The construction industry is a world of huge variety. At Damian James, we’ve worked on large scale mega projects like sports stadia, railways and power plants. We also regularly support smaller construction firms, contractors and sub-contractors working on small to medium scale projects across the UK and around the world. Whilst the projects specifics may vary, the contracts, and legal or contractual challenges can often be similar.
In this article, we look at why paying attention to the contract is just as important – whether you’re building a skyscraper or a small residential unit.
Why contracts are important
Being an SME often has its benefits. A smaller management structure can allow for quicker decision-making processes, allowing you to react to challenges, employ innovative solutions and change direction when necessary.
But this shouldn’t mean you relax your contractual processes. The commercial side of any business needs careful focus and attention. Construction contracts, however simple, should define the scope of the works, technical requirements, timelines and most importantly how and when payment will be made.
Failure to understand the contract is a top cause of construction disputes. The construction industry is an adversarial place, so it’s crucial you ensure you understand and control as many risks as possible from the very inception of a project.
It can be tempting to start work before the final contract terms are agreed. In times like this, a letter or intent is used until the contract can be finalised. But a word of caution. Sometimes, like in this recent case, agreement cannot be reached, and a contract is never signed. In this case the contractor found the cap on fees in the letter of intent was binding, and therefore they were out of pocket to the tune to £300,000. For more on the risks of working under letters of intent, take a look at this article.
Choose the right contract
So you need a contract, but which to choose? It might be tempting to reach for the standard form you always use. However, no two projects are alike, so it is worth considering your options.
You’ll know there are a number of common options: lump sum, design and build or cost plus. Each will vary, so it’s important to consider which is the most appropriate for your project’s needs. Issues like design responsibility, risk allocation, project delivery timelines, competency and budgets will all be covered by the contract you choose.
If negotiating a contract or contract terms, consider whether the contract being suggested is appropriate for the size and scale of the project. Keep a careful eye on where your liabilities and obligations lie (see below). Are there any hidden costs such as insurances or obligations in terms of unexpected risks, like weather, or delays by the employer which might create additional cost risks?
Understand Your Contractual Obligations
This brings us nicely to obligations. Make sure you know your contract inside out. Understand what you are obliged to do. Pay particular attention to payment terms and change management processes. These are common areas where people go wrong.
As the project progresses, refer back to the contract regularly. Don’t be afraid of observing the formal requirements of giving notice of delay or change as required by the contract. Provide accurate, clear notices of any changes and costs or time incurred.
A positive working relationship is important for successful projects. However, that shouldn’t be at the cost of observing contractual obligations. Often being unwilling to notify of risks and change during a project can lead to acrimonious disputes towards the end. Avoid these, by early notification and positive communication.
What Happens When Things Go Wrong?
It can be tempting to bury your head in the sand when things start to veer off track. That is potentially the worst approach. The first step is to communicate up and down the supply chain. Keep everyone informed of any issues or challenges and what you plan to do about them. Sometimes disputes can be avoided if everyone involved is proactive and pragmatic.
Secondly remember to document everything. Of course, you should be doing that from the outset. However, at the first signs of trouble, make sure you get all your records in place. Refer back to your contract documents and assess your options. Make sure you comply with obligations relating to notices. Consider keeping files or a database which contains records relating specifically to certain matters. This article gives some helpful advice.
When it comes to formal disputes, you have a number of options. The most common in the UK is adjudication. Designed to keep cash flowing, adjudication is a statutory right under construction contracts in the UK. You can refer a dispute to an adjudicator, who will decide the merits of the case (usually) within 28 days.
Not every case is suitable for adjudication, and you may need to look at other options. Good advice is crucial should you find yourself in a dispute. It may be that there are other options available to you before you ‘go legal’.
Get in touch with our team today, for a no obligation chat about the particulars of your project.
For more tips on managing construction contracts – download our guide for SMEs.