Tips for Reviewing Construction Contract

               Industrialization and urbanization all over the world has boosted construction industry. The contract Agreement is must for a construction job which require due care and knowledge. Here are few points which must be remembered while reviewing a construction Contract Agreement.

 

1.                Date, Name and address of Parties: This is the first task one should do very carefully. Check the date of the agreement, name of the parties and their addresses, which are vital part of the contract agreement.

 2.          Scope of Work:  Scope of the work is heart and soul of the construction contract. The cost of the construction is estimated on the basis of the scope of the work. It should be thorough and comprehensive. Any deviation from the agreed scope of the work may cost dear to the parties. 

3.         Contract Price: The contract prices are one of the key feature of the contract as the purpose of the all the construction companies is to earn profit. The prices should be checked properly and be insured that the Contract prices are same which were agreed between the parties or were accepted by the Employer as per tender document. It should be very clear whether the prices are firm or subject to escalation, because due to change in the market rate prices get escalated. If the escalation is provided the contractor shall be at low risk of market uncertainty.

4.         Nature of Contract: Nature of the contract should be clear and unequivocally mentioned ie. Lump sum price contract, unit rate contract or cost plus basis contract. The terms of the contract vary on the nature of the contract.

5.         Mobilization Advance: Whether the Contract/Order provides for payment of any Mobilization Advance to contractor or not if so, percentage and condition thereof.

6.               Terms of Payment:   Make it clear that the proposed terms of payment generate positive cash flow for the project. The retention money should be at lower rate and payment of bills should be within a fix short time. The list of enclosure to the invoice should limited.

7.         Bank Guarantees:  Employer normally required bank guarantees for performance, security and release of retention money. The validity and terms of the bank guarantee/bonds should be carefully scrutinized as the same are independent agreement and the employer can encash Bank Guarantee irrespective of the contract terms.

8.         Free Issue Material: Some Employer issued Material free of cost. The free issue material is considered to estimate the contract price as well as to calculate the taxes and duties. .

9.                  Schedule:  Contractor has to stick to the schedule, any deviation from schedule may attract penalty. It must be insured that there is enough time to do the work and the schedule is realistic. 

10.       Extension of Time: Is there any provision for extension of time. If the same is provided then ascertain whether it is with LD or Without LD. Ensure that the time extension is available on happening of force majeure conditions.

11        Defect Liability period: Check the defect liability period normally it should not be more than 12 months.

12.             Insurance:    Insurance always remains mandatory in all contracts. Contractor is required to arrange various Insurance policies like CAR, third party liability, accident and fire etc. Are the amounts of insurance required appropriate for the project? Read the insurance clause carefully and if it is find that the insurance policies required by the Employer are inappropriate to the amount allotted for insurance then negotiate with employer.

13.       Taxes & Duties: Taxes and duties cast a heavy burden on construction cost. It changes the whole estimated cost depending on its inclusion or exclusion in the contract price. Taxes and duties often change yearly, therefore for lower risk the clause for reimbursement of taxes & duties due to change in legislation can be considered. 

14.       Compliance with applicable Laws: Contractor is required to comply with the various laws i.e. labor laws, safety laws e.t.c. Assessment of the cost which may incurred in compliance of these laws is advisable.

15.            Indemnity:   Employer require the contractor to indemnify him his employees and third party against any losses and damages. It should be clarified that to what extent contractor is responsible for personal injury and property damage claims, and associated legal defense costs, that are attributable to some or all of the client’s negligence. It should be checked whether the indemnity is limited or unlimited.  

16.          Changes:   Check whether there is change clause or not? It should also be checked that whether the changes have to be in writing and agreed to by both parties before the work under the change is performed? 

17.          Disputes:    The dispute resolution clause should allow for some form of   alternative dispute resolution, like mediation or Arbitration. The procedure for appointment, meeting and place of the arbitration should be clearly defined, otherwise it be create lots of problems in future.

18.            Damages:   Normally all contract agreement envisage damage clause. What is look about is whether the liquidated damages so high that they actually act as a penalty?  Can they be eliminated or significantly reduced or spread out? The damages should to limited.

 

Apart from this there are some other provisions which need attention like warranty clause, confidentiality clause, assignment, and change in constitution of company during work order e.t.c

 

 AZEEZ  NAZAR  SABRI

Senior Legal Officer

azeez_nazar@yahoo.com