November 8, 2011

Forms of Construction Agreements

By Jorge Ojeda

There are various forms of executing construction agreements, with the most common being: (i) the construction
agreement for management of work, in which the owner of the work entrusts the management of the construction to a contractor who provides services in exchange for a fixed payment. However, at all times, the individual who
contracts with suppliers is the owner of the work, with the support and management of the managing contractor;
(ii) the fixed price construction agreement, in which the contractor agrees to carry out the construction for a fixed
price and is bound to comply with the specifications agreed to by the parties, with all the materials, labor and
other direct and indirect costs included in the fixed price; and (iii) the fixed price construction agreement by unit
pricing, in which a fixed price is established per construction unit, which includes the cost of materials, labor, and
other direct and indirect costs. In this latter type of construction agreement, the consideration provided to the
contractor is calculated by applying the agreed unit prices to the construction volumes of the work. Success in
the negotiation and administration of a construction agreement consists of correctly establishing the plans,
specifications, quality of materials and other particularities in a detailed manner. Further, it is also important to
document all progress of the work, order modifications with the corresponding specifications (in writing), as well
as obtain bonds from the contractor for (a) proper application of the cash advance; (b) performance; (c) hidden
defects; and (d) contingent liabilities. This last point is particularly relevant in the event that liability is imputed
to the owner due to non-performance of any of the employer’s obligations due by the contractor to its workers
and the Mexican Social Security Institute. The lack of adequate provisions in a construction agreement, the lack
of bonds with proper language and missing documentation regarding the progress of the work tend to be the most
common causes that complicate a claim for performance or rescission of construction agreements.