Want to avoid construction contract issues? Find out how with this simple guide, and keep your projects running smoothly
No one wants anything to go wrong during a construction project. It costs money, wastes time and can end up being harmful to your company’s reputation. Shipping delays, weather and on-site accidents can be out of your control, but they can cause construction contract issues if you haven’t prepared for the possibility that they may happen.
So how do construction contract issues come about? And what can you do to prevent them and keep everything running smoothly?
Why do construction contract issues arise?
The most likely reason for a contract dispute is a disagreement between parties. It could be a subcontractor, the client or even your own company not wanting to take on particular risks.
Problems can also arise once work has begun, though. Supply chain delays and unsubstantiated claims can cause issues that need to be resolved before they cause too much friction, leading to complications in project management. The last thing any party wants is a breakdown of the contract that leads to a project being halted.
How to avoid construction contract issues
If you want to minimise the likelihood of any problems arising, you need to start with the contract itself. Proper planning will protect everyone from overrun costs and unfair liability.
Every party with a stake in a project should be included in the contract. This includes subcontractors. As a result of this, each party will be able to take on the risks that are appropriate for them – an architect or owner shouldn’t be liable for injuries because they have nothing to do with their role in the project. This is in everyone’s best interests; unfair, poorly written contracts can raise a project’s costs by up to 20%, having an adverse effect on profitability and efficiency.
When it comes to sharing risk and financial burdens associated with it, indemnity provisions are popular. But while they give security against any monetary losses, they can be ineffective due to a lack of insurance and asset coverage. Check if they’ll be worth it for your project, but in any case it’s a good idea to write in a clause that all parties must regularly report on their insurance status. By doing this, everyone can be sure that no coverage ends before completion.
Every contractor knows that insurance is vital. Policies should be specified in the contract to keep everyone on the same page.
The most common types of insurance are:
- Liability insurance, which covers injuries, accidents and property damage
- Builder’s risk insurance, which can help pay for damages
- Natural disaster insurance, which provides cover for flood, fire and other natural disasters
Make sure all contingencies are accounted for in your contract, whether it’s shipping delays or weather risks (especially if you’re in an area that’s prone to natural disasters like flooding). No one wants a delayed project while parties are throwing blame around to avoid incurring extra costs. Highlight in your contract who is liable for different types of events so that everyone is clear who is responsible.
It’s also worth looking into surety bonds if you’re concerned about risk. They’re designed to prevent loss and protect parties in the case of construction contract issues.
The three most common types are:
- Bid bonds, which provide assurance that a bid has been submitted in good faith and a contractor can provide the proposed services
- Performance bonds, which protect an owner from loss if their contractor can’t perform their duties
- Payment bonds, which reassures subcontractors and suppliers that they will get paid
Having everything in writing is imperative when it comes to contracts. If any changes need to be made after signing, ensure they are always set out in writing and circulated to all parties. And remember to get a lawyer or attorney to look over every contract to ensure nothing has been missed out or poorly worded.
What about smart contracts?
Some construction firms have even started using smart contracts. These legal agreements use blockchain technology to implement their terms through code. This means that the agreed terms are always adhered to, and on-site technology can track project progress, workers’ hours, weather conditions and supply arrivals.
This could make the current form of construction contracts obsolete. Payment notices and milestones could be monitored and tracked through the new technology – no more waiting around. Some even argue that intermediaries, including lawyers, won’t be needed to settle disputes, although this may not actually be the case. Dispute resolution would be written into the smart contract, but signatories may still need to contact legal professionals in certain circumstances.
Smart contracts don’t come without their difficulties, though. It would involve change in the construction industry on a massive scale – a scale that the sector isn’t perhaps quite ready for. It also has the risk of leading to administrative job losses as fewer people would be required to set up and manage contracts. And when it comes to legal issues, should the courts be involved, or will a new legal code need to be introduced? One to watch for sure.
When can I use force majeure?
Force majeure can be complicated as there’s no general principle of it in English law. You’ll need to check the wording of your contract before you make any claims, and bear in mind that these claims rarely succeed in English law.
These clauses can provide relief when unexpected circumstances out of a party’s control prevent or delay a contractor performing its contractual obligations. It’s worth pointing out that it probably won’t result in a financial settlement – instead it focuses on time relief.
For something to qualify as a frustration, it needs to be an event beyond anything that could have been considered when the contract was drawn up. As a result of this, a lot of companies have tried to claim Brexit as a severe construction contract issue. However, this succeeding is on a case-by-case basis and is determined by the exact wording in your contract.
How can construction contract issues be resolved?
But what happens if you have a construction contract issue once work is already underway? Generally speaking, there are six ways these can be taken care of, and one or more of these should be written into your contract.
1. Negotiation
Probably the simplest of the options available to you, negotiation will involve the parties attempting to reach a satisfactory resolution between themselves. However, this isn’t always possible and you may need to escalate.
2. Mediation
Having a neutral third party help solve your dispute can be a good way to go. While the results aren’t legally binding, it can provide a fair and effective solution to your construction contract issues.
3. Expert determination
If you’d like to go down the mediation route but you need someone who’s a specialist in your field, you want expert determination. This works in exactly the same way as mediation and can save you time and money in the long run.
4. Adjudication
You don’t always have to come to the end decision yourself – with adjudication, a third party will reach a resolution, which can then be enforced in court.
5. Arbitration
To take adjudication to the next level, you’re looking at arbitration. Here, a neutral third party with relevant experience makes a decision that can be legally binding depending on where you are. While expensive, construction contract issues can be sorted in a timely manner.
6. Litigation
If all other attempts have failed, it’s time for litigation. Involving a trial and a legally binding result, it’s thorough but expensive. In the majority of cases, litigation is a last resort.
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