REUTERS | Jose Miguel Gomez

Is your building contract gathering dust?

So, after the tense negotiations, you have popped the champagne corks and finally have a building contract signed and completed. But now what? Do you let it become an attractive paperweight? Or is it going to be your Satnav – the tool that guides you through the construction process and helps you navigate any roadblocks along the way?

Practice what you have negotiated

If you are using one of the NEC3 suite of contracts for your project, you are probably aware that NEC3 is designed to be used proactively as a project management tool. Using NEC3 forces you to keep the contract by your side at all times and to follow its procedures and disciplines. If you do not, problems are all too likely to ensue.

Despite the OGC’s promotion of NEC3 as the contract for all seasons, it isn’t everyone’s cup of tea. Some clients simply do not have the appetite or resources to operate an NEC3 contract properly, and they are probably better off not using it at all. However, even if you choose to adopt a more traditional form such as JCT, it is unwise to ignore the contract entirely. At least when problems occur, you would be well advised to consult the terms of the contract and follow any procedures in it, so as to prevent that dreaded worst case scenario arising.

Two recent examples

We recently encountered just such a scenario in full swing. An employer had appointed a contractor for several projects on JCT terms. Midway through construction, the contractor went into administration. Understandably, the employer wanted to get its projects finished without delay, so it decided to pay sub-contractors direct to finish the works. Had it read the building contract, it would have discovered that it needed to send a termination notice to the contractor first. Unfortunately, it failed to do this. Imagine the employer’s horror when the administrators served a statutory demand for amounts that had already been paid direct to the sub-contractors. Because it had not terminated the contractor’s employment, it had no basis to resist the demand – as a result it ended up paying twice. The employer could so easily have protected its position, simply by reading the contract.

Even when using NEC3, it can be tempting to bypass the terms of the contract, in the hope that you can sort things out more quickly and easily without them.  However, you may come to regret doing so.

Recently, on a large project, rather than assess compensation events as and when they occurred as required by NEC3, the parties agreed to leave them until the end of the project. While this compromise may have been in the “spirit of mutual trust and cooperation” encouraged by NEC3, the subsequent wrangling and disagreement over the time and cost consequences were certainly not. The parties quickly discovered that the contract does not contain a final account mechanism and that, as a result, there were no rules governing their post-completion discussion. The assessment process simply did not work after the event and, moreover, the much-heralded benefits of “real time” assessment of compensation events had been entirely lost. The upshot was a prolonged negotiation and an unsatisfactory outcome all round.

The course of construction projects does not always run smooth

In a market where insolvencies are common, compliance with statute is essential and disputes are costly, your building contract should be your first point of reference whenever you get the feeling that things are going south. Every project is different and challenges will inevitably arise during construction. When taking a major step such as terminating a contractor’s employment, it is critical to dig out your building contract and read carefully through it. It would be unwise to assume that your counterparty will not be looking at his contractual rights. Particularly in insolvency situations, where the commercial framework holding the contractual structure together has broken down, you may find a cavalier attitude to contract terms rebounding on you.

One thought on “Is your building contract gathering dust?

  1. It’s not simply when things go wrong that the parties need to read and use their contract (and dig it out from under the dust). Survey after survey highlight that the major causes of dispute on construction projects are failing to read, understand or use the construction contract as it is written.

    Any contract – whether JCT, NEC or MF/1 – is the result of a long process and should become the parties’ agreed strategy for payment, risk management, contract administration and so on. It cannot do that if left in a drawer.

    Hope, as they say, is not a strategy!

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