To those unfamiliar with dealing with construction projects, it can often feel that seemingly straightforward schemes become unnecessarily complicated when it comes to pulling together the necessary paperwork. Coupled with the perception that construction projects are a breeding ground for disputes, businesses encountering construction on an occasional or one off basis could be excused for feeling a sense of trepidation. So how fair are those perceptions, and what are their underlying causes? What should you be aware of in preparing your business for a construction project?
Key objectives of a good construction contract
In essence, a construction contract needs to do three fundamental things:
1. It sets out the agreement of the parties as to what is to be built – how much money, how long it will take, and to what specification / quality;
2. It sets out mechanisms to enable changes to be dealt with – whether as a result of known risk events occurring or changes to the works being requested or required;
3. It allocates risk between the parties – with the agreed price reflecting the balance of the risk between them.
Much of any good construction contract will therefore concentrate on clarifying where the balance of risk is set between the parties, and the workings of the change mechanisms that are required. In other words, the contract needs to reflect not only the “day 1 intention”, but also to set an effective framework for dealing with changes through to the completion of the project. Donald Rumsfeld’s famous description of “known knowns”, “known unknowns” and “unknown unknowns” is apt in considering the change management procedures required.
Putting absolutely every risk on to the contractor (for example, for unforeseen ground conditions, contaminated land, exceptionally adverse weather during the build, etc) is possible in principle, but would lead to an exceptionally high price. A contract allowing no option at all for the contractor to be instructed to make changes to the design which the client has identified it wants would be unnecessarily inflexible. The balance of risk and the management of change are therefore fundamental to a successful project and a functional contract.
Mandatory requirements of the Construction Act
The parties do not have completely free reign as to what goes into a construction contract. A key peculiarity of construction contracts, which can often frustrate those not used to dealing with them, is the complexity of interim payment mechanisms. Their complexity flows from the need for them to comply with the mandatory minimum requirements of the Construction Act, which is an unusually interventionist piece of legislation, brought in with the express intention of maintaining cash flow within the industry. In English law, it is an unusually wide exception to the general ability of commercial parties to agree whatever terms between them they choose.
Where the parties fail to include payment provisions that comply with the requirements of the Act, default minimum provisions will be implied into the contract and will override any non compliant terms. There is obvious scope for unpredictable disputes to arise in such situations if the Act overrides the terms of a non compliant contract. There is also considerable scope for disputes where parties seek to operate the provisions of a compliant contract without fully understanding how they operate or the consequences of not complying with them.
The other non excludable right brought in by the Act (other than where the works are for a residential occupier) is the right of either party to a construction contract to refer a dispute to adjudication – regardless of what the parties may seek to agree in their contract. Adjudication is a fast formal dispute resolution process by which a party can refer a dispute to an adjudicator, who will reach a decision within as little as 28 days from the dispute being referred to them. An adjudicator’s decision is “temporarily binding” – that is, the parties must comply with its terms unless or until the matter is finally determined by court proceedings, or the parties reach terms of settlement. There is a fast track process in the High Court to enforce adjudicator’s decisions, meaning they have “teeth”. They frequently can catch out the unwary where a dispute is brewing, as the party on the receiving end of an adjudication has extremely little time to prepare and present their defence.
Third party rights and collateral warranties
More and more construction projects are being carried out where parties other than the signatory to the building contract require the ability to have direct comeback against the contractor. That may mean they can exercise “step in rights” to take over the contract if a problem happens during the build, or to have the ability to bring claims for any defects that arise after the project reaches practical completion.
Collateral warranties are often required by funders, landlords, tenants or related companies to give them that protection. It is important to ensure that the documents in place provide not only a right for them to exercise their rights but also a mechanism by which they can do so in a commercially effective way. Such rights will be sought not only against the main contractor, but also against the professional consultants on the project and key subcontractors, particularly those with material design responsibility for an element of the project.
Generally, where they are sought as part and parcel of setting up a project with proper documentation, they need not be contentious. Usually, problems occur where the parties required to give the warranties have been appointed under substandard documentation in the first place, particularly if those contracts / appointments do not place any requirement on them to provide warranties, either at all or in the way required. This can cause major difficulties where funders are involved, as they may well be entitled to refuse to allow funds to be drawn down until those matters are resolved.
So building contracts have a lot to do, in setting out what is to be built, putting in place change management processes, and balancing the risk between the parties – all whilst complying with the non excludable requirements of the Construction Act.
With proper, practically focused guidance, construction projects and the documentation required to enable them to function effectively should not render the projects any more difficult to risk manage than other commercial ventures. Whilst some disputes relating to construction projects do stem from the genuinely “unknown unknowns”, a large portion of disputes that we see arise from a failure either to put the right mechanics in place at the outset or a failure to operate the contract in accordance with its terms.
Ensuring that you have the right team of construction professionals – including construction lawyers – in place from the outset and treating the contract as being central to negotiation of the allocation of risk and change management process, rather than a last minute after thought, will give your project the best chance of success.