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 explains 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 to 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 have implications for the time related concepts explained below.

Time Considerations in Construction Contracts

What is Practical Completion?

A project will reach practical completion when the contractor finishes it to a sufficient level. This includes circumstances where they still need to resolve small defects.

It is important to distinguish between the date for practical completion and the date of practical completion. The date for practical completion is the date that the contractor must complete the construction project. This will should be clearly detailed in your construction contract. In contrast, the date of practical completion is the actual date that the contractor finished those works.

What 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 you to incentivise a contractor to complete the works on time, by the date for practical completion. Indeed, a failure to do so would incur responsibility to pay liquidated damages for 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. In order 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, it is important that you 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.

Drafting tip: As you can see in clause 1.1(b), the contractor is required to provide an acknowledgement and covenant that the rate of liquidated damages represents a genuine pre-estimate of your likely losses.  

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. 

Drafting tip: Clause 1.1(c) preserves your right to claim general damages for the contractor’s breach of your agreement by not completing the work by the date of practical completion. This is important as without such a provision, if the rate of liquidated damages was construed as a penalty, or if you incorrectly listed liquidated damages as “$0” or “Nil”, you may otherwise be left without a remedy.

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. Holding onto a portion of this security will incentivise the contractor to fulfil their obligations during the defect liability period. This is because they would lose this money if they failed to rectify any defects at your request.

Extensions of Time & 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. This is sometimes known as qualifying causes of delay. The issue of delay also affects whether any of these entitlements will also give rise to delay damages, referred to compensable causes of delay. A provision of this nature would require you to pay a certain sum of money to the contractor if the delay was your fault.

Ideally, no delay damages would be payable to the contractor. However, as a fall-back 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.

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;
  • industrial action, except due to the fault of the contractor.

What are Time Bars?

When considering time in construction contracts, you also need to address limitation periods. 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 both you and the contractor of any legal obligations.

Example Clause:

If the Contractor fails to issue a or claim within:

(a) the relevant time required by another provision of the Contract; or

(b) if no time is specified, within 10 Business Days,

the Contractor will have no entitlement to make a Claim, and the Principal will have no liability for any Claim and the Consultant waives and releases the Principal against and in respect of any such Claim, arising from, or in connection with, the relevant direction, matter or thing (as the case may be) which would have been the subject of the relevant notice had the Consultant complied with the relevant provision of the Contract.

Key Takeaways

There are a number of mechanisms you can use 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 are also useful in requiring a contractor to submit notices and claims under the contract promptly. This will also prevent the contractor from bundling all claims into one claim at the end of the project. Such outcome help to avoid disputes and litigation. 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.

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