JCT contracts are widely used and anyone working on a construction site is likely to have been asked to sign one. In this blog, we discuss what a JCT is, and outline five of the major pitfalls to be aware of when entering into this type of contract.
What is a JCT Contract and How Does It Work?
A JCT is a standardised contract created by the Joint Contracts Tribunal, a group of experts in their industries who put their heads together to create a fair agreement that could be used throughout all construction works. It is designed to be comprehensive, cover all eventualities and systemise construction contracting. In theory, all contracts should work in the same way and the idea was to regulate how and when parties are paid, as well as who takes on which liability.
Risks of Entering into a JCT Contract
The biggest risk in a JCT comes when the agreement is not written as standard and is instead amended to benefit the issuing party. Several clauses can be written to swing in favour of the employer and/or contractor, putting the onus on the sub-contractor that is carrying out the works. Some of the most important are detailed below.
Even where the agreement is a completely standard one, there will be certain clauses which won’t work to your advantage. The key in the JCT is that the clauses are balanced, and for every aspect that they write in the other party’s favour, you may get one that works to your advantage.
a. Losing ownership of materials
An important thing to make sure you are careful of in all construction contracts is who owns the materials that you have purchased for the works and at what point. In the most standard form of JCT, it will say that the client will take title in the goods once they have been delivered to site, which is often before you have received money under the contract despite having to pay your own supplier.
If amended, the contract may be changed to say that the client own all materials upon their order or even upon manufacture, which increases your risk even further, as the client could go bust within this time or simply refuse to pay you. The ideal change to make to this clause is to say that title and ownership of the materials only passes once you receive full payment for them. This can be backed up with supporting documentation called a vesting certificate in favour of the client to give them some security in return.
LADs, or liquidated and ascertained damages, are intended to be a genuine pre-estimate of any loss which may come from your delayed completion of the works. They come as a replacement to penalty clauses which were deemed as unlawful, however work in a similar way a lot of the time.
The most important things when looking at LAD clauses is to ensure that they are a reasonable amount relative to your sub-contract, and are only payable if the lateness actually delays the main project and causes your client any actual loss. Ideally you would totally remove any liability for LADs or instead be liable for actual direct loss only, but that may be quite idealistic.
c. Uncapped Damages
As LADs are almost impossible to avoid agreeing to, you should always consider that projects do overrun for various reasons. If this is the case, you need to ensure that your liability for this does not end up costing you a fortune. Even if your LADs are only 1% of your contract value per week, if you are late for an extended period of time then this significantly eats into your profits.
You should limit your liability for this to a certain timeframe, something like 5-6 weeks is standard. You may also want to limit your other damages so that you can always afford these – some people are happy to limit to match the limits of their insurance, where some may wish to only pay out to a maximum of the value of the contract, or even lower. It is a significant risk to your business if this is left uncapped.
d. Unfixed materials
Regardless of what JCT contracts say, it is important to ensure you are paid for all materials before they are used and become “fixed” to the property. If the other party owes you money or doesn’t make payment for the materials, you can only remove them whilst they are classed as unfixed materials. Once fixed, it will likely be deemed that you would cause damage to the property to remove them, regardless of whether your materials are structurally bearing or purely decorative, and this is not allowed.
e. Storage Protection Insurance
This aspect can be easily overlooked when you are focusing on the ownership of the materials, but can be equally as important, if not more so. You need to think about where the materials will be stored before they are due to be used in the works: will they be delivered just in time (assuming no delays) or will they need to be stored somewhere?
If they are to be stored by you, can you store them on your premises or do you need to pay for external storage which will leave you out of pocket? If there is room on site, you may be offered to store materials there, but that creates further risks. Who is responsible for protecting and insuring the materials while they are there? Most commonly, the client will try to pass this responsibility to you, especially if you still own the goods. However, you can’t guarantee other trades will look after the site and you may not be present to keep an eye on them. You may wish to opt for additional insurance and some sort of protective cover over the works but these are again additional costs you didn’t account for. The last thing you want to happen is that you have retained your ownership of goods that are no longer salable or fit for purpose.
JCTs were designed with fairness in mind but in truth, even an unamended version could cause you significant losses if you aren’t fully aware of the risks involved.
Take a look at our JCT construction course and learn how to avoid the risks and protect yourself today.