Construction Update

24th May 2007

New CDM Regulations

The new 2007 Regulations came into force on 6th April and create new duties and obligations on all parties involved in construction projects, clients, contractors and designers alike.

The new Regulations are designed to increase the focus on planning and management of projects and to improve risk management by ensuring responsibility is placed with those best placed to implement or manage it. The Regulations aim to clarify the law for duty holders such that they can easily understand what they and other members of the team are required to do.

Parties should not assume that the new Regulations simply involve a name change of the planning supervisor to CDM co-ordinator. Clients should digest the new Regulations and, if necessary, seek specialist advice on the extended obligations imposed upon them. The majority of the changes are, admittedly, best practice issue - the difference, however, being that there are now sanctions in place if there is a failure to comply. For further information or advice please contact any member of the Construction Team.

CIS Changes

Another 6th April change ? the new Construction Industry Scheme has been updated and modernised. The law behind the CIS remains the same, the changes being purely administrative. This, of course, means that the administrative requirements of parties are increased.

By way of summary:

? Duties affect contractor and sub-contractors, including ?deemed? contractors. Deemed contractors are non-construction businesses with an annual expenditure of more than £1 million pounds on average in the last three years. This includes public bodies.
? Tax Certificates and Registration Cards are abolished and replaced by a new on-line certification scheme. The contractor verification process is electronic, although a telephone line is also available. Contractors are now to submit the sub-contractor?s name and tax reference and the Revenue will then advise of the payment status of that sub-contractor.
? Sub-Contractors who have met the necessary conditions can be paid gross but sub-contractors who are registered with HMRC (but who have not met the conditions to be paid gross), can be paid net with twenty per cent withheld for tax. This is an increase on the old CIS under which sub-contractors entitled to net payments would be paid net of eighteen per cent withheld for tax. Sub-contractors who are not registered with HMRC will only be paid net of a thirty per cent tax withholding. This is an improvement on the old scheme which stated that a sub-contractor who could not provide a valid CIS registration card or CIS certificate to the relevant contractor could not be paid at all.
? Contractor do not have to verify where the sub-contractor has been employed either earlier in the same tax year or during the two previous tax years (during the transition period after 6th April 2007) if the payment is made to the sub-contractor within a year and the contractor paid them within the last year under the old CIS.
? Contractors are now required to complete monthly returns to the HMRC, as opposed to annual returns as was formerly the case. Failure to submit a monthly return, including a nil return, on time will result in a flat rate £100 penalty. For a return of up to fifty sub-contractors this penalty will be increased by a further £100 for each additional fifty sub-contractors, or part thereof. In addition to that penalty, the HMRC can also impose a penalty of up to £3,000 for an incomplete or incorrect monthly return.

This is just a brief summary of some of the changes. Full details can be obtained directly from HMRC or, alternatively, specialist legal advice can be sought from Blackett Hart & Pratt LLP.

The new Regulations are more detailed and extensive than previously and civil and criminal liabilities could arise from failure to comply. An Approved Code of Practice is published by the HSE (and can be found on the HSE website (www.hse.gov.uk/construction/cdm.htm) which gives detailed practical advice.

Publication of new JCT Constructing Excellence Contract
The new JCT Constructing Excellence Contract was launched on 1st March 2007. The new contract was developed by JCT in collaboration with Constructing Excellence and aims to promote collaborative and integrated working to provide a single contract form regulating all the relationships involved in a project.

The new JCT/CE contract is the second multi-party construction contract to be published. PPC 2000 has been with us for a number of years now and that paved the way for a contract which is signed up to by all the principal team members. PPC 2000 has had a very mixed reception and use of that contract is varied, the contract being favoured principally by Local Authorities and bodies that are committed to transparent or open book team based working. The JCT/CE contract has taken a lot of the positive aspects of the PPC 2000 experience, but instead of overly complicating the legality of the document JCT and Constructing Excellence have aimed to draft a document which is ?user friendly, perfectly understandable and practical? (Sir Michael Latham). One of the main criticisms which has been levelled at all partnering arrangements, not just PPC 2000, is that the obligations are vaguely drafted and so unclear that they lack any definitive meaning. For example, the PPC 2000 contract requires the project team to ?work together and individually in the spirit of trust, fairness and mutual co-operation?. Likewise, the partnering option for the NEC contract (X12) requires the parties to ?act in the spirit of mutual trust and co-operation?. No-one actually has any idea what this means from a true legal perspective. Clients are all too aware, however, of what it does not mean ? it does not mean shouldering all the risk and shelling out additional costs to cover that risk! Before parties have even started the project the whole concept of working together can be destroyed as parties attempt to offload risk onto others.

Another principal criticism of the PPC contract is that the project team sign up to the same set of terms and conditions and owe a mutual duty of care to all the other parties involved. The problem with this, however, is that the level of duty will differ between the individual entities involved, leading immediately to a potential conflict and reluctance to sign up to such a document. It is nigh on impossible to explain to your insurer the full extent of liability that you are actually assuming under this contract. In reality, if the wording was ever challenged, a Court would take a sensible and pragmatic view, but that cannot be guaranteed. The JCT/CE contract however, tries to overcome that issue by having a series of bi-lateral contracts within the multi-party document. Each bi-lateral contract establishes a duty from one party to another, thereby avoiding any confusion.

The JCT Contract is intended to be capable of use throughout the supply chain and can be used as a single stand-alone contract or as part of a framework agreement, in a similar way to the NEC Option X12. The difference with the JCT form, however, is that, unlike X12, the JCT form is a stand-alone contract, whereas X12 is simply an option to the base NEC form ? meaning all of the contractual arrangements connected with the project would have to use the NEC form, which may not, in certain circumstances, be appropriate.

The JCT contract may, however, fall down on its decision making mechanism. While in the PPC 2000 and NEC contracts there are core groups established to make key decisions, there is no such group enforced under the JCT form. Too many players wanting too much say could be an inevitable road to conflict.

The JCT form does deal with risk in a similar way to PPC and NEC and the idea is that the parties best able to manage risk will shoulder that risk. Unlike PPC however, the risk register must be considered and appended to the contract upon signature. PPC suggests that the risk register is developed after contract signature. There is sense in both approaches, although one would favour having the certainty of an agreed risk register at the outset.

Whether this contract will be received by the industry in a more favourable light than the existing PPC 2000 remains to be seen. Whether partnering as a concept is genuinely acceptable to the construction industry is a question which has received mixed answers depending on who you are. Theoretically, it is a fantastic idea and, of course, theoretically it should ensure timely and cost effective project delivery, but theory and practice do differ and the construction industry in the UK is not one in which change is particularly welcomed on the whole. Certainly, the contract would benefit from a high profile project adopting this form, as NEC has done by its vote of confidence from the Olympic Delivery Authority.

Author: Bryan Hoare