Contract First, Construction Second: The Rule Every Contractor Should Follow

"Read the contract—yes, even if it’s 200 pages long."

It’s the one piece of advice I find myself repeating to every client I work with. And I get it—when you’re knee-deep in tenders, site meetings, and scheduling chaos, flipping through hundreds of pages of legal jargon feels like the last thing you have time for.

But here’s the hard truth I’ve learned from years in the trenches as a dispute resolution expert in the construction industry: skipping the fine print can cost you far more time, money, and peace of mind than you bargained for. I’ve seen it play out too often—contractors blindsided by clauses they didn’t know they’d agreed to, disputes that drag on long after the physical work is completed.

In this article, I’ll share the real stories behind those cautionary tales, and why I always say: the smartest contractors aren’t just good with their physical works—they’re sharp with their paper works, in this case, contracts, too.

The Importance of a Thorough Contract Review

Contracts serve as the foundation of any construction project. They outline obligations, responsibilities, payment schedules, and timelines for all parties involved. Failing to grasp these essential details can lead to misunderstandings and conflicts.

For instance, imagine a scenario where a contractor misses a clause regarding completion dates. This oversight could cause a delay in project handover, leading to penalties and a loss in client trust. In my recent case, my client faced such a situation when he overlooked a simple yet crucial detail regarding timeline adjustments, which resulted in a three-month hold-up on project delivery and a significant financial penalty.

Common Contract Pitfalls to Watch For

While each contract is unique, several common issues frequently catch contractors off guard. Here are key points to watch closely:

Scope of Work

The scope of work clearly states what to be delivered. If this section is vague, conflicts can arise over what services are included or excluded. For example, if painting is not explicitly mentioned but is assumed to be part of the job, disagreements could lead to disputes.

To safeguard against this, be clear about additional services and specify exclusions. In one of my recent case, a lack of clarity around landscaping led to an unexpected $100,000 expense that wasn’t budgeted for.

Payment Terms

It's crucial to understand the timing and method of your payments. Are they tied to project milestones, given as a lump sum upon completion, or distributed as progress payments? How do you determine what constitutes a milestone, completion, or progress? Is the measurement based on physical work, or is it assessed based on tasks completed? What's the distinction? Work might include physical tasks, paperwork, and testing, all depending on the contract terms. Or worse, it might rely on the completion of tasks by others.

Dispute Resolution Process

Prevent lengthy conflicts by understanding in advance how disputes will be resolved. Look for clauses that refer to mediation, adjudication, or arbitration. For example, contracts that outline a mediation timeline can stop disagreements from turning into expensive and lengthy court cases.

When facing disputes, most people's initial reaction is to contact their lawyers. However, in the New Zealand construction industry, where cash flow is crucial for all parties, alternative dispute resolution is often more effective than litigation. This is not only because of its shorter duration and lower cost but also because it involves professionals with a construction background who can assist you efficiently and effectively.

Time Invested in Reading Can Save Time in the Long Run

Does this sound familiar: "I don't have time to read that 200-page contract," or "I've been working with that company for a long time, so it'll be fine if I don't read the contract"? I hate to say that, but such thinking can result in considerable delays when disputes occur.

Spending just a few hours, or at most a few days, to carefully examine your contract can save you numerous hours in resolving disputes. Many clients of mine have expressed regret over hastily reviewing a contract, only to later find that unclear payment terms left them financially vulnerable during a crucial period. By taking the time to read thoroughly or hiring a contract professional, they could have renegotiated more advantageous terms.

The Detrimental Effects of Not Understanding Your Contract

Misunderstandings can trigger a cascade of negative outcomes. Some serious consequences I have witnessed include:

Financial Implications

Legal fees from disputes can soar quickly, sometimes matching or exceeding the contract's total value. In one instance, a disagreement over a $50,000 payment led to over $150,000 in legal fees—money that could have been invested in new equipment or improvement projects.

Project Delays

Disputes can disrupt project timelines. If you are distracted by disagreements, your workers may be left idle, resulting in significant losses. A project I oversaw was delayed by two months due to a payment dispute, leading to an overall cost increase of 20%—both in labor and potential penalties.

Damage to Reputation

In the construction sector, your reputation is everything. Unresolved disputes can harm your standing with clients and subcontractors alike. Potential clients may hesitate to hire a contractor with a history of conflicts, drastically limiting future opportunities.

Final Thoughts

In the construction industry, where time is of the essence, reading your contracts might initially appear to be a "waste" of time. However, I assure you, this is time well spent. It is not only beneficial but essential. Understanding your agreements can help you prevent disputes that could extend beyond the duration of your projects.

Make it a habit to read and ask questions whenever necessary. A clear understanding of your contract is your best tool for mitigating disputes and the headaches they often bring.