When building, various factors can derail a construction workers project including the weather, your subcontractors, and even your client. It is then critical that you take steps to protect yourself and your business. Below, we set out some key terms that you should look for in your building contract.
- Fixed Price v Cost Plus Contracts
Is your building contract fixed price or cost price?
If your contract is a fixed price, you agree to complete the project for the fixed fee, regardless of the resources used or time expended. For homeowners, fixed cost can provide certainty and predictability. However, if you agree to a fixed price, you risk leaving yourself open to factors outside of your control (for example, the fluctuating price of goods) that can increase the project’s cost beyond what you expected.
On the other hand, under a cost plus contract, you are paid for your allowed expenses plus an additional payment for profit. A cost plus contract is advantageous as you can complete the same quality building job without having to worry needlessly about unforeseen circumstances.
- Varying Fixed Price Contracts
If you agree to a fixed price contract, you’ll need to protect yourself by clearly describing the provision and prime cost items. Your should include provisional costs that are impossible to determine at the time of signing the contract such as:
- Disposing stormwater;
- Constructing a retaining wall; or
- Piercing underneath a slab of concrete.
These jobs all cost money and your time and aren’t necessarily easy to predict at the outset of a project. Comparatively, prime cost items allow for the supply of necessary items that aren’t yet selected including taps, or door furniture.
- Liquidated damages (LD): How much are you up for?
You may have heard the term thrown around but what does Liquidated Damages actually mean? Liquidated damages accrue as a means of compensation following a breach of contract. Typically, this means compensating the party if there are delays and the project runs over time.
If your building contract contains a liquidated damages clause, ensure that it is not an arbitrary sum but attaches to a measurable factor. Take care and look for the following:
- Does the Liquidated Damages clause provide for a minimum lump sum payable on breach?
- Is the Principal entitled to suspend or withhold payment on breach?
- Is the Principal entitled to forfeit all retention money on breach?
Rather, ensure that your Liquidated Damages clause is drafted to include a formula for calculating loss if a breach of contract occurs.
- Defects liability period
A defects liability period obliges you to return to the site after the work is complete to fix any defects that have appeared in the work. Usually, this period is set at 12 months. A defects liability period is standard in most building contracts. It’s in your best interests to take care so that no defects occur in the first instance. But if they do, make sure that the defects liability period doesn’t exceed 12 months.
If you understand your building contract, your project is likely to run smoothly. We have set out several factors to look for when drafting and reviewing your contract. A cost plus contract better protects you against contingencies. However, if your agreement is fixed price, ensure that it includes provisional sums, accounting for what you can’t calculate at the outset. Your principal or client will likely want to include a liquidated damages clause. If you do have one, make sure that it is not arbitrarily defined and that it attaches to a measurable factor. Similarly, check that your defects liability clause isn’t too onerous and exceeds 12 months.
If you have any questions about drafting or reviewing your building contract, ask LegalVision’s contract lawyers.
This is the fourth edition of Spotcap Specialists – a content series which features advice and tips from experts in a range of fields to support small business growth.
This post was written by Chloe Sevil, a lawyer interested in contract law, innovation and life hacks as well as LegalVision’s resident travel consultant.
Originally published February 8 2016 , updated April 12 2019