JCT Contracts and Development Finance: Which Contract Suits Your Build

The building contract is one of the most important documents in a development finance transaction because it governs the relationship between the developer and the contractor who will build the scheme. From the lender's perspective, the building contract determines how construction risk is allocated, how cost overruns are handled, what happens if the contractor becomes insolvent, and whether the lender can step into the developer's shoes and enforce the contract if the developer defaults on the loan. A well-drafted building contract reduces construction risk for both the developer and the lender, which translates into better borrowing terms.

The Joint Contracts Tribunal, or JCT, produces the most widely used standard form building contracts in England and Wales. These contracts are recognised and trusted by development finance lenders because they have been developed over decades, refined through case law, and are understood by the construction industry, legal professionals, and quantity surveyors. When a lender sees a JCT contract, they know exactly what risk allocation it provides and can assess the development accordingly.

Using a bespoke or non-standard building contract is possible but can cause delays in the finance application process. The lender's solicitor will need additional time to review and report on a non-standard contract, and the lender may require amendments to bring it in line with market norms. In our experience, developers who use a recognised JCT form move through the legal due diligence process significantly faster than those using bespoke contracts, saving both time and legal fees.

The JCT Minor Works Building Contract is designed for straightforward projects of relatively low value and short duration. It is appropriate for simple building works where the employer, the developer, has appointed an architect or contract administrator to oversee the project. The contract is shorter and less complex than the intermediate or design and build forms, making it easier to administer and less expensive in terms of professional fees.

In the context of development finance, the Minor Works contract is suitable for projects with a construction value up to approximately £500,000, though there is no formal upper limit. Typical projects include single dwelling builds, small residential conversions of two to four units, and light refurbishment projects. The contract provides for an architect or contract administrator to issue instructions, value work, and certify practical completion. Payment is typically on a monthly basis following certification by the contract administrator.

The limitations of the Minor Works contract become apparent on larger or more complex schemes. It does not include detailed provisions for loss and expense claims, it has limited provisions for dealing with contractor insolvency, and the dispute resolution procedures are less comprehensive than those in the intermediate or design and build forms. Development finance lenders will accept a Minor Works contract for smaller schemes but may require a more robust form for projects above £750,000 in construction value. We have arranged facilities for numerous small developments using the Minor Works form and find that it strikes the right balance between simplicity and protection for projects of appropriate scale.

The JCT Intermediate Building Contract bridges the gap between the simplicity of Minor Works and the complexity of the standard form. It is designed for projects of medium value and complexity, typically between £500,000 and £2,000,000 in construction cost, though it can be used for both smaller and larger schemes. The contract includes more detailed provisions for variations, extensions of time, loss and expense, and contractor insolvency than the Minor Works form, while remaining more manageable than the full standard form.

For development finance purposes, the Intermediate Contract is the most commonly used form for residential developments of five to twenty units. It provides the level of risk allocation and contractual protection that lenders expect without the administrative burden of the full standard form. The contract requires the appointment of an architect or contract administrator, a quantity surveyor for financial administration, and allows for the use of named subcontractors. Interim payments are made monthly based on valuations prepared by the quantity surveyor and certified by the contract administrator.

One important feature of the Intermediate Contract is its provisions for contractor insolvency. If the contractor becomes insolvent during the build, the contract automatically terminates, and the developer has the right to engage a replacement contractor to complete the works. The contract also includes provisions for the contractor to provide a retention bond or guarantee, which provides additional security for the developer and, by extension, the lender. In our experience, lenders view the Intermediate Contract favourably because it provides comprehensive protection at a proportionate level of complexity. For schemes in this value range, it is the form we most frequently recommend to developers applying for development finance.

The JCT Design and Build Contract is used when the contractor takes responsibility for both the design and construction of the project. This is fundamentally different from the traditional procurement route where the developer appoints an architect to design the scheme and a contractor to build it. Under a design and build contract, the contractor is responsible for producing a design that meets the developer's requirements, known as the Employer's Requirements, and for constructing the works in accordance with that design.

For development finance lenders, the design and build contract offers the advantage of single-point responsibility. If there is a defect in the completed development, the developer, and therefore the lender, does not need to determine whether the fault lies with the architect's design or the contractor's workmanship. The contractor is responsible for both. This simplified risk profile is attractive to lenders, and many express a preference for design and build procurement on larger schemes with construction costs above £1,500,000.

The design and build contract uses a different payment mechanism from the traditional contracts. Instead of monthly valuations by an independent quantity surveyor, the contract administrator certifies payments based on the contractor's application and the contract administrator's assessment. The contract sum is typically a fixed lump sum, which provides cost certainty for the developer and the lender. However, the developer's ability to make changes during the build is more restricted under a design and build contract, and variations can be expensive because the contractor controls the design process.

We have arranged numerous facilities where the lender specifically required a design and build contract because of the risk transfer it provides. For a developer undertaking a £3,500,000 residential scheme with twenty units, the design and build form offers cost certainty, single-point responsibility, and a clear contractual framework that the lender's monitoring surveyor can easily administer. If you are considering which procurement route to adopt, submit your deal and we can advise on the form of contract that will best support your finance application.

The lender's solicitor will review the building contract as part of the legal due diligence process and will check several key provisions. First, they will verify that the contract is properly executed by both parties and that the contract sum is consistent with the build costs in the development appraisal. A discrepancy between the contract sum and the appraised build cost will require explanation and may delay the transaction.

Second, the solicitor will check that the contract includes appropriate provisions for the lender's benefit. These typically include a collateral warranty from the contractor in favour of the lender, giving the lender the right to enforce the building contract directly against the contractor if the developer defaults. The solicitor will also check for a clause allowing the lender to assign the benefit of the building contract to a purchaser if the lender enforces its security and sells the development site. Without these provisions, the lender's security is weakened because they cannot ensure that the contractor completes the works.

Third, the lender will want to see that the contract includes provisions for professional indemnity insurance, particularly under a design and build contract where the contractor has design responsibility. The minimum level of professional indemnity insurance is typically £2,000,000 to £5,000,000 depending on the size of the project. The insurance must be maintained for a specified period after practical completion, usually six to twelve years. Contractors who do not carry adequate professional indemnity insurance, or who allow their policies to lapse, create a significant risk for the developer and the lender. We always advise developers to verify their contractor's insurance position before entering into a building contract and to include a contractual obligation for the contractor to maintain insurance throughout the relevant period.

The choice of JCT contract depends on the size, complexity, and procurement route of your project. For simple schemes with construction costs below £500,000 where you have appointed your own architect, the Minor Works form is appropriate. For medium-sized residential developments with construction costs of £500,000 to £2,000,000 using traditional procurement, the Intermediate form provides the right balance of protection and practicality. For larger schemes above £1,500,000 or where you want single-point design and construction responsibility, the Design and Build form is the preferred choice.

Whichever form you choose, ensure that the contract is properly completed with all the required particulars, including the contract sum, completion date, retention percentage, liquidated damages rate, and the names of the contract administrator and quantity surveyor. Incomplete contracts are a common issue we see during legal due diligence, and they can delay the finance completion. Have your solicitor review the contract before it is signed, even if you are using a standard JCT form, to ensure that any amendments are appropriate and that the contract works alongside your facility agreement.

It is also worth noting that development finance lenders increasingly expect to see a fixed-price building contract rather than a cost-plus or remeasurement arrangement. A fixed-price contract gives the lender confidence that the build cost in the development appraisal is reliable, whereas a cost-plus contract introduces uncertainty about the total construction cost. If your contractor is unwilling to commit to a fixed price, discuss this with your broker before submitting your finance application, as it will affect the lender's appetite and the terms available.