A novation agreement is a legal document that transfers one party’s rights and obligations under a contract to another party. In construction, it is most commonly used when a consultant is transferred from the employer to the contractor.
This often happens on design and build projects. The employer may first appoint an architect, engineer or other consultant to develop the design. Once the contractor is appointed, that consultant may then be novated so they work for the contractor instead.
In simple terms:
Before novation: Employer → Consultant
After novation: Contractor → Consultant
For Quantity Surveyors, novation matters because it affects design responsibility, liability, payment, warranties and commercial risk.
Why Is Novation Used?
Novation is usually used to create continuity. The consultant already understands the project, the design intent, the planning position, the technical constraints and the employer’s requirements. Rather than appointing a completely new consultant, the contractor can continue using the same design team.
It can also help transfer design responsibility to the contractor. On a design and build contract, the contractor is usually responsible for completing the design and delivering the works in accordance with the contract. Novating the consultant gives the contractor control over the design team needed to complete that obligation.
Why Does Liability Matter?
Liability is one of the most important issues in a novation agreement.
The key question is whether the contractor gets the benefit of the consultant’s work carried out before novation, and whether the consultant remains liable for that earlier design.
For example, if an engineer made an error before the contractor was appointed, and that engineer is later novated to the contractor, who carries the risk?
The answer depends on the wording of the novation agreement and the main contract.
Some agreements make the consultant liable to the contractor for both pre-novation and post-novation services. Others may be less clear. This is why the QS and commercial team need to check the documents carefully.
The contractor should also check whether the building contract makes them responsible for all design, including design prepared before novation. If it does, the contractor may be taking on significant risk for information they did not originally control.
Design Ownership
The contractor must be able to use the consultant’s previous design information. This may include drawings, specifications, calculations, reports, models and technical submissions.
The novation agreement should make clear that the contractor has the right to use and rely on this information for the project.
Without clear wording, there may be uncertainty over who owns the design, who can amend it, and whether the contractor can rely on it if a problem arises. This is especially important where BIM models or specialist technical information are involved.
Collateral Warranties
Novation does not remove the need to consider collateral warranties.
A collateral warranty gives a third party, such as an employer, funder, tenant or purchaser, direct contractual rights against a consultant, contractor or subcontractor.
After novation, the employer may no longer have a direct appointment with the consultant. Because of this, the employer may still require a collateral warranty from the novated consultant.
A QS should check whether warranties are required, when they must be provided, and whether their delivery is linked to payment, practical completion or final certification.
Payment Issues
Novation can also create payment problems.
The consultant may have unpaid fees from before novation. After novation, the contractor will usually be responsible for future fees.
The agreement should clearly state who pays pre-novation fees, who pays post-novation fees, and what services remain to be completed.
If this is unclear, the contractor could inherit disputes or unexpected costs from before they were appointed.
What Should a QS Check?
A QS should check:
- Whether the consultant is liable for pre-novation design
- Whether the contractor can rely on previous design information
- Who pays outstanding consultant fees
- What services remain after novation
- Whether collateral warranties are required
- Whether professional indemnity insurance is adequate
- Whether the novation agreement matches the building contract
Final Thoughts
A novation agreement may look like a simple transfer document, but it can carry major commercial consequences.
For QSs, the key point is this: novation is not just about moving a consultant from the employer to the contractor. It is about transferring design responsibility, liability and risk.
Before agreeing to novation, make sure the paperwork is clear. In construction, unclear responsibility often becomes expensive responsibility.
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