FIVE TIPS FOR BETTER CONSTRUCTION CONTRACTS
Toll free: 800-796-3402
Copyright © Mark T. Coffin, Attorney At Law. All rights reserved.
Hello, and welcome to this column on construction law! In the coming months, I hope to offer some thoughts and information that will be helpful to your business. This month, I thought I would open up with a few general thoughts about drafting contracts. [Disclaimer: This is not an all-inclusive discussion of construction contracts – there is of course much more to be said. Also, I have not included any discussion about statutory requirements that apply to certain kinds of contracts, such as public works and home-improvement contracts. Hopefully we can discuss some of those items further down the line…] With that said, here are a few tips on writing contracts.
1. BE CLEAR:
Ideally, a construction contract is a written expression of both parties' understanding before the work begins. Taking the time to be clear about this will avoid a host of problems down the road. Frequently, just the process of "putting it in writing" forces parties to think through details that otherwise would be absent. There is no premium for fancy verbiage, so keep it simple if you can. On the other hand, words like "indemnification" and "subrogation" have specific legal meaning, so take the time to look up unfamiliar terms. Make sure the language in your contract is internally consistent, especially if you have borrowed "boilerplate" clauses from other contracts.
2. FOCUS ON WHAT’S IMPORTANT:
Most construction contracts have three essential elements: scope, price, and time. There is nothing wrong with the common practice of attaching a detailed proposal as an exhibit to a contract, in order to specify the scope of work. Since contractors normally write their own scope language, be aware that "ambiguities" are normally construed against the drafting party. Spell out any exclusions. If in doubt, err on the side of over–detailing things like your scope of work, materials, and delivery schedules.
There are many different pricing schemes available to contractors. In a fixed fee or guaranteed maximum contract, it may not be necessary to spell out the contractor's profit and overhead percentages, or provide backup documentation such as materials and subcontractor invoices. In contracts for "cost plus a percentage" or "cost plus fixed fee," it is frequently important to list the items that will (and won't) be included in contractor "overhead." If the project calls for progress payments, make sure to spell out the event the triggers each payment.
The phrase "time is of the essence" has legal significance, and essentially means that the parties are serious about dates. Avoid this term if a fixed completion date is not essential, and/or use terms like "approximate date of completion." Think carefully about liquidated damage clauses (which impose a dollar penalty for each day or week of delay beyond an agreed-upon completion date), or "no damage for delay" clauses (which can operate to the detriment of the contractor when a project is delayed). For contracts which don't address completion dates at all, the law will usually imply a "reasonable" time of completion.
3. PUT CHANGES IN WRITING:
I don't keep statistics, but change orders could be the number one source of construction contract disputes. Your initial contract should address how change orders will be dealt with, i.e. by stating that changes must be in writing, signed by both parties before work starts, and how they will be priced. Change orders become part of the contract, so if you wouldn't use a verbal contract, why would you use a “verbal” change order?
4. HAVE A RISK MANAGEMENT PLAN:
It's a good idea to have a plan in case things go wrong. The first tool on this list is insurance. In addition to automobile and Worker's Compensation insurance, a good risk management plan for contractors almost always incorporates liability insurance. The question of what is covered or not under a general liability policy is a broad topic beyond the scope of this article. It is important to have a working understanding of the coverage your business is buying. You may want to send your insurance agent or broker a copy of your contract, for heads up on what may be excluded under the policy.
Next, you may wish to consider including an arbitration clause. "Arbitration" is a private trial before a hired judge, where the parties usually waive their rights to a jury, and the right to an appeal. If the parties agree to this in their contract, it can provide a streamlined (and hopefully less expensive) resolution of disputes.
The term "arbitration" is sometimes confused with a completely different concept called "mediation." In a mediation, both parties select a paid neutral, who acts as an intermediary for a voluntary settlement negotiation. A mediator does not "decide" the dispute, and only has one job: to help the parties arrive at a compromise solution. However, just because mediation is voluntary does not mean it is ineffective. Mediators can, and frequently do, resolve disputes.
Another common risk management tool is to provide for a "loser pays" attorney fee recovery to the "prevailing party." (Without this clause, both sides typically pay their own litigation and attorney costs, regardless of who wins.). Many contracts “tie” the attorney fee recovery to the mediation clause, by requiring mediation as a condition to recovery of prevailing party costs.
"Indemnification" is another important concept frequently seen in construction contracts. Indemnity contracts require one party (the "indemnitor") to financially protect another party (the "indemnitee") from the consequences of a third party claim. Indemnity usually involves both a defense obligation (to hire attorneys and experts) and a "hold harmless" obligation (to pay the cost of a judgment or settlement).
Unfortunately, indemnity contracts for construction are heavily regulated by California statutes, and the legislature has tended to modify this law significantly over time. If you are seeking contractual protection against a risk, or are concerned about an indemnity agreement you've been asked to sign, this is a good topic to seek out competent legal assistance on.
5. CONSIDER EARLY TERMINATION:
If all goes well, the project will get completed on time in a workmanlike manner, and result in prompt payment. Sometimes however, one of the parties becomes financially insolvent, or fails to perform its contract obligations. Protect yourself by providing for different termination scenarios.
Owners will sometimes request the right to terminate a contract "at will." On the other hand, contractors frequently commit significant resources to a project, and may seek to limit termination to the event of a breach which is not cured within a reasonable time after written notice. In either case, most contracts call for payment for labor and materials provided prior to termination. Also, it is usually wise to include a clause specifically allowing the contractor to stop work and treat the contract as breached, if timely payment is not received.
Well, that’s it for this month…I’ll be back next issue. Until then, happy contracting!
Mark Coffin is a construction attorney based in Santa Barbara, California. This article is intended to provide general information rather than specific legal advice, and is not intended to create an attorney-client relationship or serve as a substitute for a professional legal consultation.