UK: Protecting Your Investment - Having Proper Construction Contracts can Actually Save You Money

Last Updated: 26 March 2010
Article by Ian McCann


When times are hard, as they have been for the last few years, we find that every penny counts. Unnecessary luxuries are ditched and what limited money we have is spent on essentials. The principles that govern our personal lives also extend to our business deals and unfortunately in the last few years one of the items that has often deemed a 'luxury' when dealing with developments has been a formal construction package.

What I mean by this is a package containing a building contract, consultants' appointments, collateral warranties, bonds and guarantees all of which have been completed and executed by the parties. In recent years these have taken second place behind getting 'the deal' done but now investors are more insistent upon proper risk allocation and protection for any risk that they are taking on board. If investors are being asked to take on construction risk then they are expecting to be provided with a full and proper construction package that allows them to recover any losses they incur from the people who designed and built the development.

If they can't get that from the building team they will look to the original developer to provide them with that comfort – either through exclusions of liabilities, indemnities, project specific insurance, a reduction in price, or all of these.

Unfortunately what we are seeing more and more is that this area was neglected when putting the deal together and the packages being offered now do not provide the level of comfort investors expect in return for the risks they are being asked to adopt.

This is having a negative impact – reducing sale prices, putting exclusions for latent and inherent defects in leases or making the projects unfundable. Saving money in the short term is costing considerably more when you come to realise your investment.

The point behind entering into formal contracts is to provide certainty, all parties will know what they are expected to do: when, how and why. The contracts set clear contractual obligations on all the parties to them, thereby avoiding ambiguity and the need for third party clarification (and the extra cost and time this will incur).

Due Diligence and Future Marketability of a Development

Construction contracts will contain certain, basic pieces of information that are fundamental requirements for any future due diligence process.

Any purchaser, funder or tenant of a commercial property will need to see: -

  1. A copy of the Completed Building Contract;
  2. Copies of the professional team appointments; and
  3. Copies of the draft contractor, sub-contractor and professional

In the case of a purchaser or tenant, these parties will be directly in the firing line if things go wrong further down the line, particularly for a tenant who has taken a full repairing and insuring lease. They will need to be sure that if they suffer any kind of loss as a result of a defect in the design and/or construction of the development then they can pass it down the line to the contractor and/or the professionals through the collateral warranties.

Banks also take a keen interest in the documents as they will typically be investing a large amount of money in them. They will want to be sure that they are taking on minimum exposure. They will also need to be comfortable with the underlying contracts in case they have to "step in" to the shoes of the Employer at any time.


Formal contracts provide a record of risk allocation. It will not only will be clear who is taking what on board but it will also allow the parties to price more accurately for the risk that they are being asked to take on board.

Costs can be clearly stated and there will be certainty and control of the overall budget.

They will also specify the quality of finish that is required. There will be certainty about what the client wants and how that is to be provided.
Programming can be clearly stated, such as when the contractor will start, when he is are to finish and the circumstances in which this can be amended are clearly defined.

Collateral Warranties

In a normal commercial transaction, the building contracts and appointments are entered into between the developer and the professional team. In doing so the developer has a direct contractual link with the team. The developer will then usually sell or lease the completed project but as the purchaser and/or tenant are not signatories to the original contracts they have no direct contractual link with the team. This will make it more difficult for them to recover any loss from the team or to ensure that they make good any defects.

The way to get round this is to obtain a collateral warranty from each member of the team to the third party. What this does is establish a direct contractual link that will allow the third party to pursue the granter of the warranty directly.

It is collateral to the main contract so it is imperative that the underlying contract is acceptable and does not contain any exclusions or limitations on liability. These will apply to the collateral warranty EVEN if they are not specifically stated in the warranty.

Standard Forms?

These are available but it is not sufficient to simply pick up the standard forms of building contracts, appointments and collateral warranties "off the shelf" and sign up to these. You must bear in mind that these documents have been drafted up by the professional's own industry and are there to protect their members.

The standard forms do not fully address current market needs and still fall short of what the market expects. The use of these in their unamended form continues to have a detrimental effect when it comes to maximising the potential value of your investment due to the number of exclusions and limitations on liability contained in them.

Most funders will generally not accept unamended standard forms as they present the funder with an unacceptable risk profile.

Making Money

It may seem daunting, boring and time consuming to have to deal with the contracts and I appreciate that it is in no way as sexy as looking at plans and designs, but nonetheless it is every bit as important as a means to making sure you get maximum benefit (i.e. profit) from any development.

Let's put it this way – you've worked all your life, you've scrimped, saved and borrowed as much money as you can and you've gone out to buy a top of the range Maserati.

It's shining, gleaming, fast and the envy of everyone. It's what you've always wanted and people are clamouring up to look at it and buy it. You don't then decide to save a few quid at the last minute by popping down to Joe Bloggs Tyres to put some knock-off Pirellis on.

Sure they look like tyres, they're black and round, they may even have tread on them, but you can be very sure that at some time you'll be speeding down the motorway and they'll burst and you'll end up with a gleaming wreck. Then you'll really end up putting your hand in your pocket all for the sake of saving a bit of money at the start.

What you need to do is look at the broader picture, think beyond simply getting things up and running and think also about what will be needed further down the line.

Spend a bit of time, and yes money, at the start of the project getting the construction package right and in doing so you will save yourself time and money and protect your long-term profit in the end.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions