Building the contract
Construction contracts, like construction projects, take many different forms. Building the contract, like building the project, requires considering the project team, scope, schedule, location, and risks. Here are some suggestions about the process of organizing and drafting a general construction contract, including issues not to overlook and pitfalls to avoid. By Doug Tabeling
Start by aligning the structure and vocabulary of the contract with the reality of the parties’ roles and expectations. The parties need to decide what responsibility, if any, the contractor will have for design and the point in the design process at which the contractor will become involved. They also must choose the payment structure, whether a lump sum, cost-plus-a-fee, or a guaranteed maximum price. These decisions influence the drafting of many contract provisions. Reverse engineering a single proprietary contract form into different permutations of delivery methods and payment structures can be unreasonably time-consuming and lead to difficulties in applying the contract terms as the work proceeds.
Parties often agree upon the price for the perceived project scope before negotiating the contract terms, but those terms can add scope and risk. Contract negotiations frequently become an exercise in trying to achieve acceptable terms for a previously agreed-upon price. Because the contract price should reflect the project’s scope and risk, consider whether the price should increase as the terms and conditions add unanticipated obligations.
Agree on as many terms as possible before writing or re-writing contract clauses. Repeatedly exchanging “redline” drafts delays finding efficient agreements and impairs clarity. Early on, the parties should directly discuss the contract provisions in need of negotiation or revision so that they come to an agreement in principle before drafting contract terms that reflect that agreement.
The contract form is often just one document incorporating many others to form the group that becomes the “Contract Documents.” The Contract Documents might include the base agreement, general conditions, special conditions, supplemental conditions, schedules, drawings, plans, specifications, addenda, geotechnical reports, modifications, change orders, change directives, payment application forms, waiver and release forms, and the catch-all “other documents, exhibits, or attachments listed in the agreement.” Consider the necessity, terms and interplay of all of these.
As just one example, study the breadth of the form waiver required to receive payment. Consider whether to include an order-of-precedence clause to resolve conflicts between these documents, as well as how some or all of these Contract Documents can be flowed into downstream subcontracts.
Using the exact same contract terms in different states will not always lead to the same outcome. Many state-specific laws limit or amend the enforceability of certain common contract provisions in different ways. These include prompt payment acts concerning the timing and conditions of payment and interest on late payments; laws governing pay-if-paid clauses and no-damages-for-delay clauses; the form and enforceability of lien and bond-claim waivers; anti-indemnity statutes; statutes of repose; and laws governing the limits and enforceability of arbitration clauses, forum-selection provisions and choice-of-law provisions.
Key Contract Provisions
Go “W.I.L.D.” on the contract and pay close attention to provisions addressing Warranty, Indemnity and Insurance, Limitations of Liability, and Design, Default, Differing Site Conditions, and Dispute Resolution. Warranty provisions should define what is being warranted, the warranty’s duration, and whether warranties are passed-through from downstream parties. Note whether the warranty covers workmanship and materials or guarantees meeting some performance standard, and consider whether meeting that standard is within the contractor’s control.
Indemnity provisions vary in the breadth of claims covered, the duty to defend, and the extent of a party’s obligation for the failures or faults of others. Contractors should confirm whether their insurance program contains exceptions or exclusions concerning the required coverage, and they should determine what coverage is reasonable for the particular project.
Limitations of liability come in many forms. They can set, limit or exclude recovery of certain costs or damages by amount or by type. A wavier of consequential damages waives recovery of damages for lost profits and some other indirect costs. Liquidated damages provisions can fix the cost of delay damages. No-damage-for-delay clauses can preclude recovery of extended site overhead. Limitations on markup for overhead and profit on change orders can fix those amounts. Finally, certain notice provisions can act as limits and waivers on recovering costs and damages if sufficient notice is not given timely and properly.
Design responsibility is passed to contractors in many forms. On traditional design-bid-build projects, the owner’s implied warranty of the accuracy and sufficiency of the design is only a default term or gap filler that can be undermined and limited by the express terms of the contract. A contract’s method of allocating certain risks created by problems with a project’s design might include the contractor accepting responsibility to participate in design development or to verify the sufficiency of a design; clauses dictating the contractor’s notice obligations in the event of a design error; clauses limiting the owner’s liability for certain claims or damages; and the owner simply disclaiming the accuracy or sufficiency of certain aspects of the design.
Carefully consider the triggers and remedies for a default because the potential stakes of a default and termination are high. Recovery of costs or damages for a differing site condition is often not an implied term in many jurisdictions, and so those rights, if any, should be expressed in the contract. Dispute resolution provisions should address mandatory steps prior to arbitration or litigation, whether to arrange for multi-party proceedings with involved designers or subcontractors, and whether a judge, jury, arbitrator, or arbitration panel will resolve the dispute.
Pitfalls to Avoid
Do not make promises that you cannot keep. Be wary of impractical specifications, individual personnel assignments and insurance requirements that you cannot meet. Consider whether it is practicable or even possible to bind third parties such as subcontractors, your designer, your insurer, or others to terms required to be flowed down or imposed on others.
Avoid obligating yourself to discharge or remove liens even in the face of the owner’s wrongful non-payment. Decide how much control you are willing to allow the other party to have over your dealings with and payments to third parties. Finally, know your limits. Know how far you are willing to compromise and what issues are deal-breakers.
Doug Tabeling is a Partner in the Atlanta office of Smith, Currie & Hancock LLP, a national law firm focusing on Construction Law and Government Contracts. He devotes his practice to helping owners and contractors complete successful projects and avoid, minimize and resolve disputes.
Contact Doug at email@example.com or 404-582-8058.
Learn more: www.smithcurrie.com