A Practical Guide to your Building Contract (November 2023)

Whether you're an experienced business owner, a new Project Manager or a Contract Manager in the Construction Industry in Australia, you need to understand your building contract to ensure you successfully manage your project and contract. This article provides practical insights into how building contracts work so you can apply them to your construction projects and get the best out of them in your business.

Your Building Contract - At a Glance

A building contract is a key component of construction projects in Australia, serving as the legally binding agreement between the Principal and Contractor to deliver the construction works. Building contracts define all parties' rights, duties, and responsibilities to allow the project to be carried out smoothly and successfully. All parties involved in a project need to understand their building contract, and we provide below a practical guide to some of the more important considerations.

Image of business people shaking hands over a construction contract and a crane. Caption reads, "Practical Guide to Your Building Contract". Blaze Business & Legal logo.

Share our post on social media

Key Takeaways - Building Contracts

  1. Building contracts are legally binding agreements that govern construction projects in Australia and around the world.
  2. Construction Law governs how a building contract operates and how the parties must behave in relation to that building contract.
  3. Building contracts define the roles and obligations of both the Principals and the Contractor, as well as other key players in the Project.
  4. A well-structured building contract that is followed by the parties paves the way for the project to be completed on time, to budget and to the right quality.

What is a Building Contract?

Definition of Building Contract

A building contract is a written agreement between the Principal and the Contractor, outlining the terms and conditions governing a construction project. It serves as the foundation upon which the entire project is built, covering crucial aspects such as project scope, payment terms, timelines, dispute resolution procedures, and more.

Read our article on Understanding your Construction Contract

How does a Building Contract fit within the Australian Construction Industry?

Building contracts play a pivotal role within the Australian Construction Industry. When done right, they can foster trust and transparency between Principals and Contractors. By establishing clear expectations, responsibilities, and deliverables, these contracts for building works mitigate risk, reduce potential disputes and misunderstandings, and provide a clear roadmap for the construction project, ensuring a successful and efficient project delivery.

Who is involved in a Building Contract?

The key players in a building contract include:

  1. The Principal (usually a government entity or a private sector company). Can also be called the Client or the Owner. "Principal" is the name used in the Australian Standard Contracts (including in AS4000).
  2. The Principal's Contract Manager. This is usually an employee or independent contractor of the Principal who was employed/engaged to manage one or more contracts on behalf of the Principal as part of their role. This person usually receives the formal notices from the Contractor under the Construction Contract.
  3. The Contractor (usually a private sector company). Often called the Builder.
  4.  The Contractor's Contract Manager. This is usually an employee or independent contractor of the Contractor who was employed/engaged to manage one or more contracts on behalf of the Contractor as part of their role. This person usually receives the formal notices from the Principal under the Construction Contract.
  5. Superintendent OR Principal's Representative. Each of these has different roles, and it's important to understand which role this person is playing. Superintendent - Dual roles as an independent certifier plus the agent of the Principal. Usually a contracted Project Manager. Principal's Representative - The agent of the Principal. May be an employee or contracted Project Manager, but is often the same person as the Principal's Contract Manager (not recommended).
  6. Delegates. These are the people responsible for carrying out the project within each party. They will grant internal approvals and sign the building contract on behalf of each party. They will also take part in formal dispute resolution processes.
Infographic showing the 6 key players in your building contract. Blaze Business & Legal logo.

Tell everyone how awesome our Infographic is!

What do Principals Need to Know about Building Contracts?

  • Selecting the Right Contract Type - Choosing the appropriate type of building contract is crucial, as it directly affects how the project will be managed, risks allocated, and payments made. Read about the different Project Delivery Methods and contract types in our article here.
  • Clear Scope and Specifications - Ensure that the contract clearly outlines the scope of work and project specifications to avoid ambiguity and disputes later on. 
  • Payment Terms and Schedule - Establish a clear payment schedule and terms, including milestones or progress payments, timing and final payment conditions.
  • Change Order Management - Implement a robust Change Order or Variation process to handle any modifications to the original contract scope.
  • Dispute Resolution Mechanism - Include a dispute resolution mechanism to handle conflicts and disagreements efficiently and fairly.

1. Selecting the Right Contract Type

The first step for Principals is to carefully assess the nature of their construction project and choose the most suitable contract type. The options include lump sum contracts, cost-plus contracts, and design and construct contracts, each with its own advantages and considerations. The chosen contract type will significantly influence the project's management, risks, and financial aspects.

2. Clear Scope and Specifications

Clarity is paramount when defining the project's scope and specifications within the contract. Ambiguity in these areas can lead to misunderstandings and disputes down the line. By establishing a well-defined scope, principals can avoid potential roadblocks and foster a smoother construction process.

3. Payment Terms and Schedule

The contract should clearly outline the agreed-upon payment terms and schedule. This includes detailing payment milestones, progress payments, and final payment conditions. Clear payment terms encourage trust between the principal and the contractor and can motivate timely project completion.

4. Variations / Change Management

A robust variation or change order process is crucial for handling any modifications to the original contract scope. Principals should establish a systematic procedure for addressing change orders, ensuring that all changes are documented, agreed upon, and properly compensated. This will help prevent disputes arising from unforeseen project changes.

5. Dispute Resolution Mechanism

While every effort is made to avoid disputes, they can still arise during the course of a construction project. Therefore, principals should incorporate a fair and efficient dispute resolution mechanism within the contract. This may involve mediation, arbitration, or other agreed-upon methods, allowing parties to address and resolve disputes in a timely and cost-effective manner.

6. Financial Security

To protect their interests, principals may need to require contractors to provide bank guarantees or performance and payment bonds as financial security. Performance bonds ensure that the contractor fulfills their contractual obligations, while payment bonds protect subcontractors and suppliers by guaranteeing payment for their work.

7. Insurance Requirements

Principals must also ensure that the contractor carries adequate insurance coverage, including general liability insurance and worker's compensation insurance. Adequate insurance coverage protects the principal from potential liabilities arising from accidents or damages during the construction project.

8. Indemnity Clauses

Indemnity clauses are contractual provisions that shift certain liabilities from one party to another. Principals should carefully review and negotiate these clauses to avoid excessive risks and potential financial burdens. Understanding the scope and impact of indemnity clauses is crucial for fair and equitable contract agreements.

Here's how to understand an Indemnity Clause (for Non-Lawyers)

9. Permits and Approvals

Before commencing the construction project, both the principal and the contractor must ensure that all necessary permits and approvals are obtained. Principals should verify that the contractor has obtained the required licenses and permits, avoiding potential legal issues and delays.

10. Risk Allocation

Building contracts must clearly outline how risks are allocated between the principal and the contractor. Understanding who bears responsibility for various risks, such as delays, unforeseen site conditions, or material shortages, is crucial for successful project management. A well-structured risk allocation promotes cooperation and shared responsibility for project outcomes.

Check out our Risk Management Guide

Understand what is business risk

What do Contractors Need to Know about Building Contracts?

  • Understanding the Contract Terms - Thoroughly review and understand all contract terms before signing, seeking legal advice if necessary.
  • Compliance with Regulations - Ensure that the construction work complies with all relevant laws, regulations, and building codes.
  • Document Management - Maintain accurate and organised project documentation, including change orders, progress reports, and communication with the principal.
  • Project Schedule Adherence - Meet project deadlines and milestones as outlined in the contract to avoid penalties and disputes.
  • Insurance and Liability Coverage - Obtain appropriate insurance and liability coverage to protect against potential risks.

1. Understanding the Contract Terms

For contractors, thoroughly reviewing and understanding all contract terms before signing is of paramount importance. Seeking legal advice, if necessary, will help clarify any ambiguities and ensure a comprehensive understanding of their obligations and responsibilities throughout the project.

2. Compliance with Regulations

Adhering to all relevant laws, regulations, and building codes is a fundamental requirement for contractors. Compliance ensures a smooth and legally sound construction process, mitigating potential risks and penalties. Failure to comply with regulatory requirements can lead to costly delays and legal consequences.

3. Document Management

Maintaining accurate and organised project documentation is essential for contractors. Keeping records of change orders, progress reports, and communication with the principal fosters transparency and accountability. Proper document management streamlines project administration and helps protect contractors in the event of disputes or claims.

4. Project Schedule Adherence

Timely project completion is critical for contractor success. Adhering to the project schedule as outlined in the contract demonstrates professionalism and reliability to the principal. Delays in project delivery can adversely impact a contractor's reputation and lead to financial penalties.

5. Insurance and Liability Coverage

Contractors must obtain appropriate insurance and liability coverage to protect against potential risks. Proper insurance coverage not only safeguards the contractor but also provides peace of mind to the principal. Contractors should carefully review the insurance requirements outlined in the contract to ensure compliance.

6. Subcontractors and Suppliers

Maintaining healthy and productive relationships with subcontractors and suppliers is vital for contractors. Timely payments, clear communication, and fair treatment foster a collaborative and efficient construction process. Reliable subcontractors and suppliers contribute to the overall success of the project.

7. Warranties and Defects

Understanding the warranty period and the expectations for correcting any defects in the completed work is essential for contractors. Timely addressing and resolving issues during the warranty period enhances credibility and client satisfaction. Fulfilling warranty obligations is a crucial aspect of maintaining long-term relationships with principals.

8. Variations and Change Orders

All variations and change orders should be documented and approved in writing by the principal. Transparently managing change orders avoids disputes and ensures fair compensation for additional work. Properly implemented change orders can lead to additional opportunities for the contractor and promote a positive working relationship with the principal.

9. Safety and Compliance

Contractors must prioritise safety on construction sites and comply with all relevant health and safety regulations. A strong commitment to safety not only protects the workforce but also contributes to a successful and accident-free project. Contractors should establish comprehensive safety protocols and regularly review and update them to address potential risks.

10. Sustainability and Environmental Responsibility

Embracing sustainable practices and environmentally responsible methods can set contractors apart in the competitive construction industry. Demonstrating a commitment to sustainability can lead to additional business opportunities and enhance a contractor's reputation as an eco-conscious professional.

Conclusion

Building contracts are the foundation upon which successful construction projects are built. For both principals and contractors, understanding the key elements of these agreements is vital for a seamless and efficient project execution. By adhering to contract terms, prioritising clear communication, and implementing robust document management practices, construction professionals can mitigate risks, prevent disputes, and achieve a high level of client satisfaction. Embracing sustainability and compliance with regulations further contribute to a positive impact on the construction industry and the broader community.

Remember, building contracts should be viewed as collaborative tools that promote transparency and accountability between all parties involved. It's important to carefully draft and negotiate building contracts that reflect the specific needs and expectations of the project. By doing so, you can ensure a successful construction journey that culminates in the delivery of high-quality, on-time, and within-budget projects.

FAQs

1. What are the common contract types used in the Australian construction industry?

In Australia, common contract types include lump sum contracts, cost-plus contracts, and design-build contracts. All of these contracts are referred to generally as “construction contracts” or “building contracts.” Each type has its own advantages and considerations, and the selection of the appropriate project delivery method should align with the project’s specific requirements.

2. Can a building contract be terminated before completion?

A building contract can be terminated before completion under certain circumstances, such as material breaches or mutual agreement between the parties. The terms of the contract itself will provide the guidance on how and when a contract building can be terminated.

3. Can a building contract be verbal?

A building contract can be formed through verbal agreement between the parties. However, we do not recommend verbal agreements, as written contracts offer greater clarity and protection for all parties involved. If we find our client has a verbal building contract, we may recommend that we help you record the agreement in writing, even if the construction project is already underway. This is one way you can “fix” the issue of not having written evidence of what has been agreed. Contact Rachelle to discuss if you have a building contract that is not written.

4. How can a Contractor handle delays caused by factors outside their control?

If the Contractor is delayed in performing the Construction Works (no matter the cause), the building contract usually requires the Contractor to notify the Principal in writing. There may be a time requirement to be complied with. Depending on the terms of the contract for building, the Contractor may be able to claim an extension of time to the date for practical completion or the date for completion. Possible grounds for claiming for a delay that doesn’t fit within the extension of time clause include Acts of Prevention by the Principal and Force Majeure Events.

5. Can building contracts be modified after commencement?

Building contracts can be modified through formal Change Orders or Deeds of Variation mutually agreed upon by both parties. It is crucial to document any changes to avoid disputes. Where there is a change to the scope of the building works, often a variation is directed, and a formal Change Order/Deed of Variation is not required (depending on the terms of the contract for building works).

6. What happens if unforeseen circumstances affect the project budget?

Unforeseen circumstances that significantly impact the project budget may trigger a variation or change order, requiring negotiation between the parties. Find out how to stop your business losing money on a project.

7. How can Contractors build strong relationships with Principals?

Building trust and maintaining open communication is essential for establishing strong relationships with Principals. Contractors should focus on delivering high-quality work, adhering to contract terms, and promptly addressing any issues or concerns arising during construction.

8. Can building contracts be used for both large and small-scale construction projects?

Building contracts are used in construction projects of all sizes, from small renovations and residential projects to large-scale commercial developments to massive factories and infrastructure projects. It is critical to customise the contract to suit the project’s specific needs – contact Rachelle to assist.

Let's chat about how we can
help your business

Rachelle Hare and Shannon Drew, Blaze Business & Legal
  • Free Initial Consultation
  • No-Obligation Quote for our Services
  • We Work to your Budget and Timeframes

Call Rachelle Hare on 0407 050 907 or fill out the form below and we'll contact you

Not quite ready to chat?

Take our free Business Quiz

  • Identify some of the challenges in your Business (you know, the problems that are stressing you out all the time!)
  • Get no-obligation suggestions from us about how you can overcome those challenges (and we will help you implement the fixes as well)

About the Author

Rachelle Hare

Rachelle Hare

Rachelle Hare is a highly experienced Construction Lawyer and Contract Lawyer, with over 23 years of experience in Tier 1 and Tier 2 Construction Firms, Top Tier Private Practice and Government.

With 23+ years of experience as a Senior Lawyer, Strategic Contracting Adviser and Management Consultant in Construction Law, Contracts, Major Projects, Commercial Advisory, Compliance, Procurement, Contract Management and Risk Management, Rachelle has the rare skills to offer you seamless business advice and legal advice to help support your organisation.


As well as a Lawyer and Business Adviser, Rachelle has also acted as a Strategic Procurement Adviser, Compliance Manager, Strategic Risk Adviser and Commercial Manager.

Rachelle owns
Blaze Business & Legal, a combined Commercial Law Firm and Business Advisory Firm located in Brisbane, Queensland, Australia. Blaze Business & Legal assists a broad range of clients in the Construction Industry and related industries, and advises owners, contractors, subcontractors, NFPs and other organisations on a broad range of Construction Law, Commercial Law, Business Advisory and Management Consulting issues in Brisbane, Queensland and around Australia.

Rachelle also owns Blaze Professional Learning, where she offers practical contracting skills, hands-on experience in drafting and working with contracts, and industry insights to help Professionals upskill and advance their careers with real-world skills.

Leave a Comment

Scroll to Top