In Short
- Latent conditions are site issues that could not reasonably be identified during inspection or pricing.
- If not clearly covered in your contract, disputes can arise over delays, extra costs and responsibility.
- A well-drafted latent conditions clause helps manage risk and clarify who pays and who carries delay.
Tips for Businesses
Before signing a construction contract, check how latent conditions are defined and whether the test is based on what could be reasonably foreseen. Confirm who bears the cost and delay risk if an issue arises. Ensure you receive all available site information and document what you relied on when pricing the works.
Summary
This article explains latent conditions in construction contracts for contractors and builders in Australia. It outlines how latent conditions are defined, why they matter, and how risk is typically allocated, prepared by LegalVision’s business lawyers, which specialises in advising clients on construction and infrastructure law.
As a contractor or builder, you will often encounter site conditions or issues that you did not, or could not, predict. These are known as latent conditions.It is vital that your contract covers these conditions to help avoid future issues or disputes.
In this article, we will describe:
- what latent conditions are;
- their importance in building and construction contracts; and
- how to best draft a latent conditions clause.
What are Latent Conditions?
If you are a contractor or builder conducting a site inspection, you will often immediately see:
- the condition of the site; and
- any potential risks or hazards that will impact your work.
This inspection assists you in planning how you will carry out your work and helps you factor in any additional costs. However, more often than not, it is nearly impossible to predict every factor that could affect the work. There are almost always:
- site conditions that are not visible during the first inspection; or
- events and occurrences beyond your control.
These are known as latent conditions. Latent conditions are those that may not be evident during an inspection or on plans. For example, common latent conditions include:
- soil contamination;
- asbestos;
- mine shafts; or
- hidden services, such as old plumbing systems.
Common Examples of Latent Conditions in Practice
A clear understanding of the range of potential latent conditions assists contractors in managing risk and assessing entitlement under construction contracts. In practice, latent conditions extend beyond obvious site issues and commonly include previously unidentified underground structures, such as former foundations, undocumented services, or archaeological remains, which only become apparent during excavation.
Unforeseen rock formations or rock ledges can also constitute latent conditions where site investigations did not reasonably indicate their presence, often resulting in increased excavation effort and changes to foundation design. Similarly, groundwater conditions frequently give rise to latent condition claims, particularly where water tables are materially higher than anticipated, leading to flooding risks or the need for additional dewatering or waterproofing measures.
Latent conditions may also arise in relation to materials supplied by the principal or owner. Where such materials appear suitable on reasonable inspection but are later found to be defective or unfit for purpose, they may fall within contractual definitions of latent conditions, subject to the terms of the contract.
Variations in soil conditions across a site are another common example, particularly where actual conditions differ materially from those indicated in geotechnical reports or other tender information, impacting structural design and construction methodology. The discovery of hazardous materials, such as asbestos or lead-based products, during refurbishment or demolition works, represents a particularly significant category of latent condition due to associated health, safety and regulatory requirements.
Continue reading this article below the formWhy are Latent Conditions Clauses Important?
Unknown latent conditions can have a significant impact on the work that you, as the contractor or builder, need to do. To avoid confusion about who is responsible for the latent conditions, it is essential to have a latent conditions clause in your construction contract. The main issues to consider when drafting the latent conditions clause are:
- what should be regarded as a latent condition;
- what happens if there will be a delay in completion; and
- who is responsible for the costs of latent conditions.
What Should Be a Latent Condition?
As a contractor or builder, what you would like to be considered a latent condition will be everything that:
- you did not expect;
- is outside of your control; and
- will lead to an increase in your costs of carrying out the work.
While it is reasonable to classify everything that is outside of your control as latent conditions, you may find that your principal is reluctant to accept such a broad definition of latent conditions. From a principal’s point of view, latent conditions may also be things outside of their control. Further, they may consider that as the contractor with the experience in the type of work, you should be able to identify the risks and issues upon inspection.
To address this from a drafting perspective, you will need to have a definition of latent conditions that is both:
- broad enough that it will protect you; and
- balanced enough that your principal will be happy to accept it.
The best way to do this is to draft the definition of latent condition with regards to “reasonableness”. Essentially, this means having a definition that broadly defines latent conditions as anything that:
- could not have been reasonably foreseen or anticipated by you at the time you provided the price; and
- will, or is likely to, result in additional cost or delay.
What Happens if There is a Delay in Completion?
Usually, the presence of a latent condition is likely to lead to a delay in the completion of the work. If latent conditions are drafted as being ‘conditions which could not have been reasonably foreseen or anticipated’, then it is reasonable that you should be able to claim an extension of time to complete the work.
Who Should Bear the Cost and Risks of Latent Conditions?
Often, the biggest issue with latent conditions is whether should they be:
- treated as a variation and therefore a cost to the principal; or
- a cost absorbed by the contractor.
Usually, they are costs borne by the principal on the basis that the latent condition arose due to the nature of their site and that they would have more knowledge about their site. However, it is becoming more common for this cost to shift to the contractor or builder on the basis that the principal is relying on their expertise.
Ultimately, it is a commercial decision to be agreed between the parties. As a contractor or builder, if you decide to accept a latent conditions clause that shifts liability and cost onto you, then you should consider having a:
- provision requiring the principal to provide you with all necessary information; and
- disclaimer that you are relying on the information provided by the principal.
If you work in the building and construction industry, understanding how key clauses in your contract allocate risk is critical to protecting your business. This guide outlines the top 10 risk clauses commonly found in construction contracts.
Key Takeaways
Latent conditions can result in the agreed price for a contract increasing significantly. As a contractor or builder, it is essential to consider how you want to approach latent conditions before entering into a contract. You should ensure that your contract has adequate provisions dealing with latent conditions and that you understand your responsibilities.
LegalVision provides ongoing legal support for construction businesses through our fixed-fee legal membership. Our experienced lawyers help businesses in the construction industry manage contracts, employment law, disputes, intellectual property and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 1300 544 755 or visit our membership page.
Frequently Asked Questions
A latent condition is a site condition that a contractor could not reasonably foresee during inspection or when pricing the works. Common examples include contaminated soil, asbestos, undocumented services, or unexpected ground conditions. The contract definition usually determines whether a condition qualifies as latent.
The contract determines who bears the cost of latent conditions. Many contracts require the principal to cover additional costs and grant time extensions. However, some contracts shift this risk to the contractor, making clear drafting essential to avoid disputes and unexpected financial exposure.
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