The importance of using standard forms of contracts in construction industry

The Importance of Using Standard Forms of Contracts in Construction Industry

According to the 1996 Act of UK law construction contract has been defined as an agreement in writing or evidenced in writing, under which a party carries out construction operations, arrange for others to carry out construction operations or/and provide labor for carrying out of construction operations (Zaghloul & Hartman, 2003). The contract forms establish the legal relationship between the parties, in terms of rights, obligation and duties and regulate the commercial relationship between the parties (Robinson & Lavers, 1996). There are two main classifications of contracts, namely standard and non standard contracts (Murdoch & Hughes, 2007).

In the recent times, the commercial activities associated with the construction industry are highly complex and the standard forms of contracts have integrated into the day-to-day transactions of most agreements (Bunni, 1997). It is not compulsory to use standard contracts in the construction industry; however it has become the common practice in procuring contractors, consultants or architects. There have been numerous recommendations by authors and researchers to adopt standard forms of contracts in the construction business. According to Banwell Report (1964), the construction industry should formulate and use a single standard-form contract for its entire projects. The Latham Report (1990s) also supported the concept as recommended the Engineering and Construction Contract to be adopted as universal standard construction contracts. The use of standard form of contract for all type of construction projects is not realistic, but for similar type of project has been seen to be indeed is very beneficial (Murdoch & Hughes, 2007).

The purpose of standardising contract forms is mainly to specify the chief variables concerning the construction processes and activities (Clegg, 1992). For example, it so happens in most projects that actual work done by the contractor differs from as specified in the contract. And these alterations are a major source of many conflicts and disputes (Othman, 1997). In such cases, standard forms contain arrangements as to how to manage these variations.

Standard forms of contract are mostly published by an authoritative body of the industry, recognised by all the parties involved, outlining the terms and conditions which sets the parameters for the proceeding of the work. In the correct spirit of standardization, these forms are not subjected to any negotiation and amendments and are suitable for wide array of similar projects and works. The initial set of standard forms was formulated by the government department of UK for works in the public sector. Inspired by their concept, many other professional bodies also devised their versions of standard forms (Bunni, 1997; Ismail, n.d.). Among various standard forms of construction contracts are ICE 7 (Institute of Civil Engineers), NEC 3 (New Engineering Contract), JCT (Joint Contract Tribunal), FIDIC (International Federation of Consulting Engineers), AIA (American Institute of Architects), EJDC (Engineers Joint Contracts Documents Committee), etc. (Murdoch & Hughes, 2007).

There are several advantages associated with the use of standard forms of construction contracts. Basically, standard forms originate from different sectors of construction industry for various reasons (Murdoch & Hughes, 2007). They have been devised as an output of a process of negotiation between various sectors of the industry; hence, they represent a compromise between the interest groups of the industry (Murdoch & Hughes, 2000). Also, as numbers of interest groups are involved and considered in the formulation of standard contracts, there is better possibility of fair and balanced risk allocation among the parties involved (Murdoch & Hughes, 2007).

The prime reason that inclines construction personnel to adopt standard form of contracts is familiarity. The major advantage of using a standard contractual form is that by repetitive use of the document one becomes familiar with its content, and hence is conscious of both its strengths and drawbacks (Broome & Hayes, 1997). The contractual complexities associated with any type of contract are often rather typical to understand. The use of standard contractual documents aids in familiarising the various contractual clauses and provisions to the users (Murdoch & Hughes, 2007). This familiarity with the content and clauses of the contract leads to lesser number of disputes and misunderstandings. The possibility of redundancy is also removed (Broome & Hayes, 1997). In addition, the repetitive use of these forms leads to development of experience bank and result in increased efficiency (Bunni, 1997).

Precedent is another important factor which generates from being similar with the contract and is favorable to the involved parties. In the scenario when a disputed project is taken to court, the standard contracts enable the lawyers to advice their clients regarding the probable result of the case, as judges are bound to follow the previous decisions (Broome & Hayes, 1997).

Standard forms of contracts have been reported and observed to assist the conduct of trade (Murdoch & Hughes, 2000). Another factor which attracts personnel towards standard contracts is that it reduces the focus on specific contractual terms during the bargaining process (Murdoch & Hughes, 2007). These forms are helpful in reducing the cost linked to tendering and contract administration. This is contrary to the amended forms of contracted which require the clients and tenderers to seek additional legal advice and the probability of the disputes resulting from unfamiliar terms also increase (OGC, n.d.). These forms lead to saving in time as drawing up of contracts from scratch is a tedious task (Ismail, n.d.).

Standardisation of the contract forms provides basic legal frameworks which recognise the rights, obligations and duties of the parties and highlights the ambit of the powers and duties of the contract administrator (Nayagam & Pathmavathy, 2005). Furthermore, standardisation of contracts leads to higher degree of certainty and fairness during tendering process. They become the basis of comparison and evaluation and familiarity with the content makes it convenient and faster in pricing as well (Bunni, 1997; Ismail, n.d.).

As aforementioned, there are various institutions which have developed standard forms of contract. One of the most used and popular set of standard forms of contract have been developed by International Federation of Consulting Engineers (FIDIC). These forms have been in use for international construction projects ever since their formulation in 1957. The FIDIC contracts provide a comprehensive code which can be applied with ease in any legal system. The input has been provided from both engineers with experience of many engineering projects and lawyers with wide array of experience drafting construction contracts. The acquaintance with these contracts has offered the construction industry benefits in both tendering and project management. The contracts offer balanced and clearly defined risks between the contracting parties. FIDIC believes that it only a fair and balanced contract which is in the lasting best interest of all concerned. The contracts account for all possible and probable risk factors as well as clearly define the role of all involved parties. These aspects of the contract facilitate in reducing the number of unwarranted disputes and litigations (Thomas, Glover & Hughes, 2006; Wade, 2005).

FIDIC and other similar standard forms of contract are favourable to the construction industry as they facilitate the saving of both time and cost – two success criteria for any type of construction projects. With the exception of few entirely unique projects, construction projects often share their main characteristics and these standard forms are devised considering the same.

Reference:

Broome, J.C. & Hayes, R.W., 1997, A comparison of the clarity of traditional construction contracts and of the New Engineering Contract, International Journal of Project Management, Vol. 15, No. 4, pp. 255-261

Clegg, R.S., 1992, Contracts cause conflicts, In Construction Conflict Management and Resolution, 25-27 September, UMIST, pp 128-144

Ismail, Z., n.d., Standard Forms of Construction Contracts, Lecture on Construction Law, available at: http://www.scribd.com/doc/10109497/Lect-2-Standard-Forms, accessed 11/02/2010

Nayagam, K. & Pathmavathy, N., 2005, Drafting Construction Contracts, Legal Insight, Issue 2, page 5-7

Murdoch, H. & Hughes, W., 2007, Construction Contracts, Edition 3, Routledge, pg 101-117

Murdoch, H. & Hughes, W., 2000, Construction Contracts Law and Management, Edition 3, Spon Press

Office of Government Commerce, n.d., Procurement and Contract Strategies, Achieving Excellence in Construction Procurement Guide, available at: http://www.ogc.gov.uk/documents/CP0066AEGuide6.pdf, accessed 10/02/2010

Othman, N., 1997, Management of variations in construction contracts, In A. Thorpe (ed.) Proceedingsofthe13th Annual Association of Researchers in Construction Management (ARCOM), 15-17 September, King’s College, Cambridge

Robinson, N.M. & Lavers, A.P. 1996, Construction Law in Singapore and Malaysia, 2nd Edition, Butterworths

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ICC-FIDIC Conference Paris 2005

Zaghloul, R. & Hartman, F., 2003, Construction contract: the cost of mistrust, International Journal of Project Management, Vol. 21, pp 419-424