How to manage commercial construction contracts on farms

Construction on farms is covered by a raft of legislation, not only on health and safety and work quality standards, but in the case of substantial contracts, payment obligations of which many may not be aware.

Some of these relate to payment and if the proper procedures are not followed, it can lead to large amounts of money having to be paid out unexpectedly.  

“The bigger the project and the more formal the contractor, the more sophisticated (and potentially one-sided) the contract documents will be,” says Alastair Govier, a commercial litigation and dispute resolution partner with law firm Thrings.

See also: Pitfalls of farm building projects

“Often, with smaller projects and contractors, things are less formal, which can be fine if things go right, but increases the risk if things go wrong, which they often do in construction.”

Delay to completion of the works is a frequent cause of additional cost, and can have knock on effects to the farm’s operations.

Many issues can delay construction work, including the weather, delivery or material availability problems, as well as labour matters. 

Variations of the works is also a common cause of additional cost and delay. 

“The chief documents are the construction contract, the design drawings and specification, a quote against that specification and an agreed programme of works with an agreed completion date.

“Then when there is a delay or you have to vary it (which is the case in most construction work of any size) there is a formal agreed process to be followed and you know what is an additional cost and who is responsible,” says Alastair.

Most larger projects work on staged payments, either at monthly intervals or at naturally appropriate points such as completion of key milestones, such as of the groundworks, foundations, steelwork, cladding and fitting out the inside of a building.   

Default staged payments 

The payment terms for any job should be set out in the contract. However, for construction contracts over 45 days, if they are not or they are inadequate, the Housing Grants, Construction and Regeneration Act 1996 (as amended) will imply a default staged payment mechanism, known as the “Scheme”.

This is commonly referred to as the Construction Act and not only provides a default payment mechanism, with strict deadlines for payment of the contractor of each staged payment, but also provides contractors with a statutory right to suspend works for non-payment, and the parties with an automatic right to adjudication of a dispute under any contract that qualifies as a construction contract under it, including demolition.

The act came into being because, until its inception, construction disputes over issues such as payment and defective works tended to be lengthy, often causing cashflow problems for contractors and sometimes putting them out of business as a result of the customer withholding payment, says Alastair.

“It has been in force for 30 years now, but it is surprising how it still catches out both clients and contractors, including the farmer who is unaware until they face a threat of adjudication from a contractor.”

Rapid process

Adjudication is a rapid dispute determination process, starting and finishing within 28 days from a notice of adjudication being served by either party.

It involves the appointment of a construction specialist as adjudicator, often a person qualified through the Royal Institution of Chartered Surveyors (Rics) or a suitably qualified engineer who decides the dispute.

An adjudication decision is enforceable through the courts. 

Withholding payment of a contractor without adhering to the strict process and time-limits set out in the contract or the Scheme in a construction dispute is a classic mistake, says Alastair, and can lead to the instigation of an adjudication by an aggrieved contractor (often referred to as a “smash and grab adjudication”).

Adjudication process

Construction adjudication begins with either the employer or the contractor issuing a notice of adjudication because a dispute over issues such as what payment is due, or the quality of the work, has not been resolved.

The adjudicator is then appointed within a week of service of the notice. The claiming party then has to submit its written claim and all the evidence (including witness and expert evidence) on which it relies within seven days; the defending party then has (usually) seven days to serve its defence and evidence.

Sometimes the adjudicator will allow the claimant a right of reply – the adjudicator will then issue their binding decision within 28 days of the initial notice of adjudication.  

The decision is final and binding on the parties, must be complied with and can be enforced through the courts.

In certain circumstances, the issue in dispute determined by the decision may be later reviewed afresh by a court or an arbitrator if it remains in dispute.

This is why, in adjudication of interim payment disputes, it is known as “pay now, dispute later”.

It can be an expensive process, warns Alastair, and a party’s legal costs are usually not recoverable by the winner from the loser. 

Insurance

Farming businesses are generally insured only for the business of farming and as a landowner/occupier, including a compulsory element of public and employment liability, so any proposed construction work should be notified to the farm’s insurer or broker.

Once construction begins, insurance of the site should be the responsibility of the contractor until it is handed back to the farm on completion of the project.

The construction contract should set out the contractor’s insurance obligations. 

The building contractor should be required to have a contractors’ all risk policy, in addition to compulsory public and employer’s liability insurance.

A designer, surveyor or other professional consultant should have professional indemnity insurance.

Alastair advises that employers of contractors should have sight of the contractor’s insurance, which should ideally be on an all-risks basis.

He also suggests getting experienced legal input in the drafting of the construction contract, as the contractor will often present its own terms which are often drafted in its interests.

Employing a contract manager is usually advisable, someone experienced in navigating contracts, works and dealing with contractors and the staged payment application process.

Payment for this service is typically on a percentage of the project cost, a fixed fee, or on a time spent basis.

Health and safety

Health and safety must be managed throughout all stages of a building project, from conception, design and planning through to site work and subsequent maintenance and repair of the structure.

The law on this applies to all work building projects and refurbishments, but not to an individual’s domestic dwelling such as a farmhouse. However, it does apply to refurbishment of any accommodation provided to employees.

All building work involves risk and proper controls must be in place, points out the Health and Safety Executive in its guidance on building work on farms.

The person employing the building contractor has overall responsibility for the health and safety of all those on site, and construction brings added risks and obligations.

“Working at height is a particular issue on farms, especially where this involves old roofs which is high risk. Ensure you have done a risk review and are taking steps to mitigate the risks.

Also, if a site is not clearly delineated, this can lead to problems.”