inconsistencies.
3.15On the other hand, the preparation of approximate bills15for negotiation and
selecting a contractor whilst the detailed drawings are being prepared does tend to save
time and to enhance effective contract management, since C can effectively use the time
taken in completing the design to organise and prepare for the project and to incorporate
the work of subcontractors in the programme whilst it proceeds with the site
establishment.
3.16The principal influences on the incidence of delay in traditional build only
contracts have been found16to be:
1. changes required by local authorities during construction;
2. design information not complete at the start of construction;
3. ground conditions;
4. late design information;
5. poor communication and information flow; and
6. tenant indecision and changes in tenants requirements.
3.17Essentially all these come as a result of inadequate pre-contract preparation of the
design. However, experience also shows that a failure to appreciate, or take
responsibility for the requirements of an efficient interface between Cs work and
specialist subcontractors work (whether under standard subcontractor forms or bespoke
forms) is also a major source of failure in traditional construction procurement methods.
3.18Whilst it is self-evident that delay due to unforced errors or omissions should be
avoided, in this form of procurement the CA must have sufficient opportunity to
complete the design and ensure that it is fully coordinated before C starts work on site as
it can only lead to financial disaster if the design is not completed before C does so.
Indeed, any CA who fails to warn D of the inadequacy of incomplete design
information, whilst simultaneously advising that the work should be carried out under a
build only form of contract, is likely to find it difficult to demonstrate that it has fully
discharged its professional duty of care in the selection of an appropriate contract form.
3.19There are essentially two forms of build only contract:
1. the lump sum contract; and
2. the re-measurement contract.
3.20The theory behind a lump sum contract is that the risk as to fluctuations in cost and
time falls on C because the price and contract period is predetermined. Therefore, in
theory, C is not entitled to further payment if the work costs it more to complete than
itestimated, nor may it have more time to complete if the work takes it longer. That
theory, however, becomes little more than superstition in relation to the rigidity of price
and time under the standard forms of construction contract where the risk of virtually
every change is borne by D.17

3.21A re-measurement contract is for use in connection with projects where it is

impossible or very difficult to formulate a complete design before the commencement of
the work on site. It usually relies on a fixed fee or approximate quantities method of
tendering and is normally used because D is either:
1. unable to complete the design prior to the commencement date of the project
and is thus unable to produce full and unabridged bills of quantity; or
2. D considers that the work is better procured by way of trade packages, in a
similar way to a management contract, but without the complex provisions and
organisation, and some of the administrative disadvantages of constructive
management and management contracting.
3.22It sometimes proves impossible to produce all the details of drawings, bills of
quantities, specifications and so forth before the commencement of the work on site and
if JCT98 with approximate quantities is not attractive then a fixed fee form of price cost
such as PCC98 is also a possible solution to this problem. However, under that form, the
contract does rely on a definition of the works, which should not be departed from. If the
works cannot be defined with accuracy, it may well be dangerous to invite contractors to
tender on a fixed fee to cover all their overheads and profit. Inevitably, as the scope
changes, their fee will increase and this may lead to spiralling costs and claims.
Design and build procurement
3.23Under a design and build contract C takes the lead role and is responsible to D for
both the design and construction of the works. The communications and contractual
nexus are illustrated in Figure 3.4. The nature of the responsibility can range from a duty
of reasonable skill and care in carrying out the design services18to that which in a
turnkey contract can amount to an absolute obligation to ensure the facility is fully
functional or meets certain specified performance criteria, often referred to as fitness
for purpose liability or ready to occupy status.
3.24Before any design and build tenders can be worked, D must produce its statement
of requirements or design criteria and will require professional advice to make sure that
these are adequately specified. It is important in this respect that Ds requirements are
unambiguous and provide for the standard of work required. The risk of errors in the
conceptual design are likely to reside with D. In some circumstances, C may agree to
accept responsibility for elements of the project design originally prepared by D.

Figure 3.4Design and build procurement. Abbreviations: QS = quantity surveyor; Eng =

engineer; SC = subcontractor.

3.25Cost control of a design and build project is likely to be easier than in a traditional
contract structure, particularly since, in comparison with a traditional contract, there
should be fewer events entitling C to extensions of time and loss and expense. It may,
however, be difficult to ensure value for money, and control of detailed specifications
and quality can become difficult, since the detailed design is under Cs control.
3.26Cs exposure to design liability, in addition to liability for the quality of
workmanship and materials, potentially increases tender prices, but, on the other hand, C
has greater control over the interface of the design and construction functions. In theory,

this leads to greater efficiency and, from Ds point of view, a single point of liability.
Thus if there is a building failure or delay in completion, D does not have to ascertain
whether the architect, engineer or CA is responsible (even though C may have to!).
3.27This form of procurement does not, however, relieve D of all risk. First it is difficult
for D to evaluate tender prices because the tenderers may have produced different design
solutions which are not easy to compare. Secondly, it is more difficult to ensure that
under-design is not incorporated into the specification and that low-grade workmanship
does not occur on site.
3.28 The principal reasons for delay in design and build contracts appear to be quite
similar to the sort of risks that attend the traditional form of contracting.19The only
significant differences seem to be that D is unlikely to have access to Cs planning and
progress records, rendering it more difficult to defend against claims and global
claims,20and disputes regarding design defects will be between C and its architect or
engineer, rather than between D and its architect or engineer.
Construction management procurement
3.29The essential difference between construction management and management
contracting is in the nexus of the contracting parties. In management contracting the
construction manager is in direct contract with the works contractors who carry out the

Figure 3.5Construction management procurement. Abbreviations: PM project manager;

QS = quantity surveyor; Eng = engineer; WC = works contractor.

works contracts. In construction management on the other hand, the construction

manager does not himself contract with the works contractor. In construction
management, illustrated at Figure 3.5, D directly employs all the works contractors
and provides the coordination of management through a consultant construction
manager, leaving D itself to absorb the risks associated with the coordination.21
3.30Construction management has been common in the north of England and Scotland
for some considerable time. Although the construction manager is often a major
contractor or a management arm of a major contractor, it is also entirely practical and
efficient for the management of the separate trades to be undertaken by the architect,
engineer or quantity surveyor. A major feature of this approach is the way in which it
elevates the status of the works contractors to a major participating role, thereby
recognising their complete involvement with design, construction and programming in
their particular specialisation.
3.31Under this structure D employs a number of works contractors, of the size and
specialisation that would be appropriate for subcontractors under a traditional main
contract. D is therefore effectively its own main contractor and has responsibility for
finding and tendering the works contract packages and coordinating the performance of
the work. Unless D has the in-house expertise, in addition to the usual professionals, it
must also employ a construction manager or one of the design team to manage the works
contractors and coordinate the works on its behalf.
3.32The increased risk for developers involved in contracting with and coordinating a
large number of works contractors is attributable to the fact that, because the separate
contract values tend to be quite low in proportion to the total project value, liquidated
damages for delay payable by the works contractors (which, for commercial reasons,

should not be disproportionately high in relation to the contract value) will tend to be
less than under a traditional main contract. On the other hand, the advantages of this
form of procurement include:
1. early involvement of specialist designers means buildability can more easily
be incorporated into the design;
2. design and construction phases can overlap and reduce the overall development
period substantially more than the traditional methods;
3. variations are relatively easy to incorporate;
4. the construction manager, as a professional, has equal status with the other
professionals and is closer to D;
5. there is a flexibility of approach to progress and programming;
6. individual construction contracts can be tailored to particular work;
7. D has direct contracts with the works contractors and the risk of insolvency of
the main contractor is avoided;
8. because of their direct contracts with D the works contractors have a higher
expectation of being paid, or paid promptly, without set-off, than when paid via a
principal contractor as subcontractors. This tends to promote a higher degree of
cooperation; and
9. no single works contractor has possession of the site.
3.33The practical difficulties in this form of procurement are associated with:
1. the greater involvement by D, both tactically and administratively, than is
needed in other methods of procurement;
2. the coordination of the works contractors;
3. the difficulty of getting the works contractors to accept their elevated role in the
management of the contract;
4. dealing with overlapping responsibilities;
5. the apportionment of liability for delay and disruption; and
6. the assessment of sanctions for delay and disruption.
3.34In particular, the combination of factors 2 and 3 above presents problems of a
conceptual nature, but these are rather more easily solved in practice than in theory.
3.35The programme to which each works contractor is to work must have contractual
status for the construction management system to work. If the works contractor is simply
given a date by which its works must be completed, but it is left to the subcontractor as
to how it achieves this completion date, it will be very difficult for the construction
manager to control the progress and integration of the works contractors works (e.g. to
have works contractors working contemporaneously), and the fast-track benefits of
construction management will be jeopardised.
3.36Thus, the programme must in fact be a developers programme and be designed
by the construction manager to sequence each works contractors package. The works
contractors cannot be given the power to coordinate their work amongst themselves: not
only do they generally lack the practical ability to oblige each other to work in certain
sequence or on certain parts of the site, but because of the intermittence of their interest
they cannot have command of the overall concept of how each part of the project fits
together. In so far as it is the construction managers task to programme the works
contractors, the control of the works contractor (to ensure that the works contractor does
not delay other works contractors) must come about as a result of the works contractors
participation in the programme and its acceptance of its part in it as a contractual
obligation.22

3.37A minor works agreement such as MWA98 and MW2005 or GC/Works/2/98 is the
normal contract form for a works contractor in this form of procurement. There is no
need here for the more complicated forms of dealing with complex interrelationships and
long contract periods, since the works contractors are only required to perform discrete
parts of a project (generally their particular trades only).
3.38Liquidated damages are the normal sanction, but there is a risk that the damages
leviable against a particular works contractor will not represent Ds likely loss in the
event of late completion of the project as a whole. In this method the problem is that,
except in periods of economic depression,23a works contractor, say, for tiling with a
contract value of 400,000, is unlikely to consider entering into a contract for the
completion of an office block which will justify liquidated damages of 200,000 per
week in the event of non-completion.
3.39In this form of procurement, the flexibility24and the attendant benefits of reduced
cost and enhanced quality make this an attractive alternative to the traditional build
only method of procurement. In the Holyrood Enquiry,25Lord Fraser found that the
principal cause of the failure to keep control of the cost and time of the new Scottish
Parliament building was the adoption of the procurement route of construction
management and an early completion date coupled with an incomplete design and a
desire for a fixed price. In concluding on this issue, Lord Fraser said:
virtually none of the key questions were asked. Similarly none of the disadvantages of
construction management appear to have been identified and evaluated. If the key
questions had been asked and subjected to rigorous assessment, I cannot speculate
whether the requirement for an early completion date would have been revisited,
enabling a less risky procurement method to be adopted, or whether the construction
management route would in fact still have been followed. It is, however, evident that the
Scottish Office, while working to publicly declared fixed budgets and being highly risk
averse, was preparing to follow a procurement route for which there could be no fixed
budget and a high degree of risk would rest with the client.
3.40However, it would seem that, in requiring an early completion date coupled with an
incomplete design and a desire for a fixed price, the failure was not the selection of the
procurement route but in communication. The combination of requirements was always
going to be irreconcilable.
Management-contracting procurement
3.41Management contracting is a procurement process used, so far as construction is
concerned, where D has a contract only with the management contracting firm. This
contracting construction management firm then enters its own contracts with the works
contractors doing the work. This is to be distinguished from the term construction
management in which D enters into direct contracts with the works contractors actually
doing the work. The communications and contractual nexus of management contracting
are illustrated at Figure 3.6. There is, at present, considerable confusion over the use of

Figure 3.6Management contracting procurement. Abbreviations: QS = quantity surveyor;

Eng = engineer; MC = management contractor; WC = works contractor.

these terms, and unfortunately management contracting is frequently used to refer

to both procurement patterns of the construction stage.
3.42Under this structure D will employ the professionals to design the facility and the
management contractor to construct it. This is similar to a traditional structure except in
the case of the risk of default by subcontractors (known as works contractors) which
under this form of procurement is borne by D, and not by the management
contractor.26In other words, it is somewhat like the traditional form of build only
procurement method but with a guaranteed profit for the contractor with limited
responsibility, even for domestic subcontractors. Copthorne Hotel (Newcastle) Ltdv
Arup Associates 27arose out of an appeal against the determination by His Honour Judge
Hicks QC, in which he had been asked to determine whether the management contractor
under MC87 could be liable for any defects arising in whole or in part out of a breach by
a works contractor.28The Court of Appeal,29following the authority of Lord Diplock in
Modern Engineeringv Gilbert-Ash ,30argued that whereas the management contractor
was not liable for loss flowing from a breach by a works contractor, clause 3.21 should
be given a narrow interpretation so as not to provide the management contractor with
immunity from the consequences of its own breaches of contract.
3.43The relationship between risk and tender premiums was a critical factor in the
emergence of management contracting as a method of project procurement. In a
technologically sophisticated development project, the contractual risks for the
contractor can lead to unrealistically inflated tenders. The theory behind the use of this
form of procurement is thus that D will be in a strong position to bear the risk, especially
if D is a property developer which builds frequently. It is an established principle of risk
assessment that, where D builds frequently and has large resources, the uncertainty
associated with contractual risk is reduced. However, it is not so much that the risk is
reduced, but the uncertainty of a risk factor occurring is reduced. Indeed, the likelihood
of a risk factor occurring (such as delay or escalation of cost) is greater to a habitual
developer. This method of procurement is often encouraged on the basis that, if the risk
isalmost certain to occur, it is meaningless to pay someone else to adopt it.31And it is this
philosophy which is employed to justify the choice of a contract form which used to be
said to eliminate risk to C.32
3.44The usual mechanism is that the management contractor is paid a fee together with
all amounts due to the works contractors under the works contracts. Although it can
require competitive tendering of the works contract packages and can approve the terms
of the works contracts, the risk of failure of coordination by the management contractor
can give rise to delays, claims by works contractors and escalation in the cost of the
works the risk of which resides with D, unless it can show that the loss which the works
contractor has suffered has arisen as a result of a breach by the management contractor.
There can be significant difficulty in obtaining redress from the management contractor.
3.45 Mowlemv Eagle Star 33illustrated the nature of the management contractors
obligations. It used to be a common misconception of management contractors that
management contracting was a risk-free enterprise and that all it had to do was
management, a quasi-professional task. Management contractors also assumed that, so
long as they tried their professional best, they could expect to be paid on a cost-plus
basis. So, where it says in the management contract: ensure the regular and diligent
progress and secure the completion of the same on or before the completion date, the
words ensure and secure really meant no more than use best endeavours. Since all
delays caused by the works contractors were beyond the control of the management

contractor, they therefore allowed the management contractor an extension of time

without liability. In Mowlem , the decision of His Honour Judge Bowsher QC, that to
become entitled to an extension of time the delay by the works contractor had to be
beyond the control of both the works contractor and the management contractor, was
subsequently upheld on appeal. In practice, redress will depend largely on what
indemnities are given by the respective works contractors to the management contractor.
3.46The advantages of the structure are similar to those of construction management in
that the works contracts can be entered into after settlement of the management contract,
as and when the project programme requires. There is also the similar disadvantage to
working under a traditional main contract, even when the contract has a fixed price, as
liquidated damages for delay are likely to be less per works contract than the total
liquidated and ascertained damages. In the past the completion of collateral warranties
with each of the works contractors was the normal way of dealing with this.
3.47Main influences on site times in management contracting were found, in the NEDO
report,34to be much the same as with other means of procurement, save that there
appeared to be an enhanced risk in regard to default through:
1. friction with works contractors;
2. materials not ordered/delivered in time;
3. poor pre-preparation;
4. poor supervision;
5. poor workmanship;
6. supply authorities;
7. subcontractors; and
8. sub-subcontractors.
PFI/PPP procurement
3.48Under what is alternatively called Private Finance Initiative (PFI) or Public Private
Partnership (PPP), a government typically grants a concession to D under which D has
the obligation to build and, for a fixed period, operate the facility (for instance, road,
tunnel, bridge, electricity, water or other public or large-scale services). D usually
finances the development, either from one bank or a syndicate of banks, and the loans
are repaid from tariffs paid by the state or the users of the facility over the life of the
concession. At the end of the concession period the facility is usually expected to be
transferred into state ownership.
3.49In this method of procurement, D can thus be a concession company, the
shareholders of which comprise a construction company, one or more financiers, and
possibly a local interest or other shareholders in the equity. The financiers will expect to
share with the other shareholders some construction or operational risk but may require
some protection against political risk, such as a change in local law which might result in
the project becoming non-viable as a private development.
3.50Apart from political risk, the other major problem in this form of procurement arises
out of the relationship of the shareholders in the development concession company. If
the development is a joint venture and one of the joint venturers is C (who will owe
duties to that company) then the other joint venturers will be concerned to ensure that the
subsidiary contracts are at arms length. They will also be concerned to see that the
contracts are monitored and enforced on an entirely impartial basis. (See Figure 3.7.)
3.51Thus, in a 50/50 joint-venture company, a bank, for example, should not be able to
block action by D or C in relation to a claim under the relevant construction contract.

This could be achieved by providing that the directors nominated by the contractor-jointventurer are not entitled to vote on the relevant resolution, or by ensuring that for these
matters at least there are independent directors who will, if required, provide a majority
vote binding on the development company. It will also be important to ensure that a

Figure 3.7PFI procurement by a joint venture. Abbreviations: PM = project manager; QS

= quantity surveyor; Eng = engineer; SC = subcontractor.

single joint-venturer cannot prevent a company meeting being held to deal with these
matters.
3.52Current partnership arrangements in this form of development include: DBFO35for
toll roads; DCMF36for prisons; BOO37for both sewerage and water schemes; and
BOT38and BOOT39for a variety of major projects, as well as smaller schemes, in the
rail, light rail, health and education sectors.
COLLATERAL CONTRACTS
3.53In the recent past, collateral contracts have been used to obtain redress for damages
from third parties, which otherwise would only have been recoverable in tort, if at all.
3.54Until the mid-1980s it seemed that the economic interests of third parties would
generally be protected by their rights in tort. D would seek to establish that a
subcontractor, for example, had owed a duty of care in carrying out its obligations in
respect of the work and that, where a breach of that duty by the subcontractor occurred
as a result of which D suffered loss, D would be entitled to recover damages against the
sub-contractor.
3.55Decisions in the House of Lords in D & F Estatesv Church Commissioners for
England 40and Murphyv Brentwood District Council 41have shown, however, that in a
construction contract, whilst damages will still be recoverable by a third party in respect
of death or personal injury or damage to property other than the subject matter of the
contract, there is no enforceable obligation on a third party to avoid causing economic
loss, except where there is construed to be a special relationship42between the parties.
3.56To overcome this problem, standard forms of collateral warranty were published by
the RIBA and by the British Property Federation, amongst others, for collateral contracts
between consultants, third parties and developers. The JCT also produced forms of
subcontract which include collateral contracts between the nominated subcontractor and
D.
3.57A simple collateral warranty may be limited to a clause which refers to the
underlying professional appointment made between the consultant and D, and will state,
for example, that the consultant agrees with the financier that it has complied with
and will continue to comply with all the terms of its appointment and has exercised and
will continue to exercise reasonable skill and care in the performance of its obligations
under the appointment. This gives the financier the ability to recover damages, through
the collateral warranty, for losses suffered by the financier as a result of the consultants
breach of its appointment with D.

3.58Collateral warranty standard forms are also available between D and nominated
subcontractors under JCT80 and JCT98. The warranty agreement for use with nominated
subcontractors under JCT98, NSC/W, comprises part of the documentation for the
revised nomination procedures introduced by the JCT in 1991. The agreementitself
replaces the earlier documents, NSC/2 and NSC/2a, although its content, in respect of
the liabilities undertaken, differs little from the previous versions.
3.59The fundamental point to be borne in mind when using, or considering the use of,
NSC/W is that it is designed for application between D and a nominated subcontractor. It
is not suitable for creating a warranty relationship between D and a domestic
subcontractor (even if that subcontractor is required to produce a design input) or for a
relationship between the nominated subcontractor and financiers, tenants or future
purchasers. In such a case, a different warranty agreement should be used.
3.60Typically, under the standard forms of collateral warranty provided by a nominated
subcontractor or supplier, there is a provision to the effect that, [C] shall not become
entitled to an extension of time nor become entitled to loss and or expense and
the nominated subcontractor indemnifies D to the extent that the CA is obliged to give C
an extension of time and D is unable to recover liquidated damages from C for delays
caused by the nominated subcontractor.
3.61An example of the application of a collateral warranty is to be found in the case of
Beoco Ltdv Alfa Laval Co Ltd 43in which the Official Referee held that a subcontractor
was liable under a warranty to D for the damage and loss of production resulting from
the explosion of a heat exchanger which the subcontractor was required to design and
install at an oil-seed refinery. The subcontractor had been engaged under ICE6DC for
the refinery, but by the time of the explosion Cs overall liability was considered to have
expired because of the very short limitation period stipulated in the contract. D,
therefore, proceeded against the subcontractor under the warranty and was successful.
3.62The Contracts (Rights of Third Parties) Act 1999 has effectively removed the need
for collateral warranties in England and Wales in so far as such collateral warranties
truly are collateral. In other words, provided they merely reflect a third partys rights
in the same terms as those of the parties to the principal contract, such agreements have
been overtaken by statute. On the other hand, even with the Act in place, it is foreseeable
that documents entitled collateral contract will continue to be drafted which, whilst not
truly collateral in effect, create new obligations to the third party.
3.63In continental Europe, there is less need for collateral warranties because decennial
insurance is usually taken out to cover the liability of those involved in a construction
project, which extends to a ten-year limitation period in respect of the stability and major
defects in the structure, or important parts of the structure. Such decennial
liability44mainly exists in jurisdictions where the Civil Code forms the basis of the legal
system. The precise definition of the liability (whether contractual, tortious or both) and
the parties to which it is attached differs from one jurisdiction to another and, in some
cases, it is updated and refined as frequently as the changes in construction practices
demand. European jurisdictions in which such liability is imposed include Belgium,
France, Italy, the Netherlands and Spain. In the Middle East, Egypt, Iraq and Saudi
Arabia have similar requirements.
3.64An important aspect of decennial insurance is the technical control service which is
provided in association with the cover. This is provided by firms specialising in the field,
with the task of enabling the insurer to mitigate the risks insured under the policy to an
economically acceptable level for both the insured and the insurer. A firm isusually

appointed by the developer, often prior to, or during, the design stage of the scheme and
certainly prior to the construction stage, since certain functions are required during that
period. In most cases, the firm cooperates with the design team, complementing their
role through risk-assessment and mitigation. As a result, decennial insurance is
expensive and may cost up to 2% of the value of the project for the ten-year period of
cover.
1 Langhorne, Samuel Clemens, More Maxims of Mark, Mark Twain(1927), p. 941.
2 Capper, Philip, Overview of Risk in Construction in Risk Management and Procurement in Construction ,
edited by Uff, John QC and Odams, Martin (1995, Centre of Construction Law and Management, Kings College,
London).
3 Davis, Langdon & Everest, Contracts in Use in 1995(1996, Royal Institution of Chartered Surveyors).
4 Davis, Langdon & Everest, A Survey of Building Contracts in Use During 2001(2002, Royal Institution of
Chartered Surveyors).
5 Ibid.
6 Clause 5.4.2.
7 The National Economic Development Office, Faster Building for Industry(1983, HMSO). The Report of the
Building and Civil Engineering Economic Development Committees Joint Working Party.
8 Bayfield, Richard and Roberts, Paul, Insights from beyond construction: collaborationthe Honda experience,
An occasional paper presented to the Society of Construction Law, Oxford (September 2004).
9 For example, The British Library and Holyrood, the Scottish Parliament Building, in relation to which see The
Holyrood Enquiry , A report by The Rt Hon Lord Fraser of Carmyllie QC (September 2004).
10 Great Eastern Hotel Company Ltdv John Laing Construction Ltd[2005] EWHC 181 (TCC) at [20]-[85], [189][331].
11 See Balfour Beattyv Docklands Light Railway Ltd (1996) 78 BLR 42 and John Barker Construction Ltdv
London Portman Hotel Ltd (1996) 83 BLR 31.
12 For an indication of the contractual responsibility of the parties where a project manager is involved see
Chesham Properties Ltdv Bucknall Austin Project Management Services Ltd (1996) 82 BLR 92 (QBD).
13 JCT80 and JCT98, clause 13A.
14 The National Economic Development Office, Faster Building for Industry(1983, HMSO). The Report of the
Building and Civil Engineering Economic Development Committees Joint Working Party.
15 For use under JCT98 with approximate quantities, for example.
16 Ibid.
17 Clauses 2.2.2.2 and 13.2 of JCT80 and JCT98 provide that any error or inconsistencies in the bills of quantity
constitute a variation. Therefore if the quantity surveyor has misdescribed the amount of work, C has a claim for
more money, and furthermore, if an increase in quantities delays C, it is also entitled to an extension of time by
virtue of clause 25.4.5.1, and potentially disruption costs and damages for delay by virtue of clause 26. 2.7. This is
a prime example of the detailed drafting of the contract reversing the transfer of risk normally to be expected in a
particular method of procurement.
18 As is the case with an architect or engineer.
19 The National Economic Development Office, Faster Building for Industry(1983, HMSO). The Report of the
Building and Civil Engineering Economic Development Committees Joint Working Party.
20 See Chapter 19, Global and Total Loss Claims, passim .
21 A report of the working group at Reading University entitled Construction Management Forum: Report and
Guidance 1991 sponsored by the British Property Federation, the Department of the Environment and the
developers Olympia & York found that construction management was more advantageous to D than management
contracting because it tended to be less confrontational. In construction management it was found that, because the
works contractors had a direct contract with D, their chances of being paid regularly and promptly were increased
and the price for the works contract package was therefore reduced and communications improved.

22 In this respect, the programming and integration requirements are no different from the procedures that C
should adopt in regard to its domestic subcontractors and nominated subcontractors under traditional forms of
contract.
23 When the financial climate is not so buoyant, and despite the insanity of it, the relationship of the value of the
liquidated damages to the value of the contract seems not to be such an important consideration.
24 The construction manager can have as many works contractors decorating on the site as he can manage.
25 The Holyrood Enquiry , A report by the Rt Hon Lord Fraser of Carmyllie QC (September 2004, HMSO).
26 See MC87, clause 4.1 and Schedule 2 thereto.
27 (1997) 85 BLR 22 (QBD).
28 Judge Hicks had held that clause 3.21 did not exempt the management contractor from liability for its own
breaches of contract or where loss flowed from the management contractor and the works contractor being in
breach. The purpose of clause 3.21 was to provide the management contractor with a measure of protection against
the otherwise strict consequences of clause 1.7 where a potential liability arose from default of the works
contractor alone.
29 (1997) CILL 1318.
30 Modern Engineering (Bristol) Ltdv Gilbert-Ash (Northern) Ltd[1974] AC 689.
31 The National Economic Development Office, Faster Building for Industry(1983, HMSO). The Report of the
Building and Civil Engineering Economic Development Committees Joint Working Party.
32 But see Copthorne Hotel (Newcastle) Ltdv Ove Arup , note 26 above.
33 John Mowlem & Company plcv Eagle Star Insurance Co. Ltd (1992) 62 BLR 126.
34 The National Economic Development Office, Faster Building for Industry(1983, HMSO). The Report of the
Building and Civil Engineering Economic Development Committees Joint Working Party.
35 Design-build-finance-operate.
36 Design-construct-manage-finance.
37 Build-own-operate.
38 Build-operate-transfer.
39 Build-own-operate-transfer.
40 [1983] 3 WLR 368.
41 [1990] 3 WLR 414.
42 See Chapter 2, The Risk of Development, para. 2.136 et seq .
43 (1993) 66 BLR 1.
44 Responsabilit decennale .
1Add to the end of the paragraph:
The May 2007 edition of the Irish government standard forms of contract makes no express provision for the
provision of further information, drawings, details or levels but do on the other hand make provision for
instructions. Thus under these forms any request must be framed as though it was a request for instructions.
IGCE/07 and IGBW/07 provide (at clause 4) that the parties support each other and by clause 4.1.2, that such
support may be relevant particularly to (4) efficient order and timing of information provided for in the
contract. They also identify (at clause 4.11.1) that C is to give the CA ten days advance notice, in every case, of
its need for any instruction that the CA is to provide.
2To the end of footnote 20, add:
See also Pickavance, Keith, A case for the defence, RICS Construction Journal, Royal Institute of Chartered
Surveyors, September 2006, at p. 18.