Guidance for Self-Builders
Getting Your Contracts and Agreements Right
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This document is designed to assist you if you are embarking on a self build project, whether this is a small extension or a new house on a greenfield site. In it we give some hints and tips on the terms that you need to consider including in your contracts with builders, tradesmen and suppliers.
Why You Need Contracts Construction projects can be complex affairs, with a variety of different trades working on the site, and a variety of risks – which can range from unforeseen ground conditions to bad weather and unavailability of materials or equipment. Contracts are needed in this situation – not because they solve all the problems but because they provide a framework for dealings between the participants and they help to identify how risks are allocated and what to do if things go wrong. Contracts are important: To record the commercial terms agreed by the parties To provide certainty To provide a framework for dealing with issues that might arise during the life of the contract (changes, unforeseen problems etc.) To provide a method of resolving disputes Anyone taking on work that involves constructing or enlarging a dwelling has a legal duty to “see that the work which he takes on is done in a workmanlike or… professional manner with proper materials so that …the dwelling will be fit for habitation when completed”. This duty is set out in the Defective Premises Act 1972 and claims can be brought for six years after completion. 1
The law applies to architects and other professional consultants as well as builders and other tradesmen involved in building a home. It also applies to extensions and conversions, not just new properties. But this is not enough on its own. You need a contract to deal with a whole range of issues: scope of work, price and payment terms, variations, insurance, contract duration and completion date, post-completion liability, insurance, termination and dispute resolution. This note briefly highlights some of the main points that you need to consider when embarking on a home build project.
Procurement Structure There are different ways of organising your building project. Unless you are doing the work yourself, the traditional method is to: Appoint an architect to design (and supervise) the work Appoint a main contractor who is responsible for the entire building project. A main contractor will usually subcontract work to a variety of different trades, and the contract price will include a fee to cover the cost of administering the different subcontracts and the risks, especially if there is a fixed price for the contract.
An alternative is: Appoint architect to design the project Appoint the various trade contractors directly foundations/ building/roofing/ mechanical and electrical etc. for different parts of the work This needs to be managed carefully so as to avoid one contractor delaying other contractors who then claim extra money because of the delay. But it does give a client more direct control over the process as well as the selection of contractors. You need your architect or another professional to act as construction manager or project manager. As well as an architect, on a large job you may need other consultants, e.g. structural engineer and a services engineer. You might also need a project manager if your architect does not perform this role.
Before Appointing Your Team: Prepare a list of potential consultants and contractors Get references/recommendations Get indicative quotes from more than one supplier Check their financial capacity before confirming any appointments And then decide on which firms to use
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Scope of Work or Services
get a job and then claim extras to make up any shortfall. Or they may price it too high (especially if there is no competition).
It is sensible to have a detailed scope of services or specification before you start on a building project, especially if you want to control the cost and programme. Starting work before the design and scope have been properly worked out is risky and creates uncertainty, not just for you as the owner but also for your builders.
It can be useful to have a schedule that breaks the price into a number of different elements – foundations, main structure, roof etc. Then if there is a change, you can have more control. There may also be a schedule of rates for pricing any extras.
The contract should include a schedule which sets out the scope of the work– probably by reference to a detailed specification document and a set of numbered drawings. Unless you are an experienced designer or builder yourself, be sure to have the specification prepared (or at least checked over) by a professional before you agree it, as it is not unknown for items to be missed out, only to cause cost and time problems later on. Also be sure that the specification does actually meet your requirements. Changing your mind part way through the job can involve unexpected extra cost and delays.
Contract Price
Provisional amounts or prime cost sums are sometimes included in the price. For example, a prime cost sum of £10,000 for kitchen equipment, which will be adjusted to the actual cost once you have decided what is going to be ordered. Other pricing options include: Time & Materials, where a builder perhaps gives an estimate but charges for the time spent at pre-agreed rates plus the cost of materials. Cost plus Fee where a builder charges the actual cost of labour and materials plus a fee to cover his management expenses and profit. In these cases the contract should provide for you to have access to the contractor’s records in order to verify the costs being claimed.
There are different ways of pricing a contract.
While a good system in many ways, there is no real certainty of what the final cost will be with these methods.
A fixed price or lump sum has obvious attractions – even though it is often said that there is no such thing as a fixed price on a construction project. If a contractor offers a fixed price, get your consultant to examine it: contractors sometimes bid low to
Target Cost. Sometimes a builder will agree a target cost with the client. Here they agree what the price ought to be (the target cost). If the final cost is below the target the contractor
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will get a bonus by sharing a part of the saving with the client, but if the target cost is exceeded, he will have to bear some or all of the cost overrun. Target cost contracts have a lot of attractions but they need to be very carefully structured. Some contracts provide for a GMP (Guaranteed Maximum Price) either coupled with a target cost or in another pricing arrangement. Again, this needs careful structuring if it is to work.
Payment Terms There are two main ways of arranging payment during the contract:
regular weekly or monthly invoices from the builder based on work done, or
a fixed payment schedule with specified amounts payable at particular stages of the work
When agreeing the payment terms, try to ensure that the money paid out matches the work done on site. This limits your risk if the builder gets into financial difficulties. Advance payments to cover the cost of materials are sometimes agreed- but be sure you get ownership of the items purchased. Having an architect, quantity surveyor or project manager on board to review and approve all payment applications is worthwhile for any larger project. 6
Work on Site Especially when the project involves work to your home, it is sensible to have a clause that sets out the rules of conduct such as working hours, compliance with health and safety regulations, co-operation with other contractors and the liability of the contractor for any damage caused to property of the client or of the neighbours. Cleaning up after work and safe storage of plant and equipment can also be covered in the contract.
Changes Not every client knows all the details of what he wants when the project starts and even if he does, he may change his mind. The contract should cater for this with a change or variations clause. This will set out a procedure for dealing with change. Our recommended process is: the client suggests a change to the contractor; the contractor tells the client what the cost and time implications will be and the client then decides whether or not to go ahead. This may involve some negotiation but at the end of this process the agreed change is confirmed in writing with both the extra cost and any change to the completion date recorded and signed. This way both sides know what is agreed and later disputes over the cost of a change can be avoided. (See our Change Confirmation Form B155) 7
If the contractor thinks that a direction he receives from the client or his architect is going to affect the cost and/or the completion date, then he should be required to flag this up and the same process will be followed – assuming that the client does not think the item is already covered by the specification.
time. If you do not do this, the contractor is no longer tied to a firm date and his contractual obligation to complete the work is watered down.
Completion & Defects Liability Delays & Time Extensions Even if you have a detailed scope of work and your contract specifies a fixed price, unforeseen events can occur that change the price and programme. The biggest risk is to be found in the ground: while this can be mitigated if you have a soil survey, unforeseen ground conditions – even the odd unexploded bomb – can impact on the project cost as can other unforeseen events such as severe weather or delay caused by the gas company. The contract should provide that the contractor has to notify the client once he knows of something beyond his control that could delay completion and the client has to decide whether to give an extension of time and revise the completion date. Sometimes the contract limits the contractor’s ability to claim - e.g. the contract may state that no extra time or money is allowed for delay due to bad weather. Unforeseen problems have a cost as well as a time impact, so the change procedure mentioned above is needed here as well. But not every time extension will also justify extra money. Always be sure to revise the completion date if there is some delay or change that prevents the contractor from completing on 8
It is usual to have a start date and a completion date in a building contract. When the site is not available at the time the contract is signed, or when the contractor is one of a number of contractors who will go on site for a particular part of the works, it is sensible to have wording that allows the client some flexibility – e.g. ‘The client will give not less than 7 days notice to the contractor to start work on site.’ When the work is finished, it will be inspected by the client or architect and the completion date will be confirmed. It is then usual for a contract to have a defects period of six or twelve months during which any problem that arises has to be put right by the contractor. In spite of this, the potential liability of the contractor will not stop at the end of the defects period unless the contract says so. Under the general law, a contractor is liable for any latent defect that appears for up to six years from completion or twelve years if the contract is executed as a deed. Also anyone taking on work that involves building or enlarging a dwelling has a legal duty to “see that the work which he takes on is done in a workmanlike or… professional manner with proper materials so that …the dwelling will be fit for habitation when completed”. This duty is set out in the Defective Premises Act 1972. 9
When the work includes equipment or materials that have a manufacturer’s warranty, the contractor can usefully be required to have the benefit of this warranty given to the client on completion so that he can claim directly against the manufacturer if a problem occurs.
Liquidated Damages Most large building projects contain provision for the contractor to pay liquidated damages (LDs) if he fails to finish the work by the completion date. Liquidated damages are a pre-agreed amount – e.g. £500 a day or £500 a week - and should represent an estimate of the likely cost of delay to the client such as the cost of renting another property. LDs are not often used in small projects but they could be appropriate for a main contractor building a £300,000 house.
Insurance & Liability Normally a contractor for the main building works will have Contractor’s All-Risk Insurance, Public Liability Insurance and Employers’ Liability Insurance. There will be a minimum level of cover specified for these insurances. Sometimes, especially when there is more than one contractor working for the client, the client may take out the insurance to cover loss and damage during the course of the works. A specialist insurer such as Self-Build Zone should be consulted. 10
An architect, other professional consultant (and a contractor) who undertakes design, should have professional indemnity insurance. This is an annually renewable policy and should be maintained for as long as the consultant or contractor has any liability under the contract – either 6 or 12 years, depending on whether the contract is signed as a deed. Architects and other professionals may insist on having a limit on liability in their contract with you. This is reasonable, provided that the limit is an adequate one, which will usually be the case as it will be backed by insurance. Builders too may want a limit, which, again, can be accepted if the limit is a fair one for you, the client.
Ownership & Risk Partly to protect you against the risk of a contractor bankruptcy, a clause dealing with ownership of materials is recommended. This will usually say that ownership of materials supplied by the contractor will pass to you, the client, when the materials arrive on site or when they are paid for, if this is earlier. Risk of loss or damage will, however, remain with the contractor until he hands over the completed work.
Termination & Suspension It is always advisable to have a termination clause which states the grounds on which a party can bring the contract to an end 11
and any relevant consequences. It is usual to include breach of contract and insolvency as reasons for terminating. If the contractor is in breach, the contract wording should say that the client is allowed to take over all plant and equipment on the site and does not have to pay the contractor until the work done by a replacement contractor has been assessed. The extra cost and loss caused by the failed contractor will then be taken into account. Sometimes the client has the right to terminate at any time by giving notice but in that case, you would usually have to pay reasonable demobilisation costs to the contractor and possibly compensation for loss of profit. If problems arise, a client occasionally wants the right to suspend the contract - e.g. if planning consent is delayed. The contract can contain a clause that allows you to suspend the contract but if that continues for more than a specified period, say 3 months, it is usual to state that either party can then terminate the contract.
Longer Term Risks When building a new house or an extension you need to think about the long term consequences. Even if you stay in the house for several years, if some defect appears after 5 years you might have a claim against your architect or builder but it could be expensive to pursue and there is always the possibility of the builder going bust in the meantime. 12
Also, if you sell, the buyer will want to be sure that your building work has all the necessary consents from the local authority. He may also want to have some protection in case defective work appears after he has moved in. Under the general law he would not find it easy to sue your builder or architect. Taking out a 10 year structural warranty policy is a good way to overcome this problem, such as the Build Zone Warranty.
Disputes Hopefully, you will not have a serous dispute, but if you do, we recommend a three-stage process for resolving disputes: direct negotiation, adjudication or mediation, and , as a final resort, the courts. Building disputes can be time consuming and expensive: a lawyer charges about the same for one hour of his time that a bricklayer will be paid for two days’ work. If you cannot negotiate a solution, there are interim procedures cheaper than the courts including adjudication and mediation. Adjudication is a short-term procedure where an adjudicator has to make a decision within twenty-eight days of a dispute being referred to him. Mediation involves an independent mediator who facilitates a negotiated solution. These methods can keep the costs down and achieve a quicker and cheaper solution than going through the courts.
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ContractStore Construction Contracts
JCT Contracts
We have, in collaboration with Self Build Zone, developed a suite of contract templates designed for use by those who want to build a new house or extend an existing home.
We also sell two Home Owner Contracts published by the JCT (Joint Contracts Tribunal), an organisation that is well known throughout the construction industry for their standard contracts. The JCT contracts are downloadable in editable PDF format. You can find the JCT contracts here: http://www.contractstore.com/jct
These contracts cover the essential elements of a building project, are written in plain English, and are easy to use in downloadable MS Word format. There are four main contracts: Appointment of Professional Consultant B151 for use when appointing an architect, project manger or other professional
Trade Contracts We also have a collection of contracts for builders and suppliers, plumbers, electricians and others. You can find them here: http://www.contractstore.com/construction-and-engineering
Building Contract B152, which is for use when appointing a contractor to build a new house or carry out other fairly substantial work. Trade Contract B153, for appointing a contractor for part of the work Supply & Installation Contract B154 for appointing a firm to supply and install equipment – e.g. boiler, central heating system, kitchen etc.
You can find them here: http://www.contractstore.com/ homebuilder
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About ContractStore
About the Author Giles Dixon is a solicitor specialising in construction law. He has been running his own law firm (gilesdixon.com) since 2002, having previously spent several years as a partner in the construction department of a major London law firm after a spell working in the Middle East. Giles is co-author of the JCT Constructing Excellence Contract; contributed the Chapter on Construction to the 11th Edition of Schmitthoff’s “Export Trade – The Law and Practice of International Trade” and has written numerous articles on construction related activities as well as having acted as a solicitor on several major projects, including The Shard, Europe’s tallest building.
ContractStore was established in 2002, one of the first companies to offer contract templates for sale online. The company has some 300 templates available for downloading from its website, and these include a number of documents designed for use by self-builders and those on the construction industry.
Giles is also a founding director of ContractStore and author of their range of Self-Build contracts.
ContractStore’s documents come with helpful explanatory notes and almost all of them are in editable Word format. www.contractstore.com 16
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