Build UK has recently released a report which highlights six specific terms that it recommends eliminating from construction contracts. The objective behind this initiative is to guide individuals responsible for drafting legal documentation, aiming to foster fair allocation of risk and ultimately enhance the quality of construction projects.
Whilst the industry commonly employs standardised contract forms, Build UK points out that it is not unusual to encounter amendments that are as lengthy as the original off-the-shelf contract to which they are appended.
According to the trade body, it is crucial to shift the focus towards actively managing risk rather than simply transferring it to other parties. Build UK represents over 11,000 contractors and emphasises the importance of this approach.
Throughout this article, I will be explaining the six contract terms that Build UK advocates avoiding. So, let’s dive in…
Fit-for-purpose design
Build UK warned that this phrase creates an “unrealistic and often indefinable expectation” that can lead to disputes over contract requirements. The trade body offers an example involving a building owner who intends to utilise a multipurpose sports hall for ice hockey. If the structure cannot be modified to accommodate this purpose, both parties could potentially argue whether or not it fulfils the intended function. When confronted with fitness-for-purpose clauses within contracts, designers are prone to adopting a cautious approach, while suppliers are incentivised to incorporate additional costs.
Unquantifiable risks
The report emphasises that attempting to transfer unlimited jeopardy “does not make the risk go away”. Instead of placing the entire burden on a single party, which could potentially derail an entire project, Build UK suggests allowing ample time to assess and comprehend the risk thoroughly. The trade body recommends the implementation of a risk register at the beginning of projects, accompanied by an early-warning system to promptly identify potential threats. This proactive approach aims to foster a better understanding of risks and enable effective risk management throughout the project lifecycle.
Specified-peril-cause clauses
Build UK highlights the growing prevalence of contract clauses that eliminate subcontractors’ protection from liability for delays caused by specific perils such as fire, earthquakes or riots. Although this may appear logical, the trade body emphasises that pursuing claims under these circumstances could potentially lead suppliers into insolvency. Instead, Build UK recommends managing such risks through comprehensive insurance coverage, which provides a more effective means of risk mitigation.
Blanket indemnity for breach of contract
This feature makes one party automatically liable if an in-scope loss is incurred, regardless of fault. However, the report points out that such clauses can be difficult to insure and their effectiveness relies solely on the financial capability of the party named in the contract to fulfil their obligations. Build UK highlights that standard contract law principles typically offer remedies in cases of agreement breaches, rendering indemnities in this area unnecessary.
Uncapped subcontractor liabilities
The report stresses the importance of setting liability caps at a “reasonable” level, except in extreme cases such as fraud, injury or intentional default. These caps should be sufficiently high to motivate contractors to take necessary precautions, yet not excessively high to pose a risk to the viability of the firm. For projects of significant scale, the report cautions that potential losses could surpass the financial capacity of many suppliers, even with insurance coverage. It suggests a liability limit expressed as a percentage of a contract value and set not to exceed a business’s expected profit from the scheme.
Onerous performance-security requirements
Build UK argues that certain forms of contractor securities, which clients request to safeguard against business failure, can have unintended negative consequences. According to Build UK, pure on-demand performance bonds have the potential to deplete working capital, thereby paradoxically contributing to the very risk they aim to mitigate. Similarly, parent-company guarantees may be unattractive to group leaders and extended collateral warranties can expose subcontractors to uninsured losses. Build UK urges clients to consider whether they really need securities from contractors; to select the most appropriate method if so; and to choose wording carefully.
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