Contract checks for construction companies

Contract checks for a construction company mean confirming that, during and after a project, you do everything the contract allows and requires you to do: recover price increases under the agreed clause, settle provisional sums with the correct mark-up, invoice stage payments at the agreed moment, record variations through the agreed procedure and respond within the deadlines the contract sets. The contract holds the rights. Contract checks make sure you actually exercise them.

This is different from a legal review before signing. That is about whether you should sign a contract at all. Contract checks are about what you do with a signed contract afterwards, and that is exactly where a lot of money is left on the table in construction.

Why rights on paper do not turn into money by themselves

A building contract is read carefully at tender or award stage, by the estimator, the directors and sometimes a lawyer. Then it goes into the project folder. The team delivering the project works from the drawings, the specification and the programme. The contract itself is only opened again when there is a dispute.

Between those two moments, things happen that the contract governs but that nobody tests against the contract:

• Material prices rise, and the contract has a price adjustment clause that nobody triggers.
• A provisional sum is exceeded, and the mark-up on the excess is forgotten at settlement.
• The client pays later than the payment terms allow, and the statutory or contractual late-payment interest is never claimed.
• Variations are carried out without following the procedure the contract prescribes, which weakens your claim.
• The contract sets a deadline for notifying circumstances that increase cost, and that deadline passes unnoticed.

None of these is a flaw in the contract. They are all missed opportunities to apply it. Together they make up a large part of revenue leakage in construction.

Which contract clauses are worth money?

Not every clause in a contract matters equally for revenue control. These six do.

Price adjustment and indexation

Does the contract say that labour and material costs are adjusted according to an index or a fixed formula? Then someone needs to know which index, from which date, over which part of the contract sum, and how often. On long-running projects the amounts are large. If the contract says nothing, that is a finding too: you carry the price risk yourself, and that belongs in the estimate for the next project. More on this mechanism in revenue leakage from missed price indexation.

Provisional sums

Which amounts are provisional sums, what do they cover, and with what mark-up may the excess be charged? Provisional sums are one of the few places where the contract explicitly says the final price is still open. If you do not actively settle them, you leave that room unused.

Variations and omissions

What procedure does the contract prescribe? Must an instruction be in writing? Who may give it? Is there a deadline for submitting a price? Knowing this procedure is the difference between a variation claim that holds and one that fails.

Stage payment schedule

At which moments may you invoice, and for how much? Is that tied to milestones, to a percentage of completion, or to fixed dates? If you do not put the payment schedule next to the programme, you invoice late.

Payment terms and interest

How many days does the client have to pay? What happens if payment is late? Interest on late payment is a right that is almost never exercised, often for fear of damaging the relationship. That is a choice, but then make it deliberately and per client, not by forgetting. The exact entitlement depends on the contract and on the rules in your jurisdiction, so check both.

Notification deadlines

Many contracts require you to notify circumstances that lead to extra cost within a set period. Miss that deadline and your claim may lapse or weaken. This is the clause that is missed most often, because the site manager does not know it exists.

The contract card: one sheet per project

The simplest and most effective measure is a contract card. At the start of every project, someone who has read the contract summarises the six clauses above on a single sheet. Not a legal analysis, but a working document:

The amounts and deadlines in this table are an example. They differ per contract, which is exactly why the card has to be made per project. The card goes to the project manager, the site manager and the finance team. Each then knows their part.

How do you check the contract during the project?

A contract card only works if someone uses it. So plan three fixed moments.

1. At the start. The card is drawn up and discussed at the kick-off meeting. That is where the site manager hears which notification deadlines apply.
2. Monthly. The finance team goes through the card alongside invoicing. Has a stage been invoiced that the milestones already allowed? Was a price adjustment due? Have notifications been made? This ties in with the monthly invoice checks for construction companies.
3. At the final account. Every point on the card is ticked off. Provisional sums settled, price adjustment complete, all variations included, all stages invoiced, any interest assessed.

Worked example

Worked example: suppose a contractor has a EUR 4 million project running for eighteen months. The contract allows material costs to be adjusted by an index, over the materials portion of the contract sum, which is EUR 1.6 million. Over the life of the project the index rises by an average of 4 percent relative to the base date.

If the adjustment is applied in full to the material used after the base date, which is roughly the whole materials portion, the amount is around EUR 64,000. If the adjustment is not applied, that amount comes straight out of the margin. On a EUR 4 million project with a budgeted margin of, say, 5 percent, or EUR 200,000, that is almost a third of the profit.

That is one clause on one project. The real amount depends on the formula in your contract, the base date, the index and how material use is spread over the project. But the order of magnitude shows why contract checks are not an administrative formality.

Where does it go wrong?

The contract sits with the directors, not with the project. The people delivering the project do not know what is in it. The fix: the contract card.

Everyone thinks someone else is doing it. The project manager thinks finance handles price adjustment. Finance thinks the project manager will flag it. The fix: the card names who, line by line.

Standard conditions are treated as standard. Contracts based on standard forms or industry conditions often go unread because everyone thinks they know them. But the amendments and deviations in the specification or the agreement differ per project, and that is where the difference lies.

Fear for the relationship. Price adjustments and interest are not claimed because the client is a regular. Sometimes that is the right call. But it should be a decision by the directors, per client, with the amount in front of them. Not something that happens quietly because nobody picks it up.

From checking to monitoring

The contract card and the monthly check work for a construction company with a limited number of live projects. With more projects, or with maintenance and framework contracts that run for years, it becomes hard to monitor every clause by hand. Then it helps to have a system that records the contract terms and sets them next to invoicing, so a missing adjustment shows up on its own. What that looks like in construction is covered in Revenue Intelligence for construction companies. The general principle for any type of contract is in how do you check that contracts are billed correctly.

Frequently asked questions

Is a contract check the same as a legal review?

No. A legal review assesses beforehand whether a contract is acceptable. A contract check monitors during delivery whether you actually apply the rights and obligations in the contract. The first is done by a lawyer, the second by the project administration.

Which clause is worth the most?

That varies by company. On long-running projects in a period of rising prices it is often price adjustment. On projects with many changes it is the variation procedure. With clients who pay slowly it is the payment schedule. The contract card shows per project where it lies.

What if the contract has no price adjustment clause?

Then you carry the price risk yourself. That is not a leak in delivery, but it is a finding for estimating: the risk belongs in the price of the next project, or the next negotiation should be about a clause.

Does the site manager need to know the contract?

Not the whole contract, but the variation procedure and the notification deadlines, yes. Those are the two clauses that are won or lost on site.

How long does a contract card take?

For someone who knows the contract, one to two hours per project. That is little compared with what a missed price adjustment or a lapsed variation claim costs.