Construction contract terms: What you need to know

Do you know which terms actually determine whether your construction contract protects you sufficiently? The terms that most often decide the outcome of a dispute are the rules on extensions of time, change orders, claims and termination. Many people focus on price and progress when the contract is signed, but overlook precisely these terms – right up until the day something goes wrong. Here, we go through the terms you should pay particular attention to when entering into a construction contract, whether it is based on NS 8405, NS 8407, or has been drawn up specifically for the project.

Which terms are most crucial in a construction contract?

The terms that most often determine the outcome of a dispute are the rules on extensions of time, change orders, claims and termination. These terms rarely come to the fore when the parties are in agreement and the project is proceeding according to plan, but become critical the moment a disagreement arises.

Also read: Key elements to include in a construction contract

What does the contract say about extensions of time?

The construction contract should clearly set out when the contractor is entitled to an extension of time, and what requirements apply to notice. Standard contracts normally require the contractor to notify the client without undue delay when circumstances arise that may entitle the contractor to an extension of time. Make sure the notice periods in the contract are clear, so there is no doubt as to whether the contractor gave notice in time.

Also read: Delays in construction projects in Norway: When and how?

How should change orders be regulated in the contract?

Changes to a construction project are virtually inevitable, so the contract should set out clear requirements for how changes are to be handled. Agree that changes must be notified and approved in writing before work begins, and that both the financial and schedule implications of the change must be set out in the change order itself. Without such provisions, you risk uncertainty about what additional work has actually been agreed.

What requirements should apply to claims for defects?

The contract must set clear deadlines for when the client must raise a claim for defects, and specify the requirements for the content of that claim. If a claim is raised too late, the client may lose the right to rely on the defect, even where the defect actually exists. It is therefore important to have good procedures in place for documenting and reporting defects as soon as they are discovered.

What should be agreed on daily penalties for delay?

Daily penalties (liquidated damages) are a practical remedy that give the client compensation for delay without having to prove a specific financial loss. Agree on a daily rate that is proportionate to the contract sum, and make sure there is a cap on the total penalty so both parties have predictability. Bear in mind that daily penalties do not normally exclude a claim for damages in the event of a more serious breach of contract.

What terms govern the provision of security?

The contract should specify the type of security the contractor is required to provide, the amount, and how long it must be maintained after handover. Consideration should also be given to whether the client should provide security for its payment obligations, particularly on larger projects where the contractor assumes significant risk.

What should be agreed on limitation of liability?

Many construction contracts contain a limitation of liability that caps the amount for which the contractor can be held financially liable. Consider whether such a cap is reasonable given the project's size and risk, and make sure the limitation of liability does not apply in cases of wilful misconduct or gross negligence.

Should the contract set out how disputes are to be resolved?

Yes. Agree in advance whether disputes are to be resolved through negotiation, mediation, ordinary court proceedings or arbitration. A clear dispute resolution clause makes the process more predictable and can save both parties time and cost if a disagreement arises during or after the project.

How do you make sure the terms are actually followed through the project?

Good terms in the contract are of little use if they are not followed in practice. Ensure ongoing documentation through construction meetings, written notices and an up-to-date progress plan, so you can point to concrete documentation if a disagreement arises over whether the contract's terms have been complied with. It is also worth keeping ongoing photo or video documentation of the work carried out and progress made.

In summary: The eight terms you should check

1. Extension of time – clear requirements for notice and deadlines

2. Change orders – written notice and approval before work commences

3. Claims for defects – clear deadlines and requirements for content

4. Daily penalties – a reasonable rate and a cap on the total amount

5. Security – scope, amount and duration

6. Limitation of liability – a reasonable cap, with exceptions for wilful misconduct and gross negligence

7. Dispute resolution – a clearly defined mechanism agreed before a dispute arises

8. Ongoing monitoring – continuous documentation throughout the project

Need help with your construction contracts?

The terms that seem least exciting when entering into a contract often turn out to be the most important when things go wrong. By keeping on top of extensions of time, change orders, claims and limitation of liability, you give yourself a solid foundation for the whole project. Not sure whether your construction contract has the right terms in place? [INTERNAL LINK: contract-review service] Contact our lawyers for a review before you sign..