Understanding Construction Contracts

Understanding Construction Contracts

 

Construction contracts can contain terms that impact your company’s bottom line. Reviewing them carefully prior to signing is indispensable, and can save your company time and money. This contract review guide is meant to be a starting point for reviewing contracts in general. It highlights some common contract terms and their potential impact. You can begin to understand which terms are most often negotiated in contracts generally. Then, with the help of licensed inside or outside counsel, analyze the commercial risks associated with construction contracts in depth and understand terms and conditions to protect your company’s assets.

Scope of the Agreement

Examine the definition of services to be provided to ensure the language is clear enough for an unrelated third party to understand the scope. The contract should include a time frame for completion of services. The rights and obligations of both parties should be clearly outlined.

Terms of Payment

Terms of payment should be clearly listed within the contract so that the expectations of both parties are clear. The contract should specify the agreed payment schedule for goods received.

Warranties

There are two types of warranties: express and implied. Both types are assurances regarding particular issues, such as performance.

  1. Express warranties are those that are defined specifically in the contract.
  2.  Implied warranties are based in statutory and/or common law, depending upon your jurisdiction.

Damages, Limits of Liability and Indemnification

These three items are often in close proximity to one another in a contract, as they are interrelated.

  • Damages may be defined as certain types of losses that could create liability under the contract.
  •  A limit on liability would restrict the amount of damages that a party would be required to pay if found liable for such damages. Sometimes this may also include a limit for indemnification.
  • Indemnification provisions allocate risk and cost between the parties. It is important to examine whether the party assuming the risk is the party with the most control over that risk

Insurance

Some contracts will contain minimum bodily injury and property damage liability coverage amounts that the party must possess and also may require that the customer is added as an additional insured on those coverages.

Prior to consenting to any contract, it is prudent to examine insurance coverage against the amount of liability exposure in a particular contract, as well as that each party that is requested to be added as additional insureds are also parties to the master contract, otherwise there could be coverage issues with the additional insured at the time of claim. (This is where we come into play).

Terms and Conditions

  • Governing Law & Jurisdiction – Look at the governing law provision to make sure that you are comfortable with the implications of the state law chosen by the drafter.
  • Dispute Resolution – This is another clause with which you must be comfortable with the laws of the state or forum chosen by the drafter.
  • Intellectual Property – When you are disclosing and/or licensing your company’s intellectual property, be it trademarks, copyrights or patents, it is important to include a clause that recognizes the owner of such intellectual property and affirmatively states that the agreement does not transfer any rights.
  • Standard of Care – A standard of care clause may appear in certain types of contracts. The standard of care that is provided by the law should provide the minimum standard of care for the provision of services under the contract.
  • Term/Termination – The contract should provide both parties with the right to terminate the contract.
  • Right to Cure – Related to termination, some contracts will contain a right to cure clause. This would give the defaulting party notice of a breach and a finite period of time in which to remedy such a breach.

Standard Form Contracts

Unlike other industries, construction lacks a consistent set of laws like the Uniform Commercial Code or a federal statutory scheme. Contracts produced by professional and trade associations for architects (American Institute of Architects), engineers (Engineers Joint Contract Documents Committee) and commercial contractors (Associated General Contractors of America) can serve as important references and benchmarks when drafting a new contract.

For all of their advantages, there are several things that you should be cautious about when using standard form contracts.

  • Standard forms, which are written broadly to encompass many different contexts, require transaction-specific and jurisdiction-specific modifications.
  • Custom-drafted and industry-drafted forms are often incompatible. Even industry-drafted forms from different publishers can be incompatible.
  • Standard forms always contain the bias of the drafter.

Be sure to read each of these sections carefully, and contact us with any questions that may arise from your contract review.