JCT contracts were created as a standard form of contract, to simplify the contracts process within the construction industry. However, the standard form is nowadays almost never seen – instead, main contractors will use the JCT as a starting point and add several hundred pages of amendments to it, rendering it unrecognisable.
What is a JCT Contract?
In a construction project, there can often be several JCTs in place at the same time. The first is usually made between an employer (such as the owner of the building, or the council) and the contractor or builder overseeing the project. The second will be between the contractor or builder and the sub-contractors that are actually carrying out the works. It defines all the essential terms and conditions these parties must adhere to, including the:
- Obligations of each party
- Project’s specifics; and
- Costs involved
A JCT contract is crucial to any building project because it provides all concerned individuals with a clear picture of what they must do, when they must do it, who must do the work, and how much the project will cost. Because each party’s roles and responsibility are outlined in detail, disputes and misunderstandings can be avoided, thus, preventing delays, shoddy workmanship, financial losses, and potential lawsuits.
History of JCT’s Suite of Forms
Founded in 1931, the Joint Contracts Tribunal (JCT) is a national body comprising seven organisations that represent different sectors of the UK building and construction industry. These organisations include the Royal Institute of Chartered Surveyors and the Royal Institute of British Architects. Each of these organisations nominates a director that will sit as a member of the board of the JCT.
Since its inception, the JCT has produced standard forms of documentation that include contracts and guidance notes for the UK contractors and builders. The organisation routinely revises and rewrites its suite of forms to reflect the changing needs of the construction industry, with the 2016 version being the most recent incarnation of JCT’s suite of forms.
However, as stated above, the standard form is rarely seen nowadays and will generally be accompanied by a set of amendments.
Benefits of Using a JCT Contract
JCT contracts can do more than just set out the roles of responsibilities of each party involved. If you are considering pursuing a building project with another company or individual, here are some of the ways using a JCT contract can benefit you.
1. Protection from common issues
Because JCT contracts have been around for decades, they have taken into consideration many of the issues builders and employers often encounter when handling a building project. Therefore, both parties need not create a new and bespoke contract to ensure protection from such issues since they have already been incorporated into the contract template.
2. Swift dispute resolution
Despite best efforts, disputes can and do arise. While a JCT contract is not guaranteed to prevent all kinds of disagreements between contractors and their employers, it does provide ways to help ensure their swift resolution. A JCT contract will often include a provision stating that an arbitrator or adjudicator, who will determine the accountability of each party, will be nominated in the case of a dispute.
With a JCT contract, therefore, employers and contractors can avoid expensive and time-consuming legal proceedings that can hurt the project. They can have a standard set of guidelines they can rely on when disagreements and misunderstandings arise.
3. Minimised costs
The contracts offered by the JCT use a standard form. This is to help reduce the cost of entering into a contract with another business. At the same time, it offers benchmark provisions to ensure that only the essentials are included and the unnecessary items are left out.
4. Protection from unreliable contractors
The provisions of a JCT contract are usually comprehensive and thorough. In most cases, they cover many of the risks and dangers often associated with the construction industry, such as poor quality of work and the late completion of the project. By using a JCT contract, employers and their contractors can have peace of mind knowing that they are protected from unreliable business partners and other eventualities.
Disadvantages of Using a JCT Contract
1. Unequal allocation of risk
JCTs are often weighted heavily against the sub-contractor. It’s common to see 90+ day payment terms and that the sub-contractor loses ownership of their materials once delivered to site, even if they haven’t yet been paid for them. This is a huge risk in situations where the main contractor goes bust – now not only has the sub-contractor not been paid (and will not be), but they have to pay their supplier for materials they don’t now own, so they’re out of pocket.
Damages for delays are another common concern. We regularly see projects worth £10,000 where the sub-contractor would be charged £2,000 for every week they are late in completing their work – whether the delay is their fault or not. This can quickly spiral out of control and sub-contractor businesses fail regularly as a result of this.
2. Long and complicated document
Most sub-contractors cannot afford an in-house legal team. It’s for the owner therefore to find the time to review hundreds of pages of legal jargon and attempt to negotiate a fairer deal. This is why in most cases, they simply sign the contract as-is, leaving themselves open to a great deal of risk.
Collateral Warranties, Vesting Agreements and Other Associated Documents
Other documents and types of agreements may be attached to a JCT contract. Let’s take a look at some of them.
1. Collateral warranties
Collateral warranties are agreements associated with or “collateral to” another main contract. Their main duty is to ensure that one of the contracting parties extend a duty of care to a third party, who is not privy to the original contract. Put simply, a collateral warranty is an agreement wherein a sub-contractor warrants to the employer or funder that they have performed their duties and obligations as stated in the contract or professional appointment.
Collateral warranties help create contractual relationships between entities that would not exist otherwise. They help ensure that, should there be an issue with the project, the employer/funder would have a direct line to the sub-contractor and vice versa in the event that the main contractor has completed the job or experiences insolvency.
In this way though, they present an additional risk to the sub-contractor, who will then find themselves in contract (often for a longer period of time) with a new party.
2. Vesting agreement
A vesting agreement is a written document that confirms that the ownership of construction goods, plant, or materials will be transferred from one party to another upon payment. It is also sometimes referred to as an indemnity agreement or vesting certificate.
When there is high demand or the lead times are long for certain construction goods and materials, some contractors would make advance payments to secure an order. While such a practice can help prevent delays, it does put the paying party at a disadvantage. This is particularly true when the contractor or sub-contractor becomes insolvent and the construction goods are not delivered despite the payment already being made.
In such a situation, securing a vesting agreement is advised. The agreement can be used as evidence that one party owns the materials once payment has been made. It can also be used to help identify the goods in the event that the contractor suffers insolvency before the materials are delivered to the construction site.
3. Performance bonds
Also known as contract bonds, performance bonds help guarantee that satisfactory completion of a construction project. They are designed to protect the employer or contractor if the sub-contractor goes insolvent before the project has been completed. There are two types of performance bonds: on-demand and conditional.
As the name implies, on-demand bonds can be called upon regardless if there is evidence that the sub-contractor has done a poor job or not. On the other hand, conditional bonds require evidence from the contractor that the sub-contractor fails to live up to expectations for the bonds to be paid out.
4. Parent company guarantees
A parent company guarantee, or PCG, is a guarantee given by the immediate holding company in favour of the contractor. This document is only applicable when there is a parent company involved.
The PCG is designed to ensure that the sub-contractor meets all obligations as stated in the main contract. It also aims to protect the parent company from potential losses or damages caused by the sub-contractor defaulting on their obligations.
This course offers a more substantial explanation of the agreements discussed above. We urge you to sign up to further your knowledge and develop a better understanding of how you can use these documents to your advantage.
Commonly Used JCT Contract Forms
JCT contracts can be used in any type of construction projects, from the simplest of additions to residential properties to towering commercial buildings. While they come in many forms, the most commonly used ones are the Design and Build Contract, and the Minor Works Contract.
JCT Design and Build Contract
The JCT Design and Build Contract states that the contractor would be responsible for the design and the subsequent development of a construction project. It is a lump sum contract wherein the total cost of the project is set out in detail and ensures that the contractor is paid periodically.
This contract is quite popular amongst large developers because only one party is responsible for everything: the contractor. Initially, the employer controls all of the project’s design elements. Once the contract goes into effect, that responsibility is transferred to the contractor. If the design is defective, the assigned developer or sub-contractor only needs to pursue the contractor to recover the losses they incurred due to the poor design.
JCT Minor Works Contract
The JCT Minor Works Contract is more suitable for less extensive construction projects, such as retail fit-outs or commercial property extensions. There are different versions of the JCT Minor Works Contract to fit the specifics of a particular development. For instance, there is one that allows for contractors to design a portion of the project, while the other version entrusts this responsibility to the developer or sub-contractor.
Key Changes to the 2016 JCT Contracts
Because the construction industry is constantly evolving, the JCT periodically updates their forms to reflect new regulations, streamline processes, and include specific elements that could be relevant to the parties involved. The latest incarnation of JCT’s forms is the 2016 version, which replaced the 2011 forms. Here are some of the key areas that were revised in the 2016 contracts.
1. Payment provisions
The most significant changes on the JCT forms can be found in the payment terms. This is to reflect the government’s fair payment charter, as well as to expedite the payment process and simplify the contract’s drafting.
Here are some of the most notable modifications in the payment provisions:
- Changes to the interim payment due dates.
- A common interim valuation date, applicable to all contract chains, was introduced.
- The payment period has been coordinated in the main contract and subcontracts to ensure that there is enough time to process applications and payments to subcontractors.
2. CDM regulations
The Construction (Design and Management) Regulations 2015, which replaced the Construction (Design and Management) Regulations 2007, were incorporated into the 2016 forms. With the updated regulations, the principal designer role replaces the CDM co-ordinator.
3. Performance bonds
The 2016 contracts now have provisions that allow contractors to provide a performance bond and/or parent company guarantee if the developer or sub-contractor asks for it.
4. Collateral warranties and third-party rights
The 2016 JCT forms now come with provisions that require sub-contractors to provide beneficiaries with third-party rights. In the 2011 version, sub-contractors can only provide collateral warranties to beneficiaries.
5. Insurance
While there are a number of changes to the insurance provisions, they are not that significant, save for the amendments made on Option C. Option C is used when there are alterations or extensions to existing structures.
Payment
Late, insufficient, or non-existent payments are often the root of contention and the cause of souring business relationships between employers, contractors, and their sub-contractors. Whenever you are entering into a contract with another party, it is crucial that you go over the provisions of JCT contracts to ensure that you will get your due.
How to Ensure You Get Paid – On Time!
Many sub-contractors have had the experience of rendering a significant amount of work on site, only to realise that they will not receive their pay on the date they and their main contractors have agreed upon. To avoid issues with delays or even non-payments, here’s what you can do.
1. Ask the contractor for a deposit/interim payment
Asking the contractor for a deposit or interim payment is a simple yet effective way to minimise the risk of not getting paid on time or at all. You might be surprised to find that most contractors are willing to pay sub-contractors at least 10% and often more in the form of a deposit. While 10% may not seem much, it is less money for you to lose at the end of the job. You could consider offering a vesting agreement as security for this.
2. See if there are provisions for work suspension
In a standard JCT contract, there are provisions that allow you to cease all work if you are not paid on time. However, you cannot simply stop working just after a day of your payment being delayed. There is a system you must follow to ensure that you will receive the money you are owed.
You must provide a notice, which gives the main contractor a specific amount of time (e.g. seven days) to remedy the situation. If they fail to do so, that is the only time you can suspend your work.
For more extensive information and helpful tips about this topic, including what to do if the contractor refuses to pay you a deposit, we encourage you to sign up for this course.
Understanding Payment Applications
It is crucial that you know how to structure your payment terms and file your applications. Here are a few reminders you should keep in mind:
1. Get your payment terms agreed in advance
Your payment terms will decide how and when you will receive your money. Therefore, it is best that you discuss the payment terms with the main contractor during the contract stage.
2. Include a provision for interim or staged payments
If the construction work will take longer than 45 days, ensure that the contract has a clause stating that you will receive interim or staged payments.
3. Have agreed dates for valuation
Set agreed dates for valuation. For instance, you can choose to get paid on the last Friday of every month. Ensure that the valuation date is consistent throughout. Alternatively, you can decide on a payment trigger. For example, you can ask to get paid 20% with the deposit or when the design is complete.
4. Add a clause for suspension or termination of work
If the contract doesn’t have provisions that would allow you to suspend or terminate work in the case of non-payment, see that you include one. This will give you extra protection, ensuring that you will receive your money as stated in the contract.
We are offering a course that provides a more in-depth look at setting your payment terms and making payment applications. We encourage you to take a look to avoid making mistakes that could cost you your money.
Making Sure You Get Paid for Variations
In a JCT contract, additional works are called “variations.” While, JCTs help all concerned parties better understand the scope, cost, and provisions of a construction project, they do not always specify if you should get a variation agreed before the work commences. This puts sub-contractors in a delicate situation. If you have started the variations but you have failed to get them in writing, there is a risk that you will not get paid despite all the extra work you have done.
While variation provides you with the opportunity to generate extra income, it also adds more time to your programme. Therefore, when the project involves variations, it is imperative that you remember the “3 Ps”: price, payment, and programme.
1. Price
Ensure that all the contract works, including the cost of variations, are re-valued and re-priced. This will help ensure that you will receive the appropriate amount of payment.
2. Payment
Apply for your variations and ask for your payment as soon as the extra work is complete. Do not leave them open for argument until the final account. Otherwise, the contractor might refuse to pay you.
3. Programme
Make sure that you have additional time to carry out and complete the variations. If you do not ask the contractor for an extension, you might suffer from work delays that could cost you a significant amount of money.
Whenever there are variations to the construction project, you should get them valued, priced, and agreed. Do this according to JCT’s laws and always make sure everything is in writing.
Setting the Correct Scope of Works and Getting Paid for Extras
Insurance, protection, storage, and other miscellaneous items—all of these can add up. But instead of shouldering their accompanying costs, you can make the most of them to add extra money to your bottom line.
You can do this by knowing how to agree and charge for your scope of work based on your specification. It is also vital that you know when and how to provide your manuals and documentation.
We offer a course that explains in detail how you can charge the contractor for extras instead of taking on these miscellaneous expenses on your own. We encourage you to sign up so you can learn how to make the most of opportunities to generate extra income.
Conclusion
Whether you are the primary employer, contractor or sub-contractor, signing a JCT contract is an effective way to protect yourself from risks and issues inherent to the construction industry. However, JCTs also have certain limitations. Therefore, you must go over the contract carefully. It would also be best to educate yourself about the JCTs to avoid a potential loss of income and ensure that you will receive the money owed to you.
At BEB, we offer online training courses designed to improve your understanding and working knowledge of the JCTs. By signing up, you can learn how to protect yourself from unnecessary risks better and use the contracts to your advantage. Join our courses today!