Ahmed's Blog

Top Clauses and Phrases to Look Out for in Construction Contracts

Behind the relatively simple signed contract agreement, construction contracts consist of many long, complicated and boring documents. At minimum, you will find Contract Conditions, Drawings and Specifications. This may make up thousands of papers and drawings, that parties neglect to study the contract documents in detail.

By agreeing and signing the contract, you will be bound by the conditions set forth in the contract conditions. You should therefore be very familiar with all the clauses contained therein and what they mean. Failure to understand the conditions properly will certainly lead to disputes later in the project.

Here are some of the most important construction contract clauses that you need to look out for and review before signing the contract agreement.

General Provisions #

Contract amount #

It goes without saying that you should ensure that the contract amount mentioned in the contract is the final agreed sum. Also make sure that the amount in words and in figures are identical. If your contract amount includes or excludes taxes, also make sure that it is clearly mentioned.

Project duration (Time for completion) #

As with contract amount, ensure that the project duration is as bid/agreed by you. Key milestones like site handover, access to site and commencement date of the project should be clearly defined, as they form the basis of most extension of time claims.

Variations #

Scope of works in construction contracts are most certainly bound to change and vary. Therefore, variation clauses are of utmost importance in a construction contracts. Such clauses should clearly define the cases of variation, variation instruction, and the course of action in case of an identified variation. Lack of clarity in this regard will give rise to lengthy and time-consuming disputes.

Omission #

Omissions are a type of variation that the employer omit part of the scope to suit their needs. However, contractors need to ensure that they are compensated for loss of profit due to omissions, and that the employer should not omit works to perform it (or arrange to be performed) by themselves. Otherwise, the employer may go bargain hunting, omitting parts which is most profitable to the contractor, causing financial issues to the contractor.

Conditions Precedent #

Condition precedent is an event which must occur, unless its non-occurrence is excused, before performance under a contract becomes due. Therefore, they could have serious consequences on your claims if you don't comply with it. Common conditions precedent include a timely notice as a condition precedent to claim, or requirements to submit as-built drawings and O&M manuals as a condition precedent to substantial completion.

While it is very difficult to negotiate your way out of conditions precedent, but having thorough knowledge of the requirements of the conditions precedent would make the contract administration a much effective process.

Payments #

Payment Provisions #

The contractor enters a contract to get paid. It is the primary obligation on the employer to make payment to the contractor against the work done by the contractor. Therefore, it is critically important to the contractor to review the payment clauses, to manage his cashflow. Provisions such as time for payment, the interval between each interim payment, minimum amount of payment, amount for material on site and the supporting documents required should be thoroughly reviewed.

Pay-If-Paid/Pay-When-Paid Clauses #

These classical clauses are present in almost all sub-contracts I have seen. A pay-if-paid clause shifts the risk of non-payment by the employer to the sub-contractor. Pay-if-paid clauses place a condition precedent of payment of the general contractor's money by the employer in order to pay the sub-contractor.

Pay-when-paid is a timing mechanism for payment, rather than risk-shifting, this may also mean that the main contractor shall pay to the sub-contractor within a reasonable time. However, it is usually unclear and lacks a specific timeline for making payments, giving rise to delayed payments.

Both clauses must be reviewed carefully and understand the risk at stake before agreeing to such terms.

Liabilities and Compensation #

Delay damages (Liquidated damages) #

Delay damages are pre-estimates of the loss that employer would likely incur if the contractor does not complete the works on time. They are not penalties but are compensation for damages incurred due to delays. Provisions for delay damages should have reasonable rate of delay damage, reasonable and clear extension of times mechanisms and a limit on the amount of delay damages the contractor must pay in case of delay.

Design Responsibility/Contractor's review of documents #

Many employers place responsibility for the design upon the contractor, even when the contractor did not design any part of the tendered works. Design responsibility could also appear in forms like "warranty" or "guarantee" that the "design will satisfy its intended purposes". If a contractor does not accept design responsibility, the contract must clearly reflect this.

Limitations on Liability #

Limitation of liability clauses are very important for contractors to provide financial cover in case of a contract breach that entitles the employer to compensation from the contractor.

Set-Off #

Employers are generally allowed to set-off amounts due to them from monies owed to the contractor (such as setting off delay damages from interim payments). However, care should be taken to limit this power to prevent the employer setting off money from the contractor for probable delays or other non-certain events.

Indemnities #

An indemnity is a risk shifting provision in which one party (the “indemnitor” or the “indemnifying party”) is under obligation to compensate and reimburse (or “indemnify”) the other party (the “indemnitee” or the “indemnified party”) for certain losses. Indemnity clauses should be carefully drafted to avoid introduction of un-necessary risks. Indemnity are usually acceptable with an appropriate limitation of liability clause agreed.

Termination #

Almost all contracts has termination provisions to allow either party to terminate the contract for several reasons and breaches by either party. Care must be taken to ensure that these reasons are not trivial and simple, to prevent the employer from go on bargain hunting. Also, the contractor must ensure that he is fully compensated for his loss of profit, material on site and other costs incurred in case of termination by the employer, for no fault by the contractor.

No damage for delay #

This clause basically states that the contractor's sole remedy to an employer's delay is an extension of the time for completion. This means any losses and costs incurred by the contractor due to an employer's delay is non-compensable. I dislike such provisions, which I consider quite unjust. If a contractor is ready to accept such clause, he should take this risk into consideration while preparing his tender.