Dealing with Construction and Building Materials in Your Construction Contract in 2023

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Dealing with Construction and Building Materials in Your Construction Contract in 2023 2

Introduction

Construction contracts are complex, and current Construction Industry challenges around construction and building materials shortages, as well as thousands of builders being locked into fixed price contracts, add to the challenge.

This article discusses how to deal with construction and building materials in your building contract, whether you have already signed a contract or plan to execute one soon.

And if you’re locked into a fixed price building contract, it’s particularly important that you read on.

The Importance of Dealing Properly with Construction and Building Materials in Contracts

Without construction and building materials, there could be no construction projects. Fair to say, then, that it is critical to get the contractual clauses dealing with these materials correct.

It is also important that contractors make sure the materials they purchase and install in the construction works meet the relevant specifications. By prioritising compliance with the contract terms, and getting written approval from the Principal to depart from any specifications, the Contractor will protect themselves and reduce the chances of the Contractor being in breach of contract.

Contractors should always make sure that attention is paid to the quality of the actual materials used in the construction works, to minimise defects in the work, save on costs of redoing the work, and reduce the chance of disputes.

In My Experience…Contracts containing materials clauses must be carefully read and understood. This will allow the Contractor to order the right construction and building materials, help to avoid potential disputes and ensure the smooth progress of the project.

Rachelle Hare – Blaze Business & Legal

Material Specifications and Standards

Understanding Material Specifications

Material specifications delineate the performance and quality of construction and building materials to be incorporated in the construction works. These specifications ensure that the materials used meet the project’s requirements.

Most specifications for materials to be used in the works will be located in the Scope of Works, Statement of Requirements, Specification (or other documents). They are not generally included in the terms and conditions of contract, but are still a part of the contract.

Before signing a contract

Before you sign a contract, make sure you read the Specifications and use your expertise to confirm that the right construction and building materials have been listed. Sanity-check any numbers (particularly in any Bill of Quantities) – does that sound about right for a project of this size?

Once you sign the contract, you are agreeing to supply the materials stated in the contract, so you want to make sure they are correct.

Also make sure that you can source the relevant materials – and that they will be delivered in the necessary timeframe. Material shortages are having a huge impact on building projects in the Australian Construction Industry at the moment, and the last thing you want is to be held to a fixed date for practical completion with liquidated damages imposed where your materials won’t be delivered for another four months.

In My Experience…Make sure that the specifications match the requirements of the project. Clarity is key to avoiding discrepancies, and ensuring the quality of your project.

Adherence to Australian Standards

Compliance with Australian Standards (AS) is imperative. These standards ensure the reliability, safety and quality of construction materials, so make sure you are always taking these into account during the construction process.

In My Experience…Many construction contracts don’t specify the exact Australian Standards that must be complied with for a certain task – instead they usually require the Contractor to comply with all law (including standards). It is the Contractor’s responsibility to know these standards and comply with them.

Rachelle Hare – Blaze Business & Legal

Material Sourcing and Supply Chain

Evaluating Suppliers

The origin of materials is as significant as their quality. Associating with reputable suppliers ensures reliability.

In My Experience…It is important to establish long-term relationships only with suppliers who meet the highest standards of quality. This relationship facilitates negotiation and ensures the supply chain’s reliability.

Risk Allocation in Contracts

Allocating Risks

Contracts must lucidly allocate risks associated with material procurement, such as delays or price escalations.

In My Experience…Balanced risk allocation, which is fair for both parties, cultivates a collaborative environment conducive to project success.

Material Price Fluctuations in Fixed Price Contracts

What is a Fixed Price Building Contract?

A fixed price (or lump sum) contract is one where the parties agree the price of the whole works or services before entering into the contract. There are only limited circumstances in which that fixed price can then be increased. Usually, rising costs of materials is not one of those circumstances.

Mitigating Price Fluctuations

Material prices are susceptible to market dynamics. Contracts should address mechanisms for dealing with these fluctuations.

In My Experience…Including price adjustment clauses based on reliable indices can shield against unforeseen financial strains.

CPI Clauses

Given the current challenges in the construction industry with material shortages and price increases, we recommend that all construction contracts, including fixed price contracts, contain a Consumer Price Index (CPI) clause.

In My Experience…A CPI clause can help in adjusting the contract price in line with inflation or market changes. This can be a lifesaver for contractors, especially in a volatile market. Contact me to find out how I suggest “selling” this to your client.

Material Substitution and Variation Clauses

There are instances when material substitution becomes inevitable. How contracts address these substitutions is vital.

In My Experience…The material substitution clauses must be flexible, but they should also ensure that substituted materials are equivalent in quality.

Handling Claims of Defective Materials

What to Do?

If a client claims that the materials you used are defective, it’s essential to know how to respond.

In My Experience…Review the contract for any clauses regarding material quality and compliance. Gather evidence such as delivery receipts, quality certificates, and photographs. Consult a legal expert if necessary.

Quick Tip

Always take photographs of your materials when they are delivered to the site, andwhen you have installed them (before they are covered up). This can be invaluable evidence if a dispute arises regarding material quality.

Dispute Resolution

Even with the best planning and communication, disputes can sometimes arise in construction projects. It’s essential to have a clear and effective dispute resolution mechanism in place.

1. Understanding the Dispute

Before jumping into resolution, understand the nature of the dispute. Is it about material quality, delays, or something else? Knowing the specifics will help in addressing it efficiently.

In My Experience…It’s important to keep emotions in check during a dispute. Focus on the facts and contract terms. Sometimes, a dispute arises from a simple misunderstanding that can be cleared up through communication.

2. Expert Determination

Expert determination is an ideal way to resolve disputes involving the quality of construction and building materials. In this process, an independent expert in the field is appointed to evaluate the issue and make a determination. This can be a quicker and more cost-effective alternative to litigation, especially when technical expertise is required to assess material quality.

In My Experience…Expert determination can save time and money. It’s important to choose an expert who is truly independent and has the necessary technical expertise.

3. Mediation

Mediation involves a neutral third party who helps the disputing parties to reach a mutually agreeable solution. It’s less formal than court and gives the parties more control over the resolution.

4. Arbitration

Arbitration is a more formal alternative where the parties present their case to an arbitrator or panel. The arbitrator’s decision is usually binding.

5. Litigation

As a last resort, taking the dispute to court may be necessary. This is the most time-consuming and costly option, but sometimes it’s the only way to resolve a dispute.

Conclusion

Dealing with construction and building materials in contracts requires a blend of industry experience and legal knowledge.

By ensuring clarity in material specifications, adhering to Australian Standards, judiciously allocating risks, and having clear mechanisms for material substitutions and dispute resolution, construction contracts can be effectively managed to ensure the successful completion of projects.

FAQs

1. What are the Australian Standards for construction materials?

Australian Standards (AS) are published documents that set out specifications and procedures to ensure products, services, and systems are safe, reliable, and consistently perform the way they are intended to.

2. How can I ensure the quality of construction materials?

Regularly inspect the materials, ensure compliance with Australian Standards, and maintain a good relationship with reputable suppliers.

3. What should I do if there is a sudden price increase in materials?

Review your contract for any clauses that address price fluctuations. Consider negotiating with the supplier or client to share the additional costs.

4. What is a CPI clause in a construction contract?

A CPI clause adjusts the contract price in line with inflation or market changes, protecting against material price fluctuations.

5. How can I protect myself from claims of using defective materials?

Ensure compliance with standards, keep thorough documentation, and take photographs of materials upon delivery and after installation.

6. What is expert determination in dispute resolution?

It is a process where an independent expert is appointed to evaluate a dispute and make a determination, usually binding. It is particularly suited to more technical issues, where you need an industry expert to “weigh in”.

7. What are the common causes of disputes in construction contracts?

Common causes include disagreements over contract terms, delays, material quality, and payment issues.

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