Building Contracts

Building contracts (or construction contracts) can take several forms. Given that the construction of a home (or commercial building) is an expensive exercise, it is clearly important that you obtain good legal advice, whether you are the owner or the builder.

When entering into a building contract, it is very important to understand the contractual link between the parties involved and the managerial lines of responsibility. The following broad classifications are typical:

Building Contract Description
Traditional head contract Under a traditional head contract, the employer initially contracts with a designer for the design of the project. Once that design is completed, the employer enters into a head contract with a contractor for the construction of the whole of the project in accordance with that design. The contractor, in turn, subcontracts part of the work to various subcontractors while remaining contractually responsible to the employer for those parts. In this structure, unless the terms of the head contract impose design responsibility on the contractor, responsibility for design remains with the proprietor, or employer, whose design the contractor agrees to construct.
Multi-prime contract A "multi-prime contract" is a term used to describe an arrangement whereby the employer enters into separate contracts with prime or trade contractors to form particular sections or packages of the work. The whole of the work is represented by the sum of all the prime or separate contracts. The employer may opt to undertake all of the management or administration, to contract with the contract administrator to perform those functions, or to include this as an additional direct obligation in the contract with one of the trade contractors. An essential feature is that the construction manager assumes no contractual responsibility to the trade contractor. Otherwise, the construction manager's role is that of head contractor under the traditional contract structure.
Design and build contract Design and build contracts can also be described as "turnkey"contracts. In this contractual arrangement, the contractor accepts responsibility for all of the work, whether of a design or of a construction nature. In theory, the employer is relieved of all obligations other than acceptance of design recommendations and payment for work done.
Management contract The contractual arrangement under a management contract can also be called a "construction management contract", or a "project management contract". In this structure, the managing contractor takes responsibility for the coordination of designers and the arrangement of contractors to carry out the works. The managing contractor is not necessarily accepting contractual responsibility for the outcome of the works, but is merely acting in a management role on behalf of the employer.
Lump sum contract A "lump sum contract" is a contract under which the contractor will receive, on completion of the whole works, a lump sum which is established at the outset of the contract, and which will only be varied under the specific provisions that permit variation in the contract.
Fee plus reimbursable expenditure contracts Under the fee plus reimbursable expenditure type of contract, also commonly called a "cost plus" or "prime cost" contract, the contractor receives reimbursement of what it costs to carry out the work, excluding profit and contingency elements. Those elements are covered by a fee fixed at the outset of the contract, with only certain specified events allowing any change to that fee. This type of approach might be useful where it is impossible to specify the work to be done accurately, or where works that are incomplete are taken over and there may be no other practicable way of dealing with the situation. One disadvantage is that the contractor loses some incentive to minimise the costs, as these are fully reimbursed.
Measure and value or remeasurement contracts "Measure and value", or "remeasurement" contracts, are contracts in which the amount payable to the contractor is determined by measuring the work actually done, and valuing it in accordance with the rates and prices set out in the contract in a bill of quantities, or schedule of rates. This approach allows the contractor to be remunerated fairly in circumstances where the quantity or scope of the work is unknown, whilst holding the contractor to the rates initially tendered.
Target sum contracts Another variant of contract structure involves setting a target sum. This means that the contractor will share in the benefits of any costs that are underrun, and bear a proportion of any cost overrun.
Entire and divisible contracts An "entire contract" is one in which the contractor's promise to complete the work is an essential term, and the contractor will not be entitled to payment if there is not full performance of the work. Whether a contract is entire depends upon whether on the proper construction of the contract, completion is a condition precedent to the right of the contractor to be paid the price. A lump sum contract is not necessarily an entire contract. A contract for payment by instalments is not an entire contract, although the principles applicable to entire contracts may also apply to the contractor's rights to an instalment, such as the right to be paid retention money, or the final payment.

Building contracts are affected by several pieces of legislation, including the Sale of Goods Act 1908, the Consumer Guarantees Act 1993, the Construction Contracts Act 2002, the Building Act 2004, and the Weathertight Homes Resolution Services Act 2006.

Before entering into any form of building contract, talk to Rennie Cox to ensure that your interests are strategically protected.