Construction Works Contract

The aim of this article is to provide you, the owners and managers of construction companies, with a practical and understandable guide on how to avoid these costly problems. We will show you what to look out for when negotiating a contract for work in the construction industry, what the most common mistakes are, and how to correctly set up contractual relationships to protect your business. At ARROWS, our Prague-based team deals with the issue of contracts for work in construction on a daily basis, and we know how to effectively prevent potential risks and successfully defend the interests of our clients if a problem has already arisen.

Why is a contract for work vitally important for a construction company (and often underestimated)?

The financial and time impacts of a poorly drafted or inadequate contract for work can be devastating for a construction company. We are talking not only about unexpected costs for additional work that will not be reimbursed, but also about the risk of contractual penalties for alleged or actual delays, the delay of the entire project due to the need to resolve disputes, the costs of court or arbitration proceedings, and last but not least, damage to valuable relationships with clients and business partners.

The most common mistakes in contracts for work that can cost you millions

Every construction project is unique, and every contract for work should reflect its specifics. Nevertheless, in practice, we encounter recurring mistakes that unnecessarily expose construction companies to significant risks. Being aware of these mistakes is the first step towards preventing them.

1) Insufficiently specified subject of the work – What exactly are you building and to what quality standard?

A very common issue is an unclear, overly general, or incomplete definition of the subject of the work in the contract. This can range from a mere reference to a general description of the building without detailed specifications, a reference to outdated or incomplete project documentation, a missing list of works and supplies, or the absence of an agreement on specific materials and required quality standards. Sometimes, vague phrases like a requirement for "quality of the work" appear in contracts without defining what is meant by this quality.

Example: Your company builds the work to the best of its knowledge and belief, for example, a family house. However, the client had a completely different idea about the types of tiles, sanitary equipment, or the final appearance of the facade, because these details were not sufficiently specified in the contract or project documentation. This subsequently leads to a refusal to accept the work, demands for costly rework, or deductions from the price.

Risk: The main risk is a dispute over what exactly was supposed to be the subject of the work and what constitutes additional work. A situation may arise where you will not be able to claim payment for the full price of the work, you will be forced to make costly modifications at your own expense, or you will face contractual penalties for delays caused by these disagreements.

2) Unclear pricing and rules for additional work – Who pays for changes and how much?

Another critical point is the price of the work and, in particular, the absence of clear rules for so-called additional work (work beyond the scope of the originally agreed work). Often, there is no agreement on the price for additional work, or no written procedure is established for their approval and pricing. Many companies still rely on verbal agreements "on-site," which is very risky. The determination of the price of the work itself can also be problematic, for example, if the price is set only by an estimate or an incomplete budget, which can lead to subsequent disputes about its increase.

Example: During the construction, the client verbally requests various changes and additions to the original project (e.g., a different type of roofing or additional partitions). Your company performs this work in good faith, believing it will be duly paid for. However, the contract lacks any mechanism for their written approval and pricing. The client then refuses to pay for this additional work, arguing that it was not ordered in writing.

Risk: The biggest risk is that you will not get paid for the additional work you have already performed. This can lead to significant financial losses. A subsequent lawsuit over the legitimacy and amount of the price for additional work is time-consuming and financially demanding, and its outcome is uncertain, especially if written evidence is lacking.

3) Unfavourable payment terms and missing retention money – When and how much will you get paid?

The contract may contain unfavourable payment terms for the contractor, such as excessively long invoice due dates, insufficient advance payments during the execution of the work, or, conversely, the absence of so-called retention money, which would motivate the client to quickly remedy any defects and incomplete work found during handover. The option to agree on a retention is a standard tool.

Example: Your company is forced to finance most of the construction costs from its own resources because the contract allows the client to pay only minimal advances and the majority of the price only after the complete finishing and handover of the work. After the handover, the client delays the final payment, pointing out minor incomplete work. Since the contract did not provide for retention money to be released only after their removal, you have no effective leverage to resolve the situation quickly.

Risk: Unfavourable payment terms can cause serious cash flow problems for your company. It then becomes difficult to enforce due invoices, and there is a lack of funds to cover the costs of rectifying defects if the client withholds an unreasonable portion of the price of the work or pays with a delay.

4) Missing or poorly set deadlines and contractual penalties – How to defend against delays?

Contracts often lack clearly defined deadlines for the completion of individual construction stages and for the final handover of the work. Equally problematic can be unreasonably high contractual penalties for the contractor's delay, which can be moderated by a court, or, conversely, a complete lack of sanctions for the client's delay in fulfilling their obligations (e.g., handing over the construction site, providing cooperation, or paying invoices). A fundamental mistake is also not reflecting changes in deadlines (e.g., due to additional work or obstacles on the client's side) in a written addendum to the contract, which can lead to the unjustified enforcement of penalties for not meeting the original, now outdated, deadlines.

Example: Your company is delayed in completing the work due to objective obstacles for which you are not at fault (e.g., extreme adverse weather, delay by a key technology subcontractor). However, the contract lacks a provision for extending the deadline in such cases, or the contractual penalty for delay is set at a ruinously high level. Conversely, the client is late with an invoice payment, but the contract does not specify any interest on late payment or a contractual penalty for this case.

Risk: You face the obligation to pay unreasonable contractual penalties, even if the delay was not entirely your fault. On the other hand, if the client is in delay, you have no effective tool to sanction them and enforce your rights. Financial losses caused by the other party's delay can thus significantly impact your financial performance.

5) Underestimating the handover and acceptance process – When is the work truly finished and free of defects?

Many construction companies and clients underestimate the formal side of handing over and accepting the completed work. Often, there is no handover protocol, or the work is accepted with defects and incomplete items without them being properly documented and a binding deadline for their removal being agreed upon. Yet, the handover protocol is the key document proving the state of the work at the time of handover.

Example: Your company verbally notifies the client of the completion of the construction. The client begins to use the building without further ado, without a formal handover protocol being drawn up and any defects being checked. After a few weeks of use, obvious defects appear (e.g., poorly installed windows, unfinished painting), but there is no evidence of the condition of the work at the time of the actual handover and whether these defects were not already present then.

Risk: It will be very difficult for you to prove when the work was actually handed over and what specific defects and incomplete items it had (or did not have) at the time of handover. You may thus lose claims for defective performance for patent defects if they were not properly noted in the handover protocol. Without a clear list of defects and deadlines for their removal, enforcing the final payment for the work also becomes complicated.

6) The issue of defects and warranty conditions – Who is liable for what, and for how long?

Contracts often contain vaguely defined liability for defects in the work, a missing or unfavourably agreed quality warranty for the contractor, or excessively short deadlines for the client to report defects. It is important to realize that a warranty on the construction as such is not automatic under the law; it must be explicitly agreed upon in the contract.

Example: A year after the handover and acceptance of a family house, a latent defect appears on the roof, causing it to leak. However, the contract for work only stipulated statutory liability for defects existing at the time of handover, not an extended quality warranty for the roof structure. The client can therefore not demand a free repair under warranty.

Risk: If liability for defects and warranty conditions are not clearly and favourably agreed upon, you risk having to remove defects at your own expense for which the client would otherwise be responsible (e.g., defects caused by improper use), or conversely, you will not be able to assert claims against your subcontractors if you do not have harmonized warranty conditions with them. The client, on the other hand, risks not being able to claim for defects that appear after the statutory periods have expired (for construction projects, the period for reporting latent defects is 5 years from acceptance under Czech legislation).

7) Absence of a written contract or use of an unsuitable template

There are still cases where construction work is carried out solely on the basis of a verbal agreement or an order, or a generic contract template downloaded from the internet is used, which absolutely does not correspond to the specifics of the particular project and current legislation. Such templates often fail to address key aspects of construction work and may contain invalid or extremely disadvantageous provisions for one of the parties.

Example: A construction company uses a generic contract for work template intended for new buildings for the reconstruction of a historic building. The contract thus does not address the specific requirements of heritage protection, possible archaeological findings, or the special technological procedures necessary for reconstruction. During the project, complications arise related to these very aspects, which the contract does not cover in any way, leading to disputes over liability and costs.

Risk: There is a risk of invalidity of some contractual provisions, or even the entire contract. In the event of a dispute, it is then very difficult to prove what was actually agreed, and the parties cannot effectively enforce their rights. The result is often lengthy and financially exhausting court disputes over the interpretation of an unclear or incomplete contract.

ARROWS Summary

Many of the above-mentioned mistakes, such as the absence of written addendums for additional work or underestimating the importance of the handover protocol, often do not stem solely from a lack of legal knowledge. They are also a consequence of the daily operational reality in the construction industry – pressure for speed, an effort to accommodate the client without unnecessary administration, or simply the insufficient administrative capacity of smaller firms. Contractors primarily want to build and continue their work; they do not want to delay the process for "paperwork." The problem, therefore, is not just that companies do not know what they should do, but that practical circumstances and established habits sometimes lead them to risky behaviour. The solution is therefore not just a blunt statement to "have everything in writing," but also to show how these necessary administrative processes can be made more efficient, simplified, and integrated into the company's daily operations so that they are as little of a burden as possible. Our Prague-based lawyers at ARROWS can also effectively help you with this, for example, by setting up simple templates for change order forms or handover protocols.

It is also important to realize that legal disputes concerning contracts for work in construction are often particularly complicated and costly. The reason is not only the complexity of the legal issues but also the technical nature of most problems, which requires the preparation of expensive expert opinions. Court proceedings can thus drag on for many years, and their outcome is uncertain. Prevention through a well-prepared contract is therefore all the more important in this industry.

Last but not least, it is necessary to perceive the strong interconnection between the individual mistakes. For example, an unclearly defined subject of the work directly increases the risk of subsequent disputes about what is and what is not additional work, and at the same time complicates the process of handing over and accepting the work, where it is difficult to assess whether the work corresponds to the original assignment. If the required quality standard is not clearly defined in the contract, it is then very difficult to determine at handover whether the work has defects or not. This interdependence shows that a contract for work is a complex document where individual provisions are closely linked and mutually influence each other. That is why at ARROWS, we always approach the creation and revision of contracts comprehensively and with an emphasis on all contexts.

Below you will find a clear table summarizing the most common mistakes and ways to prevent them with the help of ARROWS:

Most Common Mistakes in Contracts for Work and How to Prevent Them with ARROWS

How to build a contract for work on solid foundations: Practical tips from ARROWS

A well-prepared and thought-out contract for work is the cornerstone of every successful construction project and the best protection against future problems. Let's look at practical tips that will help you build your contractual relationships on truly solid foundations.

1) A written form and a tailor-made contract are the absolute foundation:

As already mentioned, relying on verbal agreements in the construction industry is extremely risky. Similarly, using generic contract templates downloaded from the internet is a common path to problems, as these templates generally do not reflect the specifics of your particular project or the current legal regulations. Every construction project is different and requires an individual approach.

2) Key elements of a contract for work (construction checklist from ARROWS):

For your contract for work to fulfill its protective function, it must contain all the essential elements. The following checklist will provide you with a basic overview:

• Precise identification of the contracting parties: Complete and correct details of both the client and the contractor (name/company name, registered office/residence, ID No., VAT No., entry in the Commercial Register, bank details, contact persons).

• Detailed definition of the subject of the work: The most important part of the contract. It must unambiguously specify what is to be constructed. It includes references to project documentation (specific version, date), a list of works and supplies (bill of quantities), and specifications of materials, technologies, and required quality standards.

• Price of the work and its determination method: Fixed price, price according to a budget (with or without a guarantee of completeness/binding nature), unit prices based on actually performed work. Clear rules for VAT.

• Payment terms: Amount and schedule of advance payments, invoicing method (e.g., monthly according to a list of performed works, after completion of complete stages), invoice due dates, conditions for the release of retention money.

• Performance deadlines: Start date of work, deadlines for the completion of partial stages (milestones), and the deadline for the overall completion and handover of the work. A work schedule can be included as an appendix to the contract.

• Liability for defects and quality warranty: Clear definition of liability for defects in the work, procedure and deadlines for claiming defects (both patent and latent), length of the quality warranty period, and warranty conditions.

• Conditions for changes to the work and additional work: A binding written procedure for requesting, approving, and pricing changes and additional work. Designation of the person authorized to approve changes on behalf of the client.

• Contractual penalties and interest on late payments: Sanctions for the contractor's delay in completing the work or rectifying defects, sanctions for the client's delay in making payments or providing cooperation. The amount should be reasonable.

• Liability insurance: The contractor's obligation to have liability insurance for damage caused by their activities in a sufficient amount for the entire duration of the work and possibly for the warranty period.

• Handover and acceptance procedure: Conditions for the acceptance procedure, content of the handover protocol, procedure for identifying defects and incomplete work.

• Dispute resolution: Choice of method for resolving potential disputes (general court, arbitration, mediation).

• Provisions on withdrawal from the contract: Reasons and procedure for withdrawal from the contract for both parties.

3) Detailed specification of the subject of the work and quality standards:

The basis is a reference to specific, dated project documentation approved by both parties, which should be as detailed as possible (ideally at the level of implementation documentation). A detailed list of works and supplies (bill of quantities) should be an integral part. It is also advisable to specify key materials, products, and technologies used. Reference can also be made to relevant Czech technical standards (ČSN), but with caution, as not all of them are generally binding and their blanket requirement may be unrealistic or inefficient.

Quality: If the quality of the work is not explicitly agreed upon in the contract, the contractor is obliged to deliver the work in medium quality. If you want a higher standard, this must be clearly stated in the contract and reflected in the price of the work. It is good to define how quality will be verified (e.g., specific tests, certifications).

4) Transparent price and fair payment terms:

There are several ways to determine the price of the work – a fixed price, a price according to a budget (which can be guaranteed as to completeness, or non-guaranteed; binding as to unit prices, or non-binding), or a price determined based on unit prices and the actual quantity of work performed (measured price). Each method has its advantages and disadvantages for both the contractor and the client. For the contractor, a price determined by unit prices is generally more advantageous because they are paid for the work actually performed.

It is crucial to set a balanced payment schedule. This includes reasonable advance payments (especially for larger projects to cover initial costs), the possibility of partial invoicing after the completion of complete construction stages or based on monthly lists of performed works, and reasonable invoice due dates. An important part is also the so-called retention money (usually 5-10% of the price of the work), which the client releases only after the removal of all defects and incomplete work found during the handover of the work, or a part of it after the warranty period has expired.

5) Realistic deadlines and balanced sanctions:

Work schedule: A detailed work schedule, approved by both parties, should be an integral appendix to the contract. It should contain not only the final completion date of the work but also deadlines for key stages (milestones).

Contractual penalties: Contractual penalties serve as motivation for the proper performance of the contract. It is possible to agree on a penalty for the contractor's delay in completing the work (often as a percentage of the price of the work for each day of delay), for delay in rectifying defects, but also a penalty for the client for delay in paying invoices or providing necessary cooperation. The amount of contractual penalties should be reasonable and correspond to the seriousness of the breached obligation. Unreasonably high penalties can be reduced by a court.

6) Effective management of changes and additional work:

Any change to the originally agreed work or a request for additional work should be handled formally and in writing. A proven procedure includes a written request for a change (change order form), its pricing by the contractor, approval of the scope and price of the change by the client, and the subsequent conclusion of a written addendum to the contract for work, ideally before the implementation of this additional work begins.

Authorized person: The contract should clearly specify which person (or persons) is authorized on behalf of the client to approve changes and additional work and to sign the relevant addendums. This will prevent disputes over whether a change was duly ordered.

7) Careful handover and acceptance of the work:

Handover protocol: The formal handover and acceptance of the work should always be confirmed by the signing of a detailed handover protocol. The protocol should contain at least: precise identification of the work and the contracting parties, the date of handover, a list of all performed works and supplies, a detailed list of any identified defects and incomplete work with binding deadlines for their removal, the client's declaration of acceptance or non-acceptance of the work (and the reasons for non-acceptance), and the signatures of the authorized representatives of both parties.

Acceptance with or without reservations: The client has the right to accept the work with reservations (if the work has defects) or without reservations. If they accept the work without reservations, they may lose the right to claim for patent defects that they could have discovered upon acceptance with the exercise of ordinary care.

8) Clearly defined liability for defects and warranty:

Statutory liability vs. contractual warranty: It is necessary to distinguish between the contractor's statutory liability for defects that the work has at the time of handover, and a contractual quality warranty, by which the contractor undertakes that the work will retain its agreed or usual properties for a certain period. Under the Czech Civil Code, the period for claiming latent defects in construction projects is 5 years from their acceptance. A contractual warranty can further extend this protection.

Scope of warranty: The contract should clearly specify what the warranty covers (e.g., the entire work, or only certain parts or technologies), the length of the warranty period (for construction work, a warranty of 60 months is common), and the conditions for asserting claims under the warranty (e.g., the obligation to perform regular maintenance).

9) Dispute resolution clause:

It is advisable to agree in the contract in advance on how any disputes arising from the contract will be resolved. There are several options: classic court proceedings, arbitration, or mediation. Each of these options has its advantages and disadvantages in terms of speed, costs, expertise of the decision-makers, and the non-public nature of the proceedings.

ARROWS Summary

A detailed and precisely drafted contract for work is not just a legal necessity but also a highly effective project management tool. It helps prevent misunderstandings, clearly defines the rights and obligations of all participating parties, sets rules for communication and cooperation, and thus significantly facilitates the overall coordination and management of the construction project. A well-written contract that covers all key aspects such as the subject of the work, price, deadlines, change management, quality standards, and handover procedure is therefore not just a document "for lawyers," but an active assistant for site managers and project managers, helping them keep the project on track and minimize risks.

For your quick reference, we are providing a simple checklist of key points that you should not forget in your contract for work in the construction industry:

Checklist: Key Points of Your Contract for Work in Construction

When construction goes wrong: How to resolve disputes from contracts for work effectively?

Even with the best efforts and a carefully prepared contract, a situation can sometimes arise where problems and disagreements appear on the construction site between the contracting parties. In such a case, it is important to know how to proceed and what the options are for resolving disputes from contracts for work.

Prevention is key: The best and least costly way to resolve any dispute is to prevent it. As we have emphasized many times, a high-quality and detailed contract for work that clearly defines the rights and obligations of both parties is a fundamental prerequisite for a smooth construction process and minimizing the risk of disputes.

The importance of quality contractual documentation and the construction logbook for a potential dispute:

Regardless of which dispute resolution method you choose (agreement, mediation, court proceedings, or arbitration), high-quality and complete contractual documentation will always play a key role. A well-written contract for work, all its addendums, written communication between the parties, and, last but not least, a properly kept construction logbook are all crucial pieces of evidence. The construction logbook, often perceived merely as a formal obligation, becomes one of the most important documents in disputes, mapping the course of construction, recording all important events, changes, instructions, and potential problems. Its careful and regular maintenance, including the signatures of authorized persons, is therefore an underestimated but absolutely essential part of preventing and effectively resolving disputes. Although the construction logbook is primarily a public law document, it can also be declared a contractual document in the contract for work, which further increases its importance.

Conclusion: Don't underestimate the power of a well-written contract – invest in peace of mind and certainty

A contract for work is one of the most important documents for any construction company. Its quality can determine the success or failure of the entire project, your profitability, and in extreme cases, the very existence of your business. As we have shown in this article, there are many pitfalls and potential mistakes, but with careful preparation and professional help, they can be effectively prevented.

Key recommendations in conclusion:

• Always insist on a written, tailor-made contract for work for your specific project. Avoid verbal agreements and generic templates.

• Pay maximum attention to the detailed specification of the subject of the work, the price, and the rules for additional work. This is where most disputes arise.

• Do not underestimate the process of handing over and accepting the work and insist on drawing up a detailed handover protocol.

• Remember that the investment in quality legal assistance at the beginning of a project is many times lower than the costs of resolving problems and disputes that can arise from a faulty or inadequate contract.

ARROWS: Your reliable partner for safe construction projects

Choosing the right legal partner is key to the success and safety of your construction projects. The ARROWS law firm offers construction companies, developers, and investors a comprehensive legal service built on deep expertise, extensive experience, and a real understanding of the specifics of the construction industry.

We will provide you with support in all phases of your project:

• Preparation and revision of contracts for work: Creating tailor-made contracts that minimize risks and protect your interests.

• Advice on the new Building Act: Help with navigating the new legislation and implementing it into your practice.

• Resolving issues of additional work and changes to the work: Setting up transparent and functional mechanisms.

• Liability for defects and warranty conditions: Formulating clear and balanced provisions.

• Representation in disputes: Effectively defending your rights in court and in arbitration proceedings.

• Public procurement in construction: Comprehensive advice for contracting authorities and suppliers.

• Development and spatial planning: Legal support for development projects from A to Z.

Do you have questions about your contracts for work? Do you need to revise existing documents or prepare a new contract for your key project? Do you want to consult on the impacts of the new Building Act on your business?

Do not hesitate to contact the ARROWS law firm. We will be happy to help you set fair and safe conditions for your construction projects and protect your business.