There are several types of construction contracts used in the industry and there are certain types of construction contracts preferred and commonly used by certain construction professionals, for example, JCT, NEC.
Irrespective of the form of contract you’re faced with, its purpose is to define the parties’ obligations to each other. As such, it is important to understand exactly what you are committing yourself before you sign it.
It is not unusual for parties to commence works prior signing the contract. This should be avoided as it can have serious repercussions if problems arise. At the very least the parties need to understand the basics of their bargain.
The following list can be used as a general guide for anyone in the construction industry in order to make sure that contract terms work for them. If they don’t, attempts should be made to negotiate terms that are more reasonable.
1. Analyse who you are dealing with
Whether you are appointing a contractor, or have been appointed by an employer or main contractor, you must be satisfied that you know who you are dealing with. A simple background check on the company can reveal important details about a business particularly if it is a new company or an SPV with no money. If there is any indication that the company has a track record for litigation and/or bankruptcy, you may wish to incorporate other financial measures into the contract such as an escrow account, advance payment, or even request a payment bond as a condition of the contract. Establishing the source of project funding is essential. If you are employed as a subcontractor you will want to make sure that the main contractor pays you the money obtained by them from the employer.
2. Work to be undertaken
If you and the other party have a clear understanding of the building works to be undertaken such as the type of materials to be used or if a specific service is required, then ensure they are clearly incorporated into the terms of the contract. For example, if you have an agreed scope of works for the parties to rely upon, you must either include that scope of works into the terms of the contract or append the scope of works to the contract. This will provide the parties with clear guidance on the works to be undertaken.
3. Time frame
The contract should clearly specify a time frame for completion of the works. If you are a contractor, or subcontractor, responsible for delivering the services or goods, then you may want to make sure that you are allowing yourself enough time to complete the job. On the other hand, if you are the party receiving the goods or services, you will want to make sure that the proposed completion time scale works for you.
The contract should always include clear details of the price for the works. Be wary of additional charges that may not be covered within the contract. For example, any additional work to be undertaken outside the agreed scope of works, or any variation to the agreed scope of works, will often attract additional charges sometimes quoted on an hourly rate. Make sure you know what the additional fees are prior to signing the contract. By the same token, contractors must ensure that a provision for charging additional rates for a variation, or additional work, is clearly included within the contract terms.
Determine the terms of payment and whether it is appropriate to your financial situation. For example, the payment terms for contractors working for a commercial client will be governed by the Housing Grants, Construction and Regeneration Act 1996 which stipulates that payments will be due approximately one month after an application for payment has been made. For contracts with consumers you will need to specify when payment for the majority of your bills will be due. It is always helpful to specify the amount payable and whether it is to be paid as a lump sum or on an interim basis. You will also want to consider the method of payment: can you pay by cheque for instance?
6. Late payment
Consider whether late payment penalties are to be incorporated into the terms of the contract and whether the level of penalty is reasonable.
Whilst no party wishes to be embroiled in a dispute, there is always a chance that a dispute may arise through no fault of your own. Many contracts include a clause for alternative dispute resolution, which means that a dispute could be settled by way of mediation, adjudication or arbitration rather than in court. The dispute process may require you to send an initial letter or have a without prejudice meeting between the parties prior to issuing proceedings. You will need to satisfy yourself that you are aware of the procedure should a dispute arise.
Be aware of the terms governing termination. If you wish to terminate the contract due to a breach, be sure that the breach is in fact 'material' or 'substantial'. Be sure that you understand and follow the relevant notice provisions if you do decide to terminate. If you are not sure, you run the risk of wrongfully terminating ad putting yourself in repudiatory breach of contract.