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Principal & Developer

Principal (or a developer) plays a key role throughout a construction project.

A principal needs to participate in the acquisition, design, approval, finance, construction, sales (including pre-sale) and other various aspects of a project. In this process, the principal deals with architects, engineers, builders, suppliers, lawyers, accountants, various authorities (e.g. council, PCA and work union), real estate agents, banks and other financial institutions, and as a result, brings itself into various legal relationships with all these professionals.

For instance, a principal can choose to develop a project with its partners in the form of a partnership, a joint venture or a company, each bears different legal consequences. Again, a principal can use a company, a trust or a superannuation fund as its investment structure. Properly structured, a principal could obtain significant advantage particularly in terms of tax liability and asset protection.

A key document in a construction project is the building contract. The principal would need to ensure it signs the correct contract with its builder. There are many aspects to be considered before a building contract can be finalised. Just name a few below:

  • whether the contract should adopt a schedule of rates, lump sum or MPG(maximum price guarantee)
  • does the contract provide a satisfactory payment mechanism, especially in the context of the Security of Payment regime
  • does the contract need to appoint a superintendent
  • are variations and extension of time properly dealt with in the contract
  • what happens if the builder walked off the job or goes insolvent
  • what happens if defects are found before, or after, construction completion
  • does the contract provide adequate protection if the builder cannot finish the job on time and under budget
  • are dispute resolution clauses included? Are they practicable and effective?
In fact, the principal would realise, sooner or later, that it is worthwhile to get a properly drafted building contract tailored to its project, since the bank, perhaps also the quantity surveyor, would be at least equally interested in the quality of the building contract.

Indispensable to a building contract are the various designs. A principal can choose to engage those designers through its builder, in which case the builder would contract with the designers, pay their fees and then claim them back from the principal as part of the building cost (probably with a margin on top). Alternatively, a principal can contract with the designers in its own capacity. The end outcome is the same in terms of money, because either way the design fees are ultimately born by the principal; however, the end outcome could be vastly different in terms of law, particularly when those designs are subsequently found defective and the principal wants to make a claim against the designer(s). The principal might well find that the law does not allow it to look to the designer(s) if the principal did not contract with the designer(s) directly.

For a principal, risk control is too important to overlook. That is why a principal should always consult a competent construction lawyer rather than cut corners. When it comes to construction, prevention is better than cure.

 
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