Construction contract: investor protection

The contract should be based on a sufficiently developed design, a clear scope of works and a realistic assessment of site conditions. Precise documentation allows bids to be compared and reduces the scope for subsequent claims.

Documentation and data for the offer

Offers should be compared according to equal scope. In addition to the total price, it is important to check the unit prices, included and excluded works, taxes, deadlines, terms of payment and the assumptions on which the offer is based.

• building permit and project documentation
• bill of quantities describing the works and their quantities
• data on land, access and construction site conditions
• geotechnical surveys and other available background documents
• planned dynamics and key deadlines
• information about connections and other contractors
• rules of submission and comparison of offers

Verification of contractors and project assumptions

Contractors should be reviewed for registration, authorisations, experience on comparable projects, professional staff, subcontractors, financial capacity, liability insurance and ability to provide the required guarantees.

Before signing, the parties should clarify responsibility for the design and bill of quantities, known ground conditions, existing services, site access, temporary connections, long-lead equipment, coordination of contractors and the change-approval procedure.

The investor should provide financing, professional supervision and persons authorised to make technical and financial decisions. Agreed clarifications and changes to the offer are included in the final contractual documentation.

The subject of the contract should be determined so that both parties can determine which works the contractor undertakes, according to which documents he performs them and what the agreed price includes.

Documents forming the contract

Each document should be identified by name, date and version, and their order of precedence should be specified. If the Special Usages in Construction apply, the design documentation takes precedence during execution and the contractual bill of quantities during valuation.

• the text of the contract and its appendices
• special conditions of the contract
• building permit and project documentation
• contractual bill of quantities
• the accepted contractor's bid
• programme of works and financial schedule
• technical specifications
• minutes and clarifications from the contracting procedure
• list of guarantees and insurance policies

Ancillary works and obligations of the investor

The scope should also cover preparatory work, site organisation, transport, storage, scaffolding, protection of existing buildings, testing, waste handling, cleaning, as-built documentation and participation in the technical inspection.

It is equally important to list the works and costs provided by the investor or other contractor. Thus, the contracted scope may differ from the subsequent requests of the investor and works whose need is revealed by the circumstances during execution.

The price may be agreed on the basis of unit prices, as a lump sum or by applying a "turnkey" clause.

Under a unit-price contract, the final value depends on the quantities actually executed. A lump-sum price applies to a predetermined scope, while a "turnkey" clause transfers a broader share of the risk of necessary works to the contractor. The precise effect of each model depends on the contract, design and bill of quantities.

What to arrange with the price

The bill of quantities should contain clear item descriptions, units of measurement, quantities and unit prices. Complex works should be divided into verifiable units.

• content of the agreed price and calculation of VAT
• method of measuring completed quantities
• treatment of surpluses and deficits of works
• construction site organisation and testing costs
• price change conditions
• applicable indexes and the starting date of the calculation
• method of pricing additional works

Approving the change

During construction, changes in the quantities of contracted works should be distinguished from works outside the bill of quantities. Such additional works may be requested by the investor or may arise from unforeseen site conditions.

For the change, a description of the works, a technical solution and an offer with a description of the impact on the price and deadline are prepared. Supervision checks the technical justification and quantities, and the financial decision is made by the authorised representative of the investor. The approved change is recorded in the contract and construction documentation.

In the case of emergency works required for safety reasons, the contractor should immediately inform the investor, document the circumstances and enable cost verification.

The contract should specify commencement, completion and key interim deadlines. Commencement is best linked to formal handover of the site, design documentation, permits and the other conditions required to begin work.

The programme should show the main stages, sequence of work, equipment procurement, subcontractor works, tests, technical inspection and handover. The legal consequences of particular interim deadlines should be agreed separately.

Delay and extension of time

The contractor should report regularly on progress and estimated completion date. When the risk of delay arises, the investor can request an acceleration plan with additional resources and changed dynamics.

The extension of the deadline can be justified by changes to the project, late submission of the construction site or documentation, additional works, unforeseen soil conditions, equipment provided by the investor, actions of competent authorities, force majeure or disruption caused by another contractor.

The contractor should report the disturbance in a timely manner, prove its impact and propose an amended schedule.

Contractual penalty

A daily contractual penalty, subject to an agreed maximum, may be stipulated for delay. The contract should identify the deadlines to which it applies, the calculation basis and its relationship to any claim for loss exceeding the penalty.

If the investor accepts works completed late, the right to a contractual penalty should be reserved in writing without delay, for example in the handover report.

The contract should designate persons authorised for technical instructions, confirmation of quantities, approval of changes and assumption of financial obligations.

The supervising engineer monitors compliance with the permit, design, legislation and professional standards and checks the quality and quantity of the works, installed products, tests and site documentation. The contractor remains responsible for proper, professional and timely performance.

Allocation of authority

Additional financial powers of the supervising engineer should be specifically determined. The construction diary records the progress of works, instructions and important circumstances, while the contract determines when an individual entry constitutes a binding order.

Coordination meetings should end with minutes recording the agreed tasks, responsible persons and deadlines. Open issues should be tracked to final resolution, together with their effect on price and programme.

• expert supervision over execution
• design approval of the technical solution
• confirmation of executed quantities
• approval of additional cost
• extension of the deadline
• modification of the contract

Payment should reflect the works actually performed. A common model is based on monthly interim payment certificates followed by a final account after completion.

Each payment certificate should show completed quantities, contractual prices, previous payments, approved additional works, recovery of any advance payment, retentions and the amount due. Supporting measurements and calculation sheets should be attached.

The contract should specify the review period, the period for raising a reasoned objection and the payment deadline. The undisputed amount should be paid while disputed items are reviewed.

Security instruments

An advance payment may cover mobilisation or early procurement, supported by an advance-payment guarantee and recovered progressively through interim payments.

For each guarantee, the amount, validity period, terms of payment, extension and time of return should be determined. As a rule, one risk should be covered by one proportionate instrument.

Insurance may cover the works, materials, existing property, third-party liability, subcontractors and specific site risks. Before work begins, the insured parties, limits of cover, deductibles and policy periods should be checked.

• performance guarantee
• advance-payment guarantee
• defects-liability guarantee
• retention of part of the price
• work and liability insurance

Quality requirements should be determined by the project, technical specifications, contract and applicable norms. Control during execution includes approval of materials, proof of properties, samples, inspection of works before covering, tests and records of non-conformities.

The contract should specify the stages in which the contractor invites supervision for inspection. The contractor's responsibility for quality continues even after inspection or approval of the materials.

Apparent and latent defects

During the handover, visible defects, the method of their elimination and the deadline for re-inspection are entered in the record. Minor defects that allow proper use can be removed after handover, with appropriate insurance.

Latent defects should be reported to the contractor as soon as they are discovered. For ordinary latent defects, the law requires notice within one month of discovery and provides an overall period of two years from acceptance of the works.

An investor who gives timely notice of a defect may require its rectification and claim damages. If the contractor fails to rectify it within an appropriate period, the investor may, depending on the circumstances, engage a third party at the contractor's expense, seek a price reduction or terminate the contract.

Special liability and warranty period

For defects concerning the essential requirements of the building, the contractor, designer and supervising engineer may be liable for ten years after handover and acceptance of the works, each according to the cause of the defect and their responsibility. This liability cannot be excluded or limited by contract. Special statutory deadlines apply to notification and enforcement of rights.

As a starting point, special contracts provide for a two-year warranty period for the quality of the work performed, with the possibility of different contracting and special terms for installed equipment.

Handover records completion of the works, the building's condition and transition to the use and warranty phase. Before handover, the parties should check the test results, as-built documentation, evidence of product properties, warranty certificates, operating instructions, final supervision report and site condition.

Record of handover

Earlier use of the building or its independent unit may have handover effects. Such use should be regulated by a special protocol.

• date of completion and submission
• reviewed documentation
• identified deficiencies and remaining works
• deadlines for their removal
• beginning of warranty periods
• transition of risk and protection of the building
• preservation of the right to a contractual penalty
• issues on which there are different points of view

Final settlement and termination

The final account determines the total value of the works, approved price adjustments, additional works, payments made, recovery of advances, retention, contractual penalties and the final balance payable. Acceptance of the undisputed amount should be separated from outstanding claims.

The contract should specify the violations that justify the termination, the warning procedure and the deadline for remedying the violation. Upon termination, the condition and quality of the works performed, materials on the construction site, necessary protection measures, documentation, completion costs, status of guarantees and mutual financial settlement are determined.

The law allows the investor to terminate even before completion according to the rules of the work contract, with an appropriate settlement with the contractor. Such a decision should be based on an assessment of the works performed, the costs of continuing construction and possible requests from the contractor.

• check the contractor's references and financial capacity
• check building permit, project and site information
• determine the scope of works and obligations of the investor
• determine the order of precedence of contractual documents
• choose the price model and the method of calculation
• arrange the procedure for approving additional works
• determine the start of work, the final deadline and intermediate deadlines
• arrange the reasons and procedure for extending the deadline
• agree a penalty for lateness
• determine the powers of supervision and representatives of investors
• determine the deadlines for reviewing payment certificates and making payments
• obtain the necessary guarantees and insurance policies
• determine quality and testing requirements
• arrange handover and elimination of defects
• arrange the final settlement and consequences of termination