Construction Contracts are an important part of every construction project, and as a subcontractor, it’s a massive benefit to know what they contain. A good contract will protect your interests in the event that something goes wrong with the project, and it will also help you determine what your rights and responsibilities are.
You should know the build up of a construction contract including which items have a large bearing on the amount of risk you’re exposed to as a subcontractor. Who wouldn’t want to minimise the potential downside to their business?
A good contract will also protect both parties from unforeseen events and changing circumstances during or after completion of work. Every contract will include clauses about what the work covers, how long the work is expected to take and who has to do what. Some of the more important clauses covered are about money, including how and when you’ll get paid as a subcontractor.
They will also contain a clause on breach of contract which details when and how either party can terminate this agreement, and finally there will be a dispute resolution clause.
Contracts are not a substitute for poor business practices
A very important and often overlooked point!
A contract is not a substitute for poor business practices, audit controls or effective risk management. In other words, if you don’t manage your subcontract, and the client relationship properly or put the right systems in place then it doesn’t really matter what sort of contract you have, they can still end badly!
What is a construction contract?
A construction subcontract is a type of construction contract between two or more parties, where one party (in this case the subcontractor/construction company) agrees to carry out construction work for and one or more other parties (usually the Client or Main Contractor) provide the money to fund the construction work.
Knowing what a good contract looks like will protect your interests in the event that something goes wrong with the project, and it will also help you determine what your rights and responsibilities are. You should know the build-up of a construction contract including which items have a large bearing on the potential dispute you’re exposed to as a subcontractor.
But a contract can also be a lot of other things, says HGCRA. Payment provisions apply to all “construction contracts”. Falling foul of those payment terms, resulting in non-payment, can result in the main contractor requiring to make a payment. Failure to pay less notice is arguably the end of the matter when it comes to a claimant’s entitlement to be paid.
Do I have a Construction Contract?
Essentially, if you are completing work on a construction project or as part of the project then your work should fall under a construction contract. If you don’t have a written contract between you as the subcontractor and the main contractor then basically, make sure you do! It’s critical for both parties to have a good understanding of the risks that they are taking on with this type of agreement
Ask the Main Contractor (your client / employer) to provide a written contract prior to you starting any work on-site, there are a number of things it has to include and we will cover this later in this article.
What is a construction contract under the Construction Act?
Construction agreements are defined by the Housing Grants, Construction and Regeneration Act 1996 (HGCRA). It includes agreements to do architectural, design or surveying work and to provide advice on building, engineering, interior or exterior decoration or on the laying out of landscapes in relation to construction operations and only covers certain industries. The document includes a contract for the carrying out of construction operations and arranging for construction operations by others and providing labour, to do the construction work.
The Construction Act (HGCRA)” is a complex topic that we address in a future post, and it covers a huge amount of operations you would anticipate construction, repair, maintenance, demolition and commercial building. Also includes works forming part of land including walls, roads, power lines, phone masts, runways, docks, harbours, industrial plants and coastal protection. Site clearance, excavation and excavation works are all included. Also included are the works to the inside of buildings such as fit-out, heating, mechanical and electrical and electrical systems, fire protection, security, communications systems and even cleaning works are included. So pretty much anything you might imagine being necessary is included in construction operations.
Your construction agreement should comply with the Construction Act, which we walk through in a future post.
What are the main items covered by the Construction Act?
For subcontractors the main items to be worried about are as follows:
Pay when paid clauses and behaviour is disallowed.
Subcontractors are allowed interim payments i.e to be paid at stages agreed with the main contractor
You have the right to be told how much is going to be paid to you and what is being withheld via a Payment or Pay Less Notice.
You can suspend performance (your work) if no payment is made.
If a dispute is raised and cannot be resolved then Adjudication should be allowed to reach an agreement.
Types of Construction Contracts / Agreements
Main types that most Main contractors use will be either JCT of NEC contracts. The NEC is generally used on much larger or complex projects, often ones that have a public body or local authority as the end-user.
The vast majority of projects would use a JCT contract and therefore we will run through the different JCT contract types used.
In most cases, the overall subcontract agreement you have with the Main Contractor will replicate a large number of the clauses and conditions made in the agreement between the Main Contractor and the Client. The popular contract types include the following:
- Design and Build Contract (D&B)
- Standard Building Contract (SBC)
- Major Project Construction Contract (MP)
- Intermediate Form of Building Contract (IFC)
There are many more in the JCT suite of contracts but if we just listed them out we would be adding confusion.
What are the components of a contract?
The main components that you need to understand as a subcontractor could be summarised as follows, each of these is split down into lots of headings and clauses but the headline items for you to review in your subcontract agreements would be:
Articles of Agreement
This generally includes for
Recitals,
Articles,
Contract Particulars and
Attestation (signing page)
Conditions
The number of conditions can run into the hundreds, but a summary would include:
Contract Sum
Dates including possession, completion and any stages in between
Dealing with changes
Payment Intervals
Payment Application and Due dates
Schedules
Drawings
Schedule of Work
Scope of Work
Employers Requirements
Planning Documents
Ecology Agreements
Material Specifications
This is only a brief summary of the key points that should be included in your subcontract agreement or contract with the main contractor. You are responsible for carrying out tasks and work on the project as outlined in your contract, and it’s extremely important to understand what is required of you when you sign it.
Lump Sum or Fixed Price Contract Type
A Lump sum contract is preferred when a clear scope and a defined schedule has been agreed upon. These types of an agreement involve a total fixed contract price for all construction-related activities. On a lump sum contract, it is often harder to omit for work not completed, so consider it when analysing this if a Main Contractor suggests it. Generally, Subcontractors need to include an additional percentage to the cost to cover the risk associated with carrying out the work.
An alternative to both of the options above would be a Guaranteed maximum price, usually used on design and build contracts, and would be the ultimate way for a contractor to pass the risk over to a subcontractor. Essentially, if the costs for the works is higher the subcontractor will incur the cost.
Time and Material Contracts When Scope is Not Clear
A Time and materials agreement is preferred when the project scope is not clear or has not been agreed upon. Sometimes an owner wants to establish a cap or specific project duration to the contractor that must be met. Time and material contracts are useful for small scopes or when you can make a realistic guess on how long it will take to complete the scope. Costs should be classified as direct, indirect, markup, and overhead, and should be included in the contract. Sometimes the owner might want to establish a ca or duration to be met, in order to have the owner’s risk minimized.
Cost Plus Contracts
Cost Plus contracts are not as frequently used on construction projects and generally use either a JCT Prime Cost or a JCT Cost Plus agreement, (potentially a hybrid contract of the two) or an NEC3 Option E contract. These require specific information about certain pre-negotiated amount. Costs must be detailed and should be classified as direct or indirect. Be aware that a cost-plus agreement is difficult or harder to track.
How a Construction Contract Agreement Works
Contract should include sections to protect parties on both sides of the deal. Prices should always be negotiated before a contract is signed. Both parties should agree to the terms of the agreement before any project begins. A Contract can be negotiated, signed by both parties, before any work begins, to avoid confusion and disagreement.
The Scope of Works
Scope of Work is meant to provide a clear description of the work that is to be performed. It can be written for all the parties involved and included in the Employers Requirements but more often than not they will explain the detailed works required for a specific contractor. This will go into the detail of exactly what you as a subcontractor need to include in your work, your tender and your cost for the overall project.
Project Changes and Change Orders (Variations)
Project Changes and Change Orders clauses are meant to detail how any changes you make to the agreement will be dealt with by the construction company or Main Contractor. This will give the outline of who and how any changes can be made to the work and cost of your agreement.
It will normally be only one or two named people from the Main Contractor that can agree to these adjustments and they should be completed using specific Contract or Site Instructions. There are a number of different terms used for Changes or Variations and different main contractors like to use different terms. Ensure you know exactly what each subcontract agreement says you and the main contractor should do if there is a change.
Most Common Issues with the Scope of Work
It seems to happen with a large number of projects, the methodology of work, exact materials to be used or information about the workmanship required can often be the source of disagreement on a project. This can sometimes be due to a misinterpretation of the scope.
If these issues arise during construction, it can sometimes lead to issues overpayment & disputes arise from it.
Avoiding a dispute with your employer or Main Contractor is normally the best policy, however, some circumstances lead to the need for Adjudication.
This normally has the inevitable result of a delay in being able to resolve disputes, and often will delay the construction of a project.
What is included in relation to Payments?
The Construction agreement will include a number of items relating to payment. This can be anything from the cost of the project through to how often the Main contractor will be making a payment in addition to how and when you should be applying for payment.
As the construction of a project progresses, the employer or contractor will periodically, which is normally on a monthly basis, certify what amount of work has been completed to allow payment to be made. Not understanding these details in your agreement could result in a payment being missed or paid a month later than planned. Review your payment schedule, who you need to send the application to and how it should be presented.
Reading your documents and understanding them in full is the key to ensuring the project is successful for you.
As previously highlighted, the Construction Act is a guiding light on the subject of payments. Main Contractors who don’t comply with the Construction Act have previously swept these issues under the carpet. Upskilling you knowledge on the Construction Act could be the turning point in your control over the payments you receive from those main contractors who don’t also play ball.
Most Common Issues With Delays
If a construction project is taking longer than expected, builders and contractors may be able to extend the timeline unilaterally. Subcontractors may also be compensated for delays that are not their fault. The consequence of this is that the construction project may take longer to complete than what was originally expected, and you will be paying extra for your costs as a subcontractor.
Delay provisions in the contract will generally fall into one of two camps, either allowing for just increased time or increased costs as well.
A construction contract is a document that specifies the rights and duties of both parties. It’s important to be aware of what your responsibilities are in any given situation, as well as the risks you may incur if something goes wrong with the construction process. A good construction contract will protect your interests in the event that something goes wrong with the project or it will help you determine what your rights and responsibilities are.
A Construction agreement is a necessary component in the construction industry, and it’s important to be aware of how they work. When you’re a subcontractor, it’s important to speak with your client about what will be in the construction contract and how things work.
It is also important to have a thorough understanding of the clauses that are included in such agreements because they can dictate who gets paid for certain portions of projects. Included in this would be the key points of the Construction Act and what they mean for you.
This article provides some insight into what parts typically go into a contract as well as tips for reading through them. If you want more information on this topic or need help drafting one yourself, feel free to reach out!
We have a number of other articles linked to Contracts and other elements of the Commercial Framework, check them out below:
10 Tips for a Successful Pre-Start Meeting
Retention in Construction Contracts
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