The rise in different forms of procurement and the need to reduce pre-construction timetables, combined with a realisation that early contractor involvement can be very useful, has resulted in the increasing use of forms of pre-construction services agreements (PCSAs) and two stage tendering.
In recent years I’ve seen a shift in procurement methods where the traditional method of procuring a construction project where the employer and its design team finalise their requirements first and then send the documents out to contractors for them to submit tenders is being used less frequent.
Two regularly used forms of agreement utilised before a building contract is entered into are pre-construction services agreements (PCSAs) and heads of terms.
What are pre-construction services agreements?
A pre-construction services agreement (PCSA) is used to appoint a design and build contractor to carry out services before entering into a formal building contract.
A PCSA is sometimes referred to as a pre-construction agreement (PCA) or an early works agreement (EWA) and is used in two-stage tendering to obtain further design input, buildability advice, technical advice and detailed costs information from a prospective contractor.
Rather than use a letter of intent many employers are asking contractors to become more involved in the pre-construction stage in order to benefit from their expertise and to highlight potential difficulties prior to the building contract being entered into.
Two-stage tendering is being used to pre-select contractors and then to engage the selected contractor to carry out activities alongside the professional team before the building contract is entered into.
A PCSA is a formal agreement to provide specified services (and sometimes to carry out specific works) and is not a letter of intent/heads of terms.
Unlike heads of terms/ letters of intent, PCSAs are drafted as conventional legal agreements with separate sections for parties and recitals.
What are Heads of Terms?
Heads of Terms (also known as a memorandum of understanding (or MoA), letter of intent, comfort letter, pre-contract protocol, term sheet or heads of agreement) are a set of documented principles used to capture the essence of the agreement that typically precede substantive contract negotiations and the ultimate signed formal contract.
Heads of Terms are essentially a written expression of a party’s intention to enter into a contract at a later stage.
A heads of terms document is often prepared by the commercial managers, and usually requires considerable refinement and clarification by lawyers as the drafting process proceeds, as this way any legal issues can be identified and dealt with early on.
Heads of terms show that parties are morally committed and are serious about the deal in question.
Similarly, they can also help to stop endless meetings and e-mail trails between the parties.
As heads of terms are by their nature very brief, litigation frequently arises out of their use where the parties are in disagreement as to the terms that have been incorporated.
Disputes can also arise as to whether the heads of terms is a binding contract at all.
The rules of contract formation apply equally to heads of terms as they do to any other contracts.
Therefore, consider whether the heads of terms document should be legally binding or not.
If they are not to be legally binding, draft the provisions carefully in such a way as to not unintentionally bind the parties.
Why seeking legal advice at an early stage?
Drafting and negotiating heads of terms is a balancing act. Care should be taken not to spend too much time negotiating them at the expense of the ultimate signed formal contract.
Seeking legal advice at an early stage can save you time and money when negotiating the final contract.
For instance, I work closely with clients to assess whether based on the particular circumstances of a project, the parties may prefer to use an alternative to heads of terms, e.g. a PCSA or a simple contract, which only covers initial preparatory works or the ordering of materials.
Similarly, rather than use heads of terms many employers are now asking contractors to become more involved in the pre-construction stage in order to benefit from their expertise and to highlight potential difficulties prior to the building contract being entered into.
Therefore a PCSA might be more appropriate.
My work includes advising on the best solution on a project by project basis.
I am involved with projects from the outset and I work with clients to shape their procurement and contracting strategies.
As such, I assist clients from the early stages of a transaction. This often includes drafting heads of terms while the finer points to a proposed contract are still outstanding as well as pre-construction services agreements to cover any early works carried out on a project.
For further information or to discuss a matter, please Contact me.