In brief
The construction contract is the document that determines who bears the design, price and time risk in the project. The first choice is between a traditional route, in which you design and the contractor builds, and design-build, in which the contractor is also responsible for the design. Alongside this, you need to set a performance guarantee, retention from payments, liquidated damages for delay, a mechanism for terminating and replacing a contractor, and a defects liability period coordinated with what you undertake to buyers.
Key takeaways
- 1In a traditional route you are responsible for the design and the contractor for the construction; in design-build the contractor is responsible for both, and you give up some of the control.
- 2The FIDIC books are divided by who designs: the Red for works the employer designs, the Yellow for design-build, and the Silver for turnkey projects with a wider transfer of risk to the contractor.
- 3A performance guarantee and retention do different jobs: the guarantee covers a failure of the contractor, the retention ensures that the contractor comes back to fix defects.
- 4Liquidated damages for delay should be coordinated with the compensation you owe buyers, otherwise you are financing the contractor's delay.
- 5A notice period before terminating a contract is preparation time, not waiting time: during it you prepare a replacement contractor, document the site and secure the documents.
An Israeli developer building abroad usually signs a construction contract in a language that is not their mother tongue, with a contractor who knows the local market better than they do, under a law they have not studied. This contract determines most of the project's risk: what will happen if the design is wrong, if the price rises, if construction is delayed, and if the contractor disappears midway.
This guide goes through the key decisions in a construction contract, using the contract books of FIDIC, the International Federation of Consulting Engineers, as a reference point. Even if your contractor proposes a local contract, the questions are the same.
Design-build or traditional route: what is the difference?
The difference is who is responsible for the design. In the traditional route you hire an architect and engineers, issue full drawings, and the contractor undertakes to build according to them. In design-build you define requirements, and the contractor designs and builds, and bears responsibility for the result meeting them.
| Issue | Traditional route | Design-build |
|---|---|---|
| Who designs | Your architect and engineers | The contractor or designers on its behalf |
| Who bears a design error | You, with recourse against the designers | The contractor, subject to the requirements you defined |
| Price certainty | Lower, design changes create extras | Higher, if the requirements are well defined |
| Control over quality and details | High | Lower, depends on the quality of the requirements |
| Timetable | Design, followed by tender and construction | Overlap between design and construction |
| Suitable when... | Controlling the product matters to you, for example in a luxury residential project | The product is standard and a fixed price matters to you and to the lender |
There is no route that is right in general. What matters is that the contract fits the route you chose. A design-build contract with employer's requirements that are too general will shift the design risk back to you, because the contractor will argue that it met the requirements as written.
What is FIDIC, and which book suits your project?
FIDIC publishes a series of standard conditions of contract for construction, identified by the colour of their cover. The second editions were published in 2017, and in November 2022 FIDIC published a reprint of them with amendments. The three books relevant to a developer are:
| Book | Official name | Who designs | When it is used |
|---|---|---|---|
| Red Book | Conditions of Contract for Construction | The employer, and sometimes certain parts by the contractor | Traditional route, when there is a full design before construction |
| Yellow Book | Conditions of Contract for Plant and Design-Build | The contractor, according to the employer's requirements | Design-build |
| Silver Book | Conditions of Contract for EPC/Turnkey Projects | The contractor, with a wider transfer of risk to it | Turnkey projects, usually when the lender requires a high degree of certainty on price and time |
FIDIC itself recommends not using the Silver Book when tenderers do not have enough time or information to examine the employer's requirements, when there is significant underground work that cannot be investigated in advance, or when the employer intends to supervise the contractor's work closely and approve most of the drawings. In a typical residential project of an Israeli developer, the last condition is almost always met.
In practice, on small and medium projects local contractors usually propose a local contract rather than FIDIC. You can work with such a contract and use FIDIC as a checklist of the issues that need to be regulated. In any case, the contract is subject to local law, and some of the rules there, for example statutory liability for structural defects, cannot be waived by contract.
What is the difference between a performance guarantee and retention, and why do you need both?
A performance guarantee protects you against a failure of the contractor during the project. Retention ensures that you will have money in hand when you need the contractor to come back and fix things. They complement each other.
- Performance guarantee (Performance Security). In the FIDIC 2017 books it is governed by Sub-Clause 4.2. The amount and form are set in the Contract Data. The important question is whether the guarantee is an autonomous bank guarantee payable on demand, or a conditional guarantee (Surety Bond) that requires proof of a breach. The first is much stronger for you. Also check who the issuing bank is, when the guarantee expires, and whether it also covers the defects period.
- Advance payment guarantee. If you pay the contractor an advance, require a guarantee in the amount of the advance that reduces as the advance is set off against payments.
- Retention. A percentage set in the contract is withheld from each interim payment, up to a cap. Under the customary FIDIC mechanism, half of the retention is released with the Taking-Over Certificate and the other half at the end of the defects notification period. Contractors sometimes ask to replace the retention with a bank guarantee, and this can be a reasonable compromise.
How do liquidated damages for delay work?
Liquidated damages for delay are a fixed amount for each day of delay in handover, up to a cap. In the FIDIC 2017 books they are governed by Sub-Clause 8.8 (Delay Damages), and the rate and cap are set in the Contract Data. Their advantage is that there is no need to prove the actual loss; their disadvantage is that this is usually all you will receive for delay, even if the real loss is larger.
This is where the developer's arithmetic comes in. If you have undertaken to buyers to hand over apartments on a certain date, and you pay them compensation for delay under the contract or under local law, the damages from the contractor should cover at least what you owe them, and start to apply before the date you committed to with the buyers. Otherwise you are financing the contractor's delay out of your own pocket. We wrote about buyers' rights in case of delay in Romania in a separate guide.
Overly broad extensions of time, which allow the contractor to postpone the date because of any event; a low cap that is reached quickly; and in some civil-law countries, the power of the court to reduce liquidated damages that appear excessive. Draft the grounds for extension of time precisely, and set a rate you can justify.
Pay attention to notices as well. In the FIDIC 2017 books, a party who considers itself entitled to an extension of time or additional payment must give notice within 28 days of the day on which it became aware, or should have become aware, of the event, otherwise it may lose its entitlement. The rule also applies to you as employers when you claim against the contractor. Anyone who does not keep an orderly notice log waives rights without noticing.
When can you terminate a contract with a contractor and bring in another contractor?
You can terminate when the contractor commits a material breach and has not remedied it after notice, on the grounds set out in the contract. In the FIDIC 2017 books this is governed by Clause 15: a Notice to Correct, grounds for termination for the contractor's default, and the employer's right to terminate for convenience on defined terms. In a local contract, look for the equivalents.
Such contracts often include a notice period, for example 60 days, during which the contractor may remedy the breach before it can be removed. The common mistake is to treat this period as waiting time: you wait to see whether the contractor comes back, and the day after you discover that there is no replacement contractor and no one is willing to enter the site at short notice. The right approach is to treat it as preparation time:
- Approach replacement contractors at the start of the period, and obtain quotes from them based on the state of the site.
- Document the state of the works: measurements, photographs, site diaries and approved payment applications.
- Make sure the contract allows you to receive the drawings, permits and approvals held by the contractor, and to have contracts with subcontractors and suppliers assigned to you.
- Prepare the demand for calling the performance guarantee according to its exact terms.
- Update the financing bank, which usually needs to approve a change of contractor.
A clause that allows you to remove a contractor but does not give you what you need to bring in another contractor in its place is worth little. The real protection is the ability to continue construction.
How long is the contractor liable for defects?
There are two layers of liability. The first is contractual: the Defects Notification Period in the FIDIC books, whose length is set in the Contract Data, during which the contractor must remedy defects discovered after handover. The second is statutory: in some countries the law imposes on contractors and designers liability for structural defects for a longer period, and it cannot be shortened by contract.
The developer's question is, again, coordination. What you have undertaken to buyers, under the contract or under local law, should be backed by a parallel undertaking of the contractor, for at least the same period. If the contractor is liable for one year and you are liable to buyers for two years, the second year is on you.
Checklist for the construction contract
| Clause | The question to ask |
|---|---|
| Scope of work and design | Who is responsible for a design error, and whether the requirements are detailed enough |
| Price and variations | Fixed price or by quantities, who approves variations and how they are priced |
| Guarantees | Performance and advance payment guarantees, autonomous or conditional, validity and issuer |
| Retention | Rate, cap and release dates |
| Timetable and delay | Rate and cap, grounds for extension, alignment with undertakings to buyers |
| Notices and claims | Deadlines, method of delivery, notice log |
| Termination and replacement | Grounds, cure period, handover of documents and assignment of subcontracts |
| Defects | Length of the period, alignment with liability towards buyers, statutory liability |
| Insurance | Contractors' all-risk and third-party insurance, who the beneficiary is |
| Law and dispute resolution | Local law, a dispute board or arbitration, prevailing language |
What should you do before signing with a contractor?
Read the contract together with the contract with the buyers and the loan agreement, because all three need to fit one another. We accompany Israeli developers in reviewing construction contracts, aligning them with undertakings to buyers and lenders, and preparing for delay and replacement scenarios, together with lawyers licensed in the project country who review the mandatory provisions of local law.
This article is general information as of October 2026 and is not legal advice for a specific case. The clause numbers refer to the 2017 FIDIC editions, and in any contract they may be changed in the particular conditions. Before signing a construction contract, it is worth consulting a lawyer who works only for you.
Frequently asked questions
What is the difference between the FIDIC Red Book and Yellow Book?
The Red Book is intended for works designed by the employer, with the contractor building according to the drawings. The Yellow Book is intended for design-build, in which the contractor designs and builds according to the employer's requirements and bears responsibility for the design.
Is it mandatory to use FIDIC for a project abroad?
No. On small and medium projects, local contracts are common. FIDIC is useful as a reference point and as a checklist, and lenders sometimes ask for it on large projects. In any case, the contract is subject to the mandatory provisions of local law.
What is retention in a construction contract?
A percentage set in the contract is withheld by the employer from each payment to the contractor, up to a cap, to ensure that the contractor completes the works and remedies defects. Under the customary FIDIC mechanism, half of it is released on handover and the rest at the end of the defects period.
The contractor is late. Can you replace it immediately?
Usually not immediately. Most contracts require notice and a cure period before termination. It is worth using this period to prepare a replacement contractor, document the site and secure the documents, so that the termination does not stop the project.
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