What are the basics in a construction contract?
If you’re wondering how to decipher a construction contract or what clauses you should look out for, this article breaks down some key construction contract elements that may trip you up.
It is worth keeping in mind that multiple documents might be part of the construction contract.
Inclusions and Exclusions
This is an important section for both parties (principal and contractor). It outlines what work will and will not be completed under the contract and by extension, it shows what is being received for the price.
Inclusions: This should be a detailed outline of all of the work to be completed and the products used. The principal should consider whether the products are of the desired quality (e.g. particular roof tiles) and whether any works discussed have not been written into the contract.
Exclusions: The items which are not included in the contract are also listed. There could be a broad clause that only the items covered in the contract will be performed or it could specifically list tasks which are not covered (e.g. light fittings, driveway). The principal should factor the additional cost of covering these exclusions into their budget.
A variations clause enables the principal to request changes to the work or services provided, however, they come at a cost. The contract usually sets out a specific process which needs to be followed to claim a variation.
A clear payment method and payment schedule are beneficial for the principal and contractor. They reduce the rate of missed payments and ensure both parties rights and obligations regarding payment are clear.
The payment schedule informs both parties of the time and amount of money to be paid for each progress payment. For example, common progress payment stages in a home build could include deposit, slab completed, frame stage, roof stage, internal fixing, painting and completion. There should also be a procedure for extending the payment schedule in the event of a delay.
Provisional sum items and prime costs
A provisional sum is an allowance (based on a reasonable estimate) for a task (supply of product and cost of work) that cannot be priced at the time the contract is entered into. Unlike fixed-price items, the final cost of a provisional sum item is adjusted once the final cost is known. This allows the principal to enter into the contract to commence work without completely finalising the design. Provisional sum items and the adjustment method should be carefully reviewed to ensure that the principal is not left with a much larger sum for the work than envisioned.
Prime costs: A prime cost is similar to a provisional sum except it is for the cost of an item (e.g. fitting) and does not include the cost of work. Prime costs enable the principal to enter into the contract without making a final decision about particular items.
Defect liability period
This provision provides for a period of time in which the contractor remains responsible for repairing and rectifying defects. It acts to guarantee that the work will be completed to the standard set out in the contract and recognises that certain defects will not be reasonably detectable when the project reaches practical completion. The period is often 6 or 12 months from the date of practical completion, however, it may be longer. During this time, the client will likely retain a security to ensure the contractor completes the repair work.
Time bars are provisions which invalidate a contractor’s claim if they do not make the claim or notice of the claim within a limited period of time. As the contractor, if you are unable to negotiate the removal of these clauses, it is important you are aware of them and any time-sensitive obligations under the contract.
Warranties are an assurance about the quality of the goods or services provided. The principal may be able to claim compensation for a breach of warranty. The contractor needs to be aware of their obligations under warranty clauses to mitigate liability.
Indemnity clauses require a party (e.g. the contractor) to compensate the other party (e.g. principal) for loss, damage or expenses arising from particular events. The scope of indemnity clauses may be exceptionally broad and this should be looked out for.
Consequential losses refer to indirect damage/loss caused by a breach. The contractor will often seek to exclude their liability for consequential losses under the contract.
Liquidated damages clauses provide fixed, pre-determined monetary compensation for a breach of contract. They are beneficial in removing the cost and time expended in litigation and also provide added certainty that the project will be completed on schedule. Read more about liquidated damages here.
Deciphering a construction contract can be quite a challenge. However, it is crucial to understand your contract in detail so that you know your legal rights and responsibilities. Hopefully, this summary helped to understand some challenging provisions in a construction contract.
If you need any assistance drafting or reviewing a construction contract, get in contact with us on 1300 337 997.