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 drywall 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.
Critical Subcontract Terms
Many contracts seem impenetrable, with pages upon pages of fine print and complicated language. What is a subcontractor to do? At the very least, smaller construction firms should focus on the areas where a mistake could be costly and exposure is likely. Three categories could make the difference between profit or loss, and liability or success.
Scope of Work
You clearly need to define the scope of the work that you intend on performing. Specifically, what will you do, what services and materials will you provide. As importantly as what you do provide, you need to clearly delineate what you will not provide. Most disputes that we get involved with a disagreement between the parties. Some misunderstanding where one party believed something was included and the other party did not. To the extent that you know that there are certain things that your price does not include, make sure to include an exclusions provision. That is, what is not included in your scope of work. By just doing that one thing you will save yourself a tremendous amount of headache.
A subcontractor can gain a tactical advantage and protect itself in advance of an issue through the delineation of the exact scope of work. While a primary contractor may try to have the description of the work be as broad as possible (for example, stating “subcontractor is responsible for all work, labor, materials and services on the project”), the subcontractor should try to narrow the subcontract to cover only that for which it is responsible.
The subcontract should list not only the specific work the subcontractor will actually perform, but also that for which it will not be responsible. Such specifics should allow a subcontractor to prevent disputes on whether an item should have been included in the subcontract.
Price
Next is price. Obviously it goes hand in hand with the scope of your work. Whether you are singing a cost plus contract or a stipulated sum contract, the price is critical that it mirror the scope that you intend on providing.
Time
Most subcontractors don’t think twice about entering into subcontracts that state “time is of the essence.” When time is determined to be of the essence, it means a breach of the time provision will be a material breach of the subcontract. Because delays are common on construction projects and may be outside of the subcontractor’s control, a subcontractor should exclude this provision from any subcontract.
If eliminating this provision proves difficult, the subcontractor should at least broaden the time requirements. For example, many contractors refer to a critical path schedule or require periodic updates from the subcontractor. Limit or exclude these schedules and requirements while adding more time to complete assigned tasks.
Start Date
The start date – when will you commence your work? Is that a specific date in the contract? Is it some triggering event such as the issuance of a permit? Whatever it is, it’s important that it be defined clearly in your contract.
Completion Date
Fifth and finally is the completion date. When are you expected to finish the work associated with your contract. Is it a specific date? Is it a certain number of days from the day you started work? Again, that’s up to you to decide, the important thing is that the contract that you sign include when the completion of the work is supposed to occur. This becomes critically important to the extent there are damages that extend from you being late on the job, such as liquidated damages.
You need to address these five issues in every contract and that will be a great start to the way you negotiate contracts going forward.
Payment Terms
Most contracts say that you will be paid within a certain amount of time of rendering your invoice or payment application. However, most contracts also include a pay-when-paid provision. This means that if the Owner doesn’t pay the contractor, the contractor may not pay you. If so, you need to know that that provision exists in your contract and be prepared to deal with it in your negotiations.
Most importantly, a subcontractor must look carefully for popular “pay-when-paid” provisions, which effectively state the contractor will not be required to pay the subcontractor until it receives payment from the owner. These provisions generally mean exactly what they say and can result in payment being delayed or withheld without any fault of the subcontractor.
If eliminating these provisions is not possible, then the subcontractor should look to ensure any pay-when-paid or pay-if-paid provision creates a reasonable time for payment to be made versus an absolute condition precedent to payment. Subcontractors also should not reduce or diminish their lien rights or abilities to lodge a claim against any existing bond-something primary contractors often attempt to do.
It can be easy to get lost in the minutiae of a subcontract agreement. But it really comes down to three things: You contract to perform certain work; you need an amount of time to complete the work; and you want to be paid for the work performed. Tweaking a subcontract in these three areas will significantly enhance a smaller company’s chances of getting through a job successfully.
4 Contract Provisions that can make a difference
There are four very specific contract provisions which can make a big difference in your construction contracts – a merger clause, limitation of liability, governing law and venue, and attorney’s fees and costs.
1. Merger Clause
A merger clause says that to the extent you and I discuss, either verbally or in writing, any contract provision, but that provision doesn’t exist in the contract we’re signing today, then it doesn’t exist. Let me give you an example – let’s say you and I are negotiating this contract and I exchange emails with you and it says that you’re going to pay me every 15 days. The contract says that you’re going to pay me only every 30 days. If the contract contains a merger clause, than the courts will find that the fact you were negotiating payment terms at 15 days is of no moment. What the court is going to look at are the actual terms in the contract that you signed. So what do you need to remember? If you have negotiations and discussions about provisions in your contract, and they are not written into the contract you are signing, then they don’t exist as far as the court is concerned if the contract contains a merger clause.
2. Limitation of Liability and Waiver of Consequential Damages
Construction is a very risky business and there are lots of things that could go wrong. And if they do go wrong, they could be very, very expensive. Consequential damages, while they flow from the contract, extend beyond the scope of the direct contract. Let me give you an example – a classic owner claim of consequential damages would be if the job were delivered late, then the owner may have lost rent or have additional costs associated with a construction loan that wasn’t converted to a permanent loan. It would be nice if your contract included some sort of limitation of liability such as a Waiver of Consequential Damages. Such a provision is relatively standard; it’s even included as a standard provision in the AIA contract.
3. Governing Law and Venue
Next is governing law and venue. Most written agreements include such a provision. It will dictate where and how a dispute will be resolved. If you’re doing business in Florida, you’ve been exposed to Florida law – it would be nice to have Florida law govern your contract. However parties are free to agree to use other laws from other jurisdictions. One example we recently encountered was a case in which a client based in Alabama, performed a project in the Bahamas, but the parties agreed to use New York law to govern their transaction. All of which was perfectly legal. When you review your contract, make sure that it includes a provision dictating what law will govern and where the dispute will be addressed. If you have any ability to negotiate those terms, it’s important that you try to have the law of the state that you’re in, as well as the venue where the project is located govern.
4. Attorney’s Fees
Finally, let’s talk about the attorney’s fees provision in your contract. In the construction setting there are two specific statues that are used most often. If you file a lien or assert a bond claim, both of those statues typically include the right to recover your attorney’s fees. The other way to recover your attorney’s fees in the state of Florida is if you sign a written agreement and have that written agreement provide for the recovery of attorney’s fees. Sometimes attorney’s fees dictate the outcome of a case, and the ability to recover those fees is crucial.
So when you’re reviewing your contract make sure that it includes a provision so that the prevailing party, hopefully you, will be able to recover your increased attorney’s fees.Having these four provisions in your contract will give you a leg up.
Do You Have These 2 Provisions in Your Contracts?
Every company seems to have its own form of contract these days. Whether it’s the general contractor, the plumber, or the tile distributor, everyone wants you to sign “their” contract, so that they’re protected on the job—or so they hope. In the rush to get a job and get it started, many contractors find they can’t get their terms and conditions into a contract so they overlook important details in the contracts they do sign. This could be a mistake, a big mistake, especially if the following provisions are not addressed!
Legal Fees
If you have to pay an attorney to prosecute or defend a claim, whether it goes to trial or not, the ability to recover those fees from the other side can dictate how hard you fight or how quickly you settle. So when reviewing a contract, make sure it includes a provision that allows the prevailing party, hopefully, you, to recover incurred attorney’s fees and costs.
If your agreement is not in writing (a problem) or if it is not signed (another problem), then the ability to recover legal fees becomes much harder, if not impossible. This can happen with construction clients who have “terms and conditions” on their delivery tickets or invoices but who never get those documents signed. In those cases, the unsigned terms and conditions are useless.
Dispute Resolution
When a business relationship sours, it can often lead to disputes. When this occurs, it is helpful to have a pre-agreed procedure in place to resolve disputes. Often times this is just left to a simple statement that disputes shall be arbitrated or litigated. We would suggest something more.
Ideally, the parties should agree to have a principal to principal initial meeting within 30-60 days of a problem arising. If that meeting doesn’t resolve the problem, then the parties should agree to mediate their dispute before a jointly selected and certified mediator. Mediation should always be a prerequisite to the initiation of litigation or arbitration. Each party should absorb their own legal fees during this process and before litigation. The mediator’s fees, on the other hand, should be split evenly between the parties.
Construction is a very risky business. Lots of things can go wrong, and when they do, it can be very expensive to fix them. Having these two provisions in your agreements will surely help.
What Clauses Could Put You in Jeopardy?
Contractors should know that there are three clauses in most all construction contracts which could create significant exposure.
Pay-if-paid:
Getting paid is obviously the most important part of any job. Not getting paid for one’s work is not anything a contractor would ever agree to, right? Well, in most every contract is a pay-if-paid provision stating that payment by the general contractor is specifically contingent on the general contractor’s receipt of payment from the owner. What this means is that if the general contractor isn’t paid for any reason, then it won’t have to pay the subcontractor, even though the subcontractor has done its work and is perfectly entitled to get paid. Such provisions are generally enforceable so long as they are clearly and unambiguously stated.
Applicability of The Prime Contract:
General contractors like to protect themselves – no surprise. One way they do so is to incorporate their prime contract responsibilities into all their subcontracts. All rights, remedies and responsibilities in the prime contract then apply to the subcontractor so that the subcontractor becomes bound to the general contractor to the same extent that the general contractor is bound to the owner. Subcontractors could therefore find themselves taking on more responsibilities than they actually ever contemplated.
Indemnification:
Risk shifting is not new in construction; it is quite standard and most visible in the indemnification provisions within most subcontracts presented by general contractors to their subcontractors. Many of these clauses not only have the subcontractor indemnify the general contractor, owner, architect and engineer for damages and losses resulting from the subcontractor’s own negligent acts or omissions but surprisingly also include the negligent acts of the general contractor, owner or other third parties. This means the subcontractor is actually agreeing to indemnify the general contractor and other for their own negligence. May not sound fair but this shifting or responsibility is enforceable if clearly expressed.
Depending on the circumstances, subcontractors would do well to reach out to their construction lawyer who can negotiate or even neutralize these clauses.