We previously discussed three top contract pitfalls you should always remain aware of before entering into a construction contract. Here is a breakdown of three additional and more specific mistakes you should also try to avoid when negotiating a construction contract.
1. Limit your Indemnification Provision
The indemnification clause is one of the most crucial contract provisions that you should pay attention to. These clauses usually contain language such as “indemnify” or “hold harmless,” and they basically mean that the the person who provides indemnification, known as the indemnitor, will be responsible for any judgements or claims made to the party receiving the indemnification, called the indemnitee. It can also mean that the indemnitor, will be responsible for covering legal expenses incurred by the indemnitee. Similarly, a “hold harmless” clause means that a party will waive any claims they may have against the other party or a right of recovery against a claim.
As a subcontractor or supplier, your negotiating power may be limited when it comes to indemnification provisions. If you decide to accept an indemnification clause in your contract, you should at least understand what it is your are agreeing to in terms of this important clause. If possible, try to limit your obligations regarding indemnification provisions to the extent of your own fault; this is called a limited form of indemnification. If that doesn’t work, another alternative is to attempt to have the other party agree to a mutual indemnification clause.
2. Do not waive your Lien or Bond Rights
Whatever you do, do NOT waive your ability to collect payment via a bond or lien. You might think this is an obvious “no-no,” but you’d be surprised by the amount of contractors or suppliers lacking bargaining power who will agree to it. However, under no conditions is waiving your lien or bond rights okay. If by any chance the project goes awry, a lien or a bond will probably be your only way to secure payment. Keep in mind that some states void these kinds of waivers, but not all states do. Some courts will enforce the waiver, even when the harsh consequences of the waiver are recognized.
3. Do not delay the start of the Warranty Period
If the contract you are about to enter includes a warranty, make sure that the warranty period begins when your work is complete, not when the project as a whole is complete. Contracts drafted by owner will often push to have the warranty start once the entire project is complete, so watch out. As a subcontractor or supplier you have no control over when the entire project is completed. Often times, projects run into different challenges and face unmet deadlines and delays. Therefore, if you agree to this kind of provision your warranty may take way longer than what you would like.
As mentioned before, avoiding these three common mistakes does not guarantee a conflict-free contract, but remember – it is all about keeping yourself as informed as possible so you can be prepared for any challenges that may lie ahead.