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Official Report (Hansard)

Session: 2007/2008

Date: 04 June 2008

COMMITTEE FOR 
FINANCE AND PERSONNEL

OFFICIAL REPORT
(Hansard)

Construction Contracts Bill: Policy Consultation

4 June 2008

Members present for all or part of the proceedings: 
Mr Mitchel McLaughlin (Chairperson) 
Mr Mervyn Storey (Deputy Chairperson) 
Mr Roy Beggs 
Mr Simon Hamilton 
Mr Fra McCann 
Ms Jennifer McCann 
Ms Dawn Purvis 
Mr Peter Weir

Witnesses: 
Robin McKelvey (Department of Finance and Personnel) 
Gary McCandless (Department of Finance and Personnel)

The Chairperson:
Michael, thank you very much for appearing before the Committee today.

The next item on the agenda is consultation on the construction contracts Bill policy. I refer members to the DFP paper in their folders. Officials will brief the Committee on the proposals in advance of the public consultation. I welcome Mr Robin McKelvey from the construction initiatives branch of the central procurement directorate of the Department of Finance and Personnel; and Mr Gary McCandless, who is the acting deputy director of the central procurement directorate. I remind everyone that the session is being recorded by Hansard and that mobile phones should be switched off entirely as they interfere with the recording equipment.

Gentlemen, I welcome you to the meeting, and I invite you to make your preliminary remarks.

Mr Gary McCandless (Department of Finance and Personnel):
Chairperson, thank you very much for giving us the opportunity to brief the Committee on this proposal. I will hand over to my colleague Robin McKelvey, who has researched this matter and produced the detailed proposal.

Mr Robin McKelvey (Department of Finance and Personnel):
Good morning. We wish to amend the provisions of the Construction Contracts ( Northern Ireland) Order 1997 and its associated Scheme for Construction Contracts in Northern Ireland Regulations ( Northern Ireland) 1999. For the sake of brevity, I will refer to this legislation as the Order and the Scheme.

The Order is the Northern Ireland version of part II of the Housing Grants Construction and Regeneration Act 1996, known in Great Britain as the Construction Act. The Construction Act had originally been brought into being to promote greater collaboration and integrated teamwork in the construction industry and to reduce the adversarial climate for which it had become notorious. Adjudication for the speedy resolution of disputes, together with measures to establish a regime to ensure proper payment, were implemented in GB in 1998. The provision of similar measures for Northern Ireland followed by way of the 1997 Order, which became effective in June 1999.

However, it was not long before it became obvious that some amendment to the Act and, therefore, to the Northern Ireland Order was necessary. At the heart of this proposal to launch a public consultation in Northern Ireland is the intention to amend the legislation in England and Wales and in Scotland, which arose from the conclusions of the various consultations conducted by the Department for Business, Enterprise and Regulatory Reform (BERR), and its predecessor, the Department of Trade and Industry (DTI), as well as a separate exercise that was carried out by the Scottish Government.

Interest in the need to amend the legislative position at that time was not confined to GB. Several MLAs wrote to the right honourable Gordon Brown in January 2006 to express their concerns about payment difficulties being experienced by small and medium-sized enterprises in the construction industry here. Their correspondence urged the former DTI, now BERR, to address those difficulties in its review of the Construction Act. The central procurement directorate of the Department of Finance and Personnel, which closely monitored the outcome of the review, undertook to consult fully on any draft proposals to amend Northern Ireland legislation.

That review of the Construction Act had been triggered by an announcement in the 2004 Budget. Nigel Griffiths, the then Parliamentary Under-Secretary of State for Construction, Small Business and Enterprise, asked Sir Michael Latham to undertake the review. Sir Michael’s report, which was published in September 2004, concluded that although the Construction Act was generally working well, some improvements to it would be helpful. According to various industry surveys, poor payment practices continued to be a major source of concern for many in construction. In March 2005, DTI — which has been known as BERR since June 2007 — and the National Assembly for Wales jointly published a first consultation paper, entitled ‘Improving payment practices in the construction industry’.

In January 2006, DTI issued its consultation analysis, in which it set out a proposed way forward. During the remainder of 2006, members of an industry sounding board appointed by DTI and working with Sir Michael Latham developed detailed proposals. Following on from those discussions, a second consultation document — jointly for England and Wales — was issued in June 2007, which proposed reconsidered amendments to the Construction Act. However, those amendments would affect England and Wales only.

The Construction Act also applies to Scotland, where policy responsibility for it is a matter for the Scottish Executive. Any amendments that affected Scotland would have to be agreed by the Scottish Parliament. Our proposals embody the Construction Act and those preceding GB consultations, and, as in GB, represent proportional amendment to existing legislation rather than wholesale change.

We propose further to encourage parties in dispute over construction contracts to resolve their differences through adjudication, where appropriate, rather than resorting to more costly and time-consuming solutions, such as litigation. We propose to improve transparency and clarity in the exchange of information relating to payments, to enable better management of cash flow and to improve the facility to suspend performance under the contract.

Our proposals will improve access to the right to refer disputes for adjudication by applying the legislation to oral and partly oral contracts; prevent the use of agreements that interim payment decisions will be conclusive in order to avoid adjudication on interim payment disputes; and ensure that the costs involved in the process are fairly allocated.

I will now move to the subject of payments. Our proposals will prevent unnecessary duplication of payment notices; clarify the requirement to serve a payment notice; clarify the content of payment and withholding notices; ensure that the payment framework creates clear interim entitlement to payment; and prohibit the use of “paid when certified” clauses.

On the question of suspension, we propose to improve the statutory right to suspend performance by allowing the suspended party to claim the resulting costs of delay.

Guidance, however, remains the preferred route to improving the operation of construction contracts. We have considered further legislative intervention only where we believe it to be absolutely necessary. Through the consultation process, we are seeking the views of the construction industry and its clients in Northern Ireland on whether our package of proposals, which closely mirrors the proposals developed to date in GB, addresses properly and adequately the perceived weaknesses in the framework. We also want to determine how best to evaluate the cost and benefits of the package.

Although responsibility for part 11 of the Housing Grants, Construction Regeneration Act 1996 has been transferred to Northern Ireland and to the Scottish Government, the four Administrations should work together, where possible, to minimise divergences. Our proposed consultation will also seek the views of the industry and the wider public on the need or desirability of minimising divergence across the United Kingdom.

I will now move to the issue of partial regulatory impact assessment. Disputes over construction contracts often jeopardise the effective delivery of projects on time and within budget. They can also threaten the viability of businesses and collectively damage the longer-term health of the construction industry as a whole. Our proposals seek to improve the statutory framework set out under the Construction Contracts Order ( Northern Ireland) 1997 to reduce the incidence and impact of disputes; the proposals have been conceived to introduce a better, more focused and effective regulatory framework. Bearing in mind the importance of the construction industry to Northern Ireland’s economy, it is essential that it be enabled to operate as efficiently as possible.

One of the alternative options available was to maintain the legislation as it stands and take forward a voluntary process of improving construction contract and payment practices through guidance only. It is, after all, acknowledged that Government and all parts of the construction industry here generally have a good track record of working together to improve adjudication. Developing proposals to amend legislation on adjudication as well as suggestions for areas of further guidance would be helpful. BERR has striven to maintain and build on existing positive relationships.

Several issues were considered throughout the review process, where it was decided that to do nothing was the best option; however, other issues remained. Therefore, in developing the payment and adjudication proposals, BERR and the Department of Finance and Personnel have chosen to go down the targeted regulation route and to intervene where it is clear that the legislation is not meeting the original objectives effectively and guidance on its own is not felt to be sufficient.

However, we seek to fine-tune rather than to reinvent the existing statutory framework. Through this approach we have identified a package of legislative measures to target specific weaknesses and to improve the clarity and operational effectiveness of the legislation. Many of the measures are technical and have low regulatory impact.

The other option, which we rejected, is that of extensive regulatory intervention. As a review of the Construction Act progressed, some proposals were suggested which, in BERR’s view — a view with which we concur — would undermine the compromises that were reached in 1997 and would fundamentally alter the statutory framework.

Throughout our review, we wish to remain mindful of the finely balanced compromise that distinguished the original legislation. Our guiding premise, therefore, has been to intervene only when it has been considered that the legislation has been shown not to have delivered its original objective. We propose to intervene only in such ways as do not undermine the structure of the legislation. The proposals are targeted to fine-tune the statutory framework. We consider that following a more regulatory route would be fundamentally to change the Construction Order and the contracts that it regulates. At the very least, that would impose considerable transitional burdens on the industry and its customers.

We have encountered difficulty in obtaining data on the incidence and cost of adjudication and enforcement proceedings in Northern Ireland. In order to consider the regulatory impact of our proposals, we had to examine GB data and to extrapolate as appropriate. On adjudication, our calculations tentatively suggest that modest benefits to the industry might accrue by reducing the average cost of adjudication, and enforcement proceedings when required, of the order of £170 per adjudication and £100 for every enforcement proceeding. Although the revised payment framework will improve communication between the parties, enable cash to flow through the supply chain to improve liquidity, reduce the costs of servicing debt and enable the parties to address problems and give grounds for withholding payment, we estimate that its operation might generate marginal savings to the industry in Northern Ireland of some £170,000 per annum.

The broader benefit of the new framework, however, is the creation of clear entitlements to payment, which may be reviewed at adjudication in an arrangement that is comparable to interim certification under many standard forms of construction contract. That will enable disputes to be resolved early in any given payment period. That improvement will reduce financial costs for payer and payee and prioritise the need for payment to crystallise and change hands at an early stage rather than being delayed by the determination of the amount legally payable irrespective of the delay. That is of considerable benefit to the industry and to its customers.

It is difficult to quantify the savings to the construction industry and its clients with regard to reducing costs and increasing productivity and efficiency. However, research recently commissioned by the Office of Government Commerce in support of the Fair Payment Charter indicated that improvements to the payment framework to ensure that contracts could clear the time and entitlement syndrome payment are estimated to save between 1% and 1·5% of the average project cost. Reflecting that across construction in Northern Ireland would represent potential savings of £3·25 million to £5 million per annum.

Our quality impact assessment policy has been developed having due regard to the need to promote equality of opportunity among the nine categories of persons defined in section 75 of the Northern Ireland Act 1998. Our pre-consultation among interested bodies in the industry did not identify any expected impact on any of the section-75 groups. Our proposed full consultation will seek the views of the wider public, interested individuals and groups in order to canvass any other views on the relative impact of our proposals on section-75 groups.

The proposed amendments to the Order affect contracts between businesses and self-employed individuals. They will apply equally to all businesses and individuals from all ethnic and age groups and to men and women alike. Our proposals are unlikely to have greater impact on one group over another. The proposed amendments all put in place some degree of regulatory reform that will reduce burdens by improving the operation of the legislation, ensuring greater clarity and transparency and by reducing disincentives to use adjudication where appropriate.

The proposed amendments will also help to maintain a level playing field in a competitive market with a large proportion of small firms and will underpin best practices in the industry. The amendments will thus enable contractors to plan cash flow better, address instances of poor performance and potentially improve liquidity by reducing the costs of servicing debt. They are intended to benefit small businesses in particular.

Competition assessment shows that the construction industry is already extremely competitive. There is no dominant firm is the construction sector, and competition is healthy to the point of sometimes being extremely fierce and even affecting profitability. Many firms report low margins. Similarly, there is no small key group of dominant firms in any sub-sector, other than perhaps some small specialist interests. The legislation does not set up barriers to entry to any sectors or to the construction industry, and it is unlikely to affect the size or number of firms; however, it may reduce the churn that is brought about by the combination of insolvencies and new firms being established.

The Chairperson:
Robin, how much more time do you require for your presentation?

Mr McKelvey:
I am finishing now.

With the Committee’s approval to proceed, the Department intends to launch consultation as soon as possible. Since the consultation period might take place during the summer, we propose to extend it from 12 weeks to at least 14 weeks.

Ms Purvis:
Thank you for your presentation. I have a couple of points of clarification. I am not familiar with the legislation, and I take your point that you are trying to improve the adjudication process and the payments process. Does the payment process include transactions between those who have exchanged contracts for work where difficulties may arise with, for example, the quality of workmanship or the late delivery of the product?

Mr McKelvey:
Non-performance under contract could give rise to the payer seeking to issue a withholding notice. Contracts will provide for certain amounts of money to be paid at different stages during the course of a contract; however, withholding notices can be issued where there has been a breakdown in performance. The legislation is geared to affect parties to construction contracts rather than having any effect on Government.

Ms Purvis:
You mentioned adjudication as a key issue. You said that adjudicators were often challenged because an entire contract was not in writing and that there was a proposal to delete article 6 of the Construction Contracts ( Northern Ireland) Order 1997 that contracts must be in writing. Surely the opposite is true: having the full contract in writing protects both parties.

Mr McKelvey:
I appreciate the point. However, the difficulty with building contracts, which are frequently complex, is that although a contract may start off in writing, the many changes to it during the course of the construction work may not be in writing. Many jurisdictional challenges have been made to adjudications because something that started off in writing did not end up in writing and, therefore, the adjudicator had no authority to act. Cases with plenty of merit on behalf of the referrer have been thrown out when they reached adjudication on the technicality that not enough of the material points were in writing. The proposal to delete that requirement is intended to broaden the adjudicator’s role to deal with all aspects of contracts.

Ms Purvis:
Is there no way of broadening the adjudicator’s role other than by removing article 6?

Mr McKelvey:
I do not think so. During the first consultation, which was carried out by the former Department of Trade and Industry, there was no such provision. There was a firm intention to ensure that all contracts, to be fair to adjudication, would have to be in writing. As a result of the second consultation, and in the operation of the sounding board that DTI published afterwards, the proposal was broadened to include oral or partly oral contracts.

Ms Purvis:
Does that apply solely to the adjudication process?

Mr McKelvey:
Yes.

The Chairperson:
That seems to be a recipe for increasing the number of disputes.

Mr McKelvey:
It can certainly cause difficulty for the adjudicator to work out the basis of the agreement or the material points to which the parties agreed. However, at least it removes the problem of a worthy case being dismissed on a technicality.

The Chairperson:
I understand how that problem could arise and that one response to it is to delete article 6. However, another response would have been to require written agreement on any additional works so that a written contract would form the basis for any possible adjudication process. Why was that not considered? If additional works were required, the original contract could be amended to include them and it would be signed off by both parties. That would provide a legal basis for dispute resolution.

Mr McKelvey:
That might be considered good practice, but it is not the custom and practice across the industry. The amendment results directly from the public consultation. If the same public consultation were to be carried out in Northern Ireland, it would be interesting to see the reaction that it might generate among consultees here.

The Chairperson:
Should the consultation not give people options and let them make a judgement on which option represents best practice?

I know the issues and the history of the industry — people like to leave themselves plenty of wriggle room. However, I envisage endless disputes and endless adjudication in the future.

Ms Purvis:
Does the amendment relate to the adjudication process rather than to the written contract? One can still have a written contract, but it cannot be used as an excuse not to enter the adjudication process. Is that correct?

Mr McKelvey:
Yes.

The Chairperson:
Yes. However, the adjudication process is being hamstrung by a legal technicality that is being used to challenge the remit of the adjudicators, which is the use of oral agreements. Is that correct?

Mr McKelvey:
Construction is a complex business, especially considering the length of some supply chains and the informality at the lower end of such chains that involve smaller contractors and suppliers. That is the real point.

There was some concern that the provision would encourage people to make more oral contracts. Apparently, however, that has not been the case.

Mr Storey:
Paragraph 9 of your written submission referred to proposals to have a statutory framework in place for adjudication costs. How do cost and expenses of the parties involved compare to the costs involved in small claims court cases or the normal dispute process?

Mr McKelvey:
I cannot give you a specific answer. Adjudication, as an alternative dispute resolution method, is reputed to be much cheaper than any other.

If it is a small claim, and the issues are clear, the small claims court may suffice. However, that is intended to provide what has been described as a “quick and dirty solution” to a particular type of dispute.

The Chairperson:
Is that a legal term?

Mr McKelvey:
[Inaudible due to mobile phone interference.]

The Chairperson:
Someone has not turned off their mobile phone.

Mr Storey:
Paragraph 10 of your submission refers to the “sum due”. Does that amount include additional works carried out by the payee due to unforeseen circumstances, emergencies or delays?

Mr McKelvey:
It may; it depends on the form of contract being used and what provision exists in it for variation. The intention is to ensure that every contract includes a provision to calculate the sum due at any stage. If the contract does not contain sufficient provision to meet the conditions that are described in the Order, the scheme for construction contracts will provide a default provision specifying mandatory rules, which have a statutory basis. Those rules are so rigorous that people usually try to provide their own, rather than relying on the default provision.

Mr Weir:
Thank you for your presentation. You mentioned that the next step is consultation, the likely result of which will be fine-tuning of the current system; indeed, that is the preferred option. What are the time frames for the consultation and the implementation of its result?

Mr McKelvey:
We expect the public consultation to take place over the summer. As I mentioned, we want to extend the minimum consultation period to allow for people being away on trade holidays and so forth. After that, we will analyse the results of the consultation and ensure that whatever changes we had intended reflect properly what people want. The first draft is then provided to the Office of the Legislative Counsel, and finally the draft legislation is introduced to the Assembly.

Mr Beggs:
You said that you propose to go out to consultation shortly. Has consultation already taken place in GB, or will that happen at the same time as here?

Mr McKelvey:
We have the benefit of being able to look at two consultations in England and Wales and another that took place in Scotland. The Scottish consultation largely mirrored the second in England and Wales. Therefore, the Department can draw on the distillation of three separate consultations, the results gleaned from DTI’s sounding board — which comprised prominent figures in the industry — and we can ask client groups to provide further advice on the proposals that formed the basis of the second consultation.

Mr Beggs:
I imagine that it will be much more interesting when the Committee examines the responses to the consultation. You said that there are large numbers of vexatious challenges to adjudicators’ appointments. How many are there?

Mr McKelvey:
That is one of the questions that the consultation document seeks to answer. It is difficult to find the specific number of requested adjudications. We are working on the basis that anecdotal evidence suggests that a substantial number of adjudications fail because there is a question over the jurisdiction of the challenge and because too few cases are submitted in writing. Several cases have gone to court for appeal, and the growing body of case law establishes that.

Mr Beggs:
We know that construction bodies and so on will represent their members, but who will represent the consumers in the consultation? Will the Consumer Council represent them?

Mr McKelvey:
The Construction Contracts ( Northern Ireland) Order 1997 and The Scheme for Construction Contracts in Northern Ireland Regulations ( Northern Ireland) 1999 — which apply to groups across the construction industry — allow for many parties to the disputes to be members of the same team.

Organisations such as the Government Construction Clients’ Group will also be interested in the public consultation. Indeed, we expect many interested parties to participate.

Mr Beggs:
I appreciate that it is a complicated subject. Although it would be nice to have everything clarified in writing for every amendment, the nature of the construction industry and the fact that modifications have to pass through several hands would result, I suspect, in worksites being closed down until such legal agreements were finalised. Therefore, I understand that it is a complex and messy issue, and I look forward to receiving further information following the consultation.

The Chairperson:
That concludes the question session. I thank both witnesses for steering us through what is a complicated process. I am sure that for some — particularly those who are administering it — it must also be an ageing process. We look forward to both the consultation and its outcome. There may be issues that arise from that process, and perhaps we will talk again or correspond on those as the consultation concludes.

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