Construction projects come with competing pressures from the outset.
There is the contractual and commercial side: agreeing the scope, negotiating amendments, working through qualifications, settling payment terms and making sure everyone understands where the important risks sit.
Then there is the practical side: the programme is moving, labour and materials have been lined up and somebody wants the works started.
In an ideal world, there would always be enough time to deal properly with both. The reality is often different.
A number of the disputes we see have their roots right at the beginning of the project. The parties were still negotiating the contract, but there was pressure to get started and that is where we often hear:
“We just cracked on.”
Usually, this is with good intentions to conclude the contract, but the paperwork does not always catch up.
Months later, when something has gone wrong or money is in dispute, everybody goes back to the documents and discovers that the contract was never signed, the schedule of amendments was still being negotiated, qualifications had never been resolved or the parties had different understandings about what they had actually agreed.
At that point, what seemed like a sensible and collaborative way of getting the project moving can become expensive.
And the risk is not all one way. Contractors and subcontractors can lose protections or qualifications they thought they had secured. Employers and main contractors can equally find that provisions they expected to rely upon never formed part of the contract at all.
Can you start construction work without a signed contract?
One of the first misconceptions is that, if the formal contract was never signed, there cannot be a contract.
That is not necessarily the case.
A binding contract can arise through what the parties say, write and do even where the formal document they expected eventually to sign was never executed.
That can produce one of the most difficult questions we encounter:
Not simply “is there a contract?”, but “what exactly is the contract?”
Any dispute that starts with that question is likely to be more difficult (and therefore costly) to resolve.
The well-known Supreme Court decision in RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG [2010] UKSC 14 is a good example. The parties started work for commercial reasons while contractual negotiations continued. The contemplated final contract was never signed, leaving the Court to determine what contractual relationship had actually arisen.
Cartwright Pond Ltd v Wild [2021] EWHC 1600 (TCC) provides another useful example. The tender documents envisaged use of a RIBA form of contract, but that contract was never completed or signed. The Court concluded that the RIBA form did not form part of the parties’ agreement and instead had to identify the contract from the tender material, correspondence and other documents exchanged between them.
The practical point is that, before the parties could get to the substance of the dispute, time and cost first had to be spent working out what contract had actually been made and what terms applied. That is exactly the sort of complication that can arise when the project moves ahead before the contractual position has been properly concluded.
The result in cases like these is that the parties may well have a binding contract, but it is not necessarily the contract either of them expected eventually to sign.
What happens when the contract is still being negotiated?
In our experience, the more common problem is not that work starts from a completely blank sheet of paper, although that is not unheard of. More often, the contract is still in flux. A draft contract exists, but negotiations are ongoing. There may be a schedule of amendments passing between the parties, with commercial positions recorded against individual clauses, and a mixture of points marked as agreed, revised or still outstanding. The works then begin before that negotiation has actually been concluded.
The question becomes what the parties’ communications and conduct objectively show they actually agreed.
That can lead to difficult arguments about:
- which version of the terms applied;
- whether particular amendments had been accepted;
- whether tender qualifications formed part of the agreement;
- whether starting or continuing work amounted to acceptance of particular terms; and
- which risks remained with each party.
This is where the desire to get the project moving can begin to have unintended consequences.
A contractor may discover that an exclusion or qualification it thought had been secured was never incorporated. An employer or main contractor may discover that a protection it had included in its proposed amendments was never agreed.
Neither party should assume that the contract they were hoping eventually to sign is necessarily the contract they actually made.
Scope: what did the price actually include?
Scope is another area where getting started quickly can store up problems.
A contractor or subcontractor may have priced the works using a combination of drawings, specifications, tender clarifications and qualifications. Meanwhile, the design may still be developing and the contractual documents are still being assembled.
That can lead to difficulties later when the parties disagree about whether particular work was included in the original price or genuinely additional.
Before you can sensibly decide whether something is a variation, you first need to know what the original contractual scope was.
If the parties cannot agree that baseline, the variation dispute immediately becomes more complicated.
That is why it is important to identify which drawings, specifications, qualifications and other documents actually define the works, particularly where different versions have been circulating during negotiations.
Payment: the risk can fall on the paying party too
Payment is a good example of why this issue is not simply a contractor or subcontractor problem.
The parties may have spent weeks negotiating a detailed payment mechanism, including application dates, due dates, final dates for payment and notice provisions.
But if the contract negotiations are never concluded, there may later be an argument about whether those payment terms were actually agreed at all.
For the contractor or subcontractor, that may create uncertainty about how and when to apply for payment and how the valuation process operates.
For the employer or main contractor, there can be an equally significant consequence.
They may have been seeking relatively long bespoke payment terms, only to discover that those provisions never became part of the contract and that the statutory payment regime applies instead.
For qualifying construction contracts, the Housing Grants, Construction and Regeneration Act 1996 requires an adequate mechanism for determining what becomes due and when, together with a final date for payment. Where the agreement does not contain compliant provisions, relevant parts of the Scheme for Construction Contracts can apply.
That can produce a payment timetable very different from the one a party thought it was negotiating.
So this is not simply about making sure the party carrying out the work knows when to submit an application. Both sides need to know what payment machinery actually governs the project.
Time can become just as complicated
The same problem arises with programme and delay.
What completion date has actually been agreed? What milestones are binding? Which events give rise to additional time? What delay risks have been accepted? Do the proposed liquidated damages provisions form part of the contract?
For the contractor or subcontractor, uncertainty can affect extensions of time, delay exposure and associated cost recovery.
For the employer or main contractor, it can affect the ability to enforce the completion obligations and remedies it thought had been agreed.
In more serious cases, problems with the contractual time provisions can result in arguments that time is “at large”. Broadly, that can arise where there is no effective contractual completion date or where the contractual machinery cannot properly deal with delay for which the employer is responsible.
The consequences can be significant. Instead of a clear contractual completion date and liquidated damages mechanism, the parties may find themselves arguing about a reasonable time for completion and general damages.
Again, both sides lose certainty.
What about a Letter of Intent?
Sometimes work genuinely does need to begin before the full contract can be completed.
A Letter of Intent can provide a sensible and controlled way of dealing with that position.
The key is that it should be treated as a temporary arrangement, not allowed to become the project contract by default.
A properly prepared Letter of Intent should make clear what work is authorised, the financial limit, how long the authority lasts and what terms govern the work being undertaken.
Problems arise when a Letter of Intent intended to cover a few weeks quietly continues while the project gathers pace.
The original cap is exceeded, considerably more work is undertaken than anticipated and everyone remains focused on delivery rather than returning to the contractual negotiations.
By the time the position is revisited, a substantial part of the project may already have been completed.
We have considered Letters of Intent separately in more detail, but the practical point is simple: if a temporary contractual arrangement has been put in place, somebody needs to keep track of it.
So what should you do if the job needs to start?
The commercial answer cannot always be:
“Do nothing until every last contractual point has been agreed.”
That may simply not be realistic.
The better approach is to understand what remains outstanding and make conscious decisions about the risk of proceeding.
If the full contract cannot immediately be completed, the parties should at least be clear about the important points:
- Contract documents: which documents and versions are currently intended to govern?
- Outstanding negotiations: what contractual issues are still unresolved?
- Scope: what exactly is included and what important exclusions or qualifications remain?
- Payment: what payment mechanism and timetable are being operated?
- Time: what commencement, completion and milestone requirements apply?
- Risk: are there important design, delay, site or liability provisions which are still being negotiated?
- Temporary arrangements: if there is a Letter of Intent, what does it authorise and when does it expire?
Just as importantly, somebody needs to take responsibility for actually finishing the contractual process.
Otherwise, it is very easy for the first few busy weeks of a project to become several months, with the contract slowly slipping further down everybody’s priority list.
Getting the contract right is part of delivering the project
There will always be tension in construction between getting the paperwork finished and getting the job built.
Many of the disputes we deal with would have been considerably easier, and sometimes avoided entirely, if relatively small uncertainties at the beginning of the project had been resolved before they became commercially important.
When things are going well, the differences between the parties’ understanding of the contract may not matter very much.
They tend to matter when there is delay, a variation account to agree, a substantial payment outstanding or one party wants to rely upon a contractual protection that the other says was never agreed.
How CCC can help
Contract & Construction Consultants (CCC) advises employers, contractors, subcontractors and consultants on construction contracts and commercial project management.
We regularly review contracts and schedules of amendments during negotiations, helping clients identify the provisions which carry the greatest commercial risk and distinguish between points which genuinely need to be resolved before work begins and those which can be managed without unnecessarily delaying the project.
Where work needs to start while negotiations are continuing, we can also advise on Letters of Intent and other interim arrangements to help reduce uncertainty.
And where the project has already started without the contractual position ever being properly concluded, we can review the tender documents, contractual drafts, amendment schedules and correspondence to help establish what was actually agreed and what practical steps should be taken before the uncertainty turns into a dispute.
Contact us for a free initial consultation.
