The construction industry has largely ignored the JCT’s prime cost contract, largely because it doesn’t do prime cost procurement. But that may change in the near future …
Since releasing a tidal wave of contracts in late 2005, the Joint Contracts Tribunal has been plugging away, revising and reissuing its remaining documents in the same style and form.
To almost complete indifference, the JCT Prime Cost Building Contract (PCC) was issued a few months ago. I guess that indifference was because the pre-2005 version of it was almost never used.
You could turn the page now, thinking I’m writing about a pointless contract – but don’t, as I am willing to bet that the new PCC is one you may actually want to use.
It adopts the same section-headed and simplified-English approach as the JCT 2005 family. This makes it easy to find what you want and simple to understand. It uses the same terminology and wording as the others so, for those brought up on JCT contracts, it is easier to understand than the sometimes not-so-plain English of the Engineering and Construction Contract (ECC).
The “prime cost” in its title is a clue that it is a cost reimbursement contract. That means that the contractor is paid whatever costs it incurs, plus a management fee, which can be either a fixed sum or a percentage of the prime cost. That’s why these contracts are not used much as, except for a few caveats, there is no incentive for the contractor to work efficiently or to minimise costs. Strangely, this is also the reason that prime cost contracts are used in some cases. The main attraction is that they allow a quick start on site, as little planning is required, and the tender period is as short, because the fee can be agreed in the time it takes to ask what percentage profit the contractor wants. The JCT’s own guide to the PCC recommends its use where an early start is required, before it is possible to define the extent of the works. It mentions fire damage repairs as an example of this.
Contractors are becoming more selective about what work they take on. Anything complicated, risky or onerous means
Fast forward to today’s market. The contracting sector is consolidating, for example Warings is being gobbled up by Bouygues. Meanwhile the Olympic projects are moving into the procurement phase and sucking up resources. The Building Schools for the Future programme, if it ever gets going properly, will also hoover up capacity. Commercial investment is going like a train, and contractors are screaming for recruits.
They are also becoming more selective about work. Anything complicated, risky or onerous means less interest. With the market at full capacity, clients will have to find ways to make projects more attractive to contractor. One way to do this is to move away from lump sum contracts.
While I find it difficult to envisage this leading to prime cost contracts becoming mainstream I believe there will be a shift towards more pain/gain target-cost contracts. What does this have to do with the PCC? Well it is already 99% of the way to being a target cost contract, and if rumours are correct, then it may not be long before the JCT turns it into one. That would make it a powerful alternative to its main rival – the ECC Target Contract. Indeed it would have certain advantages over the ECC, namely:
- The definition of what is payable is based on the way the industry works and, as such, is easier to understand and more precise
- The contract administrator has wider powers to accept what is payable as prime cost and to disallow costs
- The contract administrator has more control over whether and how work is let to subcontractors.
Let’s hope the JCT decides to take PCC on to the next stage.
Andrew Hemsley is head of specialist services at Cyril Sweett