Claims arising under a construction contract: a quick guide

A quick guide to the typical claims that may arise on a construction and engineering project. These include claims a contractor may make (such as loss and expense, extensions of time and for variations) and claims an employer may make (such as for defective work and liquidated damages).

For more information on the legal structure of a construction project, see Quick guide, Construction projects: the legal structure.

Why do claims arise under a construction contract?

Construction projects rarely run entirely smoothly: additional works may be requested by the employer or become necessary when things are "discovered" on site; delays may mean the building takes longer to complete; or it may cost more than the parties originally contracted for.

Common claims include:

  • A contractor may have a claim against the employer relating to a delay or a change in the works.

  • A professional consultant may have a claim against the employer for non-payment of fees or breach of copyright.

  • The employer may have a claim against:

 

What the contractor may claim from the employer

A contractor may claim against the employer for more time and money (loss and expense) and for the cost of changes to the works (as variations or as a quantum meruit).

A claim for an extension of time to the completion date

A claim for loss and expense

A claim for the cost of variations

  • Sometimes called a change, additional work or extras, a contractor may claim for a variation (www.practicallaw.com/2-384-9447) when the employer alters the contractor's scope of work.

  • Standard form contracts (www.practicallaw.com/3-502-2528) usually include a clause that defines what a variation is and provide a procedure to value the variation. If so, the contractor should comply with that procedure.

  • Both parties may benefit from a clause permitting variations:

    • the employer can make changes so that it gets the building it wants; and
    • the contractor gets paid for providing extra or different work or materials.
  • Claiming for variations often gives rise to disputes over whether:

    • the additional work is outside the original scope of work; or
    • the person who ordered the work was authorised to do so.

A claim for payment under a quantum meruit

  • Under a quantum meruit (www.practicallaw.com/5-107-4865) claim, the contractor claims a reasonable sum for the work done and the materials it has supplied. The parties (or the courts) usually value a quantum meruit claim at a fair commercial rate.

  • A contractor cannot claim a quantum meruit if the parties have a contract to pay an agreed sum, but it will be relevant if the parties have:

    • not agreed a contract or not agreed all the terms, including the price for the work;
    • an agreement to pay a reasonable sum for the work done; or
    • agreed a scope of work under the original contract and the work falls outside that scope (where the parties did not have or did not use a variation (www.practicallaw.com/2-384-9447) procedure in the contract).
  • A contractor may sometimes claim a quantum meruit if it has worked under a letter of intent (www.practicallaw.com/5-382-8108).

 

What the employer may claim from the contractor

The employer may have a claim against the contractor because the works are of poor quality or are defective, or because the project is delayed.

A claim for poor workmanship and/or defects in the works

A claim for liquidated damages

  • A liquidated damages (www.practicallaw.com/9-383-6757) clause (sometimes called LADs or LDs) compensates the employer if the contractor completes its work late. It requires a contractor to pay the employer a pre-determined rate of damages that should be a genuine pre-estimate of the employer's loss.

  • A liquidated damages clause is a common feature of many standard form contracts (www.practicallaw.com/5-329-1310). The employer must ensure that it meets any contractual notice requirements in the contract before it claims liquidated damages from the contractor.

  • The clause may take effect as an exhaustive remedy (that is, the clause may be the employer's only remedy for the contractor's delay).

  • The employer usually deducts or sets off the liquidated damages from sums it owes to the contractor.

 

What the employer may claim against the professional consultant

On construction projects, professional consultants (www.practicallaw.com/5-382-8387) often act as the contract administrator (valuing and certifying the works) as well as undertaking a design role. Generally, on building contracts, the professional consultant administering the contract is an architect; on engineering contracts, it is usually an engineer. Occasionally, the employer may appoint a project manager or quantity surveyor to administer a contract.

Professional consultants should perform their services in accordance with the implied or express duty of care (www.practicallaw.com/6-382-8382) in their professional appointment (www.practicallaw.com/5-382-5666).

The professional consultant may be liable to the employer for failing to:

  • Design the works in accordance with the professional appointment.

  • Supervise the works in accordance with the professional appointment.

  • Ensure the contractor built the works in accordance with the building contract.

  • Certify the works properly (that is, it is alleged the professional consultant was negligent in certifying the works).

An employer claims its losses caused by a breach of contract or the negligence of a professional consultant as general (unliquidated) damages.

 

What the professional consultant may claim against the employer

  • If the employer fails to make payment, the professional consultant may claim for non-payment of fees. The parties may dispute whether a particular professional service was included in the fee agreed at the outset, or whether it was extra work.

  • The professional consultant will usually retain copyright (www.practicallaw.com/7-382-8372) in the design and its plans and drawings; the employer is typically granted a licence to use these. If the employer does not pay the professional consultant, the professional consultant may argue that the employer's use of the design is in breach of copyright.

 

What are the differences on engineering projects?

Most engineering projects are procured on different forms of contracts to construction projects (such as FIDIC (www.practicallaw.com/7-384-6521), NEC3 (www.practicallaw.com/1-383-1396), IChemE (www.practicallaw.com/0-383-5696) and IMechE (www.practicallaw.com/9-383-5729)), but many of the types of claims that could arise are the same.

Some key differences include:

  • Compensation events. Claims for time and money (or extensions of time and loss and expense) may be dealt with under a single mechanism.

  • Defects liability. The contractor's ongoing liability for defects may be limited, particularly if the employer can claim performance damages.

  • Limited variations. In contrast to construction projects, the employer may have a limited right to make changes to the project.

  • Notification requirements. These may include strict time limits and act as conditions precedent to a claim. If they are not met, the contractor may lose its right to bring a claim.

  • Performance damages. The employer may be able to claim liquidated damages for the contractor's failure to meet specified performance targets.

 

Key reading

Procurement and forms of building contract

Forms of engineering contract

Common claims in construction projects

Professional appointments


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