A detailed and coherent construction agreement in place on every job minimizes confusion, makes clear everyone’s respective responsibilities and reduces disputes. There are six things that should be addressed in every construction agreement.
Define what the scope of work is that will be provided. Will it be only materials; will it be materials and labor; or will it be just labor? Be very clear and specific in how the scope of work is spelled out. Many contracts state that the contractor is responsible for all work that’s shown on the plans and specifications, as well as that which is reasonably inferable. While subjective—even if not actually on the plans or specifications, someone may believe that something should be part of the contractor’s work. This could expand what has to be done beyond what was understood or priced.
Do the parties each have the same understanding as to what is covered in the contract? How often are contractors faced with customers thinking something was included as part of the work? The contractor may have believed that task, or that material, or that specially fabricated item was excluded. But was it? Did the contractor articulate what was and was not in the scope and price? Specifically listing what is excluded can obviate this problem. Articulate what is not in the price or scope and reduce the chance of one party believing that something is to be done when it isn't.
When extra work is performed under a contract, obtain a written agreement on every change order. Make sure it’s fully memorialized—signed with change in scope, change in price and change in time, and approved before the work is done. Often contractors are given a revised page in the plans. But before doing the work, generate the change order, submit it and have it accepted. Alternatively, contractors can request a change directive, directing them to do this change work. This creates the necessary paper trail.
As important as the price in a contract is the schedule—how quickly is the work to be done? Importantly, check to see whether or not the agreement has any penalty associated with the failure to timely perform. Review the schedule and make sure that it is doable.
Are there any liquidated damage provisions that exist in the contract and if so, are they reasonable? Know that not having a liquidated damage provision doesn’t mean there are no damages for delay. A contractor may be liable for actual delay damages. A drywall subcontractor on a hotel project failed to timely perform certain aspects of its work and the hotel’s completion was delayed. Even if there were no liquidated damages in the contract, the owner may still be able to assess damages from staffing costs or loss of income from the inability to rent rooms.
All of these actual damages may become the contractor’s responsibility even without liquidated damage provisions. Review that schedule to be sure it is achievable.
Require that the executives of each party have a meeting within a week or two of any disagreement to try to resolve any dispute. If that doesn’t work, then the parties should go to mediation. Mediation is a process in which both parties meet and split the cost of a neutral mediator who tries to facilitate a resolution between the parties. The mediator may be able to bring the parties together and have them settle their dispute. If an impasse is reached at mediation, then the parties can proceed to either arbitration or litigation, but only after they mediate. Fifty percent or more of disputes actually settle at mediation.
A lot of contractors incorrectly believe that winning their case automatically means they will also recover their legal fees and costs. That’s incorrect. In most states there are only two ways to recover the legal costs incurred in any dispute—by statute or by contract. Not all construction laws automatically call for an award of legal fees to the winner, and these days determining the winner on the substantial issues in any given legal case has become a bit complicated.
The better approach is to always have a clear contractual provision which allows a contractor to recover reasonably incurred fees if its win, and which goes one step further by defining what makes one the prevailing party in any dispute. Dealing with legal issues can be very expensive, so make sure that if the company has to litigate, it will be able to recover fees if it prevails.
Remember, a short document is better than no document, and a more thorough document is better than one that is too general. Sometimes people wonder whether a handwritten (versus a typed) agreement is valid. Yes, it is. And what about something electronic? Yes—an email authorizing the terms and conditions of the agreement will be accepted as a contract. What if the contractor does not have an original? The contractor does not have to have the original for there to be a valid contract. A recent case even determined that an exchange via text message was enough to create a valid contract between two parties.
Keep hard earned income on those challenging projects by addressing these six provisions. Verbal acknowledgements won’t work here—get them all in writing.
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