A Defects Liability Period (DLP) is a key clause in every construction contract. It sets the timeframe after practical completion during which the contractor must return to fix defects at their own cost.
For construction companies, the DLP can significantly impact cashflow, reputation, and risk exposure – so it’s crucial to define it clearly in every contract.
This article, by our construction contract lawyers, explains what a DLP is, why clear drafting is essential, and what construction companies should consider when negotiating or reviewing contracts.
Key Takeaways
- Define the DLP to minimise disputes and keep projects moving
- Set a realistic duration and link retention/security to verified rectification
- Mirror DLP duties in all subcontracts to enforce the same standards and timelines
- Confirm the DLP sits alongside statutory warranties and ACL protections
- Replace vague “satisfaction” tests with objective milestones to trigger payment releases
What is the Defects Liability Period?
A DLP is the period following practical completion when the contractor remains responsible for rectifying defects. The purpose of a DLP is twofold:
- For construction companies: assurance that defects will be fixed without extra cost before final security is released
- For contractors: a structured process with clear timelines that, once satisfied, leads to closure of obligations and final payment.
Why Defining the DLP Matters for Construction Companies
A vague or one-sided DLP clause can create ongoing liability, cashflow issues, and delays in releasing security.
Common problems include:
Unclear definitions of “defect”
Open-ended timeframes
Poor communication about rectification procedures
A well-drafted clause protects both sides. For construction companies, it limits risk. For contractors, it provides certainty about final payments and project closure.
To better manage who bears risk in your projects, check out our guide on risk allocation in construction contracts.
Elements of a Well-Drafted Defects Liability Clause
Drafting an effective DLP clause is crucial for clear project management and dispute prevention. A well-crafted DLP clause sets expectations for all parties and ensures a smooth process if defects arise.
1. Clear Definition of “Defect”
Define defects as any work not meeting contract specifications, industry standards, or statutory requirements.
Exclude issues caused by:
Client misuse
Lack of maintenance
Normal wear and tear
This clarity avoids unnecessary disputes and ensures a fair scope of rectification.
2. Scope of Defect Coverage
Specify that the DLP applies to all aspects of workmanship, supplied materials, design obligations (if included in the contract), and all items to be delivered under the agreement.
3. Reference to Standards and Documentation
Make clear that all rectification work must comply with the contract documents, relevant Australian Standards, building codes, manufacturer specifications, and the required performance criteria, ensuring consistency and legal compliance.
4. Set an appropriate DLP
The DLP should start at practical completion and last a realistic duration:
12 to 24 months for major projects
6 to 12 months for smaller or residential works
A defined period gives both parties certainty about when defect obligations end.
5. Notification and Rectification Procedure
The clause should lay out a straightforward process for defect notification, such as requiring written notice that includes sufficient details to identify the issue. It should set practical timeframes for rectification which is typically between 7 and 14 days, with shorter periods for urgent matters affecting safety or operation.
Ensure the contract provides for the contractor to have reasonable access to the site during the DLP for inspections and repairs. Set out the process for verifying that rectification works are complete, such as issuing a formal sign-off or completion certificate by the superintendent or another nominated party.
6. Contractor’s Liability and Response Times
Explicitly state the contractor’s obligation to rectify defects, including prompt acknowledgement of notifications and adherence to realistic response and rectification timeframes.
For non-urgent defects, nominate a standard period. for urgent or safety-related matters, stipulate expedited timeframes.
7. Retention and Security
Link the security release to verified completion of rectification works. Avoid subjective “satisfaction” standards and instead, use measurable criteria for completion.
8. Interaction with Statutory Warranties and the ACL
Under laws such as the Home Building Act 1989 (NSW) and the Domestic Building Contracts Act 1995 (VIC), statutory warranties may extend beyond the DLP period.
Additionally, the Australian Consumer Law (ACL) guarantees that all services must be provided with due care, skill, and within a reasonable time.
Legal Tip: Your DLP clause should clearly state that it does not override or limit these statutory rights.
Poor contract drafting often fuels disputes – learn more in our piece on how poorly drafted SOWs trigger disputes.
Common Pitfalls for Construction Companies and How to Avoid Them
Copy-Paste DLP Clauses
Reusing generic clauses can expose you to unfair risks. Each project has unique requirements – tailor your DLP to reflect the project scope, materials, and risks.
Subjective “Satisfaction” Tests
Avoid payment triggers based on “satisfaction.” Instead, link retention release to objective milestones, such as written confirmation that all defects are rectified.
Inconsistent Subcontract Terms
Ensure back-to-back DLP clauses are included in every subcontract. This keeps all contractors accountable for their defect obligations and avoids project gaps.
If you’re unsure why you need specialist legal advice, here’s why construction contracts need a contract lawyer or reach out to Prosper Law today.
Example: Defects Liability Period in a Construction Project
Example Project: Office fit-out in Brisbane
Principal: Northside Developments Pty Ltd
Contractor: BuildSmart Constructions
Contract Sum: $1.2 million
Defects Liability Period: 12 months from practical completion
1. Practical Completion:
The project reaches practical completion on 1 July 2025. A certificate is issued, and the 12-month DLP begins. The principal holds 2.5% retention ($30,000) until the DLP ends and defects are rectified.
2. During the DLP:
Over the next year, minor issues arise:
- August 2025 – paint peeling in the foyer; and
- January 2026 – faulty light fittings.
The contractor is notified in writing, attends site within 7 days, and fixes defects at its own cost.
3. End of the DLP:
On 30 June 2026, the principal and contractor conduct a final inspection. No outstanding defects remain. A Final Certificate is issued, and the retention money is released.
Result:
The project closes smoothly. The owner has defects fixed at no extra cost, and the contractor finalises payment and liability with clear documentation.
To reduce conflict before it starts, have a look at our 6 tips to prevent legal disputes in construction article.
Frequently Asked Questions
Can we shorten the DLP to less than 12 months for smaller projects?
Yes, but it depends on the type of work and negotiation. Simple residential or fit-out jobs sometimes have a 6-month DLP, but anything shorter increases risk for the principal and may clash with statutory protections.
How do international contracts treat DLPs compared to Australian contracts?
Many overseas jurisdictions use similar “defects liability” or “warranty” periods, but timeframes and enforcement vary. If a contract involves offshore parties, make sure the DLP aligns with both local law and any international standards.
What happens if a defect is latent and only shows up after the DLP expires?
Latent defects are usually covered under statutory warranties or common law claims. The DLP is a contract tool, not the end of liability. Serious hidden issues may still be actionable for years.
Can DLP obligations be insured?
Direct rectification costs usually can’t be insured, but some policies (professional indemnity, contract works) may respond to consequential damage. Contractors should confirm coverage so they’re not left personally exposed.
How do principals enforce DLP rights if the contractor refuses to return?
Contracts typically allow the principal to engage others, deduct costs from retention or call on a bank guarantee. Having these enforcement mechanisms spelled out in the DLP clause is critical to avoid delays.
For understanding how payment laws can help protect you, see our article about the Security of Payment Acts.
