Contracts for building and construction projects are a big deal. The purpose of a Construction Contract is risk management hence using the right clauses in a contract can prevent conflicts, disputes and huge financial losses.
Based on my experience working on Construction Contracts for more than 15 years, lets explore a few key provisions that should be included in your contracts.
1. Scope of Construction Work
This may be the most crucial element of a Construction Contract. The contract's Scope of Work is an essential component that outlines the work to be done and the party who is ultimately responsible for it. It also serves as the basis for revisions or variations. Therefore, it must be precisely described and detailed. For instance, stating that "The Client hereby appoints the Developer to construct 100 housing units" is insufficient. Instead it should read, " The Client hereby appoints the Developer to construct 100(One Hundred) housing units of 2 (Two) blocks, comprising of 40 (Forty) Units of 1 (one) bedroom flats, and 60 (Sixty) Units of two (2) bedroom flats, at xyz Village, Ikorodu Local Government Area, Lagos State Lagos.
If the scope of work is complex, it is advisable to add it as an attachment to the signed main contract. It can include Bills of Quantities, Drawings, and Letters of Award, however it is important to refer to the attachments in the body of the contract. You must also specify that the Developer shall supply the materials, tools, equipment, and labor for the project, if this is the case.
No project is perfect, hence there is a possibility that variation shall occur. A variation is an change to the original scope of work defined in the contract by way of addition or omission. Unless a variation is requested, a Developer is required to carry out the works exactly as they were intended; otherwise, they would be in violation of the agreement.
To avoid disputes, it is essential to include a clause in your contract regarding identifying variations, instructions to variations and valuation of variations. When the Developer is asked by the Client to change the work, the change would done as detailed in the contract.
3. Project Duration
It is crucial that the Construction Contract has a clearly defined stipulated period, in order to prevent lawsuits and financial losses due to delayed delivery.
Important elements in a Construction Contract include the estimated project commencement and end dates. The site must be handed over to the Developer by the Client on the commencement date so that work may begin on schedule; otherwise, the project's completion may be delayed.
However, an extension of time should be possible in the event of unanticipated occurrences or other circumstances beyond the Developer's control. These also must be detailed in the contract
4. Contract Sum
The next crucial component of a Construction Contract is the contract sum. A wrongly stated contract sum often results in disputes.
All factors that can affect the contract sum, such as fluctuating exchange rates and changes to the Scope of Work, must be taken into account by the contract.
To manage cash flow, the payment terms must also be clearly defined. Will there be an advance payment? Will there be milestone or instalmental payments?
5. Defects Liability Period
The Developer has a window of time known as the " Defect Liability Period " during which he can rectify any hidden defects he finds in the building or that the Client brings to his attention.
The usual procedure in construction is for the Client to hold onto 5% of the Contract Sum until after the Defect Liability period, which is typically a 12-month window following the practical completion of the works and the handover of the works to the Client. The Client shall issue a Certificate of Completion to the Developer and pay the retention sum upon the developer's satisfactory completion of the remedial works.
However, to avoid disputes, it is crucial that the contract defines clear provisions on the duties and obligations of the parties throughout the Defect Liability Period. There have been disputes arising from situations where the Client fails to notify the Developer of defects in the work, within the Defect Liability Period and refuses to pay the Developer the retention sum. There have also been disputes arising from the Client insisting on performing the corrective work by themselves.
6. Insurance Policy
The representatives of the Client and Developer at a construction site run the risk of death or injury, damage to the project or property and financial losses. Therefore, the parties must choose a comprehensive insurance coverage to limit or eliminate their liability in any of these situations.
7. Dispute Resolution
Although you expect to complete your project without disputes, you will face challenges and disputes along the way. Hence the parties must determine how their disputes will be resolved preferably through Alternative Dispute Resolution methods including negotiation, mediation, and arbitration.
Seeking litigation as the only method of dispute resolution, may not be advisable as they can be lengthy and expensive.
In conclusion, it is important that the above provisions are included in your Construction Contract alongside other. important clauses such as , Warranties, Indemnity, Termination clauses. etc.
This article is a general guide regarding Construction Constructs.