Supply of materials under standard form construction contracts
Clients and contractors are now concentrating on how they can continue to deliver projects on site or how they can restart projects after the public health measures responding to Covid-19 have been lifted. Therefore the issue of how materials can be sourced quickly is a critical factor.
Our construction team have looked at the practical and legal considerations of managing the supply of materials, ownership of those materials and how the impact of the inevitable shortages of supply can be mitigated.
Practical and commercial considerations
Many suppliers are experiencing growing issues with procuring materials with factory shutdowns and delays at borders or are unable to source certain pre-agreed materials at all with many countries still in complete lockdown. These issues will continue when the lockdown lifts with a shortage in materials prevailing as the supply chain tries to catch up.
To attempt to mitigate these issues clients, contractors, sub-contractors and suppliers should engage in early discussions regarding the likely impact on the construction programme and costs. Alternative procurement methods should be considered such as substituting materials and using more local suppliers. For future contracts, the parties may consider drafting the specification more widely to give them more flexibility when procuring materials, add express wording to deal with the implications of the outbreak and/ or consider postponing entering into the contract until the restrictions are lifted.
A short summary of the key provisions from the standard construction contracts in their un-amended form is set out below.
JCT D&B 2016
- Under JCT D&B (2016) the contractor carries the risk of time and cost for the supply of materials. If and whenever it becomes reasonably apparent that the progress of the works is being delayed or likely to be delayed the contractor shall forthwith give notice to the employer.
- There are specified relevant events which may entitle the contractor to an extension of time for completion of the works including the exercise of statutory powers directly affecting the execution of the works and force majeure. Each situation would need to be assessed on its facts, examining the relevance of such events and whether they restricted the supply of materials. These events attract time only and not loss and expense.
- The change mechanism under the JCT forms enables employers to alter specifications for materials where particular materials are in short supply. A change is defined as a change in the employer's requirements which makes necessary the alteration or modification of the design, quality or quantity of the works including the alteration of the kind or standard of any of the materials or goods. Instructing a change may entitle the contractor to the cost and time consequences of the change.
- With regards to ownership of materials, JCT D&B 2016 provides that title for materials on site passes when their value has been included in an interim payment. For off site materials, title in any listed items will pass once their value has been included in an interim payment.
- It is a core clause in NEC that the employer, contractor, project manager and supervisor should act in the "spirit of mutual trust and co-operation". NEC, therefore, encourages the parties to be transparent and forthcoming in discussing the likely Covid-19 implications on the supply of materials including by giving early warning notices and holding risk reduction meetings to discuss the issue.
- Compensation events under NEC may lead to changes to the prices, key dates and completion date which could entitle the contractor to more time and money. A compensation event may include an instruction to alter the specification of materials if they are in short supply.
- Under NEC the contractor must ensure a timely notice is given of an event that has happened or it expects to happen which it believes is a compensation event.
- If parties have incorporated the "change in law" clause into the contract (Option X2) then those restrictions may amount to a compensation event. However, parties should closely examine the terms of their particular contracts and assess the situation on its facts, noting that Option X2 is stated to be: (1) triggered by a change in law and not by government guidance, advice or instruction; and (2) triggered by a change in law "of the country in which the Site is located".
- In NEC contracts, title to materials passes from the contractor to employer on delivery to site but title passes back to the contractor if the materials are removed from site with the project manager's permission. Title to off site materials passes to the employer if the supervisor has marked it "as for this contract". The supervisor is to so mark the materials if: the contract identifies them for payment and the contractor has prepared them for marking as the works information requires.
- Under PPC 2000 the constructor takes responsibility for the supply of the materials.
- The constructor must use its best endeavours at all times to minimise any delay or increase in cost to the project but if, despite the constructor's best endeavours, the date for completion is adversely affected by one of the listed events, the constructor shall be entitled to an appropriate extension of time.
- The extension of time events which may be relevant to restrictions in the supply of materials include:
- a change in law; and
- exercise of any statutory power directly affecting implementation of the project by restricting labour, materials, goods or equipment required for the project.
Each situation would need to be assessed on its facts, examining the relevance of such events and whether they restricted the supply of materials.
- Any partnering team member can request a change if it is in the best interests of the Project and if a change is notified by the client, the constructor must respond with the impact of the change on the price and time for completion before the change is agreed by the client.
- Under PPC 2000 ownership of all materials intended for the project passes to the client when they are incorporated into the project or when the constructor receives payment for them under the payment provisions. Where the value of such materials is included in a payment valuation the constructor shall ensure that they are not removed from the place they are situated at the date of the valuation (except for delivery to site) and that they are clearly marked as owed by the client, and are stored separately and securely and are insured for their full face value against all customary risks in the name of the client.
- PPC 2000 includes a number of supply chain collaboration provisions including the client's involvement in the selection of specialists and the ability for key specialists to be members of the partnering team and have representation on the core group. Therefore parties under PPC 2000 have contractual mechanisms to engage directly with material suppliers affected by the restrictions in order to facilitate a solution at core group level.
ACA Standard Form of Contract for Term Partnering (TPC 2005) and Term Alliance Contract (TAC-1)
- TPC 2005 and TAC-1 provide that when an event arises which is beyond the reasonable control of the provider and any of its supply chain members and where, despite the provider complying with its obligations under the Term Alliance Contract, that matter adversely affects any task deadline or any task prices then upon giving the relevant notice the provider shall be entitled to a fair and reasonable adjustment to the task deadline and/or task prices.
- A change can be proposed by any partnering team member for approval by the client if it is of demonstrable benefit to the programme. Like the other forms, a change of materials approved by the client can have an agreed impact on cost and time for the service provider.
- In TPC 2005 and TAC-1 ownership of all materials and goods intended for any task does not pass to the Client until they are physically incorporated into a site or when the provider receives payment for them.
- TAC-1 adopts greater focus on "Supply Chain Collaboration" by new clause 6 which introduces a system which is aimed to achieve Improved Value by means of greater involvement of supply chain members in the planning of the work and other improved supply chain commitments and working practices. It is therefore in the spirit of TAC-1 for all parties to work together in these unprecedented times to mitigate the impact of delays and shortages in the supply of materials through the use of early warnings and holding core group meetings.
Direct Payment Agreements and Vesting Certificates
Due to the demand for materials which will inevitably increase when more construction sites begin to reopen coupled with longer lead times due to lack of labour, factory closures and delays with importation and transportation, clients may consider making advance payments to secure an order and prevent delays to the programme even when materials are to remain off site. If a client decides to do this, legal advice should be taken to ensure a direct payment agreement is entered into between the client, contractor and supplier and that this is supported by appropriate security such as a vesting certificate, vesting the title in the materials upon payment.
It is unlikely that there will be a perfect contractual solution which works for all parties due to the unprecedented nature of the current situation so clients and contractors should work together with their key material supply chain members to agree how to support their suppliers getting back to full capacity to deliver the materials needed.