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Fundamentals of Construction Contracts: Key Provisions

As noted in a previous post, a key factor that determines survival and profitability in the construction industry is understanding how to manage risk through careful scrutiny of key contract provisions and calling on counsel for assistance in negotiating and drafting contract provisions in order to clarify rights and duties and to fairly allocate risk among the contracting parties. A well drafted construction contract lays the foundation for a healthy working relationship and a profitable job. Such contracts will clearly define key terms and issues including the scope of work to be performed, the price, the terms and conditions of payment, and the allocation of any foreseeable risks.

To supplement the previous post about contract pricing, this post will introduce seven of the most significant aspects of a construction contract.

Scope of work: the general purpose of this part of the contract is to establish the duty owed by the party delivering or performing the work to the party paying to receive the work. This is the very heart of a construction contract. Without a scope of work, a contractor’s duty and liability cannot be determined. Similarly, when scopes of work are brief or vague, that creates doubt and uncertainty as to when a contractor has fulfilled its performance obligations. A well written scope of work is crucial to avoid disputes.

Price and method of payment: the purpose of this contract term is to establish when and how the contractor will be paid for work completed. Usually a schedule for specific pieces of work will be included. As those work items progress, the contractor will attest that a percentage of the work has been completed and then becomes entitled to payment.

Project changes and change order requests: this section will address the allowed method for submitting evaluating, and approving any changes to the work plans or specifications of the project after the project has begun. In the case of fixed-price contracts, careful structuring of this section is very important to ensure the contractor is empowered with substantial discretion to block unnecessary or non critical changes.

Delays: this section is designed to address what happens in the event of project delays. Often, delays will be divided into two categories and addressed separately. For delays due to reasons within the contractor’s control (or assumed to be within that locus of control), the contract might provide an allowance of a certain number of days before any penalties apply. For delays due to causes outside the contractor’s control, the contract should explicitly disclaim any liability or penalty to the contractor, making it clear that the contractor will not own any damages. A contractor may also want language imposing penalties and automatic damages payable to reimburse its costs resulting from project delays for reasons outside its control; the contractor’s resources are valuable, and time wasted on project delays might otherwise have been used to generate revenue from another project.

Suspension and termination: specifies the circumstances by which the contract may be suspended or cancelled if the contractor fails to perform as agreed. This section gives the owner enforceable rights to end the contract for failure of the contractor to uphold its end of the bargain. Typically, only substantial or material breaches that go to the heart of the contract will trigger a suspension or termination right. However, contracts drafted by the owner are likely to contain language that allows the owner to invoke suspension or termination for a multitude of reasons including seemingly trivial matters tangential to the broader purpose of the contract.

Disputes: this section is another area not to be overlooked because it addresses how the parties must proceed in case a dispute over the contract arises. Some construction contracts will contain mandatory arbitration clauses that compel the parties to resolve their dispute before an arbiter rather than a judge in a state or federal court. In Texas, arbitration clauses are generally enforceable, so contractors should carefully consider whether they want to surrender their right to pursue contract claims in court.

Thoroughly negotiated and well-conceived construction contracts will be lengthy and complex. That is a necessary consequence of bringing clarity to material terms and creating a fair allocation of risk. Seeking legal counsel to negotiate the terms of a contract is the best way to ensure your contract is clear, fair, and does only what you want it to do.

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