By {{Article.AuthorName}} | {{Article.PublicationDate.slice(6, -2) | date:'EEEE, MMMM d, y'}}
{{TotalFavorites}} Favorite{{TotalFavorites>1? 's' : ''}}

Few things can dampen the thrill and promise of a newly closed construction deal than the realization that it could quickly become a losing proposition for the contractor depending on economic and other conditions. In an era of instant information, constantly adjusting markets and political extremes, projects that start under one set of assumptions or conditions can occur or conclude under much different ones. While no one has a crystal ball, there are contractual provisions that can provide clear guidance in the face of many “what ifs” that can arise in construction. 

One of the chief concerns a contractor should have in a project lasting more than a few months is what impact price increases will have on the profitability of the job. On a true cost-plus project, this may be of little concern, but on any project with a limitation on costs or a guaranteed maximum price, contractors should insist on a procedure to revisit the limitation or price if certain conditions change. 

This can be as simple as allowing the contractor to receive an upward adjustment in the price if costs increase by more than a certain percentage. It can be as complicated as requiring multiple new bids and disclosures to the property owner, architect or project manager and allowing approval of new suppliers or subcontractors to limit cost increases to the cheapest increase. The protection—and certainty—to the contractor though, comes from having a process in the contract to address cost increases, whether it is simple or complex. 

In a similar vein, if seeking cost increases is not feasible or preferable, then it may make sense to include a provision that allows the contractor to terminate the contract if costs increase beyond a certain amount or certain percentage. Again, this may require a certain amount of disclosure to property owners or other third-parties to justify termination, but it may be preferable to exit a project at a break-even point or mild profitability rather than take it to conclusion and lose money. This option does not exist though, unless a contract between the parties expressly allows it. 

Shifting away from cost-focused provisions, another unpredictable problem can involve owner-caused delays. Typically, property owners have material selections to make or approve, change orders to authorize and other input to provide on the project. While eliminating delays entirely may be impossible, the best way to address them can be to incentivize timely performance, by, for example, providing for liquidated damages in the event the owner does not meet required deadlines. Another option could be to allow cost increases to be charged if they are the result of delays, and still a third option would be to allow the contractor to make the decision for the owner in the absence of timely input. Again, the specific method of allowing for additional costs or time in response to delays is less critical than having a procedure to do so that eliminate uncertainty from the future.

Another type of delay can arise from third-parties or events external to the project. Contracts commonly alleviate contractors from delays caused by natural disasters, strikes, war, etc., but most do not go the extra step of determining how the risk of those events are to be allocated among the parties or how the contractor is to be reimbursed for the consequences of them. One way to avoid this issue is to provide more specificity, especially in the face of known issues. 

A great example of this is hurricanes. Many projects along the U.S. Gulf Coast and Eastern Seaboard face the threat of hurricanes impacting the project sometime during the summer months, whether a hurricane actually strikes the project or simply strikes a manufacturing facility 100 miles away. Contracts for these projects should include specific hurricane mobilization and demobilization provisions, allocate the costs and delays associated with the same, and allow contractors to seek cost increases if material or subcontractor prices go up due to demand or scarcity. While the hurricane may never impact the project, if it does, the contractor will be able to rely on those provisions to protect its ability to perform the project or terminate it if necessary. 

Finally, contracts should require that contractors, subcontractors and material suppliers exercise their rights under relevant lien laws. This means ensuring the pre-lien notices or any pre-project notices are sent at the beginning of the project, even when things are going well and everyone is performing their contractual obligations timely. This is the only way to ensure that lien and other rights are preserved in the event of any “what ifs” that come to fruition. 

While these are only a few specific types of issues that can arise in the future and can be mitigated through contractual risk allocation, contractors can think through common problems that occur for their business or their region and craft contractual provisions that address what the contractor wants to happen if some foreseeable event in the future. While this may not prevent problems from arising, it certainly will keep those problems from derailing a project or company. 


 Comments ({{Comments.length}})

  • {{comment.Name}}


    {{comment.DateCreated.slice(6, -2) | date: 'MMM d, y h:mm:ss a'}}

Leave a comment

Required! Not valid email!