Construction Insurance and UK Construction Contracts

Roger ter Haar, Anna Laney, Marshall Levine

• Publisher: Informa Law from Routledge
• Year: 2016
• ISBN:
  9781317496182
• Edition: 3
• Topic: Droit
• Subtopic: Droit de la construction

Construction Insurance and UK Construction Contracts has long been the premier text for legal professionals looking for a combined analysis of construction contracts and their relation to insurance law. In a new and updated third edition, this book continues to provide in-depth commentary and pragmatic advice on all the most important regulations and policies surrounding contracts and insurance in the construction industry.

Including brand new chapters on reinsurance and energy products, this book covers subjects such as:

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• Minor, intermediate and major project construction contracts
• Classes of insurance contract
• The role of insurance brokers
• Risks in construction and legal liability
• Professional indemnity insurance and directors' and officers' liability insurance
• Bonds and insurance
• Latent defect insurance
• Property insurance
• Health and Safety and Construction Regulations
• Contract Insurance
• FIDIC, JCT and NEC 3 regulations
• PFI/PPP projects in the UK
• Dispute resolution

This book is a vital reference tool and practical guide for lawyers and in-house counsels involved in the construction industry as well as project managers, quantity surveyors, construction contractors, architects and engineers needing advice from an experienced legal perspective.

Chapter 1
Introduction to UK construction industry

General

1.1 In 2014, the construction industry in the United Kingdom contributed £103 billion to economic output, 6.5% of the total gross value added of the economy.¹ This represents a rise of 9.5% in real terms on 2013: the largest increase since at least 1990. In the same period, construction accounted for 2.1 million jobs or 6.3% of all jobs. There can be no doubt as to the continued and growing importance of the construction industry to the UK economy. Outside these shores, the standard form JCT, NEC3 and FIDIC contracts remain the contracts of choice, often being subject to the laws of England and Wales. Contractors based in the United Kingdom undertake projects across the world: it is not possible to determine with any accuracy the contribution to the global economy, but it is clear that the contribution is both substantial and significant.

1.2 This raises the question as to what the construction industry comprises. Broadly speaking the market can be divided into housing, infrastructure, industrial and commercial sectors, with individual projects being undertaken on a private, public or public/private basis. Yet, this is a simplistic division as construction projects touch on every aspect of daily life, from the properties in which we live and work; the infrastructure (both in terms of plant and services) that provides us with water, electricity and gas; the transport networks (road, rail, airports, sea ports) that we use for work and pleasure and which ferry to our doors that which we consume: each involves construction and a construction contract. Everything in the built environment around us and more or less everything we use in daily life at some point would have made use of something built by the UK construction industry. Against that background, the risks that parties to construction contracts face, the ramifications of breach or failure; and identifying where the insuring obligations fall are matters that are often taken for granted or not analysed with sufficient detail until something goes awry.

1.3 As no two construction projects are ever the same, it is necessary to consider the individual characteristics of each project and to consider the risks at each stage of the process. Even on the most straightforward project where defects arise there is usually a debate as to whether the same is due to an error in design or workmanship and, accordingly, the identity of the ‘proper’ defendant. In turn, that requires a potential claimant to identify the causative breach. This inevitably leads to the question of whether the putative defendant is insured in respect of his act or omission. The stark reality is that insurance and construction contracts go together hand-in-hand.

1.4 Broadly speaking, there are two categories of insurance effected in relation to construction projects as between employer and contractor:

• (1) liability insurance, for example public liability insurance and employer’s liability arising from claims for loss or damage;
• (2) property insurance, for example, insurance of the contract works and any material, equipment and machinery associated with it.

1.5 In addition, the professional teams, and the building construction teams engaged in the design and construction of the project will take out appropriate professional indemnity insurance to cover their design liabilities and risk of carrying out negligent design whether in contract, tort, common law or statutory liabilities.

1.6 As between contractor and employer, the majority of building and engineering contracts deal with insurance matters on a broadly similar basis. The contractor is generally responsible for loss or damage to the contract works during the construction period and is responsible for repairing or reinstating them in the event of loss or damage. The contractor is usually obliged to insure the works to the satisfaction of the employer, very often using a policy which is held in the joint names of both the contractor and the employer. In addition, the employer needs to be protected against claims arising against the contractor, either by the contractor’s employees or by third parties, so, to that end, the contractor usually indemnifies the employer under the contract against such claims arising. Consequently, the contractor frequently arranges the employer’s liability and public liability insurance.

1.7 However, on very large projects, the practice is often reversed and it is often the employer who insures in the joint names of the employer and the contractor (there are normally cost savings and reduced insurance premiums because of the employer’s status). Sometimes this reversal of positions is taken into larger building contracts and, in such cases, it is not unusual to find the employer being responsible for effecting and maintaining the insurances.

Valuation methods

1.8 In order to identify the form of contract most suited to a particular project, it is necessary to consider the method of procurement that is to be adopted by the employer and to identify and assess the options and risks associated with each.

Lump Sum contracts

1.9 In this form, the contractor agrees a fixed price to execute certain defined building works. The figure is usually arrived at by way of the bill of quantities and is agreed at the time of contract formulation when the work is also commenced. All the main forms of building contract are considered to be lump sum contracts, even though they contain provisions for the adjustment of the sum for such things as fluctuations and variations. This is because the contractor agrees to undertake the defined contract works for a fixed price.

Measurement Contracts

1.10 The contract sum for a measurement contract (also known as a re-measurement contract) is not finalised until the project is completed. The process involves the employer (usually through his consultants) preparing as part of the tender documents a bill of quantities where quantities are estimated rather than finalised. The contractor prices against each item in the bill, providing a unit rate in respect of each bill item. During the project the actual quantity of works in respect of each item in the bill is measured and the quantity agreed, to which the contractual rate is applied to build up the final contract value. Accordingly, at the outset there is a contract sum that is not a finalised figure and is subject to the works being re-measured at completion. As such, by definition it cannot be a lump sum contract.

1.11 Where works are instructed in respect of which there is no applicable rate, the contractor can build up new rates or “star rates”, which will then be used in the valuation of the works.

Cost Contracts

1.12 With a cost contract there is no binding, pre-agreed sum contract sum. The contractor is entitled to be paid whatever the work(s) actually cost(s), together with an additional payment normally called a management fee, which should cover its profit and overheads. An example is the JCT Prime Cost Contract 2011. This form of contract is often adopted where the employer requires an early start on site such that there is insufficient opportunity to prepare a detailed design and bill of quantities against which a contractor can price.

1.13 There are four common variations:

• (1) Cost plus a percentage: the contractor is paid the actual cost of work reasonably incurred, plus a fee which is a percentage of the actual cost.
• (2) Cost plus fixed fee: the fee is a fixed lump sum and so the contractor has an incentive to complete.
• (3) Cost plus fluctuating fee: an estimate of the total cost is made and the fee varies according to actual cost.
• (4) Target cost based on the bill of quantities and compared with actual adjusted target cost. If the actual cost shows a saving (or an increase), the fee is increased (or reduced) appropriately.

Procurement Methods

1.14 The four most commonly used methods of procurement are considered below.

Traditional/Conventional

Approach and Standard Form

1.15 This form of procurement has been standard practice since the mid-nineteenth century. There are two defining features of the traditional/conventional method of procurement:

• (a) The employer will engage a professional team to prepare a full package of documents (usually comprising a specification, drawings, contract particulars that set out the particulars of the contract to be entered into and any amendments to those contract terms, bill of quantities (where appropriate) and, if they have been obtained, copies of any ground investigation or soil reports). That package of information is then supplied by the employer to those contractors who are to be invited to submit a tender in respect of the works described in the tender documents.
• (b) It follows that the design process is separate from the construction process, and usually the contractor will have no responsibilities as regards design.

1.16 Traditional/conventional contracts can be priced either on a lump sum, measurement or cost reimbursement basis.

1.17 Examples of a standard form of contract appropriate to the traditional method of procurement within the JCT 2011 Suite of contracts are the JCT Minor Works Contract 2011 (MW2011), JCT Standard Building Contract 2011 (with or without quantities (SBC/Q 2011 or SBC/XQ 2011), Standard Building Contract With Approximate Quantities (SBC/AQ 2011) and the Prime Cost Building Contract (PCC2011).

Responsibility and Risk

1.18 Due to the fact that a full package of documents needs to be supplied as part of the tender process, time needs to be available for those documents to be adequately prepared. Experience shows that where employers seek to rush this phase, errors are inevitably made either as to design or specification or both. This also means that the project life tends to be longer as the design and construction phases are undertaken sequentially by different entities. However, because the employer appoints the consultants that undertake the design – whether architect or engineer – it means that the employer retains full control over the design process.

1.19 Furthermore, because the invitation to tender is usually sent to a number of contractors, there is a competitive tendering process such that the employer can be confident that he is getting a good price for the works. Where there is no competitive tender it is common for there to be a negotiated contract price, again providing for certainty as to the project cost (although the cost can be increased or decreased later in the event that works are varied).

1.20 Subject to the terms of the contract, the contractor is responsible for supplying the labour and materials necessary to complete the works and accordingly for the quality of goods and workmanship. As he does not (usually) bear design responsibility,² he is not generally responsible for design – unless the errors in the design are so obvious and/or so affect the buildability and/or safety of the finished project that it would be reasonable for a contractor to bring the same to the attention of the employer.

1.21 It follows that the risk of the adequacy of the design rests with the employer (as between him and the contractor); although in the event that there is a deficiency in the design the employer will have recourse against his professional team.

Design and Build/Contractor’s Design Portion/Turn Key

Approach and Standard Form

1.22 In this method of procurement the contractor is responsible for un...