Contractor risk mitigation: A practical guide for contractors

Contract documents are the foundation of any building and construction project. They define the parties’ rights, obligations, and risk allocation, and generally include documents such as the formal agreement, general and special conditions of contract, scope of work (including specifications and drawings), pricing documents and various other schedules and annexures (including draft performance security documents, completion certificates and deeds of release).

While most stakeholders understand the importance of getting the key commercial and contract terms right, less attention is often paid to the definition of “contract documents” and how they fit together as a whole and work in practice. This oversight can give rise to disputes, cost overruns, and scope creep issues which are often avoidable with careful review and drafting at the outset.

Most construction contracts contain a clause identifying the documents that together form the contract. This is a critical provision, because any document not expressly listed or incorporated may not form part of the parties’ agreement, even if it was relied upon during negotiations or tendering. Equally, documents that are included but poorly drafted or inconsistent with one another can create ambiguity about what was agreed.

Contractors should always consider:

• what documents are identified as forming part of the contract (and in what order of priority);
• whether any pre-contract correspondence, tender clarifications, or side agreements have been properly incorporated into the terms of the contract (generally, courts will only have regard to the terms of the final contract document, and not to pre-contractual documents, discussions, or agreements);
• whether the contract contains a clear order of precedence clause to resolve inconsistencies between documents;
• whether a contract contains an entire agreement clause; and
• whether any documents have been incorporated by reference only and, if so, which version applies.

Understanding these points before signing can prevent disputes about whether a particular obligation, exclusion or risk allocation actually forms part of the deal and if so how it should be interpreted in the context of the contract as a whole.

Poorly drafted or incomplete contract documents are a common source of construction disputes. Typical risks include:

• Ambiguity: Where documents use inconsistent terminology or where the scope of work is described differently across the specification, drawings, and schedule of works, disagreements about what is “in” or “out” of scope are almost inevitable. Similarly, reference to a separate scope of work document can result in confusion as to which revision of the scope of work actually applies;
• Gaps in scope: Where contract documents do not adequately describe the full scope of works, contractors may find themselves bearing the cost of work they did not price for;
• Scope creep: This can occur where obligations are spread across multiple documents without clear boundaries. For example, requirements appearing in a specification, performance standard, or design guideline may collectively expand a contractor’s obligations beyond what was originally priced, often without a corresponding adjustment to time or cost; and
• Precedence failures: Where two or more documents conflict and the contract does not contain a clear order of precedence. For instance, a schedule may state one completion date while the programmed included elsewhere states another.

A good example that we often see in our contractor client contracts is the treatment of request for proposal documents and tender responses which are regularly included as contract documents on an unqualified basis. In that situation, the contractor’s tender qualifications, assumptions and clarifications may be entirely overridden by higher-priority contract documents such as the general or special conditions. The practical consequence is that the contractor can find itself bound by the full scope of the request for tender without the benefit of the qualifications or pricing assumptions it relied upon in formulating its offer, potentially turning a profitable project into a loss maker.

These risks are often compounded in projects that involve an early contractor involvement (ECI) phase, if preliminary deliverables, assumptions, and pricing developed during ECI are not clearly incorporated into the contract documents for the works.

Most construction contracts also grant the principal (or the superintendent acting on the principal’s behalf) the discretion to determine which document prevails in the event of an inconsistency between contract documents. This mechanism serves a practical purpose: it avoids the need for the parties to agree on every minor discrepancy and helps keep the project moving, but contractors should understand how these clauses operate, particularly where the list of contract documents is not carefully curated because it can have material consequences for scope, cost and programme.

There are several practical steps that contractors can take to mitigate the risks associated with contract documents:

• Confirm what is included and excluded: Ensure the contract clearly identifies all documents forming part of the agreement and an entire agreement clause. If a document was relied upon during tender, for example, but is not listed, raise it during the contract negotiation stage;
• Watch for incorporated documents: Documents incorporated by reference (e.g., codes or guidelines) can impose significant obligations. Confirm which version applies and understand what is being incorporated;
• Review all documents as a package: Consider how the documents interact and whether they are consistent with one another. For example, check that the drawings, specifications and schedule describe or reference the same scope of work;
• Check the order of precedence: Ensure the contract contains a clear precedence clause and understand how it operates if documents conflict;
• Review the mechanism for resolving inconsistencies: Check whether the contract provides for notice and a fair process for resolving inconsistencies between documents and consider whether the contractor has a right to claim for additional time and cost where an inconsistency results in additional or varied work that was not contemplated in the contractor’s price; and
• Retain records of negotiations and clarifications: Even if pre-contract correspondence is not formally incorporated into the contract, maintaining clear records of what was discussed and agreed during negotiations can be valuable in the event of a dispute to show the intent of the parties at the time of contracting.

Contract documents are far more than a formality; they are the commercial and legal backbone of any construction project. Taking time to review and understand the suite of contract documents as a complete package can significantly reduce the risk of disputes, unanticipated cost increases and scope uncertainty.

DMAW Lawyers has significant experience in providing advice in relation to contract documents and can provide tailored and practical advice to help manage risks and protect commercial interests across every stage of a project.

Please get in touch with us if you’d like to discuss your next upcoming project.

Author: Chloe Katzer

Position: Lawyer

Practice: Construction and Projects