What are the different types of construction contract?

It is tempting for the outsider to believe that all construction contracts are the same – they are not. This can lead to both construction disputes and a waste of valuable time, energy and cost. Getting the contract right is vital before you start a construction project. Andrew Cullyer, Litigation Executive, reviews various types of construction contracts, discussing how and why they affect you, as well as the suitability of each contract for varying projects. We present certain situations specifically written from the perspective of a potential employer rather than contractor however much of the same comments apply albeit the balance of risk is reversed.

Reference to procurement in construction contracts

Before deciding on the right construction contract, the main fundamental types of procurement in construction must be understood, i.e. who does what and who bears what risk. This usually comes down to a split between who designs the project and who builds it or how much is paid and how that is calculated. This may seem academic when written on the page however the types of procurement have very real effects in how a project is carried out, managed and how disputes arise and may be resolved.

The four main types of procurement are:

• Standard Building Procurement
• Design and Build
• Open Book and/or Re-measurable
• Time and materials.

While this is an in-depth area of construction law and will vary from project to project, we aim to summarise each of these types of procurement to leave you better equipped to tackle getting your construction project underway and running it effectively.

Standard Building Procurement

In standard building procurement you provide the design and the builder constructs that design.  From this simple statement so much complexity flows. Whenever works are defective, the question will arise as to whether this is this due to:

• defective workmanship – and is therefore the responsibility of the builder; or
• defective design – and is therefore your responsibility; or
• both – in which case there is a joint responsibility that must be apportioned.

It is also important to consider that any delay on the project is subject to the same paradigm if the:

• delay is caused by slow progress – it is the responsibility of the builder; or
• delay is caused by missing or late design information (e.g. what colour should the paint be what tiles should be used) - it will be your responsibility; or
• delay is caused by both – this can cause some very significant issues and usually results in more time for the builder but no additional costs to you.

This may seem daunting, however in reality if you consult a design professional, such as an architect, any errors or omissions in the design (and the attendant costs) may be passed on to them. Also using such a professional limits both the likelihood, severity and number of such errors.

Most building contracts carried out at a small to medium scale are likely to be Standard Building contracts.

Design & Build Procurement

In this situation, the builder is responsible for both the design and the construction of the project. You will provide your requirements for the project but then the rest is left to the builder.

This may seem to solve many of the problems with the Standard Building contract above, but appearances are deceptive. You are still responsible for your requirements so any errors or omissions in those requirements are your responsibility. You also give up a lot of control over the project as, generally, the builder can achieve your requirements by any means.

By way of an example, in a project where a builder has been requested to design and build a 2 storey 4 bedroom house, there would be nothing to prevent the builder installing the kitchen on the first floor as opposed to the ground floor unless you specifically required that they do so. You might specify the house should be painted magnolia but the builder could choose which brand of paint to use.

There is no limitation on what your requirements may be and many people opt for a very detailed set of requirements that bring the overall project much closer to the standard building contract above. However, this rarely achieves the desired effect. The default position is the builder may achieve the requirements by any means and some of those means are likely to be unacceptable to you and there will unfortunately be little you can do.

The trade off you make is to relinquish some of the control over the project for only having one person (the builder) to deal with if things go wrong. With that caveat in mind, Design and Build is a very useful vehicle for mid to large scale projects provided all involved are clear on their responsibilities and rights.

Open Book and/or Re-measurable

These can be Standard or Design and Build style contracts; the real difference here is not about who designs or builds each element but about who pays for each element.

The usual position is that the builder agrees to carry out the work for a fixed fee and this includes all of the work to be completed as set out in the contract; work that falls outside of the contract (outside of the scope) is extra. However, if the cost of the work inside of the scope of the contract increases then this is the builder’s risk.

With open book/re-measurable contracts the position is very different.

A re-measurable contract, or part of a contract, usually relates to an unknown quantity of work for which there is a rate; there is also usually an estimate. Once the work is completed the actual amount of work is measured, multiplied by the rate and the estimate adjusted into the sum due. This transfers the risk in the cost of the work from the builder to you.

An open book contract is usually a promise for you to pay for the builder’s costs plus an agreed percentage for profit. There is usually an estimated cost but what you will have to pay is the actual proven cost plus profit irrespective of what that might be. This transfers the risk in the cost of the work from the builder to you.

These contracts have their place but they are usually considerably less favourable to you than fixed price contracts and it will very much depend on the specific circumstances of the project.

Time and Materials

These sorts of contracts are very similar to open book contracts. The distinction is that most time and materials contracts are open book but not all open book contracts are time and materials contracts.

These are very simple arrangements where you literally agree to cover the cost of the builder’s time and the cost of materials to complete a specific amount of work. Such agreements are very risky as you have very little control over price or how much time the builder takes. As such this form of procurement is suitable only for very small construction projects.

To have your questions answered on your construction project or if you wish to bring a claim against a party involved in your construction project, you can contact Andrew Cullyer today on 023 8071 7482 or email andrewcullyer@warnergoodman.co.uk.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.