Construction Contracts – A Buyer’s Perspective

From the buyer’s perspective a construction contract includes multiple critical steps. Succeeding is always dependent on sufficient expertise at construction industry. If the buyer does not have the required expertise the ought to turn to a good consultant who is able to take care of the buyer’s responsibilities and monitoring over the construction project on behalf of the buyer.

A financially significant construction project usually begins with a project plan, which is meant to map the proportions of the project. Before any contracts with contractors or architects can be made the type of the contract must be chosen. The most common type is to have the construction done by one main contractor which uses subcontractors if needed. The subcontractors have a contractual relationship with the main contractor who acts as buyer to them. The buyer does not have to look after the subcontractors, for the main contractor is accountable for their outcome as well as liable of e.g. delays. With such a so-called package or fixed price contract the responsibility to provide building plans rests on a third party designer, and the buyer is responsible to deliver compatible plans upon which the contractor can work.

It is also possible to have the construction done as shared contract, to have the work done as multiple nominated subcontracts. The buyer, with this option, has remarkably more responsibilities to manage and coordinate the work than with a package contract. The subcontracts may also be subordinated i.e. the buyer makes contracts with each contractor, but there is one main contractor that coordinates the subcontracts.

A turnkey project is a type of project that is constructed so that it can be sold to any buyer as a completed product, instead of being built as per the buyer’s plans. With these projects the contactor manages the planning phase as well, instead of planning having done by the buyer.

A lot of attention should be paid to drafting the documents relating to the construction contract. Oftentimes, contracts between businesses utilize the General Terms and Conditions of the Construction Industry, often shortened to YSE98 in Finnish. Whether the general terms are to be applied or not must be agreed on separately.

During the Contract

When the construction work is undergoing it is important the buyer takes action immediately if they notice a breach of contract. Taking action means notifying the contractor of possible defects and requesting for surveys if needed. It is beneficial to the buyer to take such action as early as possible so that possible problems can be solved. A notice of defect must always be given in writing at e.g. worksite meetings when all parties involved become aware of it. Written notices also bear significance on possible trials.

The buyer’s greatest responsibilities are to contribute to the contract (YSE § 8) and obligation to pay the contract price as per the payment installment graph (YSE §§ 39–40). The buyer also must ensure the plans they deliver are compatible with each other, and the buyer, together with the contractor, drafts the schedule of the project. The buyer must also obtain any permits required to build at the worksite.

The contractor is required to finish the work on schedule and to follow the guidelines of construction industry. If the contractor causes a delay the buyer is entitled to expectation damages as per the YSE98.

The buyer may also be entitled to cancel the contract altogether due to a delay. In addition, a major defect or the contractor’s inability to deliver may institute the right to cancel the contract.

Approving the Construction

The General Terms and Conditions provide for the examination procedure for approval, which is an important step when the contract nears its finish. The buyer approves the work delivered by the contractor and the warranty period begins. The collateral security which was pledged for the duration of the construction is changed to the security of the warranty period. The risk passes to the buyer. Unless agreed otherwise, the final installation of the project price is to be paid.

Extremely important is to note that both parties should present any claims against each other during the examination procedure at latest. After the procedure no new claims may be presented. If a claim has been presented in a form of its justification e.g. a defect, the actual amount to be claimed may be presented at the settlement of accounts, which is held a few weeks after the examination if the examination procedure did not solve the financial accounts of the parties for good.

Warranty Period

After the approval of the construction the warranty period begins which is, in accordance with the General Terms and Conditions, two years. After the period has ended a warranty examination is arranged at which any defects arisen will be accounted. Having a warranty examination is the buyer’s interest. The buyer may claim a defect during the warranty period only if the defect could not have been detected at the examination for approval.

English translation by Lasse Jelekäinen