Essential Contract Terms to Include in All Construction Contracts

Construction projects are a driving force of growth and the prospect of a new building or an addition to a current space brings great anticipation. Parties to the project are often anxious to fast track the venture and get things moving.

However, eagerness to commence work on the project can undermine preparing a well drafted and thoroughly negotiated construction contract. Admittedly, there are times when the hastiness in preparing a construction contract is not problematic. The work proceeds smoothly and there are no issues. The contract is filed away and is never utilized. However, this is not always the case.

Notwithstanding the good intentions of the parties at the beginning of the job, things go wrong, mistakes are made and people are unhappy. When this occurs, it is critical to have a well drafted agreement to guide the parties. There are a number of critical provisions that are often overlooked by contractors in construction contracts. The inclusion of these provision can often make the difference between a smooth resolution when a problem arises and full-blown litigation.

The scope of the work is a construction contract provision that often is not fully vetted by the parties. From the perspective of the contractor, having a precise and specific scope of the work provision is indispensable. Without it, there can be significant disputes over exactly what the contractor was retained to do for the agreed upon contract

By way of example, assume that a construction contract states that the contractor is retained to build an addition to an existing office space. Assume further that there is little detail in the scope of work as to whether the contractor is responsible for simply foundation work and framing, or whether the construction of the structure includes, in addition to the basic components, electrical, HVAC, plumbing and finishing work. The owner assumes that the contract price includes not only just the basic structural components, but also all of the other requirements for the project. On the other hand, the contractor believes that the description of the work and the respective price includes just the essential elements of the construction project. Ultimately, the parties reach an impasse on the terms of the agreement.

Given the description of the scope of work, it is difficult to determine who is right. Is it the owner or is it the contractor? If the agreement had been specific and set forth the elements included (and not included) in the scope of work, the problem could have been adverted. Accordingly, it is essential to have a detailed scope of work provision in every construction contract.

Dispute resolution is a construction contract term that is also often not sufficiently addressed. If there is a disagreement between the parties regarding pricing issues, the scope or quality of the work, or possible breaches of the contract, there needs to be a mechanism in place to resolve these issues. Do the parties submit the matter to arbitration? Is the arbitration binding or non-binding? Is the issue litigated in court? What is the process for instituting a claim? Is there a non-binding mediation requirement that precedes submission to either arbitration or the institution of a litigated claim? Without a clear directive as to how disputes are to be handled, there will be significant confusion as to how to resolve the issues between the parties.

Therefore, it is very important to include a dispute resolution provision in a construction contract. From the contractor’s perspective, it is essential to plan ahead of time on how disputed issues will be handled. If there is an impasse on a matter that either delays or impedes construction on a project with many subcontractors, the contractor needs to be assured that the issue will be handled expeditiously and will not derail the entire project. With proper advance planning during the contract negotiation stage with the inclusion of a well drafted dispute resolution provision, contested matters can be addressed and expeditiously resolved without undermining the progress of the project.

Finally, all construction contracts should contain a force majeure or “superior force” provision. The current COVID-19 crisis facing the United States and the world serves to demonstrate this point. In short, a force majeure provision in a contract serves to mitigate and remove liability for parties resulting from unforeseen catastrophes which occur and interrupt the natural progression of the work under the contract.

A typical force majeure provision is as follows:

“Notwithstanding anything to the contrary contained herein, neither party shall be liable for any delays or failures in performance resulting from acts beyond its reasonable control including, but not limited to, acts of God, natural disasters, acts of war or terrorism, disease, shortage of supply, breakdowns or malfunctions, interruptions or malfunction of computer facilities, or loss of data due to power failures or mechanical difficulties with information storage or retrieval systems, labor shortages or civil unrest. Notwithstanding the foregoing, in the event of such an occurrence, each party agrees to make a good faith effort to perform its obligations hereunder and/or resume its performance as soon as reasonably possible.”

The current COVID-19 pandemic would fall within a properly worded force majeure provision and as such, would guide each party as to their conduct and obligations under the contract.

It is extremely important for parties to construction contracts to properly memorialize the terms of their agreement in a well drafted document. While a comprehensive construction contract will not prevent disputes from occurring, it will make their resolution much easier and less costly for all involved.