Best Practice in Construction Contracts

In a modern building project, few documents are as important as the construction contract.

Get this right and you have the basis for constructive working relationships and positive outcomes. Get it wrong and you have a recipe for delays, disputes, acrimony, financial penalties and, in extreme cases, insolvency.

So what are the problems, and what defines best practice?

A critical problem revolves around ‘take it or leave it’ style contracts.  This is where the stronger party to a contract seeks to transfer the maximum possible amount of risk to weaker parties and refuses to negotiate on terms which are unduly oppressive or unfair. This is often achieved through special provisions inserted into the detail of purpose-built contacts. These have often been drafted by a legal team working on behalf of the more powerful contracting party.

Contracts which are not standard industry contracts, are invariably designed to transfer as much risk as possible away from the party drawing up the contract.

With the ‘take it or leave it contracts, invariably, they have been designed by very astute construction lawyers and these contracts have been tailored to impart as much risk as possible to the person who did not have that purpose-built contract drafted for them.

When presented with such a contract, contractors should read all details thoroughly and seek legal advice. This ensures that they will have an adequate understanding of the extent of risk they are undertaking.  Then they can make an informed commercial decision about how to manage it or whether to even take on the work. Once a contract is signed, little can usually be done and the contractor in question is locked in to the level of risk to which they have effectively agreed.

More generally, aside from special clauses or conditions, it is imperative for all parties to read the contract carefully and to take the time to get the details right. Even on smaller residential contracts, relatively straightforward errors are easy to make but potentially costly and difficult to unravel.

Below are some classic examples of where the fine, even obvious detail, is not correctly completed:

  • Failing to identify that risks usually covered by “standard” insurance policies have been converted to contractual liabilities, which are possibly not covered.
  • Failing to consider changes to the fundamental “excepted risks” that would increase risk, or cost exposure, far beyond normal practice.
  • Failure to accurately provide the detail of specifying whether the time frame allowed is ‘business days’ or ‘natural days’ could lead to the builder having less time than they thought in which to complete the work or the client making arrangements to move out of alternative accommodation before their new home was ready.

It is advisable to use standard industry contracts with standard industry contract forms wherever possible.

‘Take it or leave it’ contracts, which place overly onerous conditions on counterparties, can actually backfire on the parties who created them, especially where they result in unrealistic obligations, budget restrictions and time frames.

An example of this was reported in connection with the National Broadband Network. Media reports suggested that the agreements were unrealistic and overly oppressive with the contracting partners. As a result, NBN Co had to renegotiate contracts mid-project and then explain massive delays and cost overruns.

Beyond commercial considerations, basic ethics dictate that no party should be forced to endure oppressive contractual conditions.

Everybody needs to be able to make a dollar. If the contracts were fair and intelligently thought through, if they were robust, if the deductible levels for principal-arranged insurances were manageable for all trades, then there would indeed be less disputes, less insolvency and less unpleasantness.  There would also be less work for lawyers.

Based upon an article by Andrew Heaton – 26th May 2015 Best Practice in Construction Contracting

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Update from Glenn Ross

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Dear all Firstly a word to the wise: If you have been following the media relating to the construction industry, you will know that your clients