What are the types of Construction Contracts

Construction contracts are agreements between the parties involved in a construction project. These include all terms and conditions agreed upon by the parties as well as the scope of work to be performed for the project.

A well-written construction contract includes terms and conditions regarding time frames, goods and services to be carried out, payment, insurance, warranties, liabilities, dispute resolution, and rights and obligations of the parties.

Different contracts exist for different types of work, whether it is for small works, residential or commercial buildings.

What are the classifications of Construction Contracts?

Residential Contracts

Residential construction contracts are available for house construction or renovation projects. Whichever contract you hold, it is important to have these contracts comply with the Home Building Act 1989 (Act).

Small job home building contracts are usually for construction projects worth $5,000 to $20,000. These contracts are only for minor renovations or additions. Any larger than that may require another type of contract.

Larger home building contracts, on the other hand, are for jobs that cost more than $20,000. These projects usually involve building a new home or carrying out major renovations in the house.

Commercial contracts

Commercial construction contracts are usually for buildings that are intended for business use or commercial purposes. Some examples are entertainment centres, hotels, restaurants and office buildings. For these types of projects and contracts, there is usually a large amount of money involved. Since most commercial contracts are for big projects, disputes are more likely to arise. Thus, having your contracts reviewed before signing is a must so you get to secure your rights and prevent being ripped off.

What are the types of Construction Contracts

Different types of construction contracts include a lump sum, cost-plus, milestone, small jobs, and large job contracts. What type of contract you need will depend on your role in the project and the contract price. Whether it is a residential or commercial contract, your construction contract could be also classified into a cost-plus, lump sum or a milestone kind of contract.

Cost-Plus Contract

A cost-plus contract is an agreement with no fixed contract price. This means that payment for work carried out is made after the work has been completed. Under this type of contract, the home or business owner agrees to reimburse the contractor’s expenses for the project, including a profit margin. The parties may still agree on a maximum amount for the project. This means that even though there is no fixed price, there is a limit to the costs that may be incurred for the project. 

Lump Sum Contract

A lump sum contract is an agreement where there is already a fixed contract price. This means that the parties already agreed on the prices or amounts of each work to be carried out or each material to be supplied. 

Milestone Contract

For a milestone contract, a builder or contractor could get paid every time they achieve a ‘milestone’. Milestone refers to a set of work. Under this contract, the works are usually classified or divided into stages. Only when a stage or set of work is completed will a payment be made.

Why are construction contracts important?

Construction contracts

Whatever type of contract it is, construction contracts are important because this contains everything you need to know about the project and the terms and conditions that all the parties agreed upon. The contract will outline all the parties’ rights and obligations so that in case other parties fail to do their obligation or if one of them breaches the contract, you will know what to do and what your rights are.

Read More: Importance of Construction Contracts

What are the important construction contract terms and conditions?

Contract Disputes Resolution

Failure to comply with the terms and conditions set in the contract may result in a contract dispute. These disputes can also come from any disagreement with a certain contract clause that only arose during construction. 

Other possible causes of construction contract disputes are vague and poorly drafted terms and conditions, sudden contract variations, and non-compliance or non-performance of the obligations under the contract.

Some contract disputes resolution methods where our contracts specialists can help include negotiation, mediation, adjudication (for payment disputes), and arbitration. The dispute between the parties may or may not escalate to litigation, except when the dispute remains unresolved despite undergoing these processes.

Contract Variations

Contract variations are changes in a construction contract, particularly with the costs and scope of work. Contract variations are inevitable in a construction project because of the preference of the owner, unstable costs of work, and necessary adjustments needed to be made during construction. A well-written construction contract outlines the procedure for contract variations. A contract variation must follow the procedure stated in the contract. It is advisable that the variation is put into writing and agreed upon by all parties.

If you are unsure of how to deal with variations, a contracts specialist may help you understand and advise you of risks involved in contract variations.

Statutory warranties

Even if these are not explicitly stated in the contract, statutory warranties are obligations under the Home Building Act 1989. This ensures that goods and services in the building project are carried out with due care and skill and are compliant with the building standards.

This is important especially when there are defects found in the house or building. The statutory warranties make the builder or contractor liable for the defects and require them to fix the same immediately.

Liquidated damages

If a contract breach has affected the quality of the construction or an unreasonable delay affected the building period, demanding payment in the form of liquidated damages may help compensate for it. Thus, having a contract clause allowing for liquidated damages can help you recover the costs or damages you suffered due to the delay or poor workmanship.

To claim this amount, you would need to write a letter of demand to the other party.

Extension of time

Some unforeseen conditions such as weather changes could affect the time frames stated in the contract. Thus if the reason is valid, a builder could request an extension of time to the other party. Some acceptable reasons include weather changes, building disputes, delay in deliveries, variations and others.

Suspension of Works

One of the rights provided under the construction contract is the right to suspend the carrying out of work, particularly if the other party hasn’t paid you for the works you completed. If you suspend the carrying out of works, you don’t have to be responsible for any losses or expenses that may be incurred as a consequence of the suspension.

Of course, it is essential that you follow the terms of your contract regarding suspension. Failing to follow the procedure outlined in your contract may invalidate your suspension and hold you responsible for the losses or costs incurred. 

The process usually starts with a notice of suspension being served on the other party. It may escalate to adjudication or the courts if the dispute persists.

Contract Termination

A worst-case scenario for a contract dispute is resorting to termination of the contract. This can be done by mutual agreement between the parties, out of frustration, for convenience, or due to contract breach. 

The process usually starts with one party writing a formal termination letter to the other party. The letter may include suggestions on how to remedy the breaches or an invitation to meet to attempt to settle the dispute. 

If you are not confident in writing your own termination notice or if you are not sure whether your contract has a termination clause, a construction lawyer can guide you on the process of creating a termination letter and advise you on the risks of the termination clause. 

Reviewing Your Contract and How We Can Help

A contract review is made so that you can spot any vague terms or conditions you do not agree with. This is the part where the parties can clarify and update the terms of the contract. 

Our Contracts Specialist construction lawyers can help you with reviewing any type of construction contracts you may need. Whether you’re a homeowner, builder or subcontractor, we could advise you of your rights and the risks involved. Need the right legal advice? Need help in drafting your contract? Call Contracts Specialist today.