Question

We normally manage our own development projects, employing the various trades direct, with no main contractor. The funder on our latest project has asked for formal JCT contracts to be put in place, with collateral warranties, for each trade contractor. Is this normal and reasonable? It seems ridiculous to expect every trade contractor, however small, to enter into a long and complicated JCT contract.

Answer

As a general rule, funders are much more cautious and demanding than they were before 2008. In the boom years funders were prepared to lend on projects that were procured on an informal basis, with very scant documentation, provided that the borrower was known to the funder and had at least some track record of successful development. Those times are long gone: the experience of many funders during the downturn means that they now expect projects to be procured in an appropriate way and to be properly documented, and are very concerned to ensure that they are able to step in and complete the project if the borrower goes into default.

The procurement route that you adopt is effectively a form of construction management, with you acting as your own construction manager. This is a perfectly valid approach to procurement, provided that you have the necessary skills and experience to manage the project, and the funder will want to be satisfied on that score. They will expect you to demonstrate a successful track record of developments carried out on this basis.

The downside from the funder's perspective is that under this method of procurement there is no single main contractor with overall responsibility for the works. You may well have worked successfully over the years with your team of trades contractors, but this history of long established working relationships will mean very little to a funder: they need to protect themselves against the risk of you going into default, and stepping in to take over the works to complete the job. This applies regardless of whether there is a single main contractor or a whole raft of trade contractors, and this is why your funder requires warranties and formal contracts from each trade contractor.

The standard JCT trade contract comprises a printed booklet which is some 124 pages long, and it is quite likely that your average self employed roofer or bricklayer will run a mile if asked to sign up to one. Most funders, and their advisers, will recognise this and will be prepared to be flexible.

However, it is very likely that they will require a properly executed short form of contract or, at very least, a properly acknowledged order with an acceptable set of terms and conditions for each trade contractor, however small. They will probably take the view that a collateral warranty from a tradesman, or a very small contractor, is worthless and will not insist on this in every case, and will not be too concerned as regards step-in rights in respect of the normal building trades.

Where the trade contractor is responsible for major elements of the works (such as the major structural elements or specialist services) or has taken on any design responsibility, it will almost invariably be the case that the funder will require full step-in rights. The funder will therefore insist on a more formal trade contract, such as a JCT form, being used and on receiving collateral warranties.

This article first appeared in the July 2013 edition of Professional Housebuilder.