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10 Essentials for an Effective Construction Contract

It is often said that there are five essentials to a (legal) contract: offer, acceptance, intention,
consideration and certain terms. Whilst technically correct, this is not the most helpful approach.
Intention, in the sense of intending the agreement to be legally binding, is presumed to exist in a
business to business context. What lawyers call consideration - in other words, the price or a
promise to do something - is anything of value, and can be as small as a peppercorn. And any
promise of offer to act, which is agreed by a nod, handshake or email, creates the requirements for
offer and acceptance.
This guide highlights 10 terms which are essential to developing an effective construction contract,
not just a legally binding one!

1.

Parties
It should be crystal clear which companies or organisations are entering into this contract.
You should check that the document correctly records the parties company names,
registered numbers, registered offices (or similar for a partnership) as well as addresses to
send notices to.

2.

Works
Well defined works are essential to project success. Many disputes arise from a lack of clarity
as to what precisely the works covers i.e. what is included in the price. The description of
the works should be wide enough to cover all incidental elements such as site security, site
services, power, utilities, temporary infrastructure, piling etc.

3.

Time/Dates
Clear dates for works commencement and completion are critical markers for any
construction project. The programme for the works should be realistic. Without stated dates,
the parties have to provide the works and/or services within a reasonable time. It is usual to
leave the contractor to plan an appropriate rate of progress.

4.

Price
All contracts need to balance the price to be paid with the risks, duties and liabilities to be
accepted. Not only should the total price, and any additional taxes payable, be clear but good
payment practices are essential to the smooth running of the works and solvency of the
project team. Fair payment practices should be adopted i.e. those which provide smooth
cashflow throughout the supply chain.

5.

Quality
Time, cost and quality are the trio of client requirements for any construction project. Quality
covers (1) quality standards for goods, (2) performance requirements for works, and (3)
standard of care for services. These standards must apply throughout the project team.
Clarity of standards is critical - the 2012 case of Trebor v ADT shows how failure to set clear
standards can result in 110m of losses.

6.

Objectives
Although more commonly associated with partnering contracts, any construction project
requires the parties to work together and co-operate if it is to be a success. The contract
should be clear what success means for this project and these parties. Where the contract
sets out clear objectives, motives or KPIs then it is easier for the parties to achieve them.

7.

Risks
Good project management requires the early identification, allocation and management of
risk events. While it may seem simpler to ignore risk, disputes commonly arise when parties
do not agree which party is responsible for the management and minimisation of cost and
time consequences, as well as related insurance issues.

8.

Rights/Remedies
Unless you only want to rely on being able to bring a claim for breach of contract
(adjudication or litigation), your contract should set out clear additional rights and remedies
for the parties. Common clauses in construction contracts which set out additional
contractual rights or remedies include: the right to an extension of time e.g. for changes and
employer breach and a remedy allowing the employer to deduct LADs for delay; the right to
ask the contractor to rectify defects1; contractor remedies for disruption and prolongation;
rights for either party to suspend and/or terminate; and rights to interest on late payments.

9.

Admin
In most construction contracts there are clear mechanisms for testing, issuing changes and
instructions, payment notices, certificates of completion, snagging lists and document
review. Although these dont often change the responsibilities of the parties, the clarity of
these mechanisms and procedures is important for the smooth running of the project.

10. Limits/Exclusions
Although not common in construction contracts 2, there are a number of ways by which the
parties can agree to limit or exclude their liabilities. These can help balance the
consequences of risk events with the rewards being offered. Examples include: (a) clauses
which list types of loss that a party will not be liable to pay; (b) a clause confirming that this
contract contains all terms relating to the parties' agreement; (c) setting a cap on the amount
of damages a party will have to pay, either for a specific breach e.g. LADs for delay, or a
maximum cap for all breaches; (d) excluding remedies that would otherwise be available;
and (e) express limitation periods for all or specific claims.
It is important to remember the key purpose of a construction contract is to record, with certainty,
all relevant elements of the parties agreement in relation to the project.
It also needs to clarify:
the division of roles and responsibilities largely in relation to works, price, time, and quality;
how the project will be managed by administrative mechanisms, and rights/remedies;
how risks are being managed by setting out how the consequences of risk events are to be
allocated and linking these to the rewards recoverable; as well as how in practice the parties will
reduce uncertainties on the project.
The Author
This overview is provided by Sarah Fox, a speaker and trainer who helps you write simpler contracts
and understand complex ones. She is also author of the 500-Word Contract.
To find out how she can help you, send her an email: sarah@500words.co.uk or ring her: 07767
342747.

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There is no right in most construction contracts for the contractor to return to rectify.
Limitations and exclusions are used more extensively in engineering contracts.