What to consider before entering into a construction contract

Tue 18th Feb 2020

Commercial Disputes lawyer, Abi Lutey, outlines some of the common issues that can arise when entering into a construction contract.

Construction projects don’t always run smoothly and can take up more time and resources than originally anticipated. Delays, changes and extra costs can lead to one contractor or employer making a claim against the other.

If you are entering into a construction contract, it is important to be aware of the more common issues that may arise.

Keeping to deadlines and securing extensions

Most building contracts detail an agreed completion date. If the contract does not specify a date by which the work should be finished, a term is implied which requires the contractor to complete the works within a ‘reasonable time’. This often gives rise to litigation.

A contract will also allow for and set out the procedure for securing an extension of time to ensure the project is completed. Contractors must take care to adhere to these procedures and request an extension if they fear they will not meet the contractual deadline. If contractors fail to do this then their client could have a right to claim damages, withhold payments or terminate the contract completely and appoint a replacement contractor.

Can a contractor seek compensation over loss of profits?

In instances when work has been disrupted, the contractor must show that they are either entitled to more money under the terms of the contract, or that the employer has breached the contract.

In both cases, the contractor must demonstrate their right to additional payment and set this out in ‘heads of loss’. This can include:

  • Loss of profits
  • Cost of collating the claim
  • General disruption
  • Finance charges and overrun costs.

The best protection for contractors in this situation is to ensure the contract caters for these potential situations.

Can I make a claim for the cost of variations?

Variation claims may arise for a number of reasons. The employer might need to change certain items of work that were left out of the contract, different work might be required or the agreed works cannot be carried out.

When a party wishes to vary the work that the contractor agreed to carry out, the variation must be made under the contract, as opposed to a variation to the contract. This means that the scope of the works change but the contract stays the same.

It is important to ensure that the construction contract provides for such a variation by defining what a variation is and sets out the procedure for carrying out and valuing the variation.

What can a contractor claim back if there was no fixed price for the work?

A contractor can claim for a payment under quantum meruit, which seeks a reasonable sum for the work done and the materials supplied by the contractor.

This claim arises when the parties have not contracted to pay an agreed total, for example:

  • There is no agreed contract
  • There is no fixed price for the work
  • The agreed payment is for a ‘reasonable sum for the works done’
  • The relevant work is outside the scope of the contract. For example, the contractor does additional work at the client’s request and those works do not fall under the contract’s variation clause.

Be aware of the defect clause in your constriction contract

Defective work is a frequent issue in both residential and commercial construction projects. Most standard form contracts contain a defects liability clause, which usually requires the contractor to return to the site to remedy any defects.

It is important for employers and contractors to ensure a defects liability clause is included in the construction contract and for the parties to consider:

  • That there is a difference between a patent defect, which is detectable at the time of completion or the end of the liability period, and a latent defect, which is concealed and does not manifest for several years.
  • That, where a contractor takes responsibility for the design and construction of the works, an employer may be able to make a claim for a defect caused by negligent design and/or substandard workmanship.
  • That the contractor will only have an automatic right to return to the site and remedy the defects if the contract’s defect liability clause allows them to.
  • That the employer must normally give the contractor notice of the defect to operate the defect’s liability clause.
  • That a defect ordinarily constitutes a breach of contract by the contractor.

Make sure cash retention sums are clear

Most building contracts entitle the employer to keep a percentage of the value of the work carried out until completion or making good of defects. This is known as a ‘retention’ and payment of this would be the ‘release’ of retention.

The contract should state when the employer is to release the retention. Usually half of the retention sum should be released on completion of the works and the other half to be released at the end of the defects liability period when the certificate of making good (of defects) is issued.

It is important to make provisions for retention sums when drafting contracts and be clear that sanctions exist in the event that payment is not made.

How can Coodes help?

Coodes has a vast level of experience in working with the construction industry. We understand the commercial factors involved in a building dispute and work hard to try and resolve the matter in a commercial manner. We will always provide a frank review of the options available to you to make sure that any legal remedy reflects the commercial realities of your position.

For more information on this issue, contact Abi Lutey in Coodes Solicitor’s Commercial Disputes team on 01872 246200 or abi.lutey@coodes.co.uk

Tue 18th Feb 2020

Abi Lutey

Head of Commercial Dispute Resolution

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