JCT contracts and insolvency: pre-construction phase

An employer should consider using the JCT Pre-Construction Services Agreement (PCSA) rather than a letter of intent to engage the contractor in the pre-construction phase. Under the PCSA, the contractor can collaborate with the employer and consultants to test the buildability of designs, the programme and cost plans for the construction phase. These services are carried out with appropriate provisions in place including for termination on insolvency. Note that the contractor does not have liability for its design under the PCSA and will only do so under the main building contract if it requires a design element. The PCSA is compatible with the JCT Design and Build, Standard and Intermediate forms of contract leading to an easier transition to agreeing and signing of the main building contract. A further advantage of the PCSA is that the contractor can tender sub-contractor works packages with the employer overseeing the process, giving the employer more assurance in terms of the sub-contractors’ viability.

If the contractor needs an advance payment from the employer to meet costs before construction starts such as for the purchase of high value materials (such as steel/stone), plant or equipment with long lead times, the employer should require an advance payment bond. This bond will secure the advance payment against default by the contractor and is usually an on demand bond, that is not conditional on the beneficiary proving default. JCT has its own form of Advance Payment Bond, which is an on demand bond, found in Schedule 6 to the Design and Build and Standard Contracts and Schedule 3 to the Intermediate form. The JCT contracts contain provisions to deal with advance payments and the provision of a bond where required. The JCT contract forms also include provisions to ensure that off-site materials and goods paid for by the employer are the property of the employer and it is the contractor’s responsibility to store, handle and insure those items. Another option would be for the employer to pay suppliers directly for any such materials or equipment but that would involve a more elaborate payment process than exists in the standard provisions.

The employer will want to make sure that the contractor has granted an assignable licence to the employer to copy and use any drawings/documents produced by or on behalf of the contractor. Provisions to this effect are included within the JCT contracts where the contractor is responsible for a design element, although subject to all sums payable having been paid to the contractor, unless these terms are amended.

During the pre-construction stage, the sooner that contractual documents can be entered into, the more likely that the risks of insolvency will be mitigated. In particular, the main building contract should be agreed and signed as soon as possible to give the employer greater protection with the types of provisions highlighted here and in our forthcoming blogs.