Tag: Construction Contracts

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 – 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.

Issues Involving Construction Contracts

Risk management is a vital part of success for construction contractors, owners, and lenders. Risk allocation, the assignment of responsibility for a risk to a certain party within the contract, serves as an essential aspect risk management. Furthermore, the way a party deals with this assumed risk is a facet of minimizing risk. Here are a few important issues to keep in mind with regards to construction contracts.

When entering or preparing a construction contract, be sure to allocate a certain risk to a party that can best control that particular risk. After determining what the potential risks are for any project, contractors and owners will need to decide if it is better to allocate a risk to another party or take on responsibility for themselves.

Insurance is a basic way in which you will manage risk and minimize costs if a loss is, in fact, realized. Furthermore, when working to prepare requirements for insurance, it is crucial that you ensure the limits are adequate in relation to potential losses.

The contractors and any subcontractors that are working on the construction project should carry workers compensation employers liability, commercial general liability, and automobile liability policies. Furthermore, these contractors and subcontractors should also carry an excess liability policy that provides coverage over the limits of the commercial general and automobile policies. Professional liability coverage should also be a requirement for those contractors who are taking part on any design-build functions.

Design professionals such as engineers and architects should be required to carry works compensation/employers liability, auto and commercial general liability, and professional liability insurance. As professional liability insurance typically provides coverage on all of a design professional’s projects, and not just a particular project, ensure that the total limit is sufficient.

Additionally, be sure to have contracts examined by a trusted attorney prior to signing.