Construction Contract Issues for Contractors
Top 20 Contract Issues for Contractors and Subcontractors
Matt DeVries
February 7, 2012
I generally follow a "put it writing" rule, which means that if something is in writing it is more than likely to be achieved. Whether you are a list-maker or a goal-setter, your efforts will be rewarded if you put those lists and goals in writing.
I will share some of the contract issues for contractors and subcontractors to review before signing a construction contract. The top five include:
- Site Conditions Clause: Make sure that the Contractor is not taking responsibility for unforeseen or differing site conditions, and that costs for such site conditions are compensable. You should also make sure that additional time is also a remedy.
- Surveys and Geotechnical/Subsurface Conditions Reports: Whose responsibility is it to do the report? Does the contract provide that Contractor can rely on the report? If not, understand that the Contractor is assuming the risk. If Owner procured the report, do not permit the Owner to disclaim responsibility. If Contractor procured the report, make sure that site conditions reported serve as the baseline for what is a “foreseen condition” in relation to the site conditions clause.
- No Damages for Delay Clause: This provision states that the Contractor is not entitled to recovery any damages for delays caused on the project. It is in the Contractor's best interest to delete this provision. If the Owner won’t budge, suggest that Contractor be entitled to recover actual, documented costs for Owner-caused delays. Contractor should not have to absorb Owner-caused delays or delays caused by others.
- Owner’s Other Contractors: Does the contract put the Contractor at the mercy of Owner’s other contractors in terms of schedule and compensation? Who is required to coordinate? Do not let the Owner disclaim responsibility for its other contractors. Remember that in most states the Contractor has no recourse directly against the other contractors.
- Ownership of Drawings: Make sure ownership of any drawings does not transfer to the Owner until payment by the Owner.
- Suspension of Work and Termination for Default due to Owner’s Nonpayment: Make sure that there is a provision that allows the Contractor to stop work for nonpayment, and ultimately to terminate the contract for nonpayment by Owner.
- Termination for Default by Contractor: Make sure that the clause does not convert the Owner’s wrongful default termination of Contractor into a termination for convenience. If the Owner wrongfully default-terminates Contractor, you will want to want to recover more than the cost of the work in place.
- Change Orders: Can Contractor refuse to perform a requested change order if the Owner will not authorize or acknowledge it as a change? How are changes priced? What happens if there is a change, but agreement on time and/or compensation is not achieved? These are all issues that need to be addressed in the changes provision.
- Who is the “Owner” listed on the Contract? Is the “Owner” (as listed on the d/b or construction contract) a property holding company or other potential “shell” company that is related to a larger company with whom you have negotiated the deal? If so, ensure that you have the financially solid company execute a guaranty agreement that guarantees the performance of the shell or holding company. Otherwise, the Contractor could end up contracting with a party without adequate resources. Also, without a guaranty agreement, the Contractor cannot assert an action against the company with financial resources to get paid.
- Environmental: Are there any known environmental hazards associated with the site that the contract needs to accommodate? The Owner should indemnify the Contractor for existing conditions at the site.
- Warranty: Make sure to check out what warranties and representations are made in the contract. What is the warranty duration, and does it start at substantial or final completion? The warranty period start at substantial completion, particularly if Owner intends to begin partial occupancy.
- Force Majeure Risks (weather, war, strikes): This is a tricky one. Make sure you identify who bears the risk of force majeure events in terms of time and cost? If weather is the culprit, you may want to define what kind of weather impact will allow for recovery, whether "excessive weather" (which is what the Contractor may want) or "unusually severe weather" (which is what the Owner will probably push for).
- Substantial Completion: Does substantial completion contemplate occupancy of the building or structure? Are you required to have a local agency-issued certificate of occupancy, or temporary occupancy permit in order to achieve substantial completion? If not addressed in the contract, most states will have a statute or law on when substantial completion occurs.
- Payment Terms: What are they, and is there a condition precedent to payment? Despite the common confusion between the terms, there is a big difference between "pay if paid" and "pay when paid" clauses. Also, look to see if there is interest on late payments available?
- Dispute Resolution Terms: Is mediation a condition precedent to other forms of dispute resolution? I recommend making mediation mandatory before proceeding further with other forms of dispute resolution. Also, make sure that the Owner doesn’t get to unilaterally select the dispute resolution method at the time of the dispute. Agree in advance to either litigation or arbitration. Most important, do you have the right to recover attorneys’ fees, or is it one-sided in favor of the Owner? If so, either delete it or make it mutual so that the "prevailing party" gets their attorneys' fees.
- Assignment: Make sure that the Owner does not have the unilateral right to assign the contract without the prior written consent of Contractor. Also, try to negotiate your right to assign the contract if necessary.
- Lien Waivers and Indemnification: Make sure that any obligation to indemnify, defend or otherwise protect the Owner from liens is expressly conditional upon the Owner’s timely payment of sums when due. Also, make sure that you are not prospectively waiving your rights to file a lien in the first place. In many states, these types of lien waivers are invalid and unenforeceable as a matter of law. These laws provide you protection and should be cited when negotiating with the other side.
- Indemnification: Ensure that you are not indemnifying the Owner for its own negligence, and that the indemnification clause covers only "personal injury" or "damage to property other than the work itself” that is caused by you or your employees.
- Liquidated Damages and Time: When liquidated damages are included in the contract, make sure that there are no unreasonable restrictions on Contractor’s ability to obtain a time extension.
- Governing Law and Forum Selection Clause: Finally, make sure you double-check these provisions. In most cases, the Owner-Contractor agreement calls for the governing law to be the place of the project and that litigation/arbitration will occur in that same locale. While this is the general rule, there may be an advantage to agreeing to another jurisdiction.
While I could write this series for a couple more weeks, I am not going to let all the secrets out. What recommendations did I miss?