What Should You Include in a Construction Project Heads of Agreement?

Construction projects require a solid foundation for both the structures you’re building and the legal work itself. As a contractor, you will require a well-written agreement between yourself and your principal. One type of document you can use is a heads of agreement.

We will explain what a heads of agreement is, how it applies to construction law, and what you need to include in it.

What is a Heads of Agreement?

By definition, the heads of agreement is the proposed agreement between contractor and principal. If both parties sign the agreement bprior to signing the contract, the heads of agreement will assist with some of the negoriations between the parties parties. A heads of agreement essentially covers some of the main points which are to be agreed upon, and included in the actual agreement which is entered into for the construction project.

Heads of agreements are suitable for large construction projects that carry a risk for both the contractor and the principal. For smaller projects, the contractor may not need to have a heads of agreement. However, having a heads of agreement for more extensive projects mayn give both parties peace of mind, helping the project move forward with fewer issues, and less contention.

What to Include in a Heads of Agreement?

What should be included drafting a heads of agreement or reading the other party’s heads of agreement? Like any agreement, what you require may vary depending on the the agreement, but there are several common factors to consider in a heads of agreement, which we will address below.

Payment Process

One of the primary areas covered in a heads of agreement are the payment terms, including the total payment to be made. There are cases where you may do some work before the final contract. You must include the payment process and scope of work in the heads of agreement too. Ensure that the payment follows the Building and Construction Industry Security of Payment Amendment Bill 2018 before continuing.

A Disclaimer that this isn’t the Final Contract

Also, the heads of agreement must state clearly that the heads of agreement is not, and should not be considered as the contract or agreement which is stll to be entered into between the parties. Think of the heads of agreement as a draft contract or summary of the main points to be included in the contract itself. Just as a book’s first draft may not reflect the final product, neither will the heads of agreement. Instead, the heads of agreement is a bridge to the final contract, which importantly, is legally binding.

However, there are exceptions. For example, let’s look at a scenario where the principal and the contractor do not come to a final agreement and instead only have a heads of agreement. There are cases where there may be an argument if the heads of agreement is the final document.

As mentioned above, one way to avoid a dispute is to include language indicating that the heads of agreement isn’t the final contract. Having phrases such as “subject to final contract” and emphasising that the heads of agreement is not legally binding is what you need to do.

The Sunset Clause

The next clause to address is the clause known as the sunset clause. The sunset clause reflects the expiry date of the heads of agreement. Having a sunset clause is a powerful legal tool. For example, in the ASIO’s Questioning and Detention Powers, the concept of the sunset clause arose frequently during the questioning. The sunset clause should have a pre-determined date on it. By providing for a specific date and time, there will be no confusion or ambiguity.

A date for the Final Contract

In addition to including an expiry date, ensure there’s a path to the final contract ready. Make sure there’s enough time for both parties to prepare for the final contract, but don’t let it sit indefinitely.

Having an agreed upon date helps you move on to the final contract while allowing for additional and unforeseen negotiations, if needed. Even with the most amicable parties, there may be some disputes.

What Are the Consequences of the Agreement Expiring or Being Terminated?

Since the heads of agreement is designed to bea draft of the main points of the final contract, you may want to to include that both parties be given the right to terminate the agreement at any time. Also, clarify that neither party will have any obligations to fulfil in case the deal ends. This is of course optional, and merely a suggestion of points to include.

With that said, you don’t want either party to end the contract suddenly. So, in the heads of agreement, be sure to have a process that one needs to go through to ensure termination. For example, a termination clause, and a dispute resolution clause may be agreed upon and included in the heads of agreement, which will subsequently be included in the main contract. Since there may be disagreements, be it in the heads of agreement or the final contract, outline a straightforward method of disputing. Giving both parties a way to discuss any conflicts allows for fair negotiations.

Finally, you may also include an NDA and confidentiality clause in the heads of agreement, if necessary.

When it comes to information between a contractor and principal, there may be information that you want to keep under an NDA (non-disclosure agreement). Clarify in the heads of agreement that both parties are to keep any sensitive information completely confidential.

Under the Privacy Act of 1988, sensitive information can include personal details about the client or contractor or information that may harm the company. Be sure to read the law and see if there is a risk of sensitive information being leaked.

Preparing for the Final Contract

While one can say that the heads of agreement is in the early stages of the final contract, the heads of agreement needs to include rules for setting the final contract up.

For example, the heads of agreement should explain that both parties will have a good faith negotiation in the final contract.

The term “good faith” has many definitions, but the definition one can mostly agree on is acting honestly. For example, the Australian Franchising Code of Conduct describes good faith in this way.

In other words, act in a way that can benefit both parties, and do not act in a way that only helps you.

When reviewing the final contract, be sure that the language and terms are accurate, and reflect what was included in the heads of agreement. If there are any inconsistencies, do not be afraid to dispute them. Since the heads of agreement is the rough draft, there may be contradictions that can pop up, and one must discuss them as soon as possible.

Key Takeaways

  • A heads of agreement is the predecessor to the main and final contract. It’s ideal for larger projects that carry risk.
  • To remove any doubt as to whether the heads of agreement is legally binding, the heads of agreement should indicate as such.
  • A heads of agreement should include a process of dispute resolution, asunset clause, and a termination process to protect all parties.
  • Having agreements to protect all sensitive information is crucial.
  • Use the heads of agreement as a path to the final contract. Once you and the party sign the final contract, there is no going back. So be sure you endeavour to come to an agreement on most aspects.

With that said, there may be instances where negotiations go sour, and both you and the other party argue about the legality of the heads of agreement. Having proper representation is important because you want to make sure both sides hold up their heads of agreement. That’s why it’s important to seek out legal assistance for your construction business.

To get the proper legal representation for all of your business needs, contact Lazarus Legal for more information.

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Mark Lazarus

Mark Lazarus, the visionary behind the business and the fresh blood of the Lazarus Legal team, Mark (or Laz as he is often known) owes much of his success to his past experiences. And he’s made it his personal goal to bring that wisdom and formula to the firm.

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What Should You Include in a Construction Project Heads of Agreement?