Legal expert Giles Dixon explains why a written contract is critical to a project’s wellbeing, be it a new house or small extension.
Do I really need a contract? Why?
It is often said that buying a house is the biggest transaction for most people in a lifetime. Building your own home is in the same category but it is a lot more complex. And for any deal involving large sums of money, you need to agree the terms in writing – in other words, you need a contract.
But you need to have contracts in place for other reasons as well as the price and payment terms. Building a house involves a lot of risks and a lot of different people and organisations, many of whom have to interact with each other over a period of months. There is usually going to be an architect and, depending on how you structure the project, one or more contractors and suppliers. Your contract with the architect should set out clearly what services he will provide, which may be confined to initial designs or they could cover all design as well as supervising construction.
You also need a contract with your builder to define the scope of the work that he is going to build and the price; to provide certainty; and to provide a framework for dealing with issues that might arise during the life of the contract.
Having a contract does not guarantee a trouble-free project. But it does establish a framework for dealing with issues that arise – from the pricing of a design change to delay caused by extreme weather or unforeseen ground conditions.
What sort of details does a contract stipulate?
I have already outlined the broader principles that a contract will cover. As for the details, the main points that it will deal with are:
- the scope of work, usually by reference to agreed drawings and a detailed specification
- the price and the payment terms. Here it is sensible to ensure that the payments you are making are matched by the value of the work as it goes along
- a start date and completion date for the work as well as a programme
- how changes are to be priced and the circumstances in which the completion date can be altered
- the quality of work and standard of care to be expected
- insurances that you and the contractor will need to maintain
- the contractor’s liability for defects that appear after he leaves the site
- and a clause stipulating how disputes will be dealt with.
Do all types of building need a contract, even small extensions?
It can do no harm, and sometimes a lot of good, to have a formal contract even for a small job. But even without a contract 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.
The main thing is to agree on the basics – i.e. the scope of work, the price and the payment terms. Bear in mind that scope of work is really the key issue. If you and your builder are both 100% agreed on precisely what he has to do, there are less likely to be problems. So it is worth having him price a detailed specification and drawings before he starts. Sorting things out as the job progresses can be fine if you know and trust your builder, but even then you need to record any changes and the cost implications as you go along.
Does a contract provide an agreed cost for the job?
Usually the contract will set out an agreed price for the job. Sometimes this is said to be a fixed price. But in the construction industry it is often said there is no such thing as a fixed price contract. Problems with third parties, unforeseen delays and, of course, changes required by the client, can all mean that extra costs will be incurred, though the risk of a price change in some situations can be reduced or even avoided by having the right wording in the contract.
An alternative to a fixed price is to work on the basis of an estimate, with the contractor charging his actual costs plus a fee.
Whichever pricing method is used, it is advisable to get your architect or other consultant to examine it: contractors sometimes bid low to 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). Or they may simply omit certain items which only later on you realise were not included.
Payment terms should also be worked out in advance: it is always risky for a client if the amounts being paid to the contractor get too far ahead of the value of the work. One solution is to break the price down into stages – e.g. foundations, main structure, roof, etc. and to have payments linked to progress on each stage. Having a schedule of rates to be used for pricing extras can also be useful.
Who should prepare the contract?
If you have an architect, quantity surveyor or project manager advising you, he should be able to assist you in preparing the contract, especially if you use one of the standard forms. On a large job, you could use a solicitor but be sure to engage one who is familiar with construction projects. –
Can I use a standard document, or should a legal professional draw one up?
Standard contracts are used throughout the construction industry. The JCT (Joint Contracts Tribunal) is the most well known supplier of standard forms. Surprisingly, there are very few standard forms suitable for self-builders. The JCT forms are generally designed for use on larger projects and are very wordy, the exception being the JCT Building Contract for a home owner/occupier. Also ContractStore has published some contract templates in plain English for self builders. All these contracts can be found online at www.contractstore.com/homebuilder
How much does a contract cost?
The standard forms I have mentioned cost about £20 each. A lawyer will usually charge by reference to the time he spends in preparing the contract. It is difficult to give an estimate as this can vary widely, but you can expect at least 4-5 hours at anything from £150 to £350 an hour plus VAT, and a lot more in central London.
What happens if there is a dispute with the builder?
If it cannot be settled, you may ultimately end up in court. And that can be expensive.
A contract can help avoid the risk of court proceedings by including a clause which contains alternative, cheaper methods of resolving disputes.
First, try to negotiate a solution directly.
If that fails, one option is to go for mediation. The parties can appoint a mediator who will hear each side separately in private and try to bring them to a negotiated solution. After a day of intensive discussion, a settlement may be reached.
Another alternative is adjudication. This is a mechanism set up in 1996 under a new law giving any party to a construction contract the right to have a dispute referred to an adjudication process before going to court. The adjudicator must reach a decision in 28 days and both parties have to implement it even if one of them later challenges the decision in court. Surprisingly, this law does not cover owner occupiers or home builders. But there is nothing to stop you having an adjudication clause in your contract.
Going to court should be a last resort and can be very expensive – in one recent case a millionaire who engaged a contractor to build his dream home in Kensington for £5.2 million was sued for delay and extras by his builder and had to pay £2.3 million damages. He also had to pay the builder’s legal fees of around £4 million plus his own fees estimated at £6 million. But that was exceptional!
What if I decide to terminate my contract with the builder?
First, you need to check that your contract has a termination clause and what it entitles you to do. Sometimes it will only permit termination if the builder is failing to comply with the contract. If you just decide you do not want to use him any more, and the contract does not contain wording to allow this, you may be faced with a large claim including loss of profit.
On the other hand, the contract would usually permit you to terminate if he commits a breach and it may also allow you to withhold any payment due to the builder and set this off against the extra cost of getting another builder to finish the job.
If you are contemplating termination, you need to try to secure the site so the builder does not remove plant and equipment as well as materials on site that you may have paid for.
What’s the worst case scenario if I don’t have a contract? Can I risk not getting one?
Yes, you can risk not getting one. In fact even if you do not have a written contract, the mere fact that you have got a builder doing some work for you creates a contract. And, as I have already mentioned, a builder has a legal duty to do a workmanlike job.
However, the absence of a written contract means there is less protection for you and much less certainty on all the important issues – price, timing and scope/quality of work, to name three and if a serious row erupts, it is your word against the builder’s. So even if you do not use a formal contract, at least confirm the details in writing and try to get your builder to confirm he agrees (in writing). Emails can be evidence of what is – or is not- agreed.
Do, however, keep things in perspective: if you are going to spend £300,000 on a building project, it is a false economy to avoid spending a mere £20 on a contract form or even a few hundred for a bespoke contract.
Giles Dixon is a solicitor with his own practice specialising in drafting commercial and construction contracts. www.gilesdixon.com
Giles is also the founding director of ContractStore, www.contractstore.com , a website selling a wide range of downloadable legal document templates, including contracts for self-builders and contractors.