What is a “construction contract” and how does that term vary?


Author: Michelle Waknine


What is and what is not a construction contract and how does that term vary? One could easily assume that there would be consistent definitions of “construction contract” and “construction operations” in UK statutes.  However, that is not the case.

The Construction Act1

The Construction Act is the principal statute applying to construction works in Great Britain and is intended to facilitate cash flow to the construction supply chain by introducing a number of statutory entitlements such as period payments, the right to adjudicate disputes and suspend performance for non-payment.  The Act applies to all “construction contracts” in Great Britain, which are broadly defined as “agreements with a person” for the “carrying out” or “arranging” of “construction operations”. Design and construction contracts, including many professional appointments, are likely to be “construction contracts” for the purposes of the Act provided they relate to “construction operations”. The Act applies to a wide ambit of operations, such as the “construction, alteration, repair, extension, demolition or dismantling of buildings or structures” and extends into areas that might not be regarded as traditional construction works such as landscaping and painting or decorating internal or external surfaces of any building or structure.

The Construction Industry Scheme

However, the definitions in the Construction Act are not universally adopted. The Construction Industry Scheme (CIS), within the Finance Act 2004, adopts its own definitions. The CIS is a tax deduction scheme that requires tax to be deducted at source from certain payments relating to construction work. The CIS generally applies to projects in England and Wales where the employer appoints contractors or spends more than £1 million a year on construction operations in a three year period. Where the CIS applies, the employer will be a “contractor” for the purposes of the CIS. This may be contrasted with the Construction Act, which applies to any persons involved in projects relating to construction operations, regardless of whether they usually carry out construction activities.

The list of services included within the definition of “construction operations” differs between the Construction Act and the CIS. The main differences are:

  • Operations such as “maintenance” of buildings, structures “forming, or to form, part of the land”, “dismantling” of any works forming part of the land including “telecommunications” are included under the Construction Act but not the CIS.
  • Various engineering projects such as extraction for “nuclear processing, power generation, water or effluent treatment” and the “production, transmission, processing or bulk storage of chemicals, pharmaceuticals, oil, gas, steel or food and drink” are expressly excluded from the Construction Act but not the CIS.
  • Works to “offshore installations” or works to “electric communications” forming part of the land are caught by the CIS but not the Construction Act.

Conclusion

One could very easily assume there would be consistency in the terms used between legislation and that we would have consistent definitions of “construction contract” and “construction operations”.  That assumption is incorrect.  Accordingly, it is important to take appropriate advice rather than assuming that the same definitions will apply.  Failure to do so could result in operations not caught by the Construction Act being captured for purposes of the CIS.  Failure to adhere to the CIS provisions could result in liability for a penalty fine to HMRC.  It is therefore important to consider from the outset the legislative framework that might apply to each construction project rather than incorrectly assuming that statute follows a “one definition fits all” approach.


1 Housing Grants, Construction and Regeneration Act 1996

 

Michelle Waknine, Trainee Solicitor, Fladgate LLP (mwaknine@fladgate.com)

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