The Importance of a Construction Contract

by | May 29, 2018

We enter into contracts every day of our lives, whether buying groceries from the supermarket or paying to park in a car park. Most of those contracts are simple and often verbal. However, due to the complex nature of construction, and the many things that can go wrong, construction contracts should be in writing, no matter how small the job is.

 

What is a Contract?

 

A contract is a binding agreement between parties for one to do work in exchange for some benefit from the other, normally a payment. The agreement is a legal document, enforceable in a court of law, and states the expectations of both parties and how negative situations will be resolved. Written contracts provide more certainty than verbal contracts, for obvious reasons, and are the preferred option for construction contracts.

 

There are 5 essential elements required for the agreement to be a legally enforceable contract:

  1. A valid offer
  2. An acceptance
  3. Consideration
  4. Capacity of all parties to enter into legal relations
  5. Lawful purpose

 

What are ‘Standard Form’ Contracts?

 

A ‘standard form’ contract is a pre-prepared contract where most of the terms are set in advance and there is little or no need for negotiation between the parties. Often these are printed with only a few blank spaces for filling in information such as names, dates and signatures.

*There are several popular standard forms of construction contracts that are currently used in Australia:

  1. Australian Building Industry Contract – ABIC MW-1 – Major works contract
  2. Australian Building Industry Contract – SW-1
  3. General Conditions of Contract – National Public Works Conference Edition 3
  4. Australian Standard General Conditions of Contract AS2124-1992
  5. Australian Standard General Conditions of Contract AS4000
  6. Lump Sum Contract for Simple Building Works – SBW
  7. Australian Standard General Conditions of Contract AS4905
  8. Project Contract PC-1 1998
  9. Cost Plus Contract for Building Works – FF/C
  10. General Conditions of Contract for Design and Construction (AS4902)
  11. Construction Management Agreement
*(Source: https://en.wikipedia.org/wiki/Australian_Construction_Contracts

Selecting the right building contract for your specific development project is extremely important. The type of contract you need will depend on various factors, however, the contract must comply with legislative requirements.

In order to assist with compliance with the required contents of contracts it is highly recommended that you use standard-form contracts, such as those offered by the Master Builders’ or the Queensland Building and Construction Commission.  The numerous standard-form contracts have been drawn up to ensure compliance with legislative requirements and have been tailored for the building and construction industry, offering a range of commercial contracts, residential contracts and subcontracts.  With everything required for compliance already drafted in the contract, all you are required to do is complete it.

 

Advantages of a Construction Contract

 

There are many benefits for both parties to have their construction contract reduced to writing. A written contract can: 

  • Provide more certainty for both parties
  • Help to minimize risks by making the agreement clear
  • Help to prevent misunderstandings
  • Set out how a dispute over payments or performance will be resolved
  • Clearly set out the details of what was agreed in terms of materials, timeframes, payments etc
  • Provide security and peace of mind
  • Help to avoid potential disputes and litigation to some degree
  • Serve as proof and a reference of what was agreed
  • Specify how either party can end the contract before the work is completed

 

One of the most common construction contracts still in use in Australia today is the AS2124 Standard Form of Contract. Typical of a construction contract, it requires careful management of time, cost and quality so as to deliver projects successfully.

For more information on this contract and an in-depth view of the specific nuances of the contract with real world examples, make sure not to miss our seminar entitled A Practical Guide to the AS2124 form of Construction Contract. (dates and venues to be released soon) This seminar is recommended for anyone who is working on, or will be working on, projects using the AS2124 form of contract, including Principals, Contractors, Superintendents and Sub-Contractors.

 

This article is for general information purposes only and should not be relied upon in any specific situation without appropriate legal advice. If you require that advice or wish to discuss any of the issues raised in this article, please contact us.
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