Five key clauses to consider when negotiating your next construction contract
The importance of a sound construction contract is often overlooked when the need to ‘win the project’ or ‘get on with the job at a minimal cost’ are factors at play. When a construction dispute (inevitably) arises, it can cost your company hundreds of thousands, if not millions of dollars to resolve issues which could have been prevented by an expertly drafted contract.
In this article, we consider five important clauses to turn your mind to when negotiating your next construction contract.
The importance of the owner’s project performance requirements
The scope of work or employer requirements is a critical term that can easily be glossed over. This clause sets out the expectation of the owner, and it covers the work that the contractor will be responsible for, at the price stated in the contract. It is therefore of utmost importance that the owner includes all of its design and performance expectations in this clause and that the contractor has a comprehensive understanding of the scope of work and its performance duties.
Nothing leads to a variation dispute quicker than a misinterpretation of the parties’ contractual obligations.
Insolvency: A real issue in the construction industry
The construction industry represents 16.47% of Australian business insolvencies and is ranked second for Australian insolvencies, according to ASIC.
It is therefore critical that every construction contract adequately deals with a potential insolvency, especially considering the pyramid structure in construction projects and the detrimental flow down effect an insolvency will invariably have.
A good construction contract will:
- Provide adequate security for performance
- Establish ownership of materials on site
- Clearly set out the right to terminate and/or suspend work in the event of an insolvency event or a suspected insolvency event
- Clearly establish a right to ‘set-off’ and/or retain funds that may otherwise be due
An effective indemnity clause is a must
An appropriately drafted indemnity clause in a construction contract can increase your chances of recouping your loss as a debt as opposed to a claim for damages. This can have substantive procedural advantages should a dispute arise, and it could extend your claim to include for remote loss.
Liquidated damages – too remote?
A liquidated damages clause can be extremely effective in motivating each party to complete their contractual obligations on time. When drafted correctly, it can significantly reduce time and cost spent on litigation down the track, because the damages are fixed. Watch out for your calculation of liquidated damages, if the price is too high the Court could interpret it as a penalty and render the provision unenforceable.
Dispute Resolution clause – consider content carefully
Each party to a construction contract should carefully consider the dispute resolution method it commits to in the construction contract, especially because courts will seek to uphold properly drafted dispute resolution clauses. It is in all parties’ best interest to have a dispute resolution clause that provides for a quick, cost-effective and fair resolution of project related disputes. Some dispute resolution methods to consider include mediation, conciliation, expert determination and/or arbitration.