Construction Claims Consultants

Onerous Construction Contracts

Advice on Dealing with Onerous Construction Contracts

When entering into a construction contract (as defined by the Construction Act), it is important to check that it is not an onerous contract, whereby the cost of meeting the obligations agreed under the contract terms are going to exceed the payment benefits. 

Below are our top 10 key points to be aware of prior to committing to a construction contract:

1. Payment Provisions
A construction contract must contain payment provisions that comply with the Construction Act, including:

  • the provision of an adequate mechanism for determining what payments become due under the contract, and when.
  • providing a final date for payment in relation to any sum which becomes due.
  • providing for the giving of a payment notice not later than five days after the due date.
A clause which fails to meet the above criteria will not satisfy the Construction Act. Non-complaint clauses can often be vague, leading to confusion and disputes between the parties as to when applications are to be issued and when payment becomes due, or is to be made. 

Example
Terms that simply state “30-day payment” are non-compliant as it is not clear from what date the 30 days is calculated from, when the due date arises, when the final date for payment arises, nor whether it is the payer or the payee that is required to issue a notice.

Extended and lengthy payment provisions can be unclear, with the “due date” and the “final date for payment” often confused. Stating the due date is 30 days after receipt of application does not mean payment is after 30 days! The final date for payment could be several weeks later. 

If non-compliant or vague payment provisions in the proposed construction contract are identified, then care should be taken to negotiate amendments to the clause to ensure clarity and compliance.

2. Defects and Retention
Consideration needs to be given to the mechanisms for the release of retention in construction contracts. Bespoke or amended contracts may contain onerous retention mechanisms.

Example
It is not uncommon to see clauses in subcontracts that are drafted to only release retention to the subcontractor on completion of the main contract works or the issuing of the certificate of making good defects under the main contract. Such clauses are non-compliant to the Construction Act, which prohibits clauses that make payment conditional on performance under another contract, however, many do not realise this and as such do not realise they can force payment of their retention.

You should also look out for excessively long retention periods. Again, this is most common in subcontracts, where the main contractor may receive their retention after 12 months but only release retention to the subcontractor after 24 months. 

3. Set-Off Clause
A set-off clause is one which allows the employer to make deductions for payments to the contractor for any money which the contractor owes to the employer. 

Whilst set off clauses are permissible in principle, care should be taken to understand the extent of the rights and remedies that they afford to the employer, and likewise the risk placed on the contractor. 

Example

It would be reasonable if the set off clause allows the employer to deduct money that the employer has evidenced to be due under the contract terms, requiring the employer to issue a payless notice prior to recovery. Whereas it may be unreasonable to allow the employer to set off and deduct sums that are unevidenced, estimated, or anticipated to become due in the future.

Care should also be taken with set off clauses that not only allow deduction from sums due, but also require reimbursement to the employer as such clauses could cause cashflow problems for the contractor. 

Clauses which allow the employer to set-off sums due under one contract against sums reimbursable under a different contract may also be problematic and should be treated with caution. Not only due to the risk to the contract, but also as such clauses run the risk of falling foul of the prohibitions on conditional payment as contained within the Construction Act.  

4. Design Responsibility
Design responsibility can be a common point of contention and dispute. 

If you are entering a contract where you do not intend to design the works, then ensure that the contract does not place design responsibility upon you. Likewise, if you are contracting to undertake design, ensure that the contract is clear as to the full extent of your design scope and responsibility. 

Example

Common issues include:

  • A lack of clarity and dispute over the responsibility of interfacing between the contractor’s design portion and any design undertaken by others.
  • The contract seeking to make the contractor responsible for accuracy and suitability of the design produced by or on behalf of the employer.
  • “Fitness for purpose” obligations, requiring the contractor to guarantee the performance of the design as opposed to a requirement to use reasonable skill and care.
It is important to fully understand the extent of the design responsibility, as a failure to do so could leave you vulnerable to the unexpected cost, time, and liability of being contractually required to undertake design over and above what you intended. 

Consideration should also be given to your PI insurance cover, and in particular whether you are insured for the full extent of the design responsibility required under the contract. For example, many policies will exclude cover for a “fitness for purpose” obligation and are more likely to instead only cover the less onerous obligation to use reasonable care and skill.

If you identify design responsibilities that you are unwilling to accept then care should be taken to negotiate the responsibilities and ensure the contract is amended to accurately reflect the intentions of the parties. 

5. The Right to Extension of Time and/or Loss and Expense 
All standard forms of construction contract allow for an extension of time in the event of certain delaying events, and for loss and expense against certain matters. However, when considering amended or bespoke contracts, care should be taken to understand the extent of the events and matters which give rise to extended time or loss, and the associated risk profile. 

Example
The JCT form contains a comprehensive list of events that allow an extension of time, whereas a bespoke form may contain significantly less. So, whilst the JCT allows an extension of time for certain events that are neither party’s fault, such as delays by statutory undertakers or exceptionally inclement weather, a bespoke form may not afford the same relief and in turn the contractor will be responsible for such delays (and the resulting costs and exposure to delay damages). 

Similar consideration should be given to loss and expense provisions in bespoke or amended contracts which may be much more restrictive than those in standard forms.

6. Condition Precedent
A condition precedent is a clause that makes the rights under a contract clause pre-requisite on the fulfilment of a prior obligation. 

Example

  • A requirement to notify a variation within a specified timescale as a condition precedent to entitlement to payment.
  • A requirement to notify a delay within a specified timescale as a condition precedent to any extension of time and entitlement to recover loss/expense.
It is important to identify conditions precedent within a contract, and the obligations that arise, a failure to comply could lead to your contractual rights being diminished or lost altogether. Using the examples above, the failure to notify in time, could result in complete loss of entitlement to claim the associated time and money.  

If you identify condition precedents in contracts, then care should be taken to consider whether you are able to comply with the requirement and the consequence of failing to comply. If you are unable to comply or unwilling to accept the commercial risk of failing to comply, then it would be prudent to negotiate amendments to the clause to either (a) make the clause less onerous in respect of timescales or consequence, or (b) have the condition precedent removed altogether. 

7. Acceleration Omission and Supplementation
It is commonplace to see bespoke contracts or bespoke clauses that allow the employer to alter the scope of the works and programme to suit their own requirements. 

Example

Clauses that permit the employer to:

  •  instruct the contractor to accelerate the works without compensation.
  • omit any part of the works and have these works completed by others without compensation.
  • supplement the contractors’ labour if they consider the contractor is in delay and contra charge the contractor for doing so. 
The above clauses are very unfavourable and if identified in a contract, consideration should be given as to whether you are willing to accept such commercial risk. Generally, if unacceptable to you, it would be prudent to negotiate amendments to the clauses to either (a) allow the employer to take such actions, but to allow the contractor to be compensated as a result, or (b) have the clauses removed. 

8. Termination Provisions
Termination provisions are common in construction contracts, and it is important to review them and understand what rights and remedies they provide the parties. In many bespoke forms it is not uncommon to see clauses that permit the employer to terminate for any reason they like and restrict the contractors’ rights to claim any damages in the event they are terminated.

It is also not uncommon for bespoke forms to contain provisions that provide the employer with the contractual right to terminate but do not contain any provisions affording the same contractual rights to the contractor.

Care should be taken to identify and understand the rights, and risks associated with such clauses. 

Example

A clause that allows the employer to terminate for convenience coupled with a clause that prevents the contractor claiming loss of profit following termination, would allow the employer to terminate the contractor on a whim and with no financial consequences. The contractor could be left with no workflow, idle resources, and with no financial right to claim for the loss that they incur as a result.


9. Conclusivity Provisions
Many forms of contract will include clauses that provide that a certificate or decision will become final and binding on the parties if it is not challenged within a certain period. 

Example

The final certificate becoming binding under a JCT if dispute resolution proceedings are not commenced within 28 days.

A conclusively clause is designed to provide finality and certainty, and to prevent disputes from being prolonged for an extended period. 

Care should be taken to identify such conditions within a contract, and to understand the timescales that apply and the risk for failure to comply. In particular, consideration should be given to any conclusivity provision that provides a very short period of time to challenge the certificate or decision. There can be a substantial risk if for example, you dispute a final certificate, but the contract provides insufficient time for you to properly compile your claim and commence dispute proceedings. 

If you identify such clauses and are concerned as to the ability to comply, then it would be prudent to negotiate amendments to the clause to either (a) provide a longer timescale prior to the matter becoming final and binding, or (b) have the conclusivity provision removed. 

10. The Particulars 
In addition to onerous clauses, it is important to check that the particulars of the contract are not overvalued and are accurate as basic errors, vagueness, or ambiguity can often creep into the contract and lead to significant issues.  

Points that should be checked and verified for accuracy before entering the construction contract include:
  • Who are the parties – are the names, addresses and company numbers correct?
  • What is the scope of works – does the contract accurately reflect what the parties intend the contract to do?
  • What are the contract documents – for example does the contract refer to the correct drawing revisions? Are all the design documents included?
  • What is the programme – is it agreed and achievable?
  • What is the cost - for example is the contract cost correct?  Are there any hidden costs?
  • The Liquidated Damages rate
  • What the Retention rate is
How to deal with Onerous Contracts 
It is always best to examine a construction contract closely before it is entered into, onerous contracts may be apparent from the start of the works or when unavoidable circumstances occur such as material shortages, delays or unpredictable costs. By understanding the contract terms and provisions from the start, disputes can often be avoided. 

If you have a query on onerous construction contracts, require any clauses to be checked or would like a contract written, please use our contact form or call our offices below:

01733 233737 Peterborough

0207 406 1494 London

0121 262 4086 Birmingham

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