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By Duane Craig
August 14, 2016
Construction contracts are complicated documents that try to balance the needs of many different parties involved in a project. Contractors face much uncertainty when delivering on their contract responsibilities, so it’s important to design contracts that are fair in allocating risk.
While every clause in a construction contract is important to review, there are some that deserve closer scrutiny. The following top contract provisions to be negotiated with the owner are ones that legal professionals consistently point to as needing special attention.
There’s always the possibility something is going to happen that will cause a delay in project activities. When these delays are out of the contractor’s control, they are called “force majeure” and include things like material shortages, labor disputes, actions on the parts of government agencies, and delays by other project participants such as the owner, architect, or engineer. In these situations, the contractor needs to be compensated for damages arising from these delays. Contractors will often have additional costs, see material prices increase, and end up with higher overhead costs.
Most contracts allow contractors to get extensions of time or to receive damages when force majeure delays occur. However, some standardized contracts don't specifically address compensation. This leaves the door open for owners to include a “no damage for delay” clause in their customized contracts.
Even though these clauses are contentious because they are inequitable, the case law and statutes related to them vary widely from jurisdiction to jurisdiction. Besides involving legal counsel when faced with these clauses, contractors should negotiate very specific language for any delays they don't cause.
This should include delays caused by the owner’s separate contractors as well as specifying the amounts and types of compensation within the contract, instead of relying on vague contract language that says compensation is available.
Liquidated damages are also contentious, but contractors can negotiate with good intent by asking for a set limit on the liquidated damages available to the owner when they accept these clauses. Contractors should also consider including a construction contingency in cost plus contracts. This is a percentage of the total contract available to them so they can get reimbursed for costs related to their own mistakes. For example, this could cover them for delays caused by their subcontractors.
There is a wide variation in the wording used for commercial construction warranties. Some contracts call for warranties to begin upon substantial completion, while others specify final completion––a date when installation is finished, and even a date of beneficial use. For a contractor negotiating a contract with an owner, these different timeframes pose significant challenges for honoring warranties, and can affect the contractor’s future work.
Sometimes the project closeout doesn't happen when expected for many different reasons. If a warranty begins upon substantial or final completion, but that completion is delayed for reasons not related to the work, then the contractor’s warranty period could get extended. A longer warranty can affect the contractor’s obligations on future projects, bonding capacity, and profits.
The effects on subcontractors who begin work very early in the project can be even more difficult. For example, work put in place early in a project may serve as a staging ground or transportation surface that will get significant wear and tear during the project. Therefore, the subcontractor is warranting work throughout the project lifecycle, and well beyond. This same scenario comes into play when owners lose funding and must go out and find new funding to complete the project. This can mean work put in place under the original funding scheme will be aging and deteriorating while the funding issues are worked out.
For all kinds of contractors, there are serious considerations related to how the contract specifies warranty details. If conditions extend the warranty timeframe for reasons unrelated to the completion of the work on the project, then contractors must consider and account for:
Even on a very small construction project contractors get into trouble with the scope of work clauses. Scope of work usually appears in the general terms very early in the contract, and should very specifically describe what is going to get built. If the description of the work isn't precise, then it is open for the owner to interpret the scope as broadly as comfortable.
This comes into play largely as work progresses and is evident with change orders. A poorly defined scope sets the stage for disputes because the owner might think the scope already includes items in change orders. One way to avoid, or at least minimize the problems that arise from ambiguous scopes of work, is to review this portion of the contract against a work breakdown structure. When you do that, you will quickly see places where the contract doesn’t adequately describe or account for the scope.
There are almost always changes to the work. Construction projects are complex, and there are many pieces that must fit together in a very precise manner. There is also much that's not known as the parties are drawing up the contract.
One major thing that often arises is unanticipated conditions on the site. At other times, the owner’s needs may change based on factors beyond the project itself, such as economic issues, local political conditions, and changes in the environment. The way you account for changes to the work is with a properly drafted change order clause. While it is common for contracts to grant the owner the right to change the contractor’s work, it should also make it possible for the contractor to get paid for those changes.
But, what if there is a dispute regarding a contractor’s assessment of the change, or how the contractor will get paid?
Some contracts specify that the architect will use certain procedures to settle the dispute. However, this can leave the contractor financing changed work until the parties agree. So, a changes clause has to spell out how the contractor and owner will determine time and costs, and specify when the owner will pay the contractor for the costs of changed work.
A well-drafted contract will work for all parties and allocate risk appropriately. Contractors can ensure contract fairness by paying close attention to what they are taking responsibility for, and by including specific remedies in the contract language for things beyond their control.
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