Construction contracts. This is part II of my short, non-exhaustive list of what should be in most construction contracts. This article is for the aspiring or beginning construction contractor, and the smaller contractor looking to become a larger business and more professional.
The larger the contractor becomes, the contract will become more complex. This article discusses what should be in the construction contract between the owner and the contractor.
See part I HERE for my initial article on construction contracts. Here’s some more good stuff:
Schedule / timeline and milestones; delay contingencies
It’s an age-old story: an owner signs a construction contract, and doesn’t hear from the contractor for six months and has to chase it to get the project started. A lot of contracts may state “time is of the essence” which frankly is meaningless lawyer jargon. A good construction contract will contain start dates; a timeline for completion; and milestones (often coupled with periodic payment obligations). It’s not difficult to put this into the contract. Thus, “Contractor must begin construction by [date] and if construction has not begun by this date, the contract is voided” or something like that.
Similarly, timelines and milestones should be included in many construction contracts. “Contractor shall finish construction and obtain occupancy approval within 120 days of the date of this contract”. That’s a timeline for completion.
A milestone is a marker during the construction to ensure the contractor is on schedule. While it can be difficult to predict specific dates for some construction events, major milestones should be fairly well predictable. “Contractor shall have the foundation poured and set within 30 days of receipt of approval of the plans for construction by the appropriate agency.” That’s a milestone – it marks a major contract completion point of the contract.
Guarantees in construction contracts
Building construction is an amalgamation of diverse and complex parts that make up a whole structure. Boards, roofing materials, electrical conduit, paint, all have to come together and work well and according to the project specifications. A guarantee will delineate what the project owner’s remedy is against the contractor if something doesn’t fit right, or work correctly, or is built out of specification.
Thus, the range of a guarantee can be from nothing – too bad so sad – to guaranteeing everything. For example, that materials will work as expected for a set time period (roofing materials, especially have strict guarantees). Or, guaranteeing that systems will work as designed, such as HVAC or specialized manufacturing processes. Most construction guarantees will require the contractor to fix or repair a non-conforming or broken item, for a certain period after the owner takes possession.
Guarantees are definitely not a “cut and paste” item in construction contracts. They have to be drafted (or read) closely to determine if the guarantee fits the project. Similarly, read carefully to see if the contractor, a subcontractor, product manufacturer, or designer will be responsible for fulfilling the guarantee. A contractor does not want to be held liable – and should not be held liable – when it builds a manufacturing plant according to the plans it was given, but the engineer designed a process that does not work.
“Change Order” procedure in construction contracts
It’s rare that a construction project of any substantial size is built in exact conformity with the specifications. Materials are not available; the specifications are drawn inaccurately; the owner wants changes to the scope during construction; there’s a huge boulder underground that no one knew about that took a week to remove. A lot of disputes arise around change orders, in my experience.
What a good construction contract needs is a clear definition of what is considered a “change order”. Next, a contract should have a mechanism to get owner approval for the change. Last, there should be a determination if a price adjustment is necessary. Once everyone agrees that a change is necessary, the cost, and the redesign, hopefully the invoice will get paid without argument.
Authorized representative contact
For example, I’ve seen construction projects turn to mush because too many people were telling the contractor what to do on the project. The owner, owner’s representative or manager, architect, engineer. Therefore when I have contracts of any kind where there are multiple decision makers, I like to get the parties to commit to one person speaking and giving decisions for the owner; and one person speaking and making decisions for the contractor.
This does two things. First, the contractor will only have one person to whom it must answer, and to whom it can direct questions or have make decisions about the project, instead of trying to chase down multiple people to make a decision that maybe they can or cannot make, or need input from yet another person. Second, it shifts the burden of that whole argument about changes between the owner, architect, engineer, etc., onto the owner, which is where it belongs anyways.
Of course, the contractor and allied trades will have input, but at the end of the discussion, the contractor will be able to point to that one, designated person and ask the question and get the answer it needs, without everyone else giving their opinions.
These windows with this design are not available, can we substitute this other design? Let the owner and architect figure it out, and let the owner direct the contractor. The chiller system that was ordered won’t be delivered for six months. Let the owner and the engineer figure out alternatives, and then the owner can make a decision and direct the contractor.
Conclusion
Too much of what I see nowadays in construction contracts is copy/paste, even from “experienced” lawyers – don’t get me started on the internet. A construction project is a complex mixture of materials, labor, and design. Don’t trust the outcome to a handshake and some poorly drafted emails.
For this and all your businesses legal needs, call me in Asheville, Hendersonville, Fletcher, Waynesville, and all of Western North Carolina at (312) 671-6453
Email me at palermo@palermolaw.com.
Be sure to check out my other blog posts HERE. Be sure to listen to my podcasts with Matt Mittan at BizRadio.US