What to Look Out For in Your Construction Contract

What to Look Out For in Your Construction Contract

With any contract, there is going to be a few things that are standard and some major points you really need to take note of. This article will set that out for you and guide you on how to read your new construction contract.

Table of Contents

Insurance

Irrespective of being a construction contract or a franchise one, insurance is a must. One of the first things your head contractor is going to ask to see proof of is your insurance details, and there is a high chance that you won’t be allowed on site without it. Whether it was directly your fault or not, there will be a time that you will need this insurance. The Government provides the direct link to iCare where you can obtain such insurance.

Depending on the value of the project, you will need different types of cover, but it is all organised through iCare. It is legally required that you have Principal Arranged Insurance (PAI) for projects valued at over $10 million. Once it’s under $10 million, it is no longer required just optional.

Cutting corners on site can be disastrous, and easily avoidable. The result can end with serious injuries and even death. Keep yourself protected and have your own insurance for every job no matter how small or large. It’s a small price to pay for peace of mind when something does go wrong.

Australian Standards

When reading your contract, you may come across a few common phrases. Standards Australia sets out these standards to ensure a safe work place for employees and home owners. They also exist to keep contracts equal for both parties. If the below phrases are absent, it usually means the builder has drafted their own contract entirely from scratch. This is where you have to be weary.

In any business, you’ll encounter the bad apples and the good ones. This is why it’s good practice to try and review everything yourself first before you ever sign any contract. A contract lawyer can always review it for you if the language is too complicated and there are too many pages. The small price you pay now will help ensure you don’t potentially loose thousands or millions later down the track.

  • AS 4300 – General conditions of contract for design and construct;
  • AS 4000 – General conditions of contract for construct only;
  • AS 2124 – General conditions of contract; and
  • AS 4902 ­– General conditions of contract for design and construct.

These standards are only voluntary, not compulsory. They aim to ensure the practice of the industry is safe, as well as being safe for others in the community. They are implemented after many months, sometimes years of review by experts in the industry, meaning nothing is outrageous. Even if your contract does not contain these, it may be a good idea to read up on some of them yourself so you are aware of good general practices.

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Watch out for these

Keep in mind, if you don’t agree with some of these terms you are able to actually request for it to be amended. Chances are they may not want to amend, but it shouldn’t stop you from trying. Sometimes you may reach a middle ground where both parties have to compromise. This is still better than loosing out due to unfair terms entirely.

Liquidated Damages

Liquidated damages are a sort of compensation payment you’ll have to pay if you don’t complete the job on time. It’s unreasonable to have no liquidated damages as the head contractor needs a clause to cover themselves if you have delayed their job. They take 100% of the liability from their client so the deadlines for them are very serious.

This is not to say that if you genuinely need more time to complete the job you will be penalised. You are able to ask for legitimate extensions of time, as explored below. For the clause to be good and fair, it will have a cap on how much liquidated damages the contractor is entitled to in total. They shouldn’t be able to endlessly claim this damages, because that leaves you in a very vulnerable position.

Another good feature is a clear deadline for the job. This allows you to properly and efficiently organise your job and do your best to complete it on time. No contractor wants to go through the headache of claiming liquidated damages. It is not in their best interests financially or for their reputation. It is merely a clause to protect themselves, and to ensure that you can keep up with the workload.

Extensions of Time

Extensions of time (EOT). All construction programs run late, and that is a fact of the industry. Suppliers run out of stock, weather intervenes and personal obligations that your employees have all affect the deadline. There is no way to avoid it, so you’ll have to ask for EOT.

The clause might states that EOT is allowed as long as written notice is given within a few working days of discovery. This is an example of a good EOT clause. A bad clause would mention that EOT is not allowed at all, or that it will automatically incur liquidated damages.

Warranties

It is good practice to provide some sort of warranty on your products or manufacturing in this industry. As the expert in that field, you are responsible for ensuring the building or site is able to operate as it intends using your services/products. However, you can strategically limit this liability to prevent endless service call outs that will eventually eat into the profits you made from that job.

One example is the window industry. Providing a desirable 6 year warranty on manufacturing, but only 12 months on hardware. This means you will return to fix anything that doesn’t operate as it’s supposed to for 6 years, but any locks and handles can no longer be covered under warranty after 12 months.

It is highly crucial that the wording you use here protects you. State clearly that this warranty period starts upon delivery or installation of your product or service. Once it’s no longer under your control on your work premises, the use of the products has now begun, which means warranty should also start.

Conclusion

There was a lot to unpack from that article as contracts are a very complicated area. Practice makes perfect, so allow yourself time to get used to reading these types of contracts. Until then, have a lawyer review all your contracts beforehand to point out problem areas. The general rule of thumb is that you’ll want your contract to be fair to both parties. Be reasonable, understanding and realistic is what you ask for, and you should not only work well with the contractor, but also avoid stress.

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