Jacob Austin 00:00:00 Hi all Jacob Austin here from QS.Zone. And welcome to episode 73 of the Subcontractors Blueprint, the show for subcontractors to learn how to ensure profitability, improve cash flow and grow their business. Today, we're going to dive headfirst into a topic that's both inevitable and often misunderstood in construction. Amending standard forms of contract. If you are a specialist subcontractor, wading through reams and reams of legal paperwork, and all you really want to do is get on with building the project, you've likely encountered these amendments before they appear as schedules of amendments in JCT, or a list of Z clauses. Under any C contracts, they're sold as a means to tailor a construction contract to specific project needs. But in many cases, they're just generic guff designed to make your life difficult. And we'll dive into all of that in just a second. If you're new to the show, please do subscribe for more user friendly advice on all things subcontracting. So let's begin. We know that standard forms of contracts. So your JCT, your neck and your physic are designed to be balanced in their conditions.
Jacob Austin 00:01:31 And they're a framework intended to reflect a commonly accepted distribution of risk and responsibility on a construction job. But projects rarely fit into the neat mold of a standard template. And then, of course, new laws come into play. Technology evolves and market conditions change, so amendments can be a way to keep your agreements relevant, incorporating new technology and new legislation, and keep them fair. At least that's the theory. But in practice, contract amendments can be double edged swords on one side. Well, drafted revisions help to ensure compliance with new regulations like GDPR, modern building regulations, practices like BIM, or perhaps change in line with economic shifts like Brexit. But on the other side, amendments can also be misused. And let's be honest, it somewhat like turning up to bowl with your pub cricket team and finding beefy, both of them slugging every ball to the bounds, pushing maximum risk onto somebody else's shoulders. And I'm sharing this episode today because I want you as a subcontractor to be able to enter into agreements with your eyes open to what goes on.
Jacob Austin 00:02:47 So let's start with why amendments are used, how they can go wrong, and what you essentially might need to do about it. We'll also look at a few cautionary tales to hopefully leave you with a clearer sense of how to spot unreasonable amendments before they drag you down into a legal dispute. So first, why amendments happen in the first place? Before we get stuck into pitfalls, let's just acknowledge that not all amendments are evil or intended to be so. In fact, sometimes they are downright necessary. Standard forms, after all, are standard templates, and unfortunately for construction projects, they don't always fit into that one size fits all off the shelf product. So the people that come up with these off the shelf products can't predict the complexity of every project, especially in an industry as dynamic as construction. And when you add to that, the shift in regulations, evolving technology and political landscapes, which might change supply chain and pricing structures, there is a necessity from time to time to amend the standard form which might otherwise be revised every 4 or 5 years to bring it in line with new rules that are brought in by our government, and try and make sure, as a minimum, that people are complying with the law.
Jacob Austin 00:04:11 For instance, a few common reasons for amending your standard contract would be regulatory change, such as GDPR. Data privacy is a huge deal in the modern world, and newer forms of contracts such as the NEC, for which now deals with confidentiality and privacy. Under its new clause, 29 older forms might not, and in some instances you might have to be handling sensitive data that can't be shared beyond the people directly involved in a particular project. So over and above just a standard amendment to incorporate GDPR, there might have to be inclusions to prevent sensitive project information leaks. This might be if you're working on a military job, or perhaps even just a job that's particularly politically sensitive. There's the addition of BIM, which is revolutionized the way projects can be planned and executed, and even managed and government funded projects in particular, have pushed for BIM adoption to improve efficiency and try and cut costs. But some older contract forms don't include provisions for BIM. So there's another good reason there to add in additional contract clauses to make sure everyone knows how the model will be managed, who's responsible for updates, and what happens if there's a discrepancy within that digital model.
Jacob Austin 00:05:35 And then whether we like it or not, politics can affect construction. And using Brexit as an example, there might need to be amendments clarifying the handling of tariffs, import regulations or changes in standards. And this is another good reason to amend the contract, because it needs to reflect the current reality and not the world as it was a decade ago when those conditions were first thought about. You then have building regulations which seem to be forever evolving, and in the latest regulations, there are additional roles and responsibilities that need to be shared out amongst the project team. And there have been a host of amendments recently to incorporate those changes. And it can seem like a lot to wade through because for context, when something relatively minor is added, there's a change to make that addition. But then there's also necessary definitions to tell the reader of the contract exactly what is meant. These are all examples of amendments that can make sense. They're adding clarity, compliance with new rules, and bringing modern relevance to a contract which is essentially out of date.
Jacob Austin 00:06:45 And nobody likes doing extra paperwork. But getting things defined at the start of the job and setting clear expectations is the best way to procure a job far better than scrambling when something goes wrong or finding out too late that a contract doesn't consider a new regulation or a crucial scenario. Of course, where there is a good thing happening, there is also the potential for misuse. And the construction industry has seen plenty of parties who use amendments less to accommodate legitimate changes are more to try and skew the risk profile in their favour. And as a subcontractor, you open up that contract document and you find a legal spaghetti of amendments. Some of them are driven by the main contract and some of them are driven by the contractor trying to limit their own risk. Sometimes it's done with ignorance. They can be there thinking they're improving the contract without understanding the knock on effects. And other times, as I say, it can be a bit of a strategic move. They might hope that you won't notice a subtle shift in the payment mechanism, or eliminating part of a statutory right to claim for force majeure events.
Jacob Austin 00:07:56 Or perhaps they're trying to offload the risk of design errors onto you, even though you're not the one who created that design. And a lot of these things start right at the top of the food chain. So they're done and instigated by clients. They try and hold as little risk as they possibly can and ship it all onto the contractor. And then the contractors sat there making not a very good margin on the size of job they're doing. So they then do the same thing and pass the risks down again to you as a subcontractor. And actually, sometimes amendments can be so extensive that the contract itself is barely recognizable. So then you might start thinking, well, why bother using a standard form at all? And that has been touched on by the courts previously. And they suggested that a standard form loses its value if the parties continually have to look outside of it for deviations. But then again, completely bespoke contracts have the capacity to go wrong as well. But let's talk about some examples of how and where costly amendments can show up in your subcontract payment terms is perhaps the most common and the most controversial.
Jacob Austin 00:09:09 Of course, payment is the lifeblood of construction projects as it is in all industries. But if you get it wrong in construction and suppliers are downing tools and disputes arise, relationships can turn pretty sour. The Housing Grants, Construction and Regeneration Act does set out some pretty clear rules for payments, and it's geared towards the applications and sets arrangement that 99% of contractors use. So there has to be a defined event that triggers payment, be that achieving a milestone or a schedule of valuation date or happen a combination of the two. And then there also has to be a set period for the contractor to certify and then pay you whatever is due. What they can't. Then B is any break for any reason that introduces another requirement that interrupts that chain. So, for instance, as happened in a case between Lidl Great Britain and Closed Circuit Cooling Limited, there is a no go clause that interrupted the payment process to say that the payment wouldn't be made until the subcontractor had provided a valid VAT invoice, and then the period was calculated from the submission of that invoice.
Jacob Austin 00:10:22 So if you missed the submission date for your invoice, the payment process was prolonged. And as I say, that's a no go. So the court found that this breached section 110 of the Construction Act. But sadly it goes all the way to court and God knows what legal fees involved in that to settle the situation or because somebody wanted to tweak the payment clauses and that didn't align with mandatory legislation. Another example might be tweaking with the force majeure clauses, and we saw that a lot in the aftermath of our lovely Covid 19 pandemic, where organisations were trying to remove Covid 19 from the definition of force majeure and effectively saying it's tough luck if you get hit by any kind of pandemic related delay. And this is typical of the kind of things that clients will try to push out in the main contract, forcing contractors to swallow unforeseen pandemic costs and potentially pushing that same cost down the supply chain to subcontractors. And let's face it, nobody saw it coming. And if you're working on a JCT contract, there isn't actually any entitlement, certainly not to cost unless the government suddenly decides to introduce new legislation to deal with it.
Jacob Austin 00:11:34 And of course, that legislation needs to change something about the physical building. It can't just be something that governs the workforce. So all they're really doing is saying, yeah, you might suffer some Covid delays, but don't delay my building, otherwise I'm going to sting you for damages. And that really undermines the collaboration that some contracts are trying to foster. And it sort of points that the employer wants a scapegoat rather than a partner. And similar to that is erosion of the mutual trust and cooperation clauses under the necessary two contracts. That whole suite of contracts is about collaboration and creating a collaborative ethos. So to delete clauses 10.1 and 10.2, which talk about working in a spirit of mutual trust and cooperation, it ruins the whole spirit of the contract. And you sort of got to question with that, if an employer is doing that to a main contractor, why are they bothering to choose any C in the first place if they're going to remove its defining first principle? And whilst we're talking neck, something that can happen is shortening of notification periods for compensation events.
Jacob Austin 00:12:46 For example, a contractor might shorten the notification period from the standard seven weeks in a neck subcontract down to what might feel reasonable, maybe a month, and you might think that's all fine, but then what happens if there's a wholesale revision to 100 drawings and within the four week period, maybe your SHS goes on holiday. So he's actually in practice, only got two weeks to review 100 drawings and decide whether any of them represent a change or not. But if you miss that four week deadline, you miss your right to claim. And four weeks might seem reasonable on a regular day to day, but it's taking away any of your wriggle room, making it a practical nightmare and encouraging disputes in a contract where you're supposed to be working together. Moving on, then to liquidated damages and practical completion, which is another common area where amendments get made in the case between ICO World Ballymore, Embassy Gardens Company versus Doblo UK, the liquidated damages clause allowed for a £25,000 per week deduction for delayed completion of the entire works, and a dispute arose in this case because there were three blocks, but two of the blocks were taken early by the client.
Jacob Austin 00:14:04 But because the contract didn't address partial handover, there then followed a dispute. And of course the third block was delivered late and the client in this instance was trying to recover the full amount of lads, the 25 grand per week against a third of the work. So there needs to be some realism about how liquidated damages are included that reflect the real world scenario that might happen on your project. So if a building is able to be broken down, perhaps it's by plots for accommodation, or perhaps there are cores or wings that might be able to be splintered off from the main building and handed over by themselves. Then really, there should be some anticipation that that might happen and a suitable liquidated damage quoted to reflect that. So even though you're not the one potentially drafting the amendments to a contract, understanding them and how they could work could save you money and potentially costly disputes. And this is one for you to watch out for and potentially negotiate on. If a portion of a project is finished early, the risks should be reduced.
Jacob Austin 00:15:10 You should be able to claim a portion of your attention early, and you should see a reduction in your potential liability for liquidated damages. Another thing that you should look out for is vague statements that introduce risk, particularly if those risks are beyond your control. For example, the risk of discovering asbestos. If there hasn't already been a refurbishment and demolition survey, then that means that there's a lack of information to enable you to properly price for what you need to uncover and remove. And the issues can be twofold with that, because firstly, you're potentially going to be told to remove things that you haven't priced for, but secondly, it's going to take you longer and you just don't know how long. So there's a potential of being stung with extra costs that you can't recover, and then stung again for the extra time that it's going to take for you to solve the problem. And this might be risks in the ground, risks associated with refurbishment projects where a building is in use and you can't do proper investigations to determine, say, what the substrate is going to be like.
Jacob Austin 00:16:16 There is some good news, though. Some industry bodies, contract publishers and even parts of the government are aware of these issues with unfair contract amendments, and they've issued guidance to encourage responsible amendments. So the NEC in 2014 recognised that Zed clauses, which are the way of inserting customized amendments, were sometimes being abused. They warned that poorly drafted Zed clauses can shift the risk profile and create unnecessary ambiguity in a project, and it defeats the purpose of using their standard form in the first place. So, unsurprisingly, their advice on this is to get an NEC specialist involved. If there are z clauses added, and the thrust of their advice is to think carefully about each amendment and the effect that it might have on risk and clarity. Fiteq is another example which has its golden principles, which are designed to maintain the integrity of the standard form of contract, and that identifies some particular conditions that should only have limited amendments to them, so that it maintains the intended balanced risk allocation that the contractor was drafting for.
Jacob Austin 00:17:28 Then there's the government guidance issued in the construction playbook that sets out some standard protocols for public work contracts. It encourages thoughtful amendments and some standard what's known as boilerplate clauses for typical definitions and other things such as freedom of information, tax compliance and fair payment. The idea being to prevent a scenario where each government agency invents its own string of terms and then confuses the supply chain, increasing building costs. In line with that, the Crown Commercial Service and the Infrastructure and Projects Authority. If even created a set of standard clauses that should be integrated without any further modification, and that brings a top down consistency and balanced starting point. And these are things that you can be aware of if you're tendering for government work, because they are at least trying to appreciate the situation and create a more level playing field. Okay, so amendments are a part of life. Some are good, some are bad, and some are bloody ugly. So how do you, as a subcontractor, navigate that to protect your own interests? Or my first advice is not to wait until you've committed to the job to start looking at the amendments.
Jacob Austin 00:18:44 You don't want a situation where you started work, and now the contract is saying, hold on, I can't pay you because you haven't signed my contract. And sometimes it's a case where they haven't even sent you the contract yet, and you're under all kinds of pressure to then sign up to a set of amendments that you haven't really got time to properly scrutinise. And so how do you do that? Well, the contractor should be telling you during the inquiry stage what the terms of the contract will be and what their amendments are, if there are any, to the standard form of subcontract, and this is the time, whilst you're pricing the job to read the proposed changes and negotiate some of these things, the contractor might be willing to drop and some they'll want to stand by. But in a nutshell, if you're reading something and it smells fishy like a clause that's shifting all the risk onto you, for some events you can't control, then raise it immediately and negotiate it before your price is locked in and you're doing the work.
Jacob Austin 00:19:40 And while you're negotiating, it's not just a case of saying no to every amendment because some changes are quite legitimate. And think about how you might change the wording to clarify responsibility without dumping all of the risk on you as a subcontractor, perhaps offering some constructive feedback, such as I see you've tried to ensure where liable for all design inaccuracies, but since we're not the design lead for this project, can we limit our liability on those elements we're not in control of to just the elements that we do control? By negotiating in such a way? You're telling the contractor, you know what you're talking about, but you also are trying to come up with a solution to the problem, which is more than likely something that they'll agree to, particularly if you're offering something reasonable whilst you are negotiating, document everything. After all, memories can fade, and if you're relying on pre-contract discussions, you need to have a record to refer back to of what was discussed and what was agreed. If there are particularly pivotal discussions, you want to try and get them incorporated into the agreement.
Jacob Austin 00:20:47 Of course, there's professional advice. If you get a string of complex and unusual amendments, then it might be worth getting legal advice, a construction lawyer or a good consultant that's familiar with standard forms of contracts can help you identify pitfalls. And yes, of course, that costs you money. But think about it as investing in an insurance against some of the pitfalls that you might discover. And of course, that advice might play dividends. If you're going to do a repeat work with the same contractor that uses the same amendments, then you can use that advice as a bit of, say, in-house training skill up your project manager or contracts manager or SHS, even so that they know what they're looking out for and they can flag up anything that doesn't look right. And it's important for them to do that because law isn't always your savior. Courts would generally expect that two parties entering into a contract will read and understand what they're signing, and it's only in cases where there's a particularly unfair term or there's something that they can easily see goes against legislation, that they'll start to intervene.
Jacob Austin 00:21:50 If a clause is clearly stated and you've agreed to it, it's not the court's job to bail you out. And actually they might interpret their job in that situation as holding you to something that you're contractually bound to. And at the end of the day, amendments are tools, and like any tool, it can be used skillfully or it can be used clumsily. If they're done well, then contract amendments can maintain the relevance of an off the shelf contract against new legislation and to complete a complex and bespoke project as a subcontractor. You might not always have the upper hand in negotiations, but knowledge is power. Understanding what amendments are intended to do and how they can be misused, gives you the ability to push back where it's appropriate and approach amendments with cautious optimism. They're there to make the contract more suitable for the real world and the real application, not to turn it into a minefield. Don't be afraid to negotiate, and certainly don't be afraid to ask the contractor what certain amendments mean and how they might intend on applying them.
Jacob Austin 00:22:55 I hope that's been helpful. My mission with the podcast is to help the million SME contractors working out there in our industry. If you've taken some value away from today's episode, I'd love it if you'd share the show and pass that value on to somebody else who'd benefit from hearing it. And of course, subscribe yourself if you haven't already. And thanks for tuning in. If you like what you've heard and you want to learn more, then please do find us at www.QS.Zone where you can subscribe to our training and support system for like minded subcontractors. In there you'll find templates, how to videos, interviews, and more. It's less than the price of a cup of coffee per day and you can cancel any time. We're also on all your favourite socials at @QS.Zone. Thanks again! I've been Jacob Austin and you've been awesome.
