Constructing a Home - Top Tips
George Loutas, the Head of Real Estate and Construction Law at Maples and Calder in the Cayman Islands, shares his top tips to remember when entering into a building contract.
By George Loutas.
You have bought your dream piece of land, chosen an architect and a contractor. The contractor gives you a ‘standard’ contract to sign, but before you ink on the dotted line, you should consider the following:
- On occasion, contractors will want to enter into building contracts on a cost plus or ‘rise and fall’ basis. Due to the uncertainty associated with these types of contracts, the preferred option is to enter into a fixed price contract. A variation of a fixed price contract is a contract which is fixed but also has a provisional sum and prime cost item component. A provisional sum means an estimate of the cost of carrying out certain work (including the cost of material required for that work) for which the contractor, after making reasonable enquiries, cannot provide a firm price at the time the contract is executed. A prime cost item means an item such as a fixture or fitting that has not been selected, or whose price is not known at the date of the execution of the contract in respect of which the contractor must make a reasonable allowance for the cost and supply. When a contract has a provisional sum or prime cost item component, there should be a requirement that the contractor provide you with invoices for those items;
- Contractors will regularly mark up the price of materials and products they supply to you during the construction process. That is acceptable, but consider inserting a provision in the building contract whereby the contractor's mark up is capped by a certain percentage;
- Have the contractor provide you with a form of security for its performance of the contract by providing a cash retention. A portion of the security is customarily released at the stage of practical completion of the works with the remaining portion at the end of the defects liability period (e.g., six months after the practical completion of the works). Of course, if for example the contractor does not remedy any defective work, goes over the project due date or skips the country then you would usually have recourse to a portion or all of that security;
- Make sure that the contractor is fully licensed and has the appropriate type of insurances – e.g., public liability and contractors all risk insurance, and that the insurances cover your interest as well as those subcontractors and consultants for whom the contractor is responsible;
- The contract should contain a provision requiring the contractor to keep proper written records of actual expenditure and monies payable to all persons engaged by the contractor and in relation to all materials to be supplied by it;
- Progress payments to a contractor should be made on the basis of works that have been completed by it and inspected and signed off by you or by a project manager (engaged by you);
- The contract should provide a date for which the works are to be practically completed (subject to agreed extensions of time and/or variations) and if they are not, consider having a provision insertedinto the contract whereby the contractor pays you an amount for your loss for each week (or part of a week) until the works are substantially complete; and
- By all means, engage the services of an attorney to help you through the maze of construction contracts.
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