An Introduction to Construction Contracts

Construction projects can be highly complex and risky, particularly when they involve significant financial investments or where multiple stakeholders are part of the project. If you do not enter a clear and well-drafted contract, your business may face disputes (and associated delays and unexpected costs). A well-drafted construction contract can help you manage risk by clearly setting out the roles and responsibilities of each party and addressing associated risks. Every project is unique, so you must tailor your contract to the specific scope and risks. This article considers construction contracts and how they can help protect your business from risk.

Who are the Key Parties in a Construction Contract?

A construction contract defines the relationships and responsibilities of the parties involved in a project. Typically, the parties will be the client (sometimes the employer or the principal) and the contractor responsible for the construction work. 

In the construction space, agreements often exist with consultants such as architects, engineers, and project managers regarding the design and oversight of the project. A project may also involve subcontractors for specialised tasks, in which case there will usually be a construction subcontract between the contractor and the relevant subcontractor.

Each party has a distinct role, and the contract should clearly allocate risk between them. It should also outline the scope of work, the contract sum, and requirements regarding the quality of the work. 

Construction projects can be challenging, and you may need various documents or niche contractual provisions (such as consultant appointments, collateral warranties, parent company guarantees, and performance bonds) for your specific project. These documents can be complex and experience heavy negotiation. It is essential to assess your project carefully from the outset to ensure you cover all aspects. 

Why is a Robust Construction Contract Important?

A well-drafted construction contract can provide a legally binding framework to minimise misunderstandings and risks and encourage smooth project execution. The contract can help establish each party’s responsibilities, establish clear timelines, ensure quality standards are met, lay out how and when payments will be made, and set clear grounds for termination.  

A well-drafted contract enables you to implement strong mechanisms to facilitate variation and extension of time claims and reduce the risk of a project being derailed altogether. It can also set out remedies, such as liquidated damages (where the contractor is late in completing the works) and delay damages (where the builder is delayed, including by the client). 

Unforeseen issues (such as defects, design errors, or site conditions such as asbestos or contamination) often arise during construction and impact both time and cost. A well-drafted contract will help your business clearly allocate risk and determine which party must take responsibility for these issues. Without such risk allocation, disputes can quickly escalate, delaying projects and increasing costs. 

What are Common Standard Form Construction Contracts?

In the UK, published standard-form contracts provide a reliable contractual framework for many construction projects. These contracts are well-known and used in the market as a base for contractual negotiations.

The most commonly used standard forms include:

• JCT Contracts: This suite of contracts is widely used in medium— to large-scale projects. They tend to be lengthy and are less suitable for smaller projects; and

• NEC Contracts: These standard-form contracts are popular in the public sector and infrastructure projects.

JCT and NEC contracts tend to be the most common standard form contracts. However, depending on the project’s needs, other options are available, including contracts issued by the Association of Consultant Architects (ACA). 

Amendments

Although standard-form contracts can provide a strong framework, parties often need to modify them to fit a project’s specific requirements. 

Common amendments include adjusting payment schedules and timelines or adjusting the risk allocation, particularly to accommodate unforeseen site conditions, delays and recent changes in the law. Often, these standard-form contracts experience heavy amendments, so they barely resemble the standard form.

However, when amending the standard forms, you must draft carefully to avoid creating ambiguities or conflicts that could lead to disputes later.

Supplier Contracts Checklist

Use this checklist to ensure your supplier contracts contain all necessary terms.

Download Now

Applicable Laws

When drafting a construction contract in the UK, you must consider several key laws to ensure the agreement is legally sound. 

These include:

• the Construction (Design and Management) Regulations 2015 (CDM Regulations) require parties to follow strict rules regarding health and safety throughout construction projects. For example, rules include appointing a principal designer to manage risks in the design phase and a principal contractor to oversee safety during the construction phase of a project;

• the Housing Grants, Construction and Regeneration Act 1996 (Construction Act) gives parties which fall under its scope various rights, including a statutory right to adjudication for speedy dispute resolution and specific payment rules; and

• the Construction Industry Scheme (CIS) is a tax scheme that sets out rules for deducting tax from certain payments in construction work. It aims to improve tax compliance in the construction sector. 

The legislation governing building can be challenging to navigate, but parties to a project should take the time to understand the relevant rules and their implications. Failure to comply with these laws can lead to penalties and disputes. 

Legal Assistance

A construction lawyer can help your business ensure that your contracts are clear, tailored for your project, and comply with applicable legal rules. They can also help you understand what you are signing up for when entering construction contracts to help prevent misunderstandings that could quickly turn into costly disputes (common in the industry, considering common problems such as defects, delays and payment issues).  

Key Takeaways 

Building projects are often complex and involve multiple parties, significant risks, and complex legal obligations. A robust contract will help you clearly define responsibilities, allocate risk and prevent disputes from the outset. Seeking legal advice can help your business comply with mandatory legal requirements and keep your projects on track, limiting the chance of conflicts arising. 

If your business needs help with a construction contract, our experienced contract lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

Frequently Asked Questions