Commercial Fit-Out Contracts - An Employer's Guide
Tuesday, 31st January 2017
They say you never get a second chance to make a first impression. It is perhaps unsurprising, therefore, that the interior fit-out and refurbishment market accounts for a significant chunk of the UK's construction activity, with owners and occupants of offices, retail outlets, hotels and the like investing large amounts of time and money to create an environment that supports the image that the business wants to convey.
Despite the financial and commercial significance of many fit-out projects, the importance of the underlying fit-out contract is often overlooked, with many employers relying on inadequate letters of intent, unamended standard forms which have not been properly considered, or even the contractor's standard (and inevitably biased) terms and conditions of business. In this article, we offer a checklist of some of the key contractual issues for employers to consider when procuring a fit-out project.
Letters of Intent
Due to the commercial time pressures involved in many fit-out projects, it is common for the parties to enter into a 'letter of intent' - essentially an interim contract which governs the relationship between the parties until full terms are agreed and a formal contract is executed. Letters of intent have their advantages in allowing the parties to commence design and/or construction work before all of the legal and commercial details are finalised, thereby minimising the possibility of the overall project timeline being jeopardised. They should not, however, be used as an open-ended arrangement in place of a properly drafted contract. Employers should always insist that the letter of intent strictly limits the work that the contractor is authorised to carry out (by scope and/or value), so that the employer's financial liability under the letter is capped and there remains a clear incentive for both parties to agree and enter into a formal contract as soon as possible.
In any construction project, it is crucial that the building contractor's responsibility for design is clearly defined. Fit-out projects are no exception. It is sometimes preferable from an employer's perspective for the contractor to take full 'turnkey' design responsibility for the entire fit-out project, so that there is a single point of responsibility for design. This makes it easier for the employer to pursue the contractor in respect of any design defects in the works, as it significantly weakens the contractor's ability to 'point the finger' at another member of the project team for the defect in question.
However, a full design and build approach is sometimes not possible if the contractor is unwilling to accept contractual liability for all design work. Indeed, it is unusual for a contractor to accept such a risk without (i) raising its prices to account for the increased liability involved; and/or (ii) insisting that the employer's professional team who compiled the initial design brief are novated across to the contractor, in order that the contractor has a direct contractual link with those professional consultants and can pursue them if there are any issues with their design work.
In other cases, a full design and build route may not be the preferred option for the employer. Whilst the employer has control over the contents of its own outline requirements in a design and build scenario, the contractor very much dictates the detailed design phase (and interference by the employer in this detailed design process could potentially give rise to variations, entitling the contractor to additional time and/or money). Depending on (i) how developed the employer's design requirements are at the point the contractor is engaged; and (ii) the employer's desire to retain control of the end design, it may be preferable to opt for a traditional procurement structure rather than design and build.
If a full design and build contract cannot be adopted or is not desired, the employer should ensure that the extent of the building contractor's and the professional consultants' design responsibilities are clearly set out in the corresponding building contract and professional appointments, such that, if a design defect does materialise, it is clear which member of the project team is liable.
Third party agreements
For projects involving commercial tenants in particular, the employer may have entered into other agreements with third parties which might impose certain obligations on the employer as to how the fit-out works are to be carried out and completed (for example an agreement for lease, licence to alter and/or funding agreement). It is advisable to 'flow down' any such obligations to the fit-out contract, so that the building contractor is expressly required to comply with these 'third party agreements'.
Unless the works are relatively simple and/or low value, it is usually advisable to include a requirement in the contract for delivery of a parent company guarantee and/or performance bond, to protect the employer in a scenario where the contractor defaults or becomes insolvent. From a pure procurement perspective, requesting a performance bond at tender stage can also provide a useful indication of the financial stability of the tendering contractors, as contractors will typically include the cost of obtaining the bond in their pricing breakdown. If the bond premium is unusually high (or if the tenderer states that it cannot obtain a bond at all), this should raise alarm bells for the employer as to the contractor's creditworthiness.
Insurance of the works and existing structures
In any project where the construction works are being carried out within an existing structure (as opposed to a new build project), it is important that the building contract accurately documents who is responsible for insuring both the works themselves and the existing structures against the risk of fire, flood etc. In a typical fit-out project, the parties often agree that the employer (or, if the employer does not own the building, the ultimate landlord) will insure the existing structures, while the building contractor will insure the works. Notably, however, the popular JCT suite of construction contracts assume that the employer will insure both the existing structures and the works, so amendments to the standard form may be required on this point.
Many standard form construction contracts are silent as to which party takes responsibility for site conditions affecting the works (for example asbestos, utilities and existing services). Arguably, in the absence of any specific drafting to the contrary, the site could be deemed suitable for the works to be carried out and any adverse site conditions subsequently uncovered may constitute a variation, entitling the contractor to claim additional time and/or money. In order to avoid ambiguity and dispute as to the parties' intentions, it is advisable to expressly set out in the contract how the time and cost risk associated with unforeseen site conditions is to be allocated between the parties.
Cooperating with others
Will there be other workers on site at the same time as the fit-out contractor? If so, the employer should include a bespoke provision requiring the contractor to coordinate its activities with those workers, and an express statement that the contractor will not be entitled to any additional time or money arising from that coordination requirement. The JCT suite of contracts assume that the contractor will be granted exclusive possession of the site until its works are completed, so an employer will potentially be opening itself up to claims for additional time and/or money if it brings third party workers onto the site without appropriate amendments to the contract having been made to account for this.
In a fit-out or refurbishment context, there may be a third party landlord, tenant and/or funder who requires a collateral warranty from the contractor. The employer should also consider whether it (and/or any third parties) requires collateral warranties from 'key sub-contractors' who are carrying out, for instance, design services or high value construction work. Sub-contractor warranties offer an extra level of protection for the employer and third party beneficiaries, in giving a direct contractual right of recourse against the sub-contractors and allowing the warrantee to pursue them in place of the main contractor if, for example, the main contractor becomes insolvent. The fit-out contract should include a provision obliging the contractor to procure the delivery of any required collateral warranties and, wherever possible, an agreed form of warranty should be appended to the contract to avoid having to negotiate this document at a later date. In order to incentivise the contractor to comply with its warranty obligations, it is also advisable to include an express sanction for failure to deliver a collateral warranty upon request (for example an ability to withhold payment and/or certification of practical completion until such warranties are delivered).