We want to help you avoid construction disputes. Having represented numerous parties in construction disputes over the years and being experienced in the arbitration and adjudication of construction disputes, we have a good insight into the common causes of disputes. In this article we identify some of the most common causes and give some practical tips on how to avoid them.
Be clear about what construction work the contract includes
It seems obvious to say you should understand what you are contracting to provide or to receive. A surprising number of disputes arise over whether certain aspects of a build are included in the contract. The starting point is usually the plans and specifications. However, many specifications are largely generic. Plans identify the significant aspects of the build required to obtain a building consent and compliance, but not necessarily many of the accessories such as internal fittings.
In our experience quotes in the form of schedules identifying (in detail) each aspect of the build including material and labour costs are helpful. Schedules provide a reference point for both parties as a starting point when there is any dispute over the scope of the works. There will occasional still be some differences, often around whether certain work not expressly identified is nevertheless included as incidental to or necessary to complete work that is identified. But generally, the more both parties have a common understanding of the scope of the work covered under the construction contract the better.
Include, understand and follow a clear variation process
Variations are one of the most common causes of construction disputes. This usually occurs when certain work is disputed as being a variation entitling the builder or contractor to charge extra under the contract. Being clear about the scope of the works minimises the likelihood of this type of dispute. However, it is very difficult to anticipate all eventualities that arise during a build. So, a good contractual provision dealing with identifying and valuing variations is important.
Generally, an effective variation clause will (a) require the employer/principal requesting the variation or the builder/contractor seeking to charge for work as a variation to advise the other party the work is carried out and (b) provide a formula or process for reaching an agreed value for the variation work, ideally also before the work is carried out. A large number of disputes arise simply because parties include such clauses in their contracts but fail to follow them. Ironically, this often occurs because there is a good relationship between the parties and a high level of trust. So builders or contractors asked to complete extra work do so assuming they can charge for it and will be paid. Equally, owners or principals who orally request extra work are unaware that the work constitutes a variation and/ or are unaware of the level of extra cost of the work requested.
Disputes for variations therefore often arise near the end of the contract, when the builder or contractor presents a payment claim for variations that significantly increases the price of the build. The payer argues that the contractual process was not followed so they should not have to pay. In most cases however the law does entitle a party to be reasonably compensated for work carried out. The payee argues that the work is not a variation at all, or that the cost charged for the variation is unreasonable.
All of these types of disputes are avoidable if the parties include, and comply with, an effective variation clause. They may still differ as to whether certain work constitutes a variation but as they do so before the work is commenced they are much more likely to resolve the issue by agreeing on whether, and if so how and at what cost, the work should be carried out.
Have payment provisions and documentation that complies with the Construction Contracts Act 2002 (“CCA”)
Most construction contracts include payment provisions which identify the nature and timing of payments. Some construction contracts, in particular standard form contracts such as Certified Builders and 3910:2013, include payment provisions that are consistent with the CCA. The CCA applies whether this is the case or not, as it is not possible to contract out of the CCA. The default position is that if the construction contract does not provide for the timing of payments, the builder or contractor is entitled to claim monthly. Whatever the provisions, disputes are much less likely to both parties understand the payment regime and adhere to it throughout the contract.
The CCA provides significant protection to builder and contractors, in particular around enabling them to enforce payment. However, in order to take advantage of this protection, the builder or contractor must have documentation that is compliant with the CCA. It can make night and day difference to whether or not a disputed payment claim can be enforced, and within a reasonable time frame.
Equally, for employers and principals, it is important to respond to claims from builders or contractors within the relevant time frame, and with a schedule that complies with the requirements of the CCA. Failing to do so enables the contractor or builder to immediately enforce their claim in Court as a debt due. This applies even if the non-complying employer/principal has a good reason for not paying. The CCA prevents a party who has not provided a CCA compliant from raising substantive issues in dispute.
The best way to avoid or minimise construction disputes is to have a construction contract in place that both parties understand and apply throughout the contract. The contract should clearly identify the scope of the works, include an effective variation clause that provides for the parties to agree and value variation work before it is carried out, and should include a clear payment regime that is CCA compliant. The parties should ensure that payments claims and payment schedules issued pursuant to the construction contract are CCA compliant in order to be able to enforce their rights and minimise their costs should a dispute arise.
If you are unsure whether you contract is appropriate, or whether your documentation is CCA compliant, we are happy to review, and provide advice on, your documentation. The cost for us doing so is minimal compared the cost of any dispute that is more likely to arise due to inadequate contract documentation.