In a modern building project, few documents are as important as the construction contract.
Get this right and you have the basis for constructive working relationships and positive outcomes. Get it wrong and you have a recipe for delays, disputes, acrimony, financial penalties and, in extreme cases, insolvency.
So what are the problems, and what defines best practice?
A critical problem revolves around ‘take it or leave it’ style contracts in which the stronger party to a contract seeks to transfer the maximum possible amount of risk to weaker parties and refuses to negotiate on terms which are unduly oppressive or unfair. This is often achieved through special provisions inserted into the detail of purpose-built contacts which have been drafted by a legal team working on behalf of the more powerful contracting party.
Professor Kim Lovegrove FAIB says contracts which are not standard industry contracts are invariably designed to transfer as much risk as possible away from the party drawing up the contract.
“With the ‘take it or leave it contracts, invariably, they have been designed by very astute construction lawyers and the contracts have been tailored to impart as much risk as possible in the province of the person who did not have that purpose built contract drafted for them,” he said.
“There are an abundance of very tough, very oppressive building contracts that are not standard industry contracts. Rather, they are contracts that come from a set of very carefully and astutely prepared precedents that are designed to ensure that as much risk as possible is migrated to the other party.”
When presented with such a contract, Lovegrove said contractors should read all details thoroughly and seek legal advice. At least that way, they will have an adequate understanding of the extent of risk they are taking on from which they can make an informed commercial decision about whether or not to take on the work. Once a contract is signed, he said, little can usually be done and the contractor in question is locked in to the level of risk to which they have signed on.
More generally, aside from special clauses or conditions, it is imperative for all parties to read the contract carefully and to take the time to get the details right. Even on smaller residential contracts, Housing Industry Association senior executive director of business, compliance and contracting David Humphrey said relatively straightforward errors are easy to make but potentially costly and difficult to unravel.
Not getting signatures of all landowners on a construction contract, for example, could lead to the builder arriving on site and finding that not all parties had agreed to the work or there was a dispute. Errors in property addresses on greenfield sites could lead to work starting at the wrong address or plans submitted to council being wrong. Errors on the price specified in the contract could lead to an awkward situation of being stuck with a lower contract price than had been intended. Even not specifying whether the time frame allowed is ‘business days’ or ‘natural days’ could lead to the builder having less time than they thought in which to complete the work or the client making arrangements to move out of alternative accommodation before their new home was ready.
“It’s important not to rush into things,” Humphrey said. “You’ll have a client who is keen to do this and you will have a builder who is keen to sign up a client. Everyone wants to get going and get something in place; the client will want to lock in a good builder.”
“Spend a bit of time. Make sure the details are right.”
Both Lovegrove and Humphrey added that it is advisable to use standard industry contracts with standard industry contract forms. Humphrey noted builders should be wary about any contracts which allow the developer or client to nominate their own tradespeople for certain trades on the job whom the builder will be required to engage. This, he said, will result in a situation of the builder being legally responsible for the work of parties whom they did not themselves select as tradespeople. He said builders should either insist on the ability to choose their own subcontractors or try to exclude the work of the tradesperson in question from the scope of the building contract.
It should be pointed out that ‘take it or leave it’ contracts which place overly onerous conditions on counterparties can indeed backfire on parties who created them, especially where they result in unrealistic obligations, budget restrictions and time frames. An example can be seen through the National Broadband Network, where what media reports suggest were unrealistic and overly oppressive agreements with contracting partners saw NBN Co having to renegotiate contracts mid-project and explain massive delays and cost overruns.
Lovegrove said beyond commercial considerations, basic ethics dictate that no party should be forced to endure oppressive contractual conditions.
“If I was to say what is in the best interests of the building industry, be fair and share the risk,” he said.
“Everybody needs to be able to make a dollar. If the contracts were fair and intelligently thought through, if they were robust, then there would indeed be less disputation, less insolvency and less unhappiness. And there would be less work for lawyers."