June 15, 2021

5 Tips to Understand and Use Construction Contracts

Tips for all construction professionals to better understand and use construction contracts

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Disclaimer: This blog post is my opinion, please do not take this as legal advice.

If you somehow end up in the construction project management industry, you'll need to quickly understand how contract law and construction contracts work.

I learnt about construction contracts through different experiences. I've worked in the contract administration team when I first started off my career. They also sent me to contract and tendering specific training run by law firms. For my Masters in Project Management, I chose Contract Law as an elective. This was the most helpful and relevant subject from my degree.

Your career path and your experience with construction contracts would be different to mine. But wherever you are in this field, if you are working in this industry, you'll need to have a good concept of construction law. Here are my 5 tips for you to help you understand and use construction contracts better.

1. Understand the importance of construction contracts.

You need to know your contract because your project could go south (I had to rewrite this sentence a few times to avoid inappropriate language). When this happens, the first thing everyone is going to do is check their contracts. I have seen this happen several times in my career so far.

To summarise, contracts are about risk allocation. You need to know what you're signing up for. And so, the more complicated and expensive your project is, the more you will seriously need to ensure that a proper contract is in place.

You need to consider many scenarios and be reasonable about how to split the risk between the Principal and the Contractor. Or else, the Contractor will allocate a significant amount in their tender to allow for the risks. Or, you might be taking on too much risks and absolve the Contractor of their responsibilities and don't get the results you want. Or, your project may turn into a legal battle.

2. Actually read through your contracts.

Project managers are always under pressure to procure and award the contractor as soon as possible. Because of this constant pressure, I wouldn't be surprised if not all of the project managers have actually read through the contract. Or, had time to carefully consider how to set up a contract.

If you are setting up a construction contract or are currently using one, take the time to actually read through it. This will help you identify what your responsibilities are.

There are many different types of construction contracts and they all slightly vary in each parties' responsibilities and procedures you need to go through. Reading through them will help you understand the what you need to do when you encounter a certain scenario.

For example, when you hit a certain milestone or need to request the contractor for variations. You'll also understand what information should be included for Payment Claims by Contractors, and so on.

3. Educate yourself on contract and construction law

Following up on the 2nd point, if you are unsure about any terminology or concepts, these websites will help you.

These are amazing resources and I always preach about them. Have them saved in your browser bookmark. Use these websites when you have a question or go through them whenever you have spare time.

Also, if possible ask your manager for construction contract training or courses. I went to GC21 contract training, as well as general government procurement and contract administration training and I found them very useful.

4. Understand how your organisation operates

All the organisations I've worked in had different stances on certain contractual topics.

For example, I worked on organisation where they had different preferences on how they obtain securities (bank guarantees or cash retention). Or, how seriously they use Delay Costs and Liquidated / Consequential Damages. I found some organisations use Provisional sums liberally and others none. Some organisations like to throw contractual clauses at the contractors to get results. And others like to have these in the back pocket and pull them out when they need to.

To better understand your organisation, once you have had a chance to read through the contract, ask your managers or colleagues how they've dealt with certain situations. For example, did the organisation ever claim for liquidated damages on contractors before?

5. Learn to set expectations and negotiate

With your contract knowledge and how your organisation operates, know how to draft up the contract when you go out for tender so that you are set certain expectations. Know also how to negotiate during the tender process.

When you receive tender submissions, contractors will outline their assumptions and exclusion clauses (and if you don't, I would be worried). Learn to analyse these and see whether the contract states anything about these situations. Also, consider what the contract says and compare to what is actually realistic.

For example, in your project, the procurement of a certain item may be dependent on so many things. Be realistic about whether the contract end date is completely set in stone, and if not, think about in what circumstances can they request for extension of time.

Summary

In summary, because your project can go south, you need to know how construction contracts work and what each of the parties responsibilities are. Use the resources above to educate yourselves on the law. Understand how your organisation operates so you can learn to set expectations and negotiate with your contractor before and during the project.

I hope your project runs smoothly and everyone knows what they're signing up for.


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