Construction companies entering into joint venture (JV) contracts should be cautious of entering into agreements where the responsibility for, and timing of cost overruns is not tightly specified, to avoid unexpected surprises.
In
Follow the formula
The procedure adopted for payment under the JVA was that
When
According to NEC3, parties agree on a target cost or price to include the contractor's best estimate of its cost to carry out the works, as well as a fee for costs, overheads, and profit. Upon completion, an assessment is made of the "price for work done to date", and any overrun or cost saving is allocated according to a formula, commonly described as a "painshare/gainshare" mechanism.
The court found that the painshare/gainshare provisions of NEC3 were incorporated into the JVA. The question before the court was whether adjustments could be made under the NEC3 to
interim payments due before the completion of works, to allow for deductions that would likely need to be made at completion of any event.
The final countdown
According to the clause:
"The project manager makes a preliminary assessment of the contractor's share at completion of the whole of the works using his forecasts of the final price for work done to date and the final total of the prices. This share is included in the amount due following completion of the whole of the works."
The position was confirmed by clause 53.4, which says:
"The project manager makes a final assessment of the contractor's share using the final price for work done to date and the final total of the prices. This share is included in the final amount due."
It followed that since the assessment of the painshare can only take place after completion, there was no amount to be paid by the contractor at the date of any interim valuation.
The court also looked at whether there was anything in the JVA which permitted interim painshare/gainshare adjustments, but concluded the JVA contained no relevant principles that could allow the deduction of painshare from the amounts due for the interim payments.
The court granted declarations that
Words to the wise
Whilst
Contractors should consider inserting a Z Clause to amend the standard provisions should they wish the allocation of pain to be applied on an interim basis. They should also take steps to ensure that their JVA terms are consistent with the construction contract or if not, and there is a conflict, it is clear which document will take precedence.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Mr
Hogan Lovells
Rue de la Science 23
1040
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