Choosing the Right Construction Contract: What Clients Need to Know

Choosing a construction contract can feel like one of the more technical decisions to make before work can start.

It’s easy to see it primarily as a legal document: something that sets out responsibilities, allocates risk and protects the parties if something goes wrong.

Of course, it does all of those things, but the contract can also influence how your project operates day-to-day. 

It can affect how change is managed, when issues are raised, how  decisions are made and how the client, project manager and contractor work together.

A good contract should create clarity, not conflict.

Choosing the wrong one can make a project harder than it needs to be. However, choosing the right contract and then failing to understand how it should be used can cause just as many problems.

So, what should clients be thinking about?

Start with the project, not the contract

There are several standard forms of construction contract used in the UK.

Two you’re likely to come across are JCT (Joint Contracts Tribunal) and NEC (New Engineering Contract). Within each are different options designed for different types of projects and procurement approaches.

There isn’t one contract that’s right for every project.

The point is to choose a contract around the project, rather than starting with a familiar contract and trying to make the project fit it.

That means looking at some fundamental questions:

• How clearly defined is the scope?

• How important is cost certainty?

• Are there fixed or particularly challenging programme requirements?

• Where should different project risks sit?

• Who is responsible for developing and coordinating the design?

• How is change likely to arise and how should it be managed?

• When will the contractor become involved?

• Are there particular constraints, such as working in an occupied building or live operational environment?

Then there’s another question that can be overlooked:

How do you want the people involved to work together?

The contract can have a real influence on that too.

What happens when the contract doesn’t fit the project?

Choosing the wrong contract doesn’t automatically mean the project will fail, but it can introduce friction that didn’t need to be there.

Responsibilities may not align with the way the project is actually being delivered. Risk can sit with a party that isn’t best placed to manage it. The process for dealing with change might not suit the speed at which decisions need to be made.

The result can be uncertainty around who is responsible for what, slower decisions and different expectations between the client, contractor and consultant team.

Once positions start to become entrenched, issues that could have been dealt with relatively simply can become much harder to resolve.

That’s the opposite of what the contract should be doing.

Choosing the right contract is only half of it

This is where the conversation needs to go further.

You can choose a contract that is entirely appropriate for the project and still run into problems if the people administering it don’t understand how it is intended to work.

NEC4 is a good example.

NEC4 is the fourth generation of the New Engineering Contract suite and is widely associated with engineering, infrastructure and major construction projects.

One of the strengths of NEC4 is its focus on active management.

Its early warning and compensation event processes provide a framework for bringing potential issues and change into the open, rather than allowing them to sit in the background.

The principle behind that makes a lot of sense: raise the issue, understand the implications and deal with it.

However, putting NEC4 on the front of the contract doesn’t automatically make a project collaborative.

If early warnings become a box-ticking exercise, notifications aren’t dealt with promptly or people fall back into defensive positions when something changes, much of the benefit can be lost.

The contract provides the framework.

The project team still has to use it.

A contract shouldn’t only appear when something goes wrong

Whatever form of contract you choose, the people responsible for managing the project need to understand it.

That needs to happen from the beginning.

Everyone should be clear about how changes are notified, who has authority to make decisions, what needs to be recorded and what the relevant timescales are.

That doesn’t mean generating paperwork for the sake of it.

Good contract administration is about maintaining clarity.

If something changes, everyone should understand what has happened, what needs to happen next and what it could mean for cost and programme.

When that process works well, issues can be dealt with while they are still manageable.

When it doesn’t, relatively small matters can sit unresolved, gathering cost, programme implications and frustration as the project moves forward.

The contract can support collaboration, but it can’t create it

This is perhaps the most important point.

Contracts can establish processes, responsibilities and behaviours. They can require information to be provided and decisions to be made within particular timescales.

However, they can’t make people communicate well.

They can’t make someone raise an uncomfortable issue early.

They also can’t stop a project team becoming defensive if every change immediately turns into a battle over contractual position.

That comes down to how the project is managed.

Good project management means using the contract to create clarity and accountability while keeping people focused on solving the problem in front of them.

There will still be disagreements, difficult conversations and times when contractual positions need to be protected.

The contract shouldn’t become a barrier to having the conversation.

So, how do you choose the right construction contract?

It helps to start with a different question:

“What does this particular project need?”

Look at the scope, risk, procurement route, programme, cost requirements, design responsibility and the environment you’re working in.

Think about how change is likely to occur and how you want the project team to work together.

Then choose the contractual structure that supports those requirements, with the appropriate professional and legal advice where needed.

Once you’ve chosen it, make sure the people responsible for administering it understand how it is supposed to work.

That is because choosing the right contract matters.

Understanding how to use it matters just as much.

Planning a construction project?

If you’re at the early stages of a project and considering procurement, contractual approach or how the project should be structured, these are useful conversations to have before key decisions are made.

Get in touch with us to talk through your project and the project management support you may need.

Author

Darren Hewitt

Darren has over 25 years experience in the construction industry. Within this time he has led and delivered construction projects for major blue chip clients.

Darren has held senior roles in both client and consultant organisations. This gives him a full understanding of the construction process and level of stakeholder engagement required to ensure successful project/programme outcomes. He enjoys both day to day project management duties as well as strategic projects.