Introduction
A construction agreement serves as the foundation for a successful construction project, providing a clear framework for the parties involved and mitigating potential disputes. Property owner, contractor, or subcontractor will heavily rely on the construction agreement to ensure a smooth and successful project. In Malaysia, there are several standardised construction contract templates, such as Pertubuhan Arkitek Malaysia (PAM) contract that is designed for overseeing construction projects within the private sector, and the Public Works Department (PWD) contract, commonly used for government-related projects. These contracts provide comprehensive description of the rights, responsibilities and expectations of each party involved. They addressed, among others, the agreed-upon timeframe, the specific standards or quality or the project, the scope of work and payment terms.
In this article, we will delve into 5 key points that should be carefully addressed or considered in any construction agreement.
5 Key Considerations in a Construction Agreement
1. Scope of work
The scope of work is the cornerstone of a construction agreement. It sets clearly the rights and responsibilities of the parties, the description of the works, the stages of the work, the deliverables at each phase of the project, communication protocols, quality standards and mitigation measures. These points must be clearly outlined and defined to avoid any potential misunderstandings that may arise between the parties during the project. For instance, a construction project involving the renovation of an office building requires guidelines on the work involved for the renovation, the quality standards of the materials used, the expected outcomes of each stage of the renovations and so on. This scope of work, acting as a detailed guide, ensures that all parties understand their roles and responsibilities in the project under the agreement. If it is not clearly defined, you might be facing confusion about the responsibilities of the parties in the renovation project, the extent of the renovation and the outcome of the renovation.
2. Project timeline
For construction matters, time is of the essence. Therefore, a construction contract must specify the commencement date and completion date of the project as well as the period or timeline of each phase of the project. This is to ensure that all parties are aligned in terms of the timeline of the project, thus minimising the risk of delays by any party. Furthermore, it is advisable to include a well-defined clause addressing potential delays. This would act as a safety net in circumstances such as, among others, bad weather, late regulatory approvals or changes in law / regulations.
3. Payment terms and schedule
In every construction agreement, it must specify the total contract price, the schedule payment and the method of payment. This is to create a balance consideration where one-party renders work; another party shall then pay for the work rendered. The payment methods can either be in the form of lump sum or progress payments that depends on the stage of the project. In the event a party fails to pay as required under the construction agreement, the agreement shall specify the penalty or interests for late payments.
4. Change order and variation order
As a construction project progresses, there may be changes to the originally agreed-upon scope of work due to various factors. These modifications shall formally be addressed through change orders and/or variation orders. Such procedure should clearly be stated and outlined in the construction agreement for the benefit of the parties in situations of unforeseen events or changes in client preferences. Therefore, in a construction agreement, there must be process of submitting change order or variation order, how it will be approved, how it will affect the project timeline and how it will impact the payment, so the parties know what to do in such situations.
5. Dispute resolution clause
A dispute resolution clause is vital in situation where the parties are in dispute as to the interpretation of the agreement. The parties should anticipate that there may be disagreements during the project notwithstanding the parties’ careful efforts to ensure that the agreement is well drafted and understood by the parties. Therefore, the dispute resolution clause helps the parties to resolve any conflicts, save time and preserve the working relationship between the parties. Some platforms which the parties may use to resolve their disputes are through negotiations, mediation, arbitration, adjudication or legal proceedings in court.
Conclusion
To conclude, well-defined clauses in a construction agreement are essential to prevent any misunderstandings or disputes among the parties. While it is important to know and understand the salient terms needed in a construction agreement, it is also crucial to have a legal professional to review a construction agreement before execution takes place to ensure that your rights under the contract are well protected.
Disclaimer: This article is for informational purposes only and does not constitute any legal advice. If you have any questions or require further information on the above matter, please do not hesitate to contact us directly.