Both prime contracts and Defcon 2000 – a new contract for smaller projects – will include fitness for purpose clauses that make contractors wholly liable for defects after practical completion.
In another radical move, the Ministry of Defence is to abandon cash retentions in Defcon 2000. This is understood to be the first public sector construction contract to eschew retentions.
As a lawyer involved in the drafting of Defcon 2000 explained, fitness for purpose means that if the building fails to meet the client’s needs, it has grounds to sue the contractor for breach of contract.
Under most construction contracts, clients are able to sue contractors for faulty buildings only if it has not used “reasonable skill and care” in choosing materials and building with them. But, the lawyer said, the fitness for purpose clause means that the contractor is liable for defects even if reasonable skill and care was applied in construction.
So, if a contractor built a structure using a material later found to be deleterious, but not recognised as such at the time of building, the contractor would still be liable. The clause has been implied in design-and-build contracts but never tested in court. This is the first time it has been used explicitly in a contract.
Prime contractors are opposed to the clause. One, recently shortlisted, said: “It is unlikely that we can get insurance for such a big risk, so we are going to have to put in a big price to cover it.”
Neil White, head of construction with law firm Taylor Joynson Garrett, said: “No contractor will accept such an onerous clause.”
Defcon 2000 will be employed for works ranging from £250 000 to a few million pounds. Under Defcon 2000, 5% of money owed will be kept only until practical completion. Main contractors or clients usually retain 3-5% of money owed, half of which is not paid back until a year after practical completion.
Mike Burt, head of the Treasury’s procurement practice division, welcomed the move, but said it was too early to remove cash retentions from all government contracts.
“Cash retentions can serve a useful purpose if you have an adversarial contractor,” he said, adding that although contractors were moving in the right direction, they could not yet be trusted to fully co-operate.
An MOD representative said losing cash retentions and imposing fitness for purpose was a “carrot and stick” approach to improving contractors’ awareness of a building’s suitability.