Ten things to consider before signing a construction contract

There are ten things you should consider before signing a construction contract.

Whatever form of contract you are using and whether you are a contractor, sub-contractor, consultant or the employer, it is vital you consider these ten questions before you sign anything.

1.Who are you working with?

It sounds really obvious, but you should be sure you know who you are contracting with. If you have any concerns, such as financial worries, you may want to re-consider or incorporate additional terms into your contract. These could include an escrow account, advance payments, payment bond, performance bond, retention of title and/or parent company guarantee.

If you are the employer you want to be confident that the contractor/consultant will be around to finish the project and if you are the contractor/consultant you need to know who is paying you and that funds will be available to complete the project.

2.What is required and to what standard?

Both sides should be as clear as possible on the buildings works and/or services to be undertaken. You should also set out any particular materials, techniques or standards required.

The contract should address how variations (additional work, omissions and change in requirements) are dealt with, in particular the effect on cost and time.

3.When will the work be carried out?

A construction contract should include a start and completion date. If you agree to a completion date, especially one with delay damages, you need to be confident that you can achieve that completion date and the contract permits extensions of time.

Both sides should be practical and reasonable at the outset as to the timeframe.

4.Who carries the risk and who insures?

If your construction contract is a building contract, it is imperative that risks are allocated up front and as early as possible. There is no point dumping all the risk on the other side as they will only increase their price. Therefore you could end up paying an inflated cost for risks that you are better off bearing yourself or can obtain insurance for.

Both sides will need to consider insurance. Who is best placed or able to obtain insurance and does the construction insurance invalidate any existing insurance?

5.What is the price for the work and how will payments be made?

Sometimes it is not possible to fix the price at the outset. A mechanism should be included in the contract for pricing the cost of the planned works (unless possible to price at the outset), any additional work and/or deduction reduction in price if some of the works are not carried out for whatever reason.

To a certain extent payment terms will be governed by legislation. Irrespective of whether legislation applies it should be clear in the contract when payment is due. Will they be monthly or stage payments? Is someone signing off payments? Also, you need to consider how payment is going to be made – by bank transfer, cheque or some other means.

You should address interest on late payments, ensuring that the level of interest is reasonable.

6.Can you terminate the contract if you need to?

You need to be clear on what grounds the contract can be terminated. Do you just want either party to have the power to terminate it for a material breach, or would you prefer the right to terminate at will, for example if you simply change your mind? It is important to get this right because if you terminate a contract incorrectly you end up being in breach of contract yourself.

The effect of termination, such as paying for works to date, cost of completing the project, ownership of copyright in the designs etc, should also be addressed.

7.How are defects dealt with?

If your contract is a building contract you should consider how defects are addressed. Do you require a retention, if so how much and when will it be released? Also, is a defects period (the period of time in which a contractor is contractually obliged to remedy any snagging) appropriate? If so, how long should it be?

8.Are limitations/exclusions of liability appropriate?

A contractor/consultant might want to consider limiting their liability or excluding certain types of liability. Great care needs to be taken when drafting such clauses as they could be constructed as unlawful meaning that they are unenforceable.

9.What if you find yourselves in a dispute?

If you have addressed the areas already covered, there is less chance of a dispute. How disputes are dealt with should, however, be addressed in the contract. Again, this may be governed by legislation. You could consider different (potentially cheaper) means of dispute such as mediation, adjudication and/or referring to a senior level within the organisation you are contracting with.

You should include a governing law and jurisdiction clause so you don’t have to enforce a contract in a different jurisdiction or find yourself subject to foreign law without good reason and prior knowledge.

10.Are you signing a deed or contract?

Finally, you need to consider how the contract is signed whether as a contract or a deed. The limitation period for actions brought under a deed is generally 12 years as opposed to six years for a contract.

For for information on this issue, contact our Corporate and Commercial team. For advice on handling a construction dispute, please contact Peter Lamble on 01872 246200 or peter.lamble@coodes.co.uk