Contractor Defect: How the Client recovers design cost.

26/08/24

Newsletter #21:

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Here’s the scenario we have been faced with:

1. Contractor has been installing piled foundations on a new building

2. One of the piles has been installed in slightly the wrong position (Defect!)

3. It doesn’t make sense to remove the pile and re-try as the void will likely fail when the pile is removed and cause bigger issues.

4. It’s the Client’s design and the Contractor cant install rebar without the design being changed to accommodate the piles new location

Problem:

1. Client will spend money changing the design to accommodate the Contractor’s Defect

2. Can the Client recover the cost of this design from the Contractor, and how?

Let’s begin…

1. The Defect and its solution

The Defect is neatly defined from within the contract, clause 11.2(6). The problem is certainly a Defect as its not in accordance with the Scope, its been installed in the wrong position!

To resolve this problem so work can continue, its evident that changing the design to accommodate a slightly different pile location will be cheaper and faster.

The Client has assessed the cost of re-design at £12,000

Because the design will have changed, the traditional process is for the Project Manager to instruct the new design as a compensation event, with the new Scope being introduced to the contract.

This will ensure the Contractor has a clear set of requirements to adhere to (Scope), which the Client know will deliver the performance requirements.

The problem is, the Client is stuck with a £12,000 bill.

Here is how we would resolve this situation…

Element 1 - Get the design right

Element 2 - Accept the Defect (as the pile location wont be changed)

The above elements will rely heavily on mutual trust and co-operation!

2. Element 1 - Get the design right

1. The Client should get new designs produced and share them with the Project Manager

2. Project Manager to instruct a change of Scope (14.3)

3. Project Manager to notify a compensation event in accordance with 60.1(1)

4. The Project Manager does not request a quotation (61.2), because the CE arises from a fault of the Contractor.

This is important, the design is instructed as a change to the Scope but a quotation is not requested, i.e. no payment will be made to the Contractor!

3. Element 2 - Accept the Defect

With the design updated and Contractor clear on how to proceed. The process for accepting the Defect can be closed out.

NOTE: You can accept the Defect before doing the re-design, but we assume speed is of the essence here, and doing the design first allows the full cost of re-design to be known.

This is how the Defect should be closed out:

1. The Contractor or Project Manager proposes to the other that the Scope should be changed to that the Defect does not have to be corrected. 45.1

2. The Contractor submits a quotation for reduced Prices (which will include a reduction of £12,000 for the re-design). 45.2

3. The Project Manager responds to the quotation accepting the change and reducing the Prices. 45.2

4. Summary - How is this resolved?

1. First thing, the Contractor has a new design to proceed with, taking into account the pile location issue

2. The Client has a cost from the designer for doing the changes

3. The Project Manager administers the Defect process which ensures the Contractor pays for the costs of re-design (£12,000) as part of accepting that the Defect does not have to be corrected.

Points to note

The reason we mentioned mutual trust and co-operation is because this solution needs discussion. The Contractor will not want to pay for a design if it will cost more than correcting the Defect. So we need transparency.

Equally, the cost of design may not be known for some time depending on the time taken by the designer. The Client and Contractor must discuss this with the Project Manager and set realistic expectations around when the costs can be agreed and the Defect accepted. This process may not land perfectly within the default NEC timescales, so trust is paramount in agreeing resolution!

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To understand more about how to prepare and manage an NEC contract, the following guidance documents are available.

NEC4 Preparing an Engineering and Construction Contract

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