The Importance of Construction Contracts

09 Jan

Construction contracts are just as important as the plans and materials. Regardless of the amount of work that will be carried out, there should be a contract in place.

A construction contract includes everything that has been agreed on. Things such as what the work is, the price, the timeframe, when payments are due, and what happens in the event of delays are all disclosed in the contract. The purpose of a contract is to protect all involved parties and govern the relationship between them. If a dispute does arise, a solid contract will have information on how to move forward.

There are four major types of contracts; standard, fixed-price, cost-plus, and custom. A standard contract if the most commonly used. It can usually be obtained from the Master Builders Association or the Housing Industry Associate. The contract is standard in nature but allows for negotiation. In it, there is space for one or both parties to personalise the document so that it is more specific to their project. A custom contract is designed specifically and approved by the appropriate parties.

A fixed-price contract involves a sum that cannot be changed. This is a popular contract for the domestic building. In the contract, there should be prime cost items in case the cost of specific things changes. Changes in cost can occur depending on the owner’s selection of things such as tiles. While it is called a fixed-price contract there are ways that the contract price may change depending on the scope of work.

A cost-plus contract is different because there is no limit set for the final price. For this type of contract, the parties agree that the owner will cover all costs, including a margin for overheads. A cost-plus contract can only be used for domestic building projects if the work cannot be estimated until the work has commenced or the estimated total cost totals more than $500,000.

Depending on how a project is funded there may be more stipulations put into a contract. Contracts involving construction are necessary to determine how the involved parties will share or divide the responsibilities and risks of a project. Without having a written and signed contract no one is protected from anything that can go wrong. 

A great example of this happened in 1988 in the case of Waltons Stores v Maher. The issue established promissory estoppel as its own case of action, allowing for damages to be sought by citing unconscionable conduct as a principle. Waltons had negotiated with Mahers for a lease of land owned by the latter. Waltons proposed demolition and replacement of a building and due to a target day, there was a sense of urgency. Allegedly based on verbal instructions the Mahers proceeded with demolition, only to later realise that Waltons no longer wished to enter into the leasing arrangement. The Mahers believed that a contract was in the works, but Waltons never signed the actual contract. The dispute became a leading case in Australian contract law.

The Housing Industry Association and the Master Builders Association provide standard contracts that can moulded according to specific situations. The organisations are a valuable resource for people during the building process and can handle disputes if any arise.

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