Your In-House Counsel Guide to Quality Considerations in Construction Contracts

If your business (the Principal) is looking to engage a contractor to carry out construction, fit-out or repair and maintenance works, there are several key provisions that you need to be aware of as an in-house counsel. You must ensure the quality of construction works and reduce the risk of a contractor cutting corners and causing defects. There are ways of ensuring quality on a construction project, which are both preventative and reactionary. This article will explain why you should address quality considerations in construction contracts and how to protect your business against construction defects.

Contract Documents

Ensuring the designs and specifications for the construction works are accurate and complete is important in maintaining and fostering quality. Similarly, where the contractor is also preparing the designs for the works, including comprehensive design provisions relating to the submission and approval of designs is key.

Warranties

In a construction contract, it is important to include warranties as to the quality of the construction works and, if relevant, the designs. A warranty is a promise that the work will be of a specific quality and that the contractor accepts responsibility to remedy certain issues that may arise. Many of the warranties seen in a construction contract are similar to those regularly seen in other commercial contracts. 

It is common and recommended that you ask your contractor to warrant that the works will be:

• fit for their intended uses and purposes;
• free from defects, which should ideally be broadly defined to extend to any defect, error, fault or omission in the works, including any aspect which does not comply with the requirements of the contract; and
• buildable in accordance with the relevant designs and specifications.

Construction contracts will also typically include warranties that the contractor:

• will comply with all applicable laws, codes (including the National Construction Code and Building Code of Australia) and Australian Standards;
• has inspected the site and its surrounds, and any conditions affecting the site (ideally coupled with a no claim provision);
• has the suitable qualifications, experience and licenses to carry out the works; and
• has checked the designs for any errors, where they were not responsible for the designs.

Security 

The provision of security for the performance of the contractor’s obligations under a contract is standard in the construction industry. Security usually represents a percentage of the contract sum (typically 5%). You can ask for security in the form of:

• retention moneys, where you retain a percentage of each claim for a progress payment made by the contractor, until you hold a percentage of the contract sum; or
• two bank guarantees, including one to be released to the contractor on practical completion and the other at the expiry of the defects liability period, subject to any rights of recourse open to your business.

Generally, you should be entitled to “call on” or have recourse to the security to satisfy any costs, expenses or damages that you have suffered as a result of the contractor’s acts, omissions or breaches of the contract.

Performance security is also a great way of incentivising the contractor to both: 

• bring the works to practical completion on time; and
• remedy defects during the defects liability period.

This is because they will seek to comply with their obligations to gain access to the security. Cash flow is essential in the construction industry and holding security can affect a contractor’s cash flow, which they could otherwise use on other projects. This means that you have more leverage over the contractor to ensure that they complete the project to a certain standard.

Key Takeaways

The nature of construction works is risky and construction contracts can be daunting in length and substance for anyone not familiar with them. However, there are various steps you can take to ensure that your contractor completes the project to a high standard. Addressing quality considerations in construction contracts is the best way to achieve this. You should check the accuracy of the contract documents before commencing the project. It is also wise to ask the contractor to make certain warranties regarding the quality of the works and their capacity to complete the project. Finally, you should request that the contractor provide performance security as an incentive to carry out the works to a high standard. If you would like legal assistance drafting or reviewing a construction contract, contact LegalVision’s construction lawyers on 1300 544 755 or fill out the form on this page.