Construction Contracts: What Commercial Investors Need to Know

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Commercial investors embarking on a construction project need to ensure that their construction contract protects their interests and maximizes the chances of a successful real estate investment.  Construction contracts should be clear about the scope of work, the process for resolving defects, and the obligations of all involved parties. Whether the contract is a design/build contract or addresses only the construction portion of the project, the construction contract should be comprehensive, understandable, and contain the necessary clauses so investors limit risk.

Owen Hodge Lawyers has extensive experience negotiating, drafting, and reviewing construction contracts.  Before you sign your name to any construction agreement, contact us to get sound legal advice on your rights and obligations under the contract and on whether the construction agreement is sufficiently protective of your financial interests.  We can help with all phases of construction contract negotiation, drafting, and enforcement and it is a good idea to get a lawyer involved early in the process so you can maximize the chances of getting the deal done and getting a favourable contractual agreement in the end.


What to Commercial Investors Need to Know About Construction Contracts

 Commercial investors need to ensure a construction contract is comprehensive, that the contract shields them from the costs and consequences of unexpected defects, and that the construction contract is clear on the scope of the work and the building specifications.  Some of the different considerations when drafting or signing a construction contract for the development of commercial real estate include the following:

1. Understand the type of construction contract and the apportion of risk it provides for.

Many building/construction contracts are standard contracts governed by rules set forth in the Domestic Building Contracts Act 1995.  Commercial investors, however, may opt to deviate from standard rules and negotiate custom construction contracts. Options for structuring contracts include a fixed-price construction contract in which investors pay a set lump sum or a cost-plus contract in which investors agree to cover the builder’s costs as well as to pay an agreed-upon margin for overheads and profits.  Builders take on the risk of cost overruns in fixed-price contracts but investors are at risk of builders cutting corners to preserve profit margins. Cost-plus construction contracts, on the other hand, result in uncertainty for investors about final costs and may entice builders to drive up expenses. You may wish to deviate from these different contract forms with a construction contract that is negotiated and drafted by your lawyers to protect your interests.

2. Watch for cost escalation clauses.

If your construction contract is a fixed-price contract, the agreement should place the risk of cost overruns on the builder. You will pay a fixed price for the completion of the project that will not go up unless you make changes after construction has begun.  However, even with fixed-price construction contracts, clauses may be included that make it possible for expenses to rise.  Builders and subcontractors may include cost escalation clauses allowing them to increase the price. These clauses may allow a high charge for an increase in taxes, for prime cost items, boundary surveys, and variations. Any provisional sums included in the contract also provides an opportunity for builders to charge unexpectedly high prices.

 3. Include comprehensive details about the scope of work and building specifications.

It is important to be clear about the type and quality of materials to be used, the work to be performed during the design and build phase, and the requirements for the finished project.  Detailed specifications requirements included in the contract can help to ensure builders do not cut corners.

4. Ensure your construction contract addresses responsibility for fixing defects.

In Brookfield Multiplex Ltd v Owners Strata Plan 61288 [2014] HCA 36, the High Court determined a builder had no duty of care for the cost of repairing defects in an apartment constructed under the terms of a contract entered into with commercial investors. The design and construct contract specified the scope and quality of work, as well as details about what would be required to fix defects- but this did not make the builder responsible for the costs of repairs of common property because the contract did not do enough to protect the interests of the investors. The duty of care imposed on builders was confined by this case to residential construction contracts where subsequent owners are vulnerable to a builder’s lack of reasonable care in construction.  Investors, on the other hand, must protect themselves in the contractual agreements they create.

5. Consider deadlines and liquidated damages clauses.

Investors on a timeline or who want to avoid lengthy construction projects may wish to build deadlines into commercial construction agreements.  A liquidated damages clause can also provide insight into how much investors should be compensated for losses when builders fail to follow through on completion to specification by the stated deadline.

Owen Hodge Lawyers will provide assistance with analyzing construction contract terms, negotiating construction contracts for investors, and ensuring that any agreement signed protects your financial interests. Contact us today at 1800 770 780, before you sign a real estate investment contract, to learn how our lawyers can help you.

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