Abigail Milner is a Partner in our specialist Construction Law team. In this article, she takes a look at why it’s vital to carefully review and understand a construction contract before agreeing to its terms, and explains the key terms to pay particular attention to so that you can successfully manage and reduce risk on a project.

Setting the scene

Perhaps you’re at tender stage or about to start on site and a substantial construction contract lands. This might be in the form of a totally bespoke set of terms and conditions, a voluminous set of amendments to the NEC form, or JCT contract, together with various appendices. You’re asked to agree to its terms and/or sign and return it as soon as possible.

Do you spend time carrying out a thorough review?

If you do, do you understand the language used and the implications of what you’re being asked to agree to? Rejecting onerous clauses and understanding the parties’ obligations under the contract is enormously beneficial and will result in reducing your risk on the project and help to save you time and expense. By going into a project with your eyes open, particularly to the higher risk clauses, can help to prevent and protect you from problems at a later date. We can provide you with concise and clear advice on the key risks with a report on the proposed contract being turned around quickly so you can get on with the job at hand.

What types of clauses should you pay particular attention to when you receive a contract?

Extent of obligations: defining the exact scope of work is arguably the most important part of a construction contract. It underpins the whole of the contract by setting out what you are contractually obliged to carry out for the agreed contract sum. It should set out in as much detail as possible the agreed work you will be carrying out and it is almost as important that it does not include anything which you are not carrying out and which you have not accounted for in the contract sum. The more detail, the better to help protect you if there is a dispute over the works you are obliged to carry out.

Be aware of a fit for purpose obligation which is sometimes included in the scope of work or elsewhere in the contract. This is a requirement that the works will meet a specified outcome irrespective of the level of skill and care used. This obligation is onerous and insurers are often unwilling to provide cover where it’s included. Recent case law includes a party that inadvertently agreed to a fitness for purpose clause finding itself on the wrong end of a £26m claim. The fit for purpose clause may not be obvious on the face of it so it’s very important that advice is sought if you’re unsure.

Contract sum: this is the agreed fee for the works set out in the scope of work. This should encompass the cost of carrying out all work which you are obliged to do. It is especially important to ensure that this sum covers everything that it should if the contract is for a fixed price, with no fluctuation provisions included meaning that if, for example, the cost of materials increase there is no mechanism under the contract to obtain an increase to the contract sum – which will remain fixed.

Termination: it is normal for the employer to have the ability to terminate the contract in certain circumstances, for example on the insolvency of the contractor, which is reasonable but watch out for a provision enabling the employer to terminate for convenience. This can be hugely problematic for a contractor especially if accompanied by a clause preventing the contractor from claiming any loss of profit as a result of such termination.

Risk allocation: are you comfortable accepting risk for those areas which have been allocated to you? Caution should be exercised before accepting responsibility for those matters which are outside of your control. Unforeseen ground conditions are commonly an area where responsibility is placed on a contractor however bearing in mind their high risk nature, it’s important that contractors carefully assess that risk before accepting responsibility.

Contract documents: it is extremely common for the contract to reference various documents ranging from architect’s drawings, a technical description of works through to third party contracts, all of which the contractor can be expected to comply with, take responsibility for and not put the employer in breach of. These documents may not be freely handed over at tender stage or indeed later on during contract negotiations. It’s important that you have sight of them and check that you are comfortable with the obligations being imposed on you regarding these documents. Pay careful attention to any design liability being imposed on you, particularly if you have not carried out that design as it might be excluded from your insurance policy.

Payment terms: it is vital to ensure that the payment terms meet your cash flow needs in order to successfully deliver the project through to practical completion. Make sure you understand what is required to get paid and that the payment cycle is short enough to ensure it doesn’t cause issues. This is particularly important where you have payment obligations to other parties including, for example, sub-contractors or suppliers. Any sub-contracts should ideally have a longer payment cycle than under the main contract to try and avoid these issues. Of equal importance is understanding your rights under the contract should you fail to be paid so that you can take swift steps to get cash back into the business and prevent serious issues.

Time bar clauses: these set a deadline for submitting a claim under the contract for things such as extensions of time and loss and expense. If you fail to submit a claim within the stipulated time frame you will lose the right to claim what you are seeking. These clauses can be very prescriptive as to the contents of any claim, often including a requirement to include specific supporting information. Falling foul of this sort of clause can prove catastrophic for a business in preventing them to obtain much needed relief and they are very onerous.

Completion requirements: it is important to check that you’re able to carry out the completion requirements in order to achieve practical completion. These can often be lengthy and not only include the conclusion of the physical works but also things such as handing over certain documents, obtaining any necessary approvals, testing of the works, and other matters which may be outside of your control. Resist agreeing to any conditions which may be problematic to achieve.

These are just a some examples of clauses to be wary of when considering signing a contract but is by no means intended to be exhaustive list. It is also important to bear in mind that the true consequences of certain clauses may not be clear both on the face of it due to the legal jargon being used, and when considered in the wider context of the rest of the contract. It is crucial to seek advice from an appropriately qualified legal professional if you do not understand what you’re being asked to agree to; if not, not only will that leave you in a position where you can’t successfully operate the contract and thereby exposing yourself to huge amount of risk, but may also invalidate any insurance policy.

Need help?...

If would like any specific advice and guidance on your construction contracts then please contact Abigail Milner who will be happy to assist.

T: 01482 324252
E: amm@gosschalks.co.uk
Profile: Abigail Milner - Partner, Construction