Issues can arise when contracts unfairly shift risks down the supply chain, often to parties that are not best equipped to manage them. A new document from Build UK aims to promote collaboration between clients, consultants, contractors, and the supply chain.
Build UK says that standard forms of contracts, such as those from JCT (Joint Contracts Tribunal) and NEC (New Engineering Contract), are designed to fairly allocate risk among project stakeholders. However, these contracts are frequently amended, which can double their length and complexity and often result in the disproportionate transfer of risk. This can create inefficiencies and additional costs for all parties as well as leaving them inadequately insured for the risks they are forced to bear.
The document advocates for a shift towards a new norm in contractual practices, where the focus is on managing risks rather than passing them on. It suggests that risks should be recognized and managed by the party best equipped to handle them. This approach aligns with the principles outlined in the Government’s Construction Playbook, which emphasizes getting projects right from the start through a collaborative approach and proper risk management.
To support this shift, Build UK has developed a set of recommendations aimed at improving contractual practices. These identify specific contractual terms that should be avoided to promote fairer risk allocation and better project outcomes.
Do not include a ‘fitness for purpose’ standard of care for design (except in the process sector)
The term “fitness for purpose” imposes a high standard of care, requiring that the deliverables meet a specific intended purpose. While this is a reasonable expectation for materials and workmanship, applying it to design services is problematic, Build UK says. Doing so creates unrealistic expectations and is often not covered by professional indemnity insurance, which only covers breaches of reasonable skill and care. This, the document says, could lead to disputes and higher costs, as contractors might take overly cautious approaches, stifling innovation. The document advises against including this standard in contracts, except in the process sector where such obligations are more common. Instead, contracts should specify that design liability is limited to reasonable skill and care, as this is more insurable and aligns with industry norms.
Do not include delay/loss and expense risk where not reasonably ascertainable for dealing with asbestos, fossils, antiquities, unexploded ordnance, or statutory body works
Unquantifiable risks, such as encountering asbestos or antiquities, should not be passed down to contractors, Build UK argues. These risks are often unknown and can have significant impacts on the project timeline and costs. Transferring these risks creates disputes and inefficiencies, as the supply chain may include overly cautious pricing or face unexpected financial burdens. The document recommends a risk management approach, involving early contractor involvement and establishing a risk register. Contract provisions should allow contractors to recover additional time and expenses when such risks materialize. This approach aligns with the Construction Playbook’s commitment to fair risk allocation.
Do not include that ‘Specified Perils’ will not give rise to extension of time where caused by the (sub-)contractor
Specified Perils, such as fire, flood, or riot, should entitle contractors to an extension of time if they cause delays, even if the contractor was at fault. Removing this entitlement unfairly shifts the risk to contractors, which is often uninsurable and could lead to insolvency if they are held liable for extensive damages. The standard JCT position allows for time extensions but not for loss and expense recovery, balancing risk between client and contractor. The document suggests maintaining this standard to avoid creating unsustainable liabilities for contractors, who might otherwise be forced into conservative practices or insolvency.
Do not include a blanket indemnity for breach of contract
A blanket indemnity requires one party to cover all losses resulting from a breach of contract, which can expose them to unlimited, unforeseeable risks. This is often uninsurable and can extend liability beyond typical contractual limitations. The document advises that indemnities should be limited to specific, fault-based categories, such as tax liabilities or intellectual property infringements. This approach provides adequate protection without imposing unreasonable burdens. Contracts should rely on standard legal remedies for breaches rather than broad indemnities, ensuring risks are manageable and insurable.
Do not include uncapped (sub-)contractor liability (except for certain aggregate cap carve-outs such as fraud, misrepresentation, personal injury/death, wilful default)
Uncapped liability exposes contractors to potentially catastrophic losses, which could lead to insolvency, particularly on large projects. This risk is often uninsurable and places an unsustainable burden on contractors. The document recommends capping liabilities at a reasonable level, based on the contract value and the contractor’s insurance coverage. Carve-outs for fraud, misrepresentation, and other serious offenses are acceptable, but general liability should be capped to allow contractors to manage risks effectively. This ensures that projects remain viable and that contractors can continue to operate within the industry.
Do not use a pure on-demand performance bond, a Parent Company Guarantee without a ‘no greater liability’ clause, or a collateral warranty without a ‘no greater liability’ clause
Performance securities like bonds, guarantees, and warranties are commonly used to ensure that contractors and subcontractors fulfill their obligations. These securities provide a safety net for clients, particularly in case of contractor insolvency or failure to perform. However, the way these securities are structured can impose significant financial and operational burdens on contractors.
Performance Bonds
Performance bonds are financial guarantees used in construction contracts to ensure that the contractor fulfills their obligations. There are two types of performance bonds: default bonds and on-demand bonds. Default bonds require proof of contractor default before payment is made, offering a level of protection for the contractor. On-demand bonds, however, allow the client to demand payment without proving any fault, placing a significant financial strain on the contractor. Since banks treat on-demand bonds as loans, they reduce the contractor’s available working capital, potentially increasing the risk of insolvency. The recommendation is to avoid using pure on-demand bonds and instead opt for default bonds that balance security for the client with fairness for the contractor.
Parent Company Guarantees
Parent Company Guarantees (PCGs) are used when a parent company guarantees the performance of its subsidiary, the primary contractor. If the subsidiary fails to meet its contractual obligations, the parent company steps in to fulfill them. However, without a ‘no greater liability’ clause, the parent company could be exposed to liabilities beyond the original contract’s obligations, leading to significant financial risks. This is especially concerning if the parent company’s structure is designed to limit its liabilities. Including a ‘no greater liability’ clause ensures that the parent company’s risk is limited to the scope of the subsidiary’s obligations, preventing unforeseen financial burdens.
Collateral Warranties
Collateral warranties extend the contractual relationship to third parties, such as funders or future property owners, allowing them to enforce rights and obligations initially agreed upon between the contractor and the client. Without a ‘no greater liability’ clause, these warranties can expand a subcontractor’s liability beyond the original contract’s scope, potentially leading to uninsurable risks. This could expose subcontractors to significant financial losses, discouraging their participation in projects requiring such warranties. Build UK recommends including a ‘no greater liability’ clause in collateral warranties, ensuring that subcontractors’ liabilities remain within the limits of the original contract, thus protecting them from excessive and unmanageable risks.
