Construction contracts include many documents other than the signed piece of contract including contract drawings, specifications and prevailing conditions of the contract. These are long documents which most parties to the contract ignore going through in detail.
Although a consultant party pays more attention to prepare the right contract document, the contractor or subcontractor neglect going through the contract thoroughly before they sign it. Reason can be due to lack of time which is common in most of the construction projects. However, when you read and understand the construction contract before you sign it, this will be the first step in avoiding future disputes.
Once you sign the contract you are bound to deliver the project within the contract period and within the agreed sum as per conditions in the contract. However if you missed out reading a specific contract clause or if you don’t have the correct idea of what it means, you may have to face issues during the construction phase which can lead to disputes and end with spending more money and time to solve those. You should have a proper idea on important clauses including how to deal with variations in a construction project, what are the retention money percentage, payment terms, and liquidated damages.
Therefore, below are some of the most important Construction Contract Clauses which you need to review before you sign the agreement.
Scope of work
Scope of work is the first thing you should check before signing your contract. In some contracts, the scope of work is defined as an attachment to the signed document. However, you have to read carefully the given scope and confirm that it is the scope that you offered your tender price or proposal. If the scope of work is not complex, it is best to include it in the main contract document. Nevertheless, if it is an attachment, it is necessary to mention about the attachment in the signing contract document.
Contract amount is the next important thing to check in your contract and make sure there are no mistakes in the sum. Most of the time, construction bid amount and agreed amount after negotiations are different. For some construction projects, there are several rounds of negotiations going on. Therefore you should track all these negotiations and discounts given in a proper manner to keep an eye on the final agreed sum. Check this figure correctly before you sign the contract. Your contract amount should reflect the tax amount or if it is excluded, then there should have an indication of excluding taxes.
Project duration is another important indication to check in any construction project agreement. You should check the anticipated project completion date including the project start date. Don’t ignore the importance of project commencement day as it is the basis for most extension of time claims. At the same time, check the expected site handing over date from the client. In case if the client fails to handover the site to the contractor to start the work on the proposed commencement day, the project may have a delay in completion. As a result, a contractor may have to face the liquidated damages to the client which is not a good idea for successful project completion.
Payment terms are essential for any construction project in order to manage the cash flow. As a contractor it is essential for you to deliver the project within a budget. In some countries, there is an advance payment provided. However, some countries do not provide any advance payment but progress payment will be made. Depending on the situation, you have to analyze the payment terms. If it is progress payment only, then you need to check the date for claim submission and period of progress claim response. It is also important to know in how many days you are entitled to get the payment. These details are important for you to deliver your project without cash flow issues.
After you check the main things to include in your contract such as project scope, contract sum, payment terms and project period, it is necessary to look into other clauses that are essential in proper project completion. Variation clause has such importance as this is one of the most discussed clauses during the contract administration. In most of the construction projects, there is a chance that variation to occur. These changes to original scope can be in way of addition or omission. Therefore it is necessary to include a clause in your contract regarding identifying variations, instructions to variations and the method of valuation of variations. If your contract document does not have a proper indication on how to act in the occurrence of a variation to contract, this can lead to disputes or many hours of discussions which in return waste of both money and time.
Well, most of the construction project ends up with delay in completion. This can be due to the nature of construction projects. This is why it is essential to implement proper contract management solutions. However, as a contractor, you should prepare on how to deliver your project on time without imposing liquidated damages. On the other way, liquidated damage amount per day should be reasonable too. Although you checked the documents for liquidated damages amount during your bid submission time, it is essential to check this figure and related clause before you sign your construction contract.
Although you expect to complete your project without disputes, you will face challenges and disputes along the way. Depending on the complexity of the project these disputes may arise. However most of the contract professionals and project managers know how to resolve disputes at the beginning of it without dragging as it impact the completion of project. But, we can’t predict.
At the end of the project if you have to seek litigation as your only method of dispute resolution, this may not sound good for you in terms of time, cost and reputation. In construction management or construction contract administration there are other alternative dispute resolution methods including negotiation, mediation, and arbitration. Check the disputes clause in your contract and see what the dispute resolution methods mentioned under this clause are. If the clause refers to alternative dispute resolution methods, it is better for you in the event of dispute arise.
Above are some of the important clauses that you should check before signing any construction contract. However there are other important clauses too to check such as retention money, warranties, indemnity and termination clause. Therefore, it is always recommended to go through your contract document thoroughly before you sign. If you do not have enough time to go through the contract document, you can ask industry professionals in your staff or seek consultant advice regarding the documents.
About the Author: Amila Gamage is the owner and Contracts Engineer of Sihela Consultants , a Quantity takeoff and Contract Administration consultancy firm. She is a Civil Engineering graduate and has experience in major construction projects from 2003. She has experience in working with clients from different countries.