Introduction

Thorough planning at the contract drafting stage is essential for effectively managing risks in construction projects, especially those related to delays and disputes. This initial phase, where the terms and conditions are set, plays a significant part in establishing a clear framework for the project, yet its importance in preventing future problems is sometimes not fully appreciated.

This article looks into strategies that can be used when drafting contracts to help reduce the likelihood of construction delays. We will examine how clearly defining terms, allocating risks appropriately, and including specific clauses can create a more resilient contract, better prepared to handle the common causes of delays and disagreements in construction projects.

Which Clauses Lead to Most Risks and Disputes in Construction Contracts?

In construction contracts, several clauses can pose significant risks, requiring careful attention and management. These include:

• Clarity and Consensus on Offer and Acceptance: Often, large-scale construction projects begin and even complete without clear consensus on the contract terms or the documents forming the contract.This lack of clarity can be due to administrative inefficiency, oversight, or sometimes strategic ambiguity. The negotiation and finalisation of a building contract, which can span several months, hinge on clear agreement. Disputes frequently arise in the construction industry over whether a contract has been concluded and, if so, what the terms are. Questions such as whether the parties intended to contract, the certainty of agreed terms, and the sufficiency of acceptance are crucial in determining the existence and enforceability of a contract.
• Ambiguous Scope of Works: Disputes are common over contract terms, especially in the interpretation of agreed-upon language. If terms are too uncertain, the contract or parts of it may be non-binding. Written contracts in commercial projects are meant to eliminate ambiguity, but disputes can still arise, especially when contracts are not in writing.
• Uncertainty about Critically important Contract Terms: For a binding construction contract, essential terms such as parties, price, time, and description of works must be agreed upon.Construction contracts often face uncertainty due to their complexity, the extent of risk allocation, and the integration of various documents (like plans, specifications, and programs) which might be inconsistent.
• Risk Allocation: Construction contracts are meant to pre-define the allocation of project-related risks. However,problems arise when risks are assigned to parties unable to manage them or when profit margins do not reflect assumed risks. The principle that risks should be borne by the party best able to manage them is often not followed. Clear identification of risks and obligations is essential to avoid disputes.
• Eventuality of Non-Performance/Frustration of the Contract: The recent trend in insolvencies in the construction industry highlights the lack of versatility in contracts to adapt to unforeseen risks. Fixed long-term agreements often do not account for variables like inflation, leading to disputes and financial losses. Better planning and inclusion of ‘escape mechanisms’ in contracts are necessary to accommodate unexpected scenarios, as seen during events like the Covid-19 pandemic.
• Payment and Cash Flow Clauses: Payment issues are a perennial problem in the construction industry. Despite laws like the Security of Payment Act aimed at improving payments to subcontractors, late payments and disputes remain common. A cultural issue exists where subcontractors often refrain from legal action against contractors to preserve future work opportunities, leading to a power imbalance and neglected payment obligations.

These clauses and issues highlight the importance of precise,thorough contract drafting and negotiation in the construction industry to minimise risks and disputes.

Avoid Poorly Drafted Contracts: How to Stay Away from Risky Contractual Clauses?

Balanced Contract Drafting

In the context of drafting construction contracts, its crucial to start by aligning the contract with your client’s objectives. This involves a deep understanding of several key factors:

• Typical causes of cost and time increases in construction projects
• Recognition of which project aspects carry inherently higher risks
• How to formulate contract conditions that safeguard parties’ interests

The ultimate goal is to create balanced contracts without unnecessarily inflating tender prices due to transferring risks that might never materialise.

achieving this balance requires detailed understanding of both construction law and potential project risks. When done effectively, this balanced approach can lead to more favourable outcomes for all parties involved in the project.

Following Best Practices for Good faith Negotiations

Negotiations in construction contracts should be conducted in good faith, focusing on fair risk allocation and efficient cash flow management.

Frequently enough,during the negotiation stages,there is a tendency to offload as much liability as possible,disproportionately impacting subcontractors with unmanageable risks and leading to legal disputes. This is indicative of a lack of obligation in the industry, with principals, developers, and head contractors frequently creating agreements heavily in their favour, neglecting the long-term ramifications for the project.

Therefore,these parties should engage in more responsible contract negotiations,ensuring fairness for all involved,which is crucial for addressing common issues in construction contracts,including:

• Short-sighted contract terms that ignore long-term project health
• Unfair risk distribution
• poor cash flow management
• Disproportionate liability allocation

Holistic Tender Evaluation

When it comes to tender evaluation,it is essential to consider more than just the price. Contractors should evaluate potential suppliers based on a range of criteria including:

• Their ability to resource the project adequately
• Capacity to meet delivery deadlines
• Financial stability
• Pricing structure and competitiveness

While pricing is an important factor, selecting the lowest bid without considering these additional factors can lead to challenges later in the project, such as supply disruptions or quality issues.

Therefore, a comprehensive approach to tender evaluation, which goes beyond cost considerations, is vital for the smooth execution and success of the project.

Effective Risk Allocation to Manage Construction Contracts

Effective risk allocation is a critical aspect of drafting construction contracts, requiring principals and contractors to plan and allocate project risks in a fair and reasonable manner. A key area that needs attention is planning for delays caused by factors beyond the builder’s control.

These often-neglected risks should be accounted for in contracts to ensure that liability is fairly distributed, particularly when delays arise from external circumstances outside the builder’s influence.

Recent trends in construction contracts have shown a tendency to limit the builder’s entitlements for extensions of time or delay costs, typically onyl allowing for these in cases of:

• Breaches by the principal
• Acts by the principal
• Omissions by the principal

This approach frequently enough unfairly burdens the builder with costs associated with common risks such as:

• Weather-related delays
• Supply chain disruptions
• Other external factors beyond builder control

Such risk allocations are neither reasonable nor practical, as they make the builder liable for circumstances beyond their control, potentially leading to unnecessary claims and disputes.

The negotiation of risk allocation should be guided by common sense and a sense of fairness. It is essential that the risks assigned to a builder or any party are within their control and management capacity. this approach:

• Promotes more collaborative working relationships among all parties
• Fosters a more equitable distribution of responsibilities
• Minimises the likelihood of disputes
• Contributes to smoother project execution

Inclusion of ‘Rise and Fall’ Clauses to Avoid Risks

A “rise and fall” clause in a construction contract is a provision that allows for the adjustment of the contract price in response to changes in:

• the costs of materials
• Labour rates
• force majeure scenarios related to the construction project

This clause is designed to address the risk of cost fluctuations over the course of a project, especially in long-term contracts where such changes are more likely.

Although it primarily handles cost variability rather than delays, a “rise and fall” clause can indirectly help manage the impact of delays in several ways:

• Financial Stability for Contractors: By adjusting contract prices according to changes in material and labour costs, a “rise and fall” clause helps maintain the financial stability of contractors.this financial predictability can be crucial in situations where delays occur, ensuring that contractors are not financially overburdened by increased costs during the extended period.
• Incentive to Continue Work: Delays frequently enough lead to increased costs. A “rise and fall” clause can provide an incentive for contractors to continue working on the project despite delays, as they know that significant cost increases will be compensated.
• Reducing Disputes Over Costs: Delays can lead to disputes over who bears the extra costs incurred during the extended period. A well-drafted “rise and fall” clause can pre-empt these disputes by providing a clear mechanism for dealing with cost escalations, thereby reducing the likelihood of legal disputes and further delays.

Specialised Legal advice Can Keep You Away from Risks

Drafting clear, comprehensive, and balanced construction contracts is paramount to mitigating risks, particularly those related to delays and disputes. Addressing potential issues like ambiguous scope, uncertain terms, unfair risk allocation, and payment problems at the contract drafting stage is crucial for project success and maintaining positive working relationships between parties.

implementing strategies such as fair risk allocation, good faith negotiations, holistic tender evaluations, and incorporating clauses like ‘rise and fall’ can substantially reduce the likelihood of conflicts. For expert assistance in drafting robust construction contracts that protect your interests and minimise potential risks, Contact PBL Law Group to consult with our experienced construction lawyers.