June, 2024

A commercial contract is a broad term that encompasses agreements related to the sale or purchase of goods or services in the course of business. Construction contracts on the other hand, are specifically tailored for construction projects, whether it involves building a structure, renovating an existing one, or any other form of construction work which is governed by specific laws and regulations that may vary from one jurisdiction to the other.

In the construction industry in Ghana, the most used standard-form contracts are the Fédération Internationale Des Ingénieurs-Conseils or International Federation of Consulting Engineers (FIDIC) contracts. Specialised standard-form contracts such as the New Engineering Contracts (NEC) 3 suite of contracts are also used.

It is crucial to carefully review and understand the basic terms found in standard construction contracts prior to executing the contract. It is equally advisable to consult legal experts in the field to ensure comprehensive protection and clarity for all the parties involved in the contract. In no particular chronological order, some of the essential terms to look out for in a standard construction contract may include, but are not limited to the following:

  1. SCOPE OF WORKAn outline of the scope of work planned for the project may include specifications, plans, aspects of the work outsourced to subcontractors, and other critical details. The scope of work in a construction contract is crucial as it defines the project’s boundaries, clarifies responsibilities of the parties and minimizes misunderstandings. This goes a long way to prevent disputes, aids in project and contract management and establishes a fertile ground for project success.

  1. JOB SITE Specifies the physical location of the construction project. It may be an address or a description of a location if no address is available. Knowing exactly where the work is to be executed and having certainty about the boundaries of the site is critical as it helps in planning, logistics, and safety considerations.

  1. PROJECT TIMELINE Specifies the planned start and completion dates of the project. This may include details about when certain tasks will be completed or any phases planned for the project. With a timeline in hand, the parties are able to monitor the progress of the project as the construction goes on.

  1. PERMITS AND LICENSINGOutlines which party is responsible for applying and obtaining any mandatory permits and licenses or approvals to undertake the project. Without the requisite statutory permits and license, the project cannot lawfully kick start. Obtaining the requisite building permits and license should be prioritized in any construction project so as to prevent any interference and “stop work order” by the regulatory authority which will likely result in demolishing of already executed work. Lack of permit may also occasion imposition of penalties on the parties.

  1. CONTRACT PRICE AND PAYMENTSThe cost of the project must be outlined in the agreement just as the terms of payment of the contract price should (how and when the owner will make the payments to the general contractor). These elements contribute to project financial stability, facilitate proper budgeting and minimizes disputes. Clear payment terms also promote transparency and fosters a positive working relationship between the parties involved in the construction project.

  1. LIQUIDATED DAMAGESThe purpose of this element is to specify the amount payable by a party for breach of any obligation of the party under the contract. This is important as it ensures certainty and clarity in the minds of the parties concerning the extent of each party’s liability for breach of the contract. The upside of this is that parties become motivated to avoid delays in the performance of their respective obligations thereby promoting timely project completion. Moreover, since these damages are predetermined, the parties can avoid lengthy legal disputes over the quantum of monetary compensation payable by a defaulting party.


  1. SAFETY REGULATIONSDetails safety practices, protocols and compliance with industry standards. Construction sites are inherently hazardous environments and as such, including this clause is vital to protect not just the workers on site, but also the public from any harm before, during, and/or after the project.


  1. CONFIDENTIALITYProtects sensitive information provided by parties during the course of the project. Maintaining confidentiality fosters trust between the parties, encourages open communication, and protects intellectual property.


  1. INDEMNITY CLAUSEOutlines which party is ultimately responsible for loss or harm suffered by a party on account of that party’s execution of the contract and third-party claims made against the party. At its core, indemnity refers to protection against damages, loss, or injury. When it comes to construction contracts, to indemnify a party means to compensate or secure them against any harm or financial loss which might arise from certain occurrences/events. The indemnity clause therefore provides protection to a party against damages and exempts them from liability caused by their own actions.


  1. DISPUTE RESOLUTIONThe purpose of this clause is to spell out the exact method and process for resolving disputes that may arise either before, during, or after the construction process. The range of dispute resolution methods are mediation, arbitration, or litigation.


  1. INSPECTION CLAUSEThis clause gives the project owner the right to inspect ongoing works to ensure compliance with project specifications regarding quality and other the terms of the contract.


  1. INSURANCE This clause is important as it specifies which party is responsible for obtaining insurance cover against losses and damages arising out of execution of the project as well as complying with minimum regulatory insurance requirements.


  1. PERFORMANCE BONDS AND INSURANCEContracts may require contractors to obtain performance bonds and insurance which aim at providing financial protection to a party particularly the project owner/employer in case of default by a party in performance of its obligations, accidents, or damage to property. This clause is crucial because it enhances project reliability and mitigate potential losses.


  1. SUBCONTRACTORSConstruction contracts often allow for subcontracting work. This clause is therefore important as it defines the extent to which thecontractor is permitted to subcontract portions of the work and the terms of such subcontracts. The terms of subcontracts are required to align with the terms of the parent.


  1. CHANGE ORDERSThe term “change order” is simply the industry term for an amendment to a construction contract that changes the scope of work. Hence, this clause is crucial as it outlines the procedures and conditions for handling changes to the original scope of work.


  1. PERFORMANCE GUARANTEES Outlines expectations for the quality of work and the consequences for under performance. This clause is essential as it provides the employer with security in the event that the contractor fails to discharge its obligations or meet the project deadlines.


  1. WARRANTY COVERAGEWarranty coverage in a construction contract is important as it assures the project owner (employer) that the work performed is free from defects for a specified period of time. In effect, this clause provides a guarantee of quality and performance, assuring the durability of the completed project. It holds the contractor liable to remedy any latent defects as and when they emerge at the post-completion stage.


  1. LABOUR AND MATERIALSThis clause is indispensable as it indicates which party is responsible for procuring the materials, as well as any costs associated with the labour and materials needed to execute the work.


  1. CONTRACT DOCUMENTSCovers all relevant documents such as blueprints, designs, exhibits, drawings, renderings, or similar components related to the work. A comprehensive and well-drafted contract document goes a long way to eliminate or minimize disputes, ensures timely completion and more importantly protects the interests of all the parties involved in the project work.


  1. RECORDS AND DOCUMENTATIONSets out record-keeping and documentation requirements including submission of project reports, change orders, and as-built drawings. Good documentation and record-keeping is invaluable in resolving misunderstandings before they escalate into disputes. One party to a misunderstanding may have an incomplete or incorrect picture of the facts of an event or occurrence on the project. Timely and proper record-keeping and documentation of events is very effective in clearing up misunderstandings, thus avoiding any potential dispute before it rears its head.


  1. NOTICE PROVISIONSProvide the addresses of the parties for service of notices on the parties. It also outlines the form in which the notice should take and when notices are deemed to be served or received by a party. This clause also determines the timelines for provision of notification. It importance is that it ensures prompt communication of issues, delays, or disputes between the parties thereby ensuring early resolution of issues. It also helps the parties to adhere to contractual obligations by notifying each other about changes, problems, or deviations from the agreed terms. In the context of claims, this clause marks the beginning of evidence gathering and disclosure processes and mutual assessment.


  1. PENALTIES AND BONUSESCovers any applicable penalties for delays or bonuses for early completion. As the name suggests, a bonus provision pays the contractor additional fees for excellent performance such as completing the project ahead of schedule. A penalty clause, on the other hand, allocates risk by holding the contractor accountable for delays or subpar performance, thereby reducing the financial impact on the project owner (employer).


  1. DEFAULT AND REMEDIES Every construction contract imposes certain specific obligations on both the employer and the contractor. Consequently, if either party fails to fulfill its obligations, this clause spells out the consequences to be visited on the defaulting party and conversely the remedies available to the innocent party. This is certainly the surest way of safeguarding the interest of both parties in the event of breach of any of the agreed terms of the contract.


  1. OWNERSHIP AND TITLE TRANSFERThis clause provides for transfer of ownership of the project and intellectual property upon completion of the project and final payment. This clause is essential as it gives the parties involved clarity as to who owns what, and exactly when title will be transferred from one party (for instance the contractor) to another (for instance the employer).


  1. ESCALATION CLAUSEThis clause isdesigned for the kind of construction project that take a considerable period to complete. An escalation clause is important because it protects the contractor from a price change on certain materials, ensuring that the contractor is not responsible for the added cost after the contract has been executed.


  1. FORCE MAJEUREThis clause is vital in any construction agreement as it addresses any supervening events that may affect the project timeline or completion or even substantially change the nature of the project. This clause eliminates any liability for catastrophic or unforeseen occurrences which makes it practically impossible for a party (usually the contractor) to discharge its obligations as agreed.


  1. TERMINATION CLAUSESets out the terms, conditions and procedures under which the construction contract may be brought to an end with or without cause. Termination with cause arises where a party terminates the contract due to its breach by the counterparty whereas termination without cause occurs where a party terminates not account of breach of the contract by the counterparty Although it is impossible to foresee every eventuality, this clause is indispensable as it acts as a risk management tool, allowing parties to exit the contract if certain conditions such as persistent breaches or financial instability pose a threat to the successful completion of the project.

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