Five Major Terms Construction Contractors Need to Worry About

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Most contract negotiations boil down to several key terms.  For construction contractors, these are five critical items that you need to carefully consider and negotiate in each of your agreements.

I.  What is the Scope?

The starting place of a construction contract is the work to be performed.  Remarkably, this is often poorly or inconsistently defined.  Contractors should strive for a clear definition of what are the “contract documents” and what portion of the work is the responsibility of that contractor.

II.  What are the Terms of Payment?

The definition of expected compensation should be clear.  Construction contracts are often clear on a total amount, but the agreements can become opaque in practice.  What are the triggers for draw payments?  What is the process for review of payment applications?  Who has the right to review the quality and progress of the work?  What are the grounds for withholding payment?  In practice, these terms can often lead to a tug of war during construction.  Starting a contract with poorly defined terms on payment can be a recipe for disputes.

III.  What are the Indemnity Terms Under the Contract?

Indemnification provisions are perhaps the greatest risk shifting terms in construction agreements.  Adding “in whole or in part” by itself to an indemnity clause can shift almost the entirety of a loss onto a barely responsible party.  Contractors are typically not tuned into the risks involved with these terms.  Subcontractors, in particular, are under pressure to sign even onerous terms that can have huge consequences.  Construction contractors should resist the temptation to sign anything to get the work and become educated in how to say no to what may be a highly damaging project.

IV.  What are the Standards of Performance?

The “contract documents” often contain a multitude of applicable performance standards.  Sloppy specifications and plans can incorporate a legion of contractual yardsticks with which to measure the contractor’s performance.  These can include incorporated codes, industry standards, local or municipal regulations or other materials.  Often, the terms of performance are actually inconsistent and even conflicting.  Contractors can and should carefully analyze the plans and specifications and ask applicable questions before contracting to ensure that the yardstick governing performance is clear and mutually understood.

V.  What if there is a Dispute?

Boilerplate terms can dramatically impact the risk of a contract.  Is there a one way or two way attorney’s fee recovery clause?  Or is there no attorney fee recovery at all?  Is mediation required prior to other dispute resolution?  Will the case be arbitrated or litigated?  Is a jury trial waived?  These terms, while innocent on their face, can tilt the playing field significantly in the context of a specific case.  You can and should know the rules prior to signing the deal.

Conclusion

Construction contracts are central to a contractor’s work.  Contractors must understand and define the basic terms of engagement on a project and then ensure those basic terms are well defined in their agreements.  Failure to establish and understand these basic terms is an invitation to potential disaster and easily avoided by savvy contractors.