Do your construction project contracts reflect your appetite for risk?

Principals, contractors, consultants and subcontractors are entering into contracts for construction projects every day.

Getting a construction contract wrong can be very expensive.

The questions that need to be asked prior to entering into such contracts are:

1. “What form of contract should be used?”;

2. “Do the proposed terms of the contract reflect my appetite for risk?”;

3. “Will shifting risk affect the price?”;

4. “Is the proposed contract appropriate for this project?”.

Research

In 2013/14 the University of Melbourne launched a research project that sought to assess the preferred forms of construction contracts and the frequency and type of amendments made to standard form construction contracts by industry participants.

The report’s findings, whilst published in 2014, reflect our present day experience assisting principals, contractors, consultants and subcontractors in the delivery of construction projects.

What is the level of use of standard form contracts?

68% of contracts, across all contracting sectors and values, used or were based on standard form contracts.

Standard form contracts were more likely used in head or main contracts than in subcontracts or trade contracts.

Which standard forms are being used?

The four most widely used Australian Standards contracts were (in order):

1. AS 4300 - General conditions of contract for design and construct;

2. AS 4000 – General Conditions of Contract for construct only;

3. AS 2124 - General conditions of Contract; and

4. AS 4902 - General conditions of contract for design and construct.

These four contracts represented almost 70% of the standard form contracts used by construction industry participants.

The main reason given for using standard forms was “familiarity with the form”.

Interestingly, 84% of contracts based on the standard form were amended, or had additional clauses inserted.

The reason predominantly given for amending the standard form of contract was the “need to shift risk”.

Which clauses were most likely to be amended and why?

The types of clause (and their incidence of amendment) that were most likely to be amended as reported by the research, were:

• Extensions of time clauses - 76%
  • Reasons for amending this type of clause may include:
    • setting out the circumstances in which a contractor is entitled to an EOT;
    • providing for a regime for claiming an EOT;
    • determining which party has the benefit of any float in the program.
• Delay damages (including liquidated damages) - 71%
  • Reasons for amending this type of clause may include:
    • providing a regime for payment of delay damages payable;
    • to exclude payment of delay damages;
    • setting a cap on daily delay damages.
• Site conditions – 68%
  • Reasons for amending this type of clause may include:
    • determining which party bears the risk of latent conditions (including contamination) and other site risk;
    • providing what information concerning the site is taken to be known by the contractor or subcontractor, including by inspection.
• Payment generally - 65%
  • Reasons for amending this type of clause may include:
    • specifying the regime for, and any conditions precedent to, claiming payment;
    • aligning payment terms with statutory payment terms under security of payment legislation.
• Variations - 63%
  • Reasons for amending this type of clause may include:
    • providing a regime for claiming and assessing variations;
    • establishing the basis for pricing a variation.
• Warranties as to the quality – 62%
  • Reasons for amending this type of clause may include:
    • modifying existing warranties;
    • inserting new warranties.

What types of clauses were added to the standard form?

The research revealed that several contractor representatives sought to include the following types of amendments that they regarded as being ”a vital part of their organisations preferred risk matrix for contracts”:

• limitation of liability clauses, particularly in respect of consequential loss; and
• a cap on liquidated damages.

What should you do?

The findings of the research demonstrate that there are a number of risk drivers that compel the amendment of standard form contracts. It is prudent to consider these drivers when entering into construction contracts.

Do the construction contracts that you are entering into reflect your appetite for risk?

Bartier Perry can help you to negotiate amendments to the contract to change the allocation of risk. 

If you have any questions regarding this article, please contact David Creais.

Author: Mark Glynn

Contributing partner: David Creais