What Commercial Investors Need to Know

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Construction Contracts

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INTRODUCTION

Commercial investors embarking on a construction project need to ensure that their construction contract protects their interests and maximizes the chances of a successful real estate investment.

Construction contracts should be clear about the scope of work, the process for resolving defects, and the obligations of all involved parties. Whether the contract is a design/build contract or addresses only the construction portion of the project, the contract should be comprehensive, understandable, and contain the necessary clauses so investors limit risk.

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Commercial investors need to ensure a construction contract is comprehensive, that the contract shields them from the costs and consequences of unexpected defects, and that the contract is clear on the scope of the work and the building speci�cations.

Some of the di�erent considerations when drafting or signing a construction contract for the development of commercial real estate include the following:

What Commercial Investors Need to Know About Construction Contracts

Understand the type of contract and the apportion of risk it provides for.

Watch for cost escalation clauses.

Include comprehensive details about scope of work and building speci�cations.

Ensure your contract addresses responsibility for �xing defects.

Consider deadlines and liquidated damages clauses.

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1. Understand the type of contract and the apportion of risk it provides for

Many building contracts are standard contracts governed by rules set forth in the Domestic Building Contracts Act 1995. Commercial investors, however, may opt to deviate from standard rules and negotiate custom contracts.

Options for structuring contracts include a �xed price contract in which investors pay a set lump sum, or a cost plus contract in which investors agree to cover the builder's costs as well as to pay an agreed-upon margin for overheads and pro�ts.

Builders take on the risk of cost overruns in �xed price contracts but investors are at risk of builders cutting corners to preserve pro�t margins. Cost plus contracts, on the other hand, result in uncertainty for investors about �nal costs and may entice builders to drive up expenses. You may wish to deviate from these di�erent contract forms with a contract that is negotiated and drafted by your lawyers to protect your interests.

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2. Watch for cost escalation clauses

contracts, clauses may be included that make it possible for expenses to rise.

Builders and subcontractors may include cost escalation clauses allowing them to increase the price. These clauses may allow a high charge for an increase in taxes, for prime cost items, for boundary surveys, and for variations. Any provisional sums included in the contract also provides an opportunity for builders to charge unexpectedly high prices.

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objecive.

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3. Include comprehensive details about scope of work and building specifications

It is important to be clear about the type and quality of materials to be used, the work to be performed during the design and build phase, and the requirements for the finished project.

not cut corners.

4. Ensure your contract addresses responsibility for fixing defects

a builder had no duty of care for the cost of repairing defects in an apartment constructed under the terms of a contract entered into with commercial investors. The design and construct contract

defects - but this did not make the builder responsible for the costs of repairs of common property because the contract did not do enough to protect the interests of the investors.

where subsequent owners are vulnerable to a builder's lack of reasonable care in construction. Investors, on the other hand, must protect themselves in the contractual agreements they create.

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5. Consider deadlines and liquidated damages clauses

Investors on a timeline or who want to avoid lengthy construction projects may wish to build deadlines into commercial construction agreements. A liquidated damages clause can also provide insight into how much investors should be compensated for losses when builders fail to follow through on completion to speci�cation by the stated deadline.

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Get the Help From Us

Owen Hodge Lawyers will provide assistance with analyzing contract terms, with negotiating construction contracts for investors, and with ensuring that any agreement signed protects your �nancial interests.

Contact us today at 1800 770 780, before you sign a real estate investment contract, to learn how our lawyers can help you.

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1800 770 780

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