Beware pitfalls of oral agreements for building work

24 January 2018 | Web Article Number: ME20188288

Construction, Civil & Structural Engineering
Consulting Engineers & Project Management
Beware pitfalls of oral agreements for building work
A signed contract is always preferable to oral agreements when it comes to building or any other kind of project, says the JBCC

ORAL agreements for building work are, theoretically, legal but frequently cause enormous problems, warns Uwe Putlitz, CEO of the Joint Building Contracts Committee (JBCC).

Pulitz said an oral agreement between employer and builder to undertake certain work based on discussions between the two parties - perhaps a drawing and/or a job description - is acceptable, providing nothing goes wrong.

“When matters do go wrong, the parties could conveniently forget what was agreed upon. The employer could maintain that the builder is not getting on with the job, the product is not as envisoned by the employer, and the builder is overcharging. On the other hand, the builder could say the employer is continuousy making changes but does not want to pay for them or allow more time, and the employer has not paid for months.”

Standard Form of Building Contracts (SFC) have been developed to fairly balance the contractual risk, obligations and rights between the employer and the contractor. The employer’s risk is reduced when dealing with a reputable builder who is a member of the Master Builders Association because the MBA would protect the public by blacklisting a non-performing contractor.

“The parties involved in a building contract must comply with the laws of the country – including adhering to the National Building Regulations and the Construction Regulations, obtaining statutory approvals for all building work, and registering domestic projects with the National Home Builders Registration Council,” Pulitz said.

“The SFC generally defines the obligations of the parties – what the contractor must do, how to deal with unforeseen events or changes after the award of a tender, and how the builder will be compensated for additional time and/or costs. The employer’s obligations, simplistically, are to define the scope of work and to provide a specification of the quality of work to be provided as part of the construction information (approved by the local authority) for the builder to work from, and also to make payments at regular intervals.”

Putlitz said the building works must be insured – preferably by the employer – with the owner as the beneficiary in the event of a claim. The insurers must be given all information, including:

  • New building or alterations;
  • Occupation during construction;
  • Ground conditions; and
  • Risks to adjoing properties.

“The builder must carry statutory insurances for staff and equipment. The professionals – architects, engineers, quantity surveyors, health and safety consultants, etc - must all carry professional indemnity insurance in addition to insurances for the business risks,” Pulitz cautioned.

Depending on the the SFC chosen, the employer may have to appoint a principal agent to administer the contract. “This is an additional cost but it may be cheap when serious problems occur in the contractual relationship that could have been prevented with a little foresight and implementation of the SFC.”

The SFC describes procedures to be followed to deal with claims from the builder for additional time and/or money. The principal agent will deal with such issues in terms of the agreement. The SFC also includes a dispute resolution procedures such as mediation, adjudication or arbitration. “By following the correct contractual procedures, claims can be kept to a minimum and most disputes can be avoided – providing the parties are prepared to cooperate,” Putlitz said.

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