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IMPORTANT PROVISIONS TO LOOK OUT FOR IN A CONSTRUCTION AGREEMENT.

Updated: Mar 28, 2023


A well-drafted construction contract is essential for all construction projects. It protects both the contractor and the owner by outlining their rights and obligations. Therefore, it’s vital to ensure that all the necessary clauses are in place to avoid disputes, conflicts, huge financial losses and ensure a successful construction project. Based on my experience working on construction contracts for more than 15 years, let us explore a few key provisions that should be included in your contracts.


Scope of Work

The scope of work in a construction agreement typically includes a detailed description of the work to be performed by the contractor. This must include the project description and deliverables. It must also specify the materials and equipment required for the project, including any specifications or standards that must be met.


A detailed scope of work outlines the technical specifications for the work to be completed, including any engineering or architectural requirements and site-specific requirements related to working in a specific location, such as zoning or building codes.


Health and safety requirements must also be detailed, including any regulatory requirements and risk management procedures.


Overall, the scope of work in a construction agreement should provide a detailed description of the work to be performed, the timelines for completion, and the expectations of both the owner and the contractor


Variation

No project is perfect, hence there is a possibility that variations may occur. A variation is a change to the original scope of work defined in the agreement by way of addition or omission. To avoid disputes, it is essential to include clauses in your agreement regarding identifying variations, instructions for variations, and valuation of variations.


The usual legal process for variation is that the owner or the contractor should formally notify the other party of the proposed change. The notification should include details of the proposed variation, its impact on the project's timing and cost, and the reasons for the change. After the other party has received the notification, the parties should discuss the proposed variation and work towards reaching an agreement. The agreement reached should be documented in writing and signed by both parties.


The initial agreement may need to be amended to reflect the variation agreed upon by the parties. If this is the case, both parties should sign the amended agreement to signify their acceptance. Once this is done, the proposed variation can be implemented.


It is important to note that, in some cases, the variation may result in a change in the contract price or project completion date. If such changes are significant, they may require further negotiations and agreement. Also, it is advisable to seek the advice of a legal professional in any variation that could significantly impact the contract or project.


Payment terms

The payment terms clause outlines the agreed payment schedule for the project. It should include the amount, frequency, and mode of payment, which can be vital in avoiding disputes.


Payment terms in a construction agreement usually include a payment schedule outlining when the contractor will be paid, either as a lump sum or a series of payments based on project milestones, such as the completion of certain stages of the construction. The payment terms may include a retention sum which is the amount held back from the total payment until the project is completed to the client's satisfaction. The clause also specifies the penalties or interests for late payments or defaulting on payments.


It is important to have clear payment terms in a construction contract to avoid misunderstandings or dispute 


Project Duration

This clause details the timeline for the completion of the project. It outlines the start and completion date, milestones, and deadlines for different stages of the project. This clause can be crucial in preventing delays and ensuring that the project is completed on time. It is crucial in order to prevent lawsuits and financial losses due to delayed delivery.


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


Defects Liability Period

A Defect Liability Period (DLP) clause in a construction agreement stipulates the period of time after the completion of a construction project during which the contractor is responsible for addressing any defects or issues that may arise in the project. It usually starts from the date of completion or substantial completion of the project and typically lasts from six months to one year.


The DLP clause requires the contractor to correct any defects or issues that may arise in the construction work during the DLP period, even if the defects or issues are not evident at the time of completion of the project. The defects could be structural, cosmetic, or any other issue that may affect the performance or safety of the building.


The clause may include provisions that specify the duration of the Defect Liability Period, the types of defects considered to be covered by the clause and the circumstances in which the contractor is responsible for any defects, and the time of notice given by the client regarding such defects. The clause may also provide the procedures to be followed in resolving any issues arising during the DLP period and the payment conditions, including whether the client is to make any payment during the DLP period and how the payment is to be made.


The DLP clause is significant because it provides security for the client by ensuring that any problems or errors in construction are addressed and corrected by the contractor during the Defect Liability Period. By including this clause in the contract, the client is ensured that the building or construction work will be durable, efficient, and of high quality.


Insurance Policy

An insurance clause in a construction agreement typically outlines the insurance coverage the contractor must have in place during the construction project. It is intended to protect both the contractor and the client from financial loss or damage in case of accidents, damages, or injuries that may occur during the construction process.


The clause usually includes information about the types of insurance coverage required, the amount of coverage needed, and the scope of the insurance coverage. For example, the insurance clause may require that the contractor carry general liability, property damage, and workers' compensation insurance. It may also specify the insurance certificate requirements, the duration of the coverage, and the circumstances in which the insurance coverage may be canceled or modified.


In summary, the insurance clause in a construction contract is an important legal document that helps ensure that both the contractor and the client are adequately protected in case of accidents, damages, or injuries that may occur during the construction project.


Termination

A termination clause in a construction agreement outlines the conditions under which either party of the contract can terminate the agreement before its completion. Depending on the specific terms of the clause, it may allow the client or the contractor to terminate the contract in the event of a default, breach of contract, or for any other reason as outlined in the terms of the agreement.


The clauses usually specify the grounds for termination of the contract, the notice period required for either party to terminate the contract, and the expected effects of the termination such as payment of work completed or termination fees, if any. The clause would also contain the requirement for dispute resolution or mediation in the event of termination and any other terms and conditions involved in the termination process.


Having a termination clause in a construction contract is important as it provides a safety net for both parties in the event that the project does not proceed as planned. In addition, it ensures that the responsibilities and obligations of each party are clearly defined in case of any unforeseen events or issues that arise during the construction process.


Dispute Resolution

Dispute resolution in a construction agreement refers to the process of resolving disagreements or conflicts that may arise during the course of a construction project. Disputes can arise due to various reasons such as delays, changes in scope, quality of work, and payment issues, among others. Your construction agreement should outline the dispute resolution mechanism that will be used in case of such disputes.


There are several dispute resolution mechanisms that can be used in a construction agreement which include negotiation, mediation, arbitration, and litigation. The choice of dispute resolution mechanism will depend on the complexity of the dispute, the time and cost involved, and the willingness of the parties to negotiate a settlement.


It is essential to have a dispute resolution mechanism in place in a construction agreement to avoid costly and time-consuming litigation.



In conclusion, a construction agreement is an essential document that contains various provisions that protect both parties involved in a building project. These provisions govern the entire construction process, from the initial planning phase to the final stages of project completion.


Remember, it's important to consult a legal professional when drafting a construction contract to ensure that it complies with local laws and regulations.



























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