What is the Defects Liability Period and how is it relevant to Subcontracts I place?
We put forward the following scenario to Jason Farnell, Adjudicator and CEDR Accredited Mediator:
I’m a Property Developer who typically acts as a Main Contractor on projects and I’m interested in understanding more about the Defects Liability Period (DLP) in contracts and how defects and warranties are best managed.
We asked Jason the following questions:
- What is the Defects Liability Period and how is it relevant to Subcontracts I place? Is the Defects Liability Period the same as the Rectification Period referred to in the JCT?
- What is the best way to report a defect during the defects liability period – is there a standard format or best practice?
- Typically, the Defects Liability Period is 12 – 24 months, is there a way of extending the DLP and what happens if a defect occurs days after the expiry of the period?
- There is often debate over whether a site defect is an installation or warranty problem. The Defects Liability Period and the Warranty provision of a product are vastly different, for example flat roofing products typically have 20 years warranty vs. 12 months in the DLP – how do we differentiate between DLP and warranty defects and what’s the best way to manage the risk of defects on high-risk packages like roofing?
- Retention is tied to the DLP but how should it be managed exactly for example in terms of releasing or holding retention should defects be apparent?
1. What is the Defects Liability Period and how is it relevant to Subcontracts I place? Is the Defects Liability Period the same as the Rectification Period referred to in the JCT?
The term ‘Rectification Period’ has replaced what was formerly known as the ‘Defects Liability Period’ but it is of the same effect. Following practical completion of the Works under the Main Contract, or practical completion of the Sub-contract works under the sub-contract, there is a defined period during which the contractor is required to remedy patent (i.e. defects that become apparent) defects in the works that have been carried out under the contract at its own cost.
It is typically the case that, during the rectification period, retention will be held at half the percentage amount held prior to practical completion, as security against the contractor failing to return to rectify the defects in its works. At the end of the rectification period when all of the defects that have arisen in the period have been rectified, or made good, then the Architect/Contract Administrator should issue a certificate to that effect and this is then a trigger for the final statement to be issued and the contract brought to a conclusion. In the case of a sub-contract it is the main contractor’s responsibility to notify the sub-contractor when it considers that the defects have all been rectified.
The relevance to the sub-contracts that you are placing is that the sub-contractors have an obligation to remedy defects arising in their works at no cost to the contractor; and the main contractor will need to manage the process when sub-contract completion may occur and the rectification of the defects since the main contractor may find himself subject to a different timescale under the main contract which may have a commercial impact in relation to when retention monies may be collected and when they need to be paid out; as well as ensuring that the standards required by the Architect/Contract Administrator are not different to what the main contractor requires of its sub-contractors. This will need to be carefully considered when sub-contracts are being placed.
As an aside I believe that retention is an out-moded and in appropriate mechanism for securing performance of the contractor’s obligations, but that is a different matter, for a different day!
2. What is the best way to report a defect during the defects liability period – is there a standard format or best practice?
This will really depend on the type of project that is being undertaken and the nature of the defect that may arise.
It is common for the Architect/Contract Administrator to begin to compile the schedule of defects towards the end of the rectification period. This is not how contracts are intended to operate and contractors should be vigilant to watch out for this. The obligation is to rectify defects occurring within the rectification period with a view to securing the Making Good Certificate at the expiry of the period so that the balance of the retention fund can be collected and the final statement can be issued.
Where there are residential occupiers, or where public health or security issues may arise it is good practice to impose a regime of response times for rectification of certain defects (e.g. sanitary installations; heating installations etc) with short response times so that performance of the building or comfort of the occupants is not compromised.
3. Typically, the Defects Liability Period is 12 to 24 months, is there a way of extending the DLP and what happens if a defect occurs days after the expiry of the period?
In residential developments it is not uncommon to have a 24 month rectification period as this covers the time between practical completion and when insurance backed guarantee will commence (i.e. this is called the decennial insurance cover which is provided by the likes of NHBC and other providers).
The rectification period is not the end of a contractor’s liability for defects arising in its works, this is just the period during which he is expressly required to rectify them under the contract. There is a statutory responsibility for rectification of defects which may arise in workmanship and materials which lasts for the limitation period, which is usually 12 years from completion for contracts executed as a deed and 6 years for simple contracts.
4. There is often debate over whether a site defect is an installation or warranty problem. The Defects Liability Period and the Warranty provision of a product are vastly different, for example flat roofing products typically have 20 years warranty vs. 12 months in the DLP – how do we differentiate between DLP and warranty defects and what’s the best way to manage the risk of defects on high-risk packages like roofing?
A warranty is a type of guarantee, usually provided by a materials manufacturer that runs separately from the contract under which the particular material is installed. Say for example a roofing contractor installs a single ply membrane roof in respect of which the manufacturer provides a 20 year warranty. If there are issues with the roof during the rectification period, then the contractor would be obliged to rectify the defects in either its workmanship or the materials at no cost to the employer in accordance with its contracted obligations.
During the limitation period thereafter, there is the an option to pursue the original contractor for defects in either workmanship or materials or as an alternative to rely on the manufacturer’s warranty. Or using a more domestic example, if you buy a set of pans which are warranted/guaranteed for 10 years by the manufacturer; if the handle falls off one of them six months after you had bought them then you would return them to the shop that you bought them from; but if it were six years after purchase then you would deal directly with the manufacturer under its warranty.
To manage the risk of defects on things like roofing materials where there is a manufacturer’s warranty then you should ensure that you comply with its terms so that in the event of an issue you would be able to rely on the warranty. If say the warranty says the product must be installed by a licensed or approved contractor then contact the manufacturer and ask for a list of approved installers and ensure that their accreditation is valid. Ensure that the product is suitable for the particular building or location (e.g. if a particular roofing material is warranted on pitched roofs with pitches in excess of 35 degrees then it would be inappropriate to specify that product for a roof with a pitch of only 20 degrees).
Warranties can be invalidated by failing to clean or maintain the product in accordance with the manufacturer’s recommendations and it is essential that the manufacturer’s literature and cleaning and maintenance requirements are incorporated into the operation and maintenance manuals and the requirements incorporated into the regimes for operation of the building.
5. Retention is tied to the DLP but how should it be managed exactly for example in terms of releasing or holding retention should defects be apparent?
As you will have gathered, I am not a lover of retention as a mechanism for securing performance; but it is still a valid question.
There should first be the discipline of knowing when inspections for the end of the rectification periods are due and schedules should be prepared identifying any issues that have arisen in the time. These should be communicated to the original contractor (or sub-contractors via the main contractor as appropriate) to afford it the opportunity to rectify its own defects. It would be good practice to include details of when access will be granted for rectification works so that control of the process can be maintained, particularly where there may be sensitivities or restrictions on access (e.g. schools; prisons; hospitals etc).
Where there is a failure or reluctance to carry out the rectification works then there are usually mechanisms in contracts to give notice that an alternative contractor will be engaged, at the original contractor’s cost, if there is a continued failure beyond a stated period.
If there should be disagreements on whether there is a defect then it may be appropriate to involve either the product manufacturer or a trade body, or specialist to attend inspections to give an opinion about whether a complaint is justified and the extent of any necessary remedial works.
It is not uncommon for contract administrators to delay releasing retention until all defects have been rectified. This can mean that a substantial number of suppliers are stood out of their retention monies until the last reluctant contractor has performed or due to a small number of disputed defects. There is no reason why retention monies for defects that have been rectified and signed off by the contract administrator should not be progressively released under the interim payment regime.
There may be instances where the amount of retention held is insufficient to cover the cost of rectification of a particular defect – that is a shortcoming of retention; it is a blunt tool. But there are other remedies available to deal with such eventualities.
My view is that the rectification of defects should be actively managed by the contract administrator and retention should be progressively released as soon as it is due and that energy should then be applied to any particular issues appropriately.