How to Review a Construction Contract: A Step-by-Step Guide
Understanding how to review a construction contract ensures that the agreement is fair, legally enforceable, and protects your financial interests. Whether you are a Principal or a Contractor, reviewing key areas such as payment terms, risk allocation, scope of work, and dispute resolution clauses is essential. Before signing, confirm compliance with Australian construction laws and seek professional legal advice to negotiate high-risk clauses effectively.
Introduction
A construction contract is one of the most important documents in any building project. It dictates responsibilities, outlines payment schedules, and determines the rights and obligations of all involved parties. A poorly reviewed contract can lead to payment disputes, unexpected liabilities, and costly legal battles.
Whether you are a Principal or a Contractor, understanding how to review a construction contract can prevent delays and extra costs and can protect your business from financial and legal risks.
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).
6. Check Preferred Dispute Resolution Strategies
A well-drafted contract should provide an efficient dispute resolution process. Look for:
- Mediation and arbitration requirements – These should be clearly outlined to prevent prolonged litigation.
- Jurisdiction clauses – Establish which State or Territory’s laws apply in case of a dispute.
- Legal costs allocation – Ensure that legal fees are fairly distributed in case of disputes.
7. Review Termination Rights
For Principals:
- Include termination clauses that allow you to cancel the contract if performance standards are not met.
For Contractors:
- Ensure the contract does not include termination for convenience clauses, which can allow the Principal to terminate without valid cause.
8. Evaluate Insurance and Liability Provisions
Insurance requirements should be well-defined to determine responsibility in case of unforeseen events. Ensure that:
- Public liability insurance covers third-party property damage and injuries.
- Professional indemnity insurance protects against negligence claims.
- Contract works insurance covers loss or damage to works under construction.
Why You Should Seek Legal Advice Before Signing a Construction Contract
Construction contracts contain complex legal terms that can significantly impact your rights, obligations, and financial security. Without a proper legal review, you may unknowingly accept clauses that increase your risk exposure, limit your ability to claim payments, or impose unfair penalties.
Seeking legal advice before signing ensures that you fully understand the contract and are protected from potential legal pitfalls. A skilled Construction Lawyer like Rachelle Hare will carefully examine the contract to:
Identify and mitigate risks within the contract by flagging high-risk clauses such as indemnity provisions, unfair liquidated damages, and restrictive termination terms.
Negotiate fairer contract terms by ensuring that payment structures, variation clauses, and dispute resolution mechanisms align with your business interests.
Ensure compliance with Australian construction laws to avoid penalties, disputes, and regulatory non-compliance.
Having a legal expert review your contract before signing is a proactive step that can prevent financial loss, project delays, and legal disputes down the track.
Blaze Business & Legal specialises in construction contract reviews, helping both Contractors and Principals navigate complex agreements with confidence. Our team ensures that your contracts are structured to safeguard your interests, reducing legal and financial risks from the outset. Contact us today for expert legal support tailored to your construction projects.
Conclusion
Understanding how to review a construction contract is crucial to avoiding legal and financial risks. Whether you are a Contractor or a Principal, a thorough review of key clauses and legal requirements can help prevent costly mistakes.
Blaze Business & Legal provides expert construction contract review services to safeguard your business interests – we’re top-notch when it comes to learning how to review a construction contract.
Contact us today for a professional construction contract review before signing and better protect your business.
Frequently Asked Questions (FAQs)
1. How do I know if a construction contract is fair?
A fair construction contract includes balanced risk allocation, clear payment terms, and transparent dispute resolution mechanisms. It should be structured to protect both parties and comply with Australian laws.
2. What is the most important clause in a construction contract?
Key clauses include payment terms, scope of work, and dispute resolution. These provisions define financial obligations, project responsibilities, and how conflicts are resolved.
3. What should I check before signing a construction contract?
You should review risk allocation, termination rights, insurance requirements, and compliance with local laws. Seeking legal advice can help identify potential red flags.
4. Can I negotiate a construction contract?
Most contracts allow for negotiation before signing. Addressing high-risk clauses before agreeing to the terms can help protect your company’s financial interests and mitigate risk for your business.
5. How can I avoid disputes in a construction contract?
Ensure all terms are clear, variations are documented, and dispute resolution clauses are well-defined. Avoid ambiguous language that could lead to misinterpretation.
6. What are liquidated damages in a construction contract?
Liquidated damages are pre-agreed amounts that are payable for project delays. These should be genuine pre-estimates of the losses that the Principal may encounter and should reflect actual financial losses caused by delays.
7. Can a construction contract be terminated early?
Construction contracts can often be terminated early, particularly in government contracts where a termination for convenience clause is mandated as part of government procurement. However, termination conditions must be explicitly stated in the contract and should state that the Contractor will be paid all costs properly incurred prior to the date of termination. In some high-value contracts, a termination payment may be pre-agreed as compensation for the loss of the contract.
8. What is a ‘pay-when-paid’ clause?
A Pay When Paid clause or a Pay If Paid clause delays subcontractor payments until the Contractor receives payment from the Principal, or makes payment to the Subcontractor contingent on the Contractor receiving payment. These clauses are often unenforceable under Australian law, pursuant to the various Security of Payment Acts.
