Understanding your Construction Contract in 2024

By Rachelle Hare, Specialist Construction Lawyer, Blaze Business & Legal, 22 July 2023

Whether you're working in, or owning a business in, the Construction Industry or related industries you're likely to encounter a Construction Contract at various points in your journey.

Whether you're planning a new office build, a fitout, a renovation project, the design and construction of a large factory, a large civil project, or a wastewater treatement plant, a Construction Contract will be at the heart of your project.

And you need to know how to read it and understand it.

Image of a construction project and project managers. Caption reads "Understanding your Construction Project." Blaze Business & Legal logo.

Construction Contracts can seem intimidating, with their complex terms and conditions. However, understanding your Construction Contract is crucial to protect your interests, manage your project effectively, and ensure a successful outcome. In Australia, the construction industry operates under a comprehensive set of laws and standards, making it even more essential to fully understand how your Construction Contract works. This means both knowing the meaning of the common terms used in the Construction Industry, and also learning how to read the Construction Contract and how to work better with your Contract to benefit your business.

If any of the above resonates, then this is the article for you!

Key Takeaways

  • Learn how to navigate the complexities of Construction Contracts in Australia.
  • Understand the key elements of a Construction Contract.
  • Learn the common terms of Construction Contracts. 
  • Gather some tips to understand and negotiate your Construction Contract.
  • Read some case studies on Construction Contracts.

By the end of this article, you'll have a solid understanding of Construction Contracts, allowing you to make informed decisions and protect the interests of your business.

What is a Construction Contract?

A Construction Contract is an agreement between two or more parties to carry out a construction project. The contract outlines the scope of work, the cost, and the timeline for the construction project. It serves as a roadmap for the project, detailing the responsibilities and expectations of each party.

In Australia, several types of Construction Contracts are commonly used, each with its unique characteristics and applications. These include lump sum contracts, cost-plus contracts, and design and construct contracts, among others. We discuss these more in our Ultimate Guide to Construction Contracts in Australia.

Key Elements of a Construction Contract

A Construction Contract has various key elements, each playing a crucial role in defining the project's parameters. These elements include:

  • Parties Involved - This refers to the client or owner who commissions the work and the contractor who carries out the work. There may also be other parties involved, such as joint venture partners, subcontractors and consultants.
  • Scope of Work - This outlines the work that the contractor is expected to perform. It includes detailed descriptions of the tasks, the materials to be used, and the expected outcomes.
  • Contract Price and Payment Terms - This section details the total cost of the project and the terms of payment. It may also include provisions for variations and adjustments.
  • Start and Completion Dates - These are the agreed dates for the commencement and completion of the project. Different contracts use different terms, for example AS4902-1997 uses "Date for Practical Completion" and "Date of Practical Completion."
  • Conditions of the Contract - These are the terms and conditions that govern the agreement between the parties. If your contract is based on an Australian Standard or other standard form of contract, these will be referred to as the Conditions of Contract. These Conditions may then be amended by the Special Conditions of Contract (if any).

Understanding Australian Construction Contracts

In Australia, Construction Contracts are often based on standard forms, such as the Australian Standard Contracts (AS 2124, AS 4300, AS 4000, AS 4902 etc). We discuss these more in our Ultimate Guide to Construction Contracts in Australia.

Common Terms in Construction Contracts

Understanding the common terms in a Construction Contract can help you navigate the complexities of the agreement. Here are 50 common Construction Contract terms, listed in alphabetical order:

  1. Acceleration - When the contractor is instructed to complete (or accelerate) the work before the agreed completion date.
  2. Adjudication - A method of dispute resolution where an independent adjudicator gives a decision which is binding unless or until it is revised in arbitration or legal proceedings (depending on the terms of the dispute resolution clause).
  3. Arbitration - A method of dispute resolution involving one or more neutral third parties who are usually agreed to by the disputing parties and whose decision is binding (depending on the terms of the dispute resolution clause).
  4. Bill of Quantities - A document used in tendering in the construction industry in which materials, parts, and labour are itemised. The BOQ is then made a part of the Contract Documents when the contract is signed.
  5. Change Order - A change ordered to the original contract regarding the scope of work, price, or schedule. The Change Order is usually the document that sets out the change that was directed.
  6. Client/Owner - The party in the contract who commissions the construction work. In Australian Standard contracts, this person is called the Principal.
  7. Collateral Warranties - Contracts which are used to transfer the benefit of warranties given by a third party to the Client.
  8. Conditions of Contract - The terms and conditions that govern the agreement between the client and the contractor. These are also called "General Conditions of Contract" and may be amended by Special Conditions of Contract.
  9. Confidentiality - The obligation of parties to keep certain information confidential.
  10. Contract - A legally binding agreement between two or more parties.
  11. Contractor - The party in the contract who is responsible for the execution of the construction work.
  12. Defects Liability Period - The period of time within which the contractor must return to the site to rectify (at the contractor's cost) any defects that have become apparent. A common period is 12 months from the Date of Practical Completion, although this can be negotiated.
  13. Delay Damages - Pre-agreed compensation for loss or damage suffered by the client as a result of late completion by the contractor. Delay damages are a form of liquidated damages.
  14. Dispute Resolution - The methods agreed upon to resolve disputes, such as arbitration or litigation.
  15. Drawings - The graphical representation of the construction work to be performed. These need to form part of the contract if the client wishes to require the contractor to construct the works in accordance with the drawings. In a design and construct contract, the contractor is responsible for creating the drawings as well as constructing the works.
  16. Estimating - The process of calculating the cost of a project or the quantities required for construction materials to be incorporated into the works. This is a role often performed by a Quantity Surveyor.
  17. Extension of Time - An extension to the contract period to allow for delays. There is usually a detailed extension of time provision in a Construction Contract, and the contractor is often only entitled to claim an extension of time to the Date for Practical Completion for specified causes of delay.
  18. Final Account - The conclusion of the financial arrangement between the client and the contractor.
  19. Fit for Purpose - The work or materials meet the client's purpose. There is a lot of case law in Australia on the meaning of "fit for purpose", and Construction Contract Lawyers need to specify in the contract the exact requirements for this concept. For example, "fit for the purpose specified in the contract."
  20. Force Majeure - Unforeseeable circumstances that prevent a party from fulfilling the contract. There will often be a detailed force majeure clause, and this governs whether, and how, any force majeure claims can be made.
  21. Indemnity - A contractual obligation of one party to compensate any loss etc incurred by the other party due to the act of the indemnitor or any other party.
  22. Insurance - The insurance policies required to cover potential risks during the construction process. 
  23. Insolvency - When a company is insolvent or unable to pay its debts.
  24. Intellectual Property Rights - Rights of a party to ownership of copyright, trademarks, inventions, designs, artistic works etc. These rights can be licensed to the other party so they can perform their obligations under the contract.
  25. Liquidated Damages - A pre-agreed amount of money that a contractor must pay to the client for each day the construction is late. Check out our post on liquidated damages.
  26. Mediation - A method of dispute resolution involving a neutral third party who tries to mediate and help the disputing parties reach a mutually agreeable solution.
  27. Milestones - Key stages in the project that are often tied to payment schedules.
  28. Novation - The process of replacing an obligation of a party to perform part of the contract with an obligation by a different party to perform the contract (ie a third party who was not already part of the contract). 
  29. Parties Involved - This refers to the client or owner who commissions the work and the contractor who carries out the work.
  30. Payment Terms - The terms and conditions under which payments will be made.
  31. Performance Bond - A security provided by the contractor to the client to secure the performance of the contractor's obligations under the contract. Often referred to as "Security" in Australia. May include a bank guarantee or an insurance bond.
  32. Performance Damages - Pre-agreed liquidated damages payable by the contractor if the performance of the works does not achieve certain benchmarks specified in the contract. These are usually specified where the client will need to accept a partial failure of performance in the Works, say they cannot be rectified by the contractor.
  33. Prime Cost Items - Items that have not been selected at the time the contract is entered into, but may become part of the contract later.
  34. Practical Completion - The stage of the works when the work is complete except for minor defects that can be put right by the contractor without undue interference or disturbance to an occupier. There is often a definition of "Practical Completion" which must be achieved before the Practical Completion Certificate is given to the contractor.
  35. Progress Payments - Payments made to the contractor as different stages of the project are completed (milestone payments) or at certain times (eg monthly progress payments).
  36. Provisional Sums - An allowance for a specific element of the works not yet defined in enough detail for the contractor to price. The Provisional Sum Item may form part of the Contract Sum, but be adjusted upwards or downwards once the relevant work is completed.
  37. Retention - A percentage of the contract price retained by the client to ensure the contractor completes all aspects of the contract. In Australia, 10% of the Contract Sum per progress payment is common.
  38. Risk Allocation - The assignment of responsibility for the risks of the project. Within a Construction Contract, this can be at the sentence level, the clause level or the contract level. 
  39. Scope of Work - This is a document that outlines the work the contractor is expected to perform. Intended to be used as a broad outline that doesn't contain specific details, but sometimes used interchangeably with other documents such as the Specification, Principal's Project Requirements and Statement of Requirements.
  40. Site Instructions - Instructions given by the client or their representative to the contractor in writing.
  41. Specifications - Detailed description of the materials, workmanship, and systems to be used in a construction project. This document may sit underneath a Scope of Works, Principal's Project Requirements and Statement of Requirements or comprise the sole document detailing the scope of the works.
  42. Start and Completion Dates - These are the agreed dates for the commencement and completion of the project. In Australia, the completion date is often called the Date for Practical Completion.
  43. Subcontractor - A secondary contractor employed by the main contractor (usually via a subcontract) to carry out specific parts of the construction work.
  44. Substantial Completion - The stage when a construction project is sufficiently completed to the point where the owner can use it for its intended purpose. Also referred to as "Practical Completion" in Australia.
  45. Tendering - The process of a client selecting and appointing a contractor to carry out the construction works.
  46. Termination - The conditions under which the contract may be ended.
  47. Variations - Changes or additions to the agreed work in a contract. Documented in a Variation Instruction or a Change Order (if the variations are referred to in the contract as "Changes").
  48. Warranty - A contractual promise by a party to the Construction Contract that can be enforced by the other parties.
  49. Value Engineering - A process aimed at improving the value of goods or products and services by using an examination of function.
  50. Workmanship - The skill and quality put into making a product or completing a project.

Understanding and Negotiating Your Construction Contract

Understanding your draft Construction Contract (before you sign) is the first step towards a successful project. However, it's equally important to negotiate the terms of the contract to protect your interests.

Here are some tips to help you navigate this process:

  • Get Legal Advice - Engage a Contract Lawyer who specialises in Construction Law to review your contract. They can help you understand the terms and conditions, identify potential risks, and suggest amendments.
  • Clarify the Scope of Work - Ensure the scope of work is clearly defined and includes all the tasks the contractor must perform. If anything is unclear, seek clarification before signing the contract.
  • Negotiate the Price - Often the client will not accept the first price offered by the contractor. You may need to negotiate the price. Make sure that the final outcome of the negotiation is reflected clearly in the contract. GST should be clear (ie included or excluded). Any assumptions in the tender should be reflected in the contract with a specific dollar value.
  • Understand the Payment Terms - Be clear about when and how payments will be made. Make sure you understand how and when any security is to be provided (and that you have the facilities set up to provide this). 
  • Check the Dispute Resolution Clause - Understand how disputes will be resolved. Consider whether arbitration or litigation is the best option for you. Don't be afraid to suggest an expert determination clause for technical disputes, as this may expedite the resolution of any issues that have a technical focus.
  • Consider the Timeframe - Ensure the project schedule is realistic and includes allowances for potential delays. Make sure there is a clear extension of time provision and reasonable circumstances in which you can claim an EOT. Check the liquidated damages amount!

Case Studies

To illustrate the importance of understanding your Construction Contract, let's look at two real-life case studies from Australia.

Case Study 1 - The Importance of a Clear Scope of Work

In a recent case in New South Wales, a dispute arose between a homeowner and a contractor over the scope of work. The homeowner believed that certain tasks were included in the contract price, while the contractor argued that these were extras. The court found in favour of the contractor, as the contract did not explicitly include these tasks in the scope of work. This case highlights the importance of having a clear and detailed scope of work in your Construction Contract.

Case Study 2 - The Risks of Variations

In another case in Victoria, a contractor carried out additional work based on verbal instructions from the client. However, the client later refused to pay for this work, arguing that it was not part of the original contract. The court ruled that the contractor should have obtained a written variation order before carrying out the additional work. This case underscores the risks of variations and the importance of following the correct procedures to document your variation in writing.

Conclusion

Understanding your Construction Contract is crucial to the success of your construction project. By familiarising yourself with the common terms and key elements of a contract, you can protect your interests and avoid potential disputes. Remember to seek legal advice, clarify the scope of work, negotiate the price, understand the payment terms, check the dispute resolution clause, and consider the timeframe. With these tips in mind, you can navigate your Construction Contract with confidence.

Frequently Asked Questions

1, What is a Construction Contract?

A Construction Contract is a legally binding agreement between two or more parties, outlining the scope of work, the cost, and the timeline for a construction project.

2. What are the key elements of a Construction Contract?

The key elements of a Construction Contract include the parties involved, scope of work, contract price and payment terms, start and completion dates, and conditions of the contract.

3. What are some common terms in a Construction Contract?

Common terms in a Construction Contract include contractor, client/owner, scope of work, variations, payment terms, and dispute resolution.

4. How can I negotiate my Construction Contract?

You can negotiate your Construction Contract by clarifying the scope of work, negotiating the price, understanding the payment terms, checking the risk allocation of the various clauses, and considering the timeframe. It’s best to seek advice from a specialist Construction Lawyer such as Rachelle Hare when negotiating your Construction Contract.

5. What are some risks in a Construction Contract?

Some risks in a Construction Contract include unclear scope of work, unfair payment terms, unrealistic project schedule, indemnities, no limitations on liability (for Contractors), time bars, and inadequate dispute resolution mechanisms.

6. What is a variation in a Construction Contract?

A variation in a Construction Contract is a change or addition to the agreed work. Under Construction Contract Law, variations to the scope of the Contract do not need to be documented in a written Deed of Variation signed by both parties. Instead, they take the form of a direction from the Superintendent or Principal.

7. What is the role of a subcontractor in a Construction Contract?

A subcontractor is a secondary contractor employed by the main contractor to carry out specific parts of the construction work.

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