The construction contract you prepare or sign up to has a big impact on the success of your project. Preparing or reviewing that contract properly and in context is therefore fundamental to your success.
In the first of a series of articles on procurement and contracts, we set out below some reminders as to how to approach a contract review. These apply whether you are a principal, a head contractor or a subcontractor.
Scoping the project
The most important thing to consider when reviewing a contract is context. If you do not understand the project, its background and what your business wants to get out of it, your review might be incomplete or inaccurate. Consider the contract in light of the project and its aims ie: does it adequately address the nuances of this particular project? Even with tenders, it is not just about pricing.
What is the purpose of reviewing this contract? If it is a tender, that will influence the way you approach the review ie: you might only look at key risk issues, and consider whether you need any contract departures. If you are reviewing the contract to brief your manager or board on what it says, you will probably focus on more than just the key risk issues eg: are there step in rights that affect your financing?
Another issue that can affect your review is the format used to set out the review’s results. If you are tendering for a project, it might be most efficient to draft the contract departures schedule from the Request for Tender while doing the review. If you are reviewing an existing contract to work out how to administer it, you need to prepare tables setting out what needs done when. Alternatively, if you are briefing a board, it might be preferable to use a memo format.
Contract reviews can be time-consuming, so planning your approach and outcome is usually time well spent.
Construction contracts can be long and are not always easy to read. This may sound ridiculous, but it is important therefore to read what the clause actually says, and not to get distracted or assume it means a specific thing. Minor changes in wording can sometimes have a major impact legally eg: indemnities, where the devil really is in the detail. We usually suggest clients try to have an open mind when reading a contract. Read it critically and ask yourself whether it actually means what you think it means. Even the most experienced contract reviewers need to be a little cynical when reading a contract.
One of the key issues in contract reviews is of course connecting the dots. How does the contract work together in practice? Are your indemnity obligations insurable? What about liability for consequential loss? Is there a liability limit? Your contract may contain a limitation on your liability, but it may also contain some carve outs from that limitation. In some cases, the limitation may actually be worthless if there are many situations in which it does not apply.
Red flag issues
While the list of key risk issues varies from project to project, we have highlighted some of the key ones below. Our subsequent articles in this series will expand on each of these topics in more detail.
Are there any preconditions to payment? Is the payment process consistent with the Building and Construction Industry Security of Payment Act 1999 (note this Act is expected to be replaced by the Building Industry Fairness (Security of Payment) Act 2017, although it is not clear when)?
Other clauses can affect payment, including set-off clauses, variations, latent conditions, changes of law and delay costs. For contractors, anything that puts hurdles in the way of getting paid is likely to be a key issue and should be identified in your contract review. For principals, those same hurdles can increase the pricing, so do you really need them?
As we all know, time is money on construction projects. So are the timeframes provided realistic? That applies to both the construction period and any tender period. If a tender period is very short, are you going to be able to submit a decent tender within the time? If not, should you bid?
Common issues relating to timing in the contract include programming, grounds for extensions of time and relevant notice requirements, liquidated damages, compensable delays and importantly, what constitutes practical completion. We will expand on these issues in our next article in this series.
Quality can be a subjective concept which means it is often the subject of disputes. Where possible, the contract should provide for clear standards, upon which the works can be objectively assessed to ensure that works are completed in accordance with the requirements of the contract. Issues like the standard of care, fitness for purpose and what constitutes defective works should be ironed out to minimise disputes.
Most experienced contract reviewers focus on key liability issues in any contract review. The revenue available from a contract is sometimes far outweighed by the liability you must accept, and can make the contract unviable. Issues such as indemnities, warranties, limits on liability, insurance, obligations to third parties (eg: a neighbouring owner) and references to related documents (eg: a head contract) can all seriously impact on a contract’s bankability.