Contracts in Construction

Contracts in Construction

A contract is a legally binding agreement between two or more parties that creates an obligation to do or not to do a particular thing. In construction, it defines the responsibilities, risks, and relationships between the owner, contractor, and other stakeholders.

Essential Requisites of a Contract

Under the Civil Code of the Philippines, a contract must have the following essential requisites:

1. Consent of the Contracting Parties: The meeting of minds upon the object and the cause.
2. Object Certain: The subject matter of the contract (e.g., the construction of a building).
3. Cause of the Obligation: The reason why the contract is entered into (e.g., payment for services, delivery of the structure).

Types of Construction Contracts

Construction contracts are often classified by how the price is determined and how risks are allocated.

1. Lump Sum Contract

• Definition: The contractor agrees to complete the project for a single, fixed price.
• Risk: High risk for the contractor if costs escalate or unforeseen conditions arise. Low risk for the owner regarding budget certainty.
• Best Use: When the scope of work is clearly defined and unlikely to change.

2. Unit Price Contract

• Definition: The contract is based on estimated quantities of items of work and their unit prices.
• Payment: Based on actual quantities measured in the field.
• Risk: Owner bears the risk of quantity variation; Contractor bears the risk of unit price variation.
• Best Use: When quantities cannot be accurately determined before bidding (e.g., earthworks, road construction).

3. Cost Plus Contract

• Definition: The owner reimburses the contractor for actual costs plus a fee (profit).
• Variations:
  • Cost Plus Fixed Fee
  • Cost Plus Percentage of Cost
  • Cost Plus with Guaranteed Maximum Price (GMP)
• Risk: Owner bears the risk of cost overruns.
• Best Use: When the scope is undefined or speed is critical (fast-track projects).

Contract Documents

The contract is not just a single document but a collection of documents that together define the project.

Validity and Voidability

Not all agreements are valid contracts.

• Valid Contract: Meets all legal requirements.
• Void Contract: Lacks one or more essential elements or is contrary to law, morals, good customs, public order, or public policy. (e.g., A contract to build an illegal gambling den).
• Voidable Contract: Valid until annulled. Usually due to vitiated consent (e.g., mistake, violence, intimidation, undue influence, fraud).
• Unenforceable Contract: Cannot be enforced in court unless ratified (e.g., oral contracts for sale of land, contracts unauthorized by a party).

Breach of Contract

A breach occurs when a party fails to perform their obligations. Remedies include:

• Rescission: Cancellation of the contract.
• Damages: Monetary compensation for losses.
• Specific Performance: Court order to fulfill the obligation.