Subordinate Legislation
Construction Contracts (Scotland) Exclusion Order 2011 [Draft]
Scheme for Construction Contracts (Scotland) Amendment Regulations 2011 [Draft]
Under item 2, we will hear from the Cabinet Secretary for Infrastructure and Capital Investment on two statutory instruments that relate to construction contracts. Members should refer to the instruments and the accompanying documents, which were sent out in their pack for the meeting.
I welcome Alex Neil MSP, the Cabinet Secretary for Infrastructure and Capital Investment, and his supporting Government officials: Jessie Laurie, procurement policy manager, and Colin Judge, principal construction adviser, from the Scottish procurement and commercial directorate, and Mark Richards, who is a solicitor.
The instruments were laid under the affirmative procedure, which means that the Parliament must approve them before they may come into force. Following the evidence session, the committee will be invited to consider a motion to recommend approval of the instruments under item 3.
I invite the cabinet secretary to make a brief opening statement about both instruments.
I apologise for causing the meeting to start a bit later than its scheduled time of 10 o’clock.
I have a detailed briefing note for the committee, because I thought that it would be useful to explain in detail the purpose of both Scottish statutory instruments. The instruments are being made under powers in the Housing Grants, Construction and Regeneration Act 1996. I will set the context. The 1996 act was designed to provide the construction sector with effective and fair payment practices and, in the event of dispute, access to a quick and relatively inexpensive adjudication process.
As committee members will be aware, late payments in the industry and prolonged disputes between employers, contractors and subcontractors can significantly delay projects and put at risk businesses, particularly smaller businesses, in the supply chain. The 1996 act requires parties to make effective provision in their contracts for payment and for adjudication of disputes. If parties fail to do so, the relevant terms of the Scheme for Construction Contracts (Scotland) Regulations 1998 apply.
Extensive consultation with the industry revealed a need for changes to the 1996 act to make it more effective in meeting its objective. Those changes—to improve the exchange of information leading to payment and access to adjudication—were included in the Local Democracy, Economic Development and Construction Act 2009.
The Scheme for Construction Contracts (Scotland) Amendment Regulations 2011 will ensure that the scheme fully reflects the changes to the 1996 act. The 1996 act now provides a statutory framework for the issue of payment notices that set out the amount due and of pay-less notices when the payer intends to pay less than the amount due. The proposed changes to the payment provisions in the scheme reflect the new payment notices framework in the 1996 act.
The 1996 act now provides that agreements between parties on adjudication costs, which have in the past acted as a disincentive to referring disputes to adjudication, are ineffective except in two limited cases. The proposed change to the scheme will allow the adjudicator to determine which party should meet his or her fees and expenses, although that determination will be subject to any valid agreements between the parties.
The 1996 act now requires construction contracts to provide that the adjudicator has the power to correct a clerical or typographical error in his decision. The proposed change to the scheme will allow the adjudicator to make such a correction within five days.
The Construction Contracts (Scotland) Exclusion Order 2011 will ensure that a change to the 1996 act to prohibit any payment mechanism that makes payment conditional on performing obligations under another contract does not adversely affect privately financed projects. That change to the 1996 act addresses industry concerns about the inappropriate use of pay-when-certified clauses as a means of delaying payments to the supply chain. However, the use of such clauses is appropriate in the context of privately financed projects in which payment to the main contractor relies on the performance of obligations under other contracts such as the contract between the public authority and the project company. The effect of the proposed exclusion order is therefore to allow such clauses in the contract between the project company and the main contractor in privately financed projects. I stress that the proposed exclusion extends no further than that specific contractual relationship; it reflects the commercial realities of privately financed projects and is necessary to allow current practice to continue.
To conclude, the proposed technical changes to the scheme and the exclusion order are necessary following changes to the 1996 act to ensure that the suite of construction contracts legislation in Scotland remains effective. The changes follow extensive consultation with stakeholders. Equivalent changes to the legislation in England and Wales have been approved by the United Kingdom Parliament and the National Assembly for Wales respectively.
Thank you. Does anyone have any questions for the cabinet secretary?
You couldnae repeat that, could you? [Laughter.]
I have a couple of questions for the cabinet secretary. Does section 110(1A) of the Housing Grants, Construction and Regeneration Act 1996 apply to conventionally funded public sector contracts? Clearly, you are talking about private finance initiative construction contracts.
Jessie Laurie (Scottish Government)
Yes, it will apply to all other construction contracts.
Why is that, especially given the need to ensure that the public interest is served? Should there not be a similar scenario for non-PFI contracts? You are saying that the purpose of the order is that section 110(1A) will not apply to PFI contracts.
The provision will not apply to contracts between the project company and the main contractor in PFI or similar projects. That is because of the different structure of those particular contracts and the risk arrangements relating to them. It is appropriate for the provision to apply to other typical construction contracts.
Could you explain a little bit more why PFI would appear to have been singled out for special treatment?
Colin Judge (Scottish Government)
In privately financed projects, payment arises on delivery of the facility that is associated with the service—it is the service that is purchased under private finance arrangements. The contractor that is delivering that facility is paid only on completion whereas, in conventionally funded projects, the contractor is usually paid at monthly intervals. For a typical 12-month project, the contractor in a conventionally funded project will be paid at the end of every month according to the interim valuation that they submit to the client’s cost adviser or project manager.
Funding arrangements on privately financed projects are not conducive to making monthly payments to the building contractor. There are four tiers of management, if you like, on privately financed projects. Tier 1, which is the client, is invariably a public body. At tier 2, there is the project company, which, in the days of PFI projects, was known as a special purpose vehicle, or SPV. The SPV will employ a main or prime contractor, which is at tier 3, and tier 4 is made up of the various subcontractors that are involved in delivering the specialist areas of the facility that is required to be constructed. The client at tier 1 will pay the project company, and the project company will pay the prime contractor, only when the facility has been delivered and the service is being provided. That differs from conventionally funded projects, in which the main contractor is paid at monthly intervals or other intervals as agreed in the terms of the contract.
10:15
Would the instrument also cover non-profit-distribution-type financing?
Yes.
Okay. My next question is on how the exclusion order will work. Could it work against the interests of small localised companies that seek work in these types of projects?
By these types of projects, do you mean NPD or other privately financed projects?
Yes.
It depends how we define smaller local companies, but I suppose that, for the purposes of this discussion, they would be regional contractors that operate, for example, in Aberdeen, Aberdeenshire and Moray—that kind of hinterland. By and large, they would tend not to be involved in the upper tiers of delivering NPD projects. The one notable exception through the years has perhaps been the construction company Robertson of Elgin, which has built up quite a portfolio, but the smaller, more local businesses tend to be involved further down the tiers. In that context, the exclusion will not apply to them. They will be paid for the work that they have done according to the terms of the contract that contain the valuation rules for the work on site.
The instrument applies in NPD only to the relationship between the project funder and the main contractor, and other contractors underneath that level are not affected.
That is correct.
And it is at that level where small and local firms come into the picture—as subcontractors.
Yes, more often than not.
You mentioned that, during the consultation process, businesses suggested that the adjudication process needed to be adjusted and improved on. Who provides adjudication and how is it initiated? Typically, how long does it take and how much does it cost?
On initiation, the party to the contract that has not been paid either on time or according to the value that it thinks it is due will consider whether to go to the dispute resolution process. If it chooses adjudication, it will serve notice on its contractual party of its intention to seek adjudication.
There were and there may still be—you will have to forgive me as my knowledge is somewhat rusty—adjudicator nominating bodies that contain banks of adjudicators. Contractors seeking adjudication can approach those adjudicators and liaise with the nominating body to secure the services of an adjudicator. Some contracts go so far as to name the status of an office-bearer who will be an adjudicator in any dispute.
I am afraid that I do not have the knowledge on average costs to hand. Duration can be 28 days for an adjudicator. It is quick and sharp—“quick and dirty” is the usual phrase—and it has been termed rough justice. The decision is not binding, so parties can choose not to agree, but adjudication gives the ability for parties to air their differences in a short timescale with a construction industry expert, who may or may not be a lawyer, acting in the capacity of adjudicator. The theory was, and I believe still remains, that, once the parties get the decision, they can move on to deliver the project. If they feel that the adjudicator’s decision is not suitable or if they disagree with it, they can take further action and move to a more litigious process through the courts.
There is no disincentive for a small firm to go down that route. It will not cost it an arm and a leg to go through the process to get its bills paid.
Adjudication was designed to avoid that more litigious process. Statutory adjudication came into being in 1998. Part of the reason for introducing it was to address the costs that are associated with arbitration and formal litigation. Since then, adjudication has become the formal and default dispute resolution process in the construction industry. The purpose of the changes is to remove perceived barriers to smaller businesses accessing proper adjudication services.
During the consultation, did you receive submissions from the Federation of Small Businesses or other organisations that represent the interests of small business? I notice that many major contractors were consulted during the process of finalising the instruments.
The FSB is not listed. I think that it had the opportunity to make a submission but, obviously, it chose not to do so.
We contacted the FSB directly, but it chose not to respond to the consultation.
Did the need for the legislation arise in Scotland, or is it that there were big problems in other parts of the UK and we are just coming into line with legislation there?
My understanding is that there have been problems in other parts of the UK, too. As I said, the changes have already been made in England and Wales.
Did some of the problems arise because contracts were not as tightly drawn as they might now be, given that we have organisations such as the Scottish Futures Trust that are involved in drilling down into projects?
My understanding is that the 1996 act has been overtaken by events and by changes to the way in which contracts are organised, particularly in the public sector, that were not envisaged when the act was drawn up. The purpose of the instruments is to keep the legislation up to speed with developments in practice in the construction industry.
As there are no more questions, we move to item 3, which is formal consideration of motions S4M-00910 and S4M-00913, which call for the committee to recommend approval of the two affirmative instruments. I invite the cabinet secretary to speak to the motions, if he wants to, and to move them.
I am sure that the committee will be delighted to hear that I will forgo the opportunity to say any more and just move the motions formally.
Motions moved,
That the Infrastructure and Capital Investment Committee recommends that the Construction Contracts (Scotland) Exclusion Order 2011 [draft] be approved.
That the Infrastructure and Capital Investment Committee recommends that the Scheme for Construction Contracts (Scotland) Amendment Regulations 2011 [draft] be approved.—[Alex Neil.]
Motions agreed to.
The committee’s report will confirm the outcome of the debate on the SSIs.
10:24
Meeting suspended.
10:25
On resuming—