General Information

Understanding Construction Contracts

In the exceedingly progressive world that we live in, it is quite essential for people to consider and understand all the legalities associated with a task they are about to undertake. Accordingly, legal contracts are established for the sole purpose of making sure that the tasks are rightfully performed, bearing in mind the interests of all the parties involved. Similarly, when it comes to construction, one needs to be aware of the possibilities for as seamless and streamlined an experience as possible.

A construction contract is specifically put together before the start of any construction activity to ensure that the promised work is delivered on time and the scheduled payments are made without delays. It not only improves the overall efficiency of the task but also clearly defines parameters and the scope of work so as to prevent petty and unnecessary disputes from emerging among the parties. It is therefore very important for every individual, who intends to engage in construction, to obtain or prepare all of the necessary documentation. In general, five construction contracts are commonly used in Pakistan.

EPC Contract

Engineering, Procurement & Construction Contract as a construction contract is fairly similar to a Turn Key Contract. In both cases, a contractor is hired and assigned the responsibility for delivering the final project at a specific rate by a defined date. However, while the owner only provides some basic requirements in a Turn Key Contract, under an EPC Contract, the basic design and engineering work is initially undertaken by the employer/owner. The contractor is subsequently restricted to execute the project based exclusively on the constraints and limitations imposed by the basic design. EPC Contracts are mostly used for complex and large-scale construction projects commissioned at commercial levels rather than by individuals.

Labour Contract

Under a Labour Contract, the employer/owner may hire multiple contractors among whom different work is distributed. Although labour contracts vary significantly based on the specifics of each project, the general characteristics are similar across all. These include an outline of the scope of work and of the services to be rendered, the duration within which the work is to be completed, the daily labour rate, and certain associated risks. Under a Labour Contract, the employer/owner is responsible for the procurement and supply of construction material, and the contractor is effectively only responsible for providing the labour at the agreed rate to use of the material to undertake the work he/she is assigned.

Plant, Design & Build Contract

Plant Design & Build Contract is a type of construction contract where the contractor assumes complete responsibility with limited or no input from the employer. The employer focuses entirely on receiving the end result, whereas the contractor enjoys a free-hand in conceptualisation, design, and implementation. Such contracts are extremely useful for people who wish to hire a contractor, and not be involved in the construction process in any way, beyond making the payments. While this may seem odd, it is beneficial for individuals who may not have time to adopt a hands-on approach, or may not want to interfere in matters beyond their expertise. Moreover, such contracts offer a value advantage based on the ability of the contractor to keep expenditures low by using simple, standard, or previously-used designs as per his/her typical technique. However, since the contractor alone is responsible for all aspects, including the supervision, and faces more challenges and pressure, with virtually no input from the employer/owner, the rates are generally higher for this type of construction contract.

Time & Material Contract

A Time & Material contract is a form of construction contract that establishes a legal agreement between the contractor and the employer/owner where both parties agree upon a labor rate, labor working hours, and the costs of various construction materials. However, the price for the overall construction is not predetermined. This contract proves to be ideal in situations where the exact final cost of the project is difficult to define in advance and is open to variation. The duration of the project completion is also not fixed and can vary depending upon the complexity and needs of the project. A Time & Materials Not to Exceed Contract (T&M NTE) can also be established whereby the maximum amount that can be charged by the contractor in agreed upon. Under this particular subcategory of a Time & Material Contract, efficiency levels are likely to be higher since the contractor is unable to charge beyond a specific amount, and is more likely to aim for efficient and timely completion.

Turn Key Contract

A Turn Key Contract is established between the parties where a contractor is hired and handed all the responsibilities, from the designing and planning to the eventual construction of the required infrastructure. While the design, layout and requirements are defined and set by the person financing the construction, the contractor is autonomously responsible for the entire execution. In essence, as the name suggests, the contractor handles each and every aspect of the construction process, and is in command of the project until the "key" is actually handed to the owner for him/her to take possession. In this regard, the contractor is additionally responsible for the performance of all other tasks related to the establishment, support and upkeep of the project, as necessary, to ensure on-time completion of the signed contract at an agreed rate.

Although all construction contracts may broadly fall under one or other of the above categories, each contract is different as a result of the specific of each project. The purpose of these categories is to assist individuals in identifying the one that best suits their needs and requirements, but in any case, the individuals are expected to customise the contract before signing it. Given the boom in the construction industry, even in urban centres, most contractors have templates available for editing, though if one wishes to err on the side of caution, the services of a lawyer and/or legal firm in this regard may be hired.