Construction contracts and contractor risk

Construction is where most development budgets succeed or fail. The contract with the main contractor allocates the risks of cost overruns, delay, defects and contractor failure, and should be negotiated with that allocation in mind.

Price models

• Lump sum: a fixed price for defined works, shifting cost risk to the contractor but requiring clear specifications.
• Measured or unit-price contracts: payment based on quantities, leaving more cost risk with the owner.
• Cost-plus arrangements: flexible but requiring strong cost control.

Key provisions

• Programme, milestones and liquidated damages for delay.
• Variation procedures and pricing of changes.
• Retentions and performance guarantees.
• Insurance requirements.
• Subcontracting controls.
• Termination rights, including on insolvency.

Statutory liability for defects

The Building Act establishes liability periods for different categories of defects, including structural defects, and requires certain insurance for residential buildings. These statutory regimes sit alongside, and do not replace, the contractual warranties negotiated between the parties.

Contractor insolvency

If a contractor becomes insolvent, works stop and recovering advance payments can be difficult. Bank guarantees, payment schedules aligned with progress and step-in rights for subcontractors can reduce exposure.

Hypothetical scenario: the example below is invented for illustration. It does not describe any real property, project, company or person. A developer signs a lump-sum contract but with vague specifications. Disputes over what is 'included' lead to repeated variation claims. A detailed specification and variation procedure at the outset would have narrowed the dispute.