Whilst framework agreements are not new, and in particular have been used by many local authorities and government departments, we have noticed that they are becoming increasingly popular, something recognised by the fact that both the NEC and JCT have recently issued standard form framework agreements to supplement their respective contractual suites.
The framework agreement, often known as an umbrella agreement, is an agreement which is reached between two parties to cover a long-term collaborative arrangement. Framework agreements are used typically where an employer has a long term programme of work in mind and is looking to set up a process to govern the individual construction or supply packages that may be necessary during that framework term. Framework agreements allow an employer to instruct another party to carry out works or provide services, by reference to pre-agreed terms, over a (usually) pre-agreed period of time. It is not intended for use with a single stand-alone contract; it is designed for use where a number of similar sets of works or services may be required of the same provider. The JCT Guide notes1 that the JCT Framework Agreement has been set up to be used:
“by anyone (including those in the public sector) who anticipates procuring a significant volume of construction/engineering work and/or services over a period of time and who wants to see a collaborative approach to such work and services and sustainable improvements in the way in which such work and services are performed.”
Why use Framework Agreements?
The Constructing Excellence website2 says that when you are procuring over a period of time, a framework can deliver many benefits, such as:
- Reduced transaction costs, through economies of scale
- Continuous improvement within long-term relationships;
- Better value and greater community wealth;
- Solutions that delight customers.
The commercial advantages of a long-term commitment are clear. Where there are long-term relationships between a client and a contractor and/or consultant, the client has the benefit of securing a long-term commitment to the project from those contactors and consultants who in return have the benefit of securing long-term work from the client. In addition, if the relationship works, another of the intended benefits is that there should be an improvement in efficiency. People and organisations get used to working with one another. They can build relationships. They get to know what makes things tick and happen. There is the benefit of early contractor involvement in a project. Everyone involved can take a long-term view. For example, if the parties have the comfort of being contractually bound in a long-term relationship, they may be prepared to invest in product development. This requires an element of trust which can only be developed over a period of time as framework agreements rarely proceed on the basis that work is guaranteed.
Types of Framework Agreements: the standard forms
Both the JCT and NEC have produced their own standard framework agreements. As you would expect, these are designed to fit in with their standard suites of contracts. It is worth considering the JCT 2007 form in a little detail as it will promote discussion of the key frameworking principles.
The JCT Framework Agreement lists at clause 5, eight Framework Objectives (objectives which should of course be common to all contracts). which should result in a ninth namely the “enhancement of the Service Providers reputation and commercial opportunities”. The remaining eight are as follows:
- Zero health and safety incidents;
- Team working and consideration for others;
- Greater predictability of out-turn cost and programme;
- Improvements in quality, productivity and value for money;
- Improvements in environmental performance and sustainability and reductions in environmental impact;
- Right first time with zero defects;
- The avoidance of disputes;
- Employer satisfaction with product and service.
The main aim of this Framework Agreement is to provide a mechanism for the Tasks to be called off and carried out and also to provide a supplemental and complementary framework of provisions designed to encourage the Parties to work with each other and with all other Project Participants in an open, cooperative and collaborative manner and in a spirit of mutual trust and respect with a view to achieving the Framework Objectives. The collaborative style of proceeding is reinforced by clauses 9 and 20 which include the following:
“20.1 In the event of a technical and/or logistical problem with any Tasks, whatever the origins of the problem and whoever may be contractually responsible for the same, the Parties will work together and with the other Project Participants to try and find a solution to the problem which is safe and environmentally sensitive; minimises the effect on the out-turn cost and/or programme and/or the quality and/or performance of the Tasks; and is acceptable to the Employer.”
Clause 4.1 is important because it makes it clear that unless specifically stated elsewhere there are no guarantees that the Employer will award any contracts to the Provider. This should serve to restrict the possibility of the Provider making a claim for lost opportunity and would have made our claim set out in the introduction of this paper difficult to maintain.
The aim of the framework is that it operates to make the agreement of the contract easier than with a one-off contract. Time periods are pre-agreed, the way the order is priced is pre-agreed, the form of contract is pre-agreed. Clause 17 deals with value engineering. The Provider is encouraged to keep costs and time under review and suggest changes if these will lead to a saving. The carrot comes in clauses 17.3 and 17.4 which refer to the possibility of the Provider sharing in the benefits of those savings.
The notes provided by the JCT acknowledge the possibility of conflict. Indeed the JCT Guide3 hopes that the Parties “ will have full regard to the partner and principles set out in the Framework Agreement with a view to resolving that conflict or discrepancy.” By clause 6.1, if there is a conflict between the underlying contract and the Framework Agreement, then the terms of the underlying contract prevail. Notwithstanding this, one area where there is a degree of overlap relates to the early warning required by clause 19. Whilst recognising that there might be notice provisions in the underlying contracts, clause 19, presumably in accordance with the need to have regard to the partnering principles, imposes a requirement on the parties to warn the other “promptly” if they become aware of any matter which might affect the performance of a particular Task.
The Framework Agreement is intended to last for a lengthy period of time. Thus by clause 8, each party must send out to the other details of their organisation and management on an on-going basis. Clause 12 complements this by setting out the need for a communications protocol. This is a common sense requirement. If the parties agree and/or understand a communal communications protocol, then this will promote clarity and the easy dissemination of information.
It is of paramount importance that the parties understand the organisational and management structures of the others involved, in particular roles and responsibilities. This means that if there are changes in those roles and responsibilities, this must be made clear. There is value in setting up a core group or management team. This can encompass representatives from each of the principal participants who will be responsible for coordination of new projects, formation of joint management teams for individual projects, arranging partnering workshops, liaising with management teams, and maybe even forming a Disputes Resolution Panel. An important strand of collaborative working is not the absence of disputes but their swift and efficient resolution achieved without damage to the parties’ relationships.
One of the potential drawbacks of this long-term arrangement is the question of the sharing of information and confidentiality. Clause 13, confirms that all project information must be kept confidential. Sharing of information is encouraged or even required by clause 11 which demands that a party “promptly volunteer” any information that comes into their possession which would be of assistance to the other in the performance of the tasks. That said, neither Party will be expected to volunteer or share:
“.1 trade secrets which are only known to that Party and upon which that Party’s business is essentially founded;
.2 knowledge or information which a Party is legally and/or contractually prohibited from disclosing to the other Party and/or other Project Participants; or
.3 knowledge or information which is privileged from disclosure.”
Clause 21 deals with performance monitoring and performance indicators. These are particularly important from an employer’s perspective. By the process of monitoring and appraisal, the employer will be able to assess the performance of the various project participants and thereby see who is best placed to deliver what is required.
Clause 22 deals with termination. No task with a duration of more than 12 months is to be instructed in the final 3 months before the framework end date. In other words the agreement gives the parties the chance to start building up a long-term relationship, but recognises the danger of being stuck in a relationship that benefits no one. Either party may terminate, after the first year, on one month’s notice. The termination of the framework agreement will not affect any Tasks that have already been called off.
Of course, notwithstanding the provisions of the framework agreement, disputes might still arise. There is nothing new in the dispute resolution procedures. Mediation is permitted but only as a suggestion. Given the principles of collaborative working and the current judicial mood in favour of mediation, one might have expected a stronger word than “suggest”. Also give some thought before adjudicating. A framework agreement by itself may well not be a contract for construction operations as required by section 105 of the Housing Grants Act.
What do you need? Every project needs a clear set of contractual requirements and obligations so that all the participants know where they stand. Remember that a contract should set out:
- what each party must do;
- what each party receives;
- time for performance;
- (sometimes) consequences of failure; and fundamentally
- where risk is to fall.
The key to this with framework agreements is the ability to work together in an efficient, collaborative manner. Therefore you need to look to the following three objectives:
- The Framework Agreement itself
An over-arching framework agreement will set out, in general terms, how the parties intend to conduct their relationship over a significant period. The continued turnover available for the one, and efficiency gains for the other, will in the long run more than compensate for any short-term deficit.
- The underlying contracts and subcontracts
In respect of the individual project the main contract, design contracts, and all subcontract and supply contracts, must be set up so as to facilitate collaboration. For this purpose, the use of a cost-reimbursable structure is often desirable. That approach assists transparency of pricing. The contract can also be designed to accommodate other important partnering mechanisms such as benchmarking and KPIs, and financial rewards for innovations that reduce time and cost. Much of this methodology will be carried down the supply chain as it will be essential to ensure that each project is served by a consistent suite of contracts and subcontracts.
- The relationship between the parties
Whilst there may be some difficulties in turning relationship-based obligations into binding contractual terms, the promotion of the relationship will nevertheless need to be given a very high degree of prominence in the collaborative structure. Many of the mechanisms to be found in the various partnering contracts can be applied with good effect outside the ambit of a formal contract and also deployed throughout the supply chain. However, ideally even such provisions as these will require a degree of legally binding regulation, in particular to determine who is to pay for each initiative, or in what proportion.
What matters is the effective operation of an integrated framework. What you must aim to achieve is a solid framework for establishing the parties’ legitimate entitlements in the event of failure. The fact that it does so will not in any way make such a failure more likely, but it will reduce the likelihood of disputes arising that cannot be settled. It will also provide the certainty that will be required by funders in respect of any project that is dependent upon finance.
In the 2007 JCT Povey Lecture5, Bob White of Mace noted that regular users of the industry, in both the public and private sectors, had accepted that one of the most successful ways of harnessing the power of collaboration through partnering or integrated team working was through the adoption of frameworks, albeit of a variety of shapes, sizes and duration. He then went on to outline eight reasons why framework agreements promote higher performance and innovation:
- Clients can use them as significant drivers of change;
- They result in reduced competitive bidding/long-term relationships;
- Innovations and cost savings can be delivered through supply chain relationships;
- They will deliver continuous improvement agendas;
- Long-term collaboration on capital programmes and long-term service revenues boost margins;
- They help to spread the overhead over a larger workload and produce fewer lossmaking projects (less risk, less volatility);
- They can improve performance-based reward mechanisms; and
- They encourage deeper relationships between clients/contractors/supply chain, demanding new upstream and downstream skills.
These are all reasons which suggest that the use of framework agreements will continue to rise.