Understand the Construct Only Contract in Australia (2023)

How to Understand the Construct Only Contract

The term "construct only contract" is widely used within the Australian construction and building industries. It refers to a traditional form of procurement where a contractor enters into an agreement for the construction of a project, the design of which has been undertaken by a third party. This is in contrast to a "design and build" contract, where the same contractor is responsible for both the design and construction of the project.

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However, it's important to note that the nature of the contract can greatly affect the liabilities of the contractor. In some cases, a contractor under a "construct only" contract may find themselves responsible for broader obligations and warranties than the contract initially suggests. For instance, the contractor might be required to warrant that the design of the project is "fit for purpose".

There's also a trend of including warranties that effectively impose design obligations upon the construct-only contractor. This can be problematic for contractors who may not have the experience or know-how to warrant against defects in design.

Contractors must remain vigilant when entering into "construct only" contracts to ascertain the full scope of their obligations. The terms of the contract will ultimately dictate the parameters of the legal relationship between the parties.

Here are some key points to consider:

  1. Construct Only Warranties: Contractors should be wary of warranties in a construct only contract that extend beyond the physical construction of the project. For example, a warranty that the design of the project is “fit for purpose”.
  2. Design Implications: There's a trend of including warranties that impose design obligations upon the construct-only contractor. This can be problematic for contractors who may not have the experience or know-how to warrant against defects in design.
  3. Duty to Warn: Even in circumstances where there is no reliance placed on the construct only contractor during the design process, an effective design or suitability obligation may be implied if a reasonably competent contractor should have realised that the design was likely to prove unsuitable.
  4. The Colloquialism Pitfall: The term “construct only” contract is merely a label that is not strictly a legal definition and will not be on their side should it come to a dispute.

10 Facts about Construct Only Contracts

  1. Definition: A "construct only" contract in the Australian construction industry refers to a contract where the contractor is responsible only for the construction of a project, not its design.
  2. Design Responsibility: The design of the project is typically completed by a third party, separate from the contractor. The contractor is then responsible for executing this design.
  3. Common Use: Construct only contracts are commonly used in the Australian construction industry, particularly for large-scale projects where the design and construction processes are complex and require different sets of expertise.
  4. Risk Allocation: Construct only contracts are often used to allocate risk more effectively. The contractor takes on the risk of construction, while the risk of design is borne by the designer.
  5. Warranties: Contractors under a construct only contract may sometimes be required to provide warranties that extend beyond the physical construction of the project. For example, they may need to warrant that the design is "fit for purpose".
  6. Design Implications: Some construct only contracts may include warranties that effectively impose design obligations on the contractor. This can be problematic if the contractor does not have the necessary design expertise.
  7. Duty to Warn: Even in a construct only contract, the contractor may have a duty to warn the client if they believe the design is unsuitable or could lead to problems during construction.
  8. Dispute Resolution: Like other types of construction contracts, construct only contracts typically include provisions for dispute resolution, which may involve mediation, arbitration, or litigation.
  9. Variations: Construct only contracts often include provisions for variations, which allow for changes to the scope of work during the construction process. These variations must be agreed upon by both parties and can affect the cost and timeline of the project.
  10. Completion and Handover: Upon completion of the construction, the contractor is typically required to hand over the project to the client in accordance with the terms of the contract. This may involve a formal handover process and the provision of necessary documentation.

Key Features of Construct Only Contracts

A construct only contract, often used in the construction industry, has several key features:

  1. Separate Design and Construction Phases: In a construct only contract, the design and construction phases are separate. The design is completed by a third party, and the contractor is responsible for executing the design.
  2. Contractor's Role: The contractor's role is limited to the construction of the project. They are not involved in the design phase and are not responsible for any design decisions.
  3. Fixed Price: Often, construct only contracts are fixed price contracts. This means the contractor agrees to complete the construction for a set price, regardless of the actual costs incurred.
  4. Scope of Work: The contract will clearly define the scope of work that the contractor is responsible for. This typically includes all the construction tasks necessary to complete the project according to the design.
  5. Timeline: The contract will specify the timeline for the construction phase, including the start date, key milestones, and the completion date.
  6. Payment Terms: The contract will outline the payment terms, including the amount to be paid, the schedule of payments, and the method of payment.
  7. Quality Standards: The contract will specify the quality standards that the construction must meet. This may include compliance with building codes, use of specific materials, and adherence to certain workmanship standards.
  8. Variations: The contract will include provisions for variations or changes to the scope of work. This outlines the process for making changes to the design or construction and how these changes will affect the price and timeline.
  9. Dispute Resolution: The contract will include a dispute resolution clause, outlining the process for resolving any disputes that arise during the construction phase.
  10. Termination Clause: The contract will include a termination clause, outlining the circumstances under which the contract can be terminated by either party.
  11. Warranties and Guarantees: The contract may include warranties or guarantees from the contractor, such as a warranty that the construction will be free from defects for a certain period after completion.

Advantages

  • Greater flexibility for changes during the project.
  • Potential for higher quality work as the contractor knows they will be reimbursed for their costs.

Disadvantages

  • Greater risk for the client as the final cost of the project is not known at the outset.
  • Potential for less cost control as the contractor knows they will be reimbursed for their costs.

Comparison with Other Contract Types

  • Fixed Price Contracts: The contractor agrees to provide specified services for a specific price. This type of contract is often used when the scope and schedule of the project are clear.
  • Time and Materials Contracts: The contractor is paid based on the actual cost of direct labour, plus an added percentage to cover overheads and profit.

Australian standard form Construct Only Contracts

In Australia, several standard forms of contract use the construct only project delivery methodology. These include:

  1. Australian Standard Contracts (AS 2124 and AS 4000): These are commonly used forms of construct only contracts in Australia. They are designed for use where the design has been completed prior to the contractor being appointed.
  2. Master Builders Australia Contracts: Master Builders Australia also provides a range of standard form contracts for use in construction projects, including construct only contracts.
  3. Australian Institute of Architects Contracts (ABIC Contracts): The Australian Institute of Architects, in conjunction with Master Builders Australia, has developed a series of contracts for use on construction projects, including construct only contracts.
  4. Government Contracts: Various state and federal government departments have their own standard form contracts for construction projects, many of which use a construct only delivery methodology.

While these standard forms provide a good starting point, they often need to be amended to suit the specific circumstances of a particular project.

Key risks of entering a Construct Only Contract as a Contractor

Entering into a construct only contract as a contractor can present several key risks:

  1. Design Flaws: Since the contractor is not involved in the design process, they may be working with a design that has flaws or is not fully developed. If these issues are not identified before construction begins, it can lead to costly delays and disputes.
  2. Design Changes: If the design is changed during the construction process, it can lead to delays and increased costs. The contractor may not have control over these changes and may not be adequately compensated for the additional work.
  3. Limited Control: The contractor has limited control over the project as a whole because they are only responsible for the construction phase. This can make it difficult to manage the project effectively and efficiently.
  4. Warranty Risks: Some construct only contracts may require the contractor to provide warranties that extend beyond their control, such as warranting that the design is "fit for purpose". If problems arise that are related to the design, the contractor could be held responsible.
  5. Financial Risks: If the project runs over budget due to design issues or changes, the contractor may not be able to recover these additional costs. This can lead to financial losses.
  6. Reputation Risks: If the project is not successful due to issues with the design, it can damage the contractor's reputation, even if the contractor was not responsible for the design.
  7. Legal Risks: If disputes arise over the design or the execution of the project, the contractor could face legal risks. This could involve costly litigation and potential liability.
  8. Communication Challenges: Since the design and construction are handled by separate parties, there can be communication challenges. This can lead to misunderstandings and mistakes.
  9. Scope Creep: Without a clear design from the outset, there's a risk of scope creep, where the project's requirements start to change and expand, leading to increased costs and time delays.
  10. Risk of Non-Payment: Like any contract, there's always the risk that the other party may fail to pay for the work done. This risk can be mitigated by including specific payment terms in the contract.

Risk Management

  • Setting a maximum price to limit the client's exposure.
  • Defining allowable costs in detail to avoid disputes.
  • Closely monitoring the contractor's work and expenses to ensure cost control.

How should Contractors protect themselves when entering into a Construct Only Contract

When entering into a construct only contract, contractors should take several steps to protect their interests:

  1. Understand the Contract: Before signing any contract, it's crucial to fully understand all its terms and conditions. If there are any unclear or ambiguous terms, seek clarification.
  2. Legal Advice: It's advisable to seek legal advice before entering into a contract. A lawyer can help understand the implications of the contract terms and suggest necessary amendments.
  3. Insurance: Make sure to have adequate insurance coverage. This can include public liability insurance, professional indemnity insurance, and contract works insurance.
  4. Clear Scope of Work: The contract should clearly define the scope of work. This includes what work is to be done, the materials to be used, and the quality standards to be met.
  5. Payment Terms: Ensure the contract includes clear payment terms. This should cover the amount to be paid, when payments will be made, and what happens in case of late payments.
  6. Change Orders: The contract should have a clear process for handling change orders. This includes how changes to the scope of work will be agreed upon, how they will be priced, and how they will affect the project timeline.
  7. Dispute Resolution: The contract should include a dispute resolution clause outlining the process for resolving any disagreements that may arise during the project.
  8. Documentation: Keep thorough records of all communications, changes, and decisions throughout the project. This can be crucial in case of disputes.
  9. Performance Guarantees: Be wary of contracts that require performance guarantees or bonds. These can tie up significant resources and should be negotiated carefully.
  10. Termination Clauses: Understand the circumstances under which both parties can terminate the contract, and the implications of termination.

Remember, every contract and project is unique, so it's important to consider the specific circumstances and risks of each project.

What are key amendments that a Contractor should make to a Construct Only Contract

While the specific amendments a contractor should make to a construct only contract will depend on the specifics of the project and the contractor's own circumstances, here are some general areas that contractors often need to consider:

  1. Scope of Work: The contractor should ensure that the scope of work is clearly defined and includes all tasks they are expected to perform. If there are any ambiguities, these should be clarified to avoid disputes later on.
  2. Payment Terms: The contractor should ensure that the payment terms are fair and provide for timely payment. This might include provisions for progress payments, the handling of variations, and interest on late payments.
  3. Time Extensions: The contract should include provisions for extensions of time in the event of delays that are beyond the contractor's control, such as inclement weather or changes requested by the client.
  4. Limitation of Liability: The contractor might seek to include a limitation of liability clause to cap their potential liability under the contract. This could be a total cap or a cap per event.
  5. Dispute Resolution: The contractor should ensure that the dispute resolution clause provides a fair and efficient process for resolving any disputes that arise. This might include negotiation, mediation, arbitration, or litigation.
  6. Termination Rights: The contractor should ensure that they have the right to terminate the contract in certain circumstances, such as non-payment by the client.
  7. Insurance: The contract should clearly set out the insurance requirements and who is responsible for obtaining and maintaining the necessary insurance coverage.
  8. Warranties: The contractor should review any warranties they are required to provide and ensure they are reasonable and within their control.
  9. Indemnities: The contractor should carefully review any indemnities they are required to provide, as these can create significant liabilities.
  10. Subcontracting: If the contractor plans to use subcontractors, they should ensure that the contract allows for this and sets out the terms for subcontracting.

It's important for contractors to seek legal advice when negotiating and entering into a construction contract to ensure their interests are adequately protected.

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Legal Considerations

  • Contract Formation: Ensure that the contract is properly formed with all essential elements: offer, acceptance, consideration, intention to create legal relations, and certainty of terms.
  • Enforceability: Make sure the contract terms are clear and unambiguous to avoid disputes and ensure enforceability.
  • Dispute Resolution: Include a dispute resolution clause in the contract, specifying the method (e.g., mediation, arbitration) and jurisdiction for resolving any disputes.

Case Studies

  • Infrastructure Project: A construct only contract was utilised in a major infrastructure development due to the well-defined project scope and costs. The project was completed successfully, with the contractor delivering high-quality work within the agreed timeline. However, unforeseen site conditions led to additional costs, highlighting the financial risks for contractors in construct only contracts.
  • Residential Construction Project: In a residential building project, a construct only contract led to a disagreement between the client and the contractor over changes in project scope. This case underscores the importance of having a clear and comprehensive contract that addresses potential changes and how they will be handled.

Legal Considerations

  • Contract Formation: Ensure that the contract is properly formed with all essential elements: offer, acceptance, consideration, intention to create legal relations, and certainty of terms.
  • Enforceability: Make sure the contract terms are clear and unambiguous to avoid disputes and ensure enforceability.
  • Dispute Resolution: Include a dispute resolution clause in the contract, specifying the method (e.g., mediation, arbitration) and jurisdiction for resolving any disputes.

Best Practices

  • Drafting the Contract:
    • Clearly define the scope of work, including the tasks to be performed, the expected outcomes, and any specific requirements or standards.
    • Specify the payment terms, including the method and timing of payment, and how the costs will be calculated and verified.
    • Include a clause for changes or variations, specifying how they will be requested, approved, and priced.
  • Managing the Project:
    • Maintain regular communication with the client, providing updates on progress and discussing any issues or changes.
    • Keep detailed records of all work performed and costs incurred, to support the calculation of payments and resolve any disputes.
    • Implement a robust risk management process, identifying potential risks and taking proactive steps to mitigate them.

How can Contractors work better with the Principal on a Construct Only project?

Working effectively with the Principal (the client or owner) on a construct only project requires clear communication, transparency, and collaboration. Here are some strategies that contractors can use:

  1. Clear Communication: Regular and clear communication is crucial. This includes providing regular updates on progress, promptly reporting any issues or delays, and discussing any changes or decisions that need to be made.
  2. Transparency: Be open and honest about all aspects of the project, including costs, timelines, and potential risks or issues. This can help to build trust and avoid misunderstandings or disputes.
  3. Collaboration: Work collaboratively with the Principal to achieve the project goals. This includes seeking their input and feedback, involving them in decision-making where appropriate, and working together to resolve any issues or challenges.
  4. Understanding Expectations: Make sure you fully understand the Principal's expectations in terms of the project outcomes, quality standards, and timelines. If there are any uncertainties, seek clarification.
  5. Professionalism: Maintain a high level of professionalism at all times. This includes meeting all contractual obligations, delivering high-quality work, and dealing with any issues or disputes in a professional and respectful manner.
  6. Responsiveness: Be responsive to the Principal's needs and concerns. This includes responding promptly to any queries or requests, and being proactive in addressing any issues or concerns.
  7. Flexibility: Be flexible and adaptable. Construction projects often involve unexpected challenges or changes, and being able to adapt and respond effectively can help to ensure the project's success.
  8. Risk Management: Proactively manage risks and inform the Principal about them. This includes identifying potential risks, implementing strategies to mitigate them, and communicating about these risks and strategies with the Principal.
  9. Quality Control: Ensure that all work meets the quality standards specified in the contract. Regular quality checks and inspections can help to ensure that any issues are identified and addressed promptly.
  10. Post-Completion Support: Provide support and assistance after the completion of the construction. This could include addressing any issues or defects that arise, providing maintenance or repair services, or assisting with any regulatory or compliance requirements.

What else should Contractors know about Construct Only Contracts?

In addition to understanding the risks, key features, and protective measures associated with construct only contracts, contractors should also be aware of the following:

  1. Importance of Accurate Bidding: Since construct only contracts often involve a fixed price, it's crucial for contractors to accurately estimate the costs of labor, materials, and other expenses to ensure profitability. Underestimating costs can lead to financial losses.
  2. Quality Control: Contractors are responsible for the quality of the work performed. They need to have robust quality control processes in place to ensure that the work meets the standards specified in the contract.
  3. Project Management Skills: Effective project management is crucial in construct only contracts. Contractors must coordinate labor, materials, and schedules to ensure that the project is completed on time and within budget.
  4. Relationship with the Designer: Since the contractor is not involved in the design phase, they need to establish a good working relationship with the designer. This can help in clarifying design details and managing design changes.
  5. Regulatory Compliance: Contractors are responsible for ensuring that all work complies with relevant building codes, safety regulations, and other legal requirements.
  6. Risk Management: Contractors should have a risk management plan in place to identify and mitigate potential risks associated with the project. This could include risks related to safety, financials, quality, and schedule.
  7. Subcontractor Management: If subcontractors are used, the contractor is typically responsible for their performance. Contractors need to carefully select, manage, and coordinate subcontractors.
  8. Communication: Clear and regular communication with all stakeholders, including the client, designer, subcontractors, and suppliers, is key to the successful execution of the project.
  9. Post-Completion Obligations: The contract may include obligations that continue after the completion of the construction, such as warranties or maintenance requirements. Contractors should be aware of these and plan accordingly.
  10. Continual Learning: The construction industry is dynamic, with evolving best practices, technologies, and regulations. Contractors should stay updated on industry trends and continually improve their skills and knowledge.

Conclusion

  • Construct Only Contracts can provide benefits in terms of flexibility and quality, but they also carry risks, even though they are seen as one of the "simplest" forms of contract.
  • It's crucial to carefully manage these contracts, with clear terms, regular communication, detailed record-keeping, and proactive risk management.
  • While Construct Only Contracts can lead to successful project outcomes, they can also result in disputes and cost overruns if not properly managed.

FAQs

1. What is a Construct Only contract?

A Construct Only contract is a type of contract where the Contractor is responsible for carrying out the construction work according to plans and specifications provided by the client (usually through their consultant).

2. What are the key features of a Construct Only contract?

Key features of a Construct Only contract include a fixed price, a defined scope of work, and a set project timeline. The Contractor is not involved in the design phase and is only responsible for the construction.

3. What are the risks for a Contractor in a Construct Only contract?

Risks for a contractor in a Construct Only contract include improper scoping and pricing of the Works, unforeseen site conditions, changes in project scope, and potential discrepancies or errors in the provided designs.

4. What standard forms of contract in Australia use the Construct Only project delivery methodology?

The Australian Standard AS 2124 and AS 4000 are commonly used forms of Construct Only contracts in Australia.

5. What amendments should a Contractor consider making to a Construct Only contract?

Contractors should consider amendments that provide clarity on the scope of work, allow for adjustments in case of unforeseen circumstances, and ensure fair payment terms.

6. How can Contractors protect themselves when entering into a Construct Only contract?

Contractors can protect themselves by thoroughly reviewing the contract, seeking legal advice, ensuring they have a clear understanding of the project scope, and implementing effective risk management strategies.

7. How can Contractors work better with the Principal on a Construct Only project?

Contractors can work better with the Principal by maintaining open and regular communication, promptly addressing any issues or concerns, and working collaboratively to achieve the project objectives.

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