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Contracts in the construction context serve multiple purposes. Foremost are establishing the parameters of the parties’ agreement, allocating and mitigating risk and avoiding disputes. To meet these goals, all construction contracts should contain certain elements. The discussion below covers some of the more important provisions that owners, developers, designers, and contractors should consider in drafting and negotiating their agreements.

 

Price, Time and Scope

These might sound obvious, but a surprising number of construction contracts do not adequately address these basic elements. This is remarkable when considering that many construction disputes focus on one or more of these key issues (i.e., the project is over budget or late, or the scope of work is in question).

Whether it is a fixed price, cost-plus (with or without guaranteed maximum price), or some other arrangement, all contracts should contain adequate pricing provisions. This includes not only an overall contract amount, but also how the amount will be paid, when it will be paid, and how change orders and extra work will be priced. A thorough contract also should include provisions governing when and why payment can properly be withheld, as well as consequences for improper non-payment.
Project timing can be equally important. Contracts should include provisions establishing the relevant dates or periods for work and services, and address the consequences for late performance. Additional provisions should define what the parties mean by “completion” (substantial and final), identify occurrences excusing late performance, and include protocols for getting late projects back on track. Many contracts include a waiver of consequential damages, which can limit the parties’ ability to recover damages related to delays. Parties should consider this and discuss alternatives such as liquidated damages or caps on consequential damages.

Before they are built, most projects exist only on paper in the form of specifications, drawings, narratives and other documents, which can be voluminous. Thus, it is rarely practical to define the project scope in the contract itself. Scope must be defined by reference, which requires thoroughness and precision when identifying external documents. This includes identifying the creators of the documents, titles, dates, sheet and document numbers, versions and other identifying information. Many project disputes can be avoided by accurately and completely establishing the scope of the work and services.

Changes

On all but the smallest of projects, changes are inevitable. Whether they are requested by the owner, proposed by the contractor or necessary because of project conditions, a good contract anticipates changes and addresses how they will be handled and priced. The particulars of change provisions can be left to the discretion of the parties, but if there is one issue that all such provisions should address, it is that changes must be in writing. Verbal changes might sound like a good idea when the project is running smoothly and the parties are satisfied, but this often leads to misunderstandings and disputes. All contracts should require change orders to be in writing signed by the parties, and state that no changes will be performed or paid for without a written and signed change order.

 

Warranties

This might sound like an issue primarily for owners, but if not adequately addressed, warranty and correction provisions (or the lack thereof) can have unanticipated consequences for contractors. If the parties intend to limit warranties to a specific period, or to limit the warranty scope, these limits must be set forth in writing. Otherwise, the parties’ rights will be governed by applicable law, including any statutes of limitation and repose, which can be as long as 10 years. The parties also should consider any separate manufacturer and supplier warranties, and how those benefits will be passed along to the appropriate party.

 

Indemnification

In the construction context, indemnity deals primarily with allocation of risk for claims made by third parties. For example, a claim for payment made by a subcontractor or supplier, a claim by a person injured at the site, or a claim for damage to adjacent property. Indemnification provisions address which party or parties will be responsible for these types of claims and damages, or whether the responsibility will be shared depending on fault or some other consideration. If not addressed, such claims might be governed by the laws of comparative fault and contributory negligence in the applicable jurisdiction. But if one party is in a better position to control or prevent a certain type of risk, a well-drafted contract will allocate that responsibility accordingly.

 

Insurance

One of the more common and important methods of managing and allocating risk on construction projects is through insurance. Contracts should include provisions addressing the specific types and limits of insurance that each party is required to carry, as well as other important issues such as waivers of subrogation and additional insured requirements. The latter consideration is particularly important because many policies include “blanket” additional insured endorsements that grant insured status only to those parties required by contract to be added as an insured. Whenever feasible, insurance provisions should always be reviewed by a qualified risk management advisor.

 

Dispute Resolution

While one goal of contracts is to avoid disputes, a well-drafted contract should address what happens in the event of a dispute. Before escalating to a binding procedure such as litigation or arbitration, it is a good idea to include a requirement for some level of informal or non-binding resolution, such as negotiation or mediation. For both non-binding and binding dispute resolution, contracts should cover details such as location, timing, number of arbitrators, judge or jury trial and other procedural matters. The parties also should consider whether the prevailing party in any such dispute will be entitled to recover its attorneys’ fees. Sometimes, just knowing what a dispute would entail can be an incentive to resolve it. Whatever dispute resolution methods the parties choose, it is important that the methods are consistent across all contracts on the project (designers, subcontractors and others). Construction disputes often involve multiple parties, and it is helpful to ensure that all parties are subject to the same procedures, and that all disputes can be resolved in the same forum.

 

Termination

Although the parties might not want to consider it, termination is sometimes necessary. Contracts should identify the possible grounds for termination, as well as the procedures to be followed in the event of termination (this should include notice requirements and an opportunity to cure). The contract also should address whether one or more parties has the right to terminate for convenience or for reasons not the fault of the other party (e.g., failure to obtain financing). In any event, the contract should include provisions governing how final payment, if any, is to be made.

While it is not always possible to avoid disputes, thoughtful contract drafting can reduce the likelihood of disputes, establish party expectations and give the parties more control over disputes when they arise.