The PSC is being sponsored by the Construction Industry Federation, the Society of Chartered Surveyors Ireland, and Engineers Ireland. It’s a pity that the Royal Institute of Architects of Ireland isn’t involved. Their standard RIAI form is widely used in private building construction, often with a string of amendments longer than the form itself.
The new contract is not all that new. It’s based on the main employer-designed public works contracts, now about 13 years old, and was first presented by Ciaran Fahy and Anthony Hussey in 2013. Their main idea, which is carried through into the contract as launched, was to use the overall structure of the public works contracts but re-balance the risk allocation. The sponsors say:
This Conditions of Contract has been drafted with the object of achieving a fair and balanced allocation of risk between the parties in order to promote long-term sustainable efficiency in the Irish construction industry. Specifically, risk has generally been allocated to the party best able to bear and manage it.
The PSC includes much of the stuff often added to the RIAI form by amendment, such as provisions for—
- compliance with Building Control Regulations
- sectional completion
- digital information modelling, incorporating the (UK) Construction Industry Council’s BIM Protocol
- programme and progress reporting
- clarity and flexibility in risk allocation with delay and compensation events, which are listed together
- a structured mechanism for dealing with changes and claims.
Most of this comes from public works contracts. But the PSC deviates in important respects, to which parties will have to give some attention if they are considering it. Here are some of them.
An entrenched feature of how commercial buildings are procured in Ireland is the client and its design team selecting specialists and telling the main contractor to give them subcontracts.
The PSC accommodates this through three kinds of client-selected subcontractors:
- specialists already working for the client when the main contract is awarded: their contracts are transferred (‘novated’) over from the client to the main contractor. These are called novated specialists.
- specialists selected before the main contract is awarded, and identified in the main contract. These are called named specialists.
- specialists selected after the main contract is awarded, and plugged-into the main contract subsequently. They are called nominated specialists.
All three types of specialists become subcontractors and the contractor is responsible for their work. But the contractor has less responsibility for nominated specialists. Their payments are administered by the client’s team and paid to the contractor on a pass-through basis (by adjusting a prime cost sum). The contractor is not responsible for their design (but has to obtain a collateral warranty; the contractor is responsible for novated and named specialists’ design). And if a nominated specialist has to be replaced, the client bears the delay and cost consequences.
This reflects the RIAI form, which provides for nomination of subcontractors by the architect, but is very often amended to transfer the risks mentioned above to the contractor. A client using the PSC can have this flexibility by setting the specialists up as ‘named’ if they are on board when the main contract is signed. But a client who wants to select specialist subcontractors after awarding the main contract may wish to consider bespoke arrangements for managing the risks it retains for traditional nominated subcontractors.
The PSC’s full title is Conditions of Contract for Private Sector Building and Engineering Works Designed by the Employer. The last 4 words are important. Clause 8.1.1 provides that the client is responsible for design of the works, except for any part to be designed by the contractor or a novated or named specialist subcontractor.
The PSC makes the client responsible for the ‘integration and co-ordination of the design’. This is not stated in most construction contracts, but is probably part of the primary design responsibility. It might have been a good idea to include a validation period at the start of the contract, during which the parties would try to check for any integration or co-ordination issues, and a limitation on recourse for issues raised late that should have been detected in this exercise.
The Office of Government Procurement’s guidance accompanying the public works contracts makes clear the need for detailed design to be complete before entering a works contract. The cost certainty objective depends on that. The RIAI form, on the other hand, envisages the architect issuing design incrementally as it is needed. There can even be provisional sums to cover items that can’t be priced because they’re not designed yet.
The PSC doesn’t have provisional sums but does envisage incremental design. Clause 8.1.4 requires the client to give the contractor ‘such design information, including criteria and parameters’ as are necessary to perform the contract. Perhaps this should refer to the Employer’s Representative, who is the one with power to issue instructions.
As I have said, the PSC is for ‘… Works Designed by the Employer’. It would need some modification to serve as a design-build (or contractor design) contract. Clause 8.1 would have to be re-worked. Some other changes to consider —
Delete 3.1(6), which makes design of the works by the client’s personnel a client risk.
Delete 4.5.4, which requires ‘necessary’ instructions (and delay and compensation event 7)
Amend 4.7, which allows only 5 working days to respond to a contractor submission. This looks short even for client design contracts.
Amend 8.2.2, which excludes contractor liability for nominated specialists’ design.
Consider amending 8.2.5 (discussed below) if the client wants to the contractor to be responsible for ensuring that works as a whole are suitable for a particular purpose. But this might not be necessary or appropriate.
Fit for purpose
Clause 8.2.5 of the PSC provides that all items ‘provided’ by the contractor for the works ‘shall also be fit for the purpose for which they are used in the Works.’ This seems to make the contractor responsible for ensuring the suitability of items designed or selected by the client’s design team. That’s odd.
There is a matching provision for items that the client provides the contractor for the works.
In the public works contracts (clause 8.1(4)), the contractor’s fitness for purpose obligation applies only to items ‘designed or selected’ by the contractor.
Law, consents, government and protester action
The PSC makes change of law and other legal requirements after the designated date (10 days before tender) a delay and compensation event. A delay result can mean a time extension. A compensation event can mean a price adjustment (in theory, up or down). A client may wish to limit this to unforeseeable changes in law.
The client is responsible for obtaining consents necessary for the works to be carried out in accordance with the works requirements. These consents having an adverse effect on the works is a delay and compensation event. The contractor is responsible for obtaining the consents needed to comply with its chosen methods. But if the consents change, regardless of who is responsible for them, that is a delay and compensation event.
Delay caused by action of public authorities is a delay and compensation event. (In the public works contract it’s only a delay event.)
Protest action against the client, not caused by the contractor acting outside the contract, is a delay event. This is unusual.
Site information, ground conditions, utilities
Like the public works contracts, the PSC lists as a delay and compensation event: factual error in information about the site or setting out information in the works requirements.
Clients sometime want to provide information they have, such as the results of site investigation, to tendering contractors outside the contract on a no recourse basis. Clause 1.10 of the public works contracts exonerates the client from liability for such background information. It is often criticised. The PSC omits this clause.
Also like the public works contract, unforeseeable ground conditions and obstacles in the ground (human-made obstructions, archaeology, utilities) are delay events and, at the parties’ option, also compensation events.
Another delay event and optional compensation event is delay by utilities in relocating and disconnecting existing services. But there seems to be no relief for utilities’ delay in connecting services required for the works, such as permanent electricity and water (unless they count as employer’s personnel, in which case their unforeseeable interference would be a delay and compensation event). Again, this matches the public works contracts.
The PSC limits the contractor’s liability to 100% of the initial contract sum (or other agreed limit, subject in either case to a higher insured limit). The limit does not cover fraud, gross negligence, deliberate default, or reckless misconduct.
While the public works contracts and the RIAI form have unlimited liability, the PSC’s limit shouldn’t deter clients. Some may prefer it to be linked to the outturn contract sum, rather than the initial. Some contractors may seek a lower limit, or a limit that reduces on substantial completion. Some contractors may dislike the exclusion for ‘gross negligence,’ which is hard to pin down.
Unlimited liability is, of course, illusory. No one has unlimited assets. The limit may lead to greater diligence of counterparties’ balance sheets, looking to see assets sufficient for the limit. This is an issue for clients and contractors, as is the availability of credit enhancement through, for example, bonds, letters of credit, and parent company support.
The PSC requires consent for assignment by either party. Clients may want to secure advance consent to certain types of assignment: security, inter-group, possibly to a purchaser.
Commercial developer clients will want to add provision for collateral warranties for lenders, tenants, and purchasers.
Two points here. First, the PSC includes an option for requiring the contractor to have professional indemnity insurance. That makes sense when there are significant elements designed by the contractor or subcontractors.
Second, clause 3.5 requires the client to take out non-negligence insurance. This insures against damage to property (other than the works) when negligence is not proven, for example due to vibration or loss of support. The need for it is usually considered case-by case. For instance, it would be appropriate on a project to demolish or make structural alterations to one building on a terrace with multiple owners. Clients might not consider it necessary on every project.
Claim and dispute mechanics
Three aspects of this stand out.
First, the PSC requires each party to notify claims within 28 days after it becomes (or should have become) aware of something resulting in an entitlement. Failure to give timely notice bars the claim. Contract clauses barring late contractor claims are not uncommon; the time bar on client claims is less common. It raises questions of when a client should notify a claim for a defect arising during construction, or during the defects period, when the client thinks the defect is being or ought to be attended to. I expect this uncertainty will give clients difficulty with the provision. A solution would be to exclude defect claims from the notice bar, at least until the end of the defects period, on the basis that they have their own regime.
Second, under the public works contracts, the employer’s representative determines claims in the first instance. A contractor claim not determined within 20 working days is deemed rejected. The decision (or deemed decision) is binding unless a dispute is raised in 28 days.
The PSC modifies this by reversing the ‘deeming’: if the employer’s representative fails to make a timely decision, the contractor can ask (again) for a decision within 10 working days, failing which the contractor’s claim is deemed to have prevailed in full. The deemed decision is binding if not disputed in 28 days.
This is similar to the NEC4, and is to have claims dealt with as they arise. But it needs a high level of attention to contract administration. Failure in that would be a source of peril.
Third, disputes not sent to adjudication can be referred to conciliation, which can result in a recommendation that is temporarily binding. I’ll come back to that in another post.
The PSC is a welcome initiative. It’s not ideal that many projects are being built using contract conditions resembling a scrapbook. The PSC drafters deserve to be commended for their work on the document, for getting it adopted by three important institutions, and for making it available to users in electronic form at no charge.
Like most issuers of standard contracts, the PSC sponsors are keen to discourage bespoke amendments. They have set up a committee of seven (with different professional backgrounds, but all men) to manage the contract and consider suggestions for amendments. That is to be welcomed.
Meanwhile, it remains to be seen whether users will adopt this new form; and if if they do, whether they will put down the scissors and glue pot.