Part 3: Project development and construction contracts

Chapter 8 Design and project consultancy contracts

Legal issues A project needs architects, engineers, a project manager, interior designers and landscape architects. Each contract must set out the scope, deliverables, fees, liability and termination. Design work is protected by copyright, and under the general rule the creator owns it unless agreed otherwise. Design fees calculated as a percentage of construction cost may create incentives that are not aligned with those of the project owner.

What the developer must do Specify the work phases and additional work clearly. Set a cap, or convert to a fixed price once the design is stable. Specify the rights to use and adapt the designs and to use them in marketing. Define the authority of the Project Manager to approve progress payments or variations. Require evidence of Professional Indemnity Insurance appropriate to the value of the work, and prohibit undisclosed benefits from material suppliers.

Key risks If the rights in the designs are not fully assigned, the designs may not be able to be amended or reused. Design errors may give rise to both civil and criminal liability. A designer with low insurance cover leaves the project owner to bear the risk instead. FF&E without a budget control mechanism often overruns its budget, and a Project Manager with an interest in the contractor makes approvals partial.

Chapter 9 Construction contracts

Legal issues The form of contract determines who bears the risk. A Lump Sum contract gives a fixed price once the design is complete. Cost Plus is flexible, but the owner bears the cost risk. GMP has a price cap, and Design-Build provides a single point of responsibility. The contract may use FIDIC or a domestic form. The key issues are Payment Milestones, Retention, Performance Bond, Variation Orders, Liquidated Damages and Force Majeure. A court may reduce penalties that are excessive.

What the developer must do Choose the contract according to how complete the design is. Require an Advance Payment Guarantee when paying in advance. Define clearly the procedure for certifying progress payments, the authority to instruct variations, how they are priced and extensions of time. Define Force Majeure and the duties to give notice and mitigate loss. Choose the courts or arbitration according to the value and the parties. Use early warning and manage the contract continuously.

Key risks Disputes usually arise from variations, material prices, delays caused by several parties and work stoppages. A Lump Sum contract usually leaves the contractor to bear the risk of material prices, but the outcome depends on the contract terms and the facts. Calling on security without complete documents may be challenged. A lawyer should review before a demand letter is sent.

Chapter 10 Employment and foreign workers

Legal issues Construction sites must comply with the laws on labour protection, social security, workmen's compensation, safety and the employment of foreigners. Foreign workers must hold a valid right to work and work only in the permitted categories. The law imposes liability along the contractor chain, and the project owner should have a lawyer assess in which cases it may be liable. A serious accident may lead to civil, criminal and administrative liability.

What the developer must do Check the contractor's worker lists, work permits, wage payments and contributions. Write warranty obligations and audit rights into the contract. Put in place a safety system, training, protective equipment and accident reporting procedures. Take out Contractor All Risks and third-party liability insurance suited to the project. The minimum wage and contribution rates must be checked against the latest version.

Key risks Finding irregular workers may result in fines, stop-work orders and an impact on the programme. Unpaid wages from subcontractors may escalate into a work stoppage. An accident may lead to investigation of the site supervisor or management. Penalty rates in old documents should not be used without checking the current law.

Chapter 11 Environmental and community liability

Legal issues EIA conditions are binding throughout construction and after the project opens; they do not end once the report is approved. The measures usually cover dust, wastewater, noise, vibration, waste, traffic, community safety and monitoring reports. Neglect may lead to stop-work orders, fines, civil actions and criminal liability for those involved. A Public Hearing is a process that must genuinely be carried out, with evidence kept.

What the developer must do Convert EIA conditions into a Compliance Register, identifying the person responsible, the frequency and the evidence. Pass the duties down into the contractor's contract. Set up a complaints channel, respond quickly, verify the facts and record the corrections. Meet stakeholders before the Public Hearing, provide information that is easy to understand, and appoint a Compliance Officer with regular internal inspections.

Key risks Poorly handled complaints may escalate into complaints to authorities, lawsuits and a stoppage of construction. Directors may face scrutiny of their liability where orders are breached, construction departs from the approved design or false information is given. D&O Insurance can help with some costs but does not replace legal compliance, and the exclusions in the policy must be checked.