Look before you leap - pre-contract safeguards

Whilst tender procurement is perhaps a more mundane subject than other forms of transactional activity that pass for procurement, it is nevertheless of great significance in influencing successful project delivery. Sound tendering and construction procurement are all about identifying and appointing an appropriately skilled team, agreeing costs and a programme, and achieving an appropriate distribution of risk between the parties. As Simon Tolson noted to the audience at the 10th Annual Construction Law Summer School at Fitzwilliam College on 3 September 2010, that all sounds simple enough, but is it really?

One only needs to think of Rafael Viñoly’s £16.5m Colchester Visual Arts Facility, Wembley Stadium,1 the British Library, Bath Spa,2 the National Physical Laboratory, Holyrood Scottish Parliament3 and T5 to think of seven humdingers, which remain useful illustrations of the impact on cost and programme of getting it wrong. We have lost in the last year the likes of Pierse, Jarvis, Verry Construction and Lancsville to bad tendering decisions. Let us hope major projects like BAA’s £1 billion Terminal 2, Crossrail’s £16 billion scheme and Thames’s £2.2 billion Tideway Tunnel will fair better.

Contractors and consultants tendering for construction projects are expected these days to put together very comprehensive proposals, which not only answer the specific points raised in the tender enquiry documents, but also outline extensively the company’s expertise, experience, procedures and methods for the proposed works. In certain situations, tenderers are expected to prepare, on a speculative basis, full option appraisals which require an extensive understanding of the potential client’s needs. Often the extent of necessary work cannot be ascertained until the works have been started, and the design is hardly ever fully complete at the time a contract is made. This has led to contracts for pre-construction services for two-stage tendering like JCT.

It is a salutary point that a large construction project may typically take four to five years through planning, design, procurement, construction and completion, during which time the contractor may only be given four weeks within the tendering process to quantify all the risks that may impact against quality, price and time. Often the extent of necessary work cannot be ascertained until the works have been started and essential opening-up work undertaken. Moreover, the design process will never have been fully completed at the time the contract is made and so design assumptions must be prepared. Like most things in life, it is best to avoid an accident and that includes inadvertently contracting, ditto doing so on the wrong terms or at a bad price.

It is for this reason risk is the single most important aspect to consider in tendering procedure and contractual arrangements. Tender documents should be examined vigilantly to ensure that a tenderer does not oblige his or her company to do the unfeasible, such as building what is practically impossible as happened with “old” Laing and the National Physical Laboratory. In particular, contractors should have a clear understanding of those documents included within the invitation to tender which will eventually become formal contract documents. All too often in retrospect the lawyers will pour over the detail arguing which party carried what risk and why. Tendering is an area where looking left and right and up and down is obligatory before you leap.

Check out your putative client before you tender

There is obviously little or no point in bidding as a tenderer and then entering into what on the face of it seems to be a rewarding and prestigious project unless there is a realistic prospect of being paid for the work done. During the past year, Haymills, Banner Holdings, Spiller Builders, Harry Neal, Frank Galliers have all gone to the wall, taking others with them. A basic point, and one I find all too rarely, is that putative clients / paymasters are not investigated for form by contractors and consultants. An oligarch from some oil-rich state may turn up in a swanky motor, with all the trappings, but will he and can he pay?

With any new client where there is no previous course of dealing, or none for some time, it is important to ascertain whether the sponsor party/invitee has sufficient resources to see the project through. Joint venture companies and companies registered overseas, particularly in the Channel Islands, BVI, Grand Cayman or similar secret or “private” registered residence, should sound warning bells. Similarly, any off-the-shelf company purchased by a developer for a particular venture is, at the end of the day, no more than a shell. Contractors should not be scared of asking for security in these circumstances, be it by advance payment bond, PCG, escrow account, project bank account or legal charge over property by securing all monies/ securing a fixed sum etc.

If in doubt do some basic research. There are a number of searches that can be made online for a fee, e.g. through Dun & Bradstreet, Experian, Equifax, Jordans, etc. A search on the web using a good search engine might also pull up some leads. It is free or low cost to undertake these searches, and whilst historically the evidence provided by them will not be “live/real time”, it can provide you with important information at the outset which will help you decide on how to proceed. County Court Judgments, Directors Disqualifications and insolvency portfolios are all indicative of folk who may not have the golden touch. It is always worthwhile carrying out a company search to find out who the main players are and an officer search can be made against the directors to see what other directorships they may hold. This may be helpful in determining whether there have been any previous hospital jobs that go with the men in the grey suits.

Read the tender documents

I will not apologise for repeating that risk is the most important factor to consider in tendering procedure and contractual arrangements. Whilst it may seem an obvious precaution to read tender documents very carefully, in my experience it is surprising how, time and again, contractors get into difficulties because they do not follow this basic rule. It is generally too late to ask your lawyers to try and get you out of a contractual condition to which you are already bound. Here are the cardinal rules to avoid taking on liability inadvertently.

• When preparing a tender, read the documents you receive carefully, including the small print. If reference is made to documents not supplied to you, request copies.
   
• Query anything that is ambiguous or unclear. Some documents are incomprehensible in parts. This is often because they include provisions cut and pasted from other documents.
   
• Once you have had a response to queries, make it clear what you have and have not taken into account and what qualifications you need to make.
   
• Tenders are hardly ever rejected if the qualifications are reasonable. In fact, it shows that you know what you are doing and may earn you some respect.
   
• The indispensable matters that you need to deal with in your tender are: the extent and scope of the work, the price, payment terms and time for completion.
   
• Regarding the scope of the work, identify the documents you have priced and note anything you have excluded.
   
• If you price a bill of quantities, make it clear that you have based the estimate upon the quantities given and ideally seek a contract that is subject to re-measurement.
   
• Are you taking on any design responsibility? If the invitation to tender is ambiguous, clarify the position either by querying it or by making a positive statement as to whether or not you have taken it into account.
   
• If you have design obligations, verify that you have professional indemnity or product liability insurance in place. The extent of any design responsibility should be clearly defined in the final contract documents: do you have design responsibility for the whole of the work or only part?
   
• You should also make sure that the responsibility for interface with other work is clear, as this is invariably where issues arise between trades, specialist or building mediums. There may be other matters to be addressed such as who provides what on site, for example attendances, and who pays for it.
   
• Liquidated damages for delay - on subcontract work - are often hidden in the main contractor’s documents.
   
• What is reasonable for a main contractor is not necessarily reasonable for a subcontractor. If bonds or warranties are required, what are the terms?
   
• Consider whether you want to include any limitations on your liability, either in the contract itself or in any warranties you are being asked to provide.
   
• Check tolerances; check for provisions which require gross internal or net lettable areas4 to be achieved or in default of the obligation to pay iniquitous damages.
   
• It is helpful to have an internal checklist so that you adopt a systematic approach for enquiry documents.
   
• Include your standard terms and conditions with your tender where possible. If you do not have them, consider having a set prepared which also covers matters that in your experience commonly arise in relation to your work. Your standard terms may not be accepted wholesale but they will be a basis for negotiation.
   
• Above all, do not be bashful; it is a mistake not to mention in your tender or estimate something of importance for fear of being seen as difficult. It is much easier to put down a marker about such issues earlier rather than later.

One area that consistently holds contractors to ransom is the risk in dealing with existing structures. The problem is compounded when the property concerned is listed or constructed from unusual or deleterious materials (early clinker concretes, post-tensioned floor slabs and beams, timber framing or cladding, thatch, for example). It is important to take an early stand and to give positive reasons to the offeree why a new provision should not be introduced. At its heaviest, you can decide not to proceed further with the tender. In other cases, you may well be able to agree an amendment but you need to undertake a risk assessment and price for it accordingly. Look at the insurance coverage position carefully when tendering in light of recent authority on co-insurance and the contractor’s liability in negligence under a construction contract5 for existing structures risk.

References to other documents

Although I have mentioned references to other documents in passing above, it is so important it warrants its own heading, such are the times it comes to haunt contractors. Sometimes the terms on which the work is to be let are referred to in correspondence passing between the parties, so watch out for this where the letter is made a contract document, particularly if that is not what you want. This often happens with drawings, planning documents/requirements, highway and s.106 issues,6 EIAs and geotechnical/ground investigation reports. You will typically see references to documents “which are available for inspection by appointment”. If that is the situation make damn sure that an appointment is made and copies taken. If they are available on an intranet or some downloadable source evoked with modern e-tendering7 bespeak the password and download them. Parties often make reference in contractual documents to the contract being “subject to conditions available on request”. Such a reference, when brought to the notice of the other party, is enough to incorporate the current edition of those conditions of contract. This rule was decided in Smith v South Wales Switchgear Ltd.8

Conclusion

Play deal, no deal; never forget, sometimes no deal is your best deal when tendering. In fact, some companies will not bid on certain contracts because of suicide bids by others to win work in this recession.

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• 1. Original construction cost £376m with a completion date of May 2006; the employer paid an extra £36m and the contractor lost £150m (completed March 2007).
• 2. Originally £13m with the completion date of August 2002, finally open August 2006, £40m over budget and still riddled with defects.
• 3. Originally, £40m with a completion date of October 2001, final cost £431m and occupied autumn 2005.
• 4. Gable House Estates Ltd v Halpern Partnership (1996) 48 Con. L.R. 1 at 103. Where an architect draws up a scheme for redevelopment, his duties may include a duty in relation to estimates of the lettable area.
• 5. In a judgment handed down on 2 April 2008 in Tyco Fire & Integrated Solutions Ltd v Rolls-Royce Motor Cars Ltd [2008] EWCA Civ 286 the Court of Appeal overturned the first instance decision of Judge Gilliland QC [2007] EWHC 3159, and held that a contractor (Tyco) under a construction contract was, on a true construction, liable to indemnify its employer (Rolls-Royce) for damage to existing structures caused by Tyco’s negligence, despite a contractual requirement for Rolls-Royce to maintain a joint names insurance for specified perils.
• 6. Section 106 of the Town and Country Planning Act 1990 allows a local planning authority (LPA) to enter into a legally binding agreement or planning obligation with a land developer. S.106 agreements can act as a main instrument for placing restrictions on the developers (who pass the risk down to contractors), often requiring them to minimise the impact on the local community and to carry out tasks, that will provide community benefits.
• 7. As used by the likes of the Olympic Delivery Authority, and the likes of Davis Langdon, CB Richard Ellis and Land Securities.
• 8. [1978] 1 All ER 18. Smith overhauled South Wales Switchgear Ltd’s electrical equipment for some years. The company wrote to Smith asking him to carry out the overhaul of equipment. A purchase note requesting work which read “subject to our general Conditions of contract 2400, obtainable on request” was sent to Smith. He carried out the instructions as requested but did not request a copy. An unrequested copy of the 1969 conditions was sent to him. There were two other versions of the conditions including the March 1970 revision. Held: The reference in the purchase order incorporated the March 1970 revision. There were three reasons for the decision:
  1) It was clear how Smith could have ascertained the terms.
  2) It was common knowledge that conditions of contract change over time.
  3) If he had asked for the conditions he would have received a copy of the current one.