June 27, 2023

Five key clauses in construction contracts: essential knowledge for constructors before starting a project

Construction projects can be both complex and high-risk, making the legal agreements crucial to the success of a project.

Whether you are a developer, contractor, or sub-contractor, a well-drafted contract can protect your interests and set out a clear process for potential disputes further down the line.

Here are five key clauses in construction contracts that are crucial to review before starting any project.

  1. Scope of work

The scope of work is arguably the most important clause in a construction contract as it describes in detail what work is to be performed.

It should clearly define the extent and limitations of the work to be carried out, including precise specifications, drawings, and schedules. It should also indicate how changes to the scope of work will be addressed.

The scope of work can vary depending on the project, and changes are often made after the contract has been awarded due to various unforeseen circumstances.

A poorly defined scope of work can result in misunderstandings or disagreements about what was originally agreed, leading to project delays and cost overruns. To mitigate such risks, it is important to have a clear and mutually agreed scope of work clause in your contract.

  1. Payment terms

The payment clause governs how the contractor will be paid for the work undertaken. This includes the contract price, payment schedule, the basis for valuing work, procedures for issuing payment notices, and how disputes about payment will be resolved.

In construction contracts, payment term clauses must abide by the Construction Act. The Act provides parties with a right to payment throughout the contracted work when the works are programmed to last 45 days or longer. If no payment framework in the contract exists, the relevant statutory scheme may apply in its place.

  1. Variation clause

In construction, it’s not unusual for the client to require changes or additions to the original scope of work, known as variations. A variation clause outlines how these changes will be managed and how they will impact costs and schedules.

The clause should clearly detail the procedure for requesting, approving, and implementing variations.

This could include the requirement for written instructions, procedures for adjusting the contract price and completion date, and the contractor’s rights if the client requests many variations.

  1. Time and delay

The clause addressing time and delay establishes the project timeline, completion date, and the consequences of not meeting these deadlines. Importantly, it should also include provisions for extending the completion date in certain circumstances, such as delays caused by adverse weather.

Liquidated and Ascertained damages (“LAD’s”) are often included in this clause. LADS are contractually agreed upon sums of money for the losses caused as a result of a delay that the contractor typically has to pay to the employer if the works are delayed and no extension of time is granted.

However, this must be a genuine pre-estimate of loss, or it could be considered a penalty.

  1. Dispute resolution

Even with the most well-drafted contract, disputes can still arise. Having a dispute resolution clause in place provides a process for handling such disagreements. In construction contracts, the options usually include negotiation, mediation, adjudication, arbitration, or litigation.

The Housing Grants, Construction and Regeneration Act 1996 (also known as the Construction Act) mandates that every UK construction contract allows for adjudication, a relatively quick and cost-effective method of resolving disputes. Other methods like arbitration or litigation might be more appropriate for complex or high-value disputes, but they are usually slower and more expensive.

Every construction project is unique, with its own set of risks and challenges. However, by ensuring that your contract contains these five key clauses and that they are tailored to your specific circumstances, you will be well-positioned to safeguard your interests, manage risks, and set the stage for a successful project.

As always, it’s highly advisable to seek professional legal advice when entering any construction contract. For more assistance, contact us today.