What Should be in Every Construction Agreement

Who doesn’t want to have a detailed and coherent construction agreement in place on every job? It minimizes confusion, makes clear everyone’s respective responsibilities, and should reduce disputes. You can do so by simply making sure you address the following 6 topics.

Define the scope

You need to define what the scope of work is that you will be providing. Will it be only materials; will it be materials and labor; or will it be just labor? You need to be very clear and very specific in how you spell out the scope of your work.  Many contracts state that you are responsible for all work that’s shown on the plans and specifications, as well as that which is reasonably inferable. Pretty subjective – even if not actually on the plans or specifications, someone may believe that something should be part of your work. This could expand what you have to do beyond what you understood or priced out.

List all the exclusions

Do the parties each have the same understanding as to what is covered in the contract? How often are you faced with the exclamation from your customer – Gee, I thought this was included as part of your work? You may have believed that task, or that material, or that specially fabricated item was excluded. But was it? Did you articulate what was and was not in your scope and your price? Specifically listing what is excluded can obviate this problem. Articulate what is not in your price and not in your scope and reduce the chance of one party believing that something is to be done when it isn’t.

Explain the change order process

When you have to perform extra work 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 you do the work.  Often you are just given a revised page in the plans. Before you do the work, generate the change order, submit it, and have it accepted. Alternatively, you can request a change directive, directing you to do this change work. You will then have the necessary paper trail.

Verify the schedule

As important as the price in your 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? Do you agree with them? Know that not having a liquidated damage provision doesn’t mean there are no damages for delay. You may be liable for actual delay damages. As an example, let’s assume you are a dry wall subcontractor on a hotel and the hotel’s completion is delayed, and it’s late in part because of your failure to timely perform certain aspects of your work. If that’s the case and there are no liquidated damages in the contract, the owner may still be able to assess damages. The hotel’s actual damages could involve having to hire employees and keep them on standby. It could mean rooms weren’t rented. All of these actual damages may become your responsibility even without those scary liquidated damage provisions. So review that schedule to be sure it is achievable.

Refine the dispute resolution procedure

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.

Make sure the winner gets legal fees

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 you incur 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 you to recover your reasonably incurred fees if you 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 you have to litigate, you will be able to recover your fees if you prevail.

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, will that work? Sure – an email authorizing the terms and conditions of your agreement will be accepted as a contract. What if you don’t have an original? No problem; you don’t 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.

So keep your hard earned income on those challenging projects by making sure you have addressed these six provisions. Verbal acknowledgements won’t work here. You need to get them all in writing. 

And while you’re at it, take a few minutes and download our latest eBook, the Construction Subcontract: 23 Provisions That Matter. You’ll learn how to level the playing field by including, excluding, and modifying contract terms. The right contract with the right provisions can be your best resource.

 

This article was first published on Construction Executive