Prepare the Contract

Once you have selected the appropriate contract for your construction project, drafting it will be your next step. To prepare, you will need all the necessary details of a contract. Incorporating all the parts of a contract will need to be done accurately to ensure compliance with all regulations and standards that apply. This will also ensure that all the parties involved understand their rights and obligations. As a contractor, you may wish to use your own form of building contract. This is quite common in the construction industry. It is advisable to have your contract checked by a specialised solicitor. However, many contractors choose to use a standard form of contract, which is usually written in ‘Plain English’. These forms of contract can be purchased from such industry associations as Master Builders Association or the Housing Industry Association (HIA). You may find contract templates provided by different government departments as well, such as NSW Fair Trading or the Queensland Building and Construction Commission (QBCC).

To explore contract types, you register freely on HIA's website, then either purchase a contract template relevant to your state/territory, or create a draft by following these steps:

• Click on 'Create'.
• Select your state/territory.
• Select the contract type you need for your project.
• Select either 'Create contract' if you have the project details or select 'Create template' to create a template that you can complete later.
• Your contract will have a 'draft' watermark displayed until you purchase it. Generally, you would need to purchase a minimum of two (2) copies: one for the client and one for yourself ('the builder').
• Once logged in, the User Guide and Frequently Asked Questions section will be able to assist you further.

This nine-minute video published by HIA will explain step-by-step how to create a HIA-contract:

At the end of the module, at the Additional Resources, you can access a few examples of different contract templates.

Details of a contract

The construction contract you are drafting will include various details along with the agreements and conditions. The essential elements that you will need to incorporate are the following:

• Identification information – This will include the names of the parties involved, their addresses and signatures in all the necessary pages of the documents attached.
• Scope of work – Also known as ‘statement of work’. This outlines the total output and work needed for the construction project. The scope of work needs to include the following:
  • An overview of the project
  • Roles
  • Responsibilities
  • Deliverables
  • Tasks
  • Exclusions
• Schedule of work – These are instructional lists of the work required.
• Payment terms – These include the terms of payment agreed upon with the costs.

It is important to note that these are only broad topics on the details of a contract that apply to building and construction projects. Remember that requirements and standards are enforced differently across states/territories. Furthermore, legislative, and regulatory requirements and standards also vary depending on the specifications, type, nature, and size of a building and construction project.

Unreasonable or vexatious notice

Throughout the construction process, a number of errors and misunderstandings may occur, causing one party to serve a default notice (for example) to the other. The contract needs to stipulate the conditions that would allow a contractor to serve this notice. A contractor may serve a notice for default to the business or the business may serve a notice of termination of employment to the contractor. In similar cases, the Court can determine that a vexatious notice may mean to have ulterior motive or to oppress, harass, or annoy the other party.

Repudiation of a contract

Repudiation of a contract by either party occurs when a party acts like it no longer intends to fulfil its contractual obligations. This is also known as Anticipatory breach. The breach of contract is grave enough that it entitles the innocent party to consider the contract terminated and to file for damages. On the other hand, the innocent party may still choose to continue enforcing the contract, as well. In both cases, the innocent party still has the right to claim damages.

There are three types of repudiation:

• Express repudiation: This when one of the contracting parties expresses that they do not intend to follow through with the deal. Expression is clear and unconditional. This may be express refusal to work.
• Repudiation when it is impossible to honour the contract: This happens when either of the contracting parties takes actions that make it impossible to perform the deal.
• The site or property might be transferred to a third party: This happens when the rights of the site or property the project is on will be transferred to another person or organisation.

Conditions for completion at the cost of the contractor

Another way to discharge a contract is when the contractor completes the project at its own cost. A contractor may forward a delay claim to a company or another contractor, meant to recover additional costs incurred in building a project. The delay claim is addressed to the party whose actions or omissions caused the injured party’s (in this case, the contractor’s) work to be delayed and the costs raised. The burden of proof must be with the injured party to prove that its work was wrongfully delayed, after which the injured party may recover the damages and additional costs garnered.

It is always the duty of the contractor to minimise damages and account for potential damages by construction delay by taking other work.

Similarly, a contractor may also file an acceleration claim, meant for another contractor or owner who induces the innocent party to complete the project ahead of the scheduled time. You have to take note that inducement must be present and that without it, simple acceleration does not entitle a party for damages. Acceleration without inducement is not enough and without evidence to prove inducement, acceleration is always presumed to be voluntary.

This is different from a mere constructive acceleration claim meant to convey by behaviour the desire for acceleration without actually saying so. Constructive acceleration claims give an avenue for damages when the schedule and scope of work stay the same, but the performance was still constructively accelerated even if the conditions were out of the contractor’s control. Generally, construction contracts allow for an extension of time because of unforeseeable delays.

Ousting the contractor

Included in the rights of contractors along with timely payments, time extensions, contract termination, and appointment of subcontractors, is site access. The contractor has the right to access and be present in the site where the project or construction shall commence at the time and date agreed upon in the contract.

Expelling the contractor from the building or construction site and even failure to provide access to the contractor to such site constitutes as a breach as it frustrates the purpose of the contract.

Abandonment of a contract

Abandonment in business and contracts means that the control has been relinquished and the terms have been given up. Contract abandonment occurs when both contracting parties have acted in such a way that the contract is rendered invalid and mutually agree to abandon the contract. This may happen when both parties violated the terms of the contract or when one party acted inconsistently with its terms and the other party consented to this. Contract abandonment can only be applied in private contracts.

Once again, it is important to remember that if only one person abandons the contract, then that is a case of a breach of contract. An example of contract abandonment occurs when a contract cannot comply with the outcomes needed for the project. Without valid reasons for abandonment, legal and disciplinary action may be enforced.

Important to a contract is the abandonment clause which allows for parties to abandon the contract before completing the contractual obligations set in place. There will be no penalties in such cases. Examples include employment contracts where an employee may resign and the company cannot argue otherwise and insurance contracts that allows the insured to abandon ruined property for settlement.

Billing for projects may be done at the start, at the end or in instalments as the project goes on. Construction contracts usually provide for progress payments. Progress payments are payments from the business or company to the contractor made at a scheduled time or each stage of a project. Under the Building and Construction Industry Security of Payment Act 1999, progress payments must be made to:

• identify the construction work (or goods and services) that will be paid
• state the amount of progress payments due
• explain that the progress payment is made under the Building and Construction Industry Security of Payment Act 1999

Stages of the project

A construction and building project usually has six stages depending on the project concerning the scheduled payments.

Progress payment scheme allows the contractors to schedule when payments will be received and not have to shoulder the project costs themselves. This payment scheme allows contractors to be paid in portions; they do not have to wait until the project is completed for payment and cease construction operations if they are not being paid. Furthermore, the contractor can pay its employees and bills on time and not go into debt. Lastly, as a security to the contractor, scheduled payments allow the contractor to check the financial capability of its clients. If the company has been delaying set payments, then that is a red flag for the contractors on the financial status and capability of the company. 

Scheduling progress payments

Usually, for a certain good or service, payments are made before or after the good or service has been delivered. However, for large-scale construction projects, this would mean that contractors would have to shoulder the bulk of the costs before they are reimbursed and paid. Your progress payment schedules will depend on the contract terms that is approved by both contracting parties. You may present a schedule based on the amount of work that needs to be done at different stages of the project and the funds that need to be distributed. Progress payments operate as a system where payments are made based on the percentage of completion of the project at hand, allowing contractors to have running funds throughout construction and to pay their employees and for the raw materials regularly.

Depending on the contract terms for payment, progress payments may be made monthly or at certain percentages of completion, e.g. 30%-60%-100%. Here is an example of progress payments at specific stages of completion of the construction process and using these percentages in Victoria. This is also the one usually followed in New South Wales, Queensland, South Australia, and Tasmania.

In Western Australia, the scheme is as follows:

If you were to use a different percentage succession, then you will need to sign that the above scheme will not apply (since the scheme from the preceding table is suggested by law) and that you will adhere to a different scheme such as the one below:

Applying for extension of time

Unforeseeable delays are inevitable in construction projects and warrants an application for an extension of time (EOT). Example of unforeseeable events are the following:

• Force majeure
• Strikes
• Changes in the law or requirements
• Political unrest or terrorism
• Delays from the part of the subcontractor
• Delays caused by other parties when the contractor has exercised due diligence preventing so.

Filing a claim for extension of time must be done immediately since recording all the details necessary for the claim may be time-consuming. To file a claim for extension of time, the following details must be included:

• When the delay occurred
• Why it occurred
• The tasks and scheduled activities that the delay affected
• Resources that were needed for the tasks involved
• Other activities on or off site that had to be carried out as a result
• Due diligence exercised by the contractor to have avoided or minimise such delay
• A solution for the delay and the affected plan
• Communications between the management and building team to avoid or minimise such delay

A claim for an extension of time must be clear, direct, accurate, and supported by records and photos. The claim must narrate what happened to have caused the delay and the consequences of the event.

There are three possible results to an extension of time:

1. The extension is granted, and a change order is issued.
2. The project manager submits a request for information to know more about the event and decide appropriately.
3. The request is denied.

In preparing contracts, you must ensure that ambiguities, erasures, alterations, and missing spaces are finalised. The ambiguities must be made clear, erasures not allowed, blank spaces are filled, and alterations should be re-typed and countersigned.

A pre-construction checklist should be arranged to make sure that all bases are covered, and an organised and systematic method is followed in the pre-construction preparation. The list includes the following:

Disputes and complaints regarding construction may arise because of delays, failure in complying with payment schedules, inability to administer the contract, and the like. However, this can all be attributed to a general lack of understanding of the construction contract itself. Disputes and complaints can lead to a further delay in the construction project since negotiations have to commence before this can be resolved. To avoid the possibility of termination (as the worst-case scenario), it is good advice to take a proactive approach at the onset of the project. The following are a few reminders on how to avoid conflict at the preparation stages of the construction project:

• Make sure you understand the entirety of the contract and clarify points immediately.
• Negotiate ambiguous or problematic clauses.
• Make sure to run accurate estimates, schedules, orders, etc.
• Account for delays and try to be realistic in terms of anticipating disruptions.
• Identify possible risks and consult all parties involved together with specialist.
• Make it a point to deal with problems and solve them immediately.
• Ensure that processes and information are transparent.
• Try to make the process and system predictable at every turn.

Contract drafting

Contract drafting is the process of setting the terms and details of the contract to create an overview of the rights, duties, and responsibilities of all parties involved, and to set the vision and goal of the construction project. Similarly, you would want to know what the penalties are for disobeying the terms stated in the contract and how to go about negotiating if disputes arise. Anyone can make a draft contract. The parties involved may do so without external assistance, but it is good practice to have a lawyer involved as they know how to make a transparent and secure contract regarding complex projects. Such contracts are not only limited to construction contracts. These may also include employment contracts, sales contracts, insurance contracts, property purchase contracts, and the like.

Having a lawyer as part of the drafting team serves as your protection from making clauses that are considered illegal by law. They can also provide additional policies and regulations that can strengthen the legality and validity of your contract. Finally, having an external party to check your contract provides as a guarantee to both parties that the terms and responsibilities shall be just for both sides.

Contract reviewing

Contract reviewing, on the other hand, is the process of meticulously going through clauses (often with a lawyer) in the contract to ensure that you have truly understood what these clauses mean and that you will not comply with what you do not understand. This is necessary so to avoid blind spots and disputes in the future. The Courts will honour what is explicitly written in the contract. Thus, a thorough review can finalise and polish a contract into a clear and simple one.

In line with this, here are some ways to ensure a smooth-sailing contract draft and review with the parties involved:

• Communicate with your lawyer. Having a qualified contract lawyer present throughout the making of the contract is necessary to ensure that the intentions of all parties are communicated in the contract and that the terms are legal to render the contract enforceable.

• State the provisions in a simple and straightforward language. The clearer and straightforward the contract is drafted, the easier it would be for everyone to understand its terms and intentions. Unclear and vague terms create a blur and vulnerability in the contract, which can lead to misunderstandings and errors. It is important to be proactive in the drafting stage to make sure that there are no loopholes to your phrasing.

• Include all the important clauses. Construction contracts are complex and tricky to construct since it must allow for the project goal to be achieved while also protecting the parties involved in the contract. An experienced lawyer can prevent overlooking important sections like payment, termination, dispute resolution, insurances, and renewal to ensure that all the important parts of a strong contract are present and legally enforceable.

• Write everything down. Whatever was agreed on verbally must still be put into writing, signed, and attached to the contract. Without a written agreement on what had transpired and what was agreed on, you may have conflicting versions of what actually happened. Written and signed agreements (no matter how little the matter may be) gives the agreement protection and proof and helps avoid misunderstandings and fault of memory.

• Avoid following contract templates available online. A comprehensive and unique contract cannot be made by following a standard contract found online. Your building project is specific to you and the entities you agreed with, so the provisions in your agreement may be unique to your situation.

Preparing a contract requires ensuring that your stipulations are complying not only with your state or territory’s standards and regulations but your organisation’s legal process as well. You may consult your supervisor or your organisation’s legal policies and procedures to understand the legal process followed for contracts.