Construction projects: the legal structure: a quick guide

A quick guide to the legal aspects of a construction or engineering project, useful for first-time employers or users of construction services, who have not built a project before. The note covers a number of issues, including the parties to the contract, procurement, insurance and regulation. It also sets out some of things that can go wrong with a project, like defects or delayed completion.

This is one of a series of quick guides, see Quick guides.

What is the legal structure of a construction and engineering project?

The key legal pillars of a construction project are: the parties, procurement, contracts, insurance and legislation and regulation.

The parties

• The employer (also known as the client, the developer or the purchaser) is the person for whose benefit the work is carried out.
• The contractor (also known as a constructor, builder or supplier) builds the project and may also carry out design.
• Professional consultants such as architects, engineers, project managers or quantity surveyors design and manage the project.
• Sub-contractors, employed by the contractor, usually carry out the majority of the physical site works (which can include design).

(See Practice note, Parties to a construction contract (www.practicallaw.com/5-386-5860).)

Procurement

"Procurement" in a construction project refers to the process of the purchase of goods and services from conception to completion. It is a vital part of the overall construction process (see Practice note, Procurement: an overview of common construction procurement methods (www.practicallaw.com/9-329-1308)). Historically, the responsibility for the design of a project was split from the responsibility for its construction. Today, "design and build" contracts, where the contractor both designs and constructs the project, are also common (see Practice note, Procurement route: design and build procurement (www.practicallaw.com/6-376-3535)).

Contracts

Professional institutions and trade bodies produce standard form construction contracts (see Practice note, Construction standard form contracts: what are they and where can I buy a copy? (www.practicallaw.com/3-502-2528)).

Employers often ask for changes to standard form building contracts, particularly as some standard form contracts favour one of the parties to that contract. (For example, see Standard document, Schedule of amendments to JCT Standard Building Contract, 2011 edition (www.practicallaw.com/3-507-1222).) Many employers use bespoke professional appointment contracts to appoint professional consultants. (For example, see Standard document, Professional appointment (www.practicallaw.com/5-382-5666).)

A typical construction project also uses bonds (www.practicallaw.com/0-107-6503), parent company guarantees, collateral warranties (www.practicallaw.com/1-107-5937) (or schedules of third party rights), deeds of assignment and deeds of novation. (See Key reading: Contracts.)

Insurance

Precise and detailed insurance arrangements are a vital component of a construction project. Employers must understand any insurance requirements imposed on them. Often, an employer will jointly insure the construction of a building in its own name and in those of its contractors and sub-contractors. (See Practice note, Insurance in construction and engineering projects (www.practicallaw.com/3-383-2074).)

Legislation and regulation

• Health and safety legislation applies to construction projects (in particular, the Construction (Design and Management) Regulations 2007: see Practice note, Construction (Design and Management) Regulations 2007 (www.practicallaw.com/0-207-2306)). These impose detailed obligations on the employer (see Checklist, CDM 2007: Checklist for clients (www.practicallaw.com/1-207-5007)).
• Part II of the Housing Grants, Construction and Regeneration Act 1996 (Construction Act 1996) regulates payment under construction contracts. You may negotiate the details of your payment arrangements but you cannot opt out of these compulsory payment rules.
• Projects must comply with the Building Regulations (see Practice note, Building Regulations: an overview (www.practicallaw.com/0-381-0634)).
• The Construction Industry Scheme (CIS) sets out construction project-specific tax rules (see Practice note, Construction Industry Scheme (www.practicallaw.com/8-383-4754)).
• Public bodies (and those exercising public functions, such as utilities) must follow EU public procurement rules (see Practice note, Competition regime: Public procurement (www.practicallaw.com/1-107-3716)).

As a non-specialist, how do I run a construction project?

• Get good advice early. Obtain recommendations for a professional adviser, such as an architect or a project manager, from others who have recently procured a construction project.
• Give the project time:
  • it is cheaper and more effective to devote more of your time early in the project, rather than make expensive changes during construction;
  • alternatively, appoint someone else to act on your behalf. Give them authority to make everyday decisions.
• Accept some compromise. You may have to make a trade-off between the time to complete the project, additional (or reduced) cost to complete and the quality of the completed project.

When might I need a specialist construction lawyer?

While any construction project will benefit from specialist legal advice, the cost of that advice may be disproportionate on a small project. Consider instructing a construction lawyer if you have:

• A potentially simple project that will be repeated many times (such as a project to re-fit a chain of shops).
• A one-off, higher-cost project (such as entirely new commercial premises, any significant refurbishment, or any engineering project).

If you need a specialist construction lawyer, consult one early.

What can go wrong?

Disputes on construction projects usually relate to:

• Delayed completion (and disputes about whether the project is complete).
• Additional costs suffered by the employer, the contractor, the professional consultants, or all three.
• Dissatisfaction with the performance of a professional consultant.
• Defects in the project, whether patent (obvious) or latent (hidden and discovered later).
• Variations (changes made to the project after the design is finalised or during construction).

(See Key reading, Common claims in construction projects.)

Resolving construction disputes

Construction disputes may be referred to adjudication by either party "at any time". Adjudication is the quick fire statutory construction dispute resolution mechanism (see Quick guide, Adjudication (www.practicallaw.com/8-381-7429)). It is not compulsory to refer a dispute to adjudication, but one party cannot stop the other party from doing so. The parties cannot opt out of the statutory adjudication rules.

If adjudication does not settle the dispute, the parties may use any method of commercial dispute resolution, including arbitration (common on international construction disputes) or litigation.

Construction litigation in England and Wales takes place before the Technology and Construction Court (TCC), a specialist division of the High Court (see Practice note, Technology and Construction Court (www.practicallaw.com/0-382-9940)). The parties must comply with the Pre-Action Protocol for Construction and Engineering Disputes before they start court proceedings in a construction dispute (see Practice note, Complying with the Pre-Action Protocol for Construction and Engineering Disputes (www.practicallaw.com/6-382-4020)).

Construction disputes can be expensive because they often involve detailed factual analysis and require expert opinion to guide the court.