Construction Contracts: The Kinds, the Essential Elements, and the Legal Difficulties
Construction contracts are among the important contracts of the building sector, governing the relationship between the owner (the project's principal) and the contractor (who carries out the work), and setting out the obligations and rights of both. Such contracts serve to fix the scope of the work, the cost, the period, and the legal terms governing the carrying out of the project. As construction projects have grown more elaborate and the parties involved more numerous, it has become necessary to understand the types of contract, their essential elements, and the difficulties they meet.
What a construction contract is
A construction contract is a legal agreement under which works of building, erection, maintenance or renovation are carried out against a consideration the parties agree. That consideration may be a fixed sum or may be calculated on the actual cost of the work.
The Types of Construction Contracts
Construction contracts fall into several kinds, according to how the cost is fixed, how the work proceeds, and what the parties are bound to. Chief among them:
- The lump sum contract
A fixed price is set for the whole project, whatever the actual costs the contractor bears.
It suits projects whose designs are final, clear and settled in advance.
It places on the contractor the risk of costs rising through unforeseen causes.
- The cost plus contract
The contractor is reimbursed the actual costs of the project together with a margin of profit agreed in advance.
It gives the project flexibility, but may drive the cost up for the owner.
It is used chiefly in projects requiring continual change while the work proceeds.
- The unit price contract
A price is fixed for each unit of work — the square metre or the tonne — and the total cost is then calculated on the quantities actually carried out.
It suits projects whose final cost cannot be fixed precisely at the outset.
- The design and build contract
The contractor undertakes both the design and the execution, which reduces the difficulties of coordination between different parties.
It suits projects that must be completed quickly and where design and execution need to work as one.
- The turnkey contract
The contractor is bound to hand the project over to the owner complete and ready for use.
A final price is agreed covering all the works through to full operation.
It is used in major projects such as factories and government buildings.
- The operation and maintenance contract
Under it the project is operated and maintained for a set period after completion.
It is used in projects needing regular attention, such as infrastructure and public facilities.
Essential Elements of a Construction Contract
For a construction contract to be complete and to provide the parties with legal security, it must contain several principal elements, among them:
- Identifying the parties
The names of the contracting parties (owner and contractor) must be given, with their legal character and their addresses.
- Describing the scope of the work
Fixing the compass of the project, the materials to be used and the techniques required, so that execution is unambiguous.
- The price and the manner of payment
Fixing the value of the contract and how payment is to be made — advance payments, payments by stage of completion, or payment in full on delivery.
- The program of works
Fixing the period for completing the project and the stages of execution, so that the dates set are met.
- Penalty clauses and compensation
Including penalty clauses for delay or for failure to meet the agreed specifications.
- Terms governing variations
Setting a mechanism for dealing with any variation in the scope or the specifications while the work proceeds.
- Terms of acceptance and handover
Fixing the standards and procedures by which the project is accepted and handed over between the parties.
- Warranties and liabilities
Making plain the period of warranty after handover and who is liable for any defect appearing within it.
- The mechanism for resolving disputes
Fixing how legal disputes are to be dealt with, whether by arbitration, mediation, or the courts.
The legal difficulties of construction contracts
Construction contracts meet a number of legal difficulties that may affect the course of a project. Chief among them:
- Delay in carrying out the project
This may arise from a shortfall in funding, from delay in the supply of materials, or from technical difficulties, and leads to legal disputes between the parties.
- Disagreement over cost
In some cases the contractor claims additional costs not agreed in advance, which gives give rise to financial disputes.
- Failure to meet the technical specifications
The work carried out may not accord with the terms agreed in the contract, which calls for court proceedings or to arbitration.
- Emergencies and force majeure
Natural disasters or economic crises may affect the carrying out of a project, which calls for clear clauses addressing such cases.
- Delay in payment
Under some contracts the owner may be late in settling what is due to the contractor, which may bring the project to a halt.
How to draft a strong construction contract
To secure the success of a project and reduce disputes, the following steps are best followed in preparing a construction contract:
- Use precise and clear legal language, so as to avoid conflicting readings.
- Fix the responsibilities of the parties in detail, so as to prevent misunderstanding.
- Include clauses addressing emergencies and force majeure, so that the project may continue.
- Set a mechanism for resolving disputes by alternative means such as arbitration, so as to reduce cost and time.
- Engage a lawyer specialising in construction, so that every legal aspect of the contract is covered.
Construction contracts are the legal frameworkwork governing the performance of building projects, and they play a pivotal part in specifying the financial and technical obligations of the contracting parties. As modern projects have grown more intricate, it has become necessary to draft complete contracts that protect rights and reduce legal disputes. By using the type of contract suited to each project, and by including clear clauses covering every operational and financial aspect, projects may be brought to success and their endurance secured.