Analysis of Construction Contract - Research Paper Example

Analysis of Construction Contract Introduction It’s a long time ago when agreements were made just by a handshake. Today, the handshake would rather be left as a formality after signing the contract. Whether it is construction, or business partnership, a contract is a source through which agreements are made nowadays. A contract avoids the chances of fraud, misunderstanding and miscommunication between two parties when they are making a deal. A contract allows the legal permissions and boundaries to be administered before an agreement is being made. This is greatly because of the expansion made in the legal systems because of which there are ways in which risks can be avoided. Legal issues can be very problematic and thus contracts are introduced to make safe agreements between two parties. A contract can be an important part of every deal no matter what nature it keeps. The contract can be written or verbal depending upon the scale of the deal. When anyone is including a contract in a deal, it sure shows that the person does not trust the other party. However, in such deals there is too much to lose by trusting the other party, but a contract is not a replacement for trust. It is the basis for trust (Murdoch and Hughes, p254). Construction Contract A construction contract is a legally binding agreement between two parties who are intending to work together for construction purposes. One party would be the one who is hiring the constructor, and the other party is the one who is the constructor. The construction contract includes details such as the cost of the project, the deadlines, the liabilities and other details. This type of contract is usually for projects that are expensive and complex, because those projects are the ones that need to be handled clearly and any liability can prove to be very heavy on either party. Thus the liabilities are clearly divided between both the parties (Murdoch and Hughes, p254). Usually the construction contract is for two types of construction projects; residential and commercial. The contract is the formal agreement for construction work such as repairing, building or altering. A construction contract tends to differ from a contract for fabrication or assembling. The types of construction projects that use the contracts have clients with different requirements that are to be included in each type of contract. Types of Construction Contracts and their Impacts A residential contract is signed by the property owner who has hired the contractor, and the manager of the construction company who is responsible for the construction. Mainly, this type of contract has three major elements. These are the project scope, the schedules of work, and the payment details. The project scope shows the complete details of the work and a statement of exactly what is included in the project. All the mutually agreed instructions, terms and conditions will be presented of both the parties. The schedule of work is the section where the starting date and the project completion date will be mentioned. The quality assurance is also to be mentioned in this section. A proper review will ensure the requirements from the project scope in this section. The payments details include all the details about the cost of the project from the starting cost till the project completion cost. This also includes the rates at which the costs will be made and the schedule of payments date wise (Wearne, p6). Commercial contracts vary from residential contracts as they are much more detailed. Though it includes all the elements same as the residential contract, there is an element which is added; procurement process details, specifications about legislative coverage and dispute resolution instructions. It can be for more than two parties thus all the people are named in a list and they all have to agree to the contract. There are further details about any change regarding any person subject to the contract and about the changes in payment etc. (Schwartzkopf and Tasker, p4) Significance of Construction Contract The main reason why a construction contract is signed is to avoid legal liability. Construction is a process, and a project which has a lot of concerns. It involves two or more parties and is a project that involves big sums of money and complex matters. If there is any dispute, or any illegal issue, then it can only be resolved if there is a contract. The parties can claim for a dispute only if they have the contractual right, and a contractual right only exists when there is a legal contract. However, to avoid risks, there are contracts signed before the construction is started. Under the contract both the parties are legally bound and this will make them carry out all their agreed terms and conditions in the right manner because they know that any breach of contract can be very heavy for them. Construction history tells that there are always many aspects to this type of dealing and so a construction contract is very important, just as the Construction Act 1996. The construction contract may become longer when the contractor adds the list of foreseeable risks, but it is a very important thing to do when drafting a contract. The contract should be designed to cover up the potential risks that both parties assume they can have. When there are many terms to the contract, both the parties should be very careful and should read the whole lengthy, dry contract properly. In case of dispute, not reading or understanding the written contract can be a negative point while defending the position. Although, the subject of the contract is covered in depth, the requirements of basic contract law should be met to make the contract valid. It is the duty of the contractors to be aware that all these requirements are met, in general the specific construction contract law applications (Goldfayl, p5). Making an offer and its acceptance is the basic rule of contract law that has to be fulfilled when making a construction contract. The owner should issue a formal proposal to the construction companies, and the one interested would respond telling the price that they would charge. If the price is accepted, this will result in a legally binding contract which constitutes an offer being made, and its acceptance. This is a bidding contract, thus when it is about a private contract, the rules are different as they are opposed to government contracts. In the private construction contract, the owner requesting the bid is free to accept and reject any bid regardless of it being the highest or the lowest unlike public contracts. The public contracts and biddings are restricted by the federal, state and local laws and regulations. Contract and the Stakeholders Construction contracts have many terms and conditions that are agreed by both the parties. It also includes description of the work, the price details and the requirements of the project. Moreover, it has the agreement of both the parties about the circumstances that will be faced if there is a dispute, and which method of alternative dispute resolution will be used. However, the court implies the legal terms to be included as well in the contract, but in case the parties have not included it they consider the local laws to fulfil that space if there is a dispute (Phillips, p3). If there is a dispute about price, the court is likely to look in the traditional methods of deciding cost in order to know which type of pricing scheme they have used. In construction contracts, the disputes over costs are a very common issue thus this is a major part that has to be mentioned. It is important to know the pricing scheme as a conclusion is to be made that who bears the financial responsibility. The pricing scheme in a construction contract should be one of the various methods of pricing. The first pricing scheme is lump sum. In this, the contractor has to pay the whole amount which is agreed and if any financial issue arises, the contractor bears the loss. Unit price is the other method in which the contract is priced by the number of units delivered multiplied by a set rate per unit. Under this pricing scheme, contractors bear less risk. Cost plus a fee is the last method which means that the contractor agrees to keep a record of the cost of labour and material. The owner agrees to pay for all the submitted costs plus a mark-up, which can be expressed either as a percentage or as a lump sum. Every time a contract is signed, there is some thought to it. At times you might find yourself thinking why to enter into a contract. A contract will usually be defined as a document drafted to protect both the parties. Ideally, a contract shows the specific terms, the obligations both parties have with each other and most importantly the payment details. Once a contract is signed, it can usually not be changes unless both the parties agree to do so. So it is wiser to be careful before the contract is being signed. The understanding and the nature of the contract should be exactly what is intended. Time frame of the contract is one of the sections that you have to be careful about before signing the contract. Time frame mentions the time in which you expect your task to be completed by the contractor. If you want your job to be completed at once then make sure you give the contractor enough time to o complete the task. However, if you want your job to be done in parts then make sure the time allotted for each job is feasible. If you are the contractor, make sure the time frame suits you. Prices mentioned in the contract are another major factor that you have to take care about before entering in a contract. The price should be clearly mentioned in the contract and should be rechecked again and again. If there are any additional charges, they should be clearly mentioned to avoid later inconvenience. Charges such as transport, food and water supply etc. should be added if necessary before the agreement is finalized (Schwartzkopf and Tasker, p4). The payment method should be determined. The way you will be paid, the date on which you will be paid and other details should be clearly mentioned and rechecked. If these are rechecked, they can also be negotiated before you bind in the contract. Payment penalties should also be determined and accepted if they are reasonable. Late payments or improper payments can be challenged if mentioned clearly in the contract. The material terms should also be agreed upon and clearly stated in the contract. If your contractor and you have agreed on the supply and purchase of goods and materials then they should be mentioned in the contract. If there is an agreement of constructing the building using 3rd grade cement, then it should be mentioned in the contract and agreed mutually. Transaction rules for particular industries means that particular industries have their own transactions and the ways in which they are governed. If there is some part of the contract based on the assumption of the transaction rules, then make sure you figure out what these rules are and mention them accurately in the contract (Institution of Civil Engineers, p10). Sometimes there is work that has to be started immediately but there are amendments that need to be made in the contract. In such a case, the contractor should be sure that the work is started and the contract signed is not the legal agreement. For this, a clause can be included such as ‘this contract is in effect only until a more permanent contract is not negotiated between both parties.’ The way disputes will be handled is another factor that has to be mentioned in the contract. No matter how good or old the relationship is with the other party, there has to be a section where both parties agree to the ways they want their disputes to be solves, if any. If arbitration is written in the contract, which is generally less costly and less time consuming, you are waiving your right to take the dispute to court. Thus careful reading and understanding of the clause plays an important role. There may be some special terms or clauses that the other party enters in the contract. These might be because of their previous experiences with other contracts or their perfection. They might include clauses that may seem okay but may be unfairly benefiting the other party. Make sure such clauses are understood clearly that they are not giving any special benefit to the other party Analyse whether these terms benefit you. The attorney’s fee is also mentioned in the contract. This would take place if there is a dispute and one party loses the case. The other has to be sure whether he will have to pay the attorney’s fee of the other party or not as per the contract (Brennan, p1). Benefits of the Construction Contract The benefits of a construction contract to the owner of the property can be many. The owner would have the legal contract under which he can sue the contractor anytime if he violates the terms and conditions. He will have his proof with him under whom he can mention all his terms and conditions. Because of the contract, the contractor would try to work as efficiently as possible. The owner minimizes its risk by choosing the cost-plus method of payment. In case of breach of contract, whoever loses the case has to pay the attorney’s fee, hence no party can afford to go in the wrong direction and thus no wrongs will be done. The project will be completed smoothly and accurately (Phillips, p3). The benefits to the contractor is that he will be clear about his payments methods, dates, schedules, schemes and other details according to which he can make future plans. He can add his terms in the contract and negotiate the price. Work done on time can give the contractor extra bonus or benefits as decided in the contract. There can be no changes in the contract without informing the contractor thus there can be no biasness. Disadvantages of the Construction Contract There can be many disadvantages to the construction contracts as well as having an impact on the contractors. A major disadvantage can be the loss of control. Usually the construction company is the one who signs the contract on behalf of the actual sole worker involved. If they lose control over the management, the contract will not be followed and will be breached in mistake. Another disadvantage is the lack of flexibility (Brennan, p1). Since the contractor is bound in the contact, he cannot make delays or change any of the material used without prior notice, and amendments in the contract since everything is mentioned in it. This might cause a lot of time consumption and there will be delays in the completion. This means that contracts can give rise to complexity and complicated matters in which every time the contractor has to disturb the owner for even the slightest amendment in the contract. Such issues might also cause the quality level to fall. In the same way, the owner might feel that the contract is giving rise to complexity instead of ease. Contracts might get too complex at times and it would rather result in issues. Moreover, there are some government laws and terms that need to be included in every contract. For that, there has to be proper and formal ways in which the contract will be made, thus inviting more complexity (Phillips, p3). Conclusion Hence, it is unveiled that the contracts very important for the constructors and the people involved in the process because they prevent both the parties to violate each other’s terms. In complex issues such as construction, these contracts become very important as they help both the parties to mutually agree on their terms and start working together. Once everything is written down on a document, there is no chance of getting that chore wrong. A contract is a good way to get good quality work as no one would take the risk of breaching the contract. Having a contract of the specific type of construction will be beneficial for the project as well as for both the parties. Although, there may be drawbacks such as complexity issues but it is rather safer to avoid risks than to take risks. A contract is a good idea when dealing with someone for an agreement which involves a very big amount of money and responsibility. Hence, I think that construction contracts are very important and they hold immense value. So if you want your own house built, then do not forget to sign a legally binding construction contract with the construction company. Work Cited Charles S. Phillips. Construction Contract Administration. NY: SME, 1999 Daniel S. Brennan. The Construction Contracts Book: How to Find Common Ground in Negotiating the 2007 Industry Form Contract Documents. US: American Bar Association, 2008 Greg Goldfayl. Construction Contract Administration. NJ: UNSW Press, 2004 Institution of Civil Engineers. Engineering and Construction Contract: An Nec Document. US: Thomas Telford, 1996 John Murdoch, Will Hughes. Construction Contracts: Law and Management. London: Routledge, 2008 Stephen Wearne. Civil Engineering Contracts: An Introduction to Construction Contracts and the Ice Model Form of Contract. NY: Thomas Telford, 01-Dec-1989 William Schwartzkopf, Richard Tasker. Practical Guide to Construction Contract Surety Claims. London: Aspen Publishers Online, 30-Dec-2005 Read More