How to Review a Construction Contract

Initial Questions to Ask Before Reviewing the Building Contract

Before going through a construction contract clause by clause, ask these key questions to identify potential risks and determine the contract’s fairness:

• Is this contract appropriate for the type of work? Different contract structures apply to different types of construction work, such as fixed-price, cost-plus, or lump-sum contracts.
• Who drafted the contract? If the contract was prepared by the Principal, it is likely structured in their favour.
• Is negotiation possible? Some contracts are rigid, while others allow amendments to unfair terms. It helps to know whether you can ask for amendments while you are carrying out your review.
• What is the scope of work? Ensuring that the work to be completed is accurately detailed prevents disputes – you should know the scope before you begin reading the draft contract.
• Does the contract comply with Australian laws? Identifying potential non-compliance issues can prevent legal complications down the line.

Key Considerations for Principals vs Contractors

For Principals

• Ensure that risk is fairly distributed and does not place an unfair burden on your company.
• Verify that contract variations follow a structured process and will not result in excessive costs.
• Include safeguards to mitigate project delays and ensure accountability for missed milestones.

For Contractors

• Identify and challenge unfair ‘pay-when-paid’ clauses that could delay payments indefinitely.
• Ensure that the dispute resolution process allows fair and accessible options for resolving conflicts.
• Verify that the Principal has the financial stability to fund the project and pay subcontractors on time.

How to carry out a Construction Contract Review

1. Understand the Basics of a Construction Contract

A well-structured construction contract should cover:

• Parties Involved – All companies and individuals involved in the project should be clearly identified.
• Scope of Work – A detailed outline of the work to be performed, materials to be used, and project deliverables.
• Payment Terms – Milestone payments, final payments, and retention provisions.
• Risk Allocation – Who is responsible for unforeseen costs, delays, and compliance issues.
• Termination Clauses – The conditions under which either party can terminate the contract.
• Dispute Resolution – Mechanisms for addressing conflicts through mediation, arbitration, or legal proceedings.

If these clauses are not present, or are not properly drafted, amendments may be required.

2. Check Compliance with Australian Laws

A construction contract must align with relevant Australian laws, including:

• the relevant Security of Payment Act for your State – Ensures that subcontractors are paid fairly and on time.
• Australian Consumer Law (ACL) – Protects parties from unfair contract terms and deceptive practices.
• Work Health and Safety (WHS) Regulations – Enforces safety standards in the construction industry.
• National Construction Code (NCC) – Establishes the minimum requirements for building work.

3. Clarify Payment Terms and Align with Security of Payment Provisions

A well-defined payment structure is essential for managing cash flow and avoiding disputes.

Key aspects to review include:

• Clear payment schedules – Ensure payments are linked to work milestones to prevent delays.
• Retention clauses – Verify that retention money is reasonable and will be released as agreed.
• Payment claims – Confirm that the contract aligns with the Security of Payment Act to protect against unfair non-payment.

For Contractors: Ensure the contract does not include ‘pay-when-paid’ clauses that could delay payment indefinitely.

For Principals: Balance payment schedules to protect your interests while maintaining fair cash flow for Contractors. Make sure the contract is aligned with the Security of Payment Act, so deadlines aren’t missed.

4. Review Scope of Work and Deliverables

A clearly defined scope of work reduces the likelihood of disputes. The contract should:

• Specify work inclusions and exclusions.
• Detail the quality of materials and workmanship required.
• Outline procedures for contract variations to avoid unexpected cost increases.
• Establish deadlines and milestones that align with realistic project timelines.

5. Identify and Negotiate High-Risk Clauses

Certain clauses place risk on one party that may not be acceptable. You will need to consider your own business’ appetite for risk, and any risk mitigation or risk management actions you can put in place.

Look for:

• Indemnity clauses – These should not unfairly transfer liability from one party to another. If you are the Contractor, you will want these to be capped in many cases.
• Liquidated damages – Ensure delay penalties are fair and proportionate.
• Variation clauses – Confirm that all changes require written agreement and appropriate compensation.
• No-lien clauses – These may prevent Contractors from taking legal action if they are not paid (State/Territory dependent).