Construction contract

Imagine this situation: Your construction company has just completed a demanding project that your people have been working on day and night. You are ready to hand over the work and collect your well-deserved reward. However, the client suddenly refuses to pay a significant portion of the price for additional work that you agreed to verbally during the construction because “there is nothing about it in the contract.” Suddenly, you are facing the threat of a protracted legal dispute, the loss of hundreds of thousands of dollars, and damage to your hard-earned reputation. Unfortunately, this is not an isolated scenario in the Czech construction industry. Even a seemingly minor oversight or omission in a contract for work can turn into a time bomb with fatal consequences for your business.

The aim of this article is to provide you, the owners and managers of construction companies, with practical and understandable guidance 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 set up contractual relationships correctly to protect your business. At ARROWS, we deal with construction contracts on a daily basis and know how to effectively prevent potential risks and successfully defend our clients' interests if a problem arises.

Author of the article: ARROWS (Mgr. Daniela Sobotková, office@arws.cz, +420 245 007 740)

Why is a works contract vital (and often underestimated) for a construction company?

The underestimation of the contractual agenda in the construction industry often stems from the pressure for speed of implementation and the desire to maintain good relations with the client based on verbal agreements and gentlemanly promises. Construction is a dynamic industry, deadlines can be tight and many firms may try to avoid "unnecessary paperwork" to speed up the process or to avoid appearing too formal to the client. Paradoxically, this approach is the source of most conflict and misunderstanding. As practical experience shows, the absence of written agreements on changes or multiple works is one of the most common mistakes leading to disputes.

The financial and time implications of a poorly set up or inadequate works contract can be devastating for a construction company. We are talking here not only about unexpected costs for extra work that will not be reimbursed, but also the risk of contractual penalties for perceived or actual delays, delays to the entire project due to the need to resolve points of contention, the cost of court or arbitration proceedings, and last but not least, damage to valuable relationships with clients and business partners.

The most common mistakes in works contracts that can cost you millions

Each building is unique and each works contract should reflect its specifics. Yet, in practice, we encounter repeated mistakes that unnecessarily expose construction companies to significant risks. Awareness of these mistakes is the first step to preventing them.

1) Insufficiently specified subject of work - What exactly are you building and in what quality?

A very common problem is a vague, too general or incomplete definition of the subject of the work in the contract. This may be a mere reference to a general description of the construction without detailed specification, a reference to outdated or incomplete project documentation, a missing inventory of works and supplies, or the absence of provisions on specific materials and required quality standards. Sometimes vague wording such as a requirement for 'quality of work' appears in contracts without defining what is meant by quality.

Example: your company builds a work to the best of its knowledge and conscience, e.g. a house. However, the client had a completely different idea about the types of tiles to be used, the sanitary technology or the final appearance of the facade, because these details were not sufficiently specified in the contract or project documentation. This subsequently led to refusal to accept the work, demands for costly alterations or deductions from the price.

Risk: The main risk is a dispute over what exactly was intended to be the subject of the work and what already constitutes extra work. You may not be able to claim payment for the full price of the work, be forced to make costly adjustments at your own expense, or face contractual penalties for delays caused by these disputes.

2) Unclear pricing and rules for extra work - Who pays for changes and how much?

Another critical point is the price of the work and in particular the lack of clear rules for so-called extra work (work beyond the originally agreed work). Often there is no agreement on the price for extra work or no written procedure for its approval and valuation. Many companies still rely on verbal agreements "on site", which is very risky. The actual determination of the price of the work can also be problematic, for example if the price is only an estimate or an incomplete budget, which can lead to subsequent disputes over price increases.

Example: during construction, the client verbally requests various changes and additions to the original design (e.g. a different type of roofing or additional partitions). Your company will carry out these works in good faith that they will be properly reimbursed. However, the contract lacks any mechanism for their written approval and pricing. The client subsequently refuses to pay for these extra works, arguing that they were not ordered in writing.

Risk: The biggest risk is not getting paid for extra work you have already done. This can lead to significant financial losses. Subsequent litigation over the validity and cost of the extra work is time-consuming and costly and the outcome is uncertain, especially if written documentation is missing.

3) Unfavourable payment terms and missing retention - 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, on the contrary, the absence of a retainer that would motivate the client to quickly eliminate any defects and deficiencies detected at handover. The possibility of negotiating a retainer is a standard instrument.

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 minimum deposits and most of the price only after the work is completely finished and handed over. After handover, the client delays the final payment and points out minor deficiencies. Since there was no retainage agreed in the contract to be released only after these have been rectified, you have no effective leverage to resolve the situation quickly.

Risk: Unfavourable payment terms can cause serious cash flow problems for your company. It can make it difficult to collect outstanding invoices and lack funds to cover the cost of rectifying defects if the client withholds an unreasonable portion of the price of the work or pays late.

4) Missing or wrongly set deadlines and contractual penalties - How to defend against default?

Contracts often lack clearly defined deadlines for the completion of individual construction stages and for the final handover of the work. Equally problematic may be excessive contractual penalties for the contractor's delay, which may be moderated by the court, or, on the contrary, the complete absence of penalties for the client's delay in fulfilling its obligations (e.g. handing over the construction site, providing assistance or paying invoices). Another fundamental error is the failure to include changes to deadlines (e.g. due to multiple works or obstacles on the client's side) in a written amendment to the contract, which may lead to unjustified penalties for non-compliance with the original, outdated deadlines.

Example: your company is delayed in completing the work due to objective obstacles that are not your fault (e.g. extreme weather, delay of a key technology subcontractor). However, the contract lacks a clause for extending the deadline in such cases, or the liquidated damages for delay are set too high. Conversely, the client is in default of payment of the invoice, but the contract does not provide for any default interest or liquidated damages in this case.

Risk: You may be liable to pay excessive contractual penalties even if the delay was not entirely your fault. On the other hand, if the client is in default, you have no effective tool to sanction it and enforce your rights. The financial losses caused by the other party's delay can thus have a significant impact on your business.

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

Many construction companies and clients underestimate the formal aspect of handing over and accepting the completed work. Often there is no handover report, or the work is accepted with defects and incompletions without being properly documented and a binding deadline for their removal has been agreed. The handover report 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 starts to use the building without any further work, without a formal handover report being drawn up and without any defects being checked. After a few weeks of use, obvious defects are discovered (e.g. poorly fitted windows, unfinished painting work), but there is no evidence of the condition of the work at the actual handover and whether these defects were already present at that time.

Risk: You will find it very difficult to prove when the work was actually handed over and what specific defects and shortcomings it had (or did not have) at the time of handover. You may lose defective performance claims for obvious defects if they were not properly pointed out in the handover report. Without a clear list of defects and the dates for their correction, it also makes it difficult to recover the additional price of the work.

6) Issues of defects in work and warranty conditions - Who is liable, for what and for how long?

Contracts often contain unclearly defined liability for defects in the work, a lack of or disadvantageous quality guarantee for the contractor, or too short periods for notification of defects by the client. It is important to note that a guarantee for the construction as such is not automatic by law; it must be expressly agreed in the contract.

Example: one year after the handover and acceptance of the house, a hidden defect appears in the roof and causes leakage. However, the work contract only agreed on legal liability for defects existing at the time of handover, not on an extended quality guarantee for the roof structure. Thus, the client cannot claim free repairs under the guarantee.

Risk: If liability for defects and warranty conditions are not clearly and conveniently agreed, you risk having to remedy defects for which the client would otherwise be liable (e.g. defects caused by improper use) at your own expense or, on the contrary, you may not be able to make claims against your subcontractors if you do not have warranty conditions agreed with them. In turn, the client runs the risk that will not be able to claim for defects that become apparent after the expiry of the statutory time limits (for buildings, the time limit for claiming hidden defects is 5 years from acceptance).

7) Absence of a written contract or use of an inappropriate model

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

Example: a construction company uses a general model contract for new buildings for the renovation of a historic building. The contract does not address the specific requirements of the conservation authority, possible archaeological findings or special technological procedures required for the reconstruction. Complications arise during the execution of the project related to these aspects, which are not covered by the contract, leading to disputes over liability and costs.

Risk: There is a risk that certain contractual provisions or even the entire contract may be invalid. In the event of a dispute, it is very difficult to prove what was actually agreed and the parties cannot effectively enforce their rights. The result is often lengthy and costly litigation over the interpretation of an unclear or incomplete contract.

ARROWS Summary

Many of the above mistakes, such as the absence of written addenda to multiple contracts or the underestimation of the importance of the handover protocol, are often not only due to legal ignorance. They are also a consequence of the everyday operational reality of the construction industry - the pressure for speed, the desire to meet the client without unnecessary administration, or simply the lack of administrative capacity of smaller companies. Above all, contractors want to build and get on with the job, they do not want to delay the process because of "paperwork". So the problem is not just that companies don't know what to do, but that practical circumstances and established practices sometimes lead them to take risks. Therefore, the solution is not just to simply state "keep everything in writing", but also to show how these necessary administrative processes can be streamlined, simplified and integrated into the normal running of the company so that they are as stress-free as possible. ARROWS lawyers can also help you effectively with this, for example by setting up simple templates for change sheets or handover reports.

It is also important to note that litigation concerning construction contracts is often particularly complicated and costly. This is not only due to the complexity of the legal issues, but also due to the technical nature of most issues, which requires the production of expensive expert reports. As a result, court proceedings can drag on for many years and their outcome is uncertain. Prevention through a well-drafted contract is therefore all the more important in this sector.

Last but not least, the strong interdependence between the individual errors must be perceived. For example, an unclearly defined subject-matter directly increases the risk of subsequent disputes about what is and what is not extra work, and at the same time complicates the handover and acceptance process, where it is difficult to assess whether the work corresponds to the original brief. If the required quality standard is not clearly defined in the contract, it is then very difficult to determine at handover whether the work is defective or not. This interdependence shows that a works contract is a complex document where the individual provisions are closely linked and interact. Therefore, at ARROWS, we always approach the drafting and review of contracts comprehensively and with attention to all contexts.

Below you will find a table summarizing the most common errors and how to avoid them with ARROWS:

The most common mistakes in works contracts and how to avoid them with ARROWS

A common mistake	Possible consequence	How ARROWS solves
Vaguely defined subject of the work	Disputes over the scope of performance, non-payment of part of the work, costs of rework	Precise specification of the work, reference to detailed project documentation and schedule of works, clear definition of quality standards in the contract.
Oral agreements on multiple works	Inability to recover payment for extra work, costly litigation over its validity	Establish a clear and binding written process for change management, including approval and pricing of multiple works prior to implementation.
Unfavourable payment terms, lack of retention	Cash-flow problems, difficulty in recovering payments, inability to cover costs of defect rectification	Negotiate fair advances, partial payments, reasonable invoice due dates and adequate retainage.
Missing/wrongly set deadlines and contractual penalties	Financial losses from the other party's default, inability to effectively sanction a breach of contract	Setting realistic performance deadlines, balanced contractual penalties and default interest for both parties.
Underestimated handover protocol	Problems with claiming obvious defects, disputes about the condition of the work at handover	Preparation of a detailed sample handover report, advising on the process of work acceptance and documentation of defects.
Unclear liability for defects and warranty conditions	Inability to claim defects, repair costs, disputes over the scope of the warranty	Clear definition of liability for defects, negotiation of the optimal contractual guarantee for quality and time limits for claims.
Absence of a written contract/use of an inappropriate model	Invalidity of the agreement, inability to enforce rights, lengthy disputes over interpretation of the contract	Preparation of the contract of work always in writing and tailored to the specific project and client, taking into account all specifics and current legislation.

 

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

A well-prepared and well thought-out construction contract is the cornerstone of any successful construction project and the best protection against future problems. Let's take a look at practical tips to help you build your contractual relationships on a truly solid foundation.

1) The written form and the customized contract are absolute essentials:

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 route to problems, as these templates generally do not reflect the specifics of your particular project or current legislation. Every building is different and requires an individual approach.

2) Key elements of the works contract (construction checklist from ARROWS):

In order for your contract to fulfil its protective function, it must contain all the essential elements. The following checklist will give you a basic overview:

• Precise identification of the contracting parties: complete and correct information about the client and the contractor (name, registered office/residence, registration number, tax identification number, registration in the commercial register, bank connection, contact persons).
• Detailed definition of the object of the work: The most important part of the contract. It must clearly specify what is to be constructed. Includes references to the design documents (specific version, date), the schedule of works and supplies (bill of quantities), specification of materials, technologies and required quality standards.
• Price of the work and how it is to be determined: fixed price, price according to budget (with or without completeness/commitment), unit prices according to the work actually carried out. Clear rules for VAT.
• Payment terms: the amount and schedule of advance payments, the method of invoicing (e.g. monthly according to the list of works performed, after completion of complete stages), invoice due dates, conditions for release of retention.
• Completion dates: the date for commencement of the work, the dates for completion of the sub-phases (milestones) and the date for overall completion and handover of the work. If applicable, an agreed schedule of works as an annex to the contract.
• Liability for defects and guarantee for quality: clear definition of liability for defects in the work, procedure and time limits for claiming defects (obvious and hidden), length of the guarantee period for quality and conditions of the guarantee.
• Conditions for Changes to the Work and Extra Work: A binding written procedure for requiring, approving, and pricing changes and extra work. Designation of a person authorized to approve changes on behalf of the client.
• Contractual penalties and interest for delay: penalties for the contractor's delay in completing the work or in removing defects, penalties for the client's delay in paying or providing assistance. The amount should be reasonable.
• Liability insurance: the contractor is obliged to have sufficient liability insurance for damage caused by his activities throughout the execution of the work and, where applicable, during the guarantee period.
• Procedure for handover and acceptance of the work: Conditions for the acceptance procedure, content of the handover report, procedure for the detection of defects and shortcomings.
• Dispute resolution: the choice of how to resolve any disputes (general court, arbitration, mediation).
• Withdrawal clause: reasons and procedure for withdrawal for both parties.

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

The basis is a reference to specific, mutually agreed and dated project documentation, which should be as detailed as possible (ideally at the level of implementation documentation). A detailed schedule of works and supplies (bill of quantities) should be an integral part of the design. The key materials, products and technologies used should also be specified. Reference may also be made to relevant technical standards (CSNs), but with caution as not all are generally binding and requiring them across the board may be unrealistic or ineffective.

Quality: if the quality of the work is not expressly agreed 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 the quality will be verified (e.g. specific tests, certification).

4) Transparent price and fair payment terms:

There are several ways of determining the price of the work - fixed price, price according to the budget (which may be guaranteed as to completeness or not guaranteed, binding as to unit prices or not binding), or price determined on the basis of unit prices and the quantity of work actually performed (measured price). Each method has advantages and disadvantages for both the contractor and the client. For the contractor, a price determined by unit prices is generally more advantageous because he is paid for the work actually done.

It is crucial to set up a balanced payment schedule. This includes reasonable advance payments (especially for larger contracts to cover initial costs), the possibility of partial invoicing upon completion of complete construction phases or on the basis of monthly work lists, and reasonable invoice due dates. An important component is the so called retainer (usually 5-10% of the work price), which is released by the client only after all defects and imperfections detected at handover have been eliminated, or part of it only after the warranty period has expired.

5) Realistic deadlines and balanced sanctions:

Schedule of works: a detailed and mutually agreed schedule of works should be an integral annex to the contract. It should include not only the final date for completion of the work but also the dates for key stages (milestones).

Contractual penalties: contractual penalties serve as an incentive for proper performance of the contract. It is possible to negotiate 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 removing defects, but also a penalty for the client for delay in paying invoices or providing the necessary assistance. The amount of the contractual penalties should be reasonable and correspond to the seriousness of the obligation breached. Disproportionately high fines may be reduced by the court.

6) Effective change management and multi-work:

Any change to the originally agreed work or request for additional work should be addressed formally and in writing. Best practice involves a written request for change (change sheet), its evaluation by the contractor, approval of the scope and price of the change by the client and subsequent conclusion of a written amendment to the works contract, ideally prior to commencement of the execution of the extra works.

Authorised person: the contract should clearly specify which person (or persons) is authorised to approve changes and additional works and sign the relevant amendments on behalf of the client. This will avoid disputes as to whether a change has been properly ordered.

7) Careful handover and acceptance of the work:

Handover protocol: the formal handover and acceptance of the work should always be confirmed by signing a detailed handover protocol. The protocol should contain at least: precise identification of the work and the contracting parties, the date of handover, an inventory of all work and deliveries carried out, a detailed inventory of any defects and shortcomings found, with binding deadlines for their removal, a declaration by the client of acceptance or non-acceptance of the work (and the reasons for non-acceptance) and the signatures of the authorised representatives of both parties.

Acceptance with reservations vs. without reservations: the Client has the right to accept the work with reservations (if the work is defective) or without reservations. If he accepts the work without reservation, he may lose the right to claim for obvious defects which he could have discovered with ordinary care at the time of acceptance.

8) Clearly defined liability for defects and warranty:

Statutory liability vs. contractual guarantee: a distinction must be made between the contractor's statutory liability for defects in the work at the time of handover and the contractual guarantee of quality, by which the contractor undertakes to maintain the agreed or usual characteristics of the work for a certain period of time. The time limit for the application of hidden defects in buildings is 5 years from the date of acceptance according to the Civil Code. The contractual guarantee may further extend this protection.

Scope of the guarantee: the contract should clearly specify what is covered by the guarantee (e.g. the whole work or only certain parts or technologies), the length of the guarantee period (for construction work, 60 months is the usual guarantee), and the conditions for claiming under the guarantee (e.g. the obligation to carry out regular maintenance).

9) Dispute resolution clause:

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

Who to contact:

ARROWS Summary

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

For your quick reference, here is a simple checklist of key points you should not forget in your construction contract:

Checklist: key points of your construction contract

Key point of the contract	Brief description
Accurate identification of parties	Full and correct details of the client and the contractor.
Detailed specification of the work	Clear definition of the construction, reference to the project documentation, list of works, quality standards.
Clear pricing	Fixed price, budget price, unit price; VAT rules.
Payment terms	Advances, partial invoicing, maturity, retention.
Dates and schedule	The date of commencement, completion of the sub-phases and the whole work.
Rules for extra work	Written procedure for approval and pricing of changes and multiple works.
Liability for defects	Legal liability, time limits for complaints.
Warranty conditions	Contractual quality guarantee, its scope and duration.
Contractual penalties	Penalties for default for both parties.
Insurance	Contractor's liability insurance.
Transfer protocol	Procedure and requirements for handover and acceptance of the work, record of defects.
Dispute Resolution	An agreed mechanism for resolving any disputes.
Withdrawal from the contract	Conditions under which the parties may withdraw from the contract.

 

When construction fails: how to resolve disputes arising from construction contracts effectively?

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

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

The importance of good contractual documentation and construction diary in case of a dispute:

Whichever way you choose to resolve the dispute (agreement, mediation, court proceedings or arbitration), good and complete contractual documentation will always play a key role. A well-written construction contract, any addenda, written communication between the parties and, last but not least, a properly maintained construction log are all essential evidence. The construction diary, often seen as a formal obligation, becomes one of the most important documents in disputes, charting the progress of the construction, recording all important events, changes, instructions and any problems. Its careful and regular maintenance, including the signatures of authorised persons, is therefore an underestimated but absolutely essential part of the prevention and effective resolution of disputes. Although the construction diary is primarily a public law document, it can also be declared a contractual document in the works contract, which adds to its importance.

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

The works contract 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 the extreme case, the very existence of your business. As we have shown in this article, the pitfalls and potential mistakes are many, but with careful preparation and professional help they can be effectively avoided.

Key recommendations to conclude:

1. Always insist on a written work contract tailored to your specific project. Avoid verbal agreements and generic templates.
2. Pay maximum attention to the detailed specification of the subject matter of the work, price and rules for extra work. This is where most disputes arise.
3. Do not underestimate the handover process and insist on a detailed handover report.

4. Remember that the investment in quality legal assistance at the start of a project is many times less than the cost of dealing with the problems and disputes that can arise from a defective or inadequate contract.

ARROWS: Your reliable partner for safe construction projects

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

We will support you in all phases of your project:

• Preparation and revision of work contracts: Creating tailored contracts that minimize risks and protect your interests.
• Advice on the new Building Act: Assistance with orientation in the new legislation and its implementation in your practice.
• Addressing the issue of multiple works and changes to the work: Setting transparent and functional mechanisms.
• Liability for defects and warranty conditions: the formulation of clear and balanced arrangements.
• Representation in disputes: effective defence of your rights before courts and in arbitration proceedings.
• Public procurement in the construction industry: comprehensive advice for contracting authorities and contractors.
• Development and planning: legal support for development projects from A to Z.

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

Don't hesitate to contact ARROWS. We will be happy to help you set fair and safe conditions for your construction projects and protect your business.

We look forward to working with you!