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An Introduction to Construction Contracts

Mario Rashid-Ring ||

When construction contracts go wrong, it can be very expensive and create a number of issues of all involved in a project. It is extremely important that when you enter into a contract that it accurately and precisely records the agreed terms between the parties while adequately balancing risk.

When seeking to draft a construction contract, many parties often rely on easily accessible, “boilerplate contracts” such as those provided under the Australian Standard (AS) and Housing Industry Association, or Master Builders Association. However, given the evolving nature of the legal climate and the increasing uncertainty in the building and construction industry following the unprecedented COVID-19 pandemic, in addition to the fact that some of these standard form contracts were released more than twenty years ago, there is often a need to closely examine your choice of contract and how it is to be amended before entering into it.

Where to start?

There are a number of different contracts available but the type of contract you select will depend on a few factors, including:

1. What type of project is this?

For example, is this for a residential, commercial, mixed use, or infrastructure project?

2. What is the size / value of the project?

For example, what is the estimated contract sum? Is it major or minor works?

3. Where does the contract sit within the contracting chain?

For example, are you a principal, head contract or sub-contract?

4. What is the scope of works?

5. What is the proposed delivery model? Do you have control over the design?

For example, do you have control over the design? Or is it a construct only contract?

6. What is the payment method?

For example, what are the payment terms? Is it a schedule of rates or a lump sum agreement?  Will there be milestones?

7. What are your legal obligations?

For example, is this for residential building works whereby the Home Building Act applies?

Some of the most commonly used standard contracts in construction in Australia include the following:

  • AS 4300-1995
  • AS 4000-1997
  • AS 2124-1992
  • AS 4902-2000
  • GC 21
  • ABIC SW
  • MBA Suite
  • NEC 3

For smaller residential constructions (such as a single dwelling) both the Master Builders Associate and Housing Industry Association have standard contracts that are widely used.

Design and Construct v Construct Only?

As a principal (developer) who is considering entering into a new project there is always a question on what the appropriate project delivery model is and the answer to this often depends on a number of factors.

In very broad terms, there are generally two types of models – the design and construct or construct only contracts. They each come with advantages and disadvantages and when consider which of the two is most appropriate it is important to consider the following:

 

Design and Construct (D&C) Contract Construct Only Contract
–  This is where same party responsible for the design and is also responsible for the construction of the project.

– The contractors take a greater risk in D&C contracts as they become responsible for both the design and the build and the risk shifts away from the principal. However this increased risk may be reflected in the contract sum.

– The downside for the principal would that they may not have the same level of involvement in the project if it was a construct only project.

– This is where the design is not done by the contractor, and the contractor is contracted to construct per the design provided by the principal.

– One risk is that the principal may have some liability if there is a defect which is caused by a design issue rather than the actual construction. Determining whether the defect was design or construction related can be complex and expensive to determine.

– Where there is a defect in the design, variations may be required resulting in extra costs and time delays which often cannot be shifted to the contractors

– The principal has control of the design and is likely to have more involvement in the project;

 What are the contract documents?

 The “Contract Documents” do not incorporate merely a standard construction contract such as the AS 4300—1995 document. The “Contract Documents” will usually include a number of other documents which together will constitute the contract/

For example, if a AS 4300-1995 is used, it is usually the case the following other documents are collated and will form the basis of the contract:

  1. Formal Instrument of Agreement (document evidencing agreement between the parties);
  2. General Conditions of the Contract (for example the AS 4300—1995 document);
  3. Special Conditions (these are usually amendments you propose to the General Conditions);
  4. Specifications;
  5. Drawings; and
  6. Tender Submission.

 If you have any questions or wish to obtain legal advice for a construction contract, please reach out to a member of Coleman Greig’s Building and Construction team.

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