The key commercial clauses in construction contracts deal with scope of work, changes to scope and resulting impacts on time and cost as a result of these and other commonly occurring events, which provide certainty for the contracting parties by understanding their responsibilities and obligations upfront when these events occur.

Australian Standard (AS) contracts provide a solid starting point to a contractual framework which include these key commercial clauses.  These standard form clauses are often amended to address project specific requirements and to update some of the standard clauses now out of date at common law.

This article outlines the key commercial clauses of construction contracts. 

Key commercial clauses in a construction contract

Disclaimer: The information below covers key commercial aspects of construction contracts. It is not an exhaustive list. While Australian Standard contracts address these issues, amendments are often necessary. The approach to amendments varies based on project requirements and the balance of commercial risk agreed between the parties.

Step 1: Contract Documents

A construction contract typically identifies all documents comprising the contract and specifies how those documents are interpreted to the extent of inconsistency between them (by order of precedence). Careful consideration should be given to the order of precedence so that the practical effect of inconsistency between contract documents is properly understood and agreed between the parties.

Careful consideration needs to be given to the following:

• All relevant contract documents, including drawings, plans, specifications, schedules, and any related documents incorporated by reference.
• Documents or scope of work expressly excluded.
• The nominated order of precedence to resolve inconsistencies between contract documents
• Understand key definitions of practical completion, defects, delays, compensable events, and project-specific requirements (performance or prescriptive requirements).

If the contract lacks clear definitions or order of precedence, this will create uncertainty. The objective of the contract and its terms are to provide for certainty.

Step 2: Contract Price & Variations

The contract should clearly define the contract price and how adjustments to the contract price are calculated.  This is usually done through a variation clause, prime cost clause and/or provisional sum clause.

The contract should identify:

• Fixed price elements of the contract price;
• Prime Cost Items (e.g. estimated costs of  fixtures and fittings and related work) and Provisional Sums (e.g. estimated costs of labour and materials based on volumes or time) with a breakdown of the values estimated and calculations that apply when these estimates are reduced,  or exceeded; and
• A clear calculation method for valuing and implementing changes to scope of work, Prime Cost Items and Provisional Sums.

Variation clauses should address as a minimum:

• How variations are directed, requested and/or agreed or approved (e.g. written notice, approval by Superintendent or Client);
• Formalising or authorising variations; and
• Method of valuation of changes to the scope of works (nominated rates, market rates, or as determined by  Superintendent).

Without sufficient details of how variations are directed and the valuation of these adjustments, disputes can arise with changes to scope. 

Step 3: Security

The contract should address whether the contractor is required to provide security for performance of the contract work, the type of security and the conditions of that security.  Security may take different forms, including retention money (deductions from progress payments), bank guarantees or bonds or personal guarantees.

The contract terms concerning security should also specify:

• The basis or requirements for the principal or main contractor having recourse to that security.
• Notice requirements to be given prior to recourse to security.

Step 4: Payment

The contract should include a payment clause that aligns with the statutory timeframes for claims, responses and due dates for payment in the BIF Act and QBCC Act (in Qld). Aligning with statutory time frames provides certainty for the parties.

Basic elements of the payment clause should address:

• Who is authorised to accept payment claims and issue payment certificates and payment schedules under the BIF Act (e.g., Superintendent or project manager)
• Pre-conditions to contractual claims for payment (noting that these issues do not impact the validity of claims under the BIF Act), such as:
  
  • Proof of insurance;
  • Proof of payment to subcontractors; and
  • Security

If a milestone contract, where the contractor’s entitlement to payment is triggered on completion of work the subject of those milestones - clear definitions as to what constitutes completion of the relevant milestones is important.  In the absence of clear descriptions of the work required to complete a subject milestone, disputes may arise.

Step 5: Scope of work

A detailed description of the scope of work and related prescriptive and performance based requirements ensures the parties understand the nature and extent of the work required to be performed and the standard to which it is required to meet the project objectives.

The contract should clearly outline:

• By drawings, specifications and performance requirements, the standard and required end performance requirements of the work;
• Specifications of materials and components (quality, grade, and technical requirements);
• Staging or separable portions (if the work is required to be completed in stages); and
• Works specifically excluded or the responsibility of other parties (to avoid misunderstandings and to ensure the roles of other parties can be appropriately scheduled).

A scope of work that is deficient or does not adequately describe the end objective in terms of standard and performance will lead to dispute over perceived defects, variations and associated impacts on time and cost. A detailed scope with performance requirements and detailed specifications maximises the alignment between the parties expectations and contract obligations.

Step 6: Program of work and reporting

A construction program ensures that all parties understand the key milestones,  critical activities and critical path for the project. The program should outline as a minimum:

• Start date and the date for practical completion;
• Stages or separable portions (if applicable);
• Critical path and all key stages of work in sequence; and
• Critical activities that impact the critical path

The contract should also require regular (typically monthly) reporting, specifying what must be included as part of that regular reporting:

• Project budget;
• % completion of works (progress) and costs to date against the project budget;
• A current works program identifying any recent changes to the program; and
• Status of disputed claims and variations, including disputed matters down the contractual chain where relevant.

Step 7: EOTs and delay costs

Unplanned delays to the program of works are common in construction. Your contract should include a clear process for revising the program of works, including processes for claiming and assessing adjustments to milestone dates and the date for practical completion (i.e. a mechanism for Extensions of Time (EOTs)) and a mechanism for claiming, assessing and valuing related delay costs.

The contract should address in detail:

• When the contractor may be entitled to an EOT (e.g., weather delays, variations, latent conditions, unforeseen events);
• Notice requirements and EOT claim timeframes (e.g., how and when the contractor must notify of delays and claim for EOT’s);
• Methods for claiming, assessing and approving disputing EOT claims;
• Methods for claiming, assessing and approving related delay and disruption costs; and
• Address issues of suspension and standby, including standby rates and rights of suspension, including methods for claiming, assessing and valuing standby and suspension.

Step 8: Liquidated damages (LD’s)

LD’s are a common mechanism parties use to agree upfront an estimate of the principal’s or main contractor’s losses for delays to completion of the work, and in particular a delay to the date for practical completion.  

The contract should specify:

• Whether LD’s apply and nominate a daily or weekly amount (supported by breakdown or calculation);
• The LD’s are a genuine pre-estimate of loss for delays to practical completion;
• When LD’s can be charged and whether security can be accessed; 
• Whether LD’s are an exclusive remedy for delays to completion (i.e. exclude common law rights); and
• How LD’s are certified and whether they can be set-off against amounts payable to the contractor.

LDs provide certainty, set expectations for project timelines, and save the time and cost of proving damages for the party suffering the loss as a result of the delay.

Step 9: Dispute resolution

Disputes regularly arise on construction projects and contract should set out a clear and detailed dispute resolution process in a dispute clause.

That dispute clause should include:

• Details as to the form and content of a notice of dispute and who should issue that notice to who;
• Senior management conferences (formal or informal);
• Mediation (formal or informal);
• Expert determination for certain types of disputes; 
• Litigation or Arbitration as a final step should the earlier steps fail to resolve the dispute; and
• Procedures and timeframes for undertaking each of the stages of the dispute process.

A structured approach to dispute resolution provides certainty for the contracting parties and improves the prospects of resolution of the dispute at each stage of the process.

Typically, Australian Standard contracts contain a dispute resolution clause that requires amendment because it was held to be void for uncertainty by the Victorian Supreme Court in 2014.

Summary

While Australian Standard contracts provide a strong foundation to construction contracting they often require amendment to reflect project-specific needs.

Ensuring clarity of the key commercial clauses outlined above assists to provide certainty to the parties and minimises the prospect for disputes.  When disputes do occur, a well considered dispute clause will also maximise the prospects of resolution of that dispute.

Need assistance with your draft contract? Troy Legal can provide fixed price contract reviews to suit your project. Seek legal advice today:  contact us online or call (07) 3854 2315.

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