Summary and implications
In the past few years Pre-Construction Services Agreements (“PCSAs”) have become commonplace on construction projects. Until recently all such agreements were bespoke documents, but the JCT has now published two standard PCSAs. This article explores:
- the key terms of PCSAs and the content of the new JCT General and Specialist documents;
- key issues relating to the use of PCSAs in general and the JCT forms in particular;
- the commercial issues.
What is a PCSA?
In recent years there has been a marked increase in the use of two stage tenders to obtain early contractor involvement and increase cost and programme certainty. This involves using the contractor’s expertise in the design development and project planning period (the “pre construction period”), and, in certain cases, using the time to procure sub-contract tenders to assist in building up a fixed price for the main contract. The provision of these contractor services is governed by a PCSA, in effect an interim contract, until a main building contract is executed, whether with the initial contractor or otherwise.
PCSAs can be used in two contexts:
- where the developer anticipates appointing the contractor under a main building contract at a future time, but wishes to achieve a higher level of cost and/or programme certainty before doing so; and
- where the developer is not yet in a position to commit to a contractor, for example where the contract is part of a PFI/PPP bidding process and the proposed developer has not yet been selected.
The crux of a PCSA is the list of services which the contractor is to provide, which need tailoring to the particular circumstances. The approach is based upon the contractor working as part of the project team to progress and finalise the design and enhance the accuracy of pricing/programming. The JCT PCSAs do not include model services, which is unfortunate as for many parties a sample menu of suggested services would be helpful.
A PCSA is, in effect, a form of consultant appointment and many of the key provisions of PCSAs follow this analogy, such as an obligation to perform the services with the level of skill, care and diligence to be expected of a contractor experienced in projects of a similar size, scope and complexity. Ideally, following completion of the pre-construction period, these services should be subsumed into the main contract to achieve single point responsibility, make it simpler to identify the contractor’s scope of responsibility and deliver rights to third parties if required.
In most lists of pre construction services there will be an element of design input, and bespoke PCSAs generally make the contractor responsible for such design advice. An unusual feature of the JCT PCSAs is that they expressly provide that the contractor has no design responsibility unless and until the contractor is appointed on a main building contract for the project. Where the developer is receiving advice from the contractor, it appears illogical that the developer should have no recourse against the contractor for any deficiencies in his advice insofar as it relates to design. Where the main building contract for the project is a design and build contract and a different contractor is later appointed, that main contractor may be reluctant to accept entire design responsibility, since the main contractor would be unable to seek redress from the PCSA contractor for such design advice. Third parties seeking rights in relation to the project may also query their rights in relation to such early design advice.
The approach to payment varies widely between PCSAs, from a nominal or nil fee, to a lump sum fee or weekly rate payable either in instalments during the pre construction period or deferred until conclusion of the period. The level of fee payable will be linked to the level of certainty of the contractor’s selection for the main building contract, i.e. the level of commitment the developer is willing and/or able to give to the contractor in the context of either its commercial position or, in a PFI/PPP context, its bidding status.
Bespoke PCSAs sometimes give the developer the ability during the pre construction period to instruct the contractor to carry out enabling works or place orders for long lead items. This may be on the basis of the contractor either doing the legwork to enable the developer to place the order in its own name, or, alternatively, the contractor placing the order but on terms that it can be novated to the developer or an alternative contractor if required. The placing of any such orders and any related payments will clearly need to be taken into account in the payment provisions.
The General JCT PCSA does not cover this possibility, but the Specialist JCT PCSA is the vehicle for the developer to place orders, and allows the benefit of the agreement to be assigned to the selected main contractor. Note, however, that this is assignment of the benefit not the burden, i.e. the payment obligations would remain with the developer.
Care should be had to avoid placing instructions for carrying out permanent works as this will make it harder to appoint a different main contractor for the project, and accordingly strengthen the PCSA contractor’s commercial negotiating position on any unresolved contract issues such as price or programme.
A PCSA needs to make provision for its possible termination, the need for which could arise in various contexts – insolvency of either party, material breach of contract by either party or the cancellation of the project. The real issue is how the consequences of termination are dealt with. This will be a particular issue where the contractor is receiving a nil or nominal fee for its services, and where termination is not due to any contractor default, the contractor will probably, understandably, seek some recompense for its provision of what were, in effect, speculative services.
If a JCT PCSA is being used, there will also be a question of responsibility for any design advice provided by the contractor, to ensure that the developer has the benefit of any design advice for which it has paid.
Commitment to enter into a full building contract
Whilst the JCT PCSAs contain no commitment on either party in relation to the main building contract, many bespoke forms of PCSA provide for this.
Often a developer will seek contractor proposals on overhead and profit percentages and weekly preliminaries figures as part of its initial selection process, and the PCSA can be used as a means of getting the contractor to commit to those figures if later selected for the main building contract.
Equally, at the time that the developer is making its initial contractor selection, discussions may take place on the potential legal terms and conditions for the main building contract. From the developer’s perspective this is desirable as it enables developers to negotiate such matters at a time when there is competition between potential contractors. Having agreed the relevant terms and conditions then the PCSA can be used to record that, if selected, the contractor will be appointed on the pre-agreed terms and conditions.
Whilst a PCSA may include a commitment on the contractor to enter into a main building contract on identified terms if requested by the developer, it should not contain any commitment on the developer to appoint the contractor on these terms or at all. At the time the PCSA is entered into the developer does not have the level of cost certainty which would enable it to make such a commitment, and its commercial position may change in the intervening period. The developer needs to retain a discretion to encourage delivery of a competitive price from the contractor. Consider using the PCSA as a vehicle to achieve contractor commitment to rates or contract terms if later appointed
Longer term responsibility
An issue in most contractual relationships is the extent of a party’s responsibility following completion of services or work. Most building contracts and consultant appointments for substantial projects are executed as deeds giving a 12 year limitation period for claims. It seems logical that a PCSA should follow the same principle, yet the JCT PCSAs make no provision for execution as deeds. Aside of the resulting discrepancies, this will create an anomaly where the specialist version of the PCSA has been used to place early orders and are later assigned to the main contractor. This issue is often addressed in bespoke agreements by making provision in the main building contract to subsume any services performed during the pre construction period, and so create a single contract covering all the advice and works undertaken by the contractor.
Bespoke PCSA or JCT document?
Whether a developer chooses to use a bespoke form of PCSA or a JCT form, in either case they should give careful consideration to its use and suitability including the points set out above. Use of a standard form document often provides a helpful framework for a contractual relationship, but in the JCT PCSA, consideration needs to be given to the various issues which that agreement it does not address, and limited amendments, largely additions, to the JCT documents may be desirable, including careful consideration of the services to be provided, and which are fundamental to the arrangements and success.
JCT Forms of PCSA – Key points to note
No design responsibility
No commitment to main contract terms or prices
Executed under hand, i.e. six year limitation period
No list of services
So is a PCSA a good idea?
Properly used a PCSA can benefit a project by early integration of the contractor into the team. However, it will not always be the best approach, for example where the developer wants to instruct early permanent works, a separate early works contract or an overall construction management structure may be more appropriate. 13