Category: Construction Law

3 Additional Mistakes Contractors Should Avoid

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.

3 Common Mistakes Contractors Should Avoid

If you are a contractor, a subcontractor, or a supplier, it is crucial to fully comprehend a construction contract before your work begins. This includes understanding the meaning of potential consequences and repercussions of the contractual terms you are about to agree on. Failing to understand the agreement terms can lead to an unwanted legal dispute with financial and reputational damages. Before starting a project, any prudent construction company will first have their attorney look over the suggested contract’s terms and begin a negotiation dialogue, where language will be used to protect not just one party, but all parties. As always, there are several contract pitfalls you should be aware. This article focuses on three top traps you should try your best to avoid or negotiate before signing the contract.

1. Obtain all of the documents

Often times you will be signing a contract that does not include the full set of obligations that will apply to your work. Therefore, you must always remember to ask for the prime contract documents (and any addenda involved). The prime contract usually binds the general contractor to the owner, but it also binds you as the subcontractor or supplier, even if you are not a signatory in the main agreement. This “binding” usually happens due to a commonly-used “flow down” provision, which states the all contractual obligations that apply to the general contractor will flow down to everyone else working on the job. If you do not obtain the prime contract documents you may remain unaware of all the provisions, obligations, and limitations, how they work together, and how they may affect positively or negatively your work.

2. Review all Project Specifications

Another thing you want to keep a close eye on is language. Usually prime contracts and subcontracts include project specifications only by reference, so make sure you obtain the full specifications on the project and you review them before signing anything.

3. Be crystal clear

Lastly, watch out for any ambiguity in all of the documents you are about to sign. Avoid jargon like “customary,” because even though parties may verbally agree on what is customary in the business, when things get ugly, “customary” will become a puddled word with interpretations that only serve the party raising a claim against you. Therefore, eliminate vague language and stick to clear and defined terms.

Avoiding these three traps can’t guarantee a 100% iron-clad contract, but it can certainly inform and educate you and the potential risks that the project can involve you down the road, if anything goes wrong.

Construction Contracts – Change Orders

As in any other industry, changes are a common factor in construction. Sometimes changes can be related to the project’s price and schedule, while other times changes can be pertaining the actual work being done. Regardless of what kind of change you may anticipate dealing with, you should familiarize yourself with the different kinds of changes that can occur and how your contract will deal with them. The three main terms that project changes typically fall into are change orders, construction change derivatives, and minor changes. But for purposes of this article, will focus solely on change orders and the process behind them.

A change order is a fancier way of naming an amendment made to a construction contract. It reflects a mutual consensus between the parties involved on whatever change is being made to the contract. Like all other contract amendments, a change order should also satisfy the requirements stipulated on the original contract and previous change orders. Change orders are usually the best way to go when making changes to a project since both parties get to agree formally on the amendment.

The first step in change orders is the consideration period. Here’s when the party who wants to request a change proposes a change order to the counterparty. The counterparty must then consider the pros and cons of this change order and ultimately decide on what they are willing to agree upon. Once both parties know what the requested changes will be, a change order must be drafted. When agreeing on a change order, all parties must take their time to clearly identify the changes the change order will in fact make (ie. price, schedule, etc.). Refer back to the original contract, other recent amendments, and any documents that can better help establish the changes being made. The clearer you are, the less controversies and disputes you will run into.

In terms of issuing an actual change order, it’s very important to know that no one can unilaterally issue or impose a change order. A change order must be a bilateral amendment where both parties issue the new terms. Lastly, keep in mind any third parties involved in the changes included in the change order or third parties involved in previous amendments. If there are any, these third parties must give consent on the proposed change order and ultimately sign the new change order, guaranteeing that the changes will be made as stipulated in the amendment.


Construction Contracts – Deadlines and Delays

As any other given contract, construction contracts will inevitably have a series of deadlines stipulated. One of the most important deadlines is substantial completion. When a project reaches substantial completion it means that work that was set out to do has reached a point where now the owner can rent, sell, or live in the property. Substantial completions is also an integral point to reach in order for third-parties to complete certain obligations such as government requirements for completion by a specific date, availability of public incentives, or refinancing of a construction loan. Here are some areas we will go over to ensure that you are well-versed when drafting a construction contract when it comes to deadlines and delays regarding those deadlines:

Identify the Deadline

Setting a clear deadline is undoubtedly the first step before starting any project. There’s two ways of establishing a deadline. You can choose a specific date and time, like Thursday December 17th, 2015 at 5:00PM local time of the project site. Another way is to specify a length of time that runs after a specific date, like 365 days after the City issues the first building permit for the project. The second option can lead to some controversy, so make sure you are clear about the start time and you ensure holidays and weekends don’t affect the set length of time.

Construction Delays

Most projects run into delays, and most of the time those delays will be determined by the complexity of the project. The three major factors to take into consideration when dealing with delays are: who and what caused the delay, does the delay mean postponing the set deadline, and will there be additional compensation for the additional costs imposed by the delay. Two kinds of delays worth discussing are excused delays and owner-caused delays (which could in fact fall into the excused delay category, depending on the circumstances).

In order to avoid controversies later on, it is imperative that the contract you draft or agree to defines what qualifies as an excused delay. Typically an excused delay is a delay caused by unforeseen events that could not have been predicted by any party before entering into the contract, but again being as clear as possible about what will be considered an excused delay and whether that will guarantee an increase in price will free you up from any potential controversies.

Owner-caused delays are delays that for example, are imposed by an owner who changes the needs or wants on a project once the work on the project has already commenced. Similar to excused delays, it is very important for a contract to spell out what exactly is an owner-caused delay. For example, is the delay solely caused by the owner or just part of it? Does it involved an excused delay? Usually owner-caused delays, because they are typically imposed by owner, mean that there will naturally be an increase in price to cover for overtime and any other additional costs.

Delay Notices

Contracts should require delayed contractors to give notice to the counterparty that they are in fact delayed. Delay notices are designed regulate the authenticity of such delays and they are usually accompanied by a deadline. If the contractor does not meet the deadline, then he or she waives his or her right to increase the price and postpone deadlines.

Delay Damages

Most of the time delays will usually result in some kind of damage, either owner delay damages or contractor delay damages. On the owner side, a delay may mean the loss of tenants, sales, public incentives and financing opportunities. On the contractor side, a delay may mean additional costs and losing the opportunity to work on other project because they are still busy working on a delayed one. A solid contract should cover both kinds of damages and detail how each potential scenario will be negotiated and worked out.

General Tips for Construction Contracts

contract_claimsIt’s important to put in due diligence when agreeing to and signing construction contracts. Here are some important tips to follow.

Before You Contract

  • Check to make sure that you have the correct licenses. Without the correct licenses, it’s incredibly difficult to get anything started
  • Check the licenses of your contractor. Make note of any anomalies, including suspended licenses, having no license or a multitude of complaints.
  • Research the owner – look for liens and judgments or lawsuits.

Get the Contract in Writing

  • The written agreement should contain all relevant and important information on terms. Make sure that the things you’ve spoken about are in writing.
  • At the very least, the contract should include who is doing what, what exactly they will be doing, when they will begin and when you expect them to be finished, where it will be done, how it will be done, and prices.
  • Both parties should sign the agreement

Assessing the Contract

  • Carefully read the whole contract. Keep an eye out for handwritten changes and don’t ignore them. 
  • Read all relevant addenda and contract documents
  • Be careful of subcontracting clauses in the contract. Just as you’ve assessed the general contractor, you may want to do so with the subcontractors.
    • Make note of ‘flow-down’ or ‘pass through’ clauses in the contract, which gives the subcontractor all the same responsibilities to the contract as the general contractor. 
    • Other important clauses can include dispute resolution, termination for convenience or time is of the essence. 
  • Make sure that all party names are correct.
    • If the party is a corporation, LLC, etc., make sure to use the full legal name of the entity in the contract. This can help to alleviate any legal troubles later on if it should come to that. 
    • If there are endorsements, make sure they include a document stating their capacity to endorse the contract on behalf of the entity.
  • Note any documents or information that you are required to give the other party and take note of any deadlines and notice periods.
    • Make separate lists of these and keep them in a place easily accessible and visible to the project managers involved. This give you the power to enforce your deadlines in a non-confrontational manner. 
  • Remember that there can always be changes to the language in the contract.If you have a little bargaining power, you may be able to negotiate some changes in the contract.

If you have any further questions or concerns, contact a local and knowledgeable construction lawyer. Consider asking them to review your contract, especially for large projects.