Contracts | Part 1: Why are Contracts so Important in the Construction Industry?

November 28, 2017

We’re about to launch our brand new ‘Construction Guides to the Law’ and we thought we’d give you a sneak preview on the content. This week we’re looking at contracts in the construction sector and why they’re so important.

The construction sector is heavily contractual. And it should be! Many parties are involved: employers (those who “buy” the construction works), the contractors (those in charge of the works), the sub-contractors (those to whom certain parts of the works will be delegated), the professional consultants (the experts), the suppliers (where materials and equipment come from). And independently of the type of building to be delivered in the end, a wide range of areas are covered: design, engineering, management, building, warranties and guarantees – just to mention the more generic ones.

Setting out where you are and what you have to do in this complex chain is absolutely essential so there can be no confusion throughout the process and there are clear routes to resolving any potential conflict.

What is usually called a “construction contract” is the contract between the employer and the contractors. It is where they define what has to be built and how. There is a wide range of legal structures and standard forms available to construction businesses. Choosing the most appropriate to the size and characteristics of your project and managing it efficiently is key to the success of the project. Each structure allocates activities, remuneration and risks in a construction contract differently so it is key that you understand very well what you are signing up to. The most important aspects of a construction contract – and from where most of disputes arise are:

  • The definition of the scope, i.e. what exactly has to be done, and what happens if the changes are required or desired along the way;
  • When the works have to be concluded and what happens if they are concluded on time;
  • When payments are due and what happens if they are not paid on time;
  • Technical specifications and quality and performance requirements and what happens if the agreed standards are not met;

Make sure you pay close attention to these issues in the contract itself and in the many schedules that constructions contracts usually have to deal with all the technical stuff required to build or renovate a building or part of it.

The construction contract often walks side by side with agreements with the professional consultants, subcontractors and suppliers. It may seem hard work – and it is. Don’t underestimate this task! It is worth making sure all these agreements are compatible, work well together and don’t contradict each other, legally nor commercially or technically. It will save a lot of time and money on disputes in the future.

Depending on the size of the project, warranties for performance and completion of the works are very likely to be required as well. The bigger the project, the more relevant they become – and more items will be added to the list of contracts ruling the construction project.

If you want to build for a public authority you have to observe the procurement rules set out in the invitations to tender or any similar document. Private employers can set out their own procurement requirements as well. If that’s the case, you have to comply with what is being requested. Otherwise, you will hardly be awarded the works.

And don’t forget that signing the contracts is the beginning of the construction adventure! Construction businesses depend a lot on good contract management to perform well. You have to monitor what is happening to all these contracts and make sure everybody is complying with what has been agreed – and if not, you have to give the appropriate notification of that. A lot of disputes in the construction sector relates to issue in contract management, in particular failure to register properly that there was a problem and how it should be handled (see part 3 of the practice guide to understand more about disputes and how to deal with the situations where you don’t have a signed contract in place).

So, have you got all your construction contacts sorted? What do you find challenging when dealing with them?

Next week we’ll continue on the contract theme and look at some of the essential legislation that construction contracts are governed by.

Carla Caroli, LawBite Corporate and Construction LawBrief

To consult with Carla today about your construction contracts, whether you’re a one-man band or a large organisation, you’re welcome to submit an enquiry for a free 15 minute legal consultation about your needs. Or call us today on 020 7148 1066.

 

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