In Short
- A building contract is an agreement between a client (proprietor) and a contractor detailing the scope of work to be completed.
- Key dates include the ‘Date for Practical Completion’ (when work should be finished) and the ‘Date of Practical Completion’ (when work is actually completed).
- If a contractor cannot perform the work, legal consequences may follow, and Security of Payment Acts provide mechanisms to secure payment.
Tips for Businesses
Clearly define the scope of work and completion dates in your building contracts. Understand the implications of practical completion dates and be aware of legal remedies available if contractual obligations are not met. Familiarise yourself with relevant Security of Payment legislation to protect your financial interests.
Table of Contents
- What is a Building Contract?
- What is the Difference Between the ‘Date of Practical Completion’ and the ‘Date for Practical Completion’?
- What Happens if the Contractor is Not Able to Perform the Work?
- What Are the Consequences of Failing to Meet Performance Obligations?
- Security of Payment Acts
- Key Takeaways
- Frequently Asked Questions
Construction companies face increased pressure to meet their deadlines and finish the job. The law takes seriously the obligation of performance of works in building contracts. Therefore, it remains relevant for you as a contractor. A contractor must complete the items of work set out in a building contract, including any necessary additional work. Each state and territory has specific legislation which regulates building contracts. This article will outline:
- what a building contract is;
- the performance completion dates;
- the consequences of non-performance; and
- the laws that govern securing performance.
What is a Building Contract?
A building contract is an agreement between a proprietor (the client who requests the work to be done) and the contractor who constructs the works. A contractor may also have many sub-contractors working for them to build the works.
The building contract will also usually allow the contractor to continue to do the work as long as the contract is on foot (unless there is a clause in the contract that says otherwise).
There are also two important dates relating to the performance of works in building contracts that are relevant to the proprietor. In particular, they outline when the contractors agree to complete the work. These dates are as follows:
- Practical Completion Date: This date outlines when the contractors will complete the work sufficiently (excluding any minor defects). Practical completion has no statutory definition and is defined under the building contract.
- Final Completion Date: This date relates to the completion of the contract rather than the project or the works. It is when the contractor no longer has work to complete concerning the contract, including rectifying any defects after the practical completion. The contractor usually issues a ‘Final Certificate’ at this stage. This obligates the proprietor to make the final payments under the contract. At this point, it is likely the contractor has complied with the obligation of performance of works in building contracts.
What is the Difference Between the ‘Date of Practical Completion’ and the ‘Date for Practical Completion’?
In many building contracts, there will be two components to the practical completion date. These are the ‘date for practical completion’ and the ‘date of practical completion’.
Upon the date of practical completion, various clauses will come into effect, including the:
- commencement of defect liability and ongoing obligations;
- release of security for the performance of works;
- release from the accrual of liquidated damages for delay; and
- right to have no additional variations requested.
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What Happens if the Contractor is Not Able to Perform the Work?
The contractor will not be able to get out of performing the work and performing their obligations. For example, this includes situations where:
- they are not able to undertake the work;
- they cannot meet the specification without having to incur additional costs; or
- unexpected issues arise, which means that the contractor has to change the work so that they can complete the work required.
The building contract (including standard form contracts) may allow for these situations, but it will address how the parties will deal with these unexpected issues. For example, the contract may provide clauses concerning extensions of time or delay.
The building contract will also likely address force majeure issues (issues outside both of the parties’ control, such as fires or floods). If this is not set out in the contract, then the common law doctrine of frustration will apply. Frustration occurs when an outside event renders the contract unperformable. The contract will become terminated, and any loss resulting from the termination will lie where it falls.
What Are the Consequences of Failing to Meet Performance Obligations?
Failing to meet performance obligations can have serious consequences for contractors, including:
- Liquidated damages: The contractor may be required to pay predetermined damages for delays.
- Termination of Contract: In severe cases, the proprietor may have grounds to terminate the contract.
- Reputational Damage: Poor performance can negatively impact future business opportunities.
- Legal action: The proprietor may pursue legal action to recover costs or enforce performance.
- Financial Strain: Delays and disputes can lead to cash flow issues and increased project costs.
How Can Disputes Regarding Performance Be Resolved?
Building contracts often include dispute resolution clauses that outline the process for resolving disagreements. Common methods include:
- Negotiation: Direct discussions between the parties to reach a mutually acceptable solution.
- Mediation: A neutral third party facilitates discussions to help the parties reach an agreement.
- Expert Determination: An independent expert provides a binding or non-binding opinion on technical matters.
- Arbitration: A formal process where an arbitrator makes a binding decision based on evidence presented by both parties.
- Litigation: As a last resort, disputes may be resolved through court proceedings.
Security of Payment Acts
Building contracts usually always address the security of payments, and each state and territory has its respective Security of Payment Act (SOPA):
- Building and Construction Industry (Security of Payment) Act 2009 (ACT);
- Construction Contracts (Security of Payments) Act 2004 (NT);
- Building and Construction Industry Security of Payment Act 1999 (NSW);
- Building and Construction Industry Payments Act 2004 (QLD);
- Building and Construction Industry Security of Payment Act 2009 (SA);
- Building and Construction Industry Security of Payment Act 2009 (TAS);
- Building and Construction Industry Security of Payment Act 2002 (VIC); and
- Construction Contracts Act 2004 (WA).
Security of Payment legislation ensures that payment claims are met and that subcontractors and suppliers receive the payment they are owed.
Key Takeaways
Generally speaking, contractors are required to perform the works under a building contract until the works are complete. The practical completion date and final completion date are crucial milestones in the performance of works. Additionally, Security of Payment legisation exists in each jurisdiction to ensure timely payments to contractors and subcontractors.
If you need help with completing a building contract, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
This date outlines when the contractors will complete the work sufficiently (minus any minor defects). Practical completion has no statutory definition and is defined under the building contract.
This date relates to the completion of the contract rather than the project or the works. It is when the contractor no longer has work to complete concerning the contract, including rectifying any defects after the practical completion. The contractor usually issues a “Final Certificate” at this stage. This obligates the proprietor to make the final payments under the contract. At this point, it is likely the contractor has complied with the obligation to perform works in building contracts.
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