If you want to engage a contractor to carry out construction, fit-out or repair and maintenance works, there are several key provisions that you need to consider. Importantly, you should address the time that a construction project will take. Such considerations will ensure that the contractor completes the work by your deadline. This will build confidence in their capabilities and limit disruptions to your business. This article will explain the importance of time in construction contracts and how to protect your business against undue delays.
Why Do I Need to Consider Time in Construction Contracts?
The time a construction project takes to complete is obviously a key concern for your business. Construction works are, by nature, often disruptive, inconvenient and almost inevitably involve delays. Sometimes, they might require your business to relocate to alternative premises and incur associated costs, such as:
- additional rent; and
- removalist costs.
The below diagram sets out a simplified timeline of a typical construction project. As you can see, there are three main stages:
- commencement of the works;
- practical completion; and
- final completion.
Each of these junctions has implications for the time-related concepts explained below.
What is Practical Completion?
A project will reach practical completion when the contractor finishes it to a sufficient level, including circumstances where they still need to resolve small defects.
Continue reading this article below the formWhat are Liquidated Damages, and Why Do You Need Them?
Liquidated damages refer to a predetermined sum of money that the parties to a contract agree to pay as compensation if they breach the contract. In the context of a construction contract, you can require the contractor to pay your business liquidated damages if they fail to practically complete construction within the time you agreed upon. This is an important tool for incentivising a contractor to complete the works on time, by the date for practical completion. Indeed, a failure to do so would incur responsibility for paying liquidated damages each day or week until they reach practical completion. This is one of the best ways to address time in construction contracts.
There are some key considerations when drafting a liquidated damages clause and determining the applicable rate of liquidated damages, including:
- preparing a genuine pre-estimate; and
- using “N/A” if you do not want to include a rate for liquidated damages.
Preparing a Genuine Pre-Estimate
When you set the rate of liquidated damages under your construction contract, it must be a genuine pre-estimate of the damages that your business is likely to suffer or incur in the event of the contractor’s failure to complete the project by the date for practical completion. To be a genuine pre-estimate, the rate should:
- not be greater than the maximum loss that your business would likely suffer as a result of the delay; and
- reflect honest and clear calculations supporting the pre-estimate.
This is important because the provision may be considered a penalty and deemed unenforceable if the rate is not a genuine pre-estimate. The onus, however, is on the contractor to prove that the rate is ‘extravagant’ or ‘unconscionable’ and, therefore, a penalty. This is a very high bar to prove.
Use “N/A”
If you do not intend to include a rate for liquidated damages, you must insert “N/A” in the contract’s damages provisions, as opposed to “Nil”, “$0” or similar. This will help to preserve your business’ right to claim general damages.
Example Clause
1.1(a) If Practical Completion is not achieved by the Date for Practical Completion, the Contractor must pay the Principal on demand liquidated damages for each day from the Date for Practical Completion until (and including) the Date of Practical Completion and the date the Contract is terminated.
1.1(b) The Contractor acknowledges and agrees that the rate of liquidated damages as particularised in the Schedule represents a genuine pre-estimate of the likely losses incurred by the Principal as a consequence of the Contractor failing to bring the Works to Practical Completion by the Date for Practical Completion.
1.1(c) The Contractor acknowledges and agrees that if the levying of liquidated damages by the Principal under the Contract is construed as a penalty by a Court or is otherwise unenforceable by the Principal, such liquidated damages will not be the Principal’s sole and exclusive remedy arising out of the failure by the Contractor to bring the Works to Practical Completion by the Date for Practical Completion, and the Principal will be entitled to claim general damages.
This guide explores the various types of leasing disputes that may arise and how to resolve them.
Defects Liability Period
A contractor will typically offer a 12-month defects liability period. During this period, you can require the contractor to return to the site of the works to rectify any defects or errors.
Ideally, you would want to retain a proportion of the performance security provided by the contractor under your agreement until the expiry of the defects liability period. Performance security refers to a sum of money staked by the contractor to compensate you for any losses suffered by their failure to complete the job to a satisfactory standard. Retention and bank guarantees are construction contracts’ most common forms of performance security. Holding onto a portion of this security will incentivise the contractor to fulfil their obligations during the defect liability period.
Effective coordination becomes paramount for large-scale construction projects involving multiple stakeholders to prevent disruptions to the project timeline. A lack of cohesion among various parties involved can lead to delays. As such, the contract should establish mechanisms to facilitate collaboration between all stakeholders, including architects, engineers, subcontractors, suppliers, and regulatory authorities.
Potential provisions you could include are:
- requiring the contractor to provide and adhere to an approved construction program identifying critical path milestones and third-party dependencies;
- obligating the contractor to proactively manage and mitigate delays caused by their subcontractors or suppliers;
- establishing a process for you to approve or facilitate the contractor’s coordination with regulatory authorities for permits and inspections; and
- granting you the right to directly engage or replace the contractor’s subcontractors/suppliers if they are causing delays.
Extensions of Time and Delay Damages
A frequently negotiated aspect of time in construction contracts is the contractor’s entitlements to extensions of the date or period for practical completion. A provision of this nature would require you to pay the contractor a certain sum of money if the delay was your fault.
Ideally, no delay damages would be payable to the contractor. However, as a fallback position, you may be willing to accept a reasonable rate of delay damages where the delay directly arises out of your breach of the contract.
Delays during construction projects can typically arise from one of three general categories:
- Delays caused by the principal: Attributed to actions or inactions by the homeowner or principal, such as late provision of site access, failure to make timely decisions, or changes to the scope of work.
- Delays caused by the contractor: Delays that occur due to factors within the control of the builder or contractor, such as inadequate resource allocation, subcontractor coordination issues, or failure to follow the agreed schedule.
- Neutral or force majeure delays: Delays that result from circumstances beyond the control of either party, such as extreme weather events, natural disasters, or unforeseen site conditions.
Understanding the root cause of a delay and its classification is essential for determining the appropriate course of action, such as granting time extensions, assessing liability for damages or invoking force majeure provisions within the contract.
It is market standard to allow extension of time entitlements when delays are caused by:
- a negligent act or negligent omission of your business;
- a request for variation to the works;
- your suspension of the works, except due to the fault of the contractor;
- depending on the project, bad weather up to a set number of times; or
- industrial action, except due to the fault of the contractor.
What are Time Bars?
Time bars prevent a party from making a claim where they fail to notify the other party of the relevant claim within the period specified in the contract. These are routinely included in business-friendly construction contracts. This is often accompanied by a requirement for the contractor to execute a deed of release at the expiry of the defects liability period, releasing you and the contractor of any legal obligations. When considering time in construction contracts, you must also address limitation periods.
Key Takeaways
You can use several mechanisms within construction contracts to facilitate their timely completion. You can incentivise a contractor to work efficiently and to bring the works to practical completion by the date for practical completion by:
- imposing a liquidated damages regime; and
- limiting a contractor’s entitlements to extensions of time and delay damages.
Time bars also require a contractor to promptly submit notices and claims under the contract. This will also prevent the contractor from bundling all claims into one claim at the end of the project. Such outcomes help to avoid disputes and litigation. However, as noted above, caution should be exercised when relying on or imposing time bars in light of the new unfair contract terms regime.
If you would like legal assistance drafting or reviewing a construction contract, our experienced construction lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to solicitors 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
Liquidated damages are a pre-agreed amount a contractor must pay if they do not finish the project on time. Including this clause in your contract helps ensure timely completion and compensates you for delays. The rate must be a genuine estimate of your potential losses to be enforceable.
Include time-related provisions like liquidated damages and time bars in your contract. Generally, these help keep the project on track and protect you from delays. Also, consider holding part of the contractor’s performance security until they fix all defects.
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