What to think about before entering a Construction Contract.

March 10, 2024

By: tme

Ai Law Legal Services

A construction contract is a specific type of contract governing the relationship between a person and a contractor for construction work. Special rules apply to a contract that falls under the provisions of Part II of the Housing Grants, Construction and Regeneration Act 1996 (Construction Act 1996), as amended by Part 8 of the Local Democracy, Economic Development and Construction Act 2009 (LDEDC Act 2009) (the Act).

The Act is intended to address unfairness in practices between contracting parties. There are settled and well known standard terms for adopting in construction contracts that are often used amongst construction professionals for example, JCT, NEC.

A “construction contract” is defined in section 104(1) of the Construction Act 1996 as an agreement with a person for any of the-following:

  • The carrying out of “construction operations”. (Construction operations are defined in section 105(1) (see Section 105(1): “construction operations”).)
  • Arranging for construction operations to be carried out, whether under a sub-contract or otherwise.
  • Providing labour (either “his own labour, or the labour of others”) for the carrying out of construction operations.

A construction contract is defined widely and includes contracts with construction professionals. That is because (under section 104(2)), a construction contract includes an agreement “in relation to construction operations” to carry out architectural, design or surveying work and advice on building, engineering, interior or exterior decoration or on the laying-out of landscape.

A contractor does not have to accept responsibility for design, management or the supply of materials for a contract to come within section 104.

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.

Below are areas that you should review before entering a construction contract.

1. Agree Terms BEFORE commencing works.

It is not unusual to find parties have commenced works before a contract has been signed. This should be avoided as it can have serious repercussions if problems should arise. The purpose of the contract is to ensure each party understands its obligations and responsibilities.

2. Know who you are contracting with.

Contractors, employers, main contractors, sub-contractors. There are potentially multiple parties involved in a construction project. It is important to check and satisfy yourself as to who you are actually contracting with. your rights will be against that person should their be a problem.

Not only is it necessary in order to know how to enforce your rights against the other party (who may be required to enforce their rights in turn further up the chain), but also carrying out a background check on the company will reveal important information to you in respect of their business, means and ability to fulfill the contract. Depending on the size of the company, it may be prudent to consider additional protective terms such as an escrow account or payment in advance for company’s that have little to no track record. 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, so it may be necessary to enquire about payment terms in their contract above too.

3. Work to be undertaken

It is important for both parties to agree in advance what works are to be carried out and what materials are to be used. Agreeing a scope of works gives a clear framework for the parties to work to and makes it clear when there has been a breach or you need to take action to enforce your rights. Being specific in scope of works will be important.

4. Time frame

Equally as important to the scope of works, the contract should clearly specify the time frame for completion of the works. Delays in construction projects can be very costly, especially if they result in other sub contractors dealing with different parts of the construction being delayed. Damages can quickly rack up. As a contractor, it is imperative that you agree enough time in which to carry out the works

5. Price

In construction, particularly in large projects there are many variables. Things like delays, variations to scope of works, or increase in cost of materials can effect the price. Parties should ensure that the contract provides for variables and what happens if the cost increases. Employers will want certainty of cost, whereas contractors will want to  ensure that a provision for charging additional rates for a variation, or additional work, is included within the contract terms.

6. Payment

The payment terms for contractors working for a commercial client will be governed by the Act 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.

7. 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. The method of enforcing late payments in Construction Contracts under the Act are different to other commercial contracts, and it is important that parties are aware of upcoming payment dates and are prepared to serve the relevant payment or pay less notices within the required deadlines.

8. Disputes

The Act provides for specific actions that need to be taken in the even tof a dispute under a Construction Contract, particularly in relation to delays and late payments. Parties should be aware of their rights and have legal advice on hand to act quickly should the need arise. When reviewing the terms of the contract before entering, parties should pay attention to the dispute resolution provisions and ensure they are relevant to the project and suit the needs of each party.

8. Termination

A party will be entitled to terminate a contract due to a breach where that breach is fundamental to the terms of the contract. In this instance, knowing the required procedure under the contract to serve notice is imperative. Again, having legal advice on hand to act quickly will be very important and hopefully will increase the chance of finding a successful resolution to the problem or saving time and money in the long run, by taking the appropriate actions at the necessary times.

A Construction Contract is a specific type of contract that can be technical. Knowing your rights and acting promptly is key for parties to a construction contract. It is strongly advisable to have legal advice at hand, both to advise you on the content of your contract prior to signing and on an ongoing basis throughout the life of the contract, so that you can take proper advice in the event of any dispute to ensure you are protected.

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